Ocado Group plc (OCDO) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Stephen Daintith. I'm the group CFO of Ocado, joined in March last year. And this particular session is something I've been looking forward to do for quite a while actually. And it's probably best to explain why that is by going through the objectives for the session this afternoon, and welcome to those of you who are joining us virtually watching us on the screen. So what we're trying to achieve in the next hour or so is provide a better understanding of the characteristics of the underlying business models in Ocado Group, a more intuitive way of looking at our three different business models. Provide a framework how you might assess revenues and returns for each of these businesses and how they might develop and for Ocado Group as a whole, over the next 4 to 6 years, we define that as midterm, just to be clear. There's all sorts of definitions around medium term and midterm. We're using 4 to 6 years as a midterm for the basis of our a view of the trajectory of Ocado into that midterm period. We're going to take a deeper dive into the workings of our Technology Solutions business. Now that's the key driver of value for the Ocado Group going forward over the next 5, 10, 20 years. And they will explore why based on the progress that we've seen so far and the visibility that we have ahead. But the investments that we're making today will drive very attractive returns in the future tomorrow. And we're going -- finally, we're going to set out a clear path to in excess of GBP 750 million of EBITDA in the midterm. And these are based just on existing contractual customer commitments. It's a really important point. There's nothing speculative here in this. There's no new business to be won. This is based on existing commitments that we have today with our customers and the road map to that GBP 750 million. And at the same time, as part of that, we're going to show a road map to cash flow generation that is sufficient at a steady state to build 10 live CFC sites going live every year, 5 module sites on a run rate basis and still breakeven or even move into positive cash flow territory. That's what we're aiming to achieve over the next half an hour or so. Here's the agenda. We're going to start off just by mapping the three business segments that we have today to these three business models that I've just run through around Ocado Retail, Ocado Logistics and Ocado Technology Solutions, which is the combined U.K. and International Solutions business. In summary, we're going to bring it all together. We're going to show, by the way, what pro forma numbers look like in fiscal '21 for those three business models and the drivers of the performance in '21 and trajectory through to that midterm. What else should I say on this one? On these business segments and be models you're about to see, it may be, in fact, it's very likely that we will resegment our formal reporting at some point soon along these lines because it makes sense to do so. Again, just going back to my earlier comment, it's a more intuitive way of looking at Ocado Group, probably most likely to be fiscal '24, but we're going to see if we can do that in fiscal '23 next year. Okay. So Ocado Group. This chart -- this slide is a reminder really of what the group is all about, changing the way the world shops, the good, technology-led, three business segments down here that you'll be familiar with and our ambition to reimagine the shopping experience. And we thought that these facts around the progress over the last 5 years are pretty helpful as well, I'll call out one or two of these. We now have eight additional partners from the three that we had 5 years ago. We've got 11 global partners, two here in the U.K. and nine in the rest of the world. At the same time, those partners generate over GBP 210 billion of sales between them. This is not online sales. This is sales that they have across their markets, but it sells for us to go for with those existing customers. What else, 57 new commitments around 58 CFC announcements and customer commitments that have been made. That's up from one just 5 years ago. Yes, so pretty -- probably sufficient for now, a pretty impressive list of achievements over the last 5 years. So let's go through those reported segments as they stand today and the underlying business models. So first of all, as a reminder, on the left-hand side, this is the business you're familiar with today, Ocado Retail. We consolidate those numbers in their retirety, 100% consolidated and that is a joint venture that we have for Marks & Spencer, 50% JV. Let me have our U.K. Solutions and Logistics business, an industry-leading logistics business, not a simple 3PL, much more than that. and is providing services in the U.K. for Ocado Retail, the JV and for Morrisons. And then we have International Solutions, and it also sorry, includes in U.K. Solutions and Logistics the U.K. part of our solutions business, that's what it does today in the way we report at the moment. The way we're going to show the group over the next half an hour or so, is to move the U.K. part of this business solutions in here along with International Solutions to give you that global perspective. And therefore, this business will be a pure logistics business that we will look at. How do the numbers -- sorry, can we just go through this one here. Ocado Retail, a breakdown of the revenues, pure-play online grocery business. The costs of Ocado Retail, cost of sales, distribution and fulfillment, marketing and head office costs. And then they also include the recharges of logistics costs from this business to provide their shopping baskets to their customers. This is the business model for Ocado Retail, the retail business. Our pure-play logistics business is the recharge of the costs incurred, that's in the revenue line to execute those logistics services, and those are recharged to Ocado Retail and to Morrisons to customers. The costs incurred to do that. I'll recharge, as I just said, there's also within the cost base and allocated share of around 30% of the total group operations costs, and balanced human resources, finance and legal. And then finally, Ocado Technology Solutions, these are the fees from the global retail partners, that's those 11 partners I referenced a little earlier. And the revenue is two key components: up fees, and this is the contribution from our partners towards the capital build, and they are recognized as revenue over time as the CFCs go live. There's a release every year of that cash receipts that sits on our balance sheet, and that goes to the revenue -- the revenue line over time. And at the same time, there are recurring capacity fees. You'll see shortly, we talk about a mid-single-digit fee of sales that are the recurring capacity fees in Ocado Technology Solutions. Now the cost base for this includes OSP costs as well as a full allocation of the group technology costs. That's the non-capitalized part of the GBP 250 million or so of tech cash spend. And it also includes 70%, that's the other 30% of the human resources, finance and legal costs. That's an overview of what the businesses are. And here are the underlying business models and how the '21 actual reported numbers. That's this column on the left-hand side, track through to the pro forma numbers for the new business, the way of looking at the business on the right-hand side. So as you might expect, the Ocado Retail number doesn't change, it stays as it is. U.K. Solutions and Logistics from revenue, we take out the solutions part of that business, and we have a pure logistics business, GBP 595 million, 90% of which are the recharge expects the cost of providing those services to Ocado Retail and Morrisons. The remainder is a management fee of 4% of total costs. and then capital recharge fees, and that's in respect of Hatfield, Dordon and Erith. That's a feed, by the way, that's going to wind down quite significantly over time. 5 years from now, it will be less than half the number that it is today. It's an important point when it comes to margin for the logistics business. Technology Solutions, fees received from global retail partners. That's currently globally GBP 183 million. And as a reminder, that's a mixture of capacity fees and the release to the P&L account from cash that's already in the bank that's being recognized over time, that initial contribution upfront to the CapEx build. That makes sense. You'll see shortly that this number is going to grow to over GBP 900 million over the midterm. And as similarly, we'll hit the U.K. Logistics business as well. It's coincidental that those 2 numbers are the