Investor Presentation October 2017 nemo2014\Presentations\Analyst - - PDF document

nemo2014\Presentations\Analyst Presentation Jan14\201401 Nemo Analyst Presentation Master-22nd Jan FINAL.pptx

Investor Presentation

October 2017

nemo2014\Presentations\Analyst Presentation Jan14\201401 Nemo Analyst Presentation Master-22nd Jan FINAL.pptx

Forward looking statements

Forward-Looking Statements 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.

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nemo2014\Presentations\Analyst Presentation Jan14\201401 Nemo Analyst Presentation Master-22nd Jan FINAL.pptx

Market

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nemo2014\Presentations\Analyst Presentation Jan14\201401 Nemo Analyst Presentation Master-22nd Jan FINAL.pptx Source: OC&C Strategy Consultants, refers to calendar years

£1.7bn £0.47bn £0.33bn £0.48bn £0.36bn £1.1bn £0.23bn £1.9bn £0.32bn

Pet market growth has accelerated, driven by faster pace in veterinary, insurance and accessories

£6.8bn

5% 7% 10% 2.5% 9% 5% 0% 1.5%

2014-16 CAGR

First Opinion veterinary Grooming Insurance Health & Hygiene Advanced Nutrition Treats Other food Other accessories

2016

Specialist veterinary referrals 10%

11%

Online participation

4% 7% 7.5% 1% 14% 8% 1% 1%

2012-14 CAGR

11% Total Market 4.5% 4%

4

9%

Source: OC&C 2017. Data refers to calendar years.

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Our total pet product market share has grown from 19% to 20% through 2014-2016

Vet Group Retail

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53% 21% 5% 13% 36% 36% 73% 64% 6% 14% 13% 17% 19% 15% 19% 7% 8% 13% 16% 12% 8% 9% 3% 21%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Advanced Nutrition Bridging Grocery Treats Accessories Market Share

Pets at Home Grocers Discounters Vets Pet Specialists Online (Specialists and Non-Specialists) Other Pets at Home Share Change 2014-2016

+2%

Pet product market share by player, 2016

+3% 0% +1% +2%

Source: OC&C 2017. Data refers to calendar years.

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Stores are an important part of future market growth. Bricks and mortar sales along with C&C expected to grow at 2.7% per annum

Vet Group Retail

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500 1000 1500 2000 2500 3000 3500 4000 4500 2016A 2021E Expected UK Pet Product Market Value (£bn.)

Bricks and Mortar Online Click and Collect Online Deliver to Home

Source: OC&C 2017. Data refers to calendar years.

c15% c11%

Online participation 0f pet market

Pet Products Market CAGR 2016-21 Total 3.0% Online Deliver to Home 5.3% Online Click and Collect 30.0% Bricks and Mortar 2.1%

2.7%

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The vet market continues to consolidate and we are one of three major players with leading market share

Vet Group Retail

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012 2014 2016 Market Share PAH JV CVS Medivet IVC Other

Source: OC&C 2017 and Pets at Home estimates

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Actual Estimated Mature Market Share PAH JV CVS Medivet IVC Other

Note: Data refers to calendar years, by estimated revenue per practice.

If all our existing practices were mature, estimated PAH share would be 18% PAH Vet Group has a 12% market share with a young practice estate

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Strategic overview

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Our Integrated Store: a unique combination of product, services and expertise under one roof

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More than just a pet shop … over 28% of customer revenues are spent on Services, with >£260m from our Vet Group

Vet Group Retail

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28% 72%

Vet and Grooming Services Retail Products

Pet products and services share of customer spend

Vet services include revenues generated by first opinion practices and specialist referral centres .

