DFS Furniture plc (DFS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the DFS FY '21 Interim Results Presentation. I'm Tim Stacey, Group CEO, and I'm here with Mike Schmidt, our Group CFO. Our presentation today will cover 3 areas. Firstly, I'll begin with a brief summary of our progress in the first half, with a reminder of the fundamental strengths of our group. Secondly, Mike will deliver the financial overview. And finally, I'll present my strategic update before finishing with the Q&A. I'm pleased to report a strong set of interim results which strengthened our market leadership in a resilient Home & Furnishings market. We've delivered revenue growth of 19%, grown our PBT by over GBP 60 million, and reduced net debt by over GBP 100 million. Revenue growth in the half was driven by the market recovery after the end of the first lockdown as well as market share gains of over 2 percentage points from successful strategy execution. We've achieved 68% growth in online sales in the half, with our integrated retail offering proving incredibly resilient despite the disruption due to lockdown restrictions on our showrooms. We look forward to reopening our showrooms in April and subject to the level of pent-up demand in quarter 4. We expect full year profit to be broadly in line with expectations at around GBP 100 million PBT. Now these results are only possible due to the supreme efforts of our colleagues and I want to thank them all for their incredible support over these past 12 months. And also to thank customers and other stakeholders for their patience and support through the incredible challenges we faced. Now like so many businesses, we've had to deal with a wide variety of operational challenges throughout these past 12 months, but we've never lost sight of our long-term strategic agenda and the fundamental strengths of our group. And I just wanted to take this opportunity to step back and set out those things that make the DFS Group strong and resilient and set for growth. Firstly, we're the clear market leader in sofa retailing, with a market share pre-pandemic of over 34%, and that continues to grow. We also have clear market leadership online at over 40% share. Now this leadership provides us with the scale and the ability to invest for the long term. Secondly, we're increasingly an integrated retail business. We're channel-agnostic, having strong web platforms that are integrated with our showroom network. Now this enables us to adapt to meet the changing consumer shopping behaviors and increasingly leverage our platforms to grow our total addressable market. Thirdly, we're building a sustainable business model. Both in terms of the impact on the environment and also our commercial success as a well invested and resilient business. These inherent strengths set the business apart in terms of financial performance. As we drive revenue growth, our relatively high variable cost ratios and negative working capital model enabled both strong profit and cash flow generation, both today and going forward. Finally, the tailwinds provided by the buoyant homeware market and the potential for pent-up demand as we reopen our showings in April, means that we are well set for growth going forward. I'd now like to hand over to Mike to present the financial overview.

