Half Yearly Report

 ISG PLC

("ISG" or "the Group")

Interim results for the period ended 31 December 2013

INCREASED REVENUE, UNDERLYING PROFIT AND ORDER BOOK

ISG plc, the international construction services group, today announces its interim results for the period ended 31 December 2013.

1from underlying items (Notes 3 and 4)

2from earnings attributable to owners of the company from underlying items (Note 7)

3from earnings attributable to owners of the company (Note 7)

Group Highlights

· Increased underlying profit driven by growth in UK Fit Out and Engineering Services

· Order book ahead by 26% at £968m (2012: £766m), of which £641m is for delivery in current year (2012: £512m)

· Improving London office fit out sector - now working on six major (>£20m) schemes with a combined value in excess of £300m

· ISG established as a leading provider of data center construction services in the UK and overseas

· UK Retail has maintained its market leadership position

· Strengthening performance in Asia and the Middle East, variable across Europe, with acquisitions in Germany and minority interest in Brazil

· UK Construction seeing an improvement in the quality and size of projects secured albeit trading conditions remain difficult

· Net cash balance of £33.3m at 31 December 2013 (2012: £25.3m)

· Interim dividend increased by 3% to 4.54p per share (2012: 4.41p)

David Lawther, Chief Executive Officer, said:

"In line with expectations, ISG has delivered an improved performance and growing order book.

Our strategy to develop new services such as our Engineering Services business is showing encouraging results. In the UK, some of our traditional key markets have started to improve in line with the general economic recovery and we continue to maintain market-leading positions in the office fit out and retail sectors. Our UK Construction business has invested in its planned restructuring and is starting to see an improvement in its pipeline. Overseas, we are seeing growth with most of our major markets improving.

We anticipate a continuing improvement in our key markets and that our performance will continue to improve."

4 March 2014

ENQUIRIES: 

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am pleased to report that our business has continued to grow in line with expectations, with revenue, underlying operating profit and order book increasing in the period.

Results

For the six months ended 31 December 2013, revenue increased by 8% to £708m (2012: £659m) and underlying profit before tax1 increased by 29% to £4.9m (2012: £3.8m). Underlying basic earnings per share2 increased by 7% to 9.50p (2012: 8.92p). Profit before tax was £2.4m (2012: £2.2m).

With the benefit of net proceeds of £7.4m from the placement of five million new shares in June 2013, of which in the period we have utilised £3.0m in connection with the acquisitions of ACE and Tecton, net cash increased to £33.3m (2012: £25.3m). Net operating cash inflow for the period was stable at £2.4m (2012: £2.4m).

The order book has increased at 31 December 2013 by 26% to £968m (2012: £766m), of which £641m is for delivery in the current financial year (2012: £512m).

1from underlying items (Notes 3 and 4)

2from earnings attributable to owners of the company from underlying items (Note 7)

Dividend

The Board has declared an interim dividend of 4.54p (2012: 4.41p), a 3% increase over prior year. The dividend will be payable on 1 May 2014 to shareholders on the register on 14 March 2014. The ex-dividend date will be 12 March 2014. A scrip alternative is again being offered.

Overview

There is a marked improvement in confidence in our core London office fit out market, where we are strategically positioned as the clear market leader. We have also maintained our leadership position in the UK retail market, and this sector is a focus for growth overseas. Additionally, our strategy to diversify our business during the economic downturn has underpinned the development of significant new revenue streams. For example, the investment we have made in developing our Engineering Services business has enabled us to establish our position as an international provider in the data center sector. The international hospitality sector is also providing a new revenue stream and we anticipate continued growth in this area going forward.

UK Fit Out and Engineering Services

Our UK Fit Out and Engineering Services business has seen a significant increase in activity in both London office fit out and international data center delivery in the first half with revenue increasing by 76% to £210m (2012: £119m), of which £107m (2012: £5m) relates to our overseas Engineering Services activity. Underlying operating profit has improved to £3.0m (2012: £2.0m).

To sustain our increasing activity, there has been a significant investment in increasing capacity, knowledge and skills across the operations of this business in the UK and overseas.

As anticipated in previous statements, the London office fit out market has made a strong recovery with revenue increasing by 40% as a result of the return of large-scale projects. We are now working on six major (>£20m) schemes with a combined value in excess of £300m.

