Pets at Home Group H1 2025 Pre Recorded Earnings Call Transcript

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November 26, 2024

There are 2 speakers on the call.

Operator

Hello, and welcome to our H1 results. I am Lisa McGowan, CEO of Pets at Home and with me today is Mike Iden, our CFO. Our strategy continues to deliver even in a subdued market environment as our H1 results show. We have conviction that this strategy is the right one and we remain laser focused on executing against it. Our strategy is to build an integrated, omnichannel, consumer centric platform that will leverage Pets at Home's competitive advantage and deliver significant growth and value for our shareholders.

Operator

Our competitive advantages are already significant as the U. K. Leading pet care business. And as we continue to strengthen our integrated omnichannel consumer centric platform, we will drive differentiated economics over the long term. H1 has been a further period of strong execution and market outperformance across both our retail and vets businesses.

Operator

We launched our new digital platform for consumers, which has seen app sales double already with plenty more improvement to come as we exit the transition phase and begin to build out our differentiated and data enabled consumer journeys. We sharpened our price position further with the launch of Price Drop and Lock. We continue to drive innovation in our own brand portfolio with the launch of NutriBalance. We grew our subscriptions revenue to 12.4% of our sales from 10% at the start of the year. We continue to invest in our physical assets, opening 3 new stores, 2 new vets and doing 14 refits, including 2 of our brand new format.

Operator

We continue to attract and retain vets and nurses, growing clinical talent by a further 8%, which underpins strong visit growth. And we continue to engage with the CMA. Really importantly, we remain true to our values, progressing our sustainability agenda with the addition of solar panels on our Stafford DC and, as the largest grant maker, continue to pet charities across the UK. But throughout H1, we've been dealing with a tough market backdrop with growth broadly flat and lower than our medium term expectation of 4%. We grew our vet consumer sales by 13% in H1 in a market that grew only slightly.

Operator

In retail, our sales were broadly flat, but this outperformed a market that was in decline. So you can see that with total consumer revenue growth of 4.1%, we're delivering the outperformance we targeted in the context of a very subdued market. So against that backdrop, we can be proud of our H1 performance and remain convinced our strategy is the right one as our strategic KPIs show. We grew consumer revenue to over £1,000,000,000 in H1. Underlying PBIT was up 14%, fueled by really strong growth in the Vets.

Operator

Free cash flow was up and so was EPS. Moving on to an update on how we're delivering against our strategy. We're a market leader in an attractive and structurally growing market. And within that market, we have a unique position. The trends that drive growth in pet spend are long established and evident over many decades.

Operator

They are premiumization as pet owners seek higher end products and services humanization as the expectations around pet and human converge driving changes in food and health care choices and penetration where the pandemic resulted in a step change in pet owners and we're now stabilising at that higher level of pet ownership. And we're uniquely placed in this market as we're the only player in the market with the scale and the credibility in all key verticals and the only player that can provide everything and anything that consumers need to care for their beloved pets. But while the market is one that we know is attractive over the long term, not every year is a vintage one. And we now expect the subdued trend that we've seen in the first half to continue for the rest of the year. So digging deeper into those drivers of long term growth.

Operator

The pet population normally has little impact since for so many years prior to the pandemic it was stable, and we expect this going forward too, albeit at a higher penetration. But right now, we've got the continued impact of normalisation as the last of those bulge cohorts moves through. Not much has changed from our previous expectations here, and this will annualize as we exit the year. 2nd, inflation. Normally, we would expect low single digit inflation, but currently across our retail business, there's no inflation at all and that's a touch lower than we would have expected at the start of the year.

Operator

And lastly, premiumization and humanization. These trends normally show up in an improvement at mix at industry level from which we're the main beneficiaries. Although we're still not seeing trading down at the moment nor are we really seeing trading up as that anticipated recovery in UK consumer behavior still hasn't materialized as confirmed by the recent GDP figures. This again is a little below our expectations at the start of the year. So this all adds up to a market that over the long term averages 4% growth but currently is not growing at all.

Operator

The important thing to remember here is that periods of slourest growth are not unprecedented and historically have been short lived. The fundamentals of our business remain strong as our outperformance of the market proves, and we're very well positioned for when growth returns. Looking into the future, the long term outlook for pet care remains bright. The pet boom cohorts are now evident in our business and the long term structural trends remain in place. Those pets provide a long term opportunity for us as we were and continue to be extremely successful in recruiting them across retail and vets.

Operator

And now we have the opportunity to meet their needs increasingly well and drive share of wallet while providing the care those pets will eventually need in the later years of life in our vets business. There is a material long term opportunity for us, and we continue to invest to ensure we capitalize on it. Now our digital investments make up a critical enabler of our strategy to integrate every part of our business. Our ACE devices are already improving efficiency in store and helping colleagues interact more effectively with our consumers, driving material improvement in consumer satisfaction, which improved by 10%. And we're on track to roll out ProVet, our new practice management system, which will deliver operational improvements for our vets and allow us to integrate vets into our full digital ecosystem.

