CVS Group plc

Good morning, everyone, and welcome to this live stream of CVS Group's full-year financial results following the publication of those earlier this morning. I'm Richard Fairman, CEO, and alongside me I've got Robin Alfonso, our CFO, and Paul Higgs, our Chief Veterinary Officer. We have delivered further growth across our group. in the past year with improved UK operations and continuing expansion of our platform in Australia. Revenue increased by 5.4% to £673.2 million. We faced some challenges particularly in the first half of the year with softer market conditions in the UK. But it was pleasing to see a significant improvement in the final quarter leading to a positive full year performance with like-for-like growth of 0.2% across the group and 1% in our core practice division. And that improved trading continued into the first quarter of the new financial year. Adjusted EBITDA increased by 9.4% to £134.6 million from both acquisitions and continued disciplined cost management. And adjusted EBITDA margin increased by 70 basis points to 20%. Adjusted operating cash conversion was 76.9% for the year, ahead of our stated ambition of circa 70%. And in light of these strengthened operating cash flows and also the proceeds from the sale of our crematoria business at a 10 times EBITDA multiple, we finished the year with leverage of 1.18 times. We completed a further seven practice acquisitions in Australia. And we've completed a further two acquisitions comprising eight practice sites so far this new financial year. And that brings our total footprint in Australia to 51 sites. We're coming towards the end of the CMA market investigation. And whilst it was disappointing to face a further delay in the announcement of their provisional decision, we do look forward to receiving that very shortly. Now, the strong market fundamentals remain attractive and we are well positioned for further growth. We've strengthened our company and we're confident with the future growth prospects. So with that, I'd now like to open the call to questions from analysts. Now, given this call is being live streamed, when you ask a question, please state your name and firm. And I think that will be helpful. Charles.

Charles Wolfe from Peelhunt. Richard, can we start on Australia and can you just give a feel for how the market is trending there? Now you've got plenty that have been under your belt for over a year. Also discuss the synergies you're starting to see and a little bit on the cost of acquisitions and the pipeline.

Yeah. So if I start with the overall performance in Australia, we've been quite selective, as you know, in terms of the acquisitions we've made. We're looking for high quality, typically larger practices with four or five vets or more. And we're buying practices consciously in areas of high population and therefore areas where there are lots of pets. They also happen to be the areas where vets want to work and live. So, that disciplined approach has served as well. We're pleased with the performance in Australia and we've seen continued growth and the practices are performing in line with business cases. In terms of the market, demand has been good. The margins of those practices are above our group margin. And in terms of investments and financial returns, I'll probably pass over to Robin to comment.

Yeah, so I think in terms of – you asked a couple of questions around kind of cost of acquisition and pipeline. So our costs of acquisition largely are in two buckets. There's the cost of the DD, and also in Australia we have stamp duty. But also in Australia, typically, when we value a business, I think it says 80% is paid up front, and then a proportion, 20%, is deferred over a period of time. That gives us some protection, but it also leaves the vendor with some skin in the game, the opportunity to earn further value. There are – that is a contingent consideration that gets booked, and that gets booked as a cost of acquisition through the P&L. In terms of pipeline, the pipeline is strong. You know, I think in Australia there are probably three major players. There's Green Cross, there's VET Partners, different VET Partners in the U.K. and ourselves. And together we have about 15% to 20% of the overall market. compared to 60% in the UK. So there's a good opportunity. We spent just under 30 million last year. Today, in the first quarter, we spent about 23 million on two acquisitions, one larger acquisition of six sites. And we have a strong pipeline of opportunities where we've got agreed terms, we're just running through DD, and a much longer list of opportunities of people that we're talking to. So there's a really good, strong opportunity for further growth in Australia.

That's great. And Is there anything to highlight from the Sydney acquisition?

I think the main highlight for us is we were, I mean, it's a decent group of practice in Sydney, the capital in Australia. What we were slightly, we knew it was a premium asset. But actually, when we made the acquisition, there were a number of people, even in the UK, that said, oh, we are aware of that group of practices and It was really pleasing to see that you've acquired it and it's part of your portfolio. So I think for us, what we have been seeing is as we acquire premium assets, veterans are quite a small community. Vendors will speak to other colleagues and we're finding that we're getting an increase. So it's kind of inbound traffic now into us in terms of potential further opportunity to acquire their practices in due course.

