Earnings Transcript for OCDGF - Q4 Fiscal Year 2020

Stuart Rose: Ladies and gentlemen, welcome to the Ocado Group full year results for 2020. In many respects, this has been a challenging year for everyone, both here and abroad. And the consequences of the COVID-19 pandemic are likely to be with us for some time. Now with this in mind, I'd like to begin today by thanking all my colleagues at Ocado Group and Ocado Retail for their dedication, resilience, adaptability and determination in playing their part to help free the nation, support our grocery partners around the world and, through constant innovation and problem-solving, create jobs and grow value for all our stakeholders and the communities we serve. I have no doubt that my colleagues will bring these characteristics to the challenges and opportunities that lie ahead of us in 2021 and beyond. With a major vaccination program now underway, it's right, I think, to think about what the postvaccine world looks like and Ocado's role within it. In this presentation, we are about to make, we will focus on 4 key points. Firstly, the world has changed. Millions of people have tried online grocery for the first time. And generally, they see the benefits, and they won't be going back. They will, however, become more discerning, and this plays to our strengths because we set the standards for customer experience worldwide. In this segment, we will remind those of you who are not already customers of what that experience feels like and hear from some of our partners, including Sobeys, Kroger and, of course, Mel at Ocado Retail. Second, how do we deliver this outstanding experience? Our unique, flexible and proprietary technology is the answer, built to solve the specific challenges in online grocery that we have experienced in our 2 decades as a pure-play retailer in the U.K. James Matthews will take us through what makes the tech special. Thirdly, in a postvaccine world, customers demand a whole range of missions served from big basket to immediacy, home delivery and pick up at store same day and next day. OSP does it all. And Luke Jensen will focus on some key components of the OSP ecosystem, including micros, minis and ISF and how we think about new partner acquisition. Fourthly, at the same time, we are constantly innovating to both expand our market opportunity and reduce the cost to serve it. In practice, it means applying the learnings of the last year to drive down costs and progressing our journey to a lights out future. Mark Richardson will talk about the learnings of the last 12 months, and Tim will detail just why we are so excited about robotic picking and other areas of recent investment. The bottom line is that Ocado Group is ahead of the curve and intends to stay there. OSP is at the apex of the structural shift in consumer shopping behavior, a trend that has only been accelerated by COVID. And we will continue to use our imagination and creativity to lead this channel shift. Finally, this is my last time introducing Ocado Group's results. And from May, I will be handing over the role of Chairman to Rick Haythornthwaite. Rick has an outstanding background with experience in leading and chairing a range of high-profile industrial and technology companies, and he will play a key role in helping us to navigate a post-COVID world using his experience to help us scale up and take advantage of the very significant global opportunities that we believe lie ahead. Now it's been a real privilege to be Chairman of Ocado Group over the last 8 years and to have helped steer the business to where it is, a world-beating online grocer and solutions provider during unprecedented change in the industry. The extraordinary creativity, problem solving, resilience and adaptability shown by the people of Ocado Group has been in evidence, particularly through the COVID-19 crisis. And I know that those qualities will serve the business well in the years to come. Thank you. And now over to Tim.

Tim Steiner: Thank you for that, Stuart. Before I move on, I'd also like to take the opportunity to thank all of the team at Ocado for the extraordinary efforts they put in this year. They really did live up to all of our values, showing how we are really all in it together, how we always believe we can do better and how proud we are of what we do. Before we move on and talk about the future, I'd just like to hand over to Andrew to talk through last year's financials.

Andrew Page: Well, thanks, Tim, and good morning, everyone. Over the next few slides, I'll cover the results for the year, which come against the backdrop of unprecedented conditions as a result of COVID-19. I'll also provide guidance for the year ahead. In summary, the group performed strongly, with revenue up by almost 1/3, principally as a result of higher volumes in the Retail business. EBITDA was also significantly higher, reflecting a number of factors

Tim Steiner: Thank you, Andrew. What we've seen over the last 12 months is that millions of people globally have started shopping for groceries online, and they love it. But as the world settles into a new postpandemic normal, customers can become more and more discerning, and that's where Ocado and its OSP clients are going to shine. With a superior proposition and better execution, we've always delivered the most outstanding service in our market, and that's what helped Ocado Retail to grow for many years ahead of its competitors and will help all of our global clients to achieve the same result. OSP is setting the benchmark for customer experience, allowing our clients to offer services with the widest ranges, with the best execution, the most accurate orders delivered on time and outstanding value and to do so with market-leading profitability. The early NPS scores from Voilà by Sobeys are outstanding, and you'll hear more on that from Michael Medline. The customer reviews for Monoprix at Groupe Casino are also excellent. If you look at this graph on the right-hand side, you'll see a familiar chart we've put out before

