Animalcare Group plc

And thank you very much for joining us, Chris and myself. You hopefully will have seen the announcements this morning and the various other communications around this. I'm here to talk you through a really short presentation. I think most people on the call know us pretty well. And then we're more than happy to answer questions. It's probably easier doing it this way to answer them at the end. And so if you could just raise your hand, as in press the raise hand button, clearly waving to... waving to your computer screen is not going to help. But if you could just raise your hand and then we'll come to questions at the end, hopefully in the order that you've raised your hand, which should make sense. And so I'm going to kick off and. You know, the first message is we've had a very strong first half. Hopefully all of you have got a copy of the presentation. We're not going to share slides. We thought that would just overcomplicate this quick presentation. But if you've got a copy of the slides, you can see we've had a very strong first half. And what's also important is that we continue to make great progress against our strategic pillars. And so I'm going to hand over to Chris in a minute to talk a little bit more about the specific financials for the first half. But just in summary, where have we got to? Firstly, the growth portfolio. We can really see the impact of the work that we've been doing over the last couple of years now, taking out products that were really not driving good quality, sustainable revenue and really focus on those top 40 products to drive improvement gross margins across the portfolio, and really to put the business in a better and more efficient shape. The innovative pipeline, we've been really excited about the launch of Daxacox. And as you have seen, we launched Daxacox just at the end of the first half. And so we're starting to see the results of that launch. We're still in that launch phase in many of our countries, but what we have initiated is is an investment in expanding the Daxacox franchise, building on the success that we've had to date, and also looking at some of our non-prescription products in the dental arena and really starting to invest in a significant number of pipeline projects. More to come, but we've moved that agenda on a lot in the first half of the year. Business development, we've been really active here. We are really clear what our criteria are. And what we're really pleased about is the continued reduction in our net debt, which is increasing our scope for M&A and pipeline deals. And actually, the performance in the first half has given us even more confidence about our ability to fund some really exciting things that we're looking at. Chris is going to talk much more about, you know, strong finances. And we've seen increased demand for companion animals products. We've seen better EBITDA margins and cash conversion and clearly net debt reduction has continued. Leadership has been, I think, one of the really important drivers for the performance in the first half. I was really pleased with how the team managed the disruption last year. But seeing them take off in the first half with such enthusiasm and such commitment to launching Dax Cox, really building capabilities and strengthening the leadership qualities of the team. And so that, I think, has been a real underpin to the success that we've seen in the first half. So on that note, I'm going to hand over to Chris to talk through the half one financial highlights. Chris, over to you.

Thanks, Jenny. Good morning, everyone. And so you'll obviously you'll have a copy of the deck as well as the press release, which has got all the numbers and the details. So we'll just focus on the on the highlights on slide four to start with. So, as Jenny said, really pleased with the first half performance delivered double digit revenue growth. I'll get some color on that on the next slide, but even more so at the profit level. And also, as Jenny noted, together with a further strengthening of the balance sheet, which, as we've talked about before, really key from the point of view of investment capacity. Just to kind of lead... I think one of the kind of real things that we're really pleased about in particular is the movement around our growth margin improvement. That's really reflecting the work that we've done in particular around optimising the portfolio. And in that regard, we're seeing the momentum on our margin accretion continuing to the second half of the year. And that's why we're indicating that we're expecting to beat previous estimates on profits. So underlying EBITDA and EPS are the two key measures. So kind of really pleased to kind of state at this stage that we're confident that the profitability will be ahead of where we expected to be. I'll give a little bit more shape of colour on the shape of FY21 later in particular. the first half, second half dynamics. If we just look at underlying EBITDA, up 28% to 8.5 million. So key things, drivers of that. So talked about the increase in margin, about 2.6% up on this time last year. Driven by really strong demand in the higher margin companion animal portfolio. That's about 20, 29 percent up. And as I said, you know, really seeing the benefits now of the focus we've had on optimising the portfolio towards the higher margin brands. We'll see that when we come on to top 40. Clearly, we're seeing the leverage benefit from the strong sales growth. We've seen a real marked improvement in our EBITDA margin, which was close to 22. So the gross margin has flowed down to EBITDA margin. We on overheads, we continue to invest in optimizing the existing platform and in areas driving future growth. So you may have noticed that we've had a 1.5 million increase in SG&A costs. This time last year, we had a million reduction year on year. So some of that is kind of a kind of a bounce back from COVID savings. But also, as I talked about, increased investment and just to actually to remind everyone that roughly about two thirds of our cost base is people. And in particular, it's people investment that we we continue to focus on to drive growth. It's not on the slide, but on profit, you'll have seen that the leverage benefit and the margin benefits flowing down to EPS, which was up 36% at the half year. On cash conversion, as expected, due to the normalization of the stock profile, just if you recall in 2020 at this stage, we saw a 2.3 million increase in stock. Some of that was COVID impact. But also some of that was strategic stock build prior to manufacturing transfers. So we said we'd expect to improve cash conversion for the first half, which you had, which was close to under 80%. Absolutely maintain the focus on cash generation to provide capacity to invest. And we remain confident that we'll achieve the full year target of 90 to 100% cash conversion. On debt, driven again largely by the strong cash conversion, we further reduced net debt by 3.5 million to 10.1 million with our net debt to EBITDA leverage