AO World plc

Good morning and welcome to AO's full year results presentation. It has definitely been a very different year for all of us. At AO we've seen significant strategic, operational and financial progress. A real step change year. And we're updating you differently today as well. We think understanding the AO journey is really important. So Mark will run you through the financials in a moment and then you'll hear more from me. At the end of the presentation, we'll be hosting a Q&A. So please stay on and don't be shy with your questions.

Good morning and thank you John. This has been a phenomenal 12 months and one that has accelerated the strategic and market progress we've made over the last couple of years. Total group revenue grew by 62% to £1.7 billion. This came mainly from product sales, which increased as we all switched to online shopping when non-essential stores were shut. The mix of products in high demand changed through the year, with freezers being the first hot product as Covid hit, through to gaming and consumer electronics and major domestic appliances in the run up to Christmas. I was incredibly thankful to all our AOers, particularly those in our logistics business, who stepped up to the plate in the early days of COVID and continued to deliver for our customers. Our UK business grew at 59%, generating sales of over £1.4 billion. Our newer categories, including small domestic appliances, audiovisual and consumer electronics, all more than doubled their sales. Gaming, DIY and mobile handsets also had a great year, although from a smaller base. We saw strong growth in Germany, where our market share doubled to over 3%. Revenue grew 81% to £226 million and we achieved a break-even adjusted EBITDA run rate through our peak period. This is a great milestone and shows what we can accomplish with our 1A0 model. More broadly, on a group basis, product revenues grew by 74% as the electrical market shifted further online. Service revenues comprising installations, premium delivery and so forth were up by 51%, slightly behind product revenues as Covid restrictions on entering people's homes and social distancing meant that we had to pause these services at certain times over the year. Commission revenue grew modestly but was impacted by adjustments in warranties and issues in mobile, which I will come back to explain in more detail later. In third-party logistics, we prioritised deliveries to our regular partners and AO customers during COVID and put new growth on hold. Recycling volumes were particularly affected by COVID restrictions, about which John will speak shortly. Despite the volume volatility, recycling reported a 32% increase in revenues. Operationally, we opened our plastics recycling facility during the year, further increasing our credentials in this area. Whilst this has been a great year for us, don't forget we've consistently reported double-digit growth of 25% since IPO. And over the past five years, Germany has grown at 37% on a compound basis. So our high growth strategy has been successful through many market cycles, and this shouldn't be seen as a one-off year. Moving on to gross margin, which remained consistent at 18% for the group, it's in the business units where positive movements become clear. UK gross margin fell slightly as a result of category mix, with newer categories typically having lower gross margin than mature categories, and this was compounded by the challenges in mobile and warranties. Despite this mixed effect, margins in all categories on AO.com improved during the period. The huge inflection point is in Germany, where gross margin has moved from a loss of 2% to almost a 9% positive margin this year. This mainly came from the steady improvements in our supplier terms, aligning pricing with the UK, and the increased product sales driving scale efficiencies through our logistics operations. What does this mean for the bottom line? Our primary focus remains revenue growth, but adjusted EBITDA has continued to grow, doubling at group level from 2% last year to 4% of revenues for this financial year, or £64 million. We've seen headwinds and tailwinds throughout the year from COVID, so we won't try to quantify them all. That said, to call out just a few, in the UK we've increased our warehouse capacity by over 80% with all the associated costs to mitigate supply chain disruption and serve customer demand. We've created 1,200 new roles across the group to meet this elevated level of sales and to bring in the skills helping us to achieve our next phase of growth. Our margin and marketing costs benefited from capacity restrictions in the market when stores were closed. And finally, we saw lots of new customers buying our category online for the first time, whom we hope will repeat purchase time and again in the future. UK EBITDA was 67 million, an increase of 68%, which was a great performance given the mix of headwinds and tailwinds we managed through the year. Losses have reduced further in our German business. As gross margins improved, we've also reduced overhead costs and improved marketing effectiveness. In the third quarter, our breakeven run rate performance demonstrates the potential of the business to deliver profitability and underlines the confidence we have in our model. As we looked through the key line items in SG&A, we saw marketing costs increasing as we ran a number of campaigns to build longer term brand awareness. We welcomed 1.9 million new customers to the website and increased traffic by over 80%. As I've already mentioned, we added around 600,000 square feet of warehousing space, which worked to our advantage when supply chain disruption hit and customer demand soared. We were able to support our supplier partners as we took on their stock in transit when stores closed and we were able to meet demand for our customers who relied on our next day service of essential electricals. The increase in other administrative costs were primarily related to the recruitment of staff across our IT and people functions to support the continued growth of our business as well as an increase in incentive payments reflecting our performance and the introduction of the value creation plan. As a percentage of revenue, these costs overall reduced from 10% to 8%. The strong growth helped us to achieve Group Adjusted EBITDA of £64 million, up