Ocado Group plc (OTCPK:OCDGF) First Half Year Results 2022 Earnings Conference Call July 21, 2022 4:30 AM ET

Stephen Daintith – Chief Financial Officer

Tim Steiner – Chief Executive Officer

Andrew Gwynn – BNP Paribas Exane

Welcome to the Ocado Group Half Year Results for the 2022 Financial Year. I'm delighted to be with you all this morning, online and at last in person again. We meet at a time of great challenges, but also crucially a time of extraordinary creativity, innovation and progress for the Ocado Group. Of course, we must and will confront the realities of today, but it is the delivery of our market-leading technology platform promise that holds the key to our future and to the value of the group.

And in the first six months of the year, that delivery has demonstrably accelerated with the opening of six new customer fulfillment facilities worldwide, four of these were in the U.S. for our partner, Kroger, in Atlanta, Dallas, Chicago and Detroit, one in Stockholm for our partner, ICA; and a second for Sobeys in Montreal. We've also opened Zoom 2 for Ocado Retail in Canning Town, London, and Alcampo is now live on OSP with In-Store Fulfillment, which is an important milestone as it means a partner game from signing to go live on the platform in well under a year. These openings are part of a fast ramp-up of capacity, which will take the total number of robotics CFCs worldwide from one in February 2020 to 17 by the end of this year.

The fact that these CFCs have been delivered to our partners on schedule, even under often challenging circumstances. And the fact that our partners have seen such consistently strong customer satisfaction as they ramp into available capacity is a testament to the hard work and intense focus on execution of our people. Each of these CFCs when live will produce highly visible recurring annuity like cash flow streams. The more CFCs we have opened, the better off our shareholders will be in terms of quantum of cash returns. We're making excellent progress as we deliver the 58 CFCs announced by our partners to date. But of course, we ultimately expect to deliver multiples of this number and the pace of growth in capacity will only increase as a result of a groundbreaking suite of innovations, which we have called Ocado Re: Imagined and announced in January this year.

When I spoke to you last, I talked about Ocado Group being a quadrant of creativity. And nothing better exemplifies this than this next leap of game-changing technology which transforms the economics of this Ocado Smart Platform for Ocado Group and its partners. We hosted Ocado Beyond, the first in-person meeting of current and prospective partners for three years. And I can tell you that the level of excitement about what Ocado Re: Imagined can offer is truly extraordinary. And I've also been traveling to meet our partners face to face. And I can confirm that they are all talking enthusiastically about what these new innovations mean for the customer experience and the economics of the model.

The investment in these assets requires capital, and we have decisively taken financial risk off the table with an £875 million raise undertaken in challenging and volatile capital markets. The funding brings total liquidity today of around £2 billion, which would allow us to fund existing and expected requirements into the midterm with no additional group financing. By this time, Ocado Group will be cash flow positive, producing a forecast £750 million plus in group EBITDA. So today is an opportunity to review our five building blocks for momentum.

First, strong execution and the ramp-up of new CFCs; second, Ocado Re: Imagined, which significantly enhances the financial base we presented at our modeling seminar in May; third, new partnerships now in horizon; fourth, ample liquidity with financial risk now off the table; and finally, number five, our resilient model demonstrating how Ocado Retail is successfully positioning for growth in current turbulent times. I hope that you enjoy the session. And by the end, you'll be as excited as I am by the momentum in the business as well as the scale of the opportunity ahead of us.

But first, let me hand over to Stephen, who will take you through the financial results for the first half. Thank you.

Okay. Good morning, everybody. Nice to be here in person today presenting results for the first time for me in 2.5 years. So it's good to be back meeting with a bunch of analysts and investors in person. So the financial review section, and then we're going to move into the five building blocks, the momentum that Rick outlined, and that's going to be a session myself and Tim are going to host. The agenda for the financial review. First of all, an update on key financial priorities. These are the ones that I outlined at the half year 2021 results, then the results themselves, and then an update on outlook and guidance for the full year.

So an update on the key financial priorities. So first of all, on the left-hand side, there are the priorities that I laid out this time last year, and the progress that we've made on the right-hand side. So the OSP economics, we held up, as you know, accounting modeling seminar on the 25th of May. And at the same time now, that proved to be pretty popular. And we're holding at request of many of our shareholders, but also analysts as well, we plan to hold a cash flow seminar in the second half of the year to help you better understand our cash flow dynamics, particularly around how those will evolve over the next few years.

Capital allocation, Ocado Re: Imagined delivery is very much on track for deliveries in the second half of the next financial year. We're going to talk about that a little later. The balance sheet is a lot stronger. We have around £2 billion of liquidity today, as Rick outlined in his opening comments, and that gives us the financing to see us through to the midterm cash flow positive and no further financing required. And then an area that's particularly close to my own heart embedding the improvement of the group operations functions and teams. So we're strengthening the finance teams, have new Group Finance Director, new Treasurer, a new Head of Tax. And at the same time, we put in Oracle Fusion for the finance systems, to the finance platform. We're extending that to MRP, supply chain and procurement as well. So we have an enterprise platform that takes us through for the next decade, at least to support our business. So in a strong position to deliver on our known and expected growth commitments regardless of the prevailing market environment.

So the financial summary today. So reporting today, revenue down 4.4%, largely driven by the 8% decline that we saw in Ocado Retail, we'll come back to that shortly, but strong growth in International Solutions, growing at around 120%, largely driven by the increasing number of live modules in our clients around the world. We saw an EBITDA reduction of £75 million. And again, that's almost entirely driven by Ocado Retail. I'm going to go through those numbers shortly.

The underlying loss before tax increased, largely driven to an increase in depreciation costs, which you might expect given the growing capital base as we continue to roll out the CFC program, but also the non-repeat of the insurance income exceptional income that we had this time last year. So Retail, 8% decline in the Ocado Retail business. Now first of all, strong momentum in customer acquisition, 867,000 active customers at the end of the period and this is a number that we expect to grow even further in the second half of the year and probably the key driver around our conviction of the ability to deliver full year revenue growth, notwithstanding the 8% decline in orders in the first half. So strong growth in customers expected in the second half on the back of that strong growth in the first half and orders per week growing as a consequence.

The dynamics that we've seen in Retail are smaller baskets. This time last year, peak COVID time, we've got seven items fewer down 13% from the levels we were at last year. But we're moving into a period now of much easier comparatives when we look at basket sizes we're at very similar levels now to the second half of last year, which is an important point, but growing customers at the same time.

We saw some gross margin pressure, but pretty resilient at 34%. Now distribution costs grew 11%, up ahead of the order growth and largely driven by the utility inflation, the fuel inflation, the labor inflation, the cost of labor shortages that we saw in the early months of this half of the year.

Marketing costs were up £10.5 million to support that customer acquisition that I've just talked about.

And admin costs are down £15 million, largely driven by the release of prior year accruals for management long-term incentive plans.

Looking at some of the key drivers around the Retail and the underlying progress that we're making. So first of all, on the left-hand side there, growing active customer numbers is 12% growth there. Orders per week were up 7%. We expect that to continue into the second half of the year if not accelerate.

Our customer acquisition at the moment is at the strongest levels we've seen for quite some time, growing at around 15,000 per week over the last six weeks eaches per basket. And this has impacted clearly revenue here, eaches per basket down 15%. The average sales price is up 3%. But the average basket value when you put those two together is down 13% half-on-half compared to this time last year. And that ripples through to revenue there on the right-hand side, while orders are growing, the basket value is down 13%, resulting in that 8% decline in the first half of the year. But as a reminder, much easier comparatives as we move into the second half and the second half last year, again, moving out of COVID.

And the near-term margin impact of the cost of living crisis and inflation. And this is just some stats here just to highlight the very specific and material impacts on the Retail business, non-underlying reasons we expect, but it impacting very much the numbers that we're reporting today in Ocado Retail.

So first of all, a 50% increase in cost per each. That's the cost of each item processed through our distribution centers, our warehouses in the UK. And that's an impact of the lower volumes in the CFCs, but also last mile costs. And a 6% EBITDA margin is expected, though, in the midterm, not despite that.

