Interim Results

Cello Group plc

Interim Results for the six months ending 30 June 2015

A solid first half

Cello Group plc ("Cello" AIM: CLL, "The Group"), the healthcare focused strategic marketing group, today announces its interim results for the six month period to 30 June 2015.

Group Financial Highlights

· Revenue £77.0m (2014: £78.3m)

· Gross profit £41.9m (2014: £39.5m)

· Like-for-like1 gross profit growth of 1.8%

· Headline profit before tax2 £4.2m (2014: £4.4m)

· Statutory operating profit £1.9m (2014: £3.6m) after additional provision for VAT of £1.1m (2014: £nil)

· Headline operating margin3 10.5% (2014: 12.0%)

· Headline basic earnings per share 3.61p (2014: 3.87p)

· Statutory basic earnings per share 1.18p (2014: 2.81p)

· Net debt of £9.8m (June 2014: £10.2m)

· Interim dividend up 5% to 0.84p (2014: 0.80p)

Divisional Financial Highlights

Operating Highlights

· Successful establishment of national US healthcare office network: New York, Philadelphia, Boston, San Francisco, Chicago

· Strong overall growth from the US health business, allowing ongoing addition of senior professionals

· Increased penetration of US biotech client community on East and West Coasts

· Alignment of Cello Signal to support the digital health communications proposition underway

· Continued strong growth of core social media software product Pulsar

1 Like-for-like comparisons remove the impact of acquisitions and results from start-ups in 2014

2 Headline measures are stated before non-headline charges (see note 2)

3 Headline operating margin is defined as headline operating profit as a percentage of segmental gross profit

Mark Scott, Chief Executive, commented: "Cello's emergence as a global provider of advisory services to the pharmaceutical and biotech industry is progressing at a rapid pace, with continuing strong growth from our core healthcare business, most notably in the US where our primary investments are being made. Cello Signal's strong digital and social media expertise will prove an invaluable addition to the Group's capabilities in the healthcare space and represents a key source of future organic growth."

Enquiries:

Notes to Editors (www.cellogroup.com)

Cello is a healthcare focussed strategic marketing group.

The Group's strategy is to create value for shareholders by building an international marketing advisory business able to advise blue chip clients globally, with a primary focus on the pharmaceutical and biotech sectors.

Cello has annualised revenues in excess of £170m, annualised gross profit in excess of £80m and employs over 900 professional staff.

Chairman's Statement

Overview

For the first six months the Group has delivered in line with expectations, with a particularly strong performance from the core healthcare business in the US.

The Group has now successfully established the US office footprint necessary to service US domestic and international pharmaceutical and biotech clients, in New York, Philadelphia, San Francisco, Chicago and Boston. This has been achieved with the recruitment of senior professionals to further the ongoing expansion of the business.

The first half of this year has seen the successful bedding in of acquisitions made in 2014, both in the UK and USA.

Good headway is being made in the application of the digital and social media capabilities of Cello Signal to the growth agenda of Cello Health, as well as building on the existing communications capabilities of Cello Signal in the healthcare space.

Following detailed analysis of the recent HMRC industry guidance that relates to the Charity activities of Cello Signal, it is prudent to make a further provision for VAT liabilities. This provision largely reflects the same activities captured in the contingent liability recognised in the 2014 accounts. More recently, other industry wide issues have been informally raised by HMRC that contradict their recent policy guidance. If these issues are eventually upheld by HMRC Policy, then the Group and its advisors will vigorously contest them.

Ongoing solid cash flow together with confidence in the operational momentum of the Group has allowed a further increase in the Interim Dividend of 5% to 0.84p (2014: 0.80p). This represents a continuation of a nine year record of increasing dividends.

Financial Review

Gross profit for the six months to 30 June 2015 was up 6.1% to £41.9m (2014: £39.5m) on revenue of £77.0m (2014: £78.3m). Like-for-like gross profit growth was 1.8%. Headline operating profit was £4.4m (2014: £4.7m). Headline operating margins were 10.5% (2014: 12.0%). Headline pre-tax profit was £4.2m (2014: £4.4m). Further detail on these numbers is provided in the operating review.

The reported tax charge is £0.7m (2014: £1.0m). This represents a headline tax rate of 26.4% (2014: 27.0%) which has fallen slightly due to reduced UK tax corporation tax rates.

Headline basic earnings per share were 3.61p (2014: 3.87p). Statutory earnings per share were 1.18p (2014: 2.81p).

The Group's net debt at 30 June 2015 was £9.8m (31 December 2014: £7.2m; 30 June 2014: £10.2m). The operating cash outflow reflects normal seasonal working capital outflows and is in line with management expectations. Total debt facilities are £24.0m.

The interim dividend has been increased 5% to 0.84p (2014: 0.80p). The interim dividend is payable on 27 November 2015 to all shareholders on the register on 22 October 2015. The Group continues an unbroken nine year record of annual dividend growth.

