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Edited Transcript of OCDO.L earnings conference call or presentation 11-Feb-20 9:30am GMT

Full Year 2019 Ocado Group PLC Earnings Presentation

London Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Ocado Group PLC earnings conference call or presentation Tuesday, February 11, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Duncan Tatton-Brown

Ocado Group plc - CFO & Executive Director

* Stuart Alan Ransom Rose

Ocado Group plc - Non-Executive Chairman

* Timothy Steiner

Ocado Group plc - CEO & Executive Director

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Conference Call Participants

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* Andrew Philip Gwynn

Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail

* Bruno Monteyne

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Marcus Diebel

JP Morgan Chase & Co, Research Division - Research Analyst

* Nick Coulter

Citigroup Inc, Research Division - Director

* Robert Joyce

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas Davies

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Victoria Petrova

Crédit Suisse AG, Research Division - Research Analyst

* Xavier Le Mené

BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director

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Presentation

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Stuart Alan Ransom Rose, Ocado Group plc - Non-Executive Chairman [1]

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Good morning, everybody. Welcome to the meeting this morning. I was only just reflecting last night on what words I might use to describe the year that Ocado had last year. And without over-egging it, I came up with a few: A year of vision, a year of innovation, a year of resilience, a year of pragmatism as a team.

But I do believe that these foundations, or these characteristics have laid the foundations for our current success, and I'm sure that they will serve us well for the future. I believe we've continued to change the way the world shops. We've created new partnerships last year with Marks & Spencer, with Coles in Australia and with most recently, Aeon in Japan. We've launched new concepts, Ocado Zoom, our intermediate -- our immediacy offering, and we've harnessed our innovation and our culture to constantly improve the platform that we have.

We've enhanced our fulfillment ecosystem with the creation of a new generation of many CFCs, which together with our standard-sized CFCs and micro-fulfillment centers, will allow all our partners to serve the full range of customer needs, combining best service with superior economics. We've made significant progress in developing artificial intelligence, which makes automated picking possible. And in future years, this will have a transformative impact on the cost of fulfilling complex grocery orders.

Now additionally, you will have seen that we've begun to leverage our technology in real estate by investing in related businesses, such as vertical farming and robotics for food preparation. So we've had a pretty busy year. And most importantly, of course, we focus relentlessly on delivering for our partners. And I'm pleased to say that the first of our international customer fulfillment centers in Toronto and Paris will open in the first half of this year. And we've achieved all this in the face of some pretty big tests to our resilience. Resilience was a word I used at the beginning because it was only within a matter of days a year ago that we had the pretty difficult and dramatic fire down in Hampshire.

We are proud of the achievements that we've made today. And without any further ado, I'm going to ask Tim and Duncan to tell you about last year and our future plans. Thank you.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [2]

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Thanks, Stuart. We're pleased to report results which show strong momentum in the business. Although the statutory results reflect the culmination of factors, including the impact of the Andover fire, which as Stuart just mentioned, I had a call before I stood up here last year that said, "We think there may actually be a fire in the building. We might need to put some water over it." It's been a busy year.

The underlying performance of Ocado Retail and the successful growth of Ocado Solutions are both very encouraging. Our progress over the last 12 months, which includes signing our eighth and ninth Solution clients, Coles in Australia and Aeon in Japan, and successfully maintaining the strong growth post-Andover has demonstrated many of the Ocado Group's most important characteristics: resilience, innovation, focus and execution. It's these qualities that will enable us to continue to develop the Smart Platform to meet the evolving needs of our partners at the cutting-edge of online grocery retail.

As usual, I'll hand over to Duncan now to take us through the financials and then come back and talk strategy afterwards. Duncan?

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [3]

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Thanks, Tim. Good morning, everyone. We've had a busy year, and we have a complicated set of results to talk you through this morning. You've seen the numbers already, so I'll be brief. But I'll try and help you understand the underlying performance.

The key headlines are that the business is operating as expected with our joint venture with M&S well established, a strong and resilient performance of Ocado Retail after the Andover fire and a great deal of progress in Ocado Solutions with significant investments for our clients, in our platform and in our capabilities.

Now just a couple of points on the presentation of the numbers. First, on this slide, we're showing the statutory results before the impact of exceptionals. Also, 2019 numbers include the impact of IFRS 16. You already have the impacts for 2018, which we shared at the accounting seminar a few weeks ago. Note that we indicated that the impact would likely all be in UK Solutions & Logistics segment. But because Ocado Retail has rights of use on properties still leased by Ocado Group, the impact is actually in both segments.

The balance of the presentation will exclude the IFRS 16 impact, where relevant, from 2019 numbers to make them comparable. So the headlines. Group revenues were up 9.9%. Group EBITDA, which includes a GBP 25.4 million benefit from IFRS 16, was GBP 43.3 million, and loss before tax was GBP 120.4 million after a GBP 9 million IFRS 16 impact.

As reported in the first half results, there's been some significant exceptional impacts from the fire in Andover with the write-off of the property, the stock and from additional operating costs. We received GBP 74 million in 2019 from our insurers. We recognize this as exceptional income when we incur the capital expenditure for the rebuild or as business interruption costs are incurred. Up until the end of the year, we'd recognized nearly GBP 24 million.

The other notable exceptional cost is GBP 1.3 million of legal cost as a result of a theft of our intellectual property. We will vigorously protect our IP and challenge anyone who uses illegally obtained information directly or indirectly. We've made a claim against the company and a number of individuals. We strongly believe in the merit of our case.

So back on to performance. Here are the results in our new segments. Firstly, revenue. Retail revenue grew 10.3%. UK Solutions & Logistics grew slower, up 7.8%. The slower growth comes from the part-year impact of Morrisons holiday, where we agreed with them to take back Erith capacity to allow us to continue to grow. Reported International Solutions revenue was flat, although this doesn't tell you the true story or the full story. More on that in a moment. Other includes Fabled, our health and beauty business that we sold during the year.

Looking at the EBITDA variance's pre-IFRS 16 impact. Retail EBITDA fell to GBP 20.2 million with the declines largely due to the impacts of Andover on reported performance. As you'll see shortly, the key operational metrics continue to move in the right direction. UK Solutions & Logistics grew 10% due to some small admin cost efficiencies. International Solutions' EBITDA fell as we continue to invest in the platform and incurred increased costs ahead of the launch of our first overseas CFCs.

Within Other, share scheme costs were up, with the cost of schemes reflecting the strong growth in value over the last few years, offset in part by research and development tax rebates. Also included, although not material, were some trading losses in the ventures we consolidate, at this point only Jones Food. Our venture investments are all at an early stage in their development, and there's much to do before we can be confident of any significant value. But there are encouraging signs.

Now I've covered revenue. Sorry, waiting for the slide. Okay. Apologies. The slide isn't quite catching up with my speaking. So I think you've got it in your packs.

(technical difficulty)

So cash fees. Now I've covered revenue and EBITDA performance for International Solutions. At the moment, a more important indicator of performance is the fees that we've invoiced to our clients. In 2019, these grew by 38%. And to date, around GBP 140 million of fees have not been recognized in revenue. We expect this strong growth in fees to continue with capacity commitments from our partners. Though, as you know, it will take a few years before all the fees we receive can be fully recognized in profits. At the same time, costs will also grow as we make the necessary investments to deliver this future growth.

As a reminder, the U.K. and Solutions Logistics (sic) [UK Solutions & Logistics] segment includes the services that we provide to Ocado Retail and Morrisons. This includes both a standard solutions offer with the hardware and software to operate using our platform plus logistics services, so the actual operational roles of picking the product and delivering to customers.

Revenue was up 7.8%, lower than would have been the case, save for the Morrisons holiday, which resulted in lower fee income, partly due to some discounted fees, where there are further effect to come next year. We continue to be more efficient for both our partners. Delivery efficiency was better with DPV up to 196 and mature CFC's UPH up to 168. It's worth noting that Erith UPH is now regularly over Hatfield.

Costs for this segment grew due to a full year of fixed cost at Erith. Engineering costs per order at Erith are higher than in mature CFCs. But importantly, they fell by 1/3 in the year. This is prior to the benefits we expect from our new-generation robot, which we used in Erith and all future CFCs.

