EBOS Group Limited (EBO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the EBOS Group Limited First Half FY '20 Interim Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, the 20th February 2020. I would now like to hand the conference over to your first speaker today, Mr. John Cullity, CEO, EBOS Group. Please go ahead, John.

Thank you, Reth. And welcome, everyone to the presentation of our first half results for FY 2020. I'm joined this morning by Shaun Hughes, our CFO. The first half has seen a very significant uplift in both our revenues and profits, and we are very pleased to deliver financial results that indicate the group's long-standing strategy of investing for growth and focusing on cash flow to deliver strong returns for our shareholders. I should point out that our reported numbers today incorporate the new accounting standard on leases, which does result in a higher reported EBITDA, but a lower NPAT. For the purpose of this presentation, I will focus on our underlying performance. So for the half, we had a 25% increase in revenues to $4.4 billion, a 13% increase in EBITDA to $149 million and a near 16% increase in underlying NPAT to $84.2 million. The increase in underlying earnings per share was just over 9% and reflects the enlarged capital base of the group following our May 2019 capital raising. Our ROCE continues to be very strong at 15.9%, which is consistent with what we reported last financial year. There were many highlights for the half, as one would expect with a 25% lift in revenues. But at an overall level, we had both our Healthcare and Animal Care segments perform very strongly. Our Australian wholesale business, as expected, had a substantial uplift in volumes and revenue on the back of commencing the exclusive wholesale pharmaceutical contract with the Chemist Warehouse Group. The performance of our Community Pharmacy business demonstrates the leading position that it occupies in the market and further justifies our long-term strategy of continuing to invest in our distribution network with high levels of automation. We also saw the TWC business record very impressive growing with 16 new stores added and network store sales growth of 5.7%. In October last year, we announced our entry into the $8 billion medical devices sector with the acquisition of LMT National Surgical. While we have only owned this business for a short period of time, it is performing in line with our expectations, and we are very confident of building a significant business in this market through both organic and inorganic growth. Our Institutional Healthcare business continues to benefit from strong revenue growth, particularly from the distribution of specialty medicines into the Australian hospital market. Our Contract Logistics business is also now benefiting from the opening of our new facility in Sydney and continued on its strong second half performance from last year. And finally, our Animal Care business also recorded a strong performance in the first half with revenue and EBITDA growth of 9.5% and 6%, respectively. So all in all, we again saw the benefits of the diversified nature of the group with most business units recording solid performances. This slide provides more details on our financial performance for the half at both the reported and underlying levels. So just to recount, revenue is up 25% and underlying EBITDA up 13%, with Healthcare reporting a 16% lift in EBITDA and Animal Care EBITDA rising by just under 6%. We also had a solid cash performance, which Shaun will talk to later, and our balance sheet is very strong with net debt to EBITDA at 1.4x. Turning now to the individual segments. And within Healthcare, we recorded a 26% increase in revenue and a 16% increase in underlying EBITDA. The Australian business had a particularly strong performance with its wholesale TerryWhite Chemmart, Institutional Healthcare and Contract Logistics businesses all performing strongly. Underlying EBITDA growth in Australia was up $20.3 million or just over 22%. In New Zealand, we had a more subdued performance with profits negatively impacted by a softer performance within our Consumer Products business, which I'll expand on later in the presentation. EBITDA was below last year by just under $2 million or 8.7% in New Zealand. Moving now to the specific components of Healthcare and within Community Pharmacy. This channel recorded a 35% increase in revenues and a 16% increase in gross operating revenue. Our wholesale business was able to successfully execute the onboarding of the Chemist Warehouse volumes from the first of July 2019 in a seamless manner, with excellent service levels being achieved for all of our loyal customers. The result today really reflects years of investment in automating our distribution facilities, which have created both the capacity and efficiency for our business to operate at these significantly higher levels. While we benefited from the commencement of the Chemist Warehouse contract, we also saw growth in our existing customer base, and particularly, the performance of our TWC business was very pleasing. You will notice the decline in our core margin, which is really a reflection of the substantial change in the sales mix for the pharmacy business upon servicing the Chemist Warehouse contract. As most of you would appreciate, we are servicing CW's pharmaceutical volumes and not their FMCG volumes. Sales of FMCG are undertaking -- undertaken at higher gross margins than for our ethical products. To TerryWhite Chemmart. It was a highlight of the result that we have been able to reignite the growth in TWC. We added a net 16 stores to the network, which is far greater than achieved in prior periods. Importantly, the TWC network partner stores' trading performance was also strong with prescription sales growing by 5.3% on a like-for-like basis. TWC has implemented a number of initiatives over the last 12 months, and these are now starting to gain real traction in the market. The that's real chemistry advertising campaign and strategic alliances with Qantas Frequent Flyer, Bupa and Afterpay are all resonating with TWC's customer base. We have a goal to take the network to more than 400 stores. And based on these results, we are confident that we can achieve that target. Our Institutional Healthcare business was once again led by strong performance from our hospital business, recording sales growth in the high single digits. Sales growth in this business is above historical norms due to the increased sales of specialty medicines, and we saw this trend last year, and it has continued into the first half of FY '20. While relatively immaterial to the first half's results, we have included our recently acquired device business, LMT National Surgical within this division. And as stated earlier, it's off to a good start. Contract Logistics. It's very pleasing to be able to report the growth we continue to generate in our Contract Logistics business. We are generating growth in both New Zealand and Australia. However, our performance in Australia is ahead of expectations. The market has responded to the new facility we built in Sydney, and we've been able to continue to -- continue the growth in this business, which really kick-started in the second half of FY '19. We have only in the last month, moved the Australian business onto the SAP platform, so that we now have a truly integrated ANZ Contract Logistics business. Our Consumer Products business performed below expectations and was negatively impacted by 2 main factors. Firstly, we saw a decline in export sales revenue from the daigou channel in the second half of FY '19, and unfortunately, that continued into this first half. Secondly, we incurred larger-than-expected costs upon transitioning the supply chain of this business to a new facility in Auckland. This investment was undertaken to support the long-term growth of the business, and we will be looking for a stronger second half performance from our Consumer Products business. However, the combination of both those factors resulted in a decline in gross operating revenue and EBITDA compared to the prior period. If I now move to the Animal Care segment, which continues to record strong growth from both our branded products and our vet wholesaling business. Aggregate revenue growth for the segment was 9.5%, and EBITDA growth was just under 6%. Both Black Hawk and Vitapet recorded solid growth rates and our Lyppard vet wholesaling business also contributed to the positive results. Black Hawk's revenue growth for the half was an impressive -- at just under 10%, and it continues to hold the premium-brand position within its category. Our Vitapet business also had a very strong first half with revenue growth of just under 15%, benefiting from increased ranging of its treats products within the Woolworth stores. I'll now hand over to Shaun Hughes to cover the financial performance for the half year.

