Pets at home Regulatory News (PETS)

FOR IMMEDIATE RELEASE, 26 NOVEMBER 2019

Pets at Home Group Plc: FY20 Interim Resultsfor the 28 week period to 10 October 2019

A strong first half; on track to deliver full year profit growth ahead of plan

·; First anniversary of launching our pet care strategy, which continues to deliver strong results

·; Sustained momentum in Retail business, with like-for-like# (LFL) revenue growth of 7.8%

o Omnichannel revenues# up 31.7% to £46.5m

o Stores delivering positive LFL# revenue growth and a solid operating margin

·; Vet Group underlying business performing well, with LFL# revenue growth of 6.4%

o First Opinion customer sales# growth across all vet practices of 11.8%, with Joint Venture (JV) practice LFL# of 14.0% and mature practice sales again growing ahead of the market

o Planned changes to fee arrangements for Joint Venture practices starting to have positive impact: increasing practice profitability and improving our Group cash performance

o JV practice buy outs now complete: total of 57 sites, with 36 having subsequently closed

·; We are introducing more customers to our complete pet care offer:

o Number of VIPs who purchase both products and a service has grown 22% year-on-year, and now represents c16% of all active members

o Number of subscription customers across the Group is now over 790,000

·; Group underlying PBT, on a comparable pre-IFRS16 basis, up 18.9% year-on-year to £45.0m1,#, driven by quality revenue growth in Retail converting strongly to profit

·; Given progress in the first half, we remain confident about the rest of the year despite continued consumer uncertainty, and expect full year profit towards top end of current market consensus2

·; After over 9 years as Chairman, succession plan for Tony DeNunzio commenced

# Alternative Performance Measures (APMs) are defined and reconciled to IFRS information, where possible, on pages 18 to 21. All H1 FY20 APMs exclude the impact of IFRS16 unless explicitly stated.

1. Adjusted financial metrics for H1 FY20, which exclude the impact of the transition of IFRS16, have been provided to aid comparability with the prior period

2. Company compiled consensus estimates for FY20 Group underlying PBT, before the impact of IFRS16, have a mean of £89m and a range of £87m to £93m

3. H1 FY20 non-underlying charges relating to costs incurred by the Group in buying out, and in some cases closing, JV practices include £7.6m charged against Vet Group, and Group, non-underlying gross margin (H1 FY19: £29.0m)

4. H1 FY20 non-underlying charges also include £0.1m relating to an accounting charge for the potential future acquisition of minority stakes owned by vet partners in the Specialist Referral centres, which has been charged against non-underlying operating costs (H1 FY19: £0.9m)

5. H1 FY20 non-underlying cash costs include £9.4m relating to practices that we have bought out (H1 FY19: £nil), plus £6.4m in relation to payments made to Shared Venture Partners in our Specialist Referral centres to acquire certain remaining minority stakes (H1 FY19: £nil)

Comment from Peter Pritchard, Group Chief Executive Officer

"I am very pleased with what we have achieved in the first half of the year. We have executed our plans well, and this has been reflected in the strong customer sales growth across the Group. Our commitment, and that of the Group's Joint Venture Partners, is to make sure pets and their owners get the very best advice, care and products; and this has led to record levels of VIPs, First Opinion practice clients and subscription customers. In short, our pet care strategy is working.

We have seen sustained momentum in Retail, with a 2-year like-for-like of 13%. This has been complemented by a meticulous delivery of our Vet Group recalibration. The programme to buy out a number of Joint Venture practices is already complete, whilst changes we have made to the fee arrangements for ongoing practices are already showing signs of positive progress and will be followed by further planned adjustments in the second half of the year.

All this provides a strong foundation, meaning we have much to look forward to in FY20 and beyond, and we now expect to return to profit growth a year ahead of our original plan. In the meantime, we will remain focussed on serving our customers, their pets and our partners better than ever before."

Outlook

We have been successful in sustaining profit growth in Retail and expect this to continue. In the Vet Group, the second half of FY20 will see the full impact of changes to the fee arrangements for ongoing JV practices, in line with our original plan. In addition, we will incur certain pre-opening costs associated with the capacity extension at Dick White Referrals, plus the opening of our fifth Specialist Referral centre in Scotland, all of which will reduce Vet Group underlying profit in the year.

Due to the progress we have made in the first half of FY20, we are confident about the rest of the year and now expect to deliver full year underlying profit growth, with Group underlying profit before tax# on a pre-IFRS16 basis towards the top end of current market consensus.

We now expect full year Group underlying free cashflow to be broadly flat, despite the previously disclosed one-off outflow of £10.7m relating to a change in timing to Corporation Tax payments.

New openings will include up to five new stores, grooming salons and vet practices, and the one-off programme to buy out a number of JV practices is now complete.

Our focus remains on sustaining the return to profit growth and we expect to generate further underlying profit and free cashflow growth from FY21, despite the potential headwind posed to Retail gross margin by USD currency movements. Due to our current hedging position, such movements will not impact FY20 profit guidance issued below.

