Good morning, everyone, and welcome to our half-year presentation. What we're gonna be covering today is, first of all, I'll take you through a strategic review of the business. James will then talk you through last year's numbers, and I'll finish off by a look forward into the future. The key message we want to deliver today is we are doing what we said we were going to do. So we said we would get Naked back on track to profitable growth by doing three things. Number one, strengthening the balance sheet. Number two, making the profits sustainable. And number three, getting us back to profitable growth.
In doing the first of those, strengthening the balance sheet, we are focused on right-sizing inventory and commitments to winemakers, which enable us to release GBP 40-50 million of cash out of inventory and to renegotiate our lending facilities to make them more flexible. To make profits sustainable, we've taken some money out of costs already, and we are far advanced with further plans to take in excess of GBP 10 million out in addition to that. This will enable us to be profitable at a lower sales level, but obviously, our ambition is not to get to that lower sales level, but to stabilize the customer base, at a point which leaves us with a decent level of profitability. And then, for profitable growth, our goal is to rebuild paybacks, to enable growth at the pre-pandemic levels. Next slide, please. So where are we on this journey?
Well, the good news is that after many years of consuming cash, we are now moving into a period of sustained cash generation. The two key things there are the cash release coming out of inventory and the impact we've already made on costs, with more to come. But a crucial thing to draw your attention to is that the existing customer base has been strong. Sales per customer are up YoY. Attrition rates are down. The customer base is lower than it was in previous years, but that is because new customer acquisition remains tough. So, there quite genuinely are, I think, more issues on the good news side of this page than on the bad news side, and I would personally feel much more concerned if we had a generalized sales problem across existing and new customers. The good news is we don't.
We have one problem, new customer acquisition. Next slide, please. We're going into the detail on all of these a bit. The key message on this page is the release of cash from inventory. As you can see on the left-hand side of the page, the dark blue bar, which is inventory coming in, is higher than the light blue bar, which is cost of goods going out again. And finally, for FY 2024 and FY 2025, those two lines are reversing, which will enable us to generate a good chunk of cash out of inventory. Next slide. On the cost side, as I've said, we've taken a chunk out of cost already, and we're well advanced in taking another and significantly bigger chunk out of costs.
The impact of this will bring our break-even sales level down from just short of GBP 280 million to just short of GBP 250 million, about a 10% improvement in the break-even sales level. Clearly, we don't want sales to fall to the GBP 250 million level. We've been working hard to keep it on the left-hand side of the page, but the goal in bringing the cost down is to ensure that whatever happens in the future, we are profitable, and that then gives us the runway to be able to fix new customer acquisition. Next slide. The key thing here is repeat customers are performing well. Sales per active Angel are up from GBP 207 a year to GBP 212, and monthly attrition rate is down to an historic low level.
I won't take a lot of credit, or we shouldn't take much credit for the chart on the right, because that is largely a function of us having recruited fewer customers, and the customer base has become more mature. But the picture remains the same when you look down through the cohorts. Our loyal customers are sticking around, and they're buying from us in bigger numbers than they were last year. The challenges in the graph in the bottom left, where the number of active Angels has fallen materially since last year, which is entirely a function of new customer acquisition. And the obvious question is, well, if you don't fix new customer acquisition, what happens?
We've tried to answer that by laying out a scenario in the first line of this page, which is, if new customer acquisition remains where it is, which is significantly harder than pre-COVID, the business will settle at a profitability at a sales level of somewhere between GBP 280 million and GBP 300 million. On that, with our new level of costs, we'll make about GBP 10 million of EBIT, and we will generate a decent chunk of cash. Obviously, our goal is to do better than that, and if we return to the long-term target of 2x payback, that is a significant improvement.
If we get back to the rates we achieved in the three years up to finishing with the start of COVID, so before pandemic, if we're able to get payback back to those levels, then we'll be looking at very healthy profit and cash generation figures. But to emphasize, we're in early days of trying to fix this, and it remains to be seen whether we will or will not. So the obvious question is: What are these new initiatives that we're testing? And the goal here is to restore Naked to profitable growth by restoring payback back to pre-COVID levels; three things we're doing. The first is reducing variable costs, which obviously impact directly on lifetime value and therefore payback.