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Having an integrated product and services offering drives overall customer spend and frequency

Vet Group

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Store Only Store and Web Store & Web & Groomer Store & Vet & Web Store & Vet & Web & Groomer Spend per annum (£) Customer type Store Vet Online Groom £490 £339 £76 £- £- £396 £245 £295 £195 £125

VIP loyalty card data: average yearly spend of product and services customers

34 22 19 11 6

Customer Transactions per annum Services spend Store spend

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Why we are better together

Vet Group Retail

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A mature store with integrated services delivers an EBITDA uplift of 24% per square foot compared to a mature store without services Annual EBITDA £0.3m Annual EBITDA £0.5m

Note: Includes central cost allocation.

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We have invested to integrate services into over 54% of our

• stores. Few are mature, with significant profit maturity to come.

Retail

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FY17A FY18E FY19E FY20E FY21E FY22E FY23E 200 15

Note: An integrated store unit is defined as a store which incorporates a first opinion veterinary practice and a groom room

Number of mature integrated store units

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Our strategy is designed to maximise our competitive position and market opportunity

Price, innovation, services & advice

Vet practice maturity

Optimised Store & Services Rollout

Key Growth Drivers Drivers of Core Growth

Like For Like Space Margin VIP club members Omnichannel Vet Group

Private label mix

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Veterinary business

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Our core business is first opinion small animal veterinary practices, with recent extension into specialist referral care

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Vet Group Retail

438 practices at end FY17 289 in-store 149 standalone Covers all aspects of general small animal veterinary work: preventative care, emergency care, sick pet work Health plans 24/7 out of hours care Extended hours Own brand nutraceuticals Internal medicine Oncology Orthopaedic surgery Soft tissue surgery Neurology and neurosurgery Diagnostic imaging

First opinion practices Referral centres

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We have a shared ownership model which runs our businesses, creating loyalty & incentivising future growth

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First Opinion Joint Venture Partners Specialist Referral Shared Venture Partners

Typical number of partners / practice One Multiple Equity / capital value entitlement Partner has 100% Key clinicians have 5-25% Day to day management & influence

• JVP. Pets at Home Vet Group

provides business services SVPs & management supported by Pets at Home Vet Group Impact on Group financials PAH receive 15-17% of practice revenue plus other management fees, for which we provide business services. In-store practices also pay rent to PAH Practice revenue, costs & balance sheet are consolidated Partner share of practice dividend 100% 5-25% Typical timeframe partner chooses to sell 10 years + Minimum 4 years

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Our first opinion Joint Venture business model is unique in the UK veterinary market

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JV Partner PAH Vet Group

Own ‘A shares’: Entitlement to profit & capital gains Personal loan: c£30k Own ‘B shares’: Influence on key business decisions to protect Group Corporate loan: c£30k Working capital support Full salary paid from day 1 (average market rate) Right to all dividends after repayment of bank loan Capital gains at exit Receive fees of 15-17% of practice revenues plus

• ther management fees

Provide all back office functions & specialist business support (these are our operating costs) Provide working capital support when needed to support practice growth

JV Practice Commercial Bank

Small business loan: c£320k

Each practice is a separate company, jointly owned by the Vet Group & JV Vet Partner

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Our JV model has allowed us to maintain a strong opening track record and drive market beating growth in mature practices

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Source: OC&C; Internal data; Annual Reports of Other Corporate Players

Number of first opinion practices in-store (IS) and standalone (SA) Like-for-like growth of PAH practices compared with the market

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Looking to the future, we have increased our rollout forecast from 700 to 1000 practices

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Vet Group

Potential UK rollout has grown from 700 to 1000 practices following full review of UK practice potential All towns/areas assessed based on: Household numbers Key demographics Current vet saturation Drive times to our existing footprint Rollout view incorporates analysis from

• ur existing extensive estate

Current UK small animal vet market has c5000 practices 289 149 116 45 401 Existing Retrofit New 550 450 In-store Standalone

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We have four specialist referral centres and plans for further expansion and rollout to 10-15 across the UK

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locations of PAH primary opinion practices in-store or standalone

Northwest Veterinary Specialists Dick White Referrals Anderson Moores The Eye Vet

