Hogg Robinson Group Regulatory News (HRG)

22 May 2014

Hogg Robinson Group plc

('HRG', 'the Company' or 'the Group')

Preliminary Results for the year ended 31 March 2014

Good progress against strategic priorities

Summary of results

Highlights

§ Underlying profit before tax up 3% and underlying operating profit margin up from 14.2% to 14.5% driven by cost management actions

§ Net debt reduced by 25% to £65m; equivalent to 1.1 times EBITDA(4) (2013: 1.4 times)

§ Full-year dividend up 5% to 2.21p per share with dividend cover of 3.5 times (2013: 3.7 times)

§ Good progress made towards our strategic goals; momentum building in key markets, balance sheet deleveraging accelerated and new long-term financing in place

Outlook

§ Good progress against strategic priorities provides base for accelerated growth

§ Expect to make further progress through the rest of the year

Notes:

(1) Profit before tax and earnings per share figures for 2013 are restated on adoption of the revised International Accounting Standard 19, Employee Benefits

(2) Before amortisation of acquired intangibles and exceptional items

(3) Free cash flow is the change in net debt before acquisitions and disposals, Employee Benefits Trust purchases, dividends and the impact of foreign exchange movements; an active working capital programme was implemented in 2009 and withdrawn in 2013

(4) Earnings before interest, tax, depreciation and amortisation (EBITDA)

(5) References to client travel activity and client travel spend throughout this document are unaudited

David Radcliffe, Chief Executive of Hogg Robinson Group plc, said:

"We made good progress against the strategic priorities we set out at the start of the year. These priorities are designed to grow our addressable market - in both our managed travel and technology businesses - and optimise our financial performance through the economic cycles. Looking ahead, our clear focus on achieving our strategic aims gives us confidence that HRG will make further progress through the rest of the year."

Contact Details

Notes to Editors

Hogg Robinson Group plc (HRG) is the award-winning international corporate services company. Established in 1845 and headquartered in Basingstoke, Hampshire, UK, HRG specialises in travel, expense and data management underpinned by proprietary technology. With a worldwide network that comprises over 120 countries, HRG provides unparalleled global expertise and local knowledge in Europe, North America, Asia Pacific, Africa, Latin America and MEWA. Read the latest HRG and search our archives.

www.hrgworldwide.com

A presentation for analysts and institutional investors will be held at 0900h BST today at Tulchan Communications, 85 Fleet Street, London EC4Y 1AE. A conference call facility and live webcast will also be available for analysts and institutional investors unable to attend in person. Pre-registration for this event is necessary to comply with security procedures at the venue. To register your interest in attending the presentation, or to obtain conference call details and access to the live webcast, please contact Tulchan Communications on +44 (0)20 7353 4200. A replay recording of the presentation via audio webcast and podcast with audio commentary from HRG's presentation team will be available at www.hrgworldwide.com by 1100h BST today or soon thereafter.

This announcement may contain forward-looking statements with respect to certain of the plans and current goals and expectations relating to the future financial conditions, business performance and results of Hogg Robinson Group plc (HRG). By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of HRG, including amongst other things, HRG's future profitability, competition with the markets in which the Company operates and its ability to retain existing clients and win new clients, changes in economic conditions generally or in the travel and airline sectors, terrorist and geopolitical events, legislative and regulatory changes, the ability of its owned and licensed technology to continue to service developing demands, changes in taxation regimes, exchange rate fluctuations, and volatility in the Company's share price. As a result, HRG's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. HRG undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules). No statement in this announcement is intended to be a profit forecast or be relied upon as a guide to future performance.

Chairman's Statement

The statement that follows aims to give shareholders a brief overview of the performance of the business during the past year. A more comprehensive analysis of business performance is offered in the Chief Executive's statement which follows this. We remain committed to a progressive dividend policy as long as it is justified by the Group's results and outlook and I am pleased to confirm that, like last year, we propose a 5% increase in the total dividend for the year.

The global economy, which drives the business activity that fuels our performance, improved in the US and, to a lesser extent, in the UK but has remained flat overall in continental Europe, while slowing growth in China and the rest of Asia Pacific has led to mixed economic outcomes. Working in this challenging environment our business volumes have increased but the resultant revenues have been somewhat affected by margin pressures due to competitive activity and business mix. However, the Group has exceeded last year's underlying profits. In the balance sheet, strong cash management has led to a good improvement in net debt levels to £65m and the company is committed to continue this focus.

