EQN.L Regulatory News (EQN)

28 July 2017

EQUINITI GROUP PLC RESULTS FOR THE 6 MONTHS ENDED 30 JUNE 2017

Equiniti Group plc ("Equiniti" or "the Group"), the specialist technology outsourcer providing non-discretionary payment and administration services, today publishes its interim results for the six months to 30 June 2017.

SOLID INTERIM RESULTS: IN LINE WITH EXPECTATIONS AND FULL YEAR GUIDANCE AFFIRMED

· Revenue progression of 1.5% (with a decline in organic growth of 0.6%) despite interest rate headwind and H2 bias

o 100% client retention with new client wins across all divisions

§ New share registration clients including Arrow Global, Howden Joinery Group and J Sainsbury

§ New client wins including Aon Hewitt, British Bankers' Association and House of Fraser

§ New mandates including Alpha FX, Arix Bioscience, Global Ports, Ramsdens and Xafinity

o Renewal or extension of relationships with clients including

§ DS Smith, Imperial Brands, Lloyds Banking Group and Santander

· New capabilities established:

o Credit bureau and credit servicing permissions secured following the acquisitions of Marketing Source and Gateway2Finance

o Increased scale and depth in the credit servicing market with the acquisition of Nostrum

o Planned entry to the US market with the proposed acquisition of Wells Fargo's Shareowner Services business to create a stronger, more diversified Group

· EBITDA prior to exceptional items growth of 1.9% with margin of 21.6%; reflecting the impact of acquisitions made in the current and prior period and an improved margin from our core operations

· EBIT of £14.1m reflecting the impact of £3.9m of exceptional items, related to the proposed acquisition of the Wells Fargo Shareowner Services business

· Strong cash flow conversion of 109%; growth of 9.2% to £20.2m in free cash flow to equity holders driven by strong working capital management

· Underlying EPS growth of 6.2% to 6.9 pence per share

· Net debt of £258.2m post acquisition-related costs of £14.9m with leverage at 2.8x

· Interim dividend growth of 6.7% to 1.75 pence per share, in line with progressive dividend policy

Commenting on the Group's results, Guy Wakeley, Chief Executive, said:

"We are pleased that Equiniti's strategy of deep specialisms in regulated markets continues to generate underlying earnings growth and shareholder value. Our market leading positions are a foundation for further defensive revenue growth, whilst the quality of our people and platforms provide continuing margin progression.

"The proposed acquisition of Wells Fargo Shareowner Services, announced on 12 July, provides an exciting opportunity to springboard our products and capabilities into the largest global equity market, allowing us to diversify our revenues with multi-national clients.

"As we enter the second half of the year, we affirm our full year guidance."

Analyst and Investor presentation

Equiniti's management will host an analyst and investor presentation at 9.15am UK time today. There will be a conference call and live webcast of the event. This will be broadcast live on Equiniti's website, www.equiniti.com and an archive version of the presentation will be available on the website later that day.

Conference call details:

Please dial into the call in time to allow for registration.

Participant dial-in : +44 (0) 20 3003 2666

Password : Equiniti

For further information please contact: 

Analyst/Investor enquiries:

Equiniti Group plc Guy Wakeley, Chief Executive +44 (0) 207 469 1800 

John Stier, Chief Financial Officer Frances Gibbons, Head of Investor Relations

Media enquiries:

Temple Bar Advisory Alex Child-Villiers + 44 (0) 7795 425580Will Barker + 44 (0) 7827 960151

Forward-looking statements

This announcement contains forward-looking statements regarding Equiniti. These forward-looking statements are based on current information and expectations, and are subject to risks and uncertainties, including market conditions and other factors outside of Equiniti's control. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. Equiniti undertakes no obligation to publicly update any forward-looking statement contained in this release, whether as a result of new information, future developments or otherwise, except as may be required by law. 

