Ocado Regulatory News (OCDO)

OCADO GROUP PLC

Ocado, creating future value now

Preliminary results for the 52 weeks ended 2 December 2018

5 February 2019

Financial and statutory highlights

Note: These numbers are reported for the first time under IFRS 15 which governs Revenue from Contracts with Customers. In order to understand the impact on FY17 and FY18 results please refer to the presentation on the Investor section of the Ocado Group website (http://www.ocadogroup.com/investors/reports-and-presentations/2019.aspx). See also the CFO review to follow and note 1.3 to the financial statements

Tim Steiner, Chief Executive Officer of Ocado, said:

"Our performance last year was the result of many years of focus, dedication and perseverance: what we have called our "18-year overnight success". Our growth story, however, is only just beginning. We now have in place a platform for significant and sustainable long-term value creation as the leading pure-play digital grocer in the UK, a world-leading provider of end-to-end ecommerce grocery solutions, and as an innovative and creative technology company applying our proprietary knowledge to a range of challenges.

"Our transformation journey is well under way with increased cash fees earned and greater investment as we execute on behalf of our partners. Creating future value now will involve us continuing to scale the business, enhancing our platform, enabling our UK retail business to take advantage of all its opportunities for growth, and innovating for the future. We look forward to fulfilling these opportunities with excitement and determination".

Key milestones

2018 was a transformative year for Ocado.

Adding partners to the Ocado Smart Platform

• Over the year we signed international partnerships with Sobeys, ICA and Kroger to develop the Ocado Smart Platform ("OSP") in Canada, Sweden and the United States respectively, utilising both our proprietary software and algorithms as well as our robotic infrastructure solutions

• We are making good progress with all our partners. Bon Preu launched its online offer in Catalonia in November; Groupe Casino continues its building work on its first Customer Fulfilment Centre ("CFC") in the south of Paris; Sobeys has begun building its first CFC site in the Greater Toronto area and is making good progress; ICA has identified the location of its first site in Stockholm: and Kroger has committed for its first three CFCs out of a total of 20 within the first three years. In the UK, we have begun to fulfil customer orders for Morrisons from our state-of-the-art facility at Erith ("CFC4") and we continue to support their roll out of a store-pick based solution

• Cash fees from Solutions partners in 2018 were £200.1 million (2017: £146.1 million)

• We continue to engage with multiple retailers in a variety of markets with a view to adding more partnerships to our platform

Innovating in technology

• Headcount in Ocado Technology has increased by 76% in the last three years, including 300 programmers hired in FY18

• To protect our intellectual property we have increased the number of filed patent applications from 73 to 395 over the last three years, now covering 80 separate innovations across a broad and deep technology estate including real-time control systems, robotics, machine learning and AI and routing systems

• We have been testing robotic picking in our Andover CFC and are targeting to start using in live production over the coming months

Scaling the business to drive faster growth

• We have been able to meet the demand from new retail customers by adding capacity to our network, most notably by opening our fourth CFC in Erith, South London. At full capacity of £1.2bn, this will be the largest automated grocery fulfilment centre in the world

• We have successfully ramped up capacity at Erith and are now processing over 30,000 orders per week. In its first three weeks it reached the same volume it took us 32 weeks to achieve at Andover

• Our dedicated transformation team is in place and focused on preparing the business to open 23 CFCs for our Solutions partners in the coming years. Our strong order book gives us good visibility, long lead times, and an ability to phase execution

Improving the experience for Ocado's retail customers

• We continue to lead the market for delivery punctuality at 94.9% (2017: 95.0%) and order accuracy at 98.8% (2017: 98.8%)

• Ocado offers the widest range of any UK grocer and we continue to make shopping easier, adding this year both low plastic and no-added sugar aisles

• We went paperless with our receipts, saving over 20 million sheets of paper every year

• Our general merchandise continued to grow strongly. All the products on our Sizzle destination site are now available on our webshop and we also launched a new range of Ocado own brand household products to give customers even more choice

• In 2018 we won numerous awards including The Grocer's "Online Supermarket of the Year", validating the progress we have been making improving the customer experience

Increasing efficiency in our retail operations

• Mature6 CFC operational productivity remained stable at 164 UPH (2017: 164 UPH)

• Delivery efficiency improved further to an average of 194 DPV (2017: 182 DPV)

