Earnings Call: Q3 2021

Sep 14, 2021

Earnings release

Good day, and welcome to the Okada Q3 Analyst Call. At this time, I would like to turn the conference over to David Schreiber. Please go ahead. Thank you, and good morning, everyone. This is David Schreiber, Communications Director at Ocado Group. Welcome to the Q3 trading update for Ocado Retail, which, as you all know, is fifty-fifty joint venture between Ocado Group and M and S. I'm joined today by Tim Steiner, Chief Executive Officer of Ocado Group and Chairman Ocado Retail and Mal McBride, the Chief Financial Officer of Ocado Retail. Now I'll begin by reviewing the highlights of the quarter and then hand over to Tim, who will sum up. Will then go to questions where Stephen Dentist, Ocado Group CFO, will also be on the call. Now over to you. Thanks, David. We are very pleased to report resilient underlying performance throughout the 3rd quarter. Although Q3 headline sales were down 10.8%, this really was a quarter of 2 halves, A strong first 6 weeks before the fire ended on July 16 and the 7 weeks following where we were recovering from the effects of the fire. We should also note that total sales for this quarter despite the year of disruption were $142,000,000 up 38% On Q3 sales in FY 2019. Before July 16, the business was performing in line with expectations As record customer acquisition drove orders per week, up 22% during the 6 week period, Well, the value of the average basket continued to trend for pre pandemic levels over the quarter to £124 This net resulted in sales marginally down 1.8% in that period. The performance also reflects a year on year comparison Against exceptionally strong growth in Q3 2020 of 52%, but ongoing pandemic Drictions drove very strong demand during what are usually softer trading months in the summer as many customers traditionally go on holiday. Our performance in this period clearly shows that many customers who tried online grocery shopping for the first time have liked the experience And I'm not going back to the old ways. They are becoming savvy about where the best service and value is to be found and are thus migrating to Ocado. After July 16, however, sales growth declined 19% for the remaining 7 weeks of the quarter. This was for two principal reasons. First, we need to cancel a small number of orders on and around the date of the fire. And second, the loss of sales capacity we would have expected to grow into. Taken together and net of the offsetting impact of increasing capacity at other CFCs, we estimate that in the period we lost around 300,000 orders £35,000,000 of revenue due to the fire. As a result, despite the strong start to the quarter, overall sales growth in the period was down 10.8 The good news is that the Ares fire is a one off. We are firmly in growth mode and the capacity is progressively being increased We're working ongoing to get back to the levels we were at before the incident. We expect that the Ares CSC We'll be back to pre fire operational capacity by the end of November. And with new capacity at CSC V in Andover and CSC 6 in Perfect also available, we've already processed a number of items similar to our peak last year. Given strong demand, we're delighted to announce Also today, the additional CFC capacity will open across FY 'twenty two and FY 'twenty three. A new CFC in Luton will contribute 65,000 orders On top of the new CSC investor, which will contribute 30,000 orders per week. As a result of the $35,000,000 of lost sales, We expect Ocado Retail to take a one off financial hit to EBITDA of £10,000,000 which will flow through to GRIP results. This impact largely falls within the insurance deductible. In addition to this business disruption, we expect about £10,000,000 of costs associated With stock and fixed asset write offs, both lease costs and the compensation we expect to receive from our insurers We'll be treated as exceptional items, so will not affect EBITDA. The resulting net cost to Ocado is therefore currently estimated to be around 10,000,000 which will impact group EBITDA in FY 2021. In addition, I need to highlight that there is a risk Of additional headwinds in Q4, mainly related to the rising costs and availability of labor, particularly LGB and delivery drivers. This is an increasingly important issue for the whole sector that may result in a further £5,000,000 impact to full year numbers, Which covers additional temporary measures we have taken to hire new staff, including raising some hourly rates and offering sign on bonuses at specific sites. We will be working to mitigate these costs as best we can. These two factors will, of course, have an impact on the account of group consensus for FY 'twenty one. The bottom line though is that the underlying trajectory performance of the Cali retail is strong, and we're excited by the long term The trajectory that the business is on, we expect a bumper Christmas and to deliver strong revenue growth in FY 'twenty two. Tim, over to you. Thanks, Niall. We're really pleased with the continued strong performance of Ocado Retail and very confident for the future. Ocado is improving the customer experience even further and continuing to grow in a