same, by the way. We're also going to show the progression of what we expect to be the progression of the retail business over the midterm as it sells into the capacity that we're building today and investing in today. EBITDA, GBP 150 million, again, they change. Logistics business is a GBP 31 million EBITDA business, and that margin, that 5.2% margin reflects that 4% management fee on the costs that we charge plus importantly, capital recharges of GBP 14 million in 2021 that I referenced earlier. Our Technology Solutions business is currently loss-making at EBITDA level, but it includes an attractive positive contribution offset by the full allocation of upfront investment in technology and head office costs. So we've got that full P&L impact of the non-capitalized technology costs and a significant contribution to 70% of group operations costs, leading to that GBP 81 million number. We're going to show later on the trajectory because we get asked this question a lot for what is going to happen to those central costs over time, going to show that shortly. So hopefully, that all makes sense, and all stacks together. That's how the math works. So we still have GBP 61 million of EBITDA at the bottom of each chart, but that's the mapping of the business. But we believe that this is a much more intuitive way of looking at our business and it allows you to get upper understanding and interpretation of the Technology Solutions business, which is the most significant driver of value creation for Ocado Group. Okay. So having gone through there, let's go through our underlying business models and their key drivers one by one. Ocado Retail. This slide looks at, first of all, what's happening in the online market, where Ocado has done very well. The online market itself has gone from 7% to 12%, market research suggests that, that will grow to 18% by fiscal '25. We are outperforming the market today in a declining online market as we get into that normalization phase post COVID, but our retail revenue, as a reminder, in Q1 of this fiscal year was up 32% versus the same time 2 years ago. So despite the trading statement that was announced today, as a reminder, how strong the business is performing compared to where it was 2 years ago. Net Promoter Scores, a 25 percentage points better than other grocers. We get very, very good feedback from our customers about the quality and accuracy of the delivery, limited substitutions, the time of the delivery. We get very good customer reaction. And indeed, if there's a standout number for our international partners, is the scores that they're seeing as well on NPS for those customers overseas. We've kept customer penetration stable at 26% despite the volume declines and driven by the cost of living and normalization of shopping behaviors, the smaller basket in particular, which is around -- trending at the moment around 10 items lower this year than it was last year. 47 items versus 57 items. So growth revenue. The headline here, we see a route for Ocado Retail to GBP 4.5 billion of revenue over the midterm, bridging from GBP 2.3 billion with the modules at site maturity that we have today, and that's off the back of at the end of this year. These 6 sites, Hatfield, Dordon, Erith, Bristol, Andover and Purfleet. We really should have included act and the Zoom site in here to make it 7 to get a complete like-for-like basis. And then going forward, this is how the sites progress on the back of recently announced, well, all of these have been announced. We haven't named specifically the locations in the Northwest and the Southeast but we've got Bicester and Luton over fiscal '22 and fiscal '23, respectively. All of these will give us the capacity as we add these modules at sites at each of the end of these years to a route by fiscal '25 of 70 modules at site maturity. As a reminder, the rule of them, one module is equipped for around GBP 70 million of sales at capacity. So this provides the route through to revenues in excess of GBP 4.5 billion. Now clearly, there are factors that might affect the shape of that progression and timing around customer acquisition and retention. We're growing customer numbers very well in Ocado Retail right now and retaining customers [indiscernible] shop by basket, as we know, we see today is an important variable, as indeed is the average sales price for each, just to flag the factors to take into account as we consider the progression. We feel confident around the GBP 4.5 billion revenue that we should just assume that because you build it, they will come. The Net Promoter Scores, we have never had excess capacity in Ocado, something that over the years, I hear that we would have loved to have more capacity that we've always had, particularly during 2020 and '21. So we have good confidence around the visibility of filling this capacity as it's added and extends our geographical reach. As a reminder, we only actually have access to 75% of U.K. customers today in the U.K., so there's plenty of room still to go for. The margin. Fiscal '21, we delivered a 6.6% EBITDA margin and a particularly strong first half performance in excess of 8% EBITDA. We did the same before, by the way, as a reminder, in fiscal '20. Clearly, there was a COVID benefit in those years. notwithstanding that margins of between 6% to 7% in each of those 2 years. We just highlighted this morning that we expect a low single-digit margin in fiscal '22. Over 90% of that margin pressure is driven by what we consider to be three temporary effects. Number one, around 40% of the impact, operating leverage as Ocado Retail builds into additional capacity that's been added, but smaller immature volumes relative to the fixed costs across either overheads, capacity fees to Ocado Solutions, of course, and site costs. 30% Marketing costs is an incredibly competitive space right now in the marketing arena for online retail, especially in the immediacy market. We're also investing to grow into the capacity that we're adding, particularly as Vista goes live. So there's a spike in marketing spend that's another key driver of that low single-digit margin. And then finally, around 20% of the impact is the utility cost inflation that we're seeing across the country. particularly diesel and electricity for Ocado Retail. In the midterm, though, we see a return or I should say, we see the route to a high mid-single-digit EBITDA margin. If you want me to get specific about that, 6% is our number, may go beyond that, but 6% is the number that we've used for our maths for the whole flow through. Underlying trends were encouraging. Customer acquisition continues. This goes back to my point that I raised a little earlier, 12% growth in customer base, year-to-date, and we are well invested for that future growth, that over GBP 4.5 billion of revenues with investments that are already made and we're now flowing through as sites go mature and we grow the customer numbers. This is an important point around the efficiency of our operation. Andover and Purfleet are now operating at over 200 units per hour picking. That's per labor hour, 200 units picked, more than 200 and the shopping basket of 55 items, four family weekly shopping baskets in an hour, one every 15 minutes. In fact, we are doing 220 in Andover and Purfleet is getting very close, if not to that number as well, when we look at day-to-day trends. We think we can take that number even higher, particularly as the reimagined products go into place. More on that later. So that's our ambition and intent for Ocado Retail. We have strong conviction around this, around the revenue and the EBITDA margin. Ocado logistics. Here on the left-hand side, a 2020 versus 2021 comparison. Each is an Ocado term that, I've only in the last year, become familiar with, but that is individual picks of stock keeping units in the shopping basket, Ocado, we call them in each. Grown from 1 bps. You can see they've grown 3.6%, '21 over 2020. And then here are the cost recharges that we are charging our customers growing in line with that growth in cost per reaches. So the logistics business is very much a cost pass-through business. The volume that's going through the logistics business is the biggest driver of revenues and costs. So going back to that earlier comment around the capacity that we're adding in the U.K. The capacity that we're adding by the midterm, we'll be doing well over 1 million orders per week compared to around 750 or 1,000 or so at the moment, growing significant capacity in the U.K. with those investments on that slide that I showed a little earlier around Luton, Bicester, the Northwest and the Southeast. The capital recharge, what I mentioned a little earlier, will reduce by more than half in the midterm, but the margin will trend towards 3%, and that pretty much reflects that underlying cost plus business model, a pretty simple business models -- model, sorry, excuse me, gets you to GBP 35 million of EBITDA in the midterm with that 3% number. Technology Solutions. Reminder, this business because it's the first time really you've seen this business in the round as a global solutions business. It's a leading solutions provider, world-class customer experience as we're going to see shortly, proven operational economics, which we think can only get better, and I'll share with you in this presentation some detail around the Purfleet, CFC, return on capital that we're seeing at this stage based on the existing cost base and with more to come. Solutions is enabled through the Ocado Smart Platform. This is a suite of solutions, end-to-er software, but it's combined with our physical activities in the warehouses, which we then sell as a managed service to our customers. 