Investor presentation...Investor presentation Becoming the best pet care business in the world...

Pets at Home Group Plc

Investor presentation

October 2019 Becoming the best pet care business in the world


Forward looking statements

2

INCLUDED IN THIS PRESENTATION ARE FORWARD-LOOKING MANAGEMENT COMMENTS AND OTHER STATEMENTS THAT REFLECT MANAGEMENT’S CURRENT OUTLOOK FOR FUTURE PERIODS

These expectations are based on currently available competitive, financial, and economic data along with our current operating plans and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements.

The forward-looking statements in this presentation should be read in conjunction with the risks and uncertainties discussed in the Pets At Home Annual Report and Accounts.


Contents

3

Market overview and business model

Our Retail business

Our Vet Group

Group strategy

Latest financials


© 2019


Market overview and business model

4 Pets at Home Group Plc

© 2019


Market size and growth rates in CY2018 Market dynamics

5

The UK pet care market is worth an estimated £6.3bn

Overall market CAGR 3.9% through 2012-18

Online penetration c15%

Steady pet population

Increasing spend per pet

Continued humanisation and premiumisation

Increase in pet insurance penetration supporting growth in veterinary market Source: Pets at Home and UK pet market reports, OC&C 2017

Note: Food and accessories market data includes online spend. Food market contains Advanced Nutrition segment, which is estimated at c£370m in value. Veterinary market includes First Opinion and Specialist Referral.

3.2%

2.7%

4.8%

4.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Food Accessories Veterinary Grooming

Ma

rke

t g

row

th r

ate

Market

size £2.7bn £850m £2.4bn £263m

UK pet care market growth


Pets at Home market share and share gains in CY2018

We continue to take market share across both the retail and veterinary segments

c16%

c42%

c14%

c10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Food Accessories Veterinary Grooming

6

Total Pets at Home market share

Estimated

share gains

in CY2018

+0.9% +1.1% +1.2% +0.4%


Our pet care company: a unique combination of product, services and expertise

7

Trusted and well known brand

Passionate and expert colleagues, groomers and veterinarians

Customer insights from VIP loyalty club and vet practice data

Strong management expertise

Corporate social responsibility – ‘doing the right thing’

For pets:

˃ Everything a pet needs to keep them happy and healthy

˃ Supported by our welfare and care standards

For pet owners:

˃ Everything pet owners need to take the best care of their pets

For colleagues:

˃ Sector leading reward, benefits and wellbeing

˃ Externally accredited training schemes

For the Group:

˃ Generate value for shareholders through free cashflow growth

Our differentiators Business activities Value created

Pet Care


£0

£100

£200

£300

£400

£500

£600

£700

£800

£900

Store customer Omnichannel customer(store + online)

Omnichannel + vetcustomer

Omnichannel + vet +grooming customer

Retail spend

Vet spend

Grooming spend

Growth in customer numbers YoY

We are the only business who can deliver complete pet care for customers

8

Annual spend by different customers

Our biggest opportunity: only 14% of our

customers buy both products and a service,

but their numbers are growing

Customers who

channel shift

spend more

overall

Annual visit frequency 6x 12x 24x >35x

+9%

+65%

+78%

+60%


© 2019


Our Retail business


© 2019


£455m £357m

£42m

Food

Accessories

Other

Retail revenue in FY19 Group revenue (£m)

10

Retail sales are balanced across both food and accessories

106

855

Vet Group Retail

Note: Financials shown are for the Financial Year ended 28 March 2019 (FY19) Other Retail revenue includes that from grooming, pet sales and insurance commissions

Includes Advanced

Nutrition sales of

£210m


11

Our Retail business

“Pets at Home is a healthy business; customers are loving what we do and how we do it. We offer pet owners the complete pet care experience – something our competitors cannot.”

Peter Pritchard

Group CEO

Locations nationwide and knowledgeable colleagues

VIP loyalty club

Fast growing omnichannel

business

Strong penetration of private label

Note: All data correct as of FY19, unless otherwise stated

˃ 452 stores (as of Q1 FY20)

˃ 312 grooming salons (as of Q1 FY20)

˃ More than 6,500 colleagues with expert pet knowledge

˃ Omnichannel revenue growth of 43%

˃ 8.6% participation of Retail revenue

˃ Increasing traffic & conversion across all devices

˃ Growing numbers signed up to subscription services

˃ 32% participation of Food revenue

˃ Even higher within Advanced Nutrition category, driven by performance of flagship brands Wainwrights and AVA

