Naked Wines Plc · LSE:WINE
Naked Wines — Investor Day (April 2018)
65 slides from Naked Wines's investor day presentation, Apr 17, 2018
Slide 1: Accelerating growth
Capital Markets Day 17 April 2018 Accelerating growth
Slide 2: Disclaimer
Disclaimer • This Document comprises the written materials/slides for a presentation concerning Majestic Wine PLC (the “Company”) and its 2018 Capital Markets Day. • By reviewing this presentation you agree to be bound by the conditions set out below. • No reliance may be placed for any purposes wha
Slide 3: Summary
Summary We are in the fortunate position of having the OPTION to accelerate growth Trading, cash and dividends on track 10 year track record of growing sales by investing in new customer acquisition Investing £12m a year in new customer acquisition – at a payback in excess of 4 to 1 Today, we
Slide 4: What we want to show you today is…
What we want to show you today is… 1 2 2 3 WHY we plan to HOW – safely, This is our choice - accelerate growth efficiently & we are on track transparently 4
Slide 5: In a nutshell...
In a nutshell... 1 2 2 3 1 This is our choice - WHY we plan to HOW – safely, we are on track accelerate growth efficiently & transparently • We are on track to deliver £500m sales target and 2018 profit expectations • Balance sheet and cash flow in good shape • We expect to pay a dividend in line wi
Slide 6: In a nutshell...
In a nutshell... 1 2 2 3 WHY we plan to HOW – safely, This is our choice - accelerate growth efficiently & we are on track transparently We believe we have the potential to double growth because: 1) Our Investment pipeline is materially bigger than we thought 2) Returns are trending up 3) We THINK t
Slide 7: In a nutshell...
In a nutshell... 1 2 2 3 This is our choice - WHY we plan to HOW – safely, we are on track accelerate growth efficiently & transparently We will... • Set out transparent guidelines – so you can see how we prioritise investments • Maintain and strengthen investment disciplines • Invest in additional
Slide 8: In a nutshell...
In a nutshell... 1 2 2 3 This is our choice - WHY we plan to HOW – safely, we are on track accelerate growth efficiently & transparently 8
Slide 9: Sales on track to hit our £500m target in 2019
Sales on track to hit our £500m target in 2019 600 500 400 £m 300 200 100 0 FY15 FY16 FY17 FY18 FY19 Retail Commercial Naked Wines L&W 9
Slide 10: FY18 Adjusted EBIT and FY18 & FY19 dividend expected in line with market consensus
FY18 Adjusted EBIT and FY18 & FY19 dividend expected to be in line with market consensus Group Adjusted EBIT Dividend 20 8 18 7 16 6 14 pence 12 5 £m 10 4 8 3 6 4 2 2 1 0 0 FY16 FY17 FY18 Market FY17 FY18 Market FY19 Market Consensus Consensus Consensus 10
Slide 11: Our balance sheet is in good shape
Our balance sheet is in good shape Net Debt & Leverage FY16-FY18 (preliminary, unaudited) £m, ratio of Net debt : EBITDA 50 1.4 45 Net debt 1.2 40 35 1.0 30 0.8 25 0.6 20 Target 0.5x 15 0.4 10 0.2 5 0 0.0 H1/16 H2/16 H1/17 H2/17 H1/18 H2/18 11
Slide 12: Heavy lifting projects are completing – so we can focus on growth
Heavy lifting projects are completing – so we can focus on growth Single customer view New Website New EPOS and Data tools FY2019 Franchise-Lite employee Next Day Delivery Store revamps and Model shelving Ongoing Buy it Again ratings / Product Availability New IT infrastructure Wine Quality
Slide 13: In a nutshell...
