CVS Group plc (CVSG) Earnings Call Transcript & Summary

Welcome to this presentation of CVS Group's full year results for the year ended 30th of June 2026. I'm Richard Fairman, CEO, and you will also be hearing from Robin Alfonso, our CFO, and Paul Higgs, our Chief Feshionary Officer. The results we've announced today demonstrate another year of growth and strategic progress. While U.K. companion animal footfall remains softer than we would like, parts of the year, we have a number of initiatives underway to support volume growth and client engagement across all 3 divisions. We continue to invest in technology, facilities and clinical equipment to support organic growth. Although as outlined in our July investor presentation, we expect our capital investment going forward to be lower than in recent years. We successfully refinanced our bank facilities in May, extending them through to 30th of May 2030 on improved terms, and we have a 1-year extension at our discretion. We will continue to focus on capital allocation and look to deploy capital to drive the highest returns. What is considered the most optum use of capital is clearly linked to our prevailing share price. With refinancing in place and our continued subdued share price, we announced a GBP 50 million share buyback in May, which we expect to conclude in the next couple of months. This is following a GBP 20 million share buyback in support of our step-up to the main market, which completed in January. After 5 years of CMA activity in the sector across their initial mergers and subsequent markets work, -- it is great that the CMA process has now concluded, following the publication of their remedies order and fees order on Tuesday. We are broadly comfortable with the remedies and are well advanced in our implementation of them. Revenue increased by 5.9% to GBP 71.8 million, with growth across all 3 divisions. Like-for-like revenue growth improved to 2.1%, reflecting positive momentum across the business despite softer demand in the final quarter as a result of continued weakness in U.K. consumer confidence and the exceptionally hot spells of weather at the end of May and again at the end of June. We saw clients less willing to travel in their cars with their packs in these periods. -- and a number of routine appointments were deferred and some procedures were canceled. We continue to see an impact of this in July, but encouragingly, more recent trading has returned to primals before the impact of these heat waves. Adjusted EBITDA increased by 5.1% to GBP 141.5 million, with margins being maintained, notwithstanding continued inflationary pressures in the financial year. Adjusted earnings per share increased by 6.9% to 85.6, benefiting from both an increase in the adjusted profit before tax and to a lesser extent, a reduction in the weighted average number of shares due to the shares which were canceled following our share buybacks. We further increased our presence in Australia with 6 acquisitions completed in the financial year comprising 14 sites for initial consideration of GBP 43.3 million. We will continue to be selective in our acquisition approach. Leverage increased at the year-end to 1.63x, reflecting these acquisitions and the share buyback programs. We continued our focus on client care and it was pleasing to see our client Net Promoter Score increased further to 80.6% and also pleasing to see an improvement in our employee Net Promoter Score. I am confident in our ability to deliver further growth in shareholder value given the attractive fundamentals of the sector in which we operate and our own positioning within it. The U.K. and Australia veterinary markets remained highly attractive. And despite recent short-term pressures continue to benefit from strong long-term growth drivers. We have scale in the U.K. and increasing scale in Australia with enhanced synergies expected to follow over time. We have a healthy balance sheet and with our continued focus on cash generation, -- and following the successful refinancing in the year, we have capital to deploy. I am very confident in our ability to undertake accretive acquisitions in Australia and the U.K. But as always, we will continue to be selective, and we will only be willing to pay multiples which are attractive with respect to our own multiple. We continue to focus on delivering great client service -- we have strengthened our technology and support, and we have an experienced leadership team. There are a number of compelling market dynamics, which make the veterinary sector attractive and which support long-term growth. The continued humanization of pets sees owners treating them as an integral part of their family. Clients expect the same level of medical support and care for their animals as they themselves enjoy, and they will go the extra mile to care for them and keep them healthy. As a result, owners want to look after animals and are willing to spend on keeping them fit and healthy. The PET populations in the U.K. and Australia have increased post COVID. And whilst the populations were higher at the peak of COVID lockdowns, the pet population in both countries remains higher than it was prior to the pandemic. And as those CoVIpets age, we will naturally see increased demand for our services. Pets are also living longer. And hence, not only is the current pet population larger, the pets under our care will require our veterinary services for a longer period of time. Advances in clinical care are a further key driver -- we are now able to provide better clinical care to animals than we could even 20 years ago. The vessel sector has also proven to have a high degree of resilience through economic cycles. Given the humanization of pets, when animals get ill or injured clients invariably bring them in for treatment and surveys of pet owners consistently reveal that they are willing to spend to look after their pets. These secular dynamics underpin our outlook for long-term market growth. Both the U.K. and Australian markets in which we operate, are large with significant opportunity for further expansion. CVS has scope to grow market share in each market, and we are confident in our ability to make further accretive acquisitions. We entered Australia 3 years ago in July 2023, and we have seen steady growth in the period since, such that Australia, excluding central overheads, now accounts for circa GBP 20 million of group EBITDA. We continue to see a great opportunity to acquire practices that are accretive to the group. We are also focused on driving organic growth in our key markets through a combination of continuing to recruit, retain and develop our teams so that they can provide great care to our clients and their animals. Further developing our product offering. For example, we launched Healthy Pet Club advance on the first of July this year, which provides the same great preventative health benefits as our core product but also gives clients unlimited consultations for an additional monthly fee continuing to improve the client experience and making it easier for clients to engage with us through improved technology and driving increased client engagement and footfall through targeted marketing and CRM activity and maximizing the benefit of our new joint CVS Vets branding. Paul will elaborate on these later. But for now, I will hand over to Robin to provide a more detailed financial update.

