Final Results

15 March 2011

Cello Group plc

A strong performance

Cello Group plc (AIM:CLL, "Cello" or "the Group"), the insight and strategic marketing group, today announces its final audited results for the year to 31 December 2010.

Highlights

• Headline operating profit1 up 21% to £7.3m (2009: £6.0m)

• Reported operating profit £5.7m (2009: loss 4.9m)

• Like-for-like gross profit2 up 3.6% in Research and Consulting

• Like-for-like gross profit2 up 1% to £60.3m (2009: £59.7m).

• Headline basic earnings per share3 7.67p (2009: 7.56p)

• Reported basic earnings per share 5.88p (2009: loss per share 11.31p)

• Full year dividend up 10% at 1.43p (2009: 1.30p)

• Strong cash generation reduces net debt to £8.8m (2009: £11.5m)

• Good start to 2011 - momentum in Q4 2010 continued into Q1 2011

• Robust pipelines of non-UK work in Research and Consulting

• Healthy profitability in core US business

Acquisition and placing

• Acquisition announced today of MedErgy HealthGroup Inc further strengthening healthcare and non UK revenue base

• Also today, to part finance the acquisition, the Group is pleased to have announced the conditional placing to raise £2.8m (before expenses) at a placing price of 52.5p from new and existing institutional investors and certain directors of the Group

Mark Scott, Chief Executive, commented:

"2010 saw a strong performance, particularly in our research and consultancy operation. Our focus on the healthcare market and our increasingly global client base have resulted in robust profit growth. We plan to continue to internationalise our operating base in 2011 and strengthen our focus on our core client sectors. The acquisition of MedErgy, announced today, will accelerate this process."

1 Headline operating profit is defined as operating profit before restructuring costs, acquisition accounting adjustments, share option charges, impairment charges and amortisation.

2 Like-for-like measures exclude discontinued operations and the impact of any reclassification of business between reporting segments. 

3 Headline earnings per share is defined in note 7.

Enquiries:

Overview

2010 saw a strong recovery in profitability, with the Group reporting a 21% growth in headline operating profit to £7.3m (2009: £6.0m) on gross profit of £60.3m (2009: £59.7m). The final quarter showed continued improving commitment to spend by clients in the Group's core areas of expertise.

The Research and Consulting division of the Group experienced a particularly robust recovery, with full year like-for-like gross profit growth of 3.6%. This produced a like-for-like growth in headline operating profit of 27.0%. The Communications division, Tangible, saw a like-for-like increase in headline operating profits of 9.2%, despite a like-for-like decline in gross profit of 3.1% as a result of the marked slowdown of public sector spend.

The Group continues to benefit from its focus on the pharmaceutical and broader health markets and increasing orientation towards large global contracts. Healthcare continued to grow at a higher rate than the rest of the Group and in 2010 accounted for 41.5% of gross profit in Research (2009: 38.1%). The acquisition of MedErgy HealthGroup Inc ("MedErgy") announced today significantly accelerates the Group's migration towards the health services market, in line with the Group's strategy.

The Group's emphasis on international activity has continued to yield good returns, with overseas revenue accounting for over 40% of Research and Consulting revenue in 2010. This has been achieved by continuing to target multinational client contracts which represent higher growth opportunities outside the relatively mature UK market. The acquisition of MedErgy will materially shift the balance of the Group towards international revenue sources. The Group now has a strong US footprint in New York, Philadelphia and San Francisco.

The Group's top 20 clients remained largely unchanged, a clear demonstration of the Group's ability to manage long term relationships. In 2010 they accounted for 37.7% of Cello's total gross profit (2009: 37.7%). At the same time the Group has achieved significant new client wins.

Following continued strong operating cash generation, net debt at the year end was reduced to £8.8m (2009: £11.5m).

This morning, the Group announced the conditional placing of 5.3m ordinary shares at 52.5p per share to new and existing investors and certain directors of the Group at a placing price of 52.5p per share to raise £2.8m (before expenses). These funds will be applied to the acquisition of 100% of the equity of MedErgy, for a total consideration of $11.0m, payable $5.5m in cash and the issue of 5,804,049 new Cello ordinary shares.

The Group continues to invest in developing its professional service model, supported by its in-house management development programme, Cello Academy, and a comprehensively structured bonus scheme. The Group has recently completed a substantial brand enhancement exercise, including a new website, in order to optimise the Group's combined credentials with multinational clients placing large contracts with the Group.

Financial Review

Total Group gross profit was £60.3m (2009: £59.7m). Headline profit before tax was £6.4m (2009: £5.1m). The Group's overall results reflect continued success in the core activities of healthcare research, healthcare consulting and specialist research. Within these areas, both qualitative and quantitative research have continued to grow strongly.

