Ao World Regulatory News (AO.)

AO World plc

FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2014

5 June 2014

AO World plc, the United Kingdom's leading online retailer of major domestic appliances, today announces its financial results for the year ended 31 March 2014.

Key financial highlights3

· Revenue up 40.0% to £384.9m (2013: £274.9m)

· AO Website revenue up 45.4% to £287.1m (2013: £197.4m)

· Adjusted EBITDA1 up 10.9% to £11.2m (2013: £10.1m)

· Operating profit before exceptional items2 of £8.2m (2013: £8.4m)

· Operating loss of £7.2m (2013: operating profit £8.4m)

Operational highlights

· Completed the re-branding of the Groups' principal website to ao.com in August 2013

· Major Domestic Appliances (MDAs) proposition enhanced by (i) introduction of Same Day Delivery option, (ii) an extension of cut-off time for Next Day Delivery from 10 pm to midnight, and (iii) extension of services for cooking appliances to include gas and electrical installation

· Ranked 4th in 2014 Sunday Times "Best Companies to Work For" (2013 - 4th place also)

· Listed on the London Stock Exchange in March 2014

· Launched online proposition for TV and related products in May 2014

Outlook

The 2015 financial year has started well with trading in line with our expectations in all respects. Our plans to broaden our product range in the UK are being implemented ahead of schedule and our European strategy is also proceeding well.

Commenting on today's statement, John Roberts, Chief Executive Officer said:

"I am delighted by the achievements the AO team has delivered over the course of the last year and the progress we have made in positioning our business structurally and financially to realise the very exciting opportunity we have ahead of us.

Our UK business continues to build strongly aided by a successful rebranding, introduction of same day delivery and entering the small domestic appliance and television markets.

We are making great strides in preparing for our launch into Germany as the first step to becoming a leading European online electrical retailer."

1 Adjusted EBITDA is defined by the Group as loss/profit before tax, depreciation, amortisation, net finance costs, fees

incurred in relation to IPO, and Share based payment charge. See note 4 of the Notes to the financial information.

2 Exceptional items of £15.4m relating to IPO costs.

3 Comparatives have been restated for IFRS - see Note 8 of the Notes to the financial information.

For further information, please contact

A recording of the management team's presentation to analysts will be available on ao.com/corporate later today.

GROUP RESULTS

In the year in which AO World plc became a listed company the Group has delivered strong sales growth, continued to strengthen the AO brand and introduced further enhancements to our customer proposition.

For the year ended 31 March 2014 total revenue for the year increased by 40.0% to £384.9m (2013: £274.9m), driven by increased order volumes at slightly higher average order values to the previous year.

This growth was primarily from AO branded website sales which grew by 45.4% to £287.1m (2013: £197.4m) and now accounts for 74.6% of total group revenue compared with 71.8% for the comparable prior year period.

Adjusted EBITDA increased by 10.9% to £11.2m (2013: £10.1m) while Adjusted EBITDA margin fell by 0.8 percentage points to 2.9% (2013: 3.7%) largely as a result of higher marketing and advertising expenses as a result of the brand migration and subsequent TV campaigns.

Operating loss for the year was £7.2m (2013: operating profit £8.4m) after charging £15.4m of exceptional costs relating to the IPO to the Income Statement.

Cash generated from operating activities was £13.6m (2013: £12.2m), and the year end net funds position was £48.7m (2013: £5.4m).

Capital expenditure for the year was £7.5m (2013: £3.3m), much of which relates to the new headquarters building which employees moved into in December and additional trailers for the trunking fleet.

Strategy

Our strategy remains the same - to "Build, Drive and Broaden".

"Build" in the UK is largely complete. Our proprietary software and systems, brand loyalty, experience, relationships, culture, team, logistics and reach give us more than enough capacity for growth and for many years to come.

Our success at "Drive" is evidenced by our sales growth over recent years and we intend to leverage our position to continue driving market share in the UK.

For many years our Company was exclusively focused on selling major domestic appliances (MDAs). "Broaden" commenced last year with the introduction of small domestic appliances (SDAs). A key rationale for the IPO was to accelerate this phase of our strategy and we are delighted to confirm that we have recently launched the sale of TVs on ao.com, and earlier than promised.

