Cvs Group Plc

Hello, everyone, and welcome to this presentation of our interim results for the half year to December. I'm Richard Fairman, Chief Executive, and I'm joined by Robin Alfonso, CFA and Ben Jacklin, Chief Operating Officer. It's a shame we can't meet face to face and Robin, Ben and I are all in separate locations, but we will run through a presentation and we will then have time for questions. I will open with an introduction to the half year and a strategic overview robin will talk through the numbers and then ben will provide an operational update linked to our strategy before i conclude with some comments on our outlook i will start with the key financials as set out on slide five for the first half of our financial year we generated a 9.4 percent increase in total sales Reflecting growth across all of our divisions, our like-for-like revenue growth was 7.8%. And this resulted in a 19% increase in EBITDA, all in comparison to the equivalent half one period in the previous year. Our adjusted EBITDA margin increased to 18.4%. We maintained our vacancy rate at 7.4% and we saw a 3.6% increase in the membership of our preventative health scheme, the Healthy Pet Club, with 430,000 members at the end of December. There are some favourable market trends which provide a strong platform for our services over the longer term. Industry reports are now providing evidence of an increase in the pet population. Cats and dogs are referred to as companion animals, and the restrictions in the past year on social interaction have seen an increased demand for pets, breeders charging significantly more for puppies and kittens, and increased demand reported by rehoming centres. Results from a recent PDSA survey indicate that there are now 21 million cats and dogs in the UK. Separately, the Pet Food Manufacturers Association, in their recent report, put this number at 24 million, and they said that 3.2 million UK households had bought a pet since the start of the COVID-19 pandemic. This clearly highlights there's no definitive industry view, but all the evidence points to a growth in the number of pets in the UK. We are also benefiting from favourable spend dynamics. with a trend over a number of years of increased humanisation of pets. For example, more dogs sleeping in bedrooms. As with human health, better clinical diets and advances in the clinical treatments available should lead to an increased life expectancy. And it's also worth mentioning the social and wellbeing benefits of pet ownership. Again, in the recent PDSA survey, 94 percent of pet owners said that owning a pet makes them happy with 86 percent saying pet ownership improves their mental health we are well positioned to benefit from these tailwinds we have a fully integrated model with first opinion veterinary practices at the core of our business supported by specialist-led multi-disciplinary referral hospitals our own diagnostic laboratories, our network of crematoria and Animed Direct, our online retailer of food and drugs. Through this fully integrated model, we can provide high-quality end-to-end care to our clients and their patients 24-7. This also gives us scale, which is particularly important for purchasing synergies, and we have strong barriers to entry. Through our referral hospitals, our laboratories and our crematoria, we also provide these services to independent third-party practices. We are a highly cash-generated business with continued prudent capital allocation. We will continue to invest in our clinical equipment and our practice facilities in support of organic growth, and we have the opportunity to make further acquisitions. So I'm confident that we are well positioned as a business to benefit from the favorable market dynamics and to deliver further growth in shareholder value. The growth in pet ownership is not only good for our business in the short term, but also in the medium to longer term. In the early years of a pet's life, there are some obvious additional veterinary procedures required, such as neutering, first vaccinations, and in some cases, microchipping. Puppies and kittens can also be overly exuberant at times, leading to injuries which also require treatment. Cats and dogs typically then lead healthy adult lives. However, we will continue to provide a full range of services to adult pets, including routine checks, preventative health services, regular dental treatments, and clearly we can provide additional services as and when required. However, As with human health, it's the later senior years when pets typically require much more veterinary intervention. For example, for the management of chronic disease, remedial dentistry, lumps and bumps requiring examination, and in some cases removal, and the increased need for specialist prescription diets. Through our fully integrated model, we can provide services to patients throughout their differing life stages. We focus on providing great clinical care and by working up cases fully in our first opinion practices, this inevitably results in more diagnostic tests for our laboratories and also increased referrals to our specialists. And through Anomed Direct, we are well positioned to benefit from increased food sales online. And we also provide compassionate cremations following end of life. Hence, we are well positioned to benefit from increased pet ownership and increased consumer spending on pets. And that's not only in the short term, but in the medium and longer term, when these new puppies and kittens reach their senior years. Whilst we're now seeing the benefit from COVID-19 in the form of increased pet ownership, we have, of course, alongside many businesses, faced considerable challenges in the past year. A year ago this week, we entered into the first UK lockdown and we were restricted for a period to only performing urgent and emergency work in our first opinion small animal practices. In light of this, we saw revenue in our small animal practices fall by roughly a half and our light for light revenue for that half year was 6.9% lower than in the previous year. The client demand, though, remained strong throughout the lockdown. And as restrictions eased, we saw a strong recovery, such that by July, revenue had recovered and was ahead of the pre-lockdown level. Whilst we've seen new lockdown restrictions imposed, firstly through the circuit breaker lockdown in November, and more recently in January this year, the Royal College of Veterinary Surgeons have imposed far less severe restrictions And we have seen limited impact to our operations such that revenue has continued to improve. This is a reflection of the strong client demand and the favorable market dynamics and demonstrates the resilience in our business and the sector as a whole. This is also credit to our fantastic team of people who have worked tirelessly over the past year. And I would like to take this opportunity to thank them all for their support. Our people are rightly at the heart of our strategy for growth, and our vision is to be the veterinary company people most want to work for. Sustainability and ESG are a key focus, and we have set out further detail on this in an appendix. Investing in our people is a key element of our social focus, and we have implemented a number of initiatives to provide support to our colleagues. I personally chair our wellbeing group, and this is important at any time, but particularly in the past year of COVID-19 destruction. We are the first major veterinary group in the UK to offer enhanced maternity pay. We continue to invest in learning, education and development, and we encourage employee shareholding through our Save As You Earn scheme. Our practices also play a pivotal role in their local communities. And this includes employee fundraising for local charities. We match this with a CVS donation to VetLife, a charity which plays a key role alongside our own focus on wellbeing and positive mental health support. The feedback that we receive from our colleagues is that this focus on our people is a real differentiator of why our colleagues want to work for CVS. We are also well positioned for further acquisitions to augment this organic growth. we have strengthened our acquisitions team we have implemented a new proactive and targeted approach to lead generation we have accelerated our completion time scales through more focused due diligence and our integration planning starts with our very first discussion on a new target we have completed eight acquisitions in the year to date and we have a pipeline of opportunities with a focus on small animal practices so that we realise the synergies of our fully integrated model. I will now hand over to Robin to cover the financials.

