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Edited Transcript of BWNG.L earnings conference call or presentation 10-Oct-19 8:30am GMT

Half Year 2020 N Brown Group PLC Earnings Call

Manchester Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of N Brown Group PLC earnings conference call or presentation Thursday, October 10, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Lovelace

N Brown Group plc - CFO, Member of Executive Board & Executive Director

* Stephen Johnson

N Brown Group plc - CEO, Member of Executive Board & Executive Director

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Conference Call Participants

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* Caroline Rachel Gulliver

Jefferies LLC, Research Division - Equity Analyst

* Christopher Wickham

Equity Development Limited - Analyst

* John Stevenson

Peel Hunt LLP, Research Division - Analyst

* Kate Calvert

Investec Bank plc, Research Division - Retail Analyst

* Matthew Neil McEachran

Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail

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Presentation

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [1]

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Everyone get settled. Good morning, everyone, and thank you for coming to our half year results presentation for the 6 months ending 31st of August 2019.

Today, I'm joined by Craig Lovelace, our CFO, who you all know well. And I'm delighted to be here today to update you on the progress we have made in the first 6 months of our new strategy. We're building great foundations, and we have a significant opportunity as a customer-centric fashion retailer.

The running order this morning is, first, I'll run you through the highlights of the half. Following this, Craig will walk you through the financial performance in detail. I'll then provide a review of the half and update you on the good progress we are making with our new strategy.

So I'm pleased with the progress we've made in the first 6 months. There's a lot of activity going on in our business, which I'll talk to you about in more detail shortly. As a result of the new strategy, we have seen digital growth of 5% in our 4 womenswear and menswear brands and 84% of the product revenue is now digital. We've taken a disciplined and sustainable approach to operating costs and they were down 9.5% in the half. Our focus on profitable digital growth delivered a 4% increase in EBITDA to GBP 54.1 million. And I'm pleased to report a 3.9% growth in adjusted profit before tax to GBP 31.8 million and a return to reporting a statutory profit before tax.

I'm now going to hand you over to Craig, who will walk you through the financials.

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [2]

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Thank you, Steve, and good morning. So in line with our strategy of scaling back unprofitable marketing and recruitment, group revenue declined 5.4% to GBP 432.9 million in the half. Product revenue excluding stores in the U.S.A. was down 6.2% and financial services increased by 2.9%.

Let me talk you through the component parts. Product revenue was GBP 282.3 million, reflecting a continued shift to focus on U.K. digital growth, away from our unprofitable off-line and U.S.A. business, the year-on-year impact of closure of our stores and ongoing challenging market conditions. We saw good growth in our digital revenue, and Steve will talk to you more about that later in the presentation.

Financial services revenue delivered a good performance. The revenue was lower in the second quarter than the first quarter as a result of proactive measures undertaken on the implementation of credit limit increases and affordability assessments.

Gross profit. So this slide shows you a bit more detail on the movements in our gross profit. Product gross margin was down 190 basis points to 51.5%. This was impacted by a highly promotional market, a shift in our revenue mix away from our higher margin U.S.A. business, growth of our lower margin partnership strategy and clearly, no store revenue.

Financial services gross margin improved by 140 basis points to 57.4%, driven by the continued improvement in the quality of the loan book. This meant the group's gross margin of 53.5%, down 70 basis points compared to H1 last year.

Let me talk you through the EBITDA improvement in the half. Starting from the left, H1 FY '19 adjusted EBITDA was GBP 52 million. Financial services solid performance continued, delivering GBP 4.5 million of additional gross profit.

Product gross profit was down GBP 21 million, largely due to the managed ongoing decline of the off-line business. The decline was broadly offset by an GBP 18.6 million improvement in operating efficiency. This meant our adjusted EBITDA grew by GBP 2.1 million or to GBP 54.1 million.

And now turning to operating expenses. We continue to be disciplined with our control of operating expenditure. Warehouse and fulfillment costs were 5.9% lower at GBP 39.9 million, reflecting lower product volumes and continued operating efficiencies.

Marketing and production costs decreased by 7.1% as we continue to shift our marketing spend away from our legacy off-line business. And admin and payroll costs were down 14.5%, and I'll explore this even further on the next slide. Our adjusted EBITDA margin increased by 110 basis points to 12.5% in the half.

Depreciation and amortization fell slightly to GBP 14.4 million, meaning that operating profit before exceptional items and unrealized FX movement was up 7% to GBP 39.7 million. As a result, operating margin increased by 110 basis points to 9.2%.