Moving on to the utility prices, 300% increase in electricity prices, and that's worth about £20 million or so in the half year that electricity price inflation alone. On the other hand, we are seeing in excess of 200 units per hour being in our latest sites and in particular, Andover achieving 220. We expect this number to get to over 300 with Re: Imagined.

Market-wide increase in customer acquisition costs, not only have we grown our marketing costs, but also in an environment that has become increasingly competitive, particularly in the online environment, you'd be very familiar with lots of the names that have entered recently and the sorts of marketing spend there and expensive marketing spend that those players are incurring to grow their customer base. So we're competing in this market. We are outperforming our peers, though, in growing our share of the online market.

Closer look at operating performance, and this just breaks down the profit and loss account, showing the key components and how each of the costs have moved as a proportion of sales.

Moving on to our UK Solutions and Logistics business, and this is the business that, number one, generates fees from our OSP partners. That's Ocado Retail and Morrisons in the UK, but also passes through the costs incurred to run our warehouses and our distribution and so on in the UK.

Fee revenue grew by 9%, and that's reflecting the growth of live modules, 54 live modules now at the end of the half, up from 44 at the end of the previous half. And the management fee growth in line with the costs incurred to the logistics services for our clients.

Cost recharges going back to my earlier comments, grew by 11%, ahead of the growth in volume of 8.8%. And that's driven by high inflation, which I've just talked about, and higher labor costs, but also the higher fixed cost of the newer sites that haven't yet ramped up to full capacity.

EBITDA pretty much flat year-on-year, and that's after the growth in admin costs, driven by the increased investment that we'll see shortly in our technology capabilities, largely around the Ocado Smart Platform.

That cost per each number there, sorry, that 70% increase in underlying cost per each has been driven by volume, inflation and then variable costs. And you can see the breakdown there of that number on a – as we build through to the increase. And again, that's the cost of processing the number of items through the distribution network. On the right-hand side, a number of live modules. I've mentioned that previously, 44, up to 54 at the end of the half.

The underlying operational efficiencies, just to reinforce that point, Andover and Purfleet, both over 200 units per hour. And the peak that we've achieved in the first half is 220 units per hour. We expect that number to only get better.

Now the underlying improvements in drop efficiency per van per shift are not reflected in the reported drops per van. We've got 10% drops per shift. We've grown our van fleet by 15%. So drops per vehicle are down by 3% drops for van per week. And that's largely driven by the impact of the surplus vans that we've held to mitigate supply chain uncertainties.

International Solutions, we're starting to recognize significant revenue growth here, 119.9% growth, £59 million of revenue now. And the fees invoiced, which is the top line there, that's the fees, the design and the capacity fees that we get received from our customers in respect to the build-out of the CFCs. That's grown by 22% to £61 million in the first half. The revenue growth is largely driven by £52 million of Ocado Smart Platform fee revenue that's recognized from partners. That's primarily the ongoing capacity fees in respect of the live modules. It also includes the revenue release of prior year cash receipts that are currently sitting on our balance sheet. That's the design and capacity fees where the cash is received, but not recognized immediately, and that's around 10% of the total revenue.

EBITDA is broadly flat. So notwithstanding the revenue growth, at the same time, distribution costs have gone up as we've got the engineering and cloud costs to support those newer clients and these newer CFCs that require a minimum level of support to run those facilities.

And admin costs are up quite significantly, again, a reflection of that growing technology cost base that we expect this year, next year, this sort of period now we're entering is the peak period of technology costs as we start to head towards that £200 million number that we've guided to as part of our modeling seminar into the midterm.

International Solutions is a growing installed revenue base. On the left-hand side there, we're now live at 10 international sites, as Rick outlined in his message, 32 live modules compared to 10 this time last year at the end of the first half of 2021.

We've got robust growth in the build pipeline. We've got 14 sites under construction. We've added 38 more modules that have been ordered since the first half of 2021, and that will add around an extra £2.5 billion pro forma sales capacity to the Ocado Smart Platform. And the growth is driven by two new clients there in the bottom right-hand corner, Alcampo and Auchan Polska and additional orders from existing partners as well.

Capital expenditure in the first half pretty much as we guided £367 million of CapEx. And you can see the split there across Ocado Retail and logistics of £53 million and then in Technology Solutions of £340 million. And we've identified on the right-hand side for you the split of the technology solutions spend around tech development. That's the red piece, £103 million of the total cash spent in technology of £161 million, the balance going through the P&L accounts around 30% for Solutions and Logistics and around 70% to International Solutions.

And then finally there, the yellow, the amber box on the bottom right of that column is the CFC, the MHE that we're investing in predominantly around the six sites that went live during the first half, but also the 14 sites that are currently under construction. Technology Solutions is scaling up and improving economics. And you'll see here that we're starting to use the terminology around the three segments that we hope to be reporting on in fiscal 2023 around a solution – a Technology Solutions business. That's global solutions, UK Logistics business and a UK Ocado Retail business, working very hard to get to that segmentation. I'm not going to commit to it today, but we hope to deliver that for fiscal 2023.

So Technology Solutions. So 221 modules now ordered. That's up from 177 this time last year. Eight sites live and 16 this time last year and now 16 sites live. And that number will only grow as we start to deliver and get closer to that 58 commitments that we have from our existing customers. So we have a revenue base that we expect to deliver a traction of returns.

Now the direct operating cost is, this is a key metric for us. We gave you an indication of the modeling seminar where we're getting to with Purfleet where we think we can get to on our operating cost. Whilst we're at 2.4% today, our target is 2%. And in fact, we expect to get lower than that, not formalized yet as a KPI, but we think we can take that cost even lower moving on.

Just reinforcing my earlier point, technology costs, as they stand today, £161 million in cash spend. We now have head count in excess of 2,700. That's around 300 heads higher than the prior year. We do believe that we're approaching our peak levels of technology spend, largely driven, of course, by the Re: Imagined innovations that we launched in late January. We do expect for that to move down in the midterm to a run rate of around £200 million per annum, which you see there on the right-hand side, £100 million on a half year basis. So that remains very much our goal for the midterm, notwithstanding these peak levels that you're seeing today just to reinforce that point.

As a reminder, the P&L costs are currently allocated on a 30/70 split. That's the 50 – sorry, the £67 that you see there in that mix of the £161 around UK Solutions and Logistics and International Solutions. Group support costs. This is group operations, which is finance, legal and human resources, and then some platform implementation, client services, solution sales management teams and so on. £56 million for the half year, £9 million of that will go to Logistics. So when you look at the £47 million for Technology Solutions, very much in line with the guidance that we gave at the modeling seminar and we expect that to stay flat, if not come down over the next four to six years. That's a key goal for us to get more efficient on our group support costs.

We have a strong cash position to support our significant growth plans. We were delighted to complete our financing in June of this year. We now have pro forma liquidity of around £2 billion and we’ve deliberately sized our financing to see us through to cash flow positive in the midterm with no further financing required. You can see here, we've had around £400 million of cash outflows in the first half of the year, largely driven by that £388 million of CapEx that you see the big red block in the middle of the chart. CapEx will, of course, start to decline as the Ocado Re: Imagined benefits come in.

On a unit basis, they will decline. We'll talk more about that in the Re: Imagined session during this particular discussion. Accounting update, an accounting update for you, and this is – will help you with your modeling on this one. So under IFRS 16, the lease cost of the CFC sites used exclusively by Ocado Retail have been determined as finance leases because of the exclusive use, and therefore, the full rise of use accounting treatment and the ownership treatment effectively for those particular assets.

Now while the Dordon and Erith sites have been accounted for as shared sites, and therefore, service arrangement and the income there to Solutions and Logistics and the cost to Ocado Retail go above the EBITDA line as an operating cost. And like that, for the shared sites, their finance sites, and they go below the line as a finance cost and finance income in Ocado Retail and Solutions & Logistics, respectively, it makes no difference to our group numbers, of course, eliminated in consolidation. But in terms of modeling around the segments, we thought this would be a helpful piece of information for you to understand.

