We'll hear from the AO team who announced their interim results earlier today. As you will be aware, they are currently under Takeover Panel restrictions due to musicMagpie deal, so we won't be taking any questions on that. But as regards to the results, we will absolutely be here for Q&A at the end. To begin with, we will start with a presentation, pre-recorded by the team earlier this morning, which will take about 13 to 14 minutes, and then we will come on to Q&A, so please feel free to submit as we go along. Otherwise, over we go.
Good morning, everybody. Thank you for joining us today. So we're gonna start with the numbers and the key drivers behind them, and then I'll hand over to John. So we've continued to make progress against our strategy. During the first half, we've delivered double-digit growth in our main B2C channel, the core of our business. Gross margins have been strong, reflecting the work we've done over the last few years across product and channel mix. We previously discussed the re-engineering in mobile, and I'm pleased with the gain we've made in margin, which is helping here, but it has had an impact to revenue, which I'll come to shortly. Free cash flow of GBP 14 million is broadly in line with profitability, and EPS was up nearly 20%. Profit slightly better than we'd anticipated, with the rest of the numbers demonstrating the continued resilience of our business model.
From today and going forwards, we've updated our revenue split to reflect how we report internally and help you understand the main channels of the business better. Overall revenue was up 6.3% on last year. Mobile and B2B revenues were down year-on-year, which I'll come back to, and it's not our specific strategy to grow the revenues of our logistics or recycling businesses. I'm pleased that our core channel of B2C has returned to double-digit growth as we'd anticipated, and this is despite the value of selling prices in the MDA market being down about 4% year-on-year. We're starting to see the compounding benefits of Five Star members repeating and buying across categories, as well as the positive impact of expanding our range.
The tumble dryer market grew by almost 100% in some months through summer, which helped solve the problem of the fridges and air conditioners that didn't sell at their normal run rates. But we're mindful of the potential forward impact, both later this year and in future years, of those tumble dryer sales. In our B2B channel, we've continued to optimize for profitability with minimum margin requirements and dropping customers who require costly, complex solutions, and as such, we've seen our B2B revenue decline year-on-year, and we expect that to continue into H2. Our mobile journey continues to make progress. As we exited 2023 making losses, our transformation required materially improved gross margins and lower traffic acquisition costs. This would always come at the expense of revenue, and it's compounded with the fall in the post-pay market, and we can see the result of all that here.
Whilst we're still partway through the process, and although improvements in margin and acquisition costs have largely been achieved, there is still a gap to the revenue we need, and any further reduction in the market over our forecast will likely result in a goodwill impairment. Gross margin has improved against the same period last year, and despite the inflationary headwinds in logistics and deflationary headwinds in retail product pricing, we're pleased to report improved gross margin of 24.4%. I've talked about that re-engineering in mobile, and revenue has declined, but a big improvement has been in gross margins where we now earn a healthy return for every handset we sell, which gives us a sustainable base from which to grow this business again.
Product protection plans have continued to perform well through the period, with cancellation rates below the long-term average, as now more than ever customers value that peace of mind that they provide. As expected, the inflationary cost of people and the uplift in rental rates has fed into warehousing cost. We've continued to spend on marketing at a broadly flat rate to sales through the period, but this year we've seen better results on direct channels than on TV. Other admin costs have been hurt by recent high levels of wage inflation, which we do expect to see come down into the future, but we will continue to drive for efficiencies and to minimize growth in these costs as we grow our revenue line.
Okay, so we've talked through revenue margin and cost lines, and I'm pleased with the output profit that's grown ahead of sales at over 30%, £17.1 million. The adjustment to PBT relates to the cost of the transactions of musicMagpie. Unlike some of our competitors, we don't expense actual ongoing costs. We're very aware of the impacts of the Labour Budget , though, on our cost base, and we're gonna have to work very hard to mitigate most of the increase. But we do expect this to be an industry-wide issue, affecting some of our competitors maybe more, and likely to drive price inflation for customers. Okay, so profits have converted to free cash flow. We've invested in inventory across our MDA and SDA ranges, and so stock days have increased slightly to 44.
Our EBT purchased 10 million shares in August, broadly to satisfy incentive plans granted over the last three years, and so this is not an annualized amount, although we may well fund the EBT to purchase further shares on an annual basis. During the first half, CapEx was about £7 million, and that's the continued refresh of our delivery vehicles and further investment in the recycling plant. The addition of an extruder is the last step in our plastic recycling process, and John is gonna talk more about this later. We expect CapEx for the full year to be about £11 million, with H2 being more vehicles than the balance of the extruder.
