Naked Wines plc

Good morning, everybody. Welcome to my last presentation as CEO.

I am the warm-up guy for today's act, and the core of the show will be Nick and James, talk you through trading and talking about the plans for the future. We call this the start of a new chapter because that's what it is, and the start of a new chapter also obviously means the end of an old chapter.

And so I'm going to focus on where we've got to as a business, and Nick and James will tell you about growth and future trading. And the summary, I think, of that where we've got to as a business is I feel like we've laid a solid foundation for the future.

And what we've got is a pure play online retailer, a nice simple business. It is -- it has a market-leading position in the biggest wine market in the world.

And with the completion of the Majestic transaction, it will have the financial resources and the management resources to be able to exploit that. We have a very simple, clear focus without the distraction of trying to run a bricks-and-mortar retailer in a tough environment.

And importantly, it's going to have a new team, who are the right team to take it forward from here. So I'd like to talk you through some of that.

The first is for those of you who haven't met him, John Walden, our new Chairman, who's in the front chair, and I'd encourage you to come and talk to John. This has been a 2-year long process, realigning the group to exploit the opportunity in the U.S.

Nick will tell you more about the U.S. opportunity, but as it became clear to us just what the scale of that opportunity is and the extent to which our model is uniquely configured to take advantage of it, what became clear was we have to realign everything about the business to take advantage of it, key thing being the management team.

And one of the most important post that is the Chairman. And what John has brought to the Board in addition to being a Native American and having a familiarity with the market, which we didn't have before, is he's brought a new level of ambition.

And I think it's -- a lot of U.K. mid-market companies with traditional nonexecutive role, people worry more about the downside than the upside.

I don't think anyone's accused John of ever not challenging us on the upside, and I hope he doesn't change in the future. So he's been a great addition to the Board.

Nick is going to become President as soon as I retire, which expect to be broadly by the end of this year once we have Christmas peak trading out the way and once we have the Majestic deal complete. But we've also made a number of other changes.

So we've got 2 senior people, one full-time line director, whose mandate is to go and recruit A-list winemakers. And I'll tell you more about that in the future.

And the second is one person based in East Coast of the U.S., focused exclusively on strategic partnerships in order to be able to drive our future growth. And then obviously with John joining, Greg Hodder, who was our previous Chairman, will be retiring, and I'll be retiring as well.

So those are the changes. The obvious questions are why and why now?

And the answer to that is my primary interest in this business is a shareholder, and I intend to remain a shareholder in the future. And for the value of Naked Wines to become what I believe it ought to be, it requires a different set of skills.

And I am at heart a start-up person, and the skills that make you successful in a start-up are the ability to make it up as you go along, the ability to be able to keep coming up with new ideas and trying new things in a kind of shotgunning approach and keeping the ones that work and dumping the ones that fail. One of my colleagues described it as the equivalent of crossing an icy pond one step at a time.

And every time you get [ a film, but you go right, let's try that curtain ]. And that kind of figuring out is something that's important to do in the early stage of the company, where you're trying to build a new type of business, and Naked Wines didn't exist as a business model 10 years ago.

Crowdfunding in wine just wasn't a thing, crowdfunding wasn't a thing at all. So those are an important bunch of skills.

But now you need a different set of skills, which are about structured long-term thinking, organization and discipline, and no one's ever accused me of having those things. So it became obvious to me that this needed to change.

We started talking about it 18 months ago. We went through an extensive process, interviewed a number -- our first starting point was we need an American CEO.

We interviewed a number of superstar candidates. And in the end, we concluded the best candidates already worked in the business.

For both -- Nick is a guy of enormous talent, which you will see for yourself as time goes by. But he's also the person who proved himself in the U.S.

You remember, he took over the U.S. operation just after we've had a profit warning there, and he turned something that was obviously high potential, but frankly, a bit of a mess into an extremely well-run slick business.

He then -- we appointed him COO in June, and he's acquitted himself extremely well in that role. And then finally, Nick has Naked DNA running in his veins.

And I think the critical thing, which maybe from a pure cold-hearted financial point of view, it's difficult to get your head around, but is the heart that drives Naked is belief that the best way to look after shareholders is to disrupt the wine market to the benefit of your customers and your staff and your people, right? And it was important to all of us that we didn't go through a kind of 2-year hiatus when a new CEO came in and did a lot navel-gazing and considering what their options were, but someone could build -- keep the momentum going and build from here and Nick is that guy.

He's also very passionate about wine. And people have accused me of being someone who's passionate about marketing and wine happens to be the product.

Nick happens to be passionate about both of those, and I think that's a good thing. What about trading?

Sales were up pretty healthy, 16%. Repeat contribution not quite as good and EBIT backwards.

Three reasons for that. One is the usual additional investment in new customer acquisition, James will go through the detail of this.

But the second is U.K. Trading is just sluggish given the market.

I don't think that comes as any surprise to anyone. And the third is we are -- we have made a number of decisions to invest on a trial basis, some margin in building LTV of customers.

