Sanderson Design Group plc (SDG) Earnings Call Transcript & Summary

Well, good morning, everybody, and welcome. Thank you for coming. I think I've met most of you, but my name is Lisa Montague, for anybody that I haven't met, and I'm here to share with you today, along with my colleague, CFO, Mike Woodcock, the Sanderson Design Group year-end results for our fiscal year FY '25 that ended on the 31st of January. Our Chairman, Dainne Thompson, is here with us in the room, and our Board colleagues are attending remotely. So I'll share with you an overview of the year, and then invite Mike to give a little more financial detail and hand back to me to talk about the future and how we have accelerated some key strategic and transformational initiatives to improve the results in this year and beyond. So to glance, our business is a leading interiors furnishings group that designs and makes world class fabrics and wallpapers with a strong licensing channel that delivers finished goods with specialist partners in our core markets. We employ some 550 people of whom 500 are in the U.K., all working to deliver our Live Beautiful promise and to lead the industry in the way we work. As you know, this past year was challenging. In summary, revenues declined to GBP 100 million, and that dealt a blow to profitability and became more significant in the second half of the year when the factories felt the full impact of both group and third-party decline in repeat orders. Licensing performed strongly and thanks to major partnerships renewing. We opened our first online shop in September in the U.K. for Morris & Co., and we launched that last month in the U.S. with a very encouraging start. We moved House last June into the historic home of Sanderson at Voysey House in Chiswick, where the archive is also housed, now digitized and valued at GBP 10 million. We have retained a cash balance of GBP 5.8 million and a robust balance sheet. And with that, the Board proposes a final dividend of 1p per share to give a total 1.50p in the year. So now I'd like to pass over to Mike to give you a bit more detail.

Okay. Thank you, Lisa.

Thank you.

