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

Okay. So good morning. Well, it's great after 2 years to finally be back in front of you, and thank you for those of you that have made the effort to come along today. And what are 2 years, it's been with all the ups and downs that, that has involved. Well, we've cemented the progress of last year with a step change in scale and consumer behavior. But there have been and will continue to be a ton of challenges that we have to navigate. We're now in the thick of peak trading and the whole Black Friday period. And forecasting this back in July was always going to be interesting. We had to take into account predicting the total online market, the jobs market, oil prices, wage inflation, container shipping prices and overall consumer demand and yet land all that on a 6 months over a 2- to 3-week period. We're genuinely looking forward to the market normalizing, and the last 6 months have very much felt like running up a down escalator. So Mark's going to talk you through the numerical output and the market dynamics of all that and give you some context of it all on a 2-year view, which I think is the most helpful way to do it. And then I'm going to come back and talk through more strategically and in some detail actually, about the opportunities and the challenges that we face. And overall, I'm delighted to report that we have continued to deliver brilliantly for customers in both territories, and that is and remains our #1 priority, because it is ultimately our long-term growth engine. So for now, I'll hand you over to Mark to take you through the numbers.

Good morning, everyone. As John has just mentioned, it's great to have you all join us today. As we look at our high-level revenue results, COVID distorts the baseline, making reporting more difficult so rather not focus on explaining the comparative period. Here, we look on a 2-year view. Over this period, which we think is a more useful comparison, the U.K. reported a CAGR of over 28% and 37% in Germany. This very strong growth proves we are winning new customers and existing customers are repeating, something John will talk more about later. We do note consumer price inflation as a result of product cost increases is supporting the overall market in the current financial year in both of our territories. In our strongest category of MDA, we've grown our overall market shares in both the U.K. and in Germany and have been able to treat many more customers like our grounds in the process. In the U.K., we've grown our total market share from 15% pre-COVID after 6 months to September 2019 to nearly 20% in the first 6 months of the year. Given that the online MDA market grew significantly over the last 2 years, our share has decreased slightly. In Germany, we have grown our share of both the overall market and the online market when compared to pre-COVID. However, both are down compared to the half year '21 COVID comparative. Gross margin, which you'll recall, is a basket of product margin, services and delivery costs remained stable in the U.K. despite the impacts of the cost of recruiting and retaining drivers, which has been material. The driver issues impacted the period by about GBP 5 million. But on a run forward basis, probably brings gross margin down by about 200 basis points. We expect this to normalize in the fullness of time as it is passed on to consumers that have little visibility today as to exactly when. We have also experienced significant product cost inflation at around 10%, which was mostly passed through to customers in the west -- in the same way our competitors have. Category mix had a little impact on our gross margin compared to the prior period. In Germany, increased volume from third-party logistics contracts kept gross margin stable offsetting the slight decline in product margin resulting from increased competition. U.K. margins remain higher than those in Germany. This is now mainly due to the effect of leveraging logistics cost but it also includes warranties and commissions, not currently offered in Germany. Moving on to SG&A in the U.K. costs as a percentage of revenue have increased when compared to the comparative period. In warehousing, we have significantly increased our footprint to deal with higher volumes, and we are also holding more stock than normal to mitigate constraints on product availability. We've also increased expenditure on brand and marketing. Whilst maintaining performance marketing, we've launched the AO Bear sponsorship of the AO Arena and other events and sports sponsorship. Our most significant investment has been in capability, which is reflected in other admin costs. In the second half of FY '21, staffing levels increased in our retail operations to support significant growth. This accounted for circa GBP 5 million, with inflationary pressures and share schemes, adding over GBP 2 million to staff costs. We've also expensed GBP 2 million on the ERP discovery phase and a further GBP 7 million on IT and data projects. In Germany, warehousing and other admin were broadly flat as a percentage