Ao World Plc Unsp/Adr

Welcome to the AO World results presentation for the first half year 2021. As I hope most of you know, I'm Geoff Cooper, Chairman, and following our usual format, in a moment I'm going to pass you over to Mark Higgins, our CFO, who will take us through our financial performance for the last half year, and then John Roberts, our CEO, will give a strategic update. Before handing over to Mark, let me just run through the highlights of the first half. As you'll all know, it's hardly news to talk about the unprecedented trading and operating conditions all companies around the world have faced with the arrival of the global pandemic. But not all companies have responded well. Our executive team at AO have directed, managed and delivered an exceptional response to these incredibly difficult challenges, plus fully grasped the opportunities available to us to support families who are locked down, working and often schooling from home. We strove to put our best foot forward to demonstrate to consumers there's a better way to buy electricals, always guided by our mantra to do the right thing by customers. That response has meant we've achieved a strong performance on all fronts, certainly robust revenue and profit growth, strong cash generation, further improved strategic relationships with manufacturers, a game changing performance in Europe and further innovation in our market leading customer propositions. All of that has only been possible because of the fundamental re-engineering and I have to say re-energising of the group undertaken in the previous financial year. That platform has now been expanded with a dramatic increase in our capacity and a strengthening of our organisational capabilities, positioning the group to win and expand. Let me now hand over to Mark.

Good morning, everyone. I'd like to reiterate Jeff's thanks for watching us this morning. I'm going to take us through the financial highlights before John gives some more operational color and then moves on to how we see things looking forwards. Trading conditions over the last six months have been absolutely unprecedented. For the first half, our group revenue increased by 58% on a like for like basis. In the UK, revenue growth of 54% has flowed through to profitability, and UK post-AFA S16 adjusted EBITDA was 32.6 million, up 19 on the previous period. In Germany, 85% revenue growth enabled us to reduce losses to 4.2 million euros in the period, a 63% improvement on last year. Net debt on a post-IFRS 16 basis was 20.7 million. I think some analysts still have pre-IFRS 16 basis in their models. And the equivalent number was net cash of 57.9 million. So up 78.6 million in the same period at the same point last year. Our UK growth was constrained by our physical capacity, particularly through our second quarter, be that supply chain availability, outbases, vehicles, warehousing or people. And we've been building that capacity as we've gone through this period. In September, we celebrated serving our millionth customer in Germany. On a like for like basis, the overall group delivered revenue growth of just under 60% to 717 million pounds in the half year. Throughout the first half in the UK, we saw an improvement in product margins across all categories. This was offset to a degree by our business model, by our mobile business, where we saw changes in consumer behaviour in both cashback redemption and contract cancellation, which resulted in a circa £9 million charge to the P&L related to contracts sold in previous periods. In Germany, the progress on manufacturer margin continued from when we last reported, and we can see the overall gross margin increased significantly year on year, but also from the previous half year. Product margins in Germany are now materially at the level we experienced in the UK. There obviously remains an opportunity to grow this in the future. The gap in gross margin is now predominantly in logistics, and that gap will be bridged as we scale the business with improved drop densities. Total UK SG&A costs scaled with growth to 16.1% of revenue in the period, compared to 18% in the comparable period last year. Advertising and marketing costs at 2.7% showed a reduction against the comparable reporting period, but a slight increase in both relative and absolute terms in the second half of last year. This is partly due to reallocating cashback and promotional spend in our mobile business to more traditional digital acquisition expenditure, but also higher investments in brand advertising in the UK with some TV spend. Warehousing costs increased as we moved from two warehouses to five. And also we had the additional costs of operating to COVID related standards. Other admin and R&D costs fell a percentage of sales. We do intend to grow this cost in the medium term. We can see the impacts of scale across all of our SG&A costs in Germany. As the group continues to grow, we would expect to see this benefit continue. Whilst warehousing costs were up slightly compared to the preceding half year, they had fallen as a percentage of sales compared to the comparable period last year. We have had additional costs relating to COVID, as well as the increase in the outbase infrastructure, which will deliver an improvement in gross margin. It was pleasing to see the efficiency improvements in our marketing costs as we implement a 1 AO approach, which were flat in cash terms on the previous half year, but with significant improvements relative to revenue. Other admin costs were flat in cash terms on the previous period, but with the obvious benefits of scale relative to revenue falling from 9.9% to 6.8%. The result of the improvements in both territories in gross margin and SG&A costs can be seen on this slide. With the UK, adjusted EBITDA improving by 140% compared to the comparable prior period, and in Germany, adjusted EBITDA losses improving by 63%. From a group perspective, our adjusted EBITDA on a post-IFRS 16 basis has improved by 25.1 million to 28.8 million