Pets at Home Group Plc

Good morning everybody and welcome to our interim results for the first six months of Finance Year 2020. I'm Peter Pritchard, your CEO, and with me is Mike Iddin, your CFO. So today I'll be covering our group strategic update and Mike will take you through our financial review and at the end we will open up for your questions. It might be raining outside, but there's a little bit of sun in the room today. We're really delighted with an excellent start to our financial year. We're really proud of our results, despite the very challenging consumer, economic and political climate. But I think our results reflect the size of the transformation that we are leading inside Pets at Home. I'm sure many of you will be thinking, why is Pets at Home booking the trend of UK retail? My answer is really simple. It's because we're not just a retailer. We're a pet care business. And that pet market remains incredibly resilient. And as the leading player in it, we're both growing our share in the market and taking share. And we're growing in every category and in every channel. You'll hear me today talk about our pet ecosystem. And that's what we're creating. We're focused on attracting pet customers and meeting their needs with our unique combination of products and services. And we're seeing strong growth across that entire ecosystem. In retail, our sales momentum has continued. And in first opinion, we've outgrown the market whilst completing our buyout and closure program. Our success comes from serving pet care customers better than our competitors. And later on, I'll show you some of the record performances we're seeing from our business. We want to be the best pet care business in the world, and we're making really good progress. And as we build our capacity and capability, we see further opportunity for growth. So we believe our pet care strategy is working. And yes, we're doing well, but we're not complacent. But we are obsessed about its delivery. And there's four key parts to our strategy. And we believe that these work for pet customers and for our business. And the first is bringing the pet experience to life. And anybody in the room who is a pet owner will know being a pet owner is an experience. It can often be an emotional one. And it's not like buying a sofa, because pets are very much part of the family. And that's why it's a resilient marketplace. And actually, when times get tough, people focus on family. And that's why we're delighted to have welcomed more new pet families to our business this year than ever before. And in doing so, we want to use our data to better serve our customers. And you can see our VIP loyalty customers are spending even more with us, up 23% year on year. We want to set our people free to serve. We are blessed with enormous capability in our organisation. So by removing low-value tasks and focus on serving customers, we can see the results. Our sales per colleague are now over £100,000, up 5% year on year. And we have an ambition that 50% of our business will come from pet services. That breadth of services brings more revenue and greater resilience to our business. And we've achieved a new high of 35.4%, which is up 99 basis points. By bringing our business together for customers, we make their pet care journey easier and certainly more rewarding. So we think our ecosystem works really well for our customers. And we know it's working for customers. We've seen record performances in key measures of success in all components of our business, in all channels, but most importantly, in key customer numbers. We now have 5 million active VIP members, up against 4 million of last year. We've seen record website traffic and conversion. We're the UK's most visited UK pet shopping site. We've seen record retail transactions. We now have 790,000 subscription customers. We've seen a record number of first opinion vet clients and growing fast in the market. And we've groomed a lot of dogs. In fact, typically we now groom 16,000 dogs a week. That's a lot of shampoo, by the way. Our ecosystem is made up of a number of key components. I'll take you through the headlines of each, starting with our retail business. We've now had 11 consecutive quarters of life-for-life growth in retail, and we continue to grow in all our channels. In bricks, we are growing at 5%. In clicks, we are growing at 41%. And in the everything-together, omni-channel, we're growing at 32%. Undoubtedly, we've grown the market and taken share. And over this timeframe, we've grown our share by 200 basis points. Repositioning our price two years ago really helped unlock our potential. And we continue to maintain a pricing position that works for customers. So pricing represents an area where we've used our data and insight to get the pricing position that really works for customers. And we think about it in the following way. Firstly, in the traditional way of actually looking at everything in a basket. So if you directly compare every comparable item to our lowest price competitor, and then you weight it to our volume, to the volume that our customers buy, so quite a tough measure, that price gap is less than 5%. But then we focus on those things that we call customer critical items, the things that we know and we can see really drive shopper behavior. On those, our price gap is zero. And then we go further. On those items, we've built a service called Easy Repeat. So on repeatable, consumable items, things like cat litter or dog food, if you opt into Easy Repeat, which is no condition repeat order service, we're 3% cheaper. We'll never let price be a reason not to shop with us. In retail, our store estate plays a really critical role. It's a key part of our ecosystem. Our stores cover the majority of the UK pet owner population, typically within a 15 to 20 minute drive time. And we think this is a huge advantage. And here's the secret. They're not just shops. It's where we acquire new pet customers. It's where we introduce them to pet care services and it's where we deliver pet care services. And it's where you conveniently collect the parcels that you've either ordered in store or online. It's where we entertain families on wet weekends or indeed on wet Tuesdays. Or it's where you bring your dog shopping. And finally, it's where you interact with our pet care experts, our pets and other customers who share the same passion as you do. And our stores work for us. Store sales are up 5% like for like, driven by real transactional growth. We've done that with less retail hours and we've driven significant productivity benefits. We are investing in our physical estate, transforming them from pet shops to pet care centres. We were fitted the first two concept stores at the start of the year at Stockport and Chesterfield, and they were really well received by our customers. They liked the broader range of services. They loved the new eventing space. They loved the new look and feel. And combined with a more tailored approach to product merchandising, we were able to deliver more sales off less physical range, combining it with our extended range online. We took all those learnings, continued to modify it, and we landed into a further three stores. One brand new and two relocations. And we've learned something really important, which is you've got to create a centre that does two things. A place that you have to go to, and that's why services are so important. As well as a store that you want to go to, a place which is enjoyable and you're happy to spend a chunk of your time in. Customer transactions, spend and satisfaction levels in these new centres are ahead of our expectations. So we continue to learn, continue to modify and continue to roll. By the end of full year 20, we'll have 19 pet care centre format stores. That's a combination of five new and relocations and 14 reformatted stores. What is important is in every store, irrespective of its size, and we fit it out very small and very large, we aim to create the best pet care centre we can in that catchment, joining everything together to make it really easy. And that's why we believe Omnichannel is really winning for customers. Because pet care customers don't care online, offline, they just don't think that at all. They think about their needs and they're in control. They want it their way. And that's why everything together really makes sense. Not all of our competitors can do that, but we can. We also think in pet care that people play a really important role. Through advising and recommending, they facilitate sales. And that's why 60% of our omnichannel business involve a store colleague. And we think that's been really crucial to our success. And just look at the success of things like our flea subscription program, the vast majority of which are created in-store. Quite frankly, however, whatever way you want to shop, we'll do it. And we'll make sure that's really simple and easy in the way that you want it. And that's why we're going to continue to focus and innovate in this space and trying to make it as frictionless and as easy as possible for customers. So in focusing on pet care and not just shopping, we drive more revenue. The more you become part of the ecosystem, the more you spend with us. And this chart shows exactly that. We're not doing a bad job, but there's so much more we can do. When a customer uses more of the ecosystem, they spend significantly more. And most importantly, they spend more in every component. So truly, the whole becomes greater than the sum of its parts. But only 16% of VIP members shop products and services. That still remains our opportunity. And through building customer data and loyalty programs, we have significant opportunity to grow customer revenue. We do have significantly more customers in retail than we do in our first opinion vet business. So by leveraging our retail customer base, we can drive and are driving vet client growth, helping us unlock the greatest opportunity of all, driving practice maturity. And unlocking that maturity is the biggest value creation too. Our estate is very well invested. They all started off as brand new and it's the most modern in the UK. And that prize in our existing estate is worth 40 million from the existing estate. In resetting and recalibrating our first opinion vet business last year, we focus our energies on releasing that potential. Now our business here is a partnership. And we had to reset that partnership. And in doing so, we create mutual value. For the partner, that's about being debt-free to drive dividends and capital growth. And for Pets at Home, it's about free cash flow growth. Last year, we laid out our plans to address the problems we identified. We took our partners with us. It was bold, it was ambitious, and it was very challenging. And I'm so pleased with the progress we've made. Under the stewardship of Jane Balmain, who's here with us today, our COO, our teams have meticulously executed our plans with the cooperation of partners. The buyout and closure programme is now complete. We bought out 57 and subsequently closed 36. Everything was completed in line with the guidance and plans we laid out last November. We've made amendments to our joint venture fee agreements. We've made them