Interim Results

Quarto Group Inc 18 August 2000 THE QUARTO GROUP, INC. INTERIM RESULTS - HALF YEAR TO 30 JUNE 2000 * Quarto, the London - based and listed book publisher in co-edition and under its own imprints, announces, for what is normally much the weaker half of the year, sales of £29.98 m (1999: £31.22 m), operating profit of £1.80 m (1999: £1.81 m), pre-tax profit of £816,000 (1999: an underlying £928,000) and an underlying EPS of 1.9p (1999: 2.4p). * An unchanged interim dividend per share of 2.2p net is declared. * The overall operating margin improved to 6.1% from 5.8%. * For the trailing 12 months ended 30 June 2000, the Group had sales of £75.22 m (1999: £74.6 m), operating profit of £5.84 m (1999: £4.38 m), pre-tax profit of £3.99 m (1999: an underlying £2.60 m), an underlying EPS of 15.3 p (1999: 5.8p) and an operating margin of 7.8 % (1999: 5.9 %). * The International Co-edition Publishing Division reported reduced sales of £16.07 m (1999: £17.76 m), reflecting problems in the co-edition publishing businesses, principally in the eurozone. The Far East print broking and production supervision businesses, Regent and ProVision, continued to perform extremely well. * The Publishing Division increased revenues to £13.91 m (1999: £13.46 m), with the US publishing businesses performing well, art publishing showing signs of improvement and UK point of sale printing, notably AP Screen, increasing sales and profits. * Most of Quarto's markets remain buoyant and expanding, but with intense pressure on retail prices. Quarto continues to move the focus of its co-edition publishing business towards areas within the book industry where higher margins will remain secure for the foreseeable future. * Laurence F Orbach, Chairman and Chief Executive, stated 'Although I am disappointed that we are unlikely to improve on last year's underlying pre-tax profit of £4.1 m, I am convinced that we have made some significant improvements during the period and that they will serve us well in the future'. For further information on Quarto, visit www.quarto.com. Enquiries: The Quarto Group, Inc. Terry Hancock (Chief Operating Officer) 020-7700 9015 Mick Mousley (Finance Director) 020-7700 9007 Bankside Consultants Limited 020-7220 7477 Charles Ponsonby CHAIRMAN'S STATEMENT Financial Review In what is, normally, much the weaker half of the year, sales in the six months ended 30 June 2000 were £29.98 million (1999: £31.22 million) and produced operating profits slightly higher at £1.82 million (1999: £1.81 million). Higher interest rates have left profit, before tax and amortisation of goodwill, lower at £836,000 (1999: £928,000 before exceptional items). Goodwill amortised during the period was £20,000 (1999: £nil). Interest costs rose to £981,000 (1999: £877,000), and the tax charge was £83,000 (1999: £83,000). Underlying earnings per share were 1.9p (1999: 2.4p). Lower sales, and a 7% strengthening of the dollar against sterling, have retarded our debt reduction programme. Net debt was £28.4 million (1999: £28.3 million). On a like-for-like, constant currency basis, net debt has declined to £27.3 million. The end of June is, cyclically, a high point for debt. The major part of our debt is denominated in dollars, reflecting the fact that the dollar is our major trading currency. For the trailing 12 months ended 30 June 2000, the Group had sales of £75.22 million (1999: £74.60 million), operating profits of £5.84 million (1999: £4.38 million), and pre-tax profits of £4.02 million (1999: £2.6 million), before amortisation of goodwill of £32,000 (1999: £nil). Operating margins improved to 7.8% (1999: 5.9%). Underlying earnings per share were 15.3p (1999: 5.8p). The Board has declared an unchanged interim dividend of 2.2p per share net, payable on 23 October 2000 to shareholders on the register on 29 September 2000. I am pleased to report that our overall operating margin has improved during the first half of the year, to 6.1% from 5.8%. There is little doubt that our continuing emphasis on profit margin, rather than revenue growth, is hurting our sales effort. But, I make no apologies for emphasising our conviction that this approach will best maintain the value of our backlist, which generates as much as 65% of our publishing revenues. (The backlist is large and varied, comprises more than five thousand book titles, and is carried at nil value in the balance sheet.) As previously