Cvs Group Plc

welcome to this presentation of cbs group plc's financial results for the year ended 30th of june 2023 i'm richard fairman ceo and i'm joined by ben jacklin deputy ceo and robin alfonso cfa this analyst call is being recorded and the recording will be uploaded to our website later today now this presentation is focused on our full year results however before Before we get into the detail of the results, I wish to discuss the recently announced Competition and Markets Authority review of veterinary services provided to household pets in the UK. As set out on slide two, the CMA announced on the 7th of September that they are undertaking a review looking at consumer experiences and business practices in the provision of veterinary services for household pets in the UK. Now, this is a voluntary market review under Section 5 of the Enterprise Act 2002. I understand that such reviews are used by the CMA to help them better understand a particular market. And they've recently undertaken market reviews in other sectors, such as AI foundation models and the grocery sector. So this review is not specifically aimed at CVS and is an industry-wide review. We will fully support the CMA in its process, and we expect to meet with the CMA in the next few weeks and also to provide written responses to their questions. We're also encouraging our colleagues to participate in the review and to provide responses to the CMA's surveys. The CMA have indicated that they will give an update on their review in early 2024. Our strategy remains unchanged and we will continue to focus our efforts in supporting our colleagues to provide great care to our clients and their animals. This is as much as we can say at the current time. So returning to our full year financial results. The agenda for our presentation is set out on slide three. I will open with a summary of our full year results, and I will give an overall update on our business, including our entry into the Australian veterinary services market. Robin will provide a more detailed financial review, with Ben then giving a strategic and operational update. And I will then close with some concluding comments. Following our presentation, we will invite questions from analysts. So moving to slide five, In our Capital Markets Day in November 2022, we outlined six key components underpinning our five-year growth ambitions. And on this slide, we have set out the progress we've made in the past financial year. As a reminder, these six components are organic revenue growth of between 4% and 8% per annum, margin expansion through investment with adjusted EBITDA margins across the group between 19% and 23% subject to mix, investment in practice facilities in clinical equipment and technology to drive further organic growth and to support margin enhancement acquisitions subject to our disciplined approach and a minimum 10 internal rate of return operating cash conversion of 70 or above and leverage remaining below two times I'm pleased to report that we've made good progress. Like-for-like sales growth was 7.3% for the financial year at the upper end of our range, reflecting our focus on providing great care to our clients and their animals. Adjusted EBITDA margin was 20%, a slight expansion from the 19.4% in the previous financial year. We invested £45.7 million in capital expenditure, completing 21 practice relocation or refurbishment projects. We acquired 11 veterinary practices comprising 16 sites for combined consideration of £54.6 million. Operating cash conversion was 70% and leverage was 0.73 times at 30th of June 2023. So turning to slide six, Our strategy for growth remains unchanged. Our purpose is to give the best possible care to animals and our vision is to be the veterinary company people most want to work for. Underpinning this purpose and vision are our four strategic pillars. Our first pillar is to recommend and provide the best clinical care every time. Now we are fortunate at CVS to have such a passionate team who are committed to providing the best possible clinical care. Our second pillar to be a great place to work and have a career and we have taken a number of steps over the past four years to reposition cvs as an employee of choice and we are seeing the benefit of this with it with an increase the number of vets and nurses employed and increased colleague engagement as measured by our employee net promoter score our third place we provide great facilities and equipment We recognise that investment in our facilities and in clinical equipment are key to both our ability to provide the best possible care and our ability to employ and attract the best talent in the profession. So we are consciously investing in these areas. And fourthly, we take our responsibilities seriously. We want to do the right thing, whether in helping to drive improved standards in the profession, in providing wellbeing support to colleagues, or in ensuring we limit our impact on the environment. Under this strategy, we are focused on driving organic growth and on expansion through investment across a range of areas. This investment will drive further organic growth and inorganic growth from acquisitions. Turning to slide seven. As announced in July, we are excited by our entry into Australia and we have now completed five practice acquisitions and we've exchanged contracts on a further two. And I will talk more about Australia in a moment. In the year to date, we've also completed the acquisitions of two small animal first opinion practices