The Mission Group Regulatory News (TMG)

Results for the year ended 31 December 2018

and Board changes

9 April 2019

The Mission Marketing Group plc ("themission", "the Company" or "the Group", AIM: TMMG), the technology-embraced marketing communications and advertising group, is pleased to announce its audited results for the year ended 31 December 2018.

Total Group

· Revenue up 13% to £78.8m (2017: £70.0m)

· Headline operating margins improved to 12.6% (2017: 11.7%)

· Headline profit before tax up 22% to £9.5m (2017: £7.7m)

· Profit on sale of BroadCare of £3.0m

· Reported profit before tax £11.0m (2017: £5.8m)

· Reported diluted EPS 10.63 pence (2017: 5.15 pence)

· Headline diluted EPS up by 22% to 8.68 pence (2017: 7.12 pence)

· Full year dividend up by 24% to 2.1p (2017: 1.7p)· Bank debt reduced to £4.0m (2017: £7.2m)· Bank debt leverage ratio reduced to x0.4 (2017: x0.8)

Continuing operations**

· Revenue up 13% to £77.6m (2017: £68.6m)

· Headline operating margins improved to 12.2% (2017: 11.2%)

· Headline profit before tax up 25% to £9.0m (2017: £7.2m)

· Reported profit before tax £7.5m (2017: £5.3m)

· Headline diluted EPS up 24% to 8.23 pence (2107: 6.64 pence)

· 2019 started well

Headline measures are defined as being before the profit/loss on investments, exceptional items, acquisition-related items and start-up losses.

** Continuing operations exclude the results of BroadCare, sold on 12 November 2018

David Morgan, Chairman, commented: "We have increased our revenues and profit for the eighth year running and seen our bank debt tumble whilst continuing to increase the reward to our shareholders. There's an energy within the Group that gives me the confidence to believe that 2019 will see this momentum continue."

Enquiries:

the mission is a network of entrepreneurial marketing communications Agencies employing over 1,000 people in the UK, Asia and US, working together to provide Clients with the expertise and resource to make them more successful in today's dynamic environment.

www.themission.co.uk

Chairman's Statement

QUAQUAVERSATILITY: it's what it's all about.

Our industry is all about people; understanding what makes them tick, supporting their aspirations and, above all, instilling in them a passion to succeed and a passion to perform for their Clients, their Agency and themission.

I genuinely believe that today we have a group of people at the top of their game, delivering great ideas and practical solutions to complex marketing issues across every discipline. An average day in themission may see a film crew on a remote Scottish island, a build crew delivering a show home and branding for a major property development in London, a complex market assessment for a leading global pharmaceutical company, an exhibition in the far corners of Asia or simply a team managing a sponsorship programme bringing the NFL to London.

In truth, there's no such thing as an average day.

So, it's these people we have to thank for another great year in themission. For the eighth year running we have grown organically, increased our revenues and profit significantly and, as a result, seen our bank debt tumble whilst continuing to increase the reward to our shareholders.

2018 was a strong year and these are just some of the highlights:

· Winning global pitches with some great companies such as Amazon, HP, Petro-Canada Lubricants, closer to home wins from Lindt and Muller and new assignments from Diomed, Barclays and Aviva. Many through multi-Agency participation.

· The acquisition of the top twenty London Agency krow who are already becoming pivotal in our strategy to deliver multi-centre teams and support across our network.

· Industry awards that included a Gold Effectiveness Award for krow with their Client DFS.

· Focus on technology through our fuse initiative which is seeing our Pathfindr asset management system grow dramatically through global contracts with Rolls-Royce, MTU Friedrichshafen GmbH and GKN Aerospace. Pathfindr generated sales of £0.5m in 2018 (2017: minimal) and we estimate sales of £2m in 2019, underpinned by a strong order book.

· Divestment of our NHS Broadcare Software System for £4.4m to CHS Health.

· Extending our global reach through Client demand by opening in Chicago and Beijing to extend our number of offices to 28, of which 8 are now outside the UK. All sharing the same culture of cooperation, creativity and commitment.

· Partnerships with innovative organisations including specialists in understanding generational differences and prosopography.

· Continued focus on our operational costs through our Shared Services initiative which is gaining real traction.

Where I am especially pleased is how, through multi-offices but a shared vision and cooperation, our quaquaversal culture works so well for those Clients that value truly integrated campaigns that break boundaries and make the parts and the sum work equally well.

