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.

Good morning, everyone, and thank you for joining us for our interim results call.

I'm Lisa McGowan, the CEO, and I'm here with Mike Hidden, our CFO. I hope you've all had a chance to listen to our recorded presentation, which includes our thoughts on what's been an incredibly busy but important period for the business. So before we move to taking your questions, I just wanted to share a few key takeaways with you. The first half has been a critical period for the business. laying the foundations for our new pet care platform as we set out at our strategic update in May. And as we stand today, we have a single DC supporting 100% of stores. We're on track to launch our new digital platform this financial year, and we've made great progress refreshing and opening new space and winning vet talent. The UK pet care market has remained in resilient growth, supported by long-established structural growth trends. And against this backdrop, we were pleased with growth in consumer revenues of 8.6% across H1, with 5.2% growth in retail and 19% growth in vets. In fact, our vets business is firing on all cylinders, supported by a unique joint venture model. High quality growth was supported by increased visits, strong consumer acquisition and growth in average transaction value. That talent remains a key area of focus and we're seeing improvements in recruitment and in retention with the new partner pipeline the healthiest it's been in some time. Our retail performance was a tale of two halves. Q1 was very strong at 7.1% like for like growth But Q2 slowed to 2.7% growth as we experienced some availability challenges as our DC ramped. This dragged on our like-for-like growth during that period by around 3%. This issue was quickly addressed by our team, and as availability returned to normal levels by the end of Q2, our sales growth normalised, with the early weeks of Q3 showing a 4% retail like-for-like growth. Underlying PBIT of 47.8 million was down from 59 million last year. This was broadly the shape we expected, as H1 bore the cost of heavy investment we had been making. We did see some extra costs associated with our DC disruption, but this has been managed within the scope of our current guidance, helped in particular by strong outperformance from the VET group. This means we make no change to our view for underlying PBIT this year, of around 136 million. Lastly, a key development in the industry first half has been the announcement by the CMA that it was opening a review of the vet sector. We shared our views of the UK vet industry and where our business fits today with the CMA. And the key point being that we see our vets business as highly differentiated in the industry, thanks to our unique joint venture model. which frees practice owners to deliver the best possible clinical care for pets and pet owners. We see our grey strategy as pro-competitive and do not expect the review to impact our ambitions. So while the first half has not been without challenges, it's been an important period for the business and we've made progress against the medium term strategy we set out earlier this year to build the world's best pet care platform. There's plenty to do in the second half as we launch our new digital platform and begin to transition our online business into the new DC, but we do so with confidence. We are now past the point of peak execution risk. And with that, we're ready to take your questions.

If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally as you'll be advised when to ask your question. The first question, it comes from the line of Jonathan Pritchard from Peel Hunt. Please go ahead.

Hi, good morning. A couple for me. Just on expectations in the second half, like for like. Are you expecting accessories? I know in the presentation you talked about preparing accessories to return to growth. Are you expecting accessories to bounce back from a like for like perspective in the second half? Or is it food that's going to have to do all the sort of heavy lifting in terms of life-for-life progress. And then secondly, you talk about the pipeline of JV partners. I think you've got about mid-50s of company-owned vets. Would we expect that number, therefore, to come down quite quickly? And if it did, does that actually have a particularly profound effect on the profitability of the vets' size?

Mike, do you want to take the first one? I'll take the JV back.

Yeah, Jonathan, you asked a question about accessories in the second half. You may remember, quarter three last year, our accessories business was in growth. And Christmas is a very strong period for us to trade accessories. In our pet care centres today, we've got some great ranges of Christmas, and the sell-throughs are going really well. So naturally, we expect to see a stronger accessories performance in the second half of the year. But you're right, we'll continue to see a really strong food performance. I mean, food in the first half is 10%, accessories in the first half is minus three. We expect accessories to be stronger in the second, but food continuing to be very strong.

