Final Results
Quarto Group Inc
14 February 2005
Monday 14 February 2005
THE QUARTO GROUP, Inc - PRELIMINARY ANNOUNCEMENT
Quarto, the London-based and listed international book publisher, announces a
sixth successive annual increase in underlying earnings per share in 2004, a
year which was exciting and challenging for Quarto and, by some measures,
redefining.
Financial Highlights
•Sales increased by 7% to £79.8m but, with over two-thirds of Quarto's
business being carried out in US$, on a constant currency basis, sales of
existing businesses grew by 6% and acquisitions contributed a further £6.7m.
69% of sales was generated by backlist and reprinted titles.
•Operating profit, before goodwill amortization, rose by almost 16% to
£7.6m, of which £0.9m came from acquisitions (2003: £6.6m pre-exceptional),
the 2004 profit suffering a reduction of some £0.5m from currency factors.
•Pre-tax profit, before goodwill amortization, rose to £6.4m (2003:
£5.7m), slightly ahead of market expectations.
•Earnings per share, before goodwill amortization, increased by 7% to
23.8p (2003: 22.3p).
•Dividends per share totalling 6.25p (2003: 5.75p), up 9% and covered more
than 3 times, are proposed.
•Indebtedness, including £13.7m in respect of acquisitions, totalled
£28.2m (2003: £17.4m), as for many years Quarto has consistently generated
more than its operating profits in cash. The interest cost of a significant
proportion of debt is hedged until 2007.
•Total shareholder return, judged over short and medium terms periods, is
substantially above average. Quarto's ordinary shares have generated a total
shareholder return of 117%, 205% and 20% over the five years, three years
and one year ended December 31, 2004, respectively. Over the same periods,
Quarto's ordinary shares have significantly outperformed the FTSE 100, the
FTSE small cap and the media sector.
Commercial Highlights
•The co-edition publishing units' sales totalled £34.6m (2003: £37.1m), a
5% increase on a constant currency basis.
•The own imprint publishing units' sales increased to £28.3m (2003:
£22.3m), including £6.7m of sales by acquired businesses. In constant
currency, sales increased by 36%.
•The publishing services businesses increased their sales by 10% to £16.9m
(2003: £15.3m), but, on the profit side, the result was less successful.
•In 2004 H2, Quarto made three acquisitions, in the US, the UK and
Australia. The effect of these acquisitions, on a 12 month going forward
basis, will be to increase Quarto's sales by about one-third.
Laurence F Orbach (Chairman and Chief Executive) stated 'Quarto was active in
2004, making a series of acquisitions of book businesses, dealing with defining
its strategy for growth, putting to rest the tender offer from JOHCM,
strengthening its banking relationships, and with capital markets generally, and
laying firm foundations for further corporate activity, and infrastructure to
support this. Quarto also increased underlying pre tax profit by 12%, slightly
ahead of market expectations.
'Quarto is already one of the largest UK-based independent book publishers and
its ambition is to become one of the world's leading independent book
publishers.
'It is early in the year. Although currency volatility, and the direction of the
US dollar, are objects of lively discussion, we have the experience to handle
these issues, and do not expect to be thrown off course. There does not seem to
be any evidence of dramatic change in our core markets and, with benefits
flowing from our new acquisitions, we expect another year of growth in 2005.'
Notes for Editors:
Quarto is an international book publisher with two principal strands of
activity: it publishes, under imprints owned by the Group, books and art prints
in the US, the UK, and Australia; and it creates books that are licensed to
other publishers for publication under their own imprints in many languages
around the world.
Quarto is listed on the London Stock Exchange under the symbol QRT. Its head
office is situated in City Road, London EC1. Quarto is a Delaware corporation.
Enquiries:
The Quarto Group, Inc. 020-7700 9000
Laurence Orbach (Chairman & CEO)
Mick Mousley (Finance Director)
Bankside Consultants Limited
Charles Ponsonby 020-7444 4166
Analyst Presentation:
From 13.00 to 14.00 today, there will be an analyst presentation, over a
sandwich lunch, at Quarto's offices, 226 City Road, EC1V 2TT (approximately 600
yards from Old Street underground station).
CHAIRMAN'S STATEMENT
Dear Shareholder:
2004 was exciting and challenging for Quarto and, by some measures, a redefining
year. I am delighted to report that, in 2004, we started to implement the
strategy we adopted previously, to grow our market position both by accelerating
the creation of new business units, and by making selective acquisitions of
well-focused, and niche-oriented, publishing businesses. In the event, we
achieved many of our objectives in 2004, in the face of what were sometimes
tough conditions.
We were confronted with continuing, and new, issues: the impact of the war in
Iraq lingered; the US dollar, despite (or perhaps because of) an apparently
strongly growing domestic economy, accelerated its steady decline against other
major currencies; the output of new book titles worldwide continued to grow
unchecked; the eurozone stirred from its slumber, but failed to show much growth
or energy, and disappointed some of management's expectations (perhaps, faced
now with competitive pressures accentuated by the strong euro, the region will
shed some of its stifling ways); benign news on the inflation front, and low
interest rates in many of our markets, intensified competition and price
pressures on us, as on most producers, reducing pricing elasticity.
