HNT.L Regulatory News (HNT)

Audited preliminary results for the year ended 31 December 2018

Huntsworth plc, the healthcare and communications group, today announces its preliminary results for the 12 months to 31 December 2018.

Financial Highlights

· Revenue up 14% (1.4% on a like-for-like1 basis) at £225.0 million (2017: £197.0 million)

· Headline2 operating profit up 26% (12% on a like-for-like basis) at £33.2 million (2017: £26.4 million), representing a margin of 14.8% (2017: 13.4%)

· Headline profit before tax up 26% (15% on a like-for-like basis) at £30.9 million (2017: £24.4 million), ahead of market expectations3

· Headline diluted earnings per share up 24% at 7.1p (2017: 5.8p)

· Leverage ratio reduced to 1.9x EBITDA from 2.5x post the acquisition of Giant

· Proposed final dividend up 10% to 1.6p per share (2017: 1.45p per share) giving a total dividend for the year of 2.3p per share (2017: 2.0p per share)

Operational Highlights

· Healthcare remains our focus for growth and investment and grew like-for-like revenues by 6% in the period. This performance was led by strong organic growth from the Medical and Immersive divisions and a return to growth of the Marketing division in H2 as anticipated

· Acquisitions of Giant, Navience and AboveNation to broaden our Marketing offer; all now integrated

· Continued margin improvement reflecting operational efficiencies and focus on high quality work

· Improved confidence in the financial stability of the Communications division

Paul Taaffe, CEO of Huntsworth, commented:

"Huntsworth has had another year of strong progress, led by stronger growth in its Healthcare divisions. Our strategy to position ourselves as a leading healthcare services-focused business continues to gain traction and was further enhanced this year with the acquisitions of Giant, Navience and AboveNation in our Marketing division. We are well positioned for additional growth in 2019 and beyond."

Summary Financial Performance

Enquiries

1 Like-for-like revenues are stated at constant exchange rates and excluding the effect of acquisitions and disposals. A reconciliation of IFRS revenues and operating profit to like-for-like results is included in Appendix 1.

2 Unless otherwise stated, headline results have been adjusted to exclude highlighted items. An explanation of how all non-IFRS measures have been calculated is included in Appendix 1.

3 Market consensus headline profit before tax for 2018 was £29.4 million

Chairman's Statement

In my final year as Chairman, I'm pleased to report a record financial performance at Huntsworth. We have made further significant progress in executing our strategy of transforming the Group into a Healthcare services-focused business, helped by the acquisitions of Giant, Navience and AboveNation Media within our Marketing division.

Our continued focus on operational excellence and client service has produced strong like-for-like growth in headline profit before tax of 15%.

That growth has been led by the Medical and Immersive divisions which both had outstanding years, producing double digit revenue growth. The Immersive division, which was formed in July 2017 following the acquisition of The Creative Engagement Group, is an example of how the Group is able to harness new capabilities and provide high quality management teams with the ability to focus and expand their businesses.

The Marketing division was our major investment focus this year as we responded to growing client demand for agencies that can offer a more complete suite of services. To that end, we brought three agencies into the Marketing division, all of which have integrated well, and we are beginning to see the benefits of this approach as we are now able to compete for bigger mandates. As previously announced, financial performance from the division was disappointing, with like-for-like revenue declines of 3% reflecting a mix of delayed client project expenditure and drug failures, in addition to its exposure to tough comparatives. We saw an improvement in the second half and, as those comparatives unwind and the benefits of the broader offering are realised, we remain confident for an improved performance in 2019.

It was a steady year in our Communications division. Red had a good year, despite the effects of client attrition in 2017, and ended the year with a return to growth. Strong wins in the year emphasise its fundamental strength and provide a positive outlook for 2019. Citigate Dewe Rogerson again had a solid year despite a much quieter IPO market in the Netherlands and Asia. Grayling's performance was mixed, with strong growth in the UK being offset by a deteriorating position in Europe. We look forward to an improved financial performance in 2019 as we have now completed the restructuring of this business and right-sized the cost base.

As I mentioned in last year's annual report, given my other commitments, I will be stepping down as Chair of the Group. Following a thorough search process, I'm delighted that the Group has appointed David Lowden as my successor. David joined the Board on 1 January 2019 and will take over as Chair on 6 March 2019. David has extensive executive experience in global marketing services as well as a wealth of public company Board experience. I'm pleased to be able to leave David with a fast growing, dynamic and exciting business to Chair.