I would also add that we're launching our new consumer website and app in the new year, and that will give us significant enhanced ability to cross-sell promote accessories and a significantly better consumer experience. So that's something that our current website doesn't really allow us to do and which will be a tailwind in the second half. On the JVs, we have about 55 company-owned practices and we do account for them slightly differently. We are fully committed to the joint venture model. It's unique, it's differentiated, it drives higher productivity. We have an owner-operator in there with clinical, operational, commercial freedom, driving the productivities and the outcomes of those practices really hard. And we've definitely seen that come through in our performance 19% like for like growth and also in the 18,000 new pet registrations that we've had in the first half every week. That isn't just puppies and kittens, that is us seeing consumers come from other vets with older puppies or with older dogs and older cats. So we're definitely winning share there. It is our preference, the JV model. We're never going to get that 55 down to zero. We're always going to have a few where we take on practices for various reasons. But we've been able to flip actually five of those practices to JV ownership in the first half, and we will continue that. I don't think it will be a material driver of profit, but it's certainly our preferred model, and we'll continue to do that.

Understood. Thank you very much.

The next question comes from the line of Matthew Abraham from Barenburg. Please go ahead.

Hi, all. Thanks for taking my question.

So just first query is in reference to H2. Obviously, guidance has been held steady. Just looking to unpack, you know, the various levers that you'll be pulling to make up some of the lost ground in H1 and see guidance. Specifically, I understand that there's a cost element, energy costs that are to drive some of that improvement in the second half. What energy costs are those? So if you could provide some colour on that one. The only other query I'd have is in reference to the operational disruption that, as you said, has been resolved. Are there any implications to potential longer-term growth ambitions given the disruption that's been observed in Q2? Thank you.

Yeah, thanks for those questions Matthew. I'll talk about the operational disruption and then Mike can unpack what our confidence in the underlying health of the business and why we're holding guidance. In terms of operational disruption, it was confined to a few weeks of Q2. We gripped it quickly and actually as we've come through that and are now delivering 100% of retail stores from that new facility, we actually have availability in our stores better than it's ever been, so structurally lower gaps than we went into, and that was partly the reason to consolidate from the three older DCs into our new state of the art facility. So we've already got better availability out of that. Some of the rest of the upside is still to come. We've got more automation in there when we move online in there. Clearly having one distribution centre, modern, fresh, with one place for suppliers to come in and one place for suppliers to go out, that will help us take more efficiencies out of our supply chain. And in the future, it opens up opportunities like cold chain as frozen and fresh become bigger and potentially more medical distribution. So the business case for Stafford, very much still intact. Benefits to flow in the coming years. and the disruption that we experienced was short term and fully boxed away. Mike, do you want to give us more colour on why we're confident in reaffirming guidance?

Yeah, Matthew, you're asking about our second half shape, and just to build on Lisa's comments, from a revenue point of view, we're really well set up, both in Pair Care Centres and in debts. But if you think about the numbers, you know, first half profit was £48 million, second half We need to do 11 million more in effect to get to 136 per year, which we're confident of. We're confirming guidance. Four steps to that. First of all, the VET performance is really strong. 4.4 million up profit-wise year on year in the first half. We'd expect that to continue. VET revenues are very predictable and the way the model works, that profit is predictable. Second part of that will be energy. Energy costs are lower year-on-year, and we'll get about a £3 million benefit out of energy in half and half in the second half. The third is we've got a really good handle on operational cost base. We've got a really well-established productivity program. We expect that to yield benefits generally second-half weighted, so there's a couple of million out of that year-on-year. And the final element of that that makes up the 11 is our SAS costs. At the start of the year, we plan the level of SAS costs. as we're working into the detail now on some of those projects, we've probably got one to two million pounds saving there as well. So we're pretty confident on that plan. And as you say, today we are reconfirming full year profit guidance of 136 million.

Great, thank you. We'll pass it on.

The next question comes from the line of Manjari Dhar from RBC. Please go ahead.

Thanks for taking my question. I have two if I may as well. The first one, how reflective do you think the early part of Q3 trading will be for the rest of the period? Did you guys see any pent-up demand coming through? Is availability improved following that disruption? And then secondly, I was just wondering if you could give some colour on how we should think about the major moving parts for gross margin in the second half, please.

