9/21/2022

speaker
Richard Fairman
Chief Executive

Welcome to this presentation of our full year results for the year ended 30th of June 2022. I'm Richard Fairman, Chief Executive, and I'm joined by Robin Alfonse, Chief Financial Officer, and Ben Jacklin, Chief Operating Officer. The agenda for this presentation is set out in slide two. I will open with an introduction to the full year results and provide an overall update. Robin will then provide a more detailed financial review with Ben then covering a strategic and operational update. I will then conclude with some comments on our outlook. We will then invite questions from analysts following our presentation. As set out on slide four, we have delivered a strong financial performance in the past financial year. Revenue increased by 8.6% to 554.2 million, with life-like growth of 8%. We delivered a 10.2% increase in adjusted EBITDA to 107.4 million, with adjusted EBITDA margin increasing by 30 basis points to 19.4%. Against a market backdrop in which the number of practicing vets in the UK has increased by circa 1%, we saw a 6% increase in the average number of vets employed in the financial year. We continue to have a good operating cash conversion and our leverage reduced to 0.4 times at 30th of June. These results demonstrate the benefits of our fully integrated veterinary model, as well as our commitment to providing the very highest standards of clinical care. Above all though, they reflect the continued dedication and commitment of our outstanding team. And I would like to take this opportunity to thank all CVS colleagues for their contribution. Turning to slide five, we continue to operate in a favourable market with our customers seeking the best possible care for their animals. As we've seen in human health, life expectancy for pets is increasing due to a combination of better clinical diets and advancements in veterinary care. A recent industry report published by Health for Animals, a global animal health association, found that life expectancy of dogs in the US had increased by over 11% over the past 20 years. We have seen a meaningful increase in the pet population in the past couple of years, with an increase in the number of puppies and kittens. These factors are beneficial to our business, with a typical pet requiring more clinical intervention in later years, And clearly, these later year procedures are often more complex. On slide six, the veterinary sector has proven to be resilient. We continue to see the humanization of pets. They are increasingly seen as an integral part of family households. And clients are likely to cut back on other spend before they cut back on spend for their pets. Our purpose as a business is to give the best possible care to animals. We typically do not advertise for clients. They are attracted to CVS because of our reputation for high clinical standards. We have somewhat diversified our business with our practice division, also including pharma and equine practices, and we are seeing underlying growth in our laboratory, crematoria and online retail divisions. We have strengthened our balance sheet and have low leverage. Whilst we're clearly not immune to rising inflation with higher energy costs anticipated, these are factored into our forecasts, and we are confident in our ability to pass on inflationary increases. We have significantly grown our healthy pet club membership, and these customers have proven to be resilient, and they also spend more on average than non-members. As set out on slide seven, we made three acquisitions in the second half of the financial year for combined consideration of circa 8 million, and we've spent a similar amount on two further acquisitions completed since the year end. Whilst the CMA review into our acquisition of quality pet care limited was not the outcome we wanted, we now have clear guidance which helps inform our future acquisition approach. We remain highly confident in our ability to expand the CVS footprint through further acquisitions. Turning to slide eight, in August, we published our first ever sustainability report, which outlines the considerable progress we've made across a number of environmental, social and governance focus areas, whilst also setting out our future plans and targets. We have provided financial and non-financial data against a range of sustainability measures set out in the SASB framework. In our annual report, we have also early adopted the TCFD recommendations, reflecting our commitment in this area. As part of this commitment to take our responsibilities seriously, we launched our CVS Clinical Research Awards with grants available to both CVS colleagues and also to academics who wish to collaborate with us in helping improve the evidence base to drive further improvements in clinical standards. For the first time, our executive bonus targets for the new financial year include five new non-financial targets linked to sustainability with 20% of bonus potential being subject to our performance against these targets. We are committed to making CVS a more sustainable business and I look forward to reporting further progress in the future. As set out on slide nine, we have a very clear strategy for future growth. Our purpose is to provide the best possible care to animals And our vision is to be the veterinary company people most want to work for, underpinned by four strategic pillars. To recommend and provide the best clinical care every time. To be a great place to work and have a career. To provide great facilities and equipment. And to take our responsibilities seriously. Our integrated veterinary services model is key to our provision of the best possible care. Our first opinion practices are supported by dedicated out-of-hours services, our specialist-led multidisciplinary referral hospitals, our diagnostic laboratories and our crematoria, which provide a compassionate cremation service at the end of an animal's life, and clinical waste disposal services. We continue our focus on organic growth through the recruitment and retention of highly skilled clinicians, And with our strengthened balance sheet, we are increasing investment across a number of areas. I will now hand over to Robin, who will provide a more detailed financial review.

