Good day, and welcome to the Ocado Q3 analyst call. At this time, I would like to turn the conference over to David Shriver, Director of Communications. Please go ahead, sir. Thank you. Good morning, everybody. Welcome to the third quarter sales call for Ocado Retail, which as you all know, is a 50/50 joint venture between Ocado Group and Marks & Spencer. Tim Steiner is the chairman of Ocado Retail, and Stephen Daintith is the CFO of Ocado Group. We'll give you a brief summary of Ocado Retail's performance in Q3, and then we'll go to questions. Tim, over to you. Thank you, David. Before we begin, I would like to express on behalf of all my colleagues at Ocado Retail and Ocado Group, our profound sadness at the passing of Her Majesty Queen Elizabeth. We join millions in the United Kingdom and around the world in mourning the loss of an extraordinary human being, whose dedication to serving her people with love, empathy, and compassion provides a constant source of inspiration to us all. In the midst of grief, we also recognize the value and importance of continuity in those things that bind us together, and we welcome the ascension of our new monarch, Charles III, wishing him a long and happy reign. God save the King. Let's now turn to Ocado Retail. When looking at our performance in the third quarter, two things are clear. The first is that the current cost of living crisis is forcing consumers to manage their spending carefully, looking for value, trading down, and putting fewer items in their shopping basket. The second is that more and more customers are coming to Ocado to find value. The record number of customers now actively shopping with Ocado is testament to the continued channel shift away from bricks and mortar to online grocery, and the fact that Ocado is increasingly seen as the best place to shop for food online. To put some numbers on this, I'm gonna hand over to Stephen. Thanks, Tim. In the third quarter, Ocado Retail sales grew by 2.7% on 2019 levels significantly. The number is driven by an increase in the number of customer transactions of 10.6%, offset by a fall in the value of the average basket by 6%. Record numbers of customers are now shopping with Ocado. Since the start of the year, we have grown our active customer base by 23% to 946,000. Customer acquisition continues to trend at rates almost double those previously. Strong growth in customer numbers translates into a significant and encouraging increase in customer transactions. It's clear that increasing numbers of customers are looking to Ocado for value in the middle of the cost of living crisis. Furthermore, pressure on consumer spending means that these consumers are, on average, spending less per transaction. The 6% decline in the value of the average basket to GBP 116 is driven by a combination of a higher average selling price offset by, on average, fewer items in the basket. Now let's look at those numbers here in a bit more detail. Food price inflation at Ocado is running at around 7%. This is materially less than the double-digit food price inflation for the market as a whole, reported by Kantar and the ONS. We've been able to do this by working closely with suppliers to provide value for customers and keep inflation as low as possible. Value-seeking customers have traded down to own label and other new entry-level products. As a result, Ocado's average selling price has increased by only 5%, which is the net of a 7% increase in food price inflation, offset by a 2% decrease related to customers choosing lower priced alternative products. In addition to trading down, customers are adding fewer items to their baskets. The number of items per basket during the quarter was 45, down 10% compared with the same quarter last year, and now in line with pre-pandemic shopping patterns. The 6% decline in the value of the average basket reflects an increase in the average selling price of around 5%, offset by declining volumes of around 10%. The headline numbers I'm giving you include some rounding up and rounding down, as you can see. The net results from a strong 10.6% growth in customer transactions but lower average baskets is an overall increase, as I mentioned a little earlier, in sales of 2.7% for the business in Q3. In the fourth quarter, we expect a combination of continued strong growth in customer numbers and orders to result in a sales number that, if anything, is likely to be slightly lower than 2021 levels. This revenue, however, is not sufficient to offset full-year growth, as I've just mentioned. This will still leave us well ahead of where we were at the end of 2019. At the end of Q3, we were 38% ahead of where we were in the corresponding period pre-COVID. Regarding profitability, the business continues to target a low single EBITDA margin for the full year. I think now we are likely to be closer to a break-even outcome given the headwinds in particular around electricity, rising costs there, and also for dry ice, which we use to transport frozen food. Tim, back to you. These are challenging times for everyone, and at Ocado Retail, we're committed to fighting for our customers to make sure we can provide them with the best possible value to help them navigate the cost of living crisis. We're encouraged by the positive