Ocado Group plc (OCDO) Earnings Call Transcript & Summary

Good day, and welcome to the Ocado Group Analyst Call. I will now hand you over to David Shriver, Director of Communications. Please go ahead.

Thank you, Mary, and good morning, everyone. This is David Shriver, Communications Director at Ocado Group. Welcome to the first quarter trading update for Ocado Retail, which, as you all know, is a 50-50 joint venture between Ocado Group and M&S. I'm joined today by Tim Steiner, the Chief Executive Officer of Ocado Group and Chairman of Ocado Retail; and Niall McBride, the Chief Financial Officer of Ocado Retail. Tim will review the results, and then we'll go to questions. Tim, over to you.

Thanks, David. Although, we are here to report results today at the top of our mind are the horrific consequences of the war in Ukraine, for the people of that country, their friends and family and our colleagues directly or indirectly impacted by the Russian Invasion. We are dismayed and deeply upset at the human tragedy unfolding in Ukraine and the refugee crisis along its borders. We are doing what we can to support those affected including a GBP 150,000 donation to the DEC Ukraine crisis appeal to help provide food, first aid, shelter, medicine, clothes and other aids for those most in need. Quarter 1 is the last quarter where we are comparing a lockdown quarter last year with a post lockdown quarter this year. The really good news today is that Ocado Retail continues to win new customers and has done so against the challenging backdrop of a year-on-year 4% decline in U.K. grocery market sales. We have grown our active customer base by 31% year-on-year to 835,000 active customers and the number of customer transactions increased 11.6% in the quarter, reflecting this strong customer acquisition. Offsetting this, of course, is the continued normalization of the value of the average basket, which is significantly lower than it was in the first quarter last year and is now approaching pre-COVID levels, as we return to the office more frequently and go about our normal lives. Netting out this increasing customer transactions with the decline in the value of the average basket meant that overall, the revenue was down 5.7% in the quarter against that tough comparative, although still up at 31.7% versus quarter 1, 2020, the last quarter before COVID. It is this growth in new customers, which gives us confidence to invest in additional capacity to grow the business. To give you some details here, the Bristol customer fulfillment center will be opened this year, adding 30,000 orders per week at maximum capacity. New sites opened in financial year '21 continue to ramp up with Purfleet and Andover now operating at over 40,000 and 25,000 orders per week, respectively, around half their end game capacities in a little more than 6 months. A new Zoom facility in Haddington will be opened in the spring with more sites over the next 12 months, expanding our unique Zoom proposition with a dramatically more expensive range and higher average basket versus q-commerce competitors to more locations. Near term, it is clear that there are a significantly greater number of uncertainties for the business to deal with, including rising food price inflation, rising energy costs and the overall level of market demand as the cost of living increases. As a result, this may mean that while revenue growth should exit the year in the high teens, the full year growth may be closer to 10%. Looking ahead, however, we remain very confident about the future and excited about the growth opportunities ahead of us. Operator, back to you for questions.

[Operator Instructions] We will take the first question from Andrew Gwynn from BNP Paribas.

So quick -- 2 questions actually. So firstly, retail sales growth during the lockdowns and so forth, I think you said was essentially held back by capacity. As we've come out the other side, there's less of a flattening in the weeks and more sort of peaks and troughs. So is that impacting trading? Or is it really just -- I suppose a drag and particularly on the basket which leads on to the second question. Where are we in terms of volume in that basket? So obviously, we've had a bit of food inflation between or during COVID, but particularly of late. So where are we in terms of that sort of basket normalization? I'm thinking here specifically around the volume side.

