Chief Financial Officer's Review

Despite a challenging trading environment as a result of the heightened level of political uncertainty, we were delighted to deliver a good full year performance.

Peter Fitzwilliam

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 retained its long term 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 set a limit for the ratio of net bank debt to EBITDA* of x1.5 and for the ratio of total debt (including both bank debt and deferred acquisition consideration) to EBITDA of x2.0.

*EBITDA is headline operating profit before depreciation and amortisation charges and before the impact of IFRS 16.

At the individual Agency level, the Group’s financial KPIs comprise revenue and controllable profitability measures, predominantly based on the achievement of the annual budget. More detailed KPIs are applied within individual Agencies. 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.


The Group’s BroadCare business was sold in November 2018 and, as a result, the following financial comparisons and commentary are based on like-for-like trading from continuing operations.

In addition, the Group has implemented IFRS 16: Leases and 2018 comparatives have been restated accordingly. The impact of IFRS 16 on the Group’s net profitability is insignificant but the bringing onto the balance sheet of future lease commitments and the reclassification of operating lease costs into depreciation and interest costs affects EBITDA and leverage ratios. The impact of the application of IFRS 16 is included in Note 2 and, where significant, referred to in the following commentary.



2019 saw revenue growth of 4%, an improvement in operating margins to 13.3% and growth in headline profit before tax of 11%. Peter Fitzwilliam, Chief Financial Officer

Debt leverage ratios remained comfortably within the Board’s limits.


Turnover (billings) was 7% higher than the previous year, at £171.1m (2018: £159.9m), but since billings include pass-through costs (e.g. TV companies’ charges for buying airtime), the Board does not consider turnover to be a key performance measure for its Agencies. Instead, the Board views operating income (turnover less third-party costs) as a more meaningful measure of activity levels. The exception to this is Pathfindr, the Group’s embryonic asset tracking business, where turnover is a more relevant measure to gauge progress over time and against relevant competitors.

Operating income (referred to as “revenue”) increased 4% to £81.0m (2018: £77.6m), representing our ninth consecutive year of growth. 2019 was undoubtedly a challenging year given the considerable political uncertainty, and we were pleased that the mix of businesses in our portfolio was resilient against this backdrop.

All growth in the year came from our core business, since we made no acquisitions during 2019, and all of our different business activities showed year-on-year progress.

Pathfindr showed good progress during the year, nearly doubling its turnover to £0.9m (2018: £0.5m) as it expanded the installed base for its tracking devices and grew its customer numbers. The time taken from initial quote and proof of concept to securing invoiced revenue has proven to be different, and longer, than for our Agency businesses, but the prospects for further growth in the coming years remain very strong.


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, acquisition adjustments and losses from start-up activities (as set out in Note 4).

Headline operating profit improved by 8% to £10.8m (2018: £9.9m), all from our core business. Our profit margin for the year (headline operating profit as a percentage of revenue) again improved, to 13.3% (2018: 12.8%). This was the result of several factors, including changes in mix between Agencies and lower central costs.

The bias of profitability towards the second half of the year as a consequence of Clients’ spending patterns repeated itself again, with 66% (2018: 65%) of our operating profit generated in this period but, more than ever, Client spending came towards the end of the year.

After £0.1m of profits from joint ventures (2018: £nil) and largely unchanged financing costs of £0.7m, headline profit before tax increased by 11% to £10.2m (2018: £9.2m).

Adjustments to reported profits, detailed further in Note 4, totalled £1.9m (2018: £1.5m), comprising acquisition-related items of £1.3m, up from £1.0m in 2018, reflecting the krow acquisition made during 2018, losses from start-up activities of £0.4m, up from £0.1m in 2018 as we expanded into China and Germany, and investment write-downs of £0.1m (2018: £0.3m). After these adjustments, reported profit before tax was £8.3m (2018: £7.7m).


The Group’s headline tax rate increased slightly, to 20.5% (2018: 20.1%). Consistent with previous years, the rate was above the statutory rate, mainly as a result of non-deductible trading losses and entertaining expenditure.

