Pets at Home Group Plc

Good morning. I am Lisa McGowan and I've been the CEO of Pets at Home for almost six months now and it's been fantastic. I've seen and felt firsthand the fabulous and supportive culture Pets at Home has and I've received such a warm and open welcome from everyone and I've really felt the whole business has been behind me from day one. So, what are my views of the business six months in? Well, this is a truly compelling, distinctive and strong business with significant opportunity ahead and we have a plan to lean into it. My previous background has been in building consumer-centric, technology-enabled growth businesses in the media and telco sectors. So my first objective was to learn the business from the ground up. So I've made sure to spend lots of time in stores, in vets, in distribution centres and groomers. I've unloaded lorries, packed customer orders, cleaned fish tanks, groomed dogs and prepped cats for surgery. And this has given me the insight I wanted and allowed me to meet as many colleagues and customers as possible and hear their views on the business. I've also focused on building a deep understanding of the sector through data and insight, which we have an incredible amount of, as well as meeting with many of our suppliers, partners and charities. I've undertaken a reorganisation to simplify our structure and to better integrate the retail and vets businesses, and we've been able to promote and rotate some key internal talent as part of this process, which provides continuity, secures expertise and enables real progression for our best people. I've also hired Rachel Mooney as our Chief People Officer, and she brings deep functional expertise as well as data, digital and services experience. As part of this change, I've also created a new consumer function, bringing together customer value proposition, loyalty, subscriptions, digital, marketing, CRM, comms and format design. And this team will be led by the newly created role of Chief Consumer Officer, and will step change our customer centricity and bring critical external expertise into the business. As you would expect, I've taken a good look at our strategic initiatives to ensure our big in-flight investments land well. Projects including our new distribution centre, our digital re-platforming and our store refurbishment programme. And I've also had the chance to review and prioritise, together with the board, the many opportunities that lie ahead of us. Six months in, I'm more convinced than ever that this is a great business built on a strong and differentiated platform. First, the pet care sector is underpinned by structural growth trends. Premiumization, so customers seeking higher end products and services for their beloved companions, and humanization, so human trends such as natural foods, premium grooming, or complex healthcare crossing over into pets, continue to drive spend and innovation. And these have been joined by another trend of increased penetration of pet ownership. People are bringing pets into their families younger, often pre-kids, more readily as home working hybrid is here to stay, and in increasing numbers with second, third and fourth pet ownership. far from being a covered boom elevated levels of pet ownership are here to stay and they continue to drive growth within this context pets at home has a unique position our special colleague culture and deep expertise built and sustained over many years is a distinctive and very hard to replicate competitive advantage and something that we will continue to protect and grow We have real category authority in pet care reinforced by the clinical freedom and expertise of our vets, our commitment to pet welfare and our shared purpose of making lives better for pets and the people that love them. Our market leadership and strength in the UK gives us economies of scale and positions us as the partner of choice for suppliers and innovators in the sector. We are the go-to brand for consumers embarking on a new pet care journey or acquiring advice for their beloved companion. This market leadership is supported by a very well-positioned and well-invested physical estate. We are a sought-after anchor tenant on retail parts nationwide. And we're also able to use this distributed estate to power our unique omnichannel model, with pet care centres acting as local distribution hubs for click and collect or rapid delivery. And our new state of the art Central DC remains on track to come online next year. Our unique joint venture vets model is also a source of real strength for the business. It promotes an owner-operator perspective amongst our partners, which drives excellent consumer and pet outcomes combined with strong financial returns. It secures clinical expertise and vet tenure in our practices in a sector where the competition for talent is really strong, and it is a very attractive wealth creation opportunity for our partners that allows us to continue to grow organically. lastly pets at home has a genuine track record in esg in the last 12 years we have donated 40 million pounds to pet charities through our fundraising and through our vip club which gives to charity every time a customer swipes we remain the largest single grant maker to rescue and adoption centers across the uk and we support over a thousand local charities We will carry forward this strong commitment to pets and expand our focus to our people and our planet. Our vision is to be the world's best pet care business, providing the best products, services and advice to guide pet owners through their pet care journey. I would argue we're already the global leader, having created a unique pet care platform, bringing together retail vets and grooming. And there is still a very significant opportunity ahead of us. We will extend and deepen our strategy to create a customer-centric, omnichannel pet care ecosystem, delivering exactly what pet owners need, where and how they need it to power our growth. I've already spoken about the need to be customer centric in everything we do. This is underpinned by our best in class data capability with one of the industry's largest proprietary databases bringing together clinical, consumer and transactional data. And this allows us to better target our offering to consumers acquiring at lower cost and to tailor our physical and digital propositions to local and individual needs. With our unique insight into the