Welcome to this presentation of CVS Group PLC's financial results for the year ended 30 of June 2023. I'm Richard Fairman, CEO, and I'm joined by Ben Jacklin, Deputy CEO, and Robin Alfonso, CFO. 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 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 U.K. As set out on Slide 2, the CMA announced on the 7 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 U.K.
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. Returning to our full year financial results. The agenda for our presentation is set out on Slide 3. 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. Moving to Slide 5.
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%-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 2x. 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 GBP 45.7 million in capital expenditure, completing 21 practice relocation or refurbishment projects. We acquired 11 veterinary practices, comprising 16 sites for a combined consideration of GBP 54.6 million. Operating cash conversion was 70%, and leverage was 0.73 times at 30th of June, 2023. Turning to Slide 6, 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 is 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 employer of choice. We are seeing the benefit of this with an increase in the number of vets and nurses employed and increased colleague engagement as measured by our Employee Net Promoter Score. Our third pillar is we provide great facilities and equipment.
We recognize 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 7. As announced in July, we are excited by our entry into Australia, and we have now completed 5 practice acquisitions, and we've exchanged contracts on a further 2.
I'll 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 U.K., 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 U.K. acquisitions completed in the year to date is GBP 30.4 million. On Slide 8, we provide additional color on our opportunity in Australia. The Australian market is attractive, with relatively low levels of corporate consolidation, favorable market dynamics, and strong similarities with the U.K.
Australia currently has two major established competitors, namely VetPartners, which is owned by JAB Holding Company and is an entirely different company to the U.K. VetPartners, and Greencross, 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 U.K., 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 U.K. 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 5 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've 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 GBP 608.3 million, from GBP 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 it only includes prior acquisitions from the same month this year as they were acquired in the previous year.
Adjusted EBITDA grew 13% to GBP 121.4 million, from GBP 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 GBP 62.9 million from GBP 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 ambition of 70%. Good operating cash conversion has meant that despite an increase in capital investment and acquisition investments totaling circa GBP 100 million in the year, up from GBP 30 million in the prior year, leverage remained low at 0.73 times, albeit up from 0.4 times at the thirtieth of June 2022.
Adjusted EPS of GBP 0.96 was also up 11.9% from GBP 0.858 and benefits from adjusted EBITDA growth. We continue to invest in our practice facilities, clinical equipment, and technology, with total capital expenditure increasing to GBP 45.7 million from GBP 24.5 million. We are confident the investment creates an opportunity for us to further increase organic growth and like-for-like 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 GBP 30 million to GBP 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 GBP 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 GBP 23.8 million, along with two in the U.K. for initial consideration of GBP 6.6 million. Turning to Slide 11, revenue was up to GBP 608.3 million, from GBP 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. Like-for-like sales growth of 7.3% was at the upper end of our Capital Markets Day ambition. The veterinary practice 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 improved processes to allow customers more time to consider their pet aftercare options. Our online retail business has benefited from improved website visits. Turning to Slide 12. The 9.8% revenue growth was the main driver for an increase in EBITDA to GBP 121.4 million, from GBP 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.
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 ambition of 70%. Free cash flow of GBP 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 GBP 38 million, leverage remained low at 0.73 times, well below our target leverage of less than 2 times. Moving to Slide 14, we have a strong balance sheet with GBP 350 million of debt facility and net 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 GBP 30 million-GBP 50 million per annum, and over GBP 50 million per annum on acquisitions over the next five years. Australia presents a strong pipeline of opportunity, and depending on timing of investment, leverage may increase in the short term, but we're mindful of leverage remaining below 2x. 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 U.K. academic institutions to further knowledge within the veterinary space. 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. Rosemullion Veterinary Practice, recognized 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, are 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 well-being. 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 well-being 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 VetOracle teleradiology, teleneurology, and telemedicine businesses further ensure that colleagues in practice are well supported when they 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 GBP 24.5 million to GBP 45.7 million. 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 GBP 30 million-GBP 50 million. Over the page, as Richard has already introduced, in July 2023, we announced our entry into the Australian market. I 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 U.K., 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 U.K. and Europe. Turning to Slide 21. In August 2023, we launched a new client-facing brand across all of our U.K. small animal practices called The Vet Collection.
