14 March 2018

 

Advanced Medical Solutions Group plc

(“AMS” or the “Group”)

 

Unaudited Preliminary Results for the year ended 31 December 2017

 

 

Winsford, UK: Advanced Medical Solutions Group plc (AIM: AMS), the surgical and advanced wound care specialist company, today announces its unaudited preliminary results for the year ended 31 December 2017.

 

 

Financial Highlights:

 

	2017	2016	Reported growth	Growth at  constant currency1
Group revenue (£ million)	96.9	83.26	16%	12%
Adjusted2 operating margin (%)	26.2	23.7	250bps	–
Adjusted2 profit before tax (£ million)	25.4	19.7	29%	–
Profit before tax (£ million)	25.3	19.1	32%	–
Adjusted2 diluted earnings per share (p)	9.46	7.66	23%	–
Diluted earnings per share (p)	9.39	7.38	27%	–
Net operating cash flow3 pre-exceptional items (£ million)	21.5	22.3	(4%)
Net cash (£ million)4	62.5	51.1	22%	–

 

·      Proposed final dividend of 0.75p per share, making a total dividend for the year of 1.10p (2016: 0.92p), up 20%

 

Business Highlights:

·      Strong revenue growth, up 16% to £96.9 million and by 12% at constant currency

o  Branded revenues up 22% to £55.2 million (2016: £45.4 million) and by 16% at constant currency

o  OEM revenues up 10% to £41.7 million (2016: £37.8 million) and by 8% at constant currency

·      Continued strong performance from LiquiBand^® topical tissue adhesives, sales up 35% to £26.0 million (2016: £19.3 million) and by 30% at constant currency

o  US revenues up 47% to £18.2 million (2016: £12.4 million) and by 40% at constant currency

o  As at 31 December 2017, market share by volume⁵ increased to 26% (June 2017: 24%)

·      RESORBA^® branded products up 15% to £20.8 milllion (2016: £18.1 million) and by 6% at constant currency

·      Antimicrobial dressings up 11% to £19.4 million (2016: £17.5 million) and by 9% at constant currency

·      Out-licensing deal signed with Organogenesis for a collagen-based wound dressing containing Polyhexamethylene Biguanide (“PHMB”)

 

Outlook

2017 has seen another good performance by the Group. With our increasing portfolio of products, high quality business partners, the opportunities we see from our R&D pipeline and our strong financial position, the Board remains optimistic about our future prospects and the potential for further growth. The Group continues to trade in line with Board expectations.

 

 

Commenting on the results Chris Meredith, Chief Executive Officer of AMS, said:

“This has been another year of good growth across the Group and we are well positioned to take advantage of market opportunities across our product portfolio. Innovation is at the heart of our strategy and this allows us to maintain the high quality of our products that offer benefits to both patients and payors. Alongside our organic growth plan, AMS is actively reviewing M&A opportunities that will further increase value for shareholders. We look to the future with continued confidence.”

 

 

 

– End –

 

Note 1   Constant currency removes the effect of currency movements by re-translating the current period’s performance at the previous period’s exchange rates

Note 2   All items are shown before exceptional items which were £nil (2016: £0.4 million) and amortisation of acquired intangible assets which were £0.1 million (2016: £0.2 million) as defined in the Financial Review

Note 3   Net operating cash flow is arrived at by taking the operating profit for the period before exceptional items of £nil (2016: £0.4 million), depreciation, amortisation, working capital movements and other non cash items

Note 4   Net cash is defined as cash and cash equivalents plus short term investments less financial liabilities and bank loans

Note 5   Data supplied by Global Healthcare Exchange

Note 6 2016 Revenue restated by £0.7 million (2016: £0.6 million) as a result of adoption of IFRS 15 (Revenue from Contracts with Customers)

 

 

 

 

For further information, please visit www.admedsol.com or contact:

 

Advanced Medical Solutions Group plc	Tel: +44 (0) 1606 545508
Chris Meredith, Chief Executive Officer Mary Tavener, Chief Financial Officer
Consilium Strategic Communications	Tel: +44 (0) 20 3709 5700
Mary-Jane Elliott / Matthew Neal / Philippa Gardner
Investec Bank PLC (NOMAD & Broker)	Tel: +44 (0) 20 7597 5970
Daniel Adams / Patrick Robb / Gary Clarence

 

About Advanced Medical Solutions Group plc – see www.admedsol.com 

 

AMS is a world-leading independent developer and manufacturer of innovative and technologically advanced products for the global surgical, wound care and wound closure markets, focused on quality outcomes for patients and value for payors. AMS has a wide range of products that include silver alginates, alginates, foams, tissue adhesives, sutures and haemostats, which it markets under its brands; ActivHeal^®, LiquiBand^® and RESORBA^® as well as supplying under white label.

