Pets at Home Group PLC

Earnings Release • Nov 27, 2018

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RNS Number : 5481I Pets At Home Group Plc 27 November 2018 FOR IMMEDIATE RELEASE, 27th NOVEMBER 2018 THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION Becoming the leading pet care specialist and returning to sustainable cashflow growth: interim financial results, strategic update and veterinary business review · UK pet care market remains resilient, growing at c3-4% · Pets at Home unique strategy winning with customers o Retail business H1 FY19 LFL growth of 4.7%#, taking market share o Vet practice H1 FY19 customer revenues growing at 15.4% · New strategy to become a complete pet care company · Taking action in our vet business to release cash profits and deliver more sustainable growth · Building the right leadership team to deliver, having recently appointed our Chief Data Officer, COO of Retail and CEO of the First Opinion vet business to our Executive Management Team · Group focus is to deliver sustainable free cashflow growth Comment from Peter Pritchard, Group Chief Executive Officer "Since becoming the Group CEO in May, I have had the opportunity to take stock of the wider group and shape my view of our future. What I have found fills me with confidence. Pets at Home is a healthy business and customers are loving what we do; responding to our price repositioning, investment in digital and the amazing service delivered by our vet partners. We have the ability to offer almost everything a pet owner needs, giving us opportunities our competitors simply don't have. Which is why my vision is to develop a complete pet care company, uniting our retail and vet businesses. Reviewing our Vet Group has been a priority. I recognise we have grown at pace and more recently, have seen the pressure that rising costs and our fees are placing on this young business. We will need to recalibrate the business to deliver more measured growth, whilst maintaining our plan to generate significant cash profits. We are focused on maximising our unique assets and delivering a plan for sustainable cashflow and profit growth. Given the success of the changes we have made in Retail, I'm confident we can do this." First Opinion vet business review: recalibrating the business to deliver sustainable returns We have completed a review of the First Opinion vet business, in recognition that the business' environment has evolved. Our findings have confirmed we are operating in a market growing at c5%, customer revenue growth is strong and we have a unique business model through shared ownership with Joint Venture Partners (JVPs). We also recognise the increasing cost pressures, including fees charged by Pets at Home, that certain practices are experiencing. We are taking action to put our business on a stronger long term footing and deliver significant cashflow. We have 471 practices, of which the majority have already achieved, or are expected to remain on track to reach maturity. With our JV practices, we plan to rebalance and simplify the fee structure, to allow practices to mature more swiftly and generate returns for both Pets at Home and JVPs. We will also offer to buy back and consolidate up to 55 practices from JVPs. Around 25 of these will be operated as company managed practices, whilst we will consider the options for the remainder, which may result in us proposing to close them. For all practices which we offer to buy back, JVPs will not be expected to repay outstanding borrowings to any parties and Pets at Home will settle any liabilities for third party bank loans and leases on behalf of the JVP. We expect this to result in total non-underlying income statement costs of up to £49m and non-underlying cash costs of up to £27m. Impact of future vet business actions on the interim financial statements For practices which we will offer to buy back from JVPs, fee income has not been recognised within Vet Group revenue. A non-underlying charge of £29.0m has been recognised against Vet Group, and Group, gross profit to provide for the balance of funding provided by Pets at Home, guaranteed bank and lease obligations, and the cost of additional operating cash outflows forecast to be incurred by the Group through to buy-out. Further costs, including closure costs if we decide to close practices, are expected to be provided during H2 FY19 and FY20. Interim financial results for the 28 week period from 30th March to 11th October 2018: £m H1 FY18 H1 FY19 YoY change LfL growth# Group revenue1 468.0 499.3 6.7% 5.3%2 Retail revenue 418.5 443.7 6.0% 4.7% Vet Group revenue1 49.5 55.6 12.3% 11.9%2 Underlying Group gross margin3 51.9% 50.3% (160) bps Group underlying profit before tax3,4,# 41.8 37.9 (9.3)% Group underlying free cashflow# 23.2 27.3 17.7% Group non-underlying charges3,4 (1.0) (29.9) NM Group statutory profit before tax 40.8 8.0 (80.5)% Dividend (p) 2.5 2.5 - 1. The fee income for practices which we will offer to buy back from JVPs has not been recognised within H1 FY19 total revenue, but remains within H1 FY18 total revenue (H1 FY18: £1.9m). For information, the fee income which has been removed from total revenue in H1 FY19 is £2.2m 2. The fee income for practices which we will offer to buy back from JVPs has not been recognised in either H1 FY19 or H1 FY18 LFL revenue 3. H1 FY19 non-underlying charges include £29.0m relating to a provision made against the balance of funding provided by Pets at Home, recognition of guaranteed third party liabilities, and the cost of additional operating cash outflows forecast to be incurred by the Group through to buy-out, for JV practices which we will offer to buy back from JVPs in the future (H1 FY18: £nil) 4. H1 FY19 non underlying charges include £0.9m 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 (H1 FY18: £1.0m) · VIP loyalty members are visiting more frequently and spending more, website traffic and conversion rates are up and we are welcoming new customers and vet practice clients · Retail performing strongly in-store and online with LFL growth of 4.7%# o Our price position on all comparable items is within 5% of online competitors, and where customers opt into a repeat delivery, our prices are c2% cheaper (correct as of 26/11/18) o Omnichannel revenues up 45.2% to £35.3m, supported by initiatives such as Easy Repeat delivery, subscription and Order-In-Store · Vet Group customer revenue growth of 15.4% and mature practices growing ahead of the market · Already delivering on our plan to unlock the combined strength of products and services o Recently launched the 'Pet Care Plan' initiative, which incentivises store colleagues to introduce customers to our vet practices and health plans Summary updated financial guidance (further detail on page 6) FY19 underlying Group financial guidance · Underlying FCF# of at least £55m (broadly flat y/y) and underlying PBT# of at least £80-85m · Intention to maintain final dividend per share at 7.5p (total dividend c£38m) FY19 and FY20 non underlying financial items relating to the Vet Group · Total non-underlying income statement charge of up to £53m: up to £42m in FY19 (of which £29.9m has been recognised in H1 FY19) and up to £11m in FY20. This includes the First opinion business recalibration and the previously guided accounting charge for Specialist Referral centres · Total non-underlying cash costs of up to £27m: up to £13m in FY19 and up to £14m in FY20 Results presentation A presentation for analysts and investors will be held today at 9:30am at Numis Securities Limited, The London Stock Exchange Building, 10 Paternoster Square, London EC4M 7LT, attendance is by invitation only. An audio webcast and statement of these results will be available at http://investors.petsathome.com Investor Relations enquiries Pets at Home Group Plc Amie Gramlick, Director of Investor Relations and Corporate Affairs Contact: +44 (0)161 486 6688 or irelations@petsathome.co.uk Media Enquiries Pets at Home Group Plc Gill Hammond, Head of Media and Public Affairs Contact: +44 (0)161 486 6688 or irelations@petsathome.co.uk Maitland/AMO Clinton Manning and Joanna Davidson Contact: +44 (0)20 7379 5151 or PetsAtHome-Maitland@maitland.co.uk About Pets at Home Pets at Home Group Plc is the UK's leading pet care business; our commitment is to make sure pets and their owners get the very best advice, products and care. Pet products are available online or from our 451 stores, many of which also have vet practices and grooming salons. Pets at Home also operates a UK leading small animal veterinary business, with 471 First Opinion practices located both in our stores and in standalone locations, as well as four Specialist Referral centres. For more information visit: http://investors.petsathome.com/ Disclaimer This statement of interim financial results does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Pets at Home Group Plc shares or other securities nor should it form the basis of or be relied on in connection with any contract or commitment whatsoever. It does not constitute a recommendation regarding any securities. Past performance, including the price at which the Company's securities have been bought or sold in the past, is no guide to future performance and persons needing advice should consult an independent financial adviser. Certain statements in this statement of interim financial results constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future plans and expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this statement. As a result you are cautioned not to place reliance on such forward-looking statements. Nothing in this statement should be construed as a profit forecast. Strategic update: becoming the best pet care business in the world We are positioned in the resilient £7bn UK pet care market, which is growing at c3-4%. Our vision is to maximise our unique assets to become a pet care business, delivered through a new strategy: Bring the pet experience to life · Optimise our store network, relocating or closing a small number of stores, accommodated by lease breaks or expiry · Put our pets centre stage · 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 Deliver 50% of sales from pet care services · Develop our stores of tomorrow, with more space dedicated to pet care and services, and a more engaging customer experience · Extend our subscription expertise into pet care plans, offering combination packages of products, vet care and grooming · Recalibrate our First Opinion vet business and realise free cashflow growth by accelerating maturity in existing practices · Grow our Specialist Referral business through existing hospitals and opening new centres Use our data to better serve customers · Connect customer data across the retail and vet businesses to deliver more personalised offers for customers · Give colleagues information to better serve customers at the point of sale · Utilise data across the business to drive strategic decision making and automation Set our people free to serve · Give our highly trained store colleagues more time with customers by removing inefficiencies and needless tasks · 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 Strategic review of interim results: already delivering our new plans The strength of trading performance reflects the steps we have taken to put the business on a stronger competitive footing and progress with our strategy to deliver complete pet care. We have seen growth and improvement across; existing retail customer spend and frequency, website traffic and conversion, vet practice new client registrations and health plan purchases, and the number of customers who purchase both products and services. In retail, price repositioning has continued and we are within 5% of our most competitive online peer on all comparable items. We are the same price when comparing the items that we believe really matter, and even cheaper if customers opt into 'easy repeat' delivery. (All price comparisons correct as of 26/11/18.) Subscription is a growing consumer trend where we are leading the way in the pet market, with 650,000 customers on a form of loyal subscription across our online, vet and grooming salon plans. The power of being 'together' for the customer has been demonstrated through the success of our VIP puppy club. The puppy club gives customers the benefit of combined offers across retail, grooming and vet practices, and has resulted in c185,000 puppy owners joining the club, which we believe is nearly 20% of the UK's annual new puppy population. Following such success, we have launched