Half Year Results

RNS Number : 8433O

Quarto Group Inc

12 August 2014

 



THE QUARTO GROUP, INC.

Half-Year Results for the Six Months Ended 30 June 2014

The Quarto Group, Inc. (LSE: QRT), the world's leading global illustrated book publisher and distribution group announces its half-year results for the six months ended 30 June 2014.

Financial Highlights

·     Revenue of $65.6m (H1 2013 $72.2m); continuing operations down 3%

·     Underlying ¹ Profit before Taxation of $0.7m (H1 2013 $1.7m)

·     Underlying ¹ diluted Earnings per Share of 2.0 cents (H1 2013 5.6 cents)

·     Net debt reduced to $81.5m (H1 2013 $83.3m); down $7.0m on a constant currency basis including proceeds of the sale of a Swiss property for $1.9m

·     Interim dividend maintained at 3.35p (H1 2013 3.35p)

Operational Highlights

·     Continuing revenue in the core publishing businesses down 1% as a result of US wholesaler HDA ceasing operations, backlist destocking and weak uptake of new titles by major book retailers

·     Better prospects for the publishing businesses in the second half based on order book visibility, strong foreign sales and flow through of 2013 investment in product development

·     Turnaround of ANZ display marketing business continues, with greater visibility of improvement in Australia than New Zealand

·     Board further strengthened by the addition of Jess Burley in May

¹Underlying is before amortization of acquired intangibles, gain on sale of property and exceptional items.

Commenting on the results, Chief Executive Officer, Marcus Leaver, said:

"Despite a tough first half we expect the new product and the marketing & sales initiatives that we invested, in 2013, to deliver a strong second half in our publishing businesses. There are positive signs of the turnaround we targeted in the Books & Gifts Direct business in Australia and New Zealand. The Group should deliver earnings growth in 2014 as expected."

Chairman, Tim Chadwick, added:

"We are making steady progress and our people have shown resolve in what has been a challenging year to date. Despite adverse exchange rates, we have paid down debt and will continue to do so. We have a settled Board and have established the requisite Audit, Remuneration and Nomination Committees. We are maintaining the interim dividend and will continue our focus on earnings growth and continuing to pay down debt."

For further information, please contact:

Quarto                                                                                  020 7700 9004

Marcus Leaver, CEO

Mick Mousley, CFO

Bell Pottinger                                                                    020 7861 2840

Elly Williamson

Harriet Clarfelt

About The Quarto Group

The Quarto Group (LSE: QRT) is the leading global illustrated book publisher and distribution group and is listed on the London Stock Exchange.  Quarto employs over 400 talented and creative people in five distinct but complementary businesses - Quarto International Co-Editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK; Books & Gifts Direct, Australia & New Zealand and Regent Publishing Services, Hong Kong.

The Group is well positioned in resilient segments of book publishing with rich reserves of Intellectual Property.  Quarto is uniquely positioned for growth as the industry adapts to new means of marketing, sales and routes to market.  The Group's headquarters are in London where the Company was founded in 1976.

Business Review

Group Performance

The first half of the year has been an undeniably challenging time for Quarto.

Our core publishing businesses have shown resilience in the face of some adversity, particularly in the US where the wholesaler, HDA, ceased trading and has impacted profitability by more than $0.5m. The turnaround we believed would be possible in our display marketing business is underway.  To date this has had greater success in Australia than New Zealand, where we have incurred further restructuring costs of $0.3m.

As detailed in the 2013 Annual Report, the Board is committed to reflecting operational expenses, such as these, through the P&L and not separating them out as exceptional items as has been done in the past.

We have continued to focus on debt reduction despite adverse exchange rates and we include proceeds from the sale of a Swiss property for $1.9m, which resulted in a non-recurring profit of $0.6m. This sale and the progress made in ANZ resulting from our ongoing strategic review may yet afford further opportunities to create the optimal group.

Despite all of the challenges outlined, the group's four businesses have turned in a performance which puts us on track for our expectations of earnings growth for the full year. We expect a greater than usual second half weighting as our investments in product and marketing & sales initiatives from FY2013 come through; they are beginning to already in our International Co-Editions business. We continue to enjoy a great degree of visibility in many areas of the business, which underpins our cautious optimism at the half year.  This visibility will be enhanced with the direct sales relationships we have entered into, as discussed below.