Thanks, Andrew. So let me just tackle the capacity point, so we all understand. So as we roll out new facilities and as they start to scale up, our peak day capacity goes up. Now what was happening in the lockdown period was that we were able to operate at peak day capacity 7 days a week. And we also -- our customers were not traveling. And so every week, they were able to operate at full levels. Whereas pre-pandemic, we had a shape of week where we had a biggest day on Friday day and Saturday morning with the biggest shifts of the week and we would have a seasonal pattern when it was half term, we would lose some volume. When it was the summer holidays, we would lose some volume, for example. So what we have seen lately in the quarter is a return to that behavior, which obviously means that what was producing a lot of capacity last year produces less capacity, but we have obviously added new facilities and continue to add new facilities so that we can go back to record volumes with shape compared to previously the records being made without shape. In terms of basket size itself, remember that Q1 is the bigger basket size quarter because it contains the Christmas week, which has larger baskets in it. But excluding that basket size is probably only 1% or 2% or 3% bigger than it was going into COVID somewhere around that kind of level, i.e., 1% to 5% bigger than it was going into COVID. So it's come back down very quickly. I think it's probably lower than would be implied by the amount of people that are still working from home a number of days a week, and that probably reflects some euphoria that's going on in terms of wow, we're all allowed out and in theory, we're safe. So let's all zoom out to every restaurant that we can. So I think we've got a balancing item where the work from home, which we expect to continue ought to result in a larger basket size than historical, but it's being outweighed by the amount of entertainment people are doing. And then the last factor is, of course, we're adding a lot of new customers which we want to continue adding new customers and expect to and new customers always come in, in their earliest orders are always smaller than our average basket sizes, and then they grow over the first kind of 5 to 10 orders. Got the next part of the question.

No, no, you pretty much answered it. I'll leave somebody else to ask a profit question. But just coming back to the peaks and troughs, are you now hitting sort of capacity constraints, say, on a Friday evening, the sort of capacity constraints back in a slightly different way?

Yes. I mean that's kind of -- yes, and that's how we normally run the business. So look, we also have had, as we've been very clear, I think, last time, there were significant labor constraints. So starting after the original kind of relaxation of rules in April, but accelerating in the summer period June, July. There was a significant labor shortage or challenges in the economy. They hit us hard because we have grown significantly in 2020, and therefore, we had a lot of people who turns out were on furlough and return to their previous employers. I think we stated at year-end that we have seen a peak of about 8.5% labor shortage which obviously cost to sales. By year-end, I think that was down to between 3% and 4% and has kind of -- we said it would end by the end of Q1. And it ended somewhere in Feb, where we're now able to hire as many people as we're selling orders. And so now we can run the business like we have historically, where every week, we now hire a few more heads, we acquire a few more customers, and we do a bit more business. So we're kind of getting back to a more normal kind of a behavior but obviously, still with uncertainties around the war and consumer demand at inflation and stuff like that.

The next question comes from William Woods from Bernstein.

Just a question in terms of the customer acquisition, it obviously outstripped order growth. We suggest that your kind of frequency is coming down. How much of that is driven by your customers kind of shopping more frequently in store versus the acquisition of new customers who are maybe buying on a voucher and then not coming back? Do you think that's a concern? And I suppose linked to that within the quarter. Could you just give some context on how well Christmas performed relative to the first 2 months of '22?

Sure, William. So let me try and tackle both of these. When you have a kind of constant growth rate of new customers and orders, et cetera, you would expect to see all other things being equal, a kind of constant frequency if you took the number of order -- or the number of active customers divided by the number of orders. When you go through a period like COVID lockdown where your existing customers are trying to buy more than every piece of capacity you can create, you stop acquiring new customers. And so then your active customers are all existing active customers and you look at their frequency and it looks higher than the average used to be because, as you know, when you acquire new customers, some of them only do 1 shop, some of them only do 2 shops, some of them do 3 shops. It's only when you get them to between 3 and 5 shops that they effectively become like longer-term loyal customers. So whenever you -- whenever and it's not often that you do it, but whenever you kind of go from a period of not acquiring customers, and then you turn on customer acquisition, you will see the active pool grow faster than the number of orders. It's exactly what you would expect because the active pool, the way that we measure it is the 12-week rolling -- it's any customer who shopped in the last 12 weeks. So if you think about it last year, it was a group of customers that were all shopping actively, whereas this year, it's that group of customers plus 31% new customers, a significant number of whom have just joined us in that 12-week period. They may have only joined us at the end of that 12-week period. And so that's -- they've done 1 shop, some of them might have done 2 and some of them might have done 3, but the active customers that we brought into that quarter will on average be shopping about every 2 weeks.