˃ 50% participation of Accessories revenue

˃ More than 4.4m active members

˃ 72% of Retail revenues transacted by VIPs

˃ £10m donated to charities through the VIP club since its launch


0%

2%

4%

6%

8%

10%

12%

14%

16%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19 Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20

Reta

il 2

Year

LF

L

Qu

art

erl

y R

eta

il L

FL

Retail like-for-like growth 2 Year LFL

Sales LFL as a result of price changes, innovation & omnichannel growth

We have demonstrated sustained trading momentum in Retail, with positive LFL growth each quarter since FY18

12

Estimated

market growth


£15m £19m

£29m

£51m

£74m

£0

£10

£20

£30

£40

£50

£60

£70

£80

FY15 FY16 FY17 FY18 FY19

Omnichannel revenue growth has been particularly strong, and we have taken online share

13

Omnichannel1 revenue (£m)

1. Refers to Retail revenues generated by: customers who purchase on our website for delivery to their home or collection in-store, by colleagues in-store who facilitate a customer order on our website for delivery to their home or for

the customer to collect in store another day, by colleagues through the sale of flea product subscription sales in-store which are delivered to the customers’ home, or by customers signing up to our online food subscription platform

Easy Repeat

Participation of

total Retail revenue 2.2% 2.6% 3.8% 6.3% 8.6%


We believe the integration of our stores and omnichannel business provide us with a strategic asset

14

1. Defined as Retail revenues generated by: customers who purchase on our website for collection in-store, by colleagues in-store who facilitate a customer order on our website for delivery to their home or for the customer to collect in store another day, or by colleagues through the sale of flea product subscription sales in-store which are delivered to the customers’ home

2. Defined as having positive EBITDA (before central overhead allocation) in FY19. Excludes those stores opened in FY18 and FY19. 3. Compares average spend of a store only shopper vs average spend of a store + omnichannel shopper

2.3x

More spend from

customers who

shop across both

channels3

Of omnichannel1

revenues involve

colleagues in store

c60% 97%

Of Pets at Home

stores are

profitable2


© 2019


Our Vet Group


© 2019


Vet Group revenue in FY19

Group revenue (£m)

16

Our Vet Group business

£52.6m

£8.1m

£37.0m

£8.7m

Joint Venture First Opinionpractice fee income

Company managed FirstOpinion practice consolidatedcustomer revenue

Specialist Referral centreconsolidated customerrevenue

Other veterinary income

106

855

Vet Group Retail

Note: Financials shown are for the Financial Year ended 28 March 2019 (FY19)

Pets at Home Group Plc 17

Vet Group has its core business in first opinion veterinary practices, plus presence in the specialist referral segment

˃ 4 independently run centres handling complex veterinary medicine across a range of disciplines:

− Internal medicine

− Oncology

− Orthopaedic surgery

− Soft tissue surgery

− Neurology and neurosurgery

− Diagnostic imaging

Specialist referral centres First Opinion small animal veterinary practices

˃ 444 practices: 302 in-store & 142 standalone

˃ Covers all aspects of general small animal veterinary work: preventative care, emergency care, treatment for sick pets

˃ Our preferred model is to establish practices as Joint Ventures with entrepreneurial veterinarians who become Joint Venture Partners (JVPs), with 401 JV practices

˃ We can also choose to operate practices ourselves,

and currently have 43 company managed practices

Note: All data correct as of Q1 FY20


18

Our Vet Group benefits from a unique model and has a number of strategic advantages

“Our Vet Group has experienced a period of rapid growth. Despite ongoing challenges within the market, releasing free cashflow from this business remains our single biggest value creation opportunity.”

Peter Pritchard

Group CEO

Partnership model incentivises growth

Unified brand driving

customer recognition

Clients have access to full

spectrum of veterinary care

Unique benefits from being part of Pets at Home Group

˃ Cross-sell opportunities with Pets at Home VIP loyalty club

˃ Recruitment on to Pet Care Plans

˃ Increased footfall for practices located in-store

˃ Entrepreneurial First Opinion veterinarians become business owners

˃ Joint Venture model unique in the market

˃ Referral centres structured as partial ownership Shared Ventures

˃ Convenient access to First Opinion care and advice

˃ World class specialists able to treat pets with specific requirements

˃ Largest branded veterinary business in the UK

˃ Centrally co-ordinated marketing


Partnership is at the heart of our Vet Group business model; incentivising growth and delivering returns for both sides

