Ocado Group plc (OCDO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Ocado Group Half Year Results for 2021. I am delighted to be welcoming you to the results for the first time as Chairman of Ocado Group. It's an honor to work with Tim, the Board and all the team to build on the extraordinary progress of Ocado Group on its journey to become a global solutions provider to the grocery industry. Having been a member of the Board since January and having then taken over the chairmanship from Stuart at the AGM in May, I know that this is a business in great shape, well prepared for the velocity of growth ahead of it, and I look forward to playing my part in writing a new chapter in the remarkable story that is Ocado Group. Over the last few months, I have met with a significant number of our shareholders. And during these meetings, I have generally been asked for my first impressions. Let me tell you that right at the top of this list is the quality of the people at Ocado. Their fearlessness, willingness to break new ground, resilience and laser focus on execution are all characteristics we've seen through the COVID period and our qualities, which I believe will serve the business and its shareholders well in the months and years to come. Most importantly, we are asking the right questions about where we focus our efforts, what opportunities we take from many in front of us and how we resource the business appropriately to take full advantage of these opportunities. Today, you're going to hear about the progress we are making as a business, organized around 5 key themes: leadership, speed, resilience, partnerships and problem-solving. Mel Smith, the CEO of Ocado Retail, will be talking about the transformative work ORL is doing to enhance the customer experience even further, its recent rebranding and the growth momentum Ocado is showing as we move on from lockdown. Mark Richardson, our COO, will talk about the velocity and the effectiveness of our execution, highlighted by the very encouraging progress of our first mini-CFC in Bristol. We'll hear from Brian McClory, the Managing Director of Ocado Logistics, who will be speaking about the incredible resilience of the business to enable the Andover CFC to literally rise from the ashes. In 2021, 7 of our 9 partners will be live on the Ocado Smart Platform; and Luke Jensen, the CEO of Ocado Solutions, will address what partnership means at Ocado. And finally, problem-solving. It's in our DNA to solve some of the most difficult technology and engineering challenges of the age, and we'll hear more about this from James Matthews, CEO of Ocado Technology. I hope that you will be as excited as I am by the scale of the opportunity ahead of us. But first, let me hand over to Tim.

Thanks, Rick. It's great to have you on board as our new Chairman. I'm joining you all today from Tim's Diner. And before you ask, it was a colleague that came up with a name and no one even told me before everybody and all the colleagues in the building had voted on it and decided it was their favorite. I guess they like to have a little laugh at my expense. We're here in Hatfield, which is the epicenter of the Ocado global campus. We've got about half of our R&D going on within a few miles of this location. And it's here that we develop all our solutions for our global partners. We're now hopefully entering a post-COVID new normal, and the grocery market globally has changed and it's changed for good, and it's changed permanently. And here at Ocado, we're the epicenter of helping our clients to deliver to their customers fresher food, broader ranges, better execution and at lower prices than they could without our help. And I'm joined here today by Stephen Daintith, our new CFO, who we're delighted to have on board. And Stephen, why don't you start off by giving us a few of your thoughts after your first few months on board?

Thanks a lot, Tim. Yes, it's great to be on board. Really enjoyed the first 3 months. I mean, crikey, it's been busy, I've met a lot of people. I've been largely in listening mode, hopefully learning quite a bit as well. I've learned a whole new language. I've learned about totes, I've never heard of before, and eaches, so there's a whole vocabulary here at Ocado I'm getting used to. I've been really struck by the energy of the place. There's a real drive here, a real determination, a real can-do attitude. And I think I said it before, Ocado has achieved enormous things over the last 20 years. I'm really excited to be part of Ocado, hopefully, delivering even more growth going forward. I think there's bags of potential in this organization. I'm struck by how many opportunities there are for Ocado, and I want to do my best to deliver on the potential that the company has. So it's -- no, it's great to be on board. Thanks very much.

That's brilliant. Well, as I said, we're really happy to have you here.

So I was thinking, Tim, that before we get into the numbers, our half year numbers that we're reporting today, I thought what I'd like to do is just ask you a few questions, get your insight on the market. And I'd like -- what I'd like to start with is that it's been a long 15 months for all of us living with COVID. There are some signs and reasons to be optimistic, but there's still a lot of uncertainty out there. But as we come out the other side, you've said a number of times now that you think the global grocery market has changed for good. What gives you the confidence to say that?

Look, I think we've seen a massive acceleration in an existing trend. So the channel shift was there before. But obviously, it's been accelerated because of COVID. But what we've always learned is that when people try the service, they learn that it's a better way to get their groceries. So we just -- more people have tried it, more people have learned that benefit, and obviously there's an additional benefit in terms of being a safer way to get your groceries, less chances of catching anything nasty, which people are much more aware of now even if we managed to get this and hopefully do get this COVID under control. I think what we've seen in the last 15 months that is going to change dramatically is that we've also -- we've seen an enormous acceleration in demand that couldn't be matched by the services customers really wanted. And then customers were sometimes going to services that were either limited in range or very expensive or slightly different that could fulfill an urgent need that they had at that point in time. And so I think as we move to a new normal, you're going to see services like Ocado Retail in the U.K. building up its capacity to serve more customers. And then those that couldn't get access to that service that wanted it can migrate to it. And some of those overpriced services, for example, will fall away, and customers will migrate back to going to stores again. But I think generally, the shift to online has been enormous. And whilst you've seen a small amount of it go back into the stores as we've opened up and as people have been vaccinated and stuff like that, the majority of the movers stayed, and there is still underlying growth going forward.

Thanks a lot for that, Tim. Now you've talked quite a bit before about the versatility or the flexibility of the Ocado Smart Platform and how it's becoming indispensable for grocers worldwide as they consider entering, if not already in the online delivery market. Can you tell us a bit more about that versatility or flexibility of the system?

Look, what I think is so unique about the Ocado Smart Platform compared to anything else you can see out there in the market is how it spans everything from in-store fulfillment through dark stores, through manual warehouses, semi-automated warehouses, micro automated warehouses, minis and large ones as well. So it's -- we've got the whole breadth in there that is incredibly useful, a, that it can always address whatever mission our partners have to solve. So if they are in a low population, not densely populated area, then they can adopt in-store fulfillment to be online. But if they're building in a large global city, then they can build a big warehouse and possibly some micros as well to do immediacy. And I think that not only means that we can address all their missions, but it means we're the only person, really, that's empowered to have an honest conversation with our global partners about what they should be deploying because a lot of people out there who have got 1 product. They sell in-store fulfillment. They sell micro warehouses. They want to position them as the answer to every question. They're not the answer to every question. But by having the full suite of products available, then we do have the right product available for every possible combination of issues and scenarios that our clients and future clients might have.

And that must have huge appeal for our potential customers.

Look, we're already seeing our customers deploying more parts of our platform. And we know from the conversations that we're having that we expect them to deploy even more of those and yes, it has that advantage of being able to say, okay, let's start with in-store fulfillment here, let's build a warehouse there, then let's think about it, in 2 years' time, we're going to put a warehouse there. Let's put a micro here so that we can do immediacy and see how we can challenge that market in that space. And also on the delivery front, the ability to deliver in the kind of vans that Ocado Retail uses, but also to have click-and-collect and to have drive-through and your different methods so it is enormously flexible, and it's enormously useful. And they also interplay, which I think is something that not everybody has understood well, in that a micro in a geography served by or in a travel distance from a large CFC is the world's most efficient micro because it can leverage the inbound capabilities, the stockholding and -- of the large CFC because it shares assets and so stock can move cleverly between them and make for massive efficiency.

And do you think we have the perfect solution today? Or do you think it's going to evolve much over time from the current model?

Stephen, I don't think that our solution has ever been evolving at the pace it's evolving today. So that's what's unbelievably exciting is that if we wanted to just deliver the solutions we have today to our clients, we'd be winding down the size of our technology teams dramatically because we've delivered on so much of what we had promised, obviously got more to go. But actually, we're -- as you know, I keep coming to you and asking for more money so that we can do more R&D and so -- because we have very clear ideas of what our ambition is and what we can deliver and what that means to our clients, what that means to end customers, what that means to ourselves, and how we can continue to evolve the grocery market so that one day, our clients can deliver a better service at a lower price to their customers and we can assist them in doing that at an even lower cost than we can today, and overall, dramatically better economics for customers, better economics for our clients and better economics for Ocado.

So moving on to a different topic, somewhat related but a different topic, immediacy. The hot topic of the day, there's some crazy valuations out there. Tell me about your views on immediacy.

