QRT.L Regulatory News (QRT)

THE QUARTO GROUP, INC.

("Quarto" or the "Company" or the "Group")

Half-Year Results for the Six Months Ended 30 June 2017

The Quarto Group, Inc. (LSE: QRT), the leading global illustrated book publisher announces its unaudited half year results for the six months ended 30 June 2017.

1. All results relate to continuing operations.

2. Adjusted measures are stated before amortisation of acquired intangibles and exceptional items.

Financial Highlights

· Lower than expected publishing performance with revenue down 13%.

· Lower revenue combined with higher than expected one-off, non recurring costs impacted profit, resulting in a higher adjusted loss before tax of $8.7m (H1 2016 loss: $1.6m).

· Group overheads, though lower, included one-off, non-recurring costs related to personnel and IT systems upgrades, partially offset by favourable currency movements.

· Net debt rose 5% to $75.8m (H1 2016: $72.5m) and reflects a higher first half loss, partially offset by a net reduction in working capital.

· Owing to the increased second half weighting, the Group will not pay an interim dividend but will review the final dividend policy over the coming months in consultation with shareholders.

· The Board has received a preliminary approach to acquire the Company at a price it considers to be attractive and reflective of the inherent value of the business as a global publishing platform - and hence worthy of due consideration. Discussions with the bidder are at an early stage and there can be no certainty that an offer will be made or as to the terms of any such offer.

Operational Highlights

· Continued softness in the retail environment across both domestic markets, characterised by a changing product mix and unusually high returns from key customers.

· In the US, despite a revenue contribution from becker&mayer, total revenue was affected by the significant sales of colouring books in H1 2016 which were not repeated or replaced by another trend in H1 2017.

· Adult publishing imprints and international English language co-edition sales most strongly hit by market softness. More resilient performance from Children's publishing imprints and Foreign Language sales.

· Disposals of trading businesses completed, reported within Discontinued Operations for the period to disposal.

· Strong and deep Autumn and Holiday publishing programme and healthy order book visibility for the second half of the year.

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

"As highlighted in our trading update in July, this set of results is below expectations. However, it needs to be set in the context of both a soft retail environment and the new reality of a higher second-half seasonality for the Group as a pure-play publishing business, especially with the addition of becker&mayer to our portfolio.

It has been a transitional period with the completion of the disposals of our non-core businesses while facing a challenging trading background in our key domestic markets. We have seen lower initial orders and reprints from some large customers. In particular, most of our adult imprints have performed below our expectations.

While we expect the soft retail environment to continue, we have an excellent publishing programme for the Autumn and the Holiday period - one of our strongest in the last few years. Order book visibility is healthy and our sales teams have the right plans in place to capture all possible opportunities. We have confidence throughout the Group in delivering a strong finish to the year."

- ENDS -

About The Quarto Group

The Quarto Group (LSE: QRT) is the leading global illustrated non-fiction book publisher. Our mission is to make and sell great books that entertain, educate and enrich the lives of adults and children around the world. 

Quarto creates and owns proprietary content, publishing books from a diverse portfolio of imprints that are creatively independent and expert in developing long-lasting content across specific niches of interest.

Quarto sells books across 47 countries and in 39 languages through a variety of traditional and non-traditional channels, while constantly looking for new ways to create and deliver content that people need.

Quarto employs over 400 talented people in the US, UK and Hong Kong. The group was founded in London in 1976. It is domiciled in the US and listed on the London Stock Exchange. 

For more information, visit quarto.com, quartoknows.com or follow us on Twitter at @TheQuartoGroup. 

This statement will be available at the registered office of the Company. A copy will also be displayed on the Company's website: www.quarto.com.

CHIEF EXECUTIVE'S STATEMENT

SUMMARY

The first six months of 2017 have been extremely challenging and the Group's performance reflects the general weakness of the retail environment in this period, with reduced footfall and consumer confidence in both the US and the UK, resulting in lower than usual levels of business with several of our key customers.

Revenue was down by 13% at $50.2m (H1 2016: $57.9m). As a result, the adjusted group operating loss for the first six months was $7.2m (H1 2016: loss of $0.1m) and the adjusted loss before tax was $8.7m (H1 2016: loss of $1.6m). Net debt at 30 June 2016 was $75.8m (H1 2016: $72.5m), an increase of $3.3m over the twelve-month period.

