EBOS Group Limited (EBO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to EBOS Group Limited FY '23 Full Year Results Conference Call. [Operator Instructions] again, I must advise you that this conference is being recorded today, the 23rd of August 2023. 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.

Thank you, Maggie, and welcome, everyone, to EBOS Group's Full Year 2023 Results Presentation. My name is John Cullity, I'm the CEO for the EBOS Group, and I'm joined this morning by both Leonard Hansen, our CFO; and Martin Krauskopf, our EGM for Strategy, M&A and Investor Relations. I'm very pleased to report that EBOS has achieved another record result driven by both organic growth and acquisitions completed in the prior year, particularly our LifeHealthcare business. The defensive and diversified nature of our portfolio of businesses is reflected in the result with both our Healthcare and Animal Care segments delivering double-digit underlying EBITDA growth. The key financial headlines of our full year results are: Revenue increased by over 14% to over $12.2 billion; underlying EBITDA increased by 33.2% to $582 million; underlying net profit after tax increased by 23% to approximately $282 million; underlying earnings per share increased by 14.1% to $1.479. We further strengthened our balance sheet, reducing our leverage ratio to 1.52x. And the Board declared a final dividend of NZD 0.57 per share, representing full year dividend growth of 14.6%. Before we go through this morning's presentation, I should point out a couple of points. One, the results are expressed in Australian dollars unless otherwise noted. And secondly, the presentation refers to both statutory and underlying results. The underlying results exclude costs associated with the noncash amortization expense attributable to the LifeHealthcare acquisition purchase price accounting and also one-off integration costs incurred in our Medical Technology division and M&A transaction costs. The commentary I'll provide this morning as well as Leonard is predominantly based on our underlying results, and we have included in the appendix to the investor presentation, a reconciliation between the reported and underlying numbers. Moving to Slide 5. The group once again saw strong performances from both its Healthcare and Animal Care segments, highlighting the benefits of our defensive and diversified portfolio of businesses. Both segments achieved organic growth. And as noted previously, the Healthcare segment benefited from a significant contribution from acquisitions, reinforcing our strategy of investing for growth. Our Healthcare segment increased underlying EBITDA by approximately 33%. Key highlights of this performance were our Institutional Healthcare division recorded very significant growth driven by our acquisitions completed in FY '22 as well as continued growth in Symbion's hospital business. TWC continued to grow its network, which now exceeds 550 stores, and it recorded total network sales of over $2 billion. And our Community Pharmacy Wholesale volumes continue to grow strongly, driven by customer growth. Our newly acquired LifeHealthcare business performed in line with expectations in its first full year of ownership, and integration of our Medical Technology division is well progressed. Our Animal Care segment delivered underlying EBITDA growth of 24%. Our key brands, Black Hawk and Vitapet, continued to achieve organic growth and maintain their leadership positions in their respective markets. We're very pleased and encouraged by the performance of our new pet food manufacturing facility in Parkes, which is now fulfilling all of Black Hawk's production requirements and providing a competitive advantage for the brand. Consistent with our strategy of investing for growth, we recently completed the acquisition of Superior Pet Food Company at the end of July. Superior is a leading manufacturer and supplier of premium dog rolls in New Zealand, and I'll provide more detail on this acquisition later in the presentation. In terms of other group highlights, we recorded very strong underlying cash flows of approximately $405 million, up 39%, and our return on capital employed of just over 15% while down on the prior year following the LifeHealthcare acquisition was in line with our expectation and internal targets. We appreciate that investors are focused on macroeconomic conditions, and I'm pleased to confirm that our earnings have remained resilient in the current environment, reflecting the defensive and diverse nature of our group. Demand for our products and services has been resilient, reflected in both the Healthcare and Animal Care segments achieving organic growth. And I'd also note that second half underlying EBITDA exceeded the first half. We have also successfully mitigated cost increases during this inflationary environment reflected in our underlying EBITDA margin increasing by 69 basis points. Excluding acquisitions, the underlying EBITDA margin was stable for the year. In terms of pharmacy industry developments, we note the Australian government 60-day dispensing policy. This policy will be implemented in 3 stages over a 12-month period starting from the 1st of September 2023. However, the earnings impact from this change on our business has been largely offset by the Australian government's decision to compensate the wholesaler via an increase in the Community Service Obligation funding pool. On Slide 7, you can see that all of our divisions contributed strongly to the group's performance, with each recording double-digit growth in gross operating revenue. You can also see the very strong uplift in our Institutional Healthcare division with 50% increase in GOR, benefiting from the acquisitions completed in the prior year. Slide 8 provides further details on the group's financial performance on both reported and underlying basis. During the period, underlying net profit after tax grew by $52.7 million to just under $282 million, representing growth of 23%, and underlying earnings per share grew by approximately 14%. EPS growth was lower than the NPAT growth due to the impact of our capital raising in FY '22. FY '23 continues our long-term track record of delivering strong and consistent performances for our shareholders. We have been able to generate over 11% compound annual growth in both underlying earnings per share and dividends per share over the last 10 years, whilst maintaining strong returns on capital and a conservative balance sheet. As mentioned earlier, consistent with our strategy of investing for growth, we have recently acquired the Superior Pet Food Co., which is a leading manufacturer and supplier of premium dog rolls based here in New Zealand. Superior's portfolio of branded products, including the Chunky, Possyum, Ranchmans, Field & Forest and Superior brands, are sold through major grocery and rural retailers throughout New Zealand. The acquisition is consistent with Animal Care's strategy of expanding our portfolio of branded products in attractive categories, increasing our in-house manufacturing capabilities and accelerating our new product development initiatives. The acquisition completed on the 31st of July and was funded through existing debt facilities and cash on hand. We expect the acquisition to be marginally EPS accretive in the first year of ownership. Moving to Slide 11. Our investment for continued growth isn't purely focused on acquisitions, and we continue to invest in our operational infrastructure. This includes completing the construction and commissioning of a new contract logistics distribution center here in Auckland and ongoing construction of 3 new distribution centers, one in Sydney for our Contract Logistics business and 2 in Auckland for our pharmaceutical wholesale and medical consumables businesses. These investments position our Healthcare division for future growth. As announced on the 6th of June, the Australian Chemist Warehouse contract will not be renewed beyond its expiry date of 30 June 2024. EBOS generated approximately $2 billion in revenue from sales to Chemist Warehouse Australian stores in FY '23. We always recognize that the contracts renewal was a risk, and we are confident in the group's alternate growth strategies. Group earnings have grown strongly across all our divisions, excluding this contract. From FY '20 to '23, group underlying EBITDA, excluding this contract grew at a CAGR of approximately 20% with around half of this being attributable to organic growth and around half attributable to acquisitions. This growth rate is equivalent to the group's actual EBITDA CAGR, including the contract over the same period. All divisions have contributed to this growth, and this reflects our well-established and diverse strategies across the group, which we believe positions us very well for the future. In addition, over