The first fruits of several of our recent initiatives appeared in 2004: QED
successfully published its initial launch of titles for the children's school
and library market; Quarto Magazines consolidated the success of a new title
launched at the end of 2003, Creative Card Making Ideas, and launched two other
titles: Creative Scrapbooking Ideas, and The World of Fine Wine; and Iqon
Editions published its first title, Isms, a guide to art movements, that
immediately went in to several foreign-language editions. In addition, Qu:id and
Eye Quarto moved successfully into their second year of publishing.
On the acquisition side, Quarto was very active in the second half of the year.
We acquired Creative Publishing international (CPi), a Minneapolis-based
publisher of how-to books, with its titles strongly focussed on home improvement
and lifestyle activities. In the UK, we acquired 80% of Aurum Press,
incorporating the joint venture Jacqui Small Editions, and giving us a larger UK
publishing base in non-fiction and illustrated book titles. In Australia, we
acquired 75% of Sydney-based Lifetime, the largest display marketer of books in
Australia. This acquisition has vaulted Quarto into the ranks of the largest
book businesses in that country.
To help us finance these acquisitions, we turned to our bank lenders, and
increased our syndicated facility from $45 million to $60 million. The effect of
these acquisitions, on a 12-month going forward basis, will be to increase
Quarto's pre-acquisition revenues by about one-third. This is, therefore, solid
implementation of our strategy for growing your company.
Quarto's share price reached a 7-year high and the tender offer for majority
control, by J O Hambro Capital Management (JOHCM), which your board had opposed,
was withdrawn, leaving Quarto as one of the largest UK-based independent book
publishers.
Financial Highlights
I am happy to report that Quarto's audited financial performance, following a
spate of acquisitions, was ahead of market expectations. For the year ended
December 31, 2004, sales increased by 7% to £79.8 million (2003: £74.6 million),
but this figure requires some elaboration. Over two-thirds of Quarto business is
in US dollars. On a constant currency basis, revenues of ongoing businesses in
2004 grew by 6%, and acquisitions contributed a further £6.7 million. The
average exchange rate between the dollar and sterling changed sharply between
2003 and 2004, from £1 = $1.63 to £1 = $1.83, or over 12%. Using average rates
for the last three years, it will help shareholders to see the strong growth of
Quarto's sales if I translate them into our principal operating currency: for
2002, sales were $112.1 million; for 2003, sales rose to $121.6 million; and for
2004, sales jumped by 20% to $146.1 million (including $12.3 million from
acquisitions). In terms of Quarto's principal operating currency, then, Quarto's
pre-acquisition sales and profits continued to show good growth.
Operating profit, before goodwill amortization, rose by almost 16% to £7.6
million (2003: £6.6 million pre-exceptional), of which £0.9 million came from
acquisitions. The operating margin of our ongoing businesses rose to 9.2% of
sales (2003: 8.8%). The impact of the decline of the dollar on our trading
profit was slightly greater in 2004 than in 2003, both because of the relative
exchange rates, and because of our strong profit performance in the US market.
Our internal estimate is that reported operating profit was reduced by
approximately £0.5 million. Pre-tax profit, before amortization of goodwill,
rose to £6.4 million, slightly ahead of market expectations, and earnings per
share were 21.5p (2003: 18.9p), an increase of 14%. It is also our sixth
successive year of underlying increase in earnings per share.
The results incorporate the start-up losses from several ventures launched
recently, which are expected to produce a stream of profits into the future.
Unsurprisingly, though, not everything went according to plan, and the outcome
was marred by the previously reported very poor performances from two
established units, which were significantly below plan.
Indebtedness, after the acquisition of three new businesses for £8.0 million,
and assumed debt of £5.7 million (in the aggregate, £13.7 million), was £28.2
million (2003: £17.4 million). This outcome demonstrates the group's continuing
strong cash generation. As in previous years, a significant percentage of our
sales revenue comes from backlist titles, and no single title accounts for more
than 1% of our sales. This solid spread of sales exemplifies the quality of our
earnings, and the group's focus on recurring revenues from evergreen titles.
Optimal management of this resource is a challenge for the publishers of our
individual imprints but it is, at the same time, a great comfort to know that it
underwrites the new publishing initiatives that maintain the vitality of each
imprint.
Total shareholder return, judged over short- and medium-term periods, is
substantially above the FTSE Media and Entertainment sector average, and is
detailed in the accompanying financial report. The Board is recommending a final
dividend of 3.5p net (2003: 3.25p)which, with the interim dividend of 2.75p
(2003: 2.5p) net, per share, represents an increase of 9% for the year. The
dividend is covered more than three times.
************************
Quarto is an international book publisher and book producer. In the US, UK, and
Australia, Quarto publishes and distributes books under imprints owned by the
group. As a book producer, Quarto's co-edition units licenses other publishers,
worldwide, to publish books in their own national markets. Quarto's licensees
include, and its books appear under the imprints of, publishers such as Simon &
Schuster, Reader's Digest, Random House, Orion, Bloomsbury, HodderHeadline,
Allen & Unwin, Murdoch Books, HarperCollins, Bonniers, Gyldendaal, Taschen,
Hachette. The group publishes approximately 500 new titles a year, and
maintains, in print, a backlist of over 6,000 thousand titles. Across our
co-edition imprints, only 31% of revenues come from new titles, 69% from sales
of backlist and reprinted titles.
