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Edited Transcript of WINE.L earnings conference call or presentation 24-Jun-20 1:00pm GMT

Full Year 2020 Naked Wines PLC Earnings Call

Hertfordshire Jun 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Naked Wines PLC earnings conference call or presentation Wednesday, June 24, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Andrew Crawford

Naked Wines plc - Group CFO & Director

* Nicholas James Devlin

Naked Wines plc - Group COO, CEO & Executive Director

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Conference Call Participants

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* Andrew Wade

* Benedict Anthony John Hernaman Hunt

Investec Bank plc, Research Division - Research Analyst

* Jonathan Pritchard

Peel Hunt LLP, Research Division - Retail Analyst

* Wayne Mervyn Brown

Liberum Capital Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the call. I will now hand over to Nick Devlin, CEO, for a 40-minute presentation. (Operator Instructions)

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [2]

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Good afternoon, and welcome to the Naked Wines annual results for financial year '20. It's a pleasure to be giving a really positive set of results to you all today. I would love to be doing it in person, but we're not living through normal times.

With that said, I'm very excited to be able to share with you the first year of performance for Naked Wines as a fully independent listed company.

We're reporting today a very strong set of results. At the top level, we see revenue growing 14%, slightly ahead of expectation. Digging underneath that, I think there's a really encouraging acceleration of all our key metrics. I mean especially momentum building throughout second half of the financial year. And you've seen that reflecting it pretty high sales retention and higher payback metrics in the reports for the half.

All told, I think the most important message here is that the business is building real momentum as we start to deliver on our strategy of growth for the independent pure play making model in all of our key markets. And the position we sit in today with a strong balance sheet and GBP 55 million of net cash gives us strategic flexibility to look for real opportunity through a time of disruption.

Overall, the group, that's very well positioned. I think we're especially well positioned, given some of the changes in consumer sentiment and consumer behavior we're seeing in all our markets.

I'm going to talk to you later about our strategy for the year ahead. But first, I'm going to hand over to our CFO, James, who's going to take us through some of the details of the financial results for the year gone.

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James Andrew Crawford, Naked Wines plc - Group CFO & Director [3]

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Thank you, Nick, and good morning, everybody. Good afternoon.

I think to start with, it's worth just reminding ourselves of the context of the reshaping of the group that's happened in the last 12 months. We've moved from being a group that was asset heavy, both in terms of fixed assets in stores and a substantial balance of working capital to a business which is very asset light. You know how that balance sheet which is predominantly cash or cash still to come from the sale processes that we've been through. We have shrunk the group to about 40% of the scale in terms of sales, but it is the portion of the group, which is growing. So we've moved from a 6% to a 14% sales growth rate. But the piece of the group that we sold was the piece that was profitable. However, those profits were shrinking significantly year-on-year. And we're left with a group which is just under breakeven, but this profitability has increased year-on-year. That gives us a very strong balance sheet with GBP 55 million of cash on hand at year-end, as Nick says.

To put that in context, that is more than 100% of the annual fund balance, the liability that we hold to our customers or it's over 2 years of our current fixed cost base. And we have cash still to come from a combination of the Escrow arrangements relating to the transactions, a store, which we continue to hold that is conditionally sold. And contingent consideration on loan note relating to the sale of Majestic.

So looking at the continuing business and performance, we feel it is a year where the results really show that the business model is delivering consistently.

Sales are up 14% to GBP 203 million, crossing the GBP 200 million mark for the first time. Strong component of those is driven by our repeat customer base, the Angels, where we've delivered 15% more contribution year-on-year. That's driven by, in part, at least, us retaining sales year-on-year from those customers and sales retention was up to 83%, which is 2 percentage points better. We have inserted a metric this year, which is the Active Angel base we've got, the number of unique Angels awarded in the period. That is nearly at 600,000, up 11% year-on-year. And then in terms of the rate at which we're recruiting new Angels, the investment we've put into recruiting new customers is up 20%, GBP 22 million nearly. And we obviously need to make sure that's a good investment and we look at our payback ratio, which is, we have targeted at 4x, actually, we delivered 4.9x in the year. That's a 0.8x improvement year-on-year.

I think always useful to look at those 2 last metrics together and multiply them together to think about the future value we've generated for the business. And that would be GBP 112 million or 43% up year-on-year. So both strong delivery from our repeat customers, but also a strong rate of growth in the rate at which we're bringing on board new repeat customers. This is now a business where the U.S.A is the largest component, and there is clear blue sky developing between the U.S. and the U.K., which is the second largest market, both in growth, where the U.S. has grown at 20% this last year, the U.K. 11% and Australia at 3%. And also in absolute scale with the U.S. now comprising 45% of the entire business.

I think important to say, don't write-off the U.K., it's still delivering double-digit growth. And for those who noticed the announcement that I would be moving to the role managing that business, I don't intend to let the U.S. business get out of sites of the scale of the U.K. There's ample market opportunity and good reason to believe we can continue to grow that business.

Australia is a business where, in the first half, we said that we wanted to be disciplined around investment and had slowed down the rate of growth. You see that in the second half as well. But we do believe that, that's a business that continues to have runway to grow significantly.

Moving over to the next slide. In terms of the profitability of the business, that's improved from a GBP 3 million loss in fiscal '19 million to GBP 1.4 million loss this year. As ever, useful to remember how this business grows, so we've grown through both growth in the repeat customer numbers, but also by delivering more contribution from each customer that we have. And yes, a relatively good mix of those 2 drivers of improved profitability from repeat customers. We then reinvested that money into new customer investment. So we've reinvested GBP 3.8 million of the GBP 5.9 million of repeat customer contribution growth and also reinvested some of it into fixed costs for the GBP 0.5 million increase in the fixed cost base. But the remainder of that repeat customer contribution growth then drops to the bottom line, hence, we move forward in the adjusted EBIT measure.

