Ocado Group PLC

LSE:OCDO

Earnings Call Transcript 2022-Q4

[Rick Haythornthwaite, Chairman]

Well, good morning everybody and welcome to Ocado’s Full Year Results for Financial Year 2022. As Tim said in his quote earlier, during the past year, every company has had its more tested by a combination of macroeconomic and geopolitical headwinds. If you look at our retail business, it’s had to deal with COVID unwind, accelerated by a once-in-a-generation consumer crisis, spending crisis, and all the while having to position ourselves for future growth.

And if you look at our Technology Solutions business is being asked to scale very rapidly for our partner clients to build CFCs in multiple geographies, to sign new contracts and all the while innovating at pace well ahead of the competition. And it’s had to achieve that in the face of incredibly challenging supply chains, high inflation and other macro pressures. But as you’ve got to hear, actually, the company has risen to the challenge, due in large part to the creativity and commitment of the Ocado people. I, along with the Board, share Tim’s sentiment that we have more belief in our model than ever before. And I once described Ocado as a cauldron of creativity. And I think it’s a phrase which is worth bearing in mind as you listen to this and you start thinking about the future of the company. It’s that culture of creativity that drives game-changing innovation that defines Ocado Re: Imagined. And that is already delivering for us and our partners in terms of lower OpEx, lower CapEx, better returns. It turns tech R&D into tangible investor returns and as you will also hear into opportunities beyond the grocery sector. So over the next 45 minutes, you’re going to hear from Tim, Stephen and others, who will give you a sense of how that’s going to play out over the next year and beyond. I hope you enjoy the session. I very much hope that you walk away as excited as I am about the possibilities of this company.

Tim, Stephen, over to you.

[Tim Steiner, Chief Executive Officer]

Rick, thank you, and welcome, everyone. A few thoughts from me before we go to the numbers. It’s been a challenging year, as we mentioned, for Ocado Retail, with baskets reflecting the COVID unwind and accelerated by the cost of living crisis. However, there are a lot of – there has been a lot of progress that I’d like to highlight. First is the rapid rollout of CFCs. We now have more international CFCs than we have here in the UK. We’ve built up dedicated client support teams that are now helping our partners achieve even more from their new CFCs. We’ve had new partner wins, and we exit the year and start the new year with a strong pipeline. Our early adopters are taking some time to absorb their early learnings as well as new optimization from Ocado Re: Imagined, the new opportunities from that.

And so we have a high conviction of future growth as those clients absorb their early learnings, take advantage and look at what we can bring with Ocado Re: Imagined to future facilities. The Ocado Re: Imagined benefits are now tangible and we can show a clear link between the technology R&D and our future financial returns and the financial returns of our clients, including our optimized site design. Our balance sheet has been strengthened, providing the capital for our future growth. And now we have the imminent launch of our new capital-light highly efficient automated fulfillment solution for use outside of e-commerce grocery.

Before talking about some of these topics in more detail, I’m going to ask Stephen to take you through the FY ‘22 numbers.

[Stephen Daintith, Chief Financial Officer]

Thank you, Tim, and morning, everybody. Okay, a lot of materials to get through, so I’ll probably move it at a reasonable pace. Next slide, please. So the agenda for the next 15, 20 minutes or so, take you through the numbers. First of all, the current reported segments, you’ll see these for the last time. And then the pro forma new segments that we talked about, we trialed on a couple of occasions last year at our accounting seminar and cash flow seminar in May and November. There is the new segments, Ocado Retail, no change there. UK Logistics, just a straightforward logistics business and then Technology Solutions combining the UK and international side of the Solutions business. Next slide, please.

Next slide. Okay. So here are the results. Revenue, £2.5 billion, slightly up on last year’s number, but a couple of things going on within that revenue number. First of all, Ocado Retail, down 4%, you heard about this number at the Q4 trading update that we gave you a few weeks back, strong customer growth coming through but offset by smaller shopping baskets primarily due to the COVID comparables, but also the pandemic – sorry, also the impact of inflation on the consumer in the UK, strong growth in our Solutions revenue, reflecting ongoing rollout of OSP for our partners. International Solutions grew by 122% with 12 CFCs live now at year-end. UK Solutions and Logistics grew by 13% and a growing solutions fee revenue within that number, reflecting continued capacity rollout for the UK partners and then the cost recharges up in logistics despite lower volumes impacted by that high inflation.

There was an EBITDA loss of £74 million, largely driven that decline year-on-year by the decline in Ocado Retail and a loss before tax, reflecting that EBITDA performance, but also with an elevated level of depreciation as our capital base continues to grow as we invest in CFCs around the world. Just reinforcing Tim’s point, healthy liquidity of £1.6 billion that follows the June equity raise and the undrawn revolving credit facility of £300 million. So we’ve got healthy liquidity to support our ambitious growth plans and to meet our cash needs for the years ahead until we turn cash flow positive. Next slide.

Here is how the numbers map from on the left-hand side, the old now reporting segments to the new segments on the right. Revenue of the £2,514 million is now allocated across those three businesses. And similarly, EBITDA on the bottom right-hand corner there. I am now going to provide commentary on the fiscal ‘22 results on these new segments. And I’m going to give guidance for fiscal ‘23 on the new segments as well. I think you’ll find that helpful. Next slide, please.

Moving on to Ocado Retail. Next slide. Part of retail, 3.8% revenue decline. I’ve gone through some of the dynamics there. We’re going to see the numbers in a second, but there’s an improving trend in Ocado Retail. You saw that in the second half of last year. We’re seeing that in the early months of this year as well. That’s an encouraging trend of growth, revenue growth on the back of that customer order growth that we’re focusing on right now – sorry, customer growth, we’re focusing on right now to fill that capacity that we have that surplus. We’re outperforming in the market in the bigger online channel with a share of online improving to 12% – just over 12% from 11.7% previously. The UK online share stabilizing around 11% at the moment and EBITDA of a small loss of £4 million reflects those current cost pressures. We are going to see the breakdown of that in a subsequent slide.

Next slide, please. But here are those revenue dynamics that I mentioned. Strong growth in active customers, up 13% to 940,000, driving that growth in average orders per week, but at the same time, the smaller shopping basket, 46 items on average in the year compared to 52 the previous year, selling price, though, up 4.5%. Our sales prices remain at industry loans compared to pretty chunky sales price increases in the rest of the grocery sector supporting that drive for customer growth.

Next slide, please. And here are the three key drivers of the margin pressure that we’ve seen during fiscal ‘22. You’ll be familiar with these. Number one, the operating leverage, the fact that we have capacity available to 600,000 orders per week, just over 600,000, it loosen going live in the second half of the year, that will push us to around 700,000 orders per week. At the moment, we’re doing around 400,000 orders per week. The cost of that surplus capacity, the fixed cost of opening and running and maintaining the minimum fixed cost for our customer fulfillment center represents 35% of the margin pressure, the gap between where we are today and the mid-single digit EBITDA margin. 25% of that pressure is due to marketing spend, but sensible marketing spend to drive customer acquisition, grow those orders, fill that capacity, which also, therefore, addresses the operating leverage point.

And then finally, the cost of inflation, the energy costs that we’ve all seen or heard about in electricity, in diesel, dry ice for us as well, all of those in their own way are getting back to more normal levels of pricing and costing, again, so that we expect that to wash out in time. The part to improvement there is in the little box on the right-hand side, and I’ve pretty much talked around all of those key dynamics, which give us that confidence to that high mid-single digit EBITDA margin in the near term. It’s going to be quite a journey. There’s a lot of capacity to fill. There’s a very clear road map there. And I think the strongest signal of delivery around this is the growing customer numbers continue to grow at a very healthy pace.

Next slide, please. UK Logistics. UK Logistics, a relatively simple business. It’s a cost pass-through business. We passed through all the cost to either Ocado Retail or to Morrisons, there’s a management fee of around 4%. The goal here really is to bring down this cost base and bring down revenues, but still grow our volumes because that’s been a more efficient operation for our two customers. Revenue actually grew by 10.8% despite the decline in volumes through our logistics business, driven by that high-cost inflation that I talked about earlier, that’s affecting Ocado Retail, okay?

The EBITDA number, I should have mentioned, by the way, there’s a bit of noise in the P&L account in the capital recharges. Above the line are the shared sites, the cost of the capital recharges for shared sites, that’s Dordon and Erith. And then below the line is the capital recharges for the exclusive to ORL sites. And in particular, that’s Andover and Bristol that are now shown below the line as income rather than above the line, which explains this £5 million decline in EBITDA. When you wash those things through, it’s neutral economics on capital recharges, really important point to make.

