Apiam Animal Health Limited (AHX.AX) Earnings Call Transcript

Thank you for standing by and welcome to the Apiam Animal Health H1 '20 FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Dr. Chris Richards, Managing Director. Please go ahead.

Thanks and welcome to our H1 FY 2020 results update or the Apiam Animal Health update. I'll just start off with a snapshot of the first half. So Apiam generated revenue of $56.2 million, which was in line with the previous comparative period of H1 of FY '19. We did, however, deliver an increase of 6.7% in our gross profit of $30.4 million. Our underlying EBITDA, pre the impact of AASB 16, was $5.1 million, which was slightly up on the previous year. And the underlying NPAT, again pre the impact of AASB 16, of $2.1 million which was 7.1% up on the first half of last year. The Board has also announced an interim dividend $0.008 per share, which is in line with last year. I'll then move on to the H1 FY '20 highlights. So Apiam continues to deliver resilient revenue and earnings despite the wider reported industry conditions that have been occurring. We saw growth in our feedlot, companion animal and the commencement of contributions from acquisitions and new business initiatives, and these have offset the impact of the dairy and pig segments, which have had some reductions in animal numbers but are now recovering from those reductions. We also saw a gross margin improvement. As I outlined in all our segments, some of it due to a change in business mix. And we've seen an increase from 50.8% gross margin in H1 '19 to 54.1% in H1 of FY '20. Despite the revenue reduction and the -- we've been able to offset this through the improvement of gross margin and a focus on our operating cost control, which has resulted in the earnings growth. H1 also saw a number of business development initiatives starting to drive new revenue streams. Some of these are complementary revenue streams, which we're leveraging across our animal footprint, but some of them also provide further diversification benefits through selling into new markets. And these have been new programs, services and products, such as ProDairy, Best Mates and the new acquisitions, which include diagnostics and custom vaccines. In terms of acquisitions, we made some late in the first half, ACE Laboratories, Grampians Animal Health as well as a small acquisition in Devoted Vets, and these are all performing strongly. On the back of the first half, where Apiam's well positioned to deliver growth as industry conditions improve and deliver the full benefits from the new business initiatives. If we turn to Slide 4, this gives an overview of the company where, as I said, we're a resilient vet services portfolio, and we've got high-growth opportunities. If we look at our core Veterinary business, it's providing veterinary, animal well-being and production services, and these are supported by the supply into our clients of technical products. We have a number of new product distribution agreements that we've put in place and as well as a private label initiative, which will form part of our core veterinary business. The second part of our business are high-growth, complementary business initiatives that we can apply across our animal footprint. So these include genetics, diagnostic services, autogenous vaccines as well as some new consulting services that we're bringing to the company. So these are both on a domestic and -- or both provide domestic and international opportunities through our own -- through -- within our own structure or through partnerships, particularly in international markets. So I'll now turn over to Matt to give an update on the financials.