It has become my practice to comment on the pension fund net deficit because of its significance to the balance sheet. At 31 March 2014, it was £180.4m (2013: £159.4m) and as is apparent from the numbers, it remains stubbornly high, not least because of the effect of low interest rates on the discount rate used in the calculation and, of course, increasing life expectancy for our members. During the year, we closed the defined benefit section to future accrual and replaced it with a defined contribution section. This should protect the company somewhat against the potentially increasing expense and volatility of the previous scheme but it is not without its impact on our loyal and hard working colleagues whose loyalty is greatly valued.

A year ago, I reported that the combination of our technology skills and travel management experience had been instrumental in us winning the travel and expense management business of the Government of Canada - a significant win. We started building the necessary fulfilment capability immediately the contract was awarded. The service delivery deadline was met and the financial year 2014/15 will benefit in revenue and earnings as a result. This has been a major achievement for those in HRG who have worked on the contract and they can feel justly proud.

All our business activity takes place in an environment of good corporate governance which I believe facilitates good business performance. We report on our governance practice in our forthcoming annual report and I encourage shareholders to review this.

On behalf of the Board and our shareholders, I would like to thank all those who work for Hogg Robinson for their dedication and commitment. I would also like to thank my fellow directors for their leadership and support.

John Coombe

Chairman

Chief Executive's Statement

Overview and strategy

As global activity broadly strengthened during the year, led by advanced economies, we saw continued and accelerating growth in the UK and North America, where client activity and travel expenditure were ahead of prior year. The pattern in other markets was less consistent. Some showed growth while others remained similar to last year or weakened slightly.

Although activity levels rose in core regions of HRG's business since last year, clients remained cost conscious and continued to seek best and most appropriate cost options. We saw further growth in client adoption of online self-booking of travel as the drive towards use of cost-saving technology continued. In response, we made further reductions to our staffing levels and other operating costs during the period, and closed a number of service locations mainly in the Nordic countries and elsewhere in continental Europe. This had a positive effect on our bottom line and we continue to see cost opportunities in the business as we adapt to the changing dynamics of the industry.

As a result of these cost reduction actions, it is with a great deal of sadness that we say goodbye to a number of our colleagues as we continue to match our cost base to the predictably changing shape of our business. I thank warmly those who have left and wish them well for the future.

We made significant progress on winning new business in our strategic focus areas and expanded our business with several existing clients, including ABB, Bupa, ConocoPhillips, EY, Statoil, Thomson Reuters and Vodafone, and renewed our contracts with many including Bechtel, Diageo, GDF Suez, GlaxoSmithKline and Wells Fargo. Our focus on delivering a service that meets the specific needs of each of our clients at all times continues to be a key part of our success. We did see continuing softness in the SME market in Europe driven by economic conditions and higher levels of competition from online only providers.

Overall, client travel activity grew by 8% year-on-year while travel spend was ahead by 3% or 5% at constant currency. HRG's headline numbers show a 1% fall in revenue to £341m (2013: £343m), unchanged at constant currency. Underlying operating profit rose 1% to £49.3m (2013: £48.8m), up 2% at constant currency, while underlying operating profit margin rose from 14.2% to 14.5%. Underlying profit before tax was up 3% and underlying EPS was unchanged from last year. Business mix, specifically lower fees associated with clients migrating to online self-booking, coupled with strong competitive pricing, resulted in downward pressure on our top line. The ongoing trend towards online self-booking of travel by clients continues as predicted and also results from our efforts to reduce the cost of travel and related expenditure for our clients.

In last year's results announcement, I described our strategic priorities for the following three years as follows:

§ Managed travel- To grow our managed travel business by increasing our business from existing clients with new service offerings, entering new markets and winning new business by leveraging our technology and service delivery

§ Software as a Service (SaaS) - To develop a SaaS business focused on providing travel, expense and payment solutions to existing and new clients, either direct or through third party travel and payment providers

Our strategy, which includes the provision of technology solutions not only to our existing clients but also to the wider travel and expense industry, provides a sensible balance of resilience and growth. Our ongoing goal is to lead the industry in innovative solutions to solve our clients travel and expense needs.

We have made considerable progress during the year as we implement this strategic vision whilst seeking to optimise HRG's financial performance through the economic cycles.