indicated, we are including, with this announcement, figures for the trailing 12 months to 30 June 2000. These figures are produced for management purposes, but we have taken the view that, in a seasonal business such as ours, the release of the figures gives investors a clearer indication of the Company's ongoing performance. My comments on operations should be read in conjunction with these figures. Operational Review Most of our units improved their performances during the period. The major exception was at our UK-based international co-edition book publishing operations. International Co-edition Publishing Division This Division, with annual sales in 1999 of £47.11 million, is a licensor of books that are produced and sold, on a territorial basis, to publishers and distributors world-wide. Sales to publishers, under the licensee's imprint, declined in the first half to £16.07 million, from £17.76 million in 1999. The co-edition publishing businesses have been affected by several problems: * Most important of all, the continuing low level of the euro against the dollar and sterling during most of the period. This has been compounded by intense price competition in the publishing industry, in the eurozone, with well- established publishers now responding to the pricing challenges of relative newcomers. * After a fruitful period of new product generation, a couple of our lists faced product 'burn-out'. This is not unusual and changes have been made to restore vitality to these lists. * Poor sales direction and management across the UK-based businesses. This issue has been tackled and rectified. I want to take this opportunity to give you a brief update on some of our developments. Shareholders will recall that we started a new international co-edition publishing subsidiary, Global Book Publishing, in Australia in August of last year. I am delighted to be able to report that it is performing according to plan, and operated profitably during the period. Global specialises in creating large, authoritative books, such as its two major, forthcoming, 912-page titles, The Encyclopedia of Wine, and Anatomy. Titles such as these are at the core of our initiative to exploit our intellectual property on the Internet, by licensing it to category-specific portals. During the period, we received revenue of £70,000 from our Internet activities, at almost nil cost. Also in the International Co-edition Publishing Division, we have merged the administration and management of Rockport and RotoVision. Both businesses produce books (at different levels) for students and professionals in the graphics, commercial arts, and interior design fields. This change will promote better international sales, and save on overheads. Within the next month we shall move Design Eye from Bishops Stortford to London. Design Eye is a successful publisher of innovative and highly interactive 'books plus' (books with components), for the hobbyist and children's markets. It was badly stalled by the sudden and unexpected death, at a very early age, of one of its founders. Although there will be some expense associated with this, the move will save money in the longer term, will eliminate some overlapping and redundant positions, and will give management much better executive control over the business. Our publishing services businesses, Regent and ProVision, based in Hong Kong and Singapore respectively, continued to perform extremely well. Both businesses serve group and third- party businesses with print broking and production supervision services. The bulk of their business comes from third parties, and was won in the face of escalating prices in the Far East and intense competition. Publishing Division In the Publishing Division, our US book publishing businesses performed well. 1999 revenues for the Division were £29.35 million. In the first half of this year, revenues rose to £13.91 million, from £13.46 million during the same period last year. The Division publishes books under its own imprints in the US and the UK, and art prints in the US and Australia. It also includes two publishing services businesses in the UK, serving the domestic market only. Approximately two-thirds of the Division's revenues arise in the United States. At Walter Foster, there is an exciting new initiative to branch out from books into social stationery-based items such as journals and day books designed, at this stage, to appeal