Final Results
Creston PLC
26 June 2006
Date: 26 June 2006
On behalf of: Creston plc ("Creston" or "the Group")
Embargoed until: 0700hrs
Creston plc
Results for the year ended 31 March 2006
Creston plc, the diversified marketing services group, today announced its fifth
year of record results for the year ended 31 March 2006. The highlights, which
demonstrate the Group's ability to successfully acquire and manage companies,
are:
FINANCIAL HIGHLIGHTS
Change
• Revenue to £43.5m (2005:£19.4m) +124%
• Headline PBIT to £8.0m (2005: £3.6m) +123%
• Reported* PBIT to £6.3m (2005:£3.1m) +103%
• Operating company like-for-like Revenue Growth + 14%
• Operating company like-for-like Headline PBIT Growth + 18%
• Headline PBT to £7.7m (2005: £3.4m) +125%
• Reported* PBT to £4.7m (2005: £2.6m) + 82%
• Headline diluted EPS to 14.04 p (2005: 10.30p) + 36%
• Reported* diluted EPS to 7.67p (2005: 6.93p) + 11%
• Net Debt reduced to £2.5m (2005: £3.3m) + 26%
• Dividend per Share to 2.40p (2005: 2.15p) + 12%
* Under IFRS
OPERATIONAL HIGHLIGHTS
• Acquisition of Red Door Communications Limited completed on 7 July
2005 for a maximum consideration of £13.5 million - the acquisition broadens
Creston's range of marketing services into healthcare.
• Appointment of Simon Williams as the Group Synergy and Strategy
Director on 5 December 2005.
• Post balance sheet events - on 17 May 2006, the Company acquired ICM
Research, a leading market research company, for a maximum consideration of
£37.2 million, and Tullo Marshall Warren, a leading direct marketing company,
for a maximum consideration of £38.3 million.
Commenting on today's announcement, Don Elgie, Group Chief Executive, said:
"Creston has yet again substantially outperformed the FTSE All Share Media and
Entertainment Index by continuing to execute successfully its strategy of strong
organic growth as well as attracting market leading companies to the Creston
stable.
"Creston has also demonstrated the robustness of its business model for five
consecutive years. With the Group's low level of net debt, strong portfolio of
diversified operating companies and exceptional like-for-like performance,
Creston is well placed to continue into the next phase of its strategic
development. We see nothing on the horizon that will prevent us from delivering
another excellent year in 2007."
FOR FURTHER INFORMATION, PLEASE CONTACT:
Creston plc 020 7930 9757
Don Elgie, Chief Executive
Barrie Brien, COO/CFO
www.creston.com
Redleaf Communications 020 7955 1410
Emma Kane/Sanna Lehtinen 07876 338339
NOTES TO EDITORS:
• Publication quality photographs are available through Redleaf on the
numbers shown above.
About Creston plc
• Our vision is to build an international diversified marketing
services group with centres in six countries around Europe, USA, Asia and
eventually Latin America.
• The growth of the Group will be driven by strong organic growth as
well as earnings-enhancing acquisitions.
• We will strive to ensure that our entrepreneurial culture thrives in
an atmosphere of openness and recognition, where talent provides exceptional
results for clients. We believe that this is ultimately what drives the growth
of a successful company.
• Creston's companies boast a substantial range of blue-chip clients.
• Creston's share price is quoted in the Financial Times, Telegraph,
the Times and the London Evening Standard.
CHAIRMAN AND CHIEF EXECUTIVE'S STATEMENT
Creston has had its fifth year of record results and has, yet again,
substantially outperformed the FTSE All Share Media and Entertainment Index by
continuing to execute successfully its strategy of strong organic growth as well
as attracting market leading companies to the Creston stable.
Financial Highlights
Overall, we are very pleased with the exceptional performance of the Group.
Revenue has increased by 124 per cent to £43.5 million (2005: £19.4 million);
Headline operating profit has increased by 123 per cent to £8.0 million (2005:
£3.6 million) and profit before tax has increased by 125 per cent to £7.7
million (2005: £3.4 million). Reported operating profit has increased by 103
per cent to £6.3 million (2005: £3.1 million) and reported profit before tax by
82 per cent to £4.7 million (2005: £2.6 million). Most importantly, this
substantial growth has not merely been achieved via our strategy of selective
acquisitions. It includes like-for-like growth at our operating company level
of 14 per cent in revenue and 18 per cent in PBIT, which yet again far exceeds
the UK market norms.
The Board is proposing a final dividend of 1.60 pence per share, giving a total
dividend for 2006 of 2.40 pence (2005: 2.15 pence). This represents an increase
in dividend per share of 12 per cent. Depending on trading performance at the
time, the Board expects to continue increasing the dividend payments to its
shareholders.