(A) Grow our managed travel business

§ Increase our business through new service offerings

Meetings, Groups and Events (MGE) has been an area of expenditure that for many corporates has thus far been unmanaged. We believe that considerable cost savings are available and we have therefore engaged with many of our clients and prospects through the year to offer fee-generating advice designed to bring greater control, transparency and leverage. Notable amongst new MGE business secured during the period is Thomson Reuters and Vodafone.

During the second half of last financial year, we entered into a preferred relationship with Citi Commercial Cards. We have already seen advantage from this new service offering as we pitch for new business. HRG now has probably the widest global footprint of any travel management company offering the Central Travel Account facility, which means we can deliver the best global coverage and support capability to large multinational clients seeking a common payment process across multiple markets. As part of our MGE strategic initiative, we launched our integrated Meetings Management proposition during the year, which brings HRG's global meetings services together with Citi Virtual Card, to help clients manage meeting-related costs more effectively.

§ Entering new markets

Our focus on the provision of specialised travel logistics to corporates in the marine, offshore and energy sectors is gaining welcome traction and benefit. As a result of our long experience of successfully managing complex travel, a great deal of activity and interest is being shown by clients and prospects and we are now responding to a greater number of tender proposals than ever. During the period, we secured the travel management contract of Statoil, an integrated oil & gas company headquartered in Norway with operations in 34 countries, and expanded our business with ConocoPhillips, DOF Marine and Tullow Oil.

§ Winning new business by leveraging our technology and service delivery

The use of technology in providing time and cost-efficient solutions in our industry has accelerated in recent years and now plays a key role in our discussions with all clients and prospects. HRG's proprietary technology lies at the forefront of a range of travel and expense management services that we now provide. Lloyds Banking Group (LBG) is one of several clients that renewed and extended their relationship with HRG during this year. In this case, we have expanded our range of services to LBG through the provision of Spendvision expense management tools as a white-label solution for its corporate clients.

(B) Develop a Software as a Service (SaaS) business

Our work during the year on the implementation of technology services for the Government of Canada proceeded very well and following user acceptance testing, we went 'live' in April 2014. This very large project has involved a considerable number of staff across our travel and expense management operations, particularly those working in technology. In recent months, we have received enquiries from a number of existing and prospective clients interested in discussing similar end-to-end travel and expense management solutions. We plan to increase our investment in sales and marketing during the current financial year in this important area of our strategy as we further develop our end-to-end travel and expense management offering and focus the distribution of HRG's technology products through a SaaS business model.

We also made substantial progress during the year in delivering against the specific FY14 action points that we identified last May:

§ Lower the cost base to reinvest in operations by reducing HRG locations, streamlining our back office and by optimising call centre and online services.

Our target was to realise annualised savings of £6.5m from FY15. We now anticipate that we will realise savings of £7.0m. For the year ended 31 March 2014, we have made an exceptional charge of £7.0m in respect of redundancy costs and onerous lease provisions. We closed a number of HRG offices or reduced office space in several countries as we transition to a service configuration delivered through a network of hub locations, a move initiated some years ago in response to the trend of consolidation of travel management by clients through fewer locations. Elsewhere, we made good progress on numerous efficiency initiatives aimed at lowering the Group's operational overheads and transaction costs. We anticipate our market will continue to be dynamic and we will therefore continue to ensure that our cost and shape are both appropriate and match our strategic need as we move forward.

§ Pension deficit - start consultation on the closure of the UK defined benefit to future defined benefit accrual.

Following a consultation process, the active members were transferred to a defined contribution section at the end of June 2013. Group pre-tax pension liabilities at 31 March 2014 were £180m, up £21m over the year.

§ Continue to reduce net debt.

Our medium-term objective is to achieve a net debt / EBITDA ratio in the range 0.7-1.0 times. Through tight working capital management, good free cash generation and rigorous cost control, we reduced net debt by 25% to £65m year-on-year, equivalent to 1.1 times EBITDA for the last 12 months.

Outlook

Our clear focus on achieving our strategic priorities gives us confidence that HRG will make further progress through the rest of the year.

David Radcliffe

Chief Executive

Financial results

Revenue of £340.8m was down 0.7% as reported, comprised of an increase of 0.4% at constant exchange rates offset by a 1.1% reduction through adverse currency movements. Underlying operating profit, which is before the amortisation of acquired intangibles and exceptional items, increased by 1.0% from £48.8m to £49.3m, or by 2.0% at constant exchange rates, and represented a margin improvement from 14.2% to 14.5%. The underlying earnings performance is partly explained by the award of a technology licensing agreement during the first half of last financial year. Excluding the impact of the technology deal and related net investments, underlying operating profit would have risen by approximately 7% at constant currency. After the restatement of finance costs as a consequence of applying IAS 19 (revised), underlying profit before tax was up by 3% to £35.8m while underlying EPS was unchanged at 7.8p.

