Naked Wines plc (MWJ.F) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Naked Wines Results for Fiscal Year 2023. With me today is our CFO, James Crawford, and we're going to take you through the details of results for the fiscal year ending April and then talk to you about the outlooks of 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. And again, I think it's important we acknowledge, we're delivering these results later than we normally would anticipate after the close of the financial year. And to start with the most important one: Is Naked Wines going to run out of cash? And the answer is absolutely no. We have been through a period, and we are at a period where liquidity is lower than we would ideally like, 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 [ as it is ] today. But even if that is the case, and then Naked Wines will be a profitable and cash-generative business, and that's really important to lay out. So the second obvious question then is, well, if that's the case, why the delay to publication of these results. And I do want to acknowledge that trading was below our initial expectations during the first quarter of our fiscal year for '24. So the April and May period. And as a result of that, we took time to review the initial budget, we developed for the year. We put in place a more conservative replan of demand, and we have taken further actions in terms of cost, inventory and commitment reduction, again, to ensure that whatever the trading environment, we as a team and as a Board, are confident that Naked Wines is well positioned to trade through that and well positioned to come out the other side of that in a strong position. And the third question then is, what are you going to do about fixing these problems in the business? And ultimately, how do you intend to return Naked Wines to growth? And here, we're taking a 3-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 for fiscal '23, we can show that a lot of that work has been successfully completed. We have taken further steps. As I said, in light of the trading in Q1 to further address cost and commitment to make sure that we are completely confident there. The second stage is to test our way systematically to understand the best way to return Naked Wines to growth, put simply to address our new customer recruitment problem. There testing is well underway. We have some promising early signs. We're not going to be able to give definitive results today, but we do intend to give more hard data at our interim results. And finally, that lays us up to where we want to get to, to fulfill the potential of this business. And again, our commitment here is not what we can know today, what that is, but we can show you our plan as to how we're going to quantify that potential over the course of the next year. And then to be provocative, it doesn't that sound like things you've been saying for a while, what's different? And we wanted to spend time as a Board and as a management team working on how we best institutionalize what we've learned through a tough period in the last 12, 18 months. And the results of that are 5 new guardrails to simplify the way we operate the business and we're going to outline today. And they've been doing things like fixing our marketing expenditure budgets to fiscal '24, '25 and '26 as opposed to having a variable budget. Solidifying our relationship between SG&A levels, inventory levels and the member-based size and top line. Aaron's restating our commitment to discipline in terms of capital allocation. I'm going to take you through those in detail. But all of them are designed to ensure that as we operate the business, Naked Wines is simpler, that it's more predictable and that we don't expose the business to risk in the event that we're rolling in some of our planning assumptions. So having covered those things off, I'm going to hand over to James, who's going to take you through the details of results for the fiscal '23 period.

