Apiam Animal Health Limited (AHX.AX) Earnings Call Transcript & Summary

[Technical Difficulty] First Half Results Call for 2024. This morning's call will be hosted by Apiam CEO, Dr. Chris Richards; and Chief Financial Officer, Matthew White. They'll start with the company presentation. And after this, you'll have the opportunity to ask questions via the Q&A button at the bottom of your screen. I'll now hand over to Chris and Matt to start the presentation.

Good morning, everybody, and welcome to Apiam Animal Health's H1 FY '24 results presentation. As Catherine outlined, today's presentation will be by myself, Executive Managing Director; and Matt White, who is our Chief Financial Officer. I'd like to begin by acknowledging the traditional owners on the land on which we are meeting today and also to pay my respects to elders past and present. If we look at the Apiam in the first half, it's been what could really be described as a solid and resilient period and really much -- it's really just followed on from what we reported at the AGM in November. If we look at the highlights as close when we look into the numbers, it has been a very solid and resilient period in terms of our revenue. And that's come about because of our -- reducing our acquisition program and really focusing on optimizing clinic performance and leveraging the synergies from those acquisitions that we made over the last few years. As a result of that, we're seeing earnings margin significantly improved in the first half of FY '24. And as a result of that, we're starting to generate some good cash flow, and that's being applied to organic growth initiatives, our debt management and as well as the resumption of the dividend. If we look at the business, we continue to operate 80 veterinary clinics. About 80% of our business comes out of the dairy and mixed clinic business, which is your typical veterinary clinics in rural and regional Australia. And we have 86% of our clinics now have over 50% of the revenue coming from the pet sector. If we look at the results snapshot from a revenue point of view, we had AUD 104.4 million in revenue, which was up 11.4% versus the first half of last year, predominantly driven through the acquisitions. What's pleasing is with gross profit of AUD 70.9 million, it was up 15.5% on the first half of last year. Again, we continue to get margin expansion, our gross margin percentage up from 65.5% to 68%. As a result of that and what we've been doing around managing costs and increasing those margins, we're starting to see some leverage at the earnings line. And our underlying EBITA of AUD 9.2 million was up 32.7% versus the comparative period. Our underlying EBITDA was also up a similar percentage. Our underlying NPATA was up 9.9% compared to the same period despite an additional AUD 1.1 million in interest costs. So what's happening with that is, again, we're really generating some really good cash flow. Our cash flow conversion to underlying EBITDA is in line with our target of around 100%, at 99.6%. As a result of that strong cash flow, the Board is reinitiating a dividend and we're paying an interim dividend of AUD 0.01 per share. If we now look at the segments. So if we look at our dairy and mixed animal segment, that was up -- revenue was up 14.8%. Again, predominantly driven by those acquisitions. But on a like-for-like basis, when we exclude the 4 restructuring clinics that we spoke about at the AGM, we still had 0.8% like-for-like revenue growth, which if you look at what's happening in the market, we're very pleased with, particularly when you look at the spend on animals from those ones -- from the rise, the height that came out of the COVID period where you see a significant drop in the animal health expenses in year 2 and 3, which is where we are now, where they dropped 30%, 40%. So being able to maintain that revenue growth has been quite an achievement. And we've been able to do that through a number of ways. We -- some of that's been through organic growth, our Best Mates program, which we are really focused on from -- again, from September in FY '23, has had 19.3% growth in September. So that's really people who subscribe to that Best Mates program are all new pet owners or new animals that are being subscribed. So we've had nearly 1,600 new animals come into our business through that Best Mates program since September. So despite what you may hear around animals being handed in from the COVID period, we're certainly not seeing that in our business. In fact, to say, we've had 19.3% growth in September in that Best Mates program. Being able to deliver that like-for-like growth, again, is around organic; not just organic growth through those new animals, but also higher standards of care. And then we've also had some great contribution from our new greenfield clinics. As we move forward, we have adopted a new vet-supported clinic management model. It's a model where we are giving greater responsibility to the clinics to make decisions and address their local markets. And that's -- and the way that we're really extracting the earnings leverage in those is that we're putting experienced vets into those clinics who have run high performance clinics, getting them to help those clinics improve their workflows, increase their standards of care. And as a result, we're seeing some early stage real positive results, not just revenue, but at the -- in terms of earnings leverage as well. If I now move on to Pig and the feedlot veterinary segments, this has had a real turnaround in the first half of this year. So -- and this improved growth has been as industry conditions have strengthened. So on a -- our revenue growth was 0.4%. But what's pleasing is that you'll see that our gross profit actually improved to 11.8%. And this is because of the services that we're now providing into these segments. Revenue in the beef feedlots has certainly strengthened since September 2023 compared to the prior comparative period. We've also seen the pig industry conditions also remain fairly resilient. Our strategy in here is to continue what we've been doing to increase our gross profit, and that's true really delivering higher value veterinary services and that's really delivering profit growth across both these segments. Some of the things that we are doing is around bringing new vaccines to market. We've got some unique pharmacological products that we're currently in trial that we'll bring into market. And we've got some unique software programs that we've just started rolling out into the industry. So if you look to the right, you'll see that the last 2 years, this segment certainly went back, but it certainly showed some very positive signs in the first half of this year. I'll now pass it over to Matt to delve into the financials a bit more deeper.

