Good morning, and welcome to CVS Group's analyst webcast following the release of our interim results. I'm Richard Fairman, CEO, and I'm joined by Ben Jacklin, Deputy CEO, and Robin Alfonso, CFO. Now, before we open to analyst questions, I would like to highlight the following. We are pleased to have delivered a strong set of results, with CVS remaining on track to deliver against the ambitions which we outlined at our November 2022 Capital Markets Day. We announced our entry into the Australian veterinary services market in July, and we completed 13 small animal practice acquisitions in the first half, comprising 15 practice sites. We also completed four small animal practice acquisitions in the U.K. in H1, with a further acquisition completed earlier this month. All these acquisitions are performing well and in line with expectations.
The board remains confident that our full year results will be in line with market expectations, and that our strategy remains appropriate to deliver long-term sustainable value accretion. We continue to engage with the CMA and look forward to an update from them soon. I'd now like to open and invite questions from analysts.
Thank you very much, sir. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. Please ensure your mute function is not activated in order to allow you to reach your equipment. And also, if you have several questions, please ask your questions one at a time to allow speakers to respond to each in sequence. Our very first question is coming from Charles Hall, Peel Hunt. Please go ahead, sir.
Morning, everyone.
Morning, Charles.
Morning, Charles.
Could we just start by going into Australia in a bit more depth? Can you just give a bit of flavor for how the practices are performing, what you're doing in creating an infrastructure, whether you're starting to get progress on energy, any synergy savings, and also what the pipeline looks like?
Yeah. So, we were really excited by our entry into Australia. We've, as you know, Charles, researched the, opportunities for international expansion for some time, and we chose Australia because we felt it was the standout market for us for a number of reasons. Clearly English speaking, same or very similar culture. The approach to clinical care is the same as it is in the U.K.. And therefore, all of the focus we've had on the U.K. that's proven successful around, I guess, focusing on people, supporting vets and nurses, and developing them, but also the focus on clinical care. All of that translates to Australia. We've been quite selective. We're looking to acquire high-quality, first-opinion small animal practices, and clearly, we're focused on the major urban conurbations.
So the city is kind of dotted around the kind of east and southeast coast of Australia and Perth in the west. We've been pleased with the pipeline. We made our first acquisition in July. We've completed 13 acquisitions so far. And we have a very strong pipeline of opportunity. We were, I guess, fortunate to find an acquisitions director who has considerable experience in the Australia market. He previously worked as the acquisitions director for one of the two existing major corporate groups, and prior to that, he worked for one of the two major wholesalers. So he has a great contact of yeah practices, and therefore, we have a strong pipeline.
The practices we're talking to are really excited about our approach to clinical care, and maybe Ben can bring that to life a bit in terms of the conversations we're having, why practices are choosing to work with us.
Yeah. Morning, Charles. I mean, the message we've managed to run successfully is we're a company people might wanna work for, and so that's been critical, 'cause as you know, retaining key staff in acquisitions is central to them being successful, and we've done a good job of that. We're landing a positive message over there about our focus on clinical work. And six months in with those practices, we're starting to get them to work together, which is obviously crucial, and starting to look at where synergies are available. And we had our first, what we call our Clinical Advisory Committee, which is something that's been a central tenet of CVS U.K. for many, many years, where we get clinicians working together to agree how are we gonna buy our drugs, which drugs are we gonna use, equipment, et cetera.
So we are starting that journey, and we had the first one of those in January. So it is a slow burn, naturally, but we will start to get those synergies, and they will grow, and we're really pleased with the response from wholesalers, manufacturers wanting to work with us. And so we expect to start delivering those synergies, over the course of the next few months and years.
Great. And in terms of the pipeline?
Yeah, so a strong pipeline. We've said this morning that we expect to complete at least 10 further acquisitions between now and the end of the financial year. And the momentum continues. We've got a strong pipeline of opportunities. The market is smaller than the U.K., but there are over 3,500 practices in Australia. The levels of consolidation are relatively low, around 15%, we believe. And therefore, there is a strong opportunity there, and we're really pleased with the performance so far. Everything we expected to Australia has kind of materialized, and continue to be really excited by the opportunity.
Great. And then, just lastly, you've made a further acquisition in the U.K.. Do you just update on interaction with the CMA, specifically on making acquisitions? Have they changed at all?
