HNT.L Regulatory News (HNT)

Huntsworth plc

Interim results for the six months to 30 June 2018

Huntsworth plc, the healthcare and communications group, today announces its interim results for the six months to 30 June 2018.

Highlights

Financial highlights

Paul Taaffe, CEO of Huntsworth plc, commented:

"Huntsworth has made strong progress in positioning itself within the healthcare market and meeting the changing needs of clients following the successful acquisition of Giant Creative Strategy LLC, as well as the integration of The Creative Engagement Group and AboveNation Media LLC and further investments in all the Healthcare divisions. Amid tough comparatives, the Group has performed well with strong growth in headline profit before tax. We are well positioned for further growth in the second half and into 2019."

Notes:

Enquiries

Group overview

The group has continued to make good progress in the first half of the year, despite some tough comparatives in the Marketing division, and has seen further very strong organic growth in the Medical and Immersive divisions.

Revenues for the first half of 2018 were £102.2 million (2017: £94.2 million), an increase of 8.5% compared to the prior year. Profit before tax and highlighted items was £11.0 million (2017: £10.0 million), an increase of 9.4% compared to the prior year and 13.5% on a like-for-like basis2.

Our focus for growth and investment remains our three Healthcare-focused divisions. Healthcare continues to be a fast-growing sector as clients seek a more differentiated and increasingly digital offering for their medical and marketing communications. To further support this we added two agencies to the Marketing division this year, both adding key new capabilities as we seek to create a full service offering for post-approval medicines. In February, we bought AboveNation Media LLC ('AboveNation'), a specialist media buying agency, for an initial consideration of £1.1 million. On 16 July 2018, we purchased San Francisco-based Giant Creative Strategy LLC ('Giant') for an initial consideration of £55.0 million. Giant is the leading west-coast healthcare professional and consumer marketing agency and adds considerable strength to the Group's offering, plus a roster of new clients. When combined with the existing Marketing division this will facilitate larger client opportunities.

As previously outlined, we have continued to focus on rightsizing the operations within the Communications division which led to a natural revenue decline of 5.4%, and we are now seeing improvements in a number of agencies led by Graying UK and Citigate Dewe Rogerson UK & Asia. We have continued to account for a number of restructuring costs within our operating profit which should lead to a stronger performance in the second half of the year and beyond.

Seasonal timings and a change in client mix affected the Group's cash flow during the period, with a net operating outflow of £1.7 million before highlighted items (2017: £6.4 million inflow), which will naturally unwind over the course of the year. Net debt at 30 June 2018 was £38.9 million (2017: £26.8 million) equivalent to 1.3x EBITDA. Net debt after the acquisition of Giant is £95 million, equivalent to 2.5x EBITDA.

Notes:

Divisional overview

Marketing

First half-year 2018 revenues are set against tough comparatives, as illustrated below, and fell by 8.5% on a like-for-like basis to £33.3 million, although the division delivered an improved operating margin of 22.1% (H1 2017 20.0%). On a sequential basis (against H2 2017), revenues grew by 1.1%.

The fall in revenues reflects a mix of delayed client project expenditure and the loss of certain drug mandates due to regulation and competition. As the comparatives ease in the second half of the year, we expect to see a return to good growth.

Medical

The Medical division, led by Apothecom, continued to perform very strongly, building on new client mandates won in late 2017. Revenues grew by 16.0% on a like-for-like basis, although lower on a sequential basis, as H2 is traditionally the stronger half of the year. Despite increased investment in staff, margin improved to 23.1% (2017: 19.0%). With a strong pipeline of new opportunities and recent mandate wins we anticipate further good growth in H2, albeit at a lower rate than H1 as H2 2017 presents a very strong comparative as illustrated below.

Immersive

The Immersive division, led by The Creative Engagement Group, which joined Huntsworth in July 2017, has performed very strongly in the first six months of the year, with revenue up by 11.1% on the equivalent period (when TCEG was under previous ownership) as it continues to expand its offering to Healthcare clients in particular. The division has continued to invest in staff, boosting its US and internal communications strength. Margin continues to improve as it delivers higher value work and realises economies of scale. The outlook for the second half of the year remains positive and we expect further good progress.

Communications

As planned, revenue in the Communications division fell by 5.4% on a like-for-like basis against the same period last year, led largely by declines at Grayling following the elimination of unprofitable client contracts. Operating profit of £2.7 million is £0.6 million lower than the same period last year but this includes some further restructuring costs which will support improved profitability in H2 and beyond.