As discussed, our total operating expenses have fallen by 9.5% compared to H1 FY '19. Out of the GBP 18.6 million reduction, GBP 8.5 million of this relates to the impact of the U.S.A. and stores. Therefore, our core operating expenses have fallen 6% half-on-half with this driven primarily through sustainable efficiencies within our administrative cost base. We've achieved this cost reduction whilst absorbing a circa GBP 4 million cost from the VAT partial exemption ruling announced in November 2018.

Turning to group profit. Net finance costs were GBP 7.9 million, an increase of GBP 1.4 million as a result of the group's increased debt. Therefore, adjusted PBT increased 3.9% to GBP 31.8 million. We delivered a statutory profit before tax in the half of GBP 18.8 million, which was driven by GBP 12 million of fair value FX adjustments due to the devaluation of sterling offset by exceptional items totaling GBP 25 million.

Exceptional items. So as previously announced, in line with the wider industry, we experienced a significant increase in the number of PPI claims in the run-up to the 29th of August deadline. And as a result, we've made a further provision of GBP 25 million. The deadline has now passed, and we are processing the remaining claims. All remaining claims will be cash settled in the second half of this financial year. These financial readjust provisions, coupled with the legacy tax costs which we have an agreement in principle or have settled, would have contributed to an exceptional cash outflow of circa GBP 200 million over the last 5 years.

Net debt. From left to right, this slide shows the movement in group debt and core debt. Given the significant majority of the group's debt to securitize on its loan book, which is nonrecourse for the company, this is a more appropriate way of showing our debt position. We generated an underlying cash flow of GBP 42.5 million. CapEx was GBP 21.9 million. We paid dividends of just over GBP 12 million, finance costs of GBP 8.1 million and tax of GBP 1.3 million. Cash paid out on exceptional items was GBP 12.8 million, resulting in net debt at the end of the period of GBP 482 million.

Core debt, that is the utilization of our revolving credit facility plus cash, was GBP 67.5 million, down GBP 10.2 million to year-end. This means the group's leverage is 0.5x on the last 12 months EBITDA on net debt basis, given it excludes securitized debt and associated interest.

Hedging. So in line with our hedging policy, we are fully hedged for the rest of FY '20 at a rate of 1.36. Moving into FY '21, we have hedged 69% of our U.S. dollar requirements at a blended rate of 1.32. We are appropriately hedged, in line with Board policy, and we believe we are solidly placed to mitigate any potential short-term impact of currency volatility.

Financial services. Total gross debtors fell by 2.9% to GBP 658 million. At half year-end, our bad debt provision was GBP 78.2 million compared to GBP 111.9 million at H1 FY '19, down 30.1%. This has been driven by an underlying improvement in the profile of the book. Our impairment rate has fallen to 11.9%. This represents a 230 basis point reduction from the previous financial year and a 460 basis point reduction compared to H1 FY '19. As a result of the improvement in the bad debt provision, our net customer loan balances have increased 2.5% versus the comparable period last year. And encouragingly, arrears rates fell in the period from 9.7% to 9% as a result of the continued improvement in the quality of the book and a disciplined approach to credit risk.

Let me now talk some of the -- through some of the initiatives we've recently launched in financial services. Year-on-year, we have successfully recruited a greater number of new credit accounts through continued innovation. We launched a 6-month introductory 0% interest offer in spring alongside lower headline rates and a discount for opening a credit account across Simply Be, Jacamo and JD Williams. There was also an initiative launched to offer larger initial limits of up to GBP 850 to lower risk customers who pass our enhanced creditworthiness assessment process, and this was part of a campaign to support the sale of higher value items. Early signs for both are encouraging.

As I highlighted in May, we undertook a successful trial to unlock an opportunity to use new data and analytics to lend to more customers and prevent financial harm. I'm pleased to say we're partnering with a leading fintech company Aire and this is now live.

And finally, to give you an update on our guidance for this financial year. We have changed the range for product gross margin from flat to down 100 basis points to down 50 basis points to down 150 basis points. This primarily reflects the increasingly competitive market and the impact that will have on our anticipated discounting levels. The range for financial services gross margin has also been revised. We now expect a range of flat to up 100 basis points as we have seen an improvement in our underlying impairment rates.

Group operating costs are now expected to be down 3.5% to 5.5%, mainly due to the continued disciplined cost control and in particular, further maximizing embedded efficiencies.

Net interest is slightly up to GBP 18 million to GBP 19 million, driven by cash outflows associated with the spike in customer redress payments and the resulting impact on net debt. There is no change to our tax, depreciation or CapEx guidance.