the last few years, we have continued to diversify the group towards higher growth, higher-margin segments. In FY '19, prior to commencing the Chemist Warehouse contract, our goal from divisions outside of Community Pharmacy was less than 50%. In FY '23, excluding the contract, GOR from divisions outside of Community Pharmacy was greater than 60%. Our Community Pharmacy division remains a leading Pharmacy wholesaler across Australia and New Zealand and is the franchisor for TerryWhite Chemmart, one of Australia's largest community pharmacy networks. Our Community Pharmacy division, excluding the Australian Chemist Warehouse Australia contract, services more than 4,000 pharmacy customers and has approximately 30% segment share in Australia and greater than 50% segment share in New Zealand. It generated over $5 billion of revenue in FY '23, and it has grown GOR at a high single-digit CAGR over the last 3 years. The division has a well-established organic growth strategy, which includes expanding Pharmacy Wholesale services to both branded and independent pharmacy customers and growing the TWC network. As you can see on Slide 15, we have multiple organic and inorganic growth drivers that are well established across our divisions. These strategies are familiar to investors, so I don't propose to go through them individually on this morning's call. These strategies are proven and position us very well for the future. The last year has also been a significant period for our ESG program as we reached net zero for our Scope 1 emissions in New Zealand and Australia, which was achieved by investing in operational improvements and procuring offsets. At our pet food manufacturing facility in Parkes, New South Wales, we have completed the first phase of our solar array project at the facility with the installation of a 500-kilowatt roof-mounted array. We are now progressing the engineering work and managing the regulatory approvals for the next phase of the project, which is a significantly larger ground-mounted array. The entire 18.8 megawatt solar array is forecast to meet all of the group's Australian electricity requirements by FY '27. We are also progressing well in preparing additional climate-related disclosures for our FY '24 reporting in accordance with the requirements of the New Zealand External Reporting Board. There are many other ESG initiatives that the group is progressing within each of our 5 sustainability pillars. Further details of these are included in our 2023 sustainability report, which is now available on our website. Moving now to our segment performance. Healthcare generated revenue growth of 14.6% and underlying EBITDA growth of 32.7% with our Australian and New Zealand and Southeast Asian regions growing earnings strongly. This performance was driven by our Community Pharmacy, TerryWhite Chemmart, Institutional Healthcare and Contract Logistics businesses, supplemented by the performance of recently completed acquisitions. Reinforcing my earlier comments, despite ongoing cost pressures across labor and freight, our Healthcare segment maintained underlying EBITDA margins for the base business and drove margin expansion through acquisitions. Moving now to the specific components of health care and starting with Community Pharmacy. The Community Pharmacy business continued its strong performance, recording revenue growth of $871 million, up 13.5% and GOR growth of $77 million, up 13.6%. There were several key drivers of this result, including customer growth and maintaining market share leadership, strong performances from our Community Pharmacy retail brands, including TWC, above market growth in ethical sales to our major wholesale customers, and growth of high-value specialty medicines and growth in OTC sales across various categories. The result did benefit from COVID-19, including sales of antiviral medications and cold and flu OTC products. The majority of these sales were recorded in the first half of FY '23. The GOR margin percentage was flat year-on-year, reflecting the high proportion of ethical sales, increased volumes of high-value specialty medicines as well as fixed income pool from the CSO. On Slide 20, our TerryWhite Chemmart business which is reported within Community Pharmacy continued its expansion with an additional 40 net new stores joining the network. The network now comprises more than 550 stores nationally, reinforcing its position as Australia's largest health advice-orientated Community Pharmacy network. TWC network sales continued to grow strongly in FY '23 to more than $2 billion. Our continued focus and investment in our TWC catalog and promotional program, increases in media spend, the leading role the network occupies in providing vaccinations and education programs were all drivers of TWC's positive performance. Institutional Healthcare generated very strong revenue growth of $521 million, up 17% and GOR growth of $192 million, up 50.7%, driven by the contributions of 5 acquisitions completed in the prior year as well as strong growth in our Symbion Hospitals business. Our recent acquisitions have significantly expanded our presence in both medical consumables and medical technology distribution. The integration of LifeHealthcare into the group's enlarged medical technology business is now well progressed. As mentioned previously, LifeHealthcare's financial performance for FY '23, its first full financial year under EBOS' ownership, was in line with expectations with both the ANZ and Southeast Asia businesses achieving positive growth. As foreshadowed at the half year results announcement, $12.5 million of nonrecurring costs were incurred in the second half in relation to the integration activities, including rationalization of operating sites and inventory lines, IT systems integration and associated stamp duty costs. Symbion hospitals revenue grew by 11.4%, driven by sales of high-value specialty medicines and new customer wins. Our Contract Logistics business increased GOR by $24 million, up 18.4%. This was primarily attributable to growth in Australia from new and existing principles, including the benefits of government initiatives to increase the depth of medicines inventory cover and growth in New Zealand from continued demand for storage and servicing of medicines and servicing of protective equipment. As previously mentioned, we have invested in new Contract Logistics facilities in both Auckland and Sydney to support the growth we are seeing in this division. Turning now to our Animal Care segment. Our Animal Care business has continued to perform very strongly with underlying EBITDA growth of $19.2 million, up 24%. This growth was driven by strong performances from our leading brands and businesses, Black Hawk, Vitapet and Lyppard as well as the benefits of our new pet food manufacturing facility and growth in Animates, our New Zealand pet retail joint venture. Second half performance reflected continued resilience in the premium pet food category, which represents the largest contributor to Animal Care's earnings, whilst growth slowed in the pet treats and accessories categories as consumer spending impacted demand for discretionary products. Our pet food manufacturing facility has been operational for approximately 1 year and is successfully operating with commercial production rates meeting demand. The underlying EBITDA margin improved by approximately 300 basis points, reflecting the relative performance of higher-margin businesses, the benefits of 3 our new manufacturing facility and the successful mitigation of cost inflation. On Slide 25, you can see our key brands demonstrated solid growth and maintained leadership positions. Black Hawk and Vitapet increased sales by 14.9% and 4.3%, respectively, on the prior year. Lyppard also experienced strong growth at the GOR line of 11.2% with lower sales revenue being a function of reduced exposure to lower-margin business. In line with our Animal Care growth strategy, several new product development launches are planned for FY '24, including the Black Hawk Healthy Benefits range, which is the first specific benefits line from Black Hawk. The products in this range have specially formulated diets focused on supporting the health of dogs with specific needs, including diets for joints and muscle, dental, weight management and sensitive skin and gut. The new range of products manufactured at our facility will appear on shelves in leading pet specialty retailers and vet clinics in September. Our new products development strategy is designed to leverage our existing strong brands, manufacturing capabilities and retailer relationships to expand into new product categories where we see growth potential. And that concludes the commentary on our segment performance. I'll now hand over to Leonard Hansen, our CFO, to cover the financial information. Thank you, Leonard.