Getting more granular behind that increase in repeat contribution, it is coming because, as in previous years, we continue to grow the business by retaining the customers we have. And adding new customers, i.e., delivering payback from the investments we made in previous years. And you can see across the top, the steady increase we have in the investment level, the payback converting to the following year on top of the retained business, delivering that growth.

I think also it is useful to look on the right-hand side and see how we see continued improvement in retention as cohorts get older. Our older cohorts there from FY '14, FY '13 and older at or ahead of 90% retention year-on-year. And that is the kind of performance that gives us the confidence to keep investing. And the kind of performance that enables us to forecast with some confidence the payback we expect to get over an extended time horizon.

So looking at those paybacks. The investments we've made and that retention translates to an attractive payback. Traditionally, we focused very much on a 20-year payback number. In the year, that is 4.9x out of the investment that we've made, what we forecasted to be. Yes, a number of people have challenged us, that's a very long time. And whilst we look at those retention characteristics, and we are confident in them. I think you sort of also look at some shorter time periods. So this chart, you can see, the equivalent forecast for the 5 years for these customers. And in the year, we would look at achieving a 2.6x forecast payback over 5 years and 0.7x in the first 12 months.

And then on the far right of this chart, we've shown how actually for these historic cohorts, we are realizing that payback. So for the FY '16 cohort, we have realized that 5-year payback. For FY '17, where we're 4 years through, we've realized 2.1x of payback. We're forecasting 2.5 over the 5 years and then 5.2 over 20 years. So we think whichever way we look at this, we believe these are attractive investment economics driven by that retention in particular. We move our investment plans and respond very quickly to what we're seeing in terms of our payback forecast. And Nick will present to you later on, some examples of how we use machine learning algorithms to do that. But this page is designed to show you how in the year, we responded to the data as it came in.

So at the start of the year, we were forecasting paybacks just under 4x, which is our target, still similar what we call the Goldilocks range between around 3.7 and 4.2, so at the bottom end. And in that half, looking at the darker line on this chart, you can see the investment was increasing. That's the rolling 12-month investment level. So the dash line shows that lower payback. So what we did is, we responded to that, and we slowed investment, and you can see that the investment line starts to reduce. And you can see that the payback line starts to edge up as we go into the second phase of the year, where we're really focused on optimizing payback and also trading the business well. And as we do that, we get more value from the existing cohorts than our models might predict. And that starts to improve the payback on all of these liftings line.

As we got into the third phase of the year, as I've broken it out, yes, we were getting very confident [demand] that we were starting to see increasing payback and that we could increase investment at greater than the 4x payback of target. So we were very aggressive in the fourth quarter in terms of how we started investing before the COVID impact started to be seen. And then as COVID started impacting the business, and we saw more new customers and more efficient media, we invested very aggressively into that. The net result being that at the end of the year, we realized nearly GBP 23 million of investment and that the payback curve has shifted up to everybody, the H1 cohorts as well. But for the full year, we then got to a 4.9x payback.

For completeness, just to talk about fixed costs, the third component of the P&L after repeat contribution and investments, our fixed cost growth was slower this year than we had guided to. Couple of reasons for that were the phasing of new hires came a little later than we had planned, and we didn't pay out fully of some of the variable compensation that we'd expected to. I think that is expected to unwind into fiscal '21 as those things get -- don't go away, as we kind of get another year into the business, and I will talk about some guidance of our fixed costs later on.

I think then to bring all of that together, we're bringing this together in a measure we call standstill EBIT. We've talked about this previously, but we're increasing our level of focus on it and increasing its usage, bringing it into things like, remuneration schemes as well.

We grew our standstill EBIT 58% in the year. That's a 58% increase in the profit we would make, if we extract it from the P&L the investment was driving growth. And that basically is a reflection of an increase in repeat contribution, offset by some replenishment costs, offset by some fixed cost increase.

The underlying measure, we believe, grew 17%, if we extract the impact of COVID, and we haven't tried to adjust all of our financial measures for the impact of COVID. But in particular, for standstill EBIT, the post-COVID impacts, the retention number, the year 1 payback number, a repeat contribution number, all of which combined into this. It does have a material effect on this. So we would say that actually the business would deliver GBP 7.3 million of profit if we were driving growth, but it was GBP 10.1 million, if you include the impact of COVID on KPIs.

Moving now to cash flow. This business on a continuing basis, which you haven't seen before with Majestic extracted, it's only consuming modest cash at its current level of investment and growth. The movement in working capital in fiscal '20 was GBP 1.7 million. We invested GBP 1.1 million of CapEx, which is the highest it's been for a couple of years and reflects some investments into our accounting systems as well as into the operational infrastructure. But actually, we consumed just under GBP 2.5 million of cash this year. That compared with GBP 9.6 million consumed the year before. But we think that puts nicely into perspective that the cash balance we have on hand is more than adequate for supporting the current rate of growth. And our investment plans are to be more aggressive with growth of the company and continue to invest that cash.

The benchmark we have given around thinking about cash has been to think of our growth in working capital in relation to our growth in new customer investment. With those numbers moving, pretty much in tandem but again what this chart shows is over the last 3 years, they've moved about 64% correlated, i.e., as we've grown new customer investment by GBP 7.6 million, we've had to deploy just under GBP 5 million growth into working capital to support that. So that was the year.

My suspicion is that the audience may be very interested in our current trading as well. We don't normally present this. But given these are extraordinary times, and we're seeing an unprecedented acceleration in the business, we are presenting them at this result session. This will be done every time going forward.

