Ao World Plc Unsp/Adr

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 pounds. 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 chat GPT in about five minutes, rather than lots of time for photographers, image editors, and so on. And so, you know, 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 7 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% to 20% down. We expect to remedy this as we head into 2024. As we look at SG&A costs, we've 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 £9 million in the period, with the annualisation 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 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. 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 materialise. 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've phrased it in the past, we'll cash the check 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 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, although 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 AOAs 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. John.

John Stevenson at Peel Hunt. A couple of questions to get us going then. Can you talk a little bit about the sales performance of non-MDA categories? And also, I suppose, the extent to which people are, you know, shopping into non-MDA categories for the first time as well. Sort of the, you know, how people come back and go into those categories. And while we're on categories, can you also talk about what you've taken out and then how those are going to come back in? You talked about, you know, cut SKUs coming back on a more profitable basis.

Yeah, so we don't break down, as you well know, into loads of granularity, the sales mix. But in terms of your question on what we've taken out, most of what we've taken out has been lower value SDA. So particularly at this time of year where gifting and those. So a coffee machine at £29 or £39 would be a very difficult choice. product for us to sell profitably when you look at trying to put that through distribution infrastructure that's built for large MDA. So we've taken a decent amount of that ranging out and we believe in the next financial year we'll be able to materially put the vast majority of that back in.

And categories like laptops, can you comment really on how you're doing in those non-MDA categories?

Well, so across again, we're not going to roll through the micro detail of that, but it's fair to say where we've taken products out of the range, that's had a sales impact. But overall, we're materially happy with where we are on the mix. As I say, it's been broadly self-inflicted stuff that we've done. And we think as we go through next year, we've got a clear plan that brings most of that back.

Actually, just a quick cash question. When is, you know, how much cash is too much and what's your thoughts on sort of capital allocation?

Well, there's no amount of cash that's too much. I think the UK government would do well to follow that strategy. And so, you know, I think in looking for the next 12 to 18 months, I think we will be further investing in the balance sheet, I think it's fair to say.

Yeah, I think we'll update more for the year on capital allocation.

Andy at the back.

Thanks very much. Andy Wade from Jefferies. A couple of questions from me.

So you talked about returning to growth in Q4 and then growing next year. and your confidence in that. What's underpinning that confidence and what are the key drivers to drive that? I know you've been through some of them there, but in terms of building blocks, they're going to do that. Secondly... Non-MDA, you talked about how you've re-engineered it. Obviously, if it's going to be profitable, more profitable than it was before, you're sort of looking at either more margin out suppliers, more efficiency in terms of your getting it to customers and handling it at your end, or charging a different pricing structure on it. Just interested as to what the balance of those is. And then the third one on Trustpilot. Two questions going slightly opposite directions. The first one, do you think that the low number of reviews that Curry's has might mean it skews towards a higher proportion of low ratings? Just because you only go on there to complain, they don't incentivize customers to do it. But on the other hand, should it be easier for them to get high ratings because they're getting a lot of accessories and stuff that aren't MDA that are harder to do? Just interested in your thoughts on that balance there.

Okay, let's take them in reverse. Trustpilot, I don't think 155,000 reviews is a low number. I think it's statistically accurate and consistent across the piece, would be my take on that. And their reasons for that, I think, are their reasons for that. And as we've gone through that, as we've grown through our numbers on Trustpilot, it's been a pretty consistent picture. And theirs has been a pretty consistent picture as well, right? Yeah. So on the topic of we've re-engineered the supply chain, we are re-engineering the supply chain. So we're in the middle of it at the minute. And I would say the single biggest thing that we're doing, again, is self-inflicted. So Ken Morrison used to say that costs walk into businesses on legs. And when people move things around a warehouse, it costs to do it. And that erodes margin very, very quickly. So we need to have a lot more automation and we need to take costs out of the supply chain. uh so it's not as though we're going to be in a position to somehow charge customers more you know there's a the world of selling electricals is pretty brutal economically on price transparency so it's about getting our house in order of being able to sell those products economically viably and as we can do that we'll reintroduce them there's no great revisit on supplier terms or asking any suppliers to pay for inefficiencies it's about or sorting out our operation rather than we used you know what we did originally was we've got our own internal logistics operation built for larger items and we've injected smaller items into that that's inefficient. But actually what it did was answer the question of, do customers want to buy those categories from us? And the answer is yes, they do. Can we make any money out of it? The answer was broadly no. But when customers want to buy it from you, and we will get our share of wallet, I believe, back, We now believe that we've worked out how to do that. But it'll take us, we're in the middle of doing that at the minute, and it'll be through next financial year. And then the first question on growth. Well, so as Mark said, over the next few weeks, we annualized the last of our actions in terms of major stuff that we did on self-inflicted. And behind the scenes, we've got a number of good growth drivers and initiatives and improvements to the shopping journey that we've been doing that will start to break through the surface and get us back to growth. But don't underestimate the points that I've made today that our customer base, there's a value to having a much bigger customer base. Our repeat business has never been higher. And we transacted with another three and a half million customers over the last two or three years. and their propensity to repeat with us is a lot higher. Our cost of marketing directly to those customers is lower. The frequency with which we can reach those customers is higher. And we've got ever better. We were starting with a pretty low bar, if you go back five years ago, on where we were at with CRM, and you were CRMing into a lower base. the fact that we've got a lot better at how we communicate, and we've got a bigger base to communicate with, and our service is as good as ever, then there's a compounding value to that. But that's not the only thing. We've called out our B2B continues to grow. There's a number of initiatives across the business, and we'll update as we've delivered on them rather than trying to speculate on exactly what's going to do what. Great, thanks. Bruce.

