Ocado Group plc (OCDO) Earnings Call Transcript & Summary

Hello, and welcome to the Ocado Retail Q1 '23 Trading Update Analyst Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Hannah Gibson, CEO, Ocado Retail, to begin today's conference. Please go ahead.

Good morning, everyone. This is Hannah Gibson, CEO of Ocado Retail. I'm joined this morning by the Chairman of Ocado Retail and CEO of Ocado Group, Tim Steiner. The key message from today's first quarter trading statement is that we are on track to restore sales momentum. The performance of the business is in line with the expectations we set out with our Q4 trading statement on the 17th of January and there's no change to guidance, and more on that shortly. Since the beginning of the year, we have been perfecting each of the elements that make Ocado so special. For our customers, this means delivering the best service in the market right to the kitchen table with on-time delivery and order accuracy back to pre-pandemic standards and close to our best-ever levels. It means unbeatable choice across our branded and own brand ranges where we are championing also small and unique suppliers and making sure our customers can experience more of the magic of M&S. And it means investing in value, and you will have seen the launch of the Ocado Price Promise delivering the Ocado experience at Tesco prices. These are early days, but our strategy is starting to bear fruit. We've continued to attract more active customers, up 13.8% year-on-year to 951,000, and this has led to a 3.6% increase in the number of customer orders on Ocado.com. As expected, however, our headline sales number is still impacted by COVID unwind, accelerated by the continued cost of living crisis in the U.K. with consumers responding to high food price inflation and lower real income by managing their spend on food more carefully than before. As a result, the average selling price of Ocado.com was up 8.3%, significantly lower, by the way, than the market overall. We did see a decline in the number of items in basket of 7.5% year-on-year to 45 items per basket. The value of the average basket was flat at GBP 124. This compares to a 1.3% decline in the value of the average basket in Q4, the improvement mainly driven by a slightly higher average selling price. In the second half of the year, we'll continue to improve our proposition, grow our customer base and we will no longer lap COVID shopping behaviors. As a result, we expect volumes to grow in the second half. Hence, there is no change to the guidance we gave in February with the Ocado Group FY '22 results. And I would just remind you what we said then. In the current year, we expect mid-single-digit revenue growth with an improving trajectory during the year. EBITDA, meanwhile, is likely to be negative in the first half and positive in the second half, as the return to volume growth supports improved capacity utilization and reduce costs relative to sales. In the medium term, we remain confident in light of the strong customer acquisition and continued improvements to underlying productivity that sales and EBITDA margin will cover strongly. Taken together, growing customer numbers, orders and increased utilization of available capacity will underpin a recovery to high mid-single-digit EBITDA margins. For these reasons, we look to the future with confidence as we return to sales growth and profitability. Now let's go to questions.

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

Two questions, if I may. The first one is on demand and how it trended throughout the quarter. You obviously had a pretty strong Christmas. But have you seen any change in consumer behavior or demand tail-off during the quarter, particularly, any color that you could give in terms of orders or average basket values? And the second one is around the cost base. You obviously spoke about 3 different hits to EBITDA last year: fuel, electricity and dry ice. Can you just give us an update of how these costs are trending or how you're mitigating the impact of some of these costs in Q1 and Q2?

Thank you, William. So on your first question in terms of demand and how that -- the shape of that over the quarter, exactly to say, we're obviously -- yes, we talked today about being up overall 3.4% versus the same quarter last year. And as you know, within Q1, that includes our Christmas. But actually, coming into January, we've seen pretty steady loyalty and frequency from our customers since the start of January. Inevitably, at the start of January, people are very cost-conscious. So we see that kind of pattern, actually, frankly, in many January starts of the year. But actually coming out of the quarter, we saw improving -- a good trajectory coming out of that quarter as well. So whilst Christmas was strong, actually, we think we're kind of keeping the momentum going throughout the quarter and beyond as well. In terms of customer basket size perspective, as I've stated here, we're seeing the average cash basket remain pretty flat year-on-year. And again, that's been relatively consistent through the quarter. Now obviously, inflation is still there. So we're obviously keeping mindful of what that will do going forward, but actually no big shifts across the quarter from that perspective. In terms of cost base, you highlighted one item. But actually, across the course of this year, there are a number of areas from a cost base perspective that we're focused on. First, in terms of fulfillment, also talked earlier about improving our capacity utilization that will help in its own rights. But on top of that, from a productivity perspective, we are seeing our CFCs continually operating at month-on-month records in terms of the UPH and the productivity that they're seeing. From a marketing perspective, we're being more targeted in our marketing strategy, and we expect that to improve the potential sales this year versus last year. And then as you say, there's also kind of utilities: fuel, electricity, dry ice. We've seen some of those prices improve over the course of the year. So we've increased our amount of hedge going into next year. And obviously, we are looking at how we balance that versus the efficiency savings we're going after too.

