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Kin and Carta PLC  -  KCT   

Full Year Results and Strategy Update

Released 07:00 09-Oct-2018

RNS Number : 3508D
Kin and Carta PLC
09 October 2018
 

This announcement contains inside information

9 October 2018                                                             

                                                                                         Kin and Carta plc

('Kin + Carta', the 'Group' or the 'Company')

 

Full Year Results and Strategy Update
 

Significant transformation - new CEO, Group identity and growth strategy in place

 

Kin + Carta, the international digital transformation group, today announces preliminary results for the 53 weeks ended 3 August 2018.

Financial Highlights

 

 

53 weeks to

3 August

2018

52 weeks to

28 July

2017

%age

change

Continuing operations2:

Revenue

£178.4m

£162.9m

+9%

Adjusted profit before tax1

£18.5m

£13.4m

+38%

Adjusted basic earnings per share1

10.10p

7.27p

+39%

Statutory loss before tax

£(31.2)m

£(19.2)m

-

Statutory basic loss per share

(22.09)p

(12.59)p

-

Full year dividend

1.95p

1.95p

-

Net debt

£26.0m

£54.6m

£27.6m

 

 

 

 

Continuing and discontinued operations:

 

 

-

Statutory loss after tax

£(29.2)m

£(43.4)m

-

1   Adjusted results exclude Adjusting Items to enhance understanding of the ongoing financial performance of the Group. Adjusting Items comprise of redundancies, restructuring costs; gain or loss on disposal of properties; impairment or amortisation charges related to goodwill, tangible and intangible assets; contingent consideration required to be treated as remuneration; movements in deferred consideration and costs related to the St Ives Defined Benefits Pension Scheme (note 3).

2  Continuing operations excludes the results of the Books and Marketing Activation segments disposed during the year (note 10).

Further details are provided within Alternative Performance Measure section.

 

·      Revenue growth of 9% from continuing operations (11% at constant currency)

·      Adjusted profit before tax up 38%

·      Net debt reduced by 50% to £26.0 million, representing a net debt to Adjusted EBITDA ratio of 1.1x (2017: 1.6x).

·      Pension scheme now in small surplus of £1.9 million (2017: deficit of £16.0 million)

 

Operational Highlights

·      J Schwan appointed as CEO

·      Strategic review complete and new strategy announced today

·      Now positioned as a digital transformation business following disposal of Books and Marketing Activation

·      Continuing businesses restructured and aligned to new strategic focus

 

J Schwan, Chief Executive Officer, said:

"It's been a transformational year as we've achieved our long-term ambition to move away from our print legacy to focus solely on strategic marketing and now more specifically, digital transformation. The digital transformation market is large, growing and we are well positioned to capitalise on this opportunity. We're a c.1,500-strong global team with the size and the reach to help the world's largest companies to invent, operate and market profitable new products and services.

Trading at the start of the new financial year has been in line with expectations, with a strong pipeline and a number of project wins from new and existing clients. With a recently strengthened balance sheet, we are confident we can both grow organically and by acquisition. I believe the future for Kin + Carta is very bright."

 

 

 

 

For further information, please contact:

Kin and Carta plc

+44 (0)20 7928 8844

J Schwan, Chief Executive Officer

Brad Gray, Chief Financial Officer

 

 

MHP Communications

+44 (0)20 3128 8778

Tim Rowntree, Giles Robinson, Luke Briggs

 

 

Numis

+44 (0)20 7260 1000

Nick Westlake, Matt Lewis, Christopher Wilkinson

 

 

 

 

Chief Executive's Review  

Introduction

This has been a transformational year for our business. During the period, we successfully completed the disposals of both our Marketing Activation and Books segments, achieving our long-term ambition of moving away from our print legacy to focus solely on digital transformation.

Our digital transformation businesses now make up the entirety of the Group, which relaunched to the market as Kin + Carta on 2 October 2018. Kin + Carta applies creativity, data and technology to help the world's largest companies invent, operate and market profitable new products and services.

Our digital transformation businesses continued to deliver significant growth, with revenue up 9% and a 38% increase in Adjusted profit before tax over the period.

Performance Highlights

The Group's revenue from continuing operations was £178.4 million (2017: £162.9 million) which delivered growth of 11% at a constant currency.

 

The statutory loss before tax from continuing operations was £31.2 million (2017: £19.2 million), which includes adjusting items of £49.6 million (2017: £32.6 million) of which £47.8 million relate to amortisation of acquired intangibles, impairment of goodwill and intangibles related to Hive and contingent consideration required to be treated as remuneration (from previous acquisitions).

 

The Group's Adjusted profit before tax from continuing operations was £18.5 million (2017: £13.4 million) up 38%.

 

I am encouraged by our growth in the past year, as well as the strengthening of our balance sheet. In addition to the disposals, we've also made several strategic moves to prepare us for the opportunity ahead.

 

We've merged Occam, Response One, Amaze One and Branded 3 into a new communications proposition, Edit.  This move has allowed us to diversify away from GDPR impacted service offerings. I'm happy to say the new proposition is resonating in the market with some recent large global customer wins.

 

We've also merged our two digital design and build agencies, Amaze and Realise into one firm, AmazeRealise, now the largest agency of its kind in the UK. This move has allowed us to more easily position AmazeRealise for international expansion.

 

We've also merged our retail property consultancy FSP into strategy firm Pragma, bringing a more comprehensive strategic proposition to our retail client base.

 

Though our healthcare communications firm, Hive, has struggled this year, we are realigning its strategic positioning with our new digital focus. Although this represents a significant shift from its current proposition, we are optimistic that this will allow our healthcare experts to focus on larger, more strategic initiatives for Hive's blue chip client base.

 

Overall these moves required a lot of hard work by our teams and I'd like to congratulate and thank them all. With the majority of these costs being incurred in 2018 financial year, we can now focus on the market opportunities we see ahead of us.

Our New Strategic Focus

In January 2018, we began a strategic review of the Group's businesses, redefining our path forward. As a result, we have defined a new set of core values, a new strategy, a new organisational model and a new brand.

The Group, now known as Kin + Carta, is focused on becoming a global leader in digital transformation services. Digital transformation is increasingly vital for businesses, who, in today's increasingly digital world, require a reset of their company's market strategy, offerings, and ways of working, to ensure they are grounded in new technologies.

 

 

 

There are four primary drivers for our strategic focus on digital transformation:  

1.   The digital transformation services market is large and growing quickly. The global market is already $44 billion in size and growing at a CAGR of 18%. *

2.   Over 80% of Kin + Carta's FY18 revenue from continuing operations was being driven from digital transformation services (strategy, innovation and communications): we have the critical mass and the reach to succeed in this market.

3.   Our competitors, which include big consultancies and large agency groups, are finding it challenging to adapt to the right operating model to succeed in this space, leaving room for new entrants.

4.   By combining our 1,500 specialists across the globe into a joined up proposition, we are competing successfully in this rapidly growing market.

New Connective Operating Model

Over the past few months, we have reorganised ourselves to integrate our services into a single, well-rounded operating model to match the evolving needs of our clients and the ambitions of our employees.  We call this "The Connective".

 

The Connective is grouped into four key service pillars:

·      Strategy (where to play) - Our strategists help our clients better understand the shifts in their market and the potential digital brings.

·      Innovation (what to build) - We utilise emerging technologies to create new products and services for our clients to bring to market.

·      Communications (who to tell) - We help our clients find new audiences online and convert those audiences into customers.

·      Transformation (how to work) - We integrate next-generation software and teach our clients agile ways of working to adapt to a rapidly changing world.

Although there is still much work to do, we are encouraged by the collaboration of the nearly 200 employees across the businesses who were involved in creating The Connective operating model. In our early market tests, The Connective is being positively received with both new Connective customer wins and the expansion of some existing client relationships. New global clients such as Rockwell Automation, Kwik Fit and Gallagher are already leveraging multiple Connective services.

Our new Brand, Kin + Carta

We felt it was important to create a new identity for our new business. Although St Ives will forever be a proud part of our history, our new strategic focus was a prime opportunity to pick a name reflecting our position in an increasingly digital world. The name Kin + Carta embodies what The Connective stands for: connection, collaboration and courage.

