AO World plc (AO) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and a warm welcome to those of you here with us today and to those watching online later. So thanks for making the time. I know many of you will have been to -- been on results calls all week, so we will aim to make this one worth your time. So I'm here with John Roberts, our Founder and Chief Exec. And between us, we're going to take you through what it means and where we go from here. So a quick word on structure. I'm going to take you through the financial and operational performance, the numbers and the story behind them. John is then going to pick up strategy, our customers, our markets and the moats we've been building. And we'll finish, as always, with questions and answers. A year of delivery is the headline, so let me take you through it. So FY '26 was a year of delivery. We did what we said we'd do, and we did it through a tougher cost backdrop than any of us were planning for at the start of the year. The headlines are revenue was GBP 1.27 billion, up 11.4%. Adjusted profit before tax was GBP 50.5 million, up 16% at the top end of the GBP 40 million to GBP 50 million range we gave you last June. Free cash flow was GBP 66.4 million, over 2.5x last year. We ended the year with over GBP 200 million of available liquidity, made up of a cash balance of GBP 81 million and an undrawn RCF of GBP 120 million. All of this resulted in a net funds position of GBP 16.4 million, having started the year with net debt of GBP 35.9 million. Profit is growing faster than revenue. Cash is growing faster than profit and the balance sheet has never been stronger. The flywheel that John has talked about previously and we'll return to later is doing what he said it would do. So I think it's worth me starting by walking back through the commitments we made last June. We told you to expect GBP 40 million to GBP 50 million of profit before tax, and we've delivered GBP 50.5 million. We told you we'd convert that profit to cash. We have GBP 66.4 million of free cash flow. We told you we'd absorb about GBP 8.5 million of group costs from the April changes to National Insurance and the national minimum wage, and we have. We told you we'd fix or close mobile, and we fixed it. It's now contributing profitably to the group. And we told you Magpie would integrate and turn profitable. It has. 18 months on, it's on an exit run rate of profitability. There were no adjusting items in the year, so reported PBT is equal to adjusted PBT at GBP 50.5 million. Basic earnings per share was 6.36p compared to 1.7p reported last year or 5.7p on an adjusted basis. So broadly, we said we wanted to be reassuringly boring, and we have been. So on to the revenue lines. As I said earlier, group revenue was GBP 1.27 billion, up 11.4%, and that breaks down as follows: B2C retail revenue was GBP 911 million, up 9.5%, and that growth is share driven. Our share of the MDA market grew by 6.8% to 17.1% of total market, with share growing faster in SDA and AV categories. About 720,000 new customers chose us in the year, taking our customer base to 13.3 million. B2B revenue was down 11.9% to GBP 103 million, and that's the annualization of the deliberate exit from the low-margin kitchen furniture work that we started in FY '25, and that reset is now materially complete. Mobile revenue was down 18.4% to GBP 77 million, which is the output of the pivot to mobile profitability, and I'll come to that on the next slide. Recommerce was GBP 119.5 million and up 180%, which is obviously the effect of the full year of Magpie consolidation versus the part year last time. Third-party logistics grew 9.2% to GBP 33.3 million, where we leverage our existing network. And recycling grew by 6.8% to GBP 22.7 million with volumes up, and this was partially offset by lower commodity prices, particularly on steel as we flagged at H1 and hasn't recovered in H2 as we'd expected. Okay. So moving on to gross profit. We delivered GBP 316.1 million, which was up 14.5%, growing faster than revenue at a 25% margin, and this was up 0.7 percentage points on last year. There are 3 things to call out as to how we get from FY '25 to FY '26. The single biggest contributor was the pivot to profit in mobile. The second was the full year inclusion of Magpie at a higher margin mix than the rest of the business. And third was the core retail gross margin was slightly up, which helps offset the lower average selling prices we saw across the year. And this was a combination of market dynamics and us sharing economics in the form of great prices with our member base. And we'd expect to see more of this into the future as we continue with our principle of scaled economies shared. We saw some partial offsets in labor inflation in logistics and the lower commodity prices in recycling that I just mentioned. On mobile specifically, and I'll keep this brief because John will cover it later in his section, it's important to know it's now a turnaround story rather than a problem story. Revenue is down by GBP 17 million by design, but the business is now contributing profitably to the group. At H1, I said margin was lumpy and bumpy. H2 has been materially cleaner. Our focus is now on concluding longer-term agreements with the networks to give us economic certainty into FY '27 and beyond. But as we look to the future, particularly on Switch24 and the MVNO, Switch24 launched in H2. We had some iPhone constraints, supply constraints, which affected the period, and we still have work to do to simplify