Ocado Group plc (OCDO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to this Ocado Retail Q4 Trading Update Call for Analysts. Today's call is being recorded. [Operator Instructions] I will now hand over to Hannah Gibson, CEO of Ocado Retail. Please go ahead.

Hello, everyone. This is Hannah Gibson, CEO of Ocado Retail, and welcome to the fourth quarter trading update analyst call for Ocado Retail, the joint venture between Ocado Group and M&S. I'm joined today by Tim Steiner, the Chair of Ocado Retail and CEO of Ocado Group; and Stephen Daintith, CFO of Ocado Group. You'll have seen this morning the RNS from Ocado Group with the details of Q4 trading and an update on guidance as well as the film broadcast on the Ocado Group website, where I took a great length about my vision and strategy for the business. I then propose that we go through all the details again here, but let me just take this opportunity to quickly summarize the Q4 numbers and the outlook, which we will then go straight to Q&A after that. So revenue was GBP 549.4 million in the fourth quarter, up 0.3% versus the same quarter last year. Active customers have increased 12.9% versus the same quarter last year. And this increase is offset by reducing frequency in customer shopping as compared to the pandemic and as customers respond to the cost of living crisis, so resulting in an increase in orders of 1.9%. The average basket value was down GBP 117. That's down 1.3% on the year as the increase in our average selling price per basket item was offset by a fall in items per basket. The combined demand and cost headwinds in '22 will mean that we report close to breakeven EBITDA for the year just gone, in line with guidance on a 3.8% revenue decline to GBP 2.2 billion, yet 40% up from 2019. We finished 2022 in a strong position and with our biggest ever Christmas for our customers with sales up 15% and our biggest ever order day on the 20th of December. This is an encouraging start, and we expect full year revenue growth in 2023 to be mid-single digits. While there remain many uncertainties, we expect ORL to deliver marginally positive EBITDA this year. A focus on what we internally were calling Perfect Execution in '23 will set the foundation for accelerating growth in 2024 and beyond, and I talk more about this in my video. I'm confident in our proposition, unbeatable choice, amazing service at great value, and this is enabled by differentiated technology and M&S magic. I believe we're well positioned for growth from FY '24 and as the benefits of Ocado Re: Imagined also come through, in addition to return to strong sales growth, I'm happy to confirm our expectation are progressing towards the high mid-single digit EBITDA margin in the mid-term. We remain confident in our ability to reset the bar in online grocery retailing, delivering even greater value for customers and even better experience online over time. We'll now move to questions.

[Operator Instructions] Our first question today comes from William Woods of Bernstein.

I've got three. The first one is could you just clarify the EBITDA guidance for FY '23? What is marginally positive EBITDA? And how does it differ to close to breakeven this year? The second one is on EBITDA this year, since you gave your kind of breakeven guidance, we've obviously seen petrol prices come down, government energy support introduced and you've innovated around dry ice. Why is there no change to your FY '22 outlook? And then the final one is, could you just give some clarity on the retail cash position at the moment? Does the JV need more cash?

Absolutely. Thank you, William. So in terms of EBITDA guidance, so for FY '23, we talked about marginally positive EBITDA guidance. I mean that is exactly as it states. There's obviously a level of uncertainty out there, and we expect to be just over breakeven in terms of marginally positive. But obviously, there's some kind of ups and downs around that, but exactly as we state is marginally positive. On the second one, in terms of your question about why is there not more movement in FY '22 given some of the changes. Well, look, we've, throughout the year, continued to see -- we've continued to see high energy costs. We've continued to see high fuel costs as well. Obviously, going into FY '23, we might see some upside there, but obviously no continued uncertainty around that as well. So we haven't seen that flow through into FY '22. And on retail cash position, Stephen, would you like to take this one up?

Yes, sure. So when we look to the year ahead, we've kind of given the guidance there on an EBITDA basis. In terms of cash flow, we've got the build-out of and the completion of the Luton site, which is going live in the second half of the year. But having said that, Ocado Retail has plenty of access to capital. It's got a revolving credit facility that it could draw down on. It's got access to a shareholder loan across Marks & Spencer and Ocado Group. And then it's also got access to third-party debt. So it's got a good source of liquidity for the year ahead.

And we move on to Andrew Gwynn of BNP Paribas.

Three, if I can, so fairly quick. So firstly, just on trading in December, I think the Kantar market share data suggested 20%. I think you're saying 15% over the 5 days. So just wondering about -- if you can give a broader figure for December, just help us clarify where you'd be in Q1. Tied to that, help us understand the full year guidance, it's more important question, but help us understand the full year guidance in the context of what clearly has been a good December. I appreciate, obviously, there's different where capacity is and demand is through the year. And then finally, obviously, you pointed to that shape, so difficult first half of profit, improvement in the second, but how marked is that variance? Is it asking a lot of the second half to get to breakeven? Or is it relatively flat?

Thank you, Andrew. So I'll take those in turn. In terms of trading in December, and you create the Kantar numbers there, and we have seen historically that Kantar numbers do tend to overstate marginally our performance. And so kind of the movement to 15% sales is, as we've quoted, that's what we saw in the Christmas period, and we had a strong Christmas for our customers, which is good to see. Your -- the question around how that flows into the new year this time around, obviously, we'll be looking at the trends coming out of Q4. Over Christmas, we certainly saw customers were out to enjoy themselves. They wanted to have people around to their houses. And so it's not per usual that we had a strong Christmas in that environment. And obviously, we're coming to the new year, there's a high level of uncertainty and cost of living crisis people are kind of concerned about. So we want to make sure that we are trading strongly in that environment. In terms of the shape then, exactly as I stated and you picked up on, we will see in the first half of the year, we are both lapping both COVID baskets, but also frequency as well. And you'll start to see that, that comes through throughout the year. So I expect probably by the half -- midpoint of the year, so kind of halfway through, we'll expect to see most of that unwind come out. There isn't at one point that kind of suddenly drops off. I'd say it's probably more of a gradual throughout the year. And then as we -- obviously, as we go into Q4, you think about it, you've got the summer which is a lighter period anyway as people are away, then we're expecting kind of higher growth going into the Q4 period.

