Ocado Group PLC

Ocado Group PLC Trading in line with expectations; statutory results impacted by Andover fire

Financial highlights

●         9.7% Retail Revenue growth demonstrates the resilience of the business, with the impact of the Andover fire estimated at 2% of sales in the half

●         Fees invoiced from Solutions partners of £122.7 million, up 36% on the same period in the prior year, with fees from international partners almost doubling

●         Group EBITDA of £18.7 million reflects the combined impacts of the Andover fire, IFRS 15 delaying the recognition of fees from international Solutions partners as revenue, and the cost of share schemes

    Statutory Adjusted  
  1H 2019£m 1H 2018Restated1£m 1H 2019Adjusted2£m 1H 2018Adjusted2£m Change Adjustedvs 1H 2018 %
Retail Revenue* 811.5 736.6 803.2 732.5 9.7
Solutions Revenue* 70.8 58.7 70.8 58.7 20.6
Group Revenue4 882.3 795.3 874.0 791.2 10.5
                 
Retail EBITDA* 43.4 45.5 44.1 46.1 (4.3)
Solutions EBITDA* (16.2) (6.6) (16.2) (6.6)  
Other EBITDA* (9.1) (4.6) (9.2) (4.7)  
Group EBITDA*5 18.1 34.3 18.7 34.8 (46.3)
           
Exceptionals3 (99.0)  
Loss before tax (142.8) (13.6) (43.0) (12.9)  
Cash and cash equivalents 360.1 447.6      
Net (debt) / cash* (0.1) 72.4      

Notes:

1. 2018 restatement was due to adoption of IFRS 15 in the second half of the year. Refer to note 3 in the condensed financial statements

2. Adjusted to remove Fabled which is now an asset held for sale

3. £98.5 million of exceptionals reflects the net cost associated with the write-down of Andover CFC and associated assets, comprising £110.3 million of costs, offset by £11.8 million in insurance proceeds recognised in exceptionals to date

See page 4 for Notes Continued

Tim Steiner, Chief Executive Officer of Ocado, said:

“In the last six months the centre of gravity at Ocado Group has shifted. Our exciting new joint venture with M&S creates further growth opportunities for both parties in the U.K. and allows Ocado Group to increase focus on growing our Ocado Solutions business and innovating for our partners. At the same time we are beginning to apply our technology skills and expertise to other related activities which we expect to be of benefit to our Solutions partners as well as to other Ocado Group stakeholders.

The innovation factory we have created is founded on a near twenty-year heritage of constant re-examination and reinvention of technology to provide the best customer experience. We have never had as many opportunities to grow as we do today. As we look to successfully scale our business and deliver outstanding execution to our partners, our challenge will be to select and prioritise the most attractive of these opportunities.”

Key milestones

Over the last six months, the centre of gravity at Ocado Group has shifted from our heritage as an iconic and much-loved domestic pure-play online grocer to our future as a technology-driven global software and robotics platform business, providing a unique and proprietary end-to-end solution for online grocery, and an innovation factory, applying our technology expertise to adjacent markets and other verticals.

Focusing on our global technology-led platform business

●         Announced the creation of a 50:50 joint venture with Marks & Spencer (“M&S”) to transform online grocery retail in the UK, with the Ocado Retail JV becoming one of now eight global partners whose online business will be enabled by the Ocado Smart Platform (“OSP”)6

●         The £562.5 million upfront cash payment on the close of the M&S deal in August, will provide us with ample financial flexibility to execute on current commitments and to take full advantage of opportunities to grow Ocado Solutions and to accelerate the development of our platform

●         Sold our remaining retail business, Fabled, to Next to simplify our operation

●         Signed our sixth international partnership with Coles to develop the OSP in Australia, utilising both our proprietary software and algorithms as well as our robotic infrastructure solutions

●         Extended our partnership with Sobeys, ahead of time, with the announcement of a second Customer Fulfilment Centre (“CFC”) in Montreal

●         Fees invoiced from international Solutions partners grew strongly in 1H 2019 to £46.7 million from £23.7 million in 1H 2018, with only an immaterial amount recognised as revenue. This will increase in the future

●         We remain engaged with multiple retailers in a variety of markets with a view to adding more partnerships to our platform

Building a partner-focused business to deliver outstanding execution

●         Our nearly 20-strong dedicated Transformation team is supporting the hundreds of colleagues who are working to prepare to open the 34 CFCs committed by partners to date. We are fully focused on successful delivery and execution

●         We continue to invest in outstanding people.  We hired 255 new software and hardware engineers in the half, out of a total addition to headcount in Ocado Group of 1,300

