Interim Results

RNS Number : 5385M

Innovation Group PLC

26 May 2010

 

26 May 2010

 

 

The Innovation Group plc

 

Interim Results for the six months ended 31 March 2010

 

The Innovation Group plc (LSE: TIG), a global provider of enterprise software and business process outsourcing solutions to the insurance, financial services, motor and fleet industries world-wide, announces interim results for the six months ended 31 March 2010.

 

Financial Highlights

 

	H1 2010	H1 2009
Revenues	£76.9m	£75.5m
Adjusted profit before tax *	£2.5m	£4.9m
(Loss) / profit before tax	(£1.0m)	£1.4m
Adjusted earnings per share	0.17p	0.46p
Loss per share	(0.29p)	(0.01p)

 

* Adjusted profit is (loss) / profit before tax after adding back amortisation on acquired intangible assets of £1.8m (H1 2009: £2.0m), exceptional restructuring costs of £3.1m (H1 2009: £nil) and share-based payments credit of £1.3m (H1 2009: £1.6m charge) as analysed on the face of the income statement.

 

Performance Indicators

 

	H1 2010	H1 2009
Organic revenue growth	2%	14%
Organic outsourcing revenue growth at constant currency	2%	16%
Outsourcing revenues	88%	83%
Operating cash outflow	(£4.6m)	(£3.4m)
Net cash at period end	£22.3m	£1.6m

 

Highlights

 

·; Underperforming regions re-structured with better management and more efficient operational structures

·; Underlying operating cash conversion 85% of EBITDA

·; Clear visibility of H2 profit bridge

·; £2.8m annualised net cost savings secured from June 2010

·; Signed Group's largest ever contract, delivering £31.0m in revenue over 5 years

·; Several significant BPO-led proofs of concept underway, with two converting to full contract in the period

·; Strategic focus on SaaS delivery continues

 

 

Andy Roberts, Chief Executive Officer of The Innovation Group commented:

 

"Following my appointment as CEO in February, it was clear that 2010 needed to be one of significant change and transition for the business in order to establish a firm foundation for 2011 and beyond. The Board quickly established several key goals for the financial year. First, to re-focus our underperforming regions, second to roll-out the first phase of our Enterprise platform to improve the productivity of our BPO operation and third, to prove to customers the flexibility and capability of our platform. Lastly, we have undertaken a fundamental regime change of the senior leadership team which is now focused on driving greater efficiencies and future growth.

 

Performance management is now becoming the norm and I am very pleased with the progress we have made thus far, particularly having signed the Group's largest ever deal in the first half of this year. On the basis of this traction, and with a more efficient operational base now underpinning our business, barring any further deterioration in economic conditions we remain on track to deliver results for the full year in line with our expectations."

 

For further information please contact:

 

The Innovation Group Andy Roberts / Jane Hall	Tel: +44 (0) 1489 898300
Financial Dynamics Ed Bridges / Matt Dixon / Erwan Gouraud	Tel: +44 (0) 20 7831 3113

 

 

Chief Executive's Review

 

Innovation Group is a global provider of enterprise software and business process outsourcing solutions to the insurance, financial services, motor and fleet industries world-wide.

 

The main aims throughout the first half of this financial year have been to restructure the underperforming divisions of our business, improve client relationships in our key geographies and continue to re-shape our technology investment programme. This we have done by making significant and important changes to our operational teams in the UK, US and our Technology division; by entering into numerous proof of concept agreements with leading insurance and motor organisations and by rolling out our Enterprise platform as planned in both France and Spain. There is more work to be done in the second half, but I am pleased with our operational progress so far.

 

Half Year Review

 

Economic conditions remain challenging and whilst we are seeing a slow improvement in motor industry statistics, new car registrations and claims volumes remain below those of 2008 and 2009. In the six months to 31 March 2010 Group revenue and adjusted profit before tax are £76.9m and £2.5m respectively (H1 2009: £75.5m and £4.9m). Reported revenue for the six months has increased by 2% (decrease of 3% at constant currency). There were no acquisitions generating revenue in the current or prior year and hence all figures reported are organic. Organic outsourcing revenues grew by 2% at constant currency, whilst software revenues declined by 26% in line with our intention to focus more heavily this year on driving profitable outsourcing business. Adjusted profit before tax has decreased to £2.5m (H1 2009: £4.9m), again due primarily to the reduction in high margin software licence revenue as we continue to evolve with our customers towards a Software-as-a-Service ("SaaS") model.

 

We have made significant changes to key management in the UK, US and Technology divisions and management reporting lines have been restructured to drive greater efficiency. As highlighted in the Interim Management Statement ("IMS") of 18th February, the Group has taken an exceptional restructuring charge of approximately £3.1m in the first half of this financial year, with a further £0.5m expected in the second half. After making some required new hires the Board anticipates net annualised cost savings from these actions will be approximately £2.8m.

 

Gross cash at 31 March 2010 was £41.1m with a net cash balance of £22.3m. In December 2009 the Group raised approximately £20.0m for specific future margin enhancing projects as well as for some fundamental restructuring, particularly in the under-performing regions of the UK and North America, as described above.