ratio now below the one times target at 0.7. You may have seen in the press release that that momentum on debt reduction and cash generation is continued. And at the end of August, we were around 7.5 million net debt And subject to any major investments between now and the end of the year, I'd expect that the year end position will be broadly similar to that. On dividend, we've held the dividend at 2p. Cash cost of 1.2 million is actually in the debt figure of 10.1. So the net debt figure at the half year includes the dividend cash cost. If we move to slide five, so this will give some more detail on revenue. And we said earlier that particularly reflects the very strong performance in companion animals. We've aligned the slide to the new regional model. So you'll see on the right hand side, we've introduced the south and north region splits. And as you can see that What we'll come on to is that the production animal part of the business is largely in the south region now. So if we start on the product categories in the centre, then we'll read across on to the revenue by country. So key driver of the first half growth was companion animals. That's up 29%. That now accounts for around 70% of overall sales. I think that's been the highest percentage of our overall sales since the merger. And that 29% compares to the 11% reduction we saw at this time last year. If we view country performance against the backdrop, We saw growth in our companion animal portfolio across all territories. If we look to the north region, we saw a very strong increase and recovery in the UK, which was at this stage 33% down last year due to the more severe impact of COVID on the customer base in that market. Looking to the south region, we delivered above market double digit growth in the south region. You can see Spain and Italy in particular performing really well. What's really pleasing in particular in those two countries and in the region is that a large part of that growth was delivered by the existing portfolio. And again, this kind of all points towards the kind of work we've been doing around having that really kind of strong maintainable base to build from. If we unpick some of that growth in Spain and Italy, Again, no doubt we're seeing the positive effects of the focus on the higher margin brands where we can grow. Additionally, what's really clear is that the market has grown strongly in that region in the first half. So definitely some of the benefits of growth are seeing in our numbers. And in particular for Spain, and we've said this in the announcement, but be really clear that there's There's phasing benefits. So either phasing carried over from the end of 2020, and we saw that very clearly in our Q1 performance, or phasing between H1 and H2. So we've seen some benefit on the revenue line, in particular for Spain, in terms of phasing. Production animals at headline level, that's declined by 12%. We highlighted in our 2020 finals that in Belgium we exited a portfolio of several antibiotics and other lower margin products that were under a legacy distribution contract. So you can see that in the Benelux figure where the sales are down 35%. So this leaves, as I said earlier, the PA focus largely in the south region and international partners. And if we kind of ignore the Benelux piece in terms of that legacy contract, the areas where we've got light for light growth, they actually grew by 10%. So you can see that. We're still delivering growth in the production animal portfolio where we've decided to continue. And that remains an important part of our business. As you can see, the South region, it's really important part of the portfolio. Just strategically, we've talked before, Germany and Italy, small growing players in large markets. Strategically, likely through M&A or partnerships, our objective remains to accelerate the scale up of these operations over the next three years. And I think we've also talked before about we're really kind of keen to kind of explore opportunities to add something in France as well. I'll just touch on network partners. So this is where on an annualized basis, the majority of our equine revenue currently lies. And again, as we noted in the 2020 finals, equine revenue is expected to decline this year due to the customer stock build that we saw in 2020 in advance of the manufacturing transfer of the particular product, which we completed early this year. And the manufacturing transfer was principally the principal objective of improving the margin on that, which we'll start to see during the second half. At the half-year stage, that decline in the equine portfolio was offset by growth elsewhere, and so the net effect is a growth of 3% in network partners. Before we move on to the kind of net debt slide, I just wanted to finish off on the P&L and give a bit more colour on the outlook for 2021. So we stated very clearly we expect to exceed the profit guidance at EBITDA and EPS level. That's really around the stronger gross margins that we've seen in the first half. It will tail off a little bit in the second half. But as we noted, we're really seeing the benefits of the portfolio focus. On revenue, we remain confident we will turn to growth. and expect the full year to be at least in line with the revenue expectations. So we're maintaining the guidance that full year revenue will be weighted towards the first half, largely as a result of the phasing that I talked about earlier. And again, we particularly saw that phasing when we look at the very strong Q1 trading, which we've highlighted before. On the market, we believe that it is starting to return to what we're considering normal levels. So we say on slide five, we've kind of seen a resurgent kind of companion animal demand driving growth. We believe that there has been some kind of acceleration in the first half from some of the kind of post COVID dynamics from 2020. So slide six, just on the balance sheet, As I commented earlier, and we've commented in all recent presentations, the financial strength underpins our ability to invest in strengthening the platform. So that's really about creating that scalable platform and also in future growth opportunities. And I continue to be really pleased to reflect on this side, the kind of continuing trajectory of debt and leverage reduction. uh largely as i said about the cash conversion and we've talked about kind of where we were at half year and also 7.6 million on that slide is is the end of august um we're now conscious we are below the target leverage range um and that all that really means is we've got more firepower to increase investment over the next years whether that's in m a or increasing the pipeline capex Just on pipeline, I think we mentioned a few months ago that we are expecting to accelerate pipeline investment. We've been directionally kind of saying investment historically was about two to three percent of sales, which is below the benchmark. And we're looking at more than doubling that into next year. So I'll hand back over to Jenny.