Thanks, Richard. I'm pleased to report on a further year of growth in revenue adjusted EBITDA and adjusted earnings per share, alongside further expansion in Australia. Revenue increased by 5.9% to $12.8 million. benefiting from acquisitions made during the current and prior year and an improvement in the year in like-for-like sales with growth of 2.1%. -- our like-for-like sales growth is adjusted for working days and on a constant currency basis. This excludes current year acquisitions and only includes prior year acquisitions from the same month this year as they were acquired in the previous year. As Richard noted earlier, despite softer market conditions due to the impact of extreme weather in the final quarter, Like-for-like sales growth remained positive and improved year-on-year. Adjusted EBITDA increased by 5.1% to GBP 141.5 million benefiting from top line revenue growth and disciplined cost management, which helped us maintain adjusted EBITDA margin at 19.9%. Despite continued inflationary pressures, for example, from increases in the U.K. national minimum wage and national living wage and increased employer national insurance contributions. Adjusted earnings per share increased by 6.9% and to 85.6, benefiting from increased adjusted profit before tax and to a lesser extent, a reduction in the weighted average number of shares in issue due to our share buyback program, which is ongoing. We continue to focus hard on ensuring we have a healthy balance sheet, and I'm delighted to complete a refinancing in the year with committed facilities of GBP 350 million through to May 2030 and continued headroom in the undrawn facilities and financial covenants. We're also able to improve our terms and flexibility through this refinancing and we have the option of an additional 1-year extension to May 2031. This, together with our continued strong operating cash conversion, which was 70.6% in the financial year, means we have a strong base in which to invest. We will continue to focus on capital allocation. And as we explained in our investor presentation in July, we will focus on the most effective use of capital. with a view to our prevailing share price. We continue to invest in Australia with $45.4 million total consideration in the financial year, which includes a small minority interest buyout -- we also invested GBP 36.4 million in capital expenditure. This reflects our continued investment in technology, facilities and clinical equipment and maintenance CapEx of GBP 11.5 million. Whilst maintenance CapEx will remain at a similar, if not slightly higher level for the next few years, I expect our total capital expenditure requirements to reduce freeing up more capital for other purposes. The investments made and the share buyback program resulted in an increase in net bank borrowings to GBP 199.6 million at 30th of June. Leverage increased to 1.63x but remains well within our stated 2x threshold. We've generated positive returns from our investments over the past few years with a return on capital employed consistently in excess of 15%. In the past financial year, we saw group ROE of 16.1%, which was impacted by a combination of like-for-like growth below our 4% to 8% target, increased U.K. employment costs and the dilutive early year impact from acquisitions and CapEx. In our July investor presentation, I'll share further detail on the returns we have made from investments in recent years, which are in excess of our weighted average cost of capital. Typical CapEx investment generates an IRR of 15% and pays back within 7 years and delivers a ROCE within 3 to 5 years of up to 15%. Similarly, for acquisitions, we see good returns with ROCE approaching 19%. And Revenue increased across all 3 of our divisions, and I will share further details on the divisional split shortly. It was pleasing to see further growth in Australia, which continues to perform in line with expectations. It was also pleasing to see the return to like-for-like growth across the group. Our Australian operations generated revenue of GBP 79.1 million in the year, representing just over 11% and the group revenue. It was pleasing to see a further increase in adjusted EBITDA in the past year, notwithstanding the weaker economic backdrop and the continued inflationary pressures, which I mentioned earlier. We continue to target cost efficiencies. For example, we retendered our major drug contracts in the year, generating improved terms and margins and the improvements we are making in our technology should also support with this. As set out in our annual report, since 2019, revenue has grown at a compound annual rate of 8.4% and EBITDA at 14.6%. The -- our veterinary practices division, which is our largest by far, comprises our companion animal, referrals, farm animal and equine veterinary practices as well as our buying groups and bet direct. This division delivered 5.2% growth in revenue, benefiting from like-for-like revenue and acquisitions. While this division experienced the greatest impact from the economic backdrop and extreme weather conditions. Demand for reactive care remained robust and underlying market fundamentals continue to be attractive. Adjusted EBITDA increased by 4.3% and AGain, this division is most impacted by higher wage inflation and increased employer national insurance contributions. Our laboratories division in the U.K. comprises 2 reference laboratories, Acxiom and fin pathologists and our desktop analyzer business, which provides analyzers in practice to allow in-house testing for which we supply the reagents for