Share price: 162.00p


15th September 2009

Cello announces its interim results for the six month period to 30 June 2009.

Maintaining market share in a challenging environment


    Operating income £30.2m (2008: £33.9m)
    Headline operating profit £2.5m (2008: £4.4m)
    Reported operating profit before impairment charges £2.1m (2008: £2.9m)
    Interim dividend maintained at 0.50p (2008: 0.50p)
    Strong underlying operating cash flow
    Large earnout settlement of £7.7m completed through a mix of cash and shares. Earnout provisions drop by 70% to £4.5m to be settled over next four years
    Large client spend remains strong
    Brand and property consolidation making good progress

    Mark Scott, Chief Executive, commented:

    “We continue to focus Cello’s activity into our primary client verticals of pharmaceutical, healthcare, public sector, and charities where we are achieving competitive advantage and relative scale. We are clearly maintaining our market share in these largely defensive sectors. As part of this process, we are accelerating the consolidation of the business into shared operating hubs behind our larger brands. This is delivering professional benefits for our staff and also reducing overhead. The combination of these activities is strengthening the Group’s position for further expansion in the broad healthcare arena in due course”.


    Cello has maintained its market share and continues to benefit from the strength of its blue chip client base. All the Group’s large clients have continued to spend significantly against a challenging industry backdrop. The Group’s strong position in the pharmaceutical market and in healthcare related sectors has been reinforced.

    Group income has declined in line with the rest of the sector and pricing pressure remains strong on projects. The Group has therefore continued to bear down on costs to reflect the current trading environment and further reduced its staff numbers. The Group will benefit from property rationalisation in 2010, especially in London, as a result of continued consolidation of operations.

    The Group has also substantially settled its earnout commitments during the period. The relatively small commitments that remain are spread over the next four years.

    2009 will continue to be a challenging year. However the actions taken in 2008 and 2009 mean that Cello is more focussed, more professionally cohesive, and on a strong financial footing from which to expand in due course.


    Turnover for the first six months to 30 June 2009 was £58.0m (2008: £66.1m), and operating income was £30.2m (2008: £33.9m). This like-for-like 10.9% decline in operating income reflects tougher trading conditions in a number of markets compared to the prior period. The Group’s considerable healthcare, and public sector client base has remained particularly resilient. In Cello Research and Consulting, areas of weakness were in the HR and business intelligence consultancies. In Tangible, the key area of weakness was in financial services marketing. If these areas are excluded, like-for-like income fell by 6.8%.

    Headline operating profit was £2.5m (2008: £4.4m) and reported operating profit before impairment charges was £2.1m (2008: £2.9m). Headline operating margins reduced to 8.4% (2008: 12.9%). Given the drop in income, there has been natural pressure on operating margins. However, this has been mitigated to a significant extent by reductions in staff costs which are 8.1% lower than the same period last year.

    Headline pretax profit, after an interest charge of £0.5m (2008: £0.5m), was £2.0m (2008: £3.9m).

    The carrying value of investments is assessed every six months. In the light of continued reduced profit performance from the business intelligence and HR consultancy operations, the Board has substantially reduced their carrying value and reported an exceptional non-cash impairment charge of £5.5m. Therefore the Group has a reported operating loss of £3.4m (2008: profit of £2.9m) and a reported pretax loss of £3.9m (2008: profit of £2.2m).

    Headline basic earnings per share was 2.81p (2008: 6.84p). This reflects the decline in profitability in the period and also the dilutive effect of earnout settlements made in the period which required the issuance of 14.2m new shares at 32.5p per share. Reported loss per share was 8.35p (2008: earnings of 3.66p), as a consequence of the non-cash impairment charge.

    As a demonstration of the Boards confidence in the Groups prospects, the interim dividend is being maintained at 0.50p per share (2008: 0.50p). It will be paid on 4 November 2009 to all shareholders on the register on 9 October 2009.

    The Group’s net debt position at the half year was £14.8m (31 December 2008: £9.9m). The increase in debt largely reflects the earnout related cash and loan notes settled in the period. The Group retains a £22.0m total banking facility.

    Underlying operating cash flow conversion after cash exceptionals was 77.0%, in line with historical norms, and before a £2.0m surplus reversal that was highlighted in the Group’s preliminary results in March.

    Provisions for future earnouts have reduced by 71.0% to £4.2m. This follows the regular six monthly review of commitments as well as the £7.7m settlement during the period. It is anticipated that there will be additional future employee related remuneration and additional future notional interest charges over the next four years of £0.3m. This total of £4.5m is anticipated to be split £1.9m in cash and £2.6m in shares, payable over the next four years.

