Interim Results
Quarto Group Inc
20 August 2004
THE QUARTO GROUP, Inc - INTERIM ANNOUNCEMENT
Quarto, the London-based and listed international book publisher, reports
further substantial underlying progress in the first half of 2004 and a spate of
corporate activity, resulting in the acquisition in July of two publishing
businesses, Creative Publishing in the US, and Aurum in the UK.
Financial Highlights
•In a half which traditionally accounts for some 40% of the annual total,
sales increased to £31.0m, a rise of 4.4% but, in constant currency terms
(most of Quarto's sales being denominated in US$), an increase of 14%.
•Pre-tax profit jumped by 23.4% to £1.7m (before amortization of
goodwill).
•Earnings per share grew by 15.2% to 5.3p (before amortization of
goodwill).
•An interim dividend per share of 2.75p, up 10.0%, is declared.
•Net debt declined by £2.0m to £22.9m.
•For the 12 months ended 30 June 2004, pre-tax profit increased by 22.3%
to £6.0m and earnings per share by 12.7% to 23.0p (before amortization of
goodwill and exceptional items).
Commercial Highlights
•The international co-edition publishing division increased sales by
approximately 4% (15% in constant currency terms) to £17.1m, 55% of group
sales. The Rockport units performed particularly well, with Fair Winds
continuing its very strong growth, as did Quantum.
•The publishing division increased its sales by approximately 4% (13% in
constant currency terms) to £13.9m, 45% of group sales. In the US, our
largest unit, Book Sales, rebounded strongly from a disappointing first half
in 2003. The Art Publishing Group, also in the US, continued its
improvement, as did our Australian art publishing business. In the UK,
however, Image Factory's relocation resulted in a £0.4m negative swing.
•Sales and profits increased in the US (which accounts for more than 60%
of sales), showed a small upturn in Continental Europe and South East Asia,
and fell in the UK.
•The larger acquisition was Creative Publishing international (CPi), which
publishes how-to and lifestyle books in the world's largest publishing
market,with nationally recognised brand partners like Black & Decker and
Singer, and has a very strong market position.
•The Aurum Press acquisition increases our publishing presence in the UK
market, and its joint venture with Jacqui Small Editions complements our
other co-edition imprints, which are much stronger in how-to and reference
than in lifestyle titles.
•At the very end of June / early July, QED Publishing, which produces
children's books for the school and library market, produced its initial
list of 63 titles. The reception from customers and distributors has been
enthusiastic and, on that basis, we have authorized the creation of an
expanded program for 2005.
Laurence Orbach, Chairman and CEO, stated 'There are no signs that the economic
conditions in our industry are changing substantially. The book market is
demanding, but is relatively stable. The gentle improvement in our business in
South East Asia and Germany shows no signs of evaporating, and our key markets
remain in positive territory. We are expecting small contributions, this year,
from the two acquisitions. At this time of the year, we are beginning to have
much more visibility on the outcome for the year as a whole. As a result,
following five successive years of growth in underlying earnings per share, we
believe that Quarto is well positioned for further overall progress.'
Notes for Editors:
Quarto's International Co-edition Book Publishing Division creates books which
are licensed to other publishers for publication, under their own imprints, in
local markets. It also includes Regent and ProVision, which are Far East-based
print broking and production service businesses, serving both third parties and
the Group.
Quarto's Publishing Division publishes books and art prints, under imprints
owned by the Group, primarily in the US and Australia. In addition, it includes
two UK-based publishing services businesses primarily serving the point of sale
display market - Image Factory and AP Screen.
In the year ended December 31, 2003, the Quarto Group's underlying pre-tax
profit rose by 12.2% to £5.7m, from revenues of £74.6m, and underlying earnings
per share by 5.7% to 22.3p - the fifth successive year of increase in underlying
EPS. Dividends per share of 5.75p were up by 10%.
A Delaware-registered corporation, listed on the London Stock Exchange under the
symbol QRT, Quarto's head office is situated in City Road, London EC1.
Enquiries:
The Quarto Group, Inc. 020-7700 9000
Laurence Orbach (Chairman & CEO)
Mick Mousley (Finance Director)
Bankside Consultants Limited
Charles Ponsonby 020-7444 4166
CHAIRMAN'S STATEMENT
Dear Shareholder:
I am pleased to be able to report further substantial underlying progress at
your company in the first half of 2004, and a spate of corporate activity,
resulting in the acquisition in July of two publishing businesses, Creative
Publishing in the US, and Aurum in the UK.