the tests. Revenue in this division increased by 11.5% to GBP 35 million due to continued strong demand. We have successfully increased the number of third-party practices we support in the year. This division benefits from the continued strong demand we are seeing in practices for reactive care where animals get ill or injured. Clients invariably wish to spend on getting them better -- and clearly, the majority of laboratory testing is undertaken in support of ill or injured animals. Adjusted EBITDA increased by 25.6% in this division, reflecting this revenue growth combined with good operating leverage. Our Online Retail business saw revenue growth of 11.1%, following the launch of a new website in the previous year, improved client service and functionality through subscriber gay, gas checkout, new payment options and more recently, next-day delivery alongside increased marketing spend. It was pleasing to see growth in adjusted EBITDA for the year as a whole. This improvement was entirely in the second half of the year following the new features being launched. Central administration costs increased in the year due to an increase in the accrual for noncash share-based payments and our stated net of our recognition of research and development expenditure credits of GBP 15.7 million. I'm pleased to report a return to growth in adjusted earnings per share, which increased by 5.5 patents to 856p. This increase reflects the increase in adjusted EBITDA and and the normalization and depreciation to circa 6% of revenue following a step-up in CapEx in recent years. And I expect CapEx to be GBP 30 million per annum. The effective tax rate on adjusted earnings per share was 27.5%, reflecting some disallowable expenditure and the U.K. rate of 25% and and the Australia rate of 30%. Free cash flow of GBP 69.2 million was generated in the year, a decrease of 4.2% and with adjusted EBITDA growth offset by adverse working capital movements, mainly from changes in buying relationships in the year, which whilst generating cost savings, resulted in a slight adverse working capital movement. There was also an impact from timing of research and development expenditure receipts. Operating cash conversion remained above our 70% target of 70.6% for the financial year. And it's important to note that included in this is our maintenance CapEx of GBP 11.5 million. We have a healthy balance sheet with GBP 350 million of debt facility and headroom within our leverage target ceiling and therefore, capital available to support our investment opportunities. Maintaining this healthy balance sheet is our first capital allocation priority and the continued focus on operating cash generation and the refinancing I mentioned earlier, are both important in this regard. Under our capital allocation framework, which has not changed, we then have a number of options to deploy capital to generate increased value for shareholders and other stakeholders. We recognize that ordinary dividends are an important component of shareholder returns. We've maintained a progressive dividend policy, under which we are recommending the payment of a final dividend of 9p per share in respect to the financial year just gone. Our remaining capital is then directed to whichever option generates the highest risk-adjusted return over the longer term. The 3 main options. First of which is an attractive pipeline of accretive acquisition opportunities with our focus in the past 3 years in Australia. We are also looking at opportunities for accretive U.K. acquisitions, and I'm delighted that we have signed contracts for the acquisition of a large practice in the U.K., which we expect to complete in the coming weeks. We anticipate investing GBP 50 million per annum in acquisitions, but we will retain flexibility to make additional attractive acquisition opportunities where the opportunity presents. We have capital investment opportunities to invest in organic growth. Please note, essential maintenance CapEx is included within our 70%-plus operating cash conversion. We continue to adopt a disciplined approach to this investment, which is aimed at delivering accretive shareholder returns significantly in excess of the company's cost of capital. Our investment is focused on driving increased revenue and enhanced margins through improved clinical facilities and equipment, enhanced client experience and loyalty through new technology and improved employee engagement and retention. Having increased capital expenditure in recent years, we expect a reduction in the coming years with total investment, including maintenance CapEx and expected to be GBP 30 million per annum. Each investment will be assessed against our criteria and other uses of capital. Any capital deemed surplus to our requirements may be returned to shareholders including in situations where return to shareholders is the most accretive of the 3 options. We completed a GBP 20 million share buyback in the financial year in support of our step up to the main market in January. And in May, we announced a GBP 50 million share buyback program, which is ongoing and which we expect to complete in the next couple of months. We recognize different shareholder appetite for leverage but we continue to believe leverage should be maintained at no more than 2x bank debt to EBITDA. However, if additional attractive acquisitions arise, we would consider temporarily increasing leverage above 2x and provided there is a clear runway to return to below 2x leverage. I will now hand over to Paul to discuss some of our key growth drivers.

