QRT.L Regulatory News (QRT)

14 Feb 2005 07:01

Quarto Group Inc14 February 2005 Monday 14 February 2005 THE QUARTO GROUP, Inc - PRELIMINARY ANNOUNCEMENT Quarto, the London-based and listed international book publisher, announces asixth successive annual increase in underlying earnings per share in 2004, ayear which was exciting and challenging for Quarto and, by some measures,redefining. Financial Highlights •Sales increased by 7% to £79.8m but, with over two-thirds of Quarto's business being carried out in US$, on a constant currency basis, sales of existing businesses grew by 6% and acquisitions contributed a further £6.7m. 69% of sales was generated by backlist and reprinted titles. •Operating profit, before goodwill amortization, rose by almost 16% to £7.6m, of which £0.9m came from acquisitions (2003: £6.6m pre-exceptional), the 2004 profit suffering a reduction of some £0.5m from currency factors. •Pre-tax profit, before goodwill amortization, rose to £6.4m (2003: £5.7m), slightly ahead of market expectations. •Earnings per share, before goodwill amortization, increased by 7% to 23.8p (2003: 22.3p). •Dividends per share totalling 6.25p (2003: 5.75p), up 9% and covered more than 3 times, are proposed. •Indebtedness, including £13.7m in respect of acquisitions, totalled £28.2m (2003: £17.4m), as for many years Quarto has consistently generated more than its operating profits in cash. The interest cost of a significant proportion of debt is hedged until 2007. •Total shareholder return, judged over short and medium terms periods, is substantially above average. Quarto's ordinary shares have generated a total shareholder return of 117%, 205% and 20% over the five years, three years and one year ended December 31, 2004, respectively. Over the same periods, Quarto's ordinary shares have significantly outperformed the FTSE 100, the FTSE small cap and the media sector. Commercial Highlights •The co-edition publishing units' sales totalled £34.6m (2003: £37.1m), a 5% increase on a constant currency basis. •The own imprint publishing units' sales increased to £28.3m (2003: £22.3m), including £6.7m of sales by acquired businesses. In constant currency, sales increased by 36%. •The publishing services businesses increased their sales by 10% to £16.9m (2003: £15.3m), but, on the profit side, the result was less successful. •In 2004 H2, Quarto made three acquisitions, in the US, the UK and Australia. The effect of these acquisitions, on a 12 month going forward basis, will be to increase Quarto's sales by about one-third. Laurence F Orbach (Chairman and Chief Executive) stated "Quarto was active in2004, making a series of acquisitions of book businesses, dealing with definingits strategy for growth, putting to rest the tender offer from JOHCM,strengthening its banking relationships, and with capital markets generally, andlaying firm foundations for further corporate activity, and infrastructure tosupport this. Quarto also increased underlying pre tax profit by 12%, slightlyahead of market expectations. "Quarto is already one of the largest UK-based independent book publishers andits ambition is to become one of the world's leading independent bookpublishers. "It is early in the year. Although currency volatility, and the direction of theUS dollar, are objects of lively discussion, we have the experience to handlethese issues, and do not expect to be thrown off course. There does not seem tobe any evidence of dramatic change in our core markets and, with benefitsflowing from our new acquisitions, we expect another year of growth in 2005." Notes for Editors: Quarto is an international book publisher with two principal strands ofactivity: it publishes, under imprints owned by the Group, books and art printsin the US, the UK, and Australia; and it creates books that are licensed toother publishers for publication under their own imprints in many languagesaround the world. Quarto is listed on the London Stock Exchange under the symbol QRT. Its headoffice is situated in City Road, London EC1. Quarto is a Delaware corporation. Enquiries: The Quarto Group, Inc. 020-7700 9000Laurence Orbach (Chairman & CEO)Mick Mousley (Finance Director) Bankside Consultants LimitedCharles Ponsonby 020-7444 4166 Analyst Presentation: From 13.00 to 14.00 today, there will be an analyst presentation, over asandwich lunch, at Quarto's offices, 226 City Road, EC1V 2TT (approximately 600yards from Old Street underground station). CHAIRMAN'S STATEMENT Dear Shareholder: 2004 was exciting and challenging for Quarto and, by some measures, a redefiningyear. I am delighted to report that, in 2004, we started to implement thestrategy we adopted previously, to grow our market position both by acceleratingthe creation of new business units, and by making selective acquisitions ofwell-focused, and niche-oriented, publishing businesses. In the event, weachieved many of our objectives in 2004, in the face of what were sometimestough conditions. We were confronted with continuing, and new, issues: the impact of the war inIraq lingered; the US dollar, despite (or perhaps because of) an apparentlystrongly growing domestic economy, accelerated its steady decline against othermajor currencies; the output of new book titles worldwide continued to growunchecked; the eurozone stirred from its slumber, but failed to show much growthor energy, and disappointed some of management's expectations (perhaps, facednow with competitive pressures accentuated by the strong euro, the region willshed some of its stifling ways); benign news on the inflation front, and lowinterest rates in many of our markets, intensified competition and pricepressures on us, as on most producers, reducing pricing elasticity.The first fruits of several of our recent initiatives appeared in 2004: QEDsuccessfully published its initial launch of titles for the children's schooland library market; Quarto Magazines consolidated the success of a new titlelaunched at the end of 2003, Creative Card Making Ideas, and