simpler and fairer for all partners. And in line with our guidance, we'll continue to do this into half year two. And with a new simpler agreement, we've now established for all new practices, taking us back actually to where we started off many, many years ago. We're driving improved operational performance with joint venture partners. The fee changes we're making are contingent on improved operational performance. This is not a handout. It's a mutual commitment. We have a big focus on gross margin and a big focus on cost control. One of the other big benefits we get by having simpler fee agreements, it makes our support office so much simpler to run, allowing us to spend more time on working with partners rather than trying to administer complicated agreements. And in line with our plans, fee income in FY20 is suppressed. However, it's releasing cash flow benefits for JVPs and pets at home like we thought it would. Our actions are already showing some signs of success. Don't get me wrong, I'm not standing here declaring victory. I am, however, pleased with the progress that we've made. We're focused on what matters for our partner and for pets at home. And we're seeing real year-on-year improvement across a range of financial metrics. In doing so, we drive better cash for all. And in running the business, you actually have to focus on three things. Driving more revenue, a higher gross margin, and lower costs. And that's exactly what we're focusing on. Practice at a time. One practice at a time. Now I do want to deal one key question which I know somebody's going to ask me. Are more successful JVPs unhappy as we've supported those in need of help? And the answer is no. Because we've levelled the playing field. We've always had different fee arrangements with different partners. Each JV is unique and is different. And our approach is about being simple and fair. And we focus on helping every partner build the most successful business that they can. In order to do this, we had to do that recalibration with partners. It would not have landed without it. And that's why it's landed so successfully. It's been done with our partners. So alongside our first opinion business, we also have a fast-growing specialist referral hospital business. Now, this year and next will represent a period of significant investment in that business to grow our future capacity. Special referrals are a really important adjacency to first opinion. Remembering that that division not only serves our clients, our first opinion clients, it also serves the needs of our competitors too. We've identified two opportunities to grow this space. Firstly, at Dick White Referrals in Cambridge, we already have a highly successful hospital. You can see it at the top of that picture, but it's full. So we're completing a major extension to significantly increase that capacity. And it'll be one of the biggest in Europe. And as Mike always says, it's probably the only one you can see from space. Secondly, we're opening our fifth specialist hospital. It's a Greenfield site opening in Scotland in 2020. It's located on the accessible Glasgow-Edinburgh corridor. Surprisingly, both Scotland and the north of England are poorly served by specialist hospitals. It will create the most capable specialist facility serving all the key ologies and all the key disciplines in the north of England and in Scotland. Elsewhere in our services business, our grooming business is also performing well. Grooming is a really important part of our pet ecosystem, particularly for dog owners of certain breeds. Grooming helps drive customer acquisition and most importantly drives retention. It's a key service that can't and never will be delivered online. It is totally incremental. Our business here is also relatively immature. Most of our salons have only opened in the last five or six years, but it's in good health. We're enjoying high single-digit life alike, and because grooming actually has quite a high fixed cost base, that's driving our productivity, which in turn is driving improved EBIT margins. So vets and groomers have been really key in building out our ecosystem. But we're also adding new services, propositions and solutions too. And there's three that we're focused in on. The first is around expanding subscriptions. So as I said, we've got 790,000 customers now on some form of repeatable subscription plan. In the last year, we've extended our very successful flea range into worming products, really important for cats and dogs. But when I tell you that there are 18 million opportunities a month to sell a subscription because there's 18 million cats and dogs in the UK, it gives you a sense of potentially the size of that opportunity. We also believe there's an opportunity to extend subscriptions into bundles and other packages. Secondly, with 5 million active VIP members, we have a ready-made pet audience. One of the biggest challenges for most people entering this space is the cost of acquisition. We know the pet customers. And that's why we formed and invested in our relationship with Tailster. And Tailster is an online dog walking, boarding and pet business. And we've been able to help them introduce their services to our customers who are looking for those solutions. And we think there's opportunity to continue to explore similar add-on services that work for us and really work for our customers. And finally, we're going to continue to convert more stores into pet care centres. We're really pleased with the performance in this space. And we're understanding the power of community and pet ownership. So in building our ecosystem, we recognise it has to be underpinned by data and insight. It'll help us serve our customers so much better. Last year, I outlined a really ambitious plan to transform our pet care business into one which is fuelled and powered by data. And it was a five-year plan. So what's happened one year on? Well, we've made quite a lot of progress. We are building our capability to drive that ecosystem. Last November, I announced the appointment of Robert Kent, our Chief Data Officer. He has built and continues to build his team of data scientists, analysts, and data architects. We're taking management of all data in-house, and we're migrating it to a market-leading cloud-based platform. Our action plans using quality data, algorithms, using machine-based learning and artificial intelligence is enabling us to better serve customers. And we're focused on driving relevant personalized communication and solutions for those customers. I'm really excited about this area. There's so much yet to come. And the team that we're building, and it's a really capable team, will unleash the potential to move our customer more into total pet care. Even though it's early days, we've already started seeing how data can really help drive our business. I want to share a couple of examples with you. The first area is in the area of merchandising. Historically, we've been quite generic in how we range our stores. But a combination of using our customer data, our pet data, and an artificial intelligence tool, we've been able to optimize ranges for stores. And we see a whole series of different benefits. The first one, and it's a really simple one, is about improving the availability of best sellers. In stock, more often, are the things that people want to buy. It drives the result. We've been able to either reduce our SKU count in some stores and get the same sales, or indeed optimise the space to get more out. And it's become a really important component of the rollout of our pet care centre formats. The sales in our initial stores are up 3.3% against the rest of our estate, and the cash margin is up 3.6%, so some really encouraging starts. Secondly, we are so focused on new customer acquisition, particularly in puppy and kitten, it is the lifeblood of our business. By harnessing data, we can drive greater customer lifetime value. Now, we've talked before about puppy and kitten, and we've made those clubs really compelling for customers to want to join. But when they do, we capture really important and vital pet data. And in doing so, we have the ability to try and influence their future pet care journey with us. So let me tell you what that means for us. When we sign up a puppy or a kitten, they become our shoppers for the next 12 to 14 years. Today, we have 200,000 active puppy and 70,000 active kitten members in those clubs. They are now spending 21% more than customers who are not in the same club. What gets very interesting is as they graduate into adulthood and becoming cats and dogs, what happens to their spend? Their spend premium has continued. We now have 160,000 graduates from those early clubs into our main program. Our core VIP program, as I said, has 5 million active members. By using that data really well, we can focus on retention and helping reducing churn. And that's exactly what we're doing. We've also been very successful at reactivating lapsed customers. But we really have just started this space and there's so much more left for us to do. And probably, I think, one of the most exciting parts of our plan. Best application of data actually also helps us set colleagues free to serve customers. And that's really where we make our money. We believe colleagues are by far and away the most precious asset we have in our retail business and in our vet business. And by liberating them from mundane tasks, we can better serve our customers. And you know what? When we do, guess what happens? Service goes up. Sales go up. We become more productive. And our colleagues enjoy their job even more. It really is a winning formula. But I do have a really simple vision. If a machine can do a job better than a human, so be it. Because it frees people up to do things that machines can't. Like deliver great experience, like pat a dog on the head, like give it a treat, like engage our customers. And for us, that's magic. In retail, that means we've introduced headsets, iPads, new systems, new processes that really drive excellence in service and takes people out the back and onto the front and serving customers all the time. In logistics, however, we've taken a different approach because data and technology can really help us drive efficiency and capacity. We've recently completed a major investment in our Northampton distribution centre, doubling our capacity in omnichannel replenishment, driving significant efficiency benefits. This year, we've invested £5 million in semi and full automation of picking and packing of customer orders. That's doubled our capacity. In the subscription area, we've automated many of the processes, giving us massive increase in capacity, the ability to increase that business fivefold. We'll continue to review how we can drive more automation into distribution. We're looking at our replenishment and our logistics network to ensure it will meet the needs of our future business whilst reducing our cost to serve. So in summary, our pet care strategy is working. One year in, we're transforming our business into a pet care business underpinned by a pet ecosystem. Our success is reflected in the results that we've driven. And to take you through those results, I'd like to hand you over to Mike.

