Ao World Plc Unsp/Adr

Good morning everyone and thanks for joining us today at Hatton Garden. We've made this as efficient as possible so I'm going to get straight into the numbers. So we first set out our strategy to pivot to profitability in July 22 and I'm pleased to present the results for the year ended March 24 which demonstrate the output of this strategy. Importantly, during the year we've also been taking action to return us to growth. And in the final quarter AO.com returned to revenue growth. We delivered our record-ever group-adjusted PBT of £34 million, up £22 million on the previous year, which is now at 3.3% of revenue. EPS was 4.29p per share, up over 380% year-on-year, and we're progressing towards our medium-term PBT target of 5%. Going forward, I expect revenue growth will leverage overheads to improve this metric further. Gross margins also improved and is now just over 23%. This growth comes as a result of the increased MDA product mix as well as an increase in the average product value which has improved the amortisation of delivery costs. This is further supported by our performance of our product protection plan customer base and is on top of the benefit from delivery charges and range rationalisation as well as further efficiency savings in our logistics operation. There are some headwinds going into FY25 as latent inflationary pressures materialise and we're working hard to mitigate the impact. Our cash has converted well to profits. CapEx was in line with our plan, albeit the decision to buy affordable mobiles and buy mobiles was an unforeseen opportunity. The actions we've taken to improve profitability resulted in a net revenue decrease year-on-year of about 9%, albeit AO.com grew in the final quarter of the year. Our MDA market share remains strong at over 15% and the market's down about 1% year-on-year, which we anticipate is the bottom of the cycle. The increase in service revenue is driven mainly by the introduction of delivery charges and membership income. Commission revenue is made up of product protection plans and mobile phone contract sales. Our product protection plan customers continue to recognise the value and peace of mind it represents. The volume of plans fell in line with retail sales, but the retention of customers improved, which has positively impacted profitability this year. Our mobile business has had a very difficult year. The new contract market was down about 14% year on year, which has been challenging as depressed customer demand placed volume pressure on our volume commitments to networks. With that suppressed market, competition for customers intensified, leading to increased expenditure in the acquisition of customers through affiliate channels and unsustainable discounts to try and achieve volume targets. Mobile remains a key part of our strategy, however we could not feasibly continue to trade under the conditions seen in 2023. Therefore, at the start of the calendar year, we reset our approach. Firstly, we re-engineered the business in partnership with the networks to remove the dysfunctionality so that our goals are aligned. And secondly, we strengthened our market position with the addition of affordable mobiles and buy mobiles. And we expect this to reduce the pressure on acquisition costs and to be a source of natural traffic. And then finally, we continue to leverage our logistics and recycling network for third party customers where it doesn't distract from our core business. The actions we've discussed before on range and profit rationalisation helped us to deliver record gross margin at 23.4% with margins in H2 being similar to H1. We've discussed that the mobile business has been impacted by a shrinking market and the resultant competitive pressure which has had a negative drag on overall margin. This was offset to some degree by the improvement in retention in our product protection plan base during the year and we're committed to growing our retail business and the improved customer offerings through finance, membership, new categories and so on will be a key part of that growth and John's going to explain the strategy for that shortly. This changing mix will result in a slightly dilutive impact to gross margin in the coming financial year. So turning to our SG&A costs, we've delivered savings of £19 million year-on-year and on a two-year basis of £65 million, firmly demonstrating the output of our pivot to profit. For the long-term benefits of the business, we have continued to invest in marketing, although we have changed the focus of our spend away from direct acquisition towards brand investment as we look to cement our most trusted positioning with customers. As previously mentioned, the dynamics in mobile resulted in an increased cost of acquisition, which we don't expect to continue on a go-forward basis. In warehousing costs, we've delivered a number of efficiencies, 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. Our overhead control has continued, with a year-on-year saving of about £9 million. The nature of some contracts means there has been a lag in the increase of some costs, where inflationary pressures have continued to materialise despite the fall in the headline rate of inflation. We've experienced this as we exit FY24 and enter FY25, and government policy on minimum wage is driving high wage inflation in some of our lower-paid operational roles. We've also invested two million in the year in the first stage of our ERP implementation. The investment will continue and increase slightly in the coming two or three years as we ensure our systems and processes are resilient and scalable for future growth. So we've talked through our revenue and our cost lines and I'm pleased with the PBT output which shows year-on-year growth of 22 million delivering PBT of 3.3% which is up 2.2% versus the previous year. We remain focused on efficiency savings as we now turn our focus to growth. So profits converted to cash during the period. The swings we witnessed in working capital over the last couple of years have now normalised and we've chosen to make some investments in inventory as we look to maximise availability for customers. This is particularly in slow moving products as well as those where manufacturer lead times can be long or inconsistent and as a result stock days have increased to 43. We've seen a cash inflow of about £28 million as a result of the reduction in trade receivables and the receivables of the mobile business, as well as tidying up the legacy of B2B. Trade and other payables have also fallen year on year. Now this is largely a timing impact in the mobile business as purchasing cycles align themselves to sales. Investment in CapEx was £8 million during the year, with the key assets being the site for our recycling operation in Telford and the acquisition of the mobile IP. Now we do expect to see CapEx increase into FY25 to about £11 million and the increase largely being the purchase of vehicles which are in their normal renewal cycle but we will now likely buy those rather than we previously leased them. We've extended our £80 million revolving credit facility by another year to April 27. This is on the same terms with our existing partners and it's undrawn at the end of the year. As we exited FY24, we saw AO.com return to growth and expect this trajectory to continue in the coming year. And John's going to cover the strategy for this shortly. We will continue to leverage the fixed costs in our business, although we do expect to see some short-term inflation, which we'll proactively manage. Our expectations for the coming year is to deliver double-digit growth and adjusted PBT between about £36 and £41 million. And our medium-term aspirations remain unchanged, to improve PBT margins towards 5%, to grow our revenue in double digits, and to grow our EPS faster than revenue. And on that positive note, I'll pass you to John.

