Interim Results

Cello Group plc

Interim Results for the six months to 30 June 2017

US Growth Drives Cello Health's Expansion

Cello Group plc (AIM: CLL; "Cello", "The Group"), the healthcare focused strategic marketing group, today announces its interim results for the six month period to 30 June 2017.

Group Financial Highlights

· Revenue £78.7m (2016: £80.7m)

· Gross profit up 12.9% to £49.1m (2016: £43.5m)

· Like-for-like1 gross profit growth of 5.4% (Constant currency: 2.4%)

· Headline profit before tax2 up 8.0% £4.6m (2016: £4.3m)

· Headline operating margin3 10.0% (2016: 10.3%)

· Headline basic earnings per share 3.43p (2016: 3.60p)

· Statutory profit before tax of £2.7m (2016: loss of £0.8m)

· Statutory basic earnings per share 2.16p (2016: loss of 1.08p)

· Net debt £6.8m (June 2016: £4.8m)

· Interim dividend up 5.0% to 1.05p (2016: 1.00p)

· Equity placing raised £14.2m (net) in February 2017

Divisional Financial Highlights

Operating Highlights

· Continued rapid growth of Cello Health both organically and by acquisition

· Successful acquisition of Defined Health in February 2017

· Continued fast growth of Pulsar helped by US launch

· Post period end acquisition of Advantage Health

· Cello Signal on track to achieve expectations

Mark Scott, Chief Executive, commented: "It has been an encouraging first half for the Group. Cello Health's strategy of focusing on expansion in the US is progressing well. The acquisition of Defined Health in February this year has already made a good contribution and we are very pleased with its integration in Cello Health which is also achieving strong organic growth, particularly in the US. Cello Signal is on track to meet expectations. The Board is therefore confident of meeting market expectations for the year and is pleased to increase the interim dividend."

This announcement contains inside information

1 Like-for-like comparisons remove the impact of acquisitions and results from start-ups in 2016 (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 gross profit

Enquiries:

Notes to Editors (www.cellogroup.com)

Cello is a healthcare-focused strategic marketing group.

The Group's strategy is to create value for shareholders by building a leading global healthcare advisory business under the Cello Health brand, and a leading digital communications solutions business under the Cello Signal brand.

Cello has annualised revenues in excess of £160m, gross profit in 2016 of £93m and employs over 1000 professional staff.

Chairman's Statement

Overview

The Group has had a productive six months in successfully executing its growth strategy. The acquisition of Defined Health in February, and the associated successful fundraise, underlines the Group's commitment to grow its Cello Health business in the US. The subsequent acquisition of Advantage Health in July continues the progress down this path.

Cello Health also continues to achieve strong organic growth, again particularly in the US. The Group is seeing the benefits of unified branding and focussed new business activity, to which it has committed increased resource. Defined Health has performed well in its first few months with the Group.

Cello Signal has had a solid six months overall against a tough comparator. Pulsar continues to grow strongly and has opened up in the US market. The Group will continue to invest significantly in Pulsar going forward. 

Overall, the Group continues to grow strongly, giving the Board confidence to grow the dividend accordingly.

Financial Review

Gross profit for the six months to 30 June 2017 increased 12.9% to £49.1m (2016: £43.5m) on slightly lower revenue of £78.7m (2016: £80.8m). Reported like-for-like gross profit growth was 5.4%. Headline operating profit was up 8.4% to £4.8m (2016: £4.4m). The headline operating margin was 10.0% (2016: 10.3%). Headline pre-tax profit was £4.6m (2016: £4.3m). Further detail on these numbers is provided in the operating review.

The reported tax charge for the period is £0.5m (2016: £0.1m). This represents a headline tax rate of 25.2% (2016 full year: 25.7%). The reduction in the overall tax rate reflects the lower headline UK tax rate, as well as variances in the overall mix of profits between the UK and the USA.