The next question...

Sorry operator, 1 second. Christmas is also every year, Christmas is very complicated. It's lucky that I'm not just the chair of this business, but used to run it, so I can answer some of these questions. Christmas, is really a peak kind of 5, 5.5 days for -- yes, 5.5 days into Christmas. And when you plan it each time because it looks different to a normal shopping week, you're constrained by, say, the chill or physical pick capacity of the machinery 1 day and then another day, you're constrained by the vans. And another day, you're constrained by the ambient, it's a very, very detailed planning. Now because in a Christmas week, we always trade at flat. We do effectively, Christmas week is what we did for Corona, but we did it for Corona for about 18 months or 2 years or something. So Christmas week, because it's flat. It was the Christmas that had the highest capacity. And despite the fact that we were constrained in labor, during Christmas week, you're able to ask people to run an extra shift for you. And so Christmas was at a record level. It's just that when you then compare the following weeks with a shape to it compared to last year, the following weeks with no shape to it, the following weeks are harder to achieve, but Christmas week was at a record level.

We will now take the next question from Victoria Petrova from Credit Suisse.

I have a clarification question. Back to volumes. Why are the volumes down from the fourth quarter where they were at 375,000 orders per week and now it's 367,000. It's already post-COVID and I was assuming that probably in Christmas season, you have some maybe additional frequency around that. Could you please clarify maybe there were any capacity issues we should just keep in mind? And secondly, when you were talking about sort of 1% to 5% higher average basket size versus pre-COVID levels, is it before or after inflation-driven price increases.

Sorry, just ask the second part again because I was just looking at the first part.

I'm very sorry. This 1% to 5% average basket growth in value versus pre-COVID levels. Is it pre price increases or post price increases driven by inflation of 4%, which you mentioned in your press release?

Okay. So the second one, in terms of where do I think the basket side is averaging out at the moment versus pre-COVID, that's a pre-price increase. That's just based on items. So we're about -- we're about 1 to 1 of the big items larger than we were going into COVID at the same kind of seasonal time of the year. Your other question, I just need to look at some data to help answer your other question for you. The basket size, I believe, is larger in Q1 than it is in Q4 because Q1, as I said, is a higher seasonal basket size. And so I have to get into the details. I can come back to you on the eaches volume. But also, I think the other thing to understand is that as we've been being freed up more and more from April when we started to become free to I can't remember exactly when we were allowed to do everything we wanted to do. But the consumer behavior has been continuing to go back to that pre-COVID kind of behavior. And so that the peaks and troughs are more pronounced now than they were during part of Q4 last year. But we can come back to you with an answer on what's happened in eaches volume Q-on-Q. I don't have it sitting in front of me right a second.

We'll now move to the next question from Rob Joyce from Goldman Sachs.

A couple of more macro ones and then 1 specific to you guys. I mean just general tone of the release, I guess, you talked about uncertainty a few times. Is there anything you're seeing actually from your own customer behavior that you're seeing them currently trading down, you're seeing any sort of items falling out the basket of those type of things. So firstly, is there anything you're seeing in your customer behavior that is seeing customers trading down or acting weaker than they have been previously? Second one, just a quick 1 I wonder if you could specify what your own basket inflation was in the quarter and whether you're passing through the inflation you need to, to hold the sort of the gross profit or the gross margin side of things. And then the final one, on the cost measures you mentioned in the release, are you able to give any more specifics on the size of those cost measures and the specifics of those cost measures, please?

