EBOS Group Limited (EBO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the EBOS Group Limited First Half FY '22 Interim Results Conference Call. [Operator Instructions] I must advise you that today's conference is being recorded today, the 16th of February 2022. I would now like to hand the conference over to your first speaker today, Mr. John Cullity, CEO, EBOS Group. Please go ahead, John.

Welcome, everyone, to EBOS Group's half year 2022 results presentation. My name is John Cullity, CEO of EBOS Group, and I'm joined this morning by Leonard Hansen, our CFO, and Martin Krauskopf, our GM for Investor Relations. I'm very pleased to report that EBOS' strong performance has continued with another record result, driven by both our Healthcare and Animal Care segments. Key highlights of the half year's results include double-digit revenue growth, strong EPS growth of 15.2%, significant investments on acquisitions and into our operational infrastructure which position the group for future growth, maintaining our strong balance sheet and increasing dividends to shareholders. Before we go through this morning's presentation, I should point out the following. The results are expressed in Australian dollars, unless otherwise noted. The presentation refers to both statutory and underlying results. The underlying results exclude $7.8 million of one-off costs related to the significant M&A activity undertaken during the period. The commentary this morning is predominantly based on our underlying results, and we have included in the appendix a reconciliation between reported and underlying. The key financial headlines of our half year results are revenue increased 12.8% to just under $5.3 billion, underlying EBIT increased 14.4% to $169 million and underlying NPAT increased by 15.8% to $109 million. In light of the groups performance, the Board has declared an interim dividend of NZD 0.47, representing an increase of 10.6% and that dividend will be paid on all the new shares issued in December and January as part of the placement and retail offer. The group's double-digit earnings growth was driven by strong performances from both the Healthcare and Animal Care segments. This again demonstrates the benefits of our diversified portfolio of market-leading businesses and our strategy of investing for growth. Our Healthcare segment increased underlying EBIT by 17%, driven by our Community Pharmacy, TerryWhite Chemmart, Institutional Healthcare and Contract Logistics businesses. Key highlights of this performance were particularly strong Community Pharmacy growth driven by customer and market share growth and the return of Pfizer products to the wholesale channel. TWC's network of stores grew by 16. Since completion of the half year, we have added further stores and total network currently sits at 483, making it one of the largest Community Pharmacy networks in Australia. And our Institutional Healthcare division continues its really strong performance, driven by growth within our hospital and medical consumables businesses, as well as organic and inorganic growth in Medical Devices distribution. Our Animal Care segment continued its outstanding growth trajectory, increasing EBIT by 14.9% for the half. Our key brands, Black Hawk and Vitapet as well as our Australian vet wholesaling business, Lyppard, continued to capitalize on strong pet market conditions and each recorded robust sales growth. Construction of our new state-of-the-art pet food manufacturing facility in Parkes, New South Wales has now been completed, and we are now in the commissioning phase of that facility. This facility provides us with many benefits, principally the self-manufacturing of Black Hawk as well as opening many new product development opportunities. At the group level, we recorded an excellent cash flow result, a record return on capital employed, and we've maintained our strong balance sheet. Leonard will take you through each of these points later in the presentation. You can see from this graph that the growth across the group was very broad-based, and what's particularly pleasing is the double-digit GOR and EBIT growth across each of our principal divisions. Consistent with our strategy of investing for growth, the first half was a very active period with 3 new bolt-on acquisitions, including Pioneer Medical, Sentry Medical and MD Solutions, all of which strengthened our positions in medical consumables and medical devices distribution. In addition, in December, we announced that we had reached agreement to acquire LifeHealthcare, and I'll make some further comments on progress with that deal on the next page. In aggregate, these 4 businesses will add over $400 million of annual revenue to the group and each are EPS accretive to shareholders. We also continue to invest in our manufacturing and distribution infrastructure to support the continued growth of our Healthcare and Animal Care businesses in a variety of locations across New Zealand and Australia. On the 9th September 2021, EBOS announced it had reached agreement to acquire LifeHealthcare for just under $1.2 billion. Upon completion, EBOS will become a leading distributor of medical device in Australia, New Zealand and Southeast Asia. Funding for the acquisition has been completed with approximately $800 million equity raised and $540 million of committed new debt facilities now in place. The share placement and retail offer were very strongly supported. And as has been previously announced, we did increase the size of the retail offer to $161 million to provide as many participating retail shareholders as possible with their pro rata allocation. The transaction remains subject to regulatory approvals and a number of other conditions with all in progress, and we remain on track to complete the acquisition prior to the end of FY '22. This slide provides further details on the group's financial performance on both a reported and underlying basis. The increase in underlying EBIT of $21.3 million or 14.4% reflects an increase in revenue of 12.8%, the slight expansion of our EBIT margin from 3.18% to 3.22%. During the period, underlying NPAT grew by $14.9 million to $109.3 million, representing growth of 15.8%. As I mentioned earlier, we saw a high level of M&A activity during the half, and as a result, we incurred $7.8 million of one-off M&A costs on a pretax basis. These costs are excluded from underlying earnings. Turning to our segment performance. Healthcare generated revenue growth of 12.9% and underlying EBIT growth of 17%. Our Australian and New Zealand health care businesses each contributed to this growth. The strong health care result was driven by a number of factors, including increased sales in our Community Pharmacy business, strong performance from the growing TWC network, increased demand for medical consumables and medical devices and growth in our Contract Logistics business. The recently acquired businesses have also performed very well in the half and contributed to our growth. Moving now to the specific components of health care and starting with Community Pharmacy. In Community Pharmacy, we occupy the leading wholesale market position in both Australia and New Zealand. The Community Pharmacy business had a particularly strong first half, recording a 15.2% increase in revenue and a 10.5% increase in gross operating revenue. There were several key drivers of the results, including a very strong market environment, assisted by increased pharmacy visitation as a result of COVID-19. Highlighting the important role Community Pharmacies are playing during this pandemic, supplying medicines, vaccinations and other PPE items. Within this strong market environment, we increased our market share as a result of above-market growth by our major wholesale customers as well as winning business from our competitors. Ethical sales were particularly strong, growing at 16% in part due to new medicines being added to the PBS. OTC sales grew by approximately 16%. This represents a return to growth in OTC products following previous declines during COVID-19 restrictions, with key categories such as cold and flu, natural medicines, weight management and pain relief, all performing strongly. And our growth was further assisted by the return of Pfizer's products to the wholesale channel. The GOR margin percentage reduced slightly, reflecting product mix, PBS pricing reforms and a broadly stable CSO income. Our TerryWhite Chemmart business, which is reported within our community pharmacy results, has further expanded its network and reinforced its position as one of Australia's leading community pharmacy networks with over 480 stores. This half year, TWC added 16 net new pharmacies to its network and continues to target plus 500 trading stores by the end of FY '22. TWC network retail sales increased by 7.4% and like-for-like retail sales grew by 5.6%. This performance was driven by new store growth and continued investment in media spend, maintaining our position as the second largest advertiser in the Australian retail pharmacy sector. Pleasingly, the TWC pharmacy network has been responsible for delivering 23% of all pharmacy delivered COVID-19 vaccinations in Australia, highlighting the important role our pharmacists are playing during the pandemic. Our Institutional Healthcare business continues to build upon the positive momentum of previous periods, growing its gross operating revenue by $32 million to $158 million. Within this division, we continue to occupy the leading market position in wholesaling medicines for hospitals as well as a strong and growing market position in medical consumables distribution. Upon completion of the LifeHealthcare acquisition, we will also have a leading position in medical devices distribution within Australia, New Zealand and Southeast Asia. The key drivers of this result in this particular division were the increased sales of specialty medicines into the hospital network, continued strong demand for medical consumables, including PPE and benefits from the acquisitions of Pioneer Medical, MD Solutions and Sentry Medical. Our Contract Logistics business has delivered another very strong performance with GOR growth of just under 40%. I also note that GOR in this division has almost doubled over the last 3 years. In this business unit, we continue to occupy the leading market position in New Zealand, and our Australian business is growing ahead of expectations, driven mainly by servicing additional new customers. The business also grew as a result of increased demand for protective equipment and COVID-19 vaccinations in New Zealand. As I mentioned at the time of our 30 June '21 results presentation, we have committed to invest in a new contract logistics distribution center in Sydney. It's our second facility there to support our growth, and I'm pleased to note that these plans are well progressed with its opening expected during mid-2023. Turning now to our Animal Care segment. Our Animal Care business has continued to capitalize on strong pet market conditions with EBIT growth of just under 15% over the period. With our Black Hawk and Vitapet brands either increasing or maintaining market share. The strong trading conditions that we highlighted last year have continued supported by established global trends such as humanization of pets and premiumization of products, further accelerated by ongoing favorable COVID-19 conditions. There is no doubt that COVID has led to an increase in the pet population. And according to one Australian industry body, pet ownership increased from 61% to 69% of Australian households from 2019 to 2021, reflecting growth in the pet population of approximately 2 million pets over this period. Black Hawk, Vitapet and Lyppard, all demonstrated solid sales growth during the period. Black Hawk remains a leading premium dog food brand in the pet specialty channel in Australia and continues to increase its market share in New Zealand. Vitapet remains the leading dog treats brand in the grocery channel in both Australia and New Zealand. And Lyppard also experienced strong growth, particularly primarily driven by sales in the Australian Vet channel. That concludes my overview of the segment performance. I'll now hand over to Leonard Hansen, our Chief Financial Officer, to cover the financial information.