Divisional Performance
A key tenet of Creston's strategy is to build a diversified marketing services
group in order to minimise risk while maximising the opportunities for synergy.
Due to the timing of acquisitions there may sometimes be a short-term weighting
towards one division. For the year ended 31 March 2006, Creston was pleased
with the contribution from each of the divisions in terms of revenue and
operating profit and the weighting towards the highest growth and non-cyclical
sectors within marketing services. The divisional split in PBIT is: BRANDCOM 24
per cent, Insight 18 per cent, MARCOMS 37 per cent and Public Relations 21 per
cent. This diversification and weighting towards Insight and MARCOMS is further
amplified following the recent acquisitions of ICM Group, which sits in the
Insight Division and TMW plus Colombus, which sits in the MARCOMS division.
BRANDCOM Division
The BRANDCOM Division was formed in March 2005 following the acquisition of DLKW
Group and this is its first full year of trading. Its revenue of £15.1 million
and PBIT of £2.6 million are ahead of management's expectations for the
financial year, due to strong new business performance with wins including the
AA, Opel and Dollond & Aitchison. These gains generated like-for-like revenue
growth of 21 per cent and PBIT growth of 29 per cent. The PBIT margin of 18 per
cent remains strong for this sector.
Insight Division
Creston's Insight Division has contributed revenue of £6.3 million (2005: £5.7
million) and PBIT of £1.9 million (2005: £1.6 million). This year shows static
like-for-like revenue but with like-for-like PBIT growth of 4 per cent. The
PBIT margin has increased from 28 per cent to 30 per cent, as increased
efficiencies have been achieved. This division has been further strengthened by
the acquisition of the ICM Group in May 2006.
MARCOMS Division
The MARCOMS Division has shown strong growth with revenue increasing to £15.0
million (2005: £8.5 million) and PBIT increasing to £4.0 million (2005: £2.3
million). Like-for-Like revenue and PBIT growth was 18 per cent and 24 per cent
respectively. Following the acquisition of DLKW Group, this division was
further strengthened by the addition of DLKW Dialogue and TCR, which together
have generated revenue of £6.9 million and PBIT of £1.8 million in 2006. These
two businesses have performed particularly strongly in the year following a
number of new client wins including the AA and Blockbuster. The Division's PBIT
margin remains very good at 27 per cent. This division has been further
enhanced by the acquisition of TMW in May 2006.
Public Relations Division
The Public Relations Division has been strengthened by the acquisition of RDC
during the period. The division has contributed revenue of £7.1 million (2005:
£4.4 million) and PBIT of £2.3 million (2005: £1.3 million). Like-for-like
revenue and PBIT growth are 10 per cent and 8 per cent respectively. These two
businesses have performed strongly in the year following a number of new client
wins including Kraft, Virgin Games, GLA, GE Healthcare and Roche Products. The
PBIT margin has improved to 32 per cent.
Acquisitions
With our acquisitions we have focused on marketing disciplines that deliver what
our clients increasingly want - genuine insights into the preferences of their
customers and efficient, measurable ways of reaching them. Overall we feel that
we are now well-placed to grow further and take advantage of the changing
international marketing landscape.
Since the last Report and Accounts, Creston has made three acquisitions: one in
July 2005 and two in May 2006.
Red Door Communications, one of Britain's best performing healthcare PR
companies, was acquired on 7 July 2005 for an initial consideration of £6.8
million, including costs and estimated further deferred consideration (on an
IFRS basis) of £1.9 million. Its clients include AstraZenecaUK, Bayer and
GlaxoSmithKline. The acquisition has bedded in well and the company continues
to excel.
Our Insight Division has recently been strengthened by the acquisition of ICM
Group Limited (ICM). Britain's largest independent market research company, ICM
Group, was acquired on 17 May 2006. Clients include Vodafone, Orange, O2,
Wanadoo, Norwich Union, NOP, Dixon Store Group, Saga, BT Mobile and Yorkshire
Bank.
TMW, Britain's leading direct marketing and digital communications agency, was
also acquired on 17 May 2006 along with its sister company Colombus
Communications. Clients include Lloyds TSB, British Airways, Nissan and
Unilever. With TMW we have an insight and data mining/analysis capability that
we consider the equal to any in Europe.
The result of these acquisitions is that Creston has developed into a rounded
diversified group with huge growth potential, as we increasingly see the
benefits of the synergies we have created in the Group. We will continue to
identify opportunities in the UK, as described later, but our attention will
also increasingly turn abroad.
The Group will continue to pursue acquisition targets that fit in with its
stated strategy and criteria whilst always maintaining prudent levels of
gearing, interest cover and banking covenant headroom. It is our policy that
all future acquisitions are made on a financially prudent basis and are
earnings-enhancing.