launched two othertitles: Creative Scrapbooking Ideas, and The World of Fine Wine; and IqonEditions published its first title, Isms, a guide to art movements, thatimmediately went in to several foreign-language editions. In addition, Qu:id andEye Quarto moved successfully into their second year of publishing. On the acquisition side, Quarto was very active in the second half of the year.We acquired Creative Publishing international (CPi), a Minneapolis-basedpublisher of how-to books, with its titles strongly focussed on home improvementand lifestyle activities. In the UK, we acquired 80% of Aurum Press,incorporating the joint venture Jacqui Small Editions, and giving us a larger UKpublishing base in non-fiction and illustrated book titles. In Australia, weacquired 75% of Sydney-based Lifetime, the largest display marketer of books inAustralia. This acquisition has vaulted Quarto into the ranks of the largestbook businesses in that country. To help us finance these acquisitions, we turned to our bank lenders, andincreased our syndicated facility from $45 million to $60 million. The effect ofthese acquisitions, on a 12-month going forward basis, will be to increaseQuarto's pre-acquisition revenues by about one-third. This is, therefore, solidimplementation of our strategy for growing your company. Quarto's share price reached a 7-year high and the tender offer for majoritycontrol, by J O Hambro Capital Management (JOHCM), which your board had opposed,was withdrawn, leaving Quarto as one of the largest UK-based independent bookpublishers. Financial Highlights I am happy to report that Quarto's audited financial performance, following aspate of acquisitions, was ahead of market expectations. For the year endedDecember 31, 2004, sales increased by 7% to £79.8 million (2003: £74.6 million),but this figure requires some elaboration. Over two-thirds of Quarto business isin US dollars. On a constant currency basis, revenues of ongoing businesses in2004 grew by 6%, and acquisitions contributed a further £6.7 million. Theaverage exchange rate between the dollar and sterling changed sharply between2003 and 2004, from £1 = $1.63 to £1 = $1.83, or over 12%. Using average ratesfor the last three years, it will help shareholders to see the strong growth ofQuarto's sales if I translate them into our principal operating currency: for2002, sales were $112.1 million; for 2003, sales rose to $121.6 million; and for2004, sales jumped by 20% to $146.1 million (including $12.3 million fromacquisitions). In terms of Quarto's principal operating currency, then, Quarto'spre-acquisition sales and profits continued to show good growth. Operating profit, before goodwill amortization, rose by almost 16% to £7.6million (2003: £6.6 million pre-exceptional), of which £0.9 million came fromacquisitions. The operating margin of our ongoing businesses rose to 9.2% ofsales (2003: 8.8%). The impact of the decline of the dollar on our tradingprofit was slightly greater in 2004 than in 2003, both because of the relativeexchange rates, and because of our strong profit performance in the US market.Our internal estimate is that reported operating profit was reduced byapproximately £0.5 million. Pre-tax profit, before amortization of goodwill,rose to £6.4 million, slightly ahead of market expectations, and earnings pershare were 21.5p (2003: 18.9p), an increase of 14%. It is also our sixthsuccessive year of underlying increase in earnings per share. The results incorporate the start-up losses from several ventures launchedrecently, which are expected to produce a stream of profits into the future.Unsurprisingly, though, not everything went according to plan, and the outcomewas marred by the previously reported very poor performances from twoestablished units, which were significantly below plan. Indebtedness, after the acquisition of three new businesses for £8.0 million,and assumed debt of £5.7 million (in the aggregate, £13.7 million), was £28.2million (2003: £17.4 million). This outcome demonstrates the group's continuingstrong cash generation. As in previous years, a significant percentage of oursales revenue comes from backlist titles, and no single title accounts for morethan 1% of our sales. This solid spread of sales exemplifies the quality of ourearnings, and the group's focus on recurring revenues from evergreen titles.Optimal management of this resource is a challenge for the publishers of ourindividual imprints but it is, at the same time, a great comfort to know that itunderwrites the new publishing initiatives that maintain the vitality of eachimprint. Total shareholder return, judged over short- and medium-term periods, issubstantially above the FTSE Media and Entertainment sector average, and isdetailed in the accompanying financial report. The Board is recommending a finaldividend of 3.5p net (2003: 3.25p)which, with the interim dividend of 2.75p(2003: 2.5p) net, per share, represents an increase of 9% for the year. Thedividend is covered more than three times. ************************ Quarto is an international book publisher and book producer. In the US, UK, andAustralia, Quarto publishes and distributes books under imprints owned by thegroup. As a book producer, Quarto's co-edition units licenses other publishers,worldwide, to publish books in their own national markets. Quarto's licenseesinclude, and its books appear under the imprints of, publishers such as Simon &Schuster, Reader's Digest, Random House, Orion, Bloomsbury, HodderHeadline,Allen & Unwin, Murdoch Books, HarperCollins, Bonniers, Gyldendaal, Taschen,Hachette. The group publishes approximately 500 new titles a year, andmaintains, in print, a backlist of over 6,000 thousand titles. Across ourco-edition imprints, only 31% of revenues come from new titles, 69% from salesof backlist and reprinted titles. Quarto's ambition is to become one of the world's leading independent bookpublishers. The printed word has unsurpassed ability to convey meaning, and,despite the regular