During this half, we have also commenced a comprehensive gift and stationery programme and increased our focussed investment in children's books, going from five dedicated children's imprints to eight.  We continue to explore joint ventures around the World.

Divisional Performance

Quarto International Co-Editions Group

·     Revenue $12.6m (H1 2013 $10.7m)

·     Operating profit $737k (H1 2013 $32k)

After consolidating several imprints in 2013 to give this business a new direction, this business has had a good first half.

Our Brazilian joint venture has made an encouraging start having launched 20 titles that will make a small positive contribution to operating profit in 2014.  This showcases the group's ability to use the Quarto platform to build new revenue.

The forward order book for this business allows healthy forward visibility for the full year that shows particular strength in foreign language sales.

Quarto Publishing Group USA

·     Revenue $27.0m (H1 2013 $29.1m)

·     Operating profit $2.2m (H1 2013 $3.6m)

This business experienced a tough first half, largely because the distributor for our books into Lowes and Tractor Supply Company ('TSC') - HDA - ceased trading.  After making no sales into these stores for four months, we have now established a direct relationship with both companies in May and achieved sales in June that gives us confidence that future sales into these stores will be more profitable than when we distributed via HDA. 

The first half results are set against a strong comparative last year.  Further we have seen our major North American book retailers destocking backlist and supporting front list buys cautiously.  

The second half should see better sales via Lowes and TSC and a better publishing performance with more 'lead' titles developed in the imprints that were reorganised in 2013 and where we invested in new product. In addition we shall see the benefit of a better co-edition performance, visible through the co-edition order book that is now managed by the combined Quarto Foreign Rights team.

Quarto Publishing Group UK

·     Revenue $7.6m (H1 2013 $8.3m)

·     Operating profit $329k (H1 2013 $499k)

The new Managing Director has settled in well and met management expectations for the half-year. This a good performance in a tough domestic market while seeing the benefits of our US sales team doing an excellent job of selling our UK originated titles in that market.

Expectations for the second half are healthy, based on the number of 'lead' titles due to be published, driven by efforts taken by new publishing management to reinvigorate the pipeline during the course of 2013 with investment in new product.

Books & Gifts Direct, ANZ

·     Revenue $11.8m (H1 2013 $12.3m)

·     Operating profit $585k (H1 2013 $984k)

New management for the display marketing business was put in place in September last year.  We consolidated our Australia and New Zealand businesses, now one display marketing business under the re-invigorated brand Books & Gifts Direct, ANZ on 1 March 2014.  We have seen overall improvement but performance has varied by geography.  Australia had a challenging first half but has a good order book for the year as a whole and better product scheduled for delivery in the second half.  New Zealand also faced a challenging market and bore some further restructuring costs as we merged two businesses in the North Island into one and re-branded as Books & Gifts Direct.  Issues with product mix are being resolved which should allow for a better second half.

Other

·     Revenue $6.5m (H1 2013 $11.8m)

·     Operating profit $623k (H1 2013: $855k)

First half numbers for 'Other' include The Image Factory (H1 2013: $4.4m) which was sold in H2 last year.  Regent, our Hong Kong based print broker, is performing in line with expectations. 

Outlook

Our business is always second half weighted, and this year we anticipate it being more so than usual. We continue to enjoy a great degree of visibility in many areas of the business, which underpins our cautious optimism at the half year. Despite the setbacks of the first half of the year, the comprehensive restructuring we did in all areas of the business in FY2013 will manifest themselves; the sales, marketing and operational efficiencies are beginning to show effect and the investment in intellectual property will come through as new books get published. Quarto is stronger and more coherent than it has been and continues to show its resilience.

On the basis of current levels of underlying trading, the Group is on track to meet management expectations for the year and deliver both debt reduction and earnings growth.