19

First Opinion Joint Venture Model Specialist Referral Shared Venture Model

Type of partner Joint Venture Partner (JVP) Shared Venture Partner (SVP)

Funding requirements

˃ JVP funded set-up loan (c£30k)

˃ Pets at Home investment (c£30-60k), plus additional operating loans where required

˃ Third party bank loan (up to £450k)

˃ Businesses have been acquired by Pets at Home

˃ Ongoing capital investment for growth

Equity / capital value

entitlement

˃ JVP has 100% entitlement to dividends when debts repaid & capital proceeds at exit

˃ No equity stake for Pets at Home

˃ Key clinicians hold 5-25% equity

˃ Pets at Home has the option to buy the clinician stakes in the future

Economics to Pets at

Home

˃ Receive %age of practice customer revenues as fee income, in return for providing business support services.

˃ In-store practices pay rent to Pets at Home

˃ Full ownership and control of Referral Centre businesses

Impact on Pets at Home

Group financials

˃ Fee income forms part of Vet Group revenue

˃ Operating costs reflect Support Office service centre

˃ Rent from in-store practices is an offset to Retail business rental costs

˃ Working capital to support young practices

˃ Free cashflow generation as practices mature

˃ Referral centre revenues, costs, cashflow & balance sheet are all consolidated in full, with annual income statement charge that reflects the future buyout option

Economics to partner ˃ Take a competitive salary from Year 1

˃ Potential for dividends and practice capital value

˃ SVP is paid a competitive salary

˃ Potential for an attractive future earn-out


The principles of our JV model are well established, and have been updated for new practice openings from FY20

20

Key features of the JV model

˃ Day to day operations managed by the JVP, who has complete clinical freedom

˃ Pets at Home receives fee income, based on practice customer revenues, from day one in return for:

1) Arranging initial financing through a third party commercial bank, to fund initial setup and working capital requirements for early years

2) Providing ongoing business support services such as finance, marketing, IT and procurement, through our colleagues at the Support Office in Swindon

˃ Pets at Home may also extend additional funding to the practice, if required through its lifetime, via an operating loan

˃ All practices are opened as brand new locations, with no pre-existing clients

Ownership is shared between the JVP and Pets at Home


We have many young JV First Opinion practices, which are expected to be loss making in early years

21

Number of JV

practices

at FY19

89 65 91 91 72 12

Fee income for Pets at Home is generated from year one

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-200

0

200

400

600

800

1000

1200

< 1 year 1-2 years 3-4 years 5-6 years 7-9 years 10+ years

Fee

in

co

me

as %

of

pra

cti

ce c

us

tom

er

reven

ue

£’0

00

Average practice customer revenue

Average practice PBT

New model - Pets at Home fee income %

Note: average practice customer revenue and PBT shown is based on actual performance of JVs in FY19

Even mature practices grow their customer

revenues ahead of the underlying market,

driven by the incentivisation of

ownership


Releasing free cashflow as First Opinion practices mature is our biggest value creation opportunity

Practice age and FCF at maturity1 Practice age and FCF in FY19

1. Assuming each existing practice is individually mature, and without opening any new practices

43%

39%

18%

Practice age Underlying FCF in FY19

0 - 4 years 5 - 9 years 10 years+ FCF

£19.8m

100%

Practice age Expected Vet Group FCFwhen all practices mature

0 - 4 years 5 - 9 years 10 years+ FCF

Up to £60m


© 2019


Group strategy

23

© 2019


Our Group strategy: building the best pet care business in the world

24

Connect our data across the retail and vet businesses

Personalise customer experience and offers

Give colleagues information to better serve customers at the point of sale

Utilise data across the business to drive strategic decision making and automation

˃ Repurpose and right size our store network

˃ Put our pets centre stage in-store

˃ Digitise our business and become the specialist market leader for online pet care

˃ Keep prices competitive and cheaper than competitors for our most loyal customers

˃ Grow private labels to 50% of our sales.

