QRT.L Regulatory News (QRT)

21 Aug 2008 07:00



Thursday August 21, 2008

THE QUARTO GROUP, INC - INTERIM ANNOUNCEMENT

Quarto (QRT.L), the fully listed international specialist book publisher based in London, announces its results for the six months to June 30, 2008.

Financial Highlights

* Adjusted excludes amortization of non-current intangibles and non-recurring items.

Commercial Highlights

In the Co-edition segment, book revenues were up by 35% to £8.2m, boosted by a larger new title program and greater reprints, but print broking revenues fell by 12% to £5.2m. The Co-edition forward order book is up by 14%.

Sales of our Co-edition titles remain very robust in most parts of the world, and more than compensate for the weakness in the US market. The slowdown in the US is beginning to impact the segment, as pressures on retailers to hold down inventory, and maintain tight controls on cash, discourage some of our licensees from reprinting books at this time.

In the Publishing segment, continuing revenues were flat overall. The UK (by 16%) and Australasian businesses were up, but US revenues were down, and reflect the deliberate reductions in inventory by retailers.

The US accounts for 60% of Quarto's Publishing segment revenues. The slowdown is real and is biting but, with the exception of the home improvement and automotive sectors, register sales of Quarto's titles are not under pressure, and sales through Amazon are rising.

Laurence Orbach, Chairman and Chief Executive, commented, "Thanks to our diversified international portfolio, trading in the first half was much stronger than we might have expected. The Co-edition segment produced extremely good results.

Our trailing 12 months' results to June 30, 2008 are encouraging. We hope that we can maintain these improvements for the balance of the year. The environment remains tough, and our performance, in the face of the challenges this poses, demonstrates the continued resilience of our business model, and our publishing programs.

The long forward order book of our Co-edition businesses provides great transparency on the likely performance of that segment for the rest of the year. Barring extraordinary manufacturing problems, we are comfortable that we should achieve our expectations for that segment for the year. In the Publishing segment, with 60% of our revenues arising in the United States, much will depend upon trading in the last quarter of the year".

Notes for Editors:

Quarto is an international book publisher and producer with two principal strands of activity: its Publishing segment publishes books, under imprints owned by the Group, in the US, the UK and Australia; and its Co-Edition Publishing segment creates books that are licensed to other publishers for publication under their own imprints in many languages around the world.

For the year ended December 31, 2007, Quarto increased revenue by 7% to £100.1m and adjusted EBITDA by 11% to £20.0m, pre-tax profit by 5% to £7.7m and diluted earnings per share by 8% to 24.4p, paying total dividends per share up 6% at 7.15p.

Enquiries:

The Quarto Group, Inc.

Laurence Orbach (Chairman and CEO) 020 7700 9003

Mick Mousley (Finance Director) 020 7700 9004

Bankside Consultants Limited 020 7367 8851Charles Ponsonby

Business Performance

Six months to June 30 (£'000)	Underlying Results*		Reported Results		Headline Growth	Underlying Growth*
	2008	2007	2008	2007
Revenue	36,944	35,565	43,836	36,565	20%	4%
Adjusted operating profit	1,765	1,702	2,254	1,700	33%	4%
EBITDA	6,236	5,906	7,379	5,922	25%	6%
Adjusted profit before taxation	540	523	452	521	(13)%	3%
Dividend per share	3.15p	3.15p	3.15p	3.15p	-%	-%
Trailing twelve months to June 30 (£'000)	Underlying Results*		Reported Results		Headline Growth	Underlying Growth*
	2008	2007	2008	2007
Revenue	92,549	89,379	107,378	91,882	17%	4%
Adjusted operating profit	9,898	9,547	11,114	9,634	15%	4%
EBITDA	19,308	18,506	21,471	18,041	19%	4%
Adjusted profit before taxation	7,382	7,281	7,582	7,368	3%	1%
Dividend per share	7.15p	6.9p	7.15p	6.9p	4%	4%
Statutory results	Underlying Results*		Reported Results		Headline Growth	Underlying Growth*
	2008	2007	2008	2007
Operating (loss) profit	-	-	(1,272)	1,579	-	-
(Loss) profit before tax	-	-	(3,074)	400	-	-

*Underlying results refer to the business performance of activities that are ongoing and have been owned throughout the two-year period. Adjusted results are stated before amortization of non-current intangibles and non-recurring items. A reconciliation to the statutory results appears in note 8 on page 12 of this announcement.

