Naked Wines plc

Good morning, everyone, and welcome to the Naked Wines results for fiscal year 2023. With me today is our CFO, James Crawford, and we're going to take you through the details of results for the fiscal year ending in April and then talk to you about the outlook for the business and our plans to drive Naked Wines to profitable growth in the year ahead. Now, turning to page four, and before we get into the detail of the presentation, think it's important to take some time to address directly some questions that i know a number of people have got around the business and again i think it's important we acknowledge you know we're delivering these results later than we normally would anticipate after the close of the financial year and to start with the most important one you know is naked wine's going to run out of cash and the answer is absolutely no we have been through a period and we are at a period where liquidity is lower than we would ideally like and but we have taken clear and decisive action, in particular in the area of cost and inventory commitment, to make sure we are well set up to manage through that, to manage through a difficult trading environment, and to make sure that we come out of that a tougher, leaner organization. Now, it may be that some of the challenges we're seeing, especially around customer recruitment that we'll talk about, Mean Naked Wines emerges in time a smaller company than it is today. But even if that is the case, Naked wines will be a profitable and cash generative business. I think that's really important to lay out. So the second obvious question then is, well, if that's the case, why the delay to publication of these results? And I do want to acknowledge that trading was below our initial expectations during the first quarter of our fiscal year for 24, so the April and May period. And as a result of that, we took time to review the initial budget we developed for the year We put in place a more conservative replan of demand, and we have taken further actions in terms of cost, inventory and commitment reduction, again, to ensure that whatever the trading environment, we as a team and as a board are confident that Naked Wines is well positioned to trade through that and well positioned to come out the other side of that in a strong position. The third question then is, what are you going to do about fixing these problems in the business? And ultimately, how do you intend to return Naked Wines to growth? And here, we're taking a three stage approach. The agenda and the pivot to profit was to build a stable platform in the business. I think as we take you through the results of fiscal 23, we can show that a lot of that work has been successfully completed. We have taken further steps, as I said, in light of the trading in Q1 to further address in a cost and commitment to make sure that we are completely confident there. The second stage is to test our way systematically to understand the best way to return naked wines to growth, put simply to address our new customer recruitment problem. There, testing is well underway. We have some promising early signs. We're not going to be able to give definitive results today, but we do intend to give more hard data at our interim results. And finally, that lays us up to where we want to get to, to fulfill the potential of this business. And again, our commitment here is not that we can know today what that is, but that we can show you our plan as to how we're going to quantify that potential over the course of the next year. And then to be provocative, doesn't that sound like things you've been saying for a while? What's different? And we wanted to spend time as a board and as a management team working out how we best institutionalize what we've learned through a tough period in the last 12, 18 months. And the results of that are five new guardrails to simplify the way we operate the business and we're gonna outline today. And they're doing things like fixing our marketing expenditure budget, for fiscal 24, 25, and 26, as opposed to having a variable budget. Solidifying our relationship between SG&A levels, inventory levels, and member-based size and top line. And restating our commitment to discipline in terms of capital allocation. I'm going to take you through those in detail, but all of them are designed to ensure that as we operate the business, Naked Wines is simpler, that it's more predictable and that we don't expose the business to risk in the event that we're wrong in some of our planning assumptions. So having covered those things off, I'm going to hand over to James, who's going to take you through the details of results for the fiscal 23 period.

Thank you, Nick, and good morning, everyone. So moving straight to slide six, where are we? I'm going to start with a summary of where we are today. I think being brutally honest, we recognise we have some challenges, so I'm going to be candid about what's bad, but also highlight where we can point to clear positives. The good. Firstly, we're profitable on an adjusted basis, but not yet sustainably so. We're just not recruiting enough new subscribers. Sustainable profitability, where we have a balance in the subscriber base, may only be achievable at a smaller scale than we're at today, given the levels that we're seeing of new customer recruitment. But when you look at the equation that drives that balance between growth and new customers and shrinking, you'll see actually that the customers we do have today are performing well, in particular when we look at retention and revenue transfer. Secondly, as Nick's alluded to, we're behind our original plans for the year in terms of trading, particularly new customer volumes. However, we've responded to that such that whether or not we see improvement, we believe we'll be in a position where we'll be able to deliver profitability and cash generation in the future. And thirdly, liquidity levels right now are lower than we'd originally planned when we first permitted to profit. But the good thing is we have already made some changes with the bank, providing greater flexibility around timing of profits and excluding costs that we may incur to resolve our challenges. So we've already responded to that. So overall, we think we're making good progress in a number of areas, but we're not going to shy away from the fact that there are some challenges in the business right now. And that's what I'm going to step through. So moving on, part one. We are profitable, but not yet sustainably profitable. We deliver too much profit due to low levels of new customer investment. So if we look at a bridge of how we grew adjusted EBIT from three and a half million to 17 