This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Cvs Group Plc
3/24/2022
Welcome everyone to this presentation of our interim results for the first half of our financial year to June 2022. I'm Richard Fairman, Chief Executive and I'm joined by Romain Alfonso, CFO and Ben Jacklin, Chief Operating Officer. In keeping with the format we've adopted for recent results presentations, I will open with an introduction in which I will provide a reminder of our strategic focus and the significant opportunities we have for investment in driving further growth. Robin will then talk through the financial results in more detail, including the increased investment we plan to make. And Ben will then provide an operational update focused around our four strategic pillars. I will then conclude with some comments on our outlook, and we will then invite questions from analysts following our presentation. So I'd like to start on slide five. When Ben, Robin and I formed a new management team in November 2019, we set out a very clear strategy for growth. the heart of this was our purpose to provide the best possible care for animals and our vision to be the veterinary company people most want to work for in support of this purpose and vision we set out four strategic pillars which have framed our focus ever since recommending and providing the best possible clinical care being a great place to work and to have a career ensuring we have the best facilities and clinical equipment and taking our responsibilities seriously to our colleagues, to the wider profession, to our shareholders and to all stakeholders in CVS. We are focused on driving organic growth in CVS through improving our existing operations, through using our integrated model to provide the best possible joined up care to our clients and their animals, and through improving the recruitment, retention and development of our clinicians. This has been supported by increased investment in our practice facilities and in clinical equipment. We strongly believe this is essential in our ability to provide great care and to being able to attract and retain the best talent. Now, clearly, this new strategic approach was a departure from the buy and build approach of the past. Nonetheless, we also recognise the opportunity to make further selective acquisitions and to invest in greenfield sites where client demand is currently underserved. We are confident that this new strategic approach remains appropriate and that it will continue to deliver good returns. I've set out some highlights from the first half, which I believe demonstrate that this strategy is working. In the first half, we saw total sales increased by 11.4% versus the corresponding half year, with total revenue of 273.7 million. The prior year comparative benefited from HPC revenue catch up of 3 million pounds, and 0.9 million pounds of revenue from COVID-19 testing in our laboratories. And if we adjust for these two items, light for light sales have increased by 11.3%. Adjusted EBITDA increased by 15.5% to 52 million. And we saw our adjusted EBITDA margin increase to 19%. Through our focus on recruitment and retention, we've seen the number of vets we employ increase by circa 9%. and our vacancy rate remained stable. We want to recruit more vets to support with growth opportunities. Now, these results have been driven by a number of factors, but I would like to highlight three in particular. Firstly, and most importantly, they are due to our outstanding team of people. We are very fortunate to have passionate colleagues who are focused on providing the best possible care. And I would like to take this opportunity to thank them all for their contribution. Secondly, as an AIM quoted company, we are committed to recommending and providing the highest levels of clinical care, and we adopt an evidence-based approach. In support of this, we have increased our investment in our facilities. We have completed 19 refurbishments or relocations since the start of the financial year, and we have 54 projects currently underway at the design, tender, or construction phase. And then as set out on slide seven, Our integrated model is important in our ability to provide joined-up end-to-end care. Clients access our services through our first opinion practices and we provide both reactive care and importantly affordable preventative care through our Healthy Pet Club and Healthy Horse programmes. Identifying issues early often leads to better clinical outcomes and less invasive treatments being required in due course. Where the circumstances require, we have dedicated out-of-hours centres Our laboratories support through the provision of diagnostic tests and our referral specialists are on hand to provide advanced veterinary care where required. Our crematory provide clinical waste disposal services and a compassionate cremation service at the end of life. This is important as most owners who lose a pet go on to buy a replacement and the cycle then continues. And importantly, our clients therefore benefit from this joined up care that we're able to provide. So turning to slide eight, the market dynamics