REG - Quarto Group Inc - Final Results
31/03/2023 10:16
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RNS Number : 9413U Quarto Group Inc 31 March 2023
The Quarto Group Inc.
("Quarto", the "Company", or the "Group")
Final Results for the Year Ended 31 December 2022
The Quarto Group Inc. (LSE: QRT), the leading global illustrated book
publisher, announces its audited results for the year ended 31 December 2022.
Results ($m) 2022 2021
Revenue 141.0 151.5
Adjusted operating profit(1) 21.3 16.0
Exceptional items 0.8 -
Operating profit 22.1 16.0
Adjusted profit before tax(1) 20.1 14.2
Profit before tax 20.9 14.2
Profit for the year 16.6 9.9
Adjusted diluted earnings per share from continuing operations(2) 37.8 24.3
Basic earnings per share from continuing operations 40.6 24.3
Net debt(3) 0.6 5.5
1 Adjusted items excludes the amortization of acquired intangibles and
exceptional items.
2 There were exceptional items of $0.8m but no dilutive share options nor
amortization of acquired intangibles in 2022.
3 Net debt excludes lease liabilities relating to right of use assets (IFRS
16).
Operating Highlights
· Clear focus on maximizing the Group's core strengths, retaining a
disciplined business model and developing future growth opportunities
· Increase in Adjusted Operating Profit of 33% due to tight cost
control, lower pre-publication and amortization costs
· Profit Before Tax up 47% at $20.9m
· Revenue of custom publishing channel of $14.2m, up 33% year on
year
· Net debt down by $4.9m to $0.6m
· New Shoe Press launched in 2022 with 25 titles repurposing
existing IP to compete at a value price point. Short-run printing allows low
inventory level responding to demand
· Kaddo, a new gift imprint, created with the first products
publishing in autumn 2023. Product lines span both the adult and children's
market consisting of games, card decks and jigsaw puzzles many of which are
based on existing book content
· We are also targeting growth in one of the largest sectors of the
book market and will be launching a new imprint focused on food and wellness
· SmartLab, our Toy business, was sold to Educational Development
Corp. to focus on our core publishing activities
Commenting on the results, Group Chief Executive Officer, Alison Goff said:
During 2022 most markets around the world reopened and we saw a return to
buying in physical bookstores with a corresponding reduction in our online
sales.
With the economic pressures squeezing consumer spending the overall book
market contracted slightly in 2022 with non-fiction sales showing one of the
biggest declines, down by c. 7%. Notwithstanding the sale of SmartLab during
2022, Quarto outperformed the market delivering increased market share in all
our core categories.
The company ended the year with sales of $141.0m down from prior year by 7%
(2021: $151.5m); adjusted operating profit increased by 33% to $21.3m (2021:
$16.0m); profit before tax increased to $20.9m (2021: $14.2m) and the strength
of the balance sheet improved to $67.3m (2021: $53.2m). The group ended the
year with net debt down 89% at $0.6m (2021: $5.5m). Results were driven by
nimble publishing maximizing opportunities which arose, strong cost-control
and reduced finance costs.
The balance of our business remains broadly 69% of revenue being derived from
adult titles and 31% from children. New books accounted for 42% of total sales
and the backlist continues to deliver strong sales delivering 58% of our
revenue.
=====
The Legal Identifier of the Company is 549300BJ2WPX3QUATW58.
For further information, please contact:
The Quarto Group Inc.
Michael Clarke, Company Secretary
+44 20
7700 6700
About The Quarto Group
The Quarto Group (LSE: QRT) creates a wide variety of books and intellectual
property products, with a mission to inspire life's experiences. Produced in
many formats for adults, children and the whole family, our products are
visually appealing, information rich and stimulating.
The Group encompasses a diverse portfolio of imprints and businesses that are
creatively independent and expert in developing long-lasting content across
specific niches of interest. Quarto sells and distributes its products
globally in over 50 countries and 40 languages, through a variety of sales
channels, partnerships and routes to market.
Quarto employs c.300 talented people in the US and the UK. The group was
founded in London in 1976. It is domiciled in the US and listed on the London
Stock Exchange.
For more information, visit quarto.com or follow us on Twitter at
@TheQuartoGroup.
Business Overview
During 2022 most markets around the world reopened and we saw a return to
buying in physical bookstores with a corresponding reduction in our online
sales.
The company ended the year with sales of $141.0m down from prior year by 7%
(2021: $151.5m); adjusted operating profit increased by 33% to $21.3m (2021:
$16.0m); profit before tax increased to $20.9m (2021: $14.2m) and the strength
of the balance sheet improved to $67.3m (2021: $53.2m). The group ended the
year with net debt down 89% at $0.6m (2021: $5.5m). Results were driven by
nimble publishing maximizing opportunities which arose, strong cost-control
and reduced finance costs.