So good morning, all. The last 6 months, given the operating environment, have had a very large number of moving parts. So in the reviewing performance today, I feel it is right and most valuable to particularly focus on the significant elements and the broader picture. Many of the changes that you can see in the numbers are white noise relative to the fundamental trends that will drive long-term shareholder value. I will aim to focus on these fundamental trends as we go through this section. So I will start with an overview of the P&L. You may recall that we entered the year with a confident outlook, given our strong opening order bank. Our revenue growth of 17.3% was as strong as we expected. And it is worth noting though that this performance was actually underpinned by even higher order intake in the period. This has led to a higher closing order bank for the period compared to the opening mortar bank which has set us up well for the second half of the financial year, as I will come on to. A key driver of our performance was the online channel, which saw revenues up 66% in the period. And despite typically seeing 4 weeks of showroom closures in the half, we also saw double-digit order growth in the showrooms over the 26 weeks as a whole, reinforcing the point that for the majority of our customers, the showroom experience is a critical element of the purchase journey. Our revenue growth has fed through as we would expect, given us positive operating leverage to drive a strong profit before tax of GBP 76.5 million. So that's a little bit more than 4.5x that generated over the same period last year. Reported profit before tax includes costs associated with the disposal of Sofa Workshop, but also costs associated with an extension of our financing facility. This facility extension was something that we were satisfied to see strong support from our existing bank group on and has extended the remaining life of the facility for up to 5 years while removing restrictions on dividends and acquisitions. Following cash generation in the 6 months of approximately GBP 120 million, we believe that our balance sheet is robust with underlying leverage at 1.1x and borrowing moving in line with the adjusted target range for this environment of 0.5x to 1x, which is set out in our refreshed capital and distribution policy that we have published today. So as we straighted on the prior page, profit before tax has grown substantially. And the key driver behind that has been volume growth, which added GBP 43.2 million of margin in the half. That data point, also includes the margin from internal manufacturing operations, which have an accretive effect on the overall percentage margin. Our internal manufacturing does have a fixed manufacturing capacity, so it hasn't been able to grow at the same rate as the overall retail business. And thus, this has had an inevitable dilutive mix effect on the percentage margin overall that we're reporting. Underlying retail selling margins have, however, been positive, and we can see that coming through, adding GBP 3.3 million of gross margin overall. And this reflects favorable trends in average order values and comes despite some cost headwinds associated mainly with well-publicized container shipping cost inflation in the first half. Operating costs comprise a lot of moving parts, but are well controlled overall. We saw higher volumes and higher colleague performance payments and some one-off fees and COVID costs being outweighed by reduced property costs and also a significant reduction in marketing spend, driven by increased data-led efficiency. While our property costs have benefited from the suspension of retail business rates given showroom closures, I should emphasize that we chose not to take any benefit from either government furlough schemes or any other government grants. This was a decision made in consideration of the strength of our financial performance overall in this period. I mentioned on the previous slide, the strong growth in online orders. It is important to recognize that these orders do contribute strongly to profits. Operating costs tend to be lower for our online orders. As we use exactly the same fulfillment network while paying lower marginal operating costs, which mitigate the slightly lower product margin mix that we typically will see. So in summarizing our position today, it is important to recognize the consistency of revenue performance despite the unpredictability of the environment. I show here as the dark red line to deliver revenues to date, relative to the light blue line being the prior year. You can see that despite the 2 very recent lockdown periods, we've continued to manufacture and deliver throughout elevated year-on-year rate. And this has meant that we are consistently able to realize revenues and drive cash generation despite the restrictions imposed on the country. The 3 red vertical lines also give you a few snapshots of our order bank opportunity relative to the more typical prior year position. During the first half of the year, you can see that the order bank grew as we saw order intake above the rate of revenue growth. This has provided us with real resilience over the last 10 weeks of showroom closures. Where the current reduced level of order intake has been mitigated by having a sizable existing order bank that allows us to keep the majority of our manufacturers fully busy. Our online channels have been performing well in this period, and this has allowed us to still retain an incremental GBP 65 million of revenues in our order bank as we stand today. So taking account of the order bank remaining, and the majority of the showroom reopenings being due to occur in the next 5 weeks, we summarize here what we see as being the range of outcomes for profits. We show 3 cases that each assume showrooms have reopened by the 12th of April, with a range of subsequent order intake levels relative to the fourth quarter in financial year 2019. The positive conclusion is that despite suffering from around 14 weeks of showroom closures. We expect to see a profitable second half of the financial year in all 3 of our reasonable scenarios. I'd emphasize that we recognize revenues on delivery and the rate-limiting factor for profit realization this year is, therefore, not just order intake, but also the pace at which we can manufacture and deliver. In the low case, we assume that delivered revenues are flat versus 2019, which is possibly conservative given the strong evidence of pent-up demand that we have. This would imply we get to revenues of GBP 1.05 billion, which is approximately GBP 50 million higher than 2019 and a profit before tax outturn of GBP 97 million, implying profit growth of over GBP 45 million. In the medium case, we assume 30% order intake growth. That generates a profit before tax outturn this year of GBP 105 million, but also means our closing order bank will be elevated and have incremental profits of GBP 10 million or so retained to be realized in the following year. Finally, as a high case, we show order intake growth up 50% versus 2019. Because of the manufacturing capacity constraints, it is unlikely that revenue and profits will be very much higher in this case, perhaps reflecting an additional GBP 15 million or so of revenues. However, we do believe we will see more of an upside secured for 2022. Finally, while the closing cash position will depend on the scenario, it is very clear that the balance sheet will close in a robust position in all scenarios. We show here in the medium and high cases, the bank net debt is expected to be beneath GBP 100 million. And this is despite an assumption that the vast majority of our current working capital benefit of around GBP 60 million will unwind. At the end of the year, we will, therefore, be less than 1x levered and will be in a position to once again consider restarting our dividend. So I'd like to close with an important reminder on the favorable characteristics of business model that we operate with. So firstly, cash generation. We operate with solid profit margins, negative working capital and limited minimum CapEx commitments. It is easy to grow complacent on the favorable characteristics of our destination showroom approach relative to stock retailers, however, we don't need to fund large amounts of working capital on our shelves. We don't carry stock ops lessons risk, and there are limited costs of maintaining our destination showrooms in great conditions. All of these characteristics are critical in helping us drive our cash generation and value for shareholders. We see profit before tax as being able to be sustainably above 7%, which is around the 12% EBITDA margin on an IAS 17 basis. We also believe that our working capital requirements will not absorb cash overall. And that the majority of our CapEx is directed to initiatives that each deliver a financial return or build sustainable operating advantages for the future. All of these characteristics combined to mean that we believe we will generate cash conversion of 75% to 80% of profit before tax from a margin of over 7%. And of course, this puts us in a position to look at a healthy ordinary dividend policy from the end of this financial year as part of the overall value creation approach for our shareholders. Our cash generation characteristics sit as one of the 4 long-term financial metrics that we consistently focus on. Firstly, looking at revenue growth. We do believe that despite our strong market position, that we have more to go after in the U.K. Tim will come on to this, but it's both in sofas, but also in broader living room and bedroom categories. We, therefore, do target growth in the U.K. that is higher than the market rate each year. And in the last 12 months, we are currently tracking approximately 2% upholstery share growth year-on-year, which implies just over 5% revenue growth year-on-year on top of the market rates of growth. Secondly, profit margins. We do believe a profit before tax margin of at least 7% is sustainable in the near term, which is underpinned by increased utilization of logistics assets, property estate and also greater back office integration. And thirdly, cash generation. We've already talked about, and we have reduced our net bank leverage to 1.1x. By the end of the year, we'd expect to be within our adjusted leverage target range of between 0.5x to 1x. And finally, return on capital employed, which we measure on a lease-adjusted post-tax basis. We believe that we can sustainably support this at high teens levels. So to conclude, overall, we saw a strong 6-month trend as part of what we can now reasonably expect to be an excellent financial year. Looking further out, with the strong financial characteristics of the group, I believe we're also well positioned to generate strong and improving financial returns into the future as well. I will now hand back to Tim to talk a little bit more about the strategy. Thank you.

