Deliveroo plc (ROO) Earnings Call Transcript & Summary

Good morning, and welcome to our full-year results for '23. I'm Will Shu, I'm the Founder and CEO of Deliveroo. I'm joined by Scilla Grimble, our CFO. I'm going to start with a brief overview of '23 before running through some of the strategic and operational progress we made in the last year that ultimately give us confidence in our medium-term growth and profitability ambitions. Then Scilla is going to take us through the financials. She'll set out our guidance for '24. And after that, we'll open for Q&A. So let's get started with the key takeaways for '23. Overall, we had a really good year in '23, and I'm really pleased with the team's delivery. We made significant progress in profitability, with adjusted EBITDA of GBP 85 million having upgraded guidance during the year. I don't want to talk too much about macro conditions, but we did face cost living headwinds in many of our markets in '23. We remained focused -- we've remained focused on what we can control, our CVP, the efficiency of our operations and our future growth plans. In doing so, we achieved resilient top line growth. We delivered good relative performance across our key markets. Overall, we're very pleased with our market share and profitability trends. We strengthened our CVP further. At our CME in November, you heard me talk about prioritizing measures that build consumer trust, trying to achieve those perfect deliveries and making sure prices are fair on the platform. In my mind, these are the two most important things that drive growth in the industry. We made good progress here, and we're building really strong foundations for the long term. We also continue to drive strong growth in our Grocery business. We're now at GBP 1 billion run rate of GTV, and we also launched a retail offering. So these are some of the things that we've done in order to lay the foundations for the future. But at the same time, we've also made strong progress on cash flow generation. I'm also really proud of that. So we've outperformed on profitability. We've made good progress on free cash flow, and this is whilst strengthening our CVP for that medium term. Now in terms of guidance for '24, Scilla will comment on to that later. But in short, we're going to guide to GTV growth of 5% to 9% in constant currency and adjusted EBITDA of GBP 110 million to GBP 130 million. And we expect to deliver positive free cash flow in '24. Now on to our business update. So at the CME, we set out our medium-term targets. Those were mid-teens GTV growth in the medium term and 4% plus adjusted EBITDA margin by '26 as a percentage of GTV. Scilla is going to talk about these later. But I guess, for me, I'm as excited as I ever have been about the business. I'm excited about the team that we have in place to execute on this, and I'm really excited about the opportunity we have to deliver these targets. First, I'm going to talk -- I'm going to start today by talking you through the strategic framework we use when we think about this as a team and then share some of the areas where we've made some progress. Let us start from strategy, which starts from our mission, right? And let me just repeat this again because I think it's really important. It's to transform the way you shop and eat, bringing the neighborhood to your door by connecting consumers, restaurants, shops and riders. It's a lot to take in, but I do think it encapsulates exactly what we're trying to do. And we have 3 pillars that support delivery of that mission. It all centers on delivering a compelling CVP across our key verticals. And of course, we remain focused on doing that as efficiently as possible in order to drive profitable growth. As we described at the CME, these focus areas support the building blocks of growth, and delivering across these areas will drive the outputs in terms of the targets we've communicated. And we're going to do this whilst maintaining an efficient capital structure. Now we've made progress across a number of areas last year, but I'm going to focus on a few. These are the ones that we've highlighted in blue, those 5 boxes. All right. So now we're going to talk about these trust-building measures that I laid out at the CME. And specifically, we're talking about the barriers to consumer trust, which is price integrity and consumer experience. And really, we're trying to answer the question to the consumer, does the consumer feel that the prices are fair? And does the consumer feel like the delivery experience was flawless? And just being realistic, there are definitely issues that happen. And I think solving these two issues is the key to driving long-term growth in the industry, right? But I'll just kind of give you a personal anecdote. So I recently ordered pizza from a place I go to in my neighborhood. And I realized the prices that they were charging in the app are 25% higher than the in-store price, which, for me, compelled me not to order from them. I just felt annoyed by that. And I don't think I'm alone in that. I think a lot of people think that. I'll give you another example, maybe more relevant for the delivery side. So let's say you order Chinese and you order 7 things, but you don't get your small side dish of fried rice, which is kind of really important to you to pair with the chicken, right? But you just didn't get it, and that's super, super annoying. I think the #1 reason for churn out of the industry or to competitors is when something goes wrong. And I think that's either on the price side or on the delivery experience side. So again, we want the customers to think the prices are fair and the delivery experience is flawless. And I think we've spent a huge amount of time working on that in '23 setting the foundations for that. And I think that ultimately will be a huge point of differentiation in the sector if we can get it right, and I think a critical way to drive growth. Okay. So I'm going to go into price value in detail. We're going to talk about better value and price integrity. And over the last year, this has become even more important than ever as inflation has hurt demand across the industry, in many industries. And this isn't -- when I talk about better value and price integrity, this isn't just we're doing it in response to inflation. I do think, however, in an inflationary environment, the sort of problems become even more acute, but this is a permanent way of thinking. So what do our consumers really want at the end of the day? So beyond access to the best merchants, they want to feel like they're getting a fair deal, whether that's promotions, savings or overall low prices, which is ultimately what I want. Now we directly deliver this through both our subscription program, which is Deliveroo Plus, but also through targeted promotions. So those are the direct levers you see up there. We've used more targeted promotions in '23. We thought about the structure of these promotions with offers such as 7 of -- GBP 7 off 7 orders. This reinforces value perception for the consumer, but it also drives frequency. We've created carousels, which highlight good deals from our merchants, including an offers tile. And so these direct levers are critical for us to deliver value to consumers. Then, if you look on the right here, we have our indirect levers. We've developed tools to incentivize our merchants to provide fair prices in combination with great service. We've been doing that with 2 different programs, which are concurrent. So the first one, this is called a commercial architecture, this is our framework to work with larger partners. Our commercial architecture means merchants can unlock lower commissions that are linked to performance