No problem. I'll take the first of those and then Michael pick up on the second. So as we said in the R&S early Q3 up to yesterday, 4% like for like. Bit of a tail of two halves there actually. As we bounce back from Stafford, that was over 5.5% like for like. So really fully normalised trading. The last couple of weeks have been slightly choppier. We're not a big Black Friday business. Christmas is much busier for us. And so we have seen slightly choppy trading in the last couple of weeks, but as we head into Christmas, we're well set up. Our availability, as I said, is better than ever. Our price position is really strong and we have some great ranges. We've already sold over 200,000 doggy advent calendars by the 1st of December and half a million Christmas dog toys. So Christmas trading and Christmas sell through is exactly where we would have expected it to be. And as we've said a number of times, the bets are firing on all cylinders. So current trading in decent shape and absolutely no hangover from the period of disruption in Q2. Mike, do you want to unpack the gross margin?

You're asking about gross margin, H2. Let me give it a little bit of colour on H1, because that will help understand the H2 shape a bit better. So in H1, we are down group. really all about our retail performance there's two parts to that the first is you know we flight back in uh when we did the update in may forex this year will be a 13 million pound impact that's broadly split half and half the same seven million pounds h1 six h2 so that's about uh 70 basis points of impact on gross margin you should expect that to come through in the second half the other big part of the gross margin down in the first half is mix food growth at 10%, accessories decline at 3%. We've already been talking about accessories this morning. We'd expect a stronger performance of accessories in the second half. So some of that mixed element, the 90 basis point, should ease in the second half, although we should still see food outperforming accessories. The final point, part of that gross margin question is the VET gross margin did dip slightly in the first half. That's all about the charge we put into gross margin for the brand advertising we did. That's very much a one-off. Structurally, we always expect our VET gross margin to grow because we've got a strong growing revenue on a pretty fixed cost base. So we'd see our VET gross margin step up a bit year-on-year in the second half, and we'll see the retail margin slightly get better than the

the first half thank you the next question it comes from the line of andrew wade from jefferies please go ahead hello there um hi team um a couple of quick questions from uh me um i guess first one um What are you seeing in terms of benefit of the brand relaunch? How are customers reacting to it? What are you seeing there? The second one, I was struck by you, Lisa, you said that the 5.5% when you bounced back from the disruption, the 5.5% like you were running at, you saw that as sort of a fully normalized run rate in the retail business. Should we, you know, last year was plus 7, Q1 was sort of plus 7. Should we be looking at a sort of slightly lower like-to-like outlook run rate than we've been seeing? That's the second question. And then the third one, do you feel a sort of, I don't know, a bit of, frustration or pent-up excitement, maybe, is a better way of thinking about it, as you're ahead of being able to launch a sort of full integrated across grooming vets, the improved user interface, all that sort of stuff. I mean, you've talked about it being critical to driving engagement and share of wallet. So is that something you're really looking forward to, to driving the next leg of like-for-like, I suppose?

Yeah, I'll take the first and the third around the platform of the brand because they're somewhat connected and then might all pick up on run rates. So yeah, the brand relaunch has been really successful, but it was never sort of an overnight thing. And actually what we did is we relaunched the brand to bring together Vets for Pets, Pets at Home, the Pets Foundation, Pets Grooming under a new modern look and feel and indicate to consumers to start that journey of us being the one-stop shop for their pet care. So in the future, they will be able to do everything from a post-surgical remote consult through to booking a green room appointment to changing a nutrition subscription to booking a kind of flea ticket worm consult in the store or just ordering a toy and all of that will be under the pet brand. So it was really important we brought those elements together. Having said that, our launch campaign was hugely successful in terms of how much consumers loved it. We found out as doing research for that campaign that we are the most trusted brand for pet care. seven times more trusted than the nearest competitor, and that runs free to the vets as well. So as we bring that platform together, our new brand gives us a platform to launch that onto. And certainly our marketing and advertising under that new brand has really stepped on and been successful. So early days, but delighted. And that really sets the scene for the last question, which is this integrated platform. Am I frustrated? No, actually, this is a big undertaking. And there's a lot to do. And I'm actually really pleased with progress. I'm particularly delighted that we're launching a new app and website in the new year. That's going to be a real step on. It's going to have much better UX and UI, much better merchandising, much better integration of offers, VIP, the Pets Club, vouchers. And really importantly, it's going to be a big step on to So you're going to be able to order a box of everything you need for your pet, whether that be food, cat litter, puppy pads, a toy, dental sticks, all in one box, all with one discount across the piece. And that's going to be really compelling for consumers. We've tested the platform quite a lot with consumers and got really good feedback. So I'm really excited about that. And then when we've cut over to that, we then start integrating the vets and grooming, rolling out our PMS into the rest of the vets' estate. So we always knew it was going to be a sort of a two-year journey. And I'm actually really delighted that we're on track with that. It's not easy stuff. If it was easy, everyone would do it. But we do have the skills and capabilities to get it done. So excitement rather than frustration, I would say. Mike, do you want to talk about run rates?