We have the ability and opportunity to replicate our UK model in mainland Europe. Our systems and logistics infrastructure is fully transferable with minimal additional investment and we have aligned our UK teams to accommodate building and operating business in Europe. Starting in Germany we have identified premises, commenced hiring staff and are engaging with suppliers with the intention to begin trading during the current financial year.

Whilst we believe our competitive strengths give us a broad range of advantages over both online and bricks & mortar retailers, we will continue to evolve our proposition to ensure we remain ahead.

Board

In preparation for the IPO the Board of Directors was strengthened to provide a balanced Board that would provide the skills and experience we need to achieve our ambitions.

After playing essential Non-executive roles during the development of the business, two of our long standing members of the Board have stepped down - Norman Stoller CBE CStJ DL and Kevin Philbin. It has been a pleasure and privilege to work with them over many years and we thank them both for their outstanding contribution and support.

We are delighted to have appointed three very experienced and complementary Non-executives who are all well equipped to help us deliver the drive and broaden strategy. Brian McBride is a seasoned expert in online retail and is currently Chairman of ASOS, the global online fashion retailer and until 2011 was Managing Director of Amazon in the UK. Marisa Cassoni is a highly experienced finance professional who, having been CFO at John Lewis until 2012, has the perfect background in relevant people culture, product categories and technologies. Rudi Lamprecht has exceptional knowledge of the international domestic appliance market having been Non-executive Chairman of BSH (Bosch and Siemens GmbH).

Outlook

The 2015 financial year has started well with trading in line with our expectations in all respects. Our plans to broaden our product range in the UK are being implemented ahead of schedule and our European strategy is also proceeding well.

BUSINESS REVIEW

Operational Review

Brand

One of our key strategic objectives is to increase brand awareness amongst UK consumers in order to help drive growth and lower the cost of customer acquisition. In August 2013 we launched a national marketing campaign, including a programme of national television advertising, to coincide with the rebranding of our Appliances Online website to ao.com. Prior to rebranding, only 2% of consumers identified Appliances Online as a business which came to mind when considering purchasing a large domestic appliance in a survey of unprompted brand awareness. It is therefore very pleasing to report that by the end of our financial year unprompted brand awareness measured in similar surveys had increased to 10%, a trend which has continued into our new financial year.

During the year to 31 March 2014 we continued to evolve our social media content to engage with our customers and enhance our brand visibility. Our expertise in this area is illustrated by the continuing rise of likes on Facebook which we anticipate will shortly exceed 1.5 million.

Customer Service & Proposition

AO is committed to delivering excellent customer service. The strength of our offering and high customer satisfaction levels encourages the purchase of additional items from our existing customers whilst also helping to attract new ones. Over the reporting period we continued to make good progress in our customer related metrics. We ask all of our customers on a scale of zero to ten (with ten being most likely) how likely they would be to recommend AO to a friend or colleague; this is a Net Promoter Score (NPS). Over the reporting period, 80% (2013: 74%) of those customers responding rated us a 9 or 10. Contacts Per Order (CPO), being the number of times a customer contacts our customer services team, continued to reduce. The Group seeks to maintain a high NPS whilst reducing the level of contact it has with customers underpinning our philosophy that a 'right first time' approach should result in no unnecessary contact with our customers. The collation of NPS and CPO data allows us to refine processes and help improve customer satisfaction levels, thus improving our efficiency.

We were delighted that our excellence in customer service was recognised by the wider retail industry when we were presented with the Customer Service Initiative award at the 2014 Oracle Retail Week Awards.

Our delivery proposition was considerably enhanced during the reporting period as we introduced to certain areas our Same Day Delivery service and extended the cut-off time for Next Day Delivery from 10pm to midnight. We also significantly extended the range of products available for these two services.

To enable the customer to make an informed decision during the purchase process, we use our in-house video production facility to produce reviews of appliances. These reviews provide detailed general and technical advice on the products AO offers, providing our customers with a more enhanced level of product information. Our capability in the area has helped to bring our TV and AV accessories proposition, launched in May 2014, to market in a way that has not been available online before.

Customers have access to a range of ancillary services through ao.com, including product protection plans, disposal and connection services. During the year we introduced additional installation services, including gas and electrical installation on cooking appliances which are available to customers in certain areas. These installations are performed by a new team of trained and approved specialists.