    The following table details the adjustments that have been made to calculate headline operating profit. All but the exceptional item are non-cash. The exceptional item relates to redundancy costs incurred during the period. The Board will continue to tightly control cost and actively manage our resources appropriately.

    Headline operating profit2.54.4
    Exceptional costs(0.5)(0.5)
    Share option costs(0.2)
    Deemed remuneration0.3(0.4)
    Reported operating profit before impairment charges2.12.9
    Impairment charge(5.5)
    Reported operating (loss)/profit(3.4)2.9



    The economic conditions continued to adversely impact financial performance across the sector. Despite the recession, the Group has emerged with a strong position in many of its markets, particularly in pharmaceutical, healthcare and the public sector, which together make up over 40% of Cello’s income. In addition, while many other areas of activity have been lower than last year, it is clear that market share has been maintained. All of the top 20 clients in the first half of 2008 remained as significant clients in the first half of 2009. The client base is broad with the largest client of the Group accounting for only 3.4% of total income, and the top 20 clients accounting for 37.3% of total income.

    The Group continues its careful programme of brand consolidation. This is most progressed within the Tangible business, and is showing clear benefits in terms of larger mandates and cross business working.

    The Group has taken significant action to reduce the cost base. This is apparent in an 8.1% reduction in total staff costs in the first half of 2009. Going forward into 2010, Cello will also benefit from materially reduced property commitments following action taken on consolidating leases in the first half of 2009 as the Group focuses resources behind bigger operating hubs. The process is ongoing, and there will be further cost reduction action in the second half of the year.


    Given the economic context, Cello Research and Consulting had a sound six months, delivering £30.0m of turnover (2008: £33.6m) and £18.2m of operating income (2008: £20.1m). 45.2% of this was from international work. Headline operating profit was £2.3m (2008: £3.7m). Headline operating margins reduced to 12.7% (2008: 18.4%). Excluding the HR and business intelligence consultancies operating margins would have been 15.0%. The balance of the margin decline was accounted for by a foreign currency loss of £0.3m (2008: gain of £0.1m) and a drop in the number of high margin qualitative research briefs.

    Cello Research and Consulting has developed its key client relationships, and continues to have a broad client base with a predominantly healthcare orientation. Pharmaceutical and healthcare accounted for 39.0% of Research and Consulting income (2008: 33.9%). Key clients active in the period included HP, Tesco, Roche, EA, Novartis, GSK, Nokia and Unilever which are all long standing key clients of the business.

    Discretionary consulting expenditure proved to be the toughest sub-market. In particular, the HR and business intelligence consultancies had a difficult six months. Taking an assessment of future prospects into account, the Board has decided to reduce the carrying value of these assets by £5.5m. This is accounted for as a non-cash exceptional charge.


    Tangible also had a solid six months, delivering £28.0m of turnover (2008: £32.5m); £12.0m of operating income (2008: £13.8m) and headline operating profit of £0.9m (2008: £1.7m). Headline operating margins fell to 7.3% (2008: 12.0%). If the financial services business is excluded, the operating margin would have been 8.9%, in line with the operating margin in the first half of 2007. The balance of the margin decline was accounted for by across-the-board pricing pressure, particularly with regard to smaller UK-based clients.

    The business has maintained its market position in its key areas, and has taken major strides in co-locating businesses, particularly in London where a single office hub now houses six disciplines. One very significant London lease has been vacated, which will positively impact on property costs in 2010.

    A key trend in Tangible’s income has been a strong six months from the public sector client base. Public sector work accounted for 26.3% of income in the Tangible business (2008: 21.1%). This is very broadly spread over several large clients, including the Scottish Government, the COI, Lifelong Learning and numerous other public sector bodies.

    Financial services income fell from 31.4% of Tangible’s income in 2008 to 20.8% in 2009. The larger financial services clients remain actively spending but smaller clients in this area have curtailed activity. The Group has retained key capacity to service this market when it recovers.


    While 2009 has so far been a challenging year, the actions on costs taken to date and those in progress in the second half will hold the Group in good stead for the future. Cello has maintained market share and is well positioned in its key client sectors, notably in the pharmaceutical, healthcare and life-style related sectors which are increasingly proving to be the core markets for the Group.

    Encouragingly, it would also appear that the rate of decline in income experienced in the first half has now stabilised, and income visibility remains in line with historical norms. Against this background, the Board currently expects the headline operating profit in the second half of 2009 to exceed the second half of 2008, reflecting the reduced cost base and increased operational focus.

    Allan Rich
    Non-Executive Chairman
    15 September 2009


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