Yeah, Andy, I asked about run rates and light to light. we said our medium term customer revenue growth plan is 7%. And you think of that 7%, that breaks down into 9% consumer revenue growth in VET and 6% consumer revenue growth in our retail business. Against that, even with the disruption we saw in our staffing transition, we had like-like retail revenues in the first half of over 5%. So, you know, against that 6 million tip target. And by the way, VET was 19% and the overall total was 8.6. So we ran ahead of those targets in the first half. So in the first week, in the first four weeks of Q3, so that's the four weeks up to the 9th of November, We did see our retail lifelike being at 5.5%. That was a big pickup and where we've been with all the disruption we saw in the second quarter of 2.7. If anything, on that show, we did see an easing of inflation actually as it came out of Q2. So inflation in our food business has been running sort of 8%, 9%, and the rest made up the volume growth. Actually, inflation sort of eased down to sort of 7%, 6% over the last few weeks. That's something we have been seeing in there. But yeah, we'd expect, you know, we had a couple of weeks where I think consumers are naturally distracted by everything going on in the environment around promotion, highly promotional environment through Black Friday. But, you know, we'd expect our retail lifelines to get back up towards 5%, 6%, which is our target when we get through the rest of Q3 into Q4.

Great stuff. Very helpful. Thanks.

next question it comes from the line of simon bowler from numis please go ahead uh good morning um two areas i just wanted to touch on if okay um one was um just if you can share any um volume numbers and kind of give any kind of further commentary around your kind of perception of the outlook for inflation um within the retail part of the business in particular and then the second one we're just going to talk around the process timing and risk or lack thereof for the online transition part of the warehousing project. Yes, for the warehousing project? Yes.

I'll take the second and then Mike, do you want to take the first? So we are 85% through our transition. We've got 100% of retail being delivered out of the DC. And we are now going to step into the goods to person, which is the online part of the transition, is only 15% of our volume. And obviously we've learned some lessons for the transition of our retail part of the business. So the period of peak risk is behind us. I wouldn't want to minimise what we've still got to do. We do have to still transfer online, but we are now doing that with a team who is operating in Stafford with goods in and goods out all operating well. This is incremental work, but we are much clearer on how to do it with a team that is now much more experienced. So I'm feeling confident and we should be through that transition by the summer. We're not going to rush it for obvious reasons. Mike, do you want to talk about... Yeah, you asked about volume inflation split out, Simon.

It's not really going to get to the nitty gritty of category by category, but you remember we have seen across the year volume growth in our food business. In fact, we still had volume growth across the first half, even though we had that disruption in Q2. We sort of seen volume growth in food 3% to 4% and the rest is inflation. And likewise, very similar shape in our accessories business that's consumable. That's about a third of our accessories business. You know, we've seen volume growth there at 3%, you know, across the year. I commented on that previous question. We have seen inflation easing over the last two or three weeks, you know, from those elevated levels down to about 6%, 7%. I think we expect that to really continue through balance of year. And as we head into next year, it's a brave person that predicts inflation, but our planning assumption will be much more normalised inflation. food, so 3-4%. And obviously as we get closer, we'll be making an assessment of that inflation nearer the time. But yeah, we are seeing inflation ease, particularly in food. Okay, great.

And actually just one more. It's not a follow-on with apologies, but on one other topic. Just in terms of the VET ATV progress, I guess there's loads of aspects to that in terms of the additional stuff you're able to sell through your vet businesses, as well as a bit of inflation running through there. Do you think you can kind of maintain that double digit growth in ATVs across your vet practices?

