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 2018

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 2018.

1. All results relate to continuing operations.

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

Financial Highlights

· Encouraging trading performance, ahead of the prior year

· Revenue up 12%

· Improved gross profit margin of 50.1% (2017: 48.2%)

· Cost-out programme initiated post period end, and significant progress made with our banking syndicate to extend facilities until August 2020

Operational Highlights

· Solid trading performance in a challenging retail environment in both domestic markets

· US publishing lists revenue up 9%, compared to 2017

· UK publishing lists revenue up 17%, compared to 2017, driven by a strong contribution from children's imprints

Commenting on the results, Chief Executive, CK Lau said: 

"This is an encouraging set of results. We have achieved good year-on-year growth and we are well placed to deliver a solid performance for the full year.

The Group has had to adjust to various transitions in the management of the Company during the first half year. Our resilient and talented staff have stepped up to the challenges we have faced and are committed to delivering on a leaner and more focused publishing programme.

The newly constituted Board are concentrating on delivering stability to the business, and the extension of the banking facilities will enable us to lay down a key building block in returning the Group to full-health."

- ENDS -

About The Quarto Group

The Quarto Group (LSE: QRT) creates a wide variety of books and intellectual property products for global distribution, with a mission to inspire life's experiences. Produced in many formats for adults, children and the whole family, our products are visually appealing, information rich and stimulating.

The Group encompasses a diverse portfolio of imprints and businesses that are creatively independent and expert in developing long-lasting content across specific niches of interest.

Quarto sells its products globally in over 50 countries and 40 languages, through a variety of sales channels and partnerships, and five main routes to market - US, UK, International English Language, Foreign Language and other Partnerships.

Quarto employs c.350 talented people in the US, UK, Hong Kong and Australia. 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 2018 have been challenging as the market place continues to show softness in the book trade, both in the US and the UK. However, trading was encouraging for the first half of the year, with revenue up by 12% at $56.2m (2017: $50.2m). Our children's imprints performed particularly strongly, with revenues up 30%. Revenues from our adult imprints were also up, by 5%. The gross profit margin before amortization of pre-publication costs, was 50.1% (2017: 48.2%). The increased revenues, together with an improved gross profit margin, have resulted in a significantly lower adjusted group operating loss of $4.7m (H1 2017: loss of $7.2m), in what is our seasonally weak half year. The adjusted loss before tax was $6.6m (H1 2017: loss of $8.7m). Net debt at 30 June 2018 was $73.2m (H1 2017: $75.8m), a decrease of $2.6m over the twelve-month period.

Each of our reporting segments produced a solid trading performance. US Publishing revenues were up 9% compared to the prior year, UK publishing revenues were up 17% and Q Partners revenues were up 1%, resulting in an improvement in the Group's adjusted operating result, as shown in the table below. The US and UK publishing segments both benefited from an improved seasonal split of co-edition revenues, with a higher percentage than normal of expected full-year revenues achieved in the first half.

The book store market continues to be slow and this is likely to continue for the remainder of the year. We may also see further consolidation in the book trade and a continued pattern of more frequent smaller orders, which puts pressure on the supply chain. The Group expects that its strong autumn and holiday publishing programme, resurgent backlist and list of break-out titles will contribute to a positive year-end.

OPERATING REVIEW

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

Continuing Publishing Operations

The Group's increase in revenue this year is a result of several factors prompted by our strong frontlist publishing programme, and backlist sales particularly from titles published in prior years. The highlights are our Little People Big Dreams list of titles which is now approaching 1 million copies in print and still growing. Our line of healthy cookery titles, led by our Keto cookery programme, has been very successful, with almost 600,000 copies in print. Returns, which were high last year when the colouring books fad ended, were at a more normalized level in 2018.

The revenue for our US publishing lists was up 9%, compared to the prior year, with a strong performance from our Beverly based imprints, Quarry and Fair Winds Press. In addition, Racepoint Publishing and becker&mayer! books achieved increased revenues. A strength of the US programme has been our ability to grow the specialty retailer accounts base, as the uncertainty of the book trade continues to show lower sales in our publishing categories.

