Paul Scott interview with Lisa Montague, CEO of Sanderson Design Group (SDG)

I’m doing a series of audio interviews with CEOs of companies that I think look interesting. In particular, I’m only inviting companies to be interviewed if I think they meet these criteria -

• Issued a recent, positive or in line trading update, and reasonably sound outlook comments,
• Strong balance sheet (so little to no dilution or insolvency risk – very important in a downturn)
• Good management (partly subjective!) with a clear strategy, executing well, and a good business model
• Reasonable or cheap valuation, so a possible buying opportunity (long-term).

I don’t charge any fees for my interviews, so I’m free to ask anything, and it doesn’t become PR for any old company. They’re obviously for general interest, and are never tips, recommendations, nor advice. As you know, our whole ethos here at Stockopedia is about everyone doing your own research amp; taking responsibility for managing your own portfolios.

Here is my audio interview with Sanderson Design (LON:SDG)

It’s also available on podcast platforms, just search for “Paul Scott small caps” and my channel should come up. It’s aimed at Stockopedia subscribers, but for now is open to all, because we haven’t got the facility to put it behind the subscriber paywall, but longer term that’s the plan.

Mindful of the fact that not everyone wants to listen, or might be hard of hearing, I’ve typed up the interview, which follows below. It started off as a summary, but morphed into almost a transcript, as there were so many interesting points made. I’ve bolded the points that struck me as the most important.

I hope you find this interesting! Do leave feedback, as these things are a lot of extra work to do, so I need to know if it’s time well spent or not. (says he, brazenly fishing for compliments!) Thanks, Paul.

Paul Scott’s interview with CEO, Lisa Montague, of SDG, 18 Oct 2022

Introduction amp; disclaimers – not advice or a recommendation, no personal holding (but is on my watchlist to buy at some point), not charging a fee, please always do your own research.

Q1. Please give a general overview of the business.

A1. Design amp; make interior fabrics amp; wall-coverings. 7 consumer brands. 2 factories (in UK). Turnover £112m LY. Two thirds brands, the rest manufacturing for third parties. We have heritage brands (e.g. Morris amp; Co), and more modern brands. UK biggest market 52%, 48% export (mainly US – and growing strongly).

Q2. You joined in April 2019, changed company name from Walker Greenbank. Covid started within a year of you joining, but your turnaround plan has impressed me, hence me asking you to do this interview. Can you explain the turnaround please.

A2. Wasn’t disrupted so much by covid, but we re-sequenced things. Not quite a stable environment now, yet. Very irritating January year end, I haven’t changed that yet! Base year was FY 1/2020, adj PBT was £7.5m. Rose to £12.5m in FY 1/2022, on similar revenues. Achieved this with focus – despite many headwinds, we’ve made underlying progress. Core markets, recover the UK reputation (which wasn’t great, from customer feedback) – 6,000 customers in UK, many small, were confused as to direction SDG was taking. Re-established us as a core partner in UK. Growing US is key strategy. Core products – we own the factory, we own the textile mill, let’s stick to the knitting, of what we’re good at.

“Cushiongate” was an issue when I started – a warehouse full of cushions, because strategy was to make finished goods, but many customers prefer to buy the fabric amp; make their own. Now gone.

SKU (no. of product options – a design, in a specific colour) reduced from 20k (too many) to 12k. Need to reduce further to 11k. Portfolio of brands. Previous strategy of “style library” was flawed, masking the brand strengths. So we now focus on each individual brand, and created a marketing strategy for each, and appointed a marketing director (none before!), with a pay as you go budget – make savings in other areas, to then spend as you want.

There had previously been very little investment in the factories, then a fire amp; a flood. Developed better teamwork.

Quite a lot to do, but now focused on core products, core markets, make investments where it’s going to work, and bring the people with you. It’s not rocket science, but it’s made the business more efficient, and not as easy as it sounds. I was lucky, as we have a great leadership team. Furloughed 500 people in covid. Mentions staff who are long-standing, and knew what needed to be done.

Q3. Interim results strike me as solid, in a difficult environment. Listeners, do have a look at the investor relations site (here), with a very good recorded webcast of results presentation, and a pdf presentation slide deck.