The impact of that is around £9 million of capital recharge fees for those Bristol and Andover CFCs that you might have modeled otherwise above the line rather than below the line. But I just wanted to be clear about that particular accounting treatment. Because I think it is important that it's fully understood.

The outlook for the year, I won't go through the detail on this one other than to say our guidance remains unchanged from that, that we gave at our full year results on the 8th of February, but also the retail trading update that we gave on the 25th of May. Clearly, there's a lot to do in Ocado Retail. That's probably when we look at guidance in the most challenged areas, we can see that route through though to full year revenue growth and through to that EBITDA low single-digit margin. But clearly, these are challenging times for Ocado Retail, notwithstanding that, we feel confident in maintaining the guidance as it stands today.

That's all I wanted to say at this stage on the financial review, and I'm going to be joined now with Tim and we're going to do a little discussion between ourselves. I'll be asking Tim a few questions around Ocado Re: Imagined and our five building blocks for momentum. So Tim.

So now we're going to discuss our five building blocks momentum that Rick mentioned at the start of this session, and I'll just start running through them. So number one is strong execution and the ramp of our CFCs. I'll let you read and digest the chart. But I guess, Tim, my question for you on this one, or a couple of questions for you. How are you feeling about the ramp-up, what you and there are sort of growing CFCs going live, how are you thinking about the opportunities to improve the challenges that we're facing and tell us about how the clients are reacting to the ramp-up as well. How are their first experiences of running an automated warehouse?

Sure. Look, I think the most important thing is that we've delivered them, we've delivered them on time. We've delivered them on budget. And I think if we actually were willing to cast our mind back a few years ago, when we started signing these many clients, people were quite worried about whether you could execute this much in this time frame. So we've clearly driven like completely through that and could roll out more quickly. We've got to a point in the business now, where I'll find out that a site went live and nobody bothered to tell me, it's kind of – so and so decided to start inbound, or so and so has decided to start outbound.

And everyone of them just turns on. And I've had comments from other partners where they've got a couple of other bits of automation in their business, and they said they've never seen a site or any site ever go live like these with the automation just working. And whilst they might have other challenges, which we'll talk about in their businesses and stuff, they never hear the automation is not working or the automation is not capable or the software delivers the wrong box or whatever it is.

So they are phenomenally reliable, predictable, do what they say on the tin and capable of significantly outperforming the service level agreement kind of productivity levels and throughput levels that they signed up for, which, again, they’ve never seen in automation in this space.

So what’s great is we’ve got confidence to roll out as many of these sites. We want to build them on plan, on budget and for them all to function and they are incredibly kind of repeatable. And I visit quite a lot of them. But if you drop – if you blindfold me and took me to one and then the only way you can work out where you are is by trying to look at the products that are being picked and we try like out with retailers they are because they are remarkably the same kind of thing wherever they are.

So the scalability, the modularity and the efficiency of the low operating numbers. So we talked today about Andover and Perfly hitting levels like 220 UPH. But they’re not operating more than half of their end gold capacity. So normally don’t see full efficiency until they hit max capacities. And so we’re seeing that early on. And the partners, the partners’ customers who are ultimately the judge of the business. They are the NPS scores that they’re achieving the repeat, the baskets, all these kind of key underlying metrics really positive and the farmers are excited about them.

So it’s all good. And it’s going to – as we’re going to talk about in a minute, it’s going to get a lot better with Ocado Re: Imagined. And we’ll talk about the impact of those things. But it’s always we remember when we are that whilst some of the benefits are only for the new sites like a smaller building, a number of the benefits are retrofittable into the existing sites like taking out the some of the human effort that’s required and making them more efficient. So they’re very upgradable, which is also highly unusual in automated facilities.

Anything that keeps you awake at night on this topic?

On this topic, no. Global supply chain is difficult at the moment. So we sit and have to decide how many of the 500 series bots we’re going to order out for the next 12 months prior to the launch and the ramp-up of 600 series bot production. And before you could have done that with say, a three-month lead time and now you’ve got to do that with at least a one-year lead time.

So it’s a bit harder to operate any business that involves physical goods that are manufactured from multiple components around the world today than it was three years ago. I think we’re doing a great job handling it. But if you’re not involved in that type of thing, and you don’t realize how much more complicated the global supply chain has got, it’s worth flagging, but I think every business probably sits here and flags that as well. But it doesn’t keep me up at night, but it is obviously challenging.

Very good. And let’s talk a little bit about return on capital. This is almost certainly going to become a key performance indicator for us. Why is this important, do you think?

Well, obviously, it’s important because we’re deploying our shareholders’ capital and they’d like to see us to make the highest returns on it. And the returns on individual sites need to obviously contribute back to the center to contribute to the ongoing R&D and obviously, the historical R&D that’s gone into the amazing product set that we deliver for our clients. I think what’s important here is the journey from the blue to the green to the whatever that color is amber or something on the chart.

And I think that so much of that is down to the improvements that we have where we can now build faster, cheaper and higher throughputs and generate more fees. And so the combination of slightly more fees but with less capital deployed. And in a compressed time frame and also enabling our clients to ramp it fast and with less labor requirements ramp it even faster means a better return on capital for us and a better return on capital for our clients and the better service for their customers.

Got it. So Ocado Re: Imagined, we’ve talked around the reduction in operating costs, the reduction in CapEx, the reduction in time to get the MHE in and installed and running and then also adding to the versatility of the platform. How are our partners responding to this, Tim?

Look, they’re all incredibly enthusiastic and waiting for installations of things that are coming. So one of the challenging things at the moment is working out where you put the first robotic pick arms and where you put the first automated frame loading machines. And we’ve not only had to design an automated frame loading machine that will go into future sites and take out that most laborious kind of job, but also how we make one that can fit the footprint in all the existing sites despite the fact that, obviously, when we started envisaging it, when we built those sites, we weren’t envisaging that machine type of thing.

And so the latest version of prototype that’s going to go into production will now fit all those existing sites. So it’s that type of thing. Look, Ocado Re: Imagined is just better for everybody. It’s technology at its best, where everybody is a winner. The planet is a winner because we need smaller buildings that therefore have a smaller footprint, and we use less energy that has a smaller footprint.

Our clients are winners because their economics are materially improved. You’re talking 30% to 40% reduction in labor costs because you’ve got over 300 UPH, up from 200 in the current version. And bear in mind at 200, that’s when we say given the inbound efficiencies that we have as well with direct delivery, that we’re at – we’ve historically said we’re at 15 minutes for an order going out the other side of the warehouse compared to about 74 minutes in a traditional bricks-and-mortar business operating as an online retailer. We’re now taking that 15 minutes to sub-10. Obviously, there’s only 9 a bit minutes left to go for, but we’re going to continue working on them.

The cost of the MHE coming down, meaning that we can put it in cheaper and then reinvest some of that in the incremental new kit as well, but hopefully, with an overall reduction in capital despite the incremental equipment to deliver the extra UPH, but generate a bit more income from it as well because of the massive savings on the client side and a significant reduction in installation time.

So we’ve come down from whatever we were at 18 months ago or something like 10 months to install, so now on future projects looking at five months. So people think that we take a long time. It’s usually the building footprint that takes a long time. Our own kind of install time for a building that can do £0.5 billion of run rate capacity is now looking like about five months. And if there’s an existing building, the time to prepare it for us to come in will be much quicker. And the new equipment is much more friendly to existing buildings and standard kind of building specifications.

And then for the end customer, not only the cost savings that I’m sure that the – our clients will pass on to them, but also significant improvements in the proposition from shorter lead time deliveries we’ve had the first bits of code of that rolling out actually in the last couple of weeks now. We’re just working out who’s going to start trialing them for us and a lot more to come.

But also from the supply chain software – from the Orbit supply chain software, higher levels of availability, lower levels of waste again, good for the planet and the retailers and keeping the customers happy as well. So it’s a win everywhere. And they’re quite big changes, the scale of them so. And anything that anyone orders from us today in terms of a CFC will benefit from the suite. So that is the timeline of it arriving.

