APM Human Services International Limited (APM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the APM Human Services International FY '23 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Megan Wynne, Founder and Executive Chair. Please go ahead.

Good morning, everyone, and thank you for joining us today for our FY '23 results presentation. Before we commence, we wish to acknowledge the traditional custodians for land on which we live and meet upon today. We pay our respects to elders, past and present, of all Aboriginal and Torres Strait Islander nations. Globally, APM recognizes the significance of indigenous people's communities and the important role they play within our own workforce and the world. My name is Megan Wynne, and I'm the Founder and Executive Chair of APM. I'm joined today by Mike Anghie, our Group CEO; Steve Fewster, our CFO; and Matt Cooper, our Deputy CFO. Before passing to Mike, we thank you for your support as shareholders. Today, we'll present our FY '23 results and share how we, as management, see the business, the market and our outlook. Thanks, Mike.

Thanks, Megan, and good morning, everyone. Just moving to Slide 4. Today, we have almost 15,000 team members in our 11 countries, operating from 1,700 locations and supporting more than 2.1 million people each year. For the year ended 30th June 2023, we've delivered strong financial performance with revenue of $1.9 billion, up 43% on the prior year, EBITDA of $365 million, up 19%, and underlying NPATA of $178.2 million, up 7%. Since FY '21, we've delivered compound annual revenue growth of 37%, EBITDA growth of 25% and NPATA of 18%. Underlying EPS is $0.19, and we've delivered a final dividend for FY '23 of $0.05 per share, bringing our total annual dividend to $0.10 per share for the year. During FY '23, we've continued to execute on our strategy through winning new contracts with highlights including the award of the Functional Assessment Services in the U.K. and the phase 2 of the Ontario Employment Transformation Program in Ottawa. We've also renewed many contracts during the period across our operations. We mobilized and commenced the Workforce Australia program and the Rehabilitation Services and Vocational Assistance Program for veterans across the whole of Canada. M&A is part of our strategy. And in terms of being a market leader in Allied Health and the growing NDIS, we acquired Everyday Independence during the year. And our overall Australian health business has achieved strong organic growth during FY '23. Whilst the market remains tight for Allied Health professionals, we're confident that this business will continue to grow over time. Since our expansion in the U.S. through the acquisition of Equus, we now have a leadership position in a large market. And since January 2023, we've won 4 new Job Corp contracts and now have a Job Corp business with revenue over USD 100 million per annum. As a company, we're more resilient than ever before. We have an incredible team across our global operations, delivering on our purpose. And this year, more than ever, we've shown we can win in new markets globally and replicate success on our proven platform and track record performance. We cannot underestimate the importance of global diversity and performance in supporting growth in contract wins and the higher barrier to entry this places on entering this growing sector. And we continue to generate strong cash flow to support growth, investment and returns and are well placed to continue to make a larger social impact across our global markets. We move to Slide 6, please. APM Services delivered sustainable social impact. In employment services, our clients are individuals that require support to find sustainable employment, whether that be due to the changing world of work displacing people or other factors. We work with many different groups, people with disability, age workers, veterans, sole parents, people needing skills. The clients we support have varying needs, and we're well placed to assist them. Our global reach is a competitive advantage as it supports continuous improvement and innovation. We operate in global markets, which are connected by evidence-based practice, reputation and knowledge sharing. As I've said before, we operate in local markets with 1,700 