●         We have made progress in delivering OSP to all our partners. Delivery of the first CFCs for each of Groupe Casino and Sobeys continues, both set to open in the first half of 2020; ICA is on track for scheduled migration onto OSP, and Kroger is ordering to plan, having broken ground on the first Kroger CFC, in Monroe, Ohio, with two other CFC locations announced in the half and continued progress in identifying further sites. Bon Preu is now making online deliveries and, in the UK, we continue to support the growth of Morrisons’ online business

Investing in innovation to future proof the platform for our partners

●         Launched initial test site for immediacy offer, Ocado Zoom. Strong customer response and operating metrics to date reinforce our confidence that we can help partners to serve and shape this new market segment, profitably, at scale

●         First strategic investments made through our ventures arm, which seeks to leverage our technology expertise to support new opportunities for customers and partners through investments in other verticals. To date, we have made investments in automated meal preparation (minority stake in Karakuri) and vertical farming (majority stake in Jones Food Company, the largest vertical farm in Europe, and the creation of a three-way JV with 80 Acres in the US and Priva in The Netherlands)

Ocado Retail continues to perform well, as work to form a 50/50 JV between Ocado Group and M&S from Monday August 5th nears completion.

Demonstrating the resilience of the UK business, growing the customer base, and winning market share

●         Although the Andover fire removed 10% of our capacity, its impact was estimated at 2% of sales in the half, demonstrating the resilience of the business

●         The total of insurance cash receipts in the first half was £43 million, net of fees, of which we recognised £12 million income in exceptionals

●         Strong underlying growth, with active customers7 up 9.7% to 745,000 (1H 2018: 679,000)

●         Total order volumes from Ocado.com and Fetch now an average of 318,000 orders per week (1H 2018: 288,000)

●         Average hypermarket basket value was stable at £108.04 (1H 2018: £108.18), as the trend to smaller baskets as a result of ordering on mobile was offset by price inflation

●         CFC3, in Andover, being rebuilt with a new state of the art facility expected to go live in late 2021/early 2022. CFC4 capacity increased by more than 50% in the period. Construction for CFC5, in Purfleet, will also commence soon

Continuing to improve the offer for Ocado’s retail customers

●         Ocado Retail continues to lead the market on service, with improved rates of delivery punctuality of 95.7% (1H 2018: 94.7%) and order accuracy of 98.9% (1H 2018: 98.8%)

●         Ocado Retail offers the broadest range (55,000 SKUS in 1H 2019) and has anticipated key market trends, adding over 900 vegan products in the period and introducing other initiatives

●         This unrivalled customer experience was recognised by The Grocer’s award for “Online Supermarket of the Year”, a leading position on which Ocado Retail will continue to build as part of the joint venture with M&S

Outlook statement

EBITDA performance for FY19, adjusted for the impact of the Andover fire (£15 million) and share incentives (£10 million), is in line with market expectations.

New guidance

●         £15 million impact on Group EBITDA from Andover-related business disruption: Of this, £8 million is related to reduced fees in Solutions and higher fixed costs as a result of Morrisons’ holiday8 on capacity at Erith, with the balance the Retail sales lost due to the Andover fire. We anticipate insurance payments relating to the Andover fire to provide a full indemnity for business disruption experienced over the next few years, including lost sales and cost inefficiencies, with the income, when recognised, as exceptional.

●         £10 million impact on Other EBITDA from share schemes: At today’s share price, we expect additional management incentive charges during the 2019 financial year largely due to recent share price performance

Current guidance

●         Retail revenue guidance in H2 unchanged: Assuming economic conditions remain broadly stable, we continue to be confident that Ocado Retail will achieve retail revenue growth of 10-15% in the balance of the 2019 financial year, despite the impact of the Andover fire, given strong underlying demand growth and our ability to utilise additional capacity in CFC4

●         Further growth in underlying EBITDA expected for Ocado Retail: As drop densities continue to improve, and CFC4 ramps up, we will continue to find efficiencies in our business and as such we expect further growth in the underlying EBITDA contribution of Ocado Retail

●         Morrisons holiday will slow Solutions revenue growth: Given the loss of fees resulting from the Morrisons holiday on Erith capacity, we expect Solutions revenue growth to be lower than that of Ocado Retail. As previously guided at FY18 results, we continue to expect £15-20 million additional in operating costs necessary to prepare the CFCs and to provide features on the platform

●         Capital expenditure guidance unchanged at £350 million

●         Continue to target further Solutions deals: These would generate additional cash fees but may impact short term profits

Results presentation

A results presentation will be held for investors and analysts at 9.30am today at Numis, 1 Paternoster Square, London EC4M 7LT. Presentation material and webcast link will be available online athttp://www.ocadogroup.com/investors/reports‐and‐presentations/2019.aspx shortly before the presentation starts.