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

Good morning, everybody. Lovely to see you in person again. Welcome to today's results presentation, and to everybody in the room as well as everybody joining on the webcast. For anybody that doesn't know me, my name is Lisa Montague. I'm the CEO of Sanderson Design Group, formerly known as Walker Greenbank. With me today is my colleague, Mike Woodcock, who joined us in October and took over as CFO in November last year. I shall start with a summary, introduction, cover the makeup of revenues and then invite Mike to take you through financial detail before coming back to talk through the strategic highlights. We'll then both be open to any questions that you have. And our presentation today is being recorded, as I mentioned, as the webcast that will be available on the corporate website which is sandersondesign.group. So without further ado, I'll take you through a summary of our group and what we do. We design -- at Sanderson Design Group, we design, manufacture, wallpapers and fabrics. And we work with our partners to supply other interior products such as paint and finished goods. The group comprises 7 consumer-facing brands sold predominantly through the trade on a wholesale basis. These include Heritage brands, Morris & Co., Sanderson and Zoffany; contemporary brands, Clarke & Clarke, Scion and Harlequin; and our new B2C incubator brand, Archive by Sanderson Design. Our 2 factories are Standfast & Barracks, textiles printing mill in Lancaster and wallcovering specialist Anstey in Loughborough. We are international in our outlook, while the U.K. is our strongest market and export focus is in the U.S., Northern Europe and Japan. In summary, it was a strong recovery year from the COVID years establishing a new equilibrium to take us forward post pandemic. We grew the top line and significantly strengthened the shape and performance of the business. Revenues of GBP 112 million delivered adjusted profit before tax of 11% at GBP 12.5 million, generating cash of [ 4 ]. By market, the U.K. stabilized and our efforts to expand distribution in North America were well rewarded with an increase in the U.S. sales of 42%. Manufacturing has been very successful this year, with a new record for Standfast and both factories in demand as the desire for British manufacturing has strengthened following Brexit, and we have reorganized to take those opportunities going forward. Our digital policy continues with B2C launches and our trade resources digital hub increasing to around 60% now of the orders that we receive are received electronically. And what is a company without its people? Our teams have pulled together in the second challenging year of COVID-19, ensuring that we've continued safety measures even after the government relaxed them, finding new ways of working with heightened engagement and full commitment to our strategic goals, our Live Beautiful pledge, and I couldn't be more proud of what the team work has achieved. Thanks to all our progress made, we have paid an interim dividend of 0.75p per share and recommend a further 2.75 to bring the total for the year to 3.5p. It's the Board's intention to follow a progressive policy from here onwards. And now I'll share with you the makeup of our revenues before handing over to Mike. You'll notice that we're using a 2-year comparative to give you a clearer view, although it's not that clear. Hopefully, you can see in the presentation, to give you a clearer view of progress against pre-pandemic and COVID-impacted years. So firstly, sharing revenues by channel and the split of brands, licensing and manufacturing. As I mentioned, brands have returned sales to growth after a second year of COVID disruption and positive on a 2-year basis looking at constant currency. Licensing has remained strong, with a positive mix of core collaborations and new agreements that we're splitting out for you a bit further on. And manufacturing was the undisputable success of the year with third-party sales more than 30% up, signaling a general desire for onshoring post Brexit with increased volume driving profitability also compared to the prior year. So if we look by region. By region, North America turned in a record performance in its 35 years of our U.S. subsidiary with a 42% growth last year and 24% over the prior