 

In the first instance, these funds have been applied to the business as follows: -

 

·; Working capital for the German rapid payment initiative. This is progressing well with approximately 70% of garages/body repair centres already having signed up to the improved terms;

 

·; Funding proofs of concept in our key geographies; and

 

·; Repayment in full of our £5.7m short term credit facility.

 

Funds will also be used to re-pay approximately £4.5m (ZAR 50.0m) of the high interest bearing Black Economic Empowerment loan in South Africa at the end of May 2010.

 

The Management team is confident that, collectively, these initiatives will generate substantial future margin enhancement in 2011 and beyond.

 

Since the start of the year, the Group has embarked on numerous proofs of concept in the UK, North America and South Africa. As advised at the time of our IMS, these proofs of concept, which create additional costs in the short term, are an important part of our goal to increase both the number of customers we work with and the volume of claims handled by our platform. As the Group moves towards securing larger outsourcing contracts, customers are increasingly requiring these three to six month pilots to provide them with the necessary outcome data upon which to base their decision to proceed with a full-term contract. In North America and South Africa, two of these pilots have already resulted in full-term contracts being signed which have been recently announced and the remainder are still ongoing. The contract that we have been awarded in South Africa with revenues totalling approximately £31.0m over a five year period, is the largest contract win in the Group's history. The Group continues to progress with several more proofs of concept globally and remains confident that some of these will convert to full-term contracts before the year end generating profit for the Group in 2011 and beyond. In addition to new contract wins, the Group has also been successful in the first half in securing significant sizeable contract renewals with long standing customers in all regions.

 

In December 2009 the Group stated that the level of software revenue, in particular one-off licence fees, would be significantly reduced in 2010 as the business model gradually moves more towards SaaS. This move will ultimately increase the quality of our earnings but it is not clear in discussions with current potential customers how quickly this migration to the SaaS model will be adopted.

 

Our enhanced technology platform, Enterprise, has been implemented in both France and Spain. Having seen the positive effects of this roll-out in these regions, the Group has made a strategic decision to change the order of the remaining regional roll-out. It is now our intention to roll-out next in Germany - a region that requires the greatest functionality and a move that will give the largest cost benefit to the Group in 2011. The UK, which will now include significant enhancement for a new customer revenue stream will follow Germany. The full cost benefit from implementation in these regions will be seen in 2011.

 

Financial Review

 

Total revenue for the six months was £76.9m of which £67.6m, representing 88% is outsourcing revenue (H1 2009: 83%). On a constant currency basis, overall revenue has declined by 3%. The decline in constant currency terms is due to the reduction in software related revenues which fell 26% at constant currency. Outsourcing revenues at constant currency increased by 2%. There is no acquisition related revenue in either period.

 

Adjusted profit before tax has decreased to £2.5m (H1 2009: £4.9m). This reduction is due primarily to the reduction in high margin software revenue and H1 2009 also included a significant foreign exchange gain of £1.2m (H1 2010: £0.3m). Adjusted profit for H1 2010 includes a one-off gain of £0.8m relating to a change in accounting estimates in relation to administration fees recognised in the Group's property subsidence division. Management believe this change is necessary to better reflect revenue in line with service delivered over the lifecycle of a claim. Substantial growth is anticipated in this area over the next twelve months and hence the change now will better reflect the timing of future profits in line with accounting standards. This is detailed under critical accounting estimates and judgements in note 1. Included within finance income is £0.8m relating to the write back of a loan which was waived in the period.

 

The reported loss before tax of £1.0m (H1 2009: profit £1.4m) includes amortisation of acquired intangible assets of £1.8m (H1 2009: £2.0m), a share-based payment credit of £1.3m (H1 2009: charge £1.6m) and exceptional costs of £3.1m (H1 2009: £nil). Adjusted EPS is 0.17p per share (H1 2009: 0.46p) and basic loss per share is 0.29p (H1 2009: 0.01p). The Group full year effective tax rate is expected to be approximately 35% depending on the location of trading profits in the remainder of this year. The tax rate is higher than previous years due to the increase in profits expected from Germany and South Africa, both of which are tax paying regions with no tax losses available for offset against profits.

 

The share-based payment credit arose due to the number of options forfeited following the departure of the former CEO and several members of the senior Management team in the subsequent restructuring.

 

Exceptional restructuring costs are £3.1m (H1 2009: £nil). These costs relate primarily to redundancy costs in the Group's underperforming BPO regions of the UK, North America and Technology and are attributable to those regions as follows: UK (£1.2m), North America (£1.1m) and Technology (£0.5m). In addition the Group closed its loss making operation in the Netherlands at a cost of £0.3m. The Group expects to take a further exceptional charge of approximately £0.5m in the second half as final restructuring is completed. The total annualised gross cost saving is approximately £4.0m with the Group benefitting from a net saving on an annualised basis of £2.8m from the end of Q3.