• Food waste7 was reduced to 0.02%, or just 1 in 6,000 items

Growing the customer base and winning market share

• We grew active customers 11.8% in the year to 721,000 (2017: 645,000)

• Total order volumes increased 12.1% to an average of 296,000 orders per week (2017: 264,000)

• Average hypermarket basket value was slightly lower at £106.85 (2017: £107.28) driven by an increase in average price per item offset by a decrease in the average basket size

• Customer loyalty remained strong and we continued to grow orders in the double digits across all our catchment areas

Outlook statement

• Assuming economic conditions remain broadly stable, we remain confident in achieving revenue growth in our Retail business of between 10‐15% in the 2019 financial year as we increase our fulfilment capacity and grow market share in the UK

• As volumes grow, and we expand utilisation of our new CFCs, we will continue to find efficiencies in our business and as such we expect further growth in Retail EBITDA*

• Solutions Revenue* under IFRS 15 will only be recognised once a customer's first CFC is opened, but we will still have to recognise the build costs. With no CFCs expected to open in 2019, whilst we expect Solutions revenue* growth well ahead of Retail growth, we expect a decline in EBITDA* given the £15-20m additional in operating costs necessary to prepare the CFCs and to provide features on the platform

• We continue to target further Solutions deals, which would generate additional cash fees but would impact short term profits

• Total capital expenditure for the group is expected to be £350m, with the increase reflecting the additional capital required to fulfil our obligations to our Solutions customers

Results presentation

A results presentation will be held for investors and analysts at 9.30am today at the offices of Goldman Sachs, River Court, 120 Fleet Street, London EC4A 2BE. Presentation material will be available online at http://www.ocadogroup.com/investors/reports-and-presentations/2019.aspx.

Contacts

Tim Steiner, Chief Executive Officer on 020 7353 4200 today or 01707 228 000

Duncan Tatton-Brown, Chief Financial Officer on 020 7353 4200 today or 01707 228 000

David Shriver, Director of Communications, on 020 7353 4200 today or 01707 228 000

Martin Robinson at Tulchan Communications on 020 7353 4200

Notes

1. Gross sales* include VAT and marketing vouchers and is used in the calculation of average basket value

2. Revenue is online sales (net of returns) including charges for delivery but excluding relevant vouchers/offers and VAT. The recharge of costs to Morrisons and fees charged to Morrisons are also included in revenue

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

4. External net debt* is the statutory net debt less amounts owing to MHE JVCo of £74.5 million (2017: £94.1 million)

5. Customers are classified as active if they have shopped on ocado.com within the previous 12 weeks

6. The definition of mature had been changed to refer to CFC1 and CFC2 only. A CFC is considered mature if it has been open for 12 months by the start of the half year reporting period

7. Food waste refers to inedible food that cannot be sold to customers or redistributed through our Food Partners or Company Shop

8. Reference to balance sheet figures for FY2017 are all stated on a 53 week basis

* These measures are Alternative Performance Measures

Financial Calendar

Our expected financial reporting calendar for the remainder of the year will be a Q1 Trading Statement on 19 March 2019, a Half Year Results Statement on 9 July 2019, a Q3 Trading Statement on 17 September 2019 and a Q4 Trading Statement on 12 December 2019.

Cautionary statement

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results expressed or implied in these forward-looking statements. Persons receiving this announcement should not place undue reliance on forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, Ocado does not undertake to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise

Chief Financial Officer's review

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

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 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.

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.

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

1. Distribution and administrative costs excludes 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 12.0% 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 11.8% from 645,000 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

1. Marketing expenditure excludes 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.

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

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

1. 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

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 to 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:

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:

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 Solution 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:

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*

Consolidated Income Statement for the 52 weeks ended 2 December 2018

Non-GAAP measure: Earnings before interest, taxation, depreciation, amortisation, impairment and exceptional items* (EBITDA*)

® 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

Consolidated Statement of Comprehensive Income for the 52 weeks ended 2 December 2018

® 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

Consolidated Balance Sheet as at 2 December 2018

® 2016 and 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

Consolidated Statement of Changes in Equity for the 52 weeks ended 2 December 2018

