Final Results

6 December 2011

The Innovation Group plc 

("Innovation" or the "Group") 

Annual Financial Report for the year ended 30 September 2011

The Innovation Group plc, a global provider of business process outsourcing and software solutions to the insurance, fleet, automotive and property industries is pleased to report results for the year ended 30 September 2011 that are in line with expectations.

Financial Highlights

* Adjusted profit before tax of £15.1m (2010: £9.8m) comprises profit before tax of £10.2m (2010: loss £1.7m) after adding back amortisation of acquired intangible assets of £3.4m (2010: £3.5m), impairment charges of £nil (2010: £0.4m) a share-based payment charge of £1.7m (2010: credit £0.9m), exceptional restructuring charges of £nil (2010: £8.5m) and a profit on disposal of investments of £0.2m (2010: £nil)

Highlights

·; Adjusted profit before tax increased 54% year-on-year

·; Strong operating cash flow conversion

·; Significant improvement in gross, EBITDA and adjusted profit margins

·; Strong flow of new business wins, including the Group's largest ever outsourcing contract

·; Early success of new Insurer v7.0 products, with revenue expected to build steadily through 2012

Andrew Roberts, Chief Executive Officer of The Innovation Group commented: 

"I am pleased that we have met all the commitments we set both for ourselves and for our investors at the start of this year. Our business is on a firm footing. Our adjusted profit has increased 54% year on year. Our solutions are selling well and we have achieved new sales records. This year has been one of real progress and we are confident that the Group is positioned for continued growth in 2012." 

Enquiries:

Notes to Editors

The Innovation Group plc (LSE: TIG.L) is a global provider of business process outsourcing and software solutions to the insurance, fleet, automotive and property industries. Innovation Group provides contact centres, repair networks, process management, supply chain and technology operations and decision support analytics to support accident management, repair and estimation and claims management services. Innovation Group has over 800 global clients including AXA, RBSI, RSA, American Modern Insurance Group, LeasePlan, The Ford Motor Company, Aviva, Toyota and Zurich. The Group processes more than 4 million claims per year with 20 per cent direct claims cost saving achieved. Innovation Group's 2,400 people are located in the United Kingdom, Australia, Belgium, Canada, France, Germany, Japan, India, Pakistan, South Africa, Spain and United States. www.innovation-group.com 

CHAIRMAN'S STATEMENT

I am delighted to report that 2011 was a year of excellent progress in which The Innovation Group has delivered to expectations.

Our goal for the year, following a period of restructuring, was to deliver a year of growth and progress in each of our strategic areas, namely technology-enabled Business Process Outsourcing (BPO) and software solutions. We have made great progress in both these areas, with significant contract wins secured during the year for both BPO and software solutions, including with RBS Insurance in the UK, our largest contract ever.

It is with some satisfaction that I note that around 87% of our overall business continues to come from BPO, providing us with some degree of resilience as we continue to face tough economic conditions. Overall, trading in the year was positive and we have generated very good levels of cash from our operations. Margins continue to trend in line with expectations: gross, EBITDA and adjusted profit margins are all significantly improved from last year.

The progress we have made is only possible with the continued commitment, talent and teamwork displayed by our employees. On behalf of the Board, I would like to take this opportunity to thank all staff for their contribution.

Board Changes

As previously announced, Chris Banks retired from the Board at the Annual General Meeting on 21 March 2011. In succession, the Board appointed James Morley as Senior Independent Director and as a member of the Nomination Committee. I would like to thank Chris for his service and commitment to the Group over the past 8 years and wish him every success in his future endeavours.

On 18 April 2011, Chris Harrison was appointed to the Board as Non-executive Director and Chairman of the Audit Committee. After a 30 year career at Ernst & Young, Chris brings to the Group extensive knowledge and experience of the European technology sector and of the international professional services arena.

Outlook

We feel strongly that we have now moved from being a 'turnaround' business to a business delivering sustainable and profitable growth. The positive momentum in all aspects of the business - in our BPO divisions, in our technology developments, in our new business wins, targeted acquisitions, and in the quality of our management team - is very evident.