Mel Smith: Ocado Retail is the UK's best online supermarket with the widest range in the market at almost 50,000 products, double our nearest competitors. We have the freshest food with the shortest supply chain from our suppliers to our customers. Historically, 95% of our orders are delivered on time, and 99% of items are delivered exactly as the customer ordered. And that is why we have had the best Net Promoter Score in the market, historically at 63%. COVID has made the last 12 months very challenging. We would have loved to have served more customers, but demand significantly exceeded our ability to supply customers for most of the year, despite our colleagues working incredibly hard, delivering 40% more groceries from our existing sites. Volatility was tough to measure as the lockdown restrictions changed frequently, causing immediate changes in customer behavior with basket sizes changing up or down by as many as 10 or 20 units as schools and workplaces closed. Our suppliers have worked really hard to support us, including through challenging periods of COVID-related absence in their facilities, but consolidation of their ranges has impacted our ability to supply everything that customers ordered. But despite the challenges, we have managed to deliver 17.7 million orders this year and add 40% more capacity to our operation. Our partners at Ocado Technology have invested to ensure our site is incredibly stable. Our colleagues at Ocado logistics ensured we picked and delivered 950 million units, delivering the best customer experience in the market and keeping substitutions below 4%. Together, we have introduced significant measures to ensure our grocery deliveries are safe for both our customers and colleagues. Our technology minimizes the number of hands that touch groceries before they reach the customer. And we are the only grocer to offer weekly COVID tests to all of our colleagues. Our Ocado platform is incredibly resilient and has enabled us to do a better job for our customers during COVID than any of our competitors. I would like to say a huge thank you to our 15,000 amazing drivers, personal shoppers and all of our frontline colleagues for their dedication and hard work in feeding the nation this year. They have been extraordinary. We have so much to look forward to in 2021 as we continue to work together to give our customers the best possible shopping experience. We are opening 3 new customer fulfillment centers in 2021, which means we'll be able to provide more slots to existing customers and welcome some new customers. We are implementing exciting new technological advances, including robotic picking in the CFCs, which will help us fulfill more orders. And we're scaling our immediacy offering, fulfilling more customer missions and offering more ways for our customers to shop with us. 2020 was an extraordinary year. I am enormously grateful to our colleagues for delivering an outstanding performance, and I'm looking forward to bringing our market-leading proposition to more customers.

Michael Medline: Hi. I'm Michael Medline, President and CEO of Empire Company. It's a pleasure to be here. I hope everyone is staying safe through this terrible pandemic. To say that 2020 was the right year to launch a grocery home delivery e-commerce business would be an understatement. e-commerce retailers around the world in retail and grocery have reported record multiples in growth, some that we didn't predict for years, especially in grocery. As Canada's second-largest grocer, the Empire family of brands employs more than 127,000 teammates across Canada and has more than 1,500 stores under the banners of Sobeys, Safeway and IGA, among others. Like many other grocers, we've tested grocery e-commerce and home delivery in a few different markets over the years. And while we have grown loyal customer bases, the case to scale these businesses hasn't been strong. We announced our partnership with Ocado in 2018 to begin building our first CFC. And over the course of the next few years, I expect we will have built 4 in Canada's largest markets. This past June, we were thrilled to open our first CFC and add our new online grocery home delivery e-commerce banner, Voilà, to our family of brands. Voilà has quickly become a trusted favorite for customers in the Greater Toronto Area in just 8 short months. We have truly been impressed with Voilà's customer satisfaction and operational metrics. Our weekly on-time delivery score is 98.6%, and our order fulfillment score is 99.6%. Both of these metrics are beating the ambitious goals we set for this new business. Our Net Promoter Score is an extraordinary 87, and we are seeing extremely high customer satisfaction, positive word-of-mouth referrals and repeat rates. In my 2 decades in retail, having worked in hard and soft goods, I can tell you, these are best-in-industry metrics. Empire is very satisfied with the Ocado system throughout this journey. We look forward to continuing this partnership as we expand both in-store fulfillment and home delivery across Canada. Next stop, Montreal, Quebec. From there, we'll open in Calgary. Ocado's powerful technology sets a strong foundation for Empire to win grocery e-commerce in Canada. Thank you.

Rodney McMullen: A few years ago, we embarked upon our partnership with Ocado to accelerate our ability to provide customers anything they want, anytime they want, anywhere they want. And now we're nearing several important milestones in our partnership. Soon, we will open our first customer fulfillment center in Monroe, Ohio, which is near our headquarters here in Cincinnati and it's the heart of Kroger country. This CFC will bring job growth to our home state and enable us to reach more customers than ever before. The Monroe CFC is a key step in our continued acceleration of our expansion to our national supply chain network to redefine the customer experience. The Kroger and Ocado partnership is and will continue to be rooted in our ability to deliver a value-added customer-centric solution that brings fresh food to customers through our seamless ecosystem that's supported by the technology and data. We are looking forward to the opening of our next CFC after this one in Groveland, Florida. It enables us to expand our footprint, enter a new market and serve even more customers. Throughout the pandemic, our customer shopping habits have continued to change and the demand for e-commerce grocery shopping solutions is the highest ever that it's been in the U.S., which is one of the reasons why we expected it, but COVID obviously has accelerated, and one of the reasons we partnered with Ocado because of their world-class technology. We continue to invest and improve our e-commerce capabilities, focusing on cost-effective solutions. And obviously, our partnership with Ocado is an important part of this evolving model. We've also built flexibility into the fulfillment ecosystem, which will be comprised of large CFCs like Monroe and Groveland, but also smaller and medium-sized sites as well. This will allow us to maximize penetration across all of our diverse markets. At Kroger, we are Fresh for Everyone. That means providing fresh, affordable food and being there for our customers when they need us most. And the CFCs in Monroe and Groveland and future innovation and collaboration will enable us to serve even more customers across the entire U.S. for many years to come. And Ocado is an important part of that overall partnership.