Thanks, John. Statutory cash flow from operations for the 6 months to December '21 was $106.8 million. This represents an improvement of $8 million on the prior corresponding period due to earnings growth as well as improvement of working capital management, offset by higher tax payments. CapEx expenditure for the period was $43.3 million, includes a further $26 million investment during the half in our new food manufacturing facility, which is now entering the commissioning phase. Business as usual CapEx of $17.3 million for the period related to investment over more than 50 operating sites across the group and our group IT systems. Working capital management remains a key focus for the group. It enables our strategy to invest in growth opportunities while returning value to our shareholders. Our investment in working capital of $265.1 million was up $4 million from June, with our cash conversion cycle of 14 days, also consistent with what we reported at the full year for June 2021. Return on capital employed as at December '21 of 18.2% as a record for the group, well above our own internal target of 15%. Improvement in return on capital employed from 18% that we reported at June 2021 is attributable to a further continuation of our strong earnings growth and disciplined approach to capital management. Underlying net debt for the group, excluding IFRS 16 Leases and the $628.3 million proceeds from our December '21 share placement was $402 million at December 2021. This represents an increase of $131 million as compared to June '21 as a result of the $107 million of investment in our current period acquisitions and $26 million further investment in our pet food manufacturing facility that John referred to earlier. Excluding the December 2021 share placement proceeds, the group's net debt-to-EBITDA ratio remains conservative at 1.28x, and EBOS has no debt maturities until the second half of FY '23. At December 2021, the group has undrawn debt facilities of over $900 million and adjusting to cash on hand of approximately $500 million. Also noting that the group has in place additional fully committed debt facilities of $540 million undertake the expected LifeHealthcare acquisition in the second half of FY '22. Underlying EPS for the half was $0.666 per share, representing growth on the prior corresponding period of 15.2%. The group has incurred $7.8 million of one-off costs associated with M&A activities during the half. These costs were primarily attributable to the expected acquisition of LifeHealthcare. These costs were excluded from our underlying results, include, however, higher corporate costs recognized during the period, which comprise or reflects the investment to project to enhance our IT security applications. EBOS Board has declared an interim dividend of NZD 0.47 per share and this will be imputed to 25% and fully franked for Australian tax resident shareholders. FY '22 interim dividend is an increase of 10.6% on FY '21 interim dividend. And this represents an underlying payout ratio for the period of 77.4% or 67.3% excluding the dividends to be paid on new shares issued under the capital raising in connection with the expected LifeHealthcare acquisition. The dividend reinvestment plan will not be available for the interim dividend in light of EBOS’ decision to accept oversubscriptions and upsize the retail offer to shareholders in January 2022. Thank you, and I hand you back to John.