GROUP RESULTS

* See Appendix 1 on page 26 for detail of restated numbers

OVERVIEW

Equiniti has delivered a solid set of results as we continued to make progress on our strategic objectives during the period. The strength and longevity of our client relationships is a key asset of the Group and we continue to retain 100% of our client relationships, whilst extending and expanding a number of major contracts. The Group continued to gain market share, winning a number of clients from our competitors and securing new clients across all divisions. The Group has delivered revenue, profit and margin in line with expectations, continued to cross-sell to our strategic clients and has increased our offshoring capability with 784 people in our centre in Chennai as at 30 June 2017.

Reported revenue increased by 1.5% to £194.8m (H1 2016: £191.9m) during the period (with a slight decline in organic growth) despite the interest rate headwind and second half bias of the Group's trading. The acquisitions of Marketing Source and Gateway2Finance have been fully integrated and add to the Group's capabilities, having now secured credit bureau and credit servicing permissions. The acquisition of Nostrum strengthens our scale and depth in the credit servicing market. The proposed acquisition of Wells Fargo's Shareowner Services business creates a stronger, more diversified multi-national Group combining our local expertise with global reach.

Investment Solutions delivered good revenue growth driven by new client wins, higher share dealing volumes and growth in employee share plans, offset by the timing of corporate action income, with EBITDA and margin expansion driven by revenue growth, project work and continued focus on operating leverage. Intelligent Solutions revenue was impacted by the timing of project work in our specialist resourcing business, with strong profit progression driven by growth in higher margin work and a continuing drive for efficiency. Pension Solutions revenue growth was driven by an increase in project work, new client wins and MyCSP revenues stabilising, offset with a decline in profit due to lower margin project work and cost pressure for specialist projects.

Revenue from interest was 19.0% lower than the prior period due to the impact of lower interest on average client cash balances of £1.7bn (H1 2016: £1.7bn). Two thirds of the rate is fixed with instruments secured to August 2018 (£650m) and July 2020 (£380m).

EBITDA prior to exceptional items increased by 1.9% to £42.0m (H1 2016: £41.2m) reflecting the impact of acquisitions made in the current and prior period and an improved margin from our core operations.

Free cash flow to equity holders was £20.2m (H1 2016 £18.5m), an increase of 9.2%. Net debt of £258.2m (30 June 2016: £261.7m) represents a ratio of 2.8x net debt/EBITDA (30 June 2016: 2.9x), showing a reduction in leverage despite acquisition-related costs of £14.9m.  

The Board has declared an interim dividend of 1.75 pence per share. The interim dividend is to be paid on 26 October 2017 to shareholders on the register of members at close of business on 15 September 2017. Any shareholder wishing to participate in the Equiniti Dividend Reinvestment Plan ("DRIP") needs to have submitted their election to do so by 5 October 2017. We maintain our progressive dividend policy which will see us distribute around 30% of our normalised profit attributable to ordinary shareholders each year.

Board changes

As announced on 3 July 2017, Philip Yea joined the Board as a non-executive director and will succeed Kevin Beeston as Chairman in September 2017. Philip has considerable executive experience in both the quoted and private equity sectors and his experience will prove invaluable to the Board.

OPERATIONAL REVIEW

We serve our clients through three divisions: Investment Solutions, Intelligent Solutions and Pension Solutions. The integrated nature of our client base and strong client relationships results in shared clients across the Group. This enables us to continually enhance our performance through cross-selling and up-selling to existing clients. Our entry point is often providing share registration services, with clients taking further services from us over time.

In addition to our three divisions, we earn interest income on balances we administer on our clients' behalf.

Investment Solutions

Investment Solutions offers a broad range of services, including share registration for around half the FTSE 100, and the administration of SAYE schemes and share incentive plans for 1.2 million employees. The division also provides share dealing, wealth management and international payments to corporate clients and their employees, as well as direct to retail customers.

* See Appendix 1 on page 25 for detail of restated numbers

Revenue in Investment Solutions increased by 2.7% to £64.2m (H1 2016: £62.5m) driven by new client wins, higher share dealing volumes and growth in employee share plans, offset by the timing of corporate action income. Corporate action revenue was £4.7m (2016: £5.6m) with a strong pipeline of corporate activity to support H2 2017.

