Earnings Transcript for OCDO.L - Q4 Fiscal Year 2023

Rick Haythornthwaite: Welcome to the Ocado Full Year Results Presentation. There's a lot to celebrate in these results but also you're going to hear there's a lot of work that we still need to do. And it's only proper we should start with the successes. First, we've seen a 25% increase in the live modules – average live modules during the course of the year. The technology works and it works well. It's delivering at or exceeding targets where we apply it. We've added three more live CFCs in UK, Canada, Japan. So we extended the geographic spread and they're ramping up to target. Customers love our online grocery experience that the – our clients are delivering in their local markets. And the NPS scores are consistently very high. You look at the reimagined technologies, we're rolling those out. This is the first year they've been commercially available and they're already being deployed in the UK and in Sweden. We've expanded the partner success activity, some theme you'll see coming through quite extensively during this presentation, helping our clients to grow to achieve long-term profitability. We really do know online grocery and we are out there helping these clients to get the most out of the Ocado smart platform and to find out better ways of filling their capacity and building new capabilities. Of course, it's the first year that we have secured contract in outside of grocery with the Ocado Intelligent Automation, as the first contract being McKesson in Canada, which is the leading pharmaceutical distributor in the US. Ocado Retail is now on a good growth trajectory. It's adjusted to the post-COVID world and delivering on the perfect execution program that was introduced by Hannah Gibson, the CEO. And as you'll hear, we have made considerable strides on cash flow and we can reiterate the – our target of becoming cash flow positive in the mid-term. But there's work to do. Repeat or repeat orders of new modules are just not at the pace they need to be. Partners – our partner success will determine our success. And so it's encouraging to see the extent to which our teams are working very closely and very collaboratively with our client teams, really to think how to deliver on the potential and how to deliver the growth of the platform and the investment they've made in us. There’s been a lot of progress during this year. But there's a lot that we still have to do and we must do and you'll hear about that during the course of the presentation. This year, coming year, we have to focus still on the partner success. We have to continue to roll out Re

Tim Steiner: Thanks, Rick. Okay. Where are we? Okay. So the key messages for today are that we do continue to make financial operational and strategic progress. So we've had a strong year in that sense. The success as Rick said for our partners is our key focus right now. We want our partners to fill up their buildings, to draw down more modules and to buy more buildings. And critically, they need to be successful with the capacity they've already downloaded. We continue to innovate, and our past innovations, our current innovations and the pipeline of innovations are driving and will drive more opportunities and attractive returns for us and for our partners. We have got good financial discipline across the business. And Stephen, obviously will talk to the numbers but as Rick said the cash burn for the year was down substantially ahead of what we had targeted. And we have an attractive business model operating in multiple segments and I always think it's just so much easier to understand our business when you focus on each of those segments individually so that's what I'm going to do today. In terms of the financial progress, we've seen strong revenue growth across all segments, positive adjusted EBITDA and improving cash flow across all businesses and Ocado retail returning to profitability in line with guidance. We made operational progress. We've seen a significant growth in live modules. We have seen increasing productivity in terms of Ocado's productivity on delivering those live modules every day for our clients. We've seen cost efficiencies and we've started the deployment in particular OGRP is operating at quite a pace and a growing pace in Luton. It's quite something to see if you get the opportunity and we have rolled out AFL a little bit here in the UK, but we're doing 100% of the loading in our client's facility in Stockholm with AFL and we expect to see more rollout of both of those products during the course of 2024. Strategic progress, massive focus on partner success and obviously John's going to talk more about that and I don't want to steal his thunder. We did sign our first Ocado intelligent automation deal with McKesson. We settled the auto store litigation so a topic that we got to talk about for a couple of years quite extensively was not mentioned on my media call this morning for the first time and we announced this morning the 13th OSP partner signing with Panda in Saudi Arabia. We also opened this year three new sites and we now have over 1,000 stores live on our in-store fulfillment platform. So looking at the financial progress in summary in some numbers, just going to head straight to the change column. Group revenue was up 10%. Adjusted EBITDA improved by £126 million from a loss of £74 million to a profit of £52 million. Our loss before tax improved by £53 million and the underlying cash flow improved by £356 million. So that was all on the back of a strong trading performance and a very rigorous focus on costs. Stephen has it all very tightly locked away. So these are the 13 world leading retailers currently on our platform and between them they have more than £250 billion of annual sales in grocery that we would look to see a portion of that moving online in the next few years. If you just took 20% of that online you'd be talking about £50 billion and you'd need to roll out north of 600 modules to achieve that level of volume. So let's have a little bit of look at the technology solutions in a bit more detail. If we move on here hopefully you can all see that in better size than I can look in the other direction. What you can see here is the 232 announced modules. But you can see the breakdown here in terms of the blue being the live modules currently generating revenue up from 99 at year end 22 up to 111 at this year end. The green, the 49 modules, are modules that can be drawn down in existing live sites. So that's where we've built a seven module site and the clients using three or four, the remaining three or four are in that 49. They also are able to be drawn down with significantly reduced CapEx because the grid's already installed. In these early versions, we installed more of the kit up front. So the machines that take the customer boxes out of the hive boxes, they're already installed. A number of the pick stations are installed. We probably need some more robots. We have those robots ready to install in those sites. So that's what the 49 are. They are no new sites needed. We can grow by 49 modules. The 40 are modules that are in sites currently under construction not yet being paid for. So they would include things like Sydney, Melbourne, Phoenix, Calgary, Busan, for example, right? So that's where you get the 40. The 32 are announced sites by our clients that are not yet actually a live program. They've announced them but they haven't come to us and said we found the site. So they would be places like Miami and New York and Los Angeles where a partner in the US has said and signed for something, but actually paused as you know, whilst we get the eight sites that are live working better and then we'll restart those programs. But that's what the 32 represents. So, easy to see that if we take the 160 to 200 of those modules the 111 the 49 and the 40, no new site announcements, no new projects, no new finding sites, we can get to 200 modules like that. Obviously, what we want to do is get to hundreds of modules as I was speaking about before. And we're confident that module growth will accelerate as the partner success delivers. And we expect the Re

