Preliminary Results

FOR IMMEDIATE RELEASE 21 March 2019

Cello Health plc

('Cello' or the 'Group')

Preliminary Results for the twelve months ending 31 December 2018

Strong performance - Continued delivery of consistent results

Cello Health plc (AIM:CLL, "Cello" or "the Group"), the healthcare-focused advisory group, today announces its results for the year to 31 December 2018.

Financial Highlights

[1] Headline basic earnings per share is defined in note 8

Operational Highlights

· Continued progress towards strategic goals

· Renaming of Group to Cello Health plc

· 2017 acquisitions continue to perform well

· Cello Health continues to broaden and deepen the client offer

· Top 20 clients represented 40.1% of net revenue (2017: 38.9%)

· Well positioned for further international expansion, with Philadelphia and Berlin office opened

· Sunday Times "100 Best Companies to Work For 2019"

· Good progress with the Signal Health offer

· Pulsar developing strong client links with Cello Health

Board Development

· Chris Jones appointed as Non-Executive Chairman

· Julia Ralston, CEO Cello Health US, appointed to the plc Board

· Clifford Tompsett appointed as Senior Independent Non-Executive Director

· Jo LeCouilliard and Michele Luzi appointed as independent Non-Executive Directors

Mark Scott, Chief Executive, commented:

"2018 marked an important moment in Cello's development as we changed our name to Cello Health plc to reflect our ongoing strategic focus and developed our Board to support that strategy. It is pleasing to see strong earnings per share growth and we have accordingly increased our dividend for the thirteenth successive year. We now intend to build on this momentum to support Cello Health's position as a leading healthcare focused advisory group globally."

The information contained within the announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). Upon the publication of this announcement via Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

Analyst meeting

A meeting for analysts will be held at 10.00am today, at the offices of Buchanan, 107 Cheapside, London EC2V 6DN. For further details please contact Buchanan on 020 7466 5000 or email [email protected]

Enquiries:

CHAIRMAN'S STATEMENT

2018 - A year of good organic growth and strong cash performance

I am very pleased to present these strong results in my first year as Chairman of Cello Health plc.

2018 represented another year of continued delivery of good results driven by strong organic headline operating profit performance. Net revenue increased by 2.3% to £104.8m (2017: £102.5m) with headline profit before tax up 6.4% to £12.2m (2017: £11.4m). Reported profit before tax was up 44.7% to £8.4m (2017: £5.8m).

Overall headline operating profit growth was underpinned by a strong divisional performance from Cello Health, with 4.3% constant currency like-for-like2 net revenue growth and raised headline operating profit margins of 18.5% (2017: 17.7%). Cello Signal's constant currency like-for-like net revenue declined by 2.9% and headline operating margins were 9.4% (2017: 9.5%).

This good overall financial performance was accompanied by strong cash flows in the second half and a strong net funds position at the year end of £6.3m (2017: £1.6m). Headline basic earnings per share rose 13.7% to 9.02p (2017: 7.93p). Reported basic earnings per share also rose 53.3% to 6.27p (2017: 4.09p).

As a result, the Board has decided to recommend an increase in the final dividend per share of 12.2% to 2.75p (2017: 2.45p), adding to a twelve year record of dividend increases. If approved by shareholders, this would bring the total dividend to 3.85p (2017: 3.50p), an increase of 10.0% over the prior year.

The Board believes that the pharmaceutical and biotechnology sector represents a stable and attractive market for the long-term. Scientific advances, strong R&D pipelines and our clients' continued need to develop and successfully commercialise every product are likely to continue to drive demand for scientific commercial services. Cello Health's combination of scientifically-led commercial advisory skills with early stage asset commercial capability and communications delivery, enables us to differentiate ourselves in the market for healthcare services. Unlike many of our competitors, we operate under a single lead brand, with an equitable balance across each of our core capabilities. This means that our approach to clients can be blended appropriately for the specific challenge, as opposed to being led by one particular skill set.

We continue to invest organically in the expansion of our global footprint via recruitment and new business development. Cello Signal has also continued to make significant progress in developing patient-centric digital solutions as well as supporting Cello Health as a digital services partner via Pulsar, our proprietary social media analysis software, and via Cello Signal's digital and creative skills.

2018 was a critical year in the Group's development, with the renaming of the Group to Cello Health plc, reflecting a commitment to becoming the scientific and commercial partner of choice to a broad range of global pharmaceutical clients and earlier stage biotech businesses. We also made changes to the composition of our Board with the appointment of Chris Jones as Non-Executive Chairman and of Clifford Tompsett, Jo LeCouilliard and Michele Luzi as independent Non-Executive Directors of the Group. Clifford and Jo bring a wealth of experience of the pharmaceutical sector to the Group, and Michele brings with him first-hand experience of growing a global professional service business. Julia Ralston, CEO of Cello Health in the US, was also appointed to the plc Board consistent with our priority to drive long-term growth in this region. I would like to thank and acknowledge the contribution of Allan Rich, Paul Hamilton and Will David, all of whom retired from the Board during the year. I would also like to thank all our people whose skill and commitment have delivered another year of consistent performance and high quality services to our clients.

