DFS Furniture plc (DFS) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to the DFS Half Year Results Presentation. I'm here with Mike Schmidt, our Chief -- our Group Chief Financial Officer, who will run through the financials and join me for a Q&A session later on. So just to start the presentation, our presentation today covers 3 areas. Firstly, our reported performance in the first half of the year. Second, an update on the progress we are making on our strategic agenda. And third, a bit more detail than usual on our outlook, given the uncertainty surrounding the COVID-19 outbreak. Firstly, in terms of our first -- of our performance in the first half, our revenues were down 5.7% year-on-year. This was as we expected, given both the strong comparative period, which was boosted by deferred purchases as a result of the hot weather in the spring and summer of 2018 and also a tough market environment, especially in the latter part of 2019. Indeed, throughout the calendar year of 2019, we observed that the sofa market environment remained pretty subdued with prolonged political uncertainty and low consumer confidence levels feeding into lower levels of footfall year-on-year across all of our brands. It is worth pointing out that these factors have impacted Sofa Workshop, in particular, and Mike and I will provide more details on that later. Pleasingly, our largest brands, DFS and Sofology, were able to partially mitigate this footfall decline by converting a higher proportion of customers, and DFS, in particular, outperformed the group. It's worth pointing out that when taking a 2-year view and including Sofology on a pro forma basis, our revenues were up 2.6%. This revenue performance dropped through into the profits and the gearing, and Mike will take you through the financial details in a short while. Secondly, we've been making good progress on our strategic agenda focusing on driving the DFS core business, further developing our group platforms and setting Sofology up for growth. Our largest and most profitable business, DFS, is benefiting from a combination of initiatives that are driving significant improvements year-on-year in customer scores, improved average order values and increases in conversion both online and in-store. We've opened 3 further Sofology showrooms, which are trading well, and we have 5 more lined up for FY '21. We've recently launched our new group delivery network, which we have called The Sofa Delivery Co, delivering all sofa brand orders on the same vehicle, enabling us to provide a better and more consistent level of customer service at a lower variable cost, increasing the utilization of our vehicle fleet. And today, I'm pleased to provide an update on our progress towards building sustainability into the way that we do business as a group as part of our overall approach to ESG. Finally, we'll come on to our outlook, which is now made more uncertain given the potential impact of COVID-19 on the remainder of our financial year. I'll spend more time on this later, but the headlines of our approach are based on: number one, our people and our customers; number two, managing our operations and our supply chain; and number three, the potential impact on consumer behavior and on our market. We are following all of the latest guidance from the government and the relevant health authorities in terms of being transparent and supportive with our people. After a period of a few weeks disruption for our Chinese suppliers, the situation is now normalizing, and we have detailed business continuity plans in place and prepared for all aspects across the group. Finally, when it comes to the impact of COVID-19 on consumer demand in the U.K., all I can say here is that, clearly, it's incredibly difficult to predict what may happen over the remaining 16 weeks of our financial year. We haven't seen a material impact yet on order intake, and we have a very strong business model in terms of cash generation, balance sheet and scale to manage any potential disruption. I'll now hand over to Mike, who will run through the numbers in more detail.