 

Growth Catalysts

 

There is a significant growth opportunity in front of us for which we have identified five key areas of focus for our management team:

 

Scaling our Sales Functions - The Connective proposition will significantly aid the cross-selling of our services. We will be adding central sales capabilities to support larger Connective business opportunities. We will also draw on the best practices of our fastest growing businesses and ensure each business' sales function is set up to adopt what's best in class.

 

Deepen Sector Focus - Instead of trying to be everything to everybody, we will use the sector strengths of our strategic consultancies to focus on the sectors where our businesses possess differentiating experience. These include Financial Services, Transportation, Retail and Distribution, Healthcare, Industrials and Agriculture.

 

 

 

 

 

Geographic Expansion - We will bring the Communications portion of The Connective proposition to the Americas, leveraging our already strong presence in Chicago, New York, San Francisco and Buenos Aires.

 

New Capabilities and Ventures -We will continue to invest in new capabilities, for example, expanding our new and fast-growing Artificial Intelligence (AI) practice. We have also created a new venture model to encourage the Connective's 'intrapreneurs' to develop new business ideas that strengthen The Connective proposition.  

 

Financial targets

 

To accelerate our organic growth rate, over the new financial year we intend to make an investment of £2.0 million in our central marketing and sales capability. Although this investment could be rolled out gradually over the next few years, we've made the decision to fast track this initiative to take advantage of the market opportunity in front of us. This is a real cost to the business that may impair our earnings for 2019 financial year, but we believe the payback thereafter will outstrip the short term drag on profitability.

 

The regrouping of the business into The Connective also affords us opportunities to create synergies and cost savings to further boost our organic growth.

 

As a result we expect for 2019 financial year to see mid-single digit revenue growth at constant currency and Adjusted operating margin of greater than 10% as we make the investment for future growth. In 2020 financial year and beyond, we expect double digit revenue CAGR and a minimum 12% margin.

 

We also expect to manage net debt to EBITDA down to below one times by the end of 2020 financial year.

 

Acquisitions

 

Acquisitions will be an important component of our growth strategy in the medium term. We will focus on acquiring digital capabilities with significant scale that can be fully integrated into our existing Connective proposition. Our strategy will be driven by acquiring complementary skill sets and/or geographic reach: growing our existing business in the US is an example of this.

 

We do not delude ourselves: we will be competing for these businesses or teams with the very best companies in the world. However, we believe that as a nimble and young Group, driven by the entrepreneurial culture imbedded in the non-hierarchical Connective structure that we can offer something different and appealing to the opportunities we identify. We have already started the process.

 

Outlook

 

Trading at the start of the new financial year has been in line with expectations, with a strong pipeline and a number of exciting project wins from existing and new clients. With our recently strengthened balance sheet, clarity on our priorities and the people and structure in place, I believe the future for Kin + Carta is very bright indeed.

 

 

J Schwan

Chief Executive Officer

8 October 2018

 

 

 

Financial Review

Overview

After a transformational year, the Group which is now entirely focused on higher growth, higher margin digital transformation businesses (previously referred to as Strategic Marketing). The disposals of our legacy Marketing Activation and Books segments have been treated as discontinued operations for both the current and comparative periods within the Consolidated Income Statement. The results that follow are discussed in terms of continuing operations. The results are for a 53 week period compared to the prior period of 52 weeks.

The Group's statutory results are set out in the table below:

 

53 weeks to

3 August

2018

52 weeks to

28 July

2017

Revenue

£178.4m

£162.9m

Statutory loss before interest and tax

£(28.2)m

£(15.5)m

Statutory loss before tax

£(31.2)m

£(19.2)m

Basic loss per share

(22.09)p

(12.59)p

The Group's statutory loss before tax of £31.2 million (2017: £19.2 million) includes Adjusting Items of £49.6 million (2017: £32.6 million), of which £47.9 million relates to non-cash items in the current period.  Adjusting non-cash  items include contingent consideration treated as remuneration of £24.0 million, an increase of deferred consideration of £3.1 million, the impairment of goodwill and acquired intangibles of £12.1 million and the amortisation of intangibles of £8.7 million.

The Group prepares Adjusted results, which, in management's view reflect how the business is managed and show the performance in a manner consistent with the previous year. Adjusted results exclude items such as costs related to restructuring activities, acquisitions made in current and prior periods, disposal of sites, impairment charges and St Ives Defined Benefits Pension Scheme charges. Further details are provided in the Alternative Performance Measures section.

The Group delivered revenue growth of 9% and a 29% increase in Adjusted operating profit from £16.4 million to £21.2 million.

Revenue and Adjusted Operating Profit

Revenue growth at constant currency was 11% (£18.7 million) offset by a 2% adverse currency impact. Revenue at constant currency grew by 23% in the first half and 1% in the second half reflecting a softer comparative in the first half of the prior year. There was a 2% negative contribution from currency translation in each half.

Revenue generated from clients located outside of the UK increased from £63.6 million to £79.6 million over the financial year, and now represent 45% of Group revenues (2017: 37%).

The Adjusted operating profit increased from £16.4 million (Adjusted operating profit margin of 10.1%) to £21.2 million (Adjusted operating profit margin of 11.8%).

A significant amount of restructuring has taken place during the year to improve the offering to clients and also operational efficiencies within the business units. This has reduced the cost base and improved the Adjusted operating margin from 10% to 12%.

The General Data Protection Regulations ("GDPR") that came into force in May 2018 affected our data brands. Clients have withdrawn from certain marketing activity and our data brands have repositioned their market offering to accommodate the new regulations. During the current period, we have focussed on ensuring that our brands meet the requirements of GDPR. Our new proposition is finding resonance with clients as they redirect marketing spend into new areas.

Our healthcare brand has seen some weakness in revenue primarily due to a number of clients seeking a network solution to their communication strategy. As a result an impairment charge of £11.8 million was recorded as an Adjusting Item relating to Hive's goodwill and intangibles. Recent new client projects have improved revenue visibility in this sector.

Central costs were £5.3 million (2017: £4.4 million). The Group has separately identified these central costs that cannot be directly attributed to the individual trading entities of the Group. Central administration costs represent 3% of Group revenue.

Central costs comprise the costs of running a plc and certain functions retained in the centre. We do not believe that additional value or understanding of the results is created by charging these costs to individual brands.

Acquisitions

No acquisitions were made in the current period. However, the total cash outflow for businesses acquired in prior periods was £16.5 million and 10.6 million shares were also issued.

Solstice: during the year 4.9 million shares were issued and a payment of £12.4 million in cash was made to the previous owners of Solstice. Subsequent to the year end a final payment of £3.1 million was made in August. There are no further payments to be made in relation to the Solstice acquisition.

TAB: TAB's third deferred consideration for the year ended 30 April 2018 has been agreed. This was based on incremental EBITDA. The Group has issued 5.7 million shares during the current year and, subsequent to the year end, also made a cash payment of £9.7 million and issued a loan note of £6.8 million to settle the deferred consideration. The loan note is exercisable six months after issue. There remains a liability of £2.0 million that the Group expects to settle in the financial year 2020. This item is treated as an Adjusting Item and is recorded as contingent consideration required to be treated as remuneration.

Balance Sheet

The net assets of the Group have reduced from £97.2 million to £81.4 million primarily due to the statutory loss incurred of £29.2 million offset by a net actuarial gain of £9.2 million. As a result of the disposals of the Group's legacy manufacturing segments, the composition of the balance sheet has changed significantly.

Total assets have reduced from £301.8 million to £191.7 million and total liabilities from £204.6 million to £110.3 million. Non-current assets consist largely of goodwill and intangible assets of £116.2 million (2017: £151.5 million). The Group retained the property that its legacy Books segment, Clays, operates from, which is classified as an investment property within non-current assets at £4.5 million. There has been a significant reduction in inventories and trade and other receivables of £56.9 million and a corresponding fall in trade and other payables and deferred income of £45.9 million.

On the disposal of SP Group Limited ('SP'), a Marketing Activation company, the Group entered into a lease to rent out a warehouse in Redditch to the acquirer, who subsequently exercised a break clause. As a consequence, this building is now being marketed for sale and is disclosed as an "asset held for sale" at £5.3 million.

Disposals

During the period, the Group undertook a strategic review of its legacy segments Marketing Activation and Books. The review concluded that it was in the best interests of all stakeholders of the Group to actively seek buyers for the segments. As a result, the Group ran an extensive process to dispose of the segments, which concluded in June 2018.