Quarto's ambition is to become one of the world's leading independent book
publishers. The printed word has unsurpassed ability to convey meaning, and,
despite the regular emergence of other media since printed books appeared over
half a millennium ago, none has rivalled its authority. Book publishing has
adapted extraordinarily well to competition, for the consumer dollar, from other
media and communication forms. Quarto focuses on the consumer non-fiction
market, with an emphasis on books in categories of enduring interest, generally
intended for audiences with specialized interests, allowing successful books to
remain in print for many years. Many of the books concentrate on informing and
instructing the reader, and are produced in attractive full colour formats to
enhance the experience of gaining skills and knowledge.
Corporate Events
As noted above, Quarto was active in 2004, making a series of acquisitions of
book businesses, dealing with refining its strategy for growth, putting to rest
the tender offer from JOHCM, strengthening its banking relationships, and with
capital markets generally, and laying firm foundations for further corporate
activity, and the infrastructure to support this.
After many months of negotiation, we were pleased to complete the acquisition of
Creative Publishing international (CPi) in August 2004. Based in the heartland
of the United States, in Minneapolis, CPi publishes, under its own imprint,
how-to and lifestyle books in the world's largest publishing market, and has a
very strong market position in its core publishing areas. For the last 15 years,
CPi has published high-quality instructional books, featuring stunningly
detailed step-by-step photography, with nationally recognized brand partners
such as Black and Decker and Singer, the names most trusted and respected by
consumers in the home improvement and needle crafts categories.
CPi's titles reprint strongly, and backlist sales provide over 80% of revenues.
In 2003, the business that we acquired had sales of $18.3 million. We paid $10.8
million for the business ($7.5 million in cash at closing, and $3.3 million in a
convertible promissory note), and assumed the $9.2 million of debt. For the
relevant period in 2004 included in the attached financial statements, CPi
performed according to our expectations.
At the end of July, we also bought 80% of Aurum Press, a London-based
non-fiction publisher that has a joint venture with Jacqui Small Editions, a
co-edition publisher of sophisticated lifestyle books. The acquisition increases
Quarto's publishing presence in the UK, and Jacqui Small's books complement our
other co-edition imprints, which are stronger in instructional how-to, and
reference, than in lifestyle titles. Aurum and Jacqui Small retain their own
creative directions, but we shall be bringing some synergies to the UK back
office operations. The two key executives at Aurum, Bill McCreadie and Piers
Burnett, retain stakes in the business, and Quarto has entered into a Put and
Call Agreement with them.
In November, we acquired a majority stake in Lifetime Distributors 'The Book
People' Pty. Limited. Based in Sydney, Australia, Lifetime is the largest
display marketer of books in Australia, and one of the few to operate
nationally. It operates through a network of franchised regional operators who,
following thorough marketplace testing, purchase inventory directly, cutting out
several layers of middlemen. The sales proposition for the customer is,
unabashedly, value for money, which this form of direct distribution allows.
Agents visit workplaces on regular sales cycles, with assortments of books and
related items.
We acquired 75% of the equity from retiring and departing shareholders, for a
cash consideration of A$1.5 million. Mark Bonello, the Managing Director, has
retained his entire 25% shareholding, and has entered into a Put and Call
Agreement with Quarto. For the year ended June 30, 2004, Lifetime had unadjusted
pre-tax profit of A$0.7 million.
The acquisition immediately catapulted Quarto into the ranks of the larger
Australian books businesses. Quarto has had a co-edition sales office in Sydney
for many years, covering south-east Asia and Australasia. We also create books
from our Global Publishing unit in Sydney, and publish and distribute art prints
from Artworks in Melbourne. The acquisition of Lifetime is another step in
Quarto's strategy to increase its business in content generation, publishing,
and distribution.
In September, JOHCM formally withdrew its tender offer to acquire majority
control of Quarto, without making a general offer to shareholders. This offer
had been opposed by your Board, and Quarto's share price had risen steadily
above JOHCM's price since the tender offer was launched on July 31st, 2003.
While the tender offered helped to raise Quarto's profile, and emphasize its
robustness, it was a distraction for senior executives, and the board.
New Ventures
I have stressed in the past, and reiterate, that, while investment in
organically developed new ventures is absolutely vital to the ongoing health of
Quarto, it is a seeding process. It involves substantial amounts of management
time and capital investment, and always carries a reasonable element of risk.
For the last couple of years, we have successfully launched new imprints, and we
stepped up our activities in 2004. Typically, we consider that these new
ventures will take from three to five years to prove their worth and, during
that time, they remain speculative. Our most significant investments in 2004
were in GraficEurope, which, in its second year, incurred a loss of $0.4
million, and our new special interest magazine, The World of Fine Wine, launched
in July, where the deficit was £155,000. Both ventures have been critically
acclaimed, but it will continue to be some time before our investment in them
has been validated.
Acquisitions
As noted above, acquisitions contributed £6.7 million to sales, which was in
line with our forecasts. Operating profit, at £0.7 million, before funding
costs, was slightly above our initial expectations, helped by strong seasonal
trading at Lifetime and Aurum.
Financial Strategy and Reporting
Quarto generates good cash flow. For many years, it has consistently generated
more than its operating profits in cash. During the present period of low
interest rates, and with an undemanding Quarto share price, your board decided
that it was in the interests of shareholders to fund the three acquisitions we
made in 2004 through debt. In addition to our current banks, other banks are
ready to help us to implement our growth strategy.