Results presentation

A presentation for analysts and investors will be held today at 10:00am 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

Jonny Armstrong, Head of Investor Relations

Contact: +44 (0)161 486 6688 or irelations@petsathome.co.uk

Media EnquiriesPets 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 452 stores, many of which also have vet practices and grooming salons. Pets at Home also operates a UK leading small animal veterinary business, with 439 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 preliminary 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.

Chief Executive Officer's Review

Key Performance Indicators

1. Customer sales include gross customer sales made by Joint Venture vet practices of £178.6m (H1 FY19: £166.8m), and therefore differs to the fee income recognised within Vet Group revenue

2. VIP customer sales are shown on a rolling 12 month basis rather than a year-to-date basis, and include gross spend at First Opinion vet practices

Strategic update: becoming the best pet care business in the world

One year on from launching our pet care strategy, it continues to deliver strong results. The UK pet care market is in structural growth and remains resilient against a backdrop of continued consumer uncertainty. By providing the complete pet care experience to customers, we are able to strengthen our position and deliver market share gains across all segments.

We have seen growth across our pet care ecosystem in H1 FY20 - whether that is in Puppy and Kitten Club members, online and offline transactions, subscription numbers or vet practice new client registrations; pet owners are shopping with us more than ever before.

Strategic pillar: Bring the pet experience to life

By making all aspects of pet care convenient and affordable for customers, we are able to capture a greater share of their overall spend. Within Retail we have maintained our competitive price position throughout the first half of the year, having remained within 5% of our most competitive online peer on all comparable items, and the same price when comparing the products we believe really matter. All parts of our omnichannel business continue to grow and around 60% of transactions involve a store-based colleague; demonstrating the benefit of having an integrated offer.

Having launched the first of our new pet care centre format at two existing stores at the end of FY19, we have extended this trial at a further three locations during the first half of this year. Initial feedback from customers and colleagues alike has been positive, proving that whilst we will continue to refine and optimise the format, investing in our store experience will provide us with a competitive advantage.

We have seen real strength in the performance of both our VIP Puppy and Kitten Clubs. These free-to-join clubs provide a programme of advice and offers designed to encourage shopping across product, grooming and vet services - acting as valuable long term customer acquisition tools and providing opportunities to take a greater share of overall spend by building brand loyalty. Early indications are that the spend uplift seen in Puppy Club members during the first 12 months continues to apply in to adulthood, demonstrating the potential to increase customer lifetime value.

Strategic pillar: Deliver 50% of sales from pet care services

In H1 FY20, 35.4% of customer sales# came from pet care services. We have seen strong growth across the different subscription packages that we offer, and now have more than 790,000 customers on plans across our Group. In particular, our Pet Care Plan initiative, which rewards store colleagues for introducing customers to vet practices, continues to be successful at increasing the number of vet clients on a healthplan. We have also expanded the range of products available via our Easy Repeat online platform, where customers enjoy our very best prices, and there remains a significant opportunity to capture a greater share of customer spend across both food and accessories.

1 including gross customer sales made by First Opinion vet practices, revenue from our Specialist Referral centres, grooming services, subscriptions, pet sales and pet insurance commissions

In the Vet Group, our programme of buying out certain Joint Venture (JV) First Opinion vet practices is now complete. Over the past 12 months we have bought out a total of 57 JV practices, of which 36 have closed and the remaining 21 have been retained as a company managed practice, controlled and operated by Pets at Home. Throughout this period, we have worked collaboratively with the Joint Venture Partners involved to ensure the best possible outcome has been reached in each case.

The planned changes to the fee arrangements for ongoing JV practices are progressing in line with our original expectations; we have already begun making adjustments for some practices and during the second half of the year we will extend this further as we look to make our fee structure simpler and fairer. Whilst this leads to an initial decrease in the JV fee income taken by Pets at Home, it will enable practices to become debt free sooner and also reduces the need for Pets at Home to provide additional funding support in the form of operating loans. Looking ahead, we expect to see fee income increase from FY21 as practices mature in a more sustainable way.

Customer sales# across the entire First Opinion estate increased by 11.8%, and mature JV practices once again grew their customer sales ahead of the market, driven by the incentivisation of our shared ownership model. The underlying health of our First Opinion estate has improved year on year, giving us confidence that the actions we are taking will help release free cashflow as practices mature.

Elsewhere in the Vet Group, our Specialist Referral division has delivered revenue growth broadly in line with the underlying market, and we are pursuing ways in which we can optimise overall performance. At the same time, we are looking to grow our capacity and capability by expanding Dick White Referrals and opening our first greenfield site in Scotland during FY21.

Strategic pillar: Use our data to better serve customers

The health of our VIP loyalty club remains strong, with further new signs-ups and lower churn leading to a record number of active members at over 5 million. By capturing data specific to the individual pet, we are able to ensure that communications are personalised and relevant to the customer, helping to increase customer spend. Our work to take the management and analytics of the VIP data in-house and migrated on to a cloud-based platform, whilst building a team of data scientists to leverage that wealth of data, is progressing well. These are key enablers in allowing us to become increasingly sophisticated in our marketing approach as we look to encourage shopping across both products and services, where we know there is a significant opportunity.