Yeah. So as you'll be aware, the mergers team at the CMA, which is separate from the markets team, they're looking at the market review. The mergers team have looked at the sector, looked at previous acquisitions, and I think they've been really consistent in their feedback around what they will consider to be acceptable in terms of local market shares. And as you know, the kind of acceptable level, it seems to be 30% of share based on either practice sites or shop fronts, or 30% share of practicing vets on a full-time equivalent basis. So they've been consistent with that kind of guidance. We will continue to be cautious in the U.K.. We are selective in terms of the acquisitions we want to make.
We are, as you know, focused on small animal practices, high quality, good sites, bigger, bigger practice teams. The performance of the ones we've acquired so far have been really good. But in terms of engaging with the CMA, we have this kind of briefing paper approach, where before we complete an acquisition, we will submit a briefing paper to the CMA, demonstrating that we are remaining below the 30% local share. And in every single case that we've submitted this year, the CMA have responded positively to confirm they have no further questions in respect to those acquisitions. That gives us the opportunity to then proceed.
Great, thanks very much.
Thanks, Charles.
Thank you, Ed. Well, thank you, sir. We'll now move to Calum Battersby of Berenberg. Please go ahead. Your line is open.
Great, thanks. Morning, guys. First question is on the comments in the outlook statement on the potential impacts on demand in the weaker macro backdrop. Would you mind just giving us a bit more color there in terms of what you're seeing from clients or any changes in client behavior in the margins that led you to pull back in the same way? Thank you.
Yeah, morning, Callum. We've delivered some strong results for the first half. The Like-for-like growth was 6%, which, as you know, is bang in the kind of range and guidance we gave of 4%-8% back in November 2022 at our Capital Markets Day. We've spoken in the past about how we believe the sector is resilient, and certainly we continue to see that resilience come through.
We've seen continued growth in our Healthy Pet Club membership, and I think when we talked in the past about how the sector behaved and the demand back in the global financial crisis, we said that the sector, and obviously, Robin and I weren't in the sector then. Ben was in a completely different role, but the sector proved very resilient back in the global financial crisis, particularly where animals were ill or injured and needed treatment. That level of demand continues to be very strong. The one area of spend that did fall away back in the global financial crisis was the kind of preventative healthcare, so the flea and worming treatments. We said previously that the first sign we'd see of any kind of weakness would be in the Healthy Pet Club, because that's our preventative healthcare scheme.
So the fact that continues to grow gives us, you know, good confidence, I think, about the future demand. So strong set of results in the first half, confident that we will continue to meet the full year expectation. But I guess the reason for that comment is that the wider macroeconomic backdrop is still weak, and we're not, you know, we're not immune to that as well. So we're very confident with the opportunity ahead and the full year results, but there is that kind of uncertain backdrop.
Got it. That makes sense. Thank you. And then secondly, probably related on pricing, clearly slightly less than inflation, on the cost base in the first half. Would you mind talking us through the decision making on pricing this year, how you've come to decide what the right level should be, and kind of any kind of specific inputs into this year compared to prior periods?
Yeah, and I think we've always said that we are cautious on price because we need to land any price changes, and importantly, our clinicians have a real view of that. So maybe Ben can kind of expand on how we approach that and how we do land and engage with our clinicians on pricing decisions.
Yeah. Morning, Callum. So clearly, there are inflationary costs that we will take into consideration when we make any decision around price, but more nuanced in our profession and our business is that we need to engage the clinicians in passing those prices on. So we have a pricing committee within CVS, which is consisted, which consists of clinicians on the ground who can give us direct feedback as to what they're feeling, experiencing, and where we think we should make changes or where we shouldn't. And so we start there when we're considering any pricing changes, and they give us a view, which we can then add into any considerations around what we might wanna do inflationary, in terms of wage increases, factoring in any other inflationary costs.
So we have a fairly consistent process where we consider that, and that will be the approach that we take this year. And all those things coming to the round, really, if we didn't engage the clinicians, as you know, many of the decisions around charging are dependent on the clinicians believing in the prices that we're charging. So if we didn't go through that exercise of being, A, really sensible, moderate, and ethical on the price rises that we're putting through, but B, ensuring that the clinicians engage, understand with it, and have an input, then we would simply see charging being reduced because clinicians have that latitude. The nature of charging in our business is that there's a judgment taken. Are, is a wound closure complex or simple?
