N Brown Group plc

Good morning everybody and welcome to NBrown's first half results for FY21. I'm joined by Rachel Izzard, our CFO, and unfortunately, once again, we were unable to be with you in person due to the ongoing pandemic. As always, I hope you are safe and well during these challenging times. So, turning to the running order this morning. Firstly, I'll give you a brief overview of our announcements today. as I'm sure you'll have seen this morning in a separate announcement, our proposed equity raise. I will then hand over to Rachel, who will talk you through the group's interim results. I will then talk a bit more about our strategic progress before turning to the opportunities we have to accelerate with the extra capital available from this raise. Since we last spoke to you in June, our product revenue has continued to improve throughout Q2. Our financial services business has remained resilient and we're continuing to make savings across our cost base. Our refresh strategy has made good progress as we entered the acceleration phase this year. I will talk you through this in more detail as we look at our five pillars shortly. This morning, we also announced the details of our proposed equity raise, which, if successful, will help strengthen our balance sheet and enable us to invest more in our strategy. I'll now hand you over to Rachel to talk you through our interim results.

Thank you, Steve. Now, the start of our financial half coincides closely with the impact of COVID-19 on the UK economy. So half one has seen material movements. both due to the impact of COVID-19, but also due to the acceleration of our underlying strategic changes. From mid-March, there was an immediate and severe reduction in customer orders and revenue, followed by a gradual recovery over the course of the half, which is reflected in our improved revenue trajectory into Q2 and into Q3. In parallel to this, the strategic changes come through, demonstrating the inherent strength of our restructured business model, We increased digital penetration to 92% and rapidly flexed our cost base to offset more than 90% of the gross margin decline. Within that gross margin decline, we've booked a $17 million additional IFRS 9 bad debt provision to cover possible future defaults in light of the uncertain macroeconomics. Now, to date, customer behavior has yet to show any material adverse change, and payments from our customers have remained resilient. This, combined with rigorous cost control, has enabled us to generate cash despite the challenging environment and reduce our net debt by 17%. Our refreshed and extended bank deals have enabled us to remove the material uncertainty we had at the end of last year end. So in summary, our resilient and more efficient business model meant our underlying profitability moved a head and a half, and we have made a start on deleveraging the balance sheet for the future. Despite the immediate impact that COVID had on the UK economy and upon our sales, we are pleased to report that the business remains profitable. Excluding the impact of that additional 17 million IFRS 9 bad debt provision, we would have seen all profit measures, operating profit, adjusted PBT and PBT, favourable to last year. Then moving below the line, finance costs are slightly higher due to the higher opening borrowing. And as we've previously guided, exceptional costs are significantly lower. We've incurred four and a half million in half one in a number of areas and remain on track for full year exceptional costs to be less than 10 million. In the same period last year, we booked an additional 25 million final PPI redress provision. Now we continue to hedge our anticipated dollar purchases to manage volatility of our cost base. The fair value adjustments to financial instruments represent the move in the fair value of those foreign currency hedging derivatives during the period. The adjustment has reduced from a 12 million credit this time last year in half year 20 to a 4 million debit charge in half year 21 due to the unrealized fair value gains on these hedges in half year 20 being replaced by unrealized losses on those such hedges as the dollar rate has moved. Lifting back up and looking at trading performance, this graph clearly sets us through the material movements and the underlying steps forward in profitability. Moving from the far left to the far right, The reported adjusted EBITDA is 6.1 million lower than last year. However, that's inclusive within that of half 1 FY20 benefiting from a 7 million IFRS 9 one-off credit, whereas half 1 FY21 has had an additional 17 million provision for predicted economic downturn overlaid. So you can see that significant impact from one-off non-cash IFRS 9 provisions, but underlying, the EBITDA is stepping forward. Now that step forward, if you strip out that 24 million IFRS 9 swing, is a step forward of 18 million. Now the impact of COVID-19 on demand pulled down both FS growth margin and product growth margin, but that was more than offset by the significant volume and efficiency savings through the cost base. Combined, we took 71 million, or 41% out of the cost base, compared to revenue being down only 17.6%. I'll now step through the individual drivers. starting with revenue. After initial deep shock in March and April, product revenue has recovered in May and further still into Q2 and into Q3. As we have emerged from lockdown and subsequently completed the half one audit, customer returns have been lower than anticipated. We've re-phased this release back into the month of sale, and this shows the underlying trend with Q1 down 25% versus last year, improving to 16% in Q2, so a steady improvement in that revenue trend. Across both quarters, our home offer had been key, enabling us to pivot towards the rapid and sustained shift in customer demand to products for the home and garden. As the extent of COVID-19 became apparent, we cancelled out and rebased our clothing and footwear purchases. We also materially reduced our marketing spend, and circa 50% of marketing is now variable at less than one week's notice. and is ably supported by AI tools, enabling