On 5 March 2018 the Group announced the disposal of a significant part of its Marketing Activation segment. This comprised of the point of sale business, SP Group Limited, the large format printer Service Graphics Limited and the field marketing businesses Tactical Solutions UK Limited and Flare Limited. The consideration was based on an enterprise value of £6.0 million and resulted in a net cash inflow of £2.5 million after costs and working capital adjustments.

On 1 May 2018 the Group announced the disposal of its Books segment. The enterprise value was £23.8 million. The net cash inflow after costs, working capital adjustment and a contribution of £2.5 million to the St Ives Defined Benefits Pension Scheme (the 'Scheme') was £16.5 million.

The disposal of St Ives Management Services Limited, the remaining part of the Marketing Activation segment, was announced on 25 June 2018. The enterprise value was £11.0 million resulting in a net cash inflow of £10.9 million after costs and working capital adjustments.

The total net cash inflow from disposals in the period after costs and working capital adjustments was £32.4 million.

The impact of the disposals on the Consolidated Income Statement until the date of disposal and for the 52 week comparator period is shown as a single line within the Income Statement. Further details are shown in note 10. The net profit included in the Income Statement from discontinued operations was £3.2 million (2017: loss £25.4 million).

Tax

The total tax charge for continuing operations was £1.2 million (2017 - credit of £1.2 million). A number of Adjusting Items are not deductible for taxation purposes. Further details are provided in the Alternative Performance Measures section.

The Group's effective tax rate on the Adjusted profit before tax was 19.8% (2017: 22.6%) compared to the standard rate of tax of 19.0% (2017: 19.63%) for the Group. The Adjusted tax charge was £3.7 million (2017: £3.0 million). The Group's effective tax rate on Adjusted profit is lower than the prior year due to the lower UK and US corporate income tax rates.

A net income tax of £2.8 million (2017: £0.3 million) was paid in the UK in respect of the 2017 and 2018 financial years.

Dividend

The Board is recommending a final dividend of 1.30 pence per ordinary share (2017: 1.30 pence) giving a total dividend of 1.95 pence (2017: 1.95 pence). The dividend is covered 5.2 times by Adjusted earnings and will be paid on 17 December 2018 to shareholders on the register at 23 November 2018, with an ex-dividend date of 22 November 2018.

Pensions

The Group closed the Scheme to new members in 2002 and ceased future accrual within the Scheme in 2008. The Group accounts for post-retirement benefits in accordance with IAS 19 Employee Benefits. The Consolidated Balance Sheet reflects the net surplus on the Scheme at 3 August 2018 based on the market value of the assets at that date and the valuation of liabilities using AA non-gilt bond yields.

On an IAS 19 basis, the net surplus on the Scheme was £1.9 million (2017: deficit of £16.0 million) before the related deferred tax liability. The value of the plan assets decreased to £353.4 million (2017: £354.5 million). Approximately 65% of the plan assets are invested in return seeking assets providing a higher level of return over the longer period. Plan liabilities decreased to £351.6 million (2017: £370.5 million). The decrease in the plan liabilities is primarily attributable to an increase in the discount rate, a number of experience adjustments and a fall in the rate of increase in life expectancy.

The Scheme's actuarial valuation reviews determine any cash deficit payments by the Group. The Scheme's triennial valuation was as at April 2016 with the next review at April 2019. The Group makes deficit funding contributions of £2.6 million per annum and a contribution of £0.4 million per annum (2016: £0.4 million) towards the costs of administration. On the disposal of the Books segment the Group made a contribution of £2.5 million to the Scheme.

The charge for the year for the Group's defined contribution schemes was £2.1 million (2017: £2.2 million).

Cash Flow

Cash generated from operations was £25.8 million (2017: £30.7 million) of which £20.5 million was generated from continuing operations and £5.3 million from discontinued operations.

Total dividends paid were £2.8 million. This consisted of a final dividend for financial year 2017 of 1.30 pence per share and an interim dividend of 0.65p per share.

Total capital expenditure was £4.6 million (2017: £3.5 million) and included capital expenditure incurred within the Marketing Activation and Books segments until their disposal as follows:

 

2018

£'m

2017

£'m

Continuing operations

4.1

2.1

Discontinued operations

0.5

1.4

 

4.6

3.5

The capital expenditure incurred within the continuing business primarily related to the fit out of new office space or the refurbishment of offices.

Solstice moved into a new office in Chicago allowing them to house all employees in one building and have capacity for future growth.

The merger of the data businesses allowed Occam and Response One to occupy one building in Bath. The freehold building that Response One had previously occupied was sold for a cash consideration of £3.2 million.

The sale of the legacy businesses created extra capacity at the Group's Head Office in London which allowed us to house the employees of AmazeRealise who previously operated from two locations. Pragma combined with FSP and relocated to Amaze's previous London premises with MyBench locating to Realises' previous London office, thereby limiting the amount of underutilised office space across the Group.

The total inflow of funds from the disposal of the legacy businesses was £32.4 million.

Debt

At the balance sheet date the Group's revolving credit facility was £95.0 million with an expiry date of March 2019.

Subsequent to the 2018 financial yearend, the Group has successfully negotiated a new revolving credit facility of £85.0 million that will expire on 30 November 2022 on terms broadly in line with the previous agreement. The banking group will consist of HSBC Bank plc, Bank of Ireland and Fifth Third Bank. 

Net debt decreased during the year from £54.6 million to £26.0 million, partly reflecting the disposal of the legacy businesses. At 3 August 2018, Kin + Carta had drawn £40.4 million on its revolving credit facility, leaving an unutilised commitment of £54.6 million. The Group had cash and cash equivalents of £14.4 million.

At 3 August 2018, the ratio of net debt to EBITDA before Adjusting Items was 1.1 times (2017: 1.6 times) as shown in the Alternative Performance Measures section.

In future, the Group will report on a calendar month basis. As such the Group's financial year end will be on 31 July from 2019 onwards.

 

Brad Gray

Chief Financial Officer

8 October 2018

 

 

Alternative Performance Measures

The Annual report includes both statutory and Adjusted results. In the management's view, the Adjusted results reflect the on-going performance of the business, how the business is managed on a day to day basis and allows for a consistent and meaningful comparison.

The APMs and KPIs are aligned to our strategy and are used to measure the performance of our business and are the basis for remuneration.

The Adjusted results exclude the items listed below as their inclusion could distort the understanding of the performance for the year and the comparison with prior years.

Key adjustments for Adjusted operating profit, profit before tax and EPS

Adjusted operating profit is calculated by adding back costs relating to, restructuring activities, acquisitions made in prior periods, the disposal of surplus property, impairment charges, movements in deferred consideration and St Ives Defined Benefits Pension Scheme. The tax effects of these adjustments are reflected in the Adjusted tax charge. The adjustments are detailed below:

1.   Profit on the disposal of property plant and equipment and restructuring costs - these items are excluded in order to reflect the performance of the business in a consistent manner and how the performance of the business is managed on a day to day basis. They are not considered to be part of the core activities of the business.

They have arisen as a result of initiatives to reduce the cost base and improve the efficiency and collaboration across the group. The initiatives reflect a significant change in the organisational structure of a business area and are assessed on an individual basis and excluded from the Adjusted results.

2.   Amortisation of acquired intangibles and impairments - the amortisation and impairments of assets acquired through business combinations are excluded from Adjusted results. These costs are acquisition related and are not part of the on-going trading performance of the business. The amortisation of computer software is included within the Adjusted results as it is part of the on-going trading performance.

3.   Contingent consideration required to be treated as remuneration, and increase in deferred consideration - Our acquisitions, where deferred consideration arises, are structured such that the consideration is contingent on continued employment within the Group. Under IFRS3 this is treated as an expense and therefore part of the statutory result. Where the purchase price has been determined and there is a subsequent increase or decrease arising from the payment of deferred consideration under IFRS3 this is required to be expensed. We consider this and not part of the underlying trading performance.

4.   Administrative expenses related to St Ives Defined Benefits Pension Scheme - the Scheme was closed to new members in 2002 and ceased future accrual in 2008. There are now less than 10 employees who are members of the Scheme and employed by the Group. On the disposal of the Books segment Kin and Carta plc is the last remaining employer. The costs of the Scheme are not considered to be part of the on-going performance of the Group and they are excluded from the performance measures. As such they are treated as Adjusting items.