With the economic pressures squeezing consumer spending the overall book
market contracted slightly in 2022 with non-fiction sales showing one of the
biggest declines, down by c. 7%. Notwithstanding the sale of SmartLab during
2022, Quarto outperformed the market delivering increased market share in all
our core categories.
The balance of our business remains in favour of adult publishing with 69% of
our revenue derived from adult titles. New titles accounted for 42% of sales
and our strong back catalog continues to perform well delivering 58% of
overall revenue. Our US publishing operation and our UK publishing drive
broadly equal shares of our overall revenue.
Our most valuable series Little People Big Dreams continues to grow and we
will publish the 100th title in this series in 2023. This series delivered
$8.3m revenue in the year. Another valuable property in our children's
publishing the Story Orchestra series delivered $2.7m in the year from just 7
titles.
During the year we ceased offering sales services to other publishers and
exited a non-core business with the sale of SmartLab.
Key Strategies
PUBLISHING
Quarto's publishing remains focused on key categories: Cookery, Home and
Garden, Art and Craft, Children's, Reference and Wellbeing. These sectors
remain strong internationally. Each of our imprints has a distinct focus and
develops new titles aiming to grow our market share in targeted categories. We
also make extensive use of our backlist where existing content may be
repurposed to create new products.
Highlights of 2022
· Quarto kids is the #1 publisher of children's general non-fiction in the
UK
· Best-selling author of Little People Big Dreams - Maria Isabel Sanchez
Vegara - is the #2 non-fiction children's author in the UK
· McDonald's Happy Meal program will put Little People Big Dreams books
into the hands of 40 million children around the world
· Strong growth in the Manga and Anime market where Quarto has built
significant market share
· New range of graphic novels produced in partnership with Saturday AM
· Beautiful Boards: 50 amazing snack boards for any occasion continues to
sell strongly - over 200k copies and $2.5m revenue in the year - some 3 years
after publication
· Custom publishing deal with Pokemon creating 4 titles which delivered
$1.5m in the year
· Speed to market an important factor with Wordle Challenge created and
delivered within 8 weeks
· Start-up of a new gift imprint which will launch in 2023 producing
puzzles, games and related products from existing content
· Timely publication of Little People Big Dreams: Queen Elizabeth selling
over 175k copies
· New cookery and health imprint to launch in 2023 expanding our reach into
one of the largest categories in non-fiction publishing
SALES PERFORMANCE
One of Quarto's great strengths is our foreign language co-edition sales team
who delivered a strong performance in 2022 despite some challenging
international situations. Trade with Russia and Ukraine was halted and
persistent lockdowns in China severely impacted that market. All other foreign
language markets delivered growth. Reprints of existing titles were 5% up on
prior year and core series continued to perform well. We also saw a
resurgence in sales of reference titles which had been reduced during the
pandemic in favour of practical titles.
Our international sales team began travelling again in 2022 with bookfairs and
in-person meetings back on the agenda. Overall these sales were 6% down on
prior year but with mixed results by region. South East Asia delivered growth
+14% and the Middle East +8% accounting for over $500k for the first time.
Sales to Europe held steady but Australia and China were both down -7% and
-34% respectively.
UK sales were 2% down on 2021 with new titles performing well but backlist
sales $2.3m down from the pandemic peak which was driven by lockdown
hobbyists. The reopening of physical bookstores saw our field sales reps
deliver over £1m for the first time in 3 years.
US sales were down 11% on prior year with both Amazon and the main bookstore
chain, Barnes & Noble, showing much slower ordering patterns. However we
saw a marked increase (+17%) in our sales through independent bookstores as
customers returned to stores.
Our Chartwell division targets the value end of the market creating books
primarily from existing content. Books are sold non-returnable. This
division had an outstanding year delivering sales significantly ahead of
budget and 32% up on the previous year.
OPERATIONS
During the year we continued our development of systems and processes to
improve our operational efficiency. Our goal is to be free of reliance on 3rd
party systems by 2024.
POST COVID WORKING
During 2022 we saw staff returning to our offices both in the UK and US. We
now operate a blended working model. This ongoing flexibility has become an
important factor in the workplace. We do however firmly believe that in-person
collaboration is vital to our creative business and essential to team-building
and staff morale.
SUPPLY CHAIN
Disruptions to the supply chain continued through much of 2022 with longer
than usual shipping times resulting from strikes and port disruptions. To
mitigate the impact of these our operations team remained nimble switching
onward shipping to trucks rather than rail when necessary and putting in place
local printings. Whilst these measures incurred some extra costs there were
significant benefits in maintaining supply to the market. In Q4 we saw much
improved freight prices and improved shipping times. We believe the market has
now stabilized and we do not anticipate a return to the volatility of 2021 and
2022.
