EBOS Group Limited (EBO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the EBOS Group Limited Full Year 2024 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, the 21st of August 2024. I would now like to hand the conference over to your speaker today, Mr. John Cullity, CEO, EBOS Group. Please go ahead, John.

Thank you, Daniel, and welcome, everyone, to EBOS Group's Full Year 2024 Results Presentation. As Daniel said, my name is John Cullity, CEO of the Group, and I'm joined this morning by both Leonard Hansen, our CFO; and Martin Krauskopf, our EGM for M&A and Investor Relations. I'm very pleased to report that EBOS has achieved another year of strong growth. The key financial headlines for FY '24 are revenue increased by 7.8% to $13.2 billion, underlying EBITDA increased by 7.3% to $624 million, underlying net profit after tax increased by 7.7% to $303 million and underlying earnings per share increased by 6.8% to $1.579. Our balance sheet continues to remain strong with a leverage ratio of 1.89x, and the Board declared a final dividend of NZD 0.615 per share, which brings the full year dividend to NZD 1.185 per share, representing an increase of 7.7%. And we are also today providing positive guidance for FY '25 for the group to reach EBITDA of between $575 million to $600 million. Before we go through this morning's presentation, I should point out the following. The results are expressed in Australian dollars unless otherwise noted, and the presentation refers to both statutory and underlying results. The underlying results exclude M&A transaction costs, restructuring and site transition costs and costs associated with the noncash amortization attributable to the LifeHealthcare acquisition purchase price accounting. The commentary this morning will be predominantly based on our underlying results, and we have included in the Appendix a reconciliation between the statutory and underlying numbers. Moving to Slide 5. The group once again saw strong performances from both the Healthcare and Animal Care segments and we continued our strategy of investing for future growth. Our Healthcare segment increased underlying EBITDA by 6%, and this was driven by particularly strong growth in the Australian business, which grew underlying EBITDA by 9.4%. Key highlights of our Healthcare segment performance were strong organic growth across both our Australian and New Zealand Pharmacy businesses, the TerryWhite Chemmart franchise network continued its store expansion, reaching 600 stores across Australia, and strong growth from our Symbion Hospitals and Medical Technology businesses. Our Animal Care segment increased underlying EBITDA by just over 13%, which was driven by double-digit growth in our branded business as a result of ongoing resilience in the pet food category and the contribution of the Superior acquisition as well as several new product launches. In terms of other group highlights, we recorded a solid ROCE result of 15.3%, and reflecting our continued focus on cost management, we achieved a 24 basis point reduction in operating expenses as a proportion of revenue. On Slide 6, you can see that both our Healthcare and Animal Care segments recorded strong underlying EBITDA growth, contributing to the solid overall group performance. Our Community Pharmacy, Institutional Healthcare and Animal Care businesses all contributed to an uplift in GOR, and this was partially offset by a small reduction in Contract Logistics GOR, which I will comment on later. Slide 7 provides further details on the group's financial performance on both a statutory and underlying basis. This slide is included for your information, and I won't comment on it in any detail. When normalizing the group's EBITDA growth to exclude earnings from the Chemist Warehouse Australia contract, which concluded at the end of FY '24, underlying EBITDA growth for the year was higher at approximately 8%. Similarly, if we normalize for the uplift of COVID-19 antiviral sales, EBITDA growth was 8%, highlighting the strength of the underlying businesses and our diverse sources of growth. Consistent with our strategy of investing for growth, FY '24 has been another period of active investment. As previously announced, we have increased our shareholding in our Southeast Asian MedTech business Transmedic to 90%, and we've completed the acquisition of Superior, a leading New Zealand manufacturer and supplier of premium dog rolls. In addition, we have recently completed 4 small bolt-on acquisitions, 2 within the Medical Consumables business in New Zealand and 2 within the Medical Technology business, with one in Australia and one in Southeast Asia. We continue to see a healthy pipeline of future consolidation opportunities. We have also continued investing in our operational infrastructure across our Healthcare businesses, all for the purposes of capturing future growth. FY '24 continues our long-term track record of delivering strong and consistent results. Over the last 10 years, we've grown both earnings and dividends per share at a CAGR of more than 10%, whilst maintaining a ROCE consistently around or above our 15% target, and a conservative leverage ratio generally below 2x net debt to EBITDA. On sustainability, our key initiatives continue to progress. This year, we electrified our new 500-kilowatt roof-mounted solar array at our pet food manufacturing facility in Parkes, New South Wales. Our focus at Parkes has now turned to the installation of a ground-mounted array that is expected to generate approximately 5 megawatts of clean energy. We continue to aim to generate electricity equivalent to our forecast Australian electricity requirements during FY '27. And we will also be releasing