ECO Animal Health sees continuing revenue growth, Group revenue increasing 9%

ECO Animal Health Group plc (LON:EAH) has announced its results for the six months ended 30 September 2023.

HIGHLIGHTS

Financial

·      Group Revenue increased 9% to £38.0 million (H1 2022: £34.9 million)

o  Revenues on a constant currency basis increased 15%

·      Gross margins 41% (H1 2022: 45%)

·      Adjusted EBITDA at £0.7 million (H1 2022: £1.7 million)

·      Loss per share of 1.93p (H1 2022: earnings per share: 1.96p)

·      Cash generated by operations increased to £4.8m (H1 2022: £3.0m)

·      Cash balances increased to £20.6m (30 September 2022 £12.9m)

Operational

·      Revenue in China and Japan increased by 14% to £9.7 million (H1 2022: £8.5 million)

·      Revenue in USA and Canada increased by 26% to £8.2 million (H1 2022: £6.5 million)

·     US FDA and Veterinary Drugs Directorate in Canada approval received for use of Aivlosin® in pregnant and lactating sows

·      Successful recent Capital Markets Day highlighted significant potential unrecognised future value in R&D pipeline

·      ESG – ‘A’ rating by Integrum ESG

David Hallas, Chief Executive Officer of ECO Animal Health Group plc, commented: “I am very pleased to see continuing revenue growth, despite currencies headwinds for a large part of this first half. Adjusting for the currency effect underlying growth in revenues increased by 15%. We expect gross margins to improve in the second half due to sales mix and improvements in Cost of Goods. We have strong visibility over second half revenue. The Board looks forward with cautious optimism to reporting the full year numbers in line with market expectations.

I was particularly proud to showcase, at our recent Capital Markets Day, some of the great results we are seeing in our R&D programme. We plan to make further disclosure as our projects progress; the intention being to build shareholder knowledge and confidence around our future potential”.

CHAIRMAN AND CHIEF EXECUTIVE’S COMBINED STATEMENT

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023

The Board is pleased to present the results for the Group for the six months ended 30 September 2023 (“H1 2023”). During the first half of the financial year, the Group experienced positive global sales momentum and despite currency headwinds our results show good revenue growth. The Group expects that the typical pattern of demand will result in a stronger second half to our year. The Group’s revenue since September 2023, current order books and run rate of sales from the Group’s stocking locations provides 90% coverage of the projected second half revenue (94% of full year consensus market forecasts*). Phasing and mix of revenues, inventory usage and costs all support the forward view of gross margins. We invested further in our promising R&D pipeline and we continued to grow our commercial footprint in anticipation of the introduction of new products. The Board is also proud to have been awarded an ‘A’ rating for ESG – the highest grade possible – by Integrum ESG, higher than some 300 companies ranked in our sub-sector. This highlights our continuing/ efforts to improve our impact on not only the environment but also the communities we work with.

*               The Board understands that current consensus figures for FY23 are £88.3m of revenue and £7.7m Adjusted EBITDA

Financial Performance

Group revenue was 9% higher in H1 2023 at £38.0 million (H1 2022: £34.9 million). China and Japan revenue of £9.7 million represented 26% of Group revenue (H1 2022: 24%). On a constant currency basis the Group’s revenue in H1 2023 was £40.1 million; an increase of 15% compared with H1 2022.  The principal currency effects were from a weaker US Dollar and Chinese RMB compared with Sterling during the period.

Excluding China and Japan, revenue from other markets grew by 7%, in aggregate, to £28.3 million (H1 2022: £26.4 million).

The gross margin in H1 2023 was 41% (H1 2022: 45%). A combination of foreign exchange effects and cost of purchases of the active pharmaceutical ingredient (“API”), as well as certain increased costs of manufacture outside of China have impacted the gross margins. In addition, depreciation of the company’s factory equipment in China was charged to Cost of Sales in the period (in 2022, during the factory rebuild, depreciation was charged to administrative costs). It is expected that the revenue and API effects will in part reverse in H2 2023. The Gross margin movement may be analysed as follows:

Administrative expenses excluding foreign exchange gains at £14.2 million were 13% higher than the comparative period last year (H2 2022: £12.6 million). This arose in the main from increased personnel costs offset in part by savings in legal, audit and professional.

Research and development (“R&D”) expenses shown in the income statement together with the amounts capitalised were in aggregate a cash investment of £3.6 million (H1 2022: £4.2 million). This represented 9.0% of revenue generated in the period (H1 2022: 12.0%). 

Earnings before interest, tax, depreciation, amortisation and impairment, share based payments and foreign exchange movements (“Adjusted EBITDA”) were £0.7 million (H1 2022: £1.7 million). This reduction arose as a direct consequence of the higher revenue offset by lower gross margin and increased personnel costs.

Cash generated from operations was £4.8 million (H1 2022: £3.0 million). Continuing close management of working capital – in particular inventories and receivables – has resulted in a cash balance of £20.6 million which is significantly greater than at 30 September 2022 and comparable to the level at 31 March 2023. Cash balances at 30 September 2023 can be analysed as follows:

The Group repatriates cash from China by annual dividend declaration; this is subject to withholding taxes of 5% and is paid according to the relevant shareholdings.  On a day‐to‐day basis, the Board considers the cash held in the Group’s joint venture subsidiary in China to be unavailable to the Group outside of China; accordingly, cash management and funds available for investment in R&D is based upon the cash balances outside of China.

During July 2023, two dividends totalling £3.4 million were received from China.

The Group’s committed banking facilities remain at £15.0 million, being a £5.0 million overdraft facility and a £10 million revolving credit facility.  These facilities expire on 30 June 2026 and were undrawn as at 30 September 2023.

