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Edited Transcript of AO.L earnings conference call or presentation 19-Nov-19 9:00am GMT

Half Year 2020 AO World PLC Earnings Call

London Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of AO World PLC earnings conference call or presentation Tuesday, November 19, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey I. Cooper

AO World plc - Non-Executive Chairman

* John Roberts

AO World plc - Founder, CEO & Executive Director

* Mark Higgins

AO World plc - Group CFO & Executive Director

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Conference Call Participants

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* Charles Allen

Bloomberg Intelligence - Senior Consumer Analyst

* Georgina Sarah Johanan

JP Morgan Chase & Co, Research Division - Analyst

* Jason Streets

Hardman & Co. - Equity Analyst

* Simon Bowler

Numis Securities Limited, Research Division - Analyst

* Tony Shiret

Whitman Howard Limited, Research Division - UK General Retail Analyst

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Presentation

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Geoffrey I. Cooper, AO World plc - Non-Executive Chairman [1]

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Okay. Well, good morning, everyone, and good morning to everyone listening over the web. I think we've got a select audience here, and I think you know everyone. I'm Geoff Cooper, Chairman. We've got John Roberts, Chief Executive; Mark Higgins, CFO, who'll be picking up in a moment.

I'm just going to say a few words of introduction before we go on. Today represents probably the first opportunity for John having reassumed the reins as chief executive to give you the conclusions from his fundamental review of the business. Upon arrival, John looked at every single aspect of the business, reviewed what we were doing, how we were doing it. No change of strategy for us, but he has supercharged our execution of strategy. His fundamental review has really supercharged the activity in the business. We've now got a sense of energy and a sense of pace in the business. And importantly, we've grasped, gripped some very important decisions, some of which you'll hear about this morning in the presentation from John, and also has renewed our focus on cash, obviously, for growing business, a key concern given the cash dynamics of growth. And again, John will talk a bit about that a bit later on.

So the business is in good shape. The people in the business have certainly been reenergized over the last 6 months of John's review. You'll hear a bit about that later on. I'm going to hand over first to Mark who's going to go through the financials, and then John will pick up. Thanks.

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Mark Higgins, AO World plc - Group CFO & Executive Director [2]

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Thank you, Geoff. Good morning, everyone. Thanks for taking time to come and see us this morning. So if I just go through the key financial highlights. So our U.K. business grew by just over 20%. And excluding the acquisition last year of MPD, that's 4.5% on a like-for-like basis. Our European revenue, I think, at full year, we talked about our expectations broadly being flat for revenue growth in that business this year and the 3.4% down, very much, we think, in line with that previous guidance.

Our pre-IFRS 16 adjusted EBITDA will continue to use that as our sort of headline measure for this year as that's the -- consistent with the way the analysts have written reports but converting that probably next year to be a baseline of post-IFRS 16. But roughly, our U.K. profits are up GBP 1 million year-on-year. European losses then down or worse by GBP 2 million compared to the same period last year. And the reason for that is, as we've adjusted our revenue growth, the business have been building its cost base to do more revenue than we achieved through the period, and so that's reflected in that increased losses year-on-year. But we've taken some steps to address that, and John will talk more fully about that in his section.

So on a post-IFRS 16 basis that we would use as we move into next year, EBITDA increased to GBP 1 million for the overall group. And at the end of the period, we had liquidity headroom of just over GBP 80 million.

Okay. So in terms of those revenue increases then. So the U.K. business was driven by increases in product revenue in the underlying numbers and particularly positive growth on some of the marketplace channels that we use in the U.K. and then, obviously, the acquisition of MPD adding to that.

So our European revenue fell very slightly but materially flat from our perspective. And this is as we rebase the methods that we use for driving traffic and converting that traffic on the site. And so this is less of a focus on -- or in fact, no longer price discounting against the market but actually driving traffic through the proven methods of traffic acquisition that we have from the U.K. and converting that on the website by delivering a great retail experience to customers. However, that is an area where there's lots more for us to be able to do. So group revenue then at headline level increased by 16.3% year-on-year.

In our gross margin then. MPD, or AO Mobile now as we have renamed it, has a dilutive effect on gross margin. On a like-for-like basis, we're flat at just over 21% for the underlying pre-MPD business compared to the same period last year. And whilst we've grown our MDA revenues in the U.K., so 5% growth in MDA in the U.K. versus a market down about 3.5%, we have maintained our MDA margin through that period. So not being discounting to drive that category, which is very encouraging for us.

In Europe then, we've seen an improvement in our gross margin from the second half of last year, so up to a 0.3% loss. And this has been a real area of focus for the business. So as we've engaged with the manufacturers and gone through some of the changes that John will come on to over the last 6 months, we expect this to improve further as we head into the new calendar year. And so our expectation is from the 1st of January, not just to be gross margin positive in our German business but actually to be contribution positive to overheads, so including the marketing spend, too. And we also expect to drive further efficiencies to help us achieve that in the logistics business, which will improve that contribution. So the discussions we've had with suppliers is hugely positive, very engaged with us being continuing in the German territory, and John will come on to some of those discussions that he's had.