Thank you, Leonard. So in conclusion, we are very pleased with our strong performance in the first half of FY '22, which included continued double-digit revenue and earnings growth, significant investments both on acquisitions and in building further operational capacity which will position the group for future growth, maintaining our strong balance sheet and increasing dividends to shareholders. We're comfortable with current trading conditions. However, it is uncertain what the ongoing disruptions caused by COVID-19 variants will have on our trading performance. We expect capital expenditure for the second half of FY '22 to remain elevated as a result of continued investment in our operational infrastructure to support the group's growth. We remain on track to complete the acquisition of LifeHealthcare before the end of FY '22, and we anticipate net debt-to-EBITDA at 30 June 2022, following completion of that transaction will be less than 2.25x. So with that, I will conclude the formal part of the presentation, and I'll hand back to Desmond to facilitate any questions.

[Operator Instructions] So first question comes from the line of Matt Montgomerie from Forsyth Barr.

Well done on another solid result. Maybe firstly, on the Healthcare segment, clearly very strong. I'm just trying to understand the drivers of that more specifically. Is there any way you can sort of attempt to split out the contributions between the Sigma SAP issues, Pfizer returning to wholesale kind of and then COVID-19 related products like the vaccines and rets, just trying to get a sense of I guess underlying growth?

Yes, no problems, Matt. No problem. So why don't we provide some further color. So on the return of Pfizer products into the Community Pharmacy channel, we estimate that contributed probably plus $50 million, around $50 million, $55 million to the sales growth. On the Sigma issues, we certainly did benefit from their issues in respect of volumes, so -- but really don't have a number on that to be truthful. And then your final question, I think, was on the rets, was it, sale of rets?

Yes, just rets and vaccines more broadly?

Yes. I think the way we'd answer that, Matt, is if you look at the numbers, we've benefited from both -- in the result benefited from both acquisitions. So we estimate that the acquisitions contributed about 4% to the EBIT growth during the period. And then when you look at the benefit of rets and other items that negatively impacted the results as a result of COVID-19, all up we estimate that the net benefit of that was about another 1%. So if you combine the benefits of acquisitions and COVID-19 into the results, we estimate that, that contributed about 5% to the EBIT growth rate for the period, at the group level.

Great. That's very helpful. And maybe one more, if I may. Haven't seen much, if any comments just on general inflation through the past. Just wondering if you could shed a bit more light on this and what you're seeing in the business across segments and geographies?

Yes. Okay. So there, as we know, we are in a different economic cycle at present, and there are inflationary impacts. It goes without saying coming through into the business. If I look at the 2 principal segments differently, in our Animal Care business, we've had cost increases come through on raw materials and other costs like freight, et cetera. But we have also the ability to take adjustments to our retail prices, which we have been doing and have been able to basically maintain our margins. So in that particular business, we've been dealing with that environment really for the last 6 months and being proactive with our response there. In respect of the Healthcare businesses, then if you look at the major components of those, the expense lines for that business, it's really, the labor, the freight and the rental costs. On labor, we basically -- we've had some adjustments to labor costs, but nothing really out of ordinary there, right? A lot of our workforce are in collective bargaining agreements or EBAs, et cetera. And they're typically running at about 3% increases, and that's just standard for the course, so not expecting anything too untoward on that labor line. Where we see probably the more large move on the cost line is in the freight line. And so we are seeing cost increases on that line coming through of, say, 5%, 10%, so they've started to come through. But I think our ability to negate the impacts of those cost increases I think is demonstrated in the result, and you can see the strong revenue growth that we are generating. We are orientating the business to higher margin businesses. We are taking market share, and we're generating strong volume gains. So there are impacts on the cost line coming through, and that will impact for the second half and also into FY '23. But there's also a lot of positive momentum in the business in terms of the revenue growth and the other activities and investments that we're undertaking.

Our next question comes from the line of Saul Hadassin from Barrenjoey Capital.

