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

Good morning, and welcome to the Naked Wines plc investor presentation. [Operator Instructions] I'd now like to hand you over to Rodrigo Maza, CEO. Good morning, sir.

Hello, everyone, and welcome to our strategy review. We are very grateful for your time. I'm Rodrigo Maza, Naked's CEO, and I'll be presenting to you today, along with Dominic Neary, our Chief Financial Officer. Before we go into the details of our plan, let me quickly remind you of what sits at the core of Naked Wines. Fundamentally, Naked is about connecting wine drinkers and winemakers. Our model removes the middlemen, so customers get better wine for their money and winemakers earn more for what they do best, which is making exceptional wine. This direct meaningful relationship builds loyalty, drives a sense of community and gives us a clear edge in the market. I just talked about how Naked's model works, but this is what it actually delivers. This chart is based on reviews from Vivino, the largest wine marketplace in the world. It shows how Naked consistently overdelivers on quality for price when compared to traditional retail brands. This is one of the main reasons our customers stay. This is not marketing. This is actual product market fit. Now this is our model at scale. Naked currently connects close to 600,000 very satisfied annuals in the U.K., the U.S. and Australia with over 300 of the world's most talented independent winemakers. We think of our footprint as an advantage, especially in the U.S., where the ability to legally deliver wine to over 90% of the population is far from easy to replicate. Operating across 3 countries also protects us from overexposure to any single market or regulatory shift. That diversification adds meaningful resilience to our business. This is a very important message. When we talk to our ideal customers and ask them what they're looking for when shopping for wine, the responses match perfectly with our value proposition; convenience, value, selection. These are the 3 key drivers, and Naked is structurally designed to deliver on all of them. These are not just differentiators. They're the reason that customers stay longer, that they spend more and that they tell their friends about Naked. The issue is that we haven't been leading with that. We stopped focusing the conversation on the value we deliver and what makes us different. And our amazing brand has struggled because of it. We are already changing that. Now over to Dominic Neary, our Chief Financial Officer.