And finally, FY '20 net debt is expected to be in the range of GBP 470 million to GBP 490 million with the increase driven by the previously announced increase in redress payments. So that's it for me. Now over to Steve.

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [3]

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Thank you, Craig. So we have continued the acceleration in the business' transition as we focus on profitable customers and dial back unprofitable marketing and recruitment. This strategy has delivered an increase in digital revenue in the half and an increase in profit. You can see from the chart that 84% of our revenue is now digital, which is an increase of 4 percentage points in the last 6 months and 8 percentage points over 12 months. Our off-line business is now 16% or GBP 45 million as we continue to scale back unprofitable marketing and recruitment. We expect this trend to continue in the second half of the year.

Turning to our digital performance by brand. JD Williams delivered revenue growth in digital revenue of 4% compared to the previous period. Simply Be also grew digital revenue by 4% compared to the prior period. As I outlined in May, Simply Be's performance reflects our continued move to customer lifetime value modeling in this financial year. We grew Simply Be customer accounts by 5.2% in the half.

Our focus has been on growing Ambrose Wilson digital revenue, and we were pleased with the 10.5% growth in this period. I'm particularly pleased with the digital penetration of the Ambrose Wilson customers, which increased from 46% to 89% over the last 12 months.

Jacamo delivered a good performance with digital revenue up 6.6%, and I'm pleased that we grew customer accounts by 8% in the half.

Product brands digital revenue declined 5.7%. Strengthened digital revenue growth at Oxendales and Figleaves was more than offset by the managed decline of House of Bath, Premier Man and High & Mighty.

So today, I'm excited to give you an update on the progress with our new strategy. We're 6 months into a year of transition for the business as we begin to implement our new strategy and make the required changes to our business model and ways of working. We have made good progress and the necessary building blocks for the success are being put in place.

So what have we done in the last 6 months? So I'm really excited about the work we've done on our brands. We have spent a substantial amount of time working on the future shape of our brand portfolio. We now have a clear and actionable market segmentation and are finalizing the strategic direction for JD Williams, Simply Be, Ambrose Wilson and Jacamo as well as all of the product brands. Significant progress has been made, and we will be announcing final plans at the full year results.

Our ambition is to deliver sustainable, profitable digital growth whilst generating sustainable free cash flow. This will enable us to bring down net debt, invest in the business and deliver shareholder returns. We now have a clear path to returning to free cash flow growth as we have surpassed the PPI deadline and have an agreement in principle or have settled all legacy old tax cases, which have combined accounted for a cash outflow of circa GBP 200 million in the last 5 years. I'm pleased this is coming to an end and excited for the prospects of the business.

So turning to the 5 pillars. As a reminder, we have 5 core focus areas around which we have now aligned our operational planning and delivery. First, we will focus on the U.K. customers to maximize our core market before leveraging any international opportunity. Second, we will simplify the business to deliver a crisper, clearer brand proposition for our customers. Third, we will continue to enhance our product offering for our customers to deliver increased loyalty. Fourth, we will use analytics and data to enhance our operational efficiency and deliver a better customer proposition. And finally, underpinning all this will be improvements in our colleague engagement as we inspire our colleagues to further delight our customers.

Let's go through the progress. So in the last 6 months, we've invested in our 4 core U.K. brands. Our focus has been on building fashion credibility for these brands through more aspirational communications grounded in deeper customer insights. I'm excited about the new approach we are taking, and I'm delighted that we have been shortlisted by Drapers for the Best Fashion Marketing Campaign award for Simply Be. We have used established channels like TV and press and newer brand building channels for us such as paid social and outdoor media. You can see some examples of our new approach to outdoor media on the slide. We have maintained our online womenswear and menswear market share over the last year, which is a good performance as we have been moving away from unprofitable sales. We closed down our international division and exited direct marketing to the U.S.A., removing an unprofitable part of our business. This has enabled us to redeploy key skills to support the U.K. business. We now have a clear and single-minded focus on the U.K.

The past 6 months has been one of real change for our social media strategy. We tested many new ways of working and as a result, have organically grown audiences at a significantly faster rate than before. Our social media following is low. Simply Be has just over 100,000 followers, JD Williams has 19,000 and Jacamo has 10,000. This is well short of where these brands could be and represents an exciting opportunity.

So let me give you an example of what we have done at Jacamo. So we started by wiping the entire Jacamo Instagram feed. Posts are now product focused, aesthetically pleasing and includes a way to find product. Results have been very encouraging, demonstrating the exciting potential of social media as this is increasingly where our customers are engaging.

