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As Reported	2019 Existing £m	2019 Acquisition £m	2019 Consolidated £m	2018 £m	Growth at AER	Growth at CER
					Consolidated %	Consolidated %
Revenue	447.6	34.2	481.8	407.1	18.3%	17.5%
Gross profit	258.8	14.3	273.1	222.4	22.8%	21.9%
Gross profit %	57.8%	41.8%	56.7%	54.6%	210bps	200bps
Operating profit/(loss)	63.3	(24.3)	39.0	34.1	14.4%	13.5%
EBIT %	14.1%	(71.1%)	8.1%	8.4%	(30bps)	(30bps)
Profit/(loss) before tax	53.7	(25.9)	27.8	28.9	(3.8%)	(4.8%)
Diluted EPS (p)			30.07	37.04	(18.8%)	(19.6%)

Overview of Underlying Financial Results

When presenting our financial results, we use a number of adjusted measures which are considered by the Board and management in reporting, planning and decision making. Underlying results reflect the Group's trading performance excluding non-underlying items. A reconciliation of underlying results to reported results in the year to 30 June 2019 is provided in the table below. In the commentary which follows, all references will be to CER movement unless otherwise stated.

		Non-underlying Items
	2019 Underlying Results £m	Non-cash uplift on acquired inventory £m	Amortisation and related costs of acquired intangibles £m	Acquisition, impairments and restructuring costs £m	Tax rate changes and finance expenses £m	2019 Reported Results £m
Revenue	481.8	–	–	–	–	481.8
Gross profit	278.2	(5.1)	–	–	–	273.1
Selling, general and administrative expenses	(125.7)	–	(70.0)	(6.5)	–	(202.2)
R&D expenses	(25.1)	–	(6.8)	–	–	(31.9)
Operating profit	127.4	(5.1)	(76.8)	(6.5)	–	39.0
Net finance costs	(9.8)	–	–	–	(1.0)	(10.8)
Share of associate loss	(0.2)	–	(0.2)	–	–	(0.4)
Profit before tax	117.4	(5.1)	(77.0)	(6.5)	(1.0)	27.8
Taxation	(24.9)	1.5	17.4	1.5	7.6	3.1
Profit after tax	92.5	(3.6)	(59.6)	(5.0)	6.6	30.9
Diluted EPS (p)	90.01	–	–	–	–	30.07

In the year, Dechra delivered consolidated revenue of £481.8 million, representing an increase of 17.5% on the prior year. This included £447.6 million from its existing business, an increase of 8.9%, and a £34.2 million contribution from acquired businesses.

Consolidated underlying operating profit of £127.4 million, represents a 27.3% increase on the prior year. This included £112.8 million from Dechra's existing business, an increase of 12.2% on a like-for-like basis, and a £14.6 million contribution from acquired businesses.

Underlying EBIT margin increased by 200 bps to 26.4%, with the accretion coming from both the existing and acquired businesses in EU Pharmaceuticals.

Underlying diluted EPS grew by 16.6% to 90.01 pence reflecting the profit growth from the existing and acquired businesses, partially offset by higher finance charges from the increase in debt and equity issuance to fund the 2018 and 2019 acquisitions, adjusted by the change in mix of the applicable tax rates.

Underlying	2019 Existing £m	2019 Acquisition £m	2019 Consolidated £m	2018 £m	Growth at CER
					Existing %	Consolidated %
Revenue	447.6	34.2	481.8	407.1	8.9%	17.5%
Gross profit	258.8	19.4	278.2	227.5	12.7%	21.5%
Gross profit %	57.8%	56.7%	57.7%	55.9%	190bps	180bps
Underlying Operating profit	112.8	14.6	127.4	99.2	12.2%	27.3%
Underlying EBIT %	25.2%	42.7%	26.4%	24.4%	80bps	200bps
Underlying EBITDA	122.2	15.0	137.2	106.6	13.2%	27.7%
Underlying Diluted EPS (p)	–	–	90.01	76.45	–	16.6%
Dividend per share	–	–	31.60	25.50	–	23.9%

Reported Segmental Performance

Reported segmental performance is presented in note 2. The effect of acquisitions in the year was material; the reported segmental performance is analysed between existing and acquired businesses, and at AER and CER in the table below. The acquisition elements capture the additional base business coming into the Group up to the first anniversary of their acquisition, including the growth Dechra generated in them during the year, and the synergies that have already been realised by the Group since acquisition. This analysis becomes less definitive the further in time from the completion of the acquisition, as the acquired business is progressively integrated with the existing business.