Thank you, Robin. We continue to see good opportunities for accretive growth through acquisitions in the U.K. and Australia. Both markets are large and we have a circa 9% share of practices in the U.K. and circa 2% share in Australia, which should give plenty of opportunity for further acquisitions. This slide provides a recap on the Australia market, which has approximately 3,600 paces of which some 1,400 are companion animal practices in large metropolitan areas. Of these, about 1,100 remain in private ownership and hence, will potentially come up for sale in the future. of these, we expect around 40% to meet our current acquisition criteria, albeit that can evolve as we gain more scale. Where we have made offers on similar practices to date, we've achieved a 50% win rate. And hence, we have a significant opportunity for further scale. Accordingly, Australia has the potential to become a significant component of the group. Coupled with this, we are confident in our ability to make accretive U.K. acquisitions -- and as Richard mentioned, attractive U.K. M&A opportunities are starting to materialize as expected. And we've exchanged contracts on a practice in the U.K. for GBP 15 million consideration and at an accretive multiple I'm pleased that we have a growing pipeline of additional opportunities. Multiples we've paid in Australia are typically 6x EBITDA. Given we generate greater synergies in the U.K. we can afford slightly higher multiples, but they will remain lower than our implied group multiple. In all acquisitions, we will take care to ensure that we gain CMA or ACCC approval where appropriate. A key element in support of our inorganic growth is in ensuring we continue to develop our product offering so that it remains compelling to our clients. With this in mind, we launched our new healthy pet Club advanced offer on the first of July, having successfully trialed this across a number of our practices in the past financial year. This builds on our existing core HPC preventative health care scheme, which provides 6 monthly checkups with a vet or as regulatory and worming treatments and where appropriate and additional discounts on veterinary fees and drugs. However, for an additional monthly fee, HPC Advanced customers also have access to unlimited consultations. And feedback from our clinical teams and clients is that removing that one-off cost of a consultation is likely to result in clients bringing their pets sooner where they have concerns and leading to better patient outcomes and client relationships. We're encouraged that around 14,500 clients have already joined HPC Advanced since launch, and we introduced a new online sign-up journey for clients to access this in July, whilst our overall HPC membership has reduced slightly over the last year, we continue to see a steady increase in HPC revenues with total revenue of GBP 95.5 million in the financial year to June from HPC membership fees. In addition, these members will be incurring additional amounts in caring for their animals through fees and medicines, whether animals need reactive care. Another key driver of our organic growth is our focus on improving the client experience, making it easier for clients to engage with us and building long-term trusted relationships. We already have foundations in place through the technology investments and developments that we have made in the past few years, including our common cloud-based practice management systems, which has open APIs, allowing us to add additional bolt-on capability. We have a number of enhanced client experience features, which are either fully live or on trial, such as online booking, HPC, digital sign-up an AI scribe tool for enhanced consultations and 2-way client conversations via SMS. We're developing additional features to drive further improvements in the client experience and improved efficiency, which should, in turn, lead to increased operating margins. And these include a client logged-in state for self-serve, further enhancements to the digital client journey, an extension of 2-way client conversations to include WhatsApp and MMS and improved resource and rostering. Ultimately, we see an opportunity for a digital app, which will allow clients to manage their pets' health in conjunction with CVS. In support of this, we are also strengthening our executive team through the imminent recruitment of a Chief Client Officer. And we now have consistent joint branding of our U.K. companion animal practices with a local practice name being used alongside CVSes. This joint branding brings new opportunities for the use of more central marketing and CRM activity as well as meeting the requirements under the CMA remedies. And like me, our vets are pleased to see the conclusion of the CMA investigation, and we are fully prepared to deliver these requirements. The establishment of the national CVS Bets joint brand can help enhance our client awareness and to drive footfall back into practice through targeted CRM campaigns. We're now able to undertake national marketing campaigns in support of the activity, which we continue to do locally in. We have a rich data set within our common practice management system and we can now target selected clients with specific breeds and pet ages to support them to seek care for common issues. This positions us to generate increasingly effective returns from marketing and CRM activity, while building on our established reputation as a trusted provider. And CVS should, can and does stand for care value and service. And as Chief Etne Officer, I'm immensely proud of our clinical and support colleagues and the care and value we provide to our clients and their animals. Through improving our clients' access to our services through digital enhancements and making it easier for them to engage with us, we will drive increased footfall, further enhance our client loyalty and position CVS as the leading veterinary group in the markets in which we operate. I am confident in the opportunities this focus will bring and look forward to sharing further details on these developments in due course. For now, I'll hand back to Richard for some closing remarks.