Outline of Key Strategic Priorities
International
In order to better serve our clients, our main priority will be to develop an
international presence. Although we declared our international aspirations
publicly in 2002, the fact that we have yet to announce an international
acquisition shows the very conservative nature of Creston's acquisitions
strategy. Having demonstrated the durability of our acquisitions strategy in
the UK, we will apply a similar model abroad.
Our goal is to be centred in only six countries within the main European
markets, USA, Asia and eventually Latin America. The timescale will depend on
matching the right opportunities with the right cultural fit. We will not force
a timetable on ourselves that might create ill-founded and unnecessary pressure.
We plan to identify potential "sister" companies which are strong in the main
disciplines represented in the UK such as market research, marketing
communications (including direct marketing), advertising, PR, digital and
online.
The Internet and Digital Communications
(i) Marketing Communications
9.6% of marketing spend in the UK was via the internet in 2005 and that is
forecast to grow by 39% in 2006 (source: Group M). Creston, as a group, is
well-represented in this area with 10.1% of Group revenue already associated
with the Internet and Digital Communications. This rises to 13.1% with the
acquisition of TMW and ICM. For instance, TMW with 38 people in digital, has
arguably the largest digital division of any of the non-specialist agencies in
the UK. However, we recognise that we must continue to grow in this area if we
are to match the growth in the market.
(ii) Online Research
Whilst there are very specific reasons such as geography and safety for the
growth of online research in the USA, we appreciate the importance of online
research which grew by 23% in 2005 in the UK (source: Inside Research September
2005).
Both ICM and Marketing Sciences Ltd (MSL), our two quantitative research
companies, already conduct research surveys online. We aim to reinforce and
increase this offering.
Building out the UK Group
Our objective is to develop a market-leading group offering. To date we are
very pleased with our diversified portfolio of companies in the UK but recognise
that further additions will be required. We will look to compliment our channel
and brand communication planning offerings, as well as our MARCOM disciplines.
Common Accounting System
Whilst we continue to build the Group, we recognise the importance of investing
in the infrastructure needed to sustain our growth. In this way we can maintain
tight financial internal controls, take advantage of our critical mass in cost
synergies and allow our operating companies to focus on what they do best.
Accordingly, the introduction of a common accounting system for all group
companies is being rolled out throughout the Group Maconomy. This is a
well-established system within the marketing services industry.
People
Synergy has been a core tenet of the Creston strategy since the formation of the
Group. In December 2005 we were very pleased to appoint Simon Williams as Group
Synergy and Strategy Director to drive the synergy process forward. April 2006
was the best month on record for synergy.
With 800 employees, the Group can now achieve significant technology
efficiencies, not just in cost but in common operating systems. In the last
year, Creston appointed Gavin Whatrup from DLKW as Head of IT for the Group with
a remit of aligning our IT strategy and investment, as well as securing
favourable group procurement agreements.
Board
We would like to thank the other Board members for the excellent contribution
they have made throughout the year. In recognition of corporate governance
guidelines, we intend to identify an appropriate non-executive director
candidate who will also act as Chairman of the Audit Committee by the 2007 AGM.
In turn, the Board would like to thank staff and colleagues for their
contribution and efforts for last year's excellent performance.
Outlook
Creston has demonstrated the robustness of its business model for five
consecutive years. With Creston's low level of net debt, strong portfolio of
diversified operating companies and exceptional like-for-like performance, the
Group is well placed to continue into the next phase of its strategic
development. As our profile rises, an increasing number of high quality
companies and individuals are approaching us. We see nothing on the horizon
that will prevent us from having another excellent year in 2007.
David Marshall Don Elgie
Chairman Chief Executive
26 June 2006
FINANCIAL REVIEW
Results and impact of IFRS
The Group's results have been prepared under International Financial Reporting
Standards ("IFRS"), which were adopted with effect from 1 April 2004. Due to
the impact of IFRS and as detailed in the Interims, Creston has presented
Headline results as the key profit performance indicators since these eliminate
the impact associated with the adoption of IFRS.
Key Performance Indicators
The Group continues to manage its internal operational performance with the help
of various key performance indicators (KPIs). Creston is pleased with the
performance in all its KPIs. The most important ratios are very promising:
revenue per head has increased by 36 per cent to £84,500 (2005: £62,000);
Headline PBIT per head has increased by 35 per cent to £15,600 (2005: £11,500);
Headline PBIT margin remains far in excess of our competitors at 18 per cent;
and Headline and reported diluted earnings per share have grown by 36 per cent
to 14.04 pence and 11 per cent to 7.67 pence respectively.
