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 gonna 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 4, and before we get into the detail of the presentation, I 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. 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.
To start with the most important one, you know, is Naked Wines gonna run out of cash? 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, 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. Even if that is the case, you know, 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, you know, 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 2024, 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, well, you know, what are you gonna do about fixing these problems in the business? And ultimately, how do you intend to return Naked Wines to growth? And here, you know, 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 2023, 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 gonna be able to give definitive results today, but we do intend to give more hard data at our interim results. And finally, you know, that lays us up to where we want to get to, you know, to fulfill the potential of this business. And again, you know, 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 gonna quantify that potential over the course of the next year. And then, you know, to be provocative, you know, doesn't that sound like things you've been saying for a while, you know, what's different?
We wanted to spend time as a board and as a management team working out how we best institutionalise what we've learnt through a tough period in the last 12, 18 months. And the result of that are 5 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 2024, 2025 and 2026, as opposed to having a variable budget. Solidifying our relationship between SG&A levels, inventory levels, and, you know, member base size and top line, and restating, you know, our commitment to discipline in terms of capital allocation.
I'm gonna 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, you know, in the event that we're wrong in some of our planning assumptions. So having covered those things off, I'm gonna hand over to James, who's gonna 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 gonna start with a summary of where we are today. I think, being brutally honest, we recognize we have some challenges, so I'm gonna 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 into 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 trends. 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 pivoted to profit. We've got a lower headroom on our cover than we'd forecast.
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 gonna shy away from the fact that there remains some challenges in the business right now, and that's what I'm gonna 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 GBP 3.5 million to GBP 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.
We added GBP 24 million to the bottom line year over year by spending less on new customer recruitment. Offsetting that, we went backwards by GBP 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 GBP 2.1 million on R&D spend, which was our above-the-line testing, all offsetting that GBP 24 million uplift from reduced new customer investment. That takes us to the GBP 16.3 million, 52-week Adjusted EBIT that we've reported. We've got a further week of benefit from our 53rd week that takes us to GBP 17.4 million. You can see strong profitability coming through the business, driven by reduction in new customer investment.
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. 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 GBP 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 fulfilment arrangements. And that's gonna provide room for additional investment going forwards 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.
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 have been losing over 10% of the customer base over a three-month period. What you see as the last two years have progressed and that base has matured, and 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. 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, 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, a month-to-month basis. So that's some of the good. On the next slide, though, we address 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 on this slide is the evolution 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 2021, we opened with just under 600,000 subscribed Angels. Over 1.3 million people took out a subscription, but over 1 million people cancelled 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 then as we move from FY 2021 to FY 2022, 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 continued to see a step change downwards in that cancellation rate. So yeah, 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 450,000 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. So then what's the challenge in terms of hitting that 450,000?
Well, ultimately, the constraint we impose on ourself 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 stabilised payback at what we're going to call a pro forma 1.9x once we think about savings, which is the level we need it 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 FY 2022. Our Pivot to Profit has started rebuilding that, and we're reporting 1.7x for this year.
When we then think about the impact the operational savings we have contracted in our fulfilment operations will have on future profitability of each order, and overlay that into the payback calculation, we'll be at a 1.9x, which is very near the midpoint of the range that we strive to be at. Essentially, you know, 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 GBP 25 million that Nick has alluded to, that we're targeting in terms of spend. And that really means that goal 1, 2, and 3 is to get that investment level back to GBP 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, kind of let's talk about recent trading and what that means for FY 2024 and beyond. We have revised our guidance for FY 2024. The guidance is going to be to a revenue decline of 8%-12%. That's constant currency, 52-week comparable. Targeting 25 million GBP of new customer investment, we might range that at 23-27, but we're going to strive to land that in the middle. We expect to deliver repeat customer contribution between 72-80 million GBP 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 GBP 8 million-GBP 12 million for fiscal 2024. 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 FY 2024, and actually, what has played out is almost a mirror image of that. We overshot profitability in fiscal 2023 due to underinvestment in new customers. As a result of that, top-line revenue in FY 2024 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.
But I think, you know, irrespective of that, it's worth saying that the FY 2024 revenue forecast we have should still deliver cash generation in the second half of the year. We're still expecting year-end inventory to be around the GBP 145 million mark that we'd originally guided with the Pivot to Profit, albeit could be up to GBP 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 GBP 10 million-GBP 30 million range, which, you know, level or ahead of the level that we closed the FY 2023 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. 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. We've traded in line with that forecast in the first two periods. For P4, P5, it does seem to be reflecting an outlook that we are delivering for 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 trend to secure profitability.
I think I've indicated that G&A 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. What you're seeing here is trajectory through FY 2022 into the first half of FY 2023 of increasing costs as we were investing for growth. Then you just start to see the impact of us taking cost out in the second half of 2023. Then the bar on the far right is the average half-year cost that we expect to incur through the G&A line for FY 2024. Again, you see that, you know, 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 some tough cost decisions, 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 the cash side. We are committed to operating with significantly less stock going forward, and we have been configuring our stock commitments to drive destock. What you see on this chart in the dark blue is the COGS in the half year, and then in the light blue is the comparable inventory intake in the same half.
