Pets at Home Group PLC

LSE:PETS

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Q3 2019 Trading Statement Call for Pets at Home Group Plc. [Operator Instructions] I would now like to hand the call over to the chairperson of today's call, Peter Pritchard, Group Chief Executive Officer. Please go ahead.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Thank you, Christian. Good morning, everybody, and thank you for joining us to discuss Pets at Home's Q3 trading update. I am Peter Pritchard, Group CEO, and with me is Mike Iddon, our Group CFO. Our Q3 period covers Christmas trading running from the 12th of October 2018 to the 3rd of January 2019. And overall, I'm very pleased with our performance, which is evidence of our strategy and action. The pet care market remains resilient. In Retail, we've delivered another quarter of strong like-for-like growth. And in the Vet Group, our practices saw good customer revenue growth. So moving on to our financial performance. Group revenue increased 6.3% to GBP 237.2 million with like-for-like growth of 5.1%. Within that, Retail grew 5.5% to GBP 213.4 million with like-for-like growth of 4.7% or 11% on a 2-year basis. In particular, our omnichannel business grew 41.5% to GBP 19 million and reflects the recent investments that we've made. We're gaining share across all channels in the market, and our overall performance in Retail is one that we are rightly proud of. We've continued to invest in pricing. Our overall price position is very competitive, and we're now through the majority of our repositioning and this has helped sustain top line growth as we've seen our eighth successive quarter of like-for-like growth since Q4 FY '17. Performance of our Christmas range this year was our best ever. Fantastic ranges, excellent execution and a very clean exit means it showcased everything that is great about Pets at Home. So we're really pleased with our sustained momentum in Retail. The continued growth in transactions, frequency and overall basket value with VIP shoppers demonstrates that customers like what we're doing. And we said before, though, moving forward, our like-for-likes are likely to moderate just above market growth of between 2% and 3% as we lap the initial phase of the price investments from last year. Now moving on to our Vet Group, we saw revenue growth of 13.6% to GBP 23.8 million and like-for-like growth of 9.1%. In the First Opinion business, practices had a solid quarter as our fee income grew 2.5% to GBP 12.4 million despite the fact we excluded GBP 0.8 million of fee income relating to those practices we are planning to buy back from joint venture partners as part of our recalibration, which we explained in detail at our interim results in November. On a cash basis, our fee income actually increased 9.3% to GBP 13.2 million. Also within the Vet Group, our specialist hospitals had another steady quarter. We know our single biggest value-creation opportunity is to drive practice revenue growth, and accelerating the maturity of our vet practices represents a huge opportunity to release free cash flow. We've already made good progress on the recalibration our First Opinion business and discussions have taken place with all potential buyback practices with encouraging engagement from those JVPs. We remain on track to deliver the first phase of our buybacks this financial year with the impact on our FY '19 financials in line with our guidance. Bringing our Retail and Vet businesses together as a combined pet care company is a compelling customer proposition and a key element of that is the number of subscription customers we have a across our various schemes in the group, including health care plans, Subscribe & Save, Easy Repeat and Bubble Bundle in grooming. This number stands now at over 670,000 customers and it continues to grow and it will become increasingly important for us as we look to locking customer revenue for the future. So to conclude, we're pleased with our third quarter performance and remain on track to deliver a full year result in line with the updated guidance we issued in November. With my executive management team appointments now complete, we will remain focused on delivering a combined pet care solution for customers so we can deliver even more of what our customers want. So I'll stop there now. Mike and I will be pleased to answer any questions you may have, so please let me hand the call back to Christian, the operator, for questions.

[Operator]

[Operator Instructions] Okay, our first question today comes from Greg Lawless.

[Greg Lawless, Research Associate]

Just two quick ones, if I could. Could you just remind us the potential time line for the Vets reset? You said the discussions for the first phase are ongoing and they're going well. Could you just refresh our memories on exactly how long the program is for the 55 stores? And the second question was around notes, the GBP 8 million potential rise in inventory. Could you just give a flavor of what sort of products and what sort of stock cover that gives you in terms of...