us to work smarter and reducing unprofitable pay-to-click spend. And then looking forward, as the new stock builds and the marketing activity is resumed, we expect to see further steady improvement in product revenue in half too. Closing with financial services, FF revenue is down as expected in light of the smaller debtor book due to those lower product sales and solid customer repayments. Moving into gross margins, the strategic development of our home and gift proposition has generated an increased mix of home sales from 26% last year to 41% mix this year. Home and gift products have both lower gross margins but also significantly lower returns than clothing and footwear, so whilst it changes the average margin, we are comfortable at drive overall bottom line and is fully in line with our strategic change. Over and above the mix change, we also took some margin erosion to make sure we worked through the stock and made the most of the working capital inventory that we came into for the period. This means we've come through summer in a strong position with our closing inventory 14 million lower than at last year end and 37 million lower than at the end of half one last year. That's been good for working capital and it also sets us up well with a cleaner slate for the new product purchases in line with the strategic change into the new seasons with relatively little old stock overhead. Moving on to financial services gross margin. From an FS perspective, the first thing to flag is that the customer loan book has been very resilient throughout half one. Repayment rates have been consistent with the previous year and the arrears have been lower, leading to a reduction in the underlying bad debt provision and a 330 basis points improvement in FS gross margin underlying. Now, in light of the forward uncertainty for macroeconomics, we've provided an additional 17 million under IFRS 9. That's in line with the range estimate we discussed at year end. But again, we're not yet seeing adverse customer repayments. And finally, we usually do a biannual debt sale, but this year we haven't needed to do that from a cash perspective as half one has been strong. So we've deferred that to a consolidated, more effective single sale that will transact later in the year. So all in all, we are happy with how the loan book is performing and have supported our customers appropriately through this period. Moving on to the cost base, establishing a stable and efficient digital retailer cost base is one of the core enablers of our strategy. As you can see, we have already made inroads into this over the previous two years, including exiting stores and the USA. Now, coming into this period, we took swift and decisive action at the onset of the pandemic to rigorously manage costs across all areas. The speed at which we could pivot demonstrates the revised high level of flexibility in our cost base, well suited to navigating these uncertain times. In total, we reduced OPEX by 41%, well ahead of the reduction in sales and offsetting more than 90% of the reduction in gross margin. Marketing costs were the largest reduction, and this came from both volume and efficiency, with the latter aided by the strategic initiative to use predictive AI understand customer lifetime values and target our marketing spend accordingly. Under the CJRS support scheme, we also furloughed some staff across the business through the first half and received circa 3.3 million of support. These savings are inclusive within the warehouse and fulfillment and selling and admin cost lines. Exceptional costs in the period also include redundancy costs to resize the business post-furlough in light of reduced but improving demand levels. Moving on to the balance sheet. At the year end, we had net debt of $497 million. This is differentiated between our securitized facility, which moves up and down with our loans to our customers and the associated assets, and the unsecured core net debt, which is the draw on our standard group unsecured funding lines, net of our cash holding. Starting with the securitization debt, the size of the loan book has reduced over the period with a step down in sales combined with healthy customer repayments. This net repayment of loans to us, 47 million, then means we've repaid the associated 41 million back to the bank and net released 6 million of working capital into reducing our unsecured net debt. The remainder of the 45 million reduction in unsecured net debt is the EBITDA generated in the period, combined with tight control of working capital, tight control of capital investment and the suspension of the dividends. Put this all together and it enabled us to pay down 50 million of the revolving credit facility. In the period, we also had to activate to maintain the seal bill facility and we needed to draw down 2 million against seal bills. Put this all together and we generated closing net debt at the end of August 17% lower than at the start of the half and we've reduced the draw on our unsecured facilities to 77 million. Looking ahead. Product revenue trends are improving, but customers remain cautious and we expect to continue to see the relative strength in sales of home and gifts compared with clothing and footwear. Product growth margin pressure will continue as a result of that sales mix and the market remains promotional. However, the strong operating cost efficiency is continuing, albeit at a slightly lower level as we move back to investing where we know there is opportunity. To put it together in summary, despite the uncertain times, we're pleased to report that we continue to trade in line with broad expectations. Our business model is now digital with a broad range of product categories and a highly flexible cost base. So we are confident of offsetting at least 75% of the gross margin decline for the full year. Our guidance on capital expenditure, exceptional items and net debt remains unchanged. However, noting that is obviously guidance pre the capital raise that we're also announcing today. And with that, I'll now hand you back to Steve to talk you through progress on our strategy in the half.

