#thisisCVS CVS Group plc Annual Report for the year ended 30 June 2017 C V S G r o u p p l c A n n u a l R e p o r t f o r t h e y e a r e n d e d 3 0 J u n e 2 0 1 7 #thisisCVS We are proud to be the UK’s most comprehensive and integrated provider of veterinary services to animal owners Inside front cover Jan and Harold Jan is a theatre technician at The Grove Cover Right: Ella and Bilbo Ella is a nurse at The Old Golfhouse Bottom: Becka and Pumpkin Becka is an administrator at the CVS office in Diss Strategic report 1 Financial highlights 2 4 CVS at a glance Chairman’s statement 6 Our business model 8 Our strategy 10 Key performance indicators 12 Our year in review 14 Our business 18 Business review 22 Our culture and values 24 Principal risks and uncertainties 27 Finance review Governance 31 Board of Directors 32 Corporate governance statement 35 Remuneration Committee report 41 Directors’ report Financial statements 43 Independent auditor’s report 47 Consolidated income statement 48 49 50 51 52 53 Consolidated statement of comprehensive income Consolidated and Company balance sheets Consolidated statement of changes in equity Company statement of changes in equity Consolidated and Company cash flow statements Notes to the consolidated financial statements 72 Five-year history IBC Contact details and advisors Find out more on-line www.cvsukltd.co.uk Financial highlights Like-for-like sales grew by 6.3% with growth in all divisions. Revenue £m £271.8m +24.6% 8 . 1 7 2 . 1 8 1 2 . 3 7 6 1 Adjusted EBITDA1 £m £42.1m +28.2% 1 . 2 4 . 8 2 3 . 0 3 2 Adjusted profit before tax2 £m £33.5m +34.8% 5 . 3 3 . 9 4 2 . 2 8 1 Adjusted earnings per share3 p 42.8p +32.1% 8 . 2 4 . 4 2 3 . 7 4 2 15 16 17 15 16 17 15 16 17 15 16 17 Proposed dividend per share p 4.5p +28.6% 5 . 4 5 3 . 0 3 . Operating profit £m £17.2m +46.2% 2 . 7 1 . 8 1 1 8 9 . Profit before tax £m £14.5m +58.4% 5 . 4 1 5 8 . 1 9 . Basic earnings per share p 18.5p +59.5% 5 . 8 1 . 6 1 1 . 6 1 1 15 16 17 15 16 17 15 16 17 15 16 17 1 Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is profit before income tax, net finance expense, depreciation, amortisation and costs relating to business combinations. 2 Adjusted profit before income tax is calculated as profit on ordinary activities before amortisation, taxation and costs relating to business combinations. 3 Adjusted earnings per share is calculated as adjusted profit before income tax less applicable taxation divided by the weighted average number of Ordinary shares in issue in the period. 4 Percentage increases have been calculated throughout this document based on the underlying values. 1 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report ThisisCVS We remain the largest employer in the UK’s veterinary profession with approximately 5,150 staff today, including around 1,270 vets. Phil and Tinker Phil is a vet at The Old Golfhouse 2 Our business The Group has four main business areas: our Veterinary Practice, Laboratory and Crematoria Divisions and Animed Direct. Veterinary Practice First-opinion and referral practices providing specialist treatment for companion animals, equine and farm animals. Laboratory Our laboratories provide diagnostic services to CVS veterinary practices and third parties. Annual Report 2017 – CVS Group plc Our geographical coverage at 30 June 2017 2 Our acquisitions have further strengthened our geographical coverage in 2017. We also acquired nine new surgeries in the Netherlands. 1 Scotland and North East Crematoria Veterinary 3 practices 57 2 Northern Ireland Veterinary practices 4 3 North West Veterinary practices 32 Crematoria 2 4 Yorkshire Veterinary practices 15 5 East Midlands Veterinary practices 39 6 West Midlands Veterinary practices 38 7 East of England Veterinary practices 44 Laboratories 2 8 South West and Wales Veterinary practices 54 Laboratories 1 Crematoria 1 Laboratories 1 Crematoria 1 9 South East Veterinary practices 128 10 London Veterinary practices 2 11 The Netherlands Veterinary practices 9 Crematoria Our crematoria provide pet cremation and clinical waste services to our veterinary practices, third-party practices and directly to pet owners. Animed Direct Our on-line pharmacy and retail business sells prescription and non-prescription medicines, pet food and other animal related products. 1 3 6 4 5 8 9 10 Netherlands UK 11 Belgium Germany France 7 3 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report Thisissuccess Highlights Revenue grew 24.6% to £271.8m Operating profit increased to £17.2m from £11.8m Results I am delighted to report a further outstanding performance by CVS with another record year for revenue and operating profits across the Group. Strong like-for-like growth of 6.3% was enhanced by further acquisitions in our Veterinary Practice Division. We increased our investment in equipment, premises, our services and our staff. Revenue grew by 24.6% to £271.8m (2016: £218.1m). Adjusted EBITDA increased by 28.2% to £42.1m (2016: £32.8m) and adjusted EPS grew by 32.1% to 42.8p (2016: 32.4p). Operating profit rose by 46.2% to £17.2m (2016: £11.8m), cash generated from operations increased 10.8% to £37.2m (2016: £33.6m) and profit before tax increased by 58.4% to £14.5m (2016: £9.1m). Basic EPS increased by 59.5% to 18.5p (2016: 11.6p). I am delighted to report a further outstanding performance by CVS with another record year for revenue and operating profits across the Group. 4 Annual Report 2017 – CVS Group plc Chairman’s statement with Richard Connell Business initiatives In 2017 we acquired 62 surgeries, following on from the 67 acquired in 2016. In total these businesses are expected to generate revenue of approximately £38.0m per annum. Subsequent to the year end a further ten surgeries have been acquired. Of particular note were our first acquisitions in the Netherlands, which give us a foothold to develop a business similar to that which we have in the UK. In the UK, our equine business expanded strongly with the acquisitions of Bell Equine during the year and B&W Equine subsequent to the year end. Severn Edge Veterinary Group gives CVS a strong presence in Shropshire in small animal and farm animal and further expands our equine capability. We have continued to progress our strategy in our referrals business. After some challenges, our state-of-the-art multi-disciplinary referral centre at Lumbry Park improved its performance significantly and is now close to breaking even. Manchester Veterinary Specialists opened in February 2017 and is already profitable. The substantial refurbishment at Chestergates Veterinary Specialists was completed in September 2017 and now has the capacity to significantly grow its business. Like-for-like sales grew by 6.3% (2016: 4.8%) with growth in all areas, in particular Animed Direct which performed exceptionally. It is pleasing to note that the new Veterinary Practice Division management team introduced at the end of 2016 has settled in well and has driven performance of the business forward. Our Healthy Pet Club scheme continued its strong growth with an additional 53,000 (20.9%) members over the year. The Laboratory Division again grew very strongly with revenue increasing by 10.2% to £16.3m (2016: £14.8m). Following the acquisition of three crematoria in 2016, the Crematoria Division has increased revenue by 27.1% to £6.3m. In August 2017, we launched our own brand pet insurance under the name of MiPet Cover. This is the only pet insurance in the UK that is designed by vets. It provides top of the range cover at a competitive price. Whilst it is too early to fully assess the response from customers, their initial reaction and that from our own staff, who were involved in its design, has been very positive. Our people The Group remains the largest employer in the UK’s veterinary profession with approximately 5,150 staff as at today (2016: 4,300), including around 1,270 vets (2016: 1,040). Yet again, our staff have risen to the challenge of delivering and integrating the high volume of acquisitions whilst continuing to develop the business. I would like to thank them all, including those new to CVS, for their efforts and for their expertise and professionalism in providing the best possible care and service to all our customers and their animals. The development of our staff and of our clinical and non-clinical training continues to be a priority. No other veterinary group has the knowledge, expertise and ability to provide so much training internally and this is an area where CVS distinguishes itself from our competition. Dividends It is proposed to pay a dividend of 4.5p per share in December 2017, a 28.6% increase on the 3.5p per share paid in 2016. The increased scale and growth of our business can support a meaningful increase in the level of dividend whilst retaining sufficient funds to continue to grow the business. If approved at the Annual General Meeting, the dividend will be paid on 8 December 2017 to shareholders on the register on 24 November 2017. The ex-dividend date will be 23 November 2017. Outlook The Group’s exposure to the potential impacts of Brexit appears to be limited. The greatest impact could be in the employment of European vets. We have not seen any significant impact on employment so far but, together with other major employers in the industry and the Royal College of Veterinary Surgeons, we are lobbying the UK Government to ensure that there are no adverse impacts. Clearly, Brexit issues create some uncertainty for the pace of growth in the UK economy over the next couple of years, but the Board believes that the characteristics of our business make it relatively resilient. Like-for-like sales growth has remained robust since the year end. The acquisition pipeline remains strong and the recent acquisition of B&W Equine will allow for further developments in our equine business. Further acquisitions in the Netherlands will continue the development of our business in Europe. The recent launch of our MiPet Cover insurance is an exciting development which has significant long-term potential, although it is not expected to generate a profit in the current financial year. Initiatives such as the introduction of own brand products, the expansion of out-of-hours sites and the development of our referrals business are expected to continue to deliver benefits in 2018. The Board therefore believes that the outlook for CVS remains very promising. Richard Connell Non-Executive Chairman 29 September 2017 5 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Thisispassion What sets us apart Our vision is to be the most comprehensive and integrated provider of veterinary services to animal owners in the UK and the Netherlands, whilst providing returns to our shareholders. We deliver our vision through like-for-like growth and the acquisition of veterinary practices, diagnostic laboratories, pet crematoria and Animed Direct. Our business model focuses on creating value through the provision of integrated services and the best customer care. Our business model is underpinned by our core values: Customer focus Commitment to excellence Success through our people Honesty and integrity Read more on our values on pages 22 and 23 6 PASSIONATE PEOPLE GEOGRAPHIC COVERAGE HIGH QUALITY CLINICAL CARE AND FACILITIES FINANCIAL STRENGTH INTEGRATED SERVICES CUSTOMER FOCUS Annual Report 2017 – CVS Group plc Geographic coverage As at the date of this report we have 422 surgeries, four laboratories and seven crematoria providing coverage of the UK. Additionally during the year we also expanded our geographic coverage outside the UK to Europe with ten sites in the Netherlands. Passionate people We employ dedicated and trained professionals, who are committed to excellent clinical care. 432 Surgeries 5,150 Total number of employees High quality clinical care and facilities All of our practices are registered with the RCVS Practice Standards Scheme, have excellent clinical governance and are committed to investing in and using modern diagnostic techniques. 46 Number of veterinary diploma holders Financial strength We continue to deliver growth in revenues, profits, adjusted earnings per share and operating cash generation. Customer focus Our staff are dedicated to providing the highest quality of service to our customers and their animals. £17.2m Operating profit for the year +20.9% 306,000 Healthy Pet Club members Integrated services We deliver first-opinion treatments, complex referral procedures, laboratory diagnostic testing, out-of-hours services, cremations, on-line dispensary, own brand medicines, Healthy Pet Club and insurance. 24 Number of dedicated emergency out-of-hours services, diagnostic laboratories and crematoria CVS expands its acquisitions in Europe We see many parallels between small animal practice in the Netherlands and the UK. In November 2016 we acquired our first practice in the Netherlands. The level of interest has been encouraging and we are delighted to have acquired ten surgeries in the Netherlands so far. During 2018, we will continue to explore opportunities to extend our activities into the Netherlands. 7 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Our strategy Our strategy is designed to increase growth and improve our long-term financial performance. 8 Priority Our performance 1 Excellent customer service and care 2 Meeting all of our customers’ needs • 46 of our vets are diploma holders, the highest recognised qualification • 375 vets have been recruited in our graduate programme in the last four years • 316 nurses have enrolled in our MiNurse Academy since its launch in January 2015 • 32 clinical pathologists are employed in our Laboratory Division • We own 422 surgeries across the UK and ten in the Netherlands, four laboratories and seven crematoria • There are 306,000 members on our HPC scheme • We invested £12.0m in developing our surgeries to improve facilities • We operate 14 specialist referral centres, including the greenfield Lumbry Park facility and our newest facility, Manchester Veterinary Specialists, which opened in February 2017 • We opened another six out-of-hours centres during the year • We launched our own brand pet insurance, MiPet Cover, in July 2017 • We achieved ISO 17025 accreditation for farm animal testing 3 Expanding our business through acquisitions • 62 surgeries acquired during the year • Ten surgeries acquired since the year end 4 Building on our strengths to provide services to external practices • Our laboratories performed 405,000 tests in 2017, of which 284,000 were for third parties • Our crematoria performed over 142,000 cremations, of which 72,000 were for third parties • 13 high quality own brand MiPet products available through HPC and MiVetClub Our focus • Customer service is one of our core values. It underpins all of our training and development • Clinical development remains a core aspect of our training • We develop our managerial and operational abilities through programmes such as our Aspirational Leadership and LEAP Programmes • We also sponsor further qualifications for our vets such as RCVS Advanced Veterinary Practitioner and Diplomas • Development of our own brand pet insurance, MiPet Cover • Further expansion of our referrals business • Development of additional complex testing capability at our diagnostic laboratories • Investment in our crematoria business to increase capacity in the current financial year • Expansion of our own out-of-hours centres, thereby reducing reliance on third-party providers • Further development and expansion of our MiPet brand of products • We aim to continue to grow our business through acquisitions • We will consider acquisitions of small, farm animal and equine surgeries. We will also consider acquisitions of crematoria and laboratories where they fit a geographical or knowledge gap • We aim to continue our expansion into the Netherlands, in both small and farm animal along with equine surgeries • Development of external sales of our laboratory analyser units • Expansion of the service offering of our buying groups. Our aim is not only to allow practices to benefit from our buying power but also through providing other services such as health and safety expertise, administering loyalty club schemes and access to MiPet products Annual Report 2017 – CVS Group plc Priority Our performance 1 Excellent customer service and care 2 Meeting all of our customers’ needs • 46 of our vets are diploma holders, the highest recognised qualification • 375 vets have been recruited in our graduate programme in the last four years • 316 nurses have enrolled in our MiNurse Academy since its launch in January 2015 • 32 clinical pathologists are employed in our Laboratory Division • We own 422 surgeries across the UK and ten in the Netherlands, four laboratories and seven crematoria • There are 306,000 members on our HPC scheme • We invested £12.0m in developing our surgeries to improve facilities • We operate 14 specialist referral centres, including the greenfield Lumbry Park facility and our newest facility, Manchester Veterinary Specialists, which opened in February 2017 • We opened another six out-of-hours centres during the year • We launched our own brand pet insurance, MiPet Cover, in July 2017 • We achieved ISO 17025 accreditation for farm animal testing 3 Expanding our business through acquisitions • 62 surgeries acquired during the year • Ten surgeries acquired since the year end 4 Building on our strengths to provide services to external practices • Our laboratories performed 405,000 tests in 2017, of which 284,000 were for third parties • Our crematoria performed over 142,000 cremations, of which 72,000 were for third parties • 13 high quality own brand MiPet products available through HPC and MiVetClub Our focus • Customer service is one of our core values. It underpins all of our training and development • Clinical development remains a core aspect of our training • We develop our managerial and operational abilities through programmes such as our Aspirational Leadership and LEAP Programmes • We also sponsor further qualifications for our vets such as RCVS Advanced Veterinary Practitioner and Diplomas • Development of our own brand pet insurance, MiPet Cover • Further expansion of our referrals business • Development of additional complex testing capability at our diagnostic laboratories • Investment in our crematoria business to increase capacity in the current financial year • Expansion of our own out-of-hours centres, thereby reducing reliance on third-party providers • Further development and expansion of our MiPet brand of products • We aim to continue to grow our business through acquisitions • We will consider acquisitions of small, farm animal and equine surgeries. We will also consider acquisitions of crematoria and laboratories where they fit a geographical or knowledge gap • We aim to continue our expansion into the Netherlands, in both small and farm animal along with equine surgeries • Development of external sales of our laboratory analyser units • Expansion of the service offering of our buying groups. Our aim is not only to allow practices to benefit from our buying power but also through providing other services such as health and safety expertise, administering loyalty club schemes and access to MiPet products 375 32 graduate vets in the last four years clinical pathologists employed 432 surgeries 306,000 members of our HPC scheme 62 10 surgeries acquired during the year surgeries acquired since the year end 13 new own brand MiPet products launched 284,000 tests performed by our laboratories for third parties A new breed of pet insurance MiPet Cover is the only pet insurance in the UK designed by vets As one of the largest providers of veterinary services in the UK, we use our knowledge to make sure our customers’ pets have access to the highest possible standard of care. Working with our vets and veterinary staff around the country, we designed and developed our own pet insurance cover. 9 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Key performance indicators The Directors monitor progress against the Group strategy by reference to the following financial KPIs. Performance during the year is set out below. Revenue £m £271.8m Like-for-like sales performance % 6.3% Healthy Pet Club revenue % 13.0% Gross margin before clinical staff costs % 79.8% 17 16 15 271.8 218.1 167.3 17 16 15 6.3 4.8 6.8 17 16 15 13.0 12.0 13.0 17 16 15 79.8 79.6 77.8 Definition Total revenue of the Group. Changes in 2017 • Total revenue increased by £53.7m. • Revenue before the impact of prior year and current year acquisitions was £216.5m, a £17.3m increase compared with 2016. Factors contributing to the increase are noted in the like-for-like sales performance. • Acquisitions in the year and the full year impact of the prior year’s acquisitions generated additional revenue of £39.9m. • Intercompany sales eliminated on consolidation increased by £3.5m, principally due to the impact of internal crematoria and laboratory sales to practices acquired in 2016 and 2017. Link to strategy 1 2 3 10 Definition Revenue generated from like-for-like operations compared to the prior year. Revenue for 2017 is included in the like-for-like calculation with effect from the month in which it was acquired in the previous year; for example, for a practice acquired in September 2015, revenue is included from September 2016 in the like-for-like calculation. This measure is calculated using a measure of Group revenue after deducting revenue from current year acquisitions and greenfield developments (£14.2m) and after adjusting for prior year acquisitions such that revenue is included for a comparable number of months with 2016 (£29.7m). Changes in 2017 • The like-for-like increase reflected strong performances in all divisions with a particular improvement in Animed Direct against a difficult comparative period. • The improved like-for-like sales growth compared with 2016 was due to the significant growth in the first half of the year (7.2% compared with 3.0% in 2016). Link to strategy 1 2 Definition Revenue received from Healthy Pet Club members as a percentage of total practice revenue for the year. Changes in 2017 • The growth of Healthy Pet Club membership from 253,000 to 306,000 led to the increase for the year. Link to strategy 2 3 Definition Gross margin after deducting the cost of drugs, laboratories fees and cremation fees, and other goods sold or used by the business from revenue, expressed as a percentage of total revenue. Gross margin was £124.5m, after deducting £90.0m of clinical staff costs. Changes in 2017 • The increase in the gross margin is principally due to improvements in the Veterinary Practice Division, marginally offset by a reduction in the Laboratory Division and Animed Direct. Further details are provided on pages 18 to 21 in the Business Review. Link to strategy 1 2 Annual Report 2017 – CVS Group plc Adjusted EBITDA £m £42.1m Adjusted EPS p 42.8p Cash generated from operations £m £37.2m 17 16 15 42.1 32.8 23.0 17 16 15 42.8 32.4 24.7 17 16 15 37.2 33.6 22.2 Definition Earnings before income tax, net finance expense, depreciation, amortisation and costs relating to business combinations. Changes in 2017 • The improvement in adjusted EBITDA is explained by like-for-like growth (£3.2m) together with the full year impact of prior year acquisitions (£5.0m) and acquisitions in the current year (£2.2m), partly offset by a £1.2m increase in central costs incurred to build a foundation for further development and expansion of the Group. Link to strategy 1 2 3 4 Definition Earnings, adjusted for amortisation, costs relating to business combinations and non-recurring tax credits, net of the notional tax impact of the above, divided by the weighted average number of issued shares. Changes in 2017 • The increase primarily reflects the improvement in the adjusted EBITDA and the effects of the share issue of 3,019,500 new shares in December 2016 to raise £30.2m in gross proceeds. Link to strategy 1 2 3 4 Definition Cash inflow before payments of taxation and interest; acquisitions; purchase of property, plant, equipment and intangible assets; payments of dividends; debt issue costs; increase/repayment of bank loans; and the proceeds from issue of shares. Changes in 2017 • The increase primarily reflects the improvement in EBITDA of the business, partially offset by increases in other receivables reflecting the growth of the Group. Link to strategy 1 2 3 4 Our strategic priorities 1 Excellent customer service and care 2 Meeting all of our customers’ needs 3 Expanding our business through acquisitions 4 Building on our strengths to provide services to external practices 11 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Thisisourstory The initiatives we progressed in 2017 will serve us well in the future, leading us to expect further growth in all divisions. Existing business • Development of referral services • Introduction of more own brand products • Growth and development of the Healthy Pet Club scheme and MiPet Cover • Development of greenfield locations and relocations of existing practices Growth through acquisitions • Continue to acquire to further strengthen UK geographical coverage • Large opportunity with only 14% market share in small animal sector • Further growth opportunities in farm animal and equine sectors • Further expansion in the Netherlands Finance • Continue to maintain strong cash flow and a healthy balance sheet • Further investment in core business activities 1999 • Company was established • First surgery: Barton Veterinary Hospital, Canterbury 2006 • First dedicated equine practice: Scott Dunn’s Equine Clinic, Berkshire 2002 • First laboratory: 2007 • 100th surgery: Regan Finn Pathologists, Norfolk Veterinary Group, Manchester 12 5,000 Staff (the largest employer in the UK veterinary profession) Annual Report 2017 – CVS Group plc 2008 • Second laboratory: Axiom Veterinary Laboratories, Devon • First crematorium: Rossendale Pet Crematorium, Lancashire 2012 • Second crematorium: Valley Pet Crematorium, Devon 2015 • Fourth crematorium: Whitley Brook, Cheshire • Major acquisition: YourVets • Fourth referral centre: Dovecote, Castle Donington • Launched MiPet own brand products 2017 • Major acquisition: Severn Edge Veterinary Group • New referral centre: Manchester Veterinary Specialists • Launched own brand pet insurance in August 2017 2010 • Commenced on-line trading: Animed Direct • Third laboratory: Greendale Veterinary Diagnostics, Surrey • Major acquisition: Pet Doctors • 200th surgery: Cedar Veterinary Group, Hampshire 2014 • Third crematorium: Silvermere Haven, Surrey 2016 • Greenfield referral centre: Lumbry Park, Hampshire • Major acquisitions: Alnorthumbria, Highcroft, Albavet • Fifth and sixth crematoria: The Pet Crematorium, Durham and Lanarkshire 13 GovernanceFinancial statementsStrategic report Veterinary Practice Our Veterinary Practice Division is the heart of our business. We added a further 62 surgeries during the year and ten since the year end. Services • 432 first-opinion and referral surgeries across the UK and the Netherlands, trading under locally established brand names • HPC loyalty scheme • Pet Medic Recruitment, recruiting locums and permanent staff • MiPet own brand products • MiVetClub and VetShare buying groups, using our buying strength to provide a unique offering to third-party practices • VETisco, providing surgical kits and instruments for our own and third-party practices • MiPet Cover own brand insurance www.cvsukltd.co.uk www.thehealthypetclub.co.uk www.petmedicrecruitment.co.uk www.mivetclub.co.uk www.vetshare.co.uk www.vetisco.com www.mipetcover.com Talia and Dora Talia is a groomer at Larwood and Kennedy 14 Revenue £m £247.9m +25.1% 9 . 