Pets at Home Group Plc

Good morning everybody and welcome. Before Mike speaks to you about our half year 19 results and our future guidance, I'm going to talk you through our group strategic review and talk you through specifically the actions we're taking following an in-depth and exhaustive review of our first opinion vet business. I became the CEO of the group six months ago and I've taken the opportunity to do a full review of the group. And as I said, I've undertaken an exhaustive review of the first opinion vet business. We've reviewed every single practice in immense detail. And today we'll be sharing that output. I know there's going to be an awful lot to absorb and understand. And I know the output is a big reset. But when you're able to review and stand back, notwithstanding the changes that we're announcing today, we've a really good vet business with the potential for high return and low capital. A model that rewards our vets for the right behaviours. We've also got a retail business which is absolutely back on track and it's on back to profitable growth. I can see Pets at Home is a good and a healthy business. And with the actions we're taking today, we'll return this to being a great business. We're a leading player in a really vibrant pet care market, which is growing at 3-4% a year. And we've demonstrated that customers really value what we do. The actions I instigated in retail are working. The actions to face our price challenges head-on are working. And that's unleashed the business, allowing it to shine, delivering its sixth consecutive quarter of like-for-like growth ahead of the market. Our vet business is unique and exciting because it's an owner-driver model. It outperforms other corporate models because they're not employees. These are owners. These are small business owners who want to create value. The fact is, we are the only business of scale in the UK that can address all of the pet owner's needs. We're not just a pet shop, we're not just a vet, we're a pet care business. Our new strategy is to focus on just this, focus on complete pet care, everything a pet owner needs to be a great pet parent. I'm going to focus this business back onto what made it great. Delivering cash and profitable growth. For customers, the more they engage with us in products and services, quite simply, the more cash they spend. For vet partners, I remember we support our vet partners from zero. Partnership needs to share that pain equally and fairly. And we need to get those businesses to being debt-free as fast as possible when we can then share the gain and generate dividends for our partners and cash for us. And for investors, through sensible capital allocation and strong management, we can deliver sustainable free cash flow. Whilst retail has addressed its pricing challenges and is back on track, our vet business had lost its focus. We were really focused on practice openings and EBITDA rather than cash generation. Today, I'm addressing that. I'm going to fix our vet business like I fixed our retail business. I've got a simple yet compelling ambition for this business, and it's to be the best pet care business in the world. I have a plan to grow cash from the group, and I've built a team who will deliver it. The reality is Pets at Home is a benchmark that all our competitors want to beat. But I'm not going to let them. Our business is special. The secret not lies in all the componentry, but in the whole and how they interplay with each other in creating more connections with customers and more cash for the business. Quite simply, we're aligning ourselves to what matters most to pet owners, and that's pet care. We know our customers. We know one in three dogs, one in four cats in the UK. We know their pets. We know their purchases. We know their behaviours. We know their triggers. But knowing's not enough. Acting is what matters. The battleground isn't about channels, nor products or services. It's actually about the pet owner, the customer. And if anybody thinks that the customer's not in charge today, he's a retailer, frankly, you're misguided. Because the whole job is about serving a customer's needs on how they want to be serviced, not on how we want to service them. Pet owners just want to be really great pet parents. Delivered on their terms, joined up, simple, convenient, great value, best quality, the list goes on. I believe we're the only business who can deliver complete pet care for customers. And it makes perfect sense too. We are present in every channel, offline, online, joined up, in products and in services, and we think that offers a stronger, more compelling proposition for customers. It's why we are absolutely obsessed about new pet owners, puppies and kittens. The reason why, it's quite simple, it allows us to engage customers into all channels and into all parts of our business right from day one. Some of you will say, I've heard it all before. Well, I agree. The difference is I'm delivering, not talking. Our new strategy isn't starting today, we've already started. Our strategy is simple, ambitious, but deliverable, because we're gonna become the best pet care business in the world. And it's focused on four simple pillars, bringing the pet experience to life, using data to better serve our customers, setting our people free to serve, and as a consequence, 50% of our sales will come from pet services. And we'll start by bringing the pet experience to life. If you're a pet owner, you already know this. Being a pet owner is an experience. It's emotional, it's challenging, it's rewarding, it's frustrating, but it's great. Pet care is all about experience. And if you have physical locations today, they can't just be places that people need to go to. They have to be places that people want to go to. And that's why we'll be repurposing our stores to maximise our existing services and make sure we're high on experience. We'll be putting our pets centre stage. Come to our store on a wet Saturday and you'll see exactly why. Pets have a unique draw for customers. And it's totally unique and it's loved by our customers, but we think it could be bigger and more immersive for our customers. We'll right-size our store network. We'll relocate or close a very small number of stores that can't accommodate pet services. And we're ensuring that digital is integrated into everything we do because it makes pet care really easy and really convenient. We'll continue to keep our prices competitive, and we'll push private brands being 50% of our business. With so many connections with customers, data is absolutely key. And we'll be using our data to better serve our customers. We've been talking about this for quite some time, and whilst we've made some great progress, I'm making it a strategic priority. We are about connecting our customers across the entire group, driving our customers into services, arming our colleagues with the information they need in the moment to better serve our customers, and using data to personalize our offers, our experience, and our convenience. And we're using data to make our strategic decisions. There's only one version of the truth. We're using data to reduce our cost base and set our people free to serve our customers. We employ many talented, very experienced colleagues. It's absolutely mad to have them tied up in task. We're eliminating that task, allowing our colleagues to do what matters most, which is serve customers. And it makes perfect sense for a very simple reason. When our customers engage with our customers, when our colleagues engage with our customers, we drive sales. We're building our systems to support our colleagues, reducing our overhead base. I think we've been really guilty of running two businesses, a pet shop and a vet business. Well, no longer. We run a pet care business, and that means we're maximising the capabilities of the wider group, working cheaper together and working better together. I've been investing in our senior talent, helping us execute our plan, but more importantly, building the capabilities that I need this business to be tomorrow. Our strategic plans will mean that we expect 50% of our business to come from pet services. By services, I don't just mean vets and groomers. I mean much more. We'll be repurposing our stores and adding new complementary services. We'll be