Welcome to the Ocado full year results presentation for Analysts and Investors. You'll hear a presentation from management, and then there'll be an opportunity for questions afterwards. First, let's hear from Chairman, Rick Haythornthwaite.
Having been on the Ocado Group board for just over a year now, and chair since May 2021, I've been able to take a good look at the business and make some important observations. The first is that Ocado is a cauldron of creativity. Innovation really seems to be part of the DNA of the business. Throughout the organization, colleagues are motivated to take on some of the biggest technology and engineering challenges of the age, and then create practical solutions which, through our close and collaborative partnerships with a growing number of the world's most forward-thinking grocers, make a material difference to the lives of millions of consumers. This commitment to discovery, innovation, and improvement is encapsulated in Ocado Re:Imagined, the next leap of game-changing technology and innovation, which we unveiled during a virtual product launch held on January 26 this year.
Many of you will have been at that event, and I would encourage those of you who weren't able to join us to go to the on-demand replay on ocadogroup.com following our results presentation. In any case, we will be taking the opportunity today to reprise some of the messages from that event, and Tim and Stephen will be digging deeper on what Ocado Re:Imagined means from a financial and strategic perspective. Secondly, I have been consistently impressed by the energy, creativity, focus, and vision of the people of Ocado. A healthy culture creates the conditions for success, and Ocado has been able to retain many of the characteristics of a start-up, pragmatism, teamwork, constant striving to find ways of doing things better, with the power and organization that a big business brings to a collective effort.
This has never been in greater focus than during the COVID period, where challenging conditions called on the great reservoirs of resilience and teamwork within the company. I would like to take this opportunity to thank all my colleagues for the incredible work they are doing and the unflagging commitment they have shown to clients and colleagues alike. On behalf of the board, we are proud of you all. The grocery industry worldwide is at an inflection point, and in many respects, so is Ocado Group. Our challenge is to focus our creativity and harness our enthusiasm to take advantage of our many strengths and to decisively set the bar as we change the way the world shops for good. I can assure you that this challenge is well in hand.
Thanks, Rick, and good morning, everyone. The past year has further reinforced that demand for online grocery is here to stay. In the majority of mature markets, the fastest growing channel is online. To truly win here, food retailers need to deliver the best offer with the best economics across all customer missions. The innovation that is powering the development of the unique and proprietary Ocado Smart Platform is focused on providing an unequaled customer experience through groundbreaking technology, which also leads to an unrivaled low-cost operation. The new generation of Ocado technology, which we have called Ocado Re:Imagined, represents a transformational leap forward, allowing our partners to comprehensively out-compete peers online. Partners ordering CSEs today will be able to go live quicker, at lower cost, and achieve higher margins and returns on capital.
For Ocado Group, this means a bigger addressable market, the opportunity to win new partners more quickly, and fresh opportunities to accelerate growth with existing partners. Over the last 20 years, Ocado Group has been a pioneer in the development of online grocery retailing. With the innovations to Ocado Smart Platform we announced this year, we have again reset the bar, demonstrating decisively that an online grocery service powered by OSP is able to offer what the customer wants with the economics the retailer needs. We are gonna begin this morning with an overview of the FY 2021 results from Stephen Daintith, our CFO. I will return for a quick resume of what Ocado Re:Imagined means in practice for Ocado Group and its partners, and then Stephen and I will discuss together what this all means for us strategically and financially. Stephen, over to you.
Thanks, Tim, and good morning, everybody. It's great to be back again with you all for the Ocado full year results. During the half year results, I talked to you about my first impressions and the priorities I had defined in my role as CFO to support the continued strong growth of Ocado Group. Today, I wanted to start by revisiting these topics. My first impressions are even more strongly held. Our unique culture of creative problem-solving and self-disruption continues to unlock a growing opportunity set for Ocado Group. Ocado Re:Imagined reinforced this a couple of weeks ago. Now in terms of priorities, we've made good, broad-based progress since July.
I'm committed to strong communication around our progress as we deliver on an accelerating rollout of OSP globally, and conversations with many of our shareholders confirmed that this would start with incremental clarity on Ocado Smart Platform economics. Today, I'm pleased to say we'll be announcing some group solutions KPIs that will help you track our progress on the rollout of OSP, including towards the target operating cost we previously outlined. Now with respect to effective capital allocation, our recent Re:Imagined event highlighted seven key innovations that we expect to materially enhance the value of OSP, both for our retail partners and for Ocado Group. At almost GBP 1.5 billion, we maintain a strong liquidity position to support our bold growth ambitions.
Our successful GBP 500 million bond issuance in the second half was also an important milestone, reflecting the growing maturity of the group's capital structure and business, both as our first unsecured note and priced at a lower cost than the secured note that we concurrently refinanced. We've strengthened our finance team too, with some key new hires across group finance, commercial finance, tax, financial planning and analysis, and treasury functions. We've gone live with cloud-based systems for both treasury and accounting that will better empower us to deal with the complexities of scale and globalization. Similar work is also underway now for the supply chain. It's been a strong start, and I'm excited to build further on this progress in the coming year.
At a critical turning point for the industry, we are well-positioned to take transformation of the landscape for grocery retailing worldwide to the next level. Now let's have a closer look at our financial performance in fiscal 2021. The headline numbers primarily reflect three things. Number one, strong underlying performance in Ocado Retail, with second half performance impacted by the temporary disruption associated with the fire at Erith and the cost of the mitigation measures taken to address industry-wide challenges in the U.K. labor market. Secondly, our successful rollout of significant capacity for OSP partners in the U.K. and internationally. Thirdly, investment in the development of the Ocado Smart Platform. Reflecting relative scale, retail performance drives group revenue growth of 7%.
Growth in fee revenue from partners was strong in both our U.K. and International Solutions segments as we successfully brought live another further five Customer Fulfillment Centers for our partners. A GBP 12 million decline in EBITDA compared with last year reflects good revenue and gross margin performance in Ocado Retail and productivity improvements in U.K. Solutions & Logistics, offset by the impacts of operational disruption at Erith and significant investment in platform development. The increasing rollout of Ocado Smart Platform naturally brings high depreciation and amortization costs. These were only partially offset by net exceptional income and reduced net finance costs, resulting in an increased loss before tax. As previously highlighted, we maintain a healthy liquidity position of almost GBP 1.5 billion to support our significant growth ambitions. In 2021, Ocado Retail continued to build on the exceptional performance in 2020.
Underlying performance throughout the year was strong, but the second half was also impacted by temporary challenges associated with Erith disruption and U.K.-wide labor market challenges. As a result of these two competing forces, strong underlying trends and temporary disruption, revenue was up 5% in 2021, 6% if we adjust for the disposal of Fetch. Similarly, EBITDA was broadly flat at GBP 150 million, reflecting the same temporary impacts, in addition to strategic investments in marketing to support long-term growth. We'll look at each of these more closely shortly. Importantly, performance in 2021, even including the impact of the temporary challenges, continues to demonstrate an operating step change compared with pre-pandemic. 2021 revenue was up 41% versus 2019, while EBITDA has almost quadrupled versus 2019.
Performance on key KPIs emphasize the strong demand for online grocery that underpins this continuing step change. The business grew active customers by 22% in the year to 832,000, and now has its eyes firmly set on the 1 million mark. This strong new customer growth drove orders per week growth of 12% in the year, allowing capacity previously deployed to larger baskets to be reallocated to new customers as shopping behaviors began to trend back towards pre-COVID levels. Ocado Retail also successfully maintained the strong gross margin performance experienced in the first half of the year, including investments in retail prices. Now let's take a look at all of this in more detail.
Here, you'll see that the retail business achieved a 6.6% EBITDA margin in 2021, slightly below the 6.8% achieved in 2020. It's worth exploring here some of the differences in margin profile between these two periods. As previously mentioned, gross margin performance was consistently strong in the year, a result of a combination of higher order volumes, improved product mix, and the commercial sourcing benefits the strengthened buying team has been able to achieve following the Waitrose transition. Importantly, this meant the business was able to invest in retail prices and still achieve this strong margin performance. Turning to distribution costs, trunking and delivery costs increased slightly as savings from non-recurring COVID costs were more than offset by the impact of lower drops per van per week and investments in labor incentives in the second half.
The increase in CFC costs reflects the typical cost inefficiencies you would expect with the go-live of three new CFCs in the year, as well as impacts associated with the challenges of the second half, disruption following the Erith fire, and investments made in temporary incentives in a tight labor market. Importantly, though, underlying efficiency continues to improve. Units per hour at our mature sites rose to 170. That's inclusive of the period of disruption at Erith. Excluding this impact, it would be 172. All three CFCs that were launched in the year, that's Bristol and Andover, Purfleet, have already achieved this level of performance, and that's less than a year from go live. Now, looking at marketing costs.