Now to help understand the retail performance, it's worth picking out some of the key capacity points. In the year, active customers grew at approximately the same rate as revenues and order volumes. We highlight big basket order volumes here, as this excludes Ocado Zoom. Tim will touch on this later, but our first Zoom site in Acton performed ahead of expectations. I am one of many active customers.

The order growth was constrained by lack of capacity, hopefully, well-illustrated by the middle graph. We've lost the Andover capacity we had, here shown as year-end numbers. Although this was much -- this was higher up by the time of the fire and clearly which we'd expect it to be much higher by the end of the year.

We continue to grow because Erith's capacity grew, ending the year at over 70,000 orders per week. And it's also notable here how much extra capacity we could squeeze from our existing mature CFCs. Not only did our CFCs grow capacity, they became more efficient, we still have more to do to get to our target of over 200 UPH with the opportunity from further efficiencies from robotic picking to come on top.

Now I want to take a moment to talk a bit more about wastage. This is an important issue for grocery retailers, and it's also an important issue for the environment. It's commonly thought that most grocers have a wastage figure in the range of 2% to 3% due to some of the inherent challenges of forecasting customer demand accurately across a large portfolio of stores, not being able to manage stock rotation perfectly and due to the length of supply chains. We have, for many years, operated at much better levels using the benefits of our model, notably bringing stock into a larger location benefiting from scale advantages that come from that. We've also used our platform benefits, better predictive capabilities, a perfect first-in, first-out system and strong visibility of customer behavior. That let us operate at 0.8% waste in 2018.

But we've worked and continue to work hard to improve. And with the use of AI and machine learning, we've been able to fine-tune our forecasting even further, so helping us to reduce to 0.4% this year without any significant impact on product availability. Note that even then, only 0.02% of our food ends in landfill.

So on to Retail performance. This is now presenting our Ocado Retail as an Ocado Solutions customer. There are no engineering costs for MHE, no technology costs for hosting and supporting our platform and of course, none of the capital costs for these. These are replaced by fees for both our platform, but also management fees for logistics services and for historic capital investments.

Gross margin was down slightly year-on-year with supplier income flat. As I highlighted at the half year, we're not expecting any gains in the second half as the market remains competitive. Trunking and delivery costs were lower due to the improved efficiency, offsetting the wage cost and pressures. Operational efficiency was better, up in mature CFCs and in Erith, but we have higher fixed costs in Erith and some small impact from our Ocado Zoom site. Marketing costs were up as we invested more heavily in customer acquisition after the slower growth period post-Andover fire and from trialing an offline campaign in one of our regions.

Fees here are charged by Ocado Group with the income recorded in UK Solutions & Logistics segment. It's worth noting that within the total fees, the OSP fees are lower than for a typical partner, reflecting a discount as the majority of their capacity is coming from less (inaudible) assets. Admin costs grew in line with revenue. Overall EBITDA was, therefore, down 80 basis points. We expect EBITDA growth ahead of revenue growth in 2020 as Erith (inaudible) sales further.

I thought I'd briefly touch on the economics for our partners. So Ocado Retail has some characteristics that make it different from our partners. First, Ocado Retail currently sources under the Waitrose agreement, incurring a fee, but also not benefiting from their buying scale that most of our partners can. And as I mentioned, the legacy assets in the U.K. don't have the efficiency that we'd expect from our new facilities. Marketing costs were higher because of the Andover fire, noting that any insurance income will be recognized in exceptions.

Here again, size matters, leveraging a well-known brand across a larger pool of customers brings better marketing efficiencies. I've already covered fees, but note that our admin costs are higher, one other line that benefits from size. Overall, once at scale, we expect our partners to have a high EBITDA margin and low capital costs.

Now cash flows. We started the year with GBP 411 million of cash. Working capital was positive with significant benefit from fees invoiced to our Solutions partners. This was partly offset by a temporary decline at Ocado Retail, partly due to faster payment to suppliers since becoming a designated retailer under GSCOP.

We received GBP 74 million of cash from our insurers, which will help fund the rebuild of Andover and other business interruption losses. We also cash-settled our growth incentive scheme, although this was largely offset by earlier treasury share sales. The largest part of the Other is finance costs, including the interest element of IFRS 16. So overall operating cash flow was GBP 48 million.

Given the initial proceeds from the M&S deal, we had ample funds to continue investing, incurring GBP 260 million of CapEx in the year. You can see that this was spread across CFC growth in both U.K. and for our international plants here, mostly Casino and Sobeys. The biggest investments in the year were on continuing to develop our platform, growing our technology teams by over 1/3. We ended the year with GBP 751 million of cash, and we increased our headroom with a convertible issued in early December. We now have GBP 1.3 billion of cash and over GBP 1.4 billion of headroom to continue to support the growth of our clients' businesses in U.K. and overseas.

So here, on to outlook. I just wanted to talk this through and give you an indication by segment. So assuming normal market conditions, we'd expect our Retail revenues to grow between 10% and 15%, with the upper end dependent on delivering sustained, fast ramp-ups in Erith. We will stay constrained until we can open more capacity expected in early 2021 with the opening of a Bristol mini-CFC with that project on track. UK Solutions & Logistics should grow at a slower rate than Retail as we absorb the full year impact of the Morrisons holiday. They're due to start to return to Erith in February 2021.

For International Solutions, as you know, we're only starting -- we only start recognizing fees as revenue when operations commence. We expect less than GBP 10 million with the quantum defined primarily by the opening date for Casino and Sobeys. As you'll hear from Tim, both projects are progressing well. A more important indicator is that we expect International Solutions fees invoiced to grow by over 40%. This would mean we've had nearly GBP 0.25 billion of unrecognized revenue by the end of the year.

For EBITDA, Retail EBITDA should grow above revenue growth as Erith scales. The UK Solutions & Logistics, as I mentioned earlier, there will be the full year impact of the Morrisons holiday, which will result in a decline in EBITDA. The corresponding offset from insurance will be in exceptions.

International Solutions EBITDA is expected to decline. There are a number of reasons for this. First, there's minimal reported revenue despite strong cash fees. Second, we're growing the size of the technology team even further to ensure that we developed quickly all the features that our partners need. And finally, as I indicated at the seminar a few weeks ago, for the first CFC openings, we plan to have higher levels of resource than we would in the future to ensure success for our clients and to help take the learnings for the significant program of openings that we have ahead.

On cash guidance, we expect continued cash receipts to cover Andover rebuild and business interruption costs, recognizing these, when appropriate, as exceptional income. CapEx guidance is for GBP 600 million. The majority of this is on the extensive program of CFC openings in the U.K. and internationally, remember with Andover funded by insurance. We expect another GBP 150 million on further developments of the platform and on other projects.

With our organic cash flows, the prepayment of client fees and our substantial headroom, we're well set to grow our business to meet the demands of our clients. So in summary, 2019 has been a busy and eventful year. There's much more to do and many further opportunities ahead. But I'll now hand you over to Tim to explain more.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [4]

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Thanks, Duncan. So we're building for tomorrow at a pace. So what you can see here is the 2 facilities that we're going to open in this first half. At the top, just outside Paris for Groupe Casino; underneath, just outside Toronto for Sobeys. So these are real. They're going to go live soon.

We are developing -- we've got 4 key elements: one, developing the Ocado Smart Platform; two, managing the greater velocity in our business. We're going to continue enhancing the customer experience at Ocado Retail to accelerate its growth; and creating the future today with the transformative innovation in the pipeline.

OSP, our Smart Platform, is there to reliably provide the best customer outcomes and the best economics for our customers, for our clients, for their customers. So if we look at what it can deliver here in the U.K., in range terms, Ocado.com has 58,000 SKUs today compared to a large hypermarket of 15,000 to 20,000. We've got 8 products in the average basket that are only available at Ocado. That's 8 products that customers want they can only buy from us. That's better acquisition, that's better retention, that's a significant improvement in margin from the long tail.

So the range, which is made possible by the automation in the systems, gives a massive advantage. That's the best service in our industry, 95% of orders delivered on time, 99% order accuracy. Again, those are statistics that are only put out in the market by us and our client, Morrisons, here in the U.K. for fairly obvious reasons. Great ease of use through all of our user interfaces, whether that's app, whether that's website, whether that's voice, and always improving constant investment. And the ability to offer all of that at a price that matches the market leader in the U.K.