underlying trends in the business, which underline the value of Ocado's differentiated proposition to customers. Our online grocery model, which creates efficiency through advanced technology, offers customers a combination of competitive prices, the widest ranges, and industry-leading service. As we've seen in Q3, customer numbers are sharply up as consumers either switch from other providers or try online grocery for the first time. Underlying productivity and fulfillment and the last mile continued to improve. Our outstanding new CEO of Ocado Retail, Hannah Gibson, brings fresh vision and energy to the business. As consumer spending stabilizes, we expect Ocado Retail will again deliver attractive and accelerating growth in sales and a strong recovery in profitability. For all these reasons, we're optimistic for the future, even while recognizing the challenges that higher energy bills and other inflationary pressures are creating for our customers today. With that, I'm now happy to take questions. Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question today. We will pause for just a moment to allow everyone to signal. Our first question today comes from William Woods of Bernstein. Please go ahead. Good morning. I've got two questions, if I may. The first one is, obviously, you're seeing strong customer growth, plus 23%, but orders are growing a little behind that at plus 11%. Could you just talk about two things? Are you seeing increased churn within the core customer base? And secondly, are the new customer cohorts slightly less sticky or developing slower than the previous cohorts? And then secondly, obviously, guidance for the break-even at full year implies a loss-making H2. Could you just walk through some of those component parts? Obviously, you've highlighted energy, but could you just talk about the impact on marketing spend, CFC efficiency and drops per van and things like that? Thanks. Sure. Hi, William. Tim here. William, when it's a good question to ask, why does your average customer numbers increase and yet your average orders not increase at the same rate? The answer to that is that if you're comparing it to a period where we weren't acquiring customers, then all the customers in the active pool at that time were kind of what I would call active actives. They were not only active in the last 12 weeks, but they had a very high expectation of being active in the next 12 weeks. Whereas in a period where you are acquiring new customers, you have some of those new customers we've always spoken about that will churn out in those first few orders. You will end up having a higher active number compared to the number of orders that you have, and you'll see this effect that you're seeing, where there's a higher percentage growth in the active base compared to the actual growth in orders. That doesn't continue over time. When you start to annualize that, if your growth in new customers is at a similar rate as a percentage of sales as it is now, you'll see that normalize. That's the impact now. In terms of are we seeing increased churn from the active, the kind of historical base, no, we're not. In terms of stickiness, I think it's a little bit too early to tell, actually. It's only at the start of this quarter that we really saw the uptick in customer acquisition, and therefore it's early to see whether the stickiness remains kind of at historical levels or not. We'll probably be able to comment more on that the next time we report. Your question was on profitability. I think Stephen's indicated to me that he's going to speak. Yeah, I've got a few points to raise on that one. Look, there are two or three significant items to bear in mind here. First of all, let's talk about energy costs, electricity, and just put some numbers around it. Last year, fiscal 2021, our total electricity bill was around GBP 10 million. This year, based on current pricing, we're estimating it's gonna be about GBP 30 million. That's a GBP 20 million increase year-on-year. The vast majority of that is in the second half of the year, okay, where electricity inflation has been particularly pronounced. Fuel costs last year were about GBP 18 million. This year, going to be a tick higher, about GBP 22 million or so, but again, impacting the EBITDA. The dry ice is the one that's moved most significantly in the last few weeks. Let me just give you some numbers around this. From the period from the first of September to the end of the year, we're estimating an incremental cost of around GBP 300,000 per week for dry ice costs. Those three items, and then you can work out the material impact that they are having of, you know, well ahead of GBP 30 million or so of impact, almost GBP 40 million of impact in the second half of the year, and particularly pronounced in Q4. The final and important piece to bear in mind here is that our numbers today carry the cost of the capacity, the investment capacity that we're growing into as we add new customer numbers. We're averaging around 360,000 or so orders per week. We've got capability for capacity of around 600,000 orders per week from the CFCs we've added over the last couple of years. I think we feel very confident, given the strong customer numbers we're reporting today, the growth in those