Next slide, please. Technology Solutions. Technology Solutions revenue grew by 59%. Revenue is now at £291 million in fiscal ‘22. As you all have read, we’re guiding today for that revenue to grow by over 40% in fiscal ‘23. Key point here, £264 million of that £291 million are recurring fees for installed live modules. The balance is made up of the release to the profit and loss account of previous cash receipts from customers in respect of the setup costs when they’ve joined the relationship on the Ocado Smart Platform and their contribution towards capital expenditure that we incur as well. That goes on the balance sheet on day 1, it gets released to the profit loss account over time and that makes up the difference between the £264 million and the £291 million, EBITDA of £72 million losses, a £9 million improvement on fiscal ‘21. We’re going to see shortly that’s a very attractive and improving contribution margin from those revenues that will only grow further as direct operating costs come down and fee rates go up as we deliver the Re: Imagined products.

Technology and group support costs are that deduction from that contribution margin £252 million, a pretty chunky increase versus fiscal ‘21. Ongoing developments and investments in technology, Re: Imagined as a key driver of that and the delivery of those during fiscal ‘22, ‘23 and beyond and then in group support costs, investment to bring our processes and our systems up to date where they should be. We put in our [indiscernible] last year for finance we have extended that into MRP. We put in a new treasury banking system. Around the group we’re investing in systems and processes to modernize Ocado to get it ready for that global world that it will be operating within. Next slide, please.

On the left hand side here, we show the evolution of live modules around the world. The green shaded is the UK, international is in blue. 99 live modules now at the end of fiscal ‘22. Why our module is important? When modules go live, they start generating those recurring fees for our Solutions business. So that’s a really important growing number for us. The split there is on the fiscal ‘22. That’s 38 International, 61 UK. Then on the right-hand side is the mix of modules that are on the Ocado Smart Platform over 71%. Why is that important? That’s important because modules on OSP deliver far greater productivity than those on our older legacy sites. That productivity justifies a higher fee rate which again drives the revenue for our Solutions business. So a really important and improving mix. Pretty important strapline here as a cure and visible recurring revenue base that’s building rapidly. We don’t have to start every year from a 0 position. We have locked in recurring fees dependable, reliable and growing.

Next slide, please. The contribution margin, a reference that just a little while ago, improving from 56% to 63%, again, that will only improve further. Key trajectory here, the direct operating costs. These are the largely the cost of the engineering support on-site at the CFC, the Ocado engineering support and then the cloud costs to run and maintain the OSP platform for our partner sites, improving from 2.7% of sales in ‘21 to 2% in fiscal ‘22, giving us really good confidence around that 1.5% that we’ve guided to for where we think we can take this to. The more we understand this space, the more we learn about it, the more we might be ready shortly to be even more ambitious on that particular target, again, driving an improvement in contribution margin.

Next slide. Group support costs. This will be a key focus for us over the next 2, 3 years. £89 million in fiscal ‘21, there’s investments that I talked about getting to fiscal ‘22, £122 million. What we’re doing with our group support costs as well. And this is important to take into account and include in all your numbers and your modeling, we’re now presenting Technology Solutions on a fully costed basis. We’re transferring from the previous technology cash spend, group IT, laptops, service and so on. And then the Infosec teams, the cybersecurity teams over into group support costs. That’s £26 million of the £344 million that you saw back in November and May for technology spend.

We are also taking on board the group and other costs. That’s the cost of the Board, not just the non-exec directors, but the executive directors as well and things like share-based payment schemes are also included within that number. And then we are addressing these. You will have seen a couple of initiatives that we took. Well, first of all, back in October last year and then in January of this year, some headcount reductions that we announced around £250 million in total across a variety of areas in the group largely in...

[Tim Steiner, Chief Executive Officer]

People.

[Stephen Daintith, Chief Financial Officer]

Sorry?

[Tim Steiner, Chief Executive Officer]

250 people.

[Stephen Daintith, Chief Financial Officer]

People, sorry. And that will deliver around £15 million of savings to impact the fiscal ‘22 cost base. The goal here is to get these fully costed group costs down to around £130 million by the midterm, which is consistent with that guidance that we gave in last year around group support costs. Much to do in this space, but we can see the route ahead.

Next slide. So continued investments in technology spend, I mentioned around the Re: Imagined innovations that we’re delivering and if not ready for market, getting ready for market, £344 million of cash spend, 40% of that goes through the profit and loss account and 60% is capitalized on our balance sheet. The cost base for fiscal 2023 will reflect the new segmental cost allocations. So we’re now building from a fiscal ‘22 pro forma of 318 – £308 million, that’s 26 – that £36 million reduction from the previous number that I just referenced. We continue to target £200 million technology cash spend to run OSP in the mid-term, but of course, qualifying that should a new exciting opportunity come along, then we should be ready to invest in that where we see value creation opportunities. Next slide, please.

So when we look at the new segments on a fully costed basis, you can see there on the left-hand side, the fiscal ‘22 pro forma May seminar, new segments, Technology Solutions and then the midterm guidance. So midterm guidance for Technology Solutions, we’re looking at revenue gross of £1.1 billion. Looking at the contribution on that revenue of over £750 million, central costs at around £200 million, that’s stable in real terms on fiscal ‘21 costs, and we’ve broken down on the right-hand side how that works. That’s our guidance for the midterm. The following CapEx commentary that’s about to follow, we’re presenting that on a basis that’s consistent with the fully costed – cost base I’ve just outlined here, and it’s also outlined with the November ‘22 cash flow seminar. Next slide, please.

CFC CapEx and technology investment, they’re broken down here on the left-hand side of our fiscal ‘22 column, £449 million of CFCs and technology, fulfilment development and innovation spend of £228 million. On the CFCs, about £100 million of that is in relation to the UK. The balance is in respect of international sites. And we’re going to see shortly a breakdown of that and the drivers of the phasing of that spend. What else? I think that slide pretty much speaks for itself. Again, just to reinforce the point that we made this at the cash flow seminar in November, we’re targeting this spend to deliver a return on capital employed in excess of 40%.

Next slide, please. Trying to show on this slide how to put more detail around the CapEx spend of £449 million across both UK and international CFCs in fiscal ‘22. This slide on the left here shows the activity of the CapEx, the CapEx was deployed in terms of the CFCs, 21 CFCs where capital was spent in fiscal ‘22. Year 2 is the year of go live. Year one, is the year of go live 1 year before go live. The key point here is a big chunk of spend in respect of year of go live and the year after that and the year before that. We break down then the cost of £449 million that way. So you can see the front phasing of our CapEx, 41% in the year of go live, 32% in the year before and a particularly elevated level of 17% earlier than that during fiscal ‘22. Now I would like to regard that as a unique set of circumstances driving that high level of spend so far ahead of go live.

The explanation here on the right-hand side is an attempt to summarize what that was all about. Supply chain challenges, mitigating those supply chain challenges and building up stock levels to deliver those CFCs on time as required by our clients. The maturity of our purchasing programs, another process we just played in place and formalized is sales and operations planning. Again, the MRP material requirement planning platform in Oracle enables that. Again, that will help our procurement planning. We’re carrying pretty large durations, and I’ve referenced this, I think, at the November cash flow seminar of inventory today kit for our CFCs. And 50% of other spend includes the upfront purchase of MHE to be deployed to future sites. So an important part of detail, I think, to explain that elevated CapEx number, but also provides confidence around the CapEx number for fiscal ‘23 that we’re guiding of £250 million lower than the fiscal ‘22 number. Of course, it is important to our cash flow trajectory.

Next slide, the guidance of fiscal ‘23. Here is the fiscal ‘22 numbers on the pro forma new segment basis, and we’re going to build the guidance of this.

Next slide. Revenue. Technology Solutions around 40%. OSP fee revenue growth, again, driven by those growing live modules. Ocado Retail, mid single-digit growth and as talked about that at the Q4 trading update and I am sure we’ll be talking a bit more about it a little later on. UK Logistics broadly stable. EBITDA, positive EBITDA. That’s pre those group and other costs of around £20 million or so, positive EBITDA. Group and other costs stable, there’s at £25 million. Ocado Retail, marginally positive EBITDA. Again, the phasing of our EBITDA, a really important point will be very much second half weighted rather than first half weighted. And then UK Logistics EBITDA stable at around £25 million.

Next slide. Cash flow to improve by around £200 million to improve from what to improve from an £800 million underlying cash outflow in fiscal ‘22. So £600 million underlying cash flow expected for fiscal ‘23 driven by those increasing fees, inflows in Technology Solutions, growing modules number, we’ll grow those cash inflows. And then at the same time, we’ve got the outflows reducing. We’ve got a small number of sites going live next year versus this year. When you think about that phasing as well and the impact of that, capital expenditure, a total of almost £550 million, a reduction of at least £250 million versus fiscal ‘22. I’ve explained there, the key drivers of those dynamics resulting in that smaller capital expenditure number. Okay. A lot to get through there.

Thank you for your time, and I’m going to hand over to Tim.

[Tim Steiner, Chief Executive Officer]

Thanks, Stephen. So, one of the big questions post-COVID, which is fundamental to the Ocado equity story is the scale and the velocity of the channel shift from bricks and mortar to online. To discuss what we’re seeing here in the UK, let me invite the CEO of Ocado Retail, Hannah Gibson to stage. Hannah, so tell us, what are you seeing?

