Pets at Home Group Plc (PETS) Earnings Call Transcript & Summary

Welcome to the Pets at Home Interim Results Presentation. I am Peter Pritchard, the Group CEO. And with me is Mike Iddon, our Group CFO. We're really pleased to have delivered a solid set of results for the first half of our financial year 2020. Despite our operation being temporarily impacted during the early stages of the first national lockdown, the strength of our subsequent recovery reflects the agile response across the business to adapt and to meet the needs of pet owners. We've adapted operationally to live alongside COVID. And although we're currently in the second lockdown, our operations have been largely unaffected. It is reaffirmed to me that our strategy to be the best pet care business in the world, and how we deliver it, is a winning formula for customers and our shareholders alike. Pets at Home is the only true omnichannel pet care business in the U.K. We've demonstrated the benefits of combining a broad range of pet products and services delivered in a way that customers want. We've leveraged our physical and digital assets to develop new, safe and convenient ways to serve our customers, for example, contactless delivery and 1-hour Click & Collect. Our Retail business has shown 2-year like-for-like growth of 14.8% and omnichannel growth of 118%. In First Opinion vets, I'm particularly pleased by the strength of recovery post the peak impact of the regulatory restrictions in the first national lockdown. And our First Opinion practices are growing faster than ever. The changes we've made over the last 18 months have strengthened the business for partners and for the group. In fact, we've halved the number of loss-making practices year-on-year. The pet care market is robust and resilient. We believe the pandemic has created more new pet owners. I'm sure you've seen for yourself the number of new puppies and number of new kitten owners amongst your own friends. Lifestyles have changed, which means people have more time to spend at home with their pets. Our Puppy and Kitten program is key in introducing new pet owners to all parts of our pet business. Year-on-year, we've welcomed 25% more puppy and kitten owners to our club. It's been the fastest-growing period we've seen since its inception. We now have over 6 million members of our VIP scheme, and we're pleased to see 20% more customers year-on-year shopping across more than 1 channel. Our subscription business is meaningful with GBP 80 million of annualized customer revenues and a significant opportunity for further growth. Subscriptions allow customers to provide better care for their pets such as preventive health care plans in our vets or food or flea plans that not only ensure you never run out, but also save you money. We now have over 970,000 subscription customers. And we see a significant addressable market opportunity, and we're implementing plans to take a sizable share. Subscriptions create visible, repeatable revenues from customers, and they are a great and convenient platform of which to build sustained share of the pet world. We have an exciting road map ahead, and we believe it's really compelling by combining our products and services to customers in ways that our competitors cannot easily replicate. We are now operationalizing and seeing the benefits from our investment in data. We've previously stated a clear ambition to place data at the heart of our business, recognizing we have a valuable pet data set, which could be leveraged to create substantial insight and value. We've built a strong internal team of 45 data scientists, artificial intelligence experts, analytical experts under the leadership of Robert Kent, our Chief Data Officer. We're now finalizing the transition of data from Excel providers and moving it onto our own systems and our own teams. We've already seen a step change in reporting, analysis and insight. At our September customer mailer, the first one using our own segmentation and AI, has resulted in the best level of redemptions in the 8-year history of the customer mailing. But we are only at the beginning of this journey, and we remain excited about the future potential. I will now hand you over to Mike Iddon to share with you how all the hard work has been reflected into solid financials.

