Naked Wines PLC

LSE:WINE

Earnings Call Analysis

Company Poised for Profitable Growth

The company, aiming to regain its trajectory toward profitable growth, asserts it is fulfilling its strategic objectives. Key achievements include rightsizing inventory and renegotiating lending to boost cash flexibility by GBP 40-50 million. Substantial cost reductions are expected to bolster profitability at lower sales levels. Significantly, repeat customer metrics are robust, with monthly attrition at historic lows and spending per active customer rising from GBP 207 million to GBP 212 million. Nevertheless, the challenge lies in new customer acquisition, impacted by pre-COVID benchmarks. Despite setbacks in some initiatives, the company remains optimistic, with promising early data indicating potential lifts in customer LTV of around 12% and improvements in payback rates. With GBP 90 million in net cash and nearly the same in net assets, the company is gearing up for future profitability and cash flow, led by a customer-oriented strategy and disciplined capital allocation.

Strategic Review and Moving Toward Profitable Growth

The company emphasized that it is on track to achieve profitable growth through strengthening its balance sheet, driving sustainable profit, and returning to pre-pandemic levels of growth. They have managed to release a significant amount of cash, between GBP 40 million to GBP 50 million, from inventory while also reducing costs by over GBP 10 million to bolster profitability, even at lower sales levels. The company’s sales per customer and customer retention rates have shown improvement, yet new customer acquisition remains a challenge. They are testing new growth initiatives to improve spend and conversion rates, particularly among under-35s, aiming to see increases in lifetime value (LTV) and consequent growth in cash generation.

Financial Health and Expected Cash Generation

The company reported a strong balance sheet with GBP 90 million in net cash and almost GBP 90 million in net assets. Future cash generation is expected from inventory destocking, and stability in Angel funding is anticipated. The U.S. market, described as underperforming due to execution rather than inherent market challenges, is expected to become the company's largest market. There are also additional cost savings planned beyond the initial GBP 10 million, shaping a leaner business structure focused on value offering and sustainable margins.

Addressing Current Challenges and Future Prospects

The company does not perceive a shortage of a customer base in its target niche and expects long-term trends to resume post-COVID, with potential market stabilization in the UK and Australia, and growth in the U.S. Enhancements in the operational strategy and execution are underway. The company also interprets the decline in the cohort contribution as a result of margin pressure rather than a decrease in customer spend. The management highlighted a strategy to improve average payback over time, cautiously escalating customer acquisition efforts while aiming for frugal resource allocation to maintain business simplicity and winemaker confidence.

Earnings Call Transcript 2024-Q2

[Rowan Gormley, executive]

