DFS Furniture plc (DF0.SG) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to the DFS Group 2025 results presentation. I'm Tim Stacey, Group CEO. I'm here with Marie Wall, our Interim CFO. And together, we'll update you on our FY '25 performance, provide a strategic update and a future outlook. So I'll now provide an overview of the key headlines before handing over to Marie to discuss the financials. So I'm pleased to report that FY '25 was a year where we accelerated our momentum by focusing our energies and our efforts on what we can control, so relentlessly focusing on executing against our strategy. Our customer propositions are in great shape across both our DFS and Sofology retail brands, leading to strong group order intake growth of up 10% year-on-year and continue to grow our market share. We are focused on our operational execution and continue to make progress here with our gross margins up 70 basis points year-on-year to 56.5%, as we target our return to a pre-pandemic average of 58%. We've achieved a further GBP 25 million of sustainable cost savings in FY '25, which means cumulatively, we have now surpassed our GBP 50 million annual savings target a year ahead of expectations. The group now has a more efficient cost base to improve profitability across the economic cycle. Growing sales, increasing margins and good cost control has clearly driven profit growth with profit before tax and brand amortization increasing by GBP 20 million to GBP 30 million. In addition, we have generated good levels of free cash flow through both profit generation and also disciplined cash management enabling us to reduce our debt by GBP 58 million and strengthen our balance sheet with leverage reducing from 2.5x at the end of the previous financial year to 1.4x, as we target getting back into our 0.5x to 1x leverage range. Finally, we remain increasingly confident about the group's future prospects. Whilst we're not expecting much support in the market in the near term, we do expect to grow profits through cost and efficiency actions and also our compelling customer propositions. Looking further ahead, we are well positioned to capitalize on any future market recovery. Given our market-leading position, our scale and the operational leverage in the business, the profit drop-through from any market support will be very significant. And we fully stand by our medium-term targets of achieving GBP 1.4 billion of revenue and an 8% PBT margin. Just moving on to some additional headlines briefly. Both of our retail brands performed well in the period ahead of the market. DFS' order intake was up 9% year-on-year, supported by 3 key drivers: firstly, our exclusive brand sales, which reached a high in the period of over 40% of our sales mix; second, a focus on new product development; and finally, our interest-free credit offer, which is market-leading. The Sofology brand has performed incredibly well in the period with order intake up 16% year-on-year, and the product range changes that we made at the end of the last financial year have proved very effective. Having established the foundations in our Home business, we have now started to accelerate our marketing investment to raise awareness with customers of our offer. And we've seen an encouraging order intake performance in quarter 4 of over 20%, and we'll continue to invest in this key area of growth for us in FY '26. Finally, the brands have been supported by our operational platforms working efficiently and effectively. Strong operational performance across the entire customer journey have collectively resulted in us achieving record established customer Net Promoter Scores, and this has been achieved by the hard work of our fantastic, passionate and dedicated colleagues, combined with an investment in data and technology, which provides us with insights and enables us to improve our decision-making and deliver a great customer experience. So in summary, a good performance, significant profit growth and our customer propositions and operations in great shape as we enter FY '26. I'll now hand over to Marie, who will cover the financials.