If you look at the grocery market globally, before the e-commerce even emerged in grocery, you had hypermarkets, which are the main distribution method in developed markets of food. You have kind of smaller formats like supermarkets, you have high street, you have convenience stores in like local high streets and you have corner shops and kind of petrol, fuel forecourt stations and stuff like that. And they're all there because consumers, customers have got different missions. When you're going -- the mainstream consumer, when they're buying the weekly grocery shop, they want large range and they want low prices for which you can read hypermarkets. And whilst hypermarkets haven't been the fastest-growing part of the market for the last, say, 10 years for our large bricks-and-mortar customers or competitors here in the U.K., they've nevertheless remained the vast majority of sales.

Right.

You've also had smaller formats and convenience growing, but convenience, because it is a smaller format, has higher operating costs. That is passed on to the consumer in higher prices. Therefore, the consumer uses it sparingly. When I only need 1, 2, 3, 4 items, I'm happy to pay a higher price for them because that's still better value than driving to a hypermarket. And I just need to top something up. I need dinner for tonight or I need to top up something in the fridge or I've forgotten -- we're running out of nappies midweek.

Right.

And so I think these immediacy players are really moving into that space. Now bear in mind that we have an immediacy format. We've called it Zoom. It's an interesting part of the market, immediacy, but it's not a replacement to the hypermarket, right? It's solving another mission. And we see that clearly in our data in Zoom, which, by the way, because it has a broad range, over 10,000 items, our average basket size is a multiple the size of, as we understand it, Deliveroo, the Amazon, the Getir...

Yes.

The Weezy, the Dija, this kind of stuff. So range and pricing are what drive bigger baskets. So I'm not against our clients, competitors or ourselves being in the immediacy space and believing there is a market there, but it's a tiny market compared to the opportunity for the big warehouses. In the longer term, those immediacy offerings are for the mission. Therefore, the -- it's there for the football. We just realized we've run out of beer, let's get some beer and while the match is still ongoing. People are not going to swap a 45-, 50-, 55-item weekly basket for 20 shops of 2 or 3 items coming 3 times a day. That's just not how people are going to behave. People do plan their lives, predominantly, and then have spontaneous needs on top of them. And so I think it's an interesting sector. But it's not going to be as big.

On a completely different topic. And the final question from me. So the OSP platform and the global appetite for that, how do you see that appetite today, Tim, and how you see it panning out going forward?

So I look, Stephen, it's been a good weird coincidence to be able to announce on results day that we've signed up our tenth customer. So now we've got 10 customers in 7 markets on OSP. We're delighted to have Auchan in Spain join the family. We're still seeing growth in all of our clients. And I think our clients' expectations is for more growth than they were expecting at the point in time that they joined us. So I still see enormous runway for our global business. The sites that we've announced today and the intention from our clients, I think, is just the beginning. There are obviously markets beyond where we are in conversation with other retailers that we hope will come to fruition. And as you know well, because, as I said, keep asking for money, we are hoping to develop solutions that will make the automation relevant in lower-labor-cost markets as it is in the higher-labor-cost markets we're predominantly serving today. And so I think that we need to start thinking about the global TAM of groceries, the kind of $10 trillion market rather than the kind of 30%, 35% or 40% of that, that is in the higher-labor-cost markets. And that's the scale of the opportunity that we need to pursue. And that's why we've got the scale and the depth of research that we're going on to solve this challenge. Because there's going to be -- the channel shift that is still to go on is enormous, and it is going to be in almost every market in the world, and we want to be at the center of that.

Brilliant. Thanks a lot, Tim. Really enjoyed the conversation. I guess now I better get down to presenting the half year numbers.

Great. Well, thank you, everybody, and now I'll release Stephen to go and present the half year numbers for you. Thank you.

Good morning, everybody. I'm delighted to be sharing with you the Ocado Group first half results for the first time. As you may know, I joined Ocado in late March of this year. And my experience of the business over the last 4 months has confirmed all my initial impressions that this truly is a remarkable business with huge growth opportunities ahead of it and terrific potential. Now although Ocado Group is a FTSE 100 business with a market capitalization of GBP 15 billion, for me, during my first few weeks here, it really does feel at times like a start-up. It's got a driven culture, animated by the passion and the resilience of the extraordinary people who work here and characterized by a flat hierarchy, creative problem-solving and an unrelenting focus on efficiency, that real sort of granular inspection of cost and driving down cost. Now this strong culture drives opportunity. We're approaching the future with clarity of thought, determination and excitement. The attractive opportunity set we have before us includes grocery and beyond as we help transform the landscape for grocery retailing worldwide while at the same time, investing in and growing organically and through acquisition in a number of adjacent markets where our brand of innovation can make a difference. So we're making a difference where? Well, a difference to the economies of our partners. We're making a difference to the returns profile of our shareholders, too. Now in my role as CFO, I've defined my -- I thought hard about them actually and defined my priorities to support this strong growth outlook. These include focusing on achieving the best Ocado Smart Platform economics, allocating capital effectively to further enhance the value of OSP, ensuring that we have an optimum balance sheet to support our bold growth ambitions and making sure that the group operations functions are sufficiently resourced to support the pace of growth that we're expecting. Now as we continue to evolve, strong communication of our progress remains a critical focus for me. I've enjoyed meeting several shareholders in the last few months. And I can see that the demand for incremental detail, especially around OSP economics, is very strong. Now as we scale up our initial sites, how to best build on the average modeling guidance, the target operating model guidance that we've given so far to date is very much top of my mind. As for today, let's have a closer look at our financial performance in the first half of the year. So I think it's fair to say Ocado Group has had a strong start to the year. Three highlights to note: First of all, we recorded strong sales growth, up 21% to GBP 1.3 billion, and that primarily reflects the continued strong demand for U.K. online grocery. Second, we achieved good EBITDA performance as an industry-leading margin performance in Retail and efficiency improvements in UK Solutions & Logistics more than offset the continued investment to support platform development. And thirdly, we reported a reduction in loss before tax, increased software amortization costs as more OSP partners went live and arising noncash finance charges in our convertible debt were offset by higher exceptional income, primarily insurance income for the Andover CFC. So now moving on to Ocado Retail. Ocado Retail again showed strong growth with revenue up 20% in the half. Excluding the impact of the Fetch sale, this would be around 22%. Importantly, this revenue growth reflects continued strong demand for online grocery even as social distancing restrictions end in the U.K. A 20% increase in average orders per week is the result of a strong return to new customer growth in the half, together with active customer growth up 22% year-on-year, while basket sizes were flat on average. Now in the chart, you can see the quarterly moves that make up this average and the strength of order growth in the second quarter, up 40% year-on-year, with the average basket falling by 23% in the same period. We've successfully maintained the strong gross margin performance that we saw in the second half of 2020, and that reflects the successful investment that we made over a year ago now in the buying team capacity, which has delivered savings across all product categories and in both branded and Ocado own-label products. The cost growth for Retail trended below the revenue growth, primarily reflecting continued efficiency gains in distribution, and we'll look at this in more detail shortly. So as a result, retail EBITDA more than doubled from GBP 45.7 million in the first half of last year to GBP 104.1 million this year. Now bringing this all together in more detail, you'll see that the Retail business achieved an 8.5% EBITDA margin, an industry-leading margin in the first half, compared with 4.5% in the first half of 2020. It's worth exploring developments on the distribution cost slides in a little more detail. Drops per van per week increased by 4% to 183, even as average basket sizes remain flat as a smoother demand profile through the week enabled roster improvements. Delivery costs also benefited from lower fuel costs compared to the same period last year as well as the nonrepeat of various COVID-related costs that we saw in the year before. Now looking at CFC costs. Units per hour at our mature sites improved by 1% to 172, reflecting the ramp of the Erith CFC, a site that is operating at a UPH above the average. And remember, also included in this line is a capital recharge fee which Retail pays the group over a number of years for the CapEx associated with land and build. This applies to all live CFCs, including Bristol, which means this element has increased to offset improvements in UPH, keeping CFC costs flat, therefore, as a share of revenue. Future sites will be recharged to the Retail business upfront. Marketing costs are slightly up year-on-year. With the end of social distancing restrictions in the second quarter, Ocado Retail launched its first-ever multimedia brand campaign to build further awareness and momentum looking forward to the capacity rollout in the second half of the year. Increased capacity fees mirror the capacity expansion at both Erith and Bristol CFCs. Finally, the rise in admin cost reflects Ocado Retail head office costs as a stand-alone entity, including the noncash impact of management incentives, various Board costs and investments in the buying team already discussed. So moving on to UK Solutions & Logistics now. We also saw good progress in UK Solutions & Logistics driven by increased volume throughput. Fee income grew by 30% year-on-year. This strength reflects the significant ramp-up in capacity at both Erith CFC and the opening and early ramp of Bristol CFC. Orders per week for Ocado Retail and Morrisons reached a new peak of 510,000 in April. As we've already seen for Ocado Retail, this ramp saw fees increase above revenue growth. With the end of the Erith holiday, we are once again receiving Erith capacity fees from Morrisons as they phase back into the site, as well as full fees on store pick volumes. Lower revenue growth reflects the smaller increase in cost recharges associated with the ongoing efficiency gains made in distribution that we've previously discussed. These benefits are passed on to our clients and recharges to Ocado Retail are eliminated on the consolidation. Distribution costs also include engineering costs for which our partners pay a fee. We're making strong progress in this area with engineering costs down 45% at Erith on a cost per each basis, ahead of plan. Finally, admin costs primarily reflects investments made in additional headcount and technology resources, driving a 20% increase compared with the prior period. So putting this all together, EBITDA increased by GBP 6.4 million to GBP 30.1 million. Moving on to our International Solutions business now. So our International Solutions business is beginning to recognize material revenue with GBP 19 million of OSP fee revenue recognized from partners of CFCs ramp-up in France and Canada. And with the go-live of the first 2 CFCs in the U.S. in the first half, the U.S. sites were opened on time and are performing to expectations, and we're getting positive feedback from all of these partners. The remainder of revenue reflects Kindred Systems and some equipment sales to partners, the latter which has no impact on EBITDA. Kindred revenue to date has ramped a little slower than we originally anticipated, but we remain excited by the long-term opportunity for their robotic picking solution outside of grocery. Now the acceleration of the OSP rollout has driven an increase in costs, up GBP 38 million year-on-year through a higher allocation of central investments that are being made in technology talent to develop the platform as well as personnel and cloud costs to support clients in CFC go-live and early ramp. The strong pipeline of CFC commitments from partners was also reflected in fees invoiced for existing and future CFCs and in-store fulfillment commitment. So for International Solutions, we're reporting an EBITDA loss of GBP 56.6 million versus a loss of GBP 39.7 million in the same period last year. Let's look at our investment spend now. So as we scale up and invest to support our growth ambitions, we're seeing a corresponding step-up in CapEx as OSP rollout picks up globally. You can see that about 2/3 of our CapEx spend is CFC-related, reflecting those sites already launched as ramping up and the 16 CFCs we currently have in various stage of build, the second-biggest bucket of spend on ongoing developments of the OSP platform. Now this spend includes vehicles in the U.K. as well as costs associated with our ongoing group transformation as we scale up as an international business. So we're making significant investments to seize the enhanced opportunity in online grocery. Our total cash spend on technology and fulfillment investments was GBP 129 million in the first half. The lion's share of this was dedicated to a mix of ongoing platform improvements, including increased use of cloud services, enhancing routing systems and our customer proposition and increased CFC support. Handling and retrieval robotics is a particular area of focus within our overall technology investment spend, now making up 30% of our capitalized platform development costs. And this reflects the size of the future opportunity. Robotic picking could see a significant reduction in partner costs in online operations and an enhanced growth and fee opportunity for Ocado Group. Now let's have a quick look at the balance sheet. Happily, we have a healthy liquidity position with around GBP 1.7 billion in cash and cash equivalents at the end of the first half, enough to meet existing commitments and deliver future growth for the short to medium term. You can see here from this slide that positive operating cash flow in the first half reflects the group's strong performance primarily in retail as well as continued growth in unrecognized fees from OSP partners. This was partly offset by a net increase in working capital, a result of higher retail trading volumes and the launch of the Bristol CFC, which drove increased stockholding requirements and trade receivables. Now looking at cash flows related to financing and investment. The inflows primarily relate to a drawdown of treasury deposits not previously in cash and cash equivalents at the start of the year and these were used to fund investments made to support future growth, capital investments and the acquisitions of Kindred and Haddington. So putting this all together, with gross debt of almost GBP 1.5 billion, the net cash position was just shy of GBP 200 million at the end of the period. Moving on to outlook. In conclusion, we're in a strong position going into the second half of the year. While uncertainties, of course, remain regarding the performance of ORL, in particular, in the second half as COVID restrictions continue to ease, we are encouraged by the performance of ORL in Q2 of this year. We're updating guidance across the other segments, expecting a GBP 30 million lower EBITDA contribution in total from those other 3 segments. The largest share of this reflects continued investments in growth, which we consider as crucial to unlocking the growth potential of the business in the years to come. The remainder is a mix of impact from a slower ramp of Kindred revenues than we had originally expected in the near-term as well as some increased charges related to deferred consideration for the management teams of Kindred and Haddington, as a reminder, the businesses that we acquired early this year. We're incredibly excited about how we can seize the huge opportunities in robotic manipulation, and with these 2 companies, we expect to play a key part of that goal, and they're now a key part of the Ocado family. So putting this all together, we have the strong performance in Ocado Retail, and at the same time, we have a number of investment opportunities that we intend to pursue. And of course, we're now -- we're consolidating the results of Kindred and Haddington as well. And putting that all together, we're not changing our outlook for the full year. Now I've given you the numbers that illustrate the progress that we've made in the first half. Now as Rick mentioned, there are 5 key themes behind everything we do at Ocado Group. They're as quarterless as our iconic grid or hive. And here is the team to talk you through them.