Thanks, John. Our statutory cash flow from operations for the first half was $74.2 million, inclusive of the impact of the changes in treatment of leases under the IFRS 16 lease accounting standard. The impact of this was to increase operating cash flow by $15.5 million, with the offset being in repayment of lease liabilities as required under the standard. Capital expenditure for the period was $13.7 million and primarily comprised the spend on our new purpose-built warehouse and manufacturing facility for the Consumer Products business, IT spend associated with continuing to modernize IT platforms across the group and other smaller projects. We also spent $30.3 million on acquisitions in the half, including the cash payment for LMT and earn-outs associated with its prior-period purchases. Moving to working capital. Working capital remains a key focus for the group with our cash conversion days at 16 as at December 2019. Net working capital days have improved on FY '19, and reflect an increase in debtors in line with revenue growth in Healthcare of 26% and Animal Care of 9.5%, a small $5.2 million increase in inventory from June 2019 with December 2019 inventory now at $728.7 million and inventory days reducing in line with the commencement of Chemist Warehouse Group trade. Creditor days have also reduced in line with the decline in inventory days. ROCE for the period remains ahead of our 15% return on capital employed target, and is consistent with June 2019 at 15.9%. Net debt for the group was $392 million, and as at December, our net debt to EBITDA ratio was 1.41x consistent with June 2019. We continue to assess a number of strategic acquisition opportunities, and we estimate we currently have between $300 million and $350 million of headroom for future acquisitions within our target gearing range. Importantly, we have agreed with our banks to adopt a frozen gap approach with respect to the new IFRS 16 lease accounting standard. We will, therefore, continue to report our net debt to EBITDA on a pre-IFRS basis. From a capital management perspective, there has been no change to our approach or thinking in providing the right balance between increased returns to shareholders via dividends and our focus on using our balance sheet strength to pursue value-added M&A opportunities. As at December 2019, the weighted average maturity of our combined facilities is 1.9 years, with actions currently underway to extend the term of some of our existing facilities. Turning to EPS and dividends. Underlying EPS for the half is AUD 0.522 per share. Growth upon the first half of F '19 of 9.1%. The board have declared a final dividend of NZD 0.375. This will be imputed to 25% and fully franked for Australian resident shareholders. Our final dividend payout ratio will be 70.2%, excluding the impact of the dividend reinvestment plan. The group's DRP will be in operation for the upcoming interim dividend and shareholders can elect to take shares in lieu of a cash dividend at a discount of 2.5% to the volume weighted average share price. I'll now hand you back to John.