The second is to convert more customers out of the traffic we're already paying for, by expanding our addressable market and fixing the fact that right now, customers under the age of 35, we're very under-penetrated. We're already paying for this traffic to come into the business, but we're converting very few of them to being profitable customers. And then the third is, we aim to improve customer quality by offering customers a relationship tailored to their spend, shopping, and wine preferences. And right now, we offer customers a one-size-fits-all solution. The expectation is by customizing that to customers' preferences, we will get more customers at a higher value, who stick around for longer. Our finding so far is on the variable cost side, as I said, any custom variable cost feeds back directly through into paybacks.
And so the stuff we've already done improves them by 0.1x, and there's more to come. The second is that we have made very good progress on monetizing under-35s. This was all started long before I came on board. It was initial testing commenced in October last year, and we scaled up the testing over the summer months, and it's being tested at scale right now in all three markets across all channels. And we would expect in the very early part of next year, to be able to give you some harder data on the impact we expect it to have on the business. But right now, it's looking like around 12% increase in LTV, which would in turn be a 12% increase in payback.
And then, finally, we think, and this is at a much earlier stage of testing, that there is a further 11% increase in LTV and payback to come through from customizing relationships. We've completed the initial testing on that. We've seen a very positive result to that. We will be, building this properly on our main site, and we'll be rolling it out into the business for the whole of FY 2025. And again, I would hope, not in the beginning of next year, but, in the first half of next year, to be able to share some hard data on the impacts of that on our business. And that's it from me, and over to James.
Thank you, Rowan. So I'm gonna walk through a bit more of the detail behind some of the comments that Rowan's made, but the overall themes that will come out of that will be that this is a business with a strong balance sheet, net cash, GBP 90 million in net assets almost, and a significant destock on the horizon that will drive cash generation. And while we wait for that to happen, stability in our Angel funding, as well as an opportunity for improving our credit facility. You'll see there's a very solid core to the business, with the rate of Angel decline beginning to turn a corner, improving revenue per customer, and opportunity for margin improvements to reverse some of the trends we've seen in the first half.
The challenge of recruitment remains, and while there is a sign that the rate of new member recruitment is now stabilizing, having reduced over recent years, we've got some very promising data, as Rowan has alluded to, around a new subscription mechanic. So overall, this is a business we look at that will deliver future profitability, and it will deliver future cash flow. I'm gonna start with that cash flow point on this slide. And I think the headline here is, you know, our operating cash consumption in the half year was GBP 3.6 million, whereas a year ago, it was almost GBP 23 million. So we've seen a significant reduction in the amount of cash flowing out of the business.
That is testament to the work that's been done to bring our inventory intake back to the right levels, as well as the work we've done on, on cost. But you can see, you know, the stock build in the half, the consumption of cash into inventory, has reduced from GBP 51 million to just shy of GBP 20 million. You would expect to see a stock build in the first half as you go into the peak trading season, but obviously, it's a much, much reduced number. And then you see a commensurate reduction in the amount of payables that you close the half with, as a result of that reduction in stock intake, but not nearly the same magnitude. And a slight improvement in the change in Angel funds, and we'll talk about those trends on the next slide.
What that starts to tell us is that the inventory balance for the group, is now expected to come down from here. You can see in the, in the chart on the right-hand side, the growth in inventory through fiscal 2022 and 2023. The seasonal bumps that then came down afterwards, but then, you have subsequent growth again to peak of this year. As we now look over the near term of our inventory commitments level, we can say with some confidence that that inventory will start to come down and stay down. And then, as we hit peak of fiscal 2025, the second half, we'll really see that destock take place as we sell through the, the inventory that we have.
On the next slide, we then look at the funding source of the business, and I think really important to note that our Angel fund redemptions remain very stable, actually improving. The orange line here is the key one, which is the percentage of balances withdrawn over the course of the last six months, and you see that has continued to trend down. Similar to the attrition chart that Rowan showed, we can't take credit for any magic here. A lot of this is because, as the base matures, 'cause of the fewer number of new customers, you get a stickier set of customers, but it's another example of that strong core of the business, remaining kind of consistent and stable. And then Rowan has mentioned that we are commencing the process to replace or renegotiate our asset-backed lending facility. We've appointed an advisor to help with that.