Obviously, you can see on the left-hand side of this chart, in FY 2022 in particular, into the first half of FY 2023, that is when the overstock developed. In the second half of 2023, that has reversed. You'll see a little increase, as I alluded to, in the first half of 2024. We 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 2024. And then that we expect to be continued into FY 2025, so still guiding to, you know, GBP 145 million-GBP 155 million stock in FY 2024, and an additional significant reduction in FY 2025, 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 GBP 96 million of stock build since FY 2020. We look at the drivers of that, GBP 48 million 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 U.S., which has a longer supply chain, requires a longer lead time, and that has added to our inventory levels. And then there is about GBP 41 million of overstock within the group, which obviously we are keen to reduce. But I think 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. If 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 FY 2020 through the sale of Majestic and into 2021 as we actually destocked. So you know, if we actually think about the balance sheet drivers of GBP 96 million of inventory build, Angel funds have funded nearly GBP 30 million of that. We do operate a degree of payables in our supply chain, and that has funded about GBP 12 million of that. But the remaining GBP 55 million has come from the cash, either that we had on hand at the end of FY 2020 or that we've generated in the near term.
And I think kind of important to kind of put 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 FY 2024. So looking forward in terms of our inventory levels, both our baseline forecast and also our, our downside scenario forecast to destock and liquidity improvement. For those who've read through the detail of our going 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 GBP 145-155 million of inventory guidance at the end of FY 2024. I think worth saying that we have managed that destock to be as orderly as possible. We've been striving to balance our liquidity needs with maintaining winemaker relationships, and so make this process as sustainable as possible. But what does that do overall for liquidity? Well, essentially, as 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 2025. And certainly envisages a scenario where once we have destocked at the end of FY 2025, we will have material liquidity on hand, and that is now within the space of something like 18-24 months. I think worth, you know, as I'm talking about liquidity, acknowledging that we have reported uncertainty 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 at managed fulfilment 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 obviously, we're watching liquidity carefully. We're confident in our forecast that 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 I 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: our Angel funding and our asset back, asset-backed lending facility, both of which are in a stable position while we work through that excess stock. First of all, on the Angel side, you know, 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 reduce 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 GBP 1 million per quarter, with a GBP 4 million test for the full year. And that's now moving to a GBP 4 million 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 where a specific quarter may be a little skinny 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.
And so look, we ended FY 2023 with net cash of GBP 10 million and GBP 38 million pounds of facility headroom above that, which gives us the liquidity to bridge the time that we're destocking, working with winemakers, and solving the excess inventory and commitments in an orderly way, as we've always said, 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 FY 24 and beyond, where we have a profitable and cash-generative business, and that affords us the time to really focus our efforts on rebuilding our customer acquisition. And that is what Nick is gonna 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 2023 period, and is the right point to talk about what comes next. Moving on to the next page. Evidently, Naked Wines over the course of the last year, you know, we laid out a Pivot to Profit strategy. I think, as you can see, we've 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. I think James showed really clearly how that has, 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 the 2024 onwards. So I'm gonna talk to you about our plans for profitable growth today. Turning to the 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, you know, we need to broadly increase the number of members recruited by 15%-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 and cash generative. I think it's important to explain why, because that's not something we've achieved in the past. The first reason, very clear, you know, we don't have an overall sales problem, but we have a new customer problem. 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 gonna show you this business is still gonna 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 rightsize 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, you know, the business has already been, you know, on a sustainable footing. Our use of cash over the course of the last 24 months has been in inventory growth. We have 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.
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 and cash generative.
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, you know, that, 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, you know, we want to commit absolutely that even if the environment gets tougher, you know, we will take further action. 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, you know, during the course of the year, we had to take some tough decisions. You know, 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 to the tune of around GBP 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, you know, warehousing and logistics in both the U.K. and the U.S. Characteristics are a little different. In the U.K., we're gonna be moving vendors. We anticipate a GBP 3 million a year run rate difference, kind of FY 2025 to FY 2023 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 kind of confident with the arrangements we have in place.
In the U.S., 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 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 as, as we drive the destock, it compounds into the cost agenda. You know, we have a couple of million GBP 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 cost. 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 eighteen 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, are that we got some of our assumptions wrong coming out of a period of unexpected and unprecedented growth in 2020 and 2021 about what the future would look like.
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, you know, 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, you know, making commitment to a real agricultural product that itself takes multiple years to come to market, it's really important that we plan against, you know, a relatively stable mid-term outlook. Now, if more demand than this is available, there are lots of ways we can capture that. You know, 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, you know, 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 this is something where we need to acknowledge we got it wrong, that even when things feel like they're going well, that investment in SG&A comes, you know, 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. 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, good payback 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 GBP 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, it 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 in 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 quality of member recruited, as opposed to just volume. 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, 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.
We will test the value of reinvesting that in the business, rigorously against, you know, the opportunity to return funds to shareholders. To the extent we do that, it's likely we do that via the vehicle of share buybacks. 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. You know, 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. Turning to the next page, I think it'd be helpful to outline how the application of those guardrails, you know, may lead to the trajectory of the business developing.
Now, I want to be very clear, you know, 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, you know, in recruiting, you know, larger numbers of new customers? Taking the top row here, if it turns out that we are unable to make any progress, you know, 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, you know, around GBP 280 million-GBP 290 million.