Post the period end, we upsized our RCF to GBP 120 million, lengthened to a four-year tenor, and I'd like to thank Barclays, NatWest, HSBC, for their continued support, and I look forward to working with Santander as a new lender. We'll talk more about FY 26 in June, but to alleviate concern, we think the direct impact of the October Labour Budget in NICs and minimum wage is about GBP four million a year. Thinking about our indirect costs, where we'll get some of this passed on to us, it could be closer to GBP eight million. And as I said a moment ago, we're gonna work really hard to mitigate these costs as we will with other inflationary pressures, and we're really, really mindful of the wider consumer environment and our price promise to customers.
We expect group revenue for the full year to be between GBP 1.09 billion and GBP 1.13 billion, and that B2C revenue will grow in excess of 10%. As a result of the strong first half and continued momentum we're seeing, we're again upgrading our profit guidance to deliver group-adjusted PBT at between GBP 39 million and GBP 44 million, and on that positive note, I'll hand over to John.
Come help yourself, could you?
No.
Okay, thanks, Mark. And good morning. We appreciate, as ever, you guys joining us. And it's nice to be bringing you the, the ninth, I think it is, consecutive, reassuringly boring upgrade. I think one more we get a set of steak knives. So, in a nutshell, look, the first half has played out broadly as we expected, continued progress on profit performance, double-digit B2C revenue growth. With that said, let me paint a little more color into the financials that Mark's just covered, 'cause underneath those positive headline numbers, it has been what I'm now terming a bit of a Mark . So all the right level of total sales, just not necessarily in the right order or the right categories.
The summer was a lot wetter than usual, so we sold far fewer air conditioning units and fridges than we planned to, and conversely, as Mark mentioned, many more tumble dryers than we expected to. Broadly, it played out as a score draw on overall volumes, but behind the scenes, the trading and supply chain teams have done a fantastic job, working with brand partners to make sure that the peaks and troughs that we've been through were thoroughly uneventful for customers. Most importantly, we've continued our momentum to deepen our relationship with customers as we move from a more transactional to a more subscription-based business. I explained at full-year results that we've been building this strategy now for several years on top of our foundation of being brilliant at the retail basics that we've been disrupting the market with, since 2000.
We're now starting to build our two-year member base as well, and we continue to make great headway in giving members more and more reasons to shop with us across more categories. I'm also pleased with the progress that we're seeing increasing our share of wallet, which is really what it's all about from our members. And we continue to have a laser focus on costs and efficiencies that means, as we've planned, profit is growing faster than sales on the growth that we've delivered. Ergo, in simple terms, the model is working. And for the avoidance of doubt, and if people have questioned us on this before, we are not driving our growth by blowing our brains out on marketing, as you can see in the numbers that Mark's taken you through.
Building on what I said at full year, our mobile business continues to represent a significant growth opportunity. In the last financial year, we undertook the strategic reassessment of the mobile business, and we entered this year with a revised approach to the model. We're now well on the way to returning that to profitability with lots of gross margin improvement, and, year-on-year, the unit acquisition costs have reduced as well. As Mark explained, we've now chosen to report the different segments of the business separately to try and be helpful for the first time, which enables you to see, the sales that we've removed from our B2B business that didn't fit our profitable growth no-grit criteria. We'll continue to assess the areas, across B2B, but I suspect that the bulk of that work is now complete.
Safe to say that since the end of the period, Homebase, where we were the exclusive provider alongside their kitchen business, they've kind of self-selected through administration, so obviously, we don't expect that business to continue. I'm pleased to report that we have just passed the latest milestone as well on our mission to produce new fridges from old recycled fridges. We're continuing to work closely with one of our manufacturing partners on this, and in the last six months, as Mark mentioned, we've also added an extruder to our plastics plant. This means we can further refine old plastics, which means we can capture the maximum amount from the value chain. There is now a very real possibility that we will be selling brand new fridges made with our old fridge plastic at some point during the next financial year.
It shouldn't be underestimated the amount of work and thinking that has gone into this, and it will be the culmination of a seven-year blind faith journey. We're not there yet, but the commitment and vision to make this happen with such a level of uncertainty and innovation required is the sort of thing I think that only AO can do with our long-term horizon, and that makes me really proud that we're able to do that. We've also announced recently the intention to acquire musicMagpie, which we hope will complete before the end of the calendar year, and this should set us up well on our ESG journey for the newer categories that we're now building nicely as we turbocharge their expertise into our website with enhanced trading offers and capabilities.