The preliminary view from that advisor that they've said I can share with the world is that replacement on improved terms may well be available, which would either generate us one or both of greater flexibility around the P&L, or improved liquidity generation from the significant asset base that the big business has. So we remain hopeful that we will get to a better place there as well. In the meantime, and this is a repeat of Rowan's slide, we are configuring the business to be profitable at lower revenue levels. The reason I wanted to repeat that slide is I think it's important context to the following slide, which is: how do we expect that revenue to evolve? If we look on the left-hand side, this is the quarterly YoY total sales trend.
You can see that we've begun to turn the corner there in terms of the rate of decline. The, the business decline was accelerating kind of through Q4 of the last fiscal year. We slowly turned that corner, and we expect that to sequentially improve as we go forward. The reason for that is really explained in the right-hand side of this chart, which is it is driven by the trends in our membership. And the light blue line, which is the, the number of subscribers we have and the change in that number YoY, you see basically mirrors the shape of the left-hand side of that chart.
As we have seen the reduction in the number of subscribers we've got, the rate of reduction in the subscriber base has just begun to moderate and actually just turned up at the right-hand side of that chart. We can look at the attrition rates we have. We know how many people we're recruiting, and we can see that at this point we are entering a period where we expect this business membership base to really start to stabilize, and that will drive a stability in the total sales trend. Looking within that membership base, and again, Rowan has mentioned that the high level that our average revenue per Angel has improved. I think it's important to understand that has happened in all markets. So we show in this chart, the dark blue...
Sorry, dark blue bar is the FY 2023 number, the light blue is FY 2024, and you can see H1 on the far left in the U.K. was up 3%. The left-hand side of the middle chart shows the U.S. also up 3%, and on the right-hand chart, the left-hand side of that is a +4% for Australia. I think really important is that we are not assuming in our forecast, and that drives the guidance we've given, that those trends necessarily continue. We do believe they'll continue in the U.K., but in the U.S. and Australia, actually our H2 expectation is we may see a slight reversal of that trend as we lap some fairly intensive promotional activity in the prior year.
But important, I think, to understand that the H2 forecast for the guidance does not require us to continue to see those improvements around the world. And on the next slide, looking at the conversion of that repeat revenue to contribution, we can see that during the half, our repeat contribution margin declined from 28.4%- 25%. The big drivers of that were gross margin reductions in both the U.S. and the U.K., where we have been more intensely promotional. Some mix effect as we've shifted sales mix towards the U.K., which has a lower gross margin, and reductions caused by our Australian fulfillment cost, in particular courier, continuing to increase at above the level of inflation. We do have a number of improvements in the pipeline that should reverse those trends at the contribution margin level in FY 2025.
In both the U.S. and the U.K., we've renegotiated our warehousing contracts, the U.S. going live on those terms now, and the U.K. going fully live on those terms from April 2024. We also expect to reverse some of the U.S. gross margin impact, where we won't repeat some of the less effective promotional activity we ran in the half. And then we also have improvements in FY 2025 on the SG&A line as a percentage of revenue. If you look at the history of our SG&A, you can see the build by half, in particular, as we went through fiscal 2022 and 2023. Over the space of the last 12-18 months, we've been eliminating the R&D spend.
We've also undertaken some cost reduction exercises, and we intend to target a run rate in FY 2025, consistent with the guardrail we've communicated of 11% of revenue. That should see that number reduce again to the tune of approximately 2% of revenue coming out of SG&A. So lots of good news there. I think the challenge is then shown on the next slide, which is around customer recruitment. And, you know, getting customers in through the door, which stabilizes the base, has been the key challenge. So on the left-hand side, you can see a medium-term history, which shows the number of new subscribers by half. And you can see that in H1 of 2024, we are somewhere around the level of about fiscal 2018, fiscal 2019, in terms of the sheer number of joiners.
But it is costing us more to get them, and that's what's driving the lower paybacks than we were at in the pre-COVID time. I think some positive drivers of the outlook here have been improvements we've seen in digital creative, which has enabled us to spend meaningfully in that channel for the first time in probably 18 months. We have accepted some lower payback thresholds to drive cash, in particular in the US. It does make sense when you have an excess of inventory to spend money to drive more customers and turn that inventory into cash, even if it's at a lower contribution payback. And then some basics we've put in place.