compared to the equivalent period last year. Group PBT has improved by 24.2 to 18.3 million. Inventory increased to 33 days at the end of September as we plan for our biggest ever peak period in both the UK and Germany, and also as we have a high order bank at the end of that month waiting to be delivered. We also aim to maintain a high stock balance in the UK business as we go through the end of the calendar year and through an uncertain Brexit period. As John will talk more about, supply of product has been a challenge and we expect to be challenging going forwards. And therefore, we will continue to buy stock available in the short term, regardless of its efficiency in our overall model. We have seen good support from our creditors during the period with about 61 days payment terms at the end of September, similar to the level at the end of September 19. We've gradually started seeing improvement in credit terms as both credit insurance supply becomes easier and manufacturers move us towards industry normal terms. There is still a big opportunity in Germany of moving towards more normal buying terms, but also an opportunity still in the UK to move our terms out further. And we have seen some success at this during the period. In debtors and contract assets, we have seen large increases in our contract assets that have scaled as we have grown revenues. We've also seen quite an increase in other debtors, up 29 million since the end of the year. This relates principally to an increase in accrued income from manufacturers in the UK and Germany, rebates and so forth, but also an increase in trade receivables in our UK B2B business. We discussed the profit and key working capital movements on the previous slides. The group is now in an overall corporate tax paying position, and we expect this to be the case moving forwards. Capital expenditure during the period was largely split between the increase in capacity in our logistics business in the UK on outbases and the warehouse fit-outs and on the finalisation of our plastics plant in recycling. Just after the end of the period, we repaid our RCF in full and there remains a balance of circa 3 million committed against guarantees and so on. The rest remains available to draw. We have available liquid funds of over 140 million at the balance sheet date. Now that we have released the capacity constraints in our main UK retail business, we would expect Q3 growth to be ahead of that in the second quarter. We are planning to continue to drive a similar level of growth through to the end of the financial year, having placed orders for sufficient stock and with the capacity built into our logistics operation. In Germany, we expect to continue with our revenue growth and the improvements in our profit and loss account. We do expect to post an overall small loss in the final half, and we will increase marketing activity in the final quarter. From a CapEx perspective, in the second half, we would expect to have our normal replacement CapEx of a million or so. But as part of our increased logistic capacity, we have orders in place for about £3 million worth of trailers to supplement our trunking fleet. The group is well positioned as we head into the second half of FY21, but we remain mindful of the uncertainty caused by COVID and also the additional uncertainty in the UK of Brexit currently with no deal in place. So now I will hand over to John who will talk more about what we have been doing during the period and how we are well placed moving forward.

Thank you, Mark. Welcome and thank you for joining us. This has been a half year like no other for our business, our customers, our manufacturers and all those involved across our whole supply chain. It certainly had its challenges and I'm very proud of how we've all come together with a laser focus on serving those customers existing and new in the distinctive AO way. I want to start, though, by thanking the whole team at AO for stepping up. Our priority throughout has been to keep our people and our customers safe so that we could keep delivering for those families that need us. Our team has lived the AO way in spades so that millions more could experience a better way to shop electricals. During the half year, we've grown share in all categories. In particular, though, our core MDA category has performed strongly. But to make it happen, this significant revenue growth has required investment and commitment to the physical and human infrastructure. By acting decisively and quickly in the early stages of what was a clear structural channel shift, we've been able to almost double our capacity in a matter of months. Warehousing infrastructure has risen from 740,000 square feet to just under 1.3 million. And our on-the-road delivery capacity has increased from in the region of 60,000 deliveries a week in March to over 150,000 a week as I stand here today. And we've grown into this capacity as we've created it. We achieved this growth in capacity in a matter of months at a total warehouse and outbase cash capex cost of less than 2 million. It's been a real-world vindication of the scalability of our business with real operational gearing delivered, of course, while maintaining world-class net promoter scores. At a macro level, we believe the combination of ubiquitous internet coverage, intense electrical product use from home working, and customers' increased appreciation of the crucial role that these products play in their lives is going to create a buoyant market for sustained periods. The compounding of the structural change, coupled with the scale advantage that we now have, we believe represents a tipping point for our UK business. We're seeing this play out in the UK with our growth rates, as Mark mentioned, accelerating into the second half as the capacity investments we've made become available for customers. The pandemic is clearly a global phenomenon. And so these market tailwinds are being felt outside the UK and Germany as well by our brand partners. And so as Mark