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

Have you taken furlough money? Have you put workers on furlough?

No. So as a company, we haven't taken any government support through the period. And whilst we did take some furlough in the very early days, where there was huge uncertainty, that was very quickly repaid. And where we've received other bits of government support where we actually have another choice on receiving it, we have now repaid all of those monies to the government.

John, you've talked about the impact of COVID on the business and how the business has scaled up. How has the business been able to do some of the things that Mark described? How much was the culture of the structure of the business important in allowing you to scale up at speed?

Yes, absolutely fundamental, Declan. And how have we done some of the things we've done? In truth, it's humbling and I marvel at how they've achieved some of them. But it is certainly a time to have a very well-invested culture, not a time to start building one. And from our point of view, actually, with the guiding lights that we have of how we run our business of treating every single customer like your grand and if you've got to explain a decision to you mom, would it make your mom proud, they're very simple principles in guiding lights. So actually, we went hard and early on the work-from-home decision. But it was an easy decision for us to make. And in truth, from my perspective, from Mark's perspective, the best thing we can do once we made the decision is get out of the way and leave great people to do what they do. And we mobilized our whole workforce that was moving to work from home to do so in 3 days, which God only knows how they did that, way beyond my pay grade. When we think about warehousing, it was very clear that there was a structural shift to online. As we stand here today, there is a massive shortage of warehousing in the U.K. and so the fact we were bold and went early in that is testament. But again, we make that decision. And then we, from a leadership team perspective, get out of the way and leave people to get on with it. But one of the things that's wonderful about that is, we've got to be able to scale up quickly, but within that pace of making big and bold decisions, we might get some of them wrong. I think it transpires, we've got the vast majority of them, right. But it's sort of hope for the best, plan for the worst scenario. So we layered those warehousing and infrastructure costs in, in a way that if we were wrong, we would be able to quickly unwind out of them as well. And that was again because we went early and bold in those decisions. So from a cultural point of view, people know what they're doing. Decisions become very, very easy. And the cost is kind of just the cost. And as Mark said, there's ups and downs of everything right across the business. But being true to our values in all circumstances normally pays dividends for customers, but also for our people.

Do you anticipate that you might have to scale back down again when the High Street reopens as it will in the run-up to Christmas, that this would have been -- some of it would have been a temporary blip, but it was lovely while it lasted, but it won't continue.

No, not at all. But it would have been irresponsible with the level of uncertainty that existed at the time back in April and May, when we were making huge decisions around infrastructure investments. It would have just been irresponsible to make those decisions as an absolute look 5, 10-year committed investment without that visibility. What we're now moving to do is to cement some of those decisions. And as Mark said, there's some inherent inefficiency in the way that we built that at the speed that we built it. And so we'll now move to cement that and to take those efficiencies out as we move forward. I absolutely see this as a fundamental shift that we will cement and customer buying behavior has changed. But as importantly in that, manufacturer mentality in that has changed. We've got to recognize online is now the dominant channel. Brands are thinking digital first. And we've been investing for years. We've been around for 20 years in this space, but we've been investing in digital content for over a decade of how we explain products better for those brands to customers in an online environment. So we absolutely see this as a fundamental shift. And if you give that some context, in March, we had capacity to do 50,000 to 60,000 deliveries. As I stand -- a week -- as I stand here today, we've got capacity to do over 150,000 deliveries a week. And we will be carrying that capacity into March next year. And so when we think about lapping COVID, there's still uncertainty out there. But we've been very clear, we are investing to win. We believe this is our time and to cement that change.

Mark, these higher costs with ware -- with social distancing and warehouses and other changes in the way you work, are they permanent? Are they not backed into the business?

So -- well, so as John talked about, there's all sorts of different costs, but we absolutely expect that once the world is able to return back to normal, as vaccines start to become mainstream and we can start to move away from these measures, that might be summertime before we can do that. We would expect to drive those efficiencies permanently back through the business. But as John also sort of mentioned, the inefficiencies and the inefficient ways of working we had back in spring and early summer, yes, we've actually worked quite a lot of other ways around that now to improve those. So whilst the costs were hired to start with, there'll be less now, but we would also see them being much less by the time we can get back out of this way of working.

John, we've had wonderful news about vaccine breakthrough, some 3 different vaccines. Now it's becoming increasingly clear that we may start to see people being vaccinated against this early in the New Year running through spring. What difference does that make?