Tim Steiner: Thank you, Mel, Michael and Rodney. We're really proud to work with you all. Only OSP can deliver the most outstanding customer experience. That's because it's built on 20 years' experience at Ocado Retail, 20 years of solving the challenges that are very unique to online grocery

James Matthews: You heard from Tim the elements that combine to make OSP unique. Let's bring some of these to life. Firstly, the end-to-end integrations of OSP make it much more powerful than the sum of its parts. To build such a platform, we've had to bring together the right technologies to solve challenges for every step of online grocery. OSP includes solutions for each part of the online grocery journey that are among the most advanced in the market. We've used data science, machine learning and artificial intelligence, robotics and other advanced technologies to solve these challenges. Importantly, we weave solutions together seamlessly for our clients. Our seamless platform enables information flows, which allow optimizations that otherwise would not be possible. To illustrate the point, let's use a real-world example. A customer, John, decides to change his order to treat himself at dinner tomorrow. He has a steak and a bottle of wine and a chocolate dessert, the sort of change that happens hundreds of times a minute on our platform. It's a simple task yet the engineering challenge to keep our order accuracy and on-time delivery promises for all our customers is extraordinary. Firstly, we need to make sure we have the right products for our customers. Behind the scenes, our forecasting models predict demand in real time. They know exactly what's on our shelves, when new stock will be arriving and which supply orders can still be modified. Whatever changes John makes, he, like other customers, would expect to receive over 99% of his order exactly as he placed it. Good news for John. We can adjust one of our incoming supply orders so that everything he wants is in stock. As John updates his order, OSP's end-to-end integrations unlock a range of fulfillment, picking, packing and delivery optimizations. John's order is only different by a few items. yes a lot has changed behind the scenes. So how does this affect fulfillment? Well, the new items mean we have to rearrange the contents of John's bags. We have to ensure that fragile and deformable items are delivered in perfect condition. We also need to make sure that each bag is densely packed without being too heavy. Our software recalculates the optimum distribution of this packing and the directions for the pack in real time. So John is getting what he wanted, but we need to make sure it gets it when he wants it, too. So what changes in delivery planning? Well, John's order now takes up an extra tote and the weight has changed as well. The original van we had planned for John's order is now full. So we've had to move his order to a different van on a different route. Overall, delivery is a complex task. Our systems need to take account of other factors such as anticipated road conditions and driver availability. Our optimizers make over 14 million calculations per second to meet our customer promises. Lastly, back to our warehouse. Due to the different delivery planning, John's order needs to be picked in a different sequence. Our thousands of robots need to be reorganized to pick John's order as efficiently as possible to get it dispatched on time. John's a happy customer. Our driver gets there on time, as we do over 95% of the time, to deliver his much-anticipated Friday night dinner. I hope I've been able to offer you a small glimpse into the scale of the engineering challenge that comes with building the OSP customer experience. What's really exciting is, of the nearly 2,500 technologies we have in Ocado Technology, the majority are working on features and capabilities not yet live on OSP, which have the potential to improve the customer experience and platform economics well beyond what I've been able to describe to you here today. Examples of these include investment in building our advanced robotic picking capabilities, optimizations across our bot fleet and other automation, and bringing more and more data to bear in our user interfaces. Many of these you're going to hear more about in the rest of this presentation.

Tim Steiner: Thank you, James. I'm now going to hand over to the CEO of Ocado Solutions, Luke Jensen, who's going to talk about the extraordinary year we've had in his area, where we've turned on our first 2 international robotic warehouses in Canada and France as well as seen extraordinary growth in our in-store fulfillment platform. Over to you, Luke.

Luke Jensen: Hello. I'm Luke Jensen, and I'm the Chief Executive of Ocado Solutions. As you've heard, 2020 has been a momentous year for Ocado. But I'm now going to turn to 2021 that promises to be even more exciting. 2021 will see an acceleration of our business with our partners and will also see a further broadening and strengthening of the way in which we're helping them build winning online businesses. By the end of 2021, we'll have 7 partners live on our platform, live with more CFCs, but also live with other fulfillment methods like in-store fulfillment. We'll see our first CFCs go live in the U.S. with Kroger. And so 2021 will be another stepping stone in the deployment of CFC capacity ahead of a strong acceleration in 2022. We now have a staggering 17 CFCs under construction worldwide. And it's a real tribute to our teams and to the quality of our collaboration with our partners that those projects have all stayed on track despite COVID-19. Strong collaboration and smart tools like virtual reality training have been key to making up for the challenges of restricted international travel. 2021 will also mark the next steps in the development of the unique OSP ecosystem, allowing our partners to achieve maximum market penetration with the best economics. In addition to offering our partners the most advantaged economics and range proposition with standard CFCS, smaller formats like mini FCs or micro CFCS will allow to maximize customer reach and market penetration while in-store fulfillment allows rapid response to market demand and allows to reach low-density geographies. In addition to this unique breadth of offering, OSP also leverages unique technology advantages across fulfillment methods, like the ability, for example, to replenish small CFCs from larger ones. With OSP, we'll offer our partners the best performance across every single fulfillment method. Let me shine a rapid spotlight on some of these formats. First, mini-CFCs. What we've done with mini-CFCs is we've taken that technology that was developed for large CFCs, and we've managed to take it into a smaller footprint, say, $150 million of sales. And this has the big advantage of being able to bring the full advantage of OSP technology to smaller catchments. Those would have previously been served through a spoke from a bigger site or through in-store fulfillment. And what that means is it means customer benefits of shorter lead times and also economic benefits of the new formats. And Bristol that's going live with Ocado Retail shortly is a great example of that. Moving on to micro FCs. Ocado Zoom has continued to demonstrate the opportunity to increase market penetration by serving ultra-immediacy demand within 1 hour. While larger planned shopping will always be most effectively served from larger formats, we see MFCs as a great opportunity to increase share of wallet and customer loyalty. Think of it as the convenience store of online retailing. And we're going to be seeking multiple new sites to roll out Zoom for Ocado Retail in Greater London and other cities in the U.K. And finally, let me touch on in-store fulfillment. In-store fulfillment brings maximum flexibility to reach low-density catchments and to respond to short-term changes in demand. This is always going to be an important part of the platform in geographies like Australia or Sweden, where you have that mix of concentrated urban catchments with low-density large tracks of country. But what it has also proven highly effective for is responding this year with Morrisons to the increased demand from COVID in the U.K. by rolling it out in just a few months across the nation. By the end of 2021, we'll be live with in-store fulfillment with 5 partners and in more than 1,000 stores. And as with other fulfillment methods, our approach is to bring Ocado's unique technology skills to create best-in-class tools. So for example, using simulation tools developed for the complexity of CFCs to be able to optimize the peak walk in stores while preparing orders with ISF. So while 2020 was definitely a significant stepping stone in the development of Ocado Solutions, we look forward to 2021 as a year of major acceleration in us helping our partners build winning online businesses. Thank you.

