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Earnings Transcript for OCDGF - Q4 Fiscal Year 2021

Operator: Welcome to the Ocado Full Year Results Presentation for Analysts and Investors. You will hear a presentation from management and then there will be an opportunity for questions afterwards. But first, let’s hear from Chair, Rick Haythornthwaite.
Rick Haythornthwaite: Having been on the Ocado Group board for just over a year now and chaired since May 2021, I have been able to take a good look at the business and make some important observations. The first is that Ocado is a cauldron of creativity. Innovation really seems to be part of the DNA of the business. Throughout the organization, colleagues are motivated to take on some of the biggest technology and engineering challenges of the age and then create practical solutions, which through our close and collaborative partnerships with a growing number of the world’s most forward-thinking grocers make a material difference to the lives of millions of consumers. This commitment to discovery, innovation and improvement is encapsulated in Ocado Re
Timothy Steiner: Thanks, Rick and good morning everyone. The past year has further reinforced that demand for online grocery is here to stay. In the majority of mature markets, the fastest-growing channel is online, and to truly win here, food retailers need to deliver the best offer with the best economics across all customer missions. For innovation that is powering the development of the unique and proprietary Ocado Smart Platform is focused on providing an unequaled customer experience through groundbreaking technology, which also leads to an unrivaled low cost operation. The new generation of Ocado technology, which we have called Ocado Re
Stephen Daintith: Thanks, Tim and good morning everybody. So it’s great to be back again with you all for the Ocado full year results. During the half year results, I talked to you about my first impressions and the priorities I have defined in my role as CFO to support the continued strong growth of Ocado Group. Today, I wanted to start by revisiting these topics. My first impressions are even more strongly held. Our unique culture of creative problem-solving and self-disruption continues to unlock a growing opportunity set for Ocado Group. Ocado Re
Timothy Steiner: Let’s talk now a little bit about the Ocado Re
Stephen Daintith: That’s right. So Ocado Re
Timothy Steiner: I think the first thing is we’ve often taken what we made in our retail business historically, but basically, we’re very big innovators with big investors, and we have, over the last few years increased the investment in our platform to not just keep ahead of the competition, but to just massively drive it forward. And that’s what Ocado Re
Stephen Daintith: And actually describe that, Tim it’s a package that must be extremely attractive to our partners, our clients, any responses from our clients so far in the last couple of weeks?
Timothy Steiner: Sure. I mean, everybody got to see our largest client because we give them a sneak preview. So anyone who didn’t get to see it in Ocado Re
Stephen Daintith: So Tim, let’s talk about our operating cost model. And the good news is that we’re well on track with all the goals that we set ourselves. What does Ocado Re
Timothy Steiner: Look, it means there are significant benefits. So capital costs coming down, robots capital costs coming down in grids as well as new things as well. We’re going to share those benefits with our clients. In fact, we’re going to be super generous in that sharing. But the way I think about it is the way that my broadband provider has treated me at home for the last 10 years or so. Every couple of years, they charge me a little bit more. That’s like the inflationary increase in price, but they keep upping the ante on what I’m getting for it. So we’re going to take some of those savings from those cheaper robots and those cheaper grids that would be on our side and we could just take to profit and actually reinvest those in giving our clients things like robotic pick that drive significant cost enhancements for them, that we know they will pass on to their end customers. And therefore, we will grow the demand, grow their need to build sheds and amount of sheds that they have and the speed with which they scale them up, and we create a virtuous cycle for their customers, for our clients and for ourselves, and that’s how we’re looking at it. And we’re talking about site productivity up over 50% for our clients which means that they get more than a 30% saving in the labor cost they put into those sites. These are quite big numbers, and this is only the beginning, of course.
Stephen Daintith: Great. Thanks, Tim. So we’ve heard a lot from our shareholders, from the market generally. They’d like to hear more about our key performance indicators for our solutions business and to be able to judge our performance. We’ve shared two or three of these today for the first time. Do you want to circle a bit more about how we’re measuring our own performance?
Timothy Steiner: Yes, look, we want to make sure that you can understand what we’re doing. And so we put some indicators out there to explain what’s – what we’ve managed to get live, the kind of the scale of what’s going on in the business and also the direction of travel in the really important cost lines as well. So people understand how we’re – what the progress is that we’re making.
Stephen Daintith: Brilliant.
Timothy Steiner: Thanks, Stephen. And we could talk about this all day, but we’ve only got a limited amount of time.
Stephen Daintith: Thanks, Tim. Really enjoyed it. Cheers.
Timothy Steiner: That brings us to the end of this presentation. Here are our main takeaways. The grocery market is at an inflection point. A huge market opportunity exists online for grocery retailers who can deliver the best customer proposition with the best economics across every customer mission. The game-changing innovation driving the development of the Ocado Smart Platform allows our partners to fully take advantage of this opportunity. Partners ordering CFCs today will be able to go-live quicker at lower cost and achieve higher margins and higher returns on capital. For Ocado Group, this means a bigger addressable market, the opportunity to win new partners more quickly and fresh opportunities for growth with existing partners. We have consistently set the bar in online grocery retailing over the last 20 years. Our deep culture of innovation is enabling us, once again, to reset the bar decisively for the benefit of our partners, their customers, our shareholders and the communities we serve. Exciting times are ahead.
