DFS Furniture plc (DFS) Earnings Call Transcript & Summary

Okay. So good morning, everyone, and welcome to the DFS Group 2025 Interim Results Presentation. I'm Tim Stacey, Group CEO, and I'm here with Marie Wall, our Interim CFO, and together, we'll update you on our half-one performance. I'll provide a bit of a strategic update and also a future outlook. Marie will come and talk about the financials. So in terms of the introduction, over the last few years, we've been very focused on building compelling customer propositions across our two retail brands, DFS and Sofology, driving significant amounts of new product development, developing a digital-first marketing strategy and training our people to be the best salespeople in the industry. Now I'll share more detail on these initiatives later, but the combination of our efforts has supported our continued growth in market share, and we're pleased to report today an order intake growth of 10.1% in the first half. We've also focused on our operational execution and continue to make progress here with gross margins up 70 basis points year-on-year and our cost-to-operate program achieving GBP 43 million of annualized savings, well on track to meet our GBP 50 million target by the end of FY '26. Obviously, growing sales, increasing margins, and reducing costs has clearly driven profit growth, and profit before tax and brand amortization has almost doubled to GBP 17 million despite operating in a market that we believe is slightly subdued, down slightly year-on-year. Our financial position has also strengthened through profit generation and disciplined cash management, we've lowered our absolute debt levels and our leverage has come down from 2.5x at the previous year-end to 1.6x as we target getting back into our 0.5 to 1x range. Finally, we remain increasingly confident about the Group's prospects and fully stand by the Capital Markets Day targets that we set out three years ago of achieving GBP 1.4 billion of revenue and an 8% PBT margin. We further strengthened our position as the clear market leader. We're growing profits through our self-help initiatives. And in addition, market demand now appears to be slightly stabilizing, and we do fully expect it to recover from the current levels, which are over 20% below pre-pandemic volumes. Given our high operational leverage, the profit drop-through from any market support will be significant. As you know, we have a highly cash-generative model, and so we expect to delever back into our target range over time, freeing up cash flow for further growth initiatives and healthy levels of returns. Just moving on to some brief additional headlines. Both of our retail brands performed well in the period ahead of the market. DFS's order intake was up 8% year-on-year, supported by its exclusive brand partnership sales, which reached a record high in the period, representing over 40% of total sales. The Sofology brand has performed incredibly well in the period with order intake up 19% year-on-year and the range changes that we made at the end of the last financial year are proving very effective. Our customer proposition and operations are in excellent shape, and NPS scores are either at record levels or very close to and reflecting all the efforts of our teams across all aspects of our customer journey. Our Sofa Delivery Company, in particular, is performing better than ever and achieved post-delivery Net Promoter Scores up 10% year-on-year, reaching record highs. So in summary, a really strong half with significant profit growth achieved and our customer propositions and our operations in great shape. So I'll now pass over to Marie to cover the financials.