Thanks, Mike. I will now provide an update on our business model and strategy. I'd like to cover 3 main areas today. As I touched on earlier, I'd like to start by revisiting the fundamental strengths of our business model. I'll then provide an update on our strategic progress. I'll then conclude by shining a spotlight on 3 specific topics that are very much front of mind right now, manufacturing, the home market opportunity and ESG. And here's the chart that I presented earlier, summarizing the fundamental strengths of our group. There are 4 key elements, which highlight why we're strong and resilient and set for growth. And I'm going to focus on each element in turn, starting with our market leadership. As the clear market leader, scale is one of the major strengths of our business model. In the 50 years since our formation, we've grown our market share, taking advantage of opportunities across all channels firstly, in out of time showrooms and more recently in the digital space. Our fastest market share growth has often come during periods of market disruption, and we've seen off a variety of established and emerging competitors. As you can see on the left-hand chart, just prior to the start of the pandemic, the group reported a 34% market share, meaning that we're over 3x the size of our nearest competitor. Since then, harvest has gone into administration, and we are confident that we have benefited from their withdrawal. The middle chart highlights our more recent market share growth using proprietary data we've developed with Barclaycard. Our market share surged earlier in 2020 during lockdown 1 as our relatively strong web channels performed well ahead of our competitive set. As showrooms reopened, we've seen consistent market share gains throughout the first half of this financial year. Our market leadership enables significant economies of scale and industry-leading margins, as we can see on the right-hand side chart based on pre-pandemic data. These economies of scale are wide-ranging from buying power with manufacturers, logistics efficiencies due to postcode delivery densities, efficiencies in advertising, insurance and IFC. And of course, operational gearing due to higher sales densities through our showrooms and websites. Scale is a major driver of our long-term success. Our second core strength is our integrated retail business model. Now since I joined DFS around 10 years ago, we've invested heavily in building the leading omnichannel business model in this sector. Now this allows us to meet fast-changing consumer shopping habits and positions us well for the future. We believe that it's the combination of digital and physical channels that is the right long-term approach in this market. With our integrated platform, we're increasingly channel-agnostic and flexible to support consumers, however, they want to shop. The customer shopping journey begins online with more than 85% of consumers who are researching online prior to purchasing their sofa. On the left-hand chart, we maintain a significant lead in the sector search traffic with over 2.5x of our next nearest specialist competitor. In fact, DFS is the most searched-for term in the sector on the web for our category ahead of sofa and sofas combined. Now once customers are on to our website, we've developed a wide range of tools to engage and support them on their journey. These include the world's largest set of augmented reality sofa images through a web browser, some 12,503 D assets, allowing customers to visualize a sofa in their living rooms. Through to live in-store video channels that enable customers to interact with our colleagues from the comfort of their own homes. When we talk about leading sofa retailing in the digital age, these are the sorts of initiatives that we are actively pursuing. Now the customer journey doesn't generally conclude online as the majority of customers still prefer to visit our showrooms for the all-important sit test. And we are, therefore, committed to maintaining an attractive showroom estate, which benefits from regular refurbishments and technology enhancements. Irrespective of which channel, the customer chooses to place an order, the order goes into our manufacturing order bank and will be delivered through our own integrated logistics platform. Now I'll talk more about the Sofa Delivery Company later when I discuss our progress on our strategy. But the key point here is that our business model is already set up for the omnichannel nature of how customers want to shop. We don't need separate manufacturing or supply chain to satisfy demand, however it arises. Thirdly, we're committed to building a sustainable business model, both in terms of the impact on the environment and also our long-term success and resilience as a group. Our scale and profitability has allowed us to invest for the long-term throughout the economic cycle. And this leaves us with well invested platforms relative to our competition. It's allowed us to adapt to the rapidly changing consumer environment and helped us remain resilient through the pandemic. As the middle chart shows, we're investing across our assets in digital capabilities and technology, in logistics, in new showrooms as well as maintaining our asset base. We have also embedded our recently launched ESG strategy into how we do business, recognizing the imperative to build a truly sustainable business for the future. I'll talk more specifically about ESG in a few moments. The fourth element behind the strength of our business model relates to the resilient U.K. consumer demand for homewares. As we show on the left-hand chart, the U.K. homeware market is benefiting from a shift of consumer spending to home away from travel and leisure and fashion. With holiday uncertainty likely to stay throughout the summer and housing transactions recovering, we expect the homeware demand to remain robust at least until the end of this calendar year. We're also looking forward to strong demand in our showrooms once the current restrictions are lifted, hopefully in the middle of April. As indicated in the right-hand chart, showrooms enjoy a sharp recovery in sales as they reopen after lockdown. This should underpin a strong order intake in our final quarter benefiting orders and deliveries in the final weeks of FY '21 and potentially into early FY '22. So we believe that the resilient homeware market should fuel the fundamentals of our business model. Now these core elements of our business model as well as the homeware market tailwind, leave us set for growth in shareholder returns. And as Mike highlighted earlier, high levels of free cash flow generation are a long-term feature of our business model, and this slide details how we expect these to persist going forward. Revenue should benefit from market share growth and a favorable homeware market. Operational gearing and ongoing cost control through our self-help efficiency initiatives should deliver improved profit margins, our made-to-order business model, short lead times and supplier credit terms allow us to operate with negative working capital, generating more cash, therefore, as the business grows. And we, therefore, anticipate annual post-tax free cash flows well in excess of GBP 55 million per annum on a sustainable basis into the medium term. I'd now like to turn to strategic progress in the half. You'll hopefully recognize this 3x3 model. And our strategy has remained broadly unchanged since 2019 and is focused on 3 core pillars: drive the DFS core business, build the platforms and unlock new growth. I'm pleased to report that we've remained focused on the execution of our strategy despite the operational challenges of the pandemic. We continue to target a GBP 40 million profit before tax benefit from this range of initiatives. Now we've added in this slide to highlight how we're progressing relative to the GBP 40 million target with a net GBP 20 million achieved to date after the reinvestment of around GBP 5 million in digital leadership. We have increasing confidence and proof points around our strategy despite the impact of the pandemic, which, if anything, serve to accelerate our focus and pace of execution. Now turning to the first pillar. The DFS brand is the largest and most profitable in the group. And the key priority of the drive DFS core pillar is to drive growth across all channels. Our market share increased by over 2 percentage points during the first half, and there are 3 main elements of this pillar. The first element is to invest in our infrastructure to further improve our omnichannel customer journey. In the first half, we launched a more responsive online checkout, introduced shared baskets to improve the end-to-end customer experience. A great example of our digital innovation is on the left-hand side, where we're investing in augmented reality. Working in partnership with a leading U.S. tech platform, we've expanded our augmented reality assets to be the world's largest in the sofa retail sector access through a web browser. With over 12,500 3D images, we enable customers to visualize a sofa in 3D in their living room using their smartphone. With high levels of engagement with this initiative, we observe improved rates of conversion and a very strong return on investment. Now we believe as well that an attractive showroom experience is vital to the customer journey. The bottom center image is our fabulous Milton Keynes store refurb. And we've refurbished 6 showrooms during the first half of the year and have a further 9 plan in the second half. The second element of this pillar is to enhance our unique product offer. And