Half Yearly Report

19 May 2015

The Innovation Group plc

("Innovation Group" or the "Group")

Interim Results for the six months ended 31 March 2015

The Innovation Group plc (LSE: TIG.L), a global provider of software solutions and business process outsourcing to the insurance, fleet, automotive and property industries, announces its interim results for the six months ended 31 March 2015.

*Note 1 defines adjusted profit and notes 2 and 3 further disclose what has included and excluded from this metric.

Financial Highlights

· Overall revenue growth of 11% (14% at constant currency)

· Adjusted profit* up from £10.0m to £11.3m, representing growth of 13% (19% at constant currency)

· Strong revenue growth in our Business Services division of 20% at constant currency, of which 7% delivered organically

· Excellent cash conversion of 89% against a target of 85%

· Interim dividend declared of 0.12p per share

Commercial Highlights

· Successful acquisition of EMaC with solid performance to date and European roll out of Service Plan blueprint already underway

· Our US Business Services division delivers a substantial adjusted profit in the period

· Positive progress made in building out wet peril capability in other regions (UK, US, Australia and France), supported by strong pipeline

Aligned For Growth

· Two highly focused business units, Business Services and Software, both with strong leadership teams in place

· The new service lines (service/warranty plans) and an expanded service line in Fleet being developed to meet new market opportunities and mitigate weather dependency

· Strong pipeline opportunities in both divisions

Trading Post Period End

· We are now beginning to gain traction in our Software division following two recent and significant wins totalling £8.4m and a good sales pipeline

Andy Roberts, Chief Executive Officer of Innovation Group commented:

"Following the recent contract wins, underlying momentum in the business is strong. The last six months have seen us deliver double digit increases in revenue and adjusted profit and, at the same time, our newly separated Software and Business Services divisions are now tightly aligned to their target markets. Both teams are fully focused on the opportunities ahead and it is particularly encouraging to see our Software business begin to gain traction."

Enquiries:

Chairman's Statement

We have made good progress during the period under review. Our strategy, outlined in our 2014 Annual Report, is proving sound and significant progress is being made.

This is the first period in which we have separately presented the results for our two divisions, Business Services and Software, providing greater transparency and clarity to our shareholders about the underlying performance of the business. I am delighted to say that this new structure has settled down well and we have a clear focus in both divisions. Our underlying management capability is now greatly enhanced.

Current levels of profitability and continuing high levels of cash conversion in the business continue to give the Board confidence in the future of the two businesses and we will again be paying an interim dividend. The interim dividend, 0.12p per share, will be paid on 17 July 2015 to shareholders with a record date of 26 June 2015.

I would like to take this opportunity to thank our people for the exceptionally high levels of customer service that we offer, day in, day out, which, along with our commitment to sustainability provides me with the confidence that our business is in good shape.

On a personal note, I stated in the 2014 Annual Review that I would be leaving the business when a suitable replacement is found; that search continues and I remain committed to the business, leading the Board and ensuring that our stakeholder's interests are fully met.

CEO Statement

I am pleased to report positive progress against our strategic objectives.

Overall, we have delivered both revenue and adjusted profit growth, despite the significant headwinds we have faced with benign weather conditions throughout the period reducing our claims volumes in our UK property business, adverse currency fluctuations and a delay in closing a small number of significant software contracts. We have already announced two of these contracts since our half year end and we are confident that these wins will underpin our ambitions for the full year.

The separation of our Business Services and Software divisions, led by Jane Hall and Paul Nichols respectively, was completed during the period and now provides us greater clarity of focus as we look to maximise the value we deliver to our shareholders.

Business Services

Our Business

We are a strategic solution partner in both claim and non-claim services to motor and property insurers, fleet owners, motor manufacturers and finance companies. We reduce both operational costs and claims costs while also improving customer experience and satisfaction.

We already have significant market share in all of our territories with the exception of the United States where, as our results are proving, we continue to build and invest. We employ the best subject matter experts across all of our business lines and handle millions of incidents on behalf of many blue-chip clients.

