Naked Wines plc

Hello, everyone, and welcome to Naked's FY24 results presentation. We're very excited that you're joining us. I'm Massa. I'll be sharing some thoughts with you later today, as well as JC, our CFO, and Rowan, our chairman. I hand it over to you, Rowan.

Good morning, everybody. I'm delighted to report that Naked Wines is in much better shape today than we were 12 or even six months ago. We've laid solid foundations and the team have made substantial progress in fixing the problems of the past. Specifically, costs have been cut very substantially to match the current trading environment. Inventory commitments have been cut intelligently so that we are now realizing cash from inventory and being done in a way which protects our core winemakers. And we now have a long-term funding facility in place that gives us the flexibility we need to restore Naked to growth. At the same time, the team have kicked off the process of restoring growth. Basic marketing disciplines have been put back in place. And for the first time since our launch, we have a team in place with experience of recruiting customers through channels other than our traditional partner channel to help us solve our customer acquisition challenge. All of this is very ably led by our new CEO, Rodrigo Mazza, who is known to his friends as Mazza. And after six months being executive chairman with Maslow in place, I've now gone back to a non-executive role. And at this point, I will hand over to James Crawford, our outgoing CFO, to cover the financial commentary.

Thank you, Rowan. Moving into the financial highlights now. So the key headlines for the year are laid out on the page here. The revenue trend was a 13% decline. Whilst obviously we'd like that to be in growth, we know that that's declining because we have fewer angels. It was pleasing to see the reduction was less in the second half at 9% than the 18% in the first half, a slowdown of that trend. That translated to an adjusted EBIT of £5 million for the year. That's a 66% reduction on the prior year. I think we said with the prior year results, we had largely underinvested in new customer recruitment in FY23. And with a £16 million reduction in repeat customer contribution in FY24, we certainly felt the impact of that. We offset that by taking £11 million out across various cost lines, and that supported the ongoing profitability of the business at the adjusted level. Looking within those costs at our operating G&A, so our overhead lines in particular, at £36 million, that was 11% lower year on year. It was 13% lower in H1, 11% lower in H2, and we undertook a further round of cost reduction at the end of the year. And as a result, the exit run rate for that measures about £30 million per year, which is intended to support profitability into FY25. We did, however, make a loss at a statutory level. There were nearly 17 million pounds of adjusted items that we reported during the year. The largest ones of those would be the inventory provision we took in the US, reflecting the risk of inventory expiry, further impairment of goodwill on our US business in particular. Inventory has been a key issue within the business. Closing inventory was just shy of £145 million for the year. That's an 11% reduction year on year, which is the first time that's come down over I think the last three years. £15 million lower year on year. Of that £15 million reduction, £7 million does relate to the provision in the US, but there is a real underlying reduction now beginning on the inventory line. And that has supported an increase in net cash. Net cash of nearly 20 million pounds was almost double year on year. That's been driven by that inventory reduction, the early redemption of the loan note and offset somewhat by reductions in angel funds and payable balances. The agenda I'm really going to work through today is in three pieces. First, I want to talk through how we've improved the cash and liquidity position of the business, how we've built the foundation around cost and some of the rigor around inventory management. Then I want to look at some of the trading dynamics. Ultimately, the core repeat performance of the business is pretty steady, but customer numbers remain lower and recruitment remains challenging. And then I want to quickly touch on the guidance that we've issued today, how we've put that together and what the drivers are looking forward to. So let's start with cash. We improved our net cash position by 10 million in the year. If we break that down in terms of some of the drivers, despite the reduction in EBIT, which translates to a reduction in adjusted EBITDA, what you can see is we saw a significant shift in the working capital trends. In FY23, we consumed nearly 48 million pounds worth of cash in working capital. The largest share of that being into inventory with nearly 30 million pounds consumed into building inventory. That trend reversed this year. We actually reduced inventory by nearly 15 million pounds. And that is what has kind of really swung the operating cash flow from a cash consumption of 25 million to a cash generation of 10 million in the year. Moving on to the next slide, we can then put that in the kind of historical context and see that we're now exiting the lower period that we've had around liquidity. This is our net cash or for a couple of months only net debt position over the last three or four years. And you'll see, you know, when I came back into the CFO role in July of 