of sales compared to the prior period. The change of cost was particularly seen in marketing where expenditure was up by just over 1% of sales period-on-period. As German shoppers have moved back to their traditional ways of buying, competition in the online space is intensified. The traditional store-based retailers and the Amazon are all now working out how to take a share of the online market. This has driven up the cost of clicks, in some cases, more than 100%. We've made a conscious decision not to chase the market higher and whilst we've seen a 25% increase in our rate of spend given the changes in the market, this is clearly less effective in driving revenue. On a half year basis, just walking through U.K. EBITDA, revenues were up slightly, and we can see that in trading. Cost to deliver has increased by just over GBP 11 million. This includes the driver issues we've spoken about and the increase in capacity, we've invested for in logistics. In recycling, we've seen favorable output material prices compared to the prior period. And in mobile, we've seen resilient underlying profitability without last year's write-offs, which we saw as customer behavior changed. We've spoken about marketing costs, inflation and investments in capability, and that brings us to the GBP 10.6 million of EBITDA for the first half of FY '22. In Germany, in the comparative period in euros, our EBITDA was a loss of GBP 4.2 million. Trading was slightly up as a result of third-party logistics and a small revenue growth in the period. The remainder of the movement we've already discussed in SG&A, and that delivered the EBITDA loss in the period of EUR 7.1 million. So looking at the major working capital movements. Inventories have been high for most of the period as we've maintained increased stock levels since the end of the last financial year. This is in response to the continued global component shortages and supply chain disruption, ensuring that we can continue to respond to customers with our excellent AO service and have our teams focused on making their moms proud through a challenging period. In the medium term, we would expect stock levels to normalize back below 30 days. U.K. trade and other receivables increased by just over GBP 10 million from year-end, reflecting an increase in revenue and business-to-business, the timing of supplier support and an increase in accrued income for insurance sales. As our rate of growth has fallen in the period, our inventory levels have been reducing. Trade payables expresses a number of days has also fallen since year-end. We would expect this to normalize towards the end of the current financial year. Net working capital in Germany decreased marginally from GBP 17.8 million to GBP 17.1 million, and this reflects a consistent balance sheet from the period end. At the end of the period, we had liquidity headroom of GBP 66 million despite the deployment of working capital to ensure we continue to deliver for our customers. Capital expenditure in the first half was GBP 4.5 million and this was predominantly continued investment in the recycling facility, our base fit out and IT equipment. In the second half of the year, we now expect capital expenditure to primarily be on ERP systems at around GBP 6 million and developments of our London creative hub of about GBP 5 million. We no longer expect to invest this year in the second recycling plant that we mentioned at our full year results. We note in our overall net debt of GBP 102 million, GBP 20 million relates to borrowings in the traditional sense and the remainder being the net of cash of GBP 11 million in leases. We would anticipate some of the working capital deployment to reverse with increased profitability. But overall, we expect the level of liquidity at the end of this financial year to be similar headroom to the end of this period. The first half of the year has been a period where our mission was to cement the revenue gains of COVID but with a number of macro and market challenges we could not have anticipated. In April, at the start of our financial year, we plan for continued revenue growth and build the cost base necessary to deliver that growth. We had to make a judgment at a time when customer and market behavior was impossible to predict, and John has already touched on that multitude of challenges. We expect further unpredictability as we lap the period where stores were opening and closing under COVID restrictions. Product allocations, particularly in newer categories, continue to constrain revenue growth and cost inflation is having a material impact. Peak trading at this point is softer than we anticipated only 8 weeks ago. We now expect full year group revenue to be between flat and 5% down year-on-year, with group adjusted EBITDA in the range of GBP 10 million to GBP 20 million. We have a strong business model, and we've continued to put fuel into our flywheel, which John will talk about shortly. We're providing an excellent customer proposition, which underpins our repeat revenue, and that gives us confidence in our future growth. John, back to you.

