Half Yearly Report

22 May 2013

The Innovation Group plc

("Innovation Group" or the "Group")

Interim Results for the six months ended 31 March 2013

The Innovation Group plc (LSE: TIG), a global provider of business process services and software solutions to the insurance, fleet, automotive and property industries, announces its interim results for the six months ended 31 March 2013.

Financial Highlights

* Adjusted profit is profit before tax after adding back amortisation on acquired intangible assets of £1.7m (H1 2012: £1.5m), exceptional costs of £nil (H1 2012: £0.8m) and a share-based payments charge of £1.0m (H1 2012: £1.0m) as analysed on the face of the income statement.

** 2012 restated

Highlights

·; 39% year on year increase in adjusted profit at constant currency

·; £99.8m of revenue delivered in the first half - an 8% increase at constant currency over H1 2012

·; 93% conversion of EBITDA to operating cash inflow

·; Significant partnerships and acquisitions completed and integrated well in the period

·; Continued flow of major customer wins and substantial pipeline opportunities across the business

Andy Roberts, Chief Executive Officer of Innovation Group commented:

"We have delivered a strong first half of the year, continuing to execute on our strategy and building momentum in our business. Our business model continues to be successful and the market is growing increasingly aware of our services and their value. This is evidenced by a number of contract wins in the period, with new and existing clients, enabling us to deliver a significant year on year increase in adjusted profit for the Group. As we scale the business, so the visibility of revenues improve and we remain confident in our expectations for the full year."

Enquiries:

Half Year Review

The business has made very good progress in the six months to 31 March 2013 and overall results are in line with our expectations. I am particularly pleased with the significant year on year increase in adjusted profit generated from new wins in both business process services and software. New contract wins and significant contract renewals have also continued since the end of the period. These wins all underpin the Group's profit targets for the current financial year and beyond.

The market now appears to both understand and recognise the high value of our model. We provide a complete end-to-end software and services portfolio that can be purchased and deployed using a variety of flexible options such as software or business process-as-a-service, or more traditionally, as on-premise or offsite. We remain in a strong competitive position and our proposition is attractive to our customers, which has been proven through significant wins against both established players and new entrants in our markets. Our pipeline also remains strong across all our geographies for our portfolio of services. This first half period can really be seen as the time when our strategy, developed over a few years, has begun to pay off.

We constantly review the performance of all the individual business units within our geographies and wherever necessary restructure to achieve optimum profit margins. To that end, we have implemented a profit improvement plan within the US services business, which is currently performing below its true potential. This will entail some exceptional costs within the second half of the year and will ensure that both current business and the substantial sales pipeline in the US business process services division, deliver improved profit margins in the 2014 financial year and beyond.

Sales Performance

The Group has achieved some notable new customer wins in the first half of the year. Highlights from North America include: Homesite, a fast growing Tier 2 property insurer, purchased Insurer Claims and Insurer Analytics and Austin Mutual Insurance Company purchased end-to-end claims and repair services for its personal and commercial auto business across nine states. Since the period end, we have announced a further software contract win in North America: GuideOne purchased Insurer Policy and Insurer Analytics in a contract valued at approximately £2.6m.

In our UK property division, shortly after the period end, we announced a major new contract with Aviva for our market leading claims scoping and supplier management solution, Innovation Symbility. The seven year contract will generate revenues of approximately £1.0m per annum. Aviva believe deploying Innovation Symbility will further demonstrate their commitment to removing complexity around the claims process, lead to faster decision making and reduce costs, all of which will ultimately be to the benefit of their customers.

Partnerships

The Group has also established a number of exciting new partnerships in the first half of the year to help broaden its reach and to access new customers. These include: an agreement with Xuber to distribute the Group's Analytics product across multiple markets; an agreement with AutoRestore to deploy the Group's Rapid Assess software into its UK network of 11 fixed sites and 130 mobile units; and a partnership agreement with the solicitors, DAC Beachcroft, to offer an extended motor claims handling service in the UK.

On 29 April 2013, the Group announced a strategic partnership with AXA France ("AXA"). The Group has a long-standing relationship with AXA in France, during which time we have been able to clearly demonstrate the strengths and benefits of our model. This is a strategic, long-term partnership which sees a subsidiary of AXA acquire a 30% shareholding in Nobilas France for £2.9m (€3.5m) in return for significantly increasing the volume of claims passed to the Group for handling. This partnership further recognises the efficiency and effectiveness of the Group's combined Business Process Services and Technology solutions. Although earnings neutral for the remainder of this financial year it is expected to be significantly earnings enhancing for the year ending 30 September 2014 and beyond.

