# AO World a year of change and transition towards One AO

- Link: https://www.directorstalkinterviews.com/ao-world-a-year-of-change-and-transition-towards-one-ao/412842045
- Published: 2020-07-14T07:17:43+01:00
- Author: Giles Arbor

**AO World plc** (LON:AO), a leading European online electrical retailer, today 
announced its audited financial results for the year ended 31 March 2020 †.

> **John Roberts, AO Founder and Chief Executive Officer, said:**
> “I’m pleased that we have made substantial progress, closing the year in good 
> shape after getting AO fit and focused on the future. Covid-19 has accelerated
> a shift in customer behaviour towards online shopping and we now need to cement
> that change.
> “In short, we must drive forward so those customers never look back.
> “At the start of the financial year, we went back to basics, bringing clarity 
> and leadership to the fundamentals of our business. AO’s model and vertically 
> integrated ecosystem is a structural advantage when properly leveraged. The whole
> business is now fixed on delighting our customers, driving innovation and creating
> growth. As a result, we made significant headway against our four priorities of
> double digit MDA growth in the UK, becoming cash generative13 as a group, accelerating
> our journey to profitability in Germany and operating as One AO.’
> “That progress ensured that we were in the best possible shape when Covid-19 hit
> in the final weeks of the financial year. Investing to make sure our operations
> were safe so that our customers and people were protected allowed AO to be a proud
> lifeline for customers during lockdown. Many experienced AO for the first time
> and were delighted with what they found.
> “AO now has the opportunity to become a new habit that lasts – by delivering brilliant
> service for customers. In other words, turning those lockdown learnings into lifelong
> change.
> “This has not been an easy journey and I’m grateful both to our teams across the
> UK and Germany for their exceptional work during an extraordinary time and also
> to our partners for their continued support.
> “Looking ahead, there is a huge amount of uncertainty but the values and principles
> that guide our thinking have positioned us well for the opportunities and challenges
> that are to come.”

**Financial Highlights**1

· Strong revenue growth with total revenue for the period increasing 15.9% to £1,046.2m(
2019: £902.5m)

 * Total UK2 revenue up 20.3% to £901.6m (2019: £749.3m), (up 8.2% on a like for
   like basis excluding revenues from our Mobile Phones Direct3 business (“MPD”))
 * Europe4 revenue for the period decreased by 4.6% to €165.4m (2019: €173.3m)5 (
   decreased 5.6% in GBP to £144.5m, 2019: £153.2m) due to the closure of AO.nl,
   our Netherlands website, in the third quarter as we re-aligned our European operating
   model with our UK policy

· Increase in Group Adjusted EBITDA6 of 53.6% to £19.6m (2019: £12.8m)

 * UK Adjusted EBITDA improved by 7.0% to £40.8m (2019: £38.1m)
 * Europe Adjusted EBITDA losses decrease to €24.2m (2019: €27.9m) (in GBP 2020:
   £21.1m loss; 2019: £25.3m loss) with actions implemented during the period starting
   to benefit performance during in the second half

· Statutory Group operating losses reduced to £3.8m (2019: £13.0m loss)

· As at 31 March 2020:

 * Net debt 7 was £23.4m (31 March 2019: net debt of £9.0m)
 * Significant liquidity headroom of £63.6m as at 31 March 2020 including available
   funds and undrawn Revolving Credit Facility (RCF), with a new £80m RCF facility
   which matures in April 2023 entered into shortly post year-end

· Basic earnings per share of 0.38p (2019: 4.00p loss), which includes foreign exchange
gains from inter-group funding. Reversing such foreign exchange gains gives an adjusted
loss per share of 0.91p (2019: 3.36p loss).8

**Strategic and Operational Highlights**

 *  Commenced roll out of One AO model across the Group to create a centralised 
   approach to scale the businesses in our eco-system

 * Net Promoter Scores9 maintained at consistently high level of over 80 in the 
   UK and Germany reflecting continued high levels of customer satisfaction

 * Strong progress against our four immediate strategic priorities with a renewed
   focus on evolving the customer proposition:

**UK Growth**

 * UK MDA growth of 9.1% YoY versus a market that remained broadly flat over the
   year; increasing to growth of 19.9% in final quarter of FY20 against a market
   that saw an increase of 3.2%12
 * UK product revenue grew by 10.3% during FY20
 * Continued to invest in the customer journey and improve in the breadth and usability
   of our overall retail experience including the launch of AO Finance to offer 
   customers additional purchasing flexibility, increased payment methods and move
   to more tactical marketing with the use of social media and influencers
 * Developed an AO branded mobile proposition and commenced building the foundations
   for the next stage of growth for our mobile business

