U.K. online grocer Ocado says its fiscal 2011 loss dropped by 80% to £2.4M as revenue grew 16% to £598.3M; company's private-label product offerings grew to 620 from 250, were found in 70% of customer orders

Cindy Allen

LONDON , January 31, 2012 (Ocado Group) – Ocado Group plc ("Ocado") today announces its unaudited preliminary results for the 52 weeks ended 27 November 2011.

Key financials

· Gross sales1 increased 16.6% to £642.8 million (2010: £551.1 million)

· EBITDA2 increased by 26.6% to £27.9 million (2010: £22.0 million)

· EBITDA3 margin increased from 4.3% to 4.7%

· Net debt of £19.2 million (2010: net cash of £80.5 million)

· Cash and cash equivalents at 27 November 2011 of £92.1 million (2010: £154.6 million, including treasury deposits)

Statutory highlights

· Revenue increased 16.0% to £598.3 million (2010: £515.7 million)

· Operating profit of £1.1 million (2010: operating loss of £5.4 million)

· Loss before tax reduced by 80.2% to £2.4 million (2010: £12.2 million)

Operating highlights

· Average orders per week increased by 18.6% to 110,219 (2010: 92,916)

· Average order size decreased by 1.7% to £112.15 (2010: £114.06)

· Items delivered exactly as ordered were 98.3% in the period (2010: 99.0%)

· Deliveries on time or early were 92.3% in the period (2010: 94.9%)

· Customer demand during the year continued to exceed Ocado's operational capacity

· Hatfield Customer Fulfilment Centre ("CFC1") capacity significantly increased to deliver 131,381 orders in peak week

· Capital investment is continuing to increase capacity at Hatfield

· At the Dordon Customer Fulfilment Centre ("CFC2"), the building, services and ancillary infrastructure are substantially complete

· At CFC2, equipment installation is advancing well; the project is on budget and on time to open in Q1 2013

· Use of mobile devices continued to increase; mobile devices used in 18% of customer checkouts at the end of 2011, up from 12% since the beginning of the year

· Ocado's own-label range at year end comprised 620 products, up from 250 products in 2010; found in 70% of customer orders at year end

Tim Steiner, Chief Executive Officer of Ocado, said:

"Against the backdrop of a weak UK economy, we have continued to see the development of the online grocery retail market. We believe this growth is evidence of a structural shift in consumer behaviour and we will continue to see an expansion of the online grocery retail market. We will continue to pursue our existing strategy in 2012 to improve what we offer our customers and increase our capacity to meet growing demand. It is our mission to make sure that customers continue to regard Ocado as the home of the market-leading offer in online grocery shopping."

Andrew Bracey, Chief Financial Officer of Ocado, said:

"With a sales increase of 16.6% in 2011, we are confident that Ocado grew faster than other players in the sector. We also ended the year with a strong cash position of £92.1 million. Because of our growing competitive advantage online we are well placed to deliver for shareholders as well as customers."


Results Presentation

A results presentation will be held for investors and analysts at 9.30am today at the offices of M:Communications, 11th floor, 1 Ropemaker Street, London, EC2Y 9AW. Presentation materials will be available online at results11.ocadogroup.com.

Contacts

· Tim Steiner, Chief Executive Officer on 020 7920 2330 today and 01707 228 000

· Andrew Bracey, Chief Financial Officer on 020 7920 2330 today and 01707 228 000

· David Hardiman-Evans, Head of Investor Relations on 020 7920 2330 today and 01707 228 000

· Ben Lovett, Senior Communications Manager on 01707 227 943

· Nick Miles, Ann-marie Wilkinson or Charlotte Kirkham at M:Communications on 020 7920 2330

Notes

1. Gross sales include revenue plus VAT and marketing vouchers.

2. EBITDA is a non-GAAP measure which we define as earnings before net finance cost, taxation, depreciation, amortisation, impairment and exceptional items.

3. EBITDA margin is calculated on revenue.

Chief Executive Officer's Review

During the past year, Ocado has made significant progress in growing sales and increasing capacity to support future growth. Against the background of the weak UK economy, gross sales have grown by 16.6%. We are very grateful to our customers for their loyalty and support.

