Good morning, ladies and gentlemen. Welcome to this Ocado Retail Q4 trading update call for analysts. Today's call is being recorded. You will be in a listen only mode to begin with, but will be able to ask questions later by pressing star one on your telephone keypad. 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 a film broadcast on the Ocado Group website, where I talk at greater length about my vision and strategy for the business. I don't propose that we go through all the details again here. Let me just take this opportunity to quickly summarize the Q4 numbers and our outlook, which we will go straight to Q&A after that.
Revenue was 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 money was down £ 117, and 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 demands and cost headwinds in 22 will mean that we report close to break-even EBITDA after 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. We expect full year revenue growth in 2023 to be mid-single digits. While there remain many uncertainties, we expect RRL to deliver marginally positive EBITDA this year. A focus on what we're internally recording perfect execution in 2023 will set the foundations for accelerating growth in 2024 and beyond. I talk more about this in my video.
A confidence in our proposition, unbeatable choice, amazing service at great value. This is enabled by differentiated technology and M&S magic. I believe we're well positioned for growth from FY24 and as the benefits of Ocado Re:Imagined also come through, in addition to return to strong sales growth, I am happy to confirm our expectation of progressing towards a high mid-single-digit EBITDA margin in the midterm. 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.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. That is star one for questions. Our first question today comes from William Woods of Bernstein. Please go ahead.
Hi. Good morning. Thanks for taking my question, Hannah and team. I've got three. The first one is could you just clarify the EBITDA guidance for FY23? What is marginally positive EBITDA, and how does it differ to close to break even this year? The second one is on EBITDA this year, since you gave your kind of break even 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 FY22 outlook? 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? Thank you.
Absolutely. Thank you, William. In terms of EBITDA guidance, for FY23, we talked about marginally positive EBITDA guidance. I mean, that is, you know, exactly as it states. There's obviously still a level of uncertainty out there, and we expect to be, you know, just over break even in terms of marginally positive. Obviously there's some kind of ups and downs around that, exactly as we state, it's marginally positive. On the second one, in terms of your question about why is there not more movement in FY22 given some of the changes. Look, we've, you know, 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 FY23, we might see some upsides there, but obviously there's continued uncertainty around that as well. We haven't seen that flow through into FY22. On retail cash position, Stephen, would you like to pick this one up?
Yeah, sure. When we look to the year ahead, we cannot have 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. Having said that, Ocado Retail has plenty of access to capital. It's got a revolving credit facility that it can 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. It's got a good source of liquidity for the year ahead.
Excellent. Thank you.
Thank you. We move on to Andrew Gwynn of BNP Paribas for our next question. Please go ahead.
Hi, good morning all. Having you here. three if I can, so fairly quick. Firstly, just on trading in December, I think the Kantar market share data suggested 20. I think you're saying 15 over the five days. Just wondering about the, if you can give a broader figure for December, just to help us clarify where you'd be in Q1? Tied to that, help us understand the full year guidance. 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. Finally, obviously, you've pointed to that shape, so a 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 break even, or is it relatively flat? Thank you very much.
Thank you, Andrew. I'll take those in turn. In terms of trading in December, you know, you create the Kantar numbers there and we, you know, we have seen historically that the Kantar numbers do tend to overstate marginally our performance. Kind of the movement to a 15% sales is, you know, as we've quoted, that's what we saw at the Christmas period, and we had a strong Christmas for our customers, which was good to see. Your, you know, the question around how that flows into the new year this time around, obviously, we've been looking at the trends coming out of Q4. Over Christmas, we've certainly saw customers were out to enjoy themselves.
They wanted to have people round to their houses, you know, it's not unusual that we had a strong Christmas in that environment. Obviously we're, you know, come into the new year, there's a high level of uncertainty and cost of living crisis that people are kind of, you know, concerned about. We want to make sure that we are trading strongly in that environment. In terms of the shape then, exactly as I've stated and you picked up on, we will see, you know, in the first half of the year, we are, I suppose lapping both COVID baskets, but also frequency as well. You'll start to see that's come through throughout the year.
I expect probably by the, you know, half mid, mid-point 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 it kind of suddenly drops off. I'd say it's probably more of a gradual throughout the year. Obviously, as we go into Q4, if you think about it, you've got the summer, which is a lighter period anyway, as people are away. We're expecting kind of higher growth going into the Q4 period.