We have hedged the interest cost of a significant portion of our debt until
2007, when our revolving credit loan comes due for renewal. Long-term interest
rates remain stable to declining, despite the upward trend in short-term rates,
and we continue to keep the capital structure of the group, and our weighted
average cost of capital, under review.
This is the last set of financial statements that we shall be producing under UK
GAAP. In common with all other listed companies, we shall be issuing our 2005
results under IFRS/IAS. We shall continue to issue quarterly trading updates
between the half-year and full year announcements. We are also discussing, with
our advisers, whether it would be appropriate for us to prepare our financial
statements in our major trading currency, as this might provide a clearer view
of our trading performance.
The last opportunity for holders of our Convertible Preferred Stock to convert
to Common Stock is in May-June 2005. At the moment, Quarto's share price makes
conversion, rather than redemption, the more attractive option for holders of
this class of stock.
Strategy
The board continues to revisit the strategy that was put before shareholders
some 18 months ago, and confirmed a year ago, and considers that it remains
appropriate. Our prime strategy is growth, because it will continue to deliver
more shareholder value, and because it will provide a career path for some of
our best people, and will upgrade our ability to source the best and brightest
from outside.
Corporate Governance
Corporate governance has been extensively discussed at board level, and our
practice remains somewhat outside current guidelines. We recognize the thought
and care that have gone into the production of the reports of the many
committees that have studied the issues, and consider that it is important that
Quarto implements the spirit of the guidelines that address issues common to
most publicly-traded companies. The detailed account on our implementation will
appear in the Directors' Report section of the Annual Report.
Recommendations for best practice, being guidelines, are not prescriptions, and
the extra expense for Quarto must be weighed against the benefits. We continue
to debate these issues, and keep all of our procedures under review. Your board
questions a 'one size fits all' approach, and has adopted corporate governance
criteria that offer strong protection for our shareholders, but do not stifle
Quarto's vitality and entrepreneurial energy.
My fellow executive directors and I have much appreciated the dedicated
involvement of our independent directors. We feel that shareholders benefit from
their continuation on the board, and that, although, according to the
guidelines, their terms of service have exceeded best practice, it would be a
disservice to shareholders to replace them now. On the issue of separating the
roles of chairman and chief executive officer, we have also concluded that it is
not appropriate for Quarto to implement this guideline. To the extent that an
independent chairman's tasks would be to represent the interests of
shareholders, and to maintain contact with them, it is worth reminding
shareholders that Bob Morley and I, as founders, and directors, of the group,
are heavily invested in the company personally, so that our interests are
closely aligned with all shareholders'.
Similarly, we adopt a different stance from the guidelines towards senior
executive and board compensation. Perhaps media businesses are different, and
job satisfaction, challenge, and being stretched intellectually are often as
important as financial reward. Within the Quarto group, senior executives reach
positions of accountability and responsibility because they are intelligent,
capable, and execute their jobs well. I am convinced, personally, that to
introduce a significant measure of performance-related pay, based upon
objectively-assessable criteria, would lessen our executives' focus on their
responsibilities, distort their perspectives on significant commercial issues,
and provide an incentive to sacrifice the future for the present.
In any event, the appropriateness of our approach must be judged in the overall
performance of the business, and shareholders will be able to make up their own
minds about it. We continue to have a strong team. Occasionally, as might be
expected, senior people leave, either to join other publishing companies, or to
set up in business themselves, and only rarely because of our compensation
practices. Of course, it is unfortunate to lose talented people but, when we do,
to competition, or to become potential customers, their effectiveness is a
continuing prod to us to keep on our toes. Book publishing is a mature industry.
It has no natural monopolizing tendencies. Its pluralism, and vitality, ensure
the industry's adaptability, and ability to flourish.
As it has been for some time now, the board's focus is on the gradual transition
of Quarto from a first-generation founder-managed business, to the next
generation. This is, necessarily, a delicate operation. Through successful, and
occasionally unsuccessful, appointments, we have learned a great deal, not least
how much of a challenge this presents. Your board has dedicated much energy to
the task, and continues to do so.
Prospects
Piers Spence, who was, for five years publisher of the Quarto imprint, was
appointed Director of Co-Edition Publishing, with effect from January 1, 2005.
This is an important appointment, which will lead to much closer direction and
involvement by senior management in running Quarto's co-edition imprints. It
also reduces the number of my direct reports, and allows me to devote more time
elsewhere.
Piers' record of achievement at Quarto is superb, and he is widely respected
throughout the industry. The growth, spread, and increasing complexity of our
businesses require that we strengthen our executive teams, and regularly improve
and enhance our infrastructure. This prescription is, of course, easier to write
than it is to implement. We shall continue to promote from within where
possible, until we are really able to benefit from the substantial pool of
talent with experience in other industries. There are clear risks from our
approach. It is too self-absorbed, and risk averse but, at our current size, I
am not persuaded that it would be possible for us to attract the cream of
outside candidates and believe, from prior experience, that with anything less
than this, we would be running even greater risks.
It is early in the year. Although currency volatility, and the direction of the
US dollar, are objects of lively discussion, we have the experience to handle
these issues, and do not expect to be thrown off course. There does not seem to
be any evidence of dramatic change in our core markets and, with benefits
flowing from our new acquisitions, we expect another year of growth in 2005.