Thank you, Nick, and good morning, everyone. So moving to straight to Slide 6. Where are we? I'm going to start with a summary of where we are today. I think being brutally honest, we recognize we have some challenges, so I'm going to be candid about what's bad, but also to highlight where we [ can point to ] stay positives -- the [ go ]. 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 at 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 in new customer volumes. However, we've responded to that, such that whether or not we see improvement we believe we'll be in a position where we'll be able to deliver profitability and cash generation in the future. And thirdly, liquidity levels right now are lower than we'd originally planned, when we first permitted to profit. We've got lower headroom [ on our cut ] than we 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 going to shy away from the fact that there remains some challenges in the business right now, and that's what I'm going to step through. So moving on part one. We are profitable, but not yet sustainably profitable. We deliver too much profit due to low levels of new customer investment. So if we look at the 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. So we added GBP 24 million to the bottom line year-on-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 above the line testing, all offsetting that GBP 24 million uplift from reduced new customer investment. And that takes us to the GBP 16.3 million 52-week adjusted EBIT that we've reported. And then we've got a further week of benefit from our 53rd week that takes us to GBP 17.4 million. So you can see strong profitability coming through the business, driven by a reduction in new customer investment. And whilst we think we are absolutely right to reduce that investment level and pivot towards profitability and stronger discipline on payback, Ultimately, we did underspend versus the goal we set ourselves for the year and we over-delivered on adjusted EBIT versus what we originally guided to for the year. And because we are unspent, we understand 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 would be remiss of me not to mention that we also took some considerable adjusted items charges in the year, predominantly noncash 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 fulfillment arrangements. And that's going to provide room for additional investment going forward into new customer acquisition loss 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 when need. But on these charts, we see really positive trends in our existing subscriber base. On the left-hand side, we show a rolling 3-month attrition rate, a negative number, the percentage of the customer base lost in the preceding 3 months. And you can see in early-2020, when we were recruiting lots of new customers in through the pandemic early in their life cycle. And to be honest, we now know the quality of those was not necessarily the greatest. We might have been losing over 10% of the customer base over a 3-month period. And what you see is the last 2 years have progressed and that base has matured. We brought in few of the better quality customers. We start to see the lowest rate of attrition of the customer base pretty much ever and certainly substantially below pre-pandemic levels. And that's not all. 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 3-month rolling period to smooth out things like monthly promotions. And flat revenue per customer would be the darker line in the middle of 0%. And you can see really, over the last 2 years, we have been increasing the revenue per customer pretty consistently. And that's a really positive trend that shows us that our customer base is spending and that we have good quality customers, who are willing to start spending more with us on a month-to-month basis. So that's another good. On the next slide, though, we address head on what's the real problem here. We are just not recruiting enough New Angels. So cancellation rates are not high that 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 '21, we opened with just under 600,000 subscribed Angels. Over 1.3 million people took out a subscription, but over 1 million people canceled in the year. And the 53% number in blue there is the percentage that, that cancellation represents of the opening Angels plus the New Angels. So you can see that as we move from FY '21 to FY '22, we recruited fewer new subscribers, but the aggregate cancellation rate was lower. And then into FY '23 with materially lower levels of New Angels being recruited, we continue to see a step change downwards in that cancellation rate. So you can see though that the bar ultimately in FY '23 with 397,000 New Angels recruited does not offset the 563,000 that canceled. And what we really need to be doing is getting that bar of New Angels to somewhere at 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 improve spend for customer flow through to revenue growth. So what's the challenge in terms of hitting that 450,000? Well, ultimately, the constraint we imposed on ourselves in spending money to drive new subscribers is payback. The ratio of future contribution from a customer versus the cost of recruiting them. And we have now stabilized 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 '22. Our pivot to profit has started rebuilding that, and we're reporting 1.7x for this year. And when we then think about the impact of the operational savings, we have contracted in our fulfillment operations will have on future profitability of each order and overlay that into the payback calculation. We'll be on 1.9x, which is very near the midpoints of the range that we strive to be at. Essentially, we're at the point where we've now configured the business back to the payment that we seek, but we're not yet spending the GBP 25 million that Nick has alluded to 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 as acceptable payback, and Nick is going to talk more about some of the progress we're making to do that and customer improvements we're making. So that's pretty much the story for profitability of the business. Moving to the second please, kind of let's talk about recent trading and what that means for FY '24 and beyond. We have revised our guidance for FY '24. The guidance is going to be to a revenue decline of 8% to 12%. That's constant currency 52-week comparable. Targeting GBP 25 million of new customer investment. We might range that to GBP 23 million to GBP 27 million, but we're going to strive to land that in the middle. We expect to deliver repeat customer contribution between GBP 70 million and GBP 80 million 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 pricing, excluding share-based payment charges should be flat to marginally down year-on-year. And that comes together to deliver as an adjusted EBIT number of GBP 8 million to GBP 12 million through fiscal '24. I just want to pause for a second to reflect on that range as it is actually the same guidance as we gave at the start of last year. But last year, we said that we should increase profitability into FY '24. And actually, what has played out is almost the mirror image of that, we overshot profitability in fiscal '23 due to underinvestment in new customers. As a result of that, top-line revenue in FY '24 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 to gain it's profitability. I think irrespective of that, it's worth saying that the FY '24 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 GBP 145 million mark that we had originally guided with the Pivot's 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 to