So as usual, the first 2 slides focus on the 10 KPIs we consistently use to track our performance. This provides a high-level view of our results for the year. And then I will cover each area in more detail on the subsequent slides. As Lisa has mentioned, the results reflect the challenging market conditions which persisted throughout the year. And consequently, all P&L focused indicators show a decline compared to last year, including a reduction in turnover from GBP 108.6 million to GBP 100.4 million, and a decline in adjusted underlying profit before tax from GBP 12.2 million to GBP 4.4 million. The fall in the group's underlying profit before tax has also triggered an impairment review, resulting in the write-off of the entire GBP 16.3 million of goodwill capitalized following the acquisition of Clarke & Clarke back in 2016. Clarke & Clarke being the only acquired brand that is carrying value on the balance sheet. This noncash charge is included in our base profit before tax calculation and contributes to a reported loss of GBP 13.9 million. Capital expenditure was budgeted to increase from the GBP 3.3 million seen in the prior year, given the significant investment planned for a new digital pigment printer and factory roof at Standfast & Barracks, and the fit out of the group's new head office and archive of Voysey House in Chiswick. Also impacting the net cash position is an exceptional one-off GBP 2.3 million payment to support a buy-in insurance investment for one of our legacy defined benefit pension schemes. And I'll discuss this later. The following slides look at the financial results in more detail. Starting with a review of revenue by segment. So just a quick reminder of how we report group revenues. Our business model has 3 pillars, brands, licensing and manufacturing. The brands and licensing segments comprise our 6 consumer brands, whilst our 2 manufacturing businesses print for both third-party customers and our own brands. In total, sales of GBP 100.4 million were down 8% on the previous year. As Lisa has mentioned, brand and manufacturing sales were heavily impacted by challenging conditions in the U.K. market, whereas the licensing segment achieved record revenues of GBP 11 million. At a more detailed level, looking firstly at brand product sales by geography, the difficult consumer environment in the U.K. that particularly impacted small, independent retailers on the U.K. high street led to a domestic sales being down 14% at GBP 32.8 million. A review to deliver a more efficient sales model for this market was completed in July with a reduction of 13 roles. The new sales team is structured to reflect the change in customer profile with more remote and fewer field roles. This initiative achieved annualized savings of approximately GBP 600,000, of which half was delivered in FY '25. Our strategic segment of North America reported growth of 1% in constant currency. However, this was significantly impacted by an GBP 800,000 year-on-year reduction in the contract sector, which had an especially strong FY '24. Excluding those contract sales, the core U.S. business increased by 5% with particularly strong growth from e-commerce customers. Trading in Northern Europe saw sales down 4% in constant currency. The Republic of Ireland experienced similar trading conditions to the U.K., whereas Sweden, historically a strong market for the company, grew by 6% after a tough couple of years. Trading in the rest of the world was down 11%, at GBP 8.5 million, impacted heavily by Japan where our long-term strategy is increasingly focused on driving sales through our licensed partners as opposed to importing fabric and wallpapers. So looking now at revenue on a brand-by-brand basis, Clarke & Clarke is our biggest selling brand with the majority of its sales in the challenging U.K. market, where sales were down 14% during the year. Despite that one-off non-cash impairment charge I mentioned earlier, we remain confident in the future performance of Clarke & Clarke in both its licensing potential and its overall importance to the group's brand portfolio. Morris & Co. saw sales fall by 5% in constant currency. It's our only brand where North America is the biggest territory, and dollar revenues in this region were flat year-on-year. Sales were up 7% in Northern Europe owing to a strong performance in Scandinavia, but U.K. revenues were down 13%, in line with the overall market trend. The Sanderson brand has been a strategic focus for the group, and was the only brand to see revenues increase in constant currency. This was driven by another year of growth for the brand in North America, with sales up 24%, offsetting softness in the U.K. and the rest of the world. The collection from the Harlequin collaboration with Henry Holland, launched in September '24, had the strongest sampling of any collection ever launched by the group. Whilst Harlequin's North America sales are down 1% in the year in constant currency, they were stronger in the second half following this launch. Zoffany, our high-end luxury brand saw sales down 16%, compared with a particularly strong prior year, which included a one-off major residential contract in the U.S. And then Scion, which is predominantly a licensing brand and its royalties make a strong contribution to the group. However, it's also being relaunched in the U.S. following a new distribution agreement signed with Kravet which will see Scion's exposure to the market grow over the coming years. Manufacturing volumes from our own brands and third-party customers reflect the challenging consumer and industry environment, particularly for fabric which consequently impacted Standfast more than Anstey. Both factories saw lower levels of high margin repeat orders and reduced volumes for new launches which significantly impacted their profitability and resulted in both sites reporting a loss for the year. A key focus for the Board is to improve the efficiency of our factories and return them to profitability. And in October, we appointed Tim Preston as our new Group Operations Director. He and his team are focused on improving efficiency, optimizing digital printing, reducing lead times and inventory, challenging procurement and simplifying operations. In order to align the factories' expected volumes with their cost base, we recently completed a review which has reduced approximately 15% of the manufacturing workforce and resulted in annualized cost saving of GBP 1.5 million, of which GBP 1.2 million will be realized in FY '26 as an exceptional cost of GBP 700,000. Licensing revenues