extending and building on the 650,000 existing subscription plans we have on product and on services. We'll be recalibrating our first opinion vet business and realising the cash growth and we'll continue to grow our specialist hospital business. Next year alone we'll be doubling the size of DWR in Cambridge and making it the single biggest pet hospital in Europe. We'll be expanding our specialist capabilities and our first opinions via the development of our super surgeries. The fact is we've already started implementing our strategy to deliver the best pet care business in the world. delivering sustainable returns through our unique capabilities and rewarding for our customers and for our investors. Our retail business has really demonstrated its resilience. Six quarters of consecutive like-for-like growth, growing ahead of the market in all categories and in all channels. Even as we annualised last year in our big price investment, our two-year like-for-like is in excess of 7%. Find me a retailer today with like-for-like growth. If you leave and look at our hardest measures, if you look at our pure bricks-and-mortar business and strip out all our omnichannel capability, our like-for-like growth in our stores was 2%. Our pure online sales were growing at 40% like-for-like, and our omnichannel business was growing at 45%. We all know the best indication of a retail business are your customer metrics, and I think we've got three big ticks. More customers, shopping more often, spending more money. That's all that matters. We've executed our price repositioning exactly in the way we said we would. And that investment is largely complete. I think the results are both compelling and competitive. And in full year 20, our attention will be back to driving profitable growth in our retail business. And if you look at our price position, If you look at those items that we have now on Easy Repeat, these are consumable items which get delivered to customers on a schedule that they choose. We are 2% cheaper than our most aggressive price competitor. If you look at the items that are most important to our customers, the big volume, big branded items, mainly in food, there is no price difference. We are the same price. And if you look at our harshest measure now, which has taken every item which is directly comparable, weighted to our volume, our price gap is now 5%. We believe that price gap and the execution of our price gap is sustainable and manageable. Price will never be a reason why you don't shop at pets at home. We've also been really busy improving our digital experience for customers. And again, all the key measures are improving. We've landed improvements virtually weekly. We're constantly tweaking and reviewing points of friction for customers, but we've landed some really big improvements too. Most recently in October, we relaunched our mobile experience. It's a complete transformation for customers. I'm already seeing those metrics improve immediately. We've landed brand new checkout across every single device, less clicks, and now you've got saved payments. We've upgraded our entire hardware stack, which means our speed is now twice that's what it was prior. We've landed a brand new VIP app. No longer do you need paper vouchers. They're now all stored in your phone. We've integrated Vets for Pets, and you can shop directly from the app. And in the next three months, we've got other significant improvements. We've got a brand new tablet and a brand new desktop experience. We've launched online booking into grooming. We'll be launching that into Vets. We have a brand new Vets for Pets app, and we've got more pet care content than ever before. And it's fair to say customers are loving what we're doing. All our customer metrics have improved. Our VIP spend is up 3%. Traffic to our website is up 16%. Our customers are accessing more services. 16% more growth in VIPs using vets and groomers. And in the key measure of private brand, our own label participation in cat and dog is up 1.5 percentage points. Our retail business is strong and it's definitely got its mojo back. But our vet business also continues to grow. As I said, in the last six months, we've conducted a really detailed, exhaustive, big review of our vet business. And yes, this is a big review. This is not something you're going to see roll on. This is a big one-off review. And there's actually a lot to be pleased about. The market is good. The market's grown at 5%, but we're growing ahead of that. Our vet business in the UK is the only one with access to 6 million known pet customers thanks to VIP. We think the model is unique and compelling because in today's world, realistically, it's the only way a vet can ever own their own practice. And there's significant profits to be realized both for us and for our partners because the business is still maturing. But life has changed. It's changed dramatically in the last few years. And our model needs to change to reflect that. The supply of vets is super challenging. And that's led to salary growth, not just in vets, but in nurses and in practice managers. And if you're a young practice, that salary growth hits you disproportionately harder than it does a mature practice. That path to profitability of younger practices has lengthened, and it's delayed returns to our JVPs. It's also increased the amount of cash support that we've had to put in to those businesses. We've been too focused on practice rollout rather than driving cash from our invested practices. And given the recent high number of openings, we have so many startup practices, and we expect them to be loss-making in the early years. Typically, a practice becomes cash-generative around year five. And we expect that revenue to build as the customer base builds, remembering that our practices start off with no clients whatsoever. People don't easily change their vet. That's why we're so focused on new pet acquisition. It's not like shopping where people can shop and change quickly. So it's a steady build. It takes time. And typically, a practice will reach about a million pounds worth of revenue after year 10. Our review has concluded that the majority of our practices are on track to follow this. But those who aren't need specific attention, because we want our vet business to be capital light with the capability to drive strong cash growth. So let me give you a very simplified view of our vet business, because I know at times it can be complicated. We've got 471 practices, of which 446 are joint venture practices. We already own 25 practices in our estate. Of the 471 practices, 190 are already profitable. The other 281 are young and therefore loss-making. Of the 190 profitable ones, 91 are debt-free and they are drawing dividends. The other 380 practices are repaying their debts to the bank or indeed pets at home. Our review concluded that the vast majority of our practices are on track to being debt free, but some require changes for them to be successful. Our focus in doing this is how we drive our practices to being debt free as fast as possible. So we are taking action and we'll be working alongside our JVPs to action this. Because we want our model to focus on practice being debt-free, addressing underperforming practices, and make sure that our model is capital light and appropriate to the practice maturity. So our action plan focuses on three core activities. Firstly, addressing poor locations. There's many things in life you can change, but if the location's wrong, it's wrong. We've opened so many startup businesses, but we never allowed a practice to fail. And that was wrong. We should have acted sooner. We've identified practices that just can't be profitable. And we've captured that learning for future openings. But more importantly, for these practices, we're going to offer to buy these practices back from our JV partners. Once we own them, in some cases, we may well relocate them inside our stores. We may combine them with another nearby practice, or we may close them altogether. Secondly, where we see a really good location, but the practice isn't performing, we have a strong belief that the practice can be successful. In most cases, it's because we believe the partner is not maximising the potential of the surgery. In those cases, we will offer to buy those practices back