AO World plc

Everyone good?

Okay well, welcome everyone. It's great to have everyone here in person and needing more chairs. So a really good sign. So thanks for joining us this morning at what is our London Creative Hub and there's quite a bit of investment gone into this. You'll have heard me say before that This is where we bring our products to life for customers through industry-leading storytelling. And this here is our latest innovation on that journey as we convene hopefully some of the best talent across the market to explore how we take that concept to yet another level. We're of course doing this in conjunction with our global brand partners and we're doing it in a really cost effective way together. The vision that I set at the beginning is that we will do to product information off the screen what Pixar did to the world of animated film when they launched Toy Story back in 1996. The truth of that is similar for them at the beginning of that journey is that exactly what that means right now, how long it'll take or exactly what it will cost is actually a bit uncertain. But this is the hub that we're investing in and it's crucial to our journey to relentlessly make online a better way to shop electricals, explain products and generally do everything on every metric better for customers. So our last update for the full year was only three months ago at the end of August and so today we intend to be pretty brief. In fact we expect this to be a reasonable, reasonably uneventful update. The key messages are that sales are in line with where we guided, profit is around the top end of guidance and our profit guidance is above consensus for next year so quite a positive message. I'd like the rest of this presentation, though, to be frankly reassuringly boring, at least by our historical standards. And so put simply, we're doing what we said we'd do. We're making solid progress with all the sort of strategic realignment goals that we set out at the full year results. And with that in mind, I'm going to take you through that progress, then Mark's going to explain the financial output, and I'm sure you'll have all seen and have a copy of the R&S, and then we'll take questions at the end. Looking at the macroeconomic picture first, even with the UK government's chaos and recent course corrections, and despite England comfortably winning their first game of the World Cup, you don't need me to tell you that the global economy is experiencing a dramatic slowdown and that the consumer outlook is tough. The era of cheap money, rising house prices, but low inflation and full employment, despite low growth, feel pretty well behind us. The disruption, though, and the cost of COVID feel firmly still with us. In the UK, the cost of living crisis has been building since early 21. Consumer sentiment is weak. The economy is now in recession officially, and I expect growth to stay negative for the rest of 22 at the very least. Interest rates are rising for the first time in years and the Bank of England is forecasting that inflation will be in double digits for the remainder of 2022. Over time though, our core major domestic appliances category has proved to be resilient through various cycles as you can see from this graph. We've been helped by the fact that it tends to be less discretionary than other categories, and a decent percentage of our sales are distressed purchases. However, in this calendar year, market movement data suggests that an exceptional 18% decline has happened in MDA volume. So that's the biggest single year of decline in our 22 years in this market. It's even meaningfully higher than we saw in the recession in the 2008-09 period. And data providers suggest that the online market will marginally grow in 2023 and 2024, but will still fall short of that during COVID. So in short, market conditions remain unpredictable and volatile, so the uncertainty we expected and we have planned for continues. So against that challenging backdrop, what are we doing? Well, back in August, I said that we were battening down the hatches ready for the storm that looked pretty clearly on the horizon. And I set out the immediate strategic actions that we were undertaking. And as a reminder, they were number one, a focus on cash and profit generation, primary lens, a simplification of our refocus across all operations of what we needed to do to achieve this. 3. Reduce our overhead 4. Remove all international costs The short term consequence of this is a reset of our sales level. In the medium term, our ambition is to be a cash generative business producing in excess of 5% EBITDA and then kicking on and growing again at a rate of more than 10%. Well in just a few short months that approach has already proven to be a prudent one and I've been really pleased with the buy-in to this and the approach across the business and we're making steady progress against every one of those priorities. In August I said there would be parts of the business that we would consciously and deliberately remove as they no longer fit with the priorities through the new lens. For example, we