CLL.L Regulatory News (CLL)

17 Mar 2009 07:00

17 March 2009

 

Cello Group plc

Solid performance in 2008 continues into 2009

Cello Group plc ("Cello", AIM:CLL "The Group"), the market research and consulting group, today announces its preliminary audited results for the year to 31 December 2008. 

Financial Highlights

Operating income up 17.2% to £66.6m (2007: £56.8m)

Like-for-like operating income growth of 2% (2007: 16.1%)

Headline operating profit £7.8m (2007: £8.1m)

Headline profit before tax £6.9m (2007: £7.6m)

Basic headline earnings per share 12.18p (2007: 15.06p)

Headline operating cash flow conversion at 124% (2007: 97%) 

Full year dividend up 4% at 1.25p (2007: 1.2p)

Strong cash management and generation held down net debt to £9.9m (2007: £5.8m), after earn out payments of £8.0m

From May 2009, minimal earn out obligations

Operational Highlights

Consolidation into lead brands: Cello (Research) and Tangible (Response)

Cello (Research) number ten and Tangible number six in the UK

Four start up companies, which focus on the rapidly growing online market, are now profitable 

Cost base cut by c.£2.0m, notably in financial services 

Headcount shifted away from exposed areas to higher growth areas

Current trading and outlook

Overall revenue visibility remains solid so far in 2009

Significant new mandates secured from global healthcare clients 

Franchise in the public sector strengthened with a number of new rosters and material project wins with both central and local government 

Robust pipeline of non-UK work in research and consulting business 

Mark Scott, Chief Executive, commented:

"Our focus on the defensive sub-sectors of research and direct marketing holds us in excellent stead against an increasingly challenging economic backdrop. It also produced higher profits and a lower debt level than anticipated, better than market consensus, as a result of extremely strong operating cash flow conversion. During the year, we took swift action where necessary to contain our cost base but also importantly we have continued to support and invest in our growth areas.

"In our core client specialisms of pharmaceutical, public sector, FMCG and quantitative business -to-business activity, we have continued to see growth. A substantial proportion of these clients, particularly in those sectors less affected by the downturn, have had relationships with our operating units for a number of years. This provides us with considerable confidence going forward with what are, in effect, recurring revenues.

"We have made a good solid start to the year and have secured some notable wins. Furthermore, our relatively low exposure to cyclical sectors should benefit us as we continue to invest in expanding our core capabilities to gain market share.

"In four years we have built up a very solid, profitable, cash generative £67 million gross profit business. The increase in our dividend is a clear indication of our confidence in both the short and longer term prospects for Cello."

Enquiries

 

Cello Group plc
Mark Scott, Chief Executive	020 7812 8460
Mark Bentley, Finance Director
Singer Capital Markets
Nicholas How	020 3205 7620
College Hill
Adrian Duffield/Carl Franklin	020 7457 2020

 

 

Overview

2008 has been a year of consolidation for the Group, against the context of an increasingly adverse economic climate in the second half of the year. Cello reinforced its leading position in two of the most defensive sub-sectors of the marketing mix: specialist research and response communications. 

Whereas demand for marketing services continues to decline in the face of global recession, demand for specialist research capability has remained broadly static in response to ever more complex market related issues for clients. Direct marketing has similarly demonstrated resilience, as clients switch spend to more accountable and direct areas of the marketing mix and away from advertising.

We delivered headline operating profit marginally above market consensus expectations and broadly flat with last year of £7.8m (2007: £8.1m). Operating income was up 17.2% to £66.6m (2007: £56.8m).

We have also continued to focus closely on tight cash management. Our high rate of cash conversion at 124%, up from 97% in 2007, reflects the successful financial management in each of our businesses. As a consequence, the Group remains very prudently funded, with net debt at the year end of £9.9m (2007: £5.8m), even after £8.0m of earn out settlement during the year. This is significantly better than market expectations. 

We have now substantially completed the integration of our research business under the Cello brand and our response business under the Tangible brand. This has given us significant advantage as we compete with global operators, particularly on larger contracts which are more tightly priced. In addition, as a priority we continue to consolidate our operations into shared facilities as leases come up for renewal. This has enabled us to create clusters of professional resource which are both more vibrant and efficient, yielding us further cost advantages. We have already implemented this in Scotland.

We have reduced headcount in areas of our business exposed to financial services and more discretionary consulting activity. Given their strong prospects, we have continued to invest in our digital businesses and in our mainstream research offering with headcount increasing in these areas. The net effect is that our headcount is now around 4% lower than it was at the end of December 2007.

We continue to act for a wide range of blue chip clients across a number of sectors including: Tesco, HP, EA, GSK, the NHS and the COI. Our income is substantially weighted towards healthcare and public sector organisations. Our client base is diverse. Our largest client is less than 4% of our operating income and our top 10 clients provide 21% of our income. These clients have on average been working with us for more than 12 years through a series of repeat projects, often from multiple buying points within the client organisation. 49 out of our top 50 clients in 2008 were also material clients in 2007, thus demonstrating the recurring nature of many of our activities.

In Cello (Research), our emphasis on targeting growth in multinational client contracts, which offer higher growth opportunities outside the relatively mature UK market, continued to bear fruit. Overseas revenue continued to account for over 20% of Group revenue. 

Our business continues to benefit from our client sector focus and increasing orientation towards large continuous contracts, many running for a number of years. Performance remained strong in healthcare which accounts for over a third of our operating income in research. We also continue to grow our public sector capability, both in research and direct marketing which has resulted in a notable increase in the percentage of Group revenue from this source, up from 9.8% to 14.2%.

The growing relevance of the internet to research and response has continued unabated. We invested over £0.5m in strengthening our online capabilities in 2008, through Blonde, Digital People, Face and Oomph. All these digital businesses are now trading profitably, having progressed rapidly through the early investment phases.

As a result of continued consolidation in the market research supply market, we have risen to be the tenth largest research operation in the UK. We anticipate this trend continuing for the foreseeable future. We are number six in direct marketing.

