Hogg Robinson Group Regulatory News (HRG)

29 November 2016

Hogg Robinson Group plc

('the Company' or 'the Group')

Results for the six months ended 30 September 2016

Continuing to deliver on strategic actions

Summary of results

Operational highlights

§ Continued earnings growth as planned with increases in both underlying operating profit and underlying operating profit margin

§ Significant cost savings of £11.5m already achieved as we reach the mid point in our three-year restructuring programme

§ Newly deployed technology delivering increased productivity and improving client experience

Financial highlights

§ Good results with Group revenue up by 5%, underlying operating profit up 12% and underlying profit before tax up 17% in the period

§ Underlying profit before tax up 17%, excluding exceptional costs of £1.1m (2015: £1.1m) incurred in the period due to restructuring initiatives expected to deliver annualised cost savings of £3.5m in FY18 and beyond

§ Fraedom delivered further revenue growth, up 21% equivalent to an 8% increase on a constant currency basis; investment made in the period to support strong pace of growth with new clients expected to generate incremental revenues in H2

§ Underlying basic EPS up 10% from 2.9p to 3.2p, with reported basic EPS up 12% from 2.6p to 2.9p

§ First-half interim dividend up 5% to 0.715p per share, with cover of 4.5 times (2015: 4.3 times), reflecting management's confidence in the full-year outlook

§ Strong improvement in free cash flow increasing by £2.3m to £6.5m with net debt significantly reduced by 45% to £31.0m

Current trading and outlook

§ We will continue to deliver our strategy in the second half and believe these initiatives have now created a platform from which to build for the future

§ The Board believes the Company will deliver a full-year performance in line with market expectations although the Board also notes that the future macroeconomic landscape looks less clear

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

"We have continued to deliver earnings growth as planned and we have improved our underlying operating profit margin. Our three-year cost restructuring programme is well advanced and is delivering significant savings. Newly deployed technology is helping us provide superior service to our clients more efficiently and will underpin future growth for our businesses.

"We've navigated the period following the Brexit referendum with minimal effect so far on our trading. However, we see a tightening in the market as our clients respond to the broader economic uncertainty. Our travel management business delivered a robust performance in challenging market conditions whilst Fraedom continued to grow with exciting client wins in the period. Following the success of our restructuring actions and technology deployment we are well placed to leverage these achievements and create strategic opportunities to develop both businesses."

Notes:

(1) Local currency results for September 2016 have been translated at September 2015 exchange rates

(2) Before amortisation of acquired intangibles and exceptional items

(3) Free cash flow is the change in net debt before acquisitions and disposals, Employee Benefit Trust purchases, dividends and the impact of foreign exchange movements

(4) A calculation of net debt is shown in Note 18 of the Financial Statements

(5) Online adoption is the proportion of total transactions booked by clients via proprietary or third-party online booking tools

(6) All references to Fraedom in this results statement include only the operations previously known as Spendvision

For further information contact:

Notes to Editors

Hogg Robinson Group plc is an international corporate services company. Established in 1845 and headquartered in Basingstoke, Hampshire, UK, the Company specialises in travel, expense, payments and data management underpinned by proprietary technology. With a worldwide network that comprises over 120 countries, the Company provides unparalleled global expertise and local knowledge in Europe, North America, Asia Pacific, Africa, Latin America and MEWA.

www.hoggrobinson.com

A presentation for analysts and institutional investors will be held at 0900h GMT today at FTI Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD. 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, to obtain conference call details and access to the live webcast, please contact FTI Consulting on +44 (0)20 3727 1000.

A replay recording of the presentation via audio webcast and podcast with audio commentary from the Company's presentation team will be available at www.hoggrobinson.com by 1100h GMT 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. 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 the Company, including amongst other things, the Company's future profitability, competition within 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, the Company'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. The Company 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.

Overview

In line with our expectations, Hogg Robinson Group delivered a good operational and financial performance during the first half of this financial year. We are now half way through our three-year restructuring programme and have delivered real benefits in terms of improved efficiency and lower operating cost. We developed and deployed new technology during the period which is already driving productivity and improving client service, and which will underpin future growth.