in the UK, and we have exchanged contracts for the acquisition of a third, which we expect to complete in the next few days. For all three acquisitions, we submitted briefing papers to the CMA prior to the announcement of their market review. The CMA responded on all three proposed deals following the announcement of their market review, leaving us free to complete the acquisitions. Total consideration for the five Australia and two UK acquisitions completed in the year to date is £30.4 million. On slide eight, we provide additional colour on opportunity in Australia. The Australian market is attractive with relatively low levels of corporate consolidation, favourable market dynamics and strong similarities with the UK. Australia currently has two major established competitors, namely VET Partners, which is owned by JAB Holdings and is an entirely different company to the UK VET Partners, and Green Cross, which is owned by TPG. Along with smaller corporate players, these corporate groups collectively own approximately 15% of VET practices in Australia, with the remainder in private hands. With circa 3,500 practices in Australia, we have a significant opportunity for expansion. Now, the Australian market has similar characteristics to the UK, including an increasing pet population, the continuing humanization of pets, and high standards of clinical care Now, we are conscious that Australia is on the other side of the world. And in addition to our focus on acquiring great practices, providing high quality clinical care with strong management teams, we have established an experienced local leadership team, including the secondment of one of our small animal operations directors from the UK and a local acquisitions director with extensive experience of the Australian market. Our acquisition focus is in the main urban conurbations, and we are excited by the opportunities ahead. So that concludes my introduction. I will now hand over to Robin, who will provide a more detailed financial review. Robin.

Thank you, Richard. In November 2022, we announced our ambition to double adjusted EBITDA over the next five years. The group's performance in 2023 demonstrates good progress towards this ambition. On slide 10, I am pleased to share another set of strong results. We have seen an increase in revenue, an increase in EBITDA, we have increased our capital investment in support of our strategic priority to provide the best clinical care to animals, and we've increased acquisition investment. Revenue grew 9.8% to 608.3 million from 554.2 million with like-for-like sales growth of 7.3%. Our like-for-like sales growth is adjusted for working days. It excludes current year acquisitions and only includes prior acquisitions from the same month this year as they were acquired in the previous year. Adjusted EBITDA grew 13% to 121.4 million from 107.4 million, benefiting from top-line revenue growth, with our continued focus on high-quality clinical care, investment in facilities and equipment, and investment in people. Free cash flow also grew 20.3%, to 62.9 million from 52.3 million benefiting from the increase in adjusted EBITDA and operating cash conversion of 70% which was also up year on year and in line with our capital markets day ambition of 70%. Good operating cash conversion has meant that despite an increase in capital investment and acquisition investments totaling circa 100 million in the year, up from 30 million in the prior year. Leverage remained low at 0.73 times, albeit up from 0.4 times at the 30th of June 2022. Adjusted EPS of 96 pence was also up 11.9% from 85.8 pence and benefits from adjusted EBITDA growth. We continue to invest in our practice facilities clinical equipment and technology with total capital expenditure increasing to 45.7 million from 24.5 million. We are confident the investment creates an opportunity for us to further increase organic growth and night flight sales by facilitating better clinical care and providing our colleagues with a better working environment, which we believe will support attracting and retaining talent. We expect development capital expenditure over the next few years to be in the region of between 30 to 50 million per annum. Acquisition activity has continued into the second half, with a total of 11 acquisitions made in the year for consideration of 54.6 million. The pipeline for acquisition remains strong. And since the year end, we have entered the Australian veterinary market and completed five acquisitions for initial consideration of 23.8 million, along with two in the UK for initial consideration of 6.6 million. Turning to slide 11. Revenue was up to 608.3 million from 554.2 million with good performance across our divisions. CVS continues to benefit from our ability to deliver high quality clinical care for an increasing pet population. Light flight sales growth of 7.3% was at the upper end of our Capital Markets Day ambition. The Veterinary Practices Division, which comprises our companion animal, referral, farm animal and equine veterinary practices, as well as our buying groups, VetDirect. This division has performed well with 10.1% revenue growth, benefiting from the continued focus on delivering quality clinical care, an increase in the average number of vets and nurses we employ, and a 4% increase in our healthy pet club membership to 489,000 members. The laboratories division, which provides analyzers in practice, which supports testing in-house, for which we supply the reagents for the tests, and a diagnostic