Financial Review

2008 was a year of continued top line growth despite the challenging conditions. Group operating income increased 17.2% to £66.6m. Headline operating profit was largely flat on the prior year at £7.8m (2007:£8.1m) with headline profit before tax at £6.9m (2007: £7.6m).

Like-for-like operating income growth was 2%, consolidating the double digit like-for-like growth of prior years. Excluding our financial services agency and business intelligence consulting business, like-for-like operating income growth across the rest of the Group was 6%.

The small reduction in headline operating profit reflects the increased trading pressure in our London based financial services focused agency and our business intelligence consulting operation. In both businesses quick action has been taken to adjust the cost structure to an appropriate level for prevailing market conditions. The other notable factor was the £0.5m investment in growing our now profitable online research products range.

Group headline operating margin (before head office costs) was 14.8% (2007: 18.1%). The Board expects to improve operating margins following the actions taken to reduce exposure to cyclical areas of client activity and associated professional cost. During the year the Group incurred exceptional charges of £1.3m, relating to staff reduction payments, surplus space provisions and trading losses of one small financial services start up consultancy that was closed during the year.

The Group's net debt position at 31 December 2008 was £9.9m, significantly better than consensus expectations. Operating cash flow of £9.7m during the year represents 124% conversion of headline operating profit. £2.0m of the year end cash balance is considered to be surplus and is therefore likely to unwind in the first half of 2009.

The interest charge rose to £0.9m (2007: £0.6m) reflecting the higher interest rates for the majority of the year as well as higher debt levels following earn out settlement in April 2008. Headline interest cover is 8.7 times. The Group's effective tax charge was 26.6% (2007: 32.2%). Notional interest is not subject to a tax deduction, and if it is excluded the effective rate would be 24.7%.

Headline basic earnings per share was 12.18p (2007: 15.06p) and headline fully diluted earnings per share was 7.83p (2007: 10.24p). Fully diluted earnings per share reflects the impact of the anticipated future issuance of shares to vendors of companies acquired by the Group under earn out arrangements. 

The Board is proposing to maintain a final dividend of 0.75p per share, giving a total dividend per share of 1.25p (2007: 1.2p) an increase of 4.0%. This dividend will be paid on 17 June 2009 to all shareholders on the register at 22 May 2009.

In April 2008 £14.4m of earn out liabilities were settled by £8.0m in cash and loan notes, and £6.4m in shares issued at £1.14p each. Following a review of further liabilities, as at 31 December 2008 undiscounted earn out commitments are £15.2m. Earn out obligations of £7.8m are payable in April 2009, in the form of £3.2m in cash or loan notes and £4.6m in ordinary shares. Shares issued under these arrangements will be subject to three year lock-ins. The Board can pay a larger proportion of this in the form of loan notes or cash. Following this payment ongoing earn out obligations over the next four years are not material in the context of anticipated Group cash flow.

During the year the Group enhanced its bank facilities with a revised revolving credit facility of £20.0m for 2009 and £17.0m for 2010. The multi-currency overdraft facility of £2.0m was also renewed. Increases in interest margins incurred by this adjustment are expected to be offset by lower overall Libor rates. The effective enlargement of our debt facilities provides the Group greater flexibility to expand sensibly.

The Group incurs a number of P&L charges, which are mostly non cash items. Share option costs are a credit of £0.5m, representing a reversal of prior year share option scheme charges where the scheme has not vested. A replacement scheme is expected to be implemented in 2009. Deemed remuneration of £0.6m (2007: £1.2m) and notional interest of £0.3m (2007: £0.5m) have both dropped as a proportion of related earn outs have been settled during the year. In October 2007, the Group entered into an interest rate cap and collar arrangement on a proportion of its overall debt facility. The charge of £0.4m reflects the valuation of the instrument at the balance sheet date due to recent falling interest rates. 

	2008 £'000	2007 £'000
Headline operating profit	7,782	8,143
Net interest payable	(891)	(559)
Headline PBT	6,891	7,584
Exceptional costs	(1,285)	-
Amortisation of intangibles	(858)	(904)
Deemed remuneration	(647)	(1,179)
Share option costs	450	(449)
Notional interest	(291)	(468)
Fair value loss on financial instruments	(444)	-
Reported PBT	3,816	4,584

The Group regularly calculates and examines all of the above financial indicators and are key performance indicators.

Divisional Review

Cello (Research)

Cello (Research), encompassing our research and consulting capabilities, had a good year given the economic context, delivering a headline operating profit of £6.1m (2007: £6.2m) from operating income of £39.1m (2007: £32.9m). With an employee base of 470 people and revenue of £66.4m (2007: £50.9m), Cello ranks firmly in the top 10 of such businesses based in the UK and is the only such business which is not part of a much larger group. 

Cello (Research) has continued to grow internationally, with revenue from overseas clients growing by 25%. We recently opened a new office in San Francisco, focusing primarily on the computer gaming market.

Operating margins in this business fell to 15.7% (2007: 18.9%) as a result of investment in an online research product and reduced profit performance in our business intelligence business. Excluding these two, the underlying business maintained its historical margins. The online research product, Digital People, is now trading profitably in 2009. 

The business is organised along client sector lines which gives us a real advantage as multi-specialists. Healthcare has shown particular resilience, representing approximately 36% of operating income in this division (2007: 35%). We now work for some 75% of the global pharma client community, carrying out a wide range of projects from Ethical to OTC areas.

Public sector work grew strongly, now representing 11% of divisional activity (2007: 6%). Cello acts for a wide range of public bodies ranging from The Metropolitan Police to the Scottish Government and the COI. Despite the economic downturn this area is likely to grow and become a larger part of our revenue stream.

We have continued to integrate our research and consulting capability and thereby achieve competitive advantage against much larger networks. We have also continued to consolidate our field force and online data capture capacity to improve utilisation levels and represent a more competitive outsourcing solution for larger research groups.

