Interim Results

Quarto Group Inc 11 August 2006 THE QUARTO GROUP, INC - INTERIM ANNOUNCEMENT strong first half results Quarto, the fully listed independent book producer and publisher based in London, announces a strong and encouraging first half of the year, highlighting the fundamental robustness of Quarto's book businesses. The first half accounts, typically, for only about 40% of annual revenue. FINANCIAL HIGHLIGHTS 6 months to June 30 2006 2005 Increase Revenue (£'000) 38,296 38,198 - Operating profit: adjusted (£'000) 2,736 2,167 +26% reported (£'000) 2,005 881 +128% Pre-tax profit: adjusted (£'000) 1,528 1,140 +34% reported (£'000) 797 (146) n/a Diluted earnings per share: adjusted (p) 4.0 3.0 +33% reported (p) 1.6 (2.2) n/a Dividend per share (p) 3.0 2.9 +3% Adjusted excludes amortization of intangibles and, in 2005, restructuring costs and aborted acquisition costs •In the 12 months ended June 30, 2006, revenue rose by 9% to £95.1m and, on an adjusted basis, operating profit rose by 21% to £9.3m and pre-tax profit by 22% to £6.9m - slightly ahead of internal expectations. COMMERCIAL HIGHLIGHTS •The results from the International Co-Edition Book Publishing segment were very strong. Revenue increased by 4% to £13.2m, but operating profit soared by 140%, as almost all units performed more strongly than in 2005. •Revenue for the Publishing segment, in contrast, slipped by 2% to £25.1m, reflecting sluggish sales in the US, and a disposal of some magazines in the UK. Operating income declined by a more substantial 24%. The results were mixed, but the indicators were generally positive. •During the period, Quarto was very involved in seeking acquisition opportunities and the Board is hopeful that Quarto shall not end the year without closing another substantial transaction. •Quarto has increased its target operating margin for both the Group and the Publishing segment to 12.5% from 10%, Co-Edition remaining on 15%. Laurence F Orbach, Chairman & Chief Executive, remarked on prospects 'The good first-half results cannot hide the fact that market conditions have become more challenging in many of our markets. At this point, it's hard to tell if the slowdown in the housing market in the United States will affect the sales of our home improvement and lifestyle books. The evidence isn't suggesting this currently but, in these categories, as in others, and whether we are selling our co-edition books to licensees, or our published titles to bookstores and other retailers, ultimately, the consumer is our main customer and, although our ranges of titles focus on areas of practical need, passion, and enthusiasm, we cannot expect to be immune from the flatter retail markets in several of our major geographies. The United States market is still our single largest market, responsible for about half of our revenue; a slowing economy there, and the weakening dollar, give pause for some concern. By the same token, we should not overstate the difficulties. Books remain, in the scheme of things, fairly inexpensive purchases, and have traditionally done well in less buoyant economic times. For the balance of this year we are rolling out substantial programs of new titles which will, in turn, provide the recurring reprint revenues that are the backbone of the group's business. As mentioned above, because we expense the development costs of our new co-edition titles at the time of the first printing, and will be producing a larger than usual number of new titles in the second half of the year, we cannot expect to continue the first half's excellent overall results, but remain confident that, barring major external developments, Quarto's 2006 results should meet our expectations..' Photo Opportunity: At 10:30 on Friday August 11, 2006, Laurence Orbach (Chairman & CEO) will be available for a photo opportunity at Quarto's offices, which are situated at 226 City Road, EC1V 2TT (approximately 800 yards from Old Street underground station). Those wishing to attend are asked to notify Ian Payne of Bankside Consultants on 020-7367 8853 / ian.payne@bankside.com. 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. In 2005, Quarto increased adjusted pre-tax profit by 12% to £6.6m and reported adjusted diluted earnings per share of 20.8p (21.5p at constant tax rates, which would have represented a seventh successive annual increase). 