Okay. Thanks, Mark. So well, there you have the financial output of the last 6 months. But importantly, the Board and the management team continue to be as confident as ever in the strategy that we outlined to you in the summer. When we take a step back from the short-term noise, all the macro market changes, we believe, are aligned behind us, whether that's the long-term migration to online. Some people still working from home, our brand growth, repeat sales gathering pace or our new categories, both building and cross-pollinating each other. All those things drive our flywheel. Strategically, scale matters on many fronts. Our infrastructure and in-house capabilities have never been better, whatever the short-term cost that, that may be. Brands are also now wide away to online, and they firmly see AO as best-in-class. AO will become the global destination for electricals through choice, service, personalization and the price that we can offer our customers, and we remain unchanged in that belief. We're now lapping last year's period of exceptional channel shift in both the U.K. and Germany, and we have materially cemented the gains that we made. And while none of us are truly delighted by the results and profitability, the structural changes to growth whilst continuing to deliver exceptional service for customers have really been our primary focus building on the step change for long term is what our strategy is all about. The supply chain headwinds for our retail business have actually also provided tailwinds to our B2B business as others have, I guess, unsurprisingly, faced the same challenges but without our scale or capability to react. And this has enabled us to deepen our relationships with almost all of the major housebuilders, for example. But again, we've still been constrained by driver shortages, particularly in our installation fleet. In fact, the first half of this year has been capacity constrained by driver shortages all -- across all categories of drivers, whether that be HGV, 7.5-ton home delivery drivers or our installation fleet. And we've made conscious decisions to prioritize quality over quantity and that has unquestionably affected our sales volumes. I'm pleased to report that other than pockets of volatility, that issue is materially fixed, albeit with a permanent step change in cost that Mark mentioned earlier, given the wage inflation that we have seen. And we expect, as Mark mentioned, about 200 bps of margin to be the impact of that. And as we look to the second half, we continue to see meaningful supply chain challenges, which manifest in poor availability in certain categories and particularly our newer categories where we've got less scale, experience and leverage and where we are still learning. Newer categories are also more affected by the technological manufacturing challenges that's driven by a lack of chips. And a good insight into the seismic impact of this is when a manufacturer of the scale of Apple has to reduce global manufacturer of iPads by about 50% just to divert resources to iPhones. There also continues to be material price inflation across the business as just about, frankly, every input cost from chips to containers and oil to steel increase. And to bring that to life, the cost of a container from China has gone from about $2,000 or $3,000 to about $13,000 to $14,000 which when you only get 35 American side by side fridge freezes in a container, that equates to about $300 more per product just on shipping. And that's for a product that retails anything from about GBP 400. So it's been a really volatile period, which we expect to continue into the next financial year. There have been lots of challenges for us and our partners to navigate, particularly in forecasting as we lap periods where stores were open or closed and major demand spikes with some sales brought forward and I think others inevitably deferred. But we've taken and will continue to take the actions to address and mitigate these issues, and we'll maintain our world-class customer service, something that we will never sacrifice for any short-term costs, however, material, as Mark highlighted earlier. Everyone at AO is invested in our long-term success as part of our value creation plan. And so I'd like to extend thanks to all AOers who continue to serve our customers brilliantly. I'd also like to acknowledge the support of our manufacturer partners who, despite their own significant challenges, consistently have stood shoulder-to-shoulder with us as we navigate these challenges together. We're a growth business, and we give customers a better way to buy electricals in an enormous total addressable market. What we sell, how we sell it, who we buy it from and how we deliver it all repeats globally. And on a 2-year like-for-like basis, group revenues grew about 67%, with our U.K. business growing about 65% and revenues in Germany growing about 88%. The market is migrating online. And it has been for the last 20 years. This shift was accelerated by the pandemic, but the long-term direction of travel really is just 1 way. And that's also true of manufacturers as well as customers who now think with a digital-first mindset. And I'll talk in a moment in more detail about the fundamentals of our strategy and the progress that we've achieved and continue to see. In July, though, I said our medium-term ambition was for double-digit growth across the group and international expansion with 3 additional territories. So to be clear, this is absolutely still our plan. And for clarity, when I say our ambition, my perspective of a high-growth business is 1 that grows at more than 20% over the medium term. And we've averaged 23% compound annual growth since our IPO back in 2014. We must though be mindful of the constraints and the volatility that I mentioned earlier, particularly in the short term. I believe we'll fundamentally deliver this medium-term growth by obsessing about customers rather than short-term profit and our consistently high Trustpilot and Net Promoter Scores underlying the customer obsession through culture is our differentiator. We've built and continue to nurture a high-performing team and strong partnerships with manufacturers who increasingly see the value of our complete platform. As I've said, in our industry, scale matters. So as a snapshot of our business today, for materiality on scale in the U.K., we amaze about 12,000 customers a day through 23 live out basis with just over 1.7 million square feet of