Initially online, this brand is focused on reconciling our national presence with local practice identities, 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.
Thanks, Ben. I will conclude on Slide 23. 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 in 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 U.K. 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 1x, 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. So that concludes our presentation, and I would now like to invite analyst questions.
If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally, as you will be advised when to ask your question. The first question comes from the line of Charles Hall from Peel Hunt. Please go ahead.
Morning, everyone.
Morning, Charles.
Morning. Could we just talk a little bit about the CMA? Obviously, you don't want to give details, but just like to hear a little bit about whether you're thinking about changing anything, as a result of them doing a review. It sounds as though it's business as usual, but maybe just touch on things like recruitment, investment, ongoing investment in the business, acquisition plans.
Yeah. So, Charles, I'll pick them up, and Ben may want to add some color as well. Our strategy remains unchanged. We are focused on providing great care to our clients and their patients, and for that, we need vets and nurses, and our vision is very much to be the employer of choice within the profession. So we will continue our planned investment as we outlined in our Capital Markets Day last November, and that investment is important because we recognize we need to provide. Well, to provide great care, we need great facilities, we need the appropriate clinical equipment, and we need vets and nurses that are key to the provision of that care. So that focus remains completely unchanged. We've announced two completed acquisitions in the U.K. today, and one which we expect to complete in the next few days.
And again, that focus on accretive acquisitions is an important part of our strategy and remains unchanged. It's too early to tell the outcome of this market review. As we said earlier, we will fully cooperate with the CMA, and they have indicated that they'll announce an update in early 2024. Ben, I'm not sure there's much else you can add, but.
No, I don't think so. I think that's the key, isn't it? We've been really focused on delivering higher and higher quality care for the last five years. The clients we have are responding well to that, as you can see in our client reviews, and we'll be working with the CMA to give them a really good view of both CVS but also the broader profession.
I guess one of the things the CMA is looking into is price visibility. Anything you can talk about in terms of messaging on that front, either to the vets or just more generally?
Yes, I mean, it, the way we operate in practice, Charles, as you know, is that, clients have access to our prices through an estimation process. Predicting clinical spend is challenging in any clinical environment, veterinary or otherwise, when disease courses are varied and unpredictable. But we, for a long time, have been committed to an estimation process for clients, and we continue to be so, so there's no change for us there.
Then secondly, on Australia, obviously really good progress being made there. The—do you want to just comment on the early experience? I know it's very early, but in terms of how the acquired businesses are responding under CVS ownership. And just talk—I know you're not including synergies in your thought process at the moment, but when do you start to think you'll start some?
Yes. In terms of the practices we acquired, the first two were completed in July. We have a full month's trading data in August, and I'm pleased to say they're trading in line with our business plan. As Ben said, we haven't assumed synergies in Australia, but as we continue to focus on driving great clinical care, the practices we acquired have been chosen because they are really good quality practices, really strong management teams, and they share our commitment to providing great care and developing that care. That, frankly, is where the biggest synergies are expected to come from in terms of increasing the care we can provide to clients in Australia.
... That pipeline that you've got, was that secured before it was sort of well known that you were entering the Australian market? Or has your phone been ringing as a result of making the first couple of acquisitions?
Ben, do you wanna cover that?
Yeah, a combination of both, Charles. As we've highlighted, we've got a local Australian acquisitions director with lots of experience in the veterinary sector. And so it was helpful prior to that announcement to be in conversation with a lot of practices. But equally, the fact it's helpful that we're now public about that. And you know, we're looking forward to bringing the experience we've got of really professionalizing the business, providing a great environment for colleagues, and taking that to the Australian market, very much to be seen as the employer of choice, and we're getting a good response to that.