Operator: [Operator Instructions] We will now take our first question from William Woods from Bernstein. Please go ahead.
William Woods: Good morning, Tim. Good morning, Stephen. So, a couple of questions from me. The first one is just on the guidance on flat International Solutions EBITDA despite doubling the revenue. Could you provide some more detail on the drivers of this additional cost? And I suppose what I’m trying to understand is, is it the structural changes to the cash profile of the CFC or have you got a mix effect from ramping or headwinds from inflation? The second question is on the Series 600 bots. Are you able to give us a view of kind of what percentage of bots will be live by the end of the year? Over how long will you expect to kind of replace them over time? And then a final question, just on the nonfood opportunity. Have you seen any further uptick from potential partners on nonfood?
Stephen Daintith: Okay. Well, I’ll do the first one, Tim, on the International Solutions. So two key drivers here. Number one, the investment we’re making in our technology platforms for the Ocado Smart Platform, we highlighted today, another £30 million also there. That’s one key driver. And then secondly, as I think the engineering costs, now every time we open a new CFC, there is a minimum level of engineering support for that particular CFC. And so there is a natural inefficiency in the earlier CFCs internationally and indeed globally. So those are the key drivers really. Those two key drivers get us to the guidance that we’re giving today.
Timothy Steiner: William, taking up to the 600s, we will start rolling off the production line about 12 months from now. And about 24 months from now, there will be exclusive bots that we roll off. So we will have probably about a year in the middle where we will be manufacturing both 500s and 600s. I think I’ve explained already that you can use 600s on any of the grids that we built to date. So any sites that have gone live can end up with a combination of 500s and 600s. As we go forward and build grids that are lighter weight and taking advantage of the lower forces that the 600s create, we will not be able to run them with a full fleet of 500s. We may be able to run some 500s on them, but not the density of 500s that would then create too much forces and ultimately end up with metal fatigue on those grids. And then your – the third part of your question was nonfood. There are significant opportunities in nonfood going forward, that the 600 and 600 grids open more than were historically available with the 500s and their grids. Because the 500s and their grids because of the extremely high performance levels that they are able to achieve, which we match with the 600s, meant that the grids were thicker and more expensive than some others out there in the market that are not able to achieve those throughputs. But with the extraordinary reductions in weight in the 600 series and therefore, the lighter grids that they need, you can gain the benefit of the low cost and the extreme throughput capabilities. But it means even on low throughput sites, they would still be the cheapest machine out there of its type to manufacture.
William Woods: Thank you.
Operator: We will now take our next question from Fabienne Caron from Kepler Cheuvreux. Please go ahead.
Fabienne Caron: Yes. Good morning, everyone. Three questions from my side, please. Regarding the metrics for Ocado Re
Timothy Steiner: So I’m going to take the first couple of questions. The model that we work with our clients is going to remain very similar to you outlined. Obviously, Re
Stephen Daintith: And then the final question around where do we expect net debt to be. Well, I think the key driver here is the £800 million of CapEx that we’ve guided to for 2022. We’re starting the year with £350 million or so of net debt. So I think around £1.1 billion is probably a good guide for net debt at the end of the year.
Fabienne Caron: Okay. Just to come back on Tim’s comments. It’s fair to assume that the CapEx from your side should be lower than with an Andover-like previous CFC?
Timothy Steiner: Yes, the CapEx going forward will be lower. But as William said before, that’s not going to affect 2022, but that will start to hit in 2023 and hit more materially in 2024.
Fabienne Caron: Thank you. Very clear.
Timothy Steiner: CapEx for the capacity, I mean obviously, what – we’d like to build more capacity. But yes, CapEx per billion of capacity will come down, yes.
Fabienne Caron: Okay, thank you.
Timothy Steiner: Thank you.
Operator: We will now take our next question from Victoria Petrova from Credit Suisse. Please go ahead.
Victoria Petrova: Good morning, thank you very much. My first question is on total addressable market. What are the new customer characteristics which could or would not have signed before and might sign now after Re
Timothy Steiner: So Victoria, on the TAM, there is two separate things that Re
Stephen Daintith: And on the...
Victoria Petrova: I’m asking about food.
Timothy Steiner: So I mean as I say on food, it really depends on who the partner is. So if somebody wants to come in and is clearly aiming for a number one market share position and very clearly wants to have the exclusive availability of our proposition because they see such an enormous advantage, then clearly we have that discussion, and we will see market by market as we roll out to new clients, where we end up on that one.
Stephen Daintith: And then the final question on do we have a target capital structure in mind, well, first of all, I’d make a point that the most important thing for us is to have healthy liquidity for our investment plans. We think now is exactly the right time to invest, to scale and catch the growth opportunity set that we see ahead of us. I think Ocado Re
Victoria Petrova: Thank you very much.
Operator: We will now take our next question from Andrew Gwynn from BNP Paribas Exane. Please go ahead.