Thank you, Richard. As set out on slide 13, we've seen a 9.4% increase in revenue with like-for-like sales growth of 7.8%. Our like-for-like sales growth adjusts for working days. It excludes current year acquisitions and only includes prior year acquisitions from the same month this year as it was acquired in the previous year. For an established business, the like-for-like growth sales was pleasing, giving the strong H1 comp, the circuit breaker lockdown in November, and our annual small animal price increase being delayed from 1st July 2020 to 1st Jan 2021. The operating leverage of the P&L means that a large proportion of the revenue increase drops through to improved EBITDA. So typically, circa 25% of revenue is paid out for cost of drugs and goods, circa 50% for employees, and that's relatively fixed, and circa 8% for general overheads and establishment costs, which are also largely fixed. This has resulted in EBITDA margin improvement of 1.5 percentage points to 18.4%. Free cash flow benefits from improved EBITDA and working capital benefits. H1 benefited from lower drug costs carried over from Q4 last year during the first lockdown. leverage of 0.72 times is an improvement from 1.14 times that 30th of june 2020 although we still have 15 million of that deferral from q4 last year still to pay and adjusted eps benefits from improved ebitda and on acquisitions we spent 10.6 million in the first half on four acquisitions or small animal all at a proforma adjusted multiple including synergies of less than 10 times revenue growth of 9.4 percent was delivered across all our divisions the veterinary practice division comprises our small animal referrals farm animal and equine veterinary practices as well as our buying groups vet direct and my pet insurance this benefited from the continued focus on delivering quality clinical care, stable vet vacancy rate, and growth in our Healthy Pet Club. The Healthy Pet Club not only grew 3.6% in the half from 415,000 members to 430,000 members, but we also put through a 6% price increase in October, which will take a full 12 months to roll through the book. The laboratory division benefits from the increased volume of analyzers in practice, which supports testing in-house. which we supply the reagents for the tests we also saw increased volume of tests in our laboratories driven by the focus on clinical care and diagnosis of the complaint in first opinion practices the laboratories also benefited from private covert testing which we were able to do in half one the crematoria division benefited from an increase in customers choosing individual cremations And Alamed Direct, our online food and farmer business benefited from increasing demand for pet food online. Onto slide 15, which sets out our EBITDA growth. The 9.4% revenue growth coupled with a 1.5 percentage point improvement in EBITDA margin resulted in a double digit growth in EBITDA from 37.9 million to 45.1 million. Given the timing, which was towards the end of the half, the contributions from the four acquisitions was relatively small. The EBITDA margin improvement was mainly from improvement in employment costs as a percentage of revenue, with stable gross margins offset by increases in central costs for COVID-19 and one-off property surveys. CVS benefits from favourable working capital dynamics. Clients typically pay for services before they leave. Circa 40% of our active client base are HPC members and pay monthly on direct debit. And drugs costs typically have delayed payment terms. Our revenue is also relatively predictable. 12% of our revenue from HPC members paying monthly. There is a small amount of seasonality, particularly in equine and farm. And small animal is impacted by holidays, especially bank holidays and weekends where we run a reduced service over reduced hours. We've proven in the past that when we stop investing in acquisitions, we deliver quite quickly. From a leverage position of 2.4 times at December 2018, when focus moved to organic growth, leverage has fallen circa 0.4 of a turn every six months. We refinance our debt facilities, and they're committed through to January 2024, and we have ample financial headroom in covenants. We have a strong balance sheet with 170 million of committed facilities and low leverage at 0.72 times. Our favourable working capital profile means we have high cash conversion at 92.5% and therefore free cash flow of 31.5 million after tax and interest. The strong balance sheet and good cash dynamics means we have capital available to invest in growth, either through acquisitions where we spent 10.6 million in the first half or through capital investment where we spent 6.2 million in the first half. there is scope for further investment in both these areas. I will now hand over to Ben who will cover the strategic and operational updates.

