CVS Group plc

Welcome to this presentation of CVS Group's full year financial results for the year ended 30th of June, 2024. I am Richard Fairman, CEO, and I'm joined by Robin Alfonso, CFA, and Paul Higgs, Chief Veterinary Officer. As set out on slide four, we have continued to make progress against our five-year strategic plan, despite some challenges faced in the past financial year, with a major cyber incident at the end of March, our resulting decision to migrate the majority of our practices to a new practice management system, and the CMA launching a market investigation in May. Revenue increased by 9.9% to 647.3 million, driven by underlying like-for-like organic growth of 4.1% and acquisitions made in the year, notably in Australia. Adjusted EBITDA increased by 4.7% to 127.3 million, with EBITDA margin of 19.7%. Whilst this remains within our stated ambition, it was adversely impacted in the year by the cyber incident, inflationary pressures on wages and utilities alongside our continued investment in people. In accordance with our strategy, we invested 43.1 million in capital expenditure to improve our facilities and equipment and our technology. This investment includes the migration of 375 of our companion animal sites to a new cloud-based practice management system and related technology in support. We successfully entered the Australian market in July 2023 and acquired 22 practices in the financial year, with a further five practices acquired in the UK following submission of briefing papers to the CMA. Combined consideration for these 27 acquisitions was £95.2 million. We achieved an operating cash conversion of 70.5% in line with our stated ambition, and we finished the year with leverage of 1.54 times, well below our stated maximum of two times. As previously announced, we divested of our Netherlands and Republic of Ireland operations and therefore all numbers shared today and the comparatives for the prior period are for continuing operations. Turning to slide five, our strategy remains unchanged and I am pleased with the progress we are making. We have laid the foundations in the past year for further growth to come. Our purpose is to give the best possible care to animals, and our vision is to be the veterinary company people most want to work for. This purpose and vision are underpinned by four strategic pillars, our ESG focus and our company values. We continue to focus on organic growth through providing appropriate care in accordance with our clients' requirements, and this is delivered by our outstanding team of colleagues. We are rightly focused on their career development and progression and in providing them with appropriate facilities and clinical equipment. We are confident that this focus on people and clinical care will continue to drive organic growth. This will be augmented through acquisitions with our short-term focus on growing our presence in Australia. As set out on slide 6, I am delighted with our entry into the Australian veterinary market, where we have established a strong platform with 22 practices acquired in the year, comprising 28 practice sites. We have focused on acquiring larger, high-quality small animal first opinion practices with strong management teams, great facilities and an excellent reputation. Multiples are lower than in the UK, and our acquisitions are performing well in line with business cases. Importantly, we've established a local management team with Graham Cram, Australia MD, who was on an interim secondment from the UK, deciding to remain in Australia, an experienced acquisitions director with significant market knowledge. and a local management team covering operations, finance, legal and HR. Many of this team have relevant veterinary sector experience. Robin, Paul and I will continue to spend time in Australia to support the local management team. Turning to slide seven, we are confident that we have a significant opportunity in Australia, having established a presence in the major urban conurbations. Importantly, we have also established CVS as a people- and clinical-focused business, and this has resonated well. In the financial year to date, we have completed a further two acquisitions, comprising three sites. We have signed contracts in relation to an additional two deals, and we have a strong pipeline, with the former owners of practices acquired supporting through positive endorsement. We have also started to identify drug purchasing synergies, having selected a preferred wholesaler, and we have negotiated favourable terms with third parties for in-house laboratory analysers, reference laboratory tests and crematoria. Moving to slide A, we have taken a number of steps in the year to lay the foundations for further organic growth. We have invested in new technology with 375 UK first opinion practices migrated to a new cloud-based practice management system. Whilst there has been some impact as our colleagues adapt to this new system, it has the potential to unlock new revenue streams in practice and to provide clients with the opportunity for improved digital interaction with our practices. The board has been strengthened with David Wilson appointed as chair and Paul Higgs joining the board as our chief veterinary officer. Paul will play a key role in ensuring we continue to develop our clinical standards and provide appropriate care to our clients and their animals. We have grown the number of clinicians employed and retention has further improved. We introduced a new clinical governance framework, which Paul will cover later, and we continued our sustainability and ESG focus, with antimicrobial stewardship a key element of our One Health focus. We also took the decision to dispose of our loss-making Netherlands and Ireland operations, leaving our focus on the UK and Australia. Turning to slide nine, the CMA announced their market investigation in May, and we continue to support them in their process. We held a teach-in session with the CMA panel at the commencement of their investigation, and we hosted the panel for site visits at two of our practices in July. We continue to respond to a number of detailed requests for information. As is typical in a market investigation, we expect the CMA to start publishing working papers from November, setting out their emerging thinking in any areas where they have concerns as to how the market is operating. Under the CMA timetable, we expect the provisional decision to be announced in May or June next year. Again, as is typical in a market investigation, we understand that this is likely to include a full range of potential remedies, even though the CMA may then focus in the final stage of their investigation on those remedies which they actually think are appropriate. The statutory deadline for the completion of the CMA's investigation is just over a year from now, on 22 November 2025. Given that the CMA first announced their initial market review of the sector in September 2023, we are almost halfway through their process. I will now pass over to Robin, who will provide an update on our financials.