year in constant currency, thanks to initiatives taken to grow the distribution in this market. U.K. trade customers have found their feet again, and we're supporting them much more strongly to find their post-COVID equilibrium. Northern Europe has also recovered from the Brexit impact of last year. And just to remind everybody, last year's Northern Europe number also includes Russia and accounts for GBP 1.8 million of turnover in Russia in last year's number with about a 45% contribution as it's an agency commission basis. We closed the Moscow subsidiary in the prior year without significant impact, and we have stopped shipping to the region at the end of February this year. The rest of the world territory has been most impacted by the collapse of contract or hospitality business, which is yet to recover. So all in all, despite the various challenges of pandemic and Brexit, the strength of our brands, agility of our teams has carried us through to a good position. And following up on individual brand performance that we're sharing -- we shared at the interims and we're sharing here for the first time this year on a full year basis. Here, you can see that the largest volume is generated by Clarke & Clarke and Harlequin, our broad appeal modern brands, with Clarke & Clarke setting a new record in the U.S., reaching over $9 million of sales in the market. Frustratingly, the comp figures masked it because we had a change of distribution model, as you may recall. The highest growth is coming from heritage brands, Morris & Co. and Sanderson, responding to the clear trend towards a more decorative style. Anthology has been merged in Harlequin for the future, and Scion is now predominantly B2C brand through our franchise relationship and with a strong element of licensed products. Each brand now has its own voice and defined audience with marketing strategies continuing strongly. And to move on to manufacturing. Both factories, as mentioned, have enjoyed stellar performance this year. As you might recall, we print for most brands in the sector and the increased demand from them as well as new customers, indicates a strategic structural shift post Brexit towards U.K. supply, which we can expect to continue. Standfast and Anstey are both positioned as leading suppliers in the U.K. and all of our customers are expressing a desire to partner more strongly. As a result, we plan to continue to invest in new technology to increase productivity and thus also capacity. Investment in digital is planned as digital printing is more efficient, it's cleaner with less environmental impact supporting our ESG strategy. The share of digital has increased significantly and requires new technology to grow further, notably at Anstey and we'll see further progress this year. At Standfast, the new ERP system is being installed this year, which will give enhanced planning and reporting capability. So this is all a great opportunity for the future now that both manufacturers have full order books, thanks to their high design skills and quality integrity and the benefits of us being vertical with our own brands. Moving on to licensing. Licensing is an important income stream for the group. And we split it this time to show you the underlying core business, the impact of collaborations that tend to be apparel and short term as well as the impact of accelerated income due to the accounting standard. If you focus on the first column, here, we've compared underlying performance, which you can see has grown from GBP 4 million to GBP 5 million in the 2-year period. The partnership with NEXT this year contributed strongly, especially from women's wear, Morris & Co. collections under collaboration. And these continue through to the end of this year with autumn into '22 collections. This year, we're also pleased to have signed up 2 big international new partnerships with market-leading megacorporation, Sangetsu in Japan and with Williams-Sonoma in the U.S. tableware and kitchenware specialist, both for Morris & Co.. They'll both be launching collections in August and September this year and taking those to market. As well as PAIGE, the U.S. fashion brand that partnered with Sanderson, has worn by CEOs internationally. And now I'd like to hand over to Mike to cover for -- of the financial metrics. And I shall be back with you presently.