Thank you, Rachel. I'll now talk you through our strategic progress in the half. I am really proud to represent a business which serves a significant amount of UK customers who are ignored by many retailers. We focus on customers across three key areas, size inclusivity, underserved credit, and more mature customers. NBrown has expertise serving customers in each of these areas, and we believe that there are structural growth drivers within each one, which mean we have a great growth opportunity playing to our existing propositional strengths. We are already number one for women's wear sizes 20 plus, and we believe we can gain share in this growing market. We also have a long history of providing retail credit to customers underserved in the mainstream credit market. Today, 80% of our customers are from C, D, and E socioeconomic groups. We believe with our expertise in retail credit, there is scope to expand our offering to a wider range of customers than today. In addition, our customers are more mature than the general markets. We have an expertise in serving and supporting an older customer base, which, as the UK population ages, gives us opportunity to grow in this market as well. Our strategic approach has evolved over the past 18 months, and I consider two phases to this. The restructure phase ran from FY18 to FY20, in which we identified and began addressing numerous factors which have been holding the business back and contributing to poor performance. This phase is completed. The COVID-19 crisis has had an unprecedented impact on all businesses, and ours is no exception. Our focus this year has been to move as fast as we can to the accelerate phase, improving the business to weather the impact, whilst ensuring we are on the strongest possible footing to benefit from our refreshed strategy. Back in June, we launched the accelerate phase of our refreshed strategy to drive sustainable and profitable growth with higher free cash flow. Five growth pillars have been developed to reflect the focus of the business and the external environment. These remain at the core of what we are doing. First, distinct brands to attract a broader range of customers. Secondly, improved product to drive customer frequency. Third, new home offering for customers to shop more across categories. Fourth, an enhanced digital experience to increase customer conversion. And fifth, flexible credit to help customers shop. These growth pillars are underpinned by our enablers. Firstly, our people and culture. Secondly, data. And finally, having a sustainable cost base appropriate for a digital retailer. Let me talk you through the progress of each of these pillars. Starting with our brands, we're building clearer brand identity through a fresh creative approach for autumn-winter 20 across our core brands. Along with our latest campaigns for autumn-winter season, we continue to develop brand relevant partnerships to further engage with our customers. Examples of this include some exciting recent collaborations, including Simply B and Copperfield and Giacomo and Arms Lens. We're also launching a new influencer strategy on Simply B to support the reach and resonance of the brand with our target customer. We've talked to our ambition of five core digital brands with clear target customers. We have made progress on our simplification agenda during the half successfully migrating High & Mighty and House of Bath customers to Giacomo and Ambrose Wilson, respectively. We continue to accelerate the use of social media, growing its use and generating new content ideas and platforms to inspire and engage audiences. We now have 1.4 million followers across our different social media platforms, and we've seen revenue increase by 12% year-on-year in this space. Turning to product. We've made some solid foundational improvements to build a clear handwriting that supports the overall brand proposition. We've increased the proportion of product designed in-house by eight percentage points from 57% to 65%, and we will continue to increase this. As demand from customers changed in response to the pandemic and lockdown restrictions, we've been able to pivot into new categories with greater customer demand. Leisure and nightwear being good examples of these. We spent time better defining our pricing architecture. The launch of Ralph Lauren and Hugo Boss on Giacomo being a good example of how we're using third-party brands to extend the best elements of our range, with the two brands driving our best performance seen on premium brands ever. We have a clearly defined roadmap to deliver an enhanced level of sustainability, which we will talk about in more depth shortly. We're increasing the use of sustainable materials within our products with 45% of our total denim mix using BCI cotton. And in April, Giacomo launched its new sustainable denim range, a major step in our menswear sustainability journey. Finally, we've continued to consolidate our supply base, which has reduced by 21% since last year, building stronger relationships with the suppliers we want to work with going forward. Our third pillar, home, has been a real success story for Enbrand. Launching our standalone home brand, Home Essentials, on April 1st really enabled us to lean into increasing customer demand for home products. particularly in key categories like home working and electrical. For the first half of the year, demand for home was plus 25.4% versus last year. We also supported the launch of the brand across Facebook and Instagram and have gained over 50,000 followers for our Home Essentials social account already. Digital is one of the areas where we would look to accelerate our investment as a key driver to unlock faster growth. We've launched Bloomreach, which is an advanced merchandising tool that helps give more personalized experience to customers across all of our brands. We are also investing in application programming spaces for social media. Social is an increasing important growth driver for end brands, all of our brands. We therefore want to invest to make sure we are using social as