Ocado Group PLC

LSE:OCDO

Earnings Call Transcript 2018-Q4

[Operator]

Hello, and welcome to the Ocado Group Fourth Quarter Analyst Call. [Operator Instructions] And just to remind you, this is being recorded. So today, I am pleased to present David Shriver, Communications Director; and Duncan Tatton-Brown, Chief Financial Officer. Gentlemen, please begin.

[David M. Shriver, Communications Director]

Thank you, and good morning, everyone. Welcome to our fourth quarter trading update. Duncan and I are in Stockholm this morning with our friends and partners at ICA. We will be participating later in the morning in ICA's Annual Capital Markets Day. But for now, we want to focus on our trading in the fourth quarter. For a brief summary and then questions, Duncan, over to you.

[Duncan Tatton-Brown]

Thank you, David. We're pleased to report another set of good sales numbers in the fourth quarter, in line with our guidance at 10% to 15% growth in the current financial year. Retail sales overall grew 12% to GBP 391 million. Orders grew at 13.4%, driven by double-digit order growth in new customers, where this growth is coming from across all our catchments. Average order size was down slightly at just under GBP 105. We're expecting our best-ever Christmas, and we'll be offering customers, as ever, the widest range of products in the market from classic favorites to new lines, such as Fred & Ginger cheesecake and our own brand, Irish cream liqueur.We saw further progress in ramping up CFC4, our new customer fulfillment center in Erith, Southeast London. We're now processing over 30,000 orders per week, a 50% increase over the number we reported on our third quarter results, further evidence of the progress we're making in ramping Erith much faster than CFC3. Just to remind you, at maturity, Erith will be the largest automated warehouse for grocery in the world. With Andover, it'll provide new growth opportunities for us and Morrisons in the U.K., while also showcasing our capabilities to the current and future Ocado Solutions partners.Our relationships in our Ocado Solutions partners are progressing very well. Groupe Casino continued to -- its building work on its first CFC in the south of Paris start of this summer. Sobeys has begun building its third CFC site in the greater Toronto area and is making good progress. Bon Preu launched its online offering cataloger in November. And Kroger has announced the location of its first CFC in southwestern Ohio, with another 2 to be ordered before the end of the year.Just a couple of points on accounting. You'll recollect that at the third quarter call I highlighted that because we're reporting a 53 -- a 52-week year this time versus a 53-week year in 2017, the seasonal variations in each quarter are slightly out of the line. In the case of Q3, that meant that we had an extra week summer holidays during which we tend to have lower sales. This contributed to a small negative impact of around 0.2%. The cumulative effect of this misalignment, however, has come out in the wash in Q4. You should also be aware that for our 2018 results, we decided to early adopt the IFRS 15 revenue recognition accounting standard. To explain the implications of this, we'll be hosting a seminar on January 24 -- 21, which will allow you to make whatever adjustments you need to, to your models before our full year results come on 5th of February.In summary, we are pleased to close out our financial year with another quarter of good sales growth, and we look forward to 2019 with confidence. I'm now happy to take the questions.

[Operator]

[Operator Instructions] Our first question is from the line of Bruno Monteyne at Bernstein.

[Bruno Monteyne, Senior Analyst]

Duncan, 3 questions, please. The 13% order per week growth, is that largely driven by your ability to ramp up at that speed? Or will you say it's largely driven by the amount of consumer demand out there? My second question is, at the full year results, you alluded to making -- or the half results of making announcement about immediacy grocery. Quite a bit time has passed since then. Anything more you can say today? And my third question is, you talked about breaking ground on the facilities. Which facility do you think will go live first and sort of what quarter should we expect the first go-live event to be in, in the next 1 or 2 years?

[Duncan Tatton-Brown]

Bruno, good morning, thanks for your questions. The first one on demand versus capacity, we saw growth across all of our customer catchments. And we, as usual, were limited by our capacity to fulfill all that demand, and there will be days in weeks, and weeks in the quarter where we were limited. So despite ramping Erith very fast, and we're also pleased with the scale of ramp there, with more capacity, we probably could have sold more. But on immediacy, this is a quarterly sales update. But Bruno, I'd say probably expect to hear more of an update at the full year results, so you got to wait a few weeks for that. In terms of breaking ground, I'm not sure I understand basically the question. We are looking for an additional facility. And that facility, we will announce as soon as we've identified it.

[Bruno Monteyne, Senior Analyst]

So, I meant, Duncan, out of all your international partners, say Sobeys, Casino, Kroger, which one will be the first one -- which quarter do you expect the first go-live date of actually switching on any of these partners, given that you're already building them? When was the first quarter when we should think something will happen?

