Okay, well, good morning, thanks for joining us today back here at our London Creative Center, where we really do bring our products to life. Since we were last here in November, we've issued a number of trading statements, so we expect today to hopefully be relatively short and reassuringly boring. I'm gonna give you some color and context to the financial year that ended in March, and then Mark's gonna take you through the numbers, and then obviously, we will both take your questions. As we began the last financial year, it was abundantly clear that a further period of macroeconomic uncertainty lay ahead. U.K. consumers and companies were, and obviously still are, suffering the economic aftermath of 3 major shocks in a very short period of time.
Those being Brexit, COVID, and the economic consequences of war in Ukraine. Inevitably, this did and still does put a squeeze on consumer spending as people have grappled with inflation across a whole range of household costs. AO clearly isn't completely immune from these pressures, so we took the view that we were sailing into an economic storm, so we prepared for it by battening down the hatches and lowering the sails, ready for, frankly, whatever came. In other words, we did what we've always done. We focused on our core strengths, and we took swift and decisive action, while continuing to focus on being amazing for our customers. Our top priority was to prepare to trade our way successfully and resiliently through whatever economic climate prevailed. As we've done in previous downturns, we emerged leaner, stronger, and more trusted than ever.
The core thrust was to pivot the business firmly towards cash and profit generation. Our deep understanding of the dynamics and drivers that underpin our operations made it relatively straightforward to identify both the opportunities and the challenges that we needed to tackle, all at AO speed. Our core UK business has always been strong, profitable, and cash generative, providing us with a fantastic platform from which we've explored many new opportunities for growth over the last 23 years. As part of our plan, we also undertook a successful capital raise to strengthen our balance sheet, making sure that we were secure as we navigated the choppy waters ahead. As Mark will explain shortly, our cash position continued to improve through the second half of the year as our actions to improve profitability gained traction.
With these macroeconomic clouds on the horizon, the lens that we decided to look through was to only continue with operations where we had a clear line of sight to profitability and cash generation. That perspective then informed our decision around, our decisions around several initiatives, and those are pretty well documented. Over the last 23 years, we have been an entrepreneurial business with a huge ambition, without fear of trying new things. There is a time and a climate for everything, and the last 12 months required rigor and real discipline to deliver the reset that we now have. It's rare that you know instantly whether a new venture is going to succeed and exactly how. It takes time, patience, conviction, intuition, reinvention, and frankly, actually, some humility to admit when you may be wrong.
For the avoidance of doubt, we are still an entrepreneurial business with huge ambition that is not afraid to try new things at the right time. Our decision-making process took us back to our fundamentals and made us carefully consider what drives our flywheel and conversely, what adds grit to the AO machine. We also simplified aspects of our operations. We consolidated several teams and realized more of the value that we deliver for customers. We rationalized relevant ranges, and we raised the bar of what we are willing to accept through our supply chains. Inevitably, the cumulative effect has been to reduce sales as was planned, and Mark will cover that in more detail shortly. I believe that the best businesses are often defined by what they decide not to do, rather than always chasing every single opportunity.
Rationalization and simplification also meant that we needed fewer people. Consequently, we've had to say goodbye to a good number of AOers over the past 12 months, which is never an easy decision, but I'm clear that it was both right and necessary. Whilst the economic element of these choices may have been relatively straightforward, of course, the human element is always much harder. During the 3 year COVID period, over 5 million new customers experienced the AO way, and whilst we don't have any intention of releasing any detailed data about this, for obvious commercially sensitive reasons, one snippet that I will give you is that the cohort acquired during COVID currently performs better and is more valuable than the pre-COVID cohort. Frankly, that's not rocket science because our business is bigger, our brand awareness is better, and our performance is, and always has been, consistently excellent.
From a market perspective, the COVID period saw a big step up and then a step back. Demand was brought forward, product usage was also increased. Overall, the market is now normalizing, with online penetration comfortably above 50%, compared with around 40% pre-COVID, when stores were the dominant channel for customers. I've always found that customers are incredibly loyal or intransigent until they find a better way. As those of you, there's enough of you, to remember fax machines with those curly bits of paper will know. Our expectation is that the migration to online will just progressively continue over time, as it has for 22 of the last 23 years, as more customers realize that online is simply a better way to shop the category.