The Group has incurred operating losses of £0.1m in the first half in relation to the development of the Pulsar suite of products. As these losses do not fit the Group's tight definitions of 'start-up' activity, these losses have been absorbed within headline operating profit.

On 17 July 2015, the Group announced that HMRC had published further guidance (Revenue and Customs Brief 10 (2015)) regarding the industry-wide VAT issues affecting the charities sector that emerged in late 2014. Following detailed analysis of the application of the guidance it is prudent to make a further provision of £1.1m, taking the total provision made to date to £3.2m. This additional provision includes some items which were previously disclosed in the 2014 accounts as contingent liabilities. This provision includes a prudent assessment of penalties and interest, as well as professional costs incurred in dealing with the matter, but it excludes any assumption of client recovery. Preliminary conversations have taken place with clients regarding recovery of these costs.Any recovery from clients will be recognised in future periods as balances are settled.

Even more recently, further industry wide VAT issues have been informally raised by HMRC. If confirmed by HMRC's policy unit, the approach and treatment now being informally suggested will be vigorously contested by the Group with its advisors.

Costs of £0.2m were incurred from continued investment in start-up activity. This is disclosed below headline operating profit. The vast majority of previous start-up activities are now profitable, albeit currently operating at lower margins than the core business.

Restructuring costs of £0.3m were incurred as part of the ongoing efficiency drive with Cello Signal, necessary both to raise profitability and also to support its migration towards the healthcare space.

The following table details the other adjustments made to calculate headline operating profit. The acquisition related costs of £0.5m (2014: £0.5m) relate to necessary accounting charges arising from the acquisition of iS Healthcare Dynamics Limited.

Operating Review

Cello Health

Cello Health had a good six months, with overall client spending patterns continuing to be robust.

Segmental gross profit increased by 10.3% to £21.7m (2014: £19.7m), including a full period contribution from iS Health, which was acquired by the Group in May 2014. Like-for-like gross profit growth in the first half of 2015 was 2.1%. Margins remained healthy and competitive at 19.9% (H1 2014: 21.2%, FY 2014: 21.2%). Operating profits therefore rose to £4.3m (2014: £4.2m).

Cello Health continues to work with a wide range of healthcare enterprises. The client base includes 22 of the top 25 Global pharmaceutical businesses; a growing portfolio of biotech clients; and a number of significant consumer health organisations.

The four underlying capabilities of Cello Health are Cello Health Insight, Cello Health Consulting, Cello Health Communications and Cello Health Consumer. While Cello Health Consumer has had a slower six months than in the prior period, all other capabilities have performed well, with particular gross profit strength from Cello Health Communications and good performance from Cello Health Insight and Cello Health Consulting against tough prior period comparators. The like-for-like gross profit growth from these three core clinically-led capabilities, where the client base is predominantly large pharmaceutical organisations, was 7.0%.

The fastest growing geographical area in Cello Health has been the US. All capabilities in the US have had a strong period, especially Cello Health Insight and Cello Health Consulting. Following further investment in headcount, Cello Health now has offices in all the major Pharmaceutical centres in the US namely, New York, Philadelphia, San Francisco, Boston and Chicago. To further capitalise on the biotech and biopharma opportunity in the US, Cello Health has launched a new business based in Boston, Cello Health BioConsulting Inc, with the recruitment of four experienced consultants in this area. This business is accounted for as a start-up, and headcount of ten is expected by the end of the year.

The major new business wins achieved in the first six months of 2015 included: AbbVie, Boehringer Ingelheim, Boston Scientific, Cooper Vision Craft, Fiona McAndrew Research, Gilead, Janssen Cilag, Janssen Pharmaceuticals, Lundbeck, Market Metrics, Merz, Reckitt Benckiser, Sanofi, and Vertex Pharma.

Cello Signal

Segmental gross profit increased by 3.0% to £20.0m (2014: £19.4m). On a like-for-like basis gross profit growth was 1.0%. Operating profit was £1.0m (2014: £1.5m), and operating margins were 4.8% (2014: 7.6%).

Overall, and although operating profits are lower than last year, Cello Signal has performed as expected. The US Consumer research business into which senior staff were hired in 2014 is not yet reaping the benefit and this reduced operating margins in the first half. Additionally, as previously announced, the first half of 2014 was unusually profitable, as a high margin project came to an end in April 2014. Both these factors are key to understanding Cello Signal's relative profit performance in the first half of 2015.

Pulsar, Cello Signal's advanced social intelligence platform, has continued to grow strongly in the period and now has over 150 clients. The recent update to the product means that Facebook data is now incorporated into the analysis available to clients. This is a new enhancement, and provides clear competitive advantage. Annualised licence revenue is now over £2.0m and, while the product remains loss making, such losses are dropping and Cello Signal expects Pulsar to be making monthly operating profit by the end of the year. 