Thanks, John. Underlying cash flow from operations for the 12 months to June 2023 was $404.7 million. This represents an improvement of $113.7 million on the prior corresponding period, attributable to earnings growth with higher underlying EBITDA of $145.2 million and a favorable movement in net working capital compared to the prior year of $39.5 million. Partially offsetting the higher earnings, the group incurred an increase in financing costs of $41.9 million in FY '23. This was due to higher debt levels of the group following the acquisition of LifeHealthcare in late FY '22 and interest rate rises during the year. Looking forward, we have hedging strategies in place to substantially mitigate against any further increases in benchmark interest rates. In addition, the higher earnings achieved by the group also resulted in an increase in tax payments of $29.1 million for the period. Capital expenditure for the period was $97.8 million, up $8.6 million on the prior year. CapEx for the period included spend on new facilities being constructed in Auckland, covering our Contract Logistics, Pharmacy Wholesale and Medical Consumables distribution businesses. We expect a similar level of total group capital expenditure in FY '24 before reducing to a low level of spend in the future years. Moving on to working capital. Working capital continues to remain a key focus for the group with a cash conversion cycle of 17 days. This is 2 days higher than that of the prior period, reflecting the stockholding requirements of the enlarged medical technology business subsequent to the LifeHealthcare acquisition in late FY '22. Return on capital employed as at 30 June '23, of 15.1% was down on the 18.6% we reported last year, reflecting the impact of the strategic investment of the LifeHealthcare business. However, it is an improvement from the 14.4% return on capital employed that we reported at the release of our half year FY '23 results. Net debt for the group, excluding leases, was $767 million, as at 30 June 2023, a reduction of $93 million on the prior year. Our net debt-to-EBITDA ratio of 1.52x is favorable to the 1.94x that we reported at the end of FY '22. This improvement and leverage ratio reflects both strong earnings and cash performance by the group for the financial period. At 30 June '23, the group had a weighted average debt maturity profile of 2.3 years. Turning now to earnings per share and dividends. Underlying EPS for the year is $1.479 per share, growth upon FY '22 of 14.1%. The EBOS Board has declared a final dividend of NZD 0.57 per share, and this will be imputed to 25% and fully franked for Australian tax resident shareholders. The total dividends for the year are therefore $0.110 per share, up 14.6% with the payout ratio for the year on an underlying basis of 68.5%. Reflecting the group's strong operating performance, cash flow and balance sheet, the group's dividend reinvestment plan will not be available for the final dividend. Thank you, and I'll now hand you back to John.