That's very useful. I'm sorry, the question was actually more about EBITDA for the year. Is it down very sharply in the first half, or is it sort of more shallow variance between first and second? Thank you.
The focus on the kind of growth numbers is important because obviously, you know, our capacity utilization affects our EBITDA numbers quite a lot, so actually the shape of the growth has quite a big implication on the EBITDA numbers. 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. I'd say it's a gradual move throughout the year.
Okay. All very clear. Thank you very much. Have a good day.
Thank you. Our next question comes from Simon Bowler of Numis. Please go ahead.
Hi, and good morning. I have two questions from myself, if okay. First one was, can you just talk a little bit around your thoughts around kind of the marketing strategy for the business going forward? There's a bit of reference within the statement to a kind of more mature customers versus newer customers being added in. Any update you can give us on kind of how you're feeling and thinking about kind of customer acquisition would be great. Thank you. 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 the thoughts and plans are from that perspective.
Thank you, Simon. On marketing strategy, I guess I would start with the most important thing here is to continue improving our customer proposition, right? Investing in value, making sure we got unbeatable choice and also improving the propositions. That's kind of always the foundation, the starting point of that. When you start to talk about customers, I mean, as you've seen, we've grown our mature customer base from Q3 into Q4. When it comes to the new customers, we're actually focusing more targeting to make sure that we're really focused on those, what I'd call probably 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. Lastly, we're thinking about reactivation as well.
You know, compared to where we were three 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, you know, those customers, I'd say on the one hand, there's the lookalikes, so those who are big basket shoppers and other online supermarkets, but also then probably linking into your second question, there are also a number of M&S fans out there, you know, a number of whom will not be aware yet that actually we sell M&S products on Ocado. We think, you know, we can offer them an opportunity to get more of the M&S products more frequently alongside topping up their M&S shop with a number of other kind of goods to their broader basket.
Linking that then into your second question, how can we leverage the M&S relationship? Say there's a kind of big customer piece, a good customer angle to 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 products have to bring a level of excitement to the weekly shop. And then there's also just inspiration around those moments of joy throughout the year which M&S overtrade in. There's also then from a, you know, operating point of view, opportunities around joint sourcing as well, and making the most of both making the most of how we both operate. I think continue to be a large number of opportunities for us to work closer together.
Great. Thank you. 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% - 3% are new customers. Therefore, you know, if you think about that over the course of we report our customers on a 12-week rolling basis.
If you think about that, in that period of time, you've got a number of new customers, some of whom are gonna stay with us and some of whom, well, obviously, you know, we'll try and we'll go into that full speed, hopefully reactivate at some point in the future. Those kind of numbers should give you some sense.
I think the key to what Hannah's been referring to in the statement and beyond is by targeting more and spending her money in a, 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.
Especially if you compare where we are now compared to where we were in COVID times. Obviously, during, you know, the pandemic, we had mostly only mature customers. Over the course of FY22, we've been real building up that new customer base. We go into FY23, we're aiming to continue to build that as well.
Okay. Very clear. Then sorry, one other just quick follow. It sounds like from how you're talking kind of for the shape of next year, it is more investment into proposition and somewhat less into marketing. When we're thinking about kind of the margin structure for next year...
We should be taking that into account. Is that fair to say?
I mean, I think marketing as a percentage of sales will probably remain, you know, reasonably in line with the last 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, you know, supplier inbound became more erratic. People were as an example, but people were less concerned about it because they were just desperate to get high quality food delivered, you know, to their homes.
What we need to get back to is both, you know, 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. Then internally, on the economic side, we need to get back to the levels of waste that we saw in 2018, 2019 and beyond, as actually new infrastructure and new software allows us to actually outperform those levels. It's just a very big operational focus on perfect execution.
Great. Thank you.
Thank you. Up next we have Luke Holbrook of Morgan Stanley. Please go ahead.
Good morning, everyone. I'm just a couple of questions. The first is on the guidance, which points to slightly positive EBITDAR for FY23. As things stand, is that sufficient in your eyes to unlock that £ 190 million M&S payment? Then I'll ask a follow-up after that. Thank you.
Thanks, Luke. Say the deferred consideration, you're quite right, is dependent on a certain performance in fiscal 2023. 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. There'll be at some point this year, investors will be told the KPI that will link to, I assume then.
You shouldn't necessarily read that into my comments. We'll give you an update on where we are at the end of February.
