QRT.L Regulatory News (QRT)

11 Aug 2006 07:00

Quarto Group Inc11 August 2006 THE QUARTO GROUP, INC - INTERIM ANNOUNCEMENT strong first half results Quarto, the fully listed independent book producer and publisher based inLondon, announces a strong and encouraging first half of the year, highlightingthe fundamental robustness of Quarto's book businesses. The first half accounts,typically, for only about 40% of annual revenue. FINANCIAL HIGHLIGHTS 6 months to June 30 2006 2005 Increase Revenue (£'000) 38,296 38,198 -Operating profit: adjusted (£'000) 2,736 2,167 +26% reported (£'000) 2,005 881 +128%Pre-tax profit: adjusted (£'000) 1,528 1,140 +34% reported (£'000) 797 (146) n/aDiluted earnings per share: adjusted (p) 4.0 3.0 +33% reported (p) 1.6 (2.2) n/aDividend per share (p) 3.0 2.9 +3% Adjusted excludes amortization of intangibles and, in 2005,restructuring costs and aborted acquisition costs •In the 12 months ended June 30, 2006, revenue rose by 9% to £95.1m and, on an adjusted basis, operating profit rose by 21% to £9.3m and pre-tax profit by 22% to £6.9m - slightly ahead of internal expectations. COMMERCIAL HIGHLIGHTS •The results from the International Co-Edition Book Publishing segment were very strong. Revenue increased by 4% to £13.2m, but operating profit soared by 140%, as almost all units performed more strongly than in 2005. •Revenue for the Publishing segment, in contrast, slipped by 2% to £25.1m, reflecting sluggish sales in the US, and a disposal of some magazines in the UK. Operating income declined by a more substantial 24%. The results were mixed, but the indicators were generally positive. •During the period, Quarto was very involved in seeking acquisition opportunities and the Board is hopeful that Quarto shall not end the year without closing another substantial transaction. •Quarto has increased its target operating margin for both the Group and the Publishing segment to 12.5% from 10%, Co-Edition remaining on 15%. Laurence F Orbach, Chairman & Chief Executive, remarked on prospects "The goodfirst-half results cannot hide the fact that market conditions have become morechallenging in many of our markets. At this point, it's hard to tell if theslowdown in the housing market in the United States will affect the sales of ourhome improvement and lifestyle books. The evidence isn't suggesting thiscurrently but, in these categories, as in others, and whether we are selling ourco-edition books to licensees, or our published titles to bookstores and otherretailers, ultimately, the consumer is our main customer and, although ourranges of titles focus on areas of practical need, passion, and enthusiasm, wecannot expect to be immune from the flatter retail markets in several of ourmajor geographies. The United States market is still our single largest market,responsible for about half of our revenue; a slowing economy there, and theweakening dollar, give pause for some concern. By the same token, we should notoverstate the difficulties. Books remain, in the scheme of things, fairlyinexpensive purchases, and have traditionally done well in less buoyant economictimes. For the balance of this year we are rolling out substantial programs of newtitles which will, in turn, provide the recurring reprint revenues that are thebackbone of the group's business. As mentioned above, because we expense thedevelopment costs of our new co-edition titles at the time of the firstprinting, and will be producing a larger than usual number of new titles in thesecond half of the year, we cannot expect to continue the first half's excellentoverall results, but remain confident that, barring major external developments,Quarto's 2006 results should meet our expectations.." Photo Opportunity: At 10:30 on Friday August 11, 2006, Laurence Orbach (Chairman & CEO) will beavailable for a photo opportunity at Quarto's offices, which are situated at 226City Road, EC1V 2TT (approximately 800 yards from Old Street undergroundstation). Those wishing to attend are asked to notify Ian Payne of BanksideConsultants on 020-7367 8853 / ian.payne@bankside.com. Notes for Editors: Quarto is an international book producer and publisher with two principalstrands of activity: it publishes, under imprints owned by the Group, books andart prints in the US, the UK, and Australia; and it creates books that arelicensed to other publishers for publication under their own imprints in manylanguages around the world. In 2005, Quarto increased adjusted pre-tax profit by 12% to £6.6m and reportedadjusted diluted earnings per share of 20.8p (21.5p at constant tax rates, whichwould have represented a seventh successive annual increase). Enquiries: The Quarto Group, Inc.Laurence Orbach (Chairman & CEO) 020-7700 9003Mick Mousley (Finance Director) 020-7700 9004 