emergence of other media since printed books appeared overhalf a millennium ago, none has rivalled its authority. Book publishing hasadapted extraordinarily well to competition, for the consumer dollar, from othermedia and communication forms. Quarto focuses on the consumer non-fictionmarket, with an emphasis on books in categories of enduring interest, generallyintended for audiences with specialized interests, allowing successful books toremain in print for many years. Many of the books concentrate on informing andinstructing the reader, and are produced in attractive full colour formats toenhance the experience of gaining skills and knowledge. Corporate Events As noted above, Quarto was active in 2004, making a series of acquisitions ofbook businesses, dealing with refining its strategy for growth, putting to restthe tender offer from JOHCM, strengthening its banking relationships, and withcapital markets generally, and laying firm foundations for further corporateactivity, and the infrastructure to support this. After many months of negotiation, we were pleased to complete the acquisition ofCreative Publishing international (CPi) in August 2004. Based in the heartlandof the United States, in Minneapolis, CPi publishes, under its own imprint,how-to and lifestyle books in the world's largest publishing market, and has avery strong market position in its core publishing areas. For the last 15 years,CPi has published high-quality instructional books, featuring stunninglydetailed step-by-step photography, with nationally recognized brand partnerssuch as Black and Decker and Singer, the names most trusted and respected byconsumers in the home improvement and needle crafts categories. CPi's titles reprint strongly, and backlist sales provide over 80% of revenues.In 2003, the business that we acquired had sales of $18.3 million. We paid $10.8million for the business ($7.5 million in cash at closing, and $3.3 million in aconvertible promissory note), and assumed the $9.2 million of debt. For therelevant period in 2004 included in the attached financial statements, CPiperformed according to our expectations. At the end of July, we also bought 80% of Aurum Press, a London-basednon-fiction publisher that has a joint venture with Jacqui Small Editions, aco-edition publisher of sophisticated lifestyle books. The acquisition increasesQuarto's publishing presence in the UK, and Jacqui Small's books complement ourother co-edition imprints, which are stronger in instructional how-to, andreference, than in lifestyle titles. Aurum and Jacqui Small retain their owncreative directions, but we shall be bringing some synergies to the UK backoffice operations. The two key executives at Aurum, Bill McCreadie and PiersBurnett, retain stakes in the business, and Quarto has entered into a Put andCall Agreement with them. In November, we acquired a majority stake in Lifetime Distributors 'The BookPeople' Pty. Limited. Based in Sydney, Australia, Lifetime is the largestdisplay marketer of books in Australia, and one of the few to operatenationally. It operates through a network of franchised regional operators who,following thorough marketplace testing, purchase inventory directly, cutting outseveral layers of middlemen. The sales proposition for the customer is,unabashedly, value for money, which this form of direct distribution allows.Agents visit workplaces on regular sales cycles, with assortments of books andrelated items. We acquired 75% of the equity from retiring and departing shareholders, for acash consideration of A$1.5 million. Mark Bonello, the Managing Director, hasretained his entire 25% shareholding, and has entered into a Put and CallAgreement with Quarto. For the year ended June 30, 2004, Lifetime had unadjustedpre-tax profit of A$0.7 million. The acquisition immediately catapulted Quarto into the ranks of the largerAustralian books businesses. Quarto has had a co-edition sales office in Sydneyfor many years, covering south-east Asia and Australasia. We also create booksfrom our Global Publishing unit in Sydney, and publish and distribute art printsfrom Artworks in Melbourne. The acquisition of Lifetime is another step inQuarto's strategy to increase its business in content generation, publishing,and distribution. In September, JOHCM formally withdrew its tender offer to acquire majoritycontrol of Quarto, without making a general offer to shareholders. This offerhad been opposed by your Board, and Quarto's share price had risen steadilyabove JOHCM's price since the tender offer was launched on July 31st, 2003.While the tender offered helped to raise Quarto's profile, and emphasize itsrobustness, it was a distraction for senior executives, and the board. New Ventures I have stressed in the past, and reiterate, that, while investment inorganically developed new ventures is absolutely vital to the ongoing health ofQuarto, it is a seeding process. It involves substantial amounts of managementtime and capital investment, and always carries a reasonable element of risk.For the last couple of years, we have successfully launched new imprints, and westepped up our activities in 2004. Typically, we consider that these newventures will take from three to five years to prove their worth and, duringthat time, they remain speculative. Our most significant investments in 2004were in GraficEurope, which, in its second year, incurred a loss of $0.4million, and our new special interest magazine, The World of Fine Wine, launchedin July, where the deficit was £155,000. Both ventures have been criticallyacclaimed, but it will continue to be some time before our investment in themhas been validated. Acquisitions As noted above, acquisitions contributed £6.7 million to sales, which was inline with our forecasts. Operating profit, at £0.7 million, before fundingcosts, was slightly above our initial expectations, helped by strong seasonaltrading at Lifetime and Aurum. Financial Strategy and Reporting Quarto generates good cash flow. For many years, it