That's great. Thanks very much.
Thanks, Charles.
The next question comes from the line of Kane Slutzkin from Numis. Please go ahead.
Morning, guys. Can you hear me?
Morning, Kane.
Morning.
Yes, loud and clear.
How's it, guys? Yeah, just following on from Charles on Australia. Just wondering, with your footprint there to increase over time, are you guys gonna sort of think about separately disclosing this business in the future so we can get a sort of feel for the, I guess, the regional splits? And then also just following on from that, you know, are we thinking now, when one thinks more broadly on M&A, are we sort of putting the rest of the world to the side, given sort of some of the CMD stuff you had around sort of other parts of Europe? Is that sort of off the cards for now because you're sort of accelerating in Aus, or is that still kind of going on in parallel?
Just last one on Australia: could you just comment maybe on the regulatory environment there? I guess, what is the sort of CMA equivalent there, and how involved have they been in, albeit, I guess consolidation levels are pretty low.
Okay. Robin, do you want to pick up the first one around disclosure and...
Well, I suppose the simple answer, Kane, is probably yes, subject to Australia becoming a material operating segment for us. So as we continue to invest in Australia, as that business grows, should it become material, then we will have to disclose it as a separate operating segment.
Kane, in terms of the focus on international expansion, we were clear at the Capital Markets Day last year that we wanted to expand into one new territory within the next 12 months. We've chosen Australia as the most obvious and the best new market for us because of the attractive features, the synergies with the U.K. Ben indeed has worked in Australia himself and understands the veterinary sector well. I mean, there's a very clear correlation between standards of care in Australia and standards of care in the U.K. Yeah, lots of Australian vets work in the U.K. and vice versa. Whilst it's the other side of the world, we're very confident we can manage it effectively. We've got a very strong local management team, and we're acquiring practices with strong management teams themselves.
In terms of competition, Ben, do you want to just touch on the Australian market a bit? As Kane says, the levels of consolidation are very low.
I think that's the key point, Kane. Yeah, the levels of consolidation are very low. There is a. Their equivalent body is the ACCC. The way they look at markets is not wildly dissimilar, but equally, there's no contagion effect, if you like, of them copying what the CMA do. Clearly, they're at a vastly earlier stage in the consolidation journey. So as you'd expect, we take local legal advice on making sure we stay the right side of all that, but that's not a major part of the environment at all over there at the moment.
Okay. Thanks, Ben. Robin, sorry, can I just ask you one last question? And I'm not sure if you'll be able to give the answer to this, but just is it possible to give us a sense for the sort of volume versus pricing dynamics for this year? I mean, I'm just struggling to sort of square this with organic growth. You know, if you're kind of growing 7%, inflation sort of being above that, you know, and if you were putting through that sort of increase, you would imply volumes would be sort of negative, I guess. Which clearly can't be the case if you look at some of your volume pointers around sort of HPC membership and vet employment growth. So just wondering if you could give us any comment on that. Perhaps I'm missing something?
Well, I was gonna ask the question, Kane, as you outlined, actually, in that we're pleased with the 9.8% top line revenue growth. We're pleased with the like-for-like revenue growth of 7.3%. The volume drivers we point to clearly are around the clinicians that we employ. We've employed 6.5% more vets and 8.4% more nurses. Also, another key kind of volume indicator for us is The Healthy Pet Club membership, which has continued to grow by 4% and has continued to grow post-year-end. We're pleased with that growth.
Okay. But if that sort of growth is a decent sort of yardstick, and you're growing 7% top line, or I guess you know ex M&A now, it would sort of imply pricing is quite low, if I'm not mistaken. I'm just trying to get a sense for whether you know, given sort of some of the comments around the sector pricing above inflation, it doesn't seem to be the case if you're growing.
Yeah, absolutely.
Uh-
We've not implied pricing, Kane, so I think-
Okay.
