AO World plc (81A.DU) Earnings Call Transcript & Summary

Okay. Sticking with interrogation of the numbers we've reported. I'm going to turn to some questions from Matthew McEachran from N+1 Singer. A question, I think for you, Mark, which I'll come on to in a moment, which is about warranty cancellation trends. Matthew, I think we've already covered your question about headwinds, which John covered earlier when he was asked whether you thought it was a home win or a score draw. And your third question, Matthew, on the international expansion, I'm going to come to in a minute. But just sticking with your question about warranty cancellation trends. Mark, the question is, can you elaborate on warranty cancellation trends? and also on penetration and uptake on new orders we're receiving?

Yes. Sure. So I think the answer on both of these is that we look at them, or certainly on the cancellation is that we look at the cancellation rate as part of the valuation of our accrued income warranties over a period of time. And in short periods, we can get volatility both up and down. But over the period that we look at and for the year we've just done, we've seen no material change in our cancellation rates that we have before for a number of years. We do constantly refine the value of the data. But we've seen no particular change in cancellation rates either during the period or, in fact, post the period end where we would look to include that in our valuation methodology. So nothing really on cancellation rates. And a similar story really with the uptake of plans that we've sold. We've obviously seen changes of mix through the period. And so that's -- whether that's across categories and particularly within categories. And different categories do have different penetration rates of warranties. But again, we haven't seen anything outside of our normal expected tolerances on conversion rates of warranties.

Okay. Thanks, Mark. And I'm going to switch subject now and talk about suppliers and margin. Georgi from JPMorgan asked a question, John, on your comments about relationships with suppliers, and how that's impacting us and improving our performance? So a question, in your presentation, you talked about tipping point regarding supplier support for online retailers. Can you please talk about how this comes through margin, credit terms, et cetera?

Yes. I think that the -- I think it's important from a margin perspective to sort of dispel the rumor that as you keep growing, you go back to the brands all the time and get more and more margin. So there might be 1% or 2%, give or take, here or there across the business that might be able to be improved. But we are meaningfully where I would expect us to be in terms of the trading margin of what we would expect to get from the brand. But I think the -- in the same way that 5 years of structural change for consumers in terms of the shift online happened. It was only October last year when I was out on a world tour talking to manufacturers and there was sort of the philosophization of where can the market penetration in online get to over the next 5 to 10 years. And consensus seemed to be that it could get to at least 50%, maybe 60%. Well, I think we've pretty much cemented 60% of the market online now in a much shorter period of time. And so that's forced manufacturers to also think differently about what that means for them in their business and which horses they are going to back. But I think that comes through on various different levels, on things like product availability, range availability, also things like trading range. So there's lots of self-help we can do on margin. We make a few hundred basis points of margin better on the trading range of direction we sold product than we do on the tail of most ranges. And so there's a lot of self-help that we can do across the margin mix. One of the most important things for us as a business when we think about margin is actually how we think about operational gearing. And that's a lot of the work that we've been doing this year of how do we build things and playbooks that repeat. So not rebuild things per category and per territory. And so build tech platforms and let the tech take the strain, whether that's chatbot, whether that's machine learning, whether that's AI, whether that's directional selling, whether that's how we focus the product teams rather than project teams. And the idea is that as we grow into bigger and bigger addressable markets, we swap those investments rather than keep rebuilding them every time. And also then from a marketing perspective, when we think about margin, if you look at the U.K. versus the German investment into marketing. The reason for that is because that the U.K. has a lot more direct traffic. It has bigger brand awareness, and it has more repeat and recommendation business. And those are much cheaper sources of traffic. And when you go into a new market or a new category, then we have to win more customers in there that over time, the cost of those reduces. So as we get more mature in market, we grow, which gives us operational gearing, we get better brand resonance, which reduces our overall marketing cost, and that better brand resonance also helps us to drive our directional sales, directionally sold products. So the various different areas really start to compound to give us much better operational gearing rather than the idea that we just go and get another 5% of margin from Samsung or Whirlpool or whoever it might be.

Okay. Thanks, John. I'm going to actually stick now with the topic of international expansion, which relates to the answer you've just given as we scale the group. So I want to talk a bit about and ask questions on Germany and international expansion. The first one, which is -- covers the overall subject is from Georgi from JPMorgan. She mentioned -- she says, you mentioned the potential to now grow quickly and easily to leverage the central infrastructure and expand further internationally, what's the potential timescale? And what are the key target markets? If you want to cover that off, and then there's a couple of subsidiary questions on international.

