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

Good morning, everyone, and welcome to Apiam Animal Health Results Call for the FY '24 Financial Year. The call this morning will be hosted by Apiam's Managing Director, Chris Richards; and Chief Financial Officer, Matt White. First, they'll start with the company presentation and there will be an opportunity to ask questions at the end by the Q&A function at the bottom of your screen. I will now hand over to Chris and Matt.

Good morning, and welcome to Apiam Animal Health FY '24 Results Presentation. I'm Chris Richards, and I'll be joined today by our CFO, Matt White. I'd like to begin by acknowledging the traditional owners of the lands on which we meet today and pay my respects to Elders past, present and emerging. Today, we'll be talking to FY '24 financials, how we are now operating the business to deliver resilient revenue and earnings growth, and I'll finish by providing some insights into our outlook for FY '25. Let's start by looking at the highlights of FY '24 and what has been a record earnings result for the company. Our diversified veterinary business model continues to support resilient revenue performance despite the broader economic and cost of living issues. Veterinary services, particularly in regional Australia, remain resilient, and our business model is starting to deliver the results that we know we're capable. This has been a year where we've had a strong focus on extracting synergies from the previous accelerated acquisition program. And in FY '24, through operating leverage, we've delivered strong earnings growth. The transition to a vet-supported operating model is providing empowerment and agility to our clinics, and this is coming through in clinic workflow efficiencies and improved clinic margins. This earnings growth is providing strong cash flows, which we have applied to debt reduction, some organic growth initiatives and resumption of a dividend. So I will now turn to the financial snapshot. In FY '24, Apiam delivered revenue of $204.8 million, which was up 6.2% compared to the prior comparative period, being FY '23. We continued to achieve gross margin expansion, with underlying gross profit of $137.3 million being 9.6% up on the prior year. This is flowing through to underlying EBITDA, which was up 22.3% on the same period last year. Our underlying NPATA was also up 12.3% to $7.2 million despite an additional $1.7 million impact of interest costs. Our operating cash flow has increased to $18.9 million, and as a result of our improved cash position, the Board has declared a fully franked dividend of $0.01 per share, bringing our FY '24 dividend in total to $0.02 per share. We'll now drill down to what is happening in the business. As a reminder, Apiam operates clinics and ancillary businesses across 80 sites, and we employ over 330 vets as part of a larger veterinary services team. We're predominantly located on the East Coast of Australia, with clinics providing services to large catchment areas, in some cases, up to 300 or 400 kilometers, with our intensive animal vets providing services across most states into those feedlot and piggery regions. Veterinary services fall into two simple types of veterinary business models: our Clinical Vet Services and our Intensive Animal Vet Services. And I'll talk a bit more to those today. Our Clinical Vet Services operate a business-to-consumer model. And this is typical veterinary clinics providing a range of veterinary services to companion animals as well as mixed animals. Most of these services are provided in highly sophisticated clinics, with some services being performed in the field. Our Clinical Vet Services contributed 78% of revenues in FY '24. The other part of our business, our Intensive Animal Vet Services, it operates under a business-to-business model, providing services to commercial feedlot and piggery operators, and these businesses contributed 22% of group revenues in FY '24. So let's now drill down further into our Clinical Vet Services and its business offering. Clinical Vet Services comprises what you typically know as a normal vet clinic providing services to companion animals or pets, horses and our farm services clients. These clinics provide a full range of veterinary services and products required for animal health and well-being. In addition to general practice, most clinics are also providing emergency services and procedures typical of what's provided by city referral hospitals. This includes some clinics being equine-only emergency and specialist referral hospitals, which are really like normal clinics, they're just bigger rooms and bigger surgical tables and a lot larger equipment. Companion animal services are provided through Apiam's extensive clinic network, including our flagship Fur Life Vet brand of clinics who, in addition to the services listed here, also offer the subscription-based Best Mates wellness program for routine and preventative health services. The clinics are also supplying medicines and retail products as well as a host of other ancillary services such as rehabilitation therapy. Several of these clinics have advanced diagnostics, typical of large city referral hospitals such as CT machines, and we've got a clinic base just north of Melbourne, which also has an MRI machine. We'll now take a look at how Clinical Vet Services performed in FY '24. These businesses continue to deliver resilient revenues despite the broader economic and cost of living issues. Segment revenue was up 7.4%, in line with the expected growth trends related to COVID pets in what's now their healthy young adult stage of life. We've also seen strong expansion of our clinical farm services. Our Best Mates membership program increased 32.4% in FY '24, which is a remarkable result considering that this program is an upfront $745 fee, and membership increased to over 11,300 dogs and cats during the period. Our vet-supported management model is driving improved earnings margins. As I said, this is providing the ability and the agility for our clinics to make rapid decisions to meet local market opportunities, and it's also driving a culture at peak levels of empowerment and accountability. FY '24 also saw the ramp-up of 4 greenfield clinics, which are supporting additional organic growth, and the full benefit of this will be reflected into FY '25 and beyond. The acquisitions that were taken in FY '23 and '24 are performing strongly, and they delivered 4.5% revenue growth in FY '24. And our ProDairy services continue to expand in both existing and new regions. The growth of ProDairy is a really good example of how we've been able to take a platform and then use it through taking advantage of the benefits of scale to apply it rapidly across the industry. We'll now turn to our Intensive Animal Vet Services, which is our business-to-business model, providing services to beef feedlots and piggeries. FY '24 has been a transformational year for our Intensive Animal Vet Services, which now sees technology and data analytics driving the service and product offering. Our proprietary and third-party software technologies, diagnostics, vaccines and our e-commerce platforms are enhancing our services and providing a buffer around what's previously been a business subject to cyclicality. Our client base is now seeing the benefits of the prior investments that we've made, and we'll continue to expand services into these industries, which are expected to continue their ongoing tailwinds in FY '25. You might have seen ALFA, the feedlot industry peak body, yesterday release a report detailing that the industry has never had so many cattle on feed and that the industry is continuing to expand, now being at record capacity. There's also a further expansion of activities continuing to happen across the industry, including several of our clients. Looking at the Intensive Animal Vet Services FY '24 financials and the transition that we've made to a data-led veterinary and production consultancy services. This has really driven improved earnings margins. Revenue has rebounded up 2.3% as a result of improved industry conditions, particularly in the feedlot sector, which has experienced strong revenue growth since Q2 of FY '24. The transition to higher-value veterinary services has delivered improved gross margin, which was up 10.1% on the prior year. In addition to using data, we're also starting to leverage the investment that's been made in new products over the previous years, including new vaccines. And these vaccines are actually being made at our own facility, ACE Laboratories, which is providing growth opportunities not just in the intensive animal vet business but across the clinical vet services businesses as well. So I'll just sort of expand on this growth opportunity of ACE a little. So ACE Laboratories was acquired by Apiam in FY '20, and we've since been making subsequent investments in the facilities and the research programs to provide some unique opportunities for the greater business. Over this period, we've achieved permit approval for 4 new vaccines. We've developed the Japanese encephalitis vaccine in a partnership with La Trobe University, and we're expecting a second project to deliver another unique vaccine in FY '25. We invested in next-generation gene sequencing technology to enhance our vaccine efficacy as well as to provide new services, including antimicrobial resistance monitoring, and we've developed and commercialized unique diagnostic testing to enhance pathogen detection and to identify new vaccine candidates. While this laboratory has always worked very closely with our Intensive Animal Vet Services, the recent advancement in the last few months has been the integration of new tests provided by ACE to our Clinical Vet Services. This is expanding some of the existing services and developing new revenue opportunities. As a result of the growth of our vaccine business and demands to fill critical gaps in Australia's animal health market, we're currently undertaking an expansion of the vaccine facilities. This project, which has been awarded a $700,000 grant under the Victorian State Government Regional Jobs Fund is being built on a modular basis to align with sales growth and is expected to be fully complete by 2027. So that's an overview of what's happened in the strategic and operations level, and I'll now pass it over to Matt to drill further into the FY financials.