from our JV and we'll run them ourselves. And in time, potentially we may resell them to another JV. The third group are practices where we can see they can be successful but the fee take is too fast and that's affecting practice maturity and it's using our cash flow. For these ones we'll be introducing a simpler JV agreement which allows the practice to focus on repaying its debt, requiring less cash from pets at home. The end point on fees is pretty much the same but the path to get there is different. It means we've been very supportive of our JVs, aligning to what they're trying to do, and we make sure that our fees are appropriate and affordable. We believe these actions and this recalibration of our vet business will deliver significant cash profit both for our JVs and for us. And we think making these changes makes sense. It creates a more sustainable business, it generates strong cash, it's a smoother path to cash flow maturity, and it's a more efficient use of our capital. We expect the underlying cash growth within the VET group, free cash flow in the VET group, to grow at high single-digit KGAR from FY20. But there is a cost to making these changes. £49 million, a non-underlying charge of which £27 million is cash. But without which, we believe the free cash flow returns will continue to decline. These changes actually are really positive for our JVs. It's more attractive. It will help us recruit and drive our openings. It will deliver a path to profitability, which is more accelerated. And in buying the practice back, we'll not expect the JV to repay existing borrowing. We think that's really important to protect the long-term viability of the model. With these changes in place, it then allows us to focus our energies about driving spend across pet services. If you remember back to May, I talked about unleashing the power of the group. Talking is one thing, but we've been acting. In September of this year, we aligned our entire retail business about driving new vet clients into the vet business. Since September alone, we've seen 10,000 introductions to care plans directly from the stores, referring clients into our vet business. And we've just started. September 17, we launched our puppy club. In joining, it gives you an exceptional offer to try all parts of the group. It makes perfect sense as a pet owner. But since launch, we've welcomed 185,000 puppy owners. That's one in five puppy owners in the UK. But more importantly, those customers are spending 20% more than non-puppy club owners. They're becoming our most valuable pet service customers above any other customer type. And these are new customers. We've got 10 to 12 years ahead with these customers. We're so pleased that we're going to replicate that in our kitten club later this year too. We've been changing the way that we engage and we sell to customers, building a really strong subscription business, making pet care really easy and really affordable. Today, we have 650,000 customers who are on some form of subscription plan, whether that be easy repeat, flea subscriptions, health plans, and even in grooming. Recently, we launched a trial for £99. We'll bath and brush your dog as often as you like for the year. It's been so successful, we're going to roll it out to the rest of the estate. Because we're aligned to customers, we're just making things easy, convenient, and really affordable. But more importantly, it drives revenue. I see subscriptions as a core part of our pet care business. Our store format hasn't changed really for over 10 years. In 2019, we'll launch the evolution of our format and we're calling it the Pet Care Centre. We'll be repurposing our stores, reflecting future customer needs and our own strategic ambition. We'll be bringing the pet experience to life through a brand new immersive pet village, adoption centres for cats, dog and puppy training, an event area for free and paid events, a new self-wash area alongside our dog grooming, and if appropriate and the practice is ready for it, extending the footprint of the vet surgery. This model contains all our latest operating improvements with all our latest technology. It's simpler and it's cheaper to operate. It's got pet care solutions focused at the heart, focusing on health plans and subscription plans. And of course, we've made the store digital first. We've made sure that all our colleagues are digitally enabled. So whether the customer wants to connect offline, online, collect whatever, we don't care. We're just making it really easy. And we think this is going to deliver the best pet care experience anywhere in the UK. The first two repurposed stores will open early in 2019. I talked about how we're using data to deliver a better business. And that's why we're investing so heavily in data. And that's why we've recruited a chief data officer. Quite unusual for a company of our size. Of course, the primary opportunity is about connecting retail and service customers together. VIP is already available. the most important source of new client registrations for our vet business. One third of all new NCRs in our vet business already come from VIP. But let's demonstrate how we're using our data in a very different way. We've been combining the last 27 years with our scanning data, our VIP customer data, our locational data into our data lake. And we're optimizing that for our store ranging. And using a very powerful artificial intelligence tool, we're able to build a store-specific optimized range. In our new pet care centres, this results in 15% less SKUs in the store, we believe taking the same amount of money. That creates 15% more space for new, higher margin services. And in our established stores, with strong vet practices, that gives them the space to grow their vet business. We've been personalising our VIP communications. Because it drives higher spend from our customers and it allows us to cross-sell. When I first launched VIP seven years ago, our very first mailer that went to customers had 16 combinations. The one that landed last week had 110,000 combinations. And that's a big step on. I think it needs to be near a million combinations to make it as unique and as personal as pet owners are. We're ensuring that our highly trained colleagues spend more time with customers because it's just that simple. More time equals more sales. I'm focused on doing two simple things, driving store efficiencies, focused on removing task and allowing our colleagues to focus in on service. And we're doing that with the support of technology, headsets for improved communication, iPads to drive subscriptions and collect data, iPhones so the store manager can manage the store anywhere where he or she is, digitising all our paperwork, we're getting rid of paper through the organisation. I've even relayed all my DCs to make sure that when a delivery arrives at the store, it takes the store colleague an hour less to work it and secondly that allows us to focus our colleagues and reward them on driving service tails which is our mps measure is a new measure it's live colleagues throughout the day get live instant feedback about the service they provide to their customers and our colleagues are focused on tails over task why because it drives our sales And finally, I'm delighted that we've attracted some great talent to our business. Building on the excellence of Mike as our CFO and Louise as our Chief Legal and People Officer, I'm delighted to welcome Jane Balmain, the original founder of our VET joint venture business, back to the group as the interim CEO of the VET business. Rob Kent is an exceptionally talented Chief Data Officer who joined us from Royal Mail. And David Robinson, the CEO of Retail, is a very seasoned retailer and he helped lead the Argus transition in digital. I'm creating the best leadership team for pets. And I'm doing that because I'm going to build the world's best pet care business. Because pets is a healthy business. Retail has turned around. We have a really clear plan for our vet business. And I know it's going to work. And I've built the team who are going to deliver it. We're going to focus the business back onto what made this business really great. So without further ado, I'd like to hand you over to Mike, who will take you through the results and share with you our guidance. Thank you.