Basic loss per share in the six months ended 30 September 2023 was 1.93p (H1 2022: EPS 1.96p).  The prior period EPS benefited from the exchange rate gain reported in the period of £2.6 million in the six months ended 30 September 2022.

Business Performance

The geographical analysis of the Group’s revenue in the six months ended 30 September 2023 compared to the prior period in 2022 and the full year ended 31 March 2023 was as follows:

Group revenue increased by 9% to £38.0 million (H1 2022: £34.9 million). As stated earlier, on a constant currency basis the increase in revenue was 15% in H1 2023 compared with H1 2022. The main components of this revenue improvement were from China and the USA.  As noted in the Group’s FY23 Annual Report the strong trading in the final quarter ended 31 March 2023 carried over into the spring and early summer months; this demand for Aivlosin® was driven by disease incidence, in particular Porcine Reproductive and Respiratory Syndrome (“PRRS”) virus. Similarly, the strength in the USA market was associated with prevalence of disease and strong key account relationships. The improvement in European revenue was offset by a phasing of revenues derived from North African markets. 

Aivlosin® continues to gain market share from other longer established branded antimicrobials. The growth seen in Southeast Asia during the last four or five years has continued during 2023. The poor poultry market in India in recent years has recovered with revenue increasing to £2.9 million (H1 2022: £2.2 million). Thailand remained the largest single market for the Group’s products in this region with revenue increasing to £3.6 million (H1 2022: £3.5 million), supported with good sales into Bangladesh, Pakistan, Malaysia and Vietnam of £1.2 million (H1 2022: £1.6 million). Revenue in Latin America decreased 3% to £7.7 million (H1 2022: £7.9 million), with Brazil representing the largest market at £4.2 million (H1 2022: £4.2 million).  Brazil’s exports of pork to China continued during the period providing strong demand for Aivlosin®. Mexico revenue in H1 2023 was £0.3 million higher than the equivalent period last year and the remaining counties in Latin America were broadly consistent year on year. Revenue derived from Europe was £0.5 million higher than H1 2022. Within the continent, Spain remained the largest single market with revenues of £0.8 million in the six months ended 30 September 2023 (H1 2022: £1.0 million).

Accelerated growth through R&D investment

Work on the Group’s promising pipeline of new products has continued at pace during the first half of this financial year with £3.6 million (H1 2022: £4.2 million) spent during the period. We held a Capital Markets Day (“CMD”) on 9 November 2023 during which a great deal of detail was provided on the Group’s pair of Mycoplasma vaccines for poultry, the Group’s novel injectable antimicrobial, the Group’s very promising PRRS virus vaccine and combination PCV2/MHyo vaccine for swine and the Group’s approach to a vaccine for necrotic enteritis in poultry. These latter three projects employ highly novel monoclonal technology approaches and promise to deliver significant technological disruption to the prevention of these diseases. We highlighted some very significant efficacy results which describe statistically significant immunity to disease challenge when compared with control groups incorporating placebo, untreated and treated with commercially available existing products. The presentations at the CMD concluded with an assessment of the revenue and profit contribution potential in the R&D portfolio as well as a description of the net present value and internal rate of return of the projects when assessed over their product life cycle.

The Board considers the R&D portfolio to be rich in opportunity and investment in this programme to be in shareholders’ best interests. These new products are complementary to our extremely successful existing Aivlosin® based business, addressing the same markets, producers, distributors and disease complexes. It is envisaged that as revenue and profits begin to be generated from these new product introductions the resulting cashflow will be applied in a progressive way to dividend distribution further enhancing shareholder value.

Strategy

Following the refresh of the Group’s strategy in the Autumn of 2022, a year later the leadership team once again reviewed the Group’s direction and priorities. This resulted in an endorsement of the vision and values of the Group.  The embodiment of these values is in the “3 C’s” – these being Curiosity, Commitment and Collaboration. Furthermore, the focus on delivering the class leading products promised by the R&D effort was reinforced as the primary opportunity to deliver shareholder value. Specific actions arising involve prioritising projects with a balance of net present value, risk, proximity to market and size of funding requirement.  In addition, key actions have been taken in relation to building the operational capabilities and manufacturing collaborations to fulfil the commercial needs of the new products. 

The Group is open to and will pursue further collaboration including technical partnering, licensing and M&A activity.

People

The Board acknowledges the value that our people relationships bring to the business. Whether it is current team members who describe the 3C’s in their everyday, prospective members of staff for whom the 3C’s resonate, customers, R&D partners commercial partners or shareholders we understand the value of engagement and the additive effect of a team working collectively. Engagement surveys and environment, social and governance initiatives have continued to enshrine these values. The Board extends its sincere gratitude to all our people, customers, partners and collaborators as we seek to maximise shareholder and stakeholder value.

Outlook

ECO Animal Health Group expects that the historically observed increased demand for Aivlosin® associated with the Northern Hemisphere winter will once again result in a stronger second half to our year. 94% of the market consensus revenue* is covered by year-to-date revenue, order books and run rate from the Group’s stocking locations.  Additionally, the first half currency headwinds have normalised and the phasing and mix of revenues, inventory usage and costs all support the forward profitability view. The Board will continue during the remainder of this financial year to invest in our extremely exciting new product pipeline.

The Board looks forward with cautious optimism to reporting the full year numbers in line with market expectations*.

*               The Board understands that current consensus figures for FY23 are £88.3m of revenue and £7.7m Adjusted EBITDA

Dr Andrew Jones                                                      David Hallas

Non-executive Chairman                                         Chief Executive Officer