central warehousing. And this scale gives us the capacity to offer the widest choice, the most competitive price and the most flexible delivery options. We've maintained world-class Net Promoter Scores of over 80 in the U.K., and we recently hit 300,000 Trustpilot reviews giving us an overall rating of 4.6 out of 5 stars. Germany is on the same path to scale with the same structural benefits and crucially has a Net Promoter Score that actually outperforms the U.K. As a group, we served around 4 million customers last year, and we're encouraged to see an improving rate of returning customers and frequency of purchases. Interestingly, German customers repeat faster than those in the U.K. did, and customers during COVID, repeat faster than customers pre-COVID. The 2 million new customers in FY '21 provide the biggest single injection of future business we've ever had in a single year and I expect we'll see more of them than ever repeat this financial year. Expansion into categories beyond MDA is a fundamental part of our strategy. Being the destination for electricals means having an expansive curated range of products across all electrical categories to serve the widest possible customer base. It increases the frequency of purchase, and it allows cross-selling into new categories and build long-term relationships with our customers. And I'll show you shortly how all categories feed each other through frequency and familiarity, underpinned by our amazing service. We can say with confidence that customers are buying products in categories that are new to AO. When we give them the right price range and delivery proposition. And this graph shows how that looks in the U.K. over time and how the most recent cohort in 2020 is behaving very differently to others. In Germany, there's still a huge opportunity for us to grow in both MDA and non-MDA once more categories are also introduced there. So looking at repeat customer behavior in a little more detail. If customers bought MDA as their first purchase, almost 23% of them then went on to buy SDA, 14% bought AV, 8% bought consumer electronics and 2% bought gaming. And this shouldn't be a surprise really because SDA was the first category we launched after MDA, followed by AV and so on. Similarly, of the customers who first bought SDA from us, almost 27% went on to buy MDA. 15% bought AV, 11% consumer electronics and 3% bought gaming. And turning to those customers who first bought AV from us, almost 30% then bought MDA next, 24% SDA and 15% bought consumer electronics and about 5% on gaming. And finally, of the customers who first bought Consumer Electronics, 24% of them went on to buy MDA, 22% bought SDA, almost 17% bought AV and nearly 7% bought gaming. In the U.K., 2.5 years ago, newer categories were a drag on our profitability as we build scale. The context on the progress we've made all categories are now at worst contribution neutral. And picking out the TV category, we've almost doubled our total market share and improved our product margin by almost 10% over the last 4 years. And a full range of services comes with these expanded categories. And we continually improve our best-in-class delivery, easy returns, product installation and set up and of course, our recycling propositions. We are in no doubt that we will drive higher customer lifetime value and share of wallet through this approach. But these things just don't happen overnight. Our lower frequency of purchase means it takes longer than a weekly grocery shop, for example. We know that our right to win in these newer categories is lower, and we're working to create compelling reasons for customers to shop with us in these categories. Hopefully, the progress that we have made so far gives some support to our confidence that we will become a minimum 10% market share player in all new categories that we're in. And the great news is that the lessons that we are learning through this process all repeat across territories. So our virtuous cycle is the decision to reinvest shared economics in our flywheel. We make things ever better for customers, innovating and investing bravely which generates scale, and we leverage that to keep driving our flywheel. Our structural advantage is our ability to leverage our fixed cost base investment over a greater addressable market in the medium term. Our model is cash generative and capital efficient and scale leads to operational gearing as a result of sales growth. We've made a dramatic improvement over the last 2.5 years in our directional selling capability through our investments in technology, trading team and, of course, our trusted brand. And to bring that to life in the U.K., in 1 of our biggest categories of laundry, up to 60% of sales are now directionally sold into a defined range of products. And this improves margin, of course, engagement with brands, supply chain efficiencies as well as delivering better value for our customers. Over the last 6 months, we've seen the first early outputs of our investments to improve the website customer journey. We're moving towards a more customized approach by category and away from a 1 size fits all. And it has been a huge undertaking over the last couple of years, involving a complete redesign and a total overhaul of all creative and a category-by-category refresh of all content and features. We've started laying the groundwork for this in our TV category, and I'm really encouraged with the early reaction from our customers. 84% of customers begin their shopping journey online. And so being the destination for information is crucially important to us as it is for manufacturers to explain their products brilliantly, as you can see here on the video. The commonality of products and brands across territories is a significant advantage to our model. It means everything repeats across territories. We're able to invest more centrally in the quality of how we tell product stories brilliantly. And we're soon to be opening our new London creative hub to further drive our innovation in this space. My brief to the team has been simple to do to product content on the screen, what Pixar did to transform the world of animation when they launched Toy Story all the way back in 1995. We are as committed as ever about being the long-term partner of choice for brands. And we see that being reciprocated such that these investments are now increasingly investments in content that we make together. We've built an operational model in Germany that with growth