Deliveroo plc

Good morning and welcome to our interim results presentation for 23. I'm Will Hsu, founder and CEO of Deliveroo, and I'm joined this morning by Cilla Grimble, our CFO. All right, before we get started, I do want to take a big step back. I'm not a particularly retrospective person, but I'm going to give it a shot. It's been two and a half years since we went public. And what has changed with Deliveroo over that time? I think a huge amount. So let's get into it. It's also worth pointing out that we, Deliveroo, we have pioneered a lot of the food delivery industry. I'm very proud of what we've done there. We were the first to develop a subscription model. We were the first in delivery-only kitchens. We moved quickly to develop Hop. We started Hop as a service. There's countless other examples. Innovation and growth is at the heart of what we do. Perhaps the best example of this is grocery. We started this business from a standstill a few years ago. We grew this business through conscious, deliberate investments, dialing up harder when we felt growing confidence in the CVP as well as the unit economics, and we also invested heavily in the tech platform. Our grocery business is now over 10% of our GTV, and I see no reason why it can't be much bigger in the future. These investments have formed the bedrock of our business, and we're going to keep investing in areas that we're excited about. Because philosophically, this is what we do. But it's not just about new verticals. One of the values at Deliveroo is champion innovation, both big and small. We relentlessly think about how we can develop the core CVP through daily improvements in our technology platform. So let me give you some examples from the first half. Improvements in our ML models that drive our delivery network greatly enhance the reliability of deliveries, but also bolster our unit economics. We're going to talk about that later. Improvements in our self-service care capabilities means consumers can resolve issues themselves more seamlessly, and it also saves us money as well. Continual improvements in personalization outgoes means consumers are discovering brands and dishes they'd never considered before. And we know before they do that they will likely love these dishes. We're shipping product faster than ever. The cumulative creativity and impact of these daily incremental improvements is just as impressive and impactful as new verticals. And we are very proud of that everyday work. And so we continue to invest in, quote, unquote, our core proposition. The compounding impact of these small daily improvements is massive. It's the engine to growth across the industry and also market share gains. Now, in the last few years, the macro shocks have been huge. We've navigated a pandemic. We're navigating food inflation. We're navigating a tough consumer environment. It's always intense at work. Yet, we have seen good growth. And on top of that, we've made massive strides towards profitability. We have an adjusted EBITDA margin of over 1% of GTV in the first half. We reached positive adjusted EBITDA a year earlier than we guided to. And now, we're getting very close to cash flow break-even. So we're really proud of those accomplishments. We've also demonstrated strong capital discipline. We exited Spain, Australia, and the Netherlands to optimize our portfolio. And including the proposed return we announced this morning, we've announced 300 million pounds of capital returns to our shareholders in the last six months, in addition to the 75 million pounds in H2 last year. So I guess if I take a step back and I put it all together, we are fundamentally stronger than the company that went public in March 21. We're a much stronger and a more resilient company in an industry that I think is, quote, unquote, getting back to normal. Our CVP is better. Our tech platform is much more established. And the team is the best it's ever been. So here I am talking to you 30 months after the IPO. I'm excited about the future. I'm excited about our future plans. And I'm excited to come to work every single day. So we're going to talk more about these future plans at an investor event in November. But I wanted to take a step back and think back on the last 30 months and provide a little context for this presentation. All right, now on to the key takeaways for the first half. I just want to start by saying I am really pleased with the team's delivery. I want to thank the team. It's driven a solid top-line performance with profitability ahead of expectations. UKI orders returned to year-on-year growth in Q2. GTV growth also accelerated. This is a strong performance despite some pretty tough consumer headwinds. We also made great progress in our CVP. I'll talk about that later. International is varied by market. I'm very pleased with our continued leadership in Italy in improving performance in Hong Kong. France has had a tough market backdrop, but I'm confident in our ability to deliver progress here. I'm someone who focuses a lot on inputs and specifically on the CVP. And we have made great progress in the first half in our consumer experience pillar, specifically on making sure our consumers get the best service possible. We've accomplished a huge amount on service in the first half. I'm going to be excited to talk about that later. We also have a healthy balance sheet and we're well capitalized to go after growth opportunities ahead. We've made really good progress towards free cash flow break even. And although I think we have further to go in terms of sustainable cash flow generation, we now see this as the right time for us to assess our surplus cash position given all the progress we've made. I think we're well aligned with shareholders on what drives value creation, continuing to build on the compelling growth opportunity in front of us. But we are also disciplined. We're announcing a proposed further return of 250 million pounds, and Cilla is going to talk more about this. So with that, let me hand over to Cilla to talk through the financials.