Reported operating profit declined by 13% to £38.8m, largely due to exceptional items of £7.0m. Reported profit before tax was down by 18% from £30.9m (restated) to £25.3m and EPS fell by 23% from 6.9p (restated) to 5.3p.

Revenue per employee increased by 1.6% from £68.6k to £69.7k. At constant exchange rates this was an increase of 2.6%.

Year-end net debt reduced by 25% or £21.7m to £65.3m, equivalent to 1.1 times EBITDA for the last 12 months (2013: 1.4 times). This translates into gearing of 34.1% (2013: 41.8%). We successfully refinanced our main banking facilities in the period and we continue to operate well within our banking covenants.

The Group has a progressive dividend policy and the Board is recommending a final dividend of 1.58p per share resulting in a full-year dividend of 2.21p per share, an increase of 5% on the prior year. Our dividend is covered 3.5 times (2013 restated: 3.7 times) by underlying EPS. The final dividend will be paid on 28 July 2014 to shareholders on the register at the close of business on 27 June 2014.

Operational Review

Client activity

Client travel booking activity rose by 8% during the financial year, while client travel spend was up by 3% or 5% at constant currency. In terms of mix of travel bookings, air accounted for nearly fifty per cent of all transactions slightly down on prior year, while hotel and rail bookings showed year on year gains.

As predicted and planned for, adoption of online self-booking of travel by HRG's clients continues to grow, with approximately 42% of all client travel bookings self-booked during the year (2013: 36%). Attracted by lower transaction fees, many clients are now seeking to mandate online self-booking for simpler travel itineraries on regional and global bases.

With increased automation of the travel booking process and related activities, the control of demand for travel is now an important factor. We welcome this development as it offers us opportunities to work more strategically with our clients and, as such, HRG is seen, valued and works increasingly as a business partner.

Our diversified client portfolio ensures that the Group is not overly exposed to any individual client or sector, with no single client accounting for more than 3% of client revenue.

During the year, HRG welcomed a number of new clients to its diversified portfolio including BGC, a construction and building materials company, and one of the largest privately owned companies in Australia, BMO Financial Group, Bupa, Friends Life, Kingfisher, MasterCard, Statoil, Thomson Reuters and Vodafone. Late in the year, we did see losses of long-term clients P&G, in Europe, and Barclays. We also secured expanded contracts, in terms of both service and geography, with existing clients such as ABB, AIG, Liberty Global, ConocoPhillips, EY, Mars, SNC Lavalin and Tullow Oil. Notable amongst clients renewing their contracts with HRG were Agilent Technologies, Bechtel, Bombardier, Diageo, DuPont, GDF Suez, GlaxoSmithKline, Hess, Lenovo, Lloyds Banking Group, Mars and Wells Fargo. Going forward we continue to see positive momentum, our pipeline of new business prospects remains very healthy, particularly in our strategic focus areas of Government, Logistics and MGE.

Corporate Travel Management (CTM)

§ Revenue broadly unchanged at constant currency

§ Proportion of online self-booked travel up from 36% to 42%

§ New business wins in strategic focus areas

 (1) Before amortisation of acquired intangibles and exceptional items

Europe

 (1) Before amortisation of acquired intangibles and exceptional items

§ Strong growth in rail and hotel bookings

§ Further rationalisation of service network to core hub locations

§ Online self-booking of travel up from 30% to 36%

Revenue in Europe was down 1.2% at constant currency. Underlying operating profit fell by £0.7m, including a £0.1m benefit from currency movements. Excluding last year's technology deal, underlying operating profit for the region was 1.7% lower at constant currency. Client travel spend increased by 3% year-on-year at constant currency. Travel transaction activity was up by 7%, with a 12% increase in rail bookings.

The recovery in the UK corporate travel market, which we first reported towards the end of last financial year, continued and strengthened through the current financial year. Compared to last year, travel spend was up by 11% and activity ahead by 15%, while the proportion of travel self-booked by clients online rose from 43% to 50%. We saw a business mix change to rail in the period largely as a result of increasing business with clients seeking lower cost, better alternatives to air and hotel.