So for example, we've been shipping customers a free sample with a case of wines at a price point above the price point they would normally spend to encourage them to trade up and to get into the kind of sweet spot where the value for money from the Naked model becomes very, very strong. We've been encouraging customers to try wines that they wouldn't normally buy, and that's partly, again, by dishing out free samples, but partly also by being very proactive with refunding customers rather than waiting for them to claim a refund if someone told us I don't like a wine, we've been proactively refunding them because small-scale tastes tell us that produces higher LTV customers, and we're now doing this on a broader scale.

And the thing I wanted to emphasize about that is -- James, correct me if I'm wrong, it's kind of 0.5% of margin roughly invested in this. That's very much a discretionary decision.

If it works in a broad scale, we can keep it, and it will go into numbers. If it doesn't work, we can reverse it, okay?

So things have gone backwards a bit at the EBIT level, but 2 of the -- 2 out of the 3 things are very much at our discretion, increased investment in customer acquisition and increased investment in customer LTV. As far as investment in new customer acquisition is concerned, the first half, the performance was fine.

We expect it to be slightly slower for the year as a whole. The key reason for this is we haven't been seeing the paybacks we would want to see in the U.K.

I think the question is certainly being asked amongst you, will we ever have the discipline when we don't see paybacks to not throw good money after bad? That's exactly what we've done.

We have held back on the investment. Last time I stood in front of you, I said we expected this number to be around GBP 26 million for the year and to continue to grow at around 15% thereafter.

I also said, don't expect it to be in a straight line. It's going to be lumpy.

That's exactly what's happening. Long-term expectations unchanged.

In the short term, we're exercising some discipline. All of which being said, if you look at the amount we invested by the payback and compare that to -- from last year to this year, there's a pretty significant increase in what we delivered.

Payback itself is slightly back in the context of a 29% increase in investment. We're in that kind of goldilocks zone, we're slightly below where we want to be.

But this is a 6-year long measure we're reporting on a 6-month basis. Historically, the reporting has turned out to be conservative.

We're pretty comfortable with that performance in the context of a significant increase in investment. Historically, every time we've slowed investment, payback has come right up.

We expect that to be no different in the future. Outside of the pure numbers, one of the things that's changing for Naked is it is becoming easier to recruit A-list winemakers.

I don't know how many of you drink 800 pound bottles of wine. But if you do, one of the best is called Pingus, it comes from Spain.

And Patricia Benitez has been making that for the past 12 years, and she's now come to be one of our winemakers. Daniel Baron is -- was former winemaker at Silver Oak in the U.S.

That's not a particular brand that in the U.K. people know.

In the U.S., it's a highly respected wine. We are now able to pull in this kind of caliber of people.

As far as new partners are concerned, one of the biggest ones we've landed is AARP, the American Retirement Association. Again, I don't know how many of you know that, but AARP has more customers than the U.K.

has adults. So just a useful bit of scale of America, okay?

That's over to James.

Thank you, Rowan. We got the winemaker names to put on there, that's not me.

There you go. So 3 sections I intend to run through quickly.

First, around the numbers in the half and how that demonstrates the growth strategies on track. Then looking at the capitalization of the group going forward, following the transaction, selling Majestic and Lay & Wheeler and where that leaves us in terms of cash and cash utilization.

And then a reiteration of how we intend to use that capital and how we think about it. So Rowan's covered a number of these headlines.

Reported sales up 16% in the half, approaching GBP 90 million. Repeat contribution is 8% higher on sales, up 12%.

Rowan's touched on some of the reasons for that margin being lower, and I'll give a little bit more context to some of that in a moment. The investment level is up 29% in the half in new customers.

Remember, that's on top of a 35% increase in the prior year. So we're actually kind of for the half looking at something like a 65%, 70% increase over 2 years.

Payback is down to 3.8. The target is 4x.

We've been trying to land on the 4x. We have overshot slightly, but not to an extent we're concerned, as Rowan indicated, there's kind of a goldilocks zone here between, say, a 3.75 and a 4.25, and staying in there is something that's important.

And hence, we've trimmed back the level of investment growth that we're looking at in the second half to ensure that, that remains the case. Repeat customer sales retention, which drives the repeat business and very much the long-term value of the business, is a percentage point higher year-on-year.

It is generally low in the first half than the second half. And last year, I think we were 78% in the first half, 81% for the full year.

We believe that 1% uplift should track through in the second half to land us around 82%. In terms of how that translates on the profit line.

This is the continuing Naked Wines business, so it's the segments we used to report as Naked Wines, plus the central costs added together. You add those together for H1 of fiscal '19, it was a GBP 1.7 million loss at the adjusted EBIT line.

That has grown to GBP 3.9 million in the half, and it's grown as the net of a GBP 1.6 million improvement due to the additional customers we have driving incremental contribution. The GBP 0.3 million reduction in the amount of contribution per customer.

