Team Internet Regulatory News (TIG)

19 May 2014

The Innovation Group plc

("Innovation Group" or the "Group")

Interim Results for the six months ended 31 March 2014

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 its interim results for the six months ended 31 March 2014.

Financial Highlights

Highlights

· Strong growth on a constant currency basis - 16% increase in adjusted profit

· 96% conversion of EBITDA to operating cash inflow (H1 2013: 93%)

· Strategic entry into the "Wet Perils" market in the UK through the acquisition of LAS Claims Management Limited in March, strengthening our Property services portfolio

· Appointment of Paul Nichols to head global software business

· Reintroduction of dividend payments: interim dividend of 0.1p per share

· $10m new US BPS contracts in Motor and Property announced today

· Strong new business pipeline

Andy Roberts, Chief Executive Officer of Innovation Group commented:

"We have experienced a strong first half where we continued to deliver on our strategy and drive increased momentum in sales. Our efforts have resulted in the Group securing new longer term, high value contracts and good cash generation. We made two material acquisitions in the period which I am pleased to say are on track, from both an integration and financial performance perspective. The business is trading in line with the Board's expectations based on our strong pipeline of new business and revenues building from contracts won in the first half and prior periods. In addition to this, I'm also delighted to be announcing today the reintroduction of dividend payments to shareholders."

Enquiries:

Chairman's statement

I am pleased to report continued growth in the business with our first half again generating strong adjusted profit growth and excellent cash conversion.

Our strategic initiatives are progressing well with the acquisition of LAS Claims Management Limited and the appointment of Paul Nichols as President Worldwide Insurer Business, underpinning two significant growth areas for the business.

I would like to again acknowledge the continued commitment and talent shown by all employees of the Group, who every day work hard to deliver outstanding service to all of our customers and stakeholders.

Dividend

The Board is pleased to announce the reintroduction of a dividend. An interim dividend of 0.1p per share is announced today, with the adoption of a progressive dividend policy that will reflect the Group's profitability, whilst taking into account of the need to continue to finance the development and expansion of the business.

The dividend will be paid on 18th June 2014, with a record date of 30th May 2014.

Board Changes

On a personal note, after eleven years as a member of the Board of the Innovation Group, including four years as Chairman, it is my intention to step down from my position at the year-end to enable a new Chairman to take the company forward in the next stage of its development. During this time we have established a well regarded management team and over the past four years successfully transitioned the Group into a business, of which I am very proud, with consistent profitable revenue growth and a strong competitive market position. The process to select a replacement will now start and further information will be communicated as appropriate.

Outlook

Our business continues to perform in line with expectations. The solid foundations, long term contracted relationships, practical innovation, and good cash generation shows our strategy is working and I look to the full year with confidence. 

David Thorpe

Non-Executive Chairman

Half Year Review

I am pleased to report progress in line with expectations. The Group has delivered strong adjusted profit performance, achieved excellent cash generation whilst at the same time, making strides towards realising the strategic vision outlined in our last Annual Report and Accounts. We would like to take this opportunity to provide an update on those key strategic areas:

1. Focus on efficiencies, technology & customer service

A key deliverable for us as a Group is to provide our clients with excellent customer service, whilst at the same time reducing the indemnity cost of claims. This is at the core of what we do as a business. Success for us in this area is measured primarily through our very high level of client renewals, as well as achieving growth in claims volumes from existing customers.

During the period, we have signed several significant contract renewals. In the UK, we renewed our contract with CIS General Insurance ("CISGIL") for a further two years. The contract is for the management of CISGIL's subsidence claims using our extensive subsidence management services capabilities. Based on anticipated claims volumes and assuming normal weather conditions, this renewal will deliver £7.0m in revenue over a two year period. In our US Business Process Services ("BPS") division, we renewed two large contracts in the motor business, with a total value of £10.0m ($17.0m).

In other areas of the business we are benefitting from a higher level of claims from existing customers. The partnership announced with AXA France during the last financial year has seen volumes grow according to plan, contributing to the significant revenue increase and leverage seen in our Rest of Europe reporting segment.

As a Group, we continue to focus on efficiencies and operational leverage within our own business and have achieved a 2% increase in our adjusted EBITDA margin compared to H1 2013, which is in line with our long term strategic goal.