7 4 2 . 1 8 9 1 . 5 7 4 1 . 4 6 2 1 . 0 8 0 1 13 14 15 16 17 EBITDA £m £44.7m +25.5% 7 . 4 4 . 6 5 3 . 3 5 2 . 9 1 2 . 2 0 2 13 14 15 16 17 HPC customers # 306k +20.9% k 2 6 1 k 2 1 1 k 6 0 3 k 3 5 2 k 3 1 2 13 14 15 16 17 Annual Report 2017 – CVS Group plc Laboratory Our laboratories provide diagnostic services to CVS veterinary practices and third parties. Over 405,000 tests were performed in 2017 (2016: 380,000), of which 284,000 (2016: 271,000) were for third parties. Services • Four diagnostic laboratories covering the UK • Biochemistry, haematology, histology, serology and advanced allergy testing • In-house analyser units installed at all CVS practices for simple blood and urine testing • Large animal ISO 17025 accreditation obtained in March 2017 www.axiomvetlab.com www.finnpathologists.co.uk www.greendale.co.uk Revenue £m £16.3m +10.2% 1 9 . . 6 0 1 3 . 6 1 . 8 4 1 . 1 3 1 EBITDA £m £3.6m +15.0% 13 14 15 16 17 6 . 3 1 3 . 2 2 . 1 1 . 1 1 . 13 14 15 16 17 Tests # 405k +6.6% k 8 6 3 k 0 8 3 k 5 0 4 k 4 5 3 k 4 2 3 13 14 15 16 17 15 Crematoria Our crematoria provide pet cremation services and clinical waste collection for veterinary practices and pet owners. Over 142,000 cremations were performed in 2017 (2016: 118,000), of which 72,000 (2016: 64,000) were for third parties. Services • Seven crematoria covering the UK • Pet cemeteries and memorial gardens at the Rossendale and Silvermere Haven sites • Clinical waste collection services • Small animal and equine cremations www.rossendalepetcrem.co.uk www.silvermerehaven.co.uk www.valleypetcrematorium.co.uk www.whitleybrook.com www.pet-crematorium.co.uk www.greenacrespetcrematorium.co.uk 16 Revenue £m £6.3m +27.1% 3 . 6 0 5 . 6 2 . 6 1 . 14 15 16 17 0 1 . 13 EBITDA £m £2.1m +21.9% 1 . 2 7 1 . 8 0 . 4 0 . 13 4 0 . 14 15 16 17 Cremations # 142k +20.3% k 2 4 1 k 8 1 1 k 8 6 k 4 4 k 5 3 13 14 15 16 17 Annual Report 2017 – CVS Group plc Animed Direct Animed Direct sells prescription and non-prescription drugs, pet food and other animal related products via its website. Services • On-line business to customer sales • Distribution of MiPet own brand drugs and pet food www.animeddirect.co.uk Revenue £m £13.0m +53.6% 9 4 . 0 . 3 1 . 3 0 1 5 8 . 4 8 . 13 14 15 16 17 EBITDA £m £0.7m +163.8% 7 . 0 5 0 . 3 0 . 3 0 . 1 0 . 13 14 15 16 17 Customers # 410k +22.4% k 0 1 4 k 2 2 3 k 5 3 3 k 0 1 2 k 0 3 1 13 14 15 16 17 17 Thisisprogress Highlights Revenue by division £m 2017 2016 Practice Laboratory Crematoria Animed Direct Head office Total Group 30 June 2017 247.9 16.3 6.3 13.0 (11.7) 271.8 30 June 2016 198.1 14.8 5.0 8.4 (8.2) 218.1 6.3% like-for-like sales growth Expansion into Europe with ten sites acquired in the Netherlands Record £12.0m investment in our surgeries MiPet Cover insurance launched in August 2017 Our investment in our surgeries again reached record levels during the year. 18 Annual Report 2017 – CVS Group plc Business review with Simon Innes Introduction CVS Group is managed across four divisions: Veterinary Practice, Laboratory, Crematoria and Animed Direct. The Veterinary Practice Division is the core of our business but all areas of the Group made excellent progress towards our strategic priorities during 2017. Veterinary Practice Practices excluding acquisitions 2016 acquisitions 2017 acquisitions Total revenue Adjusted EBITDA EBITDA margin % 2017 £m 182.8 51.7 13.4 247.9 44.7 18.0 *Restated 2016 £m 172.2 25.9 — 198.1 35.6 18.0 * Refer to note 4 Segmental Reporting. Revenue amounted to £247.9m (2016: £198.1m), an increase of 25.1% on the prior year. Adjusted EBITDA increased by 25.5% from £35.6m to £44.7m and profit before income tax increased from £21.3m to £28.1m. These increases include the impact of acquisitions in both 2016 and 2017. In the year CVS acquired 62 surgeries operating as 25 businesses. These businesses contributed £13.4m of revenue and £2.1m of EBITDA in the year. Practices acquired during the year and after the year end are set out in note 14. Adjusted EBITDA as a percentage of sales remained constant at 18.0%. Like-for-like sales grew by 5.2% for the year as a whole (2016: 5.4%), with the first half showing significantly higher growth than the second half. The development of our referrals business, and the expertise that this requires, has been and remains a key strategic priority for CVS. In October 2015 we opened Lumbry Park. This 13,000 square foot greenfield development is a state-of-the-art major multi-disciplinary referral centre in Alton, Hampshire, providing a full range of specialisms, using the most modern equipment including both a CT (“Computerised Tomography”) and an MRI (“Magnetic Resonance Imaging”) scanner. Whilst there were a number of challenges through most of the year, significant improvements were made towards the year end and revenue grew strongly. The business is not yet trading profitably but we expect it to become so on a run-rate basis during the current financial year. Manchester Veterinary Specialists opened in February 2017 and its performance has been excellent. Revenue has exceeded expectations and it is already trading profitably. The refurbishment of Chestergates Veterinary Specialists was completed in September 2017. More space has been created for expansion, and a new modern MRI scanner and a CT scanner has been installed for the first time. The site will now be able to grow its business further. During the year we extended our MiPet own brand range to include two further medicines and MiPetFood treats. Dual language packaging (English and Dutch) has begun to be introduced so that we can also sell our own brand products in the Netherlands. The rollout of our own brand pet food and waiting room retail range was completed during the year. Further product launches are planned. The own brand range has been well received by both our customers and our staff. MiPet products are available only in our surgeries and those of our buying group members and hence they differentiate CVS in the market. The MiPet range both protects our margins and helps us retain our competitiveness by limiting price increases. The Healthy Pet Club loyalty scheme continued its exceptional growth in the year. Over 53,000 pets were added to the scheme increasing membership by 20.9% and bringing the total membership to 306,000. The scheme provides preventative medicine to our customers’ pets as well as a range of discounts and benefits. We gain from improved customer loyalty, the encouragement of clinical compliance, protecting revenue generated from drug sales, and bringing more customers into our surgeries. Monthly subscription revenue generated in the year increased to £32.5m (2016: £24.0m). At the year end, the monthly run rate represented 13.4% (2016: 12.3%) of practice revenue; however, in the like-for-like practices the figure was 16.9% (2016: 16.3%), demonstrating the potential for further subscription revenue within the more recently acquired practices into which Healthy Pet Club is also being introduced. We now have 14 emergency out-of-hours sites. These reduce our reliance on third parties for the 24-hour cover that vets are required to provide to their customers. Satisfying the requirement ourselves significantly improves the experience of our customers and their pets and all of our out-of-hours centres are profitable. We continue to perform out-of-hours work for other veterinary practices and will seek to develop further centres as our growing density in an area makes this effective. 19 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Business review with Simon Innes continued Veterinary Practice continued Our acquisitions during the year particularly helped us develop our geographic spread of surgeries (including into the Netherlands and in Northern Ireland) and expand our equine business significantly. We now have ten sites in the Netherlands (nine acquired during the year and one since the year end) and expect to acquire more in the short term. This will provide us with a base from which to establish an integrated business in the Netherlands in a similar way to our UK business. In Northern Ireland we acquired three surgeries bringing the total to four. Two of these acquisitions were of mixed practices. Our equine business has grown well over the past year. The acquisition of Bell Equine, a practice with an excellent reputation, in January 2017 was a significant start. The acquisition of Severn Edge, a large mixed practice with substantial equine revenue, in April 2017 was followed by the acquisition of B&W Equine after the year end. B&W Equine is one of the largest equine practices in the UK, with an excellent reputation. These acquisitions provide us with equine capability along almost the length of the M5 to add to our practices along the M4 and in the North East. The development of our buying group was dramatically enhanced by the acquisition of VetShare in 2016. We have negotiated additional annual rebates for members and sell our own brand products to them. We expect the membership of veterinary buying groups in the UK to fall as the number of practices in corporate hands, and therefore not members of buying groups, increases. Our own buying groups face this challenge but by adding in new services our objective is to develop the best buying group in the market. Our investment in our surgeries again reached record levels during the year. We opened a new site in Smethwick in January 2017 and two further greenfield sites, in Norwich and Bracknell, are under development. We continue to relocate sites that have outgrown their existing locations and our major relocations during the year of Gorleston, Stechford and Carrick have performed strongly since their relocation. In addition to refurbishments, we spent £2.3m on new equipment in our practices. This equipment continues to improve our diagnostic capability and our ability to serve our customers in a professional environment. After much research and planning, our MiPet Cover insurance was launched in August 2017. This is the only own brand pet insurance in the UK which has been developed by a veterinary business. Our own staff were closely involved in and contributed to its development. The product is high quality and excellent value. Our initial plan is to establish the product in our practices before considering its wider marketing. The launch has been exceedingly well received by our own staff. Whilst it is too early to fully assess the reaction of customers, the initial response has been encouraging. The product will take some time to establish and accordingly we do not expect trading to be profitable in the current financial year. We have continued to develop our staff training and career opportunities. Our MiNurse Academy, successfully launched in January 2015, is now well into its third year with a further 43 nurses learning specialised skills, bringing the total since its launch to over 300. The academy provides nurses with advanced training in one of four areas: medicine, surgery, emergency and critical care, and clinical nursing. It is designed to fill a gap which exists across the profession in the post-qualification training of nurses. Our vet graduate training scheme continues to grow and 375 graduates have gone through the scheme in the past three years. The scheme is designed to assist newly qualified vets make the challenging transition from university to day-to-day practice. Clinical development remains a core aspect of our training. All of our vets and nurses are provided with a wide range of training on surgical procedures, nutrition and drugs, both through in-house expertise and external courses. We also sponsor further qualifications for vets such as RCVS Advanced Veterinary Practitioner Certificates and Diplomas, to which two of our vets passed during the year. Increasingly, this training is carried out in-house by our own experts. Laboratory Revenue Adjusted EBITDA EBITDA margin % 2017 £m 16.3 3.6 22.1 2016 £m 14.8 3.1 21.2 The Laboratory Division generated revenue of £16.3m, a 10.2% increase on the prior year figure of £14.8m. Adjusted EBITDA grew by 15.0% from £3.1m to £3.6m and profit before tax increased from £2.5m to £2.9m. We are pleased that our Laboratory Division achieved ISO 17025 accreditation in March 2017 and as a result of achieving this status, our laboratories are able to undertake the farm diagnostic testing which was previously delivered by the Government’s Animal and Plant Health Agency. Farm diagnostics are expected to be another area of growth for the business. The acquisition of Bell Equine during the year created the opportunity for the development of equine testing and the two businesses have already begun to work together. The sales of analysers and related consumables grew strongly during the year. Whilst the business installs its analysers in new CVS practices, its main focus is now on third-party sales and these have grown strongly during the year. Because the analyser machines have an economic life of several years, the sale of the machines leads to consumable sales for several further years. We now have ten sites in the Netherlands and expect to acquire more in the short term. 20 Annual Report 2017 – CVS Group plc The Laboratory Division gross margin percentage fell from 66.5% in 2016 to 65.4%. EBITDA as a percentage of sales showed growth from 21.2% to 22.1%. These changes are primarily due to the higher growth in the immature analyser business, which has a lower gross margin percentage but a higher EBITDA percentage. Adjusted EBITDA grew by 21.9% to £2.1m (2016: £1.7m). EBITDA as a percentage of sales fell slightly from 34.2% to 32.8%, primarily due to a small increase in manpower costs as the structure required to run the enlarged division was established. Profit before tax increased from £1.4m to £1.9m. Crematoria Animed Direct Like-for-like revenue 2016 and 2017 acquisitions Total revenue Adjusted EBITDA EBITDA margin % 2017 £m 4.4 1.9 6.3 2.1 32.8 2016 £m 3.9 1.1 5.0 1.7 34.2 The Crematoria Division had another strong year with like-for-like sales growing by 14.4%. The Crematoria Division benefits from becoming the supplier to veterinary practices that we have acquired in both the current and prior year, but loses business when other corporates acquire practices that are our customers and switch them to their usual supplier. The high net growth level reflects the high standard of service and the consequent ability to attract additional customers. The division has also seen a continuing market shift to individual cremations, which generate higher revenue. Revenue Adjusted EBITDA EBITDA margin % 2017 £m 13.0 0.7 5.6 *Restated 2016 £m 8.4 0.3 3.3 * See note 4 Segmental reporting. Animed Direct, our on-line dispensary and retailer, focuses on prescription and non-prescription medicines where the Group’s buying power allows it to be extremely competitive. The business performed excellently during the year bouncing back strongly from the weaker performance in 2016. Revenue grew by 53.6% to £13.0m (2016: £8.4m) and adjusted EBITDA rose to £0.7m (2016: £0.3m). The new management team, introduced at the start of the year, has reviewed all aspects of the business and brought in further expertise in on-line businesses. In March 2017 the business relocated to a much larger warehouse in Diss allowing for further growth and expansion of the product range. A new website will be launched later in the calendar year. The gross margin percentage decreased from 20.8% to 17.4%. In May 2017 a delivery fee was introduced and a free delivery threshold was introduced in the second half of the year. This has seen positive improvement on the gross margin percentage since its introduction. The business now has a customer database of over 410,000 (2016: over 335,000) people, with the average value of each purchase during the year up at £38.00 (2016: £31.00). Profit before tax increased from £0.3m to £0.6m. Head office Central administration costs include those of the central finance, IT, human resource, purchasing, legal and property functions. Total costs were £9.0m (2016: £7.9m), representing 3.3% of revenue (2016: 3.6%). The significant growth and development of the Group requires continued additional investment to maintain an appropriate level of control and to support further growth over the next few years. All central functions have taken on additional staff to assist with the integration of acquisitions, including those in the Netherlands, and the ongoing management of the enlarged business. Ensuring that we maintain control of the business is a priority and we have continued to strengthen our IT systems and enhance our management reporting. During the year we also established an internal audit function. An increasing number of support staff are now based in the regions where they can more easily provide the close support that the operations teams require. Simon Innes Chief Executive 29 September 2017 The Animed Direct business performed excellently during the year bouncing back strongly from the weaker performance in 2016. 21 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Our culture and values Our culture and values reflect our vision to be the most comprehensive and integrated provider of veterinary services to animal owners in the UK. At CVS we employ guiding principles that underpin our approach to how we work. These behaviours embed the CVS values in our everyday working lives, and support delivery of our vision to continue to be the most comprehensive and integrated provider of veterinary services to animal owners in the UK. Individual attitudes and behaviours are key to our success. These values not only make us different, they also provide us with a sense of direction for consistent behaviour. They act as a foundation for our evolving culture as well as a guide describing what we can expect of each other and what our employees, customers and the communities in which we work can expect of us. Our values are at the heart of how we work and they provide the inextricable link that ties all of these things together. 22 Customer focus Commitment to excellence Success through our people • We value all our customers and treat them all with warmth and respect • We communicate with our customers regularly • We keep our commitments • We understand and manage customer expectations • We get things right the first time • We encourage employees to be innovative to improve the way we work • We accept feedback in a positive way and act upon it • We deliver a high quality service that differentiates us from others • We are focused on our customers’ • We hold accreditations for our high and their animals’ needs standards of quality • We make all our customers feel welcome • We strive to find better ways of working, • We appreciate and act upon feedback both individually and in teams • We demonstrate professionalism at all times • New starters have a full induction and we give staff annual appraisals • We train everybody to do their job and provide progressive learning and development opportunities • We advertise all vacancies internally • We provide employees with the correct tools/resources to do their job • We value employee feedback via our consultation groups and surveys • We foster a collaborative and mutually supportive working environment for our staff • We assist all our employees in achieving their career aspirations Our dedication to our customers shows in everything we do. We constantly strive to achieve the highest possible standards. We attract, develop and retain the best people for our profession. Annual Report 2017 – CVS Group plc Honesty and integrity • We are accessible to all • We are fair and transparent • We act with integrity in all we do • We ensure a safe workplace • We are open to feedback • We keep our commitments • We trust each other to do a good job and give praise and encouragement • We value long-term relationships with our customers and suppliers • We own up to our mistakes We treat our employees and customers with honesty and respect. The people at the heart of our business Joining CVS has given me the opportunity to use and develop my clinical skills in a state-of-the-art environment, while also enabling me to lead a growing team of dedicated colleagues who share my passion for equine veterinary care. I could only have achieved this with the support and training given to me by CVS. It has been a steep learning curve, but I am now enjoying my career more than ever. CVS has nurtured and developed my passion for equine practice. Ben Jacklin Equine Director and Consultant Equine Surgeon, Member of the European College of Veterinary Surgeons (“ECVS”) I joined CVS in late 2015 and the Company’s New Graduate Programme has suited me perfectly. Having mentors within my practice has been invaluable in helping me to manage my new responsibilities. They always make time to talk through difficult cases and support me when I need it. Thanks to the CVS New Graduate Programme, I’m really enjoying the start of my veterinary career. Beth Montgomery New Graduate Veterinary Surgeon, Pet Doctors, Botley and Chandlers Ford, Hampshire 23 With thanks to my colleagues I was nominated on two separate occasions as a finalist for Crematorium Employee of the Year at the annual CVS Conference. I have been able to progress my career and was promoted to the position of Office Manager over three crematoria, which has brought with it many new challenges and responsibilities, such as staff training and management. CVS’s support has enabled me to take my career to the next level. Alison Morris Office Manager, Rossendale Pet Crematorium and Memorial Gardens GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Thisisriskmanagement The Group’s businesses are subject to a wide variety of risks. Some of the most significant risks are explained below together with details of actions that have been taken to mitigate these risks. Our risk management framework The Board has overall responsibility for ensuring risk is appropriately managed across the Group. The day-to-day identification and management of risk is delegated to the Group’s Executive Committee. During the year the Group established an internal audit function, which is currently embedding itself within the CVS Group and ensuring the processes and controls are appropriate for a public company of CVS’s size. Following the establishment of the internal audit function, significant progress has been made in the development of a risk register for each segment of the business. These registers have evaluated the risks most likely to impact the Group. Staff across the business have been involved in the process to ensure all potential areas of risk were adequately identified and recorded, along with the controls currently in place. This presented the opportunity to strengthen controls already in place and implement new controls. 24 1 IDENTIFY RISK The Board 2 ASSESS RISK AND IMPACT 5 REGULARLY REVIEW AND EVALUATE 4 UPDATE KEY RISK REGISTER 3 CREATE MITIGATION STRATEGY Annual Report 2017 – CVS Group plc Risk Economic environment Competition Key staff Clinical standards Principal risks and uncertainties The Group is exposed to risk through the actions of competitors. The Group is exposed to risk in relation to the ability to attract and retain appropriately qualified veterinary surgeons. If clinical standards expected by customers, industry forums and regulatory authorities are not maintained the Group is at risk of losing revenue. • The geographic spread of the Group’s businesses and the fragmented nature of the market help mitigate this risk. Furthermore, the expansion of the Group’s Healthy Pet Club loyalty schemes, the expansion into other business areas and the growth of Animed Direct, our on-line dispensary, provide further mitigation against the risk of competition. • The Group is committed to the • The Group has established a formal development of its employees and will continue to recruit specialist and qualified professionals to promote its services. Our graduate recruitment scheme is recognised across the industry and our Aspirational Leadership Programme helps to develop and retain senior staff. The involvement of senior personnel is encouraged through the operation of the Group’s LTIP scheme. An annual SAYE scheme, available to all staff, aids the retention of other staff. organisational structure such that clinical policies and procedures are developed by veterinary experts. Day-to-day monitoring and staff training ensures compliance. The Group has further mitigated risk by ensuring that suitable insurance policies are taken out at both an individual and corporate level. Description Mitigating factors A poor economic environment poses a risk to the Group through reduced consumer spending on veterinary, laboratory, crematoria and on-line services. • The Group seeks to become more resilient to future downturns in economic conditions through further diversification of its services. The Group’s exposure to the potential impacts of Brexit are still being assessed and, whilst the referendum vote to leave the EU creates some uncertainty for the pace of growth in the UK economy over the next couple of years, the Board believes that the characteristics of our business make it relatively resilient. • The expansion of the Group’s business to provide a broader-based service including referrals, out-of-hours, equine and farm animal services spreads the risk of a downturn in any one business. • The Veterinary Practice Division has continued to grow its Healthy Pet Club loyalty schemes during the year as one way of mitigating this risk. The scheme has the significant benefits of stimulating customer loyalty, ensuring clinical compliance in preventive medicine, protecting revenue from drug sales, and bringing customers into the surgery. • The further development of an own brand product range will help to reduce the risk of customers buying drugs on-line, whilst the growth of Animed Direct protects the Group further as customers switching to buying on-line may still be buying from CVS. 25 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Principal risks and uncertainties continued Risk Adverse publicity Changes in veterinary regulations Reliance on one supplier of medicines Description Adverse publicity could result in a reduction in customer numbers and in revenue. Changes in veterinary regulations could impact on the work we are allowed to perform and the way we work. The majority of medicines are purchased through one wholesaler. Mitigating factors • The Group has policies and procedures in place to ensure that high standards of customer service and clinical excellence are maintained. The behaviours promoting excellent customer care and clinical standards are embedded within our core values (see page 22). The individual branding of our practices reduces the risk of publicity at one practice impacting on another. • No significant proposed changes are known. Any changes are likely to impact on our competitors in the same way they impact on the Group. • A two-year supply agreement was signed in April 2017 to secure the provision of medicines. Three wholesalers can supply most medicines; hence, supply is available if the existing CVS wholesaler were to withdraw. CVS also has direct relationships with many manufacturers which would enable direct supply should any difficulties occur. 