Half Yearly Report

Interior Services Group PLC

("ISG" or "the Group")

Interim results for the period ended 31 December 2012

Interior Services Group plc, the international construction services group, today announces its interim results for the period ended 31 December 2012, during which the business has continued to grow in line with expectations, delivering both increased revenue and underlying profit.

1from continuing operations

2from underlying items (Notes 3 and 4)

3from earnings attributable to owners of the company from underlying items (Note 8)

4from earnings attributable to owners of the company (Note 8)

5restated (Note 1)

Group Highlights

·; Performing well in core retail and corporate office markets despite difficult UK economic conditions

·; Developing our presence in engineering services and hospitality sectors

·; Growing reputation and traction in our overseas businesses

·; Continuing revenue stream from London 2012 Olympics

·; Net cash balance of £25.3m at 31 December 2012 (30 June 2012: £25.4m), with banking facilities renewed until September 2015

·; Order book ahead by 9% at £766m (2011: £704m), of which £512m is for delivery in current year, with private sector bias of 80% (2011: 77%)

·; Interim dividend maintained at 4.41p per share

Divisional Highlights

UK Fit Out

·; Operating profit of £2.0m (2011: £2.3m) on revenue of £119m (2011: £92m)

·; London office fit out market remains competitive, with project sizes smaller, but larger scale projects beginning to re-emerge

·; Increased revenue from growing engineering services market

·; Order book up 83% to £170m (2011: £93m)

UK Retail

·; Operating profit, as anticipated, decreased to £2.6m (2011: £3.0m), on reduced revenue of £164m

·; Business has maintained its market leading position and margins are stable

·; Substantial work under frameworks carried out for the leading major UK supermarket and retail banking brands

·; Order book lower at £102m (2011: £148m) reflecting decrease in investment in new build projects by retail customers

Continental Europe

·; Operating profit of £1.1m (2011: £1.3m) on revenue of £51m (2011: £53m)

·; Office fit out business saw France and Germany performing well, but Italy weaker

·; Retail fit out business continuing to grow, working for several repeat customers

·; Order book lower at £26m (2011: £49m); since period end awarded £15m of projects

Middle East and Africa

·; Later project starts have again impacted the first half results

·; New office in Johannesburg opened

·; Order book up 100% from prior year to £20m supports a stronger second half

Asia

·; Operating profit maintained at £0.7m (2011: £0.7m) reflecting higher margins despite lower revenue of £35m (2011: £47m)

·; North Asia driven by strong retail, hospitality and leisure sectors

·; South East Asia, successfully diversified into hospitality and leisure sector

·; Continue to invest for growth in our consulting businesses

·; Order book higher at £39m (2011: £27m) supporting stronger second half activity in South East Asia

UK Construction

·; Revenue increased by 18% to £280m (2011: £237m) on the back of London 2012 Games overlay works contract, generating an operating profit of £0.7m

·; Strategic focus is on repeat customers and frameworks

·; Market conditions remain challenging - in process of reorganising UK East region

·; Order book increased to £409m (2011: £377m) and now weighted 65% towards private sector (2011: 58%)

David Lawther, Chief Executive Officer, said:

"ISG has delivered an improved performance and growing order book despite the continuing market challenges in Europe. In the UK, we have maintained our market leading positions in the office fit out and retail sectors, while our Construction business has increased its level of repeat work through its focus on key customers and frameworks. We have continued our progress into the engineering services and hospitality sectors, securing another major project in the period. Overseas, we continue to enhance our reputation and anticipate seeing growth in the second half.

We will continue to manage our cost base, to target growth sectors and to invest in our overseas businesses."

05 March 2013

ENQUIRIES:

CHIEF EXECUTIVE Officer'S STATEMENT

I am pleased to report that our business has continued to grow in line with expectations - with both revenue and underlying profits1 improved in the period.

Results

For the six months ended 31 December 2012, revenue2 increased by 6% to £659m (2011: £623m) and underlying profit before tax1 increased by 4% to £3.8m (2011: £3.6m). Underlying basic earnings per share3 increased by 6% to 8.92p (20114: 8.38p). Profit before tax2 was £2.2m (20114: £2.3m).

Net cash as at 31 December 2012 of £25.3m (2011: £29.5m) was in line with prior year end. Net cash inflow2 for the period was £2.4m (2011: outflow £0.3m). In the period, we renewed our banking facilities with a term loan of £6.0m and a revolving credit facility of £10.0m through to September 2015.

The order book has increased at 31 December 2012 by 9% to £766m (2011: £704m), of which £512m is for delivery in the current financial year (2011: £497m).

