Ocado Group plc (OCDO) Earnings Call Transcript & Summary

Good morning, and welcome to the Ocado Retail Trading Update Analyst Call. I will now hand over to Chief Executive Officer, Hannah Gibson. Please go ahead.

Good morning, everyone. This is Hannah Gibson, CEO of Ocado Retail. I'm here with Mat Ankers, our CFO. One year ago, [ assessing ] our plans to restore growth and profitability at Ocado, to improve the customer experience and ensure that our operating model was at its best. I'm happy to say that over the last 12 months, we've made real sustainable progress and have seen notable improvements in almost every KPI. This has been achieved by relentless focus on our priorities throughout the year, most importantly, by investing in value, delivering great choice and service. Underpinning these initiatives has also been improved cost efficiencies such as increasing marketing efficiency and continuing to roll out our latest generation of robotic customer fulfillment center. The Perfect Execution program introduced a year ago has set a high bar of our performance, and it's really pleasing that we've finished the year with strong momentum, getting back to growth and profitability and having recorded our biggest Christmas ever. Let me share with you some of the highlights from the Q4 numbers, which cover 3 months to the end of November 2023 and give you a little color on Christmas trading, which draws at the end of the first month of Q1 of '24. Most importantly, in Q4, sales growth accelerated. Q4 revenue grew 10.9% in the quarter, the fourth consecutive period of quarter-on-quarter growth, a significant increase versus the 7.2% we reported in Q3. Volumes grew consistently over the period, up 4.8% year-on-year. We're continuing to attract new customers and win market share. Average orders per week were up 6.3% year-on-year to 407,000 while active customers reached 998,000 at the end of Q4, up 5.9% year-on-year with even stronger growth in mature customers. And volumes are now consistently positive. Our average basket value was up 3.8%, while the number of items per basket remained broadly stable quarter-on-quarter at 44 items per order. Our average selling price increased 5.4% year-on-year, again, lower than overall grocery market inflation, reflecting our continued focus on delivering value. We saw our biggest Christmas ever with both niches, which is the number of open sold at 3% and sales overall, up 7% in the peak Christmas period between the 20th and 24th December. And we sold over 90% of peak Christmas slots released the 22nd to 24th December by mid-October, showing a strong customer demand. It was pleasing to the ramp-up of capacity in our new robotics CFCs such as in Luton, which went from go live to close to full capacity within 3 months of opening. Looking forward, we're confident the business will continue this momentum over the coming year, growing sales volumes ahead of the market. We expect sustained volume growth in FY '24 and continued strong trends in both customer acquisitions and customer transactions. Revenue growth is likely to be impacted by lower growth in average selling price and also as we invest in value and as improved food price inflation continues to subside. Therefore, we expect overall revenue growth in FY '24 is expected to be in the mid to high single digits. This year, we expect to make further progress on increasing efficiencies and demonstrating operational leverage while continuing on our journey to above target of high mid-single-digit EBITDA margin in the midterm. First and foremost, Ocado is adopting a really great shopkeeper with an unbeatable range, great value and unrivaled experience, both online and to customers' homes. Over the next 12 to 18 months, we'll be embedding the foundations we've laid this year, and raising the bar again to what it means to shop online. And before I go, I just like to take the opportunity to thank the great team at Ocado Retail, M&S and the Ocado Group for their focus and dedication to improving the customer experience and giving us some really strong platform to build on in 2024. Let's go to questions.

[Operator Instructions] And our first question today comes from William Woods from Bernstein.

I'd just like to pick up on the EBITDA guidance. What is the rationale behind giving the kind of quite soft and quite vague EBITDA guidance for FY '24? What are you worried about?

Thanks, William. So this year, I talked about returning to positive EBITDA this year, obviously, has been a combination of factors. First, in terms of gross volume growth obviously improves the position. We've also shifted capacity and our network to improve on that. And then lastly, we've just been focused more broadly on improving efficiencies across all items of the P&L, whether that be marketing or overheads. Now clearly, the key going forward is around volume growth. And we -- as we said, we expect next year to be similar to the exit trajectory of FY '23, and so we're expecting volume growth continuing into next year. The reason for not being more specific on EBITDA is actually quite simply that this is a trading update. We're talking about revenue and actually going to come back to being specific on the FY '23 EBITDA outcome at the end of February at the Ocado Group results, and we will also talk there more about the FY '24 guidance going forward as well.

Got you. And just a follow-up, in terms of your capacity utilization, it looks pretty good getting up to around that 75% number. Where would you be looking to get to with capacity utilization? And as a follow-on, how does robotic arms change that number as you introduce them into the warehouses?