  Outlook

The long forward order book of our Co-Edition businesses provides great transparency on the likely performance of that segment for the rest of the year. Barring extraordinary manufacturing problems, we are comfortable that we shall achieve our expectations for the year. In the Publishing segment, with 60% of our revenues arising in the United States, much will depend upon trading in the last quarter of the year. 

Sooner or later, retailers will begin to feel comfortable about their inventory levels. In some retail outlets, shelves are already beginning to look a little empty, but we're not rash enough to predict that the situation will rebound in time for the all-important Christmas season.

Our trailing 12 months' results to June 30, 2008, at £107.4 million (2007: £91.9 million) of revenues, with an adjusted operating profit of £11.1 million (2007: £9.6 million), and adjusted EBITDA of £21.5 million (2007: £18.0 million), are encouraging. We hope that we can maintain these improvements for the balance of the year. The environment remains tough, and our performance, in the face of the challenges this poses, demonstrates the continued resilience of our business model, and our publishing programs. 

Throughout the first six months of this year, the dollar: pound rate traded within a fairly narrow band. If the current resurgent strength of the dollar is maintained, as many pundits are predicting, Quarto's bottom line will benefit over the longer-term. Starting early in the new year, we plan to move our US publishing businesses into a central fulfillment facility, as the next stage of our US back-office consolidation project, helping to reduce further our cost base, and enhance service levels. 

Co-Edition Book Segment

Revenues overall rose by 12% to £13.4 million (2007: £12.0 million) and operating profit by 85% to £0.7 million (2007: £0.4 million). Operating profit, as a percentage of revenues, rose to 5.3% (2007: 3.2%). Boosted by a larger new title program and greater reprints, book revenues were up by 35% to £8.2 million (2007: £6.1 million), but print broking revenues at Regent fell by 12% to £5.2 million (2007: £5.9 million), reflecting both caution on the part of publishing customers, the great majority of which are in the US, and sharp price increases from Chinese printers.

The slowdown in the US is beginning to impact our units, as reprint numbers decline in response to pressures to hold down inventory, and maintain tight controls on cash. Fortunately, sales remain very robust in most other parts of the world, and more than compensate for the weakness in the US market. 

Our bestselling series of 1001 Things You Must Do Before You Die goes from strength to strength. The newest titles, 1001 Foods and 1001 Wines, using the resources of the editors of our award-winning magazine, The World of Fine Wine, reprinted before they landed in the warehouse. Both our books plus children's books, and supplementary educational titles, are performing strongly, and reprinting regularly.

The US is a core market for our co-edition books and the combination of economic slowdown, a weak dollar, and rising manufacturing prices poses great challenges. Although the rise in manufacturing prices in China was not wholly unexpected, it was greater than anticipated and imposed more suddenly, and perhaps opportunistically, to take advantage of the extra demand for printing with the Olympic Games. Even if prices are rolled back somewhat, later this year, it is becoming ever clearer that the benign forces that have blessed us with low costs in many, many areas are being swept away. We have dealt with this kind of situation in the past, and remain confident that, in this regard, we can adapt to whatever challenges are thrown at us.

Publishing Segment

Revenues for the segment rose by 24% to £30.4 million (2007: £24.6 million), aided by a first time contribution from MBI. Continuing revenues were flat overall and, as noted above, the US revenues were down, and the UK and Australian businesses were up. Adjusted operating profit, at £2.3 million (2007: £2.1 million), rose by 10%. We have discontinued the art print publishing businesses and are in the process of liquidating their assets.

The US accounts for 60% of our publishing segment revenues. The slowdown is real and is biting but, as noted above, with the exception of the home improvement and automotive sectors, register sales of our titles are not under pressure.  This experience was also reflected in rising sales through Amazon, a retailer that holds only small inventories of most of our titles. 

In the UK, for example, where inventory reduction by retailers was a major issue in the prior two years, our publishing revenues increased by a strong 16%. There is some hope, then, that our Publishing segment's sales to US retailers will improve as they become more comfortable with their inventory levels.

Alternative health titles, published under our Fair Winds imprint, and led by Jonny Bowden's food titles, continue to build its franchise in the marketplace, with a kid-friendly ADHD cookbook by Jenny McCarthy, and a Vegan Baking Book. Fair Winds also launched a popular history list, which is off to a strong start, mirroring the success we are having, in the same category, with some JR Books titles published in the UK.