We've also produced a swimwear shoot for JD Williams using Valerie Campbell, so Naomi's mother. Valerie posted 3 Instagram posts on her own feed, which gained 25,000 likes collectively, alongside our own social posts, which resulted in a significant uplift in our Facebook reach and Instagram impressions.

Early days, but I'm pleased with the initial progress.

Turning to what we have done to simplify the business. In the last 6 months, we have moved to an agile way of delivering improvements and streamlining the user experience. We now have over 125 colleagues in our IT department working in 20 squads. We've done this to deliver improvements to the customer experience.

I can give you an example of numerous improvements, but I'll give you one which we have delivered. We've simplified the navigation structure on the Simply Be mobile app. Previously, there were 43 links to choose from when the customer opened the menu on Simply Be mobile. We tested a simplified version with 10 core areas. This resulted in an increase in add to bag and conversion for Simply Be mobile.

Our recently opened Hyphen Interactive Live Photo studio is beginning to transform our e-commerce photography capabilities and has contributed to our cost efficiencies delivered in this period. We have good momentum and look forward to delivering more improvements in the next 6 months and beyond.

In November, we will launch our automated returns facility at our warehouse at Shaw. Our returns facility has remained unchanged for 30 years despite increasing volumes. The current operation is constrained from a design perspective, meaning the current processes needed improvements. The new facility will deliver benefits to the customer through faster refunds, better stock availability and improved presentation of items returned to stock. This will also deliver operational benefits by removing 66% of the receiving and sortation activity.

Finally and importantly, it will benefit our colleagues as the design is streamlined, has a brighter, lighter and improved work environment.

Our next focus has been on providing better products for our customers. We have placed customer at the heart of decision-making across the business and have focused on understanding our customers' views on our products. In particular, we have taken learnings from digital product reviews using Bazaarvoice and through weekly blind tasting sessions of our products versus competitors. We now have ensured that listening to our customers is more deeply embedded in our culture.

We have continued to drive further innovation through our market-leading body scanning technology and 3D design and product development to deliver continued fit improvements. We now have a much better understanding of our customers' shape, having scanned over 1,000 to date. This has fundamentally changed our approach to fit, moving it forward as a competitive differentiator.

We've also selected our first clothing ranges using virtual technology, which has enabled us to design and select hundreds of styles in less than 2 weeks. This will drive sustainable cost efficiencies as it will significantly reduce our development time and negate the need for sample production.

We have brilliant product and we are focused on making it even better with our work on fit. However, we know from listening to our customers that they also want an improved brand proposition from us. Using this feedback, we have made good progress in improving our branded portfolio to complement our own label ranges. In September, we launched Sea-Salt, Joules and Hobbs as new brands for JD Williams. And we have just launched Tommy Hilfiger on Jacamo and we'll be launching Calvin Klein shortly.

Monsoon, Oasis, Lacoste and Lyle & Scott will also expand their product across JD Williams, Simply Be and Jacamo. We are continuing to improve our offering and have some exciting new names in the pipeline.

Turning to our use of data. We have built good foundations in the last 6 months as our enhanced use of rich data has continued to improve customer insight in our business. We have moved to customer lifetime value investment models in our digital marketing strategy to drive a more sustainable financial outcome. I'm pleased that our innovation in data resulted in winning the Drapers Best Use of AI award in May. We have partnered with Decoded to deliver the data fellowship, an internal program to develop data skills across N Brown. We are now on the second cohort of this to ensure that the use of data is embedded across our whole business.

We are early stages of trading smarter with data, but we have built good foundations and continue to develop our own in-house capability, bringing new talent into the business.

Finally, but most importantly, as I outlined in May, we believe that better engaged colleagues will deliver a better customer experience. We've made changes to our trading and marketing teams to increase pace and customer ownership, whilst at the same times we are also investing in critical skills in data science and user experience across the business. We've also aligned all colleagues to the same reward framework of EBITDA growth, digital sales growth, customer satisfaction, reducing financial services arrears and improving employee engagement. This means everyone is eligible for a bonus and everyone will be remunerated and incentivized around the same goals. This is a significant step forward.

I'm hugely excited about our new vision, mission and purpose and refreshed values. We launched these to our colleagues on Monday to give them a clearer indication of the direction our business is heading in and how we behave. The process has been developed bottom-up by colleagues across the business and not top-down from senior management. This is really an important step in creating an engaged and dynamic culture and one I am really proud of.

