Final Results
Quarto Group Inc
08 March 2007
Thursday March 8, 2007
THE QUARTO GROUP, INC - PRELIMINARY ANNOUNCEMENT
Quarto (QRT.L), the fully listed independent book producer and publisher based
in London, announces underlying annual results very much in line with
expectations, although the Publishing segment was weaker, and the Co-Edition
segment was stronger, than the Board had forecast.
FINANCIAL HIGHLIGHTS
Year to December 31 2006 2005 Increase
Revenue (£m) 93.6 95.0 -1%
Adjusted EBITDA (£m) 18.0 17.5 +3%
Operating profit: adjusted (£m) 9.6 8.9 +7%
reported (£m) 6.9 6.8 +2%
Pre-tax profit: adjusted (£m) 7.3 6.7 +9%
reported (£m) 4.64 4.57 +2%
Diluted earnings per share: adjusted (p) 22.5 21.3 +6%
reported (p) 13.9 13.5 +3%
Dividends per share (p) 6.75 6.5 +4%
Net debt (£m) 31.0 35.1 -12%
Adjusted excludes amortization of non-current intangibles and
non-recurring items
• The revenue decline was predominantly the result of a £3.2m fall in
US sales and the elimination of some marginal business elsewhere.
COMMERCIAL HIGHLIGHTS
• The International Co-Edition Book Publishing segment increased its
adjusted operating profit by 16% to £5.3m (2005: £4.5m) on revenue up 4% to
£38.4m (2005: £37.1m), an adjusted operating margin of 13.7% (2005: 12.3%).
Co-edition performed better than expected, in what remained, with few
exceptions, tougher and more challenging conditions in most of its major
geographical markets. In response to these, almost all its units lifted their
games, by reducing, or eliminating, marginal activities and turning away from
marginal opportunities.
• The Publishing segment had a tough year. It operates entirely in
English-language markets, and suffered, along with the general malaise,
particularly in the United States. Adjusted operating profit, at £5.2m (2005:
£5.3m), was 1% down on revenues that declined by 5% to £55.2m (2005: £57.9m),
representing an adjusted operating margin of 9.5% (2005: 9.2%). The revenue
decline is accounted for mostly by the running-down of Quarto's UK-based
magazine business, and by the sharp fall in revenues at Book Sales, Quarto's US
promotional publishing subsidiary.
• The unexpected and unwelcome Chapter 11 bankruptcy filing of Advanced
Marketing Services (AMS), the principal conduit to the US warehouse clubs, on
the last business day of 2006, generated a £1.2m exceptional write-off, Quarto
being its 19th largest creditor, but doesn't usher in a winter of discontent.
• In 2006, Quarto spent a great deal of time trying to execute its
growth strategy that focuses on making acquisitions. There were several
important opportunities in 2006, with the focus increasingly on overseas
businesses with revenues in excess of $30m, but, in spite of management's best
efforts, Quarto failed to conclude a deal.
Laurence Orbach, Chairman and CEO, stated, 'During 2006, we corrected the
short-comings of some of our units, and eliminated some unsuccessful
initiatives, emerging with a better trading result. In 2007, we expect to manage
our way through whatever is thrown at us and, in a recitation echoing government
health warnings, anticipate that, in the absence of major currency movements,
Stock Exchange crashes, wars, and various other acts of Man, we shall again
improve on our performance.'
Notes for Editors:
Quarto is an international book producer and 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.
Enquiries:
The Quarto Group, Inc.
Laurence Orbach (Chairman & CEO) 020-7700 9003
Mick Mousley (Finance Director) 020-7700 9004
Bankside Consultants Limited
Charles Ponsonby 020-7367 8851
CHAIRMAN'S LETTER
Dear Shareholder:
Quarto traded strongly in 2006. Our performance, as the 2006 results demonstrate
, benefited from the increase in the sales, and percentage of sales, of our
'long tail' of backlist titles which, thanks in part to the Internet, grows
longer, and continues to endorse our robust business models. All of this took
place against a background of demanding business conditions. All in all, 2006
produced more surprises than expected: the continued strength of sterling (or,
more accurately, that sterling did not reflect the softer UK economy by drifting
downwards with the US dollar); Quarto's failure to close any of the substantial
corporate transactions on which we had been devoting considerable senior
executive resources; the first signs, in many years, of an end to the almost
non-inflationary environment that had lately become the norm; the
not-so-unexpected maturing of Internet use, and its ubiquity as a new medium.
The fly in the ointment was the wholly unexpected and unwelcome Chapter 11
bankruptcy protection filing of Advanced Marketing Services (AMS), the principal
conduit to the US warehouse clubs, on the last business day of 2006. If we are
living through revolutionary times in media development, and the glory days of
book publishing are gone for ever, Quarto, and the book publishing industry as a
whole, is adapting remarkably well to the challenges (albeit, not without pain).
Following many years of good service from KPMG, the Board decided that it was
time to appoint a new firm of auditors. RSM Robson Rhodes have brought to the
audit of our 2006 financial results a new perspective on our processes,
procedures, and policies, which is what the audit committee wanted from a new
auditor. The first of these to be adopted is an important accounting policy
change, which brings us into compliance with International Accounting Standards,
and with common practice in our industry. I also commend the new format of the
statement of cash flows which, for a lay person, is much simpler to follow.