That with the measures we've taken to control cost and applying the rules we've outlined here, we'll be generating around GBP 10 million a year of EBIT, and there'd be around GBP 70 million of cumulative operating cash flow generated over the course of the next three fiscal years, 2024, 2025, and 2026. 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 GBP 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, you know, already have good plans for. You get to a business that's likely to stabilize just over GBP 300 million of revenue, probably more like GBP 15 million of EBIT, and there's around GBP 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 FY 2017 and 2020, still investing GBP 25 million a year. Then you get to a business that's more in the sort of GBP 330 million-GBP 350 million range in terms of revenue, profitability, you know, at or around GBP 20 million a year, and actually over GBP 100 million of cash to come back over that period.
So again, you know, these are just scenarios applying some different levels of success around how we deploy that GBP 25 million, and then modeling through application of the guardrails I talked to you about. But I think they're important 'cause 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 rows should I believe in? Why should I believe that you're going to be able to improve payback? And I do want to be very clear, you know, 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%-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 among our member base, but there is still a gap. And equally, I want to be very clear that while our payback levels have improved materially and sequentially over the course of the last 4 half-year, half-year periods, they are still below our pre-pandemic levels in a number of areas, you know, 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 and 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, you know, 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 GBP 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, you know, that stabilizes at a point of profitability and cash generation. So let's go through a little bit more detail on whether or not we're gonna be able to achieve that. Turning to the next page. Part of this is around consistent and rigorous application of disciplines that, you know, 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 the 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, you know, we're working a way 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, you know, 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, you know, 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, you know, really some of the barriers to adoption that exist for our proposition today.
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 mechanics and proposition, and different cadences of fulfilment, and looking at different smaller pack sizes. I can say that we've seen some really encouraging early signs, especially in our U.S. 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, and we generate higher payback.
I think 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 GBP 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 instituting some guardrails, you know, more broadly, there are some learnings that I've taken from this, so does the management team and the 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. You know, 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 our 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, you know, 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, you know, while 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, you know, in hindsight, I think the tension between driving payback up and getting the customers into the business led to us probably to overcompensate here. 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 investment. And if we turn to the final page, I wanted to just share a few slightly more personal reflections.
Obviously, you know, I've led Naked now through what was first a period of very rapid growth and, you know, a business that went from, you know, GBP 200 million to, you know, you know, 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 in 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 know, you can see from the information we've outlined today, is that whatever happens, you know, we've got a business here which has got at its core, you know, 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, you know, 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 gonna be able to give a clear answer, and we're gonna outline the testing we've done to get there. And then finally, I think, you know, I recognize and, you know, 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 a business that scaled really, really quickly, and then a set of assumptions about the future where we called growth wrong.
I want to make sure that whatever happens, you know, irrespective of people, that Naked doesn't repeat those mistakes. To me, the most important thing, and 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. You know, 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, you know, 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.
Thank you very much, sir. Ladies and gentlemen, if you'd like to ask an audio question, please press star one on your telephone keypad. Please also ensure your mute function is not activated in order to let your signal reach your equipment. So once again, please press star one. Our first question today is coming from Wayne Brown, calling from Liberum. Please go ahead. Your line is open.
Thank you very much. I've got a few questions. I'll try to limit it to three for now. Just be good to understand what is going on in Australia, and you've clearly written off all the goodwill in the PP&E. Just looking at the broader strategy that you've announced today, I don't wanna-
Well, Wayne, should we, should we just take your- should we take your three in turn, just so we can, maybe-
Yeah.
especially allow for me, it's
Yeah, yeah
2 A.M. in California, so I might be a little slow if you ask me a 3-parter.
Sure, no problem. Go ahead.
Maybe I'll let James talk to the goodwill write down in Australia.
Hmm. Yeah, hi, Wayne. So I think kind of worth saying, Australia's small, right? It's actually kind of profitable as a standalone business unit, but when you do the goodwill and asset impairment testing, you have to allocate out a chunk of central costs. When you do that to Australia, it basically becomes unprofitable, and then you kind of project that forward, and you end up with a negative or nil value.
So you end up, you end up kind of writing off a set of local assets for a business unit that contributes profitability into the group, but doesn't fully absorb the level of central cost that you then have to allocate back out to it. So it's a little bit about kind of where do you end up landing bits of group profitability and elsewhere, but in the methodology that we've used and agreed, as to how we kind of do component-level goodwill and asset impairment testing, Australia unfortunately fails that because of the central cost allocation.
Okay. Thanks, thanks, James. Nick, probably one for you. On the big picture strategy that you're announcing today, and maybe this is harsh, but it seems like you may be trying to appeal to everyone, but there's still uncertainty that you've left on the table. So on the one hand, you've said you've overearned this year, yet it's not sustainable. You're obviously going to increase your marketing next year, but your year one payback's 31%. I suppose my question is, why not provide the clarity on the customer base? It seems like the whole premise of the strategy is saying you need to stop the customer base falling, but why is that the case? Why not accept a smaller customer base and then end up growing from a much more profitable perspective?
And akin to that, stock commitments for the next 12 months, why hasn't there been a commitment to say, "Okay, we're not buying any more stock in the next 12 months. We'll get that down as quickly as possible. We get a customer base which is smaller, but a hell of a lot more profitable, and in 12 months' time, we're just in a very, very secure perspective, as opposed to having this level of uncertainty in the near term?