These KPIs demonstrate that Creston continues to improve its efficiency and
productivity across the Group and more importantly, that its strategy of buying
companies that offer clients higher added-value services is translating into
excellent financial returns.
Total staff numbers increased from 313 to 515 on a full-time equivalent basis
and following the post-balance sheet events of the acquisitions of TMW and ICM
Group, the total headcount now stands at over 800 employees.
Like-for-like Growth
At the operating company level, Creston has demonstrated outstanding
like-for-like growth with turnover, revenue and PBIT increasing by 18 per cent,
14 per cent and 18 per cent respectively. This performance demonstrates the
success of the subsidiaries in their ability to win more net new business from
new and existing clients, thereby growing market share at the expense of their
competitors.
Earnings Per Share
On a Headline basis, basic earnings per share rose 41 per cent to 14.72 pence
(2005: 10.45 pence) and fully diluted earnings per share rose 36 per cent to
14.04 pence (2005: 10.30 pence). This is the fifth successive year of
significant growth in these key financial ratios reflecting the Group's success
in completing earnings-enhancing acquisitions and delivering superior value and
returns to shareholders.
On a reported basis (under IFRS) the basic earnings per share rose 14 per cent
to 8.04 pence (2005: 7.04 pence) and diluted earnings per share rose 11 per cent
to 7.67 pence (2005: 6.93 pence).
Cash Flow
As an acquisitive company, operating cash flow is a key focus for management.
We are pleased with the net cash inflow from operating activities rising to £8.0
million (2005: £4.9 million) and the cash conversion rate from operating profit
which remains high at 99 per cent (2005: 133 per cent).
The high operating cash flow was partly used to finance the acquisition of RDC
for £4.2 million together with transaction costs, tax and deferred
consideration. As a consequence, the cash balance remained stable at £5.3
million (2005: £5.4 million).
Banking
On 19 April 2006, the Group agreed a new £40.0 million banking facility. The
new facility allows term debt of £30 million (£16 million remains undrawn
following the acquisitions of ICM Group and TMW) and borrowings for working
capital of £10 million.
Balance Sheet, Net Debt and Gearing
Total equity rose by £5.6 million in the year to £47.4 million. Earnings
contributed £2.1 million to its growth and new share capital issued was £3.1
million mainly as a result of the RDC acquisition.
Under the deferred consideration arrangements, Creston has the right to settle
certain of these liabilities in equity rather than loan notes and the amount of
the deferred consideration is amended each year to the current expected amount
payable.
As a result of the increased shareholders' funds and positive cash flow,
Creston's gearing (net debt over equity) was 5.2 per cent and the net debt for
the Group at 31 March 2006 was £2.5 million (2005: £3.3 million). After
including net deferred consideration to be settled in a mixture of loan notes
and shares of £20.4 million (2005: £14.6 million) the Group's total debt has
increased to £22.9 million (2005: £17.9 million).
Creston will continue to maintain its policy of managing and restricting the net
debt and gearing to prudent levels to preserve its financial stability and
maintain high levels of headroom in its banking covenants and interest cover.
Net finance costs
The Headline net finance costs paid were £0.4 million (2005: £0.2 million)
reflecting the increased term loan for the DLKW acquisition offset by improved
cash balances and effective treasury management throughout the Group. Net
finance costs were well covered by Headline profit before interest and tax at 20
times (2005: 21 times).
Creston continued with its interest rate hedging strategy on half of its new
medium-term loan by maintaining an interest rate collar provided by Barclays
Capital.
Effective Tax Rate
The Group's effective Headline tax rate has remained at 31 per cent.
The reported effective tax rate under IFRS was 38 per cent (2005: 33 per cent),
due to the reduction in underlying profits from items not subject to tax relief
such as notional finance costs and deemed remuneration.
Dividends
The Board is proposing a final dividend of 1.60 pence per share, giving a total
dividend per share in respect of the 2006 profits of 2.40 pence (2005: 2.15).
This represents an increase in dividend per share of 12 per cent.
Depending on trading performance at the time, the Board expects to continue
increasing the dividend payments to its shareholders.
Capital Expenditure
The total capital expenditure for 2006 was £2.3 million (2005: £0.6 million).
The main categories of investment were leasehold refurbishment and computer
systems and software.
The capital expenditure includes the costs of implementing a group-wide
accounting system, Maconomy. The purpose of having a single accounting system
is to maintain strong internal controls as the Group grows, facilitate audits,
and improve the financial information to the Boards. At the time of this
report, Maconomy has been rolled out in nearly a third of the Group companies.
We aim to complete the roll-out in all companies by the end of the next
financial year.
International Financial Reporting Standards (IFRS)
The underlying trading of the Group, which has been referred to as Headline,
does not include the following IFRS adjustments:
1. notional finance costs on future deferred consideration payments;
2. future acquisition payments due to employees deemed as remuneration;
and
3. amortisation of intangible assets.