Okay, so as you've just seen in Mark's section, we've made real progress in improving our profitability. And this is going to be a continuous journey, but the heavy lifting of that is firmly done. And with the benefit of hindsight, while many businesses were paralysed by issues like working from home and cost inflation, and I think a lot are still waiting for that storm to pass, we're really glad that we had the courage of our convictions to take early decisive action. And I think that's the advantage of living through 24 years of storms, that you really do learn how to dance in the rain. That said, the depth of the effort in getting to here should not at all be underestimated, and I'm really grateful to the entire AO team, our supplier partners, our shareholders for everyone's support over the last 18 months as we've gone through the journey. As a result, we've ended the year a much simpler business in a steady state, performing better than ever for customers with outstanding unit economics, and crucially, our culture, which underpins everything, is firmly back and even stronger than ever post-COVID. That's not to say that we won't get more profitable from here with growth, but the business foundations are now good, which is evidenced by today's numbers. Looking forward, our ambition is to be a double digit growth business every year for the next five years. Now, I know it's easy to be sceptical about this, especially in the current economic climate. So I just want to spend a little bit of time setting out the broad plan that underpins our confidence to achieve this ambition. Our approach is based entirely on self-help, taking share by offering customers a great proposition in a broadly flat market, which will create operational gearing and any replacement cycle that may come from the COVID peak, that'll be incremental. For context on the opportunity, our current share of the MDA market is around 15%, give or take, and yet our share in all other categories is around 2% or less of the market. To manage your expectations though, up front, we won't be releasing all the micro details about our plans. Our overarching strategy is to create an even more loyal customer base and win a better share of wallet from total household spend in the electricals category. And we have a number of mechanisms to achieve this with a range of customer cohorts. During the COVID period, we transacted with around 3 million new customers and they all had a fantastic first time experience with AO and with our brand at a time when they really needed us. We believe and we're seeing that they continue to repeat and buy new categories from us. And it's really important that we're already seeing this. We've taken the first steps in improving our proposition and fixing the unit economics of those other categories as well. Outside our MDA heritage, we're competing with a broader set of retailers, both online and in-store. But the reality is today is that we don't have an obvious right to win in those categories. So what are we doing about that? Well, let's start by looking at those customer cohorts that we can build and how we can drive loyalty to AO. So, finance customers. Well, they give us a greater share of their wallet across categories, and they shop more frequently. That's because once they've gone through the process of opening a credit account, it's more convenient for them to shop with us, and of course, they already have the reassurance of knowing that they have access to that credit. We've been building our finance base, which currently stands at just over half a million active customers, and they have about three quarters of a billion pounds available to spend on their accounts. We now also have a growing AO membership and that base pay £39 a year for the benefit of free delivery, free recycling and great member deals. Those members are already demonstrating a willingness to give us a greater share of their wallet, giving us a clear right to win with them across new categories. Similarly, in our insurance business, we now have over a million customers paying us a monthly direct debit and trusting us for their peace of mind. And members with both finance accounts and insurance give us an even greater share of their wallet. In our mobile business, we now have over 1.1 million active customers. And members who have finance accounts, insurance products and a mobile phone, well, guess what? They give us an even greater share of their wallet. So I'm sure you can see where I'm going with it. The further that we deepen our relationship with customers at scale, the greater our right to win a bigger share of their