Ao World Plc Unsp/Adr

Hello, everybody. Welcome to the AO World Results presentation for the year to the end of March 2020. As I hope most of you know, I'm Jeff Cooper, Chairman. And following our usual format, in a moment, I'm going to pass over to Mark Higgins, our CFO, who's going to take us through our financial performance for the last year. And then John Roberts, our CEO, will outline the considerable strategic progress we've made over the last 12 months. Before I hand over to Mark, let me just run through the highlights of our year. Following John's reappointment as CEO in January 2019, he conducted a thorough health check of the business, including strategy, performance, culture, and operations. And you've heard a bit about this in the last two presentations, so that you'll know that following that review, whilst our strategy remained unaltered, the company was reinvigorated, re-energized, reorganized, and focused on a limited number of critical objectives. Firstly, growing our UK MDA business. Secondly, becoming cash generative, then accelerating the achievement of returns from our investment in the business in Germany, and finally creating an efficient, profitable, and importantly for our future, repeatable business structure through our 1A0 operating model. Now you'll see and hear from these results, the refined operating model introduced over the last year or so is beginning to gain traction. We believe there's more to come. The energy and engagement inspired by these changes, which you can actually feel as you go around the business, has meant the companies responded robustly to the very challenging market conditions you'll all be familiar with in the UK retail scene caused by the COVID pandemic. And also, AEO has continued to delight customers, an obsession of the business for a long time, and John's going to talk a bit about that as well. The response by the company to those challenging conditions has helped us to perform very well against our critical objective of managing the group's funding, which you'll hear from Mark, and driving cash generation. And that's a particularly pleasing outcome for everyone involved. With structural changes in our markets moving in our direction, the refined operating model and improved financial performance leaves the group both stronger and well positioned in the UK and in Germany. Let me now hand over to Mark.

Good morning, everybody. The results that I'm going to talk you through today are on a post-RF16 basis and relate to the financial year ended March 2020. Overall, revenue for the group was up by 16% to £1.05 billion. In the UK, up just over 8% on a like-for-like basis, but 20% including our acquisition of mobile phones and diaries. In Europe, revenue was down by 4.6%, largely reflecting the closure of our Netherlands business that wasn't in the final quarter of the comparative period. Our adjusted EBITDA for the group was up 54% to 19.6 million. In the UK, just over 40 million, and our European losses reducing to 24 million. This, at the end of the period, gave us total liquidity headroom of 64 million. So moving on to revenue, As I've spoken about in our UK business, overall revenue growth of 20% took revenue to just over £900 million. That was driven in the UK business, as well as the acquisition of MPD, by an increase in product revenue, particularly in our MBA category. And John's going to talk more about the drive to continue to increase our MBA business in the UK. In Europe, most of that reduction of 4.6% was due to the annualization of the closure of the Netherlands, but also the reason for the largely flat forms in Germany. The way that we've driven traffic to the website and converted it in a much more sustainable manner using the methods that we use in the UK rather than driving for prices we had done previously. Moving on to gross margin then, we'll recall that In the UK, MPD and the newer categories have a dilutive effect on overall margin. So we've split out the UK, excluding MPD, and you can see that we've had a slight improvement in margin in the period. This is partly due to the growth of MDA, but also the fact that we've increased our gross margin across all categories. In Germany then, we saw a big improvement into the second half of the year, where we started to see improved terms from our suppliers. albeit that this is very much towards the end of the period, and we will start to see the full benefits as we move into financial year 21. As we continue to grow that business, we'll also start to see improvements in our logistics costs and in our cost to deliver, which will really impact that gross margin line, remembering that gross margin isn't just a product margin, but also that last mile delivery cost as well. Moving on to our UK SG&A costs, you'll see that our advertising cost has fallen year on year, and that's largely due to the cancellation of TV spend in FY20. You'll also