Looking to the next phase of the Group's development, we need to continue to build on our collaborative approach and develop themission brand as a real alternative to the global groups. To achieve this, our structure needs to adapt without forfeiting our entrepreneurial ethos. Foremost among these changes is the establishment of a full time Group CEO and I am delighted to announce the promotion of bigdog CEO James Clifton into this position with immediate effect.

The Group has come a long way since I took on the role of Executive Chairman nine years ago and there's an energy within the Group that gives me the confidence to believe that 2019 will see this momentum continue. Early as it is, 2019 has already started well and we are confident that we will deliver again against our strategy to be the most regarded UK-centric Agency Group that goes wherever in the world our Clients want us to be without losing that individual Agency entrepreneurship that has made us what we are today.

David Morgan

Chairman

Financial Review

Summary

2018 saw all financial key performance indicators again met: for the total Group, revenue grew by 13%, operating margins improved from 11.7% to 12.6%, headline profit before tax increased by 22% and debt leverage ratios remained comfortably within the Board's limits.

From continuing operations, revenue grew by 13%, operating margins improved from 11.2% to 12.2% and headline profit before tax increased by 25%.

Key Performance Indicators

The Group manages its internal operational performance and capital management by monitoring various key performance indicators ("KPIs''). The KPIs are tailored to the level at which they are used and their purpose. The Board has reviewed and refined its financial KPIs, which are quantified and commented on in the Financial Review of the Year below, as follows:

· operating income ("revenue"), which the Group aims to grow by at least 5% per year;

· headline operating profit margins, which the Group is targeting to increase from 11.5% in 2016 to 14% by 2021;

· headline profit before tax, which the Group aims to increase by 10% year-on-year; and

· indebtedness, where the Group has reduced its limit of the ratio of net bank debt to EBITDA* to x1.5 (from x2.0) and the ratio of total debt (including both bank debt and deferred acquisition consideration) to EBITDA to x2.0 (from x2.5).

*EBITDA is headline operating profit before depreciation and amortisation charges.

In addition to financial KPIs, the Board periodically monitors the length of Client relationships, the forward visibility of revenue and the retention of key staff.

Trading Performance

Billings and revenue

Turnover (billings) was 10% higher than the previous year, at £161.4m (2017: £146.0m), but since billings include pass-through costs (e.g. TV companies' charges for buying air-time), the Board does not consider turnover to be a key performance measure. Instead, the Board views operating income (turnover less third-party costs) as a more meaningful measure of Agency activity levels.

Operating income (referred to as "revenue") increased 13% overall to £78.8m (2017: £70.0m), continuing our track record of consistent revenue growth.

5% of this growth came from our core business, with a further 8% coming from the acquisition of Krow Communications Limited ("krow") in April. Within our core business, Media revenue reduced as we exited a "white-labelling" media-buying contract, but this was more than offset by growth elsewhere, including from our Exhibitions business, which benefitted from the contract with the Department for International Trade won towards to the end of 2017.

Profit and margins

The Directors measure and report the Group's performance primarily by reference to headline results in order to avoid the distortions created by one-off events and non-cash accounting adjustments relating to acquisitions. Headline results are calculated before the profit/loss on investments, exceptional items, acquisition adjustments and losses from start-up activities (as set out in Note 3).

Headline operating profit improved by 21% to £9.9m (2017: £8.2m). This result reflects growth of 10% from our core business and a further 11% from the acquisition of krow. Our profit margin for the year (headline operating profit as a percentage of revenue) showed a marked improvement, to 12.6% (2017: 11.7%). This was the result of several factors, including improved staff cost ratios and the benefits accruing from our Shared Services initiative, commenced in the summer of 2017 but formally implemented from the beginning of 2018. This initiative brings accounting, HR, IT, and facilities management under central control in order both to identify opportunities for efficiency improvements and cost savings and to free up our Agencies to concentrate on revenue generation and resource levels. One notable success during 2018 was the virtually unchanged HR and recruitment costs despite the significant increase in levels of activity.

Looking to the future, we need to be mindful of the impact of the sale of our BroadCare software business, which consistently achieved high profit margins. Excluding BroadCare, our operating profit margin in 2018 was 12.2% (2017: 11.2%). We expect margins to improve further in 2019 but progress will be more modest following the sale of BroadCare and we now expect our profit margin target of 14% to be achieved one year later, in 2021.

The bias of profitability towards the second half of the year as a consequence of Clients' spending patterns moderated slightly in 2018, but 62% (2017: 65%) of our operating profit was again generated in this period and we expect this bias to remain a feature of our results in future years.

After financing costs which were unchanged at £0.5m, headline profit before tax increased by 22% to £9.5m (2016: £7.7m).