4. deferred tax on the above items
Barrie Brien
Chief Operating and Financial Officer
CONSOLIDATED INCOME STATEMENT
Note Year Year
ended ended
31 March 31 March
2006 2005
£'000 £'000
Turnover (Billings) 2 81,472 35,870
________________________
Revenue 2 43,503 19,401
Operating costs (37,234) (16,308)
________________________
Profit on ordinary activities
before finance costs, income from
investments and taxation 6,269 3,093
Finance income 182 162
Finance costs 4 (1,836) (665)
Income from investments 109 -
________________________
Profit on ordinary activities
before taxation
3 4,724 2,590
Taxation (1,797) (857)
__________ ________
Profit for financial year 2,927 1,733
_______________________
Basic earnings per share (pence) 5 8.04 7.04
Diluted earnings per share (pence) 5 7.67 6.93
CONSOLIDATED BALANCE SHEET
Note As at As at
31 March 31 March
2006 2005
£'000 £'000
Non-current assets
Intangible assets
Goodwill 7 66,535 57,053
Other 350 533
Trade and other receivables 1,162 -
Property, plant and equipment 3,006 1,740
Investments - available for sale 550 550
Deferred tax asset 906 569
_______ ______
72,509 60,445
______ ______
Current assets
Inventories and work in progress 2,907 1,810
Trade and other receivables 19,961 14,638
Cash and short term deposits 5,317 5,419
______ ______
28,185 21,867
Current liabilities
Trade and other payables (22,497) (16,441)
Corporation tax payable (1,452) (668)
Obligations under finance leases (196) (216)
Bank overdraft, loans and loan (2,525) (1,687)
notes
Short term provisions 9 (7,046) -
______ ______
(33,716) (19,012)
Net current (liabilities)/assets (5,531) 2,855
______ ______
Total assets less current 66,978 63,300
liabilities
Non current liabilities
Bank loans and loan notes (5,073) (6,659)
Obligations under finance leases (9) (205)
Long term provisions 9 (14,502) (14,603)
_______ _______
(19,584) (21,467)
Net assets 47,394 41,833
_______ _______
Equity
Called up share capital 3,759 3,493
Share premium account 19,734 19,168
Own shares (46) -
Shares to be issued 1,836 1,426
Special reserve 2,385 2,385
Revaluation reserve 535 535
Other reserve 14,690 12,442
Capital redemption reserve 72 72
Retained earnings 4,429 2,312
______ ______
Total equity 47,394 41,833
______ ______
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2006
Share Share Own Retained Other Shares to
capital premium shares earnings reserves be issued Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Changes in equity for
2006
At 1 April 2005 3,493 19,168 - 2,312 15,434 1,426 41,833
New shares issued 266 566 - - 2,258 - 3,090
Credit for share based - - - - - 410 410
incentive schemes
Own shares purchased - - (46) - - - (46)
Loss on Treasury Scheme - - - - (10) - (10)
Profit for the year - - - 2,927 - - 2,927
Dividends (note 6) - - - (810) - - (810)
At 31 March 2006 3,759 19,734 (46) 4,429 17,682 1,836 47,394
Share Share Own Retained Other Shares to
capital premium shares earnings reserves be issued Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Changes in equity for
2005
At 1 April 2004 2,207 9,083 - 1,020 8,175 449 20,934
Revaluation of - - - - 535 - 535
investments available
for sale
Profit for the year - - - 1,733 - - 1,733
Total recognised income - - - 1,733 535 - 2,268
and expense for the
period
New shares issued 1,286 10,085 - - 6,724 - 18,095
Credit for share based - - - - - 977 977
incentive schemes
Dividends - - - (441) - - (441)
At 31 March 2005 3,493 19,168 2,312 15,434 1,426 41,833
CONSOLIDATED CASH FLOW STATEMENT
Note Year ended Year ended
31 March 2006 31 March 2005
£'000 £'000
Operating cash flow 10 7,970 4,930
Net finance costs (303) (176)
Tax paid (1,908) (887)
_____ _____
Net cash inflow from operating activities 5,759 3,867
Investing activities
Purchase of subsidiary undertakings (4,240) (20,413)
Net cash acquired with subsidiaries 1,779 4,233
Purchase of property, plant and
equipment (2,262) (549)
Sale of property, plant and equipment 117 25
Decrease in restricted cash deposits 27 240
_______ ________
Net cash (outflow) from investing activities (4,579) (16,464)
Financing activities
Issue of shares 642 11,290
Share repurchases (30) -
Increase in borrowings - 3,791
(Decrease) in borrowings (841) -
Financing and share issue costs - (416)
Equity dividends paid (810) (441)
Capital element of finance lease payments (216) (124)
______ ______
Net cash (outflow)/inflow from financing (1,255) 14,100
______ ______
(Decrease)/increase in cash and cash
equivalents (75) 1,503
Cash and cash equivalents at start of period 5,357 3,854
______ ______
Cash and cash equivalents at end of period 11 5,282 5,357
______ ______
NOTES TO THE FINAL 2006 RESULTS
for the year ended 31 March 2006
1. Presentation of financial information and accounting policies
Basis of preparation
The Preliminary Announcement is extracted from financial statements that have
been prepared for the first time, in accordance with International Financial
Reporting Standards (IFRS), adopted for use in the European Union and therefore
comply with Article 4 of the EU IAS regulation.