Good morning, and thank you, Peter. As you've just heard from Peter, we've made a really good start to the financial year and excellent progress over the last six months. The retail business has continued to deliver sustainable sales and profit growth, and the actions we've taken to improve the VET group are already driving the expected improvements, including a positive impact on our cash. So when you take all that together, the progress we've made means that today we're going to update our full-year profit guidance, and I'll talk a bit more about that later. But first, let me take you through some of the details of these headlines, starting first with our key financial results. Here, we've had really strong revenue growth that's helped increase the profit whilst we've been recalibrating our first opinion business. Total group revenue growth was 9.4%, with a like-for-like within that of 7.6%. And both retail and vet group made a really significant contribution to that growth. Together, that helped drive profit before tax of £45 million for the first half, and that's a growth of 18.9%. The results today do include a non-underlying charge of £7.7 million, and that's mainly due to the actions relating to our buyout programme, which we've now successfully completed within the overall financial envelope we set out last November. Strong operational performance has also given us solid underlying free cash flow of £24.9 million, and that's enabled us to maintain the interim dividend at 2.5 pence a share. So let's take a closer look at what's contributed to that performance, starting first with sales. We've seen excellent growth continue in retail and our vet group revenues perform in line with plan. That helped grow total group revenue to just over £546 million. The like-for-like sales of 7.6% is even stronger than the 5.3% we saw in the first half of last year. In retail, we had like-for-like sales of 7.8%, and we've now benefited from 11 successive quarters of like-for-like growth, as we've progressively improved pricing and offer, as you've just heard from Peter. And our two-year like-for-like in retail is now around 13%. That growth has come from Omnichannel, where like-for-like was almost 32%, and stores, where we had like-for-like growth of 5%. We saw very strong growth in our food business of nearly 10%, and within that, advanced nutrition grew at 12%. Competitive pricing is a really key component of that growth, but also that runs alongside range development and continued product innovation. In the VET group, we grew sales by 19.6% to over £66 million. We're operating in a market underpinned by structural growth, and both our first opinion practices and our specialist referral centres are really well positioned to benefit from that, helping together to drive life-like growth of 6.4%. The fee income from joint venture vet practices grew by 2.8% to £29.7 million, and that does include the impact of the fee adjustments which we phased in from the start of the year. And the continued impact of this will still be seen in the second half. The amount and the phasing of this is exactly in line with our plans and within our existing guidance. Whilst fee income is lower, the first opinion business continues to drive really strong customer revenues at practice level, with growth of nearly 12% across all practices. And actually within our joint venture practices, that increases to 14%. We have completed the buyout programme, brought out a total of 57 practices, and we will continue to operate 21 of those as company managed practices. Results of those practices are now fully consolidated into these numbers, and that's helped increase the total revenue from company managed practices to £11.6 million, as you can see on the slide. Finally, the specialist referral revenues grew by over 8% to £21.3 million. And as Peter was saying, that's been supported by the investments we've been making to build both capacity and capability in our referral centres. Let's take a closer look at how these actions have flowed through into our gross margin of 49%, which reflects the strength of food sales in retail and is tracking in line with our plans in the VEC group. Within retail, overall, we saw a 94 basis points reduction in group gross margin. Within that, 74 basis points is the impact of the annualisation of the price investment programme we completed last year. We also saw a small impact of 20 basis points due to the very strong growth of food sales, which has a mixed impact on group gross margin. And those food sales were both in stores and online. I think it's important to note that although those food sales are at a lower than average percentage margin, they are still strongly cash accretive and serve as a really valuable point of new customer acquisition. Turning to the VET group, we saw a total reduction of 38 basis points in group gross margin and the actions were taken consistently. we're taking to recalibrate the VET group had an impact of 118 basis points. Now that's exactly in line with our plans and built into the group profit guidance we gave back in May. And that impact comes from a combination of the planned fee adjustments and also the effects of consolidating 21 buyout practices which we're now operating ourselves into the results. And it's important to remember that those 21 practices are turnaround practices. In line with the plan, we are going to up-weight fee adjustments in the second half of the year and all fee adjustments will be fully implemented by the end of this financial year. It's important to remember that our recalibration actions are aimed at driving a stronger cash performance from our first opinion practices. And alongside the actions we're taking to do that, we're also working on growing the revenues and improving the profitability of those practices to drive the underlying performance of the business. And we benefited from 80 basis points of gross margin improvement due to both a lower charge into the operating loan provision in the first half and the strength of the underlying first opinion business, which drives gross margin accretion as our practices mature. Changes in the gross margin are driven by the actions we are taking to strengthen the business. And they are exactly in line with our plans. We're also supporting our profitability by continuing to focus on our operating costs. And here, we've been driving operational efficiencies at the same time as investing in our strategic growth areas. Total operating costs in the first half increased by 4.4%, to just over £200 million. That's a slower rate of growth than our sales growth of 9.4%. And that helped reduce costs as a percent of sales by 180 basis points. That more than mitigated the impact we saw from a low gross margin percent. We continue to make really good progress with the programme we put in place. Very comprehensive programme. It addresses the whole of the cost base. It runs from store payroll costs, rents, through to distribution and our support centre costs. For example, we've improved automation in our distribution centres and we continue to take steps to further simplify our store operations. I want to highlight the progress we're making on managing rents. Over the next five years, we have over 200 lease events. That's either a lease break or a lease renewal. And that gives us a lot of operational flexibility, given the pressures in the property market. And so far, we've been able to significantly reduce our rents on our most recent lease renewals. In the VET group, we also achieved efficiency savings of a million pounds, as you can see on the slide. That's in our support center costs. And that was done at the same time as making the excellent progress on the action plans to improve the VET group. Taken together with the operational leverage from strong sales, these actions help reduce cost growth in our core areas to only 2.3%. And that's enabled us to continue to invest