Current Trading and Outlook

In 2019, we will continue to invest in new initiatives that enhance our differentiated services. We will continue to focus on growing our presence in the US and leveraging Signal's digital capability into the healthcare sector.

The Group has begun 2019 with good levels of forward bookings and has already secured a good number of new business wins. Accordingly, the Board is confident of a strong performance for 2019 in line with current market expectations.

Chris Jones

Non-Executive Chairman

20 March 2019

2 Like-for-like measures are defined in note 1 

CHIEF EXECUTIVE'S OPERATING REVIEW

2018 demonstrated the Group's ability to deliver strong organic headline operating profit progress from its core operations, with a single-minded focus on our three key strategic priorities of growth, innovation and leveraging key assets across the Group.

Growth

The Group has grown well overall in 2018, driven by the performance of the Cello Health division.

Constant currency like-for-like net revenue growth in the Cello Health division of 4.3% was driven by strong performance across our Insight, Consulting and Communications operations. This demonstrates the ability of our business model to deliver organic growth without reliance on acquisitions. Cello Health Insight represents 41% (2017: 41%) of the net revenue of the Cello Health division and its successful year has been driven by a combination of deepening relationships with specific clients and successful new business development. In addition, our Insight team successfully opened up a broader range of clients with the launch of Cello Health Logic, bringing social media analytics data to the client agenda. Cello Health Consulting, representing 29% (2017: 28%) of the net revenue of the Cello Health division, had an ongoing drive into the biotech area as a complement to its traditional pharmaceutical focus. Cello Health Communications, our scientific communications capability, represents 30% of the net revenue of the Cello Health division (2017: 31%) and was led by ongoing expansion in the US.

2018 saw a continued strengthening in our core client base, with the top 20 clients contributing 40.1% to net revenue (2017: 38.9%). We continue to have relationships in place with 24 of the top 253 pharmaceutical companies, 15 of which we have been in relationships with for over five years. Our largest client represents 7.9% (2017: 8.4%) of Group net revenue. This is a long-term client which has work streams spread over multiple therapy areas and buying points.

Over the last three years we have worked on building a strong presence within early stage commercialisation and pre-launch, accelerated by the presence of Cello Health Bioconsulting (formerly Defined Health) and Cello Health Advantage, both acquired in 2017. 2018 has shown that we are on course with this strategy, with 7.1% of Group net revenue generated by these businesses. We continue to appraise and examine potential acquisitions against our focused criteria, maintaining a disciplined approach to valuation and strategic fit.

Given that the US is by far the largest global pharmaceutical market, US expansion is a key strategic priority. Cello Health's US revenues approached $40.0m in 2018, nearly doubling since 2015, consistent with the opportunity that the market affords.

Cello Health extended its geographical reach through recent office openings in Philadelphia and Berlin and has plans to extend further in 2019 with an office opening in Boston in the first half. Germany currently represents our largest single EU market for client revenue. The Berlin office will give access to new talent whilst also strengthening our ability to access the European client base, with on-the-ground support.

Cello Signal like-for-like constant currency net revenue fell by 2.9%. This partially reflects tougher trading conditions in the UK across the range of services that Cello Signal provides. In addition, these results reflect the full year net revenue impact of the substantial reduction in capacity in the US that was undertaken in 2017, along with general restraint in hiring new staff. Signal continues to focus the franchise in healthcare, financial services, utilities, charities and technology, with a particularly strong performance overall in 2018 from its Edinburgh based operation.

Against this more demanding UK backdrop outside healthcare, Cello Signal made significant progress in terms of aligning itself with our core health operations. Cello Signal was appointed by the Scottish Government as the sole provider on its 'Healthier Scotland' digital contract. It also became the digital media partner to Macmillan, the major UK cancer charity, as it identifies and supports those at the very early stage of cancer diagnosis. Signal remains the agency partner for EFPIA (European Federation of Pharmaceutical Industries and Associations), delivering the highly successful "We won't rest" campaign, along with recent appointments by the Innovative Medicines Initiative, Novo Nordisk and the European Diabetes Forum. Pulsar continues to work increasingly closely with Cello Health as the pharmaceutical industry turns to social media channels for customer insight, with some considerable opportunities visible for 2019.

Innovation

Innovation is at the core of the Group's activity, with continued investment in existing operations and the development of new initiatives.

In 2018 we launched our new analytics unit specialising in health, Cello Health Logic, utilising the Pulsar proprietary software platform that the Group has developed in-house. We have secured sales from a number of clients through a combination of standalone and blended projects with our Insight operation. We intend to prioritise this for further investment in 2019. In addition, we continued to invest in the development of our bespoke online community platform, eVillage, improving the scale of communities that can now be included and speed of response to critical questions. The provision of digital services by Cello Health has continued to strengthen, supported by Cello Signal. Using virtual advisory platforms, Cello Health has enhanced its ability to obtain vital insights from our own proprietary web-based key opinion leader (KOL) ecosystem.