2. Add wet perils capability to our Property Services portfolio

A key pillar of the Group's growth strategy is to broaden our property service proposition to cover a wider range of property claim perils.

Our UK subsidence division (addressing 'dry' perils) has built up strong market share through its proven track record of significantly reducing claims costs, offering a unique fixed price model in the market and enhancing customer service. The addition of "wet" perils skills and capabilities to the Group's service portfolio completes this part of our strategic goal and increases the UK Property division's addressable market from a claims spend of £100m for subsidence to £1.3bn. Over time, we fully expect that the Group will also be able to replicate this business model in other geographies. In the first instance this is likely to be in Australia and North America.

To address this market opportunity, on 13 March 2014 the Group completed the acquisition of LAS Claims Management Limited ("LAS") for a maximum cash consideration of £35.0m. The acquisition was funded from part of the proceeds of a net £65.0m new issue of Innovation Group shares which the Group completed in March 2014.

LAS is an excellent strategic fit for the Group with highly complementary offerings and operations, providing a full suite of outsourced services that handle claims across a range of property-related perils including storm, burst pipes, flood, fire, theft and accidental damage. The integration of LAS into the Group has already begun in earnest and we will be updating you as appropriate on the synergies that the business can realise.

3. Focus on UK motor claims market

One of our stated business objectives is to transform our UK motor business into the market leader and the number one motor claims management business in client experience, customer experience, operational efficiency, and profitability. To help realise this objective we acquired Crash-worth Limited ("Crash-worth") in February of this year, for a maximum cash consideration of £11.75m, of which £5.0m was paid on completion with the balance payable over the course of the period to 31 December 2015. Of the remaining £6.75m balance, £3.25m is contingent on the profit performance of the UK Motor business over the next two financial years.

Crash-worth manages one of the UK's most established and efficient motor repair networks, and by combining it with our existing business we now become the second largest manager of vehicle repair claims in the UK, allowing clients to benefit from increased efficiencies. Crash-worth also brings with it a consultancy proposition for those clients seeking to gain competitive advantage in a fast changing environment.

We are delighted to welcome Chris Ashworth, the founder of Crash-worth and a leading figure in the UK motor claims industry for the last 20 years, to the Group as Managing Director of the UK Motor division. He brings with him deep industry knowledge and relationships which will enhance our market competitiveness.

As announced at the time of the Placing and Open Offer, the Group continues to explore acquisition opportunities in the motor sector to support our existing strategy.

4. Grow our Insurer Technology business

The insurance industry is changing rapidly and insurers are looking to adopt new business operating models with innovative solutions to meet new customer and regulatory demands.

To meet this need, Innovation Group has invested heavily in its Insurer Technology business in recent years and in the first half of this year we created a new role of President Worldwide Insurer Business and appointed Paul Nichols, formerly Chief Executive Officer of Kewill plc, to the post.

Paul has significant experience in growing businesses and driving value for shareholders. He will bring additional focus to our global technology business, better positioning it to leverage substantial growth opportunities over the coming years. The Group will continue to invest in innovative solutions and forge important strategic partnerships, providing the highest quality and personalised support to clients around the globe.

5. Grow our US business

In the first half of this year we announced a number of new contracts and contracts renewals in both our North American Technology and BPS businesses. North America has been identified as a growth market for us and in the first half of this year we announced a number of new contracts. This deal momentum clearly demonstrates we have the strength of offering to take advantage of opportunities in this geography.

Our software contract wins included a tier 3 motor and property insurer who will use Insurer Claims and Analytics, and a tier 3 personal and commercial lines insurer who will implement Insurer Analytics across multiple companies as an enterprise data mastery solution.

In BPS we secured a number of new agreements within our motor division - both for Innovation's direct repair programme as well as our motor recovery offering. In addition, we announced a two year contract renewal with the world's leading provider of fleet and vehicle management solutions and also secured a Tier 1 renewal on our direct repair programme.

The expected combined revenue over the term of these new software and BPS contracts and renewals is approximately £14m ($24m).

I am delighted to see this momentum continue into H2 2014, as today we are also announcing several new contract wins across our motor and property divisions in our US BPS business. These new contracts are expected to generate revenues of approximately £6m ($10m) over the next three years.