EBITDA prior to exceptional items grew by 13.5%, with margin progression of 3.0% as a result of revenue growth, an increase in project work and continued focus on operating leverage.

Registration Services continued to win market share and was appointed share registrar to Arrow Global, Howden Joinery Group and J Sainsbury, replacing existing service providers. The bereavement services contract secured with Lloyds Banking Group in the second half of 2016 has now gone live and the division secured a further pilot project for six banks through the British Bankers' Association. The division won a number of mandates from newly listed companies including Alpha FX, Arix Bioscience, Global Ports, Ramsdens and Xafinity, and renewed or extended relationships with clients such as DS Smith, Lloyds Banking Group, Imperial Brands, JPM Investment Trusts, Metro Bank, National Express, Santander and TalkTalk.

Intelligent Solutions 

Intelligent Solutions targets complex or regulated activities to help organisations manage their interactions with customers, citizens and employees. The division offers enterprise workflow for case and complaints management, credit services, on-boarding new clients and specialist resource for rectification and remediation.

* See Appendix 1 on page 26 for detail of restated numbers

Revenue in Intelligent Solutions increased by 1.3% to £55.4m (H1 2016: £54.7m) with a decline in organic revenue growth of 5.8%, reflecting good progress across the division offset by the delay of a major remediation contract with a retail bank which has now commenced.

The acquisitions of Marketing Source and Gateway2Finance have been fully integrated and add to the Group's capabilities having secured credit bureau and credit servicing permissions. The acquisition of Nostrum strengthens our scale and depth in the credit servicing market.

EBITDA prior to exceptional items increased by 10.7% to £13.4m as a result of growth in higher margin work and a continuing drive on efficiency. We continue to see a mix shift in this division, selling proportionally fewer resourcing services with more software sales and high margin project work.

The division won a broad range of work during the period including asset reunification on behalf of RBS and Royal Dutch Shell, and new sales in complaints management to a number of existing clients including a number of utilities companies.

Pension Solutions

Pension Solutions offers administration and payment services to pension schemes, as well as pension software, data solutions, and life and pensions administration. The division is a scale provider of pension technology and operates some of the largest pension schemes in the UK. These include the National Health Service scheme, which has more than 2.6 million members, and the Armed Forces Veterans which we have served continuously since 1836.

* See Appendix 1 on page 26 for detail of restated numbers

Revenue in Pension Solutions increased by 2.3% to £70.5m (H1 2016: £68.9m) driven by an increase in project work, new client wins and revenue from MYCSP stabilising.

EBITDA prior to exceptional items decreased by 16.0% to £10.5m with a decrease in margins of 3.2%. This was due to lower margin project work with cost pressure for specialist work. Action taken to adjust the cost base at the end of the second quarter will underpin full year profit and margin.

The division continues to win new clients including House of Fraser, Magnox, Shawbrook, and a partnership with Aon Hewitt, and has renewed or extended long-term relationships with Hackney, the NHS and the Metropolitan Police. The division has also been awarded contracts to manage GMP reconciliation and rectification for Tayside, Clwyd Pension Fund and SSE plc, and our early-mover advantage in local authority GMP rectification will drive revenue for H2.

OUTLOOK

Our objective remains to deliver organic revenue growth supplemented by growth from capability enhancing acquisitions each year. The dependability of our revenues, the platform nature of our operations and progressive deleveraging will enable us to grow underlying profits and earnings ahead of revenue.

We continue to make progress against this strategy with multiple opportunities for future growth. As we enter the second half of the year, we affirm our full year guidance.

 FINANCIAL REVIEW

Group Income Statement

Revenue

Reported revenue increased by 1.5% to £194.8m (H1 2016: £191.9m) during the year whilst proforma revenue adjusted for acquisitions decreased organically by 0.6%.