 

The analysis of Adjusting Items from continuing operations is set out below:

Adjusting Items description

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Profit on disposal of property, plant and equipment

(1,542)

(2,760)

Amortisation of acquired intangibles

8,659

9,889

Expenses related to restructuring items

3,062

283

Impairment of goodwill and other assets

12,082

242

Contingent consideration required to be treated as remuneration

23,994

15,550

Increase in deferred consideration

3,094

 7,362

Costs associated with prior period acquisitions and setup of subsidiaries

-

99

Administrative (income)/expenses related to St Ives Defined Benefits Pension Scheme

(31)

1,253

Total Adjusting Items added back to the statutory operating profit

49,318

31,918

Pension finance charge

324

638

Total Adjusting Items added back to the statutory profit before tax

49,642

32,556

Tax related to Adjusting Items

(2,436)

(4,228)

Total Adjusting Items added back to the statutory profit after tax

47,206

28,328

The key APMs frequently used by the Group for continuing operations are:

Revenue growth at constant currency: The measure is defined as the percentage increase in revenue when comparing the current period to the prior period from continuing operations at constant currency. This is calculated by converting revenue of the prior year at the average exchange rate determined during the current year.

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Revenue

178,355

162,948

Retranslation at current year rate

-

(3,318)

Revenue at constant currency

178,355

159,630

Revenue growth at constant currency

11%

 

The average exchange rate for each functional currency is calculated as an average of the twelve monthly Sterling exchange rate ruling at the end of each period.

Adjusted operating profit: This measure is defined as the operating profit or loss less Adjusting Items.

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Statutory operating loss

(28,153)

(15,512)

Add back total Adjusting Items excluding pension finance charge and tax

49,318

31,918

Adjusted operating profit

21,165

16,406

Adjusted profit before tax: This measure is defined as the group net profit or loss before tax less Adjusting Items.

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Statutory loss before tax

(31,171)

(19,167)

Add back total Adjusting Items excluding tax

49,642

32,556

Adjusted profit before tax

18,471

13,389

 

Adjusted profit after tax: This measure is defined as the Group profit or loss after tax before Adjusting Items:

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Statutory loss after tax

(32,394)

(17,959)

Add back total Adjusting Items

47,206

28,328

Adjusted profit after tax

14,812

10,369

Adjusted basic earnings per share: This measure is defined as basic earnings per share after Adjusting Items.

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Adjusted profit after tax

14,812

10,369

Weighted number of shares ('000)

146,654

142,642

Adjusted basic earnings per share (pence)

10.10

7.27

Adjusted operating margin: This measure is defined as the percentage of Adjusted operating profit over revenue.

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Revenue

178,355

162,948

Adjusted operating profit

21,165

16,406

Adjusted operating margin

12%

10%

Adjusted EBITDA: This measure is defined as the Adjusted operating profit or loss before depreciation, amortisation, finance expense and taxation. The amortisation charge is adjusted to remove the effect of the amortisation of acquired intangibles, which is included as an Adjusting Item.

The Adjusted EBITDA for 2017 has been determined on the basis of the Adjusted metric for continuing and discontinued operations for the purpose of calculating the ratio of net: EBITDA.

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Adjusted operating profit

21,165

27,105

Add:

Depreciation and amortisation - continuing operations for the current year

11,025

16,773

Less: Amortisation of intangibles classified as Adjusting Items

(8,659)

(9,889)

Adjusted EBITDA

23,531

33,989

 

Net debt: This measure is calculated as the total of loans and other borrowings (both current and non-current), less cash and cash equivalents.

 

2018

£'000

2017

£'000

Loans - current liabilities

40,363

-

Loans - non-current liabilities

-

80,245

Cash and cash equivalents

(14,398)

(25,651)

Net Debt

25,965

54,594

Net debt to Adjusted EBITDA: This measure is calculated by dividing Net Debt by Adjusted EBITDA. The Adjusted EBITDA for the prior year is based on continuing and discontinued operations.

 

53 weeks to

3 August

2018

£'000

52 weeks to

28 July

2017

£'000

Adjusted EBITDA

23,531

33,989

Net Debt

25,965

54,594

Net debt to Adjusted EBITDA

1.10

1.61

 

         Consolidated Income Statement    

 

53 weeks to 3 August 2018

52 weeks to 28 July 2017

 

 

Note

Adjusted Results

 

£'000

Adjusting items

(note 3)

£'000

Statutory Results

 

£'000

Adjusted Results

 

£'000

Adjusting

items

(note 3)

£'000

Statutory Results

 

£'000

 

 

 

 

 

 

 

 

Continuing operations:

 

 

 

 

 

 

 

Revenue

2

178,292

63

178,355

162,948

-

162,948

Cost of sales

 

(105,110)

(247)

(105,357)

(101,709)

-

(101,709)

Gross profit/(loss)

 

73,182

(184)

72,998

61,239

-

61,239

Selling costs

 

(10,749)

-

(10,749)

(10,699)

-

(10,699)

Administrative expenses

 

(41,817)

(50,676)

(92,493)

(34,547)

(34,678)

(69,225)

Share of results of joint arrangement

 

569

-

569

355

-

355

Other operating (expense)/income

 

(20)

1,542

1,522

58

2,760

2,818

Operating profit/(loss)

 

21,165

(49,318)

(28,153)

16,406

(31,918)

(15,512)

Net pension finance expense

 

-

(324)

(324)

-

(638)

(638)

Other finance expense

 

(2,694)

-

(2,694)

(3,017)

-

(3,017)

Profit/(loss) before tax

2

18,471

(49,642)

(31,171)

13,389

(32,556)

(19,167)

Income tax (charge)/credit

4

(3,659)

2,436

(1,223)

(3,020)

4,228

1,208

Net profit/(loss) for the period from continuing operations

 

14,812

(47,206)

(32,394)

10,369

(28,328)

(17,959)

Discontinued operations:

 

 

 

 

 

 

 

Net profit/(loss) from discontinued operations

 

3,511

(326)

3,185

8,735

(34,134)

(25,399)

Net profit/(loss) for the period

from continuing and

discontinued operations

 

 

 

18,323

(47,532)

(29,209)

19,104

(62,462)

(43,358)

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Shareholders of the parent company

 

    18,323

 (47,532)

   (29,209)

    19,104

   (62,462)

   (43,358)

 

 

 

 

 

 

 

 

Basic and diluted earnings/(loss) per share (p)

 

 

 

 

 

 

 

From continuing operations

7

10.10

(32.19)

(22.09)

7.27

(19.86)

(12.59)

From continuing and discontinued operations

7

      12.49

   (32.41)

     (19.92)

      13.39

     (43.79)

     (30.40)

Adjusted results exclude Adjusting Items to enhance understanding of the ongoing financial performance of the Group. Adjusting Items comprise of redundancies, restructuring costs; gain or loss on disposal of properties; impairment or amortisation charges related to goodwill, tangible and intangible assets; contingent consideration required to be treated as remuneration; movements in deferred consideration and costs related to the St Ives Defined Benefits Pension Scheme. Further details are provided within Alternative Performance Measure section.

*The results for the 52 weeks to 28 July 2017 have been re-presented to reflect the results of the Books and Marketing Activation segments as discontinued operations following their disposals during the period (note 3).