AMS’s products, manufactured out of two sites in the UK, one in the Netherlands, two in Germany and one in the Czech Republic, are sold in more than 75 countries via a network of multinational or regional partners and distributors, as well as via AMS’s own direct sales forces in the UK, Germany, the Czech Republic and Russia.  Established in 1991, the Group has approximately 600 employees.  For more information, please see www.admedsol.com.

 

 

 

Chairman’s Statement

 

AMS continues to progress as a leading international provider of high quality, high value, innovative and technologically advanced products for the surgical and advanced wound care markets. We are pleased to report another year of strong revenue growth, profit performance and cash generation.

 

Our revenues increased 16% to £96.9 million (2016: £83.2 million), representing growth of 12% on a constant currency basis and our adjusted⁷ profit before tax increased by 29% to £25.4 million (2016: £19.7 million) and our profit before tax increased by 32% to £25.3 million (2016: £19.1 million). The continued strong cash generation of the business has resulted in the Group ending the year with net cash of £62.5 million (2016: £51.1 million).

 

As reported at the half year, at the beginning of 2017 we reviewed our business structure and consolidated our Business Units from four to two. Our Branded Business Unit focuses on the distribution, marketing and innovation of all the Group’s branded products. Our OEM business focuses on the distribution, marketing and innovation of all the Group’s products that are supplied to our medical device partners under their brands. This new structure is designed to enhance focus and improve marketing efficiencies for the Group.We have restated our segmental prior year financials in line with this new reporting structure.   

 

Good progress has been made with all of our brands. LiquiBand^® continues to do well in the US and we have gained a further 2% market share since we last reported to take our market share by volume to 26%. Revenue from our RESORBA^® brands grew steadily across all territories and has grown by 15% and by 6% at constant currency to £20.8 million (2016: £18.1 million), while ActivHeal^® grew by 4% to £6.3 million (2016: £6.0 million).

 

We were pleased to announce in October 2017 that we had agreed a patent out-licensing agreement with Organogenisis for a collagen based wound dressing containing Polyhexamethylene Biguanide (“PHMB”). Under this agreement, we receive royalties from Organogenesis’s net sales in the US on the product. The agreement is in place for the life of the patent which expires in October 2026.  

 

The Board is proposing a final dividend of 0.75p per share, making a total dividend for the year of 1.10p per share, an increase of 20% (2016: 0.92p). If approved at the Annual General Meeting, this dividend will be paid on 15 June 2018 to shareholders on the register at the close of business on 25 May 2018.

 

On behalf of the Board, I would like to thank all of our employees for their contributions during the past year. We would not have been able to achieve our strong performance without their commitment and effort. I would also like to thank our customers, suppliers, business partners and shareholders for their continued support in helping AMS achieve its goals.

 

We ensure that the Group is managed in accordance with the UK Corporate Governance Code as far as is reasonably practicable, although it is not a requirement for an AIM quoted company. The Board believes that effective corporate governance will assist in the delivery of sustainable shareholder value and safe-guard shareholders’ long-term interests.

 

AMS continues to be in robust financial health and we are continuing to grow our international footprint and scale. The Group is well positioned to increase investment in internal innovation and to actively pursue external opportunities in line with our long-term strategy and growth objectives. 

 

 

Peter Allen

Chairman

 

 

 

 

 

 

⁷ All items are shown before amortisation of acquired intangible assets which, in 2017, was £0.1 million (2016: £0.2 million) as defined in the financial review and before exceptional costs which were £nil million (2016: £0.4 million)

 

Chief Executive’s Statement

 

I am pleased to report another strong set of results across the Group. Our revenue has increased 16% to £96.9 million and we have improved our adjusted⁸ profit before tax by 29% to £25.4 million and our reported profit before tax by 32% to £25.3 million (2016: £19.1 million).  

 

Our strategy for growth remains unchanged. We continue to expand into new geographies, increase our distribution of surgical products through our direct sales forces, and enhance our product portfolio by developing high quality products that add value to patients and payors in our advanced woundcare and surgical markets.