GBP 30 million range, which level or ahead of the level that we closed at FY '23 with probably will be some cash consumption in H1 as ever, when you prepare for peak trading, you clear stock for duty. There is still some cash consumption. And then cash generation in H2 as the reduced stock intake really begins to be seen, and we trade through peak. And those are the forecasts that we've used and what we've called our revised baseline. You might see reference to that and the going concern forward-looking information in the accounts. And we've traded in line with that forecast in the first 2 periods so for P4, P5, it does seem to be reflecting an outlook that we are delivering to the business. I think, it's worth talking to a couple of the highlights on the actions we've taken in light of that revenue and recruitment trend. First of all, on costs, really aligning those towards the revenue trends to secure profitability. And we have indicated that G&A is flat to declining. This chart really kind of shows that to be the case. You have 3 components to the overall G&A charge that we take into the adjusted EBIT number, operating G&A, share-based payments charge in the R&D spend. And what you see in here is trajectory through FY '22 into the first half of FY '23 of increasing costs as we were investing for growth. And then you just start to see the impact of us taking cost out in the second half of '23. And then the bar on the far right you see average half year cost that we expect to incur through the G&A line for FY '24. And again, you see that 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 reflects kind of some tough cost decisions, including staff restructuring undertaken within the group over the last 12 months. And then the other area that I think it's useful to look at on the next slide is on cash side. We are committed to operating with significantly less stock going forward. And we have been configuring our stock commitments to drive de-stock. 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. And Obviously, you can see on the left-hand side of this chart in FY '22 in particular into the first half of FY '23. That is when the overstock developed. In the second half of '23, that has reversed. You'll see a little increase as I alluded to in the first half of 2024, but we can't lose the seasonality from this business in terms of preparation for peak trading and then further de-stock in the second half of fiscal year '24. And then that we expect to be continued into FY '25. So still guiding to GBP 145 million to GBP 155 million stock in FY '24 and an additional significant reduction in FY '25, 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 '20. 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 GBP 17 million 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's 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 over stock. There are scale and have good commercial reasons for a component of that. We think on the next Slide is the impact that's had on the balance sheet, it has consumed the cash that we generated in FY '20 through the sale of Majestic and into '21 as we actually dieseled. So 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 '20 that we generated in the near term. And I think kind of important -- it's kind of put it in perspective, it's not quite symmetrical, but essentially the overstock has consumed us the majority of the path that we would otherwise have had on hand. And so the goal is very clear. How do we turn that over stock back into cash as quickly as we can. And that's the process that starts in the second half of FY '24. So looking forward in terms of our inventory levels, both our baseline forecast and also our downside scenario forecast to de-stock and liquidity improvement. For those who have read through the detail about going to concern narrative. You might have seen that we run both the 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 a solid line being the baseline. And again, this chart matches up to about GBP 145 million to GBP 155 million of inventory guidance at the end of FY '24. I think worth saying that we haven't managed that de-stock to be as orderly as possible. We've been striving to balance our liquidity needs with maintaining one maker relationships and to make this process as sustainable as possible. But what does that do overall for liquidity? Well, essentially, if stock drops, it turns into cash. So we are currently at probably the lowest point of liquidity we expect to have during this journey that we've been through. We're navigating that as we go into peak very successfully. We actually have more liquidity on hand now than we expected in our revised baseline. But we expect that to increase through December. We then had some bills in January and then continue to build additional liquidity through Q4 of the fiscal year and into fiscal '25. And certainly, if it is a scenario, where once we have de-stocked at the end of FY '25, we will have material liquidity on hand. And that is now within the space of something like 18 to 24 months. I think worth as I'm talking about liquidity acknowledging that we have reported on uncertainty our under going concern assessment in these accounts. Very important to stress that the Board and auditors are not questioning, whether we're a growing concern. This is a growing concern treatments. 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 forecast, whether that's the volatility we're currently seeing in trading in the macroeconomic environment, the fact that we're having to undertake an inventory reduction process that we are moving on to new warehousing contracts that manage [ for a ] cost. There are a number of moving parts. And therefore, there are certain combinations of scenarios, where everything moves down where the liquidity could be challenging. That's the basis of the MOU. 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 said, as of the end of August, we were substantially ahead of our cash forecast and the 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 2 important places to look at the stability we have, our Angel Funding and our asset-backed lending facility both of which are in a stable position whilst we work through that excess stock. First of all, on the Angel side, Angel funding is a key component of the capital structure of this business, Angel funding, funds winemakers and therefore, funds inventory. And we have been looking closely at the level of redemptions we see from Angels over the time. The blue line on this curve is the 6-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 rates of Angels reduce as we -- 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 happening 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 in the business. We've also adjusted the way that our EBITDA covenant works. It was previously set to 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 of 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 '23 with net cash of GBP 10 million and GBP 58 million of facility headroom. Above that which gives us the liquidity to bridge the time that we're de-stocking, working with winemakers and solving the excess inventory and commitments in an orderly way, as we've always set with the intent. And that's where I start to hand over to Nick. If we just tip 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 on our subscriber retention and spending patterns. We've taken the actions, and we'll 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 the time to really focus our efforts on rebuilding our customer acquisition, and that is what Nick is going to talk about in his section there. Thank you.