We've also improved the capabilities around the business to support the strategy. In the last 6 months, a Chief Brand Officer, Operations Director and Strategy Transformation Director have joined us, bringing a wealth of experience to the business. Within our senior leadership team, we are adding capabilities all the time and bringing in new talent with an example being we recently brought in a new head of SEO.

So we've made good progress against the 5 KPIs, which the entire business is focused and rewarded on. We've grown digital sales in the half, we've increased EBITDA, we've increased our Net Promoter Score, we've reduced financial services arrears and we measure our colleague engagement annually. And despite all the changes we are making, I'm confident our colleague engagement is moving in the right direction.

So in summary, we are 6 months into the year of transformation for the business, a transitionary year, and I am pleased with the good strategic progress we are making. We have an ambition to deliver profitable digital growth, whilst generating sustainable free cash flow and reducing net debt. And I am pleased that the period of exceptional items is coming to an end as we head into the next financial year. We remain focused on implementing our plans, and the Board's full year expectations are unchanged. We're excited about our future. And with that, I'll turn to Q&A. So please hold up your hand if you want to ask a question, and I think Sean and Vanessa will wander around with the microphone. Thank you.

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Questions and Answers

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John Stevenson, Peel Hunt LLP, Research Division - Analyst [1]

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John Stevenson at Peel Hunt. A couple of questions to get us going. Just on the customer performance. I mean, obviously, a lot of change going through. I'm wondering if you could talk whether qualitatively or quantitatively on what's been going on in terms of active customers within the brands and sort of recruitment and how they're shopping sort of spend, if you want to focus on digital rather than the overall brand. Second question, last time you talked about using AI and data for ranging. Can you comment if that's started to have an impact on availability and performance of product on the website? And finally, just to pick up on what you're saying on financial services, Craig, on the sort of not so much credit timing but obviously, you felt like you've sort of firmed things up in the second half. Maybe you could talk a little bit in more detail about what you've done.

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [2]

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Sure. So that's growing metrics, finishing on financial services and whether or not we're using AI in merchandising. So in terms of the metrics themselves, we're focused predominantly at the moment on customer lifetime value and digital growth of the brands that we're focused on. And as part of the brand review, our intent would be to signal at year-end where we are heading and what the shape of the business would be like at that stage. And effectively, what are the measures that would be appropriate at that particular point in time.

So what we are purposely not doing is going into the measures at this stage because we may change some of the thinking around brands and some of the future direction of some of the product brands. So the business at the moment is focused specifically on sustainable, profitable digital growth. We're pleased with the 5% increase on the 4 key brands and we know that we're moving forward from a customer lifetime value perspective. And actually within that, we have grown new credit customers as well. So that's where we are at the moment. I'll talk more at the year-end on that point.

In terms of the merchandise piece, in terms of whether we're using AI in terms of range planning, yes, we are. We're also using it in financial services now with the recent adoption of the piece that Craig talked about from a fintech perspective. So we are using it. It is helping and is improving our effectiveness particularly around sales. When we do a sale, that's helpful, but also in terms of it starting to play through into how we are starting to buy a little bit differently as well. Very, very early days would be my assertion on that point. But yes, we are moving forward on that.

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [3]

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So from an FS perspective, John, the provision has continued to come down. This has been a learning experience since we introduced IFRS 9. It's a very detailed model. But the more effort you put in at the front to effectively risk manage and don't forget we've been adding more and more new customers at lower rates who are by their very nature lower risk anyway. So throw that into the cauldron and you are generally getting a provision, which is increasingly reflective of the risk of the book. But this has been a long journey. I mean we started out at 17.9% provision, I think, 18 months ago, and we're now at 12%. We're getting a much more refined -- continuing to refine the view.

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John Stevenson, Peel Hunt LLP, Research Division - Analyst [4]

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It just sounded from the -- sort of the -- your slide as though you'd actually -- there's been like an incremental tightening sort of coming into the second half. Is that...

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [5]

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I think -- I mean introducing and having a 24.9% rate for the majority of new customers by its very nature means you're pivoting toward a less risky customer. There have been some regulatory measures as well, which have impacted to enhance affordability assessments, so where you've got an extra layer of behavioral scoring and assessment on customers that perhaps in past days you would have lent to. But now if there's any sense that they're not going to pass that behavioral score, we wouldn't be going there. So I think it's just generally internal and externally recognizing that offering credit is -- we need to be more and more refined and AI speaks to that as well.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [6]

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It's Matthew at Singer's. A couple of related questions, if I may. Just you mentioned that the product sales performance in the second quarter was impacted by a few things, including certain elements of the financial services model. I think you're probably referring to income capture, which may or may not be hampering the kind of sign on process. Do you want to just elaborate a little bit if that is part of it? Or whether or not you're through that and you've now got a smooth process for the extra bit of information?