 

As reported at the half year, we have streamlined our reporting structure and now operate under two Business Units: Branded and OEM.

 

Branded

 

The Branded Business Unit reports the sales of all our own brands. Branded reported revenue was 22% higher at £55.2 million (2016: £45.4 million) and 16% higher at constant currency.

 

LiquiBand^® topical adhesives

LiquiBand^® is our range of medical adhesives based on cyanoacrylate, and is our largest brand with sales of £26.0 million, (2016: £19.3 million) up 35% on the prior year and 30% at constant currency.

 

Our LiquiBand^® range of products utilises different formulations of cyanoacrylate in innovatively designed applicators. They are designed to meet the requirements of the clinician and to treat the full spectrum of wounds that they need to close and protect. They have several key attributes that compare favourably with the existing market leader, including wound closure strength, tensile strength, set time, surface area coverage and adhesive yield.

 

Sales in the US, which remains our largest market, increased by 47% to £18.2 million (2016: £12.4 million) at reported currency and by 40% at constant currency. We access this market through distributors who target both hospitals and non hospitals, helping us to identify customers and convert opportunities into sales following surgeon evaluation. We support our partners with marketing and clinical data demonstrating the efficacy of our products. We continue to grow our volume market share which is now at 26%, up 2% from June 2017 and 3% over the full year.

 

In the UK and Germany good progress has been made. Revenues have increased 12% to £5.3 million (2016: £4.7 million) and 10% at constant currency with new hospitals being accessed. In the EU and ROW, sales of LiquiBand^® increased by 19% to £2.5 million (2016: £2.1 million) at reported currency and 18% at constant currency. 

 

We are now targeting new geographic markets for LiquiBand^®. Following on from establishing distribution agents in Asia, we have also identified opportunities for LiquiBand^® in a number of Central American markets and anticipate first sales in this region in 2018.

 

Our primary focus for R&D is to extend our LiquiBand^® product range to compete in the growing market for combined glues and tape used for larger wound closure. We expect to receive approval to market this in the US around the end of 2018. 

  

 

⁸ All items are shown before amortisation of acquired intangible assets which, in 2017, was £0.1 million (2016: £0.2 million) as defined in the financial review and before exceptional costs which were £nil million (2016: £0.4 million)

 

Hernia Mesh Fixation device – LiquiBand^® Fix8™

LiquiBand^® Fix 8™ is used to hold hernia meshes in place within the body instead of tacks and staples. This accurate laparoscopic application of adhesive is expected to both reduce surgical complications and reduce the potential pain associated with the use of tacks and staples. It also provides the ability to attach mesh in areas where tacks and staples cannot be applied, helping to improve the patient experience and surgical outcomes.

As reported at the half year, sales growth of LiquiBand^® Fix8™ has been restricted due to design enhancements we have made following surgeon feedback. Further feedback has been received on the updated device and modifications have been completed. We have chosen not to actively promote the device while the modifications were ongoing, nevertheless sales increased by 3% to £1.7 million (2016: £1.7 million) and 1% at constant currency. We expect to see a return to sales growth this year.

 

At present, the device is approved for use within Europe and those markets that accept European approval standards. We have started the process to get LiquiBand^® Fix8™ approved in the US market. This necessitates a full Pre Market Approval (PMA) involving clinical trials with patient enrolment expected to start in mid 2018 and enrolment completing by the end of the year. We expect the total cost of completing the approval process will be around £3 million with the majority of the spend being incurred in 2018 and 2019.

 

In R&D, we are also working on broadening the claims on the use of the device for hernia mesh fixation as well as for a number of other laparoscopic surgical applications and developing a device suitable for hernia mesh fixation in open surgery which we expect to launch in Europe in the first half of 2019.

RESORBA^®

Our RESORBA^® branded products portfolio is comprised of a comprehensive range of sutures which are used to close wounds and a range of bio-surgical products that include collagens, cellulose and bone substitutes that can be used as haemostats or scaffolds for tissue growth. Sales of RESORBA^® products increased by 15% to £20.8 million (2016: £18.1 million) and by 6% at constant currency. Within this, sales of sutures increased by 15% to £13.0 million (2016: £11.3 million) and by 6% at constant currency and sales of bio-surgical products increased by 16% to £7.9 million (2016: £6.8 million) and by 8% at constant currency.

