Interim Results

Cello Group plc

('Cello' or the 'Group')

Interim Results for the six months to 30 June 2016

Progress with growth strategy

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 2016.

Group Financial Highlights

· Revenue up 5.0% to £80.9m (2015: £77.0m)

· Gross profit up 4.0% to £43.5m (2015: £41.9m)

· Like-for-like1 gross profit growth of 2.7%

· Headline profit before tax2 £4.2m (2015: £4.2m)

· Headline operating margin3 10.2% (2015: 10.5%)

· Headline basic earnings per share 3.54p (2015: 3.61p)

· Statutory operating loss of £0.8m (2015: profit of £1.9m) after additional provision for VAT of £2.1m (2015: £1.1m)

· Statutory basic loss per share 1.08p (2015: earnings of 1.18p)

· Net debt reduced to £4.8m (June 2015: £9.8m)

· VAT dispute with HMRC fully settled

· Interim dividend up 19.0% to 1.00p (2015: 0.84p), reflecting new dividend policy now in place - full year pay out ratio to increase to c.40% of headline earnings per share

Divisional Financial Highlights

Operating Highlights

· Continued rapid evolution of Cello Health as a global business

· Ongoing expansion of Cello Health US as the primary growth driver

· Successful consolidation of Cello Signal behind a single client facing brand

· Large new Signal clients won in 2015 flowing through into 2016 results

· Pulsar, the Group's social media analytic software product, growing strongly and operationally profitable

Mark Scott, Chief Executive, commented: "Following the resolution of the long standing VAT dispute with HMRC, the Group is energetically pursuing its growth ambitions, supported by a strong balance sheet. Cello Health has the potential to become a global leader in the growing healthcare advisory services space and rapid progress is being made towards this goal. Cello Signal's potential as a powerful growth and profit engine for the Group in the digital solutions space is now also taking shape. Overall, the Group is well placed to fulfil its growth ambitions."

This announcement contains inside information

1 Like-for-like comparisons remove the impact of acquisitions and results from start-ups in 2015

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 £150m, annualised gross profit in excess of £85m and employs over 900 professional staff.

Chairman's Statement

Overview

The Group has continued to make solid progress in pursuing its growth strategy. The building blocks to more rapidly expand both Cello Health and Cello Signal are now firmly established.

Cello Health continues to grow its core pharmaceutical offer behind the Cello Health brand, adding significant new blue chip clients in both the US and the UK. The operational benefits of closer integration are beginning to be realised, in the form of shared property and back office integration. The strategy of establishing Cello Health US as the primary driver of future growth is making rapid progress.

Cello Signal has successfully integrated its core client proposition behind the Cello Signal brand, developing its digital and data offer which is being purchased by large corporates globally. Pulsar, Cello Signal's proprietary social media analytic software product, continues to grow at an impressive pace and is now profitable. 2017 will see the product launched in the US market.

Financially, debt levels remain moderate and continue to drop following an excellent working capital performance in the period. Accordingly, we are pleased to increase returns to shareholders in the form of higher dividends.

Financial Review

Gross profit for the six months to 30 June 2016 increased 4.0% to £43.5m (2015: £41.9m) on revenue up 5.0% to £80.9m (2015: £77.0m). Like-for-like gross profit growth was 2.7%. Headline operating profit was £4.4m (2015: £4.4m). Headline operating margins were 10.2% (2015: 10.5%). Headline pre-tax profit was £4.2m (2015: £4.2m). Further detail on these numbers is provided in the operating review.

The reported tax charge is £0.1m (2015: £0.7m). This represents a headline tax rate of 27.6% (2015: 26.4%).

Headline basic earnings per share were 3.54p (2015: 3.61p). Statutory loss per share was 1.08p (2015: earnings of 1.18p).