Thank you, Lisa. Good morning to everyone in the room. Happy to, I'm looking forward to presenting the results for the group for the first time as the new CFO. So we'll start this section by looking at the gross margin evolution. So the licensing income Lisa has just talked through contributes a 100% gross margin. So the focus of this slide is to highlight the 500 basis point improvement in the product margin versus both 2020 and 2021. The increase in volumes we've seen at both of our manufacturing sites have significantly improved our operational gearing, and it's been further boosted by continued shift towards higher-margin digital printing for both third-party and brands production, particularly at Standfast & Barracks, our fabric printing location. From a market perspective, Lisa has talked about the strong performance of the U.S., which is one of our higher-margin markets. And also from a brand mix standpoint, our heritage brands, Sanderson and Morris & Co., are those with the strongest pricing power, and their sales growth relative to the other brands within the portfolio has also boosted our overall margin performance. Moving on to look at the income statement now. Adjusted underlying profit before tax has ended FY '22 at GBP 12.5 million compared to GBP 7 million in '21 and GBP 7.4 million in 2020. This strong profit performance is driven by the sales and gross margin improvement we've already discussed and a continued focus on cost control. Distribution and selling expenses of GBP 25.1 million represented 22% of revenue in the year compared to 20% last year and 21% in 2020. The key reason for this increase, particularly in the first half of the year, were higher container and career costs that resulted from a combination of the impact of COVID-19 on the global supply chain model and Brexit, and courier costs, again related to Brexit, particularly with relation to our European distribution. Administration expenses grew to GBP 42.8 million, up from GBP 36.5 million in '21. Obviously, in the year, impacted by COVID, the business cut back on discretionary expenditure with significant reductions in marketing and travel or hiring freeze across the business. And that year, we also benefited from the U.K. government's [indiscernible]. So although many of these activities recommence as we progress throughout the year, the benefits of our restructuring and ongoing cost efficiency measures and tighter control are evident in the administration expenses are still GBP 3 million below the 2020 level. Included within that administration expense is a GBP 1.1 million restructuring charge related to the closure of our French subsidiary. Moving forward, we will operate our French business out of the U.K. That charge, though, is largely offset by 2 one-off credits arising from the forgiveness of a COVID-19 support loan in the U.S.A. and the release of a provision relating to a U.S. legal case. Turning now to look at the balance sheet. We ended the year with net assets of GBP 79.7 million, ,up from GBP 66.8 million in the prior year and GBP 64.8 million in 2020. Following advice received from our actuaries and our lawyers, we are half for the first time recording a GBP 2.6 million retirement benefit surplus that has arisen in the year largely as a result of changes in the actuarial assumptions used to value the schemes. Further down the balance sheet, moving on to working capital. Inventories increased by GBP 3.1 million compared to January '21, which reflects the combination of stock rebuild following supply chain issues arising out of COVID-19, along with investment to assure strong availability of bestsellers as we move into our key spring/summer '22 trading season. The reduction of over GBP 5 million though versus 2020 is evidence of the success of our SKU reduction program, in which we've already achieved our 5-year target set only in October 2019 to operate with 12,000 current SKUs of fabric and wallpaper across the 7 active brands. Movements in receivables and payables are largely linked to the volumes of sales and purchasing activity around the year-end, with any one of COVID-related factors unwinding over the course of the year. Therefore, the balance sheet position we see at January '22 is what we would consider to be a normal level of working capital for the business as we move forward. The group also ended the year with cash reserves of GBP 19.1 million. And in addition, we have an undrawn GBP 12.5 million credit facility with Barclays, which is not due for renewal until October 24. So from a cash flow perspective, the group generated GBP 4.2 million of free cash flow in the year. This compares with GBP 14 million in the prior year and GBP 3.1 million in 2020. But due to the unwind of various COVID-related positions, neither of these years are a representative comparison. The working capital movement of GBP 2.8 million that you see on the screen is largely explained by the increase in inventory previously discussed. And you can also clearly see the GBP 2.2 million of net contribution in cash that we made to the group's 2 defined benefit pension scheme. In the prior year, the group took advantage of HMRC's time to pay scheme and did not payments on account in respect of our corporation tax liability. Over the course of this year, we've now settled in full the liability of GBP 1.2 million that we had at the start of the year, and also made payments on account of GBP 2.6 million in respect of this year's charge. Capital expenditure in the year totaled GBP 2.1 million compared to GBP 1 million in the COVID-impacted year '21 and GBP 2.4 million the year before. A conservative approach was taken to capital expenditure in the early part of the year due to the continued uncertainty around the COVID situation. As a result, therefore, capital expenditure was slightly lower than planned as certain projects were deferred into FY '23. Although as Lisa has mentioned, we did commence with the implementation of a new ERP system at Standfast & Barracks and other small-scale capital expenditure projects. Moving forward, though, we would expect capital expenditure to be around the GBP 6 million to GBP 7 million per annum mark though as we step up our investment in both digital printing technology and other projects required to help us to meet our zero by '30. And then to wrap up from a finance perspective. As in previous presentations, we've distilled our financial performance down into 10 key financial indicators. These illustrate the significant improvement in the performance across all metrics, not only against the COVID-impacted prior year, but as Lisa mentioned earlier, the more representative FY '20. So the revenue of GBP 112 million is 1% ahead of the GBP 111 million achieved in 2020. But that GBP 1 million translates into a GBP 6 million improvement in profit before tax from GBP 4.4 million to GBP 10.4 million this year. Backing out any one-off factors, sees the adjusted underlying PBT increased from GBP 7.4 million or 6.6% of revenue to GBP 12.5 million or 11.1% of revenue this year and adjusted EPS similarly improved from 9.26p per share to 13.75p. Moving on now to the more balance sheet and cash focus KPIs. We see the capital expenditure that I've just talked about of GBP 2.1 million, GBP [ 300,000 ] lower than in 2020, although as discussed, we'd expect to see this rise moving forward. And we see inventory ending the year at GBP 22.7 million, GBP 5.1 million, again, lower than in 2020. The unwinding of the various COVID-19 impacts means that free cash flow was only GBP 1.1 million, up versus 2 years ago, but we still finished the year with GBP 19 million of cash versus only GBP 1.3 million pre pandemic. So to summarize, therefore, from a financial perspective, the results show a strong year of trading and cash generation which reflects both the receding impact of COVID-19 on the business and the commencement of the group delivering on its strategy for growth. And I'll now hand back to Lisa, who will provide an update on our performance versus our longer-term strategy.