˃ Give our highly trained store colleagues more time with customers

˃ Build the systems to enable our new strategy and reduce overheads across the business

˃ Ensure we are building the right teams with the capability and skills to deliver our plan

˃ Develop our stores of tomorrow, with more space dedicated to pet care and services

˃ Extend our subscription expertise into pet care plans

˃ Recalibrate our First Opinion vet business and realise free cashflow growth

˃ Grow our Specialist Referral business through existing hospitals and opening new

Use data and VIP to better serve customers

Bring the pet experience to life

Set our people free to serve

50% of sales from Pet Services

Be the best Pet Care business

in the world (sustainable,

unique, rewarding)

Vision


Use data and VIP to better serve customers


Set our people free to serve

50% of sales from pet services

We made good progress on our strategy in FY19

Be the best Pet Care business

in the world (sustainable,

unique, rewarding)

Vision

34.0% customer sales

from services4

+175 bps y/y

£174k customer sales

per colleague3

+3.9% y/y

£591.6m VIP customer

sales2

+17.7% y/y

59.2m number of customer

transactions1

+5.3% y/y

1. Includes customer transactions in-store, online, in First Opinion practices, cases treated in Specialist Referral centres plus pets groomed in Groom Room salons

2. Customer sales known to be transacted by VIPs in stores, online, at First Opinion practices and in grooming salons

3. Gross customer revenues divided by the number of full-time-equivalent colleagues employed by the Group

4. Includes gross customer sales made by our First Opinion vet practices, plus revenue from our Specialist Referral centres, grooming services, subscriptions, pet sales and pet insurance commissions


Our price position remains compelling

26

1. Refers to the price of all branded and easily comparable private label products sold by Pets at Home, compared with an online pureplay,

weighted to the average volumes sold by Pets at Home

2. Refers to the price of items which we consider important to customer purchasing decisions, and where we have taken planned pr ice action

3. Refers to our online frequent order delivery service

4. All price comparisons correct as of 17/05/19


(2)%

Cheaper for

customers

who opt into

‘Easy Repeat’

delivery3

Around the

same price

on the most

important

products to

customers2

<5%

Only slightly

more expensive

on comparable

products1

Our position vs the lowest price competitor4


Key customer metrics continue to improve

27

Growth in number of active VIP members

Growth in PetsAtHome.com website traffic

Growth in number of VIPs who buy products and a service

Private label participation of dog & cat food


12% y/y 20% y/y

22% y/y 1.2 percentage points y/y

Note: All data correct as of FY19


We have launched our new pet care centre format

28

Bring the pet experience to life In FY20, we will look to optimise and trial further

For video footage of the new pet care centre, visit https://investors.petsathome.com/


We are building lifetime relationships with pet owners

29


˃ Over 230,000 owners joined the Club, c20% of the UK puppy population

˃ Customers spend 17% more when compared to shoppers not in the club

˃ Over 40,000 kittens signed up since launch in September 2018

˃ Customers receive a 10% shopping discount and the first month free on our flea prevention subscription

˃ Similar spend uplift as seen in Puppy Club

Success of Puppy Club Replicated in kitten


Complete buyout and closure programme

30


Our plans to recalibrate the Vet Group are well underway in FY20

˃ New JV model only for new practice openings

‒ Lower fees in earlier years, with increasing fees as practices mature

‒ Simpler agreement with fewer fee variables

Adjust model for existing practices

Launch new model for future openings

˃ We are providing some existing JV practices with support through temporary adjustments to their fee agreements

˃ Cashflow benefits to both JVPs and Pets at Home

Practices and JVPs become debt free more swiftly

Reduced need for PaH to provide additional funding

˃ New practice openings: up to 5

˃ Practice buy out and closure programme largely complete as of Q1 FY20

˃ Financial impact in line with our original plans

Gradually work towards UK rollout target of 700 practices


We are building a strong subscription business

Over 700,000 customers are on a form of subscription

31

Extension of Easy Repeat

˃ Range of plans tailored to pet species and age

˃ Over 27,000 plans sold through recommendations from store colleagues

Vet practice healthplans

Enhancements to subscription platform

˃ Growing new sign-ups and reduced cancellations

˃ New products to be added in FY20

˃ Recently added flagship own brands in Advanced Nutrition

˃ Rewards loyal customers with our best prices


Grooming Bubble Bundle

˃ Different services being trialled as a package

˃ Encourage customer loyalty and increase store footfall


˃ United VIP spend data with range analysis software in trial stores:

‒ Maximise availability on popular lines specific to each store

‒ Reduce range in some areas, replacing with new products

˃ Results from trial so far have been promising:

Sales outperformance vs control group

Cash margin outperformance vs control group

˃ Ambition to trial further in FY20 before rolling out to more stores

We are using our data to drive intelligent decision making

32

Using our data to serve customers Range optimisation in store driving multiple benefits