Unidentified Company Representative: Thank you very much, and good morning, everybody. Partner success, which I'm going to talk about this morning, what is it? And why are we doing it? Partner success is just a team of very experienced and specialist resources in Ocado Solutions. It is 100% focused on helping our partners to grow quickly and grow profitably. We've appointed a really experienced team of business leaders to lead Ocado Solutions in our three regions. You can see those on the screen with a number of partners. Each of those importantly now has resources dedicated specifically to each of our partners so that we can work as closely as we can with those partners on a day-to-day basis. And you see along the bottom, we got central resources. That is a bit of an understatement. Many of these people are very experienced managers in Ocado, very often, they've got really great experience of Ocado Retail and Ocado Logistics going back years and some of them decades. And they've got really good understanding of the planning, the controls, the operations, the tools that have made Ocado Retail so successful. We've also included though in those central resources, we've recruited a number of deep subject matter experts in areas like e-com marketing, customer acquisition and retention, retail media from outside the company. And finally, we also have a very effective analytics function, where we can identify with our partners what the best opportunities are. I come on board in September. I have visited every country now where we have operations, and I should share a few observations with you. Firstly, all the CFCs that I have visited, the grids, the box, the peripherals, our latest automation, it operates absolutely as it was designed to and as it's meant to. Our technology does work really well. Tim mentioned, we talked a lot historically about re-imagine technologies. And these are being rolled out now much more widely to improve efficiency, to improve safety and to lower cost on partner sites. The most transformational technology, I think, is going to be GRP. We expect that when it is rolled out, that's going to save several millions per year at each facility, and it will lower our partners exposure to expensive labor costs and also to staff churn. ISF, we've got quite a number of partners using OSP in store or dark store environments. And that might be used to service less densely populated areas or to create demand in advance of opening a CFC. And in some other areas, it might be used in lower labor cost countries, whatever, our partners are using this to really great effect now and our ISF solution has been rolled out now to more than 1,000 stores. Ocado is very strongly aligned now around that clear objective which is to help our partners accelerate profitable growth. And very importantly, from my point of view, if you look at the last bullet on this chart, our partners are fully engaged with this. We're sharing best practice data on productivity, on customer satisfaction, on finances, efficiency, operations, organizational design and we're doing that very openly and very collaboratively and comprehensively with them. What are we focused on today? Firstly, customer acquisition, so revenue growth here. Customer acquisition, retention, driving basket size. Our partners have made this investment with us with a specific goal of taking market share in e-commerce and providing an unbeatable customer experience in that online grocery retail space. We've got a dedicated team within our partner success team, focused on supporting our partners to grow and also to maximize income from sources that might not be available off-line such as retail media. Secondly, the second box here operational efficiency. To get the most out of our CFCs, it needs good planning. It needs disciplined execution and dynamic integration with marketing. Our most successful operators are also maximizing the proportion of direct inbound deliveries and they're constantly looking at reducing waste. Last mile operations account for a large part of the cost base. Careful management of slots and route optimization makes a really material difference to the P&L. And thirdly, product development. As Tim touched on here, I won't say too much about it today but we are working with our partners and this is a two-way process. We need to understand what developments they want us to make to help them gain market share. And also we need to make sure that we are taking them through the latest capabilities that our tech team has developed to make sure that they get the best use out of the platform. The significant investment that we make in the platform, that I'm sure Stephen is going to touch on, that is a really significant factor for our partners, because they know they've invested in an industry-leading solution and they want that to remain ahead of the market. And fourthly, here just under toolkit, we have got very powerful analytics and really good tools. We're continuing to develop a playbook, which allows us to share critical success factors with our partners from organizational design through to specific operating methods and reports. I did just want to touch on. If you look at this chart here, the five boxes on this chart. They represent five sort of categories of the P&L. When we're going through these with the partners, the reason we've anchored it on the P&L is it gives them a really clear view of the materiality of the levers that they can pull. For each KPI and each P&L line, now we've got a really good view, which we share with them of what good and great performance looks like based on best practice across our 22 live sites. Let me give you a flavor of the way that we've been going about partner success by just touching on a few of the projects that we've done. We work with two of our partners on a project to analyze the checkout walk that will improve conversion and optimize the basket size. Customers want to be able to checkout quickly and simply but there is also a value in allowing customers to keep the basket open as late as possible. So, we're able to do AB testing to assess the impact of different proposed changes on customer behavior. In another assignment, we work with a group of partners to measure the cost of customer acquisition. We call, CPA and to identify the conversion of customers at each stage of the customer journey to make sure that we haven't got customers drawing out at a certain point. And that helps partners understand how much to invest in marketing overall, how much to invest in customer acquisition and how much to invest in retention. And another project team does an in-depth review of the marketing for a specific customer banner and that identified opportunities to drive performance of weaker landing pages and to improve search capabilities. And in that we worked with the partner's agency to review spend and traffic by channel. If you don't get it right waste is a very significant cost for our partners. Products approaching their sell by date can be cleared by flash sales, and our demand forecasting system can instantly impact future order quantities to build in learning. Project that I'm referring to here, waste charges at the sites were reduced on an annualized basis by several million pounds per year. We've been requested by a number of partners to review their organizational design, which might come as a surprise, but we have. And that helps us share with them our view of what critical roles and responsibilities they need to adopt to make a real success on to these facilities. And lately we've completed a project to review a partner's detailed shift patterns to help them improve productivity and slot availability. I mentioned in-store fulfillment. We've consulted several partners on using our ISF tools and we do detailed store audits to optimize the pick walk and improve customer fulfillment rates. Finally, as they grow most of our partners are focused on improving last mile productivity. As I said before that's fundamental to achieving good economics. And our last mile team has been helping show our partners how to monitor slot availability and to optimize root fill sharing methodologies. And determining, which geographical areas it's most advantageous to serve using our OSP functionality to rezone and rebalance between the service offering and root fill. I hope that just gives an idea, it gives you a glimpse of the type of work that we've been doing to accelerate our partners' growth and improve our profitability. Thank you.