For many years, we have offered a patient-focused approach to our services and solutions. Given the continued importance of the patient as an audience, we have evolved this further into a Patient Innovation Hub, which pulls on all of the expertise we have in this area from across the Cello Health footprint. Consistent with the transformative nature of scientific breakthroughs and particularly the arrival of the era of gene and cell therapies, an Advanced Therapeutics practice was created within Cello Health BioConsulting. We anticipate this resulting in some innovative IP around our core offerings in 2019.

Leveraging key assets

Blending expertise across capabilities into unified client service propositions is central to our global growth initiatives. As part of this, over the past three years, we have successfully operated centres of excellence in select areas that drive additional organic growth through collaboration. This effort was focused on the key areas of oncology; rare diseases; market access; and market forecasting. The forecasting cross-capability unit included utilising databases from early stage pre-clinical/pre-acquisition to post phase 3 readouts.

2018 saw continued success in terms of collaboration across the Group, resulting in significant revenue being generated by collaborative projects. We continued to invest in shared business development resource, which works in co-ordination with our capability teams. This has yielded benefits in new business levels across the business, as professional resource is being flexibly deployed against global opportunities.

Cello Signal is also partnering with Cello Health in digital services, delivering software solutions to match the growing need for virtual advisory platforms from the early stages of drug development through post launch. Cello Signal's experience in precision digital marketing across Social, SEO, PPC and Display, alongside strengths in User Experience Design and Digital Customer Journey mapping, has been deployed very successfully within recent major Cello Health projects. 

3 pharmexec.com Top 50 Jun. 01 2018 

GROUP FINANCE DIRECTOR'S REPORT

Summary

Total Group net revenue was up 2.3% at £104.8m (2017: £102.5m) and headline profit before tax was up 6.4% at £12.2m (2017: £11.4m). Reported profit before tax was up 44.7% to £8.4m (2017: £5.8m); a reconciliation of headline profit before tax to reported profit before tax can be found in note 1 to these results.

Like-for-like net revenue growth for the whole Group was 0.4%. Constant currency like-for-like net revenue growth was 1.4%. Constant currency like-for-like net revenue growth was 4.3% in Cello Health, offset by a decline of 2.9% in Cello Signal.

The Group's headline operating margin4 was 12.0% (2017: 11.6%) with a headline operating margin of 18.5% in Cello Health (2017: 17.7%), and 9.4% in Cello Signal (2017: 9.5%).

Finance costs were £0.3m (2017: £0.4m).

The Group's reported tax charge was £1.8m (2017: £1.6m), with a headline tax rate of 21.6% (2017: 28.2%).

Reported basic earnings per share rose 53.3% to 6.27p (2017: 4.09p) reflecting strong headline operating profit growth and a significant reduction in total non-headline items to £3.7m (2017: £5.6m). Headline basic earnings per share also rose 13.7% to 9.02p (2017: 7.93p).

Operating cash flow was strong in 2018, with 104.2% of headline cash conversion (2017: 77.2%). This strong performance led to a net funds position ahead of market expectations of £6.3m at 31 December 2018 (2017: £1.6m).

Foreign Currency

The Group suffered slight aggregate foreign exchange headwinds of £0.2m of headline operating profit during the year, with average £/$ exchange rates moving from 1.29 to 1.34 during the year. The Group generated around £5.8m headline operating profit in the US in 2018 (2017: £5.3m), an increase of 9.9%.

Taxation

The headline tax rate, dropped more than initially expected from 28.2% to 21.6% in 2018, as a consequence of the changes to the US tax regime. The Group expects the headline tax rate to stabilise at around 23.5% in 2019 and then drop further in 2020 as UK corporation tax rates are expected to drop. The reconciliation of the tax charge for 2018 to reported profit before tax is in note 6 to these results.

Dividends

The Board is proposing a final dividend increase of 12.2% to 2.75p per share (2017: 2.45p), giving a total dividend of 3.85p (2017: 3.50p), representing a total increase of 10.0%. This increase in the dividend reflects the growth in headline earnings per share, the strength of the balance sheet of the Group, the lower than expected future headline tax rates and the Board's confidence in the ongoing trading performance of the business. This increase maintains the Group's thirteenth year unbroken record of dividend growth. Subject to shareholder approval, the final dividend will be paid on 24 May 2019 to all shareholders on the register at 26 April 2019, and will be recognised in the year ending 31 December 2019.

Deferred Acquisition Obligations

The maximum total payable under deferred acquisition obligations is $6.3m (2017: $6.3m). This will be settled over the years 2019 to 2021, substantially in cash. In line with recognised accounting practices, the income statement impact of these deferred obligations is spread over the length of the deferred period. In 2018, the acquisition-related employee remuneration expense element of these deferred obligations is £1.6m (2017: £1.4m).