Our focus on seeking leads in MGE and Logistics is proving beneficial. Notable MGE new business secured during the year includes Tesco, Thomson Reuters, Vodafone and Willis. After winning the travel management contract of Statoil, an integrated oil & gas company headquartered in Norway with operations in 34 countries, we saw further success during the period gaining the business of ConocoPhillips and Tullow Oil. Late in the year, we did see some client losses in financial services and consumer goods.

We have seen only partial recovery in the Nordic market. Across the whole of our Nordic operations, client travel transaction activity was up compared to prior year while spend was lower. The overwhelming focus for clients during the period has been to reduce their travel and related expenditure while gaining better value. As elsewhere, our Nordic clients have been attracted to the lower fees associated with online self-booking of travel, and we saw further growth in this booking method. Clients in the oil & gas sector in Norway remained resilient during the year, and we benefited in the final quarter of the financial year when we started trading with new client Statoil. SME and MGE revenues were significantly lower than a year ago although it was pleasing to see an improvement towards the end of the period, particularly in Sweden and Finland. Cost control remains a key focus for our Nordic operations. We reduced headcount and consolidated our service network to fewer locations during the year as part of an ongoing programme to improve efficiency.

With only very modest growth seen in the German economy during the financial year, most areas of our travel management business showed a weaker performance compared to last year. Two bright areas were in MGE, where we secured new business, and in our sports-related business, which benefited from German success in the UEFA Champions League. Cost reduction measures begun last year continued, including the consolidation of our service network, lowering headcount and reducing overheads.

In Switzerland, travel spend and activity were lower year on year mainly due to prior year client losses this resulted in a lower financial performance for the period. We started to benefit from the restructuring and efficiency initiatives begun last year. These include the closure of a number of locations as we move to a more centralised service delivery and headcount reductions.

Client adoption of online self-booking continued to grow during the year, accounting for 36% of all bookings made in the region, up from 30% last year.

North America

 (1) Before amortisation of acquired intangibles and exceptional items

§ Successful implementation of integrated travel and expense management contract for Government of Canada; benefit starting in second quarter of calendar 2014

§ Online self-booking of travel up from 51% to 56%

North American revenue was up by 4.3% year-on-year at constant currency, benefiting from increased client travel spend. Underlying operating profit rose £0.3m, including a £0.3m loss from currency movements. Excluding last year's technology deal, underlying operating profit for the region grew by 18.9% at constant currency. Client spend was up by 12% in real terms and activity higher by 12%.

We operate two businesses in North America: (1) corporate travel management, and (2) loyalty, managing the redemption of credit card loyalty programmes for financial institutions.

Travel spend amongst our travel management clients rose by 14% at constant currency while travel transaction activity was 17% ahead of prior year. Travel management revenue rose by 6% and underlying operating profit was up by 20%, both at constant currency. The improving trading conditions that we saw during the first half of the financial year continued in the second half. Business confidence amongst HRG's North American clients appears to have risen over the past year and the higher levels of travel booking activity and spend reflect this. New client activity included the wins of BMO Financial Group and Statoil, and additional business awarded by SNC Lavalin, one of the world's leading engineering and construction companies, and insurance company AIG.

In our loyalty business, we implemented new packaging options for our largest loyalty client resulting in higher revenue. We also saw further expansion in our US loyalty portfolio as we welcomed Fifth Third Bank and MasterCard. HRG now manages all US domestic travel for MasterCard's loyalty programme.

In recent years, we have made a number of significant improvements to our operations in North America, principally aimed at improving efficiency and driving forward margin in this highly competitive market. This work is ongoing. Over the past year, we made significant investment in our telephony to enable better management of calls during periods of peak activity. We also expanded our operational footprint, opening a new office in Houston to deal more effectively with our logistics and oil & gas clients in the region, and also one in Ottawa, principally to serve new client the Government of Canada.

Online self-booking of travel in the North America region continues to increase and now accounts for 56% of all bookings, up from 51% last year.

Asia Pacific

 (1) Before amortisation of acquired intangibles and exceptional items

§ Weaker performance in Australia as demand for natural resources remains weak

At constant currency, revenue was lower by 1.9%. Underlying operating profit rose by £1.3m with a £0.1m currency effect. Client spend was broadly unchanged in real terms and travel transaction activity higher by 1%.