on these trust-building metrics, such as smaller markups and better operational performance. This creates wins for consumers because you get better prices and poor -- better -- fewer poor order outcomes. It drives wins for riders because you have lower wait times in restaurants and therefore, you can do more deliveries. You have wins for merchants themselves because you have better consumer retention and it helps enhance their brand, and ultimately for us because we build more trust in the platform. And we've had a lot of good traction here. We've seen partners make organizational changes such as adding managerial roles to oversee delivery but also investing in technology to improve their metrics because they understand the value in this, and there's a big return on their investment from this. One of the key outputs so far has been reduced rider wait time at restaurants, which is really, again, that's a win-win-win for everyone. This works well with our largest partners, but then we thought, "Okay, how do we efficiently scale this approach over hundreds of thousands of merchants?" Well, we do this through our second program, which we call our Value Programme. So this is how it works. So within the Value Programme, we rate the value for money offered by each partner across 3 dimensions. First one, price integrity. What's your markup versus dine-in prices? Secondly, the quality. So how do you perform on customer ratings. Thirdly, service, and these are things we can measure. We're going to focus on availability. We're going to focus on prep time speed and defect rates. So restaurants that score well on these 3 factors, they're featured in our Deliveroo [ Choice ] carousel. And if you go to the app, you can see it's a teal -- actually, I think it's a circular thing with the Deliveroo logo. Click on that, and you can see, and I personally discovered so many new restaurants in my neighborhood through this that I just otherwise wouldn't have ordered from. So we are greatly increasing their traffic and visibility. We're also allowing those partners to participate in specific offers. But for those of you with the app, I highly encourage you to click in to Deliveroo's [ Choice ] and check it out. This program went live in the U.K. in November. So far, the results are great. Average markups are coming down. We've had a lot of positive feedback from merchants. Restaurant partners are getting in touch to say the recent changes have and, I'm quoting now, "significantly boost sales and orders volume" and "resonated positively with consumers." And so when we look over the last 12 months, our NPS score has improved by 11 points year-on-year, and a bunch of that came from specifically on value for money. So even though this thing launched in November, we're starting -- we're really seeing some benefits from that. So this is why we're pushing this really hard. Again, wins for the merchant, wins for the riders, wins for consumers and wins for Deliveroo, we really, really believe in this. And so this is a long-term program, we run this business for the long term. And so far, what we've seen suggests that our efforts on price integrity and service in tandem are having a big impact on consumer NPS. All right. Now let's talk about the delivery experience here, and that's obviously a critical part of the consumer experience. So think about it this way. This is after the consumers place an order, okay? What's the experience? So how fast did it arrive? Was our estimates accurate? Could the rider find the consumer? Did they get what they ordered? Was the food hot, right? All these things sound pretty basic, but they don't always go smoothly, which is why we're fanatically obsessed with improving the operations through technology on these things. This has been a huge focus area for us in the last year. We reduced the global average order duration by 1 minute, which is a big, big percentage because the number -- the denominator is small, right? And we've done this by both expanding our geographic reach, expanding the radii in which consumers can order from, right? So we're driving down order durations but giving consumers more selection, right? So how do we do that? Well, for those of you who are in the CME breakout sessions, you might remember Camilla and the team showed us how do we reduce that wait time in restaurant, right, through many different ways. That's one area. So you guys saw those in the breakout sessions. And this is, for me, probably the most fun part of the business, just figuring out all of these little wins through technology to drive a much better consumer experience. So what does this mean? We've reduced the defect rate overall by 10% of just bad -- the defect rate being just generally bad experiences, that's gone down by 10%. We've had really big reductions in the most trust-busting outcomes such as orders mark delivered but not received. We talked about that at the CME. That went down 65%. That saved us over GBP 20 million annualized in terms of compensation expenses and other things. But much more important than money, our consumers trust us more. And you can see that in the NPS score I told you about. And these are the long-term investments that we really prioritize that we think have a great return over that medium term because ultimately, happier customers lead to a lower net cost of the business, drives frequency, drives retention. It drives a much bigger business over time. So getting all of this right is critical to driving growth, and we are 100% behind it. All right. Let's talk about Grocery now. So we launched this in 2018 or so, 2018, 2019. We've grown grocery from a standing start to a business in Q4 that reached an annualized GTV run rate of GBP 1 billion. This was about 13% of our group GTV in the second half of '23. So really proud of building this market-leading business in a really short amount of time. So what did we do? We improved our in-app experience. We've made discovery more personalized. We've got features like your regulars and top picks based on your previous ordering behavior. We've made the grocery experience much more reliable. We introduced an availability API. We have a dedicated picking app for merchants. We've developed our substitution features for the consumer. So it's not just what do you see on the Deliveroo app, which I think is awesome because it's a completely separate shopping experience from the restaurant side, but all of these things you don't see that drives reliability, something we talked about earlier. We also have seen good traction from our Grocery top-up feature. This is when you check out of a restaurant, you get the ability to top-up your order with a Grocery order. You should try it, if you haven't. That's been a great way of introducing restaurant consumers to the Grocery offering, and about 1/4 of the consumers who use the top-up feature were actually new to grocery, which is great. I'd say this as well. Up until now, we've been focused on these hsmall basket missions, call it, GBP 30 baskets or so, up to GBP 30. And there's still a huge amount of growth here, as you can see. Now even in the U.K., where this online Grocery business -- sorry, our online Grocery business is the most developed, the majority of consumers who use the platform to order food still haven't ordered groceries, and the international business is even earlier on that maturity curve. So we've got a big opportunity just to drive these small baskets that we talked about. But we also have a real expansion opportunity, call it, in that GBP 30 to GBP 60 bucket, but still delivered with that convenience of on-demand. And it doesn't require any reinvention. We're really doing the same stuff. We're just really