The Preliminary Announcement has been prepared in sterling, the currency in
which the majority of the Group's transactions are denominated, and on the
historical cost basis, except for the revaluation of certain financial
instruments.
In preparing the Preliminary Announcement the following exemptions have been
adopted:
(i) Business combinations - in accordance with IFRS 1 Creston has
chosen not to restate business combinations that took place before the date of
transition (1 April 2004).
(ii) Share based payments - in accordance with IFRS 2 equity
instruments granted before 7 November 2002 or that had vested by 1 January 2005
have not been restated to fair value.
The significant accounting policies are:-
Basis of consolidation
Acquisitions of subsidiaries are dealt with by the purchase method. The
purchase method involves the recognition at fair value of all identifiable
assets and liabilities, including contingent liabilities of the subsidiary, at
the acquisition date, regardless of whether or not they were recorded in the
financial statements of the subsidiary prior to acquisition. On initial
recognition, the assets and liabilities of the subsidiary are included in the
consolidated balance sheet at their fair values, which are also used as the
basis for subsequent measurements in accordance with the group accounting
policies. Goodwill is stated after separating out identifiable intangible
assets. Goodwill represents the excess of acquisition cost over the fair value
of the Group's share of the identifiable net assets of the acquired subsidiary
at the date of acquisition.
Goodwill
Goodwill arising from the purchase of subsidiary undertakings, representing the
difference between the purchase consideration and the fair value of the
identifiable assets, liabilities and contingent liabilities of a subsidiary
acquired, has been capitalised in accordance with the requirements of IFRS 3.
Future anticipated payments to vendors in respect of earn-outs are based on the
director's best estimates of these obligations. Earn-outs are dependent on the
future performance of the relevant business and are regularly reviewed. The
deferred consideration is discounted to its fair value in accordance with IFRS 3
and IAS 39. The difference between the fair value of these liabilities and the
actual amounts payable are charged to the income statement as notional finance
costs over the life of the associated liability. The goodwill arising on the
relevant acquisition is adjusted to these revised estimates throughout the
earn-out period, subject to the impact on notional interest being taken to the
income statement.
Intangible assets
Other acquired intangible assets are capitalised at cost. Intangible assets
acquired as part of a business combination are capitalised at fair value at the
date of acquisition. The list of such intangible assets is significantly more
comprehensive under IFRS than was the case under UK GAAP. Intangible assets are
amortised to residual values over the useful economic life of the asset. Where
an asset's life is considered to be indefinite an annual impairment test is
performed.
The identified intangible assets and associated periods of amortisation are as
follows:
Intangible asset Period of amortisation
Brands Indefinite life -
subject to annual impairment
Customer contracts Over the notice period of the
contract (generally 1 to 3 months)
Share based payment transactions
In accordance with IFRS 3 certain payments made to employees in respect of
earn-out arrangements are required to be treated as remuneration within the
income statement. These amounts are required to be charged to the income
statement.
The Group has applied the requirements of IFRS 2 Shared-based Payments. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
January 2005.
The Group issues equity-settled and cash-settled share-based payments to certain
employees. 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-based 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.
Fair value is measured by use of a Black Scholes model on the grounds that there
are no market related vesting conditions. The expected life used in the model
has been adjusted, based on management's best estimate, for the effects of
non-transferability, exercise restrictions and behavioural considerations.
A liability equal to the portion of the goods or services received is recognised
at the current fair value determined at each balance sheet date for cash-settled
share-based payments. Over the vesting period, where re-measurements
materialise, differences are taken to the income statement.
2. Segmental analysis
Turnover, revenue and profit before tax attributable to Creston activities are
shown below. Turnover represents the gross billings to customers. Revenue
represents the fees earned by the operating companies.
