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

[Audio Gap] [Operator Instructions] I will now hand over to Chris and Matt to get started.

Thanks, Catherine, and welcome, everyone, to Apiam Animal Health H1 FY '25 results. I'm Chris Richards, Managing Director, and today, I'll be joined by Matt White, who's our CFO. Let's start off with just a summary on the results. And you can see from the results, they're very consistent with what we reported at our AGM in late November, although we did have strong revenue in December. Our revenue of $106.2 million was up 1.7% on the prior comparative year. Gross profit was up 0.1%, mainly due to the contribution of the intensive animals, which is at a lower margin. Matt will talk to that later. Our underlying EBITDA pre-AASB 16 of $10.8 million was relatively in line with the prior comparative period. Our NPATA -- underlying NPATA of $3.9 million was 15.5%. Matt will talk to that a little bit later in relation to the impact of our right-of-use depreciation interest that had an impact on that. The reported NPAT was negative $1.5 million, and that was because of an impairment that we've taken on some clinics that we've decided to divest, and we've had to report that in our H1 results. The Board has declared an interim dividend of $0.01 per share, which is in line with the prior comparative period. I'll now just give an overview of our H1 performance, just delving a little bit further into our segments. And you can see overall that we've got resilient group revenues of 1.7%, and this is really because of our diversified portfolio. We've got different parts of the business with our Clinical Vet Services as well as our Intensive Animal Vet services. So in our Clinical Vet Services, our revenue was slightly down, down 1.7% compared to the prior comparative year. If we sort of look at what makes up this segment, in our general veterinary clinics, which is our companion animal and mixed animal clinics, we had 3.2% revenue growth, which added another $2.5 million (sic) [ $2.1 million ] in revenue. But this was offset by our ACE Laboratory diagnostics all relating to the diagnostic work that we do for the export of dairy cattle to China, which came to a sudden stop early in H1 FY '25. We also had some softness around our referral equine clinics, dialed back 11.5%, predominantly due to the thoroughbred breeding areas and referrals that come into these hospitals. So this pretty flat Clinical Vet Services was offset by our Intensive Animal Vet Service revenue, which was up 15%. This is our business-to-business veterinary services providing services into the intensive animals, the pig and the feedlot industry. While the clinics had slight growth, with the reductions that we came upon with the diagnostics and the softening in equine clinics, we have worked extremely hard to manage costs in the business, and operating expenses are tracking in line with the prior period. We are continuing to see cost leverage across our clinic network. And Matt will talk to our like-for-like OpEx across Clinical Vet Services, which was down 3.1%. We've got a real focus on lifting earnings and doing it a lot quicker. And as a result, we've taken a proactive response to really managing the portfolio through divestment of underperforming assets as well as looking at some strategic acquisitions. The divestment process is underway for 3 of our businesses, and we'll talk to those a little later. The one that's of most significance is an agreement in place to divest the underperforming New South Wales-based equine clinic, which we spoke to at the AGM. And this has got an impairment loss of $4.5 million pretax, which we're reporting in H1 FY '25. Following these divestments, it's expected that revenue will decrease by $2.3 million. However, our EBIT will increase by $1 million based on our H1 FY '25 annualized basis. I now just want to drill a bit further into Clinical Vet Services. As I said, this is the segment that makes up our general veterinary clinics, our referral equine clinics as well as the diagnostics that come out of ACE Laboratories that are really directed to those export markets. This segment provides a full range of veterinary services and products for animal health and well-being. I mean this is your typical vet clinics that most people would be familiar with. In addition to providing GP services, most of them also provide emergency services and procedures typical of referral services with many of them operating under the Fur Life Vet brand, particularly those that are predominantly companion animal-based. We offer a whole range of services, which are all listed on that page. If we drill into what's happening in that segment, that segment has been impacted in the first half, as I said, by some industry challenges around the equine and the export cattle markets. However, we've been able to deliver a solid result in our core operations. The companion animal and mixed animal clinic revenues are withstanding the cost of living challenges. We're certainly seeing a reduction in volumes across the industry. And the activities that we're doing are certainly counteracting a lot of that. Obviously, as we've spoken before, we're currently at the bottom of the revenue curve when it comes to the COVID-19 animal life stages. And we're obviously doing a lot to try and counteract that reduction in volumes that are going to come through for those animals, which are in the healthiest stage of their life cycles. To do that and to keep those volumes coming through, we've been investing in additional marketing. And we're seeing some really strong early-stage results, and that is driving volumes. And as a result of that, our Best Mates membership for the first 6 months is up 5.8% as of December 31 compared to June 30. So that's on track for