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Okay, let me do the first question. So we've obviously said it's going to take across these 2 financial years so we have now engaged all 55 JVPs so -- and that also allowed us to make sure that those JVPs who weren't impacted could also know, and we see that in a series of waves across that period of time and we're actually bang on schedule for where we expected to be. So that's going exactly as we planned. In terms of the stock build, clearly, we're in very, very uncertain times. I guess the one thing -- I guess the only uncertainty you could ever try and plan for is a hard Brexit. Clearly we hope that doesn't happen, but what we've done is we've identified stock mainly from European suppliers, not necessarily from Far East or U.K. suppliers. We've identified stock -- and it's a combination of some plastics, some food items where these are bestsellers that we'd want to make sure we have additional stock coverage in our DC, so in the case of a hard Brexit, if there is a port disruption, we have enough security. Clearly, as we head towards the end of March and we get more certainty, because it is stock, it gives us an opportunity to unwind that and we just think that's a quite sensible and pragmatic move so we don't have any disruption potentially at port later on.

[Operator]

We will now take our next question from Tony Shiret.

[Tony Shiret, UK General Retail Analyst]

Just a few small questions for me, please. Looking at the Retail like-for-like, 4.7%, I wondered if you could tell us how much of that was volume and what the pricing was within that and maybe if you could give us those figures for the sort of main categories dog and cat in the Food category, that's the first question. Secondly, on the joint venture vet practices, the 9.3% increase in fees receivable, I wondered whether you could do the same sort of exercise with that and tell us how much -- or whether there is any sort of pricing reduction in terms of the fees you're charging to the remaining joint venture vet practices. And the last question is really completely different, it's about wondering whether you could give us some sort of update on the specialist hospitals and whether you are sort of putting any sort of further development there in abeyance until you have recalibrated the JV practices. That's it.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Yes, thanks, Tony. Picking up those questions then one by one. Yes, Retail like-for-like, 4.7%, what was really pleasing in that is we're getting a significant amount of growth through growth in transactions, thus, more customers coming through our tills. That's about 1.5% of that total. The rest of it is obviously a combination of factors, so you've got mix in there, you've got unit price increases as customers trade into bigger packs. So it's difficult to split that down in between how much is price and how much is transaction growth. But the transaction of 1.5% is a solid number and we're really pleased with that. Turning to joint venturing, you asked about that 9.3%, I mean we have not taken any pricing up, so that 9.3% really is growth of client as our practices grow up through the maturity curves and that's one of the things, obviously, we track continually and we'll continue to see our practices develop and grow their revenues in line with those maturity curves. And that's right across all the cohorts, by the way, not particularly any cohort. And then on the...

[Tony Shiret, UK General Retail Analyst]

Sorry, on that one, Peter, sorry, before you go, I mean, I was sort of -- from your previous commentary, I felt that there was a possibility you were going to reduce fees to existing partners to allow them to achieve maturity of profits quicker. Is that -- so that's not happening presumably?

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Well, it's one of the things we talked about at the end of November, Tony, and clearly, as we develop our plans looking forward, we know that is something that's a lever for us to help the revenue growth of those practices because volumes of clients is the most important thing. We have not instigated any of that pricing yet in any of those practices and that will be a priority as we look forward into quarter 4 and into the new financial year. So the plan for doing that is still in place. Your third question you asked was around specialist division and we had a really good quarter of growth out of our specialist division, in fact, continuing the growth we've seen in the first couple of quarters. So -- and that was a major contribute to that overall 13.6% revenue growth we had out of our Vet Group. I think the final part of that question was, are we considering growing the specialist division, and I think the answer is, of course we would, provided that we can get the right returns on our capital. And we've always said that we're in our specialist division to grow it and we'll look to opportunities to do that. Most likely, that would be a hospital we'd build ourselves rather than acquire and we're continually looking for those opportunities.

