Ocado Group's (OCDGF) CEO Tim Steiner on Q2 2016 Results - Earnings Call Transcript

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Ocado Group PLC (OTCPK:OCDGF)

Q2 2016 Earnings Conference Call

June 28, 2016 04:30 AM ET

Executives

Stuart Rose - Chairman

Duncan Tatton-Brown - CFO

Mark Richardson - COO

Tim Steiner - CEO

Analysts

Stewart McGuire - Credit Suisse

James Tracey - Redburn Partners

John Kershaw - Exane BNP Paribas

Francois Halconruy - Morgan Stanley

Charlie Storey - Macquarie

Richard Clarke - Sanford C. Bernstein

Andy Wade - Numis Securities

Presentation

Stuart Rose

Good morning, everyone. I'm Stuart Rose, I'm Chairman of Ocado. Welcome to this meeting which is the Half Year Results, 24 weeks to May 15. Just a couple of points on organization this morning and Tim is not presenting this morning. He's here, we're pleased to say, he wasn't due to be here. Sadly, he's going through a divorce process and he may have needed to have been in court this morning so he's been released from court. And the presentation this morning will be done by Duncan and by Mark Richardson. And you don't all, I think, know Mark Richardson, Mark is Chief Operating Officer of Ocado. He's not somebody new to the business. Actually, he's been in the business since, I think, 2001 and is responsible for operations, for CFCs, for logistics, for customer service, for business planning, for IT, and for engineering. So actually, we're beginning to wonder what Tim actually does do. But he's an important part of the business and there'll be an opportunity for him to tell you a bit about what's going on in the business.

Well we live in interesting times, I’d say that 50% of what happens to your life is not what you plan, it is what somebody else does to you and we’ll see what happens to us in terms of the UK PLC over the next few weeks and months, but uncertainly of course is not something that anybody likes. The good news about Ocado is that we are continuing to make good progress and you’ll hear from Duncan and from Mark this morning on that. We have made solid progress in a very difficult market, I’m not going to take away what you’re going to hear from the presentation but we all know there is overcapacity, we all know there is price deflation, we all know there is margin squeezes, we all know there is new entrants in the market, so it’s quite an interesting place. So I think that’s an exciting place to be and we are making good progress.

We’ve seen significant volume growth come to our operating platform, and improved efficiencies from both Hatfield and from Dordon you’ll hear some news about what’s happening in Andover, which again is positive news and we are making good progress with Morrisons, so all in all, actually not a bad place to be. We remain confident about our IT, we remain confident about our intellectual property, we remain confident about what we do and how we do it well and we remain confident about the opportunity for us to sell the OSP platform further on. So without further ado, I’m going to hand you over to Duncan who is going to take you through the first part of the presentation and then on to Mark after that and I say Tim is here also to answer questions after, thank you.

Duncan Tatton-Brown

Thank you Stuart and good morning new and improved presenter may be not with Tim’s charm, but a little bit more hair. So welcome to everybody, welcome to also to those who are joining us on the live feed. I’ll take you through a business update and then handover to Mark who will give you an operational update with a particular focus on the fulfillment operations. I’ll return to talk about outlook and then we’ll be happy to take your questions.

Before we get into financial results, a word on overall performance, the grocery market continues to be competitive and the UK consumer is benefitting from ongoing grocery price deflation, which makes market conditions more challenging for all retailers. The overall market was flat in value terms, but we grew strongly even faster than the discounters and unlike them our growth is like-for-like, as this growth has come from within our existing catchments. We grew faster than Waitrose who themselves grew faster than the big 4 we believe that we’re leading the way. Not only has our retail business performed well, but when combined with the growth of operations for the morrisons.com business, volumes through our operating platform grew by 30% on last year and over 75% over the last 2 years, this clearly demonstrates the rapid scaling of our business and is an indication of increasing trend of shoppers switching to the online channel.

We’re performing well because of the continued strength of our offer to customers. We believe we have the best online platform for grocery, globally, and we look to keep raising the bar. We have market leading metrics on service in terms of order accuracy and on-time deliveries. We also have easy to use customer interfaces, which have improved over the last 6 months with developments such as search, suggestions and automatically applied onsite coupons. An increasing proportion of our customers are also checking out using mobile devices, be it a tablet or smartphone now up to over 55% of orders.

Our range has grown up to over 48,000 products on ocado.com and 1000s more on our general merchandize sites Fetch and Sizzle. Overall general merchandize sales were up over 40% and this is before we add more products with our new health and beauty site in partnership with Marie Claire. This will open during the second half. We remain competitive on price and continuing our policy of matching products against key competitors. For our basket matching price scheme nearly 3 quarters of baskets were cheaper at Ocado. This proposition is valued by consumers and as you’ll see later there is a growing number of active customers, but it’s also recognized by the industry, as we won The Grocer Gold Award for the best online supermarket for the second year running.

So to our financial results, total revenue which includes the revenue on our arrangements with Morrisons was up 15.1%. EBITDA was up 5.7% to £40.4 million, slower than revenue and I’ll explain this in a moment. Interest was flat, we grew only £10 million of our 210 million facility and even then for only part of the period, so there was limited additional interest cost for this. Depreciation was slightly up on the year with the increase mostly from technology spend. We spent limited share CapEx with Morrisons and so the MHE JVCo effect, which increases EBITDA with an offsetting increase in depreciation and interest didn’t operate. It’s worth noting, we have about 120 million of capital work in progress on Andover and its related hardware and software development. That has not started depreciation yet, but will do in the second half once Andover opens. And finally profit before tax was up to £8.5 million.

Revenue growth of 15.1% came from growth in retail revenue of 13.6% and growth in revenues from the Morrisons operations of 36%, reflecting the strong growth of our operations for them. Revenues for Morrisons include the fees we earn from them and the actual cost of the operations that are recharged. Looking at operating contribution for the retail business only, i.e. before admin costs this grew at 10.7% lower than retail revenue growth. I’ll explain more later but this is primarily caused by the continued price deflation in the market, which affects margins and operational cost ratios.

The Morrisons share operating contribution comes from the fees that we earn from them and the effect of how we set up MHE JVCo, the company that owns the assets we share with Morrisons. The fees grew slower as they are for the most part fixed or inflation linked. The MHE JVCo impact was flat, as this increase is only if we spend more on capital than we are depreciating. This is not happening, as we’re not investing much to expand the capacity in Dordon. As a result, operating contribution grew slower up 3.1%. Finally, admin costs are growing, as we continue to invest ahead of the curve in technology to improve our platform.

So on to retail sales performance in more detail. Retail sales were up 14% on the year continuing on trend of mid-teen sales growth and ahead of the online grocery market. The driver of the increase was a continuing growth in active customers up 15%. Orders grew faster up 18% or up 15% for our hypermarket business only. Hypermarket basket size declined by 2.2% mostly due to a decline in item prices, due to ongoing price deflation and competitive pressures we are continuing with our policy of being a price follower, and we follow the market moves in price on the range that overlaps with our competitors. This is further evidenced by a small declining cost for us of the Lower Price Promise basket matching scheme.