Operator

And after our launch in March, we've now fully replatformed to our consumer app and website, and I want to share an update on how we're doing. Our new digital platform will allow us to dramatically improve our user experience, enabling us to engage more dynamically and effectively with consumers and leveraging our wealth of data. And I'm pleased to say it's working effectively and we're beginning to build out those consumer centric, data enabled, omnichannel experiences. We've doubled app sales, helped by higher app traffic and better conversion. And moving our customers onto an app based environment is really important as it helps us engage with them more effectively and win more share of their wallet.

Operator

We've also seen an impressive step on an easy repeat subscription sales as our new platform makes it easier for customers to sign up for subscriptions and we've broadened the range of products they can add to over 3,000 SKUs. And we've begun to leverage our full data set, including all of our store transactions, to inform recommendations and consumer targeting. As you know, we've had some transitionary impacts to our core web sales as we've moved to our new platform. These were a drag during the first half, but we're now on an improving trajectory. Over the coming months, as we optimise journeys, add new features, integrate advice and further leverage our data, we will drive cross sell, up sell and stickiness.

Operator

Moving on now to our Vets group, which again delivered a stellar performance in H1 as our differentiated model that empowers practice partners to deliver industry leading experience and outcomes continues to drive material outperformance versus the market. In H1, our practices grew revenues by 13%, EBITDA by 6%, and this was supported by the growth in the number of visits and care plans as well as average transaction value. We continue to acquire significant numbers of new consumers and pets, averaging 18,000 new pet registrations every week. And this showed up in our numbers as GBP352,000,000 of consumer sales and GBP42,000,000 of PBIT, with free cash flow of GBP46,000,000 highlighting the attraction of our capital light model. And we and our partners continue to invest behind the growth opportunity, opening 2 new VET practices, extending another 7 practices and continuing to identify opportunities to move our company managed practices into our preferred JV ownership model, with 4 flips completed in H1.

Operator

We also continue to invest and execute well in retail. We opened 3 new pet care centres in H1 in Sutton, Whetstone and Beckenham, all within the M25. We completed 14 refits, including 2 with our brand new format at Brentford and Hull, with new mould in our flagship about to launch. And our stores are looking better than ever, with excellent store standards and structurally higher availability as we drive out the benefits of our Stafford DC, which is now functioning really efficiently. This enabled our stores to significantly outperform the physical channel in H1.

Operator

So bringing all of that together, we have a clear, consistent strategy and a conviction that we're on the right track. H1 was a demonstration of this with further progress against our strategy and outperformance versus our underlying market. But that market was subdued and has been so for longer than we anticipated at the start of the year. We now factor this into our guidance where we expect modest profit growth for FY 'twenty five. The market we operate in is structurally attractive and we expect growth to return to historic norms of 4%.

Operator

And when growth does return, we have clear competitive advantages and a well invested platform. We are through the bulk of our investment and beyond the peak of operational risk with the benefits all to come. And so as growth returns, we expect the benefits of our investments to become increasingly apparent and reward our shareholders with growth, strong cash generation and returns of excess cash.

Speaker 1

Thanks, Lisa. And I'll now give you an update on our performance and financial results for the first half of the year. It's been a solid start to the year. We continue to deliver and that's reflected in our strategic and financial measures and we achieved this despite the very subdued market. Consumer revenue grew by over 4% to £1,000,000,000 and we've grown market share in a flat to declining market.

Speaker 1

Our underlying profit was £55,000,000 and that represents year on year growth of 14%, driven by our vet business, which continues to go from strength to strength. Free cash flow remained strong at £33,000,000 and that grew year on year by over 40%. In the half, we launched our new digital platform, which is now performing better despite some initial challenges and we're seeing good growth, for example, in our easy repeat subscriptions. We now have 8,100,000 members of our pet club, that's up 3% year on year and our average consumer value has grown to £175 and we've achieved all of this despite the market being subdued for longer than we planned and whilst we've continued to grow share in a weaker market. As a result of the macro environment, we are now only expecting modest profit growth for the full year.

Speaker 1

Turning now to give you more detail on our revenues, which grew by over 4%. That's ahead of the market, but below our medium term ambition to grow at 7%. Total group like for like growth was 1.6%, with retail like for like flat and that group strong with like for like growth of 18.2%. Breaking that retail like for like performance down, stores performed more strongly, whilst online saw the impacts of the transition to the new digital platform. The vet business continues to perform very strongly, underpinned by increased vet capacity.

Speaker 1

We have 8% more clinical talent year on year and that has helped improve our recruitment and retention alongside visit growth. Here we have a number of proven growth levers. We opened 2 new practices and extended 7 existing practices as well as converting 4 group managed practices to our successful joint venture format. Our average practice revenues improved 13% to over £750,000 per practice in the first half and we still have plenty of embedded maturity to come. We nearly have a third of our practices still less than 10 years old.

