Pets at Home Group Plc

Good morning and welcome to our Interim Results School. We are pleased to have delivered a solid set of results which are proof that our business is resilient and our strategy is delivering. As sales growth for the half has been pleasing, we grew consumer sales by 8.6%, fuelled by particularly strong growth in our Vets business. We've had a very busy H1, and this has weighed on our first half profits, which are down 19% to 47.8 million. This is largely the shape we expected. Our retail business suffered some disruption through Q2 as we transitioned to our new distribution centre. This disruption is now behind us, and with cost headwinds easing into H2, we expect an improved performance and maintain our guidance to deliver flat PBIT for the full year. As we reflect on a solid first half performance, it's worth looking back to our strategy, which we set out in May to build the world's best pet care platform, knitting together our unique products, services and advice to provide an unrivaled experience for pets and the people that love them. And as we continue to deliver against our strategy, our plan will unlock significant value for all stakeholders, including our shareholders. We plan to deliver 7% consumer sales CAGR, outgrowing our structurally growing pet care market by 300 basis points. We expect a 10% CAGR in PBIT with improving free cash generation as we move beyond the peak of our capex investment. And with our already strong balance sheet, surplus cash generation will be returned to shareholders. now the first half of financial year 24 has been a critical period for the business as we've been building our platform for future growth and as we stand today we've made significant progress against our plan first we've launched our new stafford distribution center this wasn't straightforward and we initially experienced some disruption impacting our like for like sales growth in q2 by around three percentage points. This was dealt with swiftly and the impact contained. And as we stand today, availability is better than ever and our new DC is now supporting deliveries to 100% of our stores. We still have to shift our online operations across to Stafford representing the final 15% of our volume, but the period of highest risk is behind us. We also built many of the key parts of our new digital platform, and we are on track to launch our new digital app and website as planned this financial year. This new digital infrastructure lays the groundwork for all the future improvements in subscriptions, in integrating grooming and vets, and improving our user experience. An integrated omni-channel experience is critical to driving broader engagement with consumers and increasing our share of wallet, as we discussed in May. We've also enhanced our leading network of physical assets in the half, delivering against our targets with three new stores, 24 store refits, five vet extensions and two new joint venture vets. We've also completed five flips from company-owned practices into JV ownership, reflecting our conviction that our JV model has significant advantages. Vet talent is a critical enabler of our growth strategy and we've made further progress there too. We've reduced churn by 10% and increased the number of vets we employ and this has a direct impact on our growth as more vets increase capacity with visits up 4% in the period. In April, we relaunched our brand, which seems like a long time ago now, given everything going on, which has been incredibly well received. And over time, we'll shift perception of our integrated consumer proposition, increasing awareness of our full offer and driving engagement across our business. Innovation has always been at the heart of the pets business and we accelerated our efforts in H1 with new ranges of food and accessories. To further drive the high growth frozen category we introduced more freezer capacity in store and expanded into new brands such as Bella and Duke. We've also agreed terms for exclusive distribution of Butternut Box's innovative freshly cooked dog food in the new year. We launched new products in the freeze-dried category under our Wainwrights brand, rapidly becoming the category leader. Own Brand was a major driver of growth in the half across all of advanced nutrition. And in accessories, we introduced Doggy Parton and Barbie Ranges. Our Halloween sales were up 18% year-on-year and our Christmas ranges have begun well with strong sell-through. Lastly, I would like to cover the review into the VET sector announced by the CMA on the 7th of September. This review reflects concerns the CMA has over the level of price inflation in the VET space and some concerns over transparency. We've cooperated fully with the CMA and have a clear view on how we see the industry and where we fit in. While we would always rather inflation was lower for consumers, there have been substantial cost increases for vets and it's inevitable that these have had to be passed on to consumers to some extent. Foremost among these is the sustained double digit increases in vet salaries we've seen in recent years, necessary in an industry facing structural shortage in the supply of vets and to reduce reliance on very high cost locums. In addition, vets have experienced higher pharmaceutical costs, increased training burdens to meet higher consumer expectations and increased occupancy costs. So what does this mean for our business? It's important to remember that from a transparency perspective, all of our practices carry a corporate brand. And following the sale of our specialist division in 21, we're only exposed to the first opinion or general practice sector. Our practice owners operate with significant autonomy around pricing and treatment. Clinical freedom and achieving the best clinical outcomes are at the core of our veterinary business. Lastly, referring to the strategy we set out in May, all of the key growth pillars of our veterinary strategy are pro-competitive, introducing new areas of choice and competition to the industry. So, while we are not complacent, we do not expect the CMA review to impact our vets growth strategy. We continue to cooperate fully with the CMA and we look forward to reading their findings in early 2024. And I'll now hand over to Mike as CFO.