into our growth areas. This includes £2.5 million into our omnichannel business, where strong sales growth of over 30% increased our fulfillment costs, but we also invested behind marketing and strengthening the support office team. We've also invested £1 million in people and systems as we build capability to drive our digital and data agenda. In the second half of the year, we will incur some one-off pre-opening costs relating to the expansion of our specialist referral centres, as Peter mentioned earlier, and that's both the extension we're making at Dick White Referral and the new hospital we plan to open in Scotland next financial year. But alongside that, we will continue to implement the next phase of actions we're taking to further reduce operating costs. Turning now to profit, underlying profit is higher year on year and that reflects the strong performance we've seen in retail. This year we will be adopting IFRS 16 and the impact on our key financial statements is included in the appendix of today's presentation. So for the purposes of this slide, the profit result is shown pre-IFRS 16 and that's to help you better compare this year's performance with last year. Profit at the underlying EBIT level grew by 18.6% to £47.2 million. Operating margin improved by 67 basis points to 8.6% and the improvement in cost of sales more than offsetting the reduction in gross margin percent. As a result, profit before tax grew by 18.9% to the £45 million, and that strong profit result helped us improve earnings per share to 7.2 pence, and we plan to maintain the interim dividend at 2.5 pence a share. The non-underlying items you see on the slide of £7.7 million mainly relate to the costs incurred completing the buyout of the VET practices. That's in line with our previous guidance and we're anticipating no further non-underlying costs relating to the buyout programme. Turning now to CAPEX, our capital investment is now fully aligned to our strategic focus programme. In the first half, total capital investment was £16.8 million, compared to £17.3 in FY19, and this year we're still planning to spend around £40 million of capital, which will continue to be focused on four key areas. First, we'll be investing in our existing store estate, behind the strategy to make our stores complete pet care centres, offering our customers products, advice and services. Second, we'll invest behind our omni-channel and our business systems, and that's part of our data and digital agenda. We see this as fundamental to building the PET ecosystem to create value for our customers and earn their lifetime loyalty. And thirdly, we're building on both the capability and capacity in the VET group. For example, we're looking to expand the referral centres, as you heard earlier from Peter, both extensions in our existing centre, such as Dick White Referral, and opening the new referral centre in Scotland that will open next year and increase our national coverage. And finally, we'll invest capital to improve the efficiency of the business. For example, in our distribution operations, over the last year we've invested nearly £5 million in our Northampton DC to help automate online picking and reduce the cost of online delivery. Our overall return on capital employed remains strong at over 19% and we will continue to take a very disciplined approach to all of our capital investment. And that approach to capital investment is part of our focus on cash. And we generated solid free cash flow, and that's been driven by the strength of trading within retail. Operating cash flow was 65.9 million, and that was a 5.4 million increase year on year. Our underlying free cash flow was £24.9 million, and of course that does include paying one-off accelerated corporation tax payments of £10.7 million as we comply with the introduction of the new tax collection rules. If you adjust for that one-off tax payment, our cash conversion rate, shown on the slide as 35.9%, improves to over 50%. Acquisitions you see on the slide does include the investment we made to acquire a stake in Tailster as Peter was talking through and the purpose of that is to enhance the service offer and it's a great example of our ambition to provide complete pet care for our customers. The non-underlying cash flow you see of 15.8, of which 9.4 relates to our JV buyout programme, and 6.4 relates to the planned acquisition of the minority stakes in our specialist referral centres. Apart from a very small stake remaining in Dick White Referral, we now own outright our other three referral centres. So when you take all that together, our overall cash result helped reduce leverage year-on-year to around about one times. The actions we're taking to improve cash performance could also be seen in working capital, which remains positive and we see a reduced need to extend operating loans. We continue to have a positive trade working capital cycle and that's been driven by our good sales growth. The increase in the inventories of £3.7 million includes around £1 million relating to additional stock we bought to help protect the business from the potentially disruptive impacts of Brexit as we came through October. Payables and receivables brought in line with last year and that helped give an overall improvement of £1.2 million in our trade working capital. The actions we've been taking to improve the cash performance of the VET group have led to a significant reduction in the amount of new operating loans. From an outflow of £5.2 million in the first half of last year to actually a net repayment of £400,000 in the first half of this year. It's still early days, but the improvement of cash is bigger than the reduction in fees from the adjustments we've put in place. And in the second half, we'll continue to implement the plan we outlined last November. We've now completed that buyout programme and any operating loans relating to the 57 practices are now fully written off using the £7.2 million provision we held at the end of last financial year. And at the end of the first half, operating loans for our ongoing practices were £34.6 million. And we've maintained the provisioning methodology for the time being, resulting in a total provision of £7.7 million. Based on our assessment of future cash requirements, which in part reflects the maturity of our VET practices, we expect our operating loans to tick up slightly towards the end of the year, but that's in line with our plan and our group guidance. However, those operating loans will remain significantly below the level they would have been at without the recalibration actions that we're taking. So in summary, we are very pleased we've been able to deliver a strong set of financial results. This is proof that we are focusing on the right areas. We've benefited from strong like-like sales growth across both vet group and retail. Our gross margin is lower, but it is in line with our plans. Underlying profit has grown in both the vet group and retail. And we've generated strong underlying free cash flow and conversion. In conclusion, we're going to the second half of the year with real sustainable momentum in our retail business. And we've made meaningful progress to set our VET group on a stronger foundation for future sustainable cash flow growth. The buyout programme is complete within the financial envelope we set out, and the fee adjustments have reduced the need for operating loans, giving us a better overall cash result. The progress we've made in the first half gives us the confidence to upgrade our full-year profit guidance towards the top end of current expectations. That means we now expect to grow group profit year on year, and that will be a year earlier than we had planned for. And when we look forward into next year, we're expecting to grow group profit and cash flow in both the VET group and retail. Thanks for listening. I'll now hand back to Peter, and we'll then go into Q&A.

