N Brown Group plc

Good morning, everybody, and welcome to NBRAN's interim results for the six months ended August 2022. I'm joined by Rachel Izard, our chief finance officer. Let's turn to the agenda for today. First, I'll give you an update on our highlights so far this year. Then I will hand over to Rachel, who will take you through the group's financial results. I will then return to talk in a little more detail about our KPIs and our strategic progress And after that, we'll open up for Q&A. The current macroeconomic climate led to a tough online retail market in the first half. Weighted for our category mix, the online market reduced by around 7% over the prior year. Customers are more cautious around discretionary spending as a result of inflationary pressures. Alongside this, we face the impact of inflation on our cost base. We have met the challenging conditions by taking action to mitigate these, and as a result, have continued to make progress across our business, balancing a credible trading performance while successfully continuing our strategic transformation. Although product revenue is down by around 5%, we've been disciplined in our trading approach. We haven't aggressively chased sales, and have seen average item values increase by 14%, which more than offset software website sessions and conversion. Demand has then reduced at a product revenue level post the normalization of returns rates. Last year was one of unusually low levels of consumer credit defaults as our customers transitioned through the pandemic. As a result, prior year profitability was boosted by the strength of financial services margin. The normalization of this has largely driven the lower EBITDA in the half. This is a business which is now in a stronger position than pre-pandemic as a result of all the work we've done over the last few years. Continue to have an incredibly strong balance sheet, a point which is sometimes overlooked. We have accessible liquidity in excess of 200 million. We're pleased that our new trading website for SimplyBee has launched to all customers in September. This is a key investment within our digital transformation, providing a mobile-first experience, reducing friction through the navigation and checkout. We'll now move forward with rolling this out to Giacomo in the first half of 2023. As a result of the impact of the macroeconomic climate on product revenue being expected to continue for the remainder of this year, We are planning for a decline in second half product revenue in line with the year-on-year trends seen in Q2 and September. We have therefore revised our guidance for the full year adjusted EBITDA to be in the region of 60 million. I'll now hand over to Rachel to talk you through the financial results.

Thanks, Steve. Let me start with giving you a summary of the group's financial performance in the half year. Overall group revenue was down circa 16 million, driven by a combination of both lower product revenue, reflecting the challenging online retail conditions, and lower financial services interest income, reflecting the smaller customer loan book from the start of the year, and the softer retail sales through the half-year period. Growth profit margin has stepped back 3.8 percentage points, materially driven by normalising of the FS margin rate post-COVID-19. Last year, we had exceptionally elevated FF margins as write-offs were atypically low, and we released the majority of the initial COVID-19 bad debt provision. Now, this has been partially offset by heartening growth in the retail growth margin. I'll talk to both these swings later. Our op-ex cost-to-sales ratio has remained below the pre-pandemic level of circa 40%. Versus half-year 2022, we saw an increase in the ratio of circa 3 percentage points. with a combination of lower operational leverage, where we held non-marketing costs broadly flat, and our active choice to invest in marketing in line with our strategy. Next, within the absolute spend, we've absorbed an impact of around two percentage points as a result of inflationary headwinds with contract management and volume flexibility. Now, combining the lower gross margin, materially driven by the FS normalization, with that active step-up in marketing investment, This led to the adjusted EBITDA of 28 million, circa 25 million lower than prior year. Below EBITDA, we saw a 4.2 million reduction in depreciation and amortization following last year's acceleration of amortization and the software as a service change. We successfully held interest costs flat, giving an adjusted profit before tax of 4.3 million, down circa 20 million on the prior year. Unsecured net cash was 5.3 million up on prior year at 47 million, and the balance sheet continues to be strong, and we have over 200 million of accessible liquidity. Finally, adjusted EPS was 72 pence, and that reflects the profit performance during the half. Looking at the EBITDA drivers, you'll clearly see from this slide that the majority of the EBITDA reduction has come from absolute reduction in FS growth profit. Now, this is partially due to the smaller loan book size coming into the year, but it's majority due to that