of GBP 11 million, included GBP 7.3 million of accelerated income from agreements signed during the year. This accelerated income, recognition of which is a requirement of IFRS 15, represents a total minimum guaranteed sales associated with newly signed contracts with a discount rate applied to them to reflect the timing of the future cash flows arising from these agreements. Of the 44 deals signed during the year, 18 were renewals and extensions, demonstrating the traction that the group's brands have with licensees. Major renewals included window coverings company, Blinds2Go; rugmaker, Brink & Campman and Japanese licensees Nishikawa and Kawashima. Notable brand extensions signed during the year included Ruggable with Sanderson and Sangetsu with Harlequin making the first time that Harlequin has ever been licensed in Japan. And then a new licensing agreement was signed in the second half of the year with a Chinese bedding company, Mine, who have already opened a Morris & Co. branded store in Changsha and plan to open further stores in Shanghai and other Chinese cities. This next slide analyzes the first column of the previous table looking at the underlying license income by brand and by territory. In the U.K., sales were boosted by the agreement signed in March '24 with Sainsbury's Group and their Habitat and Tu brands for a wide range of products for Sain and Morris & Co. Although the sales performance of some of our more established partners were softer given the general trading environment. The growing importance of North America in terms of the group's licensing income can be seen with a 16% increase versus last year, driven by Morris & Co.'s agreements with Ruggable and the Williams-Sonoma Group. Revenues in Asia fell back as some historical agreements came to an end, although the renewed and extended deals with Nishikawa, Kawashima and Sangetsu should reenergize performance in the market moving forward. And from a brand perspective, Morris & Co. continues to be the group's most licensed brand and continues to win new licensees. It's positive to see businesses such as Sangetsu and Ruggable, which have initially licensed the Morris & Co. brand, adding further of our group's brands to their product portfolios. Gross profit for the year was GBP 68.4 million, compared with GBP 73.7 million in FY '24, whilst the gross profit margin at 68.2% represents an increase of 30 basis points over the prior year. Excluding the impact of licensing income which generates a 100% gross profit, product gross margin remained broadly flat at 64.2%. Within the brands division, gross margin improved by 180 basis points, driven by lower clearance activity, a higher North American market mix and reduced sales of low margin homeware products, which are now largely sold by licensed partners. Conversely, our manufacturing division has been impacted by reduced volumes of both internal and external orders. Given the high fixed cost base of both of our factories, manufacturing gross margins fell by nearly 300 basis points despite a number of cost saving measures that were implemented during the year. And as I noted, a further factory restructuring exercise has now been completed. The adjusted underlying profit before tax was GBP 4.4 million compared to GBP 12.2 million in the prior year. The key reason for this fall was the GBP 8.2 million reduction in revenue and the corresponding GBP 5.3 million decline in gross margin previously discussed. Distribution and administration expenses grew by an average of 2.5% versus FY '24. Inflationary pressures impacted all areas of spend, particularly staff costs, where the real living wage increased by over 10% for a second consecutive year. However, we continue to identify and implement cost efficiency measures, including the restructuring of our U.K. sales and sales support function in July '24. Other operating income represents income from the sales of pattern books and was down versus the prior year as we started to implement our revised go-to-market strategy. In terms of non-underlying costs, this year's reported results include the one-off noncash impairment of the Clarke & Clarke goodwill. Non-underlying items also include GBP 1 million compared to GBP 600,000 in the prior year of restructuring charges related to both the U.K. sales and sales support functions and the 2 factories. The combined effect of restructurings over the last 2 years is an ultimate saving of GBP 3.8 million per annum. And finally, I'll talk about the group's balance sheet and cash position. The graph shows the key cash flows that caused net funds to fall to GBP 5.8 million compared to GBP 16.3 million at the previous year-end, despite GBP 7.4 million of EBITDA. As I previously highlighted, the way accelerated income is recognized means there's a time lag before the cash royalties are received. Minimum guaranteed licensing receivables increased to GBP 14.3 million at year-end which meant that GBP 4 million of the GBP 11 million of revenue from this channel has not immediately been translated into cash. During the year, the group made a one-off contribution of GBP 2.3 million to one of our 2 legacy defined benefit pension schemes. This is to support a trustee decision to transfer all of the schemes risks to an insurer under a buy-in insurance policy investment. Administration and advisory costs will continue to be paid by the group over the life of that scheme, but the core financial and demographic risks associated with funding member benefits has now transferred to the insurer. This agreement means the group will no longer be required to fund shortfalls to that Abaris scheme, which might arise from changes in market conditions and ultimately should reduce in our ongoing cash contribution to both schemes falling from GBP 2.1 million per annum to around GBP 1 million. As I noted earlier, capital expenditure of GBP 4.1 million includes a new digital pigment printer and factory roof at Standfast & Barracks and the fit out of the group's new head office and archive of Voysey House in West London. With the leases on both of our warehouses having been renewed in the year, there are no major capital expenditure projects planned for FY '26. And as a result, we would expect capital expenditure to fall to around GBP 2 million per annum. And as we move into FY '26, we also have additional opportunities to strengthen our net cash position from inventory reductions supported by our responsive launch strategy. So now I will hand back to Lisa, who will talk about this and other elements of our strategy moving forward. Lisa?