So the growth in vets has been in visits as well as ATV and about 4% of our growth has been underpinned by visits. And that's because of more clinical talent, better recruitment, better retention. There is a portion of that which is ATV, but that's not all inflation, actually. Some of it's inflation, some of it's pricing. And I should point out that those decisions on pricing are made at a local level by our joint ventures, by our practice owners in response to local conditions. So they have a choice of how much pricing to put through, and they've been doing that. The balance of it, of course, is VET plans, which are seeing growth still. and a shift into more advanced procedures and curative care. And that's a bit of an inbuilt tailwind for us because we have young practices which have been signing up more puppies and kittens that are now aging over time. So the balance of older animals that need more care is continuing. And actually, as our vets become more established, they are taking certificates and they're getting into more advanced procedures such as ophthalmic, orthopedic, we're putting in extensions with CT scanners. And so the mix, not just of preventative into curative, but the quality and price actually of the curative side of things is increasing as well. So those elements will sustain us. And when we think about the plan that we set out in May that underpins the vet growth, new space, more clinical talent, extensions and advanced procedures, those are all elements that will fuel the vet business going forward. So we're confident in the growth that we laid out in May, and all of those growth drivers remain intact.

Great. Thank you.

Before we take our next question, as a reminder, if you would like to ask a question, please press star 1. The next question comes from the line of Adam Tomlinson from Liberum. Please go ahead.

Morning. Morning. Two questions from me, please. The first question is on if you could just talk a little bit about store standards, please. That would be helpful. And really there, I'm interested in how you monitor store standards, perhaps how often they get visited a week and how Store managers are held accountable for those, and anything you can say about just how you think store standards have trended over the last couple of years, that would be interesting, please. And the second question is, you've been pretty explicit, I think, in terms of guidance for FY24. If we look at FY25, I think consensus is about 155 million of PBT there, so close to 15% growth. I'm just wondering how comfortable you are with that and anything you can comment around that in an environment where potentially inflation is easing, you've got some costs still increasing quite significantly. I'm thinking of wages, others perhaps more helpful in terms of where they're trending, but useful just to get your thoughts around that as well, please.

Yeah, thanks for the question, Adam. On store standards, I think we are in We're in really good shape, actually. We have a really strong field team with area managers, regional directors that are in store all the time with really clear standards. We've recently relaunched something called One Best Way, which is being very clear on standards around cleaning, around facing off, giving space to customers, like very clear standards, which has, I think, been really positive. We also monitor of course customer satisfaction, which is really strong took a little bit with availability and that's that short period of staff and availability but bounce back and significantly above most retailers. Our colleague turnover is significantly down over the last couple of years and our colleagues, of course, are the lifeblood of our stores and, in fact, we recently. voted for by our colleagues, one, the best retail employer. So we've got happy colleagues, happy customers, good store standards. And of course, I think as a pet care retailer, one really important thing is how we look after the animals in our care. And on that, we have a very significant program of audits, which are done by a completely separate team. that will go into the store regularly and grade the store against very specific standards, particularly on small animal and on fish to make sure that we're taking care of pets in our care to very, very high standards. So actually, I think probably, and I go in stores every week, we're looking in great shape. Availability is good. Our colleagues are in a good place. Our price position is strong. So we're set up really well. In terms of FY25, we've got ongoing structural growth, a resilient consumer, macro seems to be improving, and actually a number of our business investments, which we've been investing in, are coming on stream. So we've got the launch of our new digital platform in the new year, and the new DC, as well as the benefit of the rollout, the physical rollout we've done. So we look forward with confidence, and Michael just unpacked some of the trends there.