® 2016 and 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

Consolidated Statement of Cash Flows for the 52 weeks ended 2 December 2018

® 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

Notes to the Consolidated Financial Statements

Section 1 - Basis of Preparation

1.1 General Information

Ocado Group plc (hereafter "the Company") is a listed company incorporated in the United Kingdom under the Companies Act 2006 (Registration number 07098618). The Company is the parent and the ultimate parent of the Group. The address of its registered office is Buildings 1 & 2 Trident Place, Mosquito Way, Hatfield, Hertfordshire, AL10 9UL. The financial statements comprise the results of the Company, its subsidiaries and the Group's interest in a jointly controlled entity (hereafter "the Group"). The Financial Period represents the 52 weeks ended 2 December 2018. The prior financial period represents the 53 weeks ended 3 December 2017.

1.2 Basis of Preparation

The financial statements have been prepared in accordance with the Listing Rules and the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority (where applicable), International Financial Reporting Standards (IFRS) and International Financial Reporting Standards Interpretation Committee (IFRIC) interpretations as endorsed by the European Union ("IFRS-EU"), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The accounting policies applied are consistent with those described in the annual report and financial statements for the 53 weeks ended 3 December 2017 of Ocado Group plc., with the exception of the early adoption of IFRS 15 "Revenue from Contracts with Customers" and "Clarifications to IFRS 15 Revenue from Contracts with Customers".

The financial information does not amount to full statutory accounts within the meaning of section 434 of the Companies Act 2006 and does not include all of the information and disclosures required for full annual financial statements. It should be read in conjunction with the Annual Report and Accounts of Ocado Group plc for the 52 weeks ended 2 December 2018 which was prepared in accordance with IFRS as adopted by the European Union and were filed with the Registrar of Companies. This report is available either on request from the Company's registered office or to download from www.ocadogroup.com. The auditor's report on these accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The financial statements are presented in pounds sterling, rounded to the nearest hundred thousand unless otherwise stated. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial asset investments and certain financial assets and liabilities, which are held at fair value.

The Directors considered it appropriate to adopt the going concern basis of accounting in preparing in the financial statements of the Group.

New standards, amendments and interpretations issued that are effective for the current year

In the current year, the Group has early adopted IFRS 15 "Revenue from Contracts with Customers" as several Ocado Solutions contracts were signed during the year which are impacted by the adoption of IFRS 15. The adoption has had a material impact on the disclosures and amounts reported in these financial statements. See note 1.3 for further information.

The Group has also considered the following new standards, interpretations and amendments to published standards that are effective for the Group for the financial year beginning 4 December 2017 and concluded that they are either not relevant to the Group or that they would not have a significant impact on the Group's financial statements other than disclosures:

New standards, amendments and interpretations not yet adopted by the Group

The following further new standards, interpretations and amendments to published standards and interpretations which are relevant to the Group have been issued but are not effective for the financial year beginning 4 December 2017 and have not been adopted early:

The following new standards are not yet effective and the impact on the Group is currently under review:

· IFRS 9 "Financial Instruments", published in July 2014, replaces the existing guidance in IAS 39 "Financial Instruments: Recognition and Measurement". IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. Our initial review of IFRS 9 has indicated that the impact of this new standard on the Groups' results is not anticipated to be material. 

· IFRS 16 "Leases" provides guidance on the classification, recognition and measurement of leases to help provide useful information to the users of financial statements. The main aim of this standard is to ensure all leases will be reflected on the Consolidated Balance Sheet, irrespective of substance over form. The new standard will replace IAS 17 "Leases" and is effective for annual periods beginning on or after 1 January 2019 unless adopted early. IFRS 16 is expected to have a significant impact on the amounts recognised in the Group's consolidated financial statements. On adoption of IFRS 16 the Group will recognise within the balance sheet a right of use asset and lease liability for all applicable leases. Within the income statement, rent expense will be replaced by depreciation and interest expense. This will result in a decrease in operating expenses and an increase in finance costs with no net impact. The standard will also impact a number of statutory measures such as operating profit, cash generated from operations and alternative performance measures, such as EBITDA*, that are used by the Group.

The Group's ongoing review of IFRS 16 indicates that the financial impact will result in an increase in finance leased assets of approximately £278 million, and a corresponding increase in financial liabilities of £297 million, on the Consolidated Balance Sheet based on the current portfolio at the year end.