Andrew Gwynn: Hi, very good morning. Two, if I can. So first off, just on the CFC build-out. I think we used to think about a figure of around about £50 million for standard-sized CFCs. I’m mindful that you’re not building too many standard-sized CFCs. But where do you anticipate that getting to? Obviously, the 600 robots and so forth, more capital efficient, but obviously we’re seeing quite significant inflation in many of the products that make up the robot in the grid. Second question and kind of bigger picture question. But if you stand back and think about last couple of years, I think it’s fair to say the market has been a little bit underwhelmed by the number of partners that have signed to the platform. What do you think is really holding them back? And can we expect a step change anytime soon? Thank you.
Timothy Steiner: Hi, Andrew, so the first one I’d say is, look, the savings that we’re making on grids and robots as we deploy 600s and the new grids to significantly outweigh any inflationary pressures that we’re seeing on the cost of those sites. And where you do see inflation, if that passes on into food, then obviously, as a percent of – CapEx as a percentage of the sales capacity and CapEx as a percentage of fees would actually be staying flat. So it’s – ignoring inflation, these are two very significant reductions in costs, some of which we will redeploy into increased automation in terms of On-Grid Robotic Pick and Automated Frameload. But we would expect to see our CapEx as a percentage of sales capacity come down as we’re moving forward, even though we’re putting in the incremental infrastructure. On your...
Andrew Gwynn: So are you able to give that – sorry, Tim, are you able to give that percentage today because I think I’ve certainly lost track of what it costs to build the CFC? I think there have been so many moving parts.
Timothy Steiner: Well, I think we don’t put out a forecast exactly. I think a lot of people have got a fairly good idea where they think those come in. I think you mentioned the number before. And I think it’s not wildly off. And as you say, it depends slightly on the size of the facility. Obviously, smaller facilities, pro rata cost less, very slight increase in the percentage cost as they get smaller. There is some efficiency and scale, but a very small amount. Moving on to your next question about – Andrew, we’re sitting here, it’s only, what is it, 4 years now since people thought we weren’t going to sign one, where it was us and Morrisons. We’re now sitting with 10 customers or clients on the platform. We expect that number to grow. I can’t say exactly when or by how many. We’ve covered some of the – in terms of the developed or kind of higher income countries, we’ve covered off some of the largest ones already in the U.S., in Japan, for example. In terms of the high penetration markets like the UK, we’ve got two clients. So I do expect us to see more. But what’s also critical is the growth in those existing markets, the incredibly high NPS scores that people are achieving as they are rolling out those facilities. We’ve gone from no international facilities to, I think, seven international facilities at the moment. And we’ve got nine new facilities going live next year. So there is a lot of activity. And I think what’s really happened with Ocado Re
Andrew Gwynn: Okay, thanks very much, Tim.
Timothy Steiner: Thanks.
Operator: We will then take our next question from Nick Coulter from Citi. Please go ahead.
Nick Coulter: Hi, good morning. I have three, if I may, please. Just one by one, please. Firstly, I have a question on the scale of the reduction in capital costs for the 600 robot and grid, please. I guess the frame of reference was the 13% of GMV that you talked about for Erith. But are we talking 10%, 20%, 30% reduction? Obviously, it’s useful to understand the unit economics, please.
Timothy Steiner: Well, we’re talking about an 80% reduction in weight. We’re not talking about an 80% reduction in costs, but we are talking about probably more than the numbers that you were – at the higher end of the numbers that you were talking about on a robot on grids. Obviously, robots and grids are not the entire in-store. You still got the peripherals as well. We’re talking there about swapping out 50% to 80% of the human pick stations for robotic pick stations, and then we’re talking about adding the frame-loading machines, where they have phenomenally attractive returns. So overall, we’re talking about quite significant double-digit reductions in cost of those facilities. Equally...
Nick Coulter: Including everything that you just mentioned?
Timothy Steiner: Yes. Equally, we’re talking about the redesign of the facilities, meaning that they are also for the same amount of throughput, a double-digit percentage smaller, which pretty closely equates to a reduction in the capital investment by the client in their building because they tend to be on a per square foot basis as well as a reduction in the requirements of the remaining space in terms of the things like the thickness of the slabs or the quality of the slabs or the amount of electricity required or things like that. So we are talking about material savings across the board. And then in terms of labor, as we said before, we’re talking about 30%, 40% reduction in the amount of labor required in the building, which obviously is super meaningful in terms of the clients’ economics and the overall efficiency of this platform versus anything else. It’s huge.
Nick Coulter: Okay, great. So what you’re actually saying is that even after you put the picking arms in and remove the human pick stations, you put the frame loading in, you’re still going to end up with a capital percentage of GMV that is lower than you started? I think you said double-digit down. Is that correct? But for no extra fee, I guess, is the question mark on that.
Timothy Steiner: There is some fees – because there is some extra services as well. So things like on robotic pick, you’re running the compute for robotic pick. You’re running the tele operations for the robotic pick for example. So we’ve got two teleoperation centers, one in North America and one in Asia. But currently the robotic pick for the Kindred Systems and are now running the same thing on the – we will run it on the first installations of our On-Grid Robotic Pick. So there are incremental costs. And obviously, there is engineering costs to continue to manage the Automated Frameload and stuff. So fees may go up very slightly, but very slightly relative – i.e., the majority of the savings that the clients have in taking out the pickers and the frameloaders, the majority of those savings are going to the clients.