Thank you, Tim. Good morning, everyone. It's a pleasure to be here today. I'm going to begin by walking you through our key financial headlines, starting with order intake. We've achieved strong order intake growth of 10.1% in a market that has been subdued. Our proprietary banking data indicates both our brands grew their market share in the period. Gross sales, which are recognized on delivery of orders to customers were up to a lesser extent at 1.4% year-on-year. This is largely due to the improved order intake being back-weighted during the period, and therefore, the goods have not been manufactured, delivered, and recognized as income in the period. Consequently, this leaves us with a healthy order bank heading into the second half of the year. Revenue growth meanwhile, came in broadly flat, reflecting the decision we made to increase the use of 48-month interest-free credit to drive consumer demand in a weaker market. More on this later. In terms of profit, our underlying profit before tax and brand amortization of GBP 17 million is up GBP 8.3 million year-on-year. This improvement is primarily driven by the success of our cost-to-operate program with stronger gross margins and ongoing operating cost reductions achieved. Our underlying basic earnings per share of GBP 0.53 is up on last year, and this is consistent with the year-on-year profit performance. Reported profit before tax of GBP 15.8 million includes brand amortization charges and GBP 0.5 million of non-underlying charges related to our cost-to-operate initiatives, and these are primarily restructuring. Finally, our closing net bank debt stands at GBP 116.7 million, down from GBP 133.9 million at the same point last year. It represents a significant reduction from GBP 164.8 million at the full year '24 year-end. Now this decrease is the result of continued cash discipline with our leverage reducing from a peak of 2.5x at full year '24 year-end to 1.6x. Moving on to our sales performance. And as I mentioned earlier, the group's order intake performance was driven by strong contributions from both DFS and Sofology. Now Tim is going to elaborate on that a little bit later in the presentation. But as you can see, DFS has grown at 7.8% and Sofology by 19.1%. You can see in the table that both brands reported year-on-year gross sales growth is around 10 percentage points lower than the growth in order intake. And as I said earlier, this is due to our trading performance strengthening through the half, which means that the majority of the order intake growth in half-one will be recognized in the P&L in the second half. In terms of revenue, our year-on-year performance was broadly flat, and that is despite the market being in decline. Revenue grew to a lesser extent than gross sales as a result of our effective strategy to invest in DFS's interest-free credit proposition. It's also worth highlighting that whilst Bank of England base rates over the half year-on-year have been relatively flat, the cost of providing interest-free credit has increased significantly for the group over the last few years. As you're all aware, interest rates have recently started to reduce, and it's worth highlighting that for every one percentage point movement in the base rate, our interest-free credit costs will reduce by approximately GBP 7 million to GBP 8 million on an annualized basis and with any changes to the Bank of England base rate typically impacting our interest-free credit rates with a 3- to 4-month delay. In summary then, a strong order intake performance in a market that we believe was in decline. Now on to our cost-to-operate program, and I'm pleased to report that the momentum from last year has continued into the first half of this financial year. At the end of FY '23, we set ourselves a target of GBP 50 million of annualized savings by the end of full-year '26. We've achieved GBP 43 million of that target today with GBP 15 million delivered in the first half, and that is on top of the GBP 27.5 million we delivered in FY '24. Our gross margin as a percentage of revenue has continued to improve and last year, we took the decision to close one of our manufacturing sites on Wood Mills, which has enabled us to redistribute the production of our sofas across the remaining two factories and our third-party locations. Now this has both reduced costs and improved quality to ensuring we're making the products in the optimal locations. On the operating cost side, we delivered savings through the annualization of FY '24 initiatives, such as developing more efficient operating models across our showroom and online sales teams and also within our logistics operations. In addition, we've implemented new cost-saving measures in the first half of this year, such as through aligning payment solutions suppliers across our two retail brands and also improving the efficiency of our customer service operations. The efficiencies coming through from the Sofa Delivery Company are a real standout and is something that Tim will elaborate on later. As a result of this program, we are developing an ever-increasing cost-conscious culture across all areas of the group, using data and MI through the development and effective use of dashboards to obtain insight and improve decision-making in our operations. Our cost savings have been achieved in a sustainable manner and without compromising the customer proposition. And Tim is going to bring this to life later, but he talks to our strong NPS scores. Overall, we're very pleased with the progress we've made so far. The group is now operating at a lower cost, which will strengthen future profitability through all stages of the economic cycle. So with the pipeline of opportunities we have, we're confident we will achieve the GBP 50 million target set in FY '23, and these savings will help us to mitigate future inflationary pressures, which include the recent changes to employer national insurance contributions, which have an annualized impact of GBP 5 million to the group. Moving on to gross margin. And we're pleased with the progress we've made here, both in terms of the cash margin, which you can see is up GBP 3.3 million year-on-year on the chart, and also the margin rate, which has increased 70 basis points to 56.7%. This is a significant step forward as we continue to make progress towards our 58% margin target, which we first set out at our 2022 Capital Markets Day. Margin expansion is driven by improvements in product margin, reflecting both the strength of our commercial proposition and our continued focus on cost of goods under the cost-to-operate program. These, together with favorable FX more than mitigate the headwinds we've seen on freight rates. Now just a note on freight rates. These were notably higher in the half, broadly double the $1,500 per container rate from the prior year, with last year's rate being more in line with the long-term average. We're starting to see freight rates come down. It's worth noting that every $1,000 change in the cost per container equates to approximately $7 million to $8 million on the group. We remain confident in our ability to achieve our 58% gross margin target, and there are further opportunities to reduce our cost of goods through improved purchasing with future anticipated interest rate reductions providing further margin support through lower interest-free credit costs. Now turning to operating costs. And as I mentioned earlier, we've made good progress here, both in reducing our cost base and in building momentum in FY '24. Our total operating costs, including depreciation and interest have reduced by GBP 5 million year-on-year. This is despite GBP 3.2 million of inflationary headwinds, which we've more than offset through the cost savings achieved by our cost-to-operate program. The gross sales increase in the period has been largely driven by average order value increases with the stronger order intake volumes in Q2 to feed into the second half P&L. And as such, variable costs have been broadly flat year-on-year. Now I've already talked about the key areas of cost savings, but one further point worth mentioning is our use of data and customer segmentation to improve marketing efficiency. And as a result, we've been able to keep marketing costs flat across the half and offset inflation. Looking ahead, through our ongoing cost-to-operate program, we have a pipeline of opportunities that will enable us to run the business even more efficiently in the future. Turning to cash flow. Free cash flow in the period was GBP 48.2 million, representing an increase of GBP 37.6 million against last year. The strong performance was driven by improved profit, lower capital expenditure and tax payments, and most significantly, working capital inflows. Taking each in turn, cash capital expenditure reduced to GBP 10.4 million as we continue to prioritize spending on maintaining our existing assets and investing in capital-light short payback growth opportunities. We also expect total cash investment for the full year to remain within our previously guided range of GBP 20 million to GBP 25 million. Interest and tax reduced by GBP 5.8 million year-on-year to GBP 5.6 million. Interest costs were GBP 2.4 million lower year-on-year, primarily due to the non-recurrence of the refinancing fees that we incurred in full-year '24 and corporation tax paid was GBP 3.4 million lower year-on-year due to the in-house utilization of historical overpayments. Lease liabilities increased to GBP 46.6 million, reflecting additional payments, which fell into half 1 as a result of our period end date falling 5 calendar days later this year. Total working capital inflows increased by GBP 24.2 million year-on-year to GBP 28.9 million in the period. This was driven by a negative working capital model and reflects a higher trade creditor position linked to higher delivered gross sales and increased customer deposits held as a result of the stronger trading performance. There is also some additional benefit from deposits taken in the additional peak trading days up until the 29th of December. And we do expect to see a partial reversal of this working capital position as the order bank from customer deposits normalized by the end of the year. And in summary, the business remains highly cash-generative, and we expect to generate strong cash inflows and continue to reduce our leverage. So let's take a look at how all of this translates into an improving financial position. We've shown 3 charts on the slide to show how net debt and our key ratios of leverage and fixed charge cover have evolved for 2022. Taking each of these in turn, closing net debt stands at GBP 116.7 million, down from a recent peak of GBP 164.8 million at the end of FY '24. Now this reduction is significant, and it brings us well below the pre-COVID average level of debt that we operated with as shown in the top chart. We also have plenty of cash headroom relative to our total lending facility of GBP 250 million. As a result of the stronger profit performance over the last 12 months and the lower net bank debt, our leverage has improved to 1.6x, which is down from the FY '24 year-end position of 2.5x. Fixed charge cover has also improved to 1.7x, as I show on the bottom chart. Looking ahead, it is a priority to reduce leverage further and return to our target range of 0.5 to 1x over the medium term. In December 2024, we also successfully extended the group's revolving credit facility by a further 16 months, now secured until January 2029. The group now has a GBP 200 million revolving credit facility secured until September '27 and GBP 175 million until January 29. Additionally, we have GBP 50 million in loan notes maturing in 2 equal tranches in September 28 and September 2030. These extended facilities provide us with sufficient liquidity for the foreseeable future whilst also laying a solid foundation for growth and financial flexibility. So moving on to capital allocation. And whilst we've made good progress on reducing net debt and leverage, we recognize there is still more work to be done. And we thought it would be helpful to summarize our approach to capital allocation in light of this. So in the near term, we expect to remain outside of our target leverage range of 0.5 to 1x. However, deleveraging remains a high priority. And to support this, we will continue to take a disciplined approach to cash management, focusing on maintenance CapEx and selective capital-light short payback growth opportunities to ensure we balance investment for growth with maintaining flexibility. We also remain fully committed to delivering sustainable shareholder returns. But given our current leverage level, the Board has declared not to declare an interim dividend, and this decision reflects our focus on strengthening the balance sheet in the near term. The decision on the FY '25 final dividend will be based on full-year performance, net debt position, and the outlook at that time. In summary, I'm pleased to be announcing a strong set of numbers for my first set of results with the group having made a good start to half 2 with a strong order book and our continued focus on improving our cost base, we are well positioned for the future. And with a smile on my face, I will now hand back over to Tim.