double-digit growth in FY '25. As I've mentioned, the ACE Laboratory diagnostic revenues significantly reduced given Chinese demand for dairy heifers paused. So that was down 60%, quite significant. And that was a result of China deciding not to import any more dairy cattles to supply their milk requirements. And as we provide the blood testing to those heifers before they go to China, that has essentially stopped. Equine clinic revenues were impacted by softening in equine markets with reduced horse breeding occurring across those regions, particularly in the Hunter Valley and the Scenic Rim region. As I mentioned before, we are getting cost efficiencies at clinic level and are being realized throughout the period with like-for-like Clinical Vet Services OpEx reducing by 3.1% in the first half. If you look to the right of that page and look at those graphs, you can see that the impact that the reduction in export testing and the equine breeding season had in Q1. And in Q2, we've been able to -- it hasn't had as bigger impact. It's very much retained across that Q1 period, a little bit into Q2. But you can see that our revenue has -- in the second quarter has jumped up and is slightly -- is basically in line with last year. I'll now turn to intensive animal industries, and this is where -- this makes up about 23% of our revenue. It is a business-to-business model where the vets are out there providing consultancy services. They're using technology and data analytics to drive our service and product offering. This is a strategy that we changed about 2 years ago and is starting to really pay some dividends now. If we look at how -- its performance, we've had 15% growth in our half-on-half in the Intensive Animal Vet revenue. If we drill into it a bit further, our services into the beef feedlot industry, revenues were up 28.2% compared to the first half of last year, and our revenue in the pig segment was up 7%. So you can see in that graph that, that has really turned around where last year, for the same period compared to the previous, it was pretty flat. And prior to that, I think it was going backwards. So this has really been because of our transition to higher-value veterinary services, new vaccines that we're bringing to market, the use of data analytics. And we're expecting this continued momentum into the second half of FY '25 and into early FY '26 at least. I just want to talk about managing our portfolio because there is a real focus on increasing our earnings as quickly as possible. And where we don't believe that we can quickly mitigate losses in our underperforming clinics, then we will look to divest those so that we can increase our earnings. And the same applies to greenfield clinics. We know that they -- with the right formulas, the right people, they can be profitable. But those that are taking too long for various reasons, we're looking for other strategies to mitigate those losses or that slow growth. So there's a divestment process currently underway to exit 3 businesses in the second half of FY '25. The underlying -- there's an underlying equine clinic in New South Wales, which the sale agreement has been executed, and we expect that to complete in the next month. There was a greenfield companion animal clinic in Hastings, which just wasn't growing to our expectations. And so we have divested that. And we're also divesting our U.S. joint venture, mainly because it hasn't traded in 12 months, and we don't see that as being a growth area of the business. As a result of the divestment in the New South Wales equine clinic, we've got an impairment charge of $4.5 million pretax, which again is -- has to be applied to the first half of the year. Our equine veterinary services, despite divesting this clinic, they remain a core strategic service. The divestment of this clinic is due to specific location challenges and changes to local equine demographics. Mainly, we see the floods went through the Hawkesbury region and there's been relocation of horses. And so this clinic has underperformed, and we haven't been able to get it back to the levels that we wanted to perform at and believe that it's better to be divested into private hands who are willing to accept a different performance profile. And while there's been some softening in the equine business in the first half, Apiam's 3 other equine referral clinics have performed strongly over the last 3 years. They've been providing resilient revenue growth and strong margin contributions. We've also recently opened a new satellite equine clinic for our Victorian operations at Lancefield, where we've seen strong market growth. As I mentioned previously, the estimated financial impact of the divestment of the New South Wales equine clinic and the Victorian greenfield clinic will reduce our revenue by $2.3 million on an annualized basis. However, it will increase EBIT by $1 million because of the removal of the loss-making equine business. While we've looked at underperforming clinics for divestment, we've also been keeping an eye on the pipeline of acquisitions. We do have a lot of acquisitions coming to us. We're not in the process of just buying those that come to us, but there have been a couple of compelling opportunities. And we've subsequently executed nonbinding term sheets to acquire several mixed animal clinics in Western Australia and New South Wales that fit into our networks in those regions. So each of these businesses is strategically located to drive synergies with existing Apiam clinics in the region. We expect these to settle in Q3 of FY '25. From a financial impact point of view, we expect these will deliver about $8.9 million in revenue and $1.1 million in EBITDA for consideration of $6.3 million. I'll now hand it over to Matt to go through the financials in a bit more detail.