Thanks, Wayne. Happy to jump in there. I think there are probably a couple of parts to that question, but, you know, overall, I wanna say, you know, I think as a team, you know, we would have some sympathy with some of the things you're saying, Wayne. And actually, if you look at the guardrails we announced today, starting, you know, with the one around growth investment, and what we're indicating is that we think this business needs a period of stability in its level of growth investment. You know, that's stabilising it at GBP 25 million a year, which is substantially lower than the sort of GBP 46 million we deployed in FY 2022. You know, reflects much more the type of run rate of investment we are in the back half of FY 2023.
And I think that's an appropriate level, which, if deployed at reasonable economics, which I think we've got good belief in our ability to deliver, will lead to, as a consequence, you know, a customer base that stabilizes and provides a platform for growth. So, you know, I think I agree that we need to, you know, lay that as a kinda clear foundation and keep that steady. I think that gives us an opportunity to, as you say, grow the business from what's a very strong and stable core. And James, I think, outlined nicely that the underlying customer behavior in the business, you know, remains in the tough economic climate, incredibly robust.
And actually, I think you're seeing some indications start to come through in our payback metric, that as we deploy investment at more like that 25 million GBP a year run rate, we're seeing high-quality cohorts come into the business. You know, payback levels, they're not quite where we'd like them to be yet, but they are recovering and, you know, we still have that excess variable cost in our supply chain weighing on them. Lifetime values are moving upwards, so we're clearly bringing high-quality new recruits into the business. And actually, if you think about the return on our FY23 investment, you know, the return in year actually I think is strong as anything we've seen, apart from the height of the pandemic, so there are some signs that that is starting to work.
And the second part of your question was, why not, you know, why not just absolutely do anything it takes to, you know, bring no more inventory into the business over the course of the next 12 months? And here, I think I'd point to something James and I have talked about a number of times before, that there are ultimately three components we need to balance in order to affect an orderly destocking of the business. Absolutely, you know, we need to make sure there's plenty of cash and liquidity available, and I think we've taken strong measures to do that.
You know, we've, we've moved to a point where we're not making additional commitment as a business, and we've been able to show sequential reduction of the amount of inventory intake into the business, and we continue to have, you know, you know, necessary, but frank conversations with winemakers and suppliers about what that means. But we do also need to make sure that we preserve the strategic differentiation of this business, and at its core, that's working with, collaboratively with winemakers and suppliers in a way that creates unique brands that have value to customers. And it's a real, you know, production business here. You know, it's not, you know, possible or viable, for, you know, a number of our smaller independent suppliers to produce nothing, during the course of a year.
So there is, you know, a requirement to sustain a certain level of production, and that's reflected, you know, in us having a degree of long-term forward commitment. So, you know, that's what we're seeking to balance, and I think we've been clear today that we have taken further measures in light of the trading trends we saw at the start of this year. You know, we'll take more if needed, but I think to my mind, we still have the balance at an appropriate place.
Okay, thanks. I've got two more, if that's okay. I don't wanna hog the call. But following on that question, Nick, how do the winemakers feel about the fact that you've is liquidating or fire sale the right word? I don't know, the inventory that you've got on hand, how's that being managed with the winemakers themselves?
I like the term sell, Wayne. But I think, you know, the number one thing we're looking to do right is, you know, we have a customer base that, as James showed, actually on a per member basis is, you know, spending more than ever with us. So the number one route to use the inventory we have in the business remains selling it to the 700,000 members around the world who are really pleased with what we do, the value we deliver for them.
Absolutely, you know, where there are, you know, tactical opportunities for us to potentially dispose of a commitment at source, you know, or make a transaction in bulk, that's in common with everyone else in the wine industry, something we're perfectly willing to do. But ultimately, whilst we have too much inventory, you know, we're in a position of having high quality inventory and, you know, customers who like drinking it.
Okay. And then one last question. On the customer acquisition test that you're looking to scale, can you just give us a little bit more clarity as to which ones they are and why they've been successful?
Yes, I'm not gonna get into additional disclosure of specific results, but can talk to you about the main thesis. As we highlighted, one of the things we've asked ourselves is, you know, why has it been harder than we thought to acquire new members into the business? It's an appropriate question for us to reflect on. And a major opportunity that we've identified, and that a number of our tests in different ways, aims to exploit, is that trial of this business from younger generation of wine drinkers, so people sort of 40 years and younger, has always been substantial. They're quite a high percentage of our first order mix. But historically, lifetime values amongst those younger drinkers have been something like a third of the lifetime value we generate from an older segment of customer.
So, at the heart of it, a lot of the testing has been looking at different ways we can construct our subscription proposition to better serve a younger audience. And so that's things like looking at the default kind of pack sizes and order sizes that we provide to customers. Looking at the balance between sort of you pick each and every wine versus us leveraging the millions of data points we have and the algorithmic recommendation we have available in the business to make something simpler and easier for a customer that's maybe looking for us to do a little bit more of the hard work. And as I say, I think the early signs are that we're onto something there.
However, I want to see us get to a point where we have tested those propositions at real scale and in all of our markets, which is something we're in the process of doing at the moment. And look, we know, then ultimately, the kind of facts will decide whether or not that's something that is gonna enable us to drive up marketing returns sustainably.
Okay. Thank you for your time. Sorry, it's 2 A.M., sorry for keeping you so late.
Happy to take questions from you, Wayne. Thank you.
Cheers.
Thank you, Wayne. We'll now move to Ben Hunt, Investec. Please go ahead, sir.