Material client project wins for Cello during the year included Roche, Novartis, GSK Europe, Pfizer, Takeda, Abbott, InterMune, Eisai, The Office of National Statistics, HM Revenue and Customs, Department of Work and Pensions, Severn Trent Water, MacMillan, Unilever, Dyson, Canon, Xerox, Ernst and Young, National Savings and Investments, BUPA, Centrica, MOD, Orange, Boots, Camelot, Virgin, Wrigley, Bayer, Clarks, Arla, Toyota, TfL, ITV, Philips, Mitchell and Butlers, BBC, COI, The Ministry of Justice, Department of Health, BA and Eurostar.

Tangible (Response)

Tangible (Response) continued to benefit from the growth of response media, particularly online, as clients have become more demanding to achieve measurable return on marketing expenditure. As a result, it succeeded in maintaining revenue growth more effectively than other general communications agencies. 

Tangible delivered a headline operating profit of £3.7m (2007: £4.1m) on operating income of £27.5m (2007: £23.9m). With an employee base of 350 people and revenue of £72.7m (2007: £57.4m), Tangible now ranks in the top six of such businesses based in the UK and is also the only such business which is not part of a large international group.

Headline operating margins in this business fell to 13.5% (2007: 17.0%). This is substantially explained by declines in financial services income which has now been mitigated by resource reduction and redeployment. 

The vertical client focus on the public sector, charities and business-to-business sectors continued to prove successful with clients seeking out industry expertise as they increasingly migrate budgets into response solutions in order to defend their own revenue flows. In particular, towards the end of 2008 we were delighted to win roster places with the Scottish Government from an increased number of disciplines than previously which has already generated an increased number of tender opportunities in 2009. However, financial services, which has been a significant focus of Tangible, was more inconsistent. Larger, established relationships based on core activity have been maintained but project based growth oriented activity has declined and we have quickly moved resource away from this area.

The successful integration of online capability with more traditional direct marketing approaches has proved a successful strategy as clients look to reduce risks. Major clients are no longer willing to spend on a speculative basis, but they do want digital capability as part of tried and tested approaches that deliver secure returns on their expenditure. Our digital businesses (Blonde, Oomph, and Face) continued to show profitability and strong growth. Oomph in particular won a significant new account towards the end of 2008, utilising disciplines from around the Group.

We have consolidated Tangible into three major operating hubs in London, Edinburgh and Cheltenham. We anticipate that by the second half of 2009, we will be operating from one primary office in each hub, with associated revenue generation and cost benefits.

Material client project wins in 2008 included Lifelong Learning UK, Scottish Enterprise, Tesco Personal Finance, RICS, Aegon, Dyson, NCH, Medecins sans Frontieres, Christian Aid, The Health Promotion Agency for Northern Ireland, Energy Savings Trust, 3 Telecom, Which?, British Red Cross, National Lottery, Visa, Group 4 Securicor, Axa, Advent Training, Co-op, WVRS, Oxfam, Unilever, Coca Cola and Whyte and Mackay.

Growth Strategy

During 2009, the Group will continue to hone, integrate and refine its operations and selectively support growth opportunities. The Group's operational plans remain highly focused: to achieve differentiation in research and direct marketing by consolidating professional resource into larger units; reducing overhead, and focusing this resource into client sector verticals.

In addition, we continue to innovate in a range of areas, from carbon footprinting for print intensive clients, through to the creation of community based research panels. We have taken the decision to embed this innovation into our core offerings rather than leave it free standing, as this represents a more secure path to revenue commitment by clients.

The management teams that came into the Group through acquisition have now been fully integrated into the larger divisional structures, which has allowed for the promotion of managers from within as well as hiring additional senior professionals from outside the Group. We continue to focus much attention on competitive remuneration for our staff with appropriate incentive schemes and annual performance related bonus planning. Combined with active promotion and hiring of senior professionals, we now have a sustainable, well incentivised professional structure beyond the limited life of legacy earn out structures. The result is an experienced and highly aligned group of individuals who are determined to establish Cello as a major force through the demanding times ahead.

Current Trading and Prospects

Our current forecasts show that our first quarter headline operating profit will be similar to 2008. Our overall revenue visibility is in line with historic norms. In particular, we have continued to win significant additional mandates from our global healthcare clients. Our strong and recently improved franchise in the public sector across both Cello (Research) and Tangible has also produced a healthy number of new material project wins with both central and local government. The weaker pound has increased our competiveness overseas, and consequently we currently have a robust pipeline of non-UK work in our research and consulting business. Our quantitative research contracts are also continuing to grow.

Given the economic conditions, we remain alert to the possibility of projects across a range of areas being curtailed or delayed in the future. For example, the trends in financial services identified in the final quarter of the year have largely continued in the first quarter of 2009. We have taken appropriate action to reduce headcount in this area.

We continue to constantly review closely the Group's variable cost base and reduce overheads as leases expire and through joint purchasing of services. We remain focused firmly on cash flow and the progressive reduction of gearing.

Despite the economic backdrop, we are experiencing solidity in our core operations, particularly amongst our long standing blue chip clients, many of whom operate in defensive sectors and who commission work on a regular basis.

At this early stage in the year, we remain cautiously optimistic for a solid full year outcome in 2009.

2008 has been a sad year for all of us at Cello because of the death of Kevin Steeds, the founding Chairman of Cello. I would like to take this opportunity to thank my fellow Cellists for their commitment and contribution in 2008 and for helping to ensure that Cello stands as enduring testament to Kevin.