Very good. Those are the we all don’t go through this. It’s just a diesel of all the items that we unveiled in late January. So expanding and evolving the OSP club, we’re going to see a video shortly. Tell us about the relationship with partners, Tim, and how the partners more importantly, how they’re talking with each other.

Yes, that’s what’s really interesting. So obviously, we’ve got a good relationship, spend a lot of time with all of our partners. I personally spend a lot of time in particular in one of our partners. And are helping working with them to work through challenges to help them to grow the business and to, in the future add significant numbers of new facilities to their existing schedule. What’s really interesting is that we have encouraged our partners to work together with us. And we’ve created a series of – we’ve created the club and we created a series of areas of focus within it. So there’ll be e-commerce forums, there’ll be logistics forums, there’ll be supply chain forums and stuff like that and the work that’s going on between them is amazing.

And as we mentioned earlier, we had a conference, couple of months ago now here called beyond. There were well over 100 people here, some people from all of our clients around the world. We had left a couple of prospects, I think, in the room as well. Maybe we should have added more. The energy there was palpable. It was phenomenal.

We had some – there was a slide when I was first that were standing next to a 600 series robot, an on-grid robotic pick that we have managed to move into the Renaissance Hotel, having had to move some people our bedrooms that had windows overlooking that area of the hotel to keep the IP police happy.

But even on the way there, one of our clients have gone to visit two of our clients. One of our clients is not yet live, had got themselves invited to see two of our clients who want have been live for over one year, one had just gone live, and they’ve kind of gone there to pick up any learnings and stuff. And so that kind of collaboration, they all think is invaluable. But as you said, rather than hear it from me, we did a little impromptu recording at Beyond from and got a few of our clients to give a bit of feedback. So let’s hit the button.

So as we talk about and think about adding new partners there on the, any signs of any new partners just wanting to wait and see Ocado Re: Imagined actually before signing up?

I think we’ve got a good track record of delivering what we promised to deliver. So I think that there’s enough of it that you can see as well. So we have 600 series bots now that are running around on test grids. We have arms now under what we call full dash control. So that’s kind of integrated with the other robots so that they don’t collide into each other, like controlling the full air space above the grids.

We have live robotic pick in Erith, but in the normal location. And later this year, we’ll be able to see it on the top of the grid in Purfleet live, taking real customer orders. We have also made a frameload, the first prototypes you’ve seen live in not far from our offices. We’ve got the latest version coming over from Greece at the moment. So I think the combination of our track record and our clarity on what it will achieve and how if we say something will drive productivity to a certain level, we’ve got so much evidence historically of delivering that. And you can see the new equipment that I think that the trust level is in it is pretty high.

We have, as you know, lots of discussions ongoing, more than we’ve ever had live at any one point in time. Lots of visits to live sites. Now people’s travel has opened up. It hasn’t opened up completely. I had a business that wasn’t able to get here this week. But there’s just a lot going on. And the newest client in Poland, as you know, is very significant because they are a country with a lower GDP – significantly lower GDP per capita than we previously set as the kind of – as the target customer base.

So we previously said over 25,000 GDP per capita, and they’re at 17,000. And so I think that just shows that with Reimagined, we can open up more markets than people believe before. So I’ve learned my lesson about making specific predictions on what will happen by year-end. So that – but obviously, we will be disappointed if all the conversations we have to result in more sites being added to the client committed and the customers committed and et cetera.

Very good. I think, Tim, this might be your chance to ask me a question now.

Well, I guess the question is how confident are you that we don’t go back to market and we’ve got enough cash to see further both the ongoing R&D and the rollout of these facilities and what you’ve now seen in the business for how long have been with us now?

1.5 years now. No, I am confident, actually. We deliberately size the raise to get us through to cash flow positive in the midterm. And we’ve got a very detailed five-year plan, as you know that you’ve been gone through in some detail that has a strong understanding of cash flow broken down by key metrics: CapEx, operating costs, headcount.

So we’ve got a pretty granular five-year plan. Indeed, the Board went through it in Stockholm a few weeks ago. And I think having that strong balance sheet to give us confidence around the rollout plan. We’ve got 16 live CFCs. We’ve got 58 commitments, is really important. And I think it’s important for the management team, for our shareholders and for our partners to know that we’re well funded to fund that growth and that rollout plan through to cash flow positive. And I quite like the fact that we’ve actually got sort of a set of targets here that are very visible across the organization, hold our feet to the fire and to get us all aligned around delivering those metrics.

What I enjoyed most about the whole process was, A, splitting it into the new segments, as we’ve described at the accounting seminar, because it really simplifies looking at the business when you say, okay, retail is over there. It’s got its part, its own CapEx in terms of the fridge plant in the building or something like that, or its vans or stuff that it needs to deliver on.

But in terms of it being a client, it’s just a client and it has to pay a fee to us. But otherwise, we provide equipment. So kind of isolating those businesses and looking at them. Isolating the logistics business, that’s just the cash cow. And then looking at the Technology Solutions part of the business, and I think that was a one-part clarity. And then the other thing is we did it on a cash basis only. Because some of the stuff that Stephen was talking about before on the IFRS accounting, you’ve got to treat this warehouse differently to that warehouse because two people’s orders come out of it. It’s not helpful to try and actually have really clearly defined kind of targets and what you’re trying to achieve.

So just taking the whole thing back to, we build and deliver sites. Our clients pay us a fee upfront, our clients pass ongoing fees based on the amount of drawing down modules, the CapEx that goes into those sites, the ongoing engineering and hosting and support costs of those sites, delivering us an operating margin that is then offset by the cash that we lay out on R&D every year in the central costs and are coming down to a net number.

I think the simplification and clarity that it gave was great. And as you said, it gives very, very clear targets as to what we need to do and very clearly shows how important it is to drive that long-term operating cost down at what the benefits are of Ocado Re: Imagined in doing that and bringing the CapEx down alongside the benefits of the clients of mass to be more efficient facilities, smaller facilities and faster to build facilities.

Very good. And then finally, Ocado Retail. And we’ve described it as a resilient model for challenging times. These are challenging times – how do you feel about that resilience now, Tim, in these times that we’re operating in?

Look, I think you can see that in the long-term, it’s a phenomenal business. It obviously had from a profitability perspective, enormous tailwinds through COVID in terms of bigger basket sizes, in terms of relatively unlimited demand and in terms of people willing to take deliveries at 11 o’clock on a Tuesday night, right?

So we’ve moved back to a normalization in terms of shape of week. It’s come back in a different way, as I’ve described before. There’s more in the morning than there was before. People are a little bit less willing to take the orders on the wings very slightly than they were before. So we’re doing work in terms of rebalancing the labor and having more overlapping shifts. So we move a little bit of volume out. I’ve been very earliest in the morning, the very latest in the evening. So we’re rebalancing the labor into the right shape. And you’ve seen basket sizes come down to their historical levels.

At the same time, you’ve got the cost of living crisis that is driving some consumer behaviour in terms of slight trading down. So we’ve seen average item prices underperforming the average inflated kind of inflation on our average items by about 30% of the inflation. So we see that. The positive thing is that we’re seeing increasing productivity in the sites and in particular, in the new sites dramatically outperforming the historical ones. So as we keep growing that is a big benefit.

The challenging things at the moment, our labor has gone up at the moment faster than grocery items. Although if I look at what’s being reported by Alex at Kantar, that is going to change. The energy is just crazy at the moment where we’re seeing some months 5x, 5x the price per kilowatt hour than we were paying before and a significant multiple of independent long-term energy sources, whether that’s renewables, whether that’s nuclear or whatever it is.

So what used to be the cheapest source of energy, which we rely on gas and it sets the benchmark today for pricing has gone to crazy levels, which I don’t think is long-term sustainable. But as you mentioned earlier, is hitting the P&L to the tune of tens of millions of pounds this year. Diesel has gone up but not nearly to the same extent.

And then I think the other challenge, of course, is that we’ve opened up new capacity. And with the rebalancing of the market, we’ve got more capacity than we need today. It’s something we’ve not historically had. And obviously Ocado Retail is paying fees on it. It’s paying rent. It’s paying rates. It’s paying chill plants, and it’s paying management teams. And so that is costing it money, but we can see the clear path to coming out the other side, restoring mid-teens kind of growth numbers, getting back to mid to high single-digit EBITDA margins. I think it’s a relatively clear path.