So OSP is allowing Ocado Retail to offer market-leading customer offer, which is what all our clients will be able to do in their markets, but to do that whilst producing the best economics. I know for a large number of years, we've had the constant debate as to whether to use automation or to Store Pick, and that debate has recently moved on into the size of automation to use. What I want to try and illustrate here is that what we're able to offer to our clients is the full ecosystem of warehouses, from the micros through the minis to the large centralized ones. But what is the difference between them?

So the centralized fulfillment has the following characteristics. It's large and centralized, allowing us to have a larger range, giving us the margin benefit of a long tail. We get significant improved efficiencies inside the building from receiving large quantities of stock at a time due to the large turnover of the site, giving us significant inbound efficiencies. We fully automate all of the picking in the building with the exception of the freezer, which is about 3% of sales, giving us very efficient picking. And as Duncan highlighted earlier, the world-leading waste numbers, 0.4% last year. We're able to reduce our supply chain costs by getting over 90% of the goods that we sell from the facility at the same price landed at the back door of that facility as the supplier would charge a retailer to land them at their distribution center without having to put them through those regional distribution centers.

We get to use our own technology and IP so we can flexibly and cheaply continue to iterate and innovate in those facilities. The overall result is that those large warehouses have the best-in-channel operating costs, bar none. A typical micro-fulfillment center does not have the benefit of the long tail, does not have the benefit of inbound efficiencies, has some automated picking of a part of the ambient range, does not have the advantages of waste. They're relatively low turnover sites, does not have the advantage of a direct supply chain and therefore, has significantly materially higher operating costs in the building.

Why are we interested in micro sites? Quite simply because they offer immediacy to clients and because our micro site has materially better economics than any other. And the reason for that is their ability to leverage our larger sites. Because they use modular equipment, the same equipment in the small sites at the large sites and the same storage assets, and we're able to move goods very efficiently between them, allowing us not to leverage the long tail because they can't hold as much range as the full Ocado.com range, but they can hold the range of a U.K. hypermarket, allowing us to leverage their inbound efficiency by using them as the inbound supply chain, allowing full automated picking of everything other than the freezer stock as in the larger warehouses, allowing them pretty good waste numbers, larger than our large warehouses but better than the average supermarket because of their ability to have constant replenishment of singles picked very efficiently in our larger warehouse, allowing them to leverage the direct deliveries into our larger warehouses, and therefore, they have slightly higher operating costs.

So they are more expensive to operate, which is why immediacy services will charge more to a customer, but nevertheless, still operate great value in a very similar way to a convenience store and the relationship between a convenience store and a hypermarket. Convenience stores traditionally have about 10 points higher sales price and about 10 points higher operating costs, and that's something we would see is similar in a successful immediacy offer. But then you've got the product produced, the customer order produced in your warehouse or your micro site. And what are you going to do with it? So I thought it worth talking a little bit about the last mile.

Here in the U.K., we make deliveries from approximately 20 sites, 3 distribution warehouses direct to customers, about 30% of our volume; and about 70% of our volume from a further 17 spoke sites. It may be intuitive to believe that it will be more efficient to deliver from 170 sites than 17 sites because you would be naturally closer to the customer for first delivery. And you would be right, there is a small saving on that initial stem time of the delivery out of your spoke site or your store to the first customer on that route. However, the saving from the advantage of being able to optimize a large number of routes in one site, from being able to plan the number of routes that you need on each day, from the number of vans that you have in the location is actually greater.

Think about that and take that step a few forward. If you had a store that on a Friday morning needed 1.2 vans to make its deliveries, that store ends up with 3 vans. 2 to actually go out and make the deliveries, and 1 in cases you arrive on the Friday morning and load it, you discover that an indicator bulb has gone and you don't have an engineer on site to change it. You legally can't put it on the road. So you have to round up 1.2 to 3 instead of 121.2 to 123. Overall, we believe that shrinking from 170 sites down to, say, 20 sites, actually gives you a net advantage of around 0.5% of sales. This isn't a number we do that with. This is a number that we spent hours and hours and millions and millions of computations to simulate and understand.

Our trunking from our 3 warehouses to the 17 sites that we operate that aren't warehouses around the U.K. costs us 1.2% of sales. So net-net, if we had produced those orders in 170 sites rather than 3, we would save on the delivery side 0.7% of sales. But actually, we save on the production over 10 points. So the net result is it's the most efficient way to do it from the large sites and out to a spoke network. I think as we expand globally and in the U.K., it's not been successful to get customers to come and collect their orders. But in some markets, it's large. It's just worth touching on click-and-collect for a moment. Of 2 important areas I think you should understand as you model out our clients' businesses and their competitors' businesses.

The first one is a store can only serve a certain amount of online sales. They have a natural catchment area. And so if you were to take, for example, a typical U.S. supermarket with, say, $50 million of sales, if you were to put 10%, 12% of that online, you'd have $6 million and half of it to be collected and half of it to be driven. You'd have $3 million being collected at that store. If you build a micro site that does $30 million of sales, $15 million of which is going to be collected, it's got to go to 5 stores. So a micro site has to deliver its click-and-collect to 4 other sites as well as itself, whereas one of our warehouses, we might be delivering to 30 stores. Nevertheless, we're still -- we're both delivering to stores. And there's a cost to that, and it's a remarkably similar amount.

But once you're at that location, you need staff to operate and you need staff to operate it for all the operating hours. And when you look at the sales of a single collection site, say, $3 million, they're just over twice the sales of our average Ocado van, that's only used for 9.5 shifts a week rather than 14, actually achieves in a year. So the labor saving compared to delivering it is not massive. It's present. It's not massive. And we estimate click-and-collect costs at around 3% to 4% of sales. There's also a challenge in that part where if you give customers a 2-hour window, you obviously can't choose within that 2-hour window when those customers are going to turn up. So in the peak hours, you actually can't manage with one person at the click-and-collect site, you need to have 2.

The benefit of proximity is minimal in the context of the benefits of the CFC. In our mind, this is all about an ecosystem. It's about an ecosystem of having the right assets in the right place at the right time, enabling our clients to offer their customers the different services fulfilling the different missions and based on their densities and geographies and demand in those areas. And this slide seems to have built itself because it was supposed to slowly build out as I explain this.

If we could just take the middle circle, that's placing a large warehouse, maybe 200,000-type square feet, GBP 350 million, GBP 400 million minimum of sales, to do a full basket shop, both in terms of direct orders coming out of it and in terms of spoked orders. Obviously, as a production site, it will be capable of doing immediacy orders in the kind of 3- to 5-kilometer radius from its store, if that's a useful catchment to do that in. So it will serve immediacy, it will serve same-day, and it will serve next-day orders in that catchment.

As the business grows, you're running out of capacity. As we've done in the U.K., we serve most of the geography we serve today originally just from Hatfield, today from 3 warehouses and 3 more that we're building all to serve the same catchment just because of the growth.

And so you could decide, for example, to build a #2, the #2 up here, which would really be to serve the same -- predominantly the same geography, some more immediacy obviously in the 3- to 5-kilometer radius around it as well as a lot of same-day in that vicinity. You might find that's an affluent area. There's an immediacy demand in there. There's good density. And so you might drop some micro sites and Zoom sites around that area, giving you just immediacy as well as the same-day and next-day services in those areas.

You might, in a city an hour or 2 away, drop another mini-CFC, giving you more capacity. And then in the areas that are further away from that with less customer density, where you still want to offer a service, OSP allows you to do Store Pick in your existing store network and obviously the clients are all looking at the same interfaces and taking advantage of all the same software benefits.

So our Solution OSP has the flexibility to develop bespoke networks to serve the unique needs of each of our clients' markets and all of the missions that they want to serve. We also have work underway to leverage the ecosystem even further and reduce costs for our clients, but there's a lot of very commercially sensitive stuff in there that I can't explain today.

So on to Zoom. We've been running zoom now during the better part of the year. The first phase was to run the consumer trial. What we've validated is a real market opportunity in immediacy. The first site that we built in Acton is already operating at around 50% of the capacity we built it to do, and it's growing week-on-week. It significantly increased our market share overall in the catchment that it's operating in. And we've now got increased confidence that we can deliver the best offer and economics in the immediacy market.