Speaker 1

Our care plan revenues were also up significantly as changes to our proposition were well received by consumers, as well as the impact of changes to better align our care plan revenue recognition across the life of the plans and that reflects the way that consumers are utilising those plans. Turning now to our profits. We delivered profits of close to £55,000,000 driven by strong debt performance and the benefit of lapping last year's restructuring costs. We saw very strong debt revenue growth, which together with the changes we've made to recognising revenue on care plans helped lift profits by over 26 percent to £41,000,000 Retail profit did decline slightly to £22,000,000 and that's partly linked to a very subdued market where growth is well below the long term averages. Overall, gross margins are just over 46%.

Speaker 1

That was flat year on year as we saw an improvement in Vets gross margin linked to their improved performance and productivity, which is offset by a slight decline in retail as our food business continues to see faster growth compared to our higher margin accessories business. We continue to keep a tight grip on operating costs and these were flat year on year. We have delivered efficiency and productivity savings to help offset some known headwinds and these of course include the 9.8% increase in the national living wage. Within the half, we treated £3,400,000 of costs as non underlying, which is considerably down year on year as we have now completed in the main our restructuring programme. Our underlying profit margin was 6.9% and as planned, VET Group profit margin stepped up close to 300 basis points to just under 45%.

Speaker 1

Looking forward, the government recently announced planned changes to both the National Living Wage and employers' National Insurance Contributions. Combined, these two changes represent an £18,000,000 cost increase for our business in FY26 and we are looking to proactively mitigate these costs as much as possible using our self help initiatives. Turning now to cash flow. The business continues to generate a significant amount of cash. In fact, we grew free cash flow and returned over £50,000,000 to shareholders, as well as maintaining a robust balance sheet.

Speaker 1

We generated free cash flow of £33,000,000 in the half. That was up year on year by 43% and that was after cash capex of just over £24,000,000 and we closed with net debt of only £8,000,000 The VET group generated £46,000,000 of cash flow on the back of a very strong revenue growth and is well on track to deliver the long standing target of £60,000,000 We paid £38,000,000 in dividends in the first half and we're in the process of completing a £25,000,000 share buyback. Both of these are consistent with our very clear capital allocation policy and this continues with our announced interim dividend of 4.7p, which will be paid in the second half. Our balance sheet remains robust with little debt and lease adjusted leverage of only 1.5x. Turning now to our capital investment.

Speaker 1

Our capital investment remains fully aligned to delivering our strategy and we invested just over £24,000,000 in the first half. This investment remains focused on the 3 big strategic growth areas: digitizing the business, improving our distribution network and improving our store estate by investing into our stores, including both new stores and refits. We opened 3 new stores in the first half, all within the M25 alongside 2 new vet practices. 17 pet care centers also benefited from investment, 7 of these have had a vet practice extension and we continue to demonstrate our focus on capital light growth. We refitted both Hull and Brentford Pet Care Centres to our new format and this showcases our strengths as the home of nutrition as well as the expertise of our colleagues.

Speaker 1

Overall, we now expect capital for the year to be around £55,000,000 as we continue to move beyond our period of peak investment. And in future years, we expect our capital investment to taper down to a normalized run rate of around £50,000,000 a year. As we look forward, these significant investments we've made will set us up to drive value for our shareholders. Our strategy is on track and we expect pet care market growth to recover and that's supported by long term structural growth trends, meaning we look to the future with confidence. Given the current market softness has lasted longer than originally planned and although we are growing market share, we have updated our guidance to only modest profit growth for this financial year.

Speaker 1

Our VET momentum continues. That performance is fueled by proven growth drivers alongside our unique business model. Our peak investment and period of heightened operational risk is now very much behind us and the benefits of those strategic investments are all ahead of us. As the benefits of our investments come through, our clear competitive advantages position us to deliver growing sales and profit, strong cash generation and create significant value for our shareholders.

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Key Takeaways

  • Despite a subdued market, the group delivered 4.1% consumer revenue growth in H1, with underlying PBIT up 14%, free cash flow and EPS both increasing.
  • The newly launched digital platform has doubled app sales, increased subscription revenue to 12.4% of sales, and begun leveraging data for personalized omnichannel experiences.
  • In the Vet group, practices saw 13% revenue growth and 6% EBITDA growth in H1, driven by 8% more clinical talent, 18,000 new weekly pet registrations and expansion into 2 new practices.
  • Retail sales were broadly flat, outperforming a declining market, supported by initiatives like Price Drop and Lock, the NutriBalance own brand launch, 3 new stores and 14 refits.
  • Given the prolonged weakness in market growth, management now expects only modest profit growth for FY25, while remaining confident in a return to long-term 4% market growth and the benefits of prior investments.
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Earnings Conference Call
Pets at Home Group H1 2025 Pre Recorded
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