Thank you, Tim. Good morning, everyone. It's a pleasure to be here today. I'm going to begin by walking you through our key financial headlines. We achieved revenue growth of 4.4% year-on-year in a market which has been subdued amidst macro uncertainty. Our underlying profit before tax and brand amortization of GBP 30.2 million is up GBP 19.7 million year-on-year and underlying basic earnings per share of 9.2p is up 7.7p. Now, this improvement is driven by the revenue performance, 70 basis points of gross margin expansion and the success of our Cost to Operate program, along with lower depreciation and interest charges resulting from disciplined cash management and lower levels of net bank debt. We have continued to focus on deleveraging to strengthen the group's balance sheet, with net bank debt decreasing by GBP 58 million to GBP 107 million and bank leverage decreasing from 2.5x at the previous year-end to 1.4x, as we progress towards our 0.5 to 1x target range. To summarize, FY '25 was a year of profitable growth, delivering strong cash returns and a significant improvement in leverage. Moving on to our sales performance, and the group achieved strong levels of growth in a market that was marginally down in value terms year-on-year, and the proprietary banking data indicates both our brands with their market share. Tim will talk to this a little bit later on today. The order intake when measured on a comparable 52-week versus 52-week basis was up plus 10.2%, with strong momentum maintained from half 1 into the second half and similar levels of growth at around 10% experienced in each half. DFS performed well with like-for-like order intake growth up 8.7% as our exclusive brands resonated well with the customer. These brands are enhancing our customer proposition with perceived quality and on-trend designs contributing to growth in both average order values and order volumes. Sofology also performed well, and we were pleased to see the impact of the range and price changes made at the end of the last financial year, driving stronger conversion rates and translating into like-for-like order intake growth of plus 16.2%. On a reported basis, group order intake grew by 8.7%, reflecting the impact of the 53rd week in FY '24. Moving on to sales. And our gross sales increased plus 5.8%, which is lower than reported order intake growth. Now, this is due to 2 factors. Firstly, Easter fell later in the year, meaning that some orders placed in this high demand period could not be manufactured and delivered in the financial year. And secondly, there was a shift in customer orders to ranges with longer lead times. As a result, the group ended the year with a resilient order bank coming into FY '26. Revenue, which we show at the bottom of the table, is reported after deducting VAT, the cost of providing warranty products and interest-free credit subsidy cost gross sales. Revenue growth at 4.4% was lower than gross sales growth of 5.8%. Now, this was driven by the decision in DFS to offer customers extended 48-month interest-free credit in key periods to increase affordability and also to drive conversion and sales in a softer market environment. In summary then, a strong topline performance, outperforming the market through our relentless focus on our market-leading customer proposition. Now, on to our Cost to Operate program, and I'm pleased to report that we have had another good year of progress, sustainably reducing our cost base through this program. At the end of FY '23, we set ourselves the target of GBP 50 million annualized efficiency savings by the end of FY '26. As of the end of FY '25, we have achieved GBP 53 million of benefit with GBP 25.5 million delivered in FY '25 on top of the GBP 27.5 million we delivered in FY '24. This means we've achieved the GBP 50 million target 1 year ahead of plan. So let's take a look at some of the components. In FY '25, we achieved a further GBP 10.5 million of gross margin benefit, reflecting ongoing progress and rationalizing both our own manufacturing operations in FY '24, and in FY '25, consolidating supply across our external manufacturing partners. This has both reduced the cost of goods sold and improved quality through ensuring we are producing our products in the optimal locations. In addition, we have improved processes to clear the canceled orders and damaged items more effectively. Moving on to operating costs, where we have delivered a further GBP 15 million of cost benefits. This has been achieved through improving the efficiency of operations across our retail and customer service teams, our group support functions and the Sofa Delivery logistics operation. Key initiatives within this have included restructuring to leaner operating models, improving and streamlining our processes, enhance procurement and using data and insight dashboards to drive operational efficiencies. The efficiencies coming through the Sofa delivery company continue to be a standout, and Tim will elaborate on this a little later. In addition, we continued to reduce our property costs through property lease regearing opportunities. These cost efficiency initiatives have contributed to us delivering over a 40% drop-through to profit from the incremental revenue generated in the period. And these have been achieved in a sustainable manner, and importantly, without compromising the customer proposition or the capacity of the group to leverage market recovery. And again, Tim will mention this a little bit later on in our presentation. Overall, we are very pleased with the progress we have made. The group is now operating with a lower cost infrastructure, which will strengthen future profitability through all stages of the economic cycle. The cost discipline we have implemented along with the cost-conscious culture we have fostered will help us navigate future inflationary pressures, which do remain significant. So on to gross margin. Gross margin, as a percentage of revenue, improved by 70 basis points year-on-year to 56.5%. This represents a third consecutive year of growth and good progress towards our 58% target whilst ensuring that we continue to offer customers great value and innovative quality products. In absolute terms, gross profit increased GBP 30.9 million year-on-year to GBP 581.7 million. So looking at the individual building blocks, the revenue growth resulted in an incremental GBP 23 million of gross margin with the balance driven by margin rate improvement. The 70 basis point margin rate improvement resulted from strong