Thank you very much, James. I think that gives a really clear picture of where the business is exiting the fiscal '23 period? And is the right point to talk about what comes next. So moving on to the next page. Evidently Naked Wines over the course of the last year, we laid out a pivot to profit strategy. I think as you can see, we met and delivered on most of the goals outlined in that strategy that we announced in October last year. With the exception of not meeting our targets in terms of the level of customer recruitment. And I think James showed really clearly how that is, on one hand, led to higher adjusted profitability in this period, but ultimately sets us up for a challenge, right? We're further away from where we want to be, which is a business that is sustainably profitable and where that profitability is underpinned by a level of growth. And really, that's the next stage for us and where we want to get to from 2024 onwards. So I'm going to talk to you about our plans for profitable growth today. Turning to 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 are able to solve the challenge of getting more new members into this business. And James showed you the math, we need to broadly increase the number of members recruited by 15% to 20% to get the customer base stable, irrespective of whether we were able to do that. I'm confident we have a business here that will be profitable and cash generating. And I think it's important to explain, why? Because that's not something we've achieved in the past. And the first reason very clear. We don't have an overall sales problem, but we have a new customer problem. And while that's important, what it goes to is the ultimate size and scale of this business at maturity, not whether or not we're able to construct a business that is profitable and cash generative. Even if we aren't able to fix that problem, we're going to show you this business is still going to stabilize at a much larger level than it was pre-pandemic and the 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, the business has already been on a sustainable footing. Our use of cash over the course of the last 24 months has been in inventory growth. We have clear line of sight to reverse that and our cash flow into the business and our inventory reduction is turns out. And the third piece is that we have taken action to deliver the cost reduction that we need to -- need to reconcile ourselves to the size of the business we have today as opposed to the size of the business we believe we'd have exiting the COVID period. And that's both reduction in our SG&A levels, but also renegotiating key contracts through our supply chain to configure our business to get more efficient than 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 a meaningful profit. So I think that's an important point to start. Now the problem here is a customer retention problem. What that impact is how big make it can be. It doesn't determine whether or not we can be profitable and cash generic. So moving to the next page. I think it's important to go through a little bit of detail around the commitment and cost actions because they are very important measures, which make sure that under any scenario in an uncertain world, that future business is profitable and cash generative. As you know, we've been taking time and steps to reduce inventory in an orderly process over the course of the last 18 months. I do want to acknowledge that in light of the tougher trading environment we've seen in the first quarter, we have already taken further steps. So in collaboration and partnership with our winemakers and suppliers. We've been doing a couple of things. We've been looking at restructuring and indeed removing some levels of future commitments 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 and 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 FY '25. But I think more importantly, we want to commit absolutely. But even if the environment gets tougher, we will take further action in it. I think I recognize and as a team we recognize, but until we get that inventory level rightsized, 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. And James told you the view and trend in terms of SG&A cost in the business. As you can see here, during the course of the year, we had to take some tough decisions. There were layoffs in the group. Ultimately, [ 112% ] of our non-customer service head count was impacted. And you see the impact of that in terms of the reduction in the SG&A cost base for the June of around GBP 3 million. Beyond that, we outlined that we believe better 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 the last part of that opportunity. The biggest success we've had has been around restructuring of key contract relationships with our suppliers of warehousing and logistics in both the U.K. and the U.S. Characteristics is a little different. In the U.K., we're going to be moving vendors. We anticipate a GBP 3 million a year run rate difference, kind of FY '25 to FY '23 cost. But actually, in this financial year, we will have some additional costs 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 have 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 is taking 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 to 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 we drive the de-stock, it compounds into the cost agenda. We have a couple of million pounds of excess cost in the business today purely because we are storing too many bottles, and storing millions of bottles of wine incurs a lot of the warehouse and handling cost. So that's a further opportunity we have that will deliver naturally as we make progress on our de-stock. So having taken you through some of the detail on the steps we've taken around commitments 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 5 simple guardrails and really the thread on all of these is taking steps to learn from the challenges we've experienced as a business over the course of the last 18 months and ensure that we have systematic things in place to ensure we don't repeat those challenges. Now at the heart of some of the things that have been difficult and that we got some of our assumptions wrong coming out of a period of unexpected and unprecedented growth in '20 and '21, that what the future would look like. And I don't think we can put in place at 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 to the business too, when we ended up being wrong. And at the -- these Guardrail's attempt to simplify the way we run the business and reduce the level of risk that we expose ourselves to. If at some point in the future is likely to happen, we get forward-looking assumptions wrong. And that's why we started the first with a long-term planning assumption, but we intend to plan around a 5% level of growth over the medium term. Again, here, the intent is that in a business that's got a long supply chain, making commitment to a real agricultural product that itself takes multiple years to come to market. It's really important that we plan against a relatively stable midterm outlook. Now as more demand than this is available. There are lots of ways we can capture that. Whether that's through opportunistic sourcing of wine at the last minute or whether that's allowing some of that extra demand to flow through in terms of higher profitability recruiting just the highest quality new customer prospects and things like that. It's an approach that maybe will give slightly less peak growth in good times, but massively de-risks the business. And I think it's an important step to take. The second is reaffirming a hard links between cost in the business and the top line of the business and making sure that, that link is constructed, which is something additional to be consistent with us delivering at least a 5% EBIT margin in the business consistently. And that lets you back into effectively an allowable share of your revenue that you can spend on SG&A and making sure, and I think the same 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 behind growth of the top line as opposed to an anticipation of it. The third guardrail is around inventory. We've outlined our commitment to return stock levels on a sustainable basis by the end of FY '25. The ongoing guardrail is to embed in our commitments policy a link between the amount of inventory we hold and the scale of membership base we have. And in detailing out that commitments policy, we ensure 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 being the area that has caused the business to be cash challenged over the course of the last year. The fourth one is maybe the biggest change on the marketing front. Traditionally, we've run this business with a view that we will invest as much as we can in customer acquisition spend, subject to seeing attractive unit economics could pay back on that spend. For the next 3 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 3 years. And to allocate that investment as best as we can at the highest rates of return available. Initially, I think it means 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 and is a big part of the revenue challenge we see this year. Over the course of 3 years, what I really hope, and I think what I'm already seeing day to day in some of the conversations and our management teams in markets 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. And then finally, I think it's really important we have firm a commitment as cash comes back into the business. And I think as you can see clearly outlined from the information James showed you from the -- be 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, but we will test the value of reinvesting that in the business rigorously against the opportunity to return funds to shareholders. And to the extent we do that and likely we do that via the vehicle of share buybacks. So there are 5 guardrails, but I think are really important in terms of us institutionalizing what we've learned through a tough period for the business. And also 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 be run and hopefully we'll make us a more successful company over the long term. So turning to the next page. I think it'd be helpful to outline how the application of those guardrails may lead to the trajectory of the business developing. Now I want to be very clear. These are not forecasts. But what you can do is take the rules that we're constructing on those guardrails and give you an indication of what type of business they might give you for Naked depending on the thing we can't control, which is what's the environment going to be like and how successful are we in recruiting in a larger numbers of new customers. So taking the top row here. And if it turns out that we are unable to