special bond between pets and their owners, cemented by our market leadership position and 30 year plus track record of putting pets first, we can lead the way in innovation, anticipating emerging consumer needs and opening new market segments. between shipping a bag of dog food from a local pet care centre and performing orthopaedic surgery on a cat. There is a huge space encompassing nutrition, wellbeing, preventative medicine, homewares, accessories, end of life care, training and behaviour, and we understand it better than anyone. Omnichannel remains a cornerstone of our strategy. Our nationwide pet care centres bringing together retail, grooming and veterinary care, as well as acting as network distribution centres. And these centres are doing about 20% higher sales per square foot since pre-COVID, so we have the opportunity to grow our footprint further, particularly within the M25, as our newly opened smaller format stores are trading ahead of expectation. Our in-flight digital re-platforming will improve our multi-channel retail offer, of course, but it also opens up the opportunity to provide innovative services and advice digitally as well as physically. Our Vet Connection service, which offers remote clinical support from vets and registered nurses, and our Pet Expert Live service, which connects customers to in-store colleagues via video for advice on products, show the promise of hybrid digital and physical services to meet customer needs. Now our vet practices are absolutely central to our vision and we have a number of levers of growth. These range from building advanced practices like our recently opened hospitals in Colchester and Northampton, expanding our increasing number of highly successful mature practices within our pet care centres, to continuing to open greenfield sites within our existing centres and in new locations. And across these opportunities, we can deploy our capital in smart ways to underpin growth. And we can use all the talent within our four walls, from vets to pet care experts, to provide the right service at the lowest cost to us and the lowest cost to the consumer. And we can provide it all through the channel of their choice. We are uniquely placed to integrate our products, services and advice into a pet care ecosystem, a platform which is simple to use, highly personalised for customers and their pets. We can provide for pets and the people that love them in a way that no one else can by bringing together clinical expertise, trusted advice, best in class products, high quality services and tailored subscriptions. We have a strong track record of balancing investment in the business with returns to shareholders, and we'll continue to focus on driving top line customer and revenue growth alongside generating strong cash returns. Our capital allocation framework is clear. We invest first in the organic growth of the business, provide a progressive dividend, look for accretive M&A opportunities and finally return excess cash to shareholders. This is not changing and we will remain disciplined in how we manage shareholder capital. Now we are a market leading retailer in a structurally growing defensive industry, but we are so much more than just a retailer. Our diversified services proposition is unique and offering high returning growth, and we have emerging digital and platform opportunities that can support future growth and returns. Our sectoral growth trends, our robust balance sheet and the opportunity ahead of us will allow us to continue to invest through the cycle, something that many peers and competitors will struggle to do. And in executing our strategy, we will build a stronger and bigger business. I'm absolutely delighted that I made the decision to join Pets at Home and I'm incredibly excited about the opportunity ahead for the business. Now our performance over the first half of the year has been strong and we continue to grow our customer base, to grow our business and to grow our like for likes across all channels. Customer demand has proven resilient and pet care remains a highly defensive category. We've welcomed record numbers of new customers this year and alongside this we've continued to deepen our relationship with our customer base, engaging them in more parts of our ecosystem and improved our retention levels. we are of course conscious of the macroeconomic backdrop and the pressures it creates both for our customers and the business and in this context we remain vigilant and responsive in managing the business and as our results show this is working well our profit and cash generation remain in line with our plan and our profit guidance remains unchanged and mike will now take you through our h1 performance in more detail

Thanks Lisa. We are pleased with our first half results. We came into this year with sustained momentum, reporting 6% like-for-like growth in the first quarter and since then strong revenue growth has accelerated. Our group like-for-like sales grew by 6.4% and quarter two was stronger than quarter one. Profit before tax is £59.2 million. That's 9.3% lower than last year but it is in line with our plan. And likewise, free cash flow is £41.4 million, also in line with our plan and reflects the investments we've been making to drive our future growth. Our progress in the first half and our plan for the second half gives us the confidence to reconfirm our full-year profit guidance of £131 million. We continue to make solid progress implementing our pet care strategy. We've acquired a lot of new customers with our VIP loyalty club growing by 9% and we've continued to invest in our new distribution centre and digital capabilities. We're also dealing with strong external headwinds, including increased energy and freight costs. And despite these headwinds, our underlying business is strengthening and our prospects have never been better. Turning now to give you some more detail on our first half financial results. We saw strong revenue growth across both our retail and our vet operations. At a group level, like-for-like revenue growth across the first half was 6.4% and that's against a strong comparator of over 22% in the first half of last year. Within retail, our light for light sales growth was close to 6%, with our total food growth very strong at 14%. And although our total accessories was down by 3.5%, within this, commodity type accessories, which includes cat litter and health and hygiene