Grayling revenues fell by 7% on a like-for-like basis, to £19.1 million, resulting in a loss for the period of £0.3 million (H1 2017: profit of £0.4 million). This performance is largely the result of a decline in profitability in Grayling Europe, one-off contract profits in the Middle East last year, and a number of restructuring costs of c. £0.4 million accounted for in the period, which offset improvements in profitability in the UK and the USA. Action has been taken in Europe and we anticipate the second half of the year to be significantly more profitable than the same period in 2017.

Red's revenue declined by 6% on a like-for-like basis in the period, which was expected following the loss via a procurement-led process of its largest client in H2 2017. Good client wins since have underpinned the business, although they do come with some working capital costs, and we anticipate a return to growth in 2019. Margins continue to hold at 20%.

Citigate Dewe Rogerson has performed well during the period with revenues broadly flat to the prior period at £10.7 million but profitability sharply improving by 26% to £1.7 million. Margin has increased to 16.2% (H1 2017 13.0%) due to the impact of last year's restructuring and the focus on more profitable clients. All business units made progress against the prior year with the exception of the Netherlands where the transaction environment was softer than last year.

Dividend

Given the underlying strength of the Group's H1 performance and the outlook for the remainder of the year, together with the anticipated contribution from the newly acquired businesses, the interim dividend is being raised by 27% to 0.7p (H1 2017: 0.55p), this will be paid on 6 November 2018.

Board update

Following the announcement of Derek Mapp's intention to step down as Chairman, the Group has engaged an Executive Search firm to find a suitable replacement. The search is underway and we will update further once this process is concluded.

Group outlook

We expect to see a good performance across the Group in the second half of the year, which will be further enhanced by the first-time inclusion of Giant. This period will see the Group focus on the successful integration of this agency and an improvement in profitability in the Communications division.

The Group continues to have an active pipeline of small-scale M&A opportunities that it will monitor into the second half of the year. The balance sheet remains strong as it heads into the stronger cash-generating second half of the year. The Board remains confident in the full year outcome and the longer-term prospects of the Group.

Nothing in this announcement should be construed as a profit forecast.

Summary of financial results for the six months ended 30 June 2018

* Like-for-like growth in Immersive has been adjusted to include pre-acquisition TCEG results

Revenue and profit before highlighted items

Revenue in the six months to 30 June 2018 increased by £8.0 million to £102.2 million (H1 2017: £94.2 million).

On a like-for-like basis, revenues increased by 16.0% in Medical and 11.1% in Immersive, however they declined by 8.5% in Marketing and 5.4% in Communications.

Despite declining revenues, group operating margins remained stable. This primarily reflects strong growth from Medical as well as good cost control in Marketing, despite revenue declining against tough comparatives.  

Highlighted items

Highlighted items in the first half of 2018 related primarily to £1.1 million amortisation of acquired intangible assets (H1 2017: £0.4 million) and a disposal related credit of £0.6 million with respect to Whiteboard Advisors, LLC which was sold in 2017 (H1 2017: charge £0.1 million).

After highlighted items, the statutory reported operating profit was £11.2 million (H1 2017: £10.1 million).

Currency 

The impact of changes in exchange rates against H1 2017 was to decrease revenues by £4.4 million and decrease headline profit before tax by £2.5 million, which includes £1.7 million of incremental losses on hedging instruments.

The £2.5 million includes losses on hedging instruments of £0.8 million (H1 2017: gain of £0.9 million) of which £0.5 million relates to forward contracts maturing in H2 2018. Although USD weakened H1 2017 to H1 2018, it strengthened between 31 December 2017 and 30 June 2018 resulting in a credit of £1.5 million to Other Comprehensive Income and Expense arising from the retranslation of the Group's overseas assets.

Tax

The total tax charge of £2.6 million comprises a tax charge of £2.2 million on underlying earnings and £0.4 million on highlighted items. The pre-highlighted tax expense of £2.2 million is based on the expected full year tax rate of 20% (year ended 31 December 2017: 21%), with the fall in the rate being mainly attributed to the reduction in the US federal tax rate.

Earnings per share

Profits attributable to ordinary shareholders before highlighted items were £8.7 million (H1 2017: £7.8 million). Adjusted basic and diluted earnings per share increased to 2.6 pence (H1 2017: 2.4 pence).