Thanks Robin. On slide 19 we lay out our company strategy which sets out our purpose to give the best possible care to animals which we're delivering through our clear vision to be the veterinary company people most want to work for. Both our focus on the critical KPI of vacancy rate and our monthly tracking of employee satisfaction are reflections of this vision. Beneath our purpose and vision are four strategic pillars. Firstly, that we recommend and provide the best clinical care every time. Secondly, that we're a great place to work and to have a career. Thirdly, that we provide great facilities and equipment. And finally, that we take our responsibilities seriously. Starting with that first pillar, the quality of service we're now offering is driving significant client value and our commitment to recommending and providing the best clinical care is paying dividends. We are absolutely committed to ensuring that when owners bring us their pets, they'll have the best diagnostic and treatment options recommended to them. And our focus on supporting our clinical teams to deliver this has continued, particularly through our network of hub clinical leaders across our business. These efforts have driven a circa 6% increase in spend per client over the first half of the year, despite the postponement of our annual July price rise. As well as offering first-class care to sick or injured animals, we are continually improving the levels of preventative healthcare through our Healthy Pet Club, which offers routine flea and worming treatments and vaccinations, as well as twice-yearly health checks, which allow us to identify disease processes and recommend the best diagnostics and treatments. The scheme membership has grown by 3.6% over the first half to around 430,000 members, representing roughly 40% of our companion animal client base. We've also worked hard to improve our processes to attract more cases into our referrals division through internalisation of our own referrals and attracting those from third-party practices, reflected by a 21% increase in caseload in our referral hospitals compared to H1 in 2020. The expansion of our network of advanced practitioners has also continued, which enables us to capture advanced procedures in our first opinion practices where a referral to a tertiary referral hospital is not merited. Slide 21 is a great example of our work in the area of clinical excellence, as this month we published our annual quality improvement report. This industry-leading report reflects our commitment to patient safety and consistent clinical improvement and has gained a significant recognition in the profession, not least by our regulator the RCVS. The report provides a clear and measurable account of ways in which we are improving clinical care, including areas such as antimicrobial stewardship and improving animal welfare, both areas in which we take our responsibilities extremely seriously. Richard spoke of the critical importance of our people, and this slide speaks to the continued work we do to engage with our colleagues, not least during the COVID-19 pandemic. Amongst a range of initiatives, we've partnered with the University of Nottingham to deliver a unique four-year accredited graduate programme, which we launched this autumn. Supporting and mentoring a pipeline of talented graduates is a central tenant to our ongoing commitment to reducing our vacancy rate, which has remained stable. This has also been supported by a large number of roles filled by internal candidates and a significant number through our highly successful Refer a Friend scheme during H1. On the following slide, we outline our continued efforts to build the best learning, education and development platform in the profession, the Knowledge Hub, which has over 2,300 users per week so far in 2021. On the platform, we now offer over 130 live courses and programmes. And impressively on the platform, we have had over 12,000 webinar views since March, all of which reflects the critical role continued professional development has in the retention and recruitment of talented colleagues. We are committed to enhancing the specialist services we offer, particularly in the quality of our on-site facilities. And as such, we've completed six refurbishments in H1 and intend to complete a further eight in H2. The quality of practice facilities is directly related to our ability to recruit vets and the ability of our clinical teams to deliver the best possible care. Therefore, refurbishment is a fantastic investment opportunity for us. We're also deploying new industry leading techniques across our practices, including dental radiography and keyhole surgery for neutering, which is now in operation in 38 practices across the group. The rollout of our contact centre to ensure outstanding access to our services for clients, paused during the pandemic, has resumed with 33 practices calls now handled through Careline. The majority of our clients phone our practices seeking an appointment, and when practices transition to Careline, we see a greater than 80% improvement of conversion of calls to appointment, thus providing our clients with best-in-class access to our services. And finally, on slide 25, we've shared an example of a recent refurbishment of the Grove Veterinary Clinic in Deerham to a state-of-the-art site with dedicated parking and outstanding clinical facilities. Investments such as these enable us to offer the best possible care to our clients and patients, ensure we can attract the clinical teams we need and represent a great return on investment. I'll now hand over to Richard for some closing remarks.