Thank you, Mike. So now I'm going to share with you the actions that we've taken to recover and the strategic levers accelerated. We've come through a challenging period and the economic outlook remains difficult or difficult to predict. So we're cautiously completing our plans to ensure that our business can deliver the ambition as leaders in our sector. We've made careful and steady investment for the long-term benefit of the business, and we've weathered the decline in volume from U.K. retail by continuing to maintain tight cost control and to manage cash. In terms of strategic priorities, North America remains the strongest market with the greatest potential in the foreseeable future. We are somewhat protected from the impact of tariffs due to our structure, the way we ship in small volumes largely falling under the de minimis to our subsidiary. So we have communicated our plans to our customers to put a tariff surcharge of 3% on orders over $2,000. We have new sales talents in place, D2C sites coming and strong collaboration launches this year to give us reasons to remain confident, and we've seen a good start to sales in the new financial year. Cost control remains robust. We have a robust balance sheet that is key, and we've already this year made the 15% head count savings reduction in manufacturing since January to deliver the savings that Mike mentioned, of which we expect to realize the GBP 1.2 million in this year. Our goal is to significantly reduce inventory in the year and we've already made significant progress in the first quarter. And we're reducing CapEx envelope to cover maintenance only which is thanks to the good investments made in recent years. Digital transformation is underway. Brands are transitioning also to more digital printing which reduces minimums, lead times and stocks. And in the middle of the year, you'll see our Trade Hub replatformed and our first new transactional brand websites launching to trade and customers alike with a full omnichannel approach and the all-important storytelling behind the brands. The results of accelerating transformation in manufacturing, introducing omnichannel sites and sharpening our go-to-market strategies will deliver results this year and beyond. I think you're mostly familiar with our strategic framework and the fact that customers, of course, are always our priority. Our brands, Sanderson and Morris & Co. continue to show growth potential with heritage and archive offers that encourage and engage high-profile collaborations and licensing opportunities. America remains our focus and our biggest market opportunity for the brands and with our manufacturing customers. And going back to manufacturing, cost reduction in both factories to protect profitability has yielded those significant savings we mentioned. Our factory efficiency has been recalibrated to the actual forecast volumes of this year. And the third-party customers in the U.S. have not suffered as much as the British brands have, and we're continuing to partner strongly with our bigger export customers with less perceived risk. As Mike referenced, our Group Operations Director has now been 6 months in the business and got a really good grip on the detail, leading the teams to operate with greater efficiency, challenging the profitability of every activity to improve performance. When we speak of omnichannel, our Morris & Co. website operated by our retail partner, launched successfully in the U.K. last September and in the U.S. in March, so just last month. We're now following with the replatform Trade Hub to better service our wholesale partners and then omnichannel brand sites to enhance our brand communication to all customers internationally, first with Harlequin and then with Sanderson in the second half of this year. Over the longer term, the platform can be scaled to showcase archive assets, potentially to develop a marketplace model and of course, bring significant margin enhancement potential. Looking at the retail value of our brands, it's reassuring to see that despite a wholesale decline, the presence of the brands internationally has held up well, thanks to the sales of finished goods through our specialist retail and licensed distribution partners. I've shown this slide before because it really shows the strong penetration and visibility of our brands in the marketplace. You can see here the resilient strength of Morris & Co. continuing to grow our lead position in spite of all the noise of competition. The new works from Huntington that I'm going to share with you a little bit later are exclusively ours, and they'll give a further significant boost opportunity into future years to come for our loyal Morris & Co. partners and fan base. Notable also here is Scion, our smallest brand, punching above its weight in visibility, thanks to the high-impact collaborations with the likes of Habitat and Sainsbury's. Altogether, the trade wholesale sales of just GBP 71 million translate into total brand value at retail from sales that have been realized from sell-through that sums up to over GBP 300 million with Morris & Co. representing about GBP 150 million of brand value. And when we speak of go-to-market strategies, we're finessing how to make the greatest impact in each region efficiently to drive sales and profitable return from each SKU, as we call it, or design by colorway. The websites will help enormously with data and gauging early market responses that will optimize replenishment modeling and refine forecasting to reduce inventory. In the meantime, better webinars, enhanced training and tailored showroom displays are all driving to deliver a better customer experience to make it easier to shop our designs wherever the customer may be. Vignettes, as you can see here, are installed in top showrooms and stores. Key trade customers will preview collections ahead of launches with enhanced webinars and they can preorder their patterning and sampling requirements. Digital design books, CGI, computer-generated imagery, creative assets and visualization on our Trade Hub and brand sites will help consumers to find and shop their choices. The reduction over time, as you know, from our famous 20,000 SKUs to fewer than 10,000 design options also eases the journey and focuses on improving the return of our investment in design and development. We plan to maintain that discipline, as you can see on the blue line, while seeking volume growth by increasing the return per option that's shown in those light blue bars. The plan is to further reduce collection launches, focusing on high-profile collaborations to drive press and marketing impact and then other products to fill in market requirements and opportunities, for instance, more versions of best sellers, be it by a different colorway or a different base, driven by the product merchandising team using market data. The RPO here is return per option that unlocks working capital and drives margin improvement. Please take this as an indicative direction of travel and not a forecast. And we're excited to share with you the launch of our Highgrove collaboration with our warrant holdings Sanderson brand that has been decorating Royal households for over 100 years. We're delighted to support The King's Foundation with this wallpaper and fabric collection that's been warmly received by press and designers and the previews we've given in London and in New York. Actually, today, Highgrove is co-hosting a celebratory lunch for our friends in the industry, opinion leaders in the interior design community with a tour of the garden and a presentation of the collection by our Design Director, Claire Vallis. And I'll share with you a few snippets of the press that we've received recently for this project. Veranda, the U.S. first home publication, gave us an 8-page editorial feature that reached an audience of 300,000 in their print edition and then was boosted by Yahoo digitally to reach a phenomenal 375 million viewers. And then House & Garden also featured the collection in their May launch edition, where our first ads also appeared, including some back covers, and this is one of the favorite images that's being used. You might have seen in the FT weekend edition of the 5th of April, which also reached a digital audience of some 16 million subscribers. And meanwhile, interest is building in the Huntington collaboration that I've mentioned, and this will bring to life a new body of work in September. We're presenting at the Huntington Museum, Library and Botanical Gardens in Pasadena, California. And then we'll bring it obviously back to the U.K.. So there's a nice transatlantic approach. To put this into context, we're first releasing 25 of 50 new designs. And this is relative to a total 250 works