Our Trustpilot reviews now stand at over 600,000 reviews, and we've maintained our world-class most trusted 4.8 out of 5 rating. This is something that I will never tire of telling you or take for granted. It simply does not happen by accident, and it requires obsessional focus on the brilliant basics every day. This is a critical part of our ability not just to remain the most trusted electrical retailer, but also to grow our profitability given how expensive it is when you get things wrong, both in the short term to fix it but in lifetime customer value terms as well. It's difficult to get big and build scale in a low-frequency category. In fact, until AO, it's been impossible to deliver this level of Trustpilot reviews, brand relationships, and critically, culture in our category. None of these are built overnight.
Vertical integration and structural economic advantage take time and blind faith at times as well. Now, all these boxes are materially ticked. Our strategy is clear, and I have never been more excited about the journey that we have ahead. To summarize, it's been another solid six months of progress on our journey. As we expected, sales are growing again, and we continue with our medium-term journey to delivering over 5% PBT with double-digit revenue growth while sharing the economics with our members along the way to fuel future growth. I'd also like to thank all AOers that will be watching this, and in particular, a shout-out to our drivers. It's actually sunny here today, but I'm sure they often wish that peak trading coincided with summer weather instead of the wind, the rain, the snow, and the floods that they're currently having to contend with.
And yet, they still find every opportunity, not only to deliver the product but also their pixie dust that they deliver in the moments that matter. The fact that so many of them choose to dress up at this time of year in Santa outfits for what is a very physical job. For me, it tells a story perfectly about what makes AO unique. We're back to double-digit growth in our retail business, and profits are growing faster than sales, which is why we're able to upgrade profits yet again today. Simply put, as I've said, our model is working.
Thank you, gentlemen, for that, and thanks for joining us now in person. Disappointed not to see you in your Santa outfits, obviously. But, let's take some questions from the floor. So, your Five Star membership club, can you talk to me about how many customers have signed up for a second year and what you're seeing in terms of repeat rates, of improved numbers and, and by how much?
Yeah, of course I can. So we don't release the absolute quantum on numbers of sign-ups or renewals. Safe to say we're pleased with the conversion rate of total orders to members, and we're pleased with the rate of renewals, and basically all metrics are good. Members buy more from us. Members that have a finance account buy even more from us, and the strategy that we set out for membership is fundamentally working. We still have a big job to do, though, to be clear, on educating our customers. I would only score us three out of 10 on educating customers on the products, the beyond MDA that we sell.
So, you know, we'll have customers that have shopped with us for 15 years in major domestic appliances and know us well that don't know that we sell laptops or CCTV equipment or air fryers or toasters, etc. So, so there's a big piece of education to do, but that's not and there won't be a light switch for that. That'll be a journey, but it's a journey that we're making good progress on.
Okay, thank you. Are you seeing any signs that working from home is increasing the replacement cycle for your products?
The debate rages within the industry. We're still at all-time lows, and so in COVID, we were at all-time highs in terms of the total market, the volume of product that was sold into the market. Logically, as you use electrical products more, they get replaced more in the same way as putting miles on a car. But by the same token, you know, if you look at the car analogy, it's a good one. Cars don't rust like they used to. Electrical products are made better than they've ever been. There's more automation in the factories and so on, so they should last longer. So maybe those things play a score draw. We're not seeing yet any material market improvements, say for, you know, slight bumps here and there, so we're not planning for any.
So if we do get any of that, which logically should be a tailwind somewhere between now and the next two or three years, then that'll all be upside and gravy.
All right, nice. Thank you. Profit margins, perhaps one more for you, Mark. They've recovered substantially, and the increased guidance for full year 2025's great. Do you still believe you can increase PBT margins further given external headwinds?
Yeah, I mean, so, you know, we, we've called out today some of the short-term headwinds that we obviously know we're gonna face as a result of the Labour Budget . But, you know, our medium-term aspirations, we have ever more confidence on being able to both deliver the medium-term targets and to invest more into our proposition for members. And so those two things sort of work hand in hand. But certainly, for me, as we continue to grow the business, we get leverage through our overhead line, and that leverage is what helps move us from the just shy of 4% PBT guidance that we've issued today, towards that 5% medium-term target.
I would just add to that, Anna, in terms of just quite how achievable that is on the numbers that we've upgraded to today, is for the full year has us at a round numbers, about 4% PBT.
Yeah.
You know, the medium-term target of 5% is, you know, not a monstrous stretch from where we are when you consider that our central overhead is still currently about 9.5% to 10% of sales. And so I think the, you know, the long-term position under that should be more 6.5% to 7%.