Thank you, Mike, and thank you also for a great start in the business. Most of you will be familiar with our strategic framework that we set out in October 2019 and have continued to update regularly since. Our mission, our promise to bring the beautiful into people's homes and lives and our values to do that intrepidly, imaginatively and with respect. Our 2 ambitious goals for the Live Beautiful campaign and program is to deliver net carbon zero by 2030 and to be the industry's employer of choice. We'll come back with the interims to show you our progress and our road map in more detail on carbon reduction. And there's a full page pullout in the upcoming annual report with a lot more detail of the work streams. Employer of Choice centers around culture, engagement, and being the preferred destination for creative talent. I'm going to summarize a few of the initiatives that we've taken in the year ending January '22. All of the efficiencies, measures and controls that Mike mentioned are delivering results and have provided us with a stronger platform for future growth. We have managed to clean the portfolio of products, which was a key element of the strategy and without denting the top line, which was very important, as I'll demonstrate further in a later slide where we talk about SKU [indiscernible]. Engagement has improved, and the team is on board with the strategy enjoying seeing the results. We're very focused on giving support to our trade customers as they come out of the pandemic to be a partner for the future. And at the same time, we're experimenting with innovation projects to engage consumer interest in our brands. So I'm going to share with you next where we stand against the milestones that we set out. I don't expect you to be able to read all of these. But do just check the first 2 years of columns that are all in green are ticked off as the many tasks that we set forth by which you could measure our progress and are largely completed with just a couple at the bottom of the FY '22 that have moved across into FY '23 for reasons of being pandemic-constrained. I mentioned contract business and the digital printer, which were both not possible due to the structure of the market. In full year '23 and '24, we stick with our original goals, and we'll update that when we come back in October, with validation at the half year point and a new set of ambitions for '25 and beyond. So now I'm going to share with you a couple of images that I hope you haven't missed through the year. Here is the lovely Maro Itoje in our Very Sanderson campaign. Due to strong impact, we've resigned him for this year. The Archive creative content for this brand really does support our value set of being intrepid, with bold maximalist designs to appeal to a digitally native audience on our own B2C platform. And Harlequin's bold OWN THE ROOM campaign scored high viewing numbers with our first-ever TV advertising in the autumn of last year that we plan to follow up again this year due to its success. So taking a look now at the overall marketing KPIs and sharing some key metrics here. It's encouraging to see that the number of brand fans have continued to grow. Editorial coverage increases and patent book costs coming down as our digital previews and digital design books have become established. Brand fans is measured by Instagram followers here. And those are organic followers, not at all bought, growing from 382,000 to over 0.5 million in the year. Editorial coverage, measured on a straight-line basis of advertising rate card equivalent, grew from 17 million to 22 million, way ahead of our goal that we set of 20 million to the team. And trade hub users grew by 100%, which, as I mentioned, means that we now receive 60% of orders electronically with 1,800 customers using the hub each day, up from 900 on average last year. Consumer website daily users has also increased by 44% to 7,500 people visiting our brand sites each day. And you recall, we set those brand sites up during the COVID period. All the while making this progress, reducing our patent book costs to earn our media budget. And as we have said, brand sales are back to growth, with our top 10 customers continuing to grow as we support the trade and also explore new partnerships. We'll have a zoom into the U.S. on the following slide. And we're experimenting on new channels in both the U.K. and the U.S. to attract new consumers to our brands. In the U.S., we talked previously about [ boots ] on the ground and our desire to increase distribution in this vast territory. I'm really pleased that we've now reached a total network of 63 representative showrooms across the territory. That was 33 last year and only 12 when we first started this conversation. Two of those are directly operated in New York and Chicago, and the others are all agent commission partnerships. And as you can see, it's yielding results that we would expect to continue. I wanted to share with you specifically now this Morris & Co. store opened just last week in Harrods, on the third floor home department of the Knightsbridge flagship store. We are very pleased to open the first Morris shop since 1917, which was when the last one closed more than 100 years ago. We decided it was time to show the authority in all things Morris. And this was a concept I'm really pleased to share was proposed by our Sanderson Futures team of high potential who we asked to bring new ideas to the leadership group. Archive also launched, as you know, as a B2C project in September last year, partnering exclusively with Selfridges for the first 6 months, and that brand is now going to go into a wider platform of selective distribution as it grows in -- following this year. As I mentioned, my favorite subject is SKU reduction or has been. We've achieved the goal of reducing from 20,000 to 12,000 SKUs in the product portfolio, far ahead of our 5-year plan. So just in 3 years. Most importantly, we've done that without reducing sales on the top line. So a reduction of 30% of the offer, and that's live SKUs of wallpaper and fabric, just to be clear, has increased sales by SKU by 66%. So that's illustrated in this rather beautiful graph, which I'm sure you will all enjoy. So now we'll be a bit more disciplined going forward and finessed this model and expect broadly to keep this level of new launches as we go forward with sort of a one-in-one-out basis broadly speaking. And manufacturing, as stated, has become a really important part of the business, both as a supplier to our house brands taking all the benefits of being vertically integrated and also as a third-party supply business to all most top end interior brands, both in the U.K., U.S. and some Europeans. Sorry. Shall use clicker one day properly. And progress with people, culture and engagement has also been very encouraging. On the right there, you can see Flora, who joined us from new designers. She won an internship as an award in 2019, has since been promoted twice to junior designer, then covered maternity leave and is now in a full designer role, which we're really proud of being able to promote creative talent through the business that rapidly. We've also worked with QEST Scholar, Rachel Spelling, who's done a beautiful design having followed a chinoiserie master that we sponsored her through and has launched designed for Sanderson recently. And as I mentioned, the Sanderson Futures team project is in its second phase of developing high potential through the business, where that is a program combination of education and training. So to summarize, brands, manufacturing and licensing traction was all strong and has continued into this year. We're very much aware of the headwinds of inflationary pressure, cost increases that affect both inputs into our business and consumer confidence. The strength of our brands, our own manufacturing and our vertical business helps us mitigate impacts. So we do believe that we're in a better position than many, but we are constantly reviewing pressures on margins and looking at pricing on through -- passing on through pricing as necessary. So in summary, as we carefully navigate another potentially challenging year, the Board remains confident in our strategy in the results that it's yielding, and we look forward to seeing you again with an update shortly. So I just wanted to thank you for listening and for all your support. I'd like to take the opportunity also to thank our Board, our Chairman and nonexecutive directors for their support through the year. And to each of our 638 employees as we stand today at Sanderson Design Group for their valuable contribution, each and every one of them. So please do now feel free to ask us any questions.