Great, thanks Ben. So I will now focus on our outlook. And on slide 27, I've set out some key financials for the first eight months of the year to the end of February. Total sales growth is 8.7% for the eight months year to date. And this includes February, which is clearly a shorter month in terms of working days. Light for light sales have increased by 8.2% year to day ahead of the half one growth. We have seen a further slight reduction in leverage, which was 0.7 times at the end of February. Adjusted EBITDA margin is 18.1% for the first eight months. Our vacancy rates remains stable, and we continue to see an increase in our Healthy Pet Club membership base. Hence, the strong performance in the first half has continued for the first eight months. I am confident that the foundations have been laid for future growth we operate in an attractive and resilient sector and the market is growing with increased pet ownership and favorable consumer trends we have a clear people-focused strategy to drive growth and we have strengthened our senior management team we operate a fully integrated model with first opinion practices supported by specialist-led referral hospitals our own diagnostic laboratories, and our network of crematoria. And we have our online business, Animed Direct. This allows us to provide high-quality end-to-end clinical care 24-7. We also have the opportunity to augment organic growth through further acquisitions. So that concludes our presentation. And I'd now like to invite questions.

We'll go to Alan Smalley at Davey.

Oh, thanks for taking my question. Hi, Richard. Hi, Robin. Hi, Ben. I have three questions just to kick off. The first one is just a really short-term question related to really near-term demand. And the rolling revenue chart you presented on page nine I thought was really helpful. And I suggest that like-for-like revenue growth in March may have stepped up a notch again further versus Jan and Feb. So if you can comment on that. would be helpful. Secondly, I'd just be interested in terms of how you're thinking about planning for vet capacity for the remainder of this year as lockdowns continue to ease and some of those demand constraints come off. So what I'm really asking is to what extent do you think there's further pent-up demand for the remainder of the year as the situation improves? And then the final question I'd just be interested with respect to the Healthy Pet Club, do you have a sense at what average pet age owners take out membership? And I'm trying to understand whether That's really a lagged function of the step up in demand we've seen currently or pet ownership we've seen currently that will come through in a couple of years' time. Thank you.

Thanks, Alan. If I pick up the first question, near-term demand in March. We obviously aren't going to give detail on March trading. We've given the first eight months, but what I would say is that the chart, as you rightly imply, shows a continued trend of strong client demand. The regulations we currently work under the RCVS haven't actually changed from the start of January. So the RCVS flowchart remains unchanged currently, albeit clearly the signals are we're coming out of lockdown. The government's announced the route out of lockdown and the RCVS will naturally respond in due course. The one thing that has changed as a positive change in March is that schools are now reopen. And unfortunately, in England, our vets haven't met the criteria of critical worker unless they're farm vets. So our first opinion small animal vets don't meet the critical worker status. So the fact that schools are now reopen is certainly a positive. And the client demand has been there throughout. The second question in terms of pickup demand. Ben, I don't know if you want to talk about the kind of work we've been able to do, but we clearly can provide essential services. And I know our vets have been keen to avoid building up a backlog again.

Yeah, so the recent restrictions from the RCVS are far less onerous than they were at the beginning. We also have a, our vet workforce have been through the process of delaying that work a year ago and seeing some of the animal welfare impacts that that led to. So the guidance is very much that the individual vet makes a determination on what work is appropriate, but largely the majority of work that we do, because the definition of it is essential and most of the work we do is essential, means that we don't anticipate a significant backlog of work this time compared to what we saw a year ago.

Thanks, Ben. And then in terms of the Healthy Pet Club membership, we can sign up clients at any stages of the animal's life. Typically, clearly the obvious time to have a conversation about preventative health is when we're seeing puppies and kittens for the first time. So clearly that's a great opportunity for signing clients up to Healthy Pet Club and talking about the benefits of the preventative health scheme. But also talking about the kind of requirement for insurance and we offer our own insurance product, but we also actually engage in a discussion with insurance because regardless of whether a client buys our own insurance policy or a third party's insurance policy, if they are insured, they're clearly better able to provide the best quality care for their animals.