continue to be positive. The benefits of companion animals have been widely recognized since the first COVID-19 lockdown restrictions, and that has led to an increase in the population. We don't necessarily expect the population to increase further from here, but we have not yet seen the full benefit of the increase we've already seen. And the puppies and kittens born over the past two years, the average spend per pet increases on a fairly linear basis with age. and hence we expect to see the full benefits in five to ten years' time. And the trend of humanisation of pets continues, with consumers wanting the best possible care for their animals. Our focus is on providing high-quality, evidence-based clinical care, and I'm very confident this positions CVS well to deliver further growth in due course. Now, moving to slide nine, I'd like to cover our opportunities to make further acquisitions. I will start with the recent CMA decision following their investigation of our acquisition of Quality Pet Care Limited trading as the VET. Now, we were naturally disappointed with the CMA's decision, but given the relatively small scale of the VET in the context of the wider group, we have taken the pragmatic approach to offer undertakings to dispose of all eight sites. And we are in the process of seeking a buyer to the CMA's satisfaction. Now, whilst we don't fully agree with the CMA's approach, their decision is helpful in informing our assessment of a number of future acquisition opportunities in the UK. And as shown on this map, there are considerable parts of the UK where we currently have no practices or limited existing presence. Hence, our ability to make further acquisitions in these areas should not be impacted. And furthermore, there are other practice acquisition opportunities where even if the target practice is close to our existing sites, we will not reach the 30% VET full-time equivalent threshold outlined in the CMA decision. All practices in the UK are required to be registered with the Royal College of Veterinary Surgeons. And the RCBS website shows that there are circa 5,300 practices in the UK. The CMA have stated that around 55% of these are now owned by corporate groups. Now, this will never get to 100%, and nor should it. But as we've seen in other sectors, we believe that corporate ownership may reach 80%. And hence, we anticipate that there are over 1,000 practices which will be acquired by corporate groups over the next few years. And we remain well-placed to compete for future acquisitions in the UK. And the majority of our synergies from our buying power, our clinical approach, our in-house laboratories and our crematoria are available regardless of location. As I stated earlier, our strategic focus over the past three years has been to drive organic growth through a focus on our people and the provision of high quality clinical care augmented by selective acquisitions. We are confident in our ability to continue this approach with further UK acquisitions supporting continued organic growth. And we have also engaged advisors to undertake analysis of emerging European markets. And we expect to see opportunities to acquire practices in new countries in due course. And then turning to slide 10, I'll finish my opening remarks with a reminder of our focus on sustainability and ESG. Now we have formed a number of working groups focused on making sustainable improvements and we will provide an update in our first standalone report in the summer. We will report against the SASB framework and we plan to include ESG elements in executive bonus targets in the new financial year. So at this point, I'll hand over to Robin to cover the financials.
Thank you, Richard. We've delivered another set of strong half-yearly results, with revenue up 11.4%, adjusted EBITDA up 15.5%, and EBITDA margin up 0.6 percentage points. Our light flight sales growth adjusts for working days, excludes current year acquisitions and only includes prior year acquisitions from the same month this year as they were acquired in the previous year. As Richard noted, underlying like-for-like sales growth was 11.3% after adjusting for non-recurring COVID-19 travel testing of 0.9 million and 3 million HPC revenue deferred from Q4 full year 20 and recognised in H1 2021. Including these adjustments, like-for-like sales growth was 9.6%. EBITDA margin remained strong at 19% and improvement of 0.6 percentage points from H1 2021. And adjusted EBITDA of 52 million includes 2 million research and development expenditure tax credit in relation to the full year 20 tax year. Free cash flow also remained strong at 19.4 million. Operating cash conversion of 54% was impacted by colleague bonus payments and changes made to remuneration with the decision made to commute a proportion of colleague bonus into fixed pay. Leverage remains stable at 0.76 times, despite increasing our capital expenditure by 4.4 million to 10.6 million and spending 20 million on the acquisition of Quality Pet Care Limited, trading as the VET. Other than cash outflow in respect to the initial purchase in August 2021, all the numbers stated are exclusive