In a nutshell... 1 2 2 3 This is our choice - WHY we plan to HOW – safely, we are on track accelerate growth efficiently & transparently 13
Slide 14: 3 years ago, we set out our plan to grow by investing in customers
3 years ago, we set out our plan to grow by investing in customers, rather than stores 14
Slide 15: 3 years on, we are earning a payback in excess of 4x the investment
3 years on, we are earning a payback in excess of 4x the investment in New Customer Acquisition This data is robust. We have earned over 4x payback • Over 10 years and over a million active customers • In 3 countries • And includes ALL test and learn, mistakes and start up learnings 15
Slide 16: Potential to more than double future value generation, for three reasons
We believe we have the potential to more than double future value generation, for three reasons Invest Return Payback -£1 £4 Currently -£12m 4x £48m Potential -£24m >4x £100m+ Three reasons: 1. The potential investment pipeline is bigger than we thought 2. Returns are trending UP, not down 3. We hav
Slide 17: 1. The investment pipeline is bigger than we thought
1. The investment pipeline is bigger than we thought Group Investment in New Customer Acquisition FY2013 – FY2019F, GBP m 20 In the last 2 years we have proven digital new 18 customer acquisition as 16 a viable channel 4 We have early 14 We have grown indications of investment in Naked UK at success
Slide 18: 2. Returns are trending up – we are getting better at finding the right customers
2. Returns are trending up – we are getting better at finding the right customers Naked Wines USA • Our average 4x payback Lifetime Return includes a lot of learning and some mistakes – we are good at not repeating those USA return forecast FY17 • We have got smarter - now cohort that we have long t
Slide 19: For example… customers that cost more to acquire pay back better
For example… customers that cost more to acquire pay back better Repeat Contribution per Angel- $69 vs $79, Naked Wines USA Long term data shows that customers who spend more initially are more expensive to acquire…but more than payback over time 19
Slide 20: 3. We believe the same techniques work in Majestic – we need to prove scale
3. We believe the same techniques work in Majestic – we need to prove scale Barclays Premier Partnership with Majestic: - Rewards Barclays best customers - Drives footfall in Majestic stores Partner offers: Free bottle to collect in store £10 off £50 vouchers Free Tastings 20
Slide 21: In a nutshell...
In a nutshell... 1 2 2 3 This is our choice - WHY we plan to HOW – safely, we are on track accelerate growth efficiently & transparently 21
Slide 22: Transparent – clear investment guidelines
Transparent – clear investment guidelines We intend to maximise investment in new customer acquisition... • At the rate at which we can prove new investment opportunities that meet our return criteria • Prioritising long term value creation over short term EBIT • Provided we can finance internally I
Slide 23: SAFELY: We will maintain and strengthen our existing investment disciplines
SAFELY: We will maintain and strengthen our existing investment disciplines Test and learn Capital allocation Continuous improvement What is it? Before we commit to a new Actively pull out under- Every quarter, we double partner or acquisition performing capital and up on the best and drop strategy
Slide 24: These disciplines work – we have eliminated £2m per year of our lowest performing spend
These disciplines work – we have eliminated £2m per year of our lowest performing spend £’000 P2 P3 P4 P5 P6 P7 P8 P9 UK USA AUS 24
Slide 25: EFFICIENTLY: additional investments not just faster, but smarter
EFFICIENTLY: additional investments not just faster, but smarter Goal Where we are investing £m Growth New customer acquisition £5 – 8m Efficiency Optimisation, IT capacity, creating future £2 – 2.5m growth opportunities Safety Controls and compliance ahead of growth, £1.5 – 2m rather than after 25
Slide 26: TRANSPARENCY: We will report investment in new customers separately
TRANSPARENCY: We will report investment in new customers separately ...so you can evaluate discretionary investment decisions separately from trading performance Investment: Fluctuating Trading: Repeat Customer Profitability FY13 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 Naked Wines Naked Wi
Slide 27: Questions
Questions 1. How do you acquire new customers? 2. What are you actually investing in? 3. How is investing in new customer acquisition different from marketing? 4. Are you going to have a repeat of the direct mail mistake you had two years ago? 5. Will profits fall in the short term? 6. What are you
Slide 28: 1. How do you acquire new customers?