For the period to the end of P2, the end of May, our total sales growth has been 81%, 256% growth we have seen in new customers, so customers shopping with us for the first time. Repeat customer sales have grown by 50%, really reflective of the fact that, you can only sell so much wine to your Angels, but the number of Angels who would come and shop with you is less limited by that. That 256% of new customer sales has been driven by investment of 115%. So you can see a suggestion in there the media rate and the efficiency of our investment has also improved during that period. That is to the end of P2.

If we then kind of look forward and think about guidance for the year, I'm going to tell you, unfortunately, that I don't know how long those trends are going to continue. We're not providing full guidance for the year because of that. We know we're seeing accelerated trading now. We know that there are a lot of recessionary signs in the economy, and we're expecting a period of disruption that will unwind over an unknown period.

What we can give you good guidance on is costs. So our funds for the year include a GBP 3 million marketing R&D fund, that is to support our channel expansion and our ability to drive higher levels of investment at satisfactory payback in the future. We will report that centrally. We will exclude it from payback calculations because it is literally R&D money that we don't expect to deliver an immediate return. But once we find a channel, and we have scoped it to a point where it is productive for us, and we build it into our plans, we will then include that new customer contribution.

The other area we're giving guidance today is on the fixed cost line, which we would expect to be between GBP 28 million and GBP 30 million for the year, excluding the R&D fund. That's a GBP 4 million to GBP 6 million uplift year-on-year. That is reflective of the unwind of the underspend from last year I referred to earlier and allows us to put investment into the marketing development, which will drive the R&D, our digital marketing teams, our data science teams, commercial finance.

Worth saying that, if the level of momentum we've seen in the first few months were to be sustained for an extended period, we may add cost above that level to manage the high-growth levels. We don't know whether that will be the case, and we'll provide guidance when we have further line of sight. That's all from me. I'm going to hand back to Nick now.

Before I do that, I'd just like to say that, this may be and should be the final time I present to you as the CFO. Very excited to be becoming the Managing Director of our U.K. business. Look forward to working for Nick in that regard. I see a huge opportunity to make it to continue to grow the site in the U.K. and thank you for your support and engagement over the years. It's been a pleasure.

Over to you, Nick.

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [4]

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Thank you very much, James. I think this is one of the things that it's the biggest shame to not be able to do this in person because I want to give a massive thank you to James on a personal level, but also on behalf of the company. I'm sure on behalf of all our shareholders for the outstanding leadership as CFO over the course of the last 5 years. You've been involved, James, taking Naked from scrappy sales up into a global leader in the direct-to-consumer wine space. And I think in particular, this year, the work you've done, leading our disposals of our U.K. assets has really given us the platform to be able to look through uncertain times and focus on opportunity as opposed to focusing on risk base. I want to say a very -- very big thank you, certainly on a personal level. And I'm delighted that James is going to be continuing his involvement with the business, and he's going to be running our U.K. operation. And I'm really excited to see what he and the team there are able to do. And I really believe that together, we're going to see as sales make it in the U.K., hopefully, to become the U.K.'s #1 specialist in the coming years.

So moving on, I want to take you through 3 things today. I want to talk a little bit more about how we thought about COVID and how we've responded as a company. And then I want to talk to you about the growth opportunity ahead of us, in particular, the opportunity we have in the U.S. and finally, the plans we have to for that.

So starting with COVID, James has given you the headline trading numbers, which we're clearly pleased with, and I think reflect the fact that people are seeking our propositions like ours. In general, the way we thought about our response is very much first to think about kind of people and community and what we needed to do to take care of our broader community.

From then, we've moved on to -- once we recognized then we were able to continue trading and the proposition with [resilience], a clear focus on how we can use this event to drive long-term enduring scale into the business. And I'll give you some indications of some of the early signs we're seeing around our success in them.

Firstly, to talk a little more around some of the things we've done for our people and our communities. Obviously, we've put in place all of the things we'd expect around looking after our employees and we are conscious of a wider supply chain. I think some of the things that I'm most proud of are the way that I have seen in all our markets, our teams have instinctively looked for opportunities to get back to the wider community. We've highlighted some of the work we've been able to do, feeding key workers and vulnerable members of our community.

It also gives me a great deal of pride to talk about the $5 million COVID winemaker support fund we launched last month. I can actually say, as of today that fund is fully subscribed. We funded over 44 winemakers. I'm going to talk about a few of them later on. But really, this is a manifestation of the potential to make it happen, and start having a real enduring impact on the industry in the markets we operate. I'm very proud of the work the teams have done there.

The obvious kind of question I'm sure a lot of you are asking that we had 2 great months. What does that mean for the rest of the year?

And I'm not going to pretend that I can be certain about the long-term value of the cohorts we've recruited in that have actually developed in early March. But what I can say is, we have a very well-established model and framework for the modeling our lifetime value. I can tell you how some of the key input things our model are trending. And the news is, so far, we see no red flags from those cohorts. In fact, the actually early signs are that they may be even a higher quality of them that customers we normally convert. And by that, I mean, early cancellation rates from our Angel members, they're in all market at or below our baseline pre-COVID. We're seeing those customers coming back and being more likely to buy an early month and all of that means we're delivering more contribution sooner joining Angels.

So again, I want to be totally upfront. We've got no data in normal conditions around these customers. So we remain prudent on the outlook. But it is my belief that a subscription model like Naked gives us an opportunity to translate a 1 point in time increase in new customers into enduring benefits and enduring scale. And I think that fully transitions well to thinking about, for me, the most important questions are expected, so what are the long term impacts? And I think people are asking this about all types of business models and categories. And from a demand perspective, I think our positioning is, is supported there in a couple of ways. In the course of the year, we see it likely that cash on consumption is going to continue to take share of the category. But I think most importantly, we're seeing much greater awareness and openness for a broader set of consumers who consider online to their wine shopping, and in particular, in our key U.S. market. We obviously don't know exactly what the economic climate will look like in the U.K., the U.S. and Australia through the year, but one thing we do take comfort from is that a wine category in general tend to be very resilient, certainly in terms of volume consumption through recession. And we know from operating Naked and Majestic side-by-side in the U.K. that our advantaged subscription model and their level of customer connection we have means, we have a model which is much more robust during times of weak consumer confidence in a traditional retail approach.