Nick Coulter: Okay. But will you see lower engineering costs as well?
Timothy Steiner: Nick, we obviously do need to recoup some money for all of this R&D through that you will kind of expand [indiscernible]. We – the engineering costs on the 600 Series bot, the bots represent the majority of the engineering costs at a site. We would expect the long-term engineering cost on the 600 Series to be materially lower than they are on 500. The 500s are getting very close to our long-term targets that we set out kind of a while ago for this business to achieve. The 600s we would expect to be significantly more – significantly better, both because the design kind of manufacture process allows a faster turnaround. If I mean there is a part that you see an issue in, you can do a redesign, a prototype, a test and deploy very rapidly and also because the actual are significantly cheaper. And therefore, if you do replace a motor or you do replace physical component, the parts are significantly reduced.
Nick Coulter: Okay. So that 2% cost that you have below the fee, presumably that will come down by, I don’t know, 25%, 30% or something like that. And that’s the margin accretion that you’re referring to.
Timothy Steiner: We’re not getting into very specific numbers. Yes, we would expect to see some margin accretion. And – but we are, as you know, investing that margin accretion over a number of sites into the R&D that the entire, the clients and their customers, benefit from. So it’s to allow this continued and accelerated pace of innovation.
Nick Coulter: Got it. That’s very helpful. One last one, if I may. Can I ask about the frictional inbound and outbound costs that you get from taking inventory around the Ocado Orbit solution. I guess, you’re obviously enabling a lot of flexibility, but are there any additional costs?
Timothy Steiner: So the way that you think about it at the moment is there is two alternatives, right? One is that you run one big warehouse and you run two spokes. And if you run one big warehouse and you say 40% of the goods direct in small vans and 60% of the goods go out of the spoke site, you actually moved 60% of the goods in a one-way transportation from one warehouse to a spoke site, right? And then you take the trailer back empty. If you now run an Orbit network, you move, say, 66% of the goods rather than 60% of the goods, but you move them where the van is the – the trailer is always full when it’s moving. And therefore, you actually end up transporting less goods, but because you receive the same quantity that you would have done in a big warehouse, one of the three warehouses for each supplier, your inbound efficiency is the same. You transport 10% more goods, but you transport them on less routes because you don’t have the empty legs. You maintain very high levels of availability because if you need to reposition stock after you’ve moved it once, you can do that because you’ve got constant movement going on. And so you maintain high availability, a large range, low waste, and you can actually transport with less transportation routes.
Nick Coulter: Very clear.
Operator: We will now take our next question from Simon Bowler from Numis. Please go ahead.
Simon Bowler: Hi, good morning. First one, can you just talk a little bit around invoice fee growth. I know it came in a bit weak than you’re expecting for the year just gone. Perhaps give a bit more color around that. And I don’t know if that’s a number you can kind of talk or guide to at all for the year ahead. And then secondly, and this is maybe trying to ask the same question that others have been getting asked in a slightly different format. But can you talk at all about kind of the different return on capital profile that you are expecting to see, i.e., kind of capturing your comments around CapEx and margins under the Ocado Re
Stephen Daintith: Thank you. I’ll cover question number one, invoice fee growth in International Solutions. This is an item that is driven, of course, by new deals that we announced and the revenues that we get in from that. And the fees we’re getting from that, I should say. I think – and they can be quite binary. So, giving guidance is extraordinarily tricky because it’s down to one or two contracts, whether you get them over the line or not. I think it’s fair to say that we had hoped for more of that happening during 2021. But part of that thinking was aligned around COVID not being part of the year and everyone’s experience. And so that, once again, has restricted travel. Now that travel is opening up, we are in a number of live conversations. So we hope to get those to a successful conclusion shortly. So that’s where we are on that particular topic. And Tim, do you want to cover retail?
Timothy Steiner: So let’s, Simon, I think you know how this works as well I do. If we can get the capital costs of what we install upfront down, and we can do it quicker than also our kind of management costs of doing that are lower. If we can take the same upfront fees from the client, then the net investment is net lower. If we can charge slightly more fees because we’re doing considerably more services for the clients, but we can do it without having higher overall operating costs then the annual return is high. So you’ve got a higher return on a lower investment, and obviously that drives an improvement in the percentage return. The exact amount will need some time to quantify and are something we don’t give guidance on anyway. But it’s hard to know exactly what the cost of maintaining a fleet of 1,000 500 Series robots are because we haven’t printed that many yet. And so, we haven’t operated that many at full scale. But we have a pretty good idea because we know what are the key components? We know what are the key components that we replace on the 500 – on the 400 and 500 series robots, I mean we’ve made some really, really clever moves to make some of the key ware components, either last materially longer, be materially quicker to replace or repair and be materially cheaper in the ware part. So we’re making just phenomenal progress. And if you look to other things like even in the software, where you look at the number of escalations in the last quarter, in the warehouse software, for example, and I think we have something like double the number of warehouses operating and half the number of escalations, you see that the escalations per warehouse is coming down dramatically as we’re improving the quality of the software. [Technical Difficulty] Still there?