million, as we've just reported, you will see that the biggest bar driving increased profits is about the level of new customer investment. So we added 24 million pounds to the bottom line year on year by spending less on new customer recruitment. Offsetting that, we went backwards by 8 million as we have fewer repeat customers generating sales and contribution. Stepping over to the right, we have a slight increase in G&A costs, share-based payment charges, plus we spent 2.1 million on R&D spend, which was our above-the-line testing, all offsetting that £24 million uplift from reduced new customer investment. And that takes us to the 16.3 million 52 week adjusted EBIT that we've reported. And then we've got a further week of benefit from our 53rd week that takes us to 17.4 million. So you can see strong profitability coming through the business driven by reduction in new customer investment. And whilst we think we were absolutely right to reduce that investment level and pivot towards profitability and stronger discipline on payback, ultimately we did underspend versus the goal we'd set ourselves for the year. And we over-delivered on adjusted EBIT versus where we originally guided to for the year. And because we underspent, we underspent where we need to be to maintain the level of customer base we've got. And that's really the story of our adjusted EBIT growth. I think it'd be remiss of me not to mention that we also took some considerable adjusted items charges in the year, predominantly non-cash charges relating to goodwill impairment and inventory provisioning, which did result in a £15 million statutory loss. And then also important to highlight, and Nick will touch on this, that we've secured a range of cost savings as we've reconfigured things like our fulfillment arrangements. And that's going to provide room for additional investment going forward into new customer acquisition whilst preserving profitability. So we do see a path towards that sustainable position in terms of scale and profitability. Moving to the good on this, existing customer performance is very sound. So we might not be recruiting new customers at the scale we need, but on these charts, we see really positive trends in our existing subscriber base. On the left hand side, we show a rolling three month attrition rate, a negative number, the percentage of the customer base lost in the preceding three months. And you can see in early 2020, when we were recruiting lots of new customers in through the pandemic, early in their life cycle, and to be honest, we now know the quality of those was not necessarily the greatest. We might've been losing over 10% of the customer base over a three month period. And what you see is the last two years have progressed and that base has matured. We've brought in fewer but better quality customers. We start to see the lowest rate of attrition of the customer base pretty much ever, and certainly substantially below pre-pandemic levels. And that's not all. If we look at the right-hand side of this chart, our subscribers are not only sticking around, but the revenue per customer has also been improving. So this shows the year-on-year trend in revenue. Again, taken over a three-month rolling period to smooth out things like monthly promotions. And, you know, flat revenue per customer would be the darker line in the middle at 0%. And you can see really over the last two years, we have been increasing the revenue per customer pretty consistently. And that's a really positive trend that shows us that our customer base is spending and that we have good quality customers who are willing to start spending more with us on a month-to-month basis. So that's some of the good. On the next slide, though, we addressed head on, you know, what's the real problem here? We are just not recruiting enough new angels. So, you know, cancellation rates are not high. They're low. Revenue per customer is increasing, but we don't have enough new customers coming through the door. So what we're looking at in the number of subscribers. It's the point in time number of subscribers. So slightly different to the active angels number that we define in the accounts. But what you see in here is that in fiscal year 21, we opened with just under 600,000 subscribed angels. Over 1.3 million people took out a subscription, but over a million people canceled in the year. And the 53% number in blue there is the percentage that that cancellation represents of the opening angels plus the new angels. So you can see that as we moved from FY21 to FY22, we recruited fewer new subscribers, but the aggregate cancellation rate was lower. And then into FY23 with materially lower levels of new angels being recruited, we continue to see a step change downwards in that cancellation rate. So you can see, though, that the bar ultimately in FY23 with 397,000 new angels recruited does not offset the 563,000 that cancelled. And what we really need to be doing is getting that bar of new angels to somewhere probably between 450 and 500,000 angels, depending on exactly where the attrition rate lands, to stabilize the number of customers we have and to let that improved spend per customer flow through to revenue growth. then what's the challenge in terms of hitting that 450 000 well ultimately the constraint we impose on ourselves in spending money to drive new subscribers is payback the ratio of future contribution from a customer versus the cost of recruiting them and you know we have now stabilized payback at what we're going to call a pro formal 1.9x once we think about savings which is the level we needed to be And you can see the history on the left there that some of you may be familiar with. Our payback dropped significantly in FY22. Our pivot to profit has started rebuilding that, and we're reporting 1.7x for this year. And when we then think about the impact the operational savings we have contracted in our fulfillment operations will have on future profitability of each order and overlay that into the payback calculations, we'll be at a 1.9x, which is very near the midpoint of the range that we strive to be at. Essentially, we're at the point where we've now configured the business back to the payback we seek, but we're not yet spending the £25 million that Nick has alluded to that we're targeting in terms of spend. And that really means that goal one, two and three is to get that investment level back to £25 million at acceptable payback. And Nick is going to talk more about some of the progress we're making to do that and the customer improvements we're making. So that's pretty much the story of the profitability of the business. Moving to the second piece, let's talk about recent