has consistently generatedmore than its operating profits in cash. During the present period of lowinterest rates, and with an undemanding Quarto share price, your board decidedthat it was in the interests of shareholders to fund the three acquisitions wemade in 2004 through debt. In addition to our current banks, other banks areready to help us to implement our growth strategy. We have hedged the interest cost of a significant portion of our debt until2007, when our revolving credit loan comes due for renewal. Long-term interestrates remain stable to declining, despite the upward trend in short-term rates,and we continue to keep the capital structure of the group, and our weightedaverage cost of capital, under review. This is the last set of financial statements that we shall be producing under UKGAAP. In common with all other listed companies, we shall be issuing our 2005results under IFRS/IAS. We shall continue to issue quarterly trading updatesbetween the half-year and full year announcements. We are also discussing, withour advisers, whether it would be appropriate for us to prepare our financialstatements in our major trading currency, as this might provide a clearer viewof our trading performance. The last opportunity for holders of our Convertible Preferred Stock to convertto Common Stock is in May-June 2005. At the moment, Quarto's share price makesconversion, rather than redemption, the more attractive option for holders ofthis class of stock. Strategy The board continues to revisit the strategy that was put before shareholderssome 18 months ago, and confirmed a year ago, and considers that it remainsappropriate. Our prime strategy is growth, because it will continue to delivermore shareholder value, and because it will provide a career path for some ofour best people, and will upgrade our ability to source the best and brightestfrom outside. Corporate Governance Corporate governance has been extensively discussed at board level, and ourpractice remains somewhat outside current guidelines. We recognize the thoughtand care that have gone into the production of the reports of the manycommittees that have studied the issues, and consider that it is important thatQuarto implements the spirit of the guidelines that address issues common tomost publicly-traded companies. The detailed account on our implementation willappear in the Directors' Report section of the Annual Report. Recommendations for best practice, being guidelines, are not prescriptions, andthe extra expense for Quarto must be weighed against the benefits. We continueto debate these issues, and keep all of our procedures under review. Your boardquestions a 'one size fits all' approach, and has adopted corporate governancecriteria that offer strong protection for our shareholders, but do not stifleQuarto's vitality and entrepreneurial energy. My fellow executive directors and I have much appreciated the dedicatedinvolvement of our independent directors. We feel that shareholders benefit fromtheir continuation on the board, and that, although, according to theguidelines, their terms of service have exceeded best practice, it would be adisservice to shareholders to replace them now. On the issue of separating theroles of chairman and chief executive officer, we have also concluded that it isnot appropriate for Quarto to implement this guideline. To the extent that anindependent chairman's tasks would be to represent the interests ofshareholders, and to maintain contact with them, it is worth remindingshareholders that Bob Morley and I, as founders, and directors, of the group,are heavily invested in the company personally, so that our interests areclosely aligned with all shareholders'. Similarly, we adopt a different stance from the guidelines towards seniorexecutive and board compensation. Perhaps media businesses are different, andjob satisfaction, challenge, and being stretched intellectually are often asimportant as financial reward. Within the Quarto group, senior executives reachpositions of accountability and responsibility because they are intelligent,capable, and execute their jobs well. I am convinced, personally, that tointroduce a significant measure of performance-related pay, based uponobjectively-assessable criteria, would lessen our executives' focus on theirresponsibilities, distort their perspectives on significant commercial issues,and provide an incentive to sacrifice the future for the present. In any event, the appropriateness of our approach must be judged in the overallperformance of the business, and shareholders will be able to make up their ownminds about it. We continue to have a strong team. Occasionally, as might beexpected, senior people leave, either to join other publishing companies, or toset up in business themselves, and only rarely because of our compensationpractices. Of course, it is unfortunate to lose talented people but, when we do,to competition, or to become potential customers, their effectiveness is acontinuing prod to us to keep on our toes. Book publishing is a mature industry.It has no natural monopolizing tendencies. Its pluralism, and vitality, ensurethe industry's adaptability, and ability to flourish. As it has been for some time now, the board's focus is on the gradual transitionof Quarto from a first-generation founder-managed business, to the nextgeneration. This is, necessarily, a delicate operation. Through successful, andoccasionally unsuccessful, appointments, we have learned a great deal, not leasthow much of a challenge this presents. Your board has dedicated much energy tothe task, and continues to do so. Prospects Piers Spence, who was, for five years publisher of the Quarto imprint, wasappointed Director of Co-Edition Publishing, with effect from January 1, 2005.This is an important appointment, which will lead to much closer direction andinvolvement by senior management in running Quarto's co-edition imprints. Italso reduces the number of my direct reports, and allows me to devote