Fine. And just to follow up, I understand there was a small scale restructure, or some redundancies made November, December time. Are we to expect a larger scale restructure within retail this year when we talk about the cost management side from Hannah's comments?
So we exactly as you say, we did a small restructure in the autumn to focus, continue to drive to focus on costs, in our central and our head office. We're continuing to focus on efficiencies, but more so in terms of how we operate and how we can improve our operations, how we can improve our sourcing. There's a number of other ways that we're focused on now to improve our efficiencies, and we think we've got broadly the right cost base from a head office sector going forward.
Okay. Perfect. Thank you.
Thank you. We now move on to Nick Coulter of Citi. Please go ahead.
Hey. Morning. Thank you for taking my questions. I have three, please. I'll go one by one, if I may. Firstly, could you say what the average each is per basket were in 4Q, please? How that's trended across the year, and what your thoughts are going forward. Thank you.
In Q4, we're at 45 each is per basket. As we go through the year, as I said, we're expecting, I think I used the word, a considerable decline, as we go into this year versus last year, let's say because of the, you know, the COVID unwind. We're expecting obviously that effect to shallow as you go throughout the year. You've got a kind of a slowing rate of decline as the year goes through. As I answered in a previous question, there's not a point at which it's sharply declined. It is a gradual movement over the course of the year.
The 45 strikes me as vaguely normal. Are you expecting that to decline further from where you are? I guess there might be an inflation play into that, but.
Nick, that Hannah was referring to that versus last year. At the start of last year, we had substantially larger baskets, and that's why she's been talking about the kind of lapping challenge of the first half versus the second half, because whilst they were slightly larger in the second half than they are now, on average, it's very marginal, whereas in the first half, there was still lockdowns and COVID trading conditions. Basically, at the end of the day, there was more consumption at home of groceries than there is today because a lot of the other places that you can eat calories were closed or not being visited.
But sequentially, we're there, yeah, basically second half on next year's first half is, it sounds.
At the moment, look, we have to wait and see. Obviously, as you acquire new customers, new customers come in with smaller baskets. We've explained that before. Over their first 10 shops, their baskets grow significantly. You know, we don't know what other consumer trends, you know, could go on, but we are there or thereabouts with pre-COVID baskets at the moment. Now, that's kinda interesting. There is no doubt that there is more consumption at home in terms of kind of the working week than there was pre-COVID. A number of people, a number of our customers continue to work a few days a week at home, and one would expect slightly more consumption.
I think against that, there is still an element of euphoria on the entertainment side in terms of going out and eating out, and travel, where, you know, airlines having to put on extra flights and things like this. I think that we'll wait and see how all that unwinds. Generally, the trend ought to be towards slightly more consumption at home, but that might be matched off against slightly more shopping frequency and shopping occasions. We'll wait and see. We don't expect a substantial move from here in any direction.
Great. Thank you, Tim. Then secondly, on your comments on cost ratios, I mean, how long will it take for costs such as marketing, vouchering, wastage to revert to the pre-pandemic norms or ratios? What kind of stakes, I guess?
Look, I think some of this is a little tricky. In things like marketing, part of the increased cost is it's an elevated level to recapture the level of customers that we would've liked to have had we just done generic kind of growth through 2021 and 2022. A part of it also is in, you know, at the end of 2021, beginning of 2022, there was an, a wall of money that drove the actual cost of kind of competitive marketing upwards. Things like Google AdWords doubled in price. That is unwinding, but hasn't gone back to quite where it started yet. There is also an increase when you're doing physical marketing, things relating to, you know, I don't know, flyers, for example.
Mm.
There are physical cost increases at the moment relating to paper price, you know, commodity prices and transportation prices. I think some of that will unwind, but I don't know how fast. Things like waste, you know, we just need to build up our muscle in terms of operating in a slightly changed environment to pre-COVID, where, you know, pre-COVID, we had four CFCs live. We have moving on for seven. We just need to kind of get back into swing. We also in that COVID period, did the switchover of the supply base.
Obviously, we'd spent a lot of time working with the Waitrose suppliers in terms of frequency and of supply in terms of the order multiples to drive the right numbers for each of our buildings. It's something that, you know. It was hard enough to get supply during COVID, let alone starting instructing people how many times a week and what size you wanted everything to arrive in. There's just a work to do. How long exactly it takes, I don't know. We've got a lot of focus at the moment, and making significant improvements.