4 Headline operating margin is calculated by expressing headline operating profit as a percentage of net revenue  

Operational Financial Performance

A detailed commentary on the performance of Cello Health and Cello Signal can be found within the Chief Executive's report.

Cello Health had a good year with net revenue rising by 6.9% to £64.3m (2017: £60.2m). Headline operating profits rose by 11.8% to £11.9m (2017: £10.6m). This growth was partially driven by the full year impact of acquisitions completed in 2017. Like-for-like constant currency net revenue growth was robust at 4.3%. This growth was driven by all capabilities. Headline operating margins rose to 18.5% (2017: 17.7%), reflecting stronger operating margin performance across all capabilities. The 2017 acquisitions of Defined Health and Cello Health Advantage both performed well in the year.

Cello Signal had a slight decline in net revenue, largely attributable to the full year impact of the reductions in the US presence in 2017, as well as tougher trading conditions in the UK. Net revenue fell by 2.4% to £40.0m (2017: £41.0m). Headline operating profit fell by 3.4% to £3.7m (2017: £3.9m). Like-for-like constant currency net revenue fell by 2.9%. Headline operating margin was marginally down at 9.4% (2017: 9.5%).

Central costs rose to £3.1m (2017: £2.7m), reflecting extra resource requirements in the US and the costs relating to the changes in the Board during the year.

Headline Operating Cash Flow

Headline operating cash flow5 of £14.8m represented 104.2% cash conversion of headline EBITDA (2017: 77.2%). The underlying operating cash flow performance of the Group is therefore robust. The following table demonstrates the calculation of headline operating cash flow and the cash conversion rate.

The Group's net funds position at 31 December 2018 was £6.3m (2017: £1.6m). Operating cash flow is weighted towards the second half of the year. The Group has long-term debt facilities of £24.0m with the Royal Bank of Scotland, which expire in March 2022. At the year end £4.0m of these facilities were drawn down in sterling (2017: £11.3m which was drawn down in US dollars).

5 Headline operating cash flow represents operating cash flow adjusted for the cash flow impact of non-headline items

Non-Headline Items

Our headline operating profit is reconciled to our reported profit before tax as follows:

During 2018, the Group incurred charges of £0.2m (2017: £1.9m) on the costs related to relocation of certain businesses within the Group as part of the consolidation of operations into shared facilities to increase efficiency. In January and February 2019, as indicated in our trading statement on 17 January 2019, the Group incurred restructuring costs of c.£0.3m in relation to headcount reductions in Cello Signal. These were largely incurred in the Cheltenham office.

Start-up costs in the year of £1.2m (2017: £1.4m) largely relate to the start-up treatment for Pulsar in the US. There was also additional investment relating to the new office in Boston and investment in broadening the health offer of Cello Signal. As it has been in start-up treatment for the maximum of two years allowed under our policy, Pulsar US moves into headline in 2019. As a result, start-up losses in 2019 are likely to be reduced.

Amortisation of intangibles relates to the amortisation of identified intangible assets that are recognised on acquisitions. This charge fell to £0.3m (2017: £0.5m).

Acquisition-related employee remuneration expense of £1.6m (2017: £1.4m) is the necessary income statement charge that relates to the spreading of deferred acquisition payments made to certain employees of acquired companies over the term of the measurement period arising as a result of acquisitions. 

Share option charges of £0.5m (2017: £0.4m) relate to the appropriate income statement charge being recognised over the vesting period of issued share options to staff.

Risks and Uncertainties

The Company regularly reviews the risks and uncertainties facing the business through a series of Board and operational meetings. The Directors believe the current largest risks are as follows:

1. Varying economic conditions

The Group's business is domiciled in the UK but 50.1% (2017: 51.5%) of the Group's revenues are from clients based overseas. It is clear that income from clients is impacted by prevailing economic conditions. Economic and geopolitical uncertainty has increased recently, with continued uncertainty over Brexit. However, the broad spread of clients across sector and geography mitigates this risk.

2. Brexit risk

While Brexit may impact general macro conditions (see risk 1) the Group has been considering the risk of Brexit directly on its client and employee relationships.

The substantial business in the Group that has a client base in mainland Europe is Cello Health. Cello Health derived 21.5% (2017: 20.4%) of its revenue from mainland Europe. The other businesses in the Group are located in the UK with UK and US-domiciled clients, or located in the US with US-domiciled clients.

We are aware that even in the event of a "no-deal" Brexit, it appears unlikely that tariffs are to be levied on professional services. The provision of services to the EU client base is therefore down to individual client behaviour and the mobility of our workforce, as staff regularly travel to clients in mainland Europe.

In terms of client behaviour, we have spoken to several clients and they have expressed a desire to maintain working relationships post Brexit. We have seen no explicit threat from these conversations.

While the services we provide are not regulated by any government body, there are various trading standards in individual country markets in Europe that need to be adhered to. We have ensured that our businesses are compliant with these standards, where applicable. We have opened an entity in Berlin, and, if contracting with a UK entity becomes an issue for our European clients, then we can potentially use this entity to maintain contractual relationships. There will also be full-time German national staff who will pursue domestic European business, as well as servicing some existing work.