We've got to have volume implied price, and we haven't implied what that price is.
Okay, fair enough. All right. Thank you, guys. Cheers.
Thanks, Kane.
Next question comes from the line of Calum Battersby from Berenberg. Please go ahead.
Morning, guys. Thanks for the presentation today. Three questions from me, please, but probably just go through them one at a time. So firstly, just a follow-up to Kane's question there on, I suppose, volume growth and hiring. Would you mind just talking through how you make decisions on hiring and how many vets and nurses to employ in the year? I guess it's just interesting, as, as Kane said, that the level of, kind of-
... volume growth implied by the increase in number of vets is quite meaningful, which implies that pricing is quite low. So is there any element of catch up in there, i.e. you were understaffed by comparison last year, or that, you're hiring ahead of future growth expectations that you have? Just any comments on that would be quite helpful.
Ben?
Yeah, I mean, look, there's elements of all of that, I think, Alan, because we've said before, I think, if we could employ 10% more vets, we would do it, because there is demand for the high quality services out there. Given a particular number of vets in a clinic, they will manage to do a certain amount of work, and the quality of the work they do might vary according to how busy they are. When we add more vets, that gives the vet more time to do higher quality work, better service to clients. It's not completely binary, that you add... Oh, sorry, completely linear, that you add one vet, and that adds exactly the same chunk of revenue, because it does change the ability for them to do different sorts of work.
But in terms of how we plan, how many we would like to hire, we are really actively trying to attract all the time, high quality clinicians all over the country. There are very few clinics where we say, "We just don't want any more vets here." But clearly, there are. The odd one that's capacity constrained, but that, that's pretty unusual. We would always want to attract more vets to do more work because the demand is out there, and the same would apply to nurses.
And the other thing I'll just add to that is we had a record intake of graduate vets last year of 200 graduate vets. They are fantastic. They, they're highly trained, but clearly it takes time for them to adapt to working environment and to build their clinical skills in practice. So again, whilst they're reflected in the increased headcount, they're, they, it takes time to, for them to be as skilled, I guess, as our experienced vets.
Yeah, which probably is the best bit that you referenced, Calum.
Yeah.
No, that's helpful, understood. And then, in terms of, Australia, just wonder if you'd give slightly more color on the pipeline for acquisitions this year, because you talked on the Slide, 16 accepted offers. Kind of firstly, when you have deals at that stage, do effectively all of those complete eventually, or historically, do some fall away at that level? And if we say you've spent approximately GBP 25 million on the five deals so far, does that imply it's reasonable to say you might invest another GBP 75 million plus on acquisitions in Australia this year? Or just kind of make that proportional, or is this too optimistic?
Yeah. The ones we've had accepted offers for, we are very attracted by those opportunities. We wouldn't have made the offers if we weren't excited by the opportunity of acquiring those practices. However, we are undertaking DD, and I guess throughout due diligence, there might be issues in cancer that mean it actually becomes less attractive. We can't guarantee that all those 16 will complete. We tend to have a high proportion of completions once we have accepted offers. Certainly, that's my experience in the U.K. Ben, do you want to pick up the second part?
Yeah, I mean, the element of sort of predicting what we might spend, I mean, it's a bit- I don't think that's a sort of completely out there assumption. But clearly, the size of the practices do vary, and one of the practices that we bought early on, McDowall, is a big practice. So, there aren't many of those in Australia, never mind in our pipeline. So, that might skew it slightly, but, look, I... I mean, Robin might come in, but I don't think that's an outlandish assumption, but for that fact that we've got one big one in the five.
Yeah, that's what I was going to say, Ben. I mean, as a simple maths, it works, but clearly it depends on the practice that we're buying, and we have bought one big one in the first five. I mean, from a kind of ambition perspective, we said we want to invest over GBP 50 million per item on acquisitions. The pipeline for Australia remains strong, and if that continues to remain as strong as it is, then potentially that could be higher over the near term.
