CVS Group (CVSG) interim results 2022 - March 2022

Welcome everyone to this presentation of our interim results for the first half of our financial year to June 2022. I'm Richard Fehrman, Chief Executive, and I'm joined by Robin Alfonso, CFO, and Ben Jacklin, Chief Operating Officer. In keeping with the format we've adopted for recent results presentations, I will open with an introduction in which I will provide a reminder of our strategic focus and the significant opportunities we have for investment in driving further growth. Robin will then talk through the financial results in more detail, including the increased investment we plan to make, and Ben will then provide an operational update focused around our four strategic pillars. I will then conclude with some comments on our outlook and we will then invite questions from analysts following our presentation.

So I'd like to start on slide five. When Ben, Robin and I formed a management team in November 2019, we set out a very clear strategy for growth. At the heart of this was our purpose to provide the best possible care for animals and our vision to be the veterinary company people most want to work for. In support of this purpose and vision, we set out four strategic pillars which have framed our focus ever since: recommending and providing the best possible clinical care, being a great place to work and to have a career, ensuring we have the best facilities and clinical equipment, and taking our responsibilities seriously to our colleagues, to the wider profession, to our shareholders, and to all stakeholders in CVS. We are focused on driving organic growth in CVS through improving our existing operations, through using our integrated model to provide the best possible joined-up care to our clients and their animals, and through improving the recruitment, retention and development of our clinicians. This has been supported by increased investment in our practice facilities and in clinical equipment. We strongly believe this is essential in our ability to provide great care and to being able to attract and retain the best talent. Now clearly this new strategic approach was a departure from the buy-and-build approach of the past. Nonetheless, we also recognize the opportunity to make further selective acquisitions and to invest in greenfield sites where client demand is currently underserved. We are confident that this new strategic approach remains appropriate and that it will continue to deliver good returns.

I've set out some highlights from the first half which I believe demonstrate that this strategy is working. In the first half, we saw total sales increased by 11.4% versus the corresponding half year, with total revenue of £273.7 million. The prior comparative benefited from HPC revenue catch-up of £3 million and £0.9 million of revenue from COVID-19 testing in our laboratories. And if we adjust for these two items, like-for-like sales have increased by 11.3%. Adjusted EBITDA increased by 15.5% to £52 million, and we saw our adjusted EBITDA margin increase to 19%. Through our focus on recruitment and retention, we have seen the number of vets we employ increased by 9% and our vacancy rate remains stable. We want to recruit more vets to support with growth opportunities. Now these results have been driven by a number of factors, but I would like to highlight three in particular. Firstly, and most importantly, they are due to our outstanding team of people. We are very fortunate to have passionate colleagues who are focused on providing the best possible care, and I would like to take this opportunity to thank them all for their contribution. Secondly, as an AIM-quoted company, we are committed to recommending and providing the highest levels of clinical care, and we adopt an evidence-based approach. In support of this, we have increased our investment in our facilities. We have completed 19 refurbishments at locations since the start of the financial year, and we have 54 projects currently underway at the design, tender or construction phase.

And then, as set out on slide seven, our integrated model is important in our ability to provide joined-up end-to-end care. Clients access our services through our first opinion practices, and we provide both reactive care and, importantly, affordable preventive care through our Healthy Pet Club and Healthy Horse programs. Identifying issues early often leads to better clinical outcomes and less invasive treatments being required in due course. Where the circumstances require, we have dedicated out-of-hours centres, our laboratory support through the provision of diagnostic tests, and our referral specialists are on hand to provide advanced veterinary care where required. Our crematory provides clinical waste disposal services and a compassionate cremation service at the end of life. This is important as most owners who lose a pet go on to buy a replacement, and the cycle then continues. And importantly, our clients therefore benefit from this joined-up care that we're able to provide.

So turning to slide eight, the market dynamics continued to be positive. The benefits of companion animals have been widely recognized since the first COVID-19 lockdown restrictions, and that has led to an increase in the population. We don't necessarily expect the population to increase further from here, but we have not yet seen the full benefit of the increase we've already seen, and the puppies and kittens born over the past two years. The average spend per pet increases on a fairly linear basis with age, and hence we expect to see the full benefits in five to ten years' time. And the trend of humanization of pets continues, with consumers wanting the best possible care for their animals. Our focus is on providing high-quality, evidence-based clinical care, and I'm very confident this positions CVS well to deliver further growth in due course.