Thanks, Will, and good morning, everyone. As Will said, we've made good further progress on profitability in H1, and against the difficult market backdrop, we delivered resilient top-line performance. GTV grew 3% or 1% in constant currency, with growth improving in Q2 compared to Q1. Revenue growth again outpaced GTV growth, up 5% year-on-year or 3% in constant currency. And this increase in revenue, alongside efficiencies in the rider network, meant gross profit grew 23% year-on-year. Adjusted EBITDA was £39 million, an improvement of £91 million year-on-year. This was ahead of expectations for H1 and a good sequential improvement on the £7 million we delivered in H2 last year. As we said with prelims, we remain conscious that adjusted EBITDA is not true profitability and we're focused on reaching this and delivering sustainable cash generation. Free cash flow, which is a reminder on our definition, is after exceptionals and before interest income, with an outflow of £28 million. That's an improvement of £141 million year on year. So significant progress on profitability and improving cash flow profile, albeit with further to go to get to sustainable free cash flow generation. And we ended the half with a strong net cash position of £948 million. Moving into more detail then and starting with our top line metrics. On the top left of the slide, you see the shape of our GTV growth in constant currency, which showed improvement in Q2 after a tougher Q1. GTV growth was particularly led by the UKI, with year-on-year growth of 6% and 8% in Q1 and Q2 respectively, despite consumer headwinds. In Q2, order volumes for the UKI business returned to growth and were up sequentially on Q1. We improved our CVP, particularly on service and selection, and improved our value perception. International allowed UKI, but showed improvement in GTV growth in Q2. The major market that weighed on international through the first half has been France. Looking at the chart on the right, you can see that excluding France, international would actually have returned to GTV growth in Q2. The biggest positive driver in international is Italy, which we talked about at prelims. Our business continues to develop very positively there, and we continue to see further opportunity. In our other larger markets, we saw nice growth in the UAE again, in Q2, and quite an improvement in Hong Kong, thanks both to easing COVID comps and our own actions there. But I also want to say a few words about France. The market here has been contracting for the last 18 months, driven first by a stronger unwind from the COVID peak than other markets, and more recently, the fact that the French consumer seems to be impacted a bit more by cost of living pressures. When you compare it with markets such as the UK and Italy, consumer confidence in France has not yet recovered this year as it has in other markets. And that's partly why our strategy in France for the second half includes not only continuing to improve our selection, especially in grocery, but also focusing even more on value for money. So not an easy market backdrop in France, but it's worth noting that our France GTV is still over double the size of pre-COVID levels. Turning now to look at revenue, revenue for the half was up 3% year-on-year in constant currency. That's 4% in Q1 and 2% in Q2. The UKI saw strong revenue growth of 10%, while international lagged for the reasons I mentioned earlier, namely the top-line weakness in France. We prioritised value for money for our consumers in both segments in light of the tough macro, by reinvesting some revenue into discounts and promotions to support demand. Looking to the right, our revenue take rate improved by 60 basis points year-on-year and was broadly stable sequentially on a half-year basis. The slight tail-off in Q2 was due to increases in promotions, which are taken as an offset to revenue, and also some mixed effects, such as driving pick-up in Hong Kong. Alongside the factors that drove GTV growth, revenue was boosted by our advertising business, which has reached an annualised run rate of £55 million in Q2. Moving on to gross profit, we've been pleased with the progress here, with a year-on-year increase of 23% to £365 million. As you can see from the bars on the left, we saw improvements in both geographic segments, which led to group gross profit margin expansion