Rockport's highly-regarded graphic design list sold well through the cash register, but sales into the accounts lagged the sales out the door. Much the same is true of the Quarry list of craft and hobby titles.

In spite of CPi's dependence on distribution through the home improvement channel for its home improvement titles - and these were down significantly - the titles performed better at Amazon. We have been less surgical than some of our competitors in trimming the size of our publishing program at CPi, and this strategy has been rewarded by gaining increased shares of available slots at the Home Depot and Lowes.

Motorbooks' titles are similarly affected by the extraordinary increase in oil prices, but the enthusiast market remains strong, with titles like the Harley Davidson Archive Collection book and some one-off titles, such as McQueen's Machines, about the movie star's infatuation with automobiles, also attracted a wider audience.

At MBI, we also sell and distribute titles published by other presses, and manage the book category at Tractor Supply Company, the fast growing retailer of equipment and supplies for the smaller and hobby farmer, now comprising over 800 stores but with ambitions to grow to 1,400. We recently signed a new deal with Tractor Supply to manage the book category for a further 3 years.

We made very good progress in integrating some of the "back-office" functions of our US book publishing businesses. We are planning to centralize the fulfillment services in the first half of 2009, which will improve our performance and cost basis, and permit us to address the provision of enhanced management information.

In Australasia, our two display marketing businesses continued to trade well. Lifetime, based in Sydney, and operating a franchised business, has been focusing on operational improvements. This has been rewarding and the professionalism of the business is being enhanced regularly. Premier, in New Zealand, is facing challenges from a slowing economy and, against this backdrop, and growing competition it improved revenues and operating profit.

Finally, our UK publishing and marketing services business maintained revenues, with a slightly improved profit, as much of its output moves to digital printing. Individual jobs are smaller, but the gross margin is higher.

Dividend

In light of current economic volatility the board has declared an unchanged interim dividend of 3.15p.

THE QUARTO GROUP, INC

CONDENSED CONSOLIDATED INCOME STATEMENT

for the six months to June 30, 2008

	Six months ended June 30, 2008	Six months ended June 30, 2007	Year ended  December 31,  2007
	£'000	£'000	£'000
Revenue	43,836	36,565	100,107
Operating profit before amortization of intangibles and non-recurring items	2,254	1,700	10,560
Amortization of non-current intangible assets	(869)	(561)	(1,312)
Restructuring costs	(2,657)	-	-
Recovery of aborted acquisition costs	-	440	370
Operating (loss) profit	(1,272)	1,579	9,618
Finance costs	(1,974)	(1,413)	(3,321)
Financial income	172	234	412
(Loss) profit before taxation	(3,074)	400	6,709
Taxation	651	(83)	(1,697)
(Loss) profit for period	(2,423)	317	5,012
(Loss) profit for the period attributable to:
Minority interests	219	338	769
Equity holders of the parent company	(2,642)	(21)	4,243
	(2,423)	317	5,012
(Loss) earnings per share	(13.4)p	(0.1)p	21.6p
Diluted (loss) earnings per share	(13.4)p	(0.1)p	21.1p
The following information is presented as additional information and does not form part of the Income Statement :
Adjusted earnings per share	0.6p	0.2p	25.0p
Adjusted diluted earnings per share	0.6p	0.2p	24.4p

THE QUARTO GROUP, INC

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE 

for the six months to June 30, 2008

	Six months to June 30, 2008	Six months to June 30, 2007	Year to December 31, 2007
	£'000	£'000	£'000
Foreign exchange translation differences	280	24	116
Cash flow hedge: change in fair value	(129)	333	(1,110)
Net income (expense) recognised directly in equity	151	357	(994)
(Loss) profit for the period	(2,423)	317	5,012
Total recognised income and expense for the period	(2,272)	674	4,018
Attributable to:
Equity holders of parent	(2,491)	336	3,249
Minority interests	219	338	769
	(2,272)	674	4,018