more timeelsewhere. Piers' record of achievement at Quarto is superb, and he is widely respectedthroughout the industry. The growth, spread, and increasing complexity of ourbusinesses require that we strengthen our executive teams, and regularly improveand enhance our infrastructure. This prescription is, of course, easier to writethan it is to implement. We shall continue to promote from within wherepossible, until we are really able to benefit from the substantial pool oftalent with experience in other industries. There are clear risks from ourapproach. It is too self-absorbed, and risk averse but, at our current size, Iam not persuaded that it would be possible for us to attract the cream ofoutside candidates and believe, from prior experience, that with anything lessthan this, we would be running even greater risks. It is early in the year. Although currency volatility, and the direction of theUS dollar, are objects of lively discussion, we have the experience to handlethese issues, and do not expect to be thrown off course. There does not seem tobe any evidence of dramatic change in our core markets and, with benefitsflowing from our new acquisitions, we expect another year of growth in 2005. We continue to explore, in a measured way, acquisition opportunities that weseek out, or are presented to us. We have beefed up our resources internally,and with solid support from our lenders, are confident that, if we identifyappropriate targets, we shall be able to close deals, and integrate thebusinesses into the group. In a year of solid work and achievement, I thank all of our staff and directorsfor their contributions. I must single out a few individuals, and applaud theirspecial performances and mention, particularly, Piers Spence and Ken Fund,Karine Marko, who heads up our largest foreign-language sales team, Isabel Leao,of Quantum, Mel Shapiro of Book Sales, Gordon Cheers, of Global, Nigel Browningof Qu:id, and George Tai, of Regent; and, of course, our indefatigable, andusually imperturbable, Chief Financial Officer, Mick Mousley, and our GroupChief Accountant, Steve Grace. Sincerely, Laurence F OrbachChairman and Chief Executive OfficerLondon, February 14, 2005 ************************************ Review of Operations Quarto is an international book publisher with two principal strands ofactivity: it publishes, under imprints owned by the Group, books and art printsin the US, the UK, and Australia; and it creates books that are licensed toother publishers for publication under their own imprints in many languagesaround the world. In addition, in common with most larger book publishers, ithas businesses that provide services to the publishing and marketing industries.These have grown from providing in-house services into becoming stand-alonebusinesses. Quarto's International Co-Edition Book Publishing embraces a number of unitsthat create titles that are licensed internationally to hundreds of publishersin some 35 countries and 25 languages, and published under the imprints of thelicensees. Quarto owns the intellectual property in the books that the unitscreate, but is not engaged in the marketing, selling, and distribution of thesebooks. The business depends on international sales, and the substantial cost ofcreating titles is, in effect, borne totally by our licensees, and sharedbetween them across individual publishing territories. Book ideas are presentedto potential co-publishers, and are only put into production after firmcommitments have been received. This ensures that the cost of producing a titleis completely covered by the initial deliveries. As Quarto makes its co-editionprofits from titles that reprint, our imprints focus on creating titles ofenduring and widespread interest internationally. Quarto's reputation isparticularly strong in creating books that inform and instruct, allowing thereader to improve his or her levels of skill and knowledge. Broadly, thebusinesses included in this division do not hold inventory, but the organizingprinciple is that the creation of titles for an international, rather than apurely domestic audience, is at the core of an imprint's activity. Quarto's mostimportant co-edition markets are in the English-speaking world, and continentalEurope. Russia, and central Europe, are growing in importance as the categoriesof books that we publish have been starved in the region prior to this. Ourintellectual property rights are retained at nil value in the balance sheet,despite generating 69% of our revenues, and very considerable gross contributionbecause the cost of servicing reprints is very modest. This is, therefore, asprudent as it is possible to be, in balance sheet terms. It's worth noting thatQuarto has acquired backlist title and has paid, on average, £5,000 per title. In 2004, 66% of the co-edition units' sales was invoiced in US dollars which,because of the substantial amount of printing sourced in South East Asia, indollar-related currencies, is the group's principal operating currency. Saleswere £34.6 million (2003: £37.1 million) but, on a constant currency basis,expressed in US dollars, increased by 5%. Quarto Publishing, the group's founding imprint, has a well establishedreputation for hard-working and good-looking how-to books produced for audienceswith special interests, and is the largest imprint within the division. A newseries of how-to titles, such as The Chess Player's Bible, and The Quilter'sBible, and, in particular, The Poker Player's Bible, made an immediate impact inthe market, and is expected to be a long-term generator of profit. Althoughfluctuating currencies were a problem for the imprint, the impact was contained,and Quarto recorded its best year ever in foreign-language sales. The highlight of Quintet's year was the continued success of 1001 Movies YouMust See Before You Die, with over 225,000 copies in print. This title will beupdated in 2005, and its strength in the market has spawned a series under thesame rubric. The first two new titles, 