11 of those customers around the world, over GBP 210 billion of sales, and we have announced committed rollout plans equivalent of 58 CFCs, and that's using that proxy of 5 modules per CFC to arrive at that 58% number. And that would represent over GBP 20 billion in client sales for that 58 CFCs. Capacity rollout is picking up pace. We went from 5 CFCs at the end of 2020 to an expected 19 by the end of this current fiscal year. And we expect a 10-plus sites per annum run rate in the years beyond. For the purposes of our model, we've used 10, 5 module sites going live each year. Shortly, we're going to look at the CapEx phasing, but clearly, if it's a constant run rate, that CapEx number pretty much stays flat through that plan based on the -- excuse me, based on that assumption. As the assets we are currently installing our clients go live and ramp, we then expect strong returns for both Ocado Group and our partners importantly. Those returns will get even better as we iteratively continue to improve our operations and the reimagined innovations are still to come. So there's no impacts of reimagined benefits in the operating cost that I'm about to show you. Indeed, when we get to the direct operating costs for Ocado Solutions in the CFCs, there's a revised improved target guidance that we're putting out today, and that is despite or before reimagine benefits, still under discussion of the extent to which we share those benefits with our partners, just reinforcing the point. Okay. Revenue, how does that progress? Well, strong ramp as the CFCs roll out, a familiar story as those CFCs go live and the modules go live around the world, the revenue potential for this business based on that mid-single-digit fee from our customers is over GBP 900 million of revenue potential by the midterm. An important point again, to emphasize, this is based on existing customer contracts. There's no speculative business in here. This is based on what we know and have today. We're going to show how we turn that revenue into both an attractive contribution margin and EBITDA margin and even at EBIT level as well. We're already 1/3 of the way to the 300-plus midterm module target at the end of 2022. The modules that are either in sights already or already ordered and in build, are around 80% of the target of 300. So we're at this gray box here already at this stage. So having established the route to revenue and GBP 900 million of revenue, we thought we'd go into the costs that deliver that revenue. First of all, the direct operating cost which should be familiar. This is made up of two components: the engineering team that are local to the CFC on site and then the cloud costs to run the OSP platform. In fiscal '21, we reported this as a KPI for the first time at 2.7% of site capacity sales. Purfleet. Current -- fiscal '22 run rate is at 1.9%. So we had a target of 2% for this cost base. Today, we are reducing that to 1.5%, largely based on the real experience that we're seeing today in our warehouses and the Purfleet performance at the moment. Revising the overall target to 1.5%, we actually do believe that number can go even lower than that. We could get it as low as 1%, for example. There is a line of sight to that sort of number, a stage, we're comfortable with the 1.5%. And then that's the key direct cost within the warehouse, the technology, the cloud costs and the engineering teams. The other cost, which is a noncash cost is the amortization of the 10% of CapEx that is funded -- 10% of clients sales, sorry, that are funded by the client as a capital contribution towards the CapEx build, and we amortize it over a 10-year horizon, so a cost of 1.0% per annum, which is the amortization coming through, which is important when we get to the return on capital employed calculation. What else will I say on that? That probably does the job. So we invested in our teams via our technology cost side of the Technology Solutions business model. This is the 2,600 headcount. We've grown significantly by 1,500 as we've -- over the last 5 years, as we've invested in the platform for the products that we have today and the products that we will have over the next 2 or 3 years as reimagined rolls out. As a reminder, 35% of this cash spend makes its way to the profit and loss account, and 65% of it is capitalized on the balance sheet. The 35% of it that is -- goes to the P&L account is allocated completely to our Technology Solutions business. So there are no dangling costs in this analysis outside of the three business models. We expect that to decline gradually from probably the end of '23 from down to GBP 200 million per annum run rate. Of course, you can never predict what might else be on the horizon for new innovations and indeed or new products. But as it stands based on this business that we have today, that's the progression that we are expecting to deliver on and get to by the midterm, that lower cash cost of technology, a reminder of which 35% of that will go through the profit and loss account. I'm going to show what this business looks like when you put all the numbers together to get to both the contribution margin and the EBITDA margin. The other key cost line in the technology solutions, profit and loss account is its allocation of group support costs. I'll start with group support functions down the bottom here. As a reminder, logistics get 45% of this number, 55% of the number of GBP 75 million goes to Technology Solutions, and that's the finance team. the legal team and the human resources team and all their activities and so on. The client services and platform implementation costs are allocated to technology solutions, and in a very simple terms, these are the teams that are setting up the CFCs as they go live, helping with that rollout plan of CFCs and supporting, particularly in the early years of a CFC going live. Other is Kindred and other venture related costs. And finally, the blue row here, the blue bar is a solutions team headed by Luke Jensen that basically interacts with all of our customers around the world, and prospective customers either winning new business or ensuring that existing customers are getting the service and the returns from our businesses, particularly clearly, of course, the Technology Solutions business. FY '21 context. I'll let you just read that, but I think I've pretty much run through all those points. This is the key column, though, in respect of the guidance that we're giving as to how these numbers might change over the midterm. A question we get asked a lot, how might central costs develop? And in very simple terms, we expect to pretty much keep these flat in real terms. The one thing I would say on this one is that there is real conviction of Ocado. And if I say at the highest level, I think you will understand the making to reduce these costs. My overview is that I think these are pretty lean as they are, but there is still a runway to go for here. particularly as, for example, in finance, we get the full benefit of new software and platforms we put in place. Last year, we invested in Oracle Fusion, for example. There's still an overreliance on Excel spreadsheets. But we know that there is a route through a much better way of working and that will enable a reduction in finance costs accordingly. At the moment, we compensate for the systems that we have or have had through headcount, as a mini example, a real conviction around cost management and what we can achieve from these cost basis. So putting it all together, what is our profit and loss account look for Technology Solutions? Well, again, here's how fiscal '21 maps onto -- on pro forma numbers from the