Thanks, Chris, and good morning to everyone on the line. So our focus in FY '24 was to leverage OpEx and grow the bottom line. And we've seen underlying EBITDA grew by 23.2% over prior comparative period and EBITDA margins expand from 6.7% to 7.7%. Our reported revenue grew by 6.2% supported by strong growth in the beef feedlot segment and also the contribution of clinics acquired in H1 of FY '24. Overall, revenue for the group was 0.5% unfavorable to prior comparative period on a like-for-like basis when excluding 4 restructured clinics. Gross margin of 67% was up 2% compared to the prior year, and the gross margin improved across all segments and reflects the provision of higher-value services to our clients. Operating expense has increased by 7.1%, but this reflects the impact of acquisitions made over the past 2 years. We were pleased to see that on a like-for-like basis, our OpEx decreased by 2.5% versus prior comparative period. And the new fleet management model that we introduced in FY '24 has seen decision-making become more streamlined and it resulted in a reduction of non-veterinary positions, and this has been a key driver in the reduction of this cost. And these changes were finalized in December '23, so we expect some residual benefit also to flow on into FY '25. We're continuing to focus on our clinic efficiency and other cost savings initiatives across the group. We turn to the balance sheet now. Revenue for the group increased by 6.2%, but we saw inventory and receivables down by $1 million. So we continue to manage our working capital well. Net debt was down $4.3 million compared to December 2023, and that reflects our strong cash flow, and operating leverage has also reduced from 2.9x down to 2.6x at December '23. We'll turn to our cash flow now. We continue to generate strong cash flow. Operating cash flow is up 8.5% versus FY '23, and cash conversion is strong at 118.1% of pre-AASB 16 underlying EBITDA. FY '24 CapEx reduced by $3.1 million compared to the prior comparative period, and that reflects a reduction in our greenfield sites opened in the period. And finally, in relation to dividends. As Chris mentioned, the Board has declared a final dividend of $0.01 per share, taking our dividend for the FY '24 financial year to $0.02 per share, and our dividend reinvestment plan will be in place again for the period. Back to you, Chris.