Maybe also just with me adding there, Richard, just so everyone's aware, our practices, waiting rooms and consulting rooms are still closed. We don't have clients in the building. And that does present some challenges with signing people up to the Healthy Pet Club at the moment, because our normal processes are that's done by our nursing teams and our customer care teams in reception. So there are some challenges with not having clients in the building on the signups. I think there was also just another part of that question on resource planning for vets as well, which I'm happy to pick up. I guess the vet vacancy rate remains a challenge. It's great that we've maintained a stable vet vacancy rate in the results we've just shared. uh there are lots of efforts to make sure we maintain that including taking a record number of new graduates in the summer we've already started our recruitment process already to try and take more graduates than we have before and that includes launching the first summer camp for new graduates that's been done in the country so we will have graduates for a period of three weeks before they actually start in clinic with us which has been great at attracting more new graduates to join us We're also literally, as we speak almost, going through the changes to the IR35 regulations, which will limit the tax efficiency of contractors or locum vets, as we call them, operating in that manner, which makes employment more attractive. And we're working hard to offer more flexible fixed term contracts, variable hours contracts to those potential employees who've currently been locum. So that remains an opportunity. But overall, it does remain a challenge, particularly after a year of dealing with the COVID challenges. and it remains probably our biggest focus.

That's really helpful, Colour. Thanks, Richard. Thanks, Ben.

We'll go to Callum Battersby from Berenberg.

Yeah, morning, guys. Thank you for the presentation today. Just a couple of questions for me, please. So firstly, you've now given a bit more colour on the increase in client registrations, which is really helpful. I was wondering if now that you've delved into the data a little bit, if you think there's any meaningful impact from this in the numbers? So as Richard said, the spend on things like tutoring initial vaccinations to take place solely in the annual first year. I'm just wondering kind of if we should expect that this creates a significant part of the revenue growth this year that potentially creates difficulties in the comparative for FY22 or if you instead think that this growth can continue. And then the second question, clearly you're a bit more comfortable now on the M&A front. I was wondering if you expect the majority of future spend will be in the UK or if we should expect any more international development on the horizon. Thanks.

Thanks, Colin. So in respect to the first question and client registrations, I think we're yet to see a real kind of meaningful impact from increased pet ownership. So yes, our client registrations are up and that has meant some additional procedures, but we don't see that falling away anytime soon. And actually the slide I talked through about the longer term benefits, medium and longer term benefits of increased pet ownership. I think it's very much the case and that tailwind of growth will be here as a kind of benefit to our business for the medium and longer term. In terms of light for light growth, we are clearly entering a period, we're about to enter a period where the comparative is a weak comp given the COVID restrictions and the severe restrictions we were operating under last year in the first lockdown. um but but yeah we're confident we're well positioned to see further growth um from you know from our focus on really driving high quality clinical care and we we focus on working up cases fully and providing not only choices to clients but recommendations that allow clients to be very informed about what's best for for their patients so so that is very much a positive which we see continuing in terms of m a activity clearly we are well positioned within the uk with our fully integrated model and hence we see a significant opportunity still in terms of growth in the uk we are more proactive now in terms of the acquisitions focus we've got a strengthened team we've got a stronger pipeline and importantly we are able to execute quicker now than we were previously having revised our approach to acquisitions And also critically, the integration planning starts with the very first conversation that we have about a potential opportunity. So Ben, Robin and I will sit down with our acquisitions team and the operations team and really think through why we would be attracted to a practice, what the synergies we believe we can bring from our integrated model. And importantly, what's the kind of implementation plan so that we are confident we'll achieve those synergies from day one. Clearly, we have a foothold into Europe with practices in the Netherlands and Ireland. We recognise there are further opportunities that may present in due course, both in our existing countries of operation, but also in other areas such as Germany and France, which are significant markets and are now opening up to consolidation. So clearly, we are aware of those opportunities that will be assessing them, but equally we have a strong opportunity within the UK with our fully integrated model, clearly bringing benefits. And the focus is very much on the small animal area because that's where we get the most synergies from our integrated model.

And we'll go to Andrew Whitney at Investec.

Hi, Richard. Hi, Robin. Hi, Ben. Just one following up, I guess, on the acquisition piece. I'm just thinking about the referral revenue is growing at sort of double the group revenue growth rate. I think you reported about 22%. Have you got all of your services that you could put into that division already into the referral piece? Or is there a capital allocation thinking that needs to happen you know external acquisitions in the uk in small animal versus building further services you can add sort of as referral services how do you how do you balance those two priorities yeah morning morning andrew um i think you yeah a good point we clearly have some great coverage through our referral hospitals and we've had success in the last couple of years in recruiting more specialists

in offering, therefore, a broader range of services and also actually in encouraging more internal referrals. Ben, we always protect the kind of clinical freedom of our first opinion vets because that is really important. But I know we've worked hard to encourage internal referrals and make internal referrals easier. And also, we are A key part of our strategic focus is investing in our clinical facilities and our clinical equipment. And that's not just in our existing first opinion practices, but also in expanding our referral capability and coverage. So, for instance, a good example is in Bristol, we have Highcroft Referrals, which is a well-established, high-quality referral business. providing services to the southwest of England. We have plans with Gloucestershire Council, we're hoping for approval shortly, to relocate that business to a new multi-disciplinary hospital which will be a kind of state-of-the-art facility and that kind of reflects one opportunity I guess for us to invest more in our referral coverage we see that opportunities more as internal kind of build and greenfield investment as opposed to buying referral hospitals and ben i don't know if there's anything else you want to add to that

