Final Results

FOR IMMEDIATE RELEASE 22 March 2018

Cello Group plc

('Cello' or the 'Group')

Final Results for the twelve months ending 31 December 2017

Strong performance - Cello Health delivers robust gross profit growth.

Cello Group plc (AIM:CLL, "Cello" or "the Group"), the healthcare-focused advisory group, today announces its final audited results for the year to 31 December 2017. The Group also announces that it intends to rename itself as Cello Health Group plc to better reflect the strategic focus of the business.

Financial Highlights

· Group revenue up 2.4% to £169.3m (2016: £165.3m)

· Group gross profit up 10.6% to £102.5m (2016: £92.7m)

· Group like-for-like1 gross profit growth of 2.5%

· Cello Health constant currency like-for-like gross profit growth of 9.2%, and operating margin maintained at competitive levels

· Group constant currency like-for like gross profit growth of 1.6%

· Group headline2 profit before tax up 11.9% to £11.4m (2016: £10.2m)

· Headline basic earnings per share3 7.93p (2016: 8.66p), following successful net £14.2m fundraise in January 2017

· Reported profit before tax of £5.8m (2016: loss of £1.7m)

· Statutory basic earnings per share 4.09p (2016: loss of 3.23p per share)

· Net cash of £1.6m (2016: net debt of £5.1m)

• Full Year dividend up 2.9% to 3.50p (2016: 3.40p)

• Good start to 2018

Operational Highlights

· Cello Health continues to grow strongly organically and also by acquisition

· Secured 49 new client wins overall in 2017, with the Group now having relationships in place with 24 of the top 25 pharmaceutical companies

· Defined Health and Cello Health Advantage transactions successfully completed and integrated. Both businesses trading well

· The US now contributing 45.1% of Cello Health's gross profit, with total gross profit generated from the US being 29.5% of the Group's gross profit

· Signal business more aligned behind core health offer, with 14% of Signal gross profits from health orientated clients

· The Group well positioned for further expansion in healthcare in 2018 and beyond

· The Group to be renamed as Cello Health Group plc

Mark Scott, Chief Executive, commented:

"The Group continues to make rapid strides in evolving into a global healthcare services business, with a particular focus on the US market. Signal is successfully migrating into a position to support Cello Health and healthcare clients with its digital and consumer marketing services. In line with reinforcing this growth strategy, the Group will be renamed as Cello Health Group plc to better leverage its positioning with all constituencies. The current year has started well and the Group is positioned for further expansion in healthcare in 2018 and beyond."

1 Like-for-like measures exclude the results from companies acquired in the year and results from start-ups which are defined in note 1.

2 Headline measures exclude, where applicable, restructuring costs, share based payments, amortisation of intangible assets, impairment charges, acquisition accounting adjustments, start-up losses, the provision for VAT payable and other one-off items.

3 Headline earnings per share is defined in note 8.

4 Headline operating margin is calculated by expressing headline operating profit as a percentage of gross profit

Analyst meeting

A meeting for analysts will be held at 9.30am today, at the offices of Buchanan, 107 Cheapside, London EC2V 6DN. For further details please contact Buchanan on 020 7466 5000

Enquiries:

Chairman's Statement

Summary

We continue to deliver a consistent performance, with the Group reporting a 10.6% increase in gross profit to £102.5m (2016: £92.7m), with headline profit before tax up 11.9% to £11.4m (2016: £10.2m). Reported profit before tax was £5.8m (2016: reported loss of £1.7m). Total dividends per share increased to 3.50p per share, adding to an eleven year record of dividend increases.

Cello has evolved significantly over the years to where we are now: a global health-focused marketing advisory company that is the partner of choice for many of the top pharmaceutical, biotech and healthcare organisations globally. We work with 24 of the top 25 pharmaceutical companies.

Cello's focused strategy has delivered a strong performance across our health operations, with 9.2% constant currency like-for-like gross profit growth from Cello Health, and a competitive profit margin of 17.7% (2016: 18.1%). In addition, we were able to invest in strengthening our core operations and market position in 2017.

