Animalcare Group plc Annual Report 2016

Plain-text annual report

24942.04 13/10/2016 Proof 6www.animalcaregroup.co.ukStock Code: ANCRSupplying & SupportingVeterinary Professionals throughout the UKAnimalcare Group plcAnnual Reportfor the year ended 30th June 2016Animalcare-AR2016-Proof 6.indd 217/10/2016 17:04:05WELCOME TO ANIMALCARE GROUP PLC Animalcare Group plc is focused on growing its veterinary business. We are a leading supplier of generic veterinary medicines and identification products to companion animal veterinary markets. We develop and sell goods and services to veterinary professionals principally for use in companion animals; operating through UK wholesalers and distribution and development partners in key markets in Western Europe. We have three product groups: ■ Licensed Veterinary Medicines ■ Companion Animal Identification ■ Animal Welfare Products FormoreinformationseeGroupataGlanceon pages04and05 SeeourInvestmentcaseonpage03 Contents 01 01 02 03 04 06 08 STRATEGIC REPORT Our Business Financial Highlights Operational Highlights Chairman’s Statement Investment Case Group at a Glance Business Model Strategy Our Performance Key Performance Indicators 10 Chief Executive’s Review 11 Chief Financial Officer’s Review 14 Principal Risks 16 OUR GOVERNANCE Board of Directors Corporate Governance Directors’ Report Statement of Directors’ Responsibilities 18 20 21 23 25 OUR FINANCIALS Independent Auditor’s Report 24 Consolidated Statement of Profit and Loss and Comprehensive Income Statements of Changes in Shareholders’ Equity Balance Sheets Cash Flow Statements Notes to the Accounts Five Year Summary Advisers 26 27 28 29 59 IBC Readaboutourperformanceat: www.animalcaregroup.co.uk/year-in-review LOOK OUT FOR THESE ICONS WHEN NAVIGATING THIS REPORT See further content online at www.animalcaregroup.co.uk View more content withinthisreport 24942.04 13/10/2016 Proof 6 FINANCIALHIGHLIGHTS 01 * Underlying Operating Profit £m +2.6% at £3.2m Dividend Per Share Pence +6.6% at 6.5p ReadmoreaboutourChiefExecutiveOfficer’s Reviewonpages12to13 View our Financial Highlights online at: www.animalcaregroup.co.uk/year-in-review 12.9 13.5 14.7 Revenue £m 3.1 3.2 2.8 2014 2015 2016 12.6 13.0 10.8 2014 2015 2016 +8.6% at £14.7m Underlying * Basic EPS Pence +3.2% at 13.0p 2014 2015 2016 6.5 6.1 5.5 2014 2015 2016 *Underlying measures are before the effect of exceptional and other items as analysed in note 4 OPERATIONALHIGHLIGHTS ■ Strong financial performance with underlying operating profit and underlying basic EPS slightly ahead of recently revised market forecasts of £3.1m and 12.6p per share respectively. ■ 7.2% increase in sales of Licensed Veterinary Medicines, with associated export revenues increasing by 22.5%. ■ Advantage taken from compulsory microchipping for dogs opportunity resulting in an incremental revenue benefit of c£0.3m. ■ Cash generation remains strong which enabled the business to propose a 6.6% increase in the total dividend to 6.5p per share during our investment phase. ■ Strong momentum in building value within our product development pipeline with investment increasing by 100% to £1.6m. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT Our Business02 CHAIRMAN’SSTATEMENT Animalcare has performed well during the financial year, particularly during the second half, with growth from all three product groups: Licensed Veterinary Medicines, Companion Animal Identification, and Animal Welfare Products. The core medicines group achieved increased sales of c8.0% during the year. Financial Trading Group revenue increased by 8.6% from £13.5m to £14.7m. This was achieved principally by increasing sales of Licensed Veterinary Medicines both in the UK and Export markets by over £650,000 combined. Incremental revenue of approximately £300,000 was also recognised from the introduction of compulsory microchipping in dogs during April which benefited the second half performance. Basic EPS increased from 12.1p to 12.5p. Cash generation has remained strong, with year end cash increasing from £5.8m to £7.1m. This has been achieved during a period of significant investment in product development to £1.6m together with recruiting more colleagues in all areas of the business to help drive future growth. People These good results are testament to the strength of our Senior Management Team which continues to flourish under the able leadership of our CEO Iain Menneer. We have further strengthened our product development, marketing, sales and distribution teams in order to continue to grow your business in the future. ProductDevelopment Our European partners have more than filled the gap we had in our development pipeline during this financial year. This allowed your Company to increase sales of its generic drugs whilst we continued to progress our own development programme. The first products from our renewed development pipeline have been licensed and launched in the year and we expect further launches over the following two years. Dividend Given the strong cash generation during the financial year your Board proposes to increase the final dividend to 4.7 pence per share. With 1.8 pence paid as the interim dividend this takes the total for the year to 6.5 pence per share representing growth of c7%. from 6.1 pence last year. This is well covered by both increased earnings and cash flow and still leaves sufficient cash to invest in our future. Prospects Given the pipeline from both our in-house product development and that of our European partners, plus a much improved export business, your Board looks forward to continuing your Company’s record of consistent growth. This is being delivered by a stronger, more capable management team and committed and hard-working colleagues. I would like to personally thank them all for their dedication and hard work to the success of your business. JAMES LAMBERT Non-Executive Chairman “Our strategy is on track to build a strong business and invest in product development and geographic expansion.” JAMES LAMBERT Chairman 24942.04 13/10/2016 Proof 6INVESTMENT CASE 03 Animalcare Group plc is a sales and marketing and product development company. The UK pet medicines market has grown consistently over the last ten years at a Compound Annual Growth Rate of 5.2% demonstrating remarkable resilience in the challenging economic climate of the last eight years. It is a highly regulated and specialist market with significant intellectual and financial barriers to entry. In addition, consolidation of pharmaceutical suppliers has made our significant and skilled sales and marketing function a rare and valuable asset. As a result we believe there are four compelling reasons to invest in Animalcare Group plc: y Animalcare is a sustainable growing business (revenue +6.8% CAGR) in a growing market (+5.2% CAGR over ten years) y Animalcare is cash generative and debt-free y Animalcare is dividend paying and expects to maintain its current dividend policy during its investment phase y Animalcare is implementing a clear strategy to accelerate its growth over the next three to five years ANIMALCARE Timeline Formed Vet Drug Company (veterinary wholesaler) Genus plc formed from the break up of the Milk Marketing Board Animal Health Division divested (excluding Animalcare) Original Ritchey businesses divested to focus solely on the veterinary operations of Animalcare Ltd 1958 1988 1994 1999 2006 2008 2010 Vet Drug Company forms product development company Animalcare Ltd Vet Drug Company and Animalcare acquired by Genus plc to form Animal Health Division Ritchey plc acquires Animalcare Ltd. The enlarged group subsequently commenced trading on AIM under the name of Animalcare Group plc Animalcare Group plc Annual Report 2016 www.animalcaregroup.co.uk Stock Code: ANCR 24942.04 13/10/2016 Proof 6STRATEGIC REPORT Our Business04 GROUPATAGLANCE Animalcare is a sales, marketing and product development business operating from its head office in York, North Yorkshire. Animalcareemploys63 people;withasalesteamof22 supportedbyamarketingteam of5.Thetechnicalandproduct developmentteamnowtotals7. Animalcare does not manufacture anyofitsproducts,thesebeing contract manufactured on its behalfbyarangeofcompanies locatedpredominantlyin mainlandEurope. Animalcare’smainmarketisthe UKwithexportsalestotalling8% ofrevenues,derivedfromsaleson distributioninIreland,Germany, France,Spain,theNetherlands, Portugal,BelgiumandItaly. POTENTIAL NEW DISTRIBUTION TERRITORIES OUR MAIN LOCATION Our head office and warehousing operation are both located in York, UK. OUR DISTRIBUTION POINTS Animalcare is building a strong network of distribution and development partners. 24942.04 13/10/2016 Proof 6The product portfolio is divided into three groups; pharmaceuticals (Licensed Veterinary Medicines); pet microchips (Companion Animal Identification); and consumable items (Animal Welfare Products). 05 LICENSED VETERINARY MEDICINES COMPANION ANIMAL IDENTIFICATION ANIMAL WELFARE PRODUCTS 63% 18% 19% Revenue £9.2m 63% (2015) 61% (2014) Revenue £2.7m 17% (2015) 19% (2014) Revenue £2.8m 20% (2015) 20% (2014) Market Overview Total UK veterinary medicines market is worth approximately £625m, of which £344m is for companion animals (dogs, cats, horses and small mammals), with the whole animal medicines market growing by a little over 1% and a little under 1% for companion animals (www.noah.co.uk). OperationalAchievements f Strongsalesofthefivenewproducts launchedlateinFY15 f LeadingpositionintheUKanaesthetic and analgesic market by breadth and volumeofsales. f Threeproductlicencesgrantedfrom productdevelopmentpipeline. Market Overview Annual UK sales volume estimated to reduce from approximately 1,300,000 microchips for companion animals (excluding equine) to 810,000 in the aftermath of compulsory microchipping. Two main microchip database providers servicing the UK (The Kennel Club’s Petlog ~7.7m pets, Animalcare’s Anibase ~4.8m pets), with several much smaller operators. OperationalAchievements f Tookfulladvantageofcompulsory microchippingfordogsopportunity withmicrochipsalesup15%. f Anibase,microchipdatabase,received c1,100callsaday,threetimesnormal levels,withservicelevelsmaintained throughout. f LaunchofnewIdentichipUltra,a smallermicrochip,toaddresschange inmarkettowardssmallermicrochips. Market Overview This grouping covers a wide range of products and consequently suppliers. Accessing the veterinary market through different channels, for example established veterinary and human healthcare wholesalers, internet providers and ad hoc local suppliers. Accordingly, this fragmented market is very hard to quantify. OperationalAchievements f Strongrevenuegrowth(+10%)of infusion accessories range to further complementourmarketleadingI.V. fluidpharmaceuticals. f Newimprovedhardsurfacecleaning productslaunchedintheperiodand contributingtohygienerangesales increaseof12.5%. ReadmoreaboutourStrategyonpages08to09 Read more online at: www.animalcaregroup.co.uk 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT Our Business 06 BUSINESSMODEL “This is the Animalcare Group plc Business Model, which seeks to outline how we create, deliver and capture shareholder value.” Primary markets: Supply of goods and services to veterinary professionals. Animal types: Primarily companion animals (dogs, cats, horses and small mammals). Products and services: Licensed Veterinary Medicines, Companion Animal Identification and Animal Welfare Products. Geographic reach: Currently 92% revenue in the UK; 8% in EU with expansion plans to further penetrate the EU and ROW. y Robust process of identification of generic pharmaceuticals y Core competence in pharmaceutical licence applications y Broad experience of pharmaceutical formulation and contract manufacturers y Strong EU partner network for pharmaceutical co-development projects and quid pro quo distribution y Extensive reach of sales and marketing into UK veterinary practice customer-base STRENGTH THROUGH Our People DevelopmentTeam Our in-house and partner developers identify pharmaceutical products to develop undifferentiated, differentiated and enhanced generics. Each project is assessed against technical and commercial criteria to determine its suitability to become a full development project. Distribution Animalcare sells its products to veterinary wholesalers in bulk. These products are then sold by the wholesalers to their veterinary practice customers. Similarly, some pharmaceutical products are sold to our partners to distribute in their home territories in Europe and ROW. Sales and Marketing Team Our marketing team provides promotional literature for our sales team and support materials to help veterinary professionals explain medical conditions and therapies to their pet owning clients. Our highly trained sales team call on veterinary practices across the UK to promote our products and services, thereby pulling demand through the veterinary wholesalers. The regular visits from our sales representatives mean we have first hand experience of what our customers need, and can channel their feedback back to our development team. PetMicrochipDatabase Our database staff receive over 100,000 calls a year from owners updating their contact details and animal welfare professionals wanting to reunite lost pets. 24942.04 13/10/2016 Proof 607 Talent Management PROGRAMME The TMP is designed to recognise, develop and appreciate all the various talents we have and to build on them, to make us even more successful IN-HOUSE PRODUCT DEVELOPMENT PIPELINE PRODUCT ACQUISITION RECRUITMENT & INDUCTION CAREER & SUCCESSION PLANNING PERFORMANCE MANAGEMENT REWARD & RECOGNITION PEOPLE DEVELOPMENT ANIMALCARE- OWNED PRODUCTS PRODUCTS ON DISTRIBUTION UK VETERINARY WHOLESALERS DISTRIBUTED IN EU & ROW THROUGH PARTNER NETWORK