increasing the range of available products, right? So certain merchants now have 10,000 SKUs, which, I think, is a big deal. Those midsized baskets, by the way, they're growing at 5x the rate of our, I guess, other Grocery orders. And now they're about 1/5 of total groceries. So we see a really, really big opportunity in that, both in terms of the ongoing kind of smaller basket sizes but as well as these midsized baskets, where we're driving that through -- get it to 10,000 SKUs with certain merchants. All right. Let's look at retail. So we just launched this retail offering, right? This is a little over 3 months ago. That was in, I guess, the end of November at the CME. We really see this as a natural extension of our marketplace because even without marketing these products, at the beginning of last year, we saw that consumers were searching for thousands of nonfood items, such as pet, gifts, home accessories. And as we did with Grocery, we're building a new vertical by leveraging two sides of our marketplace, and we're leveraging that consumer base and rider network, and we're just adding in new merchants and selection. So far, we've launched this business in the U.K. and the UAE, really pleased with the early progress. Our typical customers, they're, as you would expect, busy professionals, young families. Now, as we've expected as well, we're fighting demand is driven really by two key motivators. So one is emergency items that are needed right now, so you're sick and you need paracetamol; but also convenience, where we can save you a trip to the local high street. And so the categories that are performing really well and where we're seeing the strongest demand, it's pharmacy, that's beauty, that's flowers, skincare and gifting. And beyond the categories you would expect, we're selling everything from spanner sets to ankle socks, to dog beds. These are all kind of things delivered under 30 minutes that you otherwise previously couldn't get that quickly. What have we been focused on? So we've been focused on ramping up selection across these key target categories, from flowers to gifting to pet care and DIY. We expanded our Screwfix partnership. We've added additional sites, and we're adding more. We're in very active discussions with a whole range of national chains and local independents. So that's a big area of focus. And within the app, we're evolving that shopping experience. It's we're learning better how people search and browse for retail items, learning how to better our cataloging ability, getting better at search as well because it's just a different type of search than food. But we're also, like I said at the CME, we're using machine learning to provide a curated selection to consumers as well as we have this now give-a-gift feature, which you should definitely try. Get your -- I guess, Mother's Day is gone now, but we'll -- get a gift for someone else, I don't know. And it's clear -- speaking of Mother's Day, right, that the key seasonal retail moments will be an important part of driving awareness, right, which is a bit different than food, right? Because food is something you just have every single day, driving awareness through seasonal moments is really important. Let's take the example of Valentine's Day or Mother's Day, right? And you can see here, there's an ad here for Valentine's Day. And we saw a triple-digit percentage of increase in GTV with florists on Valentine's Day. But more importantly, we added 60% more customers to the retail segment that week versus the week prior, right? So these are really set pieces that allow us to drive awareness in that industry. So it's still really early days. We're taking a measured expansion approach. We've got mid-teens millions of investments in '24, but I'm going to be excited to update you in the future because we're going to be targeting GTV in the region of GBP 700 million by '28. All right. On the advertising, so this business, you can see here, it's building very, very nicely. Ad revenues were 1% of GTV in Q4 '23. 70,000 merchants have placed an advert on the platform, including restaurants and grocers. We've got new display formats, so brands can showcase new products or dish launches. And then based on feedback from larger partners who want to increase brand awareness and grow category share, we're going to be developing new inventory, like display products such as -- sorry, display products like banners or videos on their menus and on order confirmation e-mails, which will help reinforce brand recall, both on and off our platform. We've also introduced a [ bid ] boost feature for ad campaigns. So this allows merchants to target customers using adverts at a specific time of day, so if you wanted to do breakfast or a specific day of the week, if you're focused on that. And then we also have the opportunity of advertising from our retail partners, which we talked about before as something we'll be looking into in the future. Finally, we signed an exciting new partnership with [ Rokt ]. They're going to bring to our platform a lot of non-endemic brands who want to advertise for our consumers, which we're excited about. So overall, we're progressing well here. I feel confident in our ads revenue target of reaching over 2% of GTV by '26. But I just want to end by saying that 2% has to come with a great consumer experience, right? And so we're never going to just show a bunch of ads to increase that number without understanding if there's having -- if we're having a detrimental impact on the consumer experience. All right. We're going to move on to riders before I hand over to Scilla. So riders, of course, are a vital part of our three-sided marketplace. And we offer to -- we aim to offer flexible work, attractive earnings alongside security. And our rider proposition reflects what riders tell us they want. You can see this in the high satisfaction ratings. 83% of riders tell us they are either very satisfied or satisfied working with us. And I've talked about the strong application pipelines and retention rates in the past. That is still the case. I'm going to now turn to regulation. I'm going to start with the EU Platform Workers Directive, given it's hot off the press. I'm sure most of you are aware that the European institutions have reached agreement this week. And we expect that the directive will soon clear the final formal hurdles for approval. This means that member states will then have 2 years to implement the directive. Now, what does this all mean? I think this means what we've been saying for a really long time, which is that crucially, it will say that national law will continue to determine final employment status decisions,, as is the case today. I think this is great. This is welcome clarity because we already operate according to existing national employment laws now. And so we'll be working closely with member states when this is introduced. So turning to the national level as opposed to the EU level, there's been some important developments in the last 12 months. There are still markets where there's ongoing discussions, where there's some regulatory uncertainty remaining. But we've also seen positive decisions in key markets as well. So in the U.K., in November '23, our rider model has upheld as self-employment by the Supreme Court. This is the highest court in the country. This means U.K. law has conclusively demonstrated that riders are self-employed. In France, which is also a key market, authorities have concluded that our current model is self-employment. And these developments mean that taken together, we have regulatory clarity in markets that account for 90% of our GTV. So with that, I'll hand over to Scilla to talk about the financials.