Now moving to slide nine, I'd like to cover our opportunities to make further acquisitions. I will start with the recent CMA decision following their investigation of our acquisition of Quality Pet Care Limited, trading as The Vet. Now we were naturally disappointed with the CMA's decision, but given the relatively small scale of The Vet in the context of the wider group, we have taken the pragmatic approach to offer undertakings to dispose of all eight sites, and we are in the process of seeking a buyer to the CMA's satisfaction. Now whilst we don't fully agree with the CMA's approach, their decision is helpful in informing our assessment of a number of future acquisition opportunities in the UK. And as shown on this map, there are considerable parts of the UK where we currently have no practices or limited existing presence. Hence our ability to make further acquisitions in these areas should not be impacted. And furthermore, there are other practice acquisition opportunities where, even if the target practice is close to our existing sites, we will not reach the 30% full-time equivalent threshold outlined in the CMA decision. All practices in the UK are required to be registered with the Royal College of Veterinary Surgeons, and the RCVS website shows that there are circa 5,300 practices in the UK. The CMA have stated that around 55% of these are now owned by corporate groups. Now this will never get to 100%, and nor should it, but as we've seen in other sectors, we believe that corporate ownership may reach 80%, and hence we anticipate that there are over a thousand practices which will be acquired by corporate groups over the next few years. And we will remain well placed to compete for future acquisitions in the UK. And the majority of our synergies from our buying power, our clinical approach, our in-house laboratories and our crematoria are available regardless of location. As I stated earlier, our strategic focus over the past three years has been to drive organic growth through a focus on our people and the provision of high-quality clinical care, augmented by selective acquisitions. We are confident in our ability to continue this approach, with further UK acquisitions supporting continued organic growth. And we have also engaged advisors to undertake analysis of emerging European markets, and we expect to see opportunities to acquire practices in new countries in due course.

And then turning to slide 10, I'll finish my opening remarks with a reminder of our focus on sustainability and ESG. Now we have formed a number of working groups focused on making sustainable improvements, and we will provide an update in our first standalone report in the summer. We report against the SASB framework, and we plan to include ESG elements in executive bonus targets in the new financial year. So at this point, I'll hand over to Robin to cover the financials.

Thank you, Robin. Turning to slide 20, I'll start with our first strategic pillar: that we recommend and provide the best clinical care every time. In the last few years, we've focused our leadership efforts, our operational management, our KPIs, and our practice team incentives around the delivery of this best possible clinical care. We introduced Patient Care Index as a key measure that we use to determine the proportion of the highest quality clinical work, particularly diagnostics, that our practices are undertaking. We've recruited an outstanding national team of hub clinical leaders over the last few years who are highly experienced vets who lead and support the delivery of better and better care within our practices. We've achieved significant improvements in this metric, which is great for our patients and clients and great for the company, delivering significant organic growth within the business. In figure 1 here, we shared the relationship between our Patient Care Index and the average transaction values in our small animal practices. This well demonstrates the key philosophy behind the strategy that we've been executing for the last few years: that better clinical care for patients delivers better commercial results for the business. Further to this, in figure 2, we've also shared the spread of Patient Care Index across our companion animal practices. We're proud that our practices provide extremely high levels of clinical care across the group, but this range gives us even further opportunity to improve the services we offer to our patients and clients.

There are, of course, interdependencies, not least being able to recruit great clinical talent into our practices, and directly linked to that, the quality of the premises into which we are recruiting. The first of those interdependencies is detailed on the next slide, beneath our second strategic pillar: that we're a great place to work and have a career. I'm delighted that we employ around 9% more vets and 12% more nurses than we did a year ago, despite only a 1% growth in the available pool of vets. Crucially, our key metric of employee net promoter score has continued to improve. How our colleagues feel about working for CVS is critical to our success and forms a major part of our management focus. This includes a constant review of our terms and benefits, investment in education and development, and most importantly, continuing to nurture our culture of clinical and people first. It's as a result of this focus that we've significantly outperformed the market in recruitment. As focused as we are on recruitment of clinicians, we are equally focused on creating an environment for them to develop and grow their careers, and it's positive to see the early signs of further improvement in attrition during the first half of the year. One example of our efforts to create great careers and develop our colleagues is our creation of a national network of advanced clinicians to allow vets to study for a certificate in an advanced discipline and then deliver those advanced services across a region of primary care practices. We also continue to invest in our learning, education and development function, which has now enrolled over 800 colleagues onto apprenticeships, created 256 learning webinars, and had 10,000 views of those webinars. Our vet vacancy rate is stable, and although higher than reported in previous years, this reflects our ambition to recruit even more vets in the coming months to support our ambitious growth.