to teenage and young women buyers. Although a significant part of the sales of these will be in traditional book outlets, we have established the sales and fulfilment infrastructure to penetrate the gift, stationery, and specialty markets. Walter Foster's core business, as the leading publisher of art instruction books distributed primarily in hobbyist stores, continued to grow. There are clear signs that our art publishing business is improving. For the period, and on a trailing 12-month basis, operating losses halved. In the US, June was a profitable month. We are hopeful that, with the launch of the new Vatican Library range later in the year, we can build on the momentum that now exists. The improvement is a result of reducing overheads in line with sales, upgrading our publishing programme, and better day-to-day management. The marketplace remains buoyant and crowded, and the recovery will not be complete until we have restored our business to its previous high margin performance. In Australia, similar remedial action has been taken. UK publishing services, serving primarily the point-of-sale market, increased both sales and profits. AP Screen, in particular, showed very strong growth, and management is working on a business plan for the significant growth of this cash generating business. Prospects A few weeks ago, we announced that we do not expect, this year, to exceed 1999's underlying results. This is substantially because of the disappointing sales at the UK- based International Co-edition Publishing Division. As I have explained above, some of the reasons for this have been addressed. It is now too late in the year to hope for a significant rebound. I want to emphasise that, with the very notable exception of the UK book market (which is a very small market for Quarto), most of our markets remain buoyant and expanding. The chief, and overwhelming, characteristic, of all of them is, however, the intense pressure on retail prices. This has caused us to review regularly our gross margin requirement. As I have stated above, we are convinced that it would be deleterious to the Company's longer-term interests to relax our guidelines. However, this is not intended to suggest that we are either resigned to, or complacent about, the current situation. At this stage, we have identified some publishing opportunities that we consider will remain higher margin areas. Although Quarto has a well-deserved reputation, within the industry, for its concentration on costs, our skills are not in producing low-priced, high-volume books cheaply. Rather, they lie in our ability to produce high quality books on a very cost-effective basis. It seems, therefore, that the right policy for our international co-edition book publishing businesses to pursue is to continue to focus more of our publishing in areas within the book industry where higher margins will remain secure for the foreseeable future. Although I am disappointed that we are unlikely to improve on last year's underlying pre-tax profits of £4.1 million, I am convinced that we have made some significant improvements during the period, and that they will serve us well in the future. Laurence F Orbach Chairman and Chief Executive 18 August 2000 UNAUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNT for the six months to 30 June 2000 Six Six Year months months ended ended ended 30 June 30 June 31 December 2000 1999 1999 £000 £000 £000 Turnover 29,982 31,223 76,456 ===== ===== ===== Operating profit before amortisation of goodwill 1,817 1,805 5,825 Amortisation of goodwill (20) - (12) -------- -------- -------- Operating profit after amortisation of goodwill 1,797 1,805 5,813 Exceptional item - (5,230) (5,230) -------- -------- -------- 1,797 (3,425) 583 Net interest payable (981) (877) (1,716) ------- ------- ------- Profit on ordinary activities 816 (4,302) (1,133) before taxation Taxation (83) (83) (390) -------- -------- -------- Profit on ordinary activities 733 (4,385) (1,523) after taxation Minority interests (191) (195) (440) -------- -------- -------- Profit for the period 542 (4,580) (1,963) Dividends Ordinary (394) (394) (807) Preference (228) (228) (455) -------- -------- -------- Deficit (80) (5,202) (3,225) ===== ===== ===== Earnings per share 1.8p (26.8)p (13.5)p Underlying earnings per share 1.9p 2.4p 15.8p UNAUDITED CONSOLIDATED BALANCE SHEET at 30 June 2000 30 June 30 June 31 December 2000 1999 1999 £'000 £'000 £'000 Fixed assets Intangible assets 772 - 792 Tangible assets 6,339 6,734 6,341 -------- -------- -------- 7,111 6,734 7,133 -------- -------- -------- Current assets Stocks and work in progress 19,406 19,051 16,849 Debtors 23,769 25,529 26,243 Investments 1 1 1 Cash at bank and in hand 4,634 3,858 9,567 -------- -------- -------- 47,810 48,439 52,660 Creditors: Amounts falling due within one year (20,690) (22,568) (26,362) -------- -------- -------- Net current assets 27,120 25,871 26,298 -------- -------- -------- Total assets less current 34,231 32,605 33,431 liabilities Creditors: Amounts falling due after more than one year (31,086) (30,771) (29,833) Provisions for liabilities and charges Deferred taxation (1,350) (1,230) (1,151) -------- -------- -------- Net assets 1,795 604 2,447 ==== ===== ===== Capital and reserves Called up share capital 1,341 1,341 1,341 Reserves (2,689) (3,694) (1,649) -------- -------- -------- Shareholders' funds (1,348) (2,353) (308) Minority interests 3,143 2,957 2,755 -------- -------- -------- 1,795 604 2,447 ===== ===== ===== UNAUDITED CONSOLIDATED CASH FLOW STATEMENT for the six months to 30 June 2000 Six Six Year months months ended ended ended 30 June 30 June 31 December 2000 1999 1999 £000 £000 £000 Operating profit 1,797 1,805 5,813 Non-cash items 547 658 1,217 Working capital movement, net (4,114) (2,563) 1,229 -------- -------- ------- Net cash (outflow)/inflow from operating activities (1,770) (100) 8,259 Interest, net (982) (877) (1,736) Dividends (715) (761) (1,383) Taxation (381) (462) (594) Capital expenditure, net (421) (857) (1,191) Acquisitions and disposals (1,086) - (67) -------- ------- -------- Net cash (outflow)/inflow (5,355) (3,057) 3,288 Translation difference (2,123) (1,410) (364) Net debt at beginning of (20,894) (23,818) (23,818) period -------- -------- -------- Net debt at end of period (28,372) (28,285) (20,894) ===== ===== ===== The cash outflow with regard to acquisitions and disposals relates to prior period acquisitions. NOTES TO THE FINANCIAL STATEMENTS 1. The financial information contained in this interim statement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The interim accounts for the six months ended 30 June 2000 and the comparative figures for the six months ended 30 June 1999 are unaudited. The comparative figures for the year ended 31 December 1999 are extracted from the accounts for the period which have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. 2. The exceptional item in the six months ended 30 June 1999 relates to the closure costs on Broughton Hall. It includes £4,937,000 relating to the goodwill previously written off to reserves on acquisition. 3. Taxation is based on the estimated effective tax rate for the year. 4. The interim dividend is 2.2 per share net (1999: 2.2p) and will be paid on 23 October 2000 to shareholders on the register at the close of business on 29 September 2000. 5. The calculation of earnings per share is based on 17,925,306 shares in each period and earnings, after minority interests and preference dividends, of £314,000 (30 June 1999: loss of £4,808,000: 31 December 1999: loss of £2,418,000). The calculation of underlying earnings per share is based on earnings of £334,000 (30 June 1999: £422,000: 31 December 1999: £2,824,000), calculated as follows: 30 June 30 June 31 December 2000 1999 1999 £'000 £'000 £'000 Earnings after minority interests and preference 314 (4,808) (2,418) dividends Exceptional items - 5,230 5,230 Amortisation of goodwill 20 - 12 -------- -------- -------- 344 422 2,824 ===== ===== ===== FOR INFORMATION ONLY MANAGEMENT'S PRO FORMA PROFIT AND LOSS ACCOUNT for the 12 months to 30 June 2000 for continuing operations Twelve Twelve months months ended ended 30 June 2000 30 June 1999 £'000 £'000 Turnover 75,215 74,599 ===== ===== Operating profit 5,837 4,379 Amortisation of goodwill (32) - -------- --------- 5,805 4,379 Net interest payable (1,820) (1,775) --------- ---------- Profit on ordinary activities 3,985 2,604 before taxation Taxation (390) (593) --------- --------- Profit on ordinary activities 3,595 2,011 after taxation Minority interests (436) (510) --------- --------- Profit for the period 3,159 1,501 Dividends Ordinary (807) (807) Preference (455) (455) -------- --------- Retained profit 1,897 239 ===== ===== Underlying earnings per share 15.3p 5.8p

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