Thanks, Leonard. So in conclusion, we are very pleased with the group's performance in FY '23, which included double-digit underlying EBITDA growth from both our Healthcare and Animal Care segments, reflecting strong levels of organic growth and significant contributions from acquisitions. Further, we generated double-digit EPS growth, we reduced gearing, we generated ROCE in line with target, and increased dividends to shareholders by just under 15%. Looking ahead, we expect another year of profitable growth for FY '24. This is supported by positive trading conditions in July '23, which delivered continued organic growth compared to the prior corresponding period. The macroeconomic outlook is uncertain. However, our earnings have shown resilience in this environment, reflecting the defensive and diverse nature of our group. The group expects to have capital expenditure in FY '24 at levels similar to FY '23 as we continue to invest for growth and modernize our facilities, particularly in our New Zealand health care operations. We expect capital expenditure to reduce from FY '25 onwards. And a trading update will be provided to shareholders at the annual meeting on 24 October. That concludes the formal part of the presentation, and I'll now hand back to Maggie to facilitate any questions.

[Operator Instructions] Our first question is from Matt Montgomerie from Forsyth Barr.

Well done, firstly, on another solid result. I might -- just on LifeHealthcare, you've noted that the acquisition was in line with expectations, but for us it's quite difficult without knowing what those were, what the benchmark growth rate is. So I was just wondering if you could provide a little bit more color on sort of the organic versus inorganic growth in the year, and particularly in the second half you've just reported?

Matt, I think we outlined what the expectations were for LifeHealthcare in the capital raising documents when we bought the business there. And what we're saying today is basically that it was in line with those expectations. So I think you could safely say that the organic growth that we've derived there was circa around the 10% mark.

All right. That's perfect. That's roughly what I thought and all I needed. I suppose secondly, on a somewhat related matter with LifeHealthcare, it looks as though the Institutional Health Care base GOR margin, stripping out LifeHealthcare's, just declined sequentially again in the second half after doing it in the first half. The comment back then was the first half is a more appropriate run rate, but it sort of declined 80 or 90 bps sequentially again. Is there anything sinister going on here or -- with COVID noise? Or do you think the second half base in the institutional health care business from a GOR margin perspective is roughly appropriate on a go-forward basis?

Look, I think, Matt, I think what may be impacting on your analysis there is in the second half last year, there were some COVID benefits within the Institutional Healthcare part of the business, right, which would have been at a higher GOR margin. So I think to answer your question, is the rate that we've recorded for Institutional Healthcare in the full year this year is pretty reflective of what we'd expect going forward. So as I said, I think there's some noise there from potential COVID benefits in the prior year numbers because there's nothing happening in the business in terms of underlying GOR margin that's reflective of the decline that you're referring to there.

Our next question, we have Saul Hadassin from Barrenjoey.

Can you hear me?

We can, Saul.

Right. Just a couple of questions for me, please. John, just the -- just go back to the impact of the move to 60-day script dispensing. Can you just clarify, you mentioned an increase in CSO. Your assumption is that, that will cover any impact. Do you guys lose any markup on that second script? That's the first part. And are you expecting any loss of foot traffic to translate to lower sales of OTC and other types of front shop product?