 

During 2016, we renegotiated the supply agreement with an OEM partner for collagen products in order to go direct. We are pleased that we have started to sell these products into a number of new territories.  

 

Germany remains our largest market with £13.0 million of sales (2016: £12.0 million), up 8% on the prior year and up by 1% at constant currency while sales to markets outside Germany accessed by our distributors increased by 30% to £7.5 million (2016: £5.8 million) and 19% at constant currency. Our initiative to offer a range of dental sutures into the US market is developing and following launch in 2016, sales have increased to £0.3 million. The total US surgical suture market is estimated to be in excess of $1 billion and is dominated by a few major brands and provides a significant opportunity for the Group in the medium term.

 

We continue to access new markets, in particular Asia Pacific, and have recently hired a new sales manager to target Australasia for both our RESORBA^® and LiquiBand^® brand ranges.

 

In R&D we continue to work on preparing a range of different antibiotics that can be incorporated in our bio-surgical products. We expect to file for European approval in the second half of 2018.

 

ActivHeal^®

ActivHeal^® is our range of high quality woundcare dressings specifically designed to offer the NHS significant cost savings without compromising on clinical outcomes or patient care. Sales of ActivHeal^® increased by 4% to £6.3 million (2015: £6.0 million), reversing the decline that was reported in 2016, however the market remains difficult with increasing price pressure becoming evident. The Group has enhanced its education and marketing materials as well as broadened its product range with our antimicrobial and atraumatic foam dressing ranges.

 

 

OEM

 

Our OEM business supports our partners with a multi-product portfolio of advanced woundcare products and bulk materials. We have been working with many of the world’s major wound care companies for a number of years providing manufacturing services to supply their woundcare dressings, new products they can incorporate into their portfolio of brands, as well as regulatory assistance in obtaining product approvals in overseas markets. Revenue increased 10% to £41.7 million (2016: £37.8 million) and increased 8% at constant currency.

A key driver for this Business Unit is in supplying products that incorporate antimicrobials. Sales of our antimicrobial dressings increased by 11% to £19.4 million (2016: £17.5 million), and by 9% at constant currency. Within this, silver alginate products grew by 12% to £18.0 million (2016: £16.2 million) and by 9% at constant currency while the Polyhexamethylene Biguanide (PHMB) foam range, which was launched in 2016 into Europe, increased 2% at reported and constant currency.  

PHMB is an antimicrobial which is effective against several bacteria including Methicillin-resistant Staphylococcus aureus (MRSA) and Escherichia coli (E.coli). Although we received approval to market PHMB foam into the US in 2017, we deferred a launch until we could market these products with extended claims. We expect to obtain these approvals in 2018.

Sales of our non-antimicrobial foams were down 16% at reported currency to £7.4 million (2016: £8.8 million) and by 20% at constant currency. Sales were impacted by the pipeline fill of our atraumatic foam launches in 2016, which we estimate to have been around £1 million. We also had some issues caused by a change of raw material from one of our suppliers which interrupted our ability to promote part of our more established range of products. These issues are now resolved. Sales of our other technologies, which include alginates and gels, increased 7% at reported currency to £11.8 million (2016: £11.0 million) and by 5% at constant currency.

In October 2017 we agreed an out-licensing agreement with Organogenesis Inc., a commercial leader in regenerative medicine focused on advanced wound care and surgical biologics, on a U.S. patent for a collagen-based wound dressing containing PHMB.

Under the terms of the agreement, Organogenesis has been granted an exclusive license in the United States to the patent.  In exchange for this, we have recognised £2.5 million from royalties, and will receive a minimum royalty of $1 million for each of the financial years ending 31 December 2018 and 2019. This is part of an ongoing royalty stream that will be payable to AMS on the net sales of the Licensed Product for the life of the patent. The patent is due to expire in October 2026.

The Group’s ability to out-license our patented technologies is an endorsement of the quality of our innovation and we are pleased to be working with a partner that is using the AMS patent to access the US market so effectively.

In the latter part of 2017, we noted that a number of our partners have reported a slowdown in the European advanced wound care market. We continue, however, to believe in our medium and long term prospects in this market.