Bankside Consultants LimitedCharles Ponsonby 020-7367 8851 CHAIRMAN'S LETTER Dear Shareholder: Quarto had a strong and encouraging first half of the year. For the six monthsto June 30, 2006 (adjusted to exclude amortization of intangibles andexceptional costs), unaudited operating profit rose by 26% to £2.7 million(2005: £2.2 million), profit before tax by 34% to £1.5 million (2005: £1.1million), and diluted earnings per share by 33% to 4.0p (2005: 3.0p), althoughrevenue increased only marginally to £38.3 million (2005: £38.2 million). Netdebt has fallen by £3.1 million to £38.5 million (2005: £41.6 million) and, inrecognition of the good performance, which highlights the fundamental robustnessof our book businesses, and the continuing growth trend, the board has declaredan interim dividend per share of 3.0p (2005: 2.9p), up 3%. The dividend will bepaid on 20 October 2006 to shareholders on the register at 22 September 2006,with an ex-dividend date of 20 September 2006. The period accounts, typically, for only about 40% of annual revenue. In orderto give shareholders a clearer picture of the group's progress over a longerperiod, and to eliminate seasonal variations, we also provide unaudited trailing12 months' trading figures. In summary, for the 12 months ended June 30, 2006,revenue rose by 9% to £95.1 million (2005: £86.9 million), adjusted operatingprofit by 21% to £9.3 million (2005: £7.7 million), and adjusted profit beforetax by 22% to £6.9 million (2005: £5.7 million). This is slightly ahead of ourinternal expectations. Commentary on Trading The results from our International Co-Edition Book Publishing segment were verystrong. Revenue increased by 4% to £13.2 million (2005: £12.6 million), butoperating profit soared by 140%, as almost all units performed more stronglythan in 2005. Some of the big improvement in performance lies in the timing ofnew publications, as fewer new titles were released during the period. Quarto'spolicy is to expense all the development costs of co-edition titles on firstprinting, and publishing fewer new titles during a period flatters the bottomline. Our very substantial backlist not only made up for the shortfall in newreleases, but also led to increased revenue overall. Q+ eliminated its losses ahead of schedule, and RotoVision is trading close tobreak even. Strong reprint demand for Quintet's 1001 series turned last year'sloss into a healthy profit. Other units performed at, or above, expectationsand, overall, the segment posted a record gross margin, on the back of veryhealthy sales of reprints. Much credit is due to all involved. Revenue for the Publishing segment, in contrast, slipped by 2% to £25.1 million(2005: £25.6 million), after including an extra £1.0 million of Premier's sales,which we acquired late in last year's corresponding period. The revenue of thePublishing segment is almost exclusively derived from the US, Australasia, andthe UK. This decline reflects sluggish sales in the US, and the disposal of somemagazines in the UK. Operating income declined by a more substantial 24%. The Publishing units' results were more mixed, but the indicators were generallypositive. UK book publishing sales increased by 19%, from last year's admittedlylow base, and Australasian sales, adjusted for the inclusion of Premier, heldtheir own but, as I pointed out in my Annual Meeting statement and first quartertrading update of May 2, 2006, US sales continued to be badly affected bydistribution issues at some of the specialty retail outlets to which we sell,and by the generally tepid environment for retailers, which has been widelyreported in the financial press. General trading and distribution issues have hurt our sales into the Home Depot,the largest single outlet for our home improvement titles. The chain is takingstrong steps to improve its performance, and to beat off the surging competitionfrom Lowe's, which has become, on a store-for-store basis, a larger customer forus. Home Depot has imposed demanding inventory reduction targets across thechain, and this has been working its way through all this year. The largest outlet for our arts and crafts titles is Michaels which, all year,has been in the process of changing its nominated distributor into the chain, atthe same time as it put itself up for sale. The sale of Michaels has now beenagreed, and the new distributor will shortly begin to service the stores, butthe hiatus has been costly, the loss of sales has been extremely unwelcomeduring this period, and the changes in terms that have been imposed upon the newdistributor, and have filtered down to vendors, have yet to prove that they willbenefit both Michaels and the vendors. The purchase of Michaels by a privateequity consortium may also increase pressure on its