Last checked at 2 Dec 2013 07:00
2 December 2013
The Innovation Group plc
("Innovation Group" or the "Group")
Financial results for the twelve months ended 30 September 2013
The Innovation Group plc (LSE: TIG), a global provider of business process services and software solutions to the insurance, fleet, automotive and property industries, announces financial results for the twelve months ended 30 September 2013. The results show the strong progress the Group continues to make towards its strategic goals and demonstrate the cash generative, profitable nature of its business model.
Financial Metrics
Twelve months ended 30 September
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2013 |
2012 | 2012 at constant currency |
Growth | Growth at constant currency | |
Revenue | £204.4m | £193.7m | £189.6m | 6% | 8% |
Adjusted EBITDA *** | £29.8m | £24.2m | £23.5m | 23% | 27% |
Adjusted profit before tax * | £21.9m | £18.5m | £17.6m | 18% | 24% |
Profit before tax | £14.4m | £11.8m | £10.9m | 22% | 32% |
Adjusted earnings per share ** | 1.44p | 1.25p | 1.18p | 15% | 22% |
Operating cash inflow | £19.1m | £16.7m | - | 14% | - |
Performance Highlights
· Strong growth across all financial metrics, with double-digit improvements in profitability
o 27% year-on-year growth in Adjusted EBITDA at constant currency
· Significant new business contracts across the Group
o Largest ever BPS deal signed with a Tier 1 insurer in the UK, generating £75m in revenue over seven years
o Highest ever number of software deals secured in year, including important wins in the US and UK
· Renewed and extended important customer relationships
o Five year renewal of contract with Enterprise Rent-A-Car, delivering net revenue over the period of £25m
o Extended subsidence claims management agreement with Direct Line Group, adding an additional £20m to the total contract value by December 2017
· Secured further value enhancing partnerships and acquisitions
o Strengthened partnership with AXA France, expected to be significantly earnings enhancing from 2014
o Acquisition of Gemini Vehicle Solutions Ltd for £4.5m, broadening the Group's outsourced service offering in UK motor
Commenting on the results Andy Roberts, Chief Executive Officer said:
"This past year has been our strongest, most successful ever as a Group. We have delivered a convincing double-digit increase in our profitability and secured a number of significant, high value contracts from some of the biggest players in our industry. Put simply, our model and our offering works. Our services answer a real and present need for customers in all our markets and our strong operational controls allow us to deliver tangible, profitable returns to our shareholders. Given the strength of our position I believe we are well positioned for a further strong performance in the year ahead."
Enquiries | |
The Innovation Group plc | +44 (0) 1489 898 300 |
Andy Roberts, Chief Executive Officer | |
Jane Hall, Group Finance Director | |
Louise Fisk, Head of Global Communications | |
FTI Consulting LLP | +44 (0) 20 7831 3113 |
Edward Bridges / Matt Dixon / Tracey Bowditch / Elodie Castagna |
Notes to financial table
* Adjusted profit before tax of £21.9m (2012: £18.5m) comprises profit before tax of £14.4m (2012: £11.8m) after adding back amortisation and impairment of acquired intangible assets recognised under business combinations of £4.7m (2012: £3.3m), impairment charges of £nil (2012: £0.1m), share-based payment costs of £3.2m (2012: £1.8m), exceptional costs of £0.4m (2012: £1.5m) and deducting a profit on disposal of subsidiary undertaking of £0.8m (2012: £nil).
** Adjusted earnings per share after tax of 1.44p (2012: 1.25p) comprises basic profit per share of 0.78p (2012: 0.63p) after adding back amortisation and impairment of acquired intangible assets recognised under business combinations per share of 0.49p (2012: 0.35p), impairment charges per share of nil (2012: 0.01p), share-based payment costs per share of 0.32p (2012: 0.19p), exceptional items per share of £0.04p (2012: 0.16p) and deducting share of profit on disposal of subsidiary undertaking per share 0.06p (2012: nil) and the tax effect per share of the reconciling items of 0.13p (2012: 0.09p).
*** Adjusted EBITDA comprises Adjusted profit before tax of £21.9m (2012: £18.5m) after adding back amortisation of non-business combination intangibles of £5.4m (2012: £3.9m) and depreciation of £3.3m (2012: £3.4m) and deducting share of profit in associate of £0.8m (2012: £1.5m) and net finance income of £nil (2012: £0.1m).
Notes to editors
About The Innovation Group plc:
Innovation Group (LSE: TIG) is a global provider of insurance software solutions and business process services. With revenues of £193m (US$ 302m) in 2012, it employs over 2,800 people across North America, Europe, Asia Pacific and South Africa and works with 15 of the top 20 global insurance markets, 16 of the top 20 global insurance companies and 3 of the world's top 5 fleet and lease management companies.
www.innovation-group.com
CHAIRMAN'S STATEMENT
This is the first year we have reported under the Strategic and Directors' Report regulations, which came into force for fully listed FTSE companies with years ending 30 September 2013. As such we are one of the first companies to report under these regulations. We welcome the opportunity to be able to provide more information on our Group, our strategy and business model, and to report in more detail on our progress in improving shareholder value.
I am pleased to report that the Group has had a very good year, growing profit at both the statutory profit and adjusted profit levels. We have seen our strategy - developed and executed over a number of years - benefitting all of our stakeholders, be they our clients, their customers, our shareholders, our hard-working staff, our partners, or society at large through our sustainability endeavours.
As with most businesses, we are dependent on the economy for an element of our growth as a high proportion of our revenue is volume dependent. Therefore, I am especially pleased that we have been able to achieve a solid level of revenue growth against a backdrop of a flat economy in almost all of the markets in which we operate. This has been achieved by our teams selling into growth segments of the market and delivering excellent customer service which is on a par with the best in the industry. As the economies where we operate begin their slow rise out of recession, we are well positioned to take advantage of the expected increase in the number of both motor and property claims.
The Group has experienced some challenges during the year. In April we changed the North American Business Process Services ("BPS") management team and embarked on a restructuring programme to relocate the first notice of loss ("FNOL") unit to Chicago, where our BPS operations are headquartered. We also equipped the unit with new voice and data technology to reduce headcount, improve controls and therefore seek to increase customer satisfaction and profitability. This project completed successfully, on time, at the end of September and will enable us to deliver profitable growth without the previous reliance on claims volumes relating to catastrophic events. Elsewhere, our results have also been impacted by the weakening of certain currencies during the year, in particular the South African Rand, which has continued into the new financial year.
Our business model, outlined later in this report, has proved itself in terms of both profit and cash generation. We continue to be net cash positive which allows us to invest both in research & development that broadens the solutions we are able to offer to our customers, and in acquisitions. During the year we completed three acquisitions and a strategic partnership with AXA in France. As a Board, we continue to look for both bolt-on and strategic acquisitions, which would increase the volume of incidents handled, broaden our product set or increase our share of the margin within the supply chain, which currently we believe is the best use of our funds to continue to drive shareholder return.
During the year, the Group continued to develop its sustainability strategy. We take our responsibility seriously and the progress we are making can be seen through our commitment to the long term future of the business, the environment and our staff development and opportunities.
Investment in our employees continues: we have stepped up our internal training and recruitment programmes to ensure that we are able to attract and retain people with great aptitude and talent. We are, in this way, working to alleviate the inevitable 'battle for talent' that has been highlighted by several insurance industry groups.
Finally, I would like to pay tribute to our staff and management team who deliver for our clients and their customers day-in, day-out. Their commitment and hard work are exemplary and are at the heart of our strong performance.
Outlook
The Board has seen substantial improvement in the profitability of the Group this year and a significant number of contracts signed in the second half should lead to improved organic growth in the business next year. Our combined offering of BPS and Software remains compelling and we are well positioned for strong performance in the coming year and beyond.
David Thorpe
Non-Executive Chairman, Innovation Group plc
GROUP STRATEGIC REPORT
Who we are
We are a general insurance solutions business, providing innovative 'Future-Ready' software and business process services that efficiently and effectively manage over six million incidents a year on behalf of motor and property insurers and other risk carriers in six regions.
Core operating principle
We believe that the business of insurance should be viewed and run as a complete end-to-end optimised and collaborative process, rather than a series of individual transactions. We apply this principle through our industry-leading business process and data services, flexible software products, extensive repair networks and innovative commercial models that allow insurers to gain market-leading cost efficiencies and offer a great customer experience.
Strategic goal
Our strategic goal is to become the 'go-to' strategic solution partner to 'Future-Ready' Tier 1-3 insurers and risk carriers, such that we gain a Top 3 market share position in each of our chosen markets.
We will reach this goal in three ways: firstly, growth based on our reputation for high-quality customer service; secondly, growth from sales of innovative solutions to existing and new clients; and finally through strategic and bolt-on acquisition activity.
How does our business model support our strategy?
Our chosen markets
We focus on motor and property general insurance, across both personal and commercial lines, as well as intersecting markets such as fleet, lease management companies and motor manufacturers. Our 1,100 clients reflect the complete motor and property insurance landscape, ranging from global insurers through regional insurers and niche market start-ups, to companies who distribute or provide insurance products or services including global motor manufacturers, banks and finance companies, retailers, and car hire firms.
We have decided to focus on these two specific insurance lines as we believe that this focus enables us to concentrate on delivering excellent service without distractions from any non-core activities.
We operate a regional structure consisting of 6 regions operating in 12 countries. We choose to operate in these regions as they are primarily mature, well regulated insurance markets, where we believe there remains significant scope for further penetration into both existing and new clients. However, we may work with our clients to move into new territories where a compelling investment opportunity exists and enables us to enter a new market at a lower risk to our business.
We seek to enhance our product set, either through internal research and development or the identification of strategic and bolt-on acquisitions. We target our acquisition activity such that we can achieve increased shareholder value through:
· Increasing the volume of incidents handled;
· Making us more efficient at handling incidents thereby increasing operational leverage;
· Broadening our product set, enabling us to sell different services to more of our customers; and
· Increasing our share of the margin within the supply chain.
Our Competitive Advantage
We believe our ability to deliver both Software and BPS solutions to our customers makes our value proposition extremely strong. These solutions can be deployed either end-to-end or service by service, giving our clients the option to either completely outsource or complement and enhance existing aspects of their in-house capability.
We are also able to demonstrate these benefits to our customers through our own use of Innovation Insurer - "Enterprise". As well as giving us significant operational leverage it also gives our customers confidence that we will continue to invest in and improve our solutions.
We sell our offering in a variety of ways, licence, software as a service ("SaaS") or BPS, and deploy them in a manner most appropriate to customers' needs, be it on-premise, hosted or in the cloud.
Our BPS solutions
Across both motor and property, personal and commercial lines, our BPS portfolio provides end-to-end claims management from first notice of loss, assessment and desk review, through repair using our extensive repair networks and supply chain, to settlement. Much of the work is done in real-time with claim capture tools and customer portals allowing policy holders to track the progress of their claim over the web. Our motor and property assessor, contractor and repair networks are amongst the biggest and most extensive in the world, leveraging vendor relationships to bring quality, scale and competitive pricing to our clients. We also work with the repairers to try to reduce repair or restitution times, thereby reducing inconvenience for the insured but also to reduce the cost of claim for the insurer.