In R&D, we continue to work on extending our advanced woundcare portfolio with focus on our antimicrobial range, improving the absorbancy of dressings and combining a number of materials to enhance product performance. We are developing a range of surgical dressings for which we are expecting to obtain approval in mid 2018 for the US market. We are also expecting to receive approval to market an antimicrobial high performance dressing in the US before the end of 2018.   

 

Operations and regulatory

 

With the business continuing to show strong organic growth, we have made investments in our converting capability at our Etten Leur site, as well as improving our packaging capability in Nuremberg which is expected to complete in 2018.

 

As a result of the continued success of our medical adhesives business, we have also made plans to extend the capacity of the Plymouth facility. This will be a significant project for us and we estimate that the spend will be around £4 million and will take around three years. It will provide us with the capability to increase production of our existing product range as well as allowing us the capacity to manufacture new products such as the open hernia device.

 

Following the FDA inspection of our Winsford site in June 2016, our Plymouth facility was inspected by the FDA in April 2017. We were very pleased with the outcome of this audit with no non-conformances raised.

 

The new European Medical Devices Regulation (MDR) entered into force on 25 May 2017, marking the start of the transition period for manufacturers selling medical devices into Europe. The MDR, which replaces the Medical Devices Directive (MDD) has a transition period of three years and manufacturers have this transition period to update their technical documentation and processes to meet the new requirements. The MDR brings more scrutiny on product safety and performance and stricter requirements on clinical evaluation and post-market clinical follow up. Our notified body, BSI, is already adopting the new standard and we are working with our OEM partners to ensure that we meet the new requirements. We anticipate that, although there will be some additional costs associated with meeting the new requirements, overall, the tighter regulatory standards should prove beneficial for the Group in the longer term.

Our implementation of Oracle ERP in Germany was successfully completed at the end of September.  This will bring benefits from better availability of information and enhanced controls. This completes our major ERP conversions across the Group, although ongoing improvements to systems will continue.

Acquisitions strategy

 

The Group is actively looking for businesses that meet its acquisition strategy of:

·      licensing or acquiring technology that allows us to leverage our global OEM customer base or branded routes to market;

·      licensing or acquiring additional brands within woundcare, wound closure or surgical setting that complement our existing range; and

·      geographic expansion through acquiring surgically focused companies with strong direct sales capability and ownership of complementary products.

 

We have an internal team working with advisors to identify, appraise and progress acquisition opportunities. 

 

The UK and the European Union

 

To date, there has been no day-to-day operational impact of the referendum vote to leave the European Union, other than changes to currency exchange rates. In preparation, the Group has submitted its application to obtain Authorised Economic Operator status for its UK trading entities and expects to achieve this designation by the end of the year. With its footprint in mainland Europe, the Group is well positioned to deal with the uncertain outcome of the UK negotiations with the EU, moving activities into jurisdictions that are beneficial to the business.

 

Our culture

 

As a Group that is highly dependent on the innovation and creativity of our employees for our future growth and success, it is important that we have a culture and set of values that is understood and embraced across the business. We have adopted the business motto of ‘The AMS Care, Fair, Dare approach’ to summarise our culture, underpin our values, and to deliver results, building a sustainable future for our business. Under this motto, we have defined the principles and expectations of how we will operate together to deliver success. We have run workshops across all our sites and have responded to feedback about how we can improve the Care, Fair, Dare ethos in the workplace. We are now enbodying these attitudes into our objectives and appraisal process. 

 

We recognise the importance of our people to the Group and that it is only by their effective engagement that we will continue to be successful. We value their commitment and determination to achieve and deliver good results. Our working environment encourages openness, teamwork, an understanding of others’ needs and the ability ‘to make a difference’. We continue to develop the talent at AMS by training and by providing a place to work where our employees feel valued, incentivised and fulfilled.

 

Summary and outlook

 

2017 has seen another good performance by the Group. Trading in the current financial year has begun well and is in line with the Board’s expectations. With our increasing portfolio of products, high quality business partners, the opportunities we see from our R&D pipeline and our strong financial position, the Board remains optimistic about our long-term prospects and the potential for further growth.

  

 

Financial Review

 

Summary

 

The Group has delivered another year of strong financial performance, with revenue increasing by 16%, or 12% at constant currency, to £96.9 million (2016: £83.2 million) and with improving operating margins.

 

The Group has elected to adopt IFRS 15 (Revenue from Contracts with Customers) in 2017, which has no impact on profit or cash flow but results in fee income of £0.7 million (2016: £0.6 million) being recorded as Revenue rather than as Other Income.