STRATEGY
Quarto's strategic goals in the short to medium term will be to continue to
drive organic growth through its publishing and we will launch 2 new imprints
in 2023. We will also look at acquiring other related businesses where we
believe they can be leveraged across our existing operations and provide a
good strategic fit.
VIABILITY STATEMENT
In accordance with Provision 31 of the 2018 revision of the UK Corporate
Governance Code, the Directors assessed the prospects of the Group over both a
going concern period to 31 March 2024 and a viability period to 31 December
2025. The going concern period has a greater level of certainty and was
therefore, used to set budgets for all our businesses which culminated in the
approval of a Group budget by the Board. The Directors have determined that
the three-year period is an appropriate term over which to provide its
viability statement, being aligned with both the publishing program cycle and
the long-term incentives offered to Executive Directors and certain senior
management.
The Directors have considered the underlying robustness of the Group's
business model, products and its recent trading performance, cash flows and
key performance indicators. They have also reviewed the cash forecasts
prepared for the three years ending 31 December 2025, which comprise a
detailed cash forecast for the period ending 31 December 2023 based on the
budget for that year and standard growth assumptions for revenue and costs for
the years ending 31 December 2024 and 2025. This is to satisfy themselves of
the going concern assumption used in preparing the financial statements and
the Group's viability over a three-year period ending on 31 December 2025. As
part of this work, the model was sensitized initially by an 8% reduction in
revenue to ensure headroom within the covenants. This is deemed as a
plausible scenario, given in 2022 revenue dropped 7% year on year. Management
performed a reverse stress test to assess the point in which the banking
covenants were breached. This occurred at a reduction in revenue of 13%. It is
considered unlikely that such a reduction of revenue would occur, given, sales
dropped 7% in 2022 and also dropped 7% during 2020.
In February 2021, the Group renewed its bank facilities, which run until July
2024. Management do not foresee any issues with regards to the repayment of
loans or longer-term viability of the Company. In the 3 year model we have
shown that the business is profitable and therefore capable of repaying the
bank loans in line with the facility agreements of $2.7m. We continue to
receive support from the banks. In carrying out their analysis of viability,
the Directors took account of the Group's projected profits and cash flows and
its banking facilities and covenants.
In addition to the agreement to the facility, 1010 Printing Limited (a
subsidiary of the Lion Rock Group Limited) and C.K. Lau extended the original
$13m unsecured and subordinated loans to the Group (entered into on 31 October
2018) on identical terms and on normal commercial terms. Furthermore, 1010
Printing Limited agreed to provide a further $10m unsecured and subordinated
loan to the Company on normal commercial terms. Whilst these unsecured and
subordinated loans were repayable by 31 August 2024, the loan of $13m to C.K.
Lau was fully repaid including interest at 3.75% during 2022. A repayment of
$2m was also made including interest at 4% to 1010 Printing Limited during the
year, reducing the balance to $8m. In the 3 year forecast we have shown that
the business is profitable and therefore capable of repaying the remainder of
the subordinated loans as per the agreements. The forecast also allows for the
repayment of the remaining $8m subordinated loan and interest in Q1 2023.
Approval for these specific subordinated loan repayments was agreed by the
banks and payment was made in Q1 2023. We continue to receive support from
1010 Printing Limited.
The Directors also took account of the principal risks and uncertainties
facing the business referred in the annual report. The review focused on the
occurrence of severe but plausible scenarios in respect of the principal risks
and considered the potential of these scenarios to threaten viability.
The key principal risk that the business faces is a downturn caused by a
global recession. The financial impact of this downturn has been quantified to
illustrate the Group's ability to manage the impact on liquidity and
covenants, with sensitivity analysis on the key revenue growth assumptions and
the effectiveness of available mitigating actions. In considering this
analysis, the Directors took account of the mitigating actions that had been
previously taken. These actions included reductions in investment in
pre-publication costs, print volumes, staffing levels and other variable
costs.
Based on the above indications, after taking into account the downside
scenario projections, the Directors strongly believe have a reasonable
expectation that the Group has adequate resources to continue in operation and
meet its liabilities throughout the viability period to 31 December 2025.
OUTLOOK
Quarto remains in a good financial position with a strong pipeline of new
title publishing for 2023 and beyond. Our large back catalog is a significant
strength and continues to perform well. We feel confident in our ability to
navigate the challenging market conditions expected of 2023 and in the broad
appeal of our books.
Our people culture has been a focus in 2022 and will remain so during 2023.
Attracting and retaining high-caliber staff is vital for the long-term health
of the business.
We remain confident and focused on delivering a sustainable, profitable
business for the future.
THE QUARTO GROUP, INC.
