Welcome, everyone, and thank you for joining us today to go over our half-year results presentation. I'm Maza, and I took on the CEO role at the start of this financial year. I'll be joined by Dominic Neary, who joined Naked a month ago as our CFO. Welcome to the team, Dom. Would you like to introduce yourself?
Thanks a lot, Maza. Yes, I am very happy to be here. I've been here a month already, although it seems a lot longer. I think there are two things that jumped out at me when I joined this company and have done in the past month. And I think the first is the people. I don't think I've met a team with such passion and integrity for what they do. And so a big thank you to everybody who's welcomed me. And secondly, it's a great product. It really is an interesting product. And that integrity word comes up again, both from our winemakers and how our business model works. So yeah, those are the two things that have jumped out at me so far. Really enjoyed my first month and looking forward to many more years. Maza, over to you.
Thank you, Dom. We've broken the presentation into three sections. Dom will share how we've secured robust financial foundations for the company. I'll share the latest regarding our strategic initiatives and our testing program, and finally, we'll share our view regarding the outlook. Over to you, Dom.
Thanks a lot, Maza. So on to our financial performance. I think the first thing to say is that our performance is in line with guidance. So revenue is down, but that's where we expect it to be, and that broadly follows the membership movement. The next point to come to is the G&A. As expected, that's down by nearly 3 million, reflecting the savings program we implemented in FY24. There's a GBP 400,000 one-off LTIP charge related to the cancellation of prior LTIP schemes. That will unwind over the next three years, offsetting future LTIP charges. And there was also an unusual level of dispatches at the end of the mid-year, which didn't quite make it into sale, and obviously that will come into the revenues in the second half. We then move on to loss before tax, which includes two significant items.
One is the liquidation costs, which we talked to you about at the start of the year and is in our guidance, and that's GBP 3.7 million in the half year, which is a mixture of the liquidation costs for selling items, and it's also getting provisions to a more realizable value in the balance sheet, and there's also an onerous cost there for the winery overheads, where we are obviously producing a lot less, and we still have some contracts that are unwinding, which will end at the start of FY26, and so that's what those costs are. That then takes us on to cash. Now, cash is obviously the standout, and we've got a separate slide on that, which is coming now, so this is obviously the standout, and it's a welcome change from prior year, so significant improvements here.
Inventory is generating the largest portion of the cash growth. Cash is up GBP 20 million on prior year. That's inventory in line with what we've been planning. That trajectory will continue, and the decline will particularly take effect with current plans in FY28. We are looking at options to speed that up, and there are some options which, if we implemented, would significantly increase cash flow, but there would be a take EBIT to the lower end of our guidance. We've obviously got the impact of the loan note in there, that's the GBP 9.1 million. Interestingly, the Angel Funds are tracking at the top end of expectations. What's happening there is that if you look at our core members, which are members that are more than two years old, retention there is improving, and they represent 86% of our Angel Funds.
So the most loyal and engaged part of our member base is retaining very well, and the Angel Funds therefore are to some degree tracking that. That leads us slightly ahead of our treasury policy, and the focus on cash and profitability means that there is potential for excess in the future, and we'll be monitoring that closely and coming back to you as part of our performance review by the end of the year. Finally, I wanted to leave you with a bit more detailed thoughts after my first month in the business. So firstly, I think the most important thing is to say thanks to the finance team, because the finance foundations are in a much different place to where they were 12 months ago. We're in a strong position there. There are three things that jump out at me from this business.
The first is that we have a fantastically engaged membership. So we have NPS scores that are truly excellent and bordering on world-class. And I think that reflects what we all know about the Naked Wines products and how good they are. Importantly, there are some improving trends in our core membership. So again, that's the membership more than two years plus. Retention rate is high and improving. These now represent 74% of our revenues, up from 67% last year. And they generate a significant amount of profit, circa 46 million of annual contribution. So that's a fantastically engaged membership base, which is very valuable. Maza is going to talk to you soon about digital test and learn and the progress we've been making with retention there.
So I won't go into too much detail there, but certainly this is a business that is testing and learning and seeing improvements coming through. And the final point I think I should mention is we're going to be coming back with a performance review. So we're conducting that at the moment into the performance of the business. And we're looking at a number of areas, but in particular, we will be coming back and talking about the opportunities that there are in profit and cash in this business. And for example, without going into too much detail, there are significant efficiencies, which Maza will touch on a bit later, in some of our non-voucher marketing spend, which will be helpful in the second half and particularly into FY26. We believe there are substantial procurement and other opportunities in COGS and fulfillment, which will drive improvements going forward.