 

During the year, the Group streamlined into two Business Units, to enhance commercial focus and improve marketing efficiencies.

 

All prior year values have been restated to refect IFRS 15 adoption and the Business Unit restructure.

 

The Group uses alternative performance measures such as adjusted operating margin, adjusted profit before tax, net operating cash flow pre-exceptional items, and revenue growth at constant currency, to allow the users of the accounts to gain a clearer understanding of performance, allowing the impacts of amortisation, exceptional items and exchange rate volatility to be separately identified. The Group did not incur any exceptional costs in the year (2016: £0.4 million) and amortisation of acquired intangible assets was £0.1 million in the period (2016: £0.2 million).

 

To aid comparison, the Group’s adjusted income statement is summarised in Table 1 below.

 

Table 1	Year ended 31 December 2017			Year ended 31 December 2016 (restated)10
Adjusted Income Statement	£’000			£’000		Change
Revenue	96,908				83,242	16%
Gross profit		58,404			48,048	22%
Distribution costs			(1,130)		(1,047)
Adjusted administration costs8			(32,050)		(27,293)
Other income			150		–
Adjusted operating profit			25,374		19,708	29%
Net finance income/(costs)			37		(3)
Adjusted profit before tax			25,411		19,705	29%
Amortisation of acquired intangibles			(134)		(242)
Exceptional Items			–		(361)
Profit before tax			25,277		19,102	32%
Tax			(5,143)		(3,410)
Profit for the period			20,134		15,692	28%
Adjusted earnings per share – basic9			9.58p		7.77p	23%
Earnings per share – basic9			9.52p		7.65p	24%
Adjusted earnings per share – diluted9			9.46p		7.66p	23%
Earnings per share – diluted9			9.39p		7.38p	27%

Note 8     Adjusted administration costs exclude amortisation of acquired intangible assets and exceptional items

Note 9    See Note 7 Earnings per share for details of calculation

Note 10  Restated to reflect £0.6 million of fee income as revenue under newly adopted IFRS15

 

Currency movements impacted revenues favourably by approximately £3.4 million during the year.

 

Adjusted operating profit before exceptional items increased by 29% to £25.4 million (2016: £19.7 million) and adjusted operating margin increased by 250 bps to 26.2% (2016: 23.7%). Administration costs excluding exceptional items increased by 17% to £32.0m (2016: £27.3 million) due to currency movements and further investment in selling and marketing, particularly to support the Branded Business Unit. The Group incurred £3.0 million of gross R&D spend in the year (2016: £2.6 million), respresenting 3.1% of sales (2016: 3.1%).

 

Profit before tax for the year was 32% higher at £25.3 million (2016: £19.1 million).

 

The Group’s effective tax rate increased to 20.4% (2016: 17.9%) mainly due to being required to move to the less favourable, large company RDEC scheme in 2017. This effective tax rate reflects the blended tax rates in the countries in which we operate and, for the UK, includes the tax relief associated with the patent box scheme and the utilisation of residual previously unrecognised UK tax losses.

 

A reconciliation between the weighted average Group tax rate and the Group’s effective rate is summarised in Table 2 below.

 

Table 2

Taxation	%
Weighted average Group tax rate	21.91
Patent box relief	(1.23)
Net impact of deferred tax on capitalised development costs and R&D relief	0.67
Net impact of expenses not deductible, utilisation of historical losses, prior year adjustments, depreciation and share based payments	(1.00)
Effective taxation rate	20.35

 

Earnings (excluding amortisation of acquired intangible assets and before exceptional items) increased by 24% to £20.3 million (2016: £16.3 million), resulting in a 23% increase in adjusted basic earnings per share to 9.58p (2016: 7.77p) and a 23% increase in adjusted diluted earnings per share to 9.46p (2016: 7.66p).

 

Profit after tax increased by 28% to £20.1 million (2016: £15.7 million), resulting in a 24% increase in basic earnings per share to 9.52p (2016: 7.65p) and a 27% increase in diluted earnings per share to 9.39p (2016: 7.38p).

 

The Board is proposing a final dividend of 0.75p per share, to be paid on 15 June 2018 to shareholders on the register at the close of business on 25 May 2018. This follows the interim dividend of 0.35p per share on 27 October 2017 and would, if approved, make a total dividend for the year of 1.10p per share (2016: 0.92p), a 20% increase on 2016.