speaker
Robin Alfonse
Chief Financial Officer

Thank you, Richard. As noted earlier, the group continues to benefit from favourable tailwinds. We continue to see a sustained increase in the pet population. We continue to see an increase in the demand for quality clinical intervention. And through our integrated model and focus on delivering against our strategy, we continue to see progress in our ability to meet increased demand. As you can see on slide 11, this underpins another set of strong full-year financial metrics. Revenue grew 8.6% to 554 million from 510, with like-for-like sales growth of 8%. Our like-for-like sales growth adjusts for working days It excludes current year acquisitions and it only includes prior acquisitions from the same month this year as they were acquired in the previous year. The prior period like-for-like growth of 17.4% was against a comparative period which included the first COVID-19 lockdown where we were most impacted by restrictions. We are therefore pleased with like-for-like growth of 8%. Adjusted EBITDA grew 10.2% with a slight but continued improvement in EBITDA margin. And the adjusted EBITDA of 107 million includes 2 million from another year of research and development expenditure tax credits. This is our second claim under this scheme, and we expect further claims to be made in future years. Free cash flow grew 33%, 52 million from 39, benefiting mainly from increased EBITDA, a reduction in consideration payments in respect of acquisitions from prior years, partially offset by an increase in stock. An operating cash conversion of 64.8% was up year on year. Good operating cash generation has further strengthened our balance sheet, with leverage reducing to 0.4 times, and this positions us well to capitalise on a strong pipeline of investment opportunities. Adjusted EPS of 85.8 pence was up 14%, benefiting from the improved adjusted EBITDA. And capital expenditure increased to 24.5 million in the year from 16.6, to support ongoing expansion opportunities, including a number of relocations and renovations. We continue to see an opportunity to grow revenue organically, and therefore expect development capital expenditure over the next few years to increase. We also see an opportunity to open greenfield sites with three planned over the next 12 months. Acquisition activity in the year was hampered by the CMA's investigation into the acquisition of quality pet care limited. However, five acquisitions have since been made, three in the financial year and two in the current year. The pipeline for acquisitions remains strong and we continue to see an opportunity for further investment in the future, both in the UK and other territories. Turning to slide 12, revenue was up from 510 million to 554, with good performance across all our divisions and light flight sales growth of 8%. H1 revenue was up 11% at £273 million, with the group benefiting from both price and volume increases. H2 revenue was up 6% at £280 million, with revenue growth in the second half impacted by COVID-19 isolations and fewer working days. Our veterinary practice division, which comprises our companion animal, referrals, farm animal and equine veterinary practices, as well as our buying groups, Vet Director, My Pet Insurance. This division continues to benefit from the focus on delivering quality clinical care. In the year, we saw a 6% increase in the number of vets we employ and a 4.4% increase in our Healthy Pet Club membership to 470,000 members. The laboratory division revenue decreased 2.9%, with the prior year benefiting from one-off COVID testing. Underlying revenue, therefore, adjusted for this was up 1.1% off the back of strong comps. The laboratory's division provides analysers in practice, which supports testing in-house, for which we supply the reagents for the tests and diagnostic testing services. The crematory division, which provides both individual and communal cremation services, as well as clinical waste disposal, continues to benefit from an increase in the number of customers choosing an individual cremation. And this follows a change in the process to allow customers more time to consider