Turnover Revenue
2006 2005 2006 2005
£'000 £'000 £'000 £'000
BRANDCOM 34,734 1,226 15,129 867
Insight 10,885 9,917 6,269 5,699
MARCOMS 25,800 17,876 15,042 8,461
Public Relations 10,053 6,851 7,063 4,374
______ ______ ______ ______
81,472 35,870 43,503 19,401
______ ______ ______ ______
Headline Profit before tax
2006 2005
£'000 £'000
BRANDCOM 2,648 164
Insight 1,879 1,594
MARCOMS 4,048 2,298
Public Relations 2,261 1,297
_____ ______
Operating Company Total 10,836 5,353
Corporate expenses (2,814) (1,753)
_____ _____
Headline profit before interest and tax 8,022 3,600
Income from investments 109 -
Net finance costs (412) (176)
_____ _____
7,719 3,424
It is not possible to present a segmental split of the IFRS PBIT and net finance
costs as the deemed remuneration and notional interest cannot be allocated
between the business segments. As Headline PBT excludes these items (together
with the amortisation of intangibles) a segmental split is presented on that
basis.
3. Reconciliation of Reported profit to Headline profit
2006 2005
£'000 £'000
Headline profit before interest and tax 8,022 3,600
Net finance costs and income from investments (303) (176)
______ ______
Headline profit before taxation 7,719 3,424
IFRS adjustments
Notional finance costs on future deferred consideration payments (1,242) (327)
Future acquisition payments to employees deemed as remuneration (1,225) (325)
Amortisation of intangible assets (528) (182)
______ ______
Profit before taxation - Reported 4,724 2,590
______ ______
Headline profit before taxation 7,719 3,424
Headline taxation (2,365) (851)
______ ______
Headline profit after taxation 5,354 2,573
IFRS adjustments
Notional finance costs on future deferred consideration payments (1,242) (327)
Future acquisition payments to employees deemed as remuneration (1,225) (325)
Amortisation of intangible assets (528) (182)
Taxation impact 568 (6)
______ ______
Profit after taxation - Reported 2,927 1,733
______ ______
The contingent consideration deemed as remuneration arises on payments made by
Creston to employees in respect of the deferred consideration on the business
acquisitions. The notional finance costs also relate to the deferred
consideration. Both of these charges will cease once the relevant earn-outs
have been settled.
4. Finance costs
Finance costs include:
2006 2005
£'000 £'000
Notional finance costs on future deferred consideration payments (1,242) (327)
Finance costs on bank overdrafts and loans (554) (317)
Finance costs on finance leases (40) (7)
Finance costs on other loans - (14)
______ ______
(1,836) (665)
______ ______
Under IAS 39 (fair value of liabilities) the Group is required to discount
liabilities to their fair value. This has a significant impact on the treatment
of deferred consideration, which is generally paid more than three years after
the date of acquisition. The difference between the fair value of the
liabilities and the actual amounts payable is charged to the income statement as
notional finance costs (calculated at the annual rate of 5.5%) over the life of
the associated liability. This has the impact of increasing the finance costs
by £1,242,000 (2005: £327,000).
5. Earnings per share
2006 2005
Headline Weighted average Pence per Headline Weighted average Pence per
profit for number of share profit for number of share
the financial shares the shares
year £'000 financial
year £'000
Headline basis
Basic earnings per share
Earnings attributable to 5,354 36,383,218 14.72 2,573 24,617,806 10.45
ordinary shareholders
Dilutive effect of
securities
Warrants - - - - 33,562 (0.01)
Options - 415,534 (0.17) - 339,245 (0.14)
Contingent shares - 1,346,950 (0.51) - - -
Diluted earnings per share 5,354 38,145,702 14.04 2,573 24,990,613 10.30
2006 2005
Reported Weighted average Pence per Reported Weighted average Pence per
profit for number of shares share profit for number of shares share
the financial the
year £'000 financial
year £'000
Reported basis
Basic earnings per share
Earnings attributable to 2,927 36,383,218 8.04 1,733 24,617,806 7.04
ordinary shareholders
Dilutive effect of
securities
Warrants - - - - 33,562 (0.01)
Options - 415,534 (0.09) - 339,245 (0.10)
Contingent shares - 1,346,950 (0.28) - - -
Diluted earnings per share 2,927 38,145,702 7.67 1,733 24,990,613 6.93
Diluted EPS has been calculated based on the following dilutive elements. No
warrants (2005: 33,562) are outstanding. An estimate of 415,534 options (2005:
339,245) remain outstanding that would have been issued based on the average
share price (this includes SAYE, EMI and unapproved options). The contingent
shares (2005: nil) relate to the equity element of the deferred consideration
due within one year.
A reconciliation of the profit after tax on a Reported basis and the Headline
basis is given in note 3.
