For the period to 2 December 2018, we maintained significant sales growth in a competitive environment while progressing our business further across many fronts.

The Group secured three international partnership deals and continued to deliver double digit revenue growth. Profitability in the period was impacted by the investments in our platform to deliver future growth for both our existing and future partners. It was also impacted by share-based senior management incentive charges following the significant share price increase in the year and by additional depreciation following the opening of the Erith CFC. As a consequence the loss before tax for the period was £44.4 million (2017 restated: loss of £9.8 million)

IFRS 15

The Group secured three international partnership deals and continued to deliver double digit revenue growth

Duncan Tatton-Brown
Chief Financial Officer

Ocado Group PLC has early adopted IFRS 15, the new revenue recognition standard, and this report on our performance in 2018 against the comparative period in 2017 is under the new standard. The adoption of the standard has impacted our underlying results, specifically the Solutions business in relation to the timing of recognition of certain initial and upfront fees.

  • The impact on FY 2017 results is a £9.3 million reduction in Revenue and EBITDA.
  • The estimated impact on FY 2018 compared to previous internal forecasts, on an unaudited basis, is a £15.2 million reduction in Revenue and £14.4 million decrease in EBITDA.

We have adopted IFRS 15 from 3 December 2017 using the full retrospective method, thereby restating the 2017 comparatives, to provide investors with clarity on the impact of the new accounting standard to aid transparency of the financial results reported.

The adoption of IFRS 15 will change the timing of revenue and cost recognition but does not impact upon the cash flow of contracts or the expected lifetime profitability of contracts, nor does it have any impact on our Retail segment. The main changes for the Group are the accounting treatment of its long-term contracts, specifically the existing Morrisons arrangement, along with the more recent contracts with Bon Preu, Casino, Sobeys, ICA and Kroger.

For a typical arrangement, the recognition of Revenue commences when a working solution is delivered to our partners which is typically when a CFC or Store Pick goes live. Prior to this, no revenue is recognised. The period in which revenue is recognised is dependent on management's view of the estimated customer life as the contract typically has no defined period. The balance sheet will now include contract fulfilment assets and a significant amount of deferred income in relation to contracts where payments have been received from partners to undertake work prior to the recognition of revenue and planned outcomes being delivered. The net impact of the recognition of contract assets, contract liabilities, contract costs and other movements has resulted in the Group reducing consolidated net assets at 2 December 2017 by £(23.1)million to £247.6 million (previously 2017: £270.7 million).

The adoption of IFRS 15 means that for the current Ocado Solutions arrangements, Ocado will recognise losses in the early years due to the recognition of non-capitalised costs for these arrangements and no revenue recognised for the cash fees received. The shortfall in revenue in early years will be compensated for with higher revenue recognised in future years than previously expected. To aid shareholders' understanding, we will provide information on the fees invoiced for Ocado Solutions for each accounting period. Note 1.5 to the consolidated financial statements outlines the relevant adjustments to the prior year Balance Sheet.

Revenue (£m)

Revenue graph

EBITDAA (£m)

EBITDA graph

Profit/(loss) before Tax and Exceptional ItemsA (£m)

Profit/(loss) before Tax and Exceptional Items graph

The current period results comprise 52 weeks ended 2 December 2018. For comparability purposes 52 week data to 3 December 2017, which excludes the final trading week of the 2017 financial year, is used ("2017") for comparison to the 52 weeks ended 2 December 2018 ("2018"), unless otherwise stated.

FY 2018
(52 weeks)
£million
FY 2017
(52 weeks restated)
£million
FY 2017
(53 weeks restated)
£million
Variance
(52 weeks)
Revenue11,598.81,423.61,454.512.3%
Gross profit547.5494.3495.010.8%
Other income71.959.561.020.8%
Distribution and administrative costs561.1471.3480.919.1%
Share of results from joint venture31.21.61.6(25.0)%
EBITDA*259.575.076.7(20.7)%
Depreciation, amortisation and impairment391.371.071.028.6%
Net Finance costs12.513.513.7(7.4)%
Exceptional items*0.10.30.3(66.7)%
(Loss) before tax(44.4)(9.8)(8.3)n/a
  1. Revenue is online sales (net of returns) including charges for delivery but excluding relevant vouchers/offers and value added tax. The recharge of costs to Morrisons and fees charged to Morrisons and other solutions clients are also included in revenue
  2. EBITDA* is stated before the impact of exceptional items*
  3. Depreciation, amortisation and impairment and share of results from joint venture are based on a 52 weeks basis

Revenue grew by 12.3% to £1,598.8 million in comparison to 2017 revenue of £1,423.6 million. This was due to an increase in the average number of orders a week and fees earned from our partnerships. Gross profit increased by 10.8% year-on-year, a higher rate than revenue reflecting faster growth in Solutions revenue with currently higher gross profit margins compared to Retail.