In the period the business secured a £32m project to reconfigure and fit out retail conglomerate Arcadia's headquarters in Mayfair, a £50m+ fit out for the tenant of a 17-floor (380,000 sq ft) office building near London Bridge station and international real estate firm Hines chose ISG to fit out four floors comprising 208,000 sq ft at Cannon Place. In the West of London Corridor, we were awarded a £20m refurbishment and fit out project for Scottish Widows Investment Partnership.

Just after the period end we secured one of the largest projects in our history, a £125m construction management project to fit out the new UK headquarters for UBS at 5 Broadgate in the City of London.

Our investment in establishing a high-quality Engineering Services offer has resulted in significant progress in the growing international data center market. We have achieved our strategic goal of becoming an established provider in both the UK and overseas.

During the period we worked on four data center projects in the Nordics valued at circa £400m for a majorglobal technology company. In the UK, we are delivering the refurbishment of two existing data centers for international banking clients as well as the construction and fit out of new data centers for a leading blue-chip university and a leading telecoms company. 

At 31 December 2013, our UK Fit Out and Engineering Services division's order book has increased to £282m (2012: £170m), of which £254m (2012: £129m) is to be delivered in the current financial year. We anticipate that revenue for the current financial year will be substantially ahead of the prior year.

UK Retail

Our UK Retail business continues to be a market leader. Overall, the market is stable with clients evaluating their capital expenditure plans in the light of changing sector conditions. Revenue for the period is £156m (2012: £164m), with underlying operating profit improving to £3.2m (2012: £2.6m).

The business has maintained its position on the frameworks for Asda, Marks & Spencer, Morrisons, Sainsbury's, Tesco and Waitrose. As previously reported, the market for large-scale new space in the food retail sector is weak, with a continued emphasis on the refresh of existing stock and an increase in convenience stores. We are working closely with food retailers as they develop their strategies for click and collect and online shopping.

In retail banking ISG remains the leading service provider in our frameworks with HSBC, Lloyds Banking Group, The Royal Bank of Scotland, Barclays and Nationwide. High Street banking will be an exciting sector over the coming years as current stock is adapted to regulatory change and consumer trends, and new formats are created to take advantage of digital and physical technology. ISG is well positioned in its relationships to maximise on the roll out opportunities which the next stage of evolution in retail banking will provide. Our ATM service provision has grown immensely with circa 330 machines installed in the period, this specialty is a differentiator in the sector and increases our strategic positioning with our customers.

The UK high street fit out market has shown some signs of recovery and we have increased the number of repeat customers. In the period we have won two phases of refurbishment work at Selfridges department store at Birmingham's Bullring shopping mall. We won and completed Hackett's Regent Street flagship store in London, with whom we have an international repeat business relationship. Our framework for a major high street chemist yielded the refurbishment of a store on Oxford Street. We also completed the refurbishment of the John Lewis department store in Kingston-upon-Thames.

The business is progressing its strategy to grow in the hospitality market. During the period, we won the renovation of the Sanderson and St Martins Lane hotels in London, and since period end we have secured a further hotel project in Central London. We also have been working in London Heathrow's new T2 terminal building with airline lounge projects secured for United Airlines and Air Canada, thereby developing our "air-side" credentials.

The order book for the business has remained in line with last year at £102m (2012: £102m) of which £80m (2012: £73m) is to be delivered in the current financial year. As a result, we expect revenue for the current financial year to be in line with prior year.

Continental Europe

Parts of this market are yet to reflect the upturn in the global economy, particularly the office fit out market in France. Revenue in the period is £53m (2012: £51m) with operating profit down at £0.9m (2012: £1.1m).

While the office fit out market is generally slow across Continental Europe, our business in Germany, where confidence is stronger, is performing well. In the period we completed a €4m innovation centre for a world-leading technology company in Berlin. In addition we completed the acquisition of 90% of Tecton Engineering GmbH (Tecton), an office fit out company. This has boosted our geographical reach across the country and gives us better access to key local real estate decision makers. Tecton is trading well and achieving its targets.

In Italy, the business has performed well in the first half having secured two large projects including a 300,000 sq ft fit out project across five buildings for Alcatel Lucent.

In France the retail sector in Paris continues to be strong, contrasting with the weaker office fit out market. In the period we have worked on the refurbishment and fit out of new stores for two world-renowned jewellery retailers. Additionally, we completed two fit out projects for luxury British lingerie brand Agent Provocateur and a project for fashion brand Forever 21.

