Earnings Transcript for OCDO.L - Q4 Fiscal Year 2024

Operator: Good morning, and welcome to the Ocado Q4 2024 Analyst Call. I will now hand over to Chief Executive Officer, Hannah Gibson. Please go ahead.

Hannah Gibson: Good morning, all. Thank you for joining Ocado Retail's Q4 results today. I'm Hannah Gibson, CEO of Ocado Retail, and I'm joined by Mat Ankers, our CFO. There's been a lot going on at Ocado Retail in 2024, and we've made great progress on delivering on our perfect execution strategy. And as a result, we've seen strong growth, which accelerated as the year progressed. Our proposition is resonating with customers. We've seen more people shopping with us more often as we give them even better service at better value. Let me share some of the key highlights from the Q4 period which includes the 13 weeks to the first of December 2024. Our retail revenue grew by 17.5% to GBP 716 million. On ocado.com, our volumes grew by 17% year-on-year and average orders per week grew by 16.9% to 476,000. We hit 0.5 million orders per week at the end of Q4. Looking now to the full year FY '24 results, which includes the 52 weeks, the first December 2024. Our retail revenue grew by 13.9% to GBP 2.668 billion. Volumes, total items on ocado.com grew by 12.9% and average orders per week grew by 12.5%, driven by growth in active customer base of 12.1% to 1.1 million customers and frequency increased as customers shopped with us more often. Average basket value increased by 1% to GBP 122 and 9p due to growth in basket size, up 0.3% to 44.3 items and a 0.6% increase in ASP, well below the UK growth inflation as we continue to invest in price. Given our growth rates as you expect, we delivered our biggest ever Christmas as our customers made most of the season at the indulgent massive range. And customers continue to reach all that M&S favorites too, food on the party food and show stoppers through to the core range, which continued to sell really strongly. And [indiscernible] figured showed Ocado Retail spots growing retailer in the sector for the 9 months of 2024. Throughout the year, we continued to raise the bar on our proposition. Firstly, we've continued to focus on unbeatable choice, including now having our widest ever range of M&S products live on site, and we've had a lot of joint launches with our fantastic new ranges, too. We've grown our rate of small suppliers, often being the first in this new products, supported by the launch of Ocado Roots, our new community program for challenger brands to enable us to be the first to new trends. Secondly, unrivaled service, we focus on keeping our promises to customers by delivering orders in time, on time and in full. We improved our already high perfect orders rate by 7 percentage points and continue to ensure 99% of items was delivered exactly as promised. We also added half a day's life to the freshness of our produce. And then thirdly, reassuring good value. We've made further drives through our Ocado price commerce, a series of big price drops across hundreds of products and increasing our own brand range even more. As a result, we shifted our value perceptions as customers realize how much we've moved on price is valued at fraction increasing 4.3 percentage points versus the start of the year. Taken all together, these 3 elements or propositions led to our NPS score increasing plus 4.9 percentage points versus last year, and we continue to see we have the highest NPS in the industry. Turning to our operations. Our CFC efficiency approved throughout the year with average units per hour, UPH rising to 220, up 15% versus last year, with our newest CFC in Luton reaching 269 UPH in the year as we further rolled out on grid robotic pick. And over the Christmas period, our network exceeded design capacity, demonstrating a further growth potential of our CFCs. This year has seen us make significant progress. And in addition to the revenue growth, EBITDA has also progressed strongly year-on-year. We're now moving into the next phase of our strategy, and we're evolving it to focus on the following

Operator: [Operator Instructions] And our first, we have Manjari Dhar from RBC.

Manjari Dhar: I just have two, if I may. The first, I was just wondering how you're thinking about the need for price investment across the next year and whether you plan to continue to invest in pricing? And then secondly, I wondered if you could give any sort of color on the shape of trading across maybe Q4. And I don't know if you could give something on December as well and maybe something on the exit rate?