the customer messaging. We have soft launched our own MVNO, AO Mobile, and look forward to gradually releasing it to more customers, and John will take us through how we see that developing. So on to the cost base. Advertising and marketing was GBP 53.5 million, up GBP 9.1 million on the year. About GBP 3.5 million of that is the full year effect of Magpie, about GBP 1 million of that increase is brand expenditure. The biggest piece, GBP 8.4 million is PPC on ao.com, where we leaned harder into direct customer acquisition when the customer -- when the unit economics justified it. And this was partially offset by about GBP 4 million of reduction in mobile, where we pulled back from those unprofitable connections. Warehousing was GBP 75.1 million, up GBP 13.1 million year-on-year. GBP 7.3 million of that is Magpie, the rest is volume and labor cost increases. About 30% of the warehouse cost is infrastructure, about 70% is labor, which is where the government-driven inflation lands the hardest. Other admin costs were up about -- sorry, were GBP 138.2 million, up GBP 12.5 million. About GBP 11 million of that is the full year impact of Magpie. The rest is labor inflation, which in total was about GBP 8.5 million of group costs from the April changes to National Insurance and the national minimum wage as well as continued investment in our ERP program, significantly offset by offshoring and rightsizing. We absorbed that and still delivered at the top end of the range. On the self-help side, our offshoring program saved about GBP 2 million in the year, which is about GBP 4 million on an annualized basis. That lower in-year figure reflects phasing and the necessary dual running costs whilst we were learning. We've now got about 150 colleagues based in South Africa, and we expect the majority of our customer engagement operations to be overseas by the end of FY '27. We've also reengineered warehouse shift patterns, team structures and our returns operation, and we'll come on to robotics on the next slide. But I'll repeat something I said at H1 because it's worth repeating, we will never take a cost saving that compromises our service standards. Our Trustpilot rating of 4.9 out of 5 across over 1 million reviews is not something we would ever trade for short-term margin. Our operational foundations matter for what comes next. So let me give you a bit of operational color because some of this isn't in the headline numbers. Logistics first. We have about 2 million square feet of warehousing for products and about 17 last mile home delivery depots. The fleet includes about 800 delivery trucks and a national network of about 260 primary logistics trailers, which enables the miracle of 4.9 out of 5 on 1 million Trustpilot reviews on a national next-day, 7-day a week delivery operation. We added 160 new delivery vehicles in the year, including 10 electric vans. We'll replace about 360 more vehicles in FY '27, and that will be on higher purchase. The longer-term direction for our trunking fleet is unclear as the economic and operational reliability of new lower carbon technology develops. On hedging, for cost certainty into FY '27, we've got about 80% of our expected fuel usage hedged through to March '27 and substantially all of our electricity for the group fixed through to October '27. On robotics, during the year, we carried out a small-scale exploratory trial, and we will expand this in FY '27 to include testing in a live operational setting. John will pick up the broader strategic context on this in his section. On our ERP program, we spent GBP 3.8 million in the year against GBP 2 million in the previous financial year, and we expect that to be near GBP 7 million in FY '27. The second phase of our program, which is the replacement of our warehouse management system is expected to complete during FY '28. We've also replaced our contact center platform, which didn't go as smoothly as we'd hoped, but it is now in, and we look forward to building AI solutions on top of it that will improve customer experience and in time, lower costs. In recycling, we processed 1.6 million major domestic appliances at our Telford facility in the year, up from GBP 1.17 million last year. And that takes us to 10 million products recycled since we opened the facility in 2016. Now this is the slide I'm most pleased to talk about. Free cash flow was GBP 66.4 million compared to GBP 26.3 million last year. Cash flow from operating activities of GBP 95.7 million, up from GBP 58 million. Now there's a timing piece to walk through on working capital. Net working capital was GBP 46.8 million compared to GBP 66.6 million last year, and so that's an improvement of about GBP 20 million. At H1, I flagged we had about GBP 39 million of timing inflow, which we expected to largely reverse in H2. It has broadly and the underlying year-on-year improvement is real, not a timing artifact. Inventory days came down from 47 to 40. Within that, we deliberately reduced mobile inventory by about GBP 14 million as part of our pivot. And we increased core retail inventory by about GBP 13 million to support range expansion and availability. So growth gives us about half of the reduction with the other half coming from phasing around the stock days calculation in the different business units. But importantly, it's a tighter overall position with the right shape underneath it. Receivables were up GBP 6.5 million, and we ended the year with cash of GBP 81.3 million. Total available liquidity of GBP 201 million, and this