We continue to explore, in a measured way, acquisition opportunities that we
seek out, or are presented to us. We have beefed up our resources internally,
and with solid support from our lenders, are confident that, if we identify
appropriate targets, we shall be able to close deals, and integrate the
businesses into the group.
In a year of solid work and achievement, I thank all of our staff and directors
for their contributions. I must single out a few individuals, and applaud their
special performances and mention, particularly, Piers Spence and Ken Fund,
Karine Marko, who heads up our largest foreign-language sales team, Isabel Leao,
of Quantum, Mel Shapiro of Book Sales, Gordon Cheers, of Global, Nigel Browning
of Qu:id, and George Tai, of Regent; and, of course, our indefatigable, and
usually imperturbable, Chief Financial Officer, Mick Mousley, and our Group
Chief Accountant, Steve Grace.
Sincerely,
Laurence F Orbach
Chairman and Chief Executive Officer
London, February 14, 2005
************************************
Review of Operations
Quarto is an international book publisher with two principal strands of
activity: it publishes, under imprints owned by the Group, books and art prints
in the US, the UK, and Australia; and it creates books that are licensed to
other publishers for publication under their own imprints in many languages
around the world. In addition, in common with most larger book publishers, it
has businesses that provide services to the publishing and marketing industries.
These have grown from providing in-house services into becoming stand-alone
businesses.
Quarto's International Co-Edition Book Publishing embraces a number of units
that create titles that are licensed internationally to hundreds of publishers
in some 35 countries and 25 languages, and published under the imprints of the
licensees. Quarto owns the intellectual property in the books that the units
create, but is not engaged in the marketing, selling, and distribution of these
books. The business depends on international sales, and the substantial cost of
creating titles is, in effect, borne totally by our licensees, and shared
between them across individual publishing territories. Book ideas are presented
to potential co-publishers, and are only put into production after firm
commitments have been received. This ensures that the cost of producing a title
is completely covered by the initial deliveries. As Quarto makes its co-edition
profits from titles that reprint, our imprints focus on creating titles of
enduring and widespread interest internationally. Quarto's reputation is
particularly strong in creating books that inform and instruct, allowing the
reader to improve his or her levels of skill and knowledge. Broadly, the
businesses included in this division do not hold inventory, but the organizing
principle is that the creation of titles for an international, rather than a
purely domestic audience, is at the core of an imprint's activity. Quarto's most
important co-edition markets are in the English-speaking world, and continental
Europe. Russia, and central Europe, are growing in importance as the categories
of books that we publish have been starved in the region prior to this. Our
intellectual property rights are retained at nil value in the balance sheet,
despite generating 69% of our revenues, and very considerable gross contribution
because the cost of servicing reprints is very modest. This is, therefore, as
prudent as it is possible to be, in balance sheet terms. It's worth noting that
Quarto has acquired backlist title and has paid, on average, £5,000 per title.
In 2004, 66% of the co-edition units' sales was invoiced in US dollars which,
because of the substantial amount of printing sourced in South East Asia, in
dollar-related currencies, is the group's principal operating currency. Sales
were £34.6 million (2003: £37.1 million) but, on a constant currency basis,
expressed in US dollars, increased by 5%.
Quarto Publishing, the group's founding imprint, has a well established
reputation for hard-working and good-looking how-to books produced for audiences
with special interests, and is the largest imprint within the division. A new
series of how-to titles, such as The Chess Player's Bible, and The Quilter's
Bible, and, in particular, The Poker Player's Bible, made an immediate impact in
the market, and is expected to be a long-term generator of profit. Although
fluctuating currencies were a problem for the imprint, the impact was contained,
and Quarto recorded its best year ever in foreign-language sales.
The highlight of Quintet's year was the continued success of 1001 Movies You
Must See Before You Die, with over 225,000 copies in print. This title will be
updated in 2005, and its strength in the market has spawned a series under the
same rubric. The first two new titles, 1001 Golf Holes You Must Play Before You
Die, and 1001 Natural Wonders You Must Visit Before You Die, will be published
in the spring of 2005. Quintet also had considerable success with its line of
instructional kits, licensed to Reader's Digest in the English language. A new
publisher took over responsibility for the imprint in the middle of the year.
Global Publishing, based in Sydney, had a stunning year. In 2003, it produced
Flora, the most comprehensive illustrated encyclopedia of plants ever produced.
The costs were enormous and, consistent with the group accounting policy, were
expensed when the book was first published that year. Without this expense,
Global reaped the benefits of numerous reprints, and foreign editions, in 2004.
Flora is published in Australia by the Australian Broadcasting Corporation
(Australia's equivalent of the BBC), which also published Quintet's 1001 Movies.
The two titles were ABC's highest-grossing book publishing titles in 2004.
Quantum Publishing specializes in extending the life of many of the group's
titles, by recycling them for value-priced markets internationally. It also
generates some new titles of its own. Once again, Quantum's performance was
extremely good. There is further to go, as the focus to date has been on major
markets, and there are now many smaller markets that can be exploited
profitably.
Marshall Editions only produced one new, albeit successful title, in 2004. This
was because of a change of publisher, and the decision to take Marshall closer
to its roots as publisher of reference and informational books. Fortunately,
Marshall's backlist remains strong, and achieved substantial sales. The existing
licensing relationship with the National Geographic Society was strengthened,
and more Marshall titles will be appearing under its imprint in 2005.