Good morning, everyone. I'll start with a few headlines from our financial statements. But before that, just a couple of housekeeping points, if I may, on how the numbers are presented. So firstly, the first half of the prior year was 5 months long. To aid comparability, however, all of the prior numbers -- the prior year numbers that we show here are 6-month numbers, running from July through to December 2018. And secondly, until I reach the IFRS 16 conversion slide, all numbers I quote will be on an IAS 17 basis. This is because we do not restate the prior year comparatives. So turning to the results. As we announced in January, you can see that we've experienced a reduction in revenues during the first half of the year of 5.7%. To reemphasize what Tim has said, the reduction in revenues was largely due to the strength of the comparative period in 2018, which benefited from latent demand and also a high order bank entering the period. The market environment has also continued to be weak due to political uncertainty affecting consumer confidence as other big-ticket retailers in the furniture sector have also disclosed. Importantly, though, I would look at the year on 2-year performance, which was up 2.6%. This shows a solid underlying performance by the group in what has been a difficult market throughout the period. The lower revenues this year has fed through to a reduction in profits in the period, but this reduction has then been part mitigated with the benefit of sensible cost management. As we will come on to, we have also seen some isolated performance issues in Sofa Workshop that will have a one-off impact on this year's results. We have seen net debt hold in line with the prior year, and we expect to see a continued reduction over time. Indeed, in an uncertain time, such as we face now, it is reassuring to be operating with our business model of high profit margins, a controllable cost base, strong cash conversion and a significant debt facility headroom. So finally, with a positive view on the group's long-term outlook, balanced by the short-term environment, we have decided to maintain the interim dividend at 3.7p once again. So to talk through the trends in more detail, it's helpful to look brand by brand. And I'll start with DFS, which, as you know, is by far the largest part of the group, accounting for over 70% of revenues. We've seen some encouraging underlying trends. While revenues declined by approximately GBP 18 million, order intake trends were stronger. And we have limited the profit drop-through to a reduction of GBP 5.2 million at the brand contribution level. We have seen a lower footfall trend in all of the group's ratios over the first half. However, in the DFS brand, we were pleased to have been able to mitigate the impact of much of this through both AOV growth and conversion increases both online and in-store. We have also seen gross margin growing, assisted by the work that we have been doing on the range architecture and also a small half year exchange rate benefit. And finally, we have kept tight control of operating costs, as you can see, given the broader environment and uncertainty. You can see this through the GBP 4.4 million reduction in direct operating costs in the first half of the year that comes despite also absorbing a proportion of the costs of our Team GB partnership, which we are scheduled to start using in the summer this year. So looking forward to the second half, we include on the slide comments on the outlook for all of these metrics. Obviously, these are caveated to exclude the uncertain impact of COVID-19 that we will come on to. But informed by the order intake that we have been achieving to date in the second half and the gross margin progression that you can see, we would have expected a strong profit performance from the DFS brand over the full year. So moving on to Sofology. The revenue performance over the first half has primarily been driven by the comparative and by the market environment, but also the impact of some marketing test-and-learns around how we face TV advertising so that the brand stands out in comparison to promotional furniture retailers. We opened 3 new Sofology stores in the period. These largely opened late in the first half of the financial year. And although they are trading well, very much in line with our expectations, they have not had the time to deliver material amounts of revenues in the period. And overall, we saw a profit drag of around GBP 1 million from the preopening costs that they have so far incurred. Despite the data on the chart, Sofology's underlying gross margin was actually ahead of the prior year in the first half. However, the reported gross margin was somewhat depressed as we sold through some clearance stock in the period. This gives me confidence in a positive outlook on gross margin over the full year. Operating costs were flat, with investment to support our growth ambitions offsetting the areas where we made savings, given the tight market environment. And overall, we see Sofology's first half of the year as a solid performance as we develop the business in line with our growth plans. So we report Dwell and Sofa Workshop as one segment, given relative scale within the group, but we have seen different trends that I will talk about separately. Despite the segment sales performance, Dwell actually grew revenues by a mid-single digit amount in the period. The cash margin benefit of greater sales was, however, outweighed by gross margins declining in a promotional environment, and operating costs ended the half up slightly. So as part of our strategy to -- of working to strengthen the financial returns, we've outsourced the final-mile delivery activity of Dwell's accessories business to Wincanton. And this has led to some higher operating costs in the short term, as you can see on the slide, as we've been using greater numbers of temporary workers and drivers in the run-up to that outsourcing. In contrast to Dwell's steadiness, Sofa Workshop has suffered far longer than anticipated with the aftereffects of the systems and process change that we talked about back in September. So while we saw growth in Dwell, that was outweighed by a significant decline in Sofa Workshop's revenues. This revenue decline was compounded by the gross margin performance. This largely reflects a significant increase in customer service costs. For example, the cost of remaking products or gestures goodwill following some operational issues that we have been resolving. The combined effect of lower sales and margins has led to a year-on-year expected reduction in profits over the full financial year of between GBP 4 million to GBP 5 million. But looking forward, we have a plan in place to strengthen the financial performance of Sofa Workshop and, indeed, Dwell. And this is all about ensuring that we operate with the right scale and cost base in all parts of our operations to drive very consistent profit generation. Tim will talk a little bit more about the plans in both brands in due course. So moving on to property costs. Overall, property costs have increased by about GBP 0.5 million, and this comprises of some new space costs, particularly for CDCs and Sofology showrooms. We have seen market rent inflation on CDC locations as demand for warehouse space has grown over the last 5 years. However, we have sought to offset this and our rates inflation through appropriate challenge of our ratable values. Regears have delivered an additional GBP 300,000 of savings, with a further GBP 400,000 of benefits already secured for future periods, keeping us very much on track for our total planned cost savings of GBP 6 million to GBP 8 million. Looking at the other lines that contribute to profit before tax. Administrative costs have increased by GBP 3.6 million. This is driven by 3 key areas. Firstly, there is a normalized -- there is a normalization of the trading bonus assumption within the DFS brand compared to the prior year period. Secondly, there is some investment in setting Sofology up for future success, investing in customer service support and similar. And thirdly, we do have some costs dedicated to developing and transforming the business, given the pace of broader retail change and our clear ambition to remain the absolute market leader overall. You will note that all of these cost categories are controllable and predictable, and were thus incurred very much in line with our plans for the year. Depreciation and interest are, as you would expect, the trends to be in the business. And so overall, the profit change for the period primarily reflects the revenue trends were anticipated as discussed, offset by a good gross margin performance from a well-performing range. It then also reflects sensible cost control and investment, together with the one-off impact disruption at Sofa Workshop. Moving on to capital expenditure, CapEx is very much in line with our guidance for the full year of GBP 35 million to GBP 37 million. I mean in terms of looking at where we are in the financial year so far, we do have the option of pulling back some CapEx spend should the current consumer marketing environment worsen. And while it is late in the year and a significant proportion has been spent or committed, we have put a pause in on a couple of areas while we assess the outlook. Looking into next year, our overall spend is split broadly 50-50 between growth and maintenance spend. We've always sought to avoid allowing a backlog maintenance capital expenditure to develop, and that gives us a well-invested base should we feel we needed to defer cash spend in the short term. And of course, you can choose how deeply you invest in growth areas. So turning to cash generation, we see net debt broadly flat year-on-year at period end. This reflects the phasing of profits and capital investment over the last 18 months. Setting aside any changes in the environment that may come from COVID-19 risk, we would have expected to see net debt reducing by the financial year-end. Net debt-to-EBITDA over the last 12 months is higher as we would have expected given the profit phasing we've seen, but we are comfortable -- we are comfortably within our period-end covenant tests, and we have very significant headroom within our facilities, which total GBP 250 million. In terms of annual cash seasonality, we are also moving into a higher cash generation phase of the year, with greater deliveries and lower advertising spends overall. And as we have stated before, we do intend to get net debt-to-EBITDA back beneath 1.5x. And while we may see something of a delay in that trajectory from the current environment, we remain firmly on track to secure this. So touching on IFRS 16, the impact to transition is currently modeled to PBT at GBP 3.9 million for the half and GBP 7.1 million for the full year. Clearly, this is not a cash item, and it does normalize over time. If we didn't renew leases, then it will actually be a small benefit in the 2023 financial year. Of course, we are likely to renew some leases or take new leases on for the Sofology estate as the right deals come along. So it may take a little bit longer to normalize. The balance sheet will also look different as of December. We are recognizing an additional GBP 395.2 million of assets and GBP 431.7 million of liabilities. This, of course, does not affect our bank covenants as we will continue to be measured under IAS 17. So to summarize, in terms of the management style that we seek to adopt, we firmly believe in measuring our performance transparently and using that information to optimize our approach. And at an aggregate level, these are the metrics that we have committed to reporting on. On sales performance relative to the market, we believe that we've delivered a solid performance, given the comparative period strength, and this is particularly evident when you look at year on 2-year revenue growth against the declining market. It is also positive that we have seen order intake ahead of revenue performance particularly strengthening into the second half of the year as well. We believe this trading relative to other competitors shows we are seeing the benefit coming through of the strategic investments that we are making. The metrics, however, also highlight the net negative impact of the phasing of profit generation that we have seen in the first half, driven by the comparative in the market environment. Looking forward, there is no doubt the risk that the market remains challenging. However, we believe we have the cost and cash flow levers within our control to adapt to the business as may be required. We also believe we have the clear financial strength and profitability to allow us to continue to strengthen the proposition relative to others. And we believe our growing market share position sets us up well to drive returns for shareholders once the consumer environment normalizes. And we will then see the benefits flowing through to these financial metrics. So thank you for your time so far, and I'll hand you back to Tim to talk through some of the strategic progress.