On behalf of the Board, I would like to thank the management team and staff for their hard work in achieving the growth we have enjoyed this year. The Group looks forward to more success during 2019.

Chief Executive's Statement

The Group continued to make strong progress in 2018. Revenue grew by 14% to £225.0 million and headline profit before tax by 26% to £30.9 million. On a like-for-like basis, this represents growth of 1% and 15% respectively. Huntsworth's growth was led by the combined Healthcare divisions which grew revenues by 6% on a like-for-like basis.

Healthcare remains our focus for growth and investment, and 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 market place 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 of our healthcare-focused divisions. Increasingly, clients are looking for a full service and digitally driven offering to help launch, distribute and differentiate their products.

To further support our evolution in this direction, we acquired three agencies in the Marketing division this year, all adding key new capabilities as we seek to create a full service offering for post-approval medicines. Evoke already had a strong US consumer and digital marketing capability, healthcare public relations and healthcare professional communications in both Europe and in the US. On 22 February 2018 we bought AboveNation Media, a specialist media buying agency, for an initial consideration of £1.1 million. On 17 July 2018, we purchased San Francisco-based Giant Creative Strategy for an initial consideration of £52.2 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. On 27 September 2018, we purchased Navience Healthcare Solutions, a specialist payer and advisory marketing services agency for an initial consideration of £18.9 million. All these acquisitions have been integrated well and, when combined with the capabilities of the existing Marketing division, form compelling offerings which are already leading to more client opportunities.

While the Group is firmly focused on developing and adding to its Healthcare assets, the Communications division continues to remain an important part, contributing 15% of profits before central costs. This remains a mixed group of agencies in terms of their individual performance and development, although it has been pleasing to see improving performance in key agencies this year. One-off costs borne within the year totalled around £1 million, related to further reorganising and right-sizing elements of the offering, and the benefits of these will be seen in improved financial returns in the coming years.

Group performance overview

The Group's performance this year reflects a combination of strong growth from the Medical and Immersive divisions and the impact of acquisitions, offset by an adverse movement in exchange rates and a decline in performance in the Communications division. The following bridge shows the key movements in headline profits in 2018:

A stronger sterling in 2018 compared to 2017 has resulted in a translational loss of £0.4 million, with a further £2.5 million incremental loss on hedging instruments. Acquisitions impacting for the first time in the year added £5.3 million to profits, net of interest. Overall divisional trading, including savings in central costs which are largely related to lower variable compensation, added a further £3.6 million. Adjusting for all these factors, like-for-like headline profits before tax were up 15% reflecting strong organic growth.

Revenues were £225.0 million in 2018 (2017: £197.0 million), after adverse currency movements of £3.2 million. On a like-for-like basis, revenues grew by 1%, reflecting strong organic growth from the Medical and Immersive divisions, offset by decreases in revenues from the Marketing and Communications divisions.

Headline profit before tax was £30.9 million (2017: 24.4 million), an increase of 26% or 15% on a like-for-like basis. Operating profits were £31.4 million (2017: £24.9 million), an increase of 26%. The following table reconciles statutory to headline profits:

The Group's effective tax rate has decreased to 18% (2017: 21%) principally as a result of tax reductions in the United States. Looking forward we expect to have a stable tax rate at around this level.

Diluted earnings per share were 6.1p (2017: 4.7p). Adjusted diluted earnings per share were 7.11p (2017: 5.75p), an increase of 24%.

Currency

Changes in exchange rates versus 2017 decreased revenues by £3.2 million and operating profits by £2.9 million.

The weakening of Sterling against the Dollar between 31 December 2017 and 31 December 2018 has also resulted in a £7.3 million credit to Other Comprehensive Income and Expense due to the retranslation of the Group's overseas assets.

Operating profit

Operating profit was £31.4 million (2017: £24.9 million). The increase primarily reflects organic growth (£3.1 million) and the impact of acquisitions (£6.2 million), offset by adverse foreign exchange movements (£2.9 million). Before highlighted items, operating profit was £33.2 million (2017: £26.4 million), which represents a margin of 14.8% (2017: 13.4%).