Headline basic earnings per share were 3.43p (2016: 3.60p). Statutory earnings per share was 2.16p (2016: loss of 1.08p).

In February 2017, the Group raised £14.2m (net of expenses) to finance the acquisition of the trade and assets of Defined Health Inc. The initial consideration for the transaction was US$5.25m in cash and US$0.50m in new ordinary shares. Surplus proceeds are intended to be used for further acquisitions by Cello Health in the future, in addition to the acquisition of Advantage Health completed in July, and organic expansion of the overall Cello Health business. Further investment is also being made in the expansion of Pulsar into the US market.

The Group's net debt at 30 June 2017 was £6.8m (31 December 2016: £5.1m; 30 June 2016: £4.8m). This slight increase in net debt largely reflects the second half seasonality of the cashflow of the Group. This normal seasonality of cash flows was less pronounced in 2016 due to the large one-off contract won by Cello Signal in that period. The Group expects this seasonal trend to continue in the second half of 2017. There has also been a managed unwinding of the unusually overall positive working capital position that was achieved in 2016. Total debt facilities are £25.0m. Debt facilities are to be renewed by 31 March 2018 and this renewal process is nearly complete.

The interim dividend rises 5.0% to 1.05p (2016: 1.00p). The interim dividend is payable on 3 November 2017 to all shareholders on the register on 6 October 2017. The Group continues an unbroken record of annual dividend growth since it began paying dividends in 2006.

Losses of £0.8m were incurred from continued investment in start-up activity. This is disclosed below headline operating profit. The start-up losses relate in part to the launch and opening of Pulsar in the US market. Initial client traction has been robust in the US since the launch. Accordingly , there will be an expansion of activity beyond the original plan which will lead to further start-up losses from Pulsar in the second half of the year.

Restructuring costs of £0.3m were incurred during the period. Following a significant loss making period, costs were materially reduced on the West Coast of the US in the market research business of Cello Signal. Following the completion of this restructuring in the second half of the year, it is expected that total restructuring costs of up to £1.0m will be incurred for the full year. This will relate to property provisions and staff reductions.

The following table summarises the adjustments made to calculate headline operating profit. In addition to those non-headline charges already explained, £0.3m was recovered from clients in relation to the VAT provision that the Group made in previous years. The acquisition related costs of £0.6m (2016: £0.5m) relate to necessary accounting charges arising from the acquisition of Defined Health Inc in February 2017.

Operating Review

Cello Health

The four underlying capabilities of Cello Health are Cello Health Insight, Cello Health Consulting, Cello Health Communications and Cello Health Consumer. Cello Health overall had a strong six months, with a particularly strong performance in the core US market. Overall, segmental gross profit increased by 26.7% to £28.1m (2016: £22.2m) and like-for-like gross profit growth in the first half of 2017 was 14.3%. Constant currency like-for-like gross profit growth was 9.3%. Like-for-like growth was strongest in the US. 

Cello Health Communications and Cello Health Consumer all grew strongly at constant current growth rates in excess of 10%. Cello Health Insight was flat year on year reflecting a weaker performance on the West Coast of the US, and a continued switch towards longer term tracker and quantitative studies where the revenue is earnt over longer periods of time. This area is fast becoming a major line of business for Cello Health Insight and offers significant opportunities. Visibility of income in Cello Health Insight is therefore improved from the prior period, and this business has been very busy over the summer. Cello Health Consumer saw positive growth as a result of a strong performance in the US, and continued success with our specialised UK research business, and a stabilisation of the consulting business in the UK.

Cello Health in the US has grown strongly organically and via acquisition. Defined Health is a consultancy based in New Jersey specialising in supplying scientific strategic advisory services to a wide range of biotech clients. Since Defined Health joined Cello Health Consulting, there have already been a range of shared project wins and collaborations. The business has had an excellent start to life in the Group.