2017 saw the successful addition to the Cello family of two further US acquisitions: Defined Health, and Advantage Healthcare. Both are excellent organisations with passionate staff, high quality clients and strongly differentiated service offerings. The US now contributes 45.1% of Cello Health's gross profit (2016: 35.1%).

Cello Signal had an acceptable year against a tough comparative. Operating margins were maintained at 9.5% (2016: 10.3%) despite a 6.8% like-for-like constant currency decline in gross profit.

The Group ended the year in a net cash position and recently renewed its banking facilities with RBS. This puts the Group in a good position to expand further as high quality acquisitions and start-up opportunities in the health space are identified.

We begin 2018 with a positive outlook. We expect to continue to leverage the benefits of collaboration across the Group, particularly as a result of our new acquisitions. We will continue to invest in market expansion, specifically in the US and, as a matter of priority, leverage Signal's innovative digital capability into the healthcare market. We are excited to imminently change the name of the business to Cello Health Group plc to better reflect our focus.

OPERATING REVIEW

2017 represented a year of investment and strengthening of our core operations, whilst making significant progress against our three key strategic priorities of growth, innovation and leveraging key assets across the Group. The core operations of Cello Health (namely Cello Health Communications, Cello Health Insight, and Cello Health Consulting) all made strong progress in 2017. The capability formerly represented by Cello Health Consumer was consolidated into these three core capabilities to maximise revenue from those operations. The fourth pillar of Cello Health is now serviced by Cello Signal, which is bringing its digital skills and consumer knowledge to bear on Cello Health's core agenda.

Growth

2017 has shown the benefits of our strategy of focusing the Group on its two key areas of strength: healthcare-focused advisory services and digital solutions. Overall constant currency like-for-like gross profit growth in our Cello Health operations of 9.2% was driven by good performance across our core health operations. This growth has been achieved as a result of continued investment across all of our core operations in expanding our geographic coverage, establishing the right infrastructure, capabilities and processes. This includes bringing in significant leadership and middle tier management, particularly in our consulting business, with new recruitment approaches and enhanced personal development and performance management.

The US market is a key territory for us and is critical to our long-term growth aspirations. 2017 delivered a strong performance in this region. The US share of Cello Health gross profit has now increased to 45.1% from 35.1% in 2016. In addition to our strong overall organic growth, 2017 saw the successful acquisition and integration of Defined Health and Advantage Healthcare. These acquisitions represent an important expansion of our capability as Cello Health continues to migrate towards cutting edge science.

Cello Health continues to reinforce its market presence by creating larger resource hubs in key geographies. 2017 saw the relocation of the consulting capability in the UK to the same office as the UK communications capability at Cello House in Farnham. We have also unified our European Communications capability into Cello House, strengthening our offering under a single capability umbrella. Similarly, we moved into new office premises in New York. In both cases we paid special attention to how we would use the space to enhance creativity, collaboration on projects and new business activity.

Our core client base is robust and continues to grow from strength to strength, with relationships in place with 24 of the top 25 pharmaceutical companies. We secured 49 new client wins overall in 2017, with 23 specifically in the US. We have also focused on increasing the average size of client engagements. Increased investment in marketing and business development resources has seen significant strengthening in our business development pipeline globally.

Our core digital operations under the Signal brand delivered a reduced trading result, largely reflecting the long anticipated cessation of two significant one off client projects in 2016. Importantly, as well as supporting Cello Health's core pharmaceutical client base, Signal is making rapid progress in developing business across a wide range of health and wellbeing clients, notably:

· Digital communications - working for EFPIA, Dexcom, Stryker and BUPA dental

· Insight - Public Health England, Wellcome Trust and Tesco own label health lines

· Wellbeing - The Federation for Disability Sport and The Food Doctor 

We have consolidated our core digital operations into three key operational office hubs, in Cheltenham, London and Edinburgh. All three offices work closely together, sharing business development and professional resource. This has enabled a smoother sharing of technology and technical expertise between locations. It is also the key to raising operating margins. In 2017 action was taken in the US research business to reduce professional costs, resulting in an exceptional charge. This should feed through into margin enhancement in due course.

Innovation

In 2017 we invested in existing operations as well as the development of new initiatives to be launched in 2018. 2017 saw continued success with our range of Digital offerings. Our core Insight digital offering continued its rapid growth based on its 'Living Lens' searchable video technology and a revamp of its eVillage offering. IQ, our quantitative research practice, had an equally strong year.