1. How do you acquire new customers? We acquire most of our customers by partnering with companies that have customers like ours, & strong growth in digital: Vouchers Digital Example Partners 28
Slide 29: 2. What are you actually investing in?
2. What are you actually investing in? We are not investing in hard assets – shops, vineyards or wineries – because the returns are low and the commitments are long Instead, we invest in: • Payments to partners for access to their customers • Any profit or loss sustained on discounted first orders.
Slide 30: 3. How is investing in new customer acquisition different from marketing?
3. How is investing in new customer acquisition different from marketing? Unlike most retailers, we can track retention of acquired customers – and we know they pay back for years 120 Last 12 Months Sales from Mature Angels Naked Wines FY10-FY17 H1, by year of recruitment £m 100 2017 80 2016 2015 20
Slide 31: ...and the same is true for Majestic
...and the same is true for Majestic Majestic Retail Sales Breakdown 12 months rolling total, £m 300.0 250.0 2017 2016 200.0 2015 2014 150.0 2013 2012 100.0 2011 2010 and 50.0 earlier New and Reactivated 0.0 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Sep-12 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 3
Slide 32: 4. Are you going to have a repeat of the direct mail mistake?
4. Are you going to have a repeat of the direct mail mistake you had two years ago? The nature of test and learn is that we expect to have one step back for every few steps forward BUT... • The tests are smaller – eg USA nationwide digital test may cost £50k, rather than £1m • We have tightened cont
Slide 33: 5. Will profits fall in the short term?
5. Will profits fall in the short term? Yes. But only because we expense customer acquisition investment in year, rather than writing it off over 15 years (as we would with a new store) Naked model Retail model Profit from existing 20 20 customers Investment in NCA -10 0 Net profit 10 20 Capex 0 -10
Slide 34: 6. What are you going to do IF investment potential shrinks?
6. What are you going to do IF investment potential shrinks? • We will do what we have been saying all along • If we cannot allocate capital above our target return (4x payback) we will return to shareholders We are not interested in growth for growth’s sake 34
Slide 35: 7. What if you’re wrong, and the returns don’t come through?
7. What if you’re wrong, and the returns don’t come through? • We are taking it one step at a time • The bulk of the planned spend for this year has already been tested and proven • For the rest, if we are wrong…we know within 90 days • But if we are right…we generate returns for years 35
Slide 36: Conclusion
Conclusion • We now know the potential for this business is bigger than we thought • So we plan to accelerate growth – safely, efficiently and transparently • To do this, we will need to: o put long term shareholder value ahead of short term cosmetics o maximise investment - rather than managing to
Slide 37: The Financial Section
The Financial Section 1 2 2 3 Remind you of the Explain how we Give guidance and an financial dynamics measure overview of our of the business performance forecasting approach 37
Slide 38: The Financial Section
The Financial Section 1 2 2 3 Remind you of the Explain how we Give guidance and an financial dynamics measure overview of our of the business performance forecasting approach 38
Slide 39: Traditional retailers grow by adding stores. We grow by adding customers
Traditional retailers grow by adding stores. We grow by adding customers Naked Wines: Sales by Cohort FY13-FY17 £m 160 Repeat customers 140 behave in a very 11 predictable way – FY17 120 much like stores once FY16 33 opened 9 FY15 100 FY14 29 Mature 80 7 23 FY13 Angels FY12 22 14 60 17 FY11 5 10 14
Slide 40: This is not unique to Naked. Majestic Retail performs the same
