HNT.L Regulatory News (HNT)

Huntsworth plc

Interim results for the six months to 30 June 2019

Huntsworth plc, the healthcare and communications Group, today announces its interim results for the six months to 30 June 2019.

Positive order book indicates strong second half performance; full year outcome on track

Highlights

Financial highlights

Paul Taaffe, CEO of Huntsworth plc, commented:

"The first half of the year has seen the Group continue to focus on extending its capabilities to meet its client needs through investment in new staff, offices and two new agencies. With the acquisition of Creativ-Ceutical and KYNE, we have added world-class award-winning agencies which will help us to continue to grow our business.

"The Group expects to see a strong performance in the Marketing and Medical divisions in the second half of the year following recent client wins, and this will be further enhanced by the first-time inclusion of KYNE and Creativ-Ceutical. The Communications division will continue to show improved revenue and profit performance, although Immersive is expected to be flat against strong comparatives.

"The Group retains a strong balance sheet and as we head into the stronger cash-generating second half of the year, we anticipate a reduction in our gearing levels from the current 1.8x EBITDA towards our target of 1.5x. The Board remains confident in the full year outcome and the longer-term prospects of the Group."

Notes:

Chief Executive's Statement

Group overview

Healthcare remains our focus for growth and investment, as it continues to be a fast-growing sector led by increasing global demand for new drugs to help ageing populations. This demand is driving a complex marketplace that requires a combination of higher margin consultancy services, medical affairs and more effective marketing which is being seen in client demand patterns across all our healthcare-focused divisions. Increasingly, clients are looking for a full service and digitally-driven offering to help launch, distribute and differentiate their products.

The Group has made good progress in the first half of the year. We have expanded our capabilities to better meet the changing and increasing needs of our clients and secured key new hires in all Health divisions. Revenues for the first half of 2019 were £123.5 million (2018: £102.2 million), an increase of 21% compared to the prior year (3.1% on like-for-like basis) largely due to the contribution from newly acquired businesses. Headline profit before tax and highlighted items was £11.4 million (2018: £11.0 million), an increase of 3% compared to the prior year. During the period we invested in staff to enable the expanded Group to benefit from its larger scale. That larger scale was seen in an increase number of new business pitches and wins which have contributed to a stronger second half pipeline. We also rationalised our UK property portfolio, bringing expanded space in London to accommodate the growth of the Health divisions whilst reducing excess space in the Communications division. We expect profits to be second half weighted as a result.

To further support our ability to meet our client needs, we added two agencies to the Group in May 2019, both bringing key new capabilities as we seek to create a full service offering for our clients. We acquired 70% of Creativ-Ceutical S.A.R.L. ("CC"), for an initial cash consideration of €15.5 million. CC is a fast-growing strategic market access, health economics and outcomes research consultancy serving global pharma and biotech customers. The business closely aligns with our Apothecom agency and forms an extension of the services within the Group's Medical division. In addition, we acquired 85% of Kyne Communications, LLC and Kyne Communications Limited (together, "KYNE") for an initial cash consideration of $17.4 million. KYNE is an award-winning global health communications agency providing public relations and patient advocacy services to a broad range of pharmaceutical and biotech clients, as well as working with a number of foundations to support their goals on disease awareness and eradication. The business will sit within the Group's Marketing division, complementing its existing US-focused PR business and creating one of the world's leading health-focused public relations agencies. This greater scale will allow the Group to participate in bigger global assignments.

As previously outlined, our efforts to restructure and rightsize the operations within the Communications division are beginning to be reflected in a return to like-for-like revenue growth (+0.9%) after a number of years of decline. A restructured cost base and the elimination of further underperforming business will continue to improve profitability as the year progresses.

The Group remains focused on its debt levels. The first half of the year has seen significantly stronger cash generation than the same period last year, with a net cash operating cashflow inflow before highlighted items and after lease payments of £12.9 million (2018: £1.6 million outflow). Net debt at 30 June 2019 was £85.8 million (2018: £38.9 million) equivalent to 1.8x EBITDA. We remain committed to a target of around 1.5x EBITDA.