Morning there, chaps. Just on the current trading, you talk about, obviously, the new customer recruitment is the hard part of the equation. Is it a case that it's because the actual cost of recruitment is still too high, or is it a case that you're struggling to actually get them to sort of spend as much or as frequently as they used to in the past? That's the first question.
Happy to take that one, Ben. You know, to give you a simple and direct answer, it's, you know, the cost is a bit higher than it has been historically. Actually, the early life characteristics of the cohorts we're bringing in in Fiscal 2023 look very healthy. So substantially higher levels of sales per member and contribution per member, you know, than the cohorts brought in in FY 2022. So you know, the challenge here for us is making sure that, you know, in aggregate, we're able to get to the, you know, the right blended CAC level. But good news is, you know, that's one problem to solve. We're recruiting the right types of customers.
They are high quality, they're sticky, good quality cohorts, and now we're working hard to see how we can drive up the efficiency of that set GBP 25 million budget we've talked in.
Okay. I guess related just on the, on the subject of stickiness, is it, is it the case that the actual pre-pandemic cohorts have the sort of same levels of retention as they have done in the past? Or, I mean, are they still as healthy as they were? I mean, I think they used to be as much as sort of 90%. Is that, is that still the case today?
Yes, I think the, you know, the long-term characteristics of pre-pandemic cohorts, you know, remain very stable. And, you know, still seeing those very high levels of contribution retention and revenue retention as cohorts get, you know, beyond the lifetime of our payback calculation. Those cohorts are now more than five years old. You know, you do effectively see what looks a lot like a start to become an annuity stream of revenue from those cohorts. I mean, the nuance here and, you know, the area that as we've seen the data mature, the cohorts we recruited at the peak of COVID, you know, have shown to be somewhat weaker.
And I think where you see us reporting a slightly lower sales retention number in FY23 than we historically enjoyed, you know, when you decompose that, large part of that is attributable to those relatively large cohorts washing through that calculation and having slightly weaker characteristics. So pre-pandemic, trend's very good, very stable. Some cohorts during the height of COVID, but in retrospect, you know, not as strong as we believed they were at the time. And then moving into FY23, I mean, you really see evidence that we're focusing in on the right type of customer again, and all the lead indicators pointing in the right direction.
Okay, and then final question, and I know it's early days and nothing's set in stone, but if we are beginning to create offers that are perhaps non-subscription led, what should we think about as the trade-off here between the retention of those customers or even the impact that might have on your buying terms of your suppliers, even?
I think that is too early days. You know, what we're-
Okay.
What we're committing to here is that we have a number of different proposition tests in market at the moment, and when we've got meaningful data tested across multiple markets, you know, we will come back and share that. I think we'll have a first update to give of substance with our interim results.
Okay. Nick, thanks.
Thank you very much, Mr. Hunt. Our next question is coming from Andrew Wade, calling from Jefferies. Please go ahead. Your line is open, sir.
Morning, and particularly morning, very early morning to Nick. A couple of questions from me. The first one, from looking at the disclosure in your appendices, you're sort of retaining about 65% of your repeat Angels. But going back to, that sort of implies, assuming my math is about right, you lose about 70% or 60, 70, more like 70% of the new customers, each year, 70% of those churn off. Is my math right there, that you sort of sign up new customers and about 70% of them, having signed up for a subscription, sort of churn off? Is that right?
Hey, Andy.
Thanks, sir.
Yeah. It depends. It depends on which country you're in and which recruitment channel. We have certain recruitment channels that would absolutely hit those kind of numbers, where you get a lot of lower quality Angels who literally are probably there for the kinda opening deal and then churn off again. It is one of the metrics we're trying to reduce. I don't have the precise number to hand, but I'd say kind of 50%-60% is not unusual in terms of losing people in the first 12 months. Which is why quite often in the past, we've kind of really focused on the mature Angel base, which is where you get the growth and the repeat sales really kinda coming from.
Okay. All right. Thanks. My second question is sort of the opposite to Wayne's a little bit, really, whereby if you look at what your wine intake this half versus sort of H1 2022, you're taking a third of the wine. I mean, that is a massive reduction in terms of how much you're buying from your suppliers. I'm interested as to how they can manage that. Do they scale back production? Are they having to sell it to other people? Do you lose exclusivity with them? How does that work in terms of the winemakers managing their production?
Yeah, happy to step in and, and take that one. Look, I think the first thing to say is that, you know, this is, you know, it's a real agricultural business. There are some quite long timelines. We've had line of sight into the fact the business is overstocked for a reasonable period of time now. We've obviously been working closely with our winemakers to reflect that, you know, to help them reflect that in their forward-looking plans, you know, their commitments, their long-term grape contracts, things like that. So, part of this reflects the fact that, you know, the, the process James have, and I have talked to, aiming to have an orderly destocking of the business. You know, we're getting to a point where we start to see some evidence of that flow through in intake levels, reducing substantially.
Doesn't affect the fact that, yes, it is tough to scale production up and down, you know, especially for some of our smaller suppliers or suppliers who have, you know, the vast majority of their business with Naked. And there, you know, that's where we've looked to work, you know, in a genuinely collaborative manner. You know, for example, you know, we've looked at which products is it easier to flex up and down because you might have a different level of, you know, long-term grape sourcing commitment, and things like that with Individual Winemakers. So I think we're striking the right balance. I don't wanna pretend that it's easy to do that, but I think we have been able to do it in a way that means we are retaining, you know, those relationships.