[Hannah Gibson, Chief Executive Officer, Ocado Retail]

Well, if we take back and think pre-COVID, the online share of the market was at about 6%. And obviously, during COVID, we saw that peak to over 15%. Obviously, as people start to get out about more as we return to some level of normality, we’ve seen that drop down from the peak. But actually, we’re now seeing that stabilize at about 11% share of sales. Obviously, in the UK, we’ve got a – Stephen mentioned this earlier, cost of living crisis. We’re also seeing the normalization of COVID behavior. So as Stephen mentioned earlier that a slight reduction of COVID – the peak of COVID baskets. And obviously, that means we’re seeing some headwinds in terms of the volume of our existing customer base.

Now that said, we are seeing growth in new customers. We saw our customer base up 13% last year. We saw our online share of market grow by 60 basis points. And we’ve got this kind of dual effect going on, where we’ve got that growth coming through from new customers, but some of that being masked by the headwinds from the existing customer base. But like many others, we are seeing a normalization at 11%. But absolutely, we’re expecting that growth to kind of go from there once we’ve seen these headwinds play out over the course of the year. And I think that’s what we’re seeing in the UK, you’ve presumably got a broader picture from an international perspective as well.

[Tim Steiner, Chief Executive Officer]

Yes. Internationally, our clients are seeing something fairly similar. Some markets didn’t peak as much, and therefore, they’ve not come down. Some markets also saw huge surges in peaks, and they’ve come back down and now seeing underlying customer growth. And all our clients are seeing good growth, but from a lower base than the peak of COVID. So I think it’s a similar story around the world. Hannah, why are you confident that you can take an outsized share of this growing market?

[Hannah Gibson, Chief Executive Officer, Ocado Retail]

I always think that we’ve always focused on raising the bar for what a great experience online grocery looks like and the improvements we can make to make sure we’ve got a fantastic customer proposition. We’ve seen and we’ve talked about for years, we’ve got some of the best customer NPS scores in industry, just a couple of weeks ago, we have the latest tables come out, which show once again, we are talking about the league tables when it comes to proposition. And we see that play out in our numbers as well. So our loyalty numbers are the highest in the market, too.

Now what’s interesting is I think the customer base we’re now talking about to go after is somewhat different to pre-COVID. Pre-COVID, we had early adopters of online. And actually, if you look at the broader base of who’s shopping online now, we see 3/4 of households have now shopped online. And the majority of those have actually shopped online at some point in the last 3 months. And we’ve always thought we’ve got a great opportunity to switch those from other retailers on Ocado because of the better proposition. And now there is a larger base of those individuals to go after. But actually, I think the more exciting is then say, well, how do we get the proposition to be better so that we’re not just talking about switching people from other online but also getting people to switch from offline to online. So we think about the proposition, especially in the current climate, focused on value is incredibly important.

Today, we are actually announcing our Ocado Price Promise where we are matching the price of your life like shopping in the Tesco. I think about choice, freshness. We need to get back and really focus on that, both what we can offer for M&S, those small unique brands that can really kind of attract different customers to Ocado. And then when it comes to service, we’ve had some of the best, I believe we’ve got the better fulfillment rate, on-time service in the industry, but that’s just where we are today. And actually, if I think about the operating model we’re on, the dynamic nature of the CFCs, I think there’s a huge amount of improvement that we can do to that customer proposition going forward. So I’d like to think of it not just how can we generate a share of the market, but actually how can we drive online growth and with that, obviously, we’ll generate share as well.

[Tim Steiner, Chief Executive Officer]

And obviously, all these innovations that are coming with Re: Imagined that will help that. And those, the innovation, the technology and all the advantages that you have at Ocado Retail are what we’re bringing to our clients globally for them to also see market share in their own markets. Stephen, I bring you back into the comment.

So with the channel shift starting to build again from a higher base, what kind of growth are we seeing in the Technology Solutions business?

[Stephen Daintith, Chief Financial Officer]

Yes. Well, I think we’ve seen – and I’ve really just talked about quite a few of these just now. some really good performance measures that are coming out in the OSP and how it’s working for our clients. We’ve got 12 sites going live. We’re going to have a 20, 23 now total live sites and increasingly now, we’ve got more international sites than UK sites. That module growth, that 62% module growth is really important at live module growth. That – each life module drives revenues and a very attractive contribution margin attached to it. So that’s a really encouraging number for us. I think increasing number of go-lives is going to help there as well, but also our ongoing client success as they ramp up in their CFCs will drive even more growth in live modules. And then optimizing the OSP economics is really important. I think we’ve been delighted at the progress we’ve made here. And as I’ve mentioned a little while ago, we think we can get much better than this even. So it’s – we have a very attractive operation with very attractive economics. And now it’s our job to get them out there and to help our buyers deliver the best of those CFCs.

So Tim, there is a lot of talk in the market about the time that some of our partners are taking making orders for more capacity. So how would you describe what’s going on? And what implications does it have for the business?

[Tim Steiner, Chief Executive Officer]

Yes, Stephen, look, a number of our partners are focused on ramping up the capacity that they’ve already drawn down. And working out in these first sites, how to optimize the economics in a way that Ocado Retail and the Ocado Logistics do very well in the sites here in the UK. And then they want to get to that level of efficiency and retail is always at a cost domination business. And it’s great to have an amazing machine. And all the sites that we’ve launched globally are hitting all their SLAs, all the machinery is working phenomenally well. They can all hit their sales capacities, et cetera. But some of the – this is quite new to some of our clients. And so they are having to kind of get used to how to operate them and how to have the right amount of labor at the right amount of time and how to use the UX to drive customers into the right parts of the day and days of the week, how to be efficient with their marketing and stuff like that. So they are really focused on optimizing this new business for them, ramping up the capacity, improving the economics.

And then I think they will then look at deploying the next step of capital for accelerated future growth. I think this is a fairly normal part of the investment cycle and to be expected when somebody does something as new as this as it is for some of our clients. For some it’s kind of newer and more different in that market than it is for others. So you look at markets around the world, some are – when you look, we’re launching this in Australia, for example, our Australia market works very similar to the UK. Ocado is different in terms of the automated fulfillment, but the delivery side looks very similar, automated or from stores. You look at the U.S. as an example, and it’s much more dramatic the difference because the U.S. market built up on Instacart kind of crowd source, groceries being delivered in the back of someone’s car just up to another person’s house. So I think that they’re all learning.

And what we’ve done is we have lent into this year with our enhanced partner success, our operating model, where we’ve created global teams of excellence in marketing, in UX and web in warehouse operations, in routing operations, in network planning, et cetera, and we’re deploying now our regional teams to leverage that global center of excellence on behalf of each of our clients. And what you can already see in it is how clients want to draw on that in different ways. So some want to draw on the customer acquisition side, others are drawing more on the operational labor planning and stuff like that. But we’re deploying people all over the world with our partners to help them optimize and get the best economics out of these amazing sites that they’ve got.

We are expecting an increase in new site orders in ‘23, also benefiting on the fact that the new sites have got optimized site design and Ocado Re: Imagined in them. And of course, from a cash flow perspective, the moderation of new modules going live in financial year ‘23 is one of the reasons as well as the improvements in operating costs and increases in revenue, but you’re talking about lower net outflows, obviously, partly that’s lower CapEx in the year.

[Stephen Daintith, Chief Financial Officer]

Yes. Thanks, Tim. Now just taking us back to Re: Imagined for a moment. How is Re: Imagined playing out into conversations with potential new partners? So once we having today, but how about Lotte when we were agreeing that deal with them, how they Re: Imagined payer? What – did they raise it much? Did they – was it focus for that.

[Tim Steiner, Chief Executive Officer]

Everybody has been very interested in Re: Imagined that what it delivers for us. But to answer the question, actually, I’ll invite James to come and join us on a sofa. James Matthews, CEO of Ocado Technology. And let’s ask him some questions. So James bring us up to date. Welcome. Bring us up to date on the benefits of Ocado Re: Imagined. And then I’ll talk after that, Stephen, to the – what impact it’s had on a new partner signing.

[James Matthews, Chief Executive Officer, Ocado Technology]

Thank you, Tim. So 2022 was definitely a busy year in our program of bringing Ocado Re: Imagined to life. Every program here is well advanced. And I think it’s worth me highlighting this was in the annual report, some of these products are starting to go live. So on grid robotic pick automated frame load. Each of those is now live in a real CFC, picking and frame loading real client – new customer orders. And we’re starting to get the early data from them that will help improvements on the rollout. There’s a lot of detail on the slide behind this. I think the broader point is, is that this whole portfolio is available to order indeed is being ordered. And a CFC that goes live that was ordered in 2022 will go live with an expected productivity of 300 units per person hour in that building, well ahead of the already impressive 220 that we’re achieving in our pre-Re: Imagined CFCs.