THE QUARTO GROUP, INC

CONDENSED CONSOLIDATED INCOME STATEMENT

for the six months to June 30, 2014

	Six months ended June 30, 2014	Six months ended June 30, 2013	Year ended December 31, 2013
	$'000	$'000	$'000
Revenue	65,566	72,194	176,318
Operating profit before amortization of intangibles, gain on sale of property, and exceptional items	2,383	4,033	15,957
Amortization of non-current intangible assets	(247)	(216)	(434)
Gain on sale of property	633	-	-
Exceptional items	-	(817)	(5,318)
Operating profit	2,769	3,000	10,205
Finance costs	(1,722)	(2,448)	(4,796)
Financial income	84	163	353
Profit before taxation	1,131	715	5,762
Taxation	(242)	(220)	(1,416)
Profit for period	889	495	4,346
Profit for the period attributable to:
Owners of the parent company	714	279	3,934
Non-controlling interests	175	216	412
	889	495	4,346
Earnings per share (Note 6)	3.6c	1.4c	20.0c
Diluted earnings per share (Note 6)	3.6c	1.4c	20.0c
The following information is presented as additional information and does not form part of the Income Statement :
Underlying earnings per share (Note 6)	2.0c	5.6c	44.0c
Underlying diluted earnings per share (Note 6)	2.0c	5.6c	44.0c

THE QUARTO GROUP, INC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the six months to June 30, 2014

	Six months to June 30, 2014	Six months to June 30, 2013	Year to December 31, 2013
	$'000	$'000	$'000
Profit for the period	889	495	4,346
Other comprehensive income
Foreign exchange translation differences	846	(2,096)	(2,002)
Reclassification of translation reserve on disposal	-	-	202
Cash flow hedge: change in fair value	156	588	1,136
Net income recognised directly in equity	1,002	(1,508)	(664)
Total comprehensive income and expense for the period	1,891	(1,013)	3,682
Attributable to:
Owners of parent	1,724	(1,254)	3,247
Non-controlling interests	167	241	435
	1,891	(1,013)	3,682

THE QUARTO GROUP, INC

CONSOLIDATED BALANCE SHEET

at June 30, 2014

	June 30,	June 30,	December 31
	2014	2013	2013
	$'000	$'000	$'000
Non-current assets
Goodwill	42,112	40,495	41,367
Other intangible assets	1,183	1,186	991
Property, plant and equipment	2,471	9,103	3,752
Deferred tax asset	2,149	2,672	2,226
Total non-current assets	47,915	53,456	48,336
Current assets
Intangible assets: Pre-publication costs	63,838	55,586	56,221
Inventories	23,489	21,879	19,181
Trade and other receivables	42,247	44,937	56,043
Derivative financial instruments	-	50	-
Tax receivable	-	385	-
Cash and cash equivalents	12,677	20,377	23,879
Total current assets	142,251	143,214	155,324
Total assets	190,166	196,670	203,660
Current liabilities
Short-term borrowings	(94,145)	(16,814)	(16,603)
Derivative financial instruments	(243)	-	(427)
Trade and other payables	(38,267)	(36,703)	(52,784)
Tax payable	(592)	-	(671)
Total current liabilities	(133,247)	(53,517)	(70,485)
Non current liabilities
Medium and long-term borrowings	-	(86,850)	(78,291)
Deferred tax liabilities	(5,082)	(5,261)	(4,938)
Derivative financial instruments	-	(865)	-
Other payables	-	(46)	-
Total non-current liabilities	(5,082)	(93,022)	(83,229)
Total liabilities	(138,329)	(146,539)	(153,714)
Net assets	51,837	50,131	49,946
Equity
Share capital	2,045	2,045	2,045
Paid in surplus	33,764	33,764	33,764
Retained profit and other reserves	11,052	7,134	9,328
Total equity attributable to owners of the parent	46,861	42,943	45,137
Non-controlling interests	4,976	7,188	4,809
Total equity	51,837	50,131	49,946

THE QUARTO GROUP, INC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months to June 30, 2014