has said, ensuring the security of supply has become a major focus for us. The combination here of 20 years of relationships and trust, the capability to forecast boldly and and ability to create the warehousing infrastructure to actually receive the product positions us extremely well. Throughout this period, our increased sales have delivered a much improved profit performance, despite the significant investment in COVID-related costs to keep our people and our customers safe. This has also manifested itself in our available cash and facilities, increasing from just over 80 million to just over 140 million year on year. But possibly the most pleasing achievement since I returned to the business in February last year has been the progress that we've made in Germany. Our European business was losing a run rate in the region of about 30 million back then. And I'm delighted to report that we are on track to achieve monthly profitability in Germany during our current peak trading period. And we expect to be profitable in the whole of the next financial year. That now gives us a platform to accelerate our growth in Germany and then beyond. This has been the outcome of a total restructure of that business with a new management team, a relentless focus on the core retail basics of our business and a brilliant 1A0 team effort from across the group. We've leveraged all the knowledge and the experience that we've built over two decades to repeat the model proven in the UK with only appropriate minor adaptations rather than to reinvent for each new territory. And I'd like to thank very publicly everybody involved from AOAs to our brand partners and everyone across the supply chain who embraced those leaps of faith that I asked them to take. The opportunity ahead is now both very clear and huge. But this is not a time for celebration, because frankly, there's just so much more to do. The AO flywheel is driven by our laser-like obsession with customers. And so we're taking this opportunity to double down on the investments that we need to make to serve them even better. We continue to invest in our tech platform, our website, to make the shopping journey even simpler and more intuitive. And to that end, we've increased our tech headcount by over 70 people in the period. That's going to deliver improvements in the customer experience, including personalization, chatbot automations and things like quicker, simpler payments. Our investments in scale and infrastructure mean that we now have a network that has us only 40 minutes drive from over 90% of the UK population. And this further increases delivery capacity, but it also allows us to raise the bar on the proposition that we will be rolling out over the coming months. We've also been continuing to invest in our brand through the medium term view. In September, we announced a five year agreement to sponsor the AO Arena in Manchester. and we can't wait for events to return so that we can bring a bit of the AO magic to those experiences. We'll also be investing more in a myriad of things that will cement how customers feel about shopping with us, way beyond the function of fulfilling an order. We believe it's a real difference for our brand, and we want customers to love AO, not just to transact with us. Mobile has seen some of the biggest structural changes with our competitors closing stores at scale. And we believe that the long-term customer focus is going to move from the network to the handset and the features and the affordability of those handsets. 5G, I am sure, will provide another market tailwind for the next couple of years. And our acquisition of Mobile Phones Direct gives us a great platform to make the most of this opportunity. But the integration of mobile into AO.com that was planned for this year hasn't happened. And that's as a result of us having to reprioritize our tech around COVID. But it remains a significant opportunity in the year ahead. Manufacturers have changed their customer mindset to be digital first. It's something we've been advocating for nearly two decades. We believe passionately that brands can tell their product stories digitally with more consistency and more cost effectively. We've been doing this for years through our investment in globally recognised market leading digital content. And we'll be further investing in this area with our new London Creative Centre to support the over 100 strong team that we already have focused on digital content now in Manchester. we will further raise the bar on content and we will be the destination for information for our customers and for brands to communicate the benefits of the billions that they invest in R&D and tech to help us all. I believe that the change in mindset from the brands, now that the majority of the market is being transacted online, is as meaningful as the change in customer shopping behaviour. it will surely further accelerate the migration and the quality of that customer journey. AO is wonderfully placed here to capitalise on this change because scale and reputation matter. And, of course, having the capabilities in place makes us the natural horse to back. The AO difference, though, is not one thing. In fact, it's the culmination of thousands of points of difference, all firmly underpinned by the AO culture. Now is certainly a time to build on having a well-invested culture and not a time to start building one. So it was great to be able to announce the AO Value Creation Plan back in July. It's a plan that will see all our people sharing the value that we will create together over the next five years. This is just another great example of us reinventing how things should be done. It's a scheme that we can all be proud of, not just a reward for the few of us at the top of the business. And nothing will give me more pleasure than to watch everyone benefit from their efforts. Personally, I'll be donating all of my award to charity for the benefit of young people who I think also need some AO care. Doing the right thing is