Financial Review

Our resilient performance was partly due to an improvement of business in the second half of the year.

Highlights

In the financial year ended 31 March 2010, revenue decreased by 4 per cent (2009: 4 per cent increase) to £80.5 million (2009: £83.8 million). This resilient performance was partly due to an improvement of business in the second half of the year. In our Interim Results published on 30 November 2009, the Group reported a revenue decline of 6 per cent, but this rate of decline fell to 1 per cent in respect of the second half of the financial year.

Despite the pressure on clients’ budgets and lower new business activity in 2009, the industry shift towards online marketing continued. We have kept pace with this structural shift and our digital and online revenue grew by 6 per cent during the year and now represents 31 per cent of the Group’s revenue.

We responded quickly to the downturn by re-aligning and reducing our resource base and closing CML, our smallest research company, which did not have the critical mass to trade through the recession. This meant that just 41 per cent of the revenue decline impacted Headline PBIT. Our Headline PBIT margin after all Head Office costs remained one of the best in the industry at 18 per cent (2009: 19 per cent). Consequently, Headline PBIT decreased by only 9 per cent to £14.3 million (2009: £15.6 million).

Throughout the year, we maintained a high level of focus on working capital management and cash conversion. This resulted in positive cash management which, combined with lower interest rates, meant our Headline net finance cost was £0.9 million below the previous year. Headline PBT decreased by 3 per cent to £13.8 million (2009: £14.2 million).

A reconciliation of the Group’s Headline to Reported results is presented in note 4 to the Financial Statements. Reported PBIT decreased by 27 per cent to £9.0 million (2009: £12.3 million). This rate of decline is greater than the Headline PBIT decline because of the closure of CML and the subsequent write-off of £3.8 million associated goodwill. Reported PBT decreased by 19 per cent to £8.2 million (2009: £10.0 million).

Key performance indicators

The Group continues to manage its operational performance through a number of key performance indicators (KPIs) and, although these have been impacted by the contraction of the market during the year, the Group’s performance remains in the upper quartile for the industry.

Revenue per head decreased by 4 per cent to £87,700 (2009: £91,300); Headline PBIT per head decreased 9 per cent to £15,500 (2009: £17,000); the Group achieved a strong Headline PBIT margin of 17.7 per cent (2009: 18.6 per cent); while Headline DEPS declined 4 per cent to 17.65 pence (2009: 18.46 pence). Reported DEPS declined 27 per cent to 8.74 pence (2009: 12.02 pence). The principal difference between Headline DEPS and Reported DEPS is the write-off of the CML goodwill.

Cash flow performance

In 2010, the Group delivered operating cash flow of £18.0 million (2009: £20.8 million). The cash conversion ratio of operating cash flow to Headline EBITDA was 113 per cent (2009: 116 per cent), which is above management’s long-term target of 95 per cent.

The Group’s free cash flow (defined as operating cash flow after taxation, net finance income/(cost), income from financial assets and capital expenditure) of £13.7 million (2009: £14.5 million) plus the revolving credit facility and the £3.2 million net proceeds from the share issue conducted in July 2009 were used to settle deferred acquisition consideration liabilities due to TMW, ICM and RDC (£20.1 million).

Capital expenditure for 2010 was £1.2 million (2009: £1.4 million) with the main categories of investment being system hardware and software.

Balance sheet, net debt and gearing

Total debt reduced by £16.0 million from £40.9 million to £24.9 million at 31 March 2010. This represents a gearing level to total equity of 26 per cent (2009: 47 per cent) and a total debt to Headline EBITDA multiple of 1.6 (2009: 2.3). In the year, all remaining deferred acquisition consideration liabilities were settled and, therefore, net debt and total debt are equal.

The balance sheet continued to strengthen during the year: total equity rose by £8.1 million to £96.0 million, as a result of the increase in earnings and proceeds from the share issue.