Thanks, Chris, and good morning, everybody. The first half of FY '25 saw strong revenue growth in our intensive animal business of 15% compared to prior comparative period. Clinical Vet Services was 1.7% unfavorable to prior comparative period. And solid growth in our companion animal and mixed clinics was offset by specific industry challenges related to diagnostic revenues and the softening in the equine markets, as touched on by Chris already. Gross profit grew at 0.1%, which was lower than the previous comparative period and reflects the impact of the intensive business animal revenue now being 23% of the group compared to 21% in the prior comparative period. Operating expenses rose by 0.3% only and reflects strong cost control. Like-for-like OpEx in Clinical Vet Services was actually down 3% -- 3.1% compared to prior comparative period. We see further opportunities for savings in H2 as we work with our clinics to achieve greater efficiencies and meet target margins. Our underlying EBITDA pre-AASB 16 was 3.6% unfavorable to prior comparative period and reflects greater lease costs as a result of investment in our veterinary clinic capacity to facilitate future growth. Management remains focused on ensuring that we continue to generate growth from these investments. Underlying NPATA was 15.5% unfavorable to PCP and was impacted by an increase in AASB 16 right-of-use interest charges, which reflects the requirement to update the interest rate when leases are extended. Reported NPAT was a loss of $1.5 million, and this was obviously affected by the $4.2 million post-tax impairment loss associated with divestment of the underperforming New South Wales equine business. In terms of the balance sheet, we continue to manage our working capital well, and that remains a focus, obviously, on generating strong cash flow. Our decrease in intangibles obviously reflects the impairment related to the divestment of the equine business. Net debt at $65.7 million is slightly down from $66.8 million in the prior comparative period, and operating leverage ratio remains well within our covenants at a ratio of 2.6x. In relation to our cash flow, our conversion rate is at 99%, which remains in line with our target. Our CapEx on PPE is up $1.1 million compared to the prior comparative period, and that reflects the investment in the new laboratory projects, which will continue across FY '25. And finally, our dividend of $0.01 per share, fully franked, is payable on 28th of March 2025 and represents a net payout of 52.4% of NPATA, excluding the impairment expense.