We can see that the retail business is investing for long-term growth to drive increased brand awareness and strong new customer acquisition for years to come. Of course, 2020 also provides a particularly low comparable for marketing spend, given lower levels of customer acquisition during the pandemic. Increased capacity fees mirror the significant growth in available capacity during the year. As previously guided, robotic capacity also brings a relatively higher fee rate than our heritage sites, reflecting the improved levels of efficiency that this capacity brings. The rise in admin costs reflects investments in key teams, such as the buying team to support future business growth. This was partially offset by a reduction in the accounting charge associated with the senior management incentive scheme compared with last year.
During the third and fourth quarter retail trading statements, we talked about the temporary but acute challenges we've been experiencing in the labor market, their associated impact, and our plans to resolve them. It's worth a short update on this today. The main takeaway is that these are temporary issues which we are close to resolving. They haven't distracted either the Ocado Retail business or indeed Ocado Group from delivering on its long-term growth potential. You can see how the business has invested to accelerate growth in the left-hand chart. In 2021, Ocado Retail went live with three CFC sites, materially increasing available capacity for growth by around 170,000 orders per week in response to strong demand for online grocery.
Now, as you know, the impacts of the Erith fire, compounded by labor market challenges in the second half, constrained the business's ability to grow as rapidly into that capacity as originally planned in the near term. This impact is already reflected in our EBITDA margin guidance for fiscal 2022. Since the fourth quarter, we have continued to make good progress addressing labor shortages across delivery and CFC roles. We have now more than halved our vacancy rate since the October 2021 peak. On this trajectory, we expect to put this constraint behind us during the second quarter and for growth to build strongly throughout the year from there. We continue to expect Ocado Retail to deliver strong mid-teens growth in fiscal 2022.
This strong growth, combined with the inherent operating leverage in the model, underpins our ambition for EBITDA margins to rebuild towards FY 2021 levels following this, a year of significant investment in FY 2022. Of course, Ocado Retail is investing to support strong long-term growth, and the underlying dynamics we see in the market continue to support this decision. By the middle of this decade, online grocery is expected to account for almost 20% of the U.K. grocery market, and that's up from 12% today. With a leading customer proposition, Ocado Retail is well placed to seize this huge growth opportunity, as evidenced by the strong new customer acquisition achieved this year. Seizing this structural opportunity means investing in both capacity and capability to successfully support a much larger business in the years ahead. With this in mind, Ocado Retail continues to invest in three key areas.
Firstly, capacity. CFCs announced to date will bring ultimate orders per week capacity potential to around 700,000 in 2023. Today, we're announcing two further CFCs, with one for the Northwest and one for the Southeast planned for 2024, in total adding around a further 200,000 additional orders per week. Altogether, this will mean total potential CFC capacity for Ocado Retail of around 900,000 orders per week, more than double the amount of capacity that was available to the business at fiscal 2020 at around a 50% increase versus financial year 2021. Second, transformation. Investing in talent and systems that will empower the business to make the most of the opportunities to drive both growth and value into the future. Third, marketing.
As we previously discussed, a new multi-channel brand-driven approach will underpin improving awareness and continued strong customer acquisition and has already shown great early results. As you can see, the business is ready to drive strong growth. Our OSP technology means that growth will also bring significant improvements in efficiency as more robotic capacity comes online. That is before the impact of Ocado Re:Imagined, which we expect to further transform operating economics for our partners. Now, turning to U.K. Solutions & Logistics. You'll see similar drivers in the performance of this segment to those that we've just discussed in the retail overview. Strong fee growth of 28% reflects the increased capacity rollout for Ocado Retail and Morrisons return to Erith.
In total, the three new CFCs that we launched with Ocado Retail this year represented around a 20% increase in live sales capacity, meaning capacity that from a technology readiness perspective, is available to grow into. When fully ramped, our existing U.K. CFC base will now have a total potential capacity of over 750,000 orders per week. Now, this is before the additional 300,000 orders per week capacity from the sites expected to launch in the next two years, including the two new sites announced today that are each expected to launch in 2024. Cost recharges grew slightly ahead of total volume throughput, reflecting the inefficiencies associated with immature capacity, as well as the impacts of investments made in labor incentives in the second half.
This was partially offset by improving efficiencies in mature sites and on the road, which we share with U.K. partners through reduced cost recoveries. Aside from cost recharges, distribution costs also include engineering costs, for which our partners pay a fee. These costs naturally run higher in immature sites as a minimum level of spend is required for a live site, regardless of volume. Underlying progress continues to be very encouraging. Erith achieved a 36% reduction in engineering costs on a cost per each basis. That's despite the impact of the fire. Bristol, our mini CFC that opened in March, is already operating at a cost per each level that's similar to Erith. That's less than a year after opening. Admin costs increased ahead of revenue growth or as a result of investments made in additional headcount and technology resources in the year.
Overall, strong fee growth, partially offset by these increased costs, underpinned the GBP 24 million increase in EBITDA compared with 2020. Now, turning to International Solutions. We're starting to see revenue build strongly as we bring live more CFCs. We recognize GBP 49 million of fee revenue from OSP partners in 2021, quadruple what we achieved in 2020, and that's reflecting a full year of fees from sites in France and Canada, and the go live of two more CFCs for our partner, Kroger, in the U.S. The remainder of revenue is split between Kindred Systems and equipment sales to partners, the latter which has no impact on EBITDA.
Revenue from Kindred has taken a little more time to come through due to delays in contract signings, but we remain very excited about the long-term opportunity for their robotic picking solution, particularly in the general merchandise and logistics sectors. Of course, we've already gained significant value from the Kindred team in accelerating our progress towards delivery of a robotic picking solution for our grocery partners. The first installations of this solution will be delivered this year, and we expect to be able to pick over 50% of the range by volume by the end of 2023. Turning back to the OSP rollout. As mentioned earlier, we allocate a minimum level of engineering support to each new CFC at go live, and in the early stages of ramp to ensure our partners are best placed to grow into their new capacity.
EBITDA decreased by GBP 36 million, reflecting this support relative to the early ramp stage of our operational CFC sites, as well as a higher allocation of investments made in technology talent to develop the OSP platform. Though fee growth of 15% came in below our initial ambitions as travel restrictions remained constraints in most markets for the majority of the year, performance still highlights our strong pipeline of CFC and in-store fulfillment commitments, including those from our tenth partner, Alcampo, who we welcomed to the club in July. Indeed, we've already made a strong start to 2022, bringing three of the eight international CFCs planned for the year live since the year-end. As guided, 2021 brought increased capital investment in the accelerating rollout of OSP, both internationally and in the U.K.
Around 60% of our CapEx investment in the year was on CFCs, deployed to ramp those sites already live or across the 21 CFCs we had in build going into fiscal 2022. Development of the OSP platform continues to be our second greatest area of investment. Around half of this spend is allocated to delivering transformational innovation, such as the seven key innovations we explored in our January product launch, Ocado Re:Imagined. We expect these innovations to reset the bar in online grocery fulfillment, once again with respect to both cost efficiency and flexibility. This will enable our partners to grow faster and Ocado Group to reach a larger share of the sizable grocery market opportunity and faster.
Digging a little deeper into our investment in CFCs, you can see that over 60% of CFC CapEx was related to the ongoing rollout of OSP internationally in 2021, up from around 50% in 2020. This reflects the increasing scale of the international rollout. At the beginning of 2022, we had 21 CFCs in varying stage of build. This year, we will deliver a total of nine CFC sites, almost doubling our live CFC count once again. Happily, we have a healthy liquidity position, with almost £1.5 billion in cash and cash equivalents, enough to meet existing commitments and deliver future growth in the near term. Operating cash flow was marginally negative in FY 2021, which primarily reflects a large working capital outflow as the group continues to scale.
This was partially offset by strong retail trading performance and growth in invoice fees from International Solutions partners. That's shown in contract liabilities. Looking at cash flows related to financing investment, inflows primarily related to a drawdown of treasury deposits not previously included within the cash definition, and the net proceeds of the bond refinancing and issuance we completed in the second half. These funds were used to fund the investments made to support future growth, capital investments, and the acquisitions of Kindred and Haddington. We ended the period with gross debt of around GBP 1.8 billion, a net debt of around GBP 350 million. In 2022, the rollout of OSP globally is set to scale dramatically. We're ready to bring a leading online service to hundreds of thousands more customers for our partners.
The online channel is becoming an increasingly important part of grocery sales in most markets around the world. This trend is only expected to increase. Those that invest now for the long term will take the lion's share of the huge opportunity that this represents. These two things inform our outlook for fiscal 2022, the increasing rollout of capacity for partners and investment to both drive a bigger opportunity and seize it sooner. We already provided guidance for Ocado Retail at the fourth quarter trading statement, and this is reaffirmed. With respect to our solution segments, expectations for strong fee growth in U.K., Solutions & Logistics, and especially International Solutions, mirror the significant capacity we expect to deliver for our partners.