AO's in-house logistics service has performed strongly over the period delivering products to our customers on time, as promised. The average monthly number of deliveries made successfully, on the customers' first chosen delivery date and with the desired or higher specification product at no extra cost, our Deliver-to-Promise (DTP) KPI, increased to 98.2% for the year ended 31 March 2014 compared to 96.4% for the prior year period. This is a substantial achievement when considered against an increase in orders of approximately 40%.

The hub of the logistics operation is at our 360,000 square foot National Distribution Centre (NDC) in Crewe, with stock transported to stockless outbases and loaded onto delivery vehicles for delivery to customers daily. Some deliveries are also made directly from the NDC. During the year we increased the number of outbases to eight by opening in Yaxley, Cambridgeshire in August 2013 and in Spennymoor, County Durham and Exeter, Devon in October 2013. AO's stockless outbases are strategically positioned in order to maximise the efficiency of our delivery fleet. The opening of the three additional outbases during the reporting period has enabled each outbase to serve a smaller area, thereby increasing the efficiency of deliveries and making AO less reliant on any single stockless outbase.

Culture

Culture is at the core of AO's business model and we believe has been critical to our success to date.

We were therefore delighted to retain 4th place in the 2014 Sunday Times "Best 100 Companies to Work For" award. The Sunday Times collects its data from the employees and ranks companies chiefly by eight key indicators of staff engagement including leadership, wellbeing, personal growth and the way the company treats its staff. This award represents an external validation of our commitment to sustaining our culture whilst at the same time continuing to grow head count to over 1,300 at the year end with additions across a broad cross-section of the business but particularly in Marketing, Quality, IT, Call centre and People teams as we laid the foundations for future growth.

Among the highlights for staff was the relocation of the head office at the end of 2013 to our new 48,550 sq.ft building in Bolton. The building is modern, stylish and has been fitted with a number of features all aimed at making AO a happy and desirable place to work. The reaction from staff has been overwhelmingly positive and we believe this will help to maintain AO's culture whilst at the same time attracting the high quality employees we need to drive our market leading business model.

Immediately post the end of the reporting period we launched the AO World Sharesave Scheme. We are particularly proud that approximately one-third of employees eligible joined the scheme, highlighting our people's positivity and passion for the business.

Financial Review

Revenue

For the year ended 31 March 2014 total revenue for the year increased by 40.0% to £384.9m (2013: £274.9m).

KPI Definitions

1. The number of occasions the AO.com website has been visited.

2. Total number of orders taken to completion in connection with AO Website Sales divided by total sessions.

3. Total number of orders taken to completion in connection with AO Website Sales and Third‑party Website Sales.

4. The sum of AO Website Sales and Third‑party Website Sales divided by total number of orders.

5. Total number of units sold in connection with AO Website Sales and Third‑party Website Sales divided by Number of orders.

Growth during the year was largely driven by an increase in ao.com sales which experienced an increase of 45.4% to £287.1m (2013: £197.4m) as the Group benefitted from customer proposition enhancements, its continued commitment to exceptional levels of customer service and improved brand awareness through our targeted advertising activities which resulted in increased traffic to the AO.com website, slightly improved conversion rates and increased number of orders. AO own website sales now account for 74.6% of total group revenue (2013: 71.8%).

Third-party Website Sales, where the Group builds and operates third-party branded websites and fulfils order for selected third parties and trade sales, increased by 28.5% to £79.3m during the year (2013: £61.7m), driven by higher volumes from both insurance replacement clients and branded websites.

AO also delivers products for third parties through its in-house logistics service which allows the Group to utilise its fleet more efficiently. Sales in this area increased to £18.5m (2013: £15.8m).

During the reporting period, the total number of completed orders from AO Website Sales and Third-party Website Sales increased from 763,000 to 1,066,000, an increase of 39.6%. Whereas our Average Order Value (AOV), and Products Per Order (PPO) KPI's remained broadly consistent with the previous year at £343.87 and 1.20 respectively (2013: £340.42 and 1.19 respectively).

Gross Margin

Gross margin increased to 19.3% (2013: 18.5%) for the reporting period, an increase of 0.8% against the prior year. Cost of sales, which consists of product, delivery and other direct costs increased to £310.7m (2013: £224.1m) for the twelve months to 31 March 2014, an increase of 38.6%. The decrease in cost of sales as a percentage of revenue was due to higher product margin, as well as volume efficiencies realised from our delivery cost base.