That's a judgment call that a clinician has to make when they're billing a case. So we need their support, we need their belief and buy-in, so that's why we go through that exercise when we make that decision.
Really clear. Thanks, both. Last question from me then. On the current CapEx programs, the refurbishments, relocations, kind of CVS is probably slightly relevant to this. I wonder if you could give more color on the return you're seeing from this at the EBIT level. So I think you talked about EBIT are initially profitable from these investments in year one. Kind of at the EBIT level, do you know, are these investments kind of, kind of generating a positive result initially, or is it initially dilutive, and you think kind of that's going to improve over time? A bit more detail there would be really helpful.
... Yeah, and I, I guess the first thing to say about our investment is we're very confident with the returns at all kind of levels. We believe it's the right thing to be investing in our business because we want to be a great place to work and have a career, and therefore, we want to provide our clinicians with appropriate facilities for them to do fantastic work. And also, our purpose is to give the best possible care to animals, and we recognize we need great facilities to be able to give clients the service they're looking for and the care for their animals that they rightly demand.
In terms of the specifics around the returns, I'll hand over to Robin to talk through the returns at various levels and at various stages.
Yeah. I mean, look, we take a disciplined approach to all our investment decisions, be it acquisitions or CapEx. We have a minimum hurdle rate, so all our investment decisions are based off of a minimum hurdle rate of 10% IRR, which is greater than our weighted average cost of capital. I think what we've said in the past, when we make investment decisions, often that CapEx investment has an immediate benefit in that, if we relocate or renovate, what that allows us to do is immediately do better clinical care, which has an immediate benefit, and over the shorter term, also allow us to retain and attract vets, which also supports the long-term growth of that practice and therefore the investments that we've made.
Where we've been quite clear, however, is that when it comes to greenfield sites and greenfield investments, often it takes, because it's a completely new site, 12 months for that practice to break even. So we've opened two greenfield sites, one last year, which is running through into the first half of this year, and one this year. I suppose it's worth adding, we also invested in our Bristol Vet Specialists, which is a multidisciplinary referral hospital in Bristol. It's a fantastic facility, but it's multidisciplined, and therefore, what we've seen with that, it's behaving similarly, a bit similar to a greenfield site, in that we've got all the additional costs, and we have the disciplines, we have the specialists, but it will take time for that caseload to mature.
So I suppose, for this year, for the first time, what we've seen is we've got three greenfield sites, which has a slight negative impact on EBITDA in the short term, but over the longer term, that will unwind, and we'll see margin improvements come off the back of that. And from an EBIT level, I suppose we did share in the investor presentation, from a kind of return on capital employed perspective, it's a range. It's between 9% and 15%. We look at IRR because it looks at the returns over the life of the investment, whereas as you'll be aware, kind of return on capital employed depends on where you are in the cycle of that investment, and that often grows over time.
So we're seeing good returns off the investments we've made. We are mindful that the greenfield sites, including the investment in BVS, will have a short-term impact on EBITDA, but we're pleased with the current performance of those sites and over the longer term, and value accretion that will bring.
Got it. That's helpful. Thanks, Robin.
Thank you very much, sir.
Thanks, Colin.
Our next question will come from Natalia Webster, calling from RBC. Please go ahead.
Hi there. Just checking you can hear me okay?
Yes. Fine, Natasha.
Great. So I just had a follow-up on the Australian market, firstly. I don't know if you're able to provide a bit more detail sort of on the multiple range you're seeing, sort of pre- and post-synergy. I think at full year results, you said EBITDA multiples are generally lower, but IRRs are in line.
Yeah.
My second question is just on the Netherlands and Republic of Ireland. Just what's the reason around the poor performance there, and are you doing anything to turn these businesses around? Would you still consider these as core to the group, given their relatively small market opportunities? That's it. Thank you.
Okay, so dealing with Australia, we've said that multiples are lower than they are in the U.K., and the market has around 15% level of consolidation, and it feels a bit like the U.K. market did maybe 15 years ago, but we are attracted by the very high quality of clinical care, the same approach as in the U.K. We previously said in the U.K. we've been paying around a 10x EBITDA multiple. We've also, though, said that we're hoping those multiples in the U.K. will start to come down with perhaps less competition.