Well, I think societally, it's wonderful news. We all want to get back to normal. From our perspective as a retailer, as I said, I think the shift is done. So once people find a better way of doing something, they rarely go back to the old way. I think there's a lot of people through this process. If you look at the numbers for people watching Amazon Prime video or watching Netflix, I don't see many of those people dashing out to try and find a video rental store. So once people find a better way to do something, they rarely go back to the old way of doing something. And we've said for many years that the information that's available online to help you select the product with customer reviews, with content that we create, we deliver the end products for you next day, we install them all for you. I don't say -- I think there's only Nicky Campbell that seems to enjoy smelling fridges on the radio this morning. I don't think general society really hankers after a dash to a retail part to go and look at electrical products anymore. So I think that change structurally has happened.

We've talked already with our analysts about changes in customer behavior or by customers repeat purchases, by the margins and the goals for margins as well. Mark, let's talk about the share price. We've seen it increase sub 8-fold or so in the course of this year, is that a temporary balance?

Not very much. I think it's the market understanding where we're positioned relative to our peers, the share of the market that's available for us and also our trajectory going forward. And importantly, and I think John mentioned in his introduction, the really big points are we have now proven our model in Germany and the huge runway that exists ahead of us there and in Continental Europe as well as that in the U.K. and those are the reasons that sort of cement that change in share price.

So you think this is the city buying into your argument that this is a structural change that's permanent?

Absolutely.

Of course, your employees will be looking at the share price with great interest, not just because of any direct investments that they may have themselves. But because of the employee incentive scheme that benefits some 3,000 of your workers, the value creation plan. You have targets in there where the scheme will pay out when the share price hits certain milestones in the future. Looking at the history of the share price in the last few years, are those targets too unrealistic? Are the hurdles too high?

I think from my perspective, we're right at the beginning of our journey now. So we're starting to cement the change. And we're talking about the opportunity that sits ahead of us over the next 4 or 5 years in the U.K., in Germany and beyond. We intend to continue to grow the business. We intend to continue to grow our profitability. And we think that, that gives a huge opportunity to deliver against all of those share price targets from the hurdle it starts to play out that right through to the capital scheme and well beyond being honest.

And I think fundamentally there, Declan, I'm really excited about the scheme. I think our remuneration committee were really brave and our shareholders were really supportive. For me, it was about us disrupting again and reinventing, I think, how share schemes should be done because, as you quite rightly highlight, everybody in the business shares in that scheme, not just a few at the top. And so that's the AO way of doing things. But what I want out of that scheme is I want to use the scheme, I want to talk about the scheme. I want to unite all our people behind the vision and the plan that we have for that -- for this business, so that they all can share in it. And if I don't believe that we're going to achieve the numbers in that scheme, then it's going to not motivate because they won't believe in it. So that's going to -- it's just going to be completely counterproductive. So I believe passionately, and as increasingly, people in the business are now really starting to see that as people see it coming through. But people sometimes at the beginning need to take leaps of faith. But we believe passionately that, that will be a scheme that will really reward all our people at the top end.

But John, if you were cynically minded, you might take the view that schemes like this are just a venue that they pay out small gains to lots of people on the shop floor. But in the background, it's people like you and Mark, who are taking much bigger gains home at the end of the day?

Yes. So I'm taking nothing, Declan. Apart from the dilution of paying GBP 300 million out across the business. As the major shareholder in the business. And so I'm in a unique position as the biggest shareholder by far to be able to vote unanimously to share that with all our people across the business. And when we talk about small gains, to give some context to that, the level one, if you like, people in our business, so people that would be in -- working on the shop floor, if you like, in our warehouse, they will earn at the top end of the scheme, about 1.5x annual salary. Well, that's a pretty unique event. In most of those people's lives that they're going to earn that level of money. This is not a small amount. There will be a total of GBP 300 million distributed. And yes, it is a value-creation plan. So it is right that those that create more value, get more reward from the scheme. But again, I come back to the point that it’s a scheme I want to talk about, it’s a scheme I want to use to motivate our people. And so if in its construction, there was anything in there that I wasn't happy to have a conversation with anybody in our business about, it's not a scheme I can use to motivate our people. So it's a scheme, I'm genuinely really proud of. And as a business, I think we're on the front foot with it, and we can use it. Every day around the business, I hear people talking about it. So it's clearly working.

Yes. We've already talked about the recovery of the business in Germany in some depth with the questions from our analysts. Just looking at a bigger picture, are you able to sit back today, John, and say, I told you so?