Sure, Rob, let me just tackle the kind of inflation question. What I always say here, and I repeat is if anyone wants guidance on food price inflation, I'm not sad also go to 1 of the big 4 and to come to us. And the way that we trade this business is very much as a price follower, ensuring that we offer the best value to customers by kind of matching prices being very much in line with our larger competitors, but then offering the biggest ranges the most outstanding service, the best selection, the best execution, et cetera. In terms of -- are we seeing any behavioral change? So what I would say is that the inflation that we've seen on items is lower than anything I've read about in the newspapers. And the pass-through in terms of our average selling price is probably marginally -- very marginally lower than the inflation that we've seen. So you can see a very small amount of basket mix. I would just remind everybody that in trading down, there's many ways to trade down. There's the kind of -- I used to shop at Tesco's and now I go to Aldi, that's trading down. There's the -- I shop at Ocado, and I used to eat fillet steak once a week and now I'll swap it for hamburger that's trading down. And then of course, you've got to remember that the grocery industry is the beneficiary of. I ordered the takeaway from Deliveroo or I went out to eat in a restaurant, and now I'm going to have another meal at home because that's also trading down. You may actually enjoy better food. But in terms of budget -- in terms of your budget, is trading down to make your own food. So as a very developed and a wealthy country, there's a lot of trading down that happens into supermarkets when customers are put under budgetary constraints. And then lastly Rob on cost measures. I guess I don't get into 2 specifics. Obviously, we use electricity and we use fuel. And we have historically felt that we had a slightly smaller, but it's very hard to prove with the data. So we tended not to make these statements publicly, but we believe that we have a smaller CO2 footprint on our bricks and mortar competitors operating their entire U.K. businesses. And that obviously means our model would be using a lot less CO2 because our customer -- we're delivering into our customers' kitchens rather than our customers having to drive to the supermarket to go and get it. Now if we're anywhere close to right, and we are using a similar amount, then it suggests to me that we use significantly less electricity because I'm confident that we use more diesel. And when I look at what's happening in the market right now, whilst the price of diesel is up, the amount that diesel is up relative to electricity is very small. And so I think that we're not seeing any pressure that our competitors are not seeing. Obviously, some retailers might have got longer-term hedges on, so we're not yet paying kind of stock prices in the market or anything like that. And so they might have a good hedge on. But overall, the industry uses energy. We use energy. Our biggest use of the electricity is actually the fridge plant. It's not the automation. It's actually the fridges, and then it's the diesel. But the problem with trying to forecast what it means for the rest of the year is, of course, the extreme volatility that's going at the moment, where in the last week, I think Brent -- just up, starting from a barrel of fuel, it's traded up to over 120. And I think this morning, it's back down under 100. So it's very, very difficult for us to forecast what that means going forward. And the same thing is true of electricity, which is fluctuate enormously with the price of natural gas that has been up 500% and I just not sure it's going for the rest of the year.

Okay. Tim, maybe just to clarify and a final point, I guess, do you expect that the cost measures you mentioned in the release will be enough to offset any potential EBITDA sort of a lot of downgrades from the lower revenue expectations, broadly do you expect consensus EBITDA to move?

At a group level, we don't expect it to move. But as I said to you, there's uncertainty out there. So it could be better and it could be worse. It's very hard to predict. And I think I'm the first person in this sector anyway, reporting after the invasion. And of course, that has just added to what was already a COVID unwind kind of fluctuations in energy prices. But it got harder to predict since the Russian Invasion of Ukraine. But we do expect that we can generate savings at group that will offset any loss of EBITDA in retail.

The next question comes from Maria-Laura Adurno from Morgan Stanley.

Actually, just 1 very quick question on Russia, Ukraine. Is this impacting or disrupting in any type of way your supply chain on certain products? Are you seeing some delays on the back of potential commodity disruptions coming from -- as a back of this conflict?

We don't sell any Russian SKUs today. And I think we only had 1 in the -- our 50,000 before. So that was pretty quick to be able to remove that. We are not yet seeing any disruption from our suppliers as a result of any supply chain disruptions coming out of Russia or the Ukraine, but I'm not expecting any imminently, but obviously, we have to wait and see.

[Operator Instructions] We'll now take the next question from Nick Coulter from Citi.

A couple, 2 or 3 probably. Actually, could you unpack the move from strong mid-teens sales growth guidance at the prelims to closer to 10% to date. I mean, I guess there are a number of moving parts, inflation is probably a tailwind, I guess, restaurant euphoria as you phrase is probably a headwind. But it'd be helpful to understand the steps down, would be the first one.

