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Cello Health PLC - Preliminary Results

RNS Number : 5407G
Cello Health PLC
18 March 2020
 

FOR IMMEDIATE RELEASE                                                                                         18 March 2020

 

Cello Health plc

('Cello' or the 'Group')

 

Preliminary Results for the year ended 31 December 2019

 

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 2019.

 

Group Financial Highlights

 

2019

2018

%

 

 

 

 

Headline basic earnings1 per share

9.53p

9.07p

5.1%

Net revenue

£107.6m

£100.8m

↑6.7%

Group headline2 profit before tax

£13.1m

£12.3m

↑6.6%

Reported profit before tax

£7.1m

£9.4m

↓24.2%

Reported basic earnings per share from continuing operations

4.51p

6.96p

↓35.2%

Net funds3

£5.5m

£6.4m

 

Full year dividend

4.10p

3.85p

↑6.5%

 

Divisional Financial Highlights

 

 

Cello Health

Cello Signal

£'000

2019

2018

% Growth

2019

2018

% Growth

Segmental net revenue

72,701

64,308

13.1%

34,805

36,215

(3.9%)

Headline operating profit

14,037

11,890

18.1%

2,719

3,841

(29.2%)

Headline operating margin4

19.3%

18.5%

 

7.8%

10.6%

 

 

Operational Highlights

 

·      Continued focus on the delivery of growth in core healthcare division

·      Very strong like-for-like5 growth across Cello Health in both net revenue and headline operating profit

·      Increased profit margins in Cello Health to 19.3% (2018: 18.5%)

·      Successful assimilation of Innovative Science Solutions, Inc., acquired in August 2019

·      Ongoing expansion of pharmaceutical and biotech client base

·      Creation of Cello Connect to support Cello Health's digital and creative marketing needs

·      Substantial reduction in the size of Cello Signal, including divestiture of Pulsar

·      Cello Health division now represents 82.2% of 2019 Group net revenue on a proforma basis

 

Mark Scott, Chief Executive, commented:

 

"The strong revenue and profit growth achieved by the Group in 2019 reflects our focus on our professional structure and client offering, as well as excellent operational leadership. The creation of Cello Connect within the Cello Health operating structure significantly extends our capability and skill set. We are very conscious of the uncertainty created by the COVID-19 virus and will continue to take appropriate cautionary measures to mitigate any impact, resulting from this, on the business. We remain confident of the long-term growth opportunity in the healthcare services arena."

 

 

Analyst meeting

A conference call for analysts will be held at 9.30am today. For further details please contact Buchanan on 020 7466 5000 or email [email protected]

 

Enquiries:

 

Cello Health plc

020 7812 8460

Mark Scott, Chief Executive

 

Mark Bentley, Group Finance Director

 

 

Cenkos Securities plc

020 7397 8900

Giles Balleny

 

Harry Hargreaves

 

 

 

Buchanan

Mark Court

020 7466 5000

Jamie Hooper

 

Charlotte Slater

 

 

 

CHAIRMAN'S STATEMENT

 

2019 - A year of strong growth and increased focus 

I am delighted to report that 2019 continued to deliver excellent results driven by a single-minded focus from all of our people on developing the Group into a vibrant global company set for ambitious growth. The 2019 results should be considered in light of a clearly defined strategy that has been implemented over the past five years. The strategy is focused on our being able to support our clients' journey from drug discovery through to commercialisation, with a capacity to handle cutting-edge science, complex commercial issues, multiple stakeholders and significant marketing challenges. This makes us an ideal partner, working with clients to achieve clinical and commercial success. We share the same motivation as our clients - to improve patients' lives by ensuring treatments and solutions are brought to market efficiently.

Net revenue from continuing operations increased by 6.7% to £107.6m (2018: £100.8m) with headline profit before tax up 6.6% to £13.1m (2018: £12.3m). Our strong organic headline profit before tax growth was underpinned by an excellent divisional performance from Cello Health, with 8.0% constant currency like-for-like net revenue growth and growth in headline operating profit of 18.1%. Cello Signal had a tougher year, with a decline in net revenue of 3.9% and a drop in headline operating profit of 29.2%.

This strong financial performance was accompanied by robust cash flows and a good net funds position at the year end of £5.5m (2018: £6.4m).

Reported profit before tax was down 24.2% to £7.1m (2018: £9.4m). This drop in reported profit before tax substantially reflects an impairment charge of £2.7m in respect of Signal Agency.

Headline basic earnings per share rose 5.1% to 9.53p (2018: 9.07p). As a result, the Board has decided to recommend an increase in the full dividend per share to 4.10p (2018: 3.85p), an increase of 6.5% subject to shareholder approval. Reported earnings per share from continuing activities fell 35.2% to 4.51p (2018: 6.96p). Significantly, this represents a record of 14 years of dividend increases.

As evidenced by these results, our effective execution against our strategic priorities of growth, innovation and leverage is delivering. 2019 saw the organic expansion of our global footprint, with the opening of a Berlin office, the growth in our Boston office and the substantial expansion of our core Yardley PA, office. These actions have all helped us attract top talent in key markets and contributed to our strategy for growth. 

In August, we completed the acquisition of the scientific consultancy Innovative Science Solutions, Inc. (ISS), which specialises in strategic regulatory support for the healthcare industry and scientific support on health-related issues for legal counsel. Initial consideration was $6.4m, with $4.1m as deferred consideration contingent on future performance. ISS has performed well in its first five months as part of the Group.

In line with our strategy of increasing the health-oriented focus of the Group, in October 2019 we disposed of Pulsar, our social media and analytics business, which was part of Cello Signal.

In addition, we have accelerated the positioning of relevant core services of Cello Signal towards healthcare. In January 2020, we aligned the core digital and creative marketing capability based in Edinburgh with the Cello Health operating structure under 'Cello Connect'. This supports our ambition of broadening our access to the wider health and wellbeing market as well as leveraging these digital and creative marketing capabilities into our core biopharmaceutical and health technology clients. The creation of Cello Connect substantially enlarges the scale of our core Cello Health division which for the year ended 31 December 2019 represented 82.2% of Group net revenues on a proforma basis.

Corporate Governance

After the significant changes to the non-executive team in the second half of 2018, including my appointment as Chairman, I am pleased with the way the Board has engaged and worked together during the year. The manner in which the Board has discharged its governance activities are reported on elsewhere in this report and, now that the new Board has been in place for just over a year, we have also undertaken a Board effectiveness assessment, the results of which are being reviewed so that ongoing improvements can be made in response to the feedback.

Current Trading and Outlook

 

It has become clear over the last few days that the world economy will go through a period of considerable stress as a consequence of the current threat of the COVID-19 virus. It is therefore possible that certain client spend may be disrupted while the current travel restrictions and health risks exist. However, our client base is dominated by clients which are traditionally less sensitive to short-term changes in consumer behaviour. In addition, the Group has currently not experienced any material client impact arising from the disruption. We are also mitigating this threat through the use of technology to allow digital delivery of projects, supported by flexible working patterns across our office network. The Board is confident in the strength of the business and capacity of the management team to trade effectively through this period.

The growth potential of our core pharmaceutical and biotechnology client sector remains very positive, as does the opportunity in the growing health, wellbeing and health technology markets. Clients' R&D pipelines remain strong.
 

Advances in disease areas such as oncology and technologies such as cell and gene therapies, alongside increasingly rapid FDA approvals for breakthrough therapies focused on smaller patient populations, are compressing development and regulatory timelines and challenging traditional pricing and reimbursement systems. Cello Health has an established market position working with large-scale pharmaceutical and biotech clients on these issues. Cello Health's combination of scientifically-led commercial advisory skills with early stage asset commercialisation capability and communications delivery, allows us to support our clients' commercial goals.

 

We enter 2020 with a good order book from 2019 and performance has been good in the early months of the year.

 

Further guidance on current year trading will be given at our AGM on 20 May 2020.

 

Finally, I would like to thank all of our clients for selecting us as their partners, and all of our people whose expertise and commitment have delivered another year of strong performance and high-quality services to our clients.

 

Chris Jones

 

Non-Executive Chairman

17 March 2020

 

 

 

 

CHIEF EXECUTIVE'S OPERATING REVIEW

 

Strong performance across our core capabilities

2019 demonstrated our ongoing ability to deliver strong organic headline operating profit growth from our core operations, as well as sensibly adding new capabilities through acquisition. We retain a single-minded focus on our three key strategic priorities of ambitious growth, targeted innovation and leveraging key assets across the Group. The COVID-19 virus requires us to take sensible cautionary measures to manage any impact on the business but our strategic growth objective remains unchanged.

Growth

Strong performances across our Consulting and US Communications operations in particular contributed to an excellent overall result for the Group. Constant currency like-for-like net revenue growth of 8.0% in the Cello Health division demonstrates the ability of our business model to deliver organic growth without reliance on acquisitions.

Cello Health Communications represented 35.7% (2018: 30.2%) of the net revenue of the Cello Health division and its successful year has been driven by a combination of factors such as the increasing influence of medical affairs and the ongoing demand for our deep scientific communication services with clinical, medical and commercial buying groups. This was combined with successful integration of digital within our communications offer, successful new business development, and good client retention rates where we have deepened and broadened our relationships.