In addition to the strong operating cash flow, the Group raised £3.3 million (gross of fees) in July 2009 from a fully subscribed Equity Placing with existing shareholders. The new Ordinary Shares represent approximately 10 per cent of the Company’s issued share capital.

Net finance costs

Headline net finance costs fell to £0.7 million (2009: £1.6 million). This decrease was driven by the positive cash performance of the Group during the year and the reduction in LIBOR. The Group’s average margin paid over LIBOR was 1.3 per cent during the year. Headline net finance costs were covered by Headline EBITDA 24 times (2009: 11 times).

The Reported net finance cost was £1.1 million (2009: £2.4 million), which includes notional finance cost relating to the deferred acquisition consideration payments of £0.4 million (2009: £0.9 million).

Effective tax rate

The Group’s effective Headline tax rate was 25 per cent (2009: 29 per cent). This rate is lower than the current statutory rate of 28%, as a result of a prior year adjustment to reflect the resolution of discussions with HMRC on the deductibility of goodwill in earlier periods. This lower tax rate has contributed to the increase in Headline post-tax profits of 2 per cent (2009: 8 per cent increase). The Reported effective tax rate was 37 per cent (2009: 34 per cent).

Banking facility and covenants

In June 2008, the Group agreed a revised £40.0 million banking facility, which is made up of a £15.0 million term loan amortising until 31 March 2011 and a £25.0 million revolving credit facility available until 31 March 2012.

At 31 March 2010, the term loan had amortised to £11.6 million and £13.0 million had been drawn against the revolving credit facility. Alongside the £2.8 million cash balance, the Group had £14.8 million undrawn committed banking facility at that date. There are three key banking covenants and the Group maintains headroom under each of them.

Dividends

The Board recommends a final dividend for the year of 1.00 pence per share (2009: nil) for shareholder approval at the Annual General Meeting on 1 September 2010, giving a total proposed dividend for 2010 of 1.00 pence per share (2009: 0.73 pence per share). In 2009 only an interim dividend was paid and no final dividend was recommended, since the Board believed it prudent and appropriate at the time to conserve cash and reduce gearing levels.

Basis of Headline results

Creston has presented Headline results as the key performance indicators because they eliminate non-recurring or exceptional charges incurred during the year and therefore, in the opinion of the Directors, provide a truer picture of the underlying ongoing operational performance of the Group year on year. The Headline results in 2010 exclude the following items (as detailed in note 4 to the Financial Statements):

notional finance cost on future deferred consideration payments¹;
future acquisition payments due to employees deemed as remuneration;
restructuring costs (non-recurring operational costs associated with discontinued operations and redundancies); and
goodwill write-off¹.

¹ indicates a non-cash item.

Sale of subsidiary

At the General Meeting to be held on 13 July 2010 the Directors will be recommending to shareholders the sale of Delaney Lund Knox Warren and Partners, Dialogue DLKW and The Composing Room (‘DLKW Group’) for £28.0 million. Details of the strategic reasons and financial information relating to this disposal have been announced separately. If the shareholders approve the sale, a loss on disposal of approximately £3.2 million (subject to any net asset adjustment) would be recognised in the financial year ending 31 March 2011. This loss is the difference between the net proceeds and the goodwill and intangible assets relating to the DLKW Group. The Directors do not regard the carrying value as impaired at 31 March 2010 as they believe the value in use to exceed the carrying value at that date. The Directors are recommending the sale at a value below the carrying value for strategic reasons, which have been disclosed in a separate circular detailing the disposal. The reportable segment for the DLKW Group is the Communications division.

Summary

The results for the year represent a resilient performance in a difficult economic environment. The Group has performed better than the industry average, which means that, in real terms, it has grown market share. We have maintained industry-leading margins and KPIs and continued the ongoing reduction in total debt by a further £16 million to 31 March 2010. During the year, the Group continued to invest in its people and new products and this investment ensures we are well placed to continue growing market share.