Thanks, Marie. So I want to just start off briefly by talking about the state of the market as we see it. The top left chart here illustrates our market share by value that's based on the global data survey. And this shows that the group is the largest business in the U.K. upholstery sector by some way with 36% market share by value. We're over 3x the size of our nearest competitor. So this provides us with significant scale benefits across our business, and you'll hear about that more in the following slides. There is still a material fragmented tail in the market, which makes up about 25% of it. It's made of independent chains, small businesses, and some of the generalist retailers. And in terms of some of the competitor movements within there, we know that some of the generalists have entered into the sector, and they may have taken share from some of our specialist competitors. But as for the independents, they've been in decline for a long period of time now, and we continue to see them as a donor category to our business. You can see in the middle chart, how our share has evolved across our specialist competitive set on a monthly basis, and this is using our proprietary Lloyd's banking data. We have a track record of growing share across all economic cycles. And over the last 12 months, in particular, we've made significant progress. Finally, on the chart on the right-hand side is the market size over the last few years. And the key point to play out from here is that calendar year '24, adjusting for price inflation was at its lowest point with volumes at 20% below pre-pandemic averages. We know this. However, we do expect the market to recover in time. There's a number of reasons for that. Firstly, there are more rooms in U.K. households than ever before with sofas in them. And at some point, these will need replacing. Secondly, we know that consumer confidence is a big driver of sofa replacements and confidence levels recently have stabilized. Now given that household savings are in growth, as consumers become more confident, we believe that they'll be more willing and able to spend on big-ticket items. And finally, housing transactions have been in growth for the last 10 months and housing transactions drive around 20% of our market. And this recent growth in transactions will provide a nice tailwind going forward into the future. So turning to profit growth and staying at the highest level here. We see 3 key areas to drive profit growth for this business. The first is focusing on what we can control, and that builds on the successes over the last few years and especially in the first half that you've seen to improve our own profitability, specifically growing profitability through like-for-like sales and also the clear wide space in front of us to increase the Sofology showroom estate by up to 15 new showrooms, and that's a 25% increase on the estate today. In addition, as Marie pointed out, we've got an opportunity to grow our margin by 130 basis points by targeting increased sourcing and also looking to the benefit of falling Bank of England base rates, and we'll continue to optimize our cost base to offset future inflation. Secondly, as I said earlier, market volumes are below 20% below pre-pandemic levels, and we do expect that market to recover. The good thing is that we do have the capacity across our business to handle much higher volumes without adding in further structural costs. And particularly as the cost that we've taken out recently, that's improved our operational leverage, which should enable a profit drop-through at an incremental rate of 40% of incremental revenue. Now that should convert to cash at a healthy rate of over 75% of PBT given the relatively low maintenance capital requirements and our negative working capital model. We also have growth opportunities beyond the core upholstery business. We have a great asset in the Sofa Delivery Company, and we see opportunities to leverage that in the future and more on that shortly. We're also targeting to grow our share in the non-upholstery home segment from 1% to 4%, first starting in the GBP 3 billion beds and mattress segment. Now we've laid down all of the infrastructure to support our growth in this area, and we've utilized some of our exclusive brand partnerships to sell branded beds. Going forward, we should be in a position to start to market this and build customer awareness and drive sales and profit. Just moving on to our particular sector in sofas. So moving on to our winning integrated retail proposition. And we believe that having this sort of business model is absolutely critical for our particular category. So we know from the results of our biannual surveys covering 3,000 people who are in market for a sofa that around 90% of customers will start their journey by researching online. And 85% of those customers will require the all-important sit test before being willing to commit to a sofa purchase. After all, on average, customers retain their sofas for around 7 years. So it's a decision you don't want to get wrong. Now we have 2 complementary retail propositions that are set up to meet these customer needs. To start with, we have well-invested digital assets from our website to being the first sofa retailer to offer augmented reality visualization of sofas through a mobile device. We have the marketing power and scale to be able to invest and stay ahead of our competitors. And we have high levels of brand awareness with DFS, for example, being the most searched for term in our sector on Google versus sofa. As for the all-important SIP tests, we have good geographical spread across our 2 retail brands. DFS has full representation in showrooms across the U.K. and Ireland. And Sofology, as we open the 15 more stores I mentioned, will also be in a strong position. We continue to invest and maintain our assets to high standards, creating a welcome and inspiring space for our customers to showcase the fantastic products to levels that competitors can't match. And this results in sales densities of around 3x that of our nearest competitor. Finally, in this day and age, we provide the ability for customers to transact in a way that best suits them. This includes, for example, our shared baskets in DFS that enable our sales colleagues to build an order in the showroom, and then the customer can go home and complete at their leisure. So to sum up, we have a well-invested asset base across our digital and physical channels, and we'll continue to invest in that to innovate and evolve, and this resonates really well with the customer journey in this space. Again, staying at the highest level into design, inspiration and selling. And I think we've been fantastically blessed to have some great designs in our business, and we source from the biggest suppliers around the world, and this allows us to innovate with our products and have the best ranges in the sector. Due to our scale, we can attract and work with well-recognized brand names such as French Connection, Jews, Ted Baker, Country Living, House Beautiful, and Grand Designs. And these brands carry a lot of weight with the U.K. customer, and we work with these brands on an exclusive basis to provide a competitive advantage. In addition to adding to our exclusive brands portfolio, we've continued to innovate in our products. We've introduced more technology than ever before into our sofas, such as wireless charging points, wine coolers, speakers, vibrating seats, and recently, we've patented heater seats, all of which are driving up average order values. We've been investing in data across the organization in the last few years to drive improved decision-making. Our data-driven marketing approach enables us to market at highly localized levels in a very efficient and effective way. Recently, we've won the Bloom Reach Data-driven Leader Award, recognizing our impactful use of customer data and analytics. And the teams in-house have been nominated for 4 U.K. search awards for best use of search, best in-house team. We've always been creative from an above-the-line point of view and recently, our digital-first execution of the recent DFS advert has been used as an internal case study at YouTube for effective platform and digital-first creative thinking. Finally, we believe that our highly trained and motivated sales colleagues are the best in the business, and I'd like to thank them for their efforts over the last few months. We developed a good mix of full-time and part-time colleagues, which allows us to flex our deployment based on footfall and data. We focus on matching our colleague profiles to the towns and cities they serve, and all of this drives conversion and NPS. At the end of the first half, we made a change in our organizational structure with the introduction of some additional group functions, including buying and marketing. We believe that this will further drive synergy benefits through facilitating knowledge sharing and embedding best practices across the group. Now moving on to DFS, our longest and established brand, whose core target market is mid-income families. DFS achieved order intake growth of 7.8% in the period, principally due to higher average order values, which were up 4%. The AOV growth has been driven through new product developments, especially, as I said before, in our higher-priced exclusive brand ranges. Overall, reached a record high of over 40% in participation. In the period, we also launched exclusive ranges from our new partner, La-Z-Boy, who are worldwide famous for comfort, and they're trading well. Along with this, you'll see the guy in the middle here, we've enlisted the basketball icon and fellow not Forestlab. Shaquille O'Neil, that's true, as our brand ambassador for our market-leading range of reclining furniture, and we're really excited to be working with him, especially on social media where he's a huge presence. And we hope to replicate the success that he's brought in the U.S. in a very similar role with other furniture retailers. We've also invested, as Marie said, in periods of 4 years interest-free credit to stimulate demand and enable customers to trade up to higher price point ranges. Our DFS core values of think customer, Be Real and Aim High are fully embedded across the teams and across the business in terms of our mindset. And I'm really proud to see our colleagues living these values day in and day out, and their efforts are feeding through into very strong post-purchase Net Promoter Scores for the period, which are close to the all-time record highs that we've seen in the last few years. Moving on to Sofology, which targets a slightly older and more affluent customer demographic. Sofology has had a very strong first half. You may remember in our last full year results that we talked about making significant change in the range in quarter 4 of last year. And so far, we've changed around 75% of the ranges. And this new proposition has landed very well