You know, we're not seeing key winemakers, key suppliers leave the group, which I think is really encouraging and reflects the fact that, you know, we're still ultimately providing, I think, a ton of value and differentiation compared to, you know, what it's like trying to be a small independent supplier operating out in, say, the traditional three-tier system in the U.S., or, you know, supplying into big grocery multiples in the U.K.
Okay, thanks. And then the last bit, and I wonder if maybe you've already sort of answered this with your scenario analysis. But you know, if you sort of talked to the business may end up being a smaller business, depending on what happens with your trials and your payback outputs. But what size of revenue do you think you could 100% stand by and say, "At this point we can." Because you've got a super profitable and loyal core, so what size could you stand behind 100% and say, "We won't be shrinking when we get to this revenue?" Is it that sort of 280-300, or is it a bit below that number?
You're trying to get me to answer a slightly impossible question of 100% certainty, which, the difficult level-
Sorry, yeah
of certainty to get to.
Maybe very confident then. Maybe very confident rather than 100%.
I think, I think the best way, without anchoring too much on my confidence, Andy, is in the type of the language we've provided on that slide, where we extrapolate from our guardrails. I think what you can see is that in the top line we show on that page, even if we're unable to improve the effective investment efficiency from, you know, the low point that we've seen in a really tough part of the economic cycle.
And we've kind of told you that we've got some cost-saving locked into our supply chain that should support that. You know, you see the kind of scale of business that we should be able to mature at. So rather than answering what I 100% believe, I think it's helpful to reflect on what the assumption set is on, on that top line. I think that is something that is reasonable for someone to have a good level of confidence in.
Yeah, no, that's fair. Then just to look at that top scenario there, if we're looking at it, that as an ongoing number, obviously, you've got operating free cash flow coming in from the destocking, but on a normalized basis, if that was the level of sales, then that GBP 10 million of EBIT would sort of equate to broadly GBP 10 million of cash generation on an annualized basis. Is that correct?
Yes, Andy, that's correct. Once the destock happened, I think you'd expect for a flattish top line trajectory, and hence the importance of that guardrail of kind of 5%, you know, not, not kind of 20 or 30, you'd expect your EBITDA to be dropping through to cash pretty consistently.
Thank you very much.
Thank you very much, Sir Wade. As we have no further audio questions at this time, I'll turn the call back over to Danielle for any questions that are submitted by web. Thank you.
Thank you, George. We'll now take some questions from the webcast. The first one comes from David Hughes at Stifel. Can you give any more detail of the cost savings identified and when you expect these to be realized?
Yeah, happy to talk to that one, David. I think page 26 in the presentation probably gives the best view of the most material cost opportunities that we've got line of sight of today. I'm gonna focus in, you know, as they're the largest here, on the cost reduction in our supply chain. Slightly different dynamics here. So in our U.K. market, we are gonna be changing vendor, and that means that we have good line of sight into cost reduction. You know, we're gonna be moving to a different warehousing provider, lower cost, secured, but that is a transition that will be effective for the start of fiscal year 2025. So cost saving, you know, of GBP 3 million fiscal 2025 versus fiscal 2023.
Actually, we have a little bit of on cost as we effect that transition during the course of this financial year. Turning to the US, where it's been a case of renegotiation with the same provider, we have started to see the savings we've talked to you there flow through as of effectively, I think it'll be July this year into the numbers. So back end of H1, you'll really start to see that run rate flowing through in H2 of FY24 to give you. So hopefully, that gives a little bit more detail.
Thank you. And just a follow-up: How much price inflation have you put through in FY23, and do you expect more inflation in FY24? From David also.
I think, again, you know, trends are slightly different by market and, and all those good caveats, but if you were looking at sort of high single figures, I think that's about the right number for us. I think it's worth reflecting that, you know, the way in which we've done that, you know, we continue to run a rigorous benchmarking process for all our wines in, in, in all our markets, and very confident that we're continuing to deliver, you know, great value for money to our customers, you know, notwithstanding that. I think, you know, you ask a little bit about what's the forward look on that.
I think the first thing is with, you know, with a good degree of long-term commitment and with, you know, the cost environment improving in things like international freight and shipping and dry goods, we've got, you know, a good line of sight into future COGS and, and actually those, you know, we're seeing moderation in increase. So I think the outlook for FY24, I don't think we have a requirement to repeat that level of price. The exception to that, the UK market, where obviously duty is an incredibly important component of our cost of goods, and duty increased materially, you know, effective of August this year. And we have, you know, we have taken price to reflect and pass through that cost there.
I think overall, you know, the outlook then, you know, for the rest of the group heading into FY24, you can see that we've actually got, you know, cost reduction coming through in the supply chain. You know, that gives us an opportunity to support and drive Contribution Margin, you know, without ideally the need to kinda take further material price from customers.
Thank you. Our next set of questions come from Andreas Aaen and from Symmetry Administration ApS. Do you expect further inventory write-downs?
Yeah, I'll take that one. Hi, Andreas. Look, we have tried to assess the level of impairment based on the business forecast we have. We wanted to do this once, we wanted to do it properly, and we think we have therefore done that. Obviously, you know, I have to live a little in the gray, which is, that is predicated on a certain business trajectory and a certain mix of sales. If those two things change, there is always the risk that that could happen, but, you know, thus far, you know, we are seeing things kind of progressing along the trajectory that the impairment calculations assume. So, we think we've done it once and we've done it right, but I can never say never.