Performance in the Period

The business has delivered in the period constant currency revenue and adjusted profit growth of 20% and 48% respectively and performance across most of our regions has been strong with significant new business wins in UK Motor, Germany, South Africa, US and Australia. We have also delivered on our commitment to return the US to profit, delivering a £1.8m of Adjusted EBITDA in the period, as a consequence of exiting of our first notice of loss business and other loss making contracts (resulting in excluding these results from adjusted profit), profitable growth from new wins and the acquisition of Driven Solutions and delivery of associated synergies

However, the first half of the year has had some challenges, the most significant of which being the benign weather conditions that we have experienced in the UK adversely affecting the volume of property claims. This decline in volume in the first half has been compensated at the profit level by the transaction with Symbility announced on 1 April. The pipeline in our UK property business, for both wet and dry perils, is strong and several contract discussions with Tier 1 insurers are ongoing. The pipeline in our other territories is also now building as a consequence of our territories leveraging and implementing the capabilities acquired with the acquisition of LAS in March 2014.

The acquisition of EMaC at the start of the current financial year has been very successful and is performing to plan. This acquisition supports our strategy of moving more into the areas that are not claim volume related and EMaC provides us with a best in class service plan offering that we are already starting to leverage and expand into Europe.

The Route Forward

Our strategy is to grow both organically and through targeted acquisitions.

Organic growth will primarily be in three areas;

· sell existing products to new customers or win a bigger share of existing customers;

· export our best practice offerings to other regions, for example service plans, warranty and fleet; and

· develop new product offerings, predominantly in the non-claim area using our biggest asset, the contractor network.

These imperatives are already well underway and we are well positioned for a strong second half as we open up these new markets and move towards mitigating some of the historic weather dependency.

We continue to pursue acquisition opportunities, which will be targeted for one or more of these reasons - to increase capacity, to gain competitive advantage, to diversify the portfolio or to enhance margin or achieve synergies.

We will also focus on driving further cost synergies into our business through both continued investment in our Enterprise platform as well as the establishment of shared services centres across several geographies, enabling us to adopt common and best practices, increase our own business agility and reduce duplication and cost.

Software

Our Business

Our software business is a provider of Policy Administration, Claims, Billing, and Analytics software and services for property and casualty ("P&C") personal and small commercial lines of business for insurance carriers across 3 continents - North America, Europe and AsiaPac. We are focused on providing solutions that enable carriers to transform their legacy systems and processes into highly efficient, functionally rich digital platforms that deliver an omni-channel experience. The products are built to a modern, robust, scalable and fully integrated software architecture, and interface easily into existing systems. The client-centric system design allows agents, self-serve consumers and either a carrier's or Innovation Group's own repair networks to have 'intelligent interactions' across all service touch-points.

In order to enhance our ability to service carriers of all sizes the software business has recently formed partnerships with Systems Integrators (SI), Deloitte and IBM. These partnerships enhance our routes to market and our ability to provide our larger clients with a complete business transformation offering delivered using a blend of our own and our partners resources and using Innovation Group's own scalable delivery methodology.

Performance in the Period

Following the appointment of Paul Nichols in March 2014, the Software business has undergone a major transformation. This transformation included integrating the three distinct geographic regions, into a single global business, hiring new talent in sales and delivery and introducing new processes to ensure consistent operation across the world, enabling greater flexibility in the deployment of our most highly skilled and experienced employees.

Sales & marketing in the period have been focused on personal lines motor and property insurers. Whilst this focus is working, as evidenced by the two large wins recently announced in the UK after the period end, the slippage in a small number of significant contracts anticipated to land in H1 has resulted in our Software business being behind where we had initially budgeted. However, these recent wins, underpinned by the strength of the pipeline in the software business, give us great confidence that the changes made and the strategies adopted have been the right ones.

The Route Forward

Our immediate priority is to add to the 4 new carriers that went into live operation with our Insurer platform during the period by successfully implementing the projects for our newly acquired clients. In addition, we have increased investment in sales & marketing as we look to build on this growing customer base to further convert and build on our existing pipeline in our key markets.

We also intend to further strengthen our System Integration and Distributor partner relationships, leading to further opportunity for joint marketing and subsequent delivery activity.

Our product management team are in continual discussions with customers, both new and old, the insurance analyst community and our partners to ensure our product roadmap is closely aligned to the needs of the market and in line with our growth goals. This includes new product functionality, new lines of business and specific geographic needs catering for carriers of all sizes. This will ensure that we continue to have a best in class solution for our existing markets, as well as to open up new markets as we move forward with our strategic plans.