Thanks Lisa, I'll now give you an update on our first half financial results. It's been a period of significant progress in building out our customer-centric omnichannel pet care platform with the opening of our new Stafford distribution centre moving towards the completion of the build phase of our new digital platform and launching our new rebrand. Throughout this period of high activity, we had 8.6% growth in consumer revenue, hitting a billion pounds of revenue for the first time in half one. And that's ahead of the 7% medium-term growth target we set out in our strategic update last May. Our vet group is firing on all cylinders. Revenue is up over 17% and profits up nearly 16%, with Q2 growth even stronger than Q1. And although retail had a good Q1, with sales growth of over 7%, we were impacted in Q2 by disruption from weaker availability as we transitioned our store deliverers to our new distribution centre and sales growth dropped to 2.7%. We incurred additional costs ramping up the new DC and combined with the planned costs of our rebrand and the impact of sales disruption in Q2, this all led to a drop in our first half profits. Underlying profit fell by 19.3% to £47.8 million and statutory profit, which includes £13.1 million of non-underlying costs, fell by 35% to £34.7 million. We responded quickly, as Lisa mentioned, to fix the operational issues at Stafford. Product availability has significantly improved and we contain the costs. And today we can reconfirm our full year profit guidance. Let me give you some more detail behind these key headlines, starting with the DC transition. We are now delivering from Stafford to all our stores and product availability has returned to normal levels, if not better. Sales from stores represent about 85% of all of our sales and the period of peak execution risk is now behind us. However, during Q2 our availability was badly disrupted and this led to about a 3% drop in our Q2 like-for-like. We also incurred £8 million of unplanned costs as we ramped up the operation and improved productivity levels. We've successfully contained the financial impact of this. The stronger, better than planned performance of the VET group, good progress on our cost reduction programme and swift action to contain the impact means we can confirm our full year underlying profit guidance. Turning now to revenue. Despite the sales impact in Q2, our half one retail light for light was still over 5%, with food in strong growth of over 10%, although the accessories category overall was still in decline at around 3% decline. Food saw volume growth in the first half and commodity type accessories, for example cat litter and health and hygiene, also remained in good growth. We did, however, see a weaker performance in discretionary type accessories, for example, dog toys. And looking ahead, we do have a strong pipeline of new accessories and we're planning for a return to growth. Our vet group had very strong sales performance in the first half. Revenue was up 17%, profit up 16% to nearly 33 million. And this performance was driven by both visits up 4% and average transaction value up 13%. A strong cash and proper performance also drove down operating loans by £3.5 million and the remaining balance is now only around £10 million. Turning now to gross margin, we did see a drop in group gross margin of around 160 basis points to 46%. The main driver was our retail gross margin with a drop of 170 basis points. And here we had an impact from a combination of the mix of faster growing food versus slower growing accessories. And that combined with a weaker sterling to dollar exchange rate, which we signalled at our May update weighed on our first half gross margin percent. Looking ahead, we do expect the FX impact to normalise as we hedge forward our FY25 dollar requirements and our accessories category to return to growth and mitigate the Nixam impact, which has been a drag on our retail gross margin percent. A couple of points now on operating costs before I turn to our profit result. We continue to have a strong grip on operating costs. Excluding one-off, non-underlying costs, our operating costs grew at 6.5%. We have a proactive programme of ongoing self-help initiatives. and these include our successful rent reduction program targeting efficiencies across consumables and goods not for resale as well as using technology for example our colleague handheld device which simplifies routines and helps improve store productivity We now expect our elevated distribution costs, an additional £8 million in half one, to normalise as we move to optimum efficiency across our distribution network, and we plan to achieve that in the first half of FY25. So now, turning to our profit result. The waterfall chart sets out the first half profit shape and the factors I have been describing mean that group underlying profit of £47.8 million is down year-on-year by 19%. Statutory profit is £34.7 million down year-on-year by 35.2% And in the first half, this does include £13.1 million of non-underlying costs, made up of £9.4 million of distribution costs, £2.6 million for the cost of closing our Swindon Support Centre, and £1.1 million for the write-off of our Tailster investment. For the full year we now expect total non-underlying costs to be £24 million and this total full year includes non-underlying distribution costs of around £20 million. Breaking out the group profit, VET group profit grew by 15.7% to £32.8 million and that's confirmation that the growth strategy we set out in May is working. Retail profit was held back by the sales disruption and the additional unplanned distribution costs. These are now fixed but these factors did lead to a drop in retail profit of 40% to £23.8 million. Our confidence in the underlying business and the fact that many of the impacts on our retail profit are one-off in nature and behind us means we will hold our interim dividend at 4.5 pence per share. We continue to invest to drive our strategy. The completion of our distribution centre means that we are now beyond our point of peak capex and in H1 we invested around £19 million compared to £39 million last year. This investment remains closely aligned to our strategy and in the first half we opened three new stores, two new vet practices, completed 24 refits and extended five vet practices. And alongside this capital investment, we also invested a further £15 million on our digitisation, including work to complete the build of our new platform, which we will launch later this financial year. Finally, closing on cash, We ended the first half with net cash of £12.1 million after both the ongoing investment in the business, paying out a record dividend relating to last year and buying back £25 million of shares in the first phase of our previously announced £50 million share buyback programme. And we plan to complete the second phase of £25 million by the end of the year. So in summary, opening up and ramping up our new distribution centre at Stafford has been a huge undertaking. This period of high risk is now behind us and today we are delivering from Stafford to all our stores and product availability is strong. The sales impact and £8 million of additional distribution costs during this ramp-up have hit our first half retail profit and driven down overall Group underlying profit. This impact has been contained and should not overshadow the VET Group performance of 17% revenue growth and 16% profit growth. We are deploying our cash consistent with the very clear capital allocation principles we set out in May. Investment is aligned to strategy, we are maintaining the dividend and we will complete our £50 million share buyback in the second half. Finally, our customer revenue growth of 8.6% is confirmation our strategy is working. It's ahead of the medium-term target we set out in May, and we still have the benefits from our distribution investment and digital platform to come. Thanks for listening. I will now hand back to Lisa.

As you can see, there has been a tremendous amount of activity going on in the business in the last six months. I'm incredibly proud of how our 16,000 colleagues have come together to deliver through this intense period for our consumers. It's a real privilege to lead a business where every one of our colleagues continues to strive every day to create a better world for pets and the people who love them.