QRT.L Regulatory News (QRT)

7 August 2013 

THE QUARTO GROUP, INC

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

Half year results for the six months ended 30 June 2013

Results in line with expectations for the traditionally quieter first half; clear progress with strategic review

Quarto (LSE: QRT.L), the world's leading international illustrated non-fiction book publisher and distribution group, announces its half year results for the six months ended 30 June 2013.

Financial Highlights

·; Revenue of $72.2m (H12012: $73.2m)

·; Operating Profit at $4.0m (H12012: $3.9m)

·; Profit Before Tax of $1.7m (H12012: $1.4m)

·; EPS of 1.4c (H12012 0.5c)

·; Interim dividend maintained at 3.35p (H12012: 3.35p)

Operational Highlights

·; Continuing strategic review removed $1.0m of costs

·; Ongoing focus on debt reduction: net debt down $4.5m to $83.3m (H12012 $87.8m)

·; Digital sales up 8.5% to $1.6m (H12102: $1.5m)

·; Performance in line with management expectations for the traditionally quieter first half year

Post Period End

·; Board strengthened with the addition of Michael Hartley as Senior Independent Director as well as the restoration of co-founder Robert Morley

·; The Remuneration Committee has approved the Company's LTIP Scheme with an initial grant proposed for Marcus Leaver, Chief Executive of the Company, details of which will be sent to shareholders in the coming weeks for voting at a Special Meeting of shareholders

Chairman Tim Chadwick said:

"We continue to make progress towards the aims of the strategic review and to explore all avenues regarding the re-domicile of the Company. I am very pleased to welcome Mike Hartley to the Board, where his listed media company experience will be of great benefit. The Board will be further filled out with the return of Bob Morley, one of Quarto's co- founders. Further, the Directors have agreed to maintain the interim dividend at 3.35p."

Chief Executive Officer Marcus Leaver added:

"These results are encouraging overall but much remains to do. They show a portfolio in transition; where we have taken action, the results have begun to show, and more action is to come. Importantly we are clearly bringing down our debt levels and shall continue to do so. We shall be resolute in delivering the solid results promised for 2013 while laying the foundations for growth in 2014 and beyond."

For further information please contact:

The Quarto Group

020 7700 9004

Marcus Leaver, CEO / Mick Mousley, CFO

Pelham Bell Pottinger

020 7861 2840

Elly Williamson

About The Quarto Group

The Quarto Group (LSE: QRT) is the world's leading international illustrated book publisher and distribution group and is listed on the London Stock Exchange. Quarto has about 400 talented people in four distinct but complementary businesses - Quarto International Co-editions, UK; Quayside Publishing Group, USA; Aurum Publishing Group, UK and Lifetime/Premier Display Marketing, Australia & NZ. The Group is well positioned in attractively resilient segments of the publishing market which present opportunities for growth as the industry adapts to new means of marketing, sales and consumption. The Group's headquarters are in London where the Company was founded in 1976.

Group Initiatives

To update on our main focuses for the year as outlined at our final results for 2012:

·; Our strategic review continues

·; We remain committed to debt reduction, have seen some success and expect more for the full year. We have removed $1.0m of annualized cost

·; Regarding our Children's publishing initiative we have consolidated children's imprints in Quarto Co-Editions, we have a new publisher in Frances Lincoln Children's Books and we have seen an increase in output at Walter Foster Children's

·; In digital development, our digital sales are up 8.5% to $1.6m and we continue to explore, cost-effectively, the atomization of our content and how to generate revenue from it

·; As regards our Non-book strategy we shall have a comprehensive Gift & Stationery programme in place in the US and UK for 2014

·; Looking at geographical developments, we continue to seek appropriate partners in South America and China

·; Turning to distribution, our warehousing for the publishing businesses in Europe and North America has been consolidated into one supplier

Business Review

Quarto International Co-Editions

·; Revenue $10.7m (H12012: $11.2m), down to expected degree

·; Small operating profit $32k (H12012: -$0.1m), better than expected and with good forward order book visibility

The first half has seen solid business and provided visibility that the division as a whole will match expectations for the year. The order book summary gives us a good initial snapshot profile of the shape of the various imprints.

As we have said before, all the imprints have differing profiles, generally due to the nature of their lists, the state of various international markets for the category areas they publish in, and whether series publishing partners change their focus to the detriment of reprint sales. Over the spread of imprints this variation is balancing itself satisfactorily.

Backlist sales are running at 72% right now, which shows how healthy the back catalogue is. English language backlist sales and reprints are in surprisingly good shape with the US showing some buoyancy in certain categories we publish into. Foreign language sales are more of a mixed bag; Europe is holding up well with the exception of Eastern Europe, Scandinavia is rebounding from a poor 2012, Far East is soft in parts and South America is good in Mexico but soft in Brazil.