highlights in the first half include our box it sofa in a box concept illustrated here, which targets young urban renters. Our new Halo Luxe range, launched in September and was supported with its own TV campaign and has succeeded in attracting aspirational customers into the DFS brand and is driving part of our market share growth. We're also very excited to have launched our product partnership with Grand Designs. It's a new range of sofas combining design with a sustainability ethos. This is a really significant step forward in terms of design-led sofas made from sustainable materials. With the fabric made from 100% recycled yarns and each seat cushion made from approximately 200 recycled plastic bottles. Finally, we're investing in our customer proposition and developing innovative digital services. Our customer service video, chatbots and text chat tools have been invaluable throughout the pandemic as we've navigated the operational challenges posed by COVID. Build the platforms is our second strategic pillar, and this focuses on capturing group-wide benefits from leveraging existing infrastructure systems, process and data. We are targeting significant gains in property, logistics and marketing. On property, we continue to achieve property cost savings with a further GBP 0.9 million annualized savings achieved in the first half. And this takes a cumulative savings since the start of this project to GBP 5.2 million. So we remain firmly on track to achieve as a minimum, the GBP 6 million to GBP 8 million annual savings targeted by FY '23 and recent lease rigorous are running at over 30% savings. Turning to logistics. We're progressing well with our objective of building a leading group-wide supply chain platform, the Sofa Delivery Company. Our current year rollout plans are on track as we work towards achieving annualized savings of over GBP 3 million by the end of financial year '22. We're making good progress with the rollout of our stock management systems and our Sofa Delivery Company rebranding that you'll see here on the truck. By the year-end, we'll launch sofa delivery companies 7-day extended ours delivery model across the group, benefiting customers and our operations. So Delco is also central to our ESG strategy with an important role to play in meeting the group's CO2 emissions and waste recycling targets. Finally, we're achieving savings in our marketing investment across the group by using data and insight more effectively. In the first half, we achieved GBP 6 million worth of net savings compared with a year earlier, and we're confident in our ability to achieve further savings in the future. Our third strategic pillar is to unlock new growth by driving new revenues and profit, particularly focused at our Sofology brand. Our priority is to accelerate the rollout of the Sofology showroom estate. And we remain on track to add 6 to 10 new showrooms in the current financial year. In the first half, we opened 3 new outlets, extending Sofology's coverage in the Southeast, where the brand is underrepresented. New product development reflects the brand's reputation as an environmental leader. In the first half, we launched Sofology's first eco sofa, the Pioneer, alongside their Green Friday marketing campaign. We remain very positive on the potential of Sofology and see the opportunity to grow the brand to 65 to 70 showrooms in the medium-term from the current 48. We're targeting revenues of over GBP 300 million to pretax profit margin of between 5% to 7%. So our strategic agenda and targets remain very much on track. I'd now like to cover 3 additional topics that remain very much front of mind for us. That's manufacturing the home market opportunity and the ESG. Now I'll provide with some reflections on the importance of manufacturing with our final results last September. And we believe that manufacturing is a key source of competitive advantage for the group, enabling design differentiation, shorter lead times, additional margin capture as well as a greater oversight of ESG. The pandemic and Brexit have highlighted the complexities of the global supply chain for sofa. Now as a reminder, we currently manufacture around 20% of our sales in our own 5 U.K. factories, a further 20% is manufactured by third-party U.K.-based suppliers and the remaining 60% by overseas manufacturers. Now as shown on the right of this chart, I can confirm that we are close to finalizing plans for our investment in our U.K. capability to support both DFS' market share growth and Sofology's expansion program. Total investment of circa GBP 12 million to GBP 15 million split across 2 financial years, FY '22 and '23 will be internally funded and the targeted returns will also meet our strict financial appraisal criteria that Mike set out earlier. In the short to medium term, we are also exploring potential near-shore opportunities to increase the group's manufacturing capacity, flexibility and to reduce customer lead times. Turning to home market. This slide builds on my reflections in last September's results regarding the opportunities available to successful platform-led businesses. Now we see a clear opportunity to extend our product ranges into adjacent areas including living room furniture and the bedroom market and therefore, increase our total addressable market. At almost GBP 5 billion, the bedroom and living room furniture markets combined over 50% larger than the upholstery market. And yet, we only have a minimal market share. On the left-hand side, we set out our intention to access the living room furniture opportunity through an attachment strategy which is the core strength of the group. By leveraging our established Dwell, supply chain and infrastructure, we can see a significant ancillary opportunity to attach more living room furniture items, such as coffee tables, rugs and lamps, to our sofa orders. From a bedroom furniture perspective, we are utilizing our platform assets, especially our web traffic, our online platforms, the brand partnerships that we have, our leading interest-free credit offer to sell primarily online. As you can see on the image on the right, our Joules, Windsor bed brand is a great example of this strategy in action. Since Christmas, our online sales of bedroom furniture have grown in excess of 150% year-on-year, albeit from a low base. We see these 2 areas as good ancillary opportunities to grow sales and profit in the medium to long-term and increase our total addressable market. Now we launched our ESG strategy in September 2020, with a strong focus on the environment, and that was based on our sofa cycle approach. We set out clear targets, which are included in both the full ESG presentation available on our corporate website and also in the appendix to this presentation. As the largest upholstery retailer and manufacturer in the U.K., we aim to lead on the environmental challenges that exist within our industry. Our Sofa rescue program has already saved over 65,000 sofas from landfill, and we're taking this a step further by reviewing both the materials and manufacturing methods to help the recyclability of our products. With a robust plan for E, we have turned our attention to S and are working on a clear plan to address inclusion and diversity within the group. We will embed a culture of inclusion so that everyone is welcome at DFS. This builds on our core group values that we established in 2019. In terms of G or governance, it's a core part of our status as a PLC, and we're committed to all relevant legislation and guidance as it develops. Regarding our commitments as a group, we are focused on tackling our carbon emissions. We've signed up proudly to the BRC climate action and road map targets and are well on the way to meeting our Scope 2 targets by 2030. Though we have reduction plans for Scope 1, we are reliant on technology advances such as a mission free 7.5 tonne trucks to meet the 2035 target. Transparency and traceability focused on wood and leather in Phase 1 of our ESG targets will enable us to ensure the raw materials used in our products are sourced responsibly and won't contribute to deforestation. We're on track to meet our 2025 FSC target for wood. And our ESG strategy has been woven throughout our business from responsibility champions to ESG working groups within each brand and external partners in place to validate and support us. We are at the start of our ESG journey, but we've come a long way in a short amount of time and are very excited about the opportunities ahead of us. So to summarize today's presentation. The fundamentals of our group are attractive. The group is strong and resilient and set for growth. We've reported impressive first half results in terms of revenue, profits and cash generation, and we have a positive outlook for the full year. We've achieved market share gains in the half of over 2 percentage points and we're looking forward to building on these as our showrooms reopen in April. Our strategic agenda is on track. We've made significant progress on our 3 strategic pillars: highlights being our omnichannel performance, our platform development and Sofology roll out program. We've also highlighted 3 additional topics, areas of focus, our plans for manufacturing investment, the clear home market opportunity and our commitment to our ESG priorities. I'd like to end by thanking again, once again, our colleagues and our customers and our wider stakeholders for their support during this incredibly challenging period. And I'd now like to open up the lines for questions. Thank you. Right, I think we're ready for questions. So over to Phil, who's the first questioner?