actual fiscal '21 numbers, an GBP 81 million loss, but a contribution margin already at 56%. By the midterm, we expect this to get to 70% off that revenue number of GBP 900 million that I shared a little earlier. There's a GBP 90 million of group support costs staying flat and just a reminder what was in their platform implementation, group operations and so on. And then technology costs that's that piece that's non-capitalized from that total cash spend to GBP 200 million, and you get down to an EBITDA margin of around 50% for our Technology Solutions. So of this number, around GBP 450 million of EBITDA by the midterm. A significant evolution in margin, and we believe the economics of the underlying economics of the business model really coming through. Just stress again that these numbers, this number in particular, is before the benefits of reimagined. CapEx investments. So on the left-hand side of this chart, we go through a very simple example for a five module site, gross CapEx cost of circa GBP 50 million again -- sorry to labor this, but that's a pre-remagined CapEx cost. We believe there's a number there that's at least 10% lower than that as we put through the benefits from those innovations. The next CapEx cost, that's after the upfront fees from the clients, GBP 36 million. Most of the CapEx is spent in the 2 years prior to the warehouse going live. This chart on the right shows that for three module sites -- sorry, modules that go live of three modules and two modules, respectively. We spent 3/4 of the spend if we're building a three module sites going live -- excuse me, in the first 2 years before go-live. So go live is here on this chart. Thus, the point that I made earlier, at a steady run rate phasing is smooth, and we've assumed for the purposes of this model, 10, 5 module sites going live per annum, gross CapEx using that GBP 50 million number of GBP 500 million, net CapEx of GBP 360 million using the GBP 36 million number. Making the point, of course, but not all CFCs are equal. They can vary in size, shape, they can have specific features to the location, for example, seismic, particularly important in Japan, we found and cost that goes in there, which makes the cost different. So -- but we believe that there's a rule of thumb. This is a good average for the purposes of this model. We go live with two to three modules of capacity, then we add further modules as the client builds into that capacity. We expect attractive returns, perfect is on track. And at the moment, a 22% return on capital employed. That's at an EBIT level. That's after that amortization of those -- of that client contribution upfront that I talked about a little earlier. Excluding the benefits of reimagined this number, we have a clear sight though to a number in excess of 30% of capital -- return on capital employed. Much of that is around those CapEx cost reductions but also operating cost improvements. As the sites ramp, these returns will become evident in our financial numbers. Purfleet, here's a photograph of Purfleet on the right-hand side. Just a reminder, the key characteristics of Purfleet. Just over 6 modules doing 85,000 orders per week. That's the capacity at maturity, an average basket of 45 eaches. It took 22 months to build and ramp to November '19 to September '21, 42,000 orders per week run rate right now, it's the fastest ever ramp that we've seen for our warehouses. GBP 55 million gross CapEx and net of GBP 39 million after the client contribution to those upfront fees. As a reminder, over 200-plus units per hour, back very close to that 220 number for Andover that we reported earlier and expected to get better. And a 22% return on pita employed. The return on capital employed is a combination of all sorts of things, clearly, the upfront -- the fees -- the capacity fees on a run rate basis, the upfront fees from the customer. They can vary from CFC to CFC, the average that we guided to is a sensible average, but just to make the point that not every CFC is the same as the other. In respect to Purfleet, though, a 22% return on capital employed. So the CapEx summary, here's how the CapEx looks for Technology Solutions, GBP 500 million in CFCs. Going back to that 10, 5 module sites per annum. This is the capitalized part of that GBP 200 million of technology cash spend that we expect to get to in the midterm. And then there's a small balance of GBP 45 million, it was GBP 47 million in fiscal '21, around supply chain, the capitalized cost pre-go live and a variety across cloud platform implementation, retrofit of CapEx again. That can happen going for example, from the 500 bots to the 600 bot. That goes in there. We're guiding the midterm, GBP 675 million. reimagined, we can bring that number down to GBP 600 million but still carry out that level of activity around those 10, 5 module sites per annum. An important slide because what this reinforces is that with our fiscal '21 cost and contribution profile and assuming on target cost base that we have, going back to those earlier numbers that I highlighted, whereas we required 80 mature warehouses to be cash flow breakeven for this business and still build those 10 live sites per annum. The targets that we've indicated today mean that, that number is now just 50 mature warehouses, which is consistent, of course, with where we expect to be in the midterm, given those 58 contractual commitments. So in other words, at that point, we will be cash flow breakeven stroke positive despite while still funding that CapEx rollout program. Really important point. Clearly, there's a piece in here as well just a piece of cash is the upfront fees from the ongoing capacity build -- sorry, warehouse build that we received from our customers. So in summary, bringing it all together. Ocado Retail, Logistics & Solutions, the three business models, not reported business segments today. I would hope they will be very shortly, the three business models. In the midterm, a GBP 4.5 billion revenue business, GBP 900 million revenue and GBP 900 million in Tech Solutions, all built, we think, on solid assumptions and existing customer commitments. EBITDA, Ocado Retail high mid-single-digit EBITDA margin. We've done this before. We think we can do it again. We see line of sight through there, particularly as the business scales up and many of the costs in the cost line remained flat in absolute terms and then come down in relative terms. U.K. Logistics, a 3% margin, reflecting the cost-plus business model. And then Tech Solutions, that 50% margin that I highlighted earlier. And that's after all of those cost contributions that I highlighted, direct operating cost, but also that share of the group operations costs and the non-capitalized technology spend. We put all of those together, and we get to an EBITDA of over GBP 750 million, and you can run the math on the percentages and the revenues to see how we get to those numbers. Cash flow and talked about CapEx is the GBP 600 million in Tech Solutions, plus we've allocated and over GBP 300 million for the retail and logistics business, which is pretty much in line with the sorts of numbers that we've seen in previous years for CapEx across those two businesses. So summary. The road map for growth. Hopefully, the last -- sorry, it's taken a little while, hopefully, the last 45 minutes has given you a better understanding of the underlying business models in Ocado Group and a clearer road map for growth. Principal driver, our Technology Solutions business, currently delivering OSP, the Ocado Smart Platform to 11 clients globally. We expect to grow that number. This model is not built on speculative business wins. This is existing customer commitments. We are always in live talks with potential customers, several going on at the moment and hopeful of getting one or two of those over the line. Revenue growth from Technology Solutions is secure and visible existing customer commitments to deliver a clear path to in excess of GBP 900 million in revenue. We made good progress in our target operating model. We believe the perfect example reflects that and gives us real conviction the investments we are currently making will produce attractive returns in the future. Ocado Retail is well positioned to grow profitably in the U.K. We continue to grow customers, continue to get great customer feedback. We're extending our reach around the country with the investments that we've announced. Now we have a clear path to in excess of GBP 750 million of EBITDA in the midterm, that 4 to 6 years that I referenced and the positive cash flows and strong returns while still investing in a rollout of CFCs. We're very excited about the future.