Around the Asian region generally, the past year has been characterised by a slowdown in emerging market and developing economies. While there are variations by country, the prevailing trait amongst our Asia Pacific-based clients during the period has been one of caution in terms of their travel activity and related expenditure. The convergence of a continuing production slowdown in the resources sector, driven by lower demand from China, and the strength of the Australian dollar versus the US dollar, had a knock-on effect for HRG's clients in the professional services, manufacturing and government sectors. Revenue in Australia fell by 3% at constant currency, travel activity dropped by 2%, while online self-booking by clients rose from 58% to 61%. We have taken swift action in response to the lower projected travel activity of our clients and the continuing growth in online booking by lowering headcount and reconfiguring our operations to service clients through fewer locations. On the new business front, we expanded our contract with ABB through the award of a travel management contract in Australia. New business activity remains steady and the prospect pipeline is healthy.

Signs of trading recovery in Singapore are mixed. Clients in the financial and pharmaceutical sectors have generally increased their travel activity and expenditure compared to last year, while those in logistics and manufacturing have sought to tighten and enforce their travel compliance policies, reducing their activity and spend.

In the year, we completed the acquisition of the minority interests of our joint venture operation in Hong Kong. We see this as a positive move to create further value for our current clients operating in the region and also expand and capture more business in this fast growing economy. We continue to see good growth from our joint venture in mainland China.

Online self-booking of travel in the Asia Pacific region continues to grow and now accounts for 51% of all bookings, up from 50% a year ago.

Spendvision

 (1) Before amortisation of acquired intangibles and exceptional items

§ Underlying earnings performance distorted by adverse currency impact

Revenue was up 10.8% at constant currency, with good growth in the banking sector and direct client business although the latter was impacted by a weaker Australian dollar. Underlying operating profit was unchanged at constant currency, after a £0.4m adverse impact from currency movements. This reflects the investment in additional resources to implement the Government of Canada contract. Our partnerships remain strong with new banking wins this year as well as healthy growth in new direct customers and increasing revenue from existing business.

Technology

Our focus this year has been on implementing our travel and expense software as a service for the Government of Canada. The project covers 120 government departments and more than 170,000 staff. Our modular development approach allows us to offer clients a full suite of products from travel authorisation, online booking, to expense claims and payment processes.

Our strategy for our software as a service offerings in the mid term is to expand our presence in the UK, mainland Europe and Australasia. In FY15, we will make significant investment in sales and marketing resources as we launch products into these markets.

Additional Financial Disclosure

Operating expenses

Reported operating expenses increased by 1.2% to £302.0m.

Underlying operating expenses, which are before amortisation of acquired intangibles and exceptional items, reduced by 1% to £291.5m, but were in line with the prior year at constant exchange rates.

Underlying operating profit

Underlying operating profit, which is before amortisation of acquired intangibles and exceptional items, increased by 1.0% from £48.8m to £49.3m, or by 2.0% at constant exchange rates. Underlying operating profit margin increased from 14.2% to 14.5%.

Exceptional items

The cost of exceptional items was £7.0m (2013: nil). These relate to planned cost reduction programmes in Europe and Australia. They are mainly in respect of redundancy costs and onerous lease provisions.

Net finance costs

Net finance costs reduced by £0.1m to £14.6m, primarily reflecting lower levels of average debt.

With effect from 1 April 2013, the Group has adopted the revision to IAS 19, Employee Benefits. This replaces interest cost and expected return on plan assets with a finance cost on the pension deficit calculated using the rate used to discount defined benefit pension liabilities. The change has been applied retrospectively and comparative figures have been restated (see note 6 to the financial statements).

Taxation

The tax charge for the year represents an overall effective tax rate (ETR) of 30% of the reported profit before tax (2013: 28%). On an underlying basis, before exceptional items and amortisation of acquired intangibles, it was 28% (2013 restated: 29%). The current year ETR includes a £0.2m charge relating to the impact on deferred tax assets of the reductions in the UK corporation tax rate from 23% to 21%, effective April 2014, and to 20% with effect from April 2015. An additional charge of £4.9m is reflected in the Consolidated Statement of Comprehensive Income in respect of deferred tax assets on pension liabilities resulting from the reduction in the UK corporation tax rate. We anticipate a tax rate of around 28% in future years.

EPS

After the restatement of finance costs as a consequence of applying IAS 19 (revised), underlying EPS was in line with the prior year at 7.8p. Basic EPS fell by 23% from 6.9p to 5.3p largely due to exceptional items of £7.0m.