Dividends

The Board has declared a maintained interim dividend of 4.41p (2011: 4.41p) with the intention that, for the time being, the split between the interim and final dividends will be more closely aligned than previous periods. The dividend will be payable on 1 May 2013 to shareholders on the register on 15 March 2013. The ex-dividend date will be 13 March 2013. A scrip alternative is again being offered.

Overview

Against difficult UK economic conditions we are performing well in our core Retail and Corporate Office markets, retaining our market leading positions. In addition, we are making good progress in other areas such as the development of our fit out offering in engineering services, hospitality and leisure. The reputation of our overseas businesses continues to grow and we anticipate an increase in contribution from them.

UK Fit Out5

Our UK Fit Out business has seen a significant increase in activity in the first half. This has been driven by progress we have made in penetrating the engineering services market as well as success in our traditional corporate office market.

In the period our customers in the corporate office fit out sector have been focused on small to medium-sized refresh projects. We continue to be a market leader based on our reputation for award-winning delivery. Our fit out of the London office of K&L Gates helped the project win "Best of the Best" at the annual awards for the British Council for Offices (BCO). Although large projects remain thin on the ground, during the period we completed the 180,000 sq ft fit out of the Walbrook Building in Cannon Street for commercial property developers Minerva, as well as being awarded the fit out of 220,000 sq ft for an international insurance company in the St Botolph building and a 88,000 sq ft fit out for global property consultants Savills. While this market remains well below the levels reached in 2008, there are now signs that larger scale office fit outs will start to return from the end of 2013.

Significantly, our market entry into the engineering services has been affirmed by our appointment as lead contractor to deliver a circa £120m data center project for a global technology customer in the Nordics.

At 31 December 2012, our UK Fit Out division's order book increased to £170m (2011: £93m), of which £129m (2011: £76m) is to be delivered in the current financial year. We anticipate that revenue for the current financial year will be substantially ahead of prior year.

UK Retail5

Our UK Retail business continues to be a market leader and is seeing solid demand from a diverse range of customers, despite the effect that the continued global economic uncertainty has had on the sector. We have now combined our banking, food, high street and luxury retail customers under a single management team - achieving greater efficiency - and this has helped to underpin a strong performance.

The business has maintained its positions on the frameworks for Tesco, Sainsbury's, Morrisons, Asda, Marks & Spencer and Waitrose. However, the trend towards new-build "mega stores" is now over and the emphasis is on the refresh of existing stores and an increase in convenience stores, resulting in lower revenues in the period. We have restructured our operations to tackle these challenges.

In Retail Banking we remain a top performer on the frameworks for Barclays Bank, HSBC, Lloyds Banking Group (LBG), Nationwide and The Royal Bank of Scotland (RBS). We also delivered our first project for new customer Nottingham Building Society and were appointed to carry out an ATM replacement programme for LBG throughout the UK.

The UK High Street fit out market remains highly competitive yet we have increased the number of repeat customers we are working with. We have worked on multiple projects for Hackett including a new flagship store in London's Covent Garden, as well as the roll-out of the new brand for Everything Everywhere.

The business is progressing its strategy to enter the hospitality market, with the completion of the £20m fast-track conversion of the Queen Anne's Chambers building in Westminster into a five-star, luxury InterContinental Hotel.

The order book for the business has reduced to £102m (2011: £148m) which reflects the significantly lower level of larger new build projects for some of our food retail framework customers. As a result, we expect revenue for the current financial year will be lower than the prior year, although with a larger volume of smaller projects we anticipate that margins should be higher.

Continental Europe

In Continental Europe, we have maintained activity levels similar to prior year.

Our office fit out business is performing in line with the economies where it operates, so while France and Germany continue to offer opportunities, markets such as Italy are more challenging. In France we are working on an extensive fit out project for Google in Paris, which is nearing completion, as well as completing projects for BNY Mellon, RBS and Rio Tinto, while our German office worked on Google's offices in Hamburg, Munich and Zurich.

In our retail fit out business, France is a particular highlight with the Paris market providing strong demand for our services in the period from repeat customers such as Marks & Spencer, LVMH and Uniqlo. In line with our strategy we are also increasing our work with local customers such as Aéroports de Paris and the renowned retailer Le Bon Marché.

At 31 December 2012, the business had an order book of £26m (2011: £49m), of which £24m (2011: £35m) is to be delivered in the current financial year. Since period end we have been awarded £15m of projects in France and Germany. Hence we anticipate revenue for the full year being in line with prior year.

Middle East and Africa

In the Middle East we have continued to see slippage on project starts which has again impacted the first half results. We have restructured the business to account for this. Demand for our services continues from the energy and finance sectors - including Mubadala Oil and Gas, China National Petroleum Corporation, Standard Chartered and RBS Coutts.