It has been a transitional period for the Group, which saw the successful completion of the planned disposals of its non-core businesses, Books & Gifts Direct (BGD) Australia and Regent Publishing Services. The disposal of BGD New Zealand, the Group's last non-core business, was completed on 7 July 2017. The Group is now fully focused as a pure-play publishing business, which also results in an increased second-half weighted seasonality of full-year results - even more pronounced with the addition of becker&mayer, acquired in August 2016, to the portfolio.

While the soft retail environment is likely to continue for the balance of the year, the Group expects its strong publishing programme for the Autumn and Holiday period, combined with the continuing resilience of its backlist, to result in a significantly better overall performance in the second half. Order book visibility is healthy and the Group is confident that its sales teams have the right plans in place to help deliver a strong finish to the year.

Dividend

After consultation with a large number of shareholders, and in light of the first half performance and the increased second half weighting of full year performance now that Quarto is a pure-play publishing business, the Board has concluded that the Group will not pay an interim dividend. The Board, in consultation with shareholders, will review the final dividend policy over the coming months.

OPERATING REVIEW

 Note: Revenue is shown by destination; Adjusted Operating Profit is shown by segment.

Continuing Publishing Operations

Now purely a publishing business, the Group's decline in revenue is a result of several factors prompted by the soft retail environment in the first six months of 2017 - lower initial order quantities, fewer reprints, changing product mix and higher than usual returns from a few key customers. In addition, there were still significant sales of colouring books in H1 2016 which have not been repeated or replaced by another trend in H1 2017. The quality of our Autumn and Holiday frontlist combined with lower return rates should alleviate these pressures for the remainder of the year.

Adult imprints have under-performed our expectations in both domestic markets. Adults' publishing revenue for the first six months of 2017 was $34.4m, 18% lower than the same period last year of $42.0m. That said, we are confident in the quality of our Autumn and Holiday frontlist and expect a significantly better performance in the second half. Forthcoming highlights include eight titles in our Scratch & Create adult activity series, new releases from established authors and new titles in some of our most successful publishing series such as the 1001 and the 30 Seconds series.

Children's imprints have performed resiliently despite pockets of softness, for instance in the educational market. Children's publishing revenue for the first six months of 2017 was $13.4m, 3% higher than the same period last year of $13.0m, including the impact of becker&mayer, acquired in August 2016. We have a very solid frontlist for the second half of the year and expect to show growth over the full year. Wide Eyed Editions and Frances Lincoln Children's Books continue to be successful, as demonstrated by the 'Little People, Big Dreams' series. New titles this Autumn should boost this performance further. We also expect Imagine, a unique picture book based on the John Lennon song and produced in partnership with Amnesty International, to do well with encouraging initial order quantities and 15 foreign editions already sold.

Our Foreign Language business is trading in line with expectations at this time of year, with particularly strong performance from our Children's lists. Overall, we expect the business to show growth for the full year, despite uncertainties in some of the markets in which we conduct business.

Our publishing partnerships and distribution business, Q Partners, is also performing in line with expectations at this time of year. We now have three international publishing partnerships - in Brazil (Quarto Editora), in the Middle East and North Africa (Kalimat Quarto) and a new Spanish language imprint, Quarto Iberoamericana, launching in October 2017 across North and South America. We have recently secured two new distribution agreements - Zest Books and the Viz Annual.

Discontinued Operations

The results from discontinued operations includes the trading results of Regent Publishing Services and BGD Australia to 31 March 2017 and the related profit and loss on disposal on that date. The disposal of the trade and selected assets of BGD New Zealand was completed on 7 July 2017. The trading results for the period are included within discontinued operations.

Further details of these transactions are included in Note 5.

Group overheads

Group overheads, while reducing against prior year and including favourable currency impacts, reflect the inclusion for the first time of becker&mayer as well as some costs arising from the search for a new Chief Financial Officer, some one-time professional fees and expenses related to IT systems upgrades. These are largely non-recurring costs and we expect to return to a normalised level in the second half.

 OUTLOOK

Following the disposals of its non-core businesses, Quarto is now fully focused as a pure-play publishing business, with full year results even more dependent on the second half year performance than in previous years.