And what’s more, that more productive CFC will be 20% smaller than it would have been for Re: Imagined, thanks to Re: Imagined and our optimize site design. And that in turn has knock on effects on reduced CapEx for our partners reduce these costs for our partners. The last point I’ll make is that on top of the economic, it’s also about flexibility. These innovations provide options for smaller sites, for older sites, for different configurations. They enable our partners to configure their business to offer more flexible services to their customers. So it’s not just the pound note. It’s also about the flexibility for the plant.

[Tim Steiner, Chief Executive Officer]

Thanks, James. Look, I think it’s just worth highlighting to everybody. Obviously, the savings in terms of smaller buildings are directly for our clients. Obviously, the enhancement that James is talking about the 220 to over 300 units of productivity an hour allows our clients to remove one-third of the people that they need to operate a warehouse at any given volume. And we are passing on the majority of the economic benefits to our partners, the majority of the Re: Imagined benefits, enhancing their ability to take share in the online channel in their respective markets, whilst also enjoying a slightly higher fee, as Stephen have mentioned earlier, that will translate to better operating margins. And this increasing attractiveness of OSP has also played an important role in new partner signings this year, bringing on Lotte in Korea and also bringing on Auchan Polska in Poland. And we have the largest team that we’ve ever had in terms of talking to new clients, and they are extremely busy with a strong pipeline of conversations ongoing. With Ocado Re: Imagined, we can see a clear link between the technology, R&D and our return on capital and James, when we think about the business momentum, what we are seeing tech R&D drive faster growth and higher returns. Can you talk a bit more about that?

[James Matthews, Chief Executive Officer, Ocado Technology]

Yes. So the analysis that we have on the screen behind us, I’m just going to run us through that. This is a broad brush look at where the £300 million we are spending on R&D right now, where it is going. On the right-hand side, we’ve got 3 categories of must do. We’ve got our legacy platform Auchan that is still supporting Ocado Retail and Morrisons, although both of those retailers now have customers live on OSP, those migrations are underway. It’s on about £30 million on that. We have a range of enhancements that we have to make as we launch new partners around the world in new territories or tax reasons, for regulatory reasons, alcohol regulations to get people live. And then lastly, and importantly, an element of spend on the platform health, security, patching, maintenance, making sure that we continue to hit all of our SLAs with about 30% of our spend. The more exciting 70% is all going into enhancing the platform in a number of important ways, very importantly, making the platform better for our partners, customers, so better e-com interfaces, better supply chain performance, more personalization better last mile delivery options. So it’s up to £60 million going into that. A large amount of investment in reimagine primarily that is, as you pointed out, primarily aimed at improving our partner economics.

And last but not least, at amount of investment that directly affects our economics. And it affects our economics in 3 ways, is reducing the capital that we need to deploy CFC. It is pushing our fees up from 5% of client capacity up towards 5.5%. And also, it’s going to – as Stephen says, we have an increasing amount of confidence about our 1.5% client capacity direct operating costs. I want to get us there as quick as we can. And my personal view is that we should punch through that and had from 1.5% more towards the 1%, not an official forecast. So that’s my ambition in that space. And if you take those 3 areas, where we are improving our economics that results in the north of 70% contribution margin and north of 40% ROCE on our investment into those CFCs.

[Tim Steiner, Chief Executive Officer]

And the £300 million expected spend in FY ‘23, where do you see it trending to? And why?

[James Matthews, Chief Executive Officer, Ocado Technology]

As Stephen pointed out earlier, for our online grocery platform I see that trending to the £200 million mark in the medium term. There’s a number of obvious savings and efficiencies. I mentioned Auchan earlier as we complete that transition, that’s an area we won’t need to spend in. And as our platform becomes more mature, as more configuration options, there’s more that you can do out of the box. There’s a number of areas where we can reduce spend. It’s worth pointing out that this spend will be spread across an increasing amount of partners. So per partner spend is going to come down even more significantly. And there’s 2 last, I think, important points I want to make is one of all of the technology, the intellectual property we’ve built over the years, my estimate is about 70% of it is broadly reusable outside of the grocery e-commerce context. And what’s more because in a logistics context, grocery is normally the harder problem to solve, it should account for the majority of the need in another context as we look to play that out there.

[Tim Steiner, Chief Executive Officer]

When you say the majority, James, you mean tens of percent, 20% or 50%?

[James Matthews, Chief Executive Officer, Ocado Technology]

90%.

[Tim Steiner, Chief Executive Officer]

90% plus.

[James Matthews, Chief Executive Officer, Ocado Technology]

As you go into new markets, some enhancement will be needed, but really the vast majority should be taken care of by the intellectual property that we’ve already built.

[Tim Steiner, Chief Executive Officer]

Brilliant. Thanks, James. You make the important point about how 70% of our investment already can be applied outside of the activities of the grocery sector. My last guess, Mark Richardson, the CEO of our new capital-light non-grocery business. Mark, please join us. Thanks. And why don’t you tell us about the market opportunity for this new business?

[Mark Richardson, Chief Operating Officer]

Right. So well, you know as well as I, actually, the MHE and the systems that we’ve built over the last two decades are highly evolved now. They’re brought up in the world of grocery e-commerce with all the complexity of multiple temperature zones, massive eaches throughput and the relentless focus on productivity that, that entails. And it’s a tough test for logistics solutions. And as a result, our solution is properly battle and with capabilities that are appropriate far outside of grocery retail. And so if you’re an organization that needs to store, sort and ship products then Ocado Re: Imagined is a new space efficient, high productivity and very high throughput option. And the market of people who want to do that is very big, and we are confident we can address a large part of it.

[Tim Steiner, Chief Executive Officer]

Mark, from a practical perspective, what do you think the business will look like?

[Mark Richardson, Chief Operating Officer]

So we are expecting to run a capital-light model where our customers purchase the solution rather than license it and where Ocado realizes its margin in the year of go live. In addition, we’re looking to leverage largely R&D already done in the grocery business or already planned to be done in the grocery business. And that means that we don’t expect the new venture to require capital over and above that, that we’ve already guided at group level.

[Tim Steiner, Chief Executive Officer]

So Mark, finally, I guess the question that’s on everybody in the room’s lips is how are your conversations with potential clients going?

[Mark Richardson, Chief Operating Officer]

Right. Well, it’s becoming increasingly apparent that Ocado has something quite unique to offer to potential customers. We not only design, build and code our solutions. But we also deploy them in our own operation here at large scale in the UK, and we operate them. And that gives us an unusually detailed and practical view of how to get the best out of them and how to help a client or a customer get a real world benefit from the MHE that they bought. So partly as a result of that, we are already in detailed conversations with a number of large organizations around the world. And we’re working towards installations of various sizes in a number of different industries. And so it’s worth saying that all of that activity is currently being generated just from inbound contacts because we haven’t started to market our solution yet, that will begin later this year, and it will pick up speed next year when we start to take the equipment to the world’s biggest trade shows. And I suppose the last thing I should say on the subject is we do expect to sign our first deals this year, and we expect meaningful revenues to start to flow in 2025.

[Tim Steiner, Chief Executive Officer]

Mark, thank you very much. We also look forward to hearing more about those signings as and when they occur and thanks everybody for being a part of the FY ‘22 results presentation. So I’m just going to run through a quick conclusion before we get to the Q&A. So channel shift from bricks-and-mortar to e-commerce in grocery is now resuming from a higher base than pre-COVID but obviously, from a lower amount that was achieved in the peak of the COVID pandemic in the new post-COVID world. Ocado is helping a growing number of partners globally to lead this process in their markets. We now have more CFCs internationally than in the UK for the first time ever. Our ability to innovate at pace is creating an ever more attractive solution improving the economics both for us and our partners and showing the strong link between the tech R&D and higher returns for all the relevant stakeholders. We have important opportunities to take our technology beyond grocery. And as we deepen our relationships with our existing partners, we’ve learned a lot about how to help them make the most of our world-leading technology and we are confident that we will see the benefits of these learnings in the next few years as we progress our mission to change the way the world shops for good.

[Tim Steiner, Chief Executive Officer]

Now we are going to go to Q&A. I think, Stephen, you and I are going to take the Q&A and James and Mark can go back to being a member of the audience unless we need to draw on their expertise. Alright. Nick?

[Nick Coulter, Citi]

Hi, good morning. Nick Coulter from Citi. Actually a question for Mark, he is just sitting right in front of me fortuitously. How do you benchmark the ex-grocery proposition or how do your customers benchmark it? Is it capital cost per throughput or is it third access on throughput cost or how should we think about it? And who are your principal competitors in that market, please?

[Tim Steiner, Chief Executive Officer]

Nick, generally, can we just steer the questions here, but I can happily kind of...

[Nick Coulter, Citi]

Sorry Mr. Chairman. Apologies on that front.