While some post-COVID disruption remains in global supply chains, and it does make certain aspects of forecasting difficult, we as a business now consider the COVID period to be concluded and its lasting impact to be entrenched. Since our launch back in 2000, we've been investing in our relationships with our supplier partners, and the depth of trust that we've required to navigate this hugely unpredictable trading period has proved to be invaluable, and I'd like to thank them very publicly for all their support. I'd also like to thank all AOers for their continued support and commitment during a journey that has required many leaps of faith over the last year.
I'm always really proud of how they rise to the challenges and how they protect our culture in both difficult times as well as good, something which is ultimately at the heart of our ability to deliver brilliantly for customers. Looking forward, our priority now is to continue the progress that we've made with our pivot to profitable growth and cash generation by focusing on brilliant execution and investing to deepen our relationships with customers, whilst, of course, growing our brand awareness and our share of wallet with those customers. Our strategy will always be centered around our obsession with customers and treating them like our brands. We now have over 400,000 Trustpilot reviews, and I'm really looking forward to continuing to build our brand over the years ahead around being the most trusted electricals retailer in the U.K..
This obsession is a moat around our business and makes repeating what we do and the way that we do it ever more difficult for competitors to replicate at scale, meaning that its value to our customers only increases with time. This is true across a whole host of areas, from culture, customer service, loyalty, brand relationships, right through to our B2B partnerships. Through FY24, having embedded the changes from our pivot year, our focus will move back to profitable and cash generative growth through disciplined investment at the right pace and at the right time. We'll drive our structural advantage of having an extremely well-invested, more efficient model with better unit economics built for the future, not the past, leveraging our scale centered around trust and excellence.
I'll return to this in more detail later once Mark has taken you through the numbers, but for now, I'll hand you over to Mark.
Thanks, John. Good morning, everyone. I'm gonna run through the financial results for the year, which will obviously include the output of the strategic pivot that we took and the challenges that we've navigated through on that journey. We've previously discussed how the decisions made as part of our pivot have negatively impacted revenue. This, along with a weaker consumer market, has resulted in a year-on-year drop, which is as we anticipated. We have removed non-core channels and loss-making sales. Very few products now have negative unit economics on a fully costed SKU P&L basis, and the corresponding margin drag has been removed. In August 2022, we removed free delivery slots for customers, acknowledging that deliveries are not, in fact, cost-free and to offset the growing inflationary pressures impacting our cost to deliver.
We continue to leverage our expertise in complex 2 man delivery, where it adds incremental profitability, and you can see revenue growth here this year. As we come out of COVID, the overall electrical market is down about GBP 1 billion year-over-year, of which nearly GBP 300 million is in our largest category of MDA, and the AV market is also down nearly 10%. We've seen a shift in MDA sales to offline in the year by around 6%. Our market share in MDA remains strong, and we've got about 16% share of the total market. Our repeat customer base continues to perform well. Our strategy to invest in brand with our most trusted message should continue to drive this customer base, and they will repeat and underpin our revenue in the future.
Looking forward to FY 2024, we expect revenue to be reasonably flat year-on-year. Note a decline in the first quarter until we annualize the strategic pivot made in the previous year. We've made a step change in gross margin in FY 2023. The introduction of delivery charges has acted to offset the growing cost of delivery. In addition, we have accelerated our pricing structure development, particularly in non-MDA categories, that have been in an investment and growth phase over the last few years and have caused us some margin drag. MDA mix has increased in the year as a result of those decisions, which has further contributed to the margin growth. product protection plan valuation has remained steady, and we've seen no significant change in either acquisition or cancellation rates. The mobile network operators increased their prices in line with RPI in April 2023.