Administrative Expenses

Total Administrative expenses for the year to 31 March 2014 increased to £66.0m (2013: £42.4m) and as a percentage of revenue increased to 17.1% (2013: 15.4%). 

Increases in advertising and marketing expenses were due primarily to increased advertising expenses relating to brand investment via a national television campaign (at a cost of £5.0m) and paid online advertising. The increase in paid online advertising costs arose following the rebranding to AO.com from Appliances Online in August 2013 and the resultant reduction in ao.com's Google natural search visibility which meant that more customers arrived at the AO.com website through paid channels. Whilst we expect certain advertising costs to continue to grow during the year to 31 March 2015, we believe that as brand awareness continues to improve, more orders will be generated through unpaid and lower cost sources of customer acquisition.

Warehousing expenses were 3.4% of revenue at £13.3m (2013: £9.2m) as scale efficiencies were offset by the rollout of our Same Day Delivery offering launched in October 2013, and the additional costs associated with the three new outbases. The new outbases provide capacity to deliver additional volumes more efficiently.

Other administrative expenses increased by 31.9% to £34.5m (2013: £26.1m) following the Group's investment in its cost base to support the future growth of the business.

Adjusted EBITDA

Adjusted EBITDA for the twelve months to 31 March 2014 was £11.2m (2013: £10.1m) representing an increase of 10.9% against the prior year period. As expected we experienced a reduction in EBITDA margin to 2.9% (2013: 3.7%) as a result of the increased investment in our brand, temporary increases in advertising and the investment in our cost base to prepare the business for its next stage of growth.

Exceptional Items

Total fees incurred in relation to the IPO were £19.7m, of which £15.4m has been expensed through the Income Statement as an Exceptional Item with the balance of £4.3m being charged to the Share Premium account.

Taxation

The tax charge for the year was £2.0m (2013: £1.8m). The effective rate of tax for the year was 26.8% (2013: 22.4%).

Loss/earnings per share

Basic (loss)/earnings per share was (2.38p) (2013: 1.58p) and Adjusted EPS was 1.50p (2013: 1.58p).

Cash resources and cash flow

Year end net funds position was £48.7m (2013: £5.4m), as cash increased to £55.1m (2013: £12.2m) reflecting the receipt of net proceeds from the IPO, while total borrowings declined to £6.4m (2013: £6.8m). Surplus cash balances are held with UK based, in line with the Group Treasury Policy.

The Group's cash generated from operating activities was a cash inflow of £13.6m (2013: £12.2m) and represents an operating cash flow conversion of 121% of Adjusted EBITDA (2013: 121%).

Working Capital

As at 31 March 2014 Inventories were £15.9m (2013: £8.7m) reflecting an increase in sales volumes and the change in our stock holding strategy as we hold more stock in order to provide customers with same-day and next-day delivery options on an increased number of SKUs. As a result average stock days increased to 17 days (2013: 10 days).

Trade and other receivables were £33.0m as at 31 March 2014 (2013: £26.8m) reflecting an increase in accrued income in respect of commissions due on product protection plans as a result of higher retail volumes. Trade and other payables increased to £62.9m (2013: £44.6m) as manufacturers continued to extend credit on a higher volume of sales.

Capital Expenditure

Capital expenditure for the year was £7.5m (2013: £3.3m), much of which relates to the new headquarters building which we moved into in December and additional trailers for the trunking fleet, of which £3.3m (2013: £1.7m) was funded from internal cash and the balance was funded by new finance leases.

Principal risks and uncertainties

The Company has identified certain principal risks that could prevent the Group achieving its strategic objectives and has assessed how these risks could best be mitigated through a combination of internal controls, risk management and external insurance cover purchase. These risks were last formally assessed in March 2014 and will be reviewed and updated on a regular basis.