The business has successfully diversified to work in other sectors including a new hotel fit out for Ritz Carlton Abu Dhabi and a high-end residential fit out on The Palm Jumeirah, Dubai.

In the first half we have also invested in opening our first office in Johannesburg, South Africa, developing a supply chain there and in East Africa.

Our increased order book of £20m (2011: £10m) supports a rising revenue trend that should be realised in the second half.

Asia

We have seen increasing demand from our retail and hospitality customers in North Asia, particularly in Hong Kong. Demand in the period has been weaker in South East Asia, but after recently securing a number of larger projects in Singapore and Malaysia, we expect a significant second half increase in activity levels. Margins remain strong and profits are maintained.

In North Asia, we continue to gain recognition as an industry leader for the retail sector with multiple commissions for Dior, UGG, Versace, Tod's, and Frey Wille. Additionally we delivered flagship stores for Abercrombie & Fitch and Hackett in Hong Kong. Our traditional office fit out market in South East Asia continues to be highly competitive. However, our strategy to diversify is working. We are seeing a marked increase in projects in both retail and hospitality, exemplified by our securing of a substantial refurbishment project of the Fairmont Hotel in Singapore as well as Asia's first fitness club for Virgin Active.

We are continuing to invest in our consultancy businesses, with Realys maintaining its performance (now represented in North and South East Asia) and Commtech investing in international expansion into Dubai and China.

As at 31 December 2012, the division's order book was £39m (2011: £27m). We anticipate that revenue for the current financial year will be slightly ahead of prior year.

UK Construction5

Our UK Construction business increased revenue in the first half. The profile and reputation of the business was significantly enhanced through its first-rate completion of works on the London 2012 Games. What started with the construction of the world-renowned Velodrome was only the beginning of a journey that eventually saw us working on every single venue - both on and off park - right across the UK. Our involvement in the London 2012 Games continues to provide a revenue stream with the award of our first legacy project - the South Park Hub - for the London Legacy Development Corporation, as well as assisting with the award of works at Hampden Park in Glasgow prior to the 2014 Commonwealth Games.

Our focus is to concentrate on repeat customers and frameworks. In line with this we have now been appointed on a number of schemes under the newly awarded Ministry of Justice framework as well as being appointed to a £150m construction framework with Bristol International Airport. We were also a member of a consortium which successfully secured a four-year £25m framework with the London Borough of Waltham Forest.

However, the market remains competitive and we have seen particularly tough trading conditions in our East region where we are in the process of a reorganisation to reflect current market conditions.

During the period, we have been awarded the £40m Liverpool Exhibition Centre development, a £61m contract with Center Parcs in Bedfordshire and a major new warehousing facility for a drinks company in Scotland, which has improved the visibility of our work load for the next financial year.

The order book at 31 December 2012 is up at £409m (2011: £377m) of which £238m (2011: £266m) is for delivery in the current financial year. Hence we anticipate that revenue in the current financial year will be lower than prior year, with margins continuing to be under pressure.

Non-underlying items

In addition to the reorganisation in the East region of our construction business, we have continued with the consolidation of our Retail Banking and Food Retail operations under a single management structure. As a result, we have incurred total restructuring costs of £0.5m which we have treated as non-underlying items (see Note 4).

Outlook

Our strategy of continuing to diversify and balance our portfolio is underpinning our growth - despite difficult market conditions.  At the end of December 2012 our total order book was £766m (2011: £704m), of which £512m (2011: £497m) is for delivery in the current financial year and £242m (2011: £203m) for the next financial year. Our order book is heavily weighted towards the private sector at 80% (2011: 77%), with the public sector at 20% (2011: 23%).

The outlook for our key markets is as follows:

·; The London corporate office market is starting to show signs of recovery. There is evidence that the return of some larger projects is on the horizon for late in 2013. Our reputation for high quality delivery will help to retain our position as a leader in this market. Our engineering services offer is growing and there is good opportunity in this sector in the coming year. 

·; Our UK Retail business remains profitable and stable but some of our customers, particularly the major food retailers, are scaling back their UK investment plans. We will continue to diversify our service offering and customer base to win work where there is greater opportunity.

·; Our UK Construction division has improved its position with key customers and frameworks and this will underpin its strategy for what will remain a highly competitive market.

·; Outside the UK our businesses are benefiting from a growing reputation. Our major international customers are generally maintaining their capital investment plans. We will continue to widen our offering from corporate office into engineering services, retail and hospitality.

Overall, the industry continues to experience challenging economic conditions, particularly in the UK. Our response is to continue to manage our cost base, to target growth sectors and to invest in our overseas businesses. We remain confident of meeting the Board's expectations for the full year.