We expect EBITDA to increase strongly in U.K. Solutions & Logistics, reflecting the increased fees we will receive from bringing on more capacity for our clients, as well as a reduction in engineering costs relative to this live capacity. Guidance for EBITDA stable on 2021 International Solutions reflects the investments we are making in our technology teams to deliver a new age of OSP technology for partners, as well as the minimum level of engineering support we put down for partners to best support them in the early stages of CFC ramp-up. This increased technology investment can also be seen in our guidance on central costs. Though we are making important investments, group operation costs are expected to grow below group revenue. In future years, we expect central P&L costs to grow significantly below group revenue growth, reflecting inherent operating leverage as the business scales.
Finally, we expect CapEx of around GBP 800 million this year as we bring more sites live and continue to ramp others. Unsurprisingly, the largest share of this will be dedicated to the rollout of international sites, although with a meaningful proportion remaining in the U.K. with the two new CFCs that we've announced today. Let's talk now a little bit about the Ocado Re:Imagined event we held a couple of weeks ago. Ocado Re:Imagined is really groundbreaking new technology that is an absolute game changer to Ocado OSP and the online industry. We announced seven innovations where the sum of the parts doesn't reflect the total impact of these innovations. Let's go through them one at a time. Firstly, the new 600 Series bot.
Amazingly, coming so fast on the heels of our amazing 500 Series bot, of which we're already so proud and is achieving so many of the metrics that we need it to hit our long-term plans. We went out there to see if we could do something absolutely radical, and that's what we've achieved with the 600 Series bot. Using ultramodern topology optimization software, we've been able to design a machine built using additive manufacturing with over 300 3D-printed parts, and we've removed 80% of the weight of the bot for this new 600 Series bot. It's materially cheaper to manufacture and to maintain than its predecessor, but the weight has enormous impact as we go through the grids, the floors, the buildings, et cetera. A massive improvement and absolutely the cutting edge of innovation and manufacturing. The 600 grid.
Taking advantage of the lower weight of the 600 Series bot really means taking advantage of the lower forces that it generates. Because of that, we've been able to introduce a new lightweight 600 grid that is also much faster to put up and is capable of being erected in parallel rather than in sequence. We're able to build it quicker with a lot less material and at meaningfully less expense. We're also optimizing the design of our grids, and we're now able to install them in many existing buildings, which clearly can have a material impact on the time between a client deciding to build in a new city and getting that facility live and ramping it up. Automated Frameload
Replacing one of the most physically demanding jobs in our warehouses, literally doing the work for the human of lifting the customer bins and placing them in the frames. A process that we optimized many years ago with advanced algorithms to ensure we put the right totes in the right order in the frames, to minimize the strain on the humans that are unloading them, to make sure the vans are equally balanced, to make sure we're always taking the front tote out before the last one on our routes. Now not having to use a human to do it, doing it using a machine and literally, as I say, taking out the toughest physical job in the warehouse. The next and phenomenal innovation is On-Grid Robotic Pick. You would have seen our robotic pick arms before working in our existing warehouses.
We've had some live in Erith for a while. We've moved them on top of the grid. It's hugely significant in terms of the throughput it means that we can achieve, in terms of getting more throughput from the same warehouses, in terms of the cost to install the robots, and therefore, the savings that can be split between ourselves and our clients, and the virtuous cycle that that creates. The On-Grid Robotic Pick arms are only able to do this now because of the lighter weight arms they're able to use and the very, very complex coordination and collaboration between those arms and the robots that are moving around on the grid, where the robots are dropping bins in front of the arms that the arms are subsequently dipping into and picking from.
Remember that robotic pick is complicated, actually, not so much because of the pick, but because of the pack because it's absolutely important that the robot packs with at least the same density that a human could, so we don't generate more totes to deliver to customers. Lots of advanced technologies, advanced vision, and a lot of coordination with the robots going live at the end of this year in our first sites, initially covering around 50% of the range, growing to 60, 70, 80 in the next few years.
Really excited about Ocado Orbit, the world's first virtual distribution center, allowing our clients to build smaller warehouses, but still maintaining the inbound efficiency and the direct delivery capability of big warehouses, which will be worth hundreds of basis points in their cost structures, but doing that in smaller warehouses without the need for a large physical regional distribution center that supplies them by basically taking that regional distribution center and building it in software. Each of the small warehouses acts both as a distribution center, as a picking center, and as a delivery depot. The second part to Ocado Orbit is the ability for any one of those centers to serve as a primary distribution center for new microfacilities, allowing our clients to compete in q-commerce with ranges that are completely unmatched in that sector.
Instead of 1-2,000 products that the dozens of entrants into that sector have in their little microfacilities, enabling 10,000, 12,000, 15,000 products and at a very small, incrementally higher handling costs than in the big facilities, meaning that you can get a big supermarket offering out at convenience store pricing, but in a q-commerce type format that will just blow away that industry. It's super exciting. Ocado Swift Router, enabling very short lead time deliveries from large warehouses on optimized large routes.
Now, instead of having to choose between a crowdsourced store picker who can deliver point-to-point back to a customer's home for, say, a two to three hour delivery from a store's range, but at 20% or 30% premium in pricing, being able to operate at full automation scale efficiencies, but being able to deliver to a customer's home in one, two, and three hours for maybe 30+% of the output of that facility, and being able to do same day for up to, say, 60% or 65%, taking advantage of the unique nature of our hive automation that allows us to store completed customer orders at the end of the process without having to ship them immediately in order to keep the warehouse functioning. We can pick overnight.
We can then open the website during the day and take orders that we process immediately, combine them with some overnight orders, and put them in a van route where the van spends the first, say, two hours of a four-hour route delivering orders that were only placed in the previous hour, bringing goods to customers 50 km range at supermarket prices in one to three hours, and using the return leg of the journey to deliver the today for tomorrow orders that had been placed. Phenomenally clever and only available with our hive technology. Ocado Flex. Ocado Flex is what is known in the industry as headless e-commerce.
One of the issues that some of our potential partners have had was their own desire to control more of their front end or to integrate some of their own apps or capabilities into our front end, maybe for their store-based experience.
Ocado Flex contains two sets of APIs, our core APIs and our smart APIs, and allows our clients to build their own front ends at very low cost. Integrating in any other APIs, any other bits of functionality or data they want from their own systems or from third parties, maintaining that level of control, but leveraging our core and ultimately whichever they want of our smart APIs to make sure they can still achieve the best-in-class experience for the e-commerce customer while, for example, integrating a scan and go functionality in store, or making sure that something that is on offer in the scan and go app in store can be moved instead into a basket online. Giving more flexibility to our partners and something that they've really been asking for the last few years.
Now I'm joined by Stephen Daintith, our CFO, and we're gonna talk about what we see as the scale of our opportunity.
That's right. Ocado Re:Imagined, Tim, two weeks ago now, very exciting event. You talked a lot at the event about the virtuous circle of Ocado Re:Imagined and the way Ocado works. Can you bring that to life a little bit more? What do you mean by that virtuous circle?
I think the first thing is we've often, you know, taken what we made in our retail business historically, but basically, we're very big innovators, we're big investors, and we have over the last few years increased the investment in our platform to not just keep it ahead of the competition, but to just massively drive it forwards. That's what Ocado Re:Imagined was about. What does it mean from an Ocado Group business perspective is really if we can enhance the platform in the way that we have, so we can make it lower cost for us to produce, passing on some of those benefits to our clients, so lower cost for our clients to deploy, then, you know, that's obviously a good thing.
If at the same time, we can make it not only cheaper, but actually much cleverer, so that what it can do for our clients and what they can then offer their customers is better, i.e. they can offer their customers, you know, 60%+ same-day deliveries out of the bigger warehouses, and maybe, you know, a third or something going out in the first one to three hours, matching kind of the best short lead time services coming out of supermarkets, but with all the economics that you could achieve from the big warehouses and from, you know, planned routes. Right? If we can do that, we create an opportunity for faster partner growth. They'll grow faster 'cause they can serve more customers from the same buildings for more missions.
They'll grow faster 'cause the capital they need to deploy to do it, towards simpler buildings and things like that, is less. Also to the extent that simpler buildings means existing buildings, and the time frames from starting to deploy or make those decisions to have a building, to getting it live, to ramping it up also shorten. Things like On-Grid Robotic Pick mean you need to hire and train less people in the building when you open it to go from, you know, start to full capacity.
Overall, there really is this kind of virtuous circle, virtuous cycle where you know, our increased investment allows our customers to have to invest less to actually be able to do more, and they'll grow faster, and therefore they'll deploy more, and therefore, ultimately, you know, there's more for us to justify the investment and carry on with an increased investment. With you know, 10 partners already on the platform and hopefully more to come, you know, we really are benefiting from the scale, creating the investment opportunity, creating a product that's unmatched in the market. We just think we're creating that virtuous position that nobody else can match.
As you described that, Tim, it's a package that must be extremely attractive to our partners, our clients. Anyone, any responses from our clients so far the last couple of weeks?
