CVS Group plc (CVSG) Earnings Call Transcript & Summary

Hello, everyone, and welcome to this presentation of our interim results for the half year to December. I'm Richard Fairman, Chief Executive; and I'm joined by Robin Alfonso, CFO; and Ben Jacklin, Chief Operating Officer. It's a shame we can't meet face-to-face, and Robin, Ben and I are all in separate locations, but we will run through a presentation, and we will then have time for questions. I will open with an introduction to the half year and a strategic overview. Robin will talk through the numbers, and then Ben will provide an operational update linked to our strategy before I conclude with some comments on our outlook. I will start with the key financials as set out on Slide 5. For the first half of our financial year, we generated a 9.4% increase in total sales, reflecting growth across all of our divisions. Our like-for-like revenue growth was 7.8%, and this resulted in a 19% increase in EBITDA, all in comparison to the equivalent half 1 period in the previous year. Our adjusted EBITDA margin increased to 18.4%. We maintained our vacancy rate at 7.4%, and we saw a 3.6% increase in the membership of our preventative health scheme, the Healthy Pet Club, with 430,000 members at the end of December. There are some favorable market trends, which provide a strong platform for our services over the longer term. Industry reports are now providing evidence of an increase in the pet population. -- cats and dogs are referred to as companion animals and the restrictions in the past year on social interaction have seen an increased demand for pets. Breed is charging significantly more for puppies and kittens and increased demand reported by rehoming centers. Results from a recent PDSA survey indicate that there are now 21 million cats and dogs in the U.K. Separately, the Pet Food Manufacturers Association in their recent reports put this number at GBP 24 million, and they said that 3.2 million U.K. households had bought a pet since the start of the COVID-19 pandemic. This clearly highlights there's no definitive industry view, but all the evidence points to a growth in the number of pets in the U.K. We are also benefiting from favorable spend dynamics with a trend over a number of years of increased humanization of pets, for example, more dogs sleeping in bedrooms. As with human health, better clinical diets and advances in the clinical treatments available should lead to an increased life expectancy. And it's also worth mentioning the social and well-being benefits of pet ownership. Again, in the recent PDSA survey, 94% of pet owners said that owning a pet makes them happy with 86% saying pet ownership improves their mental health. We are well positioned to benefit from these tailwinds. We have a fully integrated model with first opinion veterinary practices at the core of our business. supported by specialist-led multidisciplinary referral hospitals, our own diagnostic laboratories, our network of crematoria and Animed Direct, our online reseller of food and drugs. Through this fully integrated model, we can provide high-quality end-to-end care to our clients and their patients 24/7. This also gives us scale, which is particularly important for purchasing synergies, and we have strong barriers to entry. Through our referral hospitals, our laboratories and our crematoria, we also provide these services to independent third-party practices. We are a highly cash-generative business with continued prudent capital allocation. We will continue to invest in our clinical equipment and our practice facilities in support of organic growth, and we have the opportunity to make further acquisitions. So, I am confident that we are well positioned as a business to benefit from the favorable market dynamics and to deliver further growth in shareholder value. The growth in ownership is not only good for our business in the short term, but also in the medium to longer term. In the early years of a pet's life, there are some obvious additional veterinary procedures required such as netrin, first vaccinations and in some cases, microchipping. Puppies and kittens can also be overly exuberant at times, leading to injuries, which also require treatment. -- cats and dogs typically then lead healthy adult lives. However, we will continue to provide a full range of services to adult pets, including routine checks, preventive health services, regular dental treatments and clearly, we can provide additional services as and when required. However, as with human health, it's the latest senior years when pets typically require much more veterinary intervention. For example, for the management of chronic disease, remedial dentistry, lumps and bumps requiring examination and in some cases, removal and the increased need for specialist prescription diets. Through our fully integrated model, we can provide services to patients throughout their differing life stages. We focus on providing great clinical care. And by working up cases fully in our first opinion practices, -- this inevitably results in more diagnostic tests for our laboratories and also increased referrals to our specialists. And through Anime Direct, we are well positioned to benefit from increased food sales online, and we also provide compassionate cremations following end of life. Hence, we are well positioned to benefit from increased pet ownership and increased consumer spending on pets. And that's not only in the short term but in the medium and longer term, when these new copies and kitchens reached their senior years. Whilst we're now seeing the benefit from COVID-19 in the form of increased pet ownership, we have, of course, alongside many businesses faced considerable challenges in the past year. A year ago this week, we entered into the first U.K. lockdown, and we were restricted for a period to only performing urgent and emergency work in our first opinion, small animal practices. In light of this, we saw revenue in our small animal practices fall by roughly half, and our like-for-like revenue for that half year was 6.9% lower than in the previous year. The client demand, though remains strong throughout the lockdown. And as restrictions eased, we saw a strong recovery such that by July, revenue had recovered and was ahead of the pre-lockdown level. Whilst we've seen new lockdown restrictions imposed, firstly, through the circuit breaker lockdown in November, and more recently in January this year, the Royal College of veterinary surgeons have imposed far less severe restrictions -- and we have seen limited impact to our operations such that revenue has continued to improve. This is a reflection of the strong client demand and the favorable market dynamics and demonstrates the resilience in our business and the sector as a whole. This is also credit to our fantastic team of people who have worked tirelessly over the past year, and I would like to take this opportunity to thank them all for their support. Our people are rightly at the heart of our strategy for growth. And our vision is to be the veterinary company people most want to work for. Sustainability and ESG are a key focus, and we have set out further detail on this in an appendix. Investing in our people is a key element of our social focus, and we have implemented a number of initiatives to provide support to our colleagues I personally chair are well-being grouped, and this is important at any time, but particularly in the past year of Clover 19 destruction. We are the first major veterinary group in the U.K. to offer enhanced maternity pay. We continue to invest in learning, education and development, and we encourage employee shareholding through our Save As You Earn scheme. Our practices also play a pivotal role in their local communities, and this includes employee fundraising for local charities. We match this with a CDS donation to that Life, a charity which plays a key role alongside our own focus on well-being and positive mental health support. The feedback that we received from our colleagues is that this focus on our people is a real differentiator of why our colleagues want to work for CBS. We are also well positioned for further acquisitions to augment this organic growth. We have strengthened our acquisitions team. We have implemented a new proactive and targeted approach to lead generation. We have accelerated our completion time scales through more focused due diligence, and our integration planning starts with our very first discussion on a new target. We have completed 8 acquisitions in the year-to-date, and we have a pipeline of opportunities with a focus on small animal practices so that we realize the synergies of our fully integrated model. I will now hand over to Robin to cover the financials.