Sure. So let's just unpick that a little bit. If we think about capacity, we've obviously made changes to our network this year, both in terms of closing Hatfield, opening Luton. So we're not planning any more changes to the overall network at this point at all. And so we expect overall the denominator as it were from the capacity perspective to continue. Actually, then in terms of freeing that capacity, well, it's purely just linked to volume growth. And so obviously, looking forward to next year, as I just outlaid it my first answer, we're expecting volume growth to continue and obviously, the structure of that would inform what our overall utilization is. Looking further out, though, we actually expect that there is still an opportunity to probably get a little bit more capacity out of those sites. But the focus for the next year or 2 years as we grow on with robotic picking is more about productivity rather than necessary capacity. And we've talked about Luton going from a 200 UPH to closer to a 300 UPH and with some of our other sites as well as we roll off that [ one bit ] robotic pick across the network. Does that help, William?

Yes. That's perfect.

And we're moving on to a question from Andrew Gwynn from BNP Paribas Exane.

Two questions, if I can. So firstly, just actually following on from that comment, Hannah. So you've mentioned obviously the capacity or the opportunity to sort of sweat more capacity out of the existing facilities. So how much more headroom is there? You're thinking about sort of putting more robotics. And I think obviously, the utilization is based on the sort of CSPs as they are today. But obviously, there's options to add in further modules. So give us a little bit of idea on the headroom. A long question, but hopefully straightforward. And the second one, Christmas trading. Personally, myself I was a little bit underwhelmed by it. And obviously, you saw improved momentum in Q4. It's normally a period where your supply constrained rather than demand constrained, yet growth is a little bit subdued. So just a thought on that would be much appreciated.

Thank you. So yes, regarding to your first question on CFC opportunities to question further, that we believe the opportunity to be more at the sites. We haven't been specific on that yet, and we're going to continue to kind of understand what that looks like, but we do know that site has been operating very well. The UPH productivity when it comes to [indiscernible] has been strong. And so we'll be continuing to look at that, obviously, across the broader design, obviously, of a CFC. There's multiple elements to it, and you need to be able to optimize across all of those elements. So it's [ something ] we'll be looking at, it's something we'll be updating I expect in the near term. On your second point on Christmas trading, it's a great question. And I think to some extent, it's why we called out that -- actually, we are record breaking Christmas, it was the biggest Christmas we've ever had. We saw high demand here. We [ saw it up 9% ] of stock, so we released by mid-October. I think there's an [ emphasis ] that actually we could always do more at Christmas. I think we had a lot of network shifts in earlier in Q4 with closing Hatfield, opening other sites. We wrapped those up incredibly quickly. I think what we saw was a strong result year-on-year, but it's a different part of the year for us and actually we're a 365-day business, and we're talking now about 4 days of the year.

I just wondered, is it fair to conclude that when you're planning for Christmas, it was maybe just a bit too cautious? And you'd not put enough manpower in or enough fans and actually, it could have been better if you wanted?

I think there's always a point for our Christmas trading. There's always -- there's more demand than the last 2 weeks that we can serve. And I think it's always a period where we could possibly do more, but I wouldn't say it gives you necessarily much to guide in terms of outlook. I think the Q4 view is more reflective of our overall trading performance.

And next, we have Luke Holbrook from Morgan Stanley.

Just firstly, on Zoom site. I'd just be useful to hear an update on where we are on deployment of Zoom as of today and into 2024, just so we get an idea of contribution of overall top line revenue growth from those sides. And then secondly, on the M&S side, if you can just update us on those negotiations you're having? I guess, firstly, with the multiple kind of Hatfield CFC and some of the equipment still there and that fee that paid from the joint venture to the group. And then secondly, can you just confirm on the contingent payments, whether that is still under negotiations or whether it is not being paid?

I'll answer the second one first so you're catching it relatively straight forward in terms us answering your question for Ocado Group and M&S. This is a part of a retail trading call. So that's something that we picked up in the Ocado Group results in FY '24, should you wish to ask the question then -- at the end of February, sorry, I meant to say. And then your first question in terms of Zoom. So as you will have seen, we've announced that we are focused on growing Zoom in London. We've recently closed our [ Leeds ] sites and we're focusing on how to optimize the London locations. We've seen strong growth over the course of this year, and we're continuing to focus on new opportunities as and when the right locations come up, but we're seeing continued strong growth in those sites. We've seen strong customer NPS and we're continuing to expand that business.