1001 Golf Holes You Must Play Before YouDie, and 1001 Natural Wonders You Must Visit Before You Die, will be publishedin the spring of 2005. Quintet also had considerable success with its line ofinstructional kits, licensed to Reader's Digest in the English language. A newpublisher took over responsibility for the imprint in the middle of the year. Global Publishing, based in Sydney, had a stunning year. In 2003, it producedFlora, the most comprehensive illustrated encyclopedia of plants ever produced.The costs were enormous and, consistent with the group accounting policy, wereexpensed when the book was first published that year. Without this expense,Global reaped the benefits of numerous reprints, and foreign editions, in 2004.Flora is published in Australia by the Australian Broadcasting Corporation(Australia's equivalent of the BBC), which also published Quintet's 1001 Movies.The two titles were ABC's highest-grossing book publishing titles in 2004. Quantum Publishing specializes in extending the life of many of the group'stitles, by recycling them for value-priced markets internationally. It alsogenerates some new titles of its own. Once again, Quantum's performance wasextremely good. There is further to go, as the focus to date has been on majormarkets, and there are now many smaller markets that can be exploitedprofitably. Marshall Editions only produced one new, albeit successful title, in 2004. Thiswas because of a change of publisher, and the decision to take Marshall closerto its roots as publisher of reference and informational books. Fortunately,Marshall's backlist remains strong, and achieved substantial sales. The existinglicensing relationship with the National Geographic Society was strengthened,and more Marshall titles will be appearing under its imprint in 2005. Our recent start-ups all had eventful years. Iqon produced its first title,Isms, an exploration of movements in art history, which has been translatedalready into several foreign languages. Eye, in New York, came close tobreak-even, while Qu:id, in Brighton, moved into profit on a 75% rise in sales,and an expanding customer base internationally. QED, publishing books mainly forthe school and library market, launched it first list, of 63 titles. It willproduce approximately the same number of new titles in 2005, and is expected todouble its sales to £1.5 million, a very solid prospect for its second year oftrading. Q+, our books plus unit, had a disappointing and unprofitable year. Sales were20% below budget, and the operating result plunged from a projected profit to aloss, a swing of £0.9 million. We are in the process of refocusing the imprint.Historically, it has been a market leader in creating interactive instructionalbooks for a young audience, but this has now become a novelty and commoditymarket, producing small margins on high volume, but low-value, sales. This isnot Quarto's strength, and we are repositioning Q+ towards mainstream bookpublishing. A good example of this was Speckled Hen, published very successfullyby Simon & Schuster in the United States, and the fastest-selling children'sbook of 2004 for Mondadori, the Italian publisher of the title. The progress hasbeen disappointingly uneven, and much slower than forecast, as a result of whichQ+ is now in "intensive care". In the US, the Rockport Group had another very strong year and, overall, beatits forecast earnings. Rockport, which publishes its own titles in the US andUK, but licenses them elsewhere, took on management responsibility for thenewly-acquired CPi and, from the beginning of 2005, the sales, marketing, anddistribution activities of the two businesses have been combined. As a result ofthis new arrangement, RotoVision, which formed part of the Rockport Group in2004, is going to be run from London, as a stand-alone co-edition imprint. Rockport's success owed a great deal to the continued strong sales of its FairWinds list, specializing in cooking, wellbeing, fitness, alternative health,sex, and freemasonry. The Rockport Group disappointed in two areas: theperformance of RotoVision, which was below expectations, and in the commercialmanagement of the second pan-European conference, GraficEurope, which was heldin Berlin to critical acclaim, but fell well short of budgeted expectations. Quarto also publishes books under imprints owned by the group. In sterlingterms, sales increased to £28.3 million (2003: £22.3 million), including £6.7million of sales by acquired businesses but, as only 13% of sales were in theUK, the figures seriously understate the volume growth in the core US market. Inconstant currency, sales increased by 36%. With the acquisition of Aurum Press in the summer augmenting Apple's sales,Quarto's presence in UK publishing is growing. Aurum's pre-Christmas sales inthe UK increased by 25% over the prior year, which was well ahead of overallbook sales during the period. Feet in the Clouds, by Richard Askwith, aremarkable personal story, and history, of fell running, sold 10,000 copies;Larry Flynt's Sex, Lies and Politics, a blistering attack on right wing politicsin America, sold 12,000 copies, and was featured in Waterstone's Christmaspromotion. Of Jacqui Small Editions' titles, a joint venture with Aurum, theclear winner was Kelly Hoppen Style, with 20,000 copies in print. Quarto Magazines expanded significantly as Creative Card Making Ideas increasedits circulation, and the first of two start-ups, The World of Fine Wine,appeared in July, and Creative Scrapbooking Ideas was launched in September. Most of Quarto's book publishing is concentrated in the US. Walter Foster,specializing in art instruction titles and book kits, had a slightlydisappointing year. The core outlet for its titles, the art and craft retailstores, is increasingly dominated by one powerful retailer, Michaels. AlthoughWalter Foster is no longer dependent upon Michaels, it is affected when itsbuying slows down, as happened in 2004. There was steady growth in othermarkets, but these