Good morning. Before giving you the update on our interim results, there are a couple of things I should highlight just at the start. This is the first time we'll be reporting on our financial performance split between the retail and VET group segments, and that's the way we'll be doing it going forward. And secondly, as you just heard from Peter, we've now done a very detailed review of our VET group aimed at driving sustainable cash flow growth going forward and putting the business on a stronger, longer-term footing. and we've included a significant portion of the costs of implementing that change in our results. And therefore, our interim financials reflect both our retail repositioning and our future plans in the VET group. In terms of key headlines, we had very strong group revenue growth of 6.7%, and within that, like-for-like growth was 5.3%. Retail revenue grew by 6%, and that was supported by continuing strong omnichannel growth of over 45%. Vet group revenues grew by 12.3%, and our mature first opinion practices are still growing at more than 6%. Group underlying profit before tax is £37.9 million, and that reflects a full year-on-year impact of the planned price investments we've been making in our retail business. The costs of change of implementing the VET group review are significant and are up to £49 million in terms of P&L charge and a total cash cost of £27 million. And we've included £29 million of these costs within the total of £29.9 million for non-underlying charges you see on the slide. And finally, cash flow is the most important financial measure for us. We have solid free cash flow of over £27 million in the first half, and we confirm the interim dividend of 2.5 pence per share. So let's take a closer look at what contributed to our revenue growth of 6.7%. We saw strong customer revenue growth both in our retail and in the VET group. Total group revenues grew to just short of £500 million. Like-for-like sales growth of 5.3% in the half was even stronger than the 3.9% we had in the first half of last year. This was driven out of both our retail business with 4.7% like-for-like and our vet group with 11.9% like-for-like growth. In retail, we've now benefited from six successive quarters of like-for-like growth as we've progressively improved both our pricing and our offer. And this growth has been driven both from our online business and our stores business where we had like-for-like sales of 2%. Competitive pricing has been a very important component of this, alongside continuing range development and product innovation. For example, advanced nutrition sales grew by over 9% in the first half. Before stepping through the VET group revenue performance, I need to highlight one of the future actions from our VET group review that's impacted the revenues we're reporting for in the first half. Peter described our plan to offer to buy back underperforming practices, and therefore we've excluded fee income of £2.2 million we received in the first half from those 55 practices, and that's been excluded from the reported revenues you see here. After taking those excluded fees into account, our overall VET group revenue grew by 12.3% to £55.6 million. with both the divisions of the vet group making a strong contribution to that growth. Income from our joint venture vet practices grew by 7.4% to £30 million, driven by both the maturity of the practices, and we saw strong revenue growth across all those cohorts. Specialist division revenue grew by over 8% to £19.7 million, and that growth has been supported by the investments we've made, both to improve capacity and capability. So turning now to our gross margin. The underlying gross margin reflects the planned retail investments we've made and our core debt practice provisioning. Total group underlying gross margin is 50.3%, and that's 160 basis points lower year on year. And we are tracking in line with our full year investment plans. Our price investment is now largely complete and gave us a planned impact in group gross margin of 72 basis points. That's the equivalent of £3.6 million lower prices to customers year on year. We also had an impact of 42 basis points due to mix. And here, strong omnichannel sales drove margin rate dilution. And although cash accretive, they are at a lower percentage gross margin due to the higher mix of food sales. That impact was partially offset by the solid growth we saw in own label sales of over 6%, which drove both strong cash margin growth and margin percentage rate. Within the VET group, strong revenue growth did help us leverage what is mainly a fixed cost base and gave us margin expansion. but the £2.2 million of fee revenue we excluded did suppress that benefit to only four basis points. We've also continued to increase our core provision held against vet practice operating loans by £2.5 million, and that led to an impact on group gross margin of 49 basis points, and I'll give you more detail about that later. Alongside focusing on better pricing as a priority, We're also focused on core operational cost efficiency and investment in our strategic growth areas. Our total operating costs grew by 6.2% to over £192 million, but that's slower than our rate of sales growth of 6.7%. We've continued with our comprehensive programme of operational efficiency and simplification, and that helped reduce cost growth in the core areas of the business to only 1.2%. And that's even after absorbing the £1.6 million of future rent commitments for two stores, Skegness and Gisborough, that we decided not to open, as we outlined at our first quarter update. Strong cost control has enabled investment in our growth areas. This includes £3.1 million in Omnichannel, where strong sales growth increased fulfilment costs. And we've also invested in the marketing and support office team capabilities. In the VET group, we invested £3.4 million to build IT and people capability in both the specialist division and in our first opinion support centre. And finally, the new stores we've opened over the last 18 months have driven sales growth of around about 2%, but have also added £2.6 million into total operating costs. We continue to be very focused on costs as we go into the second half of the year and into next year. And we're already implementing the next phase of action plans, which will help further reduce our operating costs. So turning now to our profit result. Underlying profit is lower year on year, and that reflects the investments we've made in our retail business, as well as the actions we are taking in the VET group. In retail, these investments are now driving strong revenue growth. However, the short-term impact is lower profit growth as we annualise the full-year impact of our price investments. Group profit at an EBIT level fell by 9.7% to £39.8 million. And our overall EBIT margin is down 145 basis points to 8%. And that's a combination of the 160 basis points from lower gross margin percent and the benefit of 15 basis points from the mitigation from our focus on reducing our costs. On an underlying basis, profit before tax is £37.9 million and that's down 9.3% year on year. Without the fee income adjustment, profit would have been lower by around about 4%. And although profit and therefore EPS are down year on year, we do intend to maintain our full year dividend at 7.5 pence, same as last year. Non-underlying items total £29.9 million, the bulk of which is from the one-off costs relating to our plans to offer to buy back up to 55 first opinion debt practices and pay down all the outstanding debt and partner loans. These total £29 million in the first half. So taking all that into account, our statutory profit before tax in the first half is £8 million. Turning now to our capital investment. Our investment's now closely aligned to our strategic growth areas of VET services and Omnichannel. We invested £17.3 million in the first half compared to £24 million in the first half of last year. That investment's now focused on three key areas. First, improving our stores by example for putting in retrofitting services into the stores. Second, investing behind our data and Omnichannel agenda. And thirdly, building capability and capacity in the VET group. During the first half, we open four new stores and we open 10 first opinion practices. And looking forward, we plan to open up to 10 new vet practices each year whilst we deal with the actions coming out of our vet group review. We've also continued to invest in our omnichannel capabilities to make shopping even easier for our customers, as well as more efficient for us to serve. And overall, our cash return in invested capital