We are continuing to use our data to optimise store-specific product ranging. Alongside our new pet care centre format, we have been able to deliver increased sales from less space and a fewer number of products. By applying this new approach to ranging in upcoming store re-fits, it will enable us to maximise sales whilst creating new experience and events areas within the store, giving customers even more reasons to visit.

Strategic pillar: Set our people free to serve

We continue to create operational efficiencies across our Group, whether that is in store, grooming salons, distribution centres or our Support Offices. In doing so, we are able to provide the very best service to our customers, colleagues and Partners. The impressive Retail like-for-like sales growth has been achieved despite operating off fewer colleague hours in store, and all whilst customer satisfaction scores continue to increase - testament to the quality service that our colleagues provide every single day.

Following the first phase of automated picking for our flea treatment subscription service at Northampton Distribution Centre last year, we have now extended this with packing automation for the rest of our online order fulfilment. This has doubled our maximum capacity, and ensures that we have the infrastructure in place to support the continued growth of our omnichannel business, where we expect the channel shift to online to continue.

The shortage of vets in the UK has been widely documented, and whilst the Government has now agreed to restore veterinary surgeons to the shortage occupation list, the continued uncertainty surrounding the UK's departure from the EU means these challenges are likely to persist in the short term. In the meantime, practices remain focused on their existing vets, where vacancy rates have been reduced and turnover stabilised. This has been achieved by adopting a flexible approach to working arrangements that reflect the modern day demands of personal and professional life, supporting graduates and providing more opportunities for career development. Alongside a commitment to clinical freedom, these initiatives will help practices become the employer of choice for small animal veterinarians.

Chairman succession planning

After over 9 years as Chairman and in accordance with the new Corporate Governance Code, Tony DeNunzio has advised the Board that now is an appropriate time to commence a succession plan. The Board has appointed recruitment consultants and will consider both external candidates as well as existing Non-Executive Board members, before making a formal recommendation. In order to facilitate an effective succession plan, Tony will remain as Chairman until the announcement and induction of his successor. In the meantime, he remains fully committed to the company and is supportive of our pet care strategy.

Peter Pritchard

Group Chief Executive Officer

26 November 2019

Chief Financial Officer's Review

The H1 FY20 period represents the 28 weeks to 10 October 2019. The comparative period represents the 28 weeks to 11 October 2018.

The Group's results are shown as two segments that represent the size of the respective businesses and our internal reporting structures; Retail (includes products purchased online and in-store, pet sales, grooming services and insurance products) and Vet Group (includes First Opinion practices and Specialist Referral centres).

The financial statements for H1 FY20 have been prepared under the requirements of IFRS16 for the first time. To aid comparability with the prior period, adjusted financial information shown before the impact of IFRS16, are also shown in the table below. This will be presented throughout FY20 until the transition to IFRS16 is complete. The impact of IFRS16 on the Group interim financial statements has been to decrease underlying profit before tax by £3.3m, and is shown in further detail on page 12.

1. H1 FY20 non-underlying charges relating to costs incurred by the Group in buying out, and in some cases closing, JV practices include £7.6m charged against Vet Group, and Group, non-underlying gross margin (H1 FY19: £29.0m)

2. H1 FY20 non-underlying charges also include £0.1m relating to an accounting charge for the potential future acquisition of minority stakes owned by vet partners in the Specialist Referral centres, which has been charged against non-underlying operating costs (H1 FY19: £0.9m)

3. Adjusted financial metrics for H1 FY20, which exclude the impact of the transition of IFRS16, have been provided to aid comparability with the prior period. For further information on the impact of IFRS16, see page 12

4. H1 FY20 non-underlying cash costs include £9.4m relating to practices that we have bought out (H1 FY19: £nil), plus £6.4m in relation to payments made to Shared Venture Partners in our Specialist Referral centres to acquire certain remaining minority stakes (H1 FY19: £nil)

Impact of IFRS16 and Vet Group recalibration on the interim financial statements

The financial information in pages 8 to 13, and associated commentary, have been presented on a constant accounting basis and do not reflect the impact of IFRS16. The impact of IFRS16 on the Group interim financial statements is shown on page 12.

As part of the recalibration of the First Opinion vet business, a total non-underlying charge of £7.6m (H1 FY19: £29.0m) relating to any practice buy out commenced or completed in H1 FY20, has been recognised against Vet Group, and Group, gross profit. This accounts for all costs incurred by the Group relating to practices that we have bought out and/or closed during the period. In addition to this income statement charge in H1 FY20, an existing balance sheet provision of £23.5m from FY19 has been utilised.

Total cumulative non-underlying costs relating to the recalibration of the First Opinion vet business incurred since FY19 have been in line with previously issued guidance, and with the buy out programme now complete, no further non-underlying charges relating to our recalibration plans are expected in H2 FY20.

Revenue

Group revenue in H1 FY20 grew 9.4% to £546.3m (H1 FY19: £499.3m) and like-for-like (LFL) revenues grew 7.6%#.