Thank you, Paul. We operate in a large and attractive veterinary market, which has strong fundamentals, and we have a clear strategy for growth. Within the U.K. and Australia, we have opportunities for accretive acquisitions. We have completed 2 acquisitions in the new financial year to date in Australia, comprising 4 sites -- and we have signed contracts on a further 2 acquisitions in Australia, a 3-site practice in South Australia and a signal site practice in Western Australia. We have also signed contracts the acquisition of a 2-site 9 vet FTE practice in the U.K. at an attractive EBITDA multiple that is accretive to the group. We have a healthy balance sheet clear and consistent capital allocation framework, and we'll continue to be disciplined in our approach to generate long-term shareholder returns. We have an experienced management team and are strengthening further through the imminent appointment of a Chief Client Officer. We have seen a solid start to the new financial year and expect to perform in line with market expectations. -- and we remain confident in our ability to deliver further sustained growth in shareholder value. The financial results announced today and our future growth reflect the continued dedication and professionalism of all CVS colleagues. I would like to take this opportunity to thank them for all their commitment to providing great care, value and service to our clients and their animals. And I look forward to further successful growth of the group in 2027 and beyond. Thank you. -- thank you to the management team for the presentation. We are now going to start the question-and-answer session. Just as a reminder, if you would like to ask a question, please type into the Q&A box situated on the right-hand side of the screen. I will now hand over to Charlotte.