Central costs decreased from £7.6 million to £6.6 million, with the majority of the decrease relating to variable executive remuneration, being lower annual bonuses and share option charges.

Highlighted items

Highlighted items of £2.2 million comprise the following:

The disposal related credit relates to an increase in deferred consideration receivable from Whiteboard Advisors, which was disposed of in early 2017.

Cash Flow and Net debt

Cash conversion of operating profit into operating cash flows before highlighted items was 71% (2017: 113%).

Operating cash flow before highlighted items was £23.5 million (2017: £29.8 million). Free cash flow (after interest, tax and capital expenditure) was £12.7 million (2017: £20.7 million). Dividend payments, including £0.2 million paid to non-controlling interests, were £6.1 million (2017: £4.9 million). Net expenditure on acquisitions and disposals was £65.5 million, with £17.6 million raised through the issue of shares to partially fund these acquisitions.

The resulting net debt at year-end was £77.0 million, up from £36.3 million at 31 December 2017 as a result of the acquisition spending. This represents a gearing ratio of 1.9x EBITDA on a pro-forma basis, comfortably within our covenant terms of 3.0x EBITDA.

Financial covenants based on the Group's facility agreements continue to be comfortably met. After the year end the Group amended and extended its existing facility, as a result of which the Group has total committed facilities of £130 million available until March 2023, with a further accordion option of £50 million and two uncommitted overdrafts of £5 million and $10 million respectively.

Dividends

At the forthcoming AGM, the Board will propose a final dividend of 1.6 pence, bringing the total dividend for 2018 to 2.3 pence, up 15% from 2.0 pence in 2017 and reflecting the strong growth in earnings. Subject to shareholder approval, the final dividend will be paid on 4 July 2019 to all shareholders on the register at 24 May 2019. The shares will trade ex-dividend on 23 May 2019. A scrip dividend alternative will be available. The dividend payout ratio for 2018 is 32% (2017: 34%).

Tax

The total tax charge of £6.8 million (2017: £7.3 million) comprises an underlying tax expense of £5.5 million (2017: £5.1 million) together with a charge of £1.3 million on highlighted items (2017: £2.1 million). The full year underlying tax rate is 18% (2017: 21%). The highlighted tax charge of £1.3 million relates primarily to deferred tax on intangible assets.

Net corporation tax paid in the year was £4.1 million (2017: £3.3 million).

Earnings per share

Profits attributable to ordinary shareholders before highlighted items were £24.9 million (2017: £19.3 million). Profits after highlighted items attributable to ordinary shareholders are £21.4 million (2017: £15.7 million).

Before highlighted items, basic earnings per share for 2018 is 7.5p (2017: 5.9p) and diluted earnings per share is 7.1p (2017: 5.8p).

After highlighted items, basic earnings per share is 6.4p (2017: 4.8p) and diluted earnings per share is 6.1p (2017: 4.7p).

Divisional performance overview

Marketing

Marketing is led by US-based Evoke, the Group's largest agency, which primarily specialises in the marketing of prescription drugs directly to patients. As previously highlighted, the division experienced a more difficult year in 2018 than in recent years, with tough comparatives compounded by a mix of delayed client project expenditure, drug failures and the loss of certain drug mandates due to regulation and competition. Despite this, revenue grew by £8.5 million (12%) to £82.0 million as a result of the acquisitions made in the year. Although this was a decline of 3.2% on a like-for like basis, this was largely a first half issue, with the division returning to growth in the second half of the year. Operating profit increased by £4.5 million to £20.0 million, an increase on a like-for-like basis of 4% as margin was managed within the revenue decline.

Marketing's longer-term outlook remains positive despite the slowdown in performance this year. Putting the division into a wider context, the addition of the key capabilities of Giant Creative Strategy (the largest healthcare agency on the west coast and in the heart of the biotech hub), Navience Healthcare Solutions (market access) and AboveNation Media (adtech-enabled media planning and buying) has produced one of the top three independent specialist healthcare marketing groups in the industry: a group that is now capable of handling increasingly complex multi-audience, multi-geography client briefs and that is appearing on pitch rosters that were previously the preserve of the larger holding companies. The division remains nimble and has expanded its talent pool to take advantage of these opportunities. We expect to see a return to stronger growth during H2 2019.