Where possible we have made it easier for our staff to travel to the EU in the event of any restraints on free movement. For example, we have assisted staff to obtain European passports where they are eligible to do so.

3. Loss of the Group's key clients

Client relationships are crucial to the Group and the strength of them is key to our continued success. The risk is mitigated by our client base being broadly spread and by the majority of our key clients being subject to longer-term master service agreements.

Our client list is not concentrated, with the largest client being 7.9% of our net revenue. This client is spread across several therapy areas and several individual client-buying points.

4. Loss of key staff

The Group's Directors and staff are critical to the servicing of existing business and the winning of new accounts and the departure of key staff could be a risk to maintaining client service. With that risk in mind, all senior staff are subject to financial lock-ins and long-term incentive arrangements, as well as being under contractual non-compete and non-solicit clauses.

We make a significant effort to develop the working culture of our businesses. This has culminated in Cello Health UK winning a place in 'The Sunday Times 100 Best Companies to Work For 2019'. This award independently measures various employee satisfaction metrics.

In addition there are numerous policies and initiatives around the Group (in the UK and the US) to promote diversity and inclusiveness and employee engagement.

5. Changing laws and regulations

Various laws and regulations are relevant to the operations of the Group. The Group receives guidance from time to time from its legal advisers regarding changes in the law that relate to the Group.

In particular, the application of GDPR legislation has been a significant change in the law in 2018. The Group has successfully established a centrally coordinated GDPR steering group, actively working across all its businesses to ensure GDPR compliance. This compliance is reported on to the plc Board on a regular basis, with local Data Protection Officers in the Group being responsible for day-to-day questions on compliance.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2018

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2018

CONSOLIDATED BALANCE SHEET

as at 31 December 2018

Consolidated cash flow statement

for the year ended 31 December 2018

SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Preparation

The consolidated financial statements of Cello Health plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRSs"), interpretations issued by the IFRS Interpretations Committee ("IFRS IC") and the Companies Act 2006 applicable to companies reporting under IFRSs. The consolidated financial statements have been prepared under the historical cost convention.

The financial information set out in the preliminary announcement for the year ended 31 December 2018 does not constitute the statutory accounts of Cello Health plc, but is derived from those statutory accounts, which have been prepared in accordance with International Financial Reporting Standards (IFRSs) and also in accordance with IFRSs adopted by the European Union and therefore they comply with Article 4 of the EU IAS Regulation.

The financial information included in the preliminary announcement for year to 31 December 2018 has been audited and an unqualified audit report has been issued. The preliminary financial statements represent extracts from those audited accounts but do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis, other than uncertainty for all businesses around the outcome of Brexit negations which cannot be predicted, and their report and did not contain statements under s498 (2) or (3) Companies Act 2006.

Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's Annual General Meeting.

The Group's business activities, performance and position are set out in the Strategic Report. An assessment of the critical accounting judgements and estimates are set out in accounting policy 6.

During the course of the year the Group has change the nomenclature in the consolidated income statement. 'Cost of sales' has been renamed to 'third-party project costs' and 'gross profit' has been renamed 'net revenue'. The Group believes this nomenclature better reflects the underlying activity of the Group.

The Group's principal accounting policies are consistent with these applied in the year ended 31 December 2017 with the exception of changes resulting from the adoption of the following accounting standards: 

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a single comprehensive five-step model to be applied to all contracts with customers and replaces the separate models for goods and services included in IAS 18 Revenue and related interpretations.

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognised when (or as) performance obligations in contracts are satisfied by transferring control of the relevant goods or services to the customer.

The adoption of IFRS 15 did not have a significant impact on the Group's operating profits or on the Group's equity.

However, for certain contracts, the adoption of IFRS 15 resulted in a change in the timing of recognition of certain third-party costs where the Group acts as principal with respect to services provided and associated revenue. As a result there was a increase in third-party costs of £1.0m in the year ended 31 December 2017 with a corresponding decrease in revenue. There was therefore no impact on net revenue or operating profit.

The impact on the balance sheet at 31 December 2017 was to reduce current assets by £2.6m with a corresponding decrease in current liabilities. A full reconciliation of the impact of adopting IFRS 15 on the balance sheet at 31 December 2017 and 31 December 2016 together with the impact on the income statement for the year ended 31 December 2017 is disclosed in note 17.

IFRS 9 Financial Instruments

IFRS 9 replaces the provisions of IAS 39 that relate to; the recognition, classification and measurement of financial assets and liabilities; depreciation of financial instruments; impairment of financial assets and hedge accounting.

The adoption of IFRS 9 resulted in changes to the accounting policy for trade receivables.

The requirement of IFRS 9 to use the expected loss method of impairment of financial assets did not have a material effect on the Group due to the short-term nature of trade receivables, which are mainly due from large UK and US clients.

