Ocado Group plc (OCDO) Earnings Call Transcript & Summary

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

Good morning, everyone. This is Hannah Gibson, CEO of Ocado Retail. The key message from today's third quarter trading statement is that we returned to positive volume growth in the last month of the quarter, ahead of our original expectations. We delivered a return to volume growth earlier than we have guided reflects the hard work of everyone at Ocado and the progress we have made this year on all fronts, from fine-tuning on service levels, broadening the range and investing in value for our customers. This is really important because volume recovery at Ocado Retail will help grow profitability as we use the capacity we already have available. You will recall hearing me at the beginning of the year talking about our perfect execution strategy at the heart of a new plant to take Ocado forward and drive the growth online. This is about making sure every element of our customer proposition and our operating model is at its best. You can see in this quarter what perfect execution means in practical terms. Following the launch of the Ocado Price Promise earlier this year, we've gone live with 3 price drops, lowering the prices of more than 650 products. These received a positive response from customers. In addition, the number of perfect deliveries we make, which is deliveries on time and in full, remain at consistently higher levels than last year. This quarter, we've also stepped up product availability to further improve customer experience. We're making good progress but we want to go even further. The good news is that these efforts are achieving results with revenue growing faster in Q3 than in H1 and a return to positive volume growth in the last month of the quarter. As I said in January, the Q3 comparisons were going to be challenging given the customer acquisitions in this period last year. So I'm pleased with the performance the teams delivered which sets up well for Q4 and producing the growth we said we would deliver for the full year. Let me share with you some of the highlights from the numbers. Revenue grew 7.2% in the quarter. Average orders per week were up 1.9% year-on-year to 381,000, lapping a strong acquisition push this time last year. Active customers reached 961,000 at the end of Q3, slightly up year-on-year with continued good growth in mature customers. Our average basket value was up 4.2%; while basket size, i.e., the number of items, remained broadly stable quarter-on-quarter at 44 items per order. Volumes grew in the last month of the quarter, as I referred to earlier. Our average selling price increased 8.4% year-on-year, which continues to be significantly below the overall grocery market inflation as we continue to do all we can to mitigate inflation for our customers. Taking together increasing customer numbers and a higher basket value means faster growth in Q3 compared to H1, a trend which underpins our confidence in delivering our FY '23 guidance of mid-single revenue growth and marginally positive EBITDA. The progress we've made with perfect execution gives us strong foundations to build on into next year, and we have a lot of opportunity to keep raising the bar for our customers, delivering much stronger value and convenience as well. So lot of excitement is happening in the business today that differentiates Ocado Retail, from the improvements we're making to the shopping experience to exiting new range of stores, supplies and ranges that we're launching. These plans include making the most of the product and customer opportunities at M&S and realizing the benefits of the state-of-the-art Ocado Re:Imagined [ priority ], which you can see at our brand new robotics fulfillment center that opens today in Luton. As a reminder, Luton CFC will be able to achieve productivity almost double to that of the Hatfield CFC. I'd like to take the opportunity to thank the great team at Ocado for their relentless focus on the needs of our customers, especially through the challenges of the cost of living crisis. We'll talk more about the next stage at end of the year, but I'm happy with the momentum heading into Q4. We're on track to deliver what we said we would do this year with 2023 guidance unchanged. Let's go to questions.

[Operator Instructions] And our first question today comes from Luke Holbrook from Morgan Stanley.

I've got a couple of questions just from my side. Firstly, just on the M&S contingent payment. Given we're only about 2 months away from the end of the financial year, I just wanted to get a sense of your expectations on whether you expect to receive any payment or not. And just the second one is just on the Hatfield closure. My understanding is that it's being mothballed rather than completely closed. Am I right in thinking that the Ocado Group is still expecting to see fees from the joint venture for that facility? And if so, when will it be completely shut down?

Thanks, Luke, for the questions. So on the first one, conversations between Ocado Group and M&S are continuing. Actually, this is an Ocado Retail call, we're not going to be talking any further about the contingent consideration. On your second question in terms of Hatfield, as I said, we're obviously opening Luton today and we are transferring the volume from Hatfield to other sites and now to Luton as well. In terms of the future for Hatfield, we're considering a number of options but we're not going to share any of that at this stage. Actually, in terms of -- if you think about a volume shift that I sort of talked about, it's transferring to other sites and so we'll continue to pay the fee for the volume that we've got.