Cello Health Insight invested in developing and preparing the organisation to launch a new service offering, Cello Health Logic. Cello Health Logic is both a data science and social analytics unit which utilises our proprietary Pulsar technology with a focus on the health sector. In addition, we have formed strategic relationships with a number of key partners which will provide us with access to the online 'conversations' and views of healthcare professionals.

Pulsar, our social media analytics platform, has continued its rapid pace of development, ending 2017 with 346 clients, up from 257 in 2016, and a monthly revenue run rate in software licence sales of c. £0.5m. Cello Health Logic is in the process of leveraging the Pulsar software suite into the healthcare market.

Cello's overall digital capability divides into the planning and building of digital infrastructure (Content Management Systems, Mobile Applications, Personalisation and Automation Platforms) and Digital Marketing (across SEO, PPC, Media, Creative and Social). We also have a significant footprint in data-led strategy as clients seek to connect on and off-line channels to create a seamless customer experience.

In addition we have an extensive base of highly innovative clients across technology, entertainment and gaming. EA, Facebook, Apple, Sony, HP, Netflix, NBC, Wargaming and Ubisoft are all significant clients across our insight, communication and innovation teams. The very technologically advanced nature of these clients helps shape how the majority of consumers behave online. Importantly, advances made with these clients in these sectors provide a valuable lens for our health clients who want to benefit from leading-edge digital solutions used in other markets.

Leveraging our assets

The digital capability that resides in Signal has a very specific role within Cello Group as we seek to apply innovation in audience intelligence, digital marketing and digital infrastructure. We are focusing on utilising that innovation to grow our health client base. Tech and Gaming, Charities and Financial Services, are sectors that health clients are seeking to learn from in applying digital techniques to meet the complex communication challenges in their health markets.

Signal's health activity has grown to around 14.0% of gross profit as a result of collaboration with Cello Health and by direct client wins in clinical and consumer health. Signal was appointed by the European Federation of Pharmaceutical Industries and Associations to manage their digital campaign in response to growing concern about the rising costs of healthcare. In addition, Oasis Dental, the UK's largest Dental clinic network, appointed Signal to deliver their CRM, Digital Marketing and SEO activity. A further example of our success in leveraging our digital expertise in healthcare is our work with BUPA. We delivered the re-brand of their website and ensured they carried over their local SEO footprint on a clinic-by-clinic basis. The Signal Health team are also working with a range of other health clients.

In 2017 we invested in a shared business development resource which works in co-ordination with our capability teams. This is yielding strong benefits in new business levels across the business as professional resource is being flexibly deployed against global opportunities.

Group Finance Director's Report

Summary

Total Group gross profit was £102.5m (2016: £92.7m) on revenues of £169.3 (2016: £165.3m). Headline profit before tax was £11.4m (2016: £10.2m). Like-for-like gross profit growth for the whole Group was 2.5%. Constant currency like-for-like gross profit growth was 1.6%.

The Group's headline operating margin was 11.7% (2016: 11.5%) with a headline operating margin of 17.7% in Cello Health (2016: 18.1%), and 9.5% in Cello Signal (2016: 10.3%).

Finance costs were £0.4m (2016: £0.3m). These are expected to drop during the year as debt drops.

The Group's reported tax charge was £1.6m (2016: £0.8m) with a headline tax rate of 28.2% (2016: 25.7%). The headline tax rate has increased as a consequence of higher relative profits in the US in 2017, which currently attract a higher tax rate. The Group has carried out a preliminary assessment of the impact of the forthcoming changes to the US tax regime. This assessment shows that the headline tax rate for the Group should drop by at least three percentage points from 2018 onwards. The reconciliation of the tax charge for 2017 to reported profit/loss before tax is in note 6.

Headline basic earnings per share is down 8.4% to 7.93p (2016: 8.66p). This drop is largely as a result of the increased number of shares in issue following the fund raise in early 2017.

Statutory profit before tax was £5.8m (2016: loss of £1.7m), a reconciliation of headline profit before tax to the statutory profit/loss before tax can be found in note 1.