Retail revenues grew 8.1% to £479.8m (H1 FY19: £443.7m), including omnichannel revenue growth of 31.7% to £46.5m. LFL revenue growth in Retail was 7.8%#. Food revenues grew by 9.8% to £261.1m (H1 FY19: £237.8m), reflecting strong performance across both dog and cat Advanced Nutrition (AN) lines, and also dog treats. AN revenues overall grew 12.7% to £122.4m (H1 FY19: £108.7m). Accessories revenues grew 5.6% to £193.9m (H1 FY19: £183.6m), with categories such as dog toys and cat litter performing well. Due to the hot and wet weather over the Summer months, we saw a particularly strong performance in our Health & Hygiene category.

Vet Group revenues grew 19.6% to £66.5m (H1 FY19: £55.6m), with LFL growth of 6.4%#. Customer sales made by all First Opinion vet practices were up 11.8% to £190.2m# (H1 FY19: £170.1m) despite ending the period with 32 fewer practices, driven by the continued maturation of practices. Total Joint Venture fee income increased by 2.8% to £29.7m (H1 FY19: £28.9m), whilst LFL fee income growth was 2.5%# (H1 FY19: 14.7%). This LFL growth is lower than seen previously due to the fee adjustments which have been in place for some JV practices throughout the period.

Consistent with the accounting treatment during the comparative period, from the point at which any practice buy out was completed, the financial performance of that practice has been consolidated. (Please refer to Note 1 in the financial statements for more detail.) This has led to consolidated customer revenues from company managed First Opinion practices increasing significantly to £11.6m (H1 FY19: £3.3m).

Elsewhere in the Vet Group, we also saw growth of 8.4% in revenues from our Specialist Referral centres to £21.3m (H1 FY19: £19.7m).

Gross margin 

Group underlying gross margin declined by 132 bps to 49.0% (H1 FY19: 50.3%), whilst Group statutory gross margin was 47.6% (H1 FY19: 44.5%).

Underlying (and statutory) gross margin within Retail was 49.9%, a reduction of 106 bps over the prior period (H1 FY19: 51.0%). This was driven by strong food transaction growth, both in store and online, creating an adverse margin mix effect but delivering an overall cash margin benefit due to the revenue performance. As our omnichannel business increases its participation of Retail revenues, this also contributes to gross margin dilution due to the greater mix of food product versus higher margin accessories.

Underlying gross margin within the Vet Group decreased by 268 bps to 42.8% (H1 FY19: 45.5%). This decrease reflects the impact of the planned fee adjustments, which have supressed Vet Group revenue whilst the costs which are charged against gross profit have remained stable. In addition, the consolidation of a number of practices which have been bought out and retained under a company managed model, which were not consolidated in the prior period, has had a dilutive impact on Vet Group gross margin. Finally, there was a lower charge of £0.6m (H1 FY19: £2.5m) made to the underlying provision held against operating loan funding provided to First Opinion vet practices we intend to retain as Joint Ventures.

Statutory Vet Group gross margin, after all non-underlying charges, was 31.3% (H1 FY19: (6.7)%). This reflects a total charge of £7.6m (H1 FY19: £29.0m) relating to costs incurred by the Group in buying out, and in some cases closing, certain JV practices during the period.

Operating profit and operating costs (pre-IFRS16)

Underlying Group EBIT was £47.2m# (H1 FY19: £39.8m), with a margin of 8.6%# (H1 FY19: 8.0%).

Underlying Retail EBIT was £33.8m# (H1 FY19: £29.4m) with a margin of 7.0%# (H1 FY19: 6.6%) and operating cost growth, excluding depreciation and amortisation, was 4.9% to £187.3m (H1 FY19: £178.6m). This margin expansion was achieved despite the slightly lower gross margin as noted above, and represents our success in controlling operating costs. Occupation costs (rent, service charges and other property costs) again declined as a percentage of sales due to our success in achieving rent reductions during lease renewal negotiations, as did colleague and distribution costs. Excluding IFRS16 right-of-use assets, depreciation and amortisation in Retail increased slightly to £18.3m (H1 FY19: £18.2m).

Underlying Vet Group EBIT was £17.4m# (H1 FY19: £13.7m) with a margin of 26.2%# (H1 FY19: 24.6%). Operating costs in the Vet Group, excluding depreciation and amortisation, were £9.4m (H1 FY19: £10.4m), a decline of 9.6% on the prior year. The year on year change in operating costs reflects the benefit of one-off project costs incurred in the prior period not being applicable in the current period, but offset by overhead costs relating to any bought out JV practice being recognised throughout H1 FY20, whereas these practices had not yet been consolidated in the prior period. Excluding IFRS16 right-of-use assets, depreciation and amortisation in the Vet Group increased to £1.6m (H1 FY19: £1.2m).

In the Vet Group, non-underlying operating costs totalling £0.1m were recognised in relation to the ownership structures and accounting treatment of the Specialist Referral centres (H1 FY19: £0.9m). During the period, we exercised options to purchase shareholdings from certain Partners in our Specialist Referral centres, at a total cash cost of £6.4m, in line with previously issued guidance, and which represented an average EBITDA multiple of >9x. As such, three of our four centres are now wholly owned, with the remaining one 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 growth element 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.

Central costs, including Group overheads and colleagues, increased to £4.0m (H1 FY19: £3.2m).

Finance expense

Excluding IFRS16 interest charges, the net finance expense for the half year period increased slightly to £2.2m (H1 FY19: £2.0m).