Allan Rich

Chairman

17 March 2009

Cello Group plc

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2008

	Notes	Year ended 31 December 2008 £'000	Year ended 31 December 2007 £'000
Continuing operations
Revenue	1	139,127	108,315
Cost of sales		(72,543)	(51,503)
Operating income	1	66,584	56,812
Administration expenses		(58,802)	(48,669)
Headline operating profit	1	7,782	8,143
Exceptional items	4	(1,285)	-
Amortisation of intangible assets		(858)	(904)
Acquisition related employee expenses		(647)	(1,179)
Share option credit/(charge)		450	(449)
Operating profit	1	5,442	5,611
Finance income	2	243	211
Finance cost of deferred consideration	3	(291)	(468)
Fair value loss on derivative financial instruments	3	(444)	-
Other finance costs	3	(1,134)	(770)
Profit before taxation	4	3,816	4,584
Tax		(1,015)	(1,478)
Profit for the year		2,801	3,106
Attributable to:
Equity holders of parent		2,761	3,074
Minority interest		40	32
		2,801	3,106
Earnings per share
Basic earnings per share	6	6.45p	8.44p
Diluted earnings per share	6	4.87p	7.28p

Cello Group plc

CONSOLIDATED BALANCE SHEET 

31 December 2008

	Notes	31 December 2008 £'000	31 December 2007 £'000
Goodwill		76,291	77,912
Intangible assets		2,266	3,005
Property, plant and equipment		3,103	3,277
Available-for-sale investments		227	227
Deferred tax assets		1,080	1,549
Non-current assets		82,967	85,970
Trade and other receivables		26,658	28,720
Cash and cash equivalents		5,065	6,986
Current assets		31,723	35,706
Trade and other payables		(26,633)	(26,829)
Current tax liabilities		(708)	(2,037)
Borrowings		(1,053)	(950)
Consideration payable in respect of acquisitions	8	(7,980)	(15,436)
Obligations under finance leases		(68)	(70)
Current liabilities		(36,442)	(45,322)
Net current liabilities		(4,719)	(9,616)
Total assets less current liabilities		78,248	76,354
Non-current liabilities
Borrowings		(13,750)	(11,750)
Provisions	7	(6,453)	(15,145)
Obligations under finance leases		(86)	(50)
Derivative financial instruments		(444)	-
Deferred tax liabilities		(616)	(950)
Net assets		56,899	48,459
Equity
Share capital		4,456	3,884
Share premium		31,745	25,776
Retained earnings		10,048	7,692
Capital redemption reserve		50	50
Merger reserve		10,496	10,496
Share-based payment reserve		73	523
Foreign currency reserve		(47)	-
Equity attributable to equity holders of parent		56,821	48,421
Minority interest		78	38
Total equity		56,899	48,459

Cello Group plc

CONSOLIDATED CASH FLOW STATEMENT 

for the year ended 31 December 2008

		Notes	Year ended 31 December 2008 £'000	Year ended 31 December 2007 £'000
Net cash inflow from operating activities before taxation		9a	9,682	7,917
Tax paid			(1,911)	(2,047)
Net cash inflow from operating activities after taxation			7,771	5,870
Investing activities
Interest received			243	211
Purchase of property, plant and equipment			(1,119)	(1,773)
Sale of property, plant and equipment			66	22
Expenditure on intangible assets			(119)	(111)
Proceeds from sale of available-for-sale investments			-	50
Purchase of available-for-sale investments			-	(137)
Purchase of subsidiary undertakings			(3,636)	(6,587)
Net cash outflow from investing activities			(4,565)	(8,325)
Financing activities
Dividends paid to equity holders of the parent			(556)	(382)
Repayment of bank loan			(8,050)	(3,525)
Repayment of loan notes			(5,211)	(1,986)
Drawdown of borrowings			10,050	9,225
Capital element of finance lease payments			(90)	(72)
Payment of finance lease interest			(21)	(24)
Interest paid			(1,105)	(743)
Purchase of own shares			(71)	(26)
Net cash (outflow)/ inflow from financing			(5,054)	2,467
Movements in cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents			(1,848)	12
Exchange losses on cash and bank overdrafts			(73)	-
Cash and cash equivalents at the beginning of the year			6,986	6,974
Cash and cash equivalents at end of the year		9b	5,065	6,986

Cello Group plc

STATEMENT OF CHANGES IN EQUITY

Statement of changes in equity for the year ended 31 December 2008 (consolidated):

	Share  Capital £'000	Share Premium £'000	Capital Redemption Reserve £'000	Merger Reserve £'000		Share-based Payment Reserve £'000	Foreign Currency Exchange Reserve £'000	Retained Earnings £'000	Total Attributable to Equity Shareholders £'000	Minority Interest £'000	Total Equity £'000
Profit for the year	-	-	-	-		-	-	2,761	2,761	40	2,801
Currency translation	-	-	-	-		-	(47)	-	(47)	-	(47)
Deferred tax recognised directly in equity	-	-	-	-		-	-	222	222	-	222
Total recognised income in the year	-	-	-	-		-	(47)	2,983	2,936	40	2,976
At 1 January 2008	3,884	25,776	50	10,496		523	-	7,692	48,421	38	48,459
Shares issued	572	5,969	-	-		-	-	-	6,541	-	6,541
Own shares purchased	-	-	-	-	-		-	(71)	(71)	-	(71)
Debit for share-based incentive schemes	-	-	-	-		(450)	-	-	(450)	-	(450)
Dividends	-	-	-	-		-	-	(556)	(556)	-	(556)
As at 31 December 2008	4,456	31,745	50	10,496		73	(47)	10,048	56,821	78	56,899

Statement of changes in equity for the year ended 31 December 2007 (consolidated):

	Share  Capital £'000		Share Premium £'000		Capital Redemption Reserve £'000	Merger Reserve £'000		Share- based payment Reserve £'000	Foreign Currency Exchange Reserve £'000	Retained Earnings £'000		Total Attributable to Equity Shareholders £'000	Minority Interest £'000		Total Equity £'000
Profit for the year	-		-		-	-		-	-	3,074		3,074	32		3,106
Total recognised income for the year	-		-		-	-		-	-	3,074		3,074	32		3,106
At 1 January 2007	3,448		19,981		50	10,496		74	-	5,026		39,075	6		39,081
Shares issued	436		5,795		-	-		-	-	-		6,231	-		6,231
Own shares purchased	-		-		-	-		-	-	(26)		(26)	-		(26)
Credit for share based incentive schemes	-		-		-	-		449	-	-		449	-		449
Dividends	-		-		-	-		-	-	(382)		(382)	-		(382)
As at 31 December 2007	3,884		25,776		50	10,496		523	-	7,692		48,421	38		48,459

Cello Group plc

CONSOLIDATED FINANCIAL STATEMENTS - ACCOUNTING POLICIES

for the year ended 31 December 2008

GENERAL INFORMATION 

Cello Group plc is a company incorporated in the United Kingdom under the Companies Act 1985. The Group's operations consist principally of research, consulting and direct marketing.