Cello Health Consulting represented 29.3% (2018: 29.1%) of the net revenue of the Cello Health division, and also had a strong period of growth and margin expansion, with a marked widening of the core client base. It also added a healthy spread of new clients in the US biotech space. We have seen an increase in earlier stage strategy work, with pleasing growth from clients managing assets in Phase 2-3 of development. In the US, our early stage biotech strategy consultancy, Cello Health BioConsulting, continued to perform strongly in its third year in the Group. The business continues to work at the cutting edge of science and technology, with technical strength in areas such as oncology, advanced therapeutics (cell and gene therapy) and rare disease.

The addition of ISS to the consulting division in August 2019 contributed a key expansion of our advisory capability and in particular bolsters our ability to provide a comprehensive early commercialisation proposition around the regulatory submission process. 

Cello Health Insight represented 35.0% (2018: 40.7%) of the net revenue of the Cello Health division, delivering to expectations in its core operations as well as seeing strong progress with its digital practice, Cello Health Logic, as well as with its new behavioural science unit, Disrupt. In addition, we are seeing continued success in providing high-quality, value-added trackers, with revenue in this area more than doubling in 2019. This type of work brings with it the benefit of greater revenue visibility.

2019 saw continued success with the US expansion of the business. Cello Health's US revenues were $46.2m in 2019 (2018: $38.7m). The US now represents over 52.0% of the Group's operating profit. Cello Health Communications US performed extremely well and we continue to invest in further expansion of our operations in Yardley PA, and Boston. 

Our European performance was also strong, with core health operations delivering good growth in operating profit. In 2018, the European pharmaceutical industry invested an estimated €35bn on R&D and Europe represented 23.0% of world pharmaceutical sales (www.efpia.eu). Seven of the top 20 pharmaceutical companies have their global headquarters in Europe. Consequently, along with enlarging our US footprint, continuing to build on our strength in Europe is key to our long-term plans, with a primary focus in London and Berlin.

Our core client base remains strong with the top 20 clients contributing 41.0% to Group net revenue (2018: 40.1%). We continue to have relationships in place with 24 of the top 25 pharmaceutical companies (www.pharmexec.com), 17 of which we have been in relationships with for over five years. Our largest client represents 9.2% (2018: 7.9%) of Group net revenue. This is a long-term client that has work streams spread over multiple therapy areas and buying points. Our top 25 global pharmaceutical clients contributed 38.0% of total net revenues for the Cello Health division.

Cello Signal like-for-like constant currency net revenue from continuing operations fell by 4.1%. This performance largely reflected a weak trading environment in the UK market where a range of clients deferred spend in the last quarter, pending the election result and clarity around Brexit. Since the year end action has been taken to reduce the cost base to improve profitability for 2020. This is expected to give rise to an exceptional charge for redundancies of £0.5m in 2020.

In January 2020, we formed Cello Connect, as an integral part of the Cello Health operating structure. Cello Connect is centered on the high performing creative and digital teams headquartered in Edinburgh and formerly part of Cello Signal. These teams have been spearheading Signal's move into Health with notable work for EFPIA and a growing strength in digital strategy for major pharma clients. Cello Connects' growth and commercial performance are in line with that of Cello Health and these capabilities are increasingly relevant to our core biopharmaceutical and medtech clients. Cello Connect's food, drink and leisure client base positions us well to capture more of the burgeoning Health and Wellbeing market and substantially enlarges the scale of our core Cello Health division. Cello Connect delivered £15.6m (2018: £14.7m) of net revenue and £2.4m (2018: £2.7m) of operating profit in 2019. On a 2019 proforma basis, the Cello Health division now contributes 82.2% of overall Group net revenue and 96.0% of overall Group headline operating profit.

The creation of Cello Connect leaves Signal with 2019 proforma £19.2m of net revenue (2018: £21.5m) and £0.7m of operating profit (2018: £1.6m), with a 3.7% operating profit margin (2018: 7.4%). The Signal business will be tightly run to increase profitability in the short-term.

Excluding Pulsar, average headcount across the Group was 907 (2018: 922). This reflects an 8.0% increase in closing headcount in the Cello Health division; and a 6.5% decrease in Cello Signal's closing headcount. 2019 saw the strengthening of the Global Human Resources function of Cello, building on its well-established recruitment and colleague engagement strategies, including its leading training programme, Cello Academy while striving to optimise balanced and competitive remuneration programmes. A concerted effort is being made to accelerate the rate of recruitment at all levels of Cello Health.

 

We continue to appraise and examine potential acquisitions for Cello Health against our focused criteria, maintaining a disciplined approach to valuation and strategic fit.

Innovation

Innovation continues to play a critical role in each of our core capabilities, especially in light of the convergence of science and technology and the speed of change for our clients. We continually stretch our skills, knowledge and perspective to tackle clients' complex problems. In 2019, we sought to capitalise on this by:

1.  Rolling out a cross-capability Innovation Lab, with the goal of identifying opportunities to openly embrace experimentation and drive collaboration and incremental revenue.

2.  Building organised groups of internal experts by therapeutic area, as we build deep expertise in key areas of innovation. We have already established a strong leadership position in the fields of immunology, oncology, rare disease and advanced therapeutics. Our own industry event, Cancer Progress, continues to allow the oncology specialism to display its strong thought leadership in this area.

3.  Launching a unified www.cellohealth.com website to provide greater clarity around our expert navigation positioning that delivers a modern, professional platform for greater engagement with clients, prospective clients, employees and potential employees.

We have performed well across the innovation streams activated in 2018.

Our specialist analytics unit, Cello Health Logic, has grown strongly, helped by market opportunities such as recent FDA guidance highlighting the value of social media in understanding the patient voice. Net revenues in this unit nearly doubled in 2019, with confident expectations for 2020 and beyond as we are well positioned to take advantage of this long-term opportunity.

We have made additional investment in the development of our online community platform, eVillage, which has delivered improved scale of communities and speed of response.

Our dedicated Advanced Therapeutics practice has maintained its growth as the team work on the cutting edge of cell and gene therapies.

We have continued to strengthen our digital capabilities and services across the Group, especially within our Cello Health Communications and Cello Health Insight capabilities. The stronger link with Cello Connect is already yielding new project wins and enhanced digital and consumer delivery capabilities.

We continue to work towards building our own data capability, sold to clients under licence or in the form of publications, to complement our customised data collection capability. This initiative builds off our existing health panels and our social media analytics capability.

Given clients face the ongoing risk of not recovering their R&D costs, in 2019 Cello Health Consulting launched its 'Launch PRO' offering. Launch PRO is built on a deep understanding of launch, from critical thinking, coordination and cross-functional alignment. Our experts support clients to deliver a robust launch strategy, with disciplined implementation.

During 2019, we developed our new behavioural science unit, Disrupt, which pulls on the expertise we have across our capabilities in behaviour change, health psychology and social anthropology. This service addresses our clients' need to drive behaviour change in critical areas such as adherence.

Leveraging key assets

A significant strength of the Group lies in the complementarity of our service capabilities; insight and analytics, strategic and scientific consulting, scientific and creative communications.

The core of our service is working with the senior decision makers in client organisations on projects that focus on mission-critical decisions. These type of projects require best-in-class approaches in each discipline as well as a blend of expertise across each service area. This blended capability set differentiates us versus many of our competitors. It also provides opportunities for our people to work together to offer innovative and smarter solutions to our clients. This means that we have access to, and relationships with, myriad different stakeholders and buying points within our client organisations. Combined with our centres of excellence in oncology, rare diseases and market access, this continues to drive incremental growth through collaboration.

In 2019, we continued to make significant investments in marketing the Cello Health divisional brand, with the aim of establishing a strong presence at key industry events and increasing overall awareness. In addition, we applied increasing focus and coordination in the area of shared business development, supporting cross collaboration as well as individual capability areas. This continues to yield benefits in new business as our resource focuses on global opportunities.

2019 saw further success in being able to leverage the digital and creative services that reside within Cello Signal resulting in over £1.0m of winning bids partnering between Health and Signal teams. The newly formed Cello Connect brings greater focus on accelerating and leveraging this expertise into the core health agenda.

 

 

GROUP FINANCE DIRECTOR'S REPORT

 

A Robust Financial Performance

 

Summary

All numbers detailed below are from continuing operations. The trading results of Pulsar, which was disposed of in the year, are not included in either the current or the prior year, unless explicitly stated and are accounted for as discontinued operations.

 

Total Group net revenue was up 6.7% at £107.6m (2018: £100.8m) and headline profit before tax was up 6.6% at £13.1m (2018: £12.3m).

 

Like-for-like net revenue growth for the whole Group was 5.2%. Constant currency like-for-like net revenue growth was 3.7%. Constant currency like-for-like net revenue growth was 8.0% in Cello Health, partially offset by a decline of 4.1% in Cello Signal.

 

The Group's headline operating margin was 12.6% (2018: 12.5%) with a headline operating margin of 19.3% in Cello Health (2018: 18.5%), and 7.8% in Cello Signal (2018: 10.6%).

 

Reported profit before tax was down 24.2% to £7.1m (2018: £9.4m); a reconciliation of reported profit before tax to headline profit before tax can be found later in this report.