Financial Overview
For the 6-month period ended June 30, 2004, sales increased to £31.0 million
(2003: £29.7 million), a rise of 4.4% but, in constant currency terms, an
increase of 14%; operating profit rose by 15.8% to £2.1 million (2003: £1.8
million), and pre-tax profit jumped by 23.4% to £1.7 million (2003: £1.4
million), before goodwill amortization. On the same basis, earnings per share
grew by 15% to 5.3p (2003: 4.6p), the smaller increase reflecting a reducing
benefit from tax losses carried forward, and your Board is declaring an interim
dividend of 2.75p per share (2003: 2.5p), up by 10 %, and payable on October
22nd, 2004 to shareholders on the register on September 24th, 2004.
As shareholders are aware, most of Quarto's sales are denominated in US dollars,
and the reported figures, when translated into sterling, once again understate
the headway that your company is making. On a regional basis, sales and profits
increased in the US market, showed a small upturn in continental Europe and
Southeast Asia, and fell in the UK, where sales of one of our publishing
services units fell sharply, after it relocated to a new factory.
The balance sheet continues to strengthen. Once again, despite the purchase of
the capital equipment for our new factory, debt declined by £2.0 million (£22.9
million at June 30, 2004, against £24.9 million a year previously), inventories
declined, and we managed our cash better, with accounts receivable increasing
only marginally.
As usual, in addition to the half-year figures, we provide you with comparative
figures for the 12 months' ended June 30th, 2004, and June 30th, 2003, so that
you can look at the progress of the business without having to adjust for
seasonality. In common with most businesses geared to selling to the consumer,
Quarto's business is seasonal, with around 60% of sales occurring in the second
half of the year. For the 12 months' ended June 30, 2004, management's pro forma
operating financial statements show that sales rose by 4.5% to £75.9 million
(2003: £72.6 million), operating profit advanced by 15.8% to £6.9 million (2003:
£5.9 million), and pre-tax profit , thanks to lower interest costs on lower
levels of debt, leapt by 22.3% to £6.0 million (2003: £4.9 million).
Corporate News
We are now starting to deliver on the growth strategy that we articulated
earlier this year, i.e. to make selective, and significant, acquisitions in the
book publishing field, while continuing to develop our co-edition book
businesses largely through organic activity.
During the first half of the year, we were very busy negotiating the
acquisitions of two publishing businesses, which were announced in July. The
first of these, Creative Publishing international (CPi), based in Minneapolis,
publishes how-to and lifestyle books in the world's largest book publishing
market, and has a very strong market position. Over the past 15 years, CPi has
developed high-quality books featuring step-by-step photography, with nationally
recognized brand partners like Black & Decker and Singer, the most respected and
trusted names for consumers involved in home improvement and needle crafts.
CPi's titles reprint strongly, with backlist sales providing over 80% of
revenues.
In 2003, the business had sales of $18.3 million, and net assets of $7.9 million
(including the $9.2 million in debt). The net assets figure will be adjusted to
conform to Quarto's accounting policies and practices. We paid $10.8 million for
the business, of which $7.5 million was in cash, at closing, and $3.3 million in
a convertible promissory note. We expect that CPi, from next year, on a full
year basis going forward, can deliver operating profits above our Publishing
Division's target of 10% of sales, and will enhance earnings on a full-year
basis. In addition, because it is a sizeable business, the acquisition will
enable us to leverage our book publishing infrastructure much more effectively.
The acquisition was financed by the provision of an additional facility of $15
million by Lloyds TSB, which has joined our existing syndicated loan facility,
and raises it to $60 million. Your Board regards this commitment as a vote of
confidence in the Board's strategy, and in the company's management.
On a day-to-day basis, CPi will report to Ken Fund, who runs the successful
Rockport group of businesses, comprising Rockport, Fair Winds, RotoVision, and
Apple, and will retain its existing senior management team. The combined
operation will be able to leverage its resources in sales, marketing, and
fulfilment, in the USA, but in other areas the companies will maintain separate
and distinct identities.
We also bought Aurum Press, a London-based non-fiction publisher that has a
joint venture with Jacqui Small Editions, a co-edition publisher of
sophisticated lifestyle books. This acquisition increases our publishing
presence in the UK market, and Jacqui Small's books complement our other
co-edition imprints, which are much stronger in how-to and reference than in
lifestyle titles. Again, Aurum and Jacqui Small will retain their own creative
directions, but we shall be bringing some of Quarto's back office infrastructure
to them.