Thanks, Mike. I'll now provide an update on the progress we've made on delivering our strategy. The purpose of our strategy is to lead sofa retailing in the digital age. So first, a reminder of the component parts. There are 3 pillars to our strategy. The first is to drive the DFS brand, the largest and most profitable sofa brand in the group and also the U.K., through 3 elements: our omnichannel proposition, product innovation and customer service. The second is to build group platforms that enable profitable growth through leveraging the scale that we have as a group and reducing our relative cost base, including our property costs, our supply chain and our marketing. And the third is to unlock new growth by developing our other brands and territories, especially focused on Sofology. We will update further on our progress in international in September. Now standing back, it's been about a year since we set our strategy out, and I believe we're making good progress across the majority of our initiatives despite the challenging environment. We continue to grow our market share towards 34%, and we look towards the medium term with confidence and clarity on our priorities and plans. Turning to the DFS business. In looking at the DFS business model, it's worth reiterating that we are very well positioned, and as clear market leaders, have a great opportunity to further grow our share and our business both in the short and the medium term. Now we survey around 6,000 customers in the sofa market every year, and from this research, we know that the vast majority of their customers start their sofa-buying journey online. And importantly, 90% of those customers choose to visit one of our showrooms, such as this one here in Tottenham Court Road, to sit on the sofas in order to test for comfort. Our research tells us that comfort is, by far, the most important factor in determining a sofa -- which sofa a customer will buy. We, therefore, believe that, in order to succeed in the sofa market, it is essential to have a combination of a strong web offer and a showroom network that are within reach of most customers. We believe it's about the combination of the digital and physical offer that creates the best possible customer experience. We do have a very strong web platform that we continually invest in to ensure it remains sector-leading, and we also have 117 showrooms nationwide across the U.K. and Ireland to enable customers to have their sit test as well as highly trained, highly engaged and motivated colleagues to provide advice and reassurance, which many of our customers really value. In summary, we believe that our business model is well set up to meet the customer needs of the future. Moving to online, now DFS has been selling sofas online for over 10 years now, and we invest circa GBP 2 million per annum CapEx continually in our online platforms to ensure that it remains at the forefront of the sector. Now this area represents a key underlying strength of the DFS business model relative to the market and now accounts for some GBP 172 million of the revenue on a last 12 months basis, which is about 20% share of the overall DFS business. It is by far the #1 online sofa business in the U.K. In itself, the DFS web channels would represent a circa 6% market share, the equivalent of the fourth largest player in the sofa market. Revenue growth has continued despite the market challenges, and we continue to invest and innovate in this area. Recently, we've had success working with Facebook, Instagram and Pinterest to develop advertising formats targeted at specific consumer segments, and we've seen uplift in awareness, consideration and sentiment regarding the quality and reputation of the DFS brand. We've also very recently launched a market first in terms of visual search, and I'd really encourage you all to try it on the mobile site. In practical terms, this enables you to take a photo of any sofa that you see anywhere, a hotel, a bar, your friend's house, and then match that against all of the range that's in DFS. It's a very cool tool, and we're very excited about the opportunities that, that will bring. During the first half of the year, we also re-platformed the DFS website on to Google Cloud. And what that enables, improved functionality; a faster user experience, which is important in the online world; and far greater capacity, enabling future growth and agility. Having been the first sofa retailer to launch augmented reality on an iPhone browser, enabling a customer to view their sofa in their own home, we've launched a second-generation service with a new software partner and have been increasing the number of ranges that this service is available on. So in summary, we continue to invest and innovate ahead of our competitors in this channel, and we see this platform as a real competitive advantage going forward. Moving on to our showrooms. Now we have continued to see a reduction in footfall to retail parks, and hence, our showrooms over 2019, which is, as Mike alluded to, one of the drivers of our performance last year. But our showrooms are at the heart of the customer journey, and it's critical that they provide an attractive environment in which to engage our customers. We, therefore, continually invest to keep the portfolio in good condition. We focused our latest refurbishments on providing a consistent, modern and inviting experience to inspire our customers that's actually connected with the imagery and styling that you see on the website. Here's an example of some images of our recent investment in our Gateshead showroom. Encouragingly, the financial results, driven by conversion and AOV as well as post-purchase NPS scores from our recently refurbished showrooms, have outperformed the rest of the portfolio. To help further improve conversion rates, we've also equipped our store colleagues across the whole estate with 1,200 new Chrome tablets. This enables our colleagues to access key product information in a convenient, secure and modern way with our customers. It also enables our colleagues to access customer baskets they started online and direct the customers exactly to the product that they're looking for, for the all-important sit test. These investments in our showrooms, in our store technology and in our colleagues have helped, combined, to contribute to enhance the omnichannel experience and drive higher average order values and conversion by over 118 basis points. Now turning to customer proposition. One of our, I suppose, the thing I'm most proud of this year is a key achievement around the significant improvements we've made in our end-to-end customer experience as measured by our Net Promoter Scores, or NPS. Now this is an -- this improvement is a result of a business culture of customer focus captured by one of our first values here, which is Think Customer, conveniently behind me for those in the room. And many initiatives are in place to improve our customer experience. Now we've always focused on a great product -- having great product quality, and indeed, I'm proud to say we're the only sofa retailer to be awarded a British Kitemark for quality. Now armed with detailed product data, our internal design and quality teams are able to design and build even greater quality into our products at the manufacturing stage. We've seen significant improvements in our supplier quality scores of 17% year-on-year to the 6 months of December. We've also leveraged our unique delivery route-plying AI software and adapted it for use by our sofa repair technicians to improve their efficiency and productivity. This tool ensures that any customers with a service issue are seen in the most efficient order using the optimum routing. Building on the efficiencies disclosed in our year-end results, in the first half of this year, we've achieved a reduction in the average number of outstanding service calls by 28% year-on-year. And in practical terms, this means that in most parts of the country, if you have a problem with your sofa, we can be with you within 2 to 4 working days. Overall, the initiatives have helped contribute to a 24% increase in the Established Customer NPS scores to 41%. Now for those of you who are not familiar with NPS Established Customer, that's the customers who have bought and owned the sofa for at least 4 months. Our third-party partners, Grass Roots, who track this, will tell you that over 40% represents a world-class performance, and we're really proud of it. The DFS post-purchase scores remain at 85%, which is also very strong. I want to take this opportunity for anybody that's listening to DFS to thank them for all of their hard work over this last year to get to these customer scores. We believe that customer reputation is really important in this day and age, obviously, as any retailer would, and we're starting to see some real improvements here. And so moving on to our second pillar, build the platforms. So we continue to make good progress securing the property savings through a combination of rent reductions on the leases approaching renewal and also downsizing some showrooms where appropriate. We've secured a further GBP 0.4 million of annualized savings since the previous year-end, which will start to be realized from the second half of this financial year onwards. This brings the total annualized savings since the program began to GBP 3.4 million, and we are confident in achieving the GBP 6 million to GBP 8 million targeted savings by FY '23, as previously communicated. We are securing savings through regearing leases approaching expiry, along with savings on leases where we can extend the term at the same time as opening a new Sofology. We will, however, continue to wait until appropriate lease terms become available in order to secure maximum savings for the longer term, rather than tying ourselves down to annualized targets. Whilst not contributing to the savings achieved to date, our DFS Belfast showroom and warehouse has been adapted to house all of our retail brands. This is a great example of where we utilized our existing retail assets to generate incremental revenues with minimal incremental property costs for the group. In summary then, we are confident that we will deliver the targeted annualized savings of GBP 6 million to GBP 8 million and utilize our