Good morning, everyone, and welcome to our Half Year Presentation. What we're going to be covering today is, first of all, I'll take you through a strategic review of the business. James will then talk you through last year's numbers, and I'll finish off by a look forward into the future. And the key message we want to deliver today is we are doing what we said we were going to do. So we said we would get Naked back on track to profitable growth by doing 3 things: number one, strengthening the balance sheet; number two, making the profit sustainable; and number three, getting us back to profitable growth. In doing the first of those, strengthening the balance sheet, we are focused on rightsizing inventory and commitments to winemakers, which enable us to release GBP 40 million to GBP 50 million of cash out of inventory and to renegotiate our lending facilities to make them more flexible.To make profit sustainable, we've taken some money out of costs already and we are far advanced with further plans to take in excess of GBP 10 million out in addition to that. This will enable us to be profitable at a lower sales level. But obviously, our ambition is not to get to that lower sales level, but to stabilize the customer base at a point which leaves us with a decent level of profitability. And then for profitable growth, our goal is to rebuild paybacks to enable growth at the prepandemic levels.Next slide, please. So where are we on this journey? Well, the good news is that after many years of consuming cash, we are now moving into a period of sustained cash generation. The 2 key things there are the cash release coming out of inventory and the impact we've already made on costs with more to come. But a crucial thing to draw your attention to is that existing customer base has been strong. Sales per customer are up year-on-year. Attrition rates are down. The customer base is lower than it was in previous years, but that is because new customer acquisition remains tough. So there quite genuinely are, I think more issues on the good news side of this page than on the bad news side, and I would personally feel much more concerned if we had a generalized sales problem across existing and new customers. The good news is we don't. We have one problem, new customer acquisition.Next slide, please. So going into the detail on all of these a bit. The key message on this page is the release of cash from inventory. As you can see on the left-hand side of the page, the dark blue bar, which is inventory coming in is higher than the light blue bar, which is cost of goods going out again. And finally, for FY '24 and FY '25, those 2 lines are reversing, which will enable us to generate a good chunk of cash out of inventory.Next slide. On the cost side, as I've said, we've taken the chunk out of costs already, and we're well advanced in taking another and significantly bigger chunk out of costs. And the impact of this will bring a breakeven sales level down from just short of GBP 280 million to just short of GBP 250 million, about a 10% improvement in the breakeven sales level. Clearly, we don't want sales to fall to the GBP 250 million level. We'll be working hard to keep it on the left-hand side of the page. But the goal in bringing the cost down is to ensure that whatever happens in the future, we are profitable, and that then gives us the runway to be able to fix new customer acquisition.Next slide. The key thing here is repeat customers are performing well. Sales per Active Angel are up from [ GBP 207 million ] a year to [ GBP 212 million ] and monthly attrition rate is down to an historic low level. I won't take a lot of credit for the -- or we shouldn't take much credit for the chart on the right because that is largely a function of us having recruited fewer customers and the customer base has become more mature. But the same -- the picture remains the same when you look down through the cohorts. Our loyal customers are sticking around and they're buying from us in bigger numbers than they were last year. The challenges in the graph in the bottom left, where the number of Active Angels has fallen materially since last year, which is entirely a function of new customer acquisition.And the obvious question is, well, if you don't fix new customer acquisition, what happens, and we've tried to answer that by laying out a scenario in the first line of this page, which is if new customer acquisition remains where it is, which is significantly harder than pre-COVID, the business will settle out a profitability at a sales level of somewhere between GBP 280 million and GBP 300 million. On that with our new level of costs will make about GBP 10 million of EBIT, and we will generate a decent chunk of cash. Obviously, our goal is to do better than that. And if we return to the long-term target of 2x payback, that is a significant improvement. And if we get back to the rates we achieved in the 3 years up to finishing with the start of COVID, so before pandemic. If we're able to get payback back to those levels, then we'll be looking at very healthy profit and cash generation figures. That to emphasize we're in early days of trying to fix this, and it remains to be seen whether we will or will not.So the obvious question is, what are these new initiatives that we're testing. And the goal here is to restore Naked to profitable growth by restoring payback back to pre-COVID levels. 3 things we're doing. The first is reducing variable costs, which obviously impact directly on lifetime value and therefore on payback. The second is to convert more customers out of the traffic we're already paying for by expanding our addressable markets and fixing the fact that right now, customers under the age of 35, we're very underpenetrated. We're really paying for this traffic to come with the business, but we're converting very few of them to being profitable customers. And then the third is we aim to improve customer quality by offering customers a relationship tailored to their spend, shopping and wine preferences.And right now, we offer customers a one-size-fits-all solution. The expectation is by customizing that 2 customers' preferences, we will get more customers at a higher value who stick around for longer. Our filing so far is on the variable cost side. As I said, any customer variable cost feeds back directly through into paybacks. And so the stuff we've already done improved them by 0.1x and there's more to come. The second is that we have made very good progress on monetizing under [ 35 ]. This was all started long before I came on Board, where the initial testing commenced in October last year. And we scaled up the testing over the summer months, and it's been tested at scale right now in all 3 markets across all channels, and we would expect in the very early part of next year to be able to give you some harder data on the impact we expected to have in the business. But right now, it's looking like around 12% increase in LTV, which should in turn be a 12% increase in payback.And then finally, we think, and this is at a much earlier stage of testing that there is a further 11% increase in LTV and payback to come through from customizing relationships. We've completed the initial testing on that. We've seen a very positive result to that. We will be building this properly on our main site and we'll be rolling it out into the business for the whole of FY '25. And again, I would hope not in the beginning of next year, but in the first half of next year to be able to share some hard data on the impact of that on our business.And that's it from me, and over to James.