On a reported basis, revenue rose 5% with underlying operating profit and profit before tax growing by 12% and 17% respectively. Both reported revenue and earnings have been helped by favourable foreign exchange movements as a proportion of our business is transacted in overseas currencies. Revenue at constant currency was down 3% on last year reflecting pricing pressures and our continued migration from classic travel services to more online booking (online booking generating lower client fees but requiring significantly less service resource to fulfil). Underlying operating profit was up 4% at constant currency and we saw further growth in operating profit margin which grew by 0.8 percentage points to 13.1%. Our increasing profit is the result of managing our client requirements more efficiently, driving improvements in our productivity and managing cost savings throughout the business.

So far, the Brexit decision appears to have had minimal trading effect on the Company. Uncertainty following the UK's June referendum and the timing of Britain's exit from the European Union has made some UK and Continental European companies more cautious. However, this has created opportunities for HRG, the Group's travel management business, and for Fraedom, our technology division, as we work alongside our clients to help them achieve their goals for maximising value and controlling their expenditure.

We experienced mixed market conditions in the first half across the geographies in which we operate. The UK saw lower trading activity and revenue as a result of a UK Government retender process which restricted the scope of our new contract opportunity, continued pressure in the Energy & Marine and SME sectors as well as some net corporate client losses. Trading conditions in the Nordics were generally buoyant though Norway showed continuing weakness due to the ongoing decline in the Energy & Marine sector. The business travel market in Germany remained relatively flat year-on-year while North America continued to show a modest slowdown with constant currency revenue flat year-on-year, although the region has experienced strong earnings growth driven by increased service efficiencies, and new productivity and savings initiatives.

Within HRG, our travel management business saw significant growth in underlying operating profit, which increased by 7% at constant currency as a result of our restructuring programme, despite revenue falling by 4% in real terms. The revenue decline reflects expected pricing pressure and increased client adoption of online self-booking of travel which has now reached 51%, compared to 49% in the same period last year. This online migration continues as we guide and advise our clients on the benefits of automated travel processes and self-booking where we see mutual benefits. We saw some client churn during the second half of last financial year and some client losses during the first half of the current year as we have focused on engaging in contracts which will be profitable for HRG or which offer a strategic benefit to the Group. As we've mentioned in the past and as borne out in this first-half performance, our travel management model does not rely on short-term revenue growth to improve profitability.

Fraedom delivered an 8% increase in revenue for the first half and a 12% decline in underlying operating profit, both at constant currency. The fall in profit is largely attributed to first-half investments made to support the continued pace of growth within Fraedom's business and to accommodate several exciting new client wins which will start to generate revenue in the second half of the financial year. While the Expense and Travel technology sectors are more established markets, the Payments space is less mature and we are especially encouraged by the appetite for Fraedom's technology in Payments management solutions being shown by our banking partners and corporate customers, both big and small. These clients look to Fraedom to improve the efficiency of their overall payments and transaction processing.

In line with our stated strategy, we have been very successful during recent years in growing the Company's earnings and increasing our underlying operating margin. Much of that success has resulted from our restructuring work and our continued pursuit of efficiencies in the way we run our business and service our clients. We are now at the midway stage in our three-year restructuring programme designed to reshape and realign the business, and we have made excellent progress implementing a range of initiatives and projects. The programme initiatives continue to include a review of the operational and overhead cost base, deployment of technology as well as reductions in our property footprint. During the period, we incurred exceptional costs of £1.1m as we closed or downsized offices in Australia, North America, Switzerland and the UK. These actions saved £0.5m in the half year, and are expected to realise savings of £2.2m in full year FY17 and £3.5m in FY18 and beyond. FY17 is year two of our three-year programme, which in aggregate is expected to yield annual savings of circa £20m. Over the last 18 months, we have achieved annualised savings of £11.5m with exceptional costs of £4.9m.

We are also focused on our technology. For example, during the period, we have successfully developed and employed our technology to drive productivity and improve client service. We have also commenced work on a major transformation programme for our mid-back office systems and processes, with the aim of modernising our core mid-back office application set and harmonising technology platforms across the European side of the business. Any potential savings from this capital investment would be incremental to the restructuring programme above.