existing DFS presence to secure attractive terms for the new Sofology units we're planning. Moving on to our final-mile delivery, so our logistics network. And I'm pleased to bring you some new information regarding our logistics network. Now we believe it's important to have the best 2-man lift supply chain in the U.K. and Ireland, and we believe that logistic strength will increasingly being important to customers and provide a sustained competitive advantage for our business. As such, we've been working hard to improve the last-mile delivery service and utilize our group assets to improve the efficiency of our operations. I'm pleased to report that our relocated Belfast CDC, customer distribution centre, opened before Christmas, and it now delivers on behalf of DFS, Sofology and Sofa Workshop in one vehicle under the uniquely branded, Sofa Delivery Co. This new group delivery model will ensure that we'll be -- enabled us to provide much better and consistent service to our customers at a lower variable cost to the group by increasing the utilization of our delivery fleet. We'll also utilize the proprietary software routing that we have, and we are excited about the opportunities this will bring. Now our goal is to create the best 2-person delivery installation service in the U.K. and Ireland, and we will transition all of the group's facilities and operations to this model by the end of FY '22, and that will bring annualized savings of over GBP 3 million based on the current volumes that we do. Other initiatives undertaken to improve the customer experience post purchase, including a trial -- include a trial to extend our customer delivery offer, the DFS Glasgow CDC, to 7 days a week and later in the evenings, resulting in customers being given more choice as to when they take delivery of their sofa. Feedback has been incredibly positive. First, by providing increased flexibility to our customers, we've seen an increase in NPS scores, particularly those taking delivery on a Sunday. And secondly, through altering shift patterns, our supply chains and delivery colleagues have had a hugely positive feedback on this relating to work-life balance and rest periods, and we've had unprecedented levels of job applications for the CDC at Glasgow. Now we're planning to extend this approach across our other CDCs over the next 2 years. In November 2019, we also enabled DFS customers to book their delivery and installation slots online. We've seen a very fast take-up to this convenient service with over 50% of customers taking up the service now and increasing our NPS yet further. And more recently, in February this year, we've enabled customers to track where their delivery vehicle is real-time on the day of their delivery. This service is planned to be fully rolled out and available nationally by the end of March this year. So in summary, we've been deploying a lot of technology to develop the group supply chain model to improve the customer experience, and we have the opportunity to secure an additional GBP 3 million worth of savings from FY '23 onwards as the rollout program completes. Now turning on to our third pillar of unlocking new growth. Sofology, in particular, has made good operational progress in the first half of this year. After a year of stabilization in the previous financial year, we have accelerated the pace of showroom rollout. 3 new showrooms opened towards the end of the first half, expanding the brand's presence across the U.K., including the first Sofology showroom in Northern Ireland. And although not open for long, trading has been encouraging. The total showroom count now stands at 45, up from 39 when the business was first acquired in November '17. And we currently have 5 new showroom scheduled to be opened in the first half of the next financial year. We see clear potential to increase the estate to around 65 to 70 showrooms in the U.K. and Ireland over the next few years. Sofology has always been on the front foot with regard to technology and creating an omnichannel journey for quite some time, and innovation has continued throughout the first half of this year. Recent developments include a website enhancement such as the introduction of a sofa sizer on the website, enabling a customer to enter the maximum height, width and depth of the sofa. And then, immediately, the range is presented back to the customer. These types of initiatives have helped contribute to improved web and in-store conversion, which across the 6-month period are up 7% and 2%, respectively. They have helped to partially mitigate the subdued market environment and the lower footfall levels that we experienced. In summary then, we've had good operational progress within the business, and Sofology is well set for growth. 5 showrooms are confirmed for next year, and we have a strong pipeline already of future opportunities. Now moving on to our other brands, starting with Dwell. Dwell sells a range of furniture and accessories and has seen its gross margins impacted by competitive pricing pressure. It's slightly up year-on-year in terms of revenue. We've also been developing new capital-light opportunities to really grow the top line aggressively in the future through selling Dwell-sourced accessories through the DFS and Sofology showrooms. We're also trialing a concession model with Homebase, which opened recently, and these should all help drive an improved return on capital employed for this brand. We've also identified opportunities to reduce the cost base, including, for example, recently contracting to outsource the final-mile logistics to Wincanton. So Dwell is in a strong and stable position at this moment in time. Sofa Workshop's trading performance in the period has been significantly impacted by the market conditions, particularly down here in the southeast, where the vast majority of its stores are situated. Furthermore, as Mike alluded to, there has been some disruption following a number of changes implemented to remove the dependence on very old legacy systems and to move to a shared group infrastructure. Overall, revenues fell for the 6 months of the year by circa 30%, leading to a GBP 2.4 million full year-on-year in Sofa Workshop's brand contribution for the first half. Based on order intake in the second half to date, we expect by end of the financial year we, will see a reduction in profit before tax of about GBP 4 million to GBP 5 million. Now Sofa Workshop has been profitable for a number of years. And as such, we are very confident that we can swiftly return this business to profitability, and we're proactively reviewing the cost structure of the business to ensure that profits can be consistently achieved. There are no material additional cash costs currently envisaged with respect to any changes to the cost structure and the business model other than supporting the ongoing trading losses while the turnaround is complete. Now I'm very pleased to talk to you about sustainability. Over the past 12 months, we've been working very hard to look at the -- to develop an overall ESG strategy that builds on the Think Customer value that's already embedded within our business, and fully integrate sustainability into the way that we do business as a group going forward in the future. It takes into account all of the expectations of our stakeholders as well as our impact on our environment. Our long-term ambition is to ensure that we are the most sustainable mass market sofa manufacturer and retailer in the U.K. and Ireland. We believe that doing this will help us enable to meet consumer expectations that are ever-increasing in this area and the needs of other key stakeholders, including employees, communities, suppliers and, of course, investors by continuing to deliver strong margins and good levels of growth in a sustainable way. A key focus in this area is adopting a circular approach from the sourcing of raw materials, the design and manufacturing through to retailing, delivery and, in the end, the life cycle of the sofa. We want to create sustainable and ethical products and services that will make us more efficient, competitive and innovative going forward. We are working on our ESG foundations across the spectrum of our business. We want to ensure that we've got a clear view, independently audited on the current situation in terms of where we source our raw materials for, how much energy consumption we have, what water consumption we have so we understand our impact on the environment and our people. Concurrently, we are developing our medium-term targets together with the plans to ensure that we have plans that are stretching and realistic going forward. I wanted to share with you 2 case studies which illustrate our approach to sustainability. Now firstly, at DFS, we've launched a sofa rescue service. This is a not-for-profit sofa removal service and diverts sofas away from landfill and allows customers to dispose of their old sofas in a more environmentally friendly manner. We've partnered with a company called Clearabee. They are a carbon-neutral waste removal firm with a strong environmental conscience, and we've trialed this initiative in 2019. The service was launched nationally in DFS on Boxing Day and has proved incredibly popular with customers, particularly down here in the south. At the time of writing, over 6,500 sofa collections have been booked. We're just at the beginning of our journey with Sofa Rescue, and we plan to launch this service in Sofology this spring. Our second case study is a tree planting initiative we've launched in Sofology. Initially, Sofology ran a Green Friday event rather than a Black Friday promotion, where a tree was planted for every sofa order taken. We saw a fantastic response from customers and colleagues on this service. We're also delighted to be working in partnership with the Woodland Trust. And we'll be rolling this initiative out to apply to all Sofology orders this month. Over the year, we'd expect to plant over 100,000 trees as part of this initiative, and we're looking to review this as to how this might work across the group. So turning to the future and turning to our outlook. Now first of all, I'll provide some context by discussing the market drivers which we believe influenced the performance of the upholstery sector. These should be familiar