Thank you, Richard. As set out on Slide 13, we've seen a 9.4% increase in revenue with like-for-like sales growth of 7.8%. Our like-for-like sales growth adjust for working days, it excludes current year acquisitions and only includes prior year acquisitions from the same month this year as it was acquired in the previous year. For an established business, the like-for-like growth sales was pleasing given the strong H1 comp, the circuit breaker lockdown in November and our annual small animal price increase being delayed from 1st of July '20 to 1st of Jan '21. The operating leverage of the P&L means that a large proportion of the revenue increase dropped through to improved EBITDA. So typically, circa 25% of revenue is paid out for cost of drugs and goods, circa 50% for employees, and that's relatively fixed. -- and circa 8% for general overheads and establishment costs, which were also largely fixed. This has resulted in EBITDA margin improvement of 1.5 percentage points to 18.4%. Free cash flow benefits from improved EBITDA and working capital benefits. H1 benefited from lower drug costs carried over from Q4 last year during the first lockdown. Leverage of 0.72x is an improvement from 1.14x at 30th of June 2020, although we still have GBP 15 million of that deferral from Q4 last year still to pay, and adjusted EPS benefits from improved EBITDA. And on acquisitions, we spent GBP 10.6 million in the first half on 4 acquisitions or small animal, all at a pro forma adjusted multiple, including synergies of less than 10x. The revenue growth of 9.4% was delivered across all our divisions. The veterinary practice division comprises our small animal, referrals, farm animal and equine veteran practices as well as our buying groups, Vet Direct and my pet insurance. This benefited from the continued focus on delivering quality clinical care, stable vet vacancy rate and growth in our Healthy Pet Club. The Healthy Pet Club not only grew 3.6% in the half from 415,000 members to 430,000 members, but we also put through a 6% price increase in October, which will take a full 12 months to roll through the book. The laboratory division benefits from the increased volume of analyzers in practice, which supports testing in-house, for which we supply the reagents for the tests. We also saw increased volume of tests in our laboratories driven by the focus on clinical care and diagnosis of the complaint and first opinion practices. The laboratories also benefited from private COVID-testing, which we were able to do in half 1. The crematoria division benefited from an increase in customers choosing individual cremations; and Animed Direct, our online food and pharma business benefited from increasing demand for pet food online. On to Slide 15, which sets out our EBITDA growth, the 9.4% revenue growth, coupled with a 1.5 percentage point improvement in EBITDA margin resulted in a double-digit growth in EBITDA from $37.9 million to $45.1 million. Given the timing, which was towards the end of the half, the contributions from the 4 acquisitions was relatively small. The EBITDA margin improvement was mainly from improvements in employment costs as a percentage of revenue with stable gross margins, offset by increases in central costs for COVID-19 and one-off property surveys. CVS benefits from favorable working capital dynamics. Clients typically pay for services before they leave. -- circa 40% of our active client base are HPC members and pay monthly on direct debit. And drugs costs typically have delayed payment terms. Our revenue is also relatively predictable, 12% of our revenue from HPC members paying monthly. There is a small amount of seasonality, particularly in Acquire and farm and small animal is impacted by holidays, especially bank holidays and weekends where we run a reduced service over reduced hours. We've proven in the past that when we stop investing in acquisitions, we deliver quite quickly. from a leverage position of 2.4x at December 2018, when focus moved to organic growth, leverage has fallen in circa 0.4 of a turn every 6 months. We refinanced our debt facilities and they're committed through to January 2024, and we have ample financial headroom in covenants. We have a strong balance sheet with GBP 170 million of committed facilities and low leverage at 0.72x. Our favorable working capital profile means we have high cash conversion at 92.5%, and therefore, free cash flow of GBP 31.5 million after tax and interest. The strong balance sheet and good cash dynamics means we have capital available to invest in growth, either through acquisitions where we spent GBP 10.6 million in the first half or through capital investment, where we spent GBP 6.2 million in the first half, and there is scope for further investment in both these areas. I will now hand over to Ben, who will cover the strategic and operational updates.