Sure. Look, I mean, everybody got to see our largest client, you know, because we gave them a sneak preview. Anyone that didn't get to see it in Ocado Re:Imagined should go and watch it. Obviously, we saw Rodney, the CEO and Chairman at Kroger say, you know, groundbreaking, a game changer. You know, these kind of emotions were the type of responses that he was giving about what this meant and, you know, moving on to the next phase of our partnership and accelerated growth and stuff like that. You know, I've had reactions from our other clients who are also, you know, reinspired, really exciting, need to rethink about what this means and how we invest and how we grow together. During the pandemic, new services came up, new offers to customers.
I think some of the things that it's clear, you know, much clearer after we've announced Reimagined that our clients can do to be the best in class in every mission, really positive reactions. A lot of people saying, "You know, we want more information. You know, we wanna understand how much cheaper, how much gets passed on to us. How do we, you know, what does this mean? How quickly can we get that software live? How quickly can we be using a big shed to, you know, do two-hour deliveries? How many two-hour deliveries can we do from a big shed in a one-hour radius?" You know. Really busy time for our teams because everybody, you know, it's really opened people's imagination as to what's possible, and it answered so many long-term questions.
That's right.
Even talking to prospects over the last, you know, six months or a year, people have had said, "where's this all moving to in short lead time and, you know, q-commerce and range sizes and, you know, today for tomorrow and sheds?" I think this just really helps people to understand, how do I build the lowest operating cost model but deliver the best service in not just accuracy and pricing, but in accuracy and pricing and lead time.
Yeah.
Big excitement.
Tim, let's talk about our operating cost model. The good news is that we're well on track with all the goals that we set ourselves. What does Ocado Re:Imagined mean? We've heard a lot about the improvements that Ocado Re:Imagined innovations are gonna bring. What does this mean for us? What does it mean for our clients, more importantly?
Look, it means there are significant benefits. Capital costs coming down in robots, capital costs coming down in grids, as well as new things as well. We're gonna share those benefits with our clients, and in fact, we're gonna be super generous in that sharing. The way I think about it is the way my broadband provider has, you know, treated me at home for the last 10 years or so. You know, every couple of years, they charge me a little bit more. That's like the inflationary increase in price, but they keep upping the ante on what I'm getting for it.
We're gonna take some of those savings from those cheaper robots and those cheaper grids that would be on our side, and we could just take to profit and actually reinvest those in giving our clients things like robotic pick that drive significant cost enhancements for them that we know they will pass on to their end customers, and therefore will grow the demand, grow their need to build sheds and the amount of sheds that they have and the speed with which they scale them up. We create a virtuous cycle for their customers, for our clients, and for ourselves. That's how we're looking at it.
you know, we're talking about site productivity up over 50% for our clients, which, it means that they get, you know, more than a 30% saving in their, in the labor cost they put into those sites. These are quite big numbers, and this is only the beginning, of course.
Great. Thanks, Tim. We've heard a lot from our shareholders, from the market generally. They'd like to hear more about our key performance indicators for our solutions business and to be able to judge our performance. We've shared two or three of these, today for the first time. Do you wanna talk a little bit more about how we're measuring our own performance?
Yeah, look, we want to make sure that you can understand, you know, what we're doing. We put some indicators out there to explain what's, you know, what we've managed to get live, you know, the kind of scale of what's going on in the business, and also the direction of travel and the really important cost lines as well, so people understand how we're, you know, what the progress is that we're making.
Brilliant.
Thanks, Stephen. We could talk about all this all day, but we've only got a limited amount of time.
Thanks, Tim. Really enjoyed it. Cheers.
That brings us to the end of this presentation. Here are our main takeaways. The grocery market is at inflection point. A huge market opportunity exists online for grocery retailers who can deliver the best customer proposition with the best economics across every customer mission. The game-changing innovation driving the development of the Ocado Smart Platform allows our partners to fully take advantage of this opportunity. Partners ordering CFCs today will be able to go live quicker, at lower cost, and achieve higher margins and higher returns on capital. For Ocado Group, this means a bigger addressable market, the opportunity to win new partners more quickly, and fresh opportunities for growth with existing partners. We have consistently set the bar in online grocery retailing over the last 20 years.
Our deep culture of innovation is enabling us once again to reset the bar decisively for the benefit of our partners, their customers, our shareholders, and the communities we serve. Exciting times are ahead.
If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will now take our first question from William Woods from Bernstein. Please go ahead.
Morning, Tim. Morning, Stephen. A couple of questions from me. The first one is just on the guidance on flat international solutions EBITDA despite doubling the revenue. Could you provide some more detail on the drivers of this additional cost? I suppose what I'm trying to understand is it the structural changes to the cash profile of the CFC, or have you got a mix effect from ramping or headwinds from inflation? The second question is on the 600 Series bots. Are you able to give us a view of kind of what percentage of bots will be live by the end of the year? Over how long will you expect to kind of replace them over time? A final question, just on the non-food opportunity.
Have you seen any further uptick from potential partners on non-food?
Okay. Well, I'll do the first one, Tim, on the International Solutions. Two key drivers here. Number one, the investment we're making in our technology platforms for the Ocado Smart Platform. We've highlighted today another GBP 30 million or so there. That's one key driver. Secondly is, I think, the engineering cost. Now, every time we open a new CFC, there's a minimum level of engineering support for that particular CFC, and so there's a natural inefficiency in the earlier CFCs internationally and indeed globally. Those are the key drivers really. Those two key drivers get us to the guidance that we're giving today.
William, taking up to the six hundreds, we'll start rolling them off the production line about 12 months from now. About 24 months from now, they'll be the exclusive bots that we roll off. We'll have probably about a year in the middle where we'll be manufacturing both five hundreds and six hundreds. I think I've explained already that you can use six hundreds on any of the grids that we've built to date. You know, any sites that have gone live can end up with a combination of five hundreds and six hundreds. As we go forward and build grids that are lighter weight and taking advantage of the lower forces that the six hundreds create, we will not be able to run them with a full fleet of five hundreds.
We may be able to run some 500s on them, but not the density of 500s that would then create too much forces and ultimately end up with metal fatigue on those grids. The third part of your question was non-food. There are significant opportunities in non-food going forward so that the 600 and 600 grids open more than were historically available with the 500s and their grids. 'Cause the 500s in their grids, because of the extremely high performance levels that they're able to achieve, which we match with the 600s, meant that the grids were thicker, more expensive than some others out there in the market that are not able to achieve those throughputs.
with the extraordinary reductions in weight in the 600 Series, and therefore the lighter grids that they need, you can gain the benefit of the low costs and the extreme throughput capabilities. It means even on low throughput sites, they would still be the cheapest machine out there of its type to manufacture.
Understood. Thank you.
We will now take our next question from Fabienne Caron from Kepler Cheuvreux. Please go ahead.
Yes. Good morning, everyone. Three questions from my side, please. Regarding the metrics for Ocado Re:Imagined, in the past, you used to help us, saying if we take an Andover like CFC, the cost for you would be GBP 50 million. We have two-year preparation, one year then go live and 5% capacity fee. I'm just wondering how these metrics will change, as we move to the new grids and the new bots. It would be the first question. The second question would be if you move into non-food, will you work as well with exclusivity, and is exclusivity key as well for your new countries? I'm thinking here because you can go smaller, maybe there may be more food retailer in the country that could be interesting now to use your solution.
The last question would be, financially, where do you expect your net debt to be at the end of 2022, please?
Fabienne, I'm gonna take the first couple of questions. The model that we work with our clients is gonna remain very similar to what you outlined. Obviously Re:Imagined means that the bots will be cheaper for us to manufacture. The grids will be cheaper and quicker for us to install. The go-live time from the client will be shorter than it was before. Because of the robotic, we'll then reinvest some of that saving into robotic pick and into automated frame loading. Overall, we'd expect the client fees to be there or thereabouts. We'd expect the margins to be slightly higher than they were before. We would expect the clients there to go live faster.
Also because of the lower labor requirements to operate the facility, we'd expect the clients there to ramp them faster. Because of the increased opportunities to cover more missions in terms of shorter lead time deliveries as well as the existing kind of services, we'd expect the client demands to grow faster as well. Hopefully that gives you a flavor on what Reimagined means for the modeling. In terms of the non-food and exclusivity, I don't envisage us giving exclusivity to anybody in non-food, and none of our existing exclusivity arrangements cover the non-food area. Then the final question around where do we expect net debt to be.
Well, I think the key driver here is the GBP 800 million of CapEx that we've guided to for 2022. We're starting the year with GBP 350 million pounds or so of net debt, so I think around GBP 1.1 billion pounds is probably a good guide for our net debt at the end of the year.
Okay, thank you. Just to come back on Tim's comments, it's fair to assume that the CapEx from your side should be lower than with an Andover like previous CFC.
Yeah. The CapEx going forward will be lower, but as William said before, you know, that's not gonna affect 2022, but that will start to hit in 2023 and hit more materially in 2024. CapEx per-
Okay. Thank you. Very clear.
For the capacity. I mean, obviously what we'd like to build more capacity, but yeah, CapEx per billion of capacity will come down. Yes.
Okay. Thank you.
Thank you.
We will now take our next question from Victoria Petrova from Credit Suisse. Please go ahead.
