Animalcare Group plc

Hello and welcome to the Animal Care Analyst presentation. My name is Courtney and I'll be your coordinator for today's event. Please note that this conference is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question. Alternatively, you may also submit your questions at any time by the Q&A box on the presentation platform. If you require assistance at any time, please press star dot zero and you will be connected to an operator. And I will now hand you over to your host, Jenny Winter, to begin today's conference. Thank you.

JENNY WINTER Okay. Thanks, Courtney. Hi. I think many of you on the call will recognise my voice and know that I'm the CEO and I've got Chris with me as well online. I think we've been chatting quite a lot to most of you over the last couple of years, and so hopefully nothing you see or hear today will be too much of a surprise, but obviously with the recent announcements, we thought it would be a good opportunity as well to talk a little bit about post-infant-close activities. So hopefully you've all got a copy of the deck, and I'll try and remember to move on slides as we go. And the plan is that I'll give a little bit of an intro and then hand over to Chris to talk through the specifics on the financials. And then I'll come back and talk a little bit more about the deal and wrap up. Now, it should take 30 minutes or so, which leaves us lots of time for questions. And Courtney is going to facilitate the questions either that you want to ask on the phone or on the webcast. where there's a facility and Chris and I will do our best to answer them. Okay, so kicking off, I think you can see through the announcements and you'll hear from Chris and myself that really the theme of where animal care is is about resilience that we've shown through the pandemic and the disruption and confidence around our ability to land deal but also looking at future growth. I think You know, we all know that there remains uncertainty and, you know, we won't spend our time telling you what all the uncertainty is. Chris is going to refer a little bit to that in his presentation about how we see the market and how we see things returning to normal and where we see the potential for future disruption. But, you know, from where we are, what we've seen is that the different countries have responded differently to the pandemic. There's a context of uncertainty and volatility that But overall, we have been able to act quickly, be agile about how we respond to the changing situation, and we anticipate continuing to do that. So we've been trying to be very flexible and getting on with things. So what I was going to do is just remind everybody, if you move on to slide two, clearly the disclaimer, and then move on to slide three, which is titled Continued Execution of Growth Strategies. What I'm going to do here is just talk through some of those that we're not going to spend much time on today, just to reinforce that, you know, regardless of the disruption, we've continued to focus on these five things. Chris is going to talk about the strong finances in a minute. You know, you saw our year end, most of you, and we talked to you about the work that we did in 2019. Chris is going to talk a little bit more about how that panned out during the first half of 2020. Key leadership has always been, since we initiated and put in place this strategy, key leadership has always been kind of really important for our implementation. And really interestingly, the putting in place strong leaders in each of the countries, but also putting in place the group functions really lightweight group functions, I don't mean lightweight as individuals, I mean like as in not lots of people, has really helped us with that agility through disruption. But also putting in place a really clear structure with good capabilities in our business development team has meant that through the first half of this year and continuing up until now, we've really been able to focus on our BD activities. And it's made a big difference putting that very professional structure in place. And, you know, you can see from the announcements we made yesterday that that's a material change in the sort of deals that we're able to do. The growth portfolio, we talk about this as sort of the existing portfolio. We recognize that moving forward, we need to continue to maintain that existing portfolio. It's going to generate the cash flow. that will enable us to do more and more investment in future pipeline and exciting deals. And so we have continued to tidy up that portfolio. I think we've talked many times about it was a very fragmented portfolio. And the work continues. We took out about 100 brands last year. We've taken out some more tail brands this year. And we're really making sure that we focus our activities on those brands that have the opportunity to grow and are a bit more sustainable and resilient. And we're also seeing the positive impact, and Chris, you can see it in the numbers. We'll talk a bit more about where we've launched the branded generics that were in our development pipeline. And they have been launched successfully. Most of them launched in 2019. We had a couple launching this year, which has been more difficult, and we'll talk a bit more about that. But we've really now almost launched all of those branded generics that we had in the portfolio originally, which were actually from Animal Care UK days. We've got some really strong brands that are, you know, anybody would describe them as mature in terms of age, but they're continuing to perform really well. Things like Danilon, which is a painkiller for equine, and Dinalgem, which is another painkiller for, for production animals. And those are two products that are continuing to perform really well across the whole business. And things like Orizyme, which is our own dental product, is continuing to perform well. So we have some good products in our existing portfolio. We're tidying up. We've seen the benefits of some of the actions. Spain has done really well with some of the products where we've put more focus behind them. So we're really moving forward on that whole growth portfolio. And then the other two pillars, business development and innovative pipeline, the plan is I'll come back and talk a little bit more about those once Chris has talked through the finances. So we'll do a little bit more on those at the end. But it's all, from my perspective, it's all really exciting stuff that's going on and we're very positive and confident about moving forward. Just moving on to slide four. We just pulled together some highlights and things that we think really reinforce the fact that we're moving forward with our strategy. Strong finances, and you'll have seen in the announcements that there were a higher end of the range of pandemic scenario