Our recent start-ups all had eventful years. Iqon produced its first title,
Isms, an exploration of movements in art history, which has been translated
already into several foreign languages. Eye, in New York, came close to
break-even, while Qu:id, in Brighton, moved into profit on a 75% rise in sales,
and an expanding customer base internationally. QED, publishing books mainly for
the school and library market, launched it first list, of 63 titles. It will
produce approximately the same number of new titles in 2005, and is expected to
double its sales to £1.5 million, a very solid prospect for its second year of
trading.
Q+, our books plus unit, had a disappointing and unprofitable year. Sales were
20% below budget, and the operating result plunged from a projected profit to a
loss, a swing of £0.9 million. We are in the process of refocusing the imprint.
Historically, it has been a market leader in creating interactive instructional
books for a young audience, but this has now become a novelty and commodity
market, producing small margins on high volume, but low-value, sales. This is
not Quarto's strength, and we are repositioning Q+ towards mainstream book
publishing. A good example of this was Speckled Hen, published very successfully
by Simon & Schuster in the United States, and the fastest-selling children's
book of 2004 for Mondadori, the Italian publisher of the title. The progress has
been disappointingly uneven, and much slower than forecast, as a result of which
Q+ is now in 'intensive care'.
In the US, the Rockport Group had another very strong year and, overall, beat
its forecast earnings. Rockport, which publishes its own titles in the US and
UK, but licenses them elsewhere, took on management responsibility for the
newly-acquired CPi and, from the beginning of 2005, the sales, marketing, and
distribution activities of the two businesses have been combined. As a result of
this new arrangement, RotoVision, which formed part of the Rockport Group in
2004, is going to be run from London, as a stand-alone co-edition imprint.
Rockport's success owed a great deal to the continued strong sales of its Fair
Winds list, specializing in cooking, wellbeing, fitness, alternative health,
sex, and freemasonry. The Rockport Group disappointed in two areas: the
performance of RotoVision, which was below expectations, and in the commercial
management of the second pan-European conference, GraficEurope, which was held
in Berlin to critical acclaim, but fell well short of budgeted expectations.
Quarto also publishes books under imprints owned by the group. In sterling
terms, sales increased to £28.3 million (2003: £22.3 million), including £6.7
million of sales by acquired businesses but, as only 13% of sales were in the
UK, the figures seriously understate the volume growth in the core US market. In
constant currency, sales increased by 36%.
With the acquisition of Aurum Press in the summer augmenting Apple's sales,
Quarto's presence in UK publishing is growing. Aurum's pre-Christmas sales in
the UK increased by 25% over the prior year, which was well ahead of overall
book sales during the period. Feet in the Clouds, by Richard Askwith, a
remarkable personal story, and history, of fell running, sold 10,000 copies;
Larry Flynt's Sex, Lies and Politics, a blistering attack on right wing politics
in America, sold 12,000 copies, and was featured in Waterstone's Christmas
promotion. Of Jacqui Small Editions' titles, a joint venture with Aurum, the
clear winner was Kelly Hoppen Style, with 20,000 copies in print.
Quarto Magazines expanded significantly as Creative Card Making Ideas increased
its circulation, and the first of two start-ups, The World of Fine Wine,
appeared in July, and Creative Scrapbooking Ideas was launched in September.
Most of Quarto's book publishing is concentrated in the US. Walter Foster,
specializing in art instruction titles and book kits, had a slightly
disappointing year. The core outlet for its titles, the art and craft retail
stores, is increasingly dominated by one powerful retailer, Michaels. Although
Walter Foster is no longer dependent upon Michaels, it is affected when its
buying slows down, as happened in 2004. There was steady growth in other
markets, but these did not overcome the drag of the slowdown in the core area,
and the results also incorporated the start-up losses of its Paint Chip
Productions imprint, which had no sales during the period. Overall, Walter
Foster, pre-eminently a publisher of evergreen titles, performed a little below
expectations.
CPi, acquired in August, was placed under the direction of Ken Fund, president
of Quarto's Rockport group. The integration plans called for the merger of the
sales, marketing, and fulfilment operations, in the US, of Rockport and CPi. The
combined organization has been renamed the Quayside Publishing Group, and has
been operating under that name since the beginning of 2005.
Book Sales, our promotional publishing operation, based in New York, had a
better year than 2003. Returns were down significantly, and operating margins
rose to over 10%, a target set some years ago, but considered a very difficult
challenge. We shall now assess whether this level of profitability can be
sustained with growing sales.
In Australia, we only gained control on Lifetime in the middle of November, but
we immediately established a task force to improve its profitability. Uniquely,
among display marketing book distributors, Lifetime operates through
franchisees. We determined that that the franchise operations needed to be
improved, and appointed a director of franchise development. In addition, our
general manager in Australia has been intimately involved in a drive to improve
systems and procedures, helped by input from our operational research director
in London.
Our art publishing businesses in the US and Australia maintained their
profitable operations. Sales growth was disappointing, and both units are
exploring ways in which they can enhance their businesses.