We plan to continue on the same path, looking to grow organically with new clients, to add more services to existing ones and actively seek out value-enhancing acquisitions that are focused on our target market.

The Board is confident that The Innovation Group is positioned for continued growth in 2012.

David Thorpe

Non-executive Chairman

OPERATIONAL AND FINANCIAL REVIEW

Introduction

We are pleased that many of the initiatives and sales processes started last year have now begun to pay off. Our strategy to deliver a consistent portfolio of services and technology across all our regions is now bearing fruit with some excellent early results.

This year also marked a year of stability in our executive team and this team is delivering against a common set of objectives and targets. This is delivering consistent business results, as evidenced in our financial performance. New business wins from both new and existing customers, across all our operating areas, have enabled the Group to achieve a 7% increase in revenue at constant exchange rates. Despite difficult economic conditions, we enter 2012 with a strong set of customer relationships in our BPO business and a healthy pipeline of opportunity for our software solutions. We remain focused on all opportunities to improve efficiencies across our operations. Revenue from our BPO business continues to represent 87% of total revenue and this predictable revenue base is now supported by steadily increasing software sales of our Insurer v7.0 product suite, both on a licence and Software-as-a-Service (SaaS) basis.

The Group's software development programme for the Insurer v7.0 product remains on track with the successful launch of Insurer Claims and Insurer Policy during the year. Both have received critical acclaim from industry analysts. Insurer Analytics is due for release in January 2012. We are very encouraged with the contract wins secured in the first year of launch and the pipeline which is building, particularly in the US and Australia. Although the sales cycle is lengthy, we expect revenue both on a licence and 'SaaS' basis to build in 2012 and beyond.

The Group has also maintained good momentum in rolling-out its Enterprise platform across the business, with the implementations in France and Spain now starting to deliver the planned margin improvements. The roll-out in Germany and Australia is targeted for 2012.

The Group is very pleased to begin Kairos this year: a new development programme delivered in conjunction with Cranfield University for 28 of our high-potential, high performing employees around the world. Such investments are important if we are to support an innovative and sustainable growth business.

New Business

Our sales focus is to provide property and motor insurers and related businesses, such as fleets and car leasing companies, with operational and indemnity savings through their use of our repair networks and innovative solutions. The Group continues to secure larger, longer term contracts, typically following a pilot exercise which provides the client with outcome data on which to base its investment decision. During the year the Group has announced some significant contract wins, including the largest in the Group's history as well as signing numerous smaller deals. Customer retention remains high, and over the year the Group has also secured several significant contract renewals.

Key wins in our BPO business include the Group's largest ever contract in the UK property division with RBS Insurance, expected to generate revenue of £40.0m over three and a half years. In Germany, the Group signed a new contract with a Tier 1 insurer to provide a full accident repair service estimated to be worth £3.0m over three years. Our Australian business has renewed a significant contract for fleet claims management with Leaseplan, a long-standing customer for 13 years, for a further 3 years. This contract will generate revenue of £5.6m over the term. In addition, in the UK the Group has signed two high-profile deals, one with Ford UK to provide accident repair services and the other with Carsite Limited (trading as Tesco Cars) to provide on-line booking and motor servicing. These two initiatives are new for Ford and Tesco and we are delighted to be involved in these opportunities.

In our software business, following the launch of Insurer Claims v7.0 in January 2011, the Group secured a new contract with a US Tier 1 insurer for the claims product which delivered £3.0m in the year. In Australia, the Group has signed a new contract with a Tier 2 Property and Casualty insurer worth approximately £4.4m. This is the first contract that fully utilises the entire Innovation Insurer suite, Claims, Policy and Analytics. The same region has also signed a 3 year combined software and BPO agreement with the Australian arm of a global insurance company. This contract is the first to combine the Group's software and BPO capabilities, providing the Insurer Policy software via a 'SaaS' model as well as hosting the software and providing application support and outsourced services for policy administration. In Germany, the Group and its partner Symbility Solutions Inc. signed a 4 year, £3.0m contract with a Tier 1 insurer to provide a streamlined end-to-end solution for property claims.