What we're doing at the moment is proving the model. We're working on the innovation of our solution and how we'll install our automation into the solution to drive down the operational costs, both the labor costs in the facilities as well as the waste operate -- as well as the waste incurred. And we're exploring further options to correct -- to optimize the technology even further to lower the capital costs and the operating costs beyond where we believe we can get to right this minute.

We're currently working on plans for a second site in London. In the future, we expect to roll out immediacy offerings through micro sites with all of our customers as part of the Ocado Smart Platform. So micro-fulfillment solutions to serve the immediacy missions in the markets globally. And of course, it will always continue to evolve.

We're working with our clients globally to explore the benefits of being a member of our club. Today, the members of our club have bricks-and-mortar retail sales of over GBP 215 billion. It's a big group that are on the Ocado Smart Platform. And by having a big group invest and deploy our platform globally, it's allowing us to have increased innovation. So as we scale, obviously with increased resources, we can have an increased size of technology team, we can innovate at ever-faster rate, and that creates a virtuous cycle.

But there are other benefits as well. Our clients -- and we are now arranging for our clients quarterly meetings with shared learning. So each of our clients can take advantages of lessons learned in building facilities, in launching facilities, in scaling in their different home markets. The global network allows us and our clients to have a view of consumer trends ahead of their peers in their local markets. If someone, either our client or one of their competitors innovates in Australia, for example, and we and our client react to that in our software platform, whatever that innovation is can now be taken advantage of in Monroe, Ohio. It can be taken advantage of in Tokyo in Japan. It can be taken advantage of in Toronto in Canada. So it's a real advantage to national retailers to be able to deploy what is now a globally deployed platform.

And we're also looking at future optionality where the scale of deployment of our solution will give our combined club leverage over, for example, the suppliers in the industry so they can create globally pack-friendly sizes or friendly inbound options to make the warehouses more efficient by taking advantage of the scale of the entire club. We've got now a collaborative and future-focused network of forward-looking retailers who are taking advantage of all working together.

Obviously, in the last 2 years, we've signed up to undertake an enormous amount of business far greater than many had expected. And we're now managing the greater velocity in our business. We've put together a global team of top technology talent. We have, this year, brought on board 350 net new technology colleagues. We've opened a London development center to add to the development centers that we already have live. We recently launched a new corporate website just to help the global recruitment process. And going forward, we'll have continued growth of our technology and support services.

We're undertaking business transformation. We opened a U.S. office to support the scale of our operations in the United States. We've upgraded our support teams and some of those systems. We've done a very major internal restructure of pretty much the whole of our business to create mission-focused teams, allowing us to have greater bandwidth in every area so that we can deploy more sites simultaneously globally so we can carry on maintaining and servicing them.

So in the core areas of our business, we're now focused around innovation. The innovation from software through to hardware happens in one mission. The platform development that actually deploys sites globally for our customers deploys the software for their instances, et cetera, all happening in one platform development stream, and then client services who stand behind that on constantly servicing, maintaining the facilities for our clients, maintaining the software in terms of its live 24/7 availability, so working on that client relationship piece. Going forward, we're launching new global systems in HR, finance and product management to support what is now a global technology business, multiple currencies, global projects, much more complex sourcing than we had as a retail business based in one country.

Financial flexibility. Obviously, during the course of the year, we brought in the proceeds of GBP 558 million, the initial proceeds from the M&S deal. We issued a GBP 600 million convertible bond, leaving us now with a strong funding position for our current commitments and for future opportunities. As you saw the pictures of them earlier, our first 2 international CFCs will open in this half, and we expect to have over 30 operational in the next few years. So we needed to make these changes to maintain the velocity that we've already signed up to and give us the capability of increasing that velocity going forwards.

So we're opening up those first 2 CFCs, and they are creating a template for the execution of many more. We thought it just worth explaining a little bit as to how those roles and responsibilities look. In the prelaunch preparation, responsibilities look like the following. Our partners obviously have a lot of people activities to do, they're recruiting and training the staff that will actually operate the business in terms of the drivers, the CFC staff, the CFC management as well as their online head office kind of teams. And they complete the site. So they have responsibility for those buildings that you saw, including things like the lighting, the sprinklers, the dock doors and some mezzanine, whilst we have responsibility for all of the infrastructure inside.

On the software side, obviously we've made specific developments for those clients to make sure that they're regulatory and compliant in their markets as well as making adjustments for particular changes and differences in the markets they're operating in. We're involved not just in the development, but in the full testing and the integration of the software. We're obviously installing all the hardware on those sites. In fact, the testing of the hardware having been installed is what's ongoing at the moment in both Paris and in Toronto. There are robots running around on those grids right now whilst we test the installation, the peripherals and the sanctity of the grid installation as well as the on-site software.

And obviously, we have a lot of people works ourselves in terms of recruiting and training and managing not only the program managers and project managers that install the equipment and test it, but also we will be -- we're currently training the engineers that will remain on-site for the launch and the growth of those businesses. So during the go-live and ramp-up part of the business, our clients are responsible for the rollout, driving the proposition and marketing, the phasing, the pricing, the ranges that they launch with, et cetera, and reaching out to customers and explaining this new service to them.

Our own project management teams will remain on site to assist with the early execution. The relationship management will be there forever. We obviously want to fetch shared feedback, refine the proposition, help them to grow their business. We've got 24/7 support, both on the ground in the sites, and remotely, managing and watching the sites and making sure that we help them to optimize them to get the most out of their sites and the most out of the software platform that we're providing.

Constantly -- constant collaboration and innovation to leverage any shared learnings, both across that clients' sites, but all of the current and the future sites that we'll operate for all of our global clients. Our aim here is to enable our partners to grow on their own terms in and across their markets and all the missions they seek to cover.

Here in the U.K., we want to continue enhancing the customer experience at Ocado Retail. Ocado Retail, we believe, is well placed to lead the market. It's currently the fastest-growing grocer in the U.K., continues to have an award-winning proposition that is only going to improve.

Working together with M&S, M&S are going to bring food innovation and sourcing at scale. Obviously, in own-label food, their sourcing power is double that of Waitrose. We'll also, for the first time, get to see what these customers are doing in-store as well as online through integrated CRM. We at Ocado Group will bring the leading fulfillment operations with continuous technology upgrades as well as new profitable immediacy and same-day models to the mix. And the Ocado Retail will develop their commercial and marketing abilities and expect to significantly strengthen their GM offering. All of this will create new opportunities. More data and insights to act on and an unparalleled offer.

So we expect to swap out the 4,500 Waitrose lines, replacing them with more than 4,500 M&S lines that our consumer research tells us that customers understand is a better-quality product, and our data is suggesting is at cheaper prices today. And we're going to enable more missions to be served, which means that we expect that business going forwards to grow faster, to grow faster both in the current geographies and existing missions, also to grow by entering new geographies and by offering customers new -- and serving new missions.

So we're working harder at Ocado Retail preparing for faster growth after the near-term capacity constraints from the Andover fire ease. Across the business, we're aiming to create the future today. We're pursuing constant innovation in the core to further increase the competitive advantage that OSP drives in grocery. An example of that, on the left there, in robotic picking. Picking today is around 50% of the labor in a warehouse. We have today live robotic picking of real customer orders in Erith. We aspire, by the end of this year, for the performance of those picking sales to be equal to that of a human, meaning that we can swap out human pickers for robotic pick sales for a growing proportion of the range.

And over time, we expect that proportion to constantly increase. In our ventures, we have a growing portfolio to leverage our technological know-how and to participate in innovation and adjacencies. You're aware of our 2 investments in vertical farming at Jones Food and Infinite Acres, at Karakuri, an automated meal prep that we see one day being the robots behind the dark kitchens connected to the Zoom sites, enabling customers to take delivery of their groceries and fresh hot food at the same time, all prepared by robotic automation.

At Inkbit, which is the most advanced 3D printing in the world. They're helping us develop things like innovative substances for grippers for our robotic technology that can change their friction coefficients during use, for example. Parallel streams of innovation, creating future value for the medium to the long term in the core area and in the ventures.

