Interim Results

23 May 2012

The Innovation Group plc

("Innovation Group" or the "Group")

Interim Results for the six months ended 31 March 2012

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 2012.

Financial Highlights

* Adjusted profit is profit before tax after adding back amortisation on acquired intangible assets of £1.5m (H1 2011: £1.2m), exceptional costs of £0.8m (H1 2011: £nil) and a share-based payments charge of £1.0m (H1 2011: £0.8m) as analysed on the face of the income statement.

Highlights

·; Strong profitable organic outsourcing revenue growth, an increase of 10% year-on-year

·; CSA acquisition integrated well, contributing £3.8m (4%) to revenue

·; Conversion of EBITDA to operating cash inflow ahead of the Group's plan

·; Successful launch of Insurer Analytics, well-received by customers and with a strong pipeline

·; An increasing number of new customers in US, UK and Australia now implementing our combined software and services offering

Andy Roberts, Chief Executive Officer of Innovation Group commented:

"Group results during the first half have been pleasing and are according to plan. While our business is always subject to seasonal and economic factors, we are confident that the breadth of our business model means that structurally we can accommodate most challenges. Despite an adverse currency head wind in the first half, we have delivered strong profitable growth and consider the outlook to be positive and in line with our expectations."

Half Year Review

The performance of the business in the first half of the financial year has been good and the overall outcome meets our expectations.

Our business model continues to prove its value and resilience, being built on a mix of insurance-specific software and services delivered into global markets. This approach allows for varying rates of growth and differing market conditions to be accommodated within an overall profitable growth platform.

Meetings with customers and prospects around the world during this period have convinced us that we are on the right track. We are able to offer our clients operational flexibility and resilience along with the benefits of lower indemnity spend, better and more cost-effective processes and powerful insight with our sophisticated Analytics offering.

I am pleased to say that we were able to welcome many new customers over this period and an ever-growing prospect pipeline, across all our operational geographies.

Our financial results show the strength of the Group's strategy of operating a focused technology and services portfolio.

For the six months to 31 March 2012, Group revenue and adjusted profit before tax1 were £94.8m and £7.3m respectively (H1 2011: £85.8m and £6.3m). This means that overall reported revenue growth was 10%, or 14% at constant currency. Revenue from acquisitions in the period was £3.8m. The Group ended the period with net cash of £27.2m (H1 2011: £29.0m) with underlying operating cash flow conversion to EBITDA for the six months at 88% (H1 2011: 93%).

Customer retention remains high and during the period the Group has secured some significant contract wins and contract renewals, which are outlined below.

In March this year, we announced a new contract for our Insurer Claims v7.0 software and services with a Tier 2 insurance carrier in North America. This demonstrates our growing momentum in the US and the increasing interest in our unique combination of software and services.

In addition, the Group agreed a new software contract extension, for the Group's policy software, secured with one of Australia's largest insurers to enable the insurer to consolidate its policy administration for multiple insurance brands onto one system.

The Group also secured a further 5-year contract with Direct Line Insurance Group plc, the UK's largest personal lines insurer, for Innovation Symbility, our market leading claims scoping and supplier management solution. Providing a SaaS solution on this scale clearly demonstrates our ability to provide leading edge application solutions to the world's largest Insurance carriers.

Our development programme for Insurer v7.0 remains on track and with the launch of Insurer Analytics in February 2012, our pipeline is continually growing and there is significant interest from OEMs and distributors in marketing the product.

During the period, the Group successfully completed the acquisition of CSA (Claims Services Australia PTY Ltd). This acquisition, for a total cash consideration of £13.1m (AU$20.0m), when combined with the Group's existing Australian business, creates Australia's leading specialist outsourced claims management company. The acquisition complements the historic Australian motor insurance and fleet claims handling businesses and provides the Group with the opportunity to expand into the property claims handling sector in Australia. The revenue and adjusted profit before tax generated from the acquisition in the period were £3.8m and £0.5m respectively. The acquisition has been well received by both clients and staff and new opportunities for cross selling our software and services are already very apparent.

This summer will see the first set of graduates from our internal talent development programme, Kairos ("spirit of opportunity"). The Kairos programme, run on an annual basis in conjunction with Cranfield University, takes 30 high performance and high potential employees from all lines of business and geographic areas across the Group. We believe this programme provides us with a strong group of young managers who will underpin our future growth.

1 Adjusted profit is profit before tax after adding back amortisation on acquired intangible assets of £1.5m (H1 2011: £1.2m), exceptional costs of £0.8m (H1 2011: £nil) and a share-based payments charge of £1.0m (H1 2011: £0.8m) as analysed on the face of the income statement.