6. Dividends
2006 2005
£'000 £'000
Amounts recognised as distributions to shareholders in the year
Prior year final dividend of 1.45 pence per share (2005: 1.2 pence) 508 265
Interim dividend of 0.8 pence per share (2005: 0.7 pence) 302 176
______ ______
810 441
______ ______
A final dividend of 1.60 pence (2005: 1.45 pence) is to be paid on 9 August 2006
to shareholders on the register on 5 July 2006. In accordance with IFRS the
final dividend of £860,000 will be recognised in the 2007 accounts should it be
approved by shareholders at the AGM.
7. Goodwill
Purchased goodwill £'000 Goodwill on consolidation Total
£'000 £'000
Cost
At 1 April 2005 4,785 52,268 57,053
Additions - 7,501 7,501
Adjustment to (1,162) 3,143 1,981
consideration and net assets _______ _______ _______
3,623 62,912 66,535
_______ _______ _______
Net book amount at 31 March 3,623 62,912 66,535
2006 _______ _______ _______
Net book amount at 31 March 4,785 52,268 57,053
2005 _______ _______ _______
A review of the carrying value of acquisitions has been carried out using
forecast profits. This has shown an increase in the value in use of the
operating companies and a corresponding increase in the surplus over the
carrying value in the accounts. No reduction in goodwill has therefore been
made.
8. Acquisition
The acquisition of RDC was completed on 7 July 2005. The maximum consideration
payable (including deemed remuneration and notional finance costs) for RDC is
£13.5m plus legal and professional costs of £0.3m. It is satisfied by an
initial consideration of £6.5m, an estimated further £0.1m dependent upon the
final determination of the net assets acquired and a deferred consideration of
up to £6.7m, which is dependent on the financial performance of RDC in the
period to 31 March 2009. As part of the acquisition, 1,595,724 new ordinary
shares were issued and listed on the London Stock Exchange on 14 July 2005. The
remaining acquisition costs of £4.2m were funded from existing working capital
resources (£4.1m) and one year loan notes (£0.1m).
The net assets at completion were £1.2 million. The directors initially
assessed the deferred consideration payable to be £1.9 million. Goodwill on
this transaction of £7.5 million was capitalised.
9. Short term and long term provisions
Other payables represent the accumulated amounts due under the deferred
consideration arrangements with the vendors of the operating companies as
calculated in accordance with IFRS.
£'000
At 1 April 2005 14,603
Contingent provision on acquisition of RDC 1,885
Additional provision in the year 5,060
______
At 31 March 2006 21,548
______
Analysed as:
Current liabilities 7,046
Non-current liabilities 14,502
______
21,548
______
10. Reconciliation of profit on ordinary activities before finance costs
and tax to operating cash flow
Year Year
Ended Ended
31 March 31 March
2006 2005
£'000 £'000
Profit on ordinary activities before finance costs, 6,269 3,093
income from investments and taxation
Depreciation 1,019 488
Amortisation of intangible assets 528 182
Share based payments 245 80
Deemed remuneration 1,226 325
Profit on disposal of fixed assets (46) (6)
(Increase)/decrease in inventories and work in progress (1,097) 264
(Increase) in receivables (4,887) (832)
(Decrease)/increase in payables 4,713 1,336
________ ______
Operating cash flow 7,970 4,930
________ ______
11. Analysis of net debt
As at Cash Flow Acquisitions As at
1 April 31 March
2005 2006
£'000 £'000 £'000 £'000
Cash and short term deposits 5,357 (75) - 5,282
Acquisition loan notes (62) 27 (93) (128)
Bank loans (8,284) 814 - (7,470)
Finance leases (421) 216 - (205)
______ ______ ______ ______
Net (debt) (3,410) 982 (93) (2,521)
Restricted cash deposits 62 (27) - 35
______ ______ ______ ______
Net (debt) including restricted
cash deposits
(3,348) 955 (93) (2,486)
______ ______ ______ ______
The restricted cash balances are maintained in a designated account as security
for the loan notes issued on the acquisition of MSL and are, therefore, not
freely available to the Group.
12. Publication of non-statutory accounts
The financial information set out in this preliminary announcement does not
constitute statutory accounts as defined in Section 240 of the Companies Act
1985.
The preliminary announcement includes the consolidated income statement,
consolidated balance sheet, consolidated cash flow statement, consolidated
statement of changes in equity and associated notes that have been extracted
from the Group's audited financial statements for the year ended 31 March 2006.
Those financial statements have not yet been delivered to the Registrar. The
comparative figures relating to the year ended 31 March 2005 are taken from the
audited statutory accounts for that year, adjusted as described and set out in
the 2006 Annual Report.
13. Availability of the Annual Report and Accounts
Copies of the Annual Report and Accounts will be sent to shareholders in due
course and are available from the Company's registered office at City Group
P.L.C., 30 City Road, London, EC1Y 2AG and on the company's website
www.creston.com.
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