to you. First of all, consumer confidence. Now we know that consumer confidence have been falling since 2016 and that scores remained relatively low throughout 2019. However, there has been an improvement recently with levels increasing from the minus 14% we saw in November to minus 9% in January and minus 7% in February, pre the coronavirus read. And it's clearly a positive trend, still in negative territory, but gives us room for optimism. Second, housing transactions. Housing transactions have been in decline as well since 2016 to 2019. In fact, in 2019, is slightly down year-on-year. Again, though, there are some encouraging signs in more recent data. And normally, we would expect any recovering housing transactions to feed through into increased demand for sofas in the spring/summer a few months afterwards. And finally, unsecured lending. Net unsecured lending continues to grow, albeit at slower rates than we've seen in the preceding 4 years. Now overall, if you stand back on a long-term basis, our market drivers are still relatively weak. However, there has been an improving trend in consumer confidence and some early positive data on house moves. Indeed, as we stated in our statement, as we exited 2019 from Boxing Day probably through until the early part of March, we've seen encouraging order intake across the group, especially at DFS up year-on-year, in line with the guidance that we've given out previously. This is obviously pre the impact of the COVID-19. So a week ago, we've been feeling quite [Audio Gap]. It is important, though, to talk about the coronavirus and COVID-19. And clearly, we're monitoring how the situation evolves. It's obviously a live situation. It's incredibly difficult to predict what's going to happen. Just to talk about our focus as a business, it's in 3 areas. Firstly, our people and our customers. Our priority, our #1 priority is the health and well-being of our colleagues. And we have taken steps such as minimizing all nonessential business travel for the foreseeable future. We've got business continuity plans in place to deal with a range of scenarios. We're obviously following all of the latest government advice with regard to policies and procedures, including our approach to sick pay and the steps to take if the virus impacts any of our people. Secondly, in terms of supply chain and operations, now many of you know, but we source circa 30% of our finished goods from 4 Chinese suppliers. Now their factories did not recommence production immediately after Chinese New Year, and lead times are currently 2 to 3 weeks longer than it would normally be usual this time of year. So this time of the year, typically, we're on 12, 13 weeks. At the moment, we're on 15, 16 weeks. We've extended the customer lead times, as I said, to ensure we do the right thing by customers, but there's been a very limited reduction in the proportion of sales of these products to customers. Encouragingly, in the last week or 2, production volumes are increasing. And as the suppliers get back up to full capacity, they will be able to rapidly catch up with the current output deficit. Across the remainder of our 16 weeks of the financial year, we would usually import around GBP 10 million of finished goods as a gross sales value from China per week. Those goods typically spend 5 to 6 weeks being shipped to the U.K., and our European operation for then onward delivery to customers. If the production shortfall cannot be made up and, therefore, delivered ahead of our year-end, this will result in revenue and profit recognition being deferred to the following financial year. So for every GBP 10 million of gross sales deferred, approximately GBP 4 million of profit would also be deferred. And due to the working capital cycle of the business, cash flows will be impacted by around half this amount, assuming orders continue to be placed with the usual deposit levels. The remainder of our finished goods are sourced from Continental Europe, the U.K. or produced from our own manufacturing facilities in the U.K. Our internal manufacturing operations have sufficient raw material stock on hand or already in transit to see the production of orders for a number of months, and we understand that our European suppliers of finished goods have similar levels of raw material stock. One of our European suppliers is based in the south of Italy, and at the time of writing, i.e., last night, their operations have not been affected. It shows you how live the situation is. The Italian operation, just for clarity, is a very small percentage, about 10% of Sofology, so -- and don't supply DFS. Now assuming production lead times are normalized and the goods are delivered ahead of the financial year-end, we do expect to incur some additional supply chain costs of approximately GBP 1 million due to the weight of deliveries that will come in probably more back-weighted to May and June, and that will increase our supply chain costs. Turning on to the third point, though, around the potential impact to consumers, and that's a live situation. And I guess, as we've observed, increasingly, in Italy and China, there could be situations of disruption to the towns and cities in which we operate, and therefore, the consequent impact on customer footfall and, therefore, order intake. Now looking forward, we've always, as a furniture business, sofa business, we've always had a couple of significant order intake periods around Easter and around the May Bank Holidays. So as such, you can imagine, we've been modeling potential scenarios, given the uncertainty of predicting exactly what might happen and when and for how long. Now we try to be as transparent as possible and give you some data points. So in the previous financial year, the group's order intake in the last 16 weeks of the year, we've just finished week 36, we've got 16 weeks to go, the group's order intake, our gross sales value was approximately GBP 330 million. Now of which the final 6 weeks of that will be received after supply cutoff dates for manufacture and therefore, wouldn't be delivered in the period. So we're probably talking about 10 weeks worth of demand now that would be delivered typically in this period, which, if you do the maths, is about GBP 220 million. Now we've modeled the impact of a severe bookings reduction over a sustained period on things like -- and tested that against our financial covenants and bank facility limits, as Mike described, and we are very comfortable that we are well positioned in this environment with plenty of mitigants available and have considered the most severe scenarios where we believe headroom is more limited. It's important to remember, our business model is incredibly profitable, cash-generative and very resilient. We've got a strong balance sheet, and given our scale, we have a number of levers that we could pull if we need to. We've already taken some limited appropriate action, such as deferring some capital commitments on our development capital, and increasing the flexibility we have with our remaining marketing spend over the period. Also another important point, it's important to remember that the -- any impact is most likely to be transitory in nature, with the large majority of customer purchases being deferred into the future rather than not being made at all. And by way of an example, despite the negative revenue performance as a result of the hot spring and summer of 2018, actually, if you looked at the whole of the calendar year, the DFS brand grew by 2.6% in the 12 months to the end of December '18 versus the 12 months to the end of December '17, having seen strong demand return in the back half of 2018. To summarize then, half 1. Half 1 performance was as expected, and given we knew we had a strong comparative prior year period, driven by the deferred sales I just described. This was compounded by a challenging retail market, especially in the latter half of 2019 as we had the political uncertainty and general election. We have traded hard, increasing our conversion rate to mitigate these lower levels of footfall. And over a 2-year view, our revenue was up 2.6%. We've continued to invest further to strengthen our market-leading position. We've made good progress in implementing our strategic priorities, particularly on driving the DFS business, which is in good health, further developing our group platforms and setting Sofology up for future growth. Sofa Workshop has, however, struggled both with the new systems implementation and a challenging market environment, challenging market environment particularly in the southeast. In terms of outlook, although consumer confidence remains relatively low on a long-term basis, the macro factors did indicate a potential improvement to the market in the medium term in normal circumstances. And indeed, we've seen an encouraging order intake from the group since Boxing Day, especially in DFS, up until last week. Clearly, we now have to consider the COVID-19 virus. Given the uncertainty as to how the situation will develop, it's not possible to give clear guidance with certainty for the full year outturn. At present, we believe that our supply chain position will normalize before the financial year-end, and it's only in very recent days that we've seen a slight impact on consumer footfall, indicating potential change in consumer behavior. While disruption to order intake over the key trading periods of Easter and the May Bank Holidays is likely to impact our financial results this year, it is reasonable to believe that, ultimately, this will be transitory in nature. Following periods of subdued demand, we typically see a much late -- a much greater latent demand picking up and returning. Okay. So notwithstanding the uncertain short-term outlook, we remain very confident in the group's financial strength and track record of performance in all environments. Furthermore, we believe that our market-leading position would allow us to drive attractive value creation for shareholders in the longer term. Our approach in this market hasn't changed, which is to execute our strategy, strengthen our market position for the medium term and further leverage the group assets to deliver strong returns. Okay. Thank you very much. That concludes our presentation. We'll now hold a Q&A session. Mike?