The Group benefitted from a stronger dollar in 2017 compared with 2016, with average US$:£ exchange rates strengthening from 1.35 in 2016 to 1.29 in 2017. The Group generated around £5.4m of headline operating profit in the USA in 2017 (2016: £3.3m), an increase of 65.1%.

The Board is proposing a final dividend of 2.45p per share (2016: 2.40p), giving a total dividend for the year of 3.50p per share (2016: 3.40p) representing an increase of 2.9%. The dividend has now grown every year since 2006. Subject to shareholder approval, the final dividend will be paid on 25 May 2018 to all shareholders on the register at 4 May 2018, and will be recognised in the year ending 31 December 2018.

During the year the Group completed two acquisitions to support and develop its strategy of growing Cello Health in the US.

Acquisitions and deferred consideration

During the year the Group completed two acquisitions to support and develop its strategy of growing Cello Health in the US.

On 31 January 2017, the Group completed the acquisition of the trade and assets of Defined Healthcare Research Inc and Cancer Progress LLC ("Defined Health"), a business delivering scientific strategic advisory services to a wide range of US and European global biotech clients. Initial consideration was $5.75m of which $5.25m was paid in cash, with the balance settled by the issue of 398,904 new ordinary shares.

On 17 July 2017 the Group acquired the trade and assets of Advantage Healthcare Inc ("Advantage Healthcare"), a consultancy providing critical analysis and insights to biopharmaceuticals, supporting new products and business development. Initial consideration was $1.5m, payable in cash.

The cash consideration for both these acquisitions was financed by way of a placing of 15,463,919 new ordinary shares at a price of 97p a share, raising £14.2m after expenses, which occurred in early 2017. The placing was oversubscribed, and received strong support from new and existing institutional shareholders.

Total future deferred consideration obligations at 31 December 2017 now total £4.6m (2016: £2.9m). In line with recognised accounting practices, the income statement impact of this deferred consideration is spread over the length of the deferred consideration period. The acquisitions-related Employee Remuneration Expense is £1.4m (2016: £1.2m). This provision will be substantially settled over the years 2019 to 2021.

Cello Health Financial Performance

Gross profit in Cello Health grew by 26.4% in 2017, reflecting both organic growth and growth by acquisition. Like-for-like constant currency gross profit was an excellent 9.2%, with a particularly strong performance from the Cello Health businesses in the US. The acquisitions of Defined Health and Advantage Health added materially to Cello Health's biotech offer. Both businesses are performing well. Operating margins dropped slightly to 17.7%, reflecting a change in the mix of the business. 45.1% of total Cello Health gross profit was earnt by the US operations (2016: 35.1%).

Cello Signal Financial Performance

Cello Signal had an acceptable year against a tough comparator in 2016. As highlighted in previous announcements, 2016 benefitted from two significant contracts which were not going to repeat in 2017.

Notwithstanding this impact, the UK businesses in Cello Signal had a good year. Trading in the research business in the US was difficult and during the year headcount was reduced significantly. Trading in the US is now on track. Taking all these factors into account, the constant currency like-for-like decline in gross profit was 6.8%.

Pulsar continued to grow well and ended the year with 346 clients and c. £0.5m of monthly licence revenue. (2016: 257 clients and c. £0.3m of monthly revenue).

Operating Cash Flow

Headline operating cash flow of £10.4m represented 77.2% cash conversion of headline EBITDA (2016: 123.0%). The operating cash flow surplus generated in 2016 therefore reversed in 2017 as expected. The underlying operating cash flow performance of the Group is robust. The following table demonstrates the calculation of headline operating cash flow, and the cash conversion rate.

The Group's net cash position at 31 December 2017 was £1.6m (2016: debt of £5.1m). The operating cash flow is weighted towards the second half of the year. During the year the Group was pleased to renew its debt facilities with the Royal Bank of Scotland. They have been renewed on the same pricing terms as the previous arrangement, and expire in March 2022.

Non Headline items

A number of items are in the income statement below headline operating profit, which are as follows:

During 2017, the Group incurred restructuring costs of £1.9m (2016: £1.2m). This mainly relates to redundancy payments, predominately within the US research offer in Cello Signal. Structural changes were also implemented to consolidate property commitments, integrate the offer further and reduce operating costs.

