AO World plc

Good morning and thank you everyone for joining us today when we were last here you'll remember I said I wanted to be reassuringly boring and I'm delighted to say that today is just that it's a story of more good progress more profit more cash more customers continued brand investment and yet another six months as the UK's most trusted electrical retailer simply put We've done what we said we would do when we last presented to you in July. The headline is that I'm pleased with what we've achieved in the first half and how the business is now positioned and with that I'll hand you over to Mark to explain the financial outputs as usual and then I'll paint some colour into the story thereafter.

Thanks John, good morning everyone. I'm pleased with the continued progress we've made this year against our strategy of pivoting to profit and cash. We've delivered in line with the plan that we set out just over 12 months ago and I think the results today demonstrate that. As John noted earlier, we're happy with our profitability. For context, the swing from half year FY23 to this half year is over £25 million. And with PBT at 2.7%, we're making the necessary steps to get to our medium term PBT target of 5%. Improvements on the unit economics of products along with efficiency savings in our logistics business and having the right overhead base has enabled us to achieve this level of profit. We continue to look to make efficiencies right across the business and control overhead as we grow. You'll see some of these efficiencies in the slides today. Whilst it's a small start, the images in my section were knocked together by ChatGPT in about five minutes, rather than lots of time for photographers, image editors, and so on. We're doing everything we can to make sure that profits convert to cash. CapEx is relatively light in our business, and we forecast it to be about seven million this year, higher than our typical run rate, and that's due to investments in the recycling plant. Our liquidity position has continued to improve over the last six months and the working capital cycle has now normalised following the repositioning of the business over the last 18 months. The actions we've taken to improve profitability have resulted in a net revenue decrease of about 12% year on year. The actions were broadly all complete by the end of November 2022 and so I expect that headwind to go away in a couple of weeks time. We continue to leverage our logistics and recycling network for third-party customers without it distracting from our core business. Our MBA market share remains strong at over 16%. The market's down about 2% year on year, but the majority of the decline in revenue comes as a result of the actions we've taken as part of our pivot to profit. To remind you, this includes the removal of non-core channels, implementation of delivery charges, and removal of loss-making sales. Virtually no products now have negative fully costed unit economics and as such the corresponding margin drag has been removed, which you can see on this graph. We're really pleased with the improvement in gross margin. The actions that we've taken over the last 12 to 18 months to pivot to profit have delivered an improvement of 4%, making gross margin for the half 23.5%. The one drag in the period has been mobile, which has impacted us here as well as in acquisition costs, and I expect to be a negative drag on overall profitability for the full year. The nature of the agreements we have with the mobile network operators typically include volume targets, which have been difficult to achieve in a period where we've seen the market 10-20% down. We expect to remedy this as we head into 2024. As we look at SG&ACOS we have delivered savings of £19 million year on year and on a two year basis of £36 million in the half year period. We continue to invest in marketing although we have changed the focus of our spend for the retail business away from direct acquisition towards brand investment as we look to get our message of being the most trusted out there. We have delivered a number of efficiencies in our warehousing costs, which have contributed to us delivering not only a cash year-on-year saving, which you would expect with the decline in sales, but also an improvement in efficiency, as we have reduced the cost as a percentage of sales too. Other admin costs, which includes staff, have seen a year-on-year saving of about nine million in the period, with the annualization of restructuring and a continuous review of overhead spend across the group. We've talked through revenue and cost lines and I'm pleased with the PBT output which we can see here. Whilst mindful of cost inflation, we still believe there is further to go with efficiency savings. The swings we witnessed in working capital over the last 18 months have now normalised. Stock days have increased slightly in the period to 35 as we have improved our customer proposition in some of the tail skews, making sure we've got great availability in some of our slower moving products but where manufacturer lead times can be long or inconsistent. Debtors and contract assets have fallen slightly year on year, in line with revenue, with a similar fall in trade payables. Our conversations with credit insurers have all been positive, and it would appear that our suppliers are able to obtain the cover that they now want. We've invested about £4 million in the first half of the year in CapEx, with the key investment being in the site for our recycling operation in Telford, which we now own. We expect our capex spend in the year to be about 7 million, which includes the extruder machinery for recycling, and about 2.5 million of total replacement capex. Liquidity has improved by about 30 million since the last half year and by 10 million since the year end, demonstrating how we are successfully converting profit to cash. At our full year results we implicitly guided PBT this year being around £27 or £28 million and whilst mindful of the wider consumer environment as a result of the strong first half and continued momentum we are upgrading our guidance to deliver group adjusted PBT at between £28 and £33 million. Revenue will be down around 10% but importantly we expect to exit the year driving profitable top line growth. Our medium term aspirations remain unchanged to scale and leverage PBT margins further from here to continue to convert profit to cash and with revenue growth in the near term in a corridor of 10 to 20%. And on that positive note, I'll pass you back to John.