Tim Steiner: Okay. Just a quick few words on OIA. Why are we in this space? We believe that our solution has clear competitive benefits in the wider automated storage and retrieval sector. We're able to offer a unique proposition, because we're an operator ourselves with over 20 years experience of running a wide variety of material handling equipment here in the UK. So we're in a unique position to compare shuttles to overhead storage systems to conveyors to cranes and everything else, because we've owned and operated every one of them. And we've done so with probably the most ruthless focus on whole site efficiency of any MHG operator in the world. So our experience is something that is massively sought after. We have engaged over the last 10 years in extensive R&D investment and we have an extremely robust roadmap for automating further processes and all the processes across the fulfillment value chain. We're using in our systems proven expertise that creates very sophisticated dense storage and orchestration algorithms that allow us to create very high throughput and drive very high levels of efficiency, whilst maintaining full inventory traceability and also very, very safe inventory. It's very hard to take something out of grid that you're not supposed to in the system doesn't want to allow you to. Our systems are more space-efficient than shuttle systems over 20% more efficient than shuttle systems and we are able to offer the tallest available grids in the market. Our systems have the highest throughput and productivity. Our whole site efficiency is over 300 units per labor hour today and what we can offer, but also the amount of density of bots, the bot control systems, the single space bots and the acceleration, deacceleration, hoist speeds of our bots, means that we can offer the highest throughputs -- and higher throughputs than anything else out there. And because I've reimagined, we are price competitive. The new 600 series bots and grids, obviously, allow us to be price competitive along with ODRP where that should be deployed on the top of the grids and also some new peripherals that we're rolling out that are significantly cheaper than the historical pick stations, et cetera. As you're aware we signed the first OIA deal with McKesson in Canada in November 2023. They are the largest pharmaceutical distributor in North America and we have a healthy pipeline of OIA deals that is building at the moment. The OIA team are very, very busy. We also recently showed ourselves to the world for the first time in a trade show in Las Vegas in the last few weeks and our at the MODEX Show in Atlanta in the next few weeks and will be in Birmingham as well this year. So the first time we've publicly shown our wares very prominently on large stands at public events, drawing even more potential customers to us up to now McKesson and the pipeline has largely been built by inbound inquiry we're very much now actually heading out and going to be building up the pipeline ourselves. So what is the size of the opportunity? This is various industry estimates around the scale of the automation investment that needs to be made in the next, whether it's 15, 20, 25 years. It looks like a total market of over £1trillion that needs to be spent to automate storage and retrieval type facilities and warehousing facilities. We knocked that down into an addressable market, that we think is in the economies of the world that we think that we should be targeting, and we draw that down into what is currently the serviceable market, based on the product that we have today, but that actual 130 out of the 450 will be growing, as we add more products into the mix and are capable of addressing more of the needs, but if you kind of take that market and divide it by whether you think this market is going to automate in 10 years, 15 years, 20 or 25 years, you can then see the type of scale of opportunity. And I think that there was more than enough space for another player, with our skill set in this market. And so, there are billions of pounds of annual revenue opportunities to share amongst the players in this market. We would obviously, like over time to become the largest. A sizable opportunity clear path to expanding it, as our technology develops. Ocado Retail, let's move on to that segment. The perfect execution program has been delivering results including, a stronger customer proposition. We are focused on the three bars there unbeatable choice, we're now up to -- back up to 50,000 SKUs as we were before COVID. We now have around 90% of the M&S food available on Ocado.com. And we've got new international ranges including, the Polish range popular in my household. The unrivaled service, we are over 99% items delivered as promised. 95% on-time delivery, and a great doorstep experience. Getting the basics right in online grocery, is the most critical thing. And it's amazing, how I've been in this industry now for 24 years, how few players there are in the world that can actually deliver what they promise to a customer on their doorstep on time. And it is something that our platform has always enabled, and it's something that enables our clients to have high AMPS scores sort, NPS scores I mean, because doing it right, is doing it well. We are reassuringly good value. So, our average sales price has increased significantly below market inflation over the last year, as we have been investing into the proposition and our pricing. We relaunched the Ocado Price Promise to guarantee that our baskets are as cheap, as shopping at the largest grocery retailer in the UK. And we have had thousands of product price drops. I know inflation has been a question recently. Inflation has been dropping again. Our ASP is still positive, increase year-on-year, but it's very marginally down quarter-on-quarter largely due to the investments that we have made in price to drive growth -- future growth. Our customer proposition is back to where it should be, and we have a positive NPS. The strong proposition is driving customer growth. So you can see here, where we were in terms of active customers in 2019, at 796,000. The moves that we made in 2020 to deal with the massive excess of demand both from our existing loyal customers and from other customers, meant that we actually ended up in 2020, with less active customers because restricted access to the shop and we restricted even the people who had access to the shop to the amount of times that they could shop with us. It's obviously relevant to another conversation that we're having. But you can see, that those customer numbers then growing back to 832, 942, 998 continual growth of active customer numbers 9% growth in the mature customer base. Sometimes, you can do different marketing activities. So in 2020, we were doing broader marketing activities that brought in higher numbers, but of less quality. What we've tried to do this year is, refined back to get back to the lower CPAs that we were familiar with in 2019, going back to basics again or back to the future. And that has enabled us to have whilst, what looks like 5. 9% growth in active customers actually a 9% growth in what we would consider to be the mature customer growth, which is where you really want the customers to be. We have materially improved our attention to Fifth [ph], we always say once a customer gets to fix shop they largely shop with us, until they leave the country in one way or another, as well as an improved first quarter value, which obviously again helps to quickly recoup the investment in customer acquisition, the faster they shop with you. We have done that at lower costs. So we have reduced the marketing spend including vouchering back down to historical levels around 2.6%, that's very familiar kind of territory, if you look back in pre-COVID years from the increased marketing that we had in 2022. Our market share online is increase, is up 0.7 percentage points to 13.5%. And so we are gaining market share and our competitors online and we have confidence in our ongoing momentum. Sorry. We have optimized our CFC footprint. As you're aware, during the year closing our oldest warehouse, Hatfield. Hatfield was open for I think 22 years. We opened Luton and has seen the fastest ramp in probably the history of automated single-pick facilities. And we've also returned to positive volume growth, meaning that today we are using greater than 75% of CFC utilization. I will just be clear, that's greater than 75% of the design and drawn down CFC utilization it is not greater than 75% of what we will drive that number to. So we will drive 10%, 20% or 30% more capacity out of those UK warehouses in the future. But in terms of Hannah running a business that is paying for more capacity than she's using, she's up to the 75% level now. Productivity is growing. You can see the productivity there over a number of years. We're up to 199 in the fourth quarter of 2023. The exit rate of Purfleet is 225. It's been operating ahead of that 230 something I think might even have hit about 240. So the new warehouses are all operating quite meaningfully ahead of their design productivity prior to the impacts of Auto Frameload and OGRP going into those warehouses, which means that whereas we were offering sites with a 330 productivity to our clients globally with Re