We should have Jonathan Pritchard on the line from Peel Hunt.

Yes, 3 for me, if I may. Just on the adjacent markets point and the bed market. Obviously, you have the sit test for sofas. Is there -- I imagine there's a sort of lie test for beds. What's the size of the online bed market as far as you're concerned? That's #1. Secondly, more recently, and I know it's not your normal subset of customers, I guess we're in lockdown, but anything to report on just about behavior. In terms of cash -- sorry, debit or credit cards, IFC, non-IFC, all that sort of stuff, anything there to report? And then lastly, just you mentioned the benefits of scale, insurance and IFC. It's interesting you mentioned them. I thought they were quite small, but you would have mentioned it if they were that small. How often do you sort of reconfigure your agreements with your insurers and your insurance companies and your debt providers, how often does that conversation take place?

Yes, that's a good question. So Mike will come to you for that one. I think it was the first question, Jonathan, in terms of the bed market. What we found is -- well, the bed market overall is about GBP 3.7 billion. And a good proportion of that will be online. I couldn't give you exact stat on that. But what we found is, increasingly through this year, through lockdowns, there's been more searches on our own site for beds, as we've grown our bed offering, our products offering. And you've seen an example on the presentation of the Joules bed. So using our exclusive partnerships and creating upholder bedframes. We've seen more and more interest, more and more hits. So we started to sort of look at that and think there could be a good opportunity here. So we're starting to develop the product range. We're improving the website. We're starting to invest in digital search. And we've seen a significant uplift. I think the test is a really good and argue with a sit test. But what you find is, I think, some of the biggest big retailers in the country, Argos, for example, sell huge amounts of mattresses, and they don't have that sort of the lie test there. Do they? So I think we see really emerging, albeit from a low base, emerging opportunities there without necessarily having the showroom presence. So we see it's primarily an online play. Second piece around customer behavior, IFC cash. I think, certainly, over the course of the half, there was more of a shift to cash, a little bit less on IFC and certainly in lockdown 3, we haven't seen a significant change in that. So still the IFC take-ups in the kind of 2/3 territory. And approval rates are fine. So there's no issues there. The subsidy costs are coming down slightly. So there hasn't been a seismic shift, Jonathan. But in the end, it's a key enabler to people to access the higher-value products. So I think that's always been part of our DNA, which I guess thinks deferred point around how often we mix up and how we work with our plan providers, Mike?

Yes. So we've got 5 key finance providers, Jonathan, working across DFS and Sofology, each have got multiyear contracts in place. We've worked with them for long periods time. We do periodically sort of refresh, renew and we run an annual tender process each summer, typically for a certain percentage of our book to just make sure we're driving the sharpest pricing that we can for the credit that we're creating. In terms of demand levels and trends overall, we carry on seeing very, very good appetite for the lending on our book. And it remains a core part of our offer, but certainly, certainly no changes in the sort of -- in the credit appetite from our lenders for that business.

Next up should have Andrew Wade from Jefferies.