management. Fortunately,competing chains are becoming more important to us. Book retailing, in the US, has been lackluster during the period. For BookSales, the decline in revenues of 25%, in local currency terms, has beenparticularly sharp. Through careful management, though, a reasonable operatingprofit was maintained. Our art publishing business saw further sales erosion,joining the rest of the industry in a downturn, but it continued to generateuseful cash returns. We concluded that we could not turn several of our UK-based craft magazinetitles from loss to profit, and disposed of them for a nominal sum. We havedecided to start a co-edition book imprint to leverage the critical acclaim thatour Fine Wine magazine has earned, and the title, which is more like a book thana traditional magazine, will be moving to quarterly publication from September.In future, the combined book/magazine unit will report its results within theCo-Edition segment. Overall, the magazine unit continues to struggle with a weakadvertising market in the UK. Corporate Activity During the period, we were very involved in seeking acquisition opportunities.We continue to focus our efforts on identifying acquisition candidates whichoffer shareholders real added value,and were unsuccessful in one intensiveauction, when bids rose above our assessment of what was prudent. We continue topursue other candidates, and sense that valuations are returning to a rangewithin which we feel comfortable. Having successfully absorbed CPi, Aurum, Lifetime, and Premier in the last twoyears, we have the operational capacity to take on more, and are hopeful that weshall not end the year without closing another substantial transaction. Prospects We set ourselves four principal tasks for the first half of 2006: (i) tomaintain the strong overall performance of our publishing units; (ii) to correctunderperforming units; (iii) to eliminate the sources of losses in our magazinepublishing business; and (iv) to further our strategy for growth by making asignificant publishing acquisition. Some of these tasks remain works inprogress, but there has certainly been significant movement in re-arranging ourportfolio and identifying core competencies, which will surely intensify as wegrow and, particularly, when we are successful in making substantialacquisitions. For several years, Quarto has been targeting an overall operating profit of 10%on revenue (15% for the Co-Edition segment, 10% for the Publishing segment, lessgroup overhead costs) and, on the trailing 12 months' basis, we've achieved9.8%. We don't expect to improve the overall operating profit of our Co-Editionsegment by much, as it is already probably more consistently profitable than anyother firm in the industry, but we can do a lot to improve the performance ofour Publishing units, and we will be raising our expectation for this segment to12.5%, with an aim of an overall operating result, after group overheads, of12.5% profit on revenues. As the new titles produced by our Co-Edition segment are generally committed toby licensees some 12 months or more in advance of publication, our production ofnew titles tends to be a lagging indicator. The vast majority of our revenue, inthis segment, comes from reprints of our backlists of titles, i.e. of titlesfirst published in prior years. In periods of economic uncertainty, whenlicensees may be nervous about investment in new titles, they may look toreprints as a surer way of maintaining revenue. As I have stated previously, the book publishing industry produces a prodigiousoutput of new titles each year. In many markets, competition at the retail levelhas cut retailers' margins to the bone and, in order to place new books inprominent positions in bookstores, publishers often spend as much on marketingand promotion as they do on creating the books. This is often accompanied,especially in the general book area (which is not where the vast majority of ourtitles is targeted), with cutting title output in order to back fewer newtitles, and to make them winners. One can see the internal logic of thisapproach, but it's a little like asking creative people only to produce hits! Sofar, and perhaps because of our disciplined focus on special interest areas suchas arts and crafts, design, home improvement, reference, and self-improvement,we haven't experienced any noticeable trend to mimic this approach, but it issomething that we're watching. The good first-half results cannot hide the fact that market conditions havebecome more challenging in many of our markets. At this point, it's hard to tellif the slowdown in the housing market in the United States will affect the salesof our home improvement and lifestyle books. The evidence isn't suggesting thiscurrently but, in these categories, as