effectively as possible to reach and re-engage with customers. Our existing websites are built on legacy technology, which is complex to maintain and update and is not fit for a modern digital retailer. We are developing a new front-end website, which will be faster and more configurable, delivering SEO and conversion benefits as well as enabling brand relevant customer journeys and customer experience, strengthening the entire proposition. This is one of the core areas we have an opportunity to accelerate with further investments, which we will talk about later. Our final pillar, credit, remains at the core of our business model. Innovation in the retail credit space means that consumers increasingly expect more choice and flexibility through a more modern suite of credit products. Bluntly, we need to keep up to remain competitive and relevant. We are currently in a discovery phase, looking at the best way to deliver new credit products and supporting product and FS revenue growth, and the new platform will support this delivery. We've also increased our use of AI tools to support better credit decisions and customer outcomes as we continue to improve our lending proposition. We have also made good progress against our three key enablers, people and culture, data, and having a sustainable cost base. Our people have always been our biggest asset. And this year, they have demonstrated commitment like no other in their flexibility and adaptability in response to the changing ways of working due to the pandemic. I'd like to take the opportunity to thank our colleagues for the tremendous effort that they've made over the last eight months. We've also made a number of senior hires into the organization, including our new chief finance officer, Rachel Izzard, and our CEO of retail, Sarah Welsh, who have both joined us in the first half of the year. We've also refreshed the product senior leadership team, as well as embedding a new director of data science into the organization. Good progress. Data has been an important tool in helping us to better understand our customer and build efficiencies into the business. The development of a predictive customer lifetime value tool landed in 2018 enhances profitability in the short term and helps convert customers to a higher value over the long term. Won the best use of AI at the Drapers Digital Awards. This is the second year running that we have won this award and shows how the use of data is embedded within our organisation. We have also significantly changed how we target our PPC spend to maximise return on investment, resulting in a 78% reduction of spend due to better targeting enabled by data initiatives. Finally, on delivering an appropriate cost base in line with that of a digital retailer, we've continued to reduce operating costs, which are down 40.5% in the half, significantly more than the 17.6% decline in revenue. Targeted initiatives across the entire cost base resulted in operating costs as a percentage of revenue significantly improving from 41% in H1 last year to 29.6% in this half. We also took the difficult decision to conduct a redundancy program across both our head office and logistics sites in order to ensure the group has the right organizational structure for a post-COVID environment. As part of our ongoing commitment to sustainability, we recently rebranded our corporate social responsibility charter to a new environmental, social and governance initiative. This will allow us to better demonstrate how we consider climate change as part of our strategy, engage colleagues and our wider stakeholder base, build, trust and champion innovation and manage our supply chains. We've created a new four-year sustainability plan that aligns with the values of our business. We want to be known for using sustainable packaging across our fashion brands, and ultimately we want to be one of the first major digital retailers to go fully sustainable on packaging. We aim to change all Simply Be and Giacomo branded dispatch bags over to green polyethylene by the end of FY22. At the same time, we are increasing the sustainability of key product categories, having already launched a sustainable daemon range on Giacomo. Our ambition is to have 60% of our own brand product ranges sustainably sourced by mid FY24, which is double the 30% we are on target to deliver next year. Having provided an update on our strategy and the progress we've made in the half, I now want to talk about the opportunities presented by the equity raise to accelerate the delivery of our strategy. We are pleased with the progress the business has made over the past 18 months. With the restructure completed, we have entered the accelerate phase of our strategy. Whilst we believe that our legacy issues are largely behind us, our balance sheet continues to be constrained by the economic impact of these issues. holding back the pace of development of the business. We know there is a significant and growing market opportunity in the underserved customer segments we target, which has been accelerated by COVID-19 and the increased consumer shift online. At the same time, our product sales have improved from the significant impact we saw during lockdown, supported by the launch of our Home Essentials brand in April. and financial services collections remain resilient. The equity raise will strengthen the balance sheet, enable targeted investment and strategy, and create confidence in setting medium-term targets. So why now? Whilst we believe NBrown is well positioned for a post-COVID-19 world, we find ourselves constrained in our ability to trade and progress the business due to our large unsecured net debt and the CL builds facility which limits capital expenditure. Without these breaks on the business, we will be in a position to both trade harder and accelerate the strategy, ultimately enhancing growth and shareholder returns. The equity raise is the next stage of our journey and is a one-time reset to allow the business to thrive. Rachel will now take you through some further financial detail in the next two slides.