Organic revenue growth is reported revenue growth adjusted for acquisitions on a like-for like basis. Here we restate 2016 for the prior period acquisitions had they been owned in 2017 to create a like-for-like comparison of year-on-year progress. This is calculated as follows:

1 Acquisition of Risk Factor, Top Level, Marketing Source and Nostrum.

EBITDA prior to exceptional items

EBITDA prior to exceptional items increased by 1.9% to £42.0m (H1 2016: £41.2m) reflecting the impact of acquisitions made in the current and prior year and overall improved margins across the Group.

EBIT prior to exceptional items

EBIT remains an important measure of the Group's performance, reflecting profit before finance costs and taxation. In 2017, EBIT prior to exceptional items increased 1.7% to £18.0m (H1 2016: £17.7m).

Exceptional items

Exceptional items of £3.9m incurred in the period (H1 2016: £2.4m) relate to the proposed acquisition of the Wells Fargo Shareowner & Services Business. Further costs will be incurred as the transaction progresses to completion with total costs estimated at £17.0m, of which £13.0m will be charged to exceptional costs in FY 2017.

Net finance costs

Group net finance costs before exceptional items fell by £1.1m to £5.4m (H1 2016: £6.5m).

Profit before income tax

The Group made a profit for the period from continuing operations of £7.2m (H1 2016: £6.8m).

Earnings per share (EPS)

Basic EPS of 1.9 pence (H1 2016: 2.0 pence) is based on a weighted average number of shares of 300m (H1 2016: 300m). Excluding the impact of exceptional items, there was strong growth in underlying EPS of 6.2% to 6.9 pence (H1 2016: 6.5 pence).

Dividend per share

The Board has declared an interim dividend of 1.75 pence per share. The interim dividend is to be paid on 26 October 2017 to shareholders on the register of members at close of business on 15 September 2017. Any shareholder wishing to participate in the Equiniti Dividend Reinvestment Plan ("DRIP") needs to have submitted their election to do so by 5 October 2017. We maintain our progressive dividend policy which will see us distribute around 30% of our normalised profit attributable to ordinary shareholders each year.

Capital structure

The Group's Consolidated Balance Sheet at 30 June 2017 is summarised as follows:

Cash flow

The Group generated a free cash flow to equity holders of £20.2m (H1 2016: £18.5m) representing a free cash flow conversion of 109% (H1 2016: 93%). The main movements in cash flow are summarised below.

Reconciliation of EBITDA to total cash generated from operations (statutory cash flow statement)

Capital expenditure

Net expenditure on tangible and intangible assets was £16.4m (H1 2016: £10.5m). This represents 8.4% of revenue (H1 2016: 5.5%) and is driven by timing of major regulatory projects such as MiFID II and the launch of a new portal for our Selftrade business. Full year 2017 guidance remains at 7% of revenue, falling to 6% thereafter following completion of MiFID II requirements.

Net interest costs

Net interest costs in the period was £4.5m (H1 2016: £5.0m). Total interest bearing loans increased from £306.0m to £326.0m.

Investment in current and prior year acquisitions

Net cash outflow on prior and current year acquisitions was £14.9m (H1 2016: £12.1m) and relates to Marketing Source, Gateway2Finance and Nostrum.

Free cash flow to equity holders

Free cash flow to equity holders represents our cash flow prior to any acquisition, refinancing or share capital cash flows. It is a key measure of cash earned for the shareholders of the Group. Free cash flow to equity holders increased by 9.2% to £20.2m in the period and is pre acquisition-related costs of £14.9m.

Tax paid

Taxes paid are primarily due to MyCSP Limited (UK) and the Group's operations in India (Equiniti India Pvt Limited). The Group has the following tax attributes that reduce the cash tax effective rate compared to the profit and loss account effective tax rate:

· Future tax deductions on tax trading losses £232m

· Future tax deductions on intangible assets £369m

· Future tax deductions on tangible assets £34m

The tax impact of these attributes is recognised as deferred tax assets.

The forecast cash tax rate over the next few years is estimated to be around 14%.