26 Annual report 2017 – CVS Group plc Thisisgrowth Financial highlights CVS has continued to deliver growth in revenues, profits and earnings per share. Key financial highlights are shown below: Revenue (£m) Adjusted EBITDA (£m)* Adjusted profit before tax (£m)* Adjusted earnings per share (p)* Operating profit (£m) Profit before tax (£m) Basic earnings per share (p) 2017 271.8 42.1 33.5 42.8 17.2 14.5 18.5 2016 218.1 32.8 24.9 32.4 11.8 9.1 11.6 Change % 24.6 28.2 34.8 32.1 46.2 58.4 59.5 * Adjusted financial measures are defined on page 1 of this Annual Report and reconciled to the financial measures defined by International Financial Reporting Standards (“IFRS”) below and on page 63 (adjusted profit before tax and adjusted earnings per share). 27 GovernanceFinancial statementsStrategic report Finance review with Nick Perrin continued Financial highlights continued Management uses adjusted EBITDA and adjusted earnings per share (“EPS”) as the basis for assessing the financial performance of the Group. These figures exclude costs relating to business combinations and hence assist in understanding the performance of the Group. These terms are not defined by IFRS and therefore may not be directly comparable with other companies’ adjusted profit measures. Bank facilities In July 2017 the Group increased its available bank facilities through exercising the accordion contained within the November 2015 bank facility agreement. Total facilities of £152.5m are available to support the Group’s organic and acquisitive growth initiatives over the coming years. These facilities are provided by a syndicate of three banks: RBS, HSBC and AIB, and comprise the following elements: An explanation of the difference between the reported operating profit figure and adjusted EBITDA is shown below: • a fixed term loan of £67.5m, repayable on 23 November 2021 via a single bullet repayment; and Operating profit as reported Adjustments for: Amortisation and depreciation Costs of business acquisitions Adjusted EBITDA 2017 £m 17.2 21.9 3.0 42.1 2016 £m 11.8 18.9 2.1 32.8 The £9.3m (28.6%) improvement in adjusted EBITDA compared with the prior year arises primarily from the organic growth within the Veterinary Practice Division (£2.2m), the Laboratory Division (£0.5m), the Crematoria Division (£0.1m), the Animed Direct Division (£0.4m), acquisitions during the year (£2.1m) and the full year effect of previous year acquisitions (£5.1m), offset by an increase in central administration costs (£1.1m). Adjusted EBITDA as a percentage of revenue (adjusted EBITDA margin) increased from 15.0% in 2016 to 15.5%. This was driven by an increased margin in the Laboratory Division and Animed Direct Division, and a reduction in head office costs as a percentage of revenue. Profit before tax for the year increased from £9.1m to £14.5m (58.4%). Basic EPS increased 59.5% to 18.5p (2016: 11.6p). Adjusted profit before tax showed a 34.8% increase in the year from £24.9m to £33.5m. Adjusted EPS (as defined in note 10 to the financial statements) increased 32.1% to 42.8p (2016: 32.4p). Adjusted profit before tax and adjusted EPS exclude the impact of amortisation of intangible assets and business combinations costs. Long-term growth The Group has generated consistent growth in the scale of its business and profits over recent years. A summary of the compound annual growth rates (“CAGR”) over the past five years in key financial figures is as follows: Revenue (£m) Adjusted EBITDA (£m) Adjusted profit before tax (£m) Adjusted EPS (p) 2017 271.8 42.1 33.5 42.8 2012 108.7 15.1 9.7 12.8 CAGR % 20.1 22.8 28.1 27.3 • a six-year revolving credit facility (“RCF”) of £85.0m that runs to 23 November 2021. In addition the Group has a £5.0m overdraft facility renewable annually. Cash flow Cash flow from operating activities was £37.2m (2016: £33.6m). The increase reflects the growth in EBITDA. Net debt increased by £6.9m to £100.0m (2016: £93.1m) largely as a consequence of higher acquisition activity and continued investment in the business. The successful placing of Ordinary shares during the year generated net proceeds of £29.6m. The movement in net debt is explained as follows: Cash generated from operations Capital expenditure – maintenance Taxation paid Interest paid Free cash flow Capital expenditure – development Acquisitions Proceeds from Ordinary shares Purchase of own shares Dividends paid Debt issuance costs movement Increase in net debt 2017 £m 37.2 (5.9) (5.4) (2.1) 23.8 (7.9) (48.4) 30.6 (2.1) (2.1) (0.8) (6.9) 2016 £m 33.6 (5.1) (3.3) (2.4) 22.8 (6.4) (61.3) 0.2 — (1.8) (0.4) (46.9) Cash available for discretionary expenditure (“free cash flow”) increased from £22.8m to £23.8m due to increased capital expenditure on maintenance. The analysis of capital expenditure in the table above reflects a broad split between expenditure that we expect to increase profit and that which we believe will primarily maintain profit. This split can only ever be approximate. Development capital expenditure includes expenditure on new sites, relocations, significant extensions and significant new equipment. All other expenditure is included as maintenance. 28 Annual Report 2017 – CVS Group plc Development capital expenditure included £2.3m on the relocations of The Veterinary Hospital Gorleston and the Carrick Chesterfield practice, £1.1m on a new surgery at Smethwick and £3.0m on major refurbishments at Chestergates and Pet Medics. £47.0m was paid (including £1.5m repayment of acquired bank debt) for the 62 surgeries acquired during 2017. £0.2m of consideration was payable at 30 June 2017 in respect of completion net asset adjustments. The acquired businesses are trading as expected. In addition to £47.0m paid for businesses acquired in the year, £0.4m was paid in respect of completion net asset adjustments for business acquired in the 30 June 2016 financial year and £1.0m deferred consideration was paid in respect of the acquisition of Highcroft Pet Care. No corporation tax relief is received on the majority of the amortisation and transaction costs which are deducted in arriving at the unadjusted profit before taxation figure. Therefore, taxation paid increases broadly in line with the adjusted profit before tax of the Group. The interest payment of £2.1m was lower than last year (£2.4m) reflecting the benefit of the cash generated from the share placing and the lower cost of borrowing as a result of the debt refinancing in December 2015. Proceeds from Ordinary shares arose due to the placing of 3,019,500 shares in December 2016 and the exercise of options under the Group’s approved SAYE scheme which allows staff to save regular amounts each month over a three-year period and benefit from increases in the Group’s share price over that time. The movement in debt issue costs was £0.8m, which represents the amortisation of costs during the year. The prior year movement of £0.4m reflects the amortisation of costs partially offset by the capitalisation of costs associated with the November 2015 refinancing. Net debt and borrowing covenants The Group’s net debt comprises the following: Borrowings repayable: Within one year After more than one year Total borrowings Cash in hand and at bank Net debt 2017 £m 3.3 103.5 106.8 (6.8) 100.0 2016 £m (*restated) 0.3 99.5 99.8 (6.7) 93.1 * The prior year comparatives have been restated to classify the Group’s RCF as repayable after more than one year. Please refer to note 21 for further details. The £106.8m of borrowings principally consists of: • £67.5m term loan (net of unamortised issue costs). The term loan is repayable in one bullet payment in 2021; • £3.0m loan notes repayable in 2018; and • £37.0m drawn down under the RCF (net of unamortised issue costs). The RCF is available until 2021. £10.5m of the RCF remained unutilised at 30 June 2017. As noted earlier, on 3 July 2017 the Group agreed a £37.5m increase to its existing RCF through the utilisation of the accordion clause contained within the facility agreement. The margin payable on the facility increased by 50 basis points. The Board remains committed to expanding the Group through further acquisitions in all divisions, as well as through organic growth. The opportunities for acquisitions in all areas of the Group’s business remain strong. The two main financial covenants associated with the Group’s bank facilities are based on Group borrowings to EBITDA and Group EBITDA to interest ratios. EBITDA is based on the last twelve months’ performance adjusted for the full year impact of acquisitions made during that period. The EBITDA to interest ratio must not be less than 4.5. At 30 June 2017 it was 16.4. The covenant levels allow a maximum Group borrowing to EBITDA ratio of 3.5 until 31 December 2017 and 3.0 thereafter, although it is not the Group’s intention to operate at this level. The gearing ratio reduced during the year from 2.6 at 30 June 2016 to 2.3 at 30 June 2017. This reduction in the ratio reflects the benefit of the share placing in December 2016 and a combination of organic EBITDA growth and the realisation of the full benefits of recent acquisitions. The Group aims to continue to expand the business, and has a strong acquisition pipeline and sufficient capacity to fund it. The Group manages its banking arrangements centrally. Funds are swept daily from its various bank accounts into central bank accounts to optimise the Group’s net interest payable position. Interest rate risk is also managed centrally and derivative instruments are used to mitigate this risk. On 1 March 2017, the Group entered into a three-year interest rate fixed rate swap arrangement to hedge fluctuations in interest rates on £45.0m of its RCF facility. The swap reduces to £40.0m on 1 March 2018, followed by a further reduction to £35.0m on 1 March 2019. The Board remains committed to expanding the Group through further acquisitions in all divisions, as well as through organic growth. 29 GovernanceFinancial statementsStrategic reportCVS Group plc – Annual Report 2017 Finance review with Nick Perrin continued Going concern At the balance sheet date the Group had cash balances of £6.8m and an unutilised overdraft facility of £5.0m. Following the increase to the Group’s RCF, total facilities of £152.5m are available to support the Group’s organic and acquisitive growth initiatives over the coming years, comprising a term loan of £67.5m and a RCF of £85.0m. The Directors consider that the £5.0m overdraft and the £152.5m facility enable them to meet all current liabilities when they fall due. Since the year end, the Group has continued to trade profitably and to generate cash. After consideration of market conditions, the Group’s financial position (including the level of headroom available within the bank facilities), its profile of cash generation and the timing and amount of bank borrowings repayable, the Directors have formed a judgement at the time of approving the financial statements that both the Company and the Group have adequate resources available to continue operating in the foreseeable future. For this reason, the going concern basis continues to be adopted in preparing the financial statements. Taxation The Group’s effective tax rate was 20.8% (2016: 23.1%). The principal reason for the decrease is the impact of the reduction in the rate of corporation tax to 17% from April 2020. A reconciliation of the expected tax charge at the standard rate to the actual charge in millions of pounds and as a percentage of profit before tax is shown below: Profit before tax Expected tax at standard rate of tax Expenses not deductible for tax Adjustments to prior year tax charge Benefit of tax rate change Actual charge/effective rate of tax £m 14.5 2.9 0.4 0.2 (0.5) 3.0 % 19.8 2.5 1.6 (3.1) 20.8 All of the Group’s revenues and the majority of its expenses are subject to corporation tax. The main expenses which are not deductible for tax are costs relating to acquisitions. Tax relief against some expenses, mainly depreciation, is received over a longer period than that for which the costs are charged in the financial statements. The tax charge has increased by £0.9m to £3.0m (2016: £2.1m) whilst profit before taxation has increased £5.4m from £9.1m to £14.5m. The benefit of the tax rate change reflects the impact of the future reduction in corporation tax rates on the deferred tax liabilities in respect of intangible assets. Share price performance At the year end the market capitalisation was £804.5m (1,259p per share), compared to £467.7m (782p per share) at the previous year end. The graph below shows the total shareholder return performance compared to the FTSE AIM All-Share index. The values indicated in the graph show the share price movement based on a hypothetical £100 holding in Ordinary shares from 1 July 2011 to 30 June 2017. £ 1,200.0 1,100.0 1,000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 2 July 2012 2 July 2013 2 July 2014 2 July 2015 2 July 2016 2 July 2017 CVS FTSE AIM All-Share Key contractual arrangements The Directors consider that the Group has only one significant third-party supplier contract which is for the supply of veterinary drugs. In the event that this supplier ceased trading the Group would be able to continue in business without significant disruption in trading by purchasing from alternative suppliers. Forward-looking statements Certain statements in this Annual Report are forward looking. Although the Board believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. The Strategic Report on pages 1 to 30 was authorised by the Board of Directors on 29 September 2017 and was signed on its behalf by: Nick Perrin Finance Director 29 September 2017 30 Annual Report 2017 – CVS Group plc Thisisourleadership 1. Richard Connell (62) Non-Executive Chairman Appointment to the Board Richard Connell was appointed to the Board in September 2007. 2. Simon Innes (57) Chief Executive Appointment to the Board Simon Innes was appointed as Chief Executive in January 2004. 3. Mike McCollum (50) Non-Executive Director Appointment to the Board Mike McCollum was appointed to the Board in April 2013. Career and experience Richard Connell is a Chartered Accountant and worked in investment management with 3i Group, Invesco and HSBC. In addition to his role with CVS, he is chairman of a number of other companies and was previously chairman of Dignity plc, Mercury Pharma and Ideal Stelrad Group. Committee membership Richard is Chairman of the Audit Committee and the Nominations Committee. Career and experience Prior to this role Simon Innes was chief executive of Vision Express from 2000 to 2004, over which time he built the business up to £220m turnover and 205 practices, and reversed a loss-making position to create one of the most profitable corporate optical operators in the UK. Prior to Vision Express, Simon was on the board of Hamleys PLC as operations director and gained ten years’ management experience at Marks & Spencer. He also served seven years in the British Army, achieving the rank of Captain in the Royal Engineers. Career and experience Mike McCollum is chief executive officer of Dignity plc, a FTSE 250-listed provider of funeral services. Like CVS, this is a multi-site, acquisitive service business. As finance director he was a prime mover in the 2002 leveraged buyout, the whole-business securitisation in 2003 and the IPO in 2004. He became chief executive in 2009. Mike is a solicitor and holds an MBA from the University of Warwick. Committee membership He is Chairman of the Remuneration Committee. 4. Nick Perrin (57) Finance Director Appointment to the Board Nick Perrin was appointed as Finance Director in January 2013. Career and experience Nick Perrin has extensive experience in multi-site retail and service businesses. During 2012 Nick was interim chief financial officer at Praesepe plc, a leading UK bingo and gaming centre operator, and from 2008 to 2010 was finance and IT director at Genting UK plc, which operated the largest number of casinos in the UK. He previously spent nine years at The Co-operative Group, initially as group financial controller and then as finance director of the specialist retail division. 5. Richard Gilligan (37) Company Secretary Appointment to the Board Richard Gilligan was appointed as Company Secretary in September 2017. Career and experience Before joining CVS, Richard Gilligan was assistant company secretary at Greene King plc for five years and trained as a solicitor with a firm of solicitors in London providing commercial services to GPs and dentists. Richard studied at the University of York and the College of Law and completed the ICSA Chartered Secretary Qualification Scheme in 2013. 3 5 2 1 4 31 Financial statementsStrategic reportGovernance Thisisgovernance Principles of corporate governance The Directors are committed to maintaining high standards of corporate governance and, as far as is considered practicable and appropriate for a public company of CVS’s size, seek to apply the principles of good governance set out in the UK Corporate Governance Code. However, we have chosen not to comply with the UK Corporate Governance Code but we have reported on our corporate governance arrangements by drawing upon best practice available, including those aspects of the UK Corporate Governance Code we consider to be relevant to the Company, even though it is not compulsory for AIM-listed companies. Board of Directors The Board of Directors consists of four members, including a Non-Executive Chairman and a Non-Executive Director. The business of the Company and its subsidiaries is the combined responsibility of the Board, which is responsible for controlling and leading the Group. The Board’s responsibilities include: • setting the strategy of the Group and making major strategic decisions; • approving other significant operational matters; • agreeing annual budgets and monitoring results; • monitoring funding requirements; • reviewing the risk profile of the Group and ensuring adequate internal controls are in place; • approving all acquisitions and major capital expenditure; and • proposing dividends to shareholders. All Directors are able to take independent professional advice on the furtherance of their duties if necessary. They also have access to the advice and services of the Company Secretary and, where it is considered appropriate and necessary, training is made available to Directors. All Directors receive updates on the duties and responsibilities of being a director of a listed company. The Directors are committed to maintaining high standards of corporate governance and seek to apply the principles of good governance set out in the UK Corporate Governance Code. 32 Annual Report 2017 – CVS Group plc Thisisgovernance Corporate governance statement with Richard Gilligan This covers legal, accounting and tax matters, as required. The Company maintains appropriate insurance cover in respect of any legal action against its Directors. The level of cover is currently £20.0m for any one claim. Both the Chairman, R Connell, and M McCollum have been independent Non-Executive Directors throughout the year and the Board identifies M McCollum as the Senior Independent Non-Executive Director. The Company considers Chairman R Connell to be independent, notwithstanding that he has served on the Board for more than nine years, and to be independent in character and judgement due to his extensive experience. Mindful of their other commitments, they have formally confirmed to the Board that they have sufficient time to devote to their responsibilities as Directors of the Group. The Board has appointed three Committees: the Audit Committee, the Remuneration Committee and the Nominations Committee. All operate within defined terms of reference. Details of the Committees are set out below. Those attending and the frequency of Board and Committee meetings held in the financial year were as follows: Audit Committee Remuneration Committee Nominations Committee Board The Board considers that both members of the Audit Committee have significant financial expertise. The Audit Committee’s duties primarily concern financial reporting, internal control and risk management systems, whistleblowing procedures and internal audit and external audit arrangements (including auditor independence). The Committee is responsible for ensuring that the financial performance of the Group is properly monitored and reported on, for meeting with the external auditor and for reviewing its reports relating to financial statements and internal control matters. The Chief Executive and the Finance Director are invited to attend such meetings, but the Committee also meets with the auditor without the Chief Executive and the Finance Director being present at least once annually. Other members of management are invited to present such reports as are required for the Committee to discharge its duties. The agenda of each meeting is linked to the reporting requirements of the Group and the Group’s financial calendar. Each Audit Committee member has the right to require reports on matters relevant to its terms of reference in addition to the regular items. In the year ended 30 June 2017 and up to the date of this report the actions taken by the Audit Committee to discharge its duties included: • organising a tender process for the audit which led to a change in auditor to Deloitte LLP; Number 11 of meetings 11 R Connell 11 S Innes N Perrin 11 M McCollum 11 2 2 2* 2* 2 3 3 3* 3* 3 1 1 1* 1* 1 • reviewing the 2017 Annual Report and financial statements and the Interim Report issued in March 2017. As part of these reviews the Committee received a report from the external auditor on its audit of the annual financial statements; * In attendance by invitation of the respective Committee. The Audit Committee The Committee consists of two Non-Executive Directors, R Connell and M McCollum. R Connell is a Chartered Accountant and M McCollum has worked previously as the CFO for a FTSE 250 business. • reviewing the effectiveness of the Group’s internal controls and reports received from the Group’s internal audit function in respect of risk management; • reviewing the external auditor’s audit planning document, with particular reference to the audit approach, planned materiality, significant risks as detailed in the Independent Auditor’s Report on pages 43 to 46 and the audit approach to these risks; • reviewing the external auditor’s audit findings memorandum, noting conclusions in respect of identified audit risks, materiality of adjusted and unadjusted misstatements, control observations and suggested improvements in the disclosure provided in the Annual Report; • considering papers prepared by the Finance Director to support the going concern basis of preparation; • agreeing the fees to be paid to the external auditor for its audit of the 2017 financial statements; and • reviewing the performance and independence of the external auditor. The Audit Committee has a programme for reviewing its effectiveness. The Remuneration Committee The Chairman of the Remuneration Committee is M McCollum and its other member is R Connell. It reviews the performance of Executive Directors, sets the scale and structure of their remuneration and reviews the basis of their service agreements with due regard to the interests of the shareholders, utilising the services of external consultants as appropriate. The Remuneration Committee also makes recommendations to the Directors concerning any long-term incentive plans, including the award of share options to Directors and senior employees. It also reviews the ongoing appropriateness and relevance of the Company’s remuneration. The Chief Executive and the Finance Director are invited to attend meetings as appropriate but are not permitted to participate in discussions relating to their own remuneration. The Remuneration Committee Report can be found on pages 35 to 40. 