Hannah Gibson: Thanks for your question. So in terms of price investment, as I called out, we’ve materially moved in terms of our value customers over actually the last couple of years. And I’d say, many of our customers now were competitive. The price versus the [molt], we believe that has a number of benefits in terms of driving our growth driving our retention, acquisition but also supporting on frequency and stabilization of basket size as well. We’ve made a lot of progress over the last year in particular but also some in the prior year as well. I probably – first, I think we’ve made probably the bigger moves now, and I think there’s a little bit more to go, but probably not the same extent that we’ve done over the last year. So there’s a bit more we want to do, but it’s also about being smart about how offering that price not value to our consumers as well. As ever, there’s always more to do to make sure we offer information for most effective things to consumers. We are looking to do more in terms of our Ocado own brand range as well. We believe there’s more to do there, which will support consumers with higher baskets as ever, it’s not getting that price investment right balancing it with those areas that are going to support a broadly larger basket consumer as well. So I hope I give a bit more color to that. In terms of the shape of trading, well, if you just think broadly across the year, we see each quarter, the growth has accelerated. Maybe I just bring a bit more color to that overall because what we actually saw in Q4 was about 2/3 of our growth came from active base growth and about 1/3 came from frequency. So consumer shopping with us more often as we’re in a better position to offer improved cost availability, but also some of that competitors on price and our proposition that we came through as well. Going in, that was a greater acceleration in terms of frequency contribution to our growth in Q4. As we go into next year, as I just highlighted, what we’re expecting is more of that frequency to stabilize rather than give contribution to additional growth, but we expect that the exit rate of active customers was strong. You’ll see that going into this year as strong. But obviously, as we go through next year, we’ll be annualizing from a higher base. So whilst the numbers we continue to expect to be a strong contribution in terms of increasing numbers of our new active customers, we expect the overall percentage to slightly down as we go through that year-on-year comp.

Operator: And we move on to our next question now, which comes from Luke Holbrook from Morgan Stanley.

Luke Holbrook: My first one is just following up on the previous one, just around the Christmas trading period. I think usually, you provide commentary around a few days around Christmas or the week up to Christmas, our year-on-year revenue growth rate. So anything on that regard would be helpful. And then my second question is just on the capacity here because it's clear that your investment into pricing is driving strong customer acquisition and revenue growth, but you have exceeded the line capacity over the Christmas period. And as we think about capacity into 2025, could Ocado Retail look to take more capacity from Erith now that Morrisons is reducing capacity there? Or is it possible theoretically possible that you could reopen that Hatfield site that you're paying about GBP 33 million per year for -- anything on the design on that capacity would be very helpful.

Hannah Gibson: Thanks for the questions, Luke. So firstly, on Christmas trading, not really specific numbers this year, but I think as I say, Christmas is always an area we continue to see strong demand here. We sell out around 8% of our stock by the end of October. So the demand is always there. But obviously, what we're seeing this year, as we mentioned in the release, we were making sure that we could maximize the site capacity that we've got this year. But actually, as we go into next year, sort of on your question on capacity, we believe there's more that we can do. So as ever, we're looking at what is within those CFCs and the sites, what are the next opportunities to unlock more capacity in H1. And then exactly as you say, there is the opportunity going forward to look at Erith as an option, but we're in conversations with Ocado Group and we have been asked about that optionality and there's sort of no further news at that at the moment. But I would say, we did it by plastic Christmas. We believe there's even more to go after. There's more changes that we can make in terms of our CFCs to get them to be more productive and get more capacity across them as well.

Luke Holbrook: That's very clear. And theoretically, it's not possible to reopen Hatfield is basically what I would deduce from that.

Hannah Gibson: We’re not at the moment got any plans to open Hatfield, but we’ll continue to work and continue to look at. The capacity is available at the sites we’ve got and continue on conversation from Erith.

Operator: And up next, we have William Woods from Bernstein.

William Woods: The first one is just on marketing. Could you give any idea of how much marketing has kind of gone up over the period? Are you having to spend more to acquire these customers? And then the second one, in terms of the customers that you're acquiring, obviously, strong active customer growth, what does that base look like? Is it lapsed customers who are coming back? Or are you targeting different demographics? Who are the customers you're acquiring effectively?

Hannah Gibson: Thanks for the questions, William. In terms of marketing, we – across the years while we’ve grown [indiscernible] to say [34] months and revenue growth post year both in terms of [indiscernible] in the Q4. But actually, we improved our marketing efficiency across the year. So our PPA actually was improved year-on-year, overall marketing the has improved year-on-year. So we are being more effective and efficient in terms of how we are driving that activity. And as ever, we’re asking, it’s about making sure we’re being continuous optimization and looking at every channel, just a channel mix, getting the messaging right. So just continually trusting the details of how to drive that marketing efficiency. In terms of the customer base, so we’re seeing actually a pretty broad way of customers coming to Ocado, which I think very encouraging. And we look across where we are getting customers from where the switching is coming from, we’re continuing to see that it’s across almost all submarkets. We are – we’ve continued to see across the course of the years. As an example, we’ve continued to see from Tesco. And what’s also interesting is it’s not just offline and online, it’s both the mix of online and offline consumers are switching to Ocado and then sticking with us as well. And then from a region’s perspective, we’re seeing growth across multiple different regions as well. So I think what’s interesting here is that we are seeing a broader on a broad range of consumers shopping at Ocado. I think that’s sort of exciting for the potential of that holds going forward as well and managing to broaden our base loss overall keeping frequency – actually driving frequency and keeping basket stable I think it’s pretty positive to seeking to continue the momentum of next year.