trading and what that means for FY24 and beyond. We have revised our guidance for FY24. The guidance is going to be to a revenue decline of 8% to 12%. That's constant currency, 52-week comparable. Targeting 25 million of new customer investment. We might range that at 23 to 27, but we're going to strive to land that in the middle. We expect to deliver repeat customer contribution between 72 and 80 million pounds for the year. And we've taken action to moderate costs so you'll see no R&D spend in the accounts this year. Our operating G&A costs, including share based payments charges, should be flat to marginally down year on year. And that comes together to deliver us an adjusted EBIT number of 8 to 12 million for fiscal 24. I just want to pause for a second to reflect on that range as it is actually the same guidance as we gave at the start of last year. But last year we said that we should increase profitability into FY24. And actually what has played out is almost a mirror image of that. We overshot profitability in fiscal 23 due to underinvestment in new customers. As a result of that, top line revenue in FY24 is lower than we were planning, which translates to lower profitability. And so we actually have the reverse trends to what we expected when we first launched the Pivot to Profitability. I think, irrespective of that, it's worth saying that the FY24 revenue forecast we have should still deliver cash generation in the second half of the year. 145 million mark that we'd originally guided with the pivot to profit albeit could be up to 155 million slightly higher given the lower level of revenue than that original guidance And so we're guiding to year end net cash in the kind of 10 to 30 million pound range, which, you know, level or ahead of the level that we closed the FY23 with. Probably will be some cash consumption in H1 as ever when you prepare for peak trading, you clear stock for duty, there is still some cash consumption. And then cash generation in H2 as the reduced stock intake really begins to be seen and we trade through peak. And those are the forecasts that we've used in what we've called our revised baseline. You might see reference to that in the going concern forward looking information in the accounts. And we've traded in line with that forecast in the first two periods of the P4, P5. It does seem to be reflecting an outlook that we are delivering to the business. I think it's worth talking to a couple of the highlights on the actions we've taken in light of that revenue and recruitment trend. First of all, on costs, really aligning those towards the revenue trends to secure profitability. I think I've indicated that GMA is flat to declining. This chart really kind of shows that to be the case. You've got three components to the overall G&A charge that we take into the adjusted EBIT number. Operating G&A, share-based payments charge and the R&D spend. And what you see in here is trajectory through FY22 into the first half of FY23 of increasing costs as we were investing for growth. And then you just start to see the impact of us taking cost out in the second half of 23. And then the bar on the far right is the average half year cost that we expect to incur through the G&A line for FY24. And again, you see that it has certainly come down versus where we were. And I think worth bearing in mind that that's been undertaken in an environment with material wage inflation, which I'm sure you're aware of. So it does reflect kind of including staff restructuring undertaken within the group over the last 12 months. Then the other area that I think it's useful to look at on the next slide is on cash side. We are committed to operating with significantly less stock going forward, and we have been configuring our stock commitments to drive destock. you see on this chart in the dark blue is the COGS in the half year and then the light blue is the comparable inventory intake in the same half and obviously you can see on the left hand side of this chart in in FY22 in particular, into the first half of FY23. That is when the overstock developed. In the second half of 23, that has reversed. You'll see a little increase, as I alluded to, in the first half of 24. You can't lose the seasonality from this business in terms of preparation for peak trading. And then further destock in the second half of fiscal year 24. And then that we expect to be continued into FY25. So still guiding to 145 to 155 million stock in FY24 and an additional significant reduction in FY25, albeit not highly quantified at this point. So where are we then kind of more specifically on cash levels or more broadly on kind of cash levels? Let's talk about the big driver of our cash, which is our stock levels. So we have built 96 million pounds of stock built since FY20. We look at the drivers of that. 48 million pounds of that was actually required just because the business has grown. To scale the business, you need to scale the inventory. About 17 million pounds of that relates to us investing into luxury wine, in particular in the US, which has a longer supply chain, requires a longer lead time, and that has added to our inventory levels. And then there is about 41 million pounds of overstock within the group, which obviously we are keen to reduce. But I think it's important to kind of recognize that the aggregate increase we've seen in stock is not all overstock. There are scale and kind of good commercial reasons for a component of that. We think on the next slide as to the impact that's had on the balance sheet. Yeah, it has consumed the cash that we generated in FY20 through the sale of Majestic and into 21 as we actually de-stocked. So, you know, if we actually think about the balance sheet drivers of 96 million of inventory build, angel funds have funded nearly 30 million pounds of that. We do operate a degree of payables in our supply chain, and that has funded about 12 million of that. But the remaining 55 million has come from the cash either that we had on hand at the end of FY20 or that we've generated in the near term. And I think it's important to kind of put it in perspective. It's not quite symmetrical, but essentially the overstock has consumed the majority of the cash that we would otherwise have had on hand. And so the goal is very clear. How do we turn that overstock back into cash as quickly as we can? And that's the process that starts in the second half of FY24. So looking forward in terms of our inventory levels, both our baseline forecast and also our downside scenario forecast to destock and liquidity improvement. For those who've read through the detail of our going to concern narrative, you might have seen that we run both a baseline and a