33 Financial statementsStrategic reportGovernanceCVS Group plc – Annual Report 2017 Corporate governance statement with Richard Gilligan continued The Nominations Committee The Chairman of the Nominations Committee is R Connell and its other member is M McCollum. It meets at least once annually. The Nominations Committee is responsible for reviewing the structure, size and composition, including skills, knowledge and experience, of the CVS Board. It is also responsible for the co-ordination of the annual evaluation of the performance of the Board and of its Committees. It is responsible for making recommendations to the CVS Board on all CVS Board appointments and on the succession plans for both Executive Directors and Non-Executive Directors. • a continuous process for identifying, evaluating and managing significant risks across the Group together with a comprehensive annual review of risks which covers both financial and non-financial areas; • an independent internal audit function that reports to the Chairman of the Audit Committee. Given the rapidly growing size and structure of the business, the function commenced during the year ended 30 June 2017 and its focus has been on the financial and related procedures across the Group’s many sites. We will continue to review our internal control and risk management structure over the next year to ensure it remains fit for purpose; and • a central team that checks clinical, health and safety compliance in all parts of the Group. During the year the Board received a report from the Group’s IT function focusing on the cyber security threat within the Group’s IT environment. An outcome of the report was the migration to encrypted cloud-based data backup services. CVS engaged a third-party consultant to undertake testing and provide an assessment of progress toward continued data security compliance. The Board is committed to maintaining high standards of business conduct and ethics, and has an ongoing process for identifying, evaluating and managing any significant risks in this regard. The internal control procedures are delegated to the Executive Directors and senior management and are reviewed in light of the ongoing assessment of the Group’s significant risks. Internal audit The Audit Committee reviewed the key risk management processes and internal control procedures described above in 2016 and, given the increased size of the Company over the twelve months ended 30 June 2016, the Audit Committee recommended that an internal audit function was put in place. The internal audit team is now in place and is currently in the process of being embedded throughout CVS. It is responsible for ensuring that the processes and controls that are in place across the Group are appropriate for a public company of CVS’s size. By order of the Board Richard Gilligan Company Secretary 29 September 2017 Relations with shareholders Copies of the Annual Report and financial statements are issued to all shareholders and copies are available on the Group’s website (www.cvsukltd.co.uk). The Group also uses its website to provide information to shareholders and other interested parties. The Company Secretary also deals with correspondence as and when it arises throughout the year. At the Annual General Meeting (“AGM”) the shareholders are entitled to raise questions and queries, and the Chairman, the Chief Executive and other Directors are available before and after the meeting for further discussions with shareholders. The Chief Executive and the Finance Director have regular meetings with institutional investors, private client brokers, individual shareholders, fund managers and analysts to discuss information made public by the Group. The Chairman and the Non-Executive Director are always available to shareholders on all matters relating to governance and strategy. They may be contacted through the Company Secretary at company.secretary@cvsvets.com. Internal control The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness on an ongoing basis. The system is designed to manage rather than eliminate the risk of failure to achieve the Group’s strategic objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The key risk management processes and internal control procedures include the following: • the close involvement of the Executive Directors in all aspects of the day-to-day operations, including regular meetings with senior staff from across the Group and a review of the monthly operational reports compiled by senior management; • clearly defined responsibilities and limits of authority. The Board has responsibility for strategy and has adopted a schedule of matters which are required to be brought to it for decision; • a comprehensive system of financial reporting, forecasting and budgeting. Detailed budgets are prepared annually for all parts of the business. Reviews occur through the management structure culminating in a Group budget which is considered and approved by the Board. Group management accounts are prepared monthly and submitted to the Board for review. Variances from the budget and the prior year are closely monitored and explanations are provided for significant variances. Independent of the budget process, the Board regularly reviews revised profit, cash flow and bank covenant compliance forecasts which are updated to reflect actual performance trends; 34 Annual Report 2017 – CVS Group plc Thisisremuneration This report is for the period to 30 June 2017. It sets out the remuneration policy and the remuneration details for the Executive and Non-Executive Directors of the Company. As an AIM-quoted company, the information provided is disclosed to fulfil the requirements of AIM Rule 19. CVS Group plc is not required to comply with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The information is unaudited. Dear shareholder, I am pleased to introduce the Directors’ Remuneration Report for the 2017 financial year. In light of the continuing development of the Group, the Company has decided to increase the scope and content of its Remuneration Report including the inclusion of this letter from the Chairman of the Remuneration Committee and a table summarising the Executive remuneration policy. Last year the Company introduced an advisory vote on its Remuneration Report at its AGM. This resolution was supported by 95.4% of the voted shares. An advisory resolution will be put to shareholders at the 2017 AGM alongside a resolution to approve a new Long Term Incentive Plan (“LTIP”) which is required because the current LTIP, which was put in place at the time of the Company’s IPO in October 2007, will shortly expire. 35 CVS Group plc – Annual Report 2017Financial statementsStrategic reportGovernance Remuneration Committee report with Mike McCollum continued Remuneration policy The remuneration policy in respect of Executive Directors is designed to ensure that the Group achieves its potential and increases shareholder value. In respect of basic salary, the objective is to ensure that the Group attracts and retains high calibre Executives with the skills, experience and motivation necessary to direct and manage the affairs of the Group. Annual bonuses and LTIPs are seen as an important part of each Director’s total remuneration and are designed to drive and reward exceptional performance. The policy also provides for post-retirement benefits through contributions to Executive Directors’ personal pension schemes, together with other benefits such as a company car and life and medical insurance. Performance and decisions on remuneration taken in 2016/17 The Company produced strong financial results for the year with adjusted earnings per share (“EPS”) 32.1% above the prior year and basic EPS 58.5% higher. Adjusted EPS for the year ended 30 June 2017 was 42.8p. This compares to adjusted EPS of 19.0p for the year ended 30 June 2014, a compound annual growth rate (“CAGR”) of 31.0%. The target CAGR for full vesting of LTIPs issued in 2014 was 12% above inflation. This target has been substantially exceeded and, therefore, 100% of the options granted have vested. Due to the need to implement a new LTIP plan, the Remuneration Committee reviewed the policy and determined to develop the policy in a number of areas. These changes are reflected in the new LTIP plan and are detailed below and in the summary policy table. The new LTIP to be put to shareholders at the 2017 AGM is intended to comply with the Investment Association Principles of Remuneration. Full information on the plan is set out in the Notice of AGM. A summary of the changes to the policy is set out below: The basic structure of the annual bonus will remain unchanged. The maximum for the CEO will remain at 100% of salary and the maximum will be increased from 75% to 100% for the Finance Director effective 2017/18. Malus and clawback will be introduced from 2018/19. The Remuneration Committee intends to make 2017 and future LTIP awards under the new plan (if it is approved by shareholders) at 125% of salary for the CEO and 100% of salary for the Finance Director and subject to an adjusted EPS real growth condition. The Remuneration Committee will have flexibility to determine performance conditions each year but in the near term intend to maintain adjusted EPS growth with the target level determined shortly before point of award. In December 2016 the Company granted awards under its LTIP to the CEO and the Finance Director with a value of 100% of salary. As in previous years, these awards are subject to an adjusted EPS real growth performance condition measured over three years. Detail on the performance condition is set out later in this report. The Company will introduce a shareholding guideline for its Executive Directors at 100% of salary. There will be a restriction on the level of the vested LTIP awards which Executives can sell until the guideline is met. Currently each of the Executive Directors’ shareholdings meets this guideline. Salaries are reviewed annually and benchmarked against similar listed companies with changes effective in January. In light of the increased scale of the Group, its strong performance and that of the Executives, the Remuneration Committee determined to increase the salary of the CEO by 11.1% to £400,000 and to increase the salary of the Finance Director by 11.1% to £250,000. The annual bonus scheme in which the Executive Directors participate is based on the achievement of adjusted EBITDA performance. For 2016/17, the bonus maximum for the CEO was 100% of base pay and for the Finance Director was 75% of base pay. The maximum bonus was earned by both the CEO and the Finance Director. Development of remuneration policy The Remuneration Committee reviews the policy in light of market conditions, performance and developments in good corporate governance whilst taking account of the Company’s status as a larger AIM company. The Remuneration Report will contain additional disclosures including this introductory letter and a summary policy table. From 2017/18, disclosures will include performance against annual bonus targets. The Company has consulted with its largest shareholders on the new LTIP and the changes to the policy outlined above. I hope that you find the report helpful and informative and I look forward to receiving further feedback from our investors on the information presented. Mike McCollum Remuneration Committee Chairman 29 September 2017 36 Annual Report 2017 – CVS Group plc Executive Directors’ remuneration policy This part of the Directors’ Remuneration Report sets out the remuneration policy of the Company with regard to its Directors. Purpose and link to strategy Operation Potential remuneration Performance metrics Base salary Base pay is designed to reflect Executive Directors’ experience, capabilities and role within the business. To be set at a level which is sufficiently competitive to recruit and retain individuals of the appropriate calibre to deliver the Company’s strategy. Benefits To complement basic salary by providing market competitive benefits to attract and retain Executives. Pension To provide retirement benefits which, when taken together with other elements of the remuneration package, will enable the Company to attract and retain Executives. Salaries are reviewed annually and benchmarked against similar listed companies with any changes effective from 1 January. The review takes into account: The CEO’s base salary was reviewed on 1 January 2017 (the prior review being in January 2016) and was increased by 11.1% to £400,000. Not applicable. • Company performance and rapid increase in scale and complexity; • the role, experience and performance of the individual Director; and • average workforce salary adjustments within the Company. Reviewed from time to time to ensure that benefits, when taken together with other elements of remuneration, remain market competitive. Benefits for the Executive Directors currently include the provision of a company car and medical and life insurance. The Finance Director’s base salary was reviewed on 1 January 2017 (the prior review being in January 2016) and was increased by 11.1% to £250,000. The cost of providing these benefits vary year on year depending on the schemes’ premiums. The Remuneration Committee monitors the overall cost of the benefits package. Not applicable. The Chief Executive participates in a defined contribution pension arrangement and also receives a payment in lieu of a full pension. The Chief Executive is entitled to a Company pension contribution of 10%. This is taken as a payment in lieu of a pension. Not applicable. The Finance Director receives a payment in lieu of a pension. The Finance Director is entitled to a Company pension contribution of 12%. This is taken as a payment in lieu of a pension. For both the Chief Executive and the Finance Director, where a payment is taken in lieu of a pension it is reduced by the amount of the Company’s liability to pay national insurance on the contribution. 37 Financial statementsStrategic reportGovernanceCVS Group plc – Annual Report 2017 Remuneration Committee report with Mike McCollum continued Executive Directors’ remuneration policy continued Purpose and link to strategy Annual bonus To drive and reward exceptional performance. Long Term Incentive Plan (“LTIP”) To drive and reward exceptional performance. To align the interests of Executives and shareholders. Operation Potential remuneration Performance metrics From 2017/18, for the Executive Directors, the maximum capped bonus potential is 100% of salary. For the years ended 30 June 2017 and ending 30 June 2018, the targets are based on adjusted EBITDA. The target is adjusted to take account of acquisitions made in the course of the year. From 2018, the Remuneration Committee would in normal circumstances expect to make annual LTIP awards to the CEO and the Finance Director at 125% and 100% of salary, respectively. The maximum annual award permissible under the 2018 plan in exceptional circumstances is 200% of salary. Currently an adjusted EPS CAGR real growth target is applied to awards. The adjusted EPS reflects adjustments for amortisation of intangibles, costs of business combinations, income tax, exceptional items and fair value adjustments in respect of derivative financial instruments. In addition and irrespective of the adjusted EPS target, no award will vest unless, in the opinion of the Remuneration Committee, the underlying performance of the Group has been satisfactory over the measurement period. The Executive Directors participate in a discretionary, annual, performance related bonus scheme. Targets are set at the beginning of each year based on the recommendations of the Remuneration Committee. Bonuses are paid in cash based on audited financial results. Commencing financial year 2018/19, annual bonus payments will be subject to a clawback provision. Both Executive Directors are entitled to be considered for the grant of awards under the LTIP. The awards take the form of nominal cost options over a specified number of Ordinary shares. Awards are not transferable or assignable. Awards are released to participants after a performance period of three years, subject to certain performance and service conditions being met. 40% of awards vest at threshold performance. The LTIP rewards the future performance of the Executive Directors and certain other employees by linking the size of the award to the achievement of Group performance targets. Participation is at the discretion of the Remuneration Committee. Awards will typically be made annually based on a percentage of annual salary. Performance conditions are set by the Remuneration Committee at the time of the award. The 2017 plan rules, amongst other things, include clawback provisions and a limitation to ensure that new shares issued, when aggregated with all other employee share awards, must not exceed 10% of issued share capital over any ten-year period. 38 Annual Report 2017 – CVS Group plc Executive Directors’ remuneration policy continued Save As You Earn (“SAYE”) The Group operates an incentive scheme for all staff, including the Executive Directors, being the CVS SAYE plan, an HM Revenue & Customs-approved scheme. A SAYE scheme is operated for each year. Under the 2017 scheme the awards were made at a 10% discount to the closing mid-market price on the day preceding the date of invitation. Previous schemes were issued at a 20% discount. All schemes vest over a three-year period. There are no performance conditions attached to any of the SAYE schemes. Policy on Non-Executive Director remuneration The Chairman and the other Non-Executive Director’s remuneration comprises only fees. They are reviewed annually with changes effective from 1 January each year. The Chairman’s and the Non-Executive Director’s fees are approved by the Board on the recommendation of the CEO. The Non-Executive Directors are not involved in any decisions about their own remuneration. The Chairman and the other independent Non-Executive Director are entitled to be reimbursed for reasonable expenses. Details of the fees paid for 2016/17 are set out in the Annual Report on Remuneration. The Directors’ fees were increased by 2.0% with effect from January 2017. Annual Report on Remuneration Introduction This Annual Report on Remuneration sets out information about the remuneration of the Directors of the Company for the period ended 30 June 2017. Membership and role of the Remuneration Committee The Remuneration Committee is appointed by the Board, and comprises M McCollum as Chairman and R Connell. The role of the Remuneration Committee is to determine and recommend to the Board the remuneration policy for the Executive Directors. This includes base salary, annual and long-term incentive awards and pension arrangements. Advisors During the year, the Company engaged h2glenfern, a remuneration advisory practice, to undertake a benchmarking exercise for use in considering the remuneration levels of the Executive and Non-Executive Directors and to provide advice on the new LTIP and the overall development on Executive remuneration. Remuneration of the Executive Directors Directors’ emoluments The current fees are as follows: Director R Connell M McCollum £108,711 £44,161 Executive Directors S Innes Executive Directors’ service agreements S Innes entered into his service agreement on 4 October 2007 and N Perrin entered into his on 1 January 2013. Both agreements can be terminated by either party on twelve months’ notice. As well as an annual salary, the service contracts also detail the provision of other benefits including performance related bonuses, medical and life insurance, a car allowance and contributions to personal pension plans. Non-Executive Directors’ letters of appointment R Connell was appointed on 4 October 2007. His most recent service agreement is dated 8 April 2017 and is for a one-year term ending on 7 April 2018. M McCollum was appointed on 2 April 2013. His most recent service agreement is for a three-year term ending on 2 April 2019. Their appointments can be terminated by the Company or themselves by giving six months’ notice. N Perrin Non-Executive Chairman R Connell Non-Executive Director M McCollum Basic salary, allowance and fees £’000 Benefits in kind £’000 Pension £’000 Performance related bonus £’000 2017 2016 2017 2016 2017 2016 2017 2016 380 355 243 216 109 106 44 43 36 34 18 17 — — — — 39 50 25 23 — — — — 380 360 195 169 — — — — Total £’000 835 799 481 425 109 106 44 43 Benefits in kind include the provision of a company car and medical and life insurance for each Executive Director. No Director waived emoluments in respect of the years ended 30 June 2017 or 30 June 2016. The remuneration of the Executive Directors of CVS Group plc is borne by the subsidiary company, CVS (UK) Limited, without recharge to CVS Group plc. 39 Financial statementsStrategic reportGovernanceCVS Group plc – Annual Report 2017 Remuneration Committee report with Mike McCollum continued Annual Report on Remuneration continued Share scheme interests as at 30 June 2017 Details of plans at the reporting date that have not yet vested are set out below. Directors’ interests in shares The interests of the Directors as at 30 June 2017 in the shares of the Company were: Ordinary shares of 0.2p each Number 83,891 77,355 246,475 32,000 Apart from the interests in shares and share options disclosed above, the Directors had no other interest in shares of Group companies. At 30 June 2017, the market price of the Ordinary shares was 1,250p. No share options lapsed during the year. The following options have been exercised during the year: S Innes N Perrin N Perrin Scheme LTIP7 LTIP7 SAYE6 Number of shares Exercise date Exercise price Share price at exercise date 121,200 24 October 2016 92,500 24 October 2016 4,186 1 January 2017 0.2p 0.2p 215p 875p 875p 1,042p Gains arising on the exercise of options for S Innes and N Perrin amounted to £1,060,258 and £808,315, respectively. On behalf of the Remuneration Committee Mike McCollum Non-Executive Director 29 September 2017 Award LTIP8 24 September 2014 3 years Grant date Vesting period Adjusted EPS real growth performance conditions LTIP9 24 September 2015 3 years LTIP10 20 December 2016 3 years The performance targets for all awards are the same and are based on achieving adjusted EPS growth in excess of inflation as follows: • Less than 8.0% CAGR – no award R Connell M McCollum S Innes N Perrin • 8.0% to 12.0% CAGR – awarded on a straight line basis between 40% and 100% of total award • More than 12.0% CAGR – full award Options over Ordinary shares awarded to Executive Directors under the LTIP and SAYE schemes in place at 29 September 2017 are as follows: Scheme S Innes LTIP8* LTIP9 LTIP10 SAYE7 N Perrin LTIP8* LTIP9 LTIP10 SAYE6* SAYE7 SAYE9 Date of grant Market price of shares on date of grant Earliest exercise date and date of vesting Exercise price Number of shares 24 September 2014 24 September 2015 20 December 2016 27 November 2014 24 September 2014 24 September 2015 20 December 2016 29 November 2013 27 November 2014 25 November 2016 352p 699p 1,067p 30 June 2017 30 June 2018 30 June 2019 370p 1 January 2018 352p 699p 1,067p 30 June 2017 30 June 2018 30 June 2019 269p 1 January 2017 370p 1 January 2018 875p 1 January 2020 0.2p 0.2p 0.2p 296p 0.2p 0.2p 0.2p 215p 296p 790p 88,169 57,000 40,000 6,081 53,570 29,500 25,000 4,186 3,041 318 * These awards have now vested. 40 Annual Report 2017 – CVS Group plc Directors’ report The Directors present their Annual Report together with the audited consolidated financial statements for the year ended 30 June 2017. Principal activities and results The principal activities of the Group are to operate animal veterinary practices, complementary veterinary diagnostic businesses, pet crematoria and an on-line pharmacy and retail business. The principal activity of CVS Group plc is that of a holding company. The Group made a profit after taxation of £11.5m (2016: £7.0m). Business review The information that fulfils the requirements of the business review, including details of the 2017 results, key performance indicators, principal risks and uncertainties and the outlook for future years, is set out in the Chairman’s Statement (pages 4 and 5), the Business Review (pages 18 to 21) and the Finance Review (pages 27 to 30) (including key performance indicators (pages 10 and 11) and principal risks and uncertainties (pages 24 to 26)). Dividends The Directors recommend the payment of a dividend of 4.5p per share (2016: 3.5p) amounting to £2.9m (2016: £2.1m). Subject to approval at the Annual General Meeting, the dividend will be paid on 8 December 2017 to shareholders on the register at the close of business on 24 November 2017. The aggregate dividends recognised as distributions in the year ended 30 June 2017 amounted to £2.1m (2016: £1.8m). No interim dividends (2016: £nil) have been paid during the year. Directors The following Directors held office during the year and up to the date of signing the financial statements: R Connell S Innes M McCollum N Perrin Directors’ remuneration and interests The Remuneration Committee Report is set out on pages 35 to 40. It includes details of Directors’ remuneration, interests in the shares of the Company, share options and pension arrangements. Environment The Group recognises the significance of environmental responsibility and undertakes clinical compliance reviews to ensure environmental standards are conformed with in addition to providing training to its employees to ensure compliance. Although the Group’s activities do not have a major impact on the environment, every effort is made to reduce any effect. Health and safety The Group is fully aware of its obligations to maintain high health and safety standards at all times, and the safety of our customers and employees is of paramount importance. The Group’s operations are managed at all times in such a way as to ensure, as far as is reasonably practicable, the health, safety and welfare of all of our employees and all other people who may be attending our premises. Corporate governance The Board’s Corporate Governance Statement is set out on pages 32 to 34. Financial instruments Details of the Group’s financial risk management objectives and policies are included in note 3 to the financial statements. Share capital and substantial shareholdings Details of the share capital of the Company as at 30 June 2017 are set out in note 23 to the financial statements. At 31 August 2017, the Company has been notified of the following substantial shareholdings comprising 3% or more of the issued Ordinary share capital of the Company: Biographical details of the Directors are provided on page 31. Re-election of Directors The Articles of Association of the Company require all Directors to be re-elected at intervals of not more than three years. The Board has decided that it is appropriate for all Directors to be reappointed each year, so in accordance with that decision all Directors will stand for re-election at the Annual General Meeting. BlackRock Standard Life Investments Octopus Investments Invesco Perpetual Hargreave Hale, Stockbrokers (ND) Number of shares % of total issued 7,535,140 6,859,909 4,827,658 3,244,301 2,275,990 11.79 10.73 7.55 5.08 3.56 41 Financial statementsStrategic reportGovernanceCVS Group plc – Annual Report 2017 Directors’ report continued Employees Consultation with employees takes place through a number of regional meetings throughout the year and an annual staff survey. The aim is to ensure that their views are taken into account when decisions are made that are likely to affect their interests and that all employees are aware of the general progress of their business units and of the Group as a whole. To enhance communication within the Group, a committee is in place which is constituted of regional members from all areas of the business with the aim of improving consultation and communication levels. Applications for employment by disabled people are always fully considered, bearing in mind the respective aptitudes and abilities of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of a disabled person should be, as far as possible, identical to that of a person who does not have a disability. The Group operates a Long Term Incentive Plan for Executive Directors and senior managers. Details are included in note 8. The Group also has a Save As You Earn scheme, now in its eighth year, under which employees are granted an option to purchase Ordinary shares in the Company in three years’ time, dependent upon their entering into a contract to make monthly contributions to a savings account over the relevant period. These savings are used to fund the option exercise value. The exercise price in respect of options issued in the year was at a 10% discount to the shares’ market value at the date of invitation. The scheme is open to all Group employees, including the Executive Directors. Details of the scheme are included in the Remuneration Committee Report on pages 35 to 40. Directors’ third-party indemnity provision A qualifying third-party indemnity provision as defined in Section 234 of the Companies Act 2006 was in force during the year and also at the balance sheet date for the benefit of each of the Directors in respect of liabilities incurred as a result of their office, to the extent permitted by law. In respect of those liabilities for which Directors may not be indemnified, the Company maintained a directors’ and officers’ liability insurance policy throughout the financial year. Directors’ responsibilities statement The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. 