Acquisitions

In October 2012, the Group purchased 100% of the intellectual property rights for Innovation Connect Enterprise for £2.1m (€2.5m). This software suite, which was jointly developed with a third party software house in France, is a key success factor for the supply chain management strategy in France and will be critical for optimising results over the significantly higher volume of claims expected in the future. It is designed to handle all aspects of body shop management, planning, booking and profit optimisation. The software is sold to automotive body shops in France on a monthly subscription model, and to date has been implemented in over 350 body shops generating recurring revenues to the Group in excess of €1m per annum.

Also in October 2012 the Group acquired certain assets from Sachcontrol, a business in Germany, for a maximum total cash consideration of £1.2m (€1.5m). These assets were acquired to expand the current property loss adjusting business in Germany which handles only low value claims into the low volume, high value sector.

On 19 November 2012, the Group acquired the remaining 16% minority interest in InFront Solutions Limited, the specialist subsidence claims handling business in the UK. The consideration of £2.3m was settled by the issue of 10,519,172 shares in the Group. The Group is looking to expand its offering in the UK property sector and by having full ownership is better placed to structure any new proposition.

On 9 April 2013, the Group acquired Gemini Vehicle Solutions for total cash consideration of £4.5m, of which £1.5m is contingent on certain volume targets being met. The business, which predominantly provides third party intervention services to large UK insurers, is a good strategic fit with our existing UK motor offering and has led to positive interest in the UK market place. We also look forward to working with the vendors to explore opportunities for the same model in our Australian business.

Financial Review

On a constant currency basis, overall revenue has increased by 8% (H1 2012: 14%), organic revenue growth at constant currency was 2%. Business process services revenue has increased by 9% (H1 2012: 17%) at constant currency whilst software revenue has increased by 2% (H1 2012: 4% reduction) on the same basis. Total revenue for the six months was £99.8m (H1 2012: £94.8m) of which £88.5m (H1 2012: £83.5m), representing 89% is BPS revenue (H1 2012: 88%). Total software revenue of £11.3m (H1 2012: £11.3m) includes £1.3m of one-time licence fees (H1 2012: £2.8m). The revenue contribution from business combinations made in the period was £0.4m (H1 2012: £3.8m).

Overall gross margin was 40% (H1 2012: 40%) in line with the Group's targeted number. Gross margin from business process services has increased from 37% in the same period last year to 39%. This movement was caused by higher profits being generated from increased levels of property revenues as well as the realisation of the effects of cost control in most regions. In contrast, gross margin from software sales was slightly lower at 50% (H1 2012: 60%) due to a lower contribution of licence sales to the overall software revenue number.

Adjusted EBITDA for the period increased by 38% to £13.4m (H1 2012: £9.8m) and 43% at constant currency. Adjusted profit before tax has increased to £9.6m (H1 2012: £7.3m, £6.9m at constant currency). The reported profit before tax of £6.8m (H1 2012: £4.0m) is after deducting amortisation of acquired intangible assets of £1.7m (H1 2012: £1.5m), a share-based payment charge of £1.0m (H1 2012: £1.0m) and exceptional costs of £nil (H1 2012: £0.8m). Exceptional costs are outlined in Note 3. All transaction costs in relation to the disposal of 30% of Nobilas France to AXA and the acquisition of GVS will be recognised in the second half as exceptional.

Adjusted EPS is 0.60p per share (H1 2012: 0.37p) and basic earnings per share is 0.35p (H1 2012: 0.06p). The comparative EPS numbers have been restated to correct the non-controlling interest (NCI) in Holmwood and Back and Manson Pty Limited (HBM), the travel insurance business in South Africa which was caused by the incorrect allocation of NCI dividends accumulated since 2008. A reallocation of £3.4m has been made between NCI and retained earnings in the equity section of the balance sheet at 30 September 2012. As EPS is stated after removing profits attributable to NCI, both adjusted and basic earnings per share have accordingly been adjusted in each period. Although the restated EPS numbers are marginally lower than previously reported, the year on year growth in EPS is higher due to the proportional profit contribution from HBM decreasing over the period. Adjusted profit, profit before tax, net assets and cash flow are all unaffected in all periods.

The Group's full year adjusted effective tax rate is expected to be approximately 25% (Year ended 30 September 2012: 20%) depending on the location of trading profits in the remainder of this year. Increasing profitability in the UK region, where there are losses available to utilise has begun to negate the high tax paying regions of Germany and South Africa, which have no tax losses available for offset against profits.

The net cash balance at 31 March 2013 was £26.8m (H1 2012: £27.2m). Operating cash inflow was £11.5m (H1 2012: £8.0m). Gross cash of £44.7m (H1 2012: £43.7m) also includes funds of approximately £2.5m collected as a rebate on behalf of a customer (H1 2012: £2.3m). This rebate, collected throughout the year is paid annually in H2, and although this enhances cash at the half year, has no impact on the full year cash conversion. After adjusting for the rebate and adding back both bonus payments that related to the previous financial year's results as well as tax payments in the half year, cash to EBITDA conversion is approximately 93% (H1 2012: 88%).