I think if I was going to highlight 1 other thing, it would be the impact that COVID has had on the marketing environment. And James hinted at the fact that we've seen lower CPCs and CPMs in a number of our channel. But we've also seen a material change in the willingness and the speed at which we're able to originate partnerships, which is obviously a key part of our customer recruitment process, and I see that as a key opportunity going forward.

All of that is it wrapped up in the fact that with the business in the position it is now with cash on the balance sheet, we have the security and the ability to look for opportunity through this period of disruption, and are making very excited about the prospects of the business over the medium term.

I've talked to you a little bit about COVID. But what I want to talk to you now is about the growth opportunity that we see ahead of Naked. And in particular, I'm going to focus on the opportunity we have to grow and build upon our leadership position in the U.S. wine market. I think we're already an unusual story and coming from British heritage and building out #1 market share position in the online channel of the U.S. wine market. But I believe we've got an opportunity to go well beyond where we are today.

We've got a very large addressable market. And we see us serving directly with our population around $20 billion worth of off-premise spend in the U.S. wine market, of which about $5 billion sits within -- delivered to home channels today.

One thing to call out is that, the Naked proposition is actually a great gateway into online delivery and for the customers who also never been members of wine sales. Our research shows over 40% of the customers coming to Naked have never shopped with an online or a wine shop model. So we're growing participation in that market.

I think if I was going to highlight just 1 thing about the impacts that COVID has had on consumer behavior in the wine category, I'd probably point to this page, which is that we've seen a truly unprecedented speed of channel migration in the long history of [U.S.] So we've seen around a 15% change in market in channel share over the course of 1 month. And if you look at categories like grocery, retail, for example, that's the kind of channel migration that normally takes somewhere in the region of at 10 to 15 years. And the data we see shows that mainly that's being driven by new participants in the market.

Now I'm not here to say that immediately all of those customers will stick and that they're only buy wine online. But I do believe that this is a big group of additional buyers who now recognize online as the logistical part of the wine shopping repertoire. And I think we've got the right proposition over time to win a number of those over to Naked.

I think the reason for that, it comes down to the ways in which our proposition is advantaged and differentiated. We've got a business that is able to combine in a scale and thinking about the U.S., direct [access] over 90% of the wine consuming population. And that's able to deliver customers unmeasurably quantifiably better propositions to their money. I mean it's time to get tough, it's proven over and over again, that customers are more discerning about where they spend their money and look more value from businesses. But I think Naked is very well positioned to offer that. And the way we do that through exclusive wine maker brand, you can't get anywhere else, build loyalty, and our exclusivity also supports in the attractive margin characteristics of the model. So we've got a great business model that's differentiated. And I think that means we're very well positioned to be the winner in this migration to online. And partially because we don't have any legacy issues. And we don't have any constraints of trying to operate a direct consumer model alongside participation with a 3-tier model. Partly because of the scale and the capability that we have built up through 12 years of operation, which is very hard to replicate. I think all of that adds up to the model with very substantial barriers to entry. And that's not just around the cash that we've invested cumulatively in the business and especially in the U.S., but it's around the operational network we've built out, which is best in category. It's around having over 200 wine makers globally, over 100 in the U.S. and it's around the data and the know-how and the kind of investments, economics and partnerships that underpin that.

And I think if you are going to try and take all that through, what that translates into is a genuine ability to get customers a better glass of wine for their money. And ultimately, none of the other top maturity can't do this. But the great thing is, the Naked model works and appreciate in the past. So what we're sharing here is some data from a company called Vivino, industry leading wine making platform. And you can see here the average price fees that consumers pay in the U.S. market for wine at different quality levels and Vivino benchmark the 4 out of 5 is a world-class wine. And what you can see is the blue line is the price Angels pay if the right wine is rated, at that level on the Vivino platform.

A couple of things to point out. We're offering measurably better value for the money at all quality levels. But as you move to the right and you get into selling higher end wines, the model works better and better and the differential increases. And that's what the reality is for a lot of expensive wines, that's where the most money is wasted on things we can't take by marketing, that's where the Naked model works especially well.

One of the things that gives me a lot of excitement about is the potential over time to make it to continue to extend its pricing, and extend into serving customers who are looking for shifting a bit to higher end wine.

And if you take all of that, I think you've got proof from customers that we've got an advantage model. And I think the best way of looking at that is looking to share that we continue to take of the U.S. market. And here, we're looking at the direct-to-consumer market, the winery selling direct to customers. And we've built our share from around 13% to 17% in the course of the last year. And that reflects in March this year, around 1 in every 6 bottles of wine being shipped direct to consumers' home in the U.S. being by Naked, which is a tremendous achievement for a company that's only been in the market for 8 years. And we're driving around 30% growth measurable mark-to-market.

So that's the picture around the growth opportunity. And I want to talk to you about how we're going to go about delivering against as of the product testing plan that I have with the teams in the year ahead.

I'm really -- it's all pretty simple. We believe we've got opportunity to continue improving the core proposition as we do that to drive retention. We've got really clear evidence that as we grow the business, as we build to scale, that translates through to its increased efficiency, and that translates to its measurable cost reduction, which, in turn, drives LTV as well. So we've got 2 drivers to improve economics. And we can use those the improved economics to help us unlock increased investments. It's a pretty simple plan, but it's one that we're very excited about. So I'm going to talk about each of those 3 steps in turn.