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 the Company and of the profit or loss of the Company and the Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRS as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of 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 United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Disclosure of information to auditor Each of the persons who is a Director at the date of approval of this Annual Report confirms that: • so far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and • 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 Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Deloitte LLP was appointed as auditor during the year and has expressed its willingness to continue in office as auditor. A resolution to reappoint it will be proposed at the forthcoming Annual General Meeting. By order of the Board Richard Gilligan Company Secretary 29 September 2017 42 Annual Report 2017 – CVS Group plc Independent auditor’s report to the members of CVS Group plc Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: Report on the audit of the financial statements Opinion In our opinion: • 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 30 June 2017 and of the group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements of CVS Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise: Materiality Scoping • Revenue recognition – customer loyalty schemes • Acquisition fair value accounting • Valuation of goodwill The materiality that we used in the current year was £1.05 million which was determined based on a blended measure using a combination of profit and asset benchmarks. The scope of our audit was driven by our risk assessment and understanding of the business. This consisted of twenty-three components subjected to full scope audits and six components subjected to analytical procedures at group level. • the consolidated income statement; • the consolidated statement of comprehensive income; • the consolidated and parent company statements of changes in equity; • the consolidated and parent company balance sheets; • the consolidated and parent company cash flow statements; and • the related consolidated and parent company notes 1 to 31. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We are required by ISAs (UK) to report in respect of the following matters where: • the directors’ use of the going concern basis of accounting in preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. We have nothing to report in respect of these matters. 43 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report Independent auditor’s report to the members of CVS Group plc continued Acquisition fair value accounting Key audit matter description The group acquired 25 veterinary businesses during the year for a total consideration of £48 million. The fair value consists of separately identifiable customer list intangible assets of £36 million, net liabilities acquired of £3 million, and goodwill of £15 million. The identification and valuation of the separately identifiable intangible assets excluding goodwill requires significant judgement and estimation, including customer attrition rate and long term growth rate for customer list intangible asset. Details of the acquisitions are provided in the Strategic Review, on page 19. Note 2 to the financial statements sets out the group’s accounting policy for business combinations and Note 14 to the financial statements outlines details of the acquisitions and the key assumptions in determining fair value of the acquired intangible assets. Note 2 to the financial statements provides details of the critical accounting estimates and judgements. We audited the considerations paid for all of the acquisitions in the year by reviewing business purchase agreements. With the involvement of our internal valuation specialists we reviewed and challenged management on their intangible asset identification by assessing whether intangible assets identified by management are in line with the requirements of IFRS 3 “Business Combinations” and IAS 38 “Intangible assets”. We also performed benchmarking with similar businesses and business combinations. With the involvement of our internal valuation specialists we audited the opening balance sheet of the acquired entities to evaluate whether the fair value of intangible assets excluding goodwill acquired is appropriate. Based on the audit procedures performed, we concur that management has appropriately applied the principles of IFRS 3, including identification and fair valuation of intangible assets excluding goodwill on acquisitions. Key assumptions used by management fall within the reasonable range. How the scope of our audit responded to the key audit matter Key observations Report on the audit of the financial statements continued Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Revenue recognition – customer loyalty schemes The group has customer loyalty schemes. Members of customer loyalty schemes, for example Healthy Pet Club (“HPC”), pay monthly subscription fees to the group and receive preventative consultations and treatments over a twelve-month period. The group recognised £32.5 million revenue in respect of customer loyalty schemes in the year and it has 306,000 customer loyalty scheme members as at the year-end. There is a degree of judgement involved in recognising revenue for customer loyalty schemes given members of the schemes receive services at different times and they can also join or leave at different times for a variety of reasons. Therefore we focussed on whether the accounting policy for customer loyalty scheme revenue is in line with IAS 18 “Revenue”. In addition, HPC customers receive free vaccines and discounts in product purchase. There is a risk in practices where the staff may record inappropriate discounts to customers as a reduction in revenue. The accounting policy is disclosed in note 2 to the financial statements. We assessed the appropriateness of revenue recognition policy for customer loyalty schemes, especially whether the profile of revenue recognition reflects timing of service provision and whether inclusion of key estimates such as estimated animal death as reduction in revenue is in line with the requirement of IAS 18. We checked the arithmetic accuracy of management’s model in estimating customer loyalty schemes revenue, including the application of the key assumptions. For a sample of customer loyalty scheme discounts given to customers, we checked whether customers were active customer loyalty scheme members with reference to the customer loyalty scheme membership database. We critically assessed the appropriateness of the key assumptions underlying management’s model in line with the requirement of IAS 18 “Revenue”, by comparing them to historical fact patterns. We reviewed board minutes and post year-end trading information to identify any contradictory evidence. Based on the audit procedures performed, we concluded that revenue recognition in respect of the customer loyalty schemes is in line with the group’s accounting policy and IAS 18. Key assumptions used by management fall within the reasonable range. Key audit matter description How the scope of our audit responded to the key audit matter Key observations 44 Annual Report 2017 – CVS Group plc Report on the audit of the financial statements continued Key audit matters continued Valuation of goodwill Key audit matter description The group has a significant goodwill balance (£46.8 million as at 30 June 2017). In conducting the impairment review as required by IAS 36, there are a number of key judgements applied by management in determining the recoverable amounts, including discount rate and growth rates. We specified our risk to the Practice Division which makes up 90% of the goodwill balance. Note 2 to the financial statements sets out the group’s accounting policy for goodwill and its impairment assessment and Note 12 to the financial statements outlines the key assumptions involved in goodwill impairment assessment. Note 2 to the financial statements provides details of the critical accounting estimates and judgements around impairment of goodwill. How the scope of our audit responded to the key audit matter We checked the arithmetic accuracy of management’s goodwill impairment assessment model. We performed sensitivity analysis on the key assumptions to assess goodwill impairment headroom. We obtained cash flow forecasts prepared by management and challenged the reasonableness of the forecast including future growth rates by obtaining historical budgets prepared by management and performing historical forecasting review to assess management’s accuracy in preparing reasonable forecast. We obtained market data, such as like-for-like sales change in comparable companies, and incorporated these into our sensitivity analysis. We also reviewed board minutes and post year-end trading information to identify indicators of forecast inaccuracy. With the involvement of our internal valuation specialists we estimated an appropriate discount rate with reference to market data and compared that to the rate used by management. Based on the audit procedures performed, we concur that management has appropriately applied the principles of IAS 36, in relation to assessment of goodwill impairment. Key assumptions used by management fall within the reasonable range. Key observations Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group materiality £1.05 million Basis for determining materiality Rationale for the benchmark applied We considered both asset and profit bases in the determination of materiality. Materiality equates to below 2% of net assets and 7.5% of pre-tax profit. In addition to a profit-based metric, we incorporated a net asset measure in determining materiality to reflect the significant levels of investments made by the group in recent years. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £52,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level. Based on that assessment, we focused our group audit scope primarily on the audit work in the UK. Twenty-three components were subject to a full scope audit by the group audit team. Six components were subject to a review at the group level based on our assessment of the materiality of the group’s operations at those components. All components where our group audit was focussed were audited by the group audit team. The twenty-three components subject either to a full audit or specified audit procedures account for 99% of the group’s revenue, 99% of the group’s profit before tax and 97% of the group’s net assets. The component materiality ranges between £0.4 million to £0.9 million. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances. Revenue Profit before tax Net assets 1% 99% 1+ 1% 99% 1+ 3% 97% 3+ Full audit scope Review at group level 45 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report99 + P 97 + P 99 + P Independent auditor’s report to the members of CVS Group plc continued Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the group and of the parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: We have nothing to report in respect of these matters. • we have not received all the information and explanations we require for our audit; or • 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 • the parent company financial statements are not in agreement with the accounting records and returns. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made. We have nothing to report arising from this matter. Lee Welham FCA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor Cambridge, United Kingdom 28 September 2017 Report on the audit of the financial statements continued Other information The directors are responsible for the other information. The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. We have nothing to report in respect of these matters. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our auditor’s report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report 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. 46 Annual Report 2017 – CVS Group plc Consolidated income statement for the year ended 30 June 2017 Revenue Cost of sales Gross profit Administrative expenses Operating profit Finance expense Profit before income tax Income tax expense Profit for the year attributable to owners of the parent Earnings per Ordinary share (expressed in pence per share) (“EPS”) Basic Diluted * The prior year comparatives have been restated to reclassify £0.4m of administration expenses to cost of sales. 2017 £m 271.8 (147.3) 124.5 (107.3) 17.2 (2.7) 14.5 (3.0) 11.5 18.5p 18.2p *Restated 2016 £m 218.1 (112.2) 105.9 (94.1) 11.8 (2.7) 9.1 (2.1) 7.0 11.6p 11.3p Note 4 6 6 5 4 9 10 10 Reconciliation of adjusted financial measures The Directors believe that adjusted profit provides additional useful information for shareholders on performance. This is used for internal performance analysis. This measure is not defined by IFRS and is not intended to be a substitute for, or superior to, IFRS measurements of profit. The following table is provided to show the comparative earnings before interest, tax, depreciation and amortisation (“EBITDA”) after adjusting for costs relating to business combinations. Non-GAAP measure: adjusted EBITDA Profit before income tax Adjustments for: Finance expense Depreciation Amortisation and impairment of intangible assets Costs relating to business combinations Adjusted EBITDA Note 5 13 12 4 2017 £m 14.5 2.7 5.9 16.0 3.0 42.1 2016 £m 9.1 2.7 5.2 13.7 2.1 32.8 47 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report Consolidated statement of comprehensive income for the year ended 30 June 2017 Profit for the year Other comprehensive income – items that will or may be reclassified to loss in future periods Cash flow hedges: Fair value gains Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to owners of the parent Note 16 2017 £m 11.5 0.2 0.2 11.7 2016 £m 7.0 — — 7.0 48 Annual Report 2017 – CVS Group plc Consolidated and Company balance sheets as at 30 June 2017 Note 12 13 15 22 16 18 19 26 4 20 21 21 22 16 4 23 25 24 Group 2017 £m 167.2 43.0 0.1 2.1 0.1 212.5 12.5 30.9 6.8 50.2 262.7 (48.2) (2.9) (3.3) (54.4) (103.5) (16.8) — (120.3) (174.7) 88.0 0.1 38.1 0.6 0.1 (61.4) 110.5 88.0 *Restated Group 2016 £m Company 2017 £m Company 2016 £m 131.5 32.8 0.1 1.8 — 166.2 9.7 23.8 6.7 40.2 206.4 (43.0) (2.3) (0.3) (45.6) (99.5) (14.6) (0.1) (114.2) (159.8) 46.6 0.1 9.7 0.6 0.1 (61.4) 97.5 46.6 — — 67.1 — — 67.1 — 31.2 — 31.2 98.3 — — — — — — — — — 98.3 0.1 40.2 0.6 — — 57.4 98.3 — — 65.6 — — 65.6 — 3.0 — 3.0 68.6 — — — — — — — — — 68.6 0.1 9.7 0.6 — — 58.2 68.6 Non-current assets Intangible assets Property, plant and equipment Investments Deferred income tax assets Derivative financial instruments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Current income tax liabilities Borrowings Non-current liabilities Borrowings Deferred income tax liabilities Derivative financial instruments Total liabilities Net assets Shareholders’ equity Share capital Share premium Capital redemption reserve Revaluation reserve Merger reserve Retained earnings Total equity * Please refer to note 21. The Company reported a loss for the financial year ended 30 June 2017 of £0.2m (2016: £0.2m). The notes on pages 53 to 71 are an integral part of these consolidated financial statements. The financial statements on pages 47 to 71 were authorised for issue by the Board of Directors on 29 September 2017 and were signed on its behalf by: Nick Perrin Director Simon Innes Director Company registered number: 06312831 49 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report Consolidated statement of changes in equity for the year ended 30 June 2017 Share premium £m Capital redemption reserve £m Revaluation reserve £m 0.1 — — — — — — — — — Merger reserve £m (61.4) — Retained earnings £m 90.2 7.0 — — — — — — — — — — 7.0 — 1.3 0.8 (1.8) 0.3 97.5 0.1 (61.4) Revaluation reserve £m 0.1 — Merger reserve £m (61.4) — Retained earnings £m 97.5 11.5 — — — — — — — — — — — — — — — — — — 0.2 0.2 11.7 — — 1.5 1.9 (2.1) 1.3 0.6 — — — — — — — — — — 0.6 0.1 (61.4) 110.5 9.5 — — — — 0.2 — — — 0.2 9.7 0.6 — — — — — — — — — 0.6 Share premium £m Capital redemption reserve £m 9.7 — — — — 30.5 (2.1) — — — 28.4 38.1 Total equity £m 39.1 7.0 — — 7.0 0.2 1.3 0.8 (1.8) 0.5 46.6 Total equity £m 46.6 11.5 0.2 0.2 11.7 30.5 (2.1) 1.5 1.9 (2.1) 29.7 88.0 Share capital £m 0.1 — — — — — — — — — 0.1 Share capital £m 0.1 — — — — — — — — — — 0.1 At 1 July 2015 Profit for the year Other comprehensive income Cash flow hedges: Fair value gains Total other comprehensive income Total comprehensive income Transactions with owners Issue of Ordinary shares Credit to reserves for share-based payments Deferred tax relating to share-based payments Dividends to equity holders of the Company (note 23) Transactions with owners At 30 June 2016 At 1 July 2016 Profit for the year Other comprehensive income Cash flow hedges: Fair value gains Total other comprehensive income Total comprehensive income Transactions with owners Issue of Ordinary shares Purchase of own shares Credit to reserves for share-based payments Deferred tax relating to share-based payments Dividends to equity holders of the Company (note 23) Transactions with owners At 30 June 2017 50 Annual Report 2017 – CVS Group plc Company statement of changes in equity for the year ended 30 June 2017 At 1 July 2015 Total comprehensive income and loss for the year Transactions with owners Issue of Ordinary shares Credit to reserves for share-based payments Dividends to equity holders of the Company (note 23) Transactions with owners At 30 June 2016 At 1 July 2016 Total comprehensive income and loss for the year Transactions with owners Issue of Ordinary shares Credit to reserves for share-based payments Dividends to equity holders of the Company (note 23) Transactions with owners At 30 June 2017 Share capital £m Share premium £m Capital redemption reserve £m Retained earnings £m 0.1 — — — — — 0.1 9.5 — 0.2 — — 0.2 9.7 0.6 — — — — — 0.6 Share capital £m Share premium £m Capital redemption reserve £m 0.1 — — — — — 0.1 9.7 — 30.5 — — 30.5 40.2 0.6 — — — — — 0.6 58.9 (0.2) — 1.3 (1.8) (0.5) 58.2 Retained earnings £m 58.2 (0.2) — 1.5 (2.1) (0.6) 57.4 Total equity £m 69.1 (0.2) 0.2 1.3 (1.8) (0.3) 68.6 Total equity £m 68.6 (0.2) 30.5 1.5 (2.1) 29.9 98.3 51 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report Consolidated and Company cash flow statements for the year ended 30 June 2017 Note 27 14 13 12 23 26 26 26 26 Group 2017 £m 37.2 (5.4) (2.1) 29.7 (46.9) (13.3) (0.5) (60.7) (2.1) 30.6 — (2.1) 6.5 (1.8) 31.1 0.1 6.7 6.8 Group 2016 £m 33.6 (3.3) (2.4) 27.9 (53.5) (11.3) (0.2) (65.0) (1.8) 0.2 (1.3) — 51.9 (8.2) 40.8 3.7 3.0 6.7 Company 2017 £m Company 2016 £m (26.4) — — (26.4) — — — — (2.1) 30.6 — (2.1) — — 26.4 — — — 1.6 — — 1.6 — — — — (1.8) 0.2 — — — — (1.6) — — — Cash flows from operating activities Cash generated from operations Taxation paid Interest paid Net cash generated from operating activities Cash flows from investing activities Acquisitions (net of cash acquired) Purchase of property, plant and equipment Purchase of intangible assets Net cash used in investing activities Cash flows from financing activities Dividends paid Proceeds from issue of Ordinary shares Debt issuance costs Purchase of own shares Increase in borrowings Repayment of borrowings Net cash from/(used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 52 Annual Report 2017 – CVS Group plc Notes to the consolidated financial statements for the year ended 30 June 2017 1. General information The principal activity of the Group is to operate veterinary practices, complementary veterinary diagnostic businesses, pet crematoria and an on-line pharmacy and retail business. The principal activity of the Company is that of a holding company. CVS Group plc is a public limited company incorporated and domiciled in England and Wales and its shares are quoted on AIM of the London Stock Exchange. Companies in the consolidated financial statements The trading subsidiary undertakings included within the consolidation are as follows: Name of subsidiary Principal business Alnorthumbria Veterinary Practice Limited Albavet Limited Animed Direct Limited Axiom Veterinary Laboratories Limited Cromlynvets Limited CVS (Netherlands) B.V. CVS (UK) Limited Kliniek voor Gezelschapsdieren Dieren B.V. Dierenartsenpraktijk Zuid-West Friesland B.V. Dierenkliniek Amersfoort B.V. Dierenkliniek Hengelo B.V. Dierenkliniek Zwolle B.V. Dierenziekenhuis Drachten B.V. Greenacres Pet Crematorium Limited Greendale Veterinary Diagnostics Limited Highcroft Pet Care Limited Mi Vet Club Limited Okeford Veterinary Centre Limited The Pet Crematorium Limited Pet Doctors Limited Pet Medic Recruitment Limited Pet Vaccination Clinic Limited Precision Histology International Limited Rossendale Pet Crematorium Limited Severn Edge Holdings Ltd Severn Edge Farm Ltd Severn Edge Equine Ltd Severn Edge Veterinary Group Ltd Silvermere Haven Limited Valley Pet Crematorium Limited VETisco Limited Whitley Brook Crematorium for Pets Limited YourVets (Holdings) Limited Veterinary services Veterinary services and buying club On-line dispensary Veterinary diagnostic services Veterinary services Veterinary services Veterinary and diagnostic services Veterinary services Veterinary services Veterinary services Veterinary services Veterinary services Veterinary services Animal cremation Veterinary diagnostic services Veterinary services Veterinary goods and services buying club Veterinary services Animal cremation Veterinary services Recruitment services Veterinary services Veterinary diagnostic services Animal cremation and provision of burial grounds Veterinary services Veterinary services Veterinary services Veterinary services Animal cremation and provision of burial grounds Animal cremation Veterinary instrumentation supply Animal cremation Holding company The dormant subsidiary undertakings included within the consolidation are as follows: Newlands Veterinary Group Ltd Firstvets Ltd Active Vetcare Ltd All Creatures Veterinary Health Centre Ltd Ambivet Ltd Bell Equine Veterinary Clinic Ltd BTM Kent Ltd Buttercross Veterinary Centre Ltd Cedar Veterinary Services Ltd Church Walk Veterinary Centre Ltd Pet Vaccination UK Ltd Claremont Veterinary Group Ltd Clifton Villa Veterinary Services Ltd Phoenix Vets Ltd Dovecote Veterinary Hospital Ltd DVS (Turriff) Ltd Forrest House Veterinary Ltd Grants and Watson Ltd Haven Veterinary Healthcare Ltd Joel Veterinary Clinic Ltd Nottingham Veterinary Care Ltd Phoenix Vets Sandhurst Ltd Rosemullion Veterinary Practice Ltd Petmedics Ltd RVG Stevenage Ltd Seymour Vets Ltd Shannon Lodge Veterinary Practice Ltd Superstar Pets Ltd Torbridge Veterinary Hospital Ltd Valley Equine Hospital Lambourn Ltd Valley Veterinary Group (Ayrshire) Ltd Veterinary Enterprises & Trading Ltd Village Referrals Ltd Willow Vets Ltd Bell Equine Veterinary Clinic Limited Apart from CVS (UK) Limited, all of the above subsidiaries are indirectly held by CVS Group plc. All Companies are registered in England and Wales, with the exception of DVS (Turriff) Ltd, which is registered in Scotland, and Cromlynvets Limited and All Creatures Veterinary Health Centre Ltd, which are registered in Northern Ireland. All equity shareholdings are wholly owned. The registered office for all subsidiary undertakings is CVS House, Owen Road, Diss, Norfolk IP22 4ER with the exception of the following companies: DVS (Turriff) Ltd Cromlynvets Limited All Creatures Veterinary Health Centre Ltd 30 Balmellie Street, Turriff, Aberdeenshire AB53 4DU 50 Old Coach Road, Hillsborough, County Down BT26 6PB 14 Anderson Avenue, Limavady, County Londonderry BT49 0TF 2. Summary of significant accounting policies Basis of preparation The consolidated and Company financial statements of CVS Group plc have been prepared in accordance with EU-adopted International Financial Reporting Standards (“IFRS”) and International Financial Reporting Interpretation Committee (“IFRIC”) interpretations and in line with those provisions of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, except for certain financial instruments that have been measured at fair value. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing these financial statements. Further details are provided in the Corporate Governance Statement on pages 32 to 34. The accounting policies set out below have, unless otherwise stated, been applied consistently to all years presented in these financial statements. The accounting policies which follow relate to the Group and are applied by the Company as appropriate. 