downside scenario, a plausible but severe downside scenario. And we expect the inventory balance to drop considerably in either of those scenarios, the dotted line here being the downside. and the solid line being the baseline. And again, this chart matches up to that 145 to 155 million of inventory guidance at the end of FY24. I think worth saying that we haven't managed that destock to be as orderly as possible. We've been striving to balance our liquidity needs with maintaining winemaker relationships and to make this process as sustainable as possible. But what does that do overall for liquidity? Well, essentially, if stock drops, it turns into cash. So we are currently at probably the lowest point of liquidity we expect to have during this journey that we've been through. We're navigating that as we go into peak very successfully. We actually have more liquidity on hand now than we expected in our revised baseline. But we expect that to increase through December. We then pay some bills in January and then continue to build additional liquidity through Q4 of the fiscal year and into fiscal 25. And certainly envisage a scenario where once we have destocked at the end of FY25, we will have material liquidity on hand. And that is now within the space of something like 18 to 24 months. I think worth, you know, as I'm talking about liquidity, acknowledging that we have reported on a certainty around the going concern assessment in these accounts. Very important to stress that the board and auditors are not questioning whether we're a going concern. This is a going concern treatment in both our base case forecast and our severe but plausible downside. The business has adequate liquidity and meets all banking covenants. And so that uncertainty is really a somewhat generic assessment that there are a lot of moving parts in the forecasts, whether that's the volatility we're currently seeing in trading and the macroeconomic environment, the fact that we're having to undertake an inventory reduction process, that we are moving on to new warehousing contracts that managed fulfillment costs. There are a number of moving parts and therefore there are certain combinations of scenarios where everything moves down where liquidity could be challenging. That's the basis of the MU, but we're going to generate more liquidity from this point forward. And as I say, as of the end of August, we were substantially ahead of our cash forecast and cash plans. And we look to remain ahead of that trajectory going forward. So very confident in the business, but thought important to acknowledge that detail in the accounts. Moving on to the next slide and looking at the sources of our cash, I think two important places to look at the stability we have are angel funding and our asset back lending facility, both of which are in a stable position whilst we work through that excess stock. First of all, on the angel side, angel funding is a key component of the capital structure of this business. Angel funding funds winemakers and therefore funds inventory. And we have been looking closely at the level of redemptions we see from angels over time. The blue line on this curve is the six month withdrawal rate of angel funds. And you'll see that that has been trending downwards over the last 24 months or more. Again, as we kind of see that attrition rate of angels reduces. As angels mature, they tend to be more stable. So we have no concern around the angel funds level and redemption trends that we see in there. On the bank side, we've had a productive conversation with Silicon Valley Bank. I think it's fair to say it's been an interesting relationship over the last year with that business having been sold to First Citizens through the federal sale process they went through, and then us having a conversation about amending the covenants again. But between us, we've agreed that we will exclude $3.5 million of any cash costs, that we will incur restructuring inventory commitments or removing other costs from the business. We've also adjusted the way that our EBITDA covenant works. It was previously set at a million pounds per quarter with a four million pound test for the full year. And that's now moving to a four million pound rolling 12 month test. And the reason that's important is it means we don't have to worry about when different components of cost land. We don't have to worry about. because of seasonality in the business you could have a motivation to back off some customer recruitment investment that doesn't make sense and so we've agreed a structure that gives us more flexibility to run the business for the long term than we might otherwise have had um and so look we we ended fy23 with net cash of 10 million and 38 million pounds of facility headroom uh above that which gives us the liquidity to bridge the time that we're destocking solving the excess inventory and commitments in an orderly way, as we've always said was the intent. And that's where I start to hand over to Nick. If we just flip to the next slide, please. I think the summary is trading is tough. We acknowledge that, especially in new customer recruitment. There are positive trends within that tough trading, in particular in our subscriber retention and spending patterns. We've taken the actions and will continue to take the actions we need to cut costs, to cut inventory commitments and to make sure that we have the right level of liquidity and funding in place. But ultimately, we see a future for FY24 and beyond where we have a profitable and cash-generated business. And that affords us the time to really focus our efforts on rebuilding our customer acquisition. And that is what Nick is going to talk about in his section now. Thank you.