modelling. I think when we did the scenario modelling back in March, it was just really difficult to predict. But we're very pleased that the business has been resilient. We'll talk a bit more about where it's been more resilient than others. But overall, you know, we're pleased that we're at the upper end of that pandemic scenario modeling. Business development, you know, the agreement with Kane Biotech that we announced yesterday, whilst that was post-period end, obviously that's been a work in progress. And the really exciting thing about that deal is that it gives us access to products today and influence over new treatments for the future. So it's a kind of two-part deal. And that's for us, it's a really good model for the sorts of fields that we are working on. And in particular, this one's very exciting because what it is, is that Cain Biotech has a focus on producing products for human pharmaceuticals. And our new spin-out that we are building STEM animal health is going to be the sort of animal health arm of a human biotech company. And I think moving forward, that's a really exciting place to be because a lot of the innovation is coming out of human pharmaceuticals. And so cane is really our first step on that ladder. So that's why we're particularly excited about it. Pipeline progress, we'll talk a bit more about, but really for us, COX-2 inhibitor, which is differentiated from the competition for osteoarthritis in dogs, is continuing to progress as planned. And those of you who've experienced the ups and downs of the regulatory process know that that's actually a really good sign. So we're very happy that that's on track and obviously launching next year subject to approval. The improved capability part of what we've been doing We recognize that animal care and ecupharm historically were very much in the generics and branded generic space. So we recognize that launching new novel products such as the cane dental products and future products, but more specifically launching Daxacox, which is our own intellectual property. We've got launching a differentiated product, so it really needs a different approach to sales and marketing. And one of the things that we have delivered during when our effectively when our normal sales model has been disrupted is a lot of training and upskilling of our teams on sales and marketing capability and sales excellence. So that's been very exciting and the organization is really responding well to that. The other thing that has been accelerated really through the pandemic has been the way that pet owners and vets and the market has looked to more digital offerings. So whether that's us talking to our customers digitally, or it's pet owners trying to buy online. And we had already started to do more on a digital perspective, but we've really ramped that up. And so our ability to work digitally, I think we said right at the start of pandemic that our organization switched to working from home as required pretty seamlessly, but we've also switched to working with customers online pretty seamlessly as well. And that's been probably easier for us to do a bit because of our size and agility and, you know, the fact that we've got people who are really up to change and doing things in different ways. So those are just some highlights that you'll hear coming out in the rest of the presentation. Okay, so I'm going to hand over to Chris at that point, and he'll talk through a bit more detail on the finances.

Good morning, everyone. I'm going to start on slide six. Just before I do, it's a little bit of a recap to what Jenny said. And it's really referring to the communications we made back in May. So as we said, we entered 2020 in a strong financial position. and that was following the significant debt reduction we achieved in 2019. The business saw a strong first quarter in this year before the pandemic hit in quarter two. And then during that time, as we said, we modelled a range of trading scenarios, primarily for audit purposes that estimated a potential revenue downturn of something between 13% and 22% on a rolling 12-month basis. And as you can see, From the numbers, we're pleased to report that the group traded resumably in the first half and up to the end of August above that pandemic scenario modelling. And importantly, we maintained the strong balance sheet. So five things I just wanted to touch on on this slide. So revenue is down 4.4% versus prior period. We'll come on to more detail on the next slide. But we've seen varying impact by product category with CAP seeing a greater impact of COVID versus the farm animals and also across the countries. On EBITDA, that's modestly down versus 2019 to 6.6 million. Two main reasons for this, which is reflected in the improved EBITDA margin. So the first is the full year cost efficiencies we brought forward from 2019. Most of that relates to the restructuring of the tech and reg function. And as we said during May, we decided actually in quarter two to reduce or defer spend relative to the lower demand. And together those resulted in SG&A savings around one million versus prior period. What I will say is a proportion of that will be reinvested in the second half to support future growth. So SG&A costs, the percentage of sales, we should see get back to similar levels as what we had in 2019. On cash conversion, you'll see following the exceptional four-year cash performance last year that our cash conversion has dropped to below 60%. The main driver for this is an increase in stocks, which were on a cash basis 2.3 million higher than the beginning of the period. About half of that relates to strategic stock build to protect sales during manufacturing transfers, so that's in line with our expectations. The balance broadly relates to the demand disruption that we saw in quarter two. On debt, as I said, we maintained a strong balance sheet both at the half year and post period to the end of August, which we've given an indication on. The half year net debt and leverage were at similar levels to the end of 2019. At the end of August, the position was slightly stronger than at the half year. Finally, on the dividend. We said back in March, trading statement again at the finals, that we would review the decision to defer the final dividend until we had more clarity as to the impact of COVID. We did say at that time that one option that we had was to retain the cash to invest in future growth opportunities. And that's exactly what we've done in respect of the Kane deal. And secondly, affecting the resilient first half performance, we have declared an interim dividend at the same level as 2019. To return to slide seven, as I said, I'll give you a bit more colour on revenues. What we can see here is that the diversity of the portfolio across both the companion animal and production animal sector, as well as