The benefits to our customers are:
· Improved agility and greater speed-to-market with new products and services;
· More flexible underwriting capabilities offering scope for increased margins;
· Full-cycle, multi-channel policy and claims management that enhances risk management along with customer service and retention;
· A claims management solution that manages the entire process from first notice to repair, reducing operating expenses, eliminating leakage and improving service; and
· Insurance industry-specific analytics, improving insight and analysis of customers, policies and claim.
Our Software solutions
Our software portfolio, comprising our core Innovation Insurer suite of products, is modern and 'Future-Ready'. We offer complete end-to-end capabilities for the entire personal & commercial insurance value chain covering Policy, Claims, Billing, Reinsurance, Rating, Analytics, through Supply Chain Management and Repair Management. Our software is available in eight languages, supporting more than 30 million policies.
To remain at the forefront of best practice, we actively engage with industry analysts to validate our product roadmap. We also have our own innovation facility, IGnition. Our innovation roadmap includes telematics, mobile and social, portal and data services. We are also able to operate under a co-creation model, where we develop new offerings with our clients and technology partners. This may also include entry into markets where we do not currently operate, but either our clients or partners do. In July of this year, we opened a BPS operation in Poland, using software developed by IGnition, processing motor claims for ERGO Hestia, one of our largest clients in Germany.
How we generate revenue
We generate BPS revenues in three ways: Transaction fees, where we receive a fee per claim for handling motor and property claims on behalf of our clients; Sale of goods, where we sell motor parts and paint for use within the supply chain and attract a margin either as agent or principal; and Profit shares, where we use 'risk and reward' models to deliver quality service at the most efficient price to our customers and generate revenue based on cost savings.
For the vast majority of the transaction fees we earn we report only our fee for handling the claim, rather than the gross claims cost. This is because we act under delegated authority from our clients and do not carry the credit risk, hence leading to earlier cash settlements from our client and a positive cash flow model. For that part of our business where we carry risk, predominantly the sale of parts in our German motor business and on-risk service and maintenance plans in South Africa, we recognise revenue gross of claims cost.
We generate software revenues in three ways: Licence fees for use of our software as a perpetual licence, a fixed term licence or on a transactional basis; Implementation fees for the implementation of our software by our internal delivery team or chosen partners; and Recurring fees such as software maintenance & licence rental and data centre hosting.
We are able to deliver these services to our clients either through our people, via a partner relationship or a combination of the two. We have approximately 2,800 employees in the 12 largest insurance markets worldwide. Between them they create a powerful intellectual asset with deep knowledge of the insurance sector.
We also work with technology partners such as IBM and Microsoft, solution partners such as Symbility, supply chain partners such as Enterprise Rent-A-Car and industry standards partners such as ACORD. Each of these partnerships extends our reach, capabilities and value for our customers.
Market context - Who is 'The Future-Ready Insurer'?
The Future Ready insurer has a strong focus on customer experience and engagement. It is an industry innovator, always looking for new and better ways to improve its service and manage its risk. It sees technology as an enabler and uses data to help its customers in innovative ways.
The case for being 'Future Ready'
We see the insurance industry facing relentless change and pressures that are challenging long-held assumptions. Insurers no longer believe they can rely on returns from investing premiums to subsidise losses on underwriting. This, along with challenging regulatory environments, mean insurers must look to adopt new, focused strategies, new business operating models, and increasingly innovative solutions, or face being driven out of the market. We believe that successful risk carriers now need to be ready for whatever the market throws at them and need to be fleet-of-foot, data-driven, experience-focused, and market-innovative, or in short, what we term, 'Future Ready'.
What drives the Future Ready insurer and how can Innovation Group help?
Based on hundreds of conversations within the industry we have identified some key drivers for the Future Ready insurer.
The first is that fast change needs a fast response. Global markets are recovering from recession at different rates, with low projected growth in mature insurance markets. While some growth has come from new products and consolidation, there are increasing regulatory challenges. Against this backdrop, Future Ready insurers seek offerings that can help them respond to opportunities and deal with increasing regulation. Innovation Group is able to provide flexible solutions to these market innovators which will allow them to not only respond to the market challenges but also to grow. We will target our sales resource towards the segments of the insurance market that are likely to have the greatest need and the greatest propensity to take advantage of the Innovation Insurer Platform.
Customers of insurers now demand an excellent experience across all channels. They seek personalised products and services at the best value, based on changing needs, using both digital and human channels. They expect seamless interaction across every touch-point. Future Ready insurers will optimise multi-channel communication and distribution, using their ability to track behaviour and preferences across channels. Because customer experience and service is a strategic differentiator for insurers, Innovation Group works to deliver touchpoints, be they human, online, or through our repair networks, with empathy, efficiency and total quality. In this way we support the cycle that customer satisfaction leads to better retention and improved profitability for our clients. As part of this we continue to invest in our people, providing them with training and development opportunities throughout their careers and enabling them to be industry thought leaders.
Technology is now fuelling innovation. Future Ready insurers will make the most of technology to differentiate and improve risk management, using product and service innovation to increase revenue and find new segments. They are open to new technologies such as product configurators, mobile devices, telematics and sensors, with their appetite for innovation extending to transferring practices from other markets into insurance.
We bring innovation to market fast, proving its value and speed of deployment. This is a differentiating factor for Innovation Group and we continue to invest substantially in our platform.
It's not an easy task for Future Ready Insurers to make quick and substantial changes. Internal company systems and processes may not be able to cope with the demands placed on them, which consequently will mean they will rely increasingly on strategic partners to supply them with 'insurance as a service' technology and services. Hence Future Ready Insurers will have a critical dependency on suppliers, like Innovation Group, with common and mutual metrics and goals.
We will build on our position as the only solution provider currently able to offer a complete end-to-end value chain with a robust supply chain and repair network for insurers. Our solutions allow a rapid replacement of any existing systems layer so a client can pick and choose elements that can be deployed quickly and flexibly. Wrapping our software, implementation services, managed hosting and BPS as one seamless platform will prove to be a powerful enabler of change.
Insurers are moving from paying claims to preventing them. Future Ready claims processes will deal efficiently and effectively with claims received, but will also work to prevent future claims through the application of data analytics, working with customers to reduce potential losses. Such intelligence will also help to reduce fraud, write better risks and anticipate change. Innovation Group provides a number of different solutions to help analyse and manage claims more effectively - for example, Insurer Analytics, Rapid Assess (software that enables anyone to be able to take a picture of damage to a car, upload it and generate an estimate of repair work - all in a few minutes) and Gateway (software that links the repair networks, insurer and claimant to show at what stage the claim is).
Finally, insurers have a broader corporate responsibility to customers, shareholders, employees and the environment in which they operate to reduce waste, lower carbon use, and operate with social and ethical principles. Innovation Group undertakes a number of sustainable initiatives which will continue to be developed as they are increasingly required as a critical strategic partner capability and differentiator. Ultimately, our aim is to become a strategic partner for our clients, expanding on existing relationships and developing new ones with insurers to integrate our capabilities and expertise to help reshape new business and delivery models, becoming and offering a true "Platform for Change".
Key Risks and Uncertainties
In common with all businesses we face a number of risks and uncertainties in relation to the achievement of our stated strategic goal. In our business these predominantly relate to industry, product, climate and geography. It is imperative that we understand and mitigate these in order to achieve our defined strategy to maximise value for and protect the interests of all of our stakeholders.
In order to understand these risks and uncertainties more fully and to appropriately attempt to mitigate them, we operate a risk identification framework at a regional level, which assesses the risks noted above and categorises them into strategic, financial, operational and environmental risks. This identifies pertinent risks and ranks them to highlight those that require assessment by the Board based on the potential exposure and likelihood of occurrence. All of these risks have controls and actions identified to mitigate them and these are reported on every month as part of the executive review process.
Below is a summary of the key risks we have identified based upon the current market context and trends that we see developing, the potential impact on our strategy, as well as a commentary as to how we manage these as a Group.
Description of identified Risk | Impact on Strategic Goal if we fail to mitigate the risk | How management mitigates the identified principal risk |
Failure to retain our competitive advantage.
There is a risk that our software becomes obsolete in a competitive market place if we do not understand the wants and needs of the insurance carriers in each of the regions we operate in.
Our BPS business has relatively low barriers to entry. Product offerings and service levels must be continually improved through process and technology to avoid competition being based solely on price.
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If we are unable to maintain competitive advantage, our ability to gain and maintain market share will be impacted, which will impact our ability to achieve our strategic goal.
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We will continue to perform research and development and invest in our product offerings to ensure the Innovation Insurer product suite remains technologically competitive. Our product and road map is regularly validated by industry analysts and insurance consultants and we will continue to perform strategic acquisitions and partnerships which enhance our product set.
Our own BPS business uses "Enterprise" (our internal version of Innovation Insurer) to process claims. Enterprise will be continually upgraded to benefit from improved functionality in the product. We continue to invest in developing or acquiring 'point' solutions - such as Gateway, Rapid Assess and Innovation Connect Enterprise ("ICE") - which will improve processes and give better efficiencies in the claims value chain.
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Legislative changes
As we have operations in twelve countries across four continents, in both emerging and mature markets, we need to ensure we comply with the local legal and financial regulations specific to the insurance industry. |
Failure to adhere to local legislation will impact both our ability to operate and our reputation to deliver our services.
If we are unable to achieve this then we will not be providing excellent service to our customers.
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We keep abreast of such changes through both a legal presence at Group and Regional level, as well as maintaining close relationships with industry experts.
Customer contracts include the ability to mitigate the impact of new onerous legislation. |
Credit facilities and banking covenants
We have a £30.0m revolving credit facility which has a number of financial covenants. There is a risk of the Group breaching covenants if financial performance is not met. |
A level of debt is required to fund significant earnings enhancing acquisitions, be they either strategic or bolt-on.
Breach of covenants or removal of our credit facility would significantly impact our ability to perform acquisitions which support our strategic goal.
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At 30 September 2013, we had a net cash position of £26.9m and an undrawn revolving credit facility of £8.0m, out of a total available facility of £30.0m. The revolving credit facility expires in December 2015. As such, all debt drawn down under this facility is presented as a non-current liability.
Financial covenants are reviewed as part of any significant acquisition and as part of the annual budget process. As part of this process, we prepare detailed profit and cash flow forecasts to test these covenants on a forward looking basis so as to test the risk of breach. In addition, as per the terms of the covenants, they are tested every quarter with the results provided to our corporate bankers. There have been no covenant breaches nor are there any forecasted.
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On-risk models
The business operates several models, particularly in the UK property sector and South Africa where an element of risk is taken.
Failure to correctly price these offerings could lead to the Group becoming exposed to losses.
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Inappropriate pricing of these models will impact our profitability and hence leave us unable to provide optimum returns to our shareholders.
It would impact our ability to provide the relevant solution to our customers and hence would be likely to impact our ability to retain or gain market share. |
We engage third party actuaries to perform annual valuations in regards to these models and to help in the pricing of any new product offerings to the market
Management reviews the performance of these portfolios on a monthly basis to ensure that the likelihood of breach is immaterial. Revenue on such contracts is recognised on a stage of completion basis until the claim is closed to mitigate the possibility of over-recognition.