Thanks, Mark. So As you've heard, we're in good shape and the actions that we've taken during the strategic realignment are delivering what we expected them to. The pivot to profit is substantially complete and you can see this manifesting in the numbers that Mark has just explained with the business delivering a solid increase in PBT and now having structural capacity for growth both operationally and from a central overhead perspective. I'll explain more about the last six months shortly but first a brief word on the economic backdrop. In case you haven't noticed, the cost of living crisis continues and there's even more macro uncertainty economically on the horizon. But we maintain our cautiously positive stance given the proven resilience of our model. The vast majority of the sales reduction, importantly, has been self-inflicted and not market driven. And whilst for commercially sensitive reasons I am not going to go through a list today, it's fair to say we haven't just been accepting of our inability to sell certain products profitably. In the background, we have been re-engineering parts of the business that will enable us to reinstate a lot of that ranging and hopefully recapture our fair share of wallet as we go through next year. As we annualise those deliberate changes, we expect to return to growth in our Q4 and on an ongoing basis into the next financial year. And as Mark has just said, our medium term guidance remains unchanged. I can understand though why when we talked about 5% EBITDA only a year ago while we were at 1.6% there were sceptics. But hopefully you'll now get that we know what we're doing and we had a clear plan. It wasn't just a number that we plucked from thin air. As a reminder, our central overhead that is well invested and we believe to be materially fixed is still currently over 10% of sales. So looking forward, I hope it's clear that growth delivers a lot of operational gearing for us and therefore margin opportunity in our own gift. So now obviously the big question that everyone's got is how are we going to grow? Well there's a real value to being bigger and brilliant simultaneously. And those things compound over time. Brand awareness of that value remains one of our biggest opportunities. So in this financial year, we're investing about 15 million, as Mark mentioned, in the message. And the results of that will take time to fully materialize. That said, spontaneous brand awareness does continue to grow as a result, and it's currently 20% higher than it was three years ago. Similarly, 11.6 million people have now transacted with us, which is 3.5 million more than it was three years ago. This is very important Because our difference isn't what we do, it's how we do it, being magic in the moments that matter for customers. And I say this often, and I've said it many times in the past, that people forget what you tell them, but they remember how you made them feel. And as you know, our product purchase cycle isn't the quickest, which means the saplings of the service seeds we plant today take time to grow into oak trees. Or, as I phrased it in the past, we'll cash the cheque in the second half. The best way to bring this to life is what the customers say. Taking our major competitors in turn, Curry's have got over 155,000 Trustpilot reviews of which only 59% rate them 4 or 5 stars and 35% rate them 1 star. From over 54,000 Trustpilot reviews, John Lewis is rated four or five stars by only 62% of its customers, with 30% rating them one star. Argos, to be fair, has got almost 212,000 reviews, and 84% of their customers rate them four or five, with only 12% rating them one star. We've got nearly 450,000 Trustpilot reviews, and although you're all pretty good at instant maths, let me point out that that is more than all of the other retailers I've been through added together. And we have 93% rating as 405, and while personally I'm embarrassed to tell you that we've got 4% of them at one star, let me reassure you that we're working hard on dramatically reducing that every day. Retail is something that's relatively easy to do but it is hard to do well and it's even more difficult to do well and profitably at scale as our competitors kindly highlight. Our quality is without doubt in my view the biggest source of fuel for our flywheel in the long term and it always has been. I just love the transparency with which our customers can use platforms like Trustpilot to inform future customers. There are also lots of soft reasons beyond being the best price and the best service why customers rate us as the most trusted. One of these is our investment in recycling, as Mark mentioned earlier. Whilst it certainly doesn't give us permission to charge a premium, it does become another point of difference over time because, well, we've actually built it. We've invested in it and we operate it to the highest standards and we've been through the journey of learning about how to do that brilliantly at scale as well. It's real and it's market leading. It's not a cardboard compactor at the back of a warehouse somewhere but over 20 million of hard asset investment and seven years of learning. We're truly innovating and driving change and we're now well placed to see new fridges being made from old fridges in the foreseeable future. This is starting to give us real value in earned media as it turns out that it's actually a great story to tell for customers as well. And ultimately customers don't give their trust away easily or quickly. Trust takes time and it must be built on the truth. Another driver of our flywheel is that we have nearly half a million customers now with a finance account. They make up about 10% on an ongoing basis of retail turnover, but importantly they currently have around £700 million of available spend on their accounts. Similarly, our B2B business continues to develop well, and that has doubled over the last three years. And we've got lots of other initiatives happening across the business as we continue to innovate for customers, all though with the discipline and focus that we've demonstrated over the last 18 months. Technology and the capabilities around us have never developed faster. AI and large language models more broadly are clearly hot topics. And although I don't see any major step changes in the near term, for example, I don't see ChatGPT driving our vans or installing washing machines in the way that they can do pictures on slides in the next couple of years, but we do see ever more productivity gains and service improvements through harnessing their capabilities. And our vertically integrated model Uniquely places us, I think, to realise those benefits, which is just going to be more fuel for our flywheel, frankly, as we go forward. And we'll continue to build our high quality foundations on the brilliant basics that we've outlined. So in summary, as I said at the start, I'm pleased with where we are and the progress that we're making. We've made more profit in the first half of this year than we made in the whole of last year. We're cash generative in the first half of the year and we will be going forward. And crucially we expect to return to growth in our Q4 and we see that continuing into the next year. Our Trustpilot scores have never been higher and correspondingly our repeat customer mix has also never been higher because they understand the value and the reputation it brings. So in short, we're in good shape. And none of it has happened by accident. So I'd like to thank all AOers over the last couple of years across the business for making this happen. And with that, we'll take questions. But just one piece of housekeeping before we do. Please can you grab one of the mics before starting the questions so that those people listening in, particularly from the US, are able to hear the question as well as the answer. Thank you. Unsp