As we move on then to our SG&A cost bucket, you'll see an extra line of disclosure in here on R&D costs, which has come out of other admin. We'll be making this disclosure going forward. And as we've refocused the business, we expect to see an increased investment in R&D. And so what that means is improving the proposition on the website, making that a better retail journey for our customers and probably less focused in the marketing line, as we've seen previously. And obviously, we've talked about the fact that we haven't continued with TV advertising this year. And so you'll see in marketing, for example, we're down to 2.3% of marketing costs compared to 3.7% in the same period last time.

Our investments in the U.K. outbases has continued, and so there is a slight uptick in warehousing costs, and there's a corresponding credit for that then in gross margin.

In Europe then, we've taken, at the very end of the period, in our German business, some actions to address some of our other admin costs, and so we would expect to start to see leverage coming through that line as we go forward. Our warehousing costs have increased. And again, this is similar to the strategy in the U.K. that we will continue to increase the outbases that we have, which has an impact, as we grow, a positive impact into gross margin. The increase in advertising costs, though, reflects that strategy to spend more, to drive more traffic to the website and then to convert that through the traditional channel. So we will expect to see the 3.3% in H2 last year. We will expect to see that number being a bit higher going forward, but we'll be recovering at least that through not discounting in the gross margin line.

So from an EBITDA perspective, the U.K. we've spoken about being about GBP 1 million up compared to the same period last year. Europe, for the reasons we've discussed, GBP 2 million down. And so for the group, that's GBP 1 million down on the same period last year.

So from a cash flow perspective, so GBP 5.7 million of CapEx in the first half. The majority of that relates to our plastics recycling site, which is now live. And we are in the commissioning phase of really getting the production of that plant up to speed at the moment, but all good so far, and so that CapEx in the first half of the year. As we move into the second half, we'd expect CapEx to be fairly light, so GBP 1 million or so of replacement CapEx. But the significant spend for this year, done. Financing activities represented the loans and finance lease repayments.

The one thing really to talk about then is credit insurers. And so we have seen from our supplier partners that the credit insurers have taken some action during the first half of the year and have seen credit limits either removed or significantly reduced in some cases. Now we think we've managed through this period quite well and are very pleased with the support that we've received from our manufacturer partners in that they have maintained the trading terms in most cases and certainly with all the larger ones that we have with them. So in our view, that's taken some risk of credit in transaction off the table as we move through that period. As we've said, significant liquidity headroom at the end of the period and the movement from full year largely being consistent with the EBITDA loss in the period.

So we've announced this morning the decision to close the Netherlands and to understand the impact of that going forward. So that will be discontinued operations in our full year accounts. Last year, those numbers for the full year were circa EUR 25 million of revenue and EUR 6 million of EBITDA losses. We expect the closure costs to be circa EUR 3 million and effective by the end of the financial year. The decision is still technically pending on some legal consultations that we will need to go through in the Netherlands, but very much, those are our expectations. And we are very grateful to the Netherlands team who have embraced the AO culture for everything that they've done over the last 4 years.

So in terms of the financial outlook, the U.K. is now entering our busiest trading period, so Black Friday or November as it now is in reality. Our European business still going through that period of change, and we expect broadly flat revenue for the full year in our European business as we continue to work through those changes of driving traffic. But we do expect to see both leverage through our other admin costs there and an improvement in gross margin from January.

I've briefly spoken about CapEx that largely the rest of the year will be replacement. And from an overall group perspective, our ambition is to be operationally cash generative by the end of the current financial year and from that point ongoing. And what we mean by this is that we expect our EBITDA, less interest, less repayment of debt, taxes and CapEx to be positive on a monthly basis going forward from April.

We expect our German business to be generating positive contribution to overheads from the 1st of January. So growth becomes good in that business rather than growth becoming more expensive as it is today. And for the full year, we expect to be within the range of current analysts' expectations.

So thank you very much. And with that, I'll hand over to John.

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John Roberts, AO World plc - Founder, CEO & Executive Director [3]

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Thanks, Mark. Good morning. So I wanted to start with a recap of what I said in June. And so I said I was going to conduct a review of the business around 4 key areas: so the first one being growth mindset, the second, U.K. profitable growth; accelerating our profitability in Europe; and leveraging our ecosystem for our structural advantage. So for consistency, I'm just going to run through each one of those in turn.

So if we think about growth mindset, well, the most important thing is that this is the foundation for everything else. The business has firmly got its mojo back. We're once again a customer-obsessed business, driving innovation, change and disruption. We're starting to get real traction on the initiatives that we've launched through a period of, frankly, real transition. We're no longer operating in silos, and we're back to thinking as a one AO business, which is the only way that we will fix our European business and grow our U.K. business continually profitably.