Market development

The significance of the UK online grocery market, while still in its relative infancy, is now recognised by most major grocery retailers. Customers continue to migrate from traditional grocery shopping to online. This is borne out by the fact that in 2011, average orders per week at Ocado increased by 18.6% from 92,916 to 110,219. A recent report from the Institute of Grocery Distribution forecasts that the UK online grocery market will reach £11 billion of sales by 2016. We believe that the biggest threat to the growth of the online market is under-investment in capacity - retailers will not be able to service nor benefit from this increasing customer demand unless they invest in online capacity.

Competition in the online grocery sector is as strong as the traditional store-based sector, and will almost certainly increase. We believe the most effective way for Ocado to acquire new customers and retain existing customers is to continue to develop our offer. We have worked hard as always, to improve this on many levels and we continue to innovate.

Capacity expansion

This year saw significant progress in developing CFC1 towards its ultimate capacity of 180,000 orders per week. Investment has been made in a major upgrade to the functionality of the proprietary software that runs the warehouse operation; in additional storage, picking and tote conveyor capacity; and in the power infrastructure of CFC1. In 2012 we plan to make further investment in CFC1 with the aim of taking capacity to over 160,000 orders per week by the end of the year.

As we have said in previous trading updates, increasing the capacity of CFC1 to cope with the rate of sales growth has presented operational challenges. During the year several major construction projects have been carried out in the middle of CFC1 whilst the picking of groceries has continued, and I give credit for this to the planning and perseverance of our engineering and CFC1 teams. We temporarily reduced our product range to approximately 20,000 lines at the year end to create space for construction of additional automation. In H2 2011 we hired additional temporary staff and reintroduced some manual trolley-picking to provide a short-term increase in operational capacity. As a result of these changes, CFC1 efficiency measured in units per hour ("UPH") dropped by 8.2% from 121 UPH to 111 UPH. As new equipment becomes operational in CFC1 over the next 12 months, we expect to see a rise in efficiency toward our long-term target of 180 UPH.

Work is advancing well at CFC2 in Dordon, Warwickshire. The construction of the building, services and ancillary infrastructure is substantially complete and equipment installation has started. It remains on budget and on time to open in Q1 2013. Systems testing is currently planned to start in mid-2012, with initial operations scheduled to commence in early 2013, giving us a six month testing and commissioning window. We believe CFC2 will represent the single biggest increase in capacity by a grocery retailer for the online grocery market in the UK. It is a key driver in securing Ocado's leading position in this fast growing market.

Customer demand

More customers are shopping online, and doing so more frequently, but basket size has declined slightly. Average order size during the year fell by 1.7% to £112.15 from £114.06. Most of this decrease is due to the shift of customers towards the Ocado Delivery Pass ("ODP"), one of our key customer loyalty schemes. There are two reasons for this: the majority of Ocado orders are now placed using the ODP scheme, and these customers have a higher overall spend as increased shopping frequency more than offsets the lower average basket for this customer group. Nevertheless it is also clear that Ocado customers are feeling the same squeeze on budgets that is affecting the British consumer elsewhere and towards the end of 2011 we began to see a slight change in product mix and baskets that are on average one item smaller.

Operating efficiency

Our delivery network's performance continued to improve throughout the year. We opened new spokes in Bristol and Wimbledon, and acquired a spoke site in Oxfordshire which opens today. The Bristol spoke has enabled us to expand our service coverage into the South West of England and South Wales. Whilst we already operate in Wimbledon, the new spoke has increased our capacity in the London area by around 17,000 orders per week. The opening of these spokes increased the operational efficiency of our existing delivery network.

The increasing scale of the business, combined with previous upgrades to routing software and van design have contributed to deliveries per van per week ("DPV/week") increasing by 8.7% to 145 DPV/week. During the year the peak was 165 DPV/week. The on-time delivery performance was 92.3%, down from 94.9% in the previous year, largely due to the impact of significant development works in CFC1.

Grocery range

We have continued to develop our grocery range and the Directors believe that Ocado now offers a grocery range equivalent in size to our largest store-based competitors. Our investment in CFC1 will enable us to grow this from the level of around 20,000 products we had at year end, to over 30,000 products over the next year. The Ocado own-label range has more than doubled during the year to 620 products. Our own-label range is comparable in price and quality to similar products of our major competitors and has proved very popular, with 70% of all baskets containing at least one Ocado own-label product. In addition, we have a growing number of specialist ranges such as Carrefour's "Reflets de France" range of authentic French produce, as well as leading organic suppliers such as Daylesford Organic and Laverstoke Park Farm.