Thank you, Shaun. So in conclusion, if you look at our outlook for FY '20, and I'll basically just read this slide. So trading for the first half of FY '20 was in line with our internal expectations. And we reconfirmed the group is confident of a significant increase in earnings in the current financial year. We have not seen any significant impact to the group as a result of the coronavirus. However, we continue to closely monitor this issue and will take all necessary actions to ensure that we are well placed to respond to any challenges that arise as the situation unfolds. So with that, I'll conclude the formal part of the presentation and would be happy to take any questions. So if, Reth, you could coordinate the questions, please.

[Operator Instructions] And our first question comes from the line of Andrew Goodsall from MST Marquee.

Just looking at the margins for the Australian health business and just -- obviously they fell with the Chemist Warehouse contract, just to understand -- trying to understand sort of whether that's a go-forward margin or whether you're running, I guess, higher cost just at this early stage of the transition and sort of where that margin might be heading in trajectory.

Yes, Andrew. Thank you. So within that margin for the Healthcare business. So it's -- there's a lot of variables floating around within that. So of course, there's a sales mix from taking on the CW business. There's also a mix impact coming from hospitals, our lower-margin hospital business. Contract Logistics, which is basically a cost-plus type model. That's had an impact on the margin as well as our Consumer Products business. So I intimated it in the call there that we had a more subdued performance with Consumer Products, and that impacted also on the Australian business. We've also experienced some cost increases like items like rent, insurances. Within that, Healthcare margins also got increased advertising from the TWC business, so we've reinvested into the TWC business to basically reignite that. And that's also coming through on that margin line. So it's a bit hard at this point in time, Andrew, I think after the -- just the first half because of the number of variables in there to say what do we expect it to sort of come out at the full year. But really, I would expect for the full year, that number is probably as good an indication as any of what we'd see at the -- what we report at the half is what we'll see at the full year.

Okay. Great. And I guess it's probably the prospect of getting those costs down is probably FY '21 story or beyond.

Yes. And this is also -- Andrew, while we touch on it, this is also -- we operate in a price-deflationary environment, and this is why the negotiation of the 7th Community Pharmacy Agreement is very important to -- not just us but the whole industry, all right? Because the cost increases keep coming through. And we need -- you basically need that funding to offset it, right, to a large extent.

It's probably a segue, I was just going to probably just ask around that, just in terms of outlook. I know that's sort of a work in progress. So maybe there's no real update, but the second part of that was just around Chemist Warehouse and Pfizer, both exiting DHL now, just whether you sort of see any upside, particularly around market share, is Pfizer drugs coming back to you?

Well, we need to -- yes. I think -- well, if I deal with the 7th CPA, and there's no real update from our side on that. Negotiations continue, as you know, and they're continuing with the guild and the department. But we're hopeful for a positive outcome there. We've been given a good hearing by the department. And I think they and the minister, I think they very well understand the justification for our position on that. In respect of Pfizer, that's very pleasing, also, I should say, Upjohn coming back into the market, just like AstraZeneca and also Amgen coming back to the wholesale channel. That's very pleasing, not just for us but for all the wholesalers, it's an endorsement from a wholesale model that we have in Australia as being the most efficient way for not only the delivery of medicines, but also for the community to access the medicines. So we would expect to capture just our normal share in terms of those volumes. The Pfizer volumes really, though, as you know, the CSOs are fixed pool so it's just -- the additional units are just spread amongst the fixed pool, so it's marginally profitable, put it that way.

And your next question from Chelsea Leadbetter from Forsyth Barr.

I guess kind of following on the margin sort of thought process and discussion, kind of interested in your comments around Animal Care margin trend during the half and also New Zealand Healthcare to kind of round out the discussion because interesting, I guess, you're seeing potentially some cost pressure across both of those areas as well.

Well, see the Animal Care margin's relatively pretty stable. What you see there, though, is more of a mix issue. Well, it's not so much an issue, but it's a mix equation, right? So we had a better performance this half from our Lyppard business. So you might recall, last year, we had a subdued performance from Lyppard because it lost a key supplier, being Zoetis, and this half, pleasingly, that business has rebounded in terms of its profitability, but its business has a lower margin than the branded business. So really, that's just mix there in Animal Care, right? And then I think your other question was on -- in Consumer Products, and I think we've spoken about the cost...

