Half-year Report

THE QUARTO GROUP, INC.

("Quarto" or the "Company" or the "Group")

Half-Year Results for the Six Months Ended 30 June 2016

The Quarto Group, Inc. (LSE: QRT), the leading global illustrated book publisher and distribution group announces its unaudited half year results for the six months ended 30 June 2016.

Financial Highlights

 Operational Highlights

Commenting on the results, Chief Executive, Marcus Leaver said: 

"It has been another six months of progress for the Group. Importantly, the acquisition of becker&mayer adds another creative hub in the US and continues to build long-term shareholder value.

As we have highlighted before, we are increasingly second-half weighted. Trading remains on track, with healthy order book visibility, and we remain confident of both reducing debt and delivering growth for a fourth successive year."

- ENDS -

For further information please contact:

The Quarto Group

About The Quarto Group

The Quarto Group (LSE: QRT) is the leading global illustrated non-fiction book publisher and distribution group, whose mission is to make and sell great books that entertain, educate and enrich the lives of adults and children around the world. 

Quarto creates and owns proprietary content, publishing books from a diverse portfolio of imprints that are creatively independent and expert in developing long-lasting content across specific niches of interest.

Quarto sells books across 45 countries and in 35 languages through a variety of traditional and non-traditional channels, while constantly looking for new ways to create and deliver content that people need.

Quarto employs over 400 talented people in the US, UK, Hong Kong, Australia and New Zealand. The group was founded in London in 1976. It is domiciled in the US and listed on the London Stock Exchange. 

For more information, visit quartoknows.com or follow us on Twitter at @TheQuartoGroup. 

This statement will be available at the registered office of the Company. A copy will also be displayed on the Company's website: quartoknows.com.

CHIEF EXECUTIVE'S STATEMENT

SUMMARY

 It has been another six months of progress for the Group. Importantly, the acquisition of becker&mayer adds another creative hub in the US and continues to build long-term shareholder value.

Revenue was up by 8% at $73.3m (H1 2015: $67.7m1). The adjusted2 group operating profit for the first six months was $0.4m (H1 2015: $0.7m1) continuing to reflect the strong second half seasonality of the business. The adjusted loss before tax was $1.1m (H1 2015: loss of $0.8m1). The loss before tax was $1.4m (2015: loss of $1.6m1), after charging amortisation of acquired intangibles of $0.3m (2015: $0.3m). There were no operating exceptional charges in the period (2015: $0.5m). Net debt at 30 June 2016 was $72.5m (H1 2015: $81.0m), a reduction of $8.5m over the twelve month period or $4.6m on a currency adjusted basis.

Dividend

The Board is pleased to recommend an interim dividend of 5.13c per share, (2015: 5.13c). Dividends are declared in cents per share and paid in sterling at the rate prevailing at the time of payment. Using the exchange rate on Friday 5 August of $1 : £1.306, the dividend would be 3.93p per share when paid in October

OPERATING REVIEW

[1] Restated as set out in Note 1.

Publishing Operations

Quarto International Co-Editions Group has performed well in the first half of 2016, with revenue of $18.5m (2015: $15.1m) up by 23%. This excellent result reflects good trading by our children's imprints and by Ivy Press, which we acquired in March 2015 and which benefitted from some very good reprint orders in the period. Like any portfolio, some of our imprints are performing better than others but the medium term characteristics of this business' order book continue to give us good visibility. We remain confident that the business will show overall growth in revenue and profit for the full year.

Quarto Publishing Group USA has had an excellent six months. Revenue was up by 17% on the same period in 2015 and adjusted operating profit, improved by 39% from $1.8m to $2.5m. We saw continued momentum from the fourth quarter of 2015 into the first quarter of 2016, particularly with our adult art instruction/colouring book titles. As anticipated, we are now starting to see signs of retail oversaturation with this category and believe that sales of these titles will now settle to a lower, more consistent level, but one in which we expect our titles to continue to participate. In addition, we are satisfied with the integration and progress of Harvard Common Press, which we acquired in February.

Quarto Publishing Group UK generated revenue of $7.6m for the first six months of 2016, which is in line with 2015. This was against a background of sterling weakening by 7% over the comparable period in 2015. The business is performing to expectations and we expect it to show growth in revenue and profit for the full year.