Simon Bowler: Yes, I don’t know if it’s my line or yours, but you kind of cut in and out a couple of times during that. I think I picked up the majority of points that you were making. So thanks a lot.
Timothy Steiner: Thank you.
Operator: We will now take our next question from Andrew Porteous from HSBC. Please go ahead.
Andrew Porteous: Hi, guys. I think, three, if I may. I’m just trying to get my head firstly around this idea of being labor markets at the same time, sort of maintaining the economics of existing contracts. I mean is that the right way to think about things that you’re sort of...
Timothy Steiner: Sorry, you have cut a little bit. Sorry, Andrew, could you repeat the question? You cut out a little bit.
Andrew Porteous: Yes. I’m just trying to get my head around this idea of sort of demanding in new lower labor markets and your existing contracts as well. I mean, should we think about you basically make the whole solution cheaper, but you – so you can get new contracts, but you’re effectively giving away some new services to sort of maintain the fee structure of existing contracts. And if that is the case, is there a risk of deflation in your existing contracts? Or are you contractually guarded against that if sort of existing customers don’t want to take the new services?
Timothy Steiner: So I think that’s a fairly good way of describing it. So yes and in terms of – obviously, we – the existing contracts are on fixed prices, where we add in new services, we will add them in at attractive rates for our clients, because we want to give them attractive returns, that mean that they will overall grow and grow their use of the platform need and use of the platform. So, in – some of the products are – I mean you can’t gain the benefits of a 600 series robot being cheaper if you have already deployed a full fleet of 500 series robots, but the 500 robots are already very impressive. It’s just that the 600 can do something even cheaper. But you can go back into that facility and add On-grid Robotic Pick and add Automated Frameload. Overall, between us and our clients phenomenal returns on the labor savings that you will generate and we can split those in a way that’s attractive for us, but extremely attractive for our clients.
Andrew Porteous: That’s very helpful. And then you talked a lot about e-commerce and the opportunity there. Just trying to understand, are you thinking about that as being a new opportunity with new customers like the Getir, Gorillas, etcetera, of the world and therefore, more opportunity in markets that might previously been covered by exclusivity, or are you thinking about helping your existing clients competes in that space?
Timothy Steiner: I mean, in most of our existing markets, more of the latter. Obviously, in a new market, we would consider any client that wanted to approach us and we wanted to talk to, but largely, the latter. The latter have the buying power to scale and the customer knowledge. What they – and what they could do with our facilities is bring an unparalleled offer, so bring an offer that is what you would call it, taking a UK kind of terms to be convenient store pricing, sustainable – and a sustainable profitable business at convenience store pricing, not some hugely discounting thing today, but ultimately 20% or 30% premium. And with a range that would not – would be a multiple size of a convenience store, more like a high street supermarket in a distressed purchasing timeline. So, whereas at the moment for a distressed purchase, you have to pay a significant premium and shop from a really small range. This would be 10,000 to 15,000 range at convenience store pricing and with very attractive economics for the retailer. So, it’s a bit of an unparalleled offer out there that I would expect to see a number of our clients deploy. I think one of our international clients has already stated that they are building their first one of these facilities in Florida, and I expect we will see more.
Andrew Porteous: Absolutely. And then a last one, just on the Ocado Retail side of things. It feels to me like a lot of the confidence in building back margins over the next couple of years is reliant on gross margin sort of staying 200 basis points to 300 basis points above where they were pre-pandemic. Can you just help us with the confidence around that happening and what the sort of building blocks are that are seeing gross margins get to where they are?
Timothy Steiner: I would just remind you that a significant portion of that growth is just the – what we – where we historically paid fees to Waitrose that we don’t pay any more. So, well over 100 basis points is purely that. And then also, we have done some other moves where the team have, for example, taken some of the product data that we collect in-house and are generating more probably by selling that directly ourselves from our own systems to the CPG community rather than through a third-party. So, it’s not kind of increased prices that’s driving that. It’s efficiency and low waste and the long tail and the media income and the investments in the platform that help drive more opportunities to raise that as well as the no longer working with Waitrose. We overall improved our price competitiveness last year. So, when we benchmark ourselves to other retailers, we overall came down in pricing, but we can earn attractive margins. That’s part of what having a long tail of selling 50,000 SKUs in an industry that thinks 15,000 is a lot allowed you to do.
Andrew Porteous: Very clear. Thank you very much.
Timothy Steiner: Thank you.
Operator: We will now take our next question from Sreedhar Mahamkali from UBS. Please go ahead.