2.1%

2.3%


We have a plan to unite Retail and Vet customer data

33

Using our data to serve customers Our plan Expected outcomes

˃ Appointed Chief Data

Officer

˃ Create in-house expertise

− Team of data

scientists

− Reduce reliance on

third parties

− Take control of our

data management

˃ Invest in capability and the

systems to implement

˃ Coming in FY20

− Highly tailored

marketing to VIPs

through ‘Pet Care

Journeys’

− Improve quality of

customer/pet data

− Increase frequency

of communications

˃ Longer term

− Create a single view

of customer data

− Use Artificial

Intelligence to

improve the

customer experience


Setting our people free to serve

Customer sales growth through increased efficiency

˃ Created efficiencies in-store through use of headsets, ipads and

iphones, to improve communications and streamline activities

˃ Removed paperwork and digitised processes

˃ Store deliveries organised and packed in a more efficient manner

£150

£155

£160

£165

£170

£175

£180

FY18 FY19

Customer sales per colleague

+3.9%

© 2019


Latest financials

35


Pets at Home business segments

32%

68%

Vet Group Retail

Underlying EBIT in FY19 Revenue in FY19

11%

89%

Vet Group Retail

Note: Underlying EBIT shown above excludes £6.1m of central costs


Group

Revenue (£m) FY18 FY19 Change Q1 FY20

Total1 898.9 961.0 6.9% 303.4

Like-for-like1 5.5% 5.7% 8.0%

Retail


Food 421.9 455.4 7.9%

Accessories 343.5 357.0 3.9%

Other2 39.5 42.2 7.0%

Total 804.9 854.6 6.2% 266.4

Like-for-like 4.6% 5.1% 8.2%

Vet Group


Fee income from JV vet practices1 50.0 52.6 5.2%

Specialist Referral centres 33.7 37.0 9.9%

Company managed practices3 3.1 8.1 164.0%

Other veterinary income 7.3 8.7 18.9%

Total 94.1 106.4 13.1% 37.0

Like-for-like1 15.0% 11.2% 6.2%

1. FY19 excludes fee income of £4.1m from Joint Venture practices which we had already bought out, or intended to buy out from Joint Venture Partners in the future. In FY18, £3.8m in fee income from

these practices is included in total revenue growth, but excluded from LFL growth

2. Includes revenue from grooming services, pet sales and insurance commissions

3. Customer revenues generated by company managed practices, which is recognised in full

We have seen strong customer revenue growth across both Retail and the Vet Group


Underlying gross margin reflects our planned price investment in Retail

38

Retail underlying

gross margin

FY18 52.2%

FY19 51.0%

Vet Group underlying

gross margin1

FY18 47.1%

FY19 48.0%

Planned price

investment FY18

Mix

De-recognition of

£4.1m fee income

Underlying

performance2 FY19

Retail

Group underlying gross margin1 bridge

Vet Group

(88) bps (21) bps +28 bps

51.7%

50.7%

1. FY19 excludes £40.4m relating to non-underlying charges made against Vet Group, and Group, non-underlying gross profit (FY18: £nil).

2. Includes the charge made to the underlying provision against funding made by Pets at Home to practices which we plan to retain as Joint Venture practices in the future. For such practices, we adopt a c20% provision.

(21) bps


300.0

320.0

340.0

360.0

We have driven operational efficiencies whilst investing in strategic growth areas

39

Support

Office1

Distribution

Centre Established

Stores1,2

Omnichannel Vet Group Immature

Stores3

FY18

4.6% growth

£341.3m

FY19

£356.9m

1. Support office includes support centre colleagues and marketing

2. Established stores include all stores open since FY17

3. New stores includes all stores opened in FY18 and FY19

Underlying operating cost bridge excluding D&A

Operational Efficiency Investing in Growth

£343.3m

0.6% growth

+£1.3m +£2.8m +£5.3m

+£4.1m +£4.2m

(£2.3m)