Expansion of existing locations also ongoing and planned: At Anderson Moores: Facility for radio-iodine treatment of cats with hyperthyroidism added 2016 Expanded from 4 to 8 consult rooms 2017 Expansion from 2 to 3 theatres planned At Dick White Referrals Future expansion of consultation space and surgical facilities Extending laboratory facilities At Northwest & Eye Vet New surgical facilities planned for 2017/18

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<1 Year 1-2 Years 3- 4 Years 5-6 Years 7-10 Years 10+ Years

We currently have a young first opinion practice network, where fee income grows significantly as practices mature

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Maturity of practice estate at FY17 year end

No practices

Fees to PAH as practices mature

Mature practices

Fees to PAH per practice

<1 Year 1-2 Years 3-4 Years 5-6 Years 7-10 Years 10+ Years

Mature practices

c100 c60 c50 c60 c100 c50

Note: Refers to Joint Venture practices only. Does not include any wholly owned Group Venture practices. Fees to PAH represent an annual percentage charge on customer revenue earned by the practice, and fixed management fees

£10k £95k £125k £145k £185k £65k

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£0m £25m £50m £75m £100m FY17a FY20e FY23e Fees from new openings & immature practices Fees from Mature Practices

As we roll out towards reaching 1000 practices, our fee income is expected to double

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Total fee income to PAH c50% expected increase from current fees Expected doubling

• f current fees

Note: Future rollout estimated at 40 practices per annum. Fee income forecasts are based upon the FY17 average fee income for practice cohorts as they age, shown on slide 20 and inflated at c1% per annum. Fees from mature practices includes those aged 7+ years

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£0 £40,000 £80,000 £120,000 £160,000 £200,000 <1 Year 1-2 Years 3- 4 Years 5-6 Years 7-10 Years 10+ Years Fees to PAH Incremental PAH costs per new practice opening

The mainly fixed Support Office costs mean that margin leverage is delivered as our first opinion practices mature

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Incremental costs are additional Support Office colleagues when the practice opens. Colleague costs will then grow at c5% per annum Total fee income and costs to PAH

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Overall Vet Group economics: there is an opportunity to significantly increase EBITDA both through maturation and rollout

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FY17a Current Vet Group (438 practices, 4 referral centres) MATURE Current Vet Group (438 practices, 4 referral centres) MATURE Full UK rollout Vet Group (700 practices, 4 referral centres) MATURE Full UK rollout Vet Group (1000 practices, 4 referral centres)

FY17a Current Vet Group 438 practices, 4 referral centres

Mature Current Vet Group2

438 practices, 4 referral centres

Mature 700 rollout Vet Group,3

700 practices, 4 referral centres

Mature 1000 rollout Vet Group3

1000 practices, 4 referral centres

1. Mature fee income forecasts for first opinion practices are based upon those for FY17 cohorts aged 10+years – with c1% inflation per annum. EBITDA does not include any central cost allocation for the Executive Management team or Pets at Home Group Head Office support. Referral centre revenue and EBITDA is assumed to remain flat from FY17 actuals 2. EBITDA to PAH assumes no additional colleagues required at Vet Group Support Office to support the existing practice base. Colleague costs are inflated at c5% per annum 3. EBITDA to PAH assumes additional colleagues are required at Vet Group Support Office to support new practice openings. New and existing colleague costs are inflated at c5% per annum

EBITDA1 to Pets at Home from the Vet Group c2x Today Today >3x Today c5x Today

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Retail business

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Our immediate strategic focus in retail is based around three key themes: value, competitive advantage and operational leverage

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Value Competitive Advantage Operational Leverage

Leveraging the value and quality of our private label premium foods Leveraging our points of difference Driving cost efficiencies Repositioning prices in branded economy and Advanced Nutrition foods Repositioning prices in everyday pet essentials

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100 120 140 160 180 200 220 Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17