**Journey to profitability in Germany**

 * Full review of Europe business model undertaken at start of FY20
 * Focused resources and energy on German business, resulted in the closure of our
   Netherlands business by 31 March 2020 at a cost of £2.5m
 * Alignment with UK pricing model reduced lower quality price-driven revenue, with
   benefit of other actions beginning to flow though in the second half of FY20
 * Improved relationships with suppliers, gaining a renewed commitment to AO as 
   a quality online retailer able to leverage its UK customer proposition of best
   journey, content, service and price into Germany
 * Increased confidence in establishing a profitable German business through more
   efficient customer traffic acquisition and the centralisation into the UK of 
   core disciplines including eCommerce and marketing
 * Continue to expect to achieve positive EBITDA in Germany on revenue of c.€250m;
   we are very encouraged by our current trajectory of revenue growth and profitability
   improvements and will update further at our half year results in November

**Leverage our eco-system**

 * Continued development of eco-system to compound the benefits within the AO group
 * Leveraging our capabilities externally, added new third-party logistics clients
   including Aldi and Simba
 * Plastics refining facility built, operational and in final phase of testing and
   commissioning providing the capability to sort waste plastics from our fridge
   plants and creating an additional sustainable revenue stream

**Cash & financing**

 * Cash outflow reduced during the year; the Group was cash generative on an Adjusted
   EBITDA less debt repayment, interest, taxes and monthly share of annualised capex
   on a run rate basis by the end of the reporting period

**COVID-19 and post-period end**

During the final weeks of our reporting period the implications of Covid-19 became
apparent and began to impact the business. The measures introduced by the Governments
in both the UK and Germany to deal with the outbreak of Covid-19 led to an immediate
change in shopping practices and habits. This significantly increased demand in 
our core retail business at the same time as presenting us with some challenges 
and increased costs particularly in recycling and our logistics operations. We also
experienced some challenges in our supply chain which we worked through with our
manufacturer partners. Our actions were taken swiftly and in line with Government
guidance, which we continue to follow.

**Safety of our people and our customers:**

This remains our top priority. We are continually adapting the services we offer
to comply with current guidance on social distancing and ensuring safety measures
to protect our people in front line operational roles. At the start of lockdown 
we prioritised services to the most vulnerable members of society and donated essential
products to those in need. As a technology-led business we were able to quickly 
mobilise approximately 1,500 of our people to work from home with minimal impact
on the operation of our business.

**Impact on trading:**

The measures implemented by Governments created a unique set of circumstances from
the end of March through to the beginning of June. The products we sell are an essential
part of people’s lives and the electricals market migrated to nearly 100% online
overnight.

We therefore experienced strong demand and made significant market share gains across
many of our key categories from the start of lockdown on 23 March 2020, the impact
of which saw sales above our expectations and an improvement to our working capital.
We worked hard with our supply partners to maintain the availability of our products
for our customers and we will continue to look for win-win collaborative solutions
to meet demand.

While demand remains strong, the recent reopening of the high street means that 
customers now have more options to purchase their appliances offline from stores.
Although customers are able to return to bricks and mortar stores, initial data 
shows that since stores have reopened the online market has in fact continued to
grow year on year.12

**Operational impact and business resilience:**

Increased consumer demand and new Government guidelines have presented us with additional
operational and ongoing challenges. The changes made in our logistics operations
to accommodate new ways of working has led to some continued inefficiencies and 
cost increases, largely in increased staff costs. Our distribution network remained
open during the full lockdown period. However, as we concentrated on the delivery
of essential electrical products, we paused the majority of our installation services
and the logistics services we provide to our third-party clients. The easing of 
social distancing measures in recent weeks means we are now offering most of these
services again in line with guidelines.

We are pleased that despite these challenges we continued to maintain our high standards
of customer service, achieving a record NPS high in the UK during the first quarter
of our new financial year.

The decision by councils to close household waste and recycling centres together
with a reduced collection from AO’s customers, presented supply challenges in our
recycling plants, materially reducing operations for a six week period. Our WEEE11
recycling facility is now open with increased costs from social distancing measures
and resultant capacity constraints, whilst also suffering from a depressed market
for output materials. Although we expect there to be some limited recovery, we expect
to see volatility in the short term.

During FY20 our B2B business was successful in winning a number of commitments with
housebuilders. The conversion of this pipeline has now been delayed as a result 
of sites closing during lockdown. We remain excited by the opportunity for this 
business unit to support this industry as it reopens and assesses its supply chain.

We are particularly pleased with how the financial services and insurance products
business has operated during Covid-19, adapting from working in a sales environment
to home working with no noticeable impact in performance. During the first few weeks
of lockdown measures we experienced a small spike in the cancellation rate of the
AO Care product. However, we have since seen a lower level of cancellations as we
believe our improved product offered through a structured regulated sales process
provides customers with additional security in times of uncertainty. We are mindful
of the potential increased risk in the rate of cancellations against a challenging
economic backdrop.