% of

sales 38.0% 37.1%

90 bps

improvement


We have returned the business to underlying profit growth

40

£m FY18 FY19 Change

Underlying EBITDA 123.3 130.0 5.5%

Depreciation & amortisation (34.5) (36.8) 6.8%

Underlying EBIT 88.8 93.2 5.0%

EBIT margin % 9.9% 9.7% (18) bps

Net interest (4.3) (3.5) (17.3)%

Underlying PBT 84.5 89.7 6.1%

Effective tax rate 20% 21% 139 bps

Underlying basic EPS (pence) 13.5 14.1 4.2%

DPS (pence) 7.5 7.5 -

Non-underlying items1,2 (4.9) (40.1) NM

Statutory PBT 79.6 49.6 (37.7)%

1. FY19 non-underlying charges include £40.4m relating to a provision made against the balance of funding provided by Pets at Home, recognition of guaranteed third party

liabilities plus those where the likelihood of having to settle is probable, the cost of additional operating cash outflows forecast to be incurred by the Group through to buy out

and all associated closure costs, for JV practices we had already bought out, or intended to buy out in the future (FY18: £nil). Also included is £0.4m relating to an

accounting charge for the potential future acquisition of minority stakes owned by vet partners in the Specialist Referral centres, which have been charged against operating

costs (FY18: £1.6m), plus a release of £0.7m relating to provisions previously recognised associated with the closure of Barkers

2. FY18 non-underlying costs included £2.7m associated with the closure of Barkers and £0.6m of M&A related expenses for transactions that were not completed


Capital investment is fully aligned to our strategic priorities

41

£m FY18 FY19 Spend includes

New stores and groomers 7.3 3.7 Fewer new stores, groomers and vets

Existing store estate 12.8 8.8 Ongoing store refurbishment, plus launch of 2

new format trial stores

Business Systems and Omnichannel 10.0 10.8 Website re-launch across all platforms, building

digital assets and in-house data capabilities

Vet Group 5.5 3.0 Expansion of Specialist Referral centres, plus

ongoing investment in Support Office capabilities

Distribution 1.1 5.7 Installation of automated online order picking to

support growth of omnichannel

Energy savings programme 2.3 0.7

Other 1.7 1.9

Total 40.7 34.5

1. Definition contained within the appendix

Returns on capital FY18 FY19

CROIC1 19.4% 18.9%


£m FY18 FY19

Operating cashflow 126.8 126.5

Tax and interest (23.0) (21.4)

Debt issue costs 0.0 (2.5)

Capex (44.0) (37.2)

Purchase of own shares to satisfy colleague options (4.0) (1.8)

Underlying free cashflow 55.8 63.6

Conversion1 45.3% 48.9%

Ordinary Dividend (37.3) (37.2)

Acquisitions2 0.0 (2.8)

Non-underlying cash outflow3 0.0 (8.9)

Net retained cash 18.5 14.7

Leverage (ND: underlying EBITDA) 1.1x 0.9x

We have maintained the dividend payment, as well as taking the right actions in the Vet Group

42

1. Calculated as underlying free cashflow as a percentage of underlying EBITDA

2. Includes the purchase of two mature, JV practices from Joint Venture Partners for £2.1m, which are now operated as company managed practices, £(0.3)m of net cash acquired by purchasing three

other existing JV practices, and deferred consideration of £1.0m relating to one of our Specialist Referral centres

3. Includes £8.8m relating to practices that we had already bought out, plus £0.1m in relation to payments made to certain Shared Venture Partners in our Specialist Referral centres to acquire

remaining minority stakes


Working capital remains strong, and our net operating loan balance has decreased

43

Operating loan balances to JV vet practices (£m) FY18 FY19

Gross operating loans 38.0 42.2

Non-underlying provision1 (4.1) (7.2)

Underlying provision2 (4.2) (7.1)

Net operating loan balance 29.7 27.9

£m FY18 movement FY19 movement

Inventories (4.1) (7.3)

Trade and other payables 9.6 14.5

Trade and other receivables 3.9 4.9

Trading cash working capital 9.4 12.1

Increase in gross operating loans to Joint Venture vet practices (14.8) (9.6)

Group cash working capital movement (5.4) 2.5

1. For practices which we intended to offer to buy out, we provided, in full, for any funding already made by Pets at Home to those practices. In FY19, this has been charged against non-underlying

Vet Group, and Group, gross margin. In FY18, any increase in the provision relating to these practices was treated as underlying, but has been shown separately above for ease of comparability.