post lockdown environment. The last 18 months Have shown that not only is Ocado Retail able to constantly set the gold standard for customer service in online grocery, but to do so with attractive and sustainable economics. This is encouraging for our Ocado Solutions partners as what Ocado Retail can do now is what their businesses will be able to do in the future. This last quarter has had its challenges, of course, and I would like to take this opportunity to pay tribute to the efforts of all my colleagues We worked so hard to get Ocado back to business so quickly following the fire in Erith. The success of these efforts demonstrated again the resilience of Thank you. Please ensure the mute function on your phone is switched off to live signal to reach our equipment. If you find your question has been answered, We'll take the first question from Nick Coulter from Citi. Please go ahead. Hey, good morning all. I know you haven't updated on the fire impacts before, but my sense was that 1% of the grid was damaged and it was back up and running after broadly a week. That seems not to be the case, I guess, with the impact still Lingering. So if you could correct my lack of knowledge, please. I guess I'm intrigued by the additional safety measures that are still in place Eric, that's the first one. And I have another one on the CFC pipeline. Sure, Nick. So we were back Cup and running, as in we proved that we could do the end to end business at the site, and we got inbound company. We firstly got a few orders out So the whole process is all the systems and networks and everything else were running. Then we had to remove at the same time, we were removing damaged stock. We had to rebuild the stock position. Then we started shipping outbound orders and scaling that back up again. What we learned in this incident is that whilst previous testing had shown that the robots were okay for a type of collision that can occasionally occur, There was a third party involved, I. E, a third one, as we said at the time, where the 2 that collided hit somebody else. And the way that we managed to do that was a problem. What that is a problem only for Old Box that we stopped delivering at the beginning of this year. What we are doing at the moment, we've cleaned everything up, but we're just running it at slightly reduced rates whilst we implement Some physical changes that will give greater protection to those robots to reduce the possibility of this ever happening again. So they're just running at a lower speed, Slightly more space around them, which gives us a slightly reduced capacity. We expect by the end of November to have implemented all those And to be back to previous performance levels on all of those bots. And this does not affect the new bots that we've been delivering this year and I'm now rolling out to our client sites. Okay. So you're not replacing the box. You're just correcting or Dating the hardware that may have caused them not to stop on their mark effectively. It's slightly more complicated than that. But yes, we're making some small hardware changes. So in the rare event that they ever didn't behave exactly as intended and collided, that They're not able to penetrate something that you don't want them to penetrate. It's not possible on the new bots. We discovered it was possible on the old bots. We can make 2 physical changes to them that are quite minor and but they've had to be designed. They've had to be tested. They've then got to be manufactured and rolled out, which is what we will have completed by the end of November. And then they will not be possible to do that anymore, and then they can run back exactly the way that They weren't before. Okay. Super. Thank you. A better question on the CFC pipeline, if I may. How quickly will you ramp And over and perfectly, it looks like you've set them up for quite a quick build. But are there Do you anticipate the phases or are they kind of good to go? And then on Luton, when do you expect that To go live, I guess, as a quick follow-up to that, when should we expect some news on a second Zoom site? It seems like it's easier to find the full scale sites for CFCs than it is for a second June. Thank you. Nick, I'm going to take the scaling Andover and per fleet questions. And I'm going to give the other ones Niall because I can only remember one at a time. So on the scaling up, So we've already scaled those sites at a record rate. So Andover has scaled, I think, something close to twice as fast as we managed Bristol, it was already significantly faster than anything that's been done before. So what that's showing you is that the equipment, once installed on-site can go to full capacity very quickly, only to the hiring on-site, the hiring and training of the team on-site To be able to actually operate. So the speed with which we can scale Andover or currently now at 5, It's just a function of both going out and attracting demand, but also constructed by the ability to hire fast enough And add the relevant team members to the team. I think Luton, sorry, Tim, was there a follow-up on that? Yes. Luton and the second Zoon. Luton, at the moment, we're Thanks, Luton. Somewhat first half of twenty twenty three. Obviously, it is a site that we are going to be So we're subject to getting all of that right in the supply chain in that instance. But that's our expectation. The moment is ongoing to make it happen. 