Profits attributable to ordinary shareholders after highlighted items were £7.6 million (H1 2017: £5.3 million), resulting in an increase in basic and diluted earnings per share to 2.3 pence (H1 2017: 1.6 pence).

Dividends

The interim dividend is being raised by 27% to 0.7 pence (H1 2017: 0.55 pence). The record date for this dividend will be 28 September 2018 and it is payable on 6 November 2018. A scrip dividend alternative will be available.

Balance sheet and cash flow

Cash outflow from operations totalled to £1.7 million (H1 2017: inflow of £6.4 million), before highlighted cash outflows of £0.5 million (H1 2017: £1.3 million). Other principal cashflows during the period were net payments for interest, tax and non-current assets of £4.2 million (H1 2017: £3.1 million), offset by proceeds of £1.2 million received for businesses disposed of in 2017 and the net cash inflow arising on the acquisition of AboveNation of £2.6 million.

Net debt at 30 June 2018 was £38.9 million (30 June 2017: £26.8 million; 31 December 2017: £36.3 million) which is within the Group's available facilities. Financial covenants based on the Group's facility agreements continue to be comfortably met.

On 12 July 2018, the Group exercised £30 million of its £40 million accordion facility. As a result, the Group has available a £105 million multi-currency revolving credit facility with a £10 million accordion option, committed until September 2021, together with a £5 million uncommitted overdraft.

Key risks and uncertainties

The Directors monitor the risks that the Group is exposed to and the risk management processes and internal controls in place to mitigate these risks. Our risk management approach is led by the Risk Committee and is designed to identify risks to the Group using both a bottom-up and top-down approach.

The Directors have considered whether the nature or level of risk that the Group is exposed to has changed significantly in the first half of 2018 and have concluded that the risk profile is largely unchanged. The Directors continue to review risk levels and will act to mitigate any increased risks accordingly.

As described more fully on pages 26 to 31 of the 2017 Annual Report and Accounts, the Group's principal risks and uncertainties are identified as:

The Group has a number of ongoing processes to identify, evaluate and manage the key financial, operating and compliance risks faced by the Group and for determining the appropriate course of action to manage and mitigate those risks. The Board delegates the monitoring of these internal control and risk management processes to the Audit Committee, and in turn to the Risk Committee. Further details of the risk management processes undertaken are included on page 42 to 43 of the 2017 Annual Report and Accounts.

Forward looking statements

The interim management report contains certain forward looking statements in respect of Huntsworth plc and the operation of its subsidiaries. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. Nothing in this announcement should be construed as a profit forecast. 

1. Basis of preparation

The condensed consolidated unaudited interim financial statements for the six months ended 30 June 2018 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, IAS 34 "Interim Financial Reporting" and the Group's accounting policies.

The Group's accounting policies are in accordance with International Financial Reporting Standards as adopted by the European Union and are set out in the Group's Annual Report and Accounts 2017 on pages 77 - 82, except as noted below. These are consistent with the accounting policies which the Group expects to adopt in its 2018 Annual Report. The Group has not early adopted any Standard, Interpretation or Amendment that has been issued but is not yet effective.

The information relating to the six months ended 30 June 2018 and 30 June 2017 is unaudited and does not constitute statutory financial statements as defined in Section 434 of the Companies Act 2006. The information has however been reviewed by the auditors and their report to the Board of Huntsworth plc is set out on page 29 of this document. The comparative figures for the year ended 31 December 2017 have been extracted from the Group's Annual Report and Accounts 2017, on which the auditors gave an unmodified opinion and did not include a statement under section 498 (2) or (3) of the Companies Act 2006. The Group Annual Report and Accounts for the year ended 31 December 2017 have been filed with the Registrar of Companies.

Changes in accounting policies

A number of new and amended IFRS's have been adopted, none of which had any significant impact on the Group's financial statements.

The adoption of IFRS 15 Revenue from Contracts with Customers has not resulted in significant changes to the revenue recognition policy applied to the consolidated financial statements for the year ended 31 December 2017. This is due to the nature of customer contracts entered into by the Group. No adjustments have been made to the 31 December 2017 balance sheet nor to opening retained earnings at 1 January 2018. Additional disclosures have been included to disaggregate revenue on a geographical basis (Note 3).

IFRS 9 Financial Instruments has similarly not resulted in any significant changes to the accounting policy for financial instruments applied to the 31 December 2017 financial statements.