EBITDA* of £59.5 million was 20.7% lower than the prior year. This was driven by increased resources to further develop the OSP platform, the opening of our new proprietary CFC in Erith and increased technology headcount to support our ongoing development. Higher share based senior management incentive charges were caused by share price increases. This was offset by revenue from existing partners in the Solutions segments and increased supplier income within the Retail segment.

Depreciation, amortisation and impairment increased by 28.6% to £91.3 million, reflecting the increased charge arising from the opening of the Erith CFC in Summer 2018, the full year impact of Andover, the second General Merchandise Distribution Centre ("GMDC2") and the associated software for these projects.

Net finance costs decreased from £13.5 million to £12.5 million year-on-year. This is because increases in finance costs were more than offset by a £2.0 million increase in interest income which resulted from the cash raised by our rights issue and share placing by Kroger.

Loss before tax was £(44.4) million, down from the prior year loss of £(9.8) million. This is primarily driven by our continued investment in our future, the increased depreciation charge from new CFCs and the IFRS 15 impact on timing of Solutions revenue recognition.

Trading review by segment

Retail Performance

FY 2018
(52 weeks)
£million
FY 2017
(52 weeks)
£million
FY 2017
(53 weeks)
£million
Variance
(52 weeks)
Revenue1,475.81,317.41,346.112.0%
Gross profit424.5378.9386.612.0%
Other income59.849.250.421.5%
Distribution and administrative costs*1401.8348.8356.115.2%
EBITDA*282.579.281.04.2%
  1. Distribution and administrative costs exclude depreciation, amortisation and impairment for the period
  2. EBITDA* does not include the impact of exceptional items*
  3. There was no impact to the Retail Segment under the new accounting standard, IFRS 15, and thus no IFRS 15 restated FY2017 numbers are provided.

Retail revenue growth was driven by a 12.1% year-on-year increase in orders per week to 296,000 (2017 restated: 264,000), with the highest orders per week of 340,000. Active customers increased by 11.1% from 649,000 to 721,000. The average price per item increased by 1.3%. This was offset by a (0.4)% decrease in the average basket price at Ocado.com to £106.85. The general merchandise business growth was 13.0% driven by strong growth in Fetch.co.uk and Fabled.com.

Gross profit

The increase in Gross Profit was driven by higher order volumes and improved cost prices that led to an 12.0% increase in gross profit to £424.5 million.

Other Income

Other income increased by 21.5% to £59.8 million (2017 restated: £49.2 million) with supplier income increasing year-on-year by 19.6% to £57.1 million (2017 restated: £46.5 million) equivalent to 3.9% of retail revenue (2017 restated: 3.6%).

Distribution and administrative costs

FY 2018
(52 weeks)
£million
FY 2017
(52 weeks)3
£million
FY 2017
(53 weeks)3
£million
Variance
(52 weeks)
CFC138.9115.7117.920.1%
Trunking and Delivery182.1164.0167.811.0%
Other operating costs11.39.810.015.3%
Marketing115.613.714.113.9%
Head office costs53.945.646.318.2%
Total retail distribution and administrative costs*2401.8348.8356.115.2%
  1. Marketing expenditure exclude voucher costs
  2. Retail distribution and administrative costs excludes depreciation, amortisation and impairment
  3. There was no impact to the Retail Segment under the new accounting standard, IFRS 15, and thus no restated FY2017 numbers are provided.
The increase in Gross Profit was driven by higher order volumes and improved cost prices

Distribution and administrative costs consist of costs for the fulfilment and delivery operations of the business as well as head office costs. Total distribution and administrative costs increased by 15.2% year-on-year.

CFC costs increased from £115.7 million to £138.9 million, an increase of 20.1% year-on-year. This was primarily due to the opening of the Erith CFC and GMDC2 in the second half of the year both of which are currently running unused capacity as we scale these operations. Engineering costs were higher due to a greater mix of the new facilities in the Andover and Erith CFCs which, at present, have a higher cost per order despite this falling during the period across these CFCs.

Mature CFC (defined as CFC1 and CFC2) UPH remained stable at 164 UPH. There was some modest improvement driven by the Dordon CFC productivity which regularly exceeded 182 UPH in the period offset by operational issues caused by the severe weather conditions earlier in the period impacting both inbound and outbound productivity. Andover CFC UPH increased during the period and is expected to overtake Hatfield by the end of 1H 2019.

