Quarto Group Inc CEO & CFO Final Results Interview

Quarto Group Inc (LON:QRT) Marcus Leaver, CEO & Michael Connole the CFO for Quarto Publishing join DirectorsTalk to discuss Final Results for the Year Ended 31st December 2015. Michael talks us through the financial highlights for 2015 and how the core divisions performing, while Marcus talks about children’s publishing, board changes, how the business is looking and his ambition for the next phase.

Financial Highlights

· Revenue up 6% to $182.2m (2014: $171.3m3)
· Adjusted1 Operating Profit up 8% to $17.2m (2014: $15.9m3)
· Adjusted Profit Before Tax up 18% to $14.1m (2014: $11.9m3)
· Profit Before Tax up 8% to $12.9m (2014: $12.0m3)
· Adjusted Earnings per Share of 49.9c up 13% (2014: 44.1c3)
· Net debt reduced by 10% to $59.5m (2014: $66.0m)
· Proposed final dividend of 9.4c/6.15p2 (2014: 8.2c/4.95p2) up 15%, making the total dividend for the year of 14.5c/9.50p2, up 6% (2014: 13.7c/8.3p2)
· Dividend cover of 3.4x (2014: 3.2x)

Operational Highlights

· Core publishing operations revenue growth of 13% and adjusted operating profit growth of 17%
· Publishing adjusted operating margins improved to 12.8% (2014: 12.3%)
· Ivy Press business exceeded management expectations since acquisition in March 2015
· Children’s publishing revenues up 41% with both organic and acquisitive growth
· Foreign Rights revenues up 13% and up 43% in Children’s publishing despite foreign currency fluctuations in certain markets
· Contribution from non-core trading businesses of over $3.1m in operating profit (2014: $3.9m3) with Regent Publishing Services up 34% on 2014 making up for another year of currency headwinds and difficult trading at Books & Gifts Direct
· Acquisition of The Harvard Common Press in February 2016 continues targeted growth by acquisition

Commenting on the results, Quarto Group Inc Chief Executive, Marcus Leaver said: “Quarto made continued progress in 2015, delivering on our strategic objectives of revenue growth, debt reduction and dividend growth, while improving operational efficiency. This level of performance was enabled by the resilience of our business model and the professionalism, ambition and hard work of our people around the world. Our goal in our 40th anniversary year remains for Quarto to grow in a sustainable and profitable manner, organically and through judicious acquisitions, and steadily reduce net debt further.”

Chairman, Tim Chadwick added: “After three years of transformation, with cumulative earnings per share growth and debt reduction, 2015 was Quarto’s most profitable year ever. This is the fulfilment of the vision that led to my appointment as Chairman in 2012 and I am proud of what Quarto has achieved since then. I have decided not to put myself forward for re-election at the Annual Meeting, but rather hand over with confidence to Peter Read, upon his election at the Annual Meeting, to lead the Board as Chairman through Quarto’s next phase of growth.”

CHAIRMAN’S STATEMENT

After three years of transformation, with cumulative earnings per share growth and debt reduction, 2015 was Quarto’s most profitable year ever. This is the fulfilment of the vision which led to my appointment as Chairman in 2012 and I am proud of what Quarto has achieved since then. I have decided not to put myself forward for re-election at the Annual Meeting, but rather hand over with confidence to Peter Read, upon his election at the Annual Meeting, to lead the Board as Chairman through Quarto’s next phase of growth.

Dividend
As well as our continued focus on debt reduction, the Board is pleased to recommend a final dividend of 9.4c/6.15p per share, making the total dividend for the year 14.5c/9.50p, a 6% increase over last year, giving dividend cover, based on Adjusted Earnings per Share of 49.9c (2014: 44.1c11) of 3.4 times (2014: 3.2 times). Notwithstanding the increase in the final dividend for 2015, the Board believes that the balance between the interim dividend and final dividend should be more weighted to the final dividend given the increased second half weighting of revenues and profits. Accordingly, there will be no increase in the interim dividend in 2016, but with the expected earnings growth for the full year, the Board anticipates appropriate progression in the final dividend.

1 Restated as set out in Note 11.

Corporate Governance
I was elected as Chairman of Quarto at a time of great change in late 2012. Since that time Quarto’s adjusted profit before tax has increased by over 50% and its debt has reduced by over 25%.

The Group has a clear strategy for the future and I am pleased to have appointed such an accomplished executive management team during my tenure. With the exit of the activist shareholder block in November 2015, I shall leave the Board along with Christopher Mills at the conclusion of the forthcoming Annual Meeting on 24 May 2016.

The proposed new Chairman, Peter Read is currently a non-executive director of Quayle Munro Limited, Concha PLC, The Professional Cricketer’s Association and The Royal Automobile Club. He was formerly chairman of KPMG’s Telecoms, Media and Technology practice and a partner for over 20 years. Peter will join the Board upon his election at the Annual Meeting. Marie Louise Windeler will also join the Board upon her election at the Annual Meeting and assume the role of Chair of the Remuneration Committee; she has had excellent experience of executive and non-executive roles in creative businesses. They will form the non-executive Board along with Mike Hartley, Senior Independent Director and Chair of the Audit Committee, and Jess Burley, both of who were appointed during my tenure as Chairman; I am grateful to both of them for their help in reforming the Company’s corporate governance.