in others, and whether we are selling ourco-edition books to licensees, or our published titles to bookstores and otherretailers, ultimately, the consumer is our main customer and, although ourranges of titles focus on areas of practical need, passion, and enthusiasm, wecannot expect to be immune from the flatter retail markets in several of ourmajor geographies. The United States market is still our single largest market,responsible for about half of our revenue; a slowing economy there, and theweakening dollar, give pause for some concern. By the same token, we should notoverstate the difficulties. Books remain, in the scheme of things, fairlyinexpensive purchases, and have traditionally done well in less buoyant economictimes. For the balance of this year we are rolling out substantial programs of newtitles which will, in turn, provide the recurring reprint revenues that are thebackbone of the group's business. As mentioned above, because we expense thedevelopment costs of our new co-edition titles at the time of the firstprinting, and will be producing a larger than usual number of new titles in thesecond half of the year, we cannot expect to continue the first half's excellentoverall results, but remain confident that, barring major external developments,Quarto's 2006 results should meet our expectations. Sincerely, Laurence F OrbachChairman and CEO London, August 11, 2006 THE QUARTO GROUP, INC UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT for the six months to June 30, 2006 Six months Six months Year ended ended ended December 31, June 30, June 30, 2005 2006 2005 £'000 £'000 £'000 Revenue 38,296 38,198 95,038 Operating profit 2,736 2,167 8,775Less:-Amortization of intangibles (731) (586) (1,381)Restructuring costs - (600) (644)Aborted acquisition costs - (100) (102) Operating profit 2,005 881 6,648 Finance costs (1,367) (1,083) (2,351)Financial income 159 56 128 Profit (loss) before taxation 797 (146) 4,425Taxation (231) 39 (1,263) Profit (loss) for period 566 (107) 3,162 Profit (loss) for the periodattributable to:Minority interests 258 285 665Equity holders of the parent company 308 (392) 2,497 566 (107) 3,162 Earnings (loss) per share 1.6p (2.2)p 13.2p Diluted earnings (loss) per share 1.6p (2.2)p 12.9p The following information is presented as additional information and does notform part of the income statement : Adjusted earnings per share 4.1p 3.0p 22.1pAdjusted diluted earnings per share 4.0p 3.0p 20.8p THE QUARTO GROUP, INC UNAUDITED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the six months ended June 30, 2006 Six months Six months Year ended ended June ended June December 30, 2006 30, 2005 31, 2005 £'000 £'000 £'000 Foreign exchange translation (310) 268 365differencesCash flow hedge: change in fair value 9 133 329Income and expenses recognised directly (301) 401 694in equityProfit (loss) for the period 566 (107) 3,162Total recognised income and expense for 265 294 3,856the period Attributable to:Equity holders of parent 7 9 3,191Minority interests 258 285 665 265 294 3,856 THE QUARTO GROUP, INC UNAUDITED CONSOLIDATED BALANCE SHEET at June 30, 2006 June 30, June 30, December 2006 2005 31, 2005 £'000 £'000 £'000 Non-current assets Goodwill 9,723 9,871 10,317 Other intangible assets 3,810 5,068 4,842 Property, plant and equipment 7,561 8,604 8,533 Deferred tax asset 24 4 25 21,118 23,547 23,717 Current assets Inventories 26,017 25,650 23,521 Taxation recoverable 147 154 152 Trade and other receivables 23,377 24,512 28,399 Cash and cash equivalents 9,550 8,332 14,431 59,091 58,648 66,503 Total assets 80,169 82,195 90,220 Current liabilities Short-term borrowings (3,840) (8,517) (3,932) Trade and other payables (19,162) (22,173) (26,793) Tax payable (1,281) (532) (1,258) (24,283) (31,222) (31,983) Non current liabilities Medium and long-term borrowings (44,180) (41,448) (45,599) Other payables (114) (218) (114) Deferred tax liabilities (660) (638) (668) (44,954) (42,304) (46,381) Total liabilities (69,237) (73,526) (78,364) Net assets 10,972 8,669 11,856 Equity Share capital 1,162 1,162 1,162 Paid in surplus 21,719 21,709 21,716 Retained earnings and other Reserves (15,356) (17,279) (14,666) Total equity attributable to equity 7,525 5,592 8,212 holders of the parent Minority interests 3,447 3,077 3,644 Total equity 10,972 8,669 11,856 THE QUARTO GROUP, INC UNAUDITED CONDENSED CASH FLOW STATEMENT for the six months to June 30, 2006 Six months Six months Year ended ended ended June 30, June 30, December 31, 2006 2005 2005 £'000 £'000 £'000 Profit (loss) for the period 566 (107) 3,162 Tax expense (credit) 231 (39) 1,263 Net finance costs 1,208 1,027 2,223 Depreciation 509 578 1,067 Amortization 731 586 1,381 (Profit) loss on sale of fixed (86) 73 51 assets Equity settled share based