In July 2017, the Group acquired Advantage Health, a research and consulting firm located in New Jersey. Early indications of performance are positive. The Group continues to appraise suitable acquisition opportunities in the US.

As a result of the organic and acquisitive expansion of Cello Health, the US now accounts for approximately 40% of the gross profits of Cello Health. In addition, Cello Health now has an increasingly strong position in the biotech area and early stage development market for new drugs, both of which are higher growth areas in the US market.

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. This has helped collaboration on projects and new business activity. Cello Health has also invested in shared business development resource which has already yielded strong benefits in new business levels. Professional resource is being flexibly deployed against global opportunities as they present themselves.

Cello Signal

Cello Signal has had a solid six months against a tough comparatorand is on track to achieve expectations. As previously indicated, there is a constant currency like-for-like decline in gross profit of 5.0% in the period reflecting the material impact of a significant one-off contract in the first half of 2016. Operating margin was also impacted by a reduction in operating profits from the research business in the US. Necessary action has been taken here to reduce headcount and property commitments in order to restore operating margin.

Cello Signal has continued to make rapid strides in consolidating its integrated digital solutions proposition to clients behind the Signal brand. A number of significant new contracts have been secured behind this brand proposition, including in the healthcare space. Signal now has strong propositions in the key client verticals of financial services, electronic gaming and devices, charities and utilities. As a consequence, overall visibility of revenues continues to increase, allowing ongoing investment in technical programming capability.

To deliver this proposition efficiently, Signal has consolidated its operations into three core operational office hubs, in Cheltenham, London and Edinburgh. All three offices work closely together, sharing business development resource and professional resource behind secured contracts. This also enables a smoother sharing of technology and technical expertise between locations. It is also the key to raising operating margins which is a strategic imperative for Signal.

In London, the dominant Signal business is Pulsar. Pulsar continues to grow fast, backed up by an increasingly close and evolving relationship with Facebook, demonstrated by the recent confirmation as a Facebook Insight Partner. Pulsar now has 290 clients in the UK, and 20 clients in the US, including a growing number of pharmaceutical clients. Monthly recurring revenue at June 2017 was just over £430,000. This has risen from £260,000 in June 2016. Extra investment in account management has grown the renewal rate to around 80% by the end of June. Further investment is planned in the US market which represents Pulsar's largest opportunity for growth.

The Group is making a concerted effort to leverage Signal's digital skill set into the healthcare arena both within pharmaceuticals and biotech, where demand for digital solutions is rising rapidly. This effort is already bearing fruit, with Signal securing a contract with one of the largest UK based healthcare services providers, as well as with the European drugs regulator. Pulsar has already made strides in entering the healthcare arena. The Group's objective is to optimise Signal's focus on this sector to enable Cello Health to have a competitive offering in this digital activation space.

Full year Trading Outlook

The Group continues to trade well, particularly in Cello Health, and the Board remains confident of a strong full year result in line with current market expectations.

Allan Rich,

Chairman

19 September 2017Condensed Consolidated Income Statement

For the six months ended 30 June 2017

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2017

Condensed Consolidated Balance Sheet

As at 30 June 2017

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2017

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2017

Statement of changes in equity for the six months ended 30 June 2017:

Statement of changes in equity for the six months ended 30 June 2016:

Statement of changes in equity for the year ended 31 December 2016:

Notes to the Financial Information

For the six months ended 30 June 2017

1. ACCOUNTING POLICIES AND BASIS OF PREPARATION

The condensed consolidated financial information for the six months ended 30 June 2017 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 2016, 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 2016 were approved by the Board of directors on 21st March 2017 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 19 September 2017 and has not been audited.

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2016, 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. 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 or headline measures provides a useful comparison of 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.

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.

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

vi. Acquisition related employee remuneration expense - costs with regards to deferred payments payable to vendors and certain employees of a company in accordance with the purchase agreement of the acquired company or business. 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.

vii. 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 9.

4. 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.

 Six months ended 30 June 2016