[James Crawford, executive]

Thank you, Rowan. So I'm going to walk through a bit more of the detail behind some of the comments that Rowan's made. But the overall things that will come out of that will be that this is a business with a strong balance sheet. Net cash, GBP 90 million in net assets almost and a significant destock on the horizon that will drive cash generation. And while we wait for that to happen, stability in our Angel funding as well as an opportunity for improving our credit facility. You will see this a very solid quarter of the business with the rate of Angel decline beginning to turn a corner, improving revenue per customer, an opportunity for margin improvement to reverse some of the trends we've seen in the first half.But the challenge of recruitment remains. And whilst there is a sign that the rate of new member recruitment is now stabilizing having reduced over recent years. We've got some very promising data that Rowan has alluded to around a new subscription mechanic. So overall, this is a business we look at that will deliver future profitability, and it will deliver future cash flow.I'm going to start with that cash flow point on this slide. And I think the headline here is our operating cash consumption in the half year was GBP 3.6 million, whereas a year ago, it was almost GBP 23 million. So we've seen a significant reduction in the amount of cash flowing out of the business. That is a testament to the work that's been done to bring our inventory intake back to the right levels as well as the work we've done on cost. But you can see the stock build in the half, the consumption of cash into inventory has reduced from GBP 51 million to just shy of GBP 20 million. You would expect to see a stock build in the first half as you go into the peak trading season, but obviously, it's a much, much reduced number.And then you see a commensurate reduction in the amount of payables if you close the half with as a result of that reduction in stock intake, but not nearly the same magnitude. And a slight improvement in the change in Angel funds, and we'll talk about those trends on the next slide. What that starts to tell us is that the inventory balance for the group is now expected to come down from here. You can see in the chart on the right-hand side, the growth in inventory through fiscal '22 and '23, the seasonal bumps that then came down afterwards, but then subsequent growth again to peak of this year. As we now look over the near term of our inventory commitment level, we can share with some confidence that inventory will start to come down and stay down. And then as we hit peak of fiscal '25, the second half, we'll really see that destock take place as we sell through the inventory that we have.On the next slide, we then look at the funding sources of the business. And I think really important to note that our Angel fund redemptions remain very stable, actually improving. The orange line here is the key one, which is the percentage of balances withdrawn over the course of the last 6 months, and you see that as continues to trend down. Similar to the attrition chart that Rowan showed, we can't take credit for any magic here. A lot of this is because as the base matures because of a fewer number of new customers, you get a stickier set of customers, but it's another example of that strong core of the business remaining kind of consistent and stable. And then Rowan has mentioned that we are commencing the process to replace or renegotiate our asset-backed lending facility. We've appointed an adviser to help with that. The preliminary view from that adviser that they said, I can share with the world is that replacement on improved terms may will be available, which would either generate us one or both of greater flexibility around the P&L or improve liquidity generation from the significant asset base that the [ big ] business has. So we remain hopeful that we will get to a better place there as well.In the meantime, and this is a repeat of Rowan slide, we are configuring the business to be profitable at lower revenue levels. The reason I wanted to repeat that slide is, I think it's important context to the following slide, which is how do we expect that revenue to evolve? And if we look on the left-hand side, this is the quarterly year-on-year total sales trend, you can see that we've begun to turn the corner there in terms of the rate of decline. The business decline was accelerating kind of through Q4 of the last fiscal year. We still do turn that corner, and we expect that to sequentially improve as we go forward.The reason for that is really explained on the right-hand side of this chart, which is it is driven by the trends in our membership. And the light blue line, which is the number of subscribers we have and the change in that number year-on-year, you