At 31 December 2013, the business had an order book of £39m (2012: £26m), of which £34m (2012: £24m) is to be delivered in the current financial year. We expect revenue for the second half of the current year to be broadly in line with the first half.

Middle East

In the Middle East we continue to see confidence returning to the market and the business has responded by delivering improved performance and securing a strong forward order book. Revenue has risen to £13m (2012: £10m), with underlying operating profit improving to £0.1m (2012: loss of £0.3m).

In Abu Dhabi we delivered large commercial office fit out projects for the likes of Dolphin Energy and a major US health care company. We recently secured two large projects for the Abu Dhabi Tourism and Culture Authority and Daman Insurance for delivery in the second half.

In Dubai, with the award of World Expo 2020, we anticipate a surge of activity in hotel and hospitality refurbishment projects and hence we are building our expertise in this sector. We have secured an important refurbishment project on the iconic Mall of the Emirates Kempinski Hotel. We anticipate this being a growth sector going forward.

The order book has increased to £28m (2012: £20m), of which £23m (2012: £16m) is to be delivered in the current financial year. We expect revenue for the current year to be ahead of prior year.

Asia

While the commercial office market continues to be weaker, our strategy to diversify the business is delivering strong results through growth in the hospitality and retail sectors. Revenue has increased to £42m (2012: £35m), with operating profits also up at £1.1m (2012: £0.7m).

In South East Asia, we continue to grow our reputation in the retail and hospitality sectors with repeat commissions for the likes of Becasse, Hackett and UGG. In addition, we were awarded a 365-key hotel refurbishment in Singapore, and new flagship stores for Dior and Louis Vuitton in Kuala Lumpur.

In North Asia, we are established as an industry leader for the retail and hospitality sectors with multiple commissions for Dior, Disneyland, Qeelin and UGG.

Additionally, we delivered flagship stores for Patek Phillipe in Beijing and Abercrombie & Fitch in Seoul. Recently, our business was successful in securing a large flagship retail project for the world's leading consumer electronics company in Hong Kong.

Our specialist solutions companies in the region have also progressed during the period. Commtech, our commissioning management business, has seen increased demand for its services, underpinned by the continued growth of the data center sector.

Realys is also enjoying strong demand. The automotive sector in China, in particular, continues to attract customers including Mercedes, Peugeot and Porsche. Our strategy to target new geographies is succeeding with the award of a large foreign embassy project in Thailand, to be delivered over three years. Beyond project and design management, Realys has invested in the launch of a design and build business in Singapore and has secured a 38,000 sq ft commission for Westpac Bank.

The order book stands at £35m (2012: £39m), of which £23m (2012: £32m) is to be delivered in the current financial year. With several new projects secured since period end, we anticipate revenue for the current financial year will be ahead of prior year.

Rest of the World

At the beginning of the period we entered the Brazilian market by acquiring a 20% stake in the fit out and refurbishment company ACE, with offices in São Paulo and Rio de Janeiro. The business made a positive contribution in the period albeit the abrupt change in the local political and socio-economic climate at the start of the period has impacted negatively on business confidence and activity levels.

Our South African office, based in Johannesburg, has continued to build its reputation completing a number of office fit out projects both locally and in Kenya and Tanzania.

UK Construction

Performance in our UK Construction business was broadly in line with expectations with revenue reduced by 17% in the first half, reflecting the strong comparator of the London 2012 Games in the prior period, to £234m (2012: £280m) and operating profit declining to £0.1m (2012: £0.7m). We anticipate that margins will continue to remain low in 2014 as we work out projects secured during tougher market conditions in the preceding periods.

The business has simplified its regional structure into three core regions. It has strengthened its management team and made significant investment in its engineering, project delivery and supply chain capability.

In the last quarter, we have seen a marked improvement in customer confidence. This has translated into several significant larger project wins and an improving pipeline in our target sectors and regional operations. We continue to focus on key repeat customers and frameworks and encouragingly repeat business has increased to 80% (2012: 50%) of our revenue in the period.

An increasingly busy London office refurbishment market has led to us securing a circa £30m refurbishment within the iconic Art Deco Adelphi Building for private equity firm Blackstone and a £9m transformation of a City office building for Amsprop Investments. During the period we completed major office schemes in London for Aviva Life & Pensions, Great Portland Estates and Standard Life, all repeat business customers.