We've refocused our lens on cash, as Mark has said, as a key metric in decision-making, and we've made significant progress on that, too. So as Mark said, our current view is that the group will be cash generative as we enter the next financial year, and we'll have achieved that while navigating the significant impact that Mark talked about with the credit insurers and taken the load of that risk off the table.

So in the U.K., the foundation of our profitable U.K. growth has to be customer obsession. So I'm delighted to report that our world-leading execution of service and proposition through the whole period of change has been completely unchanged. We continue to be one of only a handful of retailers globally that achieve a 5-star Trustpilot rating with over 100,000 reviews, and our NPS ratings in the period remain world-class.

Our U.K. product revenue has grown at 6.8%. As we promised that we would refocus on our MDA category, that is back to growth at 5.5% in a market that is down year-on-year, and that is extremely tough. And so that's well on the way to our ambition to be a double-digit MDA growth business by the time we get into the new financial year. And as we move forward, I expect our growth to be driven much more by investment in proposition and customer journey and storytelling rather than TV advertising.

We've launched in the period the AO Finance offer, which is a leading online revolving credit account for customers to make products more affordable. To be clear, it is not our ambition in that to start making lots of money out of the financing of those products. We see that as a mechanism to sell more products. We're already outperforming our previous proposition, and we believe that there's still good upside for us into the second half of the next financial year.

And although it's early days for AO Mobile, we remain really excited by the potential in the years ahead that the seismic change that will come with a 5G rollout being on the horizon next year. And our recently inked agreement with Vodafone, we believe, is a good sign of the network confidence of our potential in that market. But it is early days, and there's lots more to come here next year.

Key to our success is going to be our ability to curate ranges better to define customer demand into the right products and to be able to tell product stories brilliantly. Over 90% of customer journeys for product discovery now begin online. So the opportunity for us to get better at those things is really clear. And I've recently been doing the whites of the eyes flying around the world to actually personally physically go and see our brand partners, as Mark talked about, from Chicago with Whirlpool to Qingdao in China or Seoul for Samsung and LG or Bosch Siemens in Munich. And I'm delighted to report that they all see AO as the leading global pure play in our space. They all recognize that the direction of travel is online for customers and that the importance of telling product stories is only increasing. And through a period where I think there was a definite period where a lot of brands sort of hoped that the Internet would go away, they are now truly willing us to succeed, and they are demonstrating that support in many ways. I think we've still got some things to fix in our U.K. business. Our tech infrastructure is a key one because it's a huge enabler, and frankly, pretty much everything that we want to do for customers leads back to our capability within tech. And so going forward, we're going to be moving from more of a monolithic platform to a microservices API-driven architecture, and that's going to require some further investment. But it's not going to be a big bang, and it won't take forever, and we're well on with journey, but it will be a critical process over the next year or 2 to get us properly fit for the future.

And this isn't live on what I'm going to show you now, but I thought it was a very good insight into where we're going and the things that we've been investing in. So a great example that pulls all this together is our new chatbot, which we hope to have the first version live pre-Christmas. But over time, it will become the best and most scalable salesperson that you could possibly imagine, with answers delivered intuitively and critically instantly, leveraging AI and machine learning from the lessons that we teach it. And as you'll see from the screen demo that I'm going to put up in a second, it's just a quick example of the speed of the help and functionality that we can bring to customers. And so it's a great customer experience that critically is fully internationally scalable as well.

(presentation)

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John Roberts, AO World plc - Founder, CEO & Executive Director [4]

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So the only delay is to give you the time to read it. Everything else is absolutely instant as you go through. Whatever question you want to ask this, ultimately, we have to teach it either prescriptively what the answer is, and then you can imagine across millions of questions, or we teach it where to go and get the answer from in an absolute real-time environment. And so the other key point about this is the change that we've got of going from a desktop screen to mobile, and so the curation behind the scenes of getting the customer to the right product for them rather than them scrolling through hundreds of different products is going to become ever more critical. For round numbers, about 60% of transactions are now done on mobile. That was only imaginable only 3 or 4 years ago. When you think about how you can translate this into voice is another great example of where technology is changing, and we've got to be at the forefront of how we help to get customers to the right product. So I just thought that chatbot was a good example to bring to life.

So on to Europe. As Mark said, we made the decision last night to close our business in the Netherlands. And to be clear, this is simply because we do not have the management bandwidth currently to focus on the territory and support the actions required. We're currently losing about GBP 6 million a year, and our cost to close it is around GBP 3 million. It has not been an easy decision, but it is the right decision. The team in the Netherlands are -- I've been shocked this morning by this decision. They embody the AO culture in spades. And this -- one of the most difficult elements of this is it's not to say that this can't work, but just at the minute, we do not have the bandwidth to do everything. So I'd like to thank all the AOers in the Netherlands for their commitment to the business.