Yeah, no, I think that's, I mean, there's sort of three key opportunities, aren't there, in referrals. There's growing service lines in the existing referral hospitals, which is actually more operational expenditure than capital, because we've got the MRI machine, we've got the CT, so you can add other disciplines without actually needing significant capital expenditure. So that remains an opportunity. There's internalising the work that's within the scope of those existing hospitals. And we're doing that by encouraging our vets and sharing you know, that we are offering the best in class service, and that's how we want to attract that work. We don't mandate it, as Richard says. And then finally, there are opportunities where we don't have a presence, which is more capital expenditure heavy. But there are sort of three opportunities, really, for referrals.

Ben, it's probably worth you talking about VET Oracle, which is quite, you know, it's a new initiative and actually quite interesting.

Yeah, it's one part of our referral business, which is a telemedicine vet-to-vet image interpretation and specialist advice service, which sort of does two things for us. It's great at helping all of our first opinion practices with image interpretation, building relationship between the first opinion practice and the referral hospitals so that we can make sure we're internalising as much of that work by showing the high quality of service that we offer. But it also is a revenue generator. We offer image interpretation to practices all over the world now. by interpreting images from particularly CT and MRI machines, which have become much more affordable now. So around the world, there will be practices that can afford particularly CT machines that don't necessarily have the expertise to interpret the images. And that's where we fill the gap. We have an online portal where anyone can submit those images for interpretation. We report and provide specialist treatment advice. So that's a really exciting part of our referral business, which is revenue generating, but also relationship generating, particularly with our own practices.

Fantastic. That's really helpful. Can I just quick follow up? I think, Robin, you mentioned the practice acquisitions were less than 10 times in the UK. That feels like it's come off a bit from the highs. Is there less sort of acquisition activity in the UK at the moment that's made those multiples drop a little bit? Or is it as competitive as it ever was?

If we're honest, I think it's as competitive as ever. I think multiples have actually reduced a little bit, though, because some activity was driving kind of higher multiples driven by probably corporate transactions as opposed to common sense. But certainly multiples and competition is still kind of strong. And therefore, we are very focused on engaging with privately owned practices that may be considering sale. being more proactive in approaching them, looking at opportunities. And if we can differentiate ourselves by our focus on our people, our ability to execute at speed, and our integration planning, I think that will position us well for the future. That's helpful. Thank you. Thanks a lot.

And we'll go to Harry Sefton at Jefferies.

Brilliant, thank you very much. Yes, I have a few questions, please. So firstly, on the EBITDA margin improvement, just wanted to get a sense of how much of that was from the recognition of the Healthy Pet Club revenues. Second question, you mentioned the growth in referrals specifically, but also just wanted to get a sense of if you could guide or give us an indication of the relative growth in the small animal practices versus equine and farm practices. And then also just maybe expanding on the M&A question, just wants to get a sense of the current market dynamics and especially what you're expecting in terms of competition. after it reported that your largest competitor raised about three and a half billion of additional capital and whether you're seeing sort of an increase in competition as a result and then just finally on uh price increases i know you mentioned that you'd um deferred some of the price increases from last year just wanted to get a sense of what you uh put in in january thank you yeah so um

The HPC deferral, there's a pretty high drop-through rate. So some of that margin improvement will be from recognising the HPC revenue. However, we recognise revenue as we provide the service. So there's certainly a margin element to delivering. So it won't all drop through 100%. There'll certainly be a margin attributed to the HPC revenue recognition. So some of the EBITDA margin improvement will be for that. However, what we are seeing is into H2 in the first two months, we continue to see strong revenue growth, and we continue to see strong EBITDA margin. So I'm expecting that to continue for the full year.

And, Harry, in terms of the splits of revenue between the species, we don't share that. But what we can say, I guess, is we are seeing growth across the practice division. And that reflects growth in small animal, in equine and farm. And we are pleased with the performance across all divisions. The referrals is showing the kind of strongest level of growth and we've given that number. In terms of price increases, I'll come on to that question next. We did apply a small animal price increase from the 1st of January, and that was a net 3%, which is a kind of typical kind of annual price increase we apply, albeit this latest price increase was deferred, as we've said previously, from last July. And that was just because we didn't feel it appropriate to apply that last July, given the COVID disruption that we had just been experiencing. and the fact that we were just returning to catch up some of those procedures that clients weren't able to access during the height of the first lockdown. And then in terms of market dynamics, I don't actually see the new fundraising by IVC changing the landscape too much in terms of they had significant capital before that latest fundraise. And I believe their key focus now seems to be in mainland Europe and expanding in other countries. through the former evidential part of their business. But as I said earlier, the market is still competitive and clearly we have to be very focused. And that's why we've kind of increased our emphasis on acquisitions and strengthened our team and also revised our approach to the process, which hopefully will stand us in good stead. And through our integrated model, our fully integrated model, we're quite unique in having our own network of laboratories providing diagnostic services. So we should be able to access synergies that others can't access. And that also is an important factor, I think, in terms of our model and the resilience of it.