The consequential benefit in AO's commissions were consistent right across the market, and these were primarily invested either in proposition or in acquisition channels. We're optimizing our physical logistics network for current levels of sales and maximizing the return on warehousing and logistics capabilities. This has had an impact both here and in our warehousing line. We've continued to invest in acquisition, marketing, and brand, but we no longer chase sales into negative margins on a fully costed SKU P&L basis. We've seen a reduction in warehouse labor in line with the decrease in revenue, and have reduced our physical footprint by about 160,000 sq ft in the year, and we have sublet a further 305,000 sq ft, which does give us the optionality for future growth. The reduction in staff, which we've spoken about previously, didn't really impact the P&L until H2.
It clearly runs forward on a full year basis into FY 2024. The compounding benefit of the staff reduction is also a reduction in our office space requirement, and we've closed offices in Thatcham, Manchester, and in Bolton. In the next financial year, we expect our warehouse costs to be materially flat. We'll look to invest further, though, in marketing and brand spend and getting our most trusted message out there. I feel like there is further for us to go in overhead reduction as we continue to simplify the business, drive efficiencies, and be more joined up than ever. Marketing costs are broadly split into two categories: those that have a fixed cash cost, and that's things like brand, and those that have a more direct cost, for example, acquisition costs with Google.
However, that being said, I would broadly expect marketing costs to remain a flat percentage of sales into FY 2024. We will increase our brand cash investment this year. I'd expect the cash costs of both other admin and warehousing to increase slightly as we grow. We anticipate that this should drive real leverage through the P&L in the medium term, as increases in revenue give us the ability to grow profits at a faster rate than sales. We can look at the percentage graph for FY 2021 for the impact that those increased sales can have. If we were to repeat those levels of sales, I would expect the output to be significantly better than it was during the COVID period. Since IFRS 16 made a mockery of EBITDA, we have now moved our headline profit measure to adjusted PBT.
We've talked through the revenue and cost lines, and this is the output. You can see the changes we have implemented have significantly improved performance from H1 to H2. Obviously, bearing in mind the usual seasonality effect that we have. The exceptional costs in the year of GBP 4.5 million are largely the termination costs relating to people and offices, and a small amount of software impairment. We've done a good job in exiting a number of property leases in the year with very, very minimal impact. We have a continued focus on an efficient working capital model. Inventory levels have fallen, but our stock days have returned to a more normalized position, and it is our intention to continue to invest in availability for customers. Debtors and contract assets are pretty flat year-on-year.
Looking at this slide, it's worth pausing on the impact of the pivot on payables. The graph on the right shows an outflow in creditors of nearly GBP 150 million over 2 years, and that's as we took GBP 500 million of sales out of our run rate. This required very careful management and financial discipline. I think few businesses would have survived that transition, and there really is no point having the operation being a complete success if the patient is left dead on the table. These stats bring to life the scale of the reset and the leaner, efficient business we now have, ready for growth. The working capital outflows have now normalized as our revenue has stabilized, and so we don't expect any material changes in working capital this year. As we move back to growth, there will, however, be an obvious cash benefit.
CapEx is expected to be around GBP 4 million this year, which includes GBP 2 million in recycling and the remainder being our usual low run rate. The RCF was extended to April 2026, with great support from HSBC, NatWest, and Barclays. Total liquidity has improved in the period by GBP 39 million, which coincidentally, is the value of the share placing. This does help somewhat hide the work done on profitability and working capital, which has been concealed by the output of the pivot. For the year ended March 2024, we expect revenue to be between flat and -5%, of which we expect to see double-digit decline in the first quarter until we annualize the strategic pivot. We expect to exit the year driving profitable top-line growth.
To remind you, our previous medium-term guidance was adjusted EBITDA margins of over 5%, continued focus on improving cash generation, and double-digit revenue growth. Now that we've changed to PBT, 5% EBITDA is the equivalent of 2.5% PBT, and we would expect to deliver at least that in FY 2024. Save for that, I would like to reiterate our medium-term guidance. I'd also like to take the opportunity to add my appreciation to John's for the hard work, focus, and commitment of our people in delivering the pivot this year. Thanks, everyone!