Divisional overview

Marketing

Divisional revenues grew by £16.3 million (49%) to £49.7 million (H1 2018: £33.3 million) helped by the recently acquired agencies Giant and Navience. On a like-for-like basis, the division was flat compared to H1 2018, as clients shifted product delivery to the second half of the year. The first half of the year was focused on the integration of Giant and Navience and investment in staff to enable the expanded Group to benefit from its larger scale. That larger scale was seen in an increased number of new business pitches and client wins. Those wins, together with the shift in work streams, will see the second half of the year produce stronger like-for-like growth. Excluding investment in staff and expanded property costs of £2.1 million, underlying operating margin was 19%.

Medical

The Medical division, led by its largest agency Apothecom, continued to perform very strongly, building on new client mandates won in late 2018. Revenues grew by 20% to £18.7 million (2018: £15.6 million), or 8.6% on a like-for-like basis. The Group again invested in staff and property to support this growth and launched the division's consulting arm Medistrava, which has won several new mandates which will help further drive the division's growth. Excluding investment in staff and expanded property costs of £0.7 million, underlying operating margin was 22%. With significant recent wins and a strong pipeline of new opportunities, we anticipate further strong growth in the second half of the year.

Immersive

The Immersive division, led by The Creative Engagement Group, has performed strongly in the first half of the year, with revenue up by 9.2% on a like-for-like basis to £18.8 million (H1 2018: £17.0 million) 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, and has also moved to new expanded space in London. The division continues to seek to differentiate itself in the market and expand on its success with the launch of two new agencies. Axiom Europe will build on the success of the US-based Axiom pharma sales training agency, and Forty1 will seek to exploit the increasing need for employee engagement which most contemporary businesses struggle with. Excluding investment in staff and expanded property costs of £0.7 million, underlying operating margin was 14%. The outlook for the second half of the year is less positive for the division, as a slow-down in spend at some larger clients and drug failures (leading to less congress and event activity) mean that H2 is likely to be flat against tough H2 2018 comparatives (which were up 23% on H1 2018). This pause in growth is not unexpected given the 35% like-for-like growth the division has achieved in the past 18 months.

Communications

The Group is very pleased to report like-for-like growth in revenue from the Communications division for the first time in a number of years. The strategy of eliminating unprofitable client contracts and operations, streamlining infrastructure and investing in quality staff is beginning to be rewarded. Overall revenue was flat at £36.3 million, representing like-for-like growth of 0.9% (H1 2018: -5.4%). Operating profit of £3.2 million is ahead of last year (H1 2018: £2.7million), with margin increasing from 7.4% to 8.7%.

Grayling revenues fell by 3.2% on a like-for-like basis, to £17.1 million, resulting in a loss for the period of £0.1 million (2018: loss of £0.3 million). This performance is largely the result of a decline in revenues in the USA for clients terminated last year and an underperformance in the Middle East. The UK continued to be the standout performer with 10.9% like-for-like revenue growth on the back of further good client wins. Red's revenue grew by 1.5% on a like-for-like basis in the period to £8.5 million. Good client wins continue to underpin the business and we anticipate further growth in H2.

Citigate Dewe Rogerson has performed well during the period with revenues up by 7.2% like-for-like to £10.7 million (2018: £9.9 million) and a further strong improvement in profitability. The improved performance was driven by good trading in Asia, especially in Hong Kong and China, along with the UK and France. The Netherlands continues to operate in a difficult market with little transaction and IPO activity. The second half of the year may prove softer in the UK, but this is likely to be offset by continued good trading in Asia.

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 7% to 0.75p (H1 2018: 0.7p). This will be paid on 6 November 2019 to shareholders on the register at 27 September 2019.

Group outlook

The Group expects to see a strong performance in the Marketing and Medical divisions in the second half of the year following recent client wins, and this will be further enhanced by the first-time inclusion of KYNE and CC. The Communications division will continue to show an improved revenue and profit performance, although Immersive is expected to be flat following a slower rate of new project demand and strong comparatives.

The Group retains a strong balance sheet and as we head into the stronger cash-generating second half of the year, we anticipate a reduction in our gearing levels from the current 1.8x EBITDA towards our target of 1.5x EBITDA. 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.