We continue to develop our reputation in Exclusive Residential and have secured a £20m scheme with repeat client Amazon Property to restore three buildings in London's Nash Terrace into exclusive residential dwellings.

In the North West we received the full award of the £50m+ new Exhibition Centre Liverpool and integrated hotel development and have been awarded the £20m+ contract to build the UK headquarters for The Phoenix Partnership in Leeds. 

In respect of our public sector frameworks, we have been reappointed to the influential £1.5bn Construction Framework South West. We have also secured a place on each of the North East Procurement Organisation (NEPO) Construction Framework's four categories and have been appointed to the new Stockton-on-Tees Borough Council Construction Framework. In addition we continue to be successful as one of the lead contractors on the North West Construction Hub framework.

The order book at 31 December 2013 has increased 17% to £482m (2012: £409m) of which £227m (2012: £238m) is for delivery in the current financial year. In line with expectations we expect revenue for the current financial year to be below prior year. 

Non-underlying items

As set out in Note 4 of the interim financial statements, the Group has incurred non-underlying costs of £2.5m including restructuring costs of £1.4m (2012: £0.5m) arising from the reorganisation of our UK Construction business and amortisation of intangibles of £1.0m (2012: £1.1m).

Outlook

Our strategy is working. The return of our traditional markets such as London office fit out has coincided with growth in new target sectors such as data centers and hospitality, as well as the continuing development of our overseas businesses.

At the end of December 2013 our total order book was £968m (2012: £766m), of which £641m (2012: £512m) is for delivery in the current financial year and £290m (2012: £243m) for the next financial year.

The outlook for our key markets is as follows:

· The recovery of the London corporate office market has commenced, with a greater prevalence of large-scale projects and improved confidence across the sector.

· Our Engineering Services business has grown to the point where it is now a core service for the Group. The sustained vibrancy of the international data center market and the focus on refurbishment and retrofit of existing stock will continue to provide strong opportunities.

· Our UK Retail business remains stable with some of our customers, particularly the major food retailers, moving from new build to refurbishment and refresh. We continue to deepen our relationship with clients through the provision of value-added services. We are focused on building our reputation in the hospitality sector.

· Our UK Construction division has improved its position with key customers and frameworks. Its revised structure and focus on quality and key sectors position it well to improve profitability from 2015 onwards.

· Outside the UK our businesses are benefiting from a growing reputation, scale and widening of service offer. Our major international customers are generally maintaining their capital investment plans. We will continue to consider further growth into new and existing geographies where there is demand for our services.

Undoubtedly our markets are recovering. We will continue to target growth sectors, to invest in our overseas businesses and to manage our cost base. We remain confident of meeting the Board's expectations for the full year.

David Lawther

Chief Executive Officer

CONDENSED CONSOLIDATED INCOME STATEMENT

for the 6 months ended 31 December 2013

There were no discontinued operations in either the current or comparative years.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 6 months ended 31 December 2013

CONDENSED CONSOLIDATED BALANCE SHEET

as at 31 December 2013

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the 6 months ended 31 December 2013

The foreign currency translation reserve is used to record cumulative translation differences on the goodwill and other intangible assets of foreign operations (Notes 8 and 9). The cumulative translation differences are recycled to the income statement on disposal of the foreign operation.

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the 6 months ended 31 December 2013

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENT

1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

General information

The results for the half years ended 31 December 2012 and 2013 and the balance sheets at those dates have not been audited and do not constitute statutory accounts. The financial information for the year ended 30 June 2013 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the audit report and did not contain statements under section 498 of the Companies Act 2006.

The Group's activities and the key risks facing its future development, performance and position are set out in the interim report and accounts. The directors have reviewed the current and projected position of the Group and have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half yearly condensed consolidated financial statements.

Statement of compliance

The condensed set of financial statements included in this interim report have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting', as adopted by the European Union and the Disclosure and Transparency Rules of the Financial Services Authority. The Group's condensed financial statements should be read in conjunction with the annual financial statements for the year ended 30 June 2013, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

Accounting policies

The same accounting polices and methods of consolidation are followed in this condensed set of financial statements as applied in the Group's latest annual report and accounts for the year ended 30 June 2013.