[Tim Steiner, Chief Executive Officer]

No problem. Mark why don’t you just actually go ahead and give your answers, but I think – go ahead, why don’t you give it a shot?

[Mark Richardson, Chief Operating Officer]

Yes. So what we encountered so far is customers are looking for – they are actually looking for a bunch of different things, right. They are clearly very interested in price and productivity. They are, for instance, some customers are very preoccupied with throughput, which is an area, because we grew up in grocery, our solution is capable of extraordinary throughput, the like of which you don’t really encounter in a lot of other industries. They are also very attracted to simplicity. It’s another example because people know that you buy a fast machine and maybe it does go as fast as it says, but you still don’t get from your operation quite what you were hoping. And so, one of the important factors in that is delivering something that’s relatively simple and doesn’t involve stitching together lots and lots of different MHE. And so the customers that we have encountered so far attracted all of those different things. Our principal competitors are the people you would expect. They include auto store, they include a number of well-established MHE providers.

[Nick Coulter, Citi]

What’s your key competitive differential, what’s the point that it’s going to make you take share versus established competitors?

[Mark Richardson, Chief Operating Officer]

I would say throughput certainly, right. So Ocado can deliver a very, very fast operating warehouse environment. Our productivity is outstanding and going to get considerably better with Re:Imagined. And so we have a roadmap to a very, very high productivity solution, which betters anything I have seen so far with which we compete. And I’d say there are certainly some potential customers who are very attracted to working closely with an organization that lives its own solution because they have bought things in the past that they couldn’t quite get the results out of that they were hoping for. And so they love the idea of working with people like us who definitely do know how to get the best out of the kit.

[Tim Steiner, Chief Executive Officer]

Nick, I think it’s important to understand that we didn’t enter this business, say, 3 years ago because when you looked at the solution we’ve been rolling out up to today, it is engineered to have significantly more throughput, not tens of percent, but hundreds of percents more throughput in a square meter of space than anything else in the market. And to achieve that, our robots sat on a single square by a single grid space, which is both engineeringly difficult but also protected by patent. And they had bigger motors to make it accelerate faster and deaccelerate faster. And those bigger motors needed more current, so they have bigger batteries and they therefore weighed more. So they weighed more and they accelerated significantly faster and they operate a much greater density. And so whilst they were more expensive but did more throughput the grids that supported the needed to offset a significant multiple of the forces, and we have more metal in them, more engineering, more bracing and took longer and cost more money to install. And so they were only valuable in very high throughput sectors. And the biggest one of which is the obvious grocery, which is why we focus there. The bot that you can see in that picture, the topology optimized additive manufactured but that has the same physics characteristics in terms of its acceleration, deacceleration in speeds, et cetera. But weigh sub 70-plus percent less means that we can achieve that incredible level of throughput with a cheaper box, but actually doesn’t drive the forces to the same level.

And with our new green engineered grids, we are now at the point where we can build something that is cheaper than anyone else can and has the capability of significantly higher throughput. So it’s become an extremely, extremely attractive product to a much broader set of uses. I think that an Ocado grid compared to any other grid can handle a multiple of the amount of volume per square meter for a variety of different reasons. And it’s not even up to a multiple of more than 1x the same throughput from a single square meter. And so a number of the people that are approaching us have installed competitor products but can’t get the throughput that they want. And that’s one of the attractive things about ours. But actually, we’re not positively marketing, as Mark said at the moment, but we can still, on a price perspective, go and compete with the low throughput use cases as well. Because the depth of innovation and R&D has meant that this machine capable of higher throughputs actually can be cheaper than one’s that’s only capable of lower throughputs. And then it gives you the much better flexibility as a result if you then suddenly find you are on a sales tower or something like that.

[Nick Coulter, Citi]

Thank you. I will leave there. I am sure we will hear a lot more. Thank you.

[Andrew Gwynn, BNP Paribas Exane]

Thanks, Tim. It’s Andrew Gwynn from BNP Paribas Exane. I just have two questions. So firstly, a boring question, but on gross margin for the retail business, down 230 basis points, really quite a big move. You mentioned vouchering, but it seems like a very big move just on vouchering. So just wondering if there is anything else going on in that? And then taking a massive step back, Tim, the channel shift obviously massive step up during the pandemic, but why would you start getting groceries delivered today if you didn’t start during the pandemic?

[Tim Steiner, Chief Executive Officer]

Well, so first of all, on margin, there is a combination of margin pressure, which we always see during periods of inflation in grocery retail largely because no retailer wants to be the first one to put the prices up. So you always see a lag between the price rises coming through from the suppliers and the prices going up to customers. And we’ve seen this. So I remember how many times I’ve been doing this about 19, 20 years or something. We’ve seen about 3 or 4x. And the margins tend to end up where they started, but with a lagging effect. So I think we mentioned before that whilst I’m reading in the newspaper about something like 17% inflation, our average item price, I think, year-on-year is up about 7.8%. We’re seeing about 1.1 in basket mix within our own shop. So the average price at Ocado is up 8.9% versus the 17% inflation, and after a mix effect, the average price of the items that we sell is up to 7.8%. And so I think it’s a combination of that. And then as you say, then there is the marketing. And I think one of the ways to think about this is that we didn’t get to market and attract new customers in 2020 and ‘21. In fact, almost the opposite, we actually had to kind of, unfortunately, really heavily focused on our best customers and on customers at the government and morally we needed to focus on as well. And that kind of pushed some of our other less loyal customers out and now we’ve got to go and do that marketing. So you can see why marketing is an accelerated rate because you’re making up for a lack of it in ‘20 and ‘21 and to try and to kind of cover off that volume. So I think that’s really where the combination of those two is where the margin impact is.

And then the other question was, why do I think that people will – they haven’t tried it during the pandemic, why would they try it now. They may well have tried it during the pandemic. They may well have tried it now. The real question is whether it becomes something more of – well, a, will they tried at Ocado. The reason they didn’t try to at Ocado during the pandemic is we shut our shops to new customers. So we clearly weren’t allowed to try it with us. We spent the first 3 or 4 weeks, I think it was of the pandemic building a system to actually make sure that we could keep new customers out of the shop to in order to allow our regular loyal long-serving customers to gain access to the service and not be muscled out by the 1 million plus people that are trying to get online to our site at one point in time. So some of those people are trialing us having trialed other services or using other services. And we’ve always the greatest over-indexation of where people shop before they come to us has always been Tesco’s and Sainsbury’s and Waitrose online customers. And so to the extent that those services have grown, that’s actually created a good pool of potential customers for Ocado Retail. What I think is also important to think about is as online retail improves as execution improves, as freshness improves as the software improves as the UX improves, as the lead time between when you need to order and when the groceries come improves, then this becomes a better proposition for more people or it can – at the moment, for example, if you’re not going to have habitual behavior. If you only think about your groceries at the minute you need them, then you can shop online and immediacy service with a very small range and higher prices. But you don’t do a full shop or you go to the store, even though you wanted to shop online, but while you’re there, you buy too much stuff. So as we launch on a – from Ocado Re: Imagined some of the new software that will enable all our new sites to offer short lead time and same-day deliveries, you change the dynamic and you make yourself more attractive to more people, whether it’s consciously or subconsciously in their behavioral – in their behavior and you grow the potential market.

[Andrew Gwynn, BNP Paribas Exane]

And those are comments you think apply internationally certainly?

[Tim Steiner, Chief Executive Officer]

Yes.

[Andrew Gwynn, BNP Paribas Exane]

Just going back to the gross margin point and hand over. But just on the gross margin, is it now pretty much behind us? Do you think your sort of pricing is more or less where it needs to be to hold gross margin? Or is there still further pressure?

[Tim Steiner, Chief Executive Officer]

I think if we ask Hannah’s team, there is still pricing pressure coming through. The inflation has not fully hit the system yet. There are still suppliers pushing price rises through and there are still retailers trying to hold that off. So I expect prices will rise during the course of the year, whether next year prices fall when the knock-on impacts of energy coming down, natural gas coming down further, whether it all works through an eases, I don’t know. But at this precise minute, what the supply base thinks it needs to charge has not been pushed to retailers and has not been pushed on to customers fully yet. Sorry, go ahead.

[Andrew Gwynn, BNP Paribas Exane]

Thank you.

[Mark Stuart, JPMorgan]

Hi, it’s Mark Stuart from JPMorgan. Three questions as well. First of all, I like the format of this is much better than having everyone in front of us, so thanks for this. Three questions. The first one is also on retail and customers. Could you tell us maybe a little bit more about developments, gross and net additions, i.e., have you lost loyal customers because of price and macro and then you had to basically compensate its new people coming in. How sticky are they? I mean, in the past, you’ve obviously commented they are very sticky. Has macro changed anything? And second question maybe for Stephen. The sources of CapEx improvement. You elaborated on this. Should we just say the move towards £550 million CapEx, is that really just broadly phasing of the new projects ramping up? And when you actually pay for that CapEx? Or is there other components as well, i.e., savings scale on your purchasing on certain items or delays, yes? Is that maybe something to comment on? And then the third question, a bit more strategic and for Tim. Can we talk a little bit more about the debate micro fulfillment versus centralized fulfillment center? It seems that Lotte – obviously, you had a component that Lotte branches also need micro fulfillment. How credible do you think is the argument that some big grocers want to protect their branches for hence micro fulfillment, at least in the short-term, much more important for them. which basically delays a little bit the big move towards centralized fulfillment? Is that something that comes up in discussions? If you can just talk a little bit more about this as well.