Yeah, yeah. Let me ask about FY25. 7% consumer revenue growth, 10% profit growth, and a market growing at 4%. And to Lisa's point, we've seen nothing to suggest the pet care customer isn't very resilient. The market continues to be underpinned by humanisation and criminalisation. So, and we're well set up to create value out of that market. So, Lisa pointed out risk all behind us. The benefits of the digital platform are launching post-Christmas. Again, we'll all flow and that will help customers shop a broader range of products and services. The vet business is well set up and we've got a clear plan we're executing to put more space in and retain and recruit vets and nurses we need. Second thing I would say really is some of the headwinds we've seen over the last couple of years actually now become tailwinds. You know, this year I commented earlier that we've been held back by about £13 million of FX year-on-year. We're hedging forward now FY25. We've hedged about 40% of our requirement, $1.24. So that becomes a tailwind after a couple of years. Well, certainly one year of a headwind. Energy costs come down year-on-year, so that's a tailwind. What has been holding our profit back starts to become more helpful. I think the one thing we wouldn't look at, though, that is a change from when we did our update back in May is national living wage. And we talked then about 10% profit growth. Our assumption on wage growth was sort of 45%. The autumn statement last week set national living wage for next year at 9.7%. For us, you know, that's about total cost of about 15, 16 million, so 8 million more than we'd expect before any mitigation. So we're working through that now. We have a lot of productivity levers we can pull, but we're still figuring out what that will be, what that will mean for next year's profits. So that's one thing to consider, that it's new since we set out our financial framework last May.

Okay, that's very helpful. Thank you for that.

The next question that comes from the line of Kane Slutskin from Numis. Please go ahead.

Good morning, guys. Just a quick one. On your vet visits, the 4%, could you just remind me how that compares to prior periods through the cycle, maybe with a reference to pre- and post-pandemic? And you mentioned retention and recruitment of vets is going particularly well. Would you be able to share your growth in vet employment?

Yeah, no problem. So, yes, we have our return over at best is actually 10 full percentage points down year on year. It's gone down from 37% to 27%, which is which is a really big part of it. But also we've made great strides in recruitment. So Mike, can you share the numbers of absolute numbers of vets and nurses you have there?

Yeah, we've got 113 vets more year on year this time now compared to this time last year, and 190 more nurses. So all the effort we put into both recruitment and retention is really paying off. And that gives us more capacity, and we know straight away that more capacity, because there's demand out there, we grow revenue. And it's a big, big contributor to our 19% growth in the revenues we see in the vet business. So that's going to continue to be our focus. And I think our model, and Lisa's been talking about our joint venture model, I think is particularly attractive. Some of the merits of that model are really now shining through, and it's

Thank you. Sorry, just sort of any sort of comment on sort of prior growth?

Yeah, this year is the 4% is a significant increase on last year and the year before. We can follow up with those numbers, but it's definitely an increase.

All right. Perfect.

And that is due to the talent improvement.

Yeah. Great. Thank you.

the next question. It comes from the line of Paul Rossington from HSBC. Please go ahead.

Good morning. Just a quick one for me. It's on the new vets and the new stores that you're rolling out. You didn't open that many new stores or that many new vets in the first half. I can see you did some extensions and refits with quite a lot of activity there. But Are you still on track to hit those medium-term targets in terms of the actual new store and new vet rollouts as well? Thank you.

Yeah, thanks for that question. So we did three new store openings, 24 refits, five vet extensions, opened two new veterinary practices and flipped five vets from company-owned to joint venture ownership, which was in line with our plan. We've got new openings in the second half, both for vets and for stores. But you will see that accelerate through the plan, just like you've seen visits accelerate in the first half due to better retention and recruitment. Our unique joint venture model is gaining a lot of traction. Our new partner pipeline is better than it's ever been. And we are not constrained by location. So we have 150 stores that don't have a vet. We've got many greenfield. We've got a very strong standalone model. And we've got a lot of opportunity within the M25. We're planning to open Tottenham Hale, Sutton and Whetstone in the second half, having opened Romford in the first half. So the constraint, of course, is that talent and finding the right joint venture partner. We've learned the lessons of the last few years. We'll only go for the right joint venture partners, the ones that have really good clinical expertise, the ability to run a business, the ability to lead a team. But we only need, you know, say a few tens of those every year, or not even tens, like 10 or 15 every year to manage our growth ambitions. So we definitely got a lot more resource in that space around recruitment retention. We were just at the London Vet Show, relaunching our model to the world, and that was very well received. around practice ownership. So we're absolutely confident that that will start to grow now over the coming years and we're in good shape to achieve our long-term ambitions.