A number of new standards, amendments to standards and interpretations are effective for the annual period beginning 1 January 2019 and have not been applied in preparing these consolidated financial statements. None of these are expected to have a significant effect on the consolidated financial statements of the Group, except the following:

IFRS 16 Leases - effective 1 January 2019

IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and related interpretations. IFRS 16 removes the distinction between operating leases and finance leases and is replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees except for short-term leases or low value assets.

The Group has made an initial assessment of the impact of adopting IFRS 16.

The Group intends to apply the simplified transition approach and will not restate comparative figures for the year prior to first adoption. Operating leases with less than 12 months remaining and low value leases will continue to be recognised on a straight line basis as expensed to profit and loss.

For the remaining leases, principally in relation to land and buildings, the Group expects to recognise a right-of-use asset of approximately £11.2m and lease liabilities of £11.1m, after adjustment for prepaid and accrued lease payments recognised at 31 December 2018.

The Group expects operating profit to increase by approximately £0.1m and profit before tax to decrease by approximately £0.1m as a result of adopting the new rules.

2. Revenue Recognition and Third-party Project Costs

i. Revenue recognition

The Group's revenues are principally derived from the provision of consulting, market research and communications projects and services. In addition, the Signal division derives some revenue from media placements, the sale of printed goods and the sale of licences to use software products developed by the Group.

Revenue is measured based on the consideration specified in a contract with a customer and excludes, where applicable, any amounts collected on behalf of third parties. Revenue is recognised either over time or at a point in time, when (or as) the Group satisfies performance obligations and control of the product or service is transferred to the customer.

In most instances, promised goods or services in a contract are not considered distinct, or represent a series of services that are substantially the same with the same pattern of transfer to the customer and therefore are accounted for as a single performance obligation. However, where there are contracts with goods or services that are capable of being distinct or multiple products or services are provided, the total transaction price is allocated amongst the various performance obligations based on the relative stand-alone selling prices to the client.

The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money.

ii. Revenue from consulting, market research and communications projects and services

Revenue derived from the provision of consulting, market research and communications projects and services are generally under fixed price contracts with single performance obligations. Contracts rarely extend beyond 12 months and clients are billed based on a payments schedule over the term of the contract. Invoices are generally payable by customers within 30 to 60 days.

Revenue is recognised over time because the customer receives and uses the benefits simultaneously and/or the Group's performance does not create an asset with alternative use and the Group has an enforceable right to payment for performance to date. 

The proportion of revenue recognised is based on milestones completed, time elapsed or actual labour hours spent relevant to total expected hours, as appropriate to the contract. Estimates of the extent of progress towards completion are revised if circumstances change with changes to estimated revenues being recognised in the period in which the circumstances which give rise to revision become known to management.

Some contracts include variable consideration in the form of volume-based rebate arrangements. Variable consideration is estimated using the most likely amount payable and deducted from the transaction value of each contract. 

iii. Media placement revenue

Revenue derived from placing advertising with media sources and is recognised and billed at the point in time when the placing is non-cancellable. Invoices are generally payable by customers within 30 to 60 days. Revenue excludes amounts where the Group collects amounts on behalf of third parties. 

iv. Sale of printed goods

Revenue derived from the sale of printed goods is recognised and billed at the point in time when the printed materials are delivered. Invoices are generally payable by customers within 30 to 60 days. Revenue excludes amounts where the Group collects amounts on behalf of third parties.

v. Software licence revenue

The Group derives revenue from the sale of licences to use in-house developed software products. This licence also includes a defined amount of monthly data the customer can access via the software. The licence and data allowance are not deemed to be distinct so revenue is recognised over the duration of the licence in line with the access to the data. Contracts with clients are for no longer than a year and are billed in advance on a monthly, quarterly or annual basis, invoices are generally payable by customers within 30 to 60 days

vi. Third-party project costs

Third-party project costs comprise amounts payable to external suppliers where they are retained at the Group's discretion to perform part of a specific performance obligation where the Group has full exposure to the benefits and risk of the contract with the client.

Third-party project costs do not include direct labour costs.

vii. Costs to obtain a contract

Costs that would have been incurred regardless of whether the contract is obtained, for example costs of developing a proposal, are organised as incurred. The Group incurs incremental costs to obtain a contract, principally in the form of sales commissions. As the amortisation period of these costs, if capitalised, would be less than one year, the Group makes use of the practical expedient in IFRS 15 p94 and expenses them as incurred. These costs are included in administrative expenses.

viii. Contract assets and liabilities

The Group recognises consideration received in respect of unsatisfied performance obligations as contract liabilities in the Consolidated Balance Sheet. Similarly, if the Group satisfies a performance obligation before it receives the consideration, the Group recognises a contract asset in the Consolidated Balance Sheet.

3. Going Concern

For the year to 31 December 2018 the Group reported a profit before tax on continuing activities of £8.4m and excluding non-recurring restructuring costs and other non-headline charges the Group generated a profit before tax of £12.2m.

The Group meets its day-to-day working capital requirements through its bank facilities. At 31 December 2018 the Group had a £20.0m revolving credit facility ("RCF") which is committed to March 2022. £16.0m of the RCF was undrawn at 31 December 2018. 