Operator: And from Barclays, we have Sarah Roberts with our next question.

Sarah Roberts: Just two for me. So firstly, there were a couple of press reports over the Christmas period that there was a technical issue at one of the CFCs and that caused some issues with orders. Can you give us a sense of the magnitude of this problem? And are you able to quantify any impact, if any, if there was on December trading? And has this issue now been resolved? And secondly, the -- on grid robotic pick seems successful and contributing to improved efficiencies at Luton over Q4. And you previously spoke about kind of rolling out the OGRP across the network. Can you give an update on how this is progressing? And kind of how you're thinking about using that to improve efficiency into the midterm?

Hannah Gibson: Thanks for your question, Sarah. So yes, the first question on Christmas. So over that Christmas period, we delivered hundreds of thousands of orders across that period, and the vast majority of kind of customers got a great experience. That said to me, if any single 1 is not so good experience, clearly, we've not delivered on promises, not absolutely what we're here to do. So we see that as not acceptable. But in terms of the issues, it was on site, 1 issue 1 day, it was a -- although if any of those customers, we obviously reached out absolutely understand the impact it would have had on any of those individuals. But looking at the numbers overall, it was a tiny proportion of the Christmas orders that we had. But as I say, really make sure we're focused on those customers getting in contact with them and apologizing for service overseas, but say vast majority of customers had a great Ocado Christmas experience. In terms of your second question in terms of on grid robotic pick, yes, absolutely, as I mentioned, Luton is now actually higher now than 269 UPH, that's where exit the year. It continues to improve and not just for those of you on the call who are not so familiar, that's already about 70% more productive than the Hatfield site that we had, I think, we closed last year. By the end of the year, we were doing more than 30% on grid robotic pick through Luton. That number has continued to even grow since that is now close to 30% numbers. And we are now in the process of orders as on grid robotic pick across our sites, and we'll be rolling that out. But it's not in the necessary next few months, but let's say over the next call of yes, two years, we’ll be rolling that out across our broader estate, but we don’t really have any specifics on exactly when that’s going in. But absolutely confident that, that can drive much more efficiency across our CFCs. And our ambition is north of 50%, close to 70% in terms of on grid robotic pick opportunities across our estate. And we said previously, we expect our site to be closer to 330 UPH versus the 220 that we just announced at the average cost of the year this year.

Operator: [Operator Instructions] And up next, we have Tintin Stormont from Deutsche Numis.

Tintin Stormont: Hannah, could you -- I think in previous calls, you've distinguished some of the behavior of the more mature customers within Ocado, and could you just describe maybe sort of give more color on mature customers versus the ones that are new online in terms of kind of their buying behavior and in terms of where you see you could really drive that customer lifetime value, where is the bigger opportunity? And then secondly, on Erith, is it possible to give any color in terms of the additional capacity it could give you if you did decide to use that capacity?

Hannah Gibson: So thanks for your questions. In terms of the different customers, I think I've given the flavor to the broader way it's not sure specifically put out those differences, but just maybe -- just -- if I think more broadly about how we grow and what that looks like. So obviously, each year, we bring in new cohorts of customers. What we tend to see is that the longer they stick with us that drives their frequency, that drives their basket size. And so we see -- whatever the new cohort we bring in as a sort of journey to get them to maturity. What we've seen over the last couple of years is that we've been improving describe it as sort of the value of those cohorts that's been coming in, so been improving our retention at best, which has continued to improve year-on-year. And we've continued to improve that [indiscernible] to value so that the value of the customer over that first quarter that we have them, and we see that as a sort of positive trajectory going forward. [indiscernible] as you grow as an organization, you have a sort of broader -- broadest way to customers, but exactly why we're continuing to invest and have invested it in price, continue to invest to our proposition so we continue to capture a greater share of wallet from those consumers. But I think if we sort of see a [indiscernible] in terms of where those customers are coming from. And as I say, I think we're becoming a broader appeal to a broader way the customer is probably the biggest flavor I give on that one. In terms of Erith, we haven't released any deals of the Ocado Group in terms of what that capacity is, what that looks like in order to say we're continuing in discussions on that. And as and when there's any further update, obviously, I will let everyone know.

Operator: And as there are currently no further questions in the queue. I would now like to hand the call back over to you, Ms. Gibson for any additional or closing remarks.

Hannah Gibson: Thank you very much for everyone joining the call today. And of course, speaking to you soon. Many thanks.

Operator: Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.