And we'll go to Charles Hall at Peel Hunt.

Morning, everyone. Morning, Charles. A few questions. So firstly, on those price increases, having delayed it to January this year, are you going to use that now as your new base or might you put through a July increase?

Yeah, we will return at some point to 1st of July. And that makes sense, given it's the start of our financial year. decision still to be made in terms of whether that's this july or you know whether we have an interim step in maybe kind of september or october this year but but certainly the intention is to return to annual price increases as soon as possible from the first of july um because that that makes sense for our uh for our financial year

Perfect. And secondly, on acquisitions, can you just give a feel for where you might have competitive advantage in terms of growing your pipeline? Now, obviously, you've got your buying group, but is that the only competitive advantage and it's really about price or are there other things that you feel you can offer?

Yeah, there are other, I guess, points of access to privately owned practices because our laboratories, for instance, provide both desktop analyzer kits to privately owned practices and also offer their diagnostic laboratory services to privately owned practices. So we have that relationship as well as the buying group relationship. Probably less relevant, but we also obviously provide crematoria services to privately owned practices as well. So again, there's a point of contact. And actually, possibly we haven't made enough of those points of contact in the past. And certainly we kind of recognise the opportunity to use all of our existing contacts to promote our, well, to position us as kind of attractive buyers of privately owned practices when those practices might come up for sale. And also our colleagues on the front line, they are probably the best sources for us to know which are the best quality privately owned practices in their areas. And again, we're tapping into that knowledge as well, as you would expect to really kind of try and target the key practices that we would love to buy and to help build relationships in advance. That said, I think when the decision is made to sell, it typically comes down to price and therefore we have to be we have to recognize that and and clearly we have to be there or thereabouts on price but alongside that if we can commit to executing at speed um again that should help differentiate us because yeah i think as a privately owned practice if if the owner has mentally decided they want to sell that they probably also want to receive the funds as quickly as possible as well and and hopefully that can be a differentiator

And it sounds as though you've got greater confidence both in the pipeline and your ability to integrate. And I guess compared to prior to 2017 or so when it was just a numbers game, it feels much more measured and thought through now.

Yeah, absolutely. And Ben, you might want to comment on the kind of operational review, I guess, of a practice before we decide how much we want to offer or whether we do want to offer.

Yeah, I mean, I guess the difference, you know, compared to three or four years ago is that our acquisitions process is very operations led and actually the sort of factors and features of a practice that we're looking to buy are around what's the clinical work like, what's the team like, what are the facilities like? not what does the P&L look like? And that's very much our focus, getting to know the individuals. Are we going to be able to give them what they want in CVS? Can we integrate their practice effectively? Can we improve it by joining CVS? So it's a much more operationally focused process. And we work really hard, right, as Richard highlighted in the presentation, from the point of our very first discussion with a practice who may or may not be considering selling there are members of the operations team in that discussion and then right through to completion and of course beyond they're sort of central to that process so that our planning begins before um well before um any sort of implementation of that integration so it's a really different process than we had a number of years ago

Great. And last question, Ben, you mentioned refurbishments. Can you just give a feel for average cost of those refurbishments and what benefits you see afterwards?

Yeah, so, I mean, it does vary. We have a real range of practices and, you know, we have converted old terraced houses, you know, more traditional practices like that. We also have some fantastic facilities. So some of those refurbishments are also relocations and relocations will cost us anywhere around the half a million pounds mark-ish on average. But it does really vary, you know, according to the size of the facility, clearly. In terms of the benefits, we see a clear benefit of moving a practice into a new facility, firstly on recruitment, because our clinical teams, one of them, you know, we looked you know, on our vacancy, we look closely at what is it that clinical teams are looking for in a role and great facilities is right up at the top of the list. So we see an immediate improvement in our ability to recruit, which is clearly essential for the performance of the business. But also just by providing great clinical facilities, we can just do better work. So that might be a separate room for dental treatments and dental x-rays, which means you can then perform dental procedures without blocking up your operating theatre for the afternoon. So and as well as that, and even more importantly, clinically, that's better. We can keep clean and dirty procedures away from each other. So we see an immediate increase in our ability to do better and more clinical work.

And Charles, because we lease most of our buildings and because we have five year break clauses on the vast majority of our leases. That also means we're challenging ourselves coming up to lease breaks. Have we got the right facilities or actually are we better relocating to a much better facility more locally? And indeed, we certainly see the benefits from that investment. And we are signalling an increased focus on improving our clinical facilities and our clinical equipment.