Under our prior policy, at the time of first printing, we expensed the pre-press
development costs of creating a new title. The rationale was that this was very
prudent, and reflected the then irreversible commitment to invest in the
creation of the title. What it failed to do was to match the flow of revenue
which, in our case, follows over a period of several years. After extensive
consultation with, and testing of our data by, our auditors, we have adopted a
new policy of capitalizing our development costs and writing them off over a
three-year period following the first delivery of a new title. According to
their annual reports, Reed, Pearson, and Haynes all capitalize their development
costs and, in their cases, use a five-year period for amortization. Our new
policy has the virtue, aside from complying with accounting standards, of
allowing easier comparison with the performance of companies in our sector, and
of recognizing value for the intangible assets that we are creating. Considering
that we had been applying the prior policy consistently for many years, the
impact on the income statement is minor, which is only to be expected; but the
balance sheet emerges stronger. This is definitely a positive move as the bulk
of our revenue comes from titles that, previously, have had no value attached to
them on the balance sheet. Even the balance sheet, though, fails to do justice
to this value as, being struck on one day in the year, it shows that our net
assets, and many of the assets are dollar-denominated, didn't grow,
year-on-year, which is unflattering, since those that were translated into
sterling went in at $1.96 to the pound at December 31, 2006, against $1.72 at
December 31, 2005, for a dollar decline of 14%.
The accounting policy change has necessitated a restating of the prior year
results and, in these remarks, my comments relate to our results following
implementation of the policy change.
Commentary on Financial Results
I am pleased to report that for the year ended December 31, 2006, our audited
revenues were £93.6 million (2005: £95.0 million), a decline of 1.5%,
predominantly the result of a fall of £3.2 million in US sales, and the
elimination of some marginal business, offset by increases in other geographical
markets. Operating profit, before amortization of intangibles and exceptional,
non-recurring items, rose by 8% to £9.6 million (2005: £8.9 million), profit
before tax, on the same basis, at £7.3 million (2005: £6.7 million) was up by
9%, and underlying diluted earnings per share were 22.5p (2005: 21.3p), for an
increase of 6%. Earnings before interest, taxes, interest, depreciation, and
amortization (EBITDA) were £18.0 million (2005: £17.5 million). Net debt was
down to £31.0 million (2005: £35.1 million). Earnings are solidly ahead of last
year and prospects are good so, in spite of the AMS bankruptcy charge, your
board is recommending a final dividend of 3.75p (2005: 3.6p), making a total
dividend for the year of 6.75p (2005: 6.5p). The final dividend is payable on 7
June 2007 to shareholders on the register on 4 May 2007. The exceptional,
non-recurring charge for the AMS debt was £1.2 million, and basic earnings per
share were 14.3p (2005: 13.8p). A reconciliation of the above figures is given
in Note 6 to the financial information.
The bankruptcy filing of AMS hit us hard, and has had a similar impact on
numerous other book publishers. Primarily, AMS is a distributor of books into
the warehouse clubs, such as Costco, Sam's, and BJ's, and it sourced its books,
as a wholesaler, from almost every publisher in the United States. Its APG unit
also publishes titles, for which the principal outlets are the warehouse clubs,
with a minority of its sales going through the more traditional book sales'
channels. The bulk of our losses arose on titles licensed to the publishing
unit. At this stage, it hasn't been possible to establish whether there is
likely to be any dividend to unsecured creditors, even though resolution of the
bankruptcy is at a fairly advanced stage. For this reason, and in the light of
what we know at this stage, we have provided for all of the debt.
AMS's bankruptcy is one of the largest ever for the book publishing industry. In
the tabulation of the 40 largest creditors, whose combined claims were
approximately $225 million, we only ranked as the 19th largest, which gives some
idea of the scale of other losses. What was most remarkable about the filing was
that, although the regulatory and legal issues that AMS had with the relevant
authorities - and which had led to successful criminal prosecutions of three
individuals in its advertising department - were widely known, they were
considered to be no more than a blot on its reputation and, given that AMS was
reliable in paying its bills, we were given no hint of financial strain.
Our results were very much in line with expectations, although the publishing
segment was weaker, and the co-edition segment stronger, than we had forecast.
The publishing segment's major markets are in the principal English-language
countries, and results in the United States were below our forecast. In
contrast, there was a significant improvement in the co-edition segment's
results and this reflects, in part, the wider geographical spread of the
segment's markets.
As I've noted above, the co-edition segment performed better than we expected,
in what remained, with few exceptions, tougher and more challenging conditions
in most of our major geographical markets. In response to these, almost all our
units lifted their games, spurred by the greater focus and direction they have
been given by senior management, and by reducing, or eliminating, marginal
activities and turning away from marginal opportunities. For much of the year
Mick Mousley, Chief Financial Officer, and I were devoting enormous amounts of
our time to abortive corporate transactions, and to putting in place longer-term
financing. We're much encouraged that our reduced involvement in operations
allowed other talented individuals within Quarto to display their abilities.
Interest costs were virtually flat, in spite of higher interest rates. The
hedge, that we have in place on a substantial part of our borrowings, increased
cash generation, and lower debt all helped to improve the picture. As with
everything else in this financial commentary, I need to remind readers that
Quarto's principal operating currency is the US dollar, and that most debt is
dollar denominated. We continue to review whether it would be more helpful to
shareholders and investors for us to report our results in dollars, rather than
in sterling.
Corporate developments
We spent a great deal of time trying to execute our growth strategy that focuses
on making acquisitions. There were several important opportunities in 2006 but,
in spite of our best efforts, we failed to conclude a deal.
Much of our focus, in this area, has shifted to more substantial stand-alone
businesses, typically with revenues in excess of $30 million. It's difficult to
know whether this level of revenues inevitably invites more interest, leading to
bids that we simply will not match, or whether part of the reason we came away
empty-handed is because we are, culturally, organizationally, and at board
level, a little too conscious of the downside when assessing the calculus of
reward and potential risk.