our first Climate Statement by the end of October, which will contain further information on our climate strategy. There are many other ESG initiatives that the group is progressing within each of our 5 sustainability pillars. A comprehensive summary of these initiatives is contained in our latest Sustainability Report, which was also released today. Moving now to our segment performance. Healthcare generated revenue growth of 8% and underlying EBITDA growth of 6%. The strong performance was driven by organic growth across each of our Community Pharmacy, TWC and Institutional Healthcare businesses. In terms of our geographic regions, our Australian Healthcare business grew revenue and underlying EBITDA by 8% and 9.4%, respectively. New Zealand's performance was impacted by a decline in nonrecurring COVID-19 activity within our Contract Logistics division. And despite cost pressures during the year, Healthcare's underlying EBITDA margin remained broadly in line with the prior year, with the business benefiting from operational efficiencies. Moving now to the divisions within Healthcare and starting within Community Pharmacy. The Community Pharmacy business continued its strong performance, recording revenue growth of just under $500 million or 6.8% and GOR growth of $31.8 million, up 4.9%. There were several key drivers of the results, including strong performance from our retail brands, including TWC, new pharmacy wholesale customer wins, which led to segment share growth, and increased sales of high-value medicines. Our TWC business continued its impressive growth, further strengthening its position as Australia's largest health advice-orientated community pharmacy store network, recently opening its 600th store. The impact of 60-day dispensing, which came into effect in September '23, was broadly neutral by virtue of the increase to the CSO funding pool. The eighth Community Pharmacy Agreement commenced on the 1st of July '24, and it was pleasing to see the new funding arrangements established for the pharmacy sector in Australia. In addition, the CSO deed has been recently extended whilst the industry finalizes discussions with the Australian government regarding the first-ever pharmacy wholesale agreement. Institutional Healthcare generated double-digit revenue growth of approximately $414 million, up 11.5% and GOR growth of approximately $41 million, up 7.2%, largely due to growth in both Symbion Hospitals and our MedTech businesses. Symbion Hospitals had another strong year, with revenue growth of approximately 16%, predominantly due to market share gains and increased sales of high-value specialty medicine. Our MedTech business delivered goal growth of 10%, driven by our spine, implant, aesthetics and allograft channels. Recognizing the growing contribution of the Institutional Healthcare division to the group, we have provided additional disclosure of the various components within this division. As mentioned, our MedTech business recorded strong GOR growth of 10%. Revenue growth was lower at 6%, reflecting that we rationalized a number of lower-margin, nonstrategic product portfolios to streamline our business. The ANZ and Southeast Asia businesses both recorded broadly equivalent revenue growth rates for the year. The combined hospital medicines and consumables business recorded revenue growth of 12%. Specialty medicines continue to drive growth in this segment and Medical Consumables delivered organic growth despite headwinds associated with the unwind of some COVID-19-related sales and a weaker flu season. In Contract Logistics, the GOR decreased by $4.5 million, down just under 3%. In Australia, the business continued to generate strong growth for new and existing principals and our recently completed second warehouse facility in Sydney will accommodate ongoing growth in the business. In New Zealand, the business experienced a reduction in GOR due to the reduced activity for the storage and servicing of COVID-19-related products. Turning now to Animal Care. Animal Care generateddouble-digit EBITDA growth of $13 million, up 13.2%, driven by the strong performance of our branded businesses. The branded business was supported by ongoing resilience in the pet food category, the contribution of the Superior acquisition, which has performed strongly during its first year under our ownership, and new product development launches. This growth was partially offset by softness in discretionary categories such as accessories and the wholesale business. The underlying EBITDA margin for the segment improved again, reflecting the relative performance of higher-margin businesses, production efficiencies and the successful mitigation of cost inflation. Demonstrating the continued strength of our brands, Black Hawk and VitaPet continue to either grow or maintain share leadership in their respective segments, contributing to our branded businesses growing sales revenue by 10%. Our vet wholesale business Lyppard was negatively impacted in '24 by one particular supplier deciding to bypass the wholesale channel, following the acquisition of it by another large direct supplier. This resulted in a 4% decline in wholesale revenue. In line with our Animal Care growth strategy, several new product launches occurred in FY '24, including the Black Hawk Healthy Benefits range, the relaunch and extension of our Black Hawk cat food Range and more recently, the launch of our VitaPet food range in the grocery channel. Our NPD strategy is designed to leverage the strength of our brands, manufacturing capabilities and retailer relationships to expand into new product categories where we see growth potential. Moving now to Slide 23 and cash flow. Underlying cash flow from