Financial Review

Following the operational separation of our Business Services and Software divisions, this is the first period where we present separately the segment results for these divisions, both for the current period and prior period. This will provide much greater clarity and transparency to our shareholders on the underlying earnings performance of our two divisions.

We continue to provide commentary on our results on the basis of constant currency as it is the Board's view that it is more appropriate to compare the operating performance on this basis with over 71% of the Group's revenues being generated outside the UK. In the current period, we experienced a devaluation of the Euro of 9% and the Rand of 2% when compared to this time last year.

Overall, the Group's reported revenue has increased from £101.7m in H1 2014 to £112.8m in H1 2015, an increase of 11%. On a constant currency basis, revenue has increased by 14% (H1 2014: 9%).

Business Services revenue in the period has increased from £92.7m to £107.1m over the prior half year, representing an increase of 16% (20% at constant currency). After excluding the revenue from Symbility of £3.8m and our acquisitions, underlying organic growth was 3% at constant currency and 7% if we were also to exclude the impact of the benign weather conditions in the UK BS business, which was approximately a 30% reduction in claims volume period on period. Allowing for the impact of currency, growth was negative 1% and 3% respectively.

In Software, delays in new contract wins meant revenue was down on the prior period to £5.7m (H1 2014: £9.0m).

Adjusted EBITDA for the period increased by 5% (9% at constant currency) to £15.6m (H1 2014: £14.9m) Business Services contributed £20.6m to the overall result and a period on period increase of 33%. The Software Business contributed a loss of £2.8m in the period, representing a period on period decline of £3.4m, which reflects the delay in a small number of significant contracts, two of which have since been secured.

The Group's reported adjusted profit before tax has increased from £10.0m in H1 2014 to £11.3m in H1 2015, an increase of 13% (19% at constant currency). Business Services contributed £18.6m to the overall result, a 42% increase on the prior year (48% at constant currency), including a contribution from the Symbility transaction to adjusted profit for the full year of £3.1m (contribution to the half year adjusted profit of £3.6m). Software contributed a loss of £4.6m, a decline of £2.8m over the prior period.

Both Adjusted Profit and Adjusted EBITDA are stated after making the adjustments as set out in note 1, which includes the add back of the trading result from the discontinuing business in the US.

Reported profit before tax has decreased from £4.8m to £3.3m. In addition to the matters discussed above, the other primary driver to this decrease is the higher levels of amortisation of acquired intangible assets due to increased acquisition activity.

The Group completed one material acquisition during the period (see note 7) and benefited from a full half year from the three acquisitions made in the prior year.

Adjusted basic earnings per share ('EPS') is 0.58p per share (H1 2014: 0.65p or 0.63p at constant currency) and basic EPS is (0.07)p (H1 2014: 0.19p).

An Interim dividend of 0.12p per share (H1 2014: 0.1p) has been declared and will be paid on 17 July 2015 with a record date 26 June 2015.

The Group's full year adjusted effective tax rate is expected to be approximately 23% (year ended 30 September 2014: 15%).

The Group delivered cash conversion of 89%* in the period and had a net cash balance at 31 March 2015 of £55.2m, representing a net reduction in cash by £1.7m since the 2014 year end. This is the result of the Group's operating cash inflow of £10.9m offset by the £7.4m of cash used in investing activities, notably on the payment of contingent consideration and purchases of fixed assets; and £4.4m paid in dividends during the period. The remaining movement of £0.8m is the impact of foreign exchange on the cash balance.

* Gross cash of £98.0m (H1 2014: £85.2m) also includes funds of approximately £2.5m collected as a rebate on behalf of a customer (H1 2014: £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; the £4m received in the current year relating to the 2014 licence sale; the payment of pre-acquisition liabilities as well as tax payments in the half year, cash to EBITDA conversion is approximately 89% (H1 2014: 96%).

Overall Outlook

Both divisions are now established and operating independently, focused on their respective target markets.

In Business Services we are confident that our focus on rolling out our Service Line blueprint across our territories is the right one and that our second half of the year will contain a number of key wins validating this further.

In Software, with an increasing number of insurers looking to shift away from their old legacy platforms, coupled with the sales momentum we now have following our recent wins and our 4 new live reference sites, we are well placed to target rapid revenue and adjusted profit growth.