We consider the cash tax rate to be an appropriate measure to use as it best reflects the economic flows from the business, taking into account our assessment of how our tax attributes, noted above, will unwind and reduce our overall tax liabilities.

At 30 June 2017, net debt was lower at £258.2m (30 June 2016: £261.7m) due to strong cash flow offset by investment in the business and payment of dividends. The slight increase in leverage from 31 December 2016 was due to acquisition costs paid in H1 2017 and the seasonality of our cash flow. In H1 we pay annual bonus payments of c£5m and £12.4m of dividends (including the annual dividend of MyCSP). We also tend to generate more profit in the second half of the year which naturally leads to more operating cash flow in this period.

The term debt facility does not include scheduled debt repayments and together with the revolving credit facility is available for a five-year term to October 2020. £74.0m of the £150.0m revolving credit facility was not drawn at the period end. The Group has substantial liquidity to support its growth ambitions and ongoing working capital requirements.

Acquisitions 

On 6 January 2017, the Group acquired Gateway2Finance for a total consideration of £200k with a further earn-out of up to £1.0m payable in 2020, dependent on growth. Gateway2Finance is an FCA authorised entity acting as a consumer finance intermediary, securing loans for clients referred by financial services companies and price comparison websites.

On 26 May 2017, the Group took control of Nostrum Group Limited and icenet Limited ("Nostrum") for a total consideration of up to £12.5m, comprising £7.0m contingent consideration, with £2.0m payable in September 2018 and £4.5m payable in September 2020, cash on legal completion of £3.9m and a total of £2.1m payable in monthly instalments to December 2018.

Nostrum is a provider of end-to-end loan management technology that helps banks, finance companies and retail brands provide innovative credit solutions to their customers. The acquisition strengthens our position in the lending sector and consolidates our strategy of providing technology-enabled loan and mortgage solutions to meet the requirements of this fast-moving market place, building on the technology platforms of Pancredit and the loan, mortgage and insurance servicing permissions of Gateway2Finance.

Events occurring post reporting period

On 12 July 2017, the Group announced the proposed acquisition and carve out of the Wells Fargo Share Registration & Services ("WFSS") business for a total cash consideration of $227.0m (c£176.0m) subject to certain customary closing adjustments and conditions.

The acquisition combines the #1 UK and #3 US share registrars to create a multi-national share registration and services business spanning the world's deepest capital markets, which will create a more diversified, multi-national Group. The business combination is expected to generate £8m of cost synergies by 2020 through introducing our Sirius platform and using this to automate processes.

Founded in 1929, WFSS provides share registration, corporate actions and investment plan services to c1,200 public and private US companies and other global companies and c9.2 million shareholder records processed in the US.

WFSS occupies a leading US market position and is growing market share driven by strong organic revenue growth (c6% 2014-16 revenue CAGR) from recent client wins and high profile corporate actions business. In 2016 WFSS delivered revenues of $104.0m (c£81.0m) and had adjusted profits to be acquired ("EBITDA") of $18.0m (c£14.0m).

WFSS has a strong track record of organic growth and market share capture with c650 clients including J.P.Morgan, Wells Fargo, General Electric and Berkshire Hathaway.  

The cash consideration and Equiniti's transaction expenses are expected to be financed from a planned £122.0m (c$160.0m) fully underwritten rights issue and £120.0m (c$155.0m) fully underwritten new debt facilities.

The rights issue is expected to be launched in September 2017, subject to the approval of the acquisition by shareholders and other customary conditions, such as the availability of new debt facilities. The rights issue will be used to pay deal fees of £17m plus part fund the acquisition. The balance of the purchase price (£70m) will be settled by the raising of the debt. The remaining £50m of debt facilities will be used to fund transformation costs and provide working capital to support WFSS.

Transaction costs are expected to be £17m, of which £9m will be charged as exceptional costs. These exceptional costs are expected to be charged to the income statement in 2017 as the transaction completes. The balance of £8m will be charged to the share premium account or charged to interest payable over the term of the new debt facility.