In Germany, we have real conviction that by applying a one AO approach and the lessons that we have learned in the U.K., we will have a great business. And once we've got that business profitable, we can look again at further international expansion by applying those lessons that have made us win in Germany and the U.K. rather than reinventing for each territory going forward.

So in my normal reasonably simplistic way, I thought I'd just break this down into what are our relatively few focused, but very key questions. So number one, can we drive the traffic into the website at the right cost? Number two, can we present the customer with a proposition that converts that traffic into a sale? Number three, can we get access to buy the product, and can we buy the product at the right price to be able to make the right gross margin? Number four, can we deliver the product at the right cost? And then out of all that, can we make a contribution and run an overhead to a level that allows us to make a profit at a run rate of sales that's in the region of about GBP 250 million to make us profitable?

So to take them in turn, traffic. What we're going to be doing is we're going to apply the same principles and the same algorithms that we have in the U.K. for our Google traffic and our social media traffic on how -- and how to manage marketplaces, and we believe the answer to the question is yes. The short-term cost will be higher as we pay for a higher percentage of the traffic than our mix in the U.K., but that will reduce over time as it did in the U.K. But critically, it is a manageable cost from the get-go of the implementation of proven U.K. expertise and systems. So traffic, tick.

Number two, proposition. So hidden behind the numbers, we look broadly flat, a couple of percent down, but the mix of that European business is completely different. So we've completely changed the shape of the business in the last few months to stop leading everything on price and driving the market down and to shift our focus to great ranging, merchandising, product content and getting customers to the right product. There's a road map for this, and there's a lot more stock to come, but we are really encouraged by the early results on what we've achieved. So we're very comfortable on proposition.

Margin. So can we get access to the products and buy it at the right price? I believe this is the single biggest question because I think the answer to most of the other questions are almost totally within our control. So will manufacturers sell us the product we want to buy at the right price, and that really was the -- for me to go very personally and have those conversations and those whites of the eyes meetings across the globe with the leaders of those businesses. This was chief exec level at all those businesses. And so if the answer to that question was no, so for example, if you think about Germany where Bosch Siemens have about a 45% market share, if their answer is no and they want to suffocate our business, now is the time to tell us because we can close it. And that's really clear. And those were the very straight conversations that we had. But whilst it would have been painful, it would have been a simple decision. So I'm delighted to report that the answer is an emphatic yes. They are already delivering incremental gains, and there will be a step change because they organize these things on an annual basis, and there'll be a step change in January for the new calendar year.

So can we deliver at the right cost? Well, this is a very simple answer, and the answer is yes. There's 2 key drivers, if you'll forgive the pun, but there's a lot of self-help that we can do, and we've just got to make sure that we get the right infrastructure in the right places with the right systems exactly as we do in the U.K., and that transformation will be largely complete by the end of this financial year.

From there, it's really just a question of volume through that network, but we -- I think about 60% of the win is basic self-help stuff. So can we operate at the right overhead? Well, the simple answer here is yes as well. And we've already taken the majority of the decisions to rightsize the overhead for the business to be profitable on all the previous dynamics with sales in the region of about GBP 250 million, or put another way, within MDA, about 3% or 4% of market share compared to our 18% to 19% in the U.K.

So for the avoidance of doubt, this process has taken longer to get where we are than we would have liked. We have had to change a lot more of the people than we thought we would. But we now believe that with a new management team, a new trading team and key marketing functions to drive that traffic largely recentralized back to the U.K., we've largely completed the people and the principles section of that work, and what we now need to do is just drive it all through. We have, though, as I would hope that you would expect that we would, done the work to understand what the impact is if we are wrong in our conviction. And if we were, we would know by the summer, and the closure cost would not exceed GBP 20 million. But for the avoidance of any doubt, whatsoever, that is not our plan. We have real conviction, deep conviction on our ability to make Germany a profitable platform from which then to grow internationally again in time. With the amount that we've got going on over there, at this stage, it's difficult to know exactly on the timing that we would expect to achieve in the region of GBP 250 million of sales. And so I'm going to update on that at full year once we've got more data and more proof points on the actions that we're taking. But rest assured, and hopefully, it comes through in terms of the energy and the momentum that we're going about things, we will be going as fast as we can.

If you get philosophical and take a step back, and there have been moments where we've had to do this, and accepting that it's taken longer and costs more than we originally thought, we will achieve a profitable business with a national logistics coverage and structural advantage and have a platform from which to grow internationally for a total accumulated losses number of ballpark in the region of about GBP 150 million, so 0.6x sales. And so that seems like good value to me for the potential that, that business releases and gives us to grow from.