Non-food business

In line with the objectives we set out at our IPO, we continue to expand our range of non-food items. We now have a dedicated non-food team in place to drive this forward. We plan to increase significantly our non-food range by the end of 2013.

Value

We continue to focus on offering greater value to an ever widening customer base. We have done this by investing in price in four main ways: increasing the number of products on promotion, continuing our Tesco price match to approximately 7,000 products, expanding the Ocado own-label range, and launching the Ocado Saving Pass ("OSP"). OSP is a discount system offering at least 10% off over 600 leading branded products, including products that are already price-matched to Tesco, in return for a small annual fee. All of this has been achieved while delivering the freshest produce to customers through our shorter supply chain, and our product life guarantee.

Technology and innovation - website and mobile interfaces

The launch of Ocado's latest Webshop was completed in Q1 2011. It proved to be very successful, with excellent customer feedback. The Webshop enabled customers to shop up to 25% faster than before. We are continually making regular enhancements to our Webshop and using our technological base to improve the customer experience and service. We launched "shop in shop", allowing suppliers to showcase their specific ranges in their own dedicated section of the Webshop. Checkouts via mobile devices grew to 18% of checkouts by the end of the period, up from 12% at the beginning of the year. In addition to enhancing the functionality and usability of the existing Ocado apps available for the iPhone, the iPad and the Android platform, we developed Ocado apps for the Blackberry and the Windows Phone 7 mobile devices. Other software developments included our "One-Click Additions" feature, allowing customers on mobile devices to add a single product (or basket) to an existing delivery without needing to check out again. We believe Ocado is the only UK supermarket to offer customers full shopping functionality on all leading smartphone devices. We also implemented a new CRM platform to improve the efficiency of our call centre and provide substantial benefits to customer service. Our software development achievements were recognised with Ocado being awarded a Grocer Gold Award for Consumer Initiative of the Year in 2011.

People and recognition

The key to our success is the energy and commitment of nearly 6,000 employees in different areas of the business. I want to recognise the tremendous efforts made by them throughout the year. Our customers and industry observers regularly comment on the outstanding service provided by our delivery team of over 2,000 Customer Service Team Members. The measures taken by Ocado to make its delivery vehicles safe were again recognised in 2011 by Ocado winning for the second year running the Safe Vehicles Award at the Fleet Safety Forum Awards, organised by road safety charity Brake. During the period Ocado also won the Fleet Van Operator of the Year at the Fleet Transport Awards.
The overall standard of the business was again recognised with our selection as a finalist for the Etailer of the Year award at the 2011 Oracle World Retail Awards, and being voted the favourite online supermarket in the Which? Magazine reader surveys.

In November 2011, we signed a voluntary union recognition agreement with USDAW for Ocado's hourly paid employees at all our current operational sites. USDAW representatives will participate on our existing Ocado Council to voice the views of the employees they represent. The Ocado Council continues to be the forum that we use to consult with our employees.

Change of Directors

On 23 January 2012, Ocado announced that Andrew Bracey intended to resign from the Board, and as Chief Financial Officer of the Group. He will remain with the Group to complete the year end audit and the Annual Report process, and is expected to leave in April 2012. We are grateful to Andrew for his vital contribution at the IPO and during our time as a public company. A process is underway to find a new Chief Financial Officer. David Young also indicated his intention to retire from the Board at the next AGM. David joined the board of Ocado as a Non-Executive Director in October 2000 and has provided invaluable advice to the Company as it has grown from a small business to a FTSE 250 listed company.

On 23 January 2012 we also welcomed Mark Richardson to the Board into the newly created role of Operations Director. Mark was previously Ocado's Head of Technology. He is now responsible for the day-to-day running of the Ocado operation, including customer fulfilment centres, logistics developments, business planning, engineering and IT. Also as of this date, Jason Gissing has taken on the new Board position of Commercial Director, with responsibility for all our grocery retail activities. In addition to his current role as Director of Legal and Business Affairs, Neill Abrams has assumed responsibility for Human Resources.