Good morning, everyone. Ocado Retail is the U.K.'s best online supermarket with the market's leading proposition. We offer the best customer experience in global online grocery. With more than 40,000 products, we have doubled the range of our nearest competitors. Our range includes more than 5,000 items from Marks & Spencer across food, drink, Clothing & Home and lifestyle. And we also have all of our customers' best-loved household brands, Ocado's expanding own-label range and the largest selection of small and independent supplier brands in the market. The past 6 months have continued to be unpredictable for the whole grocery sector. Despite this, we grew revenue by 22% and opened our new CFC in Bristol, which is now fulfilling 16,000 orders a week. Additionally, we have continued to invest in retail prices in this period to offer great value for our customers every day. As restrictions have eased, we've taken advantage of smaller basket sizes to attract new customers, and increase our average orders per week. In the first half, we increased average orders by 20% year-on-year to 356,000 orders a week. In the second quarter, orders were 390,000 per week, 40% higher than the same period last year. We now have 777,000 active customers, 22% higher than a year ago. So in the extraordinary demand for Ocado.com as we make capacity available, we broke records in this half, reaching 60,000 orders a day and almost 400,000 orders per week, our highest volumes ever. And services improved, with 98% of items delivered as ordered and 97% of orders delivered on time. Our average basket size and capacity utilization both remain well above pre-COVID levels. Combined with our continued focus on operational efficiency, this has meant EBITDA more than doubled to GBP 104 million. Ocado Retail has grown its market share to 1.8% of the U.K. grocery market. Online penetration for the whole grocery sector is now 13.4%, and we expect this channel shift to endure. Given our market-leading offer, we are confident we'll continue to grow share as we add capacity. Looking ahead, we're excited to reopen our CFC in Andover and to open our brand-new CFC in Purfleet later this summer. Next year, we'll open our seventh CFC in Bicester. At maturity, these 3 CFCs, including Bristol, will increase our capacity by around 50%. And we're planning to open even more CFCs in 2023 and beyond. We're also actively seeking 12 new Zoom sites over the next 3 years with 1 additional site in London already identified. Thanks to our partnership with Ocado Group, Ocado Retail is able to serve the full spectrum of shopper missions. On Ocado.com, customers can order for multiple weeks in advance through to order on the same day. And increasingly, we are seeing customers choosing to book in advance using our Ocado Reserved functionality, where customers have a consistent prebooked slot each and every week, and we've more than doubled Reserved orders in the last 6 months. As we add more capacity, we'll expand same-day orders to more areas, providing customers with the option to place an order in the morning for delivery that same evening. Ocado Zoom provides customers with the option of on-demand and same-day deliveries, with average delivery time for immediate orders of under an hour. On Ocado Zoom, customers can take advantage of the full breadth of shopping missions from something to eat right now to a top-up shop to a full grocery shop, getting the freshest produce from a range of over 10,000 SKUs. Finally, I would like to extend a heartfelt thanks to all of our amazing Ocado colleagues and especially our drivers, personal shoppers and frontline colleagues who have done an absolutely brilliant job for us day in, day out, serving our customers. I'm so excited about the future for Ocado Retail as we grow our amazing business, and we're really looking forward to welcoming many more customers to Ocado as we add new capacity in the second half of this year. Thank you.