Thanks, Richard. I'm pleased to share another set of results that demonstrates continued progress towards our five-year plan to double adjusted EBITDA by full year 2028 and investment in foundations to support long-term growth. We continue to focus on providing clients the care they require and executing on our acquisition strategy, and are pleased with the continued growth in revenue and adjusted EBITDA, notwithstanding the wider economic challenges. Revenue grew 9.9% to 647.3 million, benefiting from acquisitions made during the current and prior year, and like-for-like sales growth of 2.9%. Our like-for-like sales growth is adjusted for working days, it excludes current year acquisitions, and it only includes prior year acquisitions from the same month this year as they were acquired in the previous year. Like-for-like sales growth in the year was impacted by a more challenging economic environment, the COVID and puppy and kitten boom in the healthy young adult stage, as well as from disruption from a cyber incident and subsequent decision to move our practice management system to the cloud. Underlying like-for-like revenue was 4.1%, adjusted for the estimated impact of this disruption. Adjusted EBITDA grew 4.7% to 127.3 million, benefiting from top-line revenue growth. An adjusted EBITDA margin of 19.7% was down 0.9 percentage points versus prior year, impacted by disruption from the cyber incident and subsequent cloud migration. and inflation, mainly in wages and utility costs, as well as continued investment in people. During the year, £12.6 million was recognised in respect of net research and development expenditure tax credits, which was up from £9.6 million in the prior year. Free cash flow reduced to 62 million from 69.7 million, with the increase in adjusted EBITDA offset by negative working capital movements and an increase in finance expense, from increases in both cost of borrowing and net debt, to support our strategy of investment in our practices and acquisitions. Operating cash conversion was 70.5%, which was down 4.4 percentage points on the prior year, but remained in line with our stated ambition of greater than 70% operating cash conversion. Despite robust cash generation, the increase in acquisition investment to $97 million from $54.6 million and continued capex investment resulted in an increase in net bank borrowings to $168 million and an increase in leverage to 1.54 times, which remains well below our two times target ceiling. Adjusted EPS of 86.6 pence was down 12.3 pence, impacted by an increase in UK corporation tax rate from 19% to 25% from April 2023, reducing EPS by circa 6 pence. It was also impacted by an increase in depreciation from capital investment in recent years and in finance expenses from both higher costs of borrowing and net debt. We continue to invest in our practice facilities, clinical equipment and technology with total capital expenditure of 43.1 million in line with our Capital Markets Day commitment to invest between 30 million and 50 million per annum. Included in this is our work to modernise our IT infrastructure to support cloud-based IT solutions. Consideration for acquisitions of 97 million represents a step up in practice acquisitions and includes five acquisitions in the UK and 22 practices in Australia, with performance in line with expectations. The Group's short-term expansion focus will be in Australia, where there is a strong pipeline of exciting opportunities. Revenue increased to £647.3 million from £588.9 million, benefiting from acquisitions and our continued focus on people and care our clients require. The Veterinary Practices Division, which comprises our companion animal, referrals, farm animal and equine veterinary practices, as well as our buying groups, VetDirect and MyPet Insurance, This division delivered 10.6% growth in revenue, benefiting from acquisitions, continued focus on care our clients require, and an increase in the average number of vets and nurses we employ. Performance in the year was impacted by a more challenging economic environment and the COVID and puppy kitten boom in the healthy young adult stage, as well as from disruption from the cyber incident and subsequent decision to move our practices management system to the cloud. The Laboratories Division provides analysers