Final Results

The Mission Marketing Group

Preliminary results

For the year ended 31 December 2010

The Mission Marketing Group plc ("TMMG" or "themission®"), the UK marketing communications group, sets out its audited financial statements for the full year ended 31 December 2010.

Overview:

·; Successful refinancing of bank and acquisition liabilities completed

·; Board restructured to become more operator-led

·; Agencies working more closely together

·; Adverse economic impact on Client budgets largely offset by net new business wins

·; Operating margins remain above industry average

Financial summary:

·; Operating income ("revenue") unchanged, at £36.1m

·; Pre-exceptional operating profit £4.9m (2009: £5.6m)

·; Operating margins 14% (2009: 15%)

·; Working capital cash inflow of £0.9m vs outflow of £2.6m in prior year

·; Acquisition liabilities eliminated (2009: £3.9m) 

·; Total net debt/equity improved from 49% to 34%

David Morgan, Chairman, commented:

"2010 was a transitional year for themission®. Following the refinancing of the business and the restructuring of the Board to become more operator-led, we set clear goals for the future; to focus on our core business, to help our talented Agencies provide even greater value to our Clients, to improve our profitability through growth and cost reductions, to pay down debt and to encourage an atmosphere that drives success.

I am pleased with the degree to which each of these goals has been achieved through 2010 and I can confirm that they will continue to underpin our focus in the future. As a result we move into 2011 with greater confidence that the Mission can enhance its position within the UK Marketing and Advertising sector."

www.themission.co.uk 

themission® is a national marketing communications and advertising group with 12 offices across the UK. The Group specialises in providing national and international clients with award winning marketing, advertising and business communications. Group members include April-Six, Big Communications, Bray Leino, Fuse Digital, RLA, Robson Brown, Story and ThinkBDW. themission® employs 600 staff nationally and is listed on AIM (TMMG).

Chairman's Statement

2010 was a transitional year for themission®. Following the refinancing of the business and the restructuring of the Board to become more operator-led, we set clear goals for the future; to focus on our core business, to help our talented Agencies provide even greater value to our Clients, to improve our profitability through growth and cost reductions, to pay down debt and to encourage an atmosphere that drives success.

I am pleased with the degree to which each of these goals has been achieved through 2010 and I can confirm that they will continue to underpin our focus in the future. As a result we move into 2011 with greater confidence that the Mission can enhance its position within the UK Marketing and Advertising sector. We have an enviable Client list which was added to during 2010 and top talent that was further strengthened throughout our Group.

I am especially pleased with the endeavours of our Board and our Agency management teams who have responded well through a difficult period by identifying new and exciting opportunities for our businesses and our Clients. The synergies between our individual Agencies are now being more fully exploited with them working more closely together to provide solutions and unrivalled expertise and service to our Clients.

Whilst our focus remains to support our core businesses, new ventures and opportunistic purchases - such as our recent acquisition of the Robson Brown brand - should help us further accelerate our growth in 2011 and beyond.

In a nutshell, the new team has made a good start and I view the future with optimism, albeit of the cautious variety.

David Morgan

Chairman

Financial Review

Summary

The new Group structure, with a reduced head office and a more operational Board, together with the renewed focus towards further integration of the Group's agencies, organic growth, cost efficiencies and cash management, has yielded positive results in 2010 which are expected to continue into 2011.

Trading, Statement of Income and Dividend

As widely predicted, the difficult economic backdrop resulted in another year in which pressures on Clients' marketing budgets remained high. Although all the Group's agencies felt the effects of this pressure, the impact of post-election spending cuts across the public sector was particularly acute in the Group's Events & Learning and PR activities, both of which experienced year-on-year declines in revenue. New business across the board was hard-fought and often won at lower margins than in previous years. Against this background, not to mention the distraction caused by the need to re-finance the Company, the Group's financial performance was very satisfactory.