That is driven by that reduced margin, and again, the initiatives I'll talk about in a second. GBP 2.3 million more year-on-year investment into new customers that will continue to drive growth in future years and a GBP 1.2 million or a 10% uplift in fixed costs, which is in line with the guidance we gave with the full year results.

Looking at investment, I think it's useful to put this in the context of the journey that Naked has been on over the last 5 years. So when Majestic bought the business in what was the end of fiscal '15, the business was in a period of capital constraint, and we were able to start growing investment at that point.

And at that point, we did see payback start to come down as we significantly grew the investment part. Fiscal '17, we remember what happened in the U.S.

We -- reports progressed, and you'll see the payback flattened during that period. At the end of fiscal '18, as we went to the fiscal '19, we announced the intent to continue to grow investments and our target of a 4x payback level, that's the number that we've been broadly in track with since we made that announcement.

And yes, as we said, targeting 3.8 to 4x looks like the outlook for this year, and that will be on investment of GBP 20 million to GBP 25 million, which is 3x where we were in F'15, so it's a substantial increase over that period. The U.S.

is a critical market for us in terms of where future growth is going to come from. It's the market Nick has been running.

I am very pleased to see that the U.S. is moving ahead on all of these metrics we consider critical.

So investments up 21% in the U.S. in the half.

Payback is improving in the U.S. by 0.2x in the half.

Revenue growth on an underlying basis in the U.S. is up 17% due to the weaker pound that translates to something like 22%, 23% on a reported basis, and the sales retention in the U.S.

is also improving in line with the group and up 1%. So all the indicators moving in the right direction and gives us great confidence in the future value of that market.

So looking at the repeat part of the business and the repeat customer contribution, which was up by 8%. That was on sales that were up by 12%.

Sales growth alone would have driven a GBP 2.1 million improvement in the repeat contribution number in the half and that would have been boosted by a further GBP 100,000 fulfillment cost savings as we start to realize some benefits from scale. There are then 2 blocks in the middle of this chart that it's worthy of talking about, and Rowan has talked about at some length.

One is premiumization. There's about GBP 0.5 million of investments in essentially sampling higher-value products to customers to start getting them to trial.

There was a further GBP 200,000 in proactive refunds, where we've been essentially giving people their money back for bad reviews, where we were moving prices on things we've been proactively refunding customers, so they can always trust the prices that we're offering them. And all of the remaining movements together added a further GBP 100,000 of downside to that chart, but we ended with GBP 19.2 million of repeat contribution.

So how do we look at some of those investments? This is the data we've been looking at to see whether or not the proactive refund strategy is driving value to the business.

And this chart shows how a control cohort of people who haven't experienced this has built their contribution per customer versus a test cohort who have experienced it. And we build control samples that look the same.

At day 0, we have them at the same point, and we see how they evolve. And what you can see is by kind of 3, 4, 5 months out, you start seeing an uplift in the contribution delivery from the people who have had a refund, despite the fact that refund is built into the numbers here.

And that contribution uplift is coming from a couple of different areas. It's coming from increased frequency of purchase from people who've had refunds, so they become more likely to purchase in the control set.

We've also seen slightly improved retention of those people. So the idea that this builds and engenders trust from the customer base appears to be borne out in the numbers.

We need to continue to raise this. We need to see how far those lines diverge.

And if they continue to diverge to assess what the actual return on that investment is, but the early signs look positive. A quick word on fixed costs.

We now have the old central costs as well as the fixed cost of the Naked business within the continuing group. We guided to 10% growth in that cost base this year with a longer-term outlook of it growing at about half the rate of sales.

And actually, in the first half, we've landed on that 10%. It has not been consistent across all markets.

A lot of that growth has gone into the U.S. market, but that is obviously consistent with where we see the long-term value opportunity, beginning to see some cost reduction and pay I'll see here, which is the central cost base, and we are anticipating something of the order of GBP 1 million savings in the central cost base in the near term through the fact that we'll be recharging a component of our IT cost back to the Majestic business through the transition support arrangements we have with them.

So just looking forward to the rest of the year. These are the metrics that we are encouraging people to use to forecast the business forwards.

And if anybody in the room wants to kind of walk through that, please contact the IR team, very happy to walk you through how we use these. New customer investment in the range of GBP 20 million to GBP 25 million, is a small reduction from the GBP 26 million we've indicated at the start of the year.

Payback, we still believe 4x is the right number and is an achievable number with the first half in at 3.8. There's a slight reduction to the guidance on that metric.

The year 1 payback we're getting from the investment we made last year, we are forecasting to be between 65% and 70% once we come through the second half of the year. Repeat customer sales retention, as indicated earlier, around about 82%, so that would be a 1% improvement year-on-year.

Repeat customer contribution margin in the range of 25% to 26%, somewhat dependent on how much of the activity we've been doing in the first half, we continue. And fixed costs in the range of GBP 24 million to GBP 26 million is consistent with what we said at the full year results.