sites where people live, where jobs exist and where the community requires us services. This geographic reach builds resilience as we're not exposed to one location or one country. The demand for health and well-being services is growing globally, and in Australia, the market has unmet demand across disability, aging and mental health sectors, to name a few. The investments we've made will continue to grow and mature for many years to come. And in the U.K., our Functional Assessments contract award will expand our assessments business globally. Moving to Slide 7, please. At APM, we're focused on enabling better lives. And through the work we do each day, we play a key role in driving positive societal change, which underpins social and economic participation of the clients we support. APM's approach to social impact is aligned to the United Nation's Sustainable Development Goals, known as SDGs. At its core, the work of APM fundamentally supports the achievement of SDG #8: Decent work and economic growth to provide ongoing inclusive and sustainable economic growth, full and productive employment and decent work for all, while also supporting SDG #3, good health and well-being; number 5, gender quality; and #10 reduced inequalities. And many of our key programs, such as Workforce Australia and Disability Employment Services in Australia, and Restart in the U.K. have been specifically identified by respective governments as programs that contribute towards addressing the UN's Sustainable Development Goals at a national level. Across all our programs globally, our objective is to support a client to increase their independence and their social and/or economic participation. We make an incredible social impact through our services globally. We move to Slide 8, please. Financial year '23 has been a strong year of revenue growth with revenue increasing 43% to $1.9 billion. The business grew organically by $183 million during the year. EBITDA grew 19% to $365 million, with underlying NPATA growing to $178.2 million, increasing 7% year-on-year. Second half cash conversion was 83.4%. Different revenue streams mean different margins and carry different revenue risk profiles. We deliberately execute a strategy to diversify our business and expand our presence in the U.S. marketplace through the acquisition of Equus as we invest in health and well-being with a focus on Allied Health and the NDIS. Both these investments have long runways of growth and opportunity and will pay a fully franked final dividend for FY '23 of $0.05 per share, meaning since IPO, we've paid $0.15 in dividends. We move to Slide 9, please. As you can see, we continue to focus on the execution of our growth strategy. Our strategy is to deliver market-leading performance driving organic growth, and this has been evidenced by our contract awards globally. Optimize the operational performance of our acquisitions, where we're focused on the integration of the Equus business and the continued growth of our health and well-being business; diversify the depth and breadth of our service offerings to align with the clients we know best, which we continue to do as we build our business to face the large and growing addressable markets in the NDIS and age sectors; and assess and execute on strategic M&A that assists us to deliver scale to existing businesses, which supports us to enter new markets and adjacent services where we can ultimately be a market leader. Today, the market presents opportunities that meet our objectives at accretive valuations that will complement our organic growth strategy. And our strategy hasn't changed since IPO. There are many highlights during the year, and if I can just focus on some themes. We've seen a number of contract extensions during the period. Optimizing and integrating our acquisitions is a focus as over time, we'll see both top line growth and margin growth as the health and well-being businesses continue to scale. We've won a number of contracts, and the market continues to present opportunities. And our global presence, track record and reputation sets us in good stead to support future programs. And the acquisitions we've made provide a platform to drive future growth in large markets in the U.S. and the disability and age sectors. I'll now pass to Steve.