Thank you, Steve. Now, the first part of the net capital raise will be used to pay down our unsecured net debt, eliminating the current drawdown on our RCS and sale bills, which is a combined total of 77 million. We fundamentally believe this business should have no unsecured core net debt, like most online retailers, because coming in particular into the peak period, we know we will need to invest working capital in both inventory and in growing the customer loan books both of which then generate strong long-term returns for us. So a net cash position gives us the ability to trade with strength into those opportunities. The raise net of fees and post that clearing down of our unsecured net debt will generate 18 million as well, which will allow us to bring forward investment in a number of important initiatives to accelerate our strategic performance, which Steve is going to cover in a few slides' time. I'll just close on a run-through of the accompanying debt deals. As part of the proposal and to underpin the liquidity headroom going forward, we have an irrevocable commitment in place with our long-standing supportive lenders to extend and right-size the facilities. Clear down of the RCS and the move to a net cash position enables seal bills to be handed back, removing the associated restrictions. And the extension to the securitisation facility sets up really well for future loan book growth. And with that, I'll hand back to Steve to close.

Thank you, Rachel. Let me talk you through what the raise means to our strategy. We have a limited set of key strategic projects already running within the business today, but at a limited pace due to our constrained capital expenditure. £18 million of the raise will be used to accelerate these projects and deliver value more quickly. Financial services is at the heart of our business model, and we've already talked to the fact that we need to provide new, modern products to remain competitive within the retail credit markets. Our current platform is built on a mainframe technology, and though very stable, it is also inflexible, meaning we cannot build the credit proposition we need to on the existing platform. We are currently exploring opportunities and how to deliver a broad suite of credit products, which will deliver and drive both retail and financial services income. The new digital front-end website is a critical unlock for our strategy. Our current websites are built on legacy technology, which is complex to maintain and update. Building a new website front-end essentially creates a modern clean platform from which we can build brand relevant customer journeys, deliver better SEO and gain conversion rate benefits. Finally, our growth plans are contingent on new customer acquisition in key target segments. We will use some of the funds to accelerate this through brand building, for example, above the line activity across different channels and more targeted acquisition through digital and social channels. Subject to a successful raise, what does this mean for expectations from the group? We will set some medium-term targets which reflect the pull forward of the strategy and our ambition, with a 7% average product revenue growth target and 14% medium-term EBITDA margin target. More broadly, the board intend to produce net cash and will consider a new dividend policy at the full year result. I really do think that this raise is a truly transformative opportunity, enabling a reset to allow the business to thrive. There is a wealth of opportunity for M Brown, accelerated by COVID-19, and this raise will position the business to capitalize on this. Whilst we remain mindful of an uncertain retail environment, particularly in light of the current lockdown, We are confident we can continue to build on the unique strength of the group's brands and opportunities such as the structural shift into online retail. With our refreshed strategy in place, we will continue to transform this business, investing in our customer proposition and digital capabilities. The proposed capital raise will enable us to clear the unsecured debt, giving us the firepower to trade the business harder and accelerate delivery of our strategy, ultimately giving us the confidence to set medium term targets that deliver significant returns for our shareholders. And now we'll turn to Q&A. So if you're not already dialed into the conference call, please do so now, and we will take your questions in a moment. Thank you.

Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on the telephone keypad now. If you change your mind, please press star followed by 2. For those who have joined us online, please press the flag icon. When preparing to ask a question, please ensure your phone is unmuted locally. If you have not dialed in, please dial into this conference call. As a reminder, ladies and gentlemen, to ask any further questions, you can press star followed by 1 on your telephone keypad now. We now have a question from John Stevenson from Peel Hunt. John, you may ask a question.

Great, thanks. Morning, everyone. This is what's happening to active customers over the period, really. I don't know if you can comment on whether, you know, overall for all brands in aggregate or if there's any sort of particular brands you want to highlight, but what's been happening to actives and also on the cost of acquisition for those new customers. I mean, given the sort of marketing restructuring and obviously the cost you've taken out, I'm guessing cost of acquisition is coming down. Maybe you could comment on that. And then just general trends you've sort of seen from customers in terms of sort of frequency and basket and how people are behaving as we come into autumn and second lockdown.

Hi, John. Thank you for the questions. So, look, I mean, in terms of the sort of customer bar, we are moving to a different set of KPIs as we sort of move forward as a digital business. Well, I wouldn't sort of look at this in any other way than we've seen sort of trading down in the first half. And ultimately, you know, the sort of customer file would probably reflect that. But within there, you've obviously got a lot of things going on. And I talked about sort of closing the sort of house of bats business and closing sort of high and mighty as well. So there's a lot of sort of transformational work going on. And that's why, in essence, we're sort of moving towards those types of metrics as opposed to sort of reporting on them at the moment. The cost per acquisition, Rachel, I don't know if you want to sort of pick that point up.

Yeah, so morning, John. What a faggot start, as you can imagine, because we're launching the equity raise at the same time as the half-year results. We're going to be incredibly careful and stick to information that's within the documents that we've sent out this morning. Because under the panel ruling, we just can't go beyond that. So in terms of the cost per acquisition and the marketing efficiency, as I said with the overlay, this isn't just volume coming out. Obviously, at more than 60% reduction in marketing, it's a significant efficiency improvement as well. And we've done that with the use of the predictive AI tools to really understand the customer lifetime value. So we don't have a generic one target for cost per acquisition. It depends on the customer, depends on the brand, and it depends on the product that they're buying. So we're getting much more target for acquisition that we can work with the marketing distribution teams that we can go after the right customer base in the right way rather than very generic pay-per-click spend. So there isn't a one answer to that. It's a pretty layered answer, but we're really confident that we've got the right tools and processes in place, and we can now kind of move forward with that. And as we're getting more efficient with our cost base, we can feed that back into revised customer lifetime value models and revised guardrails into marketing as we come into next season and into next year, really lifting our head up and kind of going after the acceleration phase. We've got some really good tools to be able to drive that. But yeah, it was both volume and efficiency in the marketing, and it's not a single answer on the kind of customer acquisition cost, because we're targeted in terms of where there's value for us.

In terms of trends, I mean, you know, English business reflects the sort of trends that we've seen at sort of market level. So a massive step back in clothing in sort of March, given these are the H1 figures. And as we sort of bought more into sort of casual and leisure wear, we saw a sort of quite significant like-for-like growth in that area. And on home and gifts, as we've talked to, we've seen a 25% growth, which we're really pleased with. Customer shopping into toys and gaming, lots of homeware improvements, and we're sort of pleased with the home performance. So hopefully that gives you a bit of information. those trends are continuing as per the sort of COVID cycle that we find ourselves in.