I've noted before that most of our targets, at this level, will be based
overseas. It's possible that this 'foreignness' counts against us, and that our
due diligence focus tends to be more on operations and market strength than, as
in the case of many domestic bidders, on synergies and financial engineering. In
any event, your board has concluded that, disappointing as the outcomes were,
the efforts were tremendously worthwhile, not only in giving us more experience
at this level, but also in affirming that the growth strategy should still be
pursued.
Another component in our strategy has been to put in place both medium- and
longer-term financing, so that we can follow through swiftly on potential
acquisitions. Our $90 million syndicated 5-year revolving credit facility is
scheduled for renewal in July 2007, and in November we concluded a private
placement of 8-year $50 million note to an investor group led by Prudential
Insurance Company of America, achieving our objective of longer-term funding. As
we noted at the time, this was important in three principal respects: (i)
affirming support for our current business and strategy, (ii) demonstrating
confidence in the abilities of management to execute its plans for the business,
and (iii) reducing significantly any need to turn to the equity market to fund
potential acquisitions.
We have largely exited from the magazine business, as discussed below, and our
sole totally new venture in 2006 was to establish JR Books, a new venture with
well-known and respected publishing veteran Jeremy Robson, whose brief is to
bring his own broad and eclectic interests (which range from poets and writers
such as Ted Hughes and Sylvia Plath to entertainment celebrities Joan Collins,
Michael Winner, and Maureen Lippman). Jeremy's first list, as JR Books, will be
launched in the second half of 2007.
Prospects
I approach the writing of this section of my letter with dread. Of course,
having long been in book publishing, we have better knowledge of the
opportunities and obstacles than the average financial analyst. We set
expectations with our unit presidents and managers in this context. Only 18% of
our sales are in sterling, so the exchange rate with our principal operating
currency, the US dollar, is an important underlying assumption in our budgets
and forecasts. Last year, in drawing up our budgets, we used the then prevailing
rate of $1.72 to the pound sterling. In the event, the average for the year was
$1.84, a difference of 7%. Our budgets for 2007 have assumed a value for
sterling of $1.96.
The budget exercise is valuable as a stimulus for sustained reflection and
analysis of the business. It has always seemed to me both futile and faintly
absurd to measure performance against our informed 'guesstimates'. At Quarto, we
concentrate on what we can control in all circumstances, and at all times, more
than we agonize over variances from budget. If budgets are drawn up in difficult
times, they will probably reflect low expectations; in times of over-exuberance
they may well become over-confident. The only certainty is that they will be
wrong and, in evaluating the performance of our senior people, we prefer a more
nuanced approach that acknowledges the dynamic context in which we operate, and
offers a more balanced assessment. We don't appoint people to senior positions
based upon their skills as prophets, so it seems more sensible to hold them to
account for how they have performed 'in the circumstances'.
During 2006 we corrected the shortcomings of some of our units, and eliminated
some unsuccessful initiatives, emerging with a better trading result. In 2007 we
expect to manage our way through whatever is thrown at us and, in a recitation
echoing government health warnings, anticipate that, in the absence of major
currency movements, stock exchange crashes, wars, and various other acts of Man,
we shall again improve our performance. The probable demise of AMS in its
historic form will cause a hiatus for us, and for some of our licensee
publishers and, as this is written, it's impossible to guess how long this may
continue, and whether AMS's unique position will be taken up by another player.
In summary, we shall continue to focus, laser-like, on our existing businesses,
and shall redouble our efforts to make worthwhile, affordable, and above all,
sensible acquisitions that will add to our earnings per share. Your board,
recognizing that Quarto operates in a very mature industry, still expects growth
to come mainly from acquisitions. The renegotiation of our revolving credit
facility coincides with the ending of our current interest rate hedge, which has
served us well. We can expect higher interest costs as a result, although we
shall continue to hedge our interest rate, and will continue to be vigilant in
allocating capital around the group.
I'll close as I began, with the comment that, self-evidently, the bankruptcy of
AMS took the gloss off what was a year of substantial underlying positive
development. Your board and I are pleased that we dealt with some of our legacy
business issues during the year, that we are successfully bringing on board a
new, young generation of publishers, and that enthusiasm still drives our staff
to come to work every day. We are, indeed, fortunate to work in such an
environment.
Sincerely,
Laurence F Orbach
Chairman and Chief Executive Officer London, March 8, 2006
REVIEW OF OPERATIONS
Our International Co-Edition Book Publishing segment, under the very able
direction of Piers Spence, put in a strong performance across the board,
increasing its operating profit, before amortization of non-current intangibles
and exceptional, non-recurring items, by 16% to £5.3 million (2005: £4.5
million), or almost 14% of its revenues of £38.4 million (2005: £37.1 million).
During 2006 our investment in adult and children's reference publishing at
Marshall Editions began to bear fruit, and the imprint delivered a sequence of
solidly successful publishing projects. These included To the Ends of the Earth,
Whale Watcher, and The Atlas of Bird Migration, as well as another four titles
in the bestselling People who Made History series of historical biographies for
children, licensed in the US to National Geographic. There were a number of
tangible advances in the business: Marshall significantly expanded its customer
base during the year and is now no longer over-reliant on a handful of
publishing partners. Foreign language sales reached a five-year high, and new
and profitable relationships were struck with several prestigious European
publishers. And the editorial and design team was restructured and revitalized,
the better to face the demands of tomorrow. The combined effect of these
initiatives was to see sales increase by 28% and profits significantly ahead: a
fine achievement by any standards. It has taken longer than we thought, but
Marshall seems to have finally rediscovered its identity as a force to be
reckoned with in international reference publishing.