see basically mirrors the shape of the left-hand side of that chart. And as we have seen the reduction in the number of subscribers we've got, the rate of reduction in the subscriber base has just begun to moderate and actually just turn up at the right-hand side of that chart. And we can look at the attrition rates we have. We know how many people we're recruiting. And we can see that at this point, we are entering a period where we expect this business membership base to really start to stabilize and that will drive the stability in the total sales trend.Looking within that membership base. And again, Rowan has mentioned that the high level that our average revenue per Angel has improved. I think it's important to understand that has happened in all markets. So we show in this chart, the dark blue -- sorry, dark blue bar is the FY '23 number. The light blue is FY '24. And you can see H1 on the far left. In the U.K., was up 3%. The left-hand side of the middle chart shows the U.S. also up 3%. And on the right-hand chart, the left-hand side of that is plus 4% for Australia. I think really important is that we are not assuming in our forecast, and that drives the guidance we've given that those trends necessarily continue. We do believe they'll continue in the U.K., but in the U.S. and Australia, actually, our H2 expectation is we may see a slight reversal of that trend as we lap some fairly intensive promotional activity in the prior year. But importantly, I think to understand that the H2 forecast for the guidance does not require us to continue to see those improvements in [indiscernible].And on the next slide, looking at the conversion of that repeat revenue to contribution, we can see that during the half, our repeat contribution margin declined from 28.4% to 25%. The big drivers of that were gross margin reductions in both the U.S. and the U.K., where we have been more intensely promotional. Some mix effect, as we've shifted sales mix towards the U.K., which has a lower gross margin and reductions caused by our Australian fulfillment costs, in particular, Korea continuing to increase above the level of inflation. We do have a number of improvements in the pipeline that should reverse those trends at the contribution margin level in FY '25. In both the U.S. and the U.K., we've renegotiated our warehousing contracts.The U.S. going live on those terms now and the U.K. going fully live on those terms from April of 2024. We also expect to reverse some of the U.S. gross margin impact, where we won't repeat some of the less effective promotional activity we run in the half. And then we also have improvements in FY '25 on the SG&A line as a percentage of revenue. If you look at the history of our SG&A, you can see the build by half, in particular, as you went through fiscal '22 and '23. Over the space of the last 12 months to 18 months, we've been eliminating the R&D spend. We've also undertaken some cost reduction exercises. And we intend to target a run rate in FY '25, consistent with the guardrail we've communicated at 11% of revenue that should see that number reduce again to the tune of approximately 2% of revenue coming out of SG&A.So lots of good news there. I think the challenge is then shown on the next slide, which is around customer recruitment and getting customers in through the door, which stabilizes the base has been the key challenge. So on the left-hand side, you can see a medium-term history, which shows the number of new subscribers by half. And you can see that in H1 of '24, we are somewhere around the level of about fiscal '18, fiscal '19 in terms of the sheer number of joiners. But it is costing us more to get them. And that's what's driving the lower paybacks than we were -- we were at in the pre-COVID time. I think some positive drivers of the outlook here have been improvements we've seen in digital creative, which has enabled us to spend meaningfully in that challenge for the first time in probably 18 months. We have accepted some lower payback thresholds to drive cash, in particular, in the U.S.It does make sense when you have an excess of inventory to spend money to drive more customers and turn that inventory into cash even if it's at a lower contribution payback. And then some basics we've put in place, we've refocused the team on our core partner marketing process and actually started building a pipeline of partners that have new partners in there rather than renewing old ones, and that gives us a stronger foundation for all of our core marketing channels. I think some of the negatives that are included in those numbers would include a test we run in Australia, our smallest market to see whether or not we could drive high LTVs, albeit lower numbers of customers through a nonsubscription sign-up journey. We've stopped that. We did see some of the improvements