As you know, the market has been hot, I guess, in the last kind of five to ten years, given quite a lot of private equity interest in the sector, and private equity competitors are now facing higher leverage, higher costs of debt, and therefore, we may start to be seeing some of those being less acquisitive, which is clearly helpful for us. So multiples, we've said, are lower than they are in the U.K.. I don't think we've ever given a range and actually shared what that multiple is.
In terms of synergies in Australia, we've assumed no synergies in our business cases, so they essentially stack up on their own right, but we are, as Ben said, already starting to look at synergies, and the first obvious one is our ability to buy drugs more cost-effectively than an individual practice can. That comes from our approach to having clinical committees determine what are the most appropriate drugs to use across our practices, and then our commercial team going into bat to try and, you know, negotiate discounts and rebates on those, on those pharmaceutical products. In terms of the IRR, we've said, yeah, mid-10% minimal, which is the same across the group. The one thing in Australia is the corporation tax rate is 30%, so higher than it is in the U.K..
That's one negative, I guess, in Australia. But even accounting for that, we're very confident with the returns we will get. In terms of Ireland and the Netherlands, maybe Ben and Robin can comment as well, the performance of those businesses has been challenging over the years. We inherited a mixed set of practices in both territories. They are small countries in the overall scheme of things. If we take the Netherlands, which is obviously the larger of the two, we have just over 20 practices. We've got a mixed portfolio of farm, equine, small animal, and some mixed practices, and they are spread around the Netherlands in mainly rural locations.
So, there are some challenges in terms of recruiting vets, and retention, and therefore, performance of those businesses has been, I guess, suboptimal over the past few years. We are focused on improving them and have been over a number of years, without distracting too much management time. But yeah, we are confident we can improve performance. But certainly, I think Robin has called out the slight impact on overall margins from those two territories over the last six months.
Great. Thank you.
Yeah. Don't know if there's anything you want to-
Thank you very much, Ms. Webster.
Yeah.
Our next question will be from Mike Mitchell calling from Panmure Gordon. Please go ahead, Mike.
Morning, everyone. Thanks for taking my question. I just, I just wanted to understand a little bit more about the U.K. customer experience, or rather, the, the practice experience of customers, 'cause we're somewhere past the pandemic now, and what were once new pet owners, at that time, perhaps are rather more experienced. I'm just thinking, are we seeing pet owners in any way starting to question or push back on treatments that they don't think are necessary, perhaps, perhaps being emboldened by the CMA market review and the Which? survey?
Jonathan?
Yeah. So, morning. I think the first thing to say around that cohort of new owners in the pandemic is that they then have animals now who are two, three, four years old, so are unlikely to be visiting our practices a great deal. Actually, they don't really start to visit our practices till later in life, so they won't be a major participant in the practice experience right now. In terms of changes in behavior, I mean, clearly, negative coverage of the sector is unhelpful in any form. So whether it's Which?, whether it's the CMA, and we definitely saw that around the time of the CMA market review, and that undoubtedly is something that some clients will read.
But fundamentally, no, we haven't seen a change in the way clients interact with practice, and we don't-- The veterinary profession is really good at recommending treatments and procedures that are really necessary. It's not necessarily... The concern that's positioned in the Which? surveys and the CMA surveys isn't reflected in our client NPS scores and our client feedback. We see a bunch of clients who are extremely pleased to use our services. That hasn't changed. We have vets who are operating within a new clinical governance framework and consistently delivering high-quality care. I don't think I've seen any change in that, but clearly, negative coverage isn't helpful.
Okay. No, understood. And just on the Healthy Pet Club, again, in terms of sort of customer or client expectation, is there any sort of further color you can give there? I mean, do customers, new members of the Healthy Pet Club, do they basically get what they expect, or is there sort of pressure to sort of expand the range of service or range of discounting that that you offer?
Yeah, there's no pressure to expand the discounting, but maybe Robin can talk about the strength of that scheme and what we actually offer under that scheme.
Yeah, I was just gonna... I mean, as everyone knows, Healthy Pet Club, it's an annual scheme. It's pay monthly. You get your annual vaccinations, your biannual health checks, annual flea and worming, and you get some discounts with full veterinary services. It's a very rich scheme, and very valuable to the customers that take it up. I think what we've said in the past, it's not just about the preventive healthcare scheme and the current economic climate, but it's a very mature scheme.