The Group's headline operating margin4, before head office costs, recovered strongly to 15.2% (2009: 12.5%), with a headline operating margin of 18.8% in Research and Consulting (2009: 15.4%).

4 Headline operating margin is calculated by excluding central head office costs from headline operating profit and expressing that as a percentage of gross profit.

In response to the long anticipated reduction in public sector activity, the Group took prompt action to materially reduce its exposure to this area. As indicated in the interim results, this resulted in an exceptional restructuring charge of £0.8m. This charge relates to employee termination payments andsurplus space provisions. All of these were deemed prudent actions given the likelihood that public sector spend will remain depressed for the foreseeable future.

Headline finance costs5 were £0.9m (2009: £1.0m), reflecting the Group's reduced debt levels. The Group's tax charge in the year was £1.3m (2009: £0.2m).

Headline basic earnings per share rose to 7.67p (2009: 7.56p) and headline fully diluted earnings per share rose to 6.40p (2009: 6.09p). Fully diluted earnings per share reflects the impact of the anticipated future issuance of shares to vendors of companies acquired by the Group under earn out arrangements.

The Board is proposing a final dividend of 0.905p per share, giving a total dividend per share for the year ended 31 December 2010 of 1.43p (2009: 1.30p), an increase of 10%. This dividend will be paid, subject to shareholder approval, on 8 July 2011 to all shareholders on the register at 10 June 2011 and will be recognised in the year ending 31 December 2011.

The Group's net debt position at 31 December 2010 was £8.8m (2009: £11.5m). Operating cash flow before tax of £7.8m (2009: £5.2m) during the year represented a 107% conversion of headline operating profit.

The Group's banking facilities consist of an £8.0m term loan, a £7.0m Revolving Credit Facility and a multi-currency overdraft facility of £2.0m. Interest margin is between 250pts and 325pts above LIBOR.

In April 2010, £2.2m of earn out liabilities were settled. These were settled by £1.3m in cash and loan notes, and £0.9m in shares issued at an average issue price of 32.8p per share. Following a detailed review of further liabilities, expected 2011 earn out commitments have returned to levels estimated prior to the recession, reflecting recovery in underlying performance. Earn out commitments now stand at £7.3m at 31 December 2010. Of this, approximately £5.3m will fall payable in April 2011. The minimum cash or loan note element of this 2011 payment is £2.4m. Shares issued under these arrangements will be subject to contractual trading lock-ins for up to three years after their issue. The Board retains discretion to pay a larger proportion of this in the form of loan notes or cash. The remaining earn out obligations payable after April 2011 are capped at £2.4m.

5 Headline finance costs are defined as finance costs excluding notional finance costs on future deferred consideration payments.

The Group incurs a number of charges in the income statement below headline operating profit, detailed below.

* no cash flow impact

The Group monitors many financial measures on a regular basis but our key performance indicators are headline operating profit, headline operating margin, like-for-like gross profit, headline operating cash flow conversion and headline basic earnings per share.

Operational Review

Research and Consulting 

The Group's market research and consulting business experienced a strong second half of the year, with robust like-for-like annual gross profit growth of 3.6%. Operating profits rose by over 27% on a like-for-like annual basis, reflecting continued strong spending patterns from our broad international blue-chip client base. The business delivered a headline operating profit of £6.9m (2009: £5.6m) from gross profit of £36.9m (2009: £36.3m).

With an employee base of 369 (2009: 399) and revenue of £59.9m (2009: £59.9m), the business ranks firmly in the top ten market research companies based in the UK (Marketing Magazine, March 2010) and is the only such business which is not part of a much larger group. With continued consolidation in the market research sector, the business now ranks 23rd globally (Inside Research, August 2010).

Operating margins have recovered to a good level at 18.8% (2009: 15.4%) reflecting more normal operating conditions.

Performance has been particularly strong in the pharmaceutical and health related client sectors which now constitute the primary area of our research and consulting activity and which operate at a higher margin than other client sectors. In 2010, Healthcare research represented approximately 42% of gross profit in this division (2009: 38%). As well as continued strength in the pharmaceutical sector, the Group has successfully extended into the growing over-the-counter and brand oriented market for drugs and therapies, particularly in the USA.

The Group's New York office has performed strongly and is expanding rapidly. The Group also intend to expand its US West Coast office more aggressively in 2011, backed by recent new client wins. A small office was also opened in Switzerland in 2010 to service pharmaceutical clients. In 2011, the Group will embark on a concerted strategy to expand into Asia.

The acquisition of MedErgy will accelerate the Group's growth strategy, extending its healthcare reach and international capabilities. For the year ended 31 December 2010, MedErgy delivered $2.3m of profit before tax on gross profits of $9.0m, with an exclusive focus on the pharmaceutical market from its offices in Pennsylvania and London.