testing service, Revenue in this division increased 7.7%, benefiting from an increased volume of tests performed and an increased volume of analyzers in practice. The crematory division, which provides both individual and communal cremation services, as well as clinical waste disposal service, continues to benefit from an increase in the number of customers choosing an individual cremation and a more bespoke service. despite lower cost options being available. This follows the rollout of our direct pet cremation project, which improves processes to allow customers more time to consider their pet aftercare options. And our online retail business has benefited from improved website visits. Turning to slide 12, 9.8% revenue growth was the main driver for an increase in EBITDA to £121.4 million from £107.4 million. Our continued investment in people, practice facilities and equipment underpins this growth. Again, there was good performance across all our divisions. Gross margin before clinical staff costs improved marginally from 76.9% to 77.7%, benefiting largely from a change in mix. Employment costs as a percentage of revenue increased to 51.4%, with additional investment in people, including support colleagues, to support the delivery of high-quality care. And other costs have remained stable. with increases in utility costs and other costs offset by an increase in net RDEC income in the year. Turning to slide 13, the group continues to generate healthy cash flows with operating cash conversion in line with our Capital Markets Day ambition of 70%. Free cash flow of 62.9 million benefited from an increase in adjusted EBITDA, partially offset by increased tax payments. Notwithstanding the step up in investment capital expenditure and acquisition investments, resulting in a net cash outflow of 38 million, leverage remained low at 0.73 times, well below our target leverage of less than two times. And moving to slide 14, we have a strong balance sheet with 350 million of debt facility and low leverage at 0.73 times. We anticipate growing free cash flow from continued EBITDA growth and operating cash conversion at 70%. We will continue to take a disciplined approach to investment and plan to invest investment capex of between 30 to 50 million per annum and over 50 million per annum on acquisitions over the next five years. Australia presents a strong pipeline of opportunity, and depending on timing of investments, leverage may increase in the short term, but we are mindful of leverage remaining below two times. I will now hand over to Ben for a strategic and operational update, along with bringing to life the Australian pipeline.

Thank you Robin. On slide 16, we've continued our focus on providing access to the best possible care to our clients and their animals. We are completely committed to providing the right care for every patient, and that starts with getting the right diagnosis. This year has seen further significant investment across the group in both diagnostic facilities and equipment, and also in improving the skills and developing expertise to make the best use of them. During the year, we introduced nine pioneering clinical improvement projects to support colleagues in achieving these outstanding levels of patient care across a range of disciplines. Further to this, we continue to invest in clinical research in conjunction with UK academic institutions to further knowledge within the veterinary space. And we collaborate closely with the Royal College of Veterinary Surgeons Knowledge Division to share best practice and improve outcomes across the profession. Our Healthy Pet Club membership scheme, now with 489,000 members, provides owners with an affordable way to comply with best practice on flea and worming treatments and vaccinations, as well as offering significant discounts on all other veterinary procedures and drugs. Many of our practices have had amazing individual achievements this year. Rose Mullion Veterinary Hospital, recognised by the RCVS for their outstanding work. White Lodge Veterinary Surgery announced an RCVS knowledge antimicrobial stewardship champion for their work on cat bite abscesses. But just two examples. Turning to slide 17, we continue to invest in our people and remain wholly committed to our vision to be the veterinary company people most want to work for. On the slide, we've shared a number of actions we've taken as we continue to invest in our people from clinicians in our practices to the vital in-practice and central support teams who do essential work supporting the delivery of the best possible care. We continue to ensure our pay is highly competitive in the market and alongside basic salary and our ongoing commitment to pay at least 3% above national minimum wage and national living wage, we've made further enhancements during the year. We introduced CVS Refresh, a weekly fund for practices and other CVS businesses to spend on their team's wellbeing. We launched healthcare cash plans. We enhanced our sustainability effort with a new electric vehicle salary sacrifice scheme. We introduced a new exceptional health event sick pay policy, and we introduced pastoral support vets for our recent graduates. And across a range of initiatives, improved access to clinical and wellbeing support. At CVS, we really encourage clinicians to have wide-ranging and rewarding careers whilst maintaining an appropriate balance between work and life outside practice. Our national network of out-of-hours clinics are essential to ensuring that our vets