And we'll go to Charles Weston at RBC. Charles, go ahead and ask your question.

Hi, thanks for taking all the questions. Congratulations on the results. I have three as well, please. My first one is around margins. As Harry alluded to, H1 would seem to have benefited slightly from the high drop through of HPC revenue, but also more structurally, perhaps in lower debt vacancy rates, perhaps increasing numbers of more specialty procedures. And on that latter point, given the growth in those more specialty procedures, is this likely to be a gradual trend of an uplift in margin? And specifically on the margin point, also in the near term, it would seem that consensus expects a slightly lower EBITDA in H2 than you achieved in H1. Obviously, the revenue growth rate looks to have picked up with the price increase and perhaps in volume terms as well. So should we be expecting a higher absolute EBITDA in the second half or lower?

Thanks, Charles. So in terms of margins, we are constantly focused on trying to improve our margins. And the success we've had in the last couple of years has been through driving light flight revenue growth from a focus on high quality clinical care And that's more engaging work for our vets and nurses. And actually, by giving clients choices and firm recommendations, we actually end up with providing a better quality clinical service to the patients, which is clearly important. And that's actually within our first opinion practices, albeit some of that work obviously results in higher specialist work as well. And so the specialists referral hospitals are also benefiting from that focus, as are our labs as well, because by doing more diagnostic procedures, we're also generating more diagnostic tests for our laboratories to undertake. So in terms of margins, constant focus, something we're very conscious of and we are committed to clearly try and improve further. Key to that is employing the best talent in the profession and maintaining our vacancy rates. And ideally, we would like to see it reduce over time. As Ben said, you know, constant focus, there's a number of areas we're doing, a number of things we're doing to try and improve that. In terms of EBITDA for the second half, clearly we won't see the benefit that we saw in the first half from the HPC deferral. But that said, we remain very confident of our opportunity ahead and Clearly, as a team, we would like to under-promise and over-deliver. And so we will, of course, be slightly cautious in terms of the guidance we issue. But clearly, we've got a great business in a very resilient sector with some good tailwinds behind us. And through our fully integrated model and the focus on our people, we feel very confident about the future.

Thank you. My second question is actually just touching on that lab business you mentioned. Obviously, it performed extremely strongly in the first half. Any metrics you can provide on internal sales versus external sales, perhaps? You also mentioned COVID testing there. Just wondered if you can shed a little color on that and perhaps how much runway of strong growth you've got.

Yeah, I'd probably comment on that. So I suppose we don't split and share the internal versus external sales, but we are continuing to focus in our lab division on bringing on new third party clients. That's a big part of the work that we do. And we certainly see that as an opportunity for growth. Internally, I suppose in CVS practices, our focus is so clearly on let's do better and better clinical work. And a big part of that is diagnostics. Our lab will continue to benefit above and beyond an average veterinary practice from our focus in that area. So, again, we see opportunity to continue to improve clinical care in the veterinary practices and that will continue to benefit our laboratory division.

Great. Thank you. My last question, just on CapEx, just a quick one. Can you... guide us to near term capex perhaps for this year total capex but also you talked a lot about refurbishment about the benefits you get so um can you sort of give us a sense of longer term um capex expenditure as well please yes so in terms of um maintenance capex um we continue to see modest levels being required and and i think in the past few years we've incurred

about 14 million of total CapEx of which roughly half of that has been maintenance. I guess we do see an opportunity to invest more in investment CapEx and we've shown that where we improve our facilities, our clinical equipment and our practice facilities, we get the benefits from that, not only in increased engagement with our colleagues, and clearly it's far easier to recruit and retain talent where we're offering our colleagues the right facilities and the right environment, but it's also key for our ability to drive further clinical work, whether that's in our first opinion practices or in our referral hospitals. So we are signalling, I guess, the opportunity to invest more in that area. But we are very confident we will see the returns from that. And so we see that as a sensible investment in further growth. We haven't given forecasts of what that investment capex might be. I guess with any capex programme, and we saw that probably in the first half, the process of investing in properties is complex in terms of the various stages you have to go through in terms of design, planning, business case sign off, and then engaging contractors and making sure terms are agreed, et cetera. So there's inevitably a kind of delay to some of this investment. But that said, we've strengthened our property and facilities team. And we see this as a good opportunity for further organic growth in years to come. Very helpful.

Thanks very much. And that's the end of questions. Richard, do you have any closing remarks?

Yeah, thanks, Tamdin. So yes, so that concludes our presentation. And I would like to thank you all for attending. So in summary, we've had a strong first half. And that momentum has continued for the first eight months year to date. We have favourable market dynamics. And we are clearly well positioned to benefit from these through our fully integrated model and also our focus on our outstanding people. So if you've got any further follow-up questions, please approach us directly and we will respond. But thank you for your time and attention.