Thanks, Peter. The start of our financial year coincided with the start of lockdown across the U.K., and this has shaped both our sales and profit results in the first half, which has very much been a half of 2 quarters. We came into the year with significant momentum, but the initial impact of the COVID pandemic led to a decline in revenues in the first 8 weeks of the year. And that was driven by the reversal of the customer stockpiling we saw at the end of last year, restrictions in our grooming business, pausing the sale of pets and complying with the RCVS regulations in our Vet Group. We then saw a very strong recovery as we exited from the first quarter, and this delivered a strong set of results for quarter 2. Sales growth bounced back stronger than pre-COVID levels with quarter 2 like-for-like revenue growth of 12.7%. The business as a whole returned to profit growth with growth of over 43% in the second quarter. And this drove a strong cash result, with over GBP 60 million of cash generated across the first half. That enabled us to finish the half with a stronger balance sheet. With GBP 300 million of liquidity, our net debt reduced to just over GBP 50 million. But as I said at the beginning, it was certainly a half of 2 quarters, and I'll now give you some more detail behind these headline results. Group revenue across the whole of the first half grew by just over 5% to nearly GBP 575 million. And within that, like-for-like sales growth for the group was 5.3%. As I said, we delivered like-for-like sales of 12.7% in the second quarter, but that compares to a negative 0.7% in quarter 1 as the COVID restrictions eased, and we successfully adapted our operations as we went into the second quarter. The growth was broad-based with -- and sustained and confirms the relevance of our pet care strategy, the flexibility of our Retail operations and the robustness of our First Opinion business. Within Retail, like-for-like sales grew by 5.8%, and Q2 saw like-for-like growth of 12.5%. This was our 15th successive quarter of like-for-like growth in Retail with omnichannel revenue growth of 59% and store like-for-like growth of nearly 8%. In the Vet Group, we saw like-for-like growth of 1.2% for the first half, and that was despite the restrictions placed on the business in the first quarter as we complied with the RCVS guidelines. But once those restrictions were lifted, we saw the second quarter like-for-like for customer sales growth be 14.2% across our First Opinion practices. Overall across the first half, Group profit declined by 5.1% to GBP 39.6 million, and that was driven from a combination of the reversal of the stockpiling we saw at the end of last year, the revenue restrictions across our grooming pets and vet operations and both one-off and ongoing operational COVID-related costs. And these impacts were only partly mitigated by business rates relief. Since the start of the pandemic, we've been determined to do the right thing by all stakeholders. We've safeguarded our colleagues, we've paid our rents, and we have maintained our dividend, and we continue to pay the wages for colleagues in operations we closed, including across our grooming business. And although we qualified for it, we did not claim any government for their support for these colleagues. And as well as spending money on protecting colleagues and customers and adapting the stores, we also paid a one-off bonus of GBP 1.9 million to our frontline colleagues, created a GBP 1 million hardship fund and donated over GBP 1 million to charities as well as giving a 10% discount to our National Health Service customers. All of this together, then we spent around GBP 8 million of one-off type costs. These actions reduced our profits in the first quarter, but the very strong sales recovery we saw in quarter 2 translated to the strong profit growth of over 43% in that quarter. Group underlying free cash flow across the first half was GBP 60.5 million, and this included a strong cash performance from our First Opinion practices. And we're now seeing the benefits of the successful implementation of our recalibration actions. Our balance sheet has strengthened further, and we have strong liquidity. Net debt reduced to just over GBP 50 million, and that's the lowest ever. And that helped reduce our post-IFRS 16 leverage to 2.3x. And liquidity is now close to GBP 300 million including the additional backstop revolving credit facility of GBP 100 million we've put in post last year. The confidence we have in the business from the strength of revenue and cash growth and our strong liquidity enables us to maintain our interim dividend year-on-year. Our full year profit outlook has improved, and we are now projecting our full year profit to be in line with last year's result of GBP 93.5 million. And you have to remember that, that result was boosted by the strong sales from customer stockpiling in the weeks leading into the current financial year. So as we head into the second half of the year, it's clear that our strategy is delivering with sustained momentum in revenue growth, a strong balance sheet and a plan to continue to invest behind our pet care strategy, leaving us well positioned for long-term sustainable growth. I'll now hand back to Peter.

Whilst the first half of this year has been the most challenging many of us have ever experienced, our results demonstrate the strength of Pets at Home. We're optimistic about the future. We're demonstrating we're not just a pet retailer, but a strong and great provider of pet care solutions. We're building a set of skills and capabilities that enable us to build a strong, resilient and growing pet care platform. The pet care market is robust and changes in lifestyle resulting from the pandemic give cause for optimism about the growth opportunities that lie ahead. We recognize there's opportunities, and we're building a business to create value from them. Our physical estate or pet care centers, combined with our digital capabilities, allow customers to engage in pet care in ways that suit their needs and their lifestyles. It gives us access to complete pet care of the estimated GBP 6.5 billion spend in the pet care market. We will continue to give customers more ways to shop and access the services they need. And most importantly, we'll increasingly join together in ways that makes it easy, convenient and simple for our customers. Finally, I'd like to pay tribute to my amazing colleagues who've shown integrity, strength, kindness and true leadership through these really challenging times. We are more committed than ever to building the best pet care business in the world, one that puts the customer at the heart and one that delivers strong returns for our shareholders. Thank you for listening. Stay safe and take care.