Thanks, Chris, and good morning, everybody. Our focus for the half has been to leverage our operating cost base, and we're pleased to see solid progress with underlying EBITA up 32.7% versus the prior comparative period and NPAT up 13.3% despite the cost of the restructuring and redundancy program and the increase in finance expense of AUD 1.1 million. Revenue for the Group is up 11.4% across the business and is mainly driven by the contribution from acquisitions. And like-for-like revenue was 3.8% unfavorable as a result of the impact of the clinics that were restructured in the first half. We are now seeing positive results with those clinics as we move into H2. Gross profit was up 15.5% and gross margin has increased 2.5 percentage points to 68% for the half. While growth in the dairy and mixed animal segment has impacted the gross margin mix favorably, we're also seeing continued improvement in gross margin across all segments due to the focus on high-value products and services. Operating expenses were up 12.6% for the half compared to prior comparative period. But it's important to note that the increase in OpEx is driven by the impact of acquisitions. Excluding the impact of acquisitions, underlying OpEx is down 2% on a like-for-like basis compared to the prior comparative period. And these savings have been delivered in an inflationary environment and reflect the impact of the AUD 2.6 million redundancy and restructuring program. We continue to focus on the business and to deliver on opportunities to improve on the margins in the business. To balance sheet now. So in terms of the balance sheet, our working capital continues to be well managed with a focus on operating cash flow. You'll note that inventory and receivables are slightly up on the June 30 balance, but they're in line with December '22 and reflect the normal phasing of our business. Net debt is up AUD 2.4 million. And this reflects the impact of the clinics acquired in H1 FY '24 for AUD 6.3 million. And while acquisitions continue to be a strategic focus for Apiam, no further acquisitions are expected to be completed in FY '24. Now turning to the cash flow. Cash flow continues to be strong, having grown 10% over the prior comparative period and the conversion rate is at 99%, which is in line with our target of 100% for the business. We will turn to dividend now. As Chris mentioned, Apiam reinstated the dividend for the half and it will be AUD 0.01 per share. And the dividend is supported by ongoing strong cash flow generation and the slow pace of our acquisition program. Hand it back to Chris.

Thanks, Matt. So I'll just now talk to the outlook for the second half of the year. If we look into the second half, it's basically going to be continuing to do what we did in the first half. So revenue opportunities remain strong as the demand for non-discretionary veterinary services remains resilient and is certainly growing in the rural and regional areas. Our primary focus for the second half is to continue to extract further earnings and free cash flow from the existing clinic portfolio. As Matt mentioned, we're already applying the AUD 2.6 million in annualized cost savings from a redundancy and restructuring program. We're expecting the move to our vet-supported clinic management model to continue to deliver the ongoing positive results from what we've seen in the early stages. There's also further cost savings that will continue to be realized across the clinics from some of the actions that we're putting over the last few months. And we expect that to flow through into the second half and as well as we'll continue to leverage the synergy of what was a very large acquisition program over the last few years, of which we know there's a lot of opportunities within that portfolio of clinics. And as Matt mentioned, while acquisitions continue to be a strategic focus, and we do continue to speak to clinics, no further acquisitions are expected to be completed in FY '24. And with that, I'll open it up to any questions.