chose not to roll out the partnership with Tesco and we've ended our whole business in the house building sector. I actually still firmly believe that both were attractive opportunities that over time could have contributed well and added scale to the group. But through the lens that I've set out, they don't fit with our focus on profit and cash generation in the short term. In fact, quite the opposite, both require meaningful investment in both P&L and capital and both consume a lot of cash in the short term. We're also acting to ensure that every product we deliver contributes positively to our profit and cash focus. And as Mark will explain in more detail, the actions we've taken include range reviews and introducing things like delivery charges. We've removed pockets of sales and we're reducing costs accordingly. It's improving profitability and cash generation. We believe that the long-term migration of customers to online will continue despite the COVID blip. And without a legacy store estate to distract us, this actually remains a significant growth potential for us over the medium and long term. And our sector leading customer service proposition means we're continuing to see repeat customers across all of our categories. In terms of the cost reduction actions that we've taken, we've continued to identify and drive increased operational efficiencies over the past six months. This includes removing hundreds of thousands of square feet of warehousing that we put in through COVID, rationalising vehicles and reducing our office footprint as well. We also continue to reduce our overheads. In the last six months, through our lens of simplification, we've significantly reduced headcount, particularly in senior and middle management layers. And combined, these actions have significantly reduced our cost base going forward. So we anticipate that we'll have removed about 30 million run rate of overhead. And given a large element of this relates to our people, I'd like to publicly thank everyone in that process for the AO way that they went about it. Because necessity doesn't mean at all that it's easy. We'll start to realise the full benefit of all those actions during the second half and fully into the next financial year. On Germany, ever since we decided to close our operations in Germany in June, we've been managing an orderly closure of the business. Trading ceased on the 1st of July and physical operations were largely closed about a month later. The main warehouse in Berghain is now fully vacated and sublet to a new tenant and there's strong interest in the remaining two properties that we have for sale. We now expect total cash cost for the closure to be around zero against our original estimate of up to £15 million. The majority of AOers in Germany have now left the business and I'm grateful for the professional way that they approach this difficult situation and I was really pleased that we've managed to help the vast majority to find new roles elsewhere. We've also mitigated the key risks and in true AO style have reached amicable solutions to any challenges that we face with partners in the territory. and by March 23 we expect to have materially exited Germany and the small number of property leases and contracts that remain will wind down throughout 24. So, in summary, the actions we're taking are yielding the results we expected and I'm pleased with the progress that we've made. We've always been a well oiled machine but we're now less complex and an even more efficient business as a result. We expect our EBITDA run rate to be about 5% in FY24. We will see the benefit of the actions that we've taken in the second half and this will mean that our profit for this year is around the top end of previous guidance. This excellent progress has not been achieved by accident and I'm really grateful for the hard work of all AOAs over the last six months. It hasn't been easy but I'm proud of their commitment to delivering the plan. These are unquestionably tough times but with over 20 years under our belts in this industry this is not our first rodeo or indeed our first recession. Scaling our world matters, relationships matter and they are not built overnight. I said during Covid that when our manufacturers were experiencing hugely challenging times and supply chains that it was a time to deepen our relationships rather than exploit the situation for short-term profit. Well that trust that we've built with the consistency with how we've done that over 22 years means that those relationships with manufacturing partners are now stronger than ever and I'd like as ever to publicly thank all of them for their support through this period in the moments that have really mattered. As our industry leading Net Promoter and Trustpilot scores show, we continue to amaze customers old and new through our obsession with treating them all like our gran and making our mums proud as a result. And I am very proud that from our humble beginnings we retain the title of being the UK's most trusted electrical retailer. So thank you for now and I'll hand over to Mark.