Thanks Mark. No doubt the big question that everyone's going to have is how we're gonna grow, given the impact that growth now has on this business that we've got. Well, there are several answers to that question, all of which ultimately center around our brand growth, our customer numbers, and the sheer quality of our execution at scale. As I said earlier, AO is the U.K.'s most trusted electricals retailer, and what makes that true lies in how we do it, not what we do. To understand that properly, you need to experience it, ergo, you need to shop with us, because people forget what you tell them, but they remember how you made them feel. Our frequency of purchase cycle is not that of grocery or Amazon, and therefore, it takes time for the value of this to be realized.
Over the last 3 years, we have impressed over 5 million new customers. It's important context when you think that it took us 18 years to impress the first 5 million customers. I'm sure you can work out that we think there's real value in the behavior of our newer customers in the coming months and years. There is an intrinsic value as well to just being bigger than we were pre-COVID in just so many ways. These principles are as true in our B2B business as they are in our retail business, albeit inertia to change is higher and the available number of customers is lower. Once won, they really are actually our most valuable customers.
5 years ago, we had no focus at all on a B2B business, and today we have a B2B business worth over GBP 100 million in sales, and more importantly, all of the learnings, and therefore the playbook of how to grow it, importantly, in the right way. As you might expect, we have lots of other initiatives on top of these to improve the shopping experience and to cement our relationships with customers, and to drive ever more share of wallet from that base, as well as, of course, appealing to new customers so that they too can experience and therefore feel why buying electricals the AO way is just, well, fundamentally better. Cost out and simplification were cornerstones, clearly, of the pivot. As you might expect me to say, I am equally clear that we will not cut our way to success.
As Mark mentioned, we will continue to invest in our brand throughout the year, and we will do going forward as well. The output of that in the year was that spontaneous brand awareness has improved by 35%, and this is as important as for new customers as it is for existing ones. Frankly, it's just more fuel for our flywheel because increased brand awareness, well, it improves just about virtually every other metric in the business. In summary, we're in good shape. Our trading is in line with our expectations for the current year, and we're beginning to prepare our sales again for our medium-term outlook. We're looking forward to the next few years with a shipping forecast that's, well, set reasonably fair. With that, we'll take some questions.
Just one piece of housekeeping, if you can, before asking the question, if you can get hold of one of the roving mics that are hovering on either side so that our U.S. investor base can hear the questions as well as the answers. John?
Thanks. John Stevenson at Peel Hunt. I suppose keeping with growth as a starting point, I mean, can you talk about the performance between sort of MDA and non-MDA categories, and then how. Obviously, you know, you've got a fantastic service proposition in MDA. How do you break into things like to the laptops, where it's been, you know, it's been harder to drive share without, you know, the runaway marketing? Maybe sort of talk about some initiatives you've got, you know, thinking about in terms of driving share in new categories. Yeah, go on now .
To take that question. Clearly, the those newer categories are slightly more discretionary than our core MDA category. We're seeing it happening. We don't have any intention to go and blast our way from a marketing perspective into those categories. We know as we We're not releasing the data on this, but we know the cross-pollination of existing customers from one category into another category. All categories cross-pollinate other categories. One of the things that we've done in the year is to consciously take out some of the sales where the unit economics didn't work for us. We've been working hard in the background to fix the unit economics around that, such that we can sell those categories as competitively as we do everything else and do it profitably.
I would expect some of the rationalizations that we've been doing over the last year to slowly reverse over the next 12 months as well, and then compound with a bigger customer base as well. I don't expect any light switch moment. I expect it to be gradual over time, leveraging a bigger brand, that more people are aware of, that double the people have now transacted with, and trust and are more comfortable to return.
Just on that, just in terms of the CRM, I don't know how you sort of rate your CRM currently in terms of the ability to get, y ou know, rather than someone going to Google, you know, googling a laptop to actually, you know, to come to you first and to stay within the network?