Thanks, Robin. On Slide 19, we lay out our company strategy, which sets out our purpose to give the best possible care to animals, which we're delivering through our clear vision to be the veterinary company people most want to work for. Both our focus on the critical KPI vacancy rate and our monthly tracking of employee satisfaction are reflections of this vision. Beneath our purpose and vision are 4 strategic pillars: firstly, that we recommend and provide the best clinical care every time; secondly, that we're a great place to work and to have a career. Thirdly, that we provide great facilities and equipment; and finally, that we take our responsibilities seriously. Starting with that first pillar, the quality of service we're now offering is driving significant client value and our commitment to recommending and providing the best clinical care is paying dividends. We are absolutely committed to ensuring that when owners bring us their pets, they'll have the best diagnostic and treatment options recommended to them and our focus on supporting our clinical teams to deliver this has continued, particularly through our network of hub clinical leaders across our business. These efforts have driven a circa 6% increase in spend per client over the first half of the year despite the postponement of our annual July price rise. As well as offering first-class care to sick or injured animals, we are continually improving the levels of preventative health care through our healthy pet club, which offers routine flee and worming treatments and vaccinations as well as twice yearly health checks, which allow us to identify disease processes and recommend the best diagnostics and treatments. The scheme membership has grown by 3.6% over the first half to around 430,000 members, representing roughly 40% of our companion animal client base. We've also worked hard to improve our processes to attract more cases into our referrals division through internalization of our own referrals and attracting those from third-party practices, reflected by a 21% increase in case load in our referral hospitals compared to H1 in 2020. We -- the expansion of our network of advanced practitioners has also continued, which enables us to capture advanced procedures in our first opinion practices where a referral to a tertiary referral hospital is not merited. Slide 21 is a great example of our work in the area of clinical excellence as this month, we published our annual quality improvement report. This industry-leading report reflects our commitment to patient safety and consistent clinical improvement and has gained a significant recognition in the profession, not leased by our regulator, the RCVS. The report provides a clear and measurable account of ways in which we are improving clinical care, including areas such as antimicrobial stewardship and improving animal welfare, both areas in which we take our responsibilities extremely seriously. Richard spoke of the critical importance of our people, and this slide speaks to the continued work we do to engage with our colleagues, not least during the COVID-19 pandemic. Amongst a range of initiatives, we've partnered with the University of Nottingham to deliver a unique 4-year accredited graduate program, which we launched this autumn. Supporting and mentoring a pipeline of talented graduates is a central tenet to our ongoing commitment to reducing our vet vacancy rate, which has remained stable. This has also been supported by a large number of roles filled by internal candidates and a significant number through our highly successful Refer a Friend scheme during H1. On the following slide, we outline our continued efforts to build the best learning education and development platform in the profession, the Knowledge Hub, which has over 2,300 users per week so far in 2021. On the platform, we now offer over 130 live courses and programs and impressively on the platform, we have had over 12,000 webinar views since March, all of which reflects the critical role continued professional development has in the retention and recruitment of talented colleagues. We are committed to enhancing the specialist services we offer, particularly in the quality of our on-site facilities. And as such, we've completed 6 refurbishments in H1 and intend to complete a further 8 in H2. The quality of practice facilities is directly related to our ability to recruit vets and the ability of our clinical teams to deliver the best possible care. Therefore, refurbishment is a fantastic investment opportunity for us. We're also deploying new industry-leading techniques across our practices, including dental radiography and keyhole surgery for neutering, which is now in operation in 38 practices across the group. The rollout of our contact center to ensure outstanding access to our services for clients paused during the pandemic, has resumed with 33 practices calls now handled through Caroline. The majority of our clients phone our practices seeking an appointment. And when practices transition to Care line, we see a greater than 80% improvement of conversion of calls to appointment, thus providing our clients with best-in-class access to our services. And finally, on Slide 25, we've shared an example of a recent refurbishment of the Grove veterinary clinic in Dereham to a state-of-the-art site with dedicated parking and outstanding clinical facilities. Investments such as these enable us to offer the best possible care to our clients and patients, ensure we can attract the clinical teams we need and represent a great return on investment. I'll now hand over to Richard for some closing remarks.