was supported by our GBP 120 million revolving credit facility, which remains fully undrawn and is in place until October 2028. As I said at the start, we started the year with net debt of GBP 35.9 million, and we ended it with net funds of GBP 16.4 million, a GBP 52 million swing in a single year on top of the GBP 10 million buyback and EBT purchase of GBP 4.2 million. CapEx in the year was GBP 6 million against GBP 8.9 million last year, and this was mainly in our recycling facility. It included the additional purchase of land that we've previously been leasing. Asset finance lease additions were GBP 22.3 million, and that was principally the vehicle refresh I spoke about. So if you look at our total investment in operational capacity, CapEx plus lease funded, it's higher than the headline CapEx number suggests. Now the balance sheet position is what enables the next conversation. I want to be explicit about how we think about capital allocation because we now have a business that generates real cash and how we deploy that matters. We have a simple framework with 3 priorities in order. First, the balance sheet. We want it to be strong, resilient and flexible. We don't manage to a fixed leverage target, and we're comfortable moving between net funds and modest net debt depending on the investment needs and the cycle. What we won't do is trade liquidity for short-term optionality. We want enough headroom to trade confidently through whatever the cycle throws at us. Second, investment in the business, but only where the returns justify it. Every meaningful project is assessed against our cost of capital with disciplined criteria around payback and strategic fit, logistics, technology and infrastructure. On a case-by-case basis, we'll review M&A opportunities where it's consistent with the strategy and enhances our capabilities. If a project doesn't clear the bar, we won't do it. And then third, returning surplus capital to our shareholders, where we generate cash above what the balance sheet needs and what the business can sensibly deploy, that capital goes back. Our preference is share buybacks where they represent an attractive return relative to our cost of capital and special dividends where appropriate. The aim is to be consistent and flexible, not rigid or formulaic. We completed our first ever share buyback in the year, GBP 10 million, which equates to about 10 million shares. And we also funded the EBT with GBP 4.2 million to satisfy share schemes. And reflecting our strong cash generation in FY '26 and the discipline of the framework I've just described, we have today announced an intention of a further GBP 20 million of returns to shareholders, a special dividend of GBP 10 million and a new GBP 10 million share buyback, both to commence following the circulation of the annual report. Both of the natural output of the framework. We've got a balance sheet that is strongest ever, an investment program, including potential M&A that we're funding comfortably from operating cash and surplus cash generation returned to shareholders. Looking forward, the external environment remains uncertain. Geopolitical pressures continue. Inflation and input costs and on the consumer haven't gone away and consequently, consumer confidence is subdued. Our guidance for FY '27 is for profit before tax to be in line with current market consensus and with continued progress towards our medium-term 5% PBT margin target. The things that we've got working for us in FY '27, we expect to continue to gain share in core retail. We'll have a full year of mobile profitability, a full year of Magpie profitability and more synergies to pursue and offshore savings annualizing to about GBP 4 million on a run rate basis. But the costs we're absorbing, we've got further inflationary pressure on labor from labor, stepped up investment in our ERP program, the fleet refresh and the short-term cost of robotics trials. We're committed to the principle of scaled economies shared. And so on the journey to our 5% PBT target, some of the efficiency gains we deliver will necessarily be shared on route with our customers. And we're expanding our membership promise such that now our members always pay less. John will talk more about this later. But for now, we know the cost will be at least 20 bps of gross margin. On a combined basis across capital expenditure and asset financing, we expect to invest about GBP 29 million in FY '27, with GBP 7 million of this being traditional CapEx across recycling and technology, including robotics and infrastructure and a further GBP 22 million being the refresh of over 360 vehicles in our logistics business, and that will be done by our asset finance. One last point. Our effective tax rate for the year was 28.9% against the U.K. corporation tax rate of 25%. And the gap is driven by the IFRS 2 share-based payment add-back where we don't get corresponding corporation tax deduction. We've assessed our exposure under Pillar 2 and don't expect any material impact. Cash tax in FY '27 will reflect normal U.K. corporation tax rates. And so that's the numerical picture, a year of delivery against tougher conditions than we were planning for, a balance sheet in its strongest position ever, a framework for returning capital that we're now actively using and an outlook that keeps us on our path to our medium-term margin target. I'll hand over to John now to talk about turning that delivery into something more, the strategy, the customer, the moats and the runway in front of us.