Just 2 questions from me. First one, you note that in the presentation, your market share is 3x at the nearest competitor. And you also show CapEx running at 3x the competitor as well. But your search is you know being 2.5x the competitors. So just interested why do you think there's that differential given -- I would have thought you'd have over-indexed online.

That's a good question. I thought of it like that before. I mean, I think we never sort of cap our investment in digital. We've been investing more and more in digital over the years. And as I said, I think on the presentation that the search term, DFS is the most searched term in this sector. So I think we see it as a strength. I think many competitors, if you think about -- if you're a competitor, you would be trying to bid far more from a digital perspective than perhaps you can do on TV in the traditional channels. So I suspect it's more about the weighting of competitors marketing spend and rather than anything that we're doing. We're very comfortable and continue to invest more and more in digital.

And I think the other point, just logically, we know we drive very good conversion through our website. So the fact that we're seeing a increased market share relative to the traffic coming to the site is just evidence of that conversion coming through.

Yes. Okay. And then the other one, I mean, we're -- you're talking about -- and we're seeing in the share gain, we're seeing average order value or prices or your ability to increase prices by having the branded products and so on, drive prices. You're increasing U.K. manufacturing, there's more efficiency savings to come. So there's sort of a whole long list thereof opportunities on the margin side. But you're sort of talking on the slide about a target 7% at least. So I do know you say at least, but a sort of target 7% PBT margin. I mean, FY '22 consensus were already around 6.5%. I'm just wondering why you're not sort of targeting a bit more than that as a sort of a base pay 8% or 9% or 10% in the medium term. What's going the other way?

Yes. I think -- so there's certainly cost of goods inflation coming through. So we've already seen that in terms of the Chinese shipping costs. The freight costs are definitely higher. I think there's raw material cost increases coming through. We want to maintain a very competitive selling prices. So we've got to absorb those headwinds, if you like, that are coming through. There'll always be cost of goods or cost of living, in terms of living wage, et cetera. So there'll be a couple of cent there. So there's always a bit of cost that we need to absorb, and we're very keen to maintain our competitive prices to grow our volumes and our market share. So look, I think 7% is a real target to go for. We need to execute over the next couple of years, the remaining elements of the 3x3 strategy. And we'll see where we get to in the medium term. It's a good target to start with. And then most I guess, Mike, you'll have a view on that as well?

Yes. I mean, I think it's worth calling out that the 7% PBT margin is broadly equivalent to a 12% EBITDA margin. So I think it really does show that the benefits of all of the changes we've made over time coming through. But clearly, when you get to -- when you fulfill one target, you look again at what your target should be in the longer term, but I think it is that keenness on the value proposition that we keep in mind.

And on the next one should be from Olivia Townsend from UBS.

I apologize if my questions cover anything that was covered in the presentation. I was having to see technical problems, but my first question is just on your view of sort of organic revenue growth ahead, given that we're seeing a lot of capacity exit in the market, how you view that going forward? Second question is on -- touching on the ESG point, obviously from a low base in terms of the kind of sustainable ranges. So I appreciate that the growth rate is perhaps not comparable. But I'm just wondering if there are any sort of active basis points you can give in terms of relative demand for these ranges versus the rest of the offer? And my last question is just on rent and leases. I know you popped in the presentation a bit. I did hear was about the lease savings. I'm just wondering some of your competitors or other retailers that have exposure to retail parks have commented that actually maybe that bit less. So going forward for savings given as higher demand, that's been a very sort of resilient store format during COVID. I was just wondering if there was anything else that you could add to that in terms of you've covered the '21 to '23 that could be on that point whether you have insight on what kind of savings you could get?

Yes. So Michael, I'll get on to that one to you in a minute. So yes. So on your first question, Olivia, organic versus inorganic. I think it's fair to say we see plenty of organic growth opportunities. And yes, there's the DFS share growth as we invested in the showrooms, invested in our omnichannel capability, new ranges. So we see growth there, that's clearly organic. And then the other key point is Sofology, where we have 48 showrooms today and we go 65, 70. So that's circa another $20 million. So that's clearly organic. And I think that's where we'd focus. I think from a sofa market point of view, we've stated before that we -- with the Sofology rollout program and the DFS organic growth, we'd be targeting circa a 40% share, if we could. And that's probably -- we're not particularly looking at any inorganic opportunities, primarily in the sofa retail market. I think on ESG, absolutely, it's coming from a low base, but we -- and it's very, very early days, but what I kind of say is the Grand Designs launch that -- which literally has only gone live about 2 weeks ago in DFS for sofas in a change their tremendous eco credentials, but primarily, the products are fantastic design and pricing, and we've seen enormous interest in that already. So very exciting opportunity there. And we're looking at some of the components of that as to how that can influence the rest of our ranges. So we see that as a huge opportunity, but it's probably too early to give you some data points. I think, certainly, over time we get to September, it had a good circa 6 months, and we can talk a bit more about that, and I'm really happy to talk about that. But I think it is the future that we need to be looking at all componentry within our sofas and thinking about how do we make them more sustainable materials. I think on rent and leases?

Yes. A couple of things, Olivia. I mean, I think the first thing to say is that probably what we're seeing going on in the retail market is a little bit of a bifurcation with a number of sort of super-prime sites, super primary retail locations that put us really strong tenant mix and has high demand. I think likewise, there have been a lot of exits of retail park locations over the course of the pandemic. And certainly, we don't see that sort of trend changing. And I think in the super-prime side, clearly, they're better set because they've got a strong tenant mix for some conversations to rents. And we, certainly -- if you look across our sort of 110 U.K. stores. For DFS, we'd be on -- generally speaking, the super-prime eye to the prime retail sites. That all being said, the reason that those locations are prime is because the retailers like ourselves, like other sort of leading chains on those parks. And we're 1 of sort of a small handful of I must have retailers in the sorts of locations that really drive customer traffic to the site. We carry on seeing few opportunities to take down our headline rents by 30% plus at the point of lease renewal. And I think, certainly, it was a couple of years ago, we gave that target for savings through 2023. We certainly look beyond that update and sort of say, well, we run out of opportunities after that date, it was more than we were looking at what can we reasonably do over a 4-, 5-year period, and I think we expect to see those improvements continuing beyond sort of 2023, 2024.