Okay. So no timing, I guess, on when that fee would stop, but it might be when M&S gain control next year, potentially.

I wouldn't agree with that last statement. It would be -- there is no further -- there's no news on any change of fees. Thank you.

And we're now moving on to Sreedhar Mahamkali from UBS.

A couple of quick ones, actually. Can you talk a little bit of around how you see your ASPs coming into Q4 from the current sort of 8% versus the run rate for 1 year...

I'm sorry, you're very quiet, actually. Do you mind just repeating that question? I couldn't hear you -- what you're saying.

Yes, of course, of course. Can you hear me better now?

That's a bit better. Thank you.

Okay, okay. Cool. Really, the question is about ASPs as we head into Q4 and next year. I mean, we're running at about 8% or so higher prices. Do you see that sustaining into Q4? And do you have a view on where we might be next year? That's the first one. Also, just when you're talking about it, if you could also give a bit of a market context in terms of where you are seeing -- I think you talked about inflating well below market. If you could talk about that a little bit more. So that's the first one. Secondly, and I think you've previously highlighted in Q3 the slower customer growth because of marketing campaign last year. Is there anything you should be looking out for when it comes to Q4?

Thanks for the question. So on the first related to ASPs, I think on this one, generally across the market, there is a view that inflation overall in terms of market context is going to continue to come down. I think it's fair to say any estimates will certainly be wrong to some extent. But if you follow -- if you look at the IDC, then saying it will probably get down to kind of 0 by summer next year. We've seen consistently that we've inflated behind the market. Obviously, we'll expect that to continue as this year plays out, so expect inflation to continue to reduce. I think it's too tough to call at this day to say exactly how that's going to play out across the rest of this year. So that's kind of an answer to the first one. And just to kind of restate what I mentioned in the statement earlier, obviously we are choosing to invest more in value and in more for customer. So for the big price drops, we've already started. We're planning to do more of that to invest in value for our customers as well to make sure that we are passing on as much value to the consumer as possible. So that's for the first point. On your second point, exactly right. You're right to call out that in Q3 this year, we were lapping a period last year where we did a huge amount of new customer acquisition. As you can see in the RNS, we've actually stated that our mature customer growth year-on-year was at 6.6%. So we could see kind of the base improving of the mature customers, which is good to see. Going into Q4, we expect it to be normalizing, so not have those comps as we've had in Q3. So we'd expect a kind of return to normal service going into Q4.

Sorry, just a very quick follow-up. In terms of the volume growth that you referred to, was that in any particular category that you wanted to highlight? What was happening there, Hannah? And I think just generally -- yes, sorry, very quickly. Then generally, then is that volume growth, sort of do you think that will offset the lower inflation as we head into next year so that your top line in question still remains what it is? I know it's a bit early, but any thoughts would be super helpful.

The way I think about volume growth is slightly different than you laid out. Actually, what's going on there in terms of return to volume growth, there's a couple of different factors at play. On the one hand, you've got order growth increasing which obviously, on the one hand, means we've got more items coming through the doors. On the second hand, we've also seen basket size stabilizing more. So there's less of a delta year-on-year from a basket perspective. And then in terms of the orders, that actually splits down as 2 things, and if we've got more customers in the door, which we talk about in terms of customer base; but also in terms of frequency. And we've seen frequency return to healthy levels as well. So those 3 factors of customer base, frequency and basket size overall, that are meaning that now we're kind of going back into volume growth. And if we combine the effects of all those 3 things coming together at the right time, which means that we've returned to volume growth earlier than expected.

And up next, we have Andrew Gwynn from BNB Paribas Exane.

So I have 2 questions. Firstly, just on the declining basket size, just help us understand. I think sequentially you were down slightly to 44 versus 45 items, and it seems to continue a little bit of a trend. So just help us understand what's happening there. And then the second question, just on Ocado Zoom. It does seem to be the case that it's growing slower than Ocado.com. But that's very loose math. So just a comment on Ocado Zoom would be appreciated.