If we boil that down into a standstill profit calculation, the profit, the business would deliver if we were investing only in replenishing the sales lost to attrition and not growth, we expect that guidance to give us a 10% to 15% uplift in that metric. And there is in the appendix the calculation of that metric for the prior year for those that want to refresh themselves on it.

So that's the half that was. Looking at where the transactions and the restructure of the group leave us, obviously, there have been a number of moving parts.

There's GBP 111 million of disposal value to be brought into the group. GBP 11 million of that comes from Lay & Wheeler that completed in October on the day that we announced it.

GBP 78 million is the initial consideration for the sale of Majestic Wine Warehouses Limited. That's the retail and commercial business and the Calais business.

A further GBP 5 million of that is contingent on Calais performance in Brexit, which will be assessed 2 years post completion. A further GBP 12 million of that is structured as a loan note to the buyer and that would be repaid 5 years post completion at the latest.

And then there's a disposal of one of the properties to freehold the properties in the estate, it's going to generate a further GBP 5 million. Timing of that is planning dependent, and given planning dependency is related to elections, I'm not going to try and guess when that's going to be.

But the gross proceeds there is GBP 111 million. Within FY '20, GBP 89 million of gross proceeds.

And in aggregate, across that set of transactions, there's about GBP 5 million of cost, which nets to GBP 84 million that we would expect to see within the fiscal year. If we think of the disposal proceeds of GBP 84 million, we're expecting to be of the order of GBP 30 million of net debt to be repaid out of all of those.

That should give us a continuing business cash balance of the order of GBP 50 million at the point of the Majestic completion. Thinking through how that cash balance is going to evolve.

The first half cash consumption was GBP 11 million. Worth noting the first half is always a period in which we build working capital.

This is a seasonal business. And actually, that GBP 11 million is GBP 0.5 million better year-on-year, which is despite the fact that we've invested through the P&L to the tune of losses GBP 2 million higher.

What you see in there is the working capital movement in the half is actually GBP 2.5 million lower for the continuing business. So that's where we are.

In terms of how we think about that capital moving forward, really the priorities remain unchanged. Priority one, run a healthy balance sheet.

So the disposal proceeds will be used to extinguish debt. We will hold cash in the near term.

Invest behind growth, 29% growth in new customer investment in the half with the current run rate we expect, we think, somewhere of the order of GBP 10 million of cash consumption next year will fund growth, and probably a 10% to 15% is the range if we don't significantly step up the rate of investment growth from where we're at. However, that obviously gives an opportunity to return capital to shareholders.

That will be considered, but it will be considered once we finalized the growth requirements and some of the initiatives which Nick is about to talk about. So I will hand over to Nick, he will talk about it.

Thank you very much, James. So before we go into the pages, this is Stephen Millier.

Stephen, actually -- 3% of all the bottles of wine sold direct to consumer in the last 12 months were made by this guy, and that's what we do. We make a wine.

So we've got an ability to create amazing brands and tell winemaker stories and take Stephen, someone who's always been incredibly talented, hard-working, but was working in relative obscurity in the foothills of California and turn them into the single biggest direct-to-consumer brand in the U.S. market.

And I think it's a reflection on the business that we've created and the 11-year journey that we've gone on from something that Rowan founded in 2008 in the midst of the financial crisis. And it's, I think, important to kind of start by acknowledging that saying pretty incredible we've achieved on this journey.

So massive kudos to Rowan for the vision and the model he laid out, a lot of the things that are core to Naked's DNA and that we take for granted today were incredibly pioneering. So the end of this chapter, I think it's really important to acknowledge that.

No better way of showing it than through some of the success we've been able to create for our winemakers. Okay.

There we go. Okay.

So I'm going to talk about the third section of this presentation. Our ambition and the opportunity we have to fill our potential and the growth opportunity, specifically in the U.S.

I think before that, a little bit by way of introduction and a little bit about myself. I've been with Naked for just over 4 years now.

I started off working in the U.K. very closely with Rowan and actually, in an investment role, looking at our capital allocation, investment returns.

Had the opportunity, about 3 years ago, to relocate to California, I've got involved in our U.S. business.

Very proud of the work that the team out there have delivered over the course of the last 2.5 years. It's kind of Rowan to give me credit, but really it's the team who've delivered that.

We've gone from -- over that period of time, double the amount we're investing in our U.S. market.

I think you see reflected today, alongside that investment growth, we've delivered a better business, a higher-quality, higher-retention business and a record set of results we're reporting today in the U.S. Rowan did also say I am a wine lover, and one of the things that any wine lover who moves out to the U.S.

can't help but notice is the U.S. wine market perfectly exemplifies the need for a business like Naked.

The need for disruption to a bunch of long-existing structures that don't serve the needs of consumers and they don't serve the needs of winemakers, and it's the perfect place for Naked to fulfill its potential. It's a perfect place to deliver value to both of those consumers and my consumer have to -- I'm incredibly passionate about continuing to do that.

So why exactly are we so excited about the U.S. I think the first point here is obvious but as restating.