We are able to offer these models with reinsurance backing, so as to reduce the level of potential exposure to an acceptable level.
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Revenue may be significantly affected by weather conditions
The majority of the Group's BPS services revenue is derived from handling motor or property claims.
We therefore run the risk of significant claims fluctuations due to extreme or abnormal weather conditions.
Through climate change, catastrophic (CAT) events are increasing in frequency and severity. The claims process needs to undergo significant transformation to allow insurers to respond to customers more quickly and effectively.
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In order to become and remain a go-to partner for the customer base in our chosen target markets, we must be able to respond in an agile manner to changes in claims volumes which are triggered by changes in climatic conditions.
Inability to prove this capability will reduce our ability to grow market share, impacting our future revenue growth and hence reduce the potential to provide returns to our shareholders. |
We continue to be able to respond quickly so as to handle any change in volumes whilst still maintaining high levels of customer service.
Part of our customer model is to provide overflow in times of their need. Therefore we have to be able to respond quickly to changes in required capacity. We have tested surge plans in place so as to satisfy our customers that we are able to cope with this additional volume.
Innovation Group will continue to develop a capability to deal with CAT events, using its global footprint to provide 24/7 coverage to respond timely and effectively on behalf of clients.
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Risk of acquisitions failing
The Group looks to perform acquisitions which enhance our offering or increase the volume of claims entering our business, funded by the use of our credit facility, or through the issuance of shares as consideration.
In all cases, the Group should only perform acquisitions which are earnings accretive for our shareholders.
There is the risk that an acquisition will fail to meet these expectations and we fail to derive the benefit expected and increase the risk of impairment of goodwill or any intangible assets recognised as part of the acquisition.
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In order to meet the Group's revenue and profit growth targets, an element of this will need to be created in-organically, i.e. through acquisitions.
The failure of any acquisition to perform to plan will significantly impact our ability to deliver significant returns to our shareholders or achieve our strategic goal. |
Detailed business plans are submitted to the Board for approval of all acquisitions where in excess of £1m of consideration is payable. These include integration plans (where appropriate) and projections of the acquisition on the basis that it is part of the Group. The Group Finance team will engage external advisors to perform due diligence, either when the value of the acquisition exceeds £5m or where the specifics of the acquisition is such that specialist advice is required.
All acquisitions are budgeted for separately post acquisition, especially in the case where any element of consideration is dependent upon future performance. |
Increased customer requirements for sustainability
There is increased focus in the Insurance community on sustainability.
Insurers have to adopt a broader corporate responsibility to a number of stakeholders including customers, shareholders and employees to reduce waste, lower carbon use, and operate with social and ethical principles.
If we fail to adapt to this requirement and innovate in this area, then we will increase the risk of potential loss of our client base, thereby impacting the value to our shareholders.
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In order to obtain a top 3 market share in our chosen territories, it is clear that we have to be fully aware of the increased requirements of our customer base. |
We are recognised for our achievements in sustainability. Our UK Property business is a leader in this field, with our subsidiaries, Marishal Thompson & Co (Environmental) Limited, being a market leader in arboriculture and sustainability matters, and InFront Innovation, which was the first claims management company to promote a carbon neutral supply chain in the UK.
Our business model encourages the use of less resource to achieve the correct outcome, therefore reducing both the cost of claim, but also the use of energy intensive materials.
In addition, we recognise that another key resource is our people. It is our responsibility to ensure that we provide every opportunity for them to succeed.
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This is not an exhaustive list and other factors may impact the Group.
Group Operational & Financial Review
Key Performance Indicators ("KPIs")
Management has determined a number of KPIs, which are used to track progress throughout the year against our strategy. We will address these KPIs in the financial review which follows. Prior period financial information is presented both at previously reported values and on a constant currency ("CC") basis, using 2013 exchange rates to retranslate these reported numbers. We also present these on an organic and inorganic basis. We have done this so we may present the underlying performance of the business without the effect of translation.
The Group's Financial KPIs are:
· Revenue;
· Adjusted EBITDA;
· Adjusted Profit;
· Adjusted earnings per share; and
· Cash conversion as a percentage of adjusted EBITDA.
These measures have been selected as they are deemed to be most appropriate in measuring what is required to generate an increase in shareholder value and are consistent with previous years. These KPIs also form the basis of senior management reward, therefore ensuring that this is aligned with shareholder value creation.
The Group also has a number of operational KPIs that are used to manage the business on a day by day basis, many of which are woven into service level agreements within our customer contracts. Examples of these include:
· Number of claims notified within a time period (daily / weekly / monthly) - BPS;
· Number of claims closed within a time period - BPS;
· Average settlement value per claim - BPS;
· Size of sales pipeline - BPS and Software;
· Customer satisfaction - BPS and Software; and
· Utilisation of staff - Software.
It is considered impractical to separately report on these operational KPIs because although the KPI measurement may be the same, the targets will vary by region, driven predominantly by individual contractual service level requirements.
In addition, the financial KPIs noted above are linked to the operational KPIs in a manner which mean that tracking the financial KPIs is considered to be a reasonable proxy. For instance, transactional revenue is driven by the number of claims handled in a period.
These KPIs are considered to be relevant to the strategic goals as stated on the following bases:
How will we reach our strategic goal | Relevance of KPIs to how we will achieve our strategic goal |
Growth based on our reputation for high-quality customer service | On a day to day basis, our operations measure customer and client satisfaction as part of our service level agreements.
If we do not provide excellent service, then we run the risk of the loss of this client or a reduction in the volume of claims that we are asked to handle, thereby impacting revenue growth and profitability. |
Growth from sales of new innovative solutions to existing and new clients | We continually assess our sales pipeline in order to ensure that we have enough opportunities to support our growth targets. We use a Group wide standard methodology to consistently measure the size of opportunity.
Sales growth is measured by our ability to increase revenue. We measure and report revenue growth as a KPI. |
Strategic and bolt-on acquisition activity | Success of acquisition activity is measured by the returns we are able to generate through the integration of the acquired business into the Group and hence the level of adjusted profit generated. Part of the acquisition process is submission of forecasts and expected synergies (growth, strategy, leverage) which are to be gained from the acquisition.
We separately track the performance of acquisitions, for at least the first full year post acquisition (unless that business is merged into another operation) so as to ensure we are able to compare the returns generated to that originally forecast in the acquisition process.
Unless already budgeted for within that financial year (due to proximity of acquisition to the year end), all performance targets used to pay an incentive in the year of acquisition are increased to reflect the expected contribution from the acquisition target used to justify the acquisition. |
Overall Group performance
Revenue (KPI)
Overall Group revenues for the year have risen by 6% to £204.4m (2012: £193.7m). Revenue growth at constant currency was 8%, comprising an increase in BPS revenues of 5% to £179.2m (2012: £171.2) and an increase in software revenues of 12% to £25.2m (2012: £22.5m). Excluding revenue from the three acquisitions made in the year, which amounted to £2.5m, organic growth was 1% or 3% at constant currency. The Group aims to achieve revenue growth through a mixture of organic and inorganic (acquired) growth in all of its territories.
The Group operates internationally and results for the year are subject to movements in currency exchange rates. Approximately 77% (2012: 78%) of the Group's revenues are generated in currencies other than Sterling. The Group has a policy of not hedging translation movements that arise, although material transactions are hedged at the point they become more likely than not to occur. During the 2013 financial year the Group has been impacted by fluctuating exchange rates, particularly the weakening of the South African Rand.
Adjusted EBITDA, Adjusted Profit and Adjusted Earnings Per Share ("AEPS") (KPI)
The Group aimed to achieve 15% year on year growth in adjusted profit, adjusted EBITDA and AEPS at constant currency. Over performance of this KPI when compared to revenue growth indicates strong operational leverage. Growth in adjusted profit, adjusted EBITDA and AEPS were 18%, 23% and 15% respectively against revenue growth of 6%.
Adjusted EBITDA and adjusted profit before tax for the year ended 30 September 2013 of £21.9m (2012: £18.5m) is calculated as follows:
2013 (£m) | 2012 (£m) | 2012 (£m) c.c | |
Profit before tax | 14.4 | 11.8 | 10.9 |
Amortisation of acquired intangible assets recognised under business combinations | 3.9 | 3.3 | 3.3 |
Impairment of acquired intangible assets recognised under business combinations | 0.8 | - | - |
Impairment charges | - | 0.1 | 0.1 |
Share based payment costs | 3.2 | 1.8 | 1.8 |
Exceptional costs | 0.4 | 1.5 | 1.5 |
Profit on disposal of subsidiary | (0.8) | - | - |
Adjusted profit before tax for the year | 21.9 | 18.5 | 17.6 |
Amortisation of non-acquired intangibles | 5.4 | 3.9 | 3.9 |
Share of profit of associate | (0.8) | (1.5) | (1.3) |
Net finance income | - | (0.1) | - |
Depreciation | 3.3 | 3.4 | 3.3 |
Adjusted EBITDA | 29.8 | 24.2 | 23.5 |
The improvement in the Group's adjusted profit before tax is principally the result of the following significant items:
· Cost benefits flowing from the restructuring performed in FY2012 in the UK Motor division;
· Increased profits from the profit sharing arrangements in the UK subsidence business;
· Increased volumes in the Motor division in Germany, particularly in the fleet business, accompanied by strong operational leverage;
· Continued margin improvement from the use of Enterprise in France, Spain and Belgium;
· Increased number of sales of the Insurer product across the Group;
· The Group has also benefitted from a £0.8m result for the year (2012: £1.5m) from its associate Guardrisk, of which £0.6m (2012: £1.3m) resulted from the revision of estimates for future costs required in the administration of warranty plans; and
· Contribution from acquisitions made in the current year of £1.0m and the additional full year impact of prior year acquisitions of £1.0m
Adjusted profit before tax also includes amortisation of non-acquired intangibles of £5.4m, a significant increase from the £3.9m absorbed in 2012. This is a result of more of the investment in Innovation Insurer and Innovation Enterprise being expensed. A further impact of this is that amortisation is now higher than budgeted capitalisation, so the Group will be in a cash positive position in the future.
The regional improvements noted above are further expanded upon as part of the Regional review.
Amortisation of acquired intangible assets recognised under business combinations increased from £3.3m in 2012 to £3.9m in 2013. This increase is due to the full year impact of the 2012 acquisitions as well as the additional acquisitions made during the current year - being Sachcontrol (November 2012), Innovation Connect Enterprise (January 2013) and Gemini Vehicle Solutions (April 2013). An impairment charge of £0.8m (2012: £nil) has been recognised against intangible assets resulting from the loss of an acquired book of business in Claims Services Australia (£0.4m) and slightly less favourable contract terms being agreed post acquisition in return for a 3 year contract on a GVS customer (£0.4m). It should be noted that new contracts have been signed to replace these lost revenues however IAS 36 and IAS 38 do not allow these to be taken into consideration when calculating potential impairment on intangibles identified and valued at the acquisition date.