see that warehousing costs have fallen, albeit not at the rate that we might expect. And this is because we've opened additional outbases in the UK, which has an increase in our warehousing costs, but has a corresponding credit in our gross margins. We reduce those costs to deliver. We've invested into research and development costs, and we've seen that increase from FY19 at £6.9 million to £9.3 in FY20. We'd expect those costs to increase further as we go into FY21. However, we have leveraged our our other admin costs and we will expect to try to keep control of those costs as we go forward and see further leverage into FY21. In Europe then, despite our overall slight decrease in revenue, we see that we've actually leveraged through our other admin costs and so the total amount of those costs has fallen, and we would expect to see further leverage as we continue to grow that business. Warehousing costs have increased very slightly, and again, this is a function of laying in out these infrastructure, which we will really benefit from as we grow. And then lastly, on advertising costs, we see that that has increased during the period, and that is part of our strategy of driving sustainable traffic that will repeat and benefit the business into the future, rather than driving traffic with the lowest price point in the market. So the results of this then, in the UK, our profit is up by 7% to 41 million. In Europe, we've reduced our losses from 27.9 million to 24.2 in Euros. And the overall effect of that then is a 54% increase in EBITDA in FY20 to 19.6 million. From a working capital point of view, going through the three main constituent parts, for a stock perspective, you'll see that stock has fallen from the position at the end of March 19. And part of that is some of the initiatives that we have put in place throughout the year. which aim to increase the availability of stock and the range of stock that we've got available to our customers whilst holding the minimum level we require. At the end of March, we did have a bit of an uptick in sales as a result of COVID. And so actually that has brought very slightly the inventory balance down at the end of the year. In our creditors, we'll see that creditor days have fallen by about six days from the at the end of the previous year. And that's as we've changed the category mix products that we sell and also through the different territories that those days have fallen. But actually you can see that we've done a good job of maintaining those creditor balances despite challenges in the credit insurance market. If we then move on to our debtors and accrued income, we can see from March 19 the impact of the accrued income with the mobile networks. And that increasing as our revenue has increased. Our approved income on warranties again has increased as the revenue in our retail business has increased. And that, again, other debtors increasing slightly, and particularly with the new B2B business that's been growing over the last 12 to 18 months. Michael Kenyon- Moving on them to to cash flow, the significance that we talked through working capital, the significant item in capex of 7.9 million. Michael Kenyon- Was the investment in our new plastic recycling facility and also some small investments in in the in the new outbases. Michael Kenyon- And a few small improvements in logistics technology, the rest of it then being largely the the replacement capex that we normally have. In financing activities, I did remind you that we have restated fully for IFRS 16. Financing activities includes about £15 million for right of use liabilities. And the rest of it being then repayments of either asset finance or some of the repayments on the term loan. Shortly after the end of the period, we refinanced our £60 million RCA and £20 million remaining balance on the term loan. into a new £80 million revolving credit facility that expires in April 23. Our total liquidity available at the end of the period was just over £63 million. So as we then look to the outlook for the current financial year ended March 21, in the UK and in Germany, both of our businesses are currently experiencing a shift of consumers to online. So the COVID pandemic has meant that customers have moved online and despite stores reopening, there has been a market shift towards online and we expect that to in some degree continue. What we do see in both territories is huge volatility with markets being significantly up and down during the year and with forecast low GDP and forecast unemployment to rise, particularly in the UK, in the latter half of the year. Despite all of that, we think that the business is very well positioned to take advantage of the market that is coming at us. In terms of our capital expenditure, we don't have any significant capex planned during FY21, and it will largely be our replacement capex cycle. So with that, I will hand over to John.