The business is going to benefit from Re: Imagined, but also from the replatforming that it will eventually conclude to get all the benefits that are on the OSP platform that it hasn’t yet got some of our other clients have got and the very strong customer reaction. And as you mentioned earlier, the last, I think it’s now eight weeks, we have had the highest number of new customers I think we’ve ever had in an eight-week period, so by a reasonable margin. So we are now seeing cut through coming in the marketing.

And some of the challenger marketing earlier in the year was the sheer amount of recycled VC money that was trying to enter some parts of the grocery market at serious levels, just being pumped kind of almost thoughtlessly, if you say, I mean, just into marketing spend, which is crowding out kind of normal underlying marketing that’s making it very expensive. And we’re seeing a significant slowdown in that, for obvious reasons, which was the only long-term sustainable place. But nevertheless, that should be helpful in the second half.

Very good. And this slide just summarizes some of the key messages that we’ve shared with you over the last 45, 50 minutes or so.

I think the key ones are, we’ve signed 11, eight are already live. And as we mentioned earlier, getting Alcampo live was in record speed. Of the 58 kind of contracted sites, we now have 16 live. They’re all returning positive cash for us and will generate strong recurring cash flows. Re: Imagined is just – it was a lot to try and explain in 1 hour when we did the Re: Imagined presentation, but we felt we couldn’t keep everyone’s attention for longer. But the suites together really transforms everything. It transforms, as I said, the planet, the clients’ economics, the client’s proposition, what the customer receives at the end and our own economics and our own market opportunities. So we continue to be as excited by Re: Imagined as we were, but probably more because we’ve delivered more of it, and we’ve got a clearer line of sight to the rollout of the rest of it.

Pipeline is strong, got the liquidity. So we think all the building blocks are in place. We look forward to the future with confidence. We are obviously aware of the challenging kind of global economic environment.

Thank you very much. And now it’s over to you for the Q&A.

Good morning. So it’s Andrew Gwynn from BNP Paribas Exane. It was a mouthful. Thank you very much for the presentation and time as well. Just one question, actually, but I suspect the answer is going to be quite long, so apologies. You mentioned that in terms of you’ve got more capacity than you need at present. You’ve got a significant amount more capacity coming through with Vista, Luton, another CFC to be named. Is there an option to flex the supply of the business? Because it’s been one of the challenges around Ocado’s OSP. Or it’s actually selling more demand? Is that really just a key? In the end, it’s just a moment in time, maybe you turn down longer-term planning, but actually you’re not too concerned by Luton?

Not too concerned, but I didn’t understand, what was the...

Luton, sorry. Luton coming down.

Luton is coming downstream and Vista is coming downstream. And so those two will come on. And yes, they give us runway that we don’t normally have. We’re normally hand to mouth in terms of automation capacity that we can take advantage of, and now we’re probably whatever we are a year ahead of ourselves or something, right?

So we need to kind of grow into it. We are also looking at the rollout beyond that because whilst before we wanted to accelerate it, we are also working out the exact numbers of what Re: imagined is going to do in the existing sites. So Re: Imagined is going to allow us to generate more volume out of Andover, out of Purfleet, out of Bristol, our of Luton, out of Vista. And so that might influence the decisions on what we want to do on next sites as well because when we actually look two years out, they’re all bigger than we – we’re going to work out how to take advantage of Re: Imagined and do more volume each of them as well.

So really, it’s about growing into them. And as I mentioned before, that the growth numbers at the moment are good. And the environment to create that is easier than it was six months ago given the kind of crazy competitors have had to tone down their craziness. Is there an option to – I’m not sure what the other point was asking to return it or something. I don’t know.

Obviously, you committed to a huge amount of capacity. We’ve got a lot of sites which were underutilized to mentioned before, I think kind of perfectly less than 50% utilized. Is there an option to sort of turn off modules or actually when you open Luton, for instance, you can actually just open...

We can – Ocado Retail as a client can have a conversation with a group about what it’s asked for. And in theory, we can move stuff from one site to another or something like that or defer rollouts. But we’re importantly for the group, if a client asks us to deliver something and we deliver it, and the client needs to pay for it, right? They can terminate it, but terminating it, it has an expense. And then if they know they want it a year later, it’s cheaper just to keep it, right?

We wouldn’t want to be in a space where we roll it out and then the client goes it back to us and then ask it back again three months later, because there’s a physical amount of stuff that we install there. So, we think of it as like a loan facility that you draw down, but it’s like a onetime drawdown option, it’s not an instantly returnable option. But yes, they’ve got – the answer is the retail business needs to grow. But it’s always grown, and there’s no reason why it won’t grow now.

And as you see in the numbers, the customer numbers have grown, the order numbers have grown. It’s just that we’ve reversed the basket size. And unfortunately, in 2020, 2021, you didn’t have quite a lot of customers because actually, you were doing a record amount of business from a – just from the absolute core of the customer base because everybody was trying to buy more to consume everything at home. And we’re just seeing that kind of what I want to call it, rebalancing as people go back to historical patterns as such, although slightly altered by new behaviors.

I think where there is flexibility is in the sites that we’ve announced. We have guided, for example, we have said that we’ve identified a site in the Southeast and one in the Northwest, where we have flexibility around both of those nothing has been signed committed. There’s no construction underway right now. That’s where we do have flexibility should we wish to exercise that. But certainly, with Luton investor, but it’s still full steam ahead on those.

Double-digit growth next year. Is that possible?

I would hope so. I mean, look, it’s a lot to say in the current market environment. But I’ve seen when we look at what we’re doing today, and we look at customer acquisition over the last few months, and we look at customer behavior and we look at historical basket sizes and where they are today, there is no reason why we shouldn’t go back to double-digit growth. All – we are – all of the kind of COVID benefits of shape and basket size have unwound.

Now it’s left the market at 12%, not 7%, having peaked at 15%. What it has also left is more customers in the overall online grocery market, which has always been the richest them. I’ve described for many years now, for us, as to say it’s easier if Tesco’s and Sainsbury’s have persuaded someone to move out of going doing the shopping themselves in the store and move online. We’ve only got to come along and say, look, this is actually we do this better as opposed to having to persuade somebody who shops in store at Tesco. They want to shop online and they want to do it with us.

So, when we’ve looked, and quite dramatic, the over-indexation relative to the market of our acquired customers being from our competitors’ online business is dramatic. And therefore, we think we’re not nuts to believe that there’s rich teams out there to go and mine in terms of new customers. And with reimagined and with some of the enhancements to code stuff that’s coming down, the proposition is going to improve. And over the next few years, it’s going to improve material.

Perfect. Thank you very much.

I’ve got three. I’ll go through one by one.

Yes, let’s do that because you know my memory is not.

Me, Either. So first one, just in terms of the quick commerce funding environment you mentioned. So firstly, is the – are the changes there affecting the conversations you’re having with your OSP partners? Are they thinking less about small sites and in a more about big sites again? And just quickly linked to that, as that funding environment is seeing any impact in your sort of automation competitors? Any changes in how they’re behaving?

So immediacy is still an area of focus, I think, in the global grocery market. I think that it’s probably not quite at the conversation level that it was because there was a mania being driven by the VC investment into startups that could be suddenly be worth unicorns and multi unicorns in the space of three days after announcing they were going to deliver a carat in one minute or something. But the idea that you can do it in a sustainable, profitable way with a proposition that blows anything that anyone’s seen out of the water, which is what we can do with our micro facilities and Zoom range and both in terms of ranges of up to 10 times what you’ve seen up to now and sustainable economics at kind of traditional convenience store type premiums is of great interest.