It's an incredibly large market, and it's also got a very attractive characteristics, and that's the profitability and the profit pool in the U.S. wine market is very attractive.

Secondly, we're structurally advantaged in that market, and we're able to deliver materially better quality wine at a cost advantage, and I'll talk a little bit more about that. And third, we're starting from nowhere.

Actually, there's not a lot of British businesses that go to the U.S. are incredibly successful.

And one of the great legacies Rowan leaves us with is we've built a leadership position within the U.S. market.

We're the #1 direct-to-consumer wine business in the U.S. and the fastest growing.

So the market, the direct-to-consumer part of the U.S. wine market has grown by an average of 13% over the course of the last 7 years, to GBP 3 billion market.

And actually, there's a much broader pool of consumers are exactly the type of consumers we want to target, who're spending around GBP 20 billion. So it's a fast-growing market, our segments expanded, and it's backed by a couple of really positive secular trends.

The movement towards online is something that's only going to help us. And equally, the movement towards craft, independent premium across the beverage sector in the U.S., something that plays incredibly well to Naked and our core DNA focusing on independent winemakers.

Secondly, why exactly is that the economics of the U.S. business are so attractive?

And at its heart, there are 3 things here. Firstly, as Rowan talked about, our model is a winery model.

Our DNA has always been around supporting independent winemakers. That is uniquely well configured to address the American market.

We're acting as a winery. We're able to ship to 96% of the U.S.

population. A business configured as traditional retailer has only got direct access online to 14 of the 50 states in America.

So that's a really big source of advantage. The second is by acting as a winery, we're able to access 3 tiers of the American profit pool.

Those typically taken by producers, selling-through distributors and own through retailers. What that means is we're able to generate attractive margins at the same time giving customers a demonstrably better wine for their money.

And the third thing is part of the way in which we operate. Because we're not a traditional retailer, we're a business that creates our own brands.

We work with an underpinning of data and feedback from our customers, share that with our winemakers to make an iterative leap of better and better product because we're funding those winemakers, and's they're selling exclusively through us. We're able to reduce their costs and pass those savings on to customers.

All of that adds up to a bunch of exclusive brands that are only available through Naked Wines and builds a great customer loyalty. So those 3 things taken together can explain the economics we're able to generate.

And I guess the proof really is in the numbers and the feedback we get from customers. Any kind of way you want to look at this, we've built something very special in the U.S.

So we were voted the #1 U.S. wine club in America by USA Today, earlier this year.

On the right-hand side, you might ask why are we quoting state data from Pennsylvania, 2 reasons. Number one, they're the only state kind enough to publish this data.

But number two, they're the biggest -- they're the most recent large state that opened this market up to winery direct shipping. They did that in 2016.

And we can see here is that when you get a clean start and a clean run in the market, customers are clearly voting with their feet and showing that Naked Wines is the best proposition out there. We've built an 11% share in that market.

So a little bit of a recap about why we're excited about the U.S. opportunity, why we believe we've got a platform and a springboard to go on to greater growth in that market.

I think it's also important when we're talking about succession and a change of leadership for me to give you an idea or some of the guiding principles that I'm going to be operating by and how I see the company going forward. And I think that starts with a lot of things that absolutely we intend to stay the same, and that's got to start with Naked with our mission.

We're going to remain a company that's committed to connecting everyday wine drinkers with the world's best independent winemakers, and that's core to what we do. And we're going to do that with a belief that's unchanged but by disrupting the wine industry and by focusing on giving a better experience for our supply partners, our winemakers and by giving a better experience to customers.

That's the best way to create value for shareholders, and it's also the way to create opportunities for our people, our colleagues. We're not going to change the way in which we think about investment.

And whilst the composition of our balance sheet has changed and for the first time, we're properly capitalized to be able to see the opportunities in front of us, we're not going to lose our discipline. So James talked through our capital allocation priorities, and they're going to remain the same.

And culturally, we're not going to throw away the heritage that's got us to where we are and the opportunity that we've got today. So we're going to carry on being a business that tests things, occasionally will make mistakes, and I'm sure we'll make some more.

But what we do from those mistakes is we learn, we go back and we take the things that work and we invest behind them. And that culture of continuous improvement is something that we're all very proud of and certainly saying I want to maintain.

I think it's also important to point to kind of the things that will be changing. And I think the first of these is we got a really strong belief that with this platform, never in Naked's 11-year history have we had the combination of the resources we require to deliver our potential to be able to pursue all of the investments that deliver returns as opposed to some of them.

We've never had such a clear focus on the opportunity ahead of us, a clear understanding of the things we need to do to be successful, and we've never had the resources and the team to be able to go and deliver that. I think that means we're in a really exciting position, I'm very excited about the next chapter.

So we're going to be trying to grow the business faster, and we're going to be focusing on investments we think can deepen our competitive moat to make it even harder for people who're going to come after us to replicate what we do and talk a little bit more about that. Wanted to spend a little bit of time to highlight some of the investments that we've already starting to realize.