Thanks, Will, and good morning, everyone. As Will said, we made further progress on profitability in 2023. And against a difficult market backdrop, we delivered a resilient top line performance. GTV grew 3% year-on-year in constant currency, with growth improving in H2. Cost-of-living pressures impacted order volumes, although these headwinds subsided slightly as the year went on. Overall, we saw good GTV growth in the UKI, and international performance improved through the year. Revenue growth slightly [ linked ] GTV growth up 2% in constant currency, with some puts and takes impacting take rates that I'll describe shortly. That increase in revenue alongside efficiencies in the delivery network and the progress we've made on service, led to strong gross profit growth of 13%. As we indicated in our Q4 trading statement, adjusted EBITDA was ahead of our upgraded guidance, and we landed the year at GBP 85 million, with strong margin improvements both on gross margin and on operating costs. Free cash flow improved by over GBP 200 million year-on-year to an outflow of GBP 38 million. And just as a reminder, our definition of free cash flow is after exceptionals, but before interest income. So we're making good progress here. We ended the year with a strong net cash position of GBP 679 million after returning broadly 1/3 of our starting cash balance to shareholders. Moving into more detail then and starting with GTV. Consumers continue to experience cost-of-living pressures in '23. This impacted order volumes, which were down 3% in the year, while GTV benefited from food price inflation. As the year progressed, we did see consumer headwinds subside slightly as food price inflation moderated. This, alongside action we took, resulted in order growth recovering to flat in H2, with an improving trend through the year, as you can see in the chart on the left. Constant-currency GTV growth improved from negative 1% in Q1 to plus 4% in Q4, supported by the enhancements we made to our CVP, particularly on service and price integrity. Looking now to the right, as you know, a year of good growth in the UKI, albeit with a slight slowdown in Q4. In International, growth improved through the year to return to positive territory. We have particularly strong momentum in Italy and good UAE performance, which strengthened through the year. And in Hong Kong, the team has done a good job in improving the CVP and defending share despite the entry of a new competitor. As you know, in France, the overall market was weaker in '23, with consumer confidence slower to recover than in other markets. While France is still pacing behind most of our other larger markets, we've seen early signs of stabilization in recent months. And when we look at International ex-France, we saw good momentum, with GTV growth improving through the year to 6% in Q4. Turning now to look at revenue, which grew 2% year-on-year in constant currency. The UKI grew 8%, while International was down 5%, with the biggest drag being the top line weakness I mentioned in France. Before looking at the puts and takes in the year, I want to say just a word or two on how we think about take rates more broadly. Take rates is an outcome of the decisions we take to drive absolute revenue and gross profit and to build durable competitive advantage, rather than being a target in and of itself. Looking to the right, you can see our group revenue take rate for '23 versus '22. We enjoyed benefits on revenue take rate from the growth in advertising, Hop and the introduction of premium delivery as well as fewer refunds through the service improvements Will mentioned. On the other hand, given the cost-of-living pressures on consumers, we did choose to lean into targeted promotions that reinforce price perception and support ongoing demand. We also drove strong growth in Grocery and in pickup, which have a negative mix effect on percentage take rate that drive growth in absolute revenue. The net drag from these different moving parts was more pronounced in H2, meaning the take rate in H2 of 28.4% was below the full-year rate of 28.7%. So do keep this in mind as you think about your models for '24. Moving on to gross profit then. Good progress here, with a year-on-year increase of 13% and margin expansion of 90 basis points to 10.3%. That uplift was driven by a combination of the increase in GTV per order and our relentless focus on operational excellence. That included further optimization of deliveries with smarter and more efficient stacking, progress on reducing rider wait time at merchants and the reduction in order defects that Will talked about earlier, meant fewer refunds. And the margin rate, of course, benefited from the increased contribution from advertising. On a half-year basis, gross profit margin was slightly down in H2 compared to H1, as those efficiencies and improvements were offset by the CVP investments we've talked about. Looking at all of that in terms of unit economics, then, on the bottom right of the slide, you can see the impact of food price inflation in the 6% increase in GTV per order. But you can also see the impact of that operational focus I just mentioned, allowing us to keep cost of sales per order broadly stable despite an inflationary backdrop. Now on to marketing and overheads. We started to deliver some good progress in 2023, with marketing and overheads down 7% year-on-year and down 100 basis points as a percentage of GTV. On the marketing side, we've made improvements across several areas, helping us to drive growth more efficiently. For example, we improved our targeting by using better signaling, allowing us to reduce our digital marketing costs substantially while still generating the same amount of incremental demand. Looking in detail at overhead costs, we initiated a redundancy program in February '23 and significantly reduced our use of contractors. That's allowed us to reduce our total costs for staff and other people costs by 6% year-on-year, despite the impact of wage inflation. The changes we made have delivered a permanent shift towards increased efficiency, reduced friction in organizational structures and increased speed of decision-making. We also drove out efficiencies in our IT expenses and professional fees, which led to an 8% reduction in non-people expenses. There's more to do, but these are good steps towards driving operating leverage as top line growth begins to accelerate. Putting all those components together then, we delivered adjusted EBITDA of GBP 85 million ahead of expectations and a year-on-year improvement of GBP 130 million. As you've heard us describe, the profit growth came from progress across the P&L, top line growth, increased contribution from advertising, progress on service, meaning lower refunds; and/or delivery cost efficiencies, all contributed to the gross profit growth. Then on top of that, we've made progress on both marketing and overheads. That's meant an increase of 190 basis points in adjusted EBITDA or as a percentage of GTV, with approximately half of that improvement coming from gross margin and the other half from operating efficiencies. Overall, strong progress on profitability. Turning now to look at our cash position, where we closed the year with net cash of GBP 679 million. Spend on capital items of GBP 44 million was down substantially from the GBP 80 million in '22. Capitalized development costs was GBP 36 million, down GBP 14 million year-on-year. And CapEx fell to GBP 8 million, and that was primarily reflecting the flagged lower pace of rollout of addition sites. In '24, I expect total spend on capital items to be a touch higher than in '23. We had a GBP 34 million outflow from working capital, mainly due to a year-end fell in the week, which meant an increase in receivables due to us from payment service providers. Conversely, we expect a working capital inflow in '24 as the year-end falls on a more favorable day of the week. The GBP 20 million outflow for exceptionals included GBP 7 million of redundancy costs, with the rest being cost related to previously exited markets and some legal costs. Putting all that together, free cash outflow for the year was GBP 38 million, of which around GBP 28 million was an outflow in H1. If you exclude outflows relating to exceptional items, the free cash outflow in the year was GBP 18 million. Cash interest income was GBP 32 million, nearly triple the prior year. Our improved cash efficiency and the rising rate environment more than offset the lower average cash balance. And finally, the GBP 313 million of share purchases includes our share buyback programs and the GBP 250 million tender offer and associated fees. So to run that off, good progress on free cash flow as we move towards our goal of reaching sustainable cash generation. Turning then to guidance for '24. As you've seen, we expect to achieve GTV growth of 5% to 9% in constant currency. This will have some shape to it, and we've guided to Q1 growth being a similar level to Q4 '23, with an improvement through the year as we continue to deliver on our plans. On adjusted EBITDA, we expect to be in the range of GBP 110 million to GBP 130 million, and this includes the low double-digit millions investment into retail that I flagged at the Capital Markets event. And whilst we don't guide specifically on free cash flow, I do want to reiterate what I also said at the CME that we do expect to deliver positive free cash flow in 2024. Moving on to look at our capital position. We made two announcements of capital return last year, the GBP 50 million buyback announced last March and the GBP 250 million return of structurally surplus capital I talked about in August, in which we returned through the tender offer in October, this was the shareholder preference. At interims, I set out how we think about our capital position. The broader picture hasn't changed in the last 6 months or so. So enterprisingly, the way we think about our capital position remains unchanged. Investing in future growth remains our priority. We'll make sure we have sufficient capital for our operational needs and to build a durable competitive advantage. And of course, we need to have appropriate headroom to deal with unforeseen events and any potential crystallization of liabilities. You'll see that GBP 58 million of our provisions are classified as current, so we do expect those to be paid this year. We've announced today that we'll continue to buy back shares in the future through our Employee Benefit Trust to satisfy share-based compensation awards as needed, effectively offsetting dilution. And at the year-end, the trust held around 57 million shares. And finally, as we've said before, we will continue to review our capital position. And consistent with our framework, we would return any structurally surplus capital in the future. Now to recap our medium-term targets. On GTV, we remain confident that we can accelerate growth to the mid-teens in the medium term. After a difficult couple of years, we are seeing signs that macroeconomic headwinds have stabilized. And we have growing confidence in the large number of initiatives we're pursuing that are growth aligned, our CVP improvements we've touched on today, the new use cases in Grocery, the move into retail, to name but a few. The number of levers we now have and the compounding effect of them coming together gives us the confidence in achieving our medium-term growth target. As you've seen today, we're already progressing towards the target of 4% plus adjusted EBITDA margin in '26. Whereas in '22, the margin improvement was driven entirely by gross margin. In '23, we've driven improvement from both gross margin and cost efficiency. Since we talked in November, we've continued to make progress on margin levers across the P&L, including increasing ad revenue, optimizing their delivery network further and identifying further ways to improve our marketing and OpEx efficiency. As I said before, progress, the 4% plus, won't be linear. It takes time to see the full effect of some of the CVP initiatives that Will talked about earlier as well as the cost levers that I've mentioned before. But the number of levers we have and the fact that we're already making good progress gives me confidence that we'll achieve our target. So in summary then, a good year in '23, significant progress on profitability, resilient top line growth and a good relative performance across our key markets. We've strengthened our CVP further for the long term and all the while, while making further progress towards generating sustainable free cash flow. And with that, we'll open the line for Q&A.