with the customer, evidenced by the 19% year-on-year order intake growth in the period. In addition to the new ranges, Sofology's merchandising has also been elevated. A good example of this in our showrooms is where we have the new paramount recliner sofas, which are housed in inspirational home cinema room sets with sofa speakers connected via Bluetooth to large screen TVs, and we even provide free popcorn to give you the full cinema experience. We've introduced promotional activations such as limited editions and introductory pricing to drive conversion both in stores and online. And finally, post-purchase NPS stores like DFS are strong, again, close to record highs. Now on to our platforms. Firstly, sourcing and manufacturing. Now our objective across sourcing and manufacturing is to produce goods at the best cost and quality that enables us to offer the best value for money to our customers whatever the specification. We're proud to operate 2 of our own factories in the U.K. and our strong relationships with some of the largest manufacturers in the world. Operating our own factories provides us with a number of benefits. First, we know how much it costs to produce and transport sofas. And with this knowledge, we know exactly what's optimal to manufacture ourselves and what to outsource. It also helps us with our supply negotiations. Second, we can offer shorter lead times to customers than those that are sourced from overseas, something that's a competitive advantage, particularly at certain times of the year, such as in the run-up to Christmas. Our scale and strong relationships with our third-party suppliers enable us to obtain products at optimal cost. And through our use of data, we continue to work with our suppliers to identify things that the cause of defects to improve quality and reduce the cost of repair. And we're seeing this come through in terms of benefits and our established customer Net Promoter Scores, which are taken 6 months after purchase are at record highs. As Marie mentioned earlier, our sourcing and manufacturing strategy has contributed to growing our gross margin 70 basis points year-on-year. And with the brand operational changes I alluded to earlier, we hope this will facilitate us further leveraging the group's buying scale and support us in reaching our 58% gross margin target. Moving on to logistics. The Sofa Delivery Company, as you know, was formed by bringing together the logistics arms of DFS and the Sofology brands to form the largest 2-person sofa delivery network in the U.K., providing a first-class delivery and installation service. With national coverage and a 7-day operation, combined with the group's scale, we utilize cutting-edge technology such as AI-driven vehicle routing scheduling and data-rich KPI dashboards, all of which combine the Sofa Delivery Company to offer the lowest cost per order in the market and provide the highest levels of service. And these are seen in the post-delivery NPS scores, which are at record highs and the cost base, the cost per order is reduced by 4% year-on-year despite cost inflation. With the capacity available in the network and our anticipated volume recovery, we expect to see further operating leverage benefits in Sofa Delivery Company in the future. In short, Sofa Delivery Company goes from strength to strength, and we're super proud of it. Now on to our people. Our people are the group's most important asset. And we want to offer an environment for colleagues to develop and progress. Our popular leadership academies offer opportunities for colleague development across various subjects, helping us to strengthen our leaders and the future leaders. Sessions have been delivered to over 350 colleagues in the period with modules focusing on sustainability and data proving especially popular. Now creating a great place to work where everyone feels welcome and can be at their best is crucial to our future success. And to that end, we've created 6 colleague networks, which help us unite like-minded people and enable us to become a more inclusive group. Each of our networks has senior leader representation, helping us activate change and engagement initiatives across our growing communities. We are constantly seeking to raise standards. And last year, we achieved accreditation in the Inclusive Employer standard. On to sustainability, we've made good progress on our commitments where we established a cycle framework back in 2020, we are constantly trying to develop our ambition to become a circular business. We obtained validation from the science-based target initiatives of our near-term emissions reduction target, underpinning our commitment to minimize our environmental impact. Given that our scope -- our emissions are weighted to Scope 3, it's crucial that our partners are aligned with our ambitions. And I'm pleased to say that we've secured commitments from our partners to develop their own science-based net zero plans covering 59% of our Scope 3 emissions. Our scale is significant enough for us to be a driving force in this sector. And through a collaborative approach with our suppliers, we are working to ensure responsible and sustainable use of materials through transparency and traceability. And in the period, we're pleased to confirm that all of our Tier 2 and 3 suppliers are now leather working group certified, setting important standards, including to ensure our products, for example, are not contributing towards further deforestation. Moving on to outlook. So our profit expectations for the full year have increased and trading in the second half, I'm pleased to say, has remained strong with actually order intake increasing from the 10% that we achieved in half 1. Our year-to-date order intake as of Sunday is 11% year-on-year following a record winter sale at DFS and continued strong performance in Sofology. Now looking forward, we are starting to trade against our strongest period last year in quarter 4, which was 6% up. So we don't necessarily expect this 11% to continue for the rest of the year. But that performance is better than we expected and is a testament to the customer propositions we developed, our operational execution, and the super hard work of our people for which we're incredibly thankful. Now assuming lead times remain extended due to the Red Sea closure and that we experience no further supply chain disruption, we do expect to deliver full-year underlying profit before tax and brand amortization above previous analyst consensus in the range of GBP 25 million to GBP 29 million. Just looking ahead and briefly looking ahead here, looking at some of the market drivers. And I think our view would be that they're stabilizing or slightly trending in the right direction now. Starting with consumer confidence, you all know. They are slightly below pandemic, but you can see the trend is on the up, and that's encouraging given that 80% of our business is driven by replacement. Property transactions in the middle chart, they have been in growth now for the last 10 months, and we expect this to feed through as a nice tailwind as those purchases get completed. And finally look on the right-hand side, looking at household disposable incomes, and these look to be at an inflection point with the OBR forecasting return to growth. In addition, the Asta disposable income tracker indicates that as of January this year, households in 3 of 13 regions now have spending power higher than pre-pandemic levels. And we know that savings rates are also particularly high. So in summary, there are starting to be reasons that this market will recover, although don't ask me, which I'm sure you will do in a minute when. So last couple of slides now. I think this one is important. This kind of is the audit trail back to the March '22 Capital Markets Day. And we set out targets back then of GBP 1.4 billion of revenue and an 8% PBT margin. Now it's just after that time that the cost of living crisis started and interest rates started to increase, cost inflation flowed through. And as we've said before, the upholstery market did contract significantly. And I think this is illustrative without action, with a market decline of over 20%, base rates going from less than 1% to 5%, and cost inflation, we would have been in a difficult position, making a loss of around 6% if you just took the numbers this year. We've been working hard on self-help for the last 3 years, and that's the middlebox. We've set out back in '22 to gain market share in the sofa market, and we've done that. We've achieved over 3 percentage points market share gains, and that's mitigated some of the sales loss. I think you've seen in the cost-to-operate program, something in the region of GBP 43 million delivered to try and offset the base rates and the higher inflation. And that's enabled us to get to a reported margin of 3% in half. Now looking forward, resetting, and saying this is now going forward into the medium term, we do expect to deliver on our target of 58% gross margins. There's a few things going in our favor, whether that's Bank of England interest rates or the freight rates normalizing, but also we have a lot of ahead of us in terms of cost of goods. So that's a target that we remain committed to. And we've still got more work to do on cost to get to our GBP 50 million target. And if we start to see market recovery and grow our top line, given our market share now and the operating leverage that we have having taken out all this cost, any revenue growth will drop through at 40%, and that will give us a really accretive margin. So we're, therefore, very confident we can deliver the 8% PBT margin in the medium term. Please now I'm going to conclude now. So look, I guess, standing back, we're all very aware of the geopolitical uncertainties and the varying views on the U.K. economy and what's going to happen in April. But despite all that, what we know is that we've had a good half by focusing on the things that we can control. We've grown our market share. We've improved our gross margins for the fifth consecutive half. We've reduced costs and therefore, increased profitability. And that enables our financial position to improve, obviously, reduce debt, and that's our focus for the next couple of years to bring the gearing down. I'm pleased to say that the second half has started really well, and therefore, we've increased our profit for the year expectations for the year. Standing back from my position, having been here 14 years, our customer proposition has never been stronger. Our operations are in great shape. Our customer scores are amazing. Our colleagues are really fired up. And it's nice to see the market stabilizing. I wouldn't say growing, but stabilizing. And therefore, we're confident with a bit of the market recovering, we're confident in the medium term and the targets we set out before. So that concludes our presentation. I'll now invite Marie back up and so we can start the Q&A.