Financial Overview

Group revenues for the year have risen 9% to £175.9m (2010: £162.1m). Excluding revenue from the two small acquisitions in the year, which amounted to £2.3m, organic growth was 7%. Adjusted profit before tax is £15.1m (2010: £9.8m) with adjusted earnings per share of 1.04 pence (2010: 0.63 pence). The profit before tax is £10.2m (2010: loss £1.7m) with a basic profit per share of 0.56 pence (2010: loss 0.58 pence).

The Group's revenue is derived from two principal sources: the sale of BPO and software solutions. Outsourcing revenue, comprising motor (including the sale of parts in Germany), property and other BPO continues to represent 87% of total revenue (2010: 87%). Revenue from motor BPO is £122.6m (2010: £113.4m) and represents 80% of total outsourcing revenue (2010: 80%). In addition to maintaining a high percentage of predictable BPO revenues, the Group has also grown software revenue, which comprises one-time licence fees, implementation revenue and recurring software fees, by 14% this year to £23.1m (2010: £20.3m). One-time licence fees in the year were £3.4m (2010: £1.8m).

The Group operates internationally and results for the year are subject to movements in exchange rates. The Group has a policy of not hedging translation movements that arise, whether positive or negative, although material transactions are hedged at the point they become more likely than not to occur. During 2011 the Group has benefitted marginally from the strengthening of the South African Rand and Australian Dollar. Organic revenue growth at constant exchange rates is 6%, comprising an increase in outsourcing revenues of 5% and software revenues of 13%.

Gross margin was 41% (2010: 39%). Gross margin in the outsourcing business is 39%, representing a 1% increase from 2010. The Group's target gross margin over the next twelve months from the BPO business is 40%. Gross margin in the software business is 56% (2010: 49%).

Adjusted profit of £15.1m (2010: £9.8m) comprises profit before tax of £10.2m (2010: loss £1.7m) after adding back amortisation of acquired intangible assets of £3.4m (2010: £3.5m), impairment charges of £nil (2010: £0.4m), a share-based payment charge of £1.6m (2010: credit £0.9m), exceptional restructuring charges of £nil (2010: £8.5m) and a profit on disposal of a non-current asset investment of £0.2m (2010: £nil).

Adjusted profit for the year to 30 September 2011 includes no significant one-off gains or losses. Adjusted profit for the year to 30 September 2010 included a one-off gain of £1.1m relating to a change in accounting estimate in relation to administration fees recognised in the Group's property subsidence operations. Included also in 2010 adjusted profit is a bad debt charge of £0.7m relating to a software client in Japan that was unable to satisfy an outstanding debt and a credit of £0.8m in finance income relating to the write back of a loan which was waived in the year.

There were no exceptional restructuring charges in the year (2010: £8.5m). The Group is pleased that the forecast gross annual cost savings from last year's restructuring of £4.2m have been achieved. As advised in previous announcements, Innovation Group incurred exceptional costs relating to the operational realignment of the Group in the year ended 30 September 2010 that were accrued for in the Group's balance sheet for that period. The cash outflows associated with those accrued exceptional expenses (i.e. charges for rental payments on leases and remaining contractual notice periods for ex-employees) amounted to £2.7m in the year ended 30 September 2011.

The share-based payment charge this year has returned to a charge of £1.6m (2010: credit of £0.9m) and is expected to normalise at approximately £2.4m per annum from 2012 following the implementation of a new incentive scheme for Executive Directors that was effected in May 2011. The share-based payment credit in the prior year arose due to the number of options forfeited following the departure of the former CEO and several members of the senior management team as part of the restructuring programme.

The Group's adjusted EPS is 1.04 pence per share (2010: 0.63 pence per share). Basic profit per share is 0.56 pence per share (2010: loss 0.58 pence per share).

The Group's tax charge is £4.5m (2010: £2.7m). This represents an adjusted effective tax rate of 33% (2010: 33%) being the tax charge prior to deferred tax on IFRS acquired intangible assets of £0.5m (2010: £0.6m) expressed as a percentage of adjusted profit and is in line with the guidance given at the half year. The Group's adjusted effective tax rate remains high due to the strong contribution to overall profit from Germany and South Africa, both of which are taxpaying regions with no losses available for offset against profits. The Group continues to carry forward significant unrecognised tax losses in certain UK and US entities.