Given our success in managing costs and improving productivity, as well as deploying new technology, we are now well placed to leverage these achievements and create strategic opportunities to grow and develop our two businesses. We believe there is headroom to significantly grow our travel management business and redefine its market position. We can achieve this by complementing existing initiatives with a roadmap of strategic options which will serve both to reignite our core business and to drive business model innovation, while delivering sustainable revenue and earnings growth. For example, HRG is exploring new distribution initiatives and the provision of a new service model, and we believe our technology platform will provide an advantage in deploying this differentiated solution. We also believe there is an opportunity to step-change the growth profile of Fraedom. We are excited by the number of new clients coming onto the Fraedom platform and we are currently exploring a range of opportunities to grow this business further.

We have focused very successfully in recent years on reducing net debt and this period was no exception, with net debt reducing by £25.5m year-on-year to £31.0m, and by £2.6m since the year end. Ongoing free cash generation and tight cash control contributed to the fall in net debt although we also received a one-off benefit during the second half of last financial year due to the settlement of a claim in respect of the UK pension scheme, as described in our FY16 results statement last May. Excluding this one-off cash receipt, our year-on-year net debt reduction was £16.0m. In addition, year-on-year net debt was positively impacted by sterling's weakness, down by £4.1m due to foreign exchange impact as we hold significant amounts of our cash and only 7% of our borrowings in foreign currencies. Net debt of £31.0m at 30 September 2016 represented 0.5 times EBITDA for the last 12 months (2015: 1.0 times). As we continue to generate free cash and benefit from the financial flexibility afforded by our lower net debt, we are reviewing the various options open to the Company, while considering the appropriate capital structure for the Group as well as the foreseeable plans for the business. This review will be completed by the time of our next full-year results announcement.

In June 2013, we replaced our UK defined benefit pension scheme with a defined contribution pension scheme, significantly reducing future pension risk and giving greater certainty on future cash requirements. To calculate the pension deficit for accounting purposes, we are required to use corporate bond yields as the basis for the discount rate of our long-term liabilities, irrespective of the mix of our assets and their expected returns. The sharp decrease in corporate bond yields since the year-end - the biggest six-monthly fall recorded since the iBoxx corporate bond index was first introduced in 2000 - has driven a rise of 33% in the accounting valuation of our liabilities (£164.8m), largely contributing to the increase in our reported accounting deficit from £237.6m to £390.5m. A cash contribution of £3.7m was made to the UK scheme during the period in line with our deficit recovery plan. Our next triennial valuation will be based on actuarial values, and consequently gilt yields as at March 2017 and will be reported in 2018, which is when any change to our recovery plan would occur.

Board changes

We welcomed two new members to the Board during the period. John Krumins joined the Board as a Non-Executive Director on 1 April and Ashley Hubka was appointed Non-Executive Director with effect from 1 August. John and Ashley are both members of the Company's Audit, Remuneration and Nominations Committees.

Current trading and outlook

Trading in the second half of the financial year to date has progressed in line with management expectations.

As we continue to execute existing initiatives centred on managing costs and improving productivity, we also remain focused on our priorities for achieving sustainable growth over the medium and long term. We are now well placed to capitalise on opportunities to develop our two businesses and thereby accelerate revenue and earnings growth going forward.

We operate in markets affected by ongoing macroeconomic and political uncertainties, and remain alert to any possible effect of Brexit on business confidence. The Board believes that the Company will deliver a full-year performance in line with market expectations although the Board also notes that the future macroeconomic landscape looks less clear.

Operational review

HRG - Travel Management (TM)

(1) Before amortisation of acquired intangibles and exceptional items

§ Strong earnings growth with underlying operating profit up 6.6% at constant currency

§ Underlying operating profit margin accelerated from 11.7% to 12.7%

During the first half of our financial year, client travel transaction activity declined by 6% and client travel spend at constant currency fell by 11%. Air travel bookings accounted for 46% of all bookings in the first half, rail 17% and hotel 29%, all broadly in line with last year. For the six-month period, air, rail and hotel bookings declined by 6%, 7% and 4% year-on-year respectively.