Strategic Initiatives

Our children's publishing revenues for the first six months of 2016 were $12.5m, 36% higher than last year's figure for the same period of $9.2m. We believe that this upward momentum will be sustained for the full year and will be further boosted by the acquisition of the publishing assets of becker&mayer LLC, which comprises approximately 50% children's titles.

We also expect our foreign language business to show pleasing growth for 2016 despite the uncertainties in some of the markets in which we conduct business.

Trading businesses

Books & Gift Direct had a disappointing first half year, with adjusted operating profit down $1.1m, but with recovery expected in the second half, based on order book visibility.

The Executive Directors, along with local management, are looking at various options for improving the business's underlying performance and its future ownership structure. Further comment will be made at the Final Results in March 2017.

Quarto Hong Kong had a steady start to 2016 with revenue of $7.7m up 4% on last year. At this point of the year, based on its order book, we expect the business to show modest profit growth for 2016.

Group overheads

Group overheads have increased over 2015 due to the phasing of certain costs, share-based payment charges and the impact of changes in personnel.

Acquisition of becker&mayer

On the 8th August, we announced the acquisition of the publishing assets of becker&mayer LLC for a consideration of $9.8m together with a working capital adjustment payment capped at $1m and further deferred contingent consideration of up to $1.25m. The consideration is being paid in stages over the next three years and has been structured to minimize the impact on our debt facilities. Full details of the acquisition are set out in the separate announcement.

Capital Markets Day

There will be a Capital Markets Day on Thursday 13 October when Quarto's Leadership Team will outline the vision for the business over the next few years.

Outlook

The strength and breadth of our product offering means that we are continuing to see good organic growth. Our stated intention to develop the business by making judicious acquisitions is reflected in our acquisition of the publishing assets of becker&mayer LLC, an imprint which creates a fifth creative hub for us in the US market and a sizeable US-originated children's books business.

By the end of this year there will have been elections or constitutional upheaval in all of our main markets - the US, Australia, UK and Europe. We are increasingly second-half weighted and with good visibility over the majority of our second half revenues, we remain confident of both reducing debt and delivering growth for a fourth successive year.

On behalf of the Board, I would once again like to thank all of our people in all of our businesses for their continued hard work and commitment, as well as our entire ecosystem of partners and network of suppliers. 

Marcus E. Leaver

Chief Executive

8 August 2016

THE QUARTO GROUP, INC.

Condensed Consolidated Income Statement

For the six months ended 30 June 2016

* Restated as set out in Note 1

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2016

* Restated as set out in Note 1

THE QUARTO GROUP, INC.

Condensed Consolidated Balance Sheet

At 30 June 2016

* Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2016

* Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2016

Year ended 31 December 2015 (Audited)

THE QUARTO GROUP, INC. 

Condensed Consolidated Cash Flow Statement

For the six months ended June 30, 2016

* Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

1. Introduction

These interim consolidated financial statements are for the half year to 30 June 2016. They were approved by the board on 8 August 2016. These results are unaudited and have not been reviewed by the auditor. The comparative figures for the six months to 30 June 2015 are also unaudited and derived from the half-yearly financial report for that period, subject to certain restatement changes noted below.

The information for the year ended 31 December 2015 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

The information for the six months to 30 June 2015 was restated as follows:

a. Classification of the amortisation of debt issuance costs

The amortisation of debt issuance costs was previously included with administrative expenses. The policy on these costs has changed to better reflect the underlying nature as a financing cost. There is no net impact to the income statement. The reclassified amount for the six months ended 30 June 2015 was $195,000.

b. Insurance arrangements and related revenue recognition

A review of certain insurance arrangements across the Group identified that in limited circumstances the Group remains the principal insurer of product shipments in transit. In these circumstances it was determined that it was inappropriate to recognise the related revenue until the shipment was receipted by the customer. This correction is limited to the Books & Gifts Direct business only. The impact of the results of the business for the six months ended 30 June 2015 was an increase in profit after tax of $195,000.

c. Allocation of overheads to inventories

A review of the inventory costing model identified that some inconsistency in the allocation of overheads to inventories. The inconsistency was limited to the Books & Gifts Direct business only and has been corrected. There was no impact on the results for the six months ended 30 June 2015.