We have seen a good response in demand elasticity since repositioning selected dog Advanced Nutrition prices

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Private label AN volume uplifts are exceeding the deflationary effect

Average price cut c20-30%

And whilst early days we are seeing the same in a branded AN line that we have repositioned

Note: Volumes compare the average uplift since price repositioning with a defined time period before repositioning

Average volume up >40%

Indexed volumes of dog AN private label since prices repositioned

Average price cut c30% Average volume up >70% 100 120 140 160 180 200 220 240 260 Apr 17 May 17 Jun 17 Jul 17 Aug 17

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And have made feeding a better diet more accessible than ever by narrowing the pricing gaps

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Branded grocery food Private label bridging food Private label natural Advanced Nutrition

39p per feed 41p per feed 61p per feed 4% meat* 24% meat* 27% meat*

Price per feed based on medium size dog 10-20kg * Refers to fresh meat and meat meal

Private label science Advanced Nutrition

68p per feed 37% meat*

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Order in-store is a differentiator that demonstrates the importance

• f stores and service from colleagues
• Colleagues have direct access to our full
• nline range through their PetPads
• Customer order can be completed in under

two minutes

• With the option to collect the product back

in-store or be delivered to home

We estimate c70% of Order in-store revenues are incremental Driven by sales of product lines from the extended online range

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nemo2014\Presentations\Analyst Presentation Jan14\201401 Nemo Analyst Presentation Master-22nd Jan FINAL.pptx Implied monthly spend on treatment

One treatment£4.50 One treatment

£6.50 Online price leader*

Multipack x4

£10.29 (£2.57 per treatment)

Multipack x6

£33.99 (£5.67 per treatment)

Note: Pricing is based on the implied monthly spend for a customer with 100% compliance for flea treatments. Based on medium dog 10-25kg.

• Excludes any delivery charge

Subscribe & Save gives superior convenience

The success of Subscribe & Save shows how we can leverage colleague advice and convenience

We have narrowed the pricing gap but we are not price leaders

• Pet owners need to treat for fleas every

month

• Standard option is to buy a multipack and

remember to treat

• Or Subscribe & Save, where a single

treatment is delivered to your home as a timely reminder

• We already have c100,000 active plans

since launch just over a year ago

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Omnichannel performance has been a core contributor to improved Merchandise trading momentum

Omnichannel sales now represent c6% of Merchandise revenues

Q1 FY16 Q1 FY17 Q1 FY18 Online order delivered to home Click & Collect Subscription Order in-store +54% +80%

45% 48% 60%

% of omnichannel revenues involving a store or colleague

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Pet partner for product & services Lifetime loyalty Build trust & love

We have recently launched a Golden Paws initiative aimed at building a long term relationship with new puppy owners

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Welcome Average basket value for Golden Paws customers is >30% higher than other puppy customers The free Advanced Nutrition consultation drives AN participation for Golden Paws customers to double that of other puppy customers VIP data insights

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Financials

Unless otherwise stated, the comparative period FY16 commentary refers to the unaudited 52 week period to 24th March 2016, to better reflect the underlying performance of the business

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JV vet practices Other services 1

55% 45%

Food Accessories

86% 14%

Pet Services (still immature) Merchandise Higher than Group Lower than Group

Group EBITDA margin hierarchy

Merchandise £716.7m Services £117.5m

Our statutory financials reflect the Joint Venture veterinary model where we earn a proportion of customer revenue

35 35

• 1. Includes revenue from specialist referral vet centres, grooming services revenue, live pet sales in our stores, and insurance income.