In conclusion, OSP, the Ocado Smart Platform, is a flexible model with leading economics that will help our partners to win in online grocery across all missions and all markets. The model is always evolving and improving, and we're constantly investing in it. We're ready to work at even higher velocity to achieve what we've promised to do for our clients and beyond. Ocado Retail is poised for even faster growth in the U.K., and we're constantly innovating to drive that future value in grocery and beyond.

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Questions and Answers

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [1]

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So it's Andrew Gwynn from Exane. I'm going to -- I've got lots of questions, actually, but I'll just go for 3 of them. So apologies. On the Zoom, obviously, I think the technology in there is relatively basic at the moment. So I'm just wondering what the plans are going forward? Should we expect the sort of high type model with robots on top?

Second one, just to help me understand a little bit -- a bit, Tim. You're capacity constrained, but the marketing cost stepped up in the retail business. So I'm just wondering what that was about. And we did touch on it very briefly.

And then EBITDA, sort of 2 stage question. So firstly, is it the right way to measure the business, given partly what losses elsewhere in the P&L and we'll see IFRS 16? But second, actually, I think you've got to tie it, that consensus on your website. So if you can confirm the numbers because I forgot the number, Tim. We'll see if you're happy broadly where that's coming at.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [2]

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Let me start on the first 2. You're right. So the first Zoom site, as we said, was to test the customer proposition more than anything else. And what it's shown us is great demand. And what it's shown us is the basket sizes are -- the basket sizes is 25% plus larger than we initially anticipated. And it's not that we don't like each other. But -- and it's half automated, and it's not automated with our equipment and therefore, the operating costs in it are not wonderfully attractive at the moment, and it's not a sustained -- long-term sustainable site without some significant changes.

The Zoom site that we're looking at building now in London will share exactly the same automation as all of our other automated sites. It will have full automation in the Chelan and the Ambient, and it will operate at materially better levels that will lead us to a profitable model that we expect to be able to operate long term. Okay? And we're ready to do that now.

The second one was on the marketing cost. There were 2 parts to that. The first part is that one of the very first things that we did when we realized that, that site was not coming back live in a very short period of time, was to turn off our marketing. The problem is, is there's an element of momentum to your marketing where if you turn it off for a period of time and then turn it back on again, you've lost the momentum, and you have to overinvest to try and build it back up again.

The second part of that is you'll have noticed from Duncan's slides that some of the loss in the Andover volume, the gray part of the box that we lost was taken up not just by the growth in Erith but also by growth in Hatfield and Dordon. And some of that growth has come through further flattening of the week through driving volumes through the days when the kit is less constrained. So we're driving significantly higher growth on a Tuesday, Wednesday and Thursday then we're able to drive on a Friday and Saturday.

And so to push the customer demand into those days, above and beyond where we were before is more expensive in marketing terms than if we'd maintain the shape of week that we had prior to the fire. Okay? And I'll let him have the hard question.

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [3]

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Just slightly to add to what Tim said there. That extra cost of marketing, where we're doing that to ensure that we maintain the customers we otherwise would have lost, that's in the insurance company's interest because it lowers the losses that have to pay for us.

So some of this extra marketing we'll actually get back. But of course, we'll never report it back in marketing. It will get reported in exceptional income. So it's not a cash loss to us. So we're taking the decisions on the cash basis, not on reported EBITDA basis.

Your question was is EBITDA the right measure. To a certain extent, I've given you part of the answer there. EBITDA, certainly in the short-term, isn't a great measure because a lot of the things that we're doing might hit EBITDA, and we'll get paid for it from insurance. But accounting says the rules will follow the rules and the rules, therefore, reflect in exceptional income.

Obviously, at this stage, there is a question about how valuable EBITDA measures on International Solutions growth business when you're not reflecting it. But I think it's the best measure we can use today. And that's partly why we've given you increased segmental disclosure because you can look at the different parts of the business and consider the best way to understand the value that's there on those different segments. And I think the retail business EBITDA is a good measure. On the Solutions business, ultimately, it's a good part of that measure, obviously, to get a better element of the capital behind it. On the international business, at the moment, it's pre reporting revenue, so it's not a good measure.

Consensus, I think the website is showing, on a pre IFRS 16 basis, about GBP 8 million for the year, which -- so that is based on -- coming in here this morning, that was the right, I think, consensus. Clearly, we've made some indications here today. I think there's a bit of work to do on models, not least because it's a complicated set of results. So you have my sympathy. But that's why we've given you lots of information to help you work on it.

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Robert Joyce, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Rob Joyce, Goldman Sachs. I'll take 3 as well, if you don't mind. So first one, on the retail guidance for the year, on which journey you're assuming when you shift from Waitrose to M&S within that 10% to 15%.

Second one is just, you're now doing over 70,000 orders a week at Erith. Does that confirm the sites of that size, i.e. the Andover site you plan to roll out? You now have confidence that they will operate the economics you expected them to?

Final one, just in terms of the immediacy market you've talked about. I think you said global grocery is around GBP 5 trillion before. How big do you see that immediacy market as being? And within that model, how are you doing the last mile? Are you using contracted riders or fully employed riders? How is that working?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [5]

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Look, the data suggests that it's a low single-digit percentage of customers who are passionate about Waitrose. We see a larger number of that -- of people who are passionate about M&S and don't shop with us today. So we expect there will be some churn, but we expect there will be a replacement from new customers who are more passionate about the M&S brand than they were about Waitrose.

But we are budgeting in there more marketing costs just to make sure everyone understands what's going on around that time period overall.

In terms of Erith. So yes, it's very significant. Erith is operating over 70,000 orders because that's roughly the scale of the average sites that we're building for our customers, which is useful in understanding that there aren't parts of the routing algorithms that can't handle that scale or the communications infrastructure that can't handle that scale, et cetera. So it's massively reassuring to us and our clients to be able to see Erith operate at those numbers during its growth to know that there aren't new hurdles to overcome to achieve full capacity in their sites.

On the economics front, Erith, as we mentioned, is already operating at more efficiency than Hatfield. It's not yet operating at the efficiency that we expect it to get to, so there's ongoing work there. It's moving in the right direction kind of almost week on week.

And also, on our economics of providing the site, Duncan mentioned that engineering costs per order were down 1/3 in the year. But we need them to continue coming down, and that is our expectation, and it's something that we're very clear on, and it's been a successful journey in cost reduction so far. And we have the new generation robot coming out this year that we expect in the medium to long-term to have materially lower engineering costs. So everything is moving in the right direction, 70,000, big and important tick for us.

I don't know that global stats on what percentage immediacy or what you might define as convenience in the bricks-and-mortar world is. I can look at -- it's a material but minority percentage of our sales, where we have it for sale -- available at the moment, but it is rapidly growing. I don't expect it to be as big as the opportunity from big sites. And obviously, there's the challenge of, it is really only available where density exists. So you're not going to be able to offer it in all the geography that you could offer same-day and next day services in. Currently, we do the last mile working with an outside -- a third-party does the deliveries for us. It's something that we could bring in-house at some point. We could use a third party. Most of them are delivered by moped. Some are delivered in the car because they're larger than the standard moped's capacity. It's something that we want to continue to work on to optimize. It's again one of the reasons why we wanted to get a solution live prior to deploying it with our full infrastructure because there's lots of learnings to actually undertake to drive down the operational cost models to make it work.

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Robert Joyce, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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I mean that seems very quick. Are you paying them per drop? Or are you paying a sort of hourly rate per [container]?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [7]

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We pay per drop but a different amount per drop based on the size of the order and the distance from the site.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [8]

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Bruno Monteyne from Bernstein. A few from me. In the CapEx numbers, you talk about GBP 104 million for platform development versus GBP 71 million international development. I'm a little bit struggling what you call platform development versus international. So clearly, a robotic arm would be platform development. But if you have to make it earthquake proof or the [Baguette] in France versus a really -- where does it sit?

My second question is, I noticed you had, like, for Andover 40% of the GBP 225 million CapEx in the U.K. that would suggest it cost GBP 80 million. But though the old numbers was that Andover was more like a GBP 40 million, GBP 45 million. Has your CapEx gone towards more expensive?