[Operator Instructions] And our first question today comes from Andrew Ross of Barclays.

I've got two, if that's okay, both on the U.K. The first one is about the cost per order in terms of delivery in the U.K. this year in the context of some well-publicized strikes in Q1 and then the national living wage stepping up in April, which I guess is a benchmark for how riders get paid. So if you could just talk us through the kind of framework as to how to think about that this year and how you keep those costs kind of broadly [ flat ], if that's possible. And then the second one is to ask you about the competitive environment in the U.K. and your market share. If you could just give us a flavor as to how much the U.K. is growing in Q1 and what you think is happening to the market share, that would be helpful.

Andrew, I'll take those two questions, Will here. So I think, on rider earnings, the way we think about it isn't somewhat U.K. specific. I think it's just global. But at the core of how we improve efficiency and drive more earnings opportunities for riders really is this, so we do a few things: I think, first, we think about how do we drive more network density through more demand. Secondly, we increase efficiency throughout the network to reduce rider wait time -- sorry, restaurant wait times, so those are really algorithmic improvements. And some of you who were at the Capital Markets event, you saw us deep-dive into the in-restaurant improvements that we've driven, such as [ ReadyNow ] or receipt scanning, things like that. Then we also think about stacking, so that riders can do more deliveries. But that's really only if we think the consumer outcomes are okay. It's not something we will push at the expense of the consumer value proposition. And then finally, I think, and we've seen this with the grocery business, the demand curve for grocery is much flatter than the peaky sort of lunch, dinner demand curve for restaurant food. And as grocery becomes a bigger part of our business, which it has, we expect to see very good earnings opportunities for riders. But as we launch retail, we would expect that to see similar dynamics as well. I would say, your question, I think, was around the U.K...

U.K. current trading.

Current trading, okay. So I guess here's what I would say. I'd say, overall, our business in the U.K. is performing very well because if we take a step back, as most of you are aware, it's not the easiest consumer environment in the U.K. That's not just our industry. That's across, I think, a bunch of industries, and a bunch of companies have commented on this. So if we think about what we did last year and what we're focused on this year, we launched our Value Programme and commercial architecture to support price integrity. We've improved the service side and delivery experience greatly. We developed a lot on the Grocery side. We're driving changes in the Plus proposition, and we launched retail. And we've done all of this whilst we've increased our U.K. adjusted EBITDA by 60%. Now, as we've said before, not all of these CVP initiatives have an immediate impact, we're very confident that will help drive growth over the coming quarters and years. And coming back to the very short term, we expect Q1 to be the low point for UKI growth and then move forward as we deliver on these plans. And I don't really want to get into a month-to-month kind of discussion on this. But I'd say this, I think we saw a softer January for the market, but we have seen an improvement since then. And some of the input metrics that we monitor are very encouraging. So I would say, particularly, I'm pleased to see the improvement on NPS, especially in regards to value for money. So overall, very happy with everything we're doing in the U.K. business. We're very confident it's going to help us further strengthen our market position in '24 and beyond.

Thank you. We're now moving on to a question from Andrew Gwynn of BNP Paribas.

Firstly, on the International EBITDA, looking sequentially, not much evidence of sort of progress. I appreciate what you're saying about, there's obviously market launches from there. But some color on that? And again, actually, on the sequential development of the overhead story, really very good progress year-on-year, but again, sequentially, relatively muted. As we think about '24, are you able to give a little bit more color on that marketing and overhead development? Should we expect significant step forward?