A stellar performance in 2005 left Quarto Books with a tough act to follow,
especially in the light of increased competition in its key arts, crafts, and
hobbies categories as new entrants were attracted on to the bandwagon. Despite
this, the unit succeeded in growing new title sales by 5% in a mature market,
principally through relentless focus on its core audience. Over the year, Quarto
showed readers how to improve their skills at knitting, crochet, scrapbooking,
calligraphy, jewellery-making and a wide range of other craft and hobby
activities-Build Your Own Electric Guitar was perhaps one of the more
challenging of these. In the general reference field 100 Characters from
Classical Mythology and The Bridge Player's Bible were well received, while How
to Raise and Keep a Dragon proved to be one of the hits of the Christmas season,
with many booksellers filing it in the 'Pets' category! Foreign language sales
kept pace with the previous year's record result, and the unit once again
contributed generously to group profits.
This time last year Quantum, our specialist backlist imprint, found itself on
the horns of a dilemma. Its value proposition, long the principal driver of
growth and profitability, was no longer appealing in a market full of cheaper
competitors, and it was clear that new thinking, and some means to differentiate
itself from the mass, was required. The unit responded decisively by acquiring
the Cartographica map database in early 2006, and this looks increasingly like a
shrewd move: the initial investment has already been repaid from profits on the
first four Cartographica titles published-and early indications are that all of
these will reprint this year-while another four books will be launched in
mid-2007. Although original publishing represents a significant departure for
Quantum, as a pragmatic response to a fall-off in its traditional markets it has
been particularly effective: sales and profits are comfortably ahead of budget,
and access to quality product has allowed Isabel Leao, Quantum's publisher,
to strengthen her editorial and sales teams to meet future challenges.
QED, Quarto's educational publishing unit, creates books principally for the
school and library market, a sector that still enjoys some protection, and one
where margins can be healthy if you can find a way through the sometimes
convoluted supply channels. QED is still a young business, and to a certain
extent is still determining the most suitable route to market in a number of its
sales territories: although sales increased by 27%, there were setbacks in a
number of export distribution channels that prevented the business from
achieving its full potential in 2006. These deficiencies are being addressed one
by one, principally by the appointment of new distributors, and improvement is
expected in the current year. On the positive side, foreign-language co-edition
sales were ahead of forecast, and the unit continued to deepen its already
excellent relationship with book clubs, school book clubs, and
direct-to-consumer businesses, achieving double-digit increases in sales to
these markets. In a sign of the business's growing maturity, significant
internal promotions were made in the product creation team, and these are
already feeding through to a stronger publishing program for the year ahead.
RotoVision, our graphic design and photography specialist, had its best year for
some time, with sales and profits ahead of expectations. The result appears to
validate the decision taken last year to move the business to a co-edition
basis, and it has certainly sharpened the focus of our publishing
decision-making. Foreign-language co-edition sales grew by over 40%, and while
some of this is accounted for by one-off backlist sales into previously
unexploited territories, a three-point increase in margin gives an indication of
what might be achievable here in future with discipline and consistent
application. Even in the UK book trade, traditionally the bugbear of a business
like RotoVision, things turned out better than expected: sales were ahead by 13%
and returns were very significantly down on the previous year. Like many
specialist publishers, RotoVision is learning to love the online booksellers, as
Amazon creeps steadily up its list of top customers. Not everything went to
plan, however: one of our three initial US business partners failed to deliver
sales that met our expectations, and we terminated the relationship at year-end.
Sales to Japan, traditionally a very strong market for RotoVision, were the
weakest for years. And the move from a distribution to a co-edition model in the
USA may saddle us with a higher than anticipated number of overstocks. Against
this, there is a palpable sense that RotoVision is emerging into the light and
ready to start on the next phase of growth. The challenge for the business now
is to quantify how far, how fast, and in what direction.
Q+, our books-plus unit incorporating Quarto Children's Books and Design Eye,
began the year with a clear brief for change: our strategic review of the
business had shown that we needed to reinvent our approach to children's books,
and turn our backs on the gimmick-driven model that makes much of what passes
for books-plus barely distinguishable from a cheap toy. Instead, new publisher
Sue Grabham began to articulate her vision of a line of children's books that
were not just innovative, engaging, and fun, but that had at their centre a core
of curricular relevance that would stimulate young minds, while at the same time
making parents feel good about the purchase. The global success of first My
Dad's Toolbox and then Tutankhamen's Tomb, both of which have had multiple
reprints and are available in a dozen foreign-language editions, speaks to the
success of the initiative. Aside from the product offering, better discipline
and more farsighted planning ensured that in the wake of increased sales came
improved margins, higher revenue per title, fewer production errors, and much
improved customer satisfaction. Indeed, such was the effect of these changes
that as we approached the end of the fourth quarter Q+ was heading for its best
result in five years. Unfortunately all this was undone by AMS's Chapter 11
filing: they were a significant customer of Q+, and, despite some very nimble
footwork, we were unable to protect ourselves entirely from the fallout.
Frustrating as this is-and it seems particularly unfair on the Q+ team who
worked so hard to get a result, only to have it snatched from their grasp at the
last possible moment-much of the groundwork has been done to ensure that 2007
delivers on the promise of a creditable business turnaround.