Condensed Consolidated Income Statement
For the year ended 31 December 2022
Note Year ended Year ended
31 December 2022 31 December 2021
$000 $000
Continuing operations
Revenue 2 141,017 151,483
Cost of sales (87,319) (103,897)
Gross profit 53,698 47,586
Distribution costs (7,582) (8,439)
Impairment of financial assets (69) (874)
Administrative expenses (24,723) (22,314)
Operating profit before amortization of acquired intangibles and exceptional 21,324 15,959
items
Amortization of acquired intangibles - (7)
Exceptional items 3 774 -
Operating profit 2 22,098 15,952
Finance costs 4 (1,213) (1,796)
Profit before tax 20,885 14,156
Tax 5 (4,279) (4,230)
Profit for the year 16,606 9,926
Attributable to:
Owners of the parent 16,606 9,926
Earnings per share (cents)
From continuing operations
Basic 6 40.6 24.3
Diluted 6 40.6 24.3
THE QUARTO GROUP, INC.
Condensed Consolidated Statement of Comprehensive Income
For the year ended 31 December 2022
Year ended
Year ended 31 December 2021
31 December 2022
$000
$000
Profit for the year 16,606 9,926
Items that may be reclassified to profit or loss
Foreign exchange translation differences (2,475) (506)
Tax relating to items that may be reclassified to profit or loss - 66
Total other comprehensive income (2,475) (440)
Total comprehensive income for the year net of tax 14,131 9,486
Attributable to:
Owners of the parent 14,131 9,486
THE QUARTO GROUP, INC.
Condensed Consolidated Balance Sheet
At 31 December 2022
Note 31 December 2022
31 December 2021
$000
$000
Non-current assets
Goodwill 7 18,622 19,286
Other intangible assets 1 51
Property, plant and equipment 7,677 5,181
Intangible assets: Pre-publication costs 8 25,473 29,941
Deferred tax assets 1,835 2,436
Total non-current assets 53,608 56,895
Current assets
Inventories 21,826 20,393
Trade and other receivables 40,122 51,242
Cash and cash equivalents 13,290 28,432
Total current assets 75,238 100,067
Total assets 128,846 156,962
Current liabilities
Short term borrowings (4,636) (5,438)
Trade and other payables (33,869) (53,789)
Lease liabilities (944) (1,363)
Tax payable (3,295) (7,467)
Total current liabilities (42,744) (68,057)
Non-current liabilities
Long term borrowings (9,301) (28,508)
Deferred tax liabilities (2,798) (3,130)
Tax payable (386) (386)
Lease liabilities (6,277) (3,672)
Total non-current liabilities (18,762) (35,696)
Total liabilities (61,506) (103,753)
Net assets 67,340 53,209
Equity
Share capital 4,089 4,089
Paid in surplus 48,701 48,701
Retained earnings and other reserves 14,550 419
Total equity 67,340 53,209
THE QUARTO GROUP, INC.
Condensed Consolidated Statement of Changes in Equity
For the year ended 31 December 2022
Share capital Paid in surplus Translation Retained earnings Equity attributable to owners of the parent
reserve
$000 $000 $000 $000 $000
Balance at 1 January 2021 4,089 48,701 (5,607) (3,470) 43,713
Profit for the year - - - 9,926 9,926
Foreign exchange translation differences - - (506) - (506)
Tax relating to items that may be reclassified to profit or loss - - 66 - 66
Total comprehensive income for the year - - (440) 9,926 9,486
Share based payments credit - - - 10 10
Balance at 31 December 2021 4,089 48,701 (6,047) 6,466 53,209
Profit for the year - - - 16,606 16,606
Foreign exchange translation differences - - (2,475) - (2,475)
Tax relating to items that may be reclassified to profit or loss - - - - -
Total comprehensive income for the year - - (2,475) 16,606 14,131
Share based payments credit - - - - -
Balance at 31 December 2022 4,089 48,701 (8,522) 23,072 67,340
THE QUARTO GROUP, INC.
Condensed Consolidated Cash Flow Statement
For the year ended 31 December 2022
Year ended Year ended
Note 31 December 2022 31 December 2021
$000 $000
Profit for the year 16,606 9,926
Adjustments for:
Net finance costs 4 1,213 1,796
Depreciation of property, plant and equipment 2,029 1,741
Software amortization 50 101
Tax expense 5 4,279 4,230
Impairment of right-to-use assets 228 -
Loss on disposal of property, plant and equipment 3 -
Loss on disposal of SmartLab 3 1,498 -
Forgiveness of Cares Act Loan 3 (2,272) -
Share based payments - 10
Amortization of acquired intangibles - 7
Amounts expensed work-in-progress 8 2,875 4,333
Amortization and impairment of pre-publication costs 8 16,331 26,567
Operating cash flows before movements in working capital 42,840 48,811
Increase in inventories (3,299) (5,036)
Decrease/(increase) in receivables 8,594 (7,106)
(Decrease)/increase in payables (17,119) 4,035
Cash generated by operations 31,016 40,704
Income taxes paid (7,561) (3,053)
Net cash from operating activities 23,455 37,651
Investing activities
Proceeds from sale of SmartLab 3 1,437 -
Investment in pre-publication costs 8 (18,067) (20,229)
Purchases of property, plant and equipment (1,238) (111)
Net cash used in investing activities (17,868) (20,340)
Financing activities
Interest payments (397) (1,866)
Lease payments (1,708) (1,426)
Drawdown of revolving credit facility and other loans 1,500 22,994
Repayment of revolving credit facility and other loans (19,693) (30,840)
Net cash used in financing activities (20,298) (11,138)
Net (decrease)/increase in cash and cash equivalents (14,711) 6,173
Cash and cash equivalents at beginning of year 28,432 22,079
Foreign currency exchange differences on cash and cash equivalents (431) 180
Cash and cash equivalents at end of year 13,290 28,432
THE QUARTO GROUP, INC.