22, we had been rapidly consuming the cash that had been built during the pandemic and from the sale of Majestic. We put in place a set of actions to mitigate that. And we have been through a period of low liquidity for the last 12 to 18 months. And then in the last kind of three to six months, we have started to exit that and start to rebuild liquidity. Now, as we trade through the next peak trading season, we should see that liquidity in the cash position improve yet further. And I think that marks the kind of turnaround point of the journey that we've been through dealing with the aftermath of the pandemic within the business. The other kind of big achievement that we achieved just after the end of the financial year was the new credit facility. Our prior credit facility was imperfect. It didn't generate as much usable liquidity as we'd like because we were covenanted to hold 20 million of cash. There were significant exclusions and reserves against the inventory that drove availability of liquidity from that facility. And whilst that cash holding mitigated any risk of angel fund outflows from the bank's perspective, it wasn't necessarily visible to stakeholders and it wasn't necessarily accessible. And as a result of that and an EBITDA covenant that limited our ability to invest as aggressively as we'd like, we had a facility that was. Less suited to our needs. Very, very pleased to have landed a new facility with PNC. They're a tier one bank based in the US, if you aren't aware of them. It's the same headline size, but actually because of the terms of the facility generates 20 to 30 million dollars of more usable liquidity. It gives us a higher advance rate against inventory. It doesn't have that cash holding requirement, and it reduces the exclusions that we have out of inventory. It also has a lighter covenant package, a single springing fixed charge cover covenant, which would be tested were liquidity remaining to be less than $12 million. And were that to be tested, it's a fixed charge cover requirement, not an EBITDA requirement, but it's likely to require lower EBITDA than the prior facility. The net result of all of that is more usable liquidity, less restriction, and landing that has been a key part in our ability to remove the going concern uncertainty that we'd reported in the last two reporting periods. What we show is just, were we to look at liquidity within the group at year end on a pro forma basis for the new facility, we'd have had about 20 million pounds of net cash as reported. The facility would have provided 37 million pounds of borrowing capacity. And that would support operating cash balance needed in the business, the working capital cycle we have in the year. It supports downside trading protection where our forecasts to deteriorate. And it also provides security against angel balances, whether directly or through our payment providers. And, you know, we think that at year end, that really is a kind of balanced liquidity place. It doesn't give us excess liquidity, but any future cash generation from this point forward should provide optionality around investment, whether that's in business growth, share buybacks or the like. A key component that we have talked about a lot over the last kind of 18 to 24 months has been our angel fund balances. Obviously, during a period of low liquidity, that has been perceived as a risk to the business. But I think what we've been able to show and we can continue to show is that those balances have been relatively stable, both in aggregate balance, albeit a slight reduction as the angel base has shrunk. But actually, the rate of redemption of that balance has continued to reduce on a percentage basis, which is the yellow line on this chart. And, you know, we see that as a stable source of funding to the business. I think it's interesting to note, Mazza will speak later, that we are running what we call our Wine Genie program for some new customers at this point. They don't carry angel balance. So it kind of, on the one hand, reduces any risk that's perceived around us holding those balances. But at the same time, we do generate equivalent amounts of cash from that program just through selling wine to those customers. I'd like to start moving to talk about the P&L. So we delivered 5 million of adjusted EBIT in the year. That's a reduction from the nearly 15 million we reported in FY23 at a 52 week comparable basis. Big drivers of that, I touched on these earlier, but 16 million pound reduction in repeat customer contribution is really a function of the underinvestment in FY23 and customer recruitment. And then we also increased our new customer investment in FY24 by £3 million, which moved profitability backwards. Three blue blobs on the right hand side of this chart. Then you see the cost reductions really kind of come through to sustain profitability for us. So operating G&A reduction of 4.4 million, share based payment charge reduction of 1.2 million. And we cut the marketing R&D investments that we've been making in things like TV advertising that 5 million pounds in FY23, all of which contributed to bringing the adjusted EBIT number to 5 million for the year. We actually continue to take G&A out of the business during FY24, undertaking another reduction in workforce at the end of the year. And what that means is that we kind of go into FY25 with an 18% further reduction in the operating G&A base versus the prior year. What we've done on the right-hand side here