[Operator]

[Operator Instructions] We will now take our next question from Sahill Shan.

[Sahill Javed Shan, Senior Research Analyst of Consumer]

Two questions from me. It's all to do with the Vet Group side of things. That 9.1% like-for-like you reported this morning, could you give us what the underlying figure is, if you include the 50-odd surgeries that you're looking to buy back? And the second question is around cost pressure on the Vet side of things, specifically in terms of staffing. Could you update us as to what you've seen over the last quarter or so?

[Michael Iddon, Group CFO & Executive Director]

Yes, I'll take that one. So overall, yes, fee income, 9.3%. And obviously, that includes the fee income we received from our 55 practices that was actually excluded from the revenues. So in terms of the revenue growth, reported 2.5%; in terms of cash growth, we reported 9.3%. The performance of the 55 [ heath ] practices we've excluded, they contributed GBP 800,000 to that total of GBP 13.2 million and they were broadly flat in terms of growth. So the majority of our growth -- like-for-like growth, came out of the rest of those practices, so that would have been more than the 9.3%.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

[ This is now ] Peter, to the point around cost. So one of the benefits we have in our model is the owner-driver model. So we know that the vet market currently is very hot in terms of recruitment and in terms of wage rises and we're not immune to that. And we are seeing a continuous pressure on both locum rates and on vet rates. One of the benefits we have is actually our JVPs, obviously, are employees as well as owners. We're not seeing the same level of wage inflation because clearly they would be putting pressure onto their own businesses so there is a natural hedge there for us which actually gives us a degree of protection.

[Operator]

We will now take our next question from Tushar Jain.

[Tushar Jain, Research Analyst]

A couple of questions from my side. Is it possible to give us a sort of split in Retail like-for-like between Food and Accessories or just to give us color how much was the differential between Food and Accessories? Second, just looking at the store openings for the next year, I was just wondering if you could guide us what kind of plans you have for the next year in terms of store opening. And final question, just on Vet Group like-for-like, I mean there is sequential slowdown from 12% growth in first half to 9%, is it more of a timing issue or there is something else? So if you can give us a little bit of clarification on that.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Okay, so I think across the Retail business, Tushar, that growth we got really came across all categories and channels, so stores and our online business as well as our grooming business, which had also had a really good quarter of growth. Yet, when we had that growth across Food and Accessories, what we're not going to do is split all that out down by category because you'll understand a lot of that obviously then becomes quite commercially sensitive. But I think the key message is that we've had growth by channel, by category and in our grooming business. That's all contributed really strongly to the overall Retail like-for-like of 4.7%. The second part of your question is around stores and looking ahead into the new financial year, I mean, pretty much our rollout program is finished so we've already talked about that previously when we had our updates. It doesn't mean we won't open any new stores. I mean, there'll be always opportunities. There are some towns where we aren't represented and were we could open a store and make good returns and that will, obviously, be the test. Provided we can make good returns, we can put all our services in, vet, groomer and retail, then we'll look at opportunities. But that's likely to be down at maybe 3, maybe 4 opportunities in terms of our planning. So for all intents and purposes, store rollout is complete. Like-for-like in Vet Group, I think it is hard, it's not like a retail, but it's hard to point to a quarter and so we've had a slowdown. I think 9.1% Vet Group like-for-like in the third quarter is really strong performance. You're right to point out it was a bit slower that in the first half, but I think underlying, 9.1% is still a really strong like-for-like and clearly we're doing a lot to support our vet partners in driving that revenue because we know that is the #1 way to create value. And we'll continue with some of the initiatives that we have got underway.

[Operator]

We will now take your next question from Geoff Ruddell.