Thank you. And secondly, how much of the increase in revenue per customer is like for like, and how much is just coming from churning low, churning low ARPU over retaining high ARPU Angels?
Not sure if Nick or I is taking that one. I think that, I think it would be fair to say that the long-term trend has always been that the Angels that stick around tend to be the higher ARPU kind of members, so you do get a mix effect. But, you know, the underlying data shows an improvement in member retention, not just kind of sales per retained member. So you've definitely got a bit of everything positive going on. But we don't, we don't boil it down to a specific Angel, like for like. We kinda look at the cohorts rather than the individual Angels, Andreas.
Thank you. The next question comes from Marcus Meyer: On the business ambition outlined in the Chief Executive's Review, you state that based on the LTIP, among other targets, a revenue of GBP 350 million is targeted in the midterm. Given that FY 2022 and FY 2023 met or exceeded that already, how is this a target for growth?
Hi, Marcus. Very happy to talk to that. I think firstly, useful to align on the kind of context. I think in FY 2022, you know, the top-line number, you know, supported with a very high level of new customer investment, you know, a business that wasn't profitable. You know, so I think, you know, some different characteristics from what we're aiming for in, in the, in the Long-Term Incentive Plan, where we set a revenue target, with an underpinning requirement for delivering at least a 4% EBIT margin. If you think then about the trend of, you know, what does that FY 2026 target with an entry point of £350 million look like from today? I'd encourage just to start by looking at the, you know, adjusted 52-week revenue number, for FY 2023.
Three hundred forty-three million, so a little below that. Actually, also included within there, you know, a degree of, you know, high single-digit millions of bulk wine sales. You know, not something that is credited in our long-term incentive proposal. The guidance that we've talked to you today has for revenue reduction in the course of FY 2024 of, you know, between 8%-12%. If you work through that, you can kind of see that to get back to GBP 350 million in FY 2026, you know, we need to be returning this business to a reasonable level of growth in financial 2025 and 2026. That's what the targets are based off.
As I say, a reasonable level for the entry point and actually a pretty stretching level of growth in those two years, to get to the top end of the range.
Thanks. Our next question comes from Miguel Meister: What is the cost of your borrowing facility? Would you consider selling or winding down Australia as a segment in order to focus on your more scalable markets? And are you seeing more competition from online wine providers or traditional stores?
Okay, Miguel, I'll allow the three part questions as in writing, so I can read them all. I'm gonna start and take the first, take the ones around Australia and competition, and then maybe I'll let James talk a little bit to the question around, you know, cost of my borrowing. I think James laid out the facts on Australia pretty well when talking through the detail of the impairment calculation here. You know, as a board, I think, you know, we shouldn't be ruling anything out, especially at a time when clearly, you know, the business has gone through challenges and, you know, we've had to look at overall, our overall liquidity position. But I think the facts here are relatively clear. You know, we have an Australian business that is contribution positive.
You know, i.e., if we didn't have the business, you know, we would have less money coming in each year. Strategically, it's very aligned, so there's not a high level of operational complexity. We're not providing a lot of bespoke services, or undertaking a lot of bespoke work to support that Australian business. And actually, I think it's very beneficial to have a relatively isolated market where we can experiment sometimes a little more radically. So I think there's a lot of benefit, you know, beyond the pure numbers contribution that Australia brings to the group. So, you know, our assessment as a board is that ultimately, you know, therefore, you know, looking at or pursuing kinda any avenues around disposal wouldn't be value creating with regard to Australia.
In terms of competition, you know, hard to boil it down to, you know, one soundbite, but I think one thing we do do as a management team is spend, you know, a degree of time looking at the trajectory of performance of other online wine retail, you know, direct-to-consumer wine businesses in the markets we operate in. And I think it's fair to say, over the course of the period we're reporting here, I think the underlying performance, underlying profitability of Naked stacks up very well against, you know, those competitive models. And from a top-line perspective as well, I, you know, I think we'd see, you know, kind of, you know, certainly, you know, towards the top quartile, from the benchmarking we've been able to do.
So I do think it's reasonable to say there's been some challenge affecting, you know, online retail in general, online wine retail. The flip of that, you know, it's been an environment where actually some of the characteristics of store-based retail have all of a sudden not been so bad. You know, having your largest cost being stores and they're being fixed, you know, all of a sudden hasn't seemed so such a bad environment. So I think that's broadly what we've seen play out in our markets. Obviously, there's a little variation between each. James, do you want to talk a little bit about the cost of borrowing?
Yeah, sure. Always slightly dangerous to try and boil down a somewhat complex kind of interest rate calculation into a soundbite, but it's about a 3.5% margin on top of the SOFR, which is the kind of U.S. overnight rate. So it comes to about 8.5% based on where the current U.S. rates are. I think it's probably important to note in that that we borrow to meet the minimum cash holding on that facility. We hold that in a set of accounts and get interest income. There's also interest income on the Majestic loan notes. If you're trying to reconcile out the net of all the financing charges, there's quite a few moving bits, but the simple one-number answer would be about 8.5% at the moment.
Thank you. Our next question comes from Marcel Stotzel. Hello. You expect material cash generation in H2, could you therefore guide how much free cash flow we should expect you to generate? And could you also guide when you expect Adjusted EBIT and Standstill EBIT to converge?