HRG clients continue to focus on cost control and maximising value for money from travel budgets in response to uncertain macroeconomic and trading conditions. Our clients successfully manage costs by consolidating more expenditure through HRG and there is ongoing demand for expanding travel programmes to include more markets and also for bringing more related expenditure categories under centralised management. HRG continues to build capability and demonstrate added value in these areas.

As companies have taken greater control of expenditure and leveraged their purchasing power with key suppliers, incremental year-on-year improvement has become more challenging in mature programmes. New strategies are being applied to encourage savings and cost avoidance, by introducing changes in buying behaviour to take the lowest available price options, irrespective of preferred suppliers. These initiatives are supported by HRG's total cost management expertise, technology and analytics. Clients are increasingly entering into gain share agreements where HRG is financially rewarded for reducing clients' travel expenditure, and we welcome what appears to be an acceleration in this existing trend.

We continue to advise our clients on ways to develop their travel policies and compliance processes in order to control expenditure. Travel approval and self-booking are central themes. As part of our cost saving recommendations, we continue to advocate to our clients a move to automated approval processes and self-booking‎ where appropriate. As a result of this migration, we saw a further increase in online adoption, to 51% up from 49% in the same period last year. It is worth remembering that whilst revenue to HRG may reduce in the short term as a result of this shift, we expect this will increase our margins over the longer term.

An accelerating trend, and central client focus, is the traveller experience. This is defined as the service provided to the traveller before, during and after travel. Technology is playing an ever greater role in providing traveller information and advice whilst also enhancing their experience during each trip. Mobile technology has evolved as a key component of travel programmes and HRG's new online solution looks set to be a key differentiator in our service delivery to clients.

Our focus on delivering programme management and technology solutions to our clients is providing additional revenue opportunities for the Group, helping to offset the effect on our revenue of clients moving online and competitive pricing pressure, while encouraging the development of more strategic and higher margin relationships with many of our clients.

Like any global business, we lost some clients during the first half whilst extending and expanding relationships of note including AIG, BMW, Deutsche Bank, Lloyds Banking Group, Pirelli, Tetra Laval, Volkswagen Group and Wells Fargo. We continue to target, and to be successful in securing, new business from existing clients in markets and territories where we have not been the incumbent. These include ABB in Europe, Boehringer Ingleheim in Asia, Scania in Europe, and Tetra Laval in Europe and Asia. Other new clients include Elekta, where we are providing an end-to-end solution in conjunction with Fraedom and OCBC, the Singaporean bank.

Our restructuring work continued in this period driving through a significant increase in underlying operating profit margin from 11.7% up to 12.7% as we adapted our cost base and deployed technology to increase productivity as well as improve our client service.

Fraedom - Technology

(1) Before amortisation of acquired intangibles and exceptional items

§ Significant new client wins will start to generate revenue in H2

§ Expanded resources ahead of new client trading

§ Launched mobile expense management app

In the six months ended 30 September, Fraedom's reported revenue grew by 20.6% and by 7.9% at constant currency. Underlying operating profit rose by £0.2m but fell 12% at constant currency. The earnings decline was expected following our further investment in people and office space during the period to accommodate some exciting new banking partners, which will start to generate incremental revenue in the second half of the financial year. In an effort to bring on these new banking partners, additional investment was needed to both integrate and implement these clients, leading to a temporary decline in underlying operating profit.

During the period, global strategic partner Visa re-signed for an additional five years, while partner National Australia Bank (NAB) also extended its contract, for a further three years. Revenue growth was mainly driven by business from banking partners, including BMO Financial Group and Lloyds Banking Group, which have achieved differentiated service offerings through their use of Fraedom's technology and ongoing investment in their respective markets. For the period, our platform processed 96 million transactions, up 15% on prior year, totalling US $28 billion in spend volume, correlating to an uplift of 29% in spend volume, which is indicative of a growing trend in our product diversity and our continued focus on Payments as our key strategic growth opportunity.

