Dechra have released their half year results for the first half of 2012 so without further ado I will go straight into the income report.
So, if we look at the profit for the half year, it is very similar to that of the first half of last year. Revenues are up across all business units but cost of sales are also up nearly £13M to leave a gross profit £4.4M higher from last year at £46.5M. This is not bad but I would have hoped to have seen more of an increase from the acquired businesses. Distribution costs remain steady but the non-cash amortisation of intangibles charge is up £1.3M to £5.2M. Admin expenses are up too which leaves the overall operating profit up £1M to £11M.
Although revenues are up in the service sector, there has been some pressure on margins due to increased discounting in a competitive market and the actual profit contributed by the services segment is down about £1M to £5.4M. The profit contribution from the European and US pharmaceutical arms has increased. In the case of the European business it is up £2.4M to £12.8M and for the US it is up £400K to £2.3M.
Looking at the non operating items, it can be seen that the foreign exchange income has swung to negative, and along with lower finance income and a few other items, the profit before tax is slightly down on last year at just under £9M.
When considering the total income we can see that it has taken a dive of £6M, mainly sure to a similar swing on the foreign currency translations on foreign operations, suggesting there has been an unfavourable shift in exchange rates.
From the financial position sheet we see that, although net assets are down slightly at £96.5M, the net tangible assets have recovered somewhat on the position at the end of last year, being £6.5M up at -£20.3M. This I believe is a step in the right direction. When looking the assets themselves, they seem to be down almost uniformly. The massive intangible asset base is £8.3M down while cash has plummeted £15.4M to £15.1M. This does seem to be somewhat seasonal, however, as last year there was a similar dip before the second half brought in more cash so I am not too concerned about this. Inventories were the only asset type to increase – up £7.6M to £48.4M.
Looking at liabilities, we see that these have come down too. The largest reduction is in trade and other payables so hopefully Dechra have been receiving payments quicker (rather than suffering reduced orders). Other points of interest are the slight reduction in borrowings and a small reduction in the tax liability.
So, given there were no large acquisitions in this half it was a much quieter period with regards to cash flow. However, we can see there was a fairly disappointing cash outflow of £15.4M. The operating cash flow is hit by £8.3M more being tied up I inventories and an £8.7M decrease in payable suggesting that Dechra is paying up quicker or the payment cycle perhaps means they pay for more items in the first half of the year. The £3.8M in tax paid seems to be quite a bit higher than it was in the same period last year which didn’t help the cash flow situation.
Although there were no new acquisitions, we see that £500K was paid out in “acquisition of subsidiaries” This was a contingent consideration on the purchase of Genitirx due to it hitting a performance target. The other items of interest ate a £4.3M repayment in borrowings which is required by the bank and a hike of £820K in dividend payments to £5.6M. Hopefully this means the group are confident of an increased cash flow in the second half as with only £15.1M of cash left, another half like this would wipe out the cash level completely. The second half is traditionally much more cash generative, however so I don’t think much can be taken from this outflow in the first half of the year.
After this reporting date, Dechra acquired the non-Canadian world rights of HY-50 for £5.1M. This was funded using the dwindling cash reserves. It is a treatment for horse lameness and is expected to be earnings enhancing in the first full year of ownership. Dechra are certainly on an expansion phase at the moment…
In Europe, demand for pharmaceutical products has been strong and growth has also occurred due to the manufacture of Vetoryl and the launch of Dermapet products into the Nordic countries. Pet Diet sales were flat during the half year due to reduced export sales being offset by an increase in sales in core markets. In the US, the growth has been driven by the Dermapet products which are now all converted to the Dechra livery.
As far as the services sector is concerned, revenues were up 7.3% on the same period last year which is partly down to market recovery and partly due to the favourable comparison with the weather affected end of calendar year 2011. Margins, however have suffered somewhat due to an increase in discounting in a competitive market. Dechra have set up a new IT system and some other services to improve operating margin going forward and it should also improve the purchasing process to improve the inventory level.
Dechra seems to have quite a robust pipeline with a product for canine epilepsy being launched in the second half of this year and two new therapeutic pet diets having been developed.
Overall then, these are solid if not amazing results. The profit is similar to the same period of last year with increases in the pharmaceutical profits dragged down by the margin erosion for the service business. The group seems to have adversely affected by the exchange rates too. Net tangibles are up slightly, which is quite pleasing but the large cash outflow is a little disappointing, albeit rather seasonal so the actual cash flow will only become apparent by looking at the full year results. The group also seem to be taking action with regards to the stock tied up in inventories. The board have increased the interim dividend to make the total dividend yield 2.5% which is decent but not stellar. I will continue to hold.
On 5th April 2012, Dechra announced its intention to buy Eurovet Animal Health, an animal pharmaceutical company based in the Netherlands. The group seem to be quite similar to Dechra and the price they expect to pay is £112.5M. This is larger than the Dermapet acquisition is really a rather large undertaking. This is expected to be funded by a rights issue to raise £60M and new debt facilities to raise the rest of the cash. The new shares are being offered at a heavy discount and I suspect I will take up the offer but the extra debt worries me slightly. I do hope this spells the end of the current spate of acquisitions and that after this purchase, Dechra concentrate on integrating the new businesses and focus on organic growth. I have been burnt before by companies I own shares in over stretching themselves and I really hope this isn’t happening here.