Thanks, Mike. I'm really pleased with the progress that we've made. The results that you see today reflect the bold decisions that we took over the last two years. We're one year into our pet care journey and you can see the results, but I'm still really excited about what's left to come. We still have so much more left to do, but we have assembled a really talented and capable leadership team and we're focused on three things. We're focused on knowing the pet care customer better than anybody else. We'll focus on building a unique and compelling pet ecosystem that really works for customers. And we'll focus on delivering free cash flow growth for our investors. Thanks for listening. Appreciate your time. Mike and I would now be delighted to take any questions that you may have. Thank you.

Thanks, yeah. It's Jonathan Pritchard at Pale Hen. A couple of information. On the store refits, the Stockports and the Chesterfields, I think the popular opinion, sort of what I've read in the press, is you spent a few bob on the first couple. Has that come down in the second tranche, and will it come down again in the third tranche? And could you just sort of give us a bit of background on the returns you were expecting and the payback on those stores? And then secondly... You mentioned that you were doing well on lease renewals, but is there an average recent number that you could give us in terms of reductions?

I think there's probably three questions in there, Jonathan, to try and deal with. You're absolutely right. When you do your first, I mean, very much see them as concept. Everything you do is a one-off. So typically, your costs for doing the first couple of stores are always the most expensive. What you want to try and do at that stage or in the concept stage is work out what works and what doesn't, which is why it's really important then to take it to the next batch of stores. Because what you want to then to try and do is actually refine your model. And then what you want to do is go into production. And the real efficiencies come when you can actually start to buy things at a reasonable amount of scale because then you can really refine your offer. And that's exactly what you do. And typically, throughout a period of time, you see your cost base from the very first one to pretty much half as you work out what matters, what doesn't, and also how you can really value engineer your proposition. So absolutely, you're on the money. That's exactly what you'll do. In terms of measuring the performance of these stores, actually we've got the first five stores to really look at that performance. And clearly for the amount of money we're seeing, what we need to do is drive a series of things. We need to drive like-for-like transactions in the store. We want to see an improvement in the number of subscriptions that we take through a store. We want to see an improvement in actually the interaction between the retail and the vet business. which drives the overall ecosystem. And actually probably the most important thing in all of it, actually, is do your customers like it? Do they spend more time with you and are they happy? So what I can tell you is that our satisfaction levels in these stores went up 10 basis points. So it was, sorry, they went up 10 basis points. Actually, we saw a significant improvement in customer levels of satisfaction. What we've seen is that their life-alikes are actually running ahead of the estate and are pretty much in line with where we expect them to be to be able to support what we believe to be the economic rollout plan for these stores. But there's a few crucial things that have come out that we are really excited about. If I look at things like subscriptions in these stores, these stores are on a completely different level to our core stores because we've invested in space to have better conversations with customers. That's really exciting. If I look at the interaction between the retail and the vet business, that's really exciting. And then the final bit, if I look at how the omni-channel piece is working in those stores in terms of ordering store, we have dedicated collection points. That's really exciting too. So it's clearly going from the five to the ones that we're doing now. And we're choosing to refit some quite difficult stores. They're quite big. They're quite mature. That will be the real test. But going into it, we're feeling quite chipper that we've got something that we know works for customers and the indicators coming out look good. And we can see a road through as to why an investment in that would deliver as a return. Do you want to talk about lease, Mike?

I think, Jonathan, your question was on our lease renewals, what level of rent reduction are we getting? So on the ones we've done so far this year, on average it's 25% reduction in rents. And as we look forward, we've got a property team very, very focused on getting good outcomes for us when we do our lease update. As I was saying, we've got over 200 events coming up over the next five years, so plenty of opportunity to get our rent costs down.