make any progress. We're not able to recruit more members. We're not able to step change the payback levels on those we're seeing today, you have a business that's likely to stabilize in terms of revenue around GBP 280 million, GBP 290 million. That with the measures we've taken to control costs and applying the rules we've outlined here, we'll be generating around GBP 10 million a year EBIT and there'd be around GBP 70 million of cumulative operating cash flow generated over the course of the next 3 fiscal years, '24, '25 and '26. Obviously, that's not our ambition. I'm going to talk to you for a number of reasons about why I believe we can do better than that but it's important to note that's still a business materially bigger than the pre 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 their 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 it as they involve us taking costs out of business that we 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 3 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 pay back to more like the level we saw in FY '17 and '20, still investing GBP 25 million a year, then you get to a business that's more in the sort of GBP 330 million to GBP 350 million in terms of revenue, profitability at or around GBP 20 million a year and actually over GBP 100 million of cash to come back over that period. So again, these are just scenarios applying some different levels of success around how we deploy that GBP 25 million and then modeling through application of the guardrails I talked to you. But I think they're important because they give you an idea of the range of different ways in which we see the business potentially developing over the course of the next 3 years. So moving on, think it's then important to face into the question, okay, well, which are those roster believe in? Why should I believe that you're going to be able to improve that? And I do want to be very clear. Today, right now, we're still not recruiting enough new members to maintain the scale of our members. James showed you that very clearly in his section. Ultimately, what we need to do is find somewhere in the region of 15% to 20% more customer recruitment. As I have improved the efficiency of our marketing spend by around about that much. The good news here is that it's a dynamic calculation, and actually, that number is continuing to narrow as we see improved retention rates amongst our member base, but there is still a gap. And equally, I want to be very clear that whilst our payback levels have improved materially and sequentially over the course of the last half year periods, they are still below our pre-pandemic levels in a number of areas, notably in our social media spend. The good news here is, I think, we have one problem to fix, not two. The steps we've taken to focus in where we stand have restored the lifetime value of new members. So we're bringing in good quality customers, good quality cohorts. But we now just need to work on how we just drive up the efficiency of spend getting more customers for our money. So it's one problem only. Beyond that, we have been testing a number of more substantial changes to our acquisition approach over the course of the last 12 months. In particular, we've been looking at some ways to target different segments of customers and actually variations to our core proposition. And we'll talk to you a little bit on the next page about that. But before moving on from this, 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 commitments and the cost reduction measures we're taking, we will have a business and 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 going to be able to achieve that. Turning to the next Page. Part of this is around consistent and rigorous application of disciplines that we know well as a business and we are good at. But I think the idea of this fixed budget for new customer investment helps reinforce these. So making sure we are being absolutely rigorous about moving investment around the group to the point we generate the best returns in all our channels, dropping the lowest payback activity, challenging and incentivizing teams to bring in new opportunities that performed better than that. An agile approach in managing investments through media versus investment through subsidizing first cases is definitely part of that as well. That's something we know well, and we're working our 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, 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 1.5 years. It certainly has been a challenging macroeconomic environment. And we do know that a lot of migration online, it appears in the category was kind of brought forward. But acknowledging all that, we remain a relatively small business within a large addressable market. And as a result, we've conducted a lot of research we've looked at really some of the barriers to adoption that exist for our proposition today. And a lot of our testing has been around asking ourselves how can we get better penetration of segments adjacent to our core customer today. A big opportunity that we've identified and that a lot of our testing has been focused on has been really finding a way to connect to younger wine drinkers, who attitudinally have very high resonance for what we do. They're really interested in supporting independent producers buying local and buying independent matters a lot to them. They like what our brand stands for, and we've always driven a lot of trial from, but we struggled to turn them into high lifetime value members. Some of our testing has been looking into leaning into and using more, the strength of our data to provide algorithmic and personal recommendation to customers. Different types of subscription mechanic and proposition and different cadences of fulfillment and looking at different smaller pack sizes. I can say that we've seen some really encouraging early signs, especially in our 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 will 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, 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 have 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 2 things through over the course of the next 2 years, we will have a reduction in our variable cost 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 can have a 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. Let me turn to the next Page. I think it's a good point to say beyond developing a plan and institutions and guardrails, more broadly, there are some learnings that I've taken from there, so there's a management team and the business we've taken. On one hand, what went wrong here is very simple. We thought that COVID had led to an inflection point and we got that wrong. We weren't unique in getting that wrong, but I think the key thing we've learned here is that we didn't stress test enough the consequences of that assumption being wrong. And that's why we have moved to introduce the guardrails we have today to de-risk the business in the future, to recognize that a lot of our real skis 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 costs and commitment levels. I think we have learned that lesson. I'm very committed to make sure that we take whatever steps we need to put these issues behind us. And again, we've looked to institutionalize that learning into the set of guardrails we talked about today. And finally, whilst I think we got most things right in terms of our pivot to profit, we didn't manage to deploy the level of customer investments then we sought to last year. And again, in hindsight, I think the tension between driving payback up and getting the customers into the business led to us probably to overcompensate 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 -- I see a slightly more personal reflections. Obviously, I've led Naked now through what was first a period of very rapid growth and a business that went from GBP 200 million to nearly doubling in scale very rapidly and subsequently through the most volatile period in its history. On a personal level, I'm deeply committed to both resolving the challenges we're facing into today. So dealing with the conditions that create material uncertainty making sure that cash comes back into the business. And everyone involved with Naked is able to be single-mindedly focused on what I think we're all here to do, which is seeing if we can recognize Naked's potential to build on the platform we've created and continue to change the way the wine industry works for the benefit of customers and winemakers. There are a couple of things I've got a really, really high level of confidence in. The first one, as it's hopefully, you can see from the information we've outlined today is that whatever happens, we've got a business here which has got at its core, real strength because we provide value for customers and winemakers. And that's a business that can be profitable and cash generative. Now it could be a business that's smaller than it is today, so not the most exciting outcome. But I think that's something I'm very confident we can do. The second thing I'm confident in is we've got a plan to get to a systematic answer, a definitive answer to what is Naked's potential? And what do we need to do to fulfill it. Now I still firmly believe Naked has the potential to be a much larger business than it is today. I think there are an awful lot of customers out there that value the things we do well, and I think we can find ways to tailor our proposition to serve more segments effectively. The commitment here is that over the course of the next year, we're going to be able to give a clear answer, and we're going to outline the testing we've done to get there. And then finally, I think I recognize and as a management team recognize that we've made some mistakes as the course of the last 18 months as we've dealt with the business that scaled really, really quickly. And then a set of assumptions about the future, where we called growth wrong. And I want to make sure that whatever happens, irrelevant of people, what Naked doesn't repeat those mistakes. And to me, the most important thing, the best way to do that is to put in place a set of guardrails that help us simplify the way we operate the business, make it more controllable, more predictable. And that is what has been at the heart of a 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 and to reward the patience and the support of all our stakeholders, our winemakers, employees in the business, and investors in this business. I think Naked is an incredibly special company that's got fantastic opportunity ahead of us. And I'm absolutely determined that we see that through and we deliver on them. So on that note, I think it's probably a good time for us to turn over for some Q&A.