Our general merchandise business continued to grow strongly up over 40%. Part of the growth came from increased standalone destination orders, up over 80%. They have a smaller basket size and so influence the overall basket. For the first time during the half, we provided a courier delivery option to destination orders, so allowing us to grow into catchments not currently served by ocado.com. We expect to see continued growth in general merchandise with Fetch continuing to scale well and the launch of our health and beauty business in the second half.

We remain a price follower in the market and we invested in lower prices and increased promotional activity to maintain our competitiveness. As a result, our trading margins declined by around 30 basis points to 28.8%. We continue to work with suppliers to help them maximize their sales and profitability with us. One of the ways we do this is through our many shop-in shops that we provide. As an example, you can see here in the first half, we launched in each well shop which lists over a thousand products designed to help our customers, who are interested eating more healthily.

Onto operational metrics, our CFCs are continuing to improve in efficiency with our Mature CFC UPH up nearly 4% to 159. This was mostly due to further improvement at Dordon, where UPH was about 170. Delivery efficiency also improved, with drops per van up 8.3%. As our delivery catchments are almost identical, our growth results in increasing customer density, and this alone improved DPV, but we continue to look for further gains from margin improvements in our reaching software, we also operated an extended Sunday shift much in demand from our customers, which helped improve DPV. Wastage costs were slightly higher at 0.8% of revenue due to the further increase in the grocery range. Note, that I’d expect a modest increase in second half due to higher wastage at the new CFC in Andover, whilst it operates at lower volumes.

Onto retail operating contribution note that these figures exclude both the fees that we earn from Morrisons, but also our head office costs, and depreciation. In the first half our gross margins fell as I have already explained. But operational efficiencies improved both for delivery and fulfillment costs. These things have been offset by a number of factors, first; item prices have fallen, so our lower cost per order have been offset by lower order values. Second; there has been a slightly higher level of wage inflation at just over 3%; and finally there has been an increase in fixed costs in trunking and delivery costs as we added a number of additional spokes.

With the spoke capacity we have committed with one further spoke opening in the second half, we will have sufficient to cope with our growth for more than 12 months. So this increase in fixed cost is as a percentage of sales is temporary. Overall operating contribution declined to 10.5% of revenue. Admin costs grew slightly behind sales and are now up 5.4% of revenue. As at the year-end I thought it would be helpful for me to split our admin costs into the costs directly attributable to our UK business and those to the shared platform and overhead costs. As a reminder, the shared platform costs after developing and maintaining our platform both our systems and our fulfillment operations, these cannot be directly allocated to our retail business as they also support our existing partner Morrisons and they help create and maintain the platform for our future international customers.

Retail admin costs were 1.4% of sales, flat on the year despite investments in our health and beauty business which we'll launch in the second half. Our platform and overhead costs have been fallen slightly primarily due to a decline in the cost of share incentives fees. The balance of costs have grown in line with sales with the biggest growth coming from technology costs, our strategy is to improve our platform such as improving our interfaces to customers and improving the efficiency of both our existing operations on our new proprietary solutions. As a result we've grown our technology headcount to over 850 heads. Of these costs, they roughly split equally between shared platform and overhead.

Onto capital investments, I will only pullout two points from this slide, first, year-to0date spend on CapEx is similar to last year with the biggest growth in technology CapEx. As we continue to develop the new software platform for both our own use and for the use of international partners. And second, we expect to spend 150 million for the full year in line with my previous guidance.

I wanted to briefly remind you of our liquidity position. We ended the half with nearly 220 million of committed undrawn facilities, this included 200 million of the 210 million RCF that we put in place last year. In addition, we had over 50 million of cash, so in total 270 million of liquidity which when combined with our cash generative retail operations gives us sufficient capacity to cover the full capital requirements to complete the build of both Andover and Erith.

So, I would now like to hand over to Mark who can talk you of our operations in more detail.

Mark Richardson

Hello, everyone. As Duncan stated my name is Mark Richardson I am Ocado's Chief Operations Officer. By way of introduction although I have not addressed this group before, I have been part of the Ocado management team since 2001, after 10 years I led the technology function before joining the board in 2012. In addition to looking out for the Ocado operation, it's my great pleasure to have a fantastic team of people in Hatfield and around Europe who developed our groundbreaking technology and innovate the platform at an ever-increasing rate.

I am just wondering if I have got the right button, right am I right, I will try it again, great. Our operational efficiency continues to improve in line with our predictions with Hatfield hovering around 150 units per hour and Dordon regularly over 175 and still increasing. In addition to improving productivity, we've also been able to find ways to generate more capacity than originally expected from the existing CFCs. Ocado’s share of that additional capacity across CFCs 1 and 2 will be more than 10,000 orders per week. This will be achieved within the modest CapEx for existing CFCs already indicated by Duncan.

Our next two CFCs bring improvements in many areas but especially in capital efficiency and productivity, where we will see UPH in Andover of more than 180 and more than 200 in Erith. The Andover CFC is already operating as a spoke site replacing our Southampton operation which closed earlier this month. The go live build work is complete and you can see this on the slide with examples of an inbound decant station and a pick station. Our new proprietary MHE solution inside the CFC is in advanced testing and it will go live when that testing is complete. It’s also worth noting that the Erith build is progressing well.

What you see on this side is a visualization of the ambient operation inside Andover as it will look when the site is fully ramped up. This video maybe showing a simulation of the mature Andover operation, but that simulation is being generated by the real production code, it’s the same code that’s already controlling the machinery and testing, it’s the same code that will control the site when it goes live. This proprietary software including the control algorithms and the entirely new high speed communication system will be at the heart of future Ocado CFCs and those of our OSP partners.

While highly automated CFCs and the unique systems that drive them maybe the star attractions of our OSP platform, equally important are the Web site, the mobile apps, back office systems that will enable our partners to run a state-of-the-art e-commerce solution. In February this year, we launched a new internal retailer called abundo delivering breakfast and snacks to our staff and using entirely OSP systems. All the new functionality we develop for our OSP platform is deployed into abundo and so tested in a live retail environment by our own staff.

As customers we interact with the new Web site and the delivery process and as retailers use the new systems to manage our assortment, delivery slots and so on. This process provides an immediate and extended test for every aspect of the new platform and gives us an ongoing detailed view on the rapid evolution of our OSP product. The OSP software suite is tightly integrated for the standard and look and feel throughout and we look forward not only to deploying it for our OSP customer, but also to migrating the whole of our retail operation on to it in the future.