And a lot of these things are at a stage of things we're delivering. They're in pilot phase, and we're seeing really exciting early signs from them.

They're not yet showing up in the numbers. I mean, these are a lot of things that give us a lot of confidence for the ongoing trajectory.

One that James talked to the financial side of is what we call customer power pricing. This is a great example of how we're a business that does things differently.

We don't obsess about the percentage margin. We obsess about what's the right way to grow lifetime value and how we think about pricing as a good example of that.

So we say to customers, it's very simple at Naked. There are only over 2 prices you could pay for a wine.

Number one is the fair value for that wine as decided by our community. And number two is nothing.

If you don't like it, we don't believe you should pay for it. It's very different from where a lot of businesses think about pricing, and it's half just because we believe the way we drive value in the long-term is by focusing on what our customers need.

Second one down here this Never Miss Out product, we're calling it, is an example of some of the innovative pipeline of new product development that we're seeing after taking decision to focus more of our IT resource on the Naked business around 9 months ago. And the response here was one of the common base of feedback from our customers was, you've got so many amazing wines, but it's so disappointing when I find one that I really love, and then I come back strong and buy it again and it's not available anymore.

So we created great products here, which says, great, sign up, never miss out, and we'll always give you first notification, and we'll ship you the new vintage of your favorite wine every time it comes out. We've only had it live for a couple of months.

We've already got -- I think the numbers are going up by the day. It was 17,000 sign-ups the last time I looked, and see a lot more opportunity to continue innovating the core products of the Naked Wines business now that we have got the full bandwidth of the organization focused solely on that one goal.

If those are 2 things which are around ways in which we can innovate to drive lifetime values and ultimately, by driving lifetime values, open up a larger pool of investment opportunity, the right-hand side talks to a second theme that can underpin our faster growth, and that's leveraging scale economics. So we've already built out the most comprehensive and the fastest shipping network in the U.S.

in the wine sector. We can reach 90-odd percent of customers, 98% of customers within 2 days from the network we've built.

And at the same time we've been able to do that, we're taking over $1 million of run rate costs out of the organization. Really, that's the first step.

So growth trajectory we're on now has a lot of scale benefits underpinning it. And again, our philosophy and our intent is that we'll reinvest those scale benefits in opening up the pipeline of further investments and managing the business to a 4x return.

So I think it gets us to where do we think we're going. And it's important to us to acknowledge, we've got no perfect foresight of the future.

Like Rowan said, we know we have a lot of investment opportunity. The future will be no different from the past and that there'll almost certainly be an uneven rate to that growth.

But broadly, there are 2 scenarios I can paint for you, and I think there are 2 scenarios, both of which are attractive. The one on the left-hand side is we carry on growing the business at roughly our current trajectory, around about that 15% to 20% growth in customer investment year-over-year.

We'll have a business that's a medium growth, 10% to 15%, double-digit growth business, we'll be on track to around a 10% operating margin at maturity. And the cash required to do that is around GBP 10 million to GBP 15 million.

Because the investment returns are very strong, actually, our burn rate, if you look and project our cash forward, doesn't actually require a lot of cash to surface that level of growth. It's a great business.

But my ambition very much is to try and go after the scenario on the right-hand side, which is where we can deploy more of the capital what we now will have on the balance sheet post transaction, we can create a business at high growth. Clearly, in growth territory over 20%.

Be on track of that same kind of 10% operating margin at maturity. And you can do that at around GBP 40 million, comfortably within the finance that we have in the business today.

So 2 outcomes. It's going to take us 12 to 18 months to understand whether or not we can make the step change from where we are on the left to the one on the right.

If at that point in time we can't, and we've got the business on the left, that's still a great business, and we'll have excess capital that we will return to shareholders. But if we can do the one on the right, we'll absolutely do that.

And I think the U.S. context here is very important.

Easy to say, I don't feel like a loss of ambition to kind of step up growth that much. And actually, we see a lot of peers in analogous categories in direct-to-consumer spending $80 million, $100 million, $150 million a year on customer acquisition.

So in terms of our scale of ambition, it's very much tied to the opportunity we see in the U.S. market.

I think it's always useful to address a few issues head on. So in case you're wondering any of these.

Are we going to -- am I going to throw good money after bad? Absolutely, no.

We're committed to growth investment, but growth investment that's based on rational solid economics. I think we've shown in the results we're announcing today, that where there is a change in any of those economics, we will pull back and respond to that.

Second thing, got any plans to do anything stupid with the money? There's a large amount of money coming onto our balance sheet.

And the answer is absolutely no. Telling you we're going to do 2 things.

We're going to look at ways to accelerate investment in the core business, and we'll look at investments that we think can strengthen our competitive position and barriers to entry against future entrants. We're not going to be going and planning investment outside of that core.

Third one is, are you going to hold on to this cash forever? I mean it's literally not even in the bank yet, but what we're going to do -- what we're saying is we need 12 to 18 months to understand whether or not we can move from that current trajectory to a much faster rate of growth.