Next, we should have Greg Lawless from Shore Capital.

Just a follow-up may be on the online participation here. Obviously, showrooms are closed today. Just how do you see that evolving over time? And just back on to Olivia's point on property costs. Could you -- you talked about 30% cost, could you talk a little bit about the range and what be able to please?

Yes. Good question. So online participation, I think pre-pandemic, we were around 20% overall online orders, completed online. But probably half of those orders were what we call pure play, so e-commerce, where people have bought straight from the website, whereas the other half of that were people who have been into a showroom, sat on the product and come back and closed. So 20% overall, but half of that being pure play. I think post lockdown 3, what we've seen is a couple of percentage points increase each time It's hard to say how it will settle, but it could be 23%, 24%, maybe something in that region in terms of online order penetration overall. We don't see that as an issue. We've now at that point where the scale of our online orders and the fact that, as I mentioned in the presentation, it's fulfilled through our own -- the same logistics platform, the same manufacturing, the cost to serve is slightly lower in terms of commission. So overall, we're pretty agnostic about the profitability of that. So I think in the end, we just got to offer and be truly customer-led in terms of how the customers want to shop for sofas. But we don't see a fundamental shift that perhaps you've seen in other categories, and that comes down to the nature and the category that we're in, which is primarily sofas. So that's how we see it. We think playing out. We'll know, obviously more in September when life is somewhat back to normal. So hopefully. Mike, do you want to talk about lease length is a good question.

Yes. So our average lease length now is a little shy of sort of 7 years to a bit below 7 years. Typically, when leases get to expiry, you're having a conversation with the landlord about the trade-off between certainty for them and the price that they're willing to offer to get that certainty and what we will normally be agreeing is sort of a 10-year lease with a 5-year break close. So it does offer a significant flexibility in 5-year's time. But that being said, I mean, I think generally speaking, we do believe the integrated retail model is the right model to win in this sector and we carry on seeing, effectively all of our stores contributing strongly to profit and we continue to see that even if you extrapolate sort of current levels of online sales.

And I think it's fair to say. Thank you. We've worked very closely with landlords, and we've got a number of landlords up now in the country. And I think we're coming through agreements, good agreements that satisfy everybody over the pandemic. And I think as we go into the future, we're seen as a good tenant with good relationships. So we'd like kick it that way. We do believe. We actually believe in showrooms being a critical part. So underlying that, again, as Mike said. And I think the relationship with landlords is strong as a result of coming out of the pandemic and hopefully, how we've behaved.

From Numis, we should have George Pilakoutas on the line.

And first for me, if that all right, first one, if you could just talk a little bit more about evidence of pent-up demand whether that's online browsing, data, traffic, any service, you doing is just one is just to clarify that China that has a GBP 55 million of free cash flow to 2022. With that, suggest that PBT -- corresponding PBT number kind of in the GBP 70 million to GBP 75 million range is there something I am missing in that bridge. And then the third one is talking more about of living room, bathroom strategy, I guess. Can you talk a bit more about what you're going to do differently now than what you perhaps previously addressing these categories. You kind of mentioned of them to be predominantly online, just talk a little bit more about where you see kind of the range getting to kind of how much would needs to go to developing those ranges. And if you kind of store it in mind, you said this 5 percentage -- 5% or so kind of where that might get to.

Yes. Good question, George. So I'll let you think about the free cash flow question. So in terms of evidence around pent-up demand. We're definitely seeing well, I guess, a couple of data points. One, what we saw from post-lockdown 1 and 2, you'll see on the charts in terms of recovery. Two, search traffic is incredibly high. So it's higher at the moment in terms of unique visitors and searches on Google for -- also for related type of items has remained high through this January, February, March period and we're getting more than our fair share of that. So I think there's strong evidence of people looking when we've launched. So anecdotally, we just launched the Grand Designs range with a swatch service and the swatch requests have been through the roof. So I suspect there's lot -- there's good evidence and the track record of the pent-up demand coming back. So we would hope, not guarantee, hence, why we've painted these scenarios that post the middle of April, April, May, June, July should be a strong bounce back, and then we'll see how the market settles post them. So hopefully, I'll give you some data points, George, on the pent-up demand turning to free cash flow and the GBP 55 million, Mike?

Yes. I mean, I think effectively, George, what that is building in, is some of the demand in the central scenario, the order bank benefit in the central scenario rolling into 2022. But ultimately, I think if your -- the math is to say that if you're targeting a 7% PBT margin and 75% cash conversion, you are going to be seeing free cash flow generation of both of GBP 50 million. We did believe a sensible target in the medium term. But we'll rely in 2022, it will rely on that order bank benefited coming through is with anything out in the central scenario.