a similar plan for kitten owners. These initiatives show our ability to do the right thing for pets and win the loyalty of owners at the start of their lifetime journey. First Opinion veterinary business review Our veterinary business has experienced a sustained period of rollout, with more than 250 practice openings in the last five years. More recently, we recognise the business' environment is changing. An increasingly tight supply of veterinarians in the UK is putting upward pressure on salaries. This creates cost pressure in practices and constrains their growth, leading to increased levels of practice debt and a longer time to profitability. Pets at Home has experienced the need to support practices with more funding, eroding our cash profit and returns. We have therefore completed a full review of the business. Our review has confirmed that we are operating in a resilient market growing at c5% and customer revenue growth in nearly all practices remains strong and ahead of the market. We remain reassured that our shared ownership business model delivers competitive benefits to both Partners and Pets at Home. Through the review, we analysed the trading potential, cashflow projections and operational KPIs for all 471 First Opinion practices. It confirmed the vast majority are on target to reach profitability and repay liabilities within an appropriate time period, or have already reached a mature profitable status. However, there are a small number of Joint Venture practices where the fees charged by Pets at Home, when combined with the salary cost pressures they are experiencing, is limiting their ability to reach or retain profitability. Our review will lead to four areas of action with Joint Venture (JV) practices: i) Simplify and adjust the Joint Venture fee structure We expect the overall financial trajectory of most practices to remain in line with our plans. However, there is a need to rebalance the economics of the JV model, to allow practices to mature more swiftly and generate improved returns for both Pets at Home and JVPs. In the next financial year, FY20, we plan to simplify and adjust the fee structure for some practices. Through simplification, we will also create opportunities for efficiency at our central Support Office and enhance our business service levels to JVPs. ii) Operate some practices under a company managed model There are c25 JV practices where we believe their cashflows can no longer support the payment of fees under our current model, but have a viable profit pool if we were to own those practices outright. We will offer to buy back these practices from JVPs, starting the process in the current financial year, FY19, with the proposal of consolidating and operating them as company managed practices. Under this proposal, JVPs would not be expected to repay any outstanding borrowings to any parties, and Pets at Home will settle any liabilities for third party bank loans on behalf of the practice, should a buy back be completed. (NB. Pets at Home already operates 25 practices under a company managed model. This will bring the total company managed practices to around 50) iii) Consider some practice closures A small number of JV practices, in up to 30 locations, may not, we believe, be viable over the longer term. We have considered this in multiple contexts; does the practice location have the ability to generate sufficient client revenues, would practice cashflows generate a positive NPV, and whether the practice could now repay outstanding debts in a realistic time frame. We will offer to buy back these practices from existing JVPs, starting immediately. We will then consider the best option for that practice, which may result in us formulating a proposal to close them over the coming months. Under this proposal, JVPs would not be expected to repay any outstanding borrowings to any parties and again, Pets at Home plans will settle any liabilities for third party bank loans and leases on behalf of the practice, should a buy back be completed. iv) Slow rollout to focus on existing portfolio During FY19, practice rollout is expected to be up to 20 new openings. Following this year, rollout will be up to 10 practices per year, working towards a new rollout target of up to 700 practices across the UK. This enables us to focus attention on the existing practices and grow in a sustainable manner against a backdrop where veterinarian shortages are likely to persist. The actions we are taking will accelerate the path to profitability and cash returns to JVPs. For Pets at Home, we will see a decline in the working capital required to support our vet practices and a clearer path to maturity, whilst we will benefit from improved cashflow by closing practises that are unprofitable and consuming cash. We expect the Vet Group to generate underlying FCF in FY19, which is broadly flat year on year, subsequently growing at a high single digit CAGR over the next 2-3 years. Over a longer time, as our practices mature, we would expect our existing practice base to generate FCF for Pets at Home up to £60m. Updated financial guidance Underlying financial guidance £m FY19 FY20 Comments Vet Group Total revenue £110-120m Slight growth y/y Fee income from JV practices £60-65m Consolidated revenue from company managed First Opinion practices, Specialist Referral centres and other Vet Group revenue £50-55m Underlying EBIT# £30-33m Slight decline y/y FY19 includes a core provision of c£3m against funding made by PAH to practices remaining as JVs Total non-underlying items# Up to £42m Up to £11m Of the expected non-underlying items in FY19, £29.9m has already been recognised in H1 FY19 Underlying free cashflow# £10-13m Slight growth y/y FY19 includes a cash outflow of operating loans to practices remaining as JVs of c£10-12m Gross balance of funding liabilities c£70-75m Reduction y/y Includes all funding from PAH to JV practices: incl. gross balance of operating loans (£45-50m), initial practice setup investments & any other loans Pets at Home Group Underlying Group PBT £80-85m Slight decline y/y Underlying Group free cashflow At least £55m Slight growth y/y Leverage (net debt: underlying EBITDA) c1x c1x Non-underlying financial items · Non-underlying cost to the income statement of up £53m, of which we expect £42m in FY19 (of which £29.9m has been recognised in H1 FY19) and £11m in FY20 o Non-underlying costs of up to £40m in FY19 and up to £9m in FY20, related to practices which we will offer to buy back from JVPs. This includes the full provision for practice funding owed to Pets at Home by Joint Venture practices, funding liabilities transferred to Pets at Home from third party lenders and landlords and, should we decide to close any practices, closure costs during H2 FY19 and FY20 o Of which £1-2m in FY19 and £1-2m in FY20 relates to the accounting treatment of the minority stakes owned by vet partners in the Specialist Referral centres, as previously guided · Non-underlying cost to the cashflow statement of up £27m, of which we expect £13m in FY19 and £14m in FY20, which largely reflects the repayment of third party bank loans and any other liabilities, including closure costs, for practices we will offer to buy back from JVPs Financial review of interim results H1 FY19 represents the 28 week period from 30th March to 11th October 2018. The H1 FY18 accounting period represents the 28 week period from 31st March to 12th October 2017. The Group's results are shown as two segments that represent the size of the respective businesses and our new internal reporting structures; Retail (includes products purchased online and in-store, pet sales, grooming services and insurance products) and Vet Group (includes our First Opinion practices and Specialist Referral centres). Financial Key Performance Indicators £m H1 FY18 H1 FY19 YoY change Group Like for like revenue growth1, # 3.9% 5.3%2 Retail 2.8% 4.7% Vet Group1 16.7% 11.9%2 Group revenue (£m)1 468.0 499.3 6.7% Retail 418.5 443.7 6.0% Vet Group1 49.5 55.6 12.3% Group underlying gross margin3 51.9% 50.3% (160) bps Retail 52.2% 51.0% (129) bps Vet Group3 49.4% 45.5% (393) bps Group underlying EBIT3,4,# (£m) 44.1 39.8 (9.7)% Retail 31.0 29.4 (5.3)% Vet Group3,4 16.3 13.7 (16.2)% Group underlying EBIT margin3,4,# 9.4% 8.0% (145) bps Retail 7.4% 6.6% (79) bps Vet Group 3,4 32.9% 24.6% (835) bps Group Underlying PBT3,4,# (£m) 41.8 37.9 (9.3)% Group non-underlying charges2 (£m) (1.0) (29.9) NM Group Statutory PBT (£m) 40.8 8.0 (80.5)% Underlying basic EPS3,4,# (p) 6.7 6.1 (8.3)% Statutory basic EPS (p) 6.5 1.2 (80.8)% Dividend (p) 2.5 2.5 0.0% Underlying free cashflow# (£m) 23.2 27.3 17.7% CROIC# 19.4% 18.3% (115) bps Leverage (Net debt / underlying EBITDA#) 1.2x 1.1x 1. The fee income for practices which we will offer to buy back from JVPs has not been recognised within H1 FY19 total revenue, but remains within H1 FY18 total revenue (H1 FY18: £1.9m). For information, the fee income which has been removed from total revenue in H1 FY19 is £2.2m 2. The fee income for practices which we will offer to buy back from JVPs has not been recognised in either H1 FY19 or H1 FY18 LFL revenue 3. H1 FY19 excludes £29.0m relating to a provision made against all funding provided by Pets at Home, recognition of guaranteed third party liabilities, and the cost of additional operating cash outflows forecast to be incurred by the Group through to buy-out for JV practices which we will offer to buy back from JVPs in the future (H1 FY18: £nil). This has been charged against Vet Group, and Group, non-underlying gross profit 4. H1 FY19 excludes £0.9m 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 (H1 FY18: £1.0m). This has been charged against Vet Group, and Group, operating costs 5. Group underlying EBIT includes central costs of £3.2m in H1 FY19 (H1 FY18: £3.2m) Operational Key Performance Indicators H1 FY18 FY18 H1 FY19 Number of stores 450 448 451 Number of vet practices (total)1 447 461 471 Standalone 151 152 155 In-store 296 309 316 Number of grooming salons 301 309 313 % stores with a vet practice & grooming salon 55% 58% 59% VIP Club active members2 (m) 3.8 3.9 4.0 VIP swipe as % revenue3 69% 69% 70% 1. Includes both Joint Venture (JV) practices and practices which are company owned and managed 2. Active defined as customers who have purchased during the past twelve months 3. Average swipe rate of the card at store tills over latest quarterly period Impact of future vet business actions on the interim financial statements As part of the recalibration of the First Opinion vet business, we will offer to buy back up to 55 practices from Joint Venture Partners (JVPs) over the coming months. In recognition of these plans, the following principles have been applied to the interim financial statements: · No fee income for those practices has been recognised within the total Vet Group, and Group, income statements for H1 FY19. For information, the fee income generated by those practices in H1 FY19 would have been £2.2m (H1 FY18: £1.9m). (Please refer to the financial statements Note 2 for more detail.) · For the purposes of the like-for-like revenue growth calculation, the fee income for this group of practices has been removed from both H1 FY19 and the prior year H1 FY18 period. · For those practices, a non-underlying charge of £29.0m has been recognised against Vet Group, and Group, gross profit to provide for the balance of funding provided by Pets at Home, guaranteed bank and lease obligations, and the cost of additional operating cash outflows forecast to be incurred by the Group through to buy-out. Further costs, including closure costs if we decide to close practices, are expected to be provided during H2FY19 and FY20. · For all remaining practices which we intend to retain as Joint Ventures in the future, we have continued to recognise all fee income within the Vet Group, and Group, income statements. We have also continued to provide, on an expected credit loss basis, against funding made by Pets at Home to those practices. This group of Joint Venture practices currently has a balance of operating loan funding from Pets at Home of £30.6m, against which we adopt a core provision of £6.7m. This provision has increased by £2.5m since FY18 year end, and is reflected as an underlying charge against gross profit to the Vet Group, and Group, income statements. Revenue Group revenue in H1 FY19 grew 6.7% to £499.3m (H1 FY18: £468.0m) and like-for-like (LFL) revenues grew 5.3%#. Retail revenues grew 6.0% to £443.7m (H1 FY18: £418.5m), including omnichannel revenue growth of 45.2% to £35.3m. LFL