            Consolidated Statement of Comprehensive Income 

 

 

 

53 weeks to
3 August
2018
 £'000

52 weeks to
28 July
2017
 £'000

Loss for the period

 

(29,209)

(43,358)

  Items that will not be reclassified subsequently to profit or loss:

 

 

 

  Actuarial gains on defined benefits pension scheme

 

10,958

8,958

  Tax charge on items taken through other comprehensive income

 

(1,731)

(1,584)

 

 

9,227

7,374

  Items that may be reclassified subsequently to profit or loss:

 

 

 

  Transfers of losses on cash flow hedges

 

76

302

  Gains/(losses) on cash flow hedges

 

265

(138)

  Foreign exchange (loss)/gain

 

(852)

369

 

 

(511)

533

  Other comprehensive income for the period

 

8,716

7,907

Total comprehensive expense for the period attributable to shareholders of the parent company

 

(20,493)

(35,451)

 

 

 

             Consolidated Statement of Changes in Equity

 

 

Share

 capital

£'000

Additional paid-in capital**

£'000

Treasury shares

£'000

Share option reserve

 £'000

Hedging and translation reserve

£'000

Other reserves

£'000

Retained earnings

£'000

Total

£'000

Balance at

29 July 2016

14,244

69,795

(163)

6,723

661

77,016

42,368

133,628

Loss for the period

-

-

-

-

-

-

(43,358)

(43,358)

Other comprehensive income

-

-

-

-

533

533

7,374

7,907

Comprehensive income/(expense)

-

-

-

-

533

533

(35,984)

(35,451)

Dividends

-

-

-

-

-

-

(8,705)

(8,705)

Recognition of share-based contingent consideration deemed as remuneration

-

-

-

6,969

-

6,969

-

6,969

Transfer of share-based contingent consideration deemed as remuneration

-

225

-

(5,676)

-

(5,451)

5,754

303

Recognition of share-based payments

-

-

-

70

-

70

-

70

Settlement of share-based payments

40

398

-

(123)

-

275

123

438

Tax on share-based payments

-

-

-

(63)

-

(63)

16

(47)

Balance at

28 July 2017

14,284

70,418

(163)

7,900

1,194

79,349

3,572

97,205

Loss for the period

-

-

-

-

-

-

(29,209)

(29,209)

Other comprehensive (expense)/income

-

-

-

-

(511)

(511)

9,227

8,716

Comprehensive expense

-

-

-

-

(511)

(511)

(19,982)

(20,493)

Dividends

-

-

-

-

-

-

(2,784)

(2,784)

Recognition of share-based contingent consideration deemed as remuneration

-

-

-

6,016

-

6,016

-

6,016

Transfer of share-based contingent consideration deemed as remuneration

-

119

-

(6,865)

-

(6,746)

6,965

219

Recognition of share-based payments

-

-

-

1,274

-

1,274

-

1,274

Settlement of share-based contingent consideration deemed as remuneration

1,059

-

-

(1,101)

-

(1,101)

42

-

Tax on share-based payments

-

-

-

(74)

-

(74)

-

(74)

Balance at

3 August 2018

15,343

70,537

(163)

7,150

683

78,207

(12,187)

81,363

 ** Additional paid-in capital represents share premium, merger reserve and capital redemption reserve.

 

             Consolidated Balance Sheet

 

 

 

Note

3 August
2018
£'000

28 July
2017
£'000

Assets

 

 

 

Non-current assets

 

 

 

Property, plant and equipment

 

6,301

26,235

Investment property

 

4,470

-

Goodwill

 

84,742

108,676

Other intangible assets

 

31,493

42,792

Available for sale asset

 

3

3

Investment in joint arrangement

 

223

517

Deferred tax assets

 

1,264

375

Retirement benefits surplus

8

1,858

-

Other non-current assets

 

13

13

 

 

130,367

178,611

Current assets

 

 

 

Inventories

 

-

6,253

Trade and other receivables

 

40,451

91,063

Derivative financial instruments

 

291

45

Income tax receivable

 

904

124

Assets held for sale

 

5,282

11

Cash and cash equivalents

 

14,398

25,651

 

 

61,326

123,147

Total assets

 

191,693

301,758

Liabilities

 

 

 

Current liabilities

 

 

 

Loans

 

40,363

-

Trade and other payables

 

35,851

79,539

Derivative financial instruments

 

62

17

Income tax payable

 

61

1,461

Deferred consideration payable

 

21,170

15,920

Deferred income

 

4,915

7,141

Provisions

 

919

388

 

 

103,341

104,466

Non-current liabilities

 

 

 

Loans

 

-

80,245

Retirement benefits obligations

8

-

16,041

Other non-current liabilities

 

822

682

Provisions

 

1,849

1,823

Deferred tax liabilities

 

4,318

1,296

 

 

6,989

100,087

Total liabilities

 

110,330

204,553

Net assets

 

81,363

97,205

 

 

 

 

Capital and reserves

 

 

 

Share capital

 

15,343

14,284

Other reserves

 

78,207

79,349

Retained earnings

 

(12,187)

3,572

Total equity

 

81,363

97,205

These financial statements were approved by the Board of Directors on 8 October 2018.

              Consolidated Cash Flow Statement

 

 

 

Note

53 weeks to
3 August
2018
 £'000

52 weeks to
29 July
2016
 £'000

Operating activities

 

 

 

Cash generated from operations

9

25,848

30,686

Interest paid

 

(2,694)

(3,017)

Income taxes paid

 

(5,430)

(587)

Net cash generated from operating activities

 

17,724

27,082

 

 

 

 

Investing activities

 

 

 

Purchase of property, plant and equipment

 

(4,425)

(3,154)

Purchase of other intangibles

 

(149)

(311)

Proceeds on disposal of property, plant and equipment

 

3,166

11,770

Proceeds on disposal of subsidiaries

 

32,442

-

Deferred consideration paid for acquisitions made in prior periods

 

(16,518)

(663)

Net cash generated from investing activities

 

14,516

7,642

 

 

 

 

Financing activities

 

 

 

Proceeds on issue of shares

 

-

438

Dividends paid

 

(2,784)

(8,705)

Decrease in bank loans

 

(40,000)

(15,000)

Net cash used in financing activities

 

(42,784)

(23,267)

Net (decrease)/increase in cash and cash equivalents

 

(10,544)

11,457

Cash and cash equivalents at beginning of the period

 

25,651

11,835

Effect of foreign exchange rate changes

 

(709)

2,359

Cash and cash equivalents at end of the period

 

14,398

25,651

 

 

 

 

 

 

 

Notes to the Consolidated Financial Statements

 

1. Basis of preparation

The preliminary results have been prepared on the basis of the accounting policies as set out in the Group's Annual Report and Accounts 2018 and 2017. The financial information set out in the preliminary results does not comprise statutory accounts for the purpose of section 434 of the Companies Act 2006 in respect of the periods ended 3 August 2018 and 28 July 2017.

The financial information for the period ended 3 August 2018 has been extracted from the Group's 2018 statutory accounts for that period which have been prepared on a going concern basis and in accordance with the recognition and measurement principles of International Financial Reporting Standards as adopted by the European Union ('IFRS') and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The preliminary results have been prepared under the historical cost convention, except for the recognition of derivative financial instruments and available-for-sale investments, and using the accounting policies set out in the Group's 2018 statutory accounts. The accounting policies adopted are consistent with those of the previous financial year, and there have been no changes in accounting standards during the year that have had a material effect on the Group.

The 2018 statutory accounts will be delivered to the Registrar of Companies following the Company's 2018 Annual General Meeting. The financial information for the period ended 28 July 2017 has been extracted from the Group's statutory accounts for that period, which have been delivered to the Registrar of Companies. The prior period information has been restated to classify the trading results of the Books and Marketing Activation segments as discontinued operations. Further details are provided in note 10. The Auditor's report on both the Group's 2018 and 2017 statutory accounts were unqualified and did not contain statements under sections 498(2) or 498(3) of the Companies Act 2006 in respect of the 2018 and 2017 statutory accounts.

Going concern

The Directors, having made appropriate enquiries, consider that adequate resources exist for the Group to continue in operational existence for a period of at least twelve months from the date of approval of the condensed consolidated financial statements and that, therefore, it is appropriate to adopt the going concern basis in preparing the combined financial information for the fifty three weeks ended 3 August 2018.

 

2. Segment reporting

The Group reports its results through one segment and with corporate costs shown separately. This is based on the Group's internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been determined to be the Chief Executive Officer and Chief Financial Officer as they are primarily responsible for the allocation of resources and the assessment of performance of the segments.

During the period, the Group disposed of its Books and Marketing Activation segments. Therefore the operating segment includes all of the digital transformation businesses; AmazeRealise, The App Business, Solstice, Edit, Pragma, Incite and Hive. The result of our joint venture, Loop, is also reported within this segment. This segment was formerly referred to as the Strategic Marketing segment.