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 had a strong and encouraging first half of the year. For the six months to June 30, 2006 (adjusted to exclude amortization of intangibles and exceptional costs), unaudited operating profit rose by 26% to £2.7 million (2005: £2.2 million), profit before tax by 34% to £1.5 million (2005: £1.1 million), and diluted earnings per share by 33% to 4.0p (2005: 3.0p), although revenue increased only marginally to £38.3 million (2005: £38.2 million). Net debt has fallen by £3.1 million to £38.5 million (2005: £41.6 million) and, in recognition of the good performance, which highlights the fundamental robustness of our book businesses, and the continuing growth trend, the board has declared an interim dividend per share of 3.0p (2005: 2.9p), up 3%. The dividend will be paid on 20 October 2006 to shareholders on the register at 22 September 2006, with an ex-dividend date of 20 September 2006. The period accounts, typically, for only about 40% of annual revenue. In order to give shareholders a clearer picture of the group's progress over a longer period, and to eliminate seasonal variations, we also provide unaudited trailing 12 months' trading figures. In summary, for the 12 months ended June 30, 2006, revenue rose by 9% to £95.1 million (2005: £86.9 million), adjusted operating profit by 21% to £9.3 million (2005: £7.7 million), and adjusted profit before tax by 22% to £6.9 million (2005: £5.7 million). This is slightly ahead of our internal expectations. Commentary on Trading The results from our International Co-Edition Book Publishing segment were very strong. Revenue increased by 4% to £13.2 million (2005: £12.6 million), but operating profit soared by 140%, as almost all units performed more strongly than in 2005. Some of the big improvement in performance lies in the timing of new publications, as fewer new titles were released during the period. Quarto's policy is to expense all the development costs of co-edition titles on first printing, and publishing fewer new titles during a period flatters the bottom line. Our very substantial backlist not only made up for the shortfall in new releases, but also led to increased revenue overall. Q+ eliminated its losses ahead of schedule, and RotoVision is trading close to break even. Strong reprint demand for Quintet's 1001 series turned last year's loss into a healthy profit. Other units performed at, or above, expectations and, overall, the segment posted a record gross margin, on the back of very healthy sales of reprints. Much credit is due to all involved. Revenue for the Publishing segment, in contrast, slipped by 2% to £25.1 million (2005: £25.6 million), after including an extra £1.0 million of Premier's sales, which we acquired late in last year's corresponding period. The revenue of the Publishing segment is almost exclusively derived from the US, Australasia, and the UK. This decline reflects sluggish sales in the US, and the disposal of some magazines in the UK. Operating income declined by a more substantial 24%. The Publishing units' results were more mixed, but the indicators were generally positive. UK book publishing sales increased by 19%, from last year's admittedly low base, and Australasian sales, adjusted for the inclusion of Premier, held their own but, as I pointed out in my Annual Meeting statement and first quarter trading update of May 2, 2006, US sales continued to be badly affected by distribution issues at some of the specialty retail outlets to which we sell, and by the generally tepid environment for retailers, which has been widely reported in the financial press. General trading and distribution issues have hurt our sales into the Home Depot, the largest single outlet for our home improvement titles. The chain is taking strong steps to improve its performance, and to beat off the surging competition from Lowe's, which has become, on a store-for-store basis, a larger customer for us. Home Depot has imposed demanding inventory reduction targets across the chain, and this has been working its way through all this year. The largest outlet for our arts and crafts titles is Michaels which, all year, has been in the process of changing its nominated distributor into the chain, at the same time as it put itself up for sale. The sale of Michaels has now been agreed, and the new distributor will shortly begin to service the stores, but the hiatus has been costly, the loss of sales has been extremely unwelcome during this period, and the changes in terms that have been imposed upon the new distributor, and have filtered down to vendors, have yet to prove that they will benefit both Michaels and the vendors. The purchase of Michaels by a private equity consortium may also increase pressure on its management. Fortunately, competing chains are becoming more important to us. Book retailing, in the US, has been lackluster during the period. For Book Sales, the decline in revenues of 25%, in local currency terms, has been particularly sharp. Through careful management, though, a reasonable operating profit was maintained. Our