Tim Steiner: Thank you very much, Luke. Now I'm going to hand over to Mark Richardson, the Ocado Group COO, who's going to explain how we're ready to ramp as fast as our clients need us to and how we're constantly reducing the cost to serve through continuous innovation.

Mark Richardson: We are ready to ramp as fast as our partners require. Successful launches in France and Canada during the year have provided many learnings on which we're already building. Those launches took place under the extraordinary circumstances of COVID-19 and the travel restrictions which still apply today. Like many organizations, we've been forced to adapt to this new reality. The good news is that those adaptations have made us stronger, forcing us to adopt new ways of working and in some cases, new technologies to enable tasks to be performed at great distance. The result is not just successful launches this time around but also a template for future projects and permanent benefits to speed and cost. In particular, we've developed new methods for testing and training that work without large numbers of colleagues having to travel and be on site. At the same time, our reporting tools have continued to improve, giving our teams greater insights and remote visibility. And of course, with each new launch, there is new data, data we can learn from and data we can share with our partners to support their own launches. By the end of our 2021 financial year, we will have launched a total of 9 CFCs with this technology, our learning accelerating all the time. Over the last year, we transformed our organization and built in scale and capability. We formed partnerships with major international manufacturers, including Flex and Jabil, and with local electromechanical installers. We created new international team structures and hired specialists in 8 different countries. Overall, we've added more than 640 colleagues to the teams that implement our solution and then maintain it for our clients and further growth is planned for the year ahead. As our technology is maturing, we have the capability and now the experience to ramp new client sites fast. Here in the U.K. in our Erith CFC, our solution's already operating at a scale far beyond any planned in our client CFCs. That's giving us and our clients great confidence that we can meet any scaling challenge. Continuous improvement is bringing benefits across our solution to the hardware itself, the onboard software and the cost to maintain. In 2016, as we were starting to ramp our Andover CFC, we'd already designed our proprietary modular and future-proofed MHE. By 2018, as our Erith CFC was ramping, we implemented our second-generation robot, with 25% of the parts new compared to the original. Now in 2021, we are rolling out our third-generation bot, this time with 75% new parts compared to Gen 2. Our software solution was already proprietary end-to-end from the outset. In 2018, we were starting to employ sensor data from the robot to monitor the health of our system, and we began to roll out a new bot software platform. That rollout was completed in 2020. And we have now integrated the new bot software with our digital twin of CFC, enabling faster and more accurate simulation, which in turn allows us to scale with greater confidence. In 2016, we had capacity to test roughly 50 bot run hours per week. By 2018, that had increased twentyfold, and we were running each new software lease for 1,000 hours before each deployment. In 2020, we embedded testing in our bot manufacturing process, massively reducing times to fix and driving up quality. We are driving relentlessly towards hardware that's smarter, more scalable, more reliable and easier to maintain. That's improving performance, reducing downtime and cost of ownership. Last year, we saw significant reductions in maintenance costs, and we have programs in place to drive those costs still lower in the year ahead, both here in the U.K. and across our estate internationally.