operations for the 12 months to June '24 was $367 million. This reflects underlying EBITDA of $624 million, partially offset by net interest of $94 million, tax payments of $103 million and net working capital and other movements of $60 million. The reduction in the group's underlying cash flows of just under $38 million is attributable to the timing of net working capital movement. Capital expenditure for the period was $118 million, primarily due to investments in new facilities, including sites in Auckland covering our Contract Logistics, Pharmacy Wholesale and Medical Consumables distribution businesses as well as our new Contract Logistics facility in Sydney. Net debt for the group excluding leases was just over $1 billion at 30 June, an increase of just over $250 million compared to the prior year. The increase in net debt largely reflects the group's M&A investments during the year, with the acquisition of Superior and the increased ownership in Transmedic totaling approximately $209 million. Our gearing level at just under 1.9x net debt to EBITDA remains conservative and within our target range, providing capacity for further acquisition growth investments, with approximately $300 million net debt headroom available. Investment in net working capital of $414 million is up $59 million from June '23, reflecting the $952 million growth in sales revenue for the year, with the average cash conversion cycle of 17 days consistent with prior period. Underlying EPS for the year is $1.579 per share, up 6.8%. And the EBOS Board has declared a final dividend of $0.615 per share, that's NZD 0.615 per share. This will be fully imputed to 25% for New Zealand tax resident shareholders and fully franked for Australian tax resident shareholders. Total FY '24 dividends are NZD 1.185 per share, an increase of 7.7% on FY '23 and represents an underlying payout ratio for the period of just under 70%. The group's Dividend Reinvestment Plan will be available for the FY '24 final dividend. Shareholders can elect to take shares in lieu of dividends at a discount of 2.5% to the volume weighted average share price. As outlined at the half year results, the group is focused on several near-term strategic initiatives to increase our earnings. We are well progressed with these strategies, and we're confident of our momentum going into FY '25. First, as demonstrated this year and over the long term, both our Healthcare and Animal Care businesses continue to record positive organic growth, supported by well-established strategies, which are highlighted on Slide 28. Second, in light of the changed dynamics in the Australian community pharmacy industry, we are targeting $300 million in new pharmacy revenues. And thirdly, we're well advanced with our group cost efficiency exercise that has identified between $25 million to $50 million of cost savings over the next 1 to 2 years. And finally, we will continue to pursue strategic acquisitions, and we have an active pipeline of additional opportunities across our Healthcare and Animal Care sectors. On Slide 28 and commenting further on our base business growth, you can see on this slide that each of our divisions has achieved attractive levels of growth over the long term. For example, since FY '18, our Community Pharmacy division has achieved compound GOR growth of approximately 5%, excluding the Chemist Warehouse Australia contract. Our Institutional Healthcare division has achieved compound GOR growth of 21% and our Animal Care division has achieved compound GOR growth of 10%. This growth track record is underpinned by diverse and well-established strategies across the group, which are summarized on this slide. On Slide 29, with respect to costs, we expect our cost base to continue growing in FY '25, reflecting ongoing investments in our business to support our growth. Drivers of this increasing cost base includes some volume growth, investments in growing businesses and new products and IT costs. The primary cost areas we have identified and where savings will be realized are freight, packaging, labor, cost of goods sold and general administration costs. And commenting on our acquisition activities, which is a core strategy for the group. And as mentioned previously, we have completed 6 acquisitions since July last year. We continue to see an active pipeline of opportunities that would be value accretive to shareholders. These opportunities are across both our Healthcare and Animal Care businesses and across our geographic regions of Australia, New Zealand and Southeast Asia. We are focused on pursuing opportunities that strengthen our core businesses or extend existing businesses into adjacent segments. In conclusion, we're very pleased with the group's performance for FY '24, which demonstrates that we have diverse sources of organic growth and opportunities for acquisitions. The Chemist Warehouse Australia contract generated $2.2 billion of revenue in FY '24. And as has been well flagged, this contract concluded on 30 June '24. To assist investors with their analysis, we are providing guidance for FY '25 that we expect to generate underlying EBITDA between $575 million and $600 million. This guidance implies normalized EBITDA growth from the prior year of approximately 5% to 10%, excluding the CWA contract, and will be driven by the near-term growth strategies set out and discussed on Page 27. Our trading in July '24 demonstrated positive growth, excluding the CWA contract, and is supportive of this full year guidance. And we'll provide a further trading update at our annual meeting in October. So that concludes the formal part of the presentation, and I'll now hand back to Daniel, our operator, to facilitate any questions.

