Pets at Home Group Plc

Good morning, I hope you're all safe and well, and welcome to Peta Home's FY22 preliminary results presentation. I'm Peter Pritchard, the Group CEO, and with me today is Mike Iden, our Group CFO. Despite another period characterised by significant and evolving external challenges, our performance this year has been nothing short of outstanding, delivering record growth in sales, profit and cash flow. We continue to take share across each segment of the market in which we operate. We welcomed over 1.1 million new pet owners across our business, lengthening the runway of growth ahead of us. And we improved spend per customer with our aggregate share of customer wallet increasing by 600 basis points to 37%. Simply put, our business has never been in a stronger position than it is today. The ongoing resilience of the pet care market, coupled with our unique omnichannel model and clear strategic priorities to make pet care as affordable, easy and convenient as possible for customers, means that we look into the future with the utmost of confidence. We continue to invest in our business to build capability and to drive future growth, outpacing their own market in which we operate and creating long-term value for all our stakeholders. It has been a year of breaking records. Our new customer acquisition, our puppy and kitten clubs, increased signups by 48% year-on-year, with club members now accounting for approximately one fifth of our record 7.3 million VIP customers. Over 90% of puppy and kitten customers acquired over the past two years remain active today, providing a significant growth opportunity over the next 12 to 15 years as they engage and shop across our full ecosystem of products and services. We already have 2 million VIPs shopping more than one channel. That's up 40% in two years. We're also successfully retaining these customers, having reduced churn by 400 basis points and maintaining over 95% of active customer spend beyond year one. The output, well, that's a record year of sales, profit and cash delivery and growth in our market share to 24% and a record dividend for our shareholders. We have a track record of taking share and demonstrating the advantages of our omnichannel pet care ecosystem are very clear. With over 60% of our growth over the last five years coming from market share gains, we have a bold, clear plan to achieve at least 2.3 billion of customer revenue in the medium term, supported by the strategic investments that we're making. We continue to digitise the business with Project Polestar helping unlock significant opportunities around data, subscriptions and loyalty. Customers can now access all of our products and services through a frictionless single login and a new iteration of our mobile app for a much improved shopping experience is scheduled for launch later this year. Our ongoing store transformation program is improving our customer proposition and driving growth in VIP registrations, subscription signups and service performance improvements. Project Pathfinder is improving practice economics. Our client productivity has improved and so has our client engagement. And the health of our veterinary estate continues to go from strength to strength with growth in average practice revenues surpassing £1 million for the first time. And that's accompanied by expanding margins and many additional levers for future growth. Development of our new storage and distribution facility in Stafford remains on track and it's on budget and it will become fully operational by summer 2023 and that will deliver capacity and efficiency benefits and it will future-proof our operations for many, many years to come. We are well positioned to accelerate our growth and market share in the year ahead. We have more active customers than ever before, with a prevailing affluent demographic and propensity to prioritise pet care over other categories of spend. Anecdotal evidence tells that over 90% of these customers are not intending to reduce their level of pet care spend in the foreseeable future. We also know these customers better than anyone else with almost 10 years of proprietary data across our VIP club, helping us provide personalized and convenient solutions throughout the full lifetime of the pet. Our broad range of economically resilient products and services, well over 75% of them are non-discretionary in their nature and that offers choice, quality and value to all customers. and through offering full price architecture within food and a very strong private level proposition that can represent up to 30% savings to customers versus their branded equivalent, we're helping owners feed their best diet for their pet through the lifetime of the pet. Our pet care plans offer further value and convenience for customers providing essential pet care for a low fixed monthly cost whilst creating an annuity revenue stream for the group. But above all, we have an unwavering commitment to keep pet care affordable for owners and will never let price be a reason for customers not to shop with us. As a business, we are well positioned to navigate the need term industry-wide inflationary pressures, and we continue to work closely with our broad base of suppliers to unlock efficiencies across our supply chain and mitigate volatility in freight rates. We've got a comprehensive programme of live initiatives across consumables, packaging, store operations and energy usage to reduce our overall cost to serve. And with declining lease lengths and average rent reductions of up to 25% on negotiation, we're leveraging our nationwide store network as a flexible and cost-effective distribution network. Our financial strength and resilience enables us to invest in strategically important initiatives that support sustainable long-term growth towards 2.3 billion of customer revenue and beyond, having made better than expected progress this year. So I'm now going to hand you over to Mike, who will run you through the financial headlines.