progress on our commercial product margins in combination with a positive contribution from foreign exchange. Together, these more than offset the adverse impact from freight rates. Our product margins improved 140 basis points or GBP 14.6 million, and GBP 10.5 million of this resulted from our Cost to Operate program, as I mentioned earlier. We benefited from an improved U.S. dollar rate applied to our Far East purchases. The average dollar rate paid to the period was $0.05 favorable year-on-year, resulting in a $5.2 million or a 50 basis point margin rate benefit. Freight rates remained elevated over most of the year linked to the Red Sea closure and averaged over twice the amount of the previous year, resulting in GBP 11.9 million or 120 basis point margin drag. It's worth noting that every $1,000 movement in freight rate per container impacts our annual freight cost charge by circa GBP 7 million to GBP 8 million a year. So we're encouraged that our current gross margin would be at a 58% target if freight rates were back at the long-term average levels of $1,500 per container and interest rate settled at market consensus expectations of around 3.5%. Now, we obviously cannot control these elements, and we see further opportunities to continue to strengthen our product margins through our value optimization initiatives. Moving further down the P&L. Our operating costs, inclusive of depreciation and interest charges, increased to GBP 11.2 million year-on-year to GBP 551.5 million. Walking through the chart from left to right, the absolute cost increase is primarily driven by a combination of volume, which has increased with the growing revenues of the group; inflation, which is predominantly driven by wage inflation; and the cost of the annual bonus and cycling some rates rebates, which we received in FY '24. We've also invested in our customer proposition with the launch of new exclusive brands and investments in marketing to drive growth in our home proposition. Our cost to operate program has enabled us to offset a significant proportion of these cost increases through a GBP 15 million year-on-year cost saving, which is what I talked about a little earlier. On top of this, interest and depreciation charges have reduced by GBP 4.9 million. Within this, finance costs have produced GBP 3 million year-on-year, primarily as a result of our lower average net debt throughout the year. The group has reduced capital expenditure from historical average levels of around GBP 30 million to around GBP 20 million, as we prioritize reducing our debt. This recent low level of capital investment is the main driver of the reduction in depreciation that we've shown. So turning to cash flow. Free cash flow generated in FY '25 was GBP 57.8 million, an increase of GBP 72.9 million year-on-year, driven by strong trading, working capital inflows due to a strong order intake and sales performance in the final quarter and lower interest and non-underlying charges. Looking down the cash flow table, our strong free cash flow generation has been supported by a disciplined approach to capital expenditure, as I previously highlighted. Maintenance capital levels have been maintained at our historical level of 1.5% to 2% of sales. Growth investment has been prioritized towards proven opportunities. And in FY '25, these have been focused on showroom refurbishment, enhancements to showcase our new exclusive range such as Ted Baker and La-Z-Boy in DFS. Interest costs produced GBP 4.4 million year-on-year to GBP 14 million, reflecting lower average levels of net bank debt in the period and the nonrecurrence of the financing costs we incurred in FY '24. Corporation tax payments of GBP 3.7 million were low relative to our profit performance, and this is due to using historical overpayments. Lease liability payments reduced by GBP 3.7 million, where the prior year was impacted by additional payments, which fell into the longer 53-week accounting period. There was a significant working capital inflow in the year. The majority of our sales are made to order, and as such, we operate with a negative working capital model with customer deposits and final payments occurring before payments fall due to our suppliers. The significant working capital inflow reflects the strength of our order intake and sales performance in the last quarter and few of our payments. Finally, the total cash flow for the year is supported by not funding a dividend payment during the financial year as we prioritize deleveraging. As a result of our disciplined cash management, our bank leverage has reduced significantly from 2.5x last year to 1.4x at the end of FY '25. So I'll conclude today with capital allocation. In summary, we remain focused on strengthening our balance sheet. The group's capital allocation priorities are for the group to operate with net debt levels of 0.5x to 1x trailing 12-month EBITDA to invest to maintain the group's asset base and support future growth and to pay ordinary dividends with a dividend cover of 2.25x to 2.75x earnings per share and to make special returns when leverage is expected to fall below the lower end of the leverage target range. Whilst our financial position has strengthened due to improved profit performance and disciplined cash management, our current leverage remains outside our target range. So given the near-term economic uncertainty, we have determined not to build further balance sheet resilience, the focus should be on further reducing net debt. And therefore, we have taken the decision not to recommend a final dividend. We will continue to maintain strong capital discipline to bring our leverage into our target range. Now, we do remain committed to returning to the dividend register and providing sustainable shareholder returns, and we will make a decision in March 2026 on the payment of an FY '26 interim dividend based on our profit and leverage expectations for the full year at that time and the future outlook for the business. So in conclusion, I'm very pleased with our FY '25 performance, both in terms of our profit growth and the deleverage we have achieved. Our well-invested customer proposition and the success of our Cost to Operate program leave us well placed to capitalize on future market recovery. We will, however, continue to plan prudently, focusing in the short term on growing profits through our commercial initiatives, cost actions and further strengthening our balance sheet resilience through robust cash discipline. I will now hand back over to Tim.