we needed, but not at the level that we wanted.And then we have ongoing tough trends in marketing conversion. It's a difficult economy out there that definitely impacts people's willingness to sign up to a conversion. And so we continue to see lower conversion of some of our marketing collateral into new memberships than we've seen prior to the pandemic. But I think there are some emerging signs of green shoots very, very early on the right-hand side. This shows a kind of last 12-month total number of new members. And you can see very much on the right-hand side of that chart as we begin to annualize in or lap the pivot to profit, where we cut investment and reduce the number of people we were recruiting. You really see that flattening. So it feels like we've begun to find a stable level of new member recruitment that we can plan around.And actually, if you look at the U.K. business, which is the not quite darkest blue line or up from the bottom, you do begin to see a sign that that's just beginning to tick upwards, and that's the market where we pivoted towards profitability earliest, and it's taken the time now to really rebuild that marketing pipeline and start to see some growth there. But very early days, still a tough market in terms of customer recruitment. And the next slide, we then show a data set, which gives us an indication that we do have some initiatives that will support us beginning to really move that trend in the right direction.And Rowan has alluded to the testing we've been doing around a new customer subscription. This is some of the test data. It runs back about a year. As Rowan said, we started testing this in October of last year. And over kind of a year's period, you can see the test line, which is the lighter blue line, actually really beginning to show enhanced contribution per sign-up versus what we've been getting under the traditional journey and the conventional journey we've used. This is data from just a small cross-section of customers under 35. We are also testing, as Rowan has alluded to at scale across different markets and across different customer mixes this journey. And we'll have full data on that as we go into the next calendar year to understand what its impact could be across the entire business. But definitely some positive signs showing here, and we will update you in the New Year as to what that I told us for the outlook of the business.And speaking of outlook, just an update on guidance and a couple of words on current trading. We've updated our guidance about a month ago, nothing new here versus that, but we've put some more flesh on the bones in terms of the drivers of the guidance we gave. So expecting a 52-week comparable constant currency revenue trend of minus 12% to minus 16%. Bear in mind that the prior fiscal year had 53 weeks in it. So we've adjusted that out of those numbers. Expecting to spend between GBP 23 million and GBP 26 million, recruiting new customers. You'll remember our guardrail for that is to try and spend GBP 25 million. Our repeat customer contribution expectation is GBP 65 million to GBP 70 million. And our total G&A costs, including share-based payments, but excluding adjusted items, would be expected to be at the order of GBP 37 million to GBP 40 million. So seeing a reduction there versus FY '23.It is worth pointing out the note on the right-hand side, we do expect to incur some cash one-offs that will hit SG&A of the order of GBP 5 million to drive inventory and cost reductions, but they will be treated as adjusted items in the full year. That results in a total adjusted EBIT expectation of GBP 2 million to GBP 6 million, and we expect to close the year with a small net cash balance, excluding lease liabilities. I think in terms of current trading, so more comment here, but we are indicating Q3 has been broadly on the plan that we have, which underpins this guidance. We've seen the number of customer orders we expected from repeat customers. And obviously, it's mid-December. So there's a very important couple of weeks still to go, but we will update on that when the time is right.And that's been -- that's all from me. So just a reiteration really. This is a business which has a strong balance sheet with net cash, GBP 90 million of assets, opportunity to use those assets to drive liquidity through an improved credit facility and cash generation very clearly on the horizon. The core of the business, the repeat customer base showing improving trends in a number of areas and with opportunities to improve the margin realization from the revenue we realized from them. But challenges in recruitment, albeit some very early signs of stabilization and some promising testing of new mechanics. Put all together, that tells us that this is a business that will deliver future profitability and cash flow.Back to Rowan.