Notes to the condensed financial statements
1. Basis of preparation
The results have been extracted from the audited financial statements of the
Group for the year ended 31 December 2022. The results do not constitute
statutory accounts within the meaning of Section 434 of the Companies Act
2006. Whilst the financial information included in this announcement has been
computed in accordance with the principles of 'UK Adopted' International
Financial Reporting Standards ("IFRS") and Companies Act 2006 that applies to
companies reporting under IFRS, this announcement does not of itself contain
sufficient information to comply with IFRS. The Group will publish full
financial statements that comply with IFRS. The auditors have reported on
these accounts; their report was unqualified, did not draw attention to any
matters by way of emphasis without qualifying their report and did not contain
statements under s498(2) or (3) of the Companies Act 2006.
Statutory accounts for the year ended 31 December 2022, will not have been
filed with the Registrar of Companies. The accounting policies applied are
consistent with those described in the Annual Report & Accounts for the
year ended 31 December 2022.
The Group financial statements are presented in US Dollars and all values are
shown in thousands of dollars ($000) rounded to the nearest thousand dollars,
except where otherwise stated. Each entity in the Group determines its own
functional currency and items included in the financial statements of each
entity are measured using that functional currency.
Going Concern
The Board assessed the Group's ability to operate as a going concern for at
least the next 12 months from the date of signing the financial statements.
The Directors have considered the underlying robustness of the Group's
business model, products and proposition and its recent trading performance,
cash flows and key performance indicators. They have also reviewed the cash
forecasts prepared in detail to 31 March 2024. This is to satisfy themselves
of the going concern assumption used in preparing the financial statements.
The base case model was built using a detailed sales forecast driven by the
publishing program for 2023. Trade receivable days remaining consistent with
2022.
As part of this work, the model was sensitized initially by a 5% reduction in
revenue to ensure headroom within the covenants. This is deemed as a severe
but plausible scenario. Management performed a reverse stress test to assess
the point in which the banking covenants were breached. This occurred at a
reduction in revenue of 13%. It is considered unlikely that such a reduction
of revenue would occur, given, sales dropped 7% in 2022 and dropped 7% during
2020. Should we start to see a reduction in revenue, then mitigating action
will be taken, such as reduction in investment in pre-publication costs, print
volumes, staffing levels and other variable costs.
Based on the above indications, the Directors believe that it remains
appropriate to continue to adopt the going concern in preparing the financial
statements.
2. Operating segments
The analysis by segment is presented below. This is the basis on which the
operating results are reviewed and resources allocated by the Chief Executive
Officer, who is deemed to be the chief operating decision maker.
2022 US UK
Publishing Publishing Total
$000 $000 $000
External revenue - continuing operations 75,329 65,688 141,017
Operating profit before amortization of acquired intangibles and exceptional 10,608 11,875 22,483
items
Amortization of acquired intangibles - - -
Segment result 10,608 11,875 22,483
Unallocated corporate expenses (1,159)
Corporate exceptional items (note 3) 774
Operating profit 22,098
Finance costs (1,213)
Profit before tax 20,885
Tax (4,279)
Profit after tax 16,606
US Publishing UK Publishing Total
2021
$000 $000 $000
External revenue - continuing operations 81,062 70,421 151,483
Operating profit before amortization of acquired intangibles and exceptional 10,024 7,001 17,025
items
Amortization of acquired intangibles (7) - (7)
Segment result 10,017 7,001 17,018
Unallocated corporate expenses (1,066)
Corporate exceptional items (note 3) -
Operating profit 15,952
Finance costs (1,796)
Profit before tax 14,156
Tax (4,230)
Profit after tax 9,926
Segmental balance sheet
2022 2021
$000 $000
Quarto Publishing Group USA 65,945 54,313
Quarto Publishing Group UK 49,590 71,877
Unallocated (Deferred tax and cash) 13,311 30,772
Total Assets 128,846 156,962
Quarto Publishing Group USA 21,175 28,472
Quarto Publishing Group UK 22,265 30,351
Unallocated (Deferred tax, corporation tax and debt) 18,066 44,930
Total Liabilities 61,506 103,753
2. Operating segments (continued)
Geographical revenue
The Group operates in the following geographical areas:
Revenue Non-current assets
2022 2021 2022 2021
$000 $000 $000 $000
United States of America 85,397 93,399 28,908 31,333
United Kingdom 17,052 20,241 22,865 23,126
Europe 23,099 21,204 - -
Rest of the world 15,469 16,639 - -
Total 141,017 151,483 51,773 54,459
3. Exceptional items
2022 2021
$000 $000
SmartLab disposal (1,498) -
Cares Act loan forgiveness 2,272 -
Total 774 -
On 30 August 2022, the Group publicly announced that we were committed to sell
SmartLab, our toy imprint. On 1 September 2022, the intellectual property of
SmartLab to the value of $1.825m was sold for $0.5m. Sales were continued to
be made until 29 November 2022, when the inventory on hand of $1.11m was sold
at cost for $1.088m. The overall loss on disposal was $1.498m after incurring
legal fees of $31k and redundancy costs of $120k.