2nd Zoom, we have a second Zoom, and that will be in Cannington. And we I hope to open that again early in the coming year. The other sites, we have identified other sites. We're in negotiations on them. And as and when we complete negotiating, it will be a 19. And Nick, just to put the rationale one into So we took handovers from naught to over 20,000 orders in the 1st 4 weeks, which is any percent of Yes. Fund rate sales in under 4 weeks. It's quite extraordinary for the Automated business. It's about like that. No, no, granted. Thank you very much indeed. We'll now take the next question from Andrew Gwynn from Exane. Please go ahead. Hi, good morning. Just going back to the disruption, if I add back the €35,000,000 I mean, I think your sales are still down quite sharply For the quarter. I appreciate, obviously, maybe €35,000,000 might be in a conservative estimate. But just wondering what else might be going on? Is it just seasonal Impact returning to the business. And the second question, really just a quick one. I appreciate it's a call about retail, but obviously the core part of your business is solutions. So just wondering if there's anything you wanted to flag there. Let me take the first one. So Andrew, yes, look, the thing to remember here is what we're comparing quarter over quarter. So last year in Q3 was an unusual year in that It was a pandemic restrictions were in place. We grew 53% and we did not have the typical sort of Summer softness that we see when customers are often away on holidays. In this year, you've got a return of seasonality there, And which was we expected that to happen. I think if you look at the first part of the half, pre EBIT, Orders were up 22%. So I think that sort of if you take from that, that we see the demand in the market and we as we bring on the capacity, there's demand there Sir, but there is a return to some of that pre pandemic behavior because you can see it in the baskets as well. So I think it's as we expected, nothing other than that really going on. Sorry, just go back to the Welcome. Sorry, you go ahead. Yes. Just because I mean, if I look at the pre pandemic period, if I look at Q3, it was Down maybe about 5% versus Q2. This figure seems to be down quite a lot more versus Q2. So it seems like obviously there's more seasonality than normal? Andrew, we normally went from a peak volume End of June. By the time you hit mid August, we were normally down 15% to 20% week on week sales for the last 18 years, that's fairly normal. Used to estimate that 20% of our customers Would take would be aware at any one point in time, representing kind of most of our customers having a 2 week break during that 6 or 8 week period. I think we've just seen more normal behavior like that. And obviously, combined with the fact that actually, as Niall was saying, it's more customers, It's more orders because this time last year, the basket size was extremely high. And it's still higher than pre pandemic, but it's significantly smaller than last year. So there's a lot more orders going through, But smaller baskets as people are able to go out and Eating restaurants and our vaccinated feel more comfortable about doing so. Okay, cool. Yes, sorry, then the solutions. So as you said, this is a retail update, but we are pleased Yes. I'll be brief. We're pleased with the progress on solutions. We've recently had another contract for a number of sites from our partners in the United States For a number of different formats, and so great progress going on. Obviously, we mentioned earlier in the year bringing our TENS customer onboard, But we're making progress on building sites, launching sites, getting customers to commit to more sites And the progress in the existing life sites is very positive as well. Okay, cool. Thanks so much. We'll now take the next question from Andrew Porteous from HSBC. Yes. Hi, gents. A few from me. Can you just talk about the sort of the shape of normalization? I know you've sort of flagged average baskets down at 124. Is that a level they've sort of stabilized that? Or have they been sort of normalizing through the quarter so that your exit rates are a little bit lower than that? And are we starting to see the peaks come back into the week as well as people sort of go back to more normal life there? Second one, I mean, obviously, a bit of press coverage around sort of Zoom wage rates. Could you just talk about the mechanics of what went on there? And I guess, why you're getting that press coverage and what you're doing to resolve it? And then a last one really, More on the solution side again. I know you flagged some cost pressures on the retail side. What are you seeing on the solution Are there mechanics in your contracts on solutions to pass cost increases through? So I'll take the last one, and I'll let Niall go with the first two, I think, and add comments if I need to. Sure. So Shape is a normalization, Andrew. And I mean, I think, look, it is in line with our expectations