Yeah, I'll take these two, it's James. So we've given guidance for net cash of GBP 10 million-GBP 30 million at year-end. You know, we expect H1 cash consumption as we build working capital into peak. But I think if you kind of look at that, you can infer the level of cash generation that we would be expecting in the year off of that guidance. I think then in terms of Standstill and Adjusted EBIT convergence, I think the important thing to understand about that Standstill EBIT calc is that the year one payback is really the key driver of where it is at the moment. That is a rolling 12-month rearward-looking metric. So as we report FY 2023 year one payback, we're actually reporting the year one payback on cohorts recruited during FY 2022.
And so, you know, what that's showing at the moment, and the reason it is still a kinda insightful metric, is that it would be uneconomic to spend more at the year one payback levels of the cohorts we recruited in FY 2022. However, we'd expect, as Nick has alluded to, and we are seeing improved customer performance with the FY 2023 recruits. We will report, you know, their year one payback in FY 2024.
We started the Pivot to Profit midway through FY 2023, so it will be kind of at least midway. It'll be at least kind of once we get to the midway FY 2024 year one payback metrics, that you'll start seeing things looking up, and actually, you'll get a full year of that only in FY 2025. I think it's probably a long way of saying it's likely to take into FY 2025, first half at least, before we really see that convergence.
Thanks, James. Next question is from Matthias Reichert, from P&R: Can you explain to us how a payback level of 1.75x translates into shareholder value? Can you elaborate why payback levels are low, are below pre-pandemic levels?
So I think Nick and I are trying to work out who's taking that one. He's offered it to me. I think that this is kind of where the guardrails come into play, right? 1.75 is clearly at the low end of the range that we've described as desirable. 2 was always the midpoint of that range. But, you know, one of the things that, you know, we've also very much experienced and felt is that stability is also important. Once you think about pulling investment, the impact on inventory, the impact that has on cash flow in the business, there is a range of paybacks we feel we're gonna need to accept in order to manage this business for greater stability.
Yeah, I think we've been through some of this before, but, you know, 1.75x, with application of historic levels of SG&A, is probably marginal spend. Again, with the G&A guardrail that we are now putting in place, 1.75x would be becoming closer to acceptable, and certainly with that G&A guardrail and the flat level of spend that we wish to make, and then see payback grow as we drive business improvements. We expect to be getting back to the types of payback and SG&A levels as a ratio of revenue that we had, you know, prior to the pandemic, which this business was built into a growing and emergingly profitable business on.
So I think we're kind of building guardrails that take us to a place which supports what we've achieved in historic times, pre-pandemic, in terms of generating shareholder value and future profitability. But the GBP 175 would be a point on that journey that we're accepting in the pursuit of some stability and managing the consequential impact of very quickly moving spend up and down on other parts of the business.
Thank you. Our final question comes from Akash Vanchinath, from Panda Real Value. Naked still has elevated amounts of accounts payable of GBP 42.4 million, 12% of revenues. Historically, this has been closer to 6% of revenues. Where do you see this settling? And isn't this a significant offset against the cash generated from inventory sell-down?
Yeah, I'll take that one. I think, Akash, it would be good to catch up offline on this one. I've just very quickly pulled the ratio from FY20 to FY23, and I see kind of 12.8, 12, 15.6, and 12. So I don't know whether you're looking further back than that. If you are, that would be a set of ratios that include the Majestic Wine business and wouldn't be comparable to just Naked. But yeah, I think a 12% ratio looks like a pretty good benchmark based on the last four years of reported results. Not sure if we're missing each other on the data there, but, let's, let's pick it up offline, if so.
Thanks, James and Nick. That's all the time we have for questions from the webcast. Nick, I'd like to hand back to you for closing remarks.
Thank you, everyone, very much for kind of joining us today. You know, I think, obviously, you know, this has been a much-anticipated set of results. I'm, you know, pleased we've been able to, you know, get those out here today and, to talk a little bit about the plans we have, and really the 3-step plan we have to get Naked back on track. Firstly, it's very much around making sure we've got a stable foundation. I think a lot of the heavy lifting and work that we've undertaken during the course of FY 23 and our Pivot to Profit, absolutely, you know, we'll support that. You know, the guardrails that we're outlining today, I think, give us a really clear framework to help make this business simpler, you know, easier to predict, you know, easier to run.
and I hope that creates a lot of value for, for everyone over the, over the midterm. Secondly, you know, we know that to really release value in this business, we need to get it growing again. But that needs to be, you know, not just a question of: Is it profit or is it growth? It needs to be profitable growth. You know, we're committed to, committed to delivering on that. And finally, you know, we wanna make sure that we understand, you know, what the right long-term potential is for this business.
I think being quite open, you know, we can't be certain what that looks like, but what we can do is test in a way that is structured, is systematic, and, you know, commit to sharing those results with, you know, all of our stakeholders, all of our investors, and, you know, we look forward to doing that. In the meantime, I wanna thank everyone very much for their time today. Thank everyone for their support and their commitment, all of our stakeholders. You know, in particular, I'm thinking about, you know, our employees, you know, our winemakers, but also, people invested in this business. You know, counting myself as one of them. I'm very, very committed on delivering the performance that I think Naked deserves, and is absolutely capable of. Thank you very much.