Final Results - Year Ended 31 December 1999
Quarto Group Inc
22 February 2000
THE QUARTO GROUP - 1999 PRELIMS
' Our major markets remain buoyant....I am confident that, in
2000, we shall see an improving trend'
* Quarto, the London based and listed global co-edition
publisher, announces that, for the year ended 31st
December 1999, underlying pre-tax profits increased 48.9%
and, at £4.11 million, are ahead of expectations.
1999 1998 Increase
as restated
Sales (£m) 76.5 74.6 +2.5%
Operating profit (£m) 5.83 4.72 +23.5%
Pre-tax profit (£m) 4.11 2.76 +48.9%
Headline earnings per
share (p) 15.8 4.9 +222.4%
Dividends per share (p) 4.5 4.5 -
Excluding Broughton Hall, whose operations were
discontinued in November 1998
* The International Co-Edition Publishing Division's sales
increased 3.8% to £47.1 million. Operating profit rose
18.0% to £5.81 million. The operating margin increased to
12.3% from 10.8% -well ahead of consumer book publishing
industry norms.
* A combination of sharper publishing criteria, new
creative appointments, and robust cost controls improved
overall performance. A new co-edition list, Global
Publishing, was launched. It has a strong programme and
substantial advance orders for the current year.
* The Publishing Division's sales were up 0.5% at £29.4
million. Operating profit increased 22.3% to £1.21
million.
* Strong cash generation during the year resulted in a
reduction in external debt, on a constant currency basis,
of £3.3 million.
* Quarto published more than 250 new book titles in 1999,
extending still further its extensive content base, which
already runs to over 3,000 titles. We have launched iQu-
digital.com as a vehicle to co-ordinate the internet
exploitation and licensing of this valuable resource.
Books were sold to publishers in 35 different countries
in 25 languages, underlining the global nature of the
business and Quarto's leading role as a producer of
quality illustrated non-fiction books and book-related
material.
* Laurence Orbach, Chairman and Chief Executive, stated;
' Our major markets remain buoyant, the calibre of our
publishing programmes has risen, and we have a stronger
overall management team. Our new initiatives have made
encouraging starts. I am confident that, in 2000, we
shall continue the improving trend'.
There will be an analyst meeting at 11.00 a.m. today at
Bankside Consultants, 123 Cannon Street,
EC4. This announcement and other investor-related information
is available at www.quarto.com.
Enquiries:
The Quarto Group, Inc. 0171-700 9000
Terry Hancock (Chief Operating Officer) 0171-700 9015
Email: terryh@quarto.com
Mick Mousley (Chief Financial Officer) 0171-700 9005
Email: mickm@quarto.com
Bankside Consultants Limited 0171-220 7477
Charles Ponsonby
Email: charles@bankside.co.uk
CHAIRMAN'S STATEMENT
FINANCIAL OVERVIEW
At the time we released our interim statement, in September, I
wrote that there were tangible signs of improvement in our
business. I am pleased now to report that, for the year ended
31st December 1999, sales were up by 2.5% to £76.5 million
(1998: £74.6 million), pre-tax profit was 48.9% higher and,
at £4.11 million (1998: £2.76 million), was ahead of market
expectations. Overall operating margins improved to 7.6%,
compared with 6.3% in 1998. This translated into a 23.5%
increase in operating profit to £5.83 million (1998: £4.72
million). The accounting policy changes that were announced
at the interim stage have reduced our tax bill. The improved
trading results and the reduced tax charge led to a more than
threefold surge in headline earnings per share to 15.8p (1998:
4.9p).
All these figures exclude the US directory publisher,
Broughton Hall, whose operations were discontinued in November
1998. In the 1999 interim results we recorded an exceptional
charge of £5.23 million for Broughton Hall, which included a
goodwill write-back of £4.94 million that affected
neither net assets nor cash. For comparative purposes, the
1998 figures have been re-stated to reflect the accounting
policy changes introduced during the current year.