normalizing post-COVID-19. with the prior year including atypically low levels of write-offs and the release of most of the initial COVID-19 IFRS 9 expected credit loss provision that we put aside at the start of the pandemic. Our absolute growth profit in retail was down only 2 million as we offset most of the market-driven volume impact through a disciplined approach to trading and margins, which I'm going to run through later. Across the cost base, you can see we control costs well. mitigating a lot of the inflationary impacts, which cost us circa 6 million and a half, and leaving the additional strategic investment in marketing that we talked about at year-end as the main net movement in the cost base. Looking at the revenue performance, I'll start with the context of the market and the weaker UK consumer confidence. Now, over the six-month period, the BRC's online non-food market tracker showed a 14% drop in demand, If we adjust that for our own product mix, which is more heavily into women's wear and less into white goods, that market dropped by about seven percentage points. In that context, our retail product revenue contracted 5.2%. And that was driven by a combination of lower strategic brand product revenue, reflecting that tough retail market, but with strategic improvements clearly flowing through. as well as managed decline in heritage brand product revenue, which was moderated to a lower rate of decline than in prior year, as we no longer have a drag from the closure of fig leaves. And then in the FS business, the interest income reduced 3.5% due to the smaller loan book coming into the year and the softer retail sales through the half, albeit the proportion of sales made on credit did increase during the period. Now, we've been disciplined with our approach to trading and retaining margins, and we took the decision not to aggressively drive volumes. I'll come up to the positive product margin rate later in the presentation, and Steve's going to pick up on the growth in average item values. Now, getting underneath the retail numbers. As we'd anticipated, we have seen a further increase in demand for clothing and footwear, particularly in relation to formal wear and occasion wear. Clothing and footwear reflected 70% of the mix in half one, an increase over the FY22 mix, and we're now almost back at the pre-pandemic level seen in FY20 of 71%. clothing and footwear remains the heartland of the business and where we see the most opportunity for future growth. With the mix back into fashion and customer behavior normalizing post-pandemic, we expected and have seen a further increase in returns rate. The step up is also driven at the detail level by customers buying into higher returning categories such as occasion wear dresses. And so overall, we're now running an average of about one percentage point below the pre-pandemic rate. The group's adjusted gross margin was 47.2% compared to 51% in half-1.22, and that swing is materially driven by the FS rate normalising post-COVID-19. Our product gross margin has improved, building on the gain shown at year-end, with the half-1 rate up 1.4 percentage points of LY, and there's a lot of work underneath the hood with that. Firstly, a pricing and mix benefit of circa 4 percentage points. from a combination of reducing promotional levels as we're trading in a disciplined manner and we haven't changed volumes. We've also increased prices in a measured data-led way in response to cost inflation. The mix has come back into clothing, which has a higher margin than home. And we've also added a small up list to delivery charges. Secondly, due to normalizing level of write-offs in financial services, we've claimed back a higher amount of associated VAT bad debt relief. And we credit that to the product gross margin as we can only reclaim that due to the benefit of being a combined retail and credit provider. This improved product gross margin by circa one percentage point. Thirdly, partially offsetting this, we've seen flow through of higher freight rates with a drag of around one and a half percentage points. Looking at FX, the hedging which we had in place has mitigated weaker sterling. And then finally, there was a further circa two percentage point adverse impact, which primarily relates to additional stock provisioning in light of the lower sales. And on the go forward, we're obviously carefully managing inventory intake. So that covers retail margin. I'll now move on to FS. The FS margin rate reflects a normalization post COVID-19. We outlined within our FY22 year end results, the elevated financial services margin rate, which was seen in that year. And now that we're normalizing into this current year, the year-on-year change in half one is seeing that flow through in two ways. First, a release of circa 10 million of the extra overlaid COVID-19 credit loss provision from year one of the pandemic, as it was no longer required. And actually, customer behavior was better than expected in year two of the pandemic versus year one. And that caused a one-off benefit of that provision release reported in margin last year. and a delta into this year's VLY of circa 8 percentage