This is not unique to Naked. Majestic Retail performs the same Retail: Sales split by repeat cohort and new customers FY13-17 £m 300 250 14 13 21 Steady £50-60m per year of 2017 13 12 12 20 16 new customer sales 21 19 16 15 2016 converts to a repeat cohort 200 23 16 16 15 22 18 2015 of c. £20m per y
Slide 41: Cohorts retain sales better than customers
Cohorts retain sales better than customers – they improve in quality with time Naked Wines: Retention rate of Angels and Sales By month since sign-up % Sales Retention, which 100% exceeds 90% in later years, is higher than 90% previously reported Customer Retention 80% 70% Total Mature Angel sales r
Slide 42: Every £1 invested in new customer acquisition pays back £4 in 10 years
Every £1 we invest in new customer acquisition pays back £4 in 10 years, and 5x in 20 years Average cohort economics Naked Wines: All markets, Dec 2008 to Dec 2017 LTV return including forecast period 6.0x Breakeven USA and UK data to here within 2nd AUS data Cumulative Return 5.0x year to here 4.0x
Slide 43: By steadily investing more each year, Naked has steadily grown the mature business
By steadily investing more each year, Naked has steadily grown the mature business New Customers Repeat Customers (First, immature and other transactions) (Sales Month 4 onward) Sales Contribution Sales Contribution 21 (8) 38 8 FY14 28 (8) 57 14 FY15 29 (10) 79 20 FY16 36 (13) 103 26 FY17 43
Slide 44: The Financial Section
The Financial Section 1 2 2 3 Remind you of the Explain how we Give guidance and an financial dynamics measure overview of our of the business performance forecasting approach 44
Slide 45: We separate new customers from repeat customers and fixed costs
We separate new customers from repeat customers and fixed costs + Repeat + New Customers Fixed costs customers Adding and replenishing Underlying trading ● Overhead to run the customers: ● Repeat customer business ● Marketing to new customers contribution (after ● Discounted initial orders fulfilmen
Slide 46: This enables us to look through the fluctuations in new customers
This enables us to look through the fluctuations in new customers NWUSA P&L Components Grows as long as we continue to FY13-18 a. invest in new customers b. grow new customer investment 25.0 20.0 Will go up and down as we find 15.0 new channels and review The sum of the Inflation plus any £m 10.0 re
Slide 47: Six additional disclosures provide a snapshot of business value
Six additional disclosures provide a snapshot of business value New Customers Repeat Customers Fixed costs Additional • New customer • Repeat customer sales • Fixed cost performance contribution • Repeat customer base disclosure • LTV return contribution • Repeat customer sales retention Operational
Slide 48: The new customer disclosure describes the investment curve
The new customer disclosure describes the investment curve Average cohort economics Naked Wines: All markets, Dec 2008 to Dec 2017 £ and LTV return including forecast period LTV return is the multiple of 6.0x cash returned from the Cumulative Return investment by 5.0x year 20 4.0x 3.0x New Customer
Slide 49: The repeat customer disclosure describes the cohort evolution
The repeat customer disclosure describes the cohort evolution Naked Wines: Mature Angel Sales FY13-FY17 Repeat customer £m contribution is the Repeat customer profit attributable to 120.0 sales is the total those sales after sales from Mature fulfilment and angels in the period service costs 100.0 1
Slide 50: The really simple approach to a sales forecast
The really simple approach to a sales forecast New Customers Repeat Customers (First, immature and other transactions) (Sales Month 4 Onward) Sales Sales Reported F’Cast F’Cast Sales FY14 21 ~85% repeat 38 retention FY15 28 ~100% 28 32 60 57 + = conversion ~85% repeat Close! retention 29 ~100% 29 51
Slide 51: The Financial Section
The Financial Section 1 2 2 3 Remind you of the Explain how we Give guidance and an financial dynamics measure overview of our of the business performance forecasting approach 51
Slide 52: Guidance: Growth is our priority use of capital