UK VETERINARY PRACTICES PET OWNERS 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT Our Business08 STRATEGY Introduction The UK veterinary market, whilst still relatively fragmented, is consolidating at an increasing rate. In the last decade we have experienced the inception of the corporate consolidator, be it stock market or private equity financed. The early players have increased significantly in size and now there are several smaller players entering the market. Over that ten year period we have also witnessed the saturation of the buying group model, where practices maintain their independence but join a group to improve their buying power. The buying groups offer additional central functions to differentiate themselves. As this space has become saturated it is now commonplace to see practices lured from one buying group to another. An example of the market maturing further, in the last 12 months one leading corporate has acquired a buying group and one of the main UK veterinary wholesalers has acquired two of the largest buying groups. As in the human pharmaceutical arena, there are fewer and fewer original medicines being discovered and registered. The knock-on effect is that there are subsequently fewer products of which to make a generic. Also, as seen in human pharma, as opportunities become scarcer, global players acquire or launch their own range of generics. For example, Animalcare was the first company in Europe to launch a generic buprenorphine in 2008 into a sub-£2m market. There are now five generic competitors in that market. CurrentMarketDevelopments Two years ago saw the acquisition of Novartis Animal Health by Ely Lilly/Elanco. This year we are awaiting the expected regulatory clearance for the asset swap that will see Sanofi’s animal health business, Merial, taken over by Boehringer Ingelheim, catapulting the latter from number six to the second biggest in the world with a combined annual turnover of approximately £3.3 billion; and the largest animal health business in Europe. The effect of this M&A activity is mixed for Animalcare. Whilst it is clear that the larger and larger global companies do not and cannot focus on the tail of their expanding product ranges, the sheer size of the newly combined product range is hard to compete against. It has also been hard to gain access to the product disposal fall-out from the M&A. There are many examples in business that show the space and fertile environment created when consolidation occurs at the top end of a market. There is still a place and space for Animalcare in this evolving market but it was these market dynamics that made it clear that we had to invest in our product pipeline in order to offer our customers extensive product ranges and to renew the range as products move though their product life cycles. Investing in enhanced generics and furthermore in innovative, novel products will strengthen Animalcare’s position in the market and in commercial transactions, moving the discussion away from price. The additional time to develop such products requires Animalcare to invest in these projects now. Even before the referendum vote in June, it was clear that Animalcare had great potential to open up to markets further south and east in Europe but importantly beyond our continent. In conclusion we are making the most of what we have and doing what we do, only better. 24942.04 13/10/2016 Proof 6Strategic Objectives We have developed four strategic themes to maximise Animalcare’s growth in these market conditions. Our strategy for 2016 to 2018 is to: 1 2 3 4 Identify product candidates to maintain flow into and through development pipeline Increase efforts to license in new pharmaceutical products Assess opportunities to innovate and strengthen Companion Animal Identification group Increase the sales of our current products outside the UK Progress Against Strategic Themes Product Development Pipeline 1 The diagram right highlights the number of projects at each stage of the development pipeline. Progress is evident by the comparison to the number at the same time one year ago. Identifying Novel 2 Pharmaceuticals to License The investment in the technical and product development team has given us the extra capacity to actively search out novel, ideally patent protected, products to acquire or license. Several such opportunities have progressed to co-development projects or commercial negotiation during the period. Innovating in Companion 3 Animal Identification In preparation for the recent implementation of compulsory microchipping of dogs in England, Scotland and Wales, and the anticipated disruption to the market, we have reviewed our entire business model. As a result one project has started detailed planning in Q1 of the new financial year and another will be executed in Q3. Increasing Sales Outside the UK 4 We have had a very successful first year implementing our planned expansion into more territories in Europe and the ROW, with revenues increased by 23%. Further progress will be made during the next two years as we gain the regulatory certification in each new territory. Animalcare Group plc Annual Report 2016 www.animalcaregroup.co.uk Stock Code: ANCR Identification Candidate identification and selection 2016: 14 Projects 2015: 28 Projects 09 Feasibility Investment case prepared based on development, contract manufacturing, active ingredient source and market intelligence 2016: 10 Projects 2015: 9 Projects Development Data generated from manufacturing and clinical trials 2016: 12 Projects 2015: 7 Projects Regulatory Licence application dossier prepared and submitted 2016: 2 NPD + 3 EPD Projects 2015: 4 NPD + 3 EPD Projects Commercial New product launched 2016: 3 Projects 2015: 0 Projects 2–3 years to maturity Read more online at: www.animalcaregroup.co.uk 24942.04 13/10/2016 Proof 6STRATEGIC REPORT Our Business10 KEY PERFORMANCE INDICATORS The Group utilises the following Key Performance Indicators (KPIs) to measure and monitor progress against our strategic and financial targets. KPI Why this is important Past performance Link to strategy Turnover growth 8.6% Revenue growth encompasses all aspects of our strategy and demonstrates our success in key areas including increasing flow into and through our development pipeline and increasing sales both inside and outside the UK. 12.9 13.5 14.7 1 2 3 4 2014 2015 2016 Basic Underlying Earnings per share (“EPS”) 13.0p Cash generated by operations £4.6m Product development expenditure £1.6m Underlying EPS is a key measure of our overall performance and the return we generate for shareholders before exceptional items. 12.6 13.0 1 2 3 4 10.9 Cash generation is a measure of the quality of earnings and having strong operating cash flow enables the business to generate the funds needed to invest in our product development pipeline, maintain its strong balance sheet and deliver dividend flow through our investment phase. It is critical that Animalcare reinvests its free cash to develop and advance our product development pipeline to support future organic growth in line with the strategic objectives. 2014 2015 2016 4.5 4.6 1 2 3 1.6 2014 2015 2016 1.6 1 0.8 0.2 2014 2015 2016 24942.04 13/10/2016 Proof 6 CHIEFEXECUTIVE’SREVIEW 11 “We have made great progress in the year with increased revenues, our development pipeline delivering, exports growing and exploring exciting opportunities to invest in innovation.” IAIN MENNEER Chief Executive Officer CompanionAnimalIdentification Compulsory microchipping of dogs became law in England, Scotland and Wales in April 2016. Not only is it a legal requirement for all dogs over the age of eight weeks to be microchipped it is also mandatory for the dog’s keeper’s name and contact details to be registered on a DEFRA approved database. We did not experience any uplift in microchip sales or database registrations until April when we had an unprecedented surge in both. Through careful planning and the considerable efforts of our staff and suppliers we managed to supply all our veterinary customers and ensure all registrations were fulfilled in a timely manner, unlike several of our competitors. It is too soon after the disruption to the market caused by this legislative change to conclude the long-term impact, but we believe there will be a lasting reduction in realised prices and microchip volumes. This was predicted and so plans are in the advanced stage to evolve our business models and market offering. Introduction I am very pleased with the progress we have made this year. Our revenues have continued to grow, +8.6% to £14.7m (2015: £13.5m). Our export strategy is already making early gains from ‘low hanging fruit’ with more to follow once product registrations have been made in the various territories we serve. We have been in an investment phase for almost three years now. As expected the products from that investment are now starting to flow from the development pipeline and, at the same time, our core business continues to perform well in a tough commercial environment. Projects further back in the development pipeline are also progressing well in accordance with plan. Our shareholders can be assured that our plans are on track and we are confident they we will continue to deliver. Momentum in the period has been supported by further work to ensure the business has a strong platform for growth. BusinessReview Growth has come from all areas of the business. Licensed Veterinary Medicines The Licensed Veterinary Medicines group continued to grow strongly in the financial year increasing by 7.7% to over £9.2m (2015: £8.6m). In general the new products we have launched over the last five years continue to gain market share and grow revenues, while the older products in the final phases of their product life cycles are being eroded by commercial pressures and by substitution. However, five new pharmaceutical products were launched on distribution late in the prior year. With no new products to launch in this period this allowed us to focus on consolidating our market position for these products; the combined revenues of these five products increased by 262% to £0.95m (2015: £0.26m). 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT Our Performance12 CHIEFEXECUTIVE’SREVIEWCONTINUED Animal Welfare Products The Animal Welfare Product group grew again in the period with an increase of 5.1% to £2.8m (2015: £2.6m). Our Infusion Accessories range grew by almost 10% as a result of sales and marketing focus and withdrawal of a modest competitor during the year. The Hygiene Products range grew too as a result of renewed focus following the launch of a new range of hard surface cleaners in the period which increased by 12% to £0.67m. Export Martin Gore joined Animalcare on 1st July 2015 in the role of Head of Export Development to focus on growing our product distribution in existing and new territories in Europe as this had underperformed in the past due to lack of focus. A year on, this has proved to be a great success not only growing revenues of existing products in existing territories but also sales of existing over-the-counter veterinary medicines products in new territories. This has resulted in export sales growth of almost 23% on the prior period. Martin has signed distribution agreements for some of our veterinary licensed products in territories well beyond Europe. Being regulated products there will be a modest delay until first sales while local licences are secured. People Animalcare, like any organisation, is only as good as its employees. Therefore we have worked hard over the last three years during our investment phase to make sure we have the right people in the right roles to deliver our plan. We are well through this process to ensure we have the necessary roles covered and have made further important progress during the period. Underpinning the changes we have made to our team was the introduction of a Talent Management Programme which is a framework to make sure we recruit, develop, reward and engage all our employees as best we can. In addition to recruitment in export sales, we have further strengthened our product development and registration team with appointments in both areas. To reflect the evolution of the UK veterinary customers towards consolidated corporate customers and buying groups we have strengthened our sales team yet further with experienced key account specialists now on the team. We have conducted a review of our supply chain and identified key areas to improve supplier performance and demand planning. Consequently we have started to build a specialist supply chain team late in the period. 