Overheads are down in this division 13% against 2012 with the largest part of that being the removal of the Australian office and attendant overhead.

Quayside Publishing Group

·; Revenue $29.1m (H12012: $27.2m),

·; Operating profit $3.6m (H12012: $2.9m), ahead on prior year as expected driven by revenue increases and margin growth

We have had a good first half for Quayside with net sales 7% ahead of the previous year. Backlist sales are running at over 70%, again showing how resilient our catalogue is but with front list sales also up against the prior year by 27%.

The changes that were made to our sales and marketing departments in Q3/Q4 2012 are leading to signs of good growth in major accounts. Other efforts are in progress such as our gift retail, home and garden specialty sales as well as database and social media marketing. Sales by Quayside Publishing Group of Aurum Publishing Group's books into North America have started well with sales up over 20% in the four months of the arrangement so far.

With $1.4m of digital sales that represents about 6% of sales not including our distribution businesses, we are up 5% over 2012. Kindle, Nook and Apple represent 86% of our ebook sales. Our greatest percentage of growth this year has come from Kindle's international storefronts (up 57% - mostly due to their rapid expansion into new markets including Germany, Brazil and Japan). Additional library, public and academic vendors and distributors have been contracted in 2013 increasing our global footprint for ebooks beyond traditional ebook retail.

It is worth reiterating that we feel strongly that our titles work best in print, not just in Quayside but across the business. That said, if our readers choose to read them digitally we want to make that same content available to them in whatever form they choose to consume it. Digital revenues are a small part of our business today and scope for these to grow is not huge in the near term. We continue to work to our basic thesis of needing to enhance the discoverability of our content, both digitally and physically, and we continue to explore, cost-effectively, the atomization of our content and how to generate revenue from it.

Aurum Publishing Group

·; Revenue $8.3m (H12012: $8.2m),

·; operating profit $0.5m (H12012: $0.6m)

·; slightly higher revenues but down on last year's profit owing to sales mix leading to lower profit margins

·; A new Managing Director to be appointed soon

The first half has seen a satisfactory result for our UK publishing business with further outperformance from the Jacqui Small imprint. Overall sales are up marginally at $8.3m in 2013 as against $8.2m in 2012 with profit at $0.5m against $0.6m prior year.

All channels to market performed as expected with variances found between imprints. With the addition of new Publishers in our Frances Lincoln Children's Books and Aurum Press imprints, as well as a new Managing Director to be appointed soon, there is impetus for growth after what we expect to be a flat year in terms of revenue and profits in 2013.

Digital sales amount to about 2% of sales with this division although the Aurum imprint has digital sales of 8.5%.

Lifetime/Premier Display Marketing

·; Revenue $12.3m (H12012: $14.7m)

·; Operating profit $1.1m (H12012: $1.6m), weaker than expected due to both macroeconomic and operational issues

Lifetime, Australia - Our sales to our franchisees have been down 7% in units and 10% in dollars. Some of the softness in the numbers can be leveled at macroeconomic factors: it is an election year in Australia and a time of political turmoil, the mining boom is slowing and the Australian dollar has declined 10% in the last two months. Some of the softness can be leveled at microeconomic factors: we have had some retirements of key franchisees or territories unfilled, Allbooks4less.com.au, a discount chain, went into liquidation and the liquidator sold off the remaining stock very cheaply.

Premier, New Zealand - different issues are present in our business in New Zealand which is a distribution operation as opposed to a franchise one. Largely sales are soft because there is insufficient inventory in the network. A decision was made in early 2012 to cut back inventory, a decision reversed in February 2013 when it appeared to be impinging on sales. This decision has taken longer than we would have wanted to unwind. Despite these challenges we nonetheless expect a better full year profit performance than in 2012.

Other

·; Other businesses ahead of expectations

·; Revenue $11.8m (H12012: $11.9m)

·; Operating profit $0.9m (H12012: $0.7m) driven by better margins at Regent

Board Appointments

As detailed in a separate announcement, Michael Hartley joins the Board as a Non-executive Director of the Company and will be Chairman of the Remuneration Committee and Senior Independent Director.

He brings extensive international management experience to the Board, having spent 16 years with Coats Viyella plc, for the last three years as Chief Executive of the Viyella division. He has worked extensively in Asia, Australasia and Africa.

Mr Hartley was until 2009 Chairman of Dawson International plc and is currently Chairman of privately owned recruitment business Hartley Resourcing Limited. He has been a Non-executive Director of ITE Group plc since 2003. He holds an MBA from Manchester Business School.