The sale of BroadCare resulted in a profit of £3.0m, which has been disclosed as a headline adjustment. In addition, we have written down our investment in Watchable, which has struggled to make headway in the London video production market, resulting in an impairment of £0.3m. Other adjustments to reported profits, detailed further in Note 3, totalled £1.1m (2017: £1.9m), comprising acquisition-related items of £1.0m (2017: £0.8m) and losses from start-up activities totaling £0.1m, reduced from £0.4m in 2017. In 2017 we also reported restructuring costs categorised as exceptional items totaling £0.6m. After these adjustments, reported profit before tax was £11.0m (2017: £5.8m).

Taxation

The Group's headline tax rate increased slightly, to 20.5% (2017: 20.0%). Consistent with previous years, the rate was above the statutory rate, mainly as a result of non-deductible entertaining expenditure.

On a reported basis, the Group's tax rate was 16.4% (2017: 22.9%). The tax rate is expected to be consistently higher than the statutory rate (of 19.0% in 2018, slightly reduced from 19.25% in 2017) since the amortisation of acquisition-related intangibles is not deductible for tax purposes but, in 2018, the tax rate was significantly reduced by the tax-free profit on the sale of BroadCare. Excluding the BroadCare sale, the reported rate was 22.5%.

Earnings Per Share

Headline EPS increased by 21% to 8.90 pence (2017: 7.34 pence) and, on a diluted basis, increased by 22% to 8.68 pence (2017: 7.12 pence).

After tax, reported profit for the year was £9.2m (2017: £4.5m) and EPS was 10.89 pence (2017: 5.31 pence). On a diluted basis, EPS was 10.63 pence (2017: 5.15 pence).

Continuing operations

The Consolidated Income Statement separately discloses our trading results from continuing operations and BroadCare, now a discontinued operation. The key components of our continuing operations are: revenue of £77.6m, up 13% from 2017; headline operating profit of £9.5m, up 23%; and operating profit margins of 12.2%, up from 11.2% in 2017. Headline profit before tax from continuing operations in 2018 was £9.0m (2017: £7.2m), up 25% from 2017, and diluted EPS was 8.23 pence, up 24%.

Dividends

The Board adopts a progressive dividend policy, aiming to grow dividends each year in line with earnings but always balancing the desire to reward shareholders via dividends with the need to fund the Group's growth ambitions and maintain a strong balance sheet. The Board recommends a final dividend of 1.4 pence per share, bringing the total for the year to 2.1 pence per share, representing an increase of 24% over 2017. The final dividend will be payable on 22 July 2019 to shareholders on the register at 12 July 2019. The corresponding ex-dividend date is 11 July 2019. The Board will continue to keep under regular review the best use of the Group's cash resources, but it remains the Board's intention to follow a progressive policy provided trading conditions allow.

Balance Sheet

In common with other marketing communications groups, the main features of our balance sheet are the goodwill and other intangible assets resulting from acquisitions made over the years, and the debt taken on in connection with those acquisitions.

The level of intangible assets relating to acquisitions increased by £8.2m during the year as a result of the acquisition of krow in April. In contrast, the level of total debt (combined bank debt and acquisition obligations) increased by only £1.3m.

The Board undertakes an annual assessment of the value of all goodwill, explained further in Note 11, and at 31 December 2018 again concluded that no impairment in the carrying value was required.

The Group's acquisition obligations at the end of 2018 were £11.8m (2017: £7.2m), to be satisfied by a mix of cash and shares. Virtually all of this is dependent on post-acquisition earn-out profits, the majority to the end of 2020. £2.7m is expected to fall due for payment in cash within 12 months and a further £2.1m in cash in the subsequent 12 months. The Directors believe that the strength of the Group's cash generation can comfortably accommodate these obligations alongside the Group's commitments to capital expenditure and dividend payments.

Cash Flow

As expected, the Group's cash flow during 2018 was impacted by some unwinding of the exceptional working capital movements at the end of 2017. Headline profit after tax of £7.5m (2017: £6.2m) converted into £5.6m (2017: £9.0m) of "free cash flow" (defined as net cash inflow from operating activities less tangible capital expenditure).

This free cash flow funded new acquisitions, amounting to £2.4m (2017: £1.3m), the settlement of contingent consideration obligations relating to the profits generated by previous acquisitions, totaling £1.7m (2017: £1.7m), and dividends of £1.7m (2017: £1.3m). In addition, the sale of BroadCare resulted in a net cash inflow of £3.5m.