Thanks, Andrew. I think probably both of those for me. Just in terms of International, so yes, you're right that there's been a step back on EBITDA in H2 versus H1 in International. So [ 42 ] in H1 [ 38 ] in H2. That's, I think, probably no surprise, given the shape of the GTV trend that we've previously reported in terms of H1, H2. So a couple of reasons, probably the GTV shape. And the other is, you may remember interims, we flagged a bit of timing on marketing. So we said there's just a bit of phasing between H1, H2, and that equally applies to the international markets. I think what's important to call out, as I did is that we're pleased with the GTV growth trends that we've seen in International as we went through the year. In Q4, GTV growth ex-France was 6%. And in all of our larger markets, there would be the gained or held share. So I think some good green shoots, if you like, in terms of International performance. And then in terms of costs then for M&A for '24, yes, some good progress in '23. Remember that in terms of the guidance that we gave at the CME for low-teens million investments for retail, a reasonable amount of that will be effectively in the marketing line. So that's a bit of a headwind in terms of the sort of sequential reduction from all the other initiatives that we've got that again, I highlighted in Investor Day -- I mean the CME both for thinking about user-level targeting and other things that we can do to improve marketing efficiency. So that's probably what I would say on that piece. And then in terms of the overheads, again, you'll remember that I said at the CME that it's not going to be completely linear in terms of the margin recovery, both in terms of the gearing to GTV growth but also when we expected the benefits of some of the cost programs to land. So we're working hard in relation to some tooling and automation benefits this year, but I don't expect to see the benefits of those during '24.

And next, we have Lisa Yang from Goldman Sachs.

I have a few questions, please. Just in terms of the guidance for '24, so the 5% to 9%, I think, yes, clearly, the 5% seems to be in the bag already at 4%. So can you maybe talk about the main levers or external factors that would get you to be closer to that top end of the range? And basically, what are you assuming especially for France? Because that seems to be really the one of the main market, which is lagging. And what do you assume in terms of like France performance within that guidance range? So that's the first question. The second thing is on just AOV versus inflation. I just wondered like how do you see the AOV growth trending over 2024? I guess, can you still sort of maintain the regrowth we see in '23 because there might be a bit of a lag? And are you already seeing consumers potentially trading up with inflation coming down? I think they might maybe ordering a little more like extra drinks or dessert. Like just wondering if you're beginning to see that as well. And the third question, I think you mentioned in the press release, you will intend to satisfy the -- exercise [ inclusion ] and compensation awards using shares currently or purchase in the future by the [ EBT ]. So if you start to assume based on your share count, will be flat going forward, so is that the main assumption? And does that imply like beyond probably '25, you will be spending about maybe GBP 50 million a year to offset the dilution from the share-based compensation?

Okay, Lisa, I think I'll probably lead on all of those, and then Will may want to fit in some of them. So let's start with the guidance. So yes, as you're implying, the 5% to 9% clearly implies an acceleration as we go through the year. And as we talked about in the annual release this morning, that's as we continue to deliver on our plan. So kind of what do we mean by those plans is all of the things that Will has been talking about this morning. So CVP initiatives, it's about the various things that we've done to support price integrity, about improving service, it's development of Grocery. I mean, it's all of those things that we've talked about. As we've said before, not all of those initiatives have an immediate impact, but we're really confident that they will help to drive growth over the coming quarters and years. I'm very confident that all of those levers are very closely aligned with growth terms and driving frequency. So it's really that, that drives that kind of growth through the year. You have a specific question on France, which obviously, the French market was slower to recover in terms of the kind of cost-of-living pressures than other markets last year. As we've touched on, we're beginning to see some signs of improvement there. Actually, France was one of them -- was the sort of the any market really where we haven't seen some stabilization in terms of frequency and cohorts. And as we move into Q1, we're now beginning to see that. And we're also pleased with what we're seeing in terms of our own share in France. So I think some good signs there. So that's probably all I'll say on the sort of 5% to 9%. Then in terms of AOV, look, I mean, yes, I mean, I think we've been very upfront about the fact that we've seen benefits in GTV per order through the food inflation during the course of last year. I think we've also -- Will has frequently said if we had a choice between AOV and order growth, we'll probably take the latter rather than AOV. As you all know, inflation is now accelerating at a slower rate, is probably we're not in disinflation at this point in time. I think it will take some time for that to come through, in terms of consumer behavior. So some of the things that you're talking about, of people, if you like, adding one more item into the basket, and to tell I used to work in retail, we're not seeing evidence of that yet. But as I've said, I think we're doing lots of things to improve price perception. We're seeing some of that come through.

Yes. And I think the combined impact of improving price perception and as inflation slows relative to wages because remember, guys, last year, wage inflation, at some point, got to what, 2.5, 3x that of wage inflation, so it was really high; and Scilla says there's going to be a lag effect on that. But we should really -- I think that's definitely going to be a very big positive throughout the year. And I think in the U.K., we've seen that a bit towards the end of last year. I mean we believe we're the fastest-growing player in the U.K., when it comes to order growth. So we're definitely seeing some positive impacts on that.

And then the final question was just on in relation to further buybacks to offset dilution. So we would do that through our Employee Benefit Trust. As at the year-end, there were 57 million shares that were held in that trust. It's difficult to know exactly what the rate of exercise is going to be. But if you look at Note 19 in the RNS, you'll see that those which were exercisable as at the end of the year amounted to 39 million -- 39.5 million shares. So that may give you a bit of an indication in terms of burn rate. And actually, there were 34 million that were exercised during the course of '23. So I think that gives you a sense of the number of shares that we need to buy over time and I think probably for you to call what we think the share price will be over the coming years.

Now next, we have Monique Pollard from Citi.

Three questions for me, if I can. The first one is just on the retail long-term target of GBP 700 million. Just given you're already at a run rate now at the end of the year of GBP 1 billion for Grocery, and that's after 5 years, and you're giving the GBP 700 million retail GTV target after 5 years, is that a bit conservative given how much larger the TAM is, obviously, in the retail segment versus the Grocery segment? The second question I just had was whether you could give us any sense on some of those delivery experience metrics you mentioned well in terms of the 1 minute reduction in order duration, the 10% global defective orders reduction, et cetera. Any indication you can give us of how those things have trended U.K. versus International? Just wondering if there's sort of International catch-up to kind of U.K. best practices there? And then the final question I had was on the [ legal ] provision. So those have reduced by GBP [ 15 ] million from 2022 to 2023, but GBP 58 million of those have obviously become current. So just wondering, firstly, when we could expect those GBP 58 million to pay out during 2024? And what led you to be able to reduce the [ legal ] provisions overall by GBP [ 15 ] million?