Well, I think it's fair to say the numbers speak for themselves. So what I'll do now is step back from the numbers and talk about what they actually mean and where we're heading because profit doesn't happen by accident. Revenue growth at this level doesn't happen by accident and a Trustpilot rating of 4.9 out of 5 across 1 million reviews certainly doesn't happen by accident or quickly. And what you've just heard from Mark is the output. I'm going to share with you more of the inputs and the engine that we continue to build. For the last few years, I've been telling you that our model is working and gaining momentum. Today, I'm going to take you through just how deep the roots of that model now go and why I believe that the best of AO is yet to come. Our strategy is built on a simple idea, scale economies shared. We use our structural cost advantages to offer customers better value. Better value builds loyalty. Loyalty builds scale. Scale strengthens our cost position and around it goes. We've talked about this flywheel at the last set of results and likely, and I'll continue to talk about it probably for about the next 2 decades. Over the last 12 months, our revenue crossed GBP 1.2 billion and profit before tax was over GBP 50 million. And in our main retail business, we grew share. Critically, though, profit grew faster than revenue, and that is the flywheel working. That is operating leverage, and that is exactly what the model was designed to do. None of this is look, it is the compounding result of decisions we've been making consistently for years. Some of those decisions are uncomfortable. Some of them are expensive, and most of them took longer than we expected to. But that's how moats get built. The first moat is customer trust. We now have over 1 million Trustpilot reviews at 4.9 out of 5. That is a world first. And when you think it's in a category where we step over customers' thresholds. We take away their old appliances. We install new ones, often within hours of the washing machine breaking down. That rating really is simply extraordinary. And it matters strategically, not just reputationally because if AI-driven shopping is increasingly informed by trusted signals, and that's certainly what we're seeing, then being Britain's most trusted electrical retailer is a very good place to start that AI revolution. The second moat is operational excellence. Running a 2-man home delivery network servicing every U.K. post code 7 days a week is genuinely hard. The graveyard is full of businesses that have tried and failed. We do it at the highest quality standard in the world, and we do it as the lowest cost operator, and we do that while still growing. That combination of world-class service at lowest cost is not a coincidence. It's a culture. And culture, as we all know, takes years to build and it is almost impossible to copy. The third moat is brand relationships. Getting global brands to supply us directly on terms that enable us to compete has taken years, in some cases, over a decade. I certainly know I've invested a lot of my liver in the process. And those relationships are now deep and reciprocal. Those brands trust us with their premium products because we look after their customers properly, and we add value to their brands. And in reality, there are only a few retailers in the U.K. that hold these relationships at scale. Three years ago, we launched AO membership. I was clear at the time that it wasn't a quick fix. I said it would take time. I said it would be uncertain, and I said it would take patience. I was right, and I'm very glad that we applied our normal long-term lens. Today, every key membership metric continues to improve. Members transact more frequently, and they give us a greater share of their electrical spend. They cost less to retain than they did to acquire. And they're increasingly buying across categories, not just major domestic appliances. And that last point is important. When a member buys their washing machine from us and then their laptop and then their phone, that is scaled economy shared working exactly as it was designed. We get more of their wallet, they get more of our value, so everybody wins. Membership is not a loyalty scheme that's just been bolted on to a retail business. It's the architecture of what AO is becoming, and I've never been more convinced that we're on the right track. And I know you would all look to see all the data under that on it. But we continue to believe that the value that we're building is very commercially sensitive. And so for now, you will see that and continue to see that in growth, profit and cash. 18 months ago, we welcomed musicMagpie to the AO family, and we're really pleased with progress. We've taken a business together with the team there that at a PBT level was losing a run rate of GBP 6 million per year and is now run rate profitable on an annualized basis. That's not because all the systems just plugged in together perfectly on day 1, they rarely do, but it was because the cultures fitted. And culture, as I said earlier, is the really hard bit. One key thing we've been able to do is launch a partnership with Timpson, and that lets customers trade in tech for instant cash at over 1,300 locations across the high street. That is genuinely new and real convenience that's transformative