Thanks, Matt, and we'll now take a look at the outlook for FY '25. Firstly, I'd like to take you through our organic growth strategy initiatives for FY '25 across our two sectors. In the Clinical Vet Services, we'll continue our focus on the existing network of clinics to ensure that our clinics continue to work towards meeting our group target margins. We'll also focus on improving clinic efficiencies so that we can prepare for the expected increase in companion animal visits as COVID pets enter midlife stage in FY '26. We've recently relaunched the Best Mates program, called Best Mates Plus, extending it to a whole-of-life program rather than where it is now where it's mainly named it puppies and kittens and senior animals. And we're doing this to increase the uptake across the whole life cycle. This and the rollout of a new vet-only once-a-year paralysis tick and flea prevention product across our companion animal base are key focuses for our clinics to drive further traffic volumes in FY '25. We'll continue the ramp-up of our recent greenfield clinics and our 4 restructured clinics and further expand our service programs to our farm clients. For the Intensive Animal Vet Services, we'll continue our transition to a technology and data-led veterinary and production service business as well as commercializing a new third-party software program called PigFlow as well as rolling out some new products, including our recently developed vaccines from ACE Laboratories. Looking ahead to FY '25. In summary, I mean, veterinary services remain resilient in our rural and regional locations, and this is supported by Apiam's diversified Clinical Vet Services, our B2C model; and our Intensive Animal Vet Services, our B2B model. Additional earnings growth is expected in FY '25, this being achieved through delivering on further efficiencies and synergies expected from the existing clinic portfolio and leveraging investment in new product technologies. We'll also see the full year positive contributions from the restructured clinics and greenfield sites as well as the full year effects of those cost savings achieved in the second half of FY '24 as a result of moving to our new operations structure. With the surplus cash flows, we'll apply these to debt management and growth initiatives, but we will continue to monitor the market for strategic acquisitions, subject to return on capital thresholds. In FY '24, we've achieved a lot and put a solid platform in place for continued earnings growth. We know that there's still plenty of opportunities to expand earnings further within the existing business. And in FY '25, that continues to be our focus. I'll now open the forum up to any questions.

Okay. Thanks, Chris and Matt. We've already got quite a number of questions coming in, so I'll get started in the order they've come in. The first couple are from Mr. [ Ron Shamgar ]. His first question is, what operational savings were not captured during FY '24 and will benefit FY '25? And can you quantify the amount that will benefit FY '25?

Thanks, Catherine. Yes, look, I'd expect in the vicinity of $300,000 to $500,000 will also flow through into FY '25 on an annualized basis.

Okay. Thanks, Matt. Is the company intending to do any M&A during FY '25 or continue to pay down debt?

Yes. I mean our priority at the moment is to get further efficiencies out of the business and generate more cash to pay down debt. If a potential acquisition comes our way that we think is a compelling acquisition, then we are definitely going to look at it.

Okay. Thank you. A further one from Mr. [ Shamgar ], what's the target EBITDA or EBITA margin the company is targeting over the next 2 years?

Yes. So I mean, obviously, we want to continue to expand that EBITDA margin. Yes, there's probably at least another 2% that we're working towards. Again, it very much depends on the growth of the companion animal business as well as the new products that come in across the business. But yes, I mean, we're expecting 1% or 2% increase over the next couple of years.

Okay. Thanks. Further questions from Mr. [ Jim Medica ]. Can you remind us where the peak net debt level was following the acquisitions early in the financial year?

Yes, that was $71 million, Catherine.

Thanks. And further question from Mr. [ Medica ], has the system software upgrade allowing you to direct-debit your subscription offering across all your clinics being completed?

Yes. We've actually launched that on Monday this week across the business.