At the end of the year, the Group's net bank debt stood at £4.0m (2017: £7.2m). The reduction in debt resulted in the leverage ratio of net bank debt to headline EBITDA reducing to below x0.5 at 31 December 2018 (2017: x0.8), triggering a further reduction in the Group's borrowing costs of 0.25%. The Group's ratio of total debt, including remaining acquisition obligations, to EBITDA at 31 December 2018 (calculated by reference to the amount of consideration which would be payable if the acquired business were to maintain its current level of profitability) fell to x1.1 (2017: x1.4).

In view of the currently heightened levels of both economic and political uncertainty, the Board has decided to reduce each of its debt-related KPI targets by x0.5. The revised limits for net bank debt leverage and total debt leverage are now x1.5 and x2.0 respectively.

Outlook

We expect 2019 to be another year of growth. The year has started well and prospects for organic growth remain good. We also expect to make further margin improvements and to continue the rapid growth of Pathfindr. We look forward to 2019 with confidence.

Peter Fitzwilliam

Finance Director

Consolidated Income Statement

For the year ended 31 December 2018

* Prior year figures have been restated for the impact of the adoption of IFRS 15: Revenue from Contracts with Customers, as described in Note 1.Consolidated Statement of Comprehensive Income

For the year ended 31 December 2018

Consolidated Balance Sheet

As at 31 December 2018

Consolidated Cash Flow Statement

for the year ended 31 December 2018

Consolidated Statement of Changes in Equity for the year ended 31 December 2018

Notes to the Consolidated Financial Statements

1. Principal Accounting Policies

Basis of preparation

The results for the year to 31 December 2018 have been extracted from the audited consolidated financial statements, which are expected to be published by 23 April 2019.

The financial information set out above does not constitute the Company's statutory accounts for the years to 31 December 2018 or 2017 but is derived from those accounts. Statutory accounts for the year ended 31 December 2017 were delivered to the Registrar of Companies following the Annual General Meeting on 18 June 2018 and the statutory accounts for 2018 are expected to be published on the Group's website (www.themission.co.uk) shortly, posted to shareholders at least 21 days ahead of the Annual General Meeting ("AGM") on 17 June 2019 and, after approval at the AGM, delivered to the Registrar of Companies.

The auditors, PKF Francis Clark, have reported on the accounts for the years ended 31 December 2018 and 31 December 2017; their reports in both years were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006 in respect of those accounts.

The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union and the Companies Act 2006.

Basis of consolidation

The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Turnover and revenue recognition policy

The Group's operating subsidiaries carry out a range of different activities. The following policies apply consistently across subsidiaries.

Revenue is recognised when a performance obligation is satisfied, in accordance with the terms of the contractual arrangement. Where there are contracts with a variety of performance obligations that are distinct, an element of the transaction price is allocated to each performance obligation and recognised as revenue as and when that performance obligation is satisfied. Revenue is allocated to each of the performance obligations based on relative standalone selling prices. Typically, performance obligations are satisfied over time as services are rendered. The nature of the work is almost always such that it relates to facts and circumstances that are specific to the Client, with the result that the work performed does not create an asset with alternative use to the Group. Therefore, in accordance with IFRS 15, even if the Client will receive the benefits of the Group's performance only when the Client receives the piece of work, the performance obligation is regarded as being satisfied over time. The Group is generally entitled to payment for work performed to date.

Contracts are typically short-term in nature and do not include any significant financing components. The Group is generally paid in arrears for its services and invoices are typically payable within 30 to 60 days.

Where performance obligations have been satisfied and the recorded turnover exceeds amounts invoiced to Clients, the excess is classified as accrued income (within Trade and other receivables). Accrued income is a contract asset and is transferred to trade receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Where amounts invoiced to Clients exceed recorded turnover, because performance obligations have not yet been satisfied, the excess is classified as deferred income (within Trade and other payables). These balances are considered contract liabilities.

The Group has applied the practical expedient permitted by IFRS 15 to not disclose the transaction price allocated to performance obligations unsatisfied or partially unsatisfied as of the end of the reporting period as contracts typically have an original expected duration of a year or less.

The amount of revenue recognised depends on whether the Group acts as principal or agent. Third party costs are included in revenue when the Group acts as principal with respect to the goods or services provided to the Client and are excluded when the Group acts as agent, by reference to whether or not the Group controls the relevant good or service before it is transferred to the Client.

The Group has not recognised any significant costs incurred to obtain or fulfil a Client contract as assets on the balance sheet. Costs to obtain a contract are typically expensed as incurred as the contracts are generally short term in nature.

