AO World plc

Okay well good morning and thanks for joining us today back here at our London Creative Centre where we really do bring our products to life. So since we were last here in November we've issued A number of trading statements so we expect today to hopefully be relatively short and reassuringly boring. I'm going to give you some colour and context to the financial year that ended in March and then Mark's going to take you through the numbers and then obviously we will both take your questions. So as we began the last financial year, it was abundantly clear that a further period of macroeconomic uncertainty lay ahead. UK consumers and companies were and obviously still are suffering the economic aftermath of three major shocks in a very short period of time. Unsp Plc Unsp Plc Unsp Plc Now AO clearly isn't completely immune from these pressures so we took the view that we were sailing into an economic storm so we've prepared for it by battening down the hatches and lowering the sails ready for frankly whatever came and in other words we did what we've always done we focused on our core strengths and we took swift and decisive action whilst continuing to focus on being amazing for our customers. Our top priority was to prepare to trade our way successfully and resiliently through whatever economic climate prevailed. And as we've done in previous downturns, we emerged leaner, stronger and more trusted than ever. The core thrust was to pivot the business firmly towards cash and profit generation. Now, our deep understanding of the dynamics and drivers that underpin our operations made it relatively straightforward to identify both the opportunities and the challenges that we needed to tackle all at AO Speed. Our core UK business has always been strong, profitable and cash generative, providing us with a fantastic platform from which we've explored many new opportunities for growth over the last 23 years. And as part of our plan, we also undertook a successful capital raise to strengthen our balance sheet, making sure that we were secure as we navigated the choppy waters ahead. And as Mark will explain shortly, our cash position continued to improve through the second half of the year as our actions to improve profitability gained traction. With these macroeconomic clouds on the horizon, the lens that we decided to look through was to only continue with operations where we had a clear line of sight to profitability and cash generation. And that perspective then informed our decisions around several initiatives, and those are pretty well documented. Now over the last 23 years we have been an entrepreneurial business with a huge ambition without fear of trying new things. But there is a time and a climate for everything and the last 12 months required rigour and real discipline to deliver the reset that we now have. It's rare that you know instantly whether a new venture is going to succeed and exactly how. It takes time, patience, conviction, intuition, reinvention and frankly actually some humility to admit when you may be wrong. But for the avoidance of doubt, we are still an entrepreneurial business with huge ambition that is not afraid to try new things at the right time. Our decision making process took us back to our fundamentals and made us carefully consider what drives our flywheel and conversely, what adds grit to the AO machine. We also simplified aspects of our operations. We consolidated several teams and realised more of the value that we deliver for customers. We rationalised relevant ranges and we raised the bar of what we are willing to accept through our supply chains. Inevitably, the cumulative effect has been to reduce sales as was planned and Mark will cover that in more detail shortly. But I believe that the best businesses are often defined by what they decide not to do, rather than always chasing every single opportunity. Rationalisation and simplification also meant that we needed fewer people. Consequently, we've had to say goodbye to a good number of AOers over the past 12 months, which is never an easy decision, but I'm clear that it was both right and necessary. And whilst the economic element of these choices may have been relatively straightforward, of course the human element is always much harder. During the three-year COVID period, over 5 million new customers experienced the AOA. And whilst we don't have any intention of releasing any detailed data about this for obvious commercially sensitive reasons, one snippet that I will give you is that the cohort acquired during COVID currently performs better and is more valuable than the pre-COVID cohort. But frankly, that's not rocket science because our business is bigger, our brand awareness is better and our performance is and always has been consistently excellent. From a market perspective, the Covid period saw a big step up and then a step back. Demand was brought forward and product usage was also increased. Overall, the market is now normalising, with online penetration comfortably above 50% compared with around 40% pre-Covid when stores were the dominant channel for customers. I've always found that customers are incredibly loyal or intransigent until they find a better way. As those of you, and there's enough of you, to remember fax machines with those curly bits of paper will know. And our expectation is that the migration to online will just progressively continue over time as it has for 22 of the last 23 years as more customers realise that online is simply a better way to shop the category. And while some post-COVID disruption remains in global supply chains and it does make certain aspects of forecasting difficult, we as a business now consider the COVID period to be concluded and its lasting impact to be entrenched. Since our launch back in 2000, we've been investing in our relationships with our supplier partners and the depth of trust that we've required to navigate this hugely unpredictable trading period has proved to be invaluable. And I'd like to thank them very publicly for all their support. And I'd also like to thank all AOAs for their continued support and commitment during a journey that has required many leaps of faith over the last year. I'm always really proud of how they rise to the challenges and how they protect our culture in both difficult times as well as good. Something which is ultimately at the heart of our ability to deliver brilliantly for customers. Looking forward, our priority now is to continue the progress that we've made with our pivot to profitable growth and cash generation by focusing on brilliant execution and investing to deepen our relationships with customers whilst of course growing our brand awareness and our share of wallet with those customers. Our strategy will always be centred around our obsession with customers and treating them like our grands. We now have over 400,000 Trustpilot reviews and I'm really looking forward to continuing to build our brand over the years ahead around being the most trusted electricals retailer in the UK. This obsession is a moat around our business and makes repeating what we do and the way that we do it ever more difficult for competitors to replicate at scale, meaning that its value to our customers only increases with time. This is true across a whole host of areas, from culture, customer service, loyalty, brand relationships, right through to our B2B partnerships. Through FY24, having embedded the changes from our pivot year, our focus will move back to profitable and cash-generative growth through disciplined investment at the right pace and at the right time. And we'll drive our structural advantage of having an extremely well-invested, more efficient model with better unit economics built for the future, not the past, leveraging our scale centred around trust and excellence. And I'll return to this in more detail later once Mark has taken you through the numbers but for now I'll hand you over to Mark.