So Andrew Gwynn from Exane. First question, just on the 58 commitments. I've sometimes trouble sort of reconciling exactly who they are, where the time line of when they'll land. So is that something you can help us out with? Or is some of it a little bit sort of top secret?

No, it's not all. In our fiscal '21 results pack, and [indiscernible], perhaps you can share that afterwards. We have a clear summary of by partner, how those numbers add up. I think I'd just highlight that 40 of those 58 are across Kroger and Aeon in Japan. And then the balance across the other partners that you should be familiar with. So -- and that provides sort of a time line chart for by what point we expect and all the customer has committed to roll out those CFCs.

Okay. Second question, I'd be a bit boring, unfortunately. But -- is EBITDA the right measure for Ocado. I've asked this question before to Duncan unfortunately. And the second question then is sort of related to that, which is what's run rate depreciation. It's a very boring question, I know, but unfortunately, kind of relevant if you're thinking about underlying free cash flow generation?

So EBIT is it, I mean, I'm a stand of free cash flow I think what I like about free cash flow is it sort of takes away the noise in the accounting, which can be complicated. And you get -- you can get working capital comes into it as a bit of a twist, there are certain games and people can play with that. But as a rule, like quite like free cash flow. I think you sort of -- you hold your feet to the fire with free cash flow when you're generating cash and delivering on returns in a meaningful way. So I think you might expect a bit more reporting around free cash flow and free cash flow evolution from Ocado in that respect. EBITDA kind of does the job but there are still a few puts and takes that get you to your free cash flow number. That's the one. I think then the other one is return on capital. I think as we mature into our business model, particularly for Technology Solutions, I think having a formal cash return on invested capital number for the group to report against would make a lot of sense. We've got return on capital employed for individual investments, but I think a group cash rock would be a good move. So there you go, those are the two that I'd look at.