	Share capital	Paid in surplus	Hedging reserve	Translation reserve	Treasury shares	Retained earnings	Equity attributable to owners of the parent	Non-controlling interests	Total
	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000
At December 31, 2012	2,045	33,759	(1,453)	(1,858)	(643)	12,333	44,183	6,947	51,130
Total comprehensive income for the period	-	-	588	(2,121)	-	279	(1,254)	241	(1,013)
Share options exercised	-	5	-	-	9	-	14	-	14
At June 30, 2013	2,045	33,764	(865)	(3,979)	(634)	12,612	42,943	7,188	50,131
Total comprehensive income for the period	-	-	548	298	-	3,655	4,501	194	4,695
Dividends to shareholders	-	-	-	-	-	(2,427)	(2,427)	-	(2,427)
Dividends paid to non controlling interests	-	-	-	-	-	-	-	(168)	(168)
Purchase of non-controlling interests	-	-	-	-	-	120	120	(2,405)	(2,285)
At December 31,2013	2,045	33,764	(317)	(3,681)	(634)	13,960	45,137	4,809	49,946
Total comprehensive income for the period	-	-	156	854	-	714	1,724	167	1,891
At June 30, 2014	2,045	33,764	(161)	(2,827)	(634)	14,674	46,861	4,976	51,837

THE QUARTO GROUP, INC

CONDENSED CASH FLOW STATEMENT

for the six months to June 30, 2014

	Six months to June 30, 2014	Six months to June 30, 2013	Year to December 31, 2013
	$'000	$'000	$'000
Profit for the period	889	495	4,346
Tax expense	242	220	1,416
Net finance costs	1,638	2,285	4,443
Depreciation	490	778	1,374
Amortization of non-current intangible assets	247	216	434
Amortization of pre-publication costs	9,122	8,798	17,899
Movement in fair value of derivatives	(28)	(99)	61
Profit on sale of fixed assets	(628)	(120)	1,367
Loss on disposal of subsidiaries and businesses	-	-	1,801
Changes in working capital	(3,075)	(247)	2,789
Corporation tax paid	(431)	(1,435)	(2,087)
Net cash from operating activities	8,466	10,891	33,843
Purchase of tangible fixed assets	(327)	(471)	(1,998)
Proceeds on disposal of subsidiaries & businesses	-	-	1,057
Proceeds on disposal of fixed assets	1,852	175	4,861
Investment in pre-publication costs	(15,626)	(12,984)	(19,468)
Purchase of subsidiaries/minority interests	(1,977)	-	-
Interest received	84	192	353
Net cash used in investing activities	(15,994)	(13,088)	(15,195)
Exercise of share options	-	14	14
Dividends paid	-	-	(2,427)
Interest paid	(1,760)	(2,469)	(4,886)
Dividends paid to non-controlling shareholders	-	-	(168)
Net loans repaid	(2,082)	(665)	(13,400)
Net cash flows from financing activities	(3,842)	(3,120)	(20,867)
Net decrease in cash and cash equivalents	(11,370)	(5,317)	(2,219)
Cash and cash equivalents at beginning of period	23,879	26,718	26,718
Foreign currency exchange differences on cash and cash equivalents	168	(1,024)	(620)
Cash and cash equivalents at end of period	12,677	20,377	23,879

THE QUARTO GROUP, INC

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months to June 30, 2014

1.   Introduction

These interim consolidated financial statements are for the half year to June 30, 2014.  They were approved by the Board on August 11, 2014 and are unaudited, as is the case with the comparative figures to June 30, 2013.  These interim financial results do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006.  Statutory accounts for the year to December 31, 2013, prepared in accordance with International Financial Reporting Standards as adopted by the EU, which carried an unmodified Auditors' Report, have been filed with the Registrar of Companies and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

2.   Basis of preparation

These interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, "Interim Financial Reporting", as adopted by the European Union.

The Directors have formed a judgement that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.  For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.  The Group has significant banking facilities.  In particular, the Group has committed facilities of $111.6m through to December 6, 2014 and thereafter, $95m through to April 30, 2015.  The Group is currently reviewing its financing arrangements, which include the extension or renegotiation of existing facilities.  The Group has continued to comply with its bank covenants and is budgeted to do so for the foreseeable future.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended December 31, 2013, as described in those financial statements.

3.   Segmental analysis

	Revenue 2014 $000	Revenue 2013 $000	Operating Profit 2014 $000	Operating Profit 2013 $000
Revenue
Quarto Publishing Group USA	26,957	29,083	2,188	3,622
Quarto Publishing Group UK	7,624	8,276	329	499
Quarto International Co-Editions Group	12,645	10,745	737	32
Books & Gifts Direct, ANZ	11,814	12,323	585	984
Other	6,526	11,767	623	855
	65,566	72,194	4,462	5,992
Segment result before
amortisation of non-current tangibles
and exceptional items			4,462	5,992
Amortisation of non-current intangibles			(247)	(216)
Exceptional items			-	(817)
Segment result			4,215	4,959
Gain on sale of property			633
Unallocated corporate expenses			(2,079)	(1,959)
Operating profit			2,769	3,000
Investment income			84	163
Finance costs			(1,722)	(2,448)
Profit before tax			1,131	715
Tax			(242)	(220)
Profit after tax			889	495

4.   Exceptional items

Exceptional items in H1 2013 primarily related to restructuring costs.