We have a tech investment roadmap, which already is starting to free up resources within the business. And finally, of course, we've got a lot of U.S. stock, more than GBP 30 million excess, which is coming down, and we're looking for ways to bring that down more quickly. So there's a lot of opportunity and value in this business, and it's a very exciting place to be. Maza, over to you.
Many thanks, Dom. So as I shared back in August, everyone at Naked is fully focused on delivering great wine without all the guesswork to our customers. We're bringing that promise to life across different touchpoints in their journey, and the response we've seen so far is very positive. Thank you to Janet from Sheffield for her feedback. It's messages like hers that give us confidence in the direction that we're taking. We've continued to focus on the three pillars of our testing plan. We want to acquire the right type of customers and to do so for the right reasons. We want to get them into the relationship that best suits their needs. And we want to establish a strong connection with them that goes beyond that transactional, just as Naked once used to do. Let's now talk about our testing plan.
As I anticipated back in August, we've had both positive and negative results so far. I'll go into more detail in the next few slides, but I want to make it clear that we have identified comprehensive learnings over the last six months and have clear action plans for the remainder of this year and FY26. Same as most of the players in our industry, the efficiency of our vouchers declined materially during the first half of the year, hurting our CAC and therefore our payback. Both circulation and response rates are down, and to make things worse, the channel's slow feedback loop makes it hard for us to optimize the investments. We've been moving away from this channel these past few months as a consequence and have already realized meaningful savings. We plan to continue to do so moving forward.
On the other hand, we've seen very positive results from new channels since the start of the year. We're leveraging PR and content creators to enhance our reach cost-effectively and converting those that are interested in our proposition through Meta, brand search, and referrals. This flywheel is showing very interesting results. CAC in the U.K. for some of our tactics on Meta, for example, is under GBP 50. We are now focused on scaling these learnings. We launched our new Angel journey in the U.K. recently, which drove a conversion rate improvement of 20%-40% depending on the channel. This helps us bring our acquisition cost down, and because it represents our value proposition in a compelling way right from the start, we believe it will have a positive impact on LTV as well. We're in the process of rolling it out globally.
Interesting developments on the retention front as well. We launched our new onboarding flow back in the summer, and we can already bank a three percentage point improvement in our immature retention. And we relaunched our rating system recently, which has led to a big 50% improvement in engagement. Given that this behavior is highly predictive of long-term retention, we're very happy with this result. Before moving on to next steps, I want to reinforce our commitment to be transparent and scientific around our FY25 testing plan as we move into its final stages, to be focused and disciplined, fully abiding to our agreed guardrails, and very importantly, to be responsible and pragmatic as we go into a performance review aimed at maximizing shareholder value, so in summary, trading is solid two months into our peak trading season, and our liquidity and cash continues to improve.
We expect FY25 performance to be in line with guidance. We're disappointed in our payback results and have identified root causes and established clear action plans to address them. We continue to get valuable learnings from our testing plan and will share the outputs with all of you in Q4. We continue to evaluate options to accelerate inventory reduction and drive continued efficiencies, and as part of our performance review, we are now proactively looking at all options to enhance value creation. Thank you for your time. We'll be back with an update on peak results by the end of January and share the outputs of the performance review before the year's end. We welcome any questions you may have.
Hello, it's Tim Davis from London Stock Exchange here. Participants may ask a question by submitting written questions using the Ask a Question button on the Spark Live webcast page. So we do have some questions already in. If you're ready to take them.
We are.
Excellent. So performance review, please can you give some more details on all of that?
Yeah, absolutely. No problem. So, good morning. This is Dominic Neary. It's a pleasure to be here. It's very important. I'm glad the first question is on the performance review. So, I think a bit more detail on that. As we've talked about already this morning, the strategic initiatives are well underway, and we're getting valuable learnings from them. So, we're now at the point where we want to apply those learnings and look at elsewhere in the business with a real focus on maximizing shareholder value. And the first stage of that is really, I think, giving clarity and recommunicating how valuable the member base is. It's very engaged. It's very loyal. And the core members make about 46 million in profit contribution. And then the second point is focusing on profitability and cash, and as I say, maximizing shareholder value.