So let me be the ones to ask about market recovery because I think the BRC referenced furniture back in growth in February, and we've seen a bit of recovery in the Barcercard data as well. So just wondering if you're seeing that as well and what the trend was through the current trading period. Also, if you could talk about how DFS performed relative to Sofology through that period in a bit more detail? Should I ask the second question as well? So just wondering if you're thinking about integrating Sofology more within the business, for example, in terms of the design and when that might be -- what the time scale might be for that.

Yes. And what we're seeing from a market point of view from the Lloyd's data, which is real cash transactions month-on-month, it's been slightly in decline for the last 7 months of this financial year, 8 months of this financial year so far. So we're not seeing an increase yet. That said, we're seeing some footfall increases in half 2, so 2%, 3% up. And we're seeing web traffic come back a little bit, so increasing there as well. So I think the sort of sales growth that we've seen of that 10% that we quoted, about 5% is volume growth and 5% is average order value growth. So I think, therefore, we're outperforming the volumes within the market. So there's a gentle increase. And I think it's difficult to extrapolate having been here a while ebb and flow. But now we've got a good trend of probably from quarter 4 last year, which was plus 6%, and then the 36 weeks of this year at plus 11%, that's nearly a year of decent growth in a fairly stable-ish market. So I'm not going to call the bottom, but there's some green shoots there. That makes sense. Within that, DFS has performed really well. Volume growth as well, a bit lower than the 5% average order value growth of 4.5%, 5%. Sofology, since we've done the range transformation, we started in about this time last year, that's really powered forward, and that trend has continued. That's really driven by volume, not value. So we've reset a lot of the pricing to be a bit more attainable, still higher price points than DFS, but the value for money perceptions in Sofology have improved dramatically and the conversion improved on the back of that. So it's really about conversion and average order value rather than footfall and the market change. In terms of integrating Sofology, we did all of the back-office pieces, so the people team, the technology, and the finance team a few years ago. What we're now doing is we've started to join together the commercial teams, the buying teams, and the marketing teams. And so that work is underway. But that's -- what's really important is we're keeping the brands very distinct. So the retail teams are separate, run by separate teams because they are complementary. We get very little crossover. So we need to make sure we pull them apart there, but get the better buying synergies if we can and share the best practice across marketing. The DFS digital team is off the scale good. That's just my own opinion. But they're getting nominated for lots of awards. And so I think can we use some of that ability, plug that into Sofology, and that's starting to work already. The Sofology brand marketing teams are really strong. How do we get the operations working even better together? So that's as far as we want to go on that.