Thanks, Mike. And if I can ask you all to now turn to Slide 11. Slide 11 provides a summary of our P&L for FY '23. As Mike said, revenue was up 43% to $1.9 billion, and this was driven by an increase in organic revenue of $183 million as well as $383 million of revenue attributable to the acquisitions of Equus and Everyday Independence. The organic growth was driven by the health and well-being businesses, plus the communities and assessment businesses in Australia as well as the U.S. and Canadian businesses. Over the last 3 years, in dollar terms, APM's higher-margin service and outcome fee revenue has increased. However, as the North American segment, in particular, has grown, [indiscernible] has the proportion of the more stable, lower-margin cost-plus and fixed fee revenue. This revenue now makes up 37% of APM's revenue, whereas in FY '21 was 29%. The expansion of the North American segment is contributing to APM's earning growth. However, due to the proportional growth of this segment, APM's consolidated margins are lower than historical levels. The other factor that has changed our margins in FY '23 was the continued investment in the attraction and retention of talent and systems to support the growth of our Allied Health and NDIS businesses, which, given their stage of maturity, have a lower margin. However, as these businesses scale, we expect to see the margins to increase. In terms of the impact of inflation, over the last 12 months, we have seen increases in our key cost categories. And another factor that has affected margins across FY '23 was the relative strength of the Aussie dollar against the pound. Borrowing costs in FY '23 of $42.5 million were up $9.5 million on FY '22. This was due to the additional debt funding through the acquisitions of Equus and Everyday Independence as well as the movement in [ BBSY ] across FY '23. APM's effective tax rate for FY '23 increased from 22% to 25%. FY '22 had a lower effective tax rate due to the recognition of previously unused tax losses in the U.K. during FY '22 as well as an increase in the U.K. company tax rate in FY '23 from 19% to 25%. If I can get you now to turn to Slide 12, please. The key changes in our balance sheet across FY '23 were, firstly, we acquired net assets totaling $372 million as part of M&A transactions, and these transactions were mostly debt funded. And secondly, there's a $93 million increase in working capital following the growth mobilization and delivery of new contracts. During FY '23, APM replaced its term loan B financing with $1.1 billion in syndicated multicurrency revolving corporate facilities. At year-end, APM had a total liquidity of $366 million. If I could now turn to Slide 13. APM achieved a second half cash conversion of 83.4%, which is up from the first half result of 59.3%, which took our full year underlying cash conversion rate to 72.4%. This was a lower result than our historical cash conversion rate. This change was attributable to the organic growth of our business as well as the seasonality of our U.S. debtors. We also had a large amount in mobilization and ramp-up of new contracts. Whilst we continue to invest to support new contracts, looking forward, we expect cash conversion to be above 85%. During FY '23, APM's investing activities included $46 million on fixed assets and systems development. The fixed asset investment was largely attributable to assets that were required for new contracts, while refreshing our IT fleet and our ongoing investment in cyber and data security. APM's investment activities extended to developing proprietary service delivery systems for the Canadian RSVP contract, enhancing and upgrading the functionality of our Employable Me and Mobility platforms. We're also implementing practice management systems for our Allied Health businesses. FY '23 also included the investment of $284 million for the acquisition of Equus, Everyday Independence and some smaller Allied Health businesses. These acquisitions were funded through a combination of debt and cash. If I can get you just turn to Slide 14, please. Slide 14 is the cash flow bridge, which highlights the impact in the first half of the U.S. debtor seasonality. It also shows the impact in the first half of the mobilization costs that we incurred as part of the Canadian RSVP contract. The second half increase in working capital, however, reflects normal growth on the back of increased second half EBITDA. Thank you. I'll pass you back to Michael.