Good morning. Thank you very much. My first question is on total addressable market. What are the new customer characteristics which could or would not have signed before and might sign now after Re:Imagined OSP has been introduced? What is the game changer in the customer profile expanding your TAM? My second question is sort of a follow-up from Fabienne's. Should we assume that new partnerships might not have exclusivity in food, obviously in countries outside of your existing exclusive partnership countries? My third question, could you remind if you have a target capital structure in mind? Thank you very much.
Victoria, on the TAM, there's two separate things that Re:Imagined is doing for us. One is that because the robots and the grids in particular are materially cheaper than the existing ones, they open up markets where the cost of labor is cheaper than it is in the existing markets that we operate in and that we've previously targeted. Because obviously, as well as delivering a better service and range capabilities that you can't really do manually, our system obviously has already taken out significant labor in exchange for capital. Obviously, as you lower the price of the capital that you have to deploy to do that, it opens up new markets that you can do that in.
It just means that we will be targeting markets that have, you know, that are lower income than the ones that we've just historically targeted. The second part is that within any market that we're operating in, Ocado Re:Imagined is opening up more missions.
If customers now want to see kind of two- to three-hour type services, things equivalent to what, you know, the likes of Instacart would tackle in the U.S., those kind of markets, you know, those kind of missions or opportunities or market share is now available to our customers out of our fully automated warehouses on optimized delivery routes. With the Ocado Re:Imagined infrastructure installed in small micro sites, obviously the whole q-commerce market is available, but with significantly larger basket sizes and market share available to our clients because of the ability of Ocado Re:Imagined to carry, you know, 5x- 10x the range that you'd expect to get in an existing q-commerce operator.
Combination of countries that were previously considered to have too low labor costs to warrant automation, and secondly, more market share in existing and those markets. On the exclusivity question, I think that, you know, exclusivity is still something that we look at on a deal by deal basis, on a market by market basis, and depends on the scale of the client, their desire for it, and how aggressively they want to deploy capital and their confidence and our confidence in them achieving significant market share. We have no obligation to either do it or not do it in a market. I see nobody in the general merchandise area, if we were to move into that would warrant having exclusivity. On the-
No, I'm asking about food. Mm-hmm.
As I say, on food, it really depends on who the partner is. If somebody wants to come in and, you know, is clearly aiming for a number one market share position and, you know, very clearly wants to have the exclusive availability of our proposition because they see it as such an enormous advantage, then clearly we have that discussion and we'll see, you know, market by market as we roll out to new clients where we end up on that one. Then the final question on, do we have a target capital structure in mind? Well, first of all, I'd make a point that the most important thing for us is to have healthy liquidity for our investment plans.
We think now is exactly the right time to invest to scale and capture the growth opportunity set that we see ahead of us. I think Ocado Re:Imagined a couple of weeks ago only reinforced that. Having liquidity is incredibly important to us. We have GBP 1.5 billion of liquidity today, which is clearly 2022 depending on capital plans. We would rather be a pure debt-funded company, and I think a key thing to get us there would be generating positive cash flow, which you know we are increasingly moving towards as we add, in particular, to our portfolio of automated warehouses. We finish this year with 10. We're gonna finish 2022 with around 19 or so, and then we'll be adding to that in 2023 as well.
We'll be reaching that point over the next few years when we start to turn from burning cash to generating positive cash flow. That's how we think about capital structure. I think the key point is having healthy liquidity, which is what we have today.
Thank you very much.
We will now take our next question from Andrew Gwynn from BNP Paribas Exane. Please go ahead.
Hi there. Yeah, good morning. Two, if I can. First off, just on the CFC build out, I think we used to think about a figure of around about GBP 50 million for a standard size CFCs. I'm mindful that you're not building too many standard size CFCs, but where's that, where do you anticipate that getting to? Obviously, the 600 robots and so forth, more capital efficient, but obviously we're seeing quite significant inflation in many of the products made that make up the robot and the grid. Second question, I know kind of bigger picture question, but if you stand back and think about the last couple of years, I think it's fair to say the market has been a little bit underwhelmed by the number of partners that have signed to the platform.
What do you think is really holding them back? Can we expect a step change anytime soon? Thank you.
Hi, Andrew. The first one I'd say is, look, the savings that we're making on grids and robots as we deploy 600s and the new grids significantly outweigh any inflationary pressures that we're seeing on the costs of those sites. You know, where you do see inflationary, if that passes on into food, then obviously as a percentage you know, CapEx as a percentage of the sales capacity and CapEx as a percentage of the fees would actually be staying flat. It's ignoring inflation. These are two very significant reductions in cost. Some of which we will redeploy into increased automation in terms of robotic on-grid robotic pick and Automated Frameload.
We would expect to see our CapEx as a percentage of sales capacity come down, as we're moving forward, even though we're putting in the incremental infrastructure. On your,
Are you able to give that? Oh, sorry, Tim. Are you able to give that percentage today? 'Cause I think I've certainly lost track of what it costs to build a CFC. I think there's been so many moving parts.
Well, I think, you know, we don't put out a forecast exactly. I think a lot of people have got a fairly good idea where they think those come in. I think you mentioned the number before. I think it's not wildly off. As you say, it depends slightly on the size of the facility. Obviously, smaller facilities pro rata cost less. Very slight increase in the percentage cost as they get smaller. There's some efficiency. There's some, you know, efficiency in scale, but very small amount. Moving on to your next question about, you know, Andrew, we're sitting here, it's only, what is it, four years now since people thought we weren't gonna sign one, where it was us and Morrisons. We're now sitting with 10 customers or clients on the platform.
We expect that number to grow. I can't say exactly when or by how many. We've covered some of the, you know, in terms of the developed, or kind of higher income countries, we've covered off some of the largest ones already in the U.S., in Japan, for example. In terms of the high penetration markets like the U.K., we've got two clients. I do expect us to see more. You know, what's also critical is the growth in those existing markets, the incredibly high NPS scores that people are achieving as they're rolling out those facilities. We've gone from no international facilities to, I think, seven international facilities at the moment. You know, we've got nine new facilities going live next year. There's a lot of activity.
I think, you know, what's really happened with Ocado Re:Imagined is there's a lot of conversation right now going on with our existing clients and with potential clients. Huge excitement about what that brings to the offer, to their economics, to their ability to deploy faster and stuff like that. Lots and lots of activity. I don't think we've ever been busier.
Okay. Thanks so much, Tim.
Thanks.
We will now take our next question from Nick Coulter from Citi. Please go ahead.
Hi. Good morning. I have three, if I may, please. Just one by one, please. Firstly, can I press you on the scale of the reduction in capital costs for the 600 robot on grid, please. Now, I guess the frame of reference was the 13% of GMV that you talked about for Erith. Are we talking 10, 20, 30% reduction? Obviously, it's useful to understand the unit economics, please.
Well, you know, we're talking about an 80% reduction in weight. We're not talking about an 80% reduction in costs, but we are talking about probably more than the numbers that you were talking about. You know, the higher end of the numbers that you were talking about on a robot, on grids. Obviously, robots and grids are not the entire install. You still got the peripherals as well.
Yeah.
We're talking there about swapping out, you know, 50%-80% of the human pick stations for robotic pick stations, and then we're talking about adding the frame loading machines, but they have phenomenally attractive returns. Overall, we're talking about quite significant double-digit reductions in cost of those facilities. Equally-
Including everything that you've just mentioned.
Yeah. Equally, we're talking about the redesign of the facilities, meaning that they are also for the same amount of throughput, a double-digit % smaller, which, you know, pretty closely equates to a reduction in the capital investment by the client in their building, 'cause they tend to be on a per sq ft basis, as well as a reduction in the requirements of the remaining space in terms of the things like the thickness of the slabs or the quality of the slabs or the amount of electricity required or things like that. We are talking about material savings across the board.
In terms of labor, as we said before, we're talking about 30%-40% reduction in the amount of labor required in the building, which obviously is super meaningful in terms of the client's economics and the overall efficiency of this platform versus anything else. It's huge.
Okay. Great. What you're effectively saying is that even after you've put the picking arms in and removed the human pick stations, you put the frame loading in, you're still gonna end up with a capital percentage of GMV that is lower than you started. I think you said double digit down. Is that correct? For no extra fee, I guess, is the question?
There are some extra fees 'cause there's some extra services as well. You know, things like On-Grid Robotic Pick, you know, you're running the compute for On-Grid Robotic Pick, you're running the teleoperations for the On-Grid Robotic Pick, for example. We've got two teleoperation centers, one in North America and one in Asia, that currently-
Mm.
manage the robotic pick for the Kindred Systems and are now running the same thing on the we'll run it on the first installations of our On-Grid Robotic Pick. There are incremental costs, and obviously there's engineering costs to continue to manage the Automated Frameload and stuff. Fees may go up very slightly, but very slightly relative, you know, i.e. the majority of the savings that the clients have in taking out the pickers and the frame loaders, the majority of those savings are going to the clients.
Okay. Will you see lower engineering costs as well?