Turnover represents fees, commissions, rechargeable expenses and sales of materials performed subject to specific contracts.

Further details on revenue recognition are detailed by activity below:

(i) Advertising and ad hoc marketing campaigns

This typically involves fees for strategic planning and creative concepts through to execution and delivery of final campaigns. Revenue may consist of various arrangements, but typically comprises retainer fees or fixed price contracts, both of which are recognised over time. Retainer fees are recognised on a straight-line basis over the term of the contract. For fixed price contracts, revenue is recognised based on the actual service provided to the end of the reporting period as a proportion of the total services to be provided. This is typically determined based on third party costs incurred to date and actual labour hours devoted to date relative to the total expected costs and labour hours.

(ii) Website, portal or application design and build (Digital)

The Group derives revenue from designing and building websites, portals and applications under fixed price contracts. Revenue is typically recognised over time, determined by applying the hours devoted to date as a percentage of total hours expected.

(iii) Software development (Digital)

This revenue stream involves the supply of software licences and aftersales support. If billed as a single fixed price fee, each of these services is accounted for as a separate performance obligation, the transaction price allocated to each being determined by the labour hours and cost required to supply each service. Revenue attributable to the provision of the software is recognised at a point in time when the software licence is made available for use by the Client. Revenue attributable to the aftersales support is recognised monthly on a straight-line basis over the period support is to be provided. In some cases, the contract might also cover the provision of data migration and training services, but each of these is separately billed, the revenue being recognised over time, determined by applying the hours devoted to date as a percentage of total hours expected.

(iv) Media buying

Revenue is derived from identifying the Client's media requirements and managing and placing orders for the appropriate media. Revenue is typically recognised at the point in time the media is aired or on the date of publication.

(v) Exhibitions, events and conferences

Revenue is derived from the design, planning and supply of exhibition stands, events and conferences. Revenue is typically recognised over time based on third party costs incurred to date and actual labour hours devoted to date relative to the total expected costs and labour hours.

(vi) Learning and training

Revenue is in the form of fixed price fees from planning and designing training courses and from performing training courses. Specific training is recognised at a point in time on the date the training takes place. If the service provided includes planning and designing the training course and material, then revenue would be attributed to this performance obligation and recognised over time based on third party costs incurred to date and actual labour hours devoted to date relative to the total expected costs and labour hours.

(vii) Public Relations

PR revenue is typically derived from retainer fees and fixed price fees for services to be performed subject to specific agreement. Revenue under these arrangements is earned over time, in accordance with the terms of the contractual arrangement. Retainer fee revenue is recognised on a straight-line basis over the period covered by the fee. For ad hoc fixed price projects the Group generally applies the hours devoted to date as a percentage of total hours as the basis for recognising revenue.

Goodwill and other intangible assets

Goodwill

Goodwill arising from the purchase of subsidiary undertakings and trade acquisitions represents the excess of the total cost of acquisition over the Group's interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary acquired. The total cost of acquisition represents both the unconditional payments made in cash and shares on acquisition and an estimate of future contingent consideration payments to vendors in respect of earn-outs.

Goodwill is not amortised, but is reviewed annually for impairment. Goodwill impairment is assessed by comparing the carrying value of goodwill for each cash-generating unit to the future cash flows, discounted to their net present value using an appropriate discount rate, derived from the relevant underlying assets. Where the net present value of future cash flows is below the carrying value of goodwill, an impairment adjustment is recognised in profit or loss and is not subsequently reversed.

Other intangible assets

Costs associated with the development of identifiable software products where it is probable that the economic benefits will exceed the costs of development are recognised as intangible assets. These assets are carried at cost less accumulated amortisation and are amortised over periods of between 3 and 5 years. Amortisation of software development costs is included within operating expenses.

Other intangible assets separately identified as part of an acquisition are amortised over periods of between 3 and 10 years, except certain brand names which are considered to have an indefinite useful life. The value of such brand names is not amortised, but rather an annual impairment test is applied and any shortfall in the present value of future cash flows derived from the brand name versus the carrying value is recognised in profit and loss. Amortisation and impairment charges are excluded from headline profit.

Contingent consideration payments

The Directors manage the financial risk associated with making business acquisitions by structuring the terms of the acquisition, wherever possible, to include an element of the total consideration payable for the business which is contingent on its future profitability (ie earn-out). Contingent consideration is initially recognised at its estimated fair value based on a reasonable estimate of the amounts expected to be paid. Changes in the fair value of the contingent consideration that arise from additional information obtained during the first twelve months from the acquisition date, about facts and circumstances that existed at the acquisition date, are adjusted retrospectively, with corresponding adjustments against goodwill. The fair value of contingent consideration is reviewed annually and subsequent changes in the fair value are recognised in profit or loss, but excluded from headline profits. 