products, grew by over 7%. Omnichannel sales also stepped up, growing by over 16% and our stores continue to play an important role through both our click and collect and deliver from store services. We also saw strong growth in the VET group with our like-for-like revenue growth up by 10.5% and that was against a strong comparator of just over 26% in the first half of last year. New client registrations averaged over 8,800 a week, and that's helped grow our active client base to 1.7 million, a clear indication of both the market growth and the strength of our joint venture VET model. Strong veterinary revenues drove a very robust underlying profit and cash performance with profit, margin percent and normalised cash increasing year on year and we still have a significant growth from maturity to come. We also have seen pet care plan subscriptions grow by 11%. We now have over 1.6 million plans and those generate over £135 million in annualised recurring customer revenue. All of this performance was underpinned by the growth we've seen in new customers. Our active VIPs increased by 9% to 7.6 million. And the sign-ups to our puppy and kitten club continued at pace, averaging 29,000 a week in the second quarter, higher than our pre-pandemic level, and creates a 12 to 15 year growth opportunity over the full pet lifetime. Let's turn now to group gross margin which was in line with our plan but lower by 123 basis points year on year at 47.5%. Retail gross margin was impacted by the well publicised increases in freight costs These were offset by FX gains in the half and the biggest impact on gross margin came from food sales growing faster than accessories. Importantly, we've been able to increase prices where necessary to offset supply cost inflation while still maintaining our price competitiveness. VET group gross margin expanded as expected, with our revenues growing by over 10% on a carefully managed cost base. So let's look now at our cost base in more detail. Total underlying operating costs grew by just over 11% and that includes the impact of increased energy and pay rates. We have a tight operational grip on the business and remain very disciplined on costs, investing to grow the business by building capability and capacity, but also continuing to drive operational efficiency. Our programme of rent reductions continues and we have a focus on improving productivity right across the business. We were impacted by external cost headwinds in the first half which held back our results. Freight costs were up 4 million year on year and energy costs were up 4.9 million year on year and this is not unique to us. Although we are creating digital capability with multi-year benefits, we're also required to expense a significant part of our digital investment. That's consistent with the revised IFRIC accounting requirements under IAS 38. In the first half, we invested a total of just under £17 million and this had an £8 million impact on our profit year on year in H1. Consequently, taking these three impacts into account, our first half profit declined by just over 9% to £59.2 million. Let's turn now to capital expenditure and our investment plans. We have continued to invest to support our pet care strategy. In the first half, we invested nearly £56 million, of which £39 million is accounted for as capex and £17 million is digital investment we are now required to expense. We're planning for a full year total investment of around £100 million, and that's before the sale and lease back of our new distribution centre equipment, of which 30 of the 100 will be digital capability investment, which we will be required to expense. So that'll make our fully reported capex around 70 million. And there are three focus areas for this investment. Building out our new distribution centre at Stafford, which is well underway and on track. investing in the digitisation of the business through Project Polestar and regenerating our existing pet care centres as well as opening new pet care centres and expanding our vet practices. Turning now to cash flow, the business continues to be very cash generative, with free cash flow of £41.4 million in the first half. This cash result was in line with our plan, although lower than last year, driven by several factors, including the non-recurring one-off £21 million benefit we saw in last year's result. It also includes the impact of choices we've made to maintain a level of investment in future growth, optimise our inventory levels, as well as the impact of lower profits year on year. Within our working capital, we've also continued to see the strong performance in the VET group, leading to the ongoing repayment of operating loans, and we had a further £5.3 million repaid in the first half. Turning now to look at our very solid balance sheet. Our £50 million share buyback programme, which we announced last May, is progressing well. To date, we've acquired over £27 million of shares in the first half. As I've said, we have a very strong balance sheet. That includes net cash of over £43 million and significant liquidity of over £340 million. So in conclusion, we've made real progress in the first half. Our revenues have continued to grow, with quarter two even stronger than quarter one. Our profit and cash result is lower year on year, but it's still very much in line with our plans, despite the external cost headwinds. More importantly, the underlying business is strengthening and we're maintaining our plan level investment to drive the future growth of the business. And our unique business model has attracted a significant number of new customers, which bodes really well for the future of the business. And we remain very much on track to achieve our median term customer revenue target of at least £2.3 billion. Taken together, this gives us the confidence to reconfirm our full year profit guidance of £131 million. I will now hand back to Lisa to wrap up today's update. Thanks for listening.

Thanks Mike. I'm incredibly proud of what we've achieved together so far this year and we could not have delivered it without the support of all of our amazing colleagues across the business. Pet care remains a highly defensive category and the nation's pet owners continue to prioritise spending on their beloved pets. And we continue to invest to drive long-term sustainable growth and I'm incredibly excited about the opportunity that lies ahead. Thanks for watching.