During 2022, the Cares Act loan of $2.422m relating to government support
given under the Coronavirus Aid, Relief and Economic Security Act of the USA,
was forgiven to the value of $2.272m.
4. Finance costs
2022 2021
$000 $000
Interest expense on borrowings 778 1,399
Amortization of debt issuance costs and bank fees 70 85
Interest expense on lease liabilities 365 276
Other interest - 36
Total 1,213 1,796
5. Taxation
2022 2021
$000 $000
Corporation tax
Current year 3,477 6,209
Prior periods 201 -
Total current tax 3,678 6,209
Deferred tax 601 (1,979)
Origination and reversal of temporary differences
Total tax expense 4,279 4,230
5. Taxation (continued)
Corporation tax on UK profits is calculated at 19% (2021: 19%), based on the
UK standard rate of corporation tax of the estimated assessable profit for the
year. Taxation for other jurisdictions is calculated at the rate prevailing in
the respective jurisdictions. An increase in the UK corporation rate from 19%
to 25% is effective 1 April 2023. The table below explains the difference
between the expected expense at the UK statutory rate of 19% and the total tax
expense for the year.
2022 2021
$000 $000
20,885 14,156
Profit before tax
3,968 2,690
Tax at the UK corporation tax rate of 19% (2021: 19%)
Effect of different tax rates of subsidiaries operating in other jurisdictions 813 1,058
Adjustment to prior years 201 -
Tax effect of items that are not deductible in determining taxable profit (10) (16)
Tax effect of non-taxable items (587) -
Other (106) 498
Tax expense 4,279 4,230
Effective tax rate for the year 20.5% 29.9%
6. Earnings per share
2022 2021
$000 $000
From continuing operations
Profit for the year 16,606 9,926
Amortization of acquired intangibles (net of tax) - 5
Exceptional items (net of tax) (1,160) -
Earnings for the purposes of adjusted earnings per share 15,446 9,931
Number of shares Number Number
Weighted average number of ordinary shares 40,889,100 40,889,100
Diluted weighted average number of ordinary shares 40,889,100 40,889,100
Earnings per share (cents) - continuing operations
Basic 40.6 24.3
Diluted 40.6 24.3
Adjusted earnings per share (cents)
Basic 37.8 24.3
Diluted 37.8 24.3
7. Goodwill
2022 2021
$000 $000
Cost
At 1 January 43,007 43,102
Exchange differences (664) (95)
At 31 December 42,343 43,007
Accumulated impairment losses
At 1 January (23,721) (23,721)
Impairment - -
Exchange differences - -
At 31 December (23,721) (23,721)
Carrying value:
At 31 December 18,622 19,286
The cash generating units containing goodwill are as follows:
2022 2021
$000 $000
Quarto Publishing Group USA (QUS) 12,882 12,882
Quarto Publishing Group UK (QUK) 5,740 6,404
18,622 19,286
Quarto identifies its cash-generating units based on its operating model and
how data is collected and reviewed for management reporting and strategic
planning purposes, in accordance with IAS36 - Impairment of Assets. Corporate
overheads have been divided between cash-generating units and factored into
the value in use calculation.
The recoverable amount of each cash generating unit ('CGU') is determined
using the value in use basis. In determining value in use, management prepares
a detailed bottom up budget for the initial twelve-month period, with reviews
conducted at each business unit. A further two years are forecast using
relevant growth rates and other assumptions. Cash flows beyond the three-year
period are extrapolated into perpetuity, by applying a 2% growth rate from the
addressable market. The cashflows are then discounted using a country-specific
discount rate. The growth rates used are consistent with the growth
expectations for the sector in which the company operates and the discount
rate has been calculated using pre-tax Weighted Average Cost of Capital
analysis.