Review of Financial Results

Summary of financial results for the six months ended 30 June 2019

Revenue and profit before highlighted items

Revenue in the six months to 30 June 2019 increased by £21.3 million to £123.5 million (H1 2018: £102.2 million).

On a like-for-like basis, revenues increased by 8.6% in Medical, 9.2% in Immersive and 0.9% in Communications, and were flat in Marketing.

Group operating margins were broadly flat at 11.4% (H1 2018: 11.6%) despite significant investments to support the future growth of the Group. On an underlying basis, margins rose to 14.2%.

Highlighted operating items

Highlighted items of £12.1 million charged to operating expenses in the first half of 2019 related primarily to the £5.2 million cost of consolidating the Group's property portfolio (H1 2018: £nil), the £3.4 million write down of the Grayling MEA business to its fair value (H1 2018: £nil), £3.2 million of amortisation of acquired intangible assets and £1.0 million of acquisition related costs.

After highlighted items, the statutory reported operating profit was £1.9 million (H1 2018: £11.2 million).

Currency 

The impact of changes in exchange rates against H1 2018 was to increase revenues by £3.1 million and increase headline profit before tax by £2.7 million, which includes £2.0 million of incremental gains on hedging instruments. In addition, a credit of £1.5 million (H1 2018: £1.5 million) was recognised in Other Comprehensive Income and Expense arising from the retranslation of the Group's overseas assets.

Tax

The total tax charge of £0.6 million comprises a tax charge of £2.1 million on underlying earnings and a credit of £1.5 million on highlighted items. The pre-highlighted tax expense of £2.1 million is based on the expected full year tax rate of 18% (year ended 31 December 2018: 18%).

Earnings per share

Profits attributable to ordinary shareholders before highlighted items were £8.8 million (H1 2018: £8.7 million). Adjusted basic earnings per share decreased to 2.5 pence (H1 2018: 2.6 pence), and adjusted diluted earnings per share decreased to 2.4 pence (H1 2018: 2.6 pence) as result of the increased number of shares in issue.

Losses attributable to ordinary shareholders after highlighted items were £2.2 million (H1 2018: profits of £7.6 million), resulting in basic and diluted losses per share of 0.6 pence (H1 2018: earnings of 2.3 pence).

Dividends

The interim dividend is being raised by 7% to 0.75 pence (H1 2018: 0.7 pence). This will be paid on 6 November 2019 to shareholders on the register at 27 September 2019. A scrip dividend alternative will be available.

Balance sheet and cash flow

Operating cashflow inflow before highlighted items and after lease payments was £12.9 million (H1 2018: £1.6 million outflow), representing cash conversion of 100%. Other principal cashflows during the period were the net outflow on acquisitions and disposals of £10.4 million, net payments for interest and tax of £3.8 million, capital expenditure of £3.6 million, and a cash outflow on highlighted items of £2.5 million.

Net debt at 30 June 2019 was £85.8 million (30 June 2018: £38.9 million; 31 December 2018: £77.0 million) which is comfortably within the Group's available facilities. Financial covenants based on the Group's facility agreements continue to be comfortably met.

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 2019 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 23 to 26 of the 2018 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 39 to 41 of the 2018 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.

Condensed Consolidated Income Statement

for the six months ended 30 June 2019

Condensed Consolidated Statement of Comprehensive Income and Expense

for the six months ended 30 June 2019

Condensed Consolidated Cash Flow Statement

for the six months ended 30 June 2019

Condensed Consolidated Statement of Changes in Equity

for the six months ended 30 June 2019

Notes to the Financial Statements continued

for the six months ended 30 June 2019

1. Basis of preparation

The condensed consolidated unaudited interim financial statements for the six months ended 30 June 2019 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, IAS 34 "Interim Financial Reporting" as adopted by the EU 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 2018 on pages 90 - 95, except as noted below. These are consistent with the accounting policies which the Group expects to adopt in its 2019 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 2019 and 30 June 2018 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 33 of this document. The comparative figures for the year ended 31 December 2018 have been extracted from the Group's Annual Report and Accounts 2018, 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 2018 have been filed with the Registrar of Companies.