Turnover for the financial year ended 31 December 2010 increased by 5% to £90.4m (2009: £86.0m), driven by the strong growth in media placement activity handled by ThinkBDW, our property-specialist agency. ThinkBDW's business model, of working with property Clients to improve their return on investment in both on-line and traditional newspaper media, continues to hold strong appeal in the market and ThinkBDW has achieved some excellent new business wins during the year. Not least among these were the Clients of a failing competitor, to whom ThinkBDW were able to offer virtually continuous service as it fell into Administration. 

Operating income (gross profit) remained unchanged, at £36.1m. The impact of reductions in Client budgets was offset by net new business wins totalling £2.8m during the year. The strong improvement in operating income in the second half of the year reflected both new business wins and also the expected second-half bias in underlying Client activity. The lower gross margin achieved in 2010 (40% vs 42% in 2009) reflects both the higher proportion of media in the business mix and the pressure on margins experienced by the industry as a whole.

Overhead costs remained under close scrutiny across the Group, yielding a 2% year-on-year reduction in non-staff costs as a result. In contrast, the increase of 3% in staff costs reflected increases in front-line staff to handle new business wins during the year, and the re-hiring of staff from the failed Robson Brown agency in Newcastle. While the pressure on margins resulted in a modest decline in pre-exceptional operating profits, to £4.9m (2009: £5.6m), operating margins, at 14% (2009: 15%) remain above average for the industry.

Exceptional costs totalling £1.2m were incurred on professional fees relating to the re-structuring and re-scheduling of bank facilities and outstanding acquisition obligations, together with amounts payable as a result of staff restructuring across the Group. After exceptional costs, operating profits were £3.8m (2009: £0.9m after goodwill impairment charges of £4.0m).

Net interest payable increased to £2.1m (2009: £1.7m), as a consequence of the bank fees and higher interest costs resulting from the debt re-financing required in April, but interest costs are expected to reduce over the coming year as a result of the settlement of all outstanding vendor loan note obligations during 2010 and the maturing of historic interest rate hedges over the course of 2011.

Pre-exceptional profit before tax was £2.8m (2009: £3.8m). After exceptional costs, profit before tax was £1.6m (2009: loss of £0.9m) and the profit after tax was £0.9m (2009: loss of £2.0m). The effective tax rate, after adding back the notional IFRS interest charges and the goodwill impairment charge, which are not taxable, was 41.9% (2009: 35.7%). Headline diluted EPS was 3.5p (2009: 7.8p) and diluted EPS was 1.6p (2009: loss per share 5.5p).

In line with our continuing focus on cash retention the Board does not propose the payment of a year end dividend.

Balance Sheet and Cash Flow

During the period, the balance sheet was restructured such that the Group now has a much more comfortable level of financial leverage. This was accomplished by converting the majority of the outstanding vendor debt into equity, and a private placing of £1.3m cash which was used to redeem outstanding acquisition debt and associated interest. At 31 December 2010, all outstanding acquisition obligations had been settled, the Group had banking facilities committed until 2013, and the gearing ratio of total net debt (bank plus vendor debt) to equity had reduced from 49% to 34%. Net bank debt at 31 December 2010 was £18.5m (2009: £20.1m). Cash balances were £1.4m (2009: £0.3m) and the Group also had available overdraft facilities of £2.0m.

Pre-exceptional EBITDA, a common approximation for underlying cash flow, totalled £5.6m in 2010, resulting in year-end ratio of net bank debt to EBITDA ("leverage ratio") of x3.3. With the Board's continuing focus on the use of operating cash flows to reduce the Group's bank debt, this ratio is expected to fall throughout 2011.

The 2010 year-end gearing ratio could have been even further improved had it not been for the substantial cash costs incurred during the year on bank and professional fees associated with the debt refinancings in both 2009 and 2010, and also staff restructurings. Savings in these costs in 2011 will undoubtedly benefit cash flow and levels of gearing. Furthermore, while the greater emphasis on cash management throughout the Group resulted in a c20% reduction in working capital levels during 2010, further reductions are expected in the year ahead.