revenue growth was 4.7%#. Food revenues grew by 8.1% to £237.8m (H1 FY18: £220.0m), reflecting good performance in dog Advanced Nutrition (AN) and bridging food lines, as well as dog treats. AN revenues overall grew 9.7% to £108.7m (H1 FY18: £99.0m). Accessories revenues grew 3.9% to £183.6m (H1 FY18: £176.8m) where we saw particular strength in categories such as travel & training, cat litter and health & hygiene. Vet Group revenues grew 12.3% to £55.6m (H1 FY18: £49.5m), with LFL growth of 11.9%#. Revenues from the Specialist Referral centres grew 8.1% to £19.7m (H1 FY18: £18.2m). We also saw strong growth in customer generated revenues in our First Opinion practices, up 15.4% to £166.8m (H1 FY18: £144.5m). This led to our fee income increasing by 7.4% to £30.0m (H1 FY18: £28.0m). We have not recognised fee income of £2.2m in H1 FY19 for the practices which we will offer to buy back from JVPs in the future, and will continue with this approach until such time any buy back takes place. The fee income from those practices was recognised in full in the prior year period, H1 FY18, at £1.9m. (Please refer to the financial statements Note 2 for more detail.) Gross margin Group underlying gross margin declined by 160 bps to 50.3%# (H1 FY18: 51.9%). Underlying (and non-underlying) gross margin within Retail was 51.0%, a reduction of 129 bps over the prior year (H1 FY18: 52.2%), in line with our plans. This mainly reflects our price repositioning activities, where we invested a further £4m during the period, and the continued growth of our omnichannel business which has a greater mix of food product versus higher margin accessories. Underlying gross margin within the Vet Group decreased by 393 bps to 45.5%# (H1 FY18: 49.4%). This decline was largely driven by the non-recognition of fee income totalling £2.2m for practices which we will offer to buy back from JVPs in the future. In addition, there was a charge of £2.5m to the core provision held against funding provided to all other First Opinion JV practices (H1 FY18: £0.4m). Core provision refers to our underlying provisioning approach and methodology to practices which we intend to retain as JV practices in the future. In accordance with IFRS9, this is based on an assessment of various risk factors impacting the deemed recoverability of such amounts, and this is charged against underlying gross profit. Non-underlying Group gross margin was 44.5%# (H1 FY18: 51.9%) and non-underlying Vet Group gross margin was (6.7)% # (H1 FY18: 49.4%). This reflects a provision of £29.0m (H1 FY18: £nil), relating to all Pets at Home funding, and recognition of bank and lease obligations as detailed above, relating to those practices which we will offer to buy back from Joint Venture Partners in the future. Operating profit and operating costs Underlying Group EBIT was £39.8m# (H1 FY18: £44.1m), with a margin of 8.0%# (H1 FY18: 9.4%). Underlying Retail EBIT was £29.4m# (H1 FY18: £31.0m) with a margin of 6.6%# (H1 FY18: 7.4%) and operating cost growth, excluding depreciation and amortisation, of 4.6% to £178.6m. A key driver of margin dilution was a charge relating to lease costs for stores vacated during the period of £1.6m. Occupation costs (rent, service charges and other costs) again declined as a percentage of sales as we benefit from the rental and other occupancy costs paid by vet practices within our stores, which contributed £6.8m during the half (H1 FY18: £6.2m). Colleague costs also declined as a percentage of sales, resulting from further streamlining of store colleague hours during the period. We continue to invest in our omnichannel offering and business systems required to deliver the quality in-store experience and reflect the growing importance of digital channels. Depreciation and amortisation in Retail increased 7.7% to £18.2m (H1 FY18: £16.9m). Underlying Vet Group EBIT in the first half was £13.7m# (H1 FY18: £16.3m) with a margin of 24.6% (H1 FY18: 32.9%). Operating costs in the Vet Group, excluding depreciation and amortisation, were £10.4m (H1 FY18: £7.0m). The growth was primarily driven by one-off project costs incurred during the period in relation to the review of the veterinary business, together with an associated increase in Vet Group colleague and IT related costs, as we ensure the central functions which provide services to practices have the appropriate resource and capabilities. Depreciation and amortisation in the Vet Group increased 5.2% to £1.2m (H1 FY18: £1.1m). In addition to the operating cost growth, the non-recognition of fee income for practices which we will offer to buy back from JVPs in the coming months had a dilutive impact on underlying Vet Group EBIT margin. Central costs, including IFRS2 charges, Group overheads and colleagues, remained flat at £3.2m (H1 FY18: £3.2m). Non-underlying costs of £0.9m# (H1 FY18: £1.0m) were recognised in relation to the ownership structures and accounting treatment of the veterinary Specialist Referral centres. Two of our four centres are structured as a Shared Venture ownership model, where Pets at Home maintains a minimum 75% controlling share, with the remaining shares owned by multiple Shared Venture Partners (SVPs). Pets at Home has an option to buy the SVP shares in the future, with the value of these shares related to profit performance targets. The accounting treatment of such an option is therefore structured as a forward contract. Within the income statement, the discounted future value of the SVP's shares is recognised as an expense over the period to which the option can be exercised, and recognised as a non-underlying expense. Finance expense Net finance expense for the half year period was £2.0m, a reduction from the prior year (H1 FY18: £2.4m) as a result of a favourable interest rate swap. During the period, we successfully completed a Group refinancing, with the new facility providing access to £248m across seven lenders. Based on current leverage, this facility attracts a margin of 1.4% above LIBOR. Taxation, net income & EPS Underlying pre tax profit was £37.9m# (H1 FY18: £41.8m) and statutory pre tax profit, including all non-underlying items, was £8.0m (H1 FY18: £40.8m). Underlying total tax expense for the period was £7.3m#, a rate of 19% on underlying pre tax profit. Underlying profit for the period, after tax, was £30.6m# (H1 FY18: £33.4m) and underlying basic earnings per share were 6.1 pence#, (H1 FY18: 6.7 pence). Statutory basic earnings per share were 1.2 pence (H1 FY18: 6.5 pence). Cash working capital The cash movement in trading working capital for H1 FY19 was an inflow of £5.7m#. This comprised of a £4.9m increase in inventory, offset by a £13.3m increase in payables and a £2.7m decrease in receivables. We continued to support First Opinion veterinary practices with an additional £8.9m of cash operating loan funding, in line with our guidance. This lead to an overall Group cash working capital outflow of £3.2m. The gross value of operating loans at the end of the period was £46.9m (H1 FY18: £30.9m), against which a total provision of £23.0m is held (H1 FY18: £3.0m). This is comprised of: i) a core provision of £6.7m against a £30.6m balance of operating loans for practices which we plan to continue operating as Joint Ventures, and ii) a full provision of £16.3m against the £16.3m balance of operating loans for practices which we will offer to buy back from JVPs in the future. Capital investment Capital investment was £17.3m (H1 FY18: £24.0m), where £3.3m is represented by the retrofit of services into our existing store estate (H1 FY18 £7.5m), new store capital investment totalled £4.3m (H1 FY18: £5.0m) and investment in business systems totalled £4.7m (H1 FY17: £4.8m). Cash capital expenditure was £20.3m (H1 FY18: £25.8m). Underlying free cashflow Group underlying free cashflow (FCF) after interest, tax and before acquisitions increased to £27.3m# (H1 FY18: £23.2m), representing a cash conversion rate of 44.6%# (H1 FY18: 35.9%). The increase in FCF when compared with the prior year is driven by a reduced capital expenditure and smaller purchase of shares required to satisfy colleague stock option schemes, offset by a working capital outflow together with one-off costs incurred with the Group refinancing successfully completed during the period. Underlying free cashflow# (£m) H1 FY18 H1 FY19 Underlying cash EBITDA1,# 64.5 61.2 Cash working capital# 0.6 (3.2) Operating loan provision movement (0.3) 2.5 Tax (9.7) (8.4) Interest (2.2) (1.3) Debt issue costs - (1.8) Capex (25.7) (19.9) Purchase of own shares to satisfy colleague options (4.0) (1.8) Underlying free cashflow 23.2 27.3 1. Defined as underlying EBITDA# plus IFRS2 share based payment charges (H1 FY18: £2.3m, H1 FY19: £2.0m) H1 FY19 Group underlying free cashflow# (£m) Underlying FCF (£m) FCF conversion Retail 30.6 64.5% Vet Group 4.5 30.0% Central (7.8) (271.7)% Group underlying free cashflow 27.3 44.6% The Group's net debt position at the end of the half year period was £134.8m, which represents a leverage ratio of 1.1x underlying EBITDA. £m FY18 H1 FY19 Opening net debt (153.7) (135.2) Underlying free cashflow# 55.8 27.3 Ordinary dividends paid (37.3) (24.8) Acquisitions - (2.1) Closing next debt (135.2) (134.8) Leverage (Net debt/underlying EBITDA#) 1.1x 1.1x Capital allocation Our capital allocation policy prioritises investing 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. Our second priority is to maintain an ordinary dividend payment at around 50% of underlying basic earnings per share. Finally, dependent upon our acquisition outlook, and should we not foresee any alternative investment uses, it is our intention to return surplus free cashflow to shareholders in the form of a special dividend or share buyback. Dividend The Board has declared an interim dividend of 2.5 pence per share, equal with the prior year. The interim dividend will be payable on the 11th January 2019 to shareholders on the register at the close of trading on 7th December 2018. Impact of the UK's exit process from the EU We continue our work to assess and mitigate the likely impact of the United Kingdom's exit from the European Union (EU). Given the range of possible scenarios it is impossible for us to be specific, however, we are reviewing five aspects in particular: 1) Consumer demand - we recognise the retail market for pet care, despite historical resilience, may change, so we intend to remain vigilant to signs that consumer demand is being affected, so that we may seek to respond appropriately and expediently. 2) Border delays - around 17% of our cost of goods sold are imported from outside the UK. Although Food and Accessories are unlikely to 'spoil' as a result of any border delays, there is a risk that our supply chain becomes longer and there may be additional administrative and other cost burdens. 3) We do not currently expect to see a material tariff impact, as the majority of our products are imported from outside the EU. 4) Exchange rates - the exit process may prompt movements in the USD/GBP exchange rate. The Group purchases products from Asia to a value of around US$70m each year. Our policy is to use a mix of foreign exchange forward contracts to hedge our USD requirement and we have now increased our hedging period to cover the next 18 months, to give us increased time to respond to any such adverse trends. Our hedging requirements for FY19 are in place at an average rate of 1.35 USD:GBP, which had a positive impact of around £0.7m during the period. We expect a further gain of around £1.1m in the second half of FY19, and based on our current forward contracts, we expect no material foreign exchange impacts for FY20. 