And firstly, to give you an idea about some of the areas of focus for the year ahead, and really one of the biggest dividends of having simplified the group to just focus and make it in our ability to deploy all our resources against improving the core making customer proposition.

I highlight in the year ahead, particularly excited about some of the work we're doing to optimize the way we onboard new customers into the model and some of the enhancements we have planned for what is actually already a category-leading delivery proposition. And in particular, we'll be looking to enhance choice and speed in all our markets.

I'm going to give you just a little bit more color on another base to talk a little bit about our subscription proposition. I think the half year talked about that we've rolled out an early tech version on 'never miss out' proposition. I'm really pleased to announce that we've actually now just passed 100,000 active subscribers. This is a great proposition that allows customers to get first dates on delivery of each new vintage of their favorite wine. It reflects exactly the kind of thing we can do now with more resources to innovation, improve the core proposition.

It wouldn't be a Naked presentation without taking time to talk about the real stars of the business. And they're the winemakers, who we connect directly to the wine drinkers. And I want to take a bit of time here to highlight some of the wine makers that have emerged, and we've managed to build relationships with -- through our COVID winemaker and fund. Some of these names may not be familiar to you. Those of you who've invested very well over the years may have some of the wines that we highlight here -- touch wine, if there was -- if you do, good luck to you. And Jesse Katz is coming on board. He was previously a winemaker of Screaming Eagle, one of Napa's top cult producers. He's going to be producing with us a series of single-vineyard wines in Alexander Valley, incredibly excited about launching those, starting with the 2017.

Josh Pfeiffer comes from -- he made his career at a winery called Henschke, the wine, Hill of Grace, Shiraz, if you like the Connoisseur version of [temple] Shiraz. It's the second most expensive wine in the Southern Hemisphere. And Josh has been working at his own family property for the last 5 years, and we've had an opportunity to help him out after COVID to come on the back of drought and fire to give a tumultuous couple of years for winemakers in the Barossa.

Tom Rinaldi is going to be joining us working in the U.S. He was the founding winemaker at Duckhorn and he's bringing with him a series of single-vineyard Napa Cabs that we're very excited about.

And then I really want to highlight the fourth name on here, which should be a less famous name, but meet the important part of what makes Naked special, the winemaker called Jennifer Buck who makes wine out in Douzens in the southwest of France. And she makes a bunch of lovely organic wines from varietals and frankly, not even wine [gates] rightly have ever heard of. But what the wine do taste is absolutely amazing. And she reached out when we launched our COVID recovery funds. And we had actually the opportunity for her to meet Angels in a virtual tasting last week. And what was incredibly powerful was our ability to raise over GBP 75,000 in the course of the 99 minute tasting. I think that really shows what makes Naked special. It's not just world-class winemakers, it's the connection of world-class wine makers with a passionate and engaged community of wine drinkers.

Moving on from the opportunity to invest and improve in the core proposition. And I want to talk a little bit more about the scale potential that is inherent to Naked, and I think it's a really important path and a really predictable path of the way in which we intend to create value over the years.

James talked about the growth we've delivered in the last couple of months, and that growth is a testimony to the investment that we've put in creating scalable infrastructure. And the opportunity we have now is to really take the dividend back in terms of increased efficiency. There are a number of areas where that plays out. But I highlight, in particular, the opportunity we have in logistics, and in particular, in the U.S., where you've got a large market to serve, and we've invested ahead of building scale and building out a network with 4 distribution centers that able to give category-leading speed to consumer. And we've now have an opportunity to see real cost efficiency through that network.

Instead of me kind of telling you that, I think I was going to be showing you that. So if we turn to the next page, we have a look at the costs we've been realizing throughout the COVID period, so in April and May. And you see in particular, in our U.S. operation, actually gets better leverage than the fixed costs, if we drive greater sales. But what's really exciting is we've seen an 18% reduction in our fulfillment cost on a per order basis as we drive volume through that network.

And what that means, if you think about the core way we create value in investing in customers and delivering a strong investment returns over time is that vast benefit compounds through to 2 things: It reduces our cost of acquisition; and it increases lifetime value. And if you look at the kind of range and improvement we've been seeing, that translates on our lifetime payback metric to somewhere around 1 to maybe 1.3x of additional payback. Now that gives us a lot of opportunity. And other thing I'm most excited about is, it gives us the opportunity to continue seeking to explore new places to find productive investments. And I think it's one of the things that's going to underpin our ability to grow investment in the business faster.

I'll talk to you about opportunities to improve the proposition and the scale potential which is inherent to Naked. The dividend of those 2 things is higher lifetime value of consumers and nothing else to unlock new productive investment more than high lifetime value.

In terms of the amount of headroom available for us, I'm very confident that we can deploy substantially more productive investment than we do today. I see the headroom in all of our markets. But it's absolutely clear that the greatest group headroom sits in the U.S., now we're comparing here our investment in new customer acquisition to category leaders in the clothing box and food box cashes. It's very clear. I promise that we're going to come back and say we can invest $160 million or $250 million. But I do have a very strong conviction that make it a business with comparable, sometimes on some of the actions more favorable metrics than some people were comparing to here and that we should be able to deploy substantially more than we are today.

Now I think it is a fair question to ask, will they need wine? Haven't we already? And I think if you look at the next page, there are a couple of important points to understand. The first is the reality of Naked has been a business that has been capital constrained through most of its existence. And as a consequence of that, we've tended to deploy the money we've had available through channels we've known and deliver good returns. We're proud of our track record having done that. We talked to at the half year about investment in creating a strategic partnership function in the U.S., and I'm very pleased to say we've been able to kind of add a third blue text as the improvement channels. We have our first $1 million strategic partnership unlocked and working well with HelloFresh. Another of our relationships, the team originated with [Wayfair] moved to be 1 of the top 4 partners for our U.S. business in the course of the last quarter. But there remain a large number of direct marketing channels that have proven to work for a number of our peers. I'm very confident with the combination of the team we've put in place. And the R&D investments that James signaled that we will be able to unlock at least some of these in the 12 months next. As ever, what we can control is the testing process and how we do it. I can't control exactly which one it will be. But it's also worth noting that with that R&D fund, I don't anticipate testing these new channels to impact the production or the core payback we generate into this.