[Rowan Gormley, executive]

Thank you, James. I want to finish off by reiterating some of the messages we've already covered. The key one is that new customer acquisition is definitely challenging. That existing customers are strong. And the strength of those existing customers, together with the work that's already been done on commitments and costs means that we will be profitable and cash generative even if we don't solve the new customer acquisition challenge. But obviously, our aim is to do better than that, and we have made some progress in rebuilding growth despite the economy. And the goal remains for me, I want to see shareholders, staff and winemakers rewarded for their support and their loyalty in helping us through this cyclical period.Thank you very much. Over to Q&A.

[Operator]

[Operator Instructions] And now we'll take our first question from Daniel Woolfson from Telegraph.

[Daniel Woolfson, analyst]

Just a quick one. You're talking about GBP 10 million worth of cost cutting. Are you going to cut jobs? And if so, how many?

[Rowan Gormley, executive]

We're not being specific on where the cost cuts are coming from. There are a number of areas we're incurring costs that we're having a good look at including variable costs, wine, and we look at all those areas. So we're not being any more specific than that.

[Daniel Woolfson, analyst]

Does that include jobs?

[Rowan Gormley, executive]

All cost areas are being looked at.

[Daniel Woolfson, analyst]

Okay. And are you confident -- you said when you're speaking earlier [Technical Difficulty].

[Unknown Executive]

I will hand it now over to [ Emily ] for any web questions. We lost the signal. Okay. Thank you so much, [ Serge ]. So we have a couple of questions on the webcast today. Our first question comes from Andrew Wade from Jefferies. Could you give us any more detail on the new customer proposition recruitment model that is working? What is different for customers and what different behavior is driving?

[Rowan Gormley, executive]

Andrew, we're not going to give a lot more detail at the moment. The 3 things we've been testing are trying to access a younger audience where we are really getting the traffic from these people, but we haven't been converting them successfully. And that's where we've seen success already. The second area is in changing a one-size-fits-all proposition into one more tailored to customers' preferences, spend wine, how they like to shop. And that's an early stages of testing. And then we tested quite extensively a third one, which didn't work. And well, it look good in the early days, we ramped it up, but as sometimes happens with these things, when you test something at scale, you get a different answer to when you test it in a small controlled environment. And so that didn't work and we've canceled that. And the impact of that is already in these numbers. So I think we're going to be confident to go into more detail about what this looks like when we can see the impact of these actually appearing in the numbers as opposed to just over the horizon.

[Unknown Executive]

Great. And a follow-up question from Andrew here. Are you concerned that there just aren't enough customers that fit within the target niche? Regular wine drinkers that want more expensive that the supermarkets, but not to premium and are prepared to commit a subscription.

[Rowan Gormley, executive]

The answer is yes, we're -- we're not concerned about that. I think our market penetration is still pretty low. The supermarkets have despite their promises about cutting costs and rollbacks and everything else done a very good job of catching up with us on price. So in fact, the overlap between the sort of above average supermarket wines in our core range is actually closer than it was, say, 5 years ago. And there are just a very substantial audience of people we haven't got to yet. So I think once you eliminate the sort of the COVID trends and then the coming out of COVID, my expectation is the long-term trends will resume where the U.K. and Australia will be about flat in terms of market size, but the U.S. will get back into growth. And so no, we don't think there's an issue here.

[Unknown Executive]

So another follow-up question from Andrew here. You've talked to the U.S. challenges being largely about execution, what is changing operationally there? What do you -- why do you think the U.S. business has not got more traction given your inherent advantages versus the 3-tier distribution model?

[Rowan Gormley, executive]

So, I think the reason the business hasn't got more challenges, it's inherent in the question, we just haven't executed as well as we should. And there are some differences in the U.S. market, but there is nothing which is fundamental about it and makes us think that it's going to be more difficult to operate, there is state and regional complexity, but we're over all of that and managing that very comfortably.I honestly think it is just largely down to execution. And in a sense, I think the opportunity for me having been out of the business and coming back into the business, I think it's -- I have a much clearer view on where the areas are that we need to improve execution to really get the traction there. And I think the fact that we are already seeing elements of improvement through the changes that the team kicked off before I got back points to the fact that actually the U.S. should still be our biggest single market at some point in time.

[Unknown Executive]

Great. We have a question from Ben Hunt from Investec. Slide 34 shows a contribution for older cohorts continuing to shrink, how do you square this observation with your view that existing customers' spend is stable?

[James Crawford, executive]

Thanks, Ben. Well into the appendices already. Yes, a pretty simple answer. Look, we show this on a contribution basis. That means it's a combination of the sales we're getting from those cohorts and any reductions in the contribution margin, which we have seen in the first half and we bridged out earlier in the presentation. So if you were to reverse out those contribution margin reductions, you'd see kind of underlying sales retention number that would square up to the sales retention metric we've reported. And as described earlier, that's a kind of combination of the customer retention, which is looking good and the change in year-on-year sales per customer, which is a smaller uplift than it was a year ago which is an uplift. So you can square all these pieces together. Very happy to kind of work the math through with you offline. But I think the big driver in there would be you're seeing the contribution margin decrease in that chart as well.