Okay. Thanks, Marie. So I wanted to sort of step back really and just kind of explain a few of the enablers that drive our strategic progress. And we focus on 3 key areas that underpin our business model. Firstly, it's around leveraging our vertical integration and scale. Second is around utilizing data and technology. And finally, it's around harnessing our unique people and culture. And these combine to drive our underlying performance. Through leveraging our scale, we aim to provide a differentiated customer experience in order to drive sector-leading gross margins. Now, the group has a 39% market share by value based on global data research, with sales densities over 3x that of our nearest competitor. Given our scale, well-known brands want to work with us to develop unique sofa ranges. In DFS, we work on an exclusive basis with high-quality brand partners that resonate strongly with our customers, including, for example, French Connection, Joules, Country Living. Our recently launched partnerships with Ted Baker in FY '24 and La-Z-Boy in FY '25 are all performing well, and our exclusive brand sales mix has reached a record high of over 40% of total DFS sales. Our supplier partners across the world offer us priority to all new ranges to sell on an exclusive basis, ensuring that we stay ahead of the curve in terms of new product development and innovation. In terms of our own manufacturing, we produce around 20% of what we sell through our own U.K. factories, and our scale enables them to operate really efficiently. They also enable us to offer short lead times to customers, and importantly, insight to help us optimize cost pricing from ranges sourced from our third parties. The scale of our buying power in this sector enables us to source efficiently and deliver industry-leading gross margins. And as Marie mentioned, we've grown our gross margin this year by 70 basis points. We're now looking for further growth as a result of combining the commercial buying teams of DFS and Sofology under one commercial leader, and that will enable us to share best practices and further leverage our buying scale in the future. Finally, we're a major customer of our interest-free credit lending partners, and this enables us to offer a market-leading proposition. This year, we offered IFC on a 48-month term to customers in DFS to drive demand in key periods, especially with the market being relatively subdued. Moving on to vertical integration. This enables us as a group to capture value across the entire supply chain. We have a highly skilled, experienced and creative design team that research and identify emerging trends in the wider home and fashion categories and then go on to design products that are not only right for customers, but they are efficient for us to manufacture and deliver. As one of the largest manufacturers of sofas in the U.K., we ensure that we run our factories as efficiently as possible. And importantly, we integrate that operation with our logistics business on a just-in-time basis. This reduces the working capital invested and increases the speed to market and delivery for customers. The Sofa Delivery Company, our logistics operation, is the largest 2-person delivery company in the U.K. It was again a real standout performer for us this year. It delivers for both of our retail brands using the same infrastructure across 7 days a week and offers an installation and delivery service, which is absolutely focused on providing great customer service. This is evidenced by record post-delivery NPS scores achieved at the same time as reducing our delivery cost per order despite inflationary cost headwinds. Finally, we have sector-leading customer service and repair teams who use the latest technology to triage customer requests, and if necessary, deploy one of our super-skilled 300 repair people to fix any issues for customers. The control of the end-to-end customer journey means that we can deliver a great experience for customers and also operate incredibly efficiently compared to our competitors. And as I mentioned earlier, this has led to record established customer Net Promoter Scores and help fuel our reduced costs. Now, we use data and insight across our business, and it drives innovation, better decisions and a continuous improvement mindset, both to customer service and operational efficiency. Now, we've made significant progress in the last few years in simplifying how we store, access and connect data by developing a hub that sources data from 85 different sources internally and externally. We use data right across our business; for example, to power our commercial offer, with space-based productivity models and detailed price elasticity scenario planning management tools that help our buying teams set the promotional and pricing strategy in order to optimize performance. We also use data in our marketing to improve the efficiency of our spend, and our team recently won the Bloomreach Data Driven Leader award, recognizing our effective and impactful use of customer data and analytics. Another example is in our retail stores, where we're able to significantly improve our overall store-by-store performance through the use of store-level dynamic balanced scorecard. Now, this improves the visibility and provides real-time insight across our people, processes, customer and financial lenses store by store. And finally, in the Sofa Delivery Company, we have powerful dashboards that enable us to drill down in detail to drive performance. For instance, we can review the individual real-time van crew performance at any day at any time. We also use our dynamic AI-driven routing software to improve route planning. And the combination of the dashboards and these insights has helped us deliver a 10% efficiency improvement in SoDelCo and reduced failed deliveries to record lows. Moving on to technology. We continue to innovate with more technology included in our sofas than ever before, including our recently patented heated seats, wireless charge points, wine coolers, speakers and even vibrating seats, including our recently launched Cinesound ranges. These are all performing incredibly well. We continue to look to improve the customer journey in order to provide a seamless experience across all of our channels. In DFS, we recently launched an AI-driven personalized homepage on our website that changes the content based on where the customer is on their journey. We're also using a CRM platform in Sofology to develop AI-driven e-mail marketing campaigns, and this improves the personalization of individual communications to customers depending on where they are in their journey. And there's some early indications that this has yielded significant conversion rate and average order value increases in Sofology. Our proprietary Intelligent Lending Platform, ILP, now has multiple interest-free credit lending partners across both DFS and Sofology. This enables us to achieve high first-time acceptance rates with customers in order to help us manage subsidy costs. It shortens transaction times and enables our in-store colleagues to improve conversion, especially at busy times. In our customer service operation, we're enhancing colleague-written e-mails by using AI to draft written responses to customer service tickets, and this has helped reduce resolution times and increase colleague productivity. Now, delivering an exceptional customer experience requires a dedicated and passionate workforce. And it's the commitment and talent of our people that truly drive our business forward. We take great pride in the unique culture that we've cultivated across our group. We have deeply ingrained customer-led values and a set of leadership behaviors that define our culture, which drives high levels of engagement, and ultimately, we believe performance. We constantly listen to our colleagues through our Your Say survey, and we've made good progress with colleague engagement stepping forward to 12% year-on-year. Our colleagues tell us that they feel engaged and proud to work for the group, and that's evidenced by voluntary colleague turnover reducing to 15%, which is relatively low in our sector. We invest in our colleagues to help equip them with the right skills and to develop them and help them progress, and I'm very proud of our senior leadership development program, which focused on developing our most senior leaders in the business with over 30 graduates in the last 12 months. In addition, our group leadership academy offers opportunities for colleagues to develop and strengthens our future leaders in terms of the pipeline. And that's proved really popular with more than 500 of our managers attending workshops in the last year. Now to help ensure colleagues stay with us and thrive with us, we want to create an environment where everyone feels welcomed, valued and respected. Diversity in our teams helps us in many ways, from obtaining different perspectives, increasing creativity and innovation and being better able to serve the communities in which we operate. Our 6-colleague networks connect like-minded people and help us activate change and engagement initiatives identified in our inclusion agenda. We're constantly seeking to raise standards here. And this year, we've achieved a strategic level in the diversity and retail inclusion maturity curve. We also want to ensure that our people can work for us whilst managing their busy lifestyles. So recognizing this, we've adapted the retail model in DFS to increase the availability of part-time roles. And in FY '25, DFS' part-time mix was 58%. Finally, we're working towards equal gender representation in our business and are making progress here with 41% of senior leadership roles now held by female colleagues. On to sustainability, we are committed to reducing our impact on the environment. And in March 2025, we announced that we had obtained validation from the Science Based Targets initiatives, or SBTi, of our emissions reduction target to cut our emissions by 90% across Scope 1, 2 and 3 before 2050. Now, our emissions