The Group collected £0.3m of VAT from charity clients in relation to the prior years issue (2016: provision made of £1.8m).

The employment settlement costs of £nil (2016: £1.2m) represent costs incurred in the prior year regarding the establishment of a bioconsulting team in the US. This team is now profitable.

Start-up costs in the year principally related to operating losses from the Group's Cello Health Consulting operations in the US as well as losses from Pulsar operations in the US. The US operations of Cello Health Consulting moved into headline activities in the second half of 2017.

Acquisition costs of £0.2m (2016: £nil) were incurred in relation to due diligence and legal costs on acquisitions made in the year.

Amortisation of intangibles relates to the amortisation of identified intangible assets that are recognised on acquisitions, this charge has risen to £0.5m (2016: £0.3m) due to the acquisitions completed in the year.

Acquisition related employee remuneration expense of £1.4m (2016: £1.2m) is the necessary income statement charge which relates to the spreading of deferred consideration payments made to certain employees of the Group over the term of the deferred consideration measurement period. 

Share option charges of £0.4m (2016: £0.3m) relate to the appropriate income statement charge being recognised over the life of issued share options to staff.

Goodwill has not been impaired in 2017 (2016: charge of £4.9m).

Our Marketplace

Structural drivers of growth

The combination of ageing populations with advances in scientific understanding, diagnosis and treatments continue to produce an underlying requirement for health treatments. Combined with the strength of our clients' R&D pipelines and the challenges they face in ensuring every product is a commercial success, clients will continue to value the type of services that Cello provides.

The shift from the traditional block buster to specialty medicines requiring the use of Biotech technology is gathering pace. Current forecasts predict that Biotech will contribute over half of the top 100 product sales by 2022, overtaking small molecule drugs as a class. To stay ahead of the curve in this rapidly developing market, our clients need to invest earlier in startups, biotechs and promising new platform technology and make earlier go/no go decisions whether to back an asset. They also need to decide earlier on the commercial platform used to inform their clinical trial programs.

As continued financial pressures impact all sectors, health is not an exception, driven by a combination of pricing pressures, an increased drive towards generics and biosimilars and the ongoing costs of bringing novel therapies to market. Pharma and Biotech companies are having to find new approaches to pricing, value, managing costs, and sharing risks, including managing expectations around outcomes-based medicine.

These factors are forcing our clients to adapt how they develop and commercialise their products. Clients look to Cello to not only translate complex science into its commercial application but also to reinforce the value of a product by integrating health outcomes research and real world evidence into the clinical story for payers and other key stakeholders.

The challenge for our clients is to create a powerful scientific and health economic story based on a clear understanding of the science, the clinical profile of the product and the role it can play in terms of health benefit to the patient population overall. Our clients then have to be able to devise a multi-channel, multimedia communication solution that addresses the needs of an ever more complex stakeholder environment.

Additionally, clients are increasingly seeking support in helping them integrate solutions from new technologies in the areas of diagnostics, biomarkers and patient support programs. Specifically they are seeking to understand how to build innovation into the service offering, how to price, how to demonstrate value and gain market access; all key challenges that require our services.

The application of digital innovation to healthcare

Digital innovation continues unabated as clients seek to harness technology to bring better outcomes to stakeholders.

We have seen a significant change in how health information is accessed which now places the patient at the centre. Social groups, patient associations, the role of social media through its various channels, digital data, wearable and connected technology are all having a major impact on how healthcare professionals and patients receive and disseminate information. Clients need our help to understand the best way to engage with this new environment.

The ability of our digital and creative teams to personalise communication down to the individual level has significant application in the health arena. Although there are still limitations in gaining direct access to patient data, audiences are becoming increasingly educated and engaged in managing their own health and wellbeing. Their desire to better understand their conditions, treatment and related lifestyle choices offer the opportunities for the pharmaceutical client community to engage directly in supporting the patient journey with personalised guidance.

In response to these trends, we will continue to broaden our focus on the health market. Our clients will include those involved in health consumer products, healthy foods, wearable devices and organisations that focus on the health of consumers, all of whom want to see positive behaviour changes towards health. We will further evolve our ability to collaborate across Cello, enabling our clients to access integrated blended teams of experts formed to meet their specific needs, both across our core health practices and also leveraging our digital capacity.