for Magpie. But the bigger opportunity is what the capability we bought unlocks for the broader AO ecosystem. Trading reduces the effective cost of a new purchase. Lower effective cost drives higher conversion. Higher conversion drives greater frequency and greater frequency deepens membership value. It's another flywheel within a flywheel, and it really is only just getting started. So it is material upside for us for the future for both Magpie and the AO retail business. Mobile has been a tough chapter for us, and I've been clear about that over the last few years. The postpaid market has contracted. Consumer behavior has shifted and the economics of bundled contracts have been under real pressure. We face that reality though, early. We work closely with our network partners in 02, Three and Vodafone to either reshape the category into something that works for everyone or close it in an orderly way. And I'm pleased to tell you that, that focus and creativity on all sides has delivered a meaningful improvement. And the mobile business entered the new financial year now profitable. And if that changes, we'll be pragmatic. We'll exit without drama or any material cost. And I think that is AO doing what we do best, seeing things clearly and acting decisively. But the more exciting part of the mobile story is what we're building, not what we fixed. Switch24 and AO Mobile are big pieces of the strategic jigsaw falling into place. Switch24 is genuinely great value for customers. You pay for the depreciation of the handset and nothing else, and you get a new phone every 24 months, and I am absolutely delighted with the proposition. However, we have to be honest that it hasn't landed quite yet the way that we expected it to. The reason when we look back at it, is quite straightforward. Customers weren't actively searching for it in Switch24 within the mobile category, and they're still not. The proposition, though, is compelling once you understand it, but the customer journey at launch was more complex than it needed to be. So we're working hard within the constraints that we have with the FCA regulations to simplify the experience. And as Da Vinci said, simplicity is the ultimate sophistication. And right now, we're not quite sophisticated enough. At the same time, we underestimated how important the airtime offering would be alongside the handset. The share of people whose main mobile plan is SIM-only has grown from 35% to 42%. Handset-only sales, meanwhile, even of the latest flagship devices represent only about 46% of the total of mobile transactions. And the latest model handset, handset-only sales naturally skewed towards a very specific customer, which is affluent early adopters who are already more predisposed to buy outright. So that's not mass market. And the handset-only market is, to a significant degree, stagnant. These days, people need a genuinely compelling reason to change their phone. Without airtime alongside, Switch24 wasn't giving enough people that reason. AO Mobile changes that, we think, entirely. When we put the airtime and the handset together, AO Mobile with Switch24, we create the combined value that we'd always intended. So GBP 29 a month for the latest iPhone 17 with effectively an all-you-can-eat SIM is truly market-leading and compelling. For context in that, the cheapest unlimited SIM on EE, for example, is currently GBP 35 a month, and that doesn't include a phone. Given that there are 3 SIMs per U.K. household, the saving for AO members is huge. And they're also then well placed to embrace the latest tech and the AI revolution by having the latest tech in their hands. So with constant media reports about the cost of living, the Strait of Hormuz, rising interest rates and energy costs with energy costs estimated to rise by about GBP 220 per year, I think this is another brilliant example of AO engineering our scale economies to share with our members at a time when they need it most. I think it will make a real difference to people. And I believe the current model of buying the latest technology outright through your mobile phone bill will soon look as outdated today as blockbuster video does. We're early though, and we know that but I would far rather be early and course correct on this one than be late and playing catch-up. A customer who takes Switch24 and joins AO Mobile is, in my view, a member for life. We will give them the lowest price forever on their mobile and in return, they give us their share of wallet on everything else. That is the stickiest, most valuable customer relationship that we will have ever built. And so I'll make you a GBP 1 bet because you all know how much I like my GBP 1 bet that when we look back in 5 to 10 years, this will be how people access the latest tech in exactly the same way that PCP transformed how 80% of people now finance new car purchases. Now let me turn to the external environment and to what we're doing about it. You all know that we have a government that does not understand or value business and most disappointingly makes no effort to understand or appreciate the value that great businesses generate. They're unwilling to tackle any of the difficult decisions of the day, preferring to steer us as a nation into dependence and unaffordable benefits in exchange for voting for that pay master. And