I'm always harsh on our own internal scoring. I would probably give us a 6 out of 10 within CRM, and I think there's lots more upside for us to do. We can get ever more granular on that, and the capabilities and the technology that's enabling us to do that is getting ever better at a rate of knots that we've never seen before. Again, if you look at things like ChatGPT, for example, and you look at the improvements in processing power and capability of all that, of what's happening every two to four weeks, frankly, that's valuable if you've got a big base to apply it to. If you've only got 10 customers, then it's not that valuable.
If you've got 10 million customers, if those 10 million customers really trust you, if those 10 million customers had a brilliant experience with you, all the fundamentals, applying those capabilities to them, we see lots of upside. Exactly what it's all gonna be is unclear at the minute. All the critical fundamentals we've got in place, we need to go and leverage that, and one of the key areas that we're focused on.
Thanks, John.
Cheers. Thanks, John. Simon?
Hi. Thank you. It's Simon Bowler from Numis. Three if I may, I'll kind of go one by one. Can you just kind of explore a little bit more some of your comments around kind of warehousing and space? Obviously, there's been a lot of work kind of coming out of space and so on. Where are you at the moment versus kind of an ideal position from a real estate perspective?
We're pretty ideal at the minute, I think it's fair to say.
Yeah.
O n the footprint that we've got. All of our primary warehousing is centered in the crew area. We took an extra 305,000 sq ft because it was there, and it was built, and it was available. We've kept that, as Mark said, for optionality. If we'd wanted to get out of that, we could have got out of it. We've kept that for optionality and offset the cost by subletting it. Now we're materially where we need to be from a footprint perspective. What we've been working really hard on is the throughput, so storage versus throughput. We've got a lot of headroom of sales that we can now drive on throughput through that operation without. It's not a linear relationship with sales now and warehousing footprint.
Cool. Thank you. The second one was just on the B2B business that you kind of briefly mentioned within there. Anything around kind of specific plans to grow that or how you're thinking about that part of the business?
Yeah, we're continuing to grow it. It sits across different segments. We've got insurance as a segment, for example. We've got things like small landlords and letting agents, is a big piece of work, and service, and on time, in time slot delivery with all the premium installation services. You know, the cost of service to them or poor service is really significant. They place a real value on that. Again, it takes time to get out. People have been doing certain things, the way that they've been doing them for a long time. What we find is that once people taste the AO way of doing it in that space, they're extremely sticky, and really valuable. Then we've got other partnerships where,
For example, if you take somebody like Homebase, where we're the exclusive provider for appliances for whenever omebase sell a kitchen or frankly, when they sell appliances on their own. We take care of all of that for them, because there's a good number of, whether it's kitchen retailers, or businesses that have a business in electricals that are subscale, really. The investments that are required and the relationship and the management and the supply chains, you know, you need to be a volume player to make those work, at a standard. Again, we're just leveraging that, most trusted in that space. It's a fire and forget for them. They can just concentrate on selling as many kitchens as possible and forget about that.
The B2B piece sits across different verticals, and we're gradually driving them all. There have been areas within that that we've tried that haven't worked for us. We spent two or three years developing a business with house builders. The, you know, new builds, whether it's Barratts or Persimmon or Redrow or whoever it might be. On the face of it, that was extremely logical, drove our logistics flywheel and all the rest of it. Actually, at scale, it didn't. Delivering to a building site and then delivering to Mrs. Bowler and traipsing the mud from the building site through the house was different. We don't have to do a health and safety assessment when we come to your house.
We do have to do one when we go onto a building site. Actually, you can't leverage the same fleet. Actually what we found was, whilst the headline logic made sense, that there was lots of grit that it was putting into our model. Frankly, then you wait about three or four months for your cash, and we're used to waiting about three or four hours for it. When you actually look at it, I think we closed, I can't remember what the order book was, but I think it was about GBP 13 million.
Yep.
Or something like that, when we closed that business down within B2B. We spent a couple of years growing that, building the relationships, but it didn't work for us. It might have made a couple of points of margin for us, and it might have got to GBP 50 million of sales. It would have been the hardest GBP 1 million of profit we would have ever have made. The, I just know it would have cost us GBP 1 million in grit, so get rid of it. That's a very good example where go and do something and try it, but if it doesn't work, then take it out.