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

Well done on a solid result. My first question is just in relation to the working capital release from Chemist Warehouse. I think from memory, back in February commentary, it was around $75 million of working capital release. But I guess given sort of now in the midst of the process, I'd be keen just to hear your updated thoughts there.

Matt, no, that's still the number. That's still a valid number.

Okay. And then second question is just in relation to the pharmacy customer acquisition clearly did a good job in the second half. First part is, could you please provide a sense of what you think your growth was in the second half ex Chem warehouse? And secondly, how we should think about the phasing of the $300 million over the next 1, 2, 3 years, whatever may be?

First question is growth in the second half of Pharmacy business? Is that 5%, Matt, I follow?

And relative to market...

Probably slightly ahead.

Yes. And then just on the phasing of the $300 million over the next 1, 2 or 3 years, how you're thinking about that?

Our target is $300 million in FY '25, Matt.

And our next question comes from Stephen Ridgewell with Craigs IP.

Good result. Guys, well done. Just first question on Contract Logistics. We saw a ramp-up -- sorry, a bit of a ramp-up in the second half post-opening of new Sydney facility, but just ones if you can give us a bit of color in terms of customer wins during the half. I think you mentioned you picked up February results and the utilization of that facility kind of by the end of the second half, please?

Okay. Stephen, I just might ask Brett Barons, who is joining as Head of Symbion to assist us with that question in terms of second half and customer wins.

Yes. So it's a combination of our existing customers where we've got growth from them, particularly due to the new government regulations in Australia. And then we've got a couple of wins as well. And then a couple of other good starts in the new financial year.

And utilization, Brett, of the Sydney facility, percentage utilization.

Yes. It's, yes, 35.

35%, Stephen?

Great. And then just a point of clarification on the cost out, which sort of $25 million, $50 million over the next 1 to 2 years. I'm just curious, did you -- of that $25 million to $50 million, have you -- has EBOS sort of already realized some of that $25 million to $50 million in the FY '24 year? And then what are you -- within the guidance, what are you hoping to realize in the FY '25 year, please?

Yes, some portion has been realized in '24, Stephen, around some of the administration costs. And in the '25 year, we expect $25 million to be realized. Some of that will come through cost of goods sold, so through the margin, right, and the balance is in expenses. But the expectation is $25 million in '25.

And our next question comes from Saul Hadassin with Barrenjoey.

John, just a question for me as it relates to the guidance for that EBITDA growth, excluding Chemist Warehouse. Can you just give us any sense of the materiality of the acquisitions you've made in fiscal '24 to that growth in maybe in percentage terms? Is it immaterial? Or is it contributing a couple of percentage points to that? And I guess separately, does that grow...