did not overcome the drag of the slowdown in the core area,and the results also incorporated the start-up losses of its Paint ChipProductions imprint, which had no sales during the period. Overall, WalterFoster, pre-eminently a publisher of evergreen titles, performed a little belowexpectations. CPi, acquired in August, was placed under the direction of Ken Fund, presidentof Quarto's Rockport group. The integration plans called for the merger of thesales, marketing, and fulfilment operations, in the US, of Rockport and CPi. Thecombined organization has been renamed the Quayside Publishing Group, and hasbeen operating under that name since the beginning of 2005. Book Sales, our promotional publishing operation, based in New York, had abetter year than 2003. Returns were down significantly, and operating marginsrose to over 10%, a target set some years ago, but considered a very difficultchallenge. We shall now assess whether this level of profitability can besustained with growing sales. In Australia, we only gained control on Lifetime in the middle of November, butwe immediately established a task force to improve its profitability. Uniquely,among display marketing book distributors, Lifetime operates throughfranchisees. We determined that that the franchise operations needed to beimproved, and appointed a director of franchise development. In addition, ourgeneral manager in Australia has been intimately involved in a drive to improvesystems and procedures, helped by input from our operational research directorin London. Our art publishing businesses in the US and Australia maintained theirprofitable operations. Sales growth was disappointing, and both units areexploring ways in which they can enhance their businesses. Our publishing services businesses had another year of overall growth. Salesincreased by 10% to £16.9 million (2003: £15.3 million), but this due to astrong sales growth from Regent Publishing Services in Hong Kong. Regentimproved its bottom line in the face of intense price pressures, andmanufacturing hiccups caused by sporadic labour shortages at several of itsChinese suppliers. It handled the growth of its business very effectively, andestablished the management infrastructure for further growth. As I reportedduring the course of last year, in sharp contrast, the UK-based publishingservices units coped poorly with the expansion of their overall capacity andstrong competitive pressure. In an effort to achieve higher levels of sales andproductivity, I recruited a very senior executive to be the managing director.The appointment was extremely unsuccessful, and had to be terminated. Overall,these units missed their targets significantly, and moved from a profit of £0.25million in 2003, to a loss of £0.35 million in 2004, an adverse swing of £0.6million. By December, the situation was stabilized, and trading losses wereeliminated, but the recovery of these formerly successful units to previouslevels of profitability will be slower than originally anticipated. SUMMARY FINANCIAL RESULTS for the year ended December 31st, 2004 2004 2003 £000 £000TurnoverContinuing operations 73,141 74,623Acquisitions 6,694 - ------- -------- 79,835 74,623 -------- -------- Gross Profit 28,904 25,383Net operating expenses before exceptional items andgoodwill amortisation (21,300) (18,817)Amortisation of goodwill (410) (206)Exceptional items - (595) Operating Profit----------------------------- ---------- ----------Before exceptional items and goodwill amortisation 7,604 6,566Amortisation of goodwill (410) (206)Exceptional items - (595) -------- -------- 7,194 5,765----------------------------- ---------- ---------- Continuing operations 6,489 5,765Acquisitions 705 - -------- -------- 7,194 5,765 Net interest payable (1,169) (892) Profit on ordinary activities before taxation----------------------------- ---------- ----------Before exceptional items and goodwill amortisation 6,435 5,674Amortisation of goodwill (410) (206)Exceptional items - (595)----------------------------- ---------- ---------- 6,025 4,873 Taxation (1,337) (750) --------- ------- Profit on ordinary activities after taxation 4,688 4,123Minority interests - equity (403) (314) ------- -------Profit for the financial year 4,285 3,809 Dividends (including non-equity) (1,549) (1,458) --------- ---------Retained profit for the financial year 2,736 2,351 ======= ======= Earnings per share 21.5p 18.9p ======= =======Underlying earnings per share 23.8p 22.3p ------- -------Diluted earnings per share 20.1p 18.2p ======= =======Diluted underlying earnings per share 22.0p 21.2p ======= =======Dividends per ordinary share 6.25p 5.75p ======= ======= SUMMARY PROFIT & LOSS ACCOUNT for the year ended December 31st, 2004 2004 2003 £000 £000 TurnoverContinuing operations 73,141 74,623Acquisitions 6,694 - ------- ----------- 79,835 74,623 -------- -------- Gross Profit 28,904 25,383 -------- -------- Operating Profit Continuing operations 6,489 5,765Acquisitions 705 - -------- -------- 7,194 5,765 Net interest payable (1,169) (892) --------- ------- Profit on ordinary activities before 6,025 4,873taxation Taxation (1,337) (750) --------- ------- Profit on ordinary activities after 4,688 4,123taxationMinority interests - equity (403) (314) -------- --------Profit for the financial year 4,285 3,809 Dividends (including non-equity) (1,549) (1,458) --------- ---------Retained profit for the financial year 2,736 2,351 ======= ======= Earnings per share 21.5p 18.9p ======= =======Underlying earnings per share 23.8p 22.3p ------- -------Diluted earnings per share 20.1p 18.2p ======= =======Diluted underlying earnings per share 22.0p 21.2p ======= =======Dividends per ordinary share 6.25p 5.75p ======= ======= CONSOLIDATED BALANCE SHEET as at December 31st, 2004 2004 2003 £000 £000 Fixed assetsGoodwill 13,005 3,337Tangible assets 8,982 8,909 ------ ------ 21,987 12,246 ------ ------Current assets Stocks and work in progress 20,727 17,451Debtors 24,066 20,667Cash and deposits 12,578 