So leveraging the ecosystem. When we operate our business with a one AO approach, we have significant structural advantage. Our core disciplines in one area really do help us in others. One hand really does watch the other, and you'll be glad to know I'm not going to walk you through the whole list of all the opportunities we've got across the ecosystem, but I wanted to just pull out 2 examples. The first is our housebuilder business. It didn't exist 6 months ago. So in that time, we've recruited a team of key people who know the market and the people in it, and we've transformed the proposition on offer by leveraging the scale and capability that we have in our logistics business. We've leveraged the support of the retail supplier relationships that we've got, and we've gained access to all the ranges sold that we need to in that market. And as a result of that and some clear thinking and decision-making, only 12 weeks ago, we've launched a brand-new delivery proposition nationwide. So the next-day delivery nationwide for any plot on any site is now available to the builders. At the same time as delivering it, we'll also install it for the same price that they used to wait weeks for from the traditional market. And actually, it's not really that difficult a thing for us to do because we already have the scale. It's an industry that doesn't change very quickly, and it certainly hasn't been one that's been subject to a ton of disruption. So I'm delighted to report that the offer is so strong that in only 12 weeks of having put that proposition into the market, we have already won over 3,000 plots with lots more to come.

The second example is our third-party logistics offering. We haven't really taken new clients in for a few years, and we've progressively lost a number. Well, these are important to us, not just because they're profitable through leveraging our existing infrastructure but because they compound the scale which allows us to accelerate our journey to getting depots closer and closer to customers, as Mark mentioned. We now have 19, and this gives us even more capability to further then drive our own retail proposition. Again, it's another industry that doesn't change quickly. So to achieve contracts signed from initial discussions and have the business live and deliveries being made but brands like Aldi and Costco and Simba and Cotswold furniture all in the period is a testament to the make-it-happen growth mindset that we're really living right across the business.

So it's been a busy 6 months, I think it's fair to say. And we've got a ton of stuff done, and we've got a load of stuff that's still ongoing. The market remains tough, and we truly long for some macroeconomic certainty for our customers as, I think, just about every other business in the U.K. does. But we're looking ahead optimistically, and we believe that we will exit this year with some of the tailwinds from the self-help and tough decisions that we've been taking in the first half that really haven't translated yet through really into results. I'd like to thank everyone at AO for their passion and patience. I'd like to thank our trading partners for their belief and trust and our shareholders, well, frankly, for holding their nerve. AO is a great business with a bright future, and we look forward to delivering on that in the second half with a real lens on how we start to pick up momentum going through into the next financial year. For now, as Mark said, we have to deliver our peak trading, and we've never been best setup for it. So Black Friday of November has started well, which is a relief. And certainly, with the amount of consumer uncertainty that's going on there, we're very pleased with how that started.

With regard to investor communications, we have, again, as we did in June, recorded an interview that poses all the obvious questions to enable all investors, both current and hopefully potential, to be able to get the answers firsthand at their leisure, and that should be live now on the investor website. And I'm delighted that the feedback to this methodology of the way that we've gone about it has been so positive, and so we'll increasingly use that as a communication method going forward.

For now, though, I'd like to thank everybody. And does anybody have any questions?

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Questions and Answers

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Geoffrey I. Cooper, AO World plc - Non-Executive Chairman [1]

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We've got some microphones, which will come around. Can you announce yourself for people that are listening on the web, [Caroline]?

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Unidentified Analyst, [2]

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Can I start off with a couple of questions? You talked, John, about doing R&D and making some tech investments, particularly in the mobile and the customer journey. Could you talk a bit more about what you need to invest in to make the mobile offer really impressive in terms of the 60% people ordering and transacting online as opposed to not your AO Mobile offer?

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John Roberts, AO World plc - Founder, CEO & Executive Director [3]

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Yes, yes, yes. So there's no -- this is a journey. So this is not a complete replatforming going from A to B, and it's a journey that we have made a ton of progress on over the last 6 months. We will be increasing our investment in that area. And -- but we see that investment as a better investment than TV advertising. So I think it will be more of a redistribution of how we've thought in the past about marketing dollars and investing it over there. And I've sort of challenged Mark for how do we better call that out so that you guys can see what the mix of that is. In total -- so I don't have the exact answer, but I would say we will probably be investing circa GBP 5 million or GBP 6 million in terms of our IT capability, our tech capability to be able to realize the potential that comes from that.

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Unidentified Analyst, [4]

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My second question has to do with Germany and your conversations with suppliers and the fact that they are now going to give you better terms from January. I'm just interested, why now? Why not a year ago? Why -- what's changed? I mean we've talked about this journey in the past, but is it just sort of make or break? Or is there something else that's changed in the environment?

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John Roberts, AO World plc - Founder, CEO & Executive Director [5]

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Well, so the -- it's all part of a journey of building the trust. But in truth, we haven't helped ourselves. So what we have been doing for the last year or 2 is driving sales through driving price down ahead of where the market is at. That's not our model. Our model is that we are the cheapest price of any major competitor in the market, and we invest in customer journey and proposition. And we haven't. The German website is miles behind where the U.K. is. We have an amazing machine, multimedia machine in the U.K., creating content and telling product stories. And the theory is that you create that, you make that investment in the U.K. The products are the same. So you should do it and roll it, and we haven't been rolling it. So where we're seen as the global leading pure play of how to sell this category, we haven't been rolling those capabilities into our European business. So if you're a major brand, what is your reason to want to trade with us? Is it because we define demand with consumers? Is it because we explain all the billions of R&D that you invest in? Or is it because we discount the hell out of your product? So obviously, the former is of a lot more value to a brand, and that takes investment.