Just a couple of questions. So one of your FY '23 targets is to obviously grow in all brands. And I was just wondering if you could talk a little bit more about how you -- I mean the sick child in the room obviously been Harlequin, where you sort of see that going? And whether you are disappointed with that performance on a sort of 2-year basis and whether you can turn that around. And then secondly, on the gross margin side, you mentioned the product gross margin, and you talked about the operational gearing effect between them this year and last year. But over 2 years, that's when sales are more level and the mix was pretty similar between manufacturing and brands. There's still been a pretty substantial increase. And I was wondering how much of that is really all the good work you've been doing on reduction in SKUs and digital printing, you could sort of bridge that for us a bit more, give us a bit more color on that? That would be great.

Okay, thank you. Ben, I'll take the Harlequin question and then would you mind picking up on the group [indiscernible]. I'm really optimistic about Harlequin as we've done a lot of work this year. I think in the numbers, you can see that Anthology was integrated. So we -- the prior year numbers, have got the full Anthology turnover that's gone through, although we've reduced the portfolio of that product within the collection to less than half. So the numbers are slightly skewed. However, there's a great opportunity for more traction in Harlequin as a brand, I would say, going forward. And that's predominantly thanks to the repositioning of the brand this year and all the work that's been done to support that through color, concept of color, the white paper that was produced by scientists in Leeds University, Professor Stephen Westland, to validate the consumer responses and our individual responses both emotionally and physically to color and how everybody responds differently to that and profiling them through the collection for different color profiles. We have launched a color quiz on the website that takes that forward. And we've had a color panel with some TVs, makeover celebrities with the professor and with our design team talking about it. This is something that we'll take forward. I think it's quite powerful. It could, of course, apply in essence, to any brand, but Harlequin is really championing this solution to see how people can decorate in a style that makes them feel good and contribute to that your home being happy place, bringing the beautiful into people's lives and homes. So this work is something that's just started really in the second half of the year. Our first color panel, I think, was in October, and it's something that we'll take forward quite strongly this year with our top customers. So John Lewis, for instance, and brewers are both working with us on initiatives and activation for the year that we're in. So I hope that I'll be able to come back and show you really great traction in that brand going forward. Mike?