A3. “Solid! Solid would be really disappointing at this stage, 3 years into a turnaround! But solid seems to be quite well perceived in these turbulent times”. We’ve put out great results in the past and had no response! (Paul: true, but the share price has halved in the last year, so the market was obviously expecting calamitous results, yet you come out with something pretty decent). “Yes, exactly. We’re still nowhere near where we should be, but we’ll get there!”

Our markets have been difficult. By region – USA has grown. UK has held up. Europe amp; Rest of World have been difficult.

By brand, Morris has been growing double digit since before I started. Marketing has boosted something that’s already working. 54% growth in H1, USA, and 21% in UK – exceptional performance by Morris amp; Co brand.

As you say, other brands have been more challenged. Esp the bigger amp; more modern brands, Harlequin, and Clarke amp; Clarke. That’s because UK retail has been softer. Q1 was OK, Q2 softer as macro picture deteriorated. Ireland also affected.

Top customers are all growing – John Lewis doing very well with our brands, especially Harlequin. Brewers 2nd biggest customer of Harlequin, quite strong.

Clark amp; Clark working with Next amp; John Lewis, going well.

Q4. Let’s talk about licensing. Is it pure profit? Valuable revenue stream. How is IP protected? Couldn’t people just copy your designs?

A4. You’re right, licensing revenues are pure profit. We sometimes do the design work, and earn a higher royalty. Most licensing agreements have a minimum revenue guarantee. We have to account for that up-front under accounting standards. See the slide deck to de-mystify this. Core products are bedding, with Bedeck (example products here), 3-year contract renewed.

Q5. I looked at Bedeck website, and the bedding products look quite affordable, whereas your other products seem much more expensive.

A5. Bedding tends to sell through the department store network, which is challenged in the UK. Debenhams amp; House of Fraser would have been important customers. John Lewis is the main UK customer. Bedeck are also retailing directly too. Also in Harrods on 3rd floor. Power of the brands gives us that licensing potential, which can grow with the core products, and could accelerate with some brands. See slide 31 in the pack, a new disclosure, where I’ve grossed up our wholesale revenue to retail equivalent. (Paul: I saw that, it goes up from about £100m to £300m). “It’s my new favourite slide Paul!”. Paul: “I like it too!” (chuckling). The point of it is to show why Scion works, as a small brand for trade sales, you might ask why are they bothering? But when you see the licensing power of that brand, it all falls into shape.

Also this shows the potential for other brands. Eg Clarke amp; Clarke is just trade sales, but we’ve just started licensing rugs through Asiatic, last week. Lots of mileage to go, as you can see from our plan to FY 1/2025.

IP – we have design copyright on our products. So if people did copy them, we would follow that up!

Q6. How does design copyright work? Some of your Morris designs are what, 100 years old.

A6. Up to 160 years actually, both Morris, and Sanderson. We own the full Sanderson archive. With Morris it’s different – museums hold part of the archive, we have a reasonably small but important part of it. Nobody else owning the archive has the manufacturing ability. We take archive designs, then recolour or restyled, which makes the design copyright re-start.

Q7. How much fashion risk is there, or do you have best-sellers with recurring revenues? Also how would your customers be impacted by a downturn in the economy?

A7. Some designs last for hundreds of years. We have chart-toppers that last for decades, but are refreshed (with new colours), e.g. our Sanderson 160 (years) collection last year, to celebrate the anniversary. “Simply Morris” – where we’ve cleaned up the backgrounds.

Fashion can come through licensing. NEXT amp; Hamp;M tend to be apparel driven licensing, which is quite short-term product runs. That is the fashion element, which you see in the licensing side of things, less so in the core products. Colour – tend to be 30 year cycles. We had minimalism in the 1980-90s, very neutral colours. Very definitely now a return to colour, print amp; texture, coming through culturally. We’re maybe now 5 years into a 20 year trend for “maximalism” – more colour amp; designs. Trends take a while to move from the designer shows, to interior decorating, and people decorate their homes maybe every 10 years on average, we hear. So I’ll take the next 10-15 years (of current trends), that’s fine!

Everywhere you look, colour amp; design are all around us, as opposed to neutral (previous trend).

We’re 98% wholesale, so inventories are a big number. Orders come via trade customers (e.g. John Lewis, or interior designers). Trade hub (online) gives good service, and stock levels are visible, which helps interior designers know they can get hold of the product they specify in their designs.

Q8. Gross margin of 65% is extremely high for a wholesale business – you clearly have pricing power. Inflation – costs are rising – Can you manage the cost increases, and are you passing them on to customers?