No, absolutely not. We're at first base. I mean how clever are we. We've invested GBP 150 million to build a breakeven business. We'll pretty do up. That doesn't rest -- that doesn't represent success for us. But what it represents is a platform and evidence that what we said would work, works. And they have opened runway of opportunity that we now have ahead of us to go and build on then we would be able to celebrate when we get through that runway. When our German business is bigger than the U.K., I think we're really starting to get some traction. And that's the scale of the opportunity. So no, absolutely not. There's no celebration whatsoever going on in the business because we've got to realize the opportunity. We didn't want to build a breakeven business. But it is pleasing that it's testament to a true One AO effort. The teams in the U.K. really helping the teams in Germany and repeating what we do and building playbooks for the future.

Mark, it's one thing to build the German business up to the same size as the U.K. business, but is Germany ever going to be as profitable as the U.K. business?

Yes. So we absolutely see that in the medium to long term. There's no reason why actually the German business can't be more profitable than the U.K. So actually, the U.K. has a lot of the thinking and the trying and the building of different business models and creating content that's leveraged into our German operations. So -- and it bears all the costs in the U.K. of doing that. So there's no reason why in the long term, the German business can't be at least as profitable, if not more so, than our U.K. business.

Mark, given the scale of the change that you've described in the business this year, the swift adaptation to the challenges of coronavirus, are people just exhausted by change?

No, I don't think so. I think it's with huge thanks, I think, to the people that we have that we've got to the position that we're in today. And very much the spirit that they've embraced working in a One AO way has been probably challenging for them, but also rewarding and that they've seen the fruits of their labor coming out. And so we look at marketing costs that were flat in cash terms half-on-half from the final half of last year to the final half of this year, despite revenues being significantly up in the period. So they can see the benefits of using some of these tried and tested methodologies.

So I just wonder, given the scale of growth already this year, where is future growth, Mark, going to come from?

So exactly how we balance revenue growth and profitability will be something that we navigate through over the next 12 months, but we are firmly committed to significant double-digit growth in our German business going forward.

John, looking at some of the areas that you've identified in previous sessions as potential areas for growth. First of all, is B2B and your work with house builders, what's happening there?

Yes. Well, so B2B covers lots of different sectors across SMEs, insurance market, house builders, et cetera. And so as we went into COVID, we -- the first period in truth was chaos because lots of the distributors that would normally supply the B2B market actually closed. We stayed open. And so we were a lifeline to lots of those businesses. But then for others, there are procurement processes. There's just -- there's a normal process that those businesses go through. So you've got to do the onboarding of that. We're now approved with pretty much all the major house builders, we're winning hundreds of sites and plots across those house builders, but clearly, those properties still need to be built. One of the most encouraging things that we've seen is very similar to the consumer shift. B2B actually strangely moves slower than people do things that they've always done, and there's no great need or change in people's mindset. Consumers are much quicker to adopt change in that way. So it was forced onto the B2B sector. And so actually, we wondered within the B2B sector as every -- as the rest of the world reopened, if you will, what that would mean and would people just go back to what they used to do. And actually, what they've demonstrated is exactly the same behavior as the retail customers, which is they weren't looking for it a lot of them, but they've just now experienced a mild better way of doing something. So whether that's -- if you have a portfolio of rental properties, we can offer you a full installation service, we can offer you time slots, we can offer you all sorts of things on any day of the week that other people can't offer. Well, suddenly, that makes your business easier to operate. So why would you go back to the old way when there's no price premium for that service? So people have been forced in that environment to experience a much better way of doing it. So we went from a very uncertain period to sort of very much from famine to absolute feast and then how do we cope with that. And we've just seen that accelerate pretty much week-on-week, on week-on-week on week, that has grown and grown and grown. So we see a ton of potential in that area as we go forward.

But potential, Mark, what contribution is it actually making to the bottom line at the moment?

Yes. So we see a very similar bottom line contribution from B2B to our overall retail business in the U.K. at the bottom line level.

So it's beyond just toe in the water?

No, absolutely. This is a significant double-digit millions of revenue business, contributing in line with the rest of the U.K.

So when we've talked before, you've never been the biggest fan the physical stores. You admit they exist. But you've never been one to think that they were the future. And then I open my newspaper one day, and I see that you're opening up in Tesco.