Tim Steiner: Thanks, Mark. I want to pick up on one of the areas where we're working to reduce the cost to serve for our clients. You'll recall from previous explanations that an average Store Pick operator spends an hour and 14 minutes of people time to get an order from the supplier's truck into one of their own delivery vehicles. And on Ocado's OSP platform, we've previously explained that we've brought that hour and 14 minutes down to around 15 minutes. But of that 15 minutes, the bulk is in picking and decanting. And today, that represents about GBP 7 million of labor a year in an average warehouse. When you multiply that by the number of warehouses we expect to build for our clients over the next few years, it's a very large number. So this year, we acquired 2 businesses to help accelerate our efforts in this area, Kindred Systems and Haddington Dynamics. And working together with our own robotic teams, we believe that we can much more rapidly get robotic pick into our clients' facilities and pick an increasing part of their range. That GBP 7 million represents an opportunity to transform the economics for our partners through shared cost savings. The continuing and accelerating channel shift means a large runway for growth. We've looked together at some of these numbers before, the GBP 7.6 trillion global grocery market, the GBP 2.8 trillion in what we call key markets, ones with high GDP per capita and larger populations. If our future exclusive partners have a 25% share of that market, that would represent GBP 700 billion a year. Today, our clients are just over about 1/4 of that size. If we then look at how much of that in the future moves online. At 10% online, our clients would put GBP 100 billion to our platform. At 75% online, our clients will put GBP 0.5 trillion through our platform, which means there's a very big future fee opportunity of between GBP 3.5 billion and GBP 26 billion. The reason that we want to help our clients to lower their costs is because we're going to improve there and our business in multiple ways. If we can lower their costs, there'll be a bigger key market opportunity for them as they can expand faster, serving their customers with lower-priced groceries. As our partners beat their competitors, it means they've got a competitive advantage, which will enable them to have faster growth in their markets and increase their market share. And as they do more services on the Ocado Smart Platform, like robotic pick, there's an incremental fee opportunity for Ocado as well. The continued automation of the end-to-end processes for our partners will drive more opportunity for them, faster growth for them and more opportunity and faster growth for us as well. We continue to be really focused on transforming the economics for our client partners through shared cost savings. We're going to continue to invest in the core. We've also made some important investments in adjacencies around grocery. This is all about improving the end customer experience that our clients can offer and our clients' long-term economics. We've made some exciting progress in some of our existing investments. In Jones Food, our vertical farming investment, there's a fundraising in process, and there are 2 further farms planned for the end of 2021, beginning of 2022. At Infinite Acres, there are now over 100 commercially grown crops in their facilities, and there are 8 operating farms. At Karakuri, they completed a successful fundraising. They've launched the prototype for both hot and cold meal prep. Inkbit have built a proprietary 3D vision system, and the production printer is currently being assembled, and we're working very closely with Inkbit on some of our own future developments where they're enabling some really fantastic transformational advances. And Myrmex, where we announced a minority stake in October 2020, are working to create some bespoke material handling solutions for us. If we look at the bigger investments that we made at, for example, Kindred Systems, although today, they've got 180 live robotic picking systems, there's an enormous space for growth beyond the grocery opportunities that we've already outlined. We want to add significant long-term value opportunities where we can leverage our expertise or our technology. Before I conclude the presentation, I'd yet again like to thank the outstanding team members of Ocado, who, for an incredibly difficult year, have done an outstanding job both for our customers and our clients. I'd like to thank the participants with me that have joined in today on our presentation. Over the last 12 months, the world has changed. Millions of grocery customers worldwide have moved online. They've done it for the first time, and they love it, and they're not going back. The grocery landscape has changed forever and for the good. In a postvaccine world, customers will, however, become much more discerning. And they will look for the best customer experience, which is what our clients can provide given their use of the Ocado Smart Platform. Grocery customers will also expect retailers to serve a range of grocery missions. The flexible OSP ecosystem enables our partners to do it all with proven and sustainable economics. And as we enable our partners to grow, we are increasing our investment in innovation, reducing our cost to serve and expanding our total addressable market. This means more investment now to generate more value long term. Ocado Group is ahead of the curve. And the energy and vision of the business will help it to stay there. This concludes the presentation, but we're now going to move to Q&A. The numbers for the dial-in are in the RNS announcements. Please dial in and join us. We'll be starting in around 5 minutes. Thank you.

Operator: [Operator Instructions] And we'll now take our first question. It comes from Andrew Gwynn of Exane BNP Paribas.

Andrew Gwynn: Three questions, if I can. So apologies. First, on the gross margin, it looks like you saw a very significant improvement in the second half in the Retail business. And obviously, some of that is the sourcing fee from Waitrose. And I know there's a sort of build-out the buying team. But just wondering how much of that we should extrapolate into future years given some of the shifts in mix. The second, just looking on the mini-CFCs, I appreciate the benefits of the immediacy there. But I think you mentioned that it would be sourced through potentially some of the other CFCs within the business. So I'm just wondering to what extent some of the operational efficiency you have if the Ocado model could be negated if you're using mini-CFCS, where effectively, there's handling of the product elsewhere? And then, a final question. On Ocado Zoom, and obviously it's been a little while since we had that trial in West London. It feels like progress there is a bit subdued. So I'm just wondering, is the buildout just slow due to planning and so forth? Is there anything else we should be aware of?

Tim Steiner: Andrew, so let me just quickly take the gross margin question. So yes, obviously, we stopped paying the Waitrose sourcing fee, which has come down through into the gross margin. We've also had less vouchering due to the huge demand for the service that's also helped, and as you said, a change in the mix. Most of that, I would expect to carry on or obviously, the sourcing fee and the mix to carry on going forwards, and depending on how long we have this excessive amount of demand, to see reduced amount of marketing. So that's the main area. In terms of the minis, yes, look, minis are not as operationally efficient as the large sheds, but they are very operationally efficient compared to any other means of fulfilling online grocery orders. And we do have some clever sourcing tricks up our sleeve that we're not going into great detail, that will help them to operate with not dissimilar economics, the big sheds, although a little bit more expensive. In terms of Zoom, planning is the main issue that -- obviously we've had some planning issues on the second site. We did have some other sites lined up and we hope to make some good progress there. There's nothing else slowing us down other than finding sites and planning.

Operator: We will now take our next question. It comes from Rob Joyce of Goldman Sachs.

Rob Joyce: Three from me as well. First one follows on a little bit from Andrew's, just in terms of that 8.8% EBITDA margin you delivered in the second half there. I guess if we're thinking longer term, if we don't believe there is a return to normal trading patterns or the smooth week continues, is that a good indication of the potential margins in the long term the Retail business can achieve? And is there any way of thinking what that long-term margin looks like under a return to those normalized trading conditions? The second one is just, again, on a smooth week. Is this something your OSP partners, I guess, particularly Sobeys are already seeing? And how does this impact in terms of the capacity they can get from their sites and the fees you can potentially earn from those sites? And then the third one, just on Zoom. Can you confirm how that basket size is? I think it was over GBP 50 average last time we heard. And I'd just like to know, who is -- are you using third-party couriers to deliver from those Zoom sites?