Our strategy is working and, based on steady exchange rates, the Board is confident of the outlook for full year adjusted profits.

Unaudited consolidated income statement

For the six months ended 31 March 2015

All amounts relate to continuing operations.

Unaudited consolidated statement of comprehensive income

For the six months ended 31 March 2015

Unaudited consolidated balance sheet

As at 31 March 2015

Unaudited consolidated statement of changes in shareholders' equity

As at 31 March 2015

Unaudited consolidated cash flow statement

For the six months ended 31 March 2015

Notes to the unaudited results

For the six months ended 31 March 2015

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 2014 with the exception of the implementation of IFRS10 as set out below.

The condensed consolidated interim statement for the six months ended 31 March 2015 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct 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 2014, from which information has been extracted, were prepared under IFRS as adopted by the European Union 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 2015.

Adjustment to presentation of share of post-tax profit of associate

The Group has a 100% shareholding in a cell captive structure which is part of Guardrisk Insurance Company Limited. As a result of the adoption of IFRS 10 from 1 October 2014, this investment can no longer be accounted for as an investment in associate, as under South African law the assets and liabilities of the cell are not considered to be legally ringfenced from the insurance company.

The effect of the above is that all gains and losses made on the investment should be recognised as income from financial assets rather than share of post-tax profit of associate. For the six months ended 31 March 2014, this has had the effect of reducing share of post-tax profit of associate by £31,000 and increasing income from financial assets by £31,000. For the year ended 31 September 2014, this has had the effect of reducing share of post-tax profit of associate by £75,000 and increasing income from financial assets by £75,000.

The treatment of the Group's shareholdings in Absa Risk Insurance Management Services Ltd, Sureplan New Zealand Limited and e-MTA Pty Limited as equity-accounted investments remains unchanged.

Adoption of new and revised International Financial Reporting Standards ('IFRS')

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, other than the effect of the adoption of IFRS 10 discussed above.

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 2014. 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 operational existence for the foreseeable future. The Group holds net cash of £55.2m at the period end (31 March 2014: £59.8m, 30 September 2014: £56.9m) 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

Group Adjusted profit is defined as being Group profit before tax adjusted for:

· Amortisation of intangible assets created through business combinations accounted for under IFRS 3(R);

· Advisor and other related costs incurred on business combinations;

· Share based payments charges as calculated under IFRS 2;

· Exceptional and other one-off items which do not reflect the underlying trade of the business;

· Trading results of the discontinuing business that does not meet the requirements of IFRS 5;

· Impairment of non-current assets;

· Profit or loss created on disposal of non-current assets

Adjusted EBITDA is defined as being adjusted profit after adding back depreciation and amortisation.

Cash Conversion of Adjusted EBITDA is defined as being the net cash flow from operating activities, adjusted for payments made in the year relating to corporation tax, exceptional and other one-off items which do not reflect the underlying trade of the business, discontinuing business and executive team bonuses divided by adjusted EBITDA.

Organic growth is used by the Group to present the growth of the business allowing for any acquisition activity undertaken by the Group in the current and previous financial years. 

Constant Currency is used by the Group to present performance metrics for the previous year using the current year's average and closing exchange rate.

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

2. Segment information

Following the management restructure at the end of FY14 and the appointment of Jane Hall and Paul Nichols as Chief Executives of our Business Services (BS) and Software divisions, the Group has seven reporting segments which are separately disclosed, together with central cost centres which include unallocated corporate costs. Operating segments for the Business Services division have been aggregated where the aggregation criteria have been met. More specifically, Asia Pacific BS includes Australia and India and Rest of Europe BS includes France, Spain and Benelux. The Software division is a single operating segment comprising the results of the Software businesses within the UK, US, Canada, Australia and Japan. Software includes all revenues from the sale of Insurer and historic versions of the Group's core IP. The Business Services divisions include revenues derived from the sale of specific Business Services applications (including Symbility) and from the hosting of customer systems.

The HY14 and FY14 segment information has been restated to account for these changes.

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. There is no royalty charge from the Software segment to the Business Services operating segments for the use of the Insurer software asset.

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 £80.2m (H1 2014: £74.9m).