And I think if there's 1 final thing to highlight around our growth investment is the fact that we actually see the proprietary data modeling which sits behind into the core part of vacation philosophy. And a core reason, I feel very confident in our ability to go harder is that we've invested to build out the tools that give us really good quality, early data around whether we found gold or whether we found something rather less pleasant.

And does not jumped about avoiding bad investments. I'd highlighted partner #4 on here, and these are globally our 4 largest partners. And here, we've got model showing us very early on that we're investing in a partner with nearly double the lifetime value on average for our overall business. And that insight has enabled us to go back and really drive further spend and maximize the investment opportunity there. And in particular, in digital platforms, if you can afford to bid more, you can often open up a nonlinear amount of excess spend. But I talked to you about 3 things, that I've talked to you about the opportunity that we see to drive the core proposition. How in doing that, we can unlock scale benefits and how all of that compounds will allow us to accelerate our rate of productive environment.

I want to talk to you briefly about what that means for our capital allocation. Now our policy remains unchanged. We delivered healthy balance sheet. Actually, the cash we're holding has been a clear source of investment advantage in these uncertain times.

The next priority remains to invest in growth and disciplined investment in growth and the state beyond that we were returning to. I think the net of what we've just gone through, especially I'm very clear with the opportunities ahead of us and the need to manage the working capital cycle through the year, but we don't currently have excess capital. So we won't be returning any of the capital on the balance sheet. We intend to retain it and focus on delivering growth.

So in summary, it's a very exciting set of results, and I am really pleased to be able to share them with you. And I'm really pleased that we've been able to demonstrate, and I think validates the strategy we've pursued as a team to go make it a fair point of independence. I'm also really clear that we're just starting on the opportunity in front of us. We've got a differentiated proposition that delivers superior value to consumers, and they're exactly the kind of propositions that can take share through periods of consumer uncertainty. All of that is underpinned by a clear proven investment strategy that delivers very attractive returns. And we've shown them to you on a number of basis today.

In particular, that businesses have the massive opportunity ahead of it to build on its leadership in the U.S. and that's an opportunity where COVID-19 has amplified a number of pre-existing trends that we see as favorable to our business and our growth. And we're well capitalized. We've got the balance sheet to seek out those opportunities and to see that growth. And I mean, tremendously excited about doing that. I'm tremendously excited about working with the team that we've got in place to do that. So Naked as a business right now that we see is, ideally poised to accelerate our growth to scale, and I'm really excited about that journey. So that's all from me and the team.

What we'd like to do now is, open up to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have our first question from Jonathan Pritchard from Peel Hunt.

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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [2]

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Tremendous presentation, very interesting. One I'd like to just quiz you on is, Vivino side and value for money, et cetera. And into it, call it couple of 2, 3 years ago, you run into a slight problem because you got fundamental value products. But American tend to consider price to be an indicator of quality. Is that engine has been in the U.S. drinker has moved on? Or is that still a factor?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [3]

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Jonathan, thank you. Nick here. I think let's say 2 things. Firstly, it is indeed very important to us that we're able to measure, improve and challenge ourselves to deliver better quality for -- at any price level. But I think if you look at the data we've showed, actually, the way the Naked model work, actually works better and better, as you start to move into those higher end wine. And the answer is, it's not a hard trade-off between offering better value and pushing our price point of the business. So what we've seen in the course of testing over the last 12 months in particular, is there's lots of appetite for consumers within the Naked model in the U.S. that pay $30, $35 and even $40 a bottle, which are substantially higher prices than we've operated in the past. At the same time, we're able to deliver a very big discount in terms of the fair quality level to the market. So I think I'd say that we can probably do both. And it's fair to say that with some of the winemakers we're bringing on board, through the COVID recovery process, we've got an opportunity to continue to test what that top price point looks like for the U.S. business.

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Operator [4]

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The next question is from Brad [Hathaway].

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Unidentified Analyst, [5]

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I can hear you. Can you hear me?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [6]

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Yes.

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Unidentified Analyst, [7]

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Congrats on the great results, and thank you for a very helpful presentation. One kind of a longer-term question for you. So I guess, how do you think about the potential for kind of long term retention? Like, if we look out a few years, how do you think about where retention might trend versus today?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [8]

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Brad, thank you very much. I think there are a couple of things I'd highlight in terms of the long-term picture here. The first one, obviously, is, we've seen a number of trends that we think are very supportive of the longer-term growth rate of the business. And in particular, the openness of a much broader segment of the wine buying population to online models. And I think that's most acute in the U.S. I think that is going to have an impact and see through into our retention potential as well as we see a broader cross-segment of consumers trading into the online channel. There's an opportunity to reduce the number of participants that are kind of promotionally led in that channel. I think that could be favorable for retention over the medium to long term. But I think the other segment I'd highlight and we believe is something that's within our control is as we grow Naked scale, that gives us a more efficient model, and that gives us a bunch of options. We can take that scale efficiency, and we can use that to fund investment in the core proposition and better serve people's needs. We can use it to deliver more investments or we can use it to improve returns. And that's something that I'm very excited about. I believe the business works better and better as you get through critical scale and you can drive continued improvement in the customer experience. And ultimately, that's our real challenge, right? If we want higher retention numbers in the future than we've got today, we've got to deliver a proposition that better meets people's needs.