The Group currently earns around $3.5m a year in operating profits from US domiciled businesses. In addition, some UK domiciled Group businesses also do work in the US, with a proportion of this work billed in US Dollars. Accordingly, there is some foreign exchange risk, and such risk is hedged by the Group's debt being largely denominated in US Dollars, as well as the maintenance of a US Dollar denominated overdraft. There remains some residual US Dollar exposure, and over the first half of the year the average US Dollar/Pound rate strengthened from 1.51 to 1.41. The Group calculates that the benefit of this in the first half of the year is around £0.3m of operating profit.

The Group's net debt at 30 June 2016 was £4.8m (31 December 2015: £4.2m; 30 June 2015: £9.8m). This is a strong performance which reflects excellent working capital management over the period. Total debt facilities are £24.0m.

Following a review of the dividend policy and in view of the robust financial position, the expectation is that the full year payout ratio will be increased to around 40% of headline earnings per share. Accordingly, the interim dividend rises 19.0% to 1.00p (2015: 0.84p). The interim dividend is payable on 4 November 2016 to all shareholders on the register on 7 October 2016. The Group continues an unbroken record of annual dividend growth since it began paying dividends in 2006.

On 16 May 2016, the Group was pleased to announce that the dispute with HMRC regarding the VAT status of certain suppliers to charity clients had been resolved, and the uncertainty generated by the issue had been removed. It was also announced that a charge of £2.1m would be recognised in the period. The total amount due to HMRC has been settled in full in the second half of the year. The Group is now in ongoing discussions with clients regarding recovery of these balances.

Costs of £0.5m were incurred from continued investment in start-up activity. This is disclosed below headline operating profit. The majority of the losses relate to the investment in Cello Health Bioconsulting Inc., which is currently loss making but which has a good pipeline of projects and proposals for the second half of the year. In addition, as disclosed previously, the Group made a payment of £0.9m to the prior employer of the senior staff hired to establish this business. Legal costs associated with resolving this issue were £0.2m.

Restructuring costs of £0.7m were incurred within the Cello Health Consumer business, and Cello Signal. In the case of Cello Signal, operating margins have improved as a result of the elimination of redundant roles following consolidation of the business behind the Signal brand. In the case of the Cello Health Consumer business, corrective cost action following the cessation of certain client contracts has left this business now trading profitably on a monthly basis.

The following table summarises the adjustments made to calculate headline operating profit. The acquisition related costs of £0.5m (2015: £0.5m) relate to necessary accounting charges arising from the acquisition of iS Healthcare Dynamics Limited in 2014.

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 good six months, with the core pharmaceutical orientated offer performing very well both in the UK and in the US. All capabilities have therefore performed well with the exception of certain aspects of Cello Health Consumer. The client base is stable and consists of the vast majority of all large global pharmaceutical businesses. There is also a growing Bio-tech client base, particularly in the US, which represents a major source of potential growth for Cello Health. Overall, segmental gross profit increased by 2.2% to £22.2m (2015: £21.7m) and like-for-like gross profit growth in the first half of 2016 was 1.5%.

Cello Health Insight in particular had an excellent first six months of the year both in the US and the UK, with new clients coming into the income pipeline as well as a notable increase in quantitative research which is more long term and recurring in nature than the more project based nature of the qualitative research offering.

Following the cessation of certain contracts within the Cello Health Consumer division in the UK, action has been taken to align the cost base with current demand. The early signs are that the UK business has stabilised and it is now trading in monthly profit, albeit at a reduced margin that will affect Group profits both this year and next. In the US, this same activity area has continued to trade strongly and resource is being reallocated to further develop this opportunity behind new contract wins.

If the restructured UK element of Cello Health Consumer is excluded from the calculations, then the like-for-like gross profit growth from the three other core clinically-led capabilities of Cello Health, where the client base is predominantly large pharmaceutical organisations, was 6.0%. On this basis, operating margins from this part of the business were 20.8%. Despite the negative impact of the consumer unit, operating margins across the whole of Cello Health remained healthy and competitive at 17.6% (H1 2015: 19.9%, FY 2015: 19.7%). Operating profits were therefore £3.9m for the first half (2015: £4.3m).