That gives us time in a disciplined way to test a number of investment opportunities, see whether they deliver returns, see whether those returns meet our investment threshold. If we can do that, that's our #1 intent.

That's what we would like to do. If we can't do that, we'll let you know, and we will return excess capital.

And the last one is, okay, you say you're doing a bunch of testing, how much is that going to cost? You're going to come back and all the money is gone.

Not at all. So the guidance we're giving is that on an annual basis, it probably looks like around a GBP 3 million testing budget, and that's comprised of discrete measurable tests and activity that's absolutely feasible.

So if things don't work, we won't do them again. But to the extent they do work, we'll move them into our core business as usual process and we'll accelerate our rate of investment.

So that's it in terms of the overview of what the future looks like. And to recap, we've got an incredible platform.

For the first time in Naked's history, we're capitalized for growth, we've got that clarity of focus, and we've got the resources we need to exploit that. We're reporting a period where our growth is on track.

We continue -- investment growth is strong. Our trading metrics are good.

And the focus for us now is fulfilling the potential and taking the next step in the U.S. market, which I'm very excited about, and I look forward to spending more time talking to you about it over the coming years.

Thank you.

Ben Hunt from Investec. Just a couple of questions.

Could you talk a little bit more about the trading in the U.K. and Australia?

And how you came back to 3.8? What was occurring with customers?

You obviously had Easter this year, and it looks like some of the sampling would have improved your sales retention. Was 100 basis points improvement good enough or would have you hoped for more?

What was really sort of dragging back that payback?

I'll let James deal with the detail of it. But I think at a summary level, Ben, the key thing to point out is there are 3 things that move the numbers backwards: increased investments in new customers, increased investments in LTV and then some softness in the U.K.

Two of those 3 are discretionary, and we run them according to are we getting the payback from them. Not a lot we can do about trading conditions in the U.K.

at the moment, but despite all of that, we still managed double-digit growth and the company is still making decent margins. So this is far from being a company going backwards.

It's still heading in the right direction, just not at the pace at which we would like it to be long term. Do you want to give detail?

Yes. I think, look, I'm going to get down to kind of the nitty gritty cohort by cohort.

But as the trading environment in the U.K. has been tough, you see a combination of some reduction in kind of customer purchasing behavior and the way that we model and forecast out a lot of this LTV as you kind of assumed that, that then continues forever rather than it being a blip.

And then, yes, as Rowan has kind of indicated, the decisions that we made ourselves around investing in things like premiumization show up in the near term as a reduction in margin. Again, the model is not having seen this before for the forecast.

Assume that, that means that margin is going to be lower going forward. So I think it's fair to say that there's a degree of pessimism in the way that we forecast that payback because we essentially assume what we've seen in a period is likely to continue.

And that leads on -- you say 2 examples where you could grow between 15% and 20% or you could grow 20% plus per annum in terms of your investment. How should we think about that goldilocks payback corridor in those 2 different scenarios and that correlation between investment growth and payback, basically?

I think 4x is a target, we believe, is the right place to be in a moderate growth kind of position on the investment line. I think there's a reality, we'd like to be achieving 4x as we step up investment materially.

The step-up in investment drives more experimentation. And it's possible, as you've seen this number, 29% step up, you tend to be at the bottom end of that goldilocks range.

Yes, you would hope, therefore, if you got to the point where investment levels were stable, you might be seeing a 4.2x for a period. And I think this kind of concept for the goldilocks range has been -- have been helpful in our internal conversations of recognizing there is a correlation between very aggressively driving investments and realizing you're more likely to make a few mistakes as you test them on your way through it versus if you just get to a point of saying we're going to hold it ramrod still, you should expect just to be 4 or just above.

Ben, sorry, I think it's just one thing worth repeating, which was 18 months ago, we said we were going to move -- we were going to target 4. We were above 4 at that point.

But what we said very clearly is we want that to be the constant so we want the investment level to be the variable. Since then, investment's gone from around 14% to somewhere north of 20%.

So a few people have said, oh, we've got a pattern of deteriorating returns, that's intentional. It's not a case that returns are falling outside of our control.

We are maximizing the amount we can invest at around the 4x level. Wayne?

Wayne Brown from Liberum. Just a few from me.

Just firstly, kind of looking at the 3.8x payback too, but your guidance for FY '20 is for year 1 payback of 65% to 70%, which is clearly below FY '19 run rate of 70%, 80% and what we've seen before. If you could just put that into context.

And also, if that's the case, then why doesn't that flow through to your future sales retention and contribution margin coming under pressure maybe in 2021 and how do we draw that line?

You just make sure I understand, how does the 65% to 70% impact the future sales retention?

All margin for that matter, yes.

Yes. The 65% to 70% impacts the future payback expectations.

