Cheshire Jun 8, 2020 (Thomson StreetEvents) — Edited Transcript of Pets at Home Group PLC earnings conference call or presentation Thursday, May 21, 2020 at 6:00:00am GMT
Peter Pritchard, Pets at Home Group Plc – Group CEO, Director & CEO of Vet Group 
Good morning, and welcome to Pets at Home’s FY ’20 Preliminary Results. I hope you’re safe and well and managing to adapt the challenges that are being presented to us all as a consequence of COVID-19. Of course, that also means today, we’re unable to present our results to you in person. Instead, Mike Iddon, our CFO and I, have produced a short video to take you through some of the highlights from last year as well as the progress we’ve made through COVID-19, and what our Pet Care business may look like beyond this crisis. In addition, there’s a full presentation deck available for you to download from our investor website. At 9:30 today, we will host a live Q&A to analysts and investors. Please see our RNS for details on how to join.
Looking back, we had a strong FY ’20, reflecting the ongoing execution of our proven pet care strategy. We delivered record results in FY ’20, exceeding GBP 1 billion worth of revenue for the first time and delivering profit ahead of expectations. Underlying PBT grew 11% year-on-year, ahead of our sales growth. We exited FY ’20 and entered the COVID crisis from a position of strength. The crisis is testing the fundamentals of many businesses across most sectors. Pets at Home has resilience in its balance sheet, has good liquidity headroom, and with the steps we’ve taken to preserve cash, adjust our business operations and continue to serve pet care customers, we will be able to navigate the financial impact of the pandemic.
The 4 pillars of our pet care strategy remain unchanged. However, we’ve already adapted to the execution on our strategy to ensure it reflects the changing consumer environment. Post the pandemic, there will be scars for many years to come. The normal we knew will be replaced by a new normal. But the pet care market is built on strong foundations. It has previously demonstrated its defensive nature, performing well in even the most challenging economic climates.
We believe our strategy is robust. We are aligning the execution of our plan to meet that new normal. We’re doing this at pace to make the most of our new opportunities presented to us. That’s because we’re confident our pet care strategy is compelling.
Our performance in FY ’20 speaks for itself. It’s the result of the determined actions undertaken over the last 2 years, reaping the benefits of our investments as we implement our pet care strategy, winning more new customers and increasing their pet care spend. We are leveraging our unique assets, investing in building capability and capacity and building an ecosystem of pet products and services that quite simply can’t be delivered by any other business.
In retail, we delivered a 1-year like-for-like of 9.4%. If you exclude the COVID impact in the last 4 weeks, our like-for-like was 7.2%. And on a 2-year basis, our like-for-like was 15%.
In our First Opinion vet business, our recalibration was completed on time and within the financial envelope we previously set out. We delivered 13.5% like-for-like growth in customer revenues. We recorded strong growth in new customers across all parts of our business. We did this through our focus on new customers via our Puppy and Kitten Clubs. These customers are spending up to 23% more as a result. We’ve invested in data capability, and we’re starting to see the results of improved business insight and will soon in-sourced all of our VIP data and analysis, and this will help underpin our future growth. Our investment in automation and our distribution network enabled us to serve more customers, particularly online, where we’ve seen demand double since March.
Against a backdrop of an uncertain economic climate, the pet population in the U.K. is resilient and stable. There’s around 18 million cats and dogs in the U.K. and never has their role being more important in people’s lives. Whilst the virus has impacted us humans, pet’s lives, however, remain unchanged. The people are spending more time at home, whether working or just restricting time spent outside. This improves the conditions of families to consider adding a pet to their family. In recent weeks, we’ve witnessed robust sales of puppy products and new client registrations at our vets.
What’s more, pet owners are becoming increasingly likely to cut back on other things before they cut back on spending on their pets, all of which support the structural growth of the pet care market in which we operate.
We are not immune to the challenges posed by COVID-19, but we have a compelling strategy, unique assets, capabilities and an experienced managing team that is responsive to changing customer needs.
Let me now hand over to Mike, who will take you through our financial performance.
Michael Iddon, Pets at Home Group Plc – Group CFO & Executive Director 
We’ve had a record financial performance, demonstrating the progress we’ve made in implementing our pet care strategy. And this is clearly showing through in these results, which covered the year to the 26th of March.
In the year, group revenue growth was over 10%, helping total revenues exceed GBP 1 billion for the first time with group like-for-like sales growth of 9%. Within this, our retail like-for-like sales growth was 9.4%. In the 11 months to February, it had been 7.2%. And then we saw exceptional demand, which drove like-for-like sales growth of over 36% across the final 4 weeks of the year, during which we maintained our competitive pricing position across all product lines. Across last year, our omnichannel revenues grew by 27.8%, that’s 83% on a 2-year basis. From mid-March onwards, we have seen nearly a doubling in the volume of online orders, and we benefited from the investment we’ve already made in automation at our Northampton DC, which has given us the capacity to meet this demand.
In the Vet Group, customer revenue growth in our First Opinion practices was over 13%, helping drive Vet Group like-for-like of 5.6%. And this includes the planned fee adjustments, which have now all been successfully implemented. Strong revenue growth and good cost control helped grow group underlying profits by 11% to GBP 99.5 million on a pre-IFRS 16 basis. And profit was slightly ahead of expectations even before the benefit from the additional sales in March. Underlying free cash flow grew by over 40% to nearly GBP 90 million and helped reduce net debt to less than GBP 86 million and reduce leverage to only 0.6x. We’ve come into the new financial year with liquidity of GBP 162 million and have since taken steps to reinforce this further. And that strong cash performance, together with the confidence and the resilience of our business, enables us to maintain a full year dividend of 7.5p.
The final month of our financial year also saw the first month that the U.K. was meaningfully impacted by the coronavirus crisis. And our approach to managing this crisis in the year ahead is being guided by a 5-phase plan, across which we expect changing customer behavior to shape our FY ’21 performance. In the pre-lockdown phase, customer stockpiling in the final few weeks of FY ’20 drove around an additional GBP 20 million of retail sales, mainly in food, where we saw an influx of new shoppers, particularly from supermarkets, as we became #1 by market share in grocery dog food for the month of March.
As we entered the lockdown, the government deemed us to be an essential retailer and this meant we had a key responsibility to both feed and provide health care for the nation’s pets whilst protecting everyone who came in to the — came into our business and works in our business. As such, in retail, we focused on providing essential products only, choosing to close all our grooming salons and stop the sale of pets, the annual revenues from which last year were GBP 43 million. We will slowly restart these parts of the business in the coming weeks, albeit at reduced capacity as we develop protocols that make it safe to do so for both colleagues and customers. But until we do, we will temporarily lose the revenue whilst maintaining the full cost base. After the lockdown on the 23rd of March, we saw reduced customer transactions as customers followed government advice by staying at home and only making essential journeys. And we’ve seen a significant proportion of the pull forward purchases reverse in the first 7 weeks of this year as stockpiles have been reduced.
Having said that, our food and accessories sales are still in positive like-for-like growth over the last 11 weeks as a whole, with online sales doubled their run rate going into the COVID crisis, although this does create an adverse mix effect and incurs incremental fulfillment costs. We are seeing and planning for a gradual recovery in footfall as our merchandising business remains robust and we’ve already extended opening hours to 8:00 p.m. in some stores after initially restricting opening to 6:00 p.m. We also expect to see an element of lasting shift to online and whilst those discretionary purchases, which customers have been delaying due to lockdown, should also begin to increase over time. Likewise in our vet operations across both First Opinion vet practices and specialist hospitals, compliance with RCVS guidelines regarding permitted procedures and social distancing has restricted our customer revenues. Initially, we saw a reduction of revenues of around 50%, although this has improved in recent weeks as guidelines have evolved.
Whilst restrictions remain in place, customer revenues will be reduced. However, the use of telemedicine and implementation and new ways to deliver medication to customers’ homes has supported revenues, and there are also signs of new client registrations stepping up as many of our competitors have remained closed.
Finally, in our specialist hospitals, more First Opinion consultations will lead to more referral work. We are adapting well to the temporary restrictions and additional COVID-related costs and fundamentally, the business remains robust and resilient. Our financial resilience will enable us to navigate this period of uncertainty and also provides a platform for future growth. The balance sheet is strong, debt has been reduced, leverage is low, liquidity is solid, and we have a significant headroom on our banking covenants. We have stress tested the business for a variety of scenarios. And added, as a backstop, a new, additional GBP 100 million revolving credit facility that further strengthens the resilience of the business.
We’ve responded well to the COVID-19 challenge, supporting all our stakeholders fairly and responsibly. However, in doing so, we have incurred GBP 5 million of direct incremental costs as we look to safeguard our colleagues and customers. These costs include rewarding our store colleagues with a GBP 1.9 million recognition award, establishing a GBP 1 million colleague hardship fund, supporting our pet supply chain and donating GBP 1.1 million to animal welfare charities as well as supporting NHS workers.
In addition to these initial costs, we are also incurring ongoing costs of around GBP 200,000 per week associated with implementing social distancing across our operations. And the necessary restrictions on the provision of pet care services such as grooming, pet sales and veterinary health care mean that although we are not currently seeing normal levels of customer sales, we continue to incur the costs associated with those services. We do welcome the business rates relief, that’s worth GBP 33 million to us. And this will go partway towards offsetting the financial impact of the restrictions imposed on our retail and vet businesses and the additional costs we are incurring running our operations.
Finally, we have exercised sound judgment in preserving cash and mitigating the financial impact. These include a 20% reduction in salaries of the executive management team, non-exec directors and senior leadership team. The benefit of a 6-month loan repayment holiday for our First Opinion joint venture practices on their third-party bank debt on top of the pass-through of any business rates relief for practices located in stores. With new store rent payments to monthly and are progressing our ongoing program of lease negotiations. And finally, we are ensuring that our capital and critical expenditure, such as marketing, continues to closely align to our renewed priorities as we proactively manage the business through the COVID-19 crisis.
Our financial resilience enables us to both navigate this period of uncertainty as well as provide a strong platform for future growth.
So with that, let me hand back to Peter. He will take you through our operational plans for emerging from the coronavirus pandemic.
Peter Pritchard, Pets at Home Group Plc – Group CEO, Director & CEO of Vet Group 
Whilst COVID has been disruptive, we believe this is an opportunity to accelerate investment in our digital capabilities to serve customers seamlessly and profitably. As an essential business, we’ve traded through the crisis. And in doing so, we’ve learned a lot as we prepared for unlock and an elongated period of social distancing.
We entered this crisis at a time when our business was in its strongest position. But we now have a choice, we either play defensively or we accelerate. We are choosing to accelerate. We believe by adapting our plans to meet changing customer behaviors, we can maximize pet care spend. This is an opportunity for us to ensure our business is well placed over the longer term to achieve that. In retail, we will maximize the benefit of having an omnichannel business. Our business benefits by not being dedicated to 1 channel or service. It’s naive to think that customers think offline and online. The reality is customers choose how to shop and where to receive the products and services they need. Our job is to do this quickly, flexibly, affordably and profitably. We’ll use our national reach of stores combined with an increased investment in digital and logistics to ensure we can meet those needs.
In vets, we’ve implemented telemedicine, and we changed the way customers can choose to receive medication through delivering direct to their homes. Both of these are here to stay. This will be an acceleration of a more digitally led vet relationship with clients. Veterinary is still attractive, and we want to continue to extend our business, and we will actively look for exciting and rewarding adjacencies.
During this crisis, we’ve seen strong sales in puppy and kitten products, indicating there may well be more new pet owners, not less. We will continue to focus our efforts and double down on puppy and kitten as a point of acquisition across entire pet care opportunity. We will uniquely combine products and services to meet pet care needs, increasingly use our new data capabilities to leverage our assets and better inform our decision-making. This crisis has accelerated the need for digital connectivity with pet care customers.