While the soft retail environment is likely to continue for the balance of the year, the levels of returns and some of the overhead costs incurred in the first half year are not expected to recur in the second half.

The Group's Autumn and Holiday publishing programme is one of the strongest in the last few years, co-edition order book visibility is healthy and sales teams in all channels and markets around the world have the right plans in place to capture all possible opportunities. Overall, management is confident that the Group will deliver a strong finish to the year.

The Group is in the process of agreeing amendments to its banking facilities. This will allow greater flexibility over the remaining term, particularly in light of the pronounced seasonality of the business and degree of sensitivity around working capital movements as previously reported. The level of net debt continues to be monitored and managed closely.

As announced today, the Board has received a preliminary approach to acquire the Company at a price it considers to be attractive and reflective of the inherent value of the business as a global publishing platform - and hence worthy of due consideration. Discussions with the bidder are at an early stage and there can be no certainty that an offer will be made or as to the terms of any such offer.

On behalf of the Board, I would like to thank all our people for their perseverance and commitment in this challenging environment, as well as our partners and suppliers across the world.

Marcus E. Leaver

Chief Executive

THE QUARTO GROUP, INC.

Condensed Consolidated Income Statement

For the six months ended 30 June 2017

 * Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2017

* Restated as set out in Note 1

THE QUARTO GROUP, INC.

Condensed Consolidated Balance Sheet

At 30 June 2017

* Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2017

* Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2017

Year ended 31 December 2016 (Audited)

THE QUARTO GROUP, INC. 

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2017

 * Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

1. Interim Statement

These interim consolidated financial statements are for the half year to 30 June 2017. They were approved by the board on 7 August 2017. These results are unaudited and have not been reviewed by the auditor. The comparative figures for the six months to 30 June 2016 are also unaudited and derived from the half-yearly financial report for that period, subject to certain restatement changes noted below.

The information for the year ended 31 December 2016 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

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 committed facilities of $85.0m through to 30 April 2019 and is in the process of agreeing amendments to these facilities. This will allow greater flexibility over the remaining term, particularly in light of the pronounced seasonality of the business and degree of sensitivity around working capital movements as previously reported. The Group has complied with all related covenants in the current period.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2016 as described in those financial statements.

Restatement of prior year results

In the process of finalising the results of the Books and Gifts Direct business for the year ended 31 December 2016, errors were uncovered in the cut-off procedures and accounting for returns in relation to stock in transit and the related liability accounts at BGD Australia. The errors related to the value attributed to stock in transit at each of the three years ended 31 December 2016, 31 December 2015 and 31 December 2014 where detailed examination has shown that supplier invoices for stock in transit were not processed in the correct accounting period, nor was the correct accrual or return provision recorded in the financial statements. The error was caused by a failure in controls relating to cut-off and reconciliation procedures in respect of stock in transit and the related purchase clearing accounts, and accounting for returns on certain products. The full impact of the restatement is set out in the 2016 Annual Report and Accounts.

As a result of the above, the results for the period ended 30 June 2016 have been restated.The impact on the Condensed Consolidated Income Statement is to increase the cost of sales by $0.4m, which is included in the results from discontinued operations. No related tax credit is recognised as there is insufficient evidence that future profits would be available against which the credit could be applied.The impact on the Condensed Consolidated Balance Sheet at 30 June 2016 is:

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

2. Segmental analysis

During 2016, the Group concluded an operational review of the business. Following this review, the core publishing businesses were reorganised into three divisions: US Publishing, UK Publishing and Q Partners. This is now the basis on which operating results are reviewed and resources allocated by the Chief Executive.

Due to the seasonality of the business, the Group's sales and segmental results are weighted towards the second half of the year.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

2. Segmental analysis (continued)

3. Exceptional items

There were no exceptional items included in loss before tax for the current and previous period. Exceptional items for the year ended 31 December 2016 comprised of acquisition costs including due diligence expenses and other professional fees.

4. Taxation

Taxation for the six months to 30 June 2017 is based on the Group estimated underlying tax rate for the year. We expect the full year effective rate to be substantially consistent with the rate for the period.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

5. Discontinued operations

On 30 March 2017, the Group completed the disposal of its 75% interest in Regent Publishing Services Limited ("Regent"), its Hong Kong based publishing services business.