Financial Review

As approximately 75% of the Group's revenues are generated outside the United Kingdom, the Group is exposed to currency movements which can impact the sterling comparison of the Group's results to previous financial periods. In the current reporting period, we have experienced devaluation of all our currencies. The major variances to the exchange rates used this time last year being the South African Rand (25%) and the Australian Dollar (20%). Therefore the following commentary includes comparison to the Group's results on both a reported and constant currency basis. The Board believes it is more appropriate to compare the operating performance on a constant currency basis.

The Group's reported revenue has increased from £99.8m in H1 2013 to £101.7m in H1 2014, an increase of 2%. BPS revenue represents 86% of total revenue (H1 2013: 89%). On a constant currency basis, revenue has increased by 9% (H1 2013: 8%), with organic growth at constant currency of 7%.

Business process services revenue has increased by 6% (H1 2013: 9%) at constant currency whilst software revenue has increased by 37% (H1 2013: 2%) on the same basis. Total software revenue of £14.6m (H1 2013: £11.3m) includes £1.4m of one-time licence fees (H1 2013: £1.3m).

The Group completed two material acquisitions during the period. The revenue contribution from these acquisitions in the period was £2.2m (H1 2013: £0.4m) and the adjusted profit contribution was £0.5m (H1 2013: £0.1m). It should also be noted that H1 2013 results included revenue and profit contributions of £1.9m and £0.6m respectively from the South African Travel Insurance business, which was disposed of in June 2013.

Adjusted EBITDA for the period increased by 11% to £14.9m (H1 2013: £13.4m) and 21% at constant currency.

The Group's reported adjusted profit before tax has increased from £9.6m in H1 2013 to £10.0m in H1 2014, an increase of 4%. On a constant currency basis, adjusted profit before tax has increased by 16%. Reported profit before tax has decreased from £6.8m to £4.8m. This decrease is caused by higher levels of amortisation of acquired intangible assets due to increased acquisition activity; exceptional costs which again primarily relate to acquisitions under IFRS3; and a higher share-based payment charge generated by increased certainty over the vesting of certain long term incentive plans.

Adjusted EPS is 0.65p per share (H1 2013: 0.60p) and basic earnings per share is 0.19p (H1 2013: 0.35p). On a constant currency basis, H1 2013 adjusted EPS is 0.55p per share, representing a year on year increase of 18%.

The Group's full year adjusted effective tax rate is expected to be approximately 25% (year ended 30 September 2013: 27%) depending on the location of trading profits in the remainder of this year.

The Group's net cash balance at 31 March 2014 is £59.8m (H1 2013: £26.8m). The increase in this balance is driven by the placing and open offer concluded in March, as well as continued strong cash generation by our businesses. Operating cash inflow was £12.9m (H1 2013: £11.5m). Gross cash of £85.2m (H1 2013: £44.7m) also includes funds of approximately £2.5m collected as a rebate on behalf of a customer (H1 2013: £2.5m). This rebate, collected throughout the year is paid annually in H2, and although this enhances cash at the half year, has no impact on the full year cash conversion. After adjusting for the rebate and adding back both bonus payments that related to the previous financial year's results as well as tax payments in the half year, cash to EBITDA conversion is approximately 96% (H1 2013: 93%).

Outlook

Our sales engine is working well and we have a solid pipeline of contract opportunities across all our operating divisions, which we expect to capitalise on over the coming months.

Through both our own innovation and acquisition, we are working to complete our portfolio of services and software in order to expand our client offering in all of our served markets. We will continue to update the market on this area and other initiatives over the coming periods.

Our business continues to perform in line with expectations. The solid foundations, long term contracted relationships, practical innovation, and good cash generation shows our strategy is working and I look to the full year with confidence.

Finally, I would like to thank David Thorpe, who has today announced his intention to step down from the Board. David has made a significant and positive contribution to our progress, helping shape our technology-led offering and steering a profitable growth path for the Group. He leaves the Innovation Group in excellent shape and we wish him every success in his new endeavours.