Thank you very much, James. I think that gives a really clear picture of where the business is exiting the fiscal 23 period and is the right point to talk about what comes next. So moving on to the next page, evidently Naked Wines over the course of the last year, we laid out a pivot to profit strategy. I think as you can see, we met and delivered on most of the goals outlined in that strategy that we announced in October last year, with the exception of not meeting our targets in terms of the level of customer recruitment. And I think James showed really clearly how that is on one hand, you know, led to higher adjusted profitability in this period, but ultimately sets us up for a challenge, right? We're further away from where we want to be, which is a business that is sustainably profitable and where that profitability is underpinned by a level of growth. And really that's the next stage for us and where we want to get to from 2024 onwards. So I'm going to talk to you about our plans for profitable growth today. Turning to our next page, I think it's really important to lay out that our view is, irrespective of what happens in some areas that we can't control, so whether or not we're able to solve the challenge of getting more new members into this business, and James showed you the math, we need to broadly increase the number of members recruited by 15% to 20% to get the customer base stable. Irrespective of whether we're able to do that, I'm confident we have a business here that will be profitable in cash generating. And I think it's important to explain why, because that's not something we've achieved in the past. And the first reason, very clear, we don't have an overall sales problem, but we have a new customer problem. And while that's important, what it goes to is the ultimate size and scale of this business at maturity, not whether or not we're able to construct a business that is profitable and cash generative. Even if we aren't able to fix that problem, we're going to show you this business is still going to stabilize at a much larger level than it was pre-pandemic. and a level where we're very able with our unit economics to configure ourselves to be sustainable and profitable. The second reason is because we've taken the steps we need to right-size inventory, and we've done that against the revised baseline that James talked to, a much more cautious outlook for demand over the course of the next 24 months. And beyond inventory consumption, the business has already been on a sustainable footing. Our use of cash over the course of the last 24 months has been in inventory growth. We have a clear line of sight to reverse that and have cash flow into the business from inventory reduction, as James outlined. And the third piece is that we have taken action to deliver the cost reduction that we need to reconcile ourselves to the size of the business we have today, as opposed to the size of the business we believed we'd have exiting the COVID period. And that's both reduction in our SG&A levels, but also renegotiating key contracts through our supply chain to configure our business to be more efficient at the volume we are processing today and strip cost out there. And those measures mean that even on a lower top line level, we're confident we've got a business that we're able to deliver meaningful profit. I think that's an important point to start. Now, the problem here is a customer retention problem. What that impacts is how big Naked can be. It doesn't determine whether or not we can be profitable in cash generating. So moving to the next page, I think it's important to go through a little bit of detail around the commitment and cost actions, because they are very important measures which make sure that under any scenario in an uncertain world, that future business is profitable and cash generative. As you know, we've been taking time and steps to reduce inventory in an orderly process over the course of the last 18 months. I do want to acknowledge that in light of the tougher trading environment we've seen in the first quarter, we have already taken further steps. So in collaboration and partnership with our winemakers and suppliers, we've been doing a couple of things. We've been looking at restructuring and indeed removing some levels of future commitment in order to better align supply and demand. But we've also taken steps to manage the way in which we buy wine and manage our demand in the business. So looking at repurposing stock levels across the group, making better use of existing commitments that we have and matching those commitments against the markets in which we see demand. As a result of that, I'm really confident that we will have inventory to what we see as a sustainable long-term position at the end of FY25. But I think more importantly, we want to commit absolutely that even if the environment gets tougher, we will take further action here. I think I recognize and as a team we recognize that until we get that inventory level right sized, it's always going to give a level of uncertainty to the outlook of the business. And we're absolutely committed to resolving that. Turning to the next page, I think again, it's also helpful to outline some of the measures we've taken in terms of cost. James showed you the view and trend in terms of SG&A cost in the business. As you can see here, during the course of the year, we had to take some tough decisions. There were layoffs in the group. Ultimately, 12% of our non-customer service headcount was impacted. And you see the impact of that in terms of the reduction in the SG&A cost base for the tuna around £3 million. Beyond that, we outlined that we believe we had an opportunity to take cost out of our supply chain. And I'm pleased to say our teams have been working very hard and have been successful in delivering against a large part of that opportunity. The biggest success we've had has been around restructuring of key contract relationships with our suppliers of warehousing and logistics in both the UK and the US. Characteristics are a little different. In the UK, we're going to be moving vendors. We anticipate a £3 million a year run rate difference, kind of FY25 to FY23 cost. But actually in this financial year, we will have some additional cost as we manage that transition process. The process is well underway and I'm confident with the arrangements we have in place. In the US, that's playing out a little bit differently. We've restructured the contract relationship with our existing supplier. Here, really, it's a case of addressing the excess capacity we had in our supply chain. The business grew very, very rapidly and clearly unexpectedly in the middle of 2020 and into 2021. And as we laid on extra capacity, we did so with what turned out to be a wrong expectation about the ultimate size of the business. We've taken steps now to reconfigure that supply chain. We closed one of our warehouses in the U.S., and have taken steps in terms of the structure of the contract to mean that at the scale we're operating today, it's more efficient, lower on a per unit basis. And we see those savings flowing through into our P&L as of around July of 2023. Now, there remain further opportunities for us to go after, things like packaging, things like office costs. We've started to make some progress here, but I think there's more to go at. As a team, we're very motivated. This is a great place for us to take cost out of our business and give us an opportunity to either deliver additional profitability or return value back to our customers. Beyond that, there is also the benefit of as we drive the destock, it compounds into the cost agenda. You know, we