Sreedhar Mahamkali: Yes. Hi, good morning. A couple of quick questions, please. I think maybe just going back to some of the debate earlier on about liquidity. I think Stephen, you made the point, which is very well noted about strong liquidity this year. But are you able to talk about CapEx requirements beyond this or maybe paint a picture on a kind of 2-year to 3-year view, because I think in the release, you did talk about you needing further requirement to further funding in time. So, how do you think about it on a 2-year, 3-year view in terms of CapEx requirements versus the CapEx that you have seen this year? That would be very helpful. And secondly, I guess just going back to Andrew’s question on capacity, think most of us still think about capacity you are adding via lens of 65,000 orders per week type CFC. But with all the innovation, I guess the question is, is the overall capacity still the same that we were thinking about, or is it greater? Is it less relative to the contracts that you have signed? That will be helpful just to get the answer on the magnitude of these changes. Thank you.
Timothy Steiner: Can I – I will just go first for a minute, and I can let Stephen talk about specific numbers. But obviously, as we roll out these innovations that we announced from Ocado Re
Stephen Daintith: And when it comes to the specifics of CapEx, yes, we have guided to £800 million in 2022. I think it’s probably fair to regard that if we look over the sort of ‘21 to ‘23 period is probably being the peak year of that 3-year period of CapEx spend. I think key drivers, again, when we think about this is really the number of sites that are close to opening or under construction. And if we think about sort of 2020, 2022, we are going to open nine sites in ‘22, ‘23 currently we have around eight or so sites set to open. So, that’s the driver of that £800 million. The CapEx going forward probably will be lower in 2023. But one shouldn’t regard reducing CapEx as a good thing. To Tim’s point just now, CapEx growth is an indication of the order pipeline that we have ahead for automated warehouses. And the more automated warehouses we add to the portfolio of the 10 that we have today the closer we then get to becoming in a business that can generate cash flow and at the same time, invest in growing a portfolio of automated warehouses. So hopefully, that answers your question.
Sreedhar Mahamkali: No, it does. If you we can maybe perhaps just add on a little bit in terms of clearly, we are going from net cash to a greater level of net debt. I guess a couple of questions. How do you think about funding beyond this year? And the second one is relative to the level of net debt, are there any sort of covenants that we should be aware of and things like that, please? Thank you.
Stephen Daintith: Well, first of all, no, there are no covenants that you need to be concerned about in respect of the debt profile that we have today. Thinking about funding, there are a number of routes we could choose to take. The debt markets have been supportive, and we expect them to remain supportive. Similarly, with the equity markets as well. I think we have a good profile of maturities at the moment with several years before the next maturities come up, but no specific plans right now. We will keep an eye on it as the year progresses and monitor this year accordingly and choose the right time and the right way of approaching it.
Sreedhar Mahamkali: Thank you very much.
Operator: We will now take our next question from Rob Joyce from Goldman Sachs. Please go ahead.
Rob Joyce: Hi. Thanks very much for taking the questions. I have got a couple. Apologies for flogging this dead horse, but maybe from another angle, I guess in terms of the Ocado Re
Timothy Steiner: So Rob, I think that the key with the existing and new clients really is around two main changes. So, one is when they model something out, they used to model it out with kind of circa 200, is the UPH kind of target, i.e., roughly 4.4 orders per labor hour. People are modeling that out now with six, seven kind of plus orders per labor hour. So obviously, that’s phenomenally attractive, particularly as wages in many countries are under very positive pressure. So, we were already dramatically more efficient than any other means of doing this because that was an end-to-end productivity. That’s those people unloading the suppliers trucks and loading the trucks on the other side. So, I have seen many people comparing it to fractions of the work in the warehouse, driving it up into the 300-plus level, between 300 and 400 is a very dramatic improvement as well as the buildings requirements being somewhat simpler and somewhat smaller means that the incremental CapEx that the retailer needs to deploy is smaller. And so I think that’s what’s driving the economic part of the model. But I think there is an equal or possibly almost larger excitement from some of the clients around the capabilities for using those warehouses and optimized routes by managing to do short lead time deliveries, is driving a huge amount of excitement from our existing clients and some from prospects, and the ability to build smaller warehouses close to more clients and still maintain the efficiencies that has been the kind of the elusive holy grail of this automated grocery kind of business is also generating excitement. So, it’s just a really busy time for us. And we are trying to put as many numbers as we can out for our clients at the moment to just try and help them understand the implications as best as possible, but it is really throwing up a lot of conversations and a lot of excitement and a lot of interest. And of course, you can change your financial models by just saying, I am going to build quick and I am going to ramp it quicker. And that in itself has a benefit on both sides. And so there is a lot to digest, but it’s all positive. And then on the…
Rob Joyce: And just very quickly, would you mind – just on the labor cost per hour. Is that broadly saying if we assume a $20 per labor hour, it would have cost $4, $5 per basket before – or sorry per order before and now it’s looking closer to $3 on those numbers you just gave about. Is that a way of thinking about it?
Timothy Steiner: That’s the right way of thinking about it, yes.
Rob Joyce: Thank you.