Our publishing services businesses had another year of overall growth. Sales
increased by 10% to £16.9 million (2003: £15.3 million), but this due to a
strong sales growth from Regent Publishing Services in Hong Kong. Regent
improved its bottom line in the face of intense price pressures, and
manufacturing hiccups caused by sporadic labour shortages at several of its
Chinese suppliers. It handled the growth of its business very effectively, and
established the management infrastructure for further growth. As I reported
during the course of last year, in sharp contrast, the UK-based publishing
services units coped poorly with the expansion of their overall capacity and
strong competitive pressure. In an effort to achieve higher levels of sales and
productivity, I recruited a very senior executive to be the managing director.
The appointment was extremely unsuccessful, and had to be terminated. Overall,
these units missed their targets significantly, and moved from a profit of £0.25
million in 2003, to a loss of £0.35 million in 2004, an adverse swing of £0.6
million. By December, the situation was stabilized, and trading losses were
eliminated, but the recovery of these formerly successful units to previous
levels of profitability will be slower than originally anticipated.
SUMMARY FINANCIAL RESULTS
for the year ended December 31st, 2004
2004 2003
£000 £000
Turnover
Continuing operations 73,141 74,623
Acquisitions 6,694 -
------- --------
79,835 74,623
-------- --------
Gross Profit 28,904 25,383
Net operating expenses before exceptional items and
goodwill amortisation (21,300) (18,817)
Amortisation of goodwill (410) (206)
Exceptional items - (595)
Operating Profit
----------------------------- ---------- ----------
Before exceptional items and goodwill amortisation 7,604 6,566
Amortisation of goodwill (410) (206)
Exceptional items - (595)
-------- --------
7,194 5,765
----------------------------- ---------- ----------
Continuing operations 6,489 5,765
Acquisitions 705 -
-------- --------
7,194 5,765
Net interest payable (1,169) (892)
Profit on ordinary activities before taxation
----------------------------- ---------- ----------
Before exceptional items and goodwill amortisation 6,435 5,674
Amortisation of goodwill (410) (206)
Exceptional items - (595)
----------------------------- ---------- ----------
6,025 4,873
Taxation (1,337) (750)
--------- -------
Profit on ordinary activities after taxation 4,688 4,123
Minority interests - equity (403) (314)
------- -------
Profit for the financial year 4,285 3,809
Dividends (including non-equity) (1,549) (1,458)
--------- ---------
Retained profit for the financial year 2,736 2,351
======= =======
Earnings per share 21.5p 18.9p
======= =======
Underlying earnings per share 23.8p 22.3p
------- -------
Diluted earnings per share 20.1p 18.2p
======= =======
Diluted underlying earnings per share 22.0p 21.2p
======= =======
Dividends per ordinary share 6.25p 5.75p
======= =======
SUMMARY PROFIT & LOSS ACCOUNT
for the year ended December 31st, 2004
2004 2003
£000 £000
Turnover
Continuing operations 73,141 74,623
Acquisitions 6,694 -
------- -----------
79,835 74,623
-------- --------
Gross Profit 28,904 25,383
-------- --------
Operating Profit
Continuing operations 6,489 5,765
Acquisitions 705 -
-------- --------
7,194 5,765
Net interest payable (1,169) (892)
--------- -------
Profit on ordinary activities before 6,025 4,873
taxation
Taxation (1,337) (750)
--------- -------
Profit on ordinary activities after 4,688 4,123
taxation
Minority interests - equity (403) (314)
-------- --------
Profit for the financial year 4,285 3,809
Dividends (including non-equity) (1,549) (1,458)
--------- ---------
Retained profit for the financial year 2,736 2,351
======= =======
Earnings per share 21.5p 18.9p
======= =======
Underlying earnings per share 23.8p 22.3p
------- -------
Diluted earnings per share 20.1p 18.2p
======= =======
Diluted underlying earnings per share 22.0p 21.2p
======= =======
Dividends per ordinary share 6.25p 5.75p
======= =======
CONSOLIDATED BALANCE SHEET
as at December 31st, 2004
2004 2003
£000 £000
Fixed assets
Goodwill 13,005 3,337
Tangible assets 8,982 8,909
------ ------
21,987 12,246
------ ------
Current assets
Stocks and work in progress 20,727 17,451
Debtors 24,066 20,667
Cash and deposits 12,578 12,490
------ ------
57,371 50,608
------ ------
Creditors: Amounts falling due within one year (28,927) (24,303)
------ ------
Net current assets 28,444 26,305
------ ------
Total assets less current liabilities 50,431 38,551
Creditors: Amounts falling due after more than one year (38,618) (29,588)
Provision for liabilities and charges
Deferred taxation (646) (875)
------ ------
Net assets 11,167 8,088
====== ======
Capital and reserves
Called up share capital 1,341 1,341
Treasury stock (786) (802)
- Reserves - paid in surplus 23,903 23,893
- revaluation 968 978
- profit and loss (16,979) (19,758)
------ ------
Shareholders' funds 8,447 5,652
------ ------
Equity 3,575 780
Non-equity 4,872 4,872
------ ------
8,447 5,652
Minority interests - equity 2,720 2,436
------ ------
11,167 8,088
====== ======
CONSOLIDATED CASH FLOW STATEMENT
for the year ended December 31st, 2004
2004 2003
£000 £000
Net cash inflow from operating activities 6,503 7,965
--------- -------
Net cash outflow from return on investment and servicing
of finance (1,805) (1,422)
--------- ---------
Taxation (1,062) (371)
--------- -------
Capital expenditure (982) (2,502)
--------- -------
Acquisitions and disposals (13,700) (179)
--------- -------
Equity dividends paid (1,077) (969)
--------- -------
Management of liquid resources
Movement of short term deposits 1,927 (1,593)
--------- -------
Net cash flow from financing 10,993 1,631
--------- -------
Increase in cash 797 2,560
--------- -------
Reconciliation of net cashflow to movement in net debt
Movement in cash 797 2,560
Movement in debt (10,967) (1,733)
Management of liquid resources (1,927) 1,593
--------- -------
(12,097) 2,420
New finance leases - (1,631)
Translation differences 1,254 1,607
--------- -------
Movement in debt for year (10,843) 2,396
Net debt at beginning of year (17,387) (19,783)
---------- ----------
Net debt at end of year (28,230) (17,387)
========== ==========
NOTES
1. Segmental Analysis
Geographical analysis of turnover by destination
2004 2003
£000 £000
United Kingdom 15,889 14,983
United States of America 43,072 41,624
Canada 2,141 1,955
Europe 9,211 8,270
Australasia and the Far East 8,375 6,721
Rest of the World 1,147 1,070
------ -------
79,835 74,623
====== =======
2. Exceptional items in 2003 comprise US and UK professional fees
associated with the JOHCM Tender Offer and the Group's response.