Accounting estimates and judgements

The Group makes estimates and judgements concerning the future and the resulting estimates may, by definition, vary from the actual results. The Directors considered the critical accounting estimates and judgements used in the financial statements and concluded that the main areas of judgement are, in order of significance:

Potential impairment of goodwill

The potential impairment of goodwill is based on estimates of future cash flows derived from the financial projections of each cash-generating unit over an initial three year period and assumptions about growth thereafter, discussed in more detail in Note 11.

Contingent payments in respect of acquisitions

Contingent consideration, by definition, depends on uncertain future events. At the time of purchasing a business, the Directors use the financial projections obtained during due diligence as the basis for estimating contingent consideration. Subsequent estimates benefit from the greater insight gained in the post-acquisition period and the business' track record of financial performance.

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

Estimates of revenue to be recognised on contracts which straddle the year end are typically based on the amount of time so far committed to those contracts compared to the total estimated time to complete them.

Valuation of intangible assets on acquisitions

Determining the separate components of intangible assets acquired on acquisitions is a matter of judgement exercised by the Directors. Brand names, customer relationships and intellectual property rights are the most frequently identified intangible assets. When considering the valuation of intangible assets on acquisitions, a range of methods is undertaken both for identifying intangibles and placing valuations on them. The valuation of each element is assessed by reference to commonly used techniques, such as "relief from royalty" and "excess earnings" and to industry leaders and competitors. Estimating the length of Client retention is the principal uncertainty and draws on historic experience.

Share-based payment transactions

Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the number of shares that will eventually vest.

The fair value of nil-cost share options is measured by use of a Black Scholes model on the grounds that there are no market-related vesting conditions. The fair value of Growth Shares is measured by use of a Monte Carlo simulation model on the grounds that they are subject to market-based conditions (the future share price of the Company).

Foreign currencies

Assets and liabilities in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies arising from normal trading activities are translated into sterling at the rate of exchange ruling at the date of the transaction. Exchange differences are reflected in the profit or loss accordingly.

The income statements of overseas subsidiary undertakings are translated at average exchange rates and the year-end net assets of these companies are translated at year-end exchange rates. Exchange differences arising from retranslation of the opening net assets are reported in the Consolidated Statement of Comprehensive Income.

New standards, interpretations and amendments to existing standards

Impact of the adoption of IFRS 9: Financial Instruments

The Group adopted IFRS 9 with effect from 1 January 2018. Due to the short term nature of the Group's trade receivables, the credit ratings of the Group's Clients, and credit insurance on certain trade receivables, the requirement under IFRS 9 to use an expected loss method of impairment of financial assets has not had a material effect on the Group's financial statements.

Impact of the adoption of IFRS 15: Revenue from Contracts with Customers

The Group adopted IFRS 15 with effect from 1 January 2018. The new standard establishes a five step model where consideration received or expected to be received is recognised as revenue when contractual performance obligations are satisfied. Adopting IFRS 15 has not had a material impact on the amounts or timing of the Group's revenue recognition. However, for a small proportion of media buying activity, the Group is viewed as an agent because the Group does not have control of the relevant services before they are transferred to the Client. Third party costs are deducted from turnover when the Group acts as agent. As a result, turnover decreases by the amount of these third party costs and there is a corresponding decrease in costs. The operating profit remains unchanged.

In accordance with the transition provisions in IFRS 15, the Group has adopted the new standard retrospectively and has restated comparatives. The following table summarises the impact of adopting IFRS 15 on the Group's consolidated income statement for the year ended 31 December 2017.

Impact of the adoption of IFRS 16: Leases

IFRS 16: Leases will apply to the Group's 2019 financial statements. IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting and are replaced by a model where a right-of-use asset and corresponding liability have to be recognised for all leases (i.e. all on balance sheet) except for short term leases and leases of low value assets.

The right-of-use asset is initially measured at cost and subsequently at cost less accumulated depreciation, adjusted for any re-measurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications.