Stephen Daintith: And then on the cash flow positive year, I am wary of giving a specific here, but let me sort of try and talk you through a way of thinking about it. So, let’s assume we are building 10, a dozen or so of CFCs every year, and that’s a £500 million or so cash outflow. And then we are investing, let’s say, £200 million in technology, £100 million of group ops costs. So, you put that together, you have got about £800 million annual outflow and let’s sort of disregard working capital and so on in the numbers. I think the way to think about it is the number of warehouses around the world that are generating when they are operating at full maturity and capacity, then generate sufficient cash flows to offset that £800 million or so. And I think the number to think about there is when we hit about sort of 55, 60 or so warehouses around the world. And at the end of ‘23, we are going to be at around in the high-20s, so about halfway through. So hopefully, that gives you a guide then. And you will see, as we announced for the committed sites and when they are going to go live but you ought to be thinking about it, a period sort of 4 years or so years out from now – 4 years or 5 years from now, reaching that pivot point, where look, we have got a sufficient portfolio of warehouses to continue to invest and cover our cost base. That’s the – probably the best way of thinking about the whole exercise.
Timothy Steiner: Stephen, it would be fair, wouldn’t it, to say that kind of 20 to 30 would mean that you were breakeven on the level of innovation that we are trying to drive, which is huge at the moment.
Stephen Daintith: Yes.
Timothy Steiner: And then the next, as you spoke about the next 20 to 25 or something like that or 30, allows you to grow 10 a year on a self-financed basis. And then that model just keeps growing on that basis.
Stephen Daintith: Well, exactly right, yes.
Rob Joyce: Very, very helpful. And then very last one maybe that steady state CapEx spend.
Timothy Steiner: Look, we are not on a firm number. But whatever number you thought it was, imagine that we can deliver at least at no more than that number and hopefully less to deliver the efficiency that you just spoke about before in terms of the reduction of costs on the client side. And then we also hope that there is a reduction in the largest part of the engineering cost, which is the maintenance of the robots that we spoke about that – as we have talked about today in the numbers of the KPI is coming down towards our long-term target with the relatively new 500 series, an order of magnitude in terms of kind of – about 10 – as long as it took the 400s to get to these kind of levels. So, that’s doing phenomenally well, but we would expect the 600s to significantly outperform the 500s on that basis.
Rob Joyce: Thank you.
Operator: We will now take our next question from Xavier Le Mené from Bank of America. Please go ahead.
Xavier Le Mené: Thank you, gentlemen for taking my questions. Two, if I may. The first one, just understanding the 600 series and what it can change it is in signing new partnership, because it sounds like potentially, you are waiting for that series to be live. So, does it mean that potentially new partnerships could be back-end loaded, i.e., we need to see the 600 series running before you can convince new partners to potentially buy your technology? So, I just want to understand the kind of timeframe here. The second one is about non-food. You sounded a bit more vocal about the non-food opportunity. Can you confirm that you already have discussion about that or that’s more the prospects of starting discussion about non-food going forward?
Timothy Steiner: Look, the 600, 500s, we need to have availability of robots. If we sign a client up, we make a decision on the kind of pricing and how much incremental actually we are going to put in the building to drive their efficiency at what cost, at what charge effectively. And we are making an assumption on the amount of 500s and the amount of 600s we will deploy in that building or if we will only deploy 600s. And so yes, if somebody wants a building that’s going to go live in the next six months, it’s a 500 series building. If they want one that’s going live in 18 months, it’s probably a 600 series building. And if they want to go live in 2 years, it’s definitively a 600 series building. And so we just have to take that into account. It’s not the client doesn’t need to take a risk on that. We take a risk on that, because we are building one series and we will migrate to building another series. On your non-food question, we have had inquiry from non-food for many years. We have kind of batted it back, because we were aware that whilst our product had a multiple of the throughput of any competing product per robot, the robot itself was more expensive. So, the throughput curve kind of cost of robot may have been similar or in our favor. But what was different about ours was that you could get massively more throughput from a density. And that was – that is critical for grocery, but not critical for many general merchandise or storage or kind of other use cases. But then the machine that you house it on was similarly kind of over specked, but you didn’t get any benefit if you don’t want that throughput. By driving down the weight of the 600 series by 80%, we drive down the weight to the lower – the lightest bot in the industry, but even with the faster acceleration that we generate with it to do more throughput, still we generate less forces, and we can build the cheapest grids in the industry. So, the opportunity now to do anything else is present. It’s like the point where – at any of these innovation examples. But once your digital sensor, it’s higher resolution 35 mm film then suddenly, you have opened up another – that wasn’t why you designed originally, but you have opened up another opportunity. This is the fastest throughput, lightest bot that can sit on the lowest grade effectively grid and therefore, is the best storage and retrieval system available.
Xavier Le Mené: Okay. Thank you.
Operator: We will now take our next question from Tom Davies from Berenberg. Please go ahead.
Tom Davies: Good morning guys. And just three questions for me. So firstly, for like a standard CFC, can you give that CapEx split between like long life CapEx on the grid and then like the shorter life CapEx on the robots and the on-grid robotics? And then secondly, does the Series 600 robot improve the throughput per robot. So, it means that less robots are required from Ocado’s perspective. And then finally, for the innovations from a solutions perspective, you are obviously facing a trade-off between revenue and margin. So, how do you make sure that your partners keep on building that additional capacity from the lower operating costs?
Timothy Steiner: So, I think there is three questions there. Let me just try and make sure I have got them. The first one, there was the split between bots, grids and other stuff and the kind of life of those assets. Is that about right?