have a couple of million pounds of excess cost in the business today purely because we are storing too many bottles and storing millions of bottles of wine incurs a lot of warehouse and handling costs. So that's a further opportunity we have that will deliver naturally as we make progress on our destock. So having taken you through some of the detail on the steps we've taken around commitment and costs, I want to talk more about the guardrails I outlined that we're putting in place in terms of how we run the business going forward. And we've put in place five simple guardrails and really the thread on all of these is taking steps to learn from the challenges we've experienced as a business over the course of the last 18 months. and ensure that we have systematic things in place to ensure we don't repeat those challenges. Now, at the heart of some of the things that have been difficult, we got some of our assumptions wrong coming out of a period of unexpected and unprecedented growth in 20 and 21 about what the future would look like. And I don't think we can put in place a guardrail to make sure we're never wrong about our assumptions about an uncertain future. But what we can reflect on is the level of risk that we exposed the business to when we ended up being wrong. And at the heart of these guardrails attempt to simplify the way we run the business and reduce the level of risk that we expose ourselves to. If at some point in the future is likely to happen, we get forward-looking assumptions wrong. And that's why we started the first with a long-term planning assumption that we intend to plan around a 5% level of growth over the medium term. Again, here, the intent is that in a business that's got a long supply chain, making commitment to a real agricultural product that itself takes multiple years to come to market, it's really important that we plan against a relatively stable mid-term output. Now, if more demand than this is available, There are lots of ways we can capture that, whether that's through opportunistic sourcing of wine at the last minute, or whether that's allowing some of that extra demand to flow through in terms of higher profitability, recruiting just the highest quality new customer prospects and things like that. It's an approach that maybe will give slightly less peak growth in good times, but massively de-risks the business. And I think it's an important step to take. The second is reaffirming a hard link between cost in the business and the top line of the business. And making sure that that link is constructed, which is something additional, to be consistent with us delivering at least a 5% EBIT margin in the business consistently. And that lets you back into effectively an allowable share of your revenue that you can spend on SG&A. And making sure, and I think the same way we need to acknowledge we got it wrong, that even when things feel like they're going well, that investment in SG&A comes behind growth of the top line as opposed to in anticipation of it. The third guardrail is around inventory. We've outlined our commitment to return stock levels to a sustainable basis by the end of FY25. The ongoing guardrail is to embed in our commitments policy a link between the amount of inventory we hold and the scale of membership base we have. And in detailing out that commitments policy, we've ensured that we're testing that against a number of different things and including a kind of prudent downside outlook. So that even again, if we get our demand forecasting wrong, we don't end up getting over our skis in inventory. And ultimately you can see that's been the area that has caused the business to be cash challenged over the course of the last year. The fourth one is maybe the biggest change on the marketing front. Traditionally, we've run this business with a view that we will invest as much as we can in customer acquisition spend, subject to seeing attractive unit economics could pay back on that spend. For the next three years going forward, again, we intend to simplify, consistent with trying to have simpler, more predictable long-term planning in the business, and intend to look to spend around £25 million per annum for each of those three years, and to allocate that investment you know, as best as we can at the highest rates of return available. Initially, I think it means, you know, we see ourselves probably stretching a little bit to spend that. But as James showed really clearly, there's a big consequence that comes if you underinvest in the business. And if you remember James's bridge in his section about the extra profitability delivered last year, you know, is a big part of the revenue challenge we see this year. Over the course of three years, what I really hope, and I think what I'm already seeing day to day in some of the conversations and our management teams in market is that we create a mindset of our investment as a scarce resource. And we need to challenge ourselves to find better and better ways to deploy that and drive a model of growth that's around policy of member recruited as opposed to just volume. And then finally, I think it's really important we affirm a commitment as cash comes back into the business. And I think as you can see clearly outlined from the information James showed you and from the things I've shown you, there will be cash coming back into this business in pretty material quantity over the course of the next 18 months, that we will test the value of reinvesting that in the business rigorously against the opportunity to return funds to shareholders. And to the extent we do that, it's likely we do that via the vehicle of share buybacks. So there are five guardrails that I think are really important in terms of us institutionalizing what we've learned through a tough period for the business. And often, as a business, you learn more in hard times than in good times. And I think these will make this an easier company to run, a simpler company to run, and hopefully will make us a more successful company over the long term. So turning to the next page, I think it'd be helpful to outline how the application of those guardrails may lead to the trajectory of the business developing. Now, I want to be very clear. These are not forecasts. But what you can do is take the rules that we're constructing in those guardrails and give you an indication of what type of business they might give you for naked, depending on the thing we can't control, which is what's the environment going to be like and how successful are we in recruiting larger numbers of new customers? So taking the top row here, if it turns out that we are unable to make any progress, We're not able to recruit more