Just a really quick one, sorry, follow-up. What about on design and manufacturing?

Yes. So on design -- so we use common suppliers across most of our ranges. And we've got some of our own designers designing ranges for Sofology made in our own factories. So -- and they're in the top 10 products and amazing products that our design teams showed around the design studio is phenomenal. It's full of great innovation. And so we're very clear about what the Sofology handwriting is, do that with our own designers, and that may be made in our own factories or our supplier partners. Jonathan?

Firstly, on IFC, just perhaps another level of granularity on its use as a competitive tool, and has that increased as a percentage of sales recently. On the 58%, you mentioned it half a dozen times in the presentation. Is that because you think it's the right answer for the Dream P&L? Or is that just another sort of stop along the way? And if you did, God willing, the tailwinds get you to 58%, then there was more beyond that, would you reinvest that? Or it's the same question asked twice. And then lots of good stuff about people, investment in people, et cetera. Staff turnover rates responded to that accordingly.

Yes, good question. I'll take the margin one. I'll give you a bit of time to think about the answer to that because that's a good question. On IFC, I think about 60% of our business goes through IFC and 40% cash. That hasn't really changed that much when we've done the 48 months. So what you see is that people who spend on IFC, their average order value is a lot higher because we can trade people into those models, models I talked about before, the cinema models, et cetera. So we see strong growth in AOV. What you also see is it drives conversion. So customers still in the cost of living crisis, still middle-income families actually helps them afford it and it's a really good offer at 0%. So why wouldn't you in an interest rate environment that's 4%, 5%. So the penetration hasn't changed, Jonathan. It's just driving conversion relative probably to the competition, particularly in DFS. It's a really good tool. It's still on for another 8 days or so. And we'll probably pulse it at certain times at key trading times. It won't be always on as interest rates fall, hopefully, in the next year, 18 months, that will help it become even more affordable and it will help us with the margin that Marie will talk about in a second. Just in terms of the people side of things, actually, I'm pleased to say attrition is at probably the lowest levels we've seen for a very, very long time. We went through quite a lot of restructuring in the last couple of years as part of our cost-to-operate program. We had to let colleagues go, which was very, very tough decisions. closing factories have been around for a long time, a lot of people have been there 25 years plus. So we've done a lot of that now. We want to have a period of settled time and investing in our people, a lot of leadership development stuff we do, a lot of data stuff we do, and we're really proud of that. In fact, some people in this room have come to some of those academies and presented to them. So yes, staff turnover is as low as it's been, and we've got some great people coming through the business. I would say that. Do you want to talk about margin to 58% and then how we actually go further?

Yeah. I think it's a really good question, Jonathan. So in terms of where we are at the moment, we're at 56.7%. I think you heard Tim talk about the progress that we've made over recent halves in terms of our focus on self-help and looking at gross margin in the round. If freight rates were to become a bit more normalized from where they are at the moment, that would get us another point. So I guess more towards 57.7%. And if we saw Bank of England base rates go again tick down to about 3.5% to 4%, that would get us to the 58%. And that's almost notwithstanding any of the self-help work that we're doing, both in terms of looking at our product mix and our sourcing strategy and then other initiatives as we just think about the customer proposition in total. So academically, it's really easy to go from 58% north. I think in practice, we need to make the right decision at the time, taking into account what we're seeing in terms of the market, the competition, and what we thought was right for the consumer. And I think we'll probably have a look at that and then decide where we want to set it over and above.

Yes. If you went back 10 years, Jonathan and said pre-pandemic, the average was around 57%, 58%. And I think if you get towards -- you could say, well, mathematically, we get to 60%, but in the end, in the real world, this business is quite elastic pricing. So I think if you start to get to those high levels of margins, the competition will get stronger. We're seeing that with some of the big competitors. So I think we just have to -- let's get structurally to 58 and then we'll have that conversation.

Just a couple from me. Just with regards to new store openings, it'd be good to get an idea what you think the greenfield opportunities are. And then looking at the math, it looks like Ireland is relatively underpopulated. So just a flavor on that would be helpful. And then just a little bit more on the markets with regards to customer demographics. Have you seen a change in maybe the customer mix because clearly, the performance of the 2 brands are very strong, but very strong in Sofology and you've obviously had a range change there. Are you putting in different types of customers in relation to potentially lower income versus middle income and maybe higher price points? It would be helpful to answer that.