wallet. And so the more our unit economics improve. In turn, this enables us to keep investing in the reasons for customers to share that wallet with us. All the data that sits behind this is clearly extremely commercially sensitive. So today, I'm really just outlining the principles of the flywheel that drives what we think of as our shared economics model. And this enables us to share those unit economics with customers and to share value creation with investors. It also allows us to deepen our relationships with suppliers through a greater ability to directionally sell products to our members. Plus, from a people perspective, playing for a winning team is just a lot more fun than battling relegation, which is hugely rewarding for all AOers who thrive in that high-performance, fast-paced culture. And ultimately, it's the data that we can see building behind all that and the compounding effect of the customer cohorts that underpins our confidence in the ambition of double digit growth. And as Mark's alluded to, we also believe there's possibly a medium term tailwind on the horizon as well because of the amount of volume that was pulled forward into the COVID lockdown period. For context, MDA volumes were 16.2 million units in 2020, 15.4 million units in 21 compared to only 12.9 million units in 23. Now our planning assumes that we stick with today's historically low volumes and that they will continue in the short term. But we are now four years from the start of the COVID spike. And even with slightly longer purchase cycles of electricals, it does seem reasonable to assume that there will be some growth returning to the replacement cycles from those COVID peaks four years ago in the not too distant future. As ever, none of this is going to be absolute plain sailing or a perfectly smooth journey. And our desire to keep driving at AO speed and keep innovating will create oscillations on the trajectory of our growth. But equally, the long-term trend will be upwards, just as it has been for the last 24 years. And building these cohorts will take time. It requires lots of lessons and learnings, and it will also occasionally need investment at times, I'm sure. There will also need to be occasional leaps of faith and an unwavering commitment to the cause. But I am more convinced than ever that this is the best strategy to create value for everyone, from shareholders and customers to our people. And amidst all the talk of strategy, I don't want anyone to take for granted the brilliant retail basics that are so crucial to our business and will continue to underpin our success. And that's why we continue and always will obsess about them every day. Be that range, price, delivery, speed of delivery, availability, delivery execution, delivery with a smile, installation, and always being there for customers with a human touch. That obsession recently manifested itself in us passing the half a million Trustpilot reviews milestone, with a Trust score of 4.8 out of 5, meaning that AO is now the biggest scale Trustpilot retailer in the UK with the highest quality rating. That's a really, really, really proud moment. And frankly, it's the scorecard of just thousands and thousands of hours of great customer service lessons. And all this forms the foundation for that very simple message that we are, as you all well know, the UK's most trusted electrical retailer. We have a firm conviction that the need for those brilliant retail basics is not going to change anytime soon. And that means that we can really continue to invest in them with confidence. Plus, as I've said many times before, the reality is that the best service is actually no service. It should all just work and it's also the most profitable service because every intervention costs money and you've seen that in the results today. And all of this in turn gives us a clear structural advantage over time through the trust that it will generate with customers and other stakeholders. And so with that, I'll finish where I started by reiterating our confidence, which I hope some of you will now be more inclined to share a little of. The AO will be back to double-digit growth every year for the next five years. And with our medium-term PBT target in excess of 5% and having all that manifest into what I think of as just good old-fashioned cash. So thank you for everyone's time today. Thank you for coming along. And before we move to Q&A, as a point of housekeeping, we've got a microphone. So if you can take the microphone and before asking a question, if you can just state your name and organisation so that anyone watching can hear. Thank you.