24942.04 13/10/2016 Proof 613 Summary and Outlook I am confident that we have built a strong and scalable platform in the business. We will continue to focus hard on our in-house development pipeline and our efforts to source novel products. The strong progress made on our distribution territory expansion will be cemented and we will make further progress with regulatory registrations through the year. We recognise that it is vital for the future of the business that we identify the right products and invest in novel products. Animalcare will continue to be active on this key strategic front. Whilst the animal health industry evolves with customer consolidations and supplier M&A we have shown that we can continue to grow organically through launching new products and providing a superior service to our customers. With the first products successfully through our development pipeline we will start to see early revenue growth with more significant impact in subsequent periods. More product registrations are expected in the current period. In summary, Animalcare is in good health, generating strong cash flows to invest in the business and at such a rate that we are in a position to step up our investment in products and wider opportunities to provide the long-term success of the business. IAIN MENNEER Chief Executive Officer ProductDevelopment Three years ago we overhauled our product development activities and embarked on a large number of new projects. These projects were expected to take approximately three years to reach commercial launch. It is therefore very satisfying to see the successful registration of three products in the period, right on target. Two years ago Animalcare took the decision to move the contract manufacture of its largest product, Aqupharm I.V. Fluids, away from a global manufacturer to one better suited in terms of flexibility, cost, size and culture. This was the largest development and regulatory project tackled to date. I am pleased to report that the project went smoothly and was fully implemented in H2 FY16 with no product supply disruption or impact on our customers. The impact of the contract manufacturing move detailed above meant the loss of UK distribution rights for a general anaesthetic, Isocare. We embarked on a project to register our own product. The product was successfully registered in H2 and has since been launched to the market, again with no disruption, in Q1 FY17. Both these products were solely UK licensed so we took the opportunity to extend the product authorisations to several European territories. Another product successfully registered in H2 was Acecare, a premedicant to complement our extensive anaesthetic and analgesic range. It is the first generic acepromazine on the UK veterinary market. In all we submitted five licence applications during the period, a record number for Animalcare. Furthermore, during the period we prepared, entirely in-house, Animalcare’s first dossier submission to the veterinary regulatory authorities. Until now we have relied to a varying degree on external consultancies. This is a measure of the level of experience and quality of personnel that now work in the technical and regulatory team. The further strengthening of our product development and registration function gives us greater capacity to uncover novel and more complex product opportunities by expanding our network. We have a growing database of such ideas. We are also attracting more distribution opportunities from a wider pool of animal health companies, most from outside the UK. Brexit The referendum result in June 2016 will inevitably have an impact on our business, although the extent of this is, of course, still unclear. The timing of the result allowed us to put plans in place to incorporate the initial currency instability into our new financial year and we will continue to monitor the situation and take necessary and available action. The encouraging early progress of our sales in territories outside Europe will go some way to diversifying our markets in the short-term. The launch of products will take one to two years to materialise due to the various pharmaceutical regulatory requirements in place. Subsequent changes to the European pharmaceutical regulatory framework are of course currently unknown but we will monitor this closely and put plans in place to protect our business. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT Our Performance14 CHIEFFINANCIALOFFICER’SREVIEW “2016 was a strong year for the Group achieving underlying operating profit ahead of market expectations .” CHRIS BREWSTER Chief Financial Officer Presentation of Results We present our financial results on two bases. Underlying results show the performance of the business before exceptional and other items since the Directors believe this provides a clearer understanding of business performance. IFRS results include these items to give the statutory results. Overview of Financial Results The Group has delivered another year of strong top line growth whilst we continue to invest in our business. Underlying operating profit increased by 2.6% compared with previous year to £3.2m, slightly ahead of recently revised market forecasts of £3.1m. We have maintained sound financial discipline and our balance sheet strength continues to build, reflecting the cash generative nature of our operations. Group cash balances increased to £7.1m as at 30th June 2016, providing the business with the funds we need to continue the momentum of our product development pipeline and support future growth. Revenue £’000 Licensed Veterinary Medicines Companion Animal Identification Animal Welfare Products Total Revenue 2016 9,238 2,680 2,783 2015 8,579 2,309 2,648 14,701 13,536 % change 7.7% 16.1% 5.1% 8.6% Revenue increased by 8.6% to £14.7m (2015: £13.5m) driven by growth in the UK of 7.2% and outside the UK of 25.8%. As a result export revenues contributed 8.2% (2015: 7.1%) of Group revenues. The Licensed Veterinary Medicines group, which represents 63% of total revenue, continued its strong track record of growth, with sales up 7.7% to £9.2m, primarily reflecting full year sales of new products launched during FY15 which increased by £0.7m. Like-for-like sales declined by 0.3% with growth in our export business offsetting the prior year UK c£0.2m non- recurring first half benefit from sales of Buprecare in the UK as a result of supply issues with a competitor. Companion Animal Identification sales increased by 16.1%. Legislation has been implemented making it compulsory to microchip dogs in the UK from April 2016 resulting in an incremental sales benefit of c£0.3m. Price competition amongst suppliers has adversely impacted gross margins as noted below. Our Animal Welfare Products group grew by 5.1% driven by our growing Infusion Accessories range, which represents around 56% of the £2.8m sales. The financial performance of each product group is reviewed in more detail within the Business Review section of the Chief Executive’s Review. 24942.04 13/10/2016 Proof 615 GrossProfit Gross Profit (£’000) Gross Margin (%) 2016 7,999 54.4% 2015 7,573 56.0% % change 5.6% (1.6ppts) The strong sales performance led to gross profit increasing by 5.6% on prior year to £8.0m however our gross margin decreased from 56.0% to 54.4%. Microchip pricing was particularly competitive throughout the majority of the financial year in the run up to compulsory microchipping. Within our Licensed Veterinary Medicines group, overall gross margin has remained consistent with prior year. We anticipate gross margins to improve across the business during FY17 through a combination of favourable sales mix and cost of goods initiatives. OperatingResults £’000 Underlying operating profit Exceptional and other items Reported operating profit Operating margin % Reported profit after tax Basic underlying EPS (p) Basic EPS (p) Underlying operating profit increased by 2.6% to £3.2m and our operating margin reduced by 170 basis points to 20.5%, the latter reflecting the continuing investment in our business, in particular our people for which employee costs increased by £0.3m, to position the business for future growth. Exceptional and other items principally incorporate the amortisation of acquired intangibles as detailed in note 4. Our effective tax rate has reduced from 15.8% to 14.6% as a result of the significant increase in product development investment on which research and development tax credits are claimed for qualifying expenditure. Reflecting all of the above, reported profit after tax was up 4.0% to £2.6m (2015: £2.5m). Basic underlying EPS improved by 3.2% to 13.0 pence (2015: 12.6 pence). Basic EPS, which incorporates non-underlying items, rose by approximately the same amount to 12.5 pence (2015: 12.1 pence). 2016 3,190 (173) 3,017 20.5% 2,634 13.0 12.5 2015 3,110 (110) 3,000 22.2% 2,534 12.6 12.1 % change 2.6% 0.6% (1.7ppts) 4.0% 3.2% 3.3% Dividends The Board is proposing a final dividend in respect of the year of 4.7 pence per share, giving a total dividend of 6.5 pence per share for 2016 (2015: 6.1 pence per share). This final dividend is subject to shareholder approval at the Annual General Meeting on 15th November 2016 and will be paid on 25th November 2016 to shareholders on the register at the close of business on 21st October 2016. The ordinary shares will become ex- dividend on 20th October 2016. The Board will continue to monitor the Group’s cash position to ensure an appropriate balance between investment for future growth and dividend flow to deliver overall value for our shareholders. Cash Flow The Group cash position grew by £1.3m to £7.1m as at 30th June 2016, with the business continuing to generate strong levels of operating cash. We maintain focus on robust working capital management however expect a net investment within working capital during FY17 to support growth. The strong momentum in building value within our product development pipeline continues, with planned investment substantially increasing as shown in the chart below. 1.6 Product Development Expenditure £m 0.8 0.2 2014 2015 2016 Summary and Outlook Whilst the decision by the people of the UK to leave the EU has not as yet resulted in any current legal or regulatory change, it is clear there are immediate secondary effects of this decision, in particular political and economic uncertainty, as well as significant exchange rate volatility. Nevertheless, as yet we have not observed major disruption to our operating activities and our strategic objectives remain at this present time unchanged – we will continue to invest in our business for future growth. Sterling weakness has impacted on our costs of goods, in particular our pharmaceutical products imported from mainland Europe. The business is taking steps to mitigate certain of this exposure and the growth in our export business will provide some natural hedge. Our strong balance sheet will help absorb the uncertainty in the macroeconomic environment. Overall the Group continues to make good progress in executing its strategy to drive future growth, which is reflected in our financial performance and level of investment in the business. CHRIS BREWSTER Chief Financial Officer 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT Our Performance16 PRINCIPAL RISKS Risk Management Framework The Board is responsible for maintaining and reviewing the effectiveness of our risk management activities, intended to monitor and mitigate, rather than eliminate, the significant risks that the Group is exposed to. Animalcare has implemented policies and procedures to address risk including with respect to product development, operations and regulatory compliance. In accordance with our governance practices, the Audit Committee supports the Board of Directors in monitoring the Group’s risk appetite and exposures, and is responsible for reviewing the effectiveness of the risk management and internal control systems. Our Risks A summary of the principal risks together with an explanation of how the Group mitigates each risk their trend and linkage to our strategy are set out in the table below. Risk Alignment to strategy Potential impact Mitigation Trend 1 2 Complete failure of a project or failure to meet commercial expectations due to for example competitor launches (generic or novel) would result in impairment of capitalised development costs. 1 2 3 4 The growth of corporate customers and buying groups presents an opportunity for growth but at the expense of margins. The Group continues and plans to commit significant resources to expand our product portfolio. Following careful selection of development strategy, each new product development project undergoes rigorous review by the cross-discipline senior management team with final sign-off by the Board. The pipeline is reviewed regularly, with corresponding updates provided to the Board, to ensure each project is progressing according to plan. We continue to develop and strengthen our sales and marketing teams in respect of key account support and achieve our goal to better serve our changing customer-base. Product developmentrisk Pharmaceutical development is complex, involving technical, regulatory and financial risk. Failure to successfully deliver new product development projects could have a material impact on the Group’s results and damage our market position and relationship with our customers. Market risk The veterinary market continues to see a customer-base that is consolidating via the emergence of buying groups and corporate customers who are looking for value from the products and services we provide. Key Up Down Same 24942.04 13/10/2016 Proof 6 17 Risk Alignment to strategy Potential impact Mitigation Trend 1 3 4 Distribution risk The supply of products to our customers in a timely manner is vital to the success of the Group. The Group does not manufacture any of its own products and is solely reliant on an increasing third party supplier and contract manufacturer base across the UK and Europe. Any disruption to the relationship with our key supply partners or interruption to the supply chain could result in significant loss of revenue and damage the Group’s reputation with its customers. 1 2 4 Peoplerisk The Group has a small Executive and senior management team whose skills, knowledge, experience and performance make a large contribution to the success of the Group. Failure to retain and attract high calibre individuals could impact the successful implementation of our strategy. Given the increasing complexity and diversity in our supply chain, we have identified the need for increased specialist resource in this area, the recruitment for which is ongoing. Supply chain risk mitigation strategies include close monitoring of supplier performance and maintenance of adequate inventories, including safety stock held by our suppliers, based on risk assessments. Remuneration packages are reviewed annually to help ensure that the Group has the right mix of base salary, short-term and long-term incentives to attract, retain and reward key employees to execute our growth strategy. Furthermore, we have introduced a Talent Management Programme to help engage all of our employees. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT Our Performance 18 BOARDOFDIRECTORS James Lambert Non-Executive Chairman Nick Downshire Non-Executive Director Ray Harding Non-Executive Director Length of service 8 years; appointed to the Board in 2008 Length of service 8 years; appointed to the Board in 2008 Length of service 5 years; appointed to the Board in 2011 Committeemembership Audit Committee and Nomination Committee Committeemembership Chair of the Audit Committee and Remuneration Committee Keyskillsandexperience James was appointed Chairman of Animalcare in 2008 when it was acquired by Ritchey plc for whom he was Chairman from 2005 and a NED from 2003. Before this, in 1985, he was Co-Founder and CEO for 28 years of R&R Ice Cream and retired as Executive Chairman in 2014, which during this time became one of Britain’s most successful businesses. James was appointed Chairman of Burton’s Biscuits in 2013, Chairman of Inspired Pet Nutrition in 2015, Chairman of Whitman Howard in 2016 and NED of Story Homes in 2016. He also won the EY UK Entrepreneur of the Year award in 2014 and represented the UK in the world finals. James has spent a lifetime helping build, develop and manage successful businesses enabling them to reach their full potential and give them strategic direction. Keyskillsandexperience Nick joined the Board of Animalcare when it was acquired by Ritchey plc for whom he acted as a director since 1998. Nick is a qualified chartered accountant who worked in corporate finance and venture capital before becoming the finance director of a software company. He has held non-executive directorships in a diverse range of businesses in the insurance, agricultural, hospitality, education and technology sectors. He runs an estate in Yorkshire and is also Chairman of the CLA for Yorkshire and also chairs their Agriculture and Land Use national committee, as well as acting as a Trustee for a number of charitable and land related trusts. His experience with other organisations and his professional background assist him to chair the audit committee and bring objectivity and analysis to the remuneration committee. Committeemembership Chair of the Nomination Committee and Remuneration Committee Keyskillsandexperience A qualified veterinarian Ray has worked in the veterinary pharmaceutical industry since 1979 in a number of technical and product development roles in several major, global, research-based companies. He established the team at Cyton Biosciences Ltd in 1997 to provide specialist services in new product development and registration of veterinary medicines in Europe. He left the company in 2012 to take the role of independent consultant. Appointed in 2011, he brings a unique technical expertise to the board of Animalcare with his extensive international experience of the development and regulation of veterinary medicines and the commercial environment in which the company operates. In addition he provides an independent and objective role as chair of the Board Remuneration and Nomination Committees. 24942.04 13/10/2016 Proof 619 Iain Menneer Chief Executive Officer Chris Brewster Chief Financial Officer and Company Secretary Length of service 4 years; appointed to the Board in 2012 Committeemembership By invitation Keyskillsandexperience Chris joined the Board as Chief Financial Officer in June 2012. He has a broad range of experience gained during his ten years’ working across a number of functions at KPMG and through his role as Group Accounting Manager at Findus Group. Since joining, Chris has developed the systems, controls and management information needed to support the growth and strategy of the business. More recently Chris has taken responsibility for leading the changes required within the supply chain function to provide a robust platform for growth. Length of service 13 years; appointed to the Board in 2011 Committeemembership Secretary of the Nomination Committee and Remuneration Committee by invitation Keyskillsandexperience Iain gained his PhD in chemistry in 1996. He worked in product and technical development in the brewing industry, first at an independent consultancy then at Bass Brewers Ltd before moving to the University of York in a business development role in their technology transfer department. Iain joined Animalcare in 2003 and has since held positions in marketing, business development and sales, including an instrumental role in the new product development pipeline. Iain was promoted to the Board as Director of Marketing in July 2011. Iain was appointed Managing Director of Animalcare Ltd in March 2012 and subsequently Chief Executive Officer in January 2013. Iain has extensive experience of the Animalcare business, the animal health industry and pharmaceutical development. Iain has lead the transformation of the business infrastructure over the last three years. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCE20 CORPORATEGOVERNANCE Whilst the Group is listed on AIM, it is not required to comply with the provisions of the UK Corporate Governance Code (“the Code”). The Board, however, is committed to a high standard of corporate governance across the Group, recognising that it is important in protecting shareholders’ interests and the long-term success of the Group. It has therefore adopted some of the principles of the Code so far as the Board consider practicable and appropriate to the size of the Group. BoardandCommitteeStructure TO BE DRAWN BoardofDirectors The Board, which is headed by the Chairman, comprises five Directors, three of whom are non-executive. Directors’ profiles are detailed on pages 18 and 19. The Board meet at least seven times throughout the year, with further ad hoc meetings as required. Audit Committee Through the Audit Committee, the Directors ensure the integrity of financial information, the effectiveness of the financial controls and the internal control and risk management systems. The Audit Committee is composed of two Non-Executive Directors including Nick Downshire who has been appointed Chairman. The Chief Financial Officer and external auditors attend by invitation. Nomination Committee The Company has established a Nomination Committee currently composed of two Non-Executive Directors including Ray Harding as Chair. Meetings are arranged as necessary. The Committee is responsible for nominating candidates (both Executive and Non-Executive) for the approval of the Board, to fill vacancies or appoint additional persons to the Board. All Directors are required to seek election by shareholders at the first opportunity after their appointment and must stand for re-election to the Board every three years under the Company’s Articles of Association. Remuneration Committee The members of the Remuneration Committee are Ray Harding (Chairman) and Nick Downshire. Under its Terms of Reference, the Remuneration Committee is required to meet at least twice a year and at such times as the Chairman of the Committee shall think fit. The Committee’s primary responsibilities are to set key performance targets for Executive Directors, assess executive remuneration against targets, and ensure that remuneration standards at the Company are in line with best practice and guidance. During 2016, the Committee sought external guidance for the setting of FY17 remuneration. Further, during 2014 the advice of KPMG LLP was taken to provide guidance on the Group’s Long Term Incentive Plan. The Remuneration Committee reports on its activities to the Board meeting immediately following the committee’s meetings. Senior Management Team This comprises six senior managers and the CFO and is chaired by the CEO. The SMT meet monthly to consider in particular strategic and operational plans, monitor operating and financial performance and assess and manage business risk. 24942.04 13/10/2016 Proof 6AuditSeniorManagement TeamBoard of DirectorsCEODIRECTORS’REPORT 21 The Directors present their Annual Report on the affairs of the Group together with the financial statements and auditor’s report for the year ended 30th June 2016. PrincipalActivities The principal activity of the Group during the year was the development, sale and distribution of licensed veterinary pharmaceuticals and identification products and services to companion animal veterinary markets. BusinessReviewandFutureDevelopments A review of the business and future developments is provided in the Chairman’s Statement, Chief Executive’s Review and Chief Financial Officer’s Review. ResearchandDevelopment Our new product development programme is key to the future long-term growth and success of the Group and we are committed to the development of new and innovative products to meet the needs of our customers. Further information in relation to product development can be found in the Our Business and Strategy section of this report. During the year to 30th June 2016 the Group incurred research and development expense of £156,000 (2015: £143,000) and a further £1,563,000 (2015: £768,000) was capitalised as development costs. Dividends Subject to shareholder approval at the Annual General Meeting on 15th November 2016, the Board proposes paying a final dividend of 4.7 pence per share on 25th November 2016 to shareholders on the register on 21st October 2016. This will make a total dividend of 6.5 pence per share for 2016. CapitalStructure The Company’s issued share capital as at 30th June 2016 was 21,059,636 ordinary shares of 20 pence each, each credited as fully paid. Directors The following Directors held office during the year ended 30th June 2016 and subsequently: Details of Directors’ share options and long-term incentive plans are provided in note 7 to the financial statements. The Company maintains Directors’ and Officers’ liability insurance for the benefit of its Directors, which was in place throughout the year ended 30th June 2016 and remains in place at the date of this report. Creditor Payment Policy We endeavour to maintain strong trading relationships with our suppliers. Terms of payment are agreed with suppliers in advance and it is the Group’s policy to settle its liabilities in accordance with these terms. The number of days purchases included in trade creditors at 30th June 2016 was 59 days (2015: 44 days). CorporateGovernance The Group’s approach and policies surrounding Corporate Governance, which this Director’s Report comprises, are shown on page 20. Charitable and Political Donations During the year the Group made charitable donations of £71 (2015: £325). No political donations were made during the year (2015: £nil). Employees The Board recognises that the Group’s performance and success are directly related to our ability to attract, retain and motivate high calibre employees. We are committed to linking reward to business and individual performance, thereby giving employees the opportunity to share in the financial success of the Group. Employees are typically provided with financial incentives related to the performance of the Group in the form of annual bonuses. The Board also recognises employees for their contribution through the use of employee incentive plans and share plans within overall remuneration. Applications for employment by disabled persons are given full and fair consideration. When existing employees become disabled every effort is made to provide continuing employment wherever possible. C J Brewster Lord Downshire R B Harding J S Lambert Dr I D Menneer 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCE22 DIRECTORS’REPORTCONTINUED Substantial Shareholdings In accordance with the Disclosure Rules and Transparency Rules, the Company has been notified of the following interests exceeding the 3% notification threshold as at 30th September 2016, a date not more than one month before the date of the notice of the Annual General Meeting: Name of holder Liontrust Asset Management Unicorn Asset Management Octopus Investments Lord Downshire** Mr J S Lambert Investec Wealth & Investment Hargreave Hale Lazard Freres Gestion No. of ordinary shares 2,732,413 1,681,900 1,425,384 1,420,029 1,313,691 1,280,933 1,221,792 1,160,000 % holding 12.9% 8.0% 6.8% 6.7% 6.2% 6.1% 5.8% 5.5% ** Lord Downshire’s interest includes a non-beneficial interest in 310,446 ordinary shares GoingConcern The principal risks and uncertainties facing the Group are set out on page 16. For the purposes of their assessment of the appropriateness of the preparation of the Group’s accounts on a going concern basis, the Directors have considered the current cash position and forecasts of future trading including working capital and investment requirements. During the year the Group met its day-to-day general corporate and working capital requirements through existing cash resources. At 30th June 2016 the Group had cash on hand of £7.1m (30th June 2015: £5.8m). Overall, the Directors believe the Group is well placed to manage its business risks successfully and continue to be profitable and cash generative. The Group’s forecasts and projections, taking account of reasonable possible changes in trading performance, show that the Group should have sufficient cash resources to meet its requirements for at least the next 12 months. Accordingly, the adoption of the going concern basis in preparing the financial statements remains appropriate. Auditor Each of the persons who is a Director at the date of this Annual Report confirms that: y So far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and y The Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. A resolution to reappoint KPMG LLP as auditors and to authorise the Directors to determine their remuneration will be put to the members at the forthcoming Annual General Meeting. Animalcare Group plc By order of the Board, CHRIS BREWSTER Company Secretary 11th October 2016 24942.04 13/10/2016 Proof 6STATEMENTOFDIRECTORS’RESPONSIBILITIES in respect of the Annual Report and the Financial Statements for the year ended 30ᵗʰ June 2016 23 The Directors are responsible for preparing the Strategic Report, the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent Company financial statements on the same basis. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the Directors are required to: y select suitable accounting policies and then apply them consistently; y make judgements and estimates that are reasonable and prudent; y state whether they have been prepared in accordance with IFRSs as adopted by the EU; and y prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent Company will continue in business The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCE24 INDEPENDENTAUDITOR’SREPORT We have audited the financial statements of Animalcare Group plc for the year ended 30th June 2016 set out on pages 25 to 58. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. RespectiveresponsibilitiesofDirectorsand auditor As explained more fully in the Statement of Directors’ Responsibilities set out on page 23, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scopeoftheauditofthefinancialstatements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opiniononfinancialstatements In our opinion: y the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 30th June 2016 and of the Group’s profit for the year then ended; y the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; y the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and y the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opiniononothermattersprescribedbythe CompaniesAct2006 In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Mattersonwhichwearerequiredtoreportby exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: y adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or y the parent Company financial statements are not in agreement with the accounting records and returns; or y certain disclosures of Directors’ remuneration specified by law are not made; or y we have not received all the information and explanations we require for our audit. CLAIRE NEEDHAM (SENIOR STATUTORY AUDITOR) For and on behalf of KPMG LLP Statutory Auditor Chartered Accountants 1 Sovereign Square, Sovereign Street Leeds LS1 4DA 11th October 2016 24942.04 13/10/2016 Proof 6CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND COMPREHENSIVE INCOME Year ended 30ᵗʰ June 2016 25 Underlying results before exceptional and other items 2016 £'000 Exceptional and other items 2016 £'000 14,701 (6,702) 7,999 (255) (4,398) (156) 3,190 33 — 3,223 (479) — — — — (173) — (173) 36 — (137) 27 Underlying results before exceptional and other items 2015 £'000 Exceptional and other items 2015 £'000 13,536 (5,963) 7,573 (279) (4,041) (143) 3,110 27 — 3,137 (502) — — — — (110) — (110) — (17) (127) 26 Total 2016 £'000 14,701 (6,702) 7,999 (255) (4,571) (156) 3,017 69 — 3,086 (452) Total 2015 £'000 13,536 (5,963) 7,573 (279) (4,151) (143) 3,000 27 (17) 3,010 (476) 2,744 (110) 2,634 2,635 (101) 2,534 13.0p 12.8p 12.5p 12.3p 12.6p 12.5p 12.1p 12.0p Revenue Cost of sales Gross profit Distribution costs Administrative expenses Research & development expenses Operating profit/(loss) Finance income Finance expense Profit/(loss) before tax Income tax (expense)/credit Total comprehensive income/ (loss) for the year Earnings per share Basic Fully diluted Note 5 4,6 9 9 4,6 10 12 12 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 analysed in detail in note 4 to these financial statements. Total comprehensive income/(loss)for the year is attributable to the equity holders of the parent. The notes 1 to 26 form part of these financial statements. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS26 STATEMENTSOFCHANGESINSHAREHOLDERS’EQUITY Year ended 30ᵗʰ June 2016 GROUP Balance at 1st July 2014 Total comprehensive profit for the year Transactions with owners of the Company, recognised in equity: Dividends paid Issue of share capital Share-based payments Balance at 1st July 2015 Total comprehensive profit for the year Transactions with owners of the Company, recognised in equity: Dividends paid Issue of share capital Share-based payments Balance at 30th June 2016 COMPANY Balance at 1st July 2014 Total comprehensive profit for the year Transactions with owners of the Company, recognised in equity: Dividends paid Issue of share capital Share-based payments Balance at 1st July 2015 Total comprehensive loss for the year Transactions with owners of the Company, recognised in equity: Dividends paid Issue of share capital Share-based payments Balance at 30th June 2016 Note 11 23 25 11 23 25 Note 11 23 25 11 23 25 Share capital £'000 4,192 — — 12 — Share premium account £'000 6,391 — — 70 — 4,204 6,461 — — 8 — — — 45 — Retained earnings £'000 8,870 2,534 Total £'000 19,453 2,534 (1,217) (1,217) — 139 10,326 2,634 82 139 20,991 2,634 (1,283) (1,283) — 120 53 120 4,212 6,506 11,797 22,515 Share capital £'000 4,192 — — 12 — Share premium account £'000 6,391 — — 70 — 4,204 6,461 — — 8 — — — 45 — 4,212 6,506 Retained earnings £'000 3,548 (327) Total £'000 14,131 (327) (1,217) (1,217) — 74 2,078 (399) 82 74 12,743 (399) (1,283) (1,283) — 47 443 53 47 11,161 As permitted by section 408 of the Companies Act 2006, the statement of comprehensive income of the parent Company is not presented as part of these financial statements. 24942.04 13/10/2016 Proof 6BALANCESHEETS Year ended 30ᵗʰ June 2016 27 Non-current assets Goodwill Other intangible assets Property, plant and equipment Investments in subsidiary companies Deferred tax asset Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Current tax liabilities Deferred income Net current assets/(liabilities) Non-current liabilities Deferred income Deferred tax liabilities Total liabilities Net assets Capital and reserves Called up share capital Share premium account Retained earnings Equity attributable to equity holders of the parent The notes 1 to 26 form part of these financial statements. 13 14 15 16 22 17 18 18 19 21 21 22 23 Group 2016 £'000 Note 2015 £'000 12,711 1,780 306 — — 12,711 2,968 281 — — 15,960 14,797 1,604 2,189 7,118 10,911 26,871 (3,027) (101) (220) (3,348) 7,563 (762) (246) (1,008) (4,356) 22,515 4,212 6,506 11,797 22,515 1,653 2,247 5,777 9,677 24,474 (2,186) (212) (234) (2,632) 7,045 (724) (127) (851) (3,483) 20,991 4,204 6,461 10,326 20,991 Company 2016 £'000 — 4 — 14,361 105 14,470 — 332 1,576 1,908 16,378 2015 £'000 — 6 — 14,361 88 14,455 — 238 1,576 1,814 16,269 (5,217) (3,526) — — (5217) (3,309) — — — (5217) 11,161 4,212 6,506 443 11,161 — — (3,526) (1,712) — — — (3,526) 12,743 4,204 6,461 2,078 12,743 The financial statements of Animalcare Group plc, registered number 1058015, were approved by the Board of Directors and authorised for issue on 12th October 2016. They were signed on its behalf by: CHRIS BREWSTER Chief Financial Officer 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS28 CASH FLOW STATEMENTS Year ended 30ᵗʰ June 2016 Comprehensive income/(loss) for the year before tax Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible assets Finance income Share-based payment expense Net deferral/(release) of deferred income Operating cash flows before movements in working capital Decrease in inventories Decrease/(increase) in receivables Increase in payables Cash generated by operations Income taxes (paid)/received Net cash flow from operating activities Investing activities: Payments to acquire intangible assets Payments to acquire property, plant and equipment Disposal of intangible assets Interest received Net cash (used in)/generated by investing activities Financing: Receipts from issue of share capital Equity dividends paid Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year Comprising: Cash and cash equivalents Note 15 14 9 25 21 14 15 14 11 Group Company 2016 £'000 3,086 66 369 (33) 120 24 3,632 49 77 822 4,580 (444) 4,136 2015 £'000 3,010 73 359 (27) 139 (14) 3,540 767 (392) 608 4,523 (631) 3,892 (1,604) (812) (41) 47 33 (7) — 27 (1,565) (792) 53 (1,283) (1,230) 1,341 5,777 7,118 82 (1,217) (1,135) 1,965 3,812 5,777 2016 £'000 (507) — 2 (11) 47 — (469) — (3) 1,691 1,219 — 1,219 — — — 11 11 53 (1,283) (1,230) — 1,576 1,576 2015 £'000 (464) — 1 (15) 74 — (404) — (6) 1,798 1,388 — 1,388 (7) — — 15 8 82 (1,217) (1,135) 261 1,315 1,576 18 7,118 5,777 1,576 1,576 24942.04 13/10/2016 Proof 6NOTES TO THE ACCOUNTS Year ended 30ᵗʰ June 2016 29 1.GeneralInformation Animalcare Group plc (“the Company”) is a company incorporated in England and Wales under the Companies Act 2006 and is domiciled in the United Kingdom. The Group comprises Animalcare Group plc and its subsidiary, Animalcare Ltd. The nature of the Group’s operations and its principal activities are set out in note 5 and within the Directors’ Report. New,revisedorchangestoexistingaccountingstandards The following standards and amendments have been published, endorsed by the EU, with an effective date after the date of these financial statements. Their adoption, where applicable, is not expected to have a material effect on the financial statements of the Group unless otherwise indicated. International Financial Reporting Standards IFRS 15 Revenue from Contracts with Customers IFRS 9 Financial Instruments IFRS 16 Leases – this new standard will result in previously recognised operating leases, as disclosed in note 24, being treated on-balance sheet similar to current finance lease accounting. Applies to periods beginning after 1st January 2018 1st January 2018 1st January 2019 2.SignificantAccountingPolicies Basisofpreparation The Group and Company financial statements have been prepared and approved by the Directors under the historical cost convention, except for the revaluation of certain financial instruments, in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“adopted IFRSs”) and the Companies Act 2006 as applicable to companies reporting under IFRS. They have also been prepared in accordance with the requirements of the AIM Rules. Goingconcern An analysis of the factors likely to impact on the Group’s future business activities, performance and strategy are set out in the Chief Executive’s Review and Chief Financial Officer’s Review. The principal risks and uncertainties facing the Group are set out in the Strategic Report on pages 16 and 17. For the purposes of their assessment of the appropriateness of the preparation of the Group’s accounts on a going concern basis, the Directors have considered the current cash position and forecasts of future trading including working capital and investment requirements. During the year the Group met its day-to-day general corporate and working capital requirements through existing cash resources. At 30th June 2016 the Group had cash on hand of £7.1m (30th June 2015: £5.8m). Overall, the Directors believe the Group is well placed to manage its business risks successfully. The Group’s forecasts and projections, taking account of reasonable possible changes in trading performance, show that the Group should have sufficient cash resources to meet its requirements for at least the next 12 months. Accordingly, the adoption of the going concern basis in preparing the financial statements remains appropriate. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS30 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 Basisofconsolidation The consolidated financial statements incorporate the financial statements of the Company and the entity controlled by the Company (its subsidiary) made up to 30th June each year. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of a subsidiary acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of the subsidiary to bring the accounting policies used into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. Exceptionalandotheritems Exceptional items are material items of income or expense which, because of their nature and the expected frequency of the events giving rise to them, merit separate disclosure. Other items relate to the amortisation of acquired intangible assets and fair value movements on foreign exchange hedging instruments. The separate presentation of exceptional and other items enables the users of the accounts to better understand the elements of trading performance during the year and hence to better assess trends in that performance. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in comprehensive income and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (“CGUs”) expected to benefit from the synergies of the combination. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Intangible assets The Group recognises intangible assets at cost less accumulated amortisation and impairment losses. Intangible assets arise both as a result of applying IFRS 3 which requires the separate recognition of intangible assets from goodwill on all business combinations from 1st January 2004, and from the purchase of software (that is separable from any associated hardware), and development machinery and from research and development (see below). Intangible assets are amortised on a straight-line basis over their useful economic lives as follows: Customer relationships Brands Software 10 years 15 years Estimated useful life, normally 2–4 years New product development costs & marketing authorisations Estimated economic life, normally 5–7 years 24942.04 13/10/2016 Proof 631 Researchanddevelopmentcosts Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised as an expense in the year in which it is incurred. An internally generated intangible asset arising from the Group’s new product development is recognised only if all of the following conditions are met: y an asset is created that can be identified (such as a new pharmaceutical product); y it is probable that the asset created will generate future economic benefits; and y the development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basis over their estimated economic lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the year in which it is incurred. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Revenue from the sale of goods is recognised when the risks and rewards of ownership are transferred which is generally when goods are delivered. Income received in relation to long-term service contracts is deferred and subsequently recognised over the life of the relevant contracts. Further details are contained in note 21. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessee Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Employeebenefits-Pensions The Group operates a stakeholder pension scheme available to all eligible employees. Payments to this scheme are charged as an expense as they fall due. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS32 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 Investments in subsidiaries Investments in Group companies are stated at cost less provisions for impairment losses. Foreign currencies In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in comprehensive income for the year. Segmentreporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transaction with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the Board to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the first-in, first-out principle. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Dividends Dividends paid are recognised within the statement of changes in equity only when an obligation to pay the dividend arises prior to the year end. Share-basedpayments The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of such equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions (with a corresponding movement in equity). Fair value is measured by use of the Black–Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The fair value of the shares issued under the new Long Term Incentive Plan were valued on a discounted cash flow basis in conjunction with a third party valuation specialist. 24942.04 13/10/2016 Proof 633 Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Property,plantandequipment Land and buildings and other assets held for use in the production or supply of goods and services or for administrative purposes, fixtures and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Other than for land, which is not depreciated, depreciation is charged so as to write off the cost of assets, less their estimated residual value, over their estimated useful lives, as follows: Straight-line Leasehold improvements Plant and equipment Office furniture and equipment 10 years 4–7 years 3–5 years The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the net sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income as incurred. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation outstanding at the balance sheet date, and are discounted to present value where the effect is material. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS34 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 Impairmentoftangibleandintangibleassetsexcludinggoodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit (CGU) to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (CGU) in prior years. A reversal of an impairment loss is recognised as income immediately. Financial instruments Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade receivables Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in comprehensive income when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits repayable on demand, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Trade payables Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Finance income and expense Finance income comprises interest receivable on funds invested and foreign exchange gains on hedging instruments that are recognised in the income statement (see note 9). Finance expenses comprise foreign exchange losses on hedging instruments that are recognised in the income statement (see note 9). Derivative financial instruments The Group uses derivative financial instruments to manage its exposure to foreign exchange risk. Derivatives are initially recognised at fair value and the gain or loss recognised on remeasurement to fair value recognised in profit or loss. 24942.04 13/10/2016 Proof 635 3.CriticalAccountingJudgementsandKeySourcesofEstimationUncertainty CriticaljudgementsinapplyingtheGroup’saccountingpolicies In the process of applying the Group’s accounting policies, which are described in note 2, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements (apart from those involving estimations, which are dealt with below). Capitalised new product development expenditure It is the Group’s policy, where the relevant criteria of IAS 38 “Intangible Assets” are met, to capitalise new product development expenditure and to amortise this expenditure over the estimated economic life of the asset (product). Judgement is required when assessing the technical and commercial feasibility of new product development projects including whether regulatory approval will ultimately be achieved. Capitalised software expenditure The Group has historically capitalised software projects and developments. Expenditure on a bespoke web based system, designed to facilitate online ordering of its products and services, is currently capitalised in the Group’s financial statements as the Directors have adjudged it to meet the relevant criteria. The rate of depreciation on capitalised software is set so as to reflect the pattern of usage and the level of pace of change within the global information technology market. Key sources of estimation uncertainty Impairment of non-current assets Determining whether a non-current asset is impaired requires an estimation of the “value in use” and/or the “fair value less costs to sell” of the cash-generating units (“CGUs”) to which the non-current asset has been allocated. The value in use calculation requires an estimate of the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value. The key assumptions for these value in use calculations are those regarding discount rates, growth rates and expected changes to selling prices and direct costs. The Directors estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU. In the current year the Directors estimated the applicable rate to be 9.4% (2015: 13.2%). The Directors’ sensitivity analysis indicates significant headroom to the carrying value of the CGU when taking into account a reasonably possible change in any one of the key assumptions used in the value in use calculations. The Group prepares cash flow forecasts derived from the most recent financial budgets and projections approved by management for the next five years, thereafter assuming an estimated growth rate of 1.8% (2015: 2%). The growth rates for the five year period are based on current performance of the existing product portfolio and the estimated contribution from the Group’s new product development pipeline. The Directors believe that the long-term growth rate does not exceed the average long-term growth rate for the UK economy. Impairment of slow-moving and obsolete inventory The Group performs regular stock holding reviews, in conjunction with sales and market information, to help determine any slow-moving or obsolete lines. Where identified, adequate provision is made in the financial statements for writing down or writing off the value of such lines in order to reflect the realisable value of its stock. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS36 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 4.ExceptionalandOtherItems Amortisation of acquired intangible assets Supplier legal dispute – dividend received Strategic review Interest rate swap refund Fair value movements on foreign currency hedging Total exceptional and other items Note 14 9 2016 £'000 118 — 55 — (36) 137 2015 £'000 119 (9) — (18) 35 127 The amortisation charge totalling £119,000 (2015: £119,000) relates to brand and customer relationship intangible assets recognised on the acquisition of Animalcare Ltd in January 2008. 5.RevenueandOperatingSegments IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Operating Decision Maker to allocate resources and assess performance. The Chief Operating Decision Maker is considered to be the Board of Directors of Animalcare Group plc. Performance assessment is primarily based on underlying operating profit and cash generation. The Group solely comprises one reportable segment, being Animalcare. Revenue Gross profit Underlying operating profit Other Items Exceptional items Operating profit Finance income Finance expense Profit before tax Animalcare 2016 £'000 Note 14,701 7,999 3,190 (119) (54) 3,017 69 — 3,086 4 4 9 9 Animalcare 2015 £'000 13,536 7,573 3,110 (119) 9 3,000 27 (17) 3,010 24942.04 13/10/2016 Proof 6Products and Services Licensed Veterinary Medicines Companion Animal Identification Animal Welfare Other information Intangible asset additions Property, plant and equipment additions Depreciation and amortisation Consolidated assets Consolidated liabilities Consolidated net assets Key customers Number Percentage of total revenue 37 Animalcare 2016 £'000 Animalcare 2015 £'000 Note 14 15 14,15 9,238 2,680 2,783 8,579 2,309 2,648 14,701 13,536 1,604 41 435 26,871 (4,356) 22,515 2016 £'000 3 81% 812 7 432 24,474 (3,483) 20,991 2015 £'000 3 82% Key customers, all within the Animalcare segment, represent the three largest UK veterinary wholesalers as described in the Our Business section page 7. Individual customer revenues represent 33%/28%/21% (2015: 33%/28%/22%) of total revenue. Geographical market United Kingdom Europe and Rest of World 2016 £'000 13,490 1,211 14,701 2015 £'000 12,573 963 13,536 All the Group assets are wholly located in the United Kingdom and accordingly no geographical analysis of assets and liabilities is presented. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS38 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 An analysis of total Group revenue is as follows: Revenue from sale of goods Revenue from provision of services Finance income 6.TotalComprehensiveIncomefortheYear Total comprehensive income for the year has been arrived at after charging: Cost of inventories recognised as expense Depreciation of tangible assets Amortisation of intangible assets Research and development Operating lease rentals Foreign exchange losses Increase in provision for inventories 2016 £'000 13,609 1,092 14,701 33 14,734 2015 £'000 12,590 946 13,536 27 13,563 2016 £'000 2015 £'000 6,515 5,831 66 369 156 211 43 9 73 359 143 199 1 23 The above items are those charged to total comprehensive income only. Full details on items charged/(credited) to exceptional and other items are contained in note 4. The analysis of remuneration paid to the Company’s auditor is as follows: Fees payable to the Company's auditor for the audit of the Company's annual accounts The audit of the Company's subsidiaries pursuant to legislation Total audit fees Tax services Other services Total non-audit fees Total auditors' remuneration 2016 £'000 2015 £'000 13 21 34 11 — 11 45 13 20 33 11 16 27 60 24942.04 13/10/2016 Proof 639 7.Directors’RemunerationandInterests Emoluments The various elements of remuneration received by each Director were as follows: Year ended 30th June 2016 J S Lambert* Lord Downshire* R B Harding* Dr I D Menneer C J Brewster Total Year ended 30th June 2015 J S Lambert* Lord Downshire* R B Harding* Dr I D Menneer C J Brewster Total * Indicates Non-Executive Directors. Salary £'000 Bonus £'000 Company pension contributions £'000 Benefits £'000 Total £'000 35 23 23 143 102 326 34 23 23 140 102 322 — — — 18 17 35 — — — 16 11 27 — — — 17 12 29 — — — 17 12 29 — 3 — 7 6 16 — 1 — 8 6 15 35 26 23 186 137 406 34 24 23 181 131 393 Mr George Gunn was appointed to the Board as a Non-Executive Director on 9th February 2015 and subsequently resigned on 2nd June 2015. Mr Gunn received no remuneration during this period. All Company pension contributions relate to defined contribution pension schemes. Benefits consist of company car and private medical insurance. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS40 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 Shareoptions The Directors had the following beneficial options: I D Menneer Scheme Exercise Price Date of Grant EMI EMI EMI Unapproved SAYE Unapproved £1.675 14th October 2011 £1.30 2nd August 2012 £1.325 £1.40 £1.03 £1.415 20th November 2012 21st February 2013 22nd May 2013 20th June 2013 28th November 2014 Total SAYE £1.05 Outstanding at 30th June 2015 and 30th June 2016 60,000 60,000 50,000 90,000 4,377 90,000 5,142 359,519 C J Brewster Scheme Exercise Price Date of Grant EMI £1.30 22nd June 2012 EMI SAYE EMI £1.30 £1.03 £1.415 SAYE £1.05 Total 2nd August 2012 22nd May 2013 20th June 2013 28th November 2014 Outstanding at 30th June 2015 and 30th June 2016 30,000 30,000 8,754 40,000 8,571 117,325 During FY15, 3,358 shares were allotted to Dr Menneer following exercise under the Animalcare Group Save As You Earn scheme. The exercise price was equal to market value at that time hence no gain or loss arose. The Directors’ interests in the shares of the Company as at 30th June are set out below: J S Lambert Lord Downshire I D Menneer C J Brewster In addition to the above, Lord Downshire had a non-beneficial interest in 310,446 shares. 