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 2015

1 Included within Motor BS and networks is an amount relating to the sale of goods (motor parts) of £15,491,000.

2 Included within Software revenue are amounts relating to the sale of goods (software licences) of £776,000.

3 Included within UK BS Software are revenues of £3,800,000 relating to the Symbility transaction, which has a full year adjusted profit impact of £3,100,000, half year adjusted profit impact of £3,600,000.

4 Included within North America BS are revenues of £3,845,000 relating to certain first notice of loss and motor contracts that are being discontinued. The trading loss of £1,257,000 has been added back to adjusted profit.

Six months ended 31 March 2014 (restated)

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

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

3 Included within North America BS are revenues of £5,014,000 and an adjusted profit of £nil relating to certain first notice of loss and motor contracts that are being discontinued.

Year ended 30 September 2014 (restated)

1 Included within Motor BS and networks is an amount relating to the sale of goods (motor parts) of £29,220,000.

2 Included within Software is an amount relating to the sale of goods (software licences) of £5,771,000.

3 Included within North America BS are revenues of £9,619,000 and an adjusted profit of £nil relating to certain first notice of loss and motor contracts that are being discontinued.

4 Included within Software are revenues and an adjusted profit of £3.9m relating to a one-off conversion of an annual licence rental into a perpetual licence for the Group's historic Huon product.

3. Exceptional items and discontinuing business

3a. Exceptional items

Period ended 31 March 2015

Exceptional costs on acquisition primarily relate to the deal costs incurred on the acquisition completed in the first half of the year.

The majority of other exceptional costs relate to costs incurred due to restructuring of the UK and US Motor and Property BS divisions following the acquisitions made last year.

Period ended 31 March 2014

Exceptional costs on acquisition relate to the deal costs incurred on the two acquisitions completed in the first half of the year and further costs expensed due to the settlement of contingent and deferred consideration in relation to both current year and prior year acquisitions. These expenses have resulted from the mismatch between the required probability weighted estimation of the expected liability and the final cash settlement of this liability. These costs have been included in operating expenses in the income statement.

The majority of other exceptional costs relate to costs incurred due to restructuring of the UK Motor and Property BS divisions following the acquisitions made during the first half of the year.

Year ended 30 September 2014

Exceptional costs on acquisition relate to the deal costs incurred on the three acquisitions completed during the year and costs incurred in respect of aborted deals. Further costs have been incurred in the current year relating to the settlement of contingent consideration in relation to the GVS and Teledesk prior year acquisitions. These expenses have resulted from the difference between the fair value probability weighted estimation of the expected contingent consideration liability and the final cash settlement of this liability.

The majority of other exceptional costs related to restructuring activity in the year. In Europe the Motor and Property BS divisions were significantly restructured following the acquisitions of Crashworth and LAS made during the first half of the year. The restructuring in Australia is in connection with the costs of closure of one of the entities in the motor business. The BS restructuring in North America is in relation to the relocation of one office. Following the appointment of Paul Nichols in the year as the new head of our global software business, there has been restructuring activity in both the UK and North America Software divisions. The restructuring in South Africa is to separate the regulated and non-regulated parts of the business.

3b. Discontinuing business

Also included in adjusted profit is the add back of the loss of £1,257,000 (2014: £nil) which represents the trading result in the period of our first notice of loss business and other loss making contracts that are being discontinued and which will therefore not be part of the Group upon conclusion of the exit of these businesses in H2 FY15. These results have been excluded from adjusted profit as whilst they do not presently meet the IFRS 5 criteria to be classified as held for sale or discontinued operations (due to the fact that some reorganisation is needed to make them ready for sale) it is the group's intention to dispose of these businesses as soon as possible. Hence we do not consider it appropriate to include the losses in a measure of underlying performance in order to present the current run rate of the go forward business.

4. Taxation

The Group's tax charge for the period was £2.4m (31 March 2014: £1.9m). After adding back the deferred tax credit recognised against IFRS acquired intangible asset amortisation of £0.7m (31 March 2014: £0.4m) and the tax effect of exceptional costs of £0.2m (31 March 2014: £0.2m) less the movement in deferred tax on share-based payments of £0.8m (31 March 2014: £nil), gives an adjusted tax charge of £2.5m (31 March 2014: £2.5m).

When expressed as a percentage of adjusted profit, this represents an anticipated adjusted effective tax rate for the year ending 30 September 2015 of 23% (year to 30 September 2014: 25%). This however will be dependent on the location of trading profits in the remainder of this year.