Risks and Uncertainties

The Company regularly reviews the risks and uncertainties facing the business through a regular series of board and operational meetings. The Directors believe the current largest risks are as follows:

1. Economic conditions

The Group's business is domiciled in the UK but 48.9% (2016: 45.2%) of the Group's revenues are from clients based overseas. It is clear that income from clients is impacted by the prevailing economic conditions. Global economic and geopolitical uncertainty has increased following Brexit and the US election. However, the broad spread of clients across sector and geography mitigates this risk.

2. Loss of the Group's key clients

Client relationships are crucial to the Group and the strength of them is key to its continued success. The risk is mitigated by our client base being broadly spread and by several of our pharmaceutical clients being subject to longer term master service agreements. The loss of any large client would require replacement. The Group's client review programmes help mitigate this risk.

3. Changing laws and regulations

There are various laws and regulations that are relevant to the operations of the Group, in particular the forthcoming GDPR regime which applies from 25 May 2018. The Group has established a steering group on this issue which is actively working across all its businesses to ensure compliance.

4. Loss of key staff

The Group's Directors and staff are critical to the servicing of existing business and the winning of new accounts and the departure of key staff could be a risk to maintaining client service. With that risk in mind all senior staff are subject to financial lock-ins and long-term incentive arrangements, as well as being under contractual non-compete and non-solicit clauses.

Current Trading and Outlook

The Group has begun 2018 with good levels of forward bookings and already secured a good level of new business wins. Following the fundraise to finance the acquisitions of Defined Health and Advantage Healthcare, the Group is in the process of expanding its global footprint. The imminent renaming of the Group as Cello Health Group plc reflects this strategic focus. The Board is confident that expectations for 2018 will be met.

Allan Rich

Non-Executive Chairman

21 March 2018

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2017

CONSOLIDATED BALANCE SHEET

as at 31 December 2017

SIGNIFICANT ACCOUNTING POLICIES

(1) Basis of Preparation

The consolidated financial statements of Cello Group plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRSs"), interpretations issued by the IFRS Interpretations Committee ("IFRS IC") and the Companies Act 2006 applicable to companies reporting under IFRSs. The consolidated financial statements have been prepared under the historical cost convention. The Group's principle accounting policies have been applied consistently throughout the year.

The Group's business activities, performance and position and an assessment of the risks and uncertainties are set out in the Chairman's Statement. An assessment of the critical accounting estimates and judgements are set out in accounting policy 5.

(2) Going Concern

During the year the Group generated a profit before tax on continuing activities of £5.8m and excluding non-recurring restructuring costs and other non-headline charges the Group generated a profit before tax of £11.4m.

The Group meets its day-to-day working capital requirements through its bank facilities. At 31 December 2017 the Group's bank facilities consisted of a £4.0m overdraft facility and a £20.0m revolving credit facility ("RCF"). The RCF is committed to March 2022. £8.7m of the RCF is undrawn at 31 December 2017. 

The Group's forecasts and projections show that the Group is able to operate within the level of its current facilities and its covenants.

After reviewing the Group's performance and forecast future cash flows, the Directors consider the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing the Group's financial statements.

(3) Headline Measures

The Group believes that reporting non-GAAP or headline measures provides a useful comparison of underlying business performance and this reflects the way the business is reported internally and controlled. Accordingly, headline measures of operating profit, finance income, finance costs, profit before taxation and earnings per share exclude, where applicable, restructuring costs, amortisation of intangible assets, impairment charges, acquisition costs, acquisition accounting adjustments, start-up losses, share option charges, fair value gains and losses on derivative financial instruments and the provision for VAT payable. These are items that, in the opinion of the Directors, are required to be disclosed separately, by virtue of their size, nature or incidence, to enable a full understanding of the Group's underlying financial performance.

A reconciliation between reported and headline profit before taxation is presented in note 1. In addition to this, a reconciliation between reported and headline operating profit is presented in note 2 and a reconciliation between reported and headline earnings per share is presented in note 8. Headline measures in this report are not defined terms under IFRSs and may not be comparable with similarly titled measures reported by other companies.