It represents 40%-ish of our active client base, and therefore, its reach, it does kind of—there will be a saturation reaching maturity, and therefore, we are still super pleased that there is good growth in that Healthy Pet Club scheme, which I think reflects the fact of how the customers value it.
Perfect. That's great. Many thanks.
Thanks, Mike.
Thank you, Mr. Mitchell. Ladies and gentlemen, as a reminder, if you have any questions or follow-up questions, please press star one. We'll now go to Andrew Whitney calling from Investec. Please go ahead. Your line is open.
Good morning, gentlemen. Thanks a lot for taking my questions. Two from me, please. I guess the first one, just trying to understand the impact of that Greenfield site piece on the margins. I know at the Capital Markets Day a few years ago, you gave a sort of selection of margins across practices. If you strip out your immature practices, what do you think the average EBITDA margin is for the more mature practices? I guess that's one question. And then the other is, I saw leverage tick up a little bit. It feels like there's tons of opportunities for you in terms of buying practices. Do you ultimately get constrained by how much gearing you want to take?
I know you want to be below two times, but have you got some, like, a capital structure in mind that you will ultimately get to, and then you'll be a bit constrained on acquisitions thereafter? Is that the right way to think? Thanks a lot.
... Yeah, morning, Andrew. Maybe we'll pick up the leverage one first. So I guess a few points to flag. We are a highly cash-generative business, as you know, and we talked about a 70% minimum capital, yeah, operating cash conversion, which we're confident will continue. We've seen leverage tick up, but that reflects the investment in Australia and the acquisitions there, and also the U.K. acquisitions, plus the continued investment in our U.K. business. And we are, as we've said, confident with the returns that we get from all of that investment. But the three of us sign off on every single investment, and that will continue, so that discipline will continue. We did refinance the business last February, and then we've taken up the one-year extension option that we negotiated last year.
So we've got committed bank facilities in place now through to February 2028. And we've also hedged GBP 100 million of that debt, so we've protected ourselves against interest rate exposure. So we do have funding in place to continue to expand the group through further investment. And I guess the question about leverage and whether that becomes a constraint will really depend on the pace of execution of acquisitions and how quickly those come through. So there's a bit of uncertainty there. Clearly, if we continue to see success and we continue to see that positive momentum, then we believe we could raise equity funding at the appropriate time. Probably not at the current time, but certainly, we believe that that will certainly be a possibility going forward.
But I guess the important thing is we will maintain that financial discipline, and certainly, the 2x leverage is something we're very conscious of, given the investor concern generally, around highly levered businesses at the current time. But I guess the important thing is, in our business, the operating cash conversion does continue to come through, and if we stop investing for any period of time, we do delever quite quickly. We've proven that time and time again. In terms of the first question, I'll hand over to Robin to pick up the detail around that Greenfield impact.
Yeah, we've not shared the exact impact on our overall group margin. I think it's a factor, and it does 'cause I suppose if you take it at extreme end, on day one, if I have a fully staffed clinical team, I'll have all the costs and no revenue, and that clearly, although it's one practice, will have an impact on overall margin, whether within the veterinary practice division or within the overall group. So I think that's why we called it out, because it is having an impact, albeit small, on our margins, and as that unwinds, we'll see that margin improve.
And therefore, when I think about the kind of the cohort of the remaining sites, you know, it won't move the dial necessarily on the average EBITDA margin of our 450 U.K. sites versus the three Greenfield practices, if I include BVS within that measure.
Thanks. That's clear. Just, I guess, you've got some practices that do more than 23% EBITDA margin-
Yes.
-I'm right in thinking that, aren't I?
Yeah. Yeah, and we shared at the Capital Markets Day, you may recall, for the first time, I think we shared the kind of bell curve distribution of our practices, and at the top end, we said we've got some practices performing at 40%+. And there are some reasons for that, and maybe Ben can expand on that. At the bottom end, we've got some poorer quality sites that we're investing in to try and improve, and many of those need relocating. So we've got or have had practices down at 10% EBITDA margin. So there is a range, and there's a bell curve distribution. Clearly, we have been, over the last few years, investing in improving those really poorer quality sites.