But I think it's fair to say that there has been a moment in time. I have gone and sat down with these guys and said, to be clear, I am not going to continue to invest in the losses if you're not going to support us. So there isn't now a moment in time where you either support us, and that'll be a continuing journey. It's not -- so we don't have 100% of absolutely everything. But we have made a sufficient step change that we will be -- in the new year, we will be contribution positive to overhead. So growth is good. If we weren't, we'd have closed it. And so that -- I've been very clear about that, that this isn't something that we're just going to keep piling all our U.K. -- we have a significantly profitable U.K. business, and it's a great growth story with a great ecosystem. It's a fantastic U.K. business. If that doesn't internationalize, that's based into that decision. And it's not to say that the Netherlands won't work either. The model will translate into other territories. The way it's sold is common. The products are common. All the migration of customers is to online, and we've got the best platform for it. And that's what made the Netherlands decision, in truth, so hard because it will work in time. But we just do not have the bandwidth, and it does not make any sense for us to burn another GBP 10 million in that market and just leave it there while we haven't got the time and the bandwidth to do it.

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Unidentified Analyst, [6]

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One final question for me on a different subject. You talked a bit about MDA and the focus and that picking up some good growth at MDA. Could you just talk a little bit about the highlights and challenges in the newer categories, particularly in the U.K. but maybe also in Germany?

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John Roberts, AO World plc - Founder, CEO & Executive Director [7]

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So the single biggest challenge is us becoming a broader electrical retailer. And so we will be investing over the next 6 to 12 months and thereafter in more specialist category teams to manage those categories. But from a tech point of view, different categories need explaining in different ways. So we need to -- before we do that, we've got to have the capability to do that. Otherwise, we'll be bringing people in to do things without the capability to do it. So psychologically, we need to move to having a better focus on the different categories.

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Geoffrey I. Cooper, AO World plc - Non-Executive Chairman [8]

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Okay. Thanks, [Caroline]. We go over the other side. There are some questions over there, and then we'll come down to John.

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Simon Bowler, Numis Securities Limited, Research Division - Analyst [9]

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It's Simon Bowler, Numis. Just 2, if I may, both kind of focused on Germany and to pick up kind of 2 of the points you mentioned. So you spoke around kind of reducing the cost of delivery. Around about 60% of that I think you said being kind of self-help. Can you just give us some examples of what that self-help looks like? And then on one of the other kind of key drivers you spoke to on the cost of acquiring traffic, can you talk to kind of what evidence you've seen either in the past few years or in the kind of past few months that kind of fuel your belief that, that can reach a similar level to where you see it in the U.K. currently?

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John Roberts, AO World plc - Founder, CEO & Executive Director [10]

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Yes. So on bands, the simple economics of bands are not complicated, and we were on a very big sizable fleet in the U.K., and we have deep experience of this that we have not translated into our European business. So the cost of a vehicle is the person driving it and the person sat next to him, in our case, and the fuel in the tank. So it's not much more complex than that. And then the third dynamic is how many deliveries do you divide those costs by. And so we have put some restrictions in. So we've constrained the proposition because there are -- there were certain areas in the hills of the center of Germany where we were offering a next-day delivery service, but in truth, we actively wanted them not to recommend us to their neighbors because the cost to go in there was crazy. So we still have national coverage, but in those areas, we've throttled those back to 2 days a week. And so very simple decisions, in truth.

And then in other areas, we've put some of the tech that we have in the basket in the U.K. around how we price for delivery to influence customer demand. So they're pretty obvious things, and then it's around things like the length of the day. And these are all lessons that we've learned. So how close can you get to the customer, how long before you make your first delivery, and so on and so on. And as I said -- and then another one is type of vehicle. So what's the payload on the vehicle? That's a very simple one. We've got the wrong vehicles. So -- and that -- but that's part of the evolution. So in the U.K., we've evolved the actual vehicle to increase our payload, but we haven't rolled that into our European business. So we'll be changing those vehicles going through Q1 next year.

So there's just a load of very practical steps that we know what to do, and so we're on with that. And we are already seeing -- so from 6 months ago, we are -- we're about 30% more efficient-ish broadly already, and we've got more on that to come.

In terms of the cost of traffic, so there's -- within that, there's different mixes of different types of traffic that we're driving in, and there's also different tests that we're doing. So we've sort of taken the restrictions away to say, right, okay, well, we'll just absolutely go for it and see what happens, so that we can get some data to say, does it work? And then what you end up doing, so you'll get the cost of x and then you'll say, right, this bit doesn't work, that bit doesn't work. Chisel that out. Chisel that out. So rather than build it slowly incrementally, what I've been getting to is, does it fundamentally work or not? So we -- I have absolutely 0 concerns we can drive the traffic to the website. We can see it there now.