Nick, we obviously do need to recoup some money for all of this R&D work through that you all-
Yes.
The engineering costs on the 600 Series bot. The bots represent the majority of the engineering costs at a site. We would expect the long-term engineering costs on a 600 Series to be materially lower than they are on a 500. The 500s are getting very close to our long-term targets that we set out kind of a while ago for this business to achieve. The 600s we would expect to be significantly more, you know, significantly better both because the design kind of manufacturing process allows a faster turnaround. If there is a part that you see an issue in, you know, you can do a redesign, a prototype, a test, and a deploy very rapidly.
Also because the actual parts are significantly cheaper, and therefore, if you do replace a motor or you do replace a physical component, you know, the parts are significantly reduced.
Okay. That 2% cost that you have below the fee, presumably that will come down by, I don't know, 25%, 30% or something like that. That's the margin accretion that you're referring to.
Look, we're not getting into very specific numbers. Yeah, we would expect to see some margin accretion. We are, as you know, investing that, you know, that margin accretion over a number of sites into the R&D that the clients and their customers benefit from. It's to allow this continued and accelerated pace of innovation.
Got it. No, that's very helpful. One last one, if I may. Can I ask about the frictional inbound and outbound costs that you get from taking inventory around the Ocado Orbit solution? I guess you're obviously enabling a lot of flexibility, but are there any additional costs?
The way that you think about it at the moment is there's two alternatives, right? One is that you run one big warehouse and you run two spokes. If you run one big warehouse and you put, say, 40% of the goods direct in small vans and 60% of the goods go out of a spoke site, you actually move 60% of the goods in a one-way transportation from one warehouse to a spoke site, right? Then you take the trailer back empty. If you now run an Orbit network, you move, say, 66% of the goods rather than 60% of the goods, but you move them where the van is, the trailer is always full when it's moving, and therefore you actually end up transporting less goods.
Because you receive the full, the same quantity that you would have done in a big warehouse at one of the three warehouses for each supplier, your inbound efficiency is the same. You transport you know, 10% more goods, but you transport them on less routes 'cause you don't have the empty legs. You maintain very high levels of availability, 'cause if you need to reposition stock after you've moved it once, you can do that 'cause you've got constant moving, movement going on. You maintain high availability, large range, low waste, and you can actually transport, you know, with less transportation routes.
Clear.
We will now take our next question from Simon Bowler from Numis. Please go ahead.
Hi, good morning. First one, can you just talk a little bit around invoice fee growth? I think that came in a bit weaker than you're expecting for the year just gone, so perhaps give a bit more color around that. I don't know if that's a number you can kind of talk or guide to at all for the year ahead. Then secondly, this is maybe trying to ask the same question that others have been getting asked in a slightly different format. Can you talk at all about kind of the different return on capital profile that you're expecting to see? Are you kind of capturing your comments around CapEx and margins under the Ocado Re:Imagined slash Series six hundred versus what we've seen thus far?
Thank you. I'll cover question number one, revenue fee growth in International Solutions. This is an item that is driven, of course, by new deals that we announce and the revenues that we're getting from that. The fees we're getting from that, I should say. I think they can be quite binary, so giving guidance is extraordinarily tricky because it's down to one or two contracts and whether you get them over the line or not. I think it's fair to say that we had hoped for more of that happening during 2021, but part of that thinking was aligned around COVID not being part of the year and everyone's experience. That once again has restricted travel.
Now that travel is opening up, we are in a number of live conversations, so we'd hope to get those to a successful conclusion shortly. That's where we are on that particular topic. Tim, do you wanna cover return on capital?
Well, look, Simon, I think you know how this works as well as I do. If we can get the capital costs of what we install up front down, and we can do it quicker, then also our kind of management costs of doing that are lower. If we can take the same upfront fees from the client, then the net investment is net lower. If we can charge slightly more fees 'cause we're doing considerably more services for the clients, but we can do it without having higher overall operating costs, then the annual return is higher. You've got a higher return on a lower investment, and obviously that drives an improvement in the percentage return.
The exact amounts will, you know, will need some time to quantify and are something we don't give guidance on anyway. You know, it's hard to know exactly what the cost of maintaining a fleet of 1,000 500 Series robots is, 'cause we haven't printed that many yet. We haven't operated that many at full scale. We have a pretty good idea 'cause we know what the key components are that we replace on a 500, on the 400 and 500 Series robots. We know we've made some really clever moves to make some of the key wear components either last materially longer, be materially quicker to replace or repair, and be materially cheaper in the wear part.
We're making, you know, just phenomenal progress. If you look at other things like even in the software where you look at the number of escalations in the last quarter in the warehouse software, for example, and I think with, you know, we have something like double the number of warehouses operating and half the number of escalations. You see that the escalations per, you know, per warehouse are just coming down dramatically as we're improving the quality of the software. Is she still there?
We will now take.
Oh, hi. Yes, I don't know if it's my line or yours, but you kind of cut in and out a couple of times during that. Anyway, I think I picked up the majority of points that you were making, so thanks for that.
Thank you.
We will now take our next question from Andrew Porteous from HSBC. Please go ahead.
Hi, guys. I think, Tim, if I may. I'm just trying to get my head firstly around this idea of, you know, the solution being labor markets at the same time, sort of, maintaining the economics of existing contracts. I mean, is that the right way to think about things that you're sort of-
Sorry, you cut out a little bit.
...now, but then.
Sorry, Andrew. Could you repeat the question 'cause you cut out a little bit?
Yeah. I'm just trying to get my head around this idea of sort of demanding new lower, labor-
Yes
...cost markets and your existing contracts as well. I mean, should we think about that you basically made the whole solution cheaper so you can get new contracts, but you're effectively giving away some new services to sort of maintain the fee structure of existing contracts? If that is the case, is there a risk of deflation in your existing contracts, or are you contractually guarded against that if sort of, existing customers don't want to take the new services?
I think that's a fairly good way of describing it, yes. Obviously, the existing contracts are at fixed prices. Where we add in new services, we'll add them in at attractive rates for our clients because we want to give them attractive returns that mean that they will overall grow their need and use of the platform. In some of the products, you can't gain the benefits of a 600 Series robot being cheaper if you've already deployed a full fleet of 500 Series robots. But the 500s are a robot that is already very impressive. It's just that the 600 can do something even cheaper.
You can go back into that facility and add On-Grid Robotic Pick and add Automated Frameload at overall between us and our clients, phenomenal returns on the labor savings that you will generate, and we can split those in a way that's attractive for us, but extremely attractive for our clients.
That's very helpful. Then you talked a lot about q-commerce and the opportunity there. Just trying to understand, are you thinking about that as being a new opportunity with new customers like the Getir, Gorillas, et cetera of the world, and therefore more opportunity in markets that might previously been covered by exclusivity? Are you thinking about helping your existing clients compete in that space?
I mean, in most of our existing markets, more the latter. Obviously in a new market, we would consider any client that we, you know, that wanted to approach us and we wanted to talk to. Largely the latter. The latter have the buying power, the scale, and the customer knowledge. What they could do with our facilities is bring an unparalleled offer. Bring an offer that is, you know, what you would call it, take it in U.K. kind of terms, convenience store pricing, sustainable and a sustainable profitable business at convenience store pricing, not some hugely discounted thing today, but ultimately 20% or 30% premium.
With a range that would be a multiple the size of a convenience store, more like a high street supermarket, in a distressed purchasing timeline. Whereas at the moment for a distressed purchase, you have to pay a significant premium and shop from a really small range. This would be a, you know, 10,000-15,000 range at convenience store pricing and with very attractive economics for the retailer. It's an unparalleled offer out there, that I would expect to see a number of our clients deploy. I think, you know, one of our international clients has already stated that they're building their first one of these facilities in Florida. I expect we'll see more.
Absolutely. Brilliant. Then a last one, just, on the Ocado Retail side of things. It feels to me like a lot of the confidence in building back margins over the next couple of years is reliant on gross margins sort of staying 200-300 basis points above where they were pre-pandemic. Can you just help us with the confidence around that happening and what the sort of building blocks are that has seen gross margins get to where they are?
I would just remind you that a significant portion of that growth is just where we historically paid fees to Waitrose that we don't pay anymore. Well over 100 basis points is purely that. Also we have done some other moves where the team have, for example, taken some of the product data that we collect in-house and, you know, are generating more funding by selling that directly ourselves from our own systems to the CPG community rather than through a third party. It's not kind of increased prices that's driving that.
It's you know, efficiency and low waste, and you know, the long tail and the media income and the investments in the platform that help drive more opportunities to raise that, as well as the no longer working with Waitrose. We overall improved our price competitiveness last year. When we benchmark ourselves to other retailers, we overall came down in pricing, but we can earn those attractive margins. That's part of what having a long tail of, you know, selling 50,000 SKUs in an industry that thinks 15 is a lot, allows you to do.
Very clear. Thank you very much.
Thank you.
We will now take our next question from Sreedhar Mahamkali from UBS. Please go ahead.