During the year, we worked assiduously to reduce our external
debt and improve our working capital management. By the end
of the year, debt had declined by a net £2.9 million, working
capital as a percentage of sales fell by 4%, and overheads
were down by 1%. The new accounting policy changes helped us
to sharpen the focus of our publishing programmes. This has
resulted in a much better return on new titles. They also
helped our list publishers to focus on producing improved
ranges of books: a virtuous combination that augurs well for
the future.
DIVIDENDS
The Board is recommending an unchanged final dividend per
ordinary share of 2.3p, making a total for the year of 4.5p
(1998: 4.5p). If approved at the Annual General Meeting on
27th April 2000, the dividend will be paid on 5th May 2000 to
shareholders on the register at the close of business on 7th
April 2000.
TRADING REVIEW
During 1999, Quarto reorganised from four divisions into two:
International Co-edition Publishing, and Publishing, in order
to reflect more appropriately our core activities.
International Co-edition Publishing Division
Co-edition publishing remains at the heart of the Group. In
1999 the division produced 62% of Group revenue (1998: 61%)
and over 200 new book titles were published. The seven,
separate lists that comprise the division produce titles in
the how-to and self-improvement areas, specialising in art,
crafts, gardening, self-help, health, photography, and design,
all produced for adults, and inter-active books aimed at both
children and adults. The largest single market in 1999 was
North America (38%), followed by Europe (34%), the UK (15%)
and the rest of the world (13%). In addition to these book
imprints, our Far Eastern-based pre-press and print broking
businesses were merged into this division in 1999 and produced
many titles for Group and third party clients.
The strategic and operational reviews that we undertook in
1999 yielded immediate benefits. Operating profits for the
division rose 18% to £5.81 million (1998: £4.92 million) on
sales 4% higher at £47.1 million (1998: £45.4 million).
Equally gratifying, the operating margin rose to 12.3% (1998:
10.8%), indicating that we are making good progress towards
our divisional target of 15%, and is already ahead of the
norms in the consumer book publishing industry.
There were a number of key initiatives in 1999:
* New publishing appointments were made at Quarto, Quarto
Children's Books, Quantum, and Rockport. In addition, we
recruited Gordon Cheers, from Random House in Australia,
to establish our new Global Publishing list. This
resulted in a substantial improvement in the overall
creative skills in the division, and the relevance of our
publishing programmes.
* We refined our publishing criteria to ensure that our
investments in new books yield acceptable returns and
that titles subsequently have an enduring shelf life. As
a result, we saw an average 40% improvement in the
investment return on new titles. Reprints continue to
comprise over two-thirds of total revenue.
* We re-doubled our efforts at controlling our costs, and
we improved our operating performance generally. In
1999, divisional gross margins rose by 2%, as pre-press
costs declined. Printing costs rose only marginally, and
overheads were tightly controlled.
At Quarto Adult, we had much success with our self-help
titles, as well as more traditional titles, emphasising the
range of the list. Quintet consolidated its reputation for
stylish cookery, craft, and lifestyle books. At Quarto
Children's, our established educational pre-school and
juvenile ranges continued to grow their already substantial
sales. We added several innovative, colourful, new titles and
series to these.
Design Eye publishes highly innovative kit books for both
adults and children. Sales in 1999 reached almost £11
million, and operating profits rose to a new high. These
excellent achievements owed much to the vision and energy of
one of the founders of Design Eye, Michael Tout, who died
unexpectedly and tragically at the early age of 42 on 16th
August 1999. We feel his loss very deeply and hope that we
can continue to do justice to his legacy.
In July, we established a new list, Global Publishing. Its
mission is to publish definitive reference books, with as many
as 1,000 pages per title, over a broad range of subject areas.
