OCF fell 34.5% and leverage rose to 1.8x as inventories built $140m

Operating cash fell 34.5% to $105.5m even as EBITDA grew 4.8% to $303.1m, dragging cash conversion (OCF/EBITDA) from 55.7% to 34.8%. Capex nearly doubled, rising 91.2% to $66.4m, so reported free cash flow fell to $39.1m from $126.3m a year earlier.

Revenue grew 7.1% to $6.6b. Reported EBITDA was up 4.8% and operating profit up 4.7%, but profit before tax was effectively flat at -0.3%, while NPAT rose 3.0% to $136.2m on a near-identical effective tax rate (28.5% vs 28.6%).

Funding the gap fell to the balance sheet: gross borrowings rose 37.1% to $1.5b, lifting net debt/EBITDA from 1.4x to 1.8x. Inventories grew 11.8% (+$140.3m) to $1.3b. The interim dividend was raised 7.5% to 57.0 cents.

OCF/EBITDA of 34.8% is well below the prior comparable's 55.7%, and FCF/NPAT collapsed from 95.6% to 28.7%. This matters because reported NPAT growth and the lifted dividend are not being supported by cash from the underlying business in this half.

The dividend is not covered by free cash flow. At a 57.0c declared interim, the payout consumes 80.3% of NPAT (up from 76.1%) but 279.8% of FCF pre-lease. EBOS retained capacity to raise the distribution, but in this half it has been funded through working-capital absorption and increased borrowings rather than internally generated cash.

Leverage stepped up while operating profitability barely moved. Net debt/EBITDA rose from 1.4x to 1.8x while PBT was flat. The combination of a $140.3m inventory build and a capex step-up to 1.0% of revenue (vs 0.6%) absorbed cash that previously cleared the dividend, so the increase in gross borrowings is doing the work.

The HY23 reference shape was roughly even on revenue and EBITDA (50.2% and 50.8% of FY23 respectively) but heavily second-half-weighted on cash, with HY23 generating only 41.2% of FY23 operating cash. That historical 2H cash skew means a recovery in conversion is plausible if inventories normalise, but the release does not provide guidance to confirm one.

What the release does support: continued top-line growth across Healthcare and Animal Care, and management's stated underlying EBITDA growth of approximately 10% on a normalised basis. What it does not support is any view that the cash-flow shortfall is contained without a meaningful 2H working-capital release.

Revenue and segment EBITDA growth in both Healthcare and Animal Care indicate underlying trading was healthy, ROE edged up from 11.5% to 11.8%, and the tax rate was effectively unchanged so the small PBT-to-NPAT divergence is not an accounting distortion of the operating read. Underlying EBITDA cited in the release ($313.2m, +8.3%) implies modest one-off costs in reported EBITDA but no large reported-versus-underlying split.

What weakens the result is the composition of cash. The $140.3m inventory build, the doubling of capex, and the resulting 20.9 percentage-point fall in OCF/EBITDA all point to balance-sheet absorption rather than a clean cash-backed earnings step-up. Receivable days actually improved slightly (42.2 vs 44.7), so the pressure is concentrated in inventory and investment spend rather than collections.

This briefing cannot assess management's qualitative explanation of the inventory build, the strategic rationale behind the capex step-up, or any FY24 earnings or cash-flow guidance, because no such commentary or target was supplied with the release excerpts.