Sorry, Saul, just to clarify. What are you exactly asking, the growth in '24 of acquisitions?

What's the contribution to your guidance from acquisitions made in FY '24?

That's minimum.

And does the guidance include -- and do you -- are you including any further acquisitions in that growth that you might make in FY '25?

No. No.

And our next question comes from Marcus Curley with UBS.

John, could we just start with cost again? You mentioned $25 million of cost savings. The presentation also mentions your overall costs up this year. Could you just talk a little bit to what's happening outside of the cost savings program in terms of the underlying cost in the business?

Yes. So Marcus, what's certainly -- most of the group, basically, all the group excluding, say, pharmacy, right, which when you include the CW business, is still growing, right? And we've got -- we've probably been surprised by the growth rates that are coming through in our Institutional Healthcare business, our Contract Logistics business, excluding New Zealand and also, say, the Animal Care business. So that growth needs to be funded. And so some of the costs going into the business, I think like additional marketing costs, right, also funding some of that growth, right, as well. And then there's another area of cost that we're -- probably reflects that maybe we had an underinvestment in prior years being IT costs. So there's been a significant increase in IT costs that's coming through the back end of '24 and also into -- will continue into FY '25. That's why you don't see an absolute reduction in costs going to FY '25.

Understood. Absolutely. And then if we just turn to Community Pharmacy, could you talk a little bit about the potential buckets or sources of those market share gains of $300 million? Does it include a growth in TerryWhite? And is there any big contract wins you've got your hands on within that number?

I probably won't go into details on that, Marcus, commercially sensitive, but it does include continued growth in TerryWhite. So typically in a year, we target new stores, 35 to 40 new stores, and we see that continuing again in FY '25. So that's included within that new growth.

Maybe just to help, could you give any color in terms of what TerryWhite growth was in terms of retail sales in the previous year, in the '24 year?

No, I can't provide that, Marcus. That's commercially sensitive.

Okay. Maybe I'll just try a different style of question then. You mentioned you're still negotiating a new -- or the industry is still negotiating a new deal for Community Pharmacy with the government. Any color you can provide on what your expectations are and the timing of when we might hear about a final deal there?

Look, I think our expectation is that, that agreement will be successfully concluded and successfully concluded within the ask of the industry on the government to ensure that there's sustainable supply of medicines into the community. And I think in the Australian environment at the moment, you can see that there's some headlines around certain shortages for IV fluid, et cetera. So I think it's in everyone's interest that the supply chain is adequately funded. If you asked me probably 2 months ago, we had an expectation that the agreement would have been finalized by now, but what we now really understand is that because this is the first-ever pharmacy wholesale agreement that's being negotiated, it's taking probably longer within the government circle to conclude that agreement. And that's just because, no disrespect, but we are dealing with government. We're not dealing with corporate enterprises here. So because it's the first-ever one, it's just taking a little bit longer, our expectation is though that, that agreement will be concluded within, say, the next 6 to 8 weeks.

Our next question comes from Gretel Janu with E&P.

My question is just on Animal Care and margins, particularly. So you had another very strong period and have transformed business in the last few years, but how should we think about the margin trajectory from here? Can we see further margin expansion? Or is this now the new norm?

Gretel, no, I think we continue to see margins around the current level, but I wouldn't be factoring in any uplift in margins.

Understood. And then just in terms of the branded products, how much of the results that you delivered today was price versus volume?

Most of that was volume, Gretel, and also the inclusion of the Superior acquisition, right? So of that 10% -- I'm not sure, of that number, that 10% growth, how much was Superior. So of the branded revenue growth, how much was Superior. So $25 million of that $29 million was Superior, Gretel.

Our next question comes from Lyanne Harrison with Bank of America.

I might come back to the Community Pharmacy and ask that question a little bit differently. You mentioned some new pharmacy customer wins. Could you give us an indication of what the total annual revenue contribution for those new pharmacy customers might be? And if you could provide any color on who you are winning those customers from?