Thanks, Chris. And just a quick reminder, if you do have a question, press your raise hand and we'll come to you and hopefully we're able to answer it. So I was just going to say a few words about the portfolio and about the pipeline. We've said all along that we needed to tidy up our portfolio and really focus on a smaller number of higher selling, higher margin products. And we're starting to see that come through now because, you know, we've got 15 percent growth in the top 40 products worldwide. There's a little bit of flavour in the markets. The markets, each of the countries is very clear on what's really driving good quality and sustainable revenue. And so this has been a really important driver of our improved results. We also are seeing that the impact of selling the right products and really bringing that focus in has been 2.6%. increase in gross margin. And that is really driven by that work that we did in 1920. And so we're really pleased with that. We're still around the 200 brands, gradually reducing that down. I think we've said in previous presentations, our objective is around the 150. There's no great science behind that, but it feels the right number to aim for, to really challenge ourselves. And as we move into the budgeting process now, it will be one of the things that the countries will be reviewing, looking at those tail products to further drive that increase in So moving to more higher selling, high margin products. And so our portfolio progress is really on track. And I think that will continue to deliver in years to come. Moving on to slide eight and just giving a little bit of a feel for our pipeline and where we're investing. It's kind of two different sorts of investment that we're making. We're investing in prescription medicines and that's predominantly Daxacox. And so now that we're launched, and we're really driving the Daxacox business. At the moment, we have a single indication in Europe, and so a lot of our investment is to look at different uses of Daxacox to deliver different opportunities in different species, in horses, in different forms, and also expanding the market. Clearly, we have our license in Europe at the moment. We're looking at Opportunities in Canada, Australia, New Zealand, US and really taking this product globally. And we're also building the Daxacox franchise. So a lot of our investment is going into Daxacox, which will deliver new launches, new indications, new lifecycle opportunities over the next five to 10 years. And so this is a really important franchise for us. And on the non-prescription medicines, which clearly have a really important channel through the vet channel, we're looking at STEM, which is the animal health arm that we did the deal on a year ago with Kane Biotech for products that initially are in the dental market. So we're in the fourth quarter this year starting to launch this range of products. So toothpaste, water additives, wipes, et cetera, et cetera. Those, we believe, will be a bit of a slower growth because this market in dental, you really do need a portfolio of products. And whilst we already have Orizyme, which is a great kind of anchor product for us, we need to launch all of the different formulations and uses because pet owner preference and vet preference is different. And so that will build a bit more slowly, but we're investing in making sure we get those to the market. We're also looking, I think you're aware, we launched Procanicare, which is a product that is active in the gut flora. And we're developing through a number of projects and future gut health products based and supporting Procanicare. as well as diarrhoea or anti-diarrhoea products and as part of the stem portfolio we're looking at some products that are using the biofilm technology which is what we really access through the stem deal using that biofilm technology and other indications and i think we indicated last time that ear infections were a good area that we were exploring and we've initiated some studies and some investment in ears So we're moving along on the pipeline. We are also very clear that we want to continue to develop that pipeline. And as you saw in the summary slide, business development is hugely active for us. There's lots of opportunities out there, but we're very, very clear that we want to find the right opportunities. We've got very... Clear criteria is anything we need to bring into the organisation needs to be sustainable and really good quality revenue enhancing. So we have a number of projects on the go and it's just a very active area at the moment. And now I think one of the things that we recognise is the confidence from the first half. And the sort of investor sentiment and as Chris described it, you know, we've got a bit we've got a bit more firepower than we would have had a year ago. And so we started to look at some even more interesting and exciting opportunities. And those are, you know, to build the pipeline, to create geographic expansion. So we're looking at products, companies and geographies. So just coming to the final slide summary, you know, really strong half one driven by companion animal demand predominantly. EBITDA and EPS benefit from the revenue leverage and a lot of the work that's gone on in the last couple of years. The net debt, you know, reducing net debt, I know, is a really important, important aspect of our financial strength. And it also creates that opportunity for the business development and the investment that we want to do. The work on the pipeline and, sorry, the portfolio has really started to show benefit in terms of margin and actually additional growth, that 15% growth from the top 40. We've got a balanced pipeline that we want to grow and we have the capacity to grow, and we fully intend to grow that through business development. And actually, I made the point earlier, one of the really, really important reasons why we've had such a strong first half is actually we've got a leadership team and an employee group who are really committed to the future of this organisation, which is a fantastic place to be. Yeah, the favourable trading conditions, I think, you know, our peer companies, you know, there's a lot in the press about the animal health market and we expect that to continue. So we see we will have favourable trading conditions into the second half. And we're confident that the underlying EBITDA and basic EPS will be ahead of the current market expectations for the full year. So that's all we wanted to say formally. And now we're more than happy to take questions. I think Anand from HSBC, I think you were probably the winner with your hand up first. So if you want to unmute and ask your question.