of 170 basis points year-on-year to 10.4%, and slightly above the 10.1% delivered in H222. This reflects the year-on-year increase in GTV per order, as you can see on the right, the revenue per order improvement that I talked about earlier, as well as efficiencies in the rider network. Despite the impacts of cost inflation in many of our markets, we managed to keep cost of sales per order broadly stable at about £4.50 compared to about £4.40 in H1-22. And in fact, when excluding FX impacts, the year-on-year increase is less than five pence. This management of the unit economics has clearly helped create leverage and margin expansion. Now onto marketing and overheads, where we reduced costs by 6% year on year to £326 million for the first half. Marketing costs were down 27% year on year to £94 million, reflecting the more targeted approach to marketing investments that we initiated in H2 last year, given the weaker consumer environment. We continue to focus on efficiency, although I do expect spend will tick up a bit in H2. Overhead costs increased year-on-year, but decreased sequentially, and it's worth spending a minute to talk through the dynamics over the last 12 to 18 months, which you can see on the right-hand table. If we start with salaries and wages of our employed staff, you see that they were up 15% year-on-year, but the increase essentially happened last year, before we began taking cost control measures in light of the weaker consumer environment. During H2 last year, we implemented a pause on hiring and stopped backfilling roles. And then in February, we initiated a redundancy programme that removed 9% of roles during H1. The in-year cost impact of the redundancy programme is limited given the wage inflation is running at about 6% in the UK at the moment. But we do expect the changes we made to deliver a permanent shift towards increased efficiency, reduced friction in organisational structures and increased speed of decision making. Outside of staff costs, we've been able to reduce other people costs pretty substantially in H1, earlier than originally expected. A large chunk of this has come from reducing our use of contractors. And we've also taken down non-people expenses by 13% sequentially, driven by areas such as IT expenses and professional fees. Overall, we've brought our overheads down 8% compared to H2 last year. We don't expect a substantial further decrease in H2, but these are decent first steps forward to drive operating leverage when top-line growth begins to accelerate. So all those components together meant we delivered adjusted EBITDA of 39 million in H1, a year-on-year improvement of 91 million pounds. This meant significant margin expansion of 260 basis points versus H1 last year, and about two-thirds of that came from gross margin and the rest from operating leverage. As I talked about on the last slide, some of this progress came earlier than anticipated as we landed some cost efficiencies earlier in the year than we'd originally expected. We've planned further investment into the CVP and HDU, and Will's going to talk about why this is so important for the business. Overall, I'm pleased with our progress on profitability, a step forward again. Turning now to look at our cash position, and we closed the half with net cash down about £50 million to £948 million. Looking at the key elements of cash flow then, and starting with adjusted EBITDA of £39 million, which as we've seen was a significant positive swing for our cash flow compared to prior periods. We spent £25 million on capital items, that was £20 million on capitalised development costs, and £5 million on capex, which reflects our discipline and roll-out of additions and hop sites in light of the macro environment. Working capital at reporting dates is, by its nature, a snapshot, and doesn't reflect what we see through the year, and intra-month, and intra-week even. For the first half, we had a small outflow from working capital. We also had an outflow of £9 million relating to leases and a £19 million outflow for exceptionals, which mainly related to market exit costs and legal settlement, but also includes £6 million for the redundancy programme. Excluding exceptionals, the underlying movement in free cash flow was minimal. Cash interest is next. We saw a 30 million inflow up year on year as expected, given the rate environment. Then finally, we have the cash outflow for share buybacks. 