is just converted that into an estimated revenue for the business that would drive the business to breakeven. Obviously, that's not our intent. This is a scenario analysis. But with the cost base we had in FY24, we would have needed £263 million, give or take, to deliver breakeven. The cost base that we go into FY25 with, it would be down to 228 million. So it's an indication of the level that the business could decline to whilst remaining profitable. As I say, that's not what we're forecasting. We'll talk about the guidance imminently, but it gives an indication of the foundation we've built into the business with the cost base we're operating in. A lot of work has been undertaken on inventory. Pleased to say that the UK and Australia inventory is now on track. If we look on the right-hand side here, we've put the months of inventory we have in each market. Eight is about right for the UK, once you look back through the supply chain at the work in progress that we hold with our winemakers. 11 months, marginally high for Australia at year-end, but coming down in FY25 and very much at the right level. The U.S. is where we remain overstocked. 24 months of inventory, probably the best part of double where it should be for the U.S. We expect to reduce stock further over FY25 peak trading. There is very little stock coming into the U.S. We do expect to sell a significant amount over peak trading. And we actually expect intake to be below COGS through FY27 at this point. We've got a long-term inventory target, which would be below 50% of sales. And we have a team in the US who are reviewing options for accelerating our journey there. With the provisioning work we've done, we will get there naturally, but over an extended period of time. There are options we would have for accelerating disposal of that stock, and we'll be opportunistic about that. There is a balance between taking losses on that stock and generating cash near term. And we'll navigate that balance based on essentially what the markets or trade buyers of our inventory would tell us as we view opportunities. um that was the first section that's what we've done to improve our cash liquidity position get the cost to the right place and i think you know we can put ticks in those boxes that is what i came back into the cfo role to to get done um and as you know i'm leaving the role um but i think that was the line we wanted to draw into the business i want to talk now a little bit about the trading performance in the year if we move down the slide i think the the key point to understand is that On a kind of KPI basis, our repeat customers are performing well. So revenue per members are really important metric. It is stable. That's the light blue line on the left hand chart here. But what you can see in the bars on that left hand chart is the total membership has continued to decline. And so with the declining membership, stable revenue per member, we have seen repeat customer revenues decline. What's the driver of that decline in repeat customer base? It's not the attrition rate. When we look on the right hand side at our monthly attrition rates and an average kind of over a three month trail. Yeah, those have been declining or stable. Essentially, it is a seasonal effect. People tend to cancel wine subscriptions after Christmas. But, you know, there's nothing that concerns us around the attrition rate of our member. What we need to fix is the rate of customer recruitment and get those in balance. And I'll talk about that some more in a moment. Before I talk about that, just worth kind of looking at our margins on repeat customers. It has been disappointing to see our repeat customer contribution margin decline again in the year. You may remember in FY23 it declined and it declined due to higher fulfillment costs that we were seeing in all of our markets really as inflation really kind of took grip. That's not the driver in FY24. If we bridge out from 23 to 24, what we see is a small one-off reduction where we saw a supplier fail and we incurred some cost as a result of that. Mixed shift in the business away from the US, with the US business having declined quicker than the UK, but the US business having higher margins. We lost about 60 basis points of contribution margin due to that shift. And then there's about a one percentage point reduction in contribution margin where we undertook a series of deep discounting activities during the year, really testing our ability to move stock quickly, generate cash out of inventory and get the inventory off the books. That shouldn't be an underlying trend necessarily. That was kind of somewhat one off in nature. But those would be kind of the big drivers that took down that contribution margin. I think on the right hand side, it's reassuring to see that on fulfillment costs in the US, we've seen a reduction in FY24 on a per order basis. As the work we've done changing our warehousing arrangements and footprint have begin to bear fruit. In the UK, we've shown kind of FY24 to FY25 forecasts. We moved our UK warehousing across March and April, kind of the year end period of FY24. And we expect to see some reasonably material reductions in the fulfillment cost per order in the UK that should serve to bolster margins during FY25. Just now looking at the customer base trends and picking up on the point that whilst attrition in the repeat base is stable, we're still not recruiting enough new customers. This is a roll forward of a chart we've