Results from continuing operations for the current period:

 

53 weeks to 3 August 2018

 

 

Businesses

£'000

Corporate
 costs
£'000

Total

£'000

 

 

 

 

Revenue

178,355

-

178,355

 

 

 

 

Operating profit/(loss) before Adjusting Items

26,483

(5,318)

21,165

Adjusting Items

(49,287)

(31)

(49,318)

Statutory loss from operations

(22,804)

(5,349)

(28,153)

Net pension finance expense

 

 

(324)

Other finance expense

 

 

(2,694)

Statutory loss before tax

 

 

(31,171)

Income tax charge

 

 

(1,223)

Statutory net loss for the period from continuing operations

 

 

(32,394)

 

Results from continuing operations for the prior period:

 

52 weeks to 28 July 2017

 

 

Businesses

£'000

Corporate
 costs
£'000

Total

£'000

 

 

 

 

Revenue

-

162,948

 

 

 

 

Operating profit/(loss) before Adjusting Items

20,808

(4,402)

16,406

Adjusting Items

(30,665)

(1,253)

(31,918)

Statutory loss from operations

(9,857)

(5,655)

(15,512)

Net pension finance expense

 

 

(638)

Other finance expense

 

 

(3,017)

Statutory loss before tax

 

 

(19,167)

Income tax credit

 

 

1,208

Statutory net loss for the period from continuing operations

 

 

(17,959)

 

Geographical segments

Revenue by geographical segment is based on the location where the provision of goods and services have been provided.

 

3 August
2018
£'000

28 July
2017
£'000

United Kingdom

119,753

120,074

United States of America

57,066

40,896

Rest of the world

1,536

1,978

Total

178,355

162,948

2. Segment reporting (continued)

The Group derives 55% (2017: 61%) of the total revenue from customers located in the UK, 36% (2017: 30%) of the total revenue from customers located in the US and 9% (2017: 9%) from customers located in the rest of the world.

3. Adjusting items

Adjusting items disclosed on the face of the Consolidated Income Statement are as follows:

Expense/(income)

2018
£'000

2018
£'000

2017
£'000

2017
£'000

Restructuring items

 

 

 

 

Redundancies and other charges

2,737

 

283

 

Costs associated with empty properties

325

 

-

 

 

 

3,062

 

283

St Ives Defined Benefits Pension Scheme costs/(credits)

 

 

 

 

Scheme administrative costs

617

 

756

 

Curtailment credit

(1,261)

 

-

 

Other related costs

613

 

497

 

 

 

(31)

 

1,253

Costs related to acquisitions made in prior periods

 

 

 

 

Amortisation of acquired intangibles

8,659

 

9,889

 

Impairment of goodwill and intangible assets

12,082

 

242

 

Costs associated with prior period acquisitions and setup of subsidiaries

-

 

99

 

Contingent consideration required to be treated as remuneration

23,994

 

15,550

 

Increase in deferred consideration

3,094

 

7,362

 

 

 

47,829

 

33,142

Adjusting Items

 

50,860

 

34,678

Profit on disposal of property, plant and equipment

 

(1,542)

 

(2,760)

Adjusting Items before interest and tax

 

49,318

 

31,918

Net pension finance expense in respect of defined benefits pension scheme

 

324

 

638

Adjusting Items before tax

 

49,642

 

32,556

Income tax credit

 

(2,436)

 

(4,228)

Adjusting Items after tax

 

47,206

 

28,328

 

Restructuring items

The restructuring items in the current period include redundancy and restructuring costs of £2.5 million incurred by AmazeRealise, Hive and Incite and redundancies of £0.2 million in head office following the disposal of the Group's Books and Marketing Activation segments.

As a result of the amalgamation of Occam and Response One into the new Edit office located in Bath, there is an empty property cost of £0.3 million.
 

3. Adjusting items (continued)

Disposal of properties

The profit on disposal of property, plant and equipment of £1.5 million relates to the sale of properties in Bath and Bungay.

St Ives Defined Benefits Pension Scheme costs

The Scheme charges include service costs of £0.6 million, a net pension finance charge of £0.3 million and costs in relation to running the scheme of £0.6 million offset by a one off curtailment credit of £1.3 million. These items are recorded in corporate costs.

Costs related to acquisitions made in prior periods

Charges relating to the amortisation of acquired customer relationships, proprietary techniques and software amounted to £8.7 million in the current period.

Due to a decline in revenue generated from our healthcare business, Hive's goodwill was impaired by £9.6 million and an impairment charge of £2.1 million was recorded against Hive's proprietary techniques. In addition, £0.4 million of impairment charge was recorded against the proprietary techniques related to Fripp, Sandeman and Partners ('FSP') due to obsolescence of techniques.

In the current period, the tax credit of £2.4 million (2017 - £4.2 million) relates to the items discussed above.

4. Income tax credit/(charge)

Income tax (charge)/credit as shown in the Consolidated Income Statement is as follows:

Continuing operations:

 

 

2018
£'000

2017
£'000

Total current tax charge:

 

 

Current period

(3,588)

(3,155)

Adjustments in respect of prior periods

58

483

Total current tax charge

(3,530)

(2,672)

Deferred tax on origination and reversal of temporary differences:

 

 

Deferred tax credit

2,249

3,933

Adjustments in respect of prior periods

58

(53)

Total deferred tax credit

2,307

3,880

Total income tax (charge)/credit

(1,223)

1,208

 

 

Discontinued operations:

 

2018
£'000

2017
£'000

Total current tax charge:

 

 

Current period

(894)

(1,357)

Adjustments in respect of prior periods

35

199

Total current tax charge

(859)

(1,158)

Deferred tax on origination and reversal of temporary differences:

 

 

Deferred tax credit

175

828

Adjustments in respect of prior periods

19

(168)

Total deferred tax credit

194

660

Total income tax charge

(665)

(498)

 

 

 

4. Income tax credit/(charge) (continued)

Continuing and discontinued operations:

 

2018
£'000

2017
£'000

Total current tax charge:

 

 

Current period

(4,482)

(4,512)

Adjustments in respect of prior periods

93

682

Total current tax charge

(4,389)

(3,830)

Deferred tax on origination and reversal of temporary differences:

 

 

Deferred tax credit

2,424

4,761

Adjustments in respect of prior periods

77

(221)

Total deferred tax credit

2,501

4,540

Total income tax (charge)/credit

(1,888)

710

The income tax (charge)/credit on the loss before and after adjusting items are as follows:

 

Continuing Operations

2018
£'000

2017
£'000

Tax charge on Adjusted profit before tax

(3,659)

(3,020)

Tax credit on Adjusting items

  2,436

4,228

Total income tax (charge)/credit

 (1,223)

1,208

 

 

 

Discontinued Operations

 

 

Tax charge on Adjusted profit before tax

(665)

(1,964)

Tax credit on Adjusting items

-

1,466

Total income tax (charge)/credit

    (665)

(498)

 

 

 

Continuing and discontinued Operations

 

 

Tax charge on Adjusted profit before tax

(4,324)

(4,984)

Tax credit on Adjusting items

2,436

5,694

Total income tax (charge)/credit

 (1,888)

710

 

The income tax (charge)/credit for continuing operations can be reconciled to the loss before tax per the Consolidated Income Statement as follows:

 

2018
£'000

2017
£'000

Loss before tax from continuing operations

(31,171)

(19,167)

Tax calculated at a rate of 19.04% (2017: 29.67%)

5,935

5,687

Non-deductible charges on impairment of tangible and intangible assets

(1,817)

-

Expenses not deductible for tax purposes

(6,546)

(7,541)

Effect of tax deductible goodwill

626

634

Effect of change in United Kingdom corporate tax rate

(46)

(143)

Credit on research and development activities

244

307

Movement in deferred tax on industrial buildings

290

1,824

Re-assessment of tax losses

(25)

9

Adjustments in respect of prior periods

116

431

Total income tax (charge)/credit

(1,223)

1,208

 

 

 

4. Income tax credit/(charge) (continued)

Income tax charge as shown in the Consolidated Statement of Comprehensive Income is as follows:

 

2018
£'000

2017
£'000

United Kingdom corporation tax credit at 19.00% (2017: 19.67%)

1,258

548

Deferred tax on origination and reversal of temporary differences

(2,989)

(2,132)

Total income tax charge

(1,731)

(1,584)

 

Income tax credit as shown in the Consolidated Statement of Changes in Equity is as follows:

 

2018
£'000

2017
£'000

United Kingdom corporation tax credit at 19.00% (2017: 19.67%)

-

(16)

Deferred tax on origination and reversal of temporary differences

74

63

Total income tax credit

74

47

 

5. Acquisitions

The total impact on investing cash outflow in the current period relating to acquisitions made in prior period is as follows:

 

 

£'000

TAB - working capital

381

TAB - deferred consideration

3,767

Solstice - deferred consideration

12,370

Net cash outflow

16,518

6. Dividends

 

per share

2018
£'000

2017
£'000

Final dividend paid for the 52 weeks ended 29 July 2016

5.45p

7,777

Interim dividend paid for the 26 weeks ended 27 January 2017

0.65p

928

Final dividend paid for the 52 weeks ended 28 July 2017

1.30p

1,857

Interim dividend paid for the 27 weeks ended 2 February 2018

0.65p

927

Dividends paid during the period

 