In 2000, we will be publishing Anatomica, the most definitive,
illustrated, family reference book on the human body yet
published. This will be followed by the Global Wine
Encyclopaedia. These titles have attracted very substantial
pre-publication orders from leading publishers around the
world. As each of these productions contains around 1 million
words and a vast resource of photographs and illustrations in
digital form, we are negotiating with a number of companies to
make our extensive material available on the Internet.
We have widened the publishing programmes at both Rockport and
RotoVision, our graphics and commercial art publishing units.
Rockport's operating profits rose considerably on level sales.
At RotoVision, sales advanced substantially, and cash
generation improved.
Hong Kong-based Regent and Singapore-based ProVision provide
important services to the Group and third parties, using their
local presences to leverage competitive print buying and
exercising close quality control.
Publishing Division
The Publishing Division now includes our book, magazine, and
art publishing imprints, in addition to the UK-based screen
printing businesses. We have operations based in the United
States, the UK, and Australia that work largely within their
respective domestic markets. Divisional performance is stated
on a like-for-like basis.
Sales increased by 0.5% to £29.4 million. Operating profits
advanced by 22.3% to £1.21 million, helped by better
inventory management and reduced overhead. The operating
margin for the division increased to 4.1% (1998: 3.4%).
New product lines at our book publisher, Walter Foster, and
the art publishing businesses, were well received. The UK-
based screen printing businesses, AP and Western, which
produce point of sale and display material for the retail
trade, produced record results, with substantial gains in
turnover and profit. Our Artist's and Illustrator's Magazine
maintained its market-leading position in the UK.
In Australia, our art publishing business made considerable
strides. Successful new print ranges, and a rigorous focus on
overheads, virtually eliminated the 1998 operating loss. In
the USA, our art publishing business also improved, but
remained loss making. We anticipate a significant improvement
in 2000 although there is much more work to be done to produce
the kind of profit returns we have traditionally earned in
this line of business. In 1999, overheads were reduced
further. We combined back office operations and unified the
management of the lists by appointing, from within the
business, a new CEO for the whole operation. We also took
steps to reposition our lists away from less profitable mass
market areas and extend our new higher value ranges.
Book Sales, our promotional publisher in the USA, did less
well than in 1998. The focus on improving margins and cash
generation was probably a little too intense. The consequence
was that sales declined slightly, and this produced lower
operating profits. We have already responded to this by
increasing the level of third party business, and encouraging
a wider publishing range.
INTEREST AND INDEBTEDNESS
The interest charge for the year was £1.72 million (1998:
£1.93 million). Interest cover increased to 3.4 times (1998:
2.4 times). Year-end debt was down by £2.9 million, to
£20.9 million (1998: £23.8 million). We were comfortably
within our banking covenants and facilities. We expect
further debt reductions in the current year.
THE INTERNET
The Internet is having a transforming and revolutionary impact
on business. Most of Quarto's commercial activities are
business to business. We have no measurable public 'face' and
sell our products to other publishers and distributors. For
some years we have recognized that there is a market for our
material in a number of digitized and electronic outlets.
Quarto, unlike most book publishers, has always had a policy
of owning, rather than licensing, most of the content in our
books. This, coupled with the fact that our archive is, in
this respect, much vaster than most other publishers, puts us
in a very strong position to benefit from the growth of
e-commerce. Many investors have not appreciated that very
few book publishers 'own' what they publish: they are merely
licensed by authors to exploit the content in book form.
In this respect, Quarto is very different and our content
archive is potentially very valuable.
Quarto is already exploiting this archive, and is deriving
useful additional revenue at very low cost. At this stage, we
have taken the view that to digitize older portions of our
archive would not be cost-effective but we are happy to
license it to other merchants, for a fee, for them to digitize
it at their expense. We have established iQu-digital.com as a
vehicle to co-ordinate the exploitation and licensing of this
valuable asset.