Yes. So what I've said consistently is that I believe that the retail park stores as a destination for electrical shopping won't be the future. So we started looking about 2 years ago on, well, what does that mean for AO? So if 100% of the market isn't going to migrate online. Let's say, we were visionaries, and we thought 60% to 65% of it might go online. What happens to the rest? And how does AO play in that world? And so it was our thesis that actually, on a much smaller footprint where customers already are to deliver huge convenience to the customers, you can bring the best of digital into that shopping environment and the best of our scale and proposition. And so when we look at that, you would say, so who's -- where are customers already and what's the footfall? And who could we work within that arena? And so Tesco, we’re a very natural partner. Tesco have also learned their own lessons of just quite how hard electrical retailing is over the last 10 years. And so with their lessons and our expertise and their retailing expertise, it really has been a marriage made in heaven. It's taken some time to put together. But they brought tons to the party in terms of how we should do the retail element of that. And we brought all our experience to the party on how we bring digital and proposition to it. So in dead simple terms, we've got a customer, they've got 50 million transactions a week. They've got loads of premium customers as well walking through their stores that can do their shopping. They can pop in, buy their new washing machine or their new TV, extremely quickly supported with all the tech that we've got online as well. And then they can take their shopping home, and they can have their washing machine installed that afternoon or their TV put on the wall that evening whatever suits them. So it really raises the bar on the proposition of what people can get. And we've been amazed, actually, in the short time that the store was opened before lockdown. On the mix of premium products that were sold through the store. Because the early sort of perception was, yes, well, that's fine for entry-level products or distressed purchase. But we've been selling American fridge freezes in there, range focused GBP 3,500 TVs. So we've just proved, if you do that, and you do it brilliantly, people will engage with it. And that's where customers already are. So we've got the online experience or if you want the convenience in store we've got it where you are already going. And from an AO perspective it also gives us a physical manifestation of our brand and puts our brand in front of customers. So it's a marketing and branding opportunity for us as well. And by Christmas, we hope to have 5 open. So through the early part of 2021, we'll be assessing that and deciding what's best in terms of rollout thereafter.

Was this their idea or your idea?

I think it was a joint idea, where we came together on the conversation of what makes sense. And we pretty quickly built up a very good relationship with Tesco. This is something that we are firmly in together. And that comes right across in all the relationships of everything that we've done. So it has been a great team effort across their business and ours, and we are definitely in it together.

When you talk to other suppliers to Tesco, they described Tesco as a really tough company to do business with. You're not worried that their instinct is to behave like the bad boy [indiscernible] and then just ditch you when they've had what they need.

Well, I think, as I say, I think, certainly, our experience is not that. To be extremely clear, the working relationship we have with them has been fantastic all the way through. This is not something that they had to do, and it's not something that we have to do. We both saw this as an opportunity of 1 plus 1 equals 11. So in terms of the replacing, one of the things that I talked with Jason Tarry at Tesco on this with our partner conference very recently. And he was saying the value of their lessons over the last 10 years in this space is just quite how difficult it is. And when they look for a partner to work with in this space, it was their view that the way that we have a laser-like obsession with customers chimed with what they're trying to get out of it is to serve their customers with a partner in a category that's important to their customers. So we think it's a great marriage rather than any kind of master servant relationship. And that's how we've approached it, and that's definitely been our experience. Tesco have been great partners today.

We've talked a little about the Brexit and the end of the transition period earlier in the discussion. And you've mentioned Felixstowe, you're on the record is describing Felixstowe as a mess. Is Christmas capsuled? Is there a threat to the supply of Christmas goods because of what's going on in our ports.

So I don't think Christmas is canceled, Declan. That's the journalist coming out in you there. But I think -- I would advise people to -- if you know what you want, we are in the whole Black Friday promotional period at the minute. It's been great, actually, that which have highlighted for us this morning that Black Friday is not just the only promotional period in the year, there are other promotional periods in the year. But it is a very strong promotional period in the year. And actually, what's changed over the last 5 or 6 years, if you go back to 2013, 2014, what consumers had to do in retail, was buy everything through October, November and December at old price, all the Christmas shopping at old price. So then sit with your heads in your hands on Boxing Day and the January sales and watch they all get slashed once you given all those gifts out. That doesn't chime with an online world where we bring everyday low price, and we bring great deals to customers. So Black Friday is very much an online phenomenon, where we bring a huge promotional period, which pretty much now extends through most of November or customers at the time they want to buy the product. So there is going to be supply chain disruption. There's no doubt about that. We are working tirelessly to minimize that. We've got double the warehousing footprint. I can't explain how much we've invested in the product that we've ordered to try and insulate customers from that, but some disruption is inevitable. So if you know what you want, personally, my advice would be to get on and get ordering it.

Should there be a trade deal?

Should there be a?

A trade deal between the U.K. and the EU?

Well, it's not for me to comment on politics. What we do is we manage the output of that. And we're doing everything that we can to insulate the customer from whatever happens. Clearly, I think it's in everybody's interest for us to have the minimal amount of disruption, and I hope that's what happens.