of the VET. Adjusted EPS of 41.5 pence increased from 33.3 pence, benefiting from improved adjusted EBITDA. And during the half, 10.6 million was invested in capital expenditure, an increase of 4.4 million versus the prior half year, as we continue to invest in our facilities and equipment to deliver future organic growth. The group continues to benefit from our integrated model with revenue growth of 11.4% to £273.7 million from £245.6 million. The Veterinary Practices Division comprises our companion animal, referrals, farm animal and equine veterinary practices, as well as our buying groups, VetDirect and MyPet Insurance. This division continues to benefit from the focus on delivering quality clinical care, an increase in number of clinicians we employ, and growth in our Healthy Pet Club membership to 461,000 members. Underlying growth in revenue in this division, which excludes one-off Healthy Pet Club revenue of 3 million, was 13.1%, despite slightly softer Q2 due to holiday catch-up and COVID-19 isolations. The underlying revenue growth in our laboratories division was 2.4% after adjusting for non-recurring COVID-19 travel testing in H1 2021. The laboratories division provides analyzers and practice, which supports testing in-house for which we supply the reagents for the tests and diagnostic testing services. The crematoria division benefited from an increase in the number of customers choosing an individual cremation, which is an area of focus. And our online retail business continues to benefit from increasing demand for pet food and other products online. Moving on to slide 14, which sets out our EBITDA growth. The 11.4% revenue growth coupled with a 0.6 percentage point improvement in EBITDA margin resulted in a double digit growth in EBITDA from 45.1 million to 52 million. The EBITDA margin increased to 19% from 18.4%, underpinned by collegiate working across the group, as well as recognition of a further 2 million research and development expenditure tax credit. This is our second RDEC claim, with our first claim being recognised in the 2021 full year numbers. There was an increase in central overhead costs as we continue to invest in our back office functions to support our frontline colleagues. The group delivered free cash flow of 19.4 million. Operating cash conversion of 54% was impacted by an increase in bonus payments in relation to the 2021 financial year and commutation of a proportion of bonuses into fixed salary. This element of bonus was based on individual performance of our clinicians and was routinely paid. Feedback from colleagues was a state of preference to fixed salary over bonus. You can see that free cash flow in H1 2021 was higher than normal, and this is due to timing of payments in Q1 full year 21 relating to Q4 full year 20, which was severely impacted by the COVID-19 pandemic. net cash outflow of 11.9 million following an increase in capital expenditure, cost of acquisitions and a dividend payment in the half. We have multiple ways to deploy capital. We have a strong balance sheet of 170 million of committed facilities and low leverage at 0.76 times. We have a number of investment opportunities to further grow the business and we expect returns from our investments to be greater than our weighted average cost of capital. As Richard outlined earlier, we continue to have opportunities for further selective acquisitions. We continue to look at opportunities to invest in technology, either through improvements in our websites, through VET Oracle, our imaging interpretation business, or through improvements to our practice management system. We continue to have a strong pipeline of opportunities to invest in our practices and equipment. And we have the opportunity to invest further in greenfield sites, which we can open anywhere in the country. In the first half, we have invested 10.6 million in CapEx covering 14 refurbishments, five relocations, and medical equipment. We believe approximately half of our 467 UK practices represent clear opportunities for investment and growth, either via refurbishment, where often we look to increase the footprint by adding additional consulting rooms and dental suites, or via relocation. The investment supports better clinical work and helps us to attract and retain the best talent. We're pleased with the performance to date and looking to accelerate further. Ben will bring this to life later in this deck. And finally from me on slide 18, we believe we have the opportunity to invest further in greenfield sites. Although we have opened some farm greenfield sites recently, we've not opened many with a small animal focus in recent years. Where we have opened a Greenfield site, performance and returns have been strong. A Greenfield site requires less upfront investment than an acquisition. However, rather than day one EBITDA, it tends to take a period of time to break even and then contributes to EBITDA as the site matures and grows. We believe there are a number of Greenfield opportunities and are currently working on 10 potential locations. I'll now hand over to Ben who will cover the strategic and operational update.
