Interim Results

Cello Health plc

('Cello' or the 'Group')

Interim Results for the six months to 30 June 2019

Cello Health continues to deliver strong growth

Cello Health plc (AIM: CLL), the healthcare-focused advisory group, today announces its interim results for the six month period to 30 June 2019.

Group Financial Highlights

·; Net revenue up 6.8% to £54.5m (H1 2018: £51.0m)

·; Like-for-like1 constant currency net revenue growth of 4.5%

·; Cello Health divisional net revenue growth of 11.6% (like for like constant currency growth of 8.2%)

·; Cello Signal divisional net revenue decline of 0.1% (like for like constant currency decline of 1.0%)

·; Headline profit before tax2 up 12.7% to £5.7m (H1 2018: £5.1m)

·; Headline operating margin3 improves to 10.9% (H1 2018: 10.4%)

·; Headline basic earnings per share up 12.7% to 4.08p (H1 2018: 3.62p)

·; Statutory profit before tax up 39.7% to £4.7m (H1 2018: £3.3m)

·; Statutory basic earnings per share up 40.3% to 3.31p (H1 2018: 2.36p)

·; Strong cash flow for the period

·; Net funds4 at 30 June 2019 of £2.2m (30 June 2018: net debt of £5.4m)

·; Interim dividend up 4.5% to 1.15p (H1 2018: 1.10p)

1 Like-for-like comparisons remove the impact of acquisitions and results from start-ups in 2017 (see note 3)

2 Headline measures are stated before non-headline charges (see note 3)

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

4 Net funds excludes lease liabilities that arise as a result of the adoption of IFRS 16

Divisional Financial Highlights

·; New segmental presentation for Cello Signal from 1 January 2020 separating out Pulsar, the Group's software business

Operating Highlights

·; Strong growth across Cello Health, particularly in the US

·; New Berlin office now fully servicing European clients

·; Acquisition of ISS in August 2019 further strengthens Cello Health's US advisory capability

Mark Scott, Chief Executive, commented:

"The first half of 2019 has continued to see strong growth from Cello Health, notably in the US market. Cello Health Communications and Cello Health Consulting have made particularly pleasing progress. The addition of ISS in August will help contribute to this momentum and has added critical regulatory expertise. Good revenue visibility for the remainder of the year gives us confidence for a strong full year outcome."

Enquiries:

Notes to Editors

Cello Health plc is a global healthcare-focused advisory Group comprised of a set of leading clinical, commercial advisory and digital delivery capabilities. Cello Health plc currently services 24 of the top 25 pharmaceutical clients globally, as well as a wide range of biotech, diagnostics, devices and other key non-healthcare clients.

Cello Health plc enables clients to commercialise, differentiate their assets, and drive brand success in ever more complex global markets. The business delivers its services through nearly 1,000 highly skilled professionals, utilising latest thinking, technology and digital solutions.

Cello Health plc delivers its services from an office network in the UK, USA, and Asia, with hub offices in New York City, Philadelphia PA, London, Edinburgh, Farnham and Cheltenham.

For further information, please visit: https://cellohealthplc.com

Chairman's Statement

Overview

The Group has had an excellent first half of the year as it continues to execute its strategy of building and growing a global healthcare-focused advisory group. Constant currency like-for-like net revenue growth was very good at 4.5%, and the Cello Health division grew constant currency like-for-like net revenue by 8.2%. The client base of the Group remains robust: 24 of the top 25 global pharmaceutical businesses are clients, complemented by a wide range of biotech and other clients.

The Group now earns 34.1% of its net revenue from US domiciled businesses (2018: 29.8%) and the Cello Health division derives 49.5% (2018: 45.2%) of its net revenue from its US based businesses. The relative strength of the US dollar has helped reported operating profit in the first half by around £0.2m, and this effect is expected to continue for the rest of 2019. The Group was pleased to complete the acquisition of ISS, a scientific consulting firm specialising in strategic counsel and regulatory support for the healthcare industry in the US, in August 2019. This acquisition will further strengthen the US presence of the Group as well as adding key complementary regulatory expertise.