art publishing business saw further sales erosion, joining the rest of the industry in a downturn, but it continued to generate useful cash returns. We concluded that we could not turn several of our UK-based craft magazine titles from loss to profit, and disposed of them for a nominal sum. We have decided to start a co-edition book imprint to leverage the critical acclaim that our Fine Wine magazine has earned, and the title, which is more like a book than a traditional magazine, will be moving to quarterly publication from September. In future, the combined book/magazine unit will report its results within the Co-Edition segment. Overall, the magazine unit continues to struggle with a weak advertising market in the UK. Corporate Activity During the period, we were very involved in seeking acquisition opportunities. We continue to focus our efforts on identifying acquisition candidates which offer shareholders real added value,and were unsuccessful in one intensive auction, when bids rose above our assessment of what was prudent. We continue to pursue other candidates, and sense that valuations are returning to a range within which we feel comfortable. Having successfully absorbed CPi, Aurum, Lifetime, and Premier in the last two years, we have the operational capacity to take on more, and are hopeful that we shall not end the year without closing another substantial transaction. Prospects We set ourselves four principal tasks for the first half of 2006: (i) to maintain the strong overall performance of our publishing units; (ii) to correct underperforming units; (iii) to eliminate the sources of losses in our magazine publishing business; and (iv) to further our strategy for growth by making a significant publishing acquisition. Some of these tasks remain works in progress, but there has certainly been significant movement in re-arranging our portfolio and identifying core competencies, which will surely intensify as we grow and, particularly, when we are successful in making substantial acquisitions. For several years, Quarto has been targeting an overall operating profit of 10% on revenue (15% for the Co-Edition segment, 10% for the Publishing segment, less group overhead costs) and, on the trailing 12 months' basis, we've achieved 9.8%. We don't expect to improve the overall operating profit of our Co-Edition segment by much, as it is already probably more consistently profitable than any other firm in the industry, but we can do a lot to improve the performance of our Publishing units, and we will be raising our expectation for this segment to 12.5%, with an aim of an overall operating result, after group overheads, of 12.5% profit on revenues. As the new titles produced by our Co-Edition segment are generally committed to by licensees some 12 months or more in advance of publication, our production of new titles tends to be a lagging indicator. The vast majority of our revenue, in this segment, comes from reprints of our backlists of titles, i.e. of titles first published in prior years. In periods of economic uncertainty, when licensees may be nervous about investment in new titles, they may look to reprints as a surer way of maintaining revenue. As I have stated previously, the book publishing industry produces a prodigious output of new titles each year. In many markets, competition at the retail level has cut retailers' margins to the bone and, in order to place new books in prominent positions in bookstores, publishers often spend as much on marketing and promotion as they do on creating the books. This is often accompanied, especially in the general book area (which is not where the vast majority of our titles is targeted), with cutting title output in order to back fewer new titles, and to make them winners. One can see the internal logic of this approach, but it's a little like asking creative people only to produce hits! So far, and perhaps because of our disciplined focus on special interest areas such as arts and crafts, design, home improvement, reference, and self-improvement, we haven't experienced any noticeable trend to mimic this approach, but it is something that we're watching. The good first-half results cannot hide the fact that market conditions have become more challenging in many of our markets. At this point, it's hard to tell if the slowdown in the housing market in the United States will affect the sales of our home improvement and lifestyle books. The evidence isn't suggesting this currently but, in these categories, as in others, and whether we are selling our co-edition books to licensees, or our published titles to bookstores and other retailers, ultimately, the consumer is our main customer and, although our ranges of titles