Ao World Plc Unsp/Adr

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 will 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 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 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 2008-9 period. And data providers suggest that the online market will marginally grow in 23 and 24, 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. Number three, reduce our overhead. And number four, to 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% of 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 costs 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'm 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. without covering him in coffee.

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 optimizing 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've 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 at 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.

Great, thank you. Good morning. Two questions to get us going, please. Black Friday would be the first potent mix. I know you sort of comment on where consumers are at the moment, any changes in credit penetration, that sort of stuff, and just sort of a general feel about how people react to it. And then the second question is the marketing. Obviously, long-term growth depends on you sort of really driving share in those non-NBA categories. Can you talk about how you see medium-term marketing evolving and how you're going to break into those categories?

Yeah, so if you take the World Cup, I mean, clearly we've been gripped by a dominating performance against Iran, which we should all think we're going to win the World Cup now. I think there's a simple formula that the longer it goes on through the World Cup, the more TVs we sell. So I think that's the way to think about it. From a Black Friday perspective... The Black Friday is a brilliant concept for consumers because it means that they can buy everything from a gifting point of view that they need for Christmas at discounted price rather than inflated prices or full prices. We're not seeing any great collision of the two that's creating any massive challenges, but clearly we've planned through the lens that we've said that we want to make cash and profit, not give everything away through that period. So hopefully that answers that. From a non-MDA perspective, again, we're looking at it through a profit and cash lens. And we're not just blindly chasing sales across those categories. So through our existing customer base, our growth and penetration in those categories is pretty consistent. Where we've pared back on that a little bit is in the marketing efforts of attracting newer customers as the origination into those newer categories that was, frankly, still in investment phase. So we've pulled back on that. That'll probably mean that the growth in those categories will be slower, but we're relaxed about that.

So, I mean, do you see this sort of... the percentage, if you like, of marketing shifting over time, or are you happy with where it is, and you're happy with a low-level acquisition activity?

I think I'm pretty happy macro where it is at the minute, yeah.

Okay. Good morning, David. David, a couple of questions, if I could, please. One for John. John, I wonder if you could maybe expand on your perception of the Black Friday event in 2022. I guess it's never been particularly loved by most retail retailers. Do you see it declining in volume this year, or do you think it's going to continue to grow and grow as an event?

Well, so I think... I think the retailers that don't love it, I wouldn't count us as one of those. So we're all about delivering incredible value for customers. And I think Black Friday does that at a time that people want to buy stuff. So if you're a retailer that sits in a golden quarter and makes all your profit out of customers that need to buy stuff for Christmas and then you reduce the price after Christmas, I think it's quite problematic. So from our perspective, we think it's a great phenomenon. And I think that what's changing over time about it is the shape of it. So it was an extremely big spike, and that's flattening out more. So Black Friday is now more known as November. And so it's how do we deliver that value for customers? But do it brilliantly. And so if you have such an accentuated spike around a few days, then it's impossible to do that from a logistics and planning perspective. And it's both from a quality and cost effective perspective. And the two very much go hand in hand. So what we've been working on is thinking much more from an airline perspective of, right, we're going to set ourselves up around an amount of capacity, but it's not an infinite amount of capacity. So it is very much more kind of when the capacity is gone, it's gone. And, you know, when the Ryan airplane is full, Michael's not going to put another plane on just because you want to book another four seats. So it's about how do we drive the profitability within those seats as well. And so where do we lean our marketing efforts within that? It won't surprise you to know that doing promotional coffee machines at 39 quid is not an area we're going to get particularly rich on. So it's a part of the mix, of course it is, and it's a part of the promotional calendar, but it's not what we want to be filling all the seats up with. So I think just... Focusing more intellectually on, through a profit and cash lens, how we fill those seats up and how we make the most of the opportunity that is definitely present in that period.

Mark, could you just give us a bit of colour around the exceptional cost around the PRB project? What happened there and...

Yeah, so of our exceptional charges, the biggest element by far was the people restructuring costs. But there were some small charges around, some write-off of some software licenses that it doesn't look like we'll use in the short term. So we were obviously looking at a big, bangy ERP implementation last year, which we've paused indefinitely. And as part of that, there were some licenses we paid for that we no longer require. Tony next, because you're right there.