I said 10 basis points, I mean 10 points of consumer satisfaction. That sounds rubbish. It's not 10 basis points, 10 points, it's a big movement. Geoff?

Jeff Ruddle, Morgan Stanley. Three questions for me. First one, you talk, I think, in your KPIs of 9.1% increase in customer sales, and then you also talk about 4.4% increase in transactions. So there's obviously quite a big increase in the average transaction value. Could you just talk to us about what's driving that? Second question, you're obviously guiding to the top end of the current profit range. I guess it's somewhere around 93 million. What like for like do you have to assume in the retail business to get to that number? Just so I understand what sort of expectation that is baking in for the second half. And then finally, why was there 7 million pound more exceptionals on the vet business in the first half of this year? Because you closed 56 practices. I think a year ago you announced you were going to close 55. And as I understood it, you took in the provisions last year. So why are there more provisions coming in from that this year?

Let me deal with the question you asked on the exceptionals first. So when we outlined the plan for our VET buyout programme, we said our P&L hit would be £49 million, spread over a couple of years. And to date, it's including that 7.7, it's 48. So we've actually done it slightly less overall. So I think it's a split between the years. Guidance, yeah. I mean, I think when we're doing our guidance, of course, we have the benefit of knowing how we traded through the first half of quarter three, because we're in the middle of period nine. How did we trade it through? So clearly, you know, our retail business, like for likes, first half, 7.8%. I mean, that was a lot higher than we'd planned for, hence the upgrade in the guidance. Clearly, that is not our planning rate going forward. But we have real momentum in the retail business. You know, going forward, we plan next year around about 4%, 4.5% like for likes. And between now and then, I think they'll settle at that level. And that's our planning assumption. But clearly, we've had a really stellar performance in the first half. I think on the transactions and the customer sales, it's a bit of an apples to pears comparison there, because the transactions growth of 4.4% is what we're seeing coming through our store like-for-like, contributing to overall 5% growth in stores. The customer sales growth is adding together all the sales and revenue we do across all our channels. So it can include all the revenues we take in our vet practices, customer revenues, order in store, subscriptions, insurance. It's everything added together.

So the transactions is only, so it doesn't include, you know, somebody coming to the vet doesn't agree with transactions. Correct. Okay, great. Thank you.

Adam Thompson from Liberum. A quick first question actually on slide 12, which is the, I guess, the share of wallet chart you show there. And a point of clarification, you know that only 16% of the VIPs shop across both products and services. So does that mean 16% of the 5 million sit in that final bar? And what does the dispersion look like of those VIP customers across the rest of those bars? Just to give us an idea of the headroom to shift up into those higher columns and then secondly just a general question on on the vet uh turnaround looks like it's going extremely well and all to plan when you guys look at it what are the biggest risk factors in there and the things that you're most closely monitoring to to make sure that nothing derails that going forward okay okay um

I'll do your questions in reverse, actually. So think about the vet business. The fundamental difference between our retail business and our vet business, typically in retail, when you want to make a movement, you've almost got a big dial that you can shift and you move the entire estate in one go. And that's the nature of the ownership structure of retail. In vets, it's the complete opposite. The most challenging thing you have to do is go and move lots of dials across the piece. So in the plans that Jane is executing, she's... and obviously the person who built our vet business and knows it incredibly well, recognise actually this is about one-on-one conversations with partners. So the way we've structured ourselves in the business is to facilitate that so we've got more people on the ground, we're covering less partners, to allow us to have better conversations and we've reduced levels of complexity for the vets where they speak to one person, historically they might have to speak to four or five so we've made it easier. The risk sits around the fact that we're managing the individual nature of those relationships. And it's hard. It's really, really hard to do. However, in order to do that, you've got to gear yourself up for success. And I think the real credit to Jane, and I don't want to embarrass her because she's sat in the room, that's what she's doing in the vet business is making that what matters to partners is on the ground. and their conversations and their business. And if you don't believe me, go and speak to partners and they will talk about their business and that's what they're interested in. And I think this mutuality of what does partnership really mean? It doesn't mean that we're providing a service. It means actually we're alongside them and we are really challenging them on their gross margins, really challenging them on their cost base, really helping them drive their revenue. Because the other side of the equation is clinical freedom, which is what they do and they do brilliantly. And establishing that partnership actually is quite tough. But again, I think we're moving more partners in that direction, which is why I think you can see that in the performance. I think back to slide 12, you're absolutely right. For me, this is the single biggest opportunity because we know that the more customers engage with us, the more money they spend. And you can see the quantum is quite significant. I guess in some respects, one of the frustrating things, if I had that chart up a year ago, you'd probably see a very similar number of 16%. The quantum's changed, however, which is the number of VIP members has moved from 4 million to 5 million. So that's irrelevant. But to be honest, I still think this is where the biggest opportunity for us still lies. The reason why puppy and kitten are so important is because we know in order to get people into more part of the service, you've got to have that conversation right at the very start of the journey. Once people have chosen their vet, it's quite hard. So that's why we're obsessed about puppies and kittens. And actually, we've got a lot more work to do. We haven't disclosed the VIP penetration below it, but actually, as you can imagine, it falls away from retail being sort of 70% of all transactions down to the combined, so you can probably imply. Our plan, and this for me is why really unlocking data becomes the key, because we're learning about what things that you need to do to move people across. So we know trying to convert a retail shopper into vets when they've got a vet-established relationship, it's not going to happen easily. But at the very start of the journey, that matters. And what's very unique about PET versus any other retail I've worked in is it's the churn that takes place because typically a PET will live between two years for a hamster and 14 years for a dog. So that cycle of change is happening all the time. So it's really important that as you acquire people in, that becomes your model for the future because there's this roll-through factor. And as we unlock our data capabilities, for me, this is the big area of focus, which is getting it right at the very start, getting to more parts of that ecosystem. We've started. There's still so much more left for us to do.

Hi, morning. It's Greg from Shore Capital. Could you, I'm just looking at slide 41, which your capital allocation priorities, just looking at kind of your net debt. to underlying EBITDA leverage of one times. Could you just maybe bring... I understand why the dividend's been held this time out. Just trying to understand going forward how you'd allocate capital allocation.