The adoption of the standards, amendments and interpretations issued but not effective is not expected to have a material impact on the Group's financial statements. The Directors are in the process of evaluating the impact of IFRS 16, Leases.

Going concern

After reviewing the Group's performance, future forecasted performance and cash flows, ability to draw down on its facilities and the covenant requirements of those facilities, and after considering the key risks and uncertainties set out on pages 9-10, the Directors consider that the Group has sufficient resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Group's financial statements.

Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

The acquisition in the period involved an earnout arrangement and option to purchase the remaining equity of the entity at a future date. The amount payable under both the earn-out and equity option is contingent on future performance and has resulted in a deferred contingent consideration and a redemption liability being recognised. Judgement is required in estimating the future performance of the acquired entity.

Other than mentioned above the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2017.  

2. Acquisition of AboveNation

On 22 February 2018, the Group acquired 75% of the issued share capital of AboveNation Media, LLC (AboveNation). Acquisition accounting has been performed in accordance with IFRS 3 (revised) Business Combinations.

AboveNation has contributed £0.8 million to revenue and £0.3 million to profit before tax for the period between the date of acquisition and 30 June 2018. If the acquisition of AboveNation had been completed on the first day of the financial year, Group revenues for the period would have been £102.4 million and Group operating profit would have been £11.3 million.

The provisional fair values of the net assets at the date of acquisition were as follows:

Goodwill comprises the value of expected synergies arising from the acquisition and other intangible assets that do not qualify for separate recognition.

Acquisition related costs of £33,000 were incurred and these are included within highlighted items in the Consolidated Income Statement. AboveNation forms part of the Marketing Operating Segment.

A simultaneous put/call options exists over the remaining 25% equity interest.

3. Segmental analysis

The following is an analysis of the Group's revenue and operating profit before highlighted items by reportable segment.

During 2017, there was a reorganisation of the Group's operating segments. Huntsworth Health was split into 3 segments - Medical, Marketing and Immersive. Grayling, Citigate Dewe Rogerson ("CDR") and Red have been combined into one operating segment, Communications.

These revised segments are the basis on which information is reported to the Group's Chief Operating Decision Maker, which has been determined to be the Group Board. The segment result is the measure used for the purposes of performance assessment and represents profit earned by each segment, but before highlighted operating expenses, net finance costs and taxation.

3. Segmental analysis continued

Highlighted items are not presented to the Board on a segmental basis.

A reconciliation of segment operating profit before highlighted items to profit before tax is provided below:

4. Highlighted items

The Group presents highlighted items charged to profit before tax by making adjustments for costs and credits which management believe to be significant by virtue of their size, nature or incidence or which have a distortive effect on current year earnings. The Group uses these adjusted measures to evaluate performance and as a method to provide shareholders with clear and consistent reporting.

4. Highlighted items continued

Amortisation of acquired intangible assets

Intangible assets are amortised systematically over their estimated useful lives, which vary from two to 20 years depending on the nature of the asset. The amortisation charge in respect of intangible assets is excluded from adjusted results as they relate to historic business combinations rather than normal ongoing operations.

Disposal related (credit)/charge

Effective 1 January 2017 the Whiteboard Advisors business was sold for initial consideration of $2.5million and a deferred element based on future performance. The profit of £0.6 million relates to remeasuring the receivable based on expected future performance and exchange rate fluctuations. These credits have been excluded from adjusted results as they do not relate to ongoing operations. The comparatives include amounts recycled from foreign currency translation reserves into profit and loss on other disposals.

Acquisition and transaction related charge/(credit)

Transaction costs are costs incurred in relation to business acquisitions and disposals. These costs are excluded from adjusted results as they are one-off in nature.

Taxation

The tax related to highlighted items is the tax effect of the items above.

5. Finance costs and income

6. Tax

The tax expense for the six months ended 30 June 2018 has been based on an estimated effective tax rate on profit before tax and highlighted items for the full year of 20.0% (year ended 31 December 2017: 21.0%). The tax expense is analysed as follows:

The UK Government has passed legislation to further reduce the main rate of corporation tax to 17% from 1 April 2020. The expected impact of the reduction in the UK rate is reflected in the closing deferred tax position.

