introduction to the pets at home vet group...fee income for pets at home is generated from year one...

© 2019

Pets at Home Group Plc

Introduction to the Pets at Home Vet Group

Business Summary – October 2019


Pets at Home Group plc has two distinct business segments across retail and veterinary services

2

Note: Financials shown are for the year ended 28 March 2019 (FY19) Underlying gross margin excludes £40.4m of non-underlying charges relating to the recalibration of the First Opinion vet business, whilst underlying EBIT also excludes an additional £0.4m of non-underlying charges relating to an accounting charge for the potential future acquisition of minority stakes owned by vet partners in the Specialist Referral centres. Underlying EBIT excludes £6.1m of central costs in FY19

854.6

435.8

67.2

106.4

51.1

32.1

0

100

200

300

400

500

600

700

800

900

1000

Revenue Underlying gross margin Underlying EBIT

£’000

Vet Group

Retail

Pets at Home Group Plc 3

The Pets at Home Vet Group includes First Opinion veterinary practices and world class Specialist Referral centres

˃ 4 independently run pet hospitals handling the most complex veterinary cases across a range of disciplines:

− Internal medicine

− Oncology

− Orthopaedic surgery

− Soft tissue surgery

− Neurology and neurosurgery

− Diagnostic imaging

Specialist Referral centres First Opinion small animal veterinary practices

˃ 470 practices: 313 in-store & 157 standalone

˃ Largest UK branded network of First Opinion practices

˃ Covers all aspects of general small animal veterinary work: preventative care, emergency care, treatment for sick pets

˃ Preferred model is to establish practices as Joint Ventures with entrepreneurial veterinarians who become Joint Venture Partners (JVPs)

˃ Can also choose to operate practices ourselves where appropriate

Note: All data correct as of FY19


4

We benefit from a unique model which has a number of strategic advantages

“Our Vet Group has experienced a period of rapid growth. Despite ongoing challenges within the market, releasing free cashflow from this business remains our single biggest value creation opportunity.”

Peter Pritchard

Group CEO

Partnership model incentivises growth

Unified brand driving

customer recognition

Clients have access to full

spectrum of veterinary care

Unique benefits from being part of Pets at Home Group

˃ Cross-sell opportunities with Pets at Home VIP loyalty club

˃ Recruitment on to Pet Care Plans

˃ Increased footfall for practices located in-store

˃ Entrepreneurial First Opinion veterinarians become business owners

˃ Joint Venture model unique in the market

˃ Referral centres structured as partial ownership Shared Ventures

˃ Convenient access to First Opinion care and advice

˃ World class specialists able to treat pets with specific requirements

˃ Largest branded veterinary business in the UK

˃ Centrally co-ordinated marketing


Partnership is at the heart of our Vet Group business model; incentivising growth and delivering returns for both sides

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First Opinion Joint Venture Model Specialist Referral Shared Venture Model

Type of partner Joint Venture Partner (JVP); typically one per

practice but sometimes more

Shared Venture Partner (SVP); typically

multiple clinicians across disciplines

Funding requirements

˃ JVP funded set-up loan (c£30k)

˃ Pets at Home investment (c£30-60k), plus additional operating loans where required

˃ Third party bank loan (up to £450k)

˃ Businesses have been acquired by Pets at Home

˃ Ongoing capital investment for growth

Equity / capital value

entitlement

˃ JVP has 100% entitlement to dividends when debts repaid & capital proceeds at exit

˃ No equity stake for Pets at Home

˃ Key clinicians hold 5-25% equity

˃ Pets at Home has the option to buy the clinician stakes in the future

Economics to Pets at

Home

˃ Receive %age of practice customer revenues as fee income, in return for providing business support services.

˃ In-store practices pay rent to Pets at Home

˃ Full ownership and control of Referral Centre businesses

Impact on Pets at Home

Group financials

˃ Fee income forms part of Vet Group revenue

˃ Operating costs reflect Support Office service centre

˃ Rent from in-store practices is an offset to Retail business rental costs

˃ Working capital to support young practices

˃ Free cashflow generation as practices mature

˃ Referral centre revenues, costs, cashflow & balance sheet are all consolidated in full

˃ Annual non-underlying income statement charge that reflects the future buyout option

Economics to partner ˃ Take a competitive salary from Year 1

˃ Potential for dividends and practice capital value

˃ SVP is paid a competitive salary

˃ Potential for an attractive future earn-out


The principles of our JV model are well established, and have been updated for new practice openings from FY20

6

Key features of the JV model

˃ Day to day operations managed by the JVP, who has complete clinical freedom

˃ Pets at Home receives fee income, based on practice customer revenues, from day one in return for:

1) Arranging initial financing through a third party commercial bank, to fund initial setup and working capital requirements for early years

2) Providing ongoing business support services such as finance, marketing, IT and procurement, through our colleagues at the Support Office in Swindon

˃ Pets at Home may also extend additional funding to the practice, if required through its lifetime, via an operating loan