Good morning. Over the last year, the food retail market worldwide has seen a dramatic acceleration of channel shift from traditional bricks-and-mortar retailing to online grocery shopping. All the evidence so far is that many of the millions of customers who have tried online grocery shopping during the pandemic have liked the experience so much that they won't be going back to the old ways of in-store shopping. Our partners want to capture this momentum and grow faster in the online space, and we want to help them to achieve these goals. With this in mind, speed is critical, the combination of speed to market and speed to ramp. The Ocado Smart Platform offers our partners the opportunity to bring a scaled online grocery service to their customers quickly and profitably. OSP is the opposite of a one-size-fits-all solution. It is a very flexible ecosystem that allows partners to configure models of capacity in any way they want, according to their strategic or tactical needs. This can be done through in-store fulfillment using our enhanced Store Pick software as well as through a range of micro, mini and standard-sized CFCs to accommodate customer demand for an immediacy offering as well as the big basket. OSP partners have been enthusiastically embracing the flexibility of OSP over the period. A good example is Ocado Retail in the U.K., for whom we opened the first mini-CFC in Bristol in February of this year. In terms of speed to market, we have gone from announcing the site to go-live in just over a year. We have never gone live so quickly. In terms of speed to ramp, we don't need to be cautious about the technology. We know it works. It is battle-hardened. This means that following initial opening in Bristol, we have been able to ramp up faster than ever before, and we expect future CFCs to ramp up even faster than Bristol has done. Our technology has been tested in the field, and we have already shown in Erith that we can ramp to a capacity beyond that any partner will ever want in one site. Our capabilities are helping support Ocado Retail's strong growth in the U.K. With new standard-sized CFCs set to open in Andover and Purfleet later this year, another mini-CFC in Bicester in 2022 and CFCs 8 and 9 to follow, we are providing an accelerating and transformative program of capacity growth. The ability to open capacity quickly and to ramp it quickly is important. But speed to market is not so attractive if the growth is not profitable. The good news is that we have a proven profitable model validated over 20 years in the U.K. market. In addition, we are quickly deploying our learnings internationally, a win-win situation, whereby we help our partners make the most of their investment while improving our margins. Practical examples of the changes we've made to the way we build our CFCs include bidirectional grid build and implementing a new method of aligning the grid build and the build of peripherals, which decouples the 2 tasks and enables us to go faster. While these changes may sound very technical, they significantly improve our speed to go-live. To conclude, we increasingly recognize that speed to market is a very important part of our partners' plans. And there is, therefore, a huge focus at Ocado to go faster. Ocado can enable our partners to bring to market a profitable, scaled model for online grocery in the most flexible way and faster than the competition. In this sense, we are very well positioned to help our partners take advantage of the surge in demand for online grocery that we see today. Thank you.

Good morning, everyone. Nothing better illustrates the resilience of the people of Ocado than the recovery from the devastating Andover fire and the reopening of the facility as a state-of-the-art robotic customer fulfillment center just 2 years later. Andover, you will recall, was our OSP prototype CFC, opened in November 2016 with capacity for 65,000 orders per week. The loss of this facility reduced our capacity by 20%, half of which we were already using and half of which we were planning to grow into. The extraordinary work of our colleagues from across the business have minimized any impact to our customers, squeezing more capacity of our existing CFCs, redistributing delivery operations and building a new spoke on the Andover site in 10 weeks at record speed to maintain deliveries required at times a superhuman effort. But the success of our efforts meant that despite the loss of capacity, Ocado finished 2019 as the fastest-growing food retailer in the U.K. according to Kantar. At the same time, we immediately began to think about rebuilding the facility and fulfilling our commitments to the local community as an important employer and corporate citizen. And so here we are 2 years later, with a new Andover set to process its first outbound orders next month, a phoenix rising almost literally from the ashes. And as we recommence operations, we are delighted to be welcoming back 150 of our colleagues who were working with us 2 years previously. Now of course, Ocado does not stand still, and this new Andover CFC will be better than the prototype it replaces. You will see a facility with a layout built to our specifications. And like Bristol, you will see the 500 series Bots in the grids, a machine designed with fewer and interchangeable components with lower maintenance costs than previous generations. You will also see the latest-generation pick station which enables us to optimize the flow of walk to and from the personal shoppers, meaning we can operate more consistently with better productivity. The new site will also be set up for more direct deliveries of customer orders and will be integrated with our CFC digital twin, opening up new opportunities for continued optimization. What this will all mean is higher capital efficiency, a significantly faster ramp to its new capacity of 60,000 orders per week and better productivity, both during the ramp-up period and at maturity. At maturity, we expect productivity, as measured by UPH, unit shipped per laborer, within the 4 walls of the CFC to be at least 20% greater than what we would have expected from the original site. The result being the new Andover will be more capital-efficient than its predecessor and more efficient, scalable and flexible than before. The sign of a great company is how it responds to adversity, and this is all about the people and culture of a business. The rebuilding of Andover is proof of the commitment, creativity and focus on execution that characterizes the way we work at Ocado. It's truly inspiring, and I would like to take this opportunity to thank each and every one of my colleagues who have helped make this happen. Thank you.

Good morning. It's great to be with you this morning to provide an update after a busy few months for Ocado Solutions and our partners. It's been another extremely busy few months for us and indeed for the wider online grocery industry across major markets. And as restrictions gradually begin to unwind, it's clear that the appetite for grocery online that rocketed during the pandemic is proving extremely sticky. I wanted to start by looking at some of the highlights of the past few months and in particular, to recognize that 7 of our partners worldwide are now live with Ocado's technology. So from Gothenburg to Paris, Tampa to Toronto, a growing number of households are now receiving deliveries powered by Ocado Solutions. And the strength of the customer proposition available with Ocado's technology is now evident in some of the world's biggest grocery markets. It's worth reflecting as well that we have taken 4 of these partners live in just over a year. And in the past few months, we've already taken more CFCs live than we did during the whole of the previous year. So our CFC programs with partners continue to be extremely busy and the early results from our first international CFCs have been very encouraging, as evidenced by recent commentary from Sobeys and Casino, both of whom have been live for now over just a year. But today, I also wanted to touch on an aspect of the platform that is sometimes, and by definition, less visible than hardware like CFCs and robots. As much as Ocado is a cutting-edge robotics business or logistics innovator, we are also a software powerhouse. And core to our partners' maintaining leadership in their markets, both in terms of operational efficiency and customer proposition, is the constantly growing software mix we're pouring into the platform. And as you can see here, since the start of 2020 and throughout the pandemic, we've continued to scale the software capabilities available to partners with OSP at pace, spanning functions like promotional enhancements for partner web shops to new supply chain management capabilities to last-mile routing optimization, we are constantly delivering a growing and integrated software platform to our partners. Other companies may provide just software or just hardware, maybe the web shop or separately, a piece of fulfillment equipment, but we provide a solution completely unique in its sophistication and integration of software capabilities across the end-to-end value chain. More than that, as we move forward towards a new post-COVID normal, this software pipeline will be a core differentiator in enabling Ocado's partners to stay way ahead by continually driving down their costs, enhancing revenue streams online and enabling a truly market-leading service to an ever more discerning customer base for grocery online. Since the start of the pandemic, the topic of resilience in grocery value chains, particularly online, has been at the front of mind for retailers around the world. And for our partners, a big part of this resilience is in leveraging a platform that's consistently developing and providing their customers with an online experience that grows with their needs as more and more shoppers come to the channel. The constantly evolving software estate we are building within OSP provides them with a huge advantage in achieving this. Another unique aspect of our partnerships is our position at the intersection of some of the biggest grocers in the world's most developed retail markets. In an industry where 75% of markets are still dominated by local players, this is a really extraordinary position to be in. We aren't just connecting our partners through the experience of operating on the same technology platform, we're also enabling them to learn from each other's operations and experiences. And as ever, we are doing it in a way that takes account of the end-to-end considerations of online grocery. These discussions are taking place in a deliberate framework, one that brings together key sponsors and leaders within our partners, and also one that assembles partner representatives to engage on the core themes and touch points of the online grocery value chain. These are forums for our partners and led by our partners with conversations being chaired by representatives from across the retailers on our platform rather than directly by Ocado. And so far, these conversations have provided valuable insights and learnings across the group. And as our live partners continue to scale their operations and more retailers go live on the platform, I am sure that these exchanges will become more and more valuable in identifying new opportunities and driving more efficiencies across our partner markets. So through this ecosystem, we are building meaningful collective intelligence and creating opportunities for exchange, which otherwise would not have existed in the same way in global grocery markets. And so you're not just taking our word for it, I'd like to leave you with some of the amazing feedback that we've received from our partners over the last few months, both those live on the platform and some of those looking forward to go live shortly. Thank you. [Presentation]