customer numbers, well over 900,000 now heading towards that 1 million number, that we can grow into that capacity and then offset those fixed costs that we're carrying today that are impacting EBITDA in fiscal 2022. Those are the key dynamics to bear in mind as we think about the EBITDA number. Yeah, I'll just add the marketing as well, where you know, as I said, going through COVID, because the existing loyal customer base was shopping with such frequency and such large basket sizes, we were unable to add new customers in. Therefore, to grow now up about 40% in volume over the two-year, or now three-year period, we need to acquire a lot of new customers. Marketing spend has been at significantly at record levels to achieve the level of new customer growth that we're seeing. It's an important time for us to spend on marketing and acquire new customers because we built this increased capacity that we would like to fill over the next few years. Perfect. Thank you. Thank you. We now move on to our next question, which is Andrew Gwynn of BNP Paribas. Please go ahead. Hello, good morning, all. Thank you very much, Stephen, for those sort of extra points of explanation. I was wondering if you could translate it into the group numbers. Obviously, for the solutions business, lower volume would weigh a touch, but also going into next year, that unsold capacity. Loosely, where do you think group EBITDA expectations should be, for this year, and perhaps just touching on some of the moving parts for next year? Yeah. Second question, just help us understand very quickly on the products people have stopped buying, is there anything there maybe just around premium positioning of, M&S, you know, maybe sort of household products that people are perhaps buying elsewhere, or is it actually just broader based? Thank you very much. Andrew, let me just take the last one in terms of what people are buying. It's just in the mix. It's like a smaller pack size or a brand substitution or it's a, you know, I was buying a steak and now I'm buying mince. It's really hard to see any kind of very particular trend. There is, as I mentioned this on the previous results call, there was also a higher purchase of alcohol during the lockdowns in the baskets last year due to the venues that people might go and entertain and drink out that being closed. Alcohol on average has a higher item price as well. There's just a blend of a lot of movement going on that just takes that couple of percent of the average selling price down in terms of. Basically what happens, if you take last year's basket at last year's velocity, the average price is up 7%, and then you look at what we're actually selling and it's up 5%. Okay, thank you, Tim. Then, as we think about EBITDA and group EBITDA, consensus today is GBP 48 million for EBITDA for retail, sorry. We believe that now we've guided today that that's gonna be, you should be thinking around break even. That's the only number in respect to the group where consensus is, where you need to change consensus. We're comfortable where it is for UK Solutions & Logistics and also for International Solutions. Okay, that's clear. Going into next year as well, just thinking about some of that unsold capacity, is there something we should be doing for our numbers there? Sorry. Thank you. I'm not gonna give any comments at this stage on next year's numbers, given that, you know, number one, that's quite a way away. We tend to use our full year results to do that. Secondly, there remains huge uncertainty right now. I think it's unwise to stray into territory around fiscal 2023 guidance. Okay. Thank you very much, Tim, Steven. Thank you. Thank you. Marcus Diebel of J.P. Morgan has the next question. Please go ahead. Yeah. Hi, Tim. Hi, Stephen. Just to follow up on kind of like guidance and longer term guidance, which you reiterated. I mean, now we are basically EBITDA breakeven, given the downtrading and the rising costs that you highlighted. I mean, just conceptually, you highlighted midterm guidance again. Is that the increase in profitability, is it really coming through scale? Yeah. By you ramping up production and more volume? Or do you need also kind of like the downtrends to reverse, to achieve kind of like mid-single digit EBITDA margins in the midterm? Yeah, I guess from your answer it sounds like it's scale, but just wanted to clarify. Marcus, scale alone, filling up the capacity that we've actually put live at the moment, would bring EBITDA back to the mid single digits. That obviously assumes that we're not going to see a further 10% drop in the basket, which would have a negative impact. As we're now back at pre-COVID levels in basket size and we are seeing these reductions in average selling price versus inflation, all that's required to get back to that level is mid-single digits capacity growth. Actually, we see a lot of other opportunities to improve the business as well, but nothing else would be required to get there than to fill the capacity that we've turned online. Super. Thank you. Thank you. Thank you. We now move on to Xavier Le Mené of Bank of America. Please go ahead. Yes, thank you for taking my question. The first one, you mentioned the sharp increase of energy cost in H2. Is it fair to, of course, expect