So our clients remain very interested in it. I think that the pressure to try and get a couple of them live immediately to show that you’re reacting is probably a little bit abated. But I don’t – the interest is not abated at all. In terms of – I don’t know what’s happening at competitor automation sites. And most of that money was initially just going into entirely manual, because manual is fast to roll out. Manual is fast to scale. We saw that in Corona. We saw that with the rollout of some of these players. It’s also incredibly inefficient. And in the kind of labor markets that we’re starting to operate in, some of the labor that we, our clients and our competitors need for the next 20 years to operate grocery supply chain, distribution, et cetera, it’s not proving to be that price elastic.

It just – in some places, they just aren’t – people just don’t necessarily want to take up those opportunities. And so I think the automation, the importance of the automation and the robotics is going beyond the fact that you can replace something that costs x with something that x a year that actually costs x upfront and runs at 10x a year and is therefore much cheaper to operate. It’s really going beyond that, and it really is starting to think about how will we distribute food in five years, and 10 years and 20 years’ time given the trends of – in the global workforce. And so I don’t think it’s ever been a better time to be in the automation business.

Which leads seamlessly into the second question, which was basically how are you fixed as a business do you think versus competitors to deal with the inflationary environment? And in terms of your OSP partners, how has inflation feeding into those conversations?

In the core – in the Technology Solutions business, there will obviously be – there is inflation in shipping that we see, but it’s not a huge component to us. Things like – we use aluminum and steel. We use electronics. But at the moment, it’s – I would say it’s quite manageable. Our client contracts are almost entirely linked to something like a CPI. So in terms of does our revenue grow while our costs are growing, the answer is yes. If there’s a massive disparity between wage inflation and CPI, then that can be a bit more challenging. But it’s challenging for the ongoing engineering costs, which we are anyway driving down.

Stephen talked about some historical targets at 2% and 1.5%. You mentioned at the, what’s it called, modeling seminar; we’re targeting something that’s significantly under that. And I think we’ve got a relatively good line of sight to how we achieve that, and we were achieving under – well under that in Andover and Purfleet at the moment. And so I think we’re heading in the right direction. So also, you can get the cost down so low that a bit of inflation is not material anyway to the overall business model.

In the retail space, it is a question of, it's not great selling food, that's up 3% and having to buy electricity, it's up 500% to keep it cold. Now in the short-term, someone else might have done a better job than we did at hedging that out and might have some immunity to it. Although of course they could actually, that's a financial trade because they could just sell the cheaper electricity they bought in the market if they wanted to. We have shown before that we believe that our model has a similar to lower footprint than a retailer excluding the customer and ours, including getting it to the customer's home.

And if you just think about that for a moment, we clearly use more diesel so one can only believe that we use less electricity to ship a million pounds of groceries in our model than anybody else does. So in theory, increasing electricity ought to be good for us. If you see, I mean relative to the sector, but right now, trust me when you see what is costing, it really doesn't feel very good. So it's kind of a slightly weird scenario if you see what I mean, but our model uses less energy. And so in the long-term that also ought to be a good thing. So I'd say it's challenging, but it's not – we just have to work our way through it. And in the same way that that ORL made phenomenal results for two years as we've shown, it's not making phenomenal results this year, but we expect that in them kind of in the medium to long term, it will make very good results.

Last quick one. You mentioned historically that new customers have been easier to acquire from competitors online businesses in terms of the last six weeks, where are those customers coming from and how's retention looking?

Well, we don't, I mean, that's kind of live data than I would expect to see exactly where they're coming from. What I kind of look at is just share new customer numbers every week. And we're seeing tens of sense higher level of new customers every week than we've seen in any previous year, okay? More significantly at the start, from the start of the second half. We didn't see that in the first half. As I say, what we know historically is we look at the percent of the market that is represented by, for example Tesco's online and Tesco stores and Sainsbury online and Waitrose online and Waitrose stores and Sainsbury stores. And then we ask our customers as they come in the door where did you do the bulk of your shopping?

And the over indexation is extreme. It's not minor, it's extreme. And so we've always actually liked it, when our online retail competitors grow because they're really creating an online grocery customer who we now need to go and persuade to shop from a bigger range at a similar pricing level, but much better value because it's a better – it's a bigger range, it's an easier shopping experience. It's more reliable, the fulfillment is – has an order of magnitude less fulfillment errors, et cetera, et cetera. And so that's why we like that.

Hi there. William Woods from Bernstein. Two questions, the first one's just on inflation and FX within the international solutions business. So obviously its inflation protected. How are you seeing that flow through at the moment? And when does it actually is on a trailing metric and that kind of thing? And then on FX, you are modeling a pretty strong FX boost from obviously your U.S. earnings this year and you are able to quantify what that looks like?

Yeah, look, it's really hard to do. I would say, I mean look because some of the things that we buy are dollar based. So our robots, we manufacture some in the UK, we manufacture also globally, we manufacture in Mexico. But even if you manufacture here, some of the components that you put into them, the motors, the PCB boards, chipsets, et cetera, they're all dollar based. So you will see some increasing costs there, but actually because the overall trajectory of what we're doing here is so cost down. You kind of don't necessarily notice it, it would've been better if it wasn't for those increases.

In each of the client sites, we obviously have ongoing costs some in their local currency. So the local engineering resource that support those sites are local currency. The parts are that we use are probably dollar based, even if we account for them in sterling, if that makes sense. And the ongoing hosting costs are – well, not really sure what they are, because sometimes they're charging local currency, but they're based on the costs of running global data centers and stuff like that. So I would say if anything, if I was to imagine where we are based on what our receipts are and what our expected receipts are in the different currencies and what our expenditure is, we're probably in a positive – we are probably positive to a weak sterling, because a lot of our headcount, the R&D headcount over half of it or so is here. Most of the rest of it is then in euros.

We do have income coming in a whole wide variety of currencies, some of which we’ve hedged a bit out, some of which we haven't. And I say, overall, we're probably in a – when you say in it, I would say in a reasonable space, but it's not a – we don't to be a currency trading business in disguised as an automation or robotics business. It's kind of like show, what do you want? Like if to extent you think there's margin in a contract, do, should I be putting the margin in our Kroger contract back into sterling, because we're a UK business, or do you leave that margin in dollars because also it's not only your margin, but it's also that margin could be larger or smaller. So where do you, how do I know exactly how much to hedge?

So we've tried to make sure that we are kind of not exposed on where we do know that we've got sterling costs against a dollar contract, but at the same time, we probably have a business that will generate kind of long term contributing margin in dollars, in yen, in Australian dollars, in euros and et cetera, in Polish zloty and sterling,

And just check that should help top line into H2 as well. Right. We should get a benefit?

I think it's pretty small, because we saw the international solutions revenue as a part of the total revenue was whatever it was 5% or something. So it's not a big, it's not going to move the dying [ph] group revenue because most of the group revenue is retail revenue in the UK in starling. Correct.

Good morning, Tom Davies from Berenberg. Two questions for me. So firstly, with the online orders returning to like their peak year shape through the week, how are you thinking of like leveraging that like the periods of like more latent capacity is like evolving a [indiscernible]. So it becomes like an omnichannel hub, something or like with Kroger in Dallas, are they using the CFC for their restaurant delivery? And secondly is with UK solutions. In H2 it implies like a profit step up. Can you just remind us what drives the profit step up in H2?

So, let me just stick with the kind of, yes when we look at end consumer kind of shape of week, obviously we've done a lot of work here in the UK over the last 20 years to flatten it which we've been successful at. And obviously there's a huge amount of lessons and functionality there that we're helping our clients with to help them achieve similar kind of profiles to we do. But that does leave capacity in the automation on non-peak days, for example.

And yes, you're absolutely right. That to the extent that you build things like Zoom sites, you will use that capacity to aid in the replenishment of those Zoom sites and over replenish them on the nonpeak day, if you see, I mean, going into the peak day, so you can reserve the peak day automation capacity for end customers.

And yes, we are talking to a number of our clients about other ways that they could utilize those inside their businesses for economic advantage. It’s not – whilst it’s hugely interesting on paper, it’s not most of their first priorities in how they want to improve their businesses because they’re new and they’re rolling out a lot of infrastructure and they’ve got a lot of challenges and opportunities that they can see that are bigger than those to work on first.