remains strong at 18.3%. Going forward, we will continue to take a very disciplined returns approach to all of our capital investment. And as well as focusing on that disciplined approach to capital investment, our trade working capital management remains efficient, whilst providing support to underpin VET practices. We continue to have a very strong trade working capital cycle, helping us to an inflow of £5.7 million in trade working capital. This helped us support the increased investment we've made in operating loans to VET practices of £8.9 million, leading to an overall group cash working capital outflow of £3.2 million. Total gross operating loans to our VET practices are now £46.9 million. And the net operating balance after provisions is £23.8 million. And the provision we're holding is now made up of two parts. Following the VET group review, we provided 100% of the operating loans to the 55 potential buyback practices. That totals £16.3 million. and we've continued to hold a core provision held against loans to other practices, making up the remaining £6.8 million of the total provision. The actions we're taking to buy back practices and rebalance fees will significantly reduce the operating loans we're making to our vet practices, and therefore the working capital support needed from pets at home. Cash flow is now our number one financial measure and our primary focus going forward. And looking back at the first half, we had solid free cash flow generation, allowing us to maintain our dividend payout and reduce our leverage. The business generates a significant amount of cash and the underlying operating cash flow was £60.5 million. And after taking into account nearly £20 million of capital investment and the increase in the operating loans of £8.9 million in working capital, free cash flow was £27.3 million and conversion strong at nearly 45%. We also invested £2.1 million to buy back two existing successful vet practices in Maidstone and Exeter. This has enabled us to learn how best to manage our own practices and gives us confidence when we buy back more. And after paying last year's final dividend, totaling nearly £25 million, we still have positive retained cash. Net debt at the end of the first half was £135 million, and that's lower year-on-year by £21 million, helping lower our leverage from 1.2 times to 1.1 times. So in summary, our key financial metrics are looking strong. We've seen... Good revenue growth across both our retail and VET group. VET group like-for-like sales grew by nearly 12%, and we still have significant and vetted revenue growth still to come from our first opinion practices. Retail has responded very well to the decisive actions we've taken. Like-for-like sales growth has been 4.7%, with both stores and online making a strong contribution. VET Group gross margin is benefiting from margin expansion as we grow revenues on a largely fixed cost base. But this has been offset because we're providing for the operating loans we're making to support our core practices and it's also impacted by around 210 basis points by excluding £2.2 million of fee income we received from those practices in the first half but have chosen not to include in our overall revenues. Underlying gross margin in retail reflects the planned price investments we've taken to regain competitiveness and the benefits of these we're now seeing in stronger revenue growth. In our VET group, EBIT was £13.7 million and we're putting our efforts into supporting our partners to grow revenue and best manage their cost headwinds. In retail, EBIT was £29.4 million, and we're taking the right steps to grow future sustainable profits. Our first priority is to be competitive on pricing and grow like-for-like sales. And that's supported by a ruthless focus on our costs, becoming more cost-efficient right across the business, and at the same time, investing in our key growth areas of online and services. And finally, our most important financial measure is cash flow. We generated free cash flow of £4.5 million from the VET group and £30.6 million from retail. And the actions we're taking in the VET group will give us a stronger base on which to build sustainable free cash flow growth. So that's a look back at our first half numbers. And I now want to give you updated financial guidance in light of the plans that Peter's laid out. So turning first to the impact of the VET group recalibration and non-underlying financial items. In terms of our income statement, just to recap, our plan is to offer to buy back 55 VET practices. And that involves us providing for all the liabilities of these practices. These liabilities include practice funding, third-party bank loans, lease liabilities and closure costs. And we expect these non-underlying costs in total to be up to £49 million. And that will split £40 million this year and £9 million next year. In addition to this, and as we've previously guided, there are between £1 to £2 million of other non-underlying charges relating to the accounting treatment of minority stakes in our specialist referral centres. In terms of the cash flow impacts, the total non-underlying cash cost of repayment of liabilities for the buyback practices is £27 million, and that's split £13 million this year and £14 million next year. And the purpose of taking this action is to put our first opinion business on a much stronger footing, with a clearer focus on growing future cash flows. And driving the maturity of our VET practices represents a huge opportunity to release cash flow. We have a very young business. Over 40% of our practices are less than 4 years old, and less than 20% are over 10 years old. We are confident in the maturity curves. In the first half, total practice revenues grew by 15.4% and practices more than 10 years old are still growing at 6%. Our single biggest value creation opportunity is to drive practice revenue growth. and we will use our group resources to do this, as well as working with our partners to mitigate the cost headwinds facing the overall sector. Cash flow is the best performance measure for the VET Group and the prize is substantial. This year we expect VET Group underlying free cash flow of between £10 and £13 million, growing at high single-digit CAGR up to £60 million at maturity. So turning to our updated financial guidance. The actions we're taking in the VET group clearly have an impact on our guidance for this year and next year. But beyond this, they give us a strong platform to deliver future profit and cash flow growth. In our VET group, we expect total revenues to be in the range of £110 to £120 million this year, with slight growth into next year. And those revenues are made up of two parts. First, fee income from our joint venture practices of £60 to £65 million and consolidated revenue of £50 to £55 million in total from our company-owned and managed first opinion practices and our four specialist referral centres. This guidance fully incorporates all the fee income rebalancing that Peter's described and the impact on our revenues of buying back up to 55 practices. Underlying EBIT for the VET group will be in the range of £30 to £33 million this year and a slight decline going into next year. Total non-underlying items will be £42 million this year and up to £11 million in FY20. Underlying free cash flow, range of £10 to £13 million this year and with growth into next year. And the balance of funding liabilities is expected to be around £70 to £75 million and will reduce next year. For pets at home at group level, underlying PVIT, profit before tax, will be between £80 to £85 million this year with a slight decline next year. And underlying free cash flow will be at least £55 million this year with a slight growth into next year. And based on this, leverage will be at one times. So today, we're giving a lot more guidance than we've previously done, and this reflects how important it is to send a clear message around the financial outlook for the actions we're taking to improve the business. Yes, there are short-term impacts and one-off costs, and we recognise this is a step back our previous guidance of a return to profit growth next year. But these are necessary actions which will enable us to capitalise on strong customer revenue growth that we've already seen in both our retail and our VET group. But more importantly, these changes will return the group to sustainable profit growth and cash flow generation in the medium term. And we are more confident than ever in our ability to deliver shareholder value as we move through and beyond the next 18 months. Thank you for listening, and I'll now pass back to Peter.