[Duncan Tatton-Brown]

Fine, okay. Sorry, that's -- my apologies for Bruno for my understanding. Yes, so that's not likely to be until the beginning of 2020. And you should assume, although it's not necessarily the case, but it's reasonable to assume that Groupe Casino will be the first to open as they were the first to sign, with Sobeys the second to open and being the second largest CFCs and a partner.

[Bruno Monteyne, Senior Analyst]

But this will be fair to assume all 3 in 2020 will go live, so maybe quarter 1 for Casino and second half for Kroger. Would that be a fair expectation?

[Duncan Tatton-Brown]

What we typically say is about 2 years, if everything goes to plan. So if the building of the CFC goes to plan and then our installation goes to plan, we talk about 2 years. I think it's unlikely to be less than that. And it's not for us to talk about how our partners are progressing. So I think that's reasonable, Bruno, but we'll, obviously, update the closer we get to it.

[Operator]

We are now over the line of Coulter at Citi. Please go ahead, Nick.

[Nick Coulter, Director]

David, Duncan, 3 quick ones, if I may. First, could you explain some of the moving parts to the evolution of the basket or order size down 1%? And given the shape that you are -- of the comp, is that something that sort of trends that something we should expect to continue all out being equal? Then, please, could you give an update on capacity utilization or orders run rate for Andover, please? And then just to check on the 30k going through Erith, does that include Morrisons as well?

[Duncan Tatton-Brown]

Yes, Nick. In terms of basket size, it was similar drivers to that trend as before, which is a slight increase in the frequency which our customers on average are shopping, with slightly smaller baskets and still some inflation, although not strong inflation in the quarter. And in terms of invitations going...

[Nick Coulter, Director]

Is that just the part that's driving that or you have visibility over what you're putting into that evolution with respect to the part?

[Duncan Tatton-Brown]

Well, Nick, probably a broader question and maybe not for today's call, but definitely, the drivers that we talked about in the past, I think, are still there, our Ocado Smart Pass, and continues to grow, albeit at a slower rate, it continues to grow. The use of mobile devices continues, and on the smaller screen and a more convenient device, people, frankly, shop slightly more frequently with slightly smaller basket size, but with an increased loyalty. So mobile users, mobile app users, particularly, are more loyal and bigger spenders in aggregate than just the website user.

[Nick Coulter, Director]

Good, Duncan. You're capturing a bigger share of wallet. On the stoop about that kind of down 1% or trends in basket, should we expect that to continue, or how should we think about the evolution going forward?

[Duncan Tatton-Brown]

Yes, I mean, I think we would assume a slight modest decline in the number of items per basket going forward because we would intend to drive more loyal customers spending more in aggregate with us. And if the consequence of that is that each basket is slightly smaller in the number of items, we're quite happy with that. That's a trade-off we take any day. So yes, we would assume that. The undetermined amount is how much is item price inflation. And at the moment, I wouldn't assume, long-term, that item price inflation is less -- sorry, I would assume item price inflation is slightly bigger than number of items in the basket. So overall, we wouldn't necessarily assume a pound value basket size decline into the longer-term, but we would expect slightly fewer items costing slightly more. On capacity, in Andover, we are over 30,000 orders at peak during the quarter. The focus in terms of where we put additional capacity, where we put new robots as they come off -- come from the manufacturing facility was in Erith. So we're pleased with Andover's progress, but the focus in the quarter was more in Erith. In terms of the 30,000, then it was over 30,000, only slightly, but it was over 30,000 in Erith, and that includes the capacity that we provided to Morrisons.

[Operator]

We are now over the line of Sreedhar Mahamkali.

[Sreedhar Mahamkali, Analyst]

So 3 questions and quickly, please. For this, firstly, in terms of EBITDA, have you got any comment on expectations at this point, Duncan, that will be helpful; this year GBP 73 million and next year GBP 104 million, it looks like on your website. And secondly, just in terms of where you are in terms of number of bots, I think, Q3 you talked about 500, 600 on the grid. Just curious to see how that's progressed now at Erith. And finally, we got 1.5 weeks, couple of weeks left before the end of the year for Kroger to announce 2 more. Not necessarily saying it's absolutely crucial to get that in the next 2 weeks, but are you confident that, that will be the case or it'll slip into the year, just curious to know. That's all.

[Duncan Tatton-Brown]

Yes. So on EBITDA consensus, we're happy with EBITDA consensus for this financial year. We haven't given you a steer on next financial year, and I won't do that today on this call. So we'll talk about outlook at the full year results in February. In terms of number of bots, I think the figure that you heard from us was the number of bots at Andover, not at Erith, and I think we've mentioned that. But as you have probably gathered, the amount of orders per week coming from each facility, Andover and Erith, were about the same, and the majority of the growth in bot numbers is in Erith. So I think they're about the same at about 600 from memory. In terms of Kroger, I am not going to give any confidence on Kroger's announcement because they may decide when is best for them to announce. But for us, it's when they order the facilities. And when they order them from us, it's not a price-sensitive announcement. So we won't necessarily rush out an announcement ahead of Kroger, we'll let them decide when they want to tell their customers, their stakeholders about facilities. But are we confident that they'll place an order to us? Yes, we are confident.