Cello Signal had a satisfactory first half, with good performances in a number of underlying core activities where margins have continued to rise. This improvement is somewhat masked by the ongoing investment profile of Pulsar, the Group's social media software sales business, which is more capex intensive. We intend to enhance our disclosure of the performance of Signal and Pulsar by disclosing Pulsar separately as a separate segment from 1 January 2020.

The Group has continued to trade well over the summer months, and the Board is confident about meeting its upgraded expectations for the full year. The Group's cash flow remains strong, which means the business is in a strong position to accelerate its growth rate with ongoing acquisition opportunities.

Financial Review

Net revenue for the six months to 30 June 2019 increased 6.8% to £54.5m (2018: £51.0m) on revenue which increased 3.0% to £79.5m (2018: £77.2m). Reported like-for-like net revenue growth was 6.7% and the constant currency growth rate was 4.5%. Headline operating profit was up 12.3% to £5.9m (2018: £5.3m). The headline operating margin increased to 10.9% (2018: 10.4%). Headline profit before tax was up 12.7% to £5.7m (2018: £5.1m). Further detail on these numbers is provided in the operating review.

Reported operating profit was up 37.4% to £4.9m (2018: £3.5m). The reported operating margin increased to 9.0% (2018: 7.0%).

The Group earned 34.1% (2018: 29.8%) of its total net revenue from US domiciled businesses, which is therefore denominated in dollars. As such the Group carries a certain amount of foreign exchange risk. The average dollar conversion rate into sterling in the period was $1.29 (2018: $1.38). If exchange rates had been constant in the period, net revenue from the Group US domiciled entities would have been approximately £1.1m lower, and operating profits would also have been approximately £0.2m lower. For the full year, with the dollar continuing its recent strength, the Group expects this impact to continue. Our current forecast average rate for the full year of 2019 is $1.26 (2018 full year $1.34).

The reported tax charge for the period is £1.1m (2018: £0.8m), which incorporates a headline effective tax rate of 23.7% (2018: 24.7%).

Headline basic earnings per share were up 12.7% to 4.08p (2018: 3.62p). Statutory earnings per share were up 40.3% to 3.31p (2018: 2.36p).

The Group's net funds at 30 June 2018 were £2.2m (31 December 2018: net funds of £6.3m; 30 June 2018: net debt of £5.4m). This decrease in net funds in the period is consistent with management expectations and relates to normal seasonality. The Group expects to experience strong positive cash flow in the second half as it has done in the past. Total debt facilities are £24.0m and expire in March 2022.

The Group has deferred consideration obligations in respect of the acquisitions in 2017 of Defined Health Research Inc and Cancer Progress LLC ("Defined Health") and Advantage Health Inc ("Advantage Healthcare"). During the period $2.25m of these obligations were settled by the payment of $1.71m in cash and the issue of $0.54m in new ordinary shares. Remaining obligations are contingent on future performance and are forecast to reach a further $3.4m, of which $2.0m has been provided for by 30 June 2019. Post this period, in August 2019, the Group acquired the assets of ISS for initial consideration of $6.4m, and a deferred contingent consideration of up to $4.1m.

The Group has adopted IFRS 16 Leases for the first time on 1 January 2019. The impact of this adoption on the balance sheet is that the Group recognised total right of use assets of £11.9m, and associated lease liabilities of £11.3m. The right of use assets are depreciated over the length of the leases, and rent payable is treated as a capital payment against the lease liability. After these movements in the period, the lease liability at 30 June 2019 is £10.5m, and the related value of the right of use assets is £11.0m. The net impact of all these adjustments compared with the results before adoption of IFRS 16 is a negligible impact on operating profit and a £0.1m reduction in profit before tax. The detailed impact of this change in accounting standards is disclosed in note 13.