Thanks. Super useful. The third one was, on that targeted EBITDA PBT margin with the CapEx and working capital comments that you've made, the business starts throwing off quite a bit of cash. You've ended the year just going in a net cash position. How are you thinking about what a ideal or efficient balance sheet looks like on a go-forward basis?
Do you want to take that?
Yeah, I mean, I think that we've obviously been in a phase of strengthening the balance sheet over the last 12 months, you know. I would expect that to continue over the next 12. As we move further forward, we, you know, we should start to generate excess cash that we, you know, can look at how we best deploy when we think about our capital allocation policy. I don't see anything in the, you know, over the next 12 months on that.
Andy?
Thanks. Andy Wade from Jefferies. First one, just thinking about the impact of growth and profitability. I know you touched on this a little bit already, there's a load of moving parts in there. You know, some of them, Mark sort of went into a bit of detail on, you know, you've got the drag of the lower margin categories, you've got investment in the brand and actual acquisition of customers, then you've got some leverage further down the P&L. How should we be thinking about the overall mix of that? Would we be expecting a downward pressure on EBITDA over time if you're doing double-digit growth, could you still get leverage? Where's your thinking?
I don't see downward pressure at all. All the things that you talked about, the business is set up to drive operational gearing, kind of full stop, and that converts to cash. As we drive growth, that will be disciplined growth, and it will be accretive growth. You know, when you go into new things, whether that's a new product category or a new market or a new segment, not always, but quite often, you'll be in an investment phase for a while. Since IPO, we've been into new product categories with new manufacturers and new ranges and new territories and new sectors. All that heavy lifting for me is done. The vast majority of that.
It's not to say we won't try the odd thing, but the vast majority of that heavy lifting is done. No, we see ourselves extremely well placed to drive a lot of operational gearing as we go forward.
Very helpful, thanks. Some of your competitors talk about a sort of single-site warehousing and delivery model. You know, is that another opportunity for AO? Could you consolidate down to a single site, get rid of some of the outbases, and drive another step in profitability?
I get asked this quite a bit. I'm not gonna talk about other people's businesses, I'm here to talk about our business. The point surrounds our interpretation of what's the right thing to do. At the scale that we're at, we need outbases. Our outbases, so our central warehousing is in Crewe. Okay? GB driving regulations say that you can only drive or work or be on duty for 11 hours a day. If I'm gonna drive a van from Crewe to here, back to Crewe again inside 11 hours, I'm gonna struggle to get many deliveries off that van once I get here. It's just a factual reality.
Within those, within those regulations, there is an exemption for if you are doing an installation. If you look up the dictionary definition of an installation on Google, it says, "Placing something ready for use." If I take an example, like, I don't know, let's say, a furniture, let's say DFS. Let's say DFS are gonna deliver a sofa to the Wade household, and they're gonna put it in your lounge. Did they install that? Well, they did put it there ready for use. We've spoken to the DVSA on this, and they've given us their steer, and their steer is that that exemption is designed for tradesmen. Where somebody will be an electrician, let's say, is gonna drive two hours to the Wade household.
He's gonna work all day at your house, and then he's gonna drive two hours home. He may then be on duty for 13 hours. We think it's a health and safety issue. As the most trusted electrical retailer in the U.K., I don't want our drivers out there driving 16, 17 hours a day. My interpretation of that is that's a health and safety issue. Whatever our competitors choose to do, that's up to them. From our perspective, we observe the GB regulations in the spirit of how they're intended, which is that people shouldn't be driving for more than 11 hours. On that basis, and if that's your cornerstone, if you're gonna deliver nationally, then you need outbases. It's as simple as that.