Good morning, everyone. The shift to the online grocery channel is significant and permanent. Our partners are going after bigger opportunities sooner than expected. As the rollout of Ocado Smart Platform around the world accelerates, carefully planned execution is critical for our partners' ability to take advantage of these opportunities. Given the complexity of online grocery and the different infrastructure and customer behavior in each market, the breadth of the decisions we have to make with our partners is significant. Mark Richardson spoke about our increasing speed to market and speed to ramp. One critical capability that makes it possible for us to deliver hugely complex projects at speed with great confidence is our proprietary simulation and modeling technology, our ability to create digital twins. A digital twin is a virtual double of a physical asset, system or process, which allows us to test for thousands of real-world scenarios and ask what-if questions. Once the actual asset is built, we can feed the real-world data back into the simulation, a virtuous cycle which ensures we improve the accuracy of our models over time. Our simulations enable us to optimize the combined hardware and software systems in a virtual world before building them in real life. We can derisk complex builds with many moving parts as well as plan, prepare and optimize for thousands of scenarios. For example, when designing a new CFC, we would use a digital twin to optimize the layout of our automation to achieve optimal performance at the lowest cost for us and our partner. Our digital twins can be used to replace real-world testing, which will be both prohibitively expensive and time-consuming. The cloud enables us to consider many different scenarios simultaneously and apply advanced machine learning to glean immediate insights. Advanced simulations are anything but an out-of-the-box solution that you can buy off-the-shelf and integrate quickly. We found that even the most advanced solutions available on the market weren't designed to cope with a number of moving parts and complexity in online grocery. So we built our own. It's in our DNA to solve some of the most complex technological challenges. We spent the last decade building advanced capabilities in this space, which allows us to test our solutions in a variety of scenarios. And like others in the market, we can be confident in the applicability of OSP around the world. I trust this gives you a glimpse into the strategic significance of our advanced simulation capabilities for enabling our partners to move with speed and with confidence. Thank you.

We are now going to pause for 2 minutes whilst people join the conference call for the Q&A session. Thank you.

[Operator Instructions] We take our first question today from Victoria Petrova from Credit Suisse.

My first question is on your partnership with Sobeys. In their recent fourth quarter result, they mentioned opening 4 CFCs in Canada covering sort of 75% of customers, 90% of e-grocery sales. Is it correct? And do you see it as a maximum number of CFCs in Canada? And how do you put it into the context of your existing partners expanding further? That's my question number one. My second question is on countries with low labor costs, which you mentioned in the beginning of presentation. How do you think about the fee structure both related to upfront fees and especially operating fees if we are talking about countries where labor cost is relatively insignificant once compared to developed world? And my last question is on Auchan partnership and congratulations on signing it. Is it an exclusive agreement for Spain where Auchan is present or not?

Hi, Victoria. Yes, Sobeys did say on their last announcement that the first 4 warehouses will get them the geographic coverage to cover, as you say, over 75% of the population and an area that they believe was about 90% of the overall grocery market. That's similar, if you think about the U.K., to our initial warehouse in Hatfield, which got us 75% coverage of the U.K. grocery market, but increasing demand in that geography has led us to then build Dordon, to then build Andover, Erith, Bristol and going live this year, Purfleet and Andover. So what I think Sobeys are telling you is that from those first 4 warehouses, they can now reach 90% of the Canadian grocery market, which is something that a lot of people have challenged over the years and said, oh, your model only works in small countries like the U.K. But that's not true because with the 4 sites, they can get to 90% of the market. They then obviously will grow their market share in those markets. And as the channel shift continues, we would completely expect them to need to come back in those markets and add incremental facilities as more and more of the Canadian market moves online, and Sobeys, with their successful proposition, get more market share. Moving to your second question about low-labor-cost countries, yes, clearly, we need to provide the service at a lower cost in low-labor-cost countries. Obviously, it costs us less to provide it in low-labor-cost markets because the cost of the project management, the installation and the ongoing engineering that we provide as far as the service is cheaper in those markets. But our onward development that we have referred to several times in the presentation are around developing cheaper solutions that will, therefore, have better trade-offs in terms of robotics versus labor costs in more markets than our current solutions do today. So that's the direction of travel to make the service attractive also in lower-labor-cost countries. Bear in mind that the advantage of the solution is not just the labor cost efficiency. It is also more space-efficient, it's also more accurate. It allows you to sell longer tail, larger ranges that give you margin acquisition and retention advantages as well. So don't underestimate those other values of the solution as well as taking labor cost out. Thank you for your words on Auchan Spanish business, Alcampo. We're delighted to partner with them. As you are probably aware, we have an existing client in Spain. So Alcampo is our second client in Spain. We're working with Bon Preu in Catalonia. And yes, we do have some clauses in our contract with Alcampo that means that we won't, outside of our existing relationship with Bon Preu, shortly do any more business with a third player in Spain, subject to continued expansion that we've agreed between ourselves and Alcampo and a number of further facilities beyond the initial one we've announced today.

And just one follow-up, you talked about sort of CapEx like cheaper solutions. We've heard from other players, like immediacy players, that the bulk of cost savings in fulfillment are done through software, not hardware. Would you agree with that? And how should we look at it as nontech experts? That's my last question, I promise.

The hardware runs on software. So you can argue whether it's hardware or software. But the main efficiency improvements, unquestionably, come in the automated facilities. We use a small fraction of the labor that any of the manual operators use in fulfilling our customer orders. So the robotics and the automation takes out massive amounts of labor. I think it's always important to make sure when someone tries to quote you some statistic that you're comparing apples and apples and not apples and pears. I've heard others talk about their facility, saying, well, they're as efficient as an Ocado facility, they are at 200 UPH. They're talking about the picking in a facility, whereas we're talking about the end-to-end throughput from this facility that includes a number of other processes of which picking would be about 40% of the labor. And also, their facilities are of a size that means that they have to have everything go through a regional distribution center first, which adds more cost to it than the whole cost of running our facility. So I think just to compare apples and apples, and I'm absolutely confident that the robotics automation powered by very advanced software is what gives you the greatest labor saving. Thank you.

We now move on to our next question from Fabienne Caron from Kepler.

Three quick ones from my side. First, Tim, the last time you spoke, you said that the Zoom you had in the U.K. was not endgame automation. Can you tell us how has it evolved? And if your partner would be placing some order for Zoom, it would be the first question. The second question, could you share with us the ramp-up of Casino and Sobeys CFC because it's now more than 12 months? And the last one regarding Auchan, you said you're looking at other geographies. But looking at where they are and the fact that you cannot do France, I suspect, because of Casino, does it mean that you would be ready to go with them to Eastern Europe?

So I think quite a lot of questions that I can't actually answer because they're not mine to answer. So obviously, the ramp-up of our clients, individual client-specific businesses are things that you can ask them but aren't for me to put out any trading numbers on their behalf. In terms of your question on Zoom, any -- the facilities that we are now in construction in the U.K. and we will build for our clients have a different infrastructure inside them versus the initial one that we built that you know doesn't have endgame infrastructure in it. They are -- they need half the space to do 50% more volume and we'll use 1/3 of a labor per item shipped from those buildings because of the new Ocado infrastructure that will be inside them. And then your last question on Auchan's other markets, that's something between us and Auchan to discuss for the future, but I can't comment on what other markets might be of interest to them.

Okay, so just to make sure I understand. So it's like a mini-grid that you're putting into it and this is the automation you're talking about. And you receive the product in totes from the bigger CFC, correct?

So yes, they're mini-grids. They have the same storage containers as the big warehouses. They use the same made robot. They just have 50 to 100 robots in them, not 1,000 robots in them. And they're very highly tuned and optimized to run this kind of slightly smaller basket, more immediacy offering, but leveraging the inbound capabilities of the large warehouses and taking inventory from them.

We now move on to Andrew Porteous from HSBC for our next question.

A couple for me. Just wondering, you talked a lot about sort of the flexibility in your model and how the sort of operating model effectively is changing through the OSP. I'm just wondering if you thought about what the overall impact on the revenue model might be from that. Is it broadly similar to what we've been used to in the past? Or do we need to think about different channels in different ways? And then secondly, can you just give us an idea on where you're up to with sort of new customer improvement? I've noticed you've been a bit more visible from a marketing perspective. Clearly, I think customer numbers was probably one area you struggled a bit last year, but clearly, an effort to improve that this year. Have you started to see customers come back to the platform on the Retail side?

So let me go in reverse order. We weren't struggling to acquire customers last year, Andrew. We were limiting the customers that could get access into the shop because we could have done many multiples the amount of business that we did, but we were protecting our capacity for our longer-serving loyal customers as well as those that the government asked us to prioritize. So obviously, the active customer number shrunk because we only had a couple of -- the group of customers that we let in were taking all of the capacity that we had. We are back into more normalized baskets. We have said that the number of orders in the second quarter was up 40% year-on-year and that the active customers was up about 20%, so you can see more orders, more capacity. And yes, we're out talking to customers now because we have the capacity to let back in or to invite in new customers to the shop. And that obviously is something that is normal course of business for us and something that we've done for the 19 years before COVID, but something that had to be put on hold during the peak pandemic levels. Moving to your question about modeling different channels, I mean, it's fair to think about it that the more value-add that we deliver to a client, the higher the fees are, the more the costs are for us to deliver it. So a micro auto -- full-automated facility or a large warehouse has higher -- has fees that are a higher percentage of sales than a software-based product like in-store fulfillment does. And then obviously, from a kind of margin perspective, you'd expect the pure software product to have slightly higher margins than a software and hardware product, and that's probably how I would think about them. And your -- I'm trying to remember now the detail of your first question.