The key assumptions for calculating value in use are:
Terminal Growth Rates Discount Rates
2022 2021 2022 2021
United States of America 2% 2% 10.75% 11.13%
United Kingdom 2% 2% 11.13% 10.86%
Revenue growth rates: forecast sales growth rates are based on those applied
to the Board approved budget for the year ending 31 December 2023 and
three-year plan. They incorporate future expectations of growth driven by
investment plans for each CGU.
Long-term growth rates: the three-year forecasts are extrapolated to
perpetuity on the basis that the CGU's are long-established business units.
The long-term growth rates are blended rates formed from the
territory-specific long-term growth rates.
Gross margins: gross margins are based on historic performance and expected
changes to the sales mix in future periods.
The Group has undertaken various sensitivities of the QUK and QUS CGU's. There
were no reasonably possible changes in QUK that would lead to impairment. QUS,
which has the largest goodwill and non-current assets, carries a greater risk
that reasonably possible changes would result in impairment. Based on the
above long-term growth rate and discount rate, QUS exceeded the carrying value
of the CGU by $4.3m. The following sensitivities were applied to this CGU:
· 0.75% increase in discount rate, at which level there was no
impairment. The recoverable amount exceeded the carrying value of the CGU by
$0.1m. The discount rate would need to increase to 11.75% to record any
impairment.
· 1.5% terminal growth rate, at which level there was no impairment. The
recoverable amount exceeded the carrying value of the CGU by $2m. The terminal
growth rate would need to be 1% before any impairment was recorded.
Should there be a headline change in revenues and margins, this could create
an impairment.
8. Intangible assets: Pre-publication costs
2022 2022 2022 2021 2021 2021
$000 $000 $000 $000 $000 $000
Work in progress Published products Total Work in progress Published products Total
Cost
At 1 January 10,105 102,528 112,633 11,442 86,496 97,938
Exchange difference (456) (7,240) (7,696) (64) (1,037) (1,101)
Additions 18,067 - 18,067 20,229 - 20,229
Transfers (16,036) 16,036 - (17,069) 17,069 -
Amounts expensed(1) (2,875) - (2,875) (4,433) - (4,433)
Disposals (note 5) (626) (4,072) (4,698) - - -
At 31 December 8,179 107,252 115,431 10,105 102,528 112,633
Amortization and impairment
At 1 January - 82,692 82,692 - 57,025 57,025
Exchange difference - (6,193) (6,193) - (900) (900)
Amortization charge - 17,060 17,060 - 19,808 19,808
(Reversal)/impairment of published product - (729) (729) - 6,759 6,759
Disposals (note 5) - (2,872) (2,872) - - -
At 31 December - 89,958 89,958 - 82,692 82,692
Net book value 8,179 17,294 25,473 10,105 19,836 29,941
1 Amounts expensed relate to the impairment of Work-In-Progress. Titles which
have no economic future are impaired.
The carrying amount of the intangible assets is reviewed annually at each
balance sheet date to determine whether there is any indication of impairment.
If any such indication exists, the asset's recoverable amount is estimated.
The recoverable amount is the higher of fair value, reflecting market
conditions less costs to sell, and value in use based on an internal
discounted cash flow valuation.
Pre-publication costs form part of the carrying value of the CGU for each
segment and are considered for impairment of goodwill as set out in note 7.
9. Alternative performance measures
The Group uses alternative performance measures to explain and judge its
performance.
Adjusted operating profit excluding amortization of acquired intangibles and
exceptional items. The Directors consider this to be a useful measure of the
Group operating performance as it shows the performance of the underlying
business.
Exceptional items are those which the Group defines as significant items
outside the scope of normal business that need to be disclosed by virtue of
their size or incidence.
Free cashflow is the cash generated by operations less pre-publication
investment and purchases of property, plant and equipment and software.
Backlist % refers to book titles that were published in previous calendar
years and is a key measure of the performance of our intellectual property
assets.
Intellectual property development spend refers to the amounts spent annually
on the creation and publication of book titles against which we monitor
subsequent sales (see note 8).
2022 2021
$000 $000
Adjusted Operating Profit
Operating profit 22,098 15,952
Add back:
Amortization of acquired intangibles - 7
Exceptional items (note 3) (774) -
Adjusted operating profit 21,324 15,959
Adjusted profit before tax before amortization of acquired intangibles and
exceptional items
Adjusted operating profit before amortization of acquired intangibles and 21,324 15,959
exceptional items
Less: net finance costs (1,213) (1,796)
Adjusted profit before tax before amortization of acquired intangibles and 20,111 14,163
exceptional items
2022 2021
$000 $000
Net debt
Short term borrowings 4,636 5,438
Long term borrowings 9,301 28,508
Cash and cash equivalents (13,290) (28,432)
Net debt 647 5,514
10. Post balance sheet events
Quarto repaid the remaining loan of $8m plus accrued interest to 1010 Printing
Limited in February 2023. This repayment was made outside the agreement due to
a favorable liquidity position at this point in time and had been agreed by
the bank. No additional charges will be payable as a result of the early
repayment.