 

The operational performance of the Business Units is shown in Table 3 below. The adjusted profit from operations and the adjusted margin are shown after excluding amortisation of acquired intangibles.

 

Table 3

Operating result by business segment
Year ended 31 December 2017	Branded	OEM
	£’000	£’000
Revenue	55,244	41,664
Profit from operations	14,336	11,354
Amortisation of acquired intangibles	125	9
Adjusted profit from operations	14,461	11,363
Adjusted operating margin	26.2%	27.3%
Year ended 31 December 2016 (restated)
Revenue	45,427	37,815
Profit from operations	11,313	8,677
Amortisation of acquired intangibles	225	17
Adjusted profit from operations	11,538	8,694
Adjusted operating margin	25.4%	23.0%

 

Branded

The adjusted operating margin of the Branded Business Unit increased to 26.2% (2016: 25.4%), supported by sales growth and sales mix. Operating costs increased, especially sales, marketing, R&D and regulatory costs, to continue to support ongoing growth.

 

OEM

The adjusted operating margin of the OEM Business Unit increased to 27.3% (2016: 23.0%), mainly due to the out-licensing agreement of wound dressings containing Collagen and PHMB, which generated a £2.5 million royalty income in the year.

 

Geographic breakdown of revenues

 

The geographic breakdown of Group revenues in 2017 is shown in Table 4 below:

 

Table 4

Geographic Breakdown of Group Revenues
£’000	2017	% of total	2016	% of total
Europe excluding UK and Germany	22.9	23.6%	21.4	25.8%
Germany	19.1	19.7%	18.4	22.1%
UK	17.3	17.9%	17.9	21.5%
USA	35.3	36.4%	23.5	28.2%
Rest of World	2.3	2.4%	2.0	2.4%

 

Approximately 90% of our US sales are invoiced in US Dollars and approximately 60% of our sales to mainland Europe are invoiced in Euros. The Group hedges significant currency transaction exposure by using forward contracts and options and aims to have at least 70% of its estimated transactional exposure for the next twelve months hedged. The Group estimates that a 10% movement in the £:US$ or £:Euro exchange rate will impact Sterling revenues by approximately 3.3% and 2.6% respectively and in the absence of any hedging this would have an impact on profit of 2.7% and 0.3%. 

 

 

Cash Flow

 

Table 5 below summarises the Group’s cash flows.

 

Table 5

Group Cash Flows
	2017	2016
Year ended 31 December	£’000	£’000
Adjusted operating profit (Table 1)	25,374	19,708
Non-cash items	4,127	4,023
Adjusted EBITDA11	29,501	23,731
Working capital movement	(8,049)	(1,480)
Operating cash flow before exceptional items	21,452	22,251
Exceptional items	–	(361)
Operating cash flow after exceptional items	21,452	21,890
Capital expenditure and capitalised R&D	(4,455)	(2,536)
Net Interest	37	(3)
Tax	(4,486)	(2,065)
Free cash flow	12,548	17,286
Dividends paid	(2,049)	(1,783)
Proceeds from share issues	809	868
Exchange gains	21	553
Net increase in cash and cash equivalents	11,329	16,924

Note 11: Adjusted EBITDA is earnings before interest, tax, depreciation, intangible asset amortisation, share based payments and exceptional items

 

Adjusted EBITDA increased by 24% to £29.5 million (2016: £23.7 million).

 

Working capital increased during the year, mainly due to the higher value of trade receivables, which was caused by sales phasing and royalties, with debtor days unchanged at 41 days (2016: 41 days). Trade payable days reduced to 27 days (2016: 33 days) and months of supply of inventory held across the Group reduced to 4.2 months (2016: 4.4 months of supply).

 

The Group generated net cash from operating activities of £21.5 million (2016: £21.9 million).

 

In the year, we invested £4.5 million in capital equipment, software and capitalised R&D (2016: £2.5 million), including investment in new packaging machines, ERP software and internally developed products.

 

Cash outflow relating to taxation increased sharply to £4.5 million (2016: £2.1 million) with historical losses and related deferred tax balances now fully used up.

 

The Group generated a free cash flow of £12.5 million in the year (2016: £17.3 million). The conversion of adjusted operating profit into free cash flow was 49% (2016: 88%). This was mainly due to investment in the Business Units, working capital outflow, increased taxation and dividends.