ever produced by Morris & Co. So it's an important step in creating new art history, and these designs will be exclusive to us. So with all this going on, the commercial teams have great products and good tools to work with as they seek opportunities in quite tough market conditions. International growth remains our focus with the U.S. as a clear priority. U.K. recovery is important as our dominant domestic market is reshaping. So we've changed our service team and proposition accordingly, reducing the field team, as Mike mentioned, and working more remotely with fewer staff, addressing different customer cohorts and their needs. We've launched a new loyalty scheme that's been well received as is the tailored service proposition. Contract and hospitality is an ongoing opportunity now integrated in the overall sales function with the addition of specialist agents. And the design archive is a major asset of the business, as you know, including some 75,000 documents that have all now been digitized and are being cataloged and have been valued at the GBP 10 million we mentioned. Interior designers are very important to us, developing our relationships with successful interior designers around the world is critical. We've really focused on this in the U.S. and where success depends totally on designers preferring our brands and designs over others. In fact, 57% of our current revenues in North America are attributed directly to interior design practices. We've worked really hard to build these relationships. We've talked about our hard yards on the road and all of the marketing activities that we've undertaken. We continue to deepen these relationships to support Showhomes and to build awareness of our brands in these design communities. In the U.K., it's a slightly different structure, as you know, due to the backbone of independent retailers on the high street. So only 9% in the U.K. of sales currently are directly attributed to the interior design community, representing a significant opportunity. Our new showroom on the ground floor of Chelsea Harbour has seen far greater interest from designers since opening in January and with around double the footfall in a much smaller space. So that was a good relocation move. Voysey House, again, is a fantastic location and a beautiful heritage showcase, frequently visited now by designers who didn't make it to Denham previously, either inviting them for previews or events, and they have great interest also in the archive tours. Just back in January, we had 300 top American designers visiting. And we've also hosted events with the Design Leadership Network of America. Next month, we have 50 top clients from Germany coming to visit for 48 hours of immersion into British brand, design and make with the factory tour up to Anstey included. The U.S. business for us has doubled in value as a sales territory over the past 5 years. And as you've heard me say before, can double again with the strength of our brands and the momentum that we're seeing in the market, growing our share now that we have the distribution network, sales teams in place and all the product primed to deliver success in this #1 global market. Last week, we were present at High Point Furniture Fair for the first time. It's a North Carolina biannual event attended by some 70,000 designers. In May, we celebrate the Highgrove Sanderson collaboration with The King's Foundation in Chelsea at the flower show and at Garrison Chapel. I went out last month and previewed that collection in New York and there's great interest. And the business of Home Editors, which is an important daily industry communications paper is going to attend the flower show with us. In September, we then launched Huntington in California and then move on to Dallas and up to New York, where we're sponsoring the Kip's Bay Showhome for their 50th anniversary. So in short, we have great momentum and all of the controllables are aligned. The U.K. market, as you know, has struggled with low consumer confidence, the lowest we've seen in years and structural changes resulting from difficult economic times. Our top 10 customers continue to adapt and thrive, and we're partnering closely with them on special edits, collaborations and initiatives to entice their customers, while the smaller or classically independent high street retailers have struggled more as a cohort with a few exceptions. Our team has been recalibrated to give improved and tailored service to all of our customers while reducing our cost to serve and focusing on inspiring our customers to shop the brands and engaging digitally with audiences to build our fan base so that we're ready for our omnichannel sites launching later this year. In other markets, Northern Europe and the rest of the world, which for us includes Southern Europe, have also been difficult for various reasons, including the Brexit hangover and recent political and security insecurities and instabilities. Scandinavia remains an important market, particularly for Morris & Co. Germany has the opportunity for our products, although the market is quite depressed generally. Southern Ireland largely reflects the U.K. mood. But we have contract opportunities in the Middle East, which are encouraging, and we will be present there for the first time this year at the Downtown Design Show in Saudi Arabia next month. And as we've mentioned, licensing momentum continues and we have this key strategic pillar, bringing our iconic brand designs to market on finished goods. Our focus now is on the U.K. facing partnerships -- U.S. facing partnerships, sorry, Sanderson as a brand and on developing strategic categories within the brands and the markets. The renewal rate continues with our partners at 90%, which shows great confidence in our future building blocks and all of our main partners renewed last year. This year, we'll deliver the results in a different shape accordingly as the newer partnerships mature and established partnerships continue to grow underlying sales. Ruggable, the U.S. supplier of washable rugs, is a notable contributor, as mentioned by Mike, and has recently expanded from Morris & Co. also into Sanderson Designs. Our values as a group and a company are established and have been reaffirmed by the teams this year in groupwide workshops, making certain that the values are well understood and that they lead to the desired behaviors. The team has engaged across the business to deliver the impressive impact with our Live Beautiful transversal project, including more than 40% emissions reduction over the past 6 years, making Sanderson Design Group recognized as a leader in the industry, important credentials as a warrant holder and exploring more tangible biodiversity initiatives now as next steps while following our agreed road map. Anstey has been FSC certified for a while, and this accreditation is now afforded to the whole group. Thanks to our supplier development team for ensuring that responsible sourcing remains at the heart of the business. And Live Beautiful as a transversal strategic framework importantly includes Work Beautiful that ensures that we are developing and nurturing talent, that we're recognizing and rewarding outstanding performance even in difficult times and to ensure that we have an engaged and inclusive group dynamic that celebrates contributions from everybody. Moving on to the question of outlook. In terms of outlook, we are absolutely focused on ensuring the future success of the group, and we've clearly taken swift action, as I hope you'll agree, to respond to market challenges. We've restructured both factories in the past 3 months, reducing head count and saving GBP 1.5 million with GBP 1.2 million coming through this year. The U.S. remains a clear key growth opportunity and we have sales that have started well in North America in the first quarter of this year. Although the stock market tariff responses have definitely impacted confidence this month, and we can see that in the global order book. Morris & Co. online is our first successful online shop and will be followed, as I mentioned, with other digital initiatives. We continue to show a robust strong balance sheet with cash, as I mentioned, of over GBP 5 million on hand and an undrawn GBP 10 million bank facility. So with this and our strong products and launches, the Board is confident in its agility to navigate the economic climate, accelerating strategic initiatives in response to ongoing global market challenges and the unpredictability that we see. At this early stage in the year, the Board remains confident that performance will be in line with expectations. So that's all from me. Thank you for listening. And then we're very happy to take any questions that you might have.