As the strategy for Cello Health has developed, it has become clear that the cutting-edge digital and social media capabilities of Cello Signal are in rapidly growing demand by the healthcare industry and Cello Signal's capabilities will be harnessed quickly by Cello Health to capitalise on this large revenue opportunity. Additionally, over the next twelve months, the Group is committed to develop the health agenda and client base within Cello Signal itself. There are already considerable health-orientated activities within Cello Signal which contribute approximately 10% of current gross profits, including working for health charities and providing communications advice to social health organisations. This existing experience will be important in expanding the overall Group offer.

Major new business wins achieved in the first six months of 2015 include: City of Glasgow College, Courtyard Hotels, EC English, Famous Grouse Global BTL, Genesis Housing Association, Hershey's China, Holiday Inn Express, Home Retail Group (Financial Services, Habitat & Argos), Jim Beam, Leprino, Mixxit, Musgrave Group (SuperValu & Wholesale), Nairn's, Police Scotland, RBS, Renaissance Hotels, Thames Water, UK2 and Unilever.

Full year Trading Outlook

Cello's goal of becoming a leading global supplier of services to the pharmaceutical and biotech sector is being progressively met, on the back of a very focused growth strategy. The utilisation of the digital skills of Signal against this agenda opens up a whole new area of growth for the Group and offers the Group a real competitive advantage in the global healthcare space. The organic investment in additional healthcare resource in the US is an essential element of this overall growth strategy and is beginning to bear fruit. Our management team is successfully balancing the need for organic investment in resource to fulfil the Group's corporate goals with the short term delivery of profit despite the inevitable short term impact of the investment programme. The Board is optimistic that this will not materially affect the full year outcome for the Group and that expectations will be met.

Allan Rich,

Chairman

16 September 2015 

Condensed Consolidated Income Statement

For the six months ended 30 June 2015

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2015

Condensed Consolidated Balance Sheet

As at 30 June 2015

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2015

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2015

Statement of changes in equity for the six months ended 30 June 2015:

Statement of changes in equity for the six months ended 30 June 2014:

Statement of changes in equity for the year ended 31 December 2014:

Notes to the Financial Information

For the six months ended 30 June 2015

1. ACCOUNTING POLICIES AND BASIS OF PREPARATION

The condensed consolidated financial information for the six months ended 30 June 2015 has been prepared in accordance with IAS 34 Interim Financial Reporting, as adopted by the European Union. The condensed consolidated financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2014, which have been prepared in accordance with IFRSs as adopted by the European Union.

The condensed consolidated financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2014 were approved by the Board of directors on 18 March 2015 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The condensed consolidated financial information was approved for issue on 16 September 2015 and has not been audited.

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2014, as described in those annual financial statements.

There are no new IFRSs or IFRICs that are effective for the first time for the interim period that would be expected to have a material impact on the Group.

2. 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, start-up losses, 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. 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 or incidence, to enable a full understanding of the Group's financial performance.

A reconciliation between statutory and headline profit before taxation is presented in note 4. In addition to this a reconciliation between statutory and headline earnings per share is presented in note 10. Headline measures in this report are not defined terms under IFRS, and may not be comparable with similarly titled measures reported by other companies.

3. SEASONALITY OF OPERATIONS

The Cello Health division is not materially influenced by seasonal factors. However, there are a number of clients in the Cello Signal division who traditionally commission activity in the second half of the year leading to increased revenues for that period with respect to those clients.

4. RECONCILIATION OF PROFIT FROM CONTINUING OPERATIONS BEFORE TAXATION TO

HEADLINE PROFIT BEFORE TAX

5. SEGMENTAL INFORMATION

For management purposes, the Group is organised into two operating groups; Cello Health and Cello Signal. 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.

6. FINANCE INCOME AND COSTS

7. TAXATION ON PROFIT ON ORDINARY ACTIVITIES

The tax charge for the period ended 30 June 2015 is based on management's estimate of weighted average annual tax rate expected for the full financial year. The estimated average annual tax rate used is 26.4% (2014: 27.0%).

8. DIVIDEND

An interim dividend of 0.84p (2014: 0.80p) per ordinary share is declared and will be paid on 27 November 2015 to all shareholders on the register on 22 October 2015. In accordance with IAS 10 Events after the Balance Sheet Date, this dividend has not been recognised in the accounts at 30 June 2015, but will be recognised in the accounting period ending 31 December 2015.

9. RESTRUCTURING COSTS, START-UP LOSSES AND ACQUISITION COSTS

Restructuring costs, start-up losses and acquisition costs have been separately disclosed in order to assist in understanding the financial performance of the Group.

Restructuring costs principally relate to redundancy costs.

Start-up losses 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.

Acquisition costs relate to professional costs incurred in relation to acquisitions.

10. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue 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 per share is calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year adjusted for the potentially dilutive ordinary shares for which the conditions of issue have substantially been met but not issued at the end of the year.

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 earnings for the year, which excludes the effect of restructuring costs, start-up losses, amortisation of intangibles, impairments charges, acquisition accounting adjustments, share option charges, fair value gains and losses on derivative financial instruments and the provision for VAT. The calculation also excludes non-controlling interests over which the Group has exclusive options to acquire in the future.

11. GOODWILL