Thanks John and good morning everyone. It's good to get the Covid nonsense behind us and again be together in person. So welcome everyone today. John's already been through the detail of our strategic focus for this year and our medium term objective continues to be a pivot towards cash and profit. The current economic landscape has clearly impacted this period. AO has tracked slightly behind the market with a 20% drop in sales and this is a consequence of the tactical decisions we've made to stop certain sales or improve profitability. We've also removed free delivery slots from the site and that was at the beginning of August. This offsets the growing cost of logistics given a growing realisation with customers that deliveries aren't free. We've been pleased with the reaction from our customers who see the value in the quality of the delivery service that we provide. We've accelerated our pricing structure development, particularly in newer categories that have been in the investment and growth phase over the past few years. As a result, very few products are now loss-making, with the corresponding margin drag removed. We expect and are planning for this to reduce sales volumes. Following these operational changes and the pivot's profitability, we have delivered three-year growth of about 36% in the UK. Gross margin has remained robust given the global inflationary pressures of the last six months. Maintaining margin this year particularly is as much about the actions that we've taken regarding what to stop doing or to charge more for as it is the usual actions around optimising costs and sales prices. Our operating model review has focused on two key criteria. Does it operationally fit with what we do well? And does it produce sufficient gross margin? Those that don't, we either have or will stop doing. We are optimising the physical logistics network for current levels of sales, although shipping and driver costs remain elevated. We have a fixed price fuel agreement in place until February next year, and that mitigates the price volatility in a key variable cost line in our logistics operation. Our drive to profit has seen the business make a number of changes around the overhead structure. We continue to invest in acquisition, marketing and brand, but we're no longer chasing sales into negative margins. We're reviewing our warehousing footprint to right size for our current logistics requirements. The management and operational simplification has led to a significant reduction in headcount and cost base. That reduction, compounded with some limited hybrid working in the business, leads on to us reviewing our office space requirements. We will continue to drive the cost base in line with sales, with that laser focus that John mentioned on delivering EBITDA of 5% or more as we enter the new financial year. As we have worked on simplification there have been a number of one-off costs that we have adjusted for in the period. These are associated with the discontinuation of the store trial with Tesco, termination costs of employees through the simplification programme and some ERP software provisions. These exceptional costs totaled about £3.6 million including about £2.6 million of those in cash. Looking forward to H2 our continued review of overheads could lead to further asset impairments particularly in our property footprint. We've continued our focus on an efficient working capital model. Inventory levels have remained flat relative to sales, and we're happy with our current stock holding, although we'd maybe like a few more American fridges and PS5s. Global supply chains in our category are still not as efficient as pre-COVID, but the trend is definitely improving. Reductions in the levels of B2B stock as we exit those channels that John spoke about earlier mean we can do a bit more on general retail to protect customer availability. Debtors and contract assets have seen a small reduction since year end. The focus on maximising profitability in mobile has brought the asset down a little bit and prepayments have fallen in line with revenue in the main retail business. Payables and contract liabilities have also both fallen since year end in line with the reduction in revenue. The working capital outflows we saw from peak trading in 2021 through to the summer of this year as our run rate reduced have now all normalised. We expect working capital to be fairly flat in the second half of the year. CapEx remains minimal in H1 and in H2 we expect to buy the land that is currently leased for our main recycling site and we'll fund that mainly through a commercial mortgage but otherwise again CapEx will be very low in H2. Our RCF expires in April 24 and we'll refinance that in the first half of 2023. For the year ended March 23, revenues as we remove certain pockets of sales are still expected to be in our guided range of 1 to 1.25 billion with continuing adjusted EBITDA now expected to be around the top end of our previously guided 20 to 30 million and that's as we go through this pivot year. In the medium term, we're targeting adjusted EBITDA margins of over 5% and we now expect to achieve this in our next financial year. We'll continue to focus on cash generation and again, in the medium term, we intend to deliver revenue growth of over 10%. In conclusion, we're making solid operational progress. The actions we are taking are delivering the results we expected. We continue to delight our customers and our manufacturing partnerships remain strong. I'd like to add my appreciation to John's for the hard work and focus of our AOers through this challenging period. So thanks again for coming today. It really is great to be back together in person. And with that, we will take questions. So we'll start with John from Peel Hunt.