Thanks, Chris, and good morning, everyone. So I'll start with the profit and loss summary first, and we'll focus on an underlying basis with comparison to prior comparative period. We reported a slight growth in revenue despite challenging industry conditions, and this reflects the benefits of the diversified model and acquisitions. Ex acquisition revenue fell 6.5% due to reduction in low-margin wholesale business and reductions in animal numbers for both pigs and dairy. Gross margin is up 3.3 percentage points and reflects improvement across each business segment. The improvements are driven by targeted change in business mix, benefits from PMS rollout in clinics and an increasingly specialized service offering. At operating expense level, the focus continues on underlying operating cost containment. Operating expense grew largely as a result of new acquisitions, with ex acquisition growth of 2% versus the prior comparative period. Employment expenses managed tightly and growth ex acquisitions was 0.7% versus prior comparative period, and growth in general operating expenses were mainly due to marketing, training, product registration fees and first-time annual license fees associated with the PMS systems. I'll touch on the impact of AASB 16, the introduction of that accounting standard on the next page. But you will note that property lease expense, which was previously recorded in operating expense, is now recorded below the line in amortization. So yes, first time amortization of ROU assets are now recorded in accordance with AASB 16, below the line. At NPAT level, we grew 3.6%, and -- which excludes the minority interest of start-up costs in our U.S. JV Apiam Solutions. Turning over the page. So just to briefly outline the impacts of the introduction of AASB 16 leases. It was adopted in H1 FY '20 for Apiam. It's -- we have a comparison here post and pre-AASB 16. So as mentioned, lease expense no longer is reported in operational expense. That's now reported below the line in amortization of ROU assets. The impact of that is that EBITDA goes up, as you can see. EBIT is -- effectively no impact at EBIT level. And at NPAT level, there's $70,000 impact as a result of the effective interest that's charged on the base liability. Now we turn to the balance sheet. So working capital has increased. There's been an investment in inventory to take advantage of supplier pricing, which is obviously linked with improving margins and increased holdings of inventory associated with new products. We can see that the lease right of use asset has been recorded, for the first time, $11.9 million. And borrowings have increased to $38.4 million as of the 31st of December 2019, and that largely reflects the acquisition cash component of the acquisitions of ACE, Grampians Animal Health and Devoted Vets, but also the strategic increase in inventory that I outlined under working capital. And there's been a re-class of vehicle price purchase liability of $1.5 million to lease liability, also to comply with the new accounting standard lease liabilities. Operating leverage as of 31st of December 2019. Gross debt-to-EBITDA is 3x versus a covenant of 4x, and we still have $16 million headroom available under our acquisition facility. The lease liability of $11.7 million has been booked in the balance sheet for the first time also. And contingent consideration of $3.925 million related to earnout agreements to ACE and GAH has also been booked and is reflected under other liabilities. Now turning to the cash flow. So operating cash flow was impacted by the acquisition costs and the investment in inventory that we outlined on the previous page, and lease expense has now been transferred to financing activities as a repayment of lease liability. On the investing activity side, it was impacted by the cash components of the acquisitions and CapEx is in line with prior comparative period. And then financing cash flow is impacted by a repayment of lease liabilities, as I just mentioned, and the drawdown of the acquisition facility for the acquisitions. In relation to the capital management, we've declared an interim dividend of $0.008 per share, which is consistent with the previous half and is a payout of 54.9% of NPAT, which will be fully franked. The payment date of that dividend is Friday the 24th. And the other important date to remember is that the last day to participate in the DRP for interim FY '20 dividend is March 30, 2020. With that, I'll hand back to Chris.