As planned, we grew our Solutions Technology team in the period, enlarging the team by approximately one quarter, thereby enabling us to further strengthen our Payments and Expense delivery teams. In August, we launched our new mobile expense management app for both Android and Apple devices and this was well received by Fraedom's client base. Additionally, the team delivered a brand new user interface and experience across our Payments and Expense platform to our clients and partners during the first half of this financial year, and we also launched a range of major new products and initiatives covering advanced reporting, integration and automation.

HRG - Regional activity

We should be mindful that all our regions exist to serve our global capability and do not operate for the sake of separate regional profitability. Below we provide trading detail on our material travel management businesses.

Europe

(1) Before amortisation of acquired intangibles and exceptional items

§ Constant currency revenue lower due to price competition, ongoing adoption of online and lower trading

Revenue was down by 4.1% while underlying operating profit declined by 1.6%, both at constant currency. Client travel spend decreased by 8% year-on-year in real terms and travel activity was 5% lower.

UK

Our restructuring work, which remains a key focus in this important market, progressed well during the period. As part of a continuing global initiative, we commenced work to standardise our agent booking platform, and also implemented new technology to enhance and enrich data content and capture. During the period, we initiated the transition of centralised operational support tasks from the UK to Poland, as part of a wider European initiative. As part of last year's UK Government retender process, we were only able to bid for part of the business that we historically serviced. The resulting loss of several UK Government departments, along with some corporate losses and continued downtrading in the Energy & Marine sector, has resulted in client travel spend in the UK being lower in the period versus prior year by 10% and booking activity was down 8%. We have not enjoyed our usual levels of new business success in the first half as we have focused only on engaging in contracts which we assess will be profitable to HRG or which offer a strategic benefit to the Group. As expected, several key clients have extended their contracts in the period and measures to expand our sales strategy and approach are well advanced. Against this trading backdrop, online adoption has remained relatively stable at 60%.

Nordics

We saw year-on-year growth in client travel activity in our Nordic business, which was driven by Sweden, Finland and Denmark, with Norway continuing to see a decline due to ongoing weakness in the Energy & Marine market. Overall, client booking activity across the region grew by 3%, while client spend declined by 3% at constant currency. Online adoption continues to increase in the region, up from 53% last year to 59% this year. Our Nordics MGE business delivered year-on-year revenue growth in the period, driven by Sweden and Norway. The SME market continues to be challenging with volume and revenue declines across all markets. Costs continue to be closely managed in the region with lower staffing numbers versus last year and opportunities taken to reduce our property footprint. The benefits from these actions have helped drive year-on-year improvement in earnings during the period.

Germany

The business travel market in Germany remains relatively flat. In particular, following a period of growth, the German automotive industry is showing signs of caution with an emphasis on controlling costs. Client travel activity in the first six months was 1% higher year-on-year while client spend was 2% lower. Our Sports related business delivered strong results in the period from successful work with key Bundesliga clients as well as the European Championships. In addition, our MGE business continues to grow with strong double-digit year-on-year revenue increases, largely due to new business from Amgen, Merck and Samsung. Online adoption continues to grow, up from 22% last year to 28% this year, with existing clients making more online bookings and online adoption rates associated with new client wins being higher compared to lost business. During the period, we transitioned 24-hour services from Germany to a new centralised European team based in Barcelona.

North America

(1) Before amortisation of acquired intangibles and exceptional items

§ Strong earnings growth with underlying operating profit up 17% at constant currency

§ Significant operating margin increase in the period up from 13.3% to 15.4%

Revenue was down by 0.6% while underlying operating profit increased by 17.0%, both at constant currency. Client spend declined 12% in real terms and activity was lower by 5%.

HRG operates two businesses in North America: (1) travel management, and (2) loyalty, managing the redemption of credit card loyalty points programmes.

In our travel management business, client booking activity was lower compared to prior year, mainly due to general downtrading as well as some client losses. Clients in both the Energy & Marine and Banking & Finance sectors displayed subdued trading levels in the first half of the year. Our sales team in North America has been strengthened with new leadership in the period as we look to increase our sales activity in this key market. Several clients have extended their contracts with North America including BMW, Deutsche Bank, Volkswagen and Wells Fargo.