[Operator Instructions] Our first question today is coming from Wayne Brown calling from Liberum.

I've got a few questions. I'll try to limit it to 3 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. And then just looking at the broader strategy that you've announced today, and I don't want to talk about it...

Well, Wayne, should we just take your 3 in turn, just so we can maybe especially in [indiscernible] California. So I might be a little slow if you ask me a 3-parter.

Sure. No problem to go ahead.

Maybe I'll let James talk to the goodwill write-down in Australia.

Wayne. So I think kind of worth saying Australia is small, right? It's actually kind of profitable as a stand-alone 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 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 costs 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 a bit 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. 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 said you've over-earned this year, yet, it's not sustainable. You're obviously increasing your marketing next year, but your year 1 payback is 31%. So I suppose my question is, one, on provide the clarity on the customer base. It seems like your -- still the whole premise of the strategy 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 us 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 probably a couple of parts to that question, but overall, I want to say, I think as a team, 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 with the one around growth investments, what we're indicating is that we think this business needs a period of stability in its level of growth investment. And then that's stabilizing at GBP 25 million a year, which is substantially lower than the sort of GBP 46 million we deployed in FY '22, reflects much more the type of run rate investment we are in the back half of FY '23. And I think that's an appropriate level, which is deployed at reasonable economics, which I think we've got good belief in our ability to deliver, will lead to the consequence in our customer base that stabilizes and provides a platform for growth. So, I think, I agree that we need to lay that as a kind of 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. James, I think, outlined nicely that the underlying customer behavior in the business remains in the tough economic climate incredibly robust. And actually, I think you're seeing some indications start to come through in our payback metrics that as we deploy investment at more like that GBP 25 million a year run rate, we're seeing high-quality cohorts come into the business payback levels. They're not quite where we'd like them to be yet, but they are recovering, and 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 FY '23 investment, the return in year, actually, I think, as strong as anything we've seen apart from that behind of the pandemic. So that there are some signs that, that is starting to work. And the second part of your question was -- why not just absolutely do anything it takes to bring no more inventory into the business over the course of the next 12 months. And here, I think I'd point something James and I've talked about a number of times before, but there are ultimately 3 components we need to balance in order to affect an orderly de-stocking of the business. Absolutely, we need to make sure there's plenty of cash and liquidity available. And I think we've taken strong measures to do that. We've moved to a point where we're not making additional commitment as a business and we've been able to show a sequential reduction of the amount of inventory and take into the business. And we continue to have 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, as working with collaboratively with winemakers and suppliers in a way that creates unique brands that have value to customers. And it's a real production business here. It's not possible or viable for a number of our smaller independent suppliers to produce nothing during the course of the year. So there is a requirement to sustain a certain level of production. And that's reflected in us having a degree of long-term forward commitment. So I mean 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. We'll take more if needed. But I think to my mind, we still have the balance at an appropriate place.

Okay. I've got 2 more, if that's okay. I don't want to hog the call. But following on that question, how does the wine makers feel about the fact that you -- is liquidating or fire sell the right word. I don't know the inventory that you've got on hand? How is that being managed at the winemakers themselves?

I think the #1 thing we're looking to do right is we have a customer base that, as James showed, actually on a per member basis is spending more than ever with us. So the #1 route to use the inventory we have in the business remains selling it to 700,000 members around the world, who are really pleased with what we do, the value we deliver for them. Absolutely, where there are tactical opportunities for us to potentially dispose of a commitment outsource or make a transaction involved 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, we're in a position of having high-quality inventory and customers, who like drinking out.

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 going to get into additional disclosure specific results, but I can talk to you about the main thesis. As we highlighted, one of the things we've asked ourselves is 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 1/3 of the lifetime value we generate from an older segment of customer. So at the heart of a lot of the testing has been looking at different ways we can construct our subscription proposition to better serve our 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 I would say, I think the early signs are that we're on to something there. However, we want to see us get to a point where we have tested those propositions at real scale and in all of our markets, which are saying we're in the process of doing at the moment. But then ultimately, the kind of facts will decide whether or not that's something that is going to enable us to drive up marketing returns sustainably.

We'll now move to Ben Hunt comes for Investec.

Just on the current trading, you talked 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 of 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. To give you a simple and direct answer, it's 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 '23 look very healthy. So higher levels of -- substantially higher levels of sales per member contribution per member than the cohorts brought in, in FY '22. So the challenge here for us is making sure that in aggregate, we're able to get to the right blended cap level. But good news is 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 said GBP 25 million hand budget we talk to.

Okay. And I guess related just on the subjects of stickiness. Are you -- is it the case that the actual pre-pandemic cohorts are -- have the sort of same level of retention as they have done in the past? Or I mean, obviously still as healthy as they were. I mean I think they used to be as much sort of 90%. Is that still the case today?

Yes. I think the long-term characteristics of prepandemic cohorts remain very stable and still seeing those very high levels of contribution retention and revenue retention as cohorts get beyond the lifetime of our payback calculation. Those cohorts are now more than 5 years old. You to effectively see what looks a lot like a start to become an annuity stream of revenue from those cohorts. I think the nuance here and the area that we've seen the data mature, the cohorts we recruited at the peak of COVID have shown to be somewhat weaker. And I mean, where you see us reporting a slightly lower sales retention number in FY '23 than we historically enjoyed. When you decompose that, a large part of that's attributable to those relatively large cohorts washing through that calculation and having slightly weaker characteristics. So pre-pandemic trends very good, very stable. Some cohorts during the height of COVID, that in retrospect, not as strong as we believe they were at the time. And then moving into FY '23. 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 said 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 in your buying terms of your suppliers even?