New ventures
While we continue to explore other opportunities for growth through
acquisitions, we also spend a great deal of time in fostering new in-house
initiatives. As reported earlier this year, we have considerably increased our
investment in new initiatives, in both divisions. These investments will create
significant value over time. In the short-term, though, it is a slow path to
achieving the growth objectives that your Board has set for Quarto. And, as we
do not capitalize all costs, the expenditure has immediate impact on reported
profits. Your Board also recognizes that new ventures are very demanding on
management time. So, while we are starting up more new ventures simultaneously
than we have ever done before, this has to be balanced with acquisitions of
established businesses so that we can achieve appropriate growth in the
business.
Two of these new ventures launched at the very end of June/early July. QED
Publishing, which produces children's books for the school and library market,
produced its initial list of 63 titles. As the books were just being shipped to
customers and distributors, and in accordance with our revenue recognition
policy, no revenues were recorded during the period. The reception from our
customers and distributors has been enthusiastic and, on that basis, we have
authorized the creation of an expanded program for 2005.
Finally, after a long gestation period, the first issue of our new magazine,
Fine Wine, was printed. This is a serious and sophisticated bi-monthly devoted
narrowly to the best wines, and is published for the increasing community of
wine lovers whose enthusiasm and affluence allow them to indulge their passion.
Unlike many other leading wine magazines, Fine Wine is, emphatically, not
designed to be a 'ratings' magazine. The initial press reception, and the
feedback from wine experts, is that the magazine is filling a need that is
growing. Fine Wine is not intended to be a mass-market publication, and the
single copy price of $25.00 reflects its narrower target audience. We expect few
single copy sales, and, unlike with our existing magazines in the UK, we are
targeting a worldwide subscriber audience.
We reported earlier on other new ventures, which are still at early stages. Quid
Publishing is making a name for itself, producing unusual titles such as
Household Management for Men, a strong seller, with 17,500 copies in print in
Germany already this year. Eye Quarto's The Daredevil's Handbook is similarly
edgy, and will be published next month. There is a ground-breaking book for
Iqon's maiden list, Isms, which explores art movements and their impacts. At
Quarto Magazines, the card-making magazine we launched last year continues to
gain circulation. We shall be launching another magazine, in the crafts area,
later this year.
Trading Review
International Co-edition Book Publishing Division
Made up of a number of separate imprints and operating units, this division
produces books that are licensed for publication and distribution by other
companies in many markets and languages. The majority of its revenue comes from
sales of backlist titles, i.e. books that were first published in a prior year,
and most of the imprints are devoted to producing evergreen titles that are
designed to have relevance for many years. We have units producing co-edition
titles in London, Brighton, Massachusetts, New York, and Sydney.
Sales for the six months rose by 4% from £16.4 million to £17.1 million. As most
of the sales are made in US dollars, the recorded revenues understate the volume
increase and, in constant currency terms, the sales increase was closer to 15%.
The Rockport units performed particularly well, with Fair Winds continuing its
very strong growth, as did Quantum.
Two important personnel changes were made, and we welcomed Ian Castello-Cortes
as the new Publisher at Quintet, and Richard Green as the new Publisher at
Marshall Editions. Ian has a strong background in co-edition publishing, both in
books and in electronic formats, and was most recently Publishing Director,
Guinness World Records, and was part of the team responsible for the successful
sale of the business. Richard has come to us from his position as Head of
Publishing Services for Children's Learning at BBC Worldwide.
The division also includes Hong Kong-based Regent Publishing Services, which
looks after production for third party publishers, and group companies. Regent
moved to larger premises only recently. Its business is strong, and growing, it
has outgrown its new premises already, and has set up a new unit in an adjacent
office building.
Publishing Division
The Publishing Division operates mainly in the United States. Sales for the
division increased by a little over 4% to £13.9 million (2003: £13.3 million).
Once again, as the major part of the revenue arises in the United States, the
sterling figure understates the growth that has taken place. In addition, as I
outlined in the opening remarks, the relocation of Image Factory was accompanied
by a drop in sales, which was almost made up by the increase in the sales at AP,
our other publishing services unit, but the impact of the sales setback on
profit was severe. Image Factory's operating profit of £161,000 in the first
half of 2003 turned into a loss of £198,000 in the period under review, a
negative swing of £359,000. A new, more experienced managing director has been
appointed, and there are signs of improvement.