And some of the future, I think, called smart router functionality that’s coming that kind of divorces the work going on in the warehouse from a specific fan route will allow us to smooth and utilize the production stuff in the warehouse even better and flatter than the consumer demand on the other side, which will enable us to get more capacity out of the existing warehouses, both for us and our clients beyond their – beyond expectations. And…

Should I do this one?

But what it was. It’s got EBITDA, UK Solutions and Logistics. There is three big drivers here. Number one is OSP fees will grow more than they did in the first half. That’s new live modules increasing, but also Vista going live. So there’s going to be improvement there, growth there. You got the management fee on a growing order and volume base as well. That will grow. And finally, we’re expecting the group support costs in the second half of the year in the portion in Solutions and Logistics to be lower than the first half because we’re expecting a lower total group support costs across the group. Those are the three core drivers.

Sorry. Just [indiscernible] and then we will go back around the other way.

Thank you. Charles Allen, Blomberg Intelligence. First question is on M&S said in the bond call on the same day as you’re accounting seminar, that they expect to consolidate Ocado Retail in a couple of years. Is that your understanding as well? And following on from that, do you expect Ocado Retail to be able to pay a dividend?

So in terms of consolidation, so the way the contract works is it would allow them to elect to do that. So that whisker of control that means that we consolidate it or they consolidate it will pass, and therefore, they can choose if they want to consolidate it at that point. In terms of the dividend policy, look, I think if I look at that business in the medium term, and if you understand the capital that it requires to grow versus its cash-generating ability in the medium term is that it will generate, well, it should generate more cash than it needs to sustain double-digit growth and entirely finance its own side of that growth. So the question then is what is to do with that cash? And the answer may be that at some point, it pays dividends to its parents, or it dramatically accelerates its growth.

And I’m not sure what else it should do with that cash, but I’m not putting a date or a time line or whatever on that. But as I say, it’s not difficult to model out what the retailers’ commitments are to new buildings and vehicles and things for growth, what the negative working capital that they generate as they grow are. And then if you look at the underlying sales and EBITDA margin, you can show – you can see that at mid-single digits EBITDA margin though that business generates more cash than it can. It ought to be able to consume to finance its own growth on a medium-term basis.

And just for the sake of clarity, while the consolidation is just the accounting treatment, it’s not – the economics remain exactly the same, the 50-50 JV structure.

Yes. But it would mean that your – if they consolidate it, it would mean that your target EBITDA would be considerably lower than 750 million?

But it’s not. As Steve was saying, it’s just – it’s an accounting number. It doesn’t actually make any difference. We own half the business today. We own half the business then. It’s question of who shows it in a slide deck.

Yes. And sorry, the second unrelated question is when you talk about group financing needs, does that assume that your convertible bonds will need refinancing?

Yes, it does. They’ll be refinanced. That’s what it assumes.

So that would mean that there would be financing to refinance those bonds, if need be?

If need be, yes, correct.

Thank you. Simon Bowler at Numis. Just one very one to explore, which came as a part of the conversation earlier with regards to partners’ ability to understand what Re: Imagined could mean for them, and therefore, confidence kind of order those modules. I guess with your existing CFCs, there’s a number of service level guarantees that you’ll give upon building those. When you’re talking to partners around kind of what Re: Imagined can bring to them. To what extent can you provide them the same granularity of what new service level guarantees would look like and how they compare and contrast?

Hi, Simon. It’s a good question. And it’s completely straightforward. We used to say it was something around the 200 number, and that’s what you’re guaranteed to get out of it. And the answer now if you buy a new warehouse is it something around the 300 number. So I’m not sure exactly where we’re setting because we don’t normally we want to set what you actually are naming with the old kit to hit 220. I’m doing it in some of the facilities, but you don’t want SLA 220 because then every week, you’re going to be on – did I make it, did I not make it.

But relatively – relative, it’s about 50% uptick in performance that one is expecting, which corresponds to a reduction of a third of the head count required to run the facility from an operational perspective. That’s just where it is. That is the impact of a certain percentage of pick go in robotic, Automated Frameload and a few other bits around the building.

And do you SLA any of the other aspects in terms of peak through pertains hours?

Quite a few. Yes, correct. We SLA all kinds of things. And I don’t know what the exact number is. But without having the exact stat in front of me I would be surprised if we’re not 99-point-some high single-digit number in terms of the available fees that we’ve earned because we’ve had to give something off because we didn’t hit an SLA. We have a very, very strong track record on hitting all those SLAs.

Yes, we’ve got a few the last – this is the last one, maybe that’s the last one.

Yes, thank you. Xavier from Bank of America. One, just you said you’ve got 15th potential discussion right now. And as you said, you would be disappointed, of course, it were not to come to fruition. But can you tell us a bit of when this discussion started. Was it before COVID, during COVID, recently? And potentially the second one, which you think to that, you said you expect multiples of the 58 CFCs you’ve got already in the pipelines in the future. How much is coming from new partners? How much potentially is coming from existing partners?

So the 58 are sites that are existing partners have said. So some of them is literally I’ve ordered two and then it’s two. Some of them is – I’m going to take down 20, and they might have actually announced 16 or 17 or something so far. So there’s kind of three that I’ve announced a larger program that was Ocado Retail, Aeon and Kroger. Some of them are just like Sobeys; I’ve been announcing them one at a time. I’m on at one, I’m at two, I’m at three, I’m at four, right? So the 58 is all from the 11 existing clients and specific numbers they put out there. Obviously, we expect to build more. Any new clients would be on top of that would add to that 58%. That was that part of your question.

And the other part of your question was when do we start talking to these people? It completely varies. So there are some people who we didn't know particularly before. When we say we're in conversation, we often have like an underlying level of we catch up with people on a frequent basis. That number will be much larger than 15, if you see what I mean. 50 [ph] means there are people at Ocado running around furiously helping people analyze things and think about things. And it doesn't – that does not mean you're going to translate 15 into 14 clients, right? It just means that there are a high number of detailed conversations going with people that hopefully will result in some piece of business at some point in the future that could be in one-month, but it could also be in one-year or 18 months. That's the suddenness how these things turn out.

I have personally had to visit sites of ours probably more in the last two months than I have done at any point before other than when I used Frameloading and picking in Hatfield in the early days, right? So I'm in Purfleet, Erith, Canning Town, and then some of these guys, we've even taken into some of the test facilities that we have in – near Hatfield to show them some of the ongoing development and some of the work that goes behind the stuff that you can see like you go into some of these sites. Sometimes there's nothing happening here. I go, well, that's £0.25 [ph] billion of business going through it. And that's the whole point. I suppose there's nothing happening. We're going to Hatfield and it looks like frenetic like you wonder how you're managing this place because everyone is running around like lunatics. In the new sites, I always wonder, are they actually operating, but they are and they're shipping hundreds of millions of pounds of groceries out the door. But there's just a lot of activity.

Okay. Yes, we have some online. So I think we can get through this. So with rising costs and lower profitability in Ocado Retail, does this act as a deterrent in new customers for OSP to take a start with Ocado?

Look, I think it obviously would be nice if Ocado Retail was sitting, making record EBITDA margins in the market. I think it's quite easy to track the specific impacts and to show that if it was – when it grows into its current capacity and without energy costs where they are today coming to some kind of higher but more normalized rate, that, that is still a very good business model, and I think everyone pretty much understand that.

And then, let's see, I guess, related for the U.K. retail business. Can you please give us a sense for the energy cost and distribution and labor costs as a percentage of sales?

Look, I think without knowing exact numbers, we would have looked at – if I've been budgeting this two years ago, you'd have said energy costs this year were in the £10 million to £15 million range. And now you can multiply that by something. I don't know if that's three or four. It's that kind of order of magnitude, tens of millions of pounds on the electricity bill alone.

On the diesel, as I say, whilst it's up, it's not up anything like the same proportion. And as I said, if you did long-term take-off agreements on renewables and stuff, you would be ending up buying energy at significantly less than the spot market today. So it is a – it has to be some form of temporary aberration in the market. So whilst it's unattractive for immediate profitability, it's not going to be sustainable long-term.