A summary of the nature of the risks faced by the Group is as follows:

· Risks relating to the effective operation of the business including the dependence on a single national distribution centre, the interdependence of our IT systems, relationships with manufacturers and changes to search engine algorithms;

· Risks relating to acceptance of our customer proposition including failure of our brand, websites and offering to receive wide acceptance, that consumer acceptance of online retailing of MDAs might not increase, and that European expansion is unsuccessful;

· Risks relating to people, such as failure to maintain the culture and recruit AO appropriate staff, dependence on executive directors and senior management team; and

· Risks relating to regulatory changes, such as changes to EU or UK consumer protection or employment laws

A more detailed description and assessment is included in the Company's 2014 Annual Report & Accounts which will be available on ao.com from 18 June 2014.

Forward-looking statements

This preliminary announcement contains certain forward-looking statements (including beliefs or opinions) with respect to the operations, performance and financial condition of the Group. These statements are made in good faith and are based on current expectations or beliefs, as well as assumptions about future events. By their nature, future events and circumstances can cause results and developments to differ materially from those anticipated. No undertaking is given to update the forward-looking statements contained in this document, whether as a result of new information, future events or otherwise. Nothing in this document should be construed as a profit forecast or an invitation to deal in the securities of the Company.

RESPONSIBILITY STATEMENT

The responsibility statement below has been prepared in connection with the Company's Annual Report & Accounts for the year ended 31 March 2014. Certain parts thereof are not included within this announcement.

We confirm that to the best of our knowledge and belief:

· The consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted in the European Union, give a true and fair view of the assets, liabilities, financial position, cash flows and loss of the Company and Group; and

· The management report, which is incorporated into the strategic report, includes a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties it faces.

This responsibility statement was approved by the Board on 4 June 2014 and is signed on its behalf by:

Steve Caunce

4 June 2014

Consolidated statement of comprehensive income

For the year ended 31 March 2014

The accompanying Notes are integral to this financial information.

Consolidated statement of financial position

As at 31 March 2014

Consolidated statement of changes in equity

For the year ended 31 March 2014

The accompanying Notes are integral to this financial information.

Consolidated statement of cash flows

For the year ended 31 March 2014

The accompanying Notes are integral to this financial information.

Notes to the financial information

1. Basis of preparation

The financial information has been prepared under International Financial Reporting Standards (IFRS) issued by the IASB and as adopted by the European Union (EU). Further information in relation to the Group's transition to IFRS can be found in note 8 to this financial information.

Whilst the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS's), this announcement does not itself contain sufficient information to comply with IFRS's.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2014 or 2013, but is derived from those accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered following the company's Annual General Meeting. The auditor has reported on those accounts; the report was unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under section 498(2) or (3) Companies Act 2006.

Going concern

The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. This takes into consideration the proceeds received from the Group's IPO in March 2014. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements.

A copy of the full group accounts that comply with IFRS's for the period ended 31 March 2014 will be published on the Group's website ao.com\corporate on 18 June 2014 and will be posted to shareholders later this month.

2. Revenue

An analysis of the Group's revenue is as follows:

3. Administrative expenses

An analysis of the group's administrative expenses is as follows:

4. (Loss)/profit for the year

The Group has calculated Adjusted EBITDA by adding back those material items of income and expense which, because of the nature and expected infrequency of events giving rise to them, merit separate presentation to allow shareholders to better understand the financial performance of the Group in the year.

Adjusted EBITDA:

5. Exceptional items

Non-recurring IPO costs

In March 2014, AO World plc floated on the London Stock Exchange. Non-recurring IPO costs totalled £19.7 million of which £15.4 million was charged to the income statement and £4.3 million was charged to the share premium account as being directly related to newly issued shares.

6. Tax

Corporation tax is calculated at 23% (2013: 24%) of the estimated taxable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

The charge for the year can be reconciled to the (loss)/profit in the income statement as follows:

7. (Loss)/earnings per share

Given the changes in capital structure prior to the IPO, the weighted average number of shares for 2013 is based on the shares in issue immediately pre IPO as per the requirements of IAS 33: Earnings per share.

8. International Financial Reporting Standards ('IFRS') transition

This is the first set of financial information in connection with the Statutory Financial Statements that the Group has prepared under IFRS. Accordingly, the Group's opening balance sheet at 1 April 2012 has been restated as has the Group's last filed statutory accounts for the period ended 31 March 2013. The IFRS restatement also includes the discounting of the receivables balance and revenue. In continuing to give due consideration to the implementation of applicable International Financial Reporting Standards (IFRSs), this entry reflects an appropriate refinement of receivables and revenue.