The following table is a reconciliation between headline operating profit and statutory profit before tax.. Restructuring costs of £0.2m in Cello Signal (2018: £nil) relate to redundancy costs in Signal. As anticipated, losses of £0.2m were incurred from continued investment in start-up activity. This activity is disclosed below headline operating profit. The start-up losses in 2019 relate solely to the recent launch of the Berlin office within the Cello Health division. The Group expects start-up losses of this type to continue to be minimal in 2019. Results from start-up operations are not allocated to a segment.. The acquisition related costs of £0.3m (2018: £1.0m) relate to necessary accounting charges for the deferred consideration arising from the acquisition of Defined Health and Advantage Healthcare in 2017.

Interim Dividend

The interim dividend rises 4.5% to 1.15p (2018: 1.10p). The interim dividend is payable on 1 November 2019 to all shareholders on the register on 4 October 2019. The Group has a progressive dividend policy and an unbroken record of annual dividend growth since it began paying dividends in 2006.

Operating Review

Cello Health

The Cello Health division had an excellent first half, in particular in the US. Overall net revenue increased by 11.6% to £35.0m (2018: £31.4m). On a constant currency basis like-for-like net revenue grew by 8.2%. Headline operating profit also grew by 15.2% to £6.5m (2018: £5.7m). On a constant currency basis this growth rate was 10.9%. The core positioning of the business with large pharmaceutical and biotech clients has continued to develop strongly.

The Consulting and Communication capabilities both had very strong periods. This was driven by existing clients spending more in the UK and the US, and also by a number of large biotech projects being won. The new Philadelphia office is now running fully utilised and the early stage Boston office will shortly be expanded. The business has also significantly enlarged its space commitment in Yardley PA.

The Insight capability has had a slower first half in 2019 against a tough comparative. However, this area is traditionally second half weighted and this trend looks set to continue in 2019. During the period the Berlin office was opened and incremental project work is now being won successfully from it under the new team.

On 15 August 2019 the Group completed the acquisition of the trade and assets of Innovative Science Solutions LLP ("ISS"), a scientific consulting firm specialising in strategic counsel and regulatory support for the healthcare industry in the US. Initial consideration was $6.4m paid in cash, with a further deferred consideration of up to $5.4m payable over the period of 1 August 2019 to 31 July 2024. The acquisition reflects the Group's strategy of expanding further into the US and adds a key incremental component to the offering of strategic counsel and regulatory support to the healthcare industry.

Overall, visibility and momentum remains strong across Cello Health, supporting a strong outlook for 2019 and beyond.

Cello Signal

Overall Cello Signal had a flat first six months. Overall segmental revenue was almost identical to 2018 at £19.4m (2018: £19.5m). Headline operating profit was also flat at £1.2m (2018: £1.2m).

However, strong results have been achieved across a large proportion of Signal's core business, with notable improvements in core operating profit margins. Signal's Edinburgh based communications business and London based research business are now at improved and competitive margin levels. Client spend from the long standing blue-chip client list has been robust during the period.

This positive result has been masked by Pulsar which as a software business has very different performance characteristics from the core Signal business. Pulsar is impacted by higher levels of amortisation than occur in the rest of the Group. Post the exit of Facebook in 2017 as a data provider, general growth in this social media analytics market has been slower.

In order to reflect the revised management operating and reporting structure, the results of Pulsar will be presented separately from 1 January 2020. If this presentation was adopted for these interim results, the segmental split of Signal Group would have been as follows:

*This data includes the financial performance of Pulsar US in 2018 which was treated as a start-up in that period.

The above analysis shows the underlying headline operating margin improvement in core Cello Signal (exc. Pulsar) from 7.9% to 9.3%. Due to historic client spending patterns, this business structurally has higher levels of activity in the second half of the year and this trend is expected to continue.

The Pulsar results for 2019 include the results from the US operation, which is loss making. In the prior years this loss was disclosed as a start-up and not within headline operating profit. The operating losses in Pulsar US have dropped from £0.6m in 2018 to £0.4m in 2019.

Central and unallocated Costs

Central and unallocated costs include PLC central costs and the impact of the adoption IFRS 16, which is negligible. These costs have risen from £1.6m to £1.8m in the first half of 2019 reflecting the increased costs of running the necessary central functions of the Group, particularly in the US which is now a significant component of the Group.