Kate Calvert from Investec. Just 2 questions for me. Could you sort of talk about some of the future drivers behind gross margin going forward, particularly how quickly do you think the omnichannel developments could impact upon that margin? And the second question is, how much flexibility do you think you have in your cost base if consumer confidence doesn't recover in the States, or I suppose another way of asking is, what is the split of your cost base now between sort of variable costs and fixed costs?

Thank you. Two nice meaty questions, Kate. First of all, should I kick off and then perhaps you can jump in with some more detail. On gross margin, I think you've seen actually over the last 5 or 6 years, a really steady margin improvement coming through in terms of gross margin. And we would expect that to continue. I mean we're up in the high 60%s now. So I think we've always said if we get to 70%, that would be really good in terms of brand gross margin, product gross margin. Clearly, when we go vertical through to retail with direct sales, there's a significant margin improvement opportunity that will more than mitigate the softness that we've seen through the wholesale sales in the last few years. And we would obviously have gone faster if we could have done in that respect. But that will be coming through this year. We probably with the initial setup and the investment, we won't see that until next year, the year after, but we will see it as we develop those sales. So it's also slightly a direct correlation between how much marketing investment we make to drive the sales and how fast we decide to go on that. So unless there's anything more on the margin, I think.

No, I think the only point I'd add on the margin is I think probably the opportunity this year is the factories and the reset that we've just performed there in terms of taking that cost out. And most of that GBP 1.5 million of annualized saving we've talked about will flow into the margin line ultimately. So I think that's probably the opportunity for this year. And then as Lisa says, I think as omnichannel and the direct-to-consumer piece increases in years 2 and 3, that should then start to boost margin in those periods. In terms of the cost base, I think I've said this before in terms of how our P&L is structured, it's pretty much the selling and distribution cost, the variable element and the administration cost is largely fixed. Now there are various levers we can pull within that administration cost base including marketing, which is an obvious place to go. Apologies to our Marketing Director. But it's an obvious place to go when things are tough. And then obviously, we've restructured our U.K. sales team twice in the last 2 years. We've done a restructuring on the factories. And again, if sales don't come through to the level we'd expect, obviously, we would unfortunately have to have another look around the business to look at other efficiencies we could generate.

David Jeary, Progressive. Just a couple of quick ones from me. Would it be possible to give a bit more background to the new loyalty scheme that you've introduced and how that works and what you're looking to expect from that? And the second question relates a little bit to the way U.S. dollar has gone over the last -- over recent months and what impact or exposure that might give to the group for next year?

Sure, thanks. The loyalty scheme is pretty -- was predominantly U.K. and it was known as a pattern book scheme previously. The cost of pattern books and the way they've increased has made that less and less relevant and less appealing to customers who had, if you like, pledged to take all of the books from a certain brand for a certain cost that was released over the month, and that's why you've seen it coming in as other income where we've had these pattern book schemes historically. It doesn't seem a relevant scheme for the future, and it doesn't really help the retailer as they're building these really clunky libraries that were deemed valuable. So we've switched it completely so that now a pattern book has a value, a customer can preview it. They can just work with digital designs, they can order their sampling. And if they'd like a pattern book, they're very welcome to buy one, and we'll make them essentially to order. So that's a switch that's really trying to work with each customer in the way they'd like to so that their investment in our brands drives their business and how they work. In terms of the -- but that's different in other markets, that's very U.K.- focused, yes. In the other markets, and particularly in the U.S., we have the showrooms. So we have our own direct showrooms, our own direct sales team. And third-party showrooms, and they're all incentivized differently, again, to drive their sales in the way that works for them in that market, which is not through pattern books, much more through sampling. And in terms of the U.S. dollar?