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Unidentified Analyst, [9]

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All right. Great. That's very helpful. I guess the other question would be, you made 1 comment on this in this slide, but I'm curious a little more on your thoughts on kind of what you're seeing out of your online competitors and how they've been able to react to COVID and this kind of new direct-to-consumer line environment?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [10]

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Yes. Look, I mean, obviously, I can only go on what I've been reported or seen published. I think our view is, overall, we're probably growing faster than the overall online category and certainly adding more customers. And I think that reflects the fact we genuinely believe we've got the best proposition out there. I do think that some of the -- that we've seen, in general, a trend where growth has been fastest, in particular in the U.S. businesses with highest levels of awareness to kind of brand recognition and some of the traditional online e-commerce model selling well known brands have done quite well. I think my take would be, that it's going to be a little harder for some of those models to convert a very strong performance through the lockdown period into long-term growth because they don't have the differentiated models that move customers into a set of exclusive brands. And ultimately, they're offering a direct substitute for a traditional retail experience. But then only time will tell whether I'm right on that. But that would be, my take in terms of some of the things that we've seen published so far.

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Unidentified Analyst, [11]

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Great. The question is -- keeping all these new customers served. Anyway, congrats again, and best of luck. I look forward to seeing the next chapter of Naked.

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Operator [12]

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The next question is from Wayne Brown from Liberum.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [13]

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I've got 2 questions. Firstly, this might be, me being a little bit stupid today. But in your market share slide, you spoke about a $5 billion online delivered market. But I'm trying to correlate that with the commentary about a 17% share. I presume the 17% share is in relation to volumes. So there's obviously a differential because you are cheaper. But I'm still trying to figure out based on the revenues in the business, the 17% share, the $5 billion market size, what's the delta that I'm missing there? If you could just help me out square the logic?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [14]

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Happy to do that, Wayne, and not the easiest math to do on the slide. So 2 points. The first would be we see -- we've talked today about a $5 billion delivered to home wine market in the U.S. actually there are 2 component parts, the direct-to-consumer market serve winery, selling wine direct to customers, which we talked about in the past, which is around just over $3.2 billion in size. And then an additional components, we've worked to do some research that looks at the amount of wine sold online in the U.S. by more traditional retail models, the remaining $1.8 billion to get you to a total of $5 billion. In terms of then being able to show market share progression, it's only that direct-to-consumer segment where we're able to get access to a continuous data source. So we've shown our share of the $3.2 billion direct-to-consumer market. And then you're right, I think we highlighted on the page a value share underneath the bar chart. So the value share from memory sits at around 3.5% and the volume share sitting at around 17%. And the final thing to highlight is, as you can see from the disclosures, in March this year, we were driving a very high level of new business. So the disparity between volume and value share is slightly accentuated in March '20. And because as you know, our model is to provide discounted introductory cases to new customers. So on average revenue per case shipped was a little lower than they would normally be on an ongoing basis. So that helps you get explain why you've got such a big gap between the volume and value share, in particular, in market.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [15]

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Great. Sorry, that -- before I get to my second question, I've put a supplementary one. Clearly, with the gap being such that it is, can you give us an indication what the, what a normalized gap would look like? And just a commentary around pricing power within your products?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [16]

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Look, Wayne, happy to pick up. I'm not going to try and do the math on the slide, but I'll get it wrong, and it's still pretty early over here on the West Coast. But I will say that, we do believe that the disparity represents an opportunity. And I think it in particular represents an opportunity as we go through, let's be honest, what's quite likely to be a period of recession in the U.S. market. I think a lot of customers who are currently participating in direct to consumer, Napa and [Sonoma] wine clubs and paying $50, $60, $70, $80 a bottle are going to start to question whether they want to keep those quarterly shipments when the credit card bill comes in, and it's $800 a time? When we've got a product that tastes just as good but they can get in $25. So I'm absolutely -- I'm pretty excited about the opportunity for Naked to push that over time at average price and to take share from some of the rest of the direct-to-consumer market.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [17]

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Okay. And then just 1 question on the payback cohort KPIs. You've obviously given a 5-year forecast for the first time, which is incredibly helpful. If I was just playing devil's advocate, and I looked at those numbers, you clearly -- within the first 2 years, you're not -- sorry, you're breaking even after 2 years with regards to acquiring customers, and you're pretty much hitting that benchmark 3x within that 5-year time frame. And that's an undiscounted number. If I was playing devil's advocate and I looked at that around, is it fair to say that I'm looking at it incorrectly, if I said that doesn't look overly compelling, when I set that against broader online peers? Or how should I be putting those numbers into context?

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James Andrew Crawford, Naked Wines plc - Group CFO & Director [18]

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I think Wayne, we put those -- James, here. So we put those numbers into concept to a stream a cash flows, it still represent an IRR north of 50%, which is considerably ahead of the WACC rate of the business. And we've run scenarios where we've attributed fixed costs to those, et cetera. And we still come out with IRR type measures, at least double our cost of capital. I think the other thing to look at, A, we have had some work done with some of our advisers where we benchmarked that and see a number of other people in the kind of 2.5 to 3x range. So that didn't feel too different to a lot of the market. I think the third thing that strikes me is, I often kind of hear comparisons to some of the food box companies, but I don't believe they have the kind of retention rates that we're showing, in particular, towards the back end of the retention curve here. And I think if you look at the slide where we've shown the kind of cohort breakout, the fact that more than 20% of our contribution in FY '20 comes from cohorts that are more than 5 years old is an important factor to consider in there that, if you did believe our 5-year payback was a little lower than some benchmarks. And we think it's consistent with them. We think that we are still delivering more in the year payback from those cohorts as they go through 5 years and I [love] the peer to my benchmark question.