points. Secondly, last year in half one, we also saw lower than normal levels of write-offs as the customers have been supported through the pandemic with government schemes, and that resulted across all the consumer credit market in lower defaults and arrears actually than a pre-pandemic norm. This year has been more normal, so the VLY shows that impact of around 5 percentage points. To give you a sense of this in the actual customer data, we're showing you write-off rates. Normally, we see higher retail sales on credit in the peak period in the second half of our fiscal year, and then slightly higher write-off rates associated with that peak spending circa six months later in half one of the next year. Now, looking at the first three bars of the top graph showing half one performance, you can see how low half one last year was compared to the previous two years for normal write-off profiles. with customers being supported through the pandemic exhibiting higher repayment rates and lower write-offs. Looking at half one of this year, you can see how this is now normalized. In the bottom graph, for IFRS 9, we look ahead at future expected credit losses. Looking at the end of the half, we've got a provision rate of 13.9%. Now, the performance of the book in the half has been in line with the expected deterioration assumed at year end, and the macro indicators such as inflation and unemployment rates have moved as expected, So now the future economic uncertainty we included as a PMA post-model adjustment at the year end, that's now reflected in the core base provision and the PMA no longer needed. In addition, the accounts in payment arrangements have been discounted in the calculation to match our wide provisions. This amendment is consistent with year ends. So comparing the provision rate against the last two years, the underlying provision rate at half year is pretty consistent. This slide on adjusted operating cost ratio shows us continuing to hold our cost ratios below pre-COVID levels. On a one-year basis, we have seen an increase in the ratio. Some of this is operational gearing, though, with the lower revenue impacting the cost ratio for our fixed costs. We've also seen around 6 million of inflationary impacts against last year. However, in absolute terms, we've broadly been able to offset the inflation with contract management and volume savings, with the only material absolute increase in spend being the strategic investments in marketing. Looking at the individual areas, marketing and production includes that strategic decision to invest and is annualized against a low spend in quarter one of last year prior to that step up in strategic marketing. Now, we've seen about two million of inflation in this marketing area, particularly through higher costing paid in the market, paid social and paid media costs. The admin and payroll increase includes inflationary impacts totaling circa 2 million, and that includes both utilities and payroll. Finally, warehouse and fulfillment absolute costs are slightly lower, as with our high flexibility, we saved around 4 million due to lower volumes. That's then been offset with circa 2 million cost of servicing higher retainance terms as the returns rate is normalized, and about 2 million of additional costs from fuel surcharges and other inflationary costs on third-party contracts and resources. This slide shows how the EBITDA of 28 million has converted through to net cash outflow of circa 11 million, driven by in-year phasing at this halfway point in the year. Starting at the left on the top, we've seen an inflow of around 4 million, which includes benefits from non-cash and other working capital movements, partially offset by investment in inventory. The increase in inventory is around 16 million, and that includes both the increase in freight rates and input costs. And it also includes us intentionally moving our mix into newness. And we have proportionally more of our current season stock as new versus last and previous than in prior year. Customer loan book and securitization borrowings and financial services have resulted in the cash outflow in the half year. The net loan book size reduced somewhat, generating a net cash return to us. However, with the return to normal phasing with the payment arrangement building, This has reduced the eligible pool of loans that we can securitize on, so we naturally reduce the level of securitized debt as we build up this balance of payment arrangements to the bulk debt sale later in the year. Non-operational cash outflows of circa $22 million includes capital investment of $11 million, which is in line with last year, and it also includes some minor exceptional cash outflows, interest costs, and tax charges, which together are successfully slightly lower than last year. Across all these categories, we saw a net outflow of $10.5 million. We then adjusted the level voluntarily undrawn against the securitized debt by circa $15 million, and that's given us a net cash inflow of circa $4 million. I'll now walk us through what that practically means in terms of our robust cash and funding positions.

Three key points to highlight on these slides.