their pet aftercare options. And our online retail business continues to benefit from increasing demand for pet food and other products online. The focus in Alameda Direct has shifted from being a low-cost online retailer to being a trusted quality retailer in line with the group's overall purpose and strategy. On slide 13, we've included a chart showing COVID-19 isolations, which is the dotted yellow line, and year-on-year revenue performance, which is the dark blue line. You can see from the chart that there's a clear correlation between COVID-19 isolations and year-on-year revenue performance, with March, April and early May particularly impacted. The dip in revenue in June was partly an impact of the additional bank holiday for the Queen's Jubilee. As the impact of isolation has reduced through August, we've seen an uptick in life flight sales. Moving on to slide 14, which sets out our EBITDA growth. The 8% or 8.6% revenue growth coupled with a 0.3 percentage point improvement in EBITDA margin resulted in double digit growth in EBITDA from 97 million to 107.4 million. Gross margin has improved from 76% to 76.9%. And about a third of our cost of sales is made up of our own brand products. This does give us some protection from increasing prices with longer-term contracts in place. Employment costs as a percentage of revenue was pretty flat, year-on-year of 50%. And during the year, we implemented an additional interim cost of living pay review of 3% in May. And at the same time, we committed to an ongoing pledge to paying a minimum of 3% above the national living wage and national minimum wage. We continue to invest in our support functions to better support our frontline colleagues. And then on other costs, which include IT, rates, utilities, as a percentage of revenue marginally decreased 7% from 8.3%. Turning to slide 15, the group remains highly cash generative and delevers quickly post-investment. Free cash flow of 52 million, as noted earlier, benefited from increased adjusted EBITDA, reduction in contingent consideration, partially offset by an increase in inventory. Operating cash conversion of 64.8% was up year on year. When we look at our net cash inflow, it was 15.3 million after investments during the year and payment of a dividend. We've identified an opportunity in almost half of our sites, to invest in organic growth, and the £5.3 million increase in investment of capital expenditure reflects this. During the year, an impairment of £12.4 million was recognised in respect of quality pet care limited. With FI for strength and balance sheet at the year end, the net bank borrowings reduced to £36 million and leverage reduced to 0.4 times. Then on to slide 16. Whilst we're mindful of the pressures on household incomes through rising inflation, we remain confident in our ability to deliver further growth. We believe we can grow our free cash flow through the continued focus on delivering against our strategy. And across our 472 practice sites, there is distribution of performance. By focus on bringing the bottom quartile up to the average, there is a continuing opportunity for margin expansion, notwithstanding inflationary pressures. We have committed facilities of 170 million through to January 2024 with an option of a one year's extension. We are disciplined in appraising our investment opportunities, targeting internal rate of return above our weighted average cost of capital. And we believe we have a number of investment opportunities to further grow the business. We continue to have a strong pipeline of opportunities to invest in our practices and equipment. We have the opportunity to invest further in greenfield sites, which we can open anywhere in the country and are targeting three greenfields in full year 23. We continue to look at opportunities to invest in technology, the launch of a new website for AdMed Direct planned, and the launch of a new practice management system planned. And we continue to have opportunities for further selective acquisitions and have a strong pipeline with two already completed in full year 23. I'll now hand over to Ben who will cover the strategic and operational update.