The next stage is, can you convert that traffic? Because actually, your conversion rate is a bigger determinant of what you can pay for the traffic, if that makes sense. So the conversion will come again through a road map of was implementing lots of the things that we've done over the last 10 years in the U.K. to drive proposition. Mobile is another great example. The German mobile platform and customer journey is nowhere near what it is in the U.K. So therefore, we know what to do, but that isn't a 5-minute fix. That's a 6-, 9-, 12-month journey. I don't know exactly what the timing is because I don't know exactly what the impacts will be. I know what they were in the U.K. when we did all these things, but the market moves on. By full year, we'll have a really good indication of how fast that conversion rate is coming through.

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Geoffrey I. Cooper, AO World plc - Non-Executive Chairman [11]

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Okay. Can we come next to Georgina?

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [12]

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It's Georgina Johanan from JPMorgan. Just a quick one. On the U.K. core business, I think if you split out the acquisition, profitability went slightly backwards year-on-year, and I'm assuming that's investments in some of the new revenue streams and so on. But perhaps if you could just explain why the profitability went back year-on-year and what gives you the confidence because it sounds like you have strong confidence into the second half and into next year that profits will move forward again in the core business, please.

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John Roberts, AO World plc - Founder, CEO & Executive Director [13]

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Yes. For sure. Well, so one thing to call out in terms of why we are definitely going backwards from a financial point of view is the contribution that we get from insurance, so warrant -- selling extended warranty products, whatever language you want to use around it. So we've made the decision, which is now -- so again, in terms of Mark's point earlier on, taking risk off the table. We -- the direction of travel, we believe, from the FCA or whatever they call this week, is very much away from the product that we did sell.

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Mark Higgins, AO World plc - Group CFO & Executive Director [14]

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Which was a service-backed warranty.

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John Roberts, AO World plc - Founder, CEO & Executive Director [15]

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So that was -- yes. So -- but it gave us greater freedom around the way that we sold that product, and that's still a common product in the market, and some of our competitors still use that product. So we've been very proactive in how we think about that. And so we've made the transition to a fully -- full-insurance product. That is a less profitable product, so...

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [16]

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Do you expect to see some other challenges (inaudible)?

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John Roberts, AO World plc - Founder, CEO & Executive Director [17]

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Around that. So I would say -- so it'll be less profitable than it was last year, but it will be better than it was 4 or 5 months ago because you have to go through a whole reeducation process of how we go about selling that product. And as we learn how to sell the new products, the journey is a much lower conversion rate. We've largely completed that journey now, haven't we?

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [18]

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Tony Shiret from Whitman Howard. Just sort of slightly sort of spreads of questions. In terms of Germany, my impression was that when you first started looking into it, John, you sort of took the management fully into head office. And from what you said, there may be some local management now as well reappearing. Is that the case? Or is it still -- what are you doing?

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John Roberts, AO World plc - Founder, CEO & Executive Director [19]

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Yes. So working as one AO, so the plan is that we operate centrally for as much as we possibly can. We want to be as light touch as we can in the territory. But we've still got a business. It's still a sizable business over there. It still needs some day-to-day management. But if you look at, say, things like driving traffic, we want that largely to be done from the U.K. using the systems that we've got. There'll be pockets that we need to localize. And so we've got a couple of local people on the ground, but it's -- there's no big numbers in that. Again, from a logistical perspective, so the guys that -- so Dave and Stuart, who have the depth of U.K. experience around how we do logistics and all the dynamics around it, it's their plan for how we are running our German logistics. But the implementation on the ground is clearly done locally in the territory.

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [20]

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Okay. In terms of marketing, these sort of levels you're currently hitting about 2% in the U.K. and 6% in Europe, is that what we should expect for the sort of next phase, I mean, of the result?

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John Roberts, AO World plc - Founder, CEO & Executive Director [21]

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Yes. From a U.K. point of view, I don't have any current plans to reengage with TV advertising. I'm not a great believer in TV advertising unless there is a very specific reason to do it. But I want to invest much more in customer proposition and conversion of the traffic that we have on the website, and we want to tell stories. So we want -- our recycling business is an incredible story, and it's a huge differentiator that we've been pretty silent on from a customer perspective.

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [22]

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Yes. Just looking at the difference in those figures, you said -- you implied that the marketing in Europe was to drive traffic. And I suppose you could make the inference that the U.K. being much lower, you're trying to drive less new customer traffic and maybe going into more conversion of existing customers. Would that be a reasonable thing to think?

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John Roberts, AO World plc - Founder, CEO & Executive Director [23]

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The U.K. is just more mature, so we get a lot of direct traffic. We've got a much bigger brand awareness, penetration in the U.K., so we get -- which is sort of free traffic that we don't have in our European business.