Andy Roberts

Chief Executive Officer

The Innovation Group plc

Unaudited Consolidated Income Statement

For the six months ended 31 March 2014

The Innovation Group plc

Unaudited Consolidated Statement of Comprehensive Income

For the six months ended 31 March 2014

The Innovation Group plc

Unaudited Consolidated Balance Sheet

As at 31 March 2014

The Innovation Group plc

Unaudited Consolidated Statement of Changes in Shareholders' Equity

As at 31 March 2014

The Innovation Group plc

Unaudited Consolidated Cash Flow Statement

For the six months ended 31 March 2014

The Innovation Group plc

Notes to the Unaudited Results

For the six months ended 31 March 2014

1. BASIS OF PREPARATION

The condensed consolidated interim statement has been prepared on the basis of the accounting policies set out in the Annual Report and Accounts for the year ended 30 September 2013.

The condensed consolidated interim statements for the six months ended 31 March 2014 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union.

The financial information contained in this interim statement does not amount to statutory financial statements within the meaning of section 435 of the Companies Act 2006. The financial information contained in this report is unaudited but has been reviewed by Ernst & Young LLP. The financial statements for the year ended 30 September 2013, from which information has been extracted, were prepared under IFRS as adopted by the EU and have been delivered to the Registrar of Companies. The report of the auditors was unqualified in accordance with sections 495 to 497 of the Companies Act 2006 and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. This condensed consolidated interim statement was approved by the Board of Directors on 19 May 2014.

Adjustment to year end presentation of deferred tax assets and liabilities

At 30 September 2013, the Group incorrectly presented deferred tax assets and liabilities between both current and non-current assets and liabilities. This has been corrected as part of the presentation of the 30 September 2013 balance sheet within these statements. This has had the effect of increasing the non-current deferred tax asset by £1,583,000 and the non-current deferred tax liability by £1,755,000 and reducing the current deferred tax asset by £1,583,000 and the current deferred tax liability by £1,755,000. There has been no impact of this change to total assets or the income statement.

Adoption of new and revised International Financial Reporting Standards

A number of new, revised or amended standards and interpretations are effective for the current financial year, but none have had any material impact on the condensed financial information.

Critical accounting estimates and judgements

In preparing the consolidated financial statements, management has had to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses.

The interim statement has been prepared on the basis of the critical accounting estimates and judgements set out in the Annual Report and the financial statements for the year ended 30 September 2013. These have been reviewed by management and are considered to be unchanged for the reporting period.

The Directors have formed a judgement, at the time of approving the interim statement, that there is a reasonable expectation that the Group has adequate resources to continue in operation existence for the foreseeable future. The Group holds net cash of £59.8m at the period end (31 March 2013: £26.8m, 30 September 2013: £26.9m) and has access to borrowing facilities with its bankers. The Group tests all banking covenants on a quarterly basis and reports these to its bankers. Forward looking covenants are also tested based on the Group's financial forecasts. For these reasons, the Directors have adopted the going concern basis in preparing the financial statements.

Definition of non-GAAP measures

Adjusted EBITDA is profit before tax after adding back amortisation on acquired intangible assets of £2.1m (H1 2013: £1.7m), net interest costs of £nil (H1 2013: £nil), exceptional costs of £1.6m (H1 2013: £nil) and a share-based payments charge of £1.5m (H1 2013: £1.0m) as analysed on the face of the income statement.

Cash conversion is the net cash flow from operating activities, adjusted for payments made in the period in regards to taxation of £2.6m (H1 2013: £2.4m), exceptional items of £1.0m (H1 2013: £0.5m) and bonuses of £0.3m (H1 2013 £0.6m) divided by adjusted EBITDA.

Net cash is cash and cash equivalents less current and non-current borrowings adjusted for the costs of borrowings of £0.3m, which are required to be disclosed against the liability in the consolidated balance sheet.

2. SEGMENT INFORMATION

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, Japan and India, 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.

The Group's revenues, which are derived from the products and services in the tables below, are attributed to business units based on customer location. The total external revenue attributable to all countries other than the UK was £74.9m (H1 2013: £78.3m).

A reconciliation of the total adjusted profit before tax for the reportable segments to the Group's profit before tax is shown in the Income Statement.

Six months ended 31 March 2014

* Adjusted EBITDA is shown before share-based payments charge, impairment of goodwill and financial assets and exceptional items.

** Included within Motor BPS and networks is an amount relating to the sale of goods (motor parts) of £14,463,000.

*** Included within Software is an amount relating to the sale of goods (software licences) of £1,388,000.

Six months ended 31 March 2013