Great. Thanks, Ben. So I will now focus on our outlook. And on Slide 27, I've set out some key financials for the first 8 months of the year to the end of February. Total sales growth is 8.7% for the 8 months year-to-date, and this includes February, which is clearly a shorter month in terms of working days. Like-for-like sales have increased by 8.2% year-to-date, ahead of the half 1 growth. We have seen a further slight reduction in leverage, which was 0.7x at the end of February. Adjusted EBITDA margin is 18.1% for the first 8 months. Our vacancy rates remains stable, and we continue to see an increase in our Healthy Pet Club membership base. Hence, the strong performance in the first half has continued for the first 8 months. I am confident that the foundations have been laid for future growth. We operate in an attractive and resilient sector and the market is growing with increased pet ownership and favorable consumer trends. We have a clear people-focused strategy to drive growth, and we have strengthened our senior management team. We operate a fully integrated model with first opinion practices supported by specialist-led referral hospitals, our own diagnostic laboratories and our network of crematoria. And we have our online business and Animed Direct. This allows us to provide high-quality end-to-end clinical care 24 -- we also have the opportunity to augment organic growth through further acquisitions. So that concludes our presentation. And I would now like to invite questions.

We will go to Allan Smylie at Davy.

I have 3 questions just to kick off. The first one is just really a short-term question related to really near-term demand. And the rolling revenue chart you presented on Page 9 that was really helpful. And I suggested like-for-like revenue growth in March may have stepped up a notch again further versus Jan and Feb, so if you could comment on that would be helpful. Secondly, I'd just be interested in terms of how you're thinking about planning for vet capacity for the remainder of this year as lots continue to ease some of those demand constraints come off. So, what I'm really asking is what is and you think there's further pent-up demand for the remainder of the year as the situation improves. And then the final question, I'd just be interested with respect to the healthy pet plug. Did you have a sense at what average pet age owners take at membership. I'm trying to understand whether that's really a lagged function of the step-up in demand we've seen currently or pet ownership we've seen currently that will come through in a couple of years' time.

Thanks, Allan. So, if I pick up the first question, near-term demand in March. So, we obviously aren't going to give detail on March trading, we've given the first 8 months. But what I would say is that the chart, as you might imply shows the kind of continued trend of strong client demand. But the regulations we currently work under the RBS haven't actually changed from the start of January. So, the RCS flow chart remains unchanged. Currently, albeit clearly, the signals are we're coming out of lockdown. The government announced the route out of lockdown and the RBS will naturally kind of respond in due course. The one thing that has changed as a positive change in March is that schools are now reopened. And unfortunately, in England, vets haven't kind of met the criteria of critical worker unless they're farm vet. So, our first opinion, small animal bets don't meet the critical worker status. So, the fact that schools and our reopen is certainly a positive. And the client demand has been there throughout. The second question in terms of pickup demand. Ben, I don't know if you want to talk about the kind of work we've been able to do, but we clearly can provide essential services. And I know our vets have been keen to avoid building up a backlog again.

Yes. So, the recent restrictions from the RCVS are far less onerous than they were at the beginning. And we also have a -- our vet workforce have been through the process of delaying that work a year ago and seeing some of the animal welfare impacts that led to. So, the guidance is very much that the individual vet makes a determination on what work is appropriate, but largely the majority of work that we do because the definition of it is essential and most of the work we do is essential, means that there isn't -- we don't anticipate a significant backlog of work this time compared to what we saw a year ago. And then in terms of the healthy pet club membership, I mean, we can sign up clients at any stage of the animal's life. Typically, clearly the obvious time to have a conversation about preventive health is when we're seeing puppies and kittens for the first time. So simple, that's a great opportunity for signing clients up to Healthy Pet Club and talking about the benefits of the preventative health scheme -- but also talking about the kind of requirement for insurance, and we offer our own insurance product, but we also actually engage in a discussion with insurance because regardless of whether a client buys our own insurance policy or a third party insurance policy, if they are insured, they're clearly better able to provide the best quality care for their animals. Maybe also just worth me adding there, Richard, just so everyone is aware, our practices, waiting rooms and salting are still closed. We don't have clients in the building. And that does present some challenges with signing people up to the healthy pet club at the moment because our normal processes are that's done by our nursing teams and our customer care teams in reception. So there are some challenges with not having clients in the building on the sign-ups. I think there was also just another part of that question on resource planning for vets as well, which I'm happy to pick up. I guess the vacancy rate remains a challenge. It's great that we've maintained a stable vacancy rate in the results we've just shared. The -- there are lots of efforts to make sure we maintain that, including taking a record number of new graduates in the summer. We've already started our recruitment process already to try and take more graduates than we have before. And that includes launching the first summer camp for new graduates that's been done in the country. So, we will have graduates for a period of 3 weeks before they actually start in clinic with us, which has been great at attracting more new graduates to join us. We're also literally, as we speak, almost going through the changes to the IR35 regulations which will limit the tax efficiency of contractors or low converts we call them operating in that manner, which makes employment more attractive -- and we're working hard to offer more flexible fixed-term contracts, variable hours, contracts to those potential employees who've currently been local. So that remains an opportunity. But overall, it does remain a challenge, particularly after a year of dealing with the COVID challenges, and it remains probably our biggest focus.