I think that is too early days. 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, we will come back and share that. I think we'll have a first update to give a substance with our interim results.

Our next question is comes from Andrew Wade calling from Jefferies.

A couple of questions for me. The first one, looking at the disclosure in your appendices, you're sort of restating about 65% of your repeat Angels. But going back to [indiscernible] and that sort of implies -- I assume my math is about right. you lose about 70% or 60%, 70% more like 70% of the merely 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 through subscription sort of churn off? Is that right?

Yes. I'd say 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 kind of 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 at the hand, but I'd say kind of 50% to 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 kind of coming from.

Okay. All right. My second question is sort of the opposite to Wayne, a little bit really, whereby if you look at what you're buying take this -- first half versus sort of H1 '23, you're taking 1/3 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 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?

Yes, happy to step in and take that one. Look, I think the first thing to say is that this is -- it's a real agricultural business, there are some quite long time lines. We've had a line of sight into that the business is overstocked for a reasonable period of time now. We've obviously been working closely with our winemakers to reflect that, to help them reflect that in their forward-looking plans. Their commitments, their long-term great contracts, things like that. So part of this reflects the fact that the process, James and I have talked to be aiming to have an orderly de-stocking of the business. 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, especially for some of our smaller suppliers or suppliers, who have the vast majority of their business with Naked. And then, that's why we've looked to work in a genuinely collaborative manner. For example, we've looked at which products is it easier to flex up and down because you might have a different level of long-term great sourcing commitment and things like that with individual winemakers. So I think we're striking the right balance. I don't want to 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 those relationships. And we're not seeing key wine makers, key suppliers leave the group, which I think is really encouraging and reflects the fact that we're still ultimately providing, I think, a ton of value and differentiation compared to what it's like trying to be a small independent supplier operating out in, say, the traditional 3 test system in the U.S. or supplying into big grocery multiples in the U.K.

Okay. And then the last bit, and I wonder if maybe you've already sort of answered this with your scenario analysis. But you sort of talked to the business may end up being a smaller business, depending on what happens with your trials and your payback output. But what size of revenue do you think you could 100% stand by and say, at this point, we can -- because you've got 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 GBP 280 million to GBP 300 million or is it a bit below that number?

You're trying to get me to answer a slightly impossible question of 100% certainty of it. It is a difficult level of threat to get...

Maybe very confident rather than 100%.

I think the best way without anchoring too much on my confidence, Andy, is in type of the language we 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 investment efficiency from 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 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 that top line. And I think that is something that is reasonable for someone to have a good level of confidence in.

Yes. No, that's fair. And then just to look at that top scenario there. If we're looking at that as an ongoing number, and obviously, you've got operating free cash flow coming in from the de-stockings. 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 de-stock happened, I think the -- you'd expect for a very flattish top line trajectory and hence, the importance of that guardrail of kind of 5% not kind of 20% or 30%, you'd expect your EBITDA to be dropping through the cash pretty consistently.

As we have no further audio questions at this time. I'll turn the call back over to Danielle for any questions that's submitted by web.

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?

Yes, 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 going to focus in 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 going to be changing vendors. And that means that we have good line of sight into cost reduction. We're going to 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 '25. So cost savings of GBP 3 million fiscal '25 versus fiscal '23. Actually, we have a little bit of on cost as we affect that transition during the course of this financial year. Turning to the U.S., where it's been a case of renegotiation with the same provider. We have started to see the savings we talked to there, flow through as of effectively, I think it will be July this year into the numbers. So back end of H1, you already start to see that run rate flowing through in H2 of FY '24. To give you -- so hopefully, that gives a little bit more detail.

And just a follow-up. How much price inflation have you put through in FY '23? And do you expect more inflation in FY '24 from David also.

I think, again, trends are slightly different by market 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 the way in which we've done that. We continue to run a rigorous benchmarking process for all our wines in all our markets. And very confident that we're continuing to deliver great value for money to our customers, notwithstanding that. I mean you asked a little bit about what's the forward look on that? And then the first thing is with a good degree of long-term commitment and with the cost environment improving and things like international freight and shipping and dry goods, we've got good line of sight into future COGS and actually those, we're seeing moderation in increase. So having the outlook for FY '24, I don't think we have a requirement to repeat that level of price. The exception to that, the U.K. market, where obviously, duty is an incredibly important component of our cost of goods and due to increase materially effective of August this year, and we have taken price to reflect and pass through that cost there. I think overall, the outlook then for the rest of the group heading into FY '24, you can see that we've actually got cost reduction coming through in the supply chain that gives us an opportunity to support and drive contribution margin without ideally the need to kind of take further material price from customers.

Our next set of questions come from Andreas Aen from Symmetry Administration APS. Do you expect further inventory write-downs?

Yes. I'll take that one, 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, 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 2 things change, there is always the risk that, that could happen. But thus far, we are seeing things kind of progressing along the trajectory that the impairment calculations assumes. So we think we've done it once and we've done it right, but I can never say never.

And secondly, how much of the increase in revenue per customer is like-for-like? And how much is just coming from turning low ARPU over retaining high ARPU of Angels?

I'm not sure if Nick or I is taking that one. 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, yes, the underlying data shows an improvement in member retention, not just kind of sales per retained members. So you've definitely got a bit of everything positive going on. But we don't boil it down to a specific Angel like-for-like. We kind of look at the cohorts rather than the individual Angels, Andreas.

The next question comes from [ Markus Mayer ]. On the business ambition outlined in the chief executives 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 '22 and FY '23 meter exceeded that will release, how is this a target for growth?