I'm going to take the first two, okay? And then Scilla will do the third one. So yes, we're really proud that we got to GBP 1 billion of GTV on Grocery in the fourth quarter run rate. And we certainly feel that retail has a very big potential as well. I guess our guidance of GBP 700 million, it's early, right? And we did a bunch of top-down and bottoms-up analysis as to kind of where this thing could go. But ultimately, it's one of these things where it's -- we did the best we can, right, to kind of figure that out. I appreciate it might seem a bit conservative given what we've driven in Grocery. I think -- but the Grocery product and the retail product are just a bit different right? And we really think about the retail product as obviously a much wider selection of things, but it's really sort of occasion based, right, or seasonal-event based. So it's just a kind of a different purchasing habit than Grocery. But then also Grocery -- and still, I mean, the growth rates are really impressive. It's still a really big tailwind to drive growth. And so we're equally excited about the future opportunities in front of Grocery, even though it is about, obviously, over GBP 1 billion run rate today. On the delivery experience metrics, I think for those of you with the CME, I think we spent a lot of time going into what those things are and what metrics we religiously track and as I said on the call, probably my favorite thing to dive deep in with the team. So we think about how do we generate a bunch of small daily gains through technology. But Monique, our business is a global business, right? So and our tech stack isn't different country-by-country. So anything we do in the U.K., we'll roll out to other countries. But the way our business works is sometimes we develop new initiatives in other countries and roll them back to the U.K. as well. So I would say, we have the flexibility to do that. And some of the best work that we've seen at delivery comes from people that work outside the U.K. And there's a lot of insights we've learned from our Italian team and our French team, our Hong Kong team, for example, and that's part of why it's a lot of fun to work here. Speaking of fun, you want to talk about provisions?

So deal with a straightforward one, first. So the GBP 58 million, I'd expect the majority of that -- the vast majority of that to be in the first half in terms of outflow. Then in terms of why reduce, so look, we've had developments in a number of cases during the course of '23. That means that we do reassess both the likely outcome and the sizing of those outcomes. And that's meant a reduction in some of provisions and an increase in others. And I know I think sometimes you guys think we're maybe being a little bit unhelpful in relation to how we characterize these things. But just to explain that, remember that in provisions, it does include matters where we are still in dispute. And therefore, for obvious reasons, we can't really go into more color or help further.

Understood. Sorry, just coming back, Will, on your point on the customer experience and given that sort of global tech stack, so we should assume that improvement in the customer experience has been felt pretty evenly across the market?

I mean, I don't actually know if that's the case. I don't know exactly when certain initiatives are rolled out in which country. But I guess, my overall point is it's not just "Hey, we've done something in the U.K., we'll roll it out elsewhere." Sometimes things are rolled out in other countries first, and we certainly learn from our colleagues in non-U.K. markets as well.

We're now moving on to a question from Christopher Johnen from HSBC.

Two, please. First on your current footprint or maybe M&A, more general. What is the likelihood that we will see you leave a market in International or maybe enter a new one in 2024? That's the first question. And then on the free cash flow bridge, is it possible to get a little bit more color on some of the moving parts there, maybe some views on CapEx, a little bit something more specific?

I'll take the first one, and Scilla can take the second one. I think in terms of -- I think you're asking really around geographic-specific M&A. And what I would say is we took a bunch of action over the last couple of years. We exited Australia, the Netherlands, we entered Qatar. And I think we feel really good about our geographic footprint now. We feel really good about the CVP we've developed. We feel good about the unit economics. So I wouldn't foresee anything too interesting on the footprint side. Scilla?

Yes. Then in terms of the bridge, so clearly, we've given you the guide on EBITDA. In terms of the CapEx capped up together, as I said, I expect them to be a bit higher than '23, so maybe something in the region of GBP 50 million. Leases, I expect to be very similar to last year, so broadly unchanged at the GBP 18 million. The rest then, cash tax, we actually had a GBP 4 million outflow in relation to that in '23, I'd expect that to be a touch higher in '24. And I think we've given you the guidance on what we expect in terms of the provisions under 1 year. Final bit then probably, just in terms of your bridge for completeness, is interest. So given lower average cash balances, I mean, to state the obvious, I would expect it to be lower than '23. And then the final point is then just on working capital. So we -- as I mentioned, just because of the timing of where our year-end fell in the week, we actually had a bit of a headwind in '23. Actually, because of where we fall in '24, we end up with a strong tailwind in '24. I would expect that actually to be such a tailwind that it broadly offsets the GBP 58 million of outflow in terms of the provisions. But the provisions outflow, as I said earlier, will be in the first half and the working capital benefit will be larger in the second.

And from Jefferies, we have Giles Thorne with our next question.

First question is just looking ahead to an election year in the U.K. and a very likely change in ruling party. It'd be interesting to hear Will thoughts or maybe goes in the background there somewhere, on the new deal for working people document that Labor has been talking to for several years now, and it's probably going to be the backbone of their manifesto. So my reading is that it looks quite benign, and your GMB union agreement gives you a lot of political air cover, but thoughts there. Secondly, of all the possible topics to talk about, it's actually [ Ann Summers ]. They were recently using Hop stores for fulfillment, which I think was the first time nonfood retailer that's used Hop for fulfillment rather than fulfilling through the traditional store model. So it would be useful to know how or why this came about and what scope there is to use this model to get higher asset turnover on Hop stores. And then the third question is for Scilla, and it's -- given that we're now in a more steady-state period of profitability and positive equity free cash flow generation, et cetera, if you had a blank sheet of paper and you looked at the profile -- at a business with the profile of Deliveroo here, what would you think is the right capital structure?