Thank you, Maza, and good morning. Before we get into the plan, I just wanted to give you a little bit of overview of who I am. So I've been here since the middle of November, and my background is consumer, and I've spent the last 12 years or so in technology with some time in the U.S. as well. And I've got to say, during that time, I think it's rare to see such a significant value opportunity. If I go back to when I joined, the business I joined had GBP 60 million of liquidity, strong cash flow, a product which is really excellent. I've really enjoyed all the wines that I've tried so far. And what really gets me though is the people. We've got some fantastic people in this business who are hugely engaged in our value proposition. And on top of that, we've got some amazing winemakers. I've only met a few of them so far, but they really are so enthused about both what they do and how we help them. Anyhow, the first question that I asked Maza when I joined -- when I was in the interview process, in fact, is with such strong cash flow and such a fundamentally profitable business, why is the share price half the value of cash and excess stock? And that really is at the heart of our plan today. Underlying free cash flow is positive. We've got strong cash, strong cash generation and a business with growing profits. So this is a significant value opportunity. If we move on to our plan, you can see here 3 legs to that plan. The first is about cash. We've got GBP 33 million in cash today. We've also got a facility which provides about GBP 30 million in extra liquidity, which is undrawn so far. What is very clear to me is that as we come to continue sustained profitability, there really is no need for this level of cash in the business. On top of the cash I've talked about, of course, there's GBP 40 million cash coming out over the medium term from inventory, and we'll come back to that later. So that gives something like GBP 75 million cash from our current balance sheet. The next leg of our plan is about turning this business into a profitable business and recalibrating around profit. And the key point here is, as I said, the underlying business is now free cash flow positive. The underlying business itself is stable. It's profitable as well. And what's important is that once you understand the revenue progression that this business is going to see, and of course, we know the cost structure. And today, we'll be talking about GBP 23 million of annualized cost savings, which will be reducing that cost structure, you can very clearly see a route to EBITDA of GBP 10 million to GBP 15 million. And finally, the third leg to our plan is as we return to growth. And this really is about 2 core things. One is about improving retention, and we've got investments in our plan of about 200 basis points of margin, which will take us back to the levels we had in 2019. And secondly, we have a much more targeted efficient marketing plan, which will reduce GBP 7 million of spend and get our acquisition costs heading towards 2019 as well. And with those 2 factors, that's what's returned our business to growth. So in summary, GBP 75 million of cash coming from the balance sheet, an underlying business that is already profitable, we're just unlocking that and a business with investments and the right marketing strategy to return to growth. So that's our plan in a nutshell. If I start to go into a bit more detail, let's focus on the balance sheet. So cash will reach GBP 75 million from our FY '25 balance sheet. And the starting point of that is, of course, the cash we're going to have at the end of March, which is GBP 33 million. This is up GBP 23 million since the start of FY '24. And I also mentioned that we already have unused financing of about GBP 30 million. So a very, very strong cash base upon which to build our business. We also have GBP 40 million of excess inventory. So we've made significant progress with our inventory so far. We've reduced inventory by GBP 28 million in FY '25. And the GBP 40 million that I'm talking about today is GBP 5 million higher than we were anticipating in December. And that's because we've taken the last 3 months to go into a lot of detail about our U.S. inventory and our liquidation plans, and we've identified better strategies, which is generating GBP 5 million more. So GBP 40 million of cash coming out of inventory over the next -- over the medium term. There is attached to this circa GBP 12 million of liquidation costs. Now just to be clear, the GBP 40 million of net cash includes the GBP 12 million of liquidation costs. So that's GBP 40 million of cash. This GBP 12 million of costs, it covers a variety of activities and actions that are necessary to speed up our cash generation from stock. There is potential for upside in this because this is assuming very low, i.e., the current U.S. wine market prices. And we're not in the position where we have to panic sell. This is not panic selling. We have options here, and we will monitor the market closely to make sure that we're not wasting our investors' money. So GBP 12 million of liquidation costs, unlocking GBP 40 million of net cash on top of the GBP 33 million already in the balance sheet. And then the final point here is more a general point is that this is a business which has been heavily focused on initially growing and then sorting out liquidity challenges a couple of years ago. We're now in a position where we can focus on the balance sheet and on our cost base. We'll come to that in a second. There are opportunities in the balance sheet, and they're not included on plans, but we are very conscious of them and very much are targeting. So GBP 75 million of cash from our balance sheet. The next section, the second section of our business is recalibrating around a profitable core. So I mentioned already that underlying free cash flow is positive in FY '25. This is a profitable business today, and it will grow going forward. The core to this is that our underlying membership is actually already stable. So our membership today, if you look at it, is falling year-over-year and has been doing for a number of years. But actually, if you dig into that, the reason for the vast majority of that decline this year was attached to 2 specific cohorts. So during FY '21 and FY '22, we acquired a huge amount of new customers, I think 1.4 million in 1 year. This is about 3x what we normally acquire. So during those 2 years, we acquired 3x as many members as we normally acquire. The retention and attrition numbers percentages for those cohorts are normal. They're the same as any other year. But if you acquire 3x as many members in a year, then in the future, as those cohorts gradually attrite, you lose 3x the number of members each year. So at the moment, our membership base is being impacted by the very strong acquisition we did in '21 and '22. The good news is that this stabilizes. So over the medium term, the impact of those cohorts starts to mitigate and they become highly retained cohorts. And actually, the underlying business, if you strip that out, is like-for-like broadly stable and has been broadly stable for a number of years. So what this really means is that we can have a high degree of certainty as to the range of where revenue is going. And if we know where revenue is going, then if we set the right cost base, we can then get to EBITDA of GBP 10 million to GBP 15 million. So how do we get EBITDA to the right level? Well, we need to address the cost base. And the next 2 sections are about taking out GBP 23 million of annual cost savings. So the first one is removing GBP 7 million of annual savings from marketing. And I'm just going to skip now down to a marketing slide, and I'll come back. So we have been spending obviously a lot of money on marketing every year for a long time. What we've realized is we've done some very strong econometric modeling and then testing. And this is -- testing is core to our business today. And I would say this is the clearest example of a benefit coming out of our renewed strategy from last year. So we did some econometric modeling of what we were spending and got to a much better understanding for exactly where our consumers -- where our members were being acquired from and which channels they were coming from. And out of this, it became very clear that there were some key channels where the inefficiencies were much higher than we had previously understood them to be. We have then done some testing in our geographies to validate those points, and we've identified circa GBP 7 million of spend that is highly inefficient and can be cut. Now that has a small impact on our membership acquisition. So it reduces acquisition by about 10%, but actually, what it also does is it means that we are focused on much better quality customers. So the 10% that we're losing are customers that have poor retention levels because they were coming in looking for heavy discounts. They were unprofitable as well because of that. So this revised marketing plan built on our new testing strategy based on detailed modeling analysis backed up by testing has identified GBP 7 million of savings, which has a limited impact only on our membership acquisition. So if we go back to the section on savings -- one second. So we were talking about we've got stable revenues coming out of our underlying core members, which are stable. We've got GBP 7 million of savings coming out of the GBP 23 million of annual cost savings. So that's the first GBP 7 million. That comes immediately from early FY '26. We then have identified a further GBP 16 million of savings. GBP 8 million of that starts immediately in FY '26, and that's split into 2 areas. The first is the warehouse and logistics savings in the U.S. and the U.K., and those are contracts which are already in place. We've identified a further GBP 3 million of G&A savings, which takes place in FY '26. And that's because we are organizing ourselves globally, and that is generating a number of savings. Now the primary reason for that is that will make us more effective and speed up our actions, but there are some synergies which come out of that as well. So that GBP 16 million of savings, the first GBP 8 million in FY '26 coming from warehousing and central reorganization. The rest of those savings are mostly coming from COGS and variable costs, and they will come through in the medium term. And that is quite a conservative number. We have a much bigger pipeline of cost savings, but we're assuming only 25% of our COGS savings, for example. So in summary, we're recalibrating our business around a profitable core. This generates up to GBP 30 million of cash and takes our EBITDA in any realistic scenario from GBP 10 million to GBP 15 million. And it's coming from the fact that our membership base is stabilizing, and we're putting through GBP 23 million of annual cost savings, of which GBP 15 million start in early FY '26. So I mentioned about our EBITDA objective here. So this is our medium-term exit financials. We are seeing that our revenue will stabilize and our guidance is that it will stabilize between GBP 200 million and GBP 225 million over the medium term. There are a number of scenarios here, and let me just talk you through them. So the key difference between them is acquisition and retention. And I mentioned this point earlier on. So what we're saying is that we're going to cut our marketing budget in all scenarios by 30%, and that will lead to 10% less member acquisition in our planned scenario. That is what our testing is suggesting. We're trying to be conservative and say it could be worse than that. Maybe we've got the testing a bit wrong, and it could be minus 20%, and that's our lowest scenario. And of course, there is obviously the opportunity and if I'm honest, some internal expectation that the different channel mix will be of a higher quality of customer and will be more productive in terms of acquiring members. So there is definitely a potential upside, and one of those is built into our higher scenario. So different levels of acquisition and similarly, retention. In our lower scenario, we're assuming that we retain customers at our current levels, so no improvement. We're then assuming that the improved acquisition will lead to better customers. And we are also investing, as I've mentioned, 200 basis points of margin in retention improving initiatives. And it is our belief that, that will take our retention levels back to where they were in 2019. And that is the assumption built in both to the planned scenario and the higher scenario. So a clear set of scenarios showing a range of possibilities for revenue. Our internal opinion at the moment is that revenue will stabilize between GBP 200 million and GBP 225 million before growing again and that our EBITDA will be in any scenario above GBP 10 million that is realistically possible, and could be as high as GBP 15 million as our target and clearly could potentially be more than that. So our guidance is really between the lower scenario and our planned scenario. And finally, on to which is probably the most important slide that I'm presenting today. We are, in any scenario, going to have a lot of cash coming out of this business, and we are very conscious of that. We have, therefore, put in place an objective to finalize agreement with our finance partners on a new limited regular distribution policy. And we are considering share buybacks as part of that. So if we believe that there is a clear difference in value between the current share price and the intrinsic share price that the Board considers is correct for the company, then we would do share buybacks. But to be clear, we will only do that if we believe it is value creating because we see a significant valuation difference between the share price and the intrinsic value of the business. The second column is about significant medium-term one-off distributions. So we already have a lot of cash on the balance sheet and that clearly we are going to have a lot more cash coming out of the business even than profits. We need to be very mindful of that and very careful with that and governance and control over that will be incredibly strong. But of course, we are looking for ways to ensure that, that is allocated properly, and that could well mean significant medium-term distributions. The key to that is the profitability that we are incredibly confident we will be reaching in the medium term. And once we've delivered significant contributions for a period of time, then any restrictions on our ability to distribute cash will start to reduce significantly. So it is very likely we will have excess cash over the medium term, and we're committed to distributions. If we can't find a value-creating way to do that, we'll talk to our shareholders about the best way to do that. And the final 2 columns are really just reiterating this point. We are very focused on profitability. We're very focused on making sure that we have a strong return on our investments, and that is very much internally how we are working as a business. Of course, there are always opportunities for M&A, and we're mindful of them. There's nothing obvious that we're thinking about at the moment, but clearly, things may come along. However, our underlying commitment is that we want to -- the significant cash we see in the business coming, we want to distribute to our shareholders. And with that, I'm going to pass on to Maza, who's going to wrap up the presentation and take you through some of the growth story.