Thanks John and good morning everyone. So I'm going to run through the financial results for the year which will obviously include the output of the strategic pivot that we took and the challenges that we've navigated through on that journey. We've previously discussed how the decisions made as part of our pivot have negatively impacted revenue. This, along with a weaker consumer market, has resulted in a year-on-year drop, which is as we anticipated. We have removed non-core channels and loss-making sales, so very few products now have negative unit economics on a fully-costed SKU P&L basis, and the corresponding margin drag has been removed. In August 2022 we removed free delivery slots for customers, acknowledging that deliveries are not in fact cost free and to offset the growing inflationary pressures impacting our cost to deliver. We continue to leverage our expertise in complex two-man delivery where it adds incremental profitability and you can see revenue growth here this year. As we come out of Covid, the overall electrical market is down about £1bn year-on-year, of which nearly £300m is in our largest category of MDA and the AV market is also down nearly 10%. We have seen a shift in MDA sales to offline in the year by around 6%. Our market share in MDA remains strong and we've got about 16% share of the total market. Our repeat customer base continues to perform well. Our strategy to invest in brand with our most trusted message should continue to drive this customer base and they will repeat and underpin our revenue in the future. Looking forward to FY24 we expect revenue to be reasonably flat year on year but note a decline in the first quarter until we annualise the strategic pivot made in the previous year. We've made a step change in gross margin in FY23. The introduction of delivery charges has acted to offset the growing cost of delivery. In addition, we have accelerated our pricing structure development, particularly in non-MDA categories that have been in an investment and growth phase over the last few years and have caused us some margin drag. MDA mix has increased in the year as a result of those decisions, which has further contributed to the margin growth. Product protection plan valuation has remained steady and we've seen no significant change in either acquisition or cancellation rates. The mobile network operators increased their prices in line with RPI in April 23. The consequential benefit in AO's commissions were consistent right across the market and these were primarily invested either in proposition or in acquisition channels. We are optimising our physical logistics network for current levels of sales and maximising the return on warehousing and logistics capabilities. This has had an impact both here and in our warehousing line. We've continued to invest in acquisition, marketing and brand, but we no longer chase sales into negative margins on a fully costed SKU P&L basis. We've seen a reduction in warehouse labour in line with a decrease in revenue and have reduced our physical footprint by about 160,000 square feet in the year and we've sublet a further 305,000 which does give us the optionality for future growth. The reduction in staff which we've spoken about previously didn't really impact the P&L until H2. It clearly runs forward on a full year basis into FY24. The compounding benefit of the staff reduction is also a reduction in our office space requirement and we've closed offices in Thatcham, Manchester and in Bolton. In the next financial year we expect our warehouse costs to be materially flat. We'll look to invest further though in marketing and brand spend and getting our most trusted message out there. I feel like there is further for us to go in overhead reduction as we continue to simplify the business, drive efficiencies and be more joined up than ever. Marketing costs are broadly split into two categories. Those that have a fixed cash cost, and that's things like brand, and those that have a more direct cost, for example, acquisition costs with Google. However, that being said, I would broadly expect marketing costs to remain a flat percentage of sales into FY24, and we will increase our brand cash investment this year. I'd expect the cash costs of both other admin and warehousing to increase slightly as we grow and we anticipate that this should drive real leverage through the P&L in the medium term as increases in revenue give us the ability to grow profits at a faster rate than sales. And we can look at the percentage graph for FY21 for the impact that those increased sales can have. And if we were to repeat those levels of sales, I would expect the output to be significantly better than it was during the COVID period. So since IFRS 16 made a mockery of EBITDA, we have now moved our headline profit measure to adjusted PBT. We've talked through the revenue and cost lines and this is the output. You can see the changes we have implemented have significantly improved performance from H1 to H2, obviously bearing in mind the usual seasonality effect that we have. The exceptional costs in the year of £4.5 million are largely the termination costs relating to people and offices and a small amount of software impairment. We've done a good job in exiting a number of property leases in the year with very, very minimal impact. We have a continued focus on an efficient working capital model. Inventory levels have fallen, but our stock