Okay. Thanks, Giles, for the variety of questions. I'll ask Scilla to take both the [ Ann Summer's ] question as well as the last one. I'll comment on the first one. I think, in terms of upcoming elections, we're not going to make predictions on results here, and we're going to work constructively with the government, whichever party's in power. I think in terms of Labor, though, we have good relations with Labor. My team and I have spent time with some of the decision makers in the party. I was at the Labor Conference in October, and I was really impressed with the people that I've met. Labor supports genuine [ self ] employment, which we offer and of course, we welcome. I think what is important to us in any sort of engagement is that we're able to offer the genuinely self-employed more protections. And a lot of our discussions are around that. But that's really not different, Labor or Conservative. These are the discussions we've been having with people over the better course of 8 years now. And obviously, we'll work constructively with whoever is in power.

Then just in terms of [ Ann Summer ] piece first, so yes, you're spot on. They are being fulfilled out of Hop. It's actually -- it's effectively that's looking at how do we roll out retail. So we're looking at trialing whether or not for particular units that may have high asset turn and we could use the Hop sites as a way to fulfill that. So we'll wait and see how that progresses. Then in terms of your sort of capital structure -- capital allocation point, so I suppose a few points to make there. So we defined the framework back in August and at that point in time to determine the GBP 250 million in structural surface capital, as you know. I think we've been clear in that framework, and we intend to apply that framework consistently. And reality is since August, not much has changed fundamentally. So good progress, but not much change. Hence, nothing else to announce in terms of structural surplus today. So we'll continue to keep that under review. I think -- I'm sort of inferring a bit from your question, Giles. But I think I've also said previously in terms of the blank sheet of paper point. At a point where we are generating sustainable free cash flow and we've made further move towards true profitability, in my mind, there is no reason why this industry couldn't be an industry that supports leverage, but we're not there yet. And so I think it's too early to call what my picture on the blank sheet of paper is going to be.

And we're moving to a question from Silvia Cuneo of Deutsche Bank.

A couple of questions left on my side. The first one is on subscriptions with Deliveroo Plus. At the Capital Markets event, you talked about your ambition to become Plus first, so the majority of orders to come from Plus customer's [ phone ]. So I wanted to ask if you could comment about how that set of orders has evolved. And then the second question is on the new retail expansion. Since launching a few months ago, I was wondering if you could say some comments on the early adopters in terms of how frequently the [ order ], what categories has been more popular and what sort of basket size on average.

Thank you very much. Yes. So, why don't you take the cost one? I'll take the...

Just in relation to Plus, I mean, I think I'm not going to comment on how that share evolves sort of quarter-by-quarter. But what I can say in relation to what we did in '23 was move forward on a number of different frontiers. So we've looked to optimize our Plus programs a bit further, and some of you who use that in the U.K. would have seen some of that already. We looked within the UAE to make further progress with our prime and partnership in particular. We've looked in various markets to launch -- effectively to put some promotional support behind students adopting Plus in the kind of back-to-university period in Q3. So lots of different things that we're looking to do to drive further Plus adoption, and we're continuing to be pleased with the economics that we're seeing in relation to membership.

Yes. And in regards to retail, I think -- I hesitate to say too much because it's really early. I think our dual focus is building out selection from both existing grocery partners, existing partners as well as signing up exciting new partners like [ Ann summers ] and Screwfix as well as independent retailers. I think the second leg of really our focus is how do we generate awareness through seasonal types of events like Valentine's Day, like Mother's Day. It's a different muscle memory for us than what we're used to, which -- and I think it's a bit less relevant to grocery and restaurant. So we're pleased with the momentum. We're 3 months in, I mean, what we've seen on the AOV side is it's higher than grocery, and it's higher than restaurant, but it's so early that I don't know that I can draw too many conclusions from it because flowers are pretty expensive, I found out, right? So it's just hard to kind of generalize on that. But that's really what we're focused on. And then in terms of the technology side, I think the team did a lot of great work before even the launch. And so we're excited, and we're going to keep building this out.

And our last question for today comes from Sean Kealy from Panmure Gordon.

Good morning, team. So first one from me. Just thinking about the M&A outlook. Obviously, from some of your peers and competitors in Europe, we've had some comments recently that certain divisions might be up for disposal. Would you be interested in acquiring within some of your existing markets, should those divisions become available? And secondly, are you able to give an update on which of your markets you think you have a #1 position? I know it's not really how you look at the business, but it does affect how relative growth rates and so on. And yes, actually, I think that's it for me.

Yes. So let me take the M&A one. We're not a very M&A-driven company, right? All of our market launches have been organic. We haven't acquired anyone for a market position. That's not to say we won't. But in my experience, when we've looked at things, it just seems at times very, very complicated from a technology integration standpoint and headcount integration standpoint. And so our bias, I think, is really around just pushing organically, right? And I think we're really pleased with the sort of progress that we've made in the markets we're in. And as I said on a couple of questions ago, we don't anticipate that to change very much.

Next question was then about market share and where we have leading positions.

Yes. I think the way we think about this is where are the hyper-local areas with the greatest gross profit pool potential. We really spent a lot of time focusing on those markets because overall, what we want to get to is the #1 position in free cash flow generation in a company -- sorry, in a country. And I think that not all neighborhoods are created equal. Of course, yes, it would be great to have 90% market share in a country. I think those days are probably not happening for markets today. And so in a competitive context, we think about how can we drive the best consumer value prop in the neighborhoods where we think people have higher income, where we think we can drive more density, where we think we can have more independent restaurant mix. In areas like that, we're doing super, super well in, and we're going to continue to push hard in. Because by doing that, we think we can generate the most free cash flow in a country. And over time, of course, we can use that cash to compete and build out new verticals as well. So I hope that's helpful.

If I could be a little bit cheeky, can I ask a quick one from Scilla as well? Just remember my third one, which is you talked a lot about the marketing expense on the P&L so far. Are you able to disclose roughly the size of the [ contra ] revenue accounts from some of the promotional spend? So how much should we be thinking about this in terms of the gross versus net revenue perspective?

I'm afraid not. I mean it's -- would be inappropriate for me to start to disclose that because then it will be kind of helpful for our competition. I'd like to know what other people have got [ contra ] revenue.

And that concludes today's conference call. Thank you for joining, ladies and gentlemen. You may now disconnect.