Tom Davies: Yes. That’s right.
Timothy Steiner: I think it’s roughly rule of thumb would be to say it’s something like a third grid and bins. It’s something like a third robot, and it’s about a third the other peripherals in the building. The grid and bots, obviously, the grid’s long life, the peripherals are probably – to be honest, the type of equipment and the peripherals are generally, we are still running the original – a lot of the original versions in Hatfield 20 years in, but they have an average life of about 10 years. The bots are probably a bit smaller than that. But again, the overall average is about 10 years. The thing with all of that stuff, though, is like with the bot, for example, there are ware parts on them, but we run the ware parts, that’s the engineering cost that we look at. That’s changing the tires or swapping out the batteries or that type of thing. Ultimately, you run these like an airframe of an airplane, and they should last for much longer than we currently assume and that we depreciate them too. Your third – or your second part just remind me was…
Tom Davies: Do the robots improve the throughput?
Timothy Steiner: So, the 600 series robot is designed to have the same physical characteristics as the existing robot. So, it’s not designed to do more work per se, although we do expect that if it – if when it becomes more reliable than the existing robots, then it will do slightly more work because you have less robots that are coming off the grid and asking for a bit of maintenance. And if when they do want maintenance, it’s quicker, etcetera. There is a benefit there. And because the robot is smaller and lighter, it will need less energy to move itself around. So, it will spend a little bit less time charging. So, there is some benefits there. The main benefit, though, is that the On-grid Robotic Pick allows us to lay out the sites differently and to remove some of the critical congestion on the sites that allows us actually to put more robots in the same space and generate more throughput overall. The On-grid Robotic Pick may also be more efficient in the use of the robots. But that’s something that I think we are working on now to understand. And we are constantly improving all the software that runs our systems and driving robot efficiency up by a few points here and a few points there anyway. But this was – it’s more – the 600 series is more about the reduction in weight, the reduction in costs, the reduction in forces and what that means to crash barriers, slabs, grids, and things like that, that ends up in quite a material reduction in other costs, plus the reduction in their own costs.
Tom Davies: And then just the final one from – about the trade-off between revenue and margins and how do you let ensure the partners – make sure that you keep deploying that additional capacity?
Timothy Steiner: Look, I think the point with the partners is the more attractive we can make the economic model for them and the more missions we can help them to serve, and the better we can help them to serve those missions better than any competition that they have in terms of allowing them to sell fresher food, bigger ranges, better accuracy, better UI, better interfaces and to cover all the different missions from ultra-short lead time on e-commerce through short lead time, two-hour, three-hour, four-hour deliveries to later today, to today for tomorrow, etcetera. The more we can help them to do that at the lowest cost in their market, the more they will drive market share. There isn’t a grocery retailer in the world that I don’t think that doesn’t try and drive growth in their market share and take advantage of competitive advantages to do so. So, it’s a question of innovating, creating competitive advantage, sharing the competitive advantage with our clients, they go out and use it in the market, and it creates the virtuous cycle of growth.
Tom Davies: Thank you.
Operator: We will now take a follow-up question from Simon Bowler from Numis. Please go ahead.
Simon Bowler: Hi. Apologies the call has been going a little bit, but it’s a slightly off-peak question as well. I was just wondering, with some of the innovation has come through with Series 600 and so on, have you in any way, been in conversations with your growth is about using a CFC to top up or fulfill any of their physical networks? The entire focus has been very much on driving their online business, all of certain aspects of the range they want to hold in a physical store, we would have tend to be a more efficient route to fulfilling the store via CFC, via their existing manual distribution centers.
Timothy Steiner: So Simon, it is something that comes up from time-to-time, and it is something that several of the clients have asked me in the last week or so, because of the robotic pick in particular, as well as just more facilities. Because you still build facilities to a peak day, you obviously have effectively downtime in those facilities, particularly with robots. We have got robotic pick as opposed to human pick. The incremental cost of doing some sortation and some organization in there effectively is incredibly low. And so where – these things are not necessarily the right beast to send to a large hypermarket, the fast-moving part of the range, but they are very interesting in terms of either running larger ranges in small shops or big shops, frankly, and doing that more efficiently than you can do that anywhere else. So, they are extremely interesting to do store replenishment of singles, of things that you don’t want cases. So, the existing store replenishment network is mainly focused on cases, which in some places, limits what they can put in a store, and therefore, you could drive greater sales in your small store formats by allowing yourself to replenish in singles and effectively have more lines in there, or in some instances, we have clients who use like the wholesalers to try and – to add in the last parts of the range, and they could do that much more efficiently themselves and drive some margin improvements on that side. So, it is an area of interest. There are a lot of areas of interest of how to utilize this stuff. And some of it’s an area of prioritization for us and our clients so that’s the most important thing for them to achieve first. Would I be surprised if our facilities will contribute to that in the next 3 years to 5 years in some people’s store networks, I would not be surprised. No.
Simon Bowler: Okay. Thank you.
Operator: There appears to be no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks.
Timothy Steiner: I would just like to thank you all for participating today and look forward to speaking soon.