members. We're not able to step change the payback levels from those we're seeing today. You'd have a business that's likely to stabilize in terms of revenue around 280, 290 million pounds. But with the measures we've taken to control cost and applying the rules we've outlined here, we'll be generating around 10 million pounds a year of EBIT. And there'd be around 70 million of cumulative operating cash flow generated over the course of the next three fiscal years, 24, 25, and 26. Obviously, that's not our ambition. I'm going to talk to you for a number of reasons about why I believe we can do better than that. But it's important to note that's still a business materially bigger than before the pandemic that's profitable with cash to come back. Take the second row here. I think if we can take some measures to make that deployment of £25 million more efficient than we're seeing today, and James showed you that some of those we have really high level of line of sight into as they involve us taking cost out of our business that we already have good plans for, you get to a business that's likely to stabilize just over 300 million pounds of revenue, probably more like 15 million pounds a bit. And there's around 90 million of cash to come back over three years. Now, if we can do better than that, and if some of the initiatives I'm going to talk to you about around improving the efficiency of our customer acquisition spend finding ways to target new segments of customers that we haven't worked successfully with historically, and we're able to therefore return payback to more like the level we saw in FY17 and 20, still investing £25 million a year. Then you get to a business that's more in the sort of 330 to 350 range in terms of revenue, profitability, at or around £20 million a year, and actually over £100 million of cash to come back over that period. So again, these are just scenarios applying some different levels of success around how we deploy that 25 million pounds and then modeling through application of the guardrails I talked to you about. But I think they're important because they give you an idea of the range of different ways in which we see the business potentially developing over the course of the next three years. So moving on, I think it's then important to face into the question, okay, well, which of those roads should I believe in? Why should I believe that you're going to be able to improve paper. And I do want to be very clear. Today, right now, we're still not recruiting enough new members to maintain the scale of our members. James showed you that very clearly in his section. Ultimately, what we need to do is find somewhere in the region of 15% to 20% more customer recruitment, and so improve the efficiency of our marketing spend by around about that much. The good news here is that it's a dynamic calculation, and actually that number is continuing to narrow as we see improved retention rates amongst our member base. But there is still a gap. And equally, I want to be very clear that whilst our payback levels have improved materially and sequentially over the course of the last four half-year periods, they are still below our pre-pandemic levels in a number of areas, notably in our social media spend. The good news here is I think we have one problem to fix, not two. The steps we've taken to focus in where we spend have restored the lifetime value of new members. So we're bringing in good quality customers, good quality cohorts. We now just need to work on how we drive up the efficiency of spend, get more customers for our money. So one problem only. Beyond that, we have been testing a number of more substantial changes to our acquisition approach over the course of the last 12 months. In particular, we've been looking at some ways to target different segments of customers and actually variations to our core proposition. And we'll talk to you a little bit on the next page about that. But before moving on from this, I just want to reiterate that whether we are successful or not at increasing the number of new members into the business, increasing the efficiency of that £25 million of spend, with the steps we've taken around commitment and the cost reduction measures we're taking, we will have a business that stabilizes at the point of profitability and cash generation. So let's go through a little bit more detail on whether or not we're going to be able to achieve that. Turning to the next page. Part of this is around consistent and rigorous application of disciplines that we know well as a business and we're good at. But I think the idea of this fixed budget for new customer investment helps reinforce these. So making sure we are being absolutely rigorous about moving investment around the group to the point we generate the best returns in all our channels, dropping the lowest payback activity, challenging and incentivizing teams to bring in new opportunities that perform better than that. An agile approach in managing investment through media versus investment through subsidizing first cases is definitely part of that as well. That's something we know well and we're working away to do. I think it's been a big part of what has delivered the improvement in payback through the pivot to profit to date. I want to talk a little bit more about the second box here, increasing our ability to penetrate our total addressable market. As a team, I think it's really important that we've taken the time to reflect on why it has been that we've struggled to recruit customers at the scale we believed was possible over the course of the last year and a half or so. It certainly has been a challenging macroeconomic environment. And we do know that a lot of migration online, it appears in the category, was kind of brought forward. But acknowledging all that, we remain a relatively small business within a large addressable market. And as a result, we've conducted a lot of research. We've looked at really some of the barriers to adoption that exist for our proposition today. And a lot of our testing has been around asking ourselves, how can we get better penetration of segments adjacent to our core customer today? A big opportunity that we've identified and that a lot of our testing has been focused on has been really finding a way to connect to younger wine drinkers who attitudinally have very high resonance for what we do. They're really interested in supporting independent producers, buying local and buying independent matters a lot to them. They like what our brand stands for, and we've always driven a lot of trial from them, but we've struggled to turn them into high lifetime value members. Some of our testing has been looking into leaning into