Services more profitable than Merchandise Pet services are 14% of revenue

40% 60%

Merchandise Services

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We have continued to show strong Services revenue growth reinforced by positive Merchandise momentum

£m Revenue FY17 Change Q1 FY18 Group Total 834.2 7.2% 256.5 5.0% Like-for-like 1.5% 2.7% Merchandise Food 395.1 3.3%

• Accessories

321.6 2.4%

• Total

716.7 2.9% 216.4 2.8% Like-for-like 0.8% 1.5% Services Total income from JV vet practices 47.1 24.6% 16.2 19.7% Other1 70.4 61.7% 23.9 18.3% Total 117.5 44.5% 40.1 18.8% Like-for-like 7.9% 10.5%

• 1. Includes revenue from wholly owned Group Venture vet practices & other veterinary income, including specialist referrals, grooming salons, live pet sales & insurance

commission

Unless otherwise stated, the comparative period FY16 commentary refers to the unaudited 52 week period to 24th March 2016, to better reflect the underlying performance of the business

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54.5% 54.2% 37bps 72bps

Merchandise Services

Our gross margin progression in Merchandise is offset by the mix impact of fast growing Services

Merchandise FY16 FY17 57.0% 57.6% Services FY16 FY17 33.0% 33.3% Food including Advanced Nutrition Selected pricing actions FX Mix shift from Omnichannel food sales First opinion vets Lower pet sales Specialist referrals New grooming salons Group gross margin bridge

54.5% []%

FY16 FY17

Unless otherwise stated, the comparative period FY16 commentary refers to the unaudited 52 week period to 24th March 2016, to better reflect the underlying performance of the business

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We have delivered strong cost control whilst investing in profitable growth

14.8%

Group Pre-Exceptional Operating Cost Bridge Excluding D&A, £m

Unless otherwise stated, the comparative period FY16 commentary refers to the unaudited 52 week period to 24th March 2016, to better reflect the underlying performance of the business

£-1.2 £3.0 £3.3 £1.0 £7.0 £8.9

Support Office Distribution Core Stores Omni-channel Vet Group New Stores

£299.3m £321.3m FY16 FY17

Operational Efficiency Investing in Growth

£304.4m

1.7% growth

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7.3% growth

m m m m m m

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And will continue to do so as we drive number of simplicity initiatives through the retail business to manage costs

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Targeting c£5m of cost savings in FY18 Reduction in store hours Energy cost management Simpler distribution Fewer promotional & ticket changes Simpler & improved pet care routines Move manual processes to digital Customer facing time not impacted LED lights Smart energy management systems Reduce SKU count & promo stocking cycles Fewer small item goods-out deliveries Reduce goods-in deliveries

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Our capital expenditure supports growth opportunities

Vet Group Retail

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4.8 4.4 7.1 14.1 5.3 4.9 10.0 7.2 9.0 13.6 12.9 16.8 10.9 10.3 11.5 6.4 5 10 15 20 25 30 35 40 45 50 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Capital Spend (£m)

Other including distribution, energy saving and specialist referral vets Business systems and omnichannel Refurbishment and retrofit New stores

£30 m £33 m £42 m £45 m £38-40m

Expected run rate

e e e e

£40-42m

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We are efficient in our management of trading working capital, whilst providing support to underpin vet practice growth

Unless otherwise stated, the comparative period FY16 commentary refers to the unaudited 52 week period to 24th March 2016, to better reflect the underlying performance of the business

£m FY16 movement FY17 movement Inventories (3.6) (5.0) Trade payables, other payables and provisions 9.3 11.5 Trade and other receivables 5.8 (1.6) Trading working capital 11.5 8.2 Operating loans to JV vet practices (6.5) (10.5) Working capital 5.0 (2.3)

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And we will continue to have good cash generation

1 Includes provisions movement 2 53 week audited financial period

Unless otherwise stated, the comparative period FY16 commentary refers to the unaudited 52 week period to 24th March 2016, to better reflect the underlying performance of the business

£m FY16 FY17 Change EBITDA 124.7 130.5 4.7% Non-Cash Share Based Payment Charges 3.0 2.5 Cash EBITDA 127.7 133.0 4.2% Working capital1 5.0