Our loyalty business performed well in the period with year-on-year growth in activity levels. The new business pipeline continues to be strong in this sector. We are seeing an increasing number of players in this market and believe our credentials mean we are well placed to compete.

During the first half of the financial year, we reduced our corporate head office space in New York and continued to streamline overhead costs as part of our ongoing cost reduction programme.

Asia Pacific

(1) Before amortisation of acquired intangibles and exceptional items

§ Poor performance in Australia due to weak economy and lost clients

Revenue was down by 16% at constant currency. Underlying operating loss improved by £0.4m from a loss of £0.7m last year to a loss of £0.3m this period, after suffering a £0.1m adverse currency effect on the negative earnings. Client travel spend fell by 23% year-on-year in real terms while travel activity was 21% lower.

Australia

Our business in Australia continues to face trading headwinds due to a generally weak local economy as well as the impact of lost clients. On a positive note however, several clients have extended their contracts with us including MMG, Air Services Australia and National Broadband Network. In addition, our MGE business is performing well and we continue to look at strategies to grow and develop this business unit. Australia has continued to align its cost base with the downturn in trading activity and we have broadly halved our headcount compared to the same period last year. With an increased focus on technology in order to improve operational efficiency, we continue to streamline costs where appropriate. Australia remains the most mature HRG market with regards to online adoption with over 65% adoption levels. With our cost reduction programme near completion and our focus on technology improvements and integration with Fraedom, we believe we are now in the right shape to move the business forward.

Financial Review

Summary

Revenue of £163.6m was up 4.9% as reported but down 3.0% at constant exchange rates. Underlying operating profit, which is stated before exceptional items of £1.1m (2015: £1.1m) and the amortisation of acquired intangibles of £0.1m (2015: £0.3m), increased by £2.3m to £21.5m resulting in the margin increasing from 12.3% to 13.1%. The 12.0% rise in underlying operating profit included a 7.8% benefit from currency movements. Underlying profit before tax was up 16.9% to £15.2m while underlying EPS rose 10.3% from 2.9p to 3.2p.

Reported operating profit increased by 14.0% to £20.3m. Reported profit before tax climbed 20.7% from £11.6m to £14.0m and EPS was up by 11.5% from 2.6p to 2.9p.

We continue to demonstrate strong cash flow generation with net debt reducing by £25.5m year-on-year. The reduction in net debt benefited from a one-off net receipt by the Group in respect of a claim in connection with the UK pension scheme as described in our FY16 results statement last May. Net debt of £31.0m at 30 September 2016 represented 0.5 times EBITDA for the last 12 months (2015: 1.0 times). Since 31 March 2016, net debt decreased by £2.6m.

We have noted in the past that small changes in inflation and discount rates can lead to volatility in pension deficits and that the current low interest rate environment increases the accounting valuation of pension liabilities. On an accounting basis, the Group-wide pre-tax pension deficits have increased by £154.9m since the year end to £413.2m (of which £390.5m relates to the UK scheme), primarily driven by a 1.2pp decrease in the discount rate to 2.3%. The net present value of the defined benefit obligations of the UK scheme is sensitive to both the actuarial assumptions used and to market conditions. If the discount rate assumption was 0.1% lower, the obligations would be expected to increase by £16.2m and if it was 0.1% higher, they would be expected to decrease by £15.8m. The next triennial valuation will be based on actuarial values at 31 March 2017 and will be reported in 2018.

Our progressive dividend policy remains unchanged. The Board has declared an interim dividend of 0.715p per share, up 5% on the interim payment a year ago. This dividend will be paid on 9 January 2017 to shareholders on the register at the close of business on 9 December 2016.

Revenue

Reported revenue increased by 4.9% to £163.6m, comprised of a decrease of 3.0% at constant exchange rates more than offset by 7.9% favourable currency movements.

Operating expenses

Reported operating expenses increased by 3.8% to £143.3m.

Underlying operating expenses, which are before amortisation of acquired intangibles and exceptional items, increased by 4.0% to £142.1m. This represented a 4.0% decrease at constant exchange rates, comprised of a 2.6% decrease in staff costs and a 6.8% decrease in other expenses.