If I understand the question correctly, Lyanne, we're targeting $300 million of new pharmacy revenues in FY '25. So that's the target. And that's just across the whole industry.

Okay. And then another thing on Community Pharmacy. Are you seeing any changes in foot traffic to your pharmacies? And any softening of, I guess, sales with retail products given cost of living pressures?

No, we're not seeing any declines in our business, but I would point out, Lyanne, that our business is more heavily orientated towards the medicines and not the kind of shop categories. So really any upwards or negative declines in the front of shop is not going to have a significant impact on the business because -- as I said, our business is more very heavily on the medicine side, okay?

Our next question comes from Tom Godfrey with Ord Minnett.

Can I just circle back to the cost-out phasing question? So you sort of acknowledged $25 million of the $25 million to $50 million sitting in FY '25. Can I just sort of ask what are the key initiatives that will help you deliver the additional $25 million a year after? What are the sort of longer-dated cost-out initiatives?

They are pretty much across the same product categories, Tom. So like the initiatives in freight, further initial savings in cost of goods sold, further initiatives around the labor side, right, packaging that we're just -- we won't get a full run rate of those cost savings in FY '25, and therefore, they'll kick in -- they'll contribute to FY '26.

Got you. So you should have a reasonable lens on the total number at some point in this financial year and what should annualize into FY '26?

Yes. So what we're saying is we've got an expectation that the whole project will generate cost efficiencies of $50 million, just take us through '25 and '26 to be on that level and on that run rate.

Perfect. Understood. Next one I have was just around the Medical Technology division. You sort of called out rationalization of some underperforming product categories. Are you able to provide us with the revenue that they contributed in '24, just so we can sort of understand the headwind in '25?

So you exclude those legacy products that we've rationalized, then MedTech revenue growth would have been around the 10%. So in line with the GOR growth of 10%.

Just on that, Tom, you might recall, last year, we took a charge against the MedTech division, right, the rationalization cost in the MedTech division. So that's flowing through into the revenue line in FY '24, okay?

Our next question comes from Mathieu Chevrier with Citi.

My first one is just on the impact from the new wholesaler agreement that you may or may have not included in your guidance.

We haven't included any real upside on that, Mathieu, right? We've included just the status quo. And we haven't -- and also if it goes against us, that's also not in our guidance, right?

Yes. And would your expectations be that once this is signed, that would be an upside to your margins? Or will it just help to kind of offset inflation pressures?

No. I think all we really -- I don't think there's going to be any upside, Mathieu. We're just seeking an agreement that basically can assist us in absorbing the cost pressures and the demand on the business but satisfying the supply arrangements that the government requires around medicine.

Understood. And just on the institutional side of the business, do you think that sort of 10% growth is sustainable because it's -- we've seen a few peers now have quite high growth with those specialty medicines, especially that were accretive to growth in that division.

We'd like to think it continues, Mathieu, but certainly they've very strong revenue growth rates. Our hospital business has had for a couple of years now like double-digit growth. So we'd like to think it continues, and the market did rationalize somewhat in '24 with Sigma exiting the hospital business. So that's also assisted in generating a 10% growth rate.

Yes. And then just a final one on animal growth. The top line has been obviously lower this fiscal year. Do you expect that to kind of go back to high single digit on a sustainable basis from F '25?

I think mid-single digits, Mathieu, right? I think the Animal Care business has come off the COVID highs, if you like. We didn't take any price on the branded. Our key products in FY '24, we'll take some price adjustments in '25. We need to do that. And we had a headwind in '24 on the overall revenue for the segment because of the wholesale, the business, with fund supply going direct. So we'll cycle through that and we've largely cycled through that. So I wouldn't expect that to be a negative headwind into '25. We'd expect some minimal growth in that business in '25. But the wholesale business, if we can get growth out of that of 2%, 3% for the year, then that's -- it's pretty much what that business could do, I think.

This concludes the question-and-answer session. I would now like to turn it back to John Cullity for closing remarks.

Well, thank you, Daniel. Thanks for everyone's time this morning. Thanks for your interest in the business, and that concludes the formal presentation. So I wish everyone good morning. Thank you. Bye-bye.

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