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

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 outputs 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 GBP 34 million, up GBP 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 amortization 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 rationalization as well as further efficiency savings in our logistics operation. There are some headwinds going into FY '25 as latent inflationary pressures materialize, 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 affordablemobiles and buymobiles 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 is down about 1% year-on-year, which we anticipate as the bottom of the cycle. The increase in service revenue is driven and 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 recognize the value and peace of mind it represents. And 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 place 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've reset our approach. Firstly, we reengineered 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 additional of affordablemobiles and buymobiles 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 rationalization helped us to deliver record gross margin of 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 will be a key part of that growth and John is going to explain the strategy for that shortly. This change in mix will result in a slightly dilutive impact to gross margin in the coming financial year. So turning to our SG&A costs. We delivered savings of GBP 19 million year-on-year and on a 2-year basis of GBP 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 GBP 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 materialize despite the fall in the headline rate of inflation. We've experienced this as we exit FY '24 and enter FY '25. And government policy on minimum wage is driving high wage inflation in some of our lower-paid operational roles. We've also invested GBP 2 million in the year in the first stage of our ERP implementation. The investment will continue and increase slightly in the coming 2 or 3 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 GBP 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 normalized, and we've chosen to make some investments in inventory as we look to maximize availability for customers. This is particularly in slow-moving products as well as those where manufacturer lead times can be longer or inconsistent. And as a result, stock days have increased to 43. We've seen a cash inflow of about GBP 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 GBP 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 FY '25 to about GBP 11 million and the increase largely being the purchase of vehicles, which are in their normal renewal, but we will now likely buy those rather than we previously leased them. We've extended our GBP 80 million revolving credit facility by another year to April 27, and this is on the same terms with our existing partners, and it's undrawn at the end of the year. As we exited FY '24, we saw our ao.com return to growth and expect this trajectory to continue in the coming year, and John is going to cover the strategy for this shortly. We'll 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 GBP 36 million and GBP 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 with the heavy lifting of that is firmly done. And with the benefit of hindsight, while many businesses were paralyzed 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 have 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 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 5 years. Now I know it's easy to be skeptical 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 will be incremental. The 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, upfront, 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. Well, 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 0.5 million active customers, and they have about GBP 0.75 billion available to spend on their accounts. We now also have a growing AO membership. And that base pay GBP 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 1 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, it's just a lot more fun than battling relegation, which is hugely rewarding for all AOers who thrive in that high-performance fast-based 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 has 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. We are now 4 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 4 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 0.5 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 U.K. with the highest quality rating. That's a 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 U.K.'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 off. But AO will be back to double-digit growth every year for the next 5 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 fashion 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 organization so that anyone watching can hear. Thank you.

Ben Hunt from Investec. You talked 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 -- your warehousing configurations will set up for MDA. Can you perhaps talk about any sort of plans or progress you're making at improving perhaps those unit economics?

Yes. 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 2-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 2-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 the context to the 2 new mobile sites that you've acquired, how that relation is going to -- how that relationship is going to improve with the mobile network operators and your volume commitments?

Yes. So in simple terms, we were clear when we set out our update at the end of last year. The key part of our pivot to profit strategy was that if we could not see business units with a line of sight through 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, housebuilders was another one. And 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 mentioned, we opportunistically wasn't in our plan to buy A1 as what was our one of our biggest competitors in that market through the period as well. So it won't be a case of putting those 2 businesses together in it being the combined entity. It will be smaller than the combined entity. But it will be a much better business for us, and it should generate cash and it should contribute profit.

Caroline Gulliver from Equity Development. My 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 are generating double-digit revenue growth, what are some of the sort of levers or what you might like to invest in? How much should we expect might fall through to profitability and getting towards that 5% EBITDA 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 are going 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 also 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 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 GBP 10 million on TV to drive the growth. This is about much more. 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 are seeds for next year's sales, they are 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 GBP 39 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 GBP 39 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 be in a double-digit growth business on a journey to 5% PBT.

And then we know this is roughly [ 78% ] of PBT [Technical Difficulty].

Yes, 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. So in my category is high-class problems, and we'll deal with it when we get to it.

[Technical Difficulty] and I suppose as well just how you're thinking about maintaining that kind of customer experience [Technical Difficulty]?

Yes. No. 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 2-man warehouse, most of it is still on a DPD vehicle. Their service is very good, but 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, make 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 as a 3 to 4 out of 10, but that's material progress because we were probably more like 1.5 to 2. 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 deepen our relationships with the brands and the manufacturers of the products. And as the awareness within our existing customer base grows, then logically, we're already seeing our market shares in those newer categories materially overindexed with existing and repeat customers than it does with new customers. 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.

[Technical Difficulty] Reason to expect we should see kind of stock -- in terms of stockholding kind of [indiscernible]?

Yes. 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 is pretty well reported around the disruption that's happened. Stuff that comes from the Far East is now taking longer. So our priority is to maintain the proposition and protect customers for 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.