53 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 2. Summary of significant accounting policies continued Critical accounting estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form a basis for making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Due to the inherent uncertainty involved in making assumptions and estimates, actual outcomes will differ from those assumptions and estimates. The following estimates and judgements have the most significant effect on the amounts recognised in the financial statements. a) Intangibles acquired in business combinations Determining the value of intangibles (patient data records and customer lists) acquired in business combinations requires a critical judgement based on estimated future cash flows expected to arise from the intangible assets at a suitable discount rate in order to calculate their present value. EBITDA is used as an approximation to cash flow. The EBITDA contained within the acquisition business case is used for year one cash flows and beyond this a growth rate is applied based upon a prudent assessment of market-specific growth assumptions and an appropriate attrition rate for acquired patients. In addition, an estimate of the useful life of the intangible asset has to be made, over which period the cash flows are expected to be generated. Details of intangibles acquired through business are provided in note 14 to the financial statements. b) Impairment of intangible assets Determining whether intangible assets are impaired requires a critical judgement as to whether the carrying value of assets can be supported by the future cash flows expected to arise from the patient data records and customer lists discounted at a suitable rate in order to calculate their present value. In calculating net present value of the future cash flows, certain assumptions are required to be made including management’s expectations of growth and discount rates. No impairment charge has been recognised in the year (2016: £727,000). Further details are provided in note 12 to the financial statements. c) Impairment of goodwill Determining whether goodwill is impaired requires the calculation of the value in use of the cash-generating units to which goodwill has been allocated. The value-in-use calculation requires a critical judgement of the future cash flows expected to arise from the cash-generating unit at a suitable discount rate in order to calculate the present value. Details of the impairment review are provided in note 12 to the financial statements. d) Share-based payments Judgement is required in determining the fair value of shares at the award date. The fair value is calculated using valuation techniques which take into account the award’s term, the risk-free interest rate and the expected volatility of the market price of the Company’s shares. Judgement and estimation is also required to assess the number of options expected to vest. Details of share-based payments and the assumptions applied are provided in note 11 to the financial statements. e) Going concern The Directors have prepared projections of the Group’s anticipated future results based upon the budget for the period to June 2018 and forecasts thereafter. The Directors have concluded that the assumption that the Group is a going concern is valid. f) Determination of discount rates used in business combinations and impairment reviews The discount rates used in business combinations and impairment reviews are based on the current cost of capital of the business adjusted for management’s perception of risk. While management believes the discount rates used are the most appropriate rates, a change in these assumptions could result in an impairment charge. Details of the discount rates used are provided in note 12 to the financial statements. Changes in accounting policy and disclosure Standards, amendments and interpretations adopted by the Group The Group has not adopted any new and revised standards, amendments and interpretations which have been assessed as having financial or disclosure impact on the numbers presented. Standards and interpretations to existing standards (all of which have yet to be adopted by the EU) which are not yet effective and are under review as to their impact on the Group The following standards and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 July 2017 or later periods but which the Group has not early adopted: • IFRS 9 Financial Instruments (effective 1 January 2018) • IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018) • IFRS 16 Leasing (effective 1 January 2019) • IFRIC 22 Foreign Currency Transactions and Advance Consideration (effective 1 January 2018) • IFRIC 23 Uncertainty over Income Tax Treatments (effective 1 January 2019) • Disclosure Initiative (Amendments to IAS 7) (effective 1 January 2017) • Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2) (effective 1 January 2018) • Annual Improvements 2014–2016 Cycle (effective 1 January 2018) The Directors do not expect that the adoption of IFRS 9 and IFRS 15 above will have a material impact on the financial statements of the Group in future periods. The Directors are currently assessing the impact of IFRS 16 and it is not practicable to provide a reasonable estimate of the effect of this standard until a detailed review has been completed. Basis of consolidation The consolidated financial statements include the financial information of the Company and its subsidiary undertakings as at and for the year ended 30 June 2017. Subsidiaries are all entities over which the Group has control. The results of companies and businesses acquired are included in the consolidated income statement from the date control passes. They are deconsolidated from the date that control ceases. On acquisition of a company or business, all assets and liabilities that exist at the date of acquisition are recorded at their fair values, reflecting their condition at that date. All changes to those assets and liabilities, and the resulting gains and losses, which arise after the Group has gained control of the company or business, and that arise after the measurement period, are credited or charged to the post-acquisition income statement. Intra-group transactions and profits are eliminated fully on consolidation. Accounting policies of subsidiaries have been aligned to ensure consistency with the policies adopted by the Group. 54 Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 2. Summary of significant accounting policies continued Segment reporting Operating segments are reported in a manner consistent with the internal reporting to the chief operating decision maker (“CODM”). The CODM has been determined to be the Board of Directors, as it is primarily responsible for the allocation of resources to segments and the assessment of the performance of segments. The Group has four operating segments: Veterinary Practice, Laboratory, Crematoria and Animed Direct. Further details of the Group’s operating segments are provided in note 4 to the financial statements. Property, plant and equipment Property, plant and equipment are stated at cost (being the purchase cost, together with any incidental costs of acquisition) less accumulated depreciation and any accumulated impairment losses. The assets’ residual values and useful lives are reviewed annually, and adjusted as appropriate. Depreciation is provided so as to write off the cost of property, plant and equipment, less their estimated residual values, over the expected useful economic lives of the assets in equal annual instalments at the following principal rates: Freehold buildings Leasehold improvements Fixtures, fittings and equipment 20%–33% straight line Motor vehicles 2% straight line Straight line over the life of the lease 25% straight line Freehold land is not depreciated on the basis that it has an unlimited life. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred. Intangible assets Goodwill With the exception of the acquisition of CVS (UK) Limited, which was accounted for using the principles of merger accounting, all business combinations are accounted for by applying the acquisition method. Goodwill arising on acquisitions that have occurred since 1 July 2004 is stated after separate recognition of intangible assets and represents the difference between the fair value of the purchase consideration and the fair value of the Group’s share of the identifiable net assets of an acquired entity. In respect of acquisitions prior to 1 July 2004 goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous Generally Accepted Accounting Practice. Goodwill is carried at cost less accumulated impairment losses, and is subject to annual impairment testing. Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over their estimated useful lives of three years and charged to administrative expenses. Costs associated with maintaining computer software programs are recognised as an administrative expense as incurred. Patient data records, customer lists and trade names Acquired patient data records, customer lists and trade names are recognised as intangible assets at the fair value of the consideration paid to acquire them and are carried at historical cost less provisions for amortisation and impairment. The fair value attributable to these items acquired through a business combination is determined by discounting the expected future cash flows to be generated from that asset at the risk-adjusted post-tax weighted average cost of capital for the Group. The residual values are assumed to be £nil. Patient data records, customer lists and trade names are reviewed for impairment if conditions exist that indicate a review is required. Amortisation is provided so as to write off the cost over the expected economic lives of the asset in equal instalments at the following principal rates: Patient data records and customer lists Trade names 10% per annum 10% per annum Amortisation is charged to administrative expenses. Impairment of non-current assets Assets that have an indefinite useful life are not subject to amortisation but are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. As permitted by IAS 36 Impairment of Assets for the purposes of assessing impairment, individual cash-generating units (“CGUs”) are grouped at a level consistent with the Group’s operating segments. Recoverable amounts for CGUs are based on value in use, which is calculated from cash flow projections using data from the Group’s latest internal forecasts, being a one-year detailed forecast and extrapolated forecasts thereafter, the results of which are approved by the Board. The key assumptions for the value-in-use calculations are those regarding discount rates and growth rates. In respect of assets other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Impairment losses in respect of goodwill are not reversed. Inventories Inventories comprise goods held for resale and are stated at the lower of cost and net realisable value on a first in, first out basis. Net realisable value is based on estimated selling price less further costs expected to be incurred to disposal. Where necessary, provision is made for obsolete, slow moving or defective inventory. 55 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 2. Summary of significant accounting policies continued Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. (a) Trade and other receivables Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the excess of the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of any loss is recognised in the income statement within administrative expenses. Subsequent recoveries of amounts previously written off are credited against administrative expenses in the income statement. (b) Investments Gains and losses arising from changes in the fair value of available-for-sale investments in equity instruments that have a quoted market price are recognised directly in other comprehensive income until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net result for the year. In accordance with IAS 39 Financial Instruments: Recognition and Measurement, available-for-sale investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Dividends on an available-for-sale equity instrument are recognised in the income statement when the Group’s right to receive payment is established. In the Company’s financial statements, investments in subsidiary undertakings are initially stated at cost. Provision is made for any permanent impairment in the value of these investments. (c) Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are recorded initially at fair value and subsequently at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance cost in profit or loss. A financial liability is derecognised only when the obligation is extinguished. An equity instrument is any contract that gives a residual interest in the assets of the Group after deducting all of its liabilities. (d) Interest-bearing borrowings Interest-bearing bank loans and overdrafts are initially recorded as the proceeds received, net of associated transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. 56 (e) Trade and other payables Trade and other payables are not interest bearing and are stated at their amortised cost. (f) Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. (g) Derivative financial instruments and hedging activities The Group uses derivative financial instruments to hedge its exposure to interest rate risks arising from financing activities. The Group does not hold or issue derivative financial instruments for trading purposes; however, if derivatives do not qualify for hedge accounting they are accounted for as such. Derivative financial instruments are recognised and stated at fair value. The fair value of derivative financial instruments is determined by reference to market values for similar financial instruments, by discounted cash flows, or by the use of option valuation models. The fair value of interest rate swap arrangements is calculated as the present value of the estimated future cash flows. Where derivatives do not qualify for hedge accounting, any gains or losses on remeasurement are immediately recognised in the income statement. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedge relationship and the item being hedged. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than twelve months and as a current asset or liability when the remaining maturity of the hedged item is less than twelve months. Cash flow hedging Derivative financial instruments are classified as cash flow hedges when they hedge the Group’s exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted transaction. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement where material. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects the income statement. The classification of the effective portion when recognised in the income statement is the same as the classification of the hedged transaction. Any element of the remeasurement of the derivative instrument which does not meet the criteria for an effective hedge is recognised immediately in the income statement within finance costs. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 2. Summary of significant accounting policies continued Cash and cash equivalents Cash and cash equivalents comprise cash balances and deposits with maturities of three months or less from inception. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purposes of the cash flow statement. Current and deferred income tax The tax expense represents the sum of the current tax 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 income statement because it excludes some 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 on the basis of tax laws and tax rates that have been enacted or substantively enacted by the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Where the intrinsic value of a share option exceeds the fair value, the corresponding deferred tax on the excess is recognised directly in equity. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Revenue Revenue represents amounts receivable from customers for veterinary services, related veterinary products, laboratory diagnostic services, the sale of products on-line and crematoria services provided during the year. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The revenue recognition point is when a diagnostic laboratory test, a veterinary consultation, a veterinary procedure or a cremation is completed. Sales of goods are recognised when goods are dispatched and title has passed; for example, on-line sales are recognised when the goods are dispatched from the warehouse. Revenue is measured at the fair value of the consideration received or receivable, excluding value added tax and discounts. Members of customer loyalty schemes, for example the Healthy Pet Club, pay monthly subscription fees and receive preventative consultations and treatments over a twelve-month period. The monthly subscription fees are spread evenly over the twelve-month period whereas the services and drugs provided to the customer do not evenly match this profile. Appropriate adjustments are made through deferred and accrued income to recognise revenue when the underlying service has been performed. Revenue is recognised net of a provision to reflect cancellations as a result of animal deaths due to our policy not to invoice our customers in such an event. The provision is calculated based on historic membership cancellation data. All other cancellations are accounted for as an impairment of receivables within administration expenses. Our accounting policy for other cancellations has been revised during the year; the impact on revenue and profit is not material and therefore the change in policy has not been accounted for as prior year adjustment. Out-of-hours consultations and procedures provided by third parties are not recorded as revenue. The work is completed by the third party and the third-party provider invoices the customer. CVS does not act as principal or agent in this transaction. Pet Medic Recruitment principally sources locum clinical staff for the Veterinary Practice Division. Revenue is therefore intra-division and eliminated on consolidation within the Veterinary Practice Division. Rebates received from manufacturers Rebates received from drug and consumable manufacturers in respect of CVS purchases are deducted from the purchase price within cost of sales. Rebates negotiated on behalf of our buying group members, MiVetClub and VetShare, are recorded on the Group’s balance sheet as a receivable and the corresponding liability for the rebate due to the member is recorded as a payable. The commission receivable by the Group is recorded as revenue in the income statement at the point at which the buying Group member purchases the drugs and consumables. Leases 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. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful economic life of the asset and the lease term. Rentals payable under operating leases are charged to the income statement on a straight line basis over the term of the relevant lease. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight line basis over the lease term. 57 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 2. Summary of significant accounting policies continued Share-based payments Certain employees of the Group receive part of their remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). Financing costs Financing costs comprise interest payable on borrowings, debt finance costs and gains and losses on derivative financial instruments that are recognised in the income statement. Interest expense is recognised in the income statement as it accrues, using the effective interest method. The fair values of equity-settled transactions are measured indirectly at the dates of grant using Black-Scholes option pricing models, taking into account the terms and conditions upon which the awards are granted. The fair value of share-based payments under such schemes 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 at each reporting date for the effect of non-market-based vesting conditions. The fair value of options awarded to employees of subsidiary undertakings is recognised as a capital contribution and recorded in investments on the Company balance sheet. Foreign currency translation Functional and presentational currency The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements, rounded to the nearest £0.1m. In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised 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 at that 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 are recognised in profit or loss in the period in which they arise. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in a separate component of equity (attributed to non-controlling interests as appropriate). Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on acquisitions before the date of transition to IFRS as Sterling-denominated assets and liabilities. Exchange differences arising are recognised in other comprehensive income. Retirement benefit costs The Group makes contributions to stakeholder and employee personal pension defined contribution schemes in respect of certain employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense in the period to which they relate. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. 58 Use of non-GAAP measures Adjusted EBITDA, adjusted profit before tax (“adjusted PBT”) and adjusted EPS The Directors believe that adjusted EBITDA, adjusted PBT and adjusted EPS provide additional useful information for shareholders on performance. These measures are used for internal performance analysis. These measures are not defined by IFRS and therefore may not be directly comparable with other companies’ adjusted measures. It is not intended to be a substitute for, or superior to, IFRS measurements of profit or earnings per share. Adjusted EBITDA is calculated by reference to profit before income tax, adjusted for interest (net finance expense), depreciation, amortisation and costs relating to business combinations. Adjusted profit before income tax is calculated as profit on ordinary activities before amortisation, taxation, costs relating to business combinations and exceptional items. Adjusted earnings per share is calculated as adjusted profit before income tax less applicable taxation divided by the weighted average number of Ordinary shares in issue in the period. Like-for-like sales Like-for-like sales comprise the revenue generated from all operations compared to the prior year. Revenue is included in the like-for-like calculation with effect from the month in which it was acquired in the previous year; for example, for a practice acquired in September 2015, revenue is included from September 2016 in the like-for-like revenue calculation. Share premium The share premium reserve comprises the premium received over the nominal value of shares issued. Capital redemption reserve Upon cancellation of redeemable Preference shares on redemption, a capital redemption reserve was created representing the nominal value of the shares cancelled. This is a non-distributable reserve. Merger reserve The merger reserve resulted from the acquisition of CVS (UK) Limited and represents the difference between the value of the shares acquired (nominal value plus related share premium) and the nominal value of the shares issued. Profit for the financial year As permitted by Section 408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account or statement of comprehensive income for the year. The profit attributable to the Company is disclosed in the footnote to the Company’s balance sheet. Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 3. Financial risk management Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (being interest rate risk and other price risks), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative instruments to manage its exposure to interest rate movements. It is not the Group’s policy to actively trade in derivatives. Given the size of the Group, the Board monitors financial risk management. The policies set by the Board of Directors are implemented by the Group’s finance department. a) Market risk i) Foreign exchange currency rate risk The Group has very limited exposure to foreign exchange risk as substantially all of its transactions are denominated in the Company’s functional currency of Sterling. The Group has a policy to minimise foreign exchange currency rate risk through the regular monitoring of foreign currency flows. Currency exposures are reviewed regularly and all significant foreign exchange transactions are approved by Group management. The Group does not currently hedge any foreign currency transactions but continues to keep this policy under review. ii) Cash flow and fair value interest rate risk The Group has interest-bearing assets and liabilities. The Group’s income and operating cash inflows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. At the year end, the Group had interest hedging arrangements in place covering £45.0m of debt. This allows the Group to minimise its exposure to significant interest rate increases whilst enabling the Group to take advantage of interest rate reductions. The strategy for undertaking the hedge is to match the loan liability with a coterminous derivative that allows interest to float within an agreed range and thereby limits the cash flow exposure relating to interest. Excluding the impact of the interest rate swap arrangement, bank borrowings bear interest at 0.95% to 2.2% above LIBOR. The applicable interest rate is dependent upon the net debt to EBITDA ratio. During the year the bank borrowings carried a rate averaging 1.55% above LIBOR. At 30 June 2017, the Group has considered the impact of movements in interest rates over the past year and has concluded that a 1% movement is a reasonable benchmark. At 30 June 2017, if interest rates on Sterling-denominated borrowings had been 1% higher or lower, with all other variables held constant, post-tax profit and the movement in net assets for the year would have been approximately £1.0m (2016: £0.8m) lower or higher, mainly as a result of the movement in interest rates on the floating rate borrowings, net of the hedging derivative instrument in place. b) Credit risk The Group has no significant concentrations of credit risk. The Group’s principal financial assets are cash and bank balances, and trade and other receivables. A large number of receivables are very small, therefore there is not any concentration of credit risk in a single counterparty or group of counterparties with similar characteristics. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. Concentrations of credit risk with respect to trade receivables are limited due to the Group’s diverse customer base. The Group also has in place procedures that require appropriate credit checks on potential customers before sales, other than on a cash basis, are made. Customer accounts are also monitored on an ongoing basis and appropriate action is taken where necessary to minimise any credit risk. The Directors therefore believe there is no further credit risk provision required in excess of normal provision for impaired receivables. Group management monitors the ageing of receivables which are more than one month overdue and debtor days on a regular basis. At 30 June 2017 gross trade receivables amounted to 5.8% of revenue for the year (2016: 7.0%). Of these gross trade receivables, 48% (2016: 52%) were more than one month overdue. The maximum exposure to credit risk at 30 June 2017 is the fair value of each class of receivable as disclosed in note 17 to the financial statements. c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities. The Group actively maintains cash balances and a mix of long-term and short-term finance facilities that are designed to ensure the Group has sufficient available funds for operations and acquisitions. Management monitors rolling forecasts of the Group’s liquidity reserve on the basis of expected cash flow. The table below summarises the remaining contractual maturity for the Group’s financial liabilities. The amounts shown are the contractual undiscounted cash flows, which include interest, analysed by contractual maturity. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves existing at the reporting date. The Group’s revolving credit facility (“RCF”) is utilised on 30-day terms; however, the RCF is available for utilisation until November 2021, and therefore the liability is included in due in more than three years but not more than five years. 30 June 2017 Non-derivative financial liabilities Borrowings Trade and other payables (excluding social security and other taxes) Derivative contracts Interest rate swap arrangements 30 June 2016 Non-derivative financial liabilities Borrowings Trade and other payables (excluding social security and other taxes) Derivative contracts Interest rate swap arrangements In more than one year but not more than two years £m In more than two years but not more than three years £m In more than three years but not more than five years £m In less than one year £m Total £m 104.5 107.6 3.1 38.7 — 41.8 — — — — — — — — — — 104.5 In more than one year but not more than two years £m In more than two years but not more than three years £m In more than three years but not more than five years £m In less than one year £m 38.7 — 146.3 Total £m — 34.9 0.1 35.0 2.7 — — 2.7 — — — — 98.0 100.7 — — 98.0 34.9 0.1 135.7 59 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 3. Financial risk management continued Capital risk management The Group’s policy is to maintain a strong capital base, defined as bank facilities plus total shareholders’ equity, so as to maintain investor, creditor and market confidence and to sustain future development of the business. Within this overall policy, the Group seeks to maintain an optimum capital structure by a mixture of debt and retained earnings. The bank facilities include both financial and non-financial covenants. There have been no breaches of the terms of the respective loan agreements, breaches of covenants or defaults during the current or comparative years. 4. Segmental reporting The operating segments are based on the Group’s management and internal reporting structure and monitored by the Group’s CODM. Inter-segment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly interest-bearing borrowings and associated costs, taxation-related assets and liabilities, costs relating to business combinations, and head office salary and premises costs. Funding needs are reviewed periodically and also each time a significant acquisition is made. A number of factors are considered which include the net debt/adjusted EBITDA ratio, future funding needs (usually potential acquisitions) and Group banking arrangements. Net debt (see note 26) Adjusted EBITDA (see note 4) Ratio 2017 £m 100.0 42.1 2.38 2016 £m 93.1 32.8 2.83 The ratio above is calculated based upon EBITDA disclosed in the Annual Report. The actual ratio calculated for the bank covenants takes account of a twelve-month EBITDA adjustment for businesses acquired; therefore, the ratio for the purposes of the bank covenants is 2.3. There were no changes to the Group’s approach to capital management during the year. The primary source of funding for the Group is internally generated cash. The Group’s £5.0m working capital facility and £10.5m of the £47.5m revolving credit facility were undrawn at 30 June 2017. Fair value measurement The following table presents the Group’s financial assets and liabilities that are measured at fair value at 30 June 2017 by level of fair value hierarchy: • quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); • inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and • inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). 30 June 2017 30 June 2016 Level 1 £m Level 2 £m Total £m Level 1 £m Level 2 £m Total £m Assets Available-for-sale financial assets (note 15) Liabilities Derivative financial instruments (interest rate swap arrangements) (note 16) 0.1 — — — 0.1 — 0.1 — 0.1 — 0.1 0.1 The business operates predominantly in the UK. It performs a small amount of laboratory work for Europe-based clients and Animed Direct Limited distributes a small quantity of goods to European countries. In accordance with IFRS 8 Operating Segments, no segmental results are presented for trade with European clients as these are not reported separately for management reporting purposes and are not considered material for separate disclosure. Revenue comprises £201.9m of fees and £69.9m of goods. (2016: £157.5m and £60.6m, respectively). Operating segments The Group is split into four operating segments (Veterinary Practice Division, Laboratory Division, Crematoria Division and Animed Direct) and a centralised support function (Head Office) for business segment analysis. In identifying these operating segments, management generally follows the Group’s service lines representing its main products and services. Each of these operating segments is managed separately as each segment requires different specialisms, marketing approaches and resources. Intra-group sales eliminations are included within the Head Office segment. Head Office includes costs relating to the employees, property and other overhead costs associated with the centralised support function together with finance costs arising on the Group’s borrowings. Year ended 30 June 2017 Revenue Profit/(loss) before income tax Adjusted EBITDA Total assets Total liabilities Reconciliation of adjusted EBITDA Profit/(loss) before income tax Finance expense Depreciation Amortisation Costs relating to business combinations Adjusted EBITDA Veterinary Practice £m Laboratory £m Crematoria £m 247.9 28.1 44.7 232.6 (59.7) 28.1 — 4.7 10.1 1.8 44.7 16.3 2.9 3.6 13.8 (4.2) 2.9 — 0.7 — — 3.6 6.3 1.9 2.1 8.0 (1.3) 1.9 — 0.2 — — 2.1 Animed Direct £m 13.0 0.6 0.7 6.0 (5.1) 0.6 — 0.1 — — 0.7 Head Office £m (11.7) (19.0) (9.0) 2.3 (104.4) (19.0) 2.7 0.2 5.9 1.2 (9.0) Group £m 271.8 14.5 42.1 262.7 (174.7) 14.5 2.7 5.9 16.0 3.0 42.1 60 Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 4. Segmental reporting continued Operating segments continued Year ended 30 June 2016 Revenue Profit/(loss) before income tax Adjusted EBITDA Total assets Total liabilities Reconciliation of adjusted EBITDA Profit/(loss) before income tax Finance expense Depreciation Amortisation Costs relating to business combinations Adjusted EBITDA *Restated Veterinary Practice £m 198.1 21.3 35.6 184.5 (52.9) 21.3 — 4.1 9.4 0.8 35.6 Laboratory £m Crematoria £m *Restated Animed Direct £m 14.8 2.5 3.1 9.8 (2.1) 2.5 — 0.6 — — 3.1 5.0 1.4 1.7 6.7 (1.4) 1.4 — 0.3 — — 1.7 8.4 0.3 0.3 3.8 (3.1) 0.3 — — — — 0.3 Head Office £m (8.2) (16.4) (7.9) 1.6 (100.3) (16.4) 2.7 0.2 4.3 1.3 (7.9) Group £m 218.1 9.1 32.8 206.4 (159.8) 9.1 2.7 5.2 13.7 2.1 32.8 * The prior year comparatives have been restated to reflect the reclassification of the Group’s logistics and warehousing operations from Animed Direct to the Veterinary Practice Division. Revenue in the Animed Division decreased by £1.4m and there was a corresponding increase in the revenue of the Veterinary Practice Division. Divisional EBITDA was unaffected by the change. The reclassification had no impact on Group revenue. 5. Finance expense Interest expense, bank loans and overdraft Amortisation of debt arrangement fees Finance expense 6. Expenses by nature Amortisation and impairment of intangible assets Depreciation of property, plant and equipment Employee benefit expenses Cost of inventories recognised as an expense (included in cost of sales) Repairs and maintenance expenditure on property, plant and equipment Trade receivables impairment charge Operating lease rentals payable Other expenses Total cost of sales and administrative expenses 2017 £m 2.3 0.4 2.7 2017 £m 16.0 5.9 127.7 48.5 3.4 0.6 12.6 39.9 254.6 2016 £m 2.3 0.4 2.7 2016 £m 13.7 5.2 101.1 39.7 3.2 0.9 10.5 32.0 206.3 Services provided by the Company’s auditor and associates During the year the Group obtained the following services from the Company’s auditor at costs as detailed below: Audit services Fees payable to the Group’s auditor for the audit of the parent company and consolidated financial statements Other services Tax compliance services The audit of the Company’s subsidiaries pursuant to legislation All other services 7. Employee benefit expense and numbers Group Employee benefit expense for the Group Wages and salaries Social security costs Other pension costs (note 30) Share-based payments (note 11) 2017 £’000 30 — 155 7 192 2017 £m 115.0 10.1 1.1 1.5 127.7 2016 £’000 28 — 104 96 228 2016 £m 91.2 7.8 0.8 1.3 101.1 Employee benefit expense included within cost of sales is £90.0m (2016: £66.6m). The balance is recorded within administrative expenses. The average monthly number of people employed by the Group (including Executive Directors) during the year, analysed by category, was as follows: Veterinary surgeons and pathologists Nurses, practice ancillaries and technicians Crematorium staff Central support 2017 Number 1,153 3,421 77 190 4,841 2016 Number 1,002 2,911 68 149 4,130 The Company has no employees, other than the Directors. The Directors received remuneration in respect of their services to the Company from a subsidiary company. 61 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report Key management compensation Key management is considered to be those on the Executive Committee (being the Executive Directors and other senior management) and the Non-Executive Directors. The employment costs of key management are as follows: Salaries and other short-term employee benefits Post-employment benefits Share-based payments 9. Income tax expense (a) Analysis of income tax expense recognised in the income statement Current tax expense UK corporation tax Adjustments in respect of previous years Total current tax charge Deferred tax expense Origination and reversal of temporary differences Adjustments in respect of previous years Effect of tax rate change on opening deferred tax balance Total deferred tax credit (note 22) Total income tax expense 2017 £m 2.7 0.1 1.3 4.1 2017 £m 4.8 (0.1) 4.7 (1.6) 0.3 (0.4) (1.7) 3.0 2016 £m 2.2 0.1 1.2 3.5 2016 £m 3.5 (0.1) 3.4 (1.3) 0.2 (0.2) (1.3) 2.1 Factors affecting the current tax charge UK corporation tax is calculated at 19.8% (2016: 20.0%) of the estimated assessable profit for the year. The standard rate of UK corporation tax changed from 20% to 19% with effect from 1 April 2017. 8. Directors’ remuneration and key management compensation Salaries and other short-term employee benefits Company contributions to money purchase schemes Highest paid Director Directors’ emoluments 2017 £m 0.7 0.1 0.8 2016 £m 0.7 0.1 0.8 2017 £m 1.3 0.1 1.4 2016 £m 1.2 0.1 1.3 Retirement benefits are accruing to one Director (2016: one) under a personal pension plan. The remuneration of the Executive Directors amounting to £1.3m (2016: £1.2m) is borne by the subsidiary company CVS (UK) Limited, without recharge. The remuneration of the Non-Executive Directors amounting to £0.1m (2016: £0.1m) is borne by the subsidiary company CVS (UK) Limited and recharged to the Company. Share options Under the Company’s SAYE schemes the Directors have the following options at the balance sheet date: S Innes N Perrin N Perrin N Perrin SAYE scheme SAYE7 SAYE6 SAYE7 SAYE9 Date of grant 27 November 2014 29 November 2013 27 November 2014 25 November 2016 Earliest exercise date and vesting date 1 January 2018 1 January 2017 1 January 2018 1 January 2020 Exercise price 296p 215p 296p 790p Number of shares 6,081 4,186 3,041 318 Shares awarded to Executive Directors under the Long Term Incentive Plans (“LTIPs”) as at the balance sheet date are as follows: S Innes S Innes S Innes S Innes N Perrin N Perrin N Perrin N Perrin LTIP LTIP7 LTIP8 LTIP9 LTIP10 LTIP7 LTIP8 LTIP9 LTIP10 Date of grant Market price on date of grant Earliest exercise date and vesting date 5 December 2013 24 September 2014 24 September 2015 20 December 2016 5 December 2013 24 September 2014 24 September 2015 20 December 2016 250p 352p 699p 1,067p 250p 352p 699p 1,067p 30 June 2016 30 June 2017 30 June 2018 30 June 2019 30 June 2016 30 June 2017 30 June 2018 30 June 2019 Number of shares 121,200 88,169 57,000 40,000 92,500 53,570 29,500 25,000 The exercise price for all shares is 0.2p. LTIP7 was exercised in the year; see the Remuneration Committee Report on page 40 for further details. Further details of the above schemes are included in the Remuneration Committee Report on pages 35 to 40. 62 Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 9. Income tax expense continued (b) Reconciliation of effective income tax charge The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: Non-GAAP measure: adjusted earnings per share Adjusted earnings per Ordinary share is calculated as adjusted profit before income tax less applicable taxation divided by the weighted average number of Ordinary shares in issue in the period. Profit before tax Effective tax charge at 19.8% (2016: 20.0%) Effects of: Expenses not deductible for tax purposes Effect of tax rate change on opening deferred tax balance Adjustments to deferred tax charge in respect of previous years Adjustments to current tax charge in respect of previous years Total income tax expense 2017 £m 14.5 2.9 0.4 (0.5) 0.3 (0.1) 3.0 2016 £m 9.1 1.8 0.4 (0.2) 0.2 (0.1) 2.1 Earnings attributable to Ordinary shareholders Add back taxation Profit before taxation Adjustments for: Amortisation (note 12) Costs relating to business combinations (note 4) Adjusted profit before income tax Tax charge amended for the above adjustments Adjusted profit after income tax and earnings attributable to owners of the parent 2017 £m 11.5 3.0 14.5 16.0 3.0 33.5 (6.9) 26.6 2016 £m 7.0 2.1 9.1 13.7 2.1 24.9 (5.4) 19.5 The main rate of corporation tax will reduce from 19% to 17% from 1 April 2020. This change had been substantively enacted at the balance sheet date and, therefore, it is reflected in these financial statements. Weighted average number of Ordinary shares in issue Weighted average number of Ordinary shares for diluted earnings per share 62,105,419 63,053,805 59,736,436 61,143,945 10. Earnings per Ordinary share (a) Basic Basic earnings per Ordinary share is calculated by dividing the profit after taxation by the weighted average number of shares in issue during the year. Adjusted earnings per share Diluted adjusted earnings per share Pence 42.8p 42.2p Pence 32.4p 31.7p Earnings attributable to Ordinary shareholders (£m) Weighted average number of Ordinary shares in issue Basic earnings per share (p per share) 2017 11.5 2016 7.0 62,105,419 59,736,436 18.5 11.6 (b) Diluted Diluted earnings per share is calculated by adjusting the weighted average number of Ordinary shares outstanding to assume conversion of all dilutive potential Ordinary shares. The Company has potentially dilutive Ordinary shares being the contingently issuable shares under the Group’s LTIP schemes and SAYE schemes. For share options, a calculation is undertaken to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. 11. Share-based payments Long Term Incentive Plans (“LTIPs”) The Group operates an incentive scheme for certain Senior Executives, the CVS Group Long Term Incentive Plan (“LTIP”). Under the LTIP scheme awards are made at an effective nil cost, vesting over a three-year performance period conditional upon the Group’s earnings per share growth, as adjusted for amortisation of intangibles, exceptional items and fair value adjustments in respect of derivative instruments and available-for-sale assets over the same period. The LTIP scheme arrangements are equity settled. Details of the share options outstanding during the year under the LTIP schemes are as follows: Earnings attributable to Ordinary shareholders (£m) Weighted average number of Ordinary shares in issue Adjustment for contingently issuable shares – LTIPs Adjustment for contingently issuable shares – SAYE schemes 2017 11.5 2016 7.0 62,105,419 398,654 549,732 59,736,436 681,294 726,215 Weighted average number of Ordinary shares for diluted earnings per share 63,053,805 61,143,945 Outstanding at 1 July 2016 Granted during the year Forfeited during the year Exercised during the year* Outstanding at 30 June 2017 Exercisable at 30 June 2017 July 2016 scheme (“LTIP10”) Number of share awards July 2015 scheme (“LTIP9”) Number of share awards July 2014 scheme (“LTIP8”) Number of share awards July 2013 scheme (“LTIP7”) Number of share awards — 138,566 (1,819) — 136,747 — 150,500 — (4,500) — 146,000 — 251,438 — (8,233) — 243,205 — 394,100 — (1,300) (392,800) — — Diluted earnings per share (p per share) 18.2 11.3 * The weighted average share price at the date of exercise was £8.75. 63 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 11. Share-based payments continued Long Term Incentive Plans (“LTIPs”) continued Options are exercisable at 0.2p per share. The weighted average exercise price is 0.2p at the beginning and end of the period. The options outstanding at the year end under LTIP10, LTIP9 and LTIP8 have a weighted average remaining contractual life of two years, one year and nil years, respectively. The share-based payment charge for the year in respect of the options issued under the LTIP schemes amounted to £1.1m (2016: £0.9m) and has been charged to administrative expenses. National Insurance contributions amounting to £0.5m (2016: £0.3m) have been accrued in respect of the LTIP scheme transactions and are treated as cash-settled transactions. Further details of the above schemes are included in the Remuneration Committee Report on pages 35 to 40. Save As You Earn (“SAYE”) The Group operates an incentive scheme for all employees, the CVS Group SAYE plan, an HM Revenue & Customs-approved scheme. The SAYE6 scheme was opened for subscription in December 2013 (with options granted in January 2014), the SAYE7 scheme was opened for subscription in December 2014 (with options granted in January 2015) and the SAYE8 scheme was opened for subscription in December 2015 (with options granted in January 2016). Under the SAYE schemes awards have been made at a 20% discount for SAYE6, SAYE7 and SAYE8; SAYE9 was at a 10% discount of the closing mid-market price on date of invitation, vesting over a three-year period. There are no performance conditions attached to the SAYE scheme. Details of the share options outstanding during the year under the SAYE schemes are as follows: Outstanding at 1 July 2016 Granted during the year Forfeited during the year Exercised during the year* Outstanding at 30 June 2017 Exercisable at 30 June 2017 SAYE9 Number of share awards SAYE8 Number of share awards SAYE7 Number of share awards SAYE6 Number of share awards — 196,550 (4,087) — 221,244 — (22,401) (165) 674,654 — (47,824) (844) 489,423 — (5,268) (484,155) 192,463 198,678 625,986 — — — — — * The weighted average share price at the date of exercise was £7.96. Options are exercisable at 790p for the SAYE9 scheme, 536p for the SAYE8 scheme, 296p for the SAYE7 scheme and 215p per share for the SAYE6 scheme. The weighted average exercise price at the beginning of the period for the options outstanding was £3.68 and end of the period £6.47. The options outstanding at the year end under the SAYE9, SAYE8 and SAYE7 schemes have a weighted average remaining contractual life of two years and five months, one year and five months and nil years and five months, respectively. The share-based payment charge for the year in respect of the options issued under the SAYE schemes amounted to £0.4m (2016: £0.4m) and has been charged to administrative expenses. Options for both schemes were valued using the Black-Scholes option pricing model. The fair value per option granted and the assumptions used in the calculation are as follows: Grant date Share price at grant date Fair value per option Exercise price Number of employees Shares under option at date of grant Vesting period/option life/expected life Weighted average remaining contractual life Expected volatility* Expected dividends expressed as a dividend yield LTIP10 SAYE9 5 December 2016 £10.67 £10.67 0.2p 33 136,747 3 years 2 years 32.95% 0.33% November 2016 £8.75 £1.28 £7.90 325 196,550 3 years 2 years 5 months 32.95% 0.33% * Expected volatility has been determined by reference to the historical share return volatility of CVS Group plc. 12. Intangible assets Cost At 1 July 2015 Additions arising through business combinations Other additions At 30 June 2016 Additions arising through business combinations (note 14) Fair value adjustment in respect of prior periods Other additions At 30 June 2017 Accumulated amortisation At 1 July 2015 Amortisation for the year Impairment At 30 June 2016 Amortisation for the year At 30 June 2017 Net book amount At 30 June 2017 At 30 June 2016 At 1 July 2015 Goodwill £m Trade names £m Patient data records £m Computer software £m 21.9 9.2 — 31.1 15.7 — — 46.8 — — — — — — 46.8 31.1 21.9 1.5 — — 1.5 — — — 1.5 0.7 0.1 — 0.8 0.2 1.0 0.5 0.7 0.8 100.1 56.6 — 156.7 35.0 0.5 — 192.2 44.3 12.5 0.7 57.5 15.6 73.1 119.1 99.2 55.8 2.0 — 0.2 2.2 — — 0.5 2.7 1.3 0.4 — 1.7 0.2 1.9 0.8 0.5 0.7 Total £m 125.5 65.8 0.2 191.5 50.7 0.5 0.5 243.2 46.3 13.0 0.7 60.0 16.0 76.0 167.2 131.5 79.2 Amortisation expense is charged to administrative expenses. The impairment charge in 2016 relates to the patient data records purchased with one underperforming veterinary practice acquired in 2013. 64 Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 12. Intangible assets continued The patient data records, customer lists and trade names were acquired as a component of business combinations. See note 14 for further details of current year acquisitions. It is not practical to disclose the carrying amount and remaining life of each intangible asset; however, material business combinations in the current year have been separately disclosed in note 14. The components of goodwill are disclosed by the grouped cash-generating units (“CGUs”) shown below. During the year the Group changed the way in which they assess each CGU. Although each practice, laboratory and crematoria is considered to be an individual CGU the Company monitors and tests for impairment on a group of CGUs that is no bigger than the operational segments. Veterinary Practice Laboratories Crematoria 2017 £m 42.1 2.1 2.6 46.8 2016 £m 26.4 2.2 2.5 31.1 Impairment tests The pre-tax discount rate applied to the cash flow projections is derived from the Group’s post-tax weighted average cost of capital. The risks relating to each of the CGUs are considered to be the same as a result of the Group’s operations being entirely focused in the veterinary market and, as such, the discount rate applied to each CGU is the same. The use of the Group’s weighted average cost of capital is consistent with the valuation methodology used when determining the offer price for business combinations and therefore is considered an appropriate discount rate. The Directors consider the growth rate to be broadly consistent between CGUs; a 2% growth per annum in EBITDA has been assumed for the purposes of assessing net present value of future cash flows, with EBITDA used as an approximation to cash flow given the insignificant impact of working capital adjustments. The budget for the next financial year is used as a basis for the cash flow projections. The growth rate used in the impairment tests is based upon a prudent assessment of market-specific growth assumptions. Further details of the impairment tests are disclosed in note 2. Estimates are based on past experience and expectations of future changes to the market. Growth rate forecasts are extrapolated based on estimated long-term average growth rates for the markets in which the CGU operates (estimated at 2.0%). The pre-tax discount rate used to calculate value in use is 10.8% at 30 June 2017 (2016: 9.82%). These discount rates are derived from the Group’s post-tax weighted average cost of capital. Based on the results of the current year impairment review, no impairment charge has been recognised by the Group in the year ended 30 June 2017 (2016: £0.7m). The impairment charge recognised in 2016 is in respect of the patient lists acquired on acquisition of the Crescent business in July 2013; following recognition of this impairment charge, the carrying value of the Crescent intangible asset is £nil. Having assessed the anticipated future cash flows the Directors do not consider there to be any reasonably possible changes in assumptions that would lead to such further impairment charges in the year ended 30 June 2017. The 2% growth rate is considered the worst case scenario given growth rates experienced in the veterinary market and therefore further sensitivity analysis is not required. 