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [7]

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Refining our view on who we onboard. I mean, you had credit limit increases. So this is part and parcel of a wider industry move where you have to write proactively to people about credit limit increases. That's always going to have an impact, but it was more affordability checks than the tightening of those as well. So this is part and parcel of running an FS business and it is just credit refinement, and it will have had an impact on this without a doubt for the right reasons from a customer perspective.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [8]

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Do you see any of the applications in technology that you're deploying at the customer end enhancing the kind of -- smoothing out some of those processes?

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [9]

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Definitely. So -- I mean when you're -- when we're talking about partnering with a fintech, it's effectively enhancing our visibility on their credit worthiness, it's taking more data sources on their day-to-day income and expenditure, and it's making sure you have an even more refined view on those customers that could on a very simple view be considered marginal. But actually if you get more comfort on their day-to-day income expenditure, it's a sensible and risk managed approach to offer them a personal account.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [10]

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Great. And the other question was on the other side in terms of cash customers. You've now had a while in terms of looking at the performance and the repeat rates of cash customers. What can you tell us? Are you getting sufficient repeat and frequency to warrant that recruitment in the cash side?

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [11]

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I mean cash is a difficult one to call because of course, the move away from a lot of the legacy off-line business. They were cash customers, but they were unprofitable when you looked at them from a contribution perspective. So we're still encouraged the majority of new customers signing up are cash customers. We are growing that, but there's a lot of moving parts as we still exit some of the off-line business. So we're moving forward. Clearly, overall as our business model, we'd like people if it's applicable and it's appropriate to them to open a personal account as well and shop that way.

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [12]

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I think, Matthew, the move towards customer lifetime value modeling should be considered when answering that question. We want as many people to shop with us as possible however they want to shop with us. But what we want is to make sure that we have a sustainable relationship from an FS perspective. Hence, some of the changes that Craig's covered. But ultimately, we are shopping with the right people who we know will produce value over time. And I would sort of answer that question based on the work we're doing on customer lifetime value modeling. I think that's a very positive step forward.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [13]

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Yes. Great. And then the final question just in relation to the kind of hope that free cash flow will turn positive at some point. Just in relation to working capital, could you just give us a flavor as to your thoughts on -- and this is aside from debtor book financial services expansion.

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [14]

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So let's take the word hope away because hope is always a difficult one. I can't honestly control hope. Look, the reality is the known knowns are that we've had since October 16 known financial redress numbers, and it's really important. The deadline has passed, August 29 was the deadline. The cash goes out primarily by Christmas time and then that deadline has passed. I haven't been able to say that for 3 years on -- from a tax and legacy cases, we're working through very proactively with HMRC. The last 3 years have been effectively chipping off old structures, settling them, moving forward and I expect within H2 the final 2 pieces of that jigsaw puzzle will go. And then, this group I really am very keen to be a very boring tax group from every perspective possible so I can put that behind me as well. So the 2 big weights from an exceptional perspective which have driven that GBP 200 million is not a hope factor, it's a known, known. It stops.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [15]

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And working capital in the context with -- what's the sort of the outlook for working capital, stripping aside the financial services expansion?

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [16]

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So clearly, I mean the book -- if the book continues to grow, that's a good outflow of cash, but we've been tight on stocks. So at the year-end, we were 10% down on the stock. We're still focused on keeping and improving our stock turns. On -- from a creditor's perspective over the last couple of years, we have refined from a creditor perspective. We're not excessive in terms of payment dates. I don't see in a normal course of business wild fluctuations in working capital. We've had some big years where the book has grown heavily and you've seen a big increase in net debt due to that. I think a more normalized level of book growth is where we would aspire to.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [17]

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Yes. And the introduction of new brands into the external brands, there is no particular weight on receivables?

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [18]

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No because we're not going to pile in and buy huge amounts of stock and sit on that stock. It's steady as she goes, introduce and see how they work, not committing heavily upfront to that stock.

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Caroline Rachel Gulliver, Jefferies LLC, Research Division - Equity Analyst [19]

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Can I just ask -- sorry, it's Caroline Gulliver from Jefferies. Can I just ask a small follow-up on the Instagram, the changes you made for Jacamo? You talked about the fact that you could effectively start again. And without wishing to give too much away about what you might say next full year results, what sort of new approaches you're taking on social media?