1.3 Changes in Significant Accounting Policies

The accounting policies adopted are consistent with those of the previous financial year except for the early adoption of IFRS 15 "Revenue from Contracts with Customers" and "Clarifications to IFRS 15 Revenue from Contracts with Customers".

Initial adoption of IFRS 15 "Revenue from Contracts with Customers"

The standard has an effective date of 1 January 2018 but the Group has decided to early adopt this standard with a date of initial application to the Group of 4 December 2017 using the full retrospective method.

IFRS 15 replaces all existing revenue requirements in IFRS and applies to all revenue arising from contracts with customers unless the contracts are within the scope of other standards such as IAS 17 "Leases".

The standard outlines the principles that entities must apply to measure and recognise revenue with the core principle being that entities should recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for fulfilling its performance obligations to a customer.

The principles in IFRS 15 must be applied using the following 5 step model:

1. Identify the contract(s) with a customer;

2. Identify the performance obligations in the contract;

3. Determine the transaction price;

4. Allocate the transaction price to the performance obligations in the contract; and

5. Recognise revenue when or as the entity satisfies its performance obligations.

The standard requires entities to exercise considerable judgement taking into account all the relevant facts and circumstances when applying each step of this model to its contracts with customers. The standard also specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract, as well as requirements covering matters such as licences of intellectual property, warranties, principal versus agent assessment and options to acquire additional goods or services.

The Group has applied IFRS 15 fully retrospectively in accordance with paragraph C3 (a) of the standard, restating the prior period's comparatives and electing to use the following practical expedient:

· in respect of completed contracts that have variable consideration, the Group will use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative periods (para. C5(b));

Details of the change in the Group's accounting policy in respect of revenue recognition can be found in note 2.1 in the consolidated financial statements.

Consolidated Income Statement Restatement under IFRS 15

The Group early adopted IFRS 15 "Revenue from Contracts with Customers" (IFRS 15) using the full retrospective method. This note details the Group's new accounting policy for revenue and shows the impact of the adoption of IFRS 15 on the Group's primary financial statements.

Below is a description of the IFRS 15 impact on material areas requiring reclassification or restatement:

Recognition of Revenue:

Under the Group's previous accounting policy, revenue for certain contracts was recognised under the percentage of completion method based upon costs incurred to date as a proportion of the estimated full cost of completing the contract and applying the percentage to the total revenue expected to be earned. Such percentage of completion accounting would typically result in higher levels of revenue recognised in the earlier stages of a contract in line with the profile of costs incurred.

Under IFRS 15 revenue is recognised once, or as, a performance obligation is fulfilled. Typically, in an Ocado Solutions contract, revenue recognition would not commence until the date of "go-live". Previously revenue was typically recognised in the earlier development stages of a contract. This change has resulted in a reduction of £9.3 million in revenue recognised in the period to 3 December 2017. Under IFRS 15, revenue is now spread over the expected duration of the period the services are provided.

Consolidated Balance Sheet Restatement under IFRS 15

The cumulative effect of the adoption of IFRS 15 has resulted in a decrease in net assets of £23.1 million as at 3 December 2017 (28 November 2016: £13.8 million) and a corresponding decrease in retained earnings. This reflects an important change in accounting policy as the Group moves from percentage of completion to a methodology that is focused on aligning revenue recognition to the delivery of their performance obligation, as described in note 2.1 in the consolidated financial statements. The new policy results in lower levels of revenue being recognised in the early stages of a contract but higher levels towards the end of a contract.

The decrease in trade and other payables relates to the reclassification and restatement of deferred income as non-current and current contract liabilities. Prior to adoption of IFRS 15 deferred income was classified within 'Trade and other payables'.

The increase in property, plant and equipment relates to contributions received from a customer towards the cost of an asset. These are within the scope of IFRS 15 and are therefore recognised as contract liabilities and released over the life of the contract but were previously offset against the cost of the asset.

Consolidated Statement of Cash Flows Restatement under IFRS 15

As a result of the adoption of IFRS 15, certain reclassifications are required in relation to the cash flow movements between relevant balance sheet accounts. There has been no change in the net increase in cash and cash equivalents as a result of these reclassifications or the restatement of these balance sheet accounts.