That's great. Thanks.

Good morning. Kane Slutskin from Deutsche. Just, guys, on the sort of exit rates going to 26, you've obviously spoken about a better second half. It looks like vet practices did sort of 2% in the second. But could you just talk about that exit rate going into this year, bearing in mind the Q4 comp was relatively soft with the cyber events. So if anything you could help us with there. And following on from that, sort of just thinking more medium term, the 4% to 8%, you're still kind of reiterating as a target. I appreciate timing is uncertain, but what do you need to do to build back up to there?

Yeah, and maybe I'll pick the second part first and Robin can pick up the first part. But in terms of our 4% to 8% medium-term ambition, absolutely, we are committed to that and confident we can get back to that level. I guess a number of factors at play there. One is hopefully improved consumer confidence in the UK. We all eagerly await the announcement in November in the latest budget. But it does feel like consumer confidence is slowly returning. But we want that to continue. Certainty from the CMA process, I think, will help because the scrutiny the sector has been under over the last couple of years and some of the kind of press articles haven't helped the sector. And then there's the cohort of puppies and kittens born in the peak COVID period that are now typically kind of healthy animals, kind of four or five years old. But we all know they will age. And as like humans, more things go wrong in later life and more clinical care is required. So there's that. kind of tailwind, if you excuse the pun, that will benefit our numbers in due course. In terms of the final quarter and leading into the first quarter of the new financial year, maybe just ask Robin to give a bit more colour.

Yeah. We haven't shared a like-for-like number in terms of the year-to-date like-for-like percentage growth. But we have given some, I suppose, data points. H1 was minus 1.1%. We said we didn't return to growth until Q4. And the four-year line is at positive 0.2%. So, simple math would dictate, you know, we saw probably underlying 2% to 3% growth. through the final quarter. And yes, we had a cyber event in that final quarter in our comparatives, but it's pleasing to see that growth continue into the new year.

Thanks. And maybe just one quick one. Just thinking now we've got the guide is sort of seems consistent with consensus. Just wondering sort of how much inorganic growth, I mean, I probably need to go do the numbers myself, but while I'm here, if you could help me, just sort of, the sort of post-period end acquisition, that bigger one you've announced, how much revenue in EBITDA is that? Is that sort of like 10 to 50 mil of revenue, maybe two, three mil of EBITDA? I'm just trying to get a sense for how much, you know, it's becoming a little bit tricky now with all the acquisitions to kind of see what underlying is ready nowadays. But yeah, anything you can help me with there. Thanks.

Yeah. Well, maybe if I just provide you EBITDA numbers, if that's okay. So we've spent 23 million in year to date. I think we've shared before multiples in Australia are good. They're at creative levels. There's about eight times multiple-ish on average, sometimes a little bit less, sometimes a little bit more. So that would be about two to three million annualized EBITDA. Some of those acquisitions were made towards the back end of the quarter. So you just have to then prorate that. Yeah.

And in terms of revenue, we've said margins in Australia are slightly better than the group, so you can back-solve that. Andrew.

Thanks. Good morning. It's Andrew from Investec. Just following up on those questions, actually. One on Australia. Do you have a sense what the rate of the market consolidation is there? I know the presentation says you're sort of 15% to 20% market consolidated. And what I'm trying to do there is just understand how much runway... till we get to a situation similar to where we are in the uk right and then obviously being an analyst looking further are there other geography what stage do you start to think about other geographies when you're comfortable that australia is going in the way that you want so that's that's question one and then just following up on kane's question a four to eight percent like for like growth rate um Just trying to understand what the drivers are in the same way Cain was. Is that continued value accretion? Are you continuing with contextualised care? I'm just trying to think about that. What the answer is, is it value, volume, mix? What's the big driver in that getting to 4% to 8%?

Yeah, and Paul, do you want to start with that part? And I'll pick up the first part of the question.