We'll go to Calum Battersby from Berenberg.

Just a couple of questions for me, please. So firstly, you've now given a bit more color on the increase in client registrations, which is really helpful. I was wondering if now kind of you've delved into the data a little bit, if you think there's any meaningful impact from this in the numbers. So as Richard said, the spend on things like metering, initial vaccinations to take place solely in the annual first year I'm just wondering kind of if we should expect this creates a significant part of the revenue growth this year that potentially creates difficulties in the comparative for FY '22? Or if you incenting that the growth can continue? And then the second question, clearly, you're a bit more comfortable now on the M&A front. I was wondering if you expect the majority of future spend will be in the U.K. or if we should expect any more international development on the Ryzen?

Thanks, Calum. So, in respect to the first question and client registrations, I think we're yet to see a real kind of meaningful impact from increased pet ownership. So yes, our client registrations are up, and that has meant some additional procedures. But we don't see that falling away anytime soon. And actually, the slide I talked through about the longer-term benefits, medium and longer-term benefits of increased pet ownership, I think, is very much the case. And that tailwind of growth will be here as a kind of benefit to our business for the medium and longer term. In terms of like-for-like growth, we are clearly entering a period or about to enter a period where the comparative is a weak comp given the COVID restrictions and the severe restrictions. We were operating under last year in the first lockdown. But yes, we're confident we're well positioned to see further growth from our focus on really driving high-quality clinical care and we've focused on working up cases fully and providing not only choices to clients but recommendations that allow clients to be very informed about what's best for their patients. So that is very much a positive, which we see continuing. In terms of M&A activity, clearly, we are well positioned within the U.K. with our fully integrated model. And hence, we see a significant opportunity still in terms of growth in the U.K. We are more proactive now in terms of the acquisitions focus. We've got a strengthened team. We've got a stronger pipeline. And importantly, we are able to execute quicker now than we were previously, having revised our approach to acquisitions. And also, critically, the integration planning starts with the very first conversation that we have about a potential opportunity. So, Ben, Robin and I will sit down with our acquisitions team and the operations team and really think through why will be attracted to a practice, what the synergies we believe we can bring from our integrated model. And importantly, what's the kind of implementation plan so that we are conflict we'll achieve those synergies from day 1. Clearly, we have a first hold into Europe with practices in the Netherlands and Ireland. We are -- where we recognize there are further opportunities that may present in due course, both in our existing countries of operation, but also in other areas, such as Germany and France, which are significant markets are now opening up to consolidation. So clearly, we are aware of those opportunities. We'll be assessing them. But equally, we have a strong opportunity within the U.K. with our fully integrated model clearly bringing benefits. And the focus is very much on the small animal area because that's where we get the most synergies from our integrated model.

We'll go to Andrew Whitney at Investec.

Just one following up, I guess, on the acquisition piece. I'm just thinking about the referral revenue is growing at sort of double the group revenue growth rate. I think you reported about 22%. Have you got all of your services that you can put into that division already into the referral piece? Or is there a capital allocation thinking that needs to happen, external acquisitions in the U.K. in small animal versus building further services you can add to about referral services. How do you how do you balance those 2 priorities?

Andrew, I think -- yes, a good point. We clearly have some great coverage through our referral hospitals, and we've had success in the last couple of years in recruiting more specialists in offering, therefore, a broader range of services and also actually in encouraging more internal referrals. Then we always protect the kind of clinical freedom of our first opinion bets because that is really important. But I know we've worked hard to encourage internal referrals and make interior cells easier. And also, we are a key part of our strategic focus is investing in our clinical facilities and our clinical equipment. And that's not just in our existing first opinion practices, but also in expanding our referral capability and coverage. So, for instance, a good example is in Bristol, we have high crop referrals, which is a well-established, high-quality referral business, providing services to the Southwest of England. We have plans with Gloucestershire Council. We're hoping for approval shortly to relocate that business to a new multidisciplinary hospital, which will be kind of a state-of-the-art facility. And that kind of reflects one opportunity, I guess, for us to invest more in our referral coverage. We see that opportunities as more as internal kind of build and greenfield investment as opposed to buying referral hospitals. Ben, I don't know if there's anything else you want to add to that?