in terms of we are seeing number of items In the basket and basket size trend downward through the period, it's difficult to say exactly Where that will normalize to or where exactly that will finish, our expectation is that we will continue to see Sorry about tailwind from COVID because more people will be at home into the future and probably spending and therefore able to take delivery of groceries On different days of the week where maybe they hadn't done before. And so we kind of expect to see normalizing Shape of the week and normalizing basket, where it finishes, we're not sure. But it definitely trends down, but not I mean, we're talking about maybe a couple of items in the basket over the period, not a huge spike compared to how far we've gone up. It's also interesting, Niall, isn't it, that whilst shape has been coming back into the week, it's not been coming back into the week where it was before the pandemic. So before the pandemic, There was more demand in the afternoons and evenings than there was in the morning, and now there's more demand in the morning than there is in the afternoon and evenings, for example. And the peak days have changed as well. So I think you can see whilst you can see that the level of demand, I think you could sell any slot Any hour at any time of the week is not the same as it was during the middle of the pandemic. You can see that people's lives have changed and the peak periods are slightly different. Do you Do you want to hit off on the Zoom one? Zoom, so Andrew, we are aware of the coverage that's out there and the We do have a recognized union, but let me take a step back. So All ocado.com deliveries are made by Ocado employees, who receive significantly above the living wage. Overall, 99% of all of our drivers are employed by the cattle group. And we're looking we're actually looking for more full time drivers And for those people who want to seek direct deployment with us. And for Zoom specifically, that's our immediacy service operating west London. A small proportion of deliveries are made by 3rd party delivery partners. And obviously drivers who accept and fulfill orders for those partners receive Well above the living wage on a pro rata basis. So we do not accept anything that's out there in terms of the statements that have been made in the press. And in fact, over the past year, we've already been ramping up our in house directly employed employees at that site. So I guess it would be fair to say that for us, it would be unacceptable for any drivers to be paid below the living wage. And we're committed to working pretty closely with our suppliers to ensure that Our model delivers great outcomes for everybody involved, including everyone delivering orders for our Zoom customers. And then the last question was Just on the solutions side around what is there and the mechanisms to pass them through. So yes, the contracts all have some linkage to inflation in them. And we're not I mean, globally, at the moment, we're not seeing as much pressure as we are in the U. K. So I think the U. K. Has got More factors affecting its wage rates than we're seeing in certain other markets. And at the moment, we are any other kind of Supply chain type pressures, we are managing them. There are there's a lot to manage with disruptions in global shipping and electronic We We will now take the next question from Xavier Lemann from Bank of America. Yes, good morning. Thank you for taking my question. Only one actually, but Now that you've got more capacity building up in the UK, I just want to know what you're doing to hire new customers and if there is any cost associated to that And how you're working with M and S actually to achieve that? I think nothing very particular to say, but I mean, we're trying to attract customers as we always have. We have a fantastic proposition. We've got a great range, including the M and S range, and we have a fantastic service, right? So we know all of our service metrics are industry leading, And we're going out and trying to win customers who we know have probably tried a lot of them have tried online for the first time in the pandemic, I'd like it and want to find the best way to do their grocery shopping online. So I think it's pretty much What we were doing before, but really ramping it up as we try to attract more and more customers to the proposition. And that includes working with M and S to attract The M and S customer who wants to shop online and we're working very closely with them. They've obviously got a huge customer base And we're looking at the best way to tap into that. Okay. Thank you. The next question comes from Maria Laura Adorno from Morgan Stanley. Thank you very much for taking my questions. I have So the first one, perhaps on the back of everything you've discussed about labor costs in general, generally well, input costs as well. So what are your comments around pricing into year end and how you see that evolving at Ocado? And then the second question, coming back to one of the question that was already asked. Recently, summer is a seasonally weaker quarter, but can you perhaps just talk about the trends that you've already started to see