 

The Group paid its final dividend for the year ended 31 December 2016 of £1.3 million on 16 June 2017 (2016: for the year ending 2015, £1.2 million), and its interim dividend for the six months ended 30 June 2017 of £0.7 million (2016: £0.6 million) on 27 October 2017.

 

The Group has a £30 million, multi-currency credit facility with a £20 million accordion option, provided jointly by HSBC and The Royal Bank of Scotland in place until December 2019. It is unsecured and has not been drawn down. This facility carries an annual interest rate of LIBOR or EURIBOR plus a margin that varies between 0.65% and 1.75% depending on the Group’s net debt to EBITDA ratio.

 

At the end of the period, the Group had net cash of £62.5 million (2016: £51.1 million). The movement in net cash from the start of the year to net cash at the end of the year is reconciled in Table 6 below:

 

Table 6

 

Movement in net cash	£’000
Net cash as at 1 January 2017	51,125
Exchange rate impacts	21
Free cash flow	12,548
Dividends paid	(2,049)
Proceeds from share issues	809
Net cash as at 31 December 2017	62,454

 

The Group’s going concern position is fully described in note 2.

 

 

 

 

CONDENSED CONSOLIDATED INCOME STATEMENT
					Restated
Year ended 31 December		(Unaudited)				(Audited)
		2017		Before exceptional Items	Exceptional Items	2016
	Note	£’000		£’000	£’000	£’000
Revenue from continuing operations	4	96,908		83,242	–	83,242
Cost of sales		(38,504)		(35,194)	–	(35,194)
Gross profit		58,404		48,048	–	48,048
Distribution costs		(1,130)		(1,047)	–	(1,047)
Administration costs		(32,184)		(27,535)	(361)	(27,896)
Other income		150		–	–	–
Profit from operations	5	25,240		19,466	(361)	19,105
Finance income		147		108	–	108
Finance costs		(110)		(111)	–	(111)
Profit before taxation		25,277		19,463	(361)	19,102
Income tax	6	(5,143)		(3,410)	–	(3,410)
Profit for the year attributable to equity holders of the parent		20,134		16,053	(361)	15,692
Earnings per share
Basic	7	9.52p		7.65p	(0.17p)	7.48p
Diluted	7	9.39p		7.55p	(0.17p)	7.38p
Adjusted12 diluted	7	9.46p		7.66p	(0.17p)	7.49p

 

 

 

^{Note 12: Adjusted for exceptional items and for amortisation of acquired intangible assets}

 

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
					(Unaudited)	(Audited)
					2017	2016
					£’000	£’000
Profit for the year					20,134	15,692
Exchange differences on translation of foreign operations					2,187	8,851
Gain/(loss) arising on cash flow hedges					4,192	(3,009)
Total other comprehensive income for the period					6,379	5,842
Total comprehensive income for the period attributable to equity holders of the parent					26,513	21,534

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

			(Unaudited)	(Audited)
			31 Dec-17	31-Dec-16
			£’000	£’000
Assets
Non-current assets
Acquired intellectual property rights			9,675	9,468
Software intangibles			3,078	2,500
Development costs			2,135	1,645
Goodwill			41,801	40,337
Property, plant and equipment			17,019	16,177
Deferred tax assets			199	–
Trade and other receivables			286	10
			74,193	70,137
Current assets
Inventories			11,073	11,440
Trade and other receivables			20,950	11,872
Current tax assets			48	432
Cash and cash equivalents			62,454	51,125
			94,525	74,869
Total assets			168,718	145,006
Liabilities
Current liabilities
Trade and other payables			10,547	12,901
Current tax liabilities			2,290	2,049
Other taxes payable			15	85
			12,852	15,035
Non-current liabilities
Trade and other payables			310	1,291
Deferred tax liabilities			3,120	3,152
			3,430	4,443
Total liabilities			16,282	19,478
Net assets			152,436	125,528
Equity
Share capital			10,632	10,524
Share premium			34,778	34,005
Share-based payments reserve			4,676	3,469
Investment in own shares			(152)	(152)
Share-based payments deferred tax reserve			815	459
Other reserve			1,531	1,531
Hedging reserve			658	(3,534)
Translation reserve			2,823	636
Retained earnings			96,675	78,590
Equity attributable to equity holders of the parent			152,436	125,528