Yeah. Hi. Good morning. A couple of quick questions, please. I think maybe just going back to some of the debate earlier on about liquidity. I think, Stephen, you made the point, which is very well noted about strong liquidity this year. Are you able to talk about CapEx requirements beyond this year? Maybe paint a picture on a kinda two-three-year view, because I think in the release you did talk about potentially needing further requirement, further funding in time. How do you think about it on a two-three-year view in terms of CapEx requirements versus the CapEx that we've seen this year? That would be very helpful. Secondly, I guess, going back to Andrew's question on capacity.
I think most of us still think about capacity arriving through the lens of a 65,000 orders per week type CFC. With all the innovation, I guess the question is the overall capacity still the same that we were thinking about, or is it greater or lesser relative to the contracts that you've signed? That would be helpful, just to get the answer on the magnitude of these changes. Thank you.
Can I just... I'll just go first for a minute, and I'll let Stephen talk about specific numbers. But obviously, as we roll out these innovations that we announced from Ocado Re:Imagined, the CapEx per, you know, per site or per, you know, billion of capacity will come down, right? So our CapEx will be lower for the same amount of capacity. Obviously, if we build capacity at a faster rate, then that will offset that. But, you know, capacity required per site will go down. There's two halves of that CapEx on our that we see. We see the side as the solutions provider, which is where we see it on international.
In the U.K., bear in mind at the moment we consolidate the whole of Ocado Retail, you see both the part where we're the supplier of the, you know, of the Ocado solution, but you also see the buildings part, and there we're making huge strides, as I spoke about before, in reducing the size required for a building of a certain throughput and reducing the cost involved in doing that. I would expect to see the ORL CapEx per billion of capacity also come down in a very useful way. In terms of your question on site sizes, yes, we do see more of a mix of sizes, and we expect to see more of a mix of sizes.
You know, we could see sites from kind of, you know, anything from 20,000-25,000 orders up to a hundred and twenty, a hundred and fifty thousand orders being kind of range of sites. And hence that's why that Stephen persuaded me that we would go with guidance in terms of modules, so that you could kind of work out how much capacity it was, and you and no one could pull your wool over the eyes by building kind of 21-module sites and pretending that was equivalent to 20 20-module sites. We're talking modules with you there. Hopefully, that helps.
On the last part on CapEx, I just wanna talk about the investment we make in the platform, where we have announced plans to increase our headcounts by almost 500 people during the course of the next year or so, and increasingly a heavy investment. You're starting to see what some of that heavy investment is generating, not just in terms of being capable of turning on 10 clients onto a platform and making it work in all of their markets, but also in terms of enormous amounts of innovation. I would just urge you to remember that we do not need to maintain this level of investment if we are not innovating and creating amazing new opportunities for our business.
If we wanted to just continue doing what you already understand, we could materially reduce that annual CapEx. We currently have no intention of doing that, but do understand that a large part of that innovation, a large part of that spend is to drive innovation that we are not talking about and that we have not explained, and that nobody in your community has yet imagined.
When it comes to the specifics of CapEx, yes, we've guided to GBP 100 million for 2022. I think it's probably fair to regard that if we look over the sort of 2021-2023 period as probably being the peak year of that three-year period of CapEx spend. I think key drivers, again, when we think about this, is really the number of sites that are close to opening or in under construction. If we think about sort of 2020, 2022, we're gonna open nine sites in 2022. 2023, currently we have around eight or so sites set to open. That's the driver of that GBP 800 million.
The CapEx going forward probably will be lower in 2023, but one shouldn't regard reducing CapEx as a good thing. To Tim's point just now, CapEx growth is an indication of the order pipeline that we have ahead for automated warehouses. The more automated warehouses we add to the portfolio of the 10 that we have today, the closer we then get to becoming in a business that can generate cash flow and at the same time invest in growing a portfolio of automated warehouses. Hopefully that answers your question.
No, it does. If you can maybe perhaps just add on a little bit in terms of clearly we're going from net cash to a greater level of net debt. I guess, you know, a couple of questions there. How do you think about funding beyond this year? And the second one is relative to the level of net debt, are there any sort of covenants that we should be aware of and things like that, please?
Well, first of all, no, there are no covenants that you need to be concerned about in respect to the debt profile that we have today. Thinking about funding, there are a number of routes we could choose to take. The debt markets have been supportive, and we expect them to remain supportive. Similarly with the equity markets as well. I think, you know, we have a good profile of maturities at the moment with you know, several years before the next maturities come up. No specific plans right now. We'll keep an eye on it as the year progresses and monitor our liquidity accordingly and choose the right time and the right way of approaching it.
All right. Thank you very much.
We will now take our next question from Rob Joyce from Goldman Sachs. Please go ahead.
Hi. Thanks very much for taking the questions. I got a couple. Apologies for flogging this poor horse, but maybe from another angle, I guess. In terms of the Ocado Re:Imagined side of things, clearly the major sort of effort here is to pitch this to new prospects, as you say, an existing company to really drive the volume of demand there. Can you give us some context around how you're describing the improvements Ocado Re:Imagined gives to your existing customers? So maybe some metrics that you've shown them or you're explaining it to them, so maybe we can understand what excites them from their perspective.
The second one, just on that, following on from Sreedhar's comment and an earlier comment from Stephen on the cash flow moving into positive territory. Do you have any, you know, given, well, the outlook you have today and the commitments, when do you think free cash flow moves into positive territory? Maybe, Tim, if you could give us an idea of what you think that steady state CapEx number could be, the one you alluded to before. Thank you very much.
Rob, I think the key with the existing and new clients really is around two main changes. One is when they model something out, they used to model it out with kind of circa 200 as their UPH kind of target, i.e., roughly 4.4 orders per labor hour. Obviously that's phenomenally attractive, particularly as wages in many countries are under very positive pressure. We were already dramatically more efficient than any other means of doing this 'cause that was an end-to-end productivity. That's those people unloading the suppliers' trucks and loading the trucks on the other side. I see many people comparing it to fractions of the work in the warehouse.
Driving it up into the 300+ level, between 300 - 400 is a very dramatic improvement. As well as the buildings requirements being somewhat simpler and somewhat smaller, means that the incremental CapEx that the retailer needs to deploy is smaller. I think that's what's driving the economic part of the model. I think there is an equal or possibly, you know, almost larger excitement from some of the clients around the capabilities for, you know, using those warehouses and optimized routes. Managing to do short lead time deliveries is driving a huge amount of excitement from our existing clients and some from prospects.
The ability to build smaller warehouses close to more clients and still maintain the efficiencies that has been the elusive holy grail of this automated grocery kind of business is also generating excitement. It's just a really busy time for us and, you know, we're trying to put as many numbers as we can out for our clients at the moment to try and help them understand the implications as best as possible. It is really throwing up a lot of conversations and a lot of excitement and a lot of interest.
Of course, you know, you can change your financial models by just saying, "I'm gonna build it quicker and I'm gonna ramp it quicker." That in itself has a benefit on both sides. There's a lot to digest, but it's all positive. On the ca-
Tim, just very quickly.
Go on. Carry on.
Sorry, Stephen. Rob, I think the key with the existing and new clients really is around two main changes. One is when they model something out, they used to model it out with kind of circa 200 as their UPH kinda target, i.e., roughly 4.4 orders per labor hour. Obviously that's phenomenally attractive, particularly as wages in many countries are under very positive pressure. We were already dramatically more efficient than any other means of doing this 'cause that was an end-to-end productivity. That's those people unloading the suppliers' trucks and loading the trucks on the other side.
I see many people comparing it to fractions of the work in the warehouse. Driving it up into the 300+ level, between 300 - 400 is a very dramatic improvement. As well as the buildings requirements being somewhat simpler and somewhat smaller, means that the incremental CapEx that the retailer needs to deploy is smaller. I think that's what's driving the economic part of the model. I think there is an equal or possibly, you know, almost larger excitement from some of the clients around the capabilities for, you know, using those warehouses and optimized routes. Managing to do short lead time deliveries is driving a huge amount of excitement from our existing clients and some from prospects.
The ability to build smaller warehouses close to more clients and still maintain the efficiencies that has been the elusive holy grail of this automated grocery kind of business is also generating excitement. It's just a really busy time for us and, you know, we're trying to put as many numbers as we can out for our clients at the moment to try and help them understand the implications as best as possible. It is really throwing up a lot of conversations and a lot of excitement and a lot of interest.
Of course, you know, you can change your financial models by just saying, "I'm gonna build it quicker and I'm gonna ramp it quicker." That in itself has a benefit on both sides. There's a lot to digest, but it's all positive. Then on the call, Tim, just very quickly.
Go on. Carry on.
Sorry, Stephen, would you mind just
You know, you ought to be thinking about it, about a period that's sort of, you know, four or so years out from now, four to five years from now, reaching that pivot point where we've got a sufficient portfolio of warehouses to continue to invest and cover our cost base. That's the probably the best way of thinking about the whole exercise.