The revenue for our UK publishing lists was up 17%, mainly driven by our children's category, led by Frances Lincoln Children's, which has performed well in all markets. The Little People Big Dreams series continues to be a major success; we are adding additional titles to the programme this autumn, and next year will be expanding the list to include inspirational male role models. Young Quarto has also performed strongly in the first half, selling well in the book trade. Although we have had a good first half in co-edition, sales to our key co-edition publishers for the second half of the year are expected to be slower. The launch of our Build and Become series (White Lion Publishing) has been well received and, with another four titles to come, we expect continued growth in the series.

Our international English language sales have seen a good uplift at the start of the year. We have already matched full-year sales from the prior year with a strong contribution from our Australian, Middle Eastern and Asian markets.

We expect our foreign language sales to be slightly lower than the prior year as a result of market place uncertainty. 2017 was a record year for our foreign language sales team, significantly increasing our market reach and growing the business in Asia.

Q Partners, our publishing partners and distribution business, has performed in line with the prior year's results. Sales have been slow in Brazil and the launch of Quarto Iberoamericana, our Spanish language partnership, has still to reach critical mass.

Cost-out programme

We have initiated a cost-out programme, which is designed to achieve: a right-sizing of the Group; a path to sustainable debt reduction; a focus on our core strengths; and a disciplined business model.

The process involved a thorough review of key areas of expenditure, including but not limited to, pre-publication expenditure, occupancy costs, payroll and discretionary expenditure. The benefit of the cost-out programme will not flow through immediately, as we will have to incur one-time exceptional costs, mainly in 2018, to implement the plan.

Refinancing

Significant progress has been made with our banks, to extend our facilities to August 2020. The key terms, which include a debt reduction programme, have been agreed and we expect to be able to announce details of the refinancing in the short term.

Year end

We have decided to continue the historical year-end of 31 December - the previous Board had agreed a change to 31 March. By doing this, we avoid the unnecessary time and cost of carrying out the additional work that would have been required in restating comparatives and preparing additional transitional reports.

OUTLOOK

We have produced a strong first-half performance compared to last year, and we are well placed to deliver a solid result for the full year.

The newly constituted Board are fully focused on achieving stability in the business after a period of considerable change. The extension of the banking facilities will create financial stability which is a key building block in returning the Group to full-health. This will allow us to concentrate on the production of the profitable and beautifully illustrated books for which Quarto is so well-known.

On behalf of the Board, I would like to thank all staff for their continued support and loyalty during this recent period of change and uncertainty, as well as our partners and suppliers across the world.

CK Lau

Chief Executive

THE QUARTO GROUP, INC.

Condensed Consolidated Income Statement

For the six months ended 30 June 2018

THE QUARTO GROUP, INC.

Condensed Consolidated Income Statement

For the six months ended 30 June 2018

THE QUARTO GROUP, INC.

Condensed Consolidated Balance Sheet

At 30 June 2018

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Changes in Equity for the six months ended 30 June 2018

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Changes in Equity for the year ended 31 December 2017

THE QUARTO GROUP, INC.

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2018

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 2018. They were approved by the board on 17 September 2018. These results are unaudited and have not been reviewed by the Group's auditor. The comparative figures for the six months to 30 June 2017 are also unaudited and derived from the interim financial statements for that period.

The information for the year ended 31 December 2017 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 $80.0m through to 30 April 2019. The Group has complied with its bank covenants and is budgeted to do so for the foreseeable future.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2017 as described in those financial statements.

2. Segmental analysis

2. Segmental analysis (continued)

3. Exceptional items

4. Taxation

Taxation for the six months to 30 June 2018 is based on the Group estimated underlying tax rate for the year.

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 was disclosed as a discontinued operation held for sale. The final loss on disposal was accounted for in 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 disposal were used to manage the Group's net debt position as received. The results of the discontinued operations and the profit or loss on disposal were included in the consolidated income statement, under discontinued operations,

6. Earnings per share

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. Net debt

At 30 June 2018, the Group has a $80.0m syndicated facility, comprising a term loan and revolving credit facility. These facilities expire on 30 April 2019 and are subject to covenants, which were all met in the current period.

9. 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 28 and 29 of the 2017 Annual Report.

10. Financial Instruments

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

11. 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