At 31 December 2010, the Board undertook its annual assessment of the value of goodwill and concluded that no impairment in the carrying value was required, reflecting the improved prospects for the Group's agencies. Capital expenditure, at £0.7m, was maintained at similar levels to 2009.

Key Performance Indicators

The Group manages its internal operational performance by monitoring various key performance indicators ("KPIs''). The KPIs are tailored to the level at which they are used and their purpose. The Group's current focus is on: operating income generated by Client and business development; operating profit margins; and cash-related measures including bank covenant test headroom and the ratio of net debt to EBITDA.

At the individual agency level, the KPIs comprise profitability measures including achievement of annual budget and net/gross margin; productivity measures including gross profit, salary costs and net profit per head; working capital/cash measures including debtor, creditor, WIP and working capital days; meeting target cash balances and cash conversion.

Peter Fitzwilliam

Finance Director

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2010

The earnings per share figures derive from continuing and total operations.

Consolidated Balance Sheet

As at 31 December 2010

Consolidated Cash Flow Statement

for the year ended 31 December 2010

Consolidated Statement of Changes in Equity

Year ended 31 December 2010

Notes to the Preliminary Announcement

1. Basis of preparation and significant accounting policies

The results for the year to 31 December 2010 have been extracted from the audited consolidated financial statements.

The financial information set out above does not constitute the Company's statutory accounts for the years to 31 December 2010 or 2009 but is derived from those accounts. Statutory accounts for the year ended 31 December 2009 were delivered to the Registrar of Companies following the Annual General Meeting on 14 June 2010 and the statutory accounts for 2010 are expected to be published by 29 April 2011 and delivered to the Registrar following the Annual General Meeting on 13 June 2011.

The auditors, Kingston Smith LLP, have reported on the accounts for the year ended 31 December 2010 and 2009; their report in both years was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006 in respect of those accounts.

The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union and on the historical cost basis.

Going concern

The Board has substantially strengthened the Group's balance sheet in the year. Bank debt has been rescheduled, with committed facilities available to 2013, acquisition liabilities have been eliminated through equity conversion and a placing of new shares, and the focus on cash management across the agencies has resulted in stronger operating cash flows.

The available banking facilities provide comfortable levels of headroom against the Group's projected cash flows and the Directors accordingly consider that it is appropriate to continue to adopt the going concern basis in preparing these financial statements.

Accounting estimates and judgements

The Group makes estimates and judgements concerning the future and the resulting estimates may, by definition, vary from the actual results. The Directors considered the critical accounting estimates and judgements used in the financial statements and concluded that the main areas of judgement are:

·; Revenue recognition policies in respect of contracts which straddle the year end;

·; Contingent deferred payments in respect of acquisitions;

·; Recognition and quantification of share based payments; and

·; Valuation of intangible assets.

These estimates are based on historical experience and various other assumptions that management and the Board of Directors believe are reasonable under the circumstances and are discussed, to the extent necessary, in more detail in their respective notes.

2. Segmental Information

Business Segmentation

For management purposes the Group had seven operating subsidiaries during the period: April-Six Limited, Big Communications Limited, Bray Leino Limited, Fuse Digital Limited, RLA Group Limited, Story UK Limited and ThinkBDW Limited. These have been divided into four business and operating segments as defined by IFRS 8 which form the basis of the Group's primary reporting segments, namely: Branding, Advertising and Digital; Media; Events and Learning; and Public Relations. In the 2009 financial statements we disclosed a Branding and Advertising segment and a Digital segment separately. Digital has become such an integral part of our business that the distinction between these two segments has become increasingly blurred and any split increasingly arbitrary. Accordingly, the two segments have been combined into a single Branding, Advertising and Digital segment in the current year's financial statements.

Unallocated corporate expenses include corporate administration expenses necessary for a quoted company. It is considered impractical to split the debt interest and notional IFRS charges into segments.

The split of assets and liabilities has been estimated, but is not considered accurate as the businesses are integrated. Unallocated corporate assets and liabilities include unallocated IFRS assets and liabilities, corporate assets and liabilities, Group cash reserves, drawn debt liabilities and payments due to vendors.