Thank you, Dom. If we go to the next slide, our path back to sustainable growth is built upon 2 key pillars, which are retention and acquisition. And importantly, we're going to support this through investments in technology, right, driving both personalization and segmentation as key levers on our 2 key pillars. On the retention side, we are focused on discovery, helping our customers finding the wine that's right for them. Delivery, making sure that we are offering convenience at the very least part with our competitors. And finally, but very importantly, leveraging our community, our amazing engaged community of winemakers and angels to drive growth. On the acquisition side of things, we are very much focused on investing in our brand, making sure that our brand is working for us in a way that actually builds defensibility for the company and that protects us from ever-inflating CACs. We are investing in converting long-term customers. So all across our acquisition funnels and onboarding journeys, you can see significant enhancements. And finally, but again, importantly, we have invested a lot of time and effort in building robust measurement systems that ensure that we are focused on the channels and on the messages that yield the highest ROIs. Dom already covered this slide, so I'm going to skip it. We wanted to include this picture, right? I think it's representative of our community. This was taken during our Tasting Tour in the U.K. last year, last summer. In this picture, you can see wine makers, you can see the Naked team, and it's that connection, right, like getting customers to engage with the winemakers to understand their story, the story of their wines that's truly a competitive advantage that our model offers. Okay. So these are our concluding remarks. I won't go into detail -- into every single one in detail, but the key messages are that we have taken a lot of big steps this year from stabilizing the business to rebuilding the team and grounding our strategy in real data and insight. We are not promising a moonshot. This is a clear disciplined plan to unlock over GBP 100 million in value. Our team is already executing with more focus, more discipline and more conviction than ever. And yes, there's still work to do, but we genuinely believe we're going to get this company growing again. Naked Wines is undervalued. This plan is how we change that. Thank you very much.