Thanks, Peter. We are today reporting record financial results and strong progress across all of our key strategic measures. These very positive results prove the strength of our business model, the relevance of our strategy and the resilience of the pet care market. And today, our business has never been stronger. Just before I run through our headline numbers, it's worth pulling out four standout highlights from our results. we delivered £144.7 million of profit. That's before the change in the IAS 38 accounting policy. This represents year-on-year growth of over 65% and exceeds market expectations. We've gained 1.1 million new customers, a growth of 18%, helping drive our market share from 23% to 24%. And these customers will be a source of sustained growth going forward. Group revenues grew by over 15% to 1.32 billion, and that was driven across all product categories and services, including a VET group like-for-like revenue growth of over 17%. and we generated cash flow of £95 million, up close to 41% year-on-year, including a step change in the cash results of the VET group to over £50 million, helping us exit the year with our strongest ever balance sheet and increase our total dividend by 48%. Turning now to the full year numbers and looking first at our strong revenue performance. Total Group Lite for Lite revenue growth was close to 16% on a one-year basis and just under 26% on a two-year basis. And this reflects the sustained, strong growth across all channels with 22% more customers shopping across more than one channel, helping increase average customer value. In our retail business, like-for-like revenues grew 15.8%, with this growth coming from both stores with growth of 15% and Omnichannel with growth of close to 16%. We are increasingly using our stores to fulfill online orders with around 20% of orders now picked in store. This gives us a competitive advantage with more delivery options for our customers, as well as a better economics driving higher contribution per order. Category-wise, food revenue grew by over 21%. And accessories revenue, including consumables, such as litter and bedding, grew by nearly 14% as more pets came to the market and into our stores. And we saw our puppy and kitten club grow by 23,000 new pets a week, giving us a significant lifetime value opportunity as we retain and deepen the relationships with these new customers. In our VET group, full-year light flight revenue growth was over 17%, driven by a significant step-up in practice revenue, with the number of practices generating more than £1 million in revenues doubling during the year. Overall, across the whole group, both retail and vet, our customer revenues grew by more than 16% to over 1.67 billion as we continue to make great progress towards our medium-term customer revenue target of 2.3 billion. Turning now to our full-year profit result, like many other companies, we have updated our accounting policy in relation to IAS 38 intangible assets. As a result, a number of software and related implementation costs which were previously capitalized are now required to be expensed and the associated amortization charge reversed. This applies looking backwards in the current year and looking forwards. This change in policy coincides with our peak investment as we build capabilities to drive future growth, including Project Polestar, supply chain capacity investments, and as we enhance our in-house data capabilities. Group underlying pre-tax profit of £144.7 million is stated on a previous IAS 38 accounting basis and was driven by strong revenue, an expansion in gross margin and robust underlying cost control. The net impact of the revised accounting policy on our FY22 PBIT is £14.6 million. So after taking this into account, under the new policy, our underlying profit is £130.1 million. It's important to understand there is no impact on the group cash position or free cash flow. And overall, there's no net profit impact over the full asset life. More importantly, the accounting change has no impact on our planned investment schedule, future cash generation or our ambitious growth plans. We continue to be strongly cash generative. Group underlying free cash flow was 95 million and that includes a year-on-year benefit in working capital of 26.4 million with better efficiency in retail and a 6.5 million pound reduction in operating loans to our joint venture practices. as both profitability and cash generation stepped up across our veterinary estate. Capital investment was £73.1 million, reflecting investment in strategically important areas including our distribution network, our store transformation programme and data analytics and systems. The impact of the IAS38 policy change reduces our reported capital investment to £49.1 million, although the cash investment stays the same. We've also successfully refinanced our evolving credit facility on market-leading terms and increased the facility to £300 million. This taken together with our strong ongoing cash generation gives us significant capacity to invest organically and inorganically to drive future profitable growth. Taking everything together we ended the year with a net cash position of £66 million and that includes nearly £20 million of final proceeds from the disposal of our specialist hospitals which we received ahead of schedule during the year. All of this means that our balance sheet is the strongest it's ever been, with net debt on a post IFRS 16 basis reduced by over £90 million to £317 million, giving us leverage of 1.3 times, and that's down from 1.9 times in the prior year. and the strong cash generation in the year has enabled us to pay a 48% increase in the full year dividend to shareholders. So in summary, Pets at Home continues to go from strength to strength and the prospects for the business are the strongest they have ever been. We've had a record year of sales, profit and cash and made significant progress across all of our strategic measures. The resilience of the pet care sector taken together with the strong tailwind of over a million more customers and our robust self-help plans will help us navigate the near-term economic challenges. And the investments we are making in the business will help us both build and entrench our competitive advantages and continue to grow our market share. I'll now hand back to Peter.

Thanks, Mike. I'm incredibly proud of what we've achieved in the past year and that we continue to run a responsible business as well as a successful one. We could not have achieved this success without the support and dedication of all of our colleagues and partners across the group who have helped make Pets at Home a bigger, stronger and more efficient business. We have a truly unique business and by leveraging our strengths and continue to put the customer first, we will continue to grow our share of this resilient market in which we operate. As I hand over the leadership of this great business to Lisa McGowan, I have the utmost confidence that Pets at Home will continue to deliver sustainable, profitable growth as we build the best pet care business in the world. Thanks for watching, stay safe and take care.