Well, I would just add to that, the first part of the year, Q1 and the first part of Q2 is still the period in which the kind of the government caps were imposed and people were hedged out. So largely, we're paying that rate, which is high -- not as high as it reached before they did it, but not as low as the market subsequently got to. Beyond that, we've held off on our hedging activity and have been hedging in this much more friendlier market, which will leave the electricity cost for the year, I think it's down on last year, but with an exit rate significantly lower than the average.

And we're now moving on to our next question from Andrew Gwynn of BNP Paribas.

Hopefully you can hear me because it sounds like you've got some building work going on in the background. So just, obviously, capacity utilization, just help us understand where you are and actually also when Luton comes on stream. I think that's a little bit later in the year. And then second, I know you introduced it during or the same day as the full year results, we didn't really talk about it then, but why the Tesco price match now?

Thank you, Andrew. Apologies, everyone, for the building works. There's quite a lot of banging going on outside. So in terms of your first question, Andrew, on capacity utilization, so yes, we've talked before about being 2/3 of our overall capacity. We're not going to give specific numbers on what that looks like. But as in terms of the trajection going forward through the year, that actually is -- as you can imagine, we will be improving that overall capacity as we go. We've got a healthy growth in terms of new customer numbers. We've got healthy growth in terms of mature active base going through. So we'll expect that to continue as we go. We have, exactly as you call out, got Luton coming online later in the year. It's in Q4, probably speaking. And actually, as I said earlier on, we are seeing improved levels of productivity in each of our sites that are going live, they are the new OSP sites. So we will see the efficiency improvements from that. The second question in terms of Tesco price match, why now? It's a great question. I'd say that actually, different -- it's retail, right, different times call for different focuses. And it's fair to say that right now, value is the thing that is at the top of consumers' minds. And obviously, with inflation going on as it stands, we've got many customers who are loyal Ocado customers that it becomes hard to track whether or not you're getting a great deal, whether or not you're getting great value. And we want to be making sure that our customers are getting fantastic choice, great service and being able to see that they're getting great value for that as well. We only launched it a few weeks ago. We've already seen that our NPS scores on value have improved over that short course of time already. I'm seeing it in the customer feedback, unprompted, people saying that they're happy that they can now get the Ocado [ product ] from it. So hopefully, that will play out in terms of improved benefits as we go through the year as well.

And we're moving on to Luke Holbrook of Morgan Stanley.

Just a couple, if I may. Firstly, just on you made a few headcount cuts at your head office a couple of months ago, a few months ago now. Just interested to hear how you're thinking about the cost base in the last part of this year. And just secondly, any views that you have in kind of a disinflation environment as we go through the second half of this year. Do you see it as a bit of a headwind to your revenue growth or otherwise, do you see consumer volumes improving and therefore, more of a positive?

Thank you, Luke. So in terms of the cost base, I think I outlined before, in my response to William, is there's multiple parts of the cost base, so fulfillment costs, there's marketing, there's utilities, and we're focused on many of those in terms of improving them. In terms of other efficiencies that we've been making, we've been looking at things like waste, post-delivery adjustments and looking at improving those as well. Absolutely, then you're right, we have been looking at our central costs too. We did a review in the autumn in terms of our head office, and we're making changes there. And we're not planning any further changes to our head office in Hatfield at any point, too. We think we've got the right size of the business to take us forward. In terms of your second question in terms of inflationary environment, as I said, at the moment, we're seeing cash basket remaining static. That said, in terms of what we're seeing with inflation, we are saying that there are continued cost prices coming through -- cost price increases coming through, which we'll be working with our supplier base on. We're also seeing in some areas, actually commodity prices are starting to come down. But overall, we're still seeing an increase. But you start thinking, you start to look at the external advice on this, and we expect in the course of this year to -- for inflation to be coming down. Now in terms of how consumers will respond to this, obviously, we'll keep a close eye on that as we go forward. Whilst there will be headwinds from that, I also think there's lots of opportunity for us going ahead as well. And there's more we can do to be improving in availability. There's more we can be doing to making sure we've got the right choice in front of our customers, too. So hopefully, those 2 things will net out and we'll continue to see a stable trend.