There are a number of areas we've talked about already, but the focus there on marketing and the efficiencies that there are there, working on the COGS area where we've done some stuff, but I think there's still quite a long way to go there, fulfillment included within that. We've obviously got the tech roadmap, which will help to drive effectiveness and efficiency, and we need to plot that out over the next few years. Of course, stock in the U.S. remains too high. We need to communicate on that and look at ways to anticipate that. That's it.
Okay, and on a not unrelated subject, we've had a couple in on around the subject of marketing costs and savings. Simplify it. How do you see them dropping down to the bottom line?
Hello everyone, Maza here. I can take this one. So as shared a few months ago, we continue to see improvements from our testing plan and are building learnings across a number of areas, which we are already taking action on. In Q4, we will share more details around these and the implications they have on the trajectory of our new customer investment, sorry, which is likely to be lower.
Okay, and then we've got one on complex duty changes. How ready are you?
Yeah, I'll take that. Yes. So we are ready for the duty changes. And obviously, this is a relatively significant impact in the U.K. market. So to give you an idea of that, a 14% strength wine would have an extra GBP 0.73 coming through from the duty change. So really not helpful, obviously. And we are obviously trying to push back on that because, and we're working hard in the short to medium term to mitigate the impact of that to our customers. But this, as I say, is not helpful. It's going to have a significant inflationary impact on the industry, and we would obviously prefer it if that were to be reviewed and changed.
Okay. Thanks for that. There's another one coming. Can you share more information on this shareholder review? If I compare your own net cash guidance with current market cap, you're trading close to cash, i.e., the market is not giving any value to the operating business or the additional excess inventory. How close are you to be able to execute share buybacks? There are several questions in there.
There are several in there, right? Yes. So yes, the implicit within the question, I think, is the fact that there is value opportunity within the business. And I understand the point on inventory, and I think I made that on coming into the business almost on day one myself. So I think that's a very valid point. There are, of course, other parts of the balance sheet which you need to think about, like Angel Funds and so on. But yes, that's the purpose of the performance review, which is to have a focus on improving cash and profitability. And there are a number of options. We're looking on inventory about how we might speed up that cash flow, which are not in our guidance at the moment.
With regards to the question about share buybacks, what we've been saying today is that as part of the performance review, we will look at our cash and potential excess cash. So where we are today is that we are slightly ahead of our treasury policy. So with the performance review, that treasury policy could change as profitability improves. And of course, we are continuing to anticipate cash generation going forward. So the board has committed to review the cash position and if there's any potential excess and what we might do with that. And of course, share buybacks are one option.
Okay. Thanks, and Dominic, I think while we've got you, another one, not dissimilar. While you've been cutting costs, there's still around 12% of liquidation of inventory loss. Is it reasonable to stay within the guidance level for the full year?
Yes. So I think you may have got a different question here. While you've been cutting costs, there's still 12% of revenue, I think, is that the one?
Yeah.
Okay. So am I looking at the one below that? Apologies. So I'll answer the first one, then the next one. So with regards to cutting costs, I think we've covered that in the performance review comments earlier. So the answer is yes, we are focused on improving margins, and I would anticipate that continuing in the future. So the next question, which is about the midpoint of guidance for U.S. liquidation of inventory loss, is it reasonable to stay within the guidance level for the full year? Yes, it is. So as with our current plans, we would remain within guidance. But what we've also said is that there are options to speed up the generation of cash. So our inventory, the natural flow of it, will see gradual reduction over the next couple of years with a significant improvement in FY28. Obviously, that for me feels quite slow.
So we're looking at options which could speed that up. Some of those options would increase liquidation costs. And what we've said is that if we were to go for those options, they could leave us at the lower end of EBIT guidance. But we haven't made those decisions yet, and we would come back with that. I would anticipate later before the end of the financial year.
Okay. Another one, just in. You earned 150k in interest income on 30 million in cash on balance sheet corresponding to a 1% interest income. Why are you not able to earn more?
Great question. I think there's more going on than there is in just interest on the cash. But absolutely, it's an area that is one of my top areas that I'll be discussing with the team now that I've been in role for four weeks.
Okay. Any more questions, please, to - sorry, question to our audience. Any more questions, please, I should say. Yeah, something else coming through, I think. Yeah, here we go. Your five-year payback in H1 was soft at circa one times. Where do you think you can recover this to on a three-year view? And how would you rank the major elements that are going to drive that? Changing recruitment approach channels, personalization, retention, efficiencies, and so on. Do you want me to read that again? There's quite a lot in there.
