Half year results 28 March 2018
Highlights Ian Filby
Performance on Track STRATEGIC AND OPERATIONAL HIGHLIGHTS KEY FINANCIALS £513.8m Gross sales +4.1% £30.0m Underlying EBITDA before acquisitions £80.0m over LTM £55.3m LTM Free cashflow 69.6% generation cash conversion Despite a challenging furniture market our performance is on track: we have made good progress against our strategic priorities and expect strong cash generation and modest growth in EBITDA in FY18 2
Market Update Market is challenging, but we are well placed with our strong value offer Lower footfall, partly offset by a higher average order value Market Environment No changes in use of credit Some evidence of competitors pulling back on advertising and promotional offers to protect profitability Continue to focus on having sharpest prices and advertising strongly Gross margin expected to be up year-on-year despite £7m FX related inflation to absorb DFS Response Cost base being managed for a challenging market environment, helped by marketing cost deflation and efficiencies being driven from prior investments Growing top-line momentum across half-year period While the environment remains challenging we believe we can strengthen our competitive position 3
Financials Nicola Bancroft
Financial Overview H1 2017 H1 2018 FY 2017 LTM H1 2018 OVERVIEW 26 weeks 26 weeks 52 weeks 52 weeks (£m) 28-Jan-2017 27-Jan-2018 29-Jul-17 27-Jan-2018 Revenue 379.9 396.1 762.7 778.9 Solid trading performance in Growth (%) +6.8% +4.3% +0.9% -0.2% challenging market Revenue before 379.9 366.5 762.7 749.3 Acquisitions Growth (%) +6.8% -3.5% +0.9% -3.9% Underlying EBITDA Gross margin impact of FX 32.4 30.0 82.4 80.0 before Acquisitions has been offset Growth (%) +4.5% -7.4% -12.7% -16.5% Underlying PBT 16.7 11.6 50.1 45.0 Growth (%) +3.1% -30.5% -22.3% -30.8% Investment in strategic Underlying EPS 6.2p 4.6p 18.7p 17.1 initiatives has been Growth (%) +3.3% -25.8% -21.1% -28.5% maintained Ordinary DPS 11.2p 3.7p 3.7p 11.2p Financial performance reflects the impacts of acquisitions, challenging market environment and a disciplined operating performance to deliver a solid result overall and in line with expectations 5
Drivers of Group Revenue Growth REVENUE CONTRIBUTION BY CHANNEL KEY DRIVERS Performance of all brands affected by Revenues (£m) market environment; DFS overall LFL (1) 300 325 350 375 400 425 of -5.2%, with web growth of 8.1% 1H 2017 380 Positive contribution from international following new store openings DFS -15 SW & Dwell +2 Dwell and Sofa Workshop growth supported by 10 new stores y-o-y Sofology +29 Sofology underlying revenue growth in 1H 2018 396 period of 17% Growth from DFS web, DFS new stores and non-DFS brands compensates for market-driven LFL performance in DFS existing store estate. Two year growth rate still comfortably positive (1) 99 DFS stores and web in like-for-like group out of 125 stores at period end 6
DFS Gross Margin Trends and Drivers DFS-ONLY GROSS MARGIN EVOLUTION KEY DRIVERS 61.0% Annual £21m of US Dollar related cost pressure experienced since 59.7% 59.8% 59.8% 59.9% 59.9% June 2016 – impact on FY17 & 1H18 60.0% 59.1% 59.2% 59.0% USD hedging in place for FY18 and FY19 at higher rates 58.0% 57.0% FY18 margin also expected to be higher than FY17 56.0% 1H15 FY15 1H16 FY16 1H17 FY17 1H18 Gross margin is now recovering to historical levels following the impact of the USD related cost inflation 7
EBITDA Progression COST PROGRESSION KEY DRIVERS GBP millions 0 10 20 30 40 Gross profit impacted by lower revenues 1H17 EBITDA 32.4 Gross profit -4.5 Selling & distribution costs benefit Selling & Distribution +3.8 reflects marketing deflation and other selling costs flexing Property Costs New Stores & CDCs -2.4 Rates inflation -0.7 Property cost opportunity expected in the underlying estate Underlying estate +0.5 Administrative +0.9 expenses Full year administrative expense Sofology -0.5 expected to increase to reflect a normal accrual for bonuses 1H18 EBITDA 29.5 Lower revenues have driven a variable cost saving in addition to the benefit of marketing cost deflation. New space costs are partly offset by lease renegotiations 8