The Board has examined the merits of moving the Company’s domicile to the UK from its historic domicile in the USA in Delaware. Given the significant cost and execution risk of such a move, which would have limited benefits for existing shareholders, the Directors do not believe this to be in the Company’s interests in the short to medium term. If there is a beneficial change in US tax legislation, then the Board will look at the issue again in the future.

People
We said farewell to Mick Mousley, our long-standing Chief Financial Officer, in 2015. His enormous contribution to the Group can never be underestimated and we wish him well in his retirement. Our new CFO, Michael Connole, joined us in September and has made an excellent contribution to the business already.

Yet again our people at Quarto have shown restless creativity and resolute innovation. Increasingly tenacious sales and marketing efforts have lifted the Group to record profits in 2015. On behalf of the Board, I would like to thank all of our people in all of our businesses around the world for their talented hard work and commitment to Quarto.

Quarto is a fine business, poised at an exciting time in its history. I wish it all the best in executing its strategy.

Timothy J. M. Chadwick
Chairman
CHIEF EXECUTIVE’S STATEMENT

SUMMARY

Quarto made continued progress in 2015, delivering on our strategic objectives of revenue growth, debt reduction and dividend growth, while improving operational efficiency. This level of performance was enabled by the resilience of our business model and the professionalism, ambition and hard work of our people around the world. Our goal in our 40th anniversary year remains for Quarto to grow in a sustainable and profitable manner, organically and through judicious acquisitions, and steadily reduce net debt further.

Our core publishing operations contributed revenue growth of 13% and adjusted operating profit growth of 17%. Our publishing margins improved from 12.3% to 12.8%, demonstrating the quality of the revenue growth that we achieved which offset currency fluctuations in some areas of the Group. Our trading businesses contributed $3.1m in operating profits with an excellent year from Regent Publishing Services making up for another year of currency weakness and difficult trading at Book & Gifts Direct.

We have focused on tighter working capital management in all Group companies this year and net debt has been reduced by 10% or $6.5m and by over 25% since 2012. Working capital management and debt reduction will remain a key point of focus in 2016.

We continue to demonstrate the market demand and commercial value of illustrated print books. Quarto books serve clearly identified markets and are useful, instructive and well produced. These characteristics reflect our creative focus on customers and underpin the enduring quality of our imprints. We are a content-rich company, built on the foundations of the creative independence and vitality of each imprint, combined with senior management that is commercially focused. New titles are viewed through the prism of creativity, quality and economic impact. We celebrate our 40th Anniversary with confidence in the continued value of these principles in guiding our business strategy. Further, we have enhanced our model through the implementation of global operational, marketing and sales collaboration. Our new sales and marketing arrangements with Allen & Unwin in Australasia and the launch of www.QuartoKnows.com in June 2015 demonstrate this global collaboration; the second phase of the development of the latter, our digital hub and e-commerce platform, will take place in 2016.

Consequently, Quarto enters its fifth decade as a highly diversified dynamic portfolio of creative businesses underpinned by a scalable production and sales platform for organic and acquisitive growth. We will continue to grow by creating and exploiting information rich content and licensing that content in domestic and global markets. We will allocate capital across our portfolio of businesses, backing long-lasting winners and flexibly responding to both market opportunities and market challenges as they arise.

Organic growth alone will be insufficient to leverage fully the market opportunity. Starting new imprints and attracting new talent is vital but, with very rare exceptions, takes time to have a significant impact on the Group. Notwithstanding the quality of our catalogue and strong revenue contribution of historic titles, imprints do decline and organic growth sometimes serves only to offset this natural life cycle. Acquisitions of appropriate publishing imprints will therefore remain fundamental to continued strong growth providing that we stay true to our acquisition principles: that the businesses acquired shall be within our known areas of publishing expertise, bring measurable benefits to the Group as a whole, and in the year after acquisition, should be earnings enhancing.

Quarto’s people around the world have excelled in 2015 with the Quarto work ethic evident in all areas of the business; our people are hard-working, practical and focused. The spirit of co-operation within the Group continues and the commitment shown to our entire ecosystem of partners and network of suppliers allows us to keep up the momentum we have achieved in 2015 and aim for each year.

Quarto Group Inc is the leading global illustrated book publisher and distribution group and is listed on the London Stock Exchange. Quarto employs about 400 talented and creative people in five distinct but complementary businesses – Quarto International Co-editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK, Quarto Hong Kong and Books & Gifts Direct, Australia & NZ.

The Group is well positioned in resilient segments of book publishing with rich reserves of Intellectual Property. Quarto is uniquely positioned for growth as the industry adapts to new means of marketing, sales and routes to market. The Group’s headquarters are in London where the Company was founded in 1976.

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