Stephen Daintith: Thank you, Tim. Hi, everybody. Okay. I'm going to be quite snappy with these numbers to allow a good set of time for Q&A. I'm going to start with our Technology Solutions business, which – and the financial model for that business, which is a key driver of the profit and cash flow improvement over the year but this will be increasingly the case. So let me just highlight just two or three key things here battle-tested IP portfolio in the top left proven that with the case against auto store and that resounding victory there, sticky recurring cash flows. This is a business that has recurring cash flows that are very sticky as our customers around the world grow their own customers from our technology. We also have a strong pipeline visibility. We have very good visibility over the next two, three years of specific sites that are going live. We always have very – also have very good visibility around how quickly we're ramping up into existing sites and therefore, as Tim mentioned earlier on, the modules are going to be drawn down on existing sites today, those 49 modules still to be drawn down on. So really good visibility. Top right some clear value drivers. We have index-linked fees. We're protected from inflation or our fees rise as inflation, so we're delivering a constant if not improving margin. Very high operating leverage as well in this business. You'll see the power of the business model as profits and cash flows flow through, as increasing number of modules go live. Incredibly strong cash conversion and resilient cash generation reflecting those recurring cash flows. And then returns on capital. We highlighted per fleet, a 22% return on capital employed, the seminars that we did in 2022 Re

Q - Marcus Diebel: Hi, it's Marcus Diebel from JPMorgan. I have got three questions. The first one is on Swift Router. You're very excited. Could you just explain a bit more where you want to take this? So what are these additional orders that you basically then prioritize? I'm coming from a very basic view that if I log in my order tonight, I get it tomorrow as well. So if you can just understand this is a basic question but since I have you, I would like to understand a bit more. Then the second question for John on partner success. Clearly, sounds very important and given the I think developments we had in the past at some of your clients, it's absolutely necessary and clearly the right thing to do. But could you talk a little bit more about the UPH developments, at least anecdotically, are they really catching up with Ocado retail? I think that has been the problem in the past that the UPH rates were just not really coming through. I understand you can't give precise numbers but I think it would be helpful to give a bit more anecdotally? And then the third maybe for Stephen on CapEx, I think it's very good that you show the chart X growth CapEx. But given where we are and all this discussion about balance sheet, isn't it just maybe a thought process to just say the clients bear the CapEx first, it comes down to financial math effectively, but why is it that Ocado has to bear the CapEx mostly upfront when your clients are maybe as of today in a different financial position? Now that would be interesting. Thank you.