Very clear. Thank you. Lastly, probably one more for Robin. In terms of the R&D tax credits, would you mind helping us out by talking through the mechanics of how these are calculated and related, how much conviction we can have on these recurring over the coming years?
Yeah. When it comes to-- I suppose when it comes to R&D, there's two elements to the R&D that, that we do, in that we have specific projects, specific research projects, specific research papers that are peer reviewed and published, that is R&D. And equally, in the, in the kind of the day-to-day life of a vet, they encounter so many different breeds and species that, no one animal will, will react the same to a treatment as another. So they spend a lot of time researching what is the, the best care, and, approach to providing care for that animal. So that's the-- that's our, kind of our, our R&D, is, is kind of a broad range.
When it comes to the mechanics, and it's worth noting, we use Ernst & Young to support us with our R&D claims, and they will review all the activities that we make in the year and costs associated with those activities, and prepare a report for HMRC. And then for those costs that are associated with that activity, we get a percentage of those that then qualify as an R&D claim. Historically, that percentage was 13%. I think at the last announcement, the government announced that they were making that scheme richer for larger companies. So that 13% actually is going to grow to 20% from April 2023.
So I suppose the two key questions in terms of that R&D, following the kind of description of how it's calculated, is based on the current structure in the U.K., we expect those R&D claims to continue.
... for the foreseeable future, and probably at similar levels, if not slightly improved.
Just be clear on that. In FY 24, there should be an annualization benefit from that 13%-20% step up that happened in April 2023. Have I understood that right?
Not that big. There are nuances to the claims that we've made in that the what we recognized in full year 2023 is based on the claim. So you make a claim post your year-end, for claims that we've received payment for, and it's passed inquiry with HMRC, we have to recognize the claim in full. For a number of claims are still in the process with HMRC, so we will have a provision against the claim. So, it's not quite as simple as pricing up from 13 to 20 based on 2023, but there will be growth. I expect that if we continue with the same level of R&D, then the on a like-for-like basis, there should be growth in that claim.
Got it. Understood. Thanks, all.
Thanks, Calum.
The next question comes from the line of Natalia Webster from RBC Capital Markets. Please go ahead.
Hi there. Just checking you can hear me okay?
Yes.
Yes.
Great. Hi, so Natalia Webster from RBC. Thanks for taking my question. I wanted to dig a little more into the pricing transparency point relevant to the CMA review, particularly around drug pricing. I was wondering if you were able to provide some more detail around your Animed business and how much of its revenue currently comes from pharmaceuticals, prescription or otherwise, and also whether this is highlighted to customers already as a discounted option. And then also, if you're able to provide some color around the level of penetration from online pharmacies generally in the vet space in the U.K., and if you can provide a rough number of Animed 's market share within this.
Okay. The first part, Natalie, around online sales through Animed Direct. Whilst we sell food as well as drugs, and we also sell some pet accessories, toys, et cetera, the majority of our online revenue is pharmaceutical products. As you say, they can be prescription medicines, and they can be non-prescription medicines. For prescription medicines that we sell online, we need to see a prescription from a prescribing vet, and we have to inspect that prescription, so we employ pharmacists in our online pharmacy to make sure that we are dispensing drugs appropriately. The, the... Robin, do you want to pick up the second point? Because I'm not sure—
Yeah
... there's much more detail we can provide, given the disclosures we've made already, but.
Yeah, I was going to say there are a number of online providers. I'm not sure I can accurately give you what the Animed market share would be. The only thing I would add is in terms of we have seen good growth in Animed Direct over the past few years. That's largely driven, actually, from customers choosing to buy pet food and buy pet food online. And that continues to be an opportunity for us to grow that further.
Ben, in terms of the practices and clients being aware of the ability to take a prescription, do you want to just tell us?