Notable project wins in Research and Consulting in 2010 came from Allergen, Amgen, Astellas, GSK Global, Pfizer, Novartis, Novo Nordisk, Roche, Sandoz, Viropharma, 3M, Adidas, Bauer, BBC, Boots, British Airways, BUPA, Cadbury, Camelot, Citi, EA, EBay, Eurostar, hotels.com, HMRC, HP, ITV, Kellogg's, KPMG, Kraft, Lloyds Banking Group, Macmillan Cancer Support, MTV, Nestle, News International, Nokia, L'Oreal Paris, P&G, Prudential, PWC, PZ Cussons, RBS, RIM, TFL, Travis Perkins, Unilever, Virgin Media, Visa, Wrigleys and Yell.

The Group has continued to integrate its research, consulting and communications capability to achieve competitive advantage against the much larger networks with which it is now directly competing. MedErgy further reinforces this integration process. The Group has also continued to consolidate its field force and online data capture capacity to improve utilisation levels and to position itself as a competitive outsourcing solution for larger research networks.

Online activity continues to grow as a proportion of the Group's overall research activity. The Group's e-village product for pharmaceutical clients and the Group's social media research applications sold under the Face brand have performed strongly.

As indicated with the interim results in September, the Group has incurred an exceptional restructuring charge of approximately £0.8m, relating to the material reduction of the Group's exposure to public sector client spend in research. This process is now complete.

Tangible

The Group's communications business, Tangible, delivered solid like-for-like growth in headline operating profit of 9.2%, with headline operating profit of £2.2m (2009: £1.9m) on flat gross profit of £23.4m (2009: £23.4m), despite the pronounced decline in public sector spending. On a like-for-like basis, gross profit declined by 3.1%.

Headline operating margins in this business recovered somewhat to 9.4% (2009: 8.1%), reflecting an increased focus on research and value added consulting work, and away from the more commoditised aspects of communications delivery. Approximately 20% of Tangible's activity is now in the research and consulting area, a transition which we anticipate continuing rapidly in 2011. Tangible's strong position in web based social media research and communications has continued to benefit the network, as well as the Group's overall research offering. Tangible remains the fourth largest direct marketing company in the UK.

Tangible is opening an office in Beijing which will also serve as a hub for the Research and Consulting business.

Notable new business wins by Tangible came from Airwick, Birmingham Midshires, Cancer Research UK, Dettol, IFAW, Ben & Jerry's, British Red Cross, Consumer Credit Counselling Service, Damart, Dove, First Great Western, Hays Recruitment, Lloyds Banking Group, Lovatts, Macmillan Cancer Support, Mortein, Nestle Purina, NHS, Northern Rock, O2, Organ Donation, Royal Mail, Sainsbury's Finance, Salvation Army, Scottish Government, Scottish & Southern Energy, Stroke Association, Pfizer, Sony, SPX, Sue Ryder Care, The Royal British Legion, Tesco Bank, Vanish and VisitScotland.

Current Trading and Outlook

The Group is optimistic that the higher levels of client activity, particularly in the research sector, seen in the last quarter of 2010 and so far in 2011, will continue. The Group continues to enjoy strong gross profit pipelines. The acquisition of MedErgy and the expansion of the business internationally in healthcare, will provide the Group with additional momentum. At this early stage of the year the Board is optimistic that current expectations for 2011 can be met.

Allan Rich

Non-Executive Chairman

14 March 2011

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated cashflow statement

Consolidated statement of changes in equity

SIGNIFICANT ACCOUNTING POLICIES

(1) Basis of preparation and accounting policies

The final 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 to 31 December 2009 were approved by the Board of Directors on 15 March 2010, published on 16 April 2010 and delivered to the Registrar of Companies, and those for 2010 are expected to be published on 15 April 2011.

The auditors, PricewaterhouseCoopers LLP, have reported on the accounts for the year to 31 December 2010; their report 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 the accounts for the year to 31 December 2010.

The previous auditors, Baker Tilly LLP, have reported on the accounts for the year to 31 December 2009; their report 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 237 (2) or (3) of the Companies Act 1985 in respect of the accounts for the year to 31 December 2009.

During the year the Group generated a profit before tax of £4.9m and excluding non-recurring restructuring costs and other non-headline charges the Group generated a profit of £6.4m.

The Group had net current liabilities of £8.1m at 31 December 2010. This includes £2.75m of the borrowings under the Group's debt facilities, which are to be repaid in 2011, together with £5.3m of deferred consideration for acquisitions, for which conditions of payment have substantially been met. Up to £2.8m of this deferred consideration for acquisitions can be settled through the issuance of new share capital. In addition the Group has a £2.0m overdraft facility and a £7.0m revolving credit facility of which £6.0m is undrawn at 31 December 2010. The revolving credit facility is committed until March 2013.