[Geoffrey Frith Ruddell, Managing Director]

More questions on the Vet side, please. Firstly, just following up on Tony's question about changing the fee structure for -- to help vet practices to get to maturity quicker. My understanding from last November was you were planning to do that on some stores and -- or some JVPs and not others. Could you just tell us a little bit about how that plan has gone down with your broader JVP group because I would imagine that some of those guys would feel they're being disadvantaged relative to some of the less successful practices. And then, secondly, from the notes from today's statement, I guess Note 3, it suggests that the fee income is down -- I mean, obviously, there's roundings on sort of 0.8 and 0.9s, but the fee income is down in the 55 practices that you are planning to buy back. And I was just wondering if you'll -- I mean, I think in November, you were talking about continuing to operate 25 of those ongoing yourself. I was wondering if your views on that number had changed if these practices are actually going backwards.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Okay. Thanks, Geoff. I'll do the first one and I'll hand over to Mike the second one. We've got a very clear rule in the way that we are working our way through the recalibrations. And the first one is we felt some practices that we are going to buy back and close and those we're going to buy back and run. Then we're having conversations with those practices we identified that would benefit from fee relief. I think the first thing to look at is actually not all practices have the same agreements through the years. You've got different evolutions of those agreements, so they're not all on parity and they're all on very different circumstances. The one thing we found out from speaking to partners, and I have to say engagement from partners has been really strong, is the fact that actually the absolute point of being fair is how we help the practices get to becoming breakeven and debt-free, after which point in time, the vast majority of practices are treated exactly the same. And that's something that our partners would recognize. And don't forget, our partners often can be -- only have multiple practices. So they -- that's actually quite transparent to them and they can see it. They will ultimately build it about their own business, and I think with that point of fairness of making sure we get those fee income to breakeven, the ability for them to take dividends down, that's the bit that really resonates with our JVPs. And in those conversations, I have to say we're not getting that sort of pushback, if anything, we're getting lots of encouragement and support because they see that this is the right thing to do for the long-term health of both businesses. Mike?

[Michael Iddon, Group CFO & Executive Director]

Yes. So Geoff, the question on the 55 practices and fee income. Yes, we did make GBP 800,000 of fee income in quarter 3 this year. From those 55 placed, GBP 900,000 in quarter 3 of last year. I think it's important to remember, though, when we did our half year update on the 27th of November, very quickly around that date, we were communicating with those 55 practices. So obviously, that was impactful for them, the news that we were going to -- intending to buy them back. And therefore, not unsurprisingly, I think that featured in that performance on fee income inevitably. Your question, is it the same group of practices? It largely is and I think that, in part, plays to the very detailed piece of work we did over the summer into the autumn, analyzing out our Vet Group. So within that 55 practices we described back at the end of November, there might be 2 or 3 in and out, but pretty much it's the same 55 group that we described then. And obviously, as we go into the fourth quarter and into next year, top of our priority list now is getting on with buying back those practices, and where we can, improving the performance of the ones we intend to run. So -- and we'll get...

[Geoffrey Frith Ruddell, Managing Director]

Sorry. And within the 55, is it still the plan to continue to run about 25 of them and close 30? Or is that number changing within the...

[Michael Iddon, Group CFO & Executive Director]

That is pretty much the same number. Clearly, we would really like them all to be successful practices, let's be clear on that. But the reality is for some of them, mainly because of location, closure is the right thing to do. So -- and we're still working through the very fine detail of that practice by practice.

[Operator]

We will now take our next question from Andrew Porteous.

[Andrew Ian Porteous, Analyst, European Retail]

A few on the Vet side as well to start off with, just to sort of clarify a few points on that front. Just when you're talking about taking fees down for some of the surgeries to get them up on the maturity curve, can you just clarify, would that be a sort of temporary situation? I mean, is your idea that profitable sites at maturity will all pay roughly the same fee structure? And then related to that and just coming sort of back to the industry, obviously well aware of the cost pressures that the industry is seeing. Have you seen any signs that they're -- even if you're holding your own rates, that industry rates are starting to rise to reflect the high cost structure? And then the last one, actually sort of switching back to the Retail side of the business, on the sort of 4.7% like-for-like, could you sort of just give us some idea on what sort of Advanced Nutrition is within that? And sort of related to that, how sort of sustainable do you see that rate going? I mean, what sort of a tail off do you see in there?