At the top end, there are some maybe structural reasons for why certain practices can achieve the very high margins, but perhaps you can just remind everyone of that kind of detail.
Yeah. I mean, I think you hit the key point, which is that it's less of a... That curve in distribution is probably less of a maturity question and more of a how good is the site question, which is one of the reasons why, you know, we see such a positive opportunity to invest in some of those sites, and then they can achieve higher margins. 'Cause if you're in a cramped, converted terraced building, then it's very difficult for you to do the sort of work that generates higher margins. So it's probably less to do with maturity and more to do with the quality of the facility. At the highest end, when you add in things like out-of-hours services or more advanced clinical services, they tend to generate the highest margins because they're very fee-driven.
So, you, we would have some sites which would do a combination of both first opinion and second opinion work, where you've got advanced practitioners doing, you know, more advanced fracture repair, for example, which is purely fee-driven work and therefore doesn't really have an attached margin, and overall, the practice margins could be higher. So those really high 40% margin practices are not achievable everywhere 'cause they tend to have specific, whether it's out-of-hours or whether it's specialist services reasons. But there's definitely an opportunity, as we've been highlighting, to move the lower end up towards the median, and that's gonna require the investment that we're making at the moment, and we see really positive results from invest in those facilities.
Fantastic. Thank you very much. Thanks for the detail.
Thank you very much for your questions, Mr. Whitney.
Thanks, Andrew.
As we have no further... I'm sorry to interrupt you. As we have no further audio questions at this time, maybe we'll take the questions that were submitted by webcast. Thank you.
Thanks very much. We have two questions submitted to the webcast. The first is from James Vane- Tempest. He asked: "Can you remind us how much deferred consideration you have left to pay from the recent deals and when you expect to pay it? Also, any deals which have been signed and are expected to close in the second half?
Uh, Robin.
Yeah. So I suppose it's important to note that these are deferred contingent consideration payments. So if I take Australia, for example, it's very common that there's an upfront payment, and then you defer an element of that consideration over often a period of two to three years. And we think that's helpful 'cause it incentivizes ex-vendors to continue to run the business and drive value for us. But it is contingent on a number of factors. If I think about we've invested GBP 53 million upfront consideration in the first six months. So if they were to hit all those contingent consideration parameters, there would be a further GBP 10 million to pay-ish over the next three years.
Our last question comes from Sahil Shan from Singer CM: Can you please put more color on why Netherlands and the Republic of Ireland were soft in the first half?
Ben, I don't know if you want to expand on that.
Yeah, morning, Sahil. So, I mean, the challenges in the Netherlands and Ireland are something we've talked about. You know, we inherited them. The nature of the practice is critical to some of those challenges. They are largely mixed practices, not small animal practices, which is our core business, as we know, in the U.K., and certainly the business we're investing in through acquisitions in the U.K. and Australia. And that brings with it challenges around recruitment. Specifically, if you have a mixed practice, you have to have an out-of-hours rota, and that's challenging. Vets don't necessarily want to have to do an out-of-hours rota. In small animal practice, you can have dedicated night service that take that night burden away, but you can't do that with mixed practice. Those mixed practices often tend to be rural, and this applies to both the Netherlands and Ireland.
So those investment decisions were made before our time, and certainly, we're really clear that we want to invest in dedicated companion animal practices. And so they bring with them challenges, and they have done ever since we formed a management team. Those challenges are also, and particularly in the Netherlands, set against a backdrop of a slightly more challenging employee or employment environment. We have collective agreements. Managing wage inflation can be more challenging. And there's certainly some challenges, none which we haven't been managing over the last few years, and it's just different. But they certainly don't help when it comes to poor performance. So similar challenges, Sahil, to we've had before. They have just been a little bit more challenging, where we continue to manage them.
But really, they're fundamentally down to the nature of the businesses that were bought in those territories.
Thanks, Ben. Those are all our questions today, so I'll pass back to yourself, Richard, for any closing remarks.
Great. Well, thank you for attending the call this morning and for your continued support. We have delivered another positive set of results, and we are confident in our ability to continue to grow CVS, and we expect our full year results to be in line with market expectations. We have a clear strategy and a, and a five-year plan, and they remain unchanged, and we have funding in place to deliver continued growth. So thank you for attending.