As at 31 December 2018, the Group had non-cancellable operating lease commitments of £7.1m. A preliminary assessment of IFRS 16 indicates that the Group will recognise a right-of-use asset and corresponding liability in respect of a large majority of these leases and that fixed assets and liabilities will accordingly increase by this order of magnitude as a consequence of the adoption of IFRS 16. The impact on the consolidated income statement is not expected to be material as the required adjustment will predominantly involve a reclassification between operating lease expense and depreciation, both of which are included in operating costs. There is expected to be a small increase in operating profit as an element of the lease-related expense is reclassified from operating expenses to interest costs. Interest costs are expected to increase by a similar amount, resulting in a largely unchanged profit before tax.

The classification of cash flows will be affected by the adoption of IFRS 16 because operating lease payments under IAS 17 are presented as operating cash flows, whereas in future lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

The Directors will complete a detailed assessment of the impact of adopting IFRS 16. No decision has been made about whether to use any of the transitional provisions.

2. Segmental Information

IFRS 15: Revenue from Contracts with Customers requires the disaggregation of revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Board has considered how the Group's revenue might be disaggregated in order to meet the requirements of IFRS 15 and has concluded that the activity and geographical segmentation disclosures set out below represent the most appropriate categories of disaggregation. The Board considers that neither differences between types of Clients, sales channels and markets nor differences between contract duration and the timing of transfer of goods or services are sufficiently significant to require further disaggregation.

For management purposes the Group monitored the performance of fifteen operating units during the year, each of which carries out a range of activities. The performance of these businesses is managed and monitored as a whole by the Board as a single business segment - marketing communications. However, since different activities have different revenue characteristics, the Group's turnover and operating income has been disaggregated below to provide additional benefit to readers of these financial statements.

In previous years, the profitability by activity has been disclosed. However, following the implementation of a Shared Services function from the start of 2018 and the resulting transfer of certain Agency-specific contracts onto centrally-managed arrangements, a significant portion of the total operating costs are now centrally managed and segment information is therefore now only presented down to the operating income level.

As contracts typically have an original expected duration of less than one year, the full amount of the deferred income balance at the beginning of the year is released to revenue during the year. All Media buying turnover is recognised at a point in time. Virtually all other turnover from continuing operations is recognised over time.

Assets and liabilities are not split between activities.

Geographical segmentation

The following table provides an analysis of the Group's revenue by region of activity:

3. Reconciliation of Headline Profit to Reported Profit

The Board believes that headline profits, which eliminate certain amounts from the reported figures, provide a better understanding of the underlying trading of the Group. The adjustments to reported profits generally fall into three categories: exceptional items, acquisition-related items and start-up costs. In 2018, the profit/loss on investments (respectively, from the sale of BroadCare and the impairment of Watchable) has also been excluded.

Start-up costs derive from organically started businesses and comprise the trading losses of such entities until the earlier of two years from commencement or when they show evidence of becoming sustainably profitable. Start-up costs in 2018 relate to the launch of April Six's new venture in China, and trading losses at Mongoose Promotions. Start-up costs in 2017 related to the launches of fuse and Mongoose Promotions.

4. Exceptional Items

Exceptional items represent revenue or costs that, either by their size or nature, require separate disclosure in order to give a fuller understanding of the Group's financial performance.

Exceptional costs in 2017 comprised settlement costs to a former Director and also amounts payable for loss of office and other costs incurred relating to the restructuring of certain operations in order to streamline activities and underpin the Board's growth expectations.

5. Acquisition Adjustments

The movement in fair value of contingent consideration relates to a net downward (2017: upward) revision in the estimate payable to vendors of businesses acquired in prior years. Acquisition transaction costs relate to professional fees in connection with acquisitions made or contemplated.

6. Net Finance Costs

7. Profit before Taxation

Profit on ordinary activities before taxation is stated after charging / (crediting):

8. Taxation

Factors Affecting the Tax Charge for the Current Year:

The tax assessed for the year is lower (2017: higher) than the standard rate of corporation tax in the UK. The differences are:

9. Dividends

A final dividend of 1.4 pence per share is to be paid in July 2019 should it be approved by shareholders at the AGM. In accordance with IFRS this final dividend will be recognised in the 2019 accounts.

10. Earnings Per Share

The calculation of the basic and diluted earnings per share is based on the following data, determined in accordance with the provisions of IAS 33: Earnings per Share.

Basic earnings per share includes shares to be issued subject only to time as if they had been issued at the beginning of the period.

A reconciliation of the profit after tax on a reported basis and the headline basis is given in Note 3.