Carlos, I think you meant to meet yourself. Thank you, Robin. The price fell following what looked like a fairly solid set of results. Was there anything in the market's reaction that surprised you?

I guess the surprise was the reaction. As you say, the results were solid. Most of the key numbers were preannounced in July, the reaction confused our brokers and also the analysts that published positive notes off the back of those results. There was 1 erroneous article that was published first thing on the results day that was removed and corrected a couple of hours later. That's the only obvious reason for the reaction we saw in the day.

And do you think now the CMA investigation is behind us, investors will start looking more of the fundamentals of the sector.

I hope so because the fundamentals remain very strong. And we have a great opportunity within the sector to deliver further growth. We are now through the CMA process, which is pleasing. We are back to acquiring good quality practices in the U.K. as well as the growth opportunities that we see continuing in Australia. And like-for-like growth obviously improved in the year as well over the previous year. So the fundamentals and the outlook, I think, are much more positive.

Thank you, Richard. Where does the next level of growth come from CVS? Is it organic by putting up prices seeing more animals or M&A through practices and acquisitions in Australia and the U.K.

Again, I'll pick that up. The growth is both inorganic growth through further acquisitions. We have been selective in our approach, as you know, and we will continue to be selective. But we do have accretive acquisition opportunities, a strong pipeline of opportunities in Australia that will be accretive to the group. And we just recently announced our first signed acquisition yet to be completed, but signed acquisition in the U.K. for an accretive multiple. And then organic growth will come from a combination of price and future volume. That volume clearly will naturally come as the COVID cohort of animals age but it will also come from the continued focus of providing great care value and service to our clients. It was great to see the client Net Promoter Score further improved last year, which reflects that when clients do bring their animals in for treatment, they really value the service and the care they receive. Like-for-like growth is currently not within the 4% to 8% target range -- now the CMA is behind us and also the weather comps.

Can we expect a significant improvement? And will there be any benefit from the COVID cohort hitting their higher spend years?

Robin, do you want to pick that up?

Yes, I can do. I think clearly, we said we are confident of getting back to 4% to 8% like-for-like performance. We're not there yet. Clearly, there are some macro factors impacting, particularly at current cost of living. We have a number of actions that we're looking at to drive volume into our practices, some of which Paul talked about in terms of speaking to our existing clients, a reminder of the value of visiting a practice, being visible online. And also, we've recently launched our new product, healthy pet club advances. In terms of the COVID cohort, I think as animals age variable, they will need increased vessel care. However, there are different species within those species there are different breeds, there are different sizes, and they were all age at a different pace. So our expectation is that we will see a gradual improvement in performance over time. What we caution is we probably won't see a step up in any 1 given year. So we do expect some tailwinds from the COVID cohort -- and we're probably not quite there yet.

Thanks, Robin. Do you believe CBS' organic performance compares to the industry as a whole or are we performing better or worse?

We think we're performing in line and there were various data points we have. The -- the lab business we operate provides its services to many independent practices as well as CDS practices. And it's roughly 50-50 of the revenue we receive from third parties, and they are performing in line with us. We're seeing similar lab growth across the 2 businesses. We talked to many practice owners, independent practice owners. We support a number of independent practice owners, not just from our laboratories, but also the buying groups we offer, where they can access some of our scale purchasing power. And they see very similar trends. We also monitor and talk to other corporate groups, and everyone in the U.K. is seeing a similar pattern of continued resilient demand for the reactive care. But weaker demand for preventative care and clients either coming in less often or delaying vaccinations for longer periods?

Thanks, Richard. Paul, can you let us know what you're seeing in the consulting room where it comes to new puppy kits and visit trends?