We continue to innovate in the technology space investing in more technology resources across our five development sites here in the UK and overseas in Poland, Bulgaria and Spain. Increasingly, we seek to protect our inventions with patents and we’ve filed 123 applications up to the end of the first half year covering 46 separate innovations, the patent applications will protect our IP both individually and collectively. The generation and then protection of new intellectual properties is set to continue through the second half and beyond.

Now I’m going to hand back to Duncan who is going to update on our outlook.

Duncan Tatton-Brown

Thanks Mark. And I’ll just complete with some comments on what we see going forward. First for our retail business, the market environment remains challenging and we’ll continue to follow the pricing of the market leaders, so we’re exposed to the general state of the market. But we can look forward with some optimism, we believe the channel shift to online will continue, we’re also confident in the economics of our, that the economics of our retail operations will further improve compared to the industry and the strength of our proposition means that will grow sales ahead of the online grocery market. We will therefore continue to invest to drive long-term value for our shareholders both to grow our capacity in the UK and to improve the quality of our technology and fulfillment platform so we plan to grow our technology headcount to 1000 heads by the end of the year.

On to the outlook for our platform business, our arrangements with Morrisons appear to be working well for them as their sales have annualized already at over £300 million. We’re working with them to finalize the in principal agreement that we announced. This will provide more capacity for them from both sharing some of Erith and providing store pick software and will enable both them and us to grow profitably.

On to the Ocado Smart Platform business, the competitive activity in the online grocery space recently has helped prompt further interest from retailers. We continue to develop our conversations with multiple parties and remain confident both in the quality of our proposition to them and in our ability to sign deals.

So in summary, we’re leading the way in a challenging market impart because we keep raising the bar and improving the customer proposition. As you’ve heard from Mark, innovation is part of our DNA we’re good at it and expect more benefits to come. We’re scaling our capacity and are set more than double our existing capacity and finally we’re excited about the opportunities to sell our platform to others. So thank you for that. With all three of ur we’ve now happy to take your questions.

Question-and-Answer Session

Q - Stewart McGuire

Three questions for me. Number one, where is the wage inflation coming from, is it coming from the low paid workers or high paid workers? Follow on that is the FX impact from your overseas development operations given the sterling depreciation. And finally on the intellectual property update have any patents actually been granted or you still waiting for all those and also maybe some commentary on the discussion with Autostore and the patents there? Thank you.

Tim Steiner

I mean the primary place the wage inflation is coming from, it’s from the personal shoppers in the warehouses, so all the highly paid stuff in the warehouse. And in the Ocado customer service team members, so the delivery drives its wage inflation driven by the general pressure in our economy based on the new national living wage, which we were above in almost all areas. But it is not just a question of being above it it’s moving the whole of base rate pay in the UK. So I think we’ve seen pressure this year we will continue to see pressure as it drives up towards the £9 something in the minimum wage rate. It’s not coming from anywhere else in the business particularly. I mean there is wage inflation across the head office. Wage inflation is strongest in technology, out of the different departments that we’re in, but the real impact is in the hourly paid. The FX impact from our overseas offices is small I guess, I would say.

Duncan Tatton-Brown

Two-thirds of the cost now is really in UK staff, overseas staff are paid very competitively for their locations. But as you would expect in locations slightly lower than London-affected Hatfield. So yes a bit of inflation from FX from that, but it won’t be material.

Tim Steiner

The patent granting process is a very-very slow one. So no, we have not got any of them granted and don’t expect to yes. But continue to expect that they will get granted overtime. What was the last part of your question, it is very specific about Autostore?

Stewart McGuire

Just any updates with any conversations you might have had with Autostore regarding their views on their technology that you're using?

Tim Steiner

We’ve had no direct conversations with Autostore Hatteland about their comments on that technology they have not informed that they believe that there is any issue with what we’re doing in our technology. We’re very confident about our technology and our ability to use it and the series of patents that we filed on it.

Unidentified Analyst

Three from me, just following on from that one in terms of what is sort of available out there in the market, in terms of more automated picking can you give us some of the key differences between what the technology is in CFC3 and what is currently available and any metrics you put behind that as well would be very helpful? And In terms of the Ocado, small platform can you just give us an idea of, if the conversations how it involve, what is the key focus now of the people you’re discussing with, why potentially they may haven’t signed yet? And the final one got to ask you, are you saying any Amazon impact in the first couple of weeks since Fresh launched? Thank you.

Tim Steiner

In an unusual order, the last part of your question is we’ve seen absolutely no impact from the launch of Amazon so far. They’re in 69 of our post code areas that represents a small percentage of our sales but we are monitoring that very carefully. And no we have seen absolutely no impact, we hope that they will help to grow the overall market, which obviously online is still a single-digit percentage of the overall grocery market and it is that last week we were trading exceptionally strongly in the area that they’ve launched into.


On the first question, look we think that the new technology that is in Andover and will be in Erith and in all future sites has a host of advantages, so without going into all of them today. It is materially more efficient, so materially less labor required to operate it. It is more capital efficient as Mark outlined earlier and that capital efficiency will continue to improve as we build more of it. It allows a significantly faster order processing time down from between two to four hours to somewhere around five minutes. Meaning that it has a massive ability to enable immediately say, with same day orders or in the next hour or the next two hours. Obviously combined with how one setup ones delivery mechanisms, but it makes the warehouse part of the process significantly shorter.

It will be significantly more resilient and reliable because it is an entirely parallel processing system rather than a serial process. There are upstream and downstream dependencies that we have in our existing systems. It can be installed in most legacy buildings so one doesn’t have to build a custom envelope around it. It is a very modular solution as we are doing we can build a smaller one in Andover and the biggest one ever in Erith and we could build even bigger ones. And one can scale the capital into that building so a significant portion of the capital of the MHE can be installed while the machine is operating and therefore if you want to grow into a machine you can add the capital as you go and it's more cube efficient. So, Erith will be the -- Erith will have the highest volume of throughput once it's mature per cubic meter of any site that we've ever constructed and the cubic throughput of our sites already is I think somewhere around three plus X of our nearest competitor. So, it's well our biggest competitor in the UK shall we say. So, and it's even more efficient than that.

So, cheaper to buy, scale in modular build in different sizes put in existing buildings, cheaper to operate it's also significantly future proofed so where the human interaction with the machine is all of those touch points are designed in a way where as the technologies are also working on that allow more robotics or ADVs to handle the inputs or outputs that what goes into the machine they can -- these machines are kind of grandfather to that level of efficiency in a way that Hatfield and Dordon are you can swap out the manual pick station and put in a robotic pick station continuing to use the bulk of the infrastructure and therefore in the future have gained significant productivity enhancements once we've cracked that technology to do robotic picking or robotic frame loading or something like that.

Unidentified Analyst

Just on that five minutes to pick a basket is there any way to conceptualize that in context with what similar may be non-food so just in the time to picking out I think it is may be a 40 item basket is there any way to compare that to say what a standard non-food automated could do if it were able to pick a grocery basket?