Yes. I mean, to be really clear, we've made huge progress in our European business. And we're very much now, with all our KPIs in the right place and with the right direction of travel, behaving as one AO and repeating those models. So really pleased with that. But we haven't spent over GBP 100 million on our European education. And I don't joke about calling it an education. It has been a hell of an education. But we're very clear now on what the road looks like going forward. And we haven't spent GBP 100 million to build a breakeven business. We've spent GBP 100 million to build ourselves a platform from which to grow, both in Germany and beyond. And that's something that we're not committing to time scales on that. Safe to say that we want to go as fast as we sensibly can afford to invest in those. And the model going forward is very different to how we went into Germany and how we went into the Netherlands when we first did it. The model going forward is very much to repeat and build on the infrastructure that we've already created rather than to rebuild it everywhere we go. So a good way to think about that would be going from England to Wales. So delivering from Creu (sic) [ Creußen ] to Calbe is no great difference than delivering from Bergheim through Munich into Vienna, let's say. And actually, rather than thinking about it as territory, we're looking more at it as a logistical operation for a single landmass of Northern Europe of how would you go and target the major concentrations of population rather than a territory per se. And one of the lessons that we learned from Germany was that we went for full national coverage from day 1. And clearly, that was very expensive. Had we rolled that infrastructure out city by city, that would have been much better for us. And so we're building a model as we look forward that has -- that's a lot safer and has a much lower bar to profitability than when we did the German infrastructure.

John, in fact, that relates to a question Matthew has asked relative to the GBP 100 million, mentioning lower barriers to cost and success for future European launches. What level of reduction might be viable using GBP 100 million, as an example? I guess your answer there is indicating that, in fact, it's difficult to be precise simply because we're not looking on a country-by-country basis at the moment.

Yes. But if you wanted to go and take a city like Paris, you would probably say to go into a city like Paris you break even probably only about GBP 10 million to GBP 15 million of sales. And then you can build out from there. If you think about how you might build out much more on a Cardoesque model, if you think about how a Cardo does retail in the U.K., where they open post codes up as they get the coverage. So I think that will be much more how we'll probably go about it going forward.

Okay. Thanks. And sticking with Germany. A question from Georgi. Again, this relates to suppliers and your relationship with suppliers, John. How far behind the market leaders, e.g., MediaMarkt, do you think you are on bolt-in margin in Germany?

Well -- so I don't know the answer to that question, but I would guess we would be 3% to 5% of margin behind them. But with an infinitely more efficient business model, that should be more profitable than their model, even on the margin that we've got today.

Thanks, John. Then I'm -- I've got 2 remaining questions, and both relate to our future, our outlook for FY '21. First one is on MPD and then the second one is on, we're physically scaling ourselves for the volume of business we might see in FY '21. So the question on MPD comes from Simon Bowler of Numis. Can you provide an update on your plans for the mobile business and what we should expect to see across FY '21? John, I think that's for you.

Yes. So I think on FY '21, you're not going to see any great transformational change. We -- the direction of travel, we're still hugely excited about that business. But given the -- what we've been through in the last 4 months, we've had to make some choices. And our strategy for our mobile business is to replatform it onto ao.com, integrate it into our finance offer to bring much more affordability and trade-in offering using our revolving credit facility. At the same time, we have to real-time integrate into all the networks with that finance offer around the authorizations for those accounts. And then we have to put in instant gratification in terms of fast, same day, in day delivery. So that's still our plan. That was our plan 6 months ago. And that is still our plan, but it's unlikely that we will have that done before peak trading this year, which means in reality, it's going to roll into FY '22 in terms of any major impact on the number. And then the other question on physical scaling.

Yes, shall I just read the question, John? So this is again from Simon Bowler at Numis. So his questions are, do you have sufficient warehouse capacity or have you plans to take on further facilities? And also on outbases, you spoke to opening more in the period. Is there much more to be done here in the U.K.? And is there much more to be done in Germany?

So if you take the U.K., so we've got plenty of warehousing in Germany. That's not an issue at all. We have a shortage of warehousing in the U.K. as we -- it's not actually warehousing per se, completely, that's the issue, it's also numbers of doors because we've got increased sales and less efficient working practices with less efficient loading on trailers. So all those things compound up, that means that you create a lot of pressures on the doors of the warehouse as much as the physical storage space. So we have taken some more warehousing space in the short term, and we probably will take a little bit more as well as we can get it. There is a shortage of warehousing as well in the U.K. But in terms of the plans that we've got, we're now very comfortable that we're going to be very well positioned for what we are forecasting for peak trading. In terms of where -- in terms of outbases, yes, we will be further investing, and we've plans to invest ahead of the curve on our outbase infrastructure. And we will soon be within a 45-minute drive of 85% of the population in the U.K. And that's going to be important because we've got a great opportunity to really impress all the new customers that are coming to AO. And so there's a lot of constraints around physical delivery capacity in the market. And we're investing to remove those constraints, and we want to make sure that our next-day delivery proposition is widely available, and customers are not having to wait 4 or 5 days for delivery or they're not being charged too much for those early days of delivery. We also think as we go into peak trading and Black Friday or November, as it's been renamed. We will further see migration online as people will not want to go around crowded stores to buy all the products for gifting for the Christmas period. So we're forecasting that into our planning as well to make sure that we really drive robust scale advantage and make sure that the right proposition is available for those customers as they first come into contact with AO, that further fuels the structural shift that we can then build on next year as well.

Okay. Thanks, John. We have no more questions. A bit disappointing. We haven't had a deeply technical question on IFRS 16 for Mark to answer and be put on the spot, but we don't. So those were the last questions. I'd like to thank everyone for joining the call. I know there's a lot of people on the call who have not posted questions, but I hope you've got something useful from the Q&A session that we've just done. Also hope the presentation has been good for you and given you the material you need. Thank you for coming on the call. Thank you, the management team, and good bye.