Yeah. So as you know, we are all of our practices are members of the Practice Standards Scheme, which is not mandatory. Just over half of U.K. veterinary practices are members of the Royal College Practice Standards Scheme. And under that scheme, we comply with one of the recommendations across all of our practices, which is that there is a sign in all of our waiting rooms that says to clients, and we have standardized wording: "Prescriptions are available. This is how much a prescription will cost you, and you can go and get your drugs elsewhere." So that is explicitly advertised in all of our practice waiting rooms. But despite that, the vast majority of clients do not go and get a prescription because of the convenience of having it at the time and explained to them by the nurse or the vet.
Okay, great. Thank you.
Thanks, Natalia.
There are no further questions in the queue, so I will now hand over for some webcast questions.
Thank you. So our first webcast question comes from Andrew Whitney, from Investec. He has two questions. So this is on the deal making. Are you able to give a steer on how practice acquisition multiples are evolving in the U.K. and Australia? Are you seeing less competition in the U.K. given headwinds? And the second question is, what is the structure of your deal team in the Australian market? How much dedicated resource is there?
Okay, I'll answer the first question. Maybe, Ben, you can pick up the second. In terms of multiples in the U.K., probably too early to say. We've consistently spoken about our focus on being very disciplined. We are selective in terms of the acquisitions we want. We want high quality practices that allow us to continue to focus on developing and providing great care to clients. Percent internal rate of return. We're still seeing opportunities to acquire in the U.K. Indeed, we've announced three, two of which we've completed, one of which we're about to complete this morning. In terms of multiples, they may start to come down in the U.K. if competition is less. Probably slightly too early to tell.
Ben, do you want to talk about the resource in Australia and our focus?
Yeah. So we have two individuals who spend one full-time, one the majority of their time, purely dealing with acquisitions in Australia, plus all of the analyst team based in the U.K. supporting us with that process. We also have external advisors who support with the due diligence process, so that's largely outsourced, both on a financial side but also on a legal due diligence side. That we don't have a limiting factor in terms of resource on the ground. And if we did, I suspect we would invest to make sure we didn't. So yeah, we're well-resourced to keep the pipeline coming.
... Thanks, Andrew.
The next question is from James, from Jefferies. "I didn't see anything in the materials on your partnership with Dobbies. Please, can you give us an update on this? The net R&D credit in 2023 was significant, of GBP 9.6 million versus GBP 2 million in 2022, and excluding this, adjusted EBITDA margins declined. What did this relate to, and how sustainable is this into FY 2024? How should we think about the underlying margins in 2024 if inflationary pressures are persisting? And finally, why are these considered continuing rather than exceptional income?
Okay, Ben, do you want to pick up the Dobbies question?
So I think when we first talked about Dobbies, we were keen to stress that the relationship was predominantly about a land bank of opportunities. There was some potential synergy with being on the site with garden centers, but also it was largely big car parks, single-story units, and an ability to put vet practices in 3,000-4,000 sq ft facilities. And we do have a number of sites operating at Dobbies sites. What we have found more recently is that as we professionalized our property team, we now have a national network of landlords really keen to work with us with equivalent and alternative land banks, and we've probably used more of those during the course of the last 12 months than Dobbies. So, yeah, that's why we probably haven't talked so much about that.
The second part, yes, we've reported that we recognized GBP 9.6 million of Research and Development Expenditure Credits, netted in the year. That, you rightly say, compares to GBP 2 million in the previous year. Yes, if you adjust for that, margins have declined very slightly. However, we've, in the past year, seen significant inflationary pressures across a number of areas, including utilities. We've also consciously invested in people, not just in salaries, which is clearly important, but in reward and benefits, in learning, education, and development. We believe that investment is very important given the focus and our vision to be the veterinary company people most want to work for. We are pleased with the margin overall.
The final point about the exceptional nature or otherwise of Research and Development Expenditure Credits, and I'll get Ben actually to bring to life a bit more. Robin did touch on it, but the work we do day in, day out, and why there's less of a data set in veterinary science as there is in human medicine. But we do see this as an ongoing research and development focus. We believe claims will be ongoing for a number of years. The government have actually announced recently, as Robin said, that they are supporting this scheme for large corporates because they want to encourage investment in research and development across the U.K.