My next question is around the admin costs, which you have well over 3%. What's realistic for a point, given what you know is in your numbers and the fact you have to run a commercial overhead, is below 1% realistic for a partner?

And then last but not least, clearly, your supplier income is a very big part of your boost to the P&L, 4%. Now how realistically can a retail partner assume, let's say, Kroger, that they're going to get an additional 4%? And are you helping them with the support, they call it the milking of the suppliers' process, of getting there?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [9]

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If you want to?

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [10]

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Yes. Maybe I'll do the first 2. Platform development versus international rollout. So people involved in designing a change to the platform, and you -- I think you mentioned seismic in there. The cost of developing a new seismic solutions in platform development, the cost of installing a seismic grid in a particular facility is in the CFC. So it's are you writing software for use in multiple CFCs? Or are you doing something specific to a CFC? That's the differentiator. GBP 104 million, right, for this year. Expect that to grow next year, part of the overall GBP 150 million. So assume GBP 120 million, GBP 125 million, that sort of thing.

Andover's numbers, GBP 40 million to GBP 50 million, was right in terms of your recollection for the mechanical handling equipment in Andover. But remember, the building burned down. So we need to rebuild the building as well. So -- and that's from clearing the land through to a construction, a complete new building and all the facilities that go with that. So that project is, in total, about a GBP 85 million project. So it doesn't reflect the MHE costs. It's the type of build cost. Of course, that's all funded by the insurer.

And as a point of detail maybe not understood, in that GBP 250 million is actually some build costs for the Bristol mini CFC, which Ocado will fund and recover from Ocado Retail through a capital charge because the reason why we're building the Bristol mini CFC, apart from the strategic reasons, is because we need capacity quickly. So it's effectively part of the insurance claim.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [11]

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So moving on to your other two. I mean, look, I think you can look at what global retailers spend on admin costs. I would have thought they were doing well if it's under 1%. I would have thought most of them were in the 1% to 1.5% type of number, but generally not operating at 3.5%. But again, for you to look at.

The supplier income, I think it's fair to say that in a multitude of areas, our clients have not signed up to work with us and are not intending to work with us by saying, thanks very much for this software. Thanks very much for those robots. I'm glad you're here to service them. Now we're going to go and run our business. There's a lot of knowledge transfer going on.

So there's a lot of questions being asked, not just about 4% supplier income and how we raise it. Bear in mind, if you look to the top 10 payers of that 4%, I think there are probably suppliers to every one of our clients globally. So the tools are there for them to earn that money as well. And we will support them in understanding how to do that, where to get it from, who to get it from and everything else. But they're looking for our help in understanding how we digitally engage with customers, how we market, all the different tricks, everything that we tried over the last 19 years, they want to learn from rather than spend the next 5 years trying to do that themselves. So there's an enormous amount of just kind of knowledge transfer, and it's not just about software and technology.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [12]

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And maybe just one final follow-up question. You talked a little about increasing the velocity of the business. I think the way I'd sort of tried to measure the velocity is how many CFCs per year can you annually deploy? Have you increased it from 10% to 15%, from 7% to 10%? How would you quantify your velocity you're cruising at?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [13]

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Look, I would just say that we have increased our velocity such that we're comfortable to fulfill all the obligations that we've taken on from our existing clients, and we're still allowing Luke and his team to run around and talk to more potential clients. And if he comes back with the right one on the right terms and we want to sign another deal, we believe we've got the capability of doing that. So it's difficult to say exactly how many sheds could I start tomorrow versus how many sheds could I start next year. We're growing that velocity so that we can handle more clients, more sheds per year from the existing clients, more than we've -- both what we've currently committed to and more is what we think that we can handle.

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Nick Coulter, Citigroup Inc, Research Division - Director [14]

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Nick Coulter from Citi.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [15]

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We'll try it under 5 questions.

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Nick Coulter, Citigroup Inc, Research Division - Director [16]

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I think, really, Bruno actually numbered them. He just rattled them off. I'll go for 3. Firstly, on the mini warehouse or Bristol Warehouse, could you give a little bit more detail around the economics relative to either Erith or Andover? And are those economics partly contingent on working in tandem with a larger warehouse?

Secondly, on the generations of robots. Again, where are you with that with respect to the generation going into the French and Canadian warehouses? What's the development beyond that generation as you continue on that journey to lower engineering costs? I mean, what are you testing on your grids effectively?

And then lastly, if I may, kind of an ESG question on your bands, what are you doing with respect to your band replenishment, how you're moving towards natural gas or electric over time? I remember that was a project way back, so I'll assume it's still on the radar.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [17]

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Okay. So the mini in Bristol as an operating site will initially have slightly higher costs than an Erith or an Andover would have done. But there are moves afoot to do something along the lines that you just kind of suggest that will bring it down to much closer to being in line over time to do some unique ways of working together.

As I say, there's commercial sensitivity around them. So I don't want to explain it all. But in the future. But yes, initially, slightly higher, and then at some point, not dissimilar.

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [18]

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Tim, sorry, just to add in there, and you've got the benefit of not necessarily needing spokes, spoke CapEx and spoke operation cost. So 10 months, Tim, I think.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [19]

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So it will be almost 100% direct deliveries from that site. Your next question was Generation robots. Thank you. So the first 2 sites in France and Canada will have a combination of the robots that are currently deployed in Erith. That's what's on their grids now, testing and ready for go live. As they scale those sites, they'll have second -- third generation robots that will be arriving during the course of this year. Kroger, one, should go live, I think, with probably 100% new robots. Both robots are both CE and UL mark. So both can be used in North America or in Europe. But predominantly, the rollout is going to be next-generation robots. But for now, still on current, which is second generation.

Yes. The way that we work is kind of parallel development streams, where, although we haven't yet rolled out next generation, we are working on the generation, the next iteration of that generation, and we're also working on a much more forward generation. And the whole game is to lower the total cost of ownership. So not just the initial capital cost but the total cost of ownership because we maintain responsibility for total cost of ownership and charge the clients for the provision of capacity. Yes.

And then your last one was on vans. Look, the -- most of the vans in our fleet are diesel. They are Euro 6. They are significantly under the ULEZ requirements. We do have a variety of tests going on in our network with electric vans. One of the biggest constraints on electric vans is a combination of route lengths, given that we're a heavier user of energy in the van than the parcel businesses because the energy source in our van needs to keep the food cool as well as drive the van. Okay. Just worth remembering that.

And -- but electric vans probably have all the (inaudible) and the test inside London, in the inner parts of London, show that we can get enough capacity out of them. The issue then is about electrical transmission into the site to give them the capacity to charge that many vans, the availability of enough power, okay? So that's something that we're looking at a number of sites, but that's a challenge going forwards for the country if we're going to fully go electric, basically.

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Nick Coulter, Citigroup Inc, Research Division - Director [20]

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And you're using natural gas as well?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [21]

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We're using natural gas on the LGVs. For example, we recently made a commitment on the site that we've taken in North London to only use natural gas LGVs to deliver to that site so they won't get large diesel trailers going into those -- into that area. We also have a trial going on of a quite a unique hybrid model that is more like the kind of P3 BMW was with the range extender. So they're kind of -- they're hybrid but not as in they can run on diesel or petrol and run on electric. They run on electric, but you have the range extender capabilities. And then you can do some clever stuff like geo fence, understand where the root is and decide how much power you've got and where on route you're going to actually run your combustion engine to recharge your batteries because the batteries haven't got enough technology. And we're doing that sometimes with chassis that have reached the end of their useful life as a -- the chassis itself hasn't, if you saw what I mean, but we said that the vehicle has because it's engine has been used for 5 years. So we take the engines out and we're putting in a different power plants and stuff. So we've got a whole bunch of experimentation going on. I do think it's an important area going forwards, both for us and our clients. And so yes, it's an area of focus.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [22]

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Victoria Petrova from Crédit Suisse. On Page 26, you were talking about ongoing zone projects and future zone projects. Can you maybe elaborate how remote your solution project on Zoom could be? What is the CapEx per Zoom CFC or ZFC? And also, given the current agreements with your international partners, if they decide to go with someone else in their micro fulfillment strategy, would they lose exclusivity or not? How do those agreements work?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [23]

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On the CapEx, it's probably too early to start disclosing on the model apart from the general comment that we're doing this and the model looks good. But it's too early to start giving you specific economics.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [24]

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Maybe relative to CFC, sort of 10%, 5%.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [25]

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You'd expect it to be a bit higher because you've shrunk it down. And as I said, the end result of having a smaller site in a more expensive location with a shrunk down version of the kit, but you've got to have all the program management and project management to install it. You've got to take the lease on the site, et cetera. And you've got to supply it from a big shed.