Jonathan Pritchard at Peel Hunt. Three, if I may. Just a bit of detail, really, on the Sofology advertising. You've trialed a few things there. What have you trialed? What are the early readings and results? On Sofa Workshop, clearly, not an ideal period of time. How -- is there any risk that the sort of brand has been tarnished by this? Any sort of NPS scores or test pilots or anything like that that's showing -- that's reflecting a bit of disappointment from customers? And how you're going to solve that, if there is any? And then lastly, how do you raise conversion? Because you'd assume any one given moment in time that everyone is trying 100%, and how do you make people better at converting customers? Or how -- what are the things that you've done to push that in the right direction, without giving away too many trade secrets?

Let me think about what I will declare on that one. Okay, So firstly, Sofology advertising trial. What we've been testing from a brand awareness point of view, Sofology primarily use TV and digital as their 2 main channels. What we've been testing is a lot of brand TV with -- you've seen the Owen Wilson ads and how that works, and we've been looking at how that raises awareness and consideration of Sofology. What's been really impressive is that the Owen Wilson has really worked for that brand in terms of raising awareness and consideration, and the key lesson is, we need to be pretty much always on with that. So we have been a bit on and off depending on the time of year, and we've learned that raising the awareness of the brand through that type of brand creative is really important. They're doing some really interesting stuff from a digital point of view, which is really working. And we'll be working with our econometrics agency that we've just employed to help really think through how we start to boost the business in terms of advertising. So I think Sofology is well set for the future. We've got a good creative style. And particularly, as we launched the partnership with the Woodland Trust and the tree planting, which we'll literally starting this week, I think there's lots of things to talk about in Sofology. On Sofa Workshop, you're right, it's not ideal. Has the brand been tarnished? Well, we've looked after the customers where we did let them down. That's part of what Mike described around customer services costs. So we've absolutely gone over and above to compensate for people where we've been a bit late or we've not done the right thing. I don't see that coming through in any NPS scores. I think the NPS scores are still strong for Sofa Workshop. It's a great brand. I do think it's really hard to unpick the combination of the southeast market down here. It's very much a -- it's heartland, and I think that's had probably a disproportionate impact on that brand. I think it's important to get in the context of scale, though. Sofa Workshop, as a brand, is a GBP 25 million out of the GBP 1 billion that we do. In terms of conversion, so there's a little bit of maths in the sense if you get slightly lower footfall, the customers that are coming in are more intent to buy. So there's a bit of that. But to give real credit to the teams, the DFS retail teams and the Sofology retail teams, we've been working hard on training, something we'd obviously say. But some nuggets that we would say is we have been working with our AI agency to predict footfall patterns by store, by hour so we can understand what level of customer flow will be coming in every part of the day. Now that's important because Saturdays and Sundays are usually busier, and we've also been creating a flexible colleague model to allow more people to be in at the weekend so we can convert more business. So it's how do you use data to give a much better customer experience is one of the tricks that we talk -- we would say has been working for us, particularly in the last few months, Jonathan.