Shall I take that?

Would you like to?

Okay. I think we've historically talked about being long to about the level of about $6 million on the USD. We've historically tried to sort of create as much of a natural hedge as we possibly can. So we've looked to increase sourcing in dollars on things like base cloth for the factories and some of the supplies that are coming in from India and China, the small amount that comes in from China in USD to try to create a natural hedge. Having said that, obviously, the brands business has performed slightly more strongly in the U.S. this year. And we've got some noticeable licensing agreements, for example, Ruggable and Williams-Sonoma both in USD. So we are now around about sort of somewhere between $8 million and $10 million long on dollars on an annual basis. Now we have a limited hedging program in place, which will help sort of soften the decline that we've seen recently. But ultimately, that will -- I think we averaged about $1.28 and a bit last year in terms of our conversion. And it's trading, I think, at about $1.33 from a spot point of view the other day. So there is an exposure there, yes.

Matthew McEachran from Singer. A couple of questions from me as well, please. Just going back to the future factory and the cost savings that you've deployed there, would you be able to give us a flavor as to sort of the volume uplift or recovery you might [Audio Gap] to get both of those factories back to the breakeven level? Can you look at it in that way? I mean, obviously, there's some printing mix shift towards digital. But if we could just maybe just try and simplify the answer just on volume terms, that would be very helpful.

I'll go first. The cuts that we've made take into account and move back towards breakeven this year on current volume plans. That's why we've made the 15% cut. So I suppose the simple answer is 15%. And were we to then reemploy. But actually on the head count reduction that we've made, we took out 43 roles. That gets us if not completely back, largely back towards that breakeven goal this year, which was clearly the reason for doing it and can be flexed a little bit more as needed.

Would you see that fabric still lags? Is that going to still be a lag? Or was the head count reduction more heavily weighted towards the factories -- the fabric side than on the wallpaper side?

It was this time, but that's also a reflection of the fact that we made some adjustments in Anstey last year, which was really about shift patterns and evening out the workloads across the different print techniques. So this time, the reductions that we made in Anstey were relatively less impactful because it was a straight line volume equation of taking down the workforce according to the volumes expected, whereas in Standfast, that was the first time we really had to look at that. So there was a rebalancing as well. So it's a bit more significant in Standfast.

So let's just say you were to deliver breakeven in the factories in the year ahead. It could be possible that both of them would be at that level?

It's possible.

That's the target?

Yes.

Yes. Okay.

That's our internal target. Yes.

Yes. Okay. That's helpful. Could I just ask a bit more about the go-to-market strategy on the Trade Hub and the digital side? I mean that looks like it's going to deliver a much-improved experience for your like-for-like customers. But I guess -- and so maybe if you could elaborate on the timing of that and how much of a difference you think it can make and particular, which components? But I think it feels like it ought to be able to attract new customers that are more digital led in the first instance, and so, do you have a campaign to try and attract new standalone designers into the business to take advantage of that?

Yes, yes and yes. So yes, timing, we've said the middle of the year, and that's kind of flexible at the moment because as we're starting to do user testing, if things come up, obviously, it can get pushed back a little bit. But we're pretty well on time. So I would expect certainly by, let's say, we might go into a soft launch in August, which is what we did last year, and it worked very well for us from Morris & Co. So we had a soft launch in August and then we ramped up in September and once we've had a couple of weeks to make sure everything really worked. So that's the likely timing, I would say, to replatform the Trade Hub, and then Harlequin should be quite quickly behind that and then Sanderson. So once the platform is up and working, it's fairly straightforward then to put the brands up. There are so many advantages for all of our customers. I don't know how long you've got, but we can go back through it, and we can obviously show you later on. But basically, the Trade Hub at the moment is very functional. It's like an old-fashioned spreadsheet in a way, whereas this will give people really dynamic interaction with their orders, with where their deliveries are, they can follow their shipments, they can follow their quotes. They can see all the products. They can call up by color, by design, by brand and the whole thing and also see all of the marketing material, see video moving image, which we can't serve up at the moment. And so, it will be a much more -- a really good brand experience for all of our customers. Then when we turn into the -- looking at the new designers coming into the market who are perhaps not opening stores, we've already got a service desk in place when we made the changes last year to really look at those customers to find them on Instagram, to engage with them and to encourage them to work with our brands. So that obviously, again, becomes much more direct and digital and less manual intervention. So yes, we'll be able to do all of that. And we will be having a campaign. So first of all, it's an internal campaign so that it's all very well understood internally. Secondly, obviously, external communication to our existing customers to share with them the benefits. We're looking also at how we can operate click and collect as a benefit for our wholesale customers. So you might order some fabric from us directly for your curtains, but you want your local curtain maker to make them and we can make that an attractive option also. So there's a benefit back into our existing customer channel. And then, of course, there will be a promotional targeted campaign digitally in digital marketing.