As an omnichannel operator, we’re able to serve customers’ needs however they want to be served. Over 1 million vulnerable people, they still need to shield, many more may be cautious of shopping in store. Our strength is in putting the customer in charge of their shopping choices. Whilst operating costs may be inflated as we cope with social distancing and high fulfillment costs, our focus will be on maximizing our share of customer wallet. We will aggressively invest in driving top line sales growth. We’ll focus our operation, creating new and unique ways to serve customer needs. So for example, you can now call a store, order and pay. And within an hour, have those products delivered direct to your car boot, in our car park, without ever coming into the store.
In the coming months, we’re planning to utilize our 453-strong store network combined with our digital capabilities to create new and unique ways of serving customer demands in a post-COVID world.
In summary, we’re confident in the long-term potential of our business, and we will reshape our operations to maximize pet care revenue. So why should we be confident? Well, there are 6 core factors. First, the GBP 6.5 billion pet care market is in structural growth and is resilient. Pets will still need feeding and still need loving. Humanization and premiumization are trends which will continue. We’re focused on continuing to take share across all categories and channels. We are building an ecosystem of pet products and services. It’s not just a wide range of products and services which are compelling, but the way in which we will deliver them. We’ll continue to build subscriptions and unique product and service bundles, which make pet care easy and affordable whilst building predictable annuity income streams across our business.
We have a 5.6 million active customer base, and it continues to grow. Our VIP loyalty program allows us to use proprietary data to better serve pet owner needs. When combined with our investment in data capability, we will build significant strength and insight and actions to grow our pet care spend. Our unique vet owner driver model is attractive in a corporatized market. The JV ownership structure has always been growth-led as owner-drivers are more incentivized to drive new and improved revenue streams versus corporately-owned structures. This was true before COVID-19, and will be especially true as we come out. Our business is still young, and practice maturity represents a significant future cash growth opportunity.
We have sustainable omnichannel proposition in retail. Using all our assets, we will serve customers however they want to be served. Customers still need help navigating pet care. The customer relationship and purchasing decisions are not merely transactional but based on pet health and well-being. When you combine our colleague expertise with customers needing help, you do create more value. We will launch new and innovative ways of delivering pet care to customers.
Finally, we’re a financially strong and resilient business. We have GBP 162 million of liquidity with access to a further GBP 100 million facility, should we need it. Our leverage remains low at 0.6, and we have strong cash conversion. We’ve maintained our dividend at 7.5p. These 6 factors all lead into our core strategy of building our share of customers’ pet care spend. Moving customers from our retail business into services and vice versa, building unique propositions only Pets at Home can deliver.
Whilst the world has changed dramatically and will emerge into a new normal, we are focused on delivering our pet care strategy and creating a stronger and more determined business than ever.
FY ’20 was a year of excellent progress. The strength of our business going into the crisis has meant that we’ve been able to adapt and protect the interest of all of our stakeholders. I’m so incredibly proud of our colleagues and how the business has responded at incredible speed and enormous agility. New procedures, which normally take weeks and months to implement, were put in place in hours and days to exceptionally high standards. The pet market remains resilient. If anything, pet ownership looks like it’s going to increase, and pets will play an increasingly important role in their owners’ lives.
Our response to pandemic shows our strategy is robust. We’ll continue to adapt our execution to serve the changing needs of pet owners. We are building from strong foundations, and our investment in data capabilities are still to flow. Our strong leadership team and our financial strength has allowed us to navigate this period of uncertainty. But above all, we remain excited about the considerable headroom that remains to capture more pet care spend as we build the best pet care business in the world.
And finally, I just want to say thank you to our Chairman, Tony DeNunzio, who leaves us today. He’s guided the business through a significant transformation and hands over a very different business today from that he joined 10 years ago. Thank you, Tony. We will really miss you, and we wish you well in the future. And we’re delighted to welcome Ian Burke as our new Chairman, who will be in position from today and will help guide the business through its next phase of growth.
Thanks for listening. And we look forward to taking your questions later on today.