Thanks, Steve. Moving to Slide 15, please. Moving to our segments, and you can see our country breakdown in the appendix. Firstly, the ANZ segment. Revenue growth in this segment has been predominantly driven by growth in the health and well-being business. Margins will continue to be lower due to the investment in this business and over time, the margin will improve as the business scales. During the year, we commenced the Workforce Australia contract. Across employment services, we manage lower client volumes given the current low level of unemployment, which was offset by outcome performance. And the initial year of Workforce Australia also contributed to lower margins. As a result, underlying profit from operations were slightly higher year-on-year, offset by increased funding costs recorded in this segment and the higher tax rate of 29%. As we look forward, we expect to see health margins continue to grow as we invest and build scale. Today, our focus is on achieving sustainable employment for our clients, delivering high performance and supporting more people on their employment journey to meaningful employment. And in terms of opportunities, in the ANZ segment, we're focused on market opportunities across disability, assessments and in health. Moving to Slide 16. In North America, we've grown through the acquisition of Equus and new contracts in Canada across employment and veterans. Looking forward, we'll utilize our presence in 42 states and territories to continue to grow organically in the U.S. and pursue the market opportunities in Canada. This is evidenced by our award of 4 new Job Corp contracts since January 2023, taking us to 7 contracts and revenue over USD 100 million per annum, which demonstrates the opportunity ahead of us. In addition, we received an extension on our Work BC contract in British Columbia to 2027. The U.S. market is a USD 20 billion per annum market in our current services. And in North America, we'll continue to pursue our opportunities across employment, Job Corp and Homelessness services. Moving to Slide 17. In the rest of world segment, revenues remained flat with lower client volumes being offset by performance. Property is lower due to the increased tax in the U.K. Looking forward, we're excited to have been awarded the $720 million Functional Assessment Services contract, which expands and diversifies our business and demonstrates our ability to leverage our platform globally. Services are expected to start being delivered in the first half of FY '25. And on a full year basis, this would deliver around $144 million per annum in revenue. We're also seeing new opportunities in the market with our key U.K. partner, the Department of Works and Pensions this month, introducing a new pilot program known as Pioneer Support, which will start in FY '24. As recognized by the Chancellor of the Exchequer Jeremy Hunt, the U.K. must get people back into work. In the rest of the world, we'll pursue new tenders in justice, employment and health. Moving to Slide 19 and outlook. APM is uniquely positioned to continue to win market share and expand services globally, given the growing demand in our core services and the macro trends, including increasing workforce participation and the changing world of work, aging, disability inclusion and the focus on health and well-being and independents. The proven capability of APM to deliver scale in different markets and replicate strong performance is a key differentiator for us. And we have a track record of partnering with stakeholders to deliver programs that create both a social and economic return from social service spend. The growth in our sector is not linear. It is normal component of our contracts that are designed to operate through cycles. The position we have as a global leader in key markets creates the ongoing opportunities to drive growth from our base given our long-term contracts providing strength in core earnings, on the back of trusted relationships based on the investment we've made in creating the base business in the largest human services market globally, the NDIS, and the ability to scale in markets without a step change in operating cost base. This supports our goal of achieving mid-teens earnings growth over the medium term through the execution of our strategy. And we've exceeded this target since listing with 18% CAGR. In terms of operational outlook, we have inherent growth in our existing programs that have been mobilized in FY '23. In FY '24, we'll mobilize new contracts, which will contribute FY '25 revenue in excess of $125 million. As we know, today, we're in a low unemployment market, and that leads to lower client volumes in our programs. And our focus will be on supporting more people in a sustainable, meaningful employment. Employment services client flows can change through increases in unemployment and changes in policy. And an example of this is a new pilot program in the U.K., Pioneer Support. Health and well-being is expected to continue to grow to meet the unmet demand. A critical focus for us will be the attraction and retention of talent and the investment in systems to provide a better client and therapists experience and support productivity. North America is expected to grow on the back of the Equus acquisition and new contract awards in Canada and the U.S. And the M&A market is one we're seeing opportunities that are on strategy, and we'll continue to review how that can be executed in an accretive manner. Importantly, as we look forward, we're operating in growing markets with a strong pipeline of organic growth opportunities across all our services. Our pipeline is over $9 billion. And none of our major contracts are up for renewal in financial year '24 or '25. Our cash conversion is expected to be greater than 25 -- 85% based on our [ known ] contracts, and we'll see reduced leverage noting that we may increase debt to fund acquisitions. If we move to Slide 20, please. In closing, we believe that APM is an attractive investment opportunity. We're a social impact company that delivers strong financial performance. APM is a unique company. We have operated for almost 30 years, and during this time, created a market leader operating in 11 countries with understanding of local markets, a track record and reputation for delivery and a platform to continue to drive growth with our continued investment in infrastructure. We operate in large markets with a total addressable market of over $100 billion. The programs we deliver have had long tenure and are embedded in the social and economic fabric of the economies we operate within. They have operated through the cycles, government changes and meet a growing need to support underserved people in our markets. We have a proven ability to partner with government stakeholders and a track record that has demonstrated to be the scale and win in new and adjacent markets as seen with the Functional Assessment Services contract award in the U.K., the Ontario Employment Services Transformation contract in Canada and multiple Job Corp awards in the U.S. We have an incredible team that operates in each of our countries. They operate our contracts and service our clients from the frontline team to our country CEOs. They're the leaders in their field and have a strong track record of performance. It's our people in our markets and local communities that make APM a high-performance organization, and thank you to all the APM team. And finally, today, we are more diverse and resilient than ever before, operating in 11 countries, having a mix of different funders and revenue streams, having longer tenure in contracts and growing -- and a growing noncontract client choice business in the largest human services market in the world, the NDIS. On that note, I'll finish, and thank you for your support and interest in our company. Pass to the operator for Q&A.