So that was very useful. I'm sorry, the question was actually more about EBITDA for the year. So is it down very sharply in the first half? Or is it sort of more shallow variance between first and second?

So the focus on the kind of growth numbers is important because, obviously, our capacity utilization affects our EBITDA numbers quite a lot, such the shape of the growth has quite the implication on the EBITDA numbers. So I would say it's a journey throughout the year. I wouldn't say there's a particularly kind of strong fluctuations at any point. So it's a gradual move throughout the year.

And our next question comes from Simon Bowler of Numis.

Two questions for myself, if okay. First one, can you just talk a little bit around your thoughts around kind of the marketing strategy for the business going forward? And there's a bit of reference within the statement to kind of more mature customers versus newer customers being added in. And any update you can give us on kind of how you're feeling and thinking about kind of customer acquisition would be great? And the second one was, there's a bit within the statement that talks around kind of better leveraging, the M&S relationship. And I was wondering if you could just add some more color on what their thoughts and plans are from that perspective.

Thanks, Simon. So on marketing strategy, so I guess we start with the most important thing here is to continue improving our customer proposition, right? Investing in value, making sure we've got unbeatable choice and also improving the proposition. That's kind of always the foundation, the starting point of that. And then when you start to talk about customers, I mean, as you've seen, we've grown our mature customer base from Q3 into Q4. But when it comes to then the new customers, we're actually focusing more targeting to make sure that we're really focused on those, what I'd call, pretty lookalike customers versus those we've got today. We're also improving our retention strategy to make sure that we're getting more of those customers through to their [ fifth ] shop. And then lastly, we're thinking about reactivation as well. When we compare to where we were 3 years ago, we've now got a bigger pool of customers we can reactivate. And I think that's an exciting pool to go after as well. If we then think about kind of those customers, I say, on the one hand, there's the lookalike. So these are big basket shoppers that are online supermarket, but also then probably linking us to your second question. There are also a number of M&S fans out there, a number of whom will not be aware yet that actually we sell in this product on Ocado. And we think we can offer them an opportunity to get more M&S products more frequently alongside topping up their M&S shop with a number of other kind of good step order basket. So linking that then into your second question, how can we leverage them in M&S relationships? I say it's a kind of big customer piece, a good customer angles go after there. There's also, from a product perspective, making sure we've got the best possible range online and bringing through that innovation that M&S product has to bring a lot of excitement to the weekly shop. And then there's also just inspiration around those moments of joy throughout the year, which M&S over trade in. There's also then from an operating point of view opportunities around joint sourcing as well. And making the most of both the way -- making the most of how we both operate. So it continues to be a lot of number opportunities for us to work closer together.

Great. And I don't suppose -- are you able to share kind of just a sense of that kind of mature customer base, what that looks like, either as a proportion of your kind of revenues or proportion of your kind of active customer numbers?

I mean, I guess what I'd say is on a given week, we're normally something like 2% to 3% are new customers. And therefore, there's a -- if you think about that over the course of -- we report our customers on a 12-week rolling basis. So if you think about that in that period of time, you've got a number of new customers, some of whom are going to stay with us. And some of whom, obviously, we'll try and we'll go into that pool to be hopefully reactivated at some point in the future. But I think those kind of numbers should give you some sense. And I think the key to what Hannah has been referring to in the statement and beyond is by targeting more and spending her money in a way to get a better customer to come in, you're bringing slightly less customers in and hence of the active pool. A larger percentage right now is the mature frequent loyal customer, and a smaller percentage is the last 12 weeks trials than it was a quarter ago.

And especially if you compare where we are now compared to we were in COVID times, obviously, during the pandemic, we had mostly only mature customers. And in the course of FY '22, we've been rebuilding up that new customer base. So we go into FY '23 to continue to build that as well.

Okay. Very clear. And then sorry, one other, just a quick follow-up. It sounds like from how you're talking kind of for the shape of next year, there's more investment proposition and somewhat less into marketing. So I'm thinking about kind of the margin structure for next year, we should be taking that into account. Is that fair to say?

And I think marketing as a percentage of sales probably remain reasonably in line with the last year or so. We are still obviously playing that catch-up game of not having acquired new customers in '20 and most of '21. I think what we're focused on, though, is that during COVID, supplier inbound became more erratic, but people were less -- as an example, the people are less concerned about it because they were just desperate to get high-quality food delivered to their homes. And what we need to get back to is the -- both externally with working with our suppliers as well as internally, we need to get back to the level of performance that we historically had on substitutions or missing items. And then internally, on the economic side, we need to get back to the levels of waste that we saw in 2018, '19 and beyond. That's actually new infrastructure and new software allows us to actually outperform these levels. So it's just a very big operational focus on perfect execution.

And up next, we have Luke Holbrook of Morgan Stanley.

Just a couple of questions. The first is on the guidance, which points to a slightly positive EBITDA for FY '23. But as things stand, is that sufficient in your rise to unlock that GBP 190 million M&S payment? And then I'll ask a follow-up after that.

Thanks, Luke. So the first consideration, you're quite right, it's dependent on a certain performance in fiscal '23. I won't go into the details of that. We are in discussions with Marks & Spencer on this topic, and we'll update you with our Ocado Group full year results on the 28th of February.

Okay. So there will be at some point this year, investors will be told the KPI that, that will link to, I assume then?