DFS Furniture plc

Hello everyone and welcome to our financial year 24 interim results presentation. I'm Tim Stacey, the Group CEO and I'm here with John Fallon, our CFO. Today I'll provide a brief overview of our performance and current market conditions before John runs through the financials. I'll then provide a strategic update and run through our profit expectations for the full year before John and I take questions from analysts. By way of introduction, there are three key messages that John and I will build on throughout the presentation as follows. First, and this is a continuation of the trend we saw in financial year 23, we continue to win, but in a very challenging upholstery market. The market has been weaker than we had based our full year guidance on, but we've continued to grow our market share up approximately 0.5 percentage points to a record high of 38.5%. Second, we're delivering on our cost programme announced in September last year. Gross operating costs have reduced by £22 million year on year, which more than offset £11 million worth of inflation and interest rate headwinds. Gross margins also continue to increase, up 220 basis points year on year, and overall our operations are in great shape. The operational performance has helped mitigate both the relatively weak market demand and inflationary cost pressures. Finally, we believe that the longer term fundamentals for the upholstery market remain positive and that we are well positioned for growth. Given market volumes are currently at record lows and the operational leverage within our business, the profit upside from market recovery is very significant and we remain confident in achieving our target 8% margin when the market returns. So here are some headline numbers to help illustrate the story of the half. Year-on-year order intake was down 1.1% in value terms reflecting the tough trading conditions but this was well ahead of the market which is down circa 10% in volume terms. As expected, gross sales or deliveries were down to a greater extent and this is due to the high opening order bank at the start of the previous financial year which had built up as a result of the pandemic period. We've made good progress on our Cost to Operate programme, reducing our operating costs by £22 million year-on-year and improving our gross margin rate by 220 basis points. Now, this has helped us deliver year-on-year underlying profit growth of £1.6 million. Finally, both brands, Sophology and DFS, customer service scores have continued to grow in the half, with the DFS brand's established customer scores up 62% year-on-year. Overall, then, on the factors that we can control, we believe that we've made some really good progress in the half. So on to our best view of the upholstery market. And well, it's fair to say that it's very challenging out there. Now, you may remember this slide from our previous presentation. Now, we entered the year with relatively low levels of market demand in volume terms, approximately 15% below pre-pandemic levels. We expected conditions to worsen in financial year 24 before eventually starting to recover. Market demand over recent periods has been hard to forecast. But to provide some guidance at the start of the year, we needed to put a stake in the ground. And whilst acknowledging that it would be a key sensitivity for our profit performance, we assumed that market volumes would decline by a further 5% year on year. Actual market volumes in the first half have been weaker than that though and are down circa 10% year on year and are now over 20% below pre-pandemic levels. We had a reasonable start to the year but September and October were tough with very low levels of footfall across all retail parks driven by the record hot weather at that time. The housing market has also been weak with transactions down 19% year on year. and this has had a pretty strong bearing on upholstery demand levels. More on that later. Demand did pick up towards the end of the half, but remained weak by historical levels. Our top-line performance has clearly been impacted by these trends, but based on our proprietary Barclaycard data, we've continued to grow our share in the sector. And as I mentioned before, given our market share position, we feel very well placed to capitalise when the market does pick up. Now it's worth looking at our market drivers to help understand current market demand and the recovery potential. Around 80% of sofa purchases are replacements with around 20% following house moves. In terms of replacements, historically there has always been a strong correlation over time between consumer confidence levels and market demand. Looking at the top left chart on this slide, the bars represent the upholstery market size in pound notes terms, and the dotted line is consumer confidence. Given the significant retail price inflation levels we've seen in the sector, we've split the final bar on this chart to indicate the approximate inflation adjusted market size. And as you can see, market volumes are currently at record lows. The top right chart here shows general consumer confidence levels and the climate for major purchase confidence measures over the last six years. And whilst the major purchaser score is currently 20 points below the pre-pandemic average, there are some green shoots from a slightly improving trend, implying that the upholstery market demand should pick up in the near future. Moving on to property transactions, the bottom left chart shows that property transactions are 14% below pre-pandemic averages and 19% down year-on-year based on ONS data. The subdued property market is clearly proving a drag on upholstery market demand. However, the bottom right chart shows that there's been a pickup in house purchase mortgage approvals in the last few months, which again implies that the upholstery market could pick up in the future. Typically, house transactions occur three months after approval, and Savills are forecasting a fairly significant year-on-year rise in residential property transactions of around 9% in calendar year 2025. A final source worth mentioning is Global Data, who are projecting upholstery market growth of around 2.8% in calendar year 2025 and 3% thereafter. So in conclusion, whilst it's hard to be specific as to the timing and pace of a recovery in the upholstery market, the key drivers are indicating that the market could bottom out in calendar year 2024 and then start to recover. In terms of the competitive dynamics in our sector, we've seen some historical trends continue and some new trends emerge. Along with us, we've started to see recently some more general home retailers growing their upholstery share, particularly in the low to mid price points. Independents, however, continued their downward trend, now representing around 26% of the market. And around 10 to 15 years ago, they represented over 40% of the market. So there are three key takeaways from the pie chart. First of all, independents still make up around a quarter of the market and we expect them to continue to decline. Secondly, we continue to win share despite the growing strength of the general home retailers. And finally, as I've said before, with our market share position at record levels and the operational leverage within the business, we feel well positioned to capitalize when the market recovers.

I'll now pass over to John to run through the financials.

Thanks, Tim. Hello to everyone watching today. I'm going to start with the main financial headlines. Firstly, revenue has declined year on year. And as expected, that revenue decline is greater than the order intake decline of 1.1%. As Tim mentioned, that's due to the unwinding of the high opening order bank through the prior year period. Despite revenues declining, our underlying profit before tax and brand amortisation increased year-on-year by £1.6 million to £8.7 million, supported by good progress on our Cost to Operate programme, helping us to grow our gross margin rate and reduce our operating costs. Underlying basic earnings per share also grew at a similar rate. Our reported profit before tax of £0.9 million includes £7.1 million of non-underlying charges in the period, of which £4.2 million were cash-related. This is in line with our expectations and the guidance we gave in September, but more on that shortly. As expected, net bank debt came down slightly compared to the same period last year, and is also down from the £140 million that we reported at the last year end. Leverage is also reduced and we continue to maintain good levels of headroom against our cash facilities and lending covenants. Moving on to top line performance then. The group's gross sales declined by 5.6% with both brands seeing a similar reduction driven by the lower order intake and the order bank benefit in the prior year. Across the period, market demand was volatile and weaker than we had expected. We did see year-on-year order intake growth in July and August, but this was more than offset by a challenging September and October driven by very low footfall during the unseasonably warm weather, followed then by some improvement in November and December. In the last two months of the half, we also saw a shift in product mix towards models with shorter lead times, which meant that we were able to deliver more orders and gross sales in the period. Group revenue of £505.1 million was 7.2% lower than half one FY23. This is a higher rate of decline than gross sales due to an increase in interest-free credit costs of £7 million year-on-year, primarily as a result of the higher Bank of England base rates. This impact was partially mitigated by changing our everyday interest-free credit offer to a maximum of 36 months. Looking forward, our interest-free credit costs will start to reduce when reductions in base rates are instigated by the Bank of England. At current participation levels, every 1% movement in the base rate changes the cost by £7-8 million on an annualised basis. Before I talk about gross margin and operating costs, a brief recap and update on our Cost to Operate efficiency programme that we announced last September. Overall, the objective remains to deliver P&L benefits of around £50 million on an annualised run rate basis by the end of FY26. This will help us to offset future cost inflation and support us in delivering our 8% PBT target. I'm delighted to say we're making good progress. Our gross margin rate, we've now delivered a third half year period of margin rate growth. On