Tim Steiner: Thank you and thank you to split the questions up. So on Swift Router, if you look at some of the markets that there are where there has been a lot of short lead time orders, something like 40% of the demand can come in the next -- it's currently being served by customers in the kind of sub four hour type segment. Now, if you suddenly said to those customers, here's a 5 pound, 5 dollar, 5 euro cheaper service that delivers today for tomorrow, some customers will migrate, but some of them still would love to have it in the next four hours. The point about Swift router is it enables our clients, the users of our platform to be able to use the full operational efficiency of the warehouse. To pick overnight the orders that were placed yesterday for today, but to use the daytime picking for orders that are placed just before they're picked and loaded onto a van and shipped out. So we move from running kind of a morning delivery routes that go out in quite a narrow window and then we have no dispatch. And then we have a -- they come back and we do an afternoon dispatch that goes out for the next eight hour shift and move towards having more continuous dispatches going out through the day. So that there are always the opportunity for customers who want to pay probably a small premium. But that will be worked out by the retailer and the algorithms advising them to say well, it's 10

Rick Haythornthwaite: Yeah. UPH. So the good thing is we have many of our facilities. Certainly if you look at the more mature facilities those have been open longer they're really going up the UPH curve, very effectively. So I think we have a high degree of confidence that the large majority of facilities are going to go up a fairly similar curve in terms of UPH. And if you look at the operational aspects of partner success, we've got a very, very experienced team there who've done this in the UK can go out and help our partners to figure that through. Two other points here. One is it's not just UPH from our partners' profitability perspective. Labor rates are very high in a lot of the economies that we're in. Clearly that makes our model more attractive long-term and the way in, which they can address labor rates being higher than in the UK for example is just by more use of automation, auto frame load, auto bagging, OGRP are all going to reduce reliance on labor rates. But yes I think the UPH curve is well-trodden and we'd be pretty confident that the facilities are all going to get to decent good productivity.

Stephen Daintith: And then finally the question on the CapEx and maybe the clients picking up the bill there for that. Well, first of all we have explored this. We've got no plans to change our business model as it stands today there. So we have a -- as you know a license model, which we think works very well with these attractive financials that I talked through. At the same time, we shouldn't forget that around one-third of the CapEx that we put down in the CFC is funded by our partners upfront. And then what we now have with the mark six grid and the six robot is an opportunity to have more of a modular approach to our CapEx build in sites to effectively become self-funding as we progress with future module rollout as well in our sites. So I think those two things together will again reduce the burden on CapEx that we're putting into our client size.

Tintin Stormont: Perfect. I have two. Tintin Stormont from Deutsche Numis. On partner success, could you remind us of the charging model that you have with your partners? And to talk about the scalability of the teams, do you ever envision that just ask for example there are systems integrators and consulting firms that work on behalf of SAP or things like that that in the future that is something that that's a model that could be explored. Secondly, on Intelligent Automation and on the McKesson Win, could you just give a bit of background on the evaluation and the competitive benchmarking that the customer went through? And Tim for you, in three years' time what the success look like in that space?

Stephen Daintith: Yeah. So on the charging. So today we have done a number of charged for Consulting Assignments. That's not our prime focus today. Our prime focus -- certainly my prime focus since I've come on board is to make sure that all of our partners are engaged that we have local resources engaging day-in and day-out and the central resources to bring in for deeper expertise and deeper projects. And in terms of scalability, I think there will be in the evolution of partners as they come on board now -- and we're engaged with partners before they come on board which is really important, because you want to hit the ground running. And it's one of the reasons we're getting ISF into our partners as well pre-going live with CFC. I think there will be a period of sort of more intense partner success focus with our partners. Some of them are saying, look, you've done it with this one CFC. Thank you. Now we will take those learnings ourselves and implement. So I think that's absolutely likely. In terms of scalability the model is absolutely scalable. The more expertise that we have internally the better the more it is seen as a really viable place. We have lots of people who want to come and spend part of their career and part of success because they understand it's quite commercial. It isn't generic and soft and will. It is can I make a difference to the partner's growth rate and profitability. In terms of could we have a different mechanism going forward? I think that's quite possible. It's just not our focus today. But -- and we have got one or two people who we've specifically hired to look at for example the consultancy model. I think that's quite likely at some point going forward.

Tim Steiner: Just to move on. I need to obviously respect all of our clients' kind of confidentiality and stuff. But I wasn't personally close. So I can probably talk in more general terms. Certainly looking from the outside McKesson is very experienced in acquiring automation and they have acquired automation before and had a standing partner in that space, so one could imagine that the merits of our solution meant that they affected a change there to do it. As I said before, our solution has a lot of advantages in terms of its space density, it's throughput capability. The security with which it holds the inventory which as you can imagine in that field, the pharmaceuticals is very useful. That you can't just kind of walk up to the machine and start trying to rifle through anything. And so it had a number of advantages. As I say, they're not a first-time customer in automation. They're not inexperienced customer automation. It's not a random win, if you see what I mean that we should discount. It's a very smart, very sophisticated business that has dozens of warehouses across North America. And it was a good win for the OIA team, leveraging on Ocado's long track record in this space not just in -- not in the OIA but in general with the automation and running the facilities.

Tintin Stormont: And success in three years?

Tim Steiner: What would success – look, I think we'd like to become a large-scale player. So it's -- we can see what -- whether it's the [indiscernible] of the world or the [indiscernible] the auto stores or the other players in there can generate revenue in storage and retrieval systems. We'd like to be a mainstream player. So we'd like to be billing hundreds of millions of client wins or billing might not be the right word. We'd like to be sign in contracts worth hundreds of millions of pounds a year in that kind of timeframe. .