Good question. So I think in terms of new store openings on Sofology, we -- obviously, we got the data from the DFS estate going back. So we know where all the best cities are to be and all the best parts are to be. And therefore, we know that in it's the top 50 DFS stores, there's still something like 10 where we don't have a Sofology on that park or in that. So I won't name the towns because that gives it away to landlords, but we've got the target list literally going down from #1 down to #20 and they are looking all the time for the right sort of location. In fact, we will have one soon in Carlyle because that's a great to be lots of white space. So we've got the list. I think we need to balance that with the capital in terms of -- and also the right micro-location. We don't really want to open in a tertiary location. We want to open the right location. We know all the parks to be on. So it's just making sure we get targeted with that opening. So we see that in the next sort of -- we're doing our 4-year planning in a while that we'll have a theme of growth for Sofology, but very targeted. Ireland is actually well -- that's all DFS apart from Belfast or Sofology. Sofology has got an opportunity clearly the affluent. So -- but that thing gets into picking euros and lots of technology complications that our IT people will say not yet, please. So -- but there's definitely white space there in Ireland. So definitely, we can see that opportunity in the next few years to grow Sofology's business 25%. In terms of market change in customer, I don't think it's changing customer. We're very clear on the segmentation. So we've got a very clear customer segmentation we spend a long time on. I think what we're getting better at is targeting that, and that's our digital and data tools. So we spend a lot of time going into 9% of customers start their research online. So we're starting to understand exactly the types of profile we should be looking for and targeting whether you're a Sofology customer or a DFS customer. And so because we're working collaboratively from a digital marketing point of view, we're better able to get customers into the right brand, that makes sense. So we know the pools of customers to go for. We're now getting much better at fishing in those pools and really good investment. So I think we've got clearer and clearer about the brand propositions. And so how do we get 2 and 2 equals 4 and less cannibalization and grow the business. So not necessarily a change, but just better target.

[indiscernible] probably work out, but how much are you expecting in terms of cost savings annualizing into the second half? And then related to that, it obviously feels like you've got a lot of tailwinds in terms of the top-line momentum and those cost savings potentially coming through. So it feels like the sort of upside to the guidance you've given in the second half. So what's sort of holding you back from going further there? Is there anything you're investing in?

Yes. I think I guess there's a couple of things. So see holding us back, but we just -- having been here a little bit before, you sometimes don't know it does ebb and flow, right, those who followed us for a while. And if I look at -- if we look at quarter 4, we know firstly, actually, we're going to anniversary the highest comps that we have last year at 6%. So that would naturally see a bit of a drop. But I think from an economic backdrop of there's a bit of to what's going to happen following national insurance going up and national living wage. And what does that do to employment? What does that do to confidence? And we serve middle-income families have got properties. And so it's a bit of a -- we're just slightly cautious as to whether it will continue. Fantastic it does. But I think if we just extrapolate it and went through a bigger number, I'm not sure that's sensible at this point. So I think that's one thing. The second thing, which is a very micro thing, having a much later Easter this year year-on-year is actually not good for us. Last year was a perfect Easter right at the end of March. We like cold and rain, which is what it was, and it was a record Easter. Having it on the 20th of April, risks sunshine and people doing park and interesting things. So there's a few things against us in quarter 4, hence why we're not standing here going, we're going to extrapolate it. I think that will probably be -- we're optimistic, but we're cautiously optimistic that makes sense.

And then just a second question, looking at Slide 15 on the history of the market. I appreciate what you're saying you're seeing sort of nascent signs of the market. But it looks like in the last downturn, credit crunch came off 25% it started to recover. What was the difference between the market then and the market today that make you think, and maybe answer sort of view of what the replacement cycle is? What sort of makes you confident that this isn't going to be sort of nonattracted?

Yes, that's a really good question. So if you went back to a credit crunch, what's different structurally there is a lot more house moves back then, like house moves across the year have halved. So that's one thing that takes a lot of wind out of our business, point number one. I think in terms of replacement cycle, for those who followed us for a while, you'll know that the average replacement cycle is about 7 years. In good times, when confidence is high, it goes down to about 6.5 years. And when confidence is low and people are worried, it goes down to 7.5. And we're probably in that territory now. It's been tough for the last 3 years for our type of customers. And so I do think as confidence is starting to come back, we can see that the savings are high. But what's going to trigger them to buy and replace, it will have to be things like that's why we do IFC to try and encourage people in or new product development. So I think it's probably a combination of those 2. I don't think we'll ever get back to the house moves being crunched. But what you should see is replacement cycle start to come back a little bit. And again, those who follow us know there's a cycle here, and it might well be that in the next couple of years, we're on the upside again. I think your point about cost savings was your first question, wasn't it?

Yes.

So we saw what we highlighted in the first half. So we would expect to continue to make progress on the cost to operate program. But perhaps more significantly, we've got quite a few cost headwinds in the second half. So we expect costs in the second half to be up year-on-year and half-on-half. There are a few reasons for that. So firstly, the volume in relation to the order intake that you have seen us flag for the half 1. The second thing is we're again to invest in marketing. We've been a bit lighter than we would have liked to have been in the last Q4. So we want to make a considered decision to go back and invest in that in terms of brand equity. We're also going to be looking to reintroduce a bonus and make sure that we're rewarding our people. We weren't able to pay that with any level of materiality last year. And then we've also got some of the inflationary headwinds that we talked to you about, whether that's national insurance contribution and packaging taxes that we're going to be subject to as well. And so you bring all that together and…

What's the actual quantum of the savings do you think?

Probably not so dissimilar from what you have seen in the piece in the first half. I'm being a bit cryptic, but you can definitely work it out.

I just had a question around new product development. We've obviously introduced quite a lot of new product development. And I was just wondering if anything particularly surprised you in doing well and how you sort of correlate it with your customer data effectively. And then as an associated question, I know you've done quite a lot on more sustainable fabrics and product manufacturing and so forth and whether you're seeing customers really buy into more sustainable products yet or whether it's just sort of a nice to have.