9 million of this relates to the completion of the 75 million programme announced last year, and 29 million relates to the 50 million pound buyback announced in March this year. So to round that off, good progress as we move towards our goal of reaching sustainable, positive cash flow generation. Turning to our guidance for the year, if I start with GTV growth, back in March we guided you to low to mid single digits percentage growth in constant currency for the full year and said we expected to see growth improve through the year. Today we're narrowing that range to lower single digit growth based on performance through H1 and into the start of H2 and consensus currently sits at about 3% so very much already in the range of our updated guidance. Turning to adjusted EBITDA, with prelims we guided to £20 to £50 million, weighted to H2. H1 EBITDA came in ahead of expectations, driven by the earlier realisation of some of our overhead efficiencies and a mixture of timing benefits and lower marketing spend. For H2, I already mentioned that we do not expect a material further decrease in overheads, and we do expect marketing spend to tick up a bit. We'll also be reinvesting in our CVP to keep controlling the levers we can, so further improvements to consumer experience, to service, to value and so on. And you'll hear more about this from Will in a few moments. So taking into account the first half performance and our plans for H2, we're upgrading our adjusted full-year EBITDA guidance to £60 to £80 million. Moving on to look at our capital position, our progress on profitability and cash generation has given us confidence that now is the right time to assess if the group has structurally surfaced cash. When assessing our balance sheet, we've considered our capital structure, our growth plans and operational requirements. Investing for future growth remains our priority, as Will mentioned earlier. We're excited by the number of potential growth opportunities ahead of us and want to preserve the financial flexibility to pursue these, of course with the right investment discipline. And we'll come back to these plans later in the year. As you all know, our industry is very dynamic, constantly innovating and is yet to reach a steady state. It remains highly competitive and we have several well-capitalised competitors. We have strong market positions and need to maintain financial flexibility to retain and grow these. Of course, in addition to growth, we also need funds for ongoing operational requirements and working capital. So those are all the things we've considered in strategic and operational capital. We've also considered headroom. Here we mean the need for financial flexibility for unforeseen events. And as you're aware, rider status remains under scrutiny in certain markets. At any given time, Deliveroo will be involved in regulatory and legal challenges and appeals, and we have recognised provisions or contingent liabilities as appropriate. As a reminder, our legal provisions increased £27 million in behalf to £156 million, quantifiable contingent liabilities were £14 million, and we have a disclosed range for other contingent liabilities of £50 to £200 million. And then we've considered the structural surplus, i.e. cash, which we think is not required in any reasonable scenario. For clarity, whilst we've made good progress on our path to profitability over the last 18 months, we're not yet generating consistent positive free cash flow, nor are we fully profitable. And as such, we haven't considered potential future cash flow generation as part of the current structurally surplus cash. Going forward, we will regularly review our capital position as we make further progress on our profitability and cash generation, and as the competitive, consumer and regulatory backdrop becomes clearer. Taking all of this into account, the Board's announced this morning a return of a further $250 million to shareholders. This brings us to a total of $300 million announced in 2023, or broadly a third of net cash at the start of the year. We'll be consulting shareholders on the appropriate mechanism for this return and would expect that consultation to be completed before the end of September. And with that, I'll hand you back over to Will to talk through our operational progress.

