Share price: 162.00p


17th May 2009

Solid performance in 2008 continues into 2009 Cello Group plc, the market research and consulting group, today announces its preliminary audited results for the year to 31 December 2008.

Financial Highlights

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

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

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

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

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

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

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

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

From May 2009, minimal earn out obligations

Operational Highlights

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

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

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

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

Headcount shifted away from exposed areas to higher growth areas

Current trading and outlook

Overall revenue visibility remains solid so far in 2009

Significant new mandates secured from global healthcare clients

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

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

Mark Scott, Chief Executive, commented:

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

Financial Review

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

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

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

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

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

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

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

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

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

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

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





Headline operating profit 7,782 8,143

Net interest payable (891) (559)

Headline PBT 6,891 7,584

Exceptional costs (1,285) –

Amortisation of intangibles (858) (904)

Deemed remuneration (647) (1,179)

Share option costs 450 (449)

Notional interest (291) (468)

Fair value loss on financial instruments (444) –

Reported PBT 3,816 4,584

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

Divisional Review

Cello (Research)

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

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

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

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

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

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

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

Tangible (Response)

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

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

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

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

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

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

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

Growth Strategy

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

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

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

Current Trading and Prospects

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

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

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

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

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

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

Allan Rich



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