The Group ended the year with net cash of £32.7m (2010: £28.8m) comprising gross cash of £43.1m (2010: £42.2m) and debt of £10.4m (2010: £13.4m). Included within gross cash is £11.3m (2010: £10.8m) of cash available for use within our South African business which continues to be subject to normal government imposed exchange controls for that country. Included within debt is £6.5m (2010: £7.5m) related to a Black Economic Empowerment loan in the same territory.

Operating cash inflow was £16.9m (2010: £7.7m) and includes exceptional cash costs of £2.7m relating to exceptional restructuring charges accrued in the year to 30 September 2010. Operating cash inflow, adjusted for exceptional and taxation payments represents a conversion of cash relative to adjusted EBITDA of 103% (2010: 119%). In 2010 the Group converted some £3.0m of accrued income to cash which increased the conversion rate from 100% to 119%.

The net cash out flow from investing activities was £10.6m (2010: £7.1m). This includes interest received of £0.9m (2010: £0.9m), purchase of subsidiary undertakings net of cash received of £2.8m (2010: £0.3m), cash from the sale of a non-current asset investment of £0.3m (2010: £nil) and net fixed asset additions of £9.0m (2010: £7.4m) of which £5.5m (2010: £4.0m) is the capitalisation of costs relating to Project Enterprise.

Financing cash outflow of £4.3m (2010: inflow £4.9m) includes interest paid of £0.8m (2010: £1.8m), repayment of borrowings of £2.5m (2010: £12.2m), dividends paid to minorities of £1.3m (2010: £0.9m) and net proceeds from issue of shares of £0.4m (2010: £19.8m).

Total deferred income has increased by £3.0m to £16.5m. Significant movements are attributable to an increase in software revenue and additional warranty and service term policies sold in our South African business. As expected, accrued income has increased by £3.1m to £14.0m. Of this increase, £1.6m arises from increased profit shares in our UK subsidence business. In addition, increased BPO revenue throughout the Group has resulted in a higher level of work in progress on open claims. Overall, the year on year movement in accrued and deferred income is neutral.

Geographic Performance

The Group continues to provide segmental reporting by geography to reflect the way the business is structured and managed. The Group has achieved profitability in all reportable segments this financial year.

Revenue in our European business was £97.6m (2010: £87.1m) with UK, Germany and Rest of Europe contributing £34.8m (2010: £33.3m), £52.0m (2010: £43.9m) and £10.8m (2010: £9.9m) respectively. We are pleased with the performance across Europe with overall revenue growth of 12% and growth in all territories with the exception of Spain. The Spanish economy has been particularly difficult this year with revenue, predominantly in the motor fleet sector, falling by 36%. Adjusted profit for Europe is £10.9m (2010: £7.9m) comprising UK £3.1m (2010: £1.9m), Germany £7.6m (2010: £5.7m) and Rest of Europe £0.2m (2010: £0.3m).

Our South African business, assisted by the strength of the South African Rand, has increased revenue by 9% or 5% in local currency. Adjusted profit has increased by 38%, driven primarily by a reduction in net interest costs from £0.8m to £0.3m following partial repayment of the Black Economic Empowerment loan in May 2010 and a good performance from its associates, which generated a profit in the year of £0.5m (2010: loss £0.2m).

Overall revenue in North America fell by 5%. Software revenue grew by 29% following the successful launch of our Insurer 7.0 suite whilst revenue from BPO decreased by 18%. This decrease is primarily due to the fact that the prior year included a significant amount of one-off revenue from the handling of the 'oil spill' first notification of loss workers' compensation claims. We are particularly pleased that both the software and BPO division of the US are profitable this year before any charges for software royalties.

Revenue in Asia Pacific has increased by 12%, partially assisted by the strength of the Australian Dollar. Two significant software deals were signed in Australia post year end which underpin 2012 growth in that division. Adjusted profit has increased from £0.5m to £1.0m

Acquisitions

The Group has made two small acquisitions in the year for a maximum total cash consideration of £3.9m. Both of these acquisitions complement and broaden the Group's existing range of outsourcing services.