During the current period, the following accounting standards were adopted and either had no impact on the financial statements or resulted in changes to presentation and disclosure only:

· IAS 19 (amendments) 'Employee benefits'; effective 1 January 2013

· IFRS 13 'Fair value measurement'; effective 1 January 2013

· IFRIC 20 'Stripping Costs in the Production Phase of a Surface Mine'; effective 1 January 2013

2. SEASONALITY

The Group's activities are generally not subject to significant seasonal variation.

3. SEGMENTAL INFORMATION

For management purposes, the Group is organised into operating segments on both a geographic and product perspective. The performances of these segments are considered by the Board when making strategic decisions. These segments include the UK, Continental Europe, Middle East and Africa and Asia, whilst the UK is further segregated by product into UK Fit Out and Engineering Services, UK Retail and UK Construction.

Although the Middle East and Africa geographical segment does not meet the quantitative thresholds required by IFRS 8 'Operating Segments', management has concluded that this segment should be reported. This segment is closely monitored by the Board as a potential growth region and is expected to materially contribute to Group revenue in the future

The principal activities of each of these divisions are as follows:

The segmental information provided to the Board for the reportable segments for the period ended 31 December 2013 is as follows:

4. Non-underlying items

The Group has incurred restructuring costs of £1.4m (Dec 2012: £0.5m) following the substantial completion of the exercise in respect of the UK Construction operations with the reorganisation of the business from seven regions to three.

The acquisition of the trade and business assets of the French branch of Alpha was completed on 28 October 2011, with an accrual for a deferred contingent consideration element that was dependent on that business achieving certain performance targets. This amount was recognised as contingent consideration in the Group's consolidated financial statements. In line with IAS 39 'Financial Instruments - Recognition and Measurement', the Group reviews all contingent consideration outstanding at each reporting period. Based on the performance and the consequential revised amount of contingent consideration payable, a further £0.2m contingent consideration has been accrued as at 31 December 2013 and paid in January 2014.

On 8 July 2013 and 24 July 2013, the Group completed the acquisition of a minority stake in ACE in Brazil and the acquisition of a majority stake in Tecton in Germany respectively. No additional acquisition related expenses were incurred during the period (Dec 2012: £nil and June 2013: £0.6m).

The acquisition of 85% of the issued share capital of Realys was completed on 8 April 2011, with a deferred contingent element payable (in cash and shares) over the following three years depending on achieving certain performance targets in each of those years and the vendors' continuing employment. As at 30 June 2013, the value of the contingent consideration for the second and third years was calculated to be £0.2m and nil respectively. This amount was recognised as a liability in the Group's consolidated financial statements at that time and was subsequently paid in July 2013. 

5. Tax on profit on ordinary activities

Income tax for the six month period is charged at 25% (Dec 2012: 25%), being the estimated annual effective tax rate expected for the full financial year, applied to the profit before income tax expense excluding the share of net profit/loss of equity accounted associates and joint ventures for the six month period (which are stated net of income tax).

6. DIVIDENDS

In accordance with IAS 10 'Events after the Reporting Date', interim dividends are accounted for in the period in which they are paid. Accordingly the interim dividend proposed in respect of the half year ended 31 December 2013 has not been included as a liability as at 31 December 2013.

There are no tax consequences attaching to the payment of dividends by the Group to its shareholders.

The final dividend of £1.8m (Dec 2012: £1.4m) was settled by £1.7m in cash (Dec 2012: £1.4m) and by £0.1m in shares issued under the scrip scheme (Dec 2012: £37k).

7. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the earnings attributable to owners of the company by the weighted average number of ordinary shares during the period, determined in accordance with the provisions of IAS 33 'Earnings per Share'.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all dilutive potential ordinary shares. The Group has two categories of dilutive potential ordinary shares, being share options granted where the exercise price is less than the average price of the company's ordinary shares during the period, and conditional shares not vested where contingent consideration conditions are yet to be met.

Underlying basic earnings per share is calculated by dividing the earnings from underlying items attributable to owners of the company by the weighted average number of ordinary shares during the period. The Group believes that this measure of earnings from underlying items is more reflective of the ongoing trading of the Group.

A total of 1,902,959 share options that could potentially dilute earnings per share in the future were excluded from the calculations below because they were anti-dilutive at 31 December 2013 (Dec 2012: 3,680,964).

8. GOODWILL