Hi. Hi there, Ben Hunt from Investec. You talk about the need to improve unit economics, and it feels like more of a growth to achieve these medium-term objections is it's got to come from the non-MDA categories. Historically, there's obviously been a, you know, your warehousing configuration is more set up for MDA. Can you perhaps talk about any sort of plans or progress you're making at improving perhaps those unit economics categories?

Yeah, I mean, quite simply, we fixed all the unit economics. You're dead right. All our operations in our heritage of MDA are built to move big stuff around with two man home delivery. and you need a completely different operation with much more automation for smaller boxes. And so what we've done through the year is we've, in simple terms, moved all of that small stuff out of our two-man operation, and we've partnered with a business called DCC, leveraging their capital investment. There's no capital investment for us, and we put our volume through that. And it's been a careful journey to make sure that we do that and we tie all that together from a tech and a customer proposition point of view, as well as fixing the unit economics. And again, there's more stages of that to come through the year. But the growth that we will see in those newer categories through repeat business will drive us towards our 5% PBT target. So the economic element of that is done.

And then second, can you just talk a little bit more about the mobile market? The second half looked quite poor. You alluded to the connections being down. And maybe with context to the two new mobile sites that you've acquired, how that relationship is going to improve with the mobile network operators and your volume commitments?

Yeah, so in simple terms, we were clear when we set out our updates at the end of last year that the key part of our pivot to profit strategy was that if we could not see business units with a line of sight to profitability and cash generation, we'd come out of it. And we've got lots of examples, Germany being the biggest one, but our partnership with Tesco was another one, House Builders was another one, and a mobile was another one on the list. I was really clear that the new contract market on mobile has got an enormous amount of dysfunctionality and bad behavior that's built into it. That's not a business that we wanted. This will be the last year of pain for our mobile business. We're building different agreements now in partnership with the networks where we win together or we lose together. And obviously, as Mark's mentioned, opportunistically wasn't in our plan to buy one, A1, as what was one of our biggest competitors in that market through the period as well. So it won't be a case of putting those two businesses together and it being the combined entity. It'll be smaller than the combined entity, but it'll be a much better business for us and it should generate cash and it should contribute profit.

Good morning, Caroline Gulliver from Equity Development. My first question was around operating leverage. You mentioned that obviously there's minimum wage increases, putting a bit of sort of cost inflation still in this year. But as we look forward and you're generating double-digit revenue growth, what are some of the sort of levers or what might you like to invest in? How much should we expect might fall through to profitability and getting towards that 5% PBT margin?

Well, so, I mean, at its most simple level, we're guiding our journey towards 5% PBT. We'll have lots of choices then of how we think about that. If you look at a very macro level, I don't know the exact numbers, but it's about 11% of our sales go to pay central overhead. That central overhead is extremely well invested and doesn't rise in line with sales. Mark and I are quite expensive. We don't need another me. We don't need another Mark. And so we will be leveraging a lot of that central overhead as we go through. But naturally, we'll have improved unit economics through leverage of central warehousing and things like that. So it's across the piece. We will continue to obsess about efficiencies. I've always said, even through the pivot to profit, you never cut your way to success. So this was about repositioning the business. We've done that. We are back to growth. We are confident. We can see all the things that are going to drive growth. But it's not as though we're going to go and spend, right, let's go and spend 10 million on TV to drive the growth. This is about much more, you know, I've used the phrase many times of reassuringly boring. When we've got these, building these cohorts in a high value ticket environment with low frequency of purchase is expensive and takes time. And the point that we're highlighting is we put 600,000 new customers into our business this year. At the level of service that we're providing, they're seeds for next year's sales. They're seeds for this year's sales. And as we improve things like the awareness of the other categories that we're selling and as we get more members, as we get more finance accounts, that engine and that flywheel just drives. There's no silver bullet in this. This is now moving through the phases of growth and it is broadly playing out exactly as we thought it would. And that drives our economic model. But the important thing is for me that we don't expect all that to flow to the bottom line because we're operating a shared economics model so customers are paying 39 pounds for free delivery free recycling and member pricing the more profitable we can make the business the more we can invest in that flywheel to give them better value for their 39 pounds as well and we can do that across lots of different metrics with lots of different levers And that's why I don't want to really go into the micro detail of that because there are so many choices for us to make. The key is for people to focus on us being back to being a double-digit growth business on a journey to 5% PBT.

Thank you. And then we know that roughly 78% of PBT converts into cash flow. Have you had any thoughts yet about what you might do with... Yeah, we're going to make our business balance sheet bulletproof.

That's priority one. And 2022 is a difficult year for us. We're never going to go there again. So absolute bulletproof, and then we'll think about it thereafter. It's in my category as high-class problems, and we'll deal with it when we get to it.