Just a couple of questions for me. John, first of all, just on Contract Logistics, you called out it's been very strong growth in that division for quite a few years now for a low base. But I'm just wondering how much has COVID sort of played into the growth in the last 1.5 years, 2 years in terms of stocking onshore, et cetera? And do you think that's going to be an ongoing trend? In other words, I guess just your ability to sustain that rate of growth and take market share. What do you think is sort of a sustainable rate of revenue growth over the next, say, couple of years? Some commentary there would be great.

No doubt, Saul, our Contract Logistics business has benefited from the COVID environment, but it's also benefiting from the market opportunity that we see here in the Australian market, had a very strong growth rate, as you can see in the first half. What's sustainable going forward is a bit of a million-dollar question, to be truthful. But we would like to think it would always be double-digit growth there. We -- a lot of the growth in this period -- or 50% really of the growth in this period is still coming from the Australian business. So yes, we would estimate that it could -- it should be able to continue to grow double digit. And our confidence in that is really amplified by the fact that we're building that second facility in Sydney to cater for the growth. So we're certainly backing ourselves to continue to win market share in this particular part of the business.

Just one more for me on Animal Care. Again, maybe a longer term question. Looking at sort of the larger offshore peers, listed peers and their pet care divisions, we see sort of operating margins around sort of high teens, low 20%. With you internalizing manufacturing for that division and looking sort of at the trends of pet ownership, that margin, which continues to accrete each year, I mean, how -- again, how much headroom do you think there is to drive that margin higher? Do you have the scale do you think to get that margin up -- potentially up into the mid and even high teens of the operating income level?

We believe we should be able to get it up to the high-teens, Saul. So we're on the record for our investment in the pet food plant that we'd get at least 15% return on our capital. So that's not in these numbers, right? The other thing to bear in mind within that division is that half of the sales are a wholesaling business, really about wholesaling business. So that, of course, won't be a high teens margin, right? So you've got to separate out the 2. But we certainly see further margin expansion coming within that Animal Care segment that relates to our branded business and the fact that we're moving to self-manufacture.

[Operator Instructions] Your next question comes from the line of Mathieu Chevrier from Citi.

Good morning. I just had a question on Q1 versus Q2. You've given a Q1 update saying that revenue and profit was up roughly 10%. That implies an acceleration in the second quarter. Is there anything specific there that you would like to call out and whether that's continued year-to-date?

Mathieu, yes, there's a couple of points to point out there with the acceleration of the growth in the second quarter, is in the second quarter, we got the full impact of the Pfizer products into the channel. So we didn't start distributing those until basically the 1st of September. Also, the 3 acquisitions we completed, the full benefit of those were in the second quarter as well and not in the first quarter. And then we also benefited in the month of December, so -- also December was quite strong because of the whole Omicron outbreak that occurred. So increased foot traffic into pharmacy, et cetera, and driving increased volumes. So yes, they would be the principal factors that were leading to that increased growth rate, Mathieu.

Understand. And I was just wondering if you could give any comments on whether these -- that trend of higher visitation into pharmacies continued since January 1?

We're not really commenting, Mathieu, on anything past December other than what we've got in the trading update there. But what we could say is as a management team, we're very comfortable with the momentum we've got in the business and the investments we're making. So that's all we can really say.

Okay. And maybe just 1 final 1 for Leonard, I guess. Could you give us an idea of what D&A interest and CapEx is likely going to be for the full year?

Yes. So Mathieu, in regards to CapEx, I think what we're looking at still, we'll complete the beneficial plant for Animal Care in the second half. There's obviously been a little bit of delay in CapEx in regards to COVID restrictions. So I think CapEx in the second half at June -- if you look at the results, June will be sort of more on the additional sort of $40 million CapEx and the second half will come through. D&A that will also be probably a little bit of an uptick from what you saw in the first half, just in relation to some additional -- bit of additional CapEx we've been doing and also some new leases that we've been entered into with regards to IFRS 16 that flows through to the D&A number. So a slight tick up in D&A in the second half from what you saw in the first half, and the CapEx number of circa $80 million by June is what I'm expecting.

Thank you for the questions. There are no further questions at this time. I'll now hand back to John for closing remarks.

Thanks, Dizman. Thank you, everyone, for your interest in the company and listings this afternoon. So I appreciate your support of the business. Speak to you later. Bye-bye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.