Tim Steiner

I would imagine that this is going to be somewhere in the magnitude of five to kind of 20 times quicker than you could pick the same basket manually, it could even pick it in one location at extremely fast speed where just in a manual facility you have got to run around the facility and also it is a question of how much you want to split the order in the manual facility between different pickers because here the same time is picking at five times the speed you can split the order if you have four baskets you can split it between the next four pickers and then obviously the system will reemerge it before it dispatches it. So, it's from what we've seen anywhere in the world it's the fastest rate to combine 40 items from a diverse range pick them together and consolidate and ready for shipping, it's an exceptionally fast process.

Duncan Tatton-Brown

And on the OSP things are evolving and I think that one of the challenges for us is the challenge for the retailer because remember the retailer actually doesn't really want online speed there because they make more money selling it in stores than they do it online. So, anything that continues to grow the concerns of existing retailers that there is a market and it's growing faster it's good for us and so how has the market evolved. I have made slight reference to that Amazon Fresh’s growth in Europe is advantageous to us and has generated some change in terms in some of the conversations we're having. And are we still discussing the same proposition I would call it a slight refinement to our proposition in the way that we are with Morrisons in terms of providing store pick software which is another I think attribute which helps our offer. But fundamentally these are just made strategic decisions for people, which takes some time and involve lots of their team and therefore will take a period of time but they continue and we remain confident.

Unidentified Analyst

[Indiscernible]

Duncan Tatton-Brown

So the people we're taking to are further along and -- but they kind of make no promise about what that leads to when those conclude, our experience on making those promises relating to not one like another one.

James Tracey

James Tracey from Redburn two questions for me, first one is follow up from Rob's question. So given the advantages that you've outlined of the OSP why have people not planned up already? What's the stumbling block? And the second question is on the pricing for the OSP you talked about in the past hoping to charge around 5% of sales capacity and if that's still the case and how does it compare to what other companies are charging for their platforms such as Amazon with Sprowtz? And the final question is associated with that sort of revenue as a percentage of capacity, what is your operating costs for running the platform as a percentage of the sales capacity so what's the sort of margin you would anticipate you would make from selling the platform or licensing the platform? Thank you.

Tim Steiner

We're not disclosing our costs of providing the platform and therefore the margins, obviously the key from our side is the more scale we can put to the platform the cheaper it is for us to operate it. The first billion pounds that one puts through a technology part of the platform has got significantly higher costs from the next billion pounds because one doesn’t need to keep replicating the software when it’s buying more processing capacity and if the software was designed as it has been designed to run for multiple platforms, to run for multiple retailers and there is not a lot of extra work to create the new revenue incidents.

So you can imagine on the technology side, it’s got a very healthy margin, the case is about again is around the fact that it’s modular and so we are -- it’s not custom each time you build it, you are building the same pick stations, the same decant station, same robotics, the same bins et cetera for each instance and so as we produce more scale, we see a significant benefit, we’ve outlined some capital numbers that Mark spoke about earlier so you can try and work that out, but obviously the platform includes not just the capital and depreciation of the equipment, the flexibility that we’ve put into the platform but also includes the servicing and maintenance of it, also includes all the software, all the upgrades, all the running costs, all the cons, all the network rooms and server rooms in the warehouse.

So there is a lot of costs bundled into that fee making that fee very-very competitive for what it is. I think it’s entirely impossible to say how does it compare to any equivalent product, that has no in equivalent product, so I don’t think launching, ranging your products in Amazon’s offer or even listing your products in Amazon’s marketplace can be compared because one is an Amazon customer, Amazon owning the customer data, Amazon owning the strategy of the retail business and OSP is your own business as a retailer.

So Morrisons, is Morrisons business, Ocado does not own the data of the Morrisons customer, Ocado does not set the pricing of the Morrisons proposition or even the decisions Morrisons makes, so they want one hour slots or three hour slots, so they want our promotion today, or do they not want to have a promotion today but they want to charge for delivery pass, they don’t have delivery passes. It’s Morrisons business, they own their strategy, they own their customers, they own their direction and they own it for the future. And going on to Amazon marketplace for many retailers has been poisoned chalice initially increased sales and then Amazon have moved into different areas and kind of crowded out that retailer.

So I don’t think you can compare it, I mean I don’t know what Sprowtz or anyone else is paying exactly in there but Amazon’s marketplace fees are quite transparent on the Web site normally and just the listing marketplace I think is more expensive as a percentage of sales in the whole of the OSP platform as a percentage of sales ignoring the fulfilled by component of moving on to an Amazon platform.

Unidentified Analyst

[Indiscernible]

Tim Steiner

Well the Amazon fees, well I will go and have a look on…

Unidentified Analyst

[Indiscernible]

Tim Steiner

Well no we’re not public with our fee structure but I mean obviously we’re talking people about our fee structure we’ve given indications into the past that’s roughly what our fee structure might look. And it depends on a customers’, -- it’s more likely to be a fixed fee for an amount of capacity and it depends on how that customer wants to use that capacity, so if they want to have a single, very big day of the week then it’s going to be a higher percentage of sales and if they want to trade assuming in a patent like Ocado does, if there are some prices higher or lower than ours then obviously the fee is higher or lower as a percentage of sales, if you wanted to put luxury goods through it then you won’t even notice that as a percentage of sales, but as a grocery retailer, you notice it because your advertising price is lower, so there is a lot of variables in there that effect what that percentage is, but compared to anything else that we can find to compare it to, it looks exceptionally cheap, it’s certainly cheaper than our own infrastructure has ever cost us significantly cheaper than our own, than we pay for the same service from ourselves and it’s all because an incremental billion is much cheaper to provide than the first billion.

Unidentified Analyst

[Indiscernible]

Tim Steiner

You can keep asking all day but eventually I may need to go somewhere else, so that topic moves on to somebody else, it’s a nice try but we’re not going into the full detail so I am -- because we’re negotiating with people, if we go and say it cost us x and we’re selling it for 2x and the first question I’m going to get when I go to my next meeting is can I have it for x, it’s just not in our interest.

John Kershaw

John Kershaw at Exane, paint the picture of how this evolves from the OSP internationally because what you are doing in Morrisons seems a sensible compromise but it could be 80% of the market, pick from store, helped by you for the next 3 to 5 years and then in time you evolve much more to a CFC heavy model, so take us through, and I know it vary by retailers and by country, but sort of what market penetration do you think it flips to being much more efficient because what you have described as OSP, and I didn’t know anything else, given to the piece of paper I’m signing it sounds genius. So clearly there are other barriers in the real world for retailers.

Coming back to the UK and then the businesses there good growth in the top-line but new customer growth or the new customers is falling down to about 11% and marketing spend has gone up a bit as a ratio just around the edge, so tell us what’s going on with the customer base there and just how do you think about in dealing with a structurally declining average basket size because it’s clearly just drop efficiency and nothing else there is an impediment there, we’ve seen it from your OpEx leverage ratios, so take us through how that’s going to be fine.

