ECO Animal Health Group plc (LON:EAH) has announced its results for the six months ended 30 September 2022.
· Group Sales at £34.9 million (H1 2021: £38.5 million)
– China and Japan sales declined to £8.5 million (H1 2021: £15.7 million)
– Excluding China and Japan, revenues in aggregate increased by 16% to £26.4 million (H1 2021: £22.8 million)
· Gross margins at 45% remained consistent with the prior year period
· Adjusted EBITDA at £1.7 million (H1 2021 restated*: £3.4 million)
· Profit before taxation of £3.0 million including a £2.6 million foreign exchange gain (H1 2021 restated profit*: £0.5 million, including £0.3 million gain)
· Earnings per share of 1.96p (H1 2021: restated loss per share*: (0.92)p)
· Cash generated by operations of £3.0m (H1 2021 restated*: £6.1m)
* Prior period figures have been restated to reflect adjustments arising from the March 2022 audit
· Sales in Latin America increased by 25% to £7.9 million (H1 2021: £6.3 million)
· Sales in South and Southeast Asia increased by 23% to £7.4 million (H1 2021: £6.0 million)
· China revenue represented 24% of total Group revenues (H1 2021: 41%) which declined significantly as a result of reduced sales from the Group’s largest customers in the region and continued impact of COVID restrictions
· New R&D collaborations with Imperial College for saRNA technology and Moredun Research Institute for the development of a poultry red mite vaccine
· Two Mycoplasma vaccines for poultry expected to be submitted for regulatory approval in late 2023 and early 2024
Dr Andrew Jones, Non-Executive Chairman of ECO Animal Health Group plc, commented:
“We are delighted with the continuing growth in all markets outside of China and the increasing market penetration experienced by Aivlosin® in its multiple formulations. The China swine industry has been slow during the first half of this year; the socio-economic reasons for this are well publicised and understood. Nevertheless, we are pleased to retain our strong market position and we expect a return to healthy markets in China during the course of this next year.
We are excited by the progress in our new product developments and it is particularly pleasing that some ground breaking technologies are being explored in new collaborations announced in the last few months. We are on track for submission of our new Mycoplasma poultry vaccines at the end of 2023 and we expect marketing approval to be received shortly afterwards. The rest of the portfolio is demonstrating good progression.
Our recent annual strategy review endorsed the vision, objectives and direction for the Group and we look forward with cautious optimism to reporting the full year numbers in line with market expectations.”
I am pleased to present the results for the Group for the six months ended 30 September 2022 (“H1 2022”). During the first half of our financial year, we experienced positive sales momentum in all our major markets outside of China. Furthermore, our very promising new product development pipeline is progressing well towards product registration.
Group revenue was 9% lower in H1 2022 at £34.9 million (H1 2021: £38.5 million), as a result of a decline in revenues from China. China and Japan revenue of £8.5 million represented 24% of Group revenue (H1 2021: 41%). Excluding China and Japan, revenue from other markets grew by 16%, in aggregate, to £26.4 million (H1 2021: £22.8 million).
The gross margin in H1 2022 was 45% (H1 2021: 45%). Despite the significant reduction in higher margin China revenues, gross margins were maintained as a result of favourable exchange rates and cost control within the Group.
Administrative expenses at £11.9 million were 9% higher than the comparative period last year (H1 2021: £10.9 million). This arose from further investment in sales and marketing, a return to travel after the easing of COVID restrictions and a reclassification of technical support costs previously included as an R&D expense (in the H1 2021 results) but now shown as administrative expenses.
Research and development (“R&D”) expenses shown in the income statement together with the amounts capitalised were in aggregate a cash investment of £4.2 million (H1 2021: £4.0 million); for comparative purposes this represented 12.0% of revenue generated in the period (H1 2021: 10.4%).
Earnings before interest, tax, depreciation, amortisation and impairment, share based payments and foreign exchange movements (“Adjusted EBITDA”) were £1.7 million (H1 2021 restated: £3.4 million). This reduction was due to the fall in revenues in China.