Thanks Mark and good morning everyone. Thank you for joining us today. As you've heard from Mark, we've closed the financial year with AO in good shape. And I'm pleased to say that the AO of today is a very different business than the one I returned to lead last year. We've learned a lot of lessons and we've been vigorously applying them throughout the last 12 months with a firm lens on getting back to the first principles. So I'll spend the first part of the presentation setting out the actions that we've taken before detailing the impact of coronavirus and how we see that shape in the future. But before I explain more about the actions, I wanted to take a moment to thank the teams right across the UK and Germany for their exceptional work in what has been an extraordinary time and to thank our partners as well for their continued support. There have been some leaps of faith required and a lot of trust placed in promises that I made. I am hugely grateful and so are our customers. Last time we spoke, I updated you on four priorities. One, returning our MDA business to double-digit growth in the UK. Two, stemming our cash burn, which was over £30 million a year, to being cash-generative. Number three, accelerating our journey to profitability in Europe. And number four, getting the whole business back to operating at 1am. So, taking each one in turn. I'm pleased to say that double-digit UK MDA growth was achieved in the last quarter and we have consistently outperformed the market during the financial year. That momentum has continued into FY21 and it was achieved primarily through a refocus on the customer basics. We improved availability over peak across the range and especially in built-in appliances where we grew share. Our renewed investment in digital marketing through social and influencers drove increased traffic. And the new AO finance proposition was also launched and resonated well. We also saw growth in clients and marketplaces, and of course, not forgetting our B2B business, which is starting to get really good traction. It was all delivered against a tough market backdrop, and it's worth noting that we achieved that progress without TV advertising, as Mark mentioned, REF Y20, which highlights that this was driven by a growth mindset and getting back to the basics. which is a much more sustainable model than short-term marketing steroids. In the year, we also invested into further capability to drive proposition and the web journey that will deliver benefits through the second half of this financial year and beyond, both in the UK and in Germany. We ended the year cash generative as a group with the expectation of that carrying on as we go forward. We achieved this as a direct result of self-help through the step change in profitability in our German operation, the closure of our business in the Netherlands, and all that on top of the step change in performance that we achieved in the UK. At the end of the year, we closed the Netherlands. And so just a couple of points on cost and timing. It only took us three months from the point of decision, and it cost about two and a half million. while it had been losing 6 million a year. We took this decisive action to focus management time and effort on fixing Germany. And for the avoidance of any doubt, this does not preclude us from re-entering the Netherlands if and when the time is right. And I'm delighted to report that through a tremendous effort in Germany, all of our key metrics across sales, margin, marketing costs, cost to deliver, overheads are all where we need them to be or ahead of the plan at this stage of our plan and that will make us a great profitable business alongside delivering world-class mbs stores this is a direct output of our actions and the team's willingness to embrace a one ao approach so it's now a question of when and definitely not if ao will be profitable in germany We expect that when to be on sales in the region of about 250 million annualised runway. And we're very encouraged by our current trajectory of revenue growth and profitability improvements. This will then give us the platform to start to think about where next, how and when. And we will update further our half year results in November. The graph clearly illustrates the month-on-month progress that we've been making as we roll mostly self-help actions in. And to bring that to light, we are about 70 euros in order better on total profitability by order year on year. For the avoidance of doubt though, profitability is only first base. We have explicitly not invested over 100 million in our European education to get excited about a break-even business. I still see the opportunity to repeat our model, our playbooks and our centres of expertise as a huge one. We have learned an enormous amount on what works and of course what doesn't in getting to where we are today. The journey from here is now a lot clearer and we're really grateful for the team for embracing those learnings. We've reorganised all of our core competencies during the year, with the first principle being to build centres of expertise and only to devolve locally where absolutely necessary. This involved breaking down silos by fully integrating Germany and our mobile division into the wider group, instead of treating them as separate business units. And this means we can fully leverage our expertise in e-commerce, in marketing, financial services and tech, as well as our knowledge and learnings across our ecosystem. The 1AO approach will, at the right time, mean that we can enter new markets quickly and with a much lower barrier to profitability and success, rather than having to start afresh in each new market. We've also increased our tech annual expenditure in the year by just under two and a half million by reorganizing IT around product teams to create deep expertise on key elements of the customer journey. Similarly, we're doubling down on our multimedia investment to create one brilliant content platform that supports all categories and business units in all our markets to tell customer and product stories brilliantly. This is really important, particularly in the value that we're able to add at lowest cost of production for our brand partners, given how much of the content that we create repeats once it's produced. It's another great example of us raising the bar and leveraging our scale and learning. This becomes an obsession with customers at the heart of the work that we do. The product teams have really only just begun to grip and contribute. The team's outputs and iterations will compound over time, and that will flow into the second half of this year into next and beyond. 