[Unknown Executive]

Thank you. A question here again from Andrew Wade from Jefferies. I appreciate the rationale behind the guardrails, but is it pragmatic to not invest more if you're getting a great payback and/or continue investing if you're getting a poor payback?

[Rowan Gormley, executive]

It is pragmatic, Andrew, over the medium term. Over the short term, I think in an effort to be rational capital allocators, we've been too keen to put the foot on the accelerator and too keen to take it off again when the data goes the other way. And the result is a business that's difficult to manage today's inventory overhang, which thank goodness we're at the end of inventory buildup and are now starting to consume it. But today's industry overhang is dramatically worse because we cut back on new customer acquisition too dramatically. And my expectation is as we stabilize the business and continue the testing program, we will build up opportunities for good capital -- good investments in new customer acquisition.But the culture change I want to get in is rather than responding to that by investing more and investing more and investing more is to be more frugal about it. And when we land a good deal to user to replace a bad deal. And so you'll end up improving the average payback over a period of time. And what we then aim to do is if we can see, we've got paybacks consistently above, say, 2.5x. We then say, all right, we're prepared to move new customer acquisition from GBP 25 million to GBP 30 million, and we already know how we're going to invest that money. And then we start the process again. But I think having a business which is simple and stable to run, where winemakers can forecast in confidence, and we can do the same back to them, I think is going to be a very important thing going forward and outweighs the benefits of short-term rational capital allocation.

[Unknown Executive]

Great. Thank you. So a question here from [ James Hamilton ]. How do you arrive at the forecasted cash generation from inventory releases? And what is the probability of that? And then just a follow-up question from him as well. Do you anticipate any additional cost savings besides the GBP 10 million?

[James Crawford, executive]

Yes. James, I'll take the first bit and probably hand it over to Rowan for the second. So the forecasted cash generation is really a function of us looking at the inbound stock that we already know we have. We have purchase orders in the system. We have shipping dates, et cetera. Most of that wine is made. It's the nature of wine having a long supply chain. And looking at that in comparison with the cost of goods, we expect the discharge. And obviously, if you're spending less on inbound stock and you're discharging through the P&L, you end up with a cash difference and an inventory reduction. If you spotted that we're saying there's GBP 60 million to GBP 70 million difference between COGS and inbound stock and GBP 40 million to GBP 50 million of cash generation.A big chunk of that difference will be that, that inbound stock generates payables generally, things like payables, therefore, come down as the inbound stock reduces. So there's a series of other movements on the balance sheet, and we didn't want people to see that kind of [ GBP 60 million to GBP 70 million ] assume that 100% of that converted immediately to cash. Rowan, you're happy to take the second part of that?

[Rowan Gormley, executive]

Sure. We do anticipate additional cost savings besides the GBP 10 million, James. But we've grouped them into cost savings that are immediately available and entirely within our control, which we'll be executing in the short term. And then cost savings, which require either some tech build or some negotiation or a change to the way we do business or an increase in volume, which will take longer for us to put in place. But the end result is we want to go back to being a lean organization and have our cost set at a level which enables our customer pricing to be at a level where sales are easy because the value to customers is very apparent and leaving us with a decent margin in between. So that's very much the direction we're going to take it, but we are phasing these things in the order in which we -- in order of certainty of delivery, that makes sense.

[Unknown Executive]

Perfect. That's great. So there are currently no further webcast questions at the moment. So I'll hand back for any closing remarks.

[Rowan Gormley, executive]

Great. Well, thank you very much for joining us this morning. I hope you all have a very good festive season. And we look forward to sharing the update on how that goes at the beginning of next year. If you have any further questions, do feel free to e-mail them through, and I look forward to speaking to you later. Thank you very much.