Tim Steiner

Let me start, can you all do me a favor in listening the next one, can you just pass one at a time because that is a bit easier. And so in terms of reducing basket size, I think it’s just important to say that actually our basket size hasn’t reduced, our cash has reduced because we're in a very unusual period of deflation in the grocery market than we've seen now for two, three years, but we haven't historically seen in this market. And…

John Kershaw

Is that more to do with Fetch and Sizzle and the economics of -- so maybe a better gross margin?

Tim Steiner

Okay. I'll just try and separate the two then so, in terms of the grocery basket side even where we have seen a slight decline in the amount of items per basket actually when we analyze that on a weight basis the weight isn't moving so, there's been some consolidation into larger packed sizes or more multi packs. The actual amount of groceries that we're shipping to our customer isn't changing. So, we don't expect in the long-term in the grocery business to see significant basket contraction, having said that as we grow density as we do in our delivery network from a picking perspective it doesn't matter. If a customer has got half the basket it's like running a store, that part of it doesn't matter, it's a dropping part where it matters and as our -- as we send out more full vehicles that return back empty every time with a bit of spare time on them and as they keep building spare time there's no impact in that spare time being used to make another delivery. So, in the busier geographies that we're in actually has very little economic impact if the customers want to smaller basket, it still has a bigger impact in the less dense, less mature geographies that we saw.

The impact on Fetch and Sizzle and the new beauty business it slightly depends, there's some portion of those orders are delivered with a grocery item. We've recently started shipping some portion of those orders by courier well it obviously has the similar economics to another in any other online retailer. You'll actually you're right in saying that the economics there is slightly differently the gross margins overall maybe a similar percentage or a slight lower percentage but the cash margins are significantly greater per kilo per pick per liter of volume because the item prices are much higher in general merchandize than they are in grocery.

Obviously we wouldn't be expanding those businesses if we didn't sync that they were a significant addition and so I think you have got to try and separate the two baskets off and try to analyze them both differently and probably try to estimate what we should be charging for the unattached deliveries and how many of those unattached deliveries will be made by our fleet as oppose to by a courier going forward. And as we have more delivery options we can tailor our pricing to try and drive some of more of the volume potentially through the courier style delivery and then have a one hour time delivery that is attached to an Ocado order being more of a premium service that we didn't have that capability to start with. Is anything else in there?

John Kershaw

There was one on new customers?

Tim Steiner

Yes on new customer acquisitions are up 11% in the first half, was a better metric as active customers are up 15%, the business is not driven by the number of people who try you first time the business driven by the number of people who have become active customers and as you see from us in the past remains the case active customers for us once they are active they're very-very loyal. This is like a subscription business once they become an Ocado customer they stay with you for life actually. And it's a 15% growth in active customers which is an important point and what you should expect ongoing, so you shouldn’t expect the 11% growth in active customers, this is the new norm.

John Kershaw

And just the international mix, above the -- that you are all going to be sort of store picked, 80% or gradually move because that has a significant impact on the economic?

Tim Steiner

Look I think it depends where and who, and what market share you have and so in denser urban areas which is where most of the population in the both countries live I think the warehousing has significantly better economics. The key with the warehousing though is you have to believe that you're going to need a warehouse. So, we can build them smaller than Andover. Andover's a 65,000 orders, we've probably built something half the size of that but it doesn't make sense at the moment to build something the sixth of the size of that as automated, but if you believe that's the short-term opportunity for your business then you're better off to go down a store pick route to start with. Obviously it is the same platform it's an easier if you've got more scale in the future to expand or if you're actually going to a country where you've got one sense that you think you can drive 100s of millions of turnover through, you build automation there and then you can roll that in the rest of the countries in the store pick and as scale grows. I mean even the most ardent store pickers in the UK are all opening some form of centralized dark stores at the moment because at the scale of the market of the UK more than half the business is done in an area where it clearly makes no more sense to store pick even if you're an adamant fan of store picking. And so, if you look that from that perspective everybody is building some form of centralized non-customer facility.

Duncan Tatton-Brown

And John maybe just add something to that, you talked about the economics, yes we would believe the economics of online grocery are without doubt better through a centralized fulfillment model of scale. But the economics for us in OSP you were saying will be much better for CFCs not necessarily because although the fees one would expect to charge for software -- store pick software are clearly lower. Once you've developed the software the capital involved in rolling out store pick software is frankly non-existent. And so if a software business on its own typically has slightly better returns on capital than a combined software and hardware business. So I’m not saying that we’re not interested in the software, hardware business, we absolutely are. But don’t assume that providing store-pick software means worse economics for us.

Francois Halconruy

Francois from Morgan Stanley, so at a time maybe, first one is on range and if I look at this, because it’s growing at a slower pace in the past a little bit and your wastage is up a little bit due to range. So is that the physical limit of range or do you think, you can significantly expand on that, because it’s one of your key areas of differentiation so first question please?

Tim Steiner

There are physical limits obviously in the existing warehouses on range. We add range from our general merchandise site to that and we may have more capacity that if you going. But yet, it’s not a straight line, there is no, it’s not a question of just as fast as the buyers can range stuff, we can store it. They have to buy it in line with the physical capability. So range is a focus for us, we obviously have been growing range at the same time rest for the industry has been going the opposite direction and the shrinking the ranges more to match what the -- to compete better with the limited assortment discounters. So range is becoming a bigger differentiator for us and I imagine it will continue to be so.

Francois Halconruy

Okay. One may be for Duncan on the just curious about the book value of CFC1 and CFC2 on the books, because globally you’re depreciating pretty quickly in your challenge, when should we expect CFC2 to come up for your depreciation schedule and related to that you are depreciating a CFC fee towards the end of the year or in second half. So a bit more color on what we should expect as depreciation charge for this year and next year would be quite helpful if possible?

Duncan Tatton-Brown

Yes. So you asked it really on depreciation on all three, so I’ll go through them. CFC1, large parts of that facility are fully depreciated even though they’re still operating. But there are some parts of that being put in within the last 10 years, so some of the goods-to-man capabilities have been put in the last 10 years. With the consequent software developments, so there is still depreciation charge in CFC1. But that is reducing. In CFC2, at the time we opened it, we said expect depreciation, average life of depreciation of about nine or so years for CFC2. It’s not been opened for nine years, so expect that to be continuing. Of course, that’s led into a faster depreciation software average depreciation MHE and longer depreciation building. So clearly some of the software will have, because it’s been open now for three years, some of it will be well depreciated. On number three, I think the market generally have probably slightly too high view of depreciation. But based on the update today of the fact that we’re saying Andover opening in the autumn, I’m assuming, the market will assume that that is slightly later. And because we don’t start depreciating until open, there’ll be a modest saving on that versus your expectations. But there will be an amount of depreciation this year.