Mr Hartley was Chairman of Servocell Plc ("Servocell") between 2006 and 2007. In December 2007 following a cash squeeze Servocell was placed into administration with approximately £67k owing to unsecured creditors. Servocell emerged from administration with all debts settled, following which Servocell was sold.

Bob Morley, a Board Member until early 2012, is restored to the Board. Bob co-founded The Quarto Group in 1976, setting up the original co-edition imprints.

The Remuneration Committee has approved the Company's LTIP Scheme with an initial grant proposed for Marcus Leaver, Chief Executive of the Company, details of which will be sent to shareholders in the coming weeks for voting at a Special Meeting of shareholders.

Outlook

With a number of initiatives underway showing a portfolio in transition, results have begun to show where we have taken action, which is encouraging. Importantly we are clearly bringing down our debt levels and shall continue to do so. Where we are in the middle of making changes we are resolutely focused on delivering the solid results promised for 2013 while laying the foundations for growth in 2014 and beyond.

THE QUARTO GROUP, INC

CONDENSED CONSOLIDATED INCOME STATEMENT

for the six months to June 30, 2013

THE QUARTO GROUP, INC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the six months to June 30, 2013

THE QUARTO GROUP, INC

CONSOLIDATED BALANCE SHEET

at June 30, 2013

THE QUARTO GROUP, INC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months to June 30, 2013

THE QUARTO GROUP, INC

CONDENSED CASH FLOW STATEMENT

for the six months to June 30, 2013

THE QUARTO GROUP, INC

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months to June 30, 2013

1. Introduction

These interim consolidated financial statements are for the half year to June 30, 2013. They were approved by the Board on August 6, 2013 and are unaudited, as is the case with the comparative figures to June 30, 2012. These interim financial results do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year to December 31, 2012, prepared in accordance with International Financial Reporting Standards as adopted by the EU, which carried an unmodified Auditors' Report, have been filed with the Registrar of Companies and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

2. Basis of preparation

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

The Directors have formed a judgement that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. The Group has significant banking facilities. In particular, the Group has committed facilities of $128m through to December 6, 2013 and thereafter, $112m through to December 6, 2014. The Group has continued to comply with its bank covenants and is budgeted to do so for the foreseeable future.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended December 31, 2012, as described in those financial statements.

3. Segmental analysis

4. Exceptional items

Exceptional items primarily relate to restructuring costs.

5. Taxation

Taxation for the six months to June 30, 2013 is based on the estimated effective tax rate for the year. The rate that has been used is 25.0% (June 30, 2012: 24.4% and December 31, 2012: 21.0%).

6. Earnings per share

The calculation of earnings per share is based on 19,694,189 shares (the weighted average number of issued shares, excluding those held as treasury stock) (June 30, 2012: 19,684,191 shares; December 31, 2012: 19,685,212) and profits of $279,000 (June 30, 2012: $94,000; December 31, 2012: profits of $5,104,000). The calculation of adjusted earnings per share is based on earnings of $1,095,000 (June 30, 2012 $825,000; December 31, 2012: $8,594,000), calculated as follows:

There is no dilution in earnings per share or adjusted earnings per share for the six months to June 30, 2013 and June 30, 2012. For the year to December 31, 2012, diluted earnings per share were 25.9c and diluted adjusted earnings per share were 43.6c.

7. Dividend

The interim dividend of 3.35p per share is payable on October 28, 2013, to shareholders on the register on September 27, 2013, with an ex-dividend date of September 25, 2013.

8. Reconciliation of figures included in the Announcement

9. Net debt

Total borrowing facilities, at June 30, 2013, were $148m. Committed facilities total $128m and comprise a $95m syndicated facility which extends to April 30, 2015, and a $33m private placement facility, which extends to December 7, 2014, on which repayment commences on December 7, 2013.

10. Risks and uncertainties

The principal risks and uncertainties affecting the business activities of the Group remain those detailed in the Annual Report for 31 December 2012, a copy of which is available on the Group website at www.quarto.com. The Board considers that these remain a current reflection of the risk and uncertainties facing the business for the second half of the financial year.

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

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

The directors of The Quarto Group, Inc. are listed in The Quarto Group, Inc. Annual Report for 31 December, 2012. A list of current directors is maintained on the Quarto website: www.quarto.com.

THE QUARTO GROUP, INC

MANAGEMENT'S PRO FORMA ABBREVIATED INCOME STATEMENT

for the twelve months to June 30, 2013

Note: The above figures do not include amortization of non current intangible assets or exceptional items.