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Operator [19]

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(Operator Instructions) And the next question is from Ben Hunt from Investec.

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Benedict Anthony John Hernaman Hunt, Investec Bank plc, Research Division - Research Analyst [20]

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Earlier in the presentation there was a slide in the U.S. maybe improvement in the payback from the scale you had in the U.S. from COVID, did you experience the same pickup to the same extent in the U.K.? And to what extent does that now bridge the gap and the difference between payback between the U.K. and the U.S. I think it was 1.3x improvement, if I saw, right in?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [21]

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So I think 2 things to highlight there. Firstly, the slide we showed around the variable cost efficiency were driven in the U.S. market. Related to the performance early this year. So not reflected in the numbers we've reported for the full year. And I think in general, it's not our policy to disclose payback at a market level. But I can tell you that we're comfortable that all of our markets were operating at our target level of investment in the prior year. So give us no big market disparity there. In terms of the longer term, what's the upside opportunity, we have seen increased efficiency from volume throughput in all our businesses in the first 2 months of the year. But I think it's fair to say that the upside is largest in the U.S., and that's really a function of the U.S. market, having required us to put in place a pretty expansive network to deliver what is a market-leading study for our category delivery proposition. And now we're able to leverage that through submission volume. So there's been some upside in the U.K., it's not been as marked at the upside in the U.S., and that's because we were able to operate just a slightly simpler distribution model in the U.K.

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Benedict Anthony John Hernaman Hunt, Investec Bank plc, Research Division - Research Analyst [22]

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Okay. And then just going back to the contribution cohorts, that famous graph, there's been obviously an improvements over the years in the existing cohorts. So I think, if you take the FY '16 number, is it the retentions saw 74%. I think it's now 84% today. What's been driving that in the existing cohorts? Is that being a margin? Or has it been those cohorts consuming more and thus there is a bit of a maturity effect still occurring in some of the older cohorts?

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James Andrew Crawford, Naked Wines plc - Group CFO & Director [23]

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It's a maturity effect overall, Ben. Sorry, this is James. 2 things happen. Generally, the customers that tried are those that have lower frequency. So you kind of get a mix effect over time with the customers that remain, are the higher retention, higher value ones. The second thing that happens is, there is a small like-for-like increasement over time in the frequency of purchase as the cohort changes, even for the kind of like-for-like customers. And that is essentially a share of wallet enhancement or an increase in overall consumption of those individuals as they go through the life cycle. But none of it is to do with us kind of making higher margins out of older customers or anything. The product mix, they shop is pretty similar kind of from year 1 or 2 through to year 5 or 6. It's all about their frequency and the fact that they are the better customers.

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Operator [24]

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Our next question is from Andy Wade from Jefferies.

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Andrew Wade, [25]

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The first one, just 2 for me as well. The first one, in terms of the scale of benefits you're seeing in the U.S., could you give us an idea of how that compares to the U.K. and whether that gives us a model for potential further efficiencies in the U.S. or whether they're just not comparable or going to be comparable? That's the first one.

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [26]

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Look, I think making the direct dollars to pounds comparison is not particularly helpful because it is a very different model, different distances, different competitive dynamics in terms of final mile couriers, and different labor rates, et cetera. I think the most helpful thing to take here is that we've got a set of very attractive investment returns we're generating in the U.S. for the full year. And we're able to show that with heightened volume in the first 2 months of the year, we've got an equivalent benefit around 1/3 of additional payback, okay? And I think like you see the -- the guidance you needed for the potential we've got in the U.S.

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Andrew Wade, [27]

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Yes. Okay. Yes. Sorry, I was just trying to think about longer term, but that's very helpful, certainly for this (inaudible). And then -- second one I was going to ask you is, on the -- you did this sort of price quality analysis on Vivino. She's very interesting. I wonder, is there potentially some benefit to your quality scores there as those we -- so your customers who are somewhat invested in the Naked brand and your wines and so on, so they might score you up a little bit being part by exclusive club. And I guess what I was going to ask was it, then I assume there must be things that you're doing behind the scenes as well in terms of blind taste testing and so on. Just be interested to know what you guys do to look at that sort of price quality trade-off?

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [28]

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2 things I'd say to that. The first one is that it's the beauty of the model that we offer customers not just great-tasting wine, but we offer them a direct connection to the world's best winemakers and they build an emotional engagement as well as an engagement with the product, and that generates loyalty. That's kind of what we do as a business. So that's always going to be a part of what we deliver. Just in terms of -- is it apples, oranges comparison? All the ratings that we show there are taking from the Vivino platform. And they are user-generated ratings. So kind of by definition, they're all people rating wines that they themselves support. So I think it's a pretty fair comparison.

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Andrew Wade, [29]

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Great. Okay. Well, I'm 1 of those myself and also an Angels. So I'm looking forward to a couple more of my own favorite one in, [packing store].

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Operator [30]

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If I can now hand back to Nick for final comment.

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Nicholas James Devlin, Naked Wines plc - Group COO, CEO & Executive Director [31]

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Thank you very much for joining us. And look, it's the same old terminology that's in person that, I just want to finish by saying a massive thank you to all of the people within the business who've made the results we delivered this year possible. And indeed, to kind of make what we do for our customers, our winemakers possible every day. I know that this has been a year with a lot of change. And in particular, in the last 3 months, we've been asking you to work very hard. We've been asking you to work in different ways, in the Easter in the past. And I just want to say what a pleasure it's been to be able to work with you all. And I want to say massive thank you. And if you're in the U.K., it's probably time for you to crack something open. If you're in the U.S., you should probably hold on for a few hours, although if you're on the East Coast, maybe you could have a glass of wine, today. So thank you all very much, and I think that's it for us today.

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Operator [32]

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This now concludes today's call. Thank you very much for joining. You may now disconnect your lines.