5) A significant number of colleagues, particularly within our Vet Group and distribution centres, are non-UK EU nationals. Brexit may result in changes to UK immigration policy which increases the risk around the availability, recruitment and retention of these individuals. We are working closely with professional bodies including the Royal College of Veterinary Surgeons and the British Veterinary Association and support them in their calls on Government to formally recognise the shortages of veterinary surgeons across all disciplines, particularly in light of restrictions on free movement for EU nationals following Brexit. We will continue our preparations for all likely process outcomes as part of our regular risk mitigation process, until the UK and EU's path forward is clear. Disclaimer This statement of interim financial results does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Pets At Home Group Plc shares or other securities nor should it form the basis of or be relied on in connection with any contract or commitment whatsoever. It does not constitute a recommendation regarding any securities. Past performance, including the price at which the Company's securities have been bought or sold in the past, is no guide to future performance and persons needing advice should consult an independent financial adviser. Certain statements in this statement of interim financial results constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future plans, expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this statement of interim financial results. As a result you are cautioned not to place reliance on such forward-looking statements. Nothing in this statement should be construed as a profit forecast. Risks and Uncertainties An effective risk management process has been adopted to help the Group achieve its strategic objectives and enjoy long term success. The Group's risk management policies and processes, together with the Group's principal operational and financial risks and the measures being taken to mitigate and manage these risks, remain as described on pages 32 to 37 of the annual report for the year ended 29 March 2018 which is available at http://investors.petsathome.com. These include: · Protecting our brand and reputation · Competition with other retailers and vet practices, including other pet specialists, supermarkets, discounters, and online retailers · Services and stores expansion and rollout, including factors impacting on the Group's ability to drive maturity in its First Opinion vet business · Recruiting, retaining and developing engaged colleagues · Keeping core business systems up to date and with the capability to support the Group's growth plans and ensuring information and data security · Supply chain and sourcing risk · Liquidity and credit risk · Treasury and financial risk from exposure to US dollar fluctuations, in respect of goods sourced from Asia · Regulatory and compliance risk · Extreme weather, where prolonged unusual weather patterns can impact footfall to stores Responsibility Statement We confirm that to the best of our knowledge: · the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; · the interim management report includes a fair review of the information required by: (a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first 28 weeks of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining 24 weeks of the year; and (b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. By order of the Board on 26 November 2018 Peter Pritchard, Group Chief Executive Officer and Mike Iddon, Group Chief Financial Officer # Alternative Performance Measures (APMs) are defined and reconciled to IFRS, where possible, on page 17 INDEPENDENT REVIEW REPORT TO PETS AT HOME GROUP PLC Conclusion We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the 28 weeks ended 11 October 2018 which comprises the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity, condensed consolidated statement of cash flows and the related explanatory notes. Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 28 week period ended 11 October 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. The annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU. Our responsibility Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. The purpose of our review work and to whom we owe our responsibilities This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. Nicola Quayle for and on behalf of KPMG LLP Chartered Accountants 1 St Peter's Square Manchester M2 3AE November 2018 Alternative Performance Measures ("APMs") Guidelines on Alternative Performance Measures (APMs) issued by the European Securities and Markets Authority came into effect for all communications released on or after 3 July 2016 for issuers of securities on a regulated market. In the reporting of financial information, the Directors have adopted various APMs of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS). The Directors measure the performance of the Group based on the following financial measures which are not recognised under EU-adopted IFRS, and consider these to be important measures in evaluating the Group's strategic and financial performance. The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. APMs are also used to enhance the comparability of information between reporting periods, by adjusting for non-underlying items to aid the user in understanding the Group's performance. Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year. All APMs relate to the current period's results and comparative periods where provided. A full glossary of APMs is included in the most recent Annual Report & Accounts. The key APMs used by the Group are: '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 & specialist referral centres that have been trading for 52 weeks or more, excluding fee income from Joint Venture practices which the Group will offer to buy back from Joint Venture Partners in the future. Omni-channel revenue: Revenue net of discounts and VAT from core online sales, subscriptions and order to store. EBITDA: Earnings before interest, tax, depreciation & amortisation. Free Cash Flow: Net cash from operating activities, after tax, less net cash used in investing activities (excluding acquisitions), less interest paid & debt issue costs. CROIC: 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 pre-non-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. Non-underlying items: Certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group. References to Underlying GAAP measures and Underlying APMs throughout the interim statements are measured before the effect of non-underlying items. Alternative Performance Measures ("APMs") (continued) APM Definition Reconciliation Cash EBITDA Underlying EBITDA (see below) adjusted for share based payment charge. Cash EBITDA (£m) HY18 HY19 Note Underlying EBITDA 62.2 59.2 Share based payment charge 2.3 2.0 3 Cash EBITDA 64.5 61.2 CROIC 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 pre-non-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. CROIC HY18 HY19 Note Cash returns: Underlying operating profit 96.9 84.5 Property rental costs 74.3 76.5 Share based payment charges 3.0 3.6 172.2 164.6 Effective tax rate 20% 20% Tax charge on above (34.4) (32.9) 137.8 131.7 Depreciation and amortisation 32.2 35.8 Cash returns 170.0 167.5 Gross capital invested (GCI): Gross property, plant and equipment 253.6 275.4 8 Intangibles 1,010.3 1,020.9 9 Less KKR goodwill (906.4) (906.4) Investments 12.1 15.1 Net working capital (87.0) (108.5) see definition Capitalised operating leases 594.6 612.0 8x GCI 877.2 908.5 Average 877.0 917.6 Cash returns/average GCI 19.4% 18.3% Underlying EBITDA Earnings before interest, tax, depreciation and amortisation before the effect of Non-underlying items in the period. Underlying EBITDA (£m) HY18 HY19 Note Statutory operating profit 43.1 9.9 Depreciation and amortisation 18.0 19.4 3 Non-underlying items 1.0 29.9 3 Underlying EBITDA 62.2 59.2 Underlying free cash flow Net cash from operating activities, after tax, less net cash used in investing activities (excluding acquisitions), less interest paid & debt issue costs before the effect of Non-underlying items in the period. Underlying free cash flow (£m) HY18 HY19 Note Underlying free cash flow 23.2 27.3 Dividends (24.9) (24.8) CFS Acquisition of subsidiary 0.0 (2.1) CFS Loans issued (0.9) 0.0 CFS Proceeds from new loan 0.0 195.1 CFS Repayment of borrowings (3.0) (195.0) CFS Net increase in cash (5.6) 0.5 CFS = Consolidated Statement of Cash Flows Alternative Performance Measures ("APMs") (continued) Like-for-like 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 & specialist referral centres that have been trading for 52 weeks or more, excluding fee income from Joint Venture practices which the Group will offer to buy back from Joint Venture Partners in the future. Not applicable. Underlying basic EPS Underlying basic earnings per share (EPS) is based on earnings per share before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group. Underlying basic EPS (p) HY18 HY19 Note Underlying basic EPS 6.7 6.1 Non-underlying items (0.2) (4.9) 4 Basic earnings per share 6.5 1.2 Underlying operating profit Underlying operating profit is based on operating profit before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group. Underlying operating profit (£m) HY18 HY19 Note Underlying operating profit 44.1 39.8 Non-underlying items (1.0) (29.9) 3 Operating profit 43.1 9.9 Underlying profit before tax Underlying profit before tax (PBT) is based on pre-tax profit before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group. Underlying PBT (£m) HY18 HY19 Note Underlying PBT 41.8 37.9 Non-underlying items (1.0) (29.9) 3 PBT 40.8 8.0 Underlying profit after tax Underlying profit after tax (PAT) is based on post tax profit before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group. Underlying PAT (£m) HY18 HY19 Note Underlying PAT 33.5 30.6 Non-underlying items (1.0) (24.4) PAT 32.5 6.2 Underlying total tax expense Underlying total tax expense is based on the statutory tax expense for the period (being the net of current and deferred tax) before the impact of certain costs of incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group. Underlying total tax expense (£m) HY18 HY19 Note Underlying tax expense 8.2 7.3 Non-underlying items - (5.5) 5 Tax expense 8.2 1.7 Alternative Performance Measures ("APMs") (continued) Working capital Working capital movement is a measure of the cash required by the business to fund its inventory, receivables and payables. The change year on year reflects the cash in/outflow in relation to changes in the working capital cycle excluding Non-underlying items. The change in working capital is a key component of the free cash flow measure of the Group. Net working capital (£m) movement HY18 HY19 Note Net working capital 0.5 (3.2) Being: Movement in trade and other receivables (3.6) 6.5 CFS Movement in inventories (6.8) (4.9) CFS Movement in trade and other payables 11.7 13.7 CFS Excluding movement relating to Non-underlying items (0.8) (20.1) Movement in provisions 0.0 14.0 CFS Excluding movement in provision relating to Non-underlying items 0.0 (12.4) Net working capital 0.5 (3.2) CFS = Consolidated Statement of Cash Flows Net working capital HY18 HY19 Note Receivables 73.2 69.2 Inventory 63.2 65.4 Trade and other payables (incl Corporation Tax) (221.5) (226.1) Provisions (0.5) (13.9) Non-current provisions (1.4) (3.1) Net working capital (87.0) (108.5) Trading working capital Working capital before increase in gross operating loans to Joint Venture practices (£m) HY18 HY19 Note Net working capital (above) 0.5 (3.2) Loans and borrowings 7.8 8.9 13 Trading working capital 8.3 5.7 Omni-channel revenue Revenue net of discounts and VAT from core online, sales, subscriptions and order to store. (£m) HY18 HY19 Note Omnichannel revenue 24.3 35.3 Underlying EBIT Earnings before interest and tax agreed to operating profit relating to underlying trading. (£m) HY18 HY19 Note Operating profit relating to Underlying trading (EBIT) 44.1 39.8 Retail Underlying EBIT Earnings before interest and tax agreed to operating profit relating to underlying trading for the Retail division. (£m) HY18 HY19 Note Retail operating profit relating to Underlying trading (EBIT) 31.0 29.4 Vet Group Underlying EBIT Earnings before interest and tax agreed to operating profit relating to underlying trading for the Vet Group Division. (£m) HY18 HY19 Note Vet Group operating profit relating to Underlying trading (EBIT) 16.3 13.7 Net Debt Cash and cash equivalents less loans and borrowings (£m) HY18 HY19 Note Cash and cash equivalents 50.7 60.3 Loans and borrowings (207.0) (195.1) 11 Net Debt (156.3) (134.8) Condensed consolidated income statement Note 28 week period ended 11 October 2018 28 week period ended 12 October 2017 Underlying trading £000 Non-underlying items (note 3) £000 Total £000 Underlying trading £000 Non-underlying items (note 3) £000 Total £000 Revenue 2 499,345 - 499,345 468,014 - 468,014 Cost of sales (247,935) (29,030) (276,965) (224,907) - (224,907) Gross profit 251,410 (29,030) 222,380 243,107 - 243,107 Selling and distribution expenses (168,138) - (168,138) (163,842) - (163,842) Administrative expenses (43,450) (880) (44,330) (35,150) (966) (36,116) Operating profit 3 39,822 (29,910) 9,912 44,115 (966) 43,149 Financial income 463 - 463 330 - 330 Financial expense (2,415) - (2,415) (2,700) - (2,700) Net