and using more. You know, the strength of our data to provide algorithmic and personal recommendation to customers, different types of subscription mechanic and proposition, and different cadences of fulfillment and looking at different smaller pack sizes. I can say that we've seen some really encouraging early signs, especially in our US market where we've been testing for the longest. But we don't want to kind of call success too early. And we have now moved to a second stage of really testing this at scale and in multiple markets, which we'll be doing in the run up to our peak trading period this year. And we should have a point where we have more hard data on that testing to share with you and with our interim results. Now, the final point I think here is the one we should be most certain of. Ultimately, you know, the math is pretty clear. We have a supply chain in our business that was configured around an expectation of more volume. and that therefore have been operating inefficiently. We've taken the steps to renegotiate that. And we have far too many bottles of wine in warehouses, which we are paying to store. We've taken the steps to drive that number down. When you flow those two things through, over the course of the next two years, we will have reduction in our variable cost. You know, that drives higher contribution margin. It means for customers spending the same amount of money and buying the same amount of wine, they are more valuable when we generate higher payback. I think that the box on the right here, you know, you can have very high level of confidence in our ability to deliver. So that's the plan to drive more efficiency from that £25 million of spend. We turn to the next page. I think it's a good point to say, you know, beyond developing a plan and institutions and guardrails, you know, more broadly, there are some learnings that I've taken from this as a management team and a business we've taken. On one hand, you know, what went wrong here is very simple. You know, we thought that COVID had led to an inflection point. And we got that wrong. We weren't unique in getting that wrong. But I think the key thing we've learned here is that we didn't stress test enough the consequences of that assumption being wrong. And that's why we have moved to introduce the guardrails we have today to de-risk the business in the future, to recognize that a lot of our risk is associated with our production and to make sure we take steps to manage that more effectively. I think the second one, and I feel this personally very strongly, is we could have acted more decisively sooner in terms of reduction of cost and commitment levels. I think we have learned that lesson. I'm very committed to make sure that we take whatever steps we need to to put these issues behind us. And again, we've looked to institutionalize that learning into the set of guardrails we talked about today. And finally, whilst I think we got most things right in terms of our pivot to profit, We didn't manage to deploy the level of customer investment spend we sought to last year. And again, in hindsight, I think the tension between driving payback up and getting the customers into the business led to us probably to overcompensate it. And again, that's why the guardrail around fixing customer investment spend for a period of time to avoid the volatility that comes from an on-off approach in customer investments. And if we turn to the final page, I wanted to just share a few slightly more personal reflections. Obviously, I've led Naked now through what was first a period of very rapid growth and a business that went from $200 million to nearly doubling in scale very rapidly, and subsequently through the most volatile period in its history. On a personal level, I'm deeply committed to both resolving the challenges we're facing into today, so dealing with the conditions that create material uncertainty, making sure that cash comes back into the business, and everyone involved with Naked is able to be single-mindedly focused on what I think we're all here to do, which is seeing if we can recognize Naked's potential to build on the platform we've created and continue to change the way the wine industry works for the benefit of customers and winemakers. There are a couple of things I've got a really, really high level of confidence in. The first one, as hopefully you can see from the information we've outlined today, is that whatever happens, we've got a business here which has got at its core real strength because we provide value for customers and winemakers. And that's a business that can be profitable and cash generative. Now, it could be a business that's smaller than it is today, so not the most exciting outcome. But I think that's something I'm very confident we can do. The second thing I'm confident in is we've got a plan to get to a systematic answer, a definitive answer to what is Naked's potential and what do we need to do to fulfill it? Now, I still firmly believe Naked has the potential to be a much larger business than it is today. I think there are an awful lot of customers out there that value the things we do well. And I think we can find ways to tailor our proposition to serve more segments effectively. The commitment here is that Over the course of the next year, we're going to be able to give a clear answer and we're going to outline the testing we've done together. And then finally, I think, you know, I recognize and as a management team, we recognize that we've made some mistakes over the course of the last 18 months as we've dealt with the business that scaled really, really quickly. And then a set of assumptions about the future where we called growth wrong. And I want to make sure that whatever happens, you know, irrelevant people, that Naked doesn't repeat those mistakes. And to me, the most important thing, the best way to do that is to put in place a set of guardrails that help us simplify the way we operate the business, make it more controllable, more predictable. And that is what has been at the heart of the set of guardrails that I'm outlining today in terms of how we intend to run the business going forward. And finally, I'm incredibly determined and I know all of us as a management team and within the business are determined to make sure that we deliver to reward the patience and the support of all our stakeholders, our winemakers, employees in the business, and investors in this business. I think Naked's an incredibly special company that's got fantastic opportunity ahead of it. And I'm absolutely determined that we see that through and we deliver on that. So on that note, I think it's probably a good time for us to turn over for some Q&A.