Okay. So I think on margin, you hit upon the key drivers they've been. I mean I think the digital mix within those factors has gone from, what, 32% 2 years ago to 44% and continues in that direction. And digital for us, it is clearly more profitable. And more flexible in terms of manufacture as well in terms of you can run the digital lines 24/7 with minimal staffing on overnight runs, et cetera. So the operational leverage from digital is significant to us. And obviously, there's a volume play there as well. The factories are trading about 17% in terms of the volumes above 2 years ago. And again, that's dropping straight through to the bottom line. And as Lisa said, I think focusing on 12,000 SKUs, you see the benefit coming through the margin line because we're focused on bestsellers, there's less requirement discount, et cetera. But I think also, you start to see the benefit and we will see the benefit going forward in terms of the inventory in terms of we can back to the bestsellers and we're not holding large stocks of obsolete or very slow meeting SKUs. And I think that's where the real benefit for the business will come moving forward.

It's Matthew McEachran from Singer's. A couple of questions just around price, if that's okay. I mean you're seeing it at both ends. You're looking at price yourself in terms of your brands out in the market versus the peer group, but you're also passing price increases on to your manufacturing customers. We start with the latter, roughly what level of price increase have you been passing on, on average? Obviously, you don't kind of go into any individuals, but on average, those manufacturing customers and when did that start? Or has it been in phases? And then more generally, as you look out into the market, some of your brand peers, what's your sense in terms of how much price inflation they've been putting out into the market? That's the first area.

Well, we've always put through price increases on the first of February, it's sort of a standard in the industry. And generally speaking, over the last few years, those have run around between 3% to 5% on average, 5% in recent years. This year, the increase that we put through on average was around 9%. So already taking into accounts all of the cost pressures that we were seeing and anticipating that those would continue. There's a bit of a difference between the brands because we also, at the same time, have done a piece of work around Morris, in particular and the price architecture that just needed to be more consistent across similar designs. And so that was a greater increase, particularly for that brand and has established a much more aligned to the price -- to the brand positioning in the market, no more than that in terms of having made that adjustment. And what we are seeing, however, is continued increases coming through supply predominantly in base cloths and raw material substrates. And so that's a combination of clearly, energy prices, but also there are things like the linen crop famously failed, and we're having trouble sourcing some of the base cloths. Which has not caused an issue or any break in production at all thus far, as the team, I think, had very expertly managed between different suppliers. And what we were concerned about is a broad supply pace previously is proving that to be quite an advantage. So we are, at the moment, keeping a very careful watching brief and anticipating that we may need to go back to the market with further increases, should this continue? And considering perhaps to look and review half yearly, so that we don't have to put through bigger jumps and shock the market in any way on an annual basis. Does that answer your question?