Reported	2019 Existing £m	2019 Acquisition £m	2019 Consolidated £m	2018 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue by segment
EU Pharmaceuticals	269.8	34.2	304.0	258.7	4.3%	17.5%	5.2%	18.7%
NA Pharmaceuticals	177.8	–	177.8	148.4	19.8%	19.8%	15.4%	15.4%
Total	447.6	34.2	481.8	407.1	9.9%	18.3%	8.9%	17.5%
Operating profit/(loss) by segment
EU Pharmaceuticals	84.5	15.8	100.3	77.0	9.7%	30.3%	10.6%	31.7%
NA Pharmaceuticals	59.2	–	59.2	48.3	22.6%	22.6%	17.8%	17.8%
Pharmaceuticals Research and Development	(23.9)	(1.2)	(25.1)	(18.3)	(30.6%)	(37.2%)	(30.1%)	(36.6%)
Segment operating profit	119.8	14.6	134.4	107.0	12.0%	25.6%	10.6%	24.6%
Corporate and unallocated costs	(7.0)	–	(7.0)	(7.8)	10.3%	10.3%	10.3%	10.3%
Underlying operating profit	112.8	14.6	127.4	99.2	13.7%	28.4%	12.2%	27.3%
Non-underlying operating items	(49.5)	(38.9)	(88.4)	(65.1)
Reported operating profit	63.3	(24.3)	39.0	34.1	–	14.4%	–	13.5%

Operating Profit from existing business grew 10.6%, with operating margin expanding to 31.3% and consolidated operating margin increasing to 33.0%. This was principally due to operating leverage, the accretive operating margin of Le Vet and the curtailment of our Dutch defined benefit pension scheme which resulted in a £3.5 million non-cash credit (presented on a consistent basis as underlying given previous curtailments and current service costs which substantially gave rise to this balance).

Underlying	2019 Existing £m	2019 Acquisition £m	2019 Consolidated £m	2018 £m	Growth at CER
					Existing %	Consolidated %
Revenue	269.8	34.2	304.0	258.7	5.2%	18.7%
EBITDA	92.4	16.2	108.6	82.9	12.3%	32.3%
EBITDA %	34.2%	47.4%	35.7%	32.0%	220bps	370bps
Operating Profit	84.5	15.8	100.3	77.0	10.6%	31.7%
Operating Profit %	31.3%	46.2%	33.0%	29.8%	150bps	320bps

North American Pharmaceuticals

Revenue from North American (NA) Pharmaceuticals grew by 15.4% to £177.8 million. All of the growth was in the existing business, with no acquisitions in NA Pharmaceuticals within the current or prior year. The growth was driven by our CAP portfolio and represents strong outperformance of the market. This was partially offset by a reduction in Equine as there was confusion in the market about the use of bisphosphonates and the discontinuation of a human product which was non-core and a legacy of the Putney business acquired in April 2016.

Operating Profit from the business grew by 17.8% with the operating margin growing 70 bps to 33.3% as further investments were made in the commercial team to drive future growth.

Underlying	2019 Existing £m	2019 Acquisition £m	2019 Consolidated £m	2018 £m	Growth at CER
					Existing %	Consolidated %
Revenue	177.8	–	177.8	148.4	15.4%	15.4%
EBITDA	60.0	–	60.0	49.1	17.5%	17.5%
EBITDA %	33.7%	–	33.7%	33.1%	60bps	60bps
Operating Profit	59.2	–	59.2	48.3	17.8%	17.8%
Operating Profit %	33.3%	–	33.3%	32.5%	70bps	70bps

Pharmaceuticals Research and Development

Pharmaceuticals Research and Development (R&D) expenses increased by 36.6% from £18.3 million to £25.1 million, with existing business research and development increasing by 30.1%. R&D activities of the acquisitions of AST Farma and Le Vet, and Venco added £1.2 million. Overall R&D expenses as a percentage of revenue increased from 4.5% to 5.2%, excluding the acquired R&D expenses, the increase was from 4.5% to 5.3%. This was in line with the previously communicated strategic intent to expand the Group's product pipeline and to increase investment in more novel opportunities to drive enhanced future growth.