financing expense (1,952) - (1,952) (2,370) - (2,370) Profit before tax 37,870 (29,910) 7,960 41,745 (966) 40,779 Taxation 5 (7,254) 5,516 (1,738) (8,269) - (8,269) Profit for the period 30,616 (24,394) 6,222 33,476 (966) 32,510 All activities relate to continuing operations. Basic and diluted earnings per share attributable to equity shareholders of the Company: Note 28 week period ended 11 October 2018 28 week period ended 12 October 2017 Equity holders of the parent - basic 4 1.2p 6.5p Equity holders of the parent - diluted 4 1.2p 6.5p Condensed consolidated statement of comprehensive income 28 week period ended 11 October 2018 £000 28 week period ended 12 October 2017 £000 Profit for the period 6,222 32,510 Other comprehensive income Items that are or may be recycled subsequently into profit or loss: Foreign exchange translation differences (70) 79 Cash flow hedges - reclassified to profit and loss 1,173 (1,586) Effective portion of changes in fair value of cash flow hedges 1,912 2,058 Other comprehensive income for the period, before income tax 3,015 551 Income tax on other comprehensive income (586) (90) Other comprehensive income for the period, net of income tax 2,429 461 Total comprehensive income for the period 8,651 32,971 The notes on pages [ ] to [ ] form an integral part of these consolidated interim financial statements. Condensed consolidated balance sheet Note At 11 October 2018 £000 At 12 October 2017 £000 At 29 March 2018 £000 Non-current assets Property, plant and equipment 8 126,741 132,815 129,904 Intangible assets 9 995,619 991,958 992,929 Other non-current assets 19,623 18,586 20,182 1,141,983 1,143,359 1,143,015 Current assets Inventories 65,396 63,192 60,529 Other financial assets 2,255 896 1,160 Trade and other receivables 69,175 73,161 74,848 Cash and cash equivalents 60,295 50,720 59,824 197,121 187,969 196,361 Total assets 1,339,104 1,331,328 1,339,376 Current liabilities Trade and other payables (186,803) (183,988) (182,737) Provisions (13,900) (464) (835) Other financial liabilities (1,487) (1,714) (3,392) (202,190) (186,166) (186,964) Non-current liabilities Other interest-bearing loans and borrowings 10 (192,614) (206,416) (194,519) Other payables (37,769) (35,751) (36,200) Provisions (3,098) (1,375) (2,200) Other financial liabilities (8,448) (7,959) (8,693) Deferred tax liabilities (4,683) (4,893) (4,448) (246,612) (256,394) (246,060) Total liabilities (448,802) (442,560) (433,024) Net assets 890,302 888,768 906,352 Equity attributable to equity holders of the parent Ordinary share capital 5,000 5,000 5,000 Consolidation reserve (372,026) (372,026) (372,026) Merger reserve 113,321 113,321 113,321 Translation reserve (30) 48 40 Cash flow hedging reserve 1,549 1,188 (950) Retained earnings 1,142,488 1,141,237 1,160,967 Total equity 890,302 888,768 906,352 The notes on pages [ ] to [ ] form an integral part of these consolidated interim financial statements. Condensed consolidated statement of changes in equity Share capital £000 Consolidation reserve £000 Merger reserve £000 Cash flow hedging reserve £000 Translation reserve £000 Retained earnings £000 Total equity £000 Balance at 29 March 2018 5,000 (372,026) 113,321 (950) 40 1,160,967 906,352 Total comprehensive income for the period Profit for the period - - - - - 6,222 6,222 Other comprehensive income - - - 2,499 (70) - 2,429 Total comprehensive income for the period - - - 2,499 (70) 6,222 8,651 Transactions with owners, recorded directly in equity Equity dividends paid - - - - - (24,807) (24,807) Share based payment charge - - - - - 1,951 1,951 Purchase of own shares - - - - - (1,845) (1,845) Total contributions by and distributions to owners - - - - - (24,701) (24,701) Balance at 11 October 2018 5,000 (372,026) 113,321 1,549 (30) 1,142,488 890,302 Share capital £000 Consolidation reserve £000 Merger reserve £000 Cash flow hedging reserve £000 Translation reserve £000 Retained earnings £000 Total equity £000 Balance at 30 March 2017 5,000 (372,026) 113,321 806 (31) 1,135,574 882,644 Total comprehensive income for the period Profit for the period - - - - - 32,510 32,510 Other comprehensive income - - - 382 79 - 461 Total comprehensive income for the period - - - 382 79 32,510 32,971 Transactions with owners, recorded directly in equity Equity dividend paid - - - - - (24,912) (24,912) Share based payment charge - - - - - 2,332 2,332 Purchase of own shares - - - - - (4,267) (4,267) Total contributions by and distributions to owners - - - - - (26,847) (26,847) Balance at 12 October 2017 5,000 (372,026) 113,321 1,188 48 1,141,237 888,768 The notes on pages [ ] to [ ] form an integral part of these consolidated interim financial statements. Condensed consolidated statement of cash flows 28 week period ended 11 October 2018 £000 28 week period ended 12 October 2017 £000 Cash flows from operating activities Profit for the period 6,222 32,510 Adjustments for: Depreciation and amortisation 19,395 18,041 Financial income (463) (330) Financial expense 2,415 2,700 Share based payment charges 1,951 2,332 Taxation 1,738 8,269 31,258 63,522 Reduction/(increase) in trade and other receivables 6,498 (3,587) Increase in inventories (4,867) (6,772) Increase in trade and other payables 13,702 11,658 Increase/(decrease) in provisions 13,963 (47) 60,554 64,774 Tax paid (8,402) (9,720) Net cash flow from operating activities 52,152 55,054 Cash flows from investing activities Proceeds from sale of property, plant and equipment 441 276 Interest received 463 330 Acquisition of subsidiaries (2,100) - Investment in other financial assets - (3) Loans issued - (872) Acquisition of property, plant and equipment and other intangible assets (20,323) (25,771) Net cash used in investing activities (21,519) (26,040) Cash flows from financing activities Equity dividends paid (24,807) (24,912) Share based payments (1,845) (4,000) Proceeds from new loan 195,086 - Repayment of old loan (195,000) (3,000) Debt issue costs (1,790) - Finance lease obligations (36) (157) Interest paid (1,770) (2,570) Net cash used in financing activities (30,162) (34,639) Net increase/(decrease) in cash and cash equivalents 471 (5,625) Cash and cash equivalents at beginning of period 59,824 56,345 Cash and cash equivalents at end of period 60,295 50,720 The notes on pages [ ] to [ ] form an integral part of these consolidated interim financial statements. Notes (forming part of the condensed consolidated interim financial statements) 1 Accounting policies The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. Basis of preparation Pets at Home Group Plc (the Company) is a company incorporated in the United Kingdom and its registered office is Epsom Avenue, Stanley Green, Handforth, Cheshire, SK9 3RN. The company is listed on the London Stock Exchange. The condensed consolidated interim financial statements as at and for the 28 week period ended 11 October 2018 comprise the Company and its subsidiaries (together referred to as the Group). The consolidated financial statements of the Group as at and for the 52 week period ended 29 March 2018 are available on request from the Company's registered office and via the Company's website. The financial statements are prepared under the historical cost convention, as modified by the revaluation of derivative financial instruments to fair value, and in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS as adopted by the European Union. Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS34 Interim Financial Reporting as adopted by the EU. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the 52 week period ended 29 March 2018. The financial information included in this interim statement of results does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006 (the "Act"). The statutory accounts for the 52 weeks ended 29 March 2018 have been reported on by the Company's auditors and delivered to the Registrar of Companies. The auditor's report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. Going concern The Directors of Pets at Home Group Plc, having made appropriate enquiries, consider that adequate resources exist for the Group to continue in operational existence for the foreseeable future and that, therefore, it is appropriate to adopt the going concern basis in preparing the condensed consolidated interim financial statements as at and for the 28 week period ended 11 October 2018. The Group has entered into a new revolving facility of £248m, which expires in September 2023. Interest is charged at LIBOR plus a margin based on leverage (net debt: EBITDA). Further information is provided in note 10. Notes (continued) 1 Accounting policies (continued) Significant accounting policies The accounting policies adopted in preparation of the condensed consolidated interim financial statements as at and for the 28 week period ended 11 October 2018 are consistent with the policies applied by the Group in its consolidated financial statements as at and for the 52 week period ended 29 March 2018, except as described below: · In the 28 week period ended 11 October 2018, the Group's financial reporting has changed to two segments that represent the size of the respective businesses and our new internal reporting structures; Retail (includes products purchased online and in-store, pet sales, grooming services and insurance products) and Vet Group (includes our First Opinion practices and Specialist Referral Centres). As a result of the change in reporting segments, the allocation of goodwill across Cash Generating Units (CGUs) has also been re-assessed. · Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss. · The adoption of IFRS9 and IFRS15 (described below). The group has initially adopted the following IFRS's from 30 March 2018 and these have been applied in these interim financial statements. IFRS9 Financial Instruments (effective date 1 January 2018) IFRS9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The classification and measurement of financial liabilities are largely consistent with IAS 39, however IFRS 9 eliminates the categories of loans and receivables, available for sale and held to maturity. · The classification of financial assets has been considered in line with IFRS 9. The majority of current and non-current assets are held at amortised cost using the effective interest method, subject to an annual impairment review. Any gain or loss is recognised in profit or loss. The adoption of IFRS9 has had no impact on the opening consolidated balance sheet. · Equity Investments of £0.6m (12 October 2017: £0.5m, 29 March 2018: £0.5m) are held at fair value through other comprehensive income ("FVOCI"). The adoption of IFRS9 has had no impact on the opening consolidated balance sheet. · The provisioning methodology for loans to joint venture veterinary practices has been assessed in line with IFRS9 and updated to represent a basis of expected credit losses as opposed to incurred losses. The methodology adopted is considered to be in line with the requirements of IFRS9. The adoption of IFRS9 has had no material impact on the opening consolidated balance sheet. · Existing hedges under IAS39 continue to qualify for hedging under IFRS9. IFRS15 Revenue from Contract with Customers (effective date 1 January 2018) IFRS15 specifies how and when revenue can be recognised and is based on the point where the control of performance obligation passes rather than the transfer of risks and rewards, which was the basis under IAS18. There has been no significant impact of applying the new standard to the Group as revenue was already recognised in line with the principles of IFRS15. · Goods sold in store or online are for standalone products made direct to customers at standard prices. Estimates are made of anticipated returns and sales awaiting delivery to the customer. · Revenue from the provision of services is recognised upon the provision of the services. · Fee income received from Joint Venture veterinary practice companies for administrative support services is recognised in the period the services relate to, to the extent this is expected to be recovered. Notes (continued) 1 Accounting policies (continued) Significant accounting policies (continued) The following IFRS's have been issued but not yet applied by the Group in these interim financial statements. IFRS16 Leases (effective date 1 January 2019) IFRS16 will significantly affect the presentation of the Group's financial statements as all leases with the exception of short term leases will be recognised within the balance sheet with a corresponding liability being the present value of lease payments. The