will deliver profitability. Growth is now good for us, and it delivers contribution that further allows us to invest in more growth. We're improving our proposition. We've opened 3 new out bases in the summer, and we've invested in our warehouse and delivery fleets. We've also secured 5 new third-party logistics clients which help us to further leverage that logistics infrastructure even faster. And through our One AO approach, Germany, of course, also benefits from the custom category developments that I've just talked about and from all the other site improvements that we roll out. We've got an enormous opportunity here, and our suppliers are now willing us to succeed. Our progression over the past 2 years has been hard-earned, but we've created a better way to shop, and we are determined to build on that with investment in proposition and brand awareness. It has though become more competitive. And actually, that's a good thing for our market in the long term. However, in some areas, the cost of digital marketing has more than doubled over the last year as traditional retailers see the opportunity that we see and are frankly working out how to compete online. For example, the cost per click of TVs has increased 116% year-on-year. And from a market perspective, 19% of MDA was transacted online pre pandemic, and that clearly rose massively as stores were closed. But now stores are back open. The online penetration has dropped back to just below 25% for MDA. So in that context, our 2-year growth number of 87% highlights the share gains we have made even if we expect the absolute sales number to drop back a little on a full year basis. And as I mentioned earlier, with the increase in marketing costs, we have a structural brand disadvantage in Germany, given how much younger we are in the territory. And that's why we're investing in building brand awareness from SEO and PR and our first TV app over there for a few years during peak trading. And over the last 2.5 years, we have fixed the fundamentals of our P&L in Germany. So to be clear, the product margin is now materially commensurate with the U.K. The cost to make a delivery is exactly where it should be at this level of volume, and it reduces with scale, while our overhead is now rightsized for that business. So our P&L structurally is in good shape, and we're getting to work on driving more traffic and sales at a sensible cost. The opportunity also remains huge to replicate what we do in further territories. The total addressable market, let's not forget, for Western Europe is worth GBP 158 billion, and it is absolutely still my belief that the next 5 to 10 years, more than -- over the next 5 to 10 years, more than 50% of that market will be transacted online. And we're just committed to realizing what we think our share of that will be and with the ambition that we will be in 5 territories in 5 years as we've set out. But to also be clear, our priority first is to drive our German business through profitability and to be cash generative before we start to take our next steps. And whilst we're shooting for 5 in 5, I'm also relaxed if it becomes 6. We will do what is right, and we will not rush to hit a headline. In the U.K. we're continuing a significant program of brand building. Our customers love their experience with AO, and we want them to love our brand as well. People forget what you tell them, but remember how you made them feel and bad, the AO Teddy, that's 1 for everybody that made the effort to come to take away is proving particularly memorable. Concerts have returned to the AO Arena. And we've been really pleased with the engagement from ticket buyers and artists alike on stage. Our partnership with Sale Sharks has again brought the AO brand to a whole new audience, both on the pitch and online. And it's early days for both of these partnerships, but there's a ton of potential for direct engagement and wider brand building, and we'll share more about that at full year. The trial we have in Tesco stores has, since unlocking brought the brand to even more potential customers where they usually do their weekly shop. Given the disruption over the last 12 months, the trial remains ongoing, and we haven't yet reached any conclusions on how to roll that out. What is clear is that whilst building brand takes time, it remains 1 of our biggest opportunities when you compare the muscle memory, infuse trust that some of our competitors have. And it would be true to say that in new categories, we are still earning our right to win. We're still developing our brand and establishing relationships with new customers. But once they've experienced the AO way, they do tend to love us and they become fans, and that is a genuine asset for our business. Caring for people in the planet, I think, is common sense, but I think it's business sense as well. We want to make our grandchildren just as proud as our moms are. We've helped our customers to recycle over 2 million fridges. A great example of how our vertically integrated recycling facility gives us a unique ability to manage the impact of future climate regulation and help customers live more sustainably. We're also in advanced discussions with manufacturers about using our recycled plastics output in their new products. This has huge potential in offering a low carbon and cost-effective alternative to the use of raw materials as well as diverting plastics that have traditionally been difficult to recycle into longer life products. It's been more complex in truth than I could ever have imagined to get to here. But we hope to be selling these products next year, probably about a full year -- full 2 years after we really wanted to start doing that. Well, I'll finish where I started. The macro picture for AO is really bright. And the short-term challenges that we are facing, I believe, are exactly that short term. We'll continue to think long term and invest accordingly while clearly navigating those short-term issues and the uncertainty that they generate. We'll continue to put customers first to innovate for them and deliver our amazing service. We'll continue to believe in shared economics as a value model and so we'll invest in our flywheel to drive further scale. I still believe passionately that this formula will create incredible long-term value for our people, our share owners, and I'd really like to thank them both for helping us to build the future of AO with us. So thank you very much, and let's take some questions.