 

Operational Financial Performance

Cello Health

 

2019

2018

 

 

£'000

£'000

% change

Headline net revenue

72,701

64,308

13.1%

Headline operating profit

14,037

11,890

18.1%

Headline operating margin

19.3%

18.5%

 

 

 

 

 

 

 

Cello Health had an excellent year with net revenue rising by 13.1% to £72.7m (2018: £64.3m). Headline operating profits rose by 18.1% to £14.0m (2018: £11.9m). This growth was partially driven by the impact of the acquisition of ISS, which was completed in August 2019. Like-for-like constant currency net revenue growth was robust at 8.0%. This growth was driven by all capabilities, but in particular by Cello Health Communications in the US and Cello Health Consulting. Headline operating margins rose to 19.3% (2018: 18.5%), reflecting the change in the operating mix of Cello Health, but also strong operating margin improvements in Cello Health Communications.

 

On 16 August 2019, the Group purchased the trade and assets of ISS, for a maximum consideration of $10.5m. $6.4m was paid in cash on completion with the remaining $4.1m payable in four tranches until 2024, dependent on financial performance over the period from completion until 31 July 2024. ISS is a scientific consulting firm specialising in strategic counsel and regulatory support for the healthcare industry in the US. ISS performed well in the first five months post acquisition.

 

Cello Signal

 

2019

2018

 

 

£'000

£'000

% change

Headline net revenue

34,805

36,215

            (3.9%)

Headline operating profit

  2,719

3,841

(29.2%)

Headline operating margin

   7.8%

10.6%

 

 

 

 

 

 

 

 

Cello Signal had a decline in net revenue, largely attributable to tougher trading conditions in the UK, particularly in the final quarter of the year. Net revenue fell by 3.9% to £34.8m (2018: £36.2m). Headline operating profit fell by 29.2% to £2.7m (2018: £3.8m). Like-for-like constant currency net revenue fell by 4.1%. The headline operating margin was 7.8% (2018: 10.6%).

 

As a consequence of more difficult 2019 trading in Signal Agency, part of Cello Signal, the Group has recognised non-headline impairment charge of £2.7m against the carrying level of goodwill in relation to Signal Agency.

 

Central Costs

 

Central costs were flat at £3.2m (2018: £3.1m). The central cost structure of the Group represents those costs which are not attributable directly to a segment. They predominantly consist of Group staff costs in the UK and the US.

 

Finance Costs

 

Finance costs were £0.5m (2018: £0.3m). This increase reflects a £0.3m charge in 2019 in respect of notional interest arising on the adoption of IFRS 16 Leases.

 

Discontinued Operations

 

In line with the stated strategy of the Group to focus on its core healthcare advisory services capabilities, in October 2019 the Group sold Pulsar, its social media and analytics business. Gross consideration, stated at fair value, was £2.4m paid in shares of the purchaser, Access Intelligence Plc. Net asset-related adjustments to the consideration were subsequently agreed at £1.6m. The loss on disposal, after a goodwill write off of £3.4m, was £4.9m. Trading losses, after tax, from discontinued operations were £0.9m. The total loss from discontinued operations, after tax, was therefore £5.8m.

 

Earnings Per Share

 

Headline basic earnings per share rose 5.1% to 9.53p (2018: 9.07p). Reported basic earnings per share fell 114.0% to a loss per share of 0.88p (2018: earnings per share of 6.27p). The basic loss per share of 0.88p is impacted by a loss per share from discontinued operations of 5.39p (2018: 0.69p).

 

Basic earnings per share from continuing operations were down 35.2% to 4.51p (2018: 6.96p). This decline in basic earnings per share was as a result of the impairment charge of £2.7m (2018: £nil) in Signal Agency.

 

Operating Cash Flow

 

Operating cash flow was strong in 2019, with a very low movement in working capital of £0.4m outflow (2018: £0.6m inflow) reflecting an expected reversal of a slight prior year surplus. Operating cash flow is weighted towards the second half of the year. The Group has debt facilities of £24.0m with the Royal Bank of Scotland, which expire in March 2022. At the year end, £3.0m of these facilities were drawn down in US dollars (2018: £4.0m which was drawn down in sterling). This strong performance led to a healthy net funds position of £5.5m at 31 December 2019 (2018: £6.4m).   

 

Foreign Currency

 

The Group experienced a small aggregate foreign exchange benefit of £0.3m of headline operating profit during the year, as a result of average £:$ exchange rates moving from 1.34 to 1.28 during the year. The Group generated around £7.1m headline operating profit from continuing operations in the US in 2019 (2018: £5.8m), an increase of 23.0%.

 

Deferred Acquisition Obligations

 

The maximum total payable under deferred acquisition obligations is $8.8m (2018: $6.3m). This will be settled over the years 2020 to 2024, substantially in cash. In line with recognised accounting practices, the income statement impact of this deferred obligation is spread over the length of the deferred period. In 2019, the acquisition related employee remuneration expense element of this deferred obligation was £0.9m (2018: £1.6m).

 

Taxation

 

The Group's reported tax charge was £2.3m (2018: £2.0m), with a headline tax rate of 22.0% (2018: 21.9%). The Group expects the headline tax rate to stabilise at around 23.8% in 2020. This slight increase reflects the expected change in the profit mix between the UK and the US in 2020. The reconciliation of the tax charge for 2019 to reported profit before tax is in note 5 to these results.

 

Dividends

 

The Board is proposing a final dividend increase of 7.2% to 2.95p per share (2018: 2.75p), giving a total dividend of 4.10p (2018: 3.85p), representing a total increase of 6.5%. This increase in the dividend reflects the growth in headline earnings per share, the strength of the balance sheet of the Group and the Board's confidence in the ongoing trading performance of the business. This increase maintains the Group's 14th  consecutive year of dividend growth. Subject to shareholder approval, the final dividend will be paid on 22 May 2020 to all shareholders on the register at 24 April 2020 and will be recognised in the year ending 31 December 2020.

 

Employee Benefit Trust

 

The Group has recently approved the establishment of an Employee Benefit Trust (EBT). It is proposed that this Trust be used to receive ordinary shares in the Group from existing shares held in Treasury and also from occasional market purchases from time to time. The EBT would then be used to satisfy the supply of shares in relation to the exercise of employee share options as and when they are exercised in the future. In this way, the number of new ordinary shares that would otherwise be issued on exercise of these options would be reduced.

 

IFRS 16 Adoption

                                                                                                                                                    

IFRS 16 Leases became mandatory from 1 January 2019. The Group has adopted the simplified approach to implementation and has not restated prior year balances. The impact of the adoption has been to generate a right-of-use asset of £9.1m as at 31 December 2019, and a lease liability of £9.1m at 31 December 2019. Notional interest of £0.3m has been charged to the income statement for the year ended 31 December 2019.

 

Non-Headline Items

 

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

 

 

2019

2018

 

£'000

£'000

Reported operating profit

7,597

9,717

Net interest payable

(485)

(339)

 

_________

_________

Profit before tax on continuing operations

7,112

9,378

 

 

 

Restructuring costs (a)

821

204

Start-up losses (b)

404

293

Acquisition costs

44

22

Impairment of goodwill (c)

2,719

-

Amortisation of intangibles (d)

766

325

Acquisition-related employee remuneration expense (e)

932

1,571

Share option charges (f)

263

464

 

_________

_________

Headline profit before tax

13,061

12,257

 

_________

_________

 

 

(a)  During 2019, the Group incurred charges of £0.4m (2018: £0.2m) in relation to headcount reductions in Cello Signal. These were largely incurred in the Cheltenham office. The Group also incurred a charge of £0.5m associated with the disposal of a subsidiary relating to necessary lease provisions taken on the lease previously occupied by Pulsar. In the first quarter of 2020 the Group anticipates incurring exceptional redundancy charges of up to £0.5m relating to the decision to establish Cello Connect.

 

(b)  Start-up costs in the year of £0.4m (2018: £0.3m) relate to the treatment for the opening of the Berlin office. For 2020 it is envisaged that start-up costs will be minimal.

 

(c)  The Group has impaired the goodwill value relating to Signal Agency by £2.7m.

 

(d)  Amortisation of intangibles relates to the amortisation of intangible assets that are recognised on acquisition. In 2019 there is an amortisation charge relating to the acquisition of ISS, which was completed during the year, so this charge has increased.

 

(e)  Acquisition-related employee remuneration expense of £0.9m (2018: £1.6m) 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. This charge dropped in the year due to the settlement of deferred consideration relating to the 2017 acquisition of Cello Health BioConsulting (formerly Defined Health Inc).

 

(f)   Share option charges of £0.3m (2018: £0.5m) relate to the appropriate income statement charge being recognised over the vesting period of issued share options to staff.

 

Revised Segmentation for 2020

 

In January 2020 the Cello Signal division was restructured, with certain operations joining the Cello Health division under the name 'Cello Connect'. The operations which are now part of Cello Connect are substantially based in Scotland and have become part of the Cello Health reporting and Board structure. It is envisaged that this important move will encourage further utilisation of the digital and creative skill set within these businesses by the existing Cello Health client base. Going forward, Cello Connect will complement Cello Health's science-led advisory strength with marketing capability.

 

For 2020, the Group will be segmented on this revised basis for both management and reporting purposes.