payment 4 4 9 Changes in working capital (6,413) (6,286) (3,149) Corporation tax (149) (656) (1,428) Net cash from operating activities (3,399) (4,820) 4,579 Sale (purchase) of tangible fixed 431 (114) (441) assets (net) Purchase of subsidiaries (80) (2,844) (2,847) Interest received 159 56 119 Net cash from investing activities 510 (2,902) (3,169) Dividends paid (704) (629) (1,197) Interest paid (1,655) (1,081) (2,390) Issue of shares 7 2,624 18 Dividends paid to minority (191) (117) (121) shareholders New loans 1,360 1,650 2,288 Net cash flows from financing (1,183) 2,447 (1,402) activities Net (decrease)/increase in cash and (4,072) (5,275) 8 cash equivalents Cash and cash equivalents at 11,899 10,611 10,611 beginning of period Foreign currency exchange (781) 626 1,280 differences on cash and cash equivalents Cash and cash equivalents at end of 7,046 5,962 11,899 period NOTES 1. The Interim Report for the six months ended June 30, 2006 has been prepared on the basis of the accounting policies set out in the Annual Report for the year ended December 31, 2005. 2. The financial information contained in this Interim Report does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The interim accounts for the six months ended June 30, 2006 and the comparative figures for the six months ended June 30, 2005 are unaudited. The comparative figures for the year ended December 31, 2005 are extracted from the accounts for the period, which have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. 3. Restructuring costs in 2005 related to the publishing services units. The costs included redundancies, dilapidations, losses on fixed asset disposals, and other losses incurred after the closure of the Reading site was announced. 4. Aborted acquisition costs, in 2005, mainly comprised third party legal and professional fees. 5. Finance costs comprise: Six months Six months Year ended ended ended December 31, June 30, 2006 June 30, 2005 2005 £'000 £'000 £'000 Bank and other interest (1,367) (981) (2,147)Finance charge on preference shares - (102) (204) (1,367) (1,083) (2,351) 6. Taxation for the six months ended June 30, 2006 is based on the estimated effective tax rate for the year. The rate that has been used is 29% (June 30, 2005: 27% and December 31, 2005: 29%). 7. The calculation of earnings per share is based on 19,560,837 shares (the weighted average number of issued shares, excluding those held as treasury stock) (June 30, 2005: 18,218,281 shares; December 31, 2005: 18,893,419) and earnings of £307,000 (June 30, 2005: £(392,000); December 31, 2005: £2,497,000). The calculation of adjusted earnings per share is based on earnings of £798,000 (June 30, 2005: £547,000; December 31, 2005: £4,168,000), calculated as follows: June 30, June 30, December 31, 2006 2005 2005 £'000 £'000 £'000 Earnings after minority interests 308 (392) 2,497Amortization of intangibles * 490 428 925Restructuring costs * - 438 644Costs of aborted acquisition * - 73 102 798 547 4,168 Adjusted earnings per share 4.1p 3.0p 22.1p * net of tax credit and minorityinterest There is no dilution in earnings per share for the six months ended June 30,2006 and June 30, 2005 or adjusted earnings per share for the six months endedJune 30, 2005. Diluted earnings per share for the year ended December 31, 2005is based on earnings of £2,758,000 and 21,325,021 shares. Diluted adjustedearnings per share for the six months ended June 30, 2006 is calculated belowbased on earnings of £827,000 and 20,744,024 shares (December 31, 2005, based onearnings of £4,429,000 and 21,325,021 shares). June 30, December 31, 2006 2005 £'000 £'000 Adjusted earnings as above 798 4,168Interest on convertible note net of tax 29 57Interest on convertible redeemable - 204preference shares 827 4,429Adjusted diluted earnings per share 4.0p 20.8p 8. Consolidated statement of changes in equity: Share Paid in Reserves Total Capital surplus £'000 £'000 £'000 £'000 Balance at January 1, 2006 1,162 21,716 (14,666) 8,212Total recognised income and expense - - 7 7Share options exercised by - 3 4 7employeesEquity settled transactions - - 3 3Dividends to shareholders - - (704) (704)Balance at June 30, 2006 1,162 21,719 (15,356) 7,525 THE QUARTO GROUP, INC MANAGEMENT'S UNAUDITED PRO FORMA ABBREVIATED INCOME STATEMENT for the 12 months to June 30, 2006 12 months 12 months ended ended June 30, 2006 June 30, 2005 £'000 £'000 Revenue 95,136 86,899Gross profit 32,966 30,063Overheads (23,622) (22,351) Operating profit 9,344 7,712Interest (2,404) (2,002)Profit before tax 6,940 5,710 Note: The above figures do not include amortization of intangible assets or, in 2005,restructuring costs and the cost of an aborted acquisition. This information is provided by RNS The company news service from the London Stock Exchange