Cash generated from operations was £3.0 million (H1 2021 restated: £6.1 million). Improved receivables and management of payables partly offset the reduced profitability in the period.
This cash generation after allowing for tax payments of £1.0 million, resulted in cash balances at the period end of £12.9 million (31 March 2022: £14.3 million), of which £4.0 million (31 March 2022: £6.1 million) was held in the Group’s 51% owned subsidiary in China. The Group repatriates cash from China by dividend declaration, accordingly only 51% is received by the Group and is subject to withholding taxes. Additionally, the Group has a wholly owned subsidiary in China, the cash in this company is repatriated annually by dividend. 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 the China JV, which at 30 September 2022 was £8.9 million (31 March 2022: £8.2 million).
Subsequent to the period end, two dividends totalling £5.7 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 2022.
Basic EPS in the six months ended 30 September 2022 was 1.96p (H1 2021 restated: loss per share 0.92p). EPS benefited from the exchange rate gain reported in the period of £2.6 million (H1 2021: £0.3 million) and the prior period loss per share was adversely affected by the impairment of intangible assets recorded in the six months ended 30 September 2021. The dilutive effect of unexercised share options has reduced earnings per share to 1.95p in the six months ended 30 September 2022 (H1 2021 restated: no change).
The geographical analysis of the Group’s revenue in the six months ended 30 September 2022 compared to the prior period in 2021 and the full year ended 31 March 2022 was as follows:
|Revenue Summary||6 months ended 30 September|
|6 months ended 30 September|
|H1 2022 vs H1 2021|
Year ended 31 March 2022
|China and Japan||8.5||15.7||(46%)||28.4|
|North America (USA and Canada)||6.5||6.0||8%||16.4|
|South and Southeast Asia||7.4||6.0||23%||11.8|
|Rest of World and UK||1.7||1.6||6%||3.4|
Group revenue reduced by 9% to £34.9 million (H1 2021: £38.5 million). The overall reduction in Group revenue in the six months ended 30 September 2022 was caused by a 46% reduction in revenue from China and Japan; excluding China and Japan revenues in aggregate increased by 16% to £26.4 million (H1 2021: £22.8 million). Travel restrictions during H1 2022 were largely lifted in most of the Group’s markets, with the exception of China, enabling sales and marketing efforts to return to the in-person support that has historically characterised the Group’s approach to its customers and market place.
As previously indicated, trading in China was subdued during the first quarter of the current financial year and therefore the Board’s outlook for the Chinese market in 2022 was cautious. Many of the Group’s larger customers needed to repair their respective balance sheets which had been damaged by extended periods of trading at a loss and reduced their purchases of Aivlosin® in the period. However, the Group enjoyed good trading with its mid-tier customers in China who, in the main, were less expansive during the re-stocking phase in 2020/2021. We also noted in our Annual Report and Accounts for the year ended 31 March 2022 that the pork to grain price ratio had for the first time in over a year risen above 5 in August; the China National Reform and Development Commission reported that the ratio on 16 November 2022 was 8.78. This provides the Board with some optimism for improved trading conditions in China.
Revenue in North America, in particular the USA, has been broadly consistent; farm hog prices in the USA and Canada have been generally stable throughout 2022 and this has resulted in continuing strong market conditions. Aivlosin® continues to gain market share.
The growth seen in Southeast Asia during the last three or four years has continued during 2022. The poor poultry market in India in recent years has recovered with revenue increasing to £2.2 million (H1 2021: £0.4 million). Thailand remained the largest single market for the Group’s products in this region with revenue increasing to £3.5 million (H1 2021: £4.0 million), supported with good sales into Pakistan, Malaysia and Vietnam of £1.6 million (H1 2021: £1.6 million).
Revenue in Latin America grew 25% to £7.9 million (H1 2021: £6.3 million), with Brazil representing the largest market at £4.2 million (H1 2021: £3.0 million). Brazil’s exports of pork to China continued strongly during the period providing strong demand for Aivlosin®. Mexico revenue in H1 2022 was £0.5 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 consistent at £2.9 million. Within the continent, Spain remained the largest single market with revenues of £1.0 million in the six months ended 30 September 2022 (H1 2021: £1.1 million).