over 190% on the previous year. Although this has generally been a great year for AO, there were some challenges. As previously reported, our mobile phones direct business was impacted by shifts in customer behavior during the year under COVID, with much higher levels of cashback redemption and contract cancellations than our model predicted. We acted swiftly to move to a higher upfront cost model, which reduced monthly network costs for customers and removed cashback as a sales proposition. We've seen an increase in warranty plan cancellations, partly due to household financial uncertainty under COVID restrictions. Following a full review of the customer contract base, we have made a cumulative adjustment to reserves at year end of £11.1 million, with a one-off charge in the current period of £8.1 million to align our ongoing assumptions and estimates for the warranty contract asset. We finally ended our onerous contract with Payback in Germany, resulting in a £2.2 million adjustment to EBITDA this year. Moving on to cash flow, EBITDA delivered in the period was a key driver of our strong performance. Working capital inflow was then partially offset by the repayment in the ordinary course of borrowings and lease liabilities of £45 million and capital expenditure of £9 million. During the year, we refinanced our debt facilities by consolidating our £60 million RCF with the £20 million term loan into a new £80 million RCF. This matures in April 2023, resulting in total liquidity headroom of £143 million at the year end. Looking now at working capital. As you can see from this chart, inventories have increased significantly to serve strong customer demand and mitigate supply chain disruption. Stock holding in both the UK and Germany roughly doubled compared to last year. Inventory days increased slightly to about 30 days versus 28 previously. We anticipate that stock levels will remain higher than normal until our supply chains normalise. The increase in trade payables reflects higher revenues compounded with increased credit limits from manufacturers. Commercial income, mainly rebates from suppliers, has increased with revenue. Looking forward, our plan is to build on the strong momentum within AO and invest in our long term vision. Over the next 12 months, we aim to lap the volatile Covid comparatives with double digit growth. We will invest further in marketing and digital content, particularly in the UK, with a total of about 30 million incrementally planned for FY22. About 5 million of this is capital. We will invest about 30 million in support systems and process improvement. Roughly two thirds is capital. We continue to investigate a mega recycling centre. The capital costs would be in the region of 20 million. We will continue to grow our German business as quickly as we can at roughly breakeven plus or minus 2%. We will invest sensibly in our UK business for growth, but we'll constrain these investment opportunities to within plus or minus 1% of revenue. Our firm view is that the shift to online retail accelerated by COVID will continue, but we're conscious that markets are volatile and forecasting the next 12 to 18 months will remain difficult. We continue to focus on revenue growth and taking market share, becoming the recognised category leader in electricals and giving us real scale. To sum up, we have a strong business model built up over 20 years which is underpinned by our vertical integration, our 1A0 centres of expertise and our clear vision for high growth potential in newer categories. We're continuing to build scale which drives our profitability and our flywheel. It is these factors that give us confidence in our strategy and our vision. We will remain cautiously optimistic about the coming year. Finally, our people have done a great job this year under extraordinary circumstances and I would like to thank them for all their hard work.

So I'm delighted to talk to you today about what we've achieved. But more importantly, I wanted to talk you through our strategic plan and why we're just so excited about the next chapter of the AO story. Our mission is to be the global destination for electricals and the migration to online is firmly in our favour. The plan I'll set out later will bring some scale to the opportunity ahead of us. And we intend to realise it. In five years time, we will aim to have expanded into five territories with a turnover more than double what it is today. And we'll be operating in a total addressable market of some £118 billion. But before I explain more about the strategy to get us there, let me take a second to remind you quite how far we've come since Christmas 1999, when I bet my friend Alan Latchford that we really could sell washing machines on the internet. Five months later, we were registered with the company's house and selling our first few products. More than 8 million customers have now experienced the AOA since launch, with 2 million choosing us in the last year alone. We make around 14,000 deliveries a day across the UK and Germany and we've got about 1.8 million square feet of warehousing. We employ around 4,400 AOAs and have about 1,000 vans a day out on the road. We recycle hundreds of thousands of appliances and we sell products across nine categories while maintaining industry-leading net promoter scores well into the 80s both in the UK and Germany. It really has been an incredible two decades. As I said before, this has been a significant step change year for AO. We're proud to have risen to the challenge for the people that really matter most to us, our customers. And we've relished the opportunity to impress those two million more of them. Testing times are always an opportunity to deepen relationship. And of course, our trading partners who've been shoulder to shoulder with us throughout. This year has also been one of uncertainty for all areas of life and business. Our immediate response to the pandemic was to invest early and boldly to seize the opportunities created by the temporary closure of physical retail during the pandemic and prove to new customers that there really is a better way to buy these categories. The investment in our capacity, infrastructure and people set us up to serve customers brilliantly when they really needed us most. Our culture is to treat every customer as if they were our own gran and to make