[Sreedhar Mahamkali, Analyst]

Got it. I think the 500, 600 was Erith, but there might have been some mix up in that case. But yes, thank you.

[Operator]

[Operator Instructions] Next question, which is to Gwynn at Exane [Operator Instructions] Andrew, please go ahead.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

Two questions if I can. So the first question just on the -- I suppose your suppliers. So as you ramp up into Casino for your own distribution centers, how are your suppliers keeping up? I mean, presumably everything hunky-dory in that respect. The second one, just in respect to IFRS 15. I mean, my understanding of it would be, you effectively have to defer some revenue into sort of subsequent periods. You need to sort of fulfill the requirements of the contract, if we even -- before you even recognize that. In that context, is there potentially some earnings revisions coming for next year, really just the timing, no impact on cash, I get all that, but maybe just in terms of consensus disclosure?

[Duncan Tatton-Brown]

Andrew, good morning. Yes, in terms of suppliers, ramp-up from suppliers, my focus in responding to this is about Ocado's suppliers in the U.K. because we're not engaged with -- there's sometimes, obviously, the same suppliers and they ramp up for something like the Casino in Paris, as an example. Because Erith is ramping, the volumes of orders that we're putting on our suppliers is increasing. And the double pick that we used to run in Andover, and we did it in a small way in Erith, has now finished because if you think about it in the very early days of opening a facility, our demands for this from the supplier are relatively modest, and therefore it's less convenient for the supplier to deliver. We've ramped Erith much faster and, therefore, we're into, as it were, normal supply now much quicker. So are there any issues to comment on? Not really. But don't expect that we won't periodically, obviously, as little as possible have a supply issue and you may find a lack of stock availability on something to try and minimize it, but that's still there. On our...

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

So just to be clear, the question was about the equipment suppliers, sorry, just to make sure that...

[Duncan Tatton-Brown]

Sorry, sorry. We will both have to develop codes about working out with suppliers we meet in the future. Yes -- no, that's okay, that's absolutely okay. In terms of equipment supply, yes, we are -- our manufacturers, our suppliers are coping with greater volumes of purchasing. And therefore, our ability to ramp the bot numbers has increased. We don't, at this stage, see any concerns about our ability to ramp. So the first facilities we're talking about, you remember we have a significant higher throughput expected over the next 3 years, given the demands, particularly from Kroger. But at the moment, they've only ordered 1 CFC. So we're still at the early stages of that ramp, and we have plenty of time to ramp both our capabilities and for our suppliers to ramp their capabilities. So we're not envisaging any problem. In terms of IFRS 15, IFRS 15 will, as you quite rightly point out, perhaps impact the recognition of cash that we receive from our customers, and this is most likely to be Solutions customers. It clearly won't have any impact on when the cash is received and that will be unblind value from those. But if it does defer any revenue, unless there's an equal amount of deferral of cost, which I think is less likely, then it may have impact on earnings, but not in stating the obvious over the life of the contract. So just when in the life of the contract you recognize the revenues, and that's why we have a session planned and we'll obviously explain in more detail on that day.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

Okay, I thought it might be the case. And just a quick follow-up, just on Waitrose. I mean Waitrose has scaled back quite significantly its price matching scheme. I know you have a different price matching scheme. Any comments just on yours, very quickly?

[Duncan Tatton-Brown]

Well, importantly, we haven't changed our pricing stance. As it were, we continue to match the market leader. We continue to a basket matching scheme as well as matching on individual products. And we continue -- we're sensible to match the prices of the own brand product of our sourcing partner, Waitrose. So no change to our stance. Is there any material change? I don't think there is any material change you should expect in terms of our margins. But I'll talk to you about that a little bit more in, what, 6, 8 weeks time, whenever it is.

[Operator]

Okay. That was the final question for today. So could I please pass it back to you for any closing comments at this stage?

[David M. Shriver, Communications Director]

Well, thank you, ladies and gentlemen. That concludes our Q4 trading update. We'll catch up, again, formally at our briefing on the implications of the new reporting standards on the 21st of January, and then with the FY '18 results on the 5th of February. I'm sure that we'll be speaking with many of you in the coming days and weeks. But for those we won't, may we wish you a very Merry Christmas. Thanks very much. Bye for now.

[Operator]

This now concludes our call. Thank you all very much for attending. You can now disconnect your line.