3. Dividends comprise:
2004 2003
£000 £000
Non equity: Preference: 426 426
Equity: Ordinary: Interim 494 449
Final proposed 629 583
----- -----
1,549 1,458
===== =====
The Board proposes a final dividend of 3.5p net (2003: 3.25p) per share of
common stock of par value US$0.10 each ('ordinary share') which is expected to
be paid on May 19th 2005 to shareholders on the register on April 22nd 2005.
4. Shareholder Return
Quarto's ordinary shares have generated a total shareholder return of 117%, 205%
and 20% over the five years, three years and one year ended December 31, 2004,
respectively. Over the same periods, Quarto's ordinary shares have significantly
outperformed the FTSE 100, the FTSE small cap and the media sector.
5. Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to
holders by the weighted average number of ordinary shares in issue during the
period, excluding those held as treasury stock.
For diluted earnings per share, the weighted average number of ordinary shares
in issue is adjusted to assume conversion of all dilutive potential ordinary
shares. These represent share options granted to employees where the exercise
price is less than the weighted average market price of the ordinary shares
during the period, a convertible loan note and preference shares which are
convertible into ordinary shares.
Underlying earnings per share figures are presented. These exclude the effects
of exceptional items and goodwill amortisation.
Earnings 2004 Per Earnings 2003 Per Share
£000 Weighted Share £000 Weighted Amount Pence
Average Number
of Ordinary
Shares
Average Amount
Number Pence
of Ordinary
Shares
Basic
earnings 3,859 17,955,495 21.5 3,383 17,926,756 18.9
per share
Effect of
dilutive
options - 111,636 - - 66,305 -
Dilutive
loan 23 437,347 5.3 - - -
note
Dilutive
preference
shares 426 2,923,514 14.6 426 2,933,965 14.6
----- ----------- ------ ----- ----------- ------
Diluted
earnings per
share 4,308 21,427,992 20.1 3,809 20,927,026 18.2
------- ------------ ------ ------- ------------ ------
Underlying
earnings per
share
figures
Basic
earnings 3,859 17,955,495 21.5 3,383 17,926,756 18.9
per share
Effect of:
Exceptional
items - 17,955,495 - 416 17,926,756 2.3
Goodwill
amortisation 410 17,955,495 2.3 206 17,926,756 1.1
----- ------------ ----- ----- ------------ -----
Underlying
earnings per
share 4,269 17,955,495 23.8 4,005 17,926,756 22.3
------- ------------ ------ ------- ------------ ------
Underlying
earnings per
share 4,269 17,955,495 23.8 4,005 17,926,756 22.3
Effect of:
Dilutive
options - 111,636 - - 66,305 -
Dilutive
loan 23 437,347 5.3 - - -
note
Dilutive
preference
shares 426 2,923,514 14.6 426 2,933,965 14.6
----- ----------- ------ ----- ----------- ------
Diluted
underlying
earnings per
share 4,718 21,427,922 22.0 4,431 20,927,026 21.2
------- ------------ ------ ------- ------------ ------
Exceptional items are stated net of a tax credit of £179,000.
6. The financial information contained in the preliminary announcement
does not constitute the Company's statutory accounts for the years ended
December 31st 2004 or 2003 but is derived from those accounts. Statutory
accounts for 2003 have been delivered to the Registrar of Companies; those for
2004 will be delivered following the Company's Annual General Meeting. The
auditors have reported on those accounts, their reports were unqualified and did
not contain a statement under Section 237(2) or (3) of the Companies Act 1985.
7. The Annual Report will be sent out to shareholders in March. Additional
copies can be obtained from the Finance Director, The Quarto Group, Inc., The
Old Brewery, 6 Blundell Street, London, N7 9BH. Tel: 020 7700 9000 (email:
mickm@quarto.com).
This information is provided by RNS
The company news service from the London Stock Exchange
Wednesday, 15th May 2024
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