PROSPECTS
After two years of relative disappointment in 1997 and 1998,
we see a bright future ahead. We have largely concluded the
extensive strategic and operational reviews we commenced at
the beginning of 1999. Some of the early benefits of this
programme are reflected in these results. We expect that
further progress from these initiatives will materialize in
the current year. Our major markets remain buoyant, the
calibre of our publishing programmes has risen, and we have a
stronger overall management team. We have further remedial
work to complete in our art publishing business, but have a
clear strategy for improvement here. Elsewhere, our new
initiatives, in particular, Global Publishing, have made
encouraging starts. I am confident that we shall continue the
improving trend in 2000 and thank our staff, suppliers, and
customers for their good work in 1999.
Laurence F Orbach
Chairman
THE QUARTO GROUP, INC.
PROFIT AND LOSS ACCOUNT
for the year ended 31 December 1999
1998
1999 (as
restated)
£000 £000
Turnover: Continuing operations 76,456 74,581
Discontinued operations - 4,575
------ ------
76,456 79,156
====== ======
Gross Profit 25,932 27,275
Net operating expenses (20,107) (22,261)
Amortisation of goodwill (12) -
------ ------
Operating Profit: Continuing 5,813 4,715
operations
Discontinued operations - 299
------ ------
5,813 5,014
Share of loss of associate - (20)
Exceptional item: Closure of (5,230) (580)
Broughton Hall
------ ------
583 4,414
Net interest payable (1,716) (1,931)
------ ------
(Loss)/profit on ordinary
activities
before taxation:
Continuing operations 4,109 2,764
Amortisation of goodwill (12) -
Exceptional items (5,230) (580)
Discontinued operations - 299
------ ------
(1,133) 2,483
Taxation (390) (849)
------ ------
(Loss)/profit on ordinary
activities
after taxation (1,523) 1,634
Minority interests - equity (440) (555)
------ ------
(Loss)/profit for the financial (1,963) 1,079
year
Dividend (including non-equity) (1,262) (1,278)
------ ------
Deficit for the financial year (3,225) (199)
====== ======
Earnings per share (13.5)p 3.3p
====== ======
Underlying earnings per share 15.8p 4.9p
====== ======
Diluted earnings per share (9.3)p 3.3p
====== ======
Diluted underlying earnings per 15.6p 4.9p
share
====== ======
THE QUARTO GROUP, INC.
CONSOLIDATED BALANCE SHEET
as at 31 December 1999
1998
1999 (as
restated)
£000 £000
Fixed assets
Goodwill 792 -
Tangible assets 6,341 6,408
------ ------
7,133 6,408
------ ------
Current assets
Stocks and work in progress 16,849 17,889
Debtors 26,243 29,021
Investments 1 1
Cash and deposits 9,567 5,355
------ ------
52,660 52,266
Creditors: Amounts falling due (26,362) (27,884)
within one year
------ ------
Net current assets 26,298 24,382
------ ------
Total assets less current 33,431 30,790
liabilities
Creditors: amounts falling due (29,833) (28,496)
after more than one year
Provision for liabilities and
charges
Deferred taxation (1,151) (1,188)
------ ------
Net assets 2,447 1,106
====== ======
Capital and reserves
Called up share capital 1,341 1,341
Reserves - paid in surplus 23,891 23,891
- revaluation 1,018 1,018
- profit and loss (26,097) (27,278)
Treasury stock (461) (461)
------ ------
Shareholders' funds (308) (1,489)
------ ------
Equity (5,512) (6,693)
Non equity 5,204 5,204
------ ------
(308) (1,489)
Minority interests - equity 2,755 2,595
------ ------
2,447 1,106
====== ======
THE QUARTO GROUP, INC.