I know that you could accuse us of over-promising and under-delivering. I think it's a really fair criticism. However, I think you've got to ask yourself, what's changed? And I think three fundamental things have changed. I think, firstly, leadership. you have a really committed and focused team who aren't afraid to make tough decisions. The work we did in retail has delivered and we're taking decisive actions in our vet business that will also deliver. And we're determined to return this business back to profitable growth and generating free cash flow. The second thing is the plans are realistic. We've built a plan which is deliverable. The returns are sustainable, achievable, but more importantly, believable. And finally, this business is really unique. We've got the unique assets and capabilities as a group, and we haven't really brought them into the power that they can really deliver. We believe joint venture is an asset and we want to realise that potential of a capital light, high cash generating business model that drives the right behaviours amongst our vets. Because we know customers like what we're all about. Pet care really aligns to what matters most to our customers. And whenever you align yourself to a customer, it's always a winning formula. I'm really determined to build this business to be great again, to be the best pet care business in the world, and I believe that this plan allows us to deliver that. I'm conscious we've given you an awful lot of information in quite a long period of time, but now is your opportunity to ask us any questions that you may have. Thank you.

Hi there, Andy Wade from Numis. So 55 practice buybacks, some closures, some going to be run by yourself. How can you be confident that that's a big enough cut? Are we going to be sitting here in a year, 18 months' time, saying actually there are another 50? Can I answer that?