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Mark Higgins, AO World plc - Group CFO & Executive Director [24]

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And the conversion rates between the 2 businesses are fundamentally different. So the U.K. converts much better than Europe does currently, which is why the cost, when you look at that sort of cost per customer, is quite different or one of the reasons why it's different.

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John Roberts, AO World plc - Founder, CEO & Executive Director [25]

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So if you were to double your conversion rate, you halve your advertising cost.

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Geoffrey I. Cooper, AO World plc - Non-Executive Chairman [26]

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Okay. Any more questions?

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Jason Streets, Hardman & Co. - Equity Analyst [27]

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It's Jason Streets from Hardman. I'm just wondering why Germany and not Netherlands? Why didn't you shut Germany rather than Netherlands? Is there some fundamental? Or this was just the scale?

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John Roberts, AO World plc - Founder, CEO & Executive Director [28]

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Well, so the strategy is that the German market is bigger than the U.K. market, so the opportunity is bigger. And logistically, our plan is to build a sizable, profitable business and then build out logistically from Germany. Whereas if you're in the Netherlands -- if you were to close Germany and move everything to the Netherlands, well, one, our warehouse is in Germany, so it's not quite as easy to move. But you're not going to -- you're not building anything out from the Netherlands. It's not a case that the Netherlands can't work. We just -- it is very sincere. We just do not have the management bandwidth. And if we spread ourselves too thin, we won't -- we risk failing it all. But we have absolute conviction on our German business. And that's not a hope. We can see the numbers. And I'm not being flippant about if you double conversion rate, so we've seen you can drive the traffic. This is about how -- now we're into how you convert that traffic, and that is a road map we know.

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Geoffrey I. Cooper, AO World plc - Non-Executive Chairman [29]

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Okay. Charles, I think, has a question.

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Charles Allen, Bloomberg Intelligence - Senior Consumer Analyst [30]

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Charles Allen from Bloomberg Intelligence. Just -- could you talk a little bit more about mobile phones and how your proposition is addressing the sort of key factors and how the market is changing, people purchasing on finance SIM-only contracts and so on? I mean how is your -- how are you positioned in the new and different world?

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John Roberts, AO World plc - Founder, CEO & Executive Director [31]

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Yes. So the very simple answer to that question is we're not. So what we bought with Mobile Phones Direct was a platform and speed. And so we've learned in other categories just how long it takes and how painful it is to get access and relationships and all the rest of these things. So I believe that the mobile phone business is going to go through significant change over the next few years. And it's going to be exactly as you say. It's going to be how do you make handsets that are getting more expensive, more affordable? So we're building a plan for that and the instant gratification. So I don't think you really need particularly to go to a store to have a piece of glass explained to you anymore. I think the store function, if you like, in that context, is about the instant gratification of I want it now. So how do we think about that if we were building this from the ground up, which, in effect, we are from a proposition point of view. And then there's monstrous complexity around millions of tariffs. There's only half a dozen handsets and half a dozen networks, how we get to...

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Mark Higgins, AO World plc - Group CFO & Executive Director [32]

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1 million combination.

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John Roberts, AO World plc - Founder, CEO & Executive Director [33]

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How do you get to millions of combinations really does bring to life how -- what a nightmare it is for customers to navigate that. So I think affordability, speed of getting the handset in customers' hands and bringing simplicity to the networks is the way that we are thinking about that. And as I said, it's early days for AO Mobile. And for now, all we've done is take the MPD, Mobile Phones Direct, platform and put AO on it. We haven't yet -- because of GDPR, we haven't even been able to market that to the AO base. So it's probably early days. But we're -- but in terms of what's coming over the horizon, there's been less and less reasons to change a handset over the last few years. And why would you need to -- I think people are pretty ambivalent about what net -- or increasingly ambivalent about what network they're on. So 5G, 1 giga second download, download a film in 4 to 5 seconds is a game changer in terms of reasons that people will change. And so broad estimate says about 30 million phones will be changed over the next, I think, 2 or 3 years. So there's a ton of opportunity that's on the horizon.

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Mark Higgins, AO World plc - Group CFO & Executive Director [34]

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And I think John's well explained the opportunity for the future. But actually, today, where we sit with our business, we still have a very, very efficient operations, serving quite a broad range of customers, which allows us to offer a better price to customers on the Mobile Phones Direct website than you are going to get from the high street stores. And so yes, we do have a market-leading proposition in Mobile Phones Direct today but with a big opportunity as we move forward.

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Geoffrey I. Cooper, AO World plc - Non-Executive Chairman [35]

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Okay. Any more unusual questions, given that the usual questions are all on the web, are going to be answered on the web?

None? Okay. Thank you, everyone, for coming. Obviously, Mark and John are here for a few minutes if anyone wants to chat.

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John Roberts, AO World plc - Founder, CEO & Executive Director [36]

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Thanks.