A8. So far, brands have absorbed the annual increase last year (done in February each year, at start of new financial year, and new spring season). The selling price rise in early 2022 was bigger than in previous years. 5% p.a. previously accepted annual price rise. Last year we raised prices 9%, but not the same across every brand. Customers do understand current pressures, and accept price rises providing product represents value to the end customer.

So far we’re handling inflation OK.

Significant energy cost rises, although recent Govt measures have helped (until April 2023) – could be a significant rise after that. Gas we have under contract to Oct 2023, so that’s great. Making fabrics – it’s the steam (not printing) that uses the high energy. Lots of things we can do to mitigate it e eg reducing days we run the big boiler. Putting in solar panels amp; led lighting – problem is getting hold of the kit! New ERP system going into Standfast factory. Payback on energy reducing measures is now very attractive. (Paul: yes I heard another company say payback on solar panels on their factory roof is now just 4.5 years, so a no-brainer if you can get the kit). Yes.

Q9. Supply chain – any disruption, and has Brexit helped or hindered?

A9. Brexit amp; covid combined were disruptive. Standfast in particular has benefited from Brexit, due to the tariffs amp; duties applied to textiles, of 8% for imports/exports in amp; out of the EU. This helps SDG, which manufactures in the UK. Wallpaper – no duties, so Anstey factory doesn’t benefit in the same way. The brands business, selling into EU, has become much more difficult, as you can see in the numbers. N.Europe impacted by Russia. S.Europe seeing economic pressures, e.g. in Spain. We closed our French subsidiary, and now service that market from the UK, which is now picking up funnily enough, running it from here.

Q10. Your balance sheet is a thing of beauty, very strong, more important than ever now. This gives great stability, but I would say there is excess capital on the balance sheet, so share buybacks would make a lot of sense, and/or acquisitions (e.g. Portmeirion)?

A10. We do work with Portmeirion actually. It’s great to have a strong balance sheet, plus an unused Barclays facility of c.£12.5m. We have 2 defined benefit pension schemes, so we were thinking about that as the best use of any excess capital. But put it on hold when Putin invaded Ukraine, and we’ll wait to see how things pan out. Prudent thing to do. If interesting projects appear, we would have a look. Not actively pursuing acquisition strategy – note I took it off the strategy slide. Don’t want focus diverted from the really important self-help measures. Then we’ll look at acquisitions in future, once we’ve built a really good platform. We have a great Board, lots of experience amp; ideas, working very well together. In time it would be nice to look at acquisitions. Really want to see some top line growth before we get distracted.

Q11. SDG got through the 2008 recession very well, remaining profitable. Recent in line trading update. Have you got a bigger picture view for future growth?

A11. Yes, USA is the big opportunity. America has represented only about £12m into a huge market – scratching the surface. Never more than 10-20% of our total revenues. All the competition is doing two thirds of sales in USA. We’re doing far better in the UK market, but absolutely not touching the surface in USA. Our network is much too thin in America. You need to see the people (distributors, interior designers, etc). In the last year, US grew by 42%, by increasing the distribution network – more agents on commission, local partners, and road reps. The most import regions are the South (Atlanta is v important showroom), covering other states like the Carolinas, and Tennessee – top state for interior furnishings, not the Tristates (New York amp; surrounding). Texas also v.important. For the next 5 years, we’ve got broadly the right product, need to tune up marketing, will do targeted small marketing investments, and measure results, focused on Harlequin in Houston amp; Dallas for example. Or one brand in Florida. We’ve got a new marketing director, with a lot of digital experience, who does data-driven decisions, test amp; learn in the US this way, targeted approach. That’s the most exciting market – I really want to crack the USA market. 

Japan also important, a lot to go for, in licensing. 

Both Morris and Sanderson have a lot of opportunity, eg Disney 1930s designs being revived. We see Sanderson as brand that has traction, and potential too.

Q12. I found creative people sometimes temperamental amp; difficult to manage! Do you have a magic way of keeping them under control?

A12. No no! I don’t want them under control! I want them fizzing with ideas! I love working with creative people, that partnership is key. My background is in fashion, leatherware, it’s an absolute joy to work with creative talent. I don’t have any creative talent, and as long as we all do what we’re good at, it works beautifully.

Thanks, and goodbyes, and yes we’ll do it again in future.

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