We've refocused the team on our core partner marketing process, and actually started building a pipeline of partners that have new partners in there rather than renewing old ones, and that gives us a stronger foundation for one of our core marketing channels. I think some of the negatives that are included in those numbers would include a test we ran in Australia, our smallest market, to see whether or not we could drive high LTVs, albeit lower numbers of customers, through a non-subscription sign-up journey. We've stopped that. We did see some of the improvements we needed, but not at the level that we wanted. And then we have ongoing tough trends in marketing conversion. It's a difficult economy out there, that definitely impacts people's willingness to sign up to a conversion.
We continue to see lower conversion of some of our marketing collateral into new memberships than we've seen prior to the pandemic. I think there are some emerging signs of green shoots very, very early on the right-hand side. This shows a kind of last 12-month total number of new members, and you can see very much on the right-hand side of that chart, as we begin to annualize in or lap the pivot to profit, where we cut investment and reduced the number of people we were recruiting, you really see that flattening. It feels like we've begun to find a stable level of new member recruitment that we can plan around.
Actually, if you look at the U.K. business, which is the not quite darkest blue line, one up from the bottom, you do begin to see a sign that that's just beginning to tick upwards. And that's the market where we pivoted towards profitability earliest, and it's taken the time now to really rebuild that marketing pipeline and start to see some growth there. But yeah, very early days, still a tough market in terms of customer recruitment. On the next slide, we then show a data set, which gives us an indication that we do have some initiatives that will support us beginning to really move that trend in the right direction. Rowan has alluded to the testing we've been doing around a new customer subscription. This is some of the test data. It runs back about a year.
As Rowan said, we started testing this in October of last year. Over kind of a year's period, you can see the test line, which is the lighter blue line, actually really beginning to show enhanced contribution per sign-up versus what we've been getting under the traditional journey and the conventional journey we've used. This is data from just a small cross-section of customers under 35. We are also testing, as Rowan has alluded to, at scale, across different markets and across different customer mixes this journey. You know, we'll have full data on that as we go into the next calendar year to understand what its impact could be across the entire business. Definitely some positive signs showing here, and we will update you in the new year as to what that's told us for the outlook for the business.
Speaking of outlook, just an update on guidance and a couple of words on current trading. We've updated our guidance about a month ago. Nothing new here versus that, but we've put some more flesh on the bones in terms of the drivers of the guidance we gave. So expecting a 52-week comparable constant currency revenue trend of -12 to -16. Bear in mind that the prior fiscal year had 53 weeks in it, so we've adjusted that out of those numbers. Expecting to spend between GBP 23 million and GBP 26 million recruiting new customers. You'll remember our guardrail for that is to try and spend GBP 25 million. Our repeat customer contribution expectation is GBP 65 million-GBP 70 million. And our total G&A cost, including share-based payments, but excluding adjusted items, would be expected to be of the order of GBP 37 million-GBP 40 million.
So seeing a reduction there versus FY 2023. It is worth pointing out the note on the right-hand side, we do expect to incur some cash one-offs that will hit SG&A of the order of GBP 5 million to drive inventory and cost reductions, but they will be treated as adjusted items at the full year. That results in a total adjusted EBITDA expectation of GBP 2 million-GBP 6 million, and we expect to close the year with a small net cash balance, excluding lease liabilities. I think in terms of current trading, small comment here, but we, we are indicating Q3 has been broadly on the plan that we have, which underpins this guidance. We've seen the number of customer orders we expected from repeat customers. And obviously, you know, it's mid-December, so there's a very important couple of weeks still to go.
But we will update on that when the time is right. And that's pretty much all from me. So, you know, just a reiteration, really, this is a business which has a strong balance sheet with net cash, GBP 90 million of assets, opportunity to use those assets to drive liquidity through an improved credit facility, and cash generation very clearly on the horizon. The core of the business, the repeat customer base, showing improving trends in a number of areas and with opportunities to improve the margin realization from the revenue we realize from them. But challenges in recruitment, albeit some very early signs of stabilization and some promising testing of new mechanics. Put all together, you know, that tells us that this is a business that will deliver future profitability and cash flow. Back to Rowan.