12,490 ------ ------ 57,371 50,608 ------ ------ Creditors: Amounts falling due within one year (28,927) (24,303) ------ ------ Net current assets 28,444 26,305 ------ ------ Total assets less current liabilities 50,431 38,551 Creditors: Amounts falling due after more than one year (38,618) (29,588) Provision for liabilities and charges Deferred taxation (646) (875) ------ ------ Net assets 11,167 8,088 ====== ====== Capital and reserves Called up share capital 1,341 1,341Treasury stock (786) (802)- Reserves - paid in surplus 23,903 23,893- revaluation 968 978- profit and loss (16,979) (19,758) ------ ------Shareholders' funds 8,447 5,652 ------ ------ Equity 3,575 780Non-equity 4,872 4,872 ------ ------ 8,447 5,652Minority interests - equity 2,720 2,436 ------ ------ 11,167 8,088 ====== ====== CONSOLIDATED CASH FLOW STATEMENT for the year ended December 31st, 2004 2004 2003 £000 £000 Net cash inflow from operating activities 6,503 7,965 --------- ------- Net cash outflow from return on investment and servicingof finance (1,805) (1,422) --------- --------- Taxation (1,062) (371) --------- ------- Capital expenditure (982) (2,502) --------- ------- Acquisitions and disposals (13,700) (179) --------- ------- Equity dividends paid (1,077) (969) --------- ------- Management of liquid resources Movement of short term deposits 1,927 (1,593) --------- ------- Net cash flow from financing 10,993 1,631 --------- ------- Increase in cash 797 2,560 --------- ------- Reconciliation of net cashflow to movement in net debt Movement in cash 797 2,560Movement in debt (10,967) (1,733)Management of liquid resources (1,927) 1,593 --------- ------- (12,097) 2,420 New finance leases - (1,631)Translation differences 1,254 1,607 --------- ------- Movement in debt for year (10,843) 2,396Net debt at beginning of year (17,387) (19,783) ---------- ---------- Net debt at end of year (28,230) (17,387) ========== ========== NOTES 1. Segmental Analysis Geographical analysis of turnover by destination 2004 2003 £000 £000 United Kingdom 15,889 14,983United States of America 43,072 41,624Canada 2,141 1,955Europe 9,211 8,270Australasia and the Far East 8,375 6,721Rest of the World 1,147 1,070 ------ ------- 79,835 74,623 ====== ======= 2. Exceptional items in 2003 comprise US and UK professional feesassociated with the JOHCM Tender Offer and the Group's response. 3. Dividends comprise: 2004 2003 £000 £000 Non equity: Preference: 426 426Equity: Ordinary: Interim 494 449 Final proposed 629 583 ----- ----- 1,549 1,458 ===== ===== The Board proposes a final dividend of 3.5p net (2003: 3.25p) per share ofcommon stock of par value US$0.10 each ("ordinary share") which is expected tobe paid on May 19th 2005 to shareholders on the register on April 22nd 2005. 4. Shareholder ReturnQuarto's ordinary shares have generated a total shareholder return of 117%, 205%and 20% over the five years, three years and one year ended December 31, 2004,respectively. Over the same periods, Quarto's ordinary shares have significantlyoutperformed the FTSE 100, the FTSE small cap and the media sector. 5. Earnings per shareBasic earnings per share is calculated by dividing the earnings attributable toholders by the weighted average number of ordinary shares in issue during theperiod, excluding those held as treasury stock. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. These represent share options granted to employees where the exerciseprice is less than the weighted average market price of the ordinary sharesduring the period, a convertible loan note and preference shares which areconvertible into ordinary shares. Underlying earnings per share figures are presented. These exclude the effectsof exceptional items and goodwill amortisation. Earnings 2004 Per Earnings 2003 Per Share £000 Weighted Share £000 Weighted Amount Pence Average Number of Ordinary Shares Average Amount Number Pence of Ordinary SharesBasicearnings 3,859 17,955,495 21.5 3,383 17,926,756 18.9per shareEffect ofdilutiveoptions - 111,636 - - 66,305 -Dilutiveloan 23 437,347 5.3 - - -noteDilutivepreferenceshares 426 2,923,514 14.6 426 2,933,965 14.6 ----- ----------- ------ ----- ----------- ------ Dilutedearnings pershare 4,308 21,427,992 20.1 3,809 20,927,026 18.2 ------- ------------ ------ ------- ------------ ------ Underlyingearnings persharefiguresBasicearnings 3,859 17,955,495 21.5 3,383 17,926,756 18.9per shareEffect of:Exceptionalitems - 17,955,495 - 416 17,926,756 2.3Goodwillamortisation 410 17,955,495 2.3 206 17,926,756 1.1 ----- ------------ ----- ----- ------------ ----- Underlyingearnings pershare 4,269 17,955,495 23.8 4,005 17,926,756 22.3 ------- ------------ ------ ------- ------------ ------Underlyingearnings pershare 4,269 17,955,495 23.8 4,005 17,926,756 22.3Effect of:Dilutiveoptions - 111,636 - - 66,305 -Dilutiveloan 23 437,347 5.3 - - -noteDilutivepreferenceshares 426 2,923,514 14.6 426 2,933,965 14.6 ----- ----------- ------ ----- ----------- ------Dilutedunderlyingearnings pershare 4,718 21,427,922 22.0 4,431 20,927,026 21.2 ------- ------------ ------ ------- ------------ ------ Exceptional items are stated net of a tax credit of £179,000. 6. The financial information contained in the preliminary announcementdoes not constitute the Company's statutory accounts for the years endedDecember 31st 2004 or 2003 but is derived from those accounts. Statutoryaccounts for 2003 have been delivered to the Registrar of Companies; those for2004 will be delivered following the Company's Annual General Meeting. Theauditors have reported on those accounts, their reports were unqualified and didnot contain a statement under Section 237(2) or (3) of the Companies Act 1985. 7. The Annual Report will be sent out to shareholders in March. Additionalcopies can be obtained from the Finance Director, The Quarto Group, Inc., TheOld Brewery, 6 Blundell Street, London, N7 9BH. Tel: 020 7700 9000 (email:mickm@quarto.com). This information is provided by RNS The company news service from the London Stock Exchange