Francois Halconruy

And last question is on Tesco last week. So when they reported their Q1 figures they basically said that they were less willing to subsidize their online operations. Also, you might have noticed their sales growth in online is actually decelerating quite significantly. So it’s the market leader, so we can think that maybe you have a little bit of a spill-over effect in your business. But then, at the same time, they were contributing to expand the business. So if you think about this year and maybe medium-term. How do you think about that main competitors potentially being a little bit less willing to subsidize their online businesses?

Tim Steiner

Look I heard, what they said as well, I’m not surely we have seen it particularly yet. And their slower growth has been going on for a period of time. We're also, as people have mentioned, also seeing new competitors enter the market. We aim to be hopefully the fastest grower in the market. We’ve outgrown the big four on their online operations for a period of time now and we’d expect to carry-on doing that. We’ll see what Amazon does in terms of growing or creating a presence in the market. It’s good news to see the biggest player in the market, say they want to subsidize their business less. It’s an interesting point for them to make given how much profitability they’ve claimed that because has made over the years. So it’s a strange that suddenly, it’s seen as having to provide a subsidy to it. But, maybe it will give us more opportunity to grow. At the moment, we set a growth trajectory, we’ve been sticking very much to it and we’ve been building resources to enable us to do that. Obviously when we come on-stream, in particular with the second of the two buildings that we’re doing, at the moment in Erith, then we may have the potential to accelerate that growth rate in a meaningful way, prior to that we wouldn’t have for the potential to accelerated growth rate in a meaningful way, because we wouldn’t have the capacity to do that. But it’s clearly good news to see somebody slowing down the subsidy, so they’re putting into their business.

Duncan Tatton-Brown

Can I maybe suggest before we go to the next question, just to give the people who are online asking questions a chance to go. So maybe I’ll read them out and Tim you can decide, a question from Sam Hart. Please can you comment on the outlook for UK food price inflation given sterling’s recent weakness?

Tim Steiner

Look, I think that we will see pricing pressure. There is no doubt that with the recent movements in sterling, that food prices are likely to start rising as well as fuel prices and other input costs. So, we will wait to see where sterling settles after last week's events, but I would expect that it would lead to some inflation in food pricing.

Duncan Tatton-Brown

May be another one, do you think Amazon will continue to target areas of the country that you are overindexing in terms of orders and how much market share do you think that they could realistically gain in the next two years from Ocado?

Tim Steiner

Look, we don't know what areas Amazon will or weren’t opening you might recall the business they did open a couple of weeks ago now was originally announced six years ago so during our IPO road show. So, it's difficult to know exactly where and when they will open and whether they are specifically targeting areas that they believe that we're overindexing or not to be honest I have absolutely no idea what they are targeting. I think that their online market as I said before is a single-digit percentage of the overall grocery market and therefore there is a lot of stake for all of us online to continue to grow and create more channel shift. And I've got no idea what scale they can grow to, but it's the type of facility that they have opened in Bow in our opinion is not a facility that can achieve huge sales volume it's probably got a £50 to £100 million a year sales capacity. So, to grow substantially they are going to need to open a lot of those which they may well be planning to do but I think we will have to wait and see.

Charlie Storey

Charlie Storey from Macquarie and two for me, please. First one, you mentioned Fetch and Sizzle weighing on gross margin. I had in my mind that Fetch was a higher gross margin business may be it is striking it down, but if you can talk around the underlying food gross margin that will be helpful. And then that dynamics of Fetch and Sizzle in groceries essentially?

Tim Steiner

So, and I mean Fetch is a meaningful side business Sizzle at the moment is still a very small business. Fetch is a lower percentage gross margin than grocery it's been significantly improving over the last year but it is a lower percentage gross margin, but that doesn't mean and in fact it is a better cash margin per item, per kilogram and per liter than the grocery business. So it always depends on how from a different way but in this it depends on how you look at it. The general merchandise part of the hypermarket is a higher gross margin and the higher cash margin and so the more general merchandise you do the more gross margin as a percentage the more cash margin the more the pack business grows, the lower the percentage margin, but the higher the cash margin which is what we really care about on every item that we have to handle and ship.

Duncan Tatton-Brown

And I think it is best saying that Tim's comments are I think about the Fetch margin are about our business not about the market enhancing because Fetch started as a lower gross margin because we have a tiny business and we couldn't buy cost effectively because the big suppliers didn't really want to deal with us. As the business is scaling the margins are improving and we benefit inherently they won’t improve quite substantially more from where they are today but remember it did start with no existing sorting arrangement it had to start from zero.

Charlie Storey

Okay. So, it's currently weighing delta year-on-year on gross margin but it could potentially start improving gross margin?

Tim Steiner

Yes. I mean it has improved its gross margin year-on-year by hundreds of basis points but it is continuing to improve as we're becoming one of the largest players in online tech supplies business in the UK and growing the business to acquire pretty good space.

Charlie Storey

And increased percent of sales it's still weighing on gross margin just to get a clarity but it should be sometime improving?

Tim Steiner

Yes.

Charlie Storey

And the second question, how do, how important do you view same day, next day delivery and what you are doing here what more can you do may be you can just split out substantially same day and where you want to get to?

Tim Steiner

We do more same day than we used to we have been in the same day business now for hasn't any guess seven, eight years or something like that for a long time even and we don't do it in all of our geography and the geography that we do in and it's a small it's a minority sort the majority of our business is today for tomorrow. As we grow in scale ignoring changes to our equipment for a moment we generally can do more same day if we think that we could do an amount of geography same day from Hatfield when we open in Dordon then we could still do Hatfield and now we had a geography around Dordon we could do it in. When we open Andover well there will be a geography around Andover when we can do and when we open Erith there will be a geography around Erith that we can do it in. So slowly as we grow we gain the ability to do more same day because we gain the ability to have more customers closer to our production facilities, one.

Two, as we open the two new facilities and that we more than doubled the capacity of our business, those are facilities where we can reduce the processing time of our orders by several hours on average three hours or more on average that means that if in Hatfield we could cover a certain geography by having customers shop before 11 in the morning for a 4'O Clock delivery now suddenly you can be doing that significantly later three hours later than you were before for a delivery. I will start to give you more options of what it is that you can do.

On top of that there are software developments that one can do to be able to enable more same day and then there is just a making the commercial decision that you want to experiment and see what that does to consumer behavior and we've been doing some of that over the course of the last year running some experiments in some of our areas to see what happens if we make more same day available and stuff like that. Customers take to same day but not as, it is a positive but I don’t think as aggressively or as conclusively as the pundits think. So I do think we’ll do more of it but it hasn’t so far and obviously that could change but so far it doesn’t seem to be the be all and end all to customers.