Thank you, James. I want to finish off by reiterating some of the messages we've already covered. The key one is that new customer acquisition is definitely challenging, but existing customers are strong, and the strength of those existing customers, together with the work that's already been done on commitments and costs, means that we will be profitable and cash generative, even if we don't solve the new customer acquisition challenge. But obviously, our aim is to do better than that, and we have made some progress in rebuilding growth despite the economy. And the goal remains for me, I want to see shareholders, staff, and winemakers rewarded for their support and their loyalty in helping us through this difficult period. Thank you very much. Over to Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. If you wish to cancel your request, please press star two. Now we'll take our first question from Daniel Woolfson from The Telegraph. Please go ahead.
Hi, Rowan. Just a quick one. You're talking about GBP 10 million worth of cost cutting. Are you gonna cut jobs? And if so, how many?
We're not being specific on where the cost cuts are coming from. There are a number of areas where we're incurring costs that we're having a good look at, including variable costs, and we look at all those areas, so we're not being any more specific than that.
Does that include jobs?
All cost areas are being looked at.
Okay. Are you confident, you know, you said when you were speaking earlier-
I will hand it now over to Emily for any web questions. We lost Nigel.
Okay. Thank you so much, Sergey. We have a couple questions on the webcast today. Our first question comes from Andrew Wade, from Jefferies.
Mm-hmm.
Could you give us any more detail on the new customer proposition recruitment model that is working? What is different for customers, and what different behavior is driving?
Andrew, we're not gonna give a lot more detail at the moment. The three things we've been testing are trying to access a younger audience, where we're really getting the traffic from these people, but we haven't been converting them successfully, and that's where we've seen success already. The second area is in changing a one-size-fits-all proposition into one more tailored to customers' preferences, spend, wine, how they like to shop, and that's at early stages of testing. And then we tested quite extensively a third one, which didn't work, and it looked good in the early days. We ramped it up, but as sometimes happens with these things, when you test something at scale, you get a different answer to when you test it in a small, controlled environment.
And so that didn't work, and we've cancelled that, and the impact of that is already in these numbers. So I think we're gonna be confident to go into more detail about what this looks like when we can see the impact of these actually appearing in the numbers, as opposed to, you know, just over the horizon.
Great, thank you. Follow-up question from Andrew here: Are you concerned that there just aren't enough customers that fit within the target niche? Regular wine drinkers that want more expensive than the supermarkets, but not too premium, and are prepared to commit a subscription.
The answer is yeah, we are. Well, we're not concerned about that. I think our market penetration is still pretty low. The supermarkets have, despite their promises about cutting costs and rollbacks and everything else, done a very good job of catching up with us on price. So in fact, the overlap between the sort of above average supermarket wines and our core range is actually closer than it was, say, five years ago. And there are just a very substantial audience of people we haven't got to yet. So I think, you know, once you eliminate the sort of the COVID trends and then the coming out of COVID, my expectation is the long-term trends will resume, where the U.K. and Australia will be about flat in terms of market size, but the U.S. will get back into growth.
No, we don't think there's an issue there.
Okay. Thank you. So another follow-up question from Andrew here. You've talked to the U.S. challenges being largely about execution. What is changing operationally there? What do you think the U.S. business has not got more traction, given your inherent advantages versus the three-tier distribution model?
So I think the reason the business hasn't got more challenges, you know, it's, it's inherent in the question. We just haven't executed as, as well as we should. And there are some differences in the U.S. market, but there is nothing which is fundamental about it and makes us think that, you know, it's going to be more difficult to operate there. There's sort of state and regional complexity, but we're over all of that and, and managing that very comfortably. I honestly think it is just largely down to execution, and in a sense, I think the opportunity for me, having been out of the business and coming back into the business, I think it's, I have a much clearer view on where the areas are that we need to improve execution to really get the traction there.
I think the fact that we are already seeing elements of improvement through the changes that the team kicked off before I got back points to the fact that actually the U.S. should still be our biggest single market at some point in time.
Great. We have a question from Ben Hunt, from Investec. Slide 34 shows contribution for older cohorts continuing to shrink. How do you square this observation with it, with your view that existing customer spend is stable?