QU:ID, one of our two Brighton-based operating units, creates quirky, often
humorous titles aimed at the impulse-buy and gift market. Such products are
subject to a fairly modest price ceiling, and this has previously acted as a
drag on growth, which is a major source of frustration in a business that is
still in its infancy. During the year QU:ID introduced a number of
larger-format, higher-priced titles in categories with more enduring reference
value, and this has had the twin benefits of increasing revenue per title, and
raising the percentage of titles that go on to reprint. It also realigned its
publishing decision-making with the standard Quarto co-edition model (from which
it had too frequently tended to depart), to ensure that future co-edition
opportunities are maximized. Despite these important structural changes, sales
remained flat and profit fell marginally, due to the failure of a significant
title to meet its year-end delivery date. Responsibility for QU:ID's
foreign-language sales has now been assigned to the very experienced
London-based sales team. Nigel Browning, QU:ID's publisher, is confident that
this, together with the changes noted above, should bring worthwhile advances
during 2007.
The folks at Global Publishing in Sydney like to deliver at least one monumental
new book each year. In 2006 they surpassed themselves with Biblica, the most
ambitious, beautiful, and comprehensive atlas of the Bible lands ever produced.
Published in two face sizes, large (10 x 13 in), and enormous (12 x 16 in), and
weighing in at over 15 pounds, it arrived fully loaded with every possible
enhancement, including fifth-colour gold, printed endpapers, two place-marker
ribbons, and a slipcase with embossed titles and spot varnish. Publication was
widely celebrated; sales on the first printing totalled $1.5 million, and
Biblica quickly climbed into Costco's top-five bestseller list by value, for the
Christmas 2006 gift season. But it was here that the seeds of disaster lay
concealed: the primary distributor in the US was AMS. On 29 December 2006, AMS
filed for Chapter 11, owing Global more than $1.3m. The small team at Global
have responded to this devastating blow in the best way possible, and set their
faces to the wind. At time of writing, Global's order book stands at double the
level of this time last year, with a three-point margin improvement. There is
much to do, but the path to recovery is clearly signposted.
IQON is a small, but perfectly formed, co-edition imprint that turns out
sumptuously illustrated reference books in the field of high arts and culture.
Understanding Architecture, launched at the beginning of 2006, went on to sell
just short of 100,000 copies in 19 languages over six printings. Understanding
Religion will top the list for 2007; sales and pre-orders to date exceed 50,000
copies.
Quintet had an interesting 2006. Since the launch of our bestselling 1001 . . .
series in 2003, the unit had increasingly developed a split personality, in
which the half that was responsible for international mega-sellers such as 1001
Movies You Must See Before You Die, 1001 Albums You Must Hear Before You Die, et
al. had completely overshadowed the original Leisure and Lifestyle imprint, and
was starving it of resources and attention. Accordingly, in the third quarter of
2006, we took the decision to bring this tendency to its logical conclusion, and
the conjoined lists were surgically separated into Quintet and a new imprint,
Quintessence. New publishers were appointed for both units-crucially, these were
internal promotions from a talented second line of management, thereby releasing
huge reserves of productivity and goodwill in house.
Quintessence has since continued it stellar trajectory: multiple English and
foreign language reprintings of 1001 Movies, 1001 Books, and 1001 Albums
produced like-for-like sales growth of 25% and, unusually for a Quarto Group
imprint, engendered huge public awareness through a wall-to-wall branding
exercise at HMV stores in the UK, which is now being rolled out to publishing
partners overseas. Its immediate future looks very exciting, with four 1001 . .
. titles planned for each of 2007 and 2008, together with two titles per year of
a spin-off series. The medium term challenge for the unit is to come up with a
second act that stands comparison to the first.
Quintet proper, in the meantime, has bought itself some time to regroup and
re-establish its raison d'etre. Early signs are promising: major customers have
welcomed the clarity brought about by the separation of the two units, and the
key series, especially 500 Cookies, 500 Cupcakes, etc., are finding an
enthusiastic response in the market. In one of those rare instances where the
sum of the parts is greater than the whole, the combined revenues and profits of
Quintet and Quintessence in 2006 were very significantly ahead of the previous
year's results for the parent imprint, and both units seem poised for an
exciting future.
Both of our publishing services businesses prospered, with Regent, in
particular, producing a hugely impressive performance in an extremely
competitive market, replacing a large, but only marginally profitable, customer
with a string of new publishing clients. George Tai, and his team, did a fine
job.
The Publishing segment had a tough year. It operates entirely in
English-language markets, and suffered, along with the general malaise,
particularly in the United States. Operating profit, before amortization of
non-current intangibles and exceptional, non-recurring costs, at £5.2 million
(2005: £5.3 million) was slightly down, on revenues that declined by 5% to £55.2
million (2005: £57.9 million). The revenue decline is accounted for mostly by
the running-down of our UK-based magazine business, and by the sharp fall in
revenues at Book Sales, in the United States.
Encouragingly, under Bill McCreadie's watchful and careful direction, Aurum
Press and Apple were beacons of light. A strong frontlist at Aurum produced
record revenue and profit numbers on the back of vigorous marketing efforts with
major retailers. Increased print runs strengthened margins across the board, and
a number of titles went into reprint. Apple thrived in its first full year of
distribution by the Aurum sales team, and made a useful contribution to profit.
The Jacqui Small lifestyle imprint also enjoyed increased sales in the UK, as
the launch of two new series contributed to an overall increase in publishing
output. Given the backlist nature of the Jacqui Small list, this augurs well for
the near-term. Elsewhere in the UK we wound down our magazine publishing
activities. They were too small, traded in a very difficult marketplace, and
absorbed a disproportionate amount of management attention. Our remaining title,
The World of Fine Wine, which has won substantial critical acclaim and garnered
an international circulation of high-net-worth individuals, will become the core
of a co-edition book list focusing on wine and fine living.