(4) Goodwill

Goodwill represents the excess of consideration over the fair value of the Group's share of the identifiable net assets acquired at the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Impairment losses are recognised in the income statement and cannot subsequently be reversed.

Goodwill is allocated to cash-generating units ("CGUs") for the purposes of impairment testing. The allocation is made to those CGUs that are expected to benefit from the business combination in which the goodwill arose.

SIGNIFICANT ACCOUNTING POLICIES

The carrying value of goodwill for each CGU is reviewed annually for impairment, or more frequently if the events or changes in circumstances indicate a potential impairment. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value-in-use.

(5) Accounting Estimates and Judgements

The Group makes estimates and judgements concerning the application of the Group's accounting policies and concerning the future. The resulting estimates may, by definition, vary from the actual results. Estimates are based on historical experience and various other assumptions that management and the Board of Directors believe are reasonable.

The Directors consider the critical accounting estimates and judgements used in the financial statements and concluded that the main areas of judgements are:

i. Revenue recognition policies in respect of contracts which straddle the year end.

The Group is required to make an estimate of the project completion levels in respect of contracts which straddle the year end for income recognition purposes. Estimates are based on expected total costs and revenues from each contract. Total expected costs are reviewed at each period and determined based on actuals to date versus management's historic experience in relation to similar contracts. This involves a level of judgement and therefore differences may arise between the actual and estimated result. Where immaterial differences arise they are recognised in the income statement for the following reporting period. Any material changes to these estimates would affect revenue recognised in the financial statements and the level of deferred or accrued income on the balance sheet.

ii. Contingent deferred consideration payments in respect of acquisitions and acquisition-related employee remuneration.

The Group has estimated the value of future amounts payable in respect of acquisitions. The estimate is based on management's estimates of the relevant entity's future performance. If these estimates change in the future as the earn out progresses, the amount of the provision will vary. Any changes to the carrying value of the provision are recognised in the income statement.

As part of a typical acquisition an amount is also payable to the employees of the acquired company. These acquisition-related employee remuneration costs are calculated using the same estimates of the relevant entity's future performance as the deferred consideration payable. If these estimates change in the future, as the earn out progresses, the amount of the employee liability, which is recognised over the earn out period, will vary. Any changes to the carrying value of these liabilities are recognised in the income statement.

iii. Valuation and amortisation period of separately identifiable intangible assets on acquisitions.

The Group is required to value the separately identifiable intangible assets acquired as part of a business combination. In order to value some of these intangible assets, the Group must make assumptions as to future cash flows derived from these costs and estimate the expected lives of these assets. Changes to these estimates would affect the resulting valuation of goodwill and the amortisation charge recognised in the financial statements.

iv. Impairment of goodwill and intangible assets acquired as part of a business combination.

The Group tests goodwill and intangible assets acquired as part of a business combination annually for impairment, in accordance with the Group's accounting policies. The recoverable amount is based on value-in-use calculations, which requires estimates of future cash flows and the discount rate to apply in order to calculate the present values of these cash flows. The estimates used and sensitivity of these assumptions is disclosed in note 9.

NOTES TO THE PRELIMINARY ANNOUNCEMENT

1 Non-GAAP Measures

The Group believes that reporting non-GAAP measures provides a useful comparison of underlying business performance and reflects the way the business is controlled. The Group reports two types of non-GAAP measure, headline measures and like-for-like gross profit.

Headline measures 

Non-headline gains and losses are items that, in the opinion of the Directors, are required to be disclosed separately, by virtue of their size, nature or incidence, to enable a full understanding of the Group's underlying financial performance. Accordingly headline measures exclude, where applicable, the effect of the following items:

i. Restructuring costs - these costs principally relate to redundancy costs. Further details are provided in note 4.

ii. Net (credit)/charge for VAT payable and related costs - these costs relate to the VAT payable to HMRC in respect of certain charity clients. This is reported net of recovery from clients.

iii. Employment settlement and related costs - these costs relate to the payment made to the prior employer of senior staff hired to establish the Cello Health BioConsulting business, in respect of post-employment restrictions.