Stephen, it would be fair, wouldn't it, to say that kind of 20-30 would mean that you are breakeven on the level of innovation that we're trying to drive, which is huge at the moment.
Yes.
The next, you know, as you spoke about, the next 20-25 or something like that, or 30, allows you to grow 10 a year on a self-financed basis, and then that model just keeps growing at that, on that basis.
Well, exactly right. Yeah.
Very, very helpful. Very last one maybe on that steady-state CapEx, Tim.
Look, we're not on a firm number, but whatever number you thought it was, imagine that we can deliver at least, you know, at no more than that number, and hopefully less to deliver the efficiency that you just spoke about before in terms of the reduction of costs on the client side. We also hope that there is a reduction in the largest part of the engineering cost, which is the maintenance of the robots that we spoke about.
That, as we've you know talked about today in the numbers over the KPIs, is coming down towards our long-term target with the quite you know relatively new 500 Series and that an order of magnitude in terms of kind of about a tenth as long as it took the 400s to get to these kind of levels. That's doing phenomenally well. We would expect the 600s to significantly outperform the 500s on that basis.
Thank you. Much appreciated.
We will now take our next question from Xavier Le Mené from Bank of America. Please go ahead.
Thank you, gentlemen, for taking my question. It's quite late already. Two if I may. The first one, just understanding, you know, the 600 Series and what can change, or at least in signing new partnership, because it's not like potentially you're waiting for that series to be live. Does it mean that potentially new partnerships could be back-loaded, i.e., we need to see the 600 Series running before you can convince, you know, new partners to potentially buy your technology? I just want to understand, you know, the kind of timeframe here. The second one is about non-food. You're suddenly a bit more vocal about the non-food opportunity. Can you confirm that you already have discussion about that, or that's more, you know, the prospect of starting discussion about non-food going forward?
Yeah, look, the 600, 500s, we need to have availability of robots. If we sign a client up, we make a decision on the kind of pricing and you know, how much incremental extra kit we're gonna put in the building to drive their efficiency at what cost and what charge effectively. We're making an assumption on the amount of 500s and the amount of 600s we'll deploy in that building or if we'll only deploy 600s. Yes, if somebody wants a building that's gonna go live in the next six months, it's a 500 series building. If they want one that's going live in 18 months, it's probably a 600 series building.
If they want one that's going live in two years, it's, you know, definitely a 600 Series building. We just have to take that into account. It's not the client doesn't need to take a risk on that. We take a risk on that 'cause we're building one series and we'll migrate to building another series. On your non-food question, we've had inquiry from non-food for many years. We've kind of batted it back because we were aware that while our product had a multiple of the throughput of any competing product, per robot, the robot itself was more expensive. The throughput per kind of cost of robot may have been similar or in our favor.
What was different about ours was that you could get massively more throughput from a density, and that is critical for grocery, but not critical for many general merchandise or storage or kind of, you know, other use cases. Then the machine that you house it on was similarly, kind of overspecced, but you didn't get any benefit if you don't want that throughput. By driving down the weight of the 600 Series bot by 80%, we drive down the weight to the lightest bot in the industry. Even with the faster acceleration that we generate with it to do more throughput, still we generate less forces and we can build the cheapest grids in the industry. The opportunity now to do anything else is present.
It's like the point where, you know, and in any of these innovation examples, but you know, once your digital sensor, you know, is higher resolution than your 35 mil film, then suddenly, you know, you've opened up another. That wasn't why you designed it originally, but you've opened up another opportunity. This is the fastest throughput, lightest bot that can sit on the, you know, the lowest grade effectively grid, and therefore is the best storage and retrieval system available.
Okay. Thank you.
We will now take our next question from Tom Davies from Berenberg. Please go ahead.
Morning, guys. Just three questions from me. Firstly, for like a standard CFC, can you give like the CapEx split between like long life CapEx, like the grid, and then like the shorter life CapEx, like the robots and the on-grid robotics? And then secondly, does the series 600 robot improve the throughput per robot, so it means that less robots are required from Ocado's perspective? And then finally, for the innovations, from a solutions perspective, you're obviously facing a trade-off between revenue and margin. How do you make sure that your partners keep on building that additional capacity from the lower operating costs?
I think there was three questions there. Let me just try and make sure I've got them. The first one, though, was the split between bots, grids and other stuff and the kind of life of those assets. Is that about right? I think it's probably-
Yeah.
Rough rule of thumb would be to say it's something like a third grid and bins. It's something like a third robots, and it's about a third the other peripherals in the building. The grid and bots, obviously, you know, the grids, you know, long life. The peripherals are probably. No. To be honest, the type of equipment that the peripherals are generally, we're still running the original, a lot of the original versions in Hatfield 20 years in, but they have an average life of about 10 years. The bots, you know, are probably a bit smaller than that, but again, the overall average is about 10 years. The thing with all of that stuff, though, is like with the bots, for example, you know, there are wear parts on them, but we run the wear parts.
That's the engineering cost that we look at. That's, you know, changing the tires or swapping out the batteries or that type of thing. Ultimately, you run these like an airframe of an airplane, and they should last for much longer than we currently assume and that we depreciate them to. Your third or your second part, just remind me, was-
I said do the robots improve the throughput per robot?
The 600 series robot is designed to have the same physical characteristics as the existing robot. It's not designed to do more work per se, although we do expect that when it becomes more reliable than the existing robots, then it will do slightly more work because you'll have less robots that are coming off the grid and asking for a bit of maintenance. When they do want maintenance, it's quicker, et cetera. There is a benefit there. Because the robot is smaller and lighter, it will need less energy to move itself around, so it will spend a little bit less time, you know, charging. There is some benefits there.
The main benefit, though, is that the On-Grid Robotic Pick allows us to lay out the sites differently and to remove some of the critical congestion on the sites that allows us actually to put more robots in the same space and generate more throughput overall. The On-Grid Robotic Pick may also be more efficient in the use of the robots. That's something that I think we're, you know, working on now to understand. We are constantly improving all the software that runs our systems and driving robot efficiency up by a few points here and a few points there anyway. It's more.
The 600 Series is more about the reduction in weight, the reduction in cost, the reduction in forces, and what that means to crash barriers, slabs, grids, and things like that ends up in quite a material reduction in other costs, plus the reduction in our own costs.
Then just the final one from about the trade-off between like revenue and margin and how you like ensure the partners make sure they keep deploying that additional capacity.
Look, I think the point with the partners is the more attractive we can make the economic model for them and the more missions we can help them to serve and the better we can help them to serve those missions better than any competition that they have in terms of allowing them to sell fresher food, bigger ranges, better accuracy, better UI, you know, better interfaces, and to cover all the different missions from ultra short, you know, ultra short lead time or q-commerce through short lead time, two, three, four-hour deliveries to later today to today for tomorrow, et cetera. The more we can help them to do that at the lowest cost in their market, the more they will drive market share.
There isn't a grocery retailer in the world, I don't think, that doesn't try and drive growth in their market share and take advantage of their competitive advantages to do so. It's a question of, you know, innovating, creating competitive advantage, sharing the competitive advantage with our clients. They go out and use it in the market, and it creates the virtuous cycle of growth.
Great. Thank you.
We will now take a follow-up question from Simon Bowler from Numis. Please go ahead.
Hi, apologies. I'm conscious the call's been going a little bit, and it's a slightly off-piste question as well. I was just wondering, with some of the innovation that's come through with the 600 Series and so on, are you in any way having conversations with your grocers about using a CFC to top up or fulfill any of their physical networks? Your entire focus has been very much on driving their online business. Although for certain aspects of the range they wanna hold in a physical store, would it potentially be a more efficient route to fulfilling the store via a CFC via their existing manual distribution centers?
Simon, it is something that comes up from time to time, and it is something that several of the clients have asked me in the last week or so, because of the robotic pick in particular, as well as, you know, just more facilities. Because you still build facilities to a peak day, you obviously have effectively downtime in those facilities, particularly with robots. You know, where you've got robotic pick as opposed to human pick, the incremental cost of doing some sortation and some organization in there effectively is incredibly low.
Where these things are not necessarily the right beast to send to a large hypermarket, the fast-moving part of the range, but they are very interesting in terms of either running larger ranges in small shops or big shops, frankly, and doing that more efficiently than you can do that anywhere else. They are extremely interesting to do store replenishment of singles, of things that you don't want cases. The existing store replenishment networks mainly focus on cases which, in some places limits what they can put in a store, and therefore you could drive greater sales into small store formats by allowing yourself to replenish in singles and effectively have more lines in there.
In some instances, we have clients who use the likes of wholesalers to try and, you know, to add in the last parts of the range, and they could do that much more efficiently themselves and drive some margin improvements on their side. It is an area of interest. There are a lot of areas of interest of how to utilize this stuff, and some of it's an area of prioritization for us and our clients as to what's the most important thing for them to achieve first. Would I be surprised if our facilities were contributing to that in the next three to five years in some people's store networks? I would not be surprised, no.
Okay. Thank you.
There appears to be no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks.
just like to thank you all for participating today, and look forward to speaking soon.