focus on areas of practical need, passion, and enthusiasm, we cannot expect to be immune from the flatter retail markets in several of our major geographies. The United States market is still our single largest market, responsible for about half of our revenue; a slowing economy there, and the weakening dollar, give pause for some concern. By the same token, we should not overstate the difficulties. Books remain, in the scheme of things, fairly inexpensive purchases, and have traditionally done well in less buoyant economic times. For the balance of this year we are rolling out substantial programs of new titles which will, in turn, provide the recurring reprint revenues that are the backbone of the group's business. As mentioned above, because we expense the development costs of our new co-edition titles at the time of the first printing, and will be producing a larger than usual number of new titles in the second half of the year, we cannot expect to continue the first half's excellent overall results, but remain confident that, barring major external developments, Quarto's 2006 results should meet our expectations. Sincerely, Laurence F Orbach Chairman and CEO London, August 11, 2006 THE QUARTO GROUP, INC UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT for the six months to June 30, 2006 Six months Six months Year ended ended ended December 31, June 30, June 30, 2005 2006 2005 £'000 £'000 £'000 Revenue 38,296 38,198 95,038 Operating profit 2,736 2,167 8,775 Less:- Amortization of intangibles (731) (586) (1,381) Restructuring costs - (600) (644) Aborted acquisition costs - (100) (102) Operating profit 2,005 881 6,648 Finance costs (1,367) (1,083) (2,351) Financial income 159 56 128 Profit (loss) before taxation 797 (146) 4,425 Taxation (231) 39 (1,263) Profit (loss) for period 566 (107) 3,162 Profit (loss) for the period attributable to: Minority interests 258 285 665 Equity holders of the parent company 308 (392) 2,497 566 (107) 3,162 Earnings (loss) per share 1.6p (2.2)p 13.2p Diluted earnings (loss) per share 1.6p (2.2)p 12.9p The following information is presented as additional information and does not form part of the income statement : Adjusted earnings per share 4.1p 3.0p 22.1p Adjusted diluted earnings per share 4.0p 3.0p 20.8p THE QUARTO GROUP, INC UNAUDITED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the six months ended June 30, 2006 Six months Six months Year ended ended June ended June December 30, 2006 30, 2005 31, 2005 £'000 £'000 £'000 Foreign exchange translation (310) 268 365 differences Cash flow hedge: change in fair value 9 133 329 Income and expenses recognised directly (301) 401 694 in equity Profit (loss) for the period 566 (107) 3,162 Total recognised income and expense for 265 294 3,856 the period Attributable to: Equity holders of parent 7 9 3,191 Minority interests 258 285 665 265 294 3,856 THE QUARTO GROUP, INC UNAUDITED CONSOLIDATED BALANCE SHEET at June 30, 2006 June 30, June 30, December 2006 2005 31, 2005 £'000 £'000 £'000 Non-current assets Goodwill 9,723 9,871 10,317 Other intangible assets 3,810 5,068 4,842 Property, plant and equipment 7,561 8,604 8,533 Deferred tax asset 24 4 25 21,118 23,547 23,717 Current assets Inventories 26,017 25,650 23,521 Taxation recoverable 147 154 152 Trade and other receivables 23,377 24,512 28,399 Cash and cash equivalents 9,550 8,332 14,431 59,091 58,648 66,503 Total assets 80,169 82,195 90,220 Current liabilities Short-term borrowings (3,840) (8,517) (3,932) Trade and other payables (19,162) (22,173) (26,793) Tax payable (1,281) (532) (1,258) (24,283) (31,222) (31,983) Non current liabilities Medium and long-term borrowings (44,180) (41,448) (45,599) Other payables (114) (218) (114) Deferred tax liabilities (660) (638) (668) (44,954) (42,304) (46,381) Total liabilities (69,237) (73,526) (78,364) Net assets 10,972 8,669 11,856 Equity Share capital 1,162 1,162 1,162 Paid in surplus 21,719 21,709 21,716 Retained earnings and other Reserves (15,356) (17,279) (14,666) Total equity attributable to equity 7,525 5,592 8,212 holders of the parent Minority interests 3,447 3,077 3,644 Total equity 10,972 8,669 11,856 THE QUARTO GROUP, INC UNAUDITED CONDENSED CASH FLOW STATEMENT for the six months to June 30, 2006 Six months Six months Year ended ended ended June 30, June 30, December 31, 2006 2005 2005 £'000 £'000 £'000 Profit (loss) for the period 566 (107) 3,162 Tax expense (credit) 231 (39) 1,263 Net finance costs 1,208 1,027 2,223 Depreciation 509 578 1,067 Amortization 731 586 1,381 (Profit) loss on sale of fixed (86) 73 51 assets Equity settled share based payment 4 4 9 Changes in working capital (6,413) (6,286) (3,149) Corporation tax (149) (656) (1,428) Net cash from operating