into September? Thank you. So The pricing one, obviously, what we want to do is offer customers the absolute best proposition that we can. And we're not Seeing a lot on pricing at the moment. Taking the where is the question coming from, the driver Sure. It's obviously a national issue, and I tell a specific one, it's very difficult to say to the extent that will translate into anything. So the moment, we're not seeing anything. Our aim is to absolutely offer customers the best proposition that we can on Ocado. In terms of So the second question going into September, I think, what are we seeing seasonal? Has the seasonal weakness ended? And is there I think it's a drag on demand? Yes, Short version, yes. As any other normal September, we're starting to see the demand coming through. And we're trying to bring on as much capacity as quick as we can to deliver to it. And sorry, the $35,000,000 impact stemming from ARRIS, does it include the fact that you're just going to be fully ramped up Into November or is it just the impact for the summer? That's in the quarter. We'll now move to the next question from Simon Bowler from Numis. Hi, good morning. I've got 3. I'll go 1 by 1, if okay. First Did I hear you say that early into Q4, you're back to posting or achieving a similar volume of capacity year on year? And is it therefore fair to assume With ongoing ramping, you'd be hoping for 4Q revenues in line, if not ahead year on year. So yes, you did hear that. I mean, we're talking about similar number of units. And look, I think if we look at we have added the capacity in Perfleet Andover and we're going to seek to ramp those up as quick as we can. We're obviously aiming to bring ARRIS back up to the pre fire levels before the end of November. We're attracting new customers. So that's our objective, Growth in Q4. Okay, great. And then and so I think this is my line Going right near the start. Did you mention, are any of your partner CFCs run on these old spots? Is there any retrofitting or any safety measures needed And if you're international partner of CFCs or is that a nonissue? Simon, we are doing some retrofitting to some of those box So are in the original overseas partner CFCs. They're not currently affecting volume in those sites Because we had excess bots ready to deploy there, so we've put those bots just on the grid. So we're not expecting any impact at our clients, We do have a little bit of retrofitting to do to eliminate that risk. And then all the new sites that we're launching at the moment Do not have those thoughts in them. Okay, great. And then I think you also kind of dropped into a question earlier, News around signing a new contract with Kroger. Is there any other color you can I appreciate, again, retail call, but is there any other color you can share on that? And is it fair to assume that, that is going kind of over and above the 20 sites that are initially start announced Well, it's not so much it's going over the 20. It's that in building up to the 20, we will be announcing specific locations and and things like that. I think we were previously at 11. I think the last time we update I'd say last time I said it was 11. We're now at 16. And that includes Zoom and different formats, different sizes to serve multiple missions, Take advantage of the ecosystem that we can provide for Kroger to do a range of customer missions in e commerce. And so that's in addition to the ones I've already announced, the in for fulfillment software that we're working on with them as well. And so it's the continued expansion of our partnership into more geographies. We expect to continue announcing more sites in the future, It's just specific locations, which we're not putting out today. That's the progress we're doing there in time. Okay, great. Thank you. We'll now take the next question from Victoria Petrova from Credit Suisse. Thank you very much. I have just 2 small follow ups. First, are you seeing any inflation in your insurance costs Given that this is sort of the 2nd fire in the last 2 years. And my second question, There was a press release from Kroger that it collaborates with Knapp to modernize its Great Lakes distribution center. Does it come into Any competition with your solution or are those completely different tasks of modernization and automation So on the second part of your question, Victoria, the Knapp facility is a Case Pick trade facility. Kroger already had some from another company called Vitron. It's just an expansion of their store replenishment systems. So it has no conflict whatsoever with the e commerce projects that we're working with Kroger on. In terms of The insurance costs are moving around all the time based on different things going in the insurance markets and the different measures. The key is, when you have an incident, is understanding Do you have the right mitigation strategies in place, which obviously in Erith, we did. So the fire, as you know, was extinguished very quickly. The damage was limited, so that's important. And then can you make the can you make any further changes, any further learnings To reduce the future risks of either starting or of it spreading, which we can and which we work on together very closely with our insurers, That normally means that there is not a significant change outside of the normal changes going on in the insurance market. Thank you very much. That's very helpful. We will now take our next Question from Fabienne Caron from Kepler. Please go ahead. Yes. So good morning, everyone. 