Michael Benedict from Berenberg. Also a few, if I may. Any metrics you can give on footfall or sales in the last few days, just to give color on the coronavirus impact? Secondly, the Sofa Workshop disruption. What proportion of that GBP 4 million to GBP 5 million profit impact you've seen in H1? And what is still left to come? And then thirdly, on Sofology margins, where are we expecting them to get to in the coming few years? Any synergies you haven't achieved yet and still expect to achieve?

Yes, good question. So let me take the last one. Mike, you can think about the second one. So in terms of Sofology margins, as Mike alluded to, underlying, the Sofology margins are up year-on-year. We've been clearing some ranges in the first half, which is now complete. We launched 20 new Sofology products in November, many of which are working really well. Many are in this top 30 already, somewhere in the top 10, and that's part of what's driven the decline year-on-year. So in terms of half 2, I think, as Mike pointed to, we'd expect to see some good margin growth in Sofology. And overall, for the year, margins will be up in Sofology year-on-year across the whole period. I think where they can get to, they won't quite get to the levels of the DFS margins because within the DFS margin, as we've said before, there's a manufacturing profit. Our factories in the U.K., from a DFS manufacturing point of view, our own manufacturing are pretty full. So if we take a model out for DFS and put them into Sofology is just 6 and 2 3. So I think Sofology's margin will continue to grow. And we've seen in recent months, actually, from an order intake margin, we have seen that coming through. Do you want to just talk about Sofa Workshop? What's been delivered in half 1 versus half 2? I think it's on the slide, but just to be clear.

Yes, exactly. So I think we saw a GBP 2.4 million reduction in Sofa Workshop brand contribution during first half of the year, which we think is probably the slightly greater half of that impact that we'll see, and clearly, that's based on the trends that we're now seeing.

And in terms of the early days on footfall, it is very early days. It's literally 5 or 6 days, and it's only been a sort of single digit number. But it is noticeable that it's across the brands. I could say, it's kind of within the norms of what we see, week in, week out in furniture, depending on a number of factors, where it's the weather or the promotional campaign. And actually, it's -- the footfall decline is slightly worse than the bookings performance. The bookings has held up in terms of order intake that we called it. So that's driven by conversion average order value. So it's only very slight. I think it's more about looking at the next 16 weeks and thinking through scenarios as to what may or may not happen, depending on how the virus plays out in this country. And it's just been very cognizant of that, and we're trying to be as transparent as we can. I can't give you any predictions, before anybody asks me that, because obviously it's impossible. So -- but we just have seen the slight tick down in footfall coming in.

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John Stevenson of Peel Hunt. In light of that, can you talk about what you're thinking in terms of marketing plans for Easter? I don't know how flexible you are as you go in and how late you can leave it before you sort of change things. And secondly, on a more positive note, obviously, it's a great performance in kind of the Boxing Day sale to date. Can you talk a little bit more about how strongly people came back after the election? The extent any -- I don't know if there's any trends or patterns in terms of how much people are spending, what sort of ranges they're buying, any differences. Just to get a sense of, without this, actually, what we might have been seeing.