The Group presents the adjusted effective tax rate to help users of this report better understand its tax charge. In arriving at this rate, the Group removes the tax effect of items which are adjusted for in arriving at the adjusted profit before income tax disclosed in note 4. The Group considers that the resulting adjusted effective tax rate is more representative of its tax payable position. In calculating the adjusted tax rate, the Group excludes the potential future impact of the deferred tax effects of intangible assets (other than internally generated and acquired computer software), as the Group prefers to give users of its accounts a view of the tax charge based on the current status of such items. Deferred tax would only ever crystallise on a sale of the relevant businesses, which is not anticipated at the current time, and such a sale, being an exceptional item, would result in an exceptional tax impact. 

7. Dividends

The final dividend for the year ended 31 December 2017 of 1.45 pence per share was approved by shareholders at the Annual General Meeting on 24 May 2018 and was paid on 5 July 2018. This dividend is included in trade and other payables at 30 June 2018.

The 2018 interim dividend of 0.7 pence per share was approved by the Board on 19 July 2018. The dividend will be paid on 6 November 2018 to those shareholders on the register on 28 September 2018.

8. Earnings per share

The data used in the calculation of the earnings per share numbers is summarised in the table below:

The basic earnings per share calculation is based on the profit for the period attributable to parent company shareholders divided by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share is calculated based on the profit for the period attributable to parent company shareholders divided by the weighted average number of ordinary shares outstanding during the period adjusted for the potentially dilutive impact of employee share option schemes and shares that could be issued as part of contingent consideration on acquisition of subsidiaries.

8. Earnings per share continued

Adjusted earnings per share is calculated in order to provide information to shareholders about continuing trading performance and is based on the profit attributable to parent company shareholders excluding highlighted items together with related tax effects as set out below:

9. Intangible assets

There are no indicators of impairment for any of the CGUs at 30 June 2018.

10. Investment in associate

The carrying amount of equity-accounted investments has changed as follows in the six months to June 2018:

11. Financial risk management and financial instruments

The Group's activities expose it to a variety of financial risks including foreign exchange risk, interest rate risk, credit risk and liquidity risk.

The condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's Annual Financial Statements as at 31 December 2017. There have been no changes in the Group's risk management policies since the year end. 

Fair value measurement

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable.

11. Financial risk management and financial instruments continued

Valuation techniques used to derive Level 2 fair values

Level 2 derivatives comprise foreign exchange derivatives and interest rate swaps. The foreign exchange derivatives have been fair valued using exchange rates that are quoted in an active market. Interest rate swaps are valued using forward interest rates extracted from observable yield curves.

Valuation techniques used to derive Level 3 fair values

Level 3 derivatives comprise deferred consideration and redemption liability. Deferred contingent consideration and redemption liabilities are valued using a discounted cash flow methodology. The liability is based on the acquired business' forecast average profits. The significant unobservable inputs to this valuation include forecast average profits.

Fair values of other financial liabilities and assets

All financial assets and financial liabilities have been recognised at their carrying values which are not materially different to their fair values.

12. Bank loans and overdrafts

Following an amend and extend of its banking facilities in February 2018, the Group had available during the period a £75 million multi-currency revolving credit facility with a £40 million accordion option, committed until September 2021, together with a £5 million uncommitted overdraft. After the period end, the Group exercised £30 million of its £40 million accordion facility. As a result, the Group has available a £105 million multi-currency revolving credit facility with a £10 million accordion option, committed until September 2021, together with a £5 million uncommitted overdraft.

13. Provisions

Redemption liability for acquisitions

The redemption liability represents the put/call option over non-controlling interest arising on acquisitions.

Deferred contingent consideration for acquisitions

Acquisitions made by the Group typically involve an earn-out arrangement whereby the consideration payable includes a deferred element, payable in either cash or a combination of cash and shares at the Company's option, that is contingent on the future financial performance of the acquired entity.

Property provisions

Provisions for property represent amounts set aside in respect of property leases which are onerous and the unavoidable costs of restoring leasehold properties to the condition specified in the lease at the end of the contractual term. The quantification of these provisions has been determined based on external professional advice and is dependent on the Group's ability to exit the leases early or to sublet the properties. In general, property costs are expected to be incurred over a range of one to eight years.

Reorganisation and other provisions

This provision relates principally to redundancy and onerous contract provisions arising on past business closures.

14. Cash flow analysis

(a) Reconciliation of operating profit to net cash (outflow)/inflow from operations

14. Cash flow analysis continued

 (b) Reconciliation of net cash flow to movement in net debt