We still think, overall, the operating costs are going to be 8 to 10 points higher than the operating cost. The total fully amortized, et cetera, et cetera, costs mean that you need to charge more, basically. And you can do that through -- for example, a delivery fee, it doesn't look large because the order size is small. But a GBP 2.50 delivery fee on a GBP 35 or GBP 40 basket is materially higher than a GBP 1.5 delivery fee on GBP 100 basket. And you can do that, for example, in your consumer mix by having less promos as opposed to having anything that looks like materially higher pricing. So there are ways of doing it, which make it -- it's an attractive proposition. And the pricing can be very attractive compared to the local stores that are convenient. And those local stores can have between 1,000 and 4,000 SKUs in them, whereas the Zoom can comfortably carry 15,000. So materially better range, fast service, not more expensive but has to be more expensive because those costs are a bit higher as a percentage of sales.

And the second part you asked was something...

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [26]

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Exclusivity around...

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [27]

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Exclusivity.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [28]

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It's all slightly different, and it would depend on volumes and stuff like that. So it's a little bit tricky. Some -- I don't think I can give a definitive answer to that. But if one of our clients rolled out an extensive network of micro fulfillment centers with someone else, they'll -- I would imagine they'll naturally break their exclusivity anyway even if that wasn't specifically covered. And we would be able to sell our solutions then to their competitors.

It wouldn't make a lot of sense, by the way, because the -- our micro fulfillment centers won't be more expensive than others, but we'll have a huge advantage in terms of the way they interact with the other assets our clients are building.

There's one at the front here, and there's one there. And there's one there, and...

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Marcus Diebel, JP Morgan Chase & Co, Research Division - Research Analyst [29]

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It's Marcus Diebel from JPMorgan. Two questions, both for Tim, both on strategy, really. The first one on retail. We talked a lot about future developments, one on pricing. When can you actually expect even more on pricing than just the price metric? I can see a proposition that you are the most convenient and the cheapest, which would be quite powerful. Is there anything -- or is it just too early given the capacity that you're running? But I think, yes, how do you think about this for the next couple of years?

And then the second point, thanks a lot for your remarks on the last mile. I think it was very interesting and very useful. When you talk to some supermarkets who don't go with Ocado in the end, and they'd again talk about their branches, they seem to be concerned that the consumer in the long run would prefer both channels, i.e., buying the heavy commodities in the -- through the fulfillment center online but still wants to go to the supermarket to see the meat and touch the avocados kind of theme. Is that valid? Or do you think this is not at all a valid and kind of like these basically reasons to keep the branches as they are and to utilize them as much as possible is a valid, at least, approach?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [30]

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Sure. Look, on pricing, we've made a number of pricing moves over the years and where Ocado.com first started as a price follower overall of Waitrose by starting to -- in 2006, I think it was to start price matching Tesco's on all the branded products. In 2007 or '08 by basket matching the whole of Tesco's, by matching Ocado own label to standard tier Tesco's and Sainsbury's products and stuff like that.

In terms of going the next step and saying you've got the most efficient operation and taking it under, as you say, we've never had the capacity. We've always sold all the capacity that we had. At some point in the future, if we were able to build the capacity faster to realize the economic benefits of the model, then the Ocado Retail Board of which I chair and Duncan and I sit on, could decide that, that's a smart strategy for them to do. But at the moment, there's plenty of demand for the facilities that we have and the facilities we foresee rolling out. We think there's an -- there should be an increased excitement and opportunity for that business to grow based on the improvement in the proposition that's coming in September anyway.

M&S currently is driving its pricing down, I think, quite noticeably in the market, to be more price competitive. Waitrose has been driving its pricing up to maintain -- in our opinion, to maintain profitability of the supermarkets to make up for holes elsewhere in the group. So the switchover will, in itself, be a reduction in pricing to the consumer. Because right now, M&S Food is cheaper than Waitrose Food.

Moving on to the question on the last mile. Look, in 2007, we went out and did extensive surveying of customers, and some customers that like to go in the store and like to look and feel. So we went in the store, kind of -- I just don't want -- I don't want this to sound creepy, but we went in the store and started watching consumers' behavior, if you saw what I mean. And what they really like to -- they didn't really like to feel much because it's not much you can feel. And -- well, particularly, at the moment, we're not supposed to touch things. But what they were really looking at was the sell by date, was the life. They want to make sure that on the shelf, if part of the shelf was replenished more recently, usually the back of the shelf, they want to grab that product. And that's when we altered -- effectively all our systems have to be touched to put product life on the site.

And today, Ocado.com has the highest fresh food sales of any full range supermarket in the U.K. So I think that -- and customer baskets, I think we've said historically, grow by over GBP 10 from the first shop to the tenth shop, as customers start to understand the quality and the freshness of the product they can receive from us as well as familiarity with the UI. And so whilst it's an interesting proposition to say, get your heavy bulky from us and come in and pick your produce and your meat, we don't see anyone -- the quality of produce and meats that we can pick for our customers is great. And we can avoid lots of people handling them in front of you. And we don't see it as an issue. If a client wanted to use -- to put a micro site in an existing store, they could. I would strongly advise them to have the chill and fresh in it. But I wouldn't stop a customer using it and doing a collection at site or from a part of the range and then buying the other part. I think in the explanation I was explaining before about building a micro site, to get micro site efficiency working, you need to do a material amount of sales, let's call it $20 million plus. And the issue there is if you're going to do $20 million plus and it's just dry [Ambien] and it's for collection because it's only good for collection if you've only got dry Ambien in it. They got to come to buy the fresh. You basically got to put 100% of the store sales through that channel.

And I'm not sure the market is yet at 100%. And so it's a challenging thing because if you build a -- you can't build automation, an operator and have the engineering on site to keep it live to do $2 million or $3 million of Ambien alongside some fresh food that you're going to sell in a single site. The economics are not going to stack up, okay?

So I'm a bit skeptical at the moment.

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Marcus Diebel, JP Morgan Chase & Co, Research Division - Research Analyst [31]

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Maybe just to add on this. I mean, then as a consequence because I think everybody can agree that the online share will go up and it's more convenient, but I still don't fully understand how the supermarkets then think about their branches. I mean, conceptually, they would say, okay, we've given these efficiencies. We just run the fulfillment center. Perfect. Yes. But they are having a lot of branches. So what would you -- from what you can say, how are your customers actually thinking about the branches about closes and how their model really looks like in 5 years' time?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [32]

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Look, I think let's remember that, at the moment, still, the main channel is from -- through the branches. And some of the branches, particularly usually in the urban, in the centralized urban areas, are still actually delivering great economics. It's just that sometimes, there are too many branches or some branches are in the wrong locations. It's definitely possible, and clients are definitely looking at carving some space out some of those branches. And we can put a micro site in there, and then they can, therefore, give 10,000 or 15,000 square foot of the site to run a micro site to do 15 million or 20 million of annualized sales to serve that catchment area. So that's a better utilization of space where they've got too much space in a catchment. That's one option.

If some hypermarkets are of a certain size, that if the economics of the hypermarket no longer makes sense and they can do the right planning changes, the size sites actually might be perfect for mini warehouses. So there are options of ways to reutilize things, but there may be challenges going forward with some sites that, if more and more people shop online, then -- if the market is not growing fast enough, there might be some challenges in some of the bricks-and-mortar sites for sure. Mic is just behind you.

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Thomas Davies, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33]

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Tom Davies from Berenberg. I have 3 questions. So regarding the sourcing of the MHE, what proportion of the parts are sourced from China? And have you seen any impact from the coronavirus? Essentially, like, what flexibility are you building into the supply chain of this?

