Interim Financial Results

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 30^th March to 11^th 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 tax^3,4,#	41.8	37.9	(9.3)%
Group underlying free cashflow^#	23.2	27.3	17.7%

Group non-underlying charges^3,4	(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 30^th March to 11^th October 2018. The H1 FY18 accounting period represents the 28 week period from 31^st March to 12^th 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 growth^{1, #}	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 EBIT^3,4,# (£m)	44.1	39.8	(9.7)%
Retail	31.0	29.4	(5.3)%
Vet Group^3,4	16.3	13.7	(16.2)%

Group underlying EBIT margin^3,4,#	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 PBT^3,4,# (£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 EPS^3,4,# (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

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 EBITDA^1,#	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 11^th January 2019 to shareholders on the register at the close of trading on 7^th 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
	Note	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

1.2p

6.5p

Equity holders of the parent - diluted

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)

Segment operating profit/(loss)

31,009

15,320

(3,180)

43,149

Net financing expenses

(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

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

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