Last question before I hand over. One of the questions we get asked a lot at the moment is about funding. So obviously, there's a profile, which is a fairly large chunk of CapEx to come before the EBITDA comes a bit later, and there's potentially a bit of a gap in terms of liquidity. So what are the thought process around that gap?

So first of all, we have healthy liquidity. We started the year with GBP 1.5 billion of liquidity. We've got liquidity today in excess of GBP 1 billion. I would also add to that. We have shown that in the past that we can access the debt market successfully with the recent bond that we did in the autumn of last year, that GBP 500 million bond. We've had two good convertible bond issues in the last few years. And then we have a strong supportive shareholder base as well. So we don't believe that we're short of access to capital. I think what our shareholders find attractive about is are the returns that they see that we can generate going forward. So we're quietly confident around our ability to finance and put the capital behind that investment profile that I highlighted just now.

I think I'm quite clear what you said about the OSP recurring fee as being a mid-single-digit percentage of your partners' revenues. What I'm less clear about is how that might change if it does change as you become more efficient. So you've talked about reimagined, for example, or if the retail partners basket changes in some way. So could you just explain how those efficiency benefits are shared with your partners over time?

It's a really important point. I mean, we acknowledge that the retail space generally is a high-volume, low-margin business and that, therefore, our clients will have a very clear view of our returns and margins. As Tim highlighted, we've reimagined, we expect to share those benefits with our partners. And at the same time, with our fees as well, if we -- when it when we start delivering those goals that I've just run through, I would expect us to have a grown-up conversation with our partners and -- because they would expect that reverse as well, and that's what a partnership is all about. I mean, we are going for volume, and it would be very easy just to stick with as we are and say, well, let's call it, 58 CFCs does the job. We want hundreds of our CFCs around the world. And to do that, it may mean that to be leaner with the fees that we charge, still attractive returns to win that volume, which where we think our product can play best around the world in the grocery space. So it's a very live debate. And as we really sort of -- we use reimagine to highlight the first time our willingness to share with our partners but with a goal to significantly grow volumes of warehouses around the world.

Nick Coulter from Citi. Three, if I may. Firstly, on the depreciation question, but from our free cash flow sort of angle. If you think about your maintenance CapEx as a percentage of GMV for a mod in any given year, how would you kind of characterize that figure? Because clearly, the depreciation you have the bakery of asset life, you choose 10 years. These things will run for probably more than you include engineering costs already in your fee. So presumably, maintenance CapEx is significantly lower.

It is. It's less than 1%. I mean it's sort of 0.5% type number is what you should be thinking about. And we'd only hope, for example, with the 600 -- with the new bot that we've highlighted that that's going to get even better the durability of the bot that's 5x lighter than the current bot. And we think it's -- we're going to start to see a reduction there as well. So yes, it's a small number.

And then the line of sight on the 1% net cost rather than the 1.5% sounds intriguing. What are the kind of the broad drivers? Is that kind of the modular nature of the robots that engineering costs come down or how?

It's a mixture of things. I mean the big outperformer that I haven't talked about is, in fact, cloud costs, cloud costs have reduced most dramatically from that direct operating cost base. But I think the more we see of our engineering cost base and their activities from live warehouses today, the more we know we can do with smaller teams. And I think -- and on the longer we see the durability and reliability of our products, the more we can dial down that engineering resource. So that gives us the conviction around that 1% number. And I should stress, by the way, that's not formal guidance at this stage. It's the 1.5% that I've highlighted. My point was, we have clear line of sight to that even lower number. We'll be public and formal about it at the right time.

Great. We'll take that as an aspiration then. And then on the logistics business and kind of the 3PL fade and the margin bid, could you just run through that again, please, just in terms of how you kind of keep a flat profile as the revenue increases, obviously, there are [indiscernible]?

Yes. It's a 4% -- 3%, 4% margin business, 3% margin business. The reason for an elevated margin currently in fiscal '21 is because there is a recharging -- there a capital recharge to logistics -- sorry, to retail from logistics for effectively the use of the Hatfield, Dordon Erith and in fact, Andover and Bristol are included there as well, but they're just less significant to the number of GBP 40 million per annum. That is effectively a wind down of the net book value of the capital base of those assets. So clearly, that gets to a point in time where you've exhausted that net book value through your capital recharge and it reduces to the number that I've highlighted today of being much less than half than the 14 that's in. So you kind of lose the benefit of that margin over the -- over time.

But the 4% management charge stays in place, does it or do more of the kind of the 3PL responsibilities fall to the JV over time?

No, the 4% stays in place.

And then just one cheeky follow-up, if I may. On the margin for the JV, you believed to 6% medium-term target. Presumably that's excluding the kind of towards 300 basis points that would come from reimagined for the proportion of the JV would reimagined?

Yes, you're absolutely right, it does. So -- and again, you could say, well, Ocado is not dissimilar from sort of any customer. But as those innovations go in and there is improvement in operating performance, looking to what extent we share that with our partners.

A couple of questions for me. The first one is, as you outlined, Purfleet is already doing 22% return on capital and you're expecting that to grow to over 30% over time. What thought have you given to actually funding these projects with infrastructure finance because the spread is quite annualized returns on capital in the cost of 30%, you would think that you could finance each project individually or as a group for Kroger, Andover? And the second question given that your partners, I would imagine almost all of them have cost of capital meaningfully lower than yours. Have you thought about vendor financing or partner financing, if you will?