The problem is, when you're a smaller business, those outbases proportionately are more expensive. As you get to be a bigger business, the economies of scale actually mean that they make sense anyway, economically. But obviously, you know, we've kind of crossed that battlefield, and we are where we are. From our point of view, you know, and it's a long answer 'cause I get asked the question a lot. You know, we're really happy with the unit economics of our business. We're really happy with doing the right thing as the most trusted retailer and interpreting the spirit of the legislation in the right way. I'm really happy with the way that we run it and the economics that come with it.
Okay thanks. Very, very thorough. Just one last one, from me. In terms of customer acquisition, obviously, you're having to recruit customers on an ongoing basis. What are you seeing in terms of the cost of customer acquisition now versus, say, pre-pandemic?
It's different in different ways. Mark called out the difference in brand investment and digital channels. Digital channels are more expensive than they were previously, and so our strategy is to reduce our reliance on those digital channels, which again, when you've got the brand awareness levels that we've now got, and when you've got 10 million customers in the base, and, you know, to John's point, that we can CRM into that base effectively for free, that's an increasing percentage of our mix. At the same time, we are investing in above-the-line advertising to drive direct traffic to the website and lasting brand impact. Our, our brand message is very firmly the most trusted. There'll be some deals adverts in there as well, but we're investing medium term in what the brand stands for, not just the steroidal hit of deals today.
Great. Thank you very much.
Cheers.
Hi, Caroline Gulliver from Stifel. I had some follow-up questions on delivery. It's been nearly a year since you introduced the delivery charge. I think you said it was last August. I had some questions around what changes in customer behavior you've seen as a result of it. Have you noticed more price sensitivity at the low end, entry-level products versus more premium products? Have you know, just any other sort of customer behavior changes? I assume you trial different price points. What sort of thing you've felt from that?
Mm.
Saw from that, maybe?
The most noticeable effect is that 95% of the customers that we used to have now pay for delivery. I mean, it's not, it's not much more rocket science than that, in truth. They, the real message in that is they see the value in paying for delivery with us. Some of our competitors are still free, and yet the sales impact of that decision was relatively small.
When you think about how you charge for delivery, is it sort of cost plus, or are you actually looking at what the competition's doing on delivery charges as well?
The truth, I just arbitrarily picked 20 GBP. Felt like about the right number. That is not the cost to make a delivery, so it is still a subsidized delivery. It felt right.
Is that across all products?
That's all 2 man deliveries.
All 2 man.
Some of the 1 man stuff, I think, range is $4.99-
Yeah.
I think it is something like that.
Thank you.
Thanks. Bruce, did you have a question? Oh, sorry, go on.
Yeah. Brad from Shore Capital. Just a quick one when we're thinking about sort of revenue flat year-on-year, what sort of needs to happen in Q2 and 4 if 1's sort of down and 3 is gonna be quite tough?
I mean, the sort of the math is that, look, Q1 will be down double digit, and therefore, that calls for sort of small single digit growth through the remainder of the, you know, the eight months effectively. We're post-lapping the pivot in August, and that's effectively the modeling.
Are you able to sort of give us a flavor for what the drag might be from SKU rationalization this year on the top line?
I think once we're out of Q1, the majority of the drag's done.
Yeah, correct. I mean, it's a combination of SKU rationalization and the implementation of delivery charges. You know, as John said, you know, not every competitor is matched on an exact like-for-like basis.
Okay. Sort of this year, we're not really thinking of much more additional SKU rationalization, that's behind us now?
Correct.
Okay.
Yeah, in fact, the exact opposite, that we would look with the right economics to put some of the SKU rationalization back in.
Okay. No, that's very helpful. Just a quick one as well on headcount. Are you sort of happy with where that is now, and what sort of revenue base can we think of you leveraging on the current sort of headcount?
Well, from a headcount perspective, you know, Mark made the comment that we think there's more to go, but we're not at our sort of year-on-year, whatever the macro number is, GBP 47 million year-on-year or something like that.
Yeah.