Medical

Medical is led by UK and US based ApotheCom, which specialises in medical affairs and communications, underpinned by data and analytics. The division continued to grow strongly in 2018, posting its third successive year of double-digit organic revenue growth. This was driven by increased focus on consultancy services and innovative data products, giving access to larger client budgets. The division grew revenue by 11% (13% on a like-for-like basis) to £34.2 million with operating profit increasing by 18% (19% on a like-for-like basis) to £9.8 million. 

Immersive

The Immersive division is led by The Creative Engagement Group, which joined Huntsworth in July 2017 and is focused on providing deeply immersive experiences in exhibitions, events, training and internal communications, with a particular strength in healthcare. In addition, it now contains Huntsworth's pharmaceutical sales training agency, Axiom, which benefits from the creative capacity of TCEG. This is the division's first full year under the Group's ownership and it has performed very strongly, growing revenues by 34% on a like for like basis to £35.4 million and profits by over 60% on a like-for-like basis to £5.1 million. Success has been driven by expansion in both the US and Europe from existing clients and the development of relationships with a number of new healthcare clients in Europe.

Communications

The Communications division is comprised of Grayling, Red and specialist financial agency Citigate Dewe Rogerson. As previously outlined, we have continued to focus on rightsizing the operations within the division, which led to an expected decline in revenue this year. Revenue for the year was £73.4 million (2017: £77.6 million), which represents a decline of 5% on a like-for-like basis. Operating profit of £6.0 million (2017: £7.0 million) includes c. £1 million of one-off reorganisation costs. Excluding these costs, profits were flat year on year.

Grayling revenues fell by 7.6% on a like-for-like basis to £38.3 million (2017: £41.7 million), whilst one-off costs of c. £1 million contributed to an overall loss for the period of £0.4 million (2017: profit of £0.7 million). This performance is largely the result of a decline in profitability in Grayling Europe and one-off contract profits in the Middle East last year, which offset improvements in profitability in the UK and the US.

Red's revenue declined by 4% on a like-for-like basis in the period, which was expected following the loss of its largest client in H2 2017 via a procurement-led process. Performance has improved sharply in H2 with the agency back in growth mode as the comparatives unwind and the benefits of recent client wins start to come through. We anticipate this growth trend to continue in 2019. Margins continue to hold at strong levels.

Citigate Dewe Rogerson has performed well during the period with revenues broadly flat on the prior period at £21.9 million but profitability sharply improving by 19% to £4.1 million. Margin has increased to 18.8% (2017: 15.9%) 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.

Group Outlook

The Group remains focused on enhancing the services we provide to our Healthcare clients by developing and adding capabilities. The enhanced capability of the Marketing division following the recent acquisitions positions it for a return to growth in 2019. The Medical and Immersive divisions are continuing to grow on the back of multiple client wins. The Communications division continues to make progress and, whilst its revenue growth will remain modest, its profitability will improve as a result of measures taken over the past year. The Group's balance sheet remains strong, further enhanced by the recent renewal of our facilities, and we continue to aim to manage the business between 1.5x and 2.0x leverage. Overall, we are well positioned for future growth and look forward to reporting further progress in 2019.

On behalf of the Board, I would like once again to thank our Chair Derek Mapp for his leadership in guiding us all to where we are today. His contribution through a period of significant change and into a period of rapid growth can be seen in these results.

Key risks and uncertainties

The Risk Committee, on behalf of the Board, undertakes a comprehensive assessment of the principal risks facing the Group. Our risk management approach is designed to identify risks to the Group using both a bottom-up and top-down approach. The Group considers risks arising from our macro environment and strategic and operational priorities.

The likelihood and impact of each risk is determined using a risk scoring system. Appetite is set for each risk and indicators established to determine whether the Group is operating within the risk appetite set by the Board. The Group obtains various forms of ongoing assurance over the controls in place to mitigate each of the risks identified. All risks are documented in the Group's risk register which is reviewed at least six monthly or more frequently as required, including a review of the risk indicators.

Consolidated Cash Flow Statement

for the year ended 31 December 2018

Notes to the Preliminary Consolidated Financial Statements

for the year ended 31 December 2018

1. Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ('IFRS') and interpretations issued by the IFRS Interpretations Committee (IFRS IC), as adopted in the European Union and as applied in accordance with the provisions of the Companies Act 2006. The consolidated financial statements of the Group have been prepared have been prepared on the going concern basis. On 4 March 2019 the consolidated financial statements of the Group were authorised for issue in accordance with a resolution of the Directors. The consolidated financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds ('£000') except where otherwise indicated.