In the USA meanwhile, Book Sales had a torrid year. Sales were off by 23%, and
operating profit slumped by 57%. Things never really recovered from a rocky
start to the year although, by the end, the situation was stabilized and showing
signs of improvement. There's nothing to suggest that there is anything
fundamentally flawed with Book Sales' business model; the explanation lies with
cyclical issues and a number of one-off occurrences. Management is confident
that a number of new products, including some chunkier pint-size versions of
titles previously published in large formats, launched during the year will,
despite their modest beginnings, continue to sell steadily and profitably for
years to come.
Walter Foster has been trying, for some years, to break out of its box. As the
oldest-established publisher of how-to instruction books for aspiring artists,
it has adapted well to the change in retailing from independent arts and crafts
shops to the big box stores, such as Michaels, A C Moore, and Hobby Lobby. It
has attempted to leverage these relationships to enter into categories other
than fine art. On the whole, the experiments have not been successful; nor have
they been disastrous, and a great deal has been learned. With flat revenues and
profits, Walter Foster sailed through a stormy year, with the distribution into
its major arts and crafts markets in a state of disarray which, by year's end,
had been resolved. Following the purchase of the leading US arts and crafts
retailer, Michaels, by private equity interests, sales into the store improved.
Management believes that, with private equity's greater focus on returns, Walter
Foster will benefit from the chain's concentration on core competencies in its
approximately 1,000 stores. During the course of the year, Walter Foster started
to migrate its sales force and fulfillment operation to our Quayside Publishing
Group. To judge by the initial results, which have been positive for Walter
Foster's sales into the book trade, Quarto can definitely build upon the
infrastructure that we have put in place.
Quayside, which includes the Rockport imprint, Fair Winds, and Quiver, all in
the Boston area, and CPi, in Minneapolis, is the core of Quarto's sales,
marketing, and fulfillment infrastructure for North America. With minor
exceptions, all of the imprints produce for identified special interest
audiences, and this is what we wish to extend with further acquisitions.
Overall, under the able leadership of Ken Fund, operating profit improved by
approximately 7.5% but CPi, which publishes into the home improvement market,
felt the draught from the downturn in the housing market, and the stumbles of
Home Depot, the sector's major retailer. Sales into Lowe's, the number two
operator in the sector, increased substantially, but this was in marked contrast
to what happened at Home Depot where, although register sales increased, the
management of the supply chain was affected by arbitrary inventory mandates
handed down from on high. The new CEO at Home Depot has vowed to overhaul the
chain and, although the revenues from selling books are immaterial to Home
Depot, their management does know, from examining its point-of-sale data, that
book buyers tend to spend significantly more in the store on other home
improvement merchandise which is, of course, only what one would expect.
What is of particular note is that Quayside's sales into Amazon were up
substantially, to the extent that it is becoming our second-largest book trade
retailer, after Barnes & Noble. This is an encouraging sign that Amazon's
customers are using it to replace traditional mail order specialist catalogs and
book clubs. If the large bricks-and-mortar retailers ever scale back their
ranges of special interest titles because the inventory doesn't turn fast
enough, Amazon will capture an even bigger slice of the pie.
In Australia and New Zealand, where our display marketing subsidiaries, Lifetime
and Premier, respectively, are the market leaders, we had another satisfactory
year. Lifetime continues to improve its organization, and refine its business
model, which is based upon franchised agents operating on an exclusive basis in
designated territories. More resources were ploughed into the franchising side,
in order to improve the return from the territories, and to enhance the value of
franchises for our franchisees.
In Australia, interest rate rises and a slowing housing market combined with
increased fuel prices, and this, in a country of long distances and accustomed
to relatively inexpensive fuel, affected consumer sentiment. Similar factors
were at work in New Zealand, but these were compounded by Premier's inability to
continue to grow in the cramped warehouse that it occupied. Although the move to
larger premises was uneventful, inevitably it had some impact on performance,
which was slightly down on expectations. Premier does not operate on the
franchise model; instead, although the display marketing experience appears the
same to the consumer, the distributors are self-employed agents working for us
on commission, as distinct from being franchise owners. We need to do more to
improve the performance of some of our distributors, particularly on the North
Island, where there is more competition than previously. Despite this, Premier
remains an enviably successful business, and has, in Grant Letica, a very
effective general manager, who will surely come to terms with the challenges.
Art Publishing continued its gentle decline, still generating operating profit
and cash, but we have largely preferred to stand on the sidelines as we observe
the profound changes in public attitudes to purchasing reproduction art. These
have affected the industry enormously. Most of our competitors are trying new
ventures, in efforts to re-ignite consumer interest. For our part, until we feel
that we understand how consumer sentiment is likely to settle down, and for so
long as we can still generate profit and cash from the business, we'll elect to
remain observers rather than initiators.
In the UK, our publishing and marketing support services business, now renamed
the Image Factory, is turning the corner. We've installed a second
stencil-making machine for our silk screen processes, and have brought in a very
large format digital printing machine. The impact of this investment has been to
improve operational efficiency and better workflow, and allows us to tackle new
markets. Point-of-sale marketing remains a growth area, and we intend to take a
greater share of the market.