	2019 Existing £m	2019 Acquisition £m	2019 Consolidated £m	2018 £m	Growth at CER
					Existing %	Consolidated %
R&D expenses	(23.9)	(1.2)	(25.1)	(18.3)	(30.1%)	(36.6%)
% of Revenue	5.3%	3.5%	5.2%	4.5%

Revenue by Product Category

CAP revenue continues to be the largest proportion of Dechra's business at 70.7%, up from 67.0% in the prior year. CAP grew 23.1% in the year from market penetration, product launches and the addition of the AST Farma and Le Vet portfolio. Equine revenue grew strongly by 21.1% in the year, with growth driven by the EU and by acquisition. FAP revenue accelerated by 19.1% driven by strong core growth in the EU and the acquisition of Venco. Nutrition revenue was broadly flat on the prior year; however, performance in the second half of the year improved with increased focus and the relaunch of the cat diet range.

Other revenue reduced by 25.1% to £20.8 million, now representing only 4.3% of the business as we continue our planned exit from third party contract manufacturing in line with our manufacturing strategy, to improve the production efficiency of Dechra's own products.

	2019 £m	2018 £m	% Change at AER	% Change at CER
CAP	340.2	272.7	24.8%	23.1%
Equine	34.4	28.4	21.1%	21.1%
FAP	57.3	48.7	17.7%	19.1%
Subtotal Pharmaceutical	431.9	349.8	23.5%	22.4%
Nutrition	29.1	29.4	(1.0%)	0.0%
Other	20.8	27.9	(25.4%)	(25.1%)
Total	481.8	407.1	18.3%	17.5%

Underlying Gross Profit

Underlying Gross Margin for the existing business increased by 190 bps to 57.8% and the consolidated Underlying Gross Margin grew by 180 bps to 57.7%, reflecting the greater proportion of CAP sales and also the realisation of accretive Gross Margin in the acquired AST Farma and Le Vet business.

Underlying Selling, General and Administrative Expenses (SG&A)

SG&A costs at AER grew from £110.0 million in the prior year to £125.7 million in the current year, an increase of 14.3% (at AER). This represents growth from both acquired and the existing businesses, and infrastructure cost added to manage the acquisitions and drive further growth.

We also benefited from a £3.5 million non-cash credit through the income statement as a result of the curtailment of our Dutch defined benefit pension scheme.

SG&A as a percentage of revenue contracted in the year from 27.0% in 2018 to 26.1% (26.8% excluding the pension credit) in 2019.

Non-underlying Items

Non-underlying items incurred in the year are fully described in note 5. In summary, they relate to the following:

• Amortisation of acquired intangibles of £76.8 million – the amortisation of the acquired intangibles has grown significantly in the year from £54.1 million following the acquisitions in the 2018 and 2019 financial years;
• Remeasurement of contingent consideration gain of £0.1 million – this relates to the excess release to the income statement of the contingent consideration on remeasurement of milestone and sales performance liabilities;
• Non-cash inventory adjustment of £5.1 million – the non-cash inventory adjustment which increases the value of acquisition inventory sold relates to the acquisitions of AST Farma and Le Vet, Caledonian and Venco. It is the result of the fair value exercise carried out in accordance with IFRS 3 'Business Combinations' on acquisition;
• Expenses relating to acquisition and subsequent integration activities of £3.7 million – this includes the transaction and integration costs associated with the acquisitions of AST Farma and Le Vet, Caledonian and Venco;
• Rationalisation of manufacturing organisation of £2.0 million – this comprises the costs associated with this strategic programme;
• Brexit preparation costs of £0.9 million – this represents regulatory and technology transfer costs incurred in advance of Brexit;
• Finance expense of £1.0 million – this represents the unwinding of the present value discounts relating to deferred consideration due and associated foreign exchange;
• Taxation credit of £28.0 million – this represents the tax impact of the above, as well as the revaluation of deferred tax balance sheet items following changes in corporate tax rates, most notably the reduction in the Netherlands tax rate from 25.0% to 22.5% in 2020 and 20.5% in 2021.

Taxation

The reported effective tax rate (ETR) for the year is a credit of 11.2% (2018: credit of 24.9%), primarily reflecting the one-off impact of the reduction in the Netherlands tax rates on deferred tax balances; this includes both the underlying and non-underlying business. On an underlying basis the ETR is 21.2% (2018: 20.5%); the main differences to the UK corporation tax rate applicable of 19.0% (2018: 19.0%) relate to patent box allowances, and differences in overseas tax rates, particularly in NA Pharmaceuticals.

The underlying ETR is expected to remain broadly similar in the current year, due to the anticipated mix of profits from different countries.

We continue to monitor relevant tax legislation internationally as it may affect our future ETR. Further details can be found in Understanding Our Key Risks.