Underlying operating profit

Underlying operating profit, which is before amortisation of acquired intangibles and exceptional items, increased by 12.0% from £19.2m to £21.5m, or by 4.2% at constant exchange rates. Underlying operating profit margin increased from 12.3% to 13.1%.

Exceptional items

The cost of exceptional items was £1.1m (2015: £1.1m). These related to planned cost reduction programmes across the Group and are mainly in respect of redundancy costs £0.9m and property exit costs £0.2m.

Finance costs

Finance costs increased by £0.1m to £6.8m, reflecting an increase in the finance costs relating to retirement obligations partly offset by a reduction relating to interest on bank overdrafts and loans.

Taxation

The tax charge of £3.9m (2015: £3.0m) for the current period represents an overall effective tax rate (ETR) of 28% of the reported profit before tax (2015: 26%). The underlying ETR was 28%. We anticipate an underlying ETR of around 28% in future years.

EPS

Underlying EPS rose by 10% from 2.9p to 3.2p. Basic EPS rose by 12% from 2.6p to 2.9p.

Cash flow

Free cash inflow, which is the change in net debt before acquisitions and disposals, Employee Benefit Trust purchases, dividends and the impact of foreign exchange movements on net debt balances, was £6.5m (2015: £4.2m) in the period.

Cash outflow in respect of working capital was £2.9m (2015: £4.3m). The net cash outflow related to interest was £2.2m (2015: £2.3m). Dividends received from equity accounted investments were £0.6m (2015: £0.3m). Tax paid in cash was £6.5m (2015: £3.1m) and capital expenditure, which is primarily internal software development and office equipment, was £4.1m (2015: £4.7m). Cash costs for pension deficit reduction were £3.7m (2015: £3.5m). Of the £2.2m cash outflow in respect of exceptional items, £0.7m was paid relating to current period charges and £1.5m related to prior period exceptional charges.

In addition to free cash flow, other cash flow items are related to proceeds received on disposal of an associate in Germany £0.4m, share purchases of £0.7m made by the Employee Benefit Trust (2015: £0.6m), £5.9m of dividends paid to shareholders during the period (2015: £5.5m) and £2.3m of favourable foreign exchange related movements (2015: £0.1m).

Funding and net debt

The principal banking 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 £20m until February 2017. In addition, the Group has a £30m fixed rate loan, repayable by 2018, and additional uncommitted facilities amounting to around £18m at the half year.

Net external interest costs were covered 12.1 times by EBITDA (2015: 11.3 times) on a rolling 12-month basis.

Net debt decreased from 31 March 2016 by £2.6m to £31.0m and was equivalent to 0.5 times EBITDA for the last 12 months (2015: 1.0 times).

We continue to operate well within our banking covenants. 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 external interest is covered at least 4.0 times by EBITDA and net debt is less than 3.0 times 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.

Pensions

The Group-wide pension deficits under IAS 19 increased by £154.9m to £413.2m before tax during the six months ended 30 September 2016.

The UK scheme deficit increased by £152.9m to £390.5m. An increase in scheme liabilities of £164.8m, primarily driven by a 1.2pp decrease in discount rate, was only partly offset by an increase in scheme assets of £11.9m. For several years, the UK defined benefit scheme has been closed to new entrants and has capped increases in pensionable salary. The UK defined benefit section was closed to future accrual on 13 June 2013 and replaced with a defined contribution section.

At 30 September 2016, there was a deferred tax asset of £66.4m (31 March 2016: £42.8m) relating to the UK deficit and an asset of £1.2m (31 March 2016: £1.1m) relating to the overseas schemes.

Related parties

Related party disclosures are provided in note 24 to the financial statements.

Foreign currency

The following principal exchange rates have been used in the financial statements:

(1) As at 31 March 2016

The Group's foreign exchange exposure on transactions is limited with the majority of its revenue and costs matched in the currency of the country of operation. In the few instances where there is exposure, short-term hedges are taken once the exposure can be accurately identified.

Going concern

The Directors believe the Group has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Having reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing its condensed interim financial statements.