11. Intangible Assets

In accordance with the Group's accounting policies, an annual impairment test is applied to the carrying value of goodwill. The review performed assesses whether the carrying value of goodwill is supported by the net present value of projected cash flows derived from the underlying assets for each cash-generating unit ("CGU"). For all CGUs, the Directors assessed the sensitivity of the impairment test results to changes in key assumptions (in particular expectations of future growth) and concluded that a reasonably possible change to the key assumptions would not cause the carrying value of goodwill to exceed the net present value of its projected cash flows.

Other intangible assets

Additions of £377,000 (2017: £341,000) in the year include costs associated with the development of identifiable software products that are expected to generate economic benefits in excess of the costs of development.

Intangible assets include an amount of £692,000 relating to the krow trade name, which has attained recognition in the marketplace and plays a role in attracting and retaining clients. This value will be amortised over the next 9 years. Also included is an amount of £1,650,000 relating to krow customer relationships. krow has developed a base of customers to whom the Group would expect to continue selling in the future. The remaining useful life of these customer relationships is deemed to by 5 years and the value will be amortised over this period.

12. Investments in Associates

The investment in associates represents a 25% shareholding in Watchable Limited, a film and video content company, based in London. The activities of Watchable have substantially ceased and as a consequence the value of the Group's interest has been written down to zero as at 31 December.

13. Trade and Other Receivables

An allowance has been made for estimated irrecoverable amounts from the provision of services of £62,000 (2017: £193,000). The estimated irrecoverable amount is arrived at by considering the historic loss rate and adjusting for current expectations, Client base and economic conditions. Both historic losses and expected future losses being very low, the Directors consider it appropriate to apply a single average rate for expected credit losses to the overall population of trade receivables and accrued income. Accrued income relates to unbilled work in progress and has substantially the same risk characteristics as the trade receivables for the same types of contracts. The difference between the incurred loss method applied in the 2017 annual report and the new lifetime expected loss rate method under IFRS 9 is considered immaterial and comparatives have not been restated. The Directors consider that the carrying amount of trade and other receivables approximates their fair value.

Accrued income has increased by £2,234,000 partly as a result on the acquisition of krow (see note 16.2) and partly because of an increase in overall contract activity.

14. Trade and Other Payables

Deferred income has increased by £1,890,000 as a result of the acquisition of krow (see note 16.2).

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

15. Bank Overdrafts, Loans and Net Debt

Bank debt arrangement fees, where they can be amortised over the life of the loan facility, are included in finance costs. The unamortised portion is reported as a reduction in bank loans outstanding.

On 14 September 2018, the Group signed a new 3 year revolving credit facility of £15.0m, expiring on 28 September 2021, with an option to extend the facility by a further £5.0m and an option to extend by 1 year. Interest on the previous facilities was based on LIBOR plus a margin of between 1.75% and 2.75% depending on the Group's debt leverage ratio, payable in cash on loan rollover dates. Interest rate margins on the new facilities are again based on the Group's debt leverage ratio and range from 1.25% to 2.00%.

In addition to its committed facilities, the Group has available an overdraft facility of up to £3.0m with interest payable by reference to National Westminster Bank plc Base Rate plus 2.25%.

At 31 December 2018, there was a cross guarantee structure in place with the Group's bankers by means of a fixed and floating charge over all of the assets of the Group companies in favour of Royal Bank of Scotland plc.

All borrowings are in sterling.

16. Acquisitions and Disposals

16.1 Acquisition Obligations

The terms of an acquisition provide that the value of the purchase consideration, which may be payable in cash or shares at a future date, depends on uncertain future events such as the future performance of the acquired company. The Directors estimate that the liability for contingent consideration payments is as follows:

16.2 Acquisition of Krow Communications Ltd

On 10 April 2018, the Group acquired the entire issued share capital of Krow Communications Ltd ("krow"), an award-winning creative agency based in London. The fair value of the consideration given for the acquisition was £9,357,000, comprising initial cash consideration and deferred contingent cash and share consideration. Costs relating to the acquisition amounted to £141,000 and were expensed.

Maximum contingent consideration of £11,750,000 is dependent on krow achieving a profit target over the period 1 January 2018 to 31 December 2020. The Group has provided for contingent consideration of £6,367,000 to date.

The fair value of the net identifiable assets acquired was £608,000 resulting in goodwill and other intangible assets of £9,197,000 and a deferred tax liability on the other intangible assets of £448,000. Goodwill arises on consolidation and is not tax-deductible. Management carried out a review to assess whether any other intangible assets were acquired as part of the transaction. Management concluded that both a brand name and customer relationships were acquired and attributed a value to each of these by applying commonly accepted valuation methodologies. The goodwill arising on the acquisition is attributable to the anticipated profitability of krow.