Tim Steiner: I'll do my best. Right. The second half margins, will they -- obviously, they have benefited from larger basket sizes, from flatter trading profile and from less marketing. So I'm not going to go into the exact numbers, but each of those things has had a benefit on the operating margin as well as the increased scale. We would expect some of those things to continue in a new normal, maybe not quite as strongly as they are now. So still believe that people will eat more at home because they're going to work more at home, people are going to have to shop with a flatter trading pattern because they're going to work more from home. And there is an acceleration in the channel shift that means that maybe we won't have to drive as hard to acquire as many new customers as we need to take up the growth of new facilities that we're building. So hopefully, some of that will continue. And I guess that's kind of partly your 1 and 2 questions. In terms of the Sobeys angle, look, it wouldn't -- it's not appropriate for us to discuss our clients' businesses in that way. We'll talk in the future about aggregated data. It's harder at the moment when we've -- you can try and -- well, you've asked about a specific client, but also it's kind of easier to try and guess who's doing what. But overall, globally, I would expect people to benefit from work-from-home with flatter trading profiles. Flatter trading profiles will give people more capacity out of the same site, that will largely leverage the existing fees they've paid, although at some point, they'll pay slightly higher fees. But predominantly, it will allow them to operate more efficiently which obviously lowers their operating costs. They'll probably pass that on to the consumer. And therefore, that's a virtuous cycle of growth, we hope, for clients and for ourselves. Zoom basket size has remained very strong this year, probably stronger than we would expect it to be in the long term. And yes, we currently use third parties to make those deliveries.

Rob Joyce: And just to confirm though, the volume benefits from a smooth week would accrue to the OSP client rather than additional fees for yourselves?

Tim Steiner: Predominantly, yes. And Rob, we obviously think that accrues to us as well as in they will have a better economic model, which will help them to grow their business faster, which will help them to want more facilities.

Operator: We will now take our next question. It comes from Andrew Porteous of HSBC.

Andrew Porteous: Three from me as well, please. Can you just talk about the different opportunities within your services business now, now that you've sort of broadened out the offer a bit in terms of CFC versus mini-CFC versus ISF. I mean are there different sort of revenue and profit opportunities versus capital? I mean if it's more -- if your customers go more down the ISF route, is the revenue opportunity a bit lower, but there's obviously a lot lower capital intensity? And then secondly, could you talk a little bit about new Solutions customers? I mean you talked about troubles with traveling and restrictions around COVID. It seems like there's a lot of activity going on in the sector, if I look at say THG ingenuity or Dematic in terms of signing up new customers. I mean what is it specifically that you're struggling with to get customers over the line? And then lastly, can you just talk about the shape of capacity in Ocado Retail over the next year? Should we think about it as being sort of the same absolute base of sales as we saw in Q4 for a period before the new capacity sort of comes onstream in Q4 this year?

Tim Steiner: Okay. Andrew, so firstly, yes, look, obviously a CFC and minis have similar economics, fees, capital profit opportunity. ISF, as you rightly point out, is lower fees, can have attractive margins, is completely capital-light, so -- or capital nonexistent. So yes, they're all slightly different. In the long term, you'd rather have volume going through the CFCs because there's more fees and therefore, more profit opportunity. In the short term, ISF is a great model. In terms of new customers, look, we're super busy talking to a whole bunch of people. It is definitely harder in terms of there are a lot of countries we can't get to. That got much worse towards the end of the year in terms of getting people out of the U.K. and into other countries. And it's also hard to get people to come over and see the facilities, which has always been a big catalyst in making the major commitment that these customers make to us. So obviously, the customers aren't in the U.K. and therefore, that is a barrier. It's not an insurmountable barrier, and we have some conversations going on that could well result in customers signing up without seeing the facilities, but it's definitely helpful when they can. And those that have managed to turn them on, obviously we've heard from both our clients that have turned facilities on and both of them are -- and Michael has been explicit today talking about 4 facilities, obviously having had his first one go live early this year. So you can see the kind of growth potential there. Shape of capacity for the year. The Bristol site will go live soon, as will Morrisons returning into Erith. So largely, I would think about most of the growth of Erith going to Morrisons, and Bristol as an opportunity for growth for Q2 and Q3. And in Q3, the other sites starting to go live Q3, Q4 and starting to be able to give us capacity at that point. So overall, I think what we said is peak trading day, up 40% over a 2-year period before we open any incremental facilities beyond those 3.

Operator: And we'll now take our next question. It comes from Xavier Le Mene of Bank of America.

Xavier Le Mene: Three, if I may, actually. First one, actually, can you provide a bit more visibility on the pipeline for the new opening, new CFCs beyond 2021? You mentioned in the past also your ability to go faster if need be. So have you seen any changes there? And do you have discussion with your partner to actually to accelerate? That will be the first one. Second question. You mentioned the opportunity of growing business and profit outside your core grocery online business. So what are your expectation midterm profit-wise? Should we expect you to grow organically from the base you have? Or should we expect also more bolt-on acquisition? And lastly, just on the outlook, we understand that 2021 is about potential normalization with more cost to, i.e., EBITDA to be down year-on-year. But when do you expect the trend to reverse, i.e., to deliver sustainable EBITDA growth with potentially, I would say, enough international CFCs live to offset the cost of new openings? Could you have a year in mind?