That's very helpful in terms of what you've been doing with your own brands. So -- and when you look out into the market and compare your own price increases to what you're seeing elsewhere, do you think you're benefiting by not being -- not having to put prices up as much? Are you seeing more significant price increases than what you've been pushing through?

We're very competitive still. Yes. So I'd say that there's definitely some other companies are having to put through more than us. We're not seeing any significant differences. We are also a big supplier for many. We are putting through price increases that are obviously the same for third-party brands as for our house brands.

Okay. And then just a couple of others. Just in terms of the Russian suspension of trade, would it be fair to say that was quite skewed to a couple of brands, thinking about Zoffany and Morris & Co. Is there -- or is it broadly spread across the brands?

It's fairly spread actually. Russia is a particularly strong market for wallpaper and paint. And there are 2 big customers and then the portfolio of smaller ones. So there's a big customer base in Moscow and a big customer base in St. Petersburg. And so those are the -- driving the -- have been driving the distribution in Russia. But everything is suspended for the time being.

And then just going back to your medium-term targets. One of them was double-digit contract growth in the current year. And I'm thinking -- I mean contract markets haven't necessarily reopened, but actually maybe the comp is so soft that you're going to just absolutely smash it. Could you just give us a little bit of flavor around contract, please?

We'll see. It's -- yes, the base had dropped down significantly. And I was thankful at the time that contract was not a bigger part of our business. Actually, relative to the competition, it's a smaller part of our business. And we're watching it to see it come back. We're not yet seeing major refurbishment projects across either hospitality, hotels, restaurants, marine, with cruise ships or indeed health care that one would imagine in this post-COVID world will come. There's a little bit more activity starting in the U.S. for sure than we're seeing in Europe.

Yes. So you're probably online to take your target, but the base is so low that it's not going to make a meaningful difference, you don't think in the current year?

I don't think it will change the others.

This is Gavin [ Laidlaw ], Stockwatch. Just looking at the U.K. and the U.S. In the U.K., you mentioned Harrods and Selfridges. I'm just wondering as to where your -- what your plans are with NEXT and segmenting the -- or the people who sell your product? And how much further can you take things out in America? Has the footprint over there still got your legs?