In the US, our largest unit, Book Sales, rebounded strongly from a disappointing
first half in 2003. Last year, booksellers paid their bills by returning
merchandise; this year, the rate of returns was normal, and operating profits
increased by 45%. Walter Foster's sales were flat, as one of its major accounts
in the arts and crafts field embarked upon an inventory reduction program, which
now seems to have achieved its objective. Walter Foster is also involved in
creating a new book-producing unit to handle non-traditional sales. The first
titles will appear next year, but much of the cost, as with all our new
initiatives, is being expensed in this year.
Also in the US, the Art Publishing Group continued its improvement, as did our
Australian art publishing business. There remain strategic issues to face in art
publishing and, now that the businesses are returning to a reasonable level of
profitability, our options and opportunities are increasing.
In the UK, home to about one-third of the division's sales, Quarto Magazines
increased sales substantially over the same period last year, with a
contribution, this time, from its new Creative Card Making Ideas title. In
addition to the Fine Wine title, we are working to launch a further new title in
the second half of 2004.
Prospects
There are no signs that the economic conditions in our industry are changing
substantially. The book market is demanding, but is relatively stable. The
gentle improvement in our business in South East Asia and Germany shows no signs
of evaporating, and our key markets remain in positive territory. At this time
of the year, we are beginning to have much more visibility on the outcome for
the year as a whole. As a result, following five successive years of growth in
underlying earnings per share, we believe that Quarto is well positioned for
further overall progress. We are expecting small contributions, this year, from
the two acquisitions.
With these acquisitions, we have brought on some experienced publishing
managers. Together with the new publishers who have recently joined us, we
continue to strengthen our management skills and teams. This is one of your
Board's priorities, and I am pleased to report that as our success continues,
and our acquisition strategy is executed, we are attracting very capable people
to the Quarto group.
Sincerely,
Laurence F Orbach
Chairman and Chief Executive Officer
London, August 20, 2004
UNAUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the six months to June 30, 2004
Six months Six months
ended ended Year ended
June 30, June 30, December 31,
2004 2003 2003
£'000 £'000 £'000
Turnover 31,039 29,739 74,623
________ ________ ________
======== ======== ========
Operating profit before
amortization of goodwill
and exceptional item 2,101 1,815 6,566
Amortization of goodwill (105) (98) (206)
Exceptional item - - (595)
________ ________ ________
========
Group operating profit 1,996 1,717 5,765
Net interest payable (417) (450) (892)
______ ______ ______
Profit on ordinary
activities before taxation 1,579 1,267 4,873
Taxation (354) (205) (750)
______ ______ ______
Profit on ordinary
activities after taxation 1,225 1,062 4,123
Minority interests (160) (121) (314)
______ ______ ______
Profit for the period 1,065 941 3,809
Dividends
Ordinary (494) (448) (1,032)
Preference (213) (213) (426)
______ ______ ______
Retained profit for the
period 358 280 2,351
________ ________ ________
======== ======== ========
Earnings per share -
basic 4.7p 4.1p 18.9p
________ ________ ________
======== ======== ========
- underlying 5.3p 4.6p 22.3p
________ ________ ________
======== ======== ========
Dividend per share 2.75p 2.5p 5.75p
________ ________ ________
======== ======== ========
UNAUDITED CONSOLIDATED BALANCE SHEET
at June 30, 2004
June 30, June 30, December 31,
2004 2003 2003
£'000 £'000 £'000
Fixed assets
Intangible assets 3,232 3,441 3,337
Tangible assets 8,959 7,688 8,909
______ ______ ______
12,191 11,129 12,246
______ ______ ______
Current assets
Stocks and work in progress 19,148 20,979 17,451
Debtors 17,195 16,499 20,667
Cash at bank and in hand 8,327 6,579 12,490
______ ______ ______
44,670 44,057 50,608
Creditors: Amounts falling due within
one year (18,759) (18,216) (24,303)
______ ______ ______
Net current assets 25,911 25,841 26,305
______ ______ ______
Total assets less current liabilities 38,102 36,970 38,551
Creditors: Amounts falling due after (29,096) (29,486) (29,588)
more than one year
Provisions for liabilities and charges
Deferred taxation (869) (1,206) (875)
______ ______ ______
Net assets 8,137 6,278 8,088