Yeah, I think you pick up a great point around how do you create that value? And we've got a big focus at the moment on the client experience. And that's because as a profession, perhaps... We've had a great focus on our ability to deliver fantastic care for animals and I think we need to progress how we give that care to our clients, our pet owners in particular as well, and really demonstrate the value of the care that we provide. I have absolutely no doubt that our colleagues provide the best clinical care they possibly can. We can absolutely demonstrate that and demonstrate that value to our clients. And that's work that we're continuously doing. So I think that is a big action that we're taking at the moment. Driving confidence in the consulting room. We have our new graduate programme now. We have a new consulting skills programme which enables that communication with a real refocus from not necessarily a clinical outcome being the right outcome but shared decision making. So ensuring that our pet owners leave that room with the absolute confidence they've made the right decision for them and for their animal which is a slightly different shift potentially to always making the right diagnosis. It's a subtle reframing but it's an important one.

And in terms of the market share and the consolidation levels, Robin talked about the two major groups being VET Partners and Green Cross. There's also a smaller private equity-owned consolidator called VET Central. They're owned by Pemba Capital. So all three of those groups have actually more practices than we do. VET Partners, about 250, Green Cross. under 200, Vets Central, I think, over 50. I think in terms of scale, given the size of our practices, we're probably third in terms of scale. But in terms of consolidation, we think the market is between 15% and 20% consolidated, so plenty of opportunity for continued expansion of CVS. We will continue to be disciplined, though, in that we want those high-quality, larger sites because we're they de-risk our entry in that if you lose a vet post-acquisition, if you've got a larger team of vets, it's much easier to recruit into. And we've been pleased with the approach and performance so far. But we definitely see a strong pipeline of further opportunities. In terms of other people consolidating, there is competition for deals, but probably less than it was in the UK a few years ago pre the CMA process.

So you're not thinking you need other geographies at the moment?

Not yet, but equally in due course there may well be further opportunities for growth. Australia was really attractive because it's English speaking and the approach to clinical care is very similar to the UK and the clinical standards are very similar. So it had very attractive features and obviously with low levels of consolidation, That was an added attractive feature. So that's not to say there won't be other markets in due course, but certainly not in the short term. Great.

That's very helpful. Thanks.

Charles.

Sorry. James. Morning all. James Bayliss from Berenberg. Just two, if I may. On the online platform, can you just talk us a bit through where you are in terms of the investments you've been making to improve customer click through the migration to cloud and how you see that then driving a recovery or further performance on that side of the business over the next few years? And then secondly, in the context of vets up 4.5% year on year organically, can you just give us an update on what the kind of the wider backdrop is in the market in terms of recruitment, perhaps the differences between the UK and Australia in that regard? Thanks.

And maybe Paul can pick up the latter. In terms of the platform itself, we did invest in the first half of the last financial year in improving the Animo Direct website and the kind of customer journey. We have seen an improvement in revenue growth in the second half. And that will continue into the new financial year. But the market online is tough. We have seen some clients trade down from the premium pet food that we sell online. So the likes of raw cannon and hills, etc. And some clients are buying kind of cheaper supermarket pet food. So there's definitely been a trade down of some clients. But we are continuing to invest in that platform, both in the experience for the client, but also driving more repeat business as well. So subscriptions, for instance, is a new feature we've recently added. We will continue to try and optimize that platform. And hopefully we do see a return to growth in the pet food side as well.

If I pick up on that in terms of the kind of feeling within the workforce, there's no doubt that there still is a workforce shortage. And the Royal College have identified that they anticipate that shortage to become less relevant within the next few years. And we're certainly seeing a continuing improvement in the number of vets there. working in the UK. Some of that is an increase in the number of vets coming through vet schools. We have new vet schools that have opened in the last couple of years and we have larger cohorts of vet students coming through. Obviously that's contributing to our less experienced number of vets in the UK but we're also seeing through the activities that we undertake around caring for our colleagues that we're seeing better retention within the profession and in fact we're we've seen a much easier recruitment into some of those tougher-to-staff areas in the country, so a lower reliance on locums, for example, and I think that increase of 4.5% really reflects on that. Actually, we're able to recruit into some of those more challenging areas now. Charles?