Okay, Tony Shroff from Anglia Gordon. On sales, one question on sales, one on gross margin. Can you tell us what MBA sales decreased by within the product revenue line? And could you also, on sales, tell us what your, of MDA and in total. So that's a sales question. And can you sort of take us through the sort of non-movement of the gross margin? Because I presume there's going to be some volume-related payments that you didn't get. So I don't know how you look at it, but if you could give us some sort of categories within the overall movement of gross margin to give us a bit more insight into what actually happens.

Okay. Do you want, I can do any of all those. Do you want to do the first?

Well, so the last one first, which is the fact that sales have stepped back has not created, we're working really closely with manufacturers such that we don't drive dysfunctional behavior around that. So that's not an issue within the mix. The rest of it I'll...

Yeah, so MDA sales, you know, we are still very, very driven by MDA sales, Tony. And so I think you can, you know, close enough our top line movement in sales is representative of MDA. So sort of the direction of travel of the top line is similar for the category. It's so big for us. And so I don't think there's a meaningful difference. In terms of the mix of what's going on in gross margin, sorry, I'll take the inflationary point. So inflation, we're probably seeing price inflation run at about 7%, something of that region. Taking the mix of gross margin, we've obviously seen sort of a number of bits go in there. So you've got the inflationary pressures that we're seeing in logistics particularly. Towards the end of the period, we've improved our delivery charging somewhat, but that is right at the end of March. of the period for the first half. We've also then got some mix effects, so we've probably skewed slightly more towards MDA than we were in the prior period, which is helpful generally towards And so it's the basket of those things, but actually a lot of the actions that we've taken around, whether it's action on affiliates, whether it's action on charging customers for delivery, most of that's happened right at the end of the first half, so there's not a lot of impact actually in those numbers.

Okay, and in terms of the inflation of 7% in sales price inflation, is that sort of roughly the cost price inflation?

Yeah, yeah. Yeah, I think on the inflationary point, we've seen that go into the market faster than ever on the basis that nobody sat around with that margin being able to absorb it. As those price increases have come through from manufacturers due to their own input costs, it's flowed quicker than ever into consumers.

But in terms of the trend, are we currently seven or are we currently three or ten?

Well, so it sort of tends to stick, you know, and it's also dependent on exchange rates. And so, you know, we were mindful that there was likely to be another batch coming through in January. As it stands now, I think there's a bit more of a wait and see, given the sort of the strengthening of the pound versus the dollar in recent weeks.

In terms of the input costs, shipping freight rates look like they're down around 70% year-to-date. How much of that are you seeing coming through versus how far have you booked in your shipping freight or what would you expect?

Yeah, so in line with all of the UK electrical retailers, we pretty much buy everything in a UK landed price from the UK subsidiaries of the global brands. So we all buy from Samsung UK in pounds in the UK, and so actually that sits in the books of Samsung rather than us. And so that will be partly to do with the increase in input prices that we're seeing, partly reflects the... Raw materials but also shipping and exchange rates all sit effectively in the supplier's books and it's consistent for electrical retailers in the UK.

And we don't have an OEM business where we'll own the brand and take control of all the shipping and everything that goes through so it's not a part of our business of any materiality. Simon.

Good morning. It's Simon from Numis. You were very clear on your EBITDA margin expectations for next year. I just wanted to make up for the bits that would sit below that from a cash flow perspective. In terms of CapEx, we're running quite low levels this year. Is there any reason to expect mid-term CapEx needs are going to be beyond what we're seeing this year in terms of how you're thinking about assistive tech investments?

No, with our sort of simplification strategy, we intend to keep CapEx at pretty low levels moving forwards.

Okay, cool. And then with regards to your rental slash leasing costs, how much further is there to come out of that bill that you're going to be able to see in the first part of the cash flow? Is there a meaningful step further down, is there a lease and exit for the properties, or are we closer to...

So I think that there may be some small improvements to come in H2 and then there is probably a question around it. It'll be a balance between other income and... So there might be some incremental other income that offsets some of that or there will be some to come out. And that's a bit of a debate that's still ongoing. But there's probably one property, one warehouse that will either see some... additional or the commercial income offsetting it or actually that cost coming out. But it's one warehouse, I think, that's up for debate. Do you want to just do the... Thanks.

Adam Thomas from Liberal. Just the first question is around online versus stores. You mentioned in the statement that it continues structural growth within online. I'm just sort of thinking about the market being down 11% and online being down 18%. It's just some swing. quite a few people talk about that and any data points you're actually seeing that give you confidence that that's true.

Yeah, I think what we're saying is that COVID's a blip, clearly, for blindingly obvious reasons. If you take the overall trend, the overall trend is still towards online. So we would expect online to be more down than total, given that it's correcting as you come out of COVID. And that's the point that we're making, that is, despite that, the overall trend is still one towards online.