Yes. I mean Easter is largely locked down. Obviously, TV has been booked. We have a mailer, an Easter mailer that goes out to 9 million people on the 1st of April. So that's booked and printed and on its way. We have some flexibility Easter, obviously, around digital, where we could choose to take decisions there. But I do think it's one of those things that we daily -- you look at because if people are, unfortunately, isolated or at home, they will be watching TV and browsing the Internet. So I think we need to be thinking about, in the medium term, about building people's awareness of the brand and what we're doing. I think it's probably more, we've got more flexibility in May, June, John, around -- certainly around, including TV, where we have gotten really good relationships with people like ITV and MediaCom where we can -- around media partner where we can be more flexible, subject to how it transpires. So I think it's May and June across the group. I don't know, Mike, this GBP 3 million, GBP 4 million of the marketing that we -- that is not currently committed and booked. In terms of post the election, we didn't see necessarily a huge step-up in footfall. That's not what we saw. In fact, the footfall trends have been pretty consistent throughout the year. What we have seen is probably the customers that are coming in, perhaps being a little bit more confident in committing to buying. We had a very strong winter sale promotion in DFS, led by Wallace & Gromit creative, which created a really strong feeling around the brand. But the products that we're selling, actually, we've had some really good growth in some of our exclusive brand partnerships. So the likes of Joules, you'll see upstairs, the likes of French Connection, House Beautiful. They give people a reason -- it's a fantastic product offer that we've now got out there. And the teams have been working super hard on getting our range right in DFS. In Sofology, the newness that's come through. We got a tremendous team there delivering new products, and that's what people are buying. So actually, what we've seen is not necessarily footfall going up. We've seen conversion and average order value increasing even further. So the customers are coming in, feeling a bit more confident, spending a bit more on the brands, and that's what we've seen. If we'd have gone forward with that normal environment and perhaps consumer confidence improving, housing transactions feeding through, I think what I take comfort from, and Mike and I look at, is the underlying health of the business post kind of the election and things perhaps normalizing in the U.K. pre-coronavirus. Felt like we might get a bit of our mojo back and look forward with some real confidence. And we do in the medium term, and that's important to say.

It's [ George Oz ] from Numis. First one, there's a large step-up in the NPS of DFS. I guess kind of what do you think has been the biggest contributor to that? Is that delivery in-store initiatives, et cetera? Second one, just on comments on kind of recent drop-off in footfall. Have you seen anything online in terms of web traffic compensating at all for that? Could you clarify comments on Dwell in terms of the competitive environment kind of weighing on gross margins? But then if you could expand on that at all and kind of what the outlook for that would be? And then just one final one on the Sofa Delivery Co. Are those vans going to be branded Sofa Delivery Co? Would you not consider branding them DFS and get an extra advertising from the bunch of vans driving around?

It's a good question. I'll take them in order then, yes? So in terms of DFS NPS, why is it -- it's a combination. I would say, it's a combination of things we're working on, but particularly working on coming back to product quality and really making sure the customers have unbelievable product quality that lands and there's no problems with it. That's a key driver. But I do think some of the initiatives we've been doing, so we can see, for example, where a customer chooses to book their slots online and they've got control about when -- what suits them. We see quite a significant step-up in their NPS, so they're more in control. I think we've been doing a lot of work on our customer service piece. So if you do have a problem with your sofa, it's handmade furniture after all. If you can get out to people really quickly and solve that problem, again, they feel -- you can have a heroic recovery around it and make sure that the customers got a sofa that suits them quickly, rather than it hanging on. So we've got that down to now less than a week. And typically, in most parts of the country, that's 2 to 4 days. And that feels like a good service because people understand it's handmade furniture. So those sorts of things all contribute. What we've tried to do is create a real culture based on, I think, customer value but added data in, so we can literally drill down and do root cause analysis on every single thing and just keep getting into that continuous improvement thing. So hopefully that answers the question on NPS. Online traffic, the trends haven't changed. I mean I don't want to make too much of the footfall thing because it hasn't been dramatic compared to what we see week on week anyway. But it's just -- I think it's pretty more about thinking what might happen in the next 16 weeks as to what has happened. It's been a slight tick down. Online traffic trends haven't changed. It hasn't gone up, hasn't gone down. So it's just -- maybe it's a little bit too early to see what's going to come there. Dwell operates in an environment if it sells -- as well as sofas that have a lot of accessories and dining tables and lighting, et cetera. So it operates in an environment where people like MADE and Wayfair and there's -- it's quite a competitive environment there. So I think in terms of the margins that Dwell are earning are probably at the level that they'll get to now given the competitive environment there. We do see great opportunities with Dwell. They've got some fantastic accessories in terms of coffee tables and lamps and rugs that will be in Sofology and DFS stores as an add-on sale. So that will drive volume through that business in a very capital-light way. So I think we understand the kind of P&L construct we now need to drive the top line to drive the kind of bottom line. Sofa Delivery Co, it was a fantastic debate with all of our marketing colleagues as to who went on what on the side of the van. As you can imagine, that was a great conversation. We think that The Sofa Delivery Co in itself is, it's actually a really strong logistics opportunity that could be wider than just the group one day. So we see it as an ability to set something up that is really unique in this sector. Delivering and installing sofas is quite a hard job, as you can imagine, it's 2 person. And so there aren't many out there that do it well, and we want to be the best at it, which gives us a great asset going forward. Does that answer the question? Hey, Mike.

Yes. Just on The Sofa Delivery Co. Have you got any idea of the rollout? I think you said it was just in Belfast at the moment. Correct me if I'm wrong.

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And then just any sort of financial indication of cost savings you may achieve?

Yes. So our plan will be to complete the rollout by the end of FY '22. So it will take us to a little bit years from now. Why is it going to take that long? There's a lot of work to do on the systems integration. We've got to talk to all of our people do the right thing there. So -- and we're also, at the same time, implementing a stock management system to know exactly who stocks where. So there's quite some hard jobs to do, which we've got a plan to do. So by the end of FY '22, we'll be there. And on today's volumes, so it doesn't include any future Sofology stores that would, on an apples and apples basis, give us GBP 3 million worth of cost savings. And that's on the variable cost of logistics. Because this business works on volume and density. So if you've got the vans full going out every day, that's where you get the savings. So typically, the DFS fleet is full every day, whereas sometimes if you're in Sofology and Sofa Workshop, you can't quite fill the vans by having a brand that goes across all the vans are full, and that's how you unlock the savings.

And those savings will presumably be in the upper brands?

Yes, they'll probably come more reported in -- from a P&L point of view in the brand contributions of the likes of Sofology and Sofa Workshop, absolutely. Any other questions? Is everybody still there? Everybody is quite relaxed. It's quite nice to see out here. Okay, if there's any other questions, please feel free to follow up Ian, Mike or myself. But thanks very much for your attention and have a good rest of the week. Okay, thank you.