that to roll out into H1, and then to be a bit more cautious for fiscal year 2023? Back to Andrew's question. The second one is, are you concerned, you know, with all the cost increase of the energy, electricity, dry ice, does that potentially put your model in question and are your partners concerned outside the UK? Xavier, let me just try and answer as best as I can. I think in terms of forward guidance on energy prices, we both have to watch the markets, but also have to have a better understanding of the measures the new government here in the U.K. have announced. Because it, you know, they have possibly said that businesses are going to get to buy electricity at a price that's significantly lower than we've been buying it the last several months. I think we have to wait to see better clarity on that. I think you then also asked about the high energy prices. Of course, I think generically kind of cause a problem to our model or something like that. We are strongly of the belief that we use less or we and our clients use less electricity, traditionally through this way than is used in the traditional, supermarket, hypermarket, convenience store models. Therefore, while it's currently a drag on our numbers, actually high energy prices in theory is a competitive advantage to our model versus that of the store-based models. Okay, thank you. The second part of the question, second question, sorry. Sorry, what Marcus, what was the second question again? Yeah, it was just, the increasing cost you've got in H2, so is it fair enough, of course, to expect that to fall into H1 next year? Again, I just repeat what Tim had to say, really, that you know, let's see what the government initiatives will actually deliver that were announced last week. It's too early to call that one, Marcus, I'm afraid. Okay. Thank you. Thank you. We now move on to our question, which is Nick Coulter of Citi. Please go ahead. Hi. Morning. I have a couple. I'll ask them one by one, if I may. Firstly, on the under inflation versus the grocery market, what's the driver there? Is that strategic? Is that fear of elasticity? What's the rationale for what you're doing? Because if you have a better SG&A profile, you're obviously choosing not to recover that SG&A profile. So I'm just curious on the pricing strategy here. That's the first one. Thank you. Nick, I think what's happening here is that some of the inflationary numbers that are quoted are based on a kind of a theoretical index, a loaf of bread. You know, I'm making it up. I don't know what the inputs are, but a loaf of bread and, you know, six eggs and pint of milk. Whatever has been chosen in that index is actually not representative of what's actually bought in U.K. supermarkets. The first thing is the index signals a higher price rise than the average items bought in any of the supermarkets, I believe. As I say, the average item price of those bought in our supermarket without any change in baskets would be 7% lower than the quoted numbers that we keep reading about in the press. Our customers are making some changes to drive that 7% down to 5%. It's not a, you know, we've always been a price follower in terms of our pricing strategy, ensuring that our customers get best value for money from the combination of wider ranges, fresher food, and better service and not having to pay a premium for it. It's not a particularly deliberate, you know, we're not going to follow the market or we're going to, you know, do something to do with SG&A or anything else. It's really just where the items that we're selling are heading. Obviously, we work hard with our suppliers to maintain low prices. That's really where it is. Okay. We're unchanged on pricing policy, basically. Thank you. Just on your energy, am I right in believing that you're not hedging here, that you're paying spots? Just to check in on the base cost in your income statement of dry ice in a normal year. Thank you. Sure. We have had short-term hedges on, but we have nothing on that secured the energy that we've needed in the last six months that were on prior to the market rallying in the post COVID-19 wake up and then in the war. We have some hedges on for the next 12 months, but it's the minority of usage, which at the moment looks like we don't know, actually. It's too early to tell, as I say. Let's wait and see if we can understand what the government policy is really saying. In terms of dry ice, just to give you a kind of an indication, two, I think it's a week and a half or two weeks ago now, we get an email from the supplier. I read about it the next day in one of the English newspapers. It was widely talked about by a number of other users of dry ice. They just basically said, from three days' time, the price is going from memory, it was, from GBP 600 a kilogram to GBP 4,000. You know, please sign this piece of paper and accept that, otherwise you won't be receiving any deliveries on Monday, and that was on a Friday afternoon. It's related to different plant closures around Europe and to people turning off other businesses. Because the CO2 in dry ice is a by-product of fertilizer production. That's the predominant source. It's obviously used for medical reasons. It's used for carbonation of drinks and beer. It's used for