Yeah, but I think I got it, so I'll start by saying that our customer acquisition cost went significantly up in half one of this year, and that obviously has a big impact on our payback. This is largely driven by the industry-wide decline in the voucher mechanism. Naked has been historically overinvested in this area, and our recent analysis and testing has led to believe that there's an opportunity to generate significant efficiencies as we redirect investment to more efficient channels, such as earned media, for example. And as we go into the final stages of the testing plan, we will be able to come up with a clear view on what that means moving forward, but as I stated before, it's very likely that our new customer investment is going to be lower in the future.
Maza, on a not unrelated subject, what are your priorities with your tech investment? Which systems areas in the business are a priority?
Yeah, great question. I think there's a lot to explore, a lot of opportunities to go after on the retention side of things, looking mainly at segmentation and personalization of key messages. So that's something that we are already very actively pursuing. I think there's also opportunities on the backend side of things, right? And that's something that we are in the process of documenting to come up with very clear requirements and then evaluate the tools out there to see what's the option that best fits Naked.
Again, probably one for you. You mentioned the high engagement of the core members. Can you please clarify the sales retention rates of old pre-COVID cohorts? Is that well above the over 74% rate?
Yeah. So Dominic here, I'll take that, so yes, absolutely, the high engagement of the core members, our NPS of those has improved on prior year from 73 last year to 76 this year, so really highly engaged, but as I think is implicit in the question, they're also extremely loyal as well, so the retention of our core we've flagged as being 79%, that's up from 77% in HY24, and just as a reminder, core is customers who've been with the business for more than 24 months. As that aging increases, that retention improves, and it grows reasonably quickly over the next few years up toward about 90%, and then it starts to slow down, so yes, very engaged, very loyal, and because of the slightly higher contribution as well of those members, very profitable.
Okay. Thanks for that. Here's a question being asked directly of Maza. Having spent longer in the business, what do you see as the core differentiators of Naked Wines?
Wow, great question. I think it comes down to four things: our business model, our approach to the category, our service, and our community. So unpacking that a bit, our business model is truly unique. We use the money that people put into their accounts every month to fund some of the world's most talented independent winemakers. That allows them to focus only on what they do best, which is making some amazing wines. We then sell those wines at preferential prices to the Angels that make all of this possible. So world-class wines at fair prices, it's a true win-win relationship, and I think that stands at the top of the list. Now, our approach to the category is different in that we are constantly pushing the limits as to how to make it more approachable for people. We invite them to take risks.
We refund them if they don't like the wine so that they're not afraid to try a different one. We show them thousands of ratings and reviews from people just like them to help them feel more confident in their choices. So yeah, we're constantly looking for ways to improve our site and make it simpler to explore our range, and we're making things easier for our Angels. In terms of service, we try to offer a frictionless experience to our customers. Wine is heavy, bulky, fragile, not a great combination. So what's better than having it delivered to your doorstep? And we usually get that right, but when we don't, we have an amazing Customer Happiness Team ready to make things right. And that's something that our customers value a lot, as well as our wine advisors. Finally, it's about community, right?
It's about that direct connection between winemakers and Angels. And people obviously value that. It sets us apart. So yeah, we want to only do more to strengthen that connection as we think it's a very powerful thing, close to the Naked ethos. And yeah, we want more of that.
Okay. Thanks for that. And we just had one last question come in, probably for Dominic. The expense for underabsorption, a fixed cost in the U.S., you took a hit in H1 that includes a provision for H2 as well. Should we expect this expense line to continue into full year 2026?
Yes, thanks for that. The short answer is no. The slightly longer answer is we are firstly looking this year at ways we can better utilize that capacity, those contracts. At the moment, as you say, we've taken a provision. The key point, though, is that the contracts end in May and June in 2025, so not going to have a material impact, and we're already well underway with two or three options for how we would have significantly cheaper costs going forward. Although, of course, naturally, bottling will increase, which will absorb more of those overheads, but as I say, we will be reducing those costs.
Great. Okay. Well, look, that concludes the questions. Thank you to our audience, and now, if I can hand back to Maza for closing remarks.
Yes, thank you. I'll keep it short. So it's about making it clear that Naked is stronger, both financially and strategically, that we have a core set of customers and members that remain very loyal and engaged, that we are seeing positive outputs from our testing plan, and that we will give a final view on what that has produced in the upcoming months, and that we have continued to strengthen our management team, now with Dom joining us as CFO. So we're conscious of the challenges, but at the same time, very optimistic about Naked's future. And we thank you for your time.