iv. Start-up losses - these are defined as the net operating result in the period of the trading activities that relate to new offices, new products, or new organically started businesses. Activities so defined will cease being separately identified where, in the opinion of the directors, the activities show evidence of becoming sustainably profitable or are closed, whichever is earlier. In any event start-up losses will cease being separately identified after two years from the commencement of the activity. Further details are provided in note 5.

v. Acquisition costs - these are costs that are directly related to acquisitions completed in the year.

vi. Amortisation of intangible assets - this is in respect of amortisation charged against separately identifiable intangible assets acquired as part of a business combination.

vii. Acquisition related employee remuneration expense - costs with regards to deferred payments payable to vendors and certain employees of a company in accordance with the share purchase agreement of the acquired company. In accordance with IFRS 3 Business Combinations, these costs are recognised in the income statement by virtue of employment conditions in the relevant share purchase agreement.

viii. Share option charges - these costs represent the fair value of share options charged to the income statement and are separately identified due to their nature. 

ix. Impairment of goodwill. Further details are provided in note 9.

Headline measures in this report are not defined terms under IFRS, and may not be comparable with similarly titled measures reported by other companies.

A reconciliation between statutory and headline profit/(loss) before taxation is presented in below:

Like-for-like gross profit

Like-for-like gross profit measures exclude the results from companies acquired in the year, and they also exclude the results of acquired companies in the prior year to the extent that those companies were not in the Group in that prior year. Like-for-like gross profit measures also appropriately exclude the impact of start-ups, which are defined in note 5. In aggregate, these adjustments are detailed in the table below.

Like-for-like measures are also calculated both with and without the impact of movements in currency. These measures are also disclosed in the table below.

2 Segmental Information

For management purposes, the Group is organised into two operating segments, Cello Health and Cello Signal. These segments are the basis on which the Group reports internally to the plc's Board of Directors, who have been identified as the chief operating decision makers. 

Revenue and costs not included in one of these operating segments, for example central overheads and results from start-up operations, have not been allocated to an operating segment in line with the way they are reported to the chief operating decision makers.

The principal activities of the operating segments are as follows:

Cello Health

The Cello Health Division provides market research, consulting and communications services principally to the Group's pharmaceutical and healthcare clients.

Cello Signal

The Cello Signal Division provides market research and direct communications services principally to the Group's consumer-facing clients.

Revenues derived from the Group's largest client are less than 10.0% of the Group's total revenue. Revenue derived from the largest client in each operating segment also represents less than 10.0% of external revenue in each segment.

Sales between segments are carried out at arms-length. The revenue from external parties reported to the chief operating decision maker is measured in a manner consistent with that in the income statement.

The Group's operations are materially located in the United Kingdom and the US.

The following table provides an analysis of the Group's revenue by geographical market, based on the location of the client:

The following table provides an analysis of the Group's non-current assets, excluding deferred tax assets, by geographical location:

3 Administrative Expenses

4 Restructuring Costs

5 Start-up Losses

Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2015 (on 26 October 2015) and the Finance Bill 2016 (on 7 September 2016). These include reductions to the main rate of corporation tax to 19.0% from 1 April 2017 and to 17.0% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using these enacted tax rates in these financial statements.

8 Earnings/(loss) per Share

Basic earnings/(loss) per share is calculated by dividing the earnings/(loss) attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year, excluding treasury shares and shares in employee benefit trusts, determined in accordance with the provisions of IAS 33 Earnings per Share.

Diluted earnings/(loss) per share is calculated by dividing earnings/(loss) attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year adjusted for the potentially dilutive ordinary shares.

The Group's potentially dilutive shares are shares expected to be issued as deferred consideration on acquisitions and share options issued.

Headline earnings per share is calculated using headline post-tax earnings for the year, which excludes the effect of restructuring costs, start-up losses, amortisation of intangibles, impairment charges, acquisition accounting adjustments, share option charges and other exceptional costs.

The recoverable amount for each CGU is determined using a value-in-use calculation. This calculation uses budgeted pre-tax headline operating profit adjusted for non-cash transactions to generate cash flow projections. The budgets are approved by management based on past experience and historic trends. An underlying growth rate of 2.0% per annum in years 2 to 5 has accordingly been used for those years.