Financial Review

On a constant currency basis, overall revenue has increased by 14% (H1 2011: 10%). Organic outsourcing revenue growth at constant currency is 10% (H1 2011: nil). Business process services revenue has increased by 17% at constant currency whilst software revenue has reduced by 4% on the same basis. Total revenue for the six months was £94.8m (H1 2011: £85.8m) of which £83.5m, representing 88% is outsourcing revenue (H1 2011: 86%). Total software revenue of £11.3m (H1 2011: £11.9m) includes £2.8m of one-time licence fees (H1 2011: £1.6m). Revenue from acquisitions in the period was £3.8m (H1 2011: £0.7m).

Overall gross margin was 40% (H1 2011: 41%). Gross margin from business process services has reduced from 38% in the same period last year to 37%. This movement was caused by lower average repair costs in Europe due to an extremely mild winter, which is expected to normalise in the second half of the year and by an increase in low margin parts revenue during the first half. In contrast, gross margin from software sales was slightly higher at 60% (H1 2011: 59%).

Adjusted profit before tax has increased to £7.3m (H1 2011: £6.3m, £5.8m at constant currency). Adjusted profit includes two significant items in the South African business. The Group has benefitted from a £1.3m gain from its associate, Guardrisk, resulting from a revision of estimates for future reserves required in the administration of warranty plans. However, this has been almost off-set by a charge of £1.0m relating to one-off move costs and the requirement under IAS 17 to smooth future lease rentals following a move to new premises in October 2011. The reported profit before tax of £4.0m (H1 2011: £4.3m) is after deducting amortisation of acquired intangible assets of £1.5m (H1 2011: £1.2m), a share-based payment charge of £1.0m (H1 2011: £0.8m) and exceptional costs of £0.8m (H1 2011: £nil) relating to the acquisition of CSA and disposal of 25% of our South African subsidiary. These exceptional costs are outlined in Note 3. Adjusted EPS is 0.43p per share (H1 2011: 0.41p) and basic earnings per share is 0.12p (H1 2011: 0.22p).

The Group's full year effective tax rate is expected to be approximately 30% (2011: 33%) depending on the location of trading profits in the remainder of this year and as expected is a considerable improvement on the prior year. However, the tax rate remains high due to the level of profits from Germany and South Africa, both of which are high tax paying regions with no tax losses available for offset against profits.

On 2 December 2011, the Group refinanced its borrowing facility with Barclays Bank plc. The new facility is a £20.0m, multi-currency revolving credit facility expiring in December 2015. This has been used to fund the CSA acquisition and will be used for general corporate purposes.

The net cash balance at 31 March 2012 was £27.2m (H1 2011: £29.0m). Operating cash inflow was £8.0m (H1 2011: £6.3m). Gross cash of £43.7m (H1 2011: £41.3m) also includes funds of approximately £2.3m collected as a rebate on behalf of a customer (H1 2011: £2.0m). 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 88% (H1 2011: 93%).

Outlook

We are making good progress against our key objectives set out in our final results last year.

Although economic and seasonal factors have been more prominent in the first half of the year, the breadth of our product offering and the balanced geographical spread of our business has enabled us to overcome these challenges and remain on track.

Overall, given the flexibility and resilience of our business as well as our current sales momentum, the Board remains confident in achieving a successful outcome for the full year, in line with our expectations.

Andy Roberts

Chief Executive Officer

The Innovation Group plc

Unaudited Consolidated Income Statement

For the six months ended 31 March 2012

The Innovation Group plc

Unaudited Consolidated Statement of Comprehensive Income

For the six months ended 31 March 2012

The Innovation Group plc

Unaudited Consolidated Balance Sheet

As at 31 March 2012

The Innovation Group plc

Unaudited Consolidated Statement of Changes in Shareholders' Equity

As at 31 March 2012

The Innovation Group plc

Unaudited Consolidated Cash Flow Statement

For the six months ended 31 March 2012

The Innovation Group plc

Notes to the Unaudited Results

For the six months ended 31 March 2012

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 2011.

The condensed consolidated interim statements for the six months ended 31 March 2012 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 2011, 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 23 May 2012.

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.

During the first half of 2012, a change in accounting estimate enabled the Group to recognise additional share of profit in a associate of £1,259,000. This change in accounting estimate resulted from increased data in regards to motor warranty policies written within the Guardrisk cell captive that is disclosed as an investment accounted for using the equity method. This has revised the claims curve over which unearned premium is released as income, and now more accurately recognises revenue in line with the costs to which this premium relates over the term of the policy.

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 2011. These have been reviewed by management and are considered to be unchanged for the reporting period.

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 £75.2m (H1 2011: £67.8m).

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 2012

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

and exceptional items.

** Included within Motor BPO and networks is an amount relating to the sale of goods (motor parts) of £13,798,000.

*** Included within Software is an amount relating to the sale of goods (software licences) of £2,761,000.

Six months ended 31 March 2011