Section 2 - Results for the year

2.1 Segmental Reporting

The Group's principal activities are grocery retailing and the development and monetisation of Intellectual Property ("IP") and technology used for the online retailing, logistics and distribution of grocery and consumer goods. The Group is not reliant on any major customer for 10% or more of its revenue.

In accordance with IFRS 8 "Operating Segments", an operating segment is defined as a business activity whose operating results are reviewed by the chief operating decision-maker ("CODM"), for which discrete information is available. Operating segments are reported in a manner consistent with the internal reporting provided to the CODM, as required by IFRS 8. The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Directors.

During the period, the Group determined it has two reportable segments: Retail and Solutions. The Retail segment provides online grocery and general merchandise offerings to customers within the UK. The Solutions segment provides end-to-end online retail solutions to corporate customers within and outside of the UK. In order to reconcile segment revenues* to the Group revenue and profit, a third category entitled "Other" shows unallocated costs such as central business activities.

The Board assesses the performance of all segments on the basis of EBITDA*. EBITDA* as reported internally by segment, is the key measure utilised in assessing the performance of operating segments within the Group.

The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are subject to normal commercial terms and market conditions. Segment results and assets include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

® 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

No measure of total assets and total liabilities are reported for each reportable segment, as such amounts are not regularly provided to the chief operating decision-maker.

2.2 Gross Sales*

A reconciliation of revenue to gross sales* is as follows:

2.3 Revenue from Contracts with Customers

Disaggregation of revenue from contracts with customers

Set out below is the disaggregation of the Group's revenue from contracts with customers:

® 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

Contract balances

Analysis of total contract liabilities:

® 2016 and 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

The contract liabilities primarily relate to the advance consideration received from customers for Solutions contracts, for which revenue is recognised as the performance obligation is satisfied.

Significant changes in the contract liabilities balance during the period is as follows:

Set out below is the amount of revenue recognised from:

® 2016 and 2017 restatement was due to the adoption of IFRS 15 during the year. Refer to note 1.3 for further details

The transaction price allocated to the remaining performance obligations (unsatisfied or partially unsatisfied) are as follows:

Total transaction price includes £1,736.3 million (2017: £1,827.2 million) in respect of potential revenues in relation to the recovery of costs that are expected to be incurred in existing Solutions contracts.

The amounts disclosed above in respect of unsatisfied and partially unsatisfied performance obligations do not include estimates of any amounts that will arise if the customer continues to receive services beyond our estimate of the contract term. In addition, they are reduced, during the contract term, so as to limit our estimate of future variable amounts to a conservative amount that is 'highly probable'. Please see the additional explanations in note 2.1 in the Annual Report and Accounts in respect of these key judgements. The figures disclosed do not include any incremental amounts in relation to CFCs and other solutions to which a customer is not yet committed. However, they do include any amounts that are payable by the customer irrespective of whether an option for future CFCs and other solutions is exercised (e.g. amounts that are equivalent to a non-refundable deposit).

Costs to obtain contracts

Management expects that the incremental costs of obtaining the contract i.e. sales bonus are recoverable. The Group has therefore capitalised them as costs to obtain contracts of £0.8 million as at 2 December 2018 (2017: £nil).

These capitalised costs will be amortised over the period of transferring goods or services to the customer.

2.4 Exceptional Items*

Litigation costs

The Group has incurred litigation costs relating to the recovery of interchange fees for card transactions. The fees relating to this are material and non-recurring and have therefore been treated as exceptional.

Head office relocation costs

In the prior period, the Group relocated its head office. The move to the new premises was completed in stages to minimise the impact on the business and the Group incurred dual running costs as it transitioned to the new premises. Due to the one-off nature of the head office move, these costs were treated as exceptional.

2.5 Loss Per Share

Basic loss per share is calculated by dividing the loss attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares held pursuant to the Group's JSOS, which are accounted for as treasury shares.

Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion or vesting of all dilutive potential shares. The Company has three classes of instruments that are potentially dilutive: share options, share interests held pursuant to the Group's Joint Share Ownership scheme and shares under the Group's staff incentive plans.

There was no difference in the weighted average number of shares used for the calculation of basic and diluted loss per share as the effect of all potentially dilutive shares was anti-dilutive. 

Basic loss and diluted loss per share have been calculated as follows:

Section 3 - Assets and liabilities

3.1 Intangible Assets