minimum lease commitment on these leases is disclosed in Note 23 of the Group's 2018 Annual Report. The Group plans to adopt IFRS 16 on 29 March 2019 using the modified retrospective approach. The cumulative effect of adopting IFRS 16 will be recognised as an adjustment to opening balance sheet reserves, with no restatement of comparable information. Comparable information will be provided within the Annual Report. The Group has carried out an initial assessment of the impact of IFRS16 and is currently in the process of completing a detailed assessment. In order to complete the detailed assessment, data is being collated and validated and robust IT systems and processes are being put in place. Due to the complexities around the standard and the material sensitivity to key assumptions such as discount rates and lease length it is not yet practicable to fully quantify the effect on the Group's financial statements. Accounting estimates and judgments The preparation of the condensed consolidated interim financial statements in conformity with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS34 Interim Financial Reporting as adopted by the EU requires management to make judgments, estimates and assumptions concerning the future that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These judgments are based on historical experience and management's best knowledge at the time and the actual results may ultimately differ from these estimates. Estimates and underlying assumptions are reviewed on an on-going basis and revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying value of assets and liabilities are discussed below. Impairment of goodwill and other intangibles Determining whether goodwill and other intangibles are impaired requires an estimation of the value in use of the cash-generating units to which goodwill and other intangible assets have been allocated. The value in use calculation requires estimation of future cash flows expected to arise from the cash-generating unit (CGU) and a suitable discount rate in order to calculate present value. Joint Venture receivables The Group provides operating loans and other loans to a number of Joint Venture veterinary practices as detailed in note 13 to cover their cash flow requirements and support their longer term growth. As referred to in note 13, provisions are held in respect of operating loans to Joint Venture practices. In line with IFRS9, judgment is applied in determining the risk-related criteria to allocate practices into bands, and in estimating an appropriate provision percentage to apply to each band by applying the expected credit loss criteria. These judgments are made by management based on their experience and knowledge of the practices. Future financial performance will be affected if actual experience differs to the estimates and assumptions made in determining the provision. The quantum of Joint Venture receivables and provision made against these receivables is included in note 13. Notes (continued) 2 Segmental reporting The Group has moved to two reportable segments, Retail and Vet Group, which are the Group's strategic business units for the 28 week period ending 11 October 2018. In the 52 week period ended 29 March 2018, the Group only reported under one segment. The Group's operating segments are based on the internal management structure and internal management reports, which are reviewed by the Executive Directors on a periodic basis. The Executive Directors are considered to be the Chief Operating Decision Makers. The Group is a pet care business with the strategic advantage of being able to provide products, services and advice, addressing all pet owners' needs. Within this strategic umbrella, the Group has two reportable segments, Retail and Vet Group, which are the Group's strategic business units, and a central support function. The strategic business units offer different products and services, are managed separately and require different operational and marketing strategies. The operations of the Retail reporting segment comprise the retailing of pet products purchased online and in-store, pet sales, grooming services and insurance products. The operations of the Vet Group reporting segment comprise First Opinion practices and Specialist Referral Centres. Central includes group costs and finance expenses. Revenue and costs are allocated to a segment where reasonably possible. The following summary describes the operations in each of the Group's reportable segments. Performance is measured based on segment operating profit, as included in the management reports that are reviewed by the Executive Directors. These internal reports are prepared in accordance with IFRS accounting policies consistent with these Interim Financial Statements. All material operations of the reportable segments are carried out in the UK and all revenue is from external customers. 28 week period ended 11 October 2018 Income Statement - Underlying trading Retail £000 Vet Group £000 Central £000 Total £000 Revenue 443,731 55,614 - 499,345 Gross Profit 226,121 25,289 - 251,410 Underlying Operating profit/(loss) 29,352 13,651 (3,181) 39,822 Non-underlying items - (29,910) - (29,910) Segment operating profit/(loss) 29,352 (16,259) (3,181) 9,912 Net financing expenses - - (1,952) (1,952) Profit/(loss) before tax 29,352 (16,259) (5,133) 7,960 Notes (continued) 2 Segmental reporting (continued) Non-underlying operating expenses in the periods ended 11 October 2018 and 12 October 2017 are explained in Note 3. In accordance with IFRS15, revenue excludes fee income from Joint Venture practices in which the Group has an intention to offer to buy back the 'A' shares from the Joint Venture Partners in the future, on the basis of increased uncertainty of recoverability. 28 week period ended 12 October 2017 Income Statement - Underlying trading Retail £000 Vet Group £000 Central £000 Total £000 Revenue 418,505 49,509 - 468,014 Gross Profit 218,646 24,461 - 243,107 Underlying Operating profit/(loss) 31,009 16,286 (3,180) 44,115 Non-underlying items - (966) - (966) Segment operating profit/(loss) 31,009 15,320 (3,180) 43,149 Net financing expenses - - (2,370) (2,370) Profit/(loss) before tax 31,009 15,320 (5,550) 40,779 Non-underlying operating expenses in the periods ended 11 October 2018 and 12 October 2017 are explained in Note 3. 28 week period ended 11 October 2018 Reconciliation of EBITDA before Non-Underlying items Retail £000 Vet Group £000 Central £000 Total £000 Underlying Operating profit/(loss) 29,352 13,651 (3,181) 39,822 Depreciation expense 14,390 1,174 - 15,564 Amortisation expense 3,790 41 - 3,831 Underlying EBITDA 47,532 14,866 (3,181) 59,217 28 week period ended 12 October 2017 Reconciliation of EBITDA before Non-Underlying items Retail £000 Vet Group £000 Central £000 Total £000 Underlying Operating profit/(loss) 31,009 16,286 (3,180) 44,115 Depreciation expense 14,005 945 - 14,950 Amortisation expense 2,880 211 - 3,091 Underlying EBITDA 47,894 17,442 (3,180) 62,156 EBITDA before Non-Underlying items is defined on page [ ]. Notes (continued) 3 Expenses Included in operating profit are the following: 28 week period ended 11 October 2018 £000 28 week period ended 12 October 2017 £000 Non-underlying operating expenses (see below) 29,910 966 Depreciation of tangible fixed assets 15,564 14,950 Amortisation of intangible assets 3,831 3,091 Rentals under operating leases: Hire of plant and machinery 2,809 2,404 Property 41,297 40,725 Rental income from third party sublets (524) (561) Rental income from related parties1 (4,088) (3,763) Share based payment charges 1,951 2,332 1 The Rental income from related parties for the 28 week period ended 12 October 2017 has been restated to reflect only the rental element of the charge The non-underlying operating expenses in the period ended 11 October 2018 of £29,910,000 (period ended 12 October 2017: £966,000) relate to: - £10,300,000 of additional provisions for guarantees to third parties of bank loans, overdrafts and lease obligations payable by Joint Venture veterinary practices which the Group will offer to buy back from Joint Venture Partners in the future, and therefore which have been provided for under IFRS9; - £2,500,000 of additional provisions for operating cash outflows forecast to be incurred by the Group from 12 October 2018 until the date at which A shares in those Joint Venture veterinary practices which the Group will offer to buy back from Joint Venture Partners in the future are acquired, and therefore which have been provided for under IAS37; - £16,230,000 of additional provisions for operating loans, initial set-up loans, and trading balances (made by the Group) to Joint Venture veterinary practices, which are no longer expected to be recoverable, and therefore which have been provided for under IFRS9; and - £880,000 (period ended 12 October 2017 £966,000) of non-underlying operating expenses relate to an increase in the financial liability for put/call options over shares held by clinicians in three specialist referral centres. The charge represents an increase in the equity 'option' value held by those clinicians based on the Board's best estimate of the future settlement on exercise of the put/call. The charge is classified within operating expenses as a clinician is required to remain an employee of the Group in order to access the full equity value of the option at the time of the exercise. Notes (continued) 4 Earnings per share Basic earnings per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares. 28 week period ended 11 October 2018 28 week period ended 12 October 2017 Underlying trading After non-underlying items Underlying trading After non-underlying items Profit attributable to equity shareholders of the parent (£000s) 30,616 6,222 33,476 32,510 Basic weighted average number of shares (000s) 500,000 500,000 500,000 500,000 Dilutive potential ordinary shares (000s) 7,098 7,098 3,427 3,427 Diluted weighted average number of shares 507,098 507,098 503,427 503,427 Basic earnings per share 6.1p 1.2p 6.7p 6.5p Diluted earnings per share 6.0p 1.2p 6.7p 6.5p 5 Taxation Recognised in the income statement 28 week period ended 11 October 2018 £000 28 week period ended 12 October 2017 £000 Current tax expense Current period 2,134 8,886 Adjustments in respect of prior periods (45) - Current tax expense 2,089 8,886 Deferred tax expense Origination and reversal of temporary differences (371) (503) Impact of difference between deferred and current tax rates 20 (109) Adjustments in respect of prior periods - (5) Deferred tax expense (351) (617) Total tax expense 1,738 8,269 The UK corporation tax standard rate for the period was 19% (2017: 19%). The March 2016 budget announced a further reduction in the corporation tax rate to 17% from 1 April 2020. Deferred tax at 11 October 2018 has been calculated based on the rate of 18% which is the blended rate at which the majority of items are expected to reverse. Deferred tax recognised in comprehensive income 28 week period ended 11 October 2018 £000 28 week period ended 12 October 2017 £000 Effective portion of changes in fair value of cash flow hedges 586 90 Notes (continued) 5 Taxation (continued) Reconciliation of effective tax rate 28 week period ended 11 October 2018 28 week period ended 12 October 2017 Underlying trading £000 Non-underlying items £000 Total £000 Underlying trading £000 Non-underlying items £000 Total £000 Profit for the period 30,616 (24,394) 6,222 33,476 (966) 32,510 Total tax expense 7,254 (5,516) 1,738 8,269 - 8,269 Profit excluding taxation 37,870 (29,910) 7,960 41,745 (966) 40,779 Tax using the UK corporation tax rate for the period of 19% (28 week period ended 12 October 2017: 19%) 7,195 (5,683) 1,512 7,932 (184) 7,748 Impact of change in tax rate on deferred tax balances 20 - 20 (109) - (109) Expenditure not eligible for tax relief 84 167 251 454 184 638 Adjustments in respect of prior periods (45) - (45) (8) - (8) Total tax expense 7,254 (5,516) 1,738 8,269 - 8,269 The UK corporation tax standard rate for the 28 week period ended 11 October 2018 was 19% (28 week period ended 12 October 2017: 19%). 