Trunking and delivery costs increased by £18.1 million to £182.1 million, an increase of 11.0% year-on-year (2017 restated: £164.0 million). This was due to increases in wage-related and vehicle costs as a result of greater order volumes and inflationary cost pressures.

Deliveries per van per week have risen by 6.6% to 194 (2017 restated: 182) as customer density improved, Sunday delivery slots increased, and we made continued enhancements to our routing system, exceeding our revised target of 190 DPV set 2 years ago.

Head office costs increased by 18.2% year-on-year from £45.6 million to £53.9 million, reflecting increased technology headcount, from the growth in our general merchandise business, coupled with the annualised impact of additional space costs for our new head office location.

Marketing costs excluding voucher spend increased from £13.7 million to £15.6 million, 1.1% as a percentage of retail revenue and marginally up on the prior period.

EBITDA*

EBITDA* excluding exceptional items for the retail business was £82.5 million (2017 restated: £79.2 million).

Solutions Performance

FY 2018
(52 weeks)
£million
FY 2017
(52 weeks restated)
£million
FY 2017
(53 weeks restated)
£million
Variance
(52 weeks)
Fees invoiced198.5146.1147.035.9%
Revenue123.0106.2108.415.8%
Distribution and administrative costs*140.9112.7115.125.0%
EBITDA*(17.9)(6.6)(6.8)(171.2)%

Fees and Revenue

Fees invoiced, exclusive of VAT, amounted to £198.5 million (2017 restated: £146.1 million) are a combination of fees due for services invoiced under existing solutions contracts and amounts received in advance of new Solutions contracts. Fees relating to OSP are not recognised as revenue until a working solution is delivered to the partner.

Revenue from the Solutions business was £123.0 million, up from £106.2 million in 2017. This primarily comprises of fees from our original arrangement with Morrisons, for services rendered, technology support, research and development and from management fees, and a recharge of relevant operational variable and fixed costs.

Distribution and administrative costs

FY 2018
(52 weeks)
£million
FY 2017
(52 weeks restated)
£million
FY 2017
(53 weeks)
£million
Variance
(52 weeks)
Distribution Costs98.086.988.612.8%
Administrative costs42.925.826.566.3%
Total Solutions distribution and administrative costs*140.9112.7115.125.0%

* Solutions distribution and administrative costs excludes depreciation, amortisation and impairment

Distribution and administrative costs predominantly consist of fulfilment and delivery operation costs for the Morrisons business and the costs of employees developing solutions for, and supporting all of our partnership agreements. These costs grew 25.0% year-on-year primarily as a result of an increase in headcount to support further improvements in our platform, to support existing international clients, and to build further capabilities to sign future clients.

EBITDA*

EBITDA* from our Solutions activities was £(17.9) million, a decrease of £(11.3) million.

Other Segment

EBITDA loss was £(5.1) million in the current period (2017 restated: EBITDA profit £2.4 million), a decrease of £7.5 million primarily due to the increase in the accounting estimates for share-based senior management incentive charges. These charges increased in the period predominantly as a result of the share price performance in the period.

Group Performance

FY 2018
(52 weeks)
£million
FY 2017
(52 weeks restated)
£million
FY 2017
(53 weeks restated)
£million
Variance
(52 weeks)
EBITDA*59.575.076.7(20.7)%
Depreciation, amortisation and impairment91.371.071.028.6%
Net Finance costs12.513.513.7(7.4)%
Share of results from joint venture1.21.61.6(25.0)%
(Loss) before tax(44.4)(9.8)(8.3)(353.1)%
(Loss) after tax(44.9)(9.8)(8.3)(358.2)%

Depreciation, amortisation and impairment

Total depreciation and amortisation costs were £91.3 million (2017 restated: £71.0 million), an increase of 28.6% year-on-year. The increase year-on-year costs is as a result of the commencement of operations at the Erith CFC, increased bot numbers in our Andover and Erith CFCs and higher levels of technology spend on over the last few years on our platform.

Net finance costs

Net finance costs were £12.5 million, a decrease of 7.4% in comparison toj) the prior year (2017 restated: £13.5 million). The decrease is due to annualised impact of savings as a result of debt expiring or being repaid with the proceeds of the Senior Secured Notes issued in the prior year. This amount was offset by £2.2 million of finance income earned through cash deposits held (2017 restated: £0.2 million).