2,784

8,705

Proposed final dividend at the period end of 1.30p per share                                                                                                                                                         (2017: 1.30p per share)

1.30p

1,993

 

7. Earnings per share

The calculation of the basic and diluted earnings per share are based on the following:

Number of shares

 

 

2018
'000

2017
'000

Weighted average number of ordinary shares for the purposes of basic and diluted earnings per share

146,654

142,642

Effect of dilutive potential ordinary shares:

 

 

   Share options

Weighted average number of ordinary shares for the purposes of diluted earnings per share

146,654

142,642

 

 

7. Earnings per share (continued)

Basic and diluted earnings per share

Continuing Operations:

 

 

 

2018

2017

 

Earnings/(loss)

£'000

Earnings/(loss)
per share
pence

Earnings/(loss)

£'000

Earnings/(loss)
per share
pence

Continuing operations:

 

 

 

 

Earnings/(loss) and basic and diluted earnings/(loss) per share

 

 

 

 

Adjusted earnings and Adjusted basic earnings per share

14,812

10.10

10,369

7.27

Adjusting items

(47,206)

(32.19)

(28,328)

(19.86)

Loss and basic and diluted loss per share

(32,394)

(22.09)

(17,959)

(12.59)

 

 

 

 

 

Discontinued operations:

 

 

 

 

Earnings/(loss) and basic and diluted earnings/(loss) per share

 

 

 

 

Adjusted earnings and Adjusted basic earnings per share

3,511

2.39

8,735

6.12

Adjusting items

(326)

(0.22)

(34,134)

(23.93)

Earnings/(loss) and basic and diluted earnings/(loss) per share

3,185

2.17

(25,399)

(17.81)

 

 

 

 

 

Continuing and discontinued operations:

 

 

 

 

Earnings/(loss) and basic and diluted earnings/(loss) per share

 

 

 

 

Adjusted earnings and Adjusted basic earnings per share

18,323

12.49

19,104

13.39

Adjusting items

(47,532)

(32.41)

(62,462)

(43.79)

Loss and basic and diluted loss per share

(29,209)

(19.92)

(43,358)

(30.40)

 

Adjusted earnings is calculated by adding back Adjusting Items, as adjusted for tax, to the loss for the period.

8. Retirement benefits

As at 3 August 2018, the Group reported a net surplus in respect of the St Ives Defined Benefits Pension Scheme of £1.9 million compared to a deficit of £16.0 million reported as at 28 July 2017. This is primarily due to a decrease in plan liabilities. The decrease in the plan liabilities is primarily attributable to an increase in the discount rate, a number of experience adjustments and a fall in the rate of increase in life expectancy.

 

 

9. Notes to the consolidated cash flow statement

Reconciliation of cash generated from operations

 

 

2018
£'000

2017
£'000

Operating loss from continuing operations

(28,153)

(15,512)

Operating profit/(loss) from discontinued operations

3,850

(24,901)

 

 

 

Adjustments for:

 

 

Depreciation of property, plant and equipment

3,905

6,149

Share of profit from joint arrangement

(569)

(355)

Disbursements from joint arrangement

876

-

Impairment losses related to continuing operations

12,082

33,058

Impairment losses related to discontinued operations

18,833

-

Amortisation of intangible assets

8,683

10,624

Gain on disposal of subsidiaries

(18,334)

-

Profit on disposal of property, plant and equipment

(1,501)

(2,818)

Share-based payment charge

1,274

70

Decrease in defined benefits pension scheme obligations

(7,882)

(2,789)

Re-measurement of deferred consideration

3,094

7,362

Charge for contingent consideration required to be treated as remuneration

23,994

15,550

Increase/(decrease) in provisions

1,402

(5)

Operating cash inflows before movements in working capital

21,554

26,433

Decrease/(increase) in receivables

9,620

(130)

Decrease in inventory

662

583

Increase/(decrease) in payables

(4,587)

2,852

(Decrease)/increase in deferred income

(1,401)

948

Cash generated from operations

25,848

30,686

Analysis of net debt

 

2018
£'000

2017
£'000

Cash and cash equivalents

      14,398

      25,651

Loan - current assets

(40,363)

-

Loan - noncurrent assets

-

(80,245)

 

(25,965)

(54,594)

Cash and cash equivalents (which are presented as a single class of assets on the face of the consolidated balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

The effective interest rates on cash and cash equivalents are based on current market rates.

Analysis of financing liabilities

 

28 July
2017
£'000

Financing
 Cash flow
£'000

Transfer
£'000

Foreign exchange                    losses
£'000

3 August
2018
£'000

Bank loans - non current

(80,245)

-

80,245

-

-

-

40,000

(80,245)

(118)

(40,363)

 

(80,245)

40,000

-

(118)

(40,363)

 

 

                                                                                                                                   

 

 

10. Disposals

Books segment

The Group disposed of its Books segment on 30 April 2018 for total cash consideration of £26.0 million. The trading results of the Books segment up to the date of disposal are summarised as follows;

 

 

From 29 July 2017
to 30 April 2018
£'000

52 Weeks
to 28 July 2017
£'000

Profit from the Books segment before Adjusting Items:

 

 

Revenue

              52,198

              76,465

Operating costs

             (48,526)

             (72,387)

Operating profit before Adjusting Items

                3,672

                4,078

Income tax charge

                  (621)

                  (571)

Profit after tax before Adjusting Items

                3,051

                3,507

 

 

 

Adjusting Items:

 

 

Fixed asset impairment

-

               (2,232)

Stock impairment

-

                  (646)

Restructure of the business

-

               (1,505)

Adjusting Items before tax

-

               (4,383)

Income tax credit on Adjusting Items

-

                   746

Adjusting Items after tax

-

               (3,637)

Gain on sale of Books segment

                5,562

-

Total Adjusting Items

                5,562

               (3,637)

 

 

 

Profit/(loss) from discontinued operations:

 

 

Profit after tax before Adjusting Items

3,051

                3,507

Adjusting Items

-

               (3,637)

Gain on sale of Books segment

5,562

-

Statutory profit/(loss) after tax

                8,613

                  (130)

The net assets of the Books segment as at 30 April 2018 are summarised as follows;

 

30 April 2018
£'000
Assets/(liabilities)

Property, plant and equipment

7,350

Intangible assets

1

Deferred tax assets

214

Inventories

3,662

Trade and other receivables

15,519

Cash and cash equivalents

5,598

Trade and other payables

(12,966)

Corporation tax payable

(337)

Net assets

19,041

Selling costs

1,397

Profit on disposal before tax

5,562

Total consideration received

26,000

The fair value of the consideration received for the disposal of the Books segment as at 30 April 2018 was      £26.0 million.

 

 

 

10. Disposals (continued)

Books segment (continued)

The disposal of Books segment had the following impact on investing cashflows in the current period:

 

£'000

Consideration received in cash and cash equivalents

26,000

Less:

 

Cash and cash equivalents disposed of

(5,598)

Selling costs

(1,397)

Net cash inflow

19,005

 

Marketing Activation segment

The Group disposed of its Marketing Activation segment during the period, with SP Group, Service Graphics and Tactical Solutions being disposed of on 2 March 2018 for a total cash consideration of £9.8 million, and St Ives Management Services Limited being disposed of on 22 June 2018 for a total consideration of £14.2 million. The trading results of the Marketing Activation segment are summarised as follows;

 

From 29 July 2017
to the date of disposal
£'000

52 Weeks
to 28 July 2017
£'000

Profit from the Marketing Activation segment before Adjusting Items:

 

 

Revenue

            88,540

       153,741

Operating costs

           (88,036)

      (147,120)

Operating profit before Adjusting Items

                 504

           6,621

Income tax charge

                 (44)

         (1,393)

Profit after tax before Adjusting Items

                 460

           5,228

 

 

 

Adjusting Items:

 

 

Goodwill impairment

(14,482)

       (27,130)

Impairment of non-current and current assets

(4,351)

         (2,808)

Restructuring costs

-

         (1,215)

Amortisation of intangibles

173

              (64)

Adjusting Items before tax

           (18,660)

       (31,217)