Hi, Charles Weston from RBC. Clarification question first, please. In terms of guidance for this year, you've said you're happy with consensus, which I think is 141 million for EBITDA. Is that including the acquisitions that you've made in the first couple of months or excluding them?

I mean, I can't talk for every analyst on what's included in their numbers, Charles. I'd imagine it would include some of those acquisitions, yes.

I guess analysts probably don't include the acquisitions that you've just announced.

Some may, some may not. And then they definitely don't include future acquisitions.

Okay, thank you. And then secondly, just on the cyber sort of softer comps for the second half, which I think was a couple of percentage point effectively a tailwind. Is there a tailwind from cyber in the first few months of this year that's giving you a bit of a sort of a head start on a year-on-year basis? And if you think about the 4% to 8% that you expect in the medium term, and the kind of roughly zero that you had last year, could the like for like be sort of halfway in the middle this year? Where should we be thinking on the like for like for 26?

Yeah, I think the start of this year, the comp is far less soft than it was in the final quarter. I think the one disruption that we continue to face maybe in the first quarter of last financial year was that our teams are still getting used to their new practice management system. But by and large, that disruption was far less. The peak period of disruption and therefore softer comp was the final quarter when we had the cyber incident and then we rapidly migrated onto a new platform. And Paul can maybe comment on how Vets are finding that system now.

I mean, early adoption is always a challenge, but actually it really only took six weeks to roll the majority of our practice out onto that, so very much within the end of the last financial year and previous financial year. Now we're seeing significant engagement with that. In fact, I think if we asked our colleagues now how they would respond, whether they would prefer this system versus the previous system. Hands down, they would prefer this system. It enables a much wider access to client records. For example, if you work in one of our night services now, you can access the records from any of our practices that are sending cases in, whereas previously that wouldn't have been possible overnight. So it's definitely freed up an awful lot for our colleagues. There are efficiencies within that system. So, for example, there were... There's a function there which is simply called forms, which is a really simple way to input your clinical data and to also formulate that into, for example, a discharge sheet. So it actually is now bringing significant efficiencies into practice.

And in terms of the 4% to 8%, we are still confident of returning to that, as I said earlier. We talked about the building blocks to that. The one thing I didn't mention, I guess, is price. We have been quite conservative on price in the last couple of years, as you'd probably expect during the CMA process. But we absolutely believe that clients will pay for high-quality care. And we continue to invest in improving our practices and services. investing in our teams to provide that continued great care to our clients and their animals. So with some pricing, the return to consumer confidence, the investment in quality and also making sure that we service the increased demand that will come from that COVID cohort of puppies and kittens. There are a number of building blocks you can see that will hopefully get us back to that medium term ambition.

Just a last question from me, if I can. In the prepared remarks on the video, you said that there was an expectation that there may be UK M&A opportunities opening up at the end of the CMA investigation. Have you sort of had conversations with potential vendors already? Do you envisage that being more sort of trading between the groups or more of the sort of independence perhaps setting up with perhaps additional pressure from the CMA?

Yeah, I think probably the latter in that I suspect there are a number of independent practice owners that may have considered selling their practice and have possibly been frustrated over the last couple of years because we know Linnaeus bought a small group in the Rutland area, but there haven't been many transactions that have happened. We're all eagerly awaiting the CMA findings, and they will apply across the entire sector, not just for the corporate groups. And therefore, we do expect some vendors will want to approach corporate groups and look to sell their practices post-CMA process. We will continue to be selective. We would hope multiples have come down from the peak a few years ago. But we absolutely believe there are U.K., acquisition opportunities. And we have less than a 9% market share. So there are plenty of white spaces in the UK where we don't currently own practices or we own very little. And selective acquisitions can certainly augment the practices that we already own. Thank you. Thanks, Charles.

Sahil. Hello. Sahil from Singer Capital. Charles, actually, just got one of my questions in there. But Just sort of building on that UK acquisition, how should we be thinking about your view on capital deployment going forward over the next few years or so? Because clearly... Australia has got good momentum at the moment. The multiples are attractive. Just sort of help me get a sense of that. Secondly, where are we in terms of green fields in the UK and the ones you opened a few years ago? Just an update on that would be really helpful. And plans going forward once we get clarity on the CMA. And probably one for Robin. Given last year there was a lot of cost headwinds, And you did really well in terms of improving margins. Do you have a sense of what kind of like for likes you'll need this year to offset any cost inflation that you're anticipating in the current financial year? Thank you. Do you want to start with that one? I'll pick up the capital deployment.