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Well, I'll do the first question. Absolutely, around it being a temporary place, the absolute point of focus is how we help a partner get to a position of being debt-free and at the point where they're in a position where they're generating good profitability and they have the ability to pay dividends. It's absolutely right that we receive the fees for the support that we provide them so that's absolutely always our plan. I'll hand over to Mike for the second point.

[Michael Iddon, Group CFO & Executive Director]

I think the second point, Andrew, you picked up was on Advanced Nutrition growth, and in the quarter, it was 9.8% across dog and cat food. So continuing really strong growth we've seen in the first half. We don't actually see any slowdown in that. I think it's a structural shift as customers want to feed their pets a better diet and we're continuing to, obviously, develop our brands in that direction. So it's a good result, 9.8%. I don't think we should be anticipating a particular slowdown in the growth of Advanced Nutrition because of the structural factors driving that growth.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Yes, I'd also add to that, Andrew, I think one of the things we've seen is by significantly reducing the prices of Advanced Nutrition, we've made it easier for customers to trade out of grocery and that's one of the factors that we see in our sales mix is that mix effect and essentially that trade-up factor. I think the other question you also had was around industry cost pressures and I think we've seen that witnessed us by others. I think CVS talk about locum rates of 14%. The market for vets and vet nurses is incredibly tough, so there is a -- there is pressure on wages without question. It's quite hard to see retail inflation because actually there's less sort of a menu price list index, but undoubtedly I think that will result for those who are more exposed to locums and employed vets, I think that gives probably a high degree of exposure, where we've got a slight degree of protection because of our JVP structure. But there is definitely pressure points and ultimately I think that will result in inflation for customers.

[Andrew Ian Porteous, Analyst, European Retail]

Brilliant. One quick follow-up if I could do on the Retail side of the business. You've talked about the price investment now largely being complete. What have been your learnings from that? I mean, do you see it as largely complete because you're now sort of within a price corridor that you seem comfortable with versus your competitors? And if so, sort of what is that?

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Yes, we say largely, we actually have a few things left to land and that's mainly down to range changes and things that we want to be able to plan new as well as price investments. So we are pretty much complete. I think our big learnings are our investments into Advanced Nutrition, whilst initially it was about being price competitive versus the new breed of competitor, I think it's actually -- it's been a gift that kept on giving because of trade-up factors, moves out of grocery into Advanced Nutrition and it's really strengthened performance in stores. That's something we're really, really pleased with. You're absolutely right that we have -- I think when you look at pricing, if you're really basic, you just look to a basic basket. We are significantly more sophisticated than that in terms of we align products to customer behavior and shopping visits. So in our world, we're very clear about those items where there is absolutely no price gap allowed at all because they're so important in basket drivers. Others where we will consciously go below competitors because we have capability in areas like Easy Repeat. And in other areas actually it's a similar item, but it's not always directly comparable and we think the quality of the item and the -- and what we've done to it justifies some form of premium. So whilst it will ultimately result in a price basket, which I think last time we talked was certainly less than 5% gap versus our most aggressive competitor with volume weighted, we actually tend to be much more sophisticated in its execution at lower level. And actually, that's how you've got to play it because we've got to think about individual customer types, breed types, so there are different drivers and we've -- thanks to VIP, we've been very, very targeted about those items and what they do to behavior and that's what we've really learned over the last year is those items that really make a difference. So our price investment has been challenging, but incredibly focused and we've learned and adapted as we worked our way through. So I'm really pleased with our level of sophistication in that area now.

[Operator]

Thank you. This concludes today's allocated time for Q&A session. I would now like to hand the call back over to you, Mr. Pritchard, for any additional or closing remarks.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

I'd like to thank you, everybody, this morning for your time. Clearly, if you have any other questions that you'd like to ask, please feel free to give Investor Relations a call and they'd be delighted to speak to you. But thank you for your time today, and have a good day.

[Operator]

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.