decisions that would make our mums proud. We live this in spades and at times it had meaningful costs attached to it but we view those costs as great investments in customer lifetime value. It was certainly a time to have a well invested culture and not a time to start building one. Our swift response to COVID and our platform that's designed for scale leverage delivered transformational results on growth, cash and profit. Our group revenues were up 59% and profits were up 191%. In the UK we made an incredible 8% market share gain in major domestic appliances giving us an average of 23% share across the year. Our share in small domestic appliances was 2% pre-pandemic and rose to peaks of over 5% albeit settled back a little since and consumer electronics was a very similar story. But this shows the sheer scale of opportunity here and that customers will vote to buy these products in some categories that are new to AO when they're given the right range, price and delivery proposition that we are always working to improve. Mobile remains a great opportunity. Frankly a more dysfunctional market I don't think I've ever seen but the fog is clearing and the customer direction of travel is firmly towards disaggregation of handset and sim as we hoped and away from contracts. In Germany we reached a profitable run rate and we expect to maintain this level give or take a couple of points of margin tolerance as we grow. We deepened relationships in Germany with suppliers and our input prices there are now near parity to those in the UK. We reorganised our logistics in Germany to operate on a model that we've proven in the UK with the financial output that will now drive scale efficiencies as we grow. Our centres of expertise, led from and largely based in the UK, now deliver virtually all the marketing and e-commerce operations to increase sales while reducing marketing costs. We removed or prevented complexity and management layers to the tune of about 5 million of overhead annually. At group level, we accelerated our investment in tech, innovation and improving the customer journey, including a full site-wide rebrand and the launch of personalisation, with the benefits of that are going to be realised in the second half of this year and of course in the years ahead as well. Unsp Plc Unsp Plc Unsp The leadership team has also discovered new ways to operate and to integrate the new talent that we're bringing in with deep experience. The challenge of Covid of course brought with it headwinds and tailwinds, but one of the most important aspects was the speed with which the world, governments, customers and business had to adapt. This just wasn't like a huge peak trading or a Black Friday that you plan for all year. This was several Black Fridays, one after another, with very limited planning. We saw about 10 years of change accelerate into the last year on all levels. And the overall shift of customers online, I believe, will stick. I believe that a tipping point has been reached and we expect it to settle at around 60-65% on UK MDA market share and then start to grow again frankly as it has for every year in the last 20 years. There's still loads of opportunity to show people a better way to shop. I also think working from home is here to stay for lots of people. And if you think even just one day a week is a significant increase in appliance usage. We're anticipating more and faster replacements and product upgrades, while investments in home improvements and a reinvigorated housing market will also fuel that demand. However, COVID working practices have been expensive to operate, particularly in our logistics business. But our structural investment has created long lasting scale advantage. Our recycling business in the early stages of COVID suffered from famine, followed by the expensive indigestion of feast when we were able to resume normal collection services. But it could have been much worse and more costly as well if we didn't have that operation in-house. And changing legislation in recycling is also creating lots of opportunity for the future. And as such, we now need to invest in bigger capacity with a long term time horizon in mind. Global manufacturers and many of whom had resisted the migration to online for the last 20 years they're now viewing the world with a digital first lens and we are passionate as we always have been about being their long-term partner of choice. And of course there's still uncertainty and there will be volatility but the direction of travel is firmly with AO and the business model we've spent more than 20 years building. It's worth remembering that the store shopping experience is about as good as it's ever going to get and the online experience will never be worse than it is today. I expect with our growth mindset and focus on scale we'll continue to be a double digit growth business in this year ahead, even as we lap the early stages of volatile Covid comparatives from last year and of course now with physical retail having reopened. We have an opportunity to continue to drive further growth and the ability to reinvest in our flywheel and a firm belief in the scale we can achieve. And scale matters because centrally we're actually a high fixed cost based business and our structural advantage is our ability to leverage that investment over a greater addressable market. We are already proving our ability to leverage our capability and retail platform very effectively into new market segments such as house builders, B2B, social housing, SMEs, even kitchen retailers. And we're also able to test convenience stores within Tesco as well. The same is true with our logistics model where we now make deliveries for a whole host of other companies. They're proud to have their goods delivered on an AO green van because of the quality of that service and the efficiency that it represents. We're also proving this in Germany as well, where we've repeated our relationship with Aldi from the UK and we're also now making furniture deliveries for other retailers. And I think it's an important evidence point that our logistics infrastructure is not just regarded as best in class in Germany for quality, but that we've now got the economics right such that we can serve these contracts profitably. Every one of these opportunities leverages our infrastructure. It drives our flywheel.