Sorry, it was New Zealand Healthcare.

Yes. New Zealand Healthcare, right. So in New Zealand Healthcare, Chelsea, that was really impacted by the Consumer Products business, the margin there, right? So 2 aspects, one is we had declining volumes on the daigou channel and in international sales from the Red Seal product, particularly into the Chinese market, right? And that's a relatively healthy margin for us, those products. And we also rationalized the supply chain for that particular business. So we used to distribute those products in New Zealand out of about 5 warehouses. And on the 1st of July, we brought that into one warehouse. And there were just additional labor costs, freight costs, et cetera, to go through that exercise. So we hope we're over the worst of that as we come into the second half, but that certainly had the biggest impact on margin in New Zealand Healthcare.

Got you. And I guess just stepping back, obviously a lot going on this result with respect to new customers, et cetera. Can you give us any indication around what you see as sort of the like-for-like underlying growth rate maybe, and EBITDA level? Or if you can, extending that down to what the Community Pharmacy result would have looked like, like-for-like?

We can't really provide that information. Chelsea, it's pretty difficult anyway to -- if we could get it -- but that's pretty very commercial, in confidence, really. I mean the business comprises what it is today, inclusive of the CW volumes. That's a long-term contract we've got so that is the business. But as you know, also, we have a shared infrastructure. So the cost base is shared across the total business, right, for that distribution. So it's not that readily achievable to split out, say, EBITDA growth rates between pre-CW and post-CW.

Okay. But I guess just from a guidance perspective, CW and everything is going as you thought into plan. There's been nothing to change your indications to the market around impact for FY '20?

No, we're very pleased with the performance of really all our business units. Really the only part that was more subdued was the Consumer Products. So we're comfortable with the service levels we're providing all our customers, CW, TWC. We're getting good growth, as I said, in that hospital channel. Contract Logistics, we're getting good growth in. And Animal Care is performing very strongly. So the business is in very good shape.

And your next question comes from Tom Godfrey from UBS.

Just firstly, if I can follow on from Chelsea's question just around the Chemist Warehouse contract and how that tracked in the first half. Is it still roughly in line in terms of the sales contribution with the original guidance you gave us of $1 billion? And is there any seasonality in that contract?

It is still in line, Tom, with that. And if there's going to be seasonality, I suppose that's still to come because we've only done 6 months. So we probably have to have a better indication of that after we've done 12 months trading with them. But typically, December -- the December month is a strong month across the whole business. And that's what we saw, not just from, say, CW, but from all our business. So -- but typically, the business runs maybe 51%-49% first half, second half, around that level.

All right. That's very helpful. Maybe just one on the Consumer Products business, just interested in what you're seeing across January and February in terms of particularly the daigou channel, just given potential coronavirus impacts.

Yes. Well, that's -- it's probably too early to tell on that, Tom. What we do know is that the Red Seal business in China, like the sales within China, are still quite strong for us. So we're very positive on it. In the long term, we just had this -- we're not the only business that has been impacted by the daigou channel drop off. But like in market, if you call it in-market sales, they're still quite strong from our online distributors and our off-line distributors in China. Then the impact of the coronavirus on that, but we just have to wait and see. It's probably too early to tell on that to be truthful. But we're not expecting a significant impact. And we think that if there is an impact, the balance of the group and the performance of the overall group will be able to probably take up any sort of subduedness in that particular channel.

Okay. Got it. And just in terms of the 5.7% network sales figure for the TWC, is that a like-for-like sales number? Or is that the just going to store all that...

No, that's not like-for-like. Prescription sales like-for-like is 5.3% and total like-for-like sales is about 3.5%, right?

I'm sorry, I didn't mean to cut you off. Just in terms of how that translates through to your wholesale sales into that business. Is it fair to sort of assume around the 3.5%?

I think that's probably as good as indication as any.

In terms of like-for-like? Yes, okay.

Yes. That's as good as indication as any. There -- for what we see in the market, Tom, that's a strong performance from TWC, very strong performance.

And your next question comes from Stephen Ridgewell from Craigs.

Just in terms of the EBITDA growth -- underlying EBITDA growth in the first half, actually, very strong. Could you give us a rough split of how much of it was organic and how much was, say, acquisition?

It's basically all -- call it all organic. There's very little contribution there from the acquisition of LMT National Surgical. If there was a material or a significant contribution, we would have called it out, but it's basically all organic.