I'll now turn to looking at our strategy and our outlook. If we look at our organic growth strategy, it's very much in line with what was reported at the AGM. On the Clinical Vet Services side, our major focus is on targeting group margin thresholds for all the clinics. If we can get all these clinics up, it has a significant impact to our overall earnings. So we're doing that through driving volumes through the enhanced marketing, through optimizing standards of care as well as active management of clinic resources and costs that are in the clinic and the way that they're operating their workflows. We're also onboarding some AI systems to enhance efficiencies, obviously, preparing for the period when it gets extremely busy again as COVID pets commence their mid-life stage through FY '26. We're expanding -- continue to expand our successful Best Mates whole of life program. And we're really focusing on the maturation of greenfield sites to reduce those start-up losses quickly. We've got several other organic opportunities around a new prescription-only product, which we launched back in September, October. That's been traveling pretty well. And then we've got some other services around our Pro Livestock program and further expansion of the Pro Dairy program. But the main focus in this segment is around the existing clinics and getting their earning performance up. On the Intensive Animal Vet Services, again, we're continuing on the strategy that we've previously implemented 18 months ago, which is really about leveraging the investment that we've made in software technology and using data to enhance our service offering and to leverage that across the growth of our products, both existing and new. We've also got some third-party software technologies that we've been rolling out across the pig industry to improve client productivity and profitability. And we've also been rolling out a unique third-party pharmaceutical technology to enhance reproduction performance in the pig industry. The other focus in the business is further growth of our vaccine business. I'll talk to in a minute about -- we've developed further vaccines, and we are looking to grow them out across these segments. I just want to talk a little bit about integration of AI because this is an area that is really starting to enter the veterinary industry. We've been piloting various programs over the last 6 -- or platforms over the last 6 to 12 months. And we're starting to see where these opportunities can really not only enhance customer experience and standard of care, but really have an impact on operational efficiencies. So we've seen some real opportunities to improve across all those areas. Some of those have been around implementation of AI customer engagement and geometric social media platforms to drive volumes. And this is where we're really starting to get some further uplift in our Best Mates program. We're also using -- starting to roll out AI-assisted diagnostics to enhance standard of care. So this is using AI to better read things like x-rays and to interpret laboratory results. We formed a partnership with CoVet, which is a San Francisco-based veterinary technology company. And we've been trialing this across the clinic where -- and what it does is it basically sits in the consult room, it listens to the conversations and then it automates medical records, client communications, discharge instructions, a lot of the nonchargeable time that vets spend. Usually 2 to 2.5 hours a day, the vets will spend doing this. And this program can reduce up to that amount of time. The main clinic that we've trialed within to date over the last couple of months, last month, they did over 1,000 consults using this technology. Not only have they seen the time savings, but that clinic from a revenue point is certainly traveling along extremely well despite the challenges that are happening in the industry. I just want to talk to ACE Laboratory as well because this is part of our -- a significant part of our growth strategy, although it does take time to develop vaccines and get them registered with the regulators. But it is an area where we see a material uplift over the next 3 or 4 years to the business. And on the left there, you can see that we have got permit approval for 4 new vaccines. We've got a couple of other vaccines that are currently going through that process. We developed the Japanese encephalitis vaccine, which has completed its trial work. We're also delivering new services that industry is requiring, and this is around antimicrobial resistance monitoring as well as some other unique diagnostic testing. One of the big things that's happened in the last 6 months is we're starting to leverage this business better across our clinical vet services. And we're seeing our clinics are now -- rather than using external providers, are supplying their samples into this -- into our own diagnostic laboratory, which has been set up for those specific tests. Matt mentioned that there is a spend on a new vaccine laboratory. That is currently underway. We've broken ground and the building is commencing. I've spoken to that, obviously, a few times in the last 18 months. We received a Victorian government grant of $700,000 towards that build, which in total will be about $4.5 million, although that will be delivered on a modular basis and eventually be completed in 2027. So in terms of outlook and looking ahead, I mean, veterinary service remain resilient in rural and regional locations and, because of our diversity across both the Clinical Vet Services, our business-to-consumer business, as well as our Intensive Animal Vet Services, our B2B model, we're seeing resilience across our portfolio of clinics. And we're really continuing to invest to set up for the expected increase in veterinary demand as those COVID-19 pets head into their mid-life stages in FY '26. We've got to be highly efficient, have our systems well and truly tuned up for when that starts to come on. As I've mentioned before, we remain very focused on driving both revenue opportunities, but also further efficiencies at clinic level. Some of those costs that we took out towards the end of H1, we'll see those realized into H2 of this year. Surplus cash flows are being applied to our growth initiatives as well as the dividend. And we continue to monitor the market for strategic acquisitions. As I said, it's not something that we're actively out there looking to go on aggressive acquisition strategy. But when compelling acquisitions come our way, we're certainly having a look at them. And with that, I'll open it up to any questions.

Thanks, Chris. Let's get started with some questions. [Operator Instructions] Okay. The first question is from a shareholder. Do you have any insights into the broader vet clinic spend across the companion and pet animal markets? And what sort of underlying industry growth rates are you seeing in the current economy?