by country, has supported a resilient first half performance. On companion animals, this part of the business saw around 11% decline in revenues. The main driver being the significant downturn in Q2, where in general, lockdown and social distancing measures led to restricted opening hours and reduced consultations in vet practices, and that in turn led to a marked decline in the number of clients visiting small animal vet practices. This did also affect our ability to promote and launch new products, which are, as you know, a key driver of our growth. The interaction with many vet practices was much reduced. If you associate this backdrop to country performance, We can see the most significant decline is in the UK, where the portfolio is almost entirely companion animal. This performance does correspond to the more prevalent impact of COVID in the customer base, which was subject to large-scale closures of debt practices as well as the wider restrictions I've already noted. And just to give you an indication, these measures in quarter two resulted in Q2 volumes being at around 60% of normalised sales levels. To contrast this to Germany, where we said before around three quarters of vet practices continue to operate as normal. And as you can see, that's reflected in the performance of the German business, which is slightly up on last year. Italy continues to perform extremely well, growing by 30% in the first half, and that follows 20% growth in the last financial year. Growth in this period is largely driven by the companion animal portfolio, in particular annualized sales of new products that we launched in 2019. That growth has also been supported by a strong performance in the production animals part of that business. Just to finalize on those countries, we've noted previously that both Germany and Italy are small players in large animal health markets and strategically, And the resilient performance in both of these companies strengthen this. Our objective remains to utilise the really strong base we've got in each of those countries on which to build more significant scale. And, you know, one of the objectives is to do that over the next three years. If we come on to production animals, as I said, in contrast to companion animals, this grew strongly and appears to be less affected by COVID due to the more industrial nature of the market. production animals now in the in the half year accounts for around 30 of the sales it's been operating around 25 previously if we look to where the growth has come from um our spain production animal business unit which is about half of the spanish business performed particularly well that was up 21 versus last year and that's clearly benefiting from the operational restructuring that we did at the end of last year and during the first half of this year um And also, as we mentioned before, the partial reversal of the distributed e-stocking that we did see at the end of 2019. Moving on to slide eight, I've kind of already noted that the debt was broadly in line with the start of the year, but three items I want to touch on here. So non-underlying cash costs, as expected, were much lower than the prior period at 7.7 million. These primarily relate to the restructuring of the production animals business unit in Spain, which I've already noted, and also manufacturing transfer costs as we work towards both de-risking and simplifying the supply chain. CapEx was 1 million. That predominantly relates to additional clinical studies for the 6087 development, which as Jenny's noted, was submitted for approval in January, and that's proceeding as planned through the regulated pathway. Just finally, all of our facilities, as a reminder, are Euro denominated. So what we have seen is a significant movement in our debt due to the strengthening of the Euro. So we started the year around 118, the half year was around 111. And what the result is that we've had a 1.7 million impacted adverse exchange losses. I'd expect that probably be some broadly in the same region by the end of the year, but that's obviously subject to Brexit. Slide nine. We said at the finals that we weren't able to provide specific and meaningful financial guidance about time, but what we would do is continue to update you on what we're hearing and seeing across our business and the wider animal health market in respect of COVID. So this slide will just reiterate some of the things that we've talked about for the half year, but also give you some observations for the quarter that's just about to end, but also going into the end of this year and start to next year. So again, as a quick reminder, Q1 performance was strong in line with internal expectations. That was partly supported by customer stock buying in certain countries, which at the time we said we expected to unwind in Q2. And that's exactly what we experienced in particular in the UK. As we entered Q2, as I've said, while the VETRI market remained open for business, it was subject to some various restrictions which saw a marked downturn in demand. That did vary from country to country, as you've already seen on the revenue analysis. In contrast, as I said, production animals was and continues to be less effective. The other key factor in Q2 was our ability to promote and launch new products, as vets were largely focused on servicing the pet owners, and they did actually significantly limit interaction with the sales teams. Importantly, vets were not showing a lack of interest in new products. It was more a lack of bandwidth to interact. So we expect to see an improved take-up of new products in the second half, in particular, for example, in relation to botanic care. As we moved into Q3, we started to see signs of recovery with vets returning to normal working patterns. And as I've said, training to the end of August from a revenue perspective was broadly in line with the prior year. Where we can, our sales teams are back in the field visiting customers. Otherwise, they are interacting remotely via virtual meetings, for example, but importantly, utilising the learnings from Q2 in terms of how our customers want to be served. And again, this dynamic does again vary from country to country and also our business unit. If we look forward into Q4 and beyond, it's clear we're seeing evidence of potential further impact uncertainty due to COVID and while this will inevitably affect market recovery and bring further challenges we've seen that the veterinary sector is learning to live with the virus and our business across Europe as a whole has proved to be resilient and agile and this for us gives us confidence together with the strong financial position and the continuing attractive long-term fundamentals of the market we operate in to continue to deliver on our growth strategy. And I'll pass over to Jenny to talk more about that now.