speaker
Ben Jacklin
Chief Operating Officer

Thank you, Robin. On slide 18, I'm going to start by sharing some client insights that we've recently collected, which underline the fundamental resilience of the sector in which we operate and supports clearly our strategy to position ourselves as the premium provider in the veterinary space. When we asked our clients to select all of the categories of consumer spend that they would consider reducing in the event of an economic recession, it was reassuring that just 5.8% responded to say that they would include veterinary care for their pets as an area they'd consider reducing spend. We went on to ask clients about the various categories of spend on their pets that they would expect to either reduce, stay the same, or increase over the next two years. In the case of veterinary care and pet food, the majority of clients said they expected to spend more over the next two years, with only a very small minority expecting spend in these areas to fall. Pet accessories were different, however, with an even number of clients saying that their spend would decrease as those that thought it would increase, with the majority expecting it to stay the same. Clients purchase almost no pet accessories from CVS, which is an important difference to highlight when comparing veterinary-only companies such as ours with groups that include a significant retail offering. For example, we know well that new puppy owners will frequently spend significantly on beds, leads and collars, etc., in the beginning, in striving to ensure they have everything they feel they need for their pet, but quickly see these as more discretionary spend. So it's not surprising that these are areas where owners foresee less spend over the next two years. As we've shared today, we also take confidence from the continued strong growth of our Healthy Pet Club, which is our industry-leading subscription scheme providing preventative health care such as vaccinations, flea and worming treatments and annual health checks. Members of the scheme continue to see value in investing in the best preventative care for their pets, and we're encouraged by the scheme's ongoing growth. Over to the following slide, we are very much a people business, with our clients valuing their experience with our clinicians and support staff above all. I'm delighted to share that we continue to make good progress towards our vision of being the veterinary company people most want to work for. We continue to see employee satisfaction over the year improve and report our highest employee net promoter score to date of plus 4.8, building on the improvements we've made over the last few years. Furthermore, we've seen a steady decline in attrition of vets from the group, already significantly lower than at its height in 2019, to the lowest level since we began reporting the measure. Directly related to both of these factors is that we've been able to increase the number of clinicians in our group with 6% more vets and 11.4% more nurses. On the following slide, intimately linked to how our colleagues feel about working for CVS is the environment in which they're working. We want to provide great working environments that permit the delivery of the best possible care for our patients. And we've been taking a number of steps to deliver this. As Robin's already highlighted, we've significantly stepped up capital investment in our facilities and completed 23 refurbishments and relocations during the course of the year. And we continue to get significant benefit from those activities. We also have three greenfield sites in train, the first of which will open before the end of this calendar year. Aligned to both our relocation and greenfield strategies, we've started to consider strategic partners for new locations and have commenced an exciting partnership with Dobbies Garden Centres, opening our first relocation in Chesterfield Dobbies this summer. This is a good example of where we can benefit from co-location with businesses with similar client demographics, as well as having access to a national network of potential location opportunities. These are standalone units with separate entrances positioned on the Dobby sites, taking advantage of great parking and great visibility. We plan to open a further four practices on Dobby sites over the next 12 months and thereafter expand our relationship to more of their 70 sites. On the following side, we share the exciting news of a new partnership with ProVet Cloud, the leading provider of cloud-based veterinary software, with whom we will launch their new practice management system into CVS in 2023. This is a dramatic step forward for CVS in terms of technology and opens up a wide range of opportunities. Some of those are immediate, such as online booking, better data collection, improved billing capture and a better experience for our colleagues. And additionally, their open API gives us a significant number of ways in which we can integrate other areas of our existing business or indeed new business areas, such as food sales, into the experience our clients have with us. On the following slide, we've once again published our annual quality improvement report, leading the profession in the areas of clinical governance and continuous improvement. One area we've shared here is the work we've done to improve the way in which our highly skilled nurses are utilised across CVS. This means that more of our nurses are being used to their full potential and clients are benefiting from their expertise and advice across a full range of issues. It improves the resilience of the vet-led team by balancing more of the work between vets and nurses and ensures our patients have access to the right clinician at the right time. This also positions us well for expansion in the permitted range of procedures nurses can perform, which we expect via legislative reform in the next few years. I'll now hand back to Richard for some final comments.

speaker
Richard Fairman
Chief Executive

Thanks, Ben. I'm delighted to report that as set out on slide 24, we have seen a positive start to the new financial year with strong light for light growth in the first 10 weeks in our sales versus the same period last year and trading in line with market expectations. We also continue to see growth in our healthy pet club membership with clients seeking the best possible care for their pets. and they've now completed our summer camp, which greatly supports the transition from university study to commencing their careers in practice. As discussed earlier, we've completed two acquisitions year to date and we have a strong pipeline of future opportunities. Finally, as summarised on slide 25, we remain well positioned for future growth. We operate in an attractive and resilient sector with continued favourable trends. We have a clear people-based strategy centred on the delivery of the best possible care. Key to the delivery of this care is both our integrated veterinary services model, but most importantly, our outstanding team of colleagues. We have a strong balance sheet for investment in growth, and we have signalled an increase in this investment in the current year. We are holding a capital markets day on the 8th of November, and we look forward to sharing further detail on our growth opportunities and our capital allocation priorities at that event. So in summary, we've delivered another strong set of results for the financial year, and I'm delighted that that momentum has continued into the new financial year. We're trading in line with market expectations. We've got a strong balance sheet, which supports our investment in driving future growth for all our stakeholders and we're very confident in the future growth opportunities in the business so thank you all for attending and we look forward to catching up with you shortly

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