£2.8 million of interest costs have been capitalised in the period in relation to the senior secured notes and the RCF in accordance with the relevant accounting standards (2017 restated: £4.4 million).

Share of result from joint venture

MHE JVCo Limited ("MHE JVCo") holds Dordon CFC assets, which Ocado uses to service its and Morrisons' online business and is owned jointly by Ocado and Morrisons. The Group share of MHE JVCo profit after tax in the period amounted to £1.2 million (2017 restated: £1.6 million).

Loss before tax

Loss before tax for the period was £(44.4) million (2017 restated: loss of £(9.8) million).

Taxation

Due to the availability of capital allowances and Group loss relief, the Group does not expect to pay corporation tax during the period. No deferred tax credit was recognised in the period. Ocado had approximately £256.4 million (2017 restated: £183.6 million) of unutilised carried forward tax losses at the end of the period.

Dividend

During the period, the Group did not declare a dividend.

(Loss)/Earnings per share

Loss and diluted loss per share were (6.85)p (2017 restated: (1.38)p).

Capital expenditure

Capital expenditure for the period:

FY 2018
(52 weeks)
£million
FY 2017
(53 weeks)
£million
Mature CFCs6.23.1
New CFCs80.369.7
International CFCs10.9
Delivery assets21.716.5
Technology54.842.8
Fulfilment Development21.215.5
Other18.110.6
Total capital expenditure1, 2(excluding share of MHE JVCo)213.2158.2
Total capital expenditure3(including share of MHE JVCo)213.8160.3
  1. Capital expenditure includes tangible and intangible assets
  2. Capital expenditure excludes assets leased from MHE JVCo under finance lease arrangements
  3. Capital expenditure includes Ocado share of the MHE JVCo capex in 2018 of £0.6 million and in 2017 of £2.1 million

Capital expenditure in the Hatfield CFC was £5.3 million which mainly related to a number of small projects to improve the capacity and resiliency of this site.

We incurred £80.3 million of costs in the period for our new CFCs. This included £65.3 million relating to the Erith CFC. The Erith CFC commenced operations in mid 2018 and is scaling up operations with a expected eventual capacity of over 200,000 OPW. The remaining amount related to capital developments in Andover CFC which is scaling up operations since opening in 2016.

Total expenditure on new vehicles in the period was £21.7 million (2017 restated: £16.5 million). This expenditure enabled business growth and replacement of vehicles that have reached or exceeded their five year useful life, the year on year increase is due to the timing of vehicles reaching the end of useful life.

Ocado continued to develop its own proprietary software and incurred £54.8 million (2017 restated : £42.8 million) of internal development costs in the period on technology, including £10.6 million (2017 restated: £7.1 million) spent on computer hardware and software. We expanded our technology total headcount to over 1,300 staff at the end of the period (2017: over 1,100 staff) as increased investments were made to support our strategic initiatives. The main areas of investment were replatforming of our technology and the greater use of public and private cloud services, improvements in the efficiency of our routing systems, enhancements to our customer proposition, and support for the growth of Andover CFC, Erith CFC and existing partners future CFCs.

Fulfilment development expenditure of £21.2 million was spent in enhancing our next generation fulfilment solutions which will be used in our latest CFCs and within CFCs for our Solutions partners.

In the period, we incurred our share of the capital expenditure relating to MHE JVCo of £0.6 million (2017 restated: £2.1 million) to improve operational capacity and efficiency of the Dordon CFC and various minor improvement projects.

Other capital expenditure of £18.1 million was incurred in the period, of which £6.8 million related to our general merchandise business. This was to support growth in capacity of our existing general merchandise distribution centre and to enable the opening of our GMDC2 site in mid 2018. £5.6 million related to our trial of an immediacy offer, launching in the coming months.

At 2 December 2018, capital commitments contracted, but not provided for by the Group, amounted to £69.7 million (2017 restated: £45.0 million). We expect capital expenditure in 2019 to be approximately £350 million which mainly comprises the roll out of new equipment directly related to our Solutions partners, expansion of our UK based CFCs, continuing investment in our infrastructure and technology solutions, and additional investment in new vehicles to support business growth and the replacement of vehicles coming to the end of their five year financing contracts.