Profit before tax

Excluding the impact of IFRS16, underlying pre tax profit was £45.0m# (H1 FY19: £37.9m) and statutory pre tax profit, including all non-underlying items, increased significantly to £37.3m (H1 FY19: £8.0m). This increase in statutory pre tax profit reflects the strength of underlying trading in Retail, plus a reduced non-underlying charge of £7.7m (H1 FY19: £29.9m), largely relating to the recalibration of the First Opinion vet business.

Taxation, net income & EPS

After removing the impact of IFRS16, underlying total tax expense for the period was £9.1m#, a rate of 20.1% on underlying pre tax profit.

Excluding the impact of IFRS16, underlying net income for the year, after tax, increased by 17.5% to £36.0m# (H1 FY19: £30.6m). Underlying basic earnings per share were 7.2 pence# (H1 FY19: 6.1 pence) and statutory basic earnings per share were 5.7 pence (H1 FY19: 1.2 pence).

Cash working capital

The cash movement in trading working capital for H1 FY20 was an inflow of £1.2m#. This comprised of an £11.5m increase in payables offset by a £3.7m increase in inventory and a £6.6m increase in receivables.

Whilst we supported some ongoing Joint Venture First Opinion vet practices with operating loan funding in the period, we also saw some practices make repayments against existing loans such that the net cash inflow from these practices was £0.4m (H1 FY19: net cash outflow of £5.2m). This increased the overall Group cash working capital inflow to £1.6m.

The gross value of operating loans at the end of the period was £34.6m (H1 FY19: £46.9m). This was slightly lower than expected, and reflects the positive impact our fee remediation measures have had in terms of reducing the need to extend operating loans to Joint Venture practices. Following the completion of our buy out programme in H1 FY20, operating loans totalling £7.2m relating to these practices have been written off in full by utilising the 100% non-underlying provision established in FY19, and there are no remaining operating loan balances relating to any practice which has been bought out. As such, the total provision of £7.7m (H1 FY19: £23.0m) now held against the gross value of operating loans is entirely an underlying provision held against the balance of operating loans for practices which we expect to continue operating as Joint Ventures at an average of c22%.

Capital investment

Excluding IFRS16 right-of-use asset additions, capital investment was £16.8m (H1 FY19: £17.3m), where £5.6m (H1 FY19: £3.3m) is represented by the ongoing refurbishment and maintenance of our existing store estate, including rollout of our pet care centre trial at a further three stores. Investment in omnichannel and business systems totalled £4.1m (H1 FY19: £4.7m), as we continue to invest in our digital capabilities. Cash capital expenditure was £15.6m (H1 FY19: £20.3m).

Group underlying free cashflow

On a pre-IFRS16 basis, Group underlying free cashflow after interest, tax and before acquisitions decreased to £24.9m# (H1 FY19: £27.3m), representing a cash conversion rate of 35.9%# (H1 FY19: 44.6%). The decrease in free cashflow compared with the prior year is largely driven by the one-off additional outflow of £10.7m relating to a change in timing to Corporation Tax payments.

1. Includes central costs of £4.0m plus interest paid of £2.2m, a corporation tax credit of £1.5m, purchase of own shares of £3.0m and a credit relating to IFRS2 of £0.4m

The Group's net debt position at the end of the half year period was £136.3m, which represents a leverage ratio of 1.0x underlying EBITDA# on a pre-IFRS16 basis.

2. FY19 includes the purchase of two mature, JV practices from Joint Venture Partners for £2.1m, which are now operated as company managed practices, £(0.3)m of net cash acquired by purchasing three other existing JV practices, and deferred consideration of £1.0m relating to one of our Specialist Referral centres. H1 FY20, includes an investment in Tailster.com and in certain company managed practices

3. H1 FY20 includes £9.4m relating to practices bought out during the period (FY19: £8.8m), plus £6.4m in relation to payments made to certain Shared Venture Partners in our Specialist Referral centres to acquire remaining minority stakes (FY19: £0.1m)

Capital allocation

Our capital allocation policy prioritises investing our cash generation in areas that will expand the Group and deliver appropriate returns. This includes organic investment and the working capital needs of our Vet Group, plus bolt-on acquisition opportunities where we consider the potential opportunity to drive incremental value as attractive. Our second priority is to maintain an ordinary dividend payment, where despite the reduction in profits due to the adoption of IFRS16, there is no impact on the cash value of the dividend we intend to pay. 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 through a special dividend or share buyback.

Dividend

The Board has recommended an interim dividend of 2.5 pence per share, equal with the prior year. The interim dividend will be payable on 10 January 2020 to shareholders on the register at the close of trading on 6 December 2019.

Persons Discharging Managerial Responsibility (PDMRs)

Pets at Home is pleased to confirm that two members of the Executive Management Team, Jane Balmain, Chief Operating Officer of the Vet Group, and David Robinson, Chief Operating Officer of Retail, are each to be considered PDMRs. As at the date of this announcement, Jane has a beneficial interest in a total of 122,791 Pets at Home Group Plc ordinary shares ("Shares") together with 116,301 options/awards held under the Company's share plans. The number of Shares over which David holds options/awards under the Company's share plans is 164,383.