CONSOLIDATED INCOME STATEMENT
Year ended December 31, 2006
2006 2005
£000 Restated
£000
Continuing operations
Revenue 93,613 95,038
Cost of sales (58,137) (60,303)
Gross profit 35,476 34,735
Other operating income 281 227
Distribution costs (4,375) (4,148)
Administrative expenses before
amortization of non-current
intangibles and non-recurring
items (21,825) (21,898)
Amortization of non-current
intangibles (1,387) (1,381)
Non-recurring items
Bad debt (1,238) -
Aborted acquisition costs - (102)
Restructuring costs - (644)
Total administrative expenses (24,450) (24,025)
Profit from operations before
amortization of non-current
intangibles and non-recurring
items 9,557 8,916
Operating profit 6,932 6,789
Finance income 298 128
Finance costs (2,593) (2,351)
Profit before tax 4,637 4,566
Tax (1,202) (1,293)
Profit for the year 3,435 3,273
Attributable to:
Equity holders of the parent 2,800 2,615
Minority interest 635 658
3,435 3,273
Earnings per share
From continuing operations
Basic 14.3p 13.8p
Diluted 13.9p 13.5p
CONSOLIDATED BALANCE SHEET
Year ended December 31, 2006
2006 2005
£000 Restated
£000
Non-current assets
Goodwill 9,710 10,317
Other intangible assets 2,987 4,842
Property, plant and equipment 7,501 8,533
Deferred tax assets 198 25
Total non-current assets 20,396 23,717
Current assets
Intangible assets: 20,919 21,008
Pre-publication costs
Inventories 13,948 14,079
Tax receivable 178 152
Trade and other receivables 27,022 28,399
Cash and cash equivalents 13,929 14,431
Total current assets 75,996 78,069
Total assets 96,392 101,786
Current liabilities
Short term borrowings (17,800) (3,932)
Trade and other payables (25,981) (27,032)
Tax payable (1,437) (1,258)
Total current liabilities (45,218) (32,222)
Non-current liabilities
Medium and long term borrowings (27,121) (45,599)
Deferred tax liabilities (4,404) (4,104)
Other payables (21) (114)
Total non-current liabilities (31,546) (49,817)
Total liabilities (76,764) (82,039)
Net assets 19,628 19,747
Equity
Share capital 1,162 1,162
Paid in surplus 21,740 21,716
Retained deficit and other (6,951) (6,816)
reserves
Equity attributable to equity 15,951 16,062
holders of the parent
Minority interest 3,677 3,685
Total equity 19,628 19,747
CONSOLIDATED CASH FLOW STATEMENT
Year ended December 31, 2006
2006 2005
£000 Restated
£000
Profit for the year 3,435 3,273
Adjustments for:
Net finance costs 2,295 2,223
Depreciation of property, plant and equipment 959 1,067
Tax expense 1,202 1,293
Amortization of non-current intangible assets 1,387 1,381
Amortization of pre-publication costs 7,461 7,562
Movement in fair value of derivatives (254) -
Equity settled share - based payment expense 7 9
(Gain)/Loss on disposal of property, plant and equipment (87) 51
Operating cash flows before movements in working
capital 16,405 16,859
(Increase)/decrease in inventories (1,307) 11
(Increase) in receivables (672) (3,057)
Decrease in payables (267) (232)
Cash generated by operations 14,159 13,581
Income taxes paid (611) (1,428)
Net cash from operating activities 13,548 12,153
Investing activities
Interest received 298 119
Proceeds on disposal of property, plant 933 237
and equipment
Investment in pre-publication costs (8,444) (7,574)
Purchases of property, plant and equipment (864) (678)
Acquisition of subsidiaries (89) (2,847)
Net cash used in investing activities (8,166) (10,743)
Financing activities
Dividends paid (1,291) (1,197)
Interest payments (2,797) (2,390)
Proceeds on issue of share capital 56 18
New bank loans raised 583 2,288
Dividends paid to minority interest (244) (121)
Net cash used in financing activities (3,693) (1,402)
Net increase in cash and cash equivalents 1,689 8
Cash and cash equivalents at beginning of year 11,899 10,611
Foreign currency exchange differences on cash and
cash equivalents (1,478) 1,280
Cash and cash equivalents at end of year 12,110 11,899
NOTES
1. Segmented analysis
Business segments
Co-edition Co-edition
Publishing Publishing Publishing Publishing Total Total
2006 2005 2006 2005 2006 2005
£000 £000 £000 £000 £000 £000
Revenue
Total sales 40,307 38,314 55,210 57,989 95,517 96,303
Inter-segment revenue (1,900) (1,259) (4) (6) (1,904) (1,265)
External sales 38,407 37,055 55,206 57,983 93,613 95,038
Segment result before
amortization of
non-current intangibles
and non-recurring costs 5,277 4,549 5,245 5,318 10,522 9,867
Amortization of
non-current intangibles (12) (12) (1,375) (1,369) (1,387) (1,381)
Bad debts (1,085) - (153) - (1,238) -
Restructuring costs - - - (644) - (644)
Aborted acquisition costs - (102) - - - (102)
Segment result 4,180 4,435 3,717 3,305 7,897 7,740
Unallocated corporate
expenses (965) (951)
Profit from operations 6,932 6,789
Investment income 298 128
Finance costs (2,593) (2,351)
Profit before tax 4,637 4,566
Tax (1,202) (1,293)
Profit after tax 3,435 3,273
Geographical Segments
Revenue Revenue
2006 2005
£000 £000
United Kingdom 16,668 15,848
United States of America 43,070 46,305
Australia and the Far East 18,384 18,344
Europe 11,860 10,415
Rest of the World 3,631 4,126
93,613 95,038
2. Earnings per share
2006 2005
£000 £000
Earnings for the purposes of basic earnings per
share, being net profit attributable to equity
holders of the parent 2,800 2,615
Effect of dilutive potential ordinary shares:
Interest on loan notes (net of tax) 45 57
Interest on convertible redeemable preference shares - 204
Earnings for the purposes of diluted earnings per share 2,845 2,876
Number Number
Number of shares
Weighted average number of ordinary shares for the
purposes of basic earnings per share 19,563,900 18,893,419
Effect of dilutive potential ordinary shares:
Share options 104,651 139,183
Dilutive loan note 855,015 1,074,288