On a reported basis, the Group’s tax rate was 22.5% (2018: 16.2%). The tax rate is expected to be consistently higher than the statutory rate (of 19.0%, unchanged from 2018) 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 in 2018 was 22.1%.

EPS up
to 9.47 pence
(2018: 8.67 pence)

Headline EPS increased by 9% to 9.47 pence (2018: 8.67 pence) and, on a diluted basis, increased by 6% to 9.00 pence (2018: 8.46 pence). Growth in diluted EPS was lower than growth in profits due to the effect of the Growth Share Scheme, for which the performance condition was met during 2019.

After tax, reported profit for the year was £6.4m (2018: £6.0m) and EPS was 7.51 pence (2018: 7.08 pence). On a diluted basis, EPS was 7.14 pence (2018: 6.91 pence).


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 dividend progress in recent years is illustrated in the chart below

A dividend of 0.77 pence per share was paid in December 2019, representing a 10% increase over last year.

The Board has proposed a resolution for a 10% higher final dividend of 1.53 pence per share in its AGM Notice, recognising how important the dividend is to our shareholders, but in the light of the coronavirus pandemic and the considerable uncertainty about both the severity and duration of its impact, will make a final decision in the light of prevailing circumstances as we approach the AGM on 15 June.


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 remained virtually unchanged during the year but in contrast, the level of total debt (combined net bank debt and acquisition obligations) reduced by £2.0m.

The Board undertakes an annual assessment of the value of all goodwill, explained further in Note 12, and at 31 December 2019 again concluded that no impairment in the carrying value was required.

The Group’s acquisition obligations at the end of 2019 were £8.9m (2018: £11.8m), to be satisfied by a mix of cash and shares. All of this is dependent on post-acquisition earn-out profits. £3.3m is expected to fall due for payment in cash within 12 months and a further £3.7m in cash in the subsequent 12 months.


Net cash inflow from operating activities increased to £9.3m despite the back-ended nature of our trading which resulted in an increase in working capital requirements at the end of the year. This cash flow funded capital expenditure of £1.3m (2018: £1.0m), increased software development investment of £0.8m (2018: £0.4m), the settlement of contingent consideration obligations relating to the profits generated by previous acquisitions, totaling £2.7m (2018: £1.7m), and dividends of £1.8m (2018: £1.7m).

At the end of the year, the Group’s net bank debt stood at £4.9m (2018: £4.0m). On an adjusted basis (pre-IFRS 16), the leverage ratio of net bank debt to headline EBITDA remained below x0.5 at 31 December 2019 (2018: x0.5). The Group’s adjusted ratio of total debt, including remaining acquisition obligations, to EBITDA at 31 December 2019 remained unchanged at x1.1.


As mentioned in our statement of Principal Risks & Uncertainties, in view of the UK political uncertainty and real possibility of a no-deal Brexit, we undertook a stress test on our banking facilities during the year to ensure that the Group could withstand an economic downturn of the magnitude experienced following the 2008 global financial crisis, when the Group’s profits reduced by around 30%. The conclusion of this assessment was that the Group had sufficient facilities to withstand a repeat of similar magnitude.

The potentially more severe impact from the coronavirus pandemic has caused us to revisit that stress testing and to model various scenarios and the Group’s ability to adapt and take mitigating actions. The consensus view at the time of writing is that there is likely to be a sharp slowdown in the second quarter of the year, with a recovery in H2. We have modelled downturns of differing severity and duration and concluded that the Group can weather the storm within its committed banking facilities, which have recently been increased to £20m.

Notwithstanding that conclusion, the Board has already taken, and will be taking further, mitigating actions. The Board has placed the final dividend due for payment in July under review and all Board members have voluntarily reduced their salaries.

Capital expenditure has been reduced to a minimum and the Group will seek to defer a proportion of its other commitments. The Group will also look to take advantage of the financial assistance being offered by the Government.

Together, these actions will result in additional headroom against our banking facilities and are considered sufficient to enable the Group to withstand the impact of Covid-19.

Peter Fitzwilliam

Chief Financial Officer
1 April 2020