Thanks, Ben. Went into the appendices already. Yeah, pretty simple answer. Look, we show this on a contribution basis. That means it's a combination of the sales we're getting from those cohorts and any reductions in the contribution margin, which we have seen in the first half, and we bridged out earlier in the presentation. So if you were to reverse out those contribution margin reductions, you'd see a kind of underlying sales retention number that would square up to the sales retention metric we've reported. And as described earlier, that's a kind of combination of the customer retention, which is looking good, and the change in YoY sales per customer, which is a smaller uplift than it was a year ago, but still an uplift. So you can square all these pieces together.
Very happy to kind of work the math through with you offline, but I think the big driver in there would be you're seeing the contribution margin decrease in that chart as well.
... Thank you. A question here again from Andrew Wade, from Jefferies. I appreciate the rationale behind the guardrails, but is it pragmatic to not invest more if you're getting a great payback and/or continue investing if you're getting a poor pay, payback?
It is pragmatic, Andrew, over the medium term. Over the short term, I think in an effort to be, you know, rational capital allocators, we've been too keen to put the foot on the accelerator and too keen to take it off again when the data goes the other way. The result is a business that's difficult to manage. Today's inventory overhang, which, you know, thank goodness we're at the end of inventory buildup, and are now starting to consume it. But today's inventory overhang is dramatically worse because we cut back on new customer acquisition too dramatically. And my expectation is, as we stabilize the business and continue the tasting program, we will build up opportunities for good investment in new customer acquisition.
But the culture change I want to get in is rather than responding to that by investing more and investing more, and investing more, is to be more frugal about it, and when we land a good deal, to use that to replace a bad deal. And so you'll end up improving the average payback over a period of time. And what we then aim to do is, you know, if we can see we've got paybacks consistently above, say, 2.5x, we then say, "All right, we're prepared to move new customer acquisition from GBP 25 million to GBP 30 million, and we already know how we're going to invest that money." And then, you know, we start the process again.
But I think having a business which is simple and stable to run, where winemakers can forecast in confidence, and we can do the same back to them, I think is gonna be a very important thing going forward and outweighs the benefits of short-term rational capital allocation.
Great, thank you. So a question here from James Hamilton: How do you arrive at the forecasted cash generation from inventory releases, and what is the probability of that? And then just a follow-up question from him as well: Do you anticipate any additional cost savings besides the GBP 10 million?
Yeah. James, I'll take the first bit and probably hand over to Rowan for the second. So the forecasted cash generation is really a function of us looking at the inbound stock that we already know we have. We have purchase orders in the system, we have shipping dates, et cetera. You know, most of that wine is made. It's the nature of wine having a long supply chain. And looking at that in comparison with the cost of goods we expect to discharge, and obviously, if you're spending less on inbound stock than you're discharging through the P&L, you end up with a cash difference and an inventory reduction.
If you've spotted that we're saying there's, you know, GBP 60-70 million difference between COGS and inbound stock and GBP 40-50 million of cash generation, a big chunk of that difference will be that that inbound stock generates payables. Generally, things like payables therefore come down as the inbound stock reduces. So there's a series of other movements on the balance sheet, and we didn't want people to see that kind of GBP 60-70 million, assuming that 100% of that converted immediately to cash. Rowan, you happy to take the second part of that?
Sure. We do anticipate additional cost savings beside the GBP 10 million, James. But we've grouped them into cost savings that are immediately available and entirely within our control, which we'll be executing in the short term, and then cost savings which require either some tech build or some negotiation, or a change to the way we do business, or an increase in volume, which will take longer for us to put in place. But the end result is we want to go back to being a lean organization and have our cost set at a level which enables our customer pricing to be at a level where sales are easy because the value to customers is very apparent, and leaving us with a decent margin in between.
So that's very much the direction we're gonna take it, but we are phasing these things in order of certainty of delivery. That make sense?
Perfect. That's great. So there are currently no further webcast questions at the moment, so I'll hang back for any closing remarks.
Great. Well, thank you very much for joining us this morning. I hope you all have a very good festive season, and we look forward to sharing the update on how that goes at the beginning of next year. If you have any further questions, do feel free to email them through, and I look forward to speaking to you later. Thank you very much.