2016 2015 Ordinary shares of 20p Ordinary shares of 20p 1,313,691 1,413,691 1,109,583 1,109,583 17,739 4,079 17,739 4,079 24942.04 13/10/2016 Proof 641 LongTermIncentivePlan(LTIP) The Animalcare Group plc LTIP was introduced in June 2014 to provide an effective mechanism for senior executives to participate in the Company’s equity at a meaningful level, aligning their interests with those of shareholders. The Directors’ interests in the LTIP, which was implemented via a subscription for growth shares in the capital of Animalcare Ltd, the subsidiary of the Company, are as follows: y Iain Menneer – 31,955 A Ordinary Shares of £1.00 each (“A Shares”) for a total cash subscription of £31,955, representing 5.2% of Animalcare Ltd’s issued share capital; and y Chris Brewster – 19,173 A Shares, representing 3% of Animalcare Ltd’s issued share capital and 11,800 B Ordinary Shares of £1.00 each (“B Shares”), representing a further 2% of Animalcare Ltd’s issued share capital, for a total cash subscription of £30,973. The total cash subscriptions were, based on independent valuation, considered to be equal to fair value at the time of acquisition. Dr Menneer and Mr Brewster have the right to sell their A Shares to the Company at any time after 27th June 2017 in exchange for Ordinary Shares of 20 pence each in the Company (“Ordinary Shares”). Their rights to sell the A Shares are subject to, amongst other provisions, the Company having a market capitalisation in excess of £39.0m (“the Hurdle”) at the time of sale. The Hurdle was determined by Animalcare’s Remuneration Committee and broadly represented a 20% premium to the Company’s market capitalisation on 27th June 2014. Each holder of A Shares would, on a sale of his entire holding to the Company, be entitled to receive Ordinary Shares representing a percentage of the increase in the Company’s market capitalisation above the Hurdle; being 5% for Dr Menneer and 3% for Mr Brewster. The A Shares do not have a right to receive a dividend, except for any amounts distributed on the winding up of the Company or on an asset sale. The B Shares are not entitled to participate in any increase in the value of the Company above the Hurdle but can be exchanged for Ordinary Shares of an equal value at any time after 27th June 2017. The B Shares have a right to an annual dividend (on a non-fixed coupon basis), calculated by applying a rate of LIBOR + 2% to the nominal value of the B Shares. Further details of the Plan, including the Hurdle, anti-dilution and other provisions, are set out in Animalcare Ltd’s articles of association, which is available within the Investors section (constitutional documents) of the Company’s website at www.animalcaregroup.co.uk. 8.StaffCosts Number of employees The average monthly number of employees (including Directors) during the year was: Production and distribution Selling and administration Related costs Wages and salaries Social security costs Other pension costs 2016 2015 4 59 63 2016 £'000 2,195 224 139 2,558 4 56 60 2015 £'000 2,024 187 78 2,289 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS42 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 9.FinanceCostsandFinanceIncome Fair value losses on financial instruments* Interest rate swap refund Finance costs Other net finance income: Fair value gains on financial instruments Interest income on bank deposits Finance income Net finance income 2016 £'000 — — — (36) (33) (69) (69) 2015 £'000 35 (18) 17 — (27) (27) (10) * Finance gains and losses arising from derivatives held at fair value through profit and loss relate to fair value movements on the Group’s foreign exchange hedges. These gains and losses are included within “other items” on the face of the statement of comprehensive income. 10.IncomeTaxExpense The income tax expense comprises: Current tax expense Adjustment in the current year in relation to prior years The deferred tax (credit)/expense comprises: Origination and reversal of temporary differences Adjustment in the current year in relation to prior years Total tax expense for the year The total tax charge can be reconciled to the accounting profit as follows: Total comprehensive income for the year Total tax expense Profit before tax Income tax calculated at 20.0% (2015: 20.75%) Effect of expenses not deductible Effect of share-based deductions Innovation related tax credits Depreciation in excess of capital allowances Effect of adjustments in respect of prior years Note 22 22 2016 £'000 481 (148) 333 121 (2) 119 452 2,634 452 3,086 617 41 (6) (65) 15 (150) 452 2015 £'000 601 (143) 458 (99) 117 18 476 2,534 476 3,010 625 42 (88) (77) — (26) 476 24942.04 13/10/2016 Proof 643 The tax credit of £27,000 (2015: £26,000) shown within “exceptional and other items” on the face of the statement of comprehensive income, which forms part of the overall tax charge of £452,000 (2015: £476,000) relates to the items analysed in note 4. The prior year current tax credits in respect of both 2016 and 2015 primarily relate to research and development tax credits. The prior year deferred tax charge in 2015 of £117,000 relates to the first time recognition of deferred tax in relation to capitalised development costs. The Government has announced that it intends to reduce the rate of corporation tax to 17% with effect from 1st April 2020. This change in rates was not substantively enacted at the balance sheet date and therefore has not been reflected in the tax rates used for deferred tax purposes. The Finance Act 2015 (No 2) was substantively enacted on 26th October 2015 which will reduce the rate of corporation tax to 19% with effect from 1st April 2017 and 18% from 1st April 2020. This will reduce the Group’s future current tax charge accordingly. Deferred tax balances at 30th June 2016 have been calculated based on these rates. 11.Dividends Ordinary final dividend paid in respect of prior year Ordinary interim dividend paid 2016 £'000 904 379 1,283 2015 £'000 839 378 1,217 The final dividend paid during the year ended 30th June 2016 was 4.3 pence per share (2015: 4.0 pence per share). The interim dividend paid during the year ended 30th June 2016 was 1.8 pence per share (2015: 1.8 pence per share). The proposed final dividend of 4.7 pence per share, which is subject to approval of shareholders at the Annual General Meeting, results in a total dividend for the year of 6.5 pence per share. The proposed dividend has not been included as a liability as at 30th June 2016, in accordance with IAS 10 “Events After the Balance Sheet Date”. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS44 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 12.EarningsperShare Basic earnings per share amounts are calculated by dividing the total comprehensive income for the year attributable to ordinary equity holders of the Company by the weighted average number of fully paid Ordinary Shares outstanding during the year. The following income and share data was used in the basic earnings per share computations: Total comprehensive income attributable to equity holders of the Company Basic weighted average number of shares Dilutive potential Ordinary Shares Earnings per share: Basic Fully diluted Underlying earnings before exceptional and other items 2016 £’000 Underlying earnings before exceptional and other items 2015 £’000 2,744 2016 No. 2,635 2015 No. Total earnings 2016 £’000 2,634 2016 No. Total earnings 2015 £’000 2,534 2015 No. 21,043,846 20,982,367 21,043,846 20,982,367 319,863 123,127 319,863 123,127 21,363,079 21,105,494 21,363,079 21,105,494 13.0p 12.8p 12.6p 12.5p 12.5p 12.3p 12.1p 12.0p 24942.04 13/10/2016 Proof 613.Goodwill Cost At 1st July 2014, 1st July 2015 and 30th June 2016 Accumulated impairment losses At 1st July 2014, 1st July 2015 and 30th June 2016 Net book value At 30th June 2016 and 30th June 2015 45 Group £'000 12,711 — 12,711 The carrying amount of Group goodwill is allocated to the Group’s sole cash-generating unit (“CGU”), being the Animalcare segment. The recoverable amount of goodwill is determined from value in use calculations. The Group prepares cash flow forecasts derived from the most recent financial budgets and projections approved by management for the next five years and thereafter assuming an estimated long-term annual growth rate of 1.8% (2015: 2.0%). The financial budgets and projections are based on past experience and actual operating results. The growth rates for the five year period are based on current performance of the existing product portfolio and the estimated contribution from the Group’s new product development pipeline. The Directors believe that the long-term growth rate does not exceed the average long-term growth rate for the UK economy, the principal geographic area in which Animalcare operates. The Directors estimate the discount rates using the post-tax rates that reflect the current market assessments of the time value of money and the risks specific to the cash-generating unit. In the current year the Directors estimated the applicable pre-tax rate to be 9.4% (2015: 13.2%). The Directors modelled a range of different scenarios by applying sensitivities to both the cash flow assumptions and the discount rate. Based on this sensitivity analysis there is significant headroom between the value in use calculation and the carrying value of the CGU. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS46 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 14.OtherIntangibleAssets Group Cost At 1st July 2014 Additions Disposals At 30th June 2015 Additions Disposals At 30th June 2016 Amortisation At 1st July 2014 Charge for the year Disposals At 30th June 2015 Charge for the year At 30th June 2016 Carrying value At 30th June 2016 At 30th June 2015 Acquired brands £’000 Acquired customer relationships £'000 New product development costs £'000 Capitalised software £'000 524 — — 524 — — 524 227 35 — 262 35 297 227 262 837 — — 837 — — 837 545 84 — 629 83 712 125 208 1,647 768 — 2,415 1,563 (47) 3,931 990 195 — 1,185 196 1,381 2,550 1,230 165 44 (31) 178 41 — 219 84 45 (31) 98 55 153 66 80 Total £'000 3,173 812 (31) 3,954 1,604 (47) 5,511 1,846 359 (31) 2,174 369 2,543 2,968 1,780 Veterinary medicine product development costs are amortised over four to seven years. £2.4m of the total £3.9m cost is currently not being amortised. Acquired brands are amortised over 15 years and acquired customer relationships are amortised over ten years. The amortisation period for capitalised software, which principally relates to the bespoke Anibase pet database, is four years. Company Cost At 1st July 2015 and 30th June 2016 Amortisation At 1st July 2014 Charge for the year At 30th June 2015 Charge for the year At 30th June 2016 Carrying value At 30th June 2016 At 30th June 2015 Capitalised software £'000 Total £'000 7 — 1 1 2 3 4 6 7 — 1 1 2 3 4 6 24942.04 13/10/2016 Proof 647 15.Property,PlantandEquipment Group Cost At 1st July 2014 Additions Disposals At 1st July 2015 Additions At 30th June 2016 Depreciation At 1st July 2014 Charge for the year Disposals At 1st July 2015 Charge for the year At 30th June 2016 Net book value At 30th June 2016 At 30th June 2015 Leasehold improvements £'000 Plant and equipment £'000 Office furniture and equipment £'000 184 — — 184 — 184 22 19 — 41 18 59 125 143 134 2 (17) 119 32 151 56 18 (17) 57 31 88 63 62 268 5 (129) 144 9 153 136 36 (129) 43 17 60 93 101 Total £'000 586 7 (146) 447 41 488 214 73 (146) 141 66 207 281 306 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS48 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 16.InvestmentsinSubsidiaries Subsidiary undertakings Cost and net book value At 1st July 2014, 2015 and 30th June 2016 The sole subsidiary undertaking of the Company is detailed below. Animalcare Ltd * In substance 100% ownership, see note 7 for further details. Company 2016 £'000 2015 £'000 14,361 14,361 Country of registration or incorporation Class Shares held % England Ordinary 90* The principal activity of this undertaking for the last financial year was the sale of companion animal products and related services. 17.Inventories Finished goods and goods for resale Group 2016 £'000 1,604 2015 £'000 1,653 In the Directors’ opinion, the replacement cost of inventories is not materially different from their balance sheet value. 24942.04 13/10/2016 Proof 618.OtherFinancialAssets Trade and other receivables Trade receivables Amounts receivable from subsidiaries Corporation tax – Group relief Other receivables Derivative financial instruments Prepayments and accrued income The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. Movement in allowance for doubtful debts Group 2016 £'000 15 (1) 14 2015 £'000 15 — 15 Balance at 1st July Impairment losses recognised Balance at 30th June Ageingofpastduebutnotimpairedreceivables 1–30 days past due 31–90 days past due 91 days and more 49 Group Company 2016 £'000 1,782 — — 7 18 382 2,189 2015 £'000 1,924 — — 6 — 317 2,247 2016 £'000 — — 308 7 — 17 332 Company 2016 £'000 — — — Group 2016 £'000 4 — — 4 2015 £'000 — — 217 6 — 15 238 2015 £'000 — — — 2015 £'000 — 1 — 1 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS50 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 Cash and cash equivalents Cash and cash equivalents Group Company 2016 £'000 7,118 2015 £'000 5,777 2016 £'000 1,576 2015 £'000 1,576 Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less. Credit risk The Company’s principal financial assets are bank balances and cash, and trade and other receivables. The Company’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. The allowance for doubtful debts represents the difference between the carrying value of the specific trade receivables and the present value of the expected recoverable amount. The average credit period on sales of goods is 33 days (2015: 31 days). No interest has been charged on overdue receivables. 