The short answer to both those questions is yes. So first of all, Project Finance. I've looked at this in quite some detail actually. And it could be a very attractive thing for us to do because effectively, we could secure a line of credit for the CFC rollout through project finance. There are just the considerations to take into account are that you would probably structure these on a client-by-client basis and that the other side of the investor of the project finance, we'll be looking at the financial security of the retailer. And at the same time, the retailer would need to be comfortable with the third-party investors element. Now these are considerations that can be accommodated, but I'm just making the point that it's not simple and straightforward. It requires the cooperation of the retail partner as well. And indeed, it made even commitment around the ongoing operation of the warehouse. And no reason why that shouldn't happen, but I guess the point that I'm making is that it is not a straightforward financing. There are issues attached to it, but it's very doable. And I believe it is an attractive thing for us to look very hard at. So it's a very live project for me and it has been.

So in the instance that -- and most of us, I suspect, anticipate that you will sign increasingly larger orders with your existing customers, including, as you pointed out, both Kroger and Aeon are responsible for 40 out of 58 facilities that you have on contract. So the next Kroger down and says one another 20, 30, 40 facilities going forward. You can actually attach that?

Totally agreed. That's exactly the point.

Because you can attach the infrastructure financing to that specific 40 CFC projects.

Completely correct. And so you're really pointing to the logic for doing it.

They become a spreads [indiscernible]

Because the alternative routes, of course, is you're in a constant world of refinancing and either debt or equity calls and that's probably not a place you want to be for a growth business. So Project Finance has its appeal.

Rob Joyce, Goldman Sachs. I'll go through three. First one, just to clarify, in terms of that definition of medium term or midterm, sorry, you said you're expecting GBP 750 million EBITDA and free cash flow breakeven in '26 to '28. Is that the range we're thinking?

Well, yes, I mean, 4, 6 years, that's the sort of range that I'm thinking, yes, that's a good guide.

Okay. And then in terms of the -- I know you said you definitely want to build beyond the 58, but just to build on -- next question about the sort of maintenance CapEx levels. If we take the GBP 100 million or so on the retail business and then take, I think you said 0.5% of the GBP 900 million. We're looking at GBP 150 million, maybe EUR 200 million CapEx at a sort of steady state at that basis, is that a fair way to think about it? I know it's not the way you're looking at the business, but would that be a fair way?

No, it wouldn't be that high, actually. I mean, it's sort of -- I think probably mine was certainly not -- we haven't hit over GBP 100 million, for example, on maintenance CapEx so far. So I feel pretty comfortable that we're talking about a number that's sort of between GBP 50 million to GBP 100 million of maintenance CapEx. But clearly, that number varies according to the number of warehouses.

And then the third one would just be on inflation. I've already talked about that, how that feeds into both the payment you get from your partners. Is it volume linked or it linked actual to the value of sales?

No, there are inflation clauses in all of our customer that protect us from inflation increases in all of our customer contracts.

Okay. So it's both on the revenue side and the CapEx side?

Yes.

It's Simon Bowler from Numis. Two, hopefully, quite quick ones. I think you said that the start. I think you said at the start that you're thinking about moving towards this kind of new structure of reporting maybe by fiscal '23, definitely by fiscal '24. Just it seems a sensible way is kind of split the group. Why does it take that amount of time to move the group in that direction?

I'm smiling at one or two of my finance colleagues in the room here at the moment. The finance machine at Ocado is not what I would want it to be. I don't think anyone who works in finance, wanted to be. I mean it's probably an area that could have been invested harder in over the years. I think the Oracle Fusion implementation last year, we went live in September is a big step forward for us. We're now embedding it in. We're putting in place a reporting tool around it, and we're expecting significant benefits. So I'd love to do it in fiscal '23, but I just want to be sure that our finance team work extremely hard as it is just to make sure that we're in the right place to be able to do it in fiscal '23. Let's see what we can achieve.

Okay, cool. And then the second one was, I think you've kind of set out very clearly kind of your side of things from a CFC perspective, but I wonder if you give any additional color on say, the Purfleet CFC and what kind of contribution margin you think from that facility with its UPH you're going to be able to achieve relative to a Hatfield or Dordon, but I say, looking at a contribution margin level rather than some of the other KPIs you give?

Yes. I mean, I'm not going to be completely explicit about the contribution margin. I just think we can do better in perfect than the numbers that I highlighted, given where we are today, and the trajectory that we're expecting around direct operating cost. Again, it goes back to my comment around that 1% number that we believe that we can get to in the relatively near term. So I hope that answers your question probably.

I meant more we'd like your Ocado Retail at on to the extent that you won in terms of how their contribution margin fits through rather than your side of it as kind of agree.

Well, we would hope that that's really one of the key able to get into that sort of mid- to high single-digit EBITDA margin that I talked about. I think that's one of the areas today that is a significant opportunity for us in the efficiency of our platform and bringing down their cost base because the right now, I think they could benefit from that in light of the inflation they're seeing in the utility cost base. Does that answer your question? I'm not sure it necessarily is.

Sreedhar Mahamkali from UBS. If you're not going to move to this way of reporting, which clearly is very helpful for us and for a lot of investors, I'm sure. Why are you doing this now as opposed at a later date?

Well, the reason why we're doing this now is that I thought it was a piece that was missing in the Ocado narrative around the midterm trajectory. I think a lot of our reporting currently is on sort of actual reporting of current numbers. And I think for a business like ourselves, which is an investing for growth business, I think it's important for our partners and our investors to have a clearer understanding of why we're investing and what the returns can look like. And then as I thought through that then I thought the most simple and effective way of demonstrating that was this resegmented look at this new way of looking at the group. And intuitively, when I arrive new and started looking at the accounts, it was actually quite difficult. I found to understand the business -- each of the businesses. And the U.K. Solutions and Logistics business, in particular, was complicated in respect to even those two different business models together. And I can -- there's probably a very good reason at the time where we did it that way. But I think this new way of looking at it is much more intuitive and iterative as well. So we hope to get to this way of looking at as soon as -- in fiscal '23, if we can, but certainly by fiscal '24.