processing meats, poultry, and stuff like that. But you know, when the supply gets disrupted because the primary business slows down, stops, or you know, it's uneconomic, suddenly to produce it in its own right is you know, 7 times the cost. Historically, it's sort of been a few million GBP a year. I think. Yeah, 2.5. Yeah, GBP 2.5 million a year. At the rates that are currently being charged, it would be more like GBP 20 million-GBP 30 million. Now, we are- That's helpful. Thanks so much. As we mentioned in the statement, we are working on some long-term alternatives to dry ice. Thank you. Thank you. We now move on to Luke Holbrook of Morgan Stanley. Please go ahead. Yeah, thanks for taking my question. Just a couple if I may. The labor market remains tight in the U.K. Are you seeing any impact here from driver shortages or from kind of higher salaries among your retail staff? Just secondly, can you just remind me on the parameters of the GBP 190 million payment, due from M&S next year? I'm not sure how you've released much by way of details around that. Thank you. Okay, Luke. The labor market is tight, as that's a good word for it, but it's not out of control in a way that it was this time last year. Therefore we are managing to recruit the amount of people that we need to support the volumes that we are achieving from the active customer base that we have. That's, you know, it's not easy, but it's not crazy. I would say it's in a similar state to it has been on average for the last kind of, you know, five plus or pre-corona type of period. I don't think we've ever got into detail on the 190 million. No, we haven't, have we? I think all we've said is that it's measured against fiscal 2023 underlying EBITDA, and then with the cash receipts in fiscal 2024, post the announcement of the fiscal 2023 results. That's the key number for us. Perfect. Thank you. Thank you. From Credit Suisse, we have Victoria Petrova with our next question. Please go ahead. Thank you very much. I have just a small one left. What have been your litigation costs year to date, and what do you expect for the full year? Any comments on AutoStore litigation, any successes in new initiatives, any probability of settlement, could you provide some comment around that? Victoria, sorry, but we keep these quarterly statements to statements around Ocado Retail. Now is not the time for us to kind of update on the litigation picture and litigation costs at Ocado Group for its protecting its IP. Last year you did during third quarter results. Well, to be honest, we shouldn't. We might have done because there might have been something we wanted to update the market on specifically, but I'm sitting here. Understood. with Ocado Retail and, it's not the time to update on an expectation of litigation costs for next year. Understood. Thank you very much. Happy to say to you, as I said before, I'd always agree to a fair settlement, but I won't agree to an unfair one, and we're in an extremely strong position. Thank you. Thank you. We now move on to Sreedhar Mahamkali of UBS London. Please go ahead. Hi. Good morning. Thanks for taking my question. Really only one left for me. Just I think you mentioned significantly higher marketing. Can you give us a bit more color on how we should think about marketing on a sustained basis? Clearly, you're alluding to quite a lot of capacity that needs to be sold and needs to be ramped up. Any thoughts on how we should think about marketing? Clearly understand uncertainties around energy and things like that, but marketing is probably more within your own gift as well. Yeah, I think if you were to look in the long term over the last, I don't know, 10 or so years, you'd see we always actually report more detail on marketing than we need to because we report both the above the line but also the cost of vouchering that really is absent sales effectively in the way that you account for it. We've reported over that period numbers that normally would say that in a normal year would be somewhere between low 2% and high 2% in total marketing spend. I think in the last quarter, we've been up in closer to the mid 3s. I would expect it to trend back to the low- to mid-2s as a long-term percentage for a business growing order volume in the kind of low double digits. I think it's just too important to add to that as well, that, you know, the marketing cost right now is a terrific investment for us, given the capacity that we're growing into. You'll see it in that customer growth, more than 20% over the year, customer growth numbers, and that we expect to, you know, continue to grow going forward into Q4 and the back and then into next year as well. Just one final comment on that one. You know, earlier this year, due to the enormous amounts of VC that was sloshing into some business models that I did highlight, I thought were somewhat irrational, the cost of marketing in this sector rose significantly. The cost of trying to reach a customer rose significantly and drove a requirement to have to spend more money to have the same amount of voice. It has come down significantly, but it's still around 25% higher than it was pre-COVID. It's, I would say, it's normalizing, and we would expect that trend to continue as those, a lot of those business