That's pretty helpful. I mean, there's clearly a lot going on, and it could make a big difference. So really, I think what I'm hearing is that from the second half onwards, certainly going into the autumn that the wheels will be turning on all of these. And in particular, you'll be starting to target new designer wins via the Trade Hub and the digital applications.

Yes. And I hope that by the time we see you with the interims in October, we'll be able to share all of that.

Rob Sanders, Shore Capital. Where do you think or what do you think has happened to the competition over the last 12 months? It's obviously been a tough market, flattish to downish. Has competitors gone out of the market? Or is it just -- what are the conditions?

Well, we obviously make for a lot of the direct competition. So it depends how you determine competition. But yes, I mean, obviously, I can't share those statistics, but you can see in our factories that we can see very clearly that the downturn that we've suffered is pretty universal. Everybody has felt the same market conditions and felt the same responses, and we can see that coming through in the factories. Certainly, from the British brands. The U.S. has held up better during that period. And we're quite heavily focused on export customers in manufacturing. But Yes. I think you've seen this week there's been a transaction with one of our fellow British brands. It's probably indicative.

Toby Thorrington from Equity Development. I've got 3, I think. I think the most obvious question hasn't been asked yet. What are your expectations for licensing for FY '26? First one.

Hi, Toby. I think we said before that licensing should grow in line. We've had a record year this year. That has been largely driven by accelerated from renewals. Those big renewals happen now. So this year, as I said, the shape will be different because the shape this year will be about underlying income coming through from the newer partnerships that are maturing as well as those renewals and continued underlying. So we wouldn't expect any significant growth this year for that reason because we don't have those accelerated income in the pipeline at the same level that we've had in last year or the year before.

So clear on no growth, I might have expected to be a bit lower this year, but you think you can hold the number?

We have a pipeline that suggests we should be in line with. Yes.

Great. Okay. Quick current trading question, please. I think you're saying U.S. double-digit growth first couple of months of this year. It's only 2 months. I appreciate that. I don't know how double digit is, but I noticed excluding core -- excluding contracts last year, the year-on-year growth was about 9%, I think. So is it more or less similar conditions in the States? Or has anything improved year-to-date in the first couple of months? Or is there any contract in there, for example?

There's not a lot of contract in there yet actually, Toby. We would expect more to come through this year. We had a very good contract year the year before. And of course, that is lumpy. But also, we lost our contract specialist last year, and we're just on the point of hiring a new one. And Scott, our new sales SVP has been in place now 5 months, and he's got great experience in that area. So I think we're seeing a little bit of the Scott effect, and he's bringing -- he's hiring a new team around him, reenergizing the team, and we're seeing some good response to that from the market. Low double digit, Toby.

Okay. Good. Yes. Okay. And final question relating to a point on Page 32, talking about the archive post, the new valuation update and what have you. There's a phrase in there going to unlock value from FY '27 onwards. It sounds like something specific in mind, but can you share that with us?

Well, we haven't fully defined the plan, but the idea, obviously, is that which of those 75,000 documents are we going to continue to use to unlock new designs for the heritage brands. Are there some that we might not use and therefore we might take to market in a different way. We might use some for education, but we might also divest some or license them on a design-by-design basis or put them up on -- and put them up on a digital platform. So we'll see. We're just working out the detail of that. But there's definitely some opportunity there to be derived from it, whether it's for general interest or actually commercial value.

Right. Okay. So enough going on this year, so we should look to FY '27 for that?

Quite a lot going on this year. Also, it takes a while to catalog those 75,000 things and actually really make a strategy per section. So there's different designers in there, different periods, different genre. So, yes.

We've got one question over the webcast from Adrian. He's asking, "It's now been 2 years of losses for the manufacturing segment, even though external sales have remained roughly stable. Do you think the current cost-cutting initiatives are enough to return the segment to profitability? What future operating margin are you aiming for within manufacturing? And when do you think this might be achieved?"

Yes. Thank you, Adrian. I think we might have answered that already, at least to some degree. Clearly, the cost cutting that we have made is for the purpose to return to breakeven ideally this year. And we will keep a careful watching brief on that as we go through the year. In terms of operating margin, we don't normally split that out. Do you want to say anything?

No. I don't. I think, yes, initially, the aim is clearly to get those factories back to breakeven, and then we'll sort of look to work out what level of profitability we could expect over the longer term.

Thank you. There are no further questions. I'll hand back over to you.

Thank you. Well, I have nothing else. That's the end of our presentation. And thank you very much for your interest, for your questions and for your ongoing support and for coming today.