shown for the last couple of years, showing me the balance between recruitment in the dark blue bars and loss of customers from the starting base and those recruited in the light blue. And you can kind of see the big uplift we saw in customers during COVID in FY21-22. And then kind of reductions. But whereas in FY23, our net loss of customers was 164,000 with 407,000 recruited, 570,000 lost. The reduction in the loss was only 380,000 and we recruited 323,000 in FY24. So we are bringing the trends back in the direction of equilibrium. We're not getting there as quickly as any of us would like. But I think it's reassuring to see the emerging trend in that balance and also the continued reduction in the kind of percentage of opening base and customers recruited that we have seen down to 37% in FY24. Then so customer recruitment's the challenge. Let's explore that in a little more depth. FY24 headlines would be, you know, 323,000 new recruits. We invested 23 million pounds and we got a 1.3x forecast payback on that. Some negative drivers that are within those numbers. We tested a non-subscription journey for new customers. So we invested in the marketing. We gave people the discounted first order, but we didn't require them to sign up to be subscribers to see whether that would drive enhanced lifetime value and kind of improved win back opportunities the reality it didn't we stopped doing that we've seen continued tough trends in marketing conversion to traffic and we have been accepting of some low marginal paybacks to liquidate stock especially in the u.s from a cash generation perspective it makes sense to deploy money at a 1x payback when actually the stock is already on the balance sheet and generates cash immediately We've also seen some positives, improvements in digital creative and a more use of social channels versus where we've been at the end of F23. Those lowering of payback thresholds to drive cash have driven some volume into the number. And actually just a refocus of the team on our core partner marketing process. We tried quite aggressively during FY22 to 23 to expand the range of channels, probably to the detriment of our core. And what you see kind of from some of those positive drivers on the right hand chart, if we look at the last 12 months, new members recruited, actually, whereas that had been declining during and beyond FY23, during FY24, we've really seen stability at the group level in that, which is the dark line on top. And then the lighter line in the middle, you actually see an uptick beginning to emerge in the UK in the volume of new customer recruitment that we've done. So some very, very early positive signs visible in there. So moving down a slide, that's really the kind of headlines around the core trading. Then just want to touch on the guidance that we've issued today on the next slide, please. So looking forward, we've issued new guidance today for FY25. I don't want to talk through every number on the page. They're here, they're in the R&S, but I think it is useful to explain the process and method by which we arrive at that guidance. So we've basically looked across our markets and assumed quite prudently no changes in a lot of key performance metrics. So flat trends in customer recruitment, flat trends in customer retention rates, No changes to the annual revenue that we achieve per member. We've then overlaid the known cost base, whether that's on the SG&A and fixed cost side or whether it's on our fulfillment. So it includes impact of cost reduction work we've done on both of those cost elements. And then something new that we've done this year is we've overlaid not just the sell through of inventory based on underlying demand, but also we've put in some estimates for some bulk disposals or trade disposals of stock in the US, which we are estimating losses of two to five million pounds off, which is a new guidance item for us. I think just to drill down on that a little bit, because the accounting is important, any sales of provision stock we make will be treated as adjusted items. So if we've written wind down to zero in FY24 and we managed to sell it for some form of recovering, then we don't kind of take that into adjusted EBIT. That's an adjusted item gain. However, if there's stock that we haven't provisioned that we choose to liquidate in order to generate cash and reduce inventory, that will be included in adjusted EBIT. And hence we've shown an adjusted EBIT, including inventory liquidation and excluding inventory liquidation in the table on the left. So it's a relatively prudent approach. It then overlays what we know about inventory liquidation. I think then, yeah, it's worth linking that to what we said earlier today about Q1 trading. So Q1 trading was broadly in line with the board's expectations. There was a reasonable amount of volatility or variance month to month in some of that. And we've seen some of those trends continue into P4, P5. And that's the reason that we've got quite a wide range on the guidance, as you see. There's a lot of change going on in the business. um there's a relatively uh volatile consumer environment out there at the moment and hence we've got a fairly wide range around some of these metrics but they are based on no assumed improvements or changes to the underlying kpis that we've seen that's all from me uh only just to say thank you to all for listening this morning and handing back to masa for his section thank you jc and hello again everyone