players who were spending the money are either leaving the market or slowing down their marketing activities to preserve their cash. Thank you both. Thank you. Our next question comes from Sherri Malek of RBC. Please go ahead. Hi, good morning, and thank you for taking my question. I just had one. I was wondering if the rate of ramp up could change at all, if there's any flexibility on that or, for example, the timing of the opening of Luton in light of just a very uncertain environment and seemingly lower growth environment heading into next year. Thank you. Sorry, can you just repeat the question? I kind of caught a bit of Luton, but I wasn't sure the rate of ramp. Yeah. Just the rate of ramp up, if there's any flexibility including of the Luton site as well. You know, there's always some flexibility on opening sites, but if you secure the site and you sign the lease on it and you put the equipment in it, then some of the costs may already be incurred. Kind of variable operating costs or management costs or the electricity to chill the building, for example, those may be discretionary. Obviously there's flexibility around how we run our network and whether we choose to put orders, more orders through some sites and less through others. I have no further details at this point to share. Again, I'd come back to that point. We're growing customer numbers of around 14,000 new customers every week. You know, there is pent-up demand to join the Ocado platform. You know, given all the capacity we've got invested, I think if anything, you know, Luton will open as scheduled, given the you know, the customer sort of, you know, opportunity that we see there. We shall see. Clear. Thank you very much. Thank you. We now move on to Robert Joyce of Goldman Sachs. Please go ahead. Your line is open. Hi. Thanks very much. A couple of quick ones from me. Just in terms of the trajectory of the quarter, should we read was the trade down behavior accelerating towards the back end of the quarter? It did accelerate in the back end of 2023, I think, as the increasing consumer concern around energy costs accelerated. Okay. In terms of those customer acquisitions, Tim, how's the shape of that been through the quarter? Is that pretty consistent or has that tailed off at the back end or sorry? Very strong, very consistent. Thank you. The final one, the energy cost, you gave the electricity of GBP 10 million. Is that an all-in energy cost or is there a gas equivalent number of another GBP 10 million on the other side of that? We use very little gas. If you think about it, what the electricity is for is the three things that happen. The biggest single usage is chilling the food. The second use is the automated equipment, and the third use is just the general, you know, lighting, local compute, and a tiny bit of heating in, technically, in a few periods in the winter. Predominantly it's lighting and compute, the, you know, charging robots and powering other automation and the chill plant. Chill plant being the biggest single usage. Okay, very helpful. Thank you very much. Thank you. As a brief reminder, to ask a question today, please signal by pressing star one on your telephone keypad. We now move on to a question from Simon Bowler of Numis. Please go ahead. Morning. Just two for myself, please. Firstly, you kind of referenced in the statement the kind of 600,000 orders per week capacity. I believe that's when everything's fully built out. Can you give any sense of your excess live capacity at this point in time and perhaps how that compares to pre-pandemic levels? Or is it really just some of the fixed costs that you're kind of carrying at the moment, as more live capacity is built out? Secondly, can you just give us an update on whereabouts you expect the cash position of the JV to end this year, and what its kind of financing options look like? Well, I think we don't have the labor and the vans in situ to do the 600,000. We do largely have the buildings and the automation to do the 600,000 orders or thereabouts. Yes, we haven't got the people sitting around and the vans, but the more fixed elements or the longer term, the ones that have longer lead times, we do have in place. Then your second question was on the cash flow of the JV, which I'll hand over to Stephen, but he might not answer it. No, I will. I'll be happy to answer that one. No, the JV, so the JV has options around its cash balances. There is a revolving credit facility that is open to extension as well if we wish. Furthermore, there is an arrangement for a loan from the JV holders. In other words, ourselves and Marks & Spencer. Of course, there are financing options open to Ocado Retail as well, which they continue to explore. There are several options open for the group. You know, as a reminder, we expect the group to be self-financing and use its own balance sheet and cash flows for its investment requirements, using those three sources that I just described. Okay. Thank you. Thank you. At this time, there are no further questions in the queue, so I'd like to hand the call back over to you, gentlemen, for any additional or closing remarks. Thank you, operator, and thank you, ladies and gentlemen. That concludes our call. Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.