and nurses do not have to work consecutively both days and nights, and our national network of advanced practitioners and referral clinics ensure that the right expertise is available when veterinary surgeons would value a second opinion. Our vetorical teleradiology, telineurology and telemedicine businesses further ensure that colleagues in practice are well supported when they'd value more specialist expertise. Finally, we've continued to expand our industry-leading online learning environment, which offers hundreds of webinars and literature that CVS vets, nurses and support staff have live access to right in their consulting rooms. Turning to slide 18, these data remind us that at its heart, CVS is not just an animal business, but rather a people business that does amazing things for animals. The metrics shared here are perhaps our most important, and I'm pleased to say that on average during 2023, we employed 6.5% more vets and 8.4% more nurses than in 2022, against a continuing backdrop of a shortage of vets and nurses. Our colleague engagement continues to be strong, with ENPS rising significantly year on year to 14.5, well ahead of industry benchmarks. Unsurprisingly, given such significant progress on colleague engagement, our colleague attrition continues to fall and is by some margin at its lowest level since we started recording the measure. Over the page on slide 19, we are continuing to deliver on our commitment to investment in our existing facilities, and we completed 21 relocation and refurbishment projects in the year. Our total investment in CAPEX increased from 24.5 million to 45.7. We continue to see benefits in this commitment with improved clinical care, improved colleague retention, and an improved client experience. On the slide, we've highlighted one of those relocations, Bishop Auckland, now in a purpose-built facility with more consultation rooms, enhanced clinical equipment, improved clinical workflows and a massively enhanced working environment for our colleagues. We continue to track the performance of these investments and are pleased to report that they continue to perform just as well as we'd forecast. As a result, I'm pleased to confirm that we'll continue this commitment into 2024 with investment expected to be between £30 and £50 million. Over the page, as Richard has already introduced, in July 2023, we announced our entry into the Australian market. I've personally spent a lot of time over there over the last 18 months, as well as having worked there early on in my clinical career. And the quality of veterinary services offered in their high quality practices fits perfectly with our strategy. We focused our efforts on the major cities that are highlighted here. And with the low levels of consolidation in Australia, we have a long pipeline of accepted offers. We typically see that the EBITDA multiple paid is lower than that of the UK, but the IRR is in line with our other investments. This is due in part to us not baking in synergies until we've got experience in receiving them, but also is in part more structural as the rate of corporation tax is higher at 30%. Finally, we're working closely, as you'd expect, with the drug manufacturers to ensure that we strike the right commercial deal for products and make the most of our global buying power, as many of these manufacturers are the same as we use in the UK and Europe. Turning to slide 21, in August 2023, we launched a new client-facing brand across all of our UK small animal practices called The Vet Collection. Initially online, this brand is focused on reconciling our national presence with local practice identities and taking a share of voice in the digital space that we currently don't have and providing our existing and potential clients the ability to find a practice and register online, see at a glance the clinical services we have to offer, have access to articles on common conditions and what it means for their pets from an authoritative and trustworthy source, and understand our range of services and products, such as the Healthy Pet Club, another brand that's consistent across all of our practices. Future enhancements are planned and are likely to include greater automation of client requests, like repeat prescriptions, online appointment booking, and other ways to interact digitally with our practices. I'll now hand back to Richard for some final comments.

We remain well positioned for future growth with a clear strategy as outlined at our Capital Markets Day last November, which remains unchanged. I'm pleased to report that we've seen a positive start to the new financial year with trading in line with expectations. We continue to focus on our people and are seeing further growth for the number of vets we employ. We've entered the Australian veterinary services market and have an exciting opportunity there for expansion. Alongside this, we will continue to look for accretive acquisition opportunities in the UK. We have seen further growth in our Healthy Pet Club membership scheme. We will continue to invest in practice facilities, clinical equipment and technology. Our leverage remains below one times and we have committed undrawn bank facilities from which to fund this investment. Now, the results we've announced today are all due to the passion and dedication of our outstanding team of colleagues. And I would like to take this opportunity to thank them all for their continued dedication and support in providing the very best care to our clients and their animals.