Markus, very happy to talk to that. I think, firstly, useful to align on the kind of context. I mean in FY '22, the top line number supported with a very high level of new customer investment a business that wasn't profitable. So I think there's some different characteristics from what we're aiming for in the long-term incentive plan, where we set a revenue target with an underpin a requirement to delivering at least a 4% EBIT margin. If you think then about the trend of what is that FY '26 target with an entry point of GBP 350 million look like from today. I'm encouraged just to start by looking at the adjusted 52-week revenue number for FY '23, GBP 343 million, so a little below that. Actually also included within that a degree of high single-digit millions of bulk wine sales, so not something that is credited in our long-term incentive proposal. Then the guidance that we've talked to you today how is for revenue reduction in the course of FY '24 of between 8% and 12%. So if you work through that, you can kind of see that to get back to GBP 350 million in FY '26, we need to be returning this business to a reasonable level of growth in financial '25 and '26. That's what the targets are based off, I don't say, a reasonable level for the entry point and actually a pretty stretching level of growth in those 2 years to get to the top end of the range.

Our next question comes from [ Miguel Master ]. What is the cost of your borrowing facility? Would you consider selling or winding down in 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 3 pop questions, it's in writing, so I can read them all. I'm going to start and take the first and take the ones around Australian competition, and then maybe I'll let James talk a little bit to the question around customer borrowing. I think James laid out the facts on Australia pretty well when talking through the detail of the impairment calculation here. As a Board, I think we shouldn't be ruling anything out, especially at the time when clearly the business has gone through challenges, and we've had to look at over -- our overall liquidity position. But I think the facts here are relatively clear. We have an Australian business that is contribution positive, i.e., if we didn't have the business, 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 beyond the pure numbers contribution that Australia brings to the group. So our assessment as a Board is that ultimately, therefore, looking at or pursuing kind of an every round disposal wouldn't be value creating with regard to Australia. In terms of competition, hard to boil it down to one sound bite, but I think one thing we do, as a management team is spend a degree of time looking at the trajectory of performance of other online wine retail direct-to-consumer wine businesses in the markets we operate in. I don't 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 those competitive models and from a top line perspective as well, I think we could see kind of certainly 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 online retail in general, online wine retail. The flip of that, it's been an environment, where actually some of the characteristics of store-based retail have all of a sudden not been so bad having your largest cost being stores and they're being fixed and all of a sudden hasn't seen 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?

Yes, sure. Always slightly dangerous 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 SOFA, which is the kind of U.S. overnight rate. So it comes about 8.5% based on where the current U.S. rates are I think it's probably important to note in 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% of the money.

Our next question comes from [ Marcelle ]. 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 stand still EBIT to converge?

Yes. I'll take these two James. So we've given guidance for net cash of GBP 10 million to GBP 30 million at year-end. 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 stand still EBIT calc is that the year 1 payback is really the key driver of where it is at the moment. That is a rolling 12-month for rear-wood looking metric. So as we report FY '23 year 1 payback, we're actually reporting the year 1 payback on cohorts recruited during FY '22. And so what that's showing at the moment. And the reason it is still a kind of insightful metric is that it would be uneconomic to spend more at the year 1 payback levels of the cohorts we recruited in FY '22. However, we'd expect, as Nick has alluded to, and we are seeing improved customer performance with the FY '23 recruits. We will report their year 1 payback in FY '24. We started to pivot the profit midway through FY '23. So it will be kind of at least midway it will be at least kind of once we get to the midway FY '24 year 1 payback metrics that you'll start seeing things looking up. And actually you'll get a full year of that only in FY '25. So I think it's probably a long way of saying it's likely to take into FY '25 first half at least before we really see that conversion.

Next question is from [ Mattias Raiford ] from [ P&I ] Can you explain to us from a payback level of 1.75x translates into shareholder value? Can you elaborate why payback legos are below pre-pandemic legos?

So I think Nick and I'm trying to work out, who's taking that one. He's offered it to me. I think the -- this is kind of where the guardrails come into play, right, is 1.75x is clearly at the low end of the range that we've described as desirable. Two was always the midpoint of that range. But one of the things that 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 going to need to accept in order to manage this business for greater stability. I think we've been through some of this before, but 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 prior to the pandemic, which this built -- 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 17.5x 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.

Our final question comes from Akash [indiscernible] from P&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?

Yes, I'll take that one. And I think, Akash, it would be good to catch up offline on this one. I've just very quickly pulled the ratio from F '20 to F '23. 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 yes, I think a 12% ratio looks like a pretty good benchmark based on the last 4 years of reported results. I'm not sure if we're missing each other on the data there, but let's pick it up off-line.

Thanks, James and Nick. That's all the time we have for questions on 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. I think, obviously, there's been a much anticipated set of results. I'm pleased we've been able to 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, we'll support that. And the guardrails that we're outlining today, I think, give us a really clear framework to help make this business simpler, easier to predict, easier to run. And I hope that creates a lot of value for everyone over the midterm. Secondly, we know that to really, really solid in this business, we need to get it growing again. But that needs to be not just a question of is it profit or is it growth? It needs to be profitable growth. We're committed to delivering on that. And finally, we want to make sure that we understand what the right long-term potential is for this business. Thing being quite open, 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 commit to sharing those results with all of our stakeholders, all of our investors, and we look forward to doing that. In the meantime, I want to thank everyone very much for their time today. Thanks, everyone, for their support and their commitment to all of our stakeholders. In particular, I'm thinking about our employees, our winemakers, but also people invested in this business. 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.