Okay, thanks. I mean, just on the acquisition cost thing, I mean, if we were looking back a couple of years ago, could you maybe just comment on the sort of, you know, shift in overall sort of, you know, broad brush acquisition cost improvement you're delivering?

So, yeah, As you said, this has been a long-standing journey. So we started looking two years ago at customer lifetime value and their efficiency changes. We really started implementing this time last year, so October last year. So you can see we're going to start to annualize against it. So the half one improvement will be larger than the half two improvement because we kicked in at October, November this time last year, in particular in the changes for pay-per-click. And that's really where we're seeing the efficiency change. We've also seen efficiency in paper reductions, so you can see it later on in the slide deck. We've gone through level of paper clip reduction, level of paper reduction, and overall reduction in marketing spend. Now, the paper, we've got a lot more targeted in what we're doing. We're doing smaller drops rather than the big kind of catalogs and doing a lot less of it. Now we're 92% digital. But it's not a single point answer, I'm afraid, John. It's a multi-layered answer. But it's really from last October, November. So, you know, whilst we've been working on it for a couple of years, the step change in the cost base you'll see from October, November last year into flowing through into this year.

John, I think perhaps a different way to sort of I know it's a high-level answer, but there's three areas highlighted on slide 25 of the sustainable cost base. Having a sustainable cost base for a digital retailer is absolutely part of our enablers. The three areas, paper reduction minus 65, PPC reduction minus 78, broadcast reduction minus 89. The first two, paper reduction and PPC, are part of the strategic work. The broadcast reduction was effectively part of protecting the balance sheet. and we have recently started advertising again on Simply B that went above the line about two weeks ago. So I think if you look at that slide, the first two are strategic. The last one was more about the balance sheet, and we will change that going forward as we look to grow.

Okay, brilliant. Thanks, Steve. Thanks, Rachel.

Thanks, Jim.

We now have a question from Matthew McCarron from M Plus One Singer. Matthew, please ask a question.

Good morning, guys. A few questions from me, if that's possible. Just on the credit side, in terms of credit scoring and also in terms of non-credit rollers, could you give us a sense as to what the trends were at the back end of the half? and how you're kind of engineering the business coming into this peak period.

Sorry, Matthew, can you just expand a little bit on the question just to make sure that I can sort of answer it in the best possible way?

Can she credit customer behavior trends as a whole?

So, I mean, you've talked a lot about broadening the kind of payment options and, you know, you're kind of in a testing phase for different credit options. So I guess the first bit is the non-credit rollers. What's been the trend in terms of credit rollers versus non-credits in the back end of the half? And then separate to that is have you been turning the screws on the credit scoring given the increased risk and the increased provision for bad debt?

I think the language that we're sort of using is reflective of our previous sort of updates, Matthew. So I understand why you're asking the question. I'd probably go back to the sort of implementation of the customer lifetime value models. So this is down to us. We need to give better sort of metrics. It was actually a question that came out in the first one really as well. We've implemented customer lifetime value metrics. So all we are focused on in this business is investing a pound of marketing to get a value that is the most maximum value that we hold. And we're not actually that sort of obsessed about whether it is a roller, a credit customer, a cash customer anymore. That has changed as part of the sort of restructuring work. Many cash customers can also contribute at the same level as credit customers. We know that credit customers are more profitable, clearly. But ultimately, finding loyal cash customers can really, really help So actually, we internally now are using different language. It's all about customer lifetime value. It's all about a medium-term return for the organization rather than either focusing on cash, focusing on credit, focusing on rollers. So that's down to us. We haven't been clear on that yet. But again, as we sort of step forward as a digital retailer, we will see different metrics from the organization that would bring that to fruition. In terms of actually the sort of response rates, to go back to John's question earlier on, we have been a little bit of a tick up in the response rates actually, and I would like to see that because ultimately by focusing on customer lifetime value, you should be collecting more loyal customers who are going to sort of continue to trade with you. So there are some very minor green shoots at this point in time, but we're very embryonic in this approach, hence why we're not sort of We're still learning through this period, and we will sort of come on to that. In terms of the sort of credit performance, the sort of COVID-related part of the question, we had some customers ask for sort of a COVID response. It was very minor in the scheme of things. We absolutely follow the guidance. We worked with the regulator to make sure that we were adhering to what was needed, like most businesses would have done, and we made it very clear to customers that they could ask for a deferral if they want to. Actually, on the back of recent news, we will be doing that again within the rules that we've been guided towards, and we're very, very happy to support customers achieve the right outcome for them through this very difficult period. In terms of our actual credit performance, in terms of the sort of collections and in terms of the underlying performance, it is parity with last year at an underlying performance, perhaps a little bit better. So our customers have not shown any distress in the payments. We have, however, taken a very sizable IFRS 9 provision based on the sort of macro uncertainty. And to Rachel's sort of introduction, had it not been for that IFRS 9 provision, the underlying profitability would have actually been better in the first half of this year than it would have been last year. So I think it's probably worth me passing over to Rachel to articulate, in essence, the component parts of that provision.