The cost of share-based payments was £3.2m (2012: £1.8m). This increased charge is due to both the higher number of awards which were live in the year and the associated employer's national insurance costs that are based on the expected value of the shares upon exercise. The national insurance charge of £0.9m included a one-off catch up of £0.4m. The employer's national insurance charge is impacted by the significant increase in share price in the year, which in the case of the Executive Directors' Recruitment and Retention awards increases both the expected number of shares to vest and the absolute value of the award. The Group made three further awards under the PSP scheme during the year and issued discounted share options to staff under the Group's Sharesave scheme.
During the year, the Group incurred net exceptional costs of £0.4m (2012: £1.5m). This comprised:
· A credit of £0.6m relating to expected future benefit through the subletting of property in the UK. The property lease to which this sublet is related had previously been expensed in full as an onerous lease and taken through exceptional costs in the 2010 financial year;
· A credit of £0.4m generated through the non-payment of deferred contingent consideration due on the 2011 Wintec acquisition due to the profit target being marginally missed;
· A charge of £1.3m relating to employee and property restructuring costs in the North American BPS business; and
· £0.1m (2012: £0.3m) of deal costs relating to acquisitions and disposals in the year.
The profit on disposal of a subsidiary entity represents the impact to the Group accounts of the disposal of the Travel Insurance business in South Africa.
As detailed in our half year report, the AEPS for 2010, 2011 and 2012 has been restated due to the incorrect calculation of the share of profits attributable to one of the non-controlling interests in previous financial years. This non-controlling interest has been disposed of and management believe that there is low risk of this issue recurring in the future.
The increases in both profit before tax and adjusted profit has resulted in a 24% and 15% increase in basic earnings per share ("EPS") and adjusted earnings per share ("AEPS") respectively. EPS for 2013 was 0.78p (2012: 0.63p) and AEPS for 2013 was 1.44 pence (2012: 1.25 pence).
Adjusted earnings per share is calculated as follows:
2013 (p) | 2012 (p) | |
Basic profit per share | 0.78 | 0.63 |
Amortisation of intangible assets recognised under business combinations | 0.41 | 0.35 |
Impairment of intangible assets recognised under business combinations | 0.08 | - |
Impairment charges | - | 0.01 |
Share based payment costs | 0.32 | 0.19 |
Exceptional items | 0.04 | 0.16 |
Profit on disposal of subsidiary | (0.06) | - |
Tax effect of adjusted items | (0.13) | (0.09) |
Adjusted earnings per share | 1.44 | 1.25 |
The improvement in both of the earnings per share metrics has been driven by the increased level of profitability of the Group, the earnings accretive acquisition of the outstanding interest in our UK Subsidence business and a higher proportion of profits being generated by our wholly owned businesses.
Group - Cash and Cash Conversion (KPI)
The Group ended the year with net cash of £26.9m (2012: £26.0m) comprising gross cash of £50.7m (2012: £44.7m) and debt of £23.8m (2012: £18.6m). On 5 April 2013, the Group increased the amount available to borrow from Barclays Bank plc to a £30.0m, multi-currency revolving credit facility expiring in December 2015. At the year end £8.0m of the facility was undrawn. This extended facility was used to fund acquisitions during the year. Also during the year, the Group settled in full the outstanding balance on its fixed medium term loan.
Operating cash inflow, adjusted for exceptional and taxation payments represents a conversion of cash relative to adjusted EBITDA of 90% (2012: 95%). Cash Conversion is a Group KPI and demonstrates the Group's ability to convert profits into cash either for reinvestment into the business or for dividend distribution. This target is set at 85% to allow for the funding of growth in the business.
Cash conversion decreased marginally in the year, partly due to generating higher levels of EBITDA than in previous years, which has made the calculation less sensitive to small cash movements. Secondly, cash conversion has also been impacted by the recognition of profits on our UK Subsidence on-risk contracts in advance of contractual annual cash settlements. This timing difference on cash collection for large subsidence contracts will continue as the business handles a higher level of subsidence claims.
Included within gross cash is £16.7m (2012: £14.2m) of cash available for use within our South African business; this continues to be subject to the normal government imposed exchange controls for that country.
Operating cash inflow was £19.1m (2012: £16.7m) after the payment of exceptional cash costs of £1.4m (2012: £1.8m) relating to exceptional charges in the current year and those accrued from previous years.
The net cash outflow from investing activities was £13.5m (2012: £28.5m). This includes interest received of £0.9m (2012: £1.0m), purchase of business combinations net of cash received of £6.3m (2012: £19.0m), cash from the sale of a non-current asset investment of £nil (2012: £0.1m), cash received on sale of a non-controlling interest in a subsidiary of £3.0m (2012: £nil) and fixed asset additions of £10.8m (2012: £10.5m) of which £3.7m (2012: £5.3m) is the capitalisation of costs relating to the core Innovation Insurer product and Innovation Enterprise.
Financing cash inflow of £3.3m (2012: inflow £15.7m) includes interest paid of £0.8m (2012: £1.5m), repayment of borrowings of £1.7m (2012: £8.3m), new bank loans of £5.6m (2012: £16.5m), dividends paid to minorities of £2.3m (2012: £1.5m), receipts from sale of shareholding in subsidiary undertakings where control has been retained of £2.9m (2012: £7.2m) and net proceeds from issue of shares of £0.4m (2012: £3.5m).
Group - Tax
The Group's tax charge was £4.3m (2012: £2.9m). The Group's adjusted tax charge of £5.9m (2012: £3.7m) is calculated by adding back the deferred tax credit recognised against IFRS acquired intangible asset amortisation of £1.0m (2012: £0.6m), the deferred tax credit recognised against share based payments of £0.7m (2012: £0.5m), the tax effect of exceptional costs of £0.1m (2012: £0.3m) and deducting the tax effect of the gain on disposal of £0.2m (2012: £nil).
When expressed as a percentage of adjusted profit, this represents an adjusted effective tax rate of 27% (2012: 20%) and is in line with the guidance given at the half year. This is higher than the previous year primarily due to there being no additional deferred tax assets recognised in this year, other than in relation to share based payments in the UK, whereas in the prior year, the Group recognised a significant deferred tax asset in regards to losses available for use in France.
The Group's adjusted effective tax rate is driven by a number of factors, such as:
· Split of profitability between the Group's operating regions with differing tax charges;
· Ability to efficiently group relieve tax losses; and
· Recognition of deferred tax assets where it is anticipated that these will be utilised in the future particularly in the UK and North America.
The Group continues to carry forward significant unrecognised tax losses in certain UK and US entities.
Group - Trade and other Debtors
Trade debtors have increased by £0.9m from £27.9m to £28.8m. This is in line with the improved levels of revenues seen across the Group and the debtors acquired through acquisition.
Total accrued income has increased by £4.1m from £21.0m to £25.1m. Of this increase, £2.4m relates to additional recognition of profit shares in the Group's UK subsidence business. As outlined below in the UK regional review, lower than usual new claims initiated during the financial year has led to more resource being deployed on closing open claims, hence generating accrued revenues from profit shares which are contractually only settled annually.
Group - Trade and other creditors
Trade creditors have increased by £3.7m from £31.5m to £35.2m. This is primarily due to the acquired trade creditors within the Gemini Vehicle Solutions business.
Total deferred income has fallen by £2.8m from £19.5m to £16.7m. This reduction is due to the settlement of subsidence claims in our cell captive being higher than the level of new claims notified. This has no impact on the income statement as the deferred income represents the indemnity cost of the claim and is matched with an equal cost of sale.
Group - Merger and Acquisition activity
During the year the Group completed three acquisitions for a maximum total cost of £7.8m, all of which will be payable in cash. £1.5m of this balance was deferred at the year end, with £0.8m paid by the date of this report.
The revenue and adjusted profit before tax contributions from these acquisitions in the year to 30 September 2013 were £2.5m and £1.0m respectively.
We also purchased the remaining non-controlling interest in our UK subsidence business, InFront Solutions Limited, in November 2012 for £2.3m settled by the issue of 10.5m shares in The Innovation Group plc. This has enabled us to move on with fully integrating our Property division within the UK BPS business. We continue to look to other acquisitions in this area to broaden our offering to the market.
In April we disposed of 30% of our Nobilas France business to a subsidiary of AXA France for €3.45m (£2.9m) as part of a strategic partnership with AXA. We are excited about the potential returns that this could generate for our shareholders and the agreement is expected to be significantly earnings enhancing from 2014. AXA have the opportunity to increase their shareholding further if certain volume targets are met, which would increase the number of claims handled by this business by well over 100%. We also disposed of our Travel Insurance business in South Africa for R59m (£4.0m) effective 1 June 2013. This was no longer part of our core strategic goal.
Regional review
United Kingdom
Our UK business generates revenue across all of our product offerings - Motor BPS, Property BPS and Software. It has grown significantly in profitability over recent years driven predominantly by the success of our relationship with Enterprise-Rent-a-Car in the motor business and the exceptional performance of our UK Subsidence business.
Revenue
The UK reported revenue growth of approximately 10%. Overall organic growth was flat with the increase due to the in-year acquisition of GVS and the impact of a full year's revenue from Marishal Thompson acquired in 2012.
Our Property business had year on year revenue growth of 3%, all acquisition related. Organic revenues were impacted by our subsidence business experiencing a weather related, lower than normal year for new claims notifications. However, the lack of new claims revenue was partially offset through the progression of our existing open claims portfolios in the Subsidence Division. This enabled us to generate high margin revenue due to the profit sharing arrangements. In addition, 2012 was determined a benign year for subsidence claims in the insurance industry and pricing clauses within our largest contract at that time allowed for higher fees to be charged. This calculation was concluded in early 2013 and hence the benefit of these increased fees has been included in the current financial year. It should be noted that these fees really represent a compensation for lower claims volumes received in a benign year, which impacted both 2012 and 2013's results. We do not believe that this will be repeated in 2014 based on the current year's claim volumes.
We continue to focus on minimising indemnity and other costs incurred within the settlement of these claims, whilst ensuring we meet the requisite standards of excellent customer service. We anticipate that both the contract win announced in October with a Tier 1 insurer and the return of normal volumes will generate significant growth across the subsidence and arboriculture businesses over the next twelve months. The contract win in October is expected to generate approximately £75.0m of revenues over the next seven years through handling both newly notified claims and the inherited open claim book.
The Innovation Symbility product, which enables quicker decisions to be made on site by engineers and loss adjusters in regards to property claims, has continued to deliver solid revenue growth. The two most recent significant wins were with a Tier 1 insurer in April and Lloyds Banking Group in October (which will contribute to results from the 2014 financial year). We consider ourselves to be the market leader in this technology in the UK and now anticipate significant improvement in the recurring revenue streams to be derived from the contractors using this software as part of the property repair process. Revenue grew from £1.3m to £2.0m in this part of the business.
Our UK Motor business grew by 16% on a year on year basis, reflecting organic growth of 7%. This organic growth primarily came through additional volume from our contract with Enterprise Rent-A-Car. During April, the Group acquired 100% of the share capital of Gemini Vehicle Solutions ("GVS") for total cash consideration of £4.5m, of which £3.0m was paid during the year. GVS is a leading provider of motor claims management solutions in the UK, including third party intervention services and vehicle repair solutions. As a result of the acquisition, we now have a broader product set to offer within the motor claims handling sector of the UK market.