Okay, helpful. Recent budget increases in national insurance could lead to a GBP 4 million cost increase, excuse me, and GBP 8 million indirect. What are the indirect costs, and how would you look to manage these additional costs?
Yeah, so they're broadly from suppliers, which may be where we use agency labor in our warehouse or in our recycling operation or where our drivers are broadly on a self-employed model. And again, their costs of pay in line with sort of minimum wage increases and so forth will go up. And so broadly, that £8 million is a number that we think we're gonna have delivered to us, and then we'll have to work very hard on efficiencies to mitigate that as best that we can. But it's principally an output, isn't it, of labor of one form or another, whether direct or indirect. And, you know, we talk about it as costs walking to businesses on legs, and those legs just got more expensive.
For everyone, right? Retail sales to consumers are growing at 13%. Who do you think you are winning market share from?
Across the piece, we're not targeting one competitor in particular. It is just a, you know, a gradual progression. The market continues to move online. You know, we've got a big share of the online market, and overall, we're getting more repeat customers that are buying more share of wallet from us, and more of that is coming from newer categories where we were starting from a very low base as well.
Okay, thank you. And then perhaps, I guess, leading on from that, marketing costs have been well controlled. How is brand awareness for both MDA products and across the wider electricals range?
Brand awareness is at an all-time high, but again, it is just a gradual progressional journey. It's the kind of upside and downside to where we are is that it is difficult to build a brand in a low-frequency category. So it takes a long time. The upside to that is we've been at it for a long time, so you know and we got a big boost in terms of the number of customers that we served through COVID, but I repeatedly say the difference is not what we do. It's how we do it and the only way to experience that is actually to transact with us, and so that takes even longer, therefore so you can't just advertise the difference, so people forget what you tell them, and they remember how you made them feel.
But what that means is we then have a deeper relationship with those customers, and I think we have a better level of loyalty, therefore in the future.
Okay, thanks. Onto mobile phones. Obviously, the market is still very tough. How confident are you in the sales growth from here now that you've restructured the business? And on from that, do you think you can win market share from more established mobile phone retailers?
Yeah, well, I don't think there's that many established mobile phone retailers left, frankly, so there's the networks, and but the market is changing. You know, we'll put what, 250,000 handsets out there, something like that.
Yeah.
So we're a tiny piece of the market in that context. We're a big piece of the indirect market, which is customers buying a mobile phone with a two-year contract on it. But increasingly, you know, the reasons to change your phone are reducing, and they, you know, that might change as more AI comes into handsets. But there hasn't been a galactic reason to change a mobile phone for a few years. You know, I don't even have an iPhone 16. I'm quite well positioned to get one. So I think that we've got to move with that market. Fundamentally, it is the most important product to all of our customers. It's even though it's the replacement cycle has slowed, it still has the fastest replacement cycle of all products, and it is the product that is most important to customers.
So it's where we want to be. And so as more SIM-only and SIM-free takes shape in the market, we see that as a, you know, as a significant opportunity for us growing again from a low base. But, you know, you've got to have the relationships with the networks at scale in the first place. You've got to have the relationships at scale with handsets, and that's what we've done, and we've fixed the unit economics. So that is now a good business going forward that gives us a platform to build from. And, you know, how we do that will become clear over time.
Okay, thank you. You might not have an iPhone 16, nor do I, but you talk about stock levels, increasing significantly year-on-year, and stocking up on iPhone 16s. What other factors are there?
Yeah, I mean, so, so stock's only up a little bit year-on-year when sort of you're looking at it on a revenue basis, so I think stock days are at one or something from, or a couple from the end of the year. But, but we've broadly invested in availability across the range, and that has been to make sure that we've got a great customer proposition, consistent stock holding, and particularly in MDA. If there's one available in the U.K., we want it to be available from us, and so we want to make sure our customers have got a great experience when it comes to buying products, and, and we've invested in stock to make sure that we can deliver for our customers.
Yeah, and I, I would add to that our commitment to stock in the newer categories. So we would carry now higher daily rates of sales where the throughput of those products against minimum order quantities is building into those minimum order quantities where we have more established and predictable sales within the major domestic appliances sector. But critically for us, there's no great stock risk in that. We don't see any stock write-off. We've got the cash to commit to that product. So we see the availability as a wonderful investment.
Okay, thanks. This next question is bordering on sort of respectful disbelief, but how realistic is it to make a washing machine from recycled machines? You said yourself you'd hope to see it out in the next financial year, but so you're getting closer.