Yes. No, I think that's -- I mean, there's sort of 3 key opportunities out there in referrals. There growing service lines in the existing referral hospitals, which is actually more operational expenditure than capital because we start the MRI machine, we've got the CT. So, you can add other disciplines without actually needing significant capital expenditures, so that remains an opportunity. There's internalizing the work that's within the scope of those existing hospitals. And we're doing that by encouraging our bets and sharing that we are offering the best-in-class service, and that's how we want to attract that work. We don't mandate is Richard says. And then finally, there are opportunities where we don't have a presence, which is more capital expenditure heavy, but there are sort of 3 opportunities really in the referral...

Ben, it's probably worth you talking about bet Oracle, which is quite -- is the new initiative and actually quite interesting.

Yes. It's one part of our referral business, which is a telemedicine veto vet image interpretation specialist e-service, which sort of does 2 things for us. It's great at helping all of our first opinion practices with image interpretation, building relationship between the first practice in the referral hospitals so that we can make sure we're internalizing as much of that work by showing the high quality of service that we offer. But it also is a revenue generator. We offer image interpretation to practice all over the world now by interpreting images and particularly CT and MRI machines, which have become much more affordable now. So around the world, there will be practices that can afford particularly CT machines that don't necessarily have the expertise to interpret the images. And that's where we feel the gap. We have an online portal where anyone can submit those images for interpretation. We report and provide specialist treatment advice. So that's a really exciting [indiscernible] business, which is revenue generating, but also relationship generating, particularly with our own practices.

Fantastic. That's really helpful. Can I just a quick follow-up. I think, Robin, you mentioned the practice acquisitions were at less than 10x in the U.K. How are you seeing -- that feels like it's come off a bit from the highs. Is there less sort of acquisition activity in the U.K. at the moment that's made those multiples drop a little bit? Or is it as competitive as it ever was?

If we host, I think it's as competitive as ever. I think multiples have actually reduced a little bit there because some activity was driving kind of higher multiples driven by probably corporate transactions as opposed to common sense. But certainly, multiples and competition is still kind of strong. And therefore, we are very focused on engaging with privately owned practices that may be considering sale being more proactive in approaching them, looking at opportunities. And if we can differentiate ourselves by our focus on our people, our ability to execute at speed and our integration planning, I think that will position us well for the future.

We'll go to [ Harry Sefton ] at Jefferies.

Yes, I have a few questions, please. So firstly, on the EBITDA margin improvement, I just wanted to get a sense of how much of that was from the recognition of the Healthy Pet Club revenues? Second question, you mentioned the growth in referrals specifically. But also just wanted to get a sense of if you could guide or give us an indication of the relative growth in the small animal practices versus Equine and farm practices. And then also just maybe expanding on the M&A question. Just want to get a sense of the current market dynamics and especially what you're expecting in terms of competition after reported that your largest competitor raised about GBP 3.5 billion of additional capital and whether you're seeing sort of an increase in competition as a result? And then just finally on price increases. I know you mentioned that you'd deferred some of the price increases from last year. Just wanted to get a sense of what you put in, in January.

Yes. So, the HBC deferral, I think there's a pretty high drop-through rate. So, some of that margin improvement will be from recognizing the HPC revenue. However, we recognize revenue as you provide the service. So certainly a margin element to delivering. So, it's not -- it won't all drop through 100%. There will certainly be a margin attributed to the HPC revenue recognition. So, some of the EBITDA margin improvement will be for that. However, what we are seeing is into H2 in the first 2 months, we continue to see strong revenue growth, and we continue to see strong EBITDA margin. So, I'm expecting that to continue for the full year. And Harry, in terms of the split of revenue between the species, we don't share that. But what we can say, I guess, is we are seeing growth across the practice division. And that reflects growth in small animal in Equine and farm. And we are pleased with the performance across all divisions. The referrals is showing the kind of strongest level of growth, and we've given that number. In terms of price increases, I'll come on to that question next. We did apply a small animal price increase from the 1st of January, and that was a net 3%, which is a kind of typical kind of annual price increase we apply albeit this latest price increase was deferred as we've said previously from last July. And that was just because we didn't feel it appropriate to apply that last July, given the cove disruption that we had just been experiencing and the fact that we were just returning to catch up some of those procedures that clients weren't able to access during the height of the first lockdown. And then in terms of market dynamics, I don't actually see the new fundraising by IBC changing the landscape too much in terms of they had significant capital before that the latest fund raise. And I believe the key focus now seems to be in Mainland Europe and expanding in other countries through the former evidential part of their business. But as I said earlier, the market is still competitive. And clearly, we have to be very focused. And that's why we've kind of increased our emphasis on acquisitions and strengthened our team and also revised our approach to the process, which hopefully will stand us in good stead. And through our integrated model and our fully integrated model, we're quite unique in having our own network of laboratories providing diagnostic services. So we should be able to access synergies that others can't access, and that also is an important factor, I think, in terms of our model and the resilience of it.