I'll answer the second question first, Saul. I think there may be some lower foot traffic into pharmacy. I think we just have to wait and see how that plays out, right? So I got no evidence to support that. So I think we're just better off waiting to see how that plays out. In terms of your first question around lower margin, there is a margin impact from moving to 60-day dispensing, but that margin impact is going to basically be offset by the additional CSO funding that we get, right, which the government is committed to for both FY '24, '25.

Got it. And then just a follow-up question on the GOR margin for Community Pharmacy in second half '23 versus first half '23, it looks like it moved up slightly around 30 basis points. Was that mix washing through there? Or anything else that we should be aware of that may be assisted that incremental margin improvement in the second half?

Basically, mix, Saul.

Our next question is from Adrian Allbon from Jarden.

Can you hear me okay?

Yes, just slightly, Adrian, you're not that loud, but we can hear you.

Is that better?

That's better. Yes.

Okay. Just within -- back within LifePharmacy. Like, if I look at the put option for the Transmedic business, that seems to have gone up [ about ] $30 million in the second half versus what you're sort of saying in the first half. Is that reflective of that business unit within that acquisition performing much stronger?

Yes, it is, Adrian. Yes. It had a very strong FY '23.

Okay. All right. So -- because I think coming back to that capital raise, that was on a multiple of sort of on earnings in that...

It was, Adrian, yes it was. Yes.

Okay. So that's sort of the outperformer within LifeHealthcare. And the -- I guess, is there anything on the other side of the equation, given the broader acquisitions in line with expectation?

Sorry, just expand on the question, Adrian?

Just -- I guess, what Matt was asking you earlier on LifeHealthcare, you sort of said like if we've been back to a capital raising plan, the whole thing is sort of on track. LifeHealth -- the Transmedic business looks like it's outperforming that track. So what's the sort of counterbalance on that?

Well, in the -- you may recall in the first half, Adrian, when -- particularly in the first quarter of FY '23, that business, the Australian and New Zealand business, was being negatively impacted by COVID, right? And so that's probably the counter for the full year, right? But still -- basically, that business had a very strong second half across Southeast Asia and also Australia and New Zealand.

Okay. So it's COVID impact in the first half?

Yes, in the first half, yes.

Okay. And then just switching more to, I guess, Slide 14, where you outlined the growth strategies for Community Pharmacy. I guess when the Chemist Warehouse contract was announced sort of early June, like you weren't really in a position because it was -- it was sort of either at the same time as we received the information to sort of identify what you sort of labeled there as 3 and 4. Are you able to give us a bit more detail on how you're thinking about that now?

I think -- well, when we think about it, it's probably about a couple of months since that happened. And we've got strategies in place and work underway to make sure that we make our -- not just our wholesale operations, but our whole business drive for efficiencies to offset the earnings impact of that. We're making good progress on that work. We're seeing some benefits of that come through even in our July results, right? And then in terms of overall group efficiencies, there's work underway to make sure that we can do whatever we can to minimize that lost earnings impact. And then also, we are confident that we can continue to grow our revenues within that pharmacy division, right? And so we'll lose a chunk of business, but we're wholly motivated to try and minimize that loss as much as possible, both on the sales revenue side and also on the cost side.

Okay. And then just maybe just a slight extension on that, look, I guess, can you just comment -- look I think we saw an article about maybe the Chem Warehouse teaming up with some sort of private individuals sort of looking to disrupt the hospital pharmacy space. Can you just sort of describe, I guess, like, I don't think it's a hugely revenue meaningful business to you, but obviously, there's probably quite a few sort of distribution synergies that come with serving the hospital in a broader sense. Can you just sort of describe what sort of changes are you sort of seeing on that front?

I'm not seeing any changes there, right? So I think that's -- there's 2 pieces to that, Adrian, right? There's hospital distribution, right, of medicines. And our Symbion business really competes with CH2. We're the largest -- basically 2 primary distributors of hospital medicines in the market. Sigma sold their business just recently to CH2, right, in basically the last 6 months, right? So that's one piece of it. And also, the other piece is that we provide outsourced pharmacy services, right? And we have a business under trading -- under the name of HPS Pharmacy Services, and it competes with the Icon Group in that particular market. And the Icon Group and those individuals that you're referring to have teamed up with the Chemist Warehouse vendors. They've had some disagreement around the sale of business arrangement. So that's still to evolve really what translates there. But as of today, there's really just our HPS business and the [ Slade ] Icon Group providing outsourced pharmacy services, right? And those individuals teaming up with Chemist Warehouse, they're still to establish a footprint to do that. I think there's a long way to go there, Adrian, in terms of that particular market, right?

Okay. But just from my understanding, the HPS part, that's the sort of the front of the pharmacy that would serve the hospital and the back end is served by Symbion. Is that correct?

Correct, Adrian. So yes, the HPS part of it is the pharmacy that's within the hospital, right, and branded HPS.