These financial statements are presented in pounds sterling as this is the currency of the primary economic environment in which the Group operates. 

At the date of authorisation of these financial statements, the following standards and interpretations, which are issued but not yet effective, have not been applied:

IFRS 1 Revised IFRS 1 First-time adoption of IFRS

IFRS 2 Share-based payments - Amendment, vesting conditions and cancellations

IFRS 3 Business combinations - Comprehensive revision on applying the acquisition method

IFRS 7 Financial Instruments: Disclosures - Amendment; Reclassification of Financial Assets

IFRS 8 Operating segments

IAS 1 Presentation of Financial Statements - comprehensive revision including requiring a statement of comprehensive income

IAS 23 Borrowing Costs - Comprehensive revision to prohibit immediate expensing

IAS 27 Consolidated and Separate Financial Statements - Amendments arising from IFRS 3

IAS 27 Consolidated and Separate Financial Statements - Amendment; Cost of an investment in a subsidiary, jointly controlled entity or associate

IAS 28 Investment in Associates - Consequential amendments arising from IFRS 3

IAS 39 Financial Instruments: Recognition and Measurement - Amendment; Reclassification of Financial Assets

IAS 39 Financial Instruments: Recognition and Measurement - Amendment; Eligible hedged items

Amendments to IFRSs arising from Annual Improvements Projects

IFRS 7 Financial Instruments: Disclosures

IAS 1 Presentation of Financial Statements

IAS 7  Statement of Cash Flows

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10 Events after the Reporting Period

IAS 16 Property, Plant and Equipment

IAS 18 Revenue

IAS 23 Borrowing Costs

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investment in Associates

IAS 32 Financial Instruments: Presentation

IAS 36 Impairment of Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

The directors anticipate that the adoption of these Standards and Interpretations as appropriate in future periods will have no material impact on the financial statements of the Group when the relevant standards come into effect for periods commencing after 1 January 2009.

Cello Group plc

CONSOLIDATED FINANCIAL STATEMENTS - ACCOUNTING POLICIES

for the year ended 31 December 2008

SIGNIFICANT ACCOUNTING POLICIES

(1) Basis of accounting

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale investments and in accordance with applicable International Financial Reporting Standards as adopted by the European Union (IFRS)

In preparing the consolidated financial statements the Group has adopted the exemption in IFRS 1 not to restate business combinations prior to 1 December 2005. 

(2) Basis of consolidation

The Group's financial statements consolidate the financial statements of the Company and all of its subsidiary undertakings. The results of any subsidiary undertakings acquired in the year are included in the consolidated income statement from the effective date of acquisition. On acquisition of a business all of the assets and liabilities of that business that exist at the date of acquisition are recorded at fair value. Minority interests represent the portion of profit or loss and net assets in subsidiaries that is not held by the Group and is presented separately from Group shareholder's equity in the consolidated balance sheet. All intra-group transactions and balances are eliminated on consolidation.

(3) Revenue, cost of sales and revenue recognition

Revenue is recognised as contract activity progresses, in accordance with the terms of the contractual agreement and the stage of completion of the work. It is in respect of the provision of services including fees, commissions, rechargeable expenses and sales of materials performed subject to specific contract. Where recorded revenue exceeds amounts invoiced to clients, the excess is classified as accrued income and where recorded revenue is less than amounts invoiced to clients, the difference is classified as deferred income.

Cost of sales include amounts payable to external suppliers where they are retained at the Group's discretion to perform part of a specific client project or service where the Group has full exposure to the benefits and risks of the contract with the client.

(4) Goodwill and other intangible assets

In accordance with IFRS 3 Business Combinations, goodwill arising on acquisitions is capitalised as an intangible asset. Other intangible assets are also identified and amortised over their useful economic lives on a straight line basis. Examples of these are licences to trade, and client contracts. The useful economic lives vary from 3 months to 8 years. Goodwill is not amortised.

Under IAS 36 Impairment of Assets, the carrying values of all intangible assets are reviewed annually for impairment on the basis stipulated in IAS 36 and adjusted to the recoverable amount. Typically, such a review will entail an assessment of the present value of projected returns from the asset over a 3-5 year projection period, and inflation based growth assumptions for subsequent years to a maximum period of 20 years.

(5) Property, plant and equipment

Property, plant and equipment are stated at historical cost. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset, over their estimated useful economic lives as follows:-

Leasehold improvements	Over the remaining term of the lease
Motor vehicles	25% pa. straight line
Computer equipment	33% pa. straight line
Fixtures, fittings and office equipment	25% pa. straight line

(6) Available-for-sale investments

Investments classified as available-for-sale are initially recorded at fair value including transaction costs. Such instruments are subsequently measured at fair value with gains and losses being recognised directly in equity until the instrument is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is recycled to the income statement and recognised in profit or loss for the period. Impairment losses are recognised in the income statement when there is objective evidence of impairment.

(7) Internally generated intangible assets - research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally generated intangible asset arising from the Group's development expenditure is recognised only when the following conditions are met:

an asset is created that can be identified (such as software or a new process)

it is probable that the asset created will generate future economic benefit 

the development cost of the asset can be measured reliably

there is the availability of adequate technical, financial or other resources and an intention to complete the development and to use or sell the development

Internally generated assets are amortised on a straight line basis over their useful lives. Where no internally generated intangible asset can be recognised, the development expenditure is recognised as an expense in the period in which it is incurred.