[Tim Steiner, Chief Executive Officer]

Sure. So on the retail and customer front, I think we’ve always used to show those charts we called the Paul Smith chart because they were like multicolored stripes. And I think it’s fair to say that it’s still – we’re still seeing very, very consistent revenue from all of those cohorts. What you can see is that customer basket size and frequency have gone back to kind of pre-COVID levels from accelerated both basket size and a small increase in frequency as well. And yes, when you look at kind of switching data, you can see some people switching to other grocers. It’s not – there is nothing of any materiality in our customer loyalty is very good. Once a customer gets to three to five shops, their loyalty is super strong. The challenge that we have is we kind of grew the volume you would have grown if we have been acquiring customers, but without acquiring customers, then the ones that you still have are now shopping at the lower level, Hannah’s running to acquire new customers all the time. And but we’re not yet – so – during the course of this year, we start to lap similar periods. So in Q1, we were still lapping some higher baskets from last year. So we’ve got more orders, more baskets, but you’re still kind of compensating. We come out of that phase soon, and the new customer acquisitions will just drive actual growth. I think the other thing to understand in the cost diluting crisis is, if you think about our customer base, our customer base is not eating all of its meals at home. Our customer base is spending a significantly higher multiple on some meals by eating them out and so if they want to save money, the best thing to do is to one less meal out and eat one more meal that you bought the ingredients from us because that’s actually the way you save a lot more money been trying to work out if you can save £1 or £2 by buying something that we sell at Aldi or Lidl or Asda or somewhere, right? Much better to kind of stop buying a delivery or going out to a restaurant. So there is a whole kind of battle there. And I think the other thing to understand is that Hannah and the team and our partners at M&S are working kind of furiously now together, to improve the offer and the proposition. It’s worth thinking that we did the shift from Waitrose label to M&S in the middle of 2020 in the middle of the pandemic. We had spent 19 years working with Waitrose’s supply base in terms of working to optimize the way that it works for us and for our customers in terms of the way that it gets delivered in, the frequency it gets delivered in the life that comes in with the way it’s packaged and stuff like that to drive the optimal performance for somebody buying a large weekly shop and not somebody who’s turning up a convenience type format to buy tonight’s dinner. And so obviously, in 2020, 2021, suppliers were just like this is why I can give you do want it, and the answer was yes, this, we will take it. Now we’re starting to work very closely with everybody to reoptimize the new supply chain to improve what we’re doing together. There is lots of opportunity for Hannah and the team working with Ocado Logistics and M&S to overall improve.

Before Stephen gets into any detail, there is two things on the CapEx, right? One obviously is yes, less CFCs rolling out this year is less CapEx if they were the same price. I think one thing that’s important for people to understand because it’s the opposite of the guidance that everybody else is giving in the automation and robotics sector is, our CapEx per pound of capacity is coming down. And everybody else is reporting how their margins are being depleted by the inflation in raw commodities, the inflation in labor, the inflation and shipping we are seeing inflation in commodities, inflation and labor inflation and shipping and challenging supply chains. But the amazing work that we’re doing in R&D and innovation means that overall, our CapEx is coming quite materially down per scale, per amount. Well, some element of scale and a lot of it is around the innovation, right? And the innovation is – a better algorithm means that you need 5% less or 10% less robots to do the same amount of work. Therefore, if we sell the slipping in capacity, our costs are coming down by that amount on the robot front as an example, right? So we are opposite to the entire rest of the industry there, where we look forward into ‘23 and ‘24 and say, to build capacity will cost us less, not, expletive, how do we pass this price rise on to our end partner clients. I don’t know if that fully explains. So the combination of the two is what’s driving lower CapEx. And then your third question, I’ve managed to forget in answering your first two.

[Mark Stuart, JPMorgan]

It’s the most interesting. No, it’s micro-fulfillment were centralized within, what are basic growth are saying in terms of time line?

[Tim Steiner, Chief Executive Officer]

We were talking a lot about micros, if you recall, about 4 years ago or something like that. We were talking a lot about takeoff. It was the business that was going to kind of destroy what we do. And obviously, that didn’t happen. Last 2 years or last year, in particular, we were talking about even smaller than micros, kind of almost nano manual fulfillment centers of the likes of Getir and Gorillas and the other 15 people that try to do this in London as an example. And I think there is a lot less noise now from that market. Micro is still an important product for us. And we’ve got more innovation going on Micros, and we’ve launched a number of sites this year here in the UK. And we’re now working on driving the operations in those sites to achieve the productivities that they were designed for. We’ve got software coming out this year to help their supply chain and inbound the product life to get the waste down. We’ve got changes going on to improve the delivery densities and stuff. And then I think when we – when and if we achieve what we expect to achieve, we will see a faster rollout. And I think our clients are always very interested to see those sites. I think they’ll be more interested in terms of deploying some themselves, when we’ve got them operationally working the way that they are designed to do. And there is still great interest in a number of our clients around a lot of opportunities with micros.

As a reminder, micros have basket sizes that are more than double our closest competitor. £40-something on average as a result of selling over 10,000 SKU range in them, which is unique ability because of the robotic infrastructure and the support that they have being fed from our larger robotic single-pick warehouses. And that selection drives the basket size, which obviously transforms the economics and our clients obviously can take advantage of the same thing. You can’t – or you shouldn’t start with 10 micros because they are quicker to build and then build a CFC to come 2 years later. You need to build the CFC because that is the supply chain to the micros and then consider kind of adding the micros on top. But lots of innovation at the moment on front end on supply chain and some on the mechanical engineering side to drive productivity and usability in those areas. So I think it could become a large part of the market. There may be some markets in the world where the majority groceries go through those. It’s probably not the more developed markets that we’re in today in those more developed markets. This is the convenience or immediacy part of the market and the big sites are like the hypermarket part of the market, which whilst hypermarkets haven’t grown as much as convenience in the last few years, they are still by far the majority of the market in the UK.

[Mark Stuart, JPMorgan]

But to what extent, I mean to micro-fulfillment stops the big supermarket CEOs to take on the big bets and to go centralized fulfillment centers because they just want to protect their branches. It’s probably not the right thing to do. But in the short-term, they seem to – willingness to protect them.

[Tim Steiner, Chief Executive Officer]

We’re not really seeing people saying, give me micros in the back of my store because I think people a number of people talk to invested sub kind of $10 million in book or whatever it was and one or two of those micros in their stores and realize that what they were being sold was the Emperor’s New Clothes, and that the operating efficiencies they were being promised. The reality was very, very, very different, which we could have told them going into that, that they were just being told something that wasn’t going to happen. Actually, what we can deliver to a client is the most efficient micros in the world that actually do have attractive – very attractive economics for thing, short lead time kind of like 1 hour suborders we will get to 2 hour plus orders from the large automated facilities to people using some of the new Re:Imagined software. There are clients who are interested in looking at cutting corners of some stores where they built excessive amounts of space and building one of the micros inside it. We can put our micro in that store. We spoke before about how one of the benefits of Re: Imagined the lighter weight robots generating less forces meant that the grids could be more tolerant of being installed on a more generic floor that might have been built to start part of a store rather than build as a dedicated site waiting for this automation to arrive. So the amount of concrete in the slab that’s needed is reduced. The smoothness of it is reduced. And so – and we definitely have clients who are talking to us about the potential to put these things in and alongside stores. And then people playing with those other variants that others have mentioned before where you kind of think I’ll put it – if I’ve got a store that’s got small range in it or something like that, I could put one of these on the side and maybe I’ll have – people will come to the store to buy the fresh and things like that. And at the same time, they can have a much larger range delivered alongside. And then there is two uses for it. One is the courier delivery to home and the other is like a range extender for the long life dry ambient next to the store or this kind of thing. So there is a lot of discussion here there is a lot of interest. I think the main thing is people will still roll out the big ones. And I think they will then add zooms on top.

[Stephen Daintith, Chief Financial Officer]

Just a quick point on that CapEx point, Tim had two of my three points. I think the really important point is, as I referenced in the earlier presentation, sales and operations planning, joining up the balance sheet, with the demand profile and therefore, what you need to order. And getting back a smooth operating machine, there is efficiency there around CapEx procurement, it’s not just phasing that £550 million. That’s the sort of number that I think we should be thinking about for the next 1 or 2 years, given what we – the visibility that we have today.