Yeah, it's a result of a very comprehensive exercise. We looked at every single vet practice, looked at the cash flows, looked at all the operational KPIs, looked at their sales revenue growths. And out of that, we concluded that on the 55, and we do treat this as a one-off. We're not expecting to have to return. And actually, the 55 in part recognizes actions which should have been taken earlier. as we open the practices. It's the accumulation of not closing a practice, as Peter has said. So it's very much a one-off. This cleans the slate and gives us that platform to move forward.

Okay, and then just to pick up on the point you made earlier, that going from 10 to 13 of free cash flow from the VET group up to 60, and your expectation is that's a double-digit growth rate. in that to go from that's right but that 60 is that maturity so that's that's their existing business today going fully out to maturity and reflects in part just how immature a lot of those practices are so i just asked because i didn't see it on the slide or in the the the in the written down so and but i think peter mentioned it or it might be new i can't remember mentioned it alongside it but that that's that should be our broad expectation if if it plays out how you're saying that's right it's a sort of double digit breakthrough okay thanks yeah

Yeah, hi, this is Tushar from Goldman Sachs. A couple of questions. When you're talking about the new joint venture agreement, is it across the old and the new ones, or is it only for the new ones? Second one is, when you look at the number of stores on Like for Like, I mean, you're going to start analyzing sub-tough comps. Do you still maintain that store Like for Like can be in positive territory for you from the actions you are taking? And the third one is just, how many stores do you intend to close? Can you just give us a little more idea on that? Thanks.

So we're already annualising tough comps, and I think you can demonstrate, I think we can witness that actually our half-year and our Q2 numbers are up against some pretty big comps. You've seen our two-year life like at 7%, and we're confident the action we've taken actually are continuing to drive a strong business, and we're expecting to perform ahead of the market. In terms of stores, we're in a really fortunate position in the fact that actually very few of our stores are loss-making. So this is not announcement of a closure programme, far from it. What we're doing is as we come up to lease events, we're reviewing those stores and looking at long-term viability. And we look at it at that moment in time. There's lots of factors to take into account, whether we can put in vets and groomers into our business. But also we're looking now at obviously the rental environment which we're in and that has changed dramatically in the last year. So as we're approaching lease events now, we're seeing actually quite a significant reduction in rent in our portfolio and clearly that also will have a play out. But if you ask me to fast forward to say five, seven years, what do I think our estate will be? I think probably slightly smaller, maybe less than 5% smaller than we are today. And in the main, that's about looking at towns and locations where we can often have three, four or five stores. And often by combining them together, it makes a more effective pet care business. And in saying that, I've now forgotten your very first question, which you're going to remind me of was?

Yeah, the new joint venture agreements you guys are doing, is it the same for the old practices and the new? Or there's a new practice that's getting a little bit more benefit? Yeah.

Yeah, I think one of the benefits we've got of Jane Balmain coming back into the business is she has really good knowledge of the business. She worked with us for a long time, left in 2014. So she's working hard on that at the moment. I think given she's only had her feet under the table for a couple of weeks, we should give her some time to do that. But the purpose of a new joint venture agreement is to rebalance the profitability between ourselves and the vets. What has been clear is that actually the level of fees we've been charging has been holding some of those vets back to making profits, particularly in those earlier years. And we've been supporting that with operating loans. So clearly that needs to change. And Jane's working on it. So it's a work in progress and we're not far away from the answer.

Rental reduction in stores. You also charge a rental for the JVs, right?

Yeah. Well, when we brought back our practices, those ones which are in the stores, we currently receive a rental flow. That's about just over a million pounds from those 55 practices. So obviously we'll have to deal with that. But clearly we've got opportunities with the space as well.