Yes. What surprises on, well, we work hard to not have negative surprises in the sense that what we do a lot of data, we do a lot of work to understand our customers and what they're buying. We do a lot of buying trips around the world. Our teams are looking for what the trends are, particularly in the U.S., particularly in China, and some of the emerging in Japan, et cetera. So we'll take all of that insight. We understand our customers. And then what we've got is great in-house designers who all they do is design sofas all day. And if they don't know the type of sofa, then it's not worth knowing. And then we get our partners to bring us innovation. And then if we get the bull's eye, we'll trial it in 10 stores. And if it works, we'll roll it out very quickly. So what surprised us probably in simple terms is this home cinema trend has been really interesting. So recliners has always been a big part of our business, but actually adding in Bluetooth speakers, vibrating seats. I saw somebody here really excited about the heated seats and I am it's incredible. And of course, it's one of those trends isn't that's picking up. So I think there's more we can do with that. So some of these products are relatively expensive. People are buying into the car's good. So that's been a good trend. I think technology brings some things that happened in the car industry that kind of come through into our world and I think what customers are looking for, that level of comfort in the home. So that's been a big trend. I think some of the brands that we have, I talked about our exclusive brands in DFS being 42%, 43%. They're real power brands in our business now. So a real competitive advantage. Ted Baker absolutely flourishing. So these sorts of products, those sorts of brands resonate well with our type of customers. So that's one thing. I think on sustainability, we're constantly trialing new types of fabrics, and new types of interiors. I think as the market leader, we're pushing on FSC wood, we're pushing on the leather working group. These are all important things for us to do as a market leader in the U.K. It's hard to do because our Scope 3 emissions, 90% of it is all of our emissions is Scope 3, which is all about supplier partners and shipping it from around the world. So changing the entire industry is a big challenge, but we're going to try and do that by innovating. It's not super cost-effective yet. The cost of those types of materials, they're clearly not at the levels of the normal fabrics that you can buy. And therefore, customers are not willing to pay a premium, especially in a cost of living crisis. So we've got to try and engineer a way of having sustainability within our products but in an affordable way. That's the challenge, stroke opportunity. That makes sense. Andy?

Andy Wade from Jefferies. A couple from me. First one, the share gains that you made during the first half, obviously, with order intake running up double digits versus the market being slightly negative, well ahead of what you've delivered as a run rate historically. I'm just interested to dig into why you thought that was. Obviously, we know the Sofology range launch was part of it, your use of IFC was probably part of it as well and SES disruption was another part of that. But interested as to if those were the main things or if there are other things as well. And the sort of follow-up from it, which bits of those when you talk about order intake slowing down a bit in the second half, which specifically of those factors which have helped you are going to be rolling off and which bits are enduring?

Well, I think you've hit the nail on the head as to what's driving where we're taking share from. It's a good question. So our #1 competitor has been in a bit of disruption, but they will come back. And they're a really good business and good people, we know them. But we haven't seen that happen in half 2 so far. So the share gains that we've made have been held in January, February. And I think the reason why we went through why are we winning is because we've got a really good proposition we've invested in. We've been developing products, innovating on products hugely in the last 18, 24 months longer. So I think we've got to a point where the product range in DFS and Sofology is as good as it's ever been since I've been here. The marketing is as targeted as good as it's ever been. And the people, it's hard to replicate the people because we spent years training them. We've got a part-time flexible model, very diverse and inclusive. So we match each city that we're in with the type of people that are there. And it's the combination of all of that. And you throw in ISC on the top, I couldn't pick out which bits are saying, well it's that working that it's all of it together. So, therefore, that should endure. The competition will catch up, so that might nibble a bit. And it's probably more about us keeping ahead of the game and leading and bringing in new brands. And the Shaquille O'Neil thing who is noting for us, and that is absolutely true for money to do it. He could be a big thing for us in terms of clients. It's a huge social media presence, very, very well respected. So we've just got to keep innovating and stay ahead of the game, and I'm hoping it will endure if that makes sense.

Yes. No, absolutely. So that's the first one. The second one, the delivery company looks like it's been doing really well. And you talk about in there having scope to scale. Now obviously, the main part of that is return in the market. But use that capacity yourself. But interested as to whether it's something that given how high quality the proposition is and how few people are doing attended delivery very well, whether there's scope to third-party logistics through that network.

It's a very good question. And the answer is yes. And so we are actively talking to a few people about doing exactly that because what we can offer is not a sales pitch, but it's actually true. But given the densities of delivery that we do on the vans that we have and the data we have, the cost per order that we can deliver on the variable cost is lower than any, so if we can plug smaller businesses into that who don't have those delivery densities, we can give them a great cost benefit. But the Net Promoter Scores, particularly from our own teams and our delivery partners are super high. And so it is a service that we can offer. Hence, we branded it so the delivery company that we could, therefore, see it as an asset where we can bring volume in. And we've got a few conversations going. I can't reveal who yet, but the idea would be to plug other furniture businesses in the volumes, make better use of the assets, which then gives you even more synergy really. Interesting.

And then the last one was on home, sort of, looking down your growth point, sort of #11 down there, just making it in at the end, whereas we sort of look back 3 years at the Capital Markets Day, it sort of felt like the big opportunity was within our grasp. Now I know a lot has changed since then the market coming back and the bigger opportunity is probably leveraging the market volume opportunity. But sort of interested to what extent the home opportunity is as compelling as you thought it was. It feels like it maybe has been stepped back a little bit from the home market to buy mattresses online. What's your view about that market opportunity now versus then?

Yes. I think it looks well good observation. I think, look, the home team in our business has been working really hard on getting the proposition right and it is good. But to turbocharge that growth, we need to invest in marketing, and we're probably to put down space, and so at the moment, if you were to say where would you put your marketing, you put your marketing into sofas, we're probably a bit light and Marie alluded to it. We'll be investing a bit more in marketing in half 2 to drive what's clearly the core business, the profitable business. That's the first thing that you would do. We want to drive profit. We want to drive down debt. So that's where you go. But we do still see the opportunity in beds and mattresses, but we're going to need to put down a mezzanine into space, which is going to cost capital, and we need to invest in marketing, which if you have the choice, you put it into Sofas first. So it's there, and it's one of those things in our 4-year plan that you go, we can absolutely see a route to get there. But there's low-hanging fruit in front of us now, self-help. And in the end, there's only a certain amount of people in the organization, a certain amount of cash. And so we have to make choices. I guess that's the choice we've made for now. All right. Well, thanks very much, everybody. Have a great rest of the day.