property costs, we've continued to benefit from further reductions in our retail rent roll, in addition to further savings from consolidating our sofa delivery company warehouses. Across operating costs, we've also started to make good savings through adapting and utilising more efficient operating models, and we're continuing to develop a future savings pipeline of opportunities. So overall, the key message is that we have made a good, positive start in each area and we remain on track to deliver the £50 million objective. We'll provide a further update on our progress in September. Moving on to gross margins. In rate terms, H1 FY24 was 220 basis points higher than the prior year and 100 basis points higher than the half-two rate in FY23. the Group's cash gross margin decreased by £10.4 million year-on-year in the period. That was driven by the lower sales volume, which contributed £14.5 million towards the overall cash reduction, and that was partially offset by the improvement in margin rate. As anticipated, freight rates normalised back to pre-pandemic levels at the start of the half, adding 380 basis points to the margin rate year-on-year. and that benefit more than offset the adverse movements on FX rates and interest-free credit costs. Underlying product margins improved by 160 basis points, supported by the cost of goods benefits we started to see towards the end of the half following the closure of our smallest factory and wood mill in October 2023, the associated redistribution of volumes across our supplier base and the retail price increases that started to be realised in the P&L from May 2023. So overall, we're pleased with the progress we continue to make towards our 58% margin rate target. On to operating costs then, and I'm pleased to say that we have reduced our operating costs significantly in the period. Total operating costs, which presented here include depreciation and interest, have reduced by £11.5 million year on year. We estimate that inflation added £7 million to the cost base, which is around 3%. In addition, interest costs were £3.6 million higher year-on-year, primarily as a result of the Bank of England base rate increases. In total, inflation and interest costs added a year-on-year cost headwind of almost £11 million. However, that was more than offset by cost reductions totalling just over £22 million. Breaking that down, Variable volume related costs reduced by £4 million as a result of the gross sales reduction. Marketing related spend was £3.9 million lower year on year after we took the decision to optimise our spend in this area given the tough trading environment. This was mainly achieved by temporarily reducing our beds and mattresses marketing spend and Tim will discuss this further later. The remaining £14.2 million of cost savings was delivered from across the cost base of the group. The majority of the savings came from a combination of more efficient operations in the sofa delivery company and our customer service operations and other good initial progress on our cost efficiencies programme across retail and central overheads. We also continue to benefit from property savings across our retail and distribution centre estates. More generally, we've been pleased to see the entire business becoming even more focused on good disciplined cost management as we respond to the challenges of the current macro environment. Moving on to net debt and cash, our net bank debt has remained relatively stable in the period. Reported net bank debt reduced from £140.3 million at the previous year end to £133.9 million at the end of the current period. However, adjusting for the payment timing of our prior year final dividend, net bank debt would have been broadly flat. As we highlighted in September, we recently completed the refinancing of our £250 million debt facilities, providing us with the significant cash headroom that we need for the next three to four years. Our £200 million RCF facility runs to September 2027, with an option to extend to January 2029, and our US private placement notes of £50 million mature on an even split between September 28 and 2030. Operating cash flow of £28 million was delivered net of £4.2 million of non-underlying costs that relate to the closure of one of our factories and wood mills mentioned earlier, as well as costs related to the refinancing. We expect full year non-underlying cash costs to be around £5 million, consistent with our previous guidance. First half capital expenditure was over £5 million lower year on year. We've continued to prioritise investment in our retail estate and digital assets to maintain and improve our customer offer as well as in the mid and back office functions to drive operating cost efficiencies. The small working capital inflow has been driven by lower stock levels and improvements towards more consistent standard supplier payment terms. Leverage reduced slightly from 1.9 times at the end of prior year to 1.6 times at the end of the first half, or 1.8 times after adjusting for the timing of that dividend payment, which is well within the covenant limit of three times. Over time, as revenues and cash flows recover as expected, we remain committed to reducing leverage to our target range of 0.5 to one times.