Okay. And it's served by Symbion effectively in terms of the [indiscernible].

Yes. So Symbion services, HPS, and we also service the [ Slade ] Icon group and their pharmacies within the hospital network as well.

Our next speaker is Sean Laaman from Morgan Stanley.

John, I'd just like to ask your longer-term thoughts on the impact of the 60-day dispensing rule, and I guess, do you think there'll be much industry consolidation at the pharmacy, in particular, the smaller groups, and it drives, obviously, the market power in hands of the bigger groups with the TerryWhite or Chemist Warehouse. So I'm wondering if I get your thoughts on your industry consolidation longer term? And then I also wonder, you've got the bump to the CSO to offset some of the impacts at the wholesaler end, but I'm wondering if you could potentially see that being competed away as we saw maybe sort of 15 years ago in the industry through rebates and more generous trading terms. So just to get your thoughts on that, John.

Yes. No problem, Sean. I think if I look at, say, industry dynamics, I think what you see in the industry is that the bigger groups over a period of time now, and this is not just recent times, but over a long period of time now, the bigger pharmacy groups, whether it's our TerryWhite Chemmart business, Chemist Warehouse, et cetera, they continue to grow their networks. They continue to grow them strongly through the COVID environment, which provided -- that was a challenging environment for all pharmacists in the industry. And now the industry will have to deal with the 60-day dispensing. So that's further challenges. So I think the growth of those groups will continue, and therefore, it's a proportion of the market, they'll increase. And I just think that's a natural evolution of what's going to evolve here and has been on that pathway for quite some time. And if you look at a group like TerryWhite Chemmart, the support services that they can provide an individual pharmacists and assist them with their trading of their stores and the profitability of their stores is pretty compelling. So we'd like to think from what we do in the industry with TerryWhite Chemmart that, that continues to grow long term. In respect of your second point about the additional CSO, will that be traded away, I very much doubt it, Sean. In the current environment, we're doing well, very well, I believe, as a business in maintaining our EBITDA margins. And I think with the operators in the industry being what they are, very focused on maintaining margins, et cetera, and using that money to basically offset the cost increases that we're incurring, whether it's labor, freight, et cetera, rent. So there's really not an excess money here to trade away. So I don't subscribe to that theory.

And if I could just follow up on costs. So obviously, you've done well during the period to grow margin in inflationary cost environment. But -- I guess, can you give us some thoughts on the level of cost inflation going into fiscal '24 and just to gauge your confidence that you can continue to grow margin?

Yes. Well, I think what we said in the presentation, Sean, is that the base business held its margin and that the margin expansion came from the acquisitions, right? So just that point. In terms of what we see in cost, there's a couple of factors here that investors should be aware of. One is we believe as we come out of the other side of COVID that -- and you might have heard me say this before, that we believe we had some latent costs, if you like, or inherent costs in the business that will take some time to extract out of the business as we come through that COVID environment, so -- and as we improve our productivity, and we're putting new investment into New Zealand. As I mentioned on the call, that will increase our productivity in time. So we're very driven to achieve those outcomes. So we believe that we can continue to hold that margin position going forward. And then in terms of the areas of cost for the business, well, the significant ones are labor, right, freight and rent. And we see labor around probably the 4% mark going into '24, freight probably plus 5%, right, and rent's around about the 3% mark. So that gives you a bit of extra color around all those cost components.

Our next question is from Mathieu Chevrier from Citi.

My first one is just on the Animal Care business. It's experienced a lot of growth in the last few years. And obviously, the consumer environment has changed a bit. Do you still expect some reasonable growth in that division on the top line in F '24? And then the follow-up is just regarding the margins and growing nicely in the last few years as you've internalized some of the manufacturing, should we see further improvement in F '24 now that you've made this acquisition in New Zealand?

Yes, Mathieu, I think on the margin piece, we don't see further significant expansion in the margins in FY '24. I think we've done -- you can see the improvement that we've made into FY '23. A lot of that came from developing and bringing online the manufacturing facility there in Parkes. But I think that margin that we've got for FY 2023 is pretty reflective of what you should have going, going forward. I'm very positive on the growth we have in Animal Care going forward. If I went back many years, this business used to generate an EBITDA of about $25 million, right? And today, we've got a business generating EBITDA about $100 million. So as a management team, we still think we can grow this business double digits. We're very excited about the new product development initiatives that we have in the pipeline for this part of our business. We've been somewhat restricted from bringing those to market over the last couple of years until we sorted out the manufacturing capability for the business and our options there. That's now solved. And so it's very exciting for the business now in September. We're going to have our first new products hit the retail shelves, and that's just the start of what we can do in Animal Care, I believe. And as we pointed out, we've seen -- it's been really resilient through this whole inflationary cycle through the whole interest rate environment, particularly in the food category. It's been remarkably resilient, and we expect that to continue going forward.