Thank you, Robin. Turning to slide 20, I'll start with our first strategic pillar that we recommend and provide the best clinical care every time. In the last few years, we focused our leadership efforts, our operational management, our KPIs, and our practice team incentives around the delivery of this best possible clinical care. We introduced patient care index as a key measure that we use to determine the proportion of the highest quality clinical work, particularly diagnostics, that our practices are undertaking. we've recruited an outstanding national team of hub clinical leaders over the last few years who are highly experienced vets who lead and support the delivery of better and better care within our practices we've achieved significant improvements in this metric which is great for our patients and clients and great for the company delivering significant organic growth within the business in figure one here we've shared the relationship between our patient care index and the average transaction values in our small animal practices This well demonstrates the key philosophy behind the strategy that we've been executing for the last few years, that better clinical care for patients delivers better commercial results for the business. Further to this, in figure two, we've also shared the spread of patient care index across our companion animal practices. We're proud that our practices provide extremely high levels of clinical care across the group, but this range gives us even further opportunity to improve the services we offer to our patients and clients. There are, of course, interdependencies, not least being able to recruit great clinical talent into our practices, and directly linked to that, the quality of the premises into which we are recruiting. The first of those interdependencies is detailed on the next slide beneath our second strategic pillar that we're a great place to work and have a career. I'm delighted that we employ around 9% more vets and 12% more nurses than we did a year ago, despite only a 1% growth in the available pool of vets. Crucially, our key metric of employee net promoter score has continued to improve. How our colleagues feel about working for CVS is critical to our success and forms a major part of our management focus. This includes a constant review of our terms and benefits, investment in education and development, and most importantly, continuing to nurture our culture of clinical and people first. It's as a result of this focus that we've significantly outperformed the market in recruitment. As focused as we are on recruitment of clinicians, we are equally focused on creating an environment for them to develop and grow their careers and it's positive to see the early signs of further improvement in attrition during the first half of the year. One example of our efforts to create great careers and develop our colleagues is our creation of a national network of advanced clinicians to allow vets to study for a certificate in an advanced discipline and then deliver those advanced services across a region of primary care practices. We also continue to invest in our learning, education, and development function, which has now enrolled over 800 colleagues onto apprenticeships, created 256 learning webinars, and had 10,000 views of those webinars. Our vacancy rate is stable. And although higher than reported in previous years, this reflects our ambition to recruit even more vets in the coming months to support our ambitious growth. On the following slide, we've shared our view that the market for vets will benefit from further tailwinds over the coming years. In fact, our forecast suggests that the number of new graduates leaving vet schools in the UK will roughly double over the next eight years. The majority of this growth comes from the announced opening of six new vet schools, three of which are already open, as well as the growth in student numbers within the existing vet schools. This includes the introduction of a double intake at Nottingham University three years ago, which will begin to benefit from in two years time. A further benefit to us includes the removal of COVID-19 travel restrictions, which has made the employment of European colleagues who wish to travel home regularly difficult for the past two years. And finally, we expect to benefit significantly from the anticipated legislative reform that will enhance the role of the veterinary nurse in our practices. This will allow nurses to perform a significantly wider range of procedures that are currently being performed only by veterinary surgeons. Although the timing of this legislative reform is yet to be determined, our regulator has made clear recommendations to government following a broad consultation. We've already begun investing significantly in supporting and developing our nursing colleagues to ensure that they and we are ready to take advantage of reforms when they arise. On the following slide, we draw out the critical focus on our third pillar, providing great facilities and equipment. As Robin mentioned, we've increased capital investment in our facilities and we're signalling further increases in this investment. Refurbishment of our existing