Transition to IFRS16

The financial statements for H1 FY20 have been prepared under the requirements of IFRS16 for the first time. Implementation of IFRS16 has had no effect on how the business is run, nor on cash flows generated. It has, however, had an impact on the assets, liabilities and income statement of the Group, as well as the classification of cash flows relating to lease contracts.

IFRS16 seeks to align the presentation of leased assets more closely to owned assets. In doing so, a right-of-use asset and lease liability are brought onto the balance sheet, with the lease liability recognised at the present value of future lease payments. Whilst the right-of-use asset is matched in value to the lease liability at inception, it differs in value through the life of the lease. The total value of the discounted lease liability under IFRS16 on the Group's Balance Sheet at the end of the half year period is £488.7m.

IFRS16 permits a choice on the method of implementation and after careful consideration the Group has applied the modified retrospective approach. Under this method, all prior year comparative balances have not been restated, but the cumulative effect of adopting IFRS16 has been recognised as an adjustment to the opening balance sheet for FY20. Both the right-of-use asset and lease liability are recognised as the present value of future lease payments as of the date of transition, adjusted for any remaining deferred income relating to landlord incentives and rent free periods, outstanding prepayments or provisions for onerous leases.

In Retail, the application of IFRS16 results in all store and distribution centre rent no longer being included within operating costs but replaced instead by an additional depreciation charge. On a post-IFRS16 basis, Retail operating costs including depreciation were £201.3m with an operating margin of 7.9%. Including all IFRS16 right-of-use assets, total depreciation and amortisation was £55.3m.

In the Vet Group, right-of-use assets relate predominantly to our four Specialist Referral centres. On a post-IFRS16 basis, Vet Group operating costs including depreciation were £10.9m with an operating margin of 26.4%. Including all IFRS16 right-of-use assets, total depreciation and amortisation was £2.8m. 

Including all IFRS16 interest charges, the net finance expense for the period was £10.0m.

The net impact of IFRS16 in the half year period was to reduce Group underlying and statutory profit before tax by £3.3m to £41.7m and £34.0m respectively.

In order to clearly show the impact of transitioning to IFRS16, we show a reconciliation for Group underlying profit before tax and cashflow as follows.

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 keeping the following areas under review:

1) Consumer demand - although we expect the UK pet care market to remain resilient, we will be vigilant to signs that consumer demand is being adversely affected, so that we may seek to respond appropriately and expediently.

2) Although pet products are unlikely to 'spoil' as a result of any border delays, there is a risk that our supply chain becomes disrupted. In such circumstances, we may consider increasing our inventory holding to mitigate the potential impact on our Retail division.

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 to cover the next 18 months. Our hedging requirements for FY20 are in place at an average rate of 1.34 USD:GBP, and any foreign exchange impact is included within our financial guidance. Looking ahead to FY21, forward contracts are already in place for approximately 50% of our total requirement at an average rate of 1.27 USD:GBP, and we will monitor exchange rates closely as we look to mitigate any pressure on Retail gross margin.

5) A significant number of colleagues, particularly within our Vet Group and distribution centres, are non-UK EU nationals. Whilst Brexit may result in changes to UK immigration policy which could increase the risk around the availability, recruitment and retention of these individuals, it may also make it easier to recruit highly skilled workers. Although it is a positive step that the Government has accepted the Migration Advisory Committee's recommendation that veterinary surgeons be restored to the shortage occupation list, we will continue to work closely with professional bodies including the Royal College of Veterinary Surgeons and the British Veterinary Association to assess the potential impact of restrictions on free movement for EU nationals.

Mike Iddon

Chief Financial Officer

26 November 2019

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 Board does not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 28 March 2019. These comprise:

·; Protecting reputation

·; Competition with other retailers and vet practices, including other pet specialists, supermarkets, discounters, and online retailers

·; Stores and services expansion and rollout

·; Retaining and developing engaged colleagues

·; Keeping core business systems up to date and with the capability to support the Group's growth plans

·; 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

The Board continues to review the risks and opportunities that may arise as a result of Brexit. Mitigation plans are continuing to be developed in the following areas:

·; Our people

·; Supply chain and sourcing

·; Treasury and finance

A detailed explanation of these risks can be found on pages 38 to 45 of the 2019 Annual Report which is available at http://investors.petsathome.com.

During the year ended 28 March 2019, the Financial Reporting Council ("FRC") Corporate Review team began a review of our Annual Report and Accounts for the year to March 2018. The Corporate Review team entered into correspondence with the Group, which is ongoing. All correspondence received to date and our responses have been discussed with the Audit and Risk Committee. The correspondence covers accounting for investments in Joint Venture veterinary practices, practice loans provided to those practices, and impairment testing, including goodwill and investments in subsidiaries. As a result of the FRC's review, we have, and will continue to, improve the clarity of disclosure, including the related judgements and estimates, in relation to these areas in our Annual Report and Accounts.

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 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 and Transparency Rules, being related party

transactions that have taken place in the first 28 weeks 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 25 November 2019

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 advisor.

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 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.

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 week period ended 10 October 2019 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated cash flow statement, the condensed consolidated statement of changes in equity 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 ended 10 October 2019 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.