A couple of other short questions, hopefully. In terms of the moving parts to driving the contribution up from 56% to 70%, what would you say are two or three of the key drivers? I think you've referred to one at least.

I think the ongoing evolution of cloud costs that I've just highlighted, we expect that number to come down as that commodity to reduce as a cost for us. The engineering piece is clearly a big driver. We haven't yet talked around or even really looked at the extent to which we can have virtual engineering monitoring of performance. rather than on-site. We expect our products are -- we expect the 600 bot to be more reliable and faster and cost less to maintain than the 500 bots, which was indeed an improvement from the 400 bot. Those are all -- it's a variety of things that get us there. And again, that's before reimagined on-grid robotic pick, will reduce labor costs and a warehouse by over 30%. That will go live within the next sort of we'll start testing it live in our warehouses in the next sort of 6 to 9 months and picking around 70% or so of the shopping basket in a robotic way and drawing on the Haddington and the Kindred technologies, there's 2 businesses we acquired at the back end of 2020. So that's probably a simple summary of the biggest drivers of that reduction in direct operating costs.

But you've captured the 600 bots in this?

No. Sorry, that's not in that 1.5% number.

Okay. And the last one then in terms of trajectory, just back to Rob's question 4 to 6 years to get to that EBITDA. Do you see this more as a straight line through to that process? So are there any big sort of ups and downs that we should be aware of?

I think we're probably going to have some years when there's going to be more CFCs going live than other years. I don't think it will be necessarily linear. I think the economics and the progression and improvement in the economics will be pretty linear. It's really down to site by site, location by location evolution and how that might phase. But I don't -- you shouldn't expect relatively linear, but it's a channel.

William Woods from Bernstein. The first question is just on the modules. Obviously, you've got some very large Kroger CFCs coming live and some much smaller ones later down the pipeline. What's the scalability of the economics in your mind based on modules? And how does ROCE change?

In very simple terms, the larger the warehouse, the better because there is a degree of fixed cost here and the bigger the site. On the other hand, though, I think the versatility of the model that we have the fact that we can put our -- the OSP in Zooms, which are half a module and 10 module sites is terrific for our partners because, for example, well, Kroger are very keen to explore a variety of different models. The immediacy market is an important market in the U.S., which is almost certainly going to be in the next short period of time, this is going live in the U.S. many CFCs as well. We've experimented those and work those well in the U.K. with Bristol a smaller CFC for a smaller density population for smaller populations, and that's the attraction of the model. Where there's still attractive returns, albeit not as great returns as the large CFCs, they're still very attractive returns to go for that are sort of market, highly competitive in the market in terms of capital investment and returns on investment. So I think going for volume for us is incredibly important with higher returns and being prepared to accept a slightly lower return, but high volume of many CFCs is not a bad thing to do.

And then just on the 10 CFCs per annum that you've kind of given us midterm guidance, that seems feasible until FY '25 when you kind of drop down in the number that you've given to probably 4 or 5 per year. How confident are you that you're going to get some more orders in the next 6 months to make FY '25?

Okay. So I think given the talks that we are in, I feel quietly confident that we will be announcing new client wins this year, not just the one. And so watch this space on that one. I also feel quietly confident that we're going to win additional orders from existing clients. And again, there's work for us to do the work for our clients to do. They're getting used to the CFC experience, but the customer relationships are strong, and we think we can grow customer orders from existing clients as well.

Great. And then just one final one. Just on the last accounting terminal that you did, I think you talked about EBITDA margins at a single CFC getting to 60%, 70%. And you've obviously guided to 50% midterm. Is that just because of the mix effect of immature CFCs at that midpoint?

Yes. I'm not familiar with those materials at that previous [indiscernible] because that was before my time. But I would -- that sounds a plausible reason, but [indiscernible].

[indiscernible]

I'll take one last -- I think that's the final question from the room.

[indiscernible] So given the slowdown in online sales and the rapid increases in inflation, are any of your partners slowing down their commitments?

Short answer is no. I mean they're all rolling out on their commitments at this stage.

And then -- where do we see the difference between gross and net CapEx come through the cash flow?

So gross CapEx is what we include within our reported CapEx guidance, the net CapEx, the cash receipts from that, you'll see that cash coming in every year as fees received. And that sits on our balance sheet as a contract creditor, although I prefer to call it accrued income. And it's accrued income on the balance sheet, waiting to flow through the profit and loss account. Once the CFC go lives it starts and then it's effectively amortized to the P&L account as a credit as revenue through the life of the CFC.

And I think some of these already asked. How are the discussions going with existing customers as it pertains to the reimagined tech? Any thoughts on how these improved economic [indiscernible]?

I'm not going to go into explicit detail there on a customer-by-customer basis, as you might imagine. And I think I've probably said enough to say that we acknowledge that there is benefit in sharing those returns with the benefit there of future volumes, additional volumes.

And then just a final one, which I think was kind of on Aeon, which is just the number of CFCs that Aeon have a firm commitment and the breakdown by year and when they're expected to be rolled out?

Cracky. I don't have that breakdown by year, but I will let you know that the 20 needs to be built by 2035. So that gives you a profile quite a long time horizon to get those done. We've got the one, and I think there's another one, but we haven't announced the other one yet that's close to being secured.

Okay. That's a little over time.

So thank you very much, everybody. I hope that's been useful, and hopefully, we'll be reporting formally this way in the not-too-distant future. So thank you.