2. Underlying provision refers to our provisioning methodology for funding made by Pets at Home to practices which we intend to retain as Joint Venture practices in the future. For such practices, we

adopt a c20% provision against funding made by Pets at Home to the practice


£19.8m

£57.3m

Vet Group Retail

48.0% 51.0%

Vet Group Retail

In summary: FY19 key financial metrics

44

Revenue1 & like-for-like growth Underlying gross margin2 & YoY change

Underlying EBIT2,3 & margin Underlying free cashflow4 & conversion

+5.1% +11.2% (122) bps

7.9% 30.2% 56.4% 57.1%

+87 bps

£32.1m

£67.2m

Vet Group Retail

1. Excludes fee income of £4.1m from practices which we had already bought out, or intended to buy out in the future. £3.8m of fee income from these practices in FY18 is excluded from LFL growth

2. Excludes a non-underlying charge of £40.4m (FY18: £nil), relating to costs incurred in association with those JV practices which we had already bought out, or intended to buy out in the future

3. Excludes a non-underlying charge of £0.4m (FY18: £1.6m) for the potential future acquisition of minority stakes owned by vet partners in the Specialist Referral centres

4. Excludes (£13.4m) of free cashflow allocated as central

£106.4m

£854.6m

Vet Group Retail


Capital allocation priorities

45

Invest our cash generation in areas that will expand the Group and

deliver appropriate returns, including organic capital investment and

the working capital needs of our vet business

Return any surplus free cashflow to shareholders in the form of a

special dividend or share buyback

Maintain an ordinary dividend payment at c50% of underlying basic

earnings per share


Financial guidance for FY20

46

FY20 Group underlying guidance (excluding IFRS16)

Total revenue growth Ahead of market

Depreciation & amortisation £39-41m

Net finance expense £4-5m

Underlying profit before tax# Slight decline y/y

Underlying tax rate c20%

Capital expenditure Up to £40m

Underlying free cashflow# Decline y/y

Dividend per share In line with prior year

FY20 non-underlying financial items relating to the Vet Group remain largely as

previously guided

Non-underlying income statement

charge

Up to £9m: includes First Opinion business recalibration

of c£8.5m and accounting charge for Specialist Referrals

of c£0.5m

Non-underlying cash costs

Up to £27m: includes First Opinion business recalibration

of c£19m, and up to £8m if the options to purchase

shareholdings from Partners in our Specialist Referral

centres are exercised


Track record of financial metrics

48

£m FY15 FY161 FY17 FY18 FY19

Group LFL 4.2% 2.2% 1.5% 5.5% 5.7%

- Retail 1.7% 0.7% 4.6% 5.1%

- Vet Group 14.9% 15.2% 15.0% 11.2%

- Merchandise2 3.7% 1.5% 0.8% 5.0%

- Services2 10.7% 10.4% 7.9% 8.5%

Group revenue £729m £778m £834m £899m £961m

Growth YoY 9.6% 6.7% 7.2%1 7.8% 6.9%

Group underlying gross margin 54.2% 54.4% 54.2% 51.7% 50.7%

Group underlying EBIT £96.8m £100.2m £100.9m £88.8m £93,2m

Group underlying EBIT (margin) 13.3% 12.9% 12.1% 9.9% 9.7%

Underlying basic EPS (p) 13.5 15.1 15.3 13.5 14.1

DPS (p) 5.4 7.5 7.5 7.5 7.5

CAPEX £33m £42m £45m £41m £35m

Free cashflow £72m £78m £65m £56m £64m

1. Numbers presented above for FY16, and growth rates thereon, are on a 52 week basis, rather than a statutory 53 week basis. to ensure comparability with other years.

2. The financial year ending 28 March 2019 is the first year where our financial reporting disclosures are presented under the two segments of Retail and Vet Group. In previous years, the segmentation used was that of Merchandise

and Services. The difference results from grooming services, live pet sales and insurance commissions historically being shown within Services, whereas from FY19 onwards they are included within the Retail segment. For

comparability purposes to all other disclosures elsewhere in this presentation, FY18 above has been shown under both segmentations.

n/m = not meaningful as year of IPO


IFRS16 will impact the Group in FY20, but will not change how we run the business

˃ We have adopted the modified retrospective approach to implementation of IFRS16

‒ Simplest methodology and ensures consistency between Group and subsidiary financial statements

‒ Total value of the leases brought onto the Group’s Balance Sheet at the start of FY20 will be £508m

‒ At FY19, this would have increased our leverage ratio from 0.9x to 3.0x

˃ Applies to all property leases covering 452 stores, 2 Distribution Centres, 2 Support Offices and 50 vet practices which are wholly owned by the Group

‒ Each lease has been assessed individually, with a discount rate of 2.3 – 3.3% applied depending on the remaining term

˃ We have significant operational flexibility across our store property portfolio