Rodrigo, Dominic, thank you very much for your presentation today, [Operator Instructions] Just while the company takes a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed by our investor dashboard. As you can see, we have received a number of questions throughout today's presentation. And if I may dive straight into it, the first question we have here reads as follows. How much of the cash at hand is represented by Angel funds?

Yes. Thank you very much. Great question. I think the first thing to make clear is that our Angel funds are incredibly secure. So not only do consumers have incredibly strong protection through their payment processes. But actually, as it happens today, we have more liquidity than all of the Angel funds added together. So everybody could withdraw every penny of Angel funds, and we still would have enough cash. Now that's not at all something that would ever happen. It's just impossible. And the best proof of that is to have a look at our Angel fund balances. So if you look at our Angel funds over the last 5 years, the Angel fund balance has been remarkably stable. And of course, that's during a period where we've come down off the sort of COVID high of revenue. So revenue has dropped significantly. Angel funds have been incredibly stable. And the reason for that and is a core part of our profitability is that our Angel funds are very heavily weighted towards our core members. So our Angel funds have remained stable because actually, as I was saying earlier, our underlying core members have also been incredibly stable over this period. So Angel funds have been stable. They aren't going to fall down. We obviously have huge protection in all our Angels. They're entirely protected. But what they are is an incredible investment. And we were watching a video yesterday, which you could find on our investor website, where you can see winemakers talking about how these funds have been used to rescue a number of winemakers through horrible times. And it's the investments like that from our fantastic Angels supporting brilliant winemakers that really makes the Naked difference.