Yeah, I mean, so, you know, we look at GFK data on a pretty regular basis. And so, you know, as we've said, we can clearly see that the blip of COVID, where it went massively up and then it's come backwards, there's still a big step change between pre-COVID and post-COVID. And sort of, you know, the live data that we have on a weekly and monthly basis is suggesting that the trend has now normalised. And, you know, and our expectation, and it's our expectation, is that the, you know, the online shift, you know, in the medium term will continue.

The second question is, in the context of the creation plan, can you just talk a little bit about underlying staff turnover, things you can do there around staff retention, particularly for the later part of the competition?

For me, that's just a business-as-usual stuff that we would do around culture. Clearly, we've taken a lot of cost out of the business, so it's been a disruptive time in the business for that. But we're through that now, so any concerns that people might have around that... If you're on the bus now, you're on the bus and you're coming in on the journey with us. And as we've said, a lot of the cost has come out of senior and middle management as well. So the rest of that question is very much business as usual around different areas of the business and we don't go into it in that level of micro detail. Okay.

We firmly see the reset of the value creation plan as being key to retention of great staff for the next five years or more.

Just a final one. I think you're seeing it around work.

No, so acquisition rates remain very consistent with the long-term trend. And in terms of cancellation, there's some notes in the back of the accounts, but in terms of cancellation rates, we've seen customers be very sticky actually at the moment as that product, particularly when consumer finances are squeezed, is very important to people that those who want that protection have got it in place to replace that washing machine when they might not have the cash to do so. Great. Andy?

Thanks. Andy Wade from Jefferies. Just one from me. You implemented delivery charging, or charging for the delivery, should I say. I'm interested as to what you can see what your major competitor has done. But I'm interested if you could just talk about what market reaction has been to that. Have others followed? Have others had their position? And how that's played out in terms of immediate market share and impact?

I think there's been a different reaction across different competitors, and you highlight major reactions. From our point of view, what we've been most pleased with is the demonstration and the resilience that you can see in the top line sales number is that actually the best way for you to understand the difference of AO is to shop with us, because you experience it. People don't wake up in the morning thinking the way that they buy electricals is a problem. our low frequency of purchase in that is inherently, if you like, a structural disadvantage relative to people who have much broader ranges. And so for me, this is a demonstration of the fact that that 10 million of customers in our base that have shopped with us understand that we deliver 10,000 orders a week absolutely brilliantly and we impress them. And so when we're charging for that, they believe that that is a price worth paying for the quality of service that we deliver. And we believe over time that that will be the direction of travel for the market. So we've been really, really pleased with the customer's reaction to that decision to charge for that.

Thanks. Any more? Tony.

Yeah, just a bit more detail, please. I just wondered if you could tell us about the sort of trends in terms of what people are buying. Have they been trading down to key terms, what the ASP is year on year in MDA? And you referenced sort of deep relationships with brands. I just wondered if you have had any sort of changes in brand or changing the weight of the brands that you sell, whether you can sort of leverage your supply base, anything like that?

So from an ASP point of view, without getting into the micro detail, it's actually increased slightly. And what we're actually seeing, driven largely, I think, by the energy crisis, is customers migrating more towards more energy efficient products. And more energy efficient products tend to be slightly more expensive. And so customers are making that conscious investment to buy a slightly better product for an energy saving over the life of that product. And you've got to remember that we sell predominantly into an ABC customer demographic. And so that choice, even in a spending squeeze, that choice is still one that's available to the majority of our customer base. So, I think that's actually been quite positive and I think the energy crisis has driven that innovation and that change and that adoption faster than it would have ever happened. From a brand's perspective, I don't think there's any massive call-outs other than the The rise of the brands from the Far East, particularly China, and how aggressive they are about taking share in the market, whether that's through acquisition of brands or the way they're going about trading, is a definite trend of them increasing their influence, both through investment in marketing and support for the business.

Any further questions? Great, okay.

Okay, well, so to finish for me, you know, the message that I'd like everybody to take away is that clearly, you know, we said we were going to do some stuff and we are doing it and we're getting on with it. Most of it is not actually reflected in these results and will come in the second half and next year. So, you know, we're getting on with what we said we would do and it's working and that is manifesting itself in the results and the outlook that we're giving going forward. And so we're feeling pretty good about it. And thank you very much for making the effort to come in person.