In addition to the above transaction costs a further £4m of exceptional charges will be incurred in 2017 reflecting the initial stages of the integration programme. Therefore the total exceptional spend for 2017 is estimated to be £13m.

Total integration costs, which will be incurred by 2019 will be around £42m, with exceptional costs in the region of £20m and capital expenditure of £22m. These costs reflect the programme to separate WFSS from the Wells Fargo Group and to introduce our own technology to the business.

PRINCIPAL RISKS AND UNCERTAINTIES

The Directors have considered the principal risks and uncertainties affecting the Group's financial position and prospects in 2017. As described on pages 44 to 47 of the Group's Annual Report for 2016, the Group continues to be exposed to a number of risks and has well established systems and procedures in place to identify, assess and mitigate those risks. The principal risks include those arising from change in client demand; reduction in Bank of England rates; information security breach; loss of key clients; regulatory risk; attracting and retaining high calibre employees; change, transformation and mobilistion; adverse legislative and environmental changes; and disruption to client servicing.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm that, to the best of their knowledge

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;

· the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and a description of principal risks and undertainties for the remaining six months of the year); and

· the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Guy Wakeley John Stier

Chief Executive Chief Financial Officer

28 July 2017

1Earnings before interest, tax, depreciation and amortisation

2Underlying earnings per share excludes the impact of exceptional items and amortisation of acquisition related intangible assets plus cash tax

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2017

1) General information

Equiniti Group plc is a public limited company which is listed on the London Stock Exchange and incorporated and domiciled in the United Kingdom. The company and its subsidiaries (collectively, the "Group") provide complex administration and payments services, supported by technology platforms, to a wide range of organisations. The registered office address is Sutherland House, Russell Way, Crawley, West Sussex, RH10 1UH.

The financial information in these condensed interim financial statements has been reviewed but not audited by the company's auditor, PricewaterhouseCoopers LLP.

The condensed interim financial information set out herein does not constitute the Group's statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2016 have been delivered to the Registrar of Companies. The external auditor has reported on the 2016 accounts and its reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

2) Basis of preparation

These condensed interim financial statements for the six months ended 30 June 2017 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting', as adopted by the European Union. These interim financial statements have been prepared on the basis of the accounting policies as set out in the previous Annual Report and Accounts for the year ended 31 December 2016 which are available at www.equiniti.com, except for taxes on income in interim periods which are accrued using tax rates that are expected to be applicable for the full accounting year.

Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that effect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 December 2016. In addition, a judgement has been made that there were no significant changes to the pension assumptions used to calculate the net defined benefit pension obligation and as a result, there were no material changes to the obligation as at 30 June 2017.

Going concern

The Directors, after making enquiries and on the basis of current financial projections and the facilities available at the reporting date, believe that the Group has adequate financial resources to continue in operation for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

3) Seasonality

Whilst the business is not highly seasonal, there is some margin bias towards the second half of the year. The business delivers more contracted, lower margin activities such as running of AGMs, dividend payments and pension statements in the first six months and there tends to be more discretionary, higher margin project work in the second half of the year.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 30 JUNE 2017

4) Operating segments

The Group's chief operating decision maker is the Board of Directors. The Board of Directors have identified the Group's operating segments as Investment Solutions, Intelligent Solutions, Pension Solutions and Interest, in line with how the Group runs and structures its business.

Central costs principally include corporate overheads. The EBITDA prior to exceptional items of each segment is reported after charging certain central costs based on the business segments' usage of central facilities and services.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 30 JUNE 2017

5) Operating costs

6) Operating costs - Exceptional items

Acquisition related expenses represent fees paid to third party advisors and transaction fees in respect of acquisitions completed in the period, as well as costs incurred on further potential acquisitions and disposals not yet completed, including costs incurred in relation to the proposed acquisition of the share registration division of Wells Fargo & Company (note 19). It also includes exceptional income in relation to the reversal of the contingent consideration provision on historic acquisitions as a result of a change in post-acquisition performance expectations or other earn-out criteria. 

7) Earnings per share