Your revenue models around the platform.

Do you want to just hit me with the first question again, just to remind me exactly what it is you asked?

I think you've just sort of answered it. It's only really 2 questions, just about whether the change in operating model changes the revenue model.

Okay. Fine, fine. Fine. Yes. And look, if somebody is running a micro fulfilled by a large facility, then there's some revenue that comes from the goods going through the large facility and more revenue coming through them going through the small facility. And so I just think of each facility as another source of revenue and a profit contribution.

We now move on to Xavier Le Mené from Bank of America.

Two, if I may. The first one, looking at Ocado Retail and the EBITDA margin, you were able to provide to 8.5% in H1 compared with 8.8% in H2, if I'm right. So it sounds like pretty similar, but your gross margin increased quite significantly in H1. So can you give us a bit more details on the component of that EBITDA margin? And given the gross margin going up, so what was the cost, incremental cost you've seen in H1? I believe it's Bristol, but if you can give a bit more color on that, that would be quite helpful. And the second question is on your model with your partners and the fee that you're charging, so how is it going to evolve over time? So should we consider inflation as a good proxy for this relationship for your fees to go up? Or is there another rule that we should have in mind?

So I'm going to take the first question and ask and then I'm going to ask you just to ask the second one again because I didn't catch all of it. Sorry, the line is not fabulous. So yes, the gross margin, as we reported, was up significantly in Ocado Retail. You know that, that's come from several factors such as, for example, we used to pay a fee to Waitrose that was over 100 basis points. You can even see us having talked about it historically. We don't pay a fee anymore. So that has come back in. We obviously have been through a period where we've not been giving out the marketing vouchers that we would normally historically have given out to acquire customers. And marketing vouchers whilst internally, we think about them inside the marketing budget, from an accounting perspective, obviously they're nonsales, i.e. they dilute your margin. So we've clawed that back. We have seen a slight increase on delivery income, on average delivery income per order, largely driven by having less free or very cheap passes outstanding to customers. And we have seen some improvement in gross margin as we've taken the buying of general merch -- sorry, to the buying of branded goods in-house. And the teams that Mel and company have put together have done a very successful job at improving our overall margin, whilst actually improving our cost -- our price position relative to the rest of the industry. So that's largely the areas that, that margin improvement has come from. I'm not going to get into exact details of the breakdown between them.

Shall I talk about the second half as well, Tim?

Sure.

So in the second half, what are we expecting? Well, there is going to be a ramp-up in marketing spend in the second half. You'll have seen and heard Mel's comments around the growing customer numbers and customer acquisitions. So that will be an increase in spend as a proportion of sales in the second half. At the same time, the shape of the week in the second half will be very different, we think, from the first half of the year, particularly as we get out of the sort of the more easing of lockdown restrictions and so on and more of a peaky week than the very smooth week that we've typically seen during COVID. And then the third dynamic in the second half of the year, you're going to be seeing growing Ocado Smart Platform fees as well as increasing capacity goes through the platform, Erith, Bristol and then the other sites that are going to be added in the second half of the year, Andover and Purfleet as well. So those are the key dynamics for H2 for Ocado Retail margin.

Okay. And my second question was more with your partners in Ocado Solution, how we should see the fee increasing going forward? Will it be linked to inflation? Or is there already an agreement with your partners that the fee will grow according to specific metrics? So it's just to understand what -- how the fee will grow going forward.

Sure. Look, as clients open -- so there's 2 parts of the fees. There's the kind of upfront fees on new facilities or on new clients joining the platform. Obviously, those are more lumpy depending on when we start projects, specific projects and also when we sign new clients onto the platform. And then you've got the recurring fees and the recurring fees come in as the sites go live. And beyond the site -- now obviously after the sites go live, they're based on the drawn down -- predominantly based on the drawn-down capacity that those sites represent. So if someone takes a site that, say, got $500 million of capacity but initially asked for $200 million of it to be live, the fees are based on the $200 million, then at some point, as some of our clients are doing now, they ask to go to the next level up, and that might be, say, $300 million, the fees go up as well. And those fees are linked to their capacity in terms of the number of items per hour that can go through the facility, and they do have inflation links on them, predominantly have inflation links on them.

We now move on to Maria-Laura Adurno from Morgan Stanley.

I just have 2 questions. Coming back to the contract that you announced this morning with Auchan. What type of size should we expect with respect to the CFC that you've announced? Are we talking GBP 350 million in terms of revenue, GBP 420 million, which was one of the numbers quoted in one of your previous calls? So just to get a bit of a better understanding of the contract size. And then the second question, going back to some of the comments you made in the press release. So you were talking about having the 500 series bots, which are more efficient and cheaper to run. From a CapEx standpoint, does this imply any type of changes to the current guidance that you have, particularly if you have to deploy them across the platform? Any thoughts on this would also be much appreciated.

So the first question is the size of Auchan's site. And again, I'm not sure what they said. So I don't want to say too much, but I would just say it's around an average size compared to what else we've rolled out for our clients globally. So it's not materially larger or smaller than the average that we've been building for other clients. But in terms of the specific size, that should be one for our client to speak about if they wanted to. And then your next question was around 500 series bots. And I picked up that you picked up that we had said that they had a lower long-term cost of ownership. They were intended to be cheaper to operate, and the engineering cost on them would be lower than the 400 series. I think you asked something about are they also cheaper to make. The first few coming off the production lines are about the same price as the 400 series have got itself down to. We do expect the majority of 500 series robots that we will produce over the next couple of years to be meaningfully cheaper than the average of the 400 series. We have a cost-down program that is ongoing, and we have a very clear route to reduce the cost of those robots quite substantially.

Yes, and on the guidance question around CapEx, well, you'll know that we guided for GBP 700 million of CapEx this year. We're clearly on track with that with the GBP 319 million that we spent in the first half of the year. Typically, we spend more CapEx in H2 than we do in H1, so it's on track there. I would say that, if anything, on overall CapEx guidance, it's more likely to increase rather than decrease given the volume of activity that we're anticipating over the next couple of years as we finish the 15 construction sites that we have today and also as we roll out those CFCs and kit out the MHE that goes into those CFCs as we grow our sort of global footprint. So that's the overall guidance that I would give on CapEx, GBP 700 million remains this year. And if anything, you'll see a higher number than that next year.

Our next question now comes from Nick Coulter from Citi.

Welcome, Stephen. I have 4 quick questions, please. I'll go one by one for ease. Firstly, noting Alcampo deal is for food and nonfood, can you talk about how you intend to bespoke or adapt the solution to add the nonfood capability? And I guess to the Alcampo topic, just a lighthearted supplementary, are you expecting Casino and Auchan and Alcampo and Bon Preu to sit around the table and share learnings going forward? That's the first one.

Good question. So some of the non -- the specifics about how we're doing the nonfood, I'm not sure I can really get into now. Some of it is front-ended linkages to other fulfillment methods and some of it will be similar to what we have in Ocado Retail where we handle some general merchandise through the existing facilities as well. So there'll be a combination of those 2 predominantly. But more detail, I don't think it's for me to go into. Do I expect them to sit down -- I mean, some learnings, I'm sure they will sit down and share around running facilities. As certainly to start with, they're not running into to each other in any of the markets that they're operating with us. So there's no 2 Ocado sheds that are competing with each other in those markets. Obviously, there might be some details that they choose not to share with each other, but that's all to come. We do this in the U.K. Ocado Retail sit at the table, Morrisons sit at the table. In theory, they compete against each other in the U.K. grocery market, but they've been happy to share certain information that helps both parties to lower their costs and compete against broader competitors who aren't necessarily the immediate focus of each other. Obviously, there are some parts that they may not choose to share, like marketing plans and things like that. But you can take part in the parts that you want to and not in the other parts. Next question? Thank you for doing one at a time.

Then on retail media income. Are you able to share the trend in the half, please? I think you committed to kind of update on that a while back. And then noting the recent news flow on the partnership with CitrusAd, are you able to talk about who else you partner with in the ad tech or retail media space, please?