On the following slide, we've shared our view that the market for vets will benefit from further tailwinds over the coming years. In fact, our forecast suggests that the number of new graduates leaving vet schools in the UK will roughly double over the next eight years. The majority of this growth comes from the announced opening of six new vet schools, three of which are already open, as well as the growth in student numbers within the existing vet schools. This includes the introduction of a double intake at Nottingham University three years ago, which we'll begin to benefit from in two years' time. A further benefit to us includes the removal of COVID-19 travel restrictions, which has made the employment of European colleagues who wish to travel home regularly difficult for the past two years. And finally, we expect to benefit significantly from the anticipated legislative reform that will enhance the role of the veterinary nurse in our practices. This will allow nurses to perform a significantly wider range of procedures that are currently being performed only by veterinary surgeons. Although the timing of this legislative reform is yet to be determined, our regulator has made clear recommendations to government following a broad consultation. We've already begun investing significantly in supporting and developing our nursing colleagues to ensure that they and we are ready to take advantage of reforms when they arise.

On the following slide, we draw out the critical focus on our third pillar: providing great facilities and equipment. As Robin mentioned, we've increased capital investment in our facilities and we're signaling further increases in this investment. Refurbishment of our existing practices, adding consultation rooms, operating theatres and dental suites, or relocation of premises to brand new facilities have significant advantages to us in terms of attracting great talent and our ability to deliver the very best clinical care, not to mention the advantage of a great environment for our clients and patients. This is reflected in the excellent returns these investments generate. And on completed projects since July 2020, we've already seen an average of 20% uplift in revenue post-project completion. We've rated all the clinical premises in our companion animal primary care estate against our established operational matrix, and the spread of these ratings are shown in the graph on the left. The range of property quality in our estate shown here clearly demonstrates the opportunity for investment ahead of us, and we intend to seize that opportunity. In the graph on the right, we've shared how average transaction values in these practices increase as the property quality increases, demonstrating one way in which returns are realized.

On slide 24, we've now developed a standard layout to optimize our investments into new sites, whether those are relocations or greenfield, based on best clinical practice and to maximize the clinical workflow efficiency. This approach enables us to ensure consistency, maximize value, and generate optimal clinical environments. We're able to work with Vet Direct, our in-house equipment supply business, to ensure that we can then equip these facilities with the best clinical equipment at excellent value. Aside from the clinical efficiencies, through consultation with both colleagues and clients, we've also developed a new look and feel for client-facing areas in our relocations and refurbishments, creating a comfortable experience for pets and their owners without the stark clinical aesthetic of more traditional veterinary waiting rooms. We very much see this model as the CVS veterinary practice of the future, where clients and their pets can visit a comfortable, welcoming environment to seek the best possible healthcare.

On our final strategic pillar, on the following slide, we take our responsibilities seriously. We've spoken previously about our industry-leading work on quality improvement, antimicrobial resistance, and a wide range of ESG initiatives. We've shared on this slide a recent initiative as we've launched an industry-wide research grant program to support the advancement of evidence-based medicine across both CVS and the wider profession. These grants are available to UK veterinary school universities in collaboration with CVS, by way of both postgraduate research projects for specialists in training and longer-term research programs running over a number of years. We've committed £200,000 this year to the grants and have already seen an overwhelming set of impressive applications that will advance knowledge in our profession.

And finally, as set out on slide 26, I'm delighted that Loren Garrusi, Clinical Director of Vet Oracle, has been awarded the BSAVA Burgess Award for his truly outstanding international contribution to the field of small animal practice. Loren was instrumental in establishing our Vet Oracle business, and we're delighted with the recognition that he's received. I'll now hand back to Richard. He'll share some of the highlights of the eight-month period since the start of the financial year. Thanks, Ben.

As set out on slide 28, I'm pleased to report that the positive performance seen in the first half has continued into January and February. For the first eight months, we've seen sales increase by 11.5%, with like-for-like growth on an underlying basis of 11.4%. Adjusted EBITDA margin remains strong at 18.6%, and this includes a shorter month for February. And we've grown our Healthy Pet Club to 466,000 members. Our vacancy rate remains stable, and our leverage remains comfortably below 1.

And then, as set out on slide 29, we remain well positioned for future growth. We continue to operate in a growing market and in a favorable sector, and we are fortunate to have a highly skilled and dedicated team of professionals who are passionate about providing clients with outstanding care for their animals. We are increasing investment in support of a number of growth opportunities, and we are confident in our ability to continue to make further acquisitions. We have a very clear strategy, and we remain confident in our ability to deliver further growth in the future. So that concludes our formal presentation. Thank you for attending this presentation. To summarize, we have a very clear strategy to deliver future growth through our focus on providing the best possible care and, importantly, employing, developing and supporting our highly skilled clinical teams and other professionals across CVS. We delivered a strong set of results for the first half, and this momentum has continued into the first two months of the second half. And importantly, Ben, Robin and I remain very confident in our ability to drive further growth in the future. We look forward to the Capital Markets Day in June, and we look forward to sharing further success in due course. So thank you, and we appreciate your support.