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.