The Group's forecasts and projections show that the Group is able to operate within the level of its current facilities and its covenants.

After reviewing the Group's forecasts, projections 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.

4. Headline Measures of Performance

The Group believes that reporting headline measures provide a meaningful assessment of underlying business performance reflecting the way the business is managed and reported internally. Accordingly, headline measures of operating profit, profit before taxation and earnings per share exclude, where applicable, restructuring costs, net credit for certain VAT payable and related costs/(credits), certain employment settlement costs, start-up losses, acquisition costs, amortisation of intangible assets, acquisition-related employee remuneration expenses and share option charges. These are items that, in the opinion of the Directors, should be disclosed separately, by virtue of their size, nature or incidence, to enable a full understanding of the Group's underlying financial performance.

A reconciliation between headline operating profit and reported profit before tax is presented in note 1. In addition to this, a reconciliation between reported and headline earnings per share is presented in note 8. Headline measures in this report are not defined terms under IFRSs and may not be comparable with similarly titled measures reported by other companies.

5. Goodwill

Goodwill represents the excess of consideration over the fair value of the Group's share of the identifiable net assets acquired at the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Impairment losses are recognised in the income statement and cannot subsequently be reversed.

Goodwill is allocated to cash-generating units ("CGUs") for the purposes of impairment testing. The allocation is made to those CGUs that are expected to benefit from the business combination in which the goodwill arose.

The carrying value of goodwill for each CGU is reviewed annually for impairment, or more frequently if the events or changes in circumstances indicate a potential impairment. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value-in-use.

6. Accounting Judgements and Estimates

There are no significant judgements made in preparing the consolidated financial statements.

The Group makes estimates concerning the application of the Group's 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 used in the financial 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. Total expected costs are reviewed at each period and determined based on actuals to date versus management's historic experience in relation to similar contracts and therefore differences may arise between the actual and estimated result. Where immaterial differences arise they are recognised in the income statement for the following reporting period. Any material changes to these estimates would affect revenue recognised in the financial statements and the level of deferred or accrued income on the balance sheet.

ii. Contingent deferred consideration payments in respect of acquisitions and acquisition-related employee remuneration.

The Group estimates the value of future amounts payable in respect of acquisitions. The estimate is based on management's estimates of the relevant entity's future performance. If these estimates change in the future as the earn out progresses, the amount of the provision will vary. Any changes to the carrying value of the provision are recognised in the income statement.

As part of a typical acquisition an amount is also payable to the employees of the acquired company. These acquisition-related employee remuneration costs are calculated using the same estimates of the relevant entity's future performance as the deferred consideration payable. If these estimates change in the future, as the earn out progresses, the amount of the employee liability, which is recognised over the earn out period, will vary. Any changes to the carrying value of these liabilities are recognised in the income statement.

iii. Valuation and amortisation period of separately identifiable intangible assets on acquisitions.

The Group is required to value the separately identifiable intangible assets acquired as part of a business combination. In order to value some of these intangible assets, the Group must make assumptions as to future cash flows derived from these costs and estimate the expected lives of these assets. Changes to these estimates would affect the resulting valuation of goodwill and the amortisation charge recognised in the financial statements.

iv. Impairment of goodwill and intangible assets.

The Group tests goodwill and intangible assets annually for impairment, in accordance with the Group's accounting policies. 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 ACCOUNCEMENT

1. 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 redundancy costs. Further details are provided in note 4.

ii. Credit for VAT recoverable - this relates to the VAT recoverable from clients in respect of a previous VAT issue.

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. Further details are provided in note 5.

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

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

vii. 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.

viii. 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 headline operating profit and reported profit before taxation is presented below:

Like-for-like net revenue

Like-for-like net revenue measures adjusts reported net revenue for the following items:

i. They exclude the results of companies or businesses acquired in the current period

ii. They exclude the results of acquired companies or businesses in the current period to the extent that those companies or businesses were not in the Group in the prior period.

iii. They exclude the results from start-ups in the current period.

iv. They include the results from start-up operations in the prior period to the extent they are included within an operating segment in the current period.

v. Like-for-like measures are also calculated both with and without the impact of movements in currency. These measures are also disclosed in the table below.

2. 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 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.

Segmental net revenue and headline operating profit

A reconciliation of Group headline operating profit (segment result) to profit before tax on the income statement is presented in note 1.

Other information:

3. Administrative Expenses

Profit for the financial year is stated after charging/(crediting):

4. Restructuring Costs

Restructuring costs comprise of cost-saving initiatives including severance payments, property and other contract termination costs. In 2018, these costs relate to the consolidation of two UK businesses into existing property. These costs are included within administrative costs and have been separately identified as a non-headline item because of their size or their nature or because they are non-recurring. In the opinion of the Directors, these costs are required to be separately identified, to enable a full understanding of the Group's underlying financial performance.