Tim Steiner: Xavier, let me just start. I think we mentioned in the presentation that we've got 17 in build. So you can imagine that we're obviously going to see a constant stream of sites opening this year and beyond. And what isn't opening this year that's in build now is likely to open in the following year or very shortly thereafter. So I think that's kind of the visibility question. Mostly, there are clients, as you've heard Michael saying, we're talking about 4 sites. The -- we're getting a bit better at building them a bit faster, but obviously, our clients still need to find sites. And so finding sites is probably the biggest barrier to getting them open as quickly as one would love to have them open. I would highlight the 10x increase in live CFC modules expected in 2022 versus 2020. So there's quite -- there's a lot of growth going on. But we have the ability to take on new commitments from existing and new clients. And I think that's one of the things that we've emphasized today. In terms of business outside of the core, I mean, largely, I would expect organic. Obviously, we did make 2 decent-sized acquisitions this year. One of those businesses is growing rapidly in its space in robotic pick. And so obviously, that's outside of our core, and we're continuing to support it in its growth. So we're supporting it to achieve its original business objectives and accelerate them whilst also adding to its objectives to work with our own robotics team and our other acquisitions to dramatically transform the speed and breadth that we can deploy robotic pick in our own businesses. We're not actively looking for kind of "outside bolt-ons." We are always looking around the market to see if there's anything that we need as such or would like to have to boost our offer and our proposition for our clients. I'll hand over to Andrew for the outlook part if he'd like to take that one on.

Andrew Page: Sure. Thank you, Tim. So in terms of the outlook, exactly as you said, we expect and we guided towards additional costs in FY '21 and those predominantly impacting the International Solutions business. So as a result, you would expect EBITDA for International Solutions to be proportionately lower. However, probably, you'd hope FY '21 would be the last year of increasing losses on that basis. So you begin to turn the corner after that. And of course, that in turn, all reflects the -- well, the accounting treatment, but it's when we recognize revenue coming through as the new CFCs come onstream, but that should start to build progressively as those new CFCs come online.

Operator: And we'll now take our next question. It comes from Nick Coulter of Citi.

Nick Coulter: I'll keep to 3 and go one by one, if I may. Firstly, on engineering costs and the latest generation of robots on the grid in Ohio. And I'm sure you've got a bunch of guys making sure all goes very smoothly. But based on your testing, please, can I ask how far away the engineering costs will be from your long-run targets for those latest robots?

Tim Steiner: Nick, the site where we've got most of the newest generation of robots is actually Bristol. And the early signs are extremely encouraging that they are on trend to hit our long-term plans. The earliest numbers coming out of there have exceeded our expectations. It's still early days, but very positive so far.

Nick Coulter: So you basically expect to hit those targets with the Bristol robots from what you're saying and then go beyond that in the future?

Tim Steiner: Look, we've -- as a business, we've always set targets. And when we get close to them, decided that we should set a more aggressive target, but we would be happy to achieve our target obviously. If we start to get close to it, we'll start to push ourselves to go further. Obviously, that's always kind of our long-term direction. But all I'm saying is the newest generation are there at the moment and also starting to go worldwide, but that's where we're really doing the kind of learning on them. And the large-scale testing that, that effectively is. And yes, we're very pleased with the early progress.

Nick Coulter: Okay. Great. That sounds very achievable. Then secondly, if I might ask a factual question on the single-space spot. Hypothetically, if your box took up 2 spaces, how much would that reduce your throughput by?

Tim Steiner: I'm not sure that's a number that we would want to put out there. Let's just say, it's a very important patent. It was thoroughly tested at the EPO recently and is intact, and we're very pleased to be the holder of it.

Nick Coulter: Okay. Then lastly, perhaps you could talk through the thought process on the sale of Fetch. Is that just that you need the capacity for grocery or the nonfood allocation in the U.K. has gone to M&S Clothing & Home? I guess how should we think about ancillary nongrocery and the opportunity with M&S? And I guess maybe how does Sobeys and Monoprix look at ancillary nonfood? Or what are they offering, I guess, is what you can speak to?

Tim Steiner: I think, look, this was a decision by the OR, our management team. They clearly see a bigger opportunity, as you suggest, in things like Clothing & Home and other ranges that they now have access to compared to the pet business. Also, more and more of these products that we sold in -- have actually ended up in the mainstream shop where they have bigger sell-through than they do in their specialist stores. So I think largely, just expect them to do other exciting things in the nonfood categories but doing them inside the Ocado shop.

Nick Coulter: Okay. Great. And how are Sobeys and Monoprix approaching that? Have they got decent nonfood or ancillary ranges?

Tim Steiner: Again, it's for them to decide how much range to put in their stores, what range to put in them and how to market them and all that kind of stuff. So it's not a question for me.

Operator: [Operator Instructions] We will now take our next question. It comes from Victoria Petrova of Credit Suisse.

Victoria Petrova: First of all, on the model system, can you let us know what sort of first year capacity utilization usually is and the second, third year and how many years your CFC currently would be reaching full capacity? Secondly, is throughput per CFC or mini-CFCs proportional to its size? And thirdly, on the micro-fulfillment space, do you see any challenges related to large international retailers signing to MFC model like Walmart with several MFC operators? That would be very helpful.