activities (3,399) (4,820) 4,579 Sale (purchase) of tangible fixed 431 (114) (441) assets (net) Purchase of subsidiaries (80) (2,844) (2,847) Interest received 159 56 119 Net cash from investing activities 510 (2,902) (3,169) Dividends paid (704) (629) (1,197) Interest paid (1,655) (1,081) (2,390) Issue of shares 7 2,624 18 Dividends paid to minority (191) (117) (121) shareholders New loans 1,360 1,650 2,288 Net cash flows from financing (1,183) 2,447 (1,402) activities Net (decrease)/increase in cash and (4,072) (5,275) 8 cash equivalents Cash and cash equivalents at 11,899 10,611 10,611 beginning of period Foreign currency exchange (781) 626 1,280 differences on cash and cash equivalents Cash and cash equivalents at end of 7,046 5,962 11,899 period NOTES 1. The Interim Report for the six months ended June 30, 2006 has been prepared on the basis of the accounting policies set out in the Annual Report for the year ended December 31, 2005. 2. The financial information contained in this Interim Report does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The interim accounts for the six months ended June 30, 2006 and the comparative figures for the six months ended June 30, 2005 are unaudited. The comparative figures for the year ended December 31, 2005 are extracted from the accounts for the period, which have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. 3. Restructuring costs in 2005 related to the publishing services units. The costs included redundancies, dilapidations, losses on fixed asset disposals, and other losses incurred after the closure of the Reading site was announced. 4. Aborted acquisition costs, in 2005, mainly comprised third party legal and professional fees. 5. Finance costs comprise: Six months Six months Year ended ended ended December 31, June 30, 2006 June 30, 2005 2005 £'000 £'000 £'000 Bank and other interest (1,367) (981) (2,147) Finance charge on preference shares - (102) (204) (1,367) (1,083) (2,351) 6. Taxation for the six months ended June 30, 2006 is based on the estimated effective tax rate for the year. The rate that has been used is 29% (June 30, 2005: 27% and December 31, 2005: 29%). 7. The calculation of earnings per share is based on 19,560,837 shares (the weighted average number of issued shares, excluding those held as treasury stock) (June 30, 2005: 18,218,281 shares; December 31, 2005: 18,893,419) and earnings of £307,000 (June 30, 2005: £(392,000); December 31, 2005: £2,497,000). The calculation of adjusted earnings per share is based on earnings of £798,000 (June 30, 2005: £547,000; December 31, 2005: £4,168,000), calculated as follows: June 30, June 30, December 31, 2006 2005 2005 £'000 £'000 £'000 Earnings after minority interests 308 (392) 2,497 Amortization of intangibles * 490 428 925 Restructuring costs * - 438 644 Costs of aborted acquisition * - 73 102 798 547 4,168 Adjusted earnings per share 4.1p 3.0p 22.1p * net of tax credit and minority interest There is no dilution in earnings per share for the six months ended June 30, 2006 and June 30, 2005 or adjusted earnings per share for the six months ended June 30, 2005. Diluted earnings per share for the year ended December 31, 2005 is based on earnings of £2,758,000 and 21,325,021 shares. Diluted adjusted earnings per share for the six months ended June 30, 2006 is calculated below based on earnings of £827,000 and 20,744,024 shares (December 31, 2005, based on earnings of £4,429,000 and 21,325,021 shares). June 30, December 31, 2006 2005 £'000 £'000 Adjusted earnings as above 798 4,168 Interest on convertible note net of tax 29 57 Interest on convertible redeemable - 204 preference shares 827 4,429 Adjusted diluted earnings per share 4.0p 20.8p 8. Consolidated statement of changes in equity: Share Paid in Reserves Total Capital surplus £'000 £'000 £'000 £'000 Balance at January 1, 2006 1,162 21,716 (14,666) 8,212 Total recognised income and expense - - 7 7 Share options exercised by - 3 4 7 employees Equity settled transactions - - 3 3 Dividends to shareholders - - (704) (704) Balance at June 30, 2006 1,162 21,719 (15,356) 7,525 THE QUARTO GROUP, INC MANAGEMENT'S UNAUDITED PRO FORMA ABBREVIATED INCOME STATEMENT for the 12 months to June 30, 2006 12 months 12 months ended ended June 30, 2006 June 30, 2005 £'000 £'000 Revenue 95,136 86,899 Gross profit 32,966 30,063 Overheads (23,622) (22,351) Operating profit 9,344 7,712 Interest (2,404) (2,002) Profit before tax 6,940 5,710 Note: The above figures do not include amortization of intangible assets or, in 2005, restructuring costs and the cost of an aborted acquisition. This information is provided by RNS The company news service from the London Stock Exchange

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