Quarto's children's sales grow but profits plunge in 'tough year'

Quarto's children's sales grow but profits plunge in 'tough year'

The Quarto Group's sales declined marginally by 1.4% to £152.5m last year, however, its operating profits plunged 58% to £7.2m.

The company's chief executive Marcus Leaver told The Bookseller it had been a “tough year, but we dealt with it better than others, and we very happy with the second half”. He stressed that he was building an intellectual property business, and that the group was now in the right shape, but that he wanted to continue to reduce its debt.

In the second half of 2017, The Quarto Group's sales were up 5.8%, the company said. However, in the context of a "tough retail environment", Quarto reported it had experienced high levels of returns and had been impacted by the rising cost of raw materials and printing. Other factors Quarto said had affected the group’s operating margin were royalty expenses, as trade sales have become a larger part of its product mix, as well as higher product development costs owing to the integration of becker&mayer, which it acquired in 2016.

Loss after tax was $18.5m. The company incurred a goodwill impairment charge of $17.4m within the reporting period for the year to end of December 2017, as well as $5.8m in restructuing costs, which impacted on its losses. It also spent $0.4m on costs to do with the unsolicited offer for the group, as well as an unrelated acquisition that didn't complete. 

Quarto's primary focus this year will now be on strengthening the balance sheet and growing margins, it said. The group ended the year with "sizeable" net debt of $64m.

Leaver said: “You can’t pay a dividend, and continue investing in intellectual property, and pay the staff well, if you are paying $8.5m to the bank each year. That is a lot of books. We’ve spun the plates as long as we can, I’m really happy with the performance, but not happy with the capital structure. We are well set, apart from that."

The Foreign Rights division grew revenue by 6% year-on-year, and children’s publishing sales, which now make up a third of Quarto's group revenues, grew 19% year-on-year, both organically and through acquisition (counting the first full year contribution from becker&mayer). Quarto cited a "lack of any notable growth in the mature Adults publishing market" though, a situation it said was "unlikely to change". 

Referring to January's annoucement that it would roll its UK-based adult trade imprints into a single new imprint, White Lion Publishing, spearheaded by group publisher Richard Green, Quarto said it would “continue to restructure a number of our Adults imprints to realign our portfolio with broader market trends”. In 2017 it also brought Small World Creations under the umbrella of Quarto’s London-based group of children’s imprints, Young Quarto, resulting in the closure of its Yate office in Bristol, and restructured its finance team.

Breaking its results down by region, UK publishing adjusted operating profit was $7.1m, down 43% (2016: $12.4m), with sales down from $20.9m to $20.4m. Contributing factors such as a "significant decline" in English Language co-edition sales and increased royalty costs are expected to continue, the company said, but the "unusually high levels of returns" experienced are not expected to recur in 2018.

US publishing adjusted operating profit was meanwhile down 51% to $4.6m (2016: $9.4m), with sales down from $83.5m to $81.8m. Among several "one off" factors was the "far higher than expected" returns of adults colouring books in 2017.

In its report, Quarto said it had been a “transitional and challenging” year for the company. In 2017, following a 17% publishing profit rise in 2016, the company pursued a change in strategy to become a pure play intellectual property business. But - because of a “soft retail environment” - by August 2017 the company reported revenues in the first half of the year were down 13% to $50m. 

With the business being “seasonal”, typically dependent on the second half year performance, Quarto will now be moving its financial calendar year-end to 31st March. "It will enable the business to fully focus on the critical fourth quarter sales period and effect a more balanced spread of revenue between the reported fiscal half years," it said.

In the medium to long term, the company's strategy remains to "grow organically, through innovation and, where applicable, by acquisition and to continue to drive c. 60% annual recurring revenue through the Group’s enduring backlist and innovative use of its rich IP catalogue". 

Leaver commented: “While 2017 was, overall, a transitional and challenging year, we are particularly pleased with our stronger trading performance in H2 – our children’s and foreign rights businesses showing significant growth once again, when many others in our industry struggled.

“Quarto is now fully focused on what we do best – creating a variety of books and intellectual property products that inspire life’s experiences for the whole family, and selling them globally through diversified sales channels and partnerships.

“Our strategy remains to grow organically, through innovation and, where applicable, by acquisition, and to continue to drive c. 60% annual recurring revenue through our enduring backlist and to leverage our rich IP catalogue.

“We have moved into 2018 with clear objectives about continuing to realign our portfolio with the broader market and consumer trends, and making the financial and operational improvements required to fulfil our ambitions – including strengthening our balance sheet as a platform for growth.

“Since the year end, the Group has been trading in line with the Board’s expectations.”