The impact of uncertainties due to the UK exiting the European Union on our review

Uncertainties related to the effects of Brexit are relevant to understanding our review of the condensed financial statements. Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. An interim review cannot be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.

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

Stuart Burdass

for and on behalf of KPMG LLP

Chartered Accountants

1 St Peter's Square

Manchester

M2 2AE

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. Where the current period APM has been amended to exclude the impact of transition to IFRS 16, this has been set out in the definition below.

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 where the Group has bought out the Joint Venture Partners or will offer to buy out the Joint Venture Partners in the future.

Omni-channel revenue: Revenue net of discounts and VAT from online sales, subscriptions and order to store.

Underlying EBITDA: Earnings before interest, tax, depreciation & amortisation before the effect of non-underlying items in the period.

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 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 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, before the effect of non-underlying items in the period.

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)

Alternative Performance Measures ("APMs") (continued)

Alternative Performance Measures ("APMs") (continued)

All activities relate to continuing operations.

Basic and diluted earnings per share attributable to equity shareholders of the Company:

Condensed consolidated statement of comprehensive income

The notes on pages 26 to 62 form an integral part of these consolidated interim financial statements.

Condensed consolidated balance sheet

The notes on pages 26 to 62 form an integral part of these consolidated interim financial statements.

Condensed consolidated statement of changes in equity

The notes on pages 26 to 62 form an integral part of these consolidated interim financial statements.

Condensed consolidated statement of cash flows

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 10 October 2019 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 28 March 2019 are available on request from the Company's registered office and via the Company's website.

The interim 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 IAS 34 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 28 March 2019.

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 28 March 2019 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 10 October 2019.

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 10 October 2019 are consistent with the policies applied by the Group in its consolidated financial statements as at and for the 52 week period ended 28 March 2019, except as described below:

·; 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 IFRS 16 (described below)

The Group has initially adopted the following IFRS's from 29 March 2019 and these have been applied in these interim financial statements.

IFRS 16 Leases (effective date 1 January 2019) 

IFRS 16 Leases is effective for the Group from 29 March 2019 and replaces existing lease guidance under IAS 17 Leases. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17.

i) Leases in which the Group is a lessee

The majority of the Group's trading stores, standalone veterinary practices, specialist referral centres, distribution centres and support offices are leased. The Group also has a number of non-property leases relating to vehicles, equipment and material handling equipment. The commitments as at 28 March 2019 and 29 March 2018 are disclosed in note 24 of the annual financial statements.

Under IFRS 16, the Group recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The lease liability is initially measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease, or if that rate cannot be readily determined the Group's incremental borrowing rate. The rate implicit in the lease cannot be readily determined and therefore a rate based on the Group's incremental borrowing rate is used. This rate is adjusted to take into account the risk associated with the length of the lease. A higher discount rate is applied to a longer lease. Lease payments will include any fixed payments including as a result of stepped rent increases.

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the lease commencement date, any lease incentives received or premiums paid.

Under IAS 17, the Group recognised operating lease expenses on a straight line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. Lease incentives received or paid are recognised as an integral part of the total lease expense over the term of the lease. Rent prepayments are disclosed within prepayments and deferred income in respect of landlord incentives on property leases are disclosed within trade and other payables. Under IFRS 16, the current rent charge is replaced by a depreciation charge for the right-of-use asset and an interest expense on the lease liability.

There are recognition exemptions for low-value assets and short-term leases with a lease term of 12 months or less. Any leases under a short term licence agreement are excluded as they fall into the lease term of 12 months or less. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the term of the lease. The total value of leases where the Group has taken a recognition exemption is disclosed in note 9.

ii) Leases in which the Group is a lessor

Lessor accounting remains similar to current accounting under IAS 17. At lease inception, lessors will determine whether each lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is considered to be the case, then the lease is recognised as a finance lease, if not then it is recognised as an operating lease. As part of this assessment, the Group considers certain factors such as whether the lease is for the major part of the economic life of the asset.

The Group has a small number of leases where it is an intermediate lessor. For these leases, it accounts for its interest in the head lease and sub-lease separately. It assesses the lease classification of the sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset.

The Group has reassessed the classification of sub-leases in which the Group is a lessor. Under IAS 17, the subleases were classified with reference to the underlying asset which resulted in all subleases being classified as operating leases. The Group will reclassify a small number of sub-leases as a finance lease, resulting in recognition of a finance lease receivable of £2.4m as at 29 March 2019. Under IFRS 16, the finance lease is assessed by reference to the right-of-use asset under the head lease rather than the underlying asset. There will be no change to the accounting for the remaining subleases which continue to be accounted for as an operating lease, and income from these leases will continue to be recognised on a straight-line basis over the term of the lease, as disclosed in note 3.

The Group currently receives rental income from related Joint Venture veterinary practices which are located within the Group's retail stores. These rental incomes are disclosed in note 3. Under IFRS 16, the lease classification of sub-leases is assessed by reference to the right-of-use asset under the head lease rather than the underlying asset. Therefore there will be no change in accounting for this rental income, which will continue to be accounted for within operating expenses.

iii) Transition

The Group has adopted IFRS 16 on 29 March 2019 using the modified retrospective approach. The cumulative effect of adopting IFRS 16 has been recognised as an adjustment to the opening balance sheet as at 29 March 2019 with no restatement of comparable information. There is no impact to the statement of changes in equity. Further details and the impact of changes are disclosed in note 15.