Income tax credit on Adjusting Items

-

             720

Adjusting Items after tax

           (18,660)

       (30,497)

Gain on sale of Marketing Activation segment

            12,772

-

Total Adjusting Items

             (5,888)

       (30,497)

Loss from discontinued operations:

 

28 July 2017
to the date of disposal

£'000

52 Weeks
to 28 July 2017
£'000

Profit after tax before adjusting items

                 460

           5,228

Adjusting Items

           (18,660)

       (30,497)

Gain on sale of Marketing Activation segment

            12,772

                -  

Statutory loss after tax

             (5,428)

       (25,269)

 

 

 

10. Disposals (continued)

Marketing Activation segment

The net assets of the Marketing Activation segment as at the date of disposal are summarised as follows;

 

 

Assets/
(liabilities)
£'000

Impairment
£'000

Total
£'000

Property, plant and equipment

               1,740

       (1,558)

182

Goodwill

              14,482

      (14,482)

-

Other intangible assets

                  255

          (244)

11

Other non-current assets

                  127

          (127)

-

Deferred tax assets

               1,049

-

1,049

Inventories

               1,929

       (1,929)

-

Trade and other receivables

              26,535

          (493)

26,042

Cash and cash equivalents

               9,700

-

9,700

Trade and other payables

            (25,415)

-

(25,415)

Provisions

                 (844)

-

(844)

Corporation tax

                 (360)

-

(360)

Net assets

29,198

(18,833)

10,365

Selling costs

 

 

820

Profit on disposal before tax

 

 

12,772

Total consideration received

 

 

23,957

The fair value of the consideration receivable on the disposal of the Marketing Activation segment is comprised as follows:

 

 

 

 

£'000

Cash consideration paid on 2 March 2018

 

 

9,765

Cash consideration paid on 22 June 2018

 

 

14,192

Total consideration received

 

 

23,957

The disposal had the following impact on investing cashflows in the current period:

 

 

 

£'000

Consideration received in cash and cash equivalents

 

 

23,957

Less:

 

 

 

Cash and cash equivalents disposed of

 

 

(9,700)

Selling costs

 

 

(820)

Net cash inflow

 

 

13,437

Cashflows

The net cash inflow from the disposals of the Books and Marketing Activation segments are as follows:

 

£'000

Books

19,005

Marketing Activation

13,437

 

32,442

 

 

 

The discontinued operations had the following impact on operating and investing cashflows in the current and prior period:

 

2018

£'000

2017

£'000

Cash generated from operating activities

3,950

6,628

Cash used in investing activities

 (520)

(767)

Increase in cash and cash equivalents from discontinued operations

3,430

5,861

11. Related parties

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. No material related party transactions have been entered into during the period, which might reasonably affect the decisions made by the users of these financial statements.

No executive officers of the Company or their associates had material transactions with the Group during the period.

The Group earned revenue of £0.2 million (2017:£ 0.8 million) from Loop Integration LLC and the Group incurred £19,000 charges (2017:£nil) for services received. The Group also received a dividend of £0.4 million (2017: £nil). At the reporting date, Loop Integration LLC owed the Group £8,000 (2017: £27,000) for services rendered. 

12. Post balance sheet event

Subsequent to the year end, the Group has successfully negotiated a new revolving credit facility of £85.0 million that will expire on 30 November 2022 on terms broadly in line with the previous agreement.

13. Principal Risks

The Group's principal risks and key mitigating activities in place to address them, as at 29 July 2017, are set out in pages 24 to 27 of the Group's Annual Report and Accounts 2017, a copy of which is available on the Group's website: www.kinandcarta.com.

The principal risks have been considered by the Board and changes to the risk ratings have been made, since the period ended 28 July 2017 as follows;

(i)   Growth

This risk relates to growth initiatives that may be under invested or not pursued in the right sectors or territories and may therefore fail to deliver growth. Whilst our digital transformation businesses have strong client servicing organisations, some have under invested in new business and partnership channels, compromising potential growth rates.

 

The risk rating associated with this risk has been increased from medium to high, compared to the prior year due to the smaller size of the Group following the disposal of the legacy businesses. As such, it is the impact rather than the likelihood that has resulted in the increase.

 

Mitigating activities to address this risk include: further investment in new business functions; developing the Group's proposition (The Connective) to encourage collaborative behaviour and growth opportunities; detailed budgets and three year plans submitted to the Board for review; and stringent selection criteria followed for pursuing acquisitions that fit within the Group's strategy and culture.

 

(ii)  Assimilation

 

This risk has been added as a key risk this year following the recent merging of businesses. There could be short term challenges, as cultures are merged and logistic considerations are managed. The group has merged six of its businesses into two digital platforms - AmazeRealise and Edit. Whilst this is the right move in order to create a solid platform for growth, there is a risk of short-term impacts as the businesses assimilate.

 

The board considers this risk to be a short-term risk during the integration phase. It will continue to be monitored by the Board.

 

Mitigations in place include: new office moves to house new businesses in the same location and to create a more positive working environment; people focused initiatives and bonding to encourage a uniform culture; and developing processes and procedures to improve efficiency.

 

(iii) Clients

This risk covers the loss of clients due to competitive pressures. The Group has a variety of key clients within each business across a number of sectors. Long-term relationships have been fostered with many of these clients over a number of years.

Following the disposal of the print legacy businesses this risk, whilst significant, has been revised from high to medium compared to the prior year. The print segments had experienced over capacity with price pressure largely prevalent. No single client, of the continuing operations makes up more than 10% of the Group's revenue.

Mitigating activities include: encouraging collaborative behaviour across the Group's businesses and creating a commitment to cross-selling that will distinguish the Group's marketing offering from its competitors'; achieving or exceeding service level agreements with clients; broadening our capabilities and providing marketing solutions in support of our clients' marketing strategies; avoiding over reliance on any single client; implementing bespoke propositions for securing the renewal of key client contracts; providing Group support where appropriate; and conducting client satisfaction surveys.

 

(iv) Brand and Culture

 

The Group has undergone a rebranding and whilst considerable thought has gone into the rebrand, there is a risk that it might not resonate with the Group's stakeholders and not facilitate the culture being promoted.

 

This is a new risk following the launch of the new brand, Kin + Carta and the inherent risk is set as high as it is vital that the brand architecture is cohesive and easily understood by clients and top talent globally. The Group has consulted extensively internally to ensure that there is alignment with the core values of the rebrand.  The board consider the residual risk to be medium.

 

Mitigations in place include: involving the operating businesses with the rebranding and its launch through undertaking a thorough consultation process; and strong leadership alignment at the top of the organisation to demonstrate that the Group's purpose is to serve its employees and not the other way around.

 

(v)  Pension Scheme

This risk covers the volatility of the St Ives Defined Benefits Pension Scheme ("the Scheme") deficit, which may be impacted by the inflation rate, changes in the discount rate derived from gilt yields and changes in actuarial assumptions, such as mortality.

This risk rating associated with the Scheme has reduced on prior year as the deficit has been eliminated in the current year. As at 3 August 2018, the Scheme has a surplus of £1.9 million compared to a deficit of £16.0 million in the prior year.

Mitigating activities include: the agreement of a deficit recovery plan with the Pension Scheme Trustee; regular engagement with the Trustee directors with discussions on the Group's performance; managing possible Section 75 debts arising from business disposals and closures; and contributing to discussions on the Scheme's investment strategy.

 

 

14. Responsibilities

 

The 2018 Annual Report and Accounts which will be issued in November 2018 contains a responsibility statement in compliance with DTR 4.1.12 of the Listing Rules which sets out that as at the date of approval of the Annual Report and Accounts on 8 October 2018, the directors confirm to the best of their knowledge:

 

·      the Group and Company financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group and Company, respectively; and

·      the performance review contained in the Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that they face.

 

At the date of this statement, the directors are those listed in the Group's 2017 Annual Report and Accounts with the exception of the following appointments and resignations:

Appointment:     J Schwan          - Chief Executive Officer - 4 August 2018

                        David Bell          - Non Executive Director - 4 August 2018

Resignation:      Matt Armitage    - Chief Executive Officer - 4 August 2018

                        Ben Gordon       - Non Executive Director - 30 November 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The foregoing contains forward looking statements made by the directors in good faith based on information available to them up to 8 October 2018. Such statements need to be read with caution due to inherent uncertainties, including economic and business risk factors underlying such statement.


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