I mean the media income trend is positive. As I've highlighted before, the whole e-commerce space is enormously beneficial for grocery retailers in terms of the kind of balance of relative power and influence that retailers and suppliers have in terms of what customer choices get made. And so it's important for the suppliers to work more closely with the retailers in the digital space than it is in-store because of that increased influence over what ultimately gets purchased. And so again, Mel and Niall and the team have been doing a lot of work in this area. And [Audio Gap] Again, just saying, I couldn't really comment on what other bits of software were being used by the team to help drive some of that media income collection.

So you were halfway through the importance of media income to retailers in the digital domain, I think, but then you didn't complete the answer.

Sorry, what I was basically just saying -- okay. So I was just saying it continues to be the case. It will continue to be the case. And therefore, the suppliers need to work more closely with the online retailers and the platforms need to provide them with the opportunity to do that, which the Ocado platform does. And that has helped them to grow that revenue. But I'm not either sitting with the data in front of me or going to start talking about other bits of software that the team have used to help take in that revenue. And so can I get the next one?

So where retail media and -- yes, so just on quickly on retail media, where you saw that kind of come down with the pandemic, that's basically crept back up, has it? Is that the correct read?

Yes. And yes, the kind of thing that was, we've seen -- we delisted certain people's products in order to get more items through, for example, we had to pull out promos because we were trying to get more customers to be able to shop rather than encouraging people to multi-buy things. And so we had to pull back on some of the plans that we had. It wasn't that the suppliers didn't want to spend the money on the platform. It was that we were trying to optimize for something else at the time. Now we're back to kind of more normal retail behavior, we're driving similar activity to before but at increased levels.

Yes. I'll just put a little bit of detail on that one, we saw media income grow by about GBP 10 million half year on half year in the first half, and we'll probably see a similar sort of number of growth in the second half of the year as well. So good progress there.

That's helpful. Then 2 last quick ones, on the second Zoom site, when do you actually expect that to go live? It feels like it's been a long time coming.

Yes, the planning on these sites has not been as easy as one would have liked, but we've got a few of them in progress. And I would expect a couple of them to be live in the next 12-or-so months.

Then lastly, on the 20% improvement in target UPH for the new Andover, are you able to give a UPH target figure and the key drivers behind that? I assume that's excluding arm picking.

That is excluding arm picking, and the target UPH that would have been below 200 is now above 200. I don't have the exact number that we -- that's gone behind that but I mean I've got a fairly good idea in my head, but I'd rather not say what it is in case I got it slightly wrong. But from below 200 to above 200, an improvement to 20%, and that is before robotic picking that will drive that significantly higher.

And the key drivers to that improvement?

The drivers to that would be improvements to speed and resiliency and performance of the 500 series robots to various changes to the pick stations, changes to the algorithms that drive the robots around the grids and how they work and interact with each other. Those will be the main highlights that would be driving that. As I -- so I think I'm just being informed that I -- the numbers I had in my head were right, actually, it was from around 180 UPH to something approaching 220 prior to the adoption of robotic picking arms and other future automation that will come up and be installed in our facility in the future.

We now move on to James Grzinic from Jefferies for our next question.

I had 2 quick ones. First one for Tim. Can you perhaps clarify how much that has been announced by Kroger? What's the proportion of that relative to that 20 Andover equivalent site capacity? And can you just confirm that in order to retain exclusivity, the deadline is to go that commitment to that initial target by November this year, please, Tim?

Sure. So the original commitment is for a number that we've never announced, to be honest. The original contract and commitment goes on and extends beyond 3 years. We together highlighted around 20 sites in the first 3 years. We're 11 that have been announced so far in terms of locations. We're working on a number more that you should expect to see some announcements coming soon. And therefore, by the end of this year, when we hit the 3-years date, we may be at or around or below the 20, but we don't expect that -- that's not the end of the program. The program is ongoing, and I expect the program to exceed 20 in the future, it's just a question of exactly when. The exact details of the exclusivity are not something that we put into the public domain. And also in that time frame, we're launching a very significant trial of in-store fulfillment with Kroger and a rollout there that is enormous in scale as well. So we've got a big relationship. It's moving along. We'll expect more announcements to come up. And I expect it will end up significantly larger than the original announcement.

So just to clarify that, Tim, the exclusivity is not subject to 20 equivalent Andovers being signed by the end of this year.

The exclusivity is subject to a whole load of things, but as I said, we don't make those things public. And we think that the Kroger program is on track. It's continuing to grow. Expect more announcements to come in the near future.

Right. Understood. Then I had one for Stephen. Stephen, you've talked to optimum balance sheet for the group. Can you perhaps talk about how you think about that given the fact that quite clearly, the rate of the investments are set to accelerate? You've got a big size of order book to develop in the coming semesters. How do you think about that?

No, thanks a lot. As you might imagine, in my sort of first few months, it's an exercise that I've been being hard about and developed with the team a good 5-year plan and then what the shape of profits and cash flows might look like and thinking all of that through. I think in terms of future financing, in time, I think we'd like to move to a pure debt finance model. That will take time given that particularly when I think about the cash flows and the capital that's going into the business over the next few years, is going back to my comment just now. But I think right now, the priority is the growth ambition that we've got ahead and the opportunity there. Capital allocation will be about making those smart choices around the economic improvements to the Smart Platform that Tim alluded to. We got many of those have been struck by the amount of activity around improving those OSP economics. I think right now, we have healthy liquidity. There are no immediate plans for any sort of financing. But I would just point out the big CapEx number that we have certainly this year and on a growing number next year. I think thinking about optimum balance sheet, though, the credit rating side of it is a factor for us. It's not a priority for us at the moment. I think we would like to get to the sort of balance sheet that is debt-financed, going back to my earlier comments. And we're on a road to do that. It may take a little while, but that's certainly the trajectory.

I guess one follow-up, just so that you can help us a little bit more, I think the underlying cash burn in half 1 was about GBP 250 million. How do you envisage that develop over the second half and over next year, perhaps, so we can understand the shape of those financing needs a little bit?

Yes, I think as a rough guide, I would actually kind of use the CapEx number as a proxy really for the -- for what the cash burn is likely to be over the next couple of years. So that's sort of a very rough guide is sort of certainly north of GBP 500 million and perhaps sort of getting a little higher than that. So that's clearly one of the key considerations for us as we think about financing plans as indeed is the sort of headroom that we'd like to keep of liquidity on our balance sheet, which will then again be a key consideration when it comes to timing, but then also the amount of financing that we do. But right now, ample liquidity, as we said back in 2020, certainly see us through the near medium-term and no maturities on the horizon until '25, so we're in a good place at the moment, but it's certainly something that I'm thinking hard about.

We now move on to Rob Joyce from Goldman Sachs.

A couple from me, both on Ocado Retail. Just firstly, Tim, I'm not sure if you'd give us an update on the -- whether you still have a sizable waitlist for Ocado Retail in the U.K. from customers base. And then in terms of the new customers you've added in the period, can you give us an idea of whether they've come from your competitors? Are they new online customers? Or are they old customers, previously lapsed customers that you've recaptured? That would be great. And then the second one, just a clarity on the guidance for ORL. Is it implying -- I think you may have touched on this, that on EBITDA margins you're expecting to be broadly 4% to 4.5% in the second half. I'm just wondering if you can help, is that a better way to think about long-term margins for that business?

Rob, so what's happening in ORL at the moment in the market generally is the kind of the panic has come out of the market for obvious reasons. People have increased capacity, people are less scared about going to supermarkets, if they can't find the slot that they want. We're still seeing excessive demand for some days and some times of the week that we're unable to fulfill. We're also seeing that we are acquiring customers that weren't active, as we've shown 20% increase in active customers. We're doing that with less money spent than we would have historically to acquire customers, but we are obviously adding capacity, and we will want to continue acquiring customers. And as we said, the number of orders year-on-year in the quarter -- in the second quarter increased by 40%. Where we're acquiring them from, probably all of the buckets that you mentioned. So we are reacquiring customers who had shopped infrequently with Ocado and bringing them back in after them not being able to get great access to the service. We are acquiring new customers, those new customers are coming from our competitors. Some of those are coming from our competitors' online offers and some of those are coming from our competitors' store-based offers. But I think it's a broad church as to where they're coming from. Your next question, was it more about the margins that the guidance implies for the second half and are those more like the long-term margins? But the long-term margins are a moving feat. We're obviously giving guidance that's got lower second half margins in Retail than the first half because we are expecting to need to spend sums on marketing that we've had to do in a very limited way in the first half. We are expecting to see more shape of week in the lower basket size than we saw in the first half. And we know that those are positives for margin, and therefore, we're expecting to see a lower margin. But of course, remember that for all of us, for you and for us, it's very hard to forecast exactly what's going to happen in the next half because these are unprecedented times and we don't know exactly what the change to lockdown will be. We don't know if we're going to get another wave and get -- or put back into lockdown in the wintertime. We just don't know, right? So we're giving our best shot, add some guidance there. I think in terms of the long term, it's just worth remembering that there are other things coming down the track that will continue to improve the economics. So whether that's further automation, whether that's increasing scale of the business that drives drop efficiency improvements, whether that's improvements to algorithms, whether that's improvement to buying terms, there are loads of other things that will come. That will mean there's a constant underlying improvement that we would expect to see and then the question is how much of that does one reinvest versus the market to improve the price position of the business to drive further growth. And so I think it's not completely easy just to say, well, that's the target.