Luke Holbrook: Hi, it's Luke Holbrook from Morgan Stanley. Just on your nine module deployments for this year. If we strip out the three new CFCs that are due to come live, it looks like your existing customers are only deploying maybe one or two modules, so what's driven the extent of that slowdown? The second question was I think you ended the year at £105 million of capital commitments from your existing partners but your CapEx guidance is £475 million. So are we to expect that the delta between the two is intangibles? And what would be driving that increase? Thank you.

Tim Steiner: So, I'll take the easier half of that question which was the first part. As I mentioned before with the way that we work with our clients historically was that in an initial warehouse program they would start with let's call it on average, I don't have the exact average in front of me, but let's call it kind of circa 50% of the capacity and we asked them not to draw down other than pre-committed. So, they can tell us at the start I want three out of six, and three months in I want number four, but then they can't come and ask us number five a month later, right? What we ask them to give us a large window we go in and put that kit in, right? So, the sites that we've put live, as we mentioned before, have got 111 drawn modules and 49 undrawn modules. So, they are predominantly drawn but the clients obviously sometimes some of them are migrating some business into them, but most of them outside of the U.K. have been around new businesses. So, they're growing into their module capacity, right? If they built a normal warehouse with a normal MHE vendor, they would have started with 100% of the capacity and they would just be slowly utilizing that. We enabled them to only have to take half of it or something like that, right? So, they are growing but they are growing into what they already took until they get that, they don't need more. So, we have one site for example internationally that has seen constant small drawdowns that we're doing on it because it's hit that level and it's drawing down and at north of 70% of endgame capacity and it's drawn down several times this year. We're able to draw down in smaller increments than a module at a time. As we go forward, we will enable because of the work we've done with Re

Stephen Daintith: Okay. So, yes technology CapEx spend will be the majority of that difference but it will be flat year-on-year with the 2023 year. The balance will be MHE CapEx mature having the equipment CapEx for go-lives in 2025, 2026, and 2027 early spend in those sites. That's the key difference.

Luke Holbrook: And so just to clarify just on the May 2022 Seminar you said 30 module run rate of deployments. I think you caveated the interims last year it was more like 20% to 25%. But from what you've just said say is it fair to assume that's more of a low-teens runway?

Tim Steiner: I think we'll see low teens 2024 growth -- a bit of growth on quite a bit of growth on that in 2025 and significant growth on that in 2026. So, I think that we don't know whether it's 60%, 70%, 80% over that three-year time frame something in that kind of region. But more back weighted because of the filling of the existing modules in terms of the partner success and because of the rollout of Swift Router beginning. So, kind of a growth trajectory there. But over the three-year 2024, 2025, 2026, something in that region of kind of 60 to 80 new modules going live. It's probably approximately, right. Obviously, wait to see about – see some new sites that could go live in 2026 that we could sell in 2024. So, we don't have full visibility yet. And then there's the whole point about, how quickly do the clients fill the sites. But I would think, it's in that range.

Q –Unidentified Analyst: Good morning. Thank you for self critical look at the business. Is appreciate it, so thank you. Just two questions. Firstly, every time we come and listen to you, you have a sort of latest innovation for the business. What point do you say, look that's enough. This business is now optimized for the demand outlook we have. And then, tied to that, a question for Stephen. If you think about the chart there of £300 million -- just below £300 million of technology spend, how much of that is really into these sorts of new initiatives, so I suppose to development -- so not rolling out existing technology, but thinking about what's new?

Tim Steiner: Yes. Let me just give a couple of examples, to your point. Look, we don't want to stop innovating because innovation is we think good for us and good for our clients. But let me give you, a few bits of information. We previously stated that Ocado Re

Unidentified Analyst: Sort of three pieces of that. So you think about the CapEx at the moment, there's maintaining what you've got is building new sites for partners and then there's a third bucket, which is sort of R&D, it's including the OpEx part of R&D.

Tim Steiner: If you looked at the tax -- the total tax spend, so the CapEx portion in the cash, as we showed the CapEx and the P&L part of it. It's roughly speaking, about 30%, 35% is what you would need to spend to maintain scalability, resilience security upgrades to chrome and iOS and AWS and Google Cloud and to kind of -- you wouldn't want to go under about 1,000 people, and we're operating at about 2,500. About 1,500 are involved in the development of new clever things. And that's the part that you could reduce and go at a different pace when you felt like you've kind of got over the hump of developing a lot of core stuff, you can have a lot of people doing very clever things, but you develop the core to such a point where you're doing more clever things, but overall, you've got less people.

William Woods: William Woods from Bernstein. The first one is the half year results I think you talked about getting 10 new CFCs over two years. It feels like the 55 or 46 split has now gone to 37. Are you still convinced that you'll get the 10 new CFCs. And is that dependent on Kroger coming back? And then the second question is on Kroger. We obviously saw some improvement in project endeavor. But you've said very little on the actual relationship there. I suppose two parts. Why hasn't -- has project endeavor gone further than -- Groveland, and do you think you'll see any thawing of the freeze this year?