Research and development
Work on the Group’s promising pipeline of new products has continued at pace during the first half of this financial year with £4.2 million (H1 2021: £4.0 million) spent during the period. This is in line with plan and the first two Mycoplasma vaccines for poultry are expected to be submitted for regulatory approval in late 2023 and early 2024, with marketing authorisation expected to be gained shortly thereafter.
In June 2022 we announced a very exciting collaboration with Imperial College to assess the veterinary application of self-amplifying RNA technology. This technology represents the next generation of RNA delivered medicines and is particularly interesting for veterinary medication because it implies fewer doses, lower dose rates, a broader range of applications and cost savings for the producer compared with conventional mRNA approaches. Work is underway on key proof of concept studies.
In July 2022 the Group signed a partnership agreement with the Moredun Research Institute to research and develop an effective first in class vaccine solution for the sustainable control of poultry red mite (“PRM”). Red mite infestation in poultry is one of the emerging and important causes of production losses in laying hens and has a major impact on animal welfare. Poultry red mites also serve as vectors for several disease-causing bacteria and viruses in poultry. Their ubiquitous presence threatens the poultry industry globally, as there are no effective non-chemical solutions available for the prevention of PRM infestation in poultry. If this programme is successful, ECO may take the option of developing, registering and commercialising the vaccine under a worldwide exclusive license from the Moredun Research Institute.
Management plans to hold another Capital Markets Day during the first quarter of 2023 during which an update will be provided on the new product development portfolio.
During the Autumn, the leadership team and the Board undertook a refresh of the Group’s strategy. This involved an analysis of the vision for the Group, and assessment of the key internal and external elements available to the Group to achieve this vision, as well as an appraisal of the risks and threats to the success of the strategy. The exercise endorsed the Group’s direction: to maximise the commercial opportunity in the Group’s existing products, to bring forward the exciting array of new vaccine and biologicals products programmes, continuing to focus on swine and poultry. The Group is open to and will pursue further collaboration including technical partnering, licensing and M&A activity.
The Board recognises the value of dividends to shareholders and balancing the need for prudent management of cash resources as well as funding the exciting pipeline of new products. It has however decided that the best use of the Group’s cash is in the new product development initiatives and accordingly no dividend is recommended at the current time.
The Company announced on 14 November 2022 that BDO resigned as auditors to the Group and we are delighted to have appointed Haysmacintyre LLP to be the Group’s auditors. Transitionary arrangements are underway, and we look forward to their first audit for the year ending 31 March 2023.
Change of advisers
The Group also announces that from 23 November 2022, Singer Capital Markets and Investec, will be retained and will act as the Group’s nominated adviser and joint broker, and joint broker, respectively.
The China pork price has improved from less than CNY13/kg in March 2022 to in excess of CNY27/kg by the end of October 2022. This increase in pork price prompted the Ministry of Agriculture to release frozen pork onto the market ahead of the National Day on 1 October – the first time it has done so during 2022. The Group has experienced improving trading conditions in China with October’s revenue greater than any other month recorded during this financial year. Whilst this is a promising start to the second half, we remain cautious on China’s revenue recovery until January 2023 and the period of strong pork demand associated with Chinese New Year and national holidays. The containment policy in relation to COVID also provides short term reason to be cautious regarding pork demand.
We expect continuing growth in our markets outside of China. Seasonally occurring disease is anticipated to drive demand in the second half of the financial year. This seasonal effect, together with expected stronger trading in China in our fourth quarter is expected to result in the customary second half weighting to our revenue. In the event Sterling weakness continues, this would provide further upside in revenue opportunity. Cost control in relation to manufacturing costs has served us well during 2022 and we are cautiously optimistic in relation to the 2023 contractual price negotiations.
The Board is excited about the continuing results from our new product development programme and we look forward to providing an update at a Capital Markets Day in the first quarter next year.
We look forward with cautious optimism to reporting the full year numbers in line with market expectations.
Dr Andrew Jones
23 November 2022