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.

(2) Restatements

This year the Group has restated equity in relation to merger relief and employee benefit trusts.

Section 612 of the Companies Act 2006 (and previously section 131 of the Companies Act 1985) provides for mandatory relief from the recording of a share premium on shares issued in return for certain equity interests in other companies. In previous years, the Group had recorded a share premium on such transactions. Equity has therefore been restated to reclassify these amounts to a merger reserve. In addition, this merger reserve has been reduced by way of transfers to retained earnings to cover historic impairment charges in accordance with company law. The overall effect of this restatement at 31 December 2009 was a reduction in share premium of £2,832,000 (2008: £16,569,000), a reduction in merger reserve of £787,000 (2008: increase of £16,569,000) and an increase in retained earnings of £3,619,000 (2008: £nil). There is no impact on net assets or on amount recorded in the income statement or cash flow statement.

The Group had previously not consolidated certain employee benefit trusts set up as part of business combinations to remunerate management of the acquired company. Having further considered the nature of these trusts, the directors now believe that it is appropriate to consolidate these trusts because the activities of the trusts are being conducted on behalf of the Group, specific to its business needs, such that the Group derives benefits from the trusts' operations. The consolidation of these trusts has not resulted in an adjustment to profit/(loss) or net assets in previous years. The only material impact is in respect of shares held by these trusts on earnings per share as reported in the prior year. The restated 2009 basic and diluted loss per share from continuing operations figures are 0.19 pence lower than previously reported and the restated headline earnings per share is 0.13 pence higher than previously reported.

(3) Headline measures

The Group believes that reporting non-GAAP or headline measures provides a useful comparison of business performance and reflects the way the business is 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 accounting adjustments, share option charges, fair value gains and losses on derivative financial instruments and other exceptional costs. Exceptional costs are items that, in the opinion of the Directors, are required to be disclosed separately, by virtue of their size or incidence, to enable a full understanding of the Group's financial performance.

A reconciliation between reported and headline profit/(loss) before taxation is presented after the Consolidated Statement of Comprehensive Income. In addition to this reconciliation, a reconciliation between reported and headline operating profit is presented in note 1, a reconciliation between reported and headline finance income and costs 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 IFRS and may not be comparable with similarly titled measures reported by other companies.

(4) Accounting estimates and judgements 

The Group makes estimates and judgements concerning the application the groups 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. This involves a level of judgement and therefore differences may arise between the actual and estimated result. Where differences arise they are recognised in the income statement for the following reporting period. Reasonable variations to these estimates would not create material differences to the results of the Group.

ii. Contingent deferred consideration payments in respect of acquisitions.

The Group has estimated the value of future amounts payable in respect of acquisitions based on management's estimate of the relevant entities future performance. If this estimate changes in the future as the earn-out period progresses, the amount of the provision and goodwill will vary. The Group also uses this calculation to estimate acquisition related employee remuneration expense and notional finance costs on deferred consideration payments. Further disclosure on contingent deferred consideration is included in note 10.

iii. Recognition of share-based payments.

The Group makes various assumptions that are used to calculate the fair value of share options issued. Changes in these assumptions would vary the number of options expected to vest and would lead to changes in the share options charge in the period and subsequent periods. Reasonable variations to these estimates would not create material differences to the results of the Group.

iv. Impairment of Goodwill

The Group tests goodwill annually for impairment, in accordance with the Group's accounting policy. 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. Segmental information

For management purposes, the Group is organised into two operating groups; Research and Consulting, and Tangible Group. These groups 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.

The principal activities are as follows:

Research and Consulting

The Research and Consulting division provides both qualitative and quantitative research to a global range of clients across a range of sectors. This research combined with a consulting capability puts the Group in a unique position to add real value to client relationships.

Tangible Group

The Tangible Group offers direct communication solutions from a mixture of direct mail, email and related response media with a focus on the key delivery areas of response: Direct, Digital and Data.

Revenues of £5.58m (2009: £3.85m) are derived from the Group's largest client and these revenues are included in the Research and Consulting division.

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

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

2. Finance income and costs

3. Operating profit/(loss)

4. Taxation

5. Discontinued operations

The loss for the year ended 31 December 2010 relates to OMP Services Limited, a company in which the Group held a 50.1% stake. OMP Services Limited was sold to the non-controlling interests in December 2010. The loss for the year ended 31 December 2009 also includes the results in that year from Digital People Online Limited, a digital market research company, and Richmark Inc., a qualitative market research agency based in Chicago, which were closed during that year.

In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations the income statement for the year ended 31 December 2009 has been re-presented to include income and expenses for operations discontinued in the year ended 31 December 2009 in loss from discontinued operations.

An analysis of the result of discontinued operations is as follows: