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

Here from the AO team who announced their interim results earlier today. As you will be aware, they are currently under [ takeover ] panel restrictions due to musicMagpie deal, so we won't be taking any questions on that. But as regards to the results, we will absolutely be here for Q&A at the end. To begin with, we'll start with a presentation prerecorded by the team earlier this morning, which will take about 13, 14 minutes, and then we will come on to Q&A. So please feel free to submit as we go along. Otherwise, over we go.

Good morning, everybody. Thank you for joining us today. So we're going to start with the numbers and the key drivers behind them, and then I'll hand over to John. . So we've continued to make progress against our strategy. During the first half, we've delivered double-digit growth in our main B2C channel, the core of our business. Gross margin has been strong, reflecting the work we've done over the last few years across product and channel mix. We previously discussed the reengineering and mobile, and I'm pleased with the gain we've made in margin, which is helping here, but it has had an impact to revenue, which I'll come to shortly. Free cash flow of GBP 14 million is broadly in line with profitability, and EPS was up nearly 20%. Profit, slightly better than we'd anticipated, with the rest of the numbers demonstrating the continued resilience of our business model. From today and going forward, we've updated our revenue split to reflect how we report internally and help you understand the main channels of the business better. Overall, revenue was up 6.3% on last year. Mobile and B2B revenues were down year-on-year, which I'll come back to, and it's not our specific strategy to grow the revenues of our logistics or recycling businesses. I'm pleased that our core channel of B2C has returned to double-digit growth as we'd anticipated. And this is despite the value of selling prices in the MDA market being down about 4% year-on-year. We're starting to see the compounding benefits of Five Star members repeating and buying across categories as well as the positive impact of expanding our range. The tumble dryer market grew by almost 100% in some month through summer, which helps solve the problem of the fridges and air conditioners that didn't sell at their normal run rate. But we're mindful of the [ pull-forward ] impact both later this year and in future years of those tumble dryer sales. In our B2B channel, we continue to optimize profitability with minimum margin requirements and dropping customers whose -- who require costly complex solutions. And as such, we've seen our B2B revenue decline year-on-year, and we expect that to continue into H2. Our mobile journey continues to make progress. As we exited 2023 making losses, our transformation required materially improved gross margins and lower traffic acquisition costs. This would always come at the expense of revenue, and it's compounded with the fall in the postpay market, and we can see the result of all that here. Whilst we're still partway through the process and although improvements in margin and acquisition costs have largely been achieved, there is still a gap to the revenue we need and any further reduction in the market over our forecast will likely result in a goodwill impairment. Gross margin has improved against the same period last year. And despite the inflationary headwinds in logistics and deflationary headwinds in retail product pricing, we're pleased to report improved group gross margin of 24.4%. I talked about that reengineering and mobile, and revenue has declined. But a big improvement has been in gross margins, where we now earn a healthy return for every handset we sell, which gives us a sustainable base from which to grow this business again. Product protection plans have continued to perform well through the period with cancellation rates below the long-term average as now more than ever, customers value that peace of mind that they provide. As expected, the inflationary cost of people and the uplift in rental rates has fed into warehousing costs. We've continued to spend on marketing at a broadly flat rate sales through the period. But this year, we've seen better results on direct channels than on TV. Other admin costs have been hurt by recent high levels of wage inflation, which we do expect to see come down into the future, but we will continue to drive for efficiencies and to minimize growth in these costs as we grow our revenue line. Okay. So we've talked through revenue, margin and cost lines, and I'm pleased with the output profit that has grown ahead of sales over 30% to GBP 17.1 million. The adjustment to PBT relates to the cost of the transactions of musicMagpie. Unlike some of our competitors, we don't expense actual ongoing costs. We're very aware of the impacts of the labor budget, though, on our cost base. And we're going to have to work very hard to mitigate most of the increase. But we do expect this to be an industry-wide issue, affecting some of our competitors may be more and likely to drive price inflation for customers. Okay. So profits have converted to free cash flow. We've invested in inventory across our MDA and SDA ranges. And so stock days have increased slightly to 44. Our EBT purchased 10 million shares in August, broadly satisfying incentive plans granted over the last 3 years. And so this is not an annualized amount, although we may well fund the EBT to purchase further shares on an annual basis. During the first half, CapEx was about GBP 7 million, and that's the continued refresh of our delivery vehicles and further investment in the recycling plan. The addition of an extruder is the last step in our plastic recycling process, and John is going to talk more about this later. We expect CapEx for the full year to be about GBP 11 million with H2 being more vehicles and the balance of the extruder. Post the period end, we upsized our RCF to GBP 120 million, lengthened to a 4-year tenor. And I'd like to thank Barclays, NatWest, HSBC for their continued support, and I look forward to working with Santander as a new lender. We'll talk more about FY '26 in June, but to alleviate concern, we think the direct impact of the October labor budget in NICs and minimum wage is about GBP 4 million a year. Thinking about our indirect costs where we'll get some of those passed on to us, it could be closer to GBP 8 million. And as I said a moment ago, we're going to work really hard to mitigate these costs as we will with other inflationary pressures. And we're really, really mindful of the wider consumer environment and our price promise to customers. We expect group revenue for the full year to be between GBP 1.09 billion and GBP 1.13 billion, and the B2C revenue will grow in excess of 10%. As a result of the strong first half and continued momentum we're seeing, we're again upgrading our profit guidance to deliver group adjusted PBT of between GBP 39 million and GBP 44 million. And on that positive note, I'll hand over to John.

Okay. Thanks, Mark. And good morning. We appreciate as ever you guys joining us. And it's nice to be bringing you the ninth, I think it is consecutive reassuringly boring, upgrade. I think one more, we get a set of state names. . So in a nutshell, what the first half has played out broadly as we expected, continued progress on profit performance, double-digit B2C revenue growth. But that said, let me paint a little more color into the financials that Mark just covered because underneath those positive headline numbers, it has been what I'm now turning a bit of a [ Morecambe ] summer. So all the right level of total sales, just not necessarily in the right order or the right categories. The summer was a lot better than usual. So we sold far fewer air conditioning units and fridges than we planned to and conversely, as Mark mentioned, many more tumble driers than we expected to. Broadly, it played out as a score draw on overall volumes. But behind the scenes, the trading and supply chain teams have done a fantastic job working with brand partners to make sure that the peaks and troughs that we've been through were thoroughly [ uneventful ] for customers. Most importantly, we've continued our momentum to deepen our relationship with customers as we move from a more transactional to a more subscription-based business. I explained at full-year results that we've been building this strategy now for several years on top of our foundation, have been brilliant at the retail basics that we've been disrupting the market with since 2000. We're now starting to build our 2-year member base as well, and we continue to make great headway in giving members more and more reasons to shop with us across more categories. I'm also pleased with the progress that we're seeing increasing our share of wallet, which is really what it's all about from our members. And we continue to have a laser focus on cost and efficiencies. That means, as we've planned, profit is growing faster than sales on the growth that we've delivered. Ergo, in simple terms, the model is working. And for the avoidance of doubt, and if people have questioned us on this before, we are not driving our growth by blowing our brains out on marketing, as you can see in the numbers that Mark has taken you through. Building on what I said at full year, our mobile business continues to represent a significant growth opportunity. In the last financial year, we undertook the strategic reassessment of the mobile business, and we entered this year with a revised approach to the model. We're now well on the way to returning that to profitability, with lots of gross margin improvement. And year-on-year, the unit acquisition costs have reduced as well. As Mark explained, we've now chosen to report the different segments of the business separately to try and be helpful for the first time, which enables you to see the sales that we've removed from our B2B business that didn't fit our profitable growth, no grit criteria. We'll continue to assess the areas across B2B, but I suspect that the bulk of that work is now complete. Safe to say that since the end of the period, home base, where we were the exclusive provider alongside their kitchen business, they're kind of self-selected through administration; so obviously, we don't expect that business to continue. I'm pleased to report that we have just passed the latest milestone as well on our mission to produce new fridges from old recycled fridges. We're continuing to work closely with one of our manufacturing partners on this. And in the last 6 months, as Mark mentioned, we've also added an extruder to our plastics plant. And this means we can further refine old plastics, which means we can capture the maximum amount from the value chain. So there is now a very real possibility that we will be selling brand-new fridges made with our old fridges plastic at some point during the next financial year. It shouldn't be underestimated the amount of work and thinking that has gone into this, and it will be the culmination of a 7-year blind faith journey. We're not there yet, but the commitment and vision to make this happen with such a level of uncertainty and innovation required is the sort of thing, I think, that only AO can do with our long-term horizon. And that makes me really proud that we're able to do that. We've also announced recently the intention to acquire musicMagpie, which we hope will complete before the end of the calendar year, and this should set us up well on our ESG journey for the newer categories that we're now building nicely as we turbocharge their expertise into our website with enhanced trading offers and capabilities. Our Trustpilot reviews now stand at over 600,000 reviews, and we've maintained our world-class most trusted 4.8 out of 5 rating. This is something that I will never tire of telling you, all take for granted. It simply does not happen by accident. And it requires obsessional focus on the brilliant basics every day. This is a critical part of our ability, not just to remain the most trusted electrical retailer, but also to grow our profitability given how expensive it is when you get things wrong, both in the short term to fix it but in lifetime customer value terms as well. It's difficult to get big and build scale in a low-frequency category. In fact, until AO, it's been impossible to deliver this level of Trustpilot reviews, brand relationships and critically culture in our category. None of these are built overnight. Vertical integration and structural economic advantage take time and blind faith at times as well. Now all these boxes are materially ticked. Our strategy is clear, and I have never been more excited about the journey that we have ahead. So to summarize, it's been another solid 6 months of progress on our journey. As we expected, sales are growing again, and we continue with our medium-term journey to delivering over 5% PBT with double-digit revenue growth, while sharing the economics with our members along the way to fuel future growth. I'd also like to thank all AOers that will be watching this and in particular, a shout-out to our drivers, it's actually sunny here today, but I'm sure they often wish that peak trading coincided with summer weather instead of the wind, the rain, the snow and the floods that they're currently having to contend with. And yet, they still find a way. They still find every opportunity not only to deliver the product, but also their pixie dust that they deliver in the moments that matter. The fact that so many of them choose to dress up at this time of year in Santa outfits, but what is a very physical job, for me, it tells the story perfectly about what makes AO unique. We're back to double-digit growth in our retail business, and profits are growing faster than sales, which is why we're able to upgrade profits yet again today. Simply put, as I've said, our model is working.

Thank you, gentlemen, for that. And thanks for joining us now in person. -- disappointed not to see you in your santotfits, obviously.

Thank you, gentlemen, for that. And thanks for joining us now in-person. Disappointed to not see you in your Santa outfit, obviously. But let's take some questions from the floor. But let's take some questions from the floor. So your Five Star membership club, can you talk to me about how many customers have signed up for a second year and what you're seeing in terms of repeat rates of improved numbers and by how much?

Yes, [ of course, we can ]. So we don't release the absolute quantum on numbers of sign-ups or renewals. Safe to say, we're pleased with the conversion rate of total orders to members, and we're pleased with the rate of renewals. And basically, all metrics are good. So members buy more from us, members that have a finance count buy even more from us. And the strategy that we set out for membership is fundamentally working. We still have a big job to do, though, to be clear, on educating our customers. I would only score us a 3 out of 10 on educating customers on the products beyond MDA that we sell. So we'll have customers that have shopped with us for 15 years in major domestic appliances and know us well, but don't know that we sell laptops or CCTV equipment or air fries or toasters, et cetera. So there's a big piece of education to do. But that's not -- and there won't be a light switch for that. That will be a journey, but it's a journey that we're making good progress on.

Are you seeing any signs that working from home is increasing the replacement cycle for your products?

The debate rages within the industry. We're still at all-time lows. And so in COVID, we were at all-time highs in terms of the total market, the volume of product that was sold into the market. Logically, the -- as you use electrical products more, they get replaced more in the same way as putting miles on a car. Bought by the same token, if you look at -- the car analogy is a good one, cars don't rust like the use to, electrical products are made better than they've ever been, there's more automation in the factories and so on; so they should last longer. So maybe those things play a score draw. We're not seeing yet any material market improvements, say, for slight bumps here and there. So we're not planning for any. So if we do get any of that, which logically should be a tailwind somewhere between now and the next 2 or 3 years, then that will all be upside in gravy.

Nice. Profit margins, perhaps one more for you, Mark. They've recovered substantially, and the increased guidance for full year '25 is great. Do you still believe you can increase PBT margins further, given external headwinds?

Yes. I mean, so we've called out today some of the short-term headwinds that we obviously know we're going to face as a result of the labor budget. But our medium-term aspirations, we have ever more confidence on being able to, both, deliver the medium-term targets and to invest more into our proposition for members. And so those two things will work hand-in-hand. But certainly, for me, as we continue to grow the business, we get leverage through our overhead line, and that leverage is what helps move us from the just shy of 4% PBT guidance that we've issued today towards that 5% medium-term target.

And I would just add to that, Hannah, in terms of just quite how achievable that is on the numbers that we've upgraded to today is -- for the full year has us, round numbers, about 4% PBT. So the medium-term target of 5% is not a monster stretch from where we are. When you consider that our central overhead is still currently about 9.5% to 10% of sales. And so I think the long-term position in that should be more 6.5% to 7%.

Okay. Helpful. Recent budget increases in National Insurance could lead to a GBP 4 million cost increase and GBP 8 million indirect. What are the indirect costs? And how would you look to manage these additional costs?

Yes. So they're broadly from suppliers, which may be where we use agency labor in our warehouse or in our recycling operation or where we -- our drivers are broadly on a self-employed model. And again, their cost of pay in line with sort of minimum wage increases and so forth will go up. And so broadly, that GBP 8 million is a number that we think we're going to have delivered to us. And then we'll have to work very hard on efficiencies to mitigate that as best as we can.

But it's principally an output, isn't it, of labor of one form or another, whether direct or indirect. And we talk about it as cost walk into businesses on legs, and those legs just got more expensive.

For everyone. Right. Retail sales to consumers are growing at 13%. Who do you think you're winning market share from?

Across the piece, we're not targeting one competitor, in particular, it is just a gradual progression in the market, it continues to move online. We've got a big share of the online market. And overall, we're getting more repeat customers that are buying more share of wallet from us, and more of that is coming from newer categories where we were starting from a very low base as well.

And then perhaps, I guess leading on from that. Marketing costs have been well controlled. How is brand awareness for both MDA products and across the wider electricals range?

Brand awareness is at an all-time high. But again, it is just a gradual progressional journey. It's the kind of upside and downside to where we are, is that it is difficult to build a brand in a low-frequency category. And so it takes a long time. The upside to that is we've been at it for a long time. So -- and we got a big boost in terms of the number of customers that we served through COVID. But I repeatedly say, the difference is not what we do, it's how we do it. And the only way to experience that is actually to transact with us. And so that takes even longer, therefore, so you can't just advertise the difference. People forget what you tell them and they remember how you made them feel. But what that means is we then have a deeper relationship with those customers, and I think we have a better level of loyalty, therefore, in the future.