We're going to do questions from the room first, and then we'll take questions from the webcast. John?

John Stevenson at Peel Hunt. Can you talk a little bit about the cost of acquisition in Germany and how it's sort of performed over the last sort of year or so? I don't know to the extent you've got efficiency and then it's obviously gone backwards at the moment. On the infrastructure side as well, interested to see what you're delivering now at peak in sort of throughput and deliveries per week compared to where you were a couple of years ago just to get a sense of what that scale is. And then maybe just a general discussion on sort of marketing effectiveness. Obviously, a lot of brand stuff, I appreciate has a very different sort of performance than performance marketing itself, but if you can give a sort of -- just a general discussion on where you see sort of the marketing effectiveness over the next kind of year or so?

Okay. So taking those in turn, if we think about customer acquisition costs in Germany, so as we've said, so digital costs are triple-digit up year-on-year. And so what we're doing is pivoting what we're doing in Germany. So we're investing in TV adverts, which we've not done for some time. We're investing in things like leafleting, in social channels. And what we're not doing is blindly just blowing our brains out on Google cost where we don't think they're economic. And if that costs us a bit of short-term growth, we're reasonably relaxed about that. And in essence, from a P&L perspective in Germany, the gap is about EUR 80 million to EUR 100 million of sales or just over 1% of market share. So that's the kind of quantum of our gap. And we believe deeply that the other routes that we can drive customers through will get us where we need to be. And that is also underpinned by the call out of customers in Germany repeat faster than customers in the U.K. But it just takes time because of frequency of purchase for that to come through. So -- and how long we've been asked on sustainability of that I don't know genuinely. We've seen this cycle over the last 20 years happened a few times in the U.K. and it does tend to normalize. So -- but it is always uncertain on exactly what time frame that normalizes. From a U.K. peak trading point of view, the guidance that we've given is now for -- from flat to up 5% to flat down 5%. So broadly, with -- we sort of got to read that across that we're looking at peak trading being 60% to 65% up on a 2-year basis. So if somebody had offered us that at 2 years ago, you'd probably taken that, you just probably wouldn't want the volatility and the uncertainty of forecasting that came with it. And so that's how we're thinking about that. From a brand investment point of view, again, it is important as we roll across newer categories to be more front of mind with those customers, which is further fuel for our growth in newer categories. And we're trying to do our brand build in an AO Way, really and play to our strengths. So it's not to say we won't do TV adverts around was 4.99 now 3.99. But the Bear is a great example. I think we were the biggest buyer of teddy bears last year. And if you -- and so my measurement of that of is it being successful is a longer-term measurement, but it's on sentiment. And so if you go and look across all our social channels of how customers are thinking about that, than -- and what they're saying about it, I think it's delivering brilliant sentiment for our customers. But I can't measure every barrel and I can't measure every statement it's more a principle of how we're thinking about that.