Looking at the revival of the business in recent months and years, how much of that do you take the credit for? How much of that is done to you coming back to the business?

It's been an incredible team effort. The -- I don't operate the business. It's not the John Roberts show. We have an incredible team of people across the business. But myself, Mark and Danny as our COO, one of the things that we did very, very quickly back in February was bring clarity to what our strategy was, to reinforce people's autonomy, to take politics out of the business and to get on with making decisions pace and to behave as One AO. And really put the spring back in people step. And then critically, there's elements where you just need to get out the way. So bringing clarity to that strategy, simplicity is the ultimate sophistication, being bold. We've been reinvesting in our tech. We've refocused our laser back on the customer. We went back to retail basics. If we think back to February, we canceled our TV advertising yet committed to go from MDA decline back to growth. And with only -- within only 6 months, we were back to double digit. Pre-COVID, we were back to 20%-plus growth. And that wasn't me taking individual actions in that, Declan, that was a whole team of people obsessing about customers, obsessing about right product, right place, right time. Reengagement with the brands. One of the things that we did was Paul and Simon and our trading team, this time last year, we were doing our global tour of the brands. In Germany, one of the big changes was actually getting out, face time in front of the brands. One of the things I can bring to that party as the founder of the business and having been around for 20 years is a personal commitment. And so when I ask those brands to take a leap of faith, and I'm sat in front of them saying, “I commit to you, we will do this,” I have the ability to make that happen. And that resonated. And so they supported us, and they believed in us over 20 years, and I needed them to take those leaps of faith in Germany. And so it's a relatively short period of time that we've closed that gap. We couldn't have done that without the support of our manufacturers. So this is a real team effort that I hope everybody is going to benefit from. And certainly, we've been going through those top-to-top sessions with the brands over the last few months. And without exception, every single brand is delighted they took those leaps of faith and delighted with the way our business is positioned to help those brands make the most of a digital-first strategy. So absolutely not. And I couldn't be more proud of the way the team have delivered.

But for those suppliers that accepted those personal commitments, for those investors who bought back into the business because you are back, what is your level of commitment to the business in the future?

Yes. So this is probably one of the single biggest mistakes that I've made in my career was to actually step back. But it's also one of the biggest lessons. I've learned a ton of stuff from it. I've always thought about the business as my sixth child. And it's probably just start high school, and I definitely want to see it off to university. That's for sure.

But Geoff, as the Chairman, this falls on to your desk, the John's level of commitment and what happens to the business if John isn't part of it?

Yes. When we made some changes in the management a couple of years ago now, we had a fairly intense series of discussions between the Board and John about the future of the business, the strategy and his commitment to the business. And the Board unanimously decided it was the best thing for the group, for the business, for the shareholders to John's come back as the Chief Executive. I think what you've seen in the results that we've delivered since then is an absolutely indication of that decision.

So final thoughts looking ahead to 2021, the year that we might get the vaccine, the year when the COVID cloud might lift a little. Mark, are you optimistic, realistic? Where are you?

So I think I have to be realistic. But I think I do believe that the market has cemented its changes in its shift to online. And so there's a huge amount of optimism about our positioning in the market, our ability to really deliver to customers and to give them a great AO experience. We are looking at a no-deal Brexit. There still isn't a deal in place today. Hopefully, there will be one by the time we get to Christmas, but that is a concern. And what does that mean in the short term for supply? And what happens when the job support scheme and so forth ends and what happens to the overall economy? So a mixed picture, but hugely optimistic for our business prospects in the overall environment.

John, the 2021 agenda, the 2021 action plan, what is it?

More of the same Declan. Absolute laser focus on customers, driving our flywheel, reinvesting, thinking long term about what's the right thing for the business. We've got -- as we've talked about, we've got plenty of available cash, and what cash gives you is choices to make the right decision. And we've lived through periods where lack of cash forces you to make wrong short-term decisions. So I think Mark's answer of, we are realistic, but hugely optimistic. What we've talked about for 2 decades of change and being better for customers is coming out like a blizzard, and it's incumbent on us for the benefit of all our people through the VCP scheme, all those investors that invested in our IPO and are still with us and all the suppliers that have supported us to make the most of that opportunity. And if we look at the customers, I believe that they, long term, will look after us, and that will remain our strategy.

So you've been listening to John Roberts, the Chief Executive; to Mark Higgins, the Chief Financial Officer; and also Geoff Cooper, the Chairman. I'm Declan Curry. Thank you very much for your attention and your company during this Q&A session. Have a wonderful Christmas and New Year. Thank you.