Details of these have all been set out in the 2015 Annual Report and Accounts.

As a result of the above restatements, comparative figures for 30 June 2015 have been restated, as follows:

Consolidated Statement of Comprehensive income for the six months ended 30 June 2015

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

1. Introduction (continued)

Consolidated Balance Sheet at 30 June 2015

2. Basis of preparation

These interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34," Interim Financial Reporting", as adopted by the European Union.

The Directors have formed a judgement that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. The Group has significant banking facilities. In particular, the Group has committed facilities of $90.0m through to 30 April 2019. The Group has continued to comply with its bank covenants.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2015 as described in those financial statements.

3. Segmental analysis

* Restated as set out in Note 1.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

3. Segmental analysis (continued)

* Restated as set out in Note 1.

Due to the seasonality of the business, the Group's sales and segmental results are weighted towards the second half of the year.

4. Exceptional items

There were no exceptional items included in loss before tax for the period. Exceptional items for the six months ended 30 June 2015 and the year ended 31 December 2015 was comprised of corporate development costs, due diligence expenses and restructuring costs.

5. Taxation

Taxation for the six months to 30 June 2016 is based on the Group estimated underlying tax rate for the year. The tax credit for the six months also includes a deferred tax credit in respect of prior periods. We expect the full year effective rate to be substantially consistent with the prior year.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

6. Earnings per share

* Restated as set out in Note 1.

7. Dividends

The proposed interim dividend of 5.13c per share is payable on 26 October 2016, to shareholders on the register on 23 September 2016 with an ex-dividend date of 22 September 2015.

The Quarto Group, Inc., as a US incorporated company, is required to collect US dividend withholding taxes on dividend distributions made to its non-US shareholders. The US dividend withholding tax is generally 30% of any dividends paid to Quarto's non-US shareholders, but this amount can potentially be reduced pursuant to an applicable income tax treaty between the US and the country of residence of the non-US shareholder. For example, under the US/UK income tax treaty, the US dividend withholding tax rate can range from nil (applicable to certain UK resident pension trusts and tax exempt entities) to 15% (applicable to UK resident individual shareholders and certain UK corporate shareholders). For US shareholders, no US dividend withholding tax is generally applicable. It should be noted that certain documentation requirements must be met by all shareholders prior to the payment of any dividends to certify their status as a US or non-US shareholder, and, if a non-US shareholder to claim any applicable benefits under the US/UK or other applicable income tax treaty. Each shareholder should consult their own tax adviser to determine whether and to what extent they may be entitled to claim a reduced amount of US dividend withholding taxes under a US income tax treaty

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

8. Net debt and financing

At 30 June 2016 the Group had a US$90.0m syndicated bank facility, comprising a term loan and revolving credit facility, of which $9.8m was undrawn. During the period $5.0m was repaid against the term loan. These facilities expire on 30 April 2019 and are subject to financial covenants which were all met at 30 June 2016. The Group has adequate resources to continue in operational existence for the foreseeable future.

Net debt is reconciled as follows:

9. Principal risks and uncertainties facing the Group

There have been no changes to the principal risks and uncertainties facing the Group since the year-end. These are disclosed on page 33 of the 2015 Annual Report.

10. Financial Instruments

There are no material differences between the fair value of financial instruments and their carrying value.

11. Acquisitions and post balance sheet event

On 3 February 2016, the Group acquired the publishing assets from The Harvard Common Press Inc. for a total consideration of $1.0m. The consideration is payable in three stages, on completion, in July 2016 and July 2017.

On 8 August, the Group acquired the publishing business of becker&mayer LLC for a consideration of $9.8m, together with a working capital adjustment payment capped at $1.0m and further deferred contingent consideration of up to $1.25m. The consideration is being paid in stages over the next three years. Due to the proximity of the acquisition to the date of this report, it is not practicable to present the provisional fair value of the assets acquired, the allocation of the consideration and final transactions costs. Full details of the acquisition will be disclosed in the Annual Report for the year ended 31 December 2016.

THE QUARTO GROUP, INC.

Notes to the condensed financial statements

12. Management Statement

This Interim Management Report (IMR) has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The IMR should not be relied on by any other party or for any other purpose.

The IMR contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

Responsibility statement

We confirm that to the best of our knowledge:

By the order of the board