The proforma segmentation for 2019 is as follows:

 

Cello Health

 

      Cello Signal

 

 

2019

2018

 

2019

2018

 

 

£'000

£'000

% change

£'000

£'000

% change

Headline net revenue

88,350

78,998

11.8%

19,156

21,525

(11.0%)

Headline operating profit

16,437

14,595

12.6%

714

1,595

(55.2%)

Headline operating margin

18.6%

18.5%

 

3.7%

7.4%

 

 

 

 

Risks and Uncertainties

 

The Company regularly reviews the risks and uncertainties facing the business through a series of Board and operational meetings.

 

The Group has instigated a more comprehensive risk assessment process during the year and documented mitigation strategies. A risk-scoring methodology was adopted as well as an assessment of the strength of mitigation. The key risks arising were as follows:

 

1.  Macro-economic conditions

The Group's business is domiciled in the UK but 55.8% (2018: 51.2%) of the Group's revenues are from clients based overseas. Income from clients can be impacted by prevailing local and global economic conditions. Economic and geopolitical uncertainty has remained, for example the continued uncertainty over the impact of Brexit and COVID-19. However, the broad spread of clients across sector and geography mitigates this risk.

 

2.  COVID-19 and restrictions on staff and client mobility

There have recently been some restrictions on travel for clients and staff arising from the outbreak of COVID-19 across the world. This potentially impacts how staff get to work, delivery of projects, as well as conducting new business and marketing activity.

 

These risks are mitigated by the use of technology that allows staff to work from home where necessary, by the digital delivery of projects, and by adjusting new business methodologies that reduce the need for travel and face to face meetings.

 

3.  Loss of the Group's key clients

Client relationships are crucial to the Group and their strength 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. In addition, there are ongoing programmes of formal and informal client satisfaction assessment. In all cases, client satisfaction was measured as high across the Group.

 

Our client list is not concentrated, with the largest client being 9.2% (2018: 7.9%) of our net revenue. This client is spread across several therapy areas and several individual client-buying points. The Master Service Agreement has recently been renewed for three more years.

 

4.  Loss of key staff and staff turnover

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 2020'. 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.

 

For example, the recent application of GDPR legislation has been a significant change in the law. The Group has successfully established a centrally coordinated GDPR steering group, actively working across all its businesses to ensure GDPR compliance.

 

The Group will also be impacted by the April 2020 adjustments to the IR35 legislation concerning freelance and previously non-payrolled consultants. The Group has undertaken a thorough review of exposures in this area and has adjusted contractual situations where necessary.

 

 

 

 

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2019

 

 

Note

2019

£'000

2018

£'000

 

 

 

 

Continuing operations

 

 

 

Revenue

2

166,770

158,947

Third-party project costs

 

(59,207)

(58,157)

 

 

              

              

Net Revenue

1

107,563

100,790

 

 

 

 

Administrative expenses

 

 

(99,966)

(91,073)

 

 

              

              

Operating profit

1

7,597

9,717

 

 

 

 

Finance income

 

12

1

Finance costs

 

(497)

(340)

 

 

              

              

 

Profit before taxation

 

 

 

7,112

 

9,378

 

 

 

 

Taxation

5

(2,287)

(2,033)

 

 

              

              

 

Profit from continuing operations

 

 

 

4,825

 

7,345

 

 

 

 

Loss from discounted operations after tax

6

(5,768)

(727)

 

 

              

              

(Loss)/profit for the year attributable to owners of the parent

 

 

(943)

 

6,618

 

 

              

              

 

 

 

 

 

 

2019

2018

Basic (loss)/earnings per share

 

 

 

 

 

 

 

From continuing operations

8

4.51p

6.96p

From discontinued operations

8

(5.39)p

(0.69)p

Total basic (loss)/earnings per share

8

(0.88)p

6.27p

 

 

 

 

Diluted (loss)/earnings per share

 

 

 

 

 

 

 

From continuing operations

8

4.46p

6.82p

From discontinued operations

8

(5.39)p

(0.69)p

Total diluted (loss)/earnings per share

8

(0.88)p

6.14p

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2019

 

 

 

 

2019

£'000

2018

£'000

 

 

 

 

 

 

(Loss)/profit for the financial year

 

(943)

6,618

 

 

Other comprehensive income and expense:

 

 

 

 

 

 

 

Items that may be reclassified subsequently to profit and loss:

 

 

Exchange differences on translation of foreign operations

(526)

590

 

Loss reclassified to profit or loss on disposal of foreign operations

135

-

 

 

 

              

              

 

Total comprehensive (expense)/income attributable to owners of the parent:

 

(1,334)

 

7,208

 

 

 

              

 

              

 

 

 

 

 

 

Total comprehensive (expense)/income attributable to owners of the parent arises from:

 

 

 

 

 

 

Continuing operations

4,299

7,935

 

Discontinued operations

(5,633)

(727)

 

 

 

              

              

 

 

 

(1,334)

 

7,208

 

 

 

              

 

              

 

 

                 

 

 

 

 

CONSOLIDATED BALANCE SHEET

as at 31 December 2019

 

 

Note

2019

£'000

2018

£'000

 

 

 

 

Goodwill

9

70,787

73,623

Intangible assets

 

1,053

1,388

Investments

 

2,099

-

Property, plant and equipment

 

2,645

2,931

Right of use assets

18

9,082

-

Deferred tax assets

 

1,789

1,513

 

 

                      

                      

Non-current assets

 

87,455

79,455

 

 

                      

                      

 

 

 

 

Trade receivables

11

34,578

35,260

Contract assets

12

5,852

6,798

Other receivables

13

3,300

5,800

Cash and cash equivalents

 

8,549

10,424

 

 

                      

                      

Current assets

 

52,279

58,282

 

 

                      

                      

Trade and other payables

14

(27,992)

(30,949)

Contract liabilities

12

(14,307)

(14,004)

Current tax liabilities

 

(558)

(389)

Borrowings

15

(19)

(42)

Lease liabilities

18

(2,689)

(11)

 

 

                      

                      

Current liabilities

 

(45,565)

(45,395)

 

 

                      

                      

Net current assets

 

6,714

12,887

 

 

                     

                     

Total assets less current liabilities

 

94,169

92,342

 

 

                     

                     

 

 

 

 

Trade and other payables

14

(1,505)

(1,246)

Borrowings

15

(3,030)

(4,000)

Lease liabilities

18

(6,388)

(30)

Provisions

 

(557)

-

Deferred tax liabilities

 

(287)

(233)

 

 

                      

                      

Non-current liabilities

 

(11,767)

(5,509)

 

 

                      

                      

Net assets

 

82,402

86,833

 

 

                     

                     

Equity

 

 

 

Share capital

 

10,668

10,516

Share premium

 

33,209

32,759

Merger reserve

 

24,293

25,446

Capital redemption reserve

 

50

50

Retained earnings

 

13,160

16,237

Share-based payment reserve

 

844

1,256

Foreign currency reserve

 

178

569

 

 

                      

                      

Total equity

 

82,402

86,833

 

 

                      

                      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated cash flow statement

for the year ended 31 December 2019

 

 

Note

2019

£'000

2018

£'000

Cash flows from operating activities

 

 

 

Cash generated from operations

16

14,803

13,418

Tax paid

 

(2,073)

(2,239)

 

 

              

              

Net cash inflow from operating activities

 

12,730

11,179

 

 

              

              

Cash flows from investing activities

 

 

 

Interest received

 

12

1

Purchase of property, plant and equipment

 

(1,222)

(1,312)

Sale of property, plant and equipment

 

3

38

Expenditure of intangible assets

 

(407)

(672)

Purchase of subsidiary undertakings (net of cash acquired)

 

(5,031)

(256)

Disposal of subsidiary (net of cash disposed)

 

(169)

-

 

 

              

              

Net cash outflow from investing activities

 

(6,814)

(2,201)

 

 

              

              

Cash flows from financing activities

 

 

 

Proceeds from issuance of shares

 

179

69

Dividends paid to equity holders of the parent

 

(4,102)

(3,714)

Net repayment of bank loans

 

(710)

(7,686)

Repayment of loan notes

 

(23)

(17)

Principle element of lease payments (2018: Capital element of finance lease payments)

 

 

(2,770)

 

(35)

Interest paid

 

(472)

(348)

Proceeds from sale of investments

 

142

-

 

 

              

              

Net cash outflow from financing activities

(7,756)

(11,731)

 

 

              

              

 

 

 

 

Net decrease in cash and cash equivalents

17

(1,840)

(2,753)

 

 

 

 

Exchange (losses)/gains on cash and cash equivalents

(35)

156

Cash and cash equivalents at the beginning of the year

10,424

13,021

 

 

              

              

Cash and cash equivalents at the end of the year

8,549

10,424

 

 

              

              

 

 

 

Consolidated statement of changes in equity

for the year ended 31 December 2019

 

 

 

 

 

 

Share capital £'000

Share premium £'000

Merger reserve £'000

Capital redemption reserve £'000

Retained earnings £'000

Share-based payment reserve £'000

Foreign currency exchange reserve £'000

Total equity £'000

 

At 1 January 2018

10,501

32,705

25,446

50

13,368

824

(21)

82,873

 

 

           

           

           

           

           

           

           

Comprehensive income:

Profit for the period

-

-

-

-

6,618

-

-

6,618

Other comprehensive income:

Currency translation

-

-

-

-

-

-

590

590

 

                             

                             

                             

                             

                             

                             

                            

                             

Total comprehensive income for the year

 

-

 

-

 

-

 

-

6,618

-

590

7,208

 

                             

                             

                             

                             

                             

                             

                             

           

Transactions with owners:

 

 

 

 

 

 

 

 

Shares issued              

15

54

-

-

-

-

-

69

Credit for share-based incentives

-

-

-

-

-

464

-

464

Tax on share-based payments recognised directly in equity

-

-

-

-

(67)

-

-

(67)

Transfer between reserves in respect of share options

-

-

-

-

32

(32)

-

-

Dividends (note 7)

-

-

-

-

(3,714)

-

-

(3,714)

 

                             

                             

                             

                             

                             

                             

                             

           

Total transactions with owners

15

54

-

-

(3,749)

432

-

(3,248)

 

                             

                             

                             

                             

                             

                             

                            

           

 

 

 

At 31 December 2018

10,516

32,759

25,446

50

16,237

1,256

569

86,833

 

                             

                             

                             

                             

                             

                             

                             

                             

Comprehensive income:

Loss for the financial year

-

-

-

-

(943)

-

-

(943)

Other comprehensive income:

Currency translation

-

-

-

-

-

-

     (391)

(391)

 

                             

                             

                             

                             

                             

                             

                             

                             

Total comprehensive expense for the year

 

-

 

-

 

-

 

-

 

(943)

 

-

 

(391)

(1,334)

 

                             

                             

                             

                             

                             

                             

                             

           

Transactions with owners:

 

 

 

 

 

 

 

 

Shares issued              

152

450

-

-

-

-

-

602

Credit for share-based incentives

-

-

-

-

-

263

-

263

Tax on share-based payments recognised directly in equity

-

-

-

-

140

-

-

      140

Transfer between reserves in respect of share options

-

-

-

-

675

(675)

-

-

Transfer between reserves in respect of impairment

-

-

(136)

-

136

-

-

-

Transfer between reserves in respect of disposal

-

-

(1,017)

-

1,017

-

-

-

Dividends (note 7)

-

-

-

-

(4,102)

-

-

(4,102)

 

                             

                             

                             

                             

                             

                             

                             

           

Total transactions with owners

152

450

(1,153)

-

 

(2,134)

(412)

-

(3,097)

 

                             

                             

                             

                             

                             

                             

                             

           

At 31 December 2019

10,668

33,209

24,293

50

13,160

         844

178

82,402

 

                             

                             

                             

                             

                             

                             

                             

           

                                                                                                                                                           

 

 

 

SIGNIFICANT ACCOUNTING POLICIES

 

A.  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 2019 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 2019 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 2018 have been delivered to the Registrar of Companies and those for 2019 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 estimates and judgements are set out in accounting policy F.

 

The Group's principal accounting policies are consistent with these applied in the year ended 31 December 2018 with the exception of changes resulting from the adoption of the following accounting standard:

 

IFRS 16 Leases

 

IFRS 16 introduces a comprehensive model for the identification of lease arrangements for both lessors and lessees. IFRS 16 supersedes the provisions in IAS 17 Leases and related interpretations.

 

IFRS 16 removes the distinction between operating leases and finance lease which is replaced by a model where a right-of-use asset and a corresponding lease liability is recognised for all leases except for lease with low value or a term less than 12 months.

 

The Group has used the simplified transition approach and accordingly has not restated the prior year financial statements. The impact of adoption on the balance sheet at 1 January 2019 is disclosed in note 18.  

 

A number of new standards, amendments to standards and interpretations are effective for the annual period beginning 1 January 2020 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.

·      IFRS 17 Insurance contracts

·      IFRS 3 amendments - definition of a business

·      IAS 1 amendments - classification of liabilities and definition of materiality

·      Amendments to IFRS 7, IFRS 9 and IAS 39 - interest rate benchmark reform

 

B.  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. The Signal division derives some revenue from media placements and the sale of printed goods. Revenue from the sales of licences is included in discontinued operations.

Revenue is measured based on the consideration specified in a contract, exclusive of VAT, 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 either the customer receives and uses the benefits simultaneously 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, or actual labour hours spent compared 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 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.    Net revenue

Net revenue is revenue less third-party project costs and represents fees, commissions and mark-up on third-party project costs where appropriate.

viii.    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 and expenses them as incurred. These costs are included in administrative expenses.

 

ix.     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.

C.  Going Concern

For the year to 31 December 2019 the Group reported a profit before tax on continuing activities of £7.1m and excluding non-recurring restructuring costs and other non-headline recharges the Group generated a profit before tax of £13.1m.

 

The Group meets its day-to-day working capital requirements through its bank facilities. At 31 December 2019 the Group had a £20.0m revolving credit facility ("RCF") which is committed to March 2022. £17.0m of the RCF was undrawn at 31 December 2019. 

 

The Group's forecasts and projections including a reasonable downside scenario, 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.

D.  Headline Measures of Performance

The Group believes that reporting headline measures provides meaningful information on 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, right-of-use asset impairments, start-up losses, acquisition costs, impairment of goodwill, 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 reported profit before tax and headline profit 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.

E.  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.

F.  Critical Accounting Estimates and Judgements in Applying the Accounting Policies

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

 

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

 

i.       Impairment of goodwill and intangible assets

The Group tests goodwill and intangible assets for impairment annually. The recoverable amount of the Group's cash generating units ("CGUs") is based on value-in-use calculations, which require estimates of future cash flows, weighted average cost of capital used to discount the cash flows to present value, and future expected growth rates.

The assumptions used and sensitivity to changes in these assumptions are disclosed in note 9.

 

ii.      Contingent deferred acquisition related to employee payments

The Group estimates the value of amounts payable to certain employees of the Group in respect of amounts payable under acquisition agreements. The estimates made are based on management's estimates of the relevant entities future performance. If these estimates change the amount of the liability, which is recognised over a performance period, will change. Any changes to the carrying value of the liability is recognised in the income statement.

At 31 December 2019, the value of the liability recognised contingent on future performance of acquired businesses is £1.3m. The maximum amount that could be recognised at 31 December 2019 is £2.3m.
 

NOTES TO THE PRELIMINARY ACCOUNCEMENT

 

1.      Headline and like-for-like 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. Headline measures are not defined terms under IFRS, and may not be comparable with similarly titled measures reported by other companies.

 

Calculation of headline earnings per share measures are included in note 8.

 

   A reconciliation of reported operating profit to headline operating profit and headline profit before tax is as follows:

 

 

Note

 

Ref

2019

       £'000

2018

       £'000

 

 

 

 

 

Reported operating profit

 

 

7,597

9,717

Non-headline items:

 

 

 

 

Restructuring costs

3

i

821

204

Start-up losses

4

ii

404

293

Acquisition costs

 

iii

44

22

Impairment of goodwill

9

iv

2,719

-

Amortisation of intangible assets

 

v

766

325

Acquisition-related employee remuneration expense

vi

932

1,571

Share option charges

vii

263

464

 

 

 

              

              

Total non-headline items

 

 

5,949

2,879

 

 

 

              

              

 

 

 

 

 

Headline operating profit

 

 

13,546

12,596

 

 

 

 

 

Finance income

 

 

12

1

Finance costs

 

 

(497)

(340)

 

 

 

              

              

Headline profit before tax

 

 

13,061

12,257

 

 

 

              

              

           

i.    Restructuring costs - these costs principally relate to business relocation and redundancies. Further details are provided in note 3.

ii.    Start-up losses - these are defined as the net operating result in the period of the trading activities that relate to new offices, new products, or new organically started businesses. Activities so defined will cease being separately identified where, in the opinion of the Directors, the activities show evidence of becoming sustainably profitable or are closed, whichever is earlier. In any event start-up losses will cease being separately identified after two years from the commencement of the activity.  Further details are provided in note 4.

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

iv.   Impairment of goodwill - see note 9.

v.   Amortisation of intangible assets - this is in respect of amortisation charged against separately identifiable 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 - these costs represent the fair value of share options charged to the income statement and are separately identified due to their nature.

1.    Headline and like-for-like measures (continued)

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.

 

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.

 

 

 Growth

%

 

2019

£'000

 

 2018

£'000

 

 

 

 

Reported net revenue

6.7%

107,563

100,790

 

 

 

 

Acquisitions

 

(1,649)

-

Start-ups

 

(57)

(211)

 

 

             

             

Like-for-like net revenue

5.2%

105,857

100,579

 

 

 

 

Currency impact

 

(1,591)

-

 

 

             

             

Currency adjusted like-for-like net revenue

3.7%

104,266

100,579

 

 

             

             

 

 

           

 

Allocated to the Group's operating segments:

 

 

 

 

Reported net revenue:

 

 

 

Cello Health

13.1%

72,701

64,308

Cello Signal

(3.9)%

34,805

36,215

Other

 

57

267

 

 

             

             

Total

6.7%

107,563

100,790

 

 

             

             

Like-for-like net revenue:

 

 

 

Cello Health

10.4%

71,052

64,364

Cello Signal

(3.9)%

34,805

36,215

 

 

             

             

Total

5.2%

105,857

100,579

 

 

             

             

Currency adjusted like-for-like net revenue:

 

 

Cello Health

8.0%

69,533

64,364

Cello Signal

(4.1)%

34,733

36,215

 

 

             

             

Total

3.7%

104,266

100,579

 

 

             

             

 

 

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 arm's 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.

Revenue

For the year ended 31 December 2019

 

Cello Health

£'000

Cello Signal

£'000

 

Consolidation Adjustments
and Unallocated £'000

Group

£'000

 

 

 

 

 

External sales

96,308

70,300

162

166,770

Intersegment revenue

-

246

(246)

-

 

               

               

               

               

Total revenue

96,308

70,546

(84)

166,770

 

               

               

               

               

Timing of revenue recognition from external sales:

 

 

 

 

Revenue recognised over time

96,308

46,088

162

142,558

Revenue recognised at a point in time

-

24,212

-

24,212

 

               

               

               

               

Total revenue

96,308

70,300

162

166,770

 

               

               

               

               

Revenue by geography:

 

 

 

 

UK

16,188

57,463

-

73,651

Rest of Europe

17,840

561

162

18,563

USA

50,523

10,559

-

61,082

Rest of the World

11,757

1,717

-

13,474

 

               

               

               

               

Total revenue

96,308

70,300

162

166,770

 

               

               

               

               

 

 

 

 

 

 

 

2.  Segmental Information (continued)

 

 

 

 

 

Revenue

For the year ended 31 December 2018

 

Cello Health

£'000

Cello Signal

£'000

Consolidation Adjustments
and Unallocated £'000

Group

£'000

 

 

 

 

 

External sales

88,483

69,494

970

158,947

Intersegment revenue

20

295

(315)

-

 

               

               

               

               

Total revenue

88,503

69,789

655

158,947

 

               

               

               

               

Timing of revenue recognition from external sales:

 

 

 

 

Revenue recognised over time

88,483

41,788

970

131,241

Revenue recognised at a point in time

-

27,706

-

27,706

 

               

               

               

               

Total revenue

88,483

69,494

970

158,947

 

               

               

               

               

Revenue by geography:

 

 

 

 

UK

16,873

59,841

914

77,628

Rest of Europe

19,040

610

-

19,650

USA

39,130

7,334

56

46,520

Rest of the World

13,440

1,709

-

15,149

 

               

               

               

               

Total revenue

88,483

69,494

970

158,947

 

               

               

               

               

 

 

Segmental net revenue and headline operating profit

The segment result, headline operating profit, is the measure used for the purpose of performance assessment by the Group's chief operating decision makers and represents operating profit before non-headline items and the impact of adoption of IFRS 16 Leases.

For the year ended 31 December 2019

 

Cello Health

£'000

Cello Signal

£'000

 

Unallocated £'000

Group

£'000

 

 

 

 

 

Net revenue

72,701

34,805

57

107,563

 

               

               

               

               

Headline operating profit (segment result)

14,037

2,719

(3,210)

13,546

 

               

               

               

               

 

For the year ended 31 December 2018

 

Cello Health

£'000

Cello Signal

£'000

 

Unallocated £'000

Group

£'000

 

 

 

 

 

Net revenue

64,308

36,215

267

100,790

 

               

               

               

               

Headline operating profit (segment result)

11,890

3,841

(3,135)

12,596

 

               

               

               

               

 

 

 

2.  Segmental Information (continued)

A reconciliation of Group reported operating profit to headline operating profit is presented in note 1.

Non-current assets excluding deferred tax by geographical location:

 

 

2019

£'000

2018

£'000

 

 

 

UK

68,439

66,722

USA

16,940

11,197

Rest of the world

287

23

 

              

              

           

85,666

77,942

 

              

              

 

 

Cello Health

£'000

Cello Signal

£'000

Unallocated £'000

Group

£'000

 

 

 

 

 

Capital expenditure

 

 

 

 

Year ended 31 December 2019

854

353

15

1,222

Year ended 31 December 2018

703

522

145

1,370

 

               

               

               

               

Capitalisation of intangible assets

 

 

 

 

Year ended 31 December 2019

-

-

407

407

Year ended 31 December 2018

-

-

672

672

 

               

               

               

               

Depreciation of property, plant and equipment

 

 

 

 

Year ended 31 December 2019

850

456

52

1,358

Year ended 31 December 2018

742

502

61

1,305

 

               

               

               

               

Other information:

 

3.  Restructuring costs

 

 

 2019

£'000

2018

£'000

Staff redundancies

351

30

Property costs

            470

            174

 

           

           

Total restructuring costs

821

204

 

           

           

 

Restructuring costs compromise of cost-saving initiatives including severance payments, property and other contract termination costs. These costs are included in administrative expenses and have been separately identified as non-headline because of their size or their nature or because they are non-recurring, to provide a full understanding of the Group's underlying performance.

 

In the year ended 31 December 2019 these costs relate to headcount reductions in Cello Signal and right-of-use asset impairment charges. The right-of-use impairment charge was incurred following the disposal of a subsidiary, which was the principal tenant of a property leased by the Group. This property is now vacant and being actively marketed for sub-letting or assignment.

 

In the year ended 31 December 2018, the costs related to the consolidation of two UK businesses into existing property.

 

 

4.  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.

 

Start-up losses in the year ended 31 December 2019 relate to the losses associated with the opening of the new Berlin office. Start-up losses in the year ended 31 December 2018 relate to costs associated with the opening of the Boston office and losses from the Signal Health initiative. Start-up losses in the year ended 31 December 2019 have been represented in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, to exclude losses associated with Pulsar US, which are included within loss from discontinued operations (note 6).

 

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

 

2019

£'000

2018

£'000

Revenue

162

970

Third-party project costs 

(105)

(703)

 

              

              

Net revenue

57

267

 

 

 

Administrative expenses

(461)

(560)

 

              

              

Start-up losses

(404)

(293)

 

              

              

 

 

 

5.  Taxation

 

 

2019

£'000

2018

£'000

Current tax:

 

 

Current tax on profits for the year

2,770

2,609

Prior year tax adjustment

(277)

(229)

 

              

              

 

2,493

2,380

 

 

 

Deferred tax

(206)

(347)

 

              

              

Tax charge

2,287

2,033

 

              

              

 

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

 

 

2019

£'000

2018

£'000

 

 

 

Profit before taxation

7,112

9,378

 

             

             

 

 

 

Tax at the UK corporation tax rate of 19.00%

(2018: 19.00%)

 

1,351

 

1,782

Tax effect of expenses not deductible for tax purposes

801

238

Effect of change in tax rate on deferred tax assets

(10)

20

Effect of different tax rates of subsidiaries in foreign jurisdiction

 

374

 

213

Tax losses not utilised in the year

77

4

Origination and reversal of other temporary differences

(29)

5

Prior year current tax adjustment

(277)

(229)

 

             

             

Tax charge

2,287

2,033

 

             

             

 

 

 

 

 

 

       

 

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.

 

 

 

 

 

6.  Discontinued operations

On 2 October 2019 the Group sold its social media analytics software business, Pulsar, to Access Intelligence Plc, in exchange for the beneficial interest over 4,577,608 ordinary shares of 5p each in Access Intelligence Plc.  Pulsar comprised of the Group's subsidiaries, Fenix Media Limited and Face US Inc. The Group has treated these operations as discontinued in accordance with  IFRS 5 Non-current Assets Held for Sale and Discontinued Operations ("IFRS 5"). Additionally, in accordance with IFRS 5, the Income Statement for the year ended 31 December 2018 has been re-presented to include income and expenses of the discontinued operations within loss from discontinued operations.

Loss from discontinued operations after tax in the Income statement can be summarised as follows:

 

 

 

2019

£'000

2018

£'000

 

 

 

 

Trading loss from discontinued operations after tax

(870)

(727)

Loss on disposal of discontinued operations

 

(4,898)

-

 

 

             

              

Loss from discontinued operations after tax

 

(5,768)

(727)

 

             

              

The trading loss from discontinued operations after tax is as follows:

 

 

 

2019

£'000

2018

£'000

 

 

 

 

Revenue

 

4,871

6,626

Third-party project costs

 

(2,277)

(2,600)

 

 

              

              

Net revenue

 

2,594

4,026

Administration expenses

 

(3,653)

(4,985)

 

 

              

              

Loss before tax

 

(1,059)

(959)

Taxation

 

189

232

 

 

              

              

Loss after tax

 

(870)

(727)

 

 

              

              

 

 

 

 

 

 

 

 

The loss on disposal of discontinued operations is as follows:

 

 

 

 

2019

£'000

Consideration received:

 

 

 

Fair value of shares of Access Intelligence Plc

 

 

2,380

Cash and cash equivalents disposed

 

 

(85)

Deferred cash payable to fund working capital

 

 

(1,696)

Disposal related costs

 

 

(84)

 

 

 

              

Net consideration received

 

 

515

Carrying amount of net assets disposed

 

 

(5,278)

Reclassification of foreign currency exchange reserve

 

 

(135)

 

 

 

              

Loss on disposal of discontinued operations

 

 

(4,898)

 

 

              

              

 

 

 

6.  Discontinued operations (continued)

 

 

 

 

 

 

 

 

 

 

The carrying amount of assets and liabilities as at the date of sale were:

 

 

 

 

2019

£'000

 

 

 

 