Thanks. Just to clarify that, does that imply there's about, I'm trying to do the maths, but about 25 of the 55 are in stores at the moment?

Approximately that number, yeah.

And then just to follow up on Andy's question earlier, so if you're confident that this is a one-off 55 exercise and the others are all going to be fine, why are you providing 22% of the outstanding loans on the rest of them?

We'll revisit that. I think we've got a provisioning methodology we apply to those outstanding loans. I think the benefit we get of this exercise is a much cleaner base. Operating loans we expect to come down rapidly. So we've peaked, I think, about £49 million in the first half. That's going to come down really rapidly across that. And when we get to the year end, we'll revisit the provision we need to hold against those loans. But I anticipate both the percentage and the quantum coming down significantly.

And then the 700 target, I mean, if you're going to open 10 a year, that's like a 20, 25-year target, isn't it?

Yeah, I think we'll open 10 a year whilst we're dealing with the 55. I think it would be a big distraction for the team to focus on this and try and open openings. And the other side of that, of course, is the constraint we've got with vet availability. I mean, if we get a good stream of vets coming available again, we'll be back onto opening the previous opening levels, in which case 700 starts to become very, very realistic. But for the next couple of years, I think 10 a year is going to be where we set the target.

And going forward, are you going to open more company-owned vet practices, or are you going to be still expanding mainly via JV?

Well, we've learned a lot, actually, from buying back those two successful practices, Exeter and Mayston, and definitely we have more company-owned practices. It just gives us another way of growing that business. We've got a very good standalone model. We've got a model that works in store. A managed model as well will enable us to achieve our ambitions we've got for the vet group.

Yeah, Tony Sherratt from Whitman Howard. Some further questions on the JVs. The 60 to 65 million of fee income from JV practices for this year, what's that going to be next year? um it's the first question um and what is the uh percentage presumably you're reducing the percentage fee of a percentage of their gross revenues is that across the board or is that just to a selected number of people

The way to think about the VET group revenue for next year is three component parts. The buyback practice is 55. We will lose the fee income that we've earned on them. It was 2.2 million in the first half. I think it's sensible to think that's about 4.5 million full year. And that fee income will obviously impact next year. The core business is growing really strongly. So the core growth rates we're seeing in our joint venture practices will drive fee income growth upwards. And then the third element will be the fee rebalancing. So that will be very targeted at practices where we know we need to support and get to profitability. All of that, all of those three elements are in the guidance I gave on fee income for next year.

You also mentioned that you were reducing the impact of the fees you charge on the retained JV business, yeah? Yes. So presumably, you know, there is a fourth element, which is the sort of like-for-like fee income on the JVs, which is going to have a reduced percentage going forward, yeah? Yeah.

We haven't worked through whether it's going to be... The way to think about that is there will be targeted fee reduction on those practices that need it. But you've still got to remember we've got 100 practices with over £1 million a year turnover, and the fees we're taking off those practices enable those practices to make a P bid of about £140,000 after our fees. So those practices, you'd expect us, you know, we'll leave them as they are. They're profitable, they work, we've got the balance right. The focus will be on the practices that are still going up that maturity curve.

Okay, and just to wrap on that, I'm sort of struggling to see why the free cash flow should improve from this, because you're getting less fee income and making less loans, so don't those two just balance each other out?

We've also got growth, of course, in the business itself. So you're right in those two components. The income comes off. But the operating loans we've been putting in, obviously they've accelerated. We're at 38 million last year, 49 million. We carried on this year, we'll probably get to about 57. That's what we're guided to. So a big drop-off in operating loans. And yes, the fee income comes back the other way.

Okay, but the free cash flow movement is not a function of what you're doing with this charging. It's just the rate of openings that's changing.

Yeah, and we're signaling a slight growth in that next year. But after that, you'd expect that free cash flow to really start to develop strongly in the medium term. So 21 onwards, you'd expect that cash flow to really step up.

Sorry, just one last one on something completely different. The gross margin investment on the merchandise, the food side. You say that your investment's finished. What makes you confident that you're not going to be forced by the market to keep investing? I know where you've got to now. But have you seen the market stop pricing down or become less aggressive? What gives you confidence?

I do feel confident because I think actually if you look at the traction we've made in the period of time and we haven't seen a robust move from our competitors, I think that reflects the fact that most of them actually are loss-making companies. So I'm not sure they've actually got anywhere to really go to. And I think the challenge really is about actually what does sustainable look like? And I think what we've got to now is a price that works for our customers. So you never say never on pricing because you just never know. But I think we feel confident about the actions of what we've got. But also we know the levers that we can pull in our business as we move forward.

Is there some data point you've got that shows the market generally has stopped dropping prices so much?

I think the key thing was actually the price gap was big to start off with. And actually what you've seen is us narrowing and moving. So actually in us dropping our prices, have we seen responses from competitors? I'd say broadly in the main, no. Great. One last one.

Hi, Rahel from HSBC. Just one question on the retail business. Can you just tell us what categories you've been gaining share in?

Really easy answer. All of them. Seriously, we've gained share across all categories, food and accessories, both online and off. Great.

Thank you very much. Thank you.