Yeah, so, Timothy, I'll touch on a couple of things with that as well with your response to your question. So to the, you know, we're focusing just on credit. If you look at the underlying profit stepping forward year on year, That means we've moved forward with our retail profitability as well as our financial services. Loan books staying stable. So this means we're happy to sell a dress on cash or sell a dress on credit because we've restructured our cost base such that we're profitable for the retail element of the business as well as profitable for the financial services element of the business. You can see that despite the pandemic, the underlying profitability stepping forward. So whilst our credit penetration still is staying just above 80% and is staying stable, if not a little bit better, because we've obviously got a good credit offering right for the market at the moment, we're happy to generate sales as long as we focus on the customer lifetime value. And as Steve said, we understand that across all segments of the business. So that's a real change for Ren Brown and a real step forward that we're profitable across all of our trading.

Yeah, that's a pretty helpful answer. Thank you. I mean, I'm kind of tied into the equity raise. Has disruption across supply chains given you an advantage in that size range that you offer across your brands? Are you much more available in the outer boundaries of the size ranges compared to what competitors are in stock in at the moment?

Well, as part of our stock file, Matthew, in answering that one, as part of the initial pandemic, we went into it with effectively a typical order for spring, summer clothing and footwear, which we know was sort of impacted through the pandemic. And of course, we were protecting the balance sheet at that particular point in time. So we did cancel out of many orders that we'd made at the time. We worked with our suppliers in the best possible way to ensure that we continue to have a relationship with them and worked with them through that period. As we sort of got through there and we got the sort of initial refinancing done, we did start buying back into our stock file. And it's a bit more sort of COVID related. So in essence, it's outerwear, it's leisurewear, and obviously on the home and gift side. We've been able to do that. In relation to size, well, we've worked with our supply base for quite some time. Over the last 18 months to two years, we've rationalized it down from something like 2,100 suppliers to something like 900 suppliers, 930, I think. And we work with them very specifically in relation to the designs and the cutting cycles that we want which has basically been informed by all of our experience that we've built up over the years in making sure that we have fashion that fits well for the larger sizes. This is our area of expertise that we have talked about before. And actually what we've been able to do is access all of those suppliers. So we've not had any challenge accessing those suppliers. There may have been a week or two delay as we've got things through the pipeline. But as we've started reordering into those suppliers, into those files. Our file is building up very nicely.

And you can see that in a specific example with, say, Giacomo partnering with Hugo Boss as well, not just our own supply, but with the partner supply. We're there in the larger sizes, and that's done incredibly well with Giacomo in terms of bringing that brand through and offering the broader size range.

And the consolidation, is that giving you some firepower in terms of promotions in this? I mean, you talked about promotions continuing. Is that consolidation giving you some firepower to fund promotions in terms of your intake margin?

It is, but I'd say more in terms of getting back on the front foot into the second half of the year. you know, having self-sold and started to delever the balance sheet ourselves and then with the equity raise as well, which we hope will be successful through the AGM later this month, that gives us real firepower in terms of moving to a net cash position where we can start to kind of do some more of the investments, whether it's above the line marketing or more inventory working capital to get back onto the front foot and really accelerate through into the next season.

Yeah. Okay, thanks very much.

Thank you.

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Thank you, everybody. Appreciate the time.