Under IAS 36 Impairment of Assets, the carrying values of all internally generated intangible assets are reviewed annually for impairment on the basis stipulated in IAS 36 and adjusted to the recoverable amount. Typically, such a review will entail an assessment of the present value of projected returns from the asset over a 3-5 year projection period, and an inflation based growth assumptions for subsequent years. 

(8) Deferred taxation

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying value of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit or the accounting profit other than those on business combinations.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are enacted or substantially enacted and expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except where it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

 

 (9) Leasing and hire purchase commitments

When the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a finance lease or similar hire purchase contract. The asset is recorded at fair value (or present value of minimum lease payments if lower) in the balance sheet as property, plant and equipment and is depreciated over the estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included as a liability. Rentals payable are apportioned between the finance element, which is charged to the income statement, and the capital element which reduces the outstanding obligation for future instalments. 

All other leases are treated as operating leases and rentals payable are charged to the income statement on a straight line basis over the lease terms.

(10) Foreign currencies

Sterling is the functional and presentational currency of the Group. Transactions denominated in foreign currencies are initially translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date.

Assets and liabilities are translated at the exchange rate ruling at the balance sheet date with items in the income statement being translated at the average rate for the period. Exchange differences arising on consolidation are recorded in a separate component of equity, but are recognised in the consolidated income statement on disposal of the subsidiary to which they relate.

(11) Pension contributions

Subsidiaries operate defined contribution pension schemes and contribute to the personal pension schemes of certain employees or to a Group personal pension plan. The assets of the schemes are held separately from those of the subsidiary companies in independently administered funds. The amount charged against profits represents the contributions payable to the scheme in respect of the accounting period.

(12) Share-based payments

The Group has applied the requirements of IFRS 2 Share-based Payment which requires the fair value of share-based payments to be recognised as an expense. In accordance with the transitional provisions, IFRS 2 has been applied to such equity instruments that were granted after 7 November 2002 and which had not vested by 1 January 2006.

This standard has been applied to various types of share-based payments as follows:

i.  Share options

Certain employees receive remuneration in the form of share options. The fair value of the equity instruments granted is measured on the date at which they are granted by using the Black-Scholes model, and is expensed to the income statement over the appropriate vesting period.

ii. Acquisition related employee remuneration expenses

In accordance with IFRS 3 Business Combinations and IFRS 2 Share-based Payment, certain payments to employees in respect of earn out arrangements are treated as remuneration within the income statement.

 (13) Financial instruments

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group has become a party to the contractual provisions of the instrument.

(i) Trade receivables

Trade receivables are classified as loans and receivables and are initially recognised at fair value and subsequently measured at amortised cost in accordance with IAS 39 Financial Instruments: recognition and measurement. A provision for impairment is made where there is objective evidence (including customers with financial difficulties or in default on payments) that amounts will not be recovered in accordance with original terms of the agreement. A provision for impairment is established when the carrying value of the receivable exceeds the present value of the future cash flow discounted using the original effective interest rate. The carrying value of the receivable is reduced through the use of an allowance account and any impairment loss is recognised in the income statement.

(ii) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and at bank and other short-term deposits held by the Group with maturities of less than three months.

 

(iii) Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

(iv) Bank borrowings

Interest-bearing bank loans and overdrafts are recorded initially at their fair value, net of direct transaction costs. Such instruments are subsequently carried at their amortised cost and finance charges, including premiums payable on settlement or redemption, are recognised in the income statement over the term of the instrument using an effective rate of interest.

(v) Trade payables

Trade payables are initially recognised at fair value and subsequently measured at amortised cost.

(vi) Derivative financial instruments and hedge accounting

The Group's activities expose the entity primarily to foreign currency and interest rate risk. The Group uses interest rate swap contracts to hedge interest rate exposures. 

Interest rate swap contracts are initially recognised at fair value on the date the contract is entered into and subsequently remeasured at their fair value. Changes in the fair value are recorded in the income statement.

14) Accounting estimates and judgements

 

The directors consider the critical accounting estimates and judgements used in the financial statements and concluded that the main areas of judgements are:

Revenue recognition policies in respect of contracts which straddle the year end.

Contingent deferred consideration payments in respect of acquisitions.

Recognition of share-based payments.

Valuation of intangible assets

These estimates are based on historical experience and various other assumptions that management and the board of directors believe are reasonable under the circumstances and are discussed in more detail in their respective notes. The Group also makes estimates and judgements concerning the future and the resulting estimate may, by definition, vary from the related actual results.

15) Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle this obligation and a reliable estimate can be made of the amount of the obligation. Expected future cash flows to settle provisions are discounted to present value.

16) Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the board of directors. The Group's primary format for segment is by business segment and the secondary format is by geographical segment. 

Cello Group plc

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2008

1 SEGMENTAL INFORMATION

For management purposes, the Group is organised into two operating groups; Cello Research and Consulting, and Cello Response Communications. These groups are the basis on which the Group reports its primary segment information.

The principal activities are as follows:

Cello Research and Consulting

The Research and Consulting Group provide both qualitative and quantitative research to a global range of clients across a range of sectors. This research combined with a consulting capability, to define positioning, puts the Group in a unique position to add real value to client relationships.

Tangible Group

The Tangible Group offers direct communication solutions from a mixture of direct mail, email and related response media with a focus on the key delivery areas of response: Direct, Digital and Data.

Segmental information is presented below:

2008	Research and Consulting £'000			Tangible Group £'000	Eliminations £'000	Consolidated £'000
Revenue	66,415			72,712	-	139,127
Operating income	39,084			27,500	-	66,584
Headline segment result	6,122			3,708	-	9,830
Unallocated corporate expenses						(2,048)
Headline operating profit						7,782
Segment result	4,669			2,587	-	7,256
Unallocated corporate expenses						(1,814)
Operating profit						5,442
Financing income						243
Finance costs						(1,134)
Fair value loss on derivative financial instruments						(444)
Finance cost of deferred consideration						(291)
Profit before tax						3,816
Capital expenditure		742		501	-	1,243
Capitalisation of intangible assets		-		119	-	119
Depreciation of property, plant and equipment		843		560	-	1,403
Amortisation of intangibles		611		247	-	858
Segment assets		69,055		48,675	(6,532)	111,198
Unallocated corporate assets						2,412
Deferred tax assets						1,080
Consolidated total assets						114,690
Segment liabilities		(23,451)		(17,282)	6,532	(34,201)
Unallocated corporate liabilities						(7,308)
Borrowings						(14,803)
Corporation tax liabilities						(708)
Deferred tax liabilities						(616)
Finance leases						(155)
Consolidated total liabilities						(57,791)

2007	Research and Consulting £'000		Tangible Group £'000	Eliminations £'000	Consolidated £'000
Revenue	50,894		57,421	-	108,315
Operating income	32,891		23,921	-	56,812
Headline segment result	6,204		4,072	-	10,276
Unallocated corporate expenses					(2,133)
Headline operating profit					8,143
Segment result	4,831		3,184	-	8,015
Unallocated corporate expenses					(2,404)
Operating profit					5,611
Financing income					211
Finance costs					(770)
Finance cost of deferred consideration					(468)
Profit before tax					4,584
Capital expenditure	927		846	-	1,773
Capitalisation of intangible assets	481		241	-	722
Depreciation of property, plant and equipment		(695)	(421)	-	(1,116)
Amortisation of intangibles	(671)		(233)	-	(904)
Segment assets	73,284		49,002	(4,462)	117,824
Unallocated corporate assets					2,303
Deferred tax assets					1,549
Consolidated total assets					121,676
Segment liabilities	(29,515)		(26,806)	4,462	(51,859)
Unallocated corporate liabilities					(5,551)
Borrowings					(12,700)
Corporation tax liabilities					(2,037)
Deferred tax liabilities					(950)
Finance leases					(120)
Consolidated total liabilities					(73,217)

The Group's operations are located in the United Kingdom and the USA. No geographical segment is presented as all material assets and liabilities of the Group are held in the United Kingdom.

The following table provides an analysis of the Group's revenue by geographical market, based on the billing location of the client:

	2008	2007
Geographical	£'000	£'000
UK	110,361	85,339
Rest of Europe	15,954	16,195
USA	11,492	4,471
Rest of the World	1,320	2,310
	139,127	108,315

2	INTEREST RECEIVABLE AND SIMILAR INCOME	Year ended  31 December 2008  £'000	Year ended  31 December 2007  £'000
Interest receivable:
Bank deposits		243	211

3	Interest payable AND SIMILAR CHARGES	Year ended  31 December 2008  £'000	Year ended  31 December 2007  £'000
	Interest payable in respect of liabilities classified at amortised cost:
	On bank loans and overdrafts	974	703
	On loan notes	139	43
	In respect of finance leases	21	24
		1,134	770
	Notional finance costs on future deferred consideration payments	291	468
	Fair value loss on derivative financial instruments	444	-
		1,869	1,238

4	PROFIT FOR THE YEAR	Year ended  31 December 2008 £'000				Year ended  31 December 2007 £'000
	Profit for the year has been arrived at after charging/(crediting):
	Net foreign exchange gains	(522)				(43)
	Depreciation of property, plant and equipment  :  owned assets			1,314		1,083
	: leased assets			89		33
	Profit on disposal of property, plant and equipment		(48)			(13)
	Profit on disposal of available-for-sale investments		-			(10)
	Amortisation of intangible assets		858			904
	Operating lease rentals : land and buildings		2,560			1,945
	: other leases		310			214
	Exceptional items : staff redundancy		978			-
	: provision for surplus space on land and buildings		136			-
	: other		171			-
	Total exceptional items		1,285			1,285
	Total audit fees		288			289
	Non audit fees: - taxation services - interim review - other services not included above		96 10 8			99 68 20
	Total non audit fees		114			187
	Total auditors' remuneration		402			476

In addition to the non-audit fees above charged to the income statement, £nil (2007: £112,000) of services were provided in relation to due diligence advice on acquisitions. These costs have been capitalised within goodwill in the year. All auditors' remuneration was payable to Baker Tilly UK Audit LLP and its associates.

5

EQUITY DIVIDENDS A final dividend of 0.75p (2007: 0.60p) per ordinary share was paid on 18 June 2008 to all shareholders on the register on 23 May 2008. The total amount of dividend paid was £334,000 (2007: £215,000). An interim dividend of 0.50p (2007: 0.45p) per ordinary share was paid on 5 November 2008 to all shareholders on the register on 21 September 2008. The total amount of the dividend paid was £222,000 (2007: £167,000). A final dividend of 0.75p (2007: 0.75p) is proposed and will be paid on 17 June 2009 to all shareholders on the register at 22 May 2009. In accordance with IAS 10 Events After The Balance Sheet Date, this dividend has not been recognised in the consolidated financial statements at 31 December 2008, but if approved will be recognised in the year ending 31 December 2009.

6 EARNINGS PER SHARE

	Year ended  31 December 2008 £'000		Year ended  31 December 2007 £'000
Earnings attributable to ordinary shareholders	2,761		3,074
Adjustments to earnings:
Exceptional items	1,285		-
Amortisation of intangible assets	858		904
Share based payments expense	(450)		449
Acquisition related employee remuneration expenses	647		1,179
Fair value loss on derivative financial instruments	444		-
Notional finance costs on future deferred consideration payments	291		468
Tax thereon	(618)		(589)
Headline earnings attributable to ordinary shareholders		5,218	5,485
	Number		Number
Weighted average number of ordinary shares	42,831,617		36,426,361
Dilutive effect of securities:
Share options	-		600,000
Deferred consideration shares to be issued	13,823,781		5,198,646
Diluted weighted average number of ordinary shares	56,655,398		42,225,007
Further dilutive effect of securities:
Share options	-		1,966,057
Contingent consideration shares to be issued	9,964,568		9,385,087
Fully diluted weighted average number of ordinary shares	66,619,966		53,576,151
Basic earnings per share	6.45p		8.44p
Diluted earnings per share	4.87p		7.28p
Fully diluted earnings per share	4.14p		5.74p
Headline basic earnings per share	12.18p		15.06p
Headline diluted earnings per share	9.21p		12.99p
Headline fully diluted earnings per share	7.83p		10.24p

Headline earnings per share and fully diluted earnings per share have been presented to provide additional information which may be useful to the readers of this statement.

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

Diluted earnings per share is calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year adjusted for the potentially dilutive ordinary shares for which the conditions of issue have substantially been met but not issued at the end of the year.

Fully diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all potentially dilutive ordinary shares.

The Group has two categories of potentially dilutive shares; being share options granted where the exercise price is less than the average price of the Company's ordinary shares during the year and shares to be issued as deferred consideration on completed acquisitions.

7	PROVISIONS		2008 £'000		2007 £'000
	Contingent consideration for acquisitions		6,453		15,145

8	DEFERRED consideration for acquisitions
		2008 £'000	2007 £'000
	At 1 January 2008	30,581	19,590
	Payments made in the year	(15,240)	(1,485)
	Additions in the year	-	13,109
	Adjustment to provision for additions in prior years	(1,846)	(2,280)
	Acquisition related employee remuneration expense	647	1,179
	Notional finance costs on future deferred consideration payments	291	468
	At 31 December 2008	14,433	30,581
	In one year or less:
	Consideration for which all conditions have been met	7,980	15,436
	In more than one year but not more than five years
	Contingent consideration for acquisitions	6,453	15,145
	At 31 December 2008	14,433	30,581

	Analysis of consideration for which all conditions have been met:
			2008 £'000	2007 £'000
	Cash liabilities	3,315		9,013
	Shares to be issued	4,665		6,423
		7,980		15,436

	Analysis of the contingent consideration in the consolidated financial statements is as follows:
		2008 £'000		2007 £'000
	Earn out related cash liabilities		2,475	5,685
	Shares to be issued		3,978	9,460
			6,453	15,145

Acquisitions made by the Group typically involve an earn out agreement whereby the consideration payable includes a deferred element that is contingent on the future financial performance of the acquired entity.  Earn out payments are to be in cash (or loan notes) and shares; in the analysis above the minimum percentage of cash (or loan notes) has been assumed. However, at the Group's sole discretion, this percentage can be increased. Conditions have substantially been met on £7,980,000 of earn out and other consideration which is payable in 2009. The provision for contingent consideration for acquisitions represents the directors' best estimate of the amount expected to be payable in cash or loan notes and shares to be issued. The cash (or loan note) element of the provision is discounted to present value at the company's borrowing rate. If the remaining earn out conditions are met, based on current expectations, £2.0m of the consideration will become payable in 2010, £3.3m in 2011 and the remaining £1.2m is payable in 2012 or later. As a result of a review of contingent consideration at the year end, the directors' best estimate of contingent consideration payable in respect of acquisitions prior to 1 January 2008 has decreased the provision for consideration payable by £1.85m.

9 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

 

(a)  Reconciliation of profit for the year to net cash inflow from operating activities

 

		Year ended  31 December 2008 £'000	Year ended  31 December 2007 £'000
Profit for the year		2,801	3,106
Financing income		(243)	(211)
Finance costs of deferred consideration		291	468
Fair value loss on derivative financial instruments		444	-
Other finance costs		1,134	770
Tax		1,015	1,478
Depreciation		1,403	1,116
Amortisation		858	904
Share-based payment expense		(450)	449
Acquisition related employee remuneration expense		647	1,179
Profit on disposal of property, plant and equipment		(48)	(13)
Profit on disposal of available-for-sale investments		-	(10)
Decrease/(increase) in receivables		2,062	(4,617)
(Decrease)/increase in payables		(232)	3,298
Net cash inflow from operating activities		9,682	7,917

 

 

(b)  Analysis of net debt

	At 1 January 2008 £'000	Cash flow £'000	Foreign exchange £'000	At 31 December 2008 £'000
Cash and cash equivalents	6,986	(1,848)	(73)	5,065
Loan notes	(950)	(103)	-	(1,053)
Bank loans	(11,750)	(2,000)	-	(13,750)
Finance leases	(120)	(34)	-	(154)
	(5,834)	(3,985)	(73)	(9,892)

(c) Purchase of subsidiary undertakings

		Year ended  31 December 2008 £'000	Year ended  31 December 2007 £'000
	Fair value of assets and liabilities acquired:
	Property, plant and equipment	-	325
	Receivables	-	5,747
	Cash and cash equivalents	-	3,130
	Payables	-	(5,546)
	Goodwill	-	24,673
	Intangible assets	-	611
		-	28,940
	Consideration satisfied by:
	Cash	-	8,543
	Loan notes issued	-	906
	Shares allotted	-	5,466
	Deferred consideration	-	13,085
	Costs of acquisition	-	940
		-	28,940

10

FINANCIAL INFORMATION The financial information contained in this document does not constitute statutory financial statements within the meaning of section 240 Companies Act 1985. The figures for the year ended 31 December 2008 have been extracted from the audited statutory financial statements. The financial statements for the year ended 31 December 2008 and the year ended 31 December 2007 received unqualified auditors' reports which did not contain a statement under section 237 (2) or (3) Companies Act 1985. Copies of the Company's financial statements will be posted to shareholders in April and after approval at the Annual General Meeting on 19 May 2009, will be delivered to the Registrar of Companies. Further copies will be available from the registered office of the Company or the Company's Nominated Adviser and Broker, Singer Capital Markets Limited, One Hanover Street, London, W1S 1AX.

11	OTHER INFORMATION Other information regarding Cello Group plc can be found at the Company's website, www.cellogroup.co.uk

ENDFR GUUUWWUPBGRQ