And I guess the offline stuff in Germany, whether it's leaflets anything else, it must be -- you have an impact on awareness.

Yes, but it's early days. So I think our TV advert in Germany is 11 days live. So it's a bit early to call exactly what that's doing for us.

Yes. It's Tony Shiret from Panmure Gordon. A couple of interesting ones and 1 boring one. In terms of buying peak, for the peak trading period bring when you've given us net debt figures as at the end of September. I presume borrowings go up before peak. Just wonder how close you're going to get to your RCF?

So actually, liquidity headroom increases from September. So the rate of revenue and cash collection actually increases through October and November. And building stock for peak now happens sort of right through summer, so it can't all just come in the last sort of couple of weeks of October. So actually, the headroom increases from now right through to January before probably coming back to about where we were at the end of September through to February and March.

So it is down now versus half year.

Correct. Yes.

Okay. Cool.

Tony, I think it's worth calling out on that. In terms of our planning for that, a lot of the key commitments that we're making on products for peak trading and locked and loaded sort of March, April. So when we were calling out in the middle of the year on the difficulty of forecasting and the volatility, at the scale that we're at, there's not a lot we can do about it as you sort of see in it the next week, if you like.

Okay. Second question. The change in the driver costs and the impact on the gross margin, does that -- I mean I presume within your sort of spectrum of products obviously, some are much, much more profitable than others. To what extent do you think that some of the products you sell now might be taken into long-term unprofitability by this sort of step change in there?

No. So the driver cost is mostly in MDA and AV, which is where we typically make much better margins. Those newer categories that are a bit more marginal and overall contribute, but not a lot tend to be single man puzzles.

Okay. And can you give us a bit of detail on your warranty operation and what it's done in the first 6 months year-on-year in the U.K.?

Yes. So I mean, the warranty proposition continues as it has done for since we last changed the product back in 2018 and conversion levels have remained very, very consistent with prior periods.

So 3% of sales, that sort of level for MDA?

Yes. So we don't call out the specific profitability.

Any detail whatsoever.

It hasn't materially moved on where it was before.

From a figure we didn't know to start with right.