(1) Excluding amortisation of acquired intangibles

Hogg Robinson Group plc

Notes to the Consolidated Half-Year Financial Information

For the period ended 30 September 2016

1 General information

Hogg Robinson Group plc is an international corporate services company specialising in travel, expense, payments and data management underpinned by proprietary technology.

The Company is a public limited company, incorporated in the UK under the Companies Act 2006. The address of its registered office is Global House, Victoria Street, Basingstoke, Hampshire, RG21 3BT, United Kingdom.

The Company is listed on the Official List of the UK Listing Authority and the London Stock Exchange, and its registered number is 3946303.

This condensed consolidated half-yearly financial information was approved for issue on 29 November 2016.

This condensed consolidated half-yearly financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2016 were approved by the Board of Directors on 24 May 2016 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

This condensed consolidated half-yearly financial information has been reviewed, not audited.

2 Basis of preparation

This condensed consolidated half-yearly financial information for the half year ended 30 September 2016 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, Interim Financial Reporting, as adopted by the European Union. The half-yearly condensed consolidated financial report should be read in conjunction with the Annual Report and Financial Statements for the year ended 31 March 2016, which have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Having reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing its condensed interim financial statements.

3 Accounting policies

There are no standards or interpretations that are effective for the first time for the financial year beginning on 1 April 2016 that would be expected to have a material impact on the Group. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

Accounting policies adopted are consistent with those of the Annual Consolidated Financial Statements for the year ended 31 March 2016, as described in those statements.

Exceptional items are disclosed and described separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. They are material non-recurring items of income or expense that have been shown separately due to the significance of their nature or amount.

Income tax expense in the half-year period is accrued using the tax rate that would be applicable to expected total annual earnings.

4 Estimates

The preparation of condensed consolidated half-yearly financial information requires management to make judgements, estimates and assumptions that affect 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 this condensed consolidated half-yearly financial information, 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 that applied to the Consolidated Financial Statements for the year ended 31 March 2016, with the addition of the estimation that is required in determining the half-year provision for income tax expense.

5 Principal risks and uncertainties

The principal risks and uncertainties affecting the Group were identified as part of the Strategic Report and the Financial Risk Management note set out on pages 20 to 21 and 71 to 72 respectively of the Hogg Robinson Group plc Annual Report 2016, a copy of which is available on the Group's website www.hoggrobinson.com. The Board's view is that these risks and the risk management policies in place remain substantially unchanged for the second half of the current financial year. These risks and uncertainties can be summarised as follows:

Operational risks

· Loss of a major client

· Volatility of client activity or transactions risk

· Loss of a supplier

· Retention of key staff

· Corruption or reputation risk

· Technology or systems failure

· Cyber-related risks

· Development and delivery of new business and new products

· Change in industry business model

Financial risks

· Access to funding at affordable rates

· Cost and capital control

· Increased pension funding

· Changes to industry payment structures

External risks

· Significant economic or other crisis

· Competitive environment

· Foreign currency risk

· Interest rate risk

· Credit risk

· Liquidity risk

There may be additional risks unknown to the Group and other risks, currently believed to be immaterial, which could turn out to be material. These risks, whether they materialise individually or simultaneously, could significantly affect the Group's business and financial results.

6 Seasonality

The Group's revenue and operating profit are affected by the seasonality of corporate travel business, with travel declining during the summer and Christmas holiday periods and, to a lesser extent, during Easter holidays, which are times when many corporate travellers are on holiday. Typically, the Group experiences the highest levels of revenue in the last months of its financial year, principally reflecting increased travel activity by its clients during this period.

7 Operating segments

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, Travel Management, which is analysed into three distinct geographic segments and includes Fraedom Travel, and Technology, which includes Fraedom Payments and Expense operations, previously known as Spendvision. The Group's internal reporting processes do not distinguish between the numerous sources of income that comprise revenue for 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. Except as noted below, other information provided 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, financial 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 (2015: nil).

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:

8 Operating expenses

Exceptional items

Exceptional items of £1.1m (2015: £1.1m) were incurred during the period and relate to planned non-recurring cost reduction programmes across the Group.

9 Staff costs