Thanks, Matt. So I'll now go through a bit on our strategy and our outlook for the second half of the year. So on Page 12, we outlined the 3 areas of our strategic focus as we continue to leverage performance on the investments that we've made over the last few years. The first one relates to systems, where we're getting improved efficiencies and capturing missed revenue as well as improving our value proposition for customers. The second strategic focus is around increasing the animal numbers that we service. We're doing this through business unit synergies on a species level as well as through our regional model across the clinics. We're also doing it through our strong acquisition pipeline and the rollout of new services, Best Mates and ProDairy, which are also increasing the number of animals that we service. The third focus is around the new services and their products. We've got a private label strategy to improve our value proposition to our customers and reduce the supply risk. We got new product distributions that we've acquired to reduce antibiotic usage and improve animal productivity, I'll talk about those a little bit later, as well as the service programs that I mentioned, Best Mates, ProDairy, which will improve preventative health and wellness. I'll just move on to give an update on the acquisitions. Again, these acquisitions are broadening our specialist service offering and increasing market share in attractive regional locations. The first acquisition, which we completed in October of 2019, was ACE Laboratory Services. This is a highly specialized autogenous or custom vaccine facility as well as a diagnostics laboratory. And we can leverage both these services and products across our footprint as well as into new markets. ACE is the market leader in the Australian production animal industry for these types of services, and we're certainly focused on growing that business even further. Grampians Animal Health, which we completed in December of 2019. That's located or headquartered in Hamilton in the Western district of Victoria, which is a large and very productive sheep farming area. This business includes a large regional mixed animal veterinary clinic as well as a sheep and beef consultancy business. So this has enabled us to provide new services across our other clinics as well as strengthen our position in Southwest Victoria, which now brings our footprint to 7 clinics. And these 2 acquisitions, as well as the third one that we made very late in the half, being Devoted Vets, are performing above forecast and the integration is on track. I'll now move to Slide 14, where it really shows the number of services and new products that we've been able to bring to market organically or through acquisition in the first half. In July, we launched the Best Mates program, and I'll talk to that in a minute. In August, there was ProDairy, which is a consultancy program for the dairy industry. We acquired ACE in October of 2019. Devoted Vets in November to expand our footprint in West Gippsland. In November, we also entered into a new distribution agreement with Zoono Animal Health on a new disinfectant and protectant -- surface protectant nanotechnology. And in December, we acquired Grampians Animal Health. So I've spoken to the acquisitions, and I'll now provide further details on the Best Mates service program and the Zoono product opportunity, which is on Page 15. So I'll start off with Best Mates. Best Mates is a wellness program to drive growth in our companion animal services, provides a whole-of-life health and wellness program. We launched this in -- early in FY '19 in July and -- on a trial basis, and then we've expanded it across the company footprint over the last 6, 7 months. We've seen 57% average monthly growth in our member base since our launch. And we've seen some clinics well until we exceed our 5% target, which is what we had set for the first year. I'll now turn to the Zoono distribution agreement. In November, we executed a distribution agreement with Zoono Animal Health for a distribution of their proprietary sanitizer and surface protectant for use in livestock facilities in Australia. We also entered into an exclusive agreement for the swine industry in the U.S. And in the last 48 hours, we've also entered into an exclusive agreement for the swine industry in Canada and New Zealand. So the Zoono product is a -- it's an innovative alternative to chemicals, which not just sanitizes on day 1, but it provides an ongoing mechanical activity for up to 42 days. So as the product dries, it creates a nanostructure, which resembles small spikes. And then as bacteria and viruses land on these spikes, they get attracted to them. They land on them and then they get lysed, very similar to a balloon landing on a pin. What is unique about this product is that unlike most other products, which only work for 1 or 2 days, this product has been demonstrated to continue to work after 42 days. And the product has been in the human industry for a number of years, and there's been over 150 tests performed by third-party laboratories worldwide for its use in humans. In animals, it's only in the last 18 months that we started -- it was really identified an opportunity for its use in animals. It has been tested in the laboratory to be effective against a range of bacteria and viruses, including the H1N1 swine influenza and African swine fever, where it showed 99.9% efficacy. And subsequently, this product is being distributed directly by Zoono and ourselves into the China and other Asian countries where African swine fever is currently occurring. For us, with African swine fever, it will be a very important part of preventing that product coming into Australia as part of our security programs. Apiam and Zoono Animal Health have conducted successful field trials in Australia and New Zealand in poultry and pigs over the last 18 months and demonstrated the extended duration of activity against these microbes. So we've seen similar results in animal housing systems to what had been reported in the human side. The real upside for this product is the fact that in the trials, it's provided extensive production benefits in the poultry trials, where it's shown improvement in feed efficiency and growth rate. An improvement of feed efficiency basically mean that you don't use as much feed to produce animals to the same way. So this has been done in poultry. In the pig side, we've just commenced the trials to be able to demonstrate any pig productivity benefits such as growth rate and feed efficiency. So sales have just commenced in Australia as well as in the U.S. in the pig industry. In Australia, they've already commenced in pig and poultry. In the U.S., we've been targeting figures that have got existing disease issues and as well as doing further studies, which we're about to commence and to look at the production benefits of this product in the U.S. pig industry. I'll now move on to Slide 16 and provide a bit of an industry conditions outlook. Apiam's diversification certainly reduces our exposure to a mix of industry conditions. If we look at the feedlot industry, Meat & Livestock Australia recently have made a comment around the feedlot sector, having grown in recent years and a response to a strong demand in high-quality grain beef. And it certainly has a key role in finishing cattle in drought conditions. For the year ahead, MLA expects the number of cattle on feed to remain at historically high levels, although there will be some easing from the -- expected from the record numbers of 2019. In the dairy industry, Dairy Australia has recently put out comments around operating conditions across the country. Farmers in Southern Australia, which is where most of the Apiam clients are located, are experiencing a highly favorable season. In this -- the southern areas, we've had good rainfall and milk prices are quite favorable at the moment. In comparison, those further north in Queensland and in the northern New South Wales, we continue to face ongoing challenges. In the companion animal side, as I've mentioned, wellbeing attitudes continue to align with metro attitudes, and we've seen that through the launch of our Best Mates program. In the -- in terms of the pig industry, Australian Pork recently made comment around domestic grain prices have been softened, following global grain markets lower. And this, of course, improves the margin over feed costs for producers compared to 12 months ago. They also reported a reduction in the pigs slaughtered in 2019, which is in line with our observations. However, the cull rates of breeder stock have declined towards the back end of 2019, which would indicate a rebuilding of the Southeast. We now turn to Slide 17, just with our outlook. So Apiam is well positioned to deliver growth as industry conditions continue to improve. The recent rainfall and favorable commodity prices across all the segments are positive for H2 FY '20 outlook. There's a global shortage of meat protein, which is supporting growth in animal numbers across several of the segments that we operate. And our new business lines and initiatives are in place to leverage our footprint as well as diversify our revenue streams. We have a diversified platform. We expect that to deliver EBIT growth in the second half of FY '20 compared to the first half. And we're doing this through the new services and product initiatives as well as leveraging the benefits from the investments that we've been making in infrastructure and our operating platform. We also expect to deliver EBIT growth through our acquisition strategy, which continues to play a core part of Apiam's growth strategy. And with that, I'll open it up to any questions.

[Operator Instructions] There are no questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.