2. Significant accounting policies

The financial statements have been prepared on a historical cost basis, except for derivative financial instruments which have been measured at fair value. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability. The Group uses valuation techniques which maximise the use of observable inputs and minimise the use of unobservable inputs. All assets or liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, as set out within IFRS 13.

The Group's significant accounting policies are listed below. These policies have been consistently applied to all the years presented unless otherwise stated.

New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2018:

• IFRS 9 Financial Instruments;

• IFRS 15 Revenue from Contracts with Customers;

• Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts;

• Interpretation IFRIC 22: Foreign Currency Transactions and Advance Consideration;

• Amendments to IAS 40: Transfer of Investment Property;

• Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions;

• Annual improvements to IFRS Standards 2014-2016 Cycle (certain items effective from 1 January 2017).

Except for the adoption of IFRS 9 and IFRS 15, the adoption of these standards and interpretations has not led to any changes to the Group's accounting policies or had any other material impact on the financial position or performance of the Group. Other amendments to IFRSs effective for the period ending 31 December 2018 have no impact on the Group.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 provides a single, principles based five-step model to be applied to all contracts with customers. It is based on the transfer of control of goods and services to customers and replaces the separate models for goods, services and construction contracts previously included in IAS 11 Construction Contracts and IAS 18 Revenue. The major change is the requirement to identify and assess the satisfaction of delivery of each performance obligation in contracts in order to recognise revenue.

Following an assessment of the financial impact of the changes required from the adoption of this new standard, there is no change to the Consolidated Income Statement of the Group.

The Consolidated Balance Sheet has been adjusted by the requirement to net down deferred income against trade receivables for amounts that have been invoiced but are not yet due. This balance sheet adjustment has not affected the net assets of the Group.

The Group has adopted IFRS 15 on 1 January 2018 using the 'modified' retrospective approach. As a result, the prior period balance sheet has been restated as detailed in Note 17.

IFRS 9 Financial Instruments

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

The adoption of IFRS 9 Financial Instruments from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. Refer to Trade and other receivables accounting policy below. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated. 

New standards and interpretations not yet adopted

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 reporting periods and have not been early adopted by the Group. The Group's assessment of the impact of these new standards and interpretations is set out below.

IFRS 16 Leases

IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases.

The standard will affect the accounting for the Group's operating leases. For the leases within the scope of IFRS 16 the Group expects to recognise right-of-use assets of approximately £40 million on 1 January 2019 and lease liabilities of £42 million (after adjustments for prepayments and accrued lease payments recognised as at 31 December 2018).

The Group expects that net profit before tax in 2019 will decrease by approximately £0.8 million for 2019 as a result of adopting the new standard. Adjusted EBITDA used to measure segment results is expected to increase by approximately £7.7 million, as the operating lease payments were included in EBITDA, but the amortisation of the right-of-use assets and interest on the lease liability are excluded from this measure.

The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).

There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

3. Acquisitions

AboveNation

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

AboveNation has contributed £2.0 million to revenue and £1.1 million to profit before tax for the period between the date of acquisition and the year end. If the acquisition of AboveNation had been completed on the first day of the financial year, Group revenues for the period would have been £225.4 million and Group profit before tax would have been £28.9 million.

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

The fair value of the contingent consideration payment is based on forecast average profits for the period from acquisition to 31 December 2019. The potential undiscounted range of future payments that Huntsworth plc could be required to make under the contingent consideration arrangement is between nil and $13.25 million and will be paid in cash or shares at Huntsworth's discretion. A simultaneous put/call option exists over the remaining 25% equity interest.

Acquisition related costs of £34,000 were incurred and these are included within highlighted items in the Consolidated Income Statement.

AboveNation forms part of the Marketing Operating Segment.

Giant

On 17 July 2018, the Group acquired 90.225% of the membership interests of Giant Creative Holdings, LLC (Giant). Acquisition accounting has been performed in accordance with IFRS 3 (revised) Business Combinations.

Giant has contributed £11.3 million to revenue and £2.2 million to profit before tax for the period between the date of acquisition and the year end. If the acquisition of Giant had been completed on the first day of the financial year, Group revenues for the period would have been £238.0 million and Group profit before tax would have been £30.7 million.