The UK Software division increased revenue by 31% in 2013, driven by an increase in licence revenues of £1.4m on a year on year basis. This included the first UK sale of Insurer Policy to a Tier 1 Mutual insurer and a development licence to a US based company developing a telematics offering.
Adjusted Profit
Our UK business achieved its adjusted profit target for the year, primarily as a result of an excellent performance from the property division where the successful progression and closure of claims has resulted in high margin profit share revenue. Adjusted profit for the year was £9.1m compared to £5.1m in the previous year.
The increase in adjusted profit as compared to the previous year is the result of the following:
· Benefits realised from the cost restructuring in UK motor during 2012;
· Profits relating to the in-year and prior year acquisitions;
· An increased level of high margin licence sales; and
· Profits in UK property generated through high margin profit shares and 2012 benign year fees in our UK subsidence business and the growth in revenues from the Innovation Symbility product.
Germany
Germany's main revenue stream is the provision of BPS solutions to the Motor industry across both insurance and fleet. We also have a smaller property claims handling business, which was enhanced during the year by the acquisition of Sachcontrol in November 2012.
Revenue
The Motor division in Germany grew revenues by 12% during the year. This has been achieved through increased volumes across all lines but included a number of small contract wins in our fleet business. Revenues in the motor division include £28.1m (2012: £25.1m) from the sale of parts which attracts very low EBITDA margins.
On 1 November 2012, the Group acquired the trade and assets of a division of Sachcontrol for total cash consideration of €1.5m (£1.2m). The business provides loss adjusting services for large value claims to insurers, predominantly in the East of Germany. As a result of the acquisition, the Group expects to increase its potential for growth within the property claims handling sector across the whole German market.
The property division saw revenue growth of 14% year on year, however this was all due to the above acquisition with organic volumes relatively flat. This was predominantly due to a slow first half of the year with lower than expected claims volumes caused by a warm winter. Volumes improved in the second half of the year, due to flooding in Central Germany.
Adjusted Profit
The revenue growth noted above has helped to drive a significant increase in overall adjusted profit in Germany of £1.5m to £8.9m; which is an increase of 20% from 2012. Budgeted adjusted profit was achieved at constant currency and demonstrates the operating leverage that the German Motor business has been able to establish over recent years.
Rest of Europe
The Rest of Europe operation provides solely Motor BPS solutions to insurers and fleets. We are also pleased to report that all of the businesses within this region are now using our own software, Enterprise, to manage repairs on behalf of both insurers and fleets across France, Belgium and Spain and we believe that the benefits of this are clear within the profits and profit margins generated by this part of the Group.
During April, the Group announced a strategic partnership with AXA France ("AXA"). This transaction builds upon the long-standing relationship that the Group has with AXA in France, during which time we have been able to clearly demonstrate the strengths and benefits of our model. This is a strategic, long-term partnership which sees a subsidiary of AXA acquire a 30% shareholding in Nobilas France for £2.9m (€3.5m) in return for significantly increasing the volume of claims that the Group will handle into the future. As part of this transaction, warrants have been issued to AXA, which will enable them to increase their shareholding in Nobilas France if certain volume targets are hit, with an associated volume rebate charge. These targets require an increase in AXA claims volumes to be handled by Nobilas France of at least 100% from current levels, over a consecutive twelve month period. This partnership should generate significant returns to our shareholders over the next five years.
Revenue
Overall revenue growth was 31% or 29% at constant currency. Organic growth was 8% (constant currency 8%), allowing for the impact of the acquisition during the year of Innovation Connect Enterprise in France and the prior year purchase of Teledesk / Value Partners in Belgium.
Despite like-for-like claims volumes remaining low, the business has been able to drive better performance through the use of its supply chain, commercial deals with suppliers of paint, leasing vehicles and parts and operational leverage from the use of Innovation Enterprise. EBITDA margins in this region have increased to 18% from 8% in 2012.
On 4 January 2013, the Group acquired the whole of the intellectual property rights to, and contractual right to associated revenue streams of, Innovation Connect Enterprise ("ICE") for cash consideration of €2.5m (£2.1m). ICE is a body shop and supply chain performance management tool, which enables repairers to provide excellent quality, customer service and deliver cost savings in the motor insurance claim cycle. This is a tool now implemented in the majority of the bodyshops managed by our French business.
We have seen significant revenue growth in the year in Belgium, following the acquisition of Teledesk / Value Partners in 2012, with this part of the business reporting increased revenue of 127% in the year, of which 22% is organic. We continue to penetrate the broker and insurer market and we see this as an area of exciting potential.
Revenues in our Spanish business remained flat, however we remain confident that we are well positioned to take advantage of economic recovery as well as market opportunities through insurers and fleets seeking to reduce operating and indemnity costs. Due to restructuring at the end of last year the Spanish business was able to break even for this financial year.
Adjusted Profit
The region achieved its adjusted profit target at constant currency. Adjusted profit increased from £0.5m in 2012 to £2.3m in 2013, an improvement of 360% on a year on year basis, of which 180% is organic. The organic profit growth has been generated through the continued revenue growth in both our French and Belgian operations and the ability of these businesses to generate economies of scale, partly through the use of Enterprise. The restructuring exercise completed in Spain towards the end of 2012 has reduced losses in that region this year as compared to 2012.
South Africa
South Africa's main revenue stream is the provision of BPS solutions to the Motor industry. The largest contributor to this is the revenue generated through the administration of Warranty and Service & Maintenance products.
Revenue
Reported revenues in our South African business decreased from £40.7m in 2012 to £39.1m in 2013. This was caused by the significant weakening of the South African Rand on a year on year basis. On a constant currency basis, the business has performed strongly, with revenue increasing by 10% (2012: 12%). The increase in revenues has been driven by a high level of Warranty and Service & Maintenance plans, particularly in the first half of the year. The contract win with Fonesure announced in October 2013 will contribute to the ongoing growth of these businesses.
South Africa's revenue numbers were also impacted by the sale of the Travel Insurance business in South Africa, for total cash consideration payable to the Group of R59m (£3.9m). The travel business is the last significant non-core business owned by the Group and this disposal is in line with the Group's stated strategy of focussing on both organic and acquired growth in the motor and property sectors.
Adjusting for the Travel Insurance business, on a like for like basis, the revenues of the core underlying business grew by 16% on a constant currency basis and by 1% year on year in Sterling.
Adjusted Profit
The region achieved its adjusted profit target at constant currency. Adjusted profit fell from £8.7m in 2012 to £8.3m in 2013, a fall of 5%. On a constant currency basis the region improved adjusted profit by £0.9m, an increase of 10%. The increase in profitability was the result of increased revenues in the motor division as detailed above.
As in the previous financial year, we have recognised a profit share in regards to our Associate - "Guardrisk". In total this has contributed £0.8m in the current year (2012: £1.5m). Of this figure, £0.6m (£2012: £1.2m) was generated from a revision of the expected reserves required to settle out all claims within the cell.
North America
Our North American region generates revenue across all product lines, being Motor BPS, Property BPS and Software, however the largest contributor is Motor. The North American market remains our largest opportunity in regards to improvement in market share across the Group.
Revenue
Overall revenues in North America have grown by 9% on a year on year basis, reflecting an increase of 8% at constant currency.
This growth has primarily been driven by the software division, generated through six sales of the Insurer Suite or component elements of the Suite, as well as increased levels of associated implementation revenues. This has grown by 45% from £6.1m in 2012 to £8.9m in 2013.
Performance from our BPS division saw revenues decrease slightly by 4%, from £17.7m in FY2012 to £17.0m in FY2013. This is partially due to benign weather conditions leading to lower claims volumes, unlike 2012, where significant revenues were generated from the increased volume of claims caused by the BP gas recall during August and September 2012. Profitability in this division was also significantly down with cost overruns occurring in the first half of the year.
In April 2013, the management team was changed and a significant restructure commenced in this part of the business. The restructure involved exiting a number of loss making contracts, dramatically downsizing the number of staff in the FNOL call centre and relocating this division to Chicago, alongside the motor BPS division. This was all completed by the end of September and will aid improved margins from future contract wins and existing revenue streams. Exceptional costs of £1.3m were incurred in the year as part of the restructure.
Adjusted Profit
Following a number of years operating at a break-even level, the region suffered an adjusted loss of £1.2m, a reduction in profit of £1.3m from 2012. This performance meant the region did not achieve its adjusted profit target. The restructuring detailed above will return this region to profitability in the first half of 2014.
Asia Pacific
Following the addition of Claims Services Australia in December 2011, which added a property claims handling capability to our business in Australia, our Asia Pacific region now generates revenue across all product lines.
Revenue
Revenues in our Asia Pacific division fell by 13% on a year on year basis from £24.7m to £21.4m. This was a 10% fall on a constant currency basis.
This is primarily due to a £2m reduction in revenues generated by our Software division in Australia. The business did not achieve any new licence sales during the year, whereas in 2012, we achieved a one-off £2m licence sale for the Group's Insurer Policy product. Performance from this division was below target for the year due to the lack of a new software sale. However, the software pipeline is strong and significant momentum here is expected in the near future.
During the year the business completed implementation of the Innovation Insurer suite at one of Australia's best known mid tier Property and Casualty insurers, which was originally announced in October 2011 and the BPS business went live on Innovation Enterprise in our Motor division with the expectation of delivering margin improvements in the next financial year.
Outsourcing revenues were down by £1.2m (£0.7m on a constant currency), due to lower than normal claims volumes, however, tight cost control has mitigated the impact of these reduced volumes in the year on adjusted profit.
Adjusted Profit
The region did not achieve its adjusted profit target for FY2013. Adjusted profit was down £1.0m on a year on year basis (£0.9m on a constant currency basis). This is due to the lack of a licence sale in the year, which contributed a gross £1.7m in 2012 (£1.0m after the relevant transfer pricing adjustment back to the UK).
Approved by the Board of Directors and signed on behalf of the Board
Andrew Roberts | Jane Hall |
Chief Executive Officer | Group Finance Director |
1 December 2013
The Innovation Group plc
Consolidated Income Statement
For the year ended 30 September 2013
2013 | 2012 | |||
Note | £'000 | £'000 | ||
restated | ||||
Revenue | 2 | 204,431 | 193,730 | |
Cost of sales | (119,662) | (115,037) | ||
|
| |||
Gross profit | 84,769 | 78,693 | ||
Administrative expenses excluding exceptional items | (71,556) | (67,010) | ||
Exceptional items | 3 | (346) | (979) | |
Administrative expenses | (71,902) | (67,989) | ||
|
| |||
Operating profit | 12,867 | 10,704 | ||
Finance revenue | 917 | 961 | ||
Finance costs | (889) | (1,375) | ||
Profit on disposal of subsidiary undertaking | 764 | - | ||
Share of post-tax profit of associate | 770 | 1,482 | ||
|
| |||
Profit before tax | 14,429 | 11,772 | ||
UK income tax credit/(expense) | 497 | (66) | ||
Overseas income tax expense | (4,815) | (2,826) | ||
|
| |||
Total tax expense | 4 | (4,318) | (2,892) | |
|
| |||
Profit for the year | 10,111 | 8,880 | ||
|
| |||
Attributable to: | ||||
Equity holders of the parent | 7,616 | 5,950 | ||
Non-controlling interests | 2,495 | 2,930 | ||
|
| |||
10,111 | 8,880 | |||
|
| |||
Adjusted profit: | ||||
Profit before tax | 14,429 | 11,772 | ||
Amortisation of intangible assets recognised under business combinations | 3,919 | 3,265 | ||
Impairment of intangible assets recognised under business combinations | 823 | - | ||
Exceptional items | 346 | 1,479 | ||
Impairment of goodwill on associate | - | 115 | ||
Profit on disposal of subsidiary undertaking | (764) | - | ||
Share-based payments charge | 3,160 | 1,825 | ||
|
| |||
Adjusted profit for the year | 2 | 21,913 | 18,456 | |
|
| |||
Earnings per share (pence) | ||||
Basic | 5 | 0.78 | 0.63 | |
Diluted | 5 | 0.76 | 0.61 | |
Adjusted | 5 | 1.44 | 1.25 | |
Adjusted diluted | 5 | 1.41 | 1.22 | |
All amounts relate to continuing operations. |
Dividends paid or authorised are shown in the consolidated statement of changes in equity.