Cash flow

Net operating cash flow after finance costs increased to £128.4 million, up 9.8% from £116.9 million in 2017 as detailed below:

FY 2018
(52 weeks)
£million
FY 2017
(53 weeks)
£million
EBITDA*159.576.7
Working capital movement70.050.5
Exceptional items*(0.1)(0.3)
Other non-cash items13.54.1
Finance costs paid(14.5)(14.1)
Operating cash flow128.4116.9
Capital investment(170.1)(179.5)
Dividend from joint venture7.6
(Decrease)/Increase in net debt*/finance obligations(32.8)152.4
Proceeds from share issues333.11.5
Other investing and financing activities2.20.2
Movement in cash and cash equivalents260.899.1
  1. EBITDA* is stated before the impact of exceptional items*

Operating cash flow increased by £11.5 million during the year driven by increased investment in resources for the development of the OSP platform. The increase in working capital inflow of £19.5 million is driven by an increase in trade and other payables (including contract liabilities) of £56.4 million, offset by an increase in inventories of £9.8 million and trade and other receivables (including contract costs) of £27.1 million.

During the period there was £170.1 million of capital expenditure as the Group continues to invest for future growth comprising investments in new CFCs, development of our next generation fulfilment solutions, and spend on new vehicles and spoke sites.

Net financing cash flows in the period were £300.3 million comprising £(32.8) million reduction in net debt* and financing obligations, £333.1 million of proceeds from the share placing in January 2018, the shares subscribed for by Kroger in May 2018 and the issue of new share capital following the exercise of employee share options. No dividend was received from MHE JVCo in the period; this was received post the period end .

Cash received during the year in relation to Solutions partners, excluding VAT, amounted to £200.1 million (2017 restated: £146.1 million).

Balance sheet

The Group had cash and cash equivalents of £410.8 million at the end of the financial year versus £150.0 million as at 3 December 2017.

Gross debt at the period end was £360.6 million (2017 restated: £378.0 million) and external gross debt*, excluding obligations under finance leases owing to MHE JVCo, was £286.1 million (2017 restated: £283.9 million). The increase in net external cash is due to proceeds from the issue of equity raised in anticipation of investment in improving our platform and adding UK capacity. Net external cash at the period end was £124.7 million (2017 restated: net debt £133.9 million), driven mainly by cash generated from equity.

Trade and Other Receivables includes £49.1 million (2017 restated: £28.8 million) of amounts due from suppliers in respect of commercial and media income. Of this amount £29.9 million (2017 restated: £12.2 million) is within trade receivables, and £19.2 million (2017 restated: £16.6 million) within accrued income.

Within deferred income, £12.5 million (2017 restated: £9.3 million) related to delivery income received under the Ocado Smart Pass scheme allocated to future periods, lease incentives and media income from suppliers which relate to future periods. Within Contract liabilities, £115.2 million (2017 restated: £49.7 million) of amounts are related to Solution contracts, payments made for performance-based payments or progress payments on ongoing service delivery. Where payments are greater than the revenue recognised at the end of period, a contract liability is recognised for the difference. Within accrued income, £3.8 million (2017 restated: £3.1 million) is the amount due from our Solutions customers.

Included within property, plant and equipment is capital work-in-progress for land and buildings of £0.1 million (2017 restated: £37.2 million) and capital work-in-progress for fixtures, fittings, plant and machinery of £45.8 million (2017 restated: £61.6 million), the decrease relating to the Erith CFC and the second general merchandise distribution site, which have now opened.

Increasing financing flexibility

In the period, we issued approximately 5% of our issued share capital, raising gross proceeds of £143 million to provide the flexibility to take full advantage of the current opportunities to grow Ocado Solutions and accelerate development in our platform and our Retail business. The £100 million Revolving Credit Facility ("RCF") which was renegotiated in 2017 was not drawn during the year. In May 2018, Kroger Inc. subscribed for another 5% of share capital which raised a further £183 million.

Key performance indicators

The following table sets out a summary of selected unaudited operating information for FY 2018 and FY 2017:

FY 2017
(52 weeks)
FY 2018
(52 weeks)
Variance
(52 weeks)
Average orders per week264,000296,00012.1%
Average order size (£)1107.28106.85(0.4)%
Mature CFC efficiency (units per hour)2164164
Average deliveries per van per week (DPV/week)1821946.6%
Average product wastage (% of retail revenue)30.70.8(0.1)ppt

Source: the information in the table above is derived from information extracted from internal financial and operating reporting systems and is unaudited

  1. Average retail value of goods a customer receives (including VAT and delivery charge) per order from Ocado.com
  2. Measured as units dispatched from the CFC per variable hour worked by Hatfield CFC and Dordon CFC operational personnel. We consider a CFC to be mature if it had been open 12 months by the start of the half year reporting period
  3. Value of products purged for having passed Ocado's "use by" life guarantee divided by retail revenue
Office worker