• 2.3

Operating cashflow 132.7 130.7

• 1.5%

Tax

• 14.8
• 19.3

30.2% Interest cost

• 5.3
• 4.2
• 21.1%

Capex

• 34.8
• 42.6

22.5% Free cashflow 77.8 64.6

• 17.0%

Conversion 62.4% 49.5% Leverage (ND:EBITDA) 1.3x2 1.2x

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Acquisition and investment capital is being deployed to our Vet Group and is delivering good growth and returns

43

Capital expenditure Acquisition capital Working capital Overall Vet Group delivering LFL customer revenue growth above market and CROIC above the Group average

Specialist referral centre expansion Potential organic development of new referral centres Mezzanine floors in-store to house practices Specialist referral centres Other vet market assets Support to First Opinion Joint Venture practices

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Our priorities for use of cash remain focused on growth

• pportunities

Strong balance sheet Leverage policy up to 1.5x ND:EBITDA, extending up to c1.75x for appropriate acquisitions

Organic investment

Ongoing programme currently focused on rollout & omnichannel strategies

Progressive dividend

Ordinary dividend policy around 50% of earnings

Invest for growth

Disciplined bolt-ons or investment in-line with strategy, aim to deliver returns ahead of our WACC1

Further shareholder returns

Surplus FCF returned

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• 1. Weighted Average Cost of Capital

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FY20 onwards Services maturity benefits evident FY19 Transition to positive Group profit growth

Financial outlook: a three year transition to lay the foundations for future growth and realise Services maturity benefits

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FY18 Reposition the Merchandise business

All financial guidance reconfirmed Price investment on track Operational cost savings delivery H2 weighted Increased working capital support for vet practice growth vs FY17 – overall Group working capital guidance for FY18 remains c£5m outflow Lower rollout of grooming salons expected at 20-30 practices On track to deliver FY in line with market expectations Through the majority of price repositioning Annualisation of FY18 investment Potential for further investment in selected areas Targeting Merchandise LFL above market levels and taking share Vet Group delivering ongoing high profit growth Continued operational cost savings action Continued above market growth in Merchandise Group operating margin expansion evident and supported by Vet Group maturation Group profit growth at high single digit levels

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Appendix

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Financial definitions

Like-for-like ‘Like-for-Like’ sales growth comprises total sales/fee revenue in a financial period compared to revenue achieved in a prior period, for stores, online operations, grooming salons, vet practices and referral centres that have been trading for 52 weeks. Free cashflow Free Cashflow is defined as 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 exceptional costs CROIC Represents cash returns divided by the average of gross capital (GCI) invested for the last twelve months. Cash returns represent pre- exceptional 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
• n the acquisition of the group by KKR (£906,445,000) plus net working capital plus capitalised rent being property rentals multiplied by

a factor of 8x. A multiple of 8 is the industry standard methodology.

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Rollout of 10 superstores, 40-50 vet practices and 40-50 grooming salons Group gross margin down 100-200 bps Which includes price investment and year-on-year FX impact Operational cost growth (excluding depreciation and amortisation) of 4.5-5.5%, Which includes cost from the step up in National Living Wage and Apprenticeship Levy, new store openings and operational cost savings Depreciation and amortisation £34–35m, weighted more to the H1 Net interest £4-5m Effective tax rate 20% Capital investment c£40-42m – includes the remainder of the one-off energy savings project at £3m Working capital outflow of around £5m to support vet practice growth Ordinary dividend payment maintained at least at the prior year level

FY18 guidance

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Accounting treatment of veterinary specialist referral centres

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Ownership of three referral centres ≥75% share owned by Pets at Home Remaining shares owned by selected clinician Shared Venture Partners (SVPs) PAH has option to buy SVP’s shares (from 3 yrs + after acquisition) Accounting requirement is the option is treated as a forward contract Specialist referral centre ownership is structured to incentivise growth Accounting treatment required 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 Non-underlying charge may be up to £2m in FY18