[Tim Steiner, Chief Executive Officer]

Look, Stephen, we can be frank. When we built the first sites internationally, if we thought we needed to put five in of something, right? We didn’t want to fall over the hurdle of putting five in discovery and we only got the throughput of four because it wasn’t there. And then we get kind of bad client reaction. So we usually put in six, right? We now having installed six and using them somewhere, know that actually six really equal seven, if you see what I mean, right? So we now know how well the kit is performing across these international sites and we can now put in what we know that we actually are being paid for and not putting extra just in case because we don’t want to let the client down. We now know what it takes to add 10 pick stations and a few other peripherals as extra robots, as an addition in terms of the kind of teams that we need to deploy on site to do it. And therefore, whether to start with, we also said, well, actually we might be back to the site in 6 or 12 months. So the cost of kind of regearing ourselves back on site, is quite a lot. So actually, let’s predict when we might have to put it in and put it in early and stuff like that. We’re now much better at doing this. We went from building two sites over 15 years and then two sites over 5 years to getting up to the 20-something sites that we’ve got live and last year having more sites go live than we’ve built in however many in 20 something years or whatever it was. So we’re better at it now. And as Stephen said, we’ve got much better control with the new systems as well as the way that we’re working the new processes and some of the internal restructuring that we’ve done. And so we can control it and make sure that we put down the theoretical amount that we need in the models. And we don’t kind of go, well, let’s worry about when it turns on, let’s put some extra in, let’s worry about this. Whether we will get the throughput that we need per pick station. So we will put some more in there. And some of that is what’s driving our ability to look at existing sites where we built something we call a six-module site and tell the client if you want – if you’re getting up towards six, don’t worry, well, you can have seven in it and that’s fee opportunity for us. It’s a great opportunity for the clients because it means they can do more throughput with that and you’re building without a new site. And we’re seeing a lot of those opportunities in the network. The person behind you. It’s another question.

[Mark Stuart, JPMorgan]

Thank you.

[Luke Holbrook, Morgan Stanley]

It’s Luke Holbrook from Morgan Stanley. Just a question, it looks like a big chunk of the year-on-year decline in your CapEx guidance is coming from Kroger. It looks like you’re looking towards five CFCs this year, maybe only one Kroger. So what’s the latest in terms of conversations that you’ve had with them?

[Tim Steiner, Chief Executive Officer]

So we’re doing a lot of work with Kroger. They have got a lot of sites that have gone live. They have got more sites coming live. And we’re working together, our belief in the long-term is they’ll have many more sites than they have now. But we’re working at the moment on helping them in operations and the network planning and the route planning and marketing we’re working across the whole business extremely closely with them. Our Global Head of Partners’ Success, who is a 20-year Ocado Veteran is relocating. So we’re going to run our Global Partners’ Success business from the United States. He’s going to be based there. He’s also the President of the Americas for us. And I fully expect them to – they have got some of the – or they have got the busiest international sites. So some of their sites are at the top of the league table in terms of volume going through them. We need to help them. This is a new kind of operation as I mentioned earlier, it’s more new in the – for anybody operating in the U.S., this is more new than it is operating in some of the other markets. Because of the way the U.S. uniquely came to the online game later than other markets and build up this kind of crowd source type model. So kind of getting your head around the operations and optimizing yourself when you’re used to doing kind of call someone who’s on their way back from a school drop off to pick up the groceries and drive it to a customer’s house is quite different to the new skills required to somebody who was doing a employee, automate our shift, picking in a store, putting it in a van that’s also owned by the retailer that goes and does an 8-hour route. So it’s more new in the U.S., and they have got more learning to do. The all the underlying metrics of the things that we can’t show internationally are extremely, extremely positive. So our expectations of the long-term opportunity is larger than ever. But it’s definitely the hardest one to get the fine-tuning right immediately because it’s coming from a completely different kind of model. And so our expectation is that we will see great growth from Kroger. Obviously, we know what’s going live this year because we know what we’re building. And the question is when the next set of announcements made, which are based on the progress that we’re making in existing sites. But we’ve got a lot going into it, and we’re extremely optimistic about it.

[Luke Holbrook, Morgan Stanley]

Okay. And just in terms of the time frame that they need to give you before saying that they need to delay deployment, how much warning do you get from them? And does this – will this delay actually impact your revenue trajectory into next year now?

[Tim Steiner, Chief Executive Officer]

So no, we know what we’re expecting, and that’s what we’ve guided you to. Look, the way it works is you get, you’ve got sites where you’ve got specific sites where they have actually said, we’ve signed this piece of land. We finished it. We’re on-site building. And then we can look at their building program, and we know when that means we get to site, we know how long we need to be live better to install and then we know what go live date they have. And we earn fees at – there is two kind of trigger points where we earn some fees and then more fees. So that’s kind of quite transparent. There are some locations where they have said, we signed a site in – or for this greater area. And sometimes they are like still negotiating with two city, whatever you call them, cities or council – local council over tax benefits and brakes and this type of stuff. So they haven’t yet actually got on site and started building that makes sense because they haven’t chosen the site or signed it up. And then there are new geographies that they are talking to us about in network planning, where they haven’t yet signed the contracts. So there is kind of – there is live in build. There is signed and secure location, we know the timing of and then they are signed where they are still working at which locations take and then there is ones that we expect to sign in the future, and there is a combination there. Our understanding of that planning is what’s going into our forecast that we’re making for ‘23. And then the further out you look, obviously, the more the error bars and how it could change grow. If they asked us – if they decided now that they wanted 10 new sites, they need to find those sites. Now in some places, that’s taken them a similar amount of time to our average international client. One of the sites that we turned live this in late ‘22 was actually – it went live, I think it was the 8th, the 8th it went live, 7th went live. It was actually one of the two that was signed first, but it went live 8th, because just the property there was turn out to me, take longer than elsewhere. If you see what I mean.

What’s happening on our side is we used to need 10 months from handover to allow us to start installing our grids to allowing them to start their inbound go live. But we’ve got that down to seven. We’ve got that – I think we’re now at five for the same size sites. And we’ve halved the amount of time that we need on site. And for something like go live, something like inbound go live, we would now say to a client who already has experience of putting this product away in another machine, and therefore, the data is all good, that they could take out 75% of the time they used to allow themselves to do that kind of thing. So we’re shrinking these programs. But when Kroger come in, and it will be around property availability. And obviously, we talk to them all the time about being ready to move when they want to go and finding properties in advance. Sorry.

[William Woods, Bernstein]

Thank you. William Woods from Bernstein. So I just wanted to kind of pick up on that slowdown of the CFCs into next year with the fvie coming live. Can you just – are there delays in what Kroger is doing? And are they your delays or rather their delays? I’m thinking about things like North Carolina, Maryland seems to have been going on for quite a while, even something like Denver. And then secondly, how many sites will you have in year 1 build in FY ‘23?

[Tim Steiner, Chief Executive Officer]

Well, the first part of your question is, I think on the Kroger sites in total, I’m not sure we’ve had a 4-week delay on our side on any site that I can think of. So it’s not – it’s – the delays are usually them finding the land. The U.S. is a particular market where the whole system around employment and taxes and stuff is quite complex. And so sometimes those locations take longer. Maryland was the one I was talking about. It was – it’s called in our business FCO2, it was, number one, was as [indiscernible] Monroe in Ohio. Number two was that one. Number three was Florida. Florida one and three went live in early ‘21, number two went live end of ‘22, and that was purely down to property. But we – our building programs have taken the amount of time that we expected. Generally, we have a bit of a margin in a cushion in what we’ve told our clients. And so where we’ve had some issues, and we were building grids without being to visit during COVID and then we got there and we went actually need a bit of remedial work or something like that. We’ve been able to do that in the time that was allotted to us anyway and still bring those sites live on their actual program dates, which we only know exactly when they can tell us when they can hand over the completed building. They have suffered as well as from finding land in terms of timing, but also in terms of things like you used to be to buy a steel beam on 7 days, some of those things went out to 6 months or whatever it was. So sometimes even when you find the land and you finalize the planning, now you’ve got to say I need all these materials and in the global supply chains we’ve had in the last 1.5 years, sometimes that’s also added to the overall program length, but it’s not issues in the amount of time it takes Ocado to install grids commission – install our peripherals, commission it and turn them live. And then your other question was about?

[William Woods, Bernstein]

You’re in year 1 in 2023.

[Tim Steiner, Chief Executive Officer]

Not sure off hand.

[William Woods, Bernstein]

More than 5?

[Tim Steiner, Chief Executive Officer]

No, I don’t have – no. So we’re waiting for a number of sites to be – to us to be given dates to then go in to know when we’re going to install into that.

[William Woods, Bernstein]

Got it. And then just to follow-up on that. So is Kroger in line with its current commitments that it made in the initial agreement then?