Thanks a lot, Cilla. Now I'm going to talk to you about our operational progress in the first half. So as I mentioned earlier, the thing I am most proud of in the first half is the progress we've made on our Consumer Value Proposition, or CVP. Our industry is early in its maturity. It's a super interesting market. It's a really big one, yet one where, let's face it, there are a lot of improvements that we could still all be making for the consumer, even 11 years on. And that's what motivates me, making sure that every single order is flawless, making sure we surface what consumers are looking for, and then figuring out the things consumers don't even know that they want yet. I've been doing this for 11 years now. I'm surprised at the complexity and opportunity every single day. Through relentless focus and consumer obsession and always putting ourselves in the shoes of the consumer, there are many growth opportunities in front of us. The team has done an incredible job on the CVP and H1. I think this is the fastest we've ever moved. We have a heightened sense of energy and vigor on consumer obsession. And continuing to develop our CVP is the key to our long-term success as a company. So on this slide, you can see the five pillars of our CVP and specifically the improvements we focused on in the first half of this year. We've made progress across all five, including progressing our brand refresh and improvements on availability. But I'm most excited to talk to you about the three pillars on the left, and I'm going to unpack these in the upcoming slides. So what is the consumer experience pillar? Well, it's a lot of different things. How was the search and discovery experience? How was the rider tracking page? How was the interaction with the rider? Bunch of different things, right? But specifically here, I'm going to focus on that delivery experience. This is everything that happens after the customer has placed the order. So questions such as how fast was the order? Were the timings accurate? Could the rider seamlessly find the customer? Did you get exactly what you ordered? Was it hot? When something went wrong, did we deal with it appropriately? We think of this as service with a capital S, a key part of our consumer experience pillar. So let's focus what we've done on service. Back in Jan, I asked the whole team at Affirmwide a very specific question. How many of you have had a negative order experience in the past year, and how did it make you feel? Of course I knew the answer, but I wanted everyone else to hear it. There's nothing worse than when something goes wrong with your order. Let's say you don't get your Fanta Zero Orange and you got a Diet Coke instead. Happened to me. Let's say your curry spilled. Your kids are screaming for dinner and it's not showed up or the milk is missing from your grocery order so you can't make your cappuccino. The number one reason for turnout in the industry or to competitors is when something goes wrong. And I actually think this is one of the top reasons the industry isn't bigger. You don't ever think about an Amazon package going wrong. Just expect it won't. And in food delivery, it's even more emotional. Maybe you've had a long day at work. Maybe you're having a treat. Maybe it's your Friday regular takeaway. Whatever the reason is, you want a flawless experience and we need to make sure that happens. I think we're pretty good at it, but I think we can always be better. And I actually see this as a huge point of differentiation and growth in our industry. So back in Jan, I challenged the team, every single one of them to play their part in improving things on this front. And I'm incredibly proud of what they've already accomplished in the first half. I'm really proud that we've significantly reduced the percentage of orders with missing items and orders received late. We've reduced orders not received at all by around 70%. We've also worked with our merchants to reduce order rejections or cancellations. And our customer satisfaction KPIs have improved greatly as well. All of these things lead to a happier customer and also a lower net cost to the business. And this also, and most importantly, this also has a compounding impact. This helps grow our max. It improves frequency. It improves retention and ultimately builds market-leading positions. Getting this right is a key aspect of industry growth and delivers growth. So I'm going to challenge the team further every day. They're listening to this call, so I'm going to challenge you to see if we can do better than the day before. And we can, and we will. All right, we're looking at the next slide. We're going to go over some other elements of the consumer experience pillar. We've made some really exciting progress on some new features in the app. Let's start with premium delivery. This is in the UK only right now. This allows consumers the ability to enjoy priority delivery at a small cost. It guarantees they're not going to be the second leg of a batched order. This is absolutely one of my favorite features on the app already. I think it's been live for a short amount of time. We've also introduced our top-up feature, our grocery top-up feature. Consumers can add grocery items to a restaurant order during checkout. So, for example, if you want a bottle of great wine at grocery prices to arrive with the pasta you've ordered or some cold beers with your burgers, the riders will bring you both of these things. And this has been a really great way of introducing restaurant consumers to the grocery offering. And it's not just beers and wine we're selling. It's also ready to eat meals and eggs for tomorrow's breakfast. We've been really pleasantly surprised by the basket sizes on these incremental