Dilutive preference shares - 1,218,131
Weighted average number of ordinary shares for the
purposes of diluted earnings per share 20,523,566 21,325,021
2006 2005
pence pence
Basic 14.3p 13.8p
Diluted 13.9p 13.5p
Adjusted Earnings
Earnings for the purposes of basic earnings per
share, being net 2,800 2,615
profit attributable to equity holders of the
parent
Amortization of non-current intangibles (net of
tax and minority interest) 962 925
Bad debt (net of tax and minority interest) 818 -
Restructuring costs - 644
Aborted acquisition costs - 102
Earnings for the purposes of adjusted earnings per share 4,580 4,286
Effect of dilutive potential ordinary shares:
Interest on loan notes (net of tax) 45 57
Interest on convertible redeemable preference shares - 204
Earnings for the purposes of diluted earnings per share 4,625 4,547
2006 2005
pence pence
Basic 23.4p 22.7p
Diluted 22.5p 21.3p
3. Dividends
2006 2005
£000 £000
Amounts recognised as distributions to equity
holders in the period:
Interim dividend for the year ended December 31,
2006 of 3.0p (2005: 2.9p) per share. 587 567
Final dividend for the year ended December 31,
2005 of 3.6p (2004: 3.5p) per share. 704 630
1,291 1,197
Proposed final dividend for the year ended
December 31, 2006 of 3.75p (2005: 3.6p) per share. 736 704
736 704
4. Consolidated statement of recognised income and expense
2006 2005
£000 Restated
£000
Exchange differences on translation of foreign
operations (1,222) 754
Net loss on hedge of net investment in foreign
subsidiaries - (120)
Change in the fair value of cash flow hedges - 329
Net (expense)/income recognised directly in equity (1,222) 963
Profit for the year 3,435 3,273
Total recognised income and expense for the year 2,213 4,236
Prior period adjustment 7,505
Total recognised income and expense since last
annual report 9,718
Attributable to:
Equity holders of the parent 1,578 3,578
Minority interest 635 658
2,213 4,236
5. Prior period adjustment
The period adjustment relates to non-compliance with IAS 38. The Group's
pre-publication costs meet all the criteria set out in IAS 38 and therefore
these costs should have been capitalised as development expenditure. The
financial statements have been restated to correct this. The effect of the
restatement on these financial statements is summarised below:
2006 2005
£000 £000
Decrease in cost of goods sold 305 141
Increase in tax (115) (30)
Increase in profit for the year 190 111
Increase in intangible assets 20,919 21,008
Decrease in inventories (9,408) (9,442)
Increase in trade and other payables (246) (239)
Increase in deferred tax liabilities (3,417) (3,436)
Increase in net assets 7,848 7,891
Increase in total equity 7,848 7,891
Decrease in minority interest share of profit for
the year 10 7
Increase in minority interest at the year end 29 41
Increase in basic earnings per share 1.0p 0.6p
Increase in diluted earnings per share 1.0p 0.6p
The effect on opening reserves at January 1, 2005 of this prior period
adjustment is £7,505,000.
The revised accounting policy is stated below, for information:
Pre-publication costs represent direct costs incurred in the development of book
titles prior to their publication. These costs are carried forward in current
intangible assets where the book title will generate future economic benefits
and costs can be measured reliably. These costs are amortized upon publication
of the book title over estimated economic lives of 3 years or less, being an
estimate of the expected operating cycle of a book title. The investment in
pre-publication has been disclosed as part of the investing activities in the
cash flow statement.
6. Reconciliation of figures included in the Chairman's Letter
2006 2005
£000 £000
Profit before tax, before amortization of 7,262 6,693
non-current intangibles
and non-recurring items
Amortization of non-current intangibles (1,387) (1,381)
Non-recurring items (1,238) (746)
Profit before tax 4,637 4,566
EBITDA
Profit before tax, before amortization of 7,262 6,693
non-current intangibles
and non-recurring items
Net interest 2,295 2,223
Depreciation 959 1,067
Amortization of pre-publication costs 7,461 7,562
EBITDA, before non-recurring items 17,977 17,545
Net debt
Medium and long term borrowings 27,121 45,599
Short term borrowings 17,800 3,932
Cash and cash equivalents (13,929) (14,431)
30,992 35,100
7. The financial information set out above does not constitute the
company's statutory accounts for the years ended December 31, 2006 or 2005 but
is derived from the 2006 accounts. Statutory accounts for 2005, have been
delivered to the Registrar of Companies, and those for 2006, will be delivered
in due course. The auditors have reported on those accounts; their reports were
(i) unqualified, (ii) did not include references to any matters to which the
auditors drew attention by way of emphasis without qualifying their reports and
(iii) did not contain statements under section 237(2) or (3) of the Companies
Act 1985.
8. The accounting policies adopted for use in the preparation of the 2006
Preliminary Results and of the 2006 Annual Financial Statements were consistent
with those used in the preparation of the 2005 Annual Financial Statements,
except for the treatment of pre-publication costs, as noted in note 5, above.
9. The Annual Report will be sent out to shareholders in due course.
Additional copies can be obtained from the Finance Director, The Quarto Group,
Inc., 226 City Road, London EC1V 2TT. Tel: 020 7700 9000 (email:
mickm@quarto.com).
This information is provided by RNS
The company news service from the London Stock Exchange
Tuesday, 14th May 2024
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