days have returned to a more normalised position, and it is our intention to continue to invest in availability for customers. Debtors and contract assets are pretty flat year on year. Looking at this slide, it's worth pausing on the impact of the pivot on payables. The graph on the right shows an outflow in creditors of nearly 150 million over two years. And that's as we took 500 million of sales out of our run rate. This required very careful management and financial discipline. I think few businesses would have survived that transition. And there really is no point having the operation being a complete success if the patient is left dead on the table. And these stats bring to life the scale of the reset and the leaner efficient business we now have ready for growth. The working capital outflows have now normalised as our revenue has stabilised and so we don't expect any material changes in working capital this year. As we move back to growth there will however be an obvious cash benefit. CapEx is expected to be around £4 million this year which includes a couple of million in recycling and the remainder being our usual low run rate. The RCF was extended to April 26 with great support from HSBC, NatWest and Barclays. Total liquidity has improved in the period by £39 million which coincidentally is the value of the share pricing. This does somewhat hide the work done on profitability and working capital which has been concealed by the output of the pivot. For the year ended March 24, we expect revenue to be between flat and minus 5%, of which we expect to see double digit decline in the first quarter until we annualise the strategic pivot. We expect to exit the year driving profitable top line growth. To remind you, our previous medium term guidance was adjusted EBITDA margins of over 5%, continued focus on improving cash generation and double digit revenue growth. Now that we've changed to PBT, 5% EBITDA is the equivalent of 2.5% PBT and we would expect to deliver at least that in FY24. Saved for that, I would like to reiterate our medium term guidance. I'd also like to take the opportunity to add my appreciation to John's for the hard work, focus and commitment of our people in delivering the pivot this year. Thanks everyone.

Thanks Mark. So, no doubt the big question that everyone's going to have is how we're going to grow given the impact that growth now has on this business that we've got. Well there are several answers to that question, all of which ultimately centre around our brand growth, our customer numbers and the sheer quality of our execution at scale. As I said earlier AO is the UK's most trusted electricals retailer and what makes that true lies in how we do it not what we do. To understand that properly you need to experience it ergo you need to shop with us because people forget what you tell them but they remember how you made them feel. And our frequency of purchase cycle is not that of grocery or Amazon and therefore it takes time for the value of this to be realised. And over the last 3 years we have impressed over 5 million new customers. And it's important context when you think that it took us 18 years to impress the first 5 million customers. So I'm sure you can work out that we think there's real value in the behaviour of our newer customers in the coming months and years. There is an intrinsic value as well to just being bigger than we were pre-COVID in just so many ways. And these principles are as true in our B2B business as they are in our retail business, albeit inertia to change is higher and the available number of customers is lower. But once won, they really are actually our most valuable customers. Five years ago we had no focus at all on a B2B business and today we have a B2B business worth over a hundred million in sales and more importantly all of the learnings and therefore the playbook of how to grow it importantly in the right way. As you might expect we have lots of other initiatives on top of these to improve the shopping experience and to cement our relationships with customers and to drive ever more share of wallet from that base as well as of course appealing to new customers so that they too can experience and therefore feel why buying electricals the AO way is just well fundamentally better. Cost out and simplification were cornerstones clearly of the pivot. But as you might expect me to say, I am equally clear that we will not cut our way to success. And as Mark mentioned, we will continue to invest in our brand throughout the year and we will do going forward as well. The output of that in the year was that spontaneous brand awareness has improved by 35%. And this is as important as it is for new customers as it is for existing ones. And frankly, it's just more fuel for our flywheel because increased brand awareness, well, improves just about virtually every other metric in the business. So in summary, We're in good shape. Our trading is in line with our expectations for the current year and we're beginning to prepare our sales again for our medium term outlook and we're looking forward to the next few years with a shipping forecast that's, well, set reasonably fair. And so with that, we'll take some questions. Just one piece of housekeeping. Before asking the question, if you can get a hold of one of the roving mics that are hovering on either side so that our US investor base can hear the questions as well as the answers. John.