On 5 April 2013, the Group increased its borrowing facility with Barclays Bank plc to £30.0m. The increase of £10.0m was partly used to fund the Gemini Vehicle Solutions acquisition.

Outlook

We remain very confident in our full suite of product offerings and our business model. Recent contract wins, both in the period and post period end, have shown that we are able to compete and win against the best in the industry. The contract win momentum and robust sales pipeline, underpin our expectations and we are confident that we will have a successful outcome to the full year.

Andy Roberts

Chief Executive Officer

The Innovation Group plc

Unaudited Consolidated Income Statement

For the six months ended 31 March 2013

The Innovation Group plc

Unaudited Consolidated Statement of Comprehensive Income

For the six months ended 31 March 2013

* - See note 1

The Innovation Group plc

Unaudited Consolidated Balance Sheet

As at 31 March 2013

. * - See note 1

The Innovation Group plc

Unaudited Consolidated Statement of Changes in Shareholders' Equity

As at 31 March 2013

* - See note 1

The Innovation Group plc

Unaudited Consolidated Cash Flow Statement

For the six months ended 31 March 2013

1 Sale of shareholding in subsidiary undertakings not resulting in loss of control has been reclassified from investing activities to financing activities. This does not impact the total increase in cash and cash equivalents in the current or previous reporting periods.

The Innovation Group plc

Notes to the Unaudited Results

For the six months ended 31 March 2013

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 the financial statements for the year ended 30 September 2012.

The condensed consolidated interim statements for the six months ended 31 March 2013 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union.

The financial information contained in this interim statement does not amount to statutory financial statements within the meaning of section 435 of the Companies Act 2006. The financial information contained in this report is unaudited but has been reviewed by Ernst & Young LLP. The financial statements for the year ended 30 September 2012, from which information has been extracted, were prepared under IFRS 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 21 May 2013.

Restatement of Comparatives

The comparatives extracted from the audited financial statements for the year to 30 September 2012, the six months ended 31 March 2012 and the opening position as at 1 October 2011 have been restated to correct the allocation of profits between equity holders of the parent and non-controlling interests. The correction relates to the incorrect allocation of NCI dividends in the year ended 30 September 2008 and each subsequent reporting period.

This restatement has not affected the adjusted profit or profit before tax of the Group in either the current or any previous reporting period and the net assets of the Group remain unchanged. Presentation of non-controlling interests, retained earnings and the translation reserve have been adjusted, so that disclosure is on a consistent basis with the current period's figures. In accordance with IAS 1, a third balance sheet representing the opening position as at 1 October 2011 will be presented as part of the financial statements for the year to 30 September 2013.

The adjustments are summarised as follows:

Adjustment to provisional fair values of business combinations

As allowed under IFRS 3 (R), where there has been a revision in the fair values attributed to the net assets acquired during the provisional measurement period, the Group has revised the value attributed to deferred income and goodwill as at the point of acquisition of the Value Partners N.V. business. Please refer to note 7 (d) for further details.

Adoption of new and revised International Financial Reporting Standards

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

Critical accounting estimates and judgements

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

The interim statement has been prepared on the basis of the critical accounting estimates and judgements set out in the Annual Report and the financial statements for the year ended 30 September 2012. These have been reviewed by management and are considered to be unchanged for the reporting period.

The Directors have formed a judgement, at the time of approving the interim statement, that there is a reasonable expectation that the Group has adequate resources to continue in operation existence for the foreseeable future. The Group holds net cash of £26.8m at the period end (31 March 2012: £27.2m, 30 September 2012: £26.0m) and has access to borrowing facilities with its bankers that have been extended since the period end. 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.

2. SEGMENT INFORMATION

The Group has six reportable operating segments which are separately disclosed, together with a central cost centre which includes unallocated corporate costs, expensed development costs and transfer pricing royalties. Operating segments have been aggregated where the aggregation criteria have been met. More specifically, Asia Pacific includes Australia, Japan and India, the Rest of Europe includes France, Spain and Benelux and North America includes the US and Canada.

Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on adjusted profit which is the Group's internal principal measure of profit. Segment revenue excludes transactions between business segments.

The Group's revenues, which are derived from the products and services in the tables below, are attributed to business units based on customer location. The total external revenue attributable to all countries other than the UK was £78.3m (H1 2012: £75.2m).

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 2013

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

and exceptional items.

** Included within Motor BPS and networks is an amount relating to the sale of goods (motor parts) of £13,769,000.

*** Included within Software is an amount relating to the sale of goods (software licences) of £1,306,000.

Six months ended 31 March 2012