Return on capital employed

Return on capital employed is calculated by dividing underlying operating profit plus net share of the results of associates and joint ventures by average net assets. Average net assets are based on each of the 12 month ends for the financial year and exclude net debt, pension deficits and tax provisions. Average net assets amounted to £216.4m (2013: £222.0m) compared with £190.3m at the year end (2013: £204.4m). The return for the year was 23.3% (2013: 22.3%).

Cash flow

Free cash inflow, which is the change in net debt before acquisitions and disposals, Employee Benefits Trust purchases, dividends and the impact of foreign exchange movements on net debt balances, was £24.8m (2013: outflow of £10.5m).

Cash inflow in respect of working capital was £6.2m (2013: outflow of £36.8m), the prior year reflected the planned withdrawal of the working capital management programme after 31 March 2012. The cash outflow related to interest was £7.0m (2013: £6.4m), including £1.7m of fees associated with refinancing (see below). Tax paid in cash was £4.2m (2013: £5.7m) and capital expenditure, which is primarily internal software development and office equipment, was £14.3m (2013: £9.7m). Cash costs for pension deficit reduction were £10.3m (2013: £9.8m). Of the £7.0m charge in respect of exceptional items, £3.0m was paid in cash.

In addition to free cash flow, other cash flow items related to £6.7m of dividends paid to shareholders during the year (2013: £6.2m), a net £1.3m inflow arising from the Hong Kong acquisition (inclusive of £1.5m of acquired cash) and £2.3m of favourable foreign exchange related movements.

Funding

The Group refinanced its principal committed banking facility during March 2014. The new facility is a £150m multi-currency revolving credit facility (RCF) that is committed until May 2018. The RCF is used for loans, letters of credit and guarantees, with interest based on the inter-bank lending rate for the appropriate currency plus a margin. The Group has fixed interest on CHF25m until November 2014 and on £20m until February 2017. In addition, the Group has a £30m fixed rate loan, repayable by 2018, and uncommitted facilities amounting to around £18m at the year end.

The principal covenants continue to be measured semi-annually, at the end of March and the end of September, against EBITDA. The covenants require that net debt is less than 3.0 times EBITDA and net external interest is covered at least 4.0 times by EBITDA, both on a rolling 12-month basis. The definition of EBITDA for covenant purposes is not materially different from the definition used in these financial statements.

Net external interest costs of £6.3m were covered 9.6 times by EBITDA (2013: 8.8 times).

Pensions

The Group-wide pension deficits under IAS 19 have increased by £21.0m to £180.4m before tax.

The UK scheme deficit increased by £19.8m to £164.4m. The £19.8m increase in scheme assets was more than offset by a £39.6m increase in scheme liabilities, primarily driven by a lower discount rate adding £25.3m. Since 2003, the UK defined benefit scheme has been closed to new entrants and has capped increases in pensionable salary. Following a consultation process with active members, the UK defined benefit section was closed to future accrual on 30 June 2013 and replaced with a defined contribution section. A new schedule of payments for the UK scheme is expected to be agreed with the Trustees as a result of the triennial valuation which is anticipated to be completed during fiscal 2015 (effective April 2014).

The overseas schemes are primarily in Germany and Switzerland, where the deficit increased by £1.2m to £16.0m.

At the year end, there was a deferred tax asset of £33.0m (2013: £33.2m) relating to the UK deficit and an asset of £0.2m (2013: liability £0.2m) relating to the overseas schemes. The change in UK deferred tax includes the reduction in the headline rate of UK corporation tax.

The revision to IAS 19, Employee Benefits, applied from 1 April 2013, has no impact on the net deficit. The increase in finance cost recognised in the income statement is offset by a corresponding reduction in re-measurements recognised in other comprehensive income.

Share price

The closing mid-market price at the year end was 78p (2013: 57p). During the year, the price ranged from 54.5p to 87p per share.

(1) Excluding amortisation of acquired intangibles

(2) Prior-year numbers are restated on adoption of the revised International Accounting Standard 19, Employee Benefits

Hogg Robinson Group plc

Consolidated Income Statement

For the year ended 31 March 2014

*On adoption of the revised International Accounting Standard 19, Employee Benefits

Hogg Robinson Group plc

Consolidated Statement of Comprehensive Income

For the year ended 31 March 2014

*On adoption of the revised International Accounting Standard 19, Employee Benefits, and re-presentation of deferred tax related to share-based incentives.