Reported Profit

Reported profit before tax decreased by 3.8% at AER reflecting the reported operating profit growth of 14.4% at AER offset by the increase in the finance charges arising from the financing of prior and current year acquisitions.

Earnings per Share and Dividend

Underlying diluted EPS for the year was 90.01 pence, a 16.6% growth on the prior year. The EBIT growth of 27.3% was partially offset by higher interest costs from the increase in debt and the impact of the shares issued to fund the acquisitions of Venco, AST Farma and Le Vet. The weighted average number of shares for the year was 102.8 million (2018: 97.5 million).

The reported diluted EPS for the year was 30.07 pence (2018: 37.04 pence). This 18.8% reduction (at AER) in reported EPS reflects significantly higher intangible amortisation as a result of recent acquisitions.

The Board is proposing a final dividend of 22.10 pence per share (2018: 18.17 pence), added to the interim dividend of 9.50 pence, the total dividend per share for the year ended 30 June 2019 is 31.60 pence. This represents 23.9% growth over the prior year. Dividend cover based on underlying diluted EPS is 2.8 times (2018: 3.0 times). The Board continues to operate a progressive dividend policy recognising investment opportunities as they arise.

Currency Exposure

The average rate for £/€ increased by 0.5%, and the £/$ rate has decreased by 3.9% during the financial year. The effect in the Consolidated Income Statement and Statement of Financial Position is analysed in the above paragraphs of this review between performance at AER and CER. CER analysis compares the performance of the business on a like-for-like basis applying constant exchange rates.

	Average rates
	2019	2018	% Change
£/€	1.1345	1.1286	0.5%
£/$	1.2945	1.3465	(3.9%)

Currency Sensitivity

Euro €: a 1% variation in the £/€ exchange rate affects underlying diluted EPS by approximately +/- 0.8%.

US Dollar $: a 1% variation in the £/$ exchange rate affects underlying diluted EPS by approximately +/- 0.5%.

Current exchange rates are £/€ 1.1010 and £/$ 1.2203 as at 28 August 2019. If these rates had applied throughout the year, the underlying diluted EPS would have been approximately 5.6% higher.

Statement of Financial Position

The Statement of Financial Position is summarised in the table below.

• Non-current assets decreased from £765.6 million to £755.5 million mainly due to the acquisition of Venco and Caledonian being more than offset by amortisation of acquired intangibles, most notably AST Farma and Le Vet.
• Working capital has increased from £92.5 million to £108.4 million partly due to a planned increase in inventory to support the potential disruption arising as a result of Brexit and also the growth of the Group.
• Net Debt has increased in the year by £16.4 million from £211.4 million to £227.8 million; this includes cash generation from operations at £108.3 million and £39.7 million of outflows relating to the acquisitions of Venco and Caledonian. Exchange rate variations adversely affected the Net Debt position by £5.4 million.
• Current and deferred tax has reduced from £98.9 million to £89.0 million principally due to the reduction in deferred tax liabilities following the reduction in the Netherlands rate and also the release relating to the amortisation of acquired intangibles.

	2019 £m	2018 £m
Total non-current assets	755.5	765.6
Working capital	108.4	92.5
Net debt	(227.8)	(211.4)
Current and deferred tax	(89.0)	(98.9)
Other liabilities	(38.0)	(42.8)
Total net assets	509.1	505.0

Cash Flow, Financing and Liquidity

The Group enjoyed strong cash generation during the year, with the EBITDA margin strengthening from 26.2% to 28.5%. However, as mentioned above, working capital has increased by £19.5 million, mainly due to increases in inventory as a result of Brexit and growth of the Group's trading activities. This resulted in net cash generated from operations of £108.3 million, representing cash conversion of 85.0%. It is expected that the increased working capital levels will unwind to a certain extent during the forthcoming year.

	2019 £m	2018 £m
Underlying operating profit	127.4	99.2
Depreciation and amortisation	9.8	7.4
Underlying EBITDA	137.2	106.6
Underlying EBITDA %	28.5%	26.2%
Working capital movement	(19.5)	(23.4)
Other	(2.0)	2.4
Cash generated from operations before interest, taxation and non-underlying items	115.7	85.6
Non-underlying items	(7.4)	(4.4)
Cash generated from operations before interest and taxation	108.3	81.2
Cash conversion (%)	85.0%	81.9%

Net Debt Bridge

Notable cash items are listed below in the Net Debt reconciliation table:

• Net capital expenditure on tangible and intangible assets increased to £22.2 million (2018: £12.6 million), representing 2.3 times depreciation and amortisation.
• Acquisition of subsidiaries of £39.7 million includes the acquisition of Caledonian and Venco. Further details are provided in note 32 to the Accounts.