1AO has always driven significant progress with our ecosystem for external partners. We're winning new B2B clients and developing our pipeline all the time. Our business is now a supplier to 19 housing associations, which is roughly 10% of the UK social housing stock. And we're making significant inroads into student accommodation and the hospitality sectors as well with tenders that we've won over a million and a half pounds in only the first few months. Paul Ekins, Ph.D.: : Similarly, we've made real progress in the house builder sector which, despite the COVID related shutdowns remains a key growth area over the medium to long term. Paul Ekins, Ph.D.: : Where we believe there is pent up demand from time plus developers that are ready for a 21st century proposition that has had no disruption for decades. In logistics, our third-party client base continues to grow as new partners trust our two-person deliveries with service to their own customers. We have invested in additional warehousing capacity and crew, as Mark mentioned, and outbases, taking our space in the town to about a million square feet with more plans. Similarly, our recycling business has one new third-party business as well, and our plastic plant is now operational. I really look forward to the day that we're selling a new appliance manufactured using recycled raw material from old ones that we've collected from our customers. This is true market leading, cradle to cradle behaviour that we can only do because of our totally vertically integrated model. We expect it to give us a huge impact with customers to be able to do the right thing with no price premium while we leverage all stages of the value creation. We believe it will be yet another reason for customers to love how we do things, not just what we do. In mobile, we continue to integrate the mobile phones direct business into the group to leverage our expertise. And with the structural shift to online from high street stores and 5G around the corner, we're putting a lot of effort to making sure that we set up to serve customers in mobile the AO way. As we moved into the new financial year, our focus was very firmly on our fundamentals, setting us up for long-term success based on our core strengths that determine why we will win for our customers. And I believe that we will win because we provide customers with simply a better way of shopping and manufacturers with a better way of telling product story brilliantly in the electricals category. We have become ever more obsessed about what that means and how to drive the AO flywheel. We have to be the best in the world, but actually a relatively small number of big things. And that is the mission that we're on. So we need to sell at the best price, and we do. We need to offer the widest range. It needs to be brilliantly curated with world-class content that brings product to life to make us the number one destination of choice for customers and manufacturers as electrical specialists. We then need to offer the most convenient delivery at a time to suit the customer with every one of the services that they need carried out with an AL smile. We must do that on platforms and technology that scale and repeat into categories and territories to enable us to invest significantly centrally and be a lowest cost operator. It really honestly isn't much more complicated than that. And that needs to be our operating model to be the very best in the world and the lowest cost of operation. In line with our customer focus, our first principle should be for customers to be able to self-serve and for us to drive automation to let the tech platform we build take the strain. It should all just work, but if required, people who care and deliver brilliant personal service must be readily available. We will invest in the best platforms, capability and content and strive towards the perfect customer journey. We will leverage this consistently across bigger and bigger addressable markets with a scalable cost base to drive significant operational gearing. We should apply scalability consistently across our business as a very first principle and only localise when absolutely necessary. We have to leverage our scale to raise the competitive bar and be able to reinvest in a better shopping journey lower prices and a more convenient, faster delivery. Our ecosystem will leverage our capabilities into further areas that help to drive the flywheel. So from some further examples of that within third party logistics, for example, this helps us to drive the total scale in our network, which gets us closer to customer and in turn enables us to help to raise the proposition bar. Within our B2B business, it helps to drive the scale, for example, on things like installations with house builders, which in turn helps to raise the proposition bar on installations to lower the price and higher the availability for our retail customers. Within recycling, customers really care about us doing the right thing and owning that process. And it also helps us to bring unique cradle-to-cradle products to our retail business. It therefore enhances our brand development, giving customers reasons to love us rather than just buy from us. These inputs will drive great financial outputs and our model will be cash generated to enable us to reinvest. We will create meaningful operational gearing through scale leverage. we will consume low amounts of capex relative to growth potential in market. It will repeat easily with low capex into those new markets. It will allow flexibility to insource or outsource frontline operations as is appropriate. And then of course, all the world changed and coronavirus gripped the world. When the pandemic hit, our priority was to protect our people and continue to deliver safely to customers, who in turn will protect our business. We played an active