and practices which supports testing in-house, for which we supply the reagents for the tests and diagnostic testing services. Revenue in this division increased 7.9%, benefiting from an increase in the volume of tests performed. The crematoria division, which provides both individual and communal cremations, as well as clinical waste disposal services, delivered strong revenue growth, which was underpinned by the direct pet cremation service, which puts customers directly in contact with the crematoria to make pet aftercare arrangements and allows them more time to consider their range of options. This has resulted in significant changes to customers' choices and improved customer care. And our online retail business has had a challenging year, with the economic environment impacting demand for our premium life stage and veterinary diet ranges. Whilst this is a much smaller part of our group, we are confident that the launch of our new website in 2025 will bring future growth. We've seen resilient EBITDA performance with adjusted EBITDA increasing 4.7% to 127.3 million from 121.6 million, benefiting from increased revenue from acquisitions and like-for-like revenue growth of 2.9%. Adjusted EBITDA margin, however, decreased 0.9 percentage points to 19.7% from 20.6%, with gross margin improvement offset by inflationary pressures. Employment wage inflation and investment in colleagues resulted in employment costs as a percentage of revenue increasing to 51.8% from 50.7%. Another cost as a percentage of revenue increased to 6.5% from 6.3%, impacted by utility inflation, partially offset by 12.8 million net recognition of research and development tax credits, up 3.2 million year-on-year. Another factor impacting margin was the opening of our new multi-disciplinary referral hospital, Bristol Vet Specialists, and investment in two Greenfield sites. These sites will continue to impact margin as they are expected to be loss-making initially, before reaching break-even from month 12 onwards, as it establishes itself and builds a full caseload. I'm pleased to share that Bristol Vet Specialists is performing ahead of schedule. Whilst we've had some challenges in full year 24, I'm pleased with the underlying progress made. As pets age, they require more medical intervention alongside the new revenue opportunities opening up with our new practice management system. We look forward to delivering further growth over the medium longer term. The group continues to generate healthy cash flows with full year operating cash conversion of 70.5%, which is ahead of our capital markets day ambition of 70%. Notwithstanding the step up in capital expenditure and acquisition investments, which resulted in net cash outflow of 94 million, leverage remained well below our target leverage ceiling of less than two times at 1.54 times. We have committed bank facilities to February 2028. I've also hedged 100 million of debt, swapping variable Sonia to fixed, securing an interest rate including current margin of circa 5.6% through to February 2028. Our investment unlocks opportunities. Investment in facilities and equipment supports retention and ability to attract clinical talent, as well as allowing us to provide the care our clients require. In addition, our new cloud-based practice management system potentially unlocks opportunities for new revenue streams and improved client engagement through a new website and app with enriched functionality including online booking, ability for one-click repeat prescriptions, reminders, payments online, and much more. We have a healthy balance sheet with 350 million of debt facility and headroom within our leveraged target ceiling and therefore capital available to support our investment opportunities. Our stated ambition is to invest 30 million to 50 million per annum on capital investment and over 50 million on acquisitions, which for now will be focused in Australia. We continue to assess our investment opportunities against a disciplined investment criteria, ensuring long-term returns remain above 10% IRR. Our investments are value accretive and delivers an attractive return on investment in excess of our cost of capital. I will now pass you to Paul, our Chief Veterinary Officer and newly appointed board member to update you on our strategic progress.