	£m
Net Debt 30 June 2018	(211.4)
Net cash generated from operations before non-underlying items	115.7
Non-underlying items	(7.4)
Net capital expenditure	(22.2)
Acquisition of subsidiaries	(39.7)
Acquisition of subsidiary borrowings	(2.8)
Interest and tax	(26.5)
Net equity issued	1.2
Dividend paid	(28.4)
Other non-cash movements	(0.9)
Foreign exchange on net debt	(5.4)
Net Debt 30 June 2019	(227.8)

• The Net Debt/underlying EBITDA leverage ratio per the borrowing facilities' leverage covenant, which includes the proforma adjustment to full year EBITDA for the acquisitions, was 1.64 times (2018: 1.75 times) versus a covenant of 3 times.

Borrowing Facilities

Revolving Credit Facility

The Group has committed facilities to July 2024 under a Revolving Credit Facility (RCF) for £235.0 million, through seven banks: Bank of Ireland, BNP Paribas, Fifth Third, HSBC, Lloyds, Raiffeisen and Santander. The RCF has an Accordion facility of a further £125.0 million. The total drawn at 30 June 2019 is £128.8 million.

There are two covenants governing the RCF:

• Leverage: Net Debt to underlying EBITDA not greater than 3:1 (30 June 2019: 1.64); and
• Interest Cover: underlying EBITDA to Net Finance Charges not less than 4:1 (30 June 2019: 13:1).

The current RCF is committed and has a non-utilisation fee of 35.0% of the applicable margin. The margin over LIBOR (or equivalent) ranges from 1.3% for leverage below 1.0 times, up to 2.2% for leverage above 2.5 times.

Term Loan Facility

On 24 January 2018, the Group put in place a Term Loan facility of £350.0 million to provide funding for acquisitions. The committed facility has an availability period to 31 December 2019 and a termination date of 31 December 2020. A sum of €150.0 million was drawn on 12 February 2018 to fund part of the consideration paid for the AST Farma and Le Vet acquisition and further drawings were made to finance the acquisition of Venco. The total drawn at 30 June 2019 is £179.3 million.

The facility has the same covenants as the RCF above.

Return on Capital Employed (ROCE)

ROCE grew to 15.5% in the year (2018: 15.4%) as the Group continues to benefit from consolidation of the acquisitions and by further leveraging the asset base.

Acquisitions

The Group has made several acquisitions in recent years. Performance of the acquisitions made during the 2018 and 2019 financial years is separately summarised compared to the existing business in the sections above.

In October 2018, the Group acquired the trade and assets of Caledonian, an equine veterinary pharmaceuticals sales and distribution company based in New Zealand and Australia for a total consideration of £4.4 million. The business has been successfully integrated into the Group and is outperforming our expectations. The acquisition was financed from the Group's existing working capital resources.

In December 2018, the Group completed the acquisition of Venco for a total consideration of £34.8 million. The business has been successfully integrated into the Group and is outperforming our expectations. The acquisition was financed from an additional draw down from the Group's RCF.

Accounting Standards The accounting policies adopted are outlined in note 1 to the Accounts. There are no accounting policy changes which have materially impacted the 2019 financial year.

Note 1 to the Accounts outlines the impact of adopting IFRS 9 (financial instruments) and IFRS 15 (revenue recognition) in 2019 and also the Group's impact assessment of IFRS 16 (leases) which will be adopted in 2020.

Accounting Standards

The accounting policies adopted are outlined in note 1 to the accounts. There are no accounting policy changes which have materiall impacted the 2019 finacial year.

Note 1 to the accounts outlines the impact of adopting IFRS 9 (financial instruments) and IFRS 15 (revenue recognision) in 2019 and also thh groups impact assessment of IFRS 16 (leases) which will be adopted 2020.

Summary

Our existing business performed strongly this year and was further enhanced by the realisation of significant Le Vet revenue synergies which have resulted in improved operating leverage.

We have increased our R&D expenditure enabling us to expand the number of pipeline projects, novel opportunities and overseas product registrations we invest in and our acquisitions of Caledonian and Venco strengthen both our geographical and market presence.

The Group's balance sheet is strong, enabling us to continue to consider further relevant acquisition and investment opportunities as they arise.