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [20]

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Yes. So I guess it's sort of taking a step back. I could've given you some numbers that talk about thousands of percent increase from the first piece of work that we've done. But clearly, the point I'm trying to make is off a very low base, and that's why I've not chosen to put those sort of performance metrics in. They look very good, though. I mean, very good. The key thing here is I think the business over the last sort of 6 to 12 months has really started trying to understand the sort of return on investment model, again, moving to customer lifetime value. We've implemented digital attribution models, which are sort of marketplace models. And what that's telling us which we were aware of anyway, but it's nice to see it coming through sort of analytically, is that we have opportunity in our sort of social space and also natural SEO.

So from here on in, all of our brand advertising will pivot potentially a little bit away from paper, which we know, but into -- away from sort of PPC and Google shopping, more into the sort of building the brand through our social and natural search capability. So that's not to say we're walking away from those things, clearly, it's all part of trading, but it's just -- it is saying we have a great opportunity in that space. And I think, to my answer earlier on some of the metrics, one of the things we should do at the year-end is talk about where the shape of the business is going, but also where we think those types of opportunities are and what we will therefore sort of measure as we go forward. So I'd like to cover that more at the year-end not to -- being straight forward, not to dodge the question, it's just we need to work that through into a bit more detail at this stage.

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [21]

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The shape of the group's marketing spend is -- I mean, it's changed so much over the last 5 years and I'm well aware that there's a desire for more statistics on that going forward. The reality is, go back 5 years and the predominant spend was on paper. Paper still has a part in this business. So certainly, we can foresee that's still a stimulus to good contribution growth for some of our customers, but the reality is actually you're now moving into a space where 3 years ago, you were increasing your spend on paid search. That has got a lot more expensive over the last 2 to 3 years as more and more people have moved into it. So now we're refining that spend and actually now moving further into paid social. And actually, our spend on brand has gone up in this half compared to last year predominantly in TV campaigns with -- on E4 with Simply Be and also Ambrose Wilson. So that is a call we're making to try and build a brand. It would have been very easy to have pumped up the top line with spending a lot on paid search, but it's actually not driving contribution. So this is part long term, part short term.

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [22]

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Yes.

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Caroline Rachel Gulliver, Jefferies LLC, Research Division - Equity Analyst [23]

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Sorry, can I just ask then 1 follow-up as well? Again, not wishing to preempt what you might say next year. The quite significant digital decline in the product brands, obviously, quite different experiences by brand. Can you give us any more color on why you're seeing online sales go down?

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [24]

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Yes. Sure. So paper does drive some customers online. So I think that's one response. And clearly as we're working towards understanding the refinement of those models, clearly, that's an action that you don't really know unless you sort of work through that. So that's a part of it.

Actually, just sort of moving the investment into the 4 key brands and actually being a little bit more sort of delivering on what we say. So we're saying these 4 brands are important. So in the business, what we're doing is we're shaping the investment models to focus on those 4 brands and taking money out of some of those product brands. So that's a good thing.

And then I think the sort of final part I would just come back to is the sort of customer lifetime value modeling piece and where we want to try and build our brands for that sustainable future. So again, I think we -- if we wanted to, we could sell some more on those brands, if we just wanted to hit a sales number. But it isn't building that sort of sustainable story for the future. So all of it is intentional and we're very comfortable with where we are on those brands.

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [25]

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Kate Calvert from Investec. Three questions from me. First one on JD Williams performance. Sales are still down. Is this still the drag of the Fifty Plus?

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [26]

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So it's not necessarily the drag of the Fifty Plus. That's not something we're talking about in the business anymore. That has definitely annualized twice over. JD Williams is 20-odd percent -- was 20-odd percent sort of paper. That's just moved over the sort of 80% mark. So whilst that brand is important to us, we are taking a customer-led approach as opposed to a brand-led approach. That's quite different, I think. So we have the same sort of inefficient spend that goes on within that brand for the customers who shop in the same way as they do on some of the product brands we've just talked about. So we are applying the same principles and the same rules at a customer level rather than a brand level. So again, at this stage, we're very comfortable with that -- with where we are on that.

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [27]

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Second question is, obviously, the work you've been doing on the brand segmentation, you said you'd come back to us with more detail. But when do you think the product that will come out as a result of this will hit the website? Will that be more autumn next year? Or will we start to see some of that come through this spring?