1 from underlying items (Notes 3 and 4)

2 from continuing operations

3 from earnings attributable to owners of the company from underlying items (Note 8)

4 restated (Note 1)

5 we have reorganised our operations to align ourselves with our strategy and also the opportunities in the market. In line with this, we

have amended our segmentation to reflect the revised structure of our businesses (Note 3)

David Lawther

Chief Executive Officer

5 March 2013

* Restated (Note 1)

* Restated (Note 1)

* Restated (Note 1)

* Restated (Note 1)

The foreign currency translation reserve is used to record cumulative translation differences on the goodwill and other intangible assets of foreign operations (Notes 9 and 10). The cumulative translation differences are recycled to the income statement on disposal of the foreign operation.

* Restated (Note 1)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of preparation and significant accounting policies

General information

The results for the half years ended 31 December 2011 and 2012 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 2012 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 2012, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

Restatement of prior period balances

In January 2013 the IFRS Interpretation Committee (IFRIC) clarified the measurement and presentation required in accordance with IFRS 3 'Business Combinations' for contingent payments to selling shareholders in circumstances in which those selling shareholders become, or continue as, employees. Following this clarification, the prior period comparatives have been restated with the deferred contingent consideration in relation to the acquisition of Realys Group Limited (Realys) in April 2011 previously presented within goodwill and recognised as a liability at that time now presented as post-acquisition remuneration and expensed as incurred. Further information on the impact of this restatement is included within Notes 4, 8 and 9.

The restated financial information for the year ended 30 June 2012 will be included in the audited statutory accounts for the year ended 30 June 2013.

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 2012.

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 1 (amendments) 'Presentation of financial statement - Presentation of items of other comprehensive income'; effective 1 July 2012

·; IAS 12 (amendments) 'Income taxes: Deferred tax - Recovery of Underlying Assets'; effective 1 January 2012

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. During the period, the Group has reorganised its operations to align itself with its strategy and also the opportunities in the market. In line with this, the Group has amended its segmentation to reflect the revised structure of its businesses with elements of UK Fit Out now managed and therefore re-segmented to UK Retail and UK Construction. The prior period comparatives have been restated to reflect this new segmentation. These segments include the UK, Continental Europe, Middle East and Africa and Asia, whilst the UK is further segregated by product into Fit Out, Retail and Construction.

Although the Continental Europe, Middle East and Africa and Asia geographical segments do not meet the quantitative thresholds required by IFRS 8 'Operating Segments', management has concluded that these segments should be reported. All are closely monitored by the Board as potential growth regions and are 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 2012 is as follows:

* Restated (Note 1) and to reflect the revised segmentation

* Restated (Note 1) and to reflect the revised segmentation

4. Non-underlying items

* Restated (Note 1)

The Group has incurred restructuring costs of £0.5m (Dec 2011: £nil, year ended 30 June 2012: £3.0m). This is the next phase of the exercise that commenced in the previous year in respect of the Construction operations, with the South East construction business being re-organised to reflect current tough market conditions and focus the business on repeat customers. Furthermore, the various retail operations in the UK consisting of the bank branch rollout programmes, the high street retail fit out and the food retail fit out which were previously managed separately, have now been brought together under a single and uniform management structure with effect from 1 July 2012, driving efficiencies going forward. Finally, the UK IT teams have been consolidated into a single location, helping to drive operational synergies.

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 2012, the value of the contingent consideration for the first year was calculated to be £0.3m. This amount was recognised as a liability in the Group's consolidated financial statements at that time and was subsequently paid in July 2013. Non-operating gains of £1.2m for the six months ended 31 December 2011 and £1.4m for the year ended 30 June 2012 no longer arise due to the restatement described in Note 1.

5. discontinued operations

In November 2011, the Group discontinued its Construction's Affordable Housing activity in South West and it has been classified as a discontinued operation for the prior period. The results of the Group's discontinued operations are presented below.

6. Tax on profit on ordinary activities

* Restatement of profit before tax for the prior periods (see Note 1) has resulted in an increase in deferred tax from origination and reversal of temporary differences from £0.4m to £0.7m for the period ended 31 December 2011 and from £0.6m to £1.0m for the period ended 30 June 2012

Income tax for the six month period is charged at 25% (Dec 2011: 27%), 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 joint ventures for the six month period (which are stated net of income tax).

7. 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 2012 has not been included as a liability as at 31 December 2012.

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

The final dividend of £1,420,000 (2011: £3,392,000) was settled by £1,383,000 in cash (2011: £3,392,000) and by £37,000 in shares issued under the scrip scheme (2011: £nil).

8. 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 attributed 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 3,680,964 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 2012 (Dec 2011: 3,213,508).