Sofology – Financial Drivers HISTORICAL REVENUE GROWTH DRIVEN GROUP OPERATING BENEFITS LARGELY BY SUCCESSFUL STORE ROLL-OUT Sofology has been owned for <4 months 5.0 50 Revenue / Number of Stores No co-operation / discussions possible 4.0 40 Number of Stores prior to completion 3.0 30 (£m) Annualised benefits of £0.4m have been 2.0 20 secured to date 1.0 10 0.0 0 Further opportunities to a total of £4m in 2012 2013 2014 2015 2016 2017 co-ordinated sourcing and shared procurement Number of Stores Revenue per store exist – full annualisation achieved by FY20 17% 1H18 gross sales growth Medium-long term opportunity through shared approach in logistics and property utilisation 7% 1H18 LFL gross sales growth Sofology has largely driven revenue growth over the last five years through new store roll-out. 1H18 performance now also reflects good AOV growth helped by better selling. Opportunity now exists to drive profit growth through operational leverage 9
Flexible, Low-Cost DFS Platform to Drive Group Opportunity Cost Base Split – last 12 months (Sofology on pro forma basis 1 ) Comments Cost of Sales DFS margin includes manufacturing benefit 40.4% 42.6% Broader group opportunity as scale and use of 45.2% 51.1% shared sources increases Variable, Semi-Variable & Discretionary Costs Deflationary trend in marketing costs 32.1% 32.2% Store wages flexing down for volumes 37.3% 30.9% DFS distribution costs falling due to CDCs Fixed costs 16.6% 27.5% Limited fixed property and admin costs 18.0% 17.5% 8.6% EBITDA / Brand Contribution DFS Dwell & Sofology Group - Pro DFS currently the primary profit driver Sofa Forma Growth in EBITDA and group margins as group Workshop Twelve benefits are delivered Months DFS has a flexible cost base that responds to the market environment, and can be utilised to drive group operating benefits (1) Sofology shown as actual last twelve months, i.e. including the period before acquisition by DFS (2) Selling & Distribution costs which include (i) marketing costs, (ii) productivity-linked wages for store teams and manufacturing teams, 10 (iii) distribution costs and (iv) other store operating costs
Non-Underlying Costs OVERVIEW COMMENTARY Acquisition related costs principally driven by CMA process following Sofology acquisition H1 2018 26 weeks (£m) 27-Jan-2018 Professional fees 2.3 Total integration costs expected to be £5 million incurred in FY18 and FY19 Integration costs 0.5 Acquisition related costs 2.8 Restructuring costs relate to previously Restructuring costs 0.3 announced closure of our National Distribution Centre Total Non-Underlying Operating Costs 3.1 Refinancing 1.5 Refinancing cost reflects write-down of Total Non-Underlying costs 4.6 arrangement fees on prior facility As previously announced, we anticipate that, in order to drive the £4 million of near-term benefits anticipated, £5 million of integration costs will be incurred over FY18 and FY19 11
Investment in Infrastructure for Future Growth CASH CAPITAL EXPENDITURE 30 £28.3m £24-26m £24.5m Other (inc. commercial • 8 months of £4m annual 25 vehicles) 8.5 Sofology spend ex New Stores Capital Expenditure (£m) 6.8 20 • Similar investment levels to Store refurbishment 2.3 maintain well-invested estate. 2.4 Vehicles funded by leasing 4.2 15 • Similar levels of spend to Web investment 2.8 maintain leadership 10 • Completion of CDC warehouse 15.1 opening New store & CDC 10.7 5 • 3-5 Stores (UK & investment International) 0 FY2016 FY2017 FY2018 Guidance Capex spend in line with previous guidance reflecting CDC acceleration, and investment in existing and new stores. FY18 capex including Sofology expected to be £24-26m. Capex may grow slightly as combination with Sofology is undertaken. Annual D&A charge will follow trend in gross capex. 12
Excellent Cash Generation KEY TRENDS LTM H1 LTM H1 (£m) 2017 FY 2017 2018 Maintenance capital spend of £10m-15m relative to a Underlying EBITDA 95.8 82.4 79.5 business generating £80m of operating cashflow Capex (30.9) (28.3) (24.8) Change in Working Capital 0.2 2.9 0.6 Disciplined approach to growth investments with Free Cash Flow (2) 65.1 57.0 55.3 short payback periods Conversion (% of EBITDA) (2) 68.0% 69.2% 69.6% Net debt (135.6) (144.5) (172.3) Net debt will be paid down over time Multiple of underlying EBITDA (x) 1.42x 1.75x 2.17x Cash generation continues to be strong and will be used over the near-term to pay down acquisition related debt to bring gearing back in-line with policy (1) FCF is calculated as Underlying EBITDA – Capital Expenditure + Change in Working Capital (2) Cash conversion is calculated as FCF / Underlying EBITDA 13
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