The Innovation Group plc
Consolidated Statement of Comprehensive Income
For the year ended 30 September 2013
2013 | 2012 | |
£'000 | £'000 | |
restated | ||
Profit for the year | 10,111 | 8,880 |
|
| |
Other comprehensive income: | ||
Foreign currency: | ||
Currency translation differences | (2,260) | (6,188) |
Deferred tax: | ||
Deferred tax credit in respect of share based payments | 257 | - |
Cash flow hedges: |
| |
Hedging derivatives | - | 113 |
Reclassification of ineffective element of hedging derivatives to the income statement | - | 500 |
|
| |
- | 613 | |
|
| |
Other comprehensive income for the year | (2,003) | (5,575) |
|
| |
Total comprehensive income | 8,108 | 3,305 |
|
| |
Total comprehensive income attributable to: | ||
Equity holders of the parent | 5,633 | 1,071 |
Non-controlling interests | 2,475 | 2,234 |
|
| |
8,108 | 3,305 | |
|
|
Other than the deferred tax credit in respect of share based payments, none of the adjustments through other comprehensive income have had any tax impact in either the current or preceding financial year.
The Innovation Group plc
Consolidated Balance Sheet
At 30 September 2013
30 September | 30 September | 1 October | ||
2013 | 2012 | 2011 | ||
Note | £'000 | £'000 | £'000 | |
restated | restated | |||
ASSETS | ||||
Non-current assets | ||||
Property, plant and equipment | 13,088 | 13,177 | 13,089 | |
Goodwill | 84,229 | 82,121 | 69,297 | |
Other intangible assets | 32,382 | 31,844 | 24,880 | |
Investments accounted for using the equity method | 3,618 | 3,547 | 2,505 | |
Financial assets | 255 | 255 | 84 | |
Deferred tax assets | 3,852 | 2,151 | 2,672 | |
|
|
| ||
137,424 | 133,095 | 112,527 | ||
Current assets | ||||
Trade and other receivables | 7 | 57,547 | 51,982 | 43,136 |
Prepayments | 2,698 | 2,629 | 2,530 | |
Other financial assets | 154 | 144 | 154 | |
Deferred tax assets | 1,583 | 2,014 | 1,062 | |
Cash and cash equivalents | 50,646 | 44,682 | 43,119 | |
|
|
| ||
112,628 | 101,451 | 90,001 | ||
|
|
| ||
TOTAL ASSETS | 250,052 | 234,546 | 202,528 | |
|
|
| ||
EQUITY AND LIABILITIES | ||||
Attributable to equity holders of the parent | ||||
Equity share capital | 19,730 | 19,227 | 18,806 | |
Share premium | 48,287 | 45,860 | 42,626 | |
Merger reserve | 2,121 | 2,121 | 2,121 | |
Foreign currency translation | (2,616) | (516) | 5,116 | |
Unrealised gains and losses | - | - | (613) | |
Retained earnings | 59,216 | 49,785 | 35,613 | |
|
|
| ||
126,738 | 116,477 | 103,669 | ||
Non-controlling interests | 3,894 | 5,604 | 4,166 | |
|
|
| ||
TOTAL EQUITY | 130,632 | 122,081 | 107,835 | |
Non-current liabilities | ||||
Trade and other payables | 8 | 809 | 1,912 | 932 |
Deferred income | 4,726 | 5,263 | 3,535 | |
Interest bearing loans and borrowings | 9 | 22,232 | 16,902 | 7,372 |
Derivative financial instruments | - | - | 613 | |
Deferred tax liabilities | 2,622 | 2,449 | 1,729 | |
Provisions | 888 | 1,665 | 1,336 | |
|
|
| ||
31,277 | 28,191 | 15,517 | ||
Current liabilities | ||||
Trade and other payables | 8 | 69,803 | 64,496 | 59,862 |
Deferred income | 11,998 | 14,255 | 12,949 | |
Interest bearing loans and borrowings | 9 | 1,090 | 1,734 | 3,034 |
Income tax payable | 2,365 | 2,187 | 1,581 | |
Deferred tax liabilities | 1,755 | 1,019 | 688 | |
Provisions | 1,132 | 583 | 1,062 | |
|
|
| ||
88,143 | 84,274 | 79,176 | ||
|
|
| ||
TOTAL LIABILITIES | 119,420 | 112,465 | 94,693 | |
|
|
| ||
TOTAL EQUITY AND LIABILITES | 250,052 | 234,546 | 202,528 | |
|
|
|
The results were approved by the Board of Directors on 1 December 2013.
The Innovation Group plc
Consolidated statement of changes in equity
At 30 September 2013
Attributable to equity holders of the parent
Issued Capital |
Share premium |
Merger reserve |
Retained earnings |
Unrealised gains and losses |
Translation reserves |
Total |
Non- controlling interests |
Total equity | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 1 October 2011 as | |||||||||
previously stated | 18,806 | 42,626 | 2,121 | 38,241 | (613) | 5,217 | 106,398 | 1,437 | 107,835 |
Restatement | - | - | - | (2,628) | - | (101) | (2,729) | 2,729 | - |
At 1 October 2011 | 18,806 | 42,626 | 2,121 | 35,613 | (613) | 5,116 | 103,669 | 4,166 | 107,835 |
Restated | |||||||||
Currency translation differences | - | - | - | - | - | (5,492) | (5,492) | (696) | (6,188) |
Cash flow hedges | - | - | - | - | 613 | - | 613 | - | 613 |
Profit for the year | - | - | - | 5,950 | - | - | 5,950 | 2,930 | 8,880 |
Total comprehensive income and expense for the year | - | - | - | 5,950 | 613 | (5,492) | 1,071 | 2,234 | 3,305 |
Dividends (note 6) | - | - | - | - | - | - | - | (1,549) | (1,549) |
Issue of share capital | 341 | 3,109 | - | - | - | - | 3,450 | - | 3,450 |
Issue of share capital under exercise of awards and options | 80 | 125 | - | (59) | - | - | 146 | - | 146 |
Share-based payment charge | - | - | - | 1,825 | - | - | 1,825 | - | 1,825 |
Gain on disposal of shareholding in subsidiary | - | - | - | 6,456 | - | - | 6,456 | - | 6,456 |
Non-controlling interest created on disposal of shareholding in subsidiary | - | - | - | - | - | (140) | (140) | 753 | 613 |
At 30 September 2012 restated | 19,227 | 45,860 | 2,121 | 49,785 | - | (516) | 116,477 | 5,604 | 122,081 |
The Innovation Group plc
Consolidated statement of changes in equity
At 30 September 2013
Attributable to equity holders of the parent
Issued Capital |
Share premium |
Merger reserve |
Retained earnings |
Unrealised gains and losses |
Translation reserves |
Total |
Non- controlling interests |
Total equity | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 30 September 2012 restated | 19,227 | 45,860 | 2,121 | 49,785 | - | (516) | 116,477 | 5,604 | 122,081 |
Currency translation differences | - | - | - | - | - | (2,240) | (2,240) | (20) | (2,260) |
Deferred tax credit in respect of share based payments | - | - | - | 257 | - | - | 257 | - | 257 |
Profit for the year | - | - | - | 7,616 | - | - | 7,616 | 2,495 | 10,111 |
Total comprehensive income and expense for the year | - | - | - | 7,873 | - | (2,240) | 5,633 | 2,475 | 8,108 |
Dividends (note 6) | - | - | - | - | - | - | - | (2,257) | (2,257) |
Issue of share capital under exercise of awards and options | 277 | 166 | - | (563) | - | - | (120) | - | (120) |
Share-based payment charge | - | - | - | 2,234 | - | - | 2,234 | - | 2,234 |
Issue of share capital as part of consideration for increase in shareholding in subsidiary | 210 | 2,117 | - | - | - | - | 2,327 | - | 2,327 |
Issue of share capital as part of contingent consideration paid | 16 | 144 | - | - | - | - | 160 | - | 160 |
Loss on increase in shareholding in subsidiary | - | - | - | (394) | - | - | (394) | - | (394) |
Non-controlling interest derecognised upon increase in shareholding in subsidiary | - | - | - | - | - | - | - | (1,976) | (1,976) |
Gain on disposal of shareholding in subsidiary | - | - | - | 1,048 | - | 140 | 1,188 | - | 1,188 |
Transaction costs incurred as part of disposal of shareholding in subsidiary | - | - | - | (114) | - | - | (114) | - | (114) |
Non-controlling interest created on disposal of shareholding in subsidiary | - | - | - | - | - | - | - | 1,684 | 1,684 |
Loss on increase in shareholding in subsidiary | - | - | - | (653) | - | - | (653) | - | (653) |
Non-controlling interest derecognised upon increase in shareholding in subsidiary | - | - | - | - | - | - | - | (167) | (167) |
Non-controlling interest derecognised upon disposal in shareholding in subsidiary | - | - | - | - | - | - | - | (1,469) | (1,469) |
At 30 September 2013 | 19,730 | 48,287 | 2,121 | 59,216 | - | (2,616) | 126,738 | 3,894 | 130,632 |
The Innovation Group plc
Consolidated Cash Flow Statement
For the year ended 30 September 2013
Year to | Year to | ||
30 September | 30 September | ||
2013 | 2012 | ||
£'000 | £'000 | ||
Operating activities | |||
Group operating profit | 12,867 | 10,704 | |
Adjustments to reconcile group operating profit to net cash inflows from operating activities | |||
Depreciation of property, plant and equipment | 3,307 | 3,451 | |
Profit on disposal of property, plant and equipment | (37) | (67) | |
Amortisation of intangible assets | 9,299 | 7,135 | |
Impairment of intangible assets | 823 | - | |
Share-based payments | 3,160 | 1,825 | |
Impairment of goodwill in associate | - | 115 | |
Increase in receivables | (4,054) | (7,402) | |
(Decrease)/increase in payables | (939) | 4,939 | |
Income taxes paid | (5,380) | (4,062) | |
|
|
| |
Net cash flow from operating activities | 19,046 | 16,638 | |
Investing activities | |||
Sale of property, plant and equipment | 191 | 259 | |
Purchases of property, plant and equipment and intangible assets | (10,825) | (10,500) | |
Acquisition of business combinations | (6,330) | (20,120) | |
Payment of contingent consideration on business combinations | (449) | - | |
Cash acquired with subsidiary undertakings | 3 | 1,186 | |
Sale of subsidiary undertaking (net of cash disposed) | 2,997 | - | |
Purchase of non-current asset investment | - | (387) | |
Sale of non-current asset investment | - | 95 | |
Interest received | 924 | 1,000 | |
|
| ||
Net cash flow from investing activities | (13,489) | (28,467) | |
Financing activities | |||
Interest paid | (813) | (1,545) | |
Dividend paid to non-controlling interests | (2,257) | (1,549) | |
Purchase of non-controlling interest in existing participations | (883) | - | |
New bank loans | 5,571 | 16,500 | |
Repayment of borrowings | (1,302) | (7,701) | |
Repayment of capital element of finance leases | (377) | (635) | |
Proceeds from issue of shares | 443 | 3,464 | |
Sale of shareholding in subsidiary undertakings with control retained | 2,871 | 7,176 | |
|
| ||
Net cash flow from financing activities | 3,253 | 15,710 | |
Net increase in cash and cash equivalents | 8,810 | 3,881 | |
Cash and cash equivalents at beginning of year | 44,682 | 43,119 | |
Effect of exchange rates on cash and cash equivalents | (2,846) | (2,318) | |
|
| ||
Cash and cash equivalents at the year end | 50,646 | 44,682 | |
|
|
|
Cash held and available for use within the business in our South African operation of £16,691,000 (2012: £14,179,000) continues to be subject to the normal government imposed exchange controls for that country.