Excellent. Thanks very much.

The next question comes from the line of Andrew Whitney from Investec. Please go ahead.

Hi. Thanks for taking my questions. Just two for me. One was on advanced capabilities in the VEC. I know you flag it up as potential to introduce competition against secondary hospitals and improve competition. Is there any limitation to what you can do in, I guess, what is probably an expanded vet facility versus what you can do at a secondary hospital? Is there anything that can't be done in your facility? broader clinics that can be done in the hospital that's that's question one and then just on the second question is on a divisional um free cash flow i know it looks like there's some one-offs in the in the half i remember last year i think the vet business generated about 46 percent of free cash the last year. Is there a tipping point coming up where the vet business will sustainably generate more than half of the cash for the group and how soon might that be? Many thanks.

Okay, well I'm going to let Mike take that second question on pre-cash flow. But on advanced capabilities, I mean there is a huge space between kind of general practice as it's sort of traditionally seen and the very advanced stuff that's going on in specialist hospitals. And it's that grey space that we're opening up into. I think we've got a long way to go before we hit the limitations of what can be done in general practice. For example, we've put a couple of CT scanners into our 24-hour hospitals. In fact, we put one MRI scanner in. We're able to do pretty advanced orthopaedics in a number of our advanced practices. We can do ophthalmic, soft tissue. Quite a lot of our vets, and this is the benefit of the joint venture model really, is that they are with us for a career, for life, for the life of their veterinary career. And once they've got to the point of what we used to call maturity, where they pay down their loans, they've got a stable practice. They don't want to spend the next 15 years doing space. They want to advance themselves. A lot of them are doing certificates. We're actually setting up a clinical academy. So we've selected some of our top vets to be clinical centers of excellence. So Hayley, for example, in Cambridge is a laparoscopy certificate holder. She has cameras now in her in her operating theatre so other vets can benefit from seeing her techniques. So right from the very top end through down to the graduate and nurse schemes, we're investing in clinical development. So there is obviously a kind of a hard border of things you really can't do in general practice, but it's moving ever further away and we've got a long, long way to go and a lot of space to grow into before we get there. I would just say as well that quite often it is a bit cheaper to do it in general practice and certainly better for the pet because they're not going and having to travel a long distance and stay away overnight. We can do quite a lot of things as a day case that would otherwise require a long distance. So I definitely think it's pro-consumer, it's pro-choice, pro-competition, but it's actually pro-pet as well.

Yeah, you're right. Andrew, just following up on your question on cash flow, I mean, You're right. We're quite proud. We're incredibly proud, actually, of the VET performance in the half. And the cash flow that's generated is in the R&S, you know, £57 million of cash flow in the half. And I think you're making the comparison there to our retail business, which clearly we've had some one-off impacts on in the retail business. So I don't think you can judge the cash performance of the retail based on its first-half performance. We've always said that the VET business least £60 million of free cash flow. And you can see from the numbers, we're more than well on our way to achieving that. So, you know, in the future, there may be a time that the vet business generates more than the retail business. I think that actually underlies some way off yet, but there could be a time, you know, because the growth in our vet business, as Lisa's pointing out, isn't constrained by location, it's constrained by the availability of vets. I guess the other point I'd make when we're talking about cash flow is we have come out of a peak period of investment. If you look back to last year, we invested 75 million of CapEx. This year we're investing 60 million of CapEx. And as we sort of trailed and we did our update in May, we'd expect CapEx to sort of normalise at 50 million a year. And our debt business, as you know from the model, is incredibly capital white. in terms of growth. So we're going to enter a period in the next couple of years of lower capital investment, and we'll start to see some of the embedded benefits. You know, we talked briefly about the DC, talked briefly about the digital platform, but a lot of the opex to grow and the capex to grow our vet business is already embedded. I think as we look ahead, we're going to see our free cash flow across both vet and retail and step forward.

Thank you very much.

There are no further questions in the queue, so I'll now turn the call back over to your host for some closing remarks.

Great. Well, thank you very much for joining this morning. We're very confident and excited about the future of the business and look forward to seeing you at the end of the year.