So there's a table in the RNS, which said, when we announced the F'19 results, we said we thought we would be at a 4, 4.1x return from the F'19 cohort. That has been trimmed back to a 3.9, which is reflective of the fact that in year 1, we've seen a lower payback from those customers than we expected, but by a small margin, which is different from 70% and 65%, say.

So it flows straight through from that number. Actually, for the Angels we have left and the characteristics we're seeing of them, it's not that we're seeing materially lower retention going forward or a different contribution going forward at this point.

We've kind of reflected it in the 3.9x restatement of that forecast.

I suppose if the new customers that you're acquiring are obviously achieving a lower year 1 payback, does that not then, to a certain degree, dilute when they've become retained in the years out? Was that too simplistic to think about it that way?

I think one way of thinking about it is we disclosed the year 1 payback because it's a useful metric in building a model to forecast the business forward. In terms of day-to-day management discipline, the numbers we really spend most of our time looking about our overall payback projection.

And then for a mature base, whether or not they're continuing to approach almost the retention metric. So there's a lot of mix effects that can also go into a year 1 payback, whether you're investing in some slightly higher-cost customers with higher-lifetime value and different markets also have different dynamics in terms of that year 1 number.

So the things we're really obsessed about are, are we getting our 4x return or in the goldilocks zone? And we are.

And in terms of the best measure for future trading behavior, the blended behavior of all the Angels we've got, and we're showing the sales retention number in the half year to 1 point up on where we were this time last year. So our view is, going forward, we should be seeing signs of great retention behavior.

So we're not concerned about the outlook.

Okay. And then with regards to the refund, can you just tell us where you're allocating the cost of the refunds?

Is that in cost of acquisition? Or is that in margin?

Just so I know how to -- where to put it into the P&L.

It's reflected netted out of sales in the repeat sales of business. The repeat sales are suppressed by that amount.

[ Havier ] from [ LBV ]. Quick question.

Your thoughts on the Supreme Court decision to allow out-of-state shipping from retailers?

Yes. We obviously spend a lot of time looking at the regulatory environment.

A couple of things to say. There are already a number of big markets we operate in that have had retailer-direct shipping for a long time, California being a good example.

Our business continues to generate advantage for consumers and advantage for the winemakers in those markets. So it is not something that we're -- it's not something we're afraid of.

And I think that the model is resilient to it. We monitor it closely.

It's going to take a while for that to turn through into actual action and change in markets. So typically, our experience is from a Supreme Court decision to change being implemented in local markets, it's often a multiyear process.

Also important to note, the extent there are opportunities from that, for example, some customers will be able to offer an expanded product assortment too or some areas where we may be able to take some cost out of our operation, there's opportunity we can take advantage of as well.

Just a follow-up for me. 2 -- probably 2 sides of the same coin on disclosure.

But for your cost of acquisition by geography, clearly, you've trimmed back some of the spend. Could you tell us what -- where you've trimmed back the spend if it's in the U.K.

or the U.S.? And maybe give us an indication as to where you're spending the proposed GBP 25 million?

I mean, in the first half, we've grown spend everywhere. The trim backs will come back.

The range is wide because we're going to be managing that dynamically in the second half. It may come from digital.

It may come from discounts as we're looking at the level of discounting in different markets. One area we have continued to progress is removing the level of first order discount in different markets, and that's an area where the marginal return on that spend has not looked as effective as it used to.

So we're basically kind of continuing that trend of premiumization.

Okay. And then just with regards to acquisition spend in each country.

So just relative to U.K. versus the U.S.

is pretty much what I'm trying to get at is...

We're not giving regional breakdowns, Wayne.

But directionally, I suppose is -- how much is the U.K. down and the U.S.

up?

I think what we've shown in the slides, investment in the U.S. is up, materially up 21%.

We're just scratching the surface of what's possible in the U.S. And if you look at our absolute investment levels compared to a bunch of our peers, we're investing a fraction, and we see them doing.

We're seeing investment returns trend up as opposed to down as we've grown investment in the U.S. market.

So we've got a lot of confidence and that gives us a benefit to deliver material steps up in the coming years.

Kate Calvert from Investec. Obviously, the presentation is focused on the U.S.

this morning because that's the biggest opportunity. But could you talk through what you see the potential in the U.K.

to grow? So if the consumer backdrop improved, would you look to step up significant new investment there?

Or are you sort of quite comfortable with kind of double-digit growth?

Absolutely. So firstly, very proud of the fact the team in the U.K.

are delivering double-digit growth in a very tough market, and it's a reflection of the strength of the Naked model that a business at 11 years old is still very much in a growth stage. We absolutely look to invest anywhere we can find new opportunity to deploy funds at our investment rate.

And I think there are still more opportunities for us with that U.K. business.

Our intent is to have multiple growth businesses going forward. While the U.S.

opportunity is the biggest single opportunity, we'd very much intend to keep on growing the U.K.

Yes. Well, thank you very much, everybody.

Next time I see you, I'll be sitting in those seats as well. So thank you for your interest, and thank you for your support and look forward to seeing you again in a different role in the future.

Cheers.