part in keeping families plugged in and powering on across the UK and Germany. And I'm confident that customers will not forget that experience. As we enter the second quarter of the new financial year, we do so with wind in our sails. That said, there's a lot of uncertainty. And so there will inevitably be headwinds as well. So I thought it might be useful to actually walk through some of the potential ups and downs that have been involved in our thinking. There will, of course, undoubtedly be some tailwinds. And as I observed in May, we saw five years of change accelerate into the first five weeks of lockdown. They say it takes 66 days to form a habit and retail stores were closed in the UK and Germany for at least 84 and many are still not open and some will never reopen. On that basis, we believe that a lot of behavioural shopping changes will just frankly stick. If we take smartphones to over 65, for example, they've been up consistently triple digit. It was the least connected demographic with the lowest online shopping penetration, but actually they've been the most locked down. And so we've been forced to be pretty ubiquitously now connected. Let's not forget that Carphone Warehouse announced the closure of its standalone stores just before lockdown. And then 100% of the UK and German market pretty much moved online during lockdown. But also on the flip side of that, the total market in MDA in the UK was down over 30%. We expect the investments that we've been making in our product teams and customer journey and proposition to bring further market share gains as well as they've built through to make fundamental customer shopping journey better. And regardless of recent easing, we expect that people will continue to spend more time at home, which will increase the use and therefore replacement rate of electricals, either through wear and tear or aspiration to upgrade. According to consumer credit data, short-term disposable incomes for ticket spending may actually rise as holidays and hospitality spending remains constrained. And we expect online to be an even more important destination for Christmas shopping and Black Friday period this year, as we believe that customers won't want to fight through crowded shops. And we're already making sensible investments to make sure that we're well-placed to serve those customers in the AO way. Of course, like all business, I'm sure we'll face some challenges too. We've had to re-engineer the whole of our warehouse and delivery operations to accommodate social distancing wherever possible, and that fundamentally makes us less efficient. Our trunk vehicles are only about 80% of capacity, and our loading and unload operations are just frankly slower. That's a compounding issue, and with a finite number of warehouse doors, that creates challenges. Similarly, we have restored all installation services, but the social distancing requirements mean that they just take longer and therefore they're less efficient. But we haven't reflected that in the charges to our customers. We cannot ignore the prospects of a recession, a slower housing market and a more cautious consumer, with the worst GDP forecast for 100 years and expected increased unemployment. we should expect some supply chain challenges too through peak trading as a consequence of factory shutdowns, difficulty in forecasting and volatility in global demand. But AO has weathered storms before and I'm confident that we have set ourselves up to support our customers, our people and partners through the difficult times ahead. The output of this is that we can't be sure exactly where sales will end up. But we intend to continue to drive a growth mindset and prepare ourselves for success and to cement the five years of change that we saw happen in the first five weeks of COVID. And so that's going to involve us investing in our physical operational infrastructure with warehousing and outbase network. And we also plan to accelerate our trials with things like electric vehicles. We're going to invest ahead of the curve in the people and they'll be important to make sure that we've got the right amount of trained AOs and that'll be mainly across drivers, warehousing staff and insurance sales people. We're working very closely with manufacturers to be bold in our forecasting for peak trading and yet also flexible within the supply chain. We're accelerating our tech investment to bring forward as much capacity as we possibly can to automate our customers' ability to self-serve. We're accelerating the improvements in proposition through the benefits of a bigger network and raising the proposition bar to make sure that we make the best possible impact on new customers that have found a better way to shop electricals. We will be scaling the platforms we have to improve the customer's online journey by removing yet more and more friction from the ordering process. And we'll be investing in marketing to cement the structural change and increase consideration of shopping with AO in the medium term as well. We will also continue to introduce new finance offers to drive real affordability through this time for customers shopping with AO through all these challenging financial economic times. And we will be applying everything that we are doing in that list in the UK and in Germany consistently to make sure that we realise the operational gearing across the group. And so to conclude, I am hugely proud of the work that the team have done in the last financial year. We entered this financial year with our boat repaired, robustly pointed in the right direction with our sails raised. We had a happy crew and all relishing the same mission. Our decisive actions were already blowing wind into those sales, and that has only been accelerated by lockdown driving those five years of change into the first five weeks. We believe that customers have found through this period that the AO model is simply a better way to shop electricals. And we also believe that manufacturers have reached a tipping point on the importance of the online channel and are deciding who are the winners to buy. Our model is one that is fit for the future. And so we look forward with cautious optimism. And I'd like to thank everybody for all their support.