11. Principal risks and uncertainties facing the Group
a. Economic conditions. The Group has adequate
liquidity with up to $22m in available debt facilities. In addition, the
Directors have the ability to take a number of mitigating actions, including
the reduction of spend on pre-publication costs, inventory printings and other
discretionary items. The Group offers non-Chinese printing for customers in
order to avoid US tariffs on books. The Company's management information
systems allow it to assess sales performance quickly and so take the
appropriate steps to maximize operating performance. The Group has shown
itself to be adaptable by quickly accommodating the changes necessary to its
sales and marketing activities during the Covid-19 pandemic and to subsequent
supply chain pressures. The Group has a very limited exposure to the Russian
and Ukrainian markets.
b. Currency. The Group has a natural hedge that
mitigates against currency movements impacting its earnings in that one of its
largest costs, which is print costs, are paid in US Dollars.
c. Loss of intellectual property. A cloud storage
solution is integrated into our production workflow to provide storage,
back-up and recovery services for product files in development. Complete
backlist archives are stored in a mirrored storage array.
d. Financial. In 2021, a three year and five months
banking facility of $20m was secured, together with additional shareholder
support. Performance during 2022 allowed the Company to accelerate its debt
reduction.
e. Customer. The Group has a long-established strategy
of diversifying its international customer base, including specialty
retailers, resulting in the fact that with one exception no customer has over
20% of the business. Customer relations are managed to ensure a fair-trading
relationship. Management monitors debts closely and maintains close
relationships with its customers, and distributors, which may provide prior
warning of likely failure. The Group continues to adapt to supporting online
selling and continues to offer and promote e-book versions of its books.
f. Supply chain and raw materials. The Group
maintains relationships with printers in other parts of the world and is
confident that printing could be carried out by an alternative range of
printers if supply from China was interrupted or to mitigate shipping costs.
We maintain close relations with our printers, reducing the risk of a lack of
knowledge of any printer being in financial trouble. The Group has worked with
its major printers on a plan to adopt sustainable paper and recently
instituted a Forest Stewardship Council (FSC) paper or Sustainable Forestry
Initiative (SFI) paper policy across all our imprints.
By monitoring frequency of factory downtime from acute climate events (days
lost) and using forecasting data as part of scenario planning to model chronic
climate change, the Company will be better prepared in the selection of global
suppliers. Further development of internal scenario planning tools, and
through working more closely with suppliers on identified risks, the Group can
mitigate the potential impact of longer-term climate changes and ensure
security of supply. Acute interruptions to either raw materials or
manufacturing are mitigated by maintaining a flexible manufacturing supplier
base. The Group can mitigate the impact of regional climate events by
relocating manufacturing globally. This approach was tested successfully
during the Covid-19 pandemic.
g. Cyber security. The Group uses enterprise level
firewalls and IT controls to prevent attack as well as maintaining cloud-based
copies and offsite back-up of IP. Computerized files of the Group's books are
also maintained by printers. We do not store any personal or credit card data
on our websites www.quarto.com or www.quartoknows.com. The Group
undertakes industry standard system penetration testing.
h. Transition to net zero economy. By engaging in
its own emissions-reducing ambitions and as supply sectors themselves
transition towards net-zero practices, the Group will be better placed to
address climate-related transitional risks. Increasing our engagement at
industry level will support establishment of best practice approaches.
The Group continues to engage with customers and explore emerging channels to
ensure that the Group remains competitive. By working in partnership with
customers the Company will be better placed to mitigate these risks. We have
also used insight gained from Ivy Eco, an environmentally led imprint launched
in 2020, to better understanding market forces and customer levers. The
Company has also established a register identifying the environmental
offerings available through its global supplier base to ensure that all
customer climate-related needs can be met.
j. Product safety. All components receive safety
testing from specialist and accredited independent third parties. Management
carefully selects suppliers for the components the Company uses.
The Company continues to monitor the regulatory impact of product testing
following the UK's departure from the European Union and maintains a European
presence to ensure compliance with European Union Product Safety legislation
following the UK's departure from the European Union
k. Laws and regulations. Quarto reviews its licensing,
permission-acquisitions and other contracts routinely receiving advice from
relevant professional firms (including the possible impact of Brexit) so that
legal instruments remain current and represent best practices so that we
ensure that our practices are aligned and consistent across imprints, and
Quarto's IP rights are properly protected.
l. People. Quarto's Publishers are experienced and
talented professionals who work alongside sales and marketing teams and strive
to stay close to publishing trends and markets. The Group encourages diversity
and inclusion in its workforce and offers competitive market rate remuneration
packages and works hard to make Quarto an attractive place to work. The
Group operates a flexible hybrid working regimen.
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