And then on the final question around living room and bedroom and what we're doing differently and how we're approaching it. So 2 different approach, really. So on the living room, kind of makes sense, doesn't need to have in our showrooms, the ability to sell the coffee table, the rugs, the table -- the side tables, lamp mirror, et cetera. And it's just we've never really massively focused on that. The attachment rates are below 5%, significantly above 5%, so single digits, clearly there. And what we've done the acquisition of Dwell and the integration of Dwell. What we're now using and the thing that we're doing differently is using Dwell's infrastructure, supplier relationships, stock warehouse, stock systems and expertise to source really commercially the coffee tables, the rugs, the lamps, the mirrors, et cetera, and be able to deliver that to customers in short lead times. I think these sorts of products, the broader homeware retailers, short lead time stock model is the way forward, and we'll be doing that very carefully, but basing that around the showroom experience to really allow customers to buy the whole look. We'll obviously then be able to sell that online. So it's clearly an omnichannel opportunity, but it's an attachment strategy and it's just recognizing the fact that we have huge amounts of footfall and visitors already. So we don't necessarily have to go and acquire those in terms of cost acquisition. So the marginal profit is quite high. On the bedroom side of things, it's a bit different. We've always been in so dining and beds, to some extent, very low market shares. But what we found is that bedroom. And certainly, the upholster bed frames, the -- I've talked about some of the examples before, we're now the thing we're doing differently is putting resource and effort on building out that bed range. We will be changing and evolving our website. We will be investing more in digital search and to really help attract a few more customers in. But in the end, what we have seen increasingly through the pandemic is more and more internal searches on our website for beds. So it's a natural sort of adjacency for us again. And we think there's a good opportunity there. So early days, and we'll keep you updated, but I think for us, using the power of the website, the platforms, the IFC, just seems a natural opportunity with exclusive products, that's key for us. So that's how we're attacking them differently, George, 2 different strategies, but big opportunities we see.

Okay. Can I just follow-up on the living room? I guess how -- what is -- because you've kind of -- my understanding is the kind of sales force or you kind of -- you're not paying as many people selling rather directly on the shop floor. Is this more of a pushing more data and digital marketing and attachment rates within kind of the DFS website, and that's how you're going to push that attachment rate higher? Or is it more to do with the ranging? Just trying to understand why is the mix driving you?

Yes. So it's probably 3 specific things. So there's a lot of -- the first point is around attracting customers in through that whole room look. So increasingly, by having room sets imagery that's got everything in the room set imagery, we sell. So increasingly, really going after digital imagery, number one. Number two, on the website, then the ability to shop the look, if you think about lots of sort of international retailers have that ability to shop the whole look. So when you're buying your sofa, you've got that edited range. So really being thoughtful about range development is the second point. And then the third point is our colleagues in-store are renowned and excellent at the attachment model, but it's typically things like your foot stool and your electric recliner, et cetera. So they are used to selling more things to customers and using the power of interest-free credit, we can build their orders. So if we've got in store, those room sets that we've already got the imagery of then customers coming in, it will -- our colleagues in store can really turn their mind to moving the attachment rate up from sort of low single digits to could be 10% that we'd look for in the sort of short-term to try and that really allow customers to shop the look. So there's a number of facets to the strategy. It's going to take us 1 year or 2 to really get both of these things going, but we wanted to flag that this is something we see as an opportunity for the medium term.

And finally, from Berenberg, we should have Michael Benedict on the line.

First of all, all around the new categories really. First one being again additional categories have been an option for some time. I wondered why you felt now was the right time to be exploring that route. And then the other questions that on how these new categories will impact your curated model. And will they be made-to-order on for customers and then the last one is how will beds fit into your existing delivery infrastructure. Are there any changes you will need to make in that respect?

Yes. All good questions. So additional categories, why now. I think we've -- we set out the 3x3 model back in -- 2 years ago, cracking has gone quickest it. We've done a lot of heavy lifting on the DFS platform, web platforms, digital marketing, done a lot of work on Sofology rollout. And I guess, like anything in terms of strategically having spent 2 or 3 years really getting that heavy lifting going against some of those programs, executing, you then look to the next cycle of growth opportunities. And I think recognizing this -- particularly the strength the DFS website and the Sofology rollout opportunity, we realize that we've got the customers already. We've got the customers in the showroom, we've got customers on the website. So as an ancillary opportunity, it just makes logical sense to go after living room. And we'll come back to the stock implications of that. Bedroom, we've always kind of had a small presence in beds. But again, I think what we've realized through the development of the new products. Our customers are really searching for as they are spending more time at home and the home market is growing. We've always known that the bed market is a bigger market than upholstery, it's GBP 3.7 billion last count anyway. And we can see that as an opportunity to get into, again, utilizing the assets that we already have. So it just feels like a natural move there, particularly online. I think in terms of just answering the second question then, on bedroom, it is more of a made to order. So it suits our model quite well. So when we effectively place -- when the customer places an order for a Windsor bed or a French connection bed, et cetera, it then goes effectively in a similar process to manufacturing sofas goes into an order bank is manufactured and is then delivered. And it will be delivered primarily through third parties. So not through the Sofa Delivery Company because that does what it says on the tin, very focused on sofas and hugely efficient in terms of Beds slightly different. The require, in many cases, being manufactured well put together in people's rooms. So it takes a bit longer to deliver them. So I think we'll go through the third-party route for delivery, but still as an ancillary and decent profit opportunity that the marginal profits are high. Living room, slightly different in terms of what we -- when we've done all of our research, looking at all the companies that sell, coffee tables, rugs, et cetera, stock is quite important here, short lead time is important. But we'll have an edited range. So we're talking about an additive range to start off that matches the kind of sofas and the room sets that we're offering. So we're curating the range so a narrow level of stock, decent level of stock to satisfy short lead times, but we're not talking at this stage about a massive range of living room furniture. I don't know if Mike, there's anything you want to add?

No. I mean, I think we've as you know, Mike, we've always had a degree of stockholding through our dwell operation. And this is just working that well and remixing that well stockholding operation really.

Okay. Any other questions? No more questions. Well, thank you very much for all your time this morning, and no doubt, we'll see you -- or hopefully, we'll see you all again soon. Thanks very much.

Thank you.