Yes, Gavin. Generally speaking, our distribution in the U.K., as you probably are aware, results predominantly around 6,000 wholesale customers. So it's a very broad network in the U.K. Within the top 10 would be the department store group, John Lewis, [ very strong home ]. Brewers, which is an independent business, it also include their own wallpaperdirect, which is a significant partner of ours and various online retailers and high street retailers. And many, many, many independent retailers that are either design or work room-driven making products out of the fabric. Our initiatives with the department stores of Selfridges and Harrods are completely new for us. Previously, we may have sold finished goods. Bedding, for instance, into the Harrods bedding department and little other activity. The initiative with Selfridges was very specifically around the Archive brand, as Selfridges home business is not hugely established and perceived by them as an opportunity. And at the same time, our opportunity was to reach a new audience of digital native as the Selfridges business is very strong also online. And so that's been a really interesting experiment. The sales results online have been very encouraging. The following that we've generated for that brand is also very encouraging, as I probably should mention. It's still an investment at this point because developing a new brand to a new audience on a new channel just takes time. So we're watching carefully how that develops through this year. Harrods is really exciting, as in that's one iconic British brand with another iconic British brand in Morris, with a history together that's interesting. And they're very excited. We're very excited. Again, it's an experiment. We, as a group, have not retailed before, although I have a little bit, and so has our Commercial Director. And we've worked together before in retail project. So we're confident. I'd love you all to go and have a look, if you can. To find it's quite tricky because navigating that floor is in itself tricky. But if you follow the size to customer service because we haven't yet got a Morris & Co. sign up, you'll find it. And it's a lovely shop that shows, as I said, design services that there's a corner for wallpaper and fabric, and we'll work closely with Harrod's design services as well, which has a significant business in decorating as well as finished goods. So there's a good bedding representation there, for instance, as well as pickup items of made books, our partnership products and some new ones that we've added as well to make the selection more appealing. So really taking the authority in Morris with that full breadth of products. The NEXT collaboration has been fantastic. So NEXT, as you will have observed, has transitioned quite swiftly and successfully, forming an own brand retail business into carrying also partnership with branded products. And in homewares, our first initiative together was with Scion. And Scion was licensed and launched Christmas before last mainly across nightwear, which is a very successful category for NEXT, and adults and children. And then we started with Morris with them in spring/summer last year launching Morris predominantly for womenswear, which is where all the tractions come. That was a collection collaboration agreement for spring/summer/autumn/winter last year and spring/summer/autumn/winter this year and will run down at the end of this year. With the apparel collaborations, we tend to have short-term agreements. So you might recall, 3, 4 years ago, just before I started was the H&M collaboration. That was quite in and out within a couple of months. This is 2 years. But then it will come out and leave room for other collaborations fashioned by as nature moves on, and we need to continue to move that forward. We are working with NEXT, as you would have seen, we've announced with other licensed partnerships, so moving with Morris across homewares, which we're also excited about. And there's plenty of other exciting opportunities in the pipeline that we're discussing. In the U.S., the structure of the market is really very different. So the U.S. is not led by high street retailers. It's very much led by designers. So interior designers working in their territory with -- directly with clients. It's not the same at all. And therefore, we felt it was really important to have this distribution network to reach the designers in their territories by, as we said, putting boots on the ground with the phrase we use, really expanding your network across. Our 12 [indiscernible] and [ road wraps ] just could not cover the territory adequately. And we've learned also a lot by talking to those people, by talking and sharing with the new team and also by working with Cravit, who's a market leader in distribution and distributes the Clarke & Clarke brand. And so now I think with the 63 showrooms, we've got really good coverage of the territory. And we're focusing very much on helping our team from here and supporting them to deliver the potential of the business that I believe absolutely can be unlocked within the next couple of years. Long answer.

We have no further questions in the room. So we've got one question from the webcast. [Operator Instructions] Question is from Doug Drake from Phoenix. What return do you look for on the capital invested in the business?

Can you take it?

I mean I think, look, most of our investments or the significant investments are going to be long term in nature. So I think we look at them each on an individual basis rather than having a detailed preconceived idea as to what return they should be generating. I think also with things like digital printing technology, there's obviously a requirement to invest to make sure we are keeping up with the competition and ahead of the market and protecting what we have. So I think it's more nuanced than sitting and looking in a sort of more traditional model and saying, okay, we'll look for a payback period in 2 or 3 years. But look, every single capital project we go through go through a detailed analysis looking at the return on investment, looking at the efficiency it will drive and looking at the implications of not doing it as well.

We've got a further question from Greg Ward from Trafalgar Capital Management. Thank you for the presentation. Congratulations on the results. Could you kindly update us on your current energy hedging position?

Do you want me to take it.

Yes.

Okay. So -- and I think we've talked about this previously. From an electricity point of view, we are hedged up until the second half of this financial year. From a gas point of view, we are hedged through until October 2023. So obviously, we're not going to be immune, and we are a significant consumer of both gas and electricity, particularly in the factories, particularly at Standfast because, again, a lot of the processes there do require heat. But from -- at some point, and we discussed this when we're looking at price rises, but at some point, these contracts will unwind, and we will need to enter into new contracts, and we will need to make sure that we're passing those increases on to our customer base. But at the moment, certainly for the year ahead, we are reasonably unexposed to the current energy price fluctuations.

Super. Thank you. We've got no further questions from the webcast. So Lisa, I'll pass back to you for closing remarks.

Okay. Well, thank you very much. Thank you for hosting us today and for all the technological support. Thank you to you all for joining us. And I hope we've covered everything adequately, but please do reach out to us if you have any further questions that occur to you afterwards. So thank you very much, and have a good day.