practices, adding consultation rooms, operating theatres and dental suites, or relocation of premises to brand new facilities have significant advantages to us in terms of attracting great talent and our ability to deliver the very best clinical care. not to mention the advantage of a great environment for our clients and patients. This is reflected in the excellent returns these investments generate, and on the completed project since July 2020, we've already seen an average of 20% uplift in revenue post-project completion. We've rated all the clinical premises in our companion animal primary care estate against our established operational matrix, and the spread of these ratings are shown in the graph on the left. The range of property quality in our estate shown here clearly demonstrates the opportunity for investment ahead of us, and we intend to seize that opportunity. In the graph on the right, we've shared how average transaction values in these practices increase as the property quality increases, demonstrating one way in which returns are realized. On slide 24, we've now developed a standard layout to optimize our investments into new sites, whether those are relocations or greenfield, based on best clinical practice and to maximize the clinical workflow efficiency. This approach enables us to ensure consistency, maximize value, and generate optimal clinical environments. We're able to work with VetDirect, our in-house equipment supply business, to ensure that we can then equip these facilities with the best clinical equipment at excellent value. Aside from the clinical efficiencies, through consultation with both colleagues and clients, we've also developed a new look and feel for client facing areas in our relocations and refurbishments, creating a comfortable experience for pets and their owners without the stark clinical aesthetic of more traditional veterinary waiting rooms. We very much see this model as the CVS veterinary practice of the future, where clients and their pets can visit a comfortable, welcoming environment to seek the best possible health care. On our final strategic pillar on the following slide, we take our responsibilities seriously. We've spoken previously about our industry-leading work on quality improvement, antimicrobial resistance, and a wide range of ESG initiatives. We shared on this slide a recent initiative as we've launched an industry wide research grant program to support the advancement of evidence based medicine across both CVS and the wider profession. These grants are available to UK veterinary school universities in collaboration with CVS by way of both postgraduate research projects for specialists in training and longer term research programs running over a number of years. We've committed £200,000 this year to the grants and have already seen an overwhelming set of impressive applications that will advance knowledge in our profession. And finally, as set out on slide 26, I'm delighted that Laurent Garoussi, clinical director of Vet Oracle, has been awarded the BSAVA Borgelat Award for his truly outstanding international contribution to the field of small animal practice. Laurent was instrumental in establishing our Vet Oracle business and we're delighted with the recognition that he's received. I'll now hand back to Richard, who will share some of the highlights of the eight-month period since the start of the financial year.
Thanks, Ben. As set out on slide 28, I'm pleased to report that the positive performance seen in the first half has continued into January and February. For the first eight months, we've seen sales increase by 11.5%, with like-for-like growth on an underlying basis of 11.4%. Adjusted EBITDA margin remains strong at 18.6%. And this includes a shorter month of February. And we've grown our healthy pet club to 466,000 members. Our vacancy rate remains stable and our leverage remains comfortably below one times. And then as I said on slide 29, we remain well positioned for future growth. We continue to operate in a growing market and in a favorable sector. And we are fortunate to have a highly skilled and dedicated team of professionals who are passionate at providing clients with outstanding care for their animals. We are increasing investment in support of a number of growth opportunities and we are confident in our ability to continue to make further acquisitions. We have a very clear strategy and we remain confident in our ability to deliver further growth in the future. So that concludes our formal presentation. Thank you for attending this presentation. To summarise, we have a very clear strategy to deliver future growth through our focus on providing the best possible care and importantly employing and developing and supporting our highly skilled clinical teams and other professionals across CVS. We delivered a strong set of results for the first half and this momentum has continued into the first two months of the second half. And importantly, Ben, Robin, and I remain very confident in our ability to drive further growth in the future. We look forward to the capital markets day in June, and we look forward to sharing further success in due course. So thank you, and we appreciate your support.