Nick, I think just if we reflect on the quarter and then the exit rate this quarter going into next quarter, and then we look at very strong growth towards the back end of the year, we consider the quarter-on-quarter comps that we have, obviously, in the third quarter last year, we had the issue at Erith, in the fourth quarter and the third and fourth quarter, we had significant issues with labor availability. We're expecting to see very strong quarter-on-quarter -- year-on-year growth for those 2 quarters. But we know that the first 2 quarters are harder. The COVID unwind has probably come faster than we were expecting before and the impact of the shape of week and what that does to capacity, in terms of the capacity that customers want to buy as opposed to all the capacity that you have. And therefore, we just think that is a more sensible place to guide to. We don't really know if inflation goes high, then obviously, we'd expect to guide to higher growth, but we're not banking on kind of getting the growth via price rises. We're really talking about what we expect to do with the inflation we've already seen.

Okay. So it's basically the COVID unwind that has changed from the prelims?

I think the shape of week has come back more fiercely and the overall market for the quarter was down 4% in the grocery market. The overall online market was down close to 20%. So we dramatically outperformed the overall online market, which is what we would have expected to do and grew our market share. But I think that, that then left, that has left everybody or a number of people being extremely competitive with extremely high marketing spends out there that are dwarfing ours. And so it just makes it a competitive environment for Niall, Mel and the team to be acquiring customers, which -- as you can see, they did a great job doing. But it's an aggressive market at the moment.

Okay. That's helpful. And then you may or may not have the stats in front of you for this one, but in terms of a normal pre-COVID basket with respect to eaches and applying a normal shape of the week, what was the hypothetical capacity increase in the quarter to trying to remove all of the noise?

Let me come back to you with that, because there's 2 ways of looking at it. That's the kind of hypothetical. The challenge is when you turn on something like Andover that say is adding, say, 60,000 orders a week of capacity in what time frame do you want me to add it in that? Do I add it over 12 months? Do I add it over 6 months? Do I add it over 18 months? Where do we add it? And so what we've seen is, without wanting to kind of release competitive information to our competitors would like to have some of our original sites are the ones where we have the biggest labor issues, which we talked about from the kind of summer last year, kind of alleviating by around February. But some of those sites are still harder to achieve their previous hires in because you haven't yet got back to the amount of labor that they had in them. Meanwhile, the new sites are finding easier to recruit the labor in, and that's helping us. So what do you want to know? The labor -- the amount we could have done given the labor that we had employed, the amount that we could have done if we assume those sites came on and trade up in a certain -- at a certain trajectory, the answer is that we will end the year with enough fixed capacity in terms of infrastructure to do what we're saying in terms of high teens or more volume growth. And we, at the moment, based on the hiring that we are seeing, we've seen the market really kind of stabilized, I guess, is the right word to use. Because in the back end of last year, people were having to pay incentives to people joining and incentives to people attending, an extra incentives for over time. And there was a lot of extra money going everywhere in our market. All our competitors are doing the same things to get people to work now, there has been wage inflation. But it's much calmer than it was in the back 6 months of last year.

Okay. So in a sense, it's the labor that is your primary constraint or labor availability is your primary constraint that the FP&A guys are scratching their heads on through the rest of the year, I guess, is what you're trying to say?

No, I think what I would say is that the labor constraints was the issue for the last kind of from June till about February, labor was the biggest challenge. Now we are -- whilst it remains challenging, they're not like flooding in the doors like they were in the corona period where we were hiring amazing numbers extremely quickly. We are managing to hire what we need to achieve a weekly growth rate. We are also adding capacity and our new sites are ramping very successfully. I mean, these are the fastest ramps we've ever seen in Andover and Purfleet. And we're kind of circa 50% 6 months in, which is great and is a good signal for our international clients of their group business. And we are adding another site as well this year, which means that overall, we think we're well positioned to deliver on our plan. And are heading in that right direction with the active customers growing the customer order numbers growing. The part we don't expect the basket -- we know that the quarter 1 has the higher basket of the year because of the Christmas piece, but kind of in terms of where it is in its seasonal pattern, we don't expect it to fall from here. So we don't have that to deal with again, and our comps going forward the next quarter was our part COVID quarter, and then the following 2 quarters were significantly diminished COVID quarters.