There's no doubt that because of that low point in the life cycle as well as some cost of living challenges, particularly around some of the more expensive procedures, that there's challenges in the companion animal veterinary services. There's no doubt about that. The data that we get out of the industry is that we believe it's back overall, about 7% revenue in those typical companion and mixed animal clinics. So we would consider that those actions that we're taking and the investments that we've made in our people and standards of care are outperforming the industry. However, we would also like that to be stronger than where it currently is.

The next question is from [ Andrew Tan ]. Could you please quantify the cost savings you estimate flowing into the second half from some of the efficiency measures you've outlined?

Yes, Catherine. So I think what we'll see in the second half is similar to what we've already seen in the first half. So we saw a 3% reduction on a like-for-like basis in our Clinical Vet Services. And that's obviously, as we've touched on, the best opportunity for us to be more effective and efficient. So we'd expect a similar sort of rate in the second half of the year.

A further question from [ Nathan Shannon ]. Given Apiam's mixed history with acquisitions as evidenced by the divestment impairments today, what criteria and hurdle rates do the Board use when considering acquisitions?

Yes. So I mean the acquisitions need to -- they need to be compelling in terms of adding value to Apiam. And so the way that we look at them is we want to make sure that there is growth opportunities. So we're not looking at clinics that are completely mature and there isn't growth opportunities. We're also looking at succession plans to make sure that there is good succession plan in place in the event that the owners are leaving. The other thing that we really look at as well is we know that we're going to put some -- there's going to be additional costs in those business when they come into the fold. I mean a lot of private businesses do run pretty lean. And owners do work there 60, 70 hours a week, and we know that, that doesn't happen when they sell. And so we do normalize those EBITDAs when we're looking at the valuations. But at the end of the day, it's got to be a compelling growth story and add synergies not just that we can provide within that business, but also within a region.

The next question is from [ Johnny Lequijabi ]. Are they now all profitable clinics that are left or are still some losing money?

Yes. I mean we still have 4 greenfield clinics that we're developing that are losing money. I mean, at the moment, the impact of those is about $1 million a year. We've made significant ground in the last 12 months, but we want to get that -- get those profitable as quickly as possible. We've got -- the bigger impact is really where -- across our portfolio, we've got clinics that are performing at a 25% EBITDA margin. We've got others that are performing at a 5% or 6% EBITDA margin. And that's where the biggest opportunity is, is to bring them all up at least over 15%. So that's where the biggest opportunity is. They're not loss-making, but there's certainly opportunity for enhanced earnings in those clinics.

The next question, Chris, is how do you see the impact of softer equine markets flowing through into the second half?

Yes. So the majority of our equine revenue comes from the breeding season. And so that happens in -- from August through to October in the thoroughbred industry. And so yes, that part of the business doesn't really occur in the second half. It's very much heavily weighted towards H1 of the revenues.

Final question from [ Andrew Tan ]. Has Apiam's new Director, Bruce Dixon, expressed his views on why he's invested in Apiam? And what input suggestions has he made to date, noting he acquired the Hastings clinic from you?

Yes. I mean -- I think you probably have to ask him, but I think he invested in Apiam because he likes the thematic and he believes that we've got significant opportunity to grow the business. I don't think there's any other reason why he would invest in the business. So -- and certainly, he has a lot of contribution towards how he sees that we should be operating the business, which I think is adding a lot of value.

Sorry, one final question from [ Jason Sharp ]. Are you looking to expand pathogen detection services using emerging technologies as part of growth and utilization of resources at ACE Laboratories?

Yes. We definitely do that, and we've developed a couple of new diagnostic kits and are able to do that as well as imported a diagnostic kit so that we could transfer services that our clinics were using in another lab back into us. So we are doing that. The other thing is that we did invest 18 months ago in a next-generation sequencer. The purpose of that is really to enhance not only diagnostic of pathogens, to see whether -- how they differ from what we've previously known in terms of their genetic makeup. Also looking at resistance patterns and then how we can monitor antimicrobial usage as well as improve the way that antimicrobials are being used. So it's definitely a focus of the business. And obviously, as our commercial customers continue to become more sophisticated, then they're continuing to seek those services.

Great. Thank you. There are no further questions at this stage. So that concludes the call this morning. Thanks, everyone.