So Ben, yeah, it might be worth you just bringing to life a bit more the point that Robin made around that kind of day in, day out research we do.
Well, the easiest way to look at it, I think, is the comparison with human medicine. So in a veterinary care consulting room, you're not faced with just one species, and indeed, among the species, you're not faced with one particular breed. So as a result of that, and the fact that the data that's in the human sector is clearly vastly higher than it is in the veterinary sector, and then divide that up between species, and then divide that up between breeds, most of the time you're not seeing the same species of animal, the same breed of animal, the same age of the animal, the same presentation, and the same symptoms every single time. It's often the first time you've ever seen those particular combinations, and it's probably never been specifically reported on.
So our vets spend a lot of time researching comparators, getting read across from other species, other animals in the same species, other breeds, et cetera, to work out what the best course of treatment might gonna be. And sometimes when you get a group of those things together, they'll get published as a case series, or they'll get published as a review article or a journal article in peer-reviewed journals. But sometimes they won't, and sometimes it'll simply be a case of the learning in the practice that might even stay within that veterinary surgeon or across the group. As much as possible, we try and share that more broadly.
But that falls very much in the government's Research and Development Expenditure Credit scheme, and we're advised by EY as Robin said. We take a very conservative approach as to what we consider research and development, and but yet that remains significant. Their advice is clear, as Robin said, that for the foreseeable future, we can expect to continue to make these claims. In fact, as Robin said, we expect them to be enhanced, if anything.
And James, I guess because of its, the very fundamental nature of what we do, it's not exceptional, and therefore, we've given full transparent disclosure in terms of those numbers, but we don't think that's an exceptional item, and nor do our auditors, importantly.
Okay, our last question in the queue is from David Wang, from Marlowe Partners. David asks, "Can you provide more details on the pace of Research and Development Expenditure Credit recognition through the year, first half versus second half? I believe you recognized GBP 5 million in the first half, which implies GBP 4 million in the second. Firstly, can you confirm those numbers? Second, if this is true, can you talk about the underlying margin expansion, excluding RDEC from H1 to H2, and what is driving it?
Okay. Robin, do you want to pick up? Yeah.
Yeah, I think, look, well, we've touched on the kind of the margin expansion point in that we've suffered—well, as a business, we have inflationary pressures, not just in utilities, but also we consciously invest in people, so we've touched on that. In terms of the pace of R&D, it's not linear. We don't recognize a claim as we—those costs don't relate to the activity for that period. It's dependent on when the work's performed for the tax financial year, when we then submit the claim to HMRC, when HMRC then pay us, and when the inquiry window closes. It's, you can't—it's the... Yeah, the claim itself, you can't match to the period directly.
It's worth just noting that in terms of the level of R&D claim that we've seen for the year, in total, in aggregate, we expect that to continue in coming years.
But, and David's absolutely right, our margins have enhanced over the last few years. There was a step change when we moved to IFRS 16, the new accounting standard, but the underlying margin enhancement, albeit slight, is driven by our focus on people, employing more vets and nurses, and you've seen the progression of that and our success over the last few years in improving retention and increasing the number of vets and nurses we employ year on year. And in supporting those colleagues and providing great clinical care to our clients and their patients. So we are pleased with the continued success in that, and that will remain our focus going forward.
Great. Well, we've no further questions in the queue, so with that, I'd like to hand back for any closing remarks.
Thanks, Owen. So yeah, so that concludes our full year results presentation. Thank you all for attending, and thank you for your continued support. In summary, we have delivered another strong set of results, and I'm delighted that this momentum has continued into the new financial year, with trading year to date in line with market expectations. We have a clear strategy and five-year plan, which remain unchanged, with funding in place to deliver continued investment in growth. So thank you for attending.