The next question we have here reads, what factors will determine your approach in relation to share buybacks and shareholder returns?

Thank you. Again, as I said, this is the most important slide I was presenting. So we're very clear that we will only use capital where it makes value-creating sense. So if we're making investments internally on customer acquisition, we've set ourselves clear KPIs to ensure that we are adding value to our shareholders and our share price. If we can't find ways to use that money internally for investments, then we will look at distributions. And we've talked about the potential for share buybacks. But again, we're only going to do that where there is a clear valuation difference between the share price and the intrinsic value of the business. If those 2 get too close together, then there's a risk that actually that could be value destroying and we wouldn't do it. If we find ourselves with significant excess cash over the medium term, then we've been very clear. We will be very close to shareholders on what we do with that. I would imagine that, that's going to involve significant distributions. But at this point, obviously, we don't know, and we'll talk very closely to shareholders about that.

Just moving on here. How does Naked Wines plan to improve customer retention and acquisition through its revised marketing strategy? And how does investment in customer experience?

Yes. So going back to a slide I shared, on the retention side of things, we are investing in discovery, delivery and community. It's important for me to say that no one -- not any one of these variables in isolation is going to make the difference, right? Like we need to pull on these levers simultaneously to get retention back to where it used to be historically at Naked. So that's exactly what we're doing, running a lot of tests simultaneously. On the acquisition side, we are looking at our channel mix, actually, not looking, right? Like we are actively shifting our channel mix, moving out from -- moving away, sorry, from channels that are past diminishing returns, investing into new channels that are delivering on appealing ROIs. And as I mentioned, we've built robust measurement systems in the past 6 months. We have run important tests at scale that prove the actual return on the investments that we make, and we will continue to adjust our marketing plans based on that knowledge.

How does Naked Wines turn promotional offer users into long-term members instead of one-off buyers?

That's a great question, right? And it goes back to what I was saying. I think that over time, Naked became overinvested in channels that don't really lend themselves for us to tell the Naked story, right, to present our value proposition, the things that actually makes us different and hopefully better than competitors. And instead, we were invested in channels that push mechanics on people, right, whether it's a discount, a time-bounded offer, et cetera. I think that used to work quite well. It works in the moment, but you can't really build a brand around it. So that's one of the key drivers in our change of approach.

Perfect. And I think the last question we have here reads, what impact does management expect from the potential Trump tariffs on wine?

Yes. Thank you very much. So actually, this -- the primary -- you would expect the primary impact of this potentially to be in the U.S. Actually, our U.S. business generates a lot of its own wines. So something like 90% to 95% of the wines sold on our U.S. site come from the U.S. Obviously, we have stock levels over there more than we'd originally intended, but some of it potentially will be quite useful. So we don't really see a massive impact coming out of any potential tariffs or anything. And if there were an impact on a small subsection, I imagine, a, firstly, it's going to impact the whole market. And secondly, it would change consumers' decisions about which wines they were buying.

Rodrigo, Dominic, thank you for answering all those questions you can from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which is particularly important to the company, Rodrigo, could I please ask you for a few closing comments?

Yes, of course. I would close with what I said before, right, like Naked Wines is undervalued. I think the plan that we've shared with all of you today is very clear. It's actionable. It doesn't require to take massive leaps of faith, right? This is a clear disciplined plan to unlock over GBP 100 million in value. We're working hard at it already, and we'll continue to do so. And thank you again for your time.

Rodrigo, Dominic, thanks for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Naked Wines plc, we'd like to thank you for attending today's presentation, and good morning to you all.