Tim Steiner: I'll let John talk in a minute, but I would just say that from a relationship perspective, we have an excellent relationship, deep and excellent relationship. We have visibility of the warehouses that are likely to open in the next two years because they are -- they usually take two years to build. Beyond that, it's kind of -- it's not so easy to do because it could have a client who ask could have a client midyear who says, build me four more, or might not have one. And so we're not yet at a scale of clients and client growth, let's predict that we can then say reliably in the retail business, you can look at the trend and you can say, okay, every week, I acquire X thousand new customers and Y of them convert and you try and move those numbers over time. But it's not very difficult to project out 12 weeks in 20. You get increasing levels of inaccuracy, but it's pretty easy to look forward. Right now, could we get orders for 10 new warehouses this year that we would deliver in 2026 or in 2027 maybe? Could we get orders for one maybe. It's difficult to know. I don't know if John, if you want to talk a bit more about the Kroger piece.

Unidentified Company Representative: So, I think the -- if you look at the relationship today, it is intimate and getting more and more intimate over time in the sense that we're putting -- we've got team in Cincinnati, we're putting more people on that team. And there's a very good exchange of all the data, all the information, all the ideas, all the action plans. So for example, last week, we had a very large team over doing three days with the grow team of integrated, integrated plan, really down to the detail, who does what next in order to improve the profitable growth. In terms of taking the learning's from individual sites and implementing them across the network, yes, there is good evidence that there are quite a few sites making very good progress. Of course, we all want it to be faster, further we want to see better numbers all of those things, and that's our job, that's our job to do. But I think we're pretty focused. We're both pulling on the same and in the same rope to get ever improving growth and profitability. And I would say, growth actually at the moment, growth is the -- it's pretty positive.

William Woods: And sorry, sorry, just to clarify on the 10%. I think you said that they were kind of under construction or being built over the next 10 years. I appreciate you can't see what you might get in the future. But are you still comfortable with the 10%?

Stephen Daintith: Yes. I can mention that one. So we said sites we were -- which is a mixture of CFCs and Zoom. So we have seven CFCs going live over the next two years. And then we have a further fall going live in the year after that as well. So, we have good visibility around those numbers. The balancing figure or Zoom sites either in the UK or overseas.

William Woods: Understood. Thank you.

Charles Allen: Yes. Thanks. Charles Allen, Bloomberg Intelligence. Sorry, just a few sort of detailed ones. On the -- you said £33 million that's going to be paid to Ocado technology at least next year, so how long does that go on the contractual arrangement to pay?

Tim Steiner: It's index-linked until the end of the lease, because that was the originally visage closing date, which was 2032.

Charles Allen: Right. So, that's £33 million a year for another year.

Tim Steiner: That's £33 million a year index linked for another eight years, yes.

Charles Allen: All right. And is that therefore the same for counting the 14 modules that you are including in live modules although obviously the Hatfield ones are not actually working.

Tim Steiner: Yes. I think the lives in other words we're saying paid for.

Charles Allen: Right.

Tim Steiner: So we have an arrangement whereby if they replace -- they can replace them with new modules in new sites. So if they want to build a new site then we will swap the commitment from this site to a new site.

Charles Allen: Okay. So a new warehouse -- so you probably could have at least two new warehouses that could be built with the modules being paid for?

Tim Steiner: If Ocado Retail came today and said to me, they'd like to build a new six metro site to go live in two years' time but they don't want to pay for Hatfield and the new site, we would agree to that is what I'm saying right now, if that's what they wanted to do. So that £33 million will be paid until 2032 unless they asked to replace it with something else that we're happy to then say, we'll swap one out for the other, because one would be a short-term commitment to 2032 and the other one is a longer-term commitment. And the fees on Hatfield are lower than they are on other sites, because it came with lower productivity.

Charles Allen: Okay. And then -- sorry, just one other one. £27 million to write off the lead Zoom site, I mean that seems quite a lot. Why is it so much?

Tim Steiner: We're looking at the whole overall optimization of the network there. And when you close these sites, you have to take charges for the length of the lease until you dispose of the lease. So if you've got a lease you take charges, and we've also taken some charges against the Tofino Park site that has never opened, that's been a contentious site for a long period of time and one that is not necessarily a core part of the network at this point in time. So we've taken some charges against that as well, which is as the Zoom and spoke site.

Charles Allen: Thank you.

Tim Steiner: Sure.

Nick Coulter: Thank you. Good morning. Nick Coulter from Citi. I'll go one by one save you scribbling, Tim. Firstly, do better module or modular economics encourage your partners? Or do you want to encourage your partners to build smaller CFCs. And then I guess linked to that kind of better economic run rate, does Swift Router -- what does that mean for you? Are you kind of getting to a continuum of warehouses where Zoom perhaps isn't needed within the portfolio? That's the first one. Thank you.