A further strengthening of Ocado's Board is the appointment of Wendy Becker as an independent Non-Executive Director in March 2012. Wendy has significant commercial experience as a result of past roles as Group Chief Marketing Officer at Vodafone and Managing Director of TalkTalk Telecom, having previously been the Partner leading McKinsey's consumer practice. Currently Wendy is a Non-Executive Director at Whitbread and a trustee of Cancer Research UK. Wendy will also join Ocado's Nomination Committee, and is expected to chair the Company's Remuneration Committee when David Young retires.

Current trading and outlook

Against the backdrop of the weak UK economy, we have continued to see the development of the online grocery retail market. We believe this growth is evidence of a structural shift in consumer behaviour and we will continue to see an expansion of the online grocery market. We believe Ocado is well positioned to capture this growth as the market-leading offer in online grocery shopping.

Ocado achieved gross sales growth of 16.6% in 2011, during a period when we experienced capacity constraints at CFC1. Our growth has continued into the 2012 financial year, and we expect sales growth in the first quarter to be around 10%, broadly in line with Q4 2011. Given the sales growth profile we experienced in 2011 as a result of capacity constraints, we expect our growth rate to improve as the year progresses.

In 2012 we will continue with our existing strategy to improve what we offer our customers, to complete the capacity expansion work at CFC1 and to continue the build, commissioning and testing of CFC2. We will focus on improving the levels of service, beyond that which we gave our customers in the second half of 2011.

It is our mission to make sure that customers continue to regard Ocado as the home of the market-leading offer in online grocery shopping. We will continue to provide for and capture the growth of this market sector. The operational leverage we have in our business positions us strongly to benefit from increased scale to achieve a level of profitability that satisfies all stakeholders in the business.

Chief Financial Officer's Review

The historic trend of sales growth and further improvement in operational profitability continued in 2011. Gross sales grew by 16.6% compared to 2010 and EBITDA margin as a percentage of revenue increased from 4.3% to 4.7%.

The balance sheet continues to be strong with net assets of £172.9 million, an increase of £1.1 million on 2010. Cash was well controlled in the period with net cash from operating activities of £20.1 million. At 27 November 2011 the Group had net debt of £19.2 million as it began to utilise part of the £100 million credit facility in order to further expand the business. Cash and cash equivalents at the year end were £92.1 million.

Despite the uncertainty of the UK economic environment, the strength of the period end balance sheet combined with the operational improvements and continued sales growth leaves the Group well placed moving into 2012.

Revenue

Gross sales were up 16.6% to £642.8 million for the period. Growth continued to be driven by an increase in average orders per week to 110,219 from 92,916, an increase of 18.6%. This was offset by a slight decrease in the average order size of 1.7% to £112.15, mostly due to an increasing number of customers signing up to the Ocado Delivery Pass. The number of active customers increased by 13.5% to 298,000 at the end of the year. Revenue grew by 16.0 % to £598.3 million. Spend on marketing vouchers, at £8.0 million equated to 1.3% of revenue, down from 1.6% in 2010 due to reduced use of vouchers as a marketing tool.



Gross profit

Gross profit increased 14.3% to £184.8 million; this equates to a 47 basis points decrease in gross margin percentage over the period to 30.9 %. The decrease in gross margin was driven by a decrease in delivery income per order, changes in product mix and increases in product sourcing costs, promotional activity and post-delivery adjustments during the period. The increased post-delivery adjustment costs were primarily due to the capacity constraints experienced, and have since year end returned to previous levels. The reduction in gross margin is mitigated by increased other income outlined below.

Other income increased significantly by 101.0% to £12.6 million. This increase was driven by the increased sale of space on our new Webshop which was launched in the first quarter of 2011. In addition, a number of new initiatives launched in the second half of the period such as "shop in shop", which provides suppliers with the ability to have their own dedicated shop within our Webshop, have enabled increased revenue to be generated.