Okay. I'll follow up with the team. Just 1 final quick one. I assume you're not hedged on any of your energy costs from the way you've answered questions this morning.

Well, from time to time, we have some hedges on. But we didn't have like a 3-year hedge on from 6 months and a year ago when energy prices were where they were. So have we always -- have we paid spot every month? No. Has that helped us sometimes? Yes. But are we locked in with cheap electricity and cheap diesel? And the answer is no.

The next question comes from Sreedhar Mahamkali from UBS.

Most of them have already gone through. But really a quick 1 to follow up on your comment on inflation. I fully understand ORL is more of a price follower than a sector. But I'm curious to see what your thoughts are as you look at the industry overall. Do you think the industry is being rational with the COGS inflation overall? Or you see a willingness to take a little bit of a hit on the chin in trying to absorb some of it? Or how do you see it as you look at the overall inflation scale just at the moment.

I think I'll let Niall give you his view.

So I think probably overall rational and within that pockets of high competitiveness. So I mean it's definitely the case that as an industry, everyone wants to offer great value to customers. So the way we want to compete on range, we want to compete on value, and we want to add as many customers as we can throughout the year. But we're not the only ones who want to add customers. So I think if you look at some of the others, they are competing on value as well, and we don't see that letting up in the next few minutes.

We'll now take the next question from Dmitry -- Dimitrios from Schroders.

My question is actually also on value and similar to the last question, that was just asked. I think it's fair to say if you look at the various consumer surveys and reports emerge from time to time. Value is probably not the strongest point here. So I was just wondering how do you value in your ability to expand and your ability to continue increasing your audience and your appeal as you expand to more cities and especially beyond London whereby you maybe has a bigger role to play.

I'll go ahead. So look, I think a little bit like what Tim was saying earlier, value comes in many ways. I think when you look at our range, we've got 50,000 SKUs in the range. That's a massive range compared to any of the competition. And so when we say there's in Ocado just for you, we really mean that you can come in as a customer and shop our value range. We had a fantastic everyday savers campaign in January. We have fully freezer for 5-pound campaign just finished and we've got a Smart Pass campaign right now. So I think if you want to shop in that way with us, you absolutely can. Equally, if you want to shop a sort of the more expensive range, you can do that as well. So I think we think about it that way that we compete across all of those sort of points.

I think the next thing that I would add is that we're going to more cities. Ocado Retail covers mid-70% of the U.K. population has done for a number of years, is growing not through geographical growth, is growing through organic growth in the geographies that it already serves has had the majority of its business outside London for a significant period of time. And so the idea that -- or any idea that there's some challenge on value as we move out of London is it's many, many years too old, if you see. I mean we've been outside London for most of our time. And inside the end 25, it's been just under 50% of our business for an for a long period of time. But most of our business is outside of London, and we're not banking on geographical expansion to achieve the growth we expect to achieve this year.

The last question comes from Simon Bowler from Numis.

And apologies if I missed this, but I think a core comment for yourself that you feel any kind of EBITDA shortage at the retail level can be offset elsewhere from a group level perspective, and whilst I appreciate this is just a retail call. I was wondering if you can just kind of share some color of where the EBITDA of elsewhere within Ocado Group may come from?

Well, firstly, we don't expect it to be a big number. And so secondly, it's just the usual tightening of the belt that 1 would expect us both to be doing, both at retail and at group level, which means that overall, we're not expecting a move.

That will conclude today's question-and-answer session. I'd like to hand the call back over to your hosts for any additional or closing remarks.

Thank you, everyone. That concludes our call. We'll report next on the 21st of July with Ocado Group's first half results. I'm sure we'll be speaking to most of you before then. But for the moment, thank you, and have a good day.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect. .