2 from me. The first one, given the shortage in building materials as well on and as well on electronic components, are you confident that you can to your timetable regarding your CFC abroad or should we expect some delay? And the second question, can you give us some more details regarding So yes, Fabienne, on your first part, there are delays around the world on different building Then on electronic components. And we have small impacts sometimes, which we work hard to mitigate to ensure that we can On our client facilities on time, we're not yet looking at any delays from those Impact, sometimes it just means that we have to re juggle things or we have to work a little bit harder to catch up week here or week there. From handover to us of our client sites to us handing them back for use, I don't think we've got any notable delays Across the building network. I'll let Niall answer about Zoom performance in the quarter. So Zoom, I mean, remember, we're talking about the site in Athens. It's one site. The performance is That site is more or less operating at capacity. In the quarter, we saw the effect again a little bit of the seasonality of the quarter But in line with expectations, more or less, the site is at capacity. So we're looking forward to getting more capacity on Zoom as quick as we can. Okay. Did you see as well some decline in basket size on Zoom? Not, Not particularly. I mean, a little bit, Nothing to call out. There wasn't any wild movements in it. Okay. Thanks a lot. We'll now take the next question from James Grzinic from Jefferies. Thank you. Yes, good morning to you. I have 2 quick ones really. First one is, where do you see consensus EBITDA Before today, before that €15,000,000 adjustment for the full year. And in addition to that, You seem to be a lot more vocal in terms of media spend in the U. K. Can you perhaps give us some context of how much more you're spending from that I think you're talking about Beckettbach ones, but any thoughts about the exact ramp up would be very helpful. Thank you. Okay. So well, consensus before we announced this was About $167,000,000 for ORL and $74,000,000 per group. And that's going to move down, we think, by at least the $10,000,000 that we highlighted Today, clearly, there's that risk of that extra £5,000,000 around labor shortages, which will be what it will be, but that's our estimates at this stage as to what that cost might be in effect for the labor shortage, Jason. So, Jason, I'm not quite sure if picked up the exact question on media spend. I think you're asking what's our view on where media spend is. I think, James, you're also noting that he sees See More Media. So we've done more about the live TV, which was a strategy we put in place even 18 months ago or something. Yes. I mean, I think, obviously, James, our plan has been as we're coming into adding all the capacity over the summer, We've launched the very visible, hopefully above the line campaign. Again, that's about customer acquisition Reminding customers where we are and bringing people to the site. So it's very much all part of we're bringing on the capacity And we're spending the media money with it to make sure that we then use that capacity. That was, let's say, in the 1st part of this quarter Quite successful. And we will continue to do that through the back half of the year and into 2022 to fill up the capacity as we bring it on. Is there any way you could give us an order of magnitude of that step up year on year, please? James, I'm not sure we'll go into that detail. But what I would just say is When you're smaller, we spend the money we still spend money on direct response. So you individually might not see what's out there. When you get to a certain scale, the incremental direct response is less effective. And what's more effective is to add like a fixed component of More visible media that makes the direct response that you are doing more effective. We've only just, as a business, really reached That scale in the last 12 months, which is why in the last 12 months, you've seen Mellon Niall and their team doing more of that broad media to make the direct response that they are doing more effective. But whilst you spend more on the big media, you say some on the direct response because it's naturally more effective because the awareness is higher. I don't think we're going to get into specific details to the exact amount of spending on media. Understood. Thank you, Tim. As there are no further questions, I would like to hand the call back over to David for any additional or closing remarks. Great. Thank you, everyone. That concludes our call. We'll report next on the 9th December with the Q4 trading update from Ocado Retail. I'm sure we'll be speaking to most of you before then. But for the moment, thank you, and have a good day. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.