˃ All practices are opened as brand new locations, with no pre-existing clients

Ownership is shared between the JVP and Pets at Home


We have many young JV First Opinion practices, which are expected to be loss making in early years

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Number of JV

practices

at FY19

89 65 91 91 72 12

Fee income for Pets at Home is generated from year one

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-200

0

200

400

600

800

1000

1200

< 1 year 1-2 years 3-4 years 5-6 years 7-9 years 10+ years

Fee

in

co

me

as %

of

pra

cti

ce c

us

tom

er

reven

ue

£’000

Average practice customer revenue

Average practice PBT

New model - Pets at Home fee income %

Note: average practice customer revenue and PBT shown is based on actual performance of JVs in FY19

Even mature practices grow their customer

revenues ahead of the underlying market,

driven by the incentivisation of

ownership


Mature practices outperform the wider market, with strong returns for vet partners

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1. Debt free is defined as those practices having paid down their initial third party bank loan, personal loan and any Pets at Home funding (including operating loans), Sources: Pets at Home Vet Group financials, estimates based on publically available filings of four other large UK corporate vet groups (IVC, CVS, VetPartners and Medivet)

At FY19, we had 89 mature, debt free1 JV practices

These practices generated combined practice turnover of £97.0m and PBT of £14.0m

Vet Group mature JV practice Corporate competitor

Average practice turnover c£1,100k c£550-650k

Average practice PBT c£150-160k c£75-100k

JVP base salary + bonus c£40-50k c£60-90k (Clinical Director)

c£40-60k (mid-career vet)

Total average dividend payments to

JVP (practice may have >1 JVP) c£80-90k n/a - unique to JV model

Capital value to JVP at exit c£500-1,000k+ n/a - unique to JV model


The impact of a company managed practice on the Pets at Home Group financials differs to that of a JV practice

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Joint Venture Practice Company Managed Practice

Legal entity

˃ Each practice is its own company, registered with Companies House

˃ JVP(s) own A-shares

˃ Pets at Home own B-shares

˃ Each practice is its own company, registered with Companies House

˃ No JVP

˃ Pets at Home own 100% of shares

Fee income to Pets at

Home Customer revenues

consolidated by PAH Practice operating

costs in PAH P&L

Practice has a JVP

Practice employs vets

Third party bank debt (until repaid after up to 10 years) Access to operating

loan (only if required) Profit entitlement ˃ JVP (via dividends) ˃ Pets at Home (via consolidation)

Operational decision

maker

˃ JVP acts independently, with business support services from Pets at Home

˃ Pets at Home manage day-to-day operations centrally and through field teams

Access to business

support services


Our recalibration plans are well underway in FY20

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Complete buyout and closure programme

˃ New JV model only for new practice openings

‒ Lower fees in earlier years, with increasing fees as practices mature

‒ Simpler agreement with fewer fee variables

Adjust model for existing practices

Launch new model for future openings

˃ We are providing some existing JV practices with support through temporary adjustments to their fee agreements

˃ Cashflow benefits to both JVPs and Pets at Home

Practices and JVPs become debt free more swiftly

Reduced need for PaH to provide additional funding

˃ New practice openings: up to 5

˃ Practice buy out and closure programme largely complete as of Q1 FY20

˃ Financial impact in line with our original plans

Gradually work towards UK rollout target of 700 practices

Pets at Home Group Plc 11

Releasing free cashflow as First Opinion practices mature is our biggest value creation opportunity

Practice age and FCF at maturity1 Practice age and FCF in FY19

1. Assuming each existing practice is individually mature, and without opening any new practices

43%

39%

18%

Practice age Underlying FCF in FY19

0 - 4 years 5 - 9 years 10 years+ FCF

£19.8m

100%

Practice age Expected Vet Group FCFwhen all practices mature

0 - 4 years 5 - 9 years 10 years+ FCF

Up to £60m


Vet Group revenue is weighted towards fee income received from Joint Venture practices

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Note: Financials shown are for the Financial Year ended 28 March 2019 (FY19)

£37.0m

£52.6m

£8.1m

£8.7m

£69.4m

Joint Venture practicefee income

Company managedpractice consolidatedcustomer revenue

Other income

First Opinion

Specialist Referral centres


Accounting treatment of veterinary specialist referral centres

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Specialist referral centre ownership is structured to incentivise growth

Accounting treatment required

˃ Ownership of four referral centres

‒ Three centres wholly owned subsidiaries by Pets at Home

‒ One centre ≥75% share owned by Pets at Home

‒ Remaining shares owned by Shared Venture Partners (SVPs)

˃ PAH has option to buy SVP’s shares (from 3 or 5 years after acquisition)

˃ Accounting requirement of the option is treated as a forward contract

˃ Balance sheet & cashflow

‒ Full consolidation

˃ Income statement

‒ Discounted future value of SVP’s shares recognised as expense over period to exercise on a risk adjusted basis

introduction to the pets at home vet group...fee income for pets at home is generated from year one...

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