the result of this is basically higher costs at every turn for businesses. National minimum wage and employer national insurance rises increased costs on businesses and the recent labor market changes reduce the flexibility that businesses have historically relied upon. We're not immune to that as pretty much no businesses. But here is what I know. At exactly the moment that costs are rising, the capability of AI, automation and robotics is accelerating. And the cost of that technology is falling. So we're taking a parallel approach. On one track, we're capturing the immediate productivity and efficiency wins that AI can deliver today, as you would expect us to. We have multiple AI projects impacting the business now in flight, from the simple rollout of Copilot to our knowledge workers to building on the capabilities of the new telephony system that Mark mentioned and the number of customer-facing innovations that will improve their journey through our website. Over time, there will be clear cost savings by using AI to automate repetitive tasks that don't add value. But personally, I'm much more excited about how it can revolutionize customer experience and amplify growth opportunities, of which we have many. On the other track, we are reimagining the whole business from first principles with AI at its core. What does AO look like if we were to build it again from scratch today? And that's the question that we're asking ourselves. I won't pretend to have all the answers yet because nobody does. The pace of change in AI is such that certainty is the wrong ambition. We have always been comfortable with saying, I don't know, while still moving ahead at AO speed. What I can tell you concretely is that our offshoring program in South Africa is delivering. Around 150 roles have now moved there. And it took time to get it right, to recruit, to train people and critically to embed the AO culture. Mark has already made this point, but it bears repeating for absolute clarity. We will never ever take a cost saving that compromises our service standards. But we're now out of the learning phase and into business as usual. And the cost base is materially lower. The service quality is excellent and the flexibility we have gained is significant. And then there's robotics. And I'm really excited about what this can do for our business. In the same way that AI is going through inflection points, cars are probably one of the most advanced of the physical applications of that. And whilst clearly, as ever in the U.K., we'll miss pretty much every opportunity possible to be an early adopter of this stuff. When you look at Waymo self-driving cars are now a pretty normal and ubiquitous form of travel in many states across America. Driving along road safely at 50 miles an hour, dealing with dynamic real-world eventualities, making critical life-saving decisions in real time on their own without human intervention. In 2022, AI had an event horizon with the launch of OpenAI's ChatGPT-3. In the last few weeks, NVIDIA has launched Cosmos 3, which I believe will be for robotics what ChatGPT-3 did for large language models. And when people hear warehouse automation, they often think of something like this. And yes, that's a phenomenal piece of engineering, but it's not what we're doing. It's not right for our business, our product range or our model. So what we're doing is something much more like this. This is much more flexible, relatively low CapEx, software-driven solution that has application across multiple formats and for many of our product types. It's going to be built to work with our operation, not to replace it with something entirely new. And as Mark mentioned earlier, we've been testing this for a while now, and we have seen capability improve and costs reduce. Cosmos 3 should turbocharge both capability up and cost down over the next few years to create ever more scaled economies to share with our customers. So to conclude, last year was genuinely one to be proud of. Sales over GBP 1.2 billion, profit over GBP 50 million, market share growing. Our balance sheet is its strongest ever and over 1 million reviews at 4.9 out of 5. The business is now generating real cash, which gives us optionality to invest, to grow and to return surplus capital. Underneath all of this is a flywheel that is working, accelerating and compounding. We have meaningful moats, a membership model that is coming of age, a recommerce business that is run rate profitable and full of potential, a mobile proposition that is finally genuinely exciting and an AI strategy that is grounded, moving at pace and realistic, not hype. None of this happened quickly and none of it happened by accident. Building something that lasts, something that competitors can't easily replicate takes time, investment and patience. And I've said that before, and I inevitably will say it again. I have never been more confident that we have the right strategy. And I am deeply grateful, as I always am to every AO, every trading partner, every customer and every one of you for being part of this journey. So thank you. Before we move to questions on housekeeping, if you can take the microphone as normal and before asking a question, state name and organization so that anyone is watching online can hear clearly. Andy, you'd like to go first?