________ ________ ________
======== ======== ========
Capital and reserves
Called up share capital 1,341 1,341 1,341
Reserves 4,339 2,433 4,311
______ ______ ______
Shareholders' funds 5,680 3,774 5,652
Minority interests 2,457 2,504 2,436
______ ______ ______
8,137 6,278 8,088
________ ________ ________
======== ======== ========
UNAUDITED CONSOLIDATED CASH FLOW STATEMENT
for the six months to June 30, 2004
Six months Six months Year
ended ended ended
June 30, June 30, December 31,
2004 2003 2003
£'000 £'000 £'000
Operating profit 1,996 1,717 5,765
Non-cash items 642 582 1,170
Working capital movement, net (5,601) (3,895) 1,030
______ ______ ______
Net cash (outflow)/inflow from
operating (2,963) (1,596) 7,965
activities
Interest, net (417) (449) (893)
Dividend payments to minority
shareholders (103) (47) (103)
Dividends (796) (733) (1,395)
Taxation (743) (144) (371)
Capital expenditure, net (613) (2,366) (4,133)
Issue / (purchase) of shares 26 (110) (102)
Acquisitions and disposals (183) (175) (179)
______ ______ ______
Net cash (outflow)/inflow (5,792) (5,620) 789
Translation difference 257 458 1,607
Net debt at beginning of period (17,387) (19,783) (19,783)
______ ______ ______
Net debt at end of period (22,922) (24,945) (17,387)
________ ________ ________
======== ======== ========
NOTES
1. The financial information contained in this interim
statement does not constitute statutory accounts within the meaning of Section
240 of the Companies Act 1985. The interim accounts for the six months ended
June 30, 2004 and the comparative figures for the six months ended June 30, 2003
are unaudited. The comparative figures for the year ended December 31, 2003 are
extracted from the accounts for the period which have been reported on by the
Company's auditors and delivered to the Registrar of Companies. The report of
the auditors was unqualified and did not contain a statement under Section 237
(2) or (3) of the Companies Act 1985.
2. Taxation is based on the estimated effective tax rate for the year.
3. The exceptional item in the year ended December 31, 2003
comprised US and UK professional fees associated with the JOHCM tender offer.
4. The calculation of earnings per share is based on 17,944,206
shares (the weighted average number of issued shares, excluding those held as
treasury stock) (June 30, 2003: 17,925,400 shares; December 31, 2003: 17,925,306
shares) and earnings, after minority interests and preference dividends, of
£852,000 (June 30, 2003: £728,000; December 31, 2003: £3,383,000). The
calculation of underlying earnings per share is based on earnings of £957,000
(June 30, 2003: £826,000; December 31, 2003: £4,005,000), calculated as follows:
June 30, 2004 June 30, 2003 December 31,
2003
£'000 £'000 £'000
Earnings after minority
interests and preference
dividends 852 728 3,383
Amortization of goodwill 105 98 206
Exceptional item (net of tax
credit) - - 416
-------- -------- --------
957 826 4,005
________ ________ ________
======== ======== ========
5. After the period end, Quarto acquired Creative Publishing
international (CPi). The book value of the net assets being acquired will be
adjusted to conform with Quarto's accounting policies and practices. The most
significant adjustment will relate to book production costs (excluding printing
costs). CPi currently capitalises these costs, and amortizes them over their
estimated useful life, whereas Quarto charges these costs against the first
printing of a book. The effect of this, and other, adjustments necessary to
conform to Quarto's policies and practices, will be to reduce the book value of
the net assets by approximately $10 million.
FOR INFORMATION ONLY
MANAGEMENT'S PRO FORMA CONSOLIDATED OPERATING FINANCIAL STATEMENTS
for the 12 months to June 30, 2004
12 months 12 months
ended ended
June 30, 2004 June 30, 2003
£'000 £'000
Turnover 75,923 72,632
=========== ===========
----------- -----------
Operating profit 6,852 5,915
Net interest payable (859) (1,015)
----------- -----------
Profit on ordinary activities before taxation 5,993 4,900
Taxation (1,078) (550)
----------- -----------
Profit on ordinary activities after taxation 4,915 4,350
Minority interests (353) (265)
----------- -----------
Profit for the period 4,562 4,085
=========== ===========
Earnings per share 23.0p 20.4p
=========== ===========
Note:
The above figures do not include amortization of goodwill or exceptional items.
This information is provided by RNS
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Friday, 10th January 2025
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