QRT.L Regulatory News (QRT)

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.

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.

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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

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Comprehensive Income

For the year ended 31 December 2022

THE QUARTO GROUP, INC.

Condensed Consolidated Balance Sheet

At 31 December 2022

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Changes in Equity

For the year ended 31 December 2022

THE QUARTO GROUP, INC.

Condensed Consolidated Cash Flow Statement

For the year ended 31 December 2022

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.

Segmental balance sheet

3. Exceptional items

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

5. Taxation

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.

6. Earnings per share

7. Goodwill

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:

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

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).

Net debt

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.