Outlook

The Group has continued to trade well over the summer period and overall net revenue visibility remains good. The Group is already beginning to see some of the earnings enhancing benefits from acquiring ISS, and further acquisitions are being appraised. Accordingly, the Board remains confident of delivering a full year result at least in line with market expectations.

Chris Jones

Chairman

18 September 2019

Condensed Consolidated Income Statement

For the six months ended 30 June 2019

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2019

Condensed Consolidated Balance Sheet

As at 30 June 2019

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2019

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2019

Statement of changes in equity for the six months ended 30 June 2019 (unaudited):

Statement of changes in equity for the six months ended 30 June 2018 (unaudited):

Statement of changes in equity for the year ended 31 December 2018 (audited):

Notes to the Financial Information

For the six months ended 30 June 2019

1. ACCOUNTING POLICIES AND BASIS OF PREPARATION

The condensed consolidated financial information for the six months ended 30 June 2019 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 2018, 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 2018 were approved by the Board of Directors on 21 March 2019 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 18 September 2019 and has not been audited.

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2018, as described in those annual financial statements, except for the adoption of IFRS 16 Leases. The impact of the adoption of IFRS 16 is included in note 13.

2. 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.

3. NON-GAAP MEASURES

The Group believes that reporting non-GAAP measures provides a meaningful assessment of underlying business performance reflecting the way the business is managed and reported internally. The Group reports two types of non-GAAP measure, headline measures and like-for-like net revenue.

Headline measures of performance

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, the effect of the following items:

i. Restructuring costs - these costs principally relate to business relocation and redundancies.

ii. 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.

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

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

v. 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.

vi. 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.

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 before taxation is presented in below:

In addition, a reconciliation between statutory and headline earnings per share is presented in note 8.

4. 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, the impact of IFRS 16 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

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 derives revenue from the transfer of goods and services over time and at a point in time based on the location of the client and from the following geographical segments.

A reconciliation of Group headline operating profit to profit before taxation on the income statement is presented in note 3.

5. FINANCE INCOME AND COSTS

6. TAXATION ON PROFIT ON ORDINARY ACTIVITIES

The tax charge for the period ended 30 June 2019 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 24.0% (2018: 25.2%), which incorporates a headline effective tax rate of 23.7% (2018: 24.7%).

7. DIVIDEND

An interim dividend of 1.15p (2018: 1.10p) per ordinary share is declared and will be paid on 1 November 2019 to all shareholders on the register on 4 October 2019. In accordance with IAS 10 Events after the Balance Sheet Date, this dividend has not been recognised in the accounts at 30 June 2019, but will be recognised in the accounting period ending 31 December 2019.

8. EARNINGS PER SHARE

In addition to basic and diluted earnings per share, headline earnings per share, which is a non-GAAP measure, has also been presented.

Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding treasury shares, determined in accordance with the provisions of IAS 33 Earnings per Share.

Diluted earnings per share is calculated by dividing profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding 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 period, which excludes the effect of non-headline gains/losses (see note 3).

9. GOODWILL

10. SHARE CAPITAL

The Company has one class of ordinary shares which carry no right to fixed income.

During the six months ended 30 June 2019 1,057,433 (six months ended 30 June 2018: 151,185 and year ended 31 December 2018: 152,084) were issued to certain employees of the Group in relation to the share option schemes at exercise prices of between 10.0p and 85.5p per share.

The Group owns 453,000 (2018: 453,000) of its own shares and these shares are held as treasury shares. The Company has the right to re-issue these shares at a later date. The purchase of treasury shares is recorded in equity as a deduction in retained earnings.

On 20 May 2019, 320,243 new ordinary shares of 10p each were issued at 132.2p to the vendors of Defined Health Research Inc. and Cancer Progress LLC and certain employees of the Group, pursuant to the terms of the share purchase agreement of those companies.

11. CASH GENERATED FROM/(USED IN) OPERATING ACTIVITIES BEFORE TAXATION

12. NET FUNDS/(DEBT)