are weighted heavily towards Scope 3, and towards that, we launched an In This Together engagement campaign with our suppliers to set their own Science Based Targets. Now, initially, we sought buy-in to cover 20% of our Scope 3 emissions, and we surpassed this by achieving support for 59%, and I'd like to thank our suppliers for working collaboratively with us on this important journey. Tackling our Scope 1 emissions is proving challenging due to the significant investment and innovation required to upgrade our legacy electricity infrastructure and also really the limited availability of heavy electric stroke hydrogen vehicles in the market. However, we remain committed to our reduction path, and we are working to address these challenges in the coming years. This year, we've introduced an electric vehicle only policy for our company car scheme and that will be rolled out in the next 4 years. And we've also launched EV and hybrid vehicles to our repair and service managers on the road. We're making good progress to ensure our business can make the most of the opportunities that a circular economy will bring and to deliver sustainable performance and are working towards ensuring responsible and sustainable use of materials through transparency and traceability across our supply chain. So pulling it all together, as a result of our strategic progress, we have delivered on our key financial focus areas of growth, margin progression and cost optimization. We've talked about our gross sales being up 6% in a relatively subdued environment, our margin increasing by 70 basis points and delivering on the cost savings a year ahead of plan. Collectively, that's helped contribute towards growing profits by GBP 20 million year-on-year. As Marie mentioned, when we start to deliver profits with good capital management, we delivered strong free cash flow in this business and have managed to strengthen our balance sheet significantly in the year. Looking forward to the future, if we look at the market drivers, they are delicately balanced, some are stabilizing, some are trending in the right direction. Starting with consumer confidence on the left-hand chart, both the overall index and also the climate for major purchase scores have stabilized somewhat, but they're still below pre-pandemic levels. If you look at the middle chart, property transactions have been in year-on-year growth now for 15 months. And we're starting to see that level of increased activity feeding into upholstery purchases. We do acknowledge there has been a recent drop off in the last couple of months, but it's still in growth year-on-year. Looking at real household disposable incomes, now these are improving, and expect it to continue to grow, but consumers are clearly saving rather than spending at the moment, and savings levels remain at relatively high levels. Finally, clearly, we acknowledge that the autumn budget may be lingering on consumers' minds. It certainly is around here and potentially dampening appetite for big ticketing items in the near future. So look, in summary, based on all the data that we see externally, and also internally, we're not currently expecting the market to recover significantly in the short term. But that said, we look forward to FY '26 in a positive mindset. We do expect to grow profits this year in FY '26, but continue to focus on what we can control. First, by enhancing our customer propositions; and second, through continued gross margin and progression; and finally, by disciplined cost management that Marie has talked about earlier. Trading so far this year, 12 weeks in, is bang in line with our expectations. Order intake is in growth year-on-year. Margins are going in the right direction, i.e., up, and costs are being managed. In terms of capital investment, we expect to continue to incur relatively low levels, but up slightly year-on-year to around GBP 24 million to GBP 28 million, and that's reflecting at least one new Sofology showroom, which we've opened recently in Carlisle, but also additional showroom refurbishments across both of our retail brands. It's worth noting that we're currently hedged at GBP 0.03 favorable to our FY '25 actual rate and every cent is worth around GBP 1 million of profit improvement, and that will help contribute to our gross margins. We do expect to incur around GBP 15 million of inflation in FY '26. Just for context, that's GBP 5 million higher than FY '25. And that increase is primarily driven by the full year impact of the employer's national insurance increases and also higher business rates that are due to come in, in quarter 4. Taking all of these factors into account, we are comfortable where the current consensus is at this early stage of the new financial year. So turning to medium-term traffic growth. We see 3 key areas of focus. The first is what I've said before is continue to focus on what we can control to improve our profitability. Specifically, we will continue to invest in our product development and continue to leverage our scale and offer great value for money for customers, and that really offer a leading customer experience. In addition, we have white space in front of us in terms of Sofology, and we're looking to increase the Sofology showroom estate by up to 15 new showrooms, and that's a 25% increase on the current Sofology estate. We have 150 basis points of margin to go for, and we're targeting through improved sourcing, as Marie has talked to earlier, an improvement this year, and that will continue as we optimize our margins, but also our costs. Second, we know from all the data we see that market volumes in the upholstery sector are around 20% below the pre-pandemic levels. We do fundamentally believe that the market will recover. And when it does, the profit uplift we will get will be very material. Given the cost that we've taken out of the business, the operational leverage that exists and our capacity that still exists, the vertically integrated business model will handle much higher volumes, and the profit drop-through will be around 40% of incremental revenue, which will be significant. This should convert a cash at a healthy rate of around 75% of PBT, given our relatively low maintenance capital requirements and our negative working capital model. Finally, we have growth opportunities beyond our core upholstery business. We have a great asset in the Sofa Delivery Company, and we see opportunities to leverage that further. We're currently trialing providing 2-person delivery service to third-party retailers through the Sofa Delivery Company infrastructure. Now, we believe that there will be additional opportunities, especially with seasonal furniture retailers and the lower volume sofa retailers to offer great customer service and also maximize the utilization of the assets, and this will generate incremental revenue. We're also targeting to grow our share in the non-upholstery home segment from a 1% market share currently to 4%, and we're starting in the GBP 3 billion beds and mattresses segment. We've established all of the foundations to enable future growth, including the rollout of our warehouse management system, and we've also started to expand our exclusive brand partners into upholster bed frames. We've consolidated supply and improved our gross margins. And as I mentioned, we're now accelerating our investment in marketing to increase customer awareness of our home proposition. We're targeting GBP 100 million of incremental revenue in the medium term. Last couple of slides. I showed this slide back in March, but I just wanted to reiterate what's happened since last Capital Markets Day, which seems a lifetime ago, in March 2022. We set out targets, medium-term targets of GBP 1.4 billion revenue and an 8% PBT margin. Now, it wasn't long after that, that the cost of living crisis started, interest rates started to increase and that caused the contraction in the upholstery market segment. Illustratively, if we had not done anything as a business, we would have been in a significantly different position as I stand here today in a loss-making position of minus 6%. However, we've grown our market share, and we've taken significant action on costs in a sustainable way and become more efficient and effective. And as a result of these, this year's results are around 3% PBT margin in FY '25. Looking ahead, there are 2 further building blocks that take us back towards our 8% target. Firstly, we expect to deliver our target of 58% gross margin. That's 150 basis points on what we've reported today. And secondly, given the significant market recovery potential, we expect to further grow our top line, given our established asset base and our existing capacity of 40% revenue to profit drop-through that will be achieved, as I mentioned earlier. And we only need the market to recover by 60% of what it's lost to get to that 8%. We're, therefore, confident that we can deliver the 8% PBT target in the medium term. Okay. I'll finish with this slide. I think we had a good year focusing on what we can control, executing our strategy. We've grown our market share, increased our margins, got to the cost target a year ahead of plan, reduced our leverage, and that's been in a relatively subdued environment. I think having been here 14 years, I can safely say that the customer propositions have never been in better shape, and all elements of our business model are working. The vertical integration really leads to established customer scores being at record levels, and I'd just like to again thank the teams for that. The financial year, we're only 12 weeks in, but it started in line with our expectations despite the relatively warm summer, and we will deliver profit growth. We expect to deliver profit growth in FY '26. In the medium term, we do see significant profit growth potential. And we're confident with a little bit of support from the market one day, we will deliver on our medium-term targets. Okay. That concludes the presentation. I'll now invite Marie back up, so we can start a Q&A. Jonathan straight in.