Yes. Well, we've always said that surplus-free cash flow... own above that which we need to grow the business, we will return to our shareholders. We've always been very clear on that. So I think when we look at the dividend, obviously, I think it's a conversation more for the year end, and it's obviously a board decision. And we'll consult closely with shareholders as how they would choose to have free cash flow returned to them, whether it's a special or a share buyback. But clearly, I think that's a year end question. Meanwhile, we are committed to... to paying out the 50% that we've always paid out, actually frozen to ensure that under IFRS 16, that's not a lower number. So seven pence for this year is our commitment we've made.

Hi, it's Simon Bowler from Numis. Kind of two or so on kind of follow up on the cash point, I guess. Firstly, in terms of kind of capital allocation, obviously kind of the Telstra investment, a relatively small number. But are there any other things or services you could imagine being of interest to you from a kind of inorganic acquisition standpoint? And then secondly, you mentioned kind of operating loans and expectation of a small outflow for this year. Are you in a position with the visibility you've got on where fees and practices are getting to that we'll be talking about an inflow or at least no further outflows into next fiscal year? Okay, thanks, Simon.

If I deal a service appointment, then, Mike, if you want to talk to Ops Loans. I think we'll look at this through the eyes, actually, what really helps customers. And we've identified... all the things that actually would make pet ownership easier. So actually, that's why Tailster for us, finding a dog walker, a board, or a sitter is a real problem for customers. I think what's really exciting is there are so many new startups in this space, in the pet space, who are finding problems to solutions. In some cases, they might be relatively small, Or indeed, actually, in some cases, I think actually trying to address big problems for customers. So I'm really excited, firstly, by the amount of innovation that we're seeing taking place. And in some cases, the best way to harness that innovation is not by trying to do it yourself, but by partnering with people who are focused on doing that. And I think that's what we're learning with that Tailster relationship, which we're really pleased with. All those businesses, though, suffer the same problem, which is they've got a great idea. We may have a great solution, but getting it to their audience is super, super expensive. And cost acquisition is often where they just burn a lot of cash. And for us, I think sat with a customer base where we know one in three dogs in the UK, we know them by name, know an awful lot about them, our ability to cut the cost of acquisition is actually quite attractive. So I think Tailsoft for us represents something really quite important. It's tiny, it's really small, but we're learning loads. And I think we've been super excited by working with a digital disruptor. On that front alone, we've learned loads. You know, they do some things amazingly with not a lot of resource. And I look at our organization and say, why can't we do that? So I think we learned an awful lot. But at the same time, I think as we're seeing lots of that disruption take place, I think we're finding a way where we can marry innovation with our capabilities and provide a total solution. So I think that's actually exciting. And we're going to continue to look and maybe find, when it's right for our customers and find them, I think we've got probably a model that we can probably start to replicate at relatively low cost.

So, Simon, on that question on operating loans, you've got to remember, why are we doing the recalibration we're doing? Fundamentally, it's to get our practices to be debt-free as fast as possible, and it's also to make sure that we reduce the support we're giving to those practices. And that's what we've really seen already early days, as I said in the presentation in the first half. We've now got fewer practices with operating loans and we've got more profitable practices than we've had ever before. And don't forget, we're starting all our practices. We've still got a lot of immaturity. So, you know, the performance we're seeing at practice level is really quite strong. So I referenced in the presentation that customer revenues were up by over 11%. If you actually look into the joint venture practices, that's 14%. Revenue's up. Gross margins have improved because of the work that Jane's leading with the team. We've got more support to help those practices. And operating costs have come down. So we've really seen a real big step up in the profitability of the underlying business in VET. So you look forward into next year. I did outline that we expect it will tick up in operating loans. But the plan is to get those operating loans down as fast as possible. So you start to see those coming down certainly over next year and into the following year. But again, that will all be driven by the performance of the underlying business getting so strong.

Hi, it's Andrew Porteous from HSBC. A couple from me. First of all, just to follow up on the operating loans, could you just, you know, With the last question in mind, give us an idea on how many years you're expecting that balance to sort of work down over. And then the second one was really around free cash flow. I mean, you kind of sort of 63 million this year. Obviously, that's got the tax in it. So your base for next year feels like it should be about 74 million. And then if I'm thinking about that going forward, if we're thinking sort of four, four and a half percent like for like on the retail side. plus vets moving towards that 60 million, it feels like that 74 should maybe sort of increase high single-digit millions. Is that the way to think about it, this business going forward?

Yeah, I think on the cash flow, you're exactly right. So we're guiding up today that we'll probably be flat on cash flow year on year, so 60, 63, 64 million. But that, of course, takes into account that 10.7, which is a one-off corporation tax. So the base is really 74 million. And I think you're right. A combination of the performance we're seeing in retail continuing, we'd expect sales and profit growth to be pretty aligned in retail. And we've got the cash that you saw on the slide coming out of the VET group. So I think your thinking on the cash is bob on. You then asked about operating loans and how quickly we expect that balance to come down. And I think the way to think about that is the fee adjustments we've made a large part of them are focused very exclusively on those practices with the operating loan. And the intention there is to get them to be debt-free as fast as possible. So in our planning assumption, over the next five years, that balance comes down very rapidly. But I think the thing to think about in operating loans is these are investments we're making to support the businesses through what is often a very critical part of their maturity. And when they get into their third year... they have to start repaying their bank loans. And we know that's when some of those practices need some extra support, not least because of the cost environment we found ourselves in. So we see that as an investment, because the blueprint for successful practice, of which over 100 practices are completely debt-free, is really very powerful. They're turning over over a million pounds a year and they're making a profit of £130,000 after we've taken out our fee. So that blueprint gives us a lot of confidence that the investments we're making in operating loans are good investments. And I don't think we should look at them going forward as a negative thing at all. Actually, it's quite a positive thing that we're doing.

Thanks very much.