6 Dividends paid and proposed 28 week period ended 11 October 2018 £000 28 week period ended 12 October 2017 £000 Declared and paid during the period Final dividend of 5.0p per share (2017: 5.0p per share) 24,807 24,912 Proposed for approval by shareholders at the AGM Interim dividend of 2.5p per share (2017: 2.5p per share) 12,385 12,410 The trustees of the following holdings of Pets at Home Group Plc shares under the Pets at Home Group Employee Benefit Trusts have waived or otherwise foregone any and all dividends paid in relation to the period ended 11 October 2018 and to be paid at any time in the future (subject to the exceptions in the relevant trust deed) on its respective shares for the time being comprised in the Trust Funds: Computershare Nominees (Channel Islands) Limited (holding at 11 October 2018: 4,601,947 shares, holding at 12 October 2017: 3,618,166 shares). Notes (continued) 7 Business combinations Subsidiaries acquired Principal activity Date of acquisition Proportion of voting equity instruments acquired Cash consideration transferred £000 Companion Care (Exeter) Limited Veterinary practice 26 April 2018 50% 1,450 Maidstone Vets4Pets Limited Veterinary practice 26 April 2018 50% 650 Acquisition of Companion Care (Exeter) Limited In the 28 week period ended 12 October 2017 and the 52 week period ended 29 March 2018, Companion Care (Exeter) Limited was accounted for as a Joint Venture veterinary practice where the Group held 100% of the non-participatory 'B' ordinary shares. A detailed explanation for the basis of consolidation can be found on page 116 of the 2018 Annual Report. On 26 April 2018, the Group acquired 100% of the 'A' shares, leading to full control and consolidation. Assets acquired and liabilities recognised at the date of acquisition The provisional amounts recognised in respect of identifiable assets and liabilities relating to the acquisition are as follows: Assets and liabilities acquired £000 Current assets Cash and cash equivalents 71 Trade and other receivables 81 Inventories 20 Non-current assets Tangible fixed assets 66 Current liabilities Trade and other payables (100) Net assets 138 Provisional goodwill arising on acquisition Companion Care (Exeter) Limited £000 Consideration 1,450 Less: Fair value of assets acquired (138) Goodwill arising on acquisition 1,312 The goodwill is deemed to be provisional due to the timing of the acquisition in relation to the period end. Acquisition of Maidstone Vets4Pets Limited In the 28 week period ended 12 October 2017 and the 52 week period ended 29 March 2018, Maidstone Vets4Pets Limited was accounted for as a Joint Venture veterinary practice where the Group held 100% of the non-participatory 'B' ordinary shares. A detailed explanation for the basis of consolidation can be found on page 116 of the 2018 Annual Report. On 26 April 2018, the Group acquired 100% of the 'A' shares, leading to full control and consolidation. Notes (continued) 7 Business combinations (continued) Assets acquired and liabilities recognised at the date of acquisition The provisional amounts recognised in respect of identifiable assets and liabilities relating to the acquisition are as follows: Assets and liabilities acquired £000 Current assets Cash and cash equivalents 26 Trade and other receivables 92 Inventories 12 Non-current assets Tangible fixed assets 49 Current liabilities Trade and other payables (77) Net assets 102 Provisional goodwill arising on acquisition Maidstone Vets4Pets Limited £000 Consideration 650 Less: Fair value of assets acquired (102) Goodwill arising on acquisition 548 The goodwill is deemed to be provisional due to the timing of the acquisition in relation to the period end. 8 Property, plant and equipment Freehold Property £000 Short leasehold property £000 Fixtures, fittings, tools and equipment £000 Total £000 Cost Balance at 29 March 2018 2,517 53,715 206,868 263,100 Additions 7 2,341 10,379 12,727 Assets acquired on acquisition - 57 58 115 Disposals - (314) (187) (501) Balance at 11 October 2018 2,524 55,799 217,118 275,441 Depreciation Balance at 29 March 2018 238 18,717 114,241 133,196 Depreciation charge for the period 31 2,121 13,412 15,564 Disposals - (15) (45) (60) Balance at 11 October 2018 269 20,823 127,608 148,700 Net book value At 29 March 2018 2,279 34,998 92,627 129,904 At 11 October 2018 2,255 34,976 89,510 126,741 Notes (continued) 8 Property, plant and equipment (continued) Freehold Property £000 Short leasehold property £000 Fixtures, fittings, tools and equipment £000 Total £000 Cost Balance at 30 March 2017 2,517 48,720 183,625 234,862 Additions - 2,729 16,451 19,180 Disposals - (221) (189) (410) Balance at 12 October 2017 2,517 51,228 199,887 253,632 Depreciation Balance at 30 March 2017 198 15,469 90,360 106,027 Depreciation charge for the period 21 1,794 13,135 14,950 Disposals - (56) (104) (160) Balance at 12 October 2017 219 17,207 103,391 120,817 Net book value At 30 March 2017 2,319 33,251 93,265 128,835 At 12 October 2017 2,298 34,021 96,496 132,815 9 Intangible assets Goodwill £000 Customer list £000 Software £000 Total £000 Cost Balance at 29 March 2018 979,845 771 33,766 1,014,382 Additions - - 4,661 4,661 Assets acquired on acquisition 1,860 - - 1,860 Balance at 11 October 2018 981,705 771 38,427 1,020,903 Amortisation Balance at 29 March 2018 - 148 21,305 21,453 Amortisation charge for the period - 41 3,790 3,831 Balance at 11 October 2018 - 189 25,095 25,284 Net book value At 29 March 2018 979,845 623 12,461 992,929 At 11 October 2018 981,705 582 13,332 995,619 Notes (continued) 9 Intangible assets (continued) Goodwill £000 Customer list £000 Software £000 Total £000 Cost Balance at 30 March 2017 979,845 771 24,916 1,005,532 Additions - - 4,783 4,783 Balance at 12 October 2017 979,845 771 29,699 1,010,315 Amortisation Balance at 30 March 2017 - 71 15,195 15,266 Amortisation charge for the period - 42 3,049 3,091 Balance at 12 October 2017 - 113 18,244 18,357 Net book value At 30 March 2017 979,845 700 9,721 990,266 At 12 October 2017 979,845 658 11,455 991,958 The customer list is a separately identifiable intangible asset arising on the acquisition of Dick White Referrals Limited in April 2016. Amortisation and impairment charge The amortisation charge is recognised in total in operating expenses within the income statement. Impairment testing Cash generating units ('CGUs') within the Group are considered to be aligned to the two operating segments as disclosed in note 2. Within the Retail reporting segment, these CGUs comprise the body of stores, company website, grooming operations and insurance operations. Within the Vet Group, the CGUs comprise the First Opinion practices and Specialist Referral Centres. As at 12 October 2017, the Group only had one reportable CGU in line with its single operating segment. As at 11 October 2018, the Group is deemed to have two overall groups of CGUs as follows: Goodwill At 11 October 2018 £000 At 12 October 2017 £000 Retail 586,088 - Vet Group 395,617 - Total 981,705 979,865 The recoverable amount of the CGU group has been calculated with reference to its value in use. The key assumptions of this calculation are shown below: 28 week period ended 11 October 2018 28 week period ended 12 October 2017 Retail Vet Group Group Period on which management approved forecasts are based (years) 5 5 3 Growth rate applied beyond approved forecast period 2.0% 3.5% 2.0% Discount rate (pre-tax) 11% 10% 11% Notes (continued) 9 Intangible assets (continued) The goodwill is considered to have an indefinite useful economic life and the recoverable amount is determined based on 'value-in-use' calculations. These calculations use a post-tax cash flow projection based on a five-year plan approved by the Board. The plan is adjusted to remove the contribution from and costs associated with new stores and veterinary practices. The key assumptions in the business plans for both the Retail and Vet Group CGUs are like-for-like sales growth, gross profit margin and operating profit margin. The Retail forecast assumptions reflect continual innovation and our deep understanding of our customers. The Vet Group forecast assumptions are based on a deep understanding of the maturity profile of the practices and their performance. The projections are based on all available information and growth rates do not exceed growth rates experienced in prior periods. A different set of assumptions may be more appropriate in future years depending on changes in the macro-economic environment and the industry in which each CGU operates. The discount rate was estimated based on past experience and industry average weighted cost of capital. The Directors have assumed a growth rate projection beyond the five-year period based on market growth rates based on past experience within the Group taking into account the economic growth forecasts within the relevant industries. The total recoverable amount in respect of goodwill for the CGU group as assessed by the Directors using the above assumptions is greater than the carrying amount and therefore no impairment charge has been recorded in each period. Within the Retail CGU, a number of sensitivities have been applied to the assumptions in reaching this conclusion including: · Reduction in growth rate applied beyond forecast period by 100 bps · Increasing the discount rate by 100 bps · Reduction in gross margin percentage of 100bps None of the above would result in an impairment when applied either individually or collectively. Within the Vet Group CGU, a number of sensitivities have been applied to the assumptions in reaching this conclusion including: · Reduction in growth rate applied beyond forecast period by 100 bps · Increasing the discount rate by 100 bps · Reduction in gross margin percentage of 100bps None of the above would result in an impairment when applied either individually or collectively. Notes (continued) 10 Other interest-bearing loans and borrowings At 11 October 2018 £000 At 12 October 2017 £000 At 29 March 2018 £000 Non-current liabilities Secured bank loans 192,614 206,416 194,519 Terms and debt repayment schedule 11 October 2018 Currency Nominal interest rate Year of maturity Face value £000 Carrying amount £000 Senior Finance Bank Loans GBP LIBOR +1.4% 2023 195,086 192,614 12 October 2017 Currency Nominal interest rate Year of maturity Face value £000 Carrying amount £000 Senior Finance Bank Loans GBP LIBOR +1.25% 2020 207,000 206,416 During the period, the Group has entered into a new revolving facility of £248,000,000, which expires in 2023. Debt related fees of £2,472,000 have been capitalised against the loan to be amortised over the remaining term of the facility. The drawn amount was £195,086,000 at 11 October 2018 and this amount is reviewed each period. Interest is charged at LIBOR plus a margin based on leverage (net debt: EBITDA). Face value represents the principal value of the Senior Finance Bank Loans. The bank loan is unsecured. Interest-bearing borrowings are recognised initially at fair value, being the principal value of the loan net of attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at a carrying value, which represents the amortised cost of the loans using the effective interest method less any impairment losses. The analysis of repayments on the loans is as follows: At 11 October 2018 £000 At 12 October 2017 £000 At 29 March 2018 £000 Within one year or repayable on demand - - - Between one and two years - - - Between two and five years 195,086 207,000 195,000 195,086 207,000 195,000 Pets at Home Group's policy with regard to interest rate risk, is to hedge the appropriate level of borrowings by entering into fixed rate agreements. The Group has entered into one fixed rate interest rate swap agreement over a total of £142,100,000 of the senior facility borrowings at the balance sheet date at a fixed rate of 0.183%, which expires on 30 March 2019. The hedges are structured to hedge at least 70% of the forecast outstanding debt for the next 12 months. Notes (continued) 11 Financial instruments Fair value hierarchy The table below shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs) 11 October 2018 Carrying amount Fair value - hedging instruments FVOCI - equity instruments Financial assets at amortised cost Other financial liabilities Total carrying amount £000 £000 £000 £000 £000 Financial assets measured at fair value Investments in Joint Venture veterinary practices - 444 - - 444 Other investments - 112 - - 112 Fuel forward contract used for hedging 29 - - - 29 Forward exchange contracts used for hedging 1,802 - - - 1,802 Interest rate swaps used for hedging 423 - - - 423 2,254 556 - - 2,810 Financial assets not measured at fair value Current trade and other receivables - - 18,139 - 18,139 Amounts owed by joint venture veterinary practices - funding, trading and operating loans - - 25,077 - 25,077 Cash and cash equivalents - - 60,295 - 60,295 Loans to joint venture practices - initial set up loans - - 12,700 - 12,700 Loans to joint venture practices - other loans - - 5,458 - 5,458 Other receivables - - 910 - 910 - - 122,579 - 122,579 Financial liabilities measured at fair value Forward exchange contracts used for hedging (312) - - - (312) (312) - - - (312) Financial liabilities not measured at fair value Current other financial liability - - - (1,134) (1,134) Finance lease liability - - - (41) (41) Trade payables - - - (87,743) (87,743) Amounts owed to Joint Venture veterinary practices - - - (9,620) (9,620) Non-current other financial liability - - - (8,448) (8,448) Other interest-bearing loans and borrowings (note 10) - - - (192,614) (192,614) - - - (299,600) (299,600) Notes (continued) 11 Financial instruments (continued) 11 October 2018 Fair value Level 1 Level 2 Level 3 Total £000 £000 £000 £000 Financial assets measured at fair value Investments in Joint Venture veterinary practices - - 444 444 Other investments - - 112 112 Fuel forward contract used for hedging - 29 - 29 Forward exchange contracts used for hedging - 1,802 - 1,802 Interest rate swaps used for hedging - 423 - 423 Financial assets not measured at fair value Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans - - 25,077 25,077 Loans to joint venture practices - initial set up loans - - 12,700 12,700 Loans to joint venture practices - other loans - - 5,458 5,458 Other receivables - - 910 910 Financial liabilities measured at fair value Forward exchange contracts used for hedging - (312) - (312) Financial liabilities not measured at fair value Current other financial liability - - (1,134) (1,134) Non-current other financial liability - - (8,448) (8,448) Other interest-bearing loans and borrowings (note 10) - (195,086) - (195,086) Notes (continued) 11 Financial instruments (continued) 12 October 2017 Carrying amount Fair value - hedging instruments FVOCI - equity instruments Financial assets at amortised cost Other financial liabilities Total carrying amount £000 £000 £000 £000 £000 Financial assets measured at fair value Investments in Joint Venture veterinary practices - 400 - - 400 Other investments - 112 - - 112 Fuel forward contract used for hedging 37 - - - 37 Forward exchange contracts used for hedging 859 - - - 859 896 512 - - 1,408 Financial assets not measured at fair value Current trade and other receivables - - 15,457 - 15,457 Amounts owed by joint venture veterinary practices - - 29,179 - 29,179 Cash and cash equivalents - - 50,720 - 50,720 Loans to joint venture practices - initial set up loans - - 12,054 - 12,054 Loans to joint venture practices - other loans - - 4,357 - 4,357 Other receivables - - 1,663 - 1,663 - - 113,430 - 113,430 Financial liabilities measured at fair value Forward exchange contracts used for hedging (105) - - - (105) (105) - - - (105) Financial liabilities not measured at fair value Current other financial liability - - - (1,000) (1,000) Finance lease liability - - - (103) (103) Trade payables - - - (89,613) (89,613) Amounts owed to Joint Venture veterinary practices - - - (6,708) (6,708) Non-current other financial liability - - - (7,959) (7,959) Other interest-bearing loans and borrowings (note 10) - - - (206,416) (206,416) - - - (311,799) (311,799) Notes (continued) 11 Financial instruments (continued) 12 October 2017 Fair value Level 1 Level 2 Level 3 Total £000 £000 £000 £000 Financial assets measured at fair value Investments in Joint Venture veterinary practices - - 400 400 Other investments - - 112 112 Fuel forward contract used for hedging - 37 - 37 Forward exchange contracts used for hedging - 859 - 859 Financial assets not measured at fair value Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans - - 29,179 29,179 Loans to joint venture practices - initial set up loans - - 12,054 12,054 Loans to joint venture practices - other loans - - 4,357 4,357 Other receivables - - 1,663 1,663 Financial liabilities measured at fair value Forward exchange contracts used for hedging - (105) - (105) Financial liabilities not measured at fair value Current other financial liability - - (1,000) (1,000) Non-current other financial liability - - (7,959) (7,959) Other interest-bearing loans and borrowings (note 10) - (207,000) - (207,000) Notes (continued) 11 Financial instruments (continued) 29 March 2018 Carrying amount Fair value - hedging instruments FVOCI - equity instruments Financial assets at amortised cost Other financial liabilities Total carrying amount £000 £000 £000 £000 £000 Financial assets measured at fair value Investments in Joint Venture veterinary practices - 403 - - 403 Other investments - 112 - - 112 Fuel forward contract used for hedging 78 - - - 78 Forward exchange contracts used for hedging 155 - - - 155 Interest rate swaps used for hedging 926 - - - 926 1,159 515 - - 1,674 Financial assets not measured at fair value Current trade and other receivables - - 16,834 - 16,834 Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans - - 31,298 - 31,298 Cash and cash equivalents - - 59,824 - 59,824 Loans to joint venture practices - initial set up loans - - 14,194 - 14,194 Loans to joint venture practices - other loans - - 4,539 - 4,539 Other receivables - - 934 - 934 - - 127,623 - 127,623 Financial liabilities measured at fair value Forward exchange contracts used for hedging (2,333) - - - (2,333) (2,333) - - - (2,333) Financial liabilities not measured at fair value Current other financial liability - - - (1,000) (1,000) Finance lease liability - - - (59) (59) Trade payables - - - (106,709) (106,709) Amounts owed to Joint Venture veterinary practices - - - (2,951) (2,951) Non-current other financial liability - - - (8,675) (8,675) Other interest-bearing loans and borrowings (note 10) - - - (194,519) (194,519) - - - (313,913) (313,913) Notes (continued) 11 Financial instruments (continued) 29 March 2018 Fair value Level 1 Level 2 Level 3 Total £000 £000 £000 £000 Financial assets measured at fair value Investments in Joint Venture veterinary practices - - 403 403 Other investments - - 112 112 Fuel forward contract used for hedging - 78 - 78 Forward exchange contracts used for hedging - 155 - 155 Interest rate swaps used for hedging - 926 - 926 Financial assets measured at fair value Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans - - 31,298 31,298 Loans to joint venture practices - initial set up loans - - 14,194 14,194 Loans to joint venture practices - other loans - - 4,539 4,539 Other receivables - - 934 934 Financial liabilities measured at fair value Forward exchange contracts used for hedging - (2,333) - (2,333) Financial liabilities not measured at fair value Current other financial liability - - (1,000) (1,000) Non-current other financial liability - - (8,675) (8,675) Other interest-bearing loans and borrowings (note 10) - (195,000) - (195,000) Notes (continued) 11 Financial instruments (continued) Measurement of fair values The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair values at the balance sheet dates, as well as the significant unobservable inputs used. Type Valuation technique Significant unobservable inputs Inter-relationship between significant unobservable inputs and fair value measurement Investment in equity securities The fair value of investments in unlisted equity securities are considered to be their carrying value as the impact of discounting future cash flows has been assessed as not material and the investment is non-participatory. Not applicable Not applicable Forward exchange contracts and interest rate swaps Market comparison technique - the fair values are based on broker quotes. Similar contracts are traded in an active market and the quotes reflect the actual transactions on similar instruments. Not applicable Not applicable Other financial liabilities Other financial liabilities include the fair values of the put and call options over the non-controlling interests of subsidiary undertakings and contingent consideration in relation to acquisitions. The fair values represent the best estimate of amounts payable based on future earnings performance discounted to present value. Future earnings performance Fair value linked to increase or decrease in the best estimate of the future earnings performance 12 Seasonality of Operations The Group's sales can be sensitive to periods of extreme weather conditions. The Group sometimes sees a reduction in sales during periods of hot weather in the UK, due to reduced customer footfall and reduced demand as pets eat less and generally spend more time outdoors, reducing the need for essentials such as food and cat litter. If temperatures are extremely high for a prolonged period, declines in sales can be material. The number of customers visiting Pets at Home's stores also declines during periods of snow or extreme weather conditions affecting the local catchment area. In addition, the sales of certain products and services designed to address pet health needs, such as flea and tick problems, can also be seasonal, increasing in times of warm and wet weather. Traditionally the financial performance of the Group in the four-week period to the end of December is marginally stronger than in the other periods, due to Christmas purchasing. Purchasing of Accessories is also more prevalent during this season. Timing of the holiday season and any adverse weather conditions that may occur during that season impacting delivery may adversely affect sales in our stores. Notes (continued) 13 Related parties Veterinary practice transactions The Group has entered into a number of arrangements with third parties in respect of veterinary practices. The transactions entered into during the period, and the balances outstanding at the end of the period are as follows: 11 October 2018 £000 12 October 2017 £000 29 March 2018 £000 Transactions - Fees for services provided to veterinary practices 30,039 27,954 53,112 - Rental and other occupancy charges to veterinary practices 6,819 6,190 11,653 Gross income from veterinary practices 36,858 34,144 64,765 Balances Included within Trade and other receivables: - Funding for new practices 1,236 1,268 1,595 - Operating loans  - Gross value of operating loans 46,876 30,944 38,011  - Provision held for operating loans (23,035) (3,033) (8,308)  - Net Operating loans 23,841 27,911 29,703 Included within Other financial assets and liabilities: - Loans to joint venture practices 15,190 12,054 14,194 - Provision for loans to joint venture practices (2,490) - - 12,700 12,054 14,194 - Loans to other related parties (non-current) 5,458 4,357 4,539 Included within Trade and other payables: - Trading balances (9,620) (6,708) (2,951) Fees for services provided to related party veterinary practices relate to charges for support services offered in such areas as clinical development, promotion and methods of operation as well as service activities including accountancy, legal and property. Funding for new practices represents the amounts advanced by the Group to support with surgery opening costs. The funding is short term and the related party Joint Venture company draws down their own bank funding to settle these amounts outstanding with the Group shortly after opening. Trading balances represent costs incurred/income received by the Group in relation to the services provided to the veterinary practices that have yet to be recharged. Operating loans represent amounts advanced to related party veterinary practices to cover working capital requirements and support their longer term growth. The loans do not attract interest and are repayable on demand, although they are expected to be repaid over a number of years based on the projected cash flow forecast on a practice by practice basis, some over an extended period of years. In the 28 week period ended 11 October 2018, the value of balances provided for through the income statement amounted to £14,727,000 (period ended 12 October 2017: £398,000, period ended 29 March 2018: £5,673,000). Loans to joint venture practice companies trading under the Companion Care and Vets4Pets brands represent a long term investment in the joint venture, supporting their initial set up and working capital. These loans are classified as financial assets not measured at fair value. In the 28 week period ended 11 October 2018, the value of balances provided for through the income statement amounted to £2,490,000 (period ended 12 October 2017: £nil, period ended 29 March 2018: £nil). Loans to other related parties represent loan balances to joint venture partnership businesses and shared venture partners and are typically to support capacity expansion. This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com. END IR FKADPFBDDCDB