An analysis of restructuring costs incurred is as follows:

5. Start-up Losses

Start-up losses have been separately identified as a non-headline item because, in the opinion of the Directors, separate disclosure is required to enable a full understanding of the Group's underlying financial performance.

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.

5. Start-up Losses (continued)

Start-up losses in 2018 relate to the losses associated with Pulsar in the US, the costs associated with the new Boston office and the initial losses of the Signal Health initiative.

An analysis of start-up losses incurred is as follows:

6. Taxation

The standard rate of corporation tax in the UK was 19.00% (2017: 19.25%) for the whole financial year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdiction.

The charge for the year can be reconciled to the profits/(losses) per the income statement as follows:

6. Taxation (continued)

Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2015 (on 26 October 2015) and the Finance Bill 2016 (on 7 September 2016). These include reductions to the main rate of corporation tax to 17.0% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using these enacted tax rates in these financial statements.

During the year, the US federal corporate income tax rate reduced from 34.0% to 21.0%. This reduction, together with reductions in the UK rate of corporation tax, has meant the reported tax rate on profit before tax is reduced to 21.4% (2017: 27.3%).

7. Equity Dividends

The dividends paid in the year were:

A 2018 final dividend of 2.75p has been proposed for approval at the Annual General Meeting on 8 May 2019. In accordance with IAS 10 Events After the Reporting Period these dividends have not been recognised in the Consolidated Financial Statements at 31 December 2018.

8. Earnings per Share

8. Earnings per Share (continued)

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding 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 of the parent by the weighted average number of ordinary shares outstanding during the year adjusted for the potentially dilutive ordinary shares.

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 post-tax earnings for the year, which excludes the effect of restructuring costs, start-up losses, amortisation of intangibles, acquisition related costs and share option charges.

9. Goodwill

Goodwill represents the excess of consideration over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition.

Goodwill acquired through business combinations is allocated to CGUs for impairment testing. During the year ended 31 December 2018, as a result of rationalisation of management structures and restructuring initiatives, allocations to some CGUs have changed

The goodwill balance was allocated to the following CGUs:

9. Goodwill (continued)

The recoverable amount for each CGU is determined using a value-in-use calculation. This calculation uses budgeted pre-tax headline operating profit adjusted for non-cash transactions to generate cash flow projections. The budgets are prepared by management based on business plans for each CGU which reflect expectations, past performance and historic trends. An underlying growth rate of 3.8% per annum in years two to five has accordingly been used for those years.

After year five a long-term growth rate has been applied in perpetuity. This growth rate is based on estimated long term growth rates for the markets Cello operated in. Accordingly, a terminal value has been applied using an underlying long-term growth rate of 2.2%. No additional Cello-specific growth has been assumed beyond year one.

The pre-tax cash flows are discounted to present value using the Group's pre-tax weighted average cost of capital ("WACC"), which was 11.73% for 2018 (2017: 10.95%). This rate was calculated using the Capital Asset Pricing Model with an estimated cost of debt and equity, with appropriate small company risk factors.

At 31 December 2018, the value-in-use exceeds the total goodwill value across the Group by £114.7m. 

The impairment review did not result in an impairment of goodwill for any other CGU.

Sensitivity to changes in assumptions

The impairment review of the Group is sensitive to changes in the key assumptions, most notably the pre-tax discount rate, the terminal growth rate and projected operating cash flows. Reasonable changes to these assumptions are considered to be:

· 1.0% increase in the pre-tax discount rate.

· 1.0% reduction in the terminal growth rate.

· 10.0% reduction in projected operating cash flows.

Reasonable changes to the assumptions used, considered in isolation, would not result in an impairment of goodwill for any of the Groups CGUs with the exception of:

· 1.0% increase in the discount rate would potentially lead to a £0.6m impairment charge across the Pulsar and 2CV CGUs.

· A 1.0% reduction in the terminal growth rate to 1.2% would potentially lead to a £0.3m impairment charge in the Pulsar CGU.

· A 10.0% reduction in projected operating cash flow would potentially lead to a £0.3m impairment charge across the Pulsar and 2CV CGUs.

In addition, in the case of each of the sensitivities referred to above, the Cello Signal CGU has limited goodwill headroom of between 3% and 6%.

10. Trade Receivables

The average credit period taken on the provision of services was 62 days (2017: 62 days).

The Group has not recognised an expected loss allowance (2017: nil) on trade receivables.

The Directors consider that the carrying value of trade receivables approximates to fair value.

11. Contract assets and liabilities

Significant changes in the contract assets and contract liabilities are as follows:

The Group has applied the practical expedient permitted by IFRS 15 not to disclose the transaction price allocated to performance obligations unsatisfied (or partially unsatisfied) at the end of the reporting period as contracts have an original expected duration of less than 12 months.

12. Other receivables

The Directors consider that the carrying value of other receivables approximates to fair value. 

13. Trade and Other Payables

The following are included in trade and other payables falling due within one year:

The Directors consider that the carrying value of trade and other payables approximates to fair value.

14. Borrowings