Hogg Robinson Group plc

Consolidated Balance Sheet

As at 31 March 2014

Hogg Robinson Group plc

Consolidated Statement of Changes in Equity

As at 31 March 2014

*On adoption of the revised International Accounting Standard 19, Employee Benefits, and re-presentation of deferred tax related to share-based incentives

Hogg Robinson Group plc

Consolidated Cash Flow Statement

For the year ended 31 March 2014

Additional Financial Information

General information and basis of preparation

The financial information which comprises the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity and the Consolidated Cash Flow Statement and related notes does not constitute the Company's Consolidated Financial Statements for the years ended 31 March 2014 and 2013, but is derived from those financial statements. The auditors have reported on the Group's Consolidated Financial Statements for each of the years ended 31 March 2014 and 31 March 2013. Their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of Companies Act 2006 or equivalent preceding legislation. The Consolidated Financial Statements for the year ended 31 March 2013 have been delivered to the Registrar of Companies and the Consolidated Financial Statements for the year ended 31 March 2014 will be filed with the registrar in due course.

The Consolidated Financial Statements have been prepared in compliance with International Financial Reporting Standards (IFRS) as endorsed and adopted for use by the European Union, International Financial Reporting Interpretations Committee (IFRIC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Consolidated Financial Statements have been prepared under the historical cost convention, as modified by the use of valuations for certain financial instruments, share-based payment incentives and retirement benefits.

Critical accounting policies and forward-looking statements

The preparation of the IFRS financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the year.

The Operational Review should be read in conjunction with the audited Consolidated Financial Statements. The discussions contain forward-looking statements that appear in a number of places and include statements regarding HRG's intentions, beliefs or current expectations concerning, among other things, results of operations, revenue, financial condition, liquidity, growth, strategies, new products and the markets in which HRG operates. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties.

Non-GAAP measures

Underlying operating profit is calculated as operating profit before amortisation of acquired intangibles and exceptional items

Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) is calculated as operating profit before exceptional items before net finance costs, income taxes, depreciation, amortisation and impairment.

The Directors believe that the presentation of underlying operating profit and EBITDA enhances an investor's understanding of HRG's financial performance. However, underlying operating profit and EBITDA should not be considered in isolation or viewed as substitutes for retained profit, cash flow from operations or other measures of performance as defined by IFRS. Underlying operating profit and EBITDA as used in this announcement is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation and are unaudited line items but are derived from audited financial information. The Directors use underlying operating profit and EBITDA to assess HRG's operating performance and to make decisions about allocating resources among various reporting segments.

1 Segment information

The chief operating decision maker has been identified as the Executive Management Team, which reviews the Group's internal reporting in order to assess performance and allocate resources. The Executive Management Team has determined the operating segments based on these reports.

The Executive Management Team considers the business from the perspective of two core activities, Corporate Travel Management, which is analysed into three distinct geographic segments, and Spendvision. The Group's internal reporting processes do not distinguish between the numerous sources of income that comprise revenue for Corporate Travel Management. The performance of the operating segments is assessed based on a measure of operating profit excluding items of an exceptional nature. Interest income and expenditure and income tax expense are not included in the result for each operating segment that is reviewed by the Executive Management Team. Other information provided, except as noted below, to the Executive Management Team is measured in a manner consistent with that in the financial statements.

Total segment assets exclude cash and cash equivalent assets, current tax assets and deferred tax assets which are managed on a central basis. These are included as part of the reconciliation to total Consolidated Balance Sheet assets.

There is no material inter-segment revenue.

External revenue from clients by origin (where the Group's operations are located) is not materially different from external revenue from clients by geographical area (where the client is located) disclosed above.

A reconciliation of operating profit to total profit before income tax expense is provided in the Consolidated Income Statement.

Reported segments' assets are reconciled to total assets as follows:

Capital expenditure by geographical location:

2 Operating expenses

Exceptional item

Restructuring costs of £7.0m were incurred during the year. These costs relate to planned cost reduction programmes in Corporate Travel Management. They are in respect of redundancy costs and onerous lease provisions.

Services provided by the Company's auditor

The cost of services provided by the Company's auditor, PricewaterhouseCoopers LLP (PwC), and its associates is set out below:

In addition to the above services, the Company's auditor acted as auditor to the Hogg Robinson (1987) Pension Scheme. The appointment of auditors to the Group's pension scheme and the fees paid in respect of that audit are agreed by the trustees of the scheme, who act independently from the management of the Group. The aggregate fees paid to the Group's auditor for audit services to the pension scheme during the year were less than £0.1m (2013: less than £0.1m).

3 Staff costs

4 Finance income and finance costs