We'll go to Charles Hall at Peel Hunt.

A few questions. So firstly, on those price increases, having delayed it to January this year, are you going to use that now as your new base? Or might you put through a July increase?

Yes. We will return at some point, the 1st of July, and that makes sense given it's the start of our financial year. still to be made in terms of whether that's this July or whether we have an interim step in maybe kind of September or October this year. But certainly, the intention is to return to annual price increases as soon as possible from the 1st of July because that makes sense for our financial year.

Perfect. And secondly, on acquisitions, can you just give a feel for where you might have competitive advantage in terms of growing your pipeline? Now obviously, you've got your buying group -- but is that the only competitive advantage and it's really about price? Or are there other things that you feel you can offer?

Yes. There are other, I guess, points of access to private owned practices because our laboratories, for instance, provide both desktop analyzer kits to privately owned practices and also offer their diagnostic laboratory services to private and practices. So, we have that relationship as well as the buying group relationship. Probably less relevant, but we also obviously provide crematoria services to privately owned practices as well. So again, there's a point of contact. And actually, possibly, we haven't made enough of those points of contact in the past. And certainly, we kind of recognized the opportunity to use all of our existing contracts to promote our -- well, to position us as kind of attractive buyers of privately owned practices when those practices might come up for sale? And also, our colleagues on the front line, they are probably the best sources for us to know which are the best quality privately owned practices in their areas. And again, we're tapping into that knowledge as well as you would expect, to really kind of try and target the key practices that we would love to buy and to help build relationships in advance. That said, I think when the decision is made to sell, it typically comes down to price, and therefore, we have to be -- we have to recognize that. And clearly, we have to be there or thereabouts some price. But alongside that, if we can commit to executing at speed, again, that should help differentiate us because, yes, I think as a privately owned practice, if the owner has mentally decided they want to sell, but they probably also want to receive the funds as quickly as possible as well. And hopefully, that can be fit... And in terms of though, you -- you've got greater confidence both in the pipeline and your ability to integrate. And I guess, compared to prior to, well, 2017 or so, when it was just a numbers game, it feels much more measured than thought through now.

Yes. Absolutely. And Ben, you might want to comment on the kind of operational review, I guess, of a practice before we decide how much we want to offer indeed whether we do on so.

Yes. I mean I guess the difference compared to 3 or 4 years ago is that our acquisition process is very operations-led. And actually, the sort of factors and features of a practice that we're looking to buy are around what's the clinical work like, what's the team like, what's the facilities like, not what does the P&L look like? And that's very much our focus, getting to know the individuals are we going to be able to give them what they want in CVS. Can we integrate their practice effectively? Can we improve it by joining CBS? So, it's a much more operationally focused process. And we've worked really hard, right, as Richard highlighted in the presentation from the point of our very first discussion with a practice who may or may not be considering selling there are members of the operations team in that discussion and then right through to completion and of course, beyond the sort of central to that process so that our planning begins before well before any sort of implementation about integration. So, it's a really different process than we had a number of years ago.

Great. And last question, Ben, you mentioned refurbishments. Can you just give a feel for average cost of those refurbishments and what benefits you see afterwards?

Yes. So, I mean, it does vary. We have a real range of practices. And we have converted old terrorist houses, more traditional practices like that. We also have some fantastic facilities. So, some of those refurbishments are also relocations and relocations will cost us anywhere around GBP 0.5 million mark-ish on average, but it does really vary according to the size of the facility, clearly. In terms of the benefits, we see a clear benefit of moving a practice into a new facility. Firstly, on recruitment because our clinical team is one of the -- we looked on our vet vacancy, we look closely at what is it that clinical teams are looking for in a role and great facilities is right up at the top of the list. So, we see an immediate improvement in our ability to recruit, which is clearly essential for the performance of the business. but also just by providing great clinical facilities, we can just do better work. So that might be a separate room for dental treatments and dental extras, which means you can then perform dental procedures without blocking up your operating theater for the afternoon. So -- and as well as that, and even more importantly, clinically that's better, we can keep clean and dirty procedures away from each other. So, we see an immediate increase in our ability to do better and more clinical work...

And Charles, because we lease most of our buildings and because we have 5-year break clauses on the vast majority of our leases -- that also means we're challenging ourselves coming up to lease rates, have we got the right facilities? Or actually, are we better relocating to a much better facility more locally? And indeed, we certainly see the benefits from that investment. And we are signaling an increased focus on improving our clinical facilities and our clinical equipment.