The Innovation Group plc
Notes to the Results
For the year ended 30 September 2013
1. BASIS OF PREPARATION
The Annual Financial Report announcement was approved by the Board of Directors on 1 December 2013.
The financial information set out in this Annual Financial Report announcement for the year ended 30 September 2013 does not constitute the Group's statutory accounts as defined by s435 of the Companies Act but has been extracted from the 2013 statutory accounts on which an unqualified audit report has been made by the auditors, and which did not contain an emphasis of matter paragraph nor a statement under section 498(2) or (3) of CA 2006. The financial information included in the annual report announcement for the prior year ended 30 September 2012 has been extracted from the 2012 statutory accounts on which an unqualified audit report has been made by the auditors, and which did not contain an emphasis of matter paragraph nor a statement under section 237(2) or (3) of CA 1985.
The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). The accounting policies have been consistently applied to all periods presented and are consistent with those presented in the 2012 statutory accounts.
The audited financial statements for the year ended 30 September 2012 have been delivered to the Registrar of Companies. The Annual Report for the year ended 30 September 2013 will be mailed to shareholders at the end of January 2014 and will be delivered to the Registrar of Companies following the Annual General Meeting which will be held in March 2014 at the Company's office at Yarmouth House, 1300 Parkway, Solent Business Park, Whiteley, Hampshire, PO15 7AE.
Restatement of Comparatives
The figures for the year to 30 September 2012, as previously reported, and the opening position as at 1 October 2011 have been restated to correct the allocation of profits between equity holders of the parent and non-controlling interests. The correction relates to the incorrect allocation of NCI dividends in the year ended 30 September 2008 and each subsequent reporting period.
This restatement has not affected the adjusted profit or profit before tax of the Group in either the current or any previous reporting period and the net assets of the Group remain unchanged. Presentation of non-controlling interests, retained earnings and the translation reserve have been adjusted, so that disclosure is on a consistent basis with the current period's figures. In accordance with IAS 1, a third balance sheet representing the opening position as at 1 October 2011 has been presented.
The adjustments are summarised as follows:
1 October 2011 | 30 September 2012 | |
Retained Earnings | Reduction of £2,628,000 | Reduction of £3,414,000 |
Non-controlling Interests | Increase of £2,729,000 | Increase of £3,255,000 |
Translation Reserves | Reduction of £101,000 | Increase of £159,000 |
Profit attributable to equity shareholders | - | Reduction of £786,000 |
Profit attributable to non-controlling interests | - | Increase of £786,000 |
Adjusted Earnings Per Share | - | Reduction of 0.08p |
Basic Earnings per Share | - | Reduction of 0.08p |
Adjustment to prior year balance sheets
The Group has restated the comparative balance sheets to reflect the reallocation of loans and receivables owed by ETSIA Digital Inc from investments to other debtors, the movement of certain deferred tax assets and liabilities between long term and short term and the removal of certain provisions and offsetting assets relating to national insurance on share options. The effect of these adjustments on the previous year is to decrease investments by £156,000, increase current assets by £1,097,000 (2011: reduce £70,000), increase current liabilities by £605,000 (2011: £634,000), decrease non current assets by £2,014,000 (2011: £1,062,000) and decrease non current liabilities by £1,678,000 (2011: £1,766,000). None of these reallocations have affected adjusted profit or profit before tax of the Group in either the current or any previous reporting period and the net assets of the Group remain unchanged.
Change in accounting estimate
During the second half of 2013, as part of the actuarial review performed on the motor warranty policies written within the Guardrisk cell captive, a change in accounting estimate enabled the Group to recognise additional share of profit in an associate of £570,000 (FY12: £1,259,000). This change in accounting estimate resulted from increased data in regards to motor warranty policies written within the Guardrisk cell captive that is disclosed as an investment accounted for using the equity method. This has revised the claims curve over which unearned premium is released as income, and now more accurately recognises revenue in line with the costs to which this premium relates over the term of the policy.
2. SEGMENT INFORMATION
The Group is organised into regional business units and a central cost centre. The Group has six reportable operating segments which are separately disclosed together with a central cost centre which includes unallocated corporate costs, expensed development costs and transfer pricing royalties. Operating segments have been aggregated where the aggregation criteria have been met. More specifically, Asia Pacific includes Australia, India, Pakistan and Japan, the Rest of Europe includes France, Spain and Benelux and North America includes the US and Canada.
Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on adjusted profit which is the Group's internal principal measure of profit. Segment revenue excludes transactions between business segments. Segment adjusted profit as reflected in the tables within this note, includes both royalty charges and transfer pricing adjustments for reallocating corporate costs to the regional business units. Management does not monitor the balance sheets of its business units separately for the purposes of making decisions and therefore segmental assets, additions to non-current assets and segmental liabilities have not been disclosed. Non-current assets in the segmental disclosure comprise investments, intangible assets and property, plant and equipment.
The Group's revenues are derived from the following products and services:
- Motor Business Process Services (BPS) and networks;
- Property Business Process Services (BPS) and networks;
- Other Business Process Services (BPS) and networks; and
- Software.
Information regarding the Group's six operating segments and its central cost centre is reported below.
The Group's revenues are attributed to business units based on customer location. The total external revenue attributable to all countries other than the UK was £158.4m (2012: £151.8m). The total non-current assets attributable to all countries other than the UK was £67.2m (2012: £66.6m).
Year ended 30 September 2013
UK | Germany | Rest of Europe | South Africa | North America | Asia Pacific | Central Costs** | Total |
| |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| |
Segment revenue: | |||||||||
Motor BPS & networks *** | 11,967 | 51,208 | 15,150 | 33,070 | 10,874 | 13,528 | - | 135,797 | |
Property BPS & networks | 24,618 | 5,649 | - | - | 3,292 | 4,177 | - | 37,736 | |
Other BPS & networks | 229 | - | - | 2,612 | 2,818 | - | - | 5,659 | |
Software *** | 9,218 | - | - | 3,410 | 8,954 | 3,657 | - | 25,239 | |
|
|
|
|
|
|
|
| ||
Total external revenue | 46,032 | 56,857 | 15,150 | 39,092 | 25,938 | 21,362 | - | 204,431 | |
Segment result: | |||||||||
EBITDA before transfer pricing adjustments | 12,632 | 9,535 | 3,390 | 7,673 | 715 | 3,456 | (7,599) | 29,802 | |
Software royalties | (1,521) | - | (482) | - | (1,270) | (1,004) | 4,277 | - | |
Reallocation of corporate costs | (353) | (134) | (188) | (135) | (303) | (92) | 1,205 | - | |
EBITDA* | 10,758 | 9,401 | 2,720 | 7,538 | (858) | 2,360 | (2,117) | 29,802 | |
Depreciation | (1,295) | (191) | (385) | (615) | (166) | (369) | (286) | (3,307) | |
Net finance (costs)/income | (114) | (5) | (9) | 768 | (1) | (380) | (231) | 28 | |
Share of profit of associate | - | - | - | 745 | - | 25 | - | 770 | |
Amortisation of non-acquired intangibles | (277) | (256) | (40) | (118) | (164) | (39) | (4,486) | (5,380) | |
|
|
|
|
|
|
|
| ||
Adjusted profit/(loss) before tax | 9,072 | 8,949 | 2,286 | 8,318 | (1,189) | 1,597 | (7,120) | 21,913 | |
EBITDA % | 23% | 17% | 18% | 19% | (3)% | 11% | - | 15% | |
Non-current assets | 70,209 | 18,059 | 9,933 | 6,646 | 17,481 | 15,096 | - | 137,424 | |
* EBITDA is shown before share-based payments charge, impairment of goodwill, acquired intangibles and financial assets and exceptional items
** Central costs include unallocated corporate costs, expensed development costs and transfer pricing royalties.
*** Included within Motor BPS & networks and Software are amounts relating to the sale of goods (motor parts and software licences) of £28,150,000 and £3,670,000 respectively.
Year ended 30 September 2012
UK | Germany | Rest of Europe | South Africa | North America | Asia Pacific | Central Costs** | Total |
| ||||||
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| ||||||
Segment revenue: | ||||||||||||||
Motor BPS & networks *** | 10,338 | 45,856 | 11,580 | 32,386 | 11,370 | 13,544 | - | 125,074 | ||||||
Property BPS & networks | 24,050 | 4,965 | - | - | 2,978 | 5,446 | - | 37,439 | ||||||
Other BPS & networks | 524 | - | - | 4,800 | 3,363 | - | - | 8,687 | ||||||
Software *** | 7,058 | 206 | - | 3,493 | 6,080 | 5,693 | - | 22,530 | ||||||
|
|
|
|
|
|
|
| |||||||
Total external revenue | 41,970 | 51,027 | 11,580 | 40,679 | 23,791 | 24,683 | - | 193,730 | ||||||
Segment result: | ||||||||||||||
EBITDA before transfer pricing adjustments | 7,619 | 8,163 | 1,498 | 8,013 | 1,130 | 5,499 | (7,713) | 24,209 | ||||||
Software royalties | (690) | (123) | (482) | - | (700) | (2,108) | 4,103 | - | ||||||
Reallocation of corporate costs | (422) | (174) | (92) | (383) | (203) | (149) | 1,423 | - | ||||||
EBITDA* | 6,507 | 7,866 | 924 | 7,630 | 227 | 3,242 | (2,187) | 24,209 | ||||||
Depreciation | (1,247) | (187) | (307) | (852) | (167) | (312) | (379) | (3,451) | ||||||
Net finance (costs)/income | (22) | (20) | 1 | 601 | (2) | (327) | (145) | 86 | ||||||
Share of profit/(loss) of associate | - | - | - | 1,475 | - | 7 | - | 1,482 | ||||||
Amortisation of non-acquired intangibles | (171) | (309) | (91) | (161) | (26) | (1) | (3,111) | (3,870) | ||||||
|
|
|
|
|
|
|
| |||||||
Adjusted profit/(loss) before tax | 5,067 | 7,350 | 527 | 8,693 | 32 | 2,609 | (5,822) | 18,456 | ||||||
|
|
|
|
|
|
|
| |||||||
EBITDA % | 16% | 15% | 8% | 19% | 1% | 13% | - | 13% | ||||||
Non-current assets | 66,465 | 15,760 | 5,981 | 10,853 | 16,736 | 17,300 | - | 133,095 | ||||||
* EBITDA is shown before share-based payments charge, impairment of goodwill, acquired intangibles and financial assets and exceptional items
** Central costs include unallocated corporate costs, expensed development costs and transfer pricing royalties.
*** Included within Motor BPS & networks and Software are amounts relating to the sale of goods (motor parts and software licences) of £25,094,000 and £3,844,000 respectively.