Great. And then just maybe another one on Chemist Warehouse, if I may. What sort of working capital release are you expecting to come out towards, I guess, in the first half of F '25 as a result of the contract ending? And then just in terms of that Community Pharmacy GOR, do you expect it to expand once Chemist Warehouse is no longer your customer?

I think the GOR won't change very much, right? I'll answer that part, and I'll let Leonard talk to the working capital.

Yes, Matt, I think we alluded to in the earlier call that we're expecting an approximate sort of $100 million release on working capital in the first half of FY '25 post the Chemist Warehouse passing the contract over to Sigma.

Next, we have Marcus Curley from UBS.

Just a couple for me. Could you talk a little bit to the reduction in the OpEx, John, in the second half sequentially in the Healthcare division? So was there anything specific you'd call out in terms of what potentially drove that cost reduction?

Look, Marcus, I actually don't have that right in front of me to be truthful, but I'd have to take that online and come back to you, if you may?

Okay. No, no problem. Yes, secondly, could you talk to -- is the intention still to buy out the residual Transmedic stake in the next 12 months?

That is still the intention, Marcus. There's negotiations underway on that. But in a material sense, yes, there's a little angle we're working out as well to keep one of the vendors in the business there, which we're confident we'll achieve that. So we might not move to the full 100%. It might be 90%, but that -- whether it's 90% or 100%, that will happen, but it's most likely going to be 90%, Marcus.

Okay. And John, could you talk to what you thought the market growth rate was in Community Pharmacy medicines in the year and what you think it could be in the year coming?

That's a tricky question. So we think in terms of FY '23, right, if you -- if you take out the noise of antivirals and high specialty medicines, then we think it was probably growing in FY '23 around about the 7% mark, right? I'm not going to make a forecast of what it could be for FY '24, Marcus?

And antivirals and specialty medicines, that base level of sales continues into '24? Is there any reason to think that would change?

No, no, not the antivirals, right? So the antivirals were very strong in the first half of '23. We called that out. You might recall our growth rate in the first half of '23. I think was it something like 17%, right?

Sure. So COVID-related antivirals broadly speaking, not relevant heading into '24?

Not relevant. However, what we will -- what you should be aware of is that as we head into '24, we're going to be cycling those antivirals, right, that level. So our -- we might see a lower growth rate in the reported number, but when you strip out antivirals, the growth will be what the growth is.

Sure. And I'm not sure if you said at that time, John, did you call out what the specific revenue benefit for antivirals was in the first half of last year -- sorry, first half of this year, just this year just finished?

Was about $220 million, was it? About $220 million. I don't know whether we actually called that out, Marcus, but that's what they're telling me $220 million.

$220 million benefit first half of this year just finished.

Yes.

And then finally, and I'd say this, to last, John, because it may be a little cheeky, but I see in the presentation, you do have a square box for the Chemist Warehouse EBITDA. You've called out the revenue. Any chance that you call out what that box on EBITDA represents?

Yes, no problem. I think how we've guided the market on that, Marcus, was that we referred to the revenue number of $2 billion. And in terms of the EBITDA margin, we referred to the EBITDA margin for purpose of calculating the EBITDA was approximately what our EBITDA -- the health care EBITDA margin was pre the LifeHealthcare acquisition.

Okay. And so that's just been applied for the FY '23 year?

Yes. So about, 3.7%, the EBITDA margin, right?

Next, we have Lyanne Harrison from Bank of America.

Can you hear me okay?

We can, Lyanne.

I might just follow up on Marcus a little bit there. So I understand the antiviral benefits will cycle out. But also this winter, we've had quite a -- Australia has had quite a tough flu season. Has there been any sort of tailwinds that we might have seen through this winter and as we go in through to July and August of financial '24?

No, not from the flu season. It actually hasn't been that strongest flu season.

Contrary, my household has had a bad run in the last 4 weeks. Okay. So another point is -- apologies if I've missed it. So obviously, very strong top line growth in terms of revenue and GOR. But can you call out what the organic growth rate is at the group level and also for the health care segment?

Yes. So if you exclude acquisitions, then the revenue growth rate at the group level was 10% and the EBITDA growth rate was approximately 10%. And for the Healthcare segment in total, the revenue growth rate organically is about 10%, and the EBITDA growth was about 9%, excluding acquisitions.

Very helpful. And then one last point in terms of outlook, understanding the guidance, but you did mention that July '23 trading conditions were positive. Can you provide a little bit more color in terms of what you're seeing across each of the different segments in subsegment?

I'll actually probably refrain from doing that, Lyanne. I think if we provide more color on our trading performance, I think we're better doing that at the time of the annual meeting rather than just calling out 1 month trading, I think that would be -- that wouldn't -- that could be misleading really, I think, to do that. So I think we're very confident what we can do in FY '24. And it started off in line with our expectations, and it was positive. I think we're just best placed to do that.