Tim Steiner: Sure. So in new facilities now, of the size that our clients and Ocado Retail are also building, they can ramp them up very quickly. So we would not be surprised to see a client who wanted to ramp -- was entering a market where they already had demand, for example, to ramp a facility in, say, 12 months. So rapid growth. There's no need to spend 2 or 3 years ramping a facility if the demand is in that market. So the infrastructure is capable of ramping very quickly. What a client can't do is tell us they're going to ramp up over 3 years, ask for an amount of capacity for the first 6 months. And then 3 weeks in, say I'd like to go to 100% next week. So that's a certain point where there's a little bit of lead time involved. Your second question is, largely, they are proportionate to size. Obviously, there is some economy of scale as you get larger just in terms of kind of wasted space that minimizes as they get bigger. Until you get down to something like a micro, where you may not, for example, store finished orders, they might literally just go out the door as they're picked, so then you can get some of that back. But largely, yes, they're proportionate to size. Do we see micro challenges? Look, obviously, our clients aren't going to be the only people to apply automation to the grocery industry. Otherwise, they will end up with a hundred -- they would end up with 100% of the grocery market at some point. We believe that the micros that we can offer to our clients are more efficient than any other in the business and the ecosystem of operating our micros in conjunction with our larger sheds will give them hundreds of basis points of cost advantage over anything else we've seen in the market.

Victoria Petrova: And just one follow-up in terms of your addressable market. You mentioned China in your presentation. Is it now a market you sort of seriously could consider entering? And secondly, in how many countries -- maybe you can comment on Canada, do you have exclusivity? I'm just wondering if you can have more than 4 CFCs in Canada and maybe other large markets. We know that Kroger relationships are completely exclusive. Do you have any flexibility anywhere else? That's it from me, I promise.

Tim Steiner: In Canada, our relationship is also one of conditional exclusivity. Our client is growing very successfully. Michael didn't say today that he sees, in the long term, having 4 CFCs. He's talking about having 4 CFCs to get this business going, a good geographical spread. Once those CFCs are successful in filling, I'm sure Michael will want more to CFCs. I mean in those markets where we are exclusive, it's always worth remembering, our exclusivity is dependent on our clients growing and having a significant market share without getting into very specifics of each one. Sorry, I've distracted myself. The second part to your question there was?

Victoria Petrova: China, China.

Tim Steiner: Was China. The answer, of course, is that our solutions, as we mentioned in the presentation, take time out, something like 80% of the time involved in a manual solution. Obviously, that is more attractive when you're having to pay for robotics in higher labor cost markets. So China as a whole, on average may not be attractive, although if you went to some of the more expensive cities, it might start to be attractive. And it gets more attractive every year as their labor gets more expensive every year, and it will get attractive, more attractive every year as we work out how to bring the cost of our solution down every year. So there will obviously come a point where it becomes an attractive solution in those markets.

Operator: We will now take our next question. It comes from Tom Davies of Berenberg.

Tom Davies: A couple of questions from me. Just firstly, on the robotic pick. Will that be like an add-on feature to the OSP solution? And thereby, are you able to charge an incremental fee for your CFC partners given the economic benefits they will receive? Secondly, click-and-collect. You trialed click-and-collect at Ocado Retail U.K. before. But given the UK market had seen like a shift of mix towards click and collect as well, has this changed your view? And if so, could you leverage some of the M&S store estate? And then finally, just in terms of the competitive environment for Ocado Solutions. Why are some of the other grocers internationally trying with multiple partners. Is there something wrong with some of their solutions? What challenges are they facing?

Tim Steiner: So the first question is, yes, it is an add-on service that will come at an extra fee. And therefore, it is a profit opportunity for both of us. So as we say, there's a significant shared saving in terms of the incremental cost of a picking robot versus the saving for the client. And we will charge a fee for it. The client will be better off, and we have another fee opportunity to make money on, yes. Two, click-and-collect in the U.K. market. Our view still remains that our competitors are seeing more demand for delivery that they're unable to satisfy. And therefore, they've launched click-and-collect at the same time because they can scale the picking in the stores faster than they can scale the delivery part of their business. And that actually, the U.K. consumer, not in every market we're in, the U.K. consumer still has a huge preference for delivery and so I'm not sure, whilst we could trial it again, I'm not sure that we would expect in the short-term to have a significant click-and-collect proposition in the U.K. Obviously, globally, that's not the case, and our solution has click-and-collect and is active in click-and-collect right now. And your last one was competitors...

Tom Davies: In terms of the competitive environment?

Tim Steiner: I think what you asked, if I correctly understood your question, you're saying to me, why do I think that some of the retail competitors, competitors to our clients, are now trying additional solutions, having previously suggested they were trying other solutions? Do I imagine there are problems with the first solution? Is that what you were asking me?

Tom Davies: Yes, that's probably what I'm asking.

Tim Steiner: Look, I think that a number of the solutions away from Ocado out there are, how do I say it politely, are overselling themselves in what they're going to achieve. And therefore, I think that people that try them are not as pleased with the solutions that they try as we've seen some of our clients today. I'm talking about our solution, and therefore, will try another one. Also, if you think about micros for a moment, micros are super small and relatively cheap. And so actually, if you're a big retailer, trying a few is maybe not an irresponsible thing to do, right? Because you just -- you can just -- you learn something. You might even just try one to see what your competitors might roll out, just to understand what their economics are likely to be like without even having a view that you're going to roll out loads of them because they -- you can -- they might be single-digit millions of pounds worth of initial investment.

Operator: It appears we have no further questions at this time. I would like to hand the call back to our speakers for any additional or closing remarks.

Tim Steiner: I just like to thank everyone for joining us today. And please stay safe.