Great. Thanks. And Matt, can you just talk a little bit further about the inventory write-down adjustments that have obviously been noted through the accounts in reference to FY '23, perhaps the pretax and the post-tax amounts and what it relates to?

Yes. So the inventory write-down relates to the Juno product in FY '23. And we took a write-down of just under $2.4 million. That's the pretax impact. That was in FY '23. Obviously, in the comparisons that we've included in the presentation, you'll see in the notes that we've added that back or excluded that write-down, so we've got a like-for-like comparison.

Thank you. A further question from Mr. [ David Young ], how many greenfield sites are planned for next year?

Yes. We currently don't have any that we've identified for next year. We're continually assessing the market where it would be good to have a greenfield site. We've got 3 other redevelopments of existing clinics that we're currently doing at the moment. So yes, at the moment, it's really looking for where the opportunities are. If the opportunities are put our way, then we're certainly considering all of them.

An additional question from an anonymous investor, what is the split between stay-in-business CapEx versus growth CapEx?

Yes. Stay-in-business CapEx sits around $4.5 million to $5 million. And obviously, we assess growth initiatives on a year-by-year basis, but things like our greenfield sites for new clinics or investment opportunities in the lab that we've highlighted and other things, we assess them as they come along.

Thank you. A further question from [ Xiao Lin ] who is the current shareholder, growth looks like it's slowing in the second half compared to the first, where do you see growth coming from in FY '25? And can you provide an update on trading so far this year?

Yes. So we do have seasonality in the business, mainly due to the growth of our equine business, which is where most of that revenue comes in that August through December period. So there's definitely seasonality, which is why you'll see a lower revenue contribution in the second half than the first half. What was the second part, sorry, Catherine?

Apologies. If there's a trading update for the current year, the first 4 to 6 weeks.

Yes. So the first 4 to 6 weeks are very consistent with what we saw in FY '24. So similar growth rates to what our overall growth rates were in FY '24.

Sure. Okay. A question from [ Andrew Tan ], can you quantify the negative impact on profit of the 4 clinics that were significantly restructured?

Yes, Catherine, so we obviously haven't quantified that. I think with the figures that we've given in the presentation, you can probably work your way back to that. Yes, from a top line point of view, it's in the vicinity of $5 million.

Thank you. A further question from Mr. [ Ron Shamgar ], what's the target gross margin in FY '25?

The gross margin in FY '25, I think, will go up maybe 5 percentage points or 0.5% over FY '24. We expect the trend to continue that we've seen in previous years.

Okay. Thanks, Matt. A further question, why do you think there has been so much corporate activity in the pet sector over the last 12 months? And has the company been in any discussions in these areas?

I mean I think if you look at what happened during COVID, there was a significant upside in the pet business, for all those businesses in the pet industry, for all those businesses associated in pets. And so if you look at the life cycle of the animal, years sort of 2 to 4, the revenue spend goes down, but then from sort of '26, '27 onwards, as animals enter into that late adult stage, you would expect that revenues across those COVID pets are going to increase quite significantly. So I think everybody is looking out saying, well, there's probably a 5- to 10-year pretty strong tailwinds in this industry once we get through the current couple of years at the lower cycle of the animal. So I think that's why there's probably been a lot of activity. For us, our focus this year has really been on the existing business. We made a lot of acquisitions between 2020 through to 2023. And we know that there's a lot of upside in that existing business. So that's what our real focus has been rather than looking at anything else.

Thanks. Matt, sorry, just a clarification, can you just clarify around the gross margin? Did you say an increase of up to 5%?

Catherine, I would love 5%, but it's 0.5%.

Okay, 0.5%. Sorry, that was a question from a shareholder, yes. Okay. And last one, where do you see growth in the companion animal market in FY '25 ahead of the expected growth in FY '26 as COVID pets enter mid-life?

Yes. As I've sort of outlined organic growth strategies today, it's really around those initiatives we've got around our Best Mates program, trying to drive more traffic through the door. We've also been seeing an increase in the standards of care across the business, which increases the average transaction value which, despite there being a reduction in volumes across the industry, and we've seen a little bit of that but we've also seen an increase in our average transaction values, which mean that when people are coming in, they're still certainly caring about their pets and doing whatever is required to what's now a member of the family. So yes, we're expecting to at least maintain existing volumes, increase transaction values. If we can increase their volumes through the new tick and flea prevention product, which is a vet-only product, rather than buying a 3-monthly chewable or a spot-on, it's a once-a-year injection that's available only from the vet. It only got launched about 4 weeks ago, but we've seen significant uptake in the first 4 weeks.

Thanks, Chris. There are no further questions at this stage. So that will conclude the call today. Thank you, everyone, for your time.