Yes.

We always start with you.

9:15 it was supposed to be. It is 9:45 now. No, I'm delivery.

Andy is having a delivery.

I have got delivery from AO coming today, actually. It's going to be 15 more minutes, so I can start complaining then or not, hopefully. So a whole bunch of moving parts in the P&L in the year ahead, not to go over all of the things that you flagged there, but inflation, ERP trading down and the non-fixed element of fuel on one side, the offshoring annualization, mobile profit, Magpie profit on the other side of things. There's a whole load of moving parts there. It sort of feels like they broadly net off-ish this year such that the underlying growth that consensus implies is sort of underlying-ish. So I guess 2 questions really coming from that. One, well, we've already confirmed that they sort of broadly net off this year. But not -- those factors aren't always going to net off, are they? I mean, how do you think about managing profit growth over -- on a year-to-year basis when you're doing GBP 1 billion and whatever of revenue and you're trying to land it within a few million quid. How do you feel about that? And are we going to have years where it's a bit more volatile, say, in terms of delivery? I guess that's my first question.

Yes. I mean, look, so I mean, you're right that broadly all that stuff nets off and the growth then delivers the underlying profit growth that sort of the market is expecting. I think there will be things like the investment in our ERP program, and that is a mix of revenue cost and there will be a little bit of that's capitalized as well. So there will be things that we do over time that, that means some of that profit number might move a little bit, and we'll happily talk to you about that in advance and try and get you to sort of understand the journey that we're on. But we've set ourselves a medium-term target of 5%. We're going to continue to progress towards that. And as we grow the business, we should get closer and close to that 5% and then on to our longer-term target that we set out after that. And so the direction of travel will be that way. Some years we will have some lumps and bumps in it, and we'll try and give you the visibility. But we do expect that growth continues to drive an increase in our profit growth.

Andy, I would add to that as well that if you sort of think back to 2022 coming out of COVID and our pivot to profit, what we would -- what we did then was when we look on to the horizon, it was fix or close anything that isn't making money or generating cash. So that was that program. And then when you look at our strategic house, if you like, and the flywheel, it was bring all the pieces of that jigsaw together. And so that's all done. So there isn't any -- we have no problem areas of the business. We have no turnarounds. We have nothing to fix. So this is now about head down and drive. And we've got loads of, as I said before, flywheels within flywheels and growth opportunities and things that we've not done. We've got huge recommerce opportunities that we've not plugged into ao.com yet. What will it do? I don't know because we've not plugged it in yet. But there's loads of initiatives across the business to drive growth. And at the same time, there's loads of initiatives to take cost out. So it isn't one big silver bullet. There's loads of contributors that will make that happen. But the biggest thing for me is the strategic jigsaw is in place and the stickiness of that just keeps driving the flywheel.