The first, Wintec, is a leading franchised windscreen repair network with over 250 mobile and fixed repair centres operating across Germany. Wintec's nationwide coverage and technical expertise, combined with the Group's strong relationship with the insurance industry, will enable us to considerably accelerate our penetration into the growing market for windscreen repair in Germany.

The second, TJH Financial Services, is an insurance administrator providing underwriting administration as well as policy administration and claims handling services for insurers and brokers. This acquisition, funded entirely by cash available in the South African business, broadens the policy and underwriting administration services available to our clients.

The revenue and adjusted profit before tax from acquisitions in the year were £2.3m and £0.5m respectively.

Allstate Litigation

The litigation process continues with no significant developments during the financial year or to the date of this report. Pleadings and documentary discoveries are concluded with oral examinations on both sides almost complete. As previously announced, the Company remains of the opinion that the litigation is speculative in the extreme and without foundation, and will continue to vigorously defend the claim and pursue the Group's filed counterclaim.

The Innovation Group plc

Consolidated Income Statement

For the year ended 30 September 2011

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 2011

None of the adjustments through other comprehensive income have had any tax impact in either the current or preceding financial years.

The Innovation Group plc

Consolidated Balance Sheet

At 30 September 2011

The results were approved by the Board of Directors on 5 December 2011.

The Innovation Group plc

Consolidated statement of changes in equity

At 30 September 2011

The Innovation Group plc

Consolidated Cash Flow Statement

For the year ended 30 September 2011

Cash held and available for use within the business in our South African operation of £11,341,000 (2010: £10,770,000) 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 2011

1. BASIS OF PREPARATION

The Annual Financial Report announcement was approved by the Board of Directors on 5 December 2011.

The financial information set out in this Annual Financial Report announcement for the year ended 30 September 2011 does not constitute the Group's statutory accounts as defined by s435 of the Companies Act but has been extracted from the 2011 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 2010 has been extracted from the 2010 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.

The audited financial statements for the year ended 30 September 2010 have been delivered to the Registrar of Companies. The Annual Report for the year ended 30 September 2011 will be mailed to shareholders at the end of January 2012 and will be delivered to the Registrar of Companies following the Annual General Meeting which will be held in March 2012 at the Company's office at Yarmouth House, 1300 Parkway, Solent Business Park, Whiteley, Hampshire, PO15 7AE.

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 Outsourcing (BPO) and networks;

- Property Business Process Outsourcing (BPO) and networks;

- Other Business Process Outsourcing (BPO) 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 £141.1m (2010: £128.9m).

Year ended 30 September 2011

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

** Central costs include unallocated corporate costs, expensed development costs and transfer pricing royalties.

*** Included within Motor BPO & networks and Software are amounts relating to the sale of goods (motor parts and software licences) of £24,628,000 and £3,378,000 respectively.

Year ended 30 September 2010

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

** Central costs include unallocated corporate costs, expensed development costs and transfer pricing royalties.

*** Included within Motor BPO & networks and Software are amounts relating to the sale of goods (motor parts and software licences) of £19,541,000 and £1,788,000 respectively.

3. EXCEPTIONAL COSTS

No exceptional costs were incurred in the year ended 30 September 2011.

In 2010 other restructuring costs mainly related to employee redundancy costs in underperforming divisions during the first half of the year. These costs and the right-sizing of operations across all regions generated savings to adjusted profit during the last six months of the previous financial year. As a result of this restructuring the Group reviewed its property requirements in the US, UK and Germany and consolidation opportunities were identified to reduce the number of occupied leased properties. The property restructuring costs included the discounted future cash flows that will arise until the end of the leases along with the write down of associated fixed assets. The discounted future cash flows may be partly offset by any future sub-leasing income.

4. TAXATION

5. EARNINGS PER SHARE

At 30 September 2011 there were 940,294,290 shares in issue (2010: 935,427,013).

6. DIVIDENDS