It's Jonathan Pritchard of Peel Hunt. Three, if I may. I'll start with Marie. Just on that rental opportunity, the property cost opportunities, is there a chunk of sort of big years ahead for lease renewals? Is the shape of the portfolio such that we could actually have a couple of bumpy years ahead? Or is it fairly flatly proportioned? Just talk us a little bit through the conversation about the dividend. Obviously, I understand the desire to put everything behind deleveraging. But was there a thought that maybe a sort of token gesture might have been appropriate? And, Tim, you alluded a little bit to a bit of shape to go and trading, not asking for numbers necessarily, but is it safe to say that the exit rate was stronger than the early months of the current trading period?

Property piece.

Yes. So I'll pick up your question, Jonathan, on properties. So we've got about 80 lease regears coming up over the next 4 years that we're looking, and then, we've got something that we call the Delphi Properties at the end of that, where we should get some significant benefits, which were, I guess, some long legacy properties. So we're looking at around 6 or 7 over the next couple of years, and then, I think it accelerates from there.

Yes. It's quite back-weighted to 2030. So there's a whole bunch of properties when Advent acquired the business back in the day that were leased up to 2030, which are coming up. And so they're significantly probably over-rented arguably. But the next few years, we've got a steady 6% to 10% and achieving on retail sites 25%, commercial properties going the other way. But yes, it's steady for the next few years, and then, quite a hockey stick at the end. On the dividend conversation, I think we just had a long conversation with the Board. I think it's fair to say, we're very focused on trying to delever and bring the debt down. Who knows what's happening in the world. It's been so volatile in the last few years. And we just want to remove the financial leverage risk in the business. So I think that's a really important message that we've taken from a lot of shareholders. And I think you'll see what we've tried to do in the last 2 years is be super disciplined on CapEx. We really, really relentlessly focused on our working capital, lots of work on payment terms, trying to get the cash back into the business, and it's been a really strong year. We do expect by the end of FY '26 to be pretty much at the top end of our target of 1, and that then brings the dividend back into play, as Marie mentioned earlier in conversation, in March '26. Current trading, warm weather is never great for us, so July and August are pretty difficult, footfall down at key periods, but it's all -- it's going to come back quite heavily in September. If you looked over the period, footfall is just about up year-on-year now and volumes a little bit up. Average order values are strong in both brands. So I think actually, we're starting to see some really good momentum. But October, November are really big months for us. So hopefully, there won't be this lingering consumer confidence, which will dampen demand, but yes, on track so far.

It's Hai from UBS. I have 2, if you don't mind. Could you walk me through some of your assumptions behind the GBP 39 million PBT consensus that you're comfortable with? I know you've mentioned FX GBP 0.03 hedge, right? But what about freight rates? And also, do you assume any interest rate cuts already in there? Or is that a flat interest rate environment you're expecting for that number? My second question is on competitiveness and competition. You've gained share from 36% to 39%. Who are you seeing you gaining shares from? And where do you see the threats of players like Dunelm and NEXT, more diversified players, recently entering the market, particularly, for example, Dunelm gaining market share. Are they not gaining market share? How do you see that threat from them?

Let me take that one, and then, Marie, you can talk about the financial assumptions, if that's okay.

Yes.

So, yes, no, we -- when we look at the market, it's not a super well-read market. But from what the data that we can see, so our own internal data plus global data, you see that we're probably gaining share from some of the shared competitors, traditional shared competitors. The online players seem to have plateaued. But definitely, you see -- we don't see the detail, but we know that the likes of Dunelm and NEXT, really strong amazing retailers, and that they'll be gaining a little bit from a relatively low base. But on the other hand, M&S pulled out of furniture. So you've kind of got swings and roundabouts a little bit in the multiple category retailers. Our focus is to -- we are gaining a bit from independents. That's been a trend for a long time that we've talked about. So the independents have started coming down. That helps Sofology, particularly, and sort of slightly higher customer demographic there. So as probably -- we're winning in the shared area, it's neutral online and probably in the kind of the Dunelms and the NEXTs are probably gaining a little bit there. In terms of the assumptions behind this year's financials, would you want to just...

Yes. So I think, Hai, we were talking earlier. So we're reasonably comfortable with consensus expectations of about 4% to 5% revenue growth. We've got a strong start to the year anticipated with just lapping the really soft period last year. So I think those of you that have been following us, our first quarter growth this time last year was about just 5%, and then, we built strength as we went through that first half. So we're expecting to see strong revenue growth in the first half and the second half. In terms of gross margins, I think Tim talked to expansion. We're probably looking at about 50 basis points, and that's a combination of factors. So we talked about our Cost to Operate program. We continue to expect some benefits, particularly from buying synergies, as we've consolidated the leadership of our commercial buying function across Sofology and DFS. We're also going to get freight rate benefits. So we'll have a nice tailwind for the first time in a long time, but quite small. And we talked about the FX piece as well. The interest-free credit piece is interesting. We've got a slight delay versus what you would see, but our expectations in terms of the interest rate reductions over the year are pretty much in line with where you get to for market consensus with a slight delay. But I wouldn't get sort of overly excited about putting all those together because we've also got a small mix impact from the home growth that Tim talks about, and that will get us to about the 50 spread evenly over the 2 halves. But the real story is probably aside from that is on costs. So we've got volume costs similar to what we've seen this year. And on top of that, we've got extra inflation headwinds. And I think we've plugged those reasonably consistently. So we're expecting about GBP 15 million of inflation in the year to come. That, I think, as we talked about slightly earlier, it was going to come from a full year of national insurance contributions. We've got business rates starting in April. And then we've got some of our other expectations across the rest of our cost base. So we hope to be able to offset about 1/3 of that, again, with just the flow over savings and some of the new costs to operate savings that we've got. And then I guess last but not least, we've got -- we're planning to invest behind our commercial proposition, both in home and in Sofology. And that's going to create a little bit of net investment compared to this year, and we'll be able to partially fund that through continued savings from lower net bank debt and depreciation. So net-net, we're looking at about GBP 25 million cost increases over the year, and that gets you to about the numbers you're talking about. Anything else, Tim?