Good morning, guys. Alison from Deutsche News. I'm wondering if you'd talk a bit about where you are on the journey in terms of increasing that range of small domestic appliances and bringing people into that category. And I suppose, as well, just how you're thinking about maintaining that kind of customer experience, that trust as you sort of move out and someone else takes responsibility for the fulfillment. I guess the delivery is going to be part of what's differentiated for

Yeah, so there's no massive change in that. So we primarily partner with DPD around delivery, but we have done, even when those products were coming out of our two-man warehouse, most of it still went on a DPD vehicle. Their service is very good. We've got everything in the background to deal with that. If it's not, we fall back on, we've got amazing people in our customer service team. and our obsession with customer service makes sure that those customers get looked after. And so that DPD service has been in place for years, and so there won't be any outward change on that. In terms of where are we on the journey, I'd probably score us a 3 to 4 out of 10. But that's material progress because we were probably more like a one and a half to two. And so we will bring more of that range into our own stock holding. We'll take more of the risk of stock. We'll build more credibility in those categories. We're already seeing that. We'll deepen our relationships with. with the brands and the manufacturers of the products and as the awareness within our existing customer base grows then logically you know we're already seeing our market shares in those newer categories materially over index with existing and repeat customers than it does with new customers so so it's just a journey it's not and again it isn't a light switch it's just a progression But to be clear, we're only 15% share in MDA. It's not the end of our MDA growth journey. So those 600,000 new customers this year, I expect them to buy MDA from us as well. I think that should make sense. Nothing of any great materiality to be concerned about. In the same way that we've had supply chain disruption, everybody's pretty well reported around the disruption that's happened. Stuff that comes from the Far East is now taking longer. Our priority is to maintain the proposition and protect customers from any impact of that. So we have increased our stock holding in certain areas because of that as well. So it's a great investment. Stock is a wonderful investment for us. We have relatively microscopic obsolescence within that stock. So it genuinely is a great investment for us.

From a worker capital point of view, I think you'll see an offset in trade creditors. So if there is an increase in stock in those new categories, it will offset creditors. There's no investment.

Hi there. Andy Wade from Jefferies. Following on the non-MDA theme, you sort of talked about that category, helping drive towards 5% PVT margin. You talked about it being fixed from an economic perspective. Does that mean that...

this year as in now the unit economics are where they where they're going to get to or is there still a journey on gross margin which you're going to be going through over time as you scale that's the first one yeah i mean so yes we've fixed the delivery element and the warehousing element of it i think there is still a progression to go with the manufacturers of those products that will develop over time so i think there's more opportunity to go but the you know the day one you know do we do we not lose money on this stuff anymore that's the tip

And I think to just build on that, the very manual way of warehousing and moving those products around has been removed and we've got all the benefits of all the automation in effect without the CapEx operational.

Yeah, okay, thanks. That's clear. Second one on that, from a customer-facing perspective on the non-MDA, what is going to look different? Is the range going to be bigger? Is it going to be a bit more obvious and a bit more promotion on the web? Not promotion as in cash putting in, but promotion as in visibility, perhaps, on the website? And... Is price going to be a bit sharper? I don't know.

Everything. I mean, it literally is everything. So from a proposition perspective, we want to be able to... So the ultimate goal is next day delivery every day, seven days a week for up till midnight. how you get to that so pushing back that time window so customers can shop longer for next day delivery increasing the range increasing the web improving the web journey as well you know our website is you know it has some fundamental flaws in it because it was built for mda so if you want to download software in our system it has to have a color So you download white software. And so in the background, we're sort of paying some of the smart talks about on the system debt of paying some of that down so that we can present those products, those products specific by category. You know, we're here at Hatton Garden. which is at the heart of our creative hub of how we create content for customers to be able to shop products better. And so we're getting ever better at how we tell those product stories with different complications. Shopping consumer electronics is just a minefield. for the average consumer and so what we are historically very good at is taking that customer journey and making that customer journey much better so it really is across everything and then of course price you know we want a price reason for customers to shop with us and those customers that are investing with us in being members they're enabling us to to invest back in their shared economics model

Okay, thanks. And then last one on the other admin element of your cost base. It's about 11% I think now. And you talk about it being sort of substantially fixed from here on in. Where can that get down to in time? Or is that entirely dependent on where top line gets to?

And then that's the answer, right, is that the cash amount is pretty fixed. It's going to go up with inflation, but it is a pretty fixed and well-invested number. And so the question is, where does the top line go in language history?

Fine. All right. Thanks. Importantly, though, Andy, what we choose to do with that... in the shared economics model, if we drive another 4% or 5% of saving out of that central overhead over time, that doesn't necessarily mean we're going to choose to, you know, as Jeff Bezos used to say, your margin is my opportunity. We really want to drive that volume shared economics model and choose where to reinvest those operational savings that we create.

Sounding more like a Costco model.

Say again?

Sounding more like a Costco model.

Funny that. Okay, any other questions? All right, great. Well, it's great to be back to growth and to be delivering fantastic results today. Record ever profit and thanks for being here to listen to it. Thank you.