Tim Steiner: Nick, two questions great questions that we could spend half the morning on. So, smaller CFCs are better for more short lead time deliveries as that becomes an advantage, because you are departing from a site closer to the customer, but larger warehouses do have economies of scale in rent and security and comms lines and management, right? So our automation itself is proving to be incredibly modular. So, we have got within about 5% to 7% I think of the productivity of the kind of six module sites in the two module site that we ran. So run i.e. Bristol versus say per fleet, the productivity in per fleet is a little bit higher, but not much higher and would be easily offset by savings in transportation, but there is a waste calculation, because if you want to carry the full range and there is just a property occupation kind of costs, property occupation costs I should say that are -- need to be taken into account as well. I wouldn't build three 2s that were all in 0.5 hours drive of each other. But similarly, I would avoid building a 10-module site in one city that needs to be trunked two hours to another city to offset its volume. I'd rather have a six and a four. There was another piece of software that we have not yet delivered as part of reimagined which we call Orbit. And Orbit is something that we will deliver, but probably not -- we started to deliver little components of it, but not all of it yet and not all of it in '24, probably in '25, which will enable the smaller sites to have lower stock holdings and lower waste and similar inbound economics to the bigger sites that's not yet available, but will help drive the ability to have multiple smaller sites in the same kind of geography. There are some places where it might be more interesting. If you talk about seismic zone for example, might be better to have four 3s than one 12s for example, just from a risk perspective or where you've got a city with very, very bad traffic issues. It's very much a dependency. But yes, we can build them small, we can turn them on small and the economics on them are really -- are good despite them being much smaller. The Zoom one is, I think the way I would think about it is, it's the sub-1 hour is the Zoom space the kind of two hours plus or maybe it's even one hour, 1.5 hours plus is the warehouse space. Definitely, it erodes the need for many consumers. A lot of people use Zoom today as a 4-hour service, right? I need something four hours, standardcard.com [ph] can't do it, I will use Zoom. That ought to be able to be serviced from the standard warehouse. And therefore the immediacy warehouse needs to only focus on the real immediacy need of, I want it in the next one hour or in areas that for whatever reason is are not close enough to a large warehouse, they still get deliveries, but the minimum delivery lead time might be six or eight hours, then obviously Zoom could play a part as a fill-in kind of service and that's why you've got to look at it all as a bit of a network. But it's definitely true that Zoom as a result is more for the densest populated areas and that ultra short lead time deliveries. It is worth us remembering that it is only about 18 months ago that the likes of [indiscernible] that they were going to be larger than Ocado Retail in the UK in 2023. I believe that the combined sales of [indiscernible] was under £150 million and retail is £2.5 billion. So they were out by a factor of 30 or something on that assumption. There is demand for these short lead times services at a premium price across many markets that we see it and Zoom we will develop Zoom to be the best of dealing with that, if there is sufficient demand. You've got to be able to have demand of £10 million, £15 million of annual run rate sales from in a 5-or-so kilometer radius. And if you're not going to do that for sub-1 hour deliveries, then probably it's not a good opportunity for it.

Nick Coulter: Great. All be as where I was heading. Then second question is on OIA. You kind of mentioned greater than 300 UPH. And it sounds like you've got ambitions to go considerably further. But when you think about -- is there a capital ratio that you can reference because that's probably the sticking point. Is the throughput to capital? Or how do you think about that? How do your potential clients think about that please.

Tim Steiner: Sure. Look I think we are unbelievably focused on not on technology for technology's sake. The reason that we spend so much R&D is to be able to create cheap to replicate unbelievable technology because there are some things that we work on in On-Grid Robotic Pick for example to go beyond probably 60% range penetration or velocity you need something other than the simple suction rippers that you've seen working before. We can buy end-effectors that do that but they are tens of thousands sometimes into the 100-plus thousand if they're actually effective and have kind of sensitive operate more like a hand in terms of understanding that they don't break the glass when they do that. We're trying to build those for single-digit thousands so that we can create solutions, we can give to our clients and help our clients to save tons of money. I think if you look at our kind of current pricing for On-Grid Robotic Pick, it is something like approximately about one-third of the human cost in most of our markets which means it's cost effective down to a market that would have labor costs at one-third of the UK's today and where you expect that labor to only rise at CPI whereas in most markets when we talk to anybody where labor is today offered it's actually rising much faster than CPI and therefore OGRP will have an effect there. We're also working -- and one of the reasons it's OG On-Grid Robotic Pick rather than robotic pick was to try and actually make the overall CapEx later with it than without it because we were trying to take out the pick stations and the pick tunnels, right? And so the aim is to try and reduce the overall CapEx where you automate frame loading in the frame loading works more consistently so the ultimate aim is to take out some of the conveyor that feeds it because you need less buffer between the thing going on upstairs and the thing going on downstairs because the robots are more consistent and reliable than humans and so we're constantly working to strip that out and we can pass on most of the savings to the clients. And it's not a question of hey look we can do something without a human but you've got to pay us the equivalent of five humans to it.

Nick Coulter: Got it. Then last one just –

Unidentified Company Representative: I think that will number four.

Nick Coulter: I hope, 1A, 1B.

Tim Steiner: Take a longer debating it. I will answer it quickly. Yes or no. Go.

Nick Coulter: Thanks. So just a very quick one then just a benchmark. You normally disclose in your bond docs which we may or may not see at some point, but just a percentage of labor in your warehouses I think you referenced 2% as the kind of the normalized level? And then also the percentage of labor in your delivery as well just so we get a sense of your labor cost to serve please.

Tim Steiner: The labor is significantly larger in the delivery than it is. I think I mentioned before delivery is usually around 11% of sales and the majority of that is labor and in the warehouses the labor I said before that at 350 you'd expect it to be around 2% including management. We're currently hitting 230s, 240s. So you can estimate for yourself what that means mathematically sitting here and it's going to sound like it's about three in those warehouses.

Nick Coulter: Really, thank you. That was a quick one.

Unidentified Company Representative: Great. Thank you. Thank you for the great questions. Unfortunately, we are beyond 11 at this point so we're going to have to call it there. But obviously we will be catching up with all of you in the coming days. Thank you so much for all engagement. And for those online, we will be getting to your questions. Sorry, we haven't had the time today. But as usual we'll be getting back to you very shortly. Okay. Thanks a lot.

Tim Steiner: Thank you.