In terms of the cost base, the other thing to consider is, you know, our capacity utilization. As you know, opened four sites in the last year or so, actually, as you grow into those sites, as you expect your waste example in terms of sales to continue to improve.
No, thanks for that. I mean, that actually plays into the last question I was going to ask on how long roughly you think it will take to grow into your installed capacity base of, I think, 600 orders, 600,000 orders per week. I guess just noting the comment that you expect significant improvement in 2023.
Look, I think there's a variety of different ways of looking at that, but don't take the average because of course the average isn't the, isn't the peak that we actually trade to at the moment. You know, with continued order growth, then obviously we'll use up that capacity. We're not gonna put forward a timeframe because that's effectively putting a growth target that we're not supposed to do out there.
Okay, thank you so much.
Thank you. Our final question today comes from Sreedhar Mahamkali of UBS. Please go ahead.
Hi. Good morning, all. Maybe just to actually follow up on Nick's question, but kind of try and maybe triangulate, help us here a little bit. You still talk confidently to that sort of 7% margin medium-term target that you sort of articulated a couple of times now. I guess the context was that you've sort of pitched the 2022 margin pressure or 90% of that margin pressure being temporary. It now seems like we're sort of talking on the year of pretty much close to break even. It feels like quite a lot to bridge here from there to 7%. Maybe if you could just help us understand what is driving your confidence or just maybe a couple of points around the drivers. That's the first one.
I guess second one, Tim, I think you referred to waste and shrink. Is there anything you can share in terms of is that a specific issue for 2022 just for you or the industry wide? Anything you can talk to in terms of shape pre-pandemic to where we are now, that would be super helpful.
I think the first question on what's the, especially the EBIT bridge from where we are now to the 7%. There's a few different factors at play here. The first we've talked about a few times on the call around capacity utilization. As we grow into that capacity, obviously our operating leverage will improve. There's also around kind of how we operate in terms of efficiencies, whether that be, you know, optimizing our network strategy, improving our sourcing, improving, you know, how we operate waste effective, which we'll come on to your second question in a minute. There's also marketing efficiencies as well, which again, we've touched on. Over the medium term, obviously we're going to expect that utilities costs are going to come down.
On top of that, we have got the benefits of Re: Imagined still to come as well. You know, sort of pick up on the waste.
Look, I think waste was a little higher during the COVID period, the trading conditions were exceptionally positive. I think, you know, obviously during this time frame, we've opened Bristol, Andover, Purfleet, Bicester, we've got Luton to come. With, you know, with each site has an additional waste bill, We've got some software that we spoke about at the Re:Imagined launch called Orbit, that will help us on the smaller sites to reduce the waste. That's carrying a large amount of lines in less sites. That software is under development at the moment. Yeah, we're running a bit higher than we would expect to.
As I said, some of this is still the suppliers haven't got back to the level of performance that they had pre-COVID, in some areas, so we're still working with them. As I mentioned as well, you know, the M&S supply base, not yet as being in tune with the way that we need them to work as some of the Waitrose supply base were, but very keen and eager to help. We just got stuff to do to bring it back down. It's probably. Well, I imagine we're still the lowest waste in the global food industry, but we were hitting some incredible stats, in 2018, 2019, and we want to get back and beyond those levels.
Got you. Very quick follow-up. Just in terms of that shape to get to that 7%, what is your assumption there in terms of marketing? If you can give us some idea, that'll be great.
I think we spoke about this earlier in the call and, you know, as many things, we, you know, we will continue to both refine our strategy. We will continue to grow the potential sales, you know. That will come down, and also we will continue to make sure that we are targeting better and better. Don't have any further guidance on that today.
I mean, I think if you looked at the You know, we've historically released more information than required, i.e. we've explained that both the kind of the non-sales, i.e. they're not reported sales because of a voucher, plus the kind of above the line, the actual kind of communicating to the customers. If you looked at that in the kind of 2010 to 2019, we range from somewhere around 2% to 2.5% of sales. We tipped over that in 2022. I'd expect us probably to be, you know, at the high end to over that in 2023. In the long term, I'd expect that's a good number in the long term to continue to see kind of double-digit sustainable growth.
You know, If, if you weren't growing, if you were only growing in line with inflation, you could, you know, you could probably more than halve it. Anyway, these are things that we're constantly working on. As I say, it is about refining the targeting and the different methods that we're using, and getting back the skills that we have previously honed, but taking into account new channels, you know, new marketing channels and changes in the industry.
Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.