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

A simultaneous put/call option exists over the remaining 9.775% equity interest.

Acquisition related costs of £655,000 were incurred and these are included within highlighted items in the Consolidated Income Statement.

Giant forms part of the Marketing Operating Segment.

Navience

On 27 September 2018, the Group acquired 80% of the membership interests of Navience Healthcare Solutions, LLC (Navience). Acquisition accounting has been performed in accordance with IFRS 3 (revised) Business Combinations.

Navience has contributed £0.9 million to revenue and £0.2 million to profit before tax for the period between the date of acquisition and the year end. If the acquisition of Navience had been completed on the first day of the financial year, Group revenues for the period would have been £231.1 million and Group profit before tax would have been £33.2 million.

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

The fair value of the contingent consideration payment is based on forecast average profits for the period from acquisition to 31 December 2019. The potential undiscounted range of future payments that Huntsworth plc could be required to make under the contingent consideration arrangement is between nil and $16.0 million and will be paid in cash or shares at Huntsworth's discretion. A simultaneous put/call option exists over the remaining 20% equity interest.

Acquisition related costs of £121,000 were incurred and these are included within highlighted items in the Consolidated Income Statement.

Navience forms part of the Marketing Operating Segment.

4. 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.

Details of the types of services from which each segment derives its revenues are included within the Strategic Report. The accounting policies applied in preparing the management information for each of the reportable segments are the same as the Group's accounting policies described in Note 2.

5. Highlighted items

Highlighted items charged/(credited) to profit for the year comprise significant non-cash charges and non-recurring items.

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.

Acquisition and transaction related costs

In 2018 and 2017, 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 credit

This represents profit on past disposals of subsidiaries in 2017, including adjustments for deferred consideration receivable and recycled foreign currency translation reserves. These credits 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.

6. Finance costs and income

7. Taxation

8. Dividends

The total dividend includes a cash element of £5.9 million (2017: £4.9 million) and a scrip element of £1.1 million (2017: £0.9 million). Shareholdings under the Group's Employee Benefit Trust of 1,568,788 and 1,818,788 shares waived their rights to the 2017 final and 2018 interim dividends respectively (2017: 2,379,181 shares waived their rights to the 2016 final and 2017 interim dividend).

A 2018 final dividend of 1.6p per share has been proposed for approval at the Annual General Meeting in 2019.

9. Earnings per share

The basic earnings per share calculation is based on the profit for the year attributable to the Parent Company's shareholders divided by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share takes the basic earnings per share and adjusts for the potentially dilutive impact of employee share option schemes and shares to be issued as part of contingent consideration on acquisitions of subsidiaries.

Adjusted earnings per share is calculated in order to provide information to shareholders about underlying trading performance and is based on the profit attributable to the Parent Company's shareholders excluding highlighted items.

10. Intangible assets

No CGUs were considered impaired at 31 December 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.

Fair values of 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.

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.

· Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

· Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Valuation techniques used to derive Level 2 fair values

Level 2 derivatives comprise interest rate swaps. Interest rate swaps are fair valued using forward interest rates extracted from observable yield curves.

Valuation techniques used to derive Level 3 fair values

Deferred contingent consideration liabilities are valued using a discounted cash flow methodology. The liability is based on the acquired business' forecast average profits for the period from the date of acquisition to 31 December 2018. The significant unobservable inputs to this valuation include forecast average profits and the discount rate of 2.86% to 2.87%.

12. Provisions

Redemption liability for acquisitions

Certain acquisitions made by the Group include a put/call option to purchase the non-controlling interests' equity share at a future date, payable in either cash or a combination of cash and shares at the Company's option, which is contingent on the future financial performance of the acquired entity. The amount utilised in the year represents the cash paid or shares issued under the earn-out arrangements. The amount arising or released in the year represents a change in the estimated future financial performance of the acquired company.

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, which is contingent on the future financial performance of the acquired entity. The amount utilised in the year represents the cash paid or shares issued under the earn-out arrangements. The amount arising or released in the year represents a change in the estimated future financial performance of the acquired company. Where deferred consideration is not contingent on the outcome of future events the amount was included in trade and other payables.

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 sub-let 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 provisions and contingent liabilities arising on acquisitions.

13. Cash flow analysis

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