Goodwill

 

 

3,442

Intangible assets

 

 

815

Property, plant and equipment

 

 

29

Deferred tax assets

 

 

20

Trade and other receivables

 

 

850

Contract assets

 

 

713

Other receivables

 

 

461

 

 

 

              

Total assets disposed

 

 

6,330

 

 

              

              

 

 

 

 

Trade and other payables

 

 

(793)

Contract liabilities

 

 

(259)

 

 

 

              

Total liabilities disposed

 

 

(1,052)

 

 

 

              

Net assets disposed

 

 

5,278

 

 

 

              

 

 

 

 

 

Cash flows from discontinued operations to the date of sale were as follows:

 

 

 

2019

£'000

2018

£'000

 

 

 

 

Operating cash outflow

(237)

(197)

Investing cash outflow

 

(414)

(707)

 

 

             

              

 

 

(651)

(904)

 

             

              

 

 

7. Equity Dividends

 

The dividends paid in the year were:

 

 

2019

£'000

2018

£'000

 

Date paid

 

 

Final dividend 2017 - 2.45p per share

25 May 2018

-

2,563

Interim dividend 2018 - 1.10p per share

02 Nov 2018

-

1,151

Final dividend 2018 - 2.75p per share

24 May 2019

2,881

-

Interim dividend 2019 - 1.15p per share

01 Nov 2019

1,221

-

 

 

              

              

 

 

4,102

3,714

 

 

              

              

             

 

A 2019 final dividend of 2.95p has been proposed for approval at the Annual General Meeting on 20 May 2020. In accordance with IAS 10 Events After the Reporting Period these dividends have not been recognised in the Consolidated Financial Statements at 31 December 2019.

 

8. Earnings/(loss) per Share

 

 

Note

2019

£'000

2018

£'000

 

 

 

 

(Loss)/profit for the year attributable to owners of the parent

(943)

6,618

 

 

 

 

Loss from discontinued operations

 

5,768

727

 

 

              

              

Earnings attributable to ordinary shareholders from continuing operations

4,825

7,345

 

 

 

 

Adjustments to earnings/(loss):

 

 

 

Non-headline charges

1

5,949

2,879

Tax theron

 

(585)

(651)

 

 

              

              

Headline earnings for the year

 

10,189

9,573

 

 

              

              

         

 

 

 

2019

Number of shares

2018

Number of shares

Weighted average number of ordinary shares used in basic earnings per share calculation

 

106,970,710

 

105,592,302

Dilutive effect of securities:

 

 

 

Share options

 

377,718

1,459,481

Deferred consideration shares

 

871,056

663,308

 

 

                  

                 

Weighted average number of ordinary shares in diluted earnings per share

 

108,219,484

 

107,715,091

 

 

                 

                 

 

 

 

 

 

 

 

 

 

 

 

 

8.   Earnings/(loss) per Share (continued)

 

 

 

2019

2018

Basic (loss)/earnings per share

 

 

 

From continuing operations

 

4.51p

6.96p

From discontinued operations

 

(5.39)p

(0.69)p

Total basic (loss)/earnings per share

 

(0.88)p

6.27p

 

 

 

 

Diluted (loss)/earnings per share

 

 

 

From continuing operations

 

4.46p

6.82p

From discontinued operations

 

(5.39)p

(0.69)p

Total diluted (loss)/earnings per share

 

(0.88)p

6.14p

 

In addition to basic and diluted (loss)/earnings per share, headline earnings per share, a non-GAAP measure is presented below:

 

 

 

 

Headline earnings per share

 

 

 

Headline basic earnings per share

 

9.53p

9.07p

Headline diluted earnings per share

 

9.42p

8.89p

 

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 non-headline charges as defined in note 1.

 

 

9.  Goodwill

 

 £'000

Cost

 

At 1 January 2018

90,270

Additions

146

Exchange differences

523

 

_______

At 31 December 2018

90,939

 

 

Additions (note 10)

3,928

Disposals (note 6)

(3,442)

Exchange differences

(603)

 

_______

At 31 December 2019

90,822

 

_______

Accumulated impairment

 

At 1 January 2018 and 31 December 2018

17,316

 

 

Impairment charge in the year

2,719

 

_______

At 31 December 2019

20,035

 

_______

Net book amount

 

At 31 December 2019

70,787

 

            

At 31 December 2018

73,623

 

            

At 1 January 2018

72,954

 

            

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 2019, allocations to some CGUs have changed as a result of rationalisation of management structures. This resulted in £15.5m of goodwill being allocated to a new CGU, Cello Connect, previously included in the Cello Signal CGU.

 

The goodwill balance was allocated to the following CGUs:

 

2019

2018

 

£'000

£'000

 

 

 

Cello Health Insight

10,528

10,537

Cello Health Consulting

7,666

7,666

Cello Health Communications US

5,745

5,925

Cello Health Communications UK

1,819

1,819

Cello Health BioConsulting

3,462

3,570

Cello Health Advantage

259

267

ISS

3,630

-

TVE

4,589

4,589

RS Consulting

4,305

4,305

Cello Signal

5,055

23,227

Cello Connect

15,453

-

2CV

8,276

8,276

Pulsar

-

3,442

 

               

               

Total

70,787

73,623

 

               

               

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, cash performance and historic trends. An underlying growth rate of 5.0% per annum in years two to five has accordingly been used for the CGUs within the Cello Health segment. For the CGUs within the Cello Signal segment a growth of 2.3% has been applied to years two to five.

 

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 the Group operates in. Accordingly, a terminal value has been applied using an underlying long-term growth rate of 2.2%. No additional Group-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 2019 (2018: 11.73%). 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 2019, the value-in-use exceeds the total goodwill value across the Group by £118.8m.

 

The impairment review resulted in an impairment charge of £2.7m in the Cello Signal CGU. 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 two to five year 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 Group's CGUs with the exception of:

·       1.0% increase in the discount rate would potentially lead to a £0.7m additional impairment charge in the Cello Signal CGU and an impairment charge of £0.6m in the TVE CGU.

·       A 1.0% reduction in the two to five year growth rate would potentially lead to a £0.1m additional impairment charge in the Cello Signal CGU and a £0.2m impairment charge in the TVE CGU.

·       A 10.0% reduction in projected operating cash flow would potentially lead to a £0.4m impairment charge in the Cello Signal CGU and a £0.4m impairment charge in the TVE CGU.

 

 

10.    Acquisitions

Innovative Science Solutions

On 15 August 2019, the Group acquired the trade and assets of Innovative Science Solution LLC ("ISS"), a scientific consulting firm specialising in strategic counsel and regulatory support for the healthcare industry, based in New Jersey, US.

 

ISS has contributed £2.2m to revenue and £0.1m to profit before tax for the period between the date of acquisition and the balance sheet date. Had ISS been consolidated from 1 January 2019 the consolidated income statement would show revenue of £169.3m and profit before tax of £7.3m.

 

Details of the provisional fair value of assets and liabilities acquired, goodwill and purchase consideration are as follows:

 

 

 

£'000

 

 

 

 

Intangible assets - client relationships

 

 

1,308

Right-of-use assets

 

 

128

Trade and other receivables

 

 

832

Contract assets

 

 

138

Other receivables

 

 

21

Cash and cash equivalents

 

 

205

Trade and other payables

 

 

(166)

Contract liabilities

 

 

(26)

Lease liabilities

 

 

(124)

 

 

 

              

Net assets acquired

 

 

2,316

Goodwill arising on acquisition

 

 

3,928

 

 

              

              

Total purchase consideration

 

 

6,244

 

 

 

              

 

The gross contractual amount of trade receivables is equal to the fair value. Goodwill comprises of the value of expected synergies and other opportunities arising from the acquisition, management know-how, the skilled work force employed by ISS and other intangible assets that do not qualify for separate recognition.

 

The fair value of the purchase consideration at the acquisition date is as follows:

 

 

 

£'000

 

 

 

 

Cash consideration

 

 

5,236

Deferred consideration

 

 

1,008

 

 

              

              

Total purchase consideration

 

 

6,244

 

 

              

              

 

 

 

 

 

11. Trade Receivables

 

2019

£'000

2018

£'000

2017

£'000

 

 

 

 

Trade receivables

34,578

35,260

36,420

 

 

            

            

            

The average credit period taken on the provision of services was 61 days (2018: 62 days).

 

There were no material expected loss allowances recognised on trade receivables in the year ended 31 December 2019 or the prior year.

 

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

12. Contract assets and liabilities

 

2019

£'000

2018

£'000

2017

£'000

 

 

 

 

Contract assets

5,852

6,798

6,726

Contract liabilities

(14,307)

(14,004)

(14,064)

 

 

            

            

            

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

 

 

   Contract assets

         Contract liabilities

 

2019

£'000

2018

£'000

2019

£'000

2018

£'000

 

 

 

 

 

At 1 January

6,798

6,726

(14,004)

(14,064)

 

 

 

 

 

Revenue recognised that was included in contract liability balance at the beginning of the period

 

 

-

 

 

-

 

 

14,004

 

 

14,064

 

 

 

 

 

Increase due to amounts invoiced to customers and not recognised as revenue in the period

 

 

-

 

 

-

 

 

(14,631)

 

 

(13,881)

 

 

 

 

 

Transfer from contract assets recognised at the beginning of the period to receivables

 

 

(6,798)

 

 

(6,726)

 

 

-

 

 

-

 

 

 

 

 

Revenue recognised as a result of changes in the measure of progress in the period in excess of amounts billed to clients

 

 

 

     6,485

 

 

 

6,694

 

 

 

-

 

 

 

-

 

 

 

 

 

Disposed with subsidiary

(713)

-

259

-

Acquisitions

       138

-

(26)

-

Other movements

(58)

104

91

(123)

 

            

            

            

            

At 31 December

5,852

6,798

(14,307)

(14,004)

 

            

            

            

            

 

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.