Hello, I'm Paul Higgs, Chief Veterinary Officer at CVS. I'm an RCVS and European recognised veterinary specialist in small animal medicine, and I am responsible for the clinical stewardship and governance of all of our practice divisions, ensuring that we deliver on our purpose to give the best possible care to animals. Prior to becoming CVO in 2022, I was Clinical Director of Highcroft Referrals, which has now transformed into our largest hospital, Bristol Vet Specialists, where I still work clinically on a weekly basis. In February, we introduced our Clinical Governance Framework, a framework centred around developing a culture of continuous improvement and leading the profession in improving quality of care. This framework encompasses the concept of contextualised care, in which a deep understanding of each individual client's needs must be integrated with the animal's needs and our clinical expertise to create shared decision making. Although truly understanding and empathising with what influences an owner's decision is a complex skill, we believe it is underpinned by key actions in the consulting room. Our colleagues ask what matters to our animal owners, they listen carefully to and empathise with what matters to them, and then they are clear how they have included what matters into the care plan for their pet. And this requires mutual respect, strong relationships and excellent communication. Our clinical governance framework helps us to continue improving how we provide the care that animals need and owners want. Alongside this framework, we continue to progress our number one clinical improvement focus of antimicrobial stewardship. Our aim, linked to our ESG focus of One Health, is twofold. To limit the development of antimicrobial resistance through ensuring antibiotics are only used appropriately, whilst balancing our primary responsibility of animal welfare. and to reduce infections that could occur as a result of our clinical activities. This is infection control. We are pleased that clients continue to value the services that we provide. Our focus on high quality clinical care and investment in our practice facilities to provide a safe and comfortable environment for our clients and exceptional care for animals is reflected in our strong client net promoter score. We remain committed to our vision to be the veterinary company people most want to work for. As we continue to grow our business, we have once again increased the number of clinicians that we employ. We've seen an increase in the number of vets that we employed in FY24 compared to FY23 of 5.8% and nurses by 2.3%, both excluding acquisitions. Given the challenges across the veterinary care sector, alongside the continued negative publicity and the specific disruption of the cyber incident and accelerated rollout of our cloud-based practice management system, we've seen our employee net promoter score reduce to minus 2.8. Clearly, this is focused in frontline colleagues most impacted by this disruption. Although we can explain this reduction through these one-off incidents, improvement remains a key focus. And I, alongside other members of the Executive Committee, have been spending time in our practices working with our colleagues. I'm pleased that since the year end, the score has improved. Part of what attracts our colleagues to CVS is our emphasis and support on continued learning. Not only did we launch our new company values in November 2023, fostering a culture of continuous improvement, our new graduate programme continues to attract an increased share of available new graduates to CBS each year, and we only have a handful of places left available for our 2024 intake. We also launched our new nursing career pathway, which was received extremely positively with all practice colleagues, but particularly with our nurses. With the support of the Chief Veterinary Nursing Officer, this pathway demonstrates our commitment to developing lifelong rewarding careers for veterinary nurses. I'm pleased that despite the challenges on our profession, our total colleague attrition has fallen again during the year. At our Capital Markets Day in 2022, we committed to spending between 30 to 50 million per annum on CapEx to further improve our facilities. During the year we completed 16 property projects and alongside our investment in technology spent £43.1 million. Our investment provides an opportunity for growth, improves wellbeing and satisfaction across our teams and provides a pleasant and welcoming environment for our clients and their animals and helps us to deliver individualised clinical care. Our fourth strategic pillar is that we take our responsibilities seriously. This spans across everything that we do as a company and as a profession. Today we release our third sustainability report, updating our stakeholders on our progress against our six programmes. I'm pleased that we have seen a reduction in our UK carbon footprint, we've been smart about how to dispose of waste, progressing our antimicrobial stewardship agenda, and we continue to support our people and their development. We've promoted wellbeing across check-ins and group-wide initiatives such as our annual distance challenge, and we provide an environment where our colleagues feel equally included. I will now pass over to Richard for some closing remarks.

Thank you, Paul. I will close on slide 22. Whilst the past year has had its challenges, we have successfully laid the foundations for future growth. Our entry to the Australian market has been successful and we are excited by the opportunity it presents. We are confident of making further acquisitions in line with our strict investment criteria and we expect to achieve synergies from drug purchasing and through preferential terms now agreed with third party providers of laboratory and crematoria services. We have a new cloud-based technology platform, and this has the potential to unlock new revenue streams and to provide clients with an improved experience. We continue to be mindful of the economic backdrop, and we recognize that we face some short-term headwinds, but the fundamentals of the sector remain strong. We are well capitalised with a healthy balance sheet, headroom in both our committed and drawn facilities and our leverage, and we have continued strong operating cash flows. The financial results announced today and our future growth opportunities are all due to our outstanding team of colleagues who care passionately about our clients and the animals under our care. I would like to take this opportunity to thank them all for their dedication and commitment, and I look forward to sharing further success in 2025 and beyond.