And we'll go to Charles Weston at RBC.

Congratulations on the results. I have 3 as well, please. My first one is around margins. As Harry alluded to H1 would seem to have benefited slightly from the high drop-through of HPC revenue but also more structurally, perhaps in lower debt vacancy rates, perhaps increasing numbers of more specialty procedures. And on that latter point, given the growth in those more specialty procedures, is this likely to be a gradual trend of an uplift in margin? And specifically on the margin point also in the near term, it would seem that consensus expects a slightly lower EBITDA in H2 than you achieved in H1. Obviously, the revenue growth rate looks to have picked up with the price increase and perhaps in volume terms as well. So, should we be expecting the higher absolute EBITDA in the second half or lower?

Thanks, Charles. So, in terms of margins, we clearly are constantly focused on trying to improve our margins. And the success we've had in the last couple of years has been through driving like-for-like revenue growth from a focus on high-quality clinical care. And that's more engaging for our vets nurses. And actually, by giving clients choices and firm recommendations, we actually end up with providing a better quality clinical service to the patients, which is clearly important. And that's actually within our first opinion practice, albeit some of that work obviously results in higher specialist work as well. And so, the specialist referral hospitals are also benefiting from that focus as are our labs as well because by doing more diagnostic procedures, -- we're also generating more diagnostic tests for our laboratories to undertake. So, in terms of margins, constant focus, something we're very conscious of and we are committed to clearly trying to improve further. Key to that is employing the best talent in the profession and maintaining our vacancy rates. And I believe we would like to see it reduce over time. As Ben said, constant focus is a number of areas we're doing a number of things we're doing to try and improve that. In terms of EBITDA for the second half, clearly, we won't see the benefit from the -- that we saw in the first half from the HPC deferral. But that said, we remain very confident of our opportunity ahead. And clearly, as a team, we would like to under promise and over deliver and so we will, of course, be kind of slightly cautious in terms of the guidance we see -- but clearly, we've got a great business in a very resilient sector with some good tailwinds behind us. And through our fully integrated model and the focus on our people, we feel very confident about the future.

My second question is actually just touching on that lab business you mentioned, obviously, it performed extremely strongly in the first half. Any metrics you can provide on internal sales versus external sales, perhaps? You also mentioned cover testing there. Just wondered if you can shed a little color on that and perhaps how much runway of strong growth you've got?

Yes, I'd probably comment on that. So, I suppose we don't split and share the internal versus external sales, but we are continuing to focus in our lab division on bringing on new third-party clients. That's a big part of the work that we do, and we certainly see that as an opportunity for growth. Internally, I suppose, in CVS practices, our focus is so clearly on let's do better and better clinical work. And a big part of that is diagnostics. Our lab will continue to benefit above and beyond an average veterinary practice from our focus in that area. So again, we see opportunity to continue to improve clinical care in the better practices, and that will continue to benefit our Laboratory division.

Great. My last question just on CapEx. Just a quick one. Can you guide us to near-term CapEx perhaps for this year total CapEx, but also you talked a lot about refurbishment about the benefits you get. So, can you sort of give us a sense of longer-term CapEx expenditure as well, please?

Yes. So, in terms of maintenance CapEx, we continue to see modest levels being required. And I think in the past few years, we've incurred about GBP 14 million of total CapEx, of which roughly half of that has been maintenance. I guess we do see an opportunity to invest more in investment CapEx. And we've shown that where we improve our facilities, our clinical equipment and our practice facilities, we get the benefits from that, not only in increased engagement with our colleagues. And clearly, it's far easier to recruit and retain talent, where we're offering our colleagues the right facilities and the right environment. But it's also key for our ability to drive further clinical work, whether that's in our first opinion practices or in our referral hospitals. So, we are signaling, I guess, the opportunity to invest more in that area, but we are very confident we will see the returns from that. And so we see that as a kind of sensible investment in further growth. We haven't given kind of forecast of what that investment CapEx might be. I guess with any CapEx program, and we saw that probably in the first half, the process of investing in properties is complex in terms of the various stages you have to go through in terms of design, planning, business case sign-off and then engaging contractors and making sure terms are agreed, et cetera. So, there's inevitably a kind of delay to some of this investment. But that said, we've got -- we've strengthened our property and facility team -- and we see this as a good opportunity for further organic growth in years to come. Very...

And that's the end of questions. Richard, do you have any closing remarks?

Yes. Thanks, Sandy. So yes, so that concludes our presentation. And I would like to thank you all for attending. So in summary, we've had a strong first half, and that momentum has continued for the first 8 months year-to-date. We have favorable market dynamics, and we are clearly well positioned to benefit from these through our fully integrated model and also our focus on our outstanding people. So if you got any further follow-up questions, please approach us directly, and we will respond. But thank you for your time and attention.