5.   Taxation

Taxation for the six months to June 30, 2014 is based on the estimated underlying tax rate for the year. The rate that has been used is 25.0% (June 30, 2013: 25.0% and December 31, 2013: 21.0%).

6.   Earnings Per Share and Underlying Earnings Per Share         

The calculation of earnings per share of 3.6c (June 30, 2013: 1.4c; December 31, 2013: 20.0c) is based on 19,696,729 shares (the weighted average number of issued shares, excluding those held as treasury stock) (June 30, 2013: 19,694,189 shares; December 31, 2013: 19,694,658) and profits of $714,000 (June 30, 2013: $279,000; December 31, 2013: $3,934,000).  The calculation of underlying earnings per share is based on earnings of $387,000 (June 30, 2013 $1,095,000; December 31, 2013: $8,673,000), calculated as follows:

	June 30,	June 30,	December 31,  2013
	2014	2013
	$'000	$'000	$'000
Earnings after non-controlling interests	714	279	3,934
Amortization of non-current intangible assets *	172	147	297
Gain on sale of property*	(499)	-	-
Exceptional items*	-	669	4,442
	387	1,095	8,673
Underlying earnings per share	2.0c	5.6c	44.0c
* net of tax

There is no dilution in earnings per share or underlying earnings per share for the six months to June 30, 2014 and June 30, 2013 or for the year to December 31, 2013.

7.   Dividend

The interim dividend of 3.35p per share is payable on October 27, 2014, to shareholders on the register on September 26, 2014, with an ex-dividend date of September 24, 2014.

8.   Reconciliation of figures included in the Announcement

	June 30,	June 30,	December 31,
	2014	2013	2013
	$'000	$'000	$'000
Underlying operating profit	2,383	4,033	15,957
Amortization of non-current intangible assets	(247)	(216)	(434)
Gain on sale of property	633	-	-
Exceptional items	-	(817)	(5,318)
Operating profit	2,769	3,000	10,205
Underlying profit before taxation	745	1,748	11,514
Amortization of non-current intangible assets	(247)	(216)	(434)
Gain on sale of property	633	-	-
Exceptional items	-	(817)	(5,318)
Profit before taxation	1,131	715	5,762

9.   Net debt

	June 30,	June 30,	December 31,
	2014	2013	2013
	$'000	$'000	$'000
Cash and cash equivalents	12,677	20,377	23,879
Short term borrowings	(94,145)	(16,814)	(16,603)
Medium and long term borrowings	-	(86,850)	(78,291)
Net debt	(81,468)	(83,287)	(71,015)
By currency:
US Dollars	(38,075)	(47,434)	(38,200)
£ Sterling	(45,635)	(42,748)	(39,245)
Other currencies	2,242	6,895	6,430
	(81,468)	(83,287)	(71,015)

Total borrowing facilities, at June 30, 2014, were $114.2m.  Committed facilities total $111.6m and comprise a $95m syndicated facility which extends to April 30, 2015, and a $16.6m private placement facility, with repayment on December 7, 2014.

10. Risks and uncertainties

The principal risks and uncertainties affecting the business activities of the Group remain those detailed in the Annual Report for 31 December 2013, a copy of which is available on the Group website at www.quarto.com.  The Board considers that these remain a current reflection of the risk and uncertainties facing the business for the second half of the financial year.

11. Directors' Responsibility Statement in respect of the Condensed Interim Financial Statements

The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union, and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules of the Financial Services Authority, paragraphs DTR 4.2.7 and DTR 4.2.8.

The directors of The Quarto Group, Inc. are listed in The Quarto Group, Inc. Annual Report for 31 December, 2013.  A list of current directors is maintained on the Quarto website: www.quarto.com. 

 

END

 

 

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