On the overhead base, that's changed. We're kind of done. Anything else is just normal efficiencies that isn't worth calling out, but we will obsess about joining the business up ever better. You know, we have a real value to being vertically integrated, so obviously, running the retail business, we've got the B2B business, we've got our own logistics operation, we've got the recycling on the back end of that. The better we join that business up, the more efficient it is. The more grit we take out, then, you know, if there's grit coming out, then things will get more efficient. Ken Morrison used to say, "Cost walking to business is on legs," and it's as true today as it has ever been.
We don't have any plans for next stage of mass redundancies or anything like that. We're really happy with where we are, and we really want to now leverage that as we grow.
I think to add, Brad, just in particularly in the other admin line, you know, I do see that sort of cash cost being, you know, pretty well invested now, actually, and so there'll be some inflationary pressure or whatever, but actually, as we grow, I would hope to keep that cash cost pretty flat, really driving leverage through that particular line.
Okay, cheers. That's really helpful.
Bruce?
Hi. Bruce Hubbard at Brook Asset Management. Your expansion into SDA and other new categories was pretty dilutive, partly because of how you approached it and partly because of what you did. Can you just take us through a bit of the things that make, as you start growing into new categories, why it's different this time in terms of not being dilutive?
Yeah. When we went into it, we had a much smaller business. We were much less interesting to the brands in that space. Our unit economics were set up much more for a two-man home delivery business, not a one-man operation, with no automation at all in our operation. Again, every time somebody touches something, there's a cost that goes with it. The product values were lower. We just took the view in the early days of that, look, let's go and build the problem, and then let's work out what works, what doesn't work, and let's go through that process. That's been something we've been doing very aggressively in the last 12 months.
Again, we're building that on experience that we've gained over the last nine years. And we will keep then building on that going forward. We're now, in some ways, we're less interesting because we've done some of the rationalization, and in some ways, we're more interesting because we're getting more share of wallet from customers, and we're demonstrating the ability to different brands to sell, to cross-sell into those products, and our customer base is twice as big. And it's more loyal, and it's behaving better, and we're getting more share of wallet. I think it, I think you've got to look at it on a more sort of five to 10-year journey of what we've been doing, rather than just a 12-month journey. Does that answer? Any other questions?
Can we give, Dave a mic in the middle?
John, ust a very quick one. Thoughts on, like, Frasers Group and their actions, what does that mean for the business going forward, if anything?
It means we've got a new, really supportive shareholder. Frasers have been an admirer of AO for some time. We've been in commercial discussions in our B2B channel with them for some time, and we don't have any current commercial relationship with Frasers, so we sort of and now deal with them as an investor, and as a shareholder, where they see long-term value, and obviously, we continue the commercial discussions. You know, it's very much business as usual. I've got a huge amount of respect for what they have created and are building as a platform, and I think there's lots of opportunity within there, whether it's leveraging 2 man home delivery. They've obviously got Frasers Plus, that can be an opportunity the other way. There's opportunities with Studio Retail.
We've just got to do the right thing at the right time. None of that is in our current medium-term plan, because no agreements have been reached, so why would it be in that plan? Is it in our thinking and our discussions of what might be possible? Yes, but it was pre-investment. Obviously, the investment came through an opportunity that arose, and, you know, Michael sees a great investment opportunity, I think, is the way that they see it. For me, they're a supportive shareholder, and they've been very public about that. I think they're admirers of the business, and they see it as a platform to invest in, not something to come and fix.
Great, thanks.
Anyone else? Okay, well, thanks very much to everybody. I think the only final point I would make is to really pull through the year of two halves that Mark highlighted in his presentation and the momentum that the business has going forward and quite what it's achieved. When you think about the GBP 150 million of working capital that's been managed through that process, you know, the working capital cycle of retail businesses in decline is something that sometimes gets forgotten. That needs very careful management, and there's been a lot of things that have been very carefully managed simultaneously through the last 12- 18 months that put us in a really good position.
You know, the depth of understanding that we have of our business, having been running it for 23 years, is really important as an ingredient to the value that we have on knowing what we're doing. We would hope to be continuing to be reassuringly boring on the presentations going forward. Thank you very much for everybody's time. Cheers.
Thanks.