Hi, Bruce Hubbard at Lancaster. I'm mindful that you've had quite a bouncy half one, half two profit record. This is mostly for Mark. If we go to consensus, what's implied for second half is very little progress on first and actually down year on year. So could you just sort of talk us through the major moving parts on that? Is mobile sort of increasing losses part of that?

No, so I think mobile will deliver better performance in H2 than H1, albeit loss-making overall. And so I think the point there is we've upticked numbers today a little bit, which should move up consensus a bit, I think. And you're right, that's forecasting a similar performance for mobile. h2 profitability then as uh as for the last financial year uh and so you know there's an opportunity for us to um to do a bit better but we're a consumer business um looking into um you know a tough economic market so that's kind of where we are at the moment let's see where we end up in march

And just thinking, there's a fair chunk of cost and revenue things that should all be annualising positively into next year. Is that a correct understanding of what you've been saying to us? Because I think major moves, I understand they're annualising out, but you've got extra.

Correct. So the revenue stuff should all be sort of annualised out by around about now. But certainly from a cost point of view and from a margin point of view, you know, the run rate that we've got, as we sit here today, is the run rate I expect to take into next year. And whilst we see some opportunities for further efficiencies, we're really mindful of current rates of inflation that will affect our cost base. And my expectation is that broadly those two things end up being a wash and that we can offset inflation through efficiencies as we head into next year.

So let's work from the back forwards. It doesn't matter.

Let's start with Caroline in the middle.

Good morning, Caroline Gulliver from Equity Development. I just had a question around customer behaviour. You mentioned that the cost of living crisis is still ongoing. Are there any innovations that you can talk to us about driving either upgrades or non-replacement purchases that we can look to to obviously help that average order value? And is or are energy-saving products still something that customers are buying into? Yeah.

Yeah, so we're seeing a mix of cohorts of different things across the business that I would say on an average product value is still netting out slightly negative. But underneath that picture, there's lots of different moving parts. So there is definitely still a drive to more energy efficient products that is happening. Without any doubt whatsoever. And I think a lot of this comes down to what's discretionary and what's not, right? And every household's in a different position and everyone takes a different view. And if you're, I always bring it back to, if your fridge freezer breaks... That's essential as a product for the vast majority of households. And the vast majority of households would then look at that and say, right, well, let's get a more energy efficient one because in the long run that will cost us more. But actually, can you afford that in the short term stacked against the other priorities? And every household's in a different situation with that. I was having a conversation with some of the press stuff that we were doing earlier on, yeah, but TVs are more discretionary. Yeah, not if it's the main one in your lounge, it's not. And so again, in that category, there's discretionary. If you're upgrading your TV, normally if there's a World Cup on, here we go again, England getting through the first round, the amount of the nation that upgrades their TV to watch the three England group games always amazes me, frankly. I think that's a discretionary upgrade. But if your TV breaks, then I don't think that is discretionary. But then what you will replace it with, there's still a bit of Moore's Law in TVs of prices coming down and technology going up. We've talked about the reduction in the mobile phone market, and so the innovation improvements and curve is definitely reducing. You know, I haven't got an iPhone 15, for example. I didn't feel the need. But if I drop it and I smash it, then I'll feel the need. So even within categories, different people are viewing it in different ways. So there's loads of moving parts right across the piece. So it's impossible to just make general sweeping statements.

David Hughes from Stiefel. In terms of your movement up to 5% margin, you say the pivot to profit is broadly complete. Is the rest of the movement just based on the return to growth of the economies of scale, or are there other things you're also going after?

Well, so as Mark said, we believe there's extra efficiencies across the group, but it's probably a score drawer on that with inflation and everything else that's going on. But what I'm highlighting is that our central overhead, which we believe to be materially fixed, is still double digit as a percentage of sales. And so when you look at what we've done in terms of actions, so you correct me on the numbers, Mark, but for macro, we were about 1.6 billion of sales at about 11% central overhead. We're now about 1.1 billion of sales at 11% central overhead. And so we've taken a huge amount of cost out of the business. Some of that's blindingly obvious because when you stop doing something, the cost goes with it. But we've done a lot more than that and we've done a lot of simplification across the group. We are still at 11% central overhead. So in simple terms, if you double your sales, that 11% doesn't halve, but it probably goes to about 6.5%. Well, that makes a 5% PVT target from where we are today seem pretty achievable. And so that's why I say, so the big question is, okay, John, so how are you going to grow then? And that's why we're very clear on our guidance. We expect to be back to growth in Q4, and we expect to be in a corridor of 10% to 20% growth next year. And as we update, as we go forward, we'll tell you what we've done to achieve that rather than going through a list of things that we might do to achieve that.