Secondly, regarding Zoom. Are you able to provide a bit of an insight into the incrementality of these convenience shops versus the main shops of the customers coming through the CFCs? Essentially, are you increasing the absolute spend per customer, an absolute cash profitability of each individual customer? And then finally, on Zoom, what time frame would you expect it to be offered to partners?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [34]

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The first question on the coronavirus is a great one. I think it's a little early to be able to give you a fully accurate answer. The majority of parts we don't believe are coming from China, but there may be subcomponents of parts that are. And we don't currently have any delays as a result. There's at least one part where we are looking at alternative sourcing, where we believe we could encounter delays if we don't. It's a non-electronic, just solid casting part that we can manufacture elsewhere that was coming out of a part of China that's hard to get stuff out of at the moment. So we think we can mitigate any effects of the coronavirus. But obviously, that will depend for everybody on how extensively it spreads, et cetera, et cetera.

Zoom, look, I think it's fair to say that more than half of the sales are incremental. So there is some cannibalization and that -- of Ocado customers, more than half the sales are incremental, and then some of the sales are from nonexisting Ocado customers as well. So more than more than half of the sales are incremental.

Right now, given the fact that we're not using it with the right infrastructure that someone around here raised before, it's currently -- that's not improving our profitability as some of it migrates. In the long term, we would expect both for our clients and for us to have a similar net margin on sales, whether that sale goes through a big warehouse, a mini warehouse, a micro warehouse, whether -- so we would expect to be able to help our clients build a model. That means their profitability, they're indifferent, and our profitability as the supplier of the solution, we are also indifferent to where that sale goes through.

Can I just clarify one last point on your incrementality, and it's not affecting the basket size of the overall order. So they're not taking 80% of the order there and 40% there. It's an incremental shop. But overall, there is some cannibalization.

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Xavier Le Mené, BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director [35]

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Xavier Le Mene from Bank of America. Two questions, if I may. The first one, just looking at the pipeline you've got for the new opening for the CFC outside the U.K. So can you help us a bit to understand what is the time frame here going forward? And potentially looking at the EBITDA, where should we expect the EBITDA to break even for intentional solution, in what year?

Second, just on the balance sheet and where you are now. Are you happy with what you've got so far? And do you think that's enough to fund all the partnership, including Aeon? Or do you think, at some point, you would have to potentially raise more cash?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [36]

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Well, on the pipeline for a moment -- sorry, you just lost me on the question for a second. What was it? Where are we on the pipeline and...

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Xavier Le Mené, BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director [37]

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Yes. How much CFC per year, more or less?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [38]

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Look, I...

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Xavier Le Mené, BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director [39]

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For the year?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [40]

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It's increasing the CFC build per year. Obviously, we're expecting the first 2 to go live in the first half of this year. We're expecting the next ones to go live in the first half of next year. And then eventually, we'd expect to have a more, kind of, standard rollout. As you know, we said -- and -- the equivalent of, kind of, 20 warehouses of a certain size with Kroger over a 3-year period, so that's 6 to 7 a year. Plus, you can add on to that, so something for Aeon, the U.K., France, Australia, Canada and then the one site in Sweden. So -- and then potentially more. So we can see that number growing. So whether that's 10, 12, 14, 16, we have a trajectory. And we can see we're really more focused on the number of live projects that we have to manage at the same time. And obviously, that number could grow as people want to add in Zooms or somebody might decide to order 3 minis instead of a medium-sized one or something like that. So we're geared up for that.

It's just also worth understanding that our clients need to get planning and need to find the availability of sites. And so some of them have gone very fast, faster than anticipated. Some of them have taken a little bit longer than they had hoped. And so there's all that variability in there, and we have to be capable of managing that and deploying at the right time -- our resources at the right time on it.

In terms of the numbers part of that, I'll hand over to Duncan.

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [41]

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Yes. I mean, if you take the GBP 600 million CapEx this year, take off 85% for Andover because that's being funded elsewhere and isn't obviously going to repeat, and then allow for the fact that if you take a 40% growth on GBP 80 million of cash fees, call it, about GBP 110 million of cash fees, you're back to GBP 400 million cash outflow for Solutions. Ignore the retail business that can generate some cash, GBP 400 million cash outflow. So let's assume that's 3 years’ worth of funding because we've got GBP 1.4 billion of headroom. So I'm a CFO. So I'm conservative. So I'm going to sit there and say, well, in 2 years ago, I'm going to think about how you might fund the business. I can tell you what, in 2 years' time, the next 12 months EBITDA will look quite attractive. So I think if there is a need for funding there. And frankly, I hope that we're in a situation to say we do need funding because we've signed up lots more plants with lots more capacity needs. Then the profile of the EBITDA in the next few years will look quite attractive. So yes, there may be a need to more funding. Let's hope so.

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Xavier Le Mené, BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director [42]

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Just in the EBITDA in terms of the U.K. (inaudible)?

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [43]

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To a certain extent, I'm giving you the answer, which is in 2 years' time. The next 12 months should look pretty attractive.

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Bruno Monteyne, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [44]

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Bruno from Bernstein again. You didn't mention there was something special about the CapEx that you have to clarify, Duncan. Could you give that secret, please?

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [45]

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Bruno, you didn't pick up the hint. It was the Bristol. We're funding the building as well. Just to make sure that we pick that one up as well. Tom again.

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Thomas Davies, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [46]

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Tom Davies, Berenberg. One follow-up. Regarding the whole funding question, the existing callable bond was issued in 2017, which is before the Solutions business signed most of your deals. Now obviously, you're a much larger company. Would you consider addressing this bond, potentially replacing it with a larger one where you could get a low coupon?

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [47]

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So you don't look at the CEO with a funding question because that's my job. We'll obviously keep the capital structure under review and we'd do anything that gave us a more efficient form of capital. But -- so I don't think you should assume anything in the near term. But yes, we'll -- absolutely, we'll keep it under review.

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Stuart Alan Ransom Rose, Ocado Group plc - Non-Executive Chairman [48]

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We've kept you a long time. Any last question? Otherwise, we're going to (inaudible) now. Andrew, one quick last one.

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [49]

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One, Andrew, not 5 or 6.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [50]

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Yes. And it's Andrew, not Bruno. So...

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [51]

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Is it Andrew?

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [52]

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Yes. No. Sorry, but Bruno with his multiple questions. It's a quick question. It's a hard answer. Next 12 months, next 24 months, massive years for execution. Where do you think the key risks are? And any sort of particular things we should have in mind as you go live with partners?

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Timothy Steiner, Ocado Group plc - CEO & Executive Director [53]

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Look, to be honest, I get asked this question a lot. What is the thing that keeps you awake at night? And I would say if there's one thing that kept us awake at night, then we're not doing a good job of balancing the business properly. So I don't see a single risk, if that makes sense, or one thing. Obviously, it's complex to build in multiple countries at the same time, the amount of code that we're developing, the challenge of new robotic design and bringing down the operate -- the ongoing engineering costs, keeping the clients happy. I need to be in 5 countries at the same time sometimes. But I -- there isn't a single thing that I would say for you to watch out for because that's the thing that we're worried about but we're kind of hopeful because I actually think that we've got a good balance of resource on all of the challenges that we have as a business.

And I think it's just look for continued overall execution. Obviously, if we were sat here in 9 months' time and we weren't -- we hadn't turned those sites on live for our clients in Toronto and in Paris, you need to be asking some very serious questions to whoever is sitting in this seat because it won't be me. But -- so obviously, there are some very clear progress items that we need to make. But I don't see that being a thing that we're really worried about, if that makes sense. Plenty of stress and challenges on an ongoing basis, but nothing outstanding.

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Duncan Tatton-Brown, Ocado Group plc - CFO & Executive Director [54]

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And don't forget, all of our investors recognize that we are not a company that you'll invest in because you want slow, steady, safe, modest growth. So by its inherent nature, we're taking on more than most would do, which does not mean we're without risk. But I think our, as Tim says, our execution of that and the ability to constantly adapt to that means, yes, sometimes there might be some bumps in the road. But overall, we are looking with great prospects for the years out.

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Stuart Alan Ransom Rose, Ocado Group plc - Non-Executive Chairman [55]

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Tim and Duncan, thank you very much. Ladies and gentlemen, really appreciate your time today. Thank you.