On 3 April 2017, the Group completed the disposal of its 100% share of Books & Gifts Direct Pty Limited ("BGD Australia"), its direct sales business in Australia.

On 7 July 2017, the Group completed the disposal of the trade and selected net assets of Books & Gifts Direct Limited ("BGD New Zealand"), its direct sales business in New Zealand. At 30 June 2017, this business is disclosed as a discontinued operation held for sale. The final loss on disposal will be accounted for in the financial statements for the year ended 31 December 2017.

These disposals were completed in line with the Group's strategy of disposing of non-core businesses. Proceeds from the disposals will be used to manage the Group's net debt position as received. The results of the discontinued operations which have been included in the consolidated income statement were:

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

6. Earnings per share

* Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

7. Dividends

The Quarto Group, Inc., as a US incorporated company, is required to collect US dividend withholding taxes on dividend distributions made to its non-US shareholders. The US dividend withholding tax is generally 30% of any dividends paid to Quarto's non-US shareholders, but this amount can potentially be reduced pursuant to an applicable income tax treaty between the US and the country of residence of the non-US shareholder. For example, under the US/UK income tax treaty, the US dividend withholding tax rate can range from nil (applicable to certain UK resident pension trusts and tax exempt entities) to 15% (applicable to UK resident individual shareholders and certain UK corporate shareholders). For US shareholders, no US dividend withholding tax is generally applicable. It should be noted that certain documentation requirements must be met by all shareholders prior to the payment of any dividends to certify their status as a US or non-US shareholder, and, if a non-US shareholder to claim any applicable benefits under the US/UK or other applicable income tax treaty. Each shareholder should consult their own tax adviser to determine whether and to what extent they may be entitled to claim a reduced amount of US dividend withholding taxes under a US income tax treaty.

8. Goodwill

The Group performs its annual impairment review at the end of each financial year. The recent and on-going challenging trading environment gives rise to an indicator of potential impairment and therefore, a full review was undertaken at 30 June 2017. The key inputs to the review were consistent with the review performed at 31 December 2016 and applied to the Group's updated forecasts. The review did not require an impairment charge in respect of either of the two cash generating units of US Publishing and UK Publishing.

9. Net debt and financing

At 30 June 2017, the Group has a $85.0m syndicated bank facility, comprising a term loan and revolving credit facility. These facilities expire in 30 April 2019 and are subject to financial covenants which were all met in the current period.

Net debt is reconciled as follows:

10. Principal risks and uncertainties facing the Group

There have been no changes to the principal risks and uncertainties facing the Group since the year-end. These are disclosed on pages 22 and 23 of the 2016 Annual Report.

11. Financial Instruments

There are no material differences between the fair value of financial instruments and their carrying value.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

12. Acquisitions and post balance sheet event

On 7 July 2017, the Group completed the sale of the trade and selected assets of Books & Gifts Direct Limited ("BGD New Zealand"), its direct sales business in New Zealand and last remaining non-publishing business. The business has been acquired by Etailer BGD (2017) Limited, a company incorporated in New Zealand and formed for the purposes of acquiring the business. It is part of the established online retail group Etailer Limited in New Zealand. The cash consideration for the sale is US$0.6m (NZ$0.8m) payable over the next two years. In addition, Quarto is entitled to receive 50% of debtor receipts for the next year and 15% of the profit before interest and tax of the business for the next three years. The cashflows will be used to reduce the Group's bank debt as they are received.

The Board has received a preliminary approach to acquire the Company at a price it considers very attractive and hence worthy of due consideration. Discussions with the potential acquirer are at an early stage and there can be no certainty that an offer will be made.

13. Management Statement

This Interim Management Report (IMR) has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The IMR should not be relied on by any other party or for any other purpose.

The IMR contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

Responsibility statement

We confirm that to the best of our knowledge:

(a) the condensed set of financial statements, which has been prepared in accordance with IAS 34 "Interim Financial Reporting", gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole as required by DTR 4.2.4R;

(b) the interim management report includes a fair review of the information required by DTR 4.27R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.28R (disclosure of related party transactions and changes therein).

By the order of the board