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [28]

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That's a great question. I mean, our product is developing all the time. We're reducing our lead times. We should talk a little bit about the sort of weekly blind tasting sessions. We'll move sort of weekly, biweekly depending on what time we do them in the year. But effectively, we get our customers in and we put a bunch of our customers and a bunch of people who look like our customers from a data perspective, and we invite them in and they talk to us about our product, but they don't know it's our product because we cut all the labels out of it. And they are giving us a sort of preferred product between ours and our competitors. And that feedback is really, really incredibly rich. And therefore, what we're doing on a weekly basis is we're taking that feedback and feeding it back into the sort of product cycle.

So improvements are actually starting to appear now and will continue to gain momentum over that period of time. So I wouldn't assume that the product is sort of waiting for the brand piece. Internally clearly, we also know where the brand piece may turn out. We're well developed with it because of the things that we've been doing in the organization. When I talk about putting customer at the heart and listening to them, we are literally listening to them telling us whether they like our product or not. The product team are in the room. It's very interesting feedback for them to receive firsthand. But clearly, on the back of that, there's a process that goes into sort of moving it forward quickly. And I'm pretty pleased with the progress the product team are making. I'd also say it's really good product in the first place. So what we're not saying is we've got a difficult situation here. We're saying we've got great product. We want to make it even better. And that's the process that we have in place.

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [29]

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And the final question is on the additional third-party brands. Is there any exclusivity within that in terms of sizing or...

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [30]

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There is a little bit of exclusivity in 1 of the deals -- 1 or 2 of the deals. I would need to come back to you with that one, Kate, in terms of the full detail, but I don't want to sort of get it wrong. So we'll come back to you on the full detail, but we do have some exclusivity on some of those deals, absolutely.

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Christopher Wickham, Equity Development Limited - Analyst [31]

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It's Chris Wickham from Equity Development. Just a couple of things. You talked about your 125 strong headcount in IT. I was just wondering if you'd tell us a bit more what like the staff churn is in that space. And what you'd -- where you'd expect it? And a little bit more about the actual roles within that 125 that you have got? And then just going back to the earlier point, I mean, perhaps you'd give us a bit more granularity about social media profile and then how you get that up?

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [32]

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Yes. So in terms of the 125 colleagues we've got in IT, so effectively, we moved from nothing to 125. We did have some small sort of agile squads being -- starting to build, which we built around sort of mobile app development historically. So we've taken that concept in essence and we've accelerated it. So it isn't new for some members of our business to understand how -- that's how we work. What we've done over the last 6 months particularly is absolutely ramp that up at an enormous pace. So we're now at 125. In the next half of the year, what we want to do is connect those 125 guys in IT a little bit more with the business. So starting to get the business users operating within the scrums that you would expect in a sort of typical agile environment. So we're halfway through that process, would be the way I would describe it. Right now, turnover in that, I don't have the stats off the top but I know it's reasonably low. Lots of engaged colleagues really enjoying the empowerment, really enjoying the way that this works in our organization. We've moved from big program delivery to micro services and the feedback is very, very positive from our colleagues.

In terms of the social media question, look, we've given some examples in the presentation, the work that we're doing, a sort of collaboration with Valerie Campbell trying to start to use sort of real stories to enable us to create that sort of engagement with our customers, but a lot of it clearly flows from the brand advertising. So I don't know if you noticed as you came in that the brand advertising has changed slightly in the sense of how it's positioned. So Simply Be, the new icons piece, is all about sort of celebrating the curve implicitly. We know that customers of size 16 and over are underrepresented from a fashion perspective and underrepresented from a catwalk perspective in the way that that's put forward.

So we're now using that sort of iconography to start to tell stories and get people engaged from a social media perspective. Jacamo is moving a little bit from the sort of big guy to the sort of what makes the real man in a sense of Haskell is talking about his day-to-day and his thoughts and his feelings. So we're moving a little bit more into the sort of it's all about your moment, it's all about as a guy, and what makes the man rather than the size of the man, basically.

And JD Williams, we've moved to an interesting campaign, which is all about how ladies of a certain age can't necessarily accept compliments and lots of compliments get given. And that's the sort of story that we're trying to create there. So storytelling through social engagement and taking that sort of ad and running it through the line is how we're going to try and engage more customers in that space as well as, as you heard me say, investing in a ton of capability to come in and help us.

Any more questions?

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [33]

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Thank you very much for coming along.

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Stephen Johnson, N Brown Group plc - CEO, Member of Executive Board & Executive Director [34]

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Yes. Thank you. Yes. Thanks very much. Have a good day, everyone.

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Craig Lovelace, N Brown Group plc - CFO, Member of Executive Board & Executive Director [35]

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Thank you.