a core part of our very DNA. Only last week, our efforts on inclusion were recognised by the annual FT survey, which ranked us 31st among 850 leading European businesses. We still have a lot to do though, but it's a sign of our early progress. I'm also really excited to see how our team in our recycling business are pushing the boundaries of the possible. As a result of our major investment in our recycling capabilities, both in our fridge and our plastics plant, we're now working with manufacturers to sell cradle-to-cradle appliances. We are going to have an exclusive range of products for AO and it will include washing machines and fridges made from materials from the products that we collect from our customers. Environmental and social change, though, doesn't happen overnight. Our value creation plan took over a year to invent and then process through shareholders. Our cradle-to-cradle appliances have been nearly, unbelievably, five years in the incubation period. And the on-site youth clubs that we helped to build take an average of about five years from conception to being open and delivering impact. It takes a real commitment and investment with a long-term view. And it's not a quick fix for some PR. But we have a mindset to do the right thing. It's what our customers want, and it's what we want. We have to take decisions that make our mums proud, even when no one is watching. Although I have to say, I believe customers are increasingly watching. It takes time to earn that trust. And they say that you get the reputation you deserve. And I think over time, it will be yet another point of difference on why customers love the AO brand and want to be part of our movement. I talked last year about the AO ecosystem and the value of vertical integration. And that's only realized when the whole group behaves as one AO, united behind the same strategy. We've made huge strides in the clarity and simplification of this since then. And we're now really starting to see the benefits flow across that ecosystem. One area that has been turbocharged through the first half is our B2B business, as Mark mentioned. As traditional competitors closed their businesses in the first lockdown, we stayed open and we were able to bring the AO service to a whole new cohort of customers. We've been helping to supply lots of companies, from SMEs to insurance companies, from hotels to house builders. We're now an approved supplier to almost all the major house builders. And we're winning thousands of new plots that will be built in the years ahead. It's our view that whilst the majority of the market will be transacted online, that won't reach 100%. So we've been working now for about two years on a concept with Tesco to bring the AO proposition to their customers in their stores at the customer's convenience. I believe that the days of destination electrical shopping on retail parks are numbered. And I believe that we can bring the best of digital to the place where customers already are. This in turn also creates a significant opportunity for us to increase our brand reach. Customers will be able to do their grocery shopping in the morning, buy a new TV and then have it installed and on their wall that afternoon. The innovation that we've injected into the first store was a real hit with customers in the brief time that it was open before the second lockdown. We have the full support for this concept from our brand partners. And we've been encouraged by the amount of premium mix that we've sold in the early stages. We should have five stores open by Christmas, and we will look to see how these perform in early 21 before we make any decisions about what's next. Our obsession with customer journey and our flywheel delivers significant operational gearing, giving us the ability to invest centrally in the things that I've outlined. In turn, we can scale these across our platforms in all categories and territories, delivering further structural advantage while at the same time providing market leading returns. Our strategy is to grow and then hold operating margins in the mature markets and categories steady at around 8% of EBITDA. We'll then reinvest the gains delivered by the operational gearing into improvements in proposition to yet again raise that competitive bar. We see a similar structural gain in cash flow. For example, our negative working capital cycle has also been amplified in the first half, as stock days have reduced to meet demand, which has driven further funds available to around 140 million at the half year. So looking ahead in the UK, we have seen growth accelerate in the early stages of the second half of our financial year. And we've been bold in our orders for that second half to ensure that we make the most of the infrastructural investments in logistical scale that we've made. We believe the changes in customer behavior will stick. And we plan to cement them through amazing service. Because I think people rarely go back once they find a better way of doing something. Internationally, our opportunity is frankly enormous. We now have a proven model that customers are voting for and manufacturers are seeing us as the digital first retailer. The German market is approximately twice the size of the UK. And so the growth opportunity ahead is very clear. We've built the model to repeat. And we'll be working to do that beyond Germany as soon as it's practically possible. And we'll do that to capitalize on all the changes that are happening in consumer behavior right across the globe. But I'd like to end where I started. Opportunities often look a lot bigger when they're going away from you rather than coming towards you. And realizing them doesn't happen by accident. This has been a huge team effort from all AOers and our partners to collectively impress millions of new customers. We've been running at normal peak trading levels now for every one of the last six months, but we're pushing on again. It's a challenge that we relish at AO and I would like to thank everybody