 

13. Other receivables

 

 

2019

£'000

2018

£'000

 

 

 

 

Contract assets - amounts to fulfil a contract

 

849

1,745

Prepayments

 

1,562

2,320

Other receivables

 

889

1,735

 

 

            

            

 

 

3,300

5,800

 

 

 

            

            

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

14. Trade and Other Payables

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

 

2019

£'000

2018

£'000

 

 

 

Trade payables

9,641

12,472

Other taxation and social security

2,421

2,591

Accruals

 12,151

 13,326

Deferred consideration for acquisitions

768

 35

Deferred cash payable in respect of discontinued operations

1,696

-

Acquisition-related employee remuneration liability

811

 1,806

Other payables

504

719

 

            

            

 

27,992

30,949

 

               

               

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

 

Deferred consideration for acquisitions

199

-

Acquisition-related employee remuneration liability

 1,306

 1,246

 

            

            

1,505

1,246

 

               

               

       

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

15. Borrowings

 

 

 

2019

£'000

2018

£'000

 

 

 

 

Bank loans

 

3,030

4,000

Loan notes

 

19

42

 

 

            

            

 

 

3,049

4,042

 

 

             

             

 

 

 

2019

£'000

2018

£'000

The borrowings are repayable as follows:

 

 

- on demand or within one year

19

42

- within two to five years

3,030

4,000

 

             

             

 

3,049

4,042

 

             

             

             

Bank loans

The Group has a multi-currency debt facility with the Royal Bank of Scotland plc ("RBS"). At 31 December 2019 this facility consisted of a £20.0m revolving credit facility ("RCF"). The RCF bears interest at a variable rate of 1.25% to 2.30% over LIBOR and is committed to March 2022. The average interest rate on the Group's bank loans in the year was 3.1% (2018: 2.6%). The debt facility is secured by a debenture held by RBS over the assets of the Group.

 

At 31 December 2019, the Group has drawn £3.0m (2018: £4.0m) under the RCF.

 

 

 

15.   Borrowings (continued)

Loan notes

Loan notes have been issued as part of the consideration for certain acquisitions. Loan notes are initially secured by way of cash deposits and by guarantee. This security expires after a period of between two and five years in accordance with the terms of the relevant acquisition agreement. After this period the loan notes are unsecured. Loan notes bear interest at the following rates:

 

 

2019

£'000

 

2018

£'000

Unsecured

 

 

LIBOR less 2.0%

5

28

LIBOR

14

14

 

             

             

 

19

42

 

             

             

16. Cash Generated from Operations

 

2019

£'000

2018
£'000

 

 

 

Profit before taxation

7,112

9,378

Loss before taxation on discontinued operations

(1,059)

(959)

 

            

            

Profit before tax including discontinued operations

6,053

8,419

 

 

 

Finance income

(12)

(1)

Finance costs

497

340

Depreciation of property, plant and equipment

1,358

1,305

Depreciation of right-of-use assets

2,957

-

Amortisation of intangible assets

1,152

769

Impairment of goodwill

2,719

-

Impairment of right-of-use assets

470

-

Share-based payment expense

263

464

Loss/(profit) on disposal of property, plant and equipment

39

(17)

(Decrease)/increase in acquisition-related employee

remuneration payable

 

(450)

 

1,543

Change in market value of investments

20

-

Other non-cash expenses

119

-

 

            

            

Operating cash flow before movements in working capital

15,185

12,822

 

 

 

Movements in working capital:

 

 

Decrease in receivables

2,081

4,592

Decrease in payables

(2,463)

(3,996)

 

            

            

Operating cash flow from movements in working capital

(382)

596

 

            

            

Cash generated from operations

14,803

13,418

 

            

            

         

 

 

 

 

17.  Net Funds

 

Net funds is a non-statutory measure which is disclosed as the Group considers it helpful to the users of the accounts. Lease liabilities that arise on adoption of IFRS 16 are not included in the Group's definition of net funds.

 

2019
£'000

2018
£'000

 

 

 

Cash and cash equivalents

8,549

10,424

Bank loans

(3,030)

(4,000)

Loan notes

(19)

(42)

 

            

            

Net funds

5,500

6,382

 

            

            

 

Movements in net funds can be analysed as follows:

 

2019
£'000

2018
£'000

 

 

 

 

Net decrease in cash and cash equivalents

(1,840)

(2,753)

 

 

 

 

 

Changes in net funds as a result of cash flow:

 

 

 

Repayment of bank loans

710

7,686

 

Repayment of loan notes

23

17

 

 

 

 

 

Other movements:

 

 

 

Foreign exchange differences

225

(197)

 

 

            

            

 

Movement in net funds in the year

(882)

4,753

 

 

 

 

 

Net funds at the beginning of the year

6,382

1,629

 

 

            

           

 

Net funds at the end of the year

5,500

6,382

 

 

            

            

 

         

 

18.   Adoption of IFRS 16 Leases

 

On 1 January 2019 the Group adopted IFRS 16 Leases ("IFRS 16") using the simplified transition approach and accordingly has not restated comparative figures. IFRS 16 supersedes the current lease guidance under IAS 17 Leases and related interpretations. IFRS 16 removes the distinction between operating leases and finance leases, replacing with a model where a right-of-use asset and corresponding lease liability is recognised for all leases except for short-term or low-value leases.

 

Leases previously classified as operating leases with less than 12 months remaining or with low value have continued to be expensed in the income statement on a straight line basis. For remaining leases previously classified as operating leases the Group has recognised right-of-use assets and lease liabilities at 1 January 2019, the transition date. There was no material effect on the financial statements with regards to leases previously classified as finance leases under IAS 17.

 

Lease liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate. The weighted average borrowing rate applied to the lease liabilities on 1 January 2019 was 2.5%.

 

 

 

 

 

 

18.   Adoption of IFRS 16 Leases (continued)

 

A reconciliation of operating commitments under operating leases disclosed in the financial statements as at 31 December 2018 to the lease liability recognised at the transition date is presented below:

 

 

 

Properties

£'000

Office equipment

£'000

Total

£'000

 

 

 

 

 

Operating lease commitments at 31 December 2018

 

12,328

 

86

12,414

Less low-value leases

-

(86)

(86)

Less short-term leases

(424)

-

(424)

Finance leases at 31 December 2018

-

41

41

Adjustment in respect to variable lease payments

127

-

127

Discount using the Group's incremental borrowing rate

(791)

-

(791)

 

 

               

               

              

Lease liability at 1 January 2019

 

11,240

41

11,281

 

 

              

              

             

Current lease liabilities

 

2,595

11

2,606

Non-current lease liabilities

 

8,645

30

8,675

 

 

              

              

             

 

 

11,240

41

11,281

 

 

              

              

             

 

 

 

 

 

           

 

Movement in lease liabilities in the period to 31 December 2019 are as follows:

 

 

Properties

£'000

Office equipment

£'000

Total

£'000

 

 

 

 

 

Recognition of lease liabilities at 1 January 2019

11,240

41

11,281

Interest on lease liabilities

252

2

254

Lease payments during the period

(3,012)

(12)

(3,024)

New leases commenced in the period

525

-

525

Acquisition

124

-

124

Exchange differences

(83)

-

(83)

 

 

              

              

              

Lease liability at 31 December 2019

 

9,046

31

9,077

 

 

              

              

              

Current lease liabilities

 

2,678

11

2,689

Non-current lease liabilities

 

6,368

20

6,388

 

 

              

              

              

 

 

9,046

31

9,077

 

 

              

              

              

 

 

 

 

 

Right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments recognised at 31 December 2018. In addition, the right-of-use asset includes a provision of £557,000 for restoration costs in relation to some of these leases. This provision has been recognised as a result of a reassessment of these provisions as a result of the adoption of IFRS 16.

 

 

18.   Adoption of IFRS 16 Leases (continued)

Movements in right-of-use assets in the period to 31 December 2019 were as follows:

 

 

Properties

£'000

Office equipment

£'000

Total

£'000

 

 

 

 

 

Recognised on 1 January 2019 on transition to IFRS 16

11,877

-

11,877

Right-of-use assets previously included in property, plant and equipment

       -

57

57

 

 

              

              

              

Total recognised at 1 January 2019

 

11,877

57

11,934

 

 

 

 

 

Recognised on commencement of new leases

 

525

-

525

Acquisition

 

128

-

128

Depreciation charged in the year

 

(2,945)

(12)

(2,957)

Impairment charge in the year

 

(470)

-

(470)

Exchange differences

 

(78)

-

(78)

 

 

              

             

              

Net book amount at 31 December 2019

 

9,037

45

9,082

 

 

              

              

              

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
END
 
 
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