19.OtherFinancialLiabilities Trade payables Amounts payable to subsidiaries Other taxes and social security costs Other creditors Derivative financial instruments (see note 20) Accruals Group Company 2016 £'000 1,513 — 448 468 — 598 2015 £'000 936 — 450 386 18 396 2016 £'000 97 4,991 56 20 — 53 2015 £'000 73 3,385 46 18 — 4 3,027 2,186 5,217 3,526 The Directors consider that the carrying amount of trade and other payables approximates to their fair value. 24942.04 13/10/2016 Proof 651 20.FinancialInstruments Capitalandliquidityriskmanagement At 30th June the Group was contractually obliged to make repayments of principal and payments of interest as detailed below: 2016 Trade and other payables 2015 Trade and other payables Within one year or on demand £'000 3,027 2,186 Categories and fair value of financial instruments carrying value 1–2 years £'000 3–5 years £'000 More than 5 years £'000 — — — — — — 2016 £'000 Total £'000 3,027 2,186 2015 £'000 Financial assets Trade and other receivables (including cash and cash equivalents) 8,925 7,707 Financial liabilities Trade and other payables (3,027) (2,186) The fair values of the Group’s financial assets and liabilities are not materially different from their carrying values. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS52 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 Foreign currency risk management The Group undertakes transactions denominated in foreign currencies which gives rise to the risks associated with currency exchange rate fluctuations. Exposures are managed by a combination of matching foreign currency income and expenditure, maintaining foreign currency deposits and the use of forward contracts. The carrying value of the Group’s foreign currency assets and liabilities at the reporting date was: Euro US dollar Assets Liabilities 2016 £'000 276 4 2015 £'000 446 264 2016 £'000 109 96 2015 £'000 153 — Foreign currency sensitivity analysis At 30th June 2016 the Group is mainly exposed to the Euro and the US dollar. The following table details the effect of a 10% increase and decrease in the exchange rate of these currencies against sterling when applied to outstanding monetary items denominated in foreign currency as at 30th June 2016. A positive number indicates that an increase in profit would arise from a 10% change in value of sterling against these currencies, a negative number indicates that a decrease would arise. Euro US dollar Strengthening £'000 Weakening £'000 (15) 8 18 (10) Interest rate sensitivity analysis This sensitivity analysis was not performed as the Group had no exposure to interest rates for either derivatives or non-derivative instruments at the balance sheet date. Forward foreign exchange contracts The Group had two (2015: three) open foreign exchange contracts at 30th June 2016. The values are shown below: Principal value Fair value 2016 £'000 200 18 2015 £'000 338 (18) Capitalmanagement In line with the disclosure requirements of IAS 1, “Presentation of Financial Statements”, the Company regards its capital as being the issued share capital together with its banking facilities, used to manage short-term working capital requirements. Note 23 to the financial statements provides details regarding the Company’s share capital and movements in the period. There were no breaches of any requirements with regard to any relevant conditions imposed by the Company’s Articles of Association during the periods under review. 24942.04 13/10/2016 Proof 653 21.DeferredIncome Deferred income arises from certain services sold by the Group’s subsidiary Animalcare Ltd. In return for a single up-front payment, Animalcare Ltd commits to a fixed term contract to provide certain database, pet reunification and other support services to customers. There is no contractual restriction on the amount of times the customer makes use of the service. At the commencement of the contract it is not possible to determine how many times the customer will make use of the services, nor does historical evidence provide indications of any future pattern of use. As such, income is recognised evenly over the term of the contract, currently eight years. Movements in the Group’s deferred income liabilities during the current and prior reporting period are as follows: Balance at the beginning of the period Income deferred to future periods Release of income deferred from previous periods Balance at end of the period The deferred income liabilities fall due as follows: Within one year After one year Income recognised during the year is set out below: Income received Income deferred to future periods Release of income deferred from previous periods Income recognised in the year 2016 £'000 958 263 (239) 982 2016 £'000 220 762 982 2016 £'000 282 (263) 239 258 2015 £'000 972 241 (255) 958 2015 £'000 234 724 958 2015 £'000 227 (241) 255 241 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS54 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 22.DeferredTax Group The following are the major components of the deferred tax liabilities/(assets) recognised by the Group, and the movements thereon, during the current and prior reporting period: Balance at 1st July 2014 Charge/(credit) to income Balance at 30th June 2015 Charge/(credit) to income Balance at 30th June 2016 Property, plant and equipment £'000 Share-based payments £'000 Intangible fixed assets £'000 Other £'000 41 (4) 37 (1) 36 (43) (111) (154) (22) (176) (7) (1) (8) — (8) 118 134 252 142 394 Total £'000 109 18 127 119 246 Deferred tax balances have been calculated at an effective rate of 18%, being the substantively enacted rate at 30th June 2016. Company The following are the major components of the deferred tax assets recognised by the Company, and the movements thereon, during the current and prior reporting period: Balance at 1st July 2014 Charge/(credit) to income Balance at 30th June 2015 Charge/(credit) to income At 30th June 2016 Accelerated tax depreciation £'000 Share-based payments £'000 (12) 3 (9) 2 (7) (25) (52) (77) (19) (96) Other £'000 (2) — (2) — (2) Total £'000 (39) (49) (88) (17) (105) Deferred tax balances have been calculated at an effective rate of 18%, being the substantively enacted rate at 30th June 2016. 24942.04 13/10/2016 Proof 623.ShareCapital Allotted, called up and fully paid Ordinary Shares of 20p each Allotted, called up and fully paid Ordinary Shares of 20p each 55 2016 No. 2015 No. 21,059,636 21,019,636 2016 £’000 4,212 2015 £’000 4,204 During the year £8,000 (2015: £11,886) of Ordinary Shares were issued for proceeds of £52,525 (2015: £81,814) resulting in a share premium of £44,525 (2015: £69,928). 24.OperatingLeaseArrangements TheGroupaslessee Lease payments under operating leases recognised as an expense in the year 2016 £'000 211 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Within one year In the second to fifth years inclusive After five years 2016 £'000 187 240 45 472 2015 £'000 199 2015 £'000 168 298 78 544 Operating lease payments principally represent rentals payable by the Group for its office and warehouse properties and motor vehicles. 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS56 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 25.Share-basedPayments During the year the Group operated the Animalcare Group plc Executive Share Option Scheme, the Save As You Earn (SAYE) Share Option Scheme and the new Long Term Incentive Plan as described below: AnimalcareGroupplcExecutiveShareOptionScheme Under this scheme, options may be granted to certain executives and senior employees of the Group to subscribe for new shares in the Company at a fixed price equal to the market value at the time of grant. The options are exercisable three years after the date of grant. Once vested, options must be exercised within six years of the date of grant. The exercise of these options is not subject to any performance criteria. SAYEOptionScheme This scheme is open to all UK employees to encourage share ownership. Share options are granted at an option price fixed at a 20% discount to the market value at the start of the savings period. The SAYE options vest and are exercisable three years after the date of grant and must ordinarily be exercised within six months of the completion of the relevant savings period. Details of the movement in all share option schemes during the year are as follows: Outstanding at beginning of year Granted during the year Lapsed during the year Exercised during the year Open at 30th June 2016 Exercisable at the end of the year EMI SAYE Unapproved Options 495,000 110,000 (15,000) (40,000) 550,000 325,000 Price £ 1.446 2.157 2.175 1.313 1.578 1.400 Options 206,102 — (13,640) — 200,491 — Price £ 1.041 — 1.029 — 1.0422 — Options 180,000 — — — 180,000 180,000 Price £ 1.408 — — — 1.408 1.408 24942.04 13/10/2016 Proof 657 The weighted average inputs into the Black–Scholes model at the time of grant were as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate EMI Scheme 162p 162p 51% SAYE Scheme Unapproved Scheme 130p 104p 50% 141p 141p 56% 3.0 years 3.1 years 3.0 years 0.5% 0.5% 0.5% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected lives used in the model were estimated based on management’s best estimate for the effects of non-transferability, exercise restrictions, and behavioural considerations. The aggregate estimated fair value of the options granted during the year was £nil (2015: £nil). The Group recognised a total charge in respect of share based payments of £120,000 (2015 : £139,000) within administrative expenses. The respective Company charges were £47,000 (2015: £74,000). Long Term Incentive Plan The Animalcare Group plc LTIP was introduced in June 2014 to provide an effective mechanism for senior executives to participate in the Company’s equity at a meaningful level, aligning their interests with those of shareholders. The Directors’ interests in the LTIP, which was implemented via a subscription for growth shares in the capital of Animalcare Ltd, a subsidiary of the Company, are as follows: y Iain Menneer – 31,955 A Ordinary Shares of £1.00 each (“A Shares”) for a total cash subscription of £31,955, representing 5.2% of Animalcare Ltd’s issued share capital; and y Chris Brewster – 19,173 A Shares, representing 3% of Animalcare Ltd’s issued share capital and 11,800 B Ordinary Shares of £1.00 each (“B Shares”), representing a further 2% of Animalcare Ltd’s issued share capital, for a total cash subscription of £30,973. Further details of the Plan are provided in note 7. The charge for the year to the income statement in respect of the Plan is £nil (2015: £nil). 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS58 NOTES TO THE ACCOUNTS CONTINUED Year ended 30ᵗʰ June 2016 26.RelatedPartyTransactions Trading transactions During the year ended 30th June, the following trading transactions took place between the Company and its subsidiary listed in note 16: 2016 Management charges levied 2015 Management charges levied Animalcare Ltd £’000 240 Animalcare Ltd £’000 240 Total £’000 240 Total £’000 240 Remunerationofkeymanagementpersonnel The remuneration of the Directors, who are the key management personnel of the Group, is set out in aggregate for each of the categories specified in IAS 24 “Related Party Disclosures”. Further information about the remuneration of Directors is provided in note 7. The Directors’ interests in the shares of the Company are contained in note 7. 24942.04 13/10/2016 Proof 6FIVE YEAR SUMMARY 59 Consolidated Statement of Comprehensive Income 2016 2015 2014 2013 2012 Revenue Underlying EBITDA Underlying operating profit Profit before tax Underlying earnings per share basic diluted Dividend per share Balance Sheets Non-current assets Current assets Current liabilities Non-current liabilities Shareholders' funds Cash Flow Statements Net cash flow from operating activities Net cash used in investing activities Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents 14,701 3,506 3,190 3,086 13.0p 12.8p 6.5p 15,960 10,911 (3,348) (1,008) 22,515 4,136 (1,565) (1,230) 1,341 13,536 12,881 12,118 10,856 3,423 3,110 3,010 12.6p 12.5p 6.1p 14,797 9,677 (2,632) (851) 20,991 3,892 (792) (1,135) 1,965 3,162 2,802 2,672 10.8p 10.8p 5.5p 14,410 8,115 (2,233) (839) 19,453 1,067 (202) (798) 67 2,916 2,684 2,330 10.5p 10.4p 5.3p 14,661 6,825 (2,575) (949) 17,962 2,831 (483) (908) 1,440 2,501 2,294 2,106 9.3p 9.2p 4.5p 14,522 5,022 (1,692) (1,015) 16,837 2,123 (268) (729) 1,126 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS 60 24942.04 13/10/2016 Proof 6ADVISERS IBC Directors Secretary J S Lambert Lord Downshire I D Menneer C J Brewster R B Harding C J Brewster Company Number 1058015 Registered Office Auditor Bankers Solicitors Nominated Advisor and Broker Registrars Unit 7, 10 Great North Way York Business Park Nether Poppleton York YO26 6RB KPMG LLP 1 Sovereign Square Sovereign Street Leeds LS1 4DA Barclays Bank PLC PO Box 190 1 Park Row Leeds LS1 5WU Langleys Queens House Micklegate York YO1 6WG Panmure Gordon & Co One New Change London EC4M 9AF Capita Asset Services 34 Beckenham Road Beckenham Kent BR3 4TU 24942.04 13/10/2016 Proof 6Animalcare Group plc Annual Report 2016www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSADDRESS 10GreatNorthWay YorkBusinessPark,York YO266RB CONTACT T: +44(0)1904487687 F: +44(0)1904487611 E:Investors@animalcare.co.uk W:www.animalcaregroup.co.uk 24942.04 13/10/2016 Proof 6

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