Our next question is from Stephen Hudson from Macquarie Securities NZ.

Just firstly, on CapEx, I just wondered if you could give us a bit of a steer for what you're expecting that $100 million or so of CapEx number to normalize to sort of go, I think, $30 million to $40 million long-term [indiscernible] business number. So I just wondered if that was broadly right? And then sort of attached to that, I guess, your ROFE at 15%. Could we expect you to return back to the 10-year average of maybe 17% with some of the investment that you're undertaking and sustainability and your facilities and productivity, as you say. So just kind of give me some sort of feel for what we have to believe, I suppose, to get back to that 10-year average ROFE. And then just lastly, on the Chemist Warehouse, I think you've sort of said the $75 million there for [ EBITDAF ] over FY '23. Is that pre or post a share of corporate costs?

I think you just take the Chemist Warehouse. If I just answer the Chemist Warehouse, I think that's what we've guided to there, Stephen, is basically the number, right? It's -- there's no corporate cost, right?

Stephen, so Leonard here. On CapEx, Stephen, I think post the LifeHealthcare acquisition with the CapEx profile as well, I think the number you've got in your model is probably the pre LifeHealthcare normalized numbers. So I'll be using a number of sort of circa $50 million in FY '25 onwards, as a CapEx number spend. But I don't really want to go near the ROCE forecast. I'll get into trouble for doing forecast with my boss, Stephen. So I prefer not to comment on that. We don't do forecast.

We target the 15%, right? And that's what we target. We've never targeted 18%. We've never targeted 20%. That's just the way that we achieved those numbers through the growth and the performance of the business. But what we really sort of target, our internal targets is to make that 15%. So that's what you probably should be basing your modeling on.

Yes, I mean I suppose I'm just looking at the buckets that you're thinking of rather than quantifying them as it sort of LifeHealthcare integration or is it return of elective surgery volumes in Australia? Or what are the sort of the big buckets that you were thinking about that could move the dial in the next sort of 3 years?

Well, I think for us, we've outlined that on the strategy page, right? So we're confident what we get. We continue to get good growth in our Med Tech division, right? The Animal Care business continues to grow. Contract Logistics continues to grow, and we continue to get productivity improvements out of our -- both our New Zealand and Australian health care operations. right? And we'll supplement that by M&A, which we've got numerous categories of the business that we can continue to invest in and probably the opportunities for us within the Animal Care segment are probably greater now than with our manufacturing capability, probably greater now than what they were a couple of years back. So that's a nice sort of addition that we can hopefully bring to the group and build on for the group.

Our next question is from Daniel Hurren from MST Marquee.

Sorry, back to 60-day dispensing. Look, we understand that the CSO top-up will offset the majority of that direct impact, but pharmacists appear to think that they can share their pain back up the supply chain via manufacturers and distributors. And some of your competitors seem to think this is an opportunity to get more volume through their assets. Can I ask you, what are your discussions with pharmacists have been to date around 60-day dispensing? And what are their expectations for pricing and discounts going forward?

Matt (sic) [ Dan ] actually, I think, I've answered that question actually, [ Matt ]. In terms of -- I mean, I know there might be a lot of noise in the industry around that. But our expectation is that we'll hold our margin, right?

Right. So you won't be -- there will be no additional discount pharmacists to help offset their pain?

We've got our own issues, right? So I don't think we've got anything there to give them that, right? So -- but our Symbion business, we've never been the cheapest provider in the market, but we focus on our service levels, and we've got to hold our margin, right, as rational operators in the industry. We've got to hold our margins. So that's why I say [indiscernible].

Okay, that's -- in April, we saw those -- that generic price -- generic catch-up price cuts from generic -- on generic drugs here's about [indiscernible] drugs. At the Investor Day, you talked that there might actually be some opportunities, some benefits around that through back working with manufacturers. How has that played out so far?

I actually can't recall, Dan, what you're actually referring to in terms of additional benefits playing out with manufacturers. The only change, the only change we've done from the -- I know there's been generic pricing changes, et cetera, but that wasn't going to provide a benefit to the business. There was only -- the only change of real note, if you like, in the company's generic arrangements was TerryWhite Chemmart changed its first-line supplier of generics in the last, say, 18, 24 months, right? And that largely provided our customers with the benefit. But yes, the other point you're referring to, I actually can't recall.

I think you were talking about with discounts from manufacturers and so forth, there might be some opportunity to move around that. But it's not a big deal. I was just wondering if how the -- broadly I was wondering how those price cuts have impacted.

Yes. No, no, no, that's mainly, I think, going through to the customers.

Thank you for the questions. I would now like to turn the conference back to Mr. John Cullity for closing remarks.

Thank you, Maggie, and thanks, everyone, for this morning's call. I appreciate everyone's interest in the company and the questions we've got. So I'd like to wish everyone a good day. Thank you. Goodbye.

Thank you. This concludes today's conference. You may now disconnect.