Operating costs

Distribution costs at £151.7 million, fell as a percentage of revenue from 25.8% in 2010 to 25.4% in 2011. This represented an increase of 14.2% on the prior period. The two major components of distribution costs are CFC1 costs and trunking and delivery costs. CFC1 costs fell as a percentage of revenue from 11.5% in 2010 to 11.3% in 2011, this represented an increase of 13.9% on the prior period. Variable CFC1 costs increased slightly faster than revenue as a result of the increased labour required to mitigate temporary capacity constraints. However, the operating leverage of the fixed cost base on increased volume combined with some savings in the fixed cost base meant that total CFC1 costs fell as a percentage of sales. Trunking and delivery costs fell as a percentage of revenue from 13.2% in 2010 to 12.9% in 2011, this represented an increase of 13.8% on the prior period with productivity gains more than offsetting inflationary pressures. Administrative expenses, including marketing costs, increased by 20.6% to £44.5 million, and increased by 28 basis points as a percentage of revenue to 7.4% largely due to an increase in other marketing activity to partly complement the use of vouchers.

Operating profit/loss

Operating profit for the period was £1.1 million, compared to an operating loss of £5.4 million in 2010. This improvement is primarily attributable to the growth in revenue, contributing to profit and enabling greater operating efficiencies.



Net finance costs

The reduction in net finance costs of 49.0% to £3.5 million is largely the result of the repayment of four long-term loans in the second half of 2010. A large portion of the current period borrowing costs under the £100 million credit facility remain on the balance sheet as they have been accounted for as transaction costs and will affect profit or loss over the remaining period of the loan, or will be capitalised to property, plant and equipment to the extent that drawdowns directly finance qualifying assets. The reduction in net finance costs is also due to increased finance income on cash and cash equivalents on a higher average cash balance throughout the period compared to 2010.

Loss before tax

Loss before tax for the period was £2.4 million, an improvement of £9.8 million against 2010.

Taxation

Due to the availability of capital allowances and loss relief, the Group did not pay corporation tax during the year. A deferred tax credit of £1.9 million was recognised during the period as we begin to recognise more of the tax losses available for use against future taxable profits. Ocado had approximately £278.7 million of unutilised carried forward tax losses at the end of the period.

Loss per share

Basic and diluted loss per share decreased from 1.63p to 0.10p, primarily due to the improved financial performance of the Group.



Cashflow

Net operating cashflow before finance costs increased to £26.4 million, up 42.2% from £18.5 million in 2010. This increase is primarily driven by an increase in EBITDA and the fall away of the 2010 IPO costs. The net movement in working capital was an outflow of £2.6 million (2010: £0.4 million). The increase in trade and other receivables was due to amounts outstanding at the period end in relation to other income and an increase in VAT receivable due to the volume of invoices relating to capital projects in progress, this offset a significant increase in trade and other payables arising from business growth and capital projects in progress.

Balance sheet

The Group had cash and cash equivalents of £92.1 million at the period end, this was down 40.4% from the 28 November 2010 amount which included treasury deposits, due to the continued capital investment required to expand the business. The Group had net debt of £19.2 million at 27 November 2011 (2010: net cash of £80.5 million) as it began to draw on the £100 million credit facility to assist in funding capital investment. At year end Ocado has drawn £40.2 million of this facility. Total undrawn facilities at 27 November 2011, including this facility, were £78.8 million (2010: £117.3 million)

During the period the Group agreed with its banks to increase one of its covenant ratios in the £100 million credit facility for the remainder of the life of the facility, which runs to January 2014. Given the current difficult economic climate the Group continues to monitor closely its liquidity position for a range of scenarios for revenues, cost performance and capital spend.

Capital investment

In the period Ocado invested £126.1 million in capital items, an increase of 260% on the comparative period. Of this amount, £27.7 million was spent on projects at the existing CFC1 in order to expand capacity, the benefits of which will be realised from 2012 onwards. The amount spent on CFC2 in 2011 was £72.6 million including the acquisition of land. The work schedule and costs on CFC2 are in line with expectations. The project is expected to complete in the first quarter of 2013. The investment in new vehicles in 2011 was £7.1 million. Capital expenditure on the expansion of the delivery network was £4.7 million. Two new spokes opened in the period, both of which are leasehold sites. One further freehold site was purchased and partially developed in the period. The Group continues to develop the majority of its own software, and during the period £8.2 million of internal development costs were capitalised as intangible assets.

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