3. Reconciliation of Headline profit to Reported Profit

The IFRS interest charges relate to both the deferred consideration and the bank arrangement fees.

4. Other Exceptional Costs

Bank refinancing costs consist of professional fees relating to the restructuring and rescheduling of the bank facilities and outstanding acquisition obligations.

Restructuring costs consist of amounts payable for loss of office as a result of the restructuring of the Board and the exit of vendor management following refinancing.

5. Finance Costs and IFRS Interest Charges

6. Profit on Ordinary Activities before Tax

Profit on ordinary activities before taxation is stated after charging:-

7. Earnings per Share

The calculation of the basic and diluted earnings per share is based on the following data, determined in accordance with the provisions of IAS33: "Earnings per Share".

Basic earnings per share includes shares to be issued subject only to time as if they had been issued at the beginning of the period.

The additional consideration shares included in non current liabilities at 31 December 2009 were not included in the diluted earnings per share because the conditions for their issue had not been met in the period. Options issued are included in diluted earnings per share to the extent that the market price is above the exercise price in accordance with IAS33.

Dilutive options are not incorporated into the reported diluted earnings per share calculation if the effect would be to lower the loss per share.

A reconciliation of the profit after tax on a reported basis and the headline basis is given in note 3.

8. Intangible Assets

Goodwill

The adjustments to consideration relate to changes in the estimated deferred consideration in the earn-out period under the terms of the relevant sale and purchase agreement.

In accordance with the Group's accounting policies, an annual impairment test is applied to the carrying value of goodwill and other intangible assets. The review performed assesses whether the carrying value of goodwill is supported by the net present value of future cash flows derived from the underlying assets considering forecast cash flows over an initial projection period of three years for each cash-generating unit. After this period, a nil growth rate was assumed for all units. The discount rate used is the Group's estimated pre-tax weighted average cost of capital, which is 5.4%. Similarly the cash flow projections used in the calculations are pre-tax.

Other Intangible Assets

Other intangible assets consist of intellectual property rights which are amortised over 20 years. Amortisation of £4,000 (2009: £4,000) was charged in operating expenses before exceptional items.

9. Bank Overdrafts, Loans and Net Debt

The adjustment to amortised cost relates to the amortisation of bank debt renegotiation fees over the life of the loan facility.

During the year an agreement was reached with the Group's bankers to restructure the committed facilities from a revolving credit facility of £20.3m into a revolving credit facility of £17.3m, due for repayment by June 2013 on a quarterly basis starting June 2011, and a term loan facility of £3.0m with a bullet repayment on 31 December 2013. The total repayment maturity profile is shown above.

Interest on the old revolving credit facility was based on 1 month LIBOR plus 3.5%. Interest on the new revolving credit facility is payable quarterly by reference to 3 month LIBOR plus 4.125%, subject to a downward ratchet on achievement of certain ratios of debt to EBITDA on an annual basis. Interest on the new term loan is calculated by reference to 3 month LIBOR plus 7.5% and is payable in full with the bullet repayment on 31 December 2013.

In addition to its committed facilities, the Group has available an overdraft facility of up to £2.0m with interest payable by reference to National Westminster Bank plc Base Rate plus 3.5% (on balances up to £2m) or 5.5% (on balances over £2m).

There is a cross guarantee structure in place with the Group's bankers by means of a fixed and floating charge over all of the assets of the Group companies in favour of the Royal Bank of Scotland plc and HSBC Bank plc.

All borrowings are in sterling.

10. Share Capital

The increase in shares during the year arose from the issue of 9.8m ordinary shares as a placing to raise £1.3m and the issue of 23.0m shares in settlement of acquisition liabilities, both in June 2010.

11. Own Shares

Shares are held in an Employee Benefit Trust to meet certain requirements of The Mission Marketing Group Long Term Incentive Plan.

12. Reconciliation of Operating Profit to Operating Cash Flow