orders. Finally, we wanted to bring customers closer to our partners through a richer in-app experience that I think will help drive discovery. So we introduced video content, which does exactly that. I get very excited and hungry when I see merchants telling their stories in our app. And ultimately, it's been sort of a dream of mine for a long time. I want merchants and consumers to share their stories about food and illuminate and bring this emotion to life in this really, really rich industry. And this is one major first step in doing so. All right, now we're gonna move on to selection. And we are continuing to enhance merchant supply across all of our markets. We want Delibro to be the number one choice for consumers everywhere. And we're working with over 182,000 restaurants and grocers globally now. We're always trying to improve this on a hyperlocal basis. um just a few things we've done in the first half we've expanded our radii in certain neighborhoods to give consumers a much greater selection of merchants within their reach some of you may see that in your app today the aim is to leverage our restaurant supply to deliver differentiated high quality selection to consumers increasing radio is also attractive for our merchants as it clearly lets them access more of our customer base and increase their volumes so But alongside increasing radii, our models will be increasingly aware about how certain cuisines and restaurants travel better than others. A chicken curry is plainly going to travel better than a Neapolitan pizza. And over time, we want to offer as much selection as possible to consumers, but at a very good service level. All right, now on to price value. Now, this is clearly more important than ever, as there's no question that inflation has hurt the demand side and also MPS scores across the industry. Things simply cost a lot more than they did two years ago, and prices have increased much faster than wages. Now, these trends have gotten a bit better. Maybe they stabilized a bit, but it's still a really big issue in the U.K. and Europe. So what did we do in the first half? We set up a team to tackle how we mitigate the impact of food inflation to support our consumers. This included setting up pricing incentives for our partners to encourage them to offer fair pricing and good value for money. But we've also been targeting promotions such as buy one, get one free or seven pounds off seven orders to give our consumers real value for money and to drive order frequency. And we're going to keep doing this in H2. We've also created carousels in our app that we think highlight really good deals for merchants, but also affordable menus such as burgers under 10 pounds, as well as an offers tile. We're also making consumers more aware of the great value they're getting on Deliveroo by improving the ways that our promotions are displayed in that, as well as bringing value options to greater prominence in our TV and digital and print media campaigns. I think this focus on value has been a really significant but also very useful undertaking. And now that we have started, I think, a really strong foundation, I'm excited about how we can get better in H2. Okay, now we're going to move on to advertising. I talked about this briefly in March. Basically, we've carried on making really good progress. Just to remind you, our advertising business gives restaurants and grocers the chance to advertise their products on our app. They can pay to appear in high visibility carousels or in search results. This creates incremental demand with a high proven return on spend. FMCG and other non-food companies can also advertise products. As you can see on the slide, we've got ITVX advertising in our rider tracking page. And they can also do this in virtual storefronts in the app. I think we're just at the beginning of this opportunity. It's very exciting. On the numbers themselves, in Q2, the advertising business reached an annualized run rate of 55 million pounds, or 80 basis points of GTV. We saw a very positive increase in our restaurant advertising partners, which shows obviously a very clear interest in this side of the business. The FMCG side of the opportunity is still very nascent for us. As I mentioned earlier, though, the thing I think about most is that consumer experience. And whilst ads is exciting, to me, the consumer experience is absolutely paramount. And we're going to make progress on ads, but in a measured way without impacting the overall experience. So in summary, we've made significant progress on profitability. We've had resilient top line growth despite market conditions, and our teams are working diligently to improve things in our control, such as the CVP. I'm super proud of the improvements we've made to our CVP, and I'm really, really happy with the team's performance on this. Thank you again, team. Particularly, I would say on consumer experience and what we've accomplished on service. The balance sheet is healthy, and whilst we are very focused on delivering future growth and having the flexibility to do that, we've recognized that we've had structurally surplus capital, and so we are planning to return a significant amount to shareholders, as Cilla talked about in detail. And let's take a step back. As I said at the start, I think the company is fundamentally a stronger company than we were when we went public. The CVP is stronger. The technology platform is stronger. We're shipping product faster than we ever have before. And the team is the best I've ever worked with. So overall, it's been a really positive first half. I'm really excited about the future, both our future as a company and the future of this growing industry. And so with that, let's open it for Q&A. Thank you.