No, very thorough. John?

John Stevenson of Peel Hunt. Just 1 question. Just on Home. I mean, as you mentioned in the CMD from 3 years ago and you sort of like came over the top, if you like, on home and obviously been in a very different place. What's the level of operational focus that's going into home now in terms of sort of both resources and, I guess, emphasis. Are we now coming out and you're going back to putting the foot down?

Yes, that's a really good question. So the world did change a bit in terms of making that incremental investment, particularly in marketing, given the volatility in '22, '23, '24. But I think as we started to build back the profitability, and our balance sheet, the teams, the home team, the commercial buy team has done an amazing job. So the offer is fantastic, we believe. And we've taken a lot of our licensed brand partnerships and created unique bed frames and dining ranges, et cetera. So we've been working very heavily on the offer. The operational teams have been doing a huge amount of work to get the warehouse management system in, a stock management system in, brought more away from wholesalers into directly. So our margins have improved by 6, 7 percentage points. So we're ready to go. And then what we want to do is to start to invest in our digital marketing, which is strong on the website, particularly. This is all about DFS, it's not Sofology. And so we wanted to trial that in quarter 4 to see what returns we get based on all the data we have, and we've seen a big uplift. So the focus is high with where we're going. And so we've continued that investment in quarter 1 still seeing very good levels of growth, working with our partners on delivery. So we are -- we can see some really good green shoots and the team have worked incredibly hard in the last few years to get us ready for it. So yes, it's high-level focus. Sorry, David, you had to hand it from, my apologies.

David Hughes from Shore Capital. A couple of questions from me. First one on the Sofa Delivery Company. Obviously, it's a real differentiating factor. How much kind of capacity/scalability is there that, one, to kind of continue to grow if you get the volume recovery, and two, in terms of the opportunity to offer as a third-party service and the potential that you think looking at in terms of revenue there? And then second question, just on interest-free credit. You mentioned you've been able to improve the offer to try and drive conversion. Are you seeing an uptick in the share of customers who are taking up interest-free credit? And what does that look like? How is that evolving?

Sofa Delivery Company, we've probably got capacity -- variable capacity to increase by 25%, 30% on the fixed infrastructure we have today. So there's no more fixed infrastructure required. What you would need if we wanted to grow we've got like an investment in more in vans and crews, but we have delivery partners that we work with who provide an amazing service on a Net Promoter Score as well, so we flex up. We flex up at certain times of the year. So for example, as we lead up to Christmas, we will flex up 20%, 30%, 40% relatively straightforward with the partnerships that we have. So we've got the capacity, point number one. Point number two, that capacity should go to our own business first, if we grow, obviously. But secondly, we're starting to work with 2 partners, which we'll name in the future, who are really enjoying the customer, and it's really about the customer service that we can give them first. So the Net Promoter Scores will give them the reduced delivery failures. The delivery and installation teams do an amazing job, but we can also give them a really competitive cost per order, which is the best -- one of the best in the market. So we are getting approached, and we are working trialing carefully with them, but it becomes a really strong platform for which to grow our revenues and incremental revenue. So that's -- hopefully, that answers that question.

David, I'm sorry, we're getting to repeat your question on interest-free credit, just to make sure I have understood it.

[indiscernible].

Yes. So we generally talk about being about 60%, around about that, on the DFS side and around about 50% participation cash interest-free credit on the Sofology side. We've seen a small increase on the DFS side as a result of offering it for extended periods of key promotional periods really for the 48 months. And we've also seen the term that people take, go up a little bit as well, and that's been linked to higher average order values as well. It increases confidence and affordability with our consumers. So net-net, we see it as a really positive promotional tool.

I'm interested about the plan to combine DFS and Sofology buying teams. Just wondering how you're going to get the scale benefits from that while keeping the 2 propositions separate and distinctive? And then secondly, just a follow-up on IFC. I think you reached 30 weeks of the year on 4-year IFC last year, just wondering if you're going to extend that or maybe revert back to 3 years?

Good commercial questions. Yes, the buying teams in DFS and Sofology, actually having them combined will really help us differentiate the offer. So we'll have a very clear buying briefs for the teams. But we have common suppliers across both DFS and Sofology, so you can imagine having one team going out to negotiate with our third-party supplier looking at the group scale means that you have more buying power. So as long as you're clear about what you're buying, what the brief is and make sure there's a differentiated offer, you can go and talk about from a group volume point of view and leverage that. So that's how that is planned to work, and the commercial director, who will be watching this, he knows that he is on the hook for that. And so yes, I think it will work well. We've already started that process now. In terms of IFC and DFS, it's a good question. It drives -- if you use it at key times, so we shouldn't necessarily be always on if you use it at key promotional time, so the likes of Easter or May Day, those sorts of times, it does bring customers into the market because it increases affordability. So we think about going through 3 years to 4 years. And particularly online, we see that as a real benefit. So at this stage, it's not going to be materially different. I don't think from the 30 weeks, we're not going to default back to 48 all time. I don't think that that's probably a commercial decision, but we'll use it at certain times of the year as a promotional offer.

Caroline Gulliver from Equity Development. I just had my first question on sustainability. You mentioned that there's quite a challenge to improve Scope 1 because of retroactively having to try and refit all your delivery vehicles. And I just wondered sort of what the progress looks like there and how you have to work with suppliers. What's going to make that happen, I guess, effectively?

Yes. I think it's -- we're doing everything that we can within our power on Scope 1. So for example, moving from gas in our stores to electric and HVAC, we're doing that where it's appropriate. And we've seen our CO2 come down by 500 tonnes this financial year, which we report in the annual report. We're also trialing 3.5-tonne electric vehicles, and we're also looking at electric vans for our repair people. The challenge is we run over 200 7.5-tonne vehicles to deliver furniture, and furniture is heavy. And there isn't the technology out there currently to replace that. And so in terms of us working with partners, it's a whole industry challenge because it's not just the truck, you've then got to have the infrastructure. So whether it's hydrogen or electric, we are talking to all of the big truck players and the big logistics partners, and I think we're all facing the same challenge. So we'll do everything we can. The routing software has been fantastic for Sofa Delivery Company in terms of less miles per delivery. So we get really, really efficient on that, and that's reduced our mobile combustion significantly this year. So the things that we can control, switching to electric cars, et cetera, we're doing. The trucks is a challenge.

That makes sense. And I just had a follow-up question on Home in John's question. You mentioned sort of the GBP 100 million opportunity. Just to clarify, was that all in beds effectively? Or is that more dining? And where do you see the priorities after beds in terms of sort of where you're going to put your digital marketing dollars?

Yes. So beds and mattresses is priority 1 and dining is #2. And so the GBP 100 million would probably be split 70:30, in that sort of way. Andy?

Two from me. First one, on Slide 9, gross margin, you talked about optimization of product margin through redistribution of volumes. Is that supplier consolidation? Or is that? Yes. So just thinking about, is there any downside element from that additional reliance on suppliers? Or is it all just upside really?

I think it's all upside because the partners and suppliers we work with are worldwide suppliers. They are big players in both Europe and in the Far East, and they have got more capacity than anybody out there. So we've taken capacity supply into them, and they give us better buying rates, particularly in the Far East as well. So I think it's all upside, to be honest.

So why isn't that something you would have done a few years ago?

It's been a journey. We've been on that journey to do that. I think what you have to make sure is that the product quality and the designs are absolutely right first and then -- and some of these models couldn't have been made in the past in some of these suppliers. We've been working with them to make sure the product quality is bang on. And once we get confidence that the product quality is working, we can then switch. And also, the dynamics have changed quite a bit, haven't those, because if freight rates were at $8,000, we won't be switching a huge amount to the Far East. Once freight rates come down, that allows us to look at that from an end-to-end economic point of view. So also, the U.K. unfortunately has become more and more expensive in the last few years. So there's quite a few dynamics. There's the costs in the different territories. There's lead time as well. You'd switch all of your products to the Far East, and your lead times go out. So you have to think about lead times, design, product quality, cost end-to-end.

So just quite a few trade-offs then. You've got a balance in all of that. Yes.

Yes, it's always the balance, but we're really happy with the partners that we have. We've had a lot of them for 20-odd years, and they're incredibly innovative people.

And then the second one, just around your market share gains. I don't think you gave a number for where the market had gone last year, but presumably it was slightly down. I don't know if I got the impression from how you talked those sort of shape, and your order intake was 8% to add. So I guess the question was, one, I know we've already had the question on where it's coming from. But I mean, more specifically, what do you think is driving it? You've obviously got the fundamental propositions to ask, price, products and all that. You've got a bit presumably of ScS weakness. Is that still playing through? And then, how much of it do you think is around IFC and that working through?

Well, I think our read on the market from the different data sources we've seen is that it was probably slightly down for upholstery across our period. So not -- so sort of stabilized from where it was over the last few years. And so we've seen that probably for 18, 24 months now, similar pattern, point number one. Point number 2 would be -- I don't really like to talk about competitors in terms of, I think, ScS. I know the owner of ScS well. He's a fantastic guy, a great retailer. So they'll have ups and downs, and they're coming back. So I'm sure they'll get back to where they would like to be. Furniture is very strong. So I think some of our gains tend to come from some of the independents. If M&S come out, that will probably benefit Sofology. But what drives it ultimately, and what we're trying to get across in the presentation, is we focus on what we do, which starts with products. It starts with innovation. Customer service is massively important. If you look at the Trustpilot scores, we're right at the top of Trustpilot in many of the major retailers. So customer service plus product innovation, the marketing teams, it's a combination of everything. You couldn't really say so -- I think it all works together, and that's the point we're trying to make about a vertical integration, Sofa Delivery Company delivering brilliantly well. That last sort of feeling with the customers of delivering fantastically, it creates a real end to end. So that's what we're trying to get across.

Just to -- I know you said you don't want to talk about competitors too much. But just to ask a little bit more on ScS, obviously, they've been sort of a relatively close competitor, albeit at the sort of lower end of things. Given that they're moving or seem to be moving their off quite a bit, is that a chunk of share, which they're going to be fighting more with someone else for? Or, I don't know, is that just an opportunity which could continue to play out a bit for you?

It's hard to know, isn't it? So I think what we see is we keep an eye on all competitors and respect them all. I think ScS's offerings, in terms of their product offering, is strong, and you have to look at it and look at what they do in Italy and France. And we learn from that and look at that. And I just think they've always been a strong competitive ScS whatever guys they've been, in plc or private. So we have to keep an eye on that and respond accordingly. But what we're trying to do is stay ahead of everybody. Is that diplomatic enough?

Pretty well attended.

Any other questions? Are we -- all right. Well, thanks very much for your attendance and engagement and lovely to see you all.

Thank you.

See you again. Thank you.