**Financial stability:**

As reported above, we now have a new £80m RCF in place which matures in April 2023
and which replaces our previous £60m RCF and £20m term loan. As anticipated net 
debt (excluding right of use lease liabilities under IFRS 16) increased by £14.3m
in the period to £23.4m as a result of investment in the Group’s infrastructure 
and a relatively modest outflow of working capital. Including lease liabilities 
arising from the adoption of IFRS 16, net debt was £99.1m (2019: £83.5m).

Our strategy is to be cash generative (on a Group Adjusted EBITDA less debt repayment,
interest, taxes and monthly share of annualised capex) on a run rate basis going
forward. With our liquidity headroom of £63.6m as at 31 March 2020 including Revolving
Credit Facility and Group cash resources, we are able to continue to grow but remain
vigilant given economic uncertainty.

**Outlook for 2020/21**

With the closing of physical retail outlets as a result of the implementation of
the Government’s lockdown measures, the market for electrical products moved to 
nearly 100% online for that period. This resulted in an increase in our revenue 
above our expectations and has led to improvements in working capital. We continue
to expect to achieve positive EBITDA in Germany on revenues of c.€250m; we are very
encouraged by our current trajectory of revenue growth and profitability improvements
and will update further at our half year results in November.

Although around 70% of electrical purchases are replacement in nature, a fall in
consumer confidence may lead to a delay in the purchase of big-ticket items. There
may also be a significant fall in GDP in both the UK and Germany and the level of
UK housing transactions, to which our performance is in part linked, may also decline
as a result of restrictions in the mortgage market. There is also an additional 
level of uncertainty over a hard Brexit in December.

Although it is difficult to predict with certainty, we believe this crisis has had
a seismic impact on retail and that many shoppers will have been permanently converted
to online shopping. The forced migration to online has presented AO with an opportunity
to impress a new customer demographic and convert them to the AO Way as they experience
a better way of shopping for electrical products which should continue to drive 
sales growth through repeat and recommendation purchases.

The strength of AO’s customer proposition, infrastructure and ecosystem, underpinned
by our culture and strong balance sheet puts us in a good position to ensure we 
are prepared for the times ahead.

**Webcast details**

A pre-recording webcast of our results presentation hosted by Geoff Cooper, John
Roberts and Mark Higgins for analysts and investors will be available via the following
link AO World FY20 Results Webcast from 7am (BST) today, 14 July 2020. A live Q&
A session will also be held today at 9am (BST). Please register to join the Q&A 
session at AO World FY20 Q&A. Both the webcast and a playback of the Q&A session
will be available on AO’s corporate website at ao-world.com10 later today.

Notes:

^(†) Unless otherwise disclosed all figures stated throughout this statement are
after the adoption of IFRS 16. Comparative figures have therefore been restated.

^(1)The highlights are for the 12 month period ended 31 March 2020 and the comparative
2019 period. References to FY20 are defined as the twelve months to 31 March 2020.
Certain financial data have been rounded.  As a result of this rounding, the totals
of data presented in this document may vary slightly from the actual arithmetic 
totals of such data.

^(2 )UK is defined by the Group as entities operating within the United Kingdom.(
It excludes AO Deutschland Limited which is a company registered in England but 
operates in Germany and therefore is included in the Europe segment).^( )

^(3)Mobile Phones Direct Limited (acquired in December 2018) has been renamed AO
Mobile Limited. This entity includes the MobilePhonesDirect brand.

^(4)^( )Europe is defined by the Group as entities operating within the European
Union but excluding the UK.

^(5 )Where Euro amounts are disclosed they represent the actual Euro revenue, cost
or loss for the period. Providing this information eliminates the impact of foreign
exchange movements.

^(6 )Adjusted EBITDA is defined by the Group as profit/ (loss) before tax, depreciation,
amortisation, profit on disposal of fixed assets net finance income, and adjusting
items. Adjusting items are set out in the paragraph below entitled “Alternative 
Performance Measures”

^(7 )Net debt is defined by the Group as cash less borrowings (excluding Lease Liabilities
recognised on the adoption of IFRS 16) less overdrafts as per the consolidated statement
of financial position.

^(8 )Please refer to the earnings per share paragraph later in this announcement
for a reconciliation.

^(9 )NPS is defined by the Group as Net Promoter Score which is an industry measure
of customer loyalty and satisfaction.

^(10)The content of the ao.com website should not be considered to form a part of
or be incorporated into this announcement.

^(11)WEEE means waste electrical and electronic equipment. MDA means Major Domestic
Appliances.

^(12) Source: GfK

^(13) Cash generative is defined as on a Group Adjusted EBITDA less debt repayment,
interest, taxes and monthly share of annualised capex

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