Thank you.

Simon. Sorry, Simon. Good morning. Simon Bowler from Numis. Two if it's okay. One, probably quite a quick one. You kind of spoke around a few bits of re-engineering the supply chain and where else automation was mentioned. I think you've been very clear on this year's kind of CapEx guidance. Just as we look out into outer years, do you expect any kind of meaningful CapEx buckets beyond the kind of maintenance level you've implied? No.

Not outside of our recycling business?

Yes. The one I flag in the medium term is potentially a second recycling plant at around 10 million. And we'll talk to you well in advance if that does come on the horizon. But that's a medium term, you know, might happen in the plant.

Okay, cool. And then the second one was just on the mobile part of the business. You kind of spoke about the market decline and the impacts that has had versus volume targets. Can you just touch on when those volume targets were set? How forecastable was that decline in the market by yourself and or networks, handset manufacturers? And how easy does that then therefore make it to put into context the remedies and the recovery and profitability for next year?

So those targets would have been set this time last year for this year. And so at the beginning of the year, how easy is it to forecast? Not that easy. The amount of product that is sold in the last quarter, obviously no one ever knows when Apple are going to launch the new iPhone. It does always seem to be in the second week of September, to be fair. But you've got to try and build the volume as you go through the year. You don't know what the allocations are going to be. It's a pretty dysfunctional market, in truth, on the way a lot of that works. We've taken exactly, so the confidence that I can give you is that we have applied the same profit and cash generation lens to our mobile business over the last couple of months that we have to everything else. And we've taken some major decisions. We are not frightened to close things as we've demonstrated with Germany. And we're definitely not piling good money after bad. And so I'm very clear that if we do not have a clear line of sight to profit and cash generation, we stop. And we're not stopping. So we've got real confidence going into next year that we've got a mobile business that will generate profit and cash next year. Past that, we're not going to go into any great detail, but hopefully the actions that we've taken across everything else in the business will give confidence that we would have taken the action if we had concerns about that. We don't have concerns about that going forward. Okay.

And directionally, does that, as has been the case in certain other aspects of the group, does that mobile business shrink into profitability, or does it stabilise or grow to generate profit from here when you look at the different drivers of it?

We'll give you a better steer on that up for you. It'll be profitable and it'll be cash generative.

Thank you.

Hi, Brad from SureCap. First one, any color on the AO five-star membership growth contribution to revenue or profit? And then sort of second one, if run rate revenue stays at this sort of level, what does Q4 look like up, down, flat? Any color on that as well? Thanks, guys.

Well, so we've guided that Q4 will be back to growth, so that's pretty clear. In terms of membership, it's something we're experimenting with at the minute. It's costing us something at the minute, so it's a small drag. But it's nothing of any materiality to really call out. It's way too early for us to make any predictions.

Cheers.

Any more?

Hi, Carl from Singers. Just any kind of colour on expectations of Black Friday versus last year? Or performance?

Well, for us, I would expect Black Friday to be lower this year because of the deranging of gifting, a lot of the gifting categories that we've done. But for materiality, Black Friday is Black Friday now. It's not still the stratospheric growth or more appearance of Black Friday onto the scene. I mean, it's about 10 years old now because it launched just after our IPO, which was frighteningly 10 years ago. And I'm sure which will regurgitate some nonsense that they wrote last year about Black Friday not being a great deal. And the big consumer message about Black Friday is that all the sales used to happen from Boxing Day, right? And if you look into categories like SDA, for example, something like 35% of the year's sales are done in the four weeks before Christmas. They're all now done at a significant discount where they used to be done at full price. So from a consumer perspective, it delivers fantastic value for consumers at a time when they want to buy the products. That does not mean that all of the sales periods within the year have stopped. So guess what? There's an Easter sale. There's a Christmas sale. There's a summer sale where we'll focus on refrigeration and cooling products. I don't think we're as far as where DFS are on sales. But there are key promotional periods in the year, and Black Friday is an important one. But from a consumer perspective, it's the biggest one. because that's where demand is skewed so much pre-Christmas. But I don't think this concept that Black Friday is going to get even bigger and even bigger, where you're in a replacement market, which is most of what we sell, replacement tends to get replaced when something breaks. And it doesn't conveniently break at Black Friday. So it tends to be more of a press story than a business story.

Anything else?

Okay, so I'll finish with just reminding that some key points. We're really happy with where we are. From a profitability point of view, we're in really good shape. The business is in a really good position from a cash position. We expect to be back in growth in Q4, which is Jan, Feb, March, for the avoidance of doubt. And we expect to be in a corridor of growth of between 10% and 20% for the next financial year. And we'll update on that as we deliver it. Okay, thank you very much.