Yeah, so we are. And just for the avoidance of doubt, it's not 100%, but it is taking what we hope to be able to do is to take 100% of the plastics, so when we bring fridges back and we process about 700,000 fridges.
Yeah.
Is that right? So about 700,000 fridges and fridge freezers a year, and all the plastics that come from that, we plan to put into the production of new fridges, and a bit of stuff into washing machines, but primarily into fridges and fridge freezers, so that's been a torturous journey that we thought might take a couple of years, and we're into our seventh year, so but we're as close as we've ever been. We've got actual real product manufactured on test in people's homes at scale, which is the last regulatory hurdle for us to pass, and if we pass that, then we can go to real scale manufacture.
Critically, we're going to bring this to consumers at no price premium to the product that doesn't have recycled plastic in it, which will be, not just, it'll be a kind of double first, I think, that you don't have to pay a premium to do the right thing.
Brilliant. We talked about market shares and competitors. There is a question here focusing on Amazon specifically. How much do you see them as a competitor, and have they won share in the UK like yourselves?
Well, I think Amazon clearly won share in the U.K., and you know, Amazon continues to grow. You know, they're a fantastic competitor and deliver amazing service. There's no doubt about that. In our core business of major domestic appliances, it's more their marketplace that is a competitor, but it's still relatively small in terms of; it's tiny in terms of their share overall. But clearly, once you get out of the challenge of two-man logistics, then Amazon are a much more significant competitor. And you know, they have much better frequency than we do. They've got their Prime membership, which we've copied as much as we possibly can. It's probably the most successful membership scheme that's ever been built. And so you know, they are a significant competitor in all the other categories. But again, we're growing from a low base.
So, you know, growing in major domestic appliances is harder than growing in small domestic appliances. And, you know, we're whatever, 35% of the online market, 17% of the total market. So it is possible. And we're seeing good progression in all those categories. But, the competitor set just widens out, as the logistical challenge reduces, I think it's fair to say.
Yeah.
Yeah, okay. Well, and I guess a bit of a soft question, but, you know, with your excellent Trustpilot reviews, and the customer service, what is it that you think the competition can't copy? I guess perhaps at the more difficult end of the delivery spectrum.
Well, so I don't just think it's the you know everybody focuses on last mile, and clearly our drivers are amazing. I made that point in the presentation, and you know what they have to contend with at this time of year is you know a real challenge, but it's all year round, and it is not just the drivers, and what I really love about our competitive advantage is it's not one thing. It's the compounding effect. It's almost like the British cycling team of doing 100 things 1% better, and you know we've just talked about availability. You know we have by far the best. We track all competitors' availability, and across range we always have the best availability. We can't sell fresh air. Customers don't want to wait. They want the product that they want when they want it.
They want it at the right price. You know, we have some competitors that have price promises that, you know, well, they're in it one month, they're not in it the next month. They, they can't afford it. They can't afford it, depending on the management team, as is consistent. And it's any competitor. We don't exclude anyone. So anyone, anywhere, anytime on anything, as long as the offer is real. So if you can go and buy it and have that quickly delivered from a competitor, we'll match it. So, you know, whether it's availability, I call them brilliant retail basics. It's having the right range, having the right product, having it in stock, having it at the right price. If something goes wrong, having human beings who know what they're doing, who care about it.
You know, we talk about treat every customer like your grandma, make decisions that make your mom proud. We empower our people to make those decisions and so it's the whole formula of everything that's difficult to copy at scale. It's not difficult to copy at small scale and that's really important. You know, if you, if you've got a small electrical, you know, mom-and-pop business doing, you know, a few million quid of sales, you know, you can get your arms around that business and you know everybody in that business. Doing it at scale, doing, you know, 10,000 deliveries plus a day, is difficult out of 20 different outbases and 1,000 vans and everything that goes with it but we've been deeply investing in the culture, and the standards and the processes and the systems and everything that delivers that.
You can't just flick a switch and do it. That's one of our competitive advantages is getting big in our world is very difficult. The graveyard is full of people that have tried to cross that battlefield over the years.
Good summation. We're on to our final question, unless anyone else has any more they would like to submit. But, one for all investors. As the business grows in profits and cash, would you consider paying a dividend?
Well, so I think the first priority for us with cash is to make the balance sheet absolutely bulletproof, and then once we've done that, we'll assess what other investments that we've got to make, and if we've run out of all other things to do, we might pay a dividend.
I think you've got lots on your plate for now, but, listen, thank you both for your time.
Thanks.
To our audience for joining us, and we'll look forward to an update in six months' time.
Thanks, Anna. Thank you.
Cheers.