‒ Average total lease length is 17.1 years

‒ Average unexpired total lease term is 7.0 years

‒ c210 stores have a lease renewal or break coming up in the next 5 years

‒ Most rent reviews are open market upward only, with a significant proportion capped

‒ Remain focussed on optimising economic returns during each renewal negotiation

49


Pro-forma FY19 financial statements would have shown a decrease to reported PBT, but leave FCF unchanged

50

All IFRS 16 adjustments are

non-cash

£m (unaudited) Pre-

IFRS 16

Exclude

rent

Include

depn

Include

interest

Post-

IFRS 16 Notes

Revenue 961.0 - - - 961.0 No change

Operating lease rentals (78.6) 78.6 - - - Rental cost removed

D&A (36.8) - (69.8) - (106.6) Straight line depreciation charge added

Operating profit 93.2 78.6 (69.8) - 102.0 Operating profit increases

Finance income 0.6 - - 0.1 0.7

Finance expense (4.1) - - (15.0) (19.1) Higher interest charge

Underlying PBT 89.7 78.6 (69.8) (14.9) 83.6 PBT (and therefore EPS) decreases

Re-classification only – no

change to free cashflow

£m (unaudited) Pre-

IFRS 16

Add

back

rent

Replace with

interest & capital

repayment

Post-

IFRS 16 Notes

Group operating cashflow 126.5 78.6 - 205.1 Increases as lease rental removed

Tax and interest (21.4) - (8.6) (30.0) Interest element of lease payments added

Repayment of lease obligations - - (70.0) (70.0) Capital element of lease payments added

Net capex (37.2) - - (37.2) No change

Other cashflow items (4.3) - - (4.3) No change

Group free cashflow 63.6 78.6 (78.6) 63.6 FCF remains unchanged


Impact of the Vet Group recalibration on FY19 and FY20 financial statements

51

˃ No fee income for practices we have already bought out, or will offer to buy out in the future, has been recognised within revenue

˃ For the purposes of the LFL revenue growth calculation, fee income from these practices has been removed from both FY19 and FY18

˃ Provision, or write off, of liabilities for these practices:

‒ Practice funding owed to Pets at Home

‒ Third party bank loans

‒ Property leases for standalone practices

‒ Business closure and employee costs

˃ Non-underlying income statement cost of £40.4m in FY19 and up to £8.5m in FY20

˃ We continue to recognise all fee income from practices we intend to retain as a JV

˃ We have also provide against a proportion of any funding made by Pets at Home to those practices at c20%

Income statement Cashflow impacts

˃ Repayment of liabilities for practices we have already bought out, or will offer to buy out in the future:

‒ Third party bank loans

‒ Property leases for standalone practices

‒ Business closure and employee costs

˃ Non-underlying cash cost of £8.8m in FY19 and up to £19m in FY20

˃ Further cash funding in FY19 of £7.1m to practices we intend to retain as a JV to support


Accounting treatment of veterinary specialist referral centres

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Specialist referral centre ownership is structured to incentivise growth

Accounting treatment required

˃ Ownership of four referral centres

‒ Three centres wholly owned subsidiaries by Pets at Home

‒ One centre ≥75% share owned by Pets at Home

‒ Remaining shares owned by Shared Venture Partners (SVPs)

˃ PAH has option to buy SVP’s shares (from 3 or 5 years after acquisition)

˃ Accounting requirement of the option is treated as a forward contract

˃ Balance sheet & cashflow

‒ Full consolidation

˃ Income statement

‒ Discounted future value of SVP’s shares recognised as expense over period to exercise on a risk adjusted basis


Financial definitions

‘Like-for-like’ sales growth comprises total revenue in a financial period compared to revenue achieved in a prior period, for stores, online operations, grooming salons, vet practices & referral centres that have been trading for 52 weeks or more.

EBITDA being Earnings before interest, tax, depreciation & amortization before the effect of non-underlying items in the period.

Free Cashflow being net cash from operating activities, after tax, less net cash used in investing activities (excluding acquisitions), less interest paid & debt issue costs, and is stated before cash flows for non-underlying items

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CROIC being Cash Return on Invested Capital, represents cash returns divided by the average of gross capital invested (GCI) for the last twelve months. Cash returns represent underlying operating profit before property rentals and share based payments subject to tax then adjusted for depreciation and amortisation. GCI represents Gross Property, Plant and Equipment plus Software and other intangibles excluding the goodwill created on the acquisition of the group by KKR (£906,445,000) plus net working capital, plus capitalised rent multiplied by a factor of 8x.

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