[Tim Steiner, Chief Executive Officer]

The initial agreement was 20 of a certain size, but a number of the ones that they built already were larger than that certain size. So I think they have made – I think we signed 17 commitments to date that on average of a larger size than the 20, but we haven’t yet been told the handover dates for those. So we’re sitting on specific signed sites of either a specific site or a local when those are all completed that to 17x the module have probably been the number that was – or there or thereabouts, right, plus or minus. But that was only a notional number anyway, plan that we are working together with Kroger is substantially larger than that. But Kroger very sensibly do not want to end up with or did not want to find themselves with 30 sites. They haven’t yet worked out how to do the labor planning or how to migrate some of the processes that they have historically done in store into warehouses.

So they can’t mirror exactly what we do. There are things that they do with loose product. There are things that they do with misters. There are things that they do with selling singles. There are things that they do with hot food, there are things that their proposition does that they need to work out what do they do in this online format and how do they do that in an efficient way. And so when you look at those warehouses, you can see the pick, the decount the pick, the dispatch, it’s working as well as it is in – on average, in a number of our sites globally. It’s the other processes and stuff like that, that they need to work on improving I think very sensibly, and then say, fine, I sorted this, I practice. I can see my clear path. I want to just go faster and faster. And that those are the conversations that I have with Rodney. He wants to sort a few things out and then really accelerate. The opportunity, obviously, is vast. And we’re hopeful as well that he will be successful in his acquisition. And obviously, that is an extremely large opportunity of that merged business in terms of the footprint. It should be looking to roll out.

[William Woods, Bernstein]

Great. Thank you.

[Charles Allen, Bloomberg Intelligence]

Charles Allen from Bloomberg Intelligence. You talked about selling effectively modules into the non-food market. How will the revenue from that compare with the revenue in the supermarket area? And will supermarket customers be tempted to purchase modules?

[Tim Steiner, Chief Executive Officer]

Yes. So we’re not selling equipment to our other clients. So we kind of got two models going on. We’ve got the single pick grocery model obviously is not just about the storage and retrieval machines but also about a full end-to-end SaaS software service, and that is currently priced in this like kind of contribution and platform-as-a-service robots-as-a-service, how we want to describe it, kind of model leasing-type model where we obviously have a large capital outflow and then receive fee ongoing. We give the clients a lot of flexibility in terms of we guarantee the throughput. We don’t sell in our role or provide them an amount robots not only financial leasing. It’s also a lot of risk that we accept in terms of the longevity, in terms of the throughputs, in terms of continue giving them enhancements and stuff like that.

And that is the model that we intend to carry on working with in the e-commerce grocery sector. In the new business, we are looking at ourselves more as a traditional automation provider in the sense that our aim at the moment is predominantly to sell that equipment to the client and to sell it in the year – to receive the full income or full revenue in the year of go live and therefore, run a capital-light model. I think if a client trying to send in the general merchandise business and try and work out the cost of their facilities and stuff. I think they realize that effectively, we lease that equipment to them. We provide a software that’s servicing the maintenance and margin. And I think it will be swings around about as to which one is more economically attractive. There is a huge attraction in grocery because we have taken a vertical of the market and the amount of resource and the amount of knowledge that we can bring to that is very different to somebody who just wants a generic automated storage retrieval system. And we have signed on clients in the last couple of years who have been buyers of other people’s automation in the past, thinking that it was just a question of buying automation and you can integrate it yourself. And they have obviously not had as much success with that as they would like to, which is why they have ended up coming and signing on to our platform because they can see the benefits that brings versus the efforts they made with cap shuttles or conveyors or auto store machines. So we have got clients who have bought all these things in the past.

[Charles Allen, Bloomberg Intelligence]

Thanks. And can I just have a second different one. Given the overcapacity in the UK market, is it tempting to close your oldest facility? Or is it too fully depreciated? And would it affect profitability too much?

[Tim Steiner, Chief Executive Officer]

I think, obviously, one has an overcapacity situation, you have to examine all of the options, and it’s something the management of ORL and we would be looking at all the time. Obviously, we’ve not made any decisions in that space, and that’s why we’ve not talked about it. The facility runs very well, the oldest facility and has generated huge cash flows. And obviously, we will evaluate what’s the best thing to do and when is the right time to update or renew one of those facilities.

[Sreedhar Mahamkali, UBS]

Thank you. Sreedhar Mahamkali from UBS. A couple of questions, please. I think, Stephen, given your answer just a little earlier on CapEx being similar for the next couple of years or so, does that mean we’re modeling five go lives a year for the next sort of medium term? Is that what your expectation?

[Stephen Daintith, Chief Financial Officer]

That’s a good guide as things stand today. I mean I think that’s probably less certainly in fiscal ‘25, I think ‘23 and ‘24. ‘23, certainly, ‘24, let’s see. ‘25, that I’d put a qualification around that, but it’s a decent guide on run rate. And in fact, it’s an important part of that modeling to cash flow positive. It means sort of less capital expenditure outflow over that time horizon, allowing existing sites to ramp into their modules and grow those fees to offset the CapEx and get us to cash flow positive. So it’s quite an important dynamic.

[Tim Steiner, Chief Executive Officer]

I think the other thing just need thinking about modules and drawing down modules. So on the earlier sites, we might have been more susceptible to the ramp-up of those sites in terms of the amount of CapEx that went in on day 1 versus the amount of drawdown the clients have. We – with the benefits of Re: Imagined and site optimization and other work that we’re doing, are making ourselves much more in a space where the CapEx that comes out from us is about modules. So if you build a six, but you only draw down two, you make a contribution upfront, that kind of should be relatively equal to the chassis that we put in, so you can have six. The CapEx that we net put in should be reflective of the two, whether we – whether it’s six a operating in a two or a two operating as a two I mean. So what’s really important isn’t just how many new sites we have. It’s how many modules at our clients draw down. So as we look at ‘23, ‘24, ‘25. It’s not just, well, well, they built five, they didn’t do nine or they did nine they didn’t do five. It’s also how many more modules did the clients that have already got sites draw down. Because we can see substantial growth in the year without any new sites if our existing clients are pay for more modules in the existing sites.

[Sreedhar Mahamkali, UBS]

Got it. Thank you. And I guess maybe just a follow-up on that cash balance point, Stephen, you made comfortable with £1.6 billion and not needing any further growth CapEx. Given this year, we’re already seeing sizable cash outflow, even though CapEx is recalibrated. Can you just talk a little bit through maybe the year, next year and the year after? Just to give us some comfort around, not needing further funding.

[Stephen Daintith, Chief Financial Officer]

It’s the combination of all the things we’ve talked about. It’s sort of like that 3-year horizon of slightly reduced CapEx levels versus previous couple of years for the reasons we talked about. At the same time, growing number of live modules, which Tim has just referenced. Really importantly is our central costs as well, getting a grip on those and delivering that any game that we’ve guided to over – it was not necessarily completely linear that you should be expecting to see certainly in group central costs, support costs, a reduction year-on-year. Those are the sorts of key factors that will drive us to that cash flow. We’re expecting as a rough rule of thumb, a £200 million or so cash flow improvement year-on-year for each of the next 2 or 3 years. That’s the goal that we’ve set ourselves. There is a road map to get there. Those factors I’ve just described, all combined together to deliver that road map.

[Sreedhar Mahamkali, UBS]

Got it. Thank you.

[Tim Steiner, Chief Executive Officer]

I think just to reemphasize the point, the margin per module is improving. As we’re showing you the cost of the engineering cloud cost per module coming down. So for every module we’ve got out there, the contribution is getting greater, then you can see them more modules. So it’s more modules and more contribution for our module driving the contribution. And then it’s around what are the two costs that it needs to cover. One is the kind of central the finance team, the people team, the Board and stuff. And then the other one is the technology R&D spend, where we’ve both been supporting two platforms that we won’t be doing anymore and we’ve been building a lot of the plumbing and core infrastructure. And so even at this reduced level of spend that James is talking about, we will be adding new functionality are probably the fastest rate ever that the Auchan customers and the clients will see. And the – whilst we’ve gone from a generation of 400 series bots to 500 to 600, while we’ve been doing that, we’ve been working on the iterative improvement of the 500 and the completely – and the development of 600 at the same time. We don’t need to develop a 700. The iterative improvement to the 600 is enough to take us for many years because of how far it’s got to. So there is many opportunities for James to reduce the spend while still actually delivering more functionality that means that, that growing contribution per order times more orders, needs to deal with less cost base and the cost base that James runs is what other people that then is why we have a people team, I mean. So James these engineers, we need less of a people team. So it’s all a bit of a circle improvement. As Mark grows his business, if you need some more tech support, it will be fully funded by the margins that it’s making in year. And so then we can migrate some of the heads in that direction. But it’s a very – I think a very simple kind of trajectory to follow in terms of why the cash flow improved year-on-year-on-year.

[Tim Steiner, Chief Executive Officer]

Is there anyone else? I can’t see anyone else. In which case, thank you all very much for coming today.