Great. And then can you touch briefly on the nonfood retail clients you have? When you acquired Kindred you gained customers such as Gap, American Eagle. How are those going? Any other thoughts on GM?

I don't think we talked about in the numbers, the Kindred's increase in revenue. Kindred when we bought it had one live product in terms of salt. It's made enormous progress on the subsequent product that it wanted to launch, which is INDUCT. And hopefully, INDUCT is getting towards the point where it could become a very big opportunity. And obviously, the majority of people at Kindred are working together with existing historical Ocado teams around the world actually on its third product, which is On-Grid Robotic Pick for which we have a large number of clients anxiously waiting.

And so it has had some more kind of client wins and is doing – rolling out more machines. We'll wait and see. I think that we are looking more broadly in the group about how we put – what we think about with Kindred, with Haddington and with the advances that we're making in Ocado Re: Imagined what opportunities that leads to outside of the core of e-commerce grocery. I'm sure we'll talk about that during the rest of the year or over the rest of the year.

Great. And you flagged a 30% return on capital employed in the midterm at the modeling seminar or the path two. Can you provide us with a similar type of metric for your clients? For example, how is your longer-standing client Casino performing on an ROI basis?

Look, I think some of those questions are not for me to answer. If you want to ask Casino, a question about their performance, then you have to ask Casino. It'd be completely inappropriate for me to sit here and talk about 11 other people's financials, a lot of which I have no knowledge of it. I don't know what their average item price is. I don't know what their – that's their business. The machine that we provided does exactly what it was supposed to do. So there's no surprises. They're not sitting there going, well, we need to have a 10% contingency because your machine doesn't pick x units an hour. They're exceeding all of that performances, and as Frederic was saying, the NPS scores and client, their customers are very happy, and they need to grow their business. They've got a great opportunity to do it.

And then can you give some indication as to how the fee stream in international is capacity-based versus throughput dependent?

I think on the whole, we are 80-plus percent or 80-ish percent capacity base. Some of them are 100% capacity. And I think some of the newer ones are maybe 80% capacity and 20% throughput or something like roughly, it's about that magnitude. So on the whole that capacity base.

Just I think we've got time for...

Just took the clarity, again, that is drawn down capacity, not end game capacity. The design and implementation or whatever we call the upfront fees are based on the finite capacity of a building. The ongoing module fees are based on the drawn down capacity.

And then at your accounting seminar, you flagged a mid-long or mid-term 50% EBITDA margin for Tech Solutions. You've also flagged low levels of ongoing CapEx for mature CFCs. Can we, therefore, imply that the long run free cash flow margin for tax solutions, excluding the build-out of new CFCs, is around 45% to 50%?

That's actually a reasonable number, yes. I'll share more on the second half of this year.

And then can you give more color on Japan? When should we expect the first CFC to go live? And given the specificity of the country, is a five modules standard CFC, the right size?

Again, I think if there's any news on the date other than what's been said before, I don't believe there is, it will be for Aeon. So offhand, I can't remember the date. The plan is – the program is on plan. It was – we had a short delay that I believe we've already made up relating to supply chain challenges on certain parts coming out of, parts of China that were under lockdown. It was a, I think, two to four weeks. I think we've made up in the plan already. So that one is on plan for whenever it was due to go live. I can't remember what that date is, but I think everyone is working towards it, and it's a good date.

There are first few sites that I think that I'm seeing there are larger than five module average. But I don't know what they're going to be going forward, if you say, I mean. So I think the availability of sites challenging, very challenging in the market was even more challenging with the lockdown and their ability to find new sites. I know they're working very hard at it. And it will be a significant go-live in Japan because it's obviously a highly seismic region of the world.

And the – so it will be the first time that we've launched a site in that level of seismicity. And so – but that the grid is going in at the moment and has a lot of steel in it compared to their normal grids, which is at some small increase in cost, but it doesn't affect the overall economics and very excited to get live there. I think it's a really big opportunity.

And then one, just could you further, I guess, expand on the consumer benefit from Ocado Re: Imagined beyond the cost and technology benefit for you and your client?

Sure. I think the main consumer benefit is that we have worked out how to – you manage to use automation and optimized chilled fleet delivery, but managed to achieve using that shortly, a significant portion of quite short lead time deliveries, kind of more akin to what in the U.S. would be kind of an Instacart type standard market as opposed to what we've been more familiar with here in the U.K. of kind of a today for tomorrow market.

So one of the significant benefits is going to be the ability to kind of place an order now and get food in time for lunch, right, from a 50,000 item range somewhere with hypermarket type pricing. So that's coming downstream from Ocado Re: Imagined, and that's because we could build smaller sites closer to customers. It's because we've got the smart supply chain to enable us to do that. It's because we've got a smart router to enable us to divorce the production of an order from a route and to put orders that were placed in the last hour and pick them in five minutes and place them on the same band with orders that were produced last night and stuff like that and sent them out on a multi-hour VAM route, but do those short lead time on the first deliveries and stuff like that.

So that's all coming. There's a lot of smarts in the ongoing development that we might not have tagged as Re: Imagined, but just in the ongoing development of the platform that's improving the predictive algorithms that help customers to shop, that is – there's work going on that enables our clients to put even more range if they chose to in warehouses of the same size and still have a lot of stock holdings that. Orbit is part of that, but there's more parts of that as well that goes on in the warehouse management software and control systems. So clients should get access to more range selection faster turnaround of the food.

So fresher if we can improve the forecasting algorithms to make them more accurate and all this kind of stuff. So overall, clients should continue to get more range, fresher food delivered, much shorter potential lead times if they want them and our clients ought to be able to do that more economically. And the grocery industry, I think, is pretty well known globally for passing on a significant portion of any efficiency benefits into the end consumer proposition. So I think what we're doing is helping to drive to the point where e-commerce becomes cheaper than store based retail.

And just two more. So I think we can probably [indiscernible]. Firstly, so obviously with Aeon in Japan, you announced a capacity equivalent 20 CFCs build through launching three to 2030, so longer dated. And do you feel that that's on track with the first two sites only announced so far?

I don't think – I mean I don't think we put a number. But…

It was the capacity equivalent. It was the ¥1 trillion converted.

Which might be in less sites because they might be larger. Look, I think that we'll have to wait and see. As I say, it's too early to tell because sites that could be live by 2023, I just said I can put my kit in them in five months now. So I don't know how many they're going to have ordered by the beginning of 2029 on that plan.

They're clearly ambitious. It's clearly a huge market opportunity. It has proved in the first two years more challenging to find sites. How much of that is down to a lack of availability versus the fact that it was COVID and the restrictions in COVID were significantly stricter than anything, I think any of us in the room were exposed to. And so we'll have to see how successful they are. Obviously, with the new site rolling out in the next, whatever it is, I don't remember what the date is, yes, next year. And obviously, they'll start to get trading experience and I'll start to get consumer reaction to the proposition, which I know is going to be better than anything in market.

And there of also – so then there's a long kind of period they could go ahead, they could go behind. But realistically, I think their target was realistic, and we'll see how long it takes them to get there. It might be faster. It might not. I don't know.

Great. And then the final one was just how do spoke site economics work? Kroger has announced a few of these. Does Kroger pay 5% fee once at a CFC, twice to CFC and spoke, et cetera?

There's no fees at spoke. I mean spoke is just running cloud-based software of ours. We don't put automation into spoke. Spoke's have a fridge in them. If you have double-deck trailers, they have things like dock lifters in them, but their client side division of responsibility expenses. The software that runs them is just part of the overall SaaS software offering. So there's no incremental cost to run anything through a spoke. What the significance of it is just showing you the growing geography of what they're selling from those CFCs and therefore, the market opportunity, the TAM from those warehouses.

Over time, what you hope they do is exactly what Ocado Retail has done over time in the UK, which was we served almost all the geography we serve today from Hatfield. And then the geography grew in the end customer penetration in the geography grew, and then we need a Dordon and then we needed Andover, and then we needed Erith, and then we needed Bristol and then we needed Purfleet, et cetera. So what you hope is that probably most of those spoke sites one day become a warehouse.

Great. And I think that's it.

Thank you very much everybody.