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 IAS 34 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 (significant estimate)

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 (significant estimate)

The Group provides operating loans and other loans to a number of Joint Venture veterinary practices to cover their cash flow requirements and support their longer term growth. The loans advanced to the practices are interest free and either repayable on demand or repayable within 90 days of demand. As detailed in these notes, provisions for expected credit losses are held in respect of operating and other loans to Joint Venture veterinary practices. In line with IFRS 9, judgement is applied in determining both the definition of default and the qualitative and quantitative risk-related criteria used to allocate loans into bands based on the probability of default, and in estimating an appropriate provision to apply to each loan by applying the expected credit loss criteria including the effective interest rate. In assessing the qualitative and quantitative information the Group takes into account factors including current performance against business plan and change in customer numbers. The revenue and profit expectations of the practices are taken into account in determining the length of time that the practice is expected to take in order to repay the loans. This is also the period over which losses are estimated should default occur within the contractual period. The provision is based on forward-looking information, taking into account expected credit losses giving due consideration to the Joint Venture's business plan, as well as macro-economic factors such as growth in the size of the veterinary market, availability of veterinary practitioners and cost inflation within the industry. These judgements are made by management based on their experience and knowledge of the practices. The quantum of Joint Venture receivables and the provision made against these receivables is disclosed in notes 15, 16 and 27 in the annual consolidated financial statements.

Assessment of control with regard to Joint Ventures (significant judgement)

The Group has assessed, and continually assesses whether the level of an individual Joint Venture veterinary practices' indebtedness to the Group, particularly those with high levels of indebtedness, implies that the Group has the practical ability to control the Joint Venture, which would result in the requirement to consolidate. In making this judgement, the Group reviewed the terms of the Joint Venture agreement and the question of practical ability as a provider of working capital to control the activities of the practice. This included consideration of barriers to the Group's ability to exercise such practical or other control, which include difficulty in replacing Joint Venture Partners due to the shortage of veterinarians in the UK and reputational damage within the veterinary network should the Group attempt to exercise control, as well as potential barriers to the Joint Venture Partner exercising their own power over the activities of the practice. We note that under the terms of the Joint Venture agreement, our partners run their practices with complete clinical freedom. The Group is satisfied that on the balance of evidence from the Group's experience as shareholder and provider of working capital support to the practices, it does not have the current ability to exercise control over those practices to which operating loans are advanced and therefore non consolidation is appropriate.

Put and call options (significant estimate)

The Group recognises put and call options over non-controlling interests (NCI) in its subsidiary undertakings as a liability in the consolidated balance sheet. The nature of the Group's option agreements are such that there is an element that is a minimum amount, and a growth element to reward and retain key individuals employed by the acquired business, who are also non-controlling shareholders, and which is linked to improvements in the results of the acquired business. The growth element would be forfeited under certain conditions by the NCI, including if they ceased to be employed by the Group.

Upon initial recognition, the minimum amount is recognised as a liability at fair value, which is estimated as the present value of the future exercise price based upon the fair value of the business at acquisition. For the growth element, the expected amount is charged to the income statement as employment costs over the option period within non-underlying items. The financial liability is valued based on management's best estimate of the future pay out, which is based on the estimated future earnings. The charge is spread over the financial years before the put and call can be exercised for the first time.

The Group consider that no reasonably possible change in assumptions underlying the carrying value of the put and call options would result in a material range of estimation uncertainty in the next 12 months. Therefore, the carrying value of the options is not considered a significant estimate as at 10 October 2019.

Carrying value of inventory (significant estimate)

A provision is made for those items of inventory where the net realisable value is estimated to be lower than cost. Net realisable value is based on both historical experience and assumptions regarding future selling values and disposal channels, and is consequently a source of estimation uncertainty. At 10 October 2019 the inventory provision amounted to £2.6m (11 October 2018: £2.5m). The value of inventory against which an ageing provision is held is £1.9m (11 October 2018: £1.6m). Management consider the range of reasonably possible estimation uncertainty to be immaterial given the value of the provision, the value of inventory against which the provision is held, and the degree of historical accuracy in the provisioning policy. Therefore, the carrying value of inventory is not considered a significant estimate as at 10 October 2019.

IFRS 16 Leases (significant judgement)

Under IFRS 16, the Group recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The lease liability is initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate, adjusted to take into account the risk associated with the length of the lease which ranges between 1 and 27 years. The Group have therefore made a judgement to determine the incremental borrowing rate used. As a result of the significant impact the transition to IFRS 16 has had on the Group's opening balance sheet (£473.2m right of use asset and £506.1m lease liability recognised as at 29 March 2019), the discount rate is considered to be a significant judgement. The discount rate applies ranges between 2.3% and 3.3% dependent on the length of the lease term.

2 Segmental reporting

The Group has two reportable segments, Retail and Vet Group, which are the Group's strategic business units. 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.

EBITDA before non-underlying items is defined on page 19.