Changes in accounting policies

A number of new or amended standards became applicable for the current reporting period. The impact of the adoption of IFRS 16 Leases is disclosed in note 15 below. The other standards adopted did not have any impact on the Group's accounting policies.

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.

Judgements and 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 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 2018.

2. Acquisitions

KYNE

On 21 May 2019, the Group acquired 85% of Kyne Communicati-ons, LLC and Kyne Communications Limited through direct and indirect interests (together, "KYNE"). Acquisition accounting has been performed in accordance with IFRS 3 (revised) Business Combinations.

KYNE has contributed £1.2 million to revenue and £0.4 million to profit before tax for the period between the date of acquisition and 30 June 2019. If the acquisition of KYNE had been completed on the first day of the financial year, Group revenues for the period would have been £126.9 million and Group operating profit would have been £2.6 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 £0.2 million were incurred and these are included within highlighted items in the Consolidated Income Statement. KYNE forms part of the Marketing Operating Segment.

Simultaneous put/call options exist over the remaining 15% equity interest.

2. Acquisitions continued

Creativ-Ceutical

On 21 May 2019, the Group acquired 70% of Creati-v-Ceuti-cal S.A.R.L. ("CC"). Acquisition accounting has been performed in accordance with IFRS 3 (revised) Business Combinations.

CC has contributed £1.0 million to revenue and £0.3 million to profit before tax for the period between the date of acquisition and 30 June 2019. If the acquisition of CC had been completed on the first day of the financial year, Group revenues for the period would have been £126.6 million and Group operating profit would have been £2.7 million.

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

Cash consideration comprised €15.5 million for the trade of CC plus €4.0 million in respect of assets acquired.

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 £0.6 million were incurred and these are included within highlighted items in the Consolidated Income Statement. CC forms part of the Medical Operating Segment.

Simultaneous put/call options exist over the remaining 30% equity interest.

3. Segmental analysis

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

The Group's business activities are split into four operating divisions: Marketing, Medical, Immersive and Communications. These divisions 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. Amortisation on software development costs is not considered a highlighted item.

Property consolidation

These are costs associated with property consolidations across the Group, and include double rent costs and provision for onerous leases. These costs are excluded from adjusted results as they are one-off in nature.

Acquisition and transaction related costs

In 2019 and 2018, costs were incurred relating to the acquisition of subsidiaries. These costs are excluded from adjusted results as they are one-off in nature.

Remeasurement of deferred consideration

The credit relates to subsequent remeasurement of the fair value of deferred contingent consideration. This credit is excluded from adjusted results as they relate to historic business combinations rather than ongoing operations.

Disposal related (charge) / credit

This represents profit on disposals of subsidiaries and the loss recognised on the fair value measurement of assets held for sale. These amounts have been excluded from adjusted results as they do not relate to ongoing operations.

Imputed interest on deferred consideration and redemption liability

Amounts payable as deferred consideration and the redemption liability contain a significant financing component. This represents the unwinding of the financing component.

Taxation

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

5. Finance costs and income

6. Tax

The tax expense for the six months ended 30 June 2019 has been based on an estimated effective tax rate on profit before tax and highlighted items for the full year of 18.0% (year ended 31 December 2019: 18.0%). The tax expense is analysed as follows:

The main rate of UK corporation tax will reduce from 19% 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.

7. Dividends

The final dividend for the year ended 31 December 2018 of 1.60 pence per share was approved by shareholders at the Annual General Meeting on 9 May 2019 and was paid on 4 July 2019. This dividend is included in trade and other payables at 30 June 2019.

The 2019 interim dividend of 0.75 pence per share was approved by the Board on 22 July 2019. The dividend will be paid on 6 November 2019 to those shareholders on the register on 27 September 2019.

8. Earnings per share

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

1 As the basic EPS results in a loss per share, the diluted EPS is calculated using the undiluted weighted average number of shares.

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 2019.

10. Investment in associate

The carrying amount of equity-accounted investments has changed as follows in the six months to June 2019:

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 2018. 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.