13. Property, plant and equipment Group Cost At 1 July 2015 Additions arising through business combinations Additions Disposals At 30 June 2016 Additions arising through business combinations (note 14) Fair value adjustment in respect of prior periods Additions Disposals At 30 June 2017 Accumulated depreciation At 1 July 2015 Charge for the year Disposals At 30 June 2016 Fair value adjustment in respect of prior periods Charge for the year Disposals At 30 June 2017 Net book amount At 30 June 2017 At 30 June 2016 At 1 July 2015 Freehold land and buildings £m Leasehold improvements £m Fixtures, fittings and equipment £m Motor vehicles £m 3.4 3.0 4.0 — 10.4 — (0.6) 3.7 — 13.5 0.4 0.2 — 0.6 — 0.3 — 0.9 12.6 9.8 3.0 12.6 0.9 3.0 — 16.5 1.3 0.4 4.9 — 23.1 4.5 1.5 — 6.0 — 2.1 — 8.1 15.0 10.5 8.1 20.6 2.7 4.2 (0.4) 27.1 2.3 (0.2) 4.2 (0.2) 33.2 12.2 3.3 (0.3) 15.2 0.2 3.3 (0.1) 18.6 14.6 11.9 8.4 1.4 0.2 0.1 — 1.7 — — 0.5 (0.2) 2.0 0.9 0.2 — 1.1 — 0.2 (0.1) 1.2 0.8 0.6 0.5 Freehold land amounting to £0.2m (2016: £0.2m) has not been depreciated. Total £m 38.0 6.8 11.3 (0.4) 55.7 3.6 (0.4) 13.3 (0.4) 71.8 18.0 5.2 (0.3) 22.9 0.2 5.9 (0.2) 28.8 43.0 32.8 20.0 65 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 14. Business combinations Details of business combinations in the year ended 30 June 2017 are set out below, in addition to an analysis of post-acquisition performance of the respective business combinations, where practicable. The reason for each acquisition was to expand the CVS Group business through acquisitions as explained on pages 8 and 9. Name of business combination Nottingham Veterinary Care Limited Buttercross Veterinary Centre Limited Church Walk Veterinary Centre Limited Batheaston (Trade and Assets) DVS (Turriff) Limited Haven Veterinary Healthcare Limited Forrest House Veterinary Limited Dieren Kliniek Dewetering B.V. Dierenziekenhuis Drachten B.V. O’Reilly & Fee Veterinary Surgery (Trade and Assets) Dierenartsenpraktijk Zuid-West Friesland B.V. Bell Equine Veterinary Clinic Limited Valley Veterinary Group (Ayrshire) Limited Pennine Vets (Trade and Assets) Ambivet Limited Willow Vets Limited Champion Vets (Trade and Assets) Eagle Veterinary Group (Trade and Assets) Severn Edge Holdings Limited Severn Edge Farm Limited Severn Edge Equine Limited Severn Edge Veterinary Group Limited BTM Kent Limited Dierenkliniek Zwolle B.V. Dierenkliniek Hengelo B.V. Dierenkliniek Amersfoort B.V. Phoenix Vets Limited Phoenix Vets Sandhurst Limited All Creatures Veterinary Health Centre Limited Shannon Lodge Veterinary Practice Limited Grants and Watson Limited Date of acquisition 30 August 2016 27 September 2016 5 October 2016 12 October 2016 1 November 2016 4 November 2016 18 November 2016 21 November 2016 29 November 2016 13 December 2016 11 January 2017 30 January 2017 10 February 2017 15 February 2017 14 March 2017 30 March 2017 31 March 2017 11 April 2017 13 April 2017 13 April 2017 13 April 2017 13 April 2017 2 May 2017 4 May 2017 4 May 2017 4 May 2017 11 May 2017 11 May 2017 16 May 2017 22 May 2017 23 May 2017 All businesses were acquired via 100% share purchase agreement unless indicated as such in the table above. Given the nature of the veterinary surgeries acquired and the records maintained by such practices, it is not practicable to disclose the revenue or profit/loss of the combined entity for the year as though the acquisition date for all business combinations effected during the year had been at the beginning of that year. It is not practicable to disclose the impact of the business combinations on the consolidated cash flow statement as full ledgers were not maintained for each business combination in relation to all related assets and liabilities following acquisition. 66 The table below summarises the assets acquired in the year ended 30 June 2017: Property, plant and equipment Patient data records and customer lists Inventory Deferred tax liability (note 22) Trade and other receivables Trade and other payables Loans Total identifiable assets Goodwill Total initial consideration paid (net of cash acquired) Book value of acquired assets £m Adjustments £m Fair value £m 3.6 5.1 1.2 (0.2) 2.3 (4.9) (1.5) 5.6 — — 29.9 — (5.3) — — — 24.6 15.7 3.6 35.0 1.2 (5.5) 2.3 (4.9) (1.5) 30.2 15.7 45.9 £1.0m was paid in the year in respect of deferred consideration for which there was no performance criteria and was included in patient data records last year. £1.0m was paid in the year in respect of deferred consideration has been expensed to the income statement within employment costs. Deferred consideration is expensed to the income statement where payment is dependent upon the recipient being employed by CVS Group. Goodwill recognised represents the excess of purchase consideration over the fair value of the identifiable net assets. Goodwill reflects the synergies arising from the combination of the businesses; this includes cost synergies arising from shared support functions and buying power synergies. Goodwill includes the recognition of deferred tax in respect of the acquired patient data records and customer lists. Post-acquisition revenue and post-acquisition EBITDA were £13.4m and £2.1m respectively. The post-acquisition period is from the date of acquisition to 30 June 2017. Post-acquisition EBITDA represents the direct operating result of practices from the date of acquisition to 30 June 2017 prior to the allocation of central overheads, on the basis that it is not practicable to allocate these. The acquisition costs incurred in relation to the above business combinations amounted to £1.4m for the year and are included within other expenses in note 6 of the financial statements. Bell Equine Limited Property, plant and equipment Patient data records Inventory Deferred tax liability Trade and other receivables Trade and other payables Loans Total identifiable assets Goodwill Total consideration paid Book value of acquired assets £m Adjustments £m Fair value £m 1.1 0.5 — — 0.4 (1.0) (0.1) 0.9 — — 3.7 — (0.8) — — — 2.9 1.0 1.1 4.2 — (0.8) 0.4 (1.0) (0.1) 3.8 1.0 4.8 Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 14. Business combinations continued Ambivet Limited Property, plant and equipment Patient data records Inventory Deferred tax liability Trade and other receivables Trade and other payables Loans Total identifiable assets Goodwill Total consideration paid Severn Edge Veterinary Group Limited Property, plant and equipment Patient data records Inventory Deferred tax liability Trade and other receivables Trade and other payables Loans Total identifiable assets Goodwill Total consideration paid Business combinations in previous years Details of business combinations in the comparative year are presented in the consolidated financial statements for the year ended 30 June 2016. Business combinations subsequent to the year end Subsequent to the year end, the Group acquired the trade and assets of Cundall and Duffy Veterinary Surgeons, a one site practice in North Yorkshire, on 1 August 2017, Maatschap Dierenliniek Wolvega, a one site practice in the Netherlands, on 3 August 2017 and Strule Veterinary Services, a two site practice based in Northern Ireland, on 22 August 2017, 100% of the ordinary share capital of B&W Equine Group, a five site practice based in Breadstone, Cardiff, Failand, Willesley and Stretcholt, on 11 September 2017 and 100% of the ordinary share capital of Aire Veterinary Centre Ltd, a one site practice based in Headingley, Leeds, on 28 September 2017 for a total cash consideration of £13.5m. Assets acquired comprised principally goodwill and intangible patient data records with a provisional fair value of £13.5m. 15. Investments (a) Available-for-sale financial assets Available-for-sale financial assets, which are denominated in Sterling, consist of an investment in managed investment funds. The Group holds an investment in managed investment funds which have a quoted market price in an active market and are accordingly measured at fair value. Gains and losses arising from changes in the fair value are recognised directly in equity until the security is disposed of or deemed to be impaired. (b) Shares in subsidiary undertakings Company Cost and net book amount At 1 July 2015 Options granted to employees of subsidiary undertakings At 30 June 2016 Options granted to employees of subsidiary undertakings Book value of acquired assets £m Adjustments £m Fair value £m At 30 June 2017 £m 64.3 1.3 65.6 1.5 67.1 Book value of acquired assets £m Adjustments £m Fair value £m 0.7 0.4 0.1 (0.1) 0.5 (0.6) (0.4) 0.6 — — 5.3 — (1.0) — — — 4.3 2.7 0.7 5.7 0.1 (1.1) 0.5 (0.6) (0.4) 4.9 2.7 7.6 0.6 1.1 0.2 — 0.8 (1.0) (0.7) 1.0 — — 5.1 — (1.0) — — — 4.1 2.9 0.6 6.2 0.2 (1.0) 0.8 (1.0) (0.7) 5.1 2.9 8.0 The principal subsidiary undertakings of CVS Group plc are set out in note 1. 16. Derivative financial instruments Derivatives are used for hedging in the management of exposure to market risks. This enables the optimisation of the overall cost of accessing debt capital markets, and the mitigation of the market risk which would otherwise arise from movements in interest rates. There is no material impact on the Group income statement resulting from hedge ineffectiveness. There was no ineffective portion of cash flow hedges in 2017 (2016: £nil). Cash flow hedges On 6 December 2011, the Group entered into an interest rate swap arrangement limiting the Group’s exposure to interest rate increases. At 30 June 2016 £45.0m of debt was hedged, the remainder of the debt was unhedged at the year end. The Group classifies its interest rate swap arrangement as a cash flow hedge and utilises hedge accounting to minimise income statement volatility in relation to movements in the value of the swap arrangement. The fair values of the Group’s interest rate derivatives are established using valuation techniques, primarily discounted cash flows, based on assumptions that are supported by observable market prices or rates. 67 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 16. Derivative financial instruments continued Cash flow hedges continued The fair values of derivative financial instruments have been disclosed in the Group balance sheet as follows: Group Non-current Interest rate swap arrangements – cash flow hedges 2017 2016 Assets £m Liabilities £m Assets £m Liabilities £m 0.1 — — (0.1) The notional principal amount of the outstanding interest rate swap arrangement contract at 30 June 2016 was £15.6m. The outstanding interest rate swap arrangement contract expires on 27 January 2017. Movements in fair values Group Fair value at 1 July 2015 Fair value gain through reserves – hedged At 30 June 2016 Fair value gain through reserves – hedged At 30 June 2017 17. Financial instruments 2017 2016 Interest rate swap arrangements £m (0.1) — (0.1) 0.2 0.1 Company – assets as per balance sheet Trade and other receivables (excluding prepayments) Liabilities as per balance sheet Borrowings Trade and other payables (excluding social security and other taxes) Derivative financial instruments Loans and receivables £m 2017 Available for sale £m 31.2 31.2 — — Derivative instruments in designated hedge accounting relationships £m 2017 Other financial liabilities £m Total £m 31.2 31.2 Total £m Loans and receivables £m 3.0 3.0 Derivative instruments in designated hedge accounting relationships £m 2016 Available for sale £m — — 2016 Other financial liabilities £m Total £m 3.0 3.0 Total £m — (106.8) (106.8) — (99.8) (99.8) — — (38.7) — (38.7) — — (145.5) (145.5) — (0.1) (0.1) (34.9) — (34.9) (0.1) (134.7) (134.8) 18. Inventories All inventories are goods held for resale. The Directors do not consider the difference between the purchase price of inventories and their replacement cost to be material. 19. Trade and other receivables Derivative instruments in designated hedge accounting relationships £m Loans and receivables £m Available for sale £m Total £m Derivative instruments in designated hedge accounting relationships £m — — 0.1 0.1 — — 0.1 0.1 21.8 6.8 — 28.6 — 21.8 — — 0.1 6.8 0.1 28.8 — — — — — Group – assets as per balance sheet Available-for-sale financial assets Trade and other receivables (excluding prepayments) Cash and cash equivalents Derivative financial instruments Loans and receivables £m Available for sale £m Total £m Within their due period Past due (between one and six months old): Trade receivables: — 0.1 0.1 Not impaired Fully impaired 18.8 6.7 — 25.5 — — — 0.1 18.8 6.7 — 25.6 Total trade receivables Less: provision for impairment of receivables Trade receivables – net Amounts owed by Group undertakings Other receivables Prepayments Accrued income 68 Group 2017 £m 8.2 4.4 3.2 15.8 (3.2) 12.6 — 3.6 9.1 5.6 30.9 Group 2016 £m Company 2017 £m Company 2016 £m 7.3 5.6 2.5 15.4 (2.5) 12.9 — 2.6 5.0 3.3 23.8 — — — — — — 31.2 — — — 31.2 — — — — — — 3.0 — — — 3.0 Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued 19. Trade and other receivables continued Group The carrying amount of trade and other receivables is deemed to be a reasonable approximation to fair value. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable above. The Group does not hold any collateral as security. The Group’s trade and other receivables are denominated in Sterling. A provision for impairment is established based on historical experience. The amount of the provision was £3.2m (2016: £2.5m). The individually impaired receivables relate mainly to individual customers who are in unexpectedly difficult economic situations. These amounts continue to be legally pursued for collection notwithstanding they are provided against. Movements on the Group’s provision for impairment of trade receivables are as follows: At the beginning of the year Charged to the income statement within administrative expenses Utilised in the year At the end of the year Other receivables do not contain impaired assets. 2017 £m 2.5 0.7 — 3.2 2016 £m 2.0 0.9 (0.4) 2.5 Company Amounts owed by Group undertakings are unsecured, interest free and repayable on demand. 20. Trade and other payables Current Trade payables Social security and other taxes Other payables Accruals Group 2017 £m 24.5 9.6 2.8 11.3 48.2 Group 2016 £m 20.3 8.1 4.5 10.1 43.0 Company 2017 £m Company 2016 £m — — — — — — — — — — In July 2017 the Group increased its available bank facilities through exercising the accordion contained within the November 2015 bank facility agreement. Total facilities of £152.5m are available to support Group’s organic and acquisitive growth initiatives over the coming years. These facilities are provided by a syndicate of three banks: RBS, HSBC and AIB, and comprise the following elements: • a fixed term loan of £67.5m, repayable on 23 November 2021 via a single bullet repayment; and • a six-year revolving credit facility (“RCF”) of £85.0m that runs to 23 November 2021. In addition the Group has a £5.0m overdraft facility renewable annually. The two main financial covenants associated with these facilities are based on Group borrowings to EBITDA and Group EBITDA to interest. The Group borrowings to EBITDA ratio must not exceed 3.5 for the period up to 31 December 2017 from when it must not exceed 3.0. The Group EBITDA to interest ratio must not be less than 4.5. The facilities require cross guarantees from the most significant of the CVS Group’s trading subsidiaries but are not secured on the assets of the Group. EBITDA is based on the last twelve months’ performance adjusted for the full year impact of acquisitions made during the period. Interest rate risk is also managed centrally and derivative instruments are used to mitigate this risk. On 1 March 2017, the Group entered into a three-year interest rate fixed swap arrangement to hedge fluctuations in interest rates on £45.0m of its RCF facility. The swap reduces to £40.0m on 1 March 2018, followed by a further reduction to £35.0m on 1 March 2019. At the balance sheet date £45.0m of the term loan was hedged using an interest rate swap. The remainder of the debt is not hedged. * Management has elected to change its accounting policy in relation to the classification of its revolving credit facility (“RCF”) to reflect management’s intention in relation to repayment rather than solely the legal form of the arrangement. The impact of this is that the £37.0m (2016: £30.5m) RCF has been disclosed as a non-current liability. This change has also been reflected retrospectively to adjust the classification of the RCF from current liabilities to non-current liabilities in the prior periods. This change in accounting policy has no impact on the income statement, earnings per share or any other key performance indicator. Undrawn committed borrowing facilities At 30 June 2017 the Group has a committed overdraft facility of £5.0m (2016: £5.0m) and an RCF of £47.5m (2016: £47.5m). The overdraft facility was undrawn at 30 June 2017 and 30 June 2016. £10.5m of the RCF was undrawn at 30 June 2017 (2016: £17.0m). 22. Deferred income tax Deferred income tax assets comprised: 21. Borrowings Borrowings comprise bank loans and are denominated in Sterling. The repayment profile is as follows: Group Group Within one year or on demand Between one and two years After more than two years 2017 £m 3.3 — 103.5 106.8 *Restated 2016 £m 0.3 2.7 96.8 99.8 The balances above are shown net of issue costs of £1.1m (2016: £1.5m), which are being amortised over the term of the bank loans. The carrying amount of borrowings is deemed to be a reasonable approximation to fair value. Tax effect of temporary differences: Share-based payments Losses The Group’s deferred tax assets have been recognised based on historical performance and future budgets. The Directors believe that it is probable that there will be sufficient taxable profits against which the assets will reverse. 69 2017 £m 2.0 0.1 2.1 2016 £m 1.7 0.1 1.8 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report 22. Deferred income tax continued Deferred income tax liabilities comprise the excess of qualifying depreciation and amortisation over tax allowances: Group Tax effect of temporary differences: Excess of qualifying depreciation and amortisation The movement in the net deferred income tax liabilities is explained as follows: 2017 £m 16.8 16.8 2016 £m 14.6 14.6 At 1 July 2016 £m 1.7 0.1 (14.6) (12.8) At 1 July 2015 £m 1.7 0.1 (6.5) (4.7) Group Share-based payments Unutilised tax losses carried forward Excess of qualifying depreciation and amortisation over capital allowances Group Share-based payments Unutilised tax losses carried forward Excess of qualifying depreciation and amortisation over capital allowances The deferred tax balance is non-current. 23. Share capital (Charged)/ credited to income statement £m Deferred tax gross up on acquisitions £m Credited to statement of changes in equity £m (1.6) — 3.3 1.7 — — (5.5) (5.5) 1.9 — — 1.9 (Charged)/ credited to income statement £m Deferred tax gross up on acquisitions £m Credited to statement of changes in equity £m (0.8) — 2.1 1.3 — — (10.2) (10.2) 0.8 — — 0.8 2017 £m 0.1 At 30 June 2017 £m 2.0 0.1 (16.8) (14.7) At 30 June 2016 £m 1.7 0.1 (14.6) (12.8) 2016 £m 0.1 Issued and fully paid 63,903,911 (2016: 59,998,926) Ordinary shares of 0.2p each During the year, 392,800 shares were issued for consideration of £703 in respect of the vesting of LTIP7, and 484,155 shares were issued for consideration of £1,040,933 in respect of SAYE6. 3,019,500 shares were issued in December 2016 for consideration of £29,579,055 following a placing. Details of shares under option are provided in note 11 to the financial statements. The authorised share capital of the Company is 352,000,000 Ordinary shares of 0.2p each. 70 Dividends The Directors have proposed a final dividend of 4.5p (2016: 3.5p) per share total: £2.9m (2016: £2.1m), payable on 8 December 2017 to shareholders on the register at the close of business on 24 November 2017. The dividend has not been included as a liability as at 30 June 2017. During the year a dividend of 3.5p per share amounting to £2.1m was paid. 24. Revaluation reserve The revaluation reserve is used to record any surplus following a revaluation of property, plant and equipment. The revaluation reserve arose on the revaluation of a property in the subsidiary undertaking Precision Histology International Limited. The revaluation reserve is not a distributable reserve until realised. 25. Share premium During the financial year the Group established an Employee Benefit Trust (“EBT”) for the purposes of satisfying the exercise of certain share options vesting under the Group’s LTIP and SAYE schemes. The Group has accounted for the purchase of the shares held by the EBT as treasury shares and has deducted these from reserves. 26. Analysis of movement in net debt Group Cash and cash equivalents Borrowings – current Borrowings – non-current Net debt At 1 July 2016 £m 6.7 (0.3) (99.5) (93.1) Cash flow £m Non-cash movement £m At 30 June 2017 £m 0.1 — (4.7) (4.6) — (3.0) 0.7 (2.3) 6.8 (3.3) (103.5) (100.0) Non-cash movements comprise amortisation of issue costs on bank loans, new finance lease obligations, bank debt acquired and transfers between categories of borrowings. Cash and cash equivalents comprise cash at bank and in hand. 27. Cash flow generated from operations Profit/(loss) for the year Taxation Total finance costs Amortisation of intangible assets Depreciation of property, plant and equipment Increase in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Share option expense Total net cash flow generated from operations Group 2017 £m 11.5 3.0 2.7 16.0 5.9 (1.5) (4.5) 2.6 1.5 37.2 Group 2016 £m 7.0 2.1 2.7 13.7 5.2 (1.6) 5.2 (2.0) 1.3 33.6 Company 2017 £m Company 2016 £m (0.2) — — — — — (27.7) — 1.5 (26.4) (0.2) — — — — — 0.5 — 1.3 1.6 Annual Report 2017 – CVS Group plcNotes to the consolidated financial statements for the year ended 30 June 2017 continued The following balances were owed by/(due to) related companies: CVS (UK) Limited 2017 2016 Receivable £m 31.2 Payable £m — Receivable £m 3.0 Payable £m — Amounts owed by CVS (UK) Limited are unsecured, interest free and have no fixed date of repayment. Transactions with Directors and key management Annual market-based rent payable to the spouse of S Innes for the rental of premises amounts to £0.1m (2016: £0.1m), of which £0.1m (2016: £0.1m) was paid in the year. Annual market-based rent payable to Tim Davies, who was a member of key management prior to leaving the business during the year, for the rental of premises amounts to £0.1m (2016: £0.1m), of which £0.1m (2016: £0.1m) was paid in the year. During the year the following dividends were paid to the Directors: R Connell £2,936; M McCollum £2,707; S Innes £8,626; and N Perrin £980. Ultimate controlling party The Directors consider there is no ultimate controlling party. 28. Guarantees and other financial commitments Capital commitments The Group had no capital commitments as at 30 June 2017 (2016: £nil). Bank guarantees The Company is a member of the Group banking arrangement, under which it is party to unlimited cross guarantees in respect of the banking facilities of other Group undertakings, amounting to £98.0m at 30 June 2017. The Directors do not expect any material loss to the Company to arise in respect of the guarantees. 29. Operating lease commitments The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Not later than one year Later than one year and not later than five years Later than five years Total 2017 Plant and machinery £m 0.8 1.2 — 2.0 Property £m 10.1 27.5 15.6 53.2 Total £m 10.9 28.7 15.6 55.2 2016 Plant and machinery £m 0.6 0.7 — 1.3 Property £m 9.2 25.5 13.3 48.0 Total £m 9.8 26.2 13.3 49.3 Operating lease commitments primarily represent rentals payable by the Group in respect of its veterinary practices and office premises. 30. Pension schemes The Group contributes to certain employees’ personal pension schemes in accordance with their service contracts. The amounts are charged to the income statement as they fall due. The amounts charged during the year amounted to £1.1m (2016: £0.8m). The amount outstanding at the end of the year included in trade and other payables was £0.2m (2016: £0.2m). 31. Related party transactions Directors’ and key management’s compensation is disclosed in note 8. Company During the year the Company had the following transactions with CVS (UK) Limited: Recharge of expenses incurred by CVS (UK) Limited on behalf of the Company Cash advanced to fund payment of dividend 2017 £m (0.2) (2.1) 2016 £m (0.2) (1.8) 71 CVS Group plc – Annual Report 2017GovernanceFinancial statementsStrategic report Five-year history 2017 £m 271.8 124.5 17.2 (2.7) 14.5 (3.0) 11.5 42.1 33.5 37.2 (13.8) (46.9) (1.5) (5.4) (2.1) (0.8) 30.6 (2.1) (2.1) (6.9) 100.0 Pence 18.5 42.8 2016 £m 218.1 105.9 11.8 (2.7) 9.1 (2.1) 7.0 32.8 24.9 33.6 (11.5) (53.5) (7.8) (3.3) (2.4) (0.4) 0.2 — (1.8) (46.9) 93.1 Pence 11.6 32.4 2015 £m 167.3 79.1 9.8 (1.3) 8.5 (1.7) 6.8 23.0 18.2 22.2 (6.5) (21.1) (4.2) (2.3) (1.3) (0.5) 0.3 — (1.5) (14.9) 46.2 Pence 11.6 24.7 2014 £m 142.9 65.2 7.5 (1.2) 6.3 (1.5) 4.8 18.3 14.3 20.7 (5.3) (12.4) — (2.5) (1.2) — 0.5 — (1.1) (1.3) 31.3 Pence 8.3 19.0 2013 £m 120.1 41.9 6.7 (1.2) 5.5 (1.5) 4.0 15.8 12.1 16.7 (4.1) (7.7) — (2.1) (1.2) — 0.1 — (0.8) 0.9 30.0 Pence 7.1 16.2 Revenue Gross profit Operating profit Finance expense Profit before tax Income tax expense Profit for the year EBITDA Adjusted EBITDA Adjusted profit before income tax Cash generated from operations Capital expenditure Acquisitions Loans and borrowings acquired through business combinations Taxation paid Interest paid Amortisation of debt issue costs Proceeds from Ordinary shares Purchase of own shares Dividends paid (Increase)/reduction in net debt Year-end net debt Basic earnings per share Adjusted basic earnings per share 72 Annual Report 2017 – CVS Group plc Registered office CVS House Owen Road Diss Norfolk IP22 4ER Nominated advisor and broker N+1 Singer One Bartholomew Lane London EC2N 2AX Company Secretary R Gilligan Bankers NatWest Bank Plc 12 High Street Southampton SO14 2BF Royal Bank of Scotland Plc 36 St Andrew Square Edinburgh EH2 2YB HSBC Bank Plc 8 Canada Square London E14 5HQ Contact details and advisors Independent auditor Deloitte LLP 1 Station Square Cambridge CB1 2GA Legal advisors Blake Morgan LLP New Kings Court, Tollgate Eastleigh Hampshire SO53 3LG Leathes Prior 74 The Close Norwich NR1 4DR DLA Piper UK LLP Victoria Square House Victoria Square Birmingham B2 4DL CVS Group plc is committed to the environmental issues reflected in this Annual Report. The report is printed on Novatech Silk, which is FSC® certified and ECF (Elemental Chlorine Free). Printed in the UK by Pureprint using their environmental printing technology. Both manufacturing mill and the printer are registered to the Environmental Management System ISO14001 and are Forest Stewardship Council® (FSC) chain-of-custody certified. C V S G r o u p p l c A n n u a l R e p o r t f o r t h e y e a r e n d e d 3 0 J u n e 2 0 1 7 CVS Group Plc CVS House Owen Road Diss Norfolk IP22 4ER