3. EXCEPTIONAL ITEMS
2013 | 2012 | |
£'000 | £'000 | |
Exceptional costs incurred on reorganisation of South African Business | - | 201 |
Exceptional costs incurred on acquisition of subsidiaries | 111 | 283 |
Exceptional costs incurred on restructuring of motor divisions within Europe | - | 495 |
Exceptional costs incurred on restructuring of BPS divisions in North America and Australia |
1,302 |
- |
Release of contingent consideration no longer due on acquisition of subsidiary | (421) | - |
Exceptional income recognised on sublease of property previously provided for | (646) | - |
|
| |
346 | 979 | |
Exceptional costs incurred on breaking the interest rate swap | - | 500 |
|
| |
346 | 1,479 | |
|
|
Year ended 30 September 2013
Exceptional costs incurred on acquisition relate to the deal costs incurred on the three acquisitions completed in the year. These costs have been included in operating expenses in the income statement.
Other exceptional costs relate to redundancy and compromise costs incurred due to a restructuring of the BPS motor divisions within North America and Australia.
The release of contingent consideration no longer due on acquisition of subsidiary of £0.4m relates to amounts no longer owed to the previous owner of Wintec AG, acquired in 2011, due to performance targets for the year ended 30 September 2013 not being met in line with the sale and purchase agreement. This is not considered, however, to have any impact on the carrying value of any goodwill or intangible assets held in relation to this acquisition.
The exceptional income recognised relates to management's best estimates of the future cash flows of the partial sublet of property previously accounted for as an onerous lease.
Year ended 30 September 2012
Exceptional costs incurred on reorganisation of the South African business relate to the disposal of 25% of the main South African trading subsidiary to Zico Capital for total cash consideration of R92m (£7.1m) and the subsequent settlement of the ZAR loan. These include the finance costs incurred through the break of the interest rate swap (£0.5m), which has been included in finance costs in the income statement and is also disclosed further in the Consolidated Statement of Comprehensive Income and £0.2m in regards to advisor costs which have been included within operating expenses in the income statement.
4. TAXATION
2013 | 2012 |
| ||||
£'000 | £'000 |
| ||||
Current tax expense |
| |||||
UK corporation tax expense | - | 96 |
| |||
Foreign tax expense | 5,369 | 3,986 |
| |||
|
|
| ||||
Current tax on income in the year | 5,369 | 4,082 |
| |||
Adjustments in respect of prior years | 10 | 18 |
| |||
|
|
| ||||
Total current tax expense | 5,379 | 4,100 |
| |||
| ||||||
Deferred tax credit |
| |||||
Origination and reversal of temporary differences | (1,156) | (1,124) |
| |||
Adjustments in respect of prior periods | 95 | (84) |
| |||
|
|
| ||||
Total deferred tax credit | (1,061) | (1,208) |
| |||
|
|
| ||||
Total income tax expense/(credit) in the income statement | 4,318 | 2,892 |
| |||
|
|
| ||||
2013 £'000 | 2012 £'000 | |||||
Reconciliation of total tax charge | ||||||
Group profit before tax | 14,429 | 11,772 | ||||
Income tax using UK corporation tax rate of 23.5% (2012: 25%) | 3,391 | 2,943 | ||||
Tax effects of: | ||||||
Permanent differences | 1,990 | 996 | ||||
Non-taxable income | (1,433) | (823) | ||||
Rate differences on overseas earnings | 1,003 | 480 | ||||
Transfers from/to unrecognised deferred tax assets | (738) | (638) | ||||
Adjustments in respect of prior years - current tax | 10 | 18 | ||||
Adjustments in respect of prior years - deferred tax | 95 | (84) | ||||
|
| |||||
Total tax expense | 4,318 | 2,892 | ||||
|
| |||||
5. EARNINGS PER SHARE
2013 | 2012 | ||
pence | pence | ||
restated | |||
Basic profit per share | 0.78 | 0.63 | |
Adjustment for dilutive potential ordinary shares | (0.02) | (0.02) | |
|
| ||
Diluted profit per share | 0.76 | 0.61 | |
|
| ||
Basic profit per share | 0.78 | 0.63 | |
Adjustments | |||
- amortisation of intangible assets recognised under business combinations | 0.41 | 0.35 | |
- impairment of intangible assets recognised under business combinations | 0.08 | - | |
- share-based payments | 0.32 | 0.19 | |
- exceptional costs | 0.04 | 0.16 | |
- profit on disposal of subsidiary undertaking | (0.06) | - | |
- impairment of goodwill in associate | - | 0.01 | |
- tax effect of the above | (0.13) | (0.09) | |
|
| ||
Adjusted basic earnings per share | 1.44 | 1.25 | |
Adjustment for dilutive potential ordinary shares | (0.03) | (0.03) | |
|
| ||
Adjusted diluted earnings per share | 1.41 | 1.22 | |
|
| ||
Number of shares (000's) | 2013 | 2012 | |
restated | |||
Average number of shares in issue used to calculate basic and adjusted earnings per share |
975,600 |
948,118 | |
Dilutive potential ordinary shares | |||
- add share options | 20,500 | 23,378 | |
|
| ||
Shares used to calculate diluted and adjusted diluted earnings per share | 996,100 | 971,496 | |
|
| ||
Earnings per share is calculated as follows: | |||
Basic and diluted earnings (£'000) | |||
Basic and diluted earnings for the year | 7,616 | 5,950 | |
- amortisation of intangible assets recognised under business combinations |
3,919 |
3,265 | |
- impairment of intangible assets recognised under business combinations |
823 |
- | |
- share-based payments | 3,160 | 1,825 | |
- exceptional items | 346 | 1,479 | |
- share of profit on disposal of subsidiary undertaking | (595) | - | |
- impariment of goodwill in associate | - | 115 | |
- tax effect of the above | (1,180) | (819) | |
|
| ||
Adjusted and adjusted diluted earnings for the year after tax | 14,089 | 11,815 | |
|
|
At 30 September 2013 there were 986,494,935 shares in issue (2012: 961,371,998).
6. DIVIDENDS
Equity dividends on ordinary shares paid to non-controlling interests: | 2013 | 2012 |
£'000 | £'000 | |
Travel Insurance Consultancy (Pty) Limited | ||
Interim dividend for 2013: 39,830 South African Rand per share (2012: 84,600 South African Rand per share) |
257 |
623 |
Final dividend for 2013: nil South African Rand per share (2012: 48,300 South African Rand per share) |
- |
356 |
Netsol Innovation (Private) Limited | ||
Interim dividend for 2013: 26 Pakistan Rupees per share (Interim dividend for 2012: 21 Pakistan Rupees per share) |
256 |
206 |
Innovation Maven (Pty) Limited | ||
Interim dividend for 2013: 153 South African Rand per share (2012: Nil South African Rand per share) |
3 |
- |
Innovation Group South Africa (Pty) Limited | ||
Interim dividend for 2013: 187 South African Rand per share (2012: 45 South African Rand per share) |
857 |
235 |
Inthutuko Investments (Pty) Limited | ||
Final dividend for 2012: Nil South African Rand per share (Final Dividend for 2011: 18,499 South African Rand per share) |
- |
129 |
Nobilas France SAS | ||
Interim dividend for 2013: 324 Euros per share (2012: Nil Euros per share) | 884 | - |
|
| |
2,257 | 1,549 | |
|
|
7. TRADE AND OTHER RECEIVABLES
2013 | 2012 | ||
£'000 | £'000 | ||
restated | |||
Trade receivables | 28,755 | 27,863 | |
Other debtors | 3,655 | 3,104 | |
Accrued income | 25,137 | 21,015 | |
|
| ||
57,547 | 51,982 | ||
|
|
8. TRADE AND OTHER PAYABLES
2013 | 2012 | ||
£'000 | £'000 | ||
Current | |||
Trade payables | 35,189 | 31,461 | |
Other payables | 13,229 | 14,554 | |
Contingent consideration | 1,975 | 599 | |
Accruals | 16,242 | 14,761 | |
Social security and other taxes | 3,168 | 3,121 | |
|
| ||
69,803 | 64,496 | ||
|
| ||
Non-current | |||
German pension liabilities | 197 | 332 | |
Contingent consideration | 612 | 1,580 | |
|
| ||
809 | 1,912 | ||
|
| ||
9. INTEREST BEARING LOANS AND BORROWINGS
2013 | 2012 | ||
£'000 | £'000 | ||
Current | |||
Bank loans and overdrafts | 370 | 1,245 | |
Obligations under finance leases and hire purchase agreements | 720 | 489 | |
|
| ||
1,090 | 1,734 | ||
|
| ||
Non-current | |||
Bank loans and overdrafts | 21,584 | 16,500 | |
Obligations under finance leases and hire purchase agreements | 648 | 402 | |
|
| ||
22,232 | 16,902 | ||
|
|
10. RELATED PARTY TRANSACTIONS
The remuneration of Directors and other members of key management, recognised in the income statement, is set out below in aggregate. Key management are defined as the Board of the Innovation Group plc and those persons, directly or indirectly, having authority and responsibility for planning, directing and controlling the activities of the Group.
2013 £'000 | 2012 £'000 | |
Short-term employee benefits | 2,976 | 2,644 |
Post-employment benefits | 132 | 130 |
Share-based payments | 1,404 | 1,351 |
Termination payments | - | 40 |
|
| |
4,512 | 4,165 | |
|
|
Statement of Directors' Responsibilities
The 2013 Annual Report contains a responsibility statement in compliance with DTR4.1.12 signed on behalf of the Board by the Company Secretary. This states that on 1 December 2013, the date of approval of the 2013 Annual Report, each of the Directors (whose names and functions are listed below) confirms that, to the best of each person's knowledge and belief
· the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and
· the Chairman's Review, Group Strategic Review and Directors' report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties faced by the Group.
Andrew Roberts | Chief Executive Officer |
Jane Hall | Group Finance Director |
David Thorpe | Non-executive Chairman |
James Morley | Non-executive Director |
Chris Harrison | Non-executive Director |