Yeah, a tiny shout-out from Whitman Howard. I wondered, could you give us what you perceive to be your market share in cats and dogs market? And clearly dogs is miles bigger. I just wondered if some of the stuff you're doing at the moment makes you think the cat market might be a bit more of an opportunity going forward, bearing in mind you've got a much lower market share. And on an unrelated question, now you're going to become data... engineers etc etc um do you have any sort of sense of um you know sort of lifetime values of of um cat spend and dog spend and um you know how much of that you get sorry very vague question but might say something interesting okay uh

On market share, actually, we are very much a dog-led business. A huge proportion of our revenue comes from dog. So cat is, in specialists typically, is a much smaller part of the businesses. In supermarkets, you'll find it's the complete opposite. And in the main, that's driven by food, and it's driven by convenience of shopping food whilst you're shopping. There's so much more money you can spend on a dog than you can a cat. There are, if you believe the national statistics, there are about 8 million dogs in the UK and about 10 million cats. The populations are relatively static, slight increase in cat ownership than there is dog ownership. The way people are spending money, however, is changing. So as people are buying more breeds, typically with an oodle in it, typically, cockapoo, you name it, combine it with a poodle, you get something. That's driving a different approach on spend. So I think without question, dog will always be the bastion of driving value. I think cats actually, the cat owner is really hard to try and get. You typically see that they will show up more in online shopping. So convenience is a really big deal. And I've got two cats. My cats just pretty much want, they want feeding. And then after they're being fed, the stuff that comes out the other end, they want taken out. So that is a very different proposition. I think on data... You're absolutely right, because I think increasingly, I think historically retailers would look at sales, they'd look at by category, they'd look at their margin. And I think that's very much a retrograde way of how you should think about your business. I think you've got to look at it through the lens of actually how many customers have you got? How much does it cost you to acquire those customers? And what's the lifetime value of those customers? And I think for us, this is where it gets very exciting, because I think if you start off by saying, if you look at that retail slide, a typical dog's going to live 12 years, they're spending £100 a year with you, well, you can do the maths. If you can get them into a party business and they're spending £1,000 a year with you, you can do the maths. And I think that's exactly how we're starting to think about our business, which is looking at customers... through our business, you see different opportunities, you see the opportunity to move them through, and you also see solutions. And in doing so, you find things that, you know, you find problems. If I think about flea subscription, we've gone from thinking about selling a... um a three pack of flea subscript a three pack of three treatments for you know might be 24 pounds now i'm a classic example i buy two a month i'm spending four pound fifty per cast of nine pounds a month i've been in it for three years and hopefully with my cats i've got another 10 15 years left to go And we've created a solution, which actually I'm really happy with, so why would it change? So I think as we think looking through the customer lenses, and that's how we're starting to engineer our business, data really helps us fuel that because it's the one time we can bring everything together. And we're very early still, I think, on this journey. I think a lot of digital businesses, that's how they run their business. And I think that's how that really helps us think about ours. And that really, I think, is where the opportunity for growing our business really comes from.

So you'll be presenting this data in future, will you?

You know, my ambition would be that we ultimately, we internally, we talk about our customer revenue in that way, the way that we show it externally is in that way. Because I think it actually makes more relevance. And then it really allows us to think about, when you think about the dog shopper, that's just not enough. We know breed has got a significant impact. And I think that really allows us to segment in a way. And if I'm Amazon, Tony, I know you've got a dog. Great. Our pets at home, we should know you've got a dog. He's called Charlie. He's three years old. He's a Labradoodle and he goes to our vet. He uses our vet services. He's doing all these things. And that's actually where I think our value really comes from in quite a unique way.

Thanks. Matt Grand City. I just had a question in terms of, a couple of questions. One in terms of your level of CapEx spend going forward. Is kind of 40 million what we should be targeting? And I suppose at what stage will you need to invest further into online? I wasn't sure what kind of sales was implied by the new automation, so what your total capacity would be. And then second of all, obviously looking further into the future, the rollout of vet practices again after this kind of reset has occurred is quite an important driver. Can you give us kind of an update on... where you currently see vet availability and if it has got better or worse or how that has changed in your opinion?

I'll pick that question up. Thanks. Well, we just had the conversation, didn't we, about how much cash the business is generating. And the business is very cash generative. So the question on how much CapEx spend all comes down to returns. So we're generating really good returns and we've got great opportunities to invest capital. Planning assumption for this year will be around about 40 million. But we look at that ongoing. And we know we've got lots of opportunities to deploy capital to grow the business. Lots of things we've been talking about today. But it will come down to returns. We will remain very disciplined on our capex returns.

If I talk about Roland Verprest, you know clearly we went from doing 50, 60 a year to in the last year we've done five. And our primary focus is on delivering the maturity from our existing business first, so that's where we're obsessed. Even in maintaining that existing business, we recognise that we have partners who are actually coming through the other end of that journey and actually have creative value and want to exit. So actually one of the things we do consistently in our business is what we call A-share transactions, where we bring new partners in to acquire successful business and keep them maintained. Actually, that's our first priority. Moving forward, however, that we would expect to see probably, we think a sensible run rate would be between 10 and 15. And that's where we're starting to fill our pipeline for. But for us, taking all our lessons of the past, it's really down to making sure we do that with a quality location, with a quality partner. And I think, again, back under Jane's governance and the team that we're building, that's where our focus will be. But without question, the biggest opportunity still comes from the business we've already invested in, which is a high quality and leveraging the capability from that.

Please, for the last question. Yeah, just two quick questions. One is in terms of vet practices. The wage inflation for doctors and nurses was an issue last year. Is it changing right now? And second, on non-VIP practices, customers, are they growing in the similar like-for-like fashion as VIP just yet?

I'll talk about wage inflation. I think the first thing is actually we have a huge degree of protection in our business because our partners, who are in a lot of cases our vets, own the business too. So we see much more probably sensible levels of wage inflation amongst our JVPs than you would do at locums. And I think it's been well reported that we're seeing wage inflation in locums. And of course, we're exposed to that too, but probably at a significantly lesser extent than others. There are things you can do, however, to try and really mitigate that. And I think if you become very reliant upon low incomes, you've got a real problem. So hence the reason why we've invested heavily in our graduate recruitment programme. And I was recently at an event where we'd welcomed our new intake and we had over 100 grads joining our programme. And it's now one of the biggest in the UK. So I think that's a way that proactively you grow your own talent. And also they learn about joint venturing. So that's really, really important. And with our VIPs, it's interesting because I think if you look at our... The nature of pet ownership means actually there are dogs dying every year. Sounds awful, but there are puppies being born every year. So we have this natural churn. And the real success for us is we see growth in customers walking in through the door. Our job is about converting them into VIP members. So for us, the VIP journey never stops now. So sign-ups is always a really important indicator to us of the future health of business. So if you look at our VIP penetration in retail, that's pretty much over 70% and that's grown. And for us, we don't think of it as non-VIP VIP. We see new pet owners and our job is to get you into the club as fast as we possibly can do because we see the benefits as a consequence. And that will just continue forevermore. Thank you ever so much for all your time. We really appreciate your questions as well. Thank you.