Charlie Storey

Okay. So just third question and how much of your just growth rate increase till to Q1 to Q3 to a 0.5 to maybe 40.6 something like that and how much of that is due to capacity constrains over Christmas because Q1 and Q2 did December, so you’re not capacity constrained due to and how do you think around the mix there?

Tim Steiner

I mean I think that the Christmas capacity constraints effect about 3 days of your volume and so even if on those 3 days you couldn’t grow the portion is much as you did the rest of the quarter, the impact on the total quarter’s number is pretty small.

Unidentified Analyst

Richard Clarke from Bernstein, two questions from me, maybe a little early to answer these ones but just on the implications of the referendum results, I assume some of your negotiations are with other EU retailers, do you think it’s likely you can sign a deal in the next 2 years given the uncertainty of UK’s position, how does it impact that? You also said you want to increase more technology staff up to a 1000, I would imagine some of those people would want to come from the EU, any sign that they will be a less labor availability at that kind of higher skill level and also at the lower skill level within your warehouses, how many people are EU or non-EU nationals working in the warehouses?

Tim Steiner

Three parts, all Brexit related. So the first one is in terms of selling into Europe, yes a number of the conversations we’re having are with retailers working in the EU, I don’t believe that a Brexit that will force any of them, I do believe will have the right to sell products into the EU and possibly even deliver most of that infrastructure into the EU prior to any changes actually occurring in the EU and I don’t believe that we won’t be able to service and maintain or deliver software from the UK into the EU. If we can’t do that, this country is going to have a lot more problems than even we’re envisaging now and I think at the moment therefore the slight sterling weakness which is a huge sterling weakness against the dollar but isn’t as huge if you look for the kind of the trading history versus the euro, it’s just making a slightly more cost effective for those retailers, again their item prices in euros isn’t being effected and their OSP fees that James was trying to work out what they are, slightly lower I can give James that clue in euro terms today than they were last week and so instead of anything it helped that conversation.

In terms of increasing our IT headcount, the real growth at the moment in our IT headcount actually is in our newer overseas offices, that would be Wroclaw, Sofia and Barcelona and therefore they are unaffected in their recruitment because the reason that we’re definitely not trying to hire UK nationals, we do send one or two outlets to manage those operations, we’re assuming they are going to be allowed to work there but if they weren’t for any reason we would deal with that fact but they are not going to be affected in their ability to recruit people.

We do have a very significant number of as you described them lower skill level employees, team members in our business who are not UK nationals working in both of our facilities, a number of whom are EU nationals. I don’t believe that whatever negotiation we get into is going to mean that we are going to have no access to labor in this country, we are far from the only employer in the UK who relies on non-UK national employment to operate a business and clearly for the economy to carry on functioning we’re going to need to carry on both encouraging those nationals to remain here and encouraging more to come as well.

Duncan Tatton-Brown

Go back to questions from online. What is your response to Amazon Fresh, response plan to Amazon Fresh?

Tim Steiner

Look obviously, if we are doing anything specific in response to Amazon Fresh, we wouldn’t be sharing it, we’d love to share it with you but unfortunately we’d be sharing it with Amazon which wouldn’t be commercially sensible. So we believe in serving our customers with a fantastic proposition and we will carry on doing that. We will try and make sure that our proposition is best than anything else out that is available to them.

Duncan Tatton-Brown

Okay. And our last one, I’m assuming for myself to answer, free cash flow is just 4 million are you being aggressive with capped investments at the risk of needing to raise additional capital, we -- free cash flow was a modest because we are investing the cash flow generating to more than double the scale of our business. But I’ll come back to what I said earlier with 270 million of liquidity and the ability within the existing size of facilities they have got to fully fund both the roll-out of Andover and Erith with far existing capabilities we will continue to do that, we believe the market is growing and there's a big opportunity. So, there wouldn't be any need to raise capital if we're doing that. And the reason why we have to raise capital is if we decide to accelerate even faster than we're currently growing and then that would create a problem of much higher growth which I don't think is a real problem. So, maybe another question from online if there's none from here. Is there strategic value in Smart Pass in the way that Amazon uses Prime?

Tim Steiner

I mean Smart Pass clearly as we said over the years and we've been operating it now again for I think something around seven or eight years has driven a changing customer behavior, so loyalty, more baskets, more frequency, higher total annual spend, and a small impact to the basket size of each order. It is the majority of our orders a shift to a minority of our customers who are on Smart Pass. It has other benefits that we've bundled into it for the customer. We continue to see very strong merits of operating and promoting our Smart Pass to our customers, we'll continue to do so.

Duncan Tatton-Brown

Okay, perhaps if I take a last one here from online and then leave it open to the floor. Why do you think you've seen an increase in reactivation of lapsed customers and can you say what the average basket size is for Smart Pass holder?

Tim Steiner

The Smart Pass customer basket is slightly smaller it's not materially smaller but it's slightly smaller than the non-Smart Pass customer of the same level of maturity. So, a mature Smart Pass customer will have a bigger basket size than a new non-Smart Pass customer but at any given level of maturity the basket is slightly higher if you are a non-Smart Pass customer who is paying for the one off delivery fee that influences your behavior to try and ram a bit more shopping in, because you're paying on each delivery basis and if you've sunk cost into the Smart Pass the first part was about reactivation, why we're seeing more reactivation. Look we're focusing on acquiring and reacquiring the best customers and as Duncan said earlier in terms of why's the new customer acquisition lower but the active customer base higher is because we're being more selective about who we're going after and focusing because the more data that we keep having access to both internally and the more data that you can use in the media world enables you to be more targeted about who you're going after. And so we will continue to pursue our last customers and we'll continue to pursue the most likely to become active loyal customers in our marketing and that's something what as we get the opportunity we'll continue to try and do.

Andy Wade

Andy Wade from Numis just two from me, first one, in terms of all the sort of platforming-type store-pick operations internationally, any concerns about then obviously they are signing up deals and do you think there's potential that the presence of then and the increasing presence of that could have pushed back retailers, think a lot we can do this first in the short-term and then if we need to later on we can shift to Ocado's? That was the first one.

Tim Steiner

Look I think the most prominent of those platforms is obviously Instacart one. It, in our opinion has a couple of challenges, the first one being it's a little bit of the old Trojan horse like the Amazon marketplace I think you're losing your customer data, your customer relationship to Instacart, so as a retailer that's not hugely attractive. Secondly the economic model is one of inefficient store pick and store picking itself is pretty inefficient but if you've taken the time and travelled to go and watch someone doing it, its store pick without a planogram. So, i.e. they don't know where the products are in this shop. It's like being sent by a partner to the shop without a shopping list. There's no aggregation of customers onto a single trolley to create efficiency or anything else. And they have to run it through the tail. So, it's a very inefficient process that looks like it has been mildly successful in certain areas where there aren't successful established players like we have here in the UK.