THE QUARTO GROUP, INC

CONSOLIDATED BALANCE SHEET

at June 30, 2008

	June 30,  2008	June 30, 2007	December 31, 2007
	£'000	£'000	£'000
Non-current assets
Goodwill	18,247	9,910	18,307
Other intangible assets	3,254	2,391	4,194
Property, plant and equipment	7,412	7,345	7,445
Deferred tax asset	980	208	763
Total non-current assets	29,893	19,854	30,709
Current assets
Intangible assets: Pre-publication costs	27,202	22,393	25,079
Inventories	15,820	13,256	15,696
Tax receivable	-	131	-
Trade and other receivables	24,270	22,239	32,285
Cash and cash equivalents	11,488	12,789	17,577
Total current assets	78,780	70,808	90,637
Total assets	108,673	90,662	121,346
Current liabilities
Short-term borrowings	(3,812)	(4,207)	(2,760)
Trade and other payables	(22,728)	(19,562)	(32,572)
Tax payable	(485)	(1,266)	(1,547)
	(27,025)	(25,035)	(36,879)
Non current liabilities
Medium and long-term borrowings	(58,487)	(41,925)	(58,190)
Deferred tax liabilities	(3,479)	(4,399)	(3,273)
Derivative financial instruments	(1,239)	-	(1,110)
Other payables	(29)	(20)	(29)
Total non-current liabilities	(63,234)	(46,344)	(62,602)
Total liabilities	(90,259)	(71,379)	(99,481)
Net assets	18,414	19,283	21,865
Equity
Share capital	1,162	1,162	1,162
Paid in surplus	21,768	21,745	21,768
Retained deficit and other Reserves	(8,303)	(7,345)	(5,025)
Total equity attributable to equity holders of the parent	14,627	15,562	17,905
Minority interests	3,787	3,721	3,960
Total equity	18,414	19,283	21,865

  THE QUARTO GROUP, INC

CONDENSED CASH FLOW STATEMENT

for the six months to June 30, 2008

THE QUARTO GROUP, INC

NOTES

	June 30, 2008	June 30, 2007	December 31, 2007
	£'000	£'000	£'000
(Loss) earnings after minority interests	(2,642)	(21)	4,243
Amortization of non-current intangible assets *	591	375	905
Restructuring costs*	2,162	-	-
Recovery of acquisition costs*	-	(317)	(242)
	111	37	4,906
Adjusted earnings per share	0.6p	0.2p	25.0p
* net of tax

There is no dilution in earnings per share or adjusted earnings per share for the six months to June 30, 2008 and June 30, 2007. Diluted earnings per share for the year to December 31, 2007 is based on earnings of £4,269,000 and 20,236,534 shares. Diluted adjusted earnings per share for the year to December 31, 2007 is calculated below based on earnings of £4,932,000 and 20,236,534 shares.

		December 31, 2007
		£'000
Adjusted earnings as above		4,906
Interest on convertible note, net of tax		26
		4,932
Adjusted diluted earnings per share		24.4p

 

 

7. Consolidated statement of changes in equity:

	Share Capital	Paid in  surplus	Reserves	Total
	£'000	£'000	£'000	£'000
Balance at January 1, 2008	1,162	21,768	(5,025)	17,905
Total recognised income and expense	-	-	(2,491)	(2,491)
Dividends to shareholders	-	-	(787)	(787)
Balance at June 30, 2008	1,162	21,768	(8,303)	14,627

 

8, Reconciliation of figures included in the Announcement

 

 

9. Dividend

The interim dividend of 3.15p per share is payable on October 17, 2008, to shareholders on the register on September 19, 2008, with an ex-dividend date of September 17, 2008.

 

10. Net debt

Net debt, at June 30, 2008, on a constant currency basis, and excluding the impact of acquisitions, is £32,200,000 and lower by £1,143,000 compared to June 30, 2007. Total borrowing facilities at June 30, 2008, were $180m (£90m). Committed facilities total $165m (£83m) and comprise a $115m syndicated facility which extends to June 12, 2012, and a $50m (£25m) private placement facility, repayment of which commences on December 7, 2012.

  THE QUARTO GROUP, INC

MANAGEMENT'S PRO FORMA ABBREVIATED INCOME STATEMENT

for the twelve months to June 30, 2008

	12 months to June 30, 2008	12 months to June 30, 2007
	£'000	£'000
Revenue	107,378	91,882
Gross profit	38,291	32,693
Overheads	(27,177)	(23,059)
Adjusted operating profit	11,114	9,634
Interest	(3,532)	(2,266)
Profit before tax	7,582	7,368
Adjusted EBITDA	21,471	18,041

Note:

The above figures do not include amortization of non-current intangible assets or non-recurring items.

ENDIR URABRWORWUAR