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 1999
1999 1998
£'000 £'000
Net cash inflow from operating 8,259 5,907
activities
------ ------
Net cash outflow from return on (2,191) (2,417)
investment and servicing of finance
------ ------
Taxation (594) (678)
------ ------
Capital expenditure (465) (878)
------ ------
Acquisition and disposals (67) 30
------ ------
Equity dividends paid (928) (955)
------ ------
Management of liquid resources
Movement of short term deposits (1,418) 105
------ ------
Financing
Purchase of shares - (461)
Movement in debt 478 855
------ ------
Net cash flow from financing 478 394
------ ------
Increase in cash 3,074 1,508
------ ------
Reconciliation of net cashflow to
movement in (debt)/funds
Movement in cash 3,074 1,508
Movement in debt (478) (855)
Management of liquid resources 1,418 (105)
------ ------
4,014 548
New finance leases (726) (139)
Translation differences (364) 221
------ ------
Net cash inflow 2,924 630
------ ------
Movement in debt for year
Net debt at beginning of year (23,818) (24,448)
------ ------
Net debt at end of year (20,894) (23,818)
------ ------
NOTES
1. The financial information contained in the preliminary
announcement does not constitute the Company's statutory
accounts for the years ended 31 December 1999 or 1998 but is
derived from those accounts. Statutory accounts for 1998 have
been delivered to the Registrar of Companies; those for 1999
will be delivered following the Company's Annual General
Meeting. The auditors have reported on those accounts, their
reports were unqualified and did not contain a statement under
Section 237(2) or (3) of the Companies Act 1985. The accounts
for the year ended 31 December 1999 have been prepared using
accounting policies consistent with the previous year with the
exception of the change in accounting policy with regard to
the development cost of books as set out in note 2 below.
2. The accounting policy of capitalising the development
costs of books and amortising them over the estimated economic
life of the books (not more than three years) was changed
during the year. The Directors consider the new policy of
charging all development costs against the first printing of a
book to be a more appropriate and fair presentation of the
results and financial position of the Group. The comparative
figures have been restated to reflect the new policy, the
effect of which is as follows:
a) The consolidated operating profit and profit on ordinary
activities before taxation for the year ended 31 December 1998
were reduced by £1,196,000 and the consolidated net assets at
31 December 1998 were reduced by £13,315,000.
b) Had the Group continued to adopt the old policy, the
consolidated operating profit and profit on ordinary
activities before taxation for the year ended 31 December 1999
would have been lower by £269,000 and the consolidated net
assets at 31 December 1999 would have been higher by
£12,906,000.
3. The exceptional item comprises the closure costs on
Broughton Hall. It includes £4,937,000 relating to the
goodwill previously written off to reserves on acquisition.
4. Dividends comprise:
1999 1998
£'000 £'000
Non Preference 455 455
equity:
Equity: Ordinary: Interim 395 411
Final 412 412
proposed
------ ------
1,262 1,278
====== ======
The Board proposes a final dividend of 2.3p net (1998:
2.3p) per share of common stock of par value US$0.10 each
('ordinary shares') which is expected to be paid on 5
May 2000 to shareholders on the register on 7 April 2000.
5. The calculation of earnings per share is based on
17,925,306 shares (1998: 18,644,484) and a loss, after
minority interests and preference dividends, of £2,418,000
(1998: profit of £624,000).
The calculation of underlying earnings per share is based
on earnings of £2,824,000 (1998: £905,000) calculated as
follows:
1999 1998
£'000 £'000
Earnings after minority interest and (2,418) 624
preference dividends
Exceptional items 5,230 580
Amortisation of goodwill 12 -
Earnings of discontinued operations - (299)
------ -----
2,824 905
====== =====
Diluted earnings per share is based on 21,063,732 shares
(1998: 18,653,004) and a loss, after minority interests,
of £1,963,000 (1998: profit of £624,000). Diluted
underlying earnings per share is based on 21,063,732
shares and earnings of £3,279,000 (1998: 18,653,004
shares and earnings of £905,000).
6. The Annual Report will be sent out to shareholders in due
course. Additional copies can be obtained from the Company
Secretary, The Quarto Group, Inc., The Old Brewery, 6 Blundell
Street, London, N7 9BH.