[Operator Instructions] And we now move on to Simon Bowler of Numis.

A couple from myself, please. First one, just being on your ranging, there's kind of a few bits that you kind of mentioned within there. Can you give us any sense in terms of how you're thinking about or what you're seeing in terms of your overall kind of breadth of ranges? Is there much of a change that you're planning to put through or putting through with regard to your SKU count? And then secondly, just on customer numbers, up kind of 11,000 or 1% in the quarter. Can you just talk about some of the dynamics that are beneath that regarding, I guess, kind of churn and customer acquisition trends?

Absolutely, Simon. Yes, thanks for your question. So firstly, on ranging, it's a great question. So overall, I'm sure many of you are familiar with this, but yes, we've got a SKU count of [ 8,000 ] to 50,000 products. Actually, I think this is a real point of differentiation. You'll hear me talk quite a lot about choice rather than range because I think they are different things. So it's all about making sure we've got the best choice in the market, making sure that we're meeting every single different need state. And that could be every store making sure that we are broadening our Ocado own brand names to make sure we've got all those items. If you need to do a big basket shop for the week for the family, we've obviously got M&S. We've been improving the number of products we've got and we're launching with them at the moment. So you saw that we did increase the sales, let's say, of higher-welfare chicken, for example, which is kind of interesting dynamic versus the people focusing on own brands. But then also in terms of smaller suppliers, I want to make sure that we're getting back to getting those early trends back into Ocado first. And so we'll see things -- the names of like fermented products, for example, are a good example of things that customers are going after. So we're trying to really make sure that we're getting that great choice of need states. And we do have more than double the SKU count of an average supermarket, and it's how we make sure we make the most of that. We are also focused, though, on the efficiency of those products as well, though, so making sure that actually we've got products that have got a great rate of sale and that we're managing that overall cost and getting the best return on that SKU count as well. So that is a bit on range. In terms of customer numbers, yes, thank you for your question on there. So we're at 951,000, that is still up 13.8% year-on-year. You do see kind of Q4 to Q1, it's not necessarily the straightforward just extrapolate from one to the second. What I will say is actually a little bit more about the underlying trends here. So actually, our mature customer base, i.e., those customers who got beyond the fifth shop, have actually been improving steadily over the last few months. It's actually up 3% on the quarter. So if you extrapolate that out to an annual number, obviously, that's kind of a healthy number to be looking at. The second thing just to note is that actually, we've been more focused on our marketing strategy over the last few months as well and to be really making sure we're more targeted to bring in better quality of customers and getting more of those to fifth shop. And we've certainly seen some improvements in that over the last few months as well. I hope that helps.

Yes. Could you possibly expand on the -- and what you're changing from a marketing perspective? I think on the shift between kind of marketing and vouching is quite different type, it was pre-COVID. Are you reversing some of that? Or is it a different focus of your marketing spend?

Let me -- I'll just say probably 3 things just to call out there, Simon. The first is when we are kind of going out and looking for customers of the world, we're being more targeted in the customers that we're going after. So both in terms of channel mix, but also the customers that we're targeting within that channel mix, we are taking opportunities to kind of up our game in terms of how we can be more targeted there. The second thing to talk about is like, as you're saying and I think as we've alluded to in previous calls, we have increased amount of vouchering versus a year, 2 years ago, precisely to try and get customers over that initial barrier, right, to get them to try Ocado to understand it better. And then thirdly, what we're doing is making sure that we are -- we've improved the [ nursery ] journey. So that experience that customers get from our first shop through to that fifth shop has improved, and we've seen a significant improvement in that over the last few months in terms of customers going to fifth shop.

As there are no further questions at this time, I would like to hand the call back over to you, Hannah Gibson, for any additional or closing remarks.

So thank you, everyone. And that concludes our call. We'll give a next update with the -- on sales with the Ocado Group half year results, and that will be on the 18th of July. Thank you for your questions, and see you all then.

Thank you. That concludes today's call. Thank you for joining, everyone, and enjoy the rest of your day.