Cello Health US has continued to grow well, with strong performances from the Research and Communications capabilities in New York, Philadelphia, Chicago and San Francisco. Several new material clients have commenced work during this period. The Consulting business is smaller, but getting good traction as the investment in the new Cello Health BioConsulting business starts to generate returns and the business pitches for and wins new projects for new clients. Cello Health intends to build a strong practice in the Biotech area, which will account for a material proportion of the overall healthcare market. Cello Health BioConsulting in the US continued to be loss making in the first half but is gaining momentum with a robust pipeline of proposals and prospects. With further planned investment in this territory, the strategic goal of the US being the largest geographical revenue contributor to Cello Health is within reach.

Cello Health has also recently added significant professional resource in the digital solutions area, enabling provision of digital services to clients, both in the US and UK. The recent launch of Pulsar Health as a focused social media research offering to clients has already shown rapid traction.

Cello Health continues to extract the benefits of being a unified business. In the second half of the year, the Consulting and Communications businesses in the UK will move to a single office in Farnham housing over 120 people. This will encourage collaboration as well as being more efficient.

Cello Signal

The benefits of the integration process behind the Cello Signal brand are beginning to flow, after an extended period of rationalisation. This is reflected in solid growth and an improved profit margin. The core proposition of Cello Signal of solving complex digital communications and social media challenges is proving to be powerful with large clients. Segmental gross profit increased by 3.9% to £20.8m (2015: £20.0m) and like-for-like gross profit growth in the first half of 2016 was 4.1%.

In the UK the business is now clustered into three office hubs, located in Edinburgh, Cheltenham and London, enabling development of more integrated client solutions and greater efficiency of delivery. This is now allowing the business to look to expand into the US market more energetically, with 2017 set to see a focused push to accelerate this US organic expansion process.

In the first half of the year, the Edinburgh hub traded very well, with income secured from new clients won in the final quarter of 2015 flowing well into 2016. In the Cheltenham hub, a further new material client has delivered significant incremental income in the first half of the year although some of this income will not be repeatable in the future. The improvement in these two locations has significantly driven the considerable overall improvement in first half performance. Performance in Signal's research division based in London has also been very strong.

Pulsar, the Group's proprietary social media intelligence platform has continued to grow software sales very strongly, making a first contribution to operating profits in the period. It now has over 240 licence holding clients. Plans are in development to launch Pulsar in the US and this is likely to happen in 2017. Renewals rates are good, and the product continues to evolve with the social media environment. We therefore expect Pulsar to continue to be profitable going forward, and to sustain a high growth rate.

Cello Signal is also building an impressive franchise in the tech client community with clients including Facebook, Spotify, EA, Activision, and HP in addition to its broader blue chip client base.

Full year Trading Outlook

The Group has had a solid first half, and expects to benefit from the usual second half weighting that has occurred in the past due to the nature of the work done for its clients. The Group also expects to benefit from the recent strengthening of the US Dollar against the Pound.

Overall momentum in both Cello Health and Cello Signal is strong, with clear growth strategies and the Board believes that full year expectations will be broadly achieved.

Allan Rich,

Chairman

13 September 2016Condensed Consolidated Income Statement

For the six months ended 30 June 2016

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2016

Condensed Consolidated Balance Sheet

As at 30 June 2016

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2016

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2016

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

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

Statement of changes in equity for the year ended 31 December 2015:

Notes to the Financial Information

For the six months ended 30 June 2016

1. ACCOUNTING POLICIES AND BASIS OF PREPARATION

The condensed consolidated financial information for the six months ended 30 June 2016 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 2015, 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 2015 were approved by the Board of directors on 16th March 2016 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 13 September 2016 and has not been audited.

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2015, 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. 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. 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. Accordingly headline measures exclude, where applicable, the effect of the following items:

i. Restructuring costs - these costs principally relate to redundancy costs.

ii. Charge for VAT payable and related costs - these costs relate to the VAT payable to HMRC in respect of certain charity clients. Further details are provided in note 10.

iii. Bioconsulting settlement and related costs - these costs relate to the payment made to the prior employer of senior staff hired to establish the 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 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

vii. Share option charges

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 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.