Great stuff. The capital return, GBP 20 million additional, good to see that. 50-50 between special and buyback. Interested as to how you came to that, why you're not doing all buyback as an example.

Yes. I mean -- so I think there's 2 things there is that the different returns appeal to different categories of shareholders. And so we think it is important to address both of those. And the other one on why not just all buyback as a default. The reality is that our last GBP 10 million buyback probably took about 9 months to deliver. And so we wanted to return 20, not 10.

That makes perfect sense, point. And then the last one -- sorry, left the most boring one till last, I'm afraid. GBP 22 million on the vehicle refresh in the year ahead. Can you just sort of help us how that's going to play through the -- well, we sort of know on the balance sheet, but how it's going to play through balance sheet and P&L?

Yes. I mean, so P&L, there won't be a big impact. So it's replacing -- it's all replacing existing vehicles. So the cost of vehicles has probably gone up slightly. So the run rate of the cost will go up slightly, but it's nothing that...

Won't have any impact on the interest line.

No. And effectively, they will all be done on asset finance. So it doesn't go -- actually go through the CapEx line, but it is on the sort of the IFRS 16 piece.

John.

John Stevenson from Peel Hunt. A couple of questions as well, please. Just start on credit-enabled sales. You've quoted the credit penetration. Can you talk about how that's grown over the last couple of years, what the blocks are, I guess, and to what extent your credit customers are converting into kind of 5-star members because they seem like an obvious kind of conversion place. Secondly, just picking up on Andy's point on the cash, you -- I mean, in my model, you're going to be over GBP 200 million of net cash in a couple of years' time, 3 years' time. There's potentially a lot more coming out. I mean do you see anything from a capital point of view that would stop that happening? It feels like the cash returns are going to become more meaningful...

I'll answer the second question first, if you like, yes. So I mean, no, so I think in terms of the profile of the cash generation, I don't see anything that sort of makes a big change to that. We've talked about our allocation policy that we've got to keep -- make sure the balance sheet is strong, that we will consider internal investment projects and M&A. We might do a little bit more of that. But in terms of the big macro piece on the fundamental assumption on the cash flows, then no, I think we probably broadly agree with you, which is why we sort of set out the allocation framework today.

And as far as the AO Finance is concerned, you won't be surprised to know that I'm not going to give you the number of how many of them are members, but they are very good loyal. They're some of our best loyal customers and incredibly cost effective to market to. We have now over GBP 1 billion of available to spend in their accounts. And -- but it's just very much business as usual. There's no great step change. It is just a progression along the way.

Okay. And last one, just on the automation piece. You're starting testing. You've got, I think GBP 40 million, GBP 50 million of kind of overall sort of warehouse costs. How do you -- I mean, whether it's just keeping that down as you scale or whichever way you sort of think about it, how quickly do you think you can start to have an impact?

So we don't know. So -- but the direction of travel is firmly towards robots moving things around rather than people moving things around. It's just as simple as that. Cost walk into businesses on legs, those legs are getting more expensive and less flexible. The tech is getting better and the cost of it is getting cheaper. And that inflection we've reached that inflection point. So that is firmly the direction of travel. It wouldn't surprise me in the short term if that's more of a cost actually than a saving as we learn how to scale that. But it's just uncertain at the minute. But there's nothing massive or material in it. It's much more of a direction of travel.

Caroline Gulliver from Equity Development. I just wanted to pick up on something you just mentioned around your customer data lake effectively. Now you've got your Five Star membership, you're obviously collecting quite a lot of good data and in particular, that cross purchase from the washing machine to the TV, et cetera, to the computer and mobile. When you're looking at your marketing, how much personalized marketing are you doing now? And how are you seeing that sort of people buying at what point in the journey do they start to buy other categories? And could you just think back to the fact that you talked about SD&A and audiovisual growing faster than MDA. What's particularly doing well? Have you seen a pickup in TVs ahead of the World Cup, that kind of thing? Are there any particular categories you would call out where you feel like you're particularly winning share?