Guidance: Growth is our priority use of capital Hierarchy Status at End of FY18 Based on current known pipeline 1. Investment in new £12.5m p.a. £5m - £8m additional in customers/growth FY19 2. Target net debt 0.5x Net debt c. 0.4x EBITDA, 0.7-1x (driven by FY19 EBITDA 0.7x/£17m lower year on year E
Slide 53: Total Group Investments in FY19
Total Group Investments in FY19 Growth New Customer Growing the right way Controls & Compliance acquisition (Growth) (Efficiency) (Safety) What Naked: Optimisation Systems: EPOS, Partners and digital, IT capacity Accounting esp USA Creating future growth Resource: Compliance, opportunities controls,
Slide 54: Using the reporting we will provide you can forecast the P&L
Using the reporting we will provide you can forecast the P&L New Customers Repeat Customers Fixed costs Additional • New customer • Repeat customer sales • Fixed cost performance contribution • Repeat customer base measures • LTV return contribution • Repeat customer sales retention Forecasting • Ne
Slide 55: Forecasting Example
Forecasting Example New Business Mature Angels (First, immature and other transactions) (Sales Month 4 Onward) Sales Contrib. Margin % Sales Contrib. Margin % Fixed Costs FY15 28 (8) -29% 57 14 25% (9) 3 2 1 5 6 Calculate Guidance 10-20% Retention Calculate based on Guidance based on growth, (400)bp
Slide 56: Naked Wines FY18 and FY19 guidance
Naked Wines FY18 and FY19 guidance Naked FY18 Naked FY19 New customer investment £12-12.5m £16-20m Repeat sales retention c.85% c.85% New to repeat sales c.105% c.100% conversion New customer margin -200 to -300bps YoY -600 to -900bpsYoY Repeat contribution margin +70-100bps Unchanged Fixed cost gro
Slide 57: Questions
Questions 1. Why are you changing from ROI? - It was unusual and confusing for a lot of investors - LTV brings closer focus into immediacy of payback - We are migrating our internal reporting and measurement processes in line with the change 2. Why don’t you discount your LTV? - We’ve looked at it -
Slide 58: Finance conclusion
Finance conclusion • We generate attractive returns by acquiring customers, vs opening stores • Payback is predictable and well established at Naked. Retail displays the same consistency of customer behaviour • As a result we’re going to investment faster in the customer base, and build supporting o
Slide 59: Summary
Summary We are in the fortunate position of having the OPTION to accelerate growth Trading, cash and dividends on track 10 year track record of growing sales by investing in new customer acquisition Investing £12m a year in new customer acquisition – at a payback in excess of 4 to 1 Today, we
Slide 60: Questions?
MajesticWinepic QUESTIONS?
Slide 61: Appendices
MajesticWinepic APPENDICES 61
Slide 62: Glossary
Glossary Additional disclosure Repeat customer The total sales from Mature angels in the period sales New Customer The sum of all investments in new customers in the period: Marketing and profit/loss Contribution Lifetime Value LTV return is the multiple of cash returned from the investment by year
Slide 63: Glossary (cont.)
Glossary (cont.) Majestic Retail, Commercial and Lay & Wheeler Nurture Customer A customer who has shopped once Active Customer A customer who has made a purchase in the last year Repeat Customer A customer who has shopped more than once in the last year Loyal Customer A customer who has shopped mor
Slide 64: Amended and extended Revolving Credit Facility
Amended and extended Revolving Credit Facility • Revolving Credit Facility extended to December 2022 • £65m headline value • Amended covenants: • Net debt : EBITDA max 3x, dropping to 2x over 5 years • Fixed charge cover >1.75x. End FY19 c.3x 64
Slide 65: Four year Naked Wines history
Four year Naked Wines history New Customers Mature Angels (First, immature and other transactions) (Sales Month 4 Onward) Sales Contrib. Margin % Sales Contrib. Margin % Fixed Costs FY14 21 (8) -38% 38 8 21% (7) FY15 28 (8) -29% 57 14 25% (9) FY16 29 (10) -34% 79 20 25% (10) FY17 36 (13) -36% 103 26