[Operator Instructions] Your first question comes from Lyanne Harrison with Bank of America.

I just want to talk about organic growth. Obviously, in the presentation, you mentioned very strong organic growth, 14%. Can you talk a little bit about what sort of organic growth you're seeing across each of these 4 segments?

Yes. Thank you for your question. I guess for us, as I mentioned, going through the segment review, in Australia, the organic growth in this market has been driven by the investment we're making in Allied Health and NDIS under the health and well-being business. And when we move to the rest of the world segment, that growth is being driven in future years through expanding our businesses in new services and functional assessment. As I said, on a full year basis, functional assessment is $144 million per annum revenue, noting that it doesn't start -- it starts during the first half of FY '25. So we won't have a full year in FY '25. And in the U.S., it's been driven by new contract awards, such as Job Corp, where we expanded that business significantly from 3 contracts to 7 contracts. And then through Canada, where we're still mobilizing our Ontario Employment Services Transformation award and hopefully, we'll be successful in future tenders in that marketplace. So they're the key drivers of organic growth in those markets, whilst we're still operating a low unemployment environment.

Okay. And on that mention, obviously, the lower unemployment environment, but to some extent, volumes are being impacted. Can you comment on where your employment services volumes are currently versus where you were this time last year?

Look, whilst I'm not going to give you client volumes directly, in, typically, employment services, we're basically seeing client volumes since July '22 in our business increased at a total client and an active price level. Our focus there -- we see the increase in low single-digit percentages. But our focus there is really as we support the clients that we do have sustainable, meaningful employment. In Workforce Australia, given it's a new contract, I mean, that was a ramp-up period for clients upward. So we're also seeing in that market today recent months of stabilization of client volumes. But once again, the focus is about sustainable, meaningful employment and helping the clients that we do have in program to achieve that goal. And if we can do that, then overall, we can continue to hold and grow in a market of low client flow.

Okay. And just one more question for me around margins. So I understand the geographic mix is impacting margins a little bit in the period. But I wanted to talk about Allied Health and the opportunity there. So obviously huge investments in allied health with the expectation that, that would cause margin expansion over the next few years. But in terms of the -- can you talk about the current challenges you're facing today that might impact scale and also timing of how you get that growth and that margin expansion?

Yes. Look, I mean, the main challenge, as we've discussed, and you'd probably be aware from your coverage of various company is the ability to attract and retain allied health professionals in this marketplace, a combination of high turnover, lack of graduates. The market itself has grown exponentially, whether it's through the NDIS or the growing demand for health workers. We've seen a significant growth in the demand for Allied Health workers. And for us, our focus is on attraction and retention pipeline of future team members, how do you accelerate their journey as a new starter into an opportunity to be a fully productive team member, what systems can you use to enable them. What are the other benefits, nonfinancial benefits that the team members like, whether that's education, ability to invest in community and research. There's lots of areas that we need to focus on that we are focusing on, but they all require investments. So this market, we are focused on enabling our current team members, retaining them and then growing into the demand of the Australian marketplace.

The next question comes from Tim Plumbe with UBS.

I'll just ask 2 questions and jump back in the queue. Just the first question is around new contract opportunity pipeline, please. Just wondering if you can give us a bit of color in terms of some of the opportunities that are out there and how we should be thinking about timing, please?

Yes. Thanks, Tim. Look, it really depends on the market we're in. So in the majority of cases outside of the U.S. marketplace, the timing between tender and award would generally not sit within this financial year. So in terms of the Australian marketplace, once the reviews will be finished in the NDIS and employment sectors, we expect there'll be market opportunities in some of the support areas of the NDIS and -- but they will flow into future years. There's certainly an opportunity of assessments that will continue to come forward in the aging sector in Australia that we're focused on. And ongoing, there's continuous health and well-being contracts that are probably more shorter term, especially in the mental health space. Moving to the U.S. marketplace. Once again, other than the pilot program, which will start relatively soon and is really being delivered through an extension of the work health program, which is excellent for us. Those contracts will see tenders, awards and then mobilize -- and then delivery into next year's results. The U.S. dollar is more short term. So the award to -- the award into commencement of contract is a much shorter time frame and like things -- like the Job Corp award, where I said we've been awarded for additional Job Corp contracts too, which we announced in March this year. That's more short term. Yes, the mobilization there is -- could be 1 to 2 months of mobilization. So we'll get -- or not immediate, but short-term revenue and profit impact from those contracts.

Got you. Sorry, just in terms of Canada, Ontario?

Sorry, Ontario, so the phase 3 tender is out shortly. And that would be -- well, if you go on historical time frames, that would be a potential award in Q1 next year with a commencement in FY -- and towards the back end of FY '24 calendar year. But that's the type -- we followed historical timing. I mean we're still obviously rolling out the previous Ottawa award at the moment. So that won't really commence a meaningful [ flight ] until the back end of this first half.