[Operator Instructions] We'll get started with the first question from Mr. [ Madeka ]. What is the targeted net debt to EBITDA multiple the company is looking to achieve before embarking on another round of acquisitions, noting that it's currently at just under 3x?

Yes. So I mean, as we said, we don't intend to make any acquisitions for the rest of this year, which means we'll be generating some additional cash, and we'd expect that to trend down towards 2.5x. Where it ends up depends on the phasing of future acquisitions.

The next question, Chris, is -- there's actually a few from Mr. Ron Shamgar. The first one is, do you expect earnings to be the same or higher for the second half of FY '24?

Yes, Catherine. Yes, so we expect earnings to be similar to the first half. No doubt there's a little bit of seasonality in the business with our equine strong in the first half, but we also expect some opportunities around those restructured clinics to improve the result in the second half as well. So we'd expect it to be similar.

The next one from Ron is, without acquisitions, what's the revenue growth potential organically? And can you quantify this?

Yes. I mean, we would expect organic growth to be sort of in that somewhere between 3% and 5% we expect currently. So that's where we expect it to be. I think what's probably more important is around the earnings leverage that we're getting as we're extracting synergies out of the clinics.

And the last question from Ron is, will the final dividend for FY '24 be at the same quantum as the interim dividend just declared?

Yes. So that will depend on what the results look like at the end of the year. So the Board take into consideration several factors when they declare a dividend. And so we'll have to wait and see what that looks like at that time.

Okay. Next question from Charlie Kingston. Can you just please elaborate on why the like-for-like growth this period was lower than previous periods?

Yes. So, I mean, I think there's a couple of things that are happening. Obviously, we've just come through the COVID boom and the pet cycle. Those animals are at the stage where the largest number of revenues through their life cycle comes in. So in that first year, when there's -- when they're getting initial vaccinations and getting [ desexed ] as well as some other things that are happening to them, that is one of the larger revenue per year period. So those animals are now hitting year 2 and 3 where there tends to be a 30%, 40% drop in the revenue. Now what's pleasing is, as you go into year 4 and 5, that gets back to that original level. And then as they become geriatric animals then that increases again above that initial year. So if you look at volume and traffic coming to our clinics, it's back -- that's 3% or 4% and -- which we're actually quite comfortable with when you look at the make-up of animals and the impact of those ones from COVID a couple of years ago. If you're probably aware of what's happening at an industry level, you'd be very pleased with our like-for-like revenue growth.

Next question from another investor is, how much more earnings leverage do you think you can get on your cost base moving forward? And will this continue to improve earnings margins?

Yes. So I mean, we -- at the AGM, we outlined that our clinic portfolio in terms of our EBITDA margin is probably 4% below what has been achieved or reported by some of the other large veterinary groups. And so if you sort of apply that 4% across that AUD 150 million of revenue in that segment, that's probably the opportunity. If we can capitalize on half of that, then I think over the next 12 months or 18 months, I think that's where that's sort of the quantum that you're looking at.

The next question. How do you see free cash flow building in the second half if no acquisitions are planned?

Well, it tends to be aligned to our underlying EBITDA. So it -- as Matt said, we're expecting that our revenue to be very similar and earnings to be similar to in the second half to first half. So you'd expect it to be at a similar level really.

Yes. Cash flow, we'd expect to be at the same rate. Obviously, without the acquisitions, which was AUD 6 million impact in the first half, you're going to see more of that cash flow fall out to apply the debt.

And one final question from Ron Shamgar again. Do you see Apiam as a takeover target at current market valuations?

We tend to be focusing on the current business ourselves. I'm just trying to extract the earnings leverage that we know in the business. So we don't really think about that.

Sorry, one final question has popped in. Can you comment on CapEx in the first half and the split of CapEx between growth and maintenance CapEx?

Yes. I mean, this varies from half to half. If we went back 1 half ago, there was quite a bit of investment in growth in terms of new clinics. First half this financial year, we will focus probably more on maintenance. And as we catch-up with vehicles, I think as you well know, there's been suppliers who put vehicles. So that's probably more focused on maintenance, but it just -- it swings from half to half.

Okay. Thank you. At this stage, there are no further questions. So that will conclude the call this morning. Thank you everyone for dialing in.