Thank you, Andrew. On basket size, actually what you can see if you track it over the last number of quarters, that the gap year-on-year is narrowing, right? So we have been, spoken at previous quarters, lapping what has been previous COVID impact to bucket sizes, so people going out less, people at home more. And actually, what we've seen as we go through this year, we've narrowed that gap. And suffice to say as well, we did have, in Q4 going to Q1 last year, obviously cost of living prices was at a higher peak. And we saw that as ASP increased at the end of last year, that actually that did have an effect on basket. But actually since about November, December, we've seen basket sizes relatively stable and pretty flat despite the ongoing market inflation that's going on. And that said, obviously we've still got the rest of the year to play out. But actually, we've certainly seen that, that gap has narrowed, and year-on-year it feels that we're getting to a more stable position now. On your second question on Zoom, the comparison isn't quite like-for-like, if that helps, because Zoom is obviously in a specific number of catchment areas and post codes. So the opportunity from a growth perspective isn't quite the same as Ocado.com obviously covers a broader range. We've got [ both ] at the moment growing strongly. Our year-on-year growth is at very high percentage numbers actually. So it's not quite the same comparison as Ocado.com. In the particular areas in which they're live, they do have a strong representation and good volume share versus Ocado.com.

So definitely growing materially ahead of the group, the Ocado.com.

Ocado Zoom in the catchments in which they are, and especially if you think about London, yes, their size are growing strongly.

And now we're moving on to a question from Nick Coulter of Citi.

I have 3, maybe if I go one at a time. So firstly, just to come back to Hatfield. Is it possible to get a sense of how the capacity phases out of the Hatfield, please? Over what time period that trends to 0?

Nick, yes. So to answer your first question, we're expecting Hatfield volumes really to stop over the coming weeks, so very short-term. And from a capacity perspective, we will be operating that at the end of the week closer -- end of this year, sorry, closer to 75% of capacity that we've got and as we guided to at the half year.

Okay. Great. And then on Luton, how many modules do you open up with, please? And what's the kind of the maximum UPH you can run with it, if that's 2 or 3 modules?

So in terms of Luton, we are ramping Luton the fastest we've ramped any CFC. Obviously, that's possible because we are transferring a lot of volume across from Hatfield directly. We expect the site to be operating within half its capacity in the coming months. And we can have the capacity to get up to around 65,000 orders a week, but I would say we'll be getting to the half of that pretty soon. In terms of UPH, now overall the site in due course will be able to deliver north of 300 UPH. Obviously to start with, as we ramp and as with normal sites you have a slightly lower UPH start, we will also be ramping up the level of [indiscernible] we've got in our facility. So again, that will be ramping up over the course of the next year or so. And so again, that will drive up productivity up as well. And as a comparison, you have to look at -- yes?

Sorry, you open with 5 or 6 modules licensed, is that what you're saying, for Luton? Or do you start with 2 or 3?

Just in terms of -- to just unpick the kind of question, are you saying if we installed the capacity? Or are you asking whether we've got engineering running? I just wanted to unpick what you're trying to get at.

Well, I guess I'm asking is the capacity there, therefore are you paying a fee on the 5 or 6 modules for Luton? And then, yes, how does it ramp up, I guess, is -- so yes, both elements of your unpick, so to speak.

Okay. So on the -- we'll be ramping Luton, as I say, pretty quickly, and we expect it to get to close to full capacity. And so we will be paying the fees for that capacity we're using. And l'll be assuming it would be a significant portion of that, if not all. I think -- I hope that answers your question more broadly.

That's helpful, I think. And then last one, if I may, please. Just on execution and cost discipline. Could you talk about the start-up costs that you'll see from the ORL side for Luton, please?

In terms of ramping the sites, obviously as you ramp up a site, the UPH is clearly a big factor in terms of that site ramp. Because we're ramping it faster than any other sites, we expect that improvement in cost base to be better than any other site we've ramped before. We wouldn't release kind of further specific details on a CFC basis at a cost level.

[Operator Instructions] And we're now moving to Alex Mishurov of KPS.

My question was asked already. Thank you.

[Operator Instructions] There appears to be no further questions at this time, Ms. Gibson.

Okay. Thank you much, everyone. That concludes our call. We'll give the next update on sales with our Q4 trading segment on the 16th of January 2024. Thank you very much, and see you all then.

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