Okay. Understood. But is it fair to say there's a degree of conservatism into the second half? If you can give us visibility on that.

I think we've been suitably cautious when we think about the second half and given the uncertainty around how COVID is going to play out over the next 6 months. I mean it's worthwhile just pausing for a moment and just reflect on the first half performance of Ocado Retail, and particularly Q2. We actually -- sales in Q2, aggregate gross sales, were actually higher than they were in Q1. And we actually had, to Mel's number, 40% more orders. We did 5.1 million orders in Q1. That was in fact was more orders -- sorry, in Q2, more orders in Q2 than we did in Q1. So really strong first half performance, and I just think we're being appropriately cautious on our outlook for Ocado Retail for the second half of the year.

We now move on to Andrew Gwynn from Exane BNP Paribas.

Just in the interest of time, I'll keep it to one. So just on disruption, labor disruption. We obviously hear quite a lot around Brexit and many staff sort of heading elsewhere. So wondering if that's having an impact on the business. And then secondly, broader disruption in terms of supply chains, in terms of building things generally more challenging. So could we expect some sort of impact on the CFC build schedule?

So good questions, Andrew. Recruitment, obviously, is harder now than it's been for the last 12 months. During the last 12 months, we were one of the few growing businesses alongside other kind of online retailers and a few other people. But generally, there was a lot of people available that were on furlough from other companies and stuff like that. And then you see the increase in orders, a 40% increase in orders over this time last year. It meant that we've needed more people and then we've been doing a good job at keeping our numbers up. That is obviously a challenge. It's been a challenge for most of the last 19 years to have the right people in the right places at the right time. It is a challenge at the moment. It's one that we do expect to succeed at. And but it is -- you're right to flag it. It is a -- it takes a lot of effort to work on. In terms of -- and obviously, it's nationally reported about the LGV shortage. We actually have our own drivers. Our own fleet are easily able to keep up with our own demand for them. And in fact, we have seen some of the issues at some of our suppliers by picking up certain loads to bring to us that aren't normally our responsibility to do that because they have had more effect from the national shortage of LGVs. And you're also right that the supply chain is not -- it's not just a shortage of certain computer chips in the global market. There's a shortage of various building materials. But we're pretty good at this. We're pretty good and resilient at understanding our -- the supply chain of our construction as well as the supply chain for our grocery retail business and working around either finding alternative suppliers, finding alternative products or building up inventories of certain products to reduce the impact of any shortages on our build programs. If you think about what we managed to do last year, in the middle of the peak COVID crisis, we managed to open 2 facilities like 1 in Paris and 1 in Toronto. We managed to open the facilities this year in the U.S. with no delays despite having gone through that very awkward period. There were periods there where we were buying metal components that are part of the grid out of Wuhan. Obviously, there was nothing leaving Wuhan, so we had to find alternative supply, which initially came from Italy until Italy shut down. We have components of the safety system in the robot that came from Northern Italy as well that weren't arriving where they were supposed to go to. But overall, we work through it, we find alternatives. It does make things more effort and challenging. But as I say, we're very resilient and we're very good at dealing with it.

We now move on to James Anstead of Barclays with our next question.

Stephen, 2 relatively quick questions. Firstly, can you just remind me, is there a change of control clause in your agreement with Morrisons? I'm definitely not asking you whether you would exercise it, but it's just interesting just to kind of remind ourselves whether that's in the contract or not. And the second one was just out of curiosity, were Auchan Spain able to come and see your CFC in action before they signed your deal? Or the travel restriction is still a problem?

So I think it's fair to say that but I would not expect to be at or even to review a change of control clause if the current rumored buyers buy Morrisons. That's not to say that there isn't one, but it's unlikely to be triggered by any of the rumored names at the moment. And as you say, that doesn't mean that we would trigger it anyway. And then in terms of Auchan, yes, we have had people from Auchan inside our facilities. We have been able to facilitate some travel over the last year. It's not easy. It's not easy at the moment. But we've had -- we've been to the States, we've had people from the States, we've been to Europe, but there are some things you can get to, some of our clients, I just can't get to. But there are some of our clients in the world I would love to get over and see and potential clients we'd love to get into to see facilities that we just can't do, but we're hoping that, that is going to get easier as the year progresses. But you're right to think that I'm yet to have a client that hasn't seen a facility yet.

We now move on to Sreedhar Mahamkali of UBS for our next question.

Yes, a couple of them. Most of them have been asked already. Just to follow-up on that point, Tim, about sort of qualitatively, perhaps a little bit more intensity in the conversations versus perhaps last year. But within those conversations, can you talk a little bit about how much is there a debate around the lower-CapEx MFC versus CFC? Is that still a feature? And do people still think about those things? That's one question. And secondly, just to kind of come back to Zoom and robotic picking, probably just first in the U.K. What is the potential beyond the sort of 12 locations you're talking about over the next 3 years for Zoom, please? Is there really much potential do you see? And then the robotic arm itself, what does the rollout look like? Again, if we take a 3-year view, how much of the picking would be done by the arms would you say in the U.K.? And then the last one was on either of these products, assuming you had robotic picking, are you now starting to engage with any customers on adding these features to the existing contracts?

Sure, so look, there is lower CapEx for an MFC than a CFC in terms of an absolute quantum because 1 is 20x the size of the other. But there isn't lower CapEx in terms of CapEx to sales. The CFC remains the most efficient means for distributing groceries into customers' homes. But -- so it's not a debate where customers are saying, well, I'd rather build MFCs because they've got a lower percentage CapEx because they don't. They're just smaller. It's easier for somebody to buy 1 or 2 of those and say, well I've done something in the automation space because they've done 2 small projects. But 2 small MFCs might give them GBP 30 million of sales capacity, whereas 1 decent warehouse might give them GBP 400 million of sales capacity. So they're just at a different scale, is what I would say. We're continuing to engage with our customers and our potential customers or clients, and they are mostly interested in a network of large CFCs, sometimes interested in some small MFCs to try and see what incremental demand they can find from the immediacy markets on top of the mainstream demand for big ranges, low-priced groceries delivered later today or tomorrow from the CFCs. In terms of -- look, I don't think we need to go beyond saying that we've got a view of looking for 20-ish sites for Zoom around London and possibly some other sites in the U.K. and then when we had 20 sites and if 20 sites were sold out, then we'll go and look for another 20 sites. We don't kind of -- we're not going to wait until we've got 20 to make that decision, but we don't need to make a decision beyond 20 at the moment because we're still looking for those sites now. So only when we find that we've signed the 21st site do we need to decide whether we want to take it on top of the first 20. And we're always going to learn a lot along the way about how to optimize and best manage and run that business. In terms of robotic pick, on a 3-year time horizon, I would expect the majority of the velocity, i.e. the majority of picks in ours and our clients' warehouses to be capable of being picked by our robot fleet. And so I think that's the best answer. In 3 years' time, the majority of products should be picked by robotics. It won't -- that won't be retrofitted into something like Hatfield and Dordon because they're legacy warehouses built with equipment from the traditional material handling industry. But in terms of all of the OSP CFCs, the majority of picks should, in 3 years' time, be done by robots.

Good. Just a quick follow-up. In terms of the size of the CFCs that you're now typically discussing, is it fair to say that they're now probably smaller in size and obviously faster to roll out than the classic 65,000, 70,000 orders per week size of CFCs or is that not necessarily the case?

To be honest, we see a combination. We see some bigger than the number that you just mentioned, some at the number that you mentioned, some smaller than the number that you mentioned. It really depends on where clients are rolling them out and what their ambition is for the first few years and whether they want to end up with 1 larger one or 3 medium-sized ones or, as I say, it's a complete mix. So we're building stuff from 2 modules to kind of 8 to 10 modules in size. We're not building anything of Erith's size. And I think we said that before. That's a particularly large warehouse. It was a particularly unique opportunity inside London in a developed market. But they're up to 10 and down to 2 in terms of the size that we're building. And mostly in the higher -- in the 6, 7 -- the majority are in kind of 6, 7 -- 65,000-, 70,000-, 80,000-order range.

Thank you. As there are no further questions in the queue, I'd like to hand the call back over to Tim for any additional or closing remarks.

Thank you very much for joining us this morning, exciting times continue at Ocado. We look forward to updating you on more news in the future. Thank you.