Yeah, so as you rightly say, we faced some national wage increases last year, some national insurance contribution increases. We said the annualised impact of that was between 11 to 12 million. It started from April 25, so there's a manualisation of those costs. And against that, we have been looking at our cost base. I suppose the areas that we've been looking at to kind of help drive, there's some efficiency savings in terms of headcount. And we've delivered some of that already. We've delivered sufficient to kind of offset those costs. There are also some purchasing synergies. We every day look at buying of drugs and make sure that we have the most optimum net net prices. But we actually think there's an opportunity right now for us to drive that harder. And I think that will help offset. And then we've locked into some favorable kind of utility cost savings. We forward buy our gas and electricity. So, those three will offset I believe most of the cost inflation. We've not shared a kind of a like-for-like guidance number, but I think the kind of the market consensus revenue and the like-for-likes will be sufficient to offset kind of cost inflation plus those activities.

And then in terms of capital deployment style, we are in a good position, I guess, in that our leverage reduced during the year and we finished the year at 1.18 times. So we have capital to deploy and we will continue to adopt our selective and disciplined investment criteria. In terms of those investments, we absolutely believe there's an opportunity for further growth. accretive acquisitions in Australia and as I said returning to UK acquisitions hopefully in this financial year but we will continue to be selective in terms of the practices we acquire. We're also committed to improving our existing facilities in the UK and that's both the practices themselves and the space both from a client perspective but also for our teams and also investing in high quality equipment because obviously that allows us to provide that great care So, we will – the three of us sign off on all investments and we will continue to adopt that disciplined approach. But we do see options ahead in terms of further investment for growth. And we're seeing good returns from that investment at the moment. In terms of greenfields, we have opened a few greenfields in the last few years. And that, I guess, if we don't see an acquisition opportunity in a certain area we want to expand, that can be helpful. I suspect in the UK our focus will be more on acquisitions rather than further greenfield sites. That's not to say there won't be any, but I guess we do feel acquisitions will be back on the table this year. Any questions from the call?

So there's no questions from the calls, but we do have one from the webcast from Roland French from Penman Securities. How are you incorporating AI or machine learning into the practices and your broader processes? And is there an opportunity here?

Absolutely, there is. And I'll hand over to Paul, who's actually using some of that AI at the present.

Yeah, I think we need to probably separate out the AI and machine learning, which is a separate component. We certainly at the moment don't use machine learning from a clinical diagnostics perspective. And that's importantly, from my perspective as chief veterinary officer, that... At the moment, we don't have sufficient evidence to be secure in the way that that's functioning. So we're exploring it, but not something that we're engaging fully with. What we are using AI with is support in the consulting room, again, to build in efficiency. So we have a trial at the moment with a scribing AI. function which will record the consultation so that the vet has to make no notes at all can fully engage with the owner and it will then structure the clinical notes in the same format every single time and it can then also automatically create a note to for the owner to take away so um what would obviously within the profession be termed a lay person's interpretation of the clinical notes. So it actually really builds in not just efficiencies in there, but enables really great clinical record taking, which can be a challenge in the timeframe that we have, but it also allows our colleagues to engage directly with owners and not have to worry about writing those notes at the same time. So that's the key element of AI that's in practices that we are using at the moment.

It's just worth adding, we also already use AI in terms of those processing of invoices through AP. So that's something we've been using for some time already.

Brilliant. Thank you.

Any other questions?

That's all the questions from the webcast. Over to Richard for closing remarks.

Yeah, thank you. So first of all, thank you all for joining this presentation this morning. And thank you for your continued support. I'd like to close by thanking our fantastic team of colleagues because these results are all due to their contribution and significant focus on providing great care to our clients and their animals. And we really appreciate all of their hard work. And I look forward to sharing further success with you all in the coming months and years. Thank you.