I think anyone would struggle dramatically to launch an Instacart offering here in the UK, because of their premium pricing that you have to charge a customer to recruit the incremental costs of picking it and delivering it in an inefficient manner when all the other costs are still being incurred. Having said that, there's an attraction which is that because you do run the things through the till, because the picking software has no planogram, there's no integration to the retailer systems required so, the first part you can go and take products of your -- take images of your products put their pricing on and you're in business for the next day. You're in business with a service that loses money every time, if it's an order but you're in business. And so a number of people that we're talking to has enabled it or allowed it in some stores just to test the market out and see what demand there is but the people that we're talking to tell us that it's not part of their long-term future.

Andy Wade

And then the second one, obviously a part of being an ongoing negotiations with Morrisons you talked about and developing the store pick element to it, in terms of looking at theoretical situation where you could offer a store pick now what proportion of orders do you think that you currently fulfill for Morrisons that would shift over to store pick from central fulfillment?

Tim Steiner

So my expectation would be that nothing would shift from one to the other. When we enabled Morrisons for them we only had capacity that we were able to sell them, because of our own demands, in Dordon. Dordon wasn’t as well located as a single site to serve as much of the country as Hatfield was when we only had one site. So from Hatfield I think originally we were covering 68%-69% of the UK households by geography. From Dordon, we’ve been able to cover 50 something percent for Morrisons. And so I think that the store pick will be used to expand the geography, but not to some, it’s not, if you’re already processing the order through the facility, we think that is the economically best way to do it. So it’s not that you want to take it out and put it in a store, it is that you might want to do more volume and you haven’t yet got a warehouse or you might want to do volume where it isn’t close enough to the warehouse to be served by the warehouse or you might want to do volume in an area that’s too far away to ever have a warehouse. So those are the times that you would use, I envisage that they would want to us store pick.

Andy Wade

So where you’re delivering at the moment, none of that would be, you don’t think any of it would be economically better served by a store pick model?

Tim Steiner

I don’t think it would be economically better served by our store pick model. But as we stated before, the warehouse was designed to do 180,000 Ocado equivalent orders and we have at this point exceeded that number. As Mark outlined earlier, we have created some more capacity and we’ve outlined between the two warehouses our whole of Hatfield and our half of Dordon. That amounts to about 10,000 orders a week for us. So there is a bit of extra capacity there, and Morrisons get their half. But Morrisons business has grown very rapidly and if we’ve exceeded 180,000 in a building designed to do 180,000, you can imagine that we’re close to having, they’re close to having utilized all the capacity that that they bought in that building. And therefore, as they continue to acquire customers in the geography they’re already serving, as soon as the store pick is available to them. Then I imagine that they will be some of that store pick to enable them to carry on growing. But that’s for them to decide, where they choose to turn one on or the other will be for them to decide, not for me.

Andy Wade

Okay.

Duncan Tatton-Brown

But remember the in-principle agreement is not just to provide store pick software, it’s that plus sharing in it Erith.

Tim Steiner

And James is coming round two, how much is OSP?

James Tracey

I’m going to ask the same question again, so thanks for that Tim. But I have noticed the change in your tone over the years in relation to the desirability and efficiency of store pick. So you’ve always been dismissive of it in the past, and now you seem to be warming up to it a bit. Is the reason for the lack of deal to date due to potential partners wanting to do store pick and so have you, have to sort of going to that market looks like they want to do it, because they’ve got stores. And the second question is what is your competitive advantage when it comes to store picking and why would the retail and not just do it themselves given that they own the stores? Thank you.

Tim Steiner

So what is our competitive advantage in it? I think that to do online well it is about a lot of software, even if you’re doing it in-store. So you want to have an efficient in-store picking system, but you also want to have the front-end as I have got the best feasibility. That are therefore easiest to require customers, to retain customers to drive frequency and spend margin and loyalty from those customers. And we think, we’re good at building those interfaces, we’ve led on a number of the innovations on the front-end in our market including mobile that today is over 55% of our business.

So we can provide, we think a very cost effective, but also a very good system for the store pick part of that business. One of the big competitive advantages of it is that there is then a seamless turn on both from them as a business and for their customers when they’ve achieved a density in an area where they want to put automation in. So whereas if they go with one of our competitive product, that is just a store pick solution and then they reach the point in a London-equivalent type of thing, where they want to move to automation, because it makes a lot of sense for them at that point they have now got to migrate their customers and their data, and we’ve seen people try and migrate off one platform onto another, we’ve seen M&X do it in their general merchandise business. It can be a risky thing to do.

And so therefore by using our store pick, they’ve enabled themselves to be able to use our other solution, the OSP warehousing, but also anything else that we develop in the future that might give them more flexibility. So I think it’s got a number of advantages. I am still not a massive fan of store pick for its overall economics. However, what is definitely seen by our competitors is that, if you offer online, you not only do online business, you do more business in the store excluding the online. So that there is some element of doing online sales to drive traffic, however you do the online sales, you drive more physical store business to your store and therefore it’s possible that you are not wonderful economics on store pick can actually drive fantastic economics for your business.

And that customers want a service and possibly if you can buy a very cost effective store based solution where you are not having to invest large amounts of upfront capital in redesigning Web sites or designing new order processing or CRM or mobile sites as most of our competitors have to do may be economics there are a lot much better. So maybe you can improve the economics of the store pick if you are doing it with somebody like us who will charge you on a platform type basis on a pay-to-play basis while you're not sinking a lot of money in. I still believe that our volume that OSP is, the automation is significantly better than store pick but if we offer both to retailers than it clearly can become their choice and also to somebody who is not yet committed enough to believe there are going to do 100s of millions of sales online and they want the automation it allows them an entry to come in and start with store pick in some of their geographies to gain customers onto our platform in the future to expand their business. So, yes it is a good string to our bow whatever that expression is to add that as something that clearly retailers can choose what they want to use and where they want to use it.

Duncan Tatton-Brown

And may be just finish to on that one our biggest competitor in the UK is probably the largest online grocer anywhere in the world also as talked recently about a need to I think we've subsidized that online channel less. So if the largest player in the world in online thinks that store pick doesn’t really improve their economics then you have to question whether store pick is a good solution. We have fundamentally have not changed our view of store pick does not have the economics that centralized model does unless your sales are so small it doesn't matter because if your sales are very small doing store pick you will lose less money than doing a centralized facility which has some elements of fixed cost once you get that any scale centralized model is the ramp down better so -- but the point is that we haven't changed our view but you want to provide a retailer who might not appreciate that because they are still considering whether there is an online market so they prefer it not to be there. So, no our view haven't changed but that's modeled in the centralized model of store pick does. I think we should conclude there. We've hopefully answered most of your questions, not answered all the questions from online but a good proportion of them.

Tim Steiner

Thank you very much.

Duncan Tatton-Brown

Thank you.