 

In light of the rapid progress made in restructuring the business, the Board is now in a position to consider the Group's reduced property requirements in both the US and the UK. Though plans have yet to be formalised, we have identified annualised potential cost savings of up to £1.0m from 2011 relating to two leases. Should we pursue this strategy, the Company will incur a one-off exceptional charge in the second half of the current financial year of approximately £4.5m with the cash impact being spread over the remaining terms of the leases.

 

The gross cash balance at 31 March 2010 was £41.1m (H1 2009: £25.6m) with net cash of £22.3m (H1 2009: £1.6m). Operating cash outflow of £4.6m includes payment of prior and current years exceptional costs of £3.4m as well as a significant working capital injection into Germany of approximately £4.5m for the new payment process, as detailed at the time of the fund raising. After accounting for these items, cash to EBITDA conversion is approximately 85%.

 

In December 2009, the Group raised approximately £20.0m from shareholders. This cash has already been invested as planned to facilitate the new payment process in Germany, fund proofs of concept for large outsourcing contracts across our key geographies and to restructure the Group's underperforming divisions. At the end of May 2010, the Group will repay capital of ZAR 50m (£4.5m) from the Black Economic Empowerment loan. In addition, the Group has currently repaid in full, the £5.7m rolling credit facility although this facility remains available until July 2011.

 

Board Change

 

On 11 February 2010 I was appointed as Chief Executive Officer and David Thorpe assumed the role of Non-Executive Chairman.

 

Outlook

 

The Group's performance is historically weighted towards the second half of the year and this trend will be greater in the current financial year. The Board is pleased with the number of new proofs of concept already underway this year and with the conversion rate thus far. The restructuring program has also given the Group a lower cost base for the second half and beyond.

 

As a result, the Board remains confident that, unless there is further deterioration in economic conditions in our markets, full year results (before exceptional restructuring costs) will be 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 2010

 

		Unaudited			Unaudited		Audited
		6 months to			6 months to		Year to
		31 March			31 March		30 September
		2010			2009		2009
	Note	£'000			£'000		£'000
Revenue	2	76,949			75,450		155,865
Cost of sales		(47,981)			(47,587)		(96,348)
Gross profit		28,968			27,863		59,517
Operating expenses		(30,464)			(26,201)		(79,311)
Operating (loss)/profit		(1,496)			1,662		(19,794)
Finance income	4	1,279			683		1,711
Finance costs		(769)			(1,137)		(1,973)
Share of profit of associate		(40)			151		234
(Loss)/profit before tax		(1,026)			1,359		(19,822)
UK taxation		(208)			(185)		(235)
Overseas taxation		(360)			(648)		(1,990)
Taxation	5	(568)			(833)		(2,225)
(Loss)/profit for the period after tax		(1,594)			526		(22,047)
Attributable to:
Equity holders of the parent		(2,400)			(51)		(22,308)
Minority interests		806			577		261
		(1,594)			526		(22,047)
Adjusted profit:
(Loss)/profit before tax		(1,026)			1,359		(19,822)
Amortisation of acquired intangibles		1,773			1,988		4,074
Exceptional restructuring costs	3 a	3,075			-		2,622
Impairment of Investments		-			-		21,470
Share-based payment (credit)/charge	3 b	(1,334)			1,579		2,829
Utilisation of pre-acquisition brought forward tax losses		-			-		98
Adjusted profit for the period	2	2,488			4,926		11,271
(Loss)/earnings per share (pence)
Basic	6	(0.29)			(0.01)		(3.19)
Diluted	6	(0.29)			(0.01)		(3.19)
Adjusted	6	0.17			0.46		1.05
Adjusted diluted	6	0.17			0.45		1.03
All amounts relate to continuing operations.

 

 

 

The Innovation Group plc

Unaudited Consolidated Statement of Comprehensive Income

For the six months ended 31 March 2010

 

 

		Unaudited		Unaudited		Audited
		6 months to		6 months to		Year to
		31 March		31 March		30 September
		2010		2009		2009
		£'000		£'000		£'000
(Loss)/profit for the period after tax		(1,594)		526		(22,047)
Other comprehensive income
Currency translation differences		664		12,525		6,615
Hedging derivatives		(389)		(534)		(774)
Other comprehensive income for the period (net of tax)		275		11,991		5,841
Total comprehensive income for the period		(1,319)		12,517		(16,206)
Total comprehensive income attributable to:
Equity holders of the parent		(2,366)		11,532		(16,894)
Minority interests		1,047		985		688
		(1,319)		12,517		(16,206)

 

 

 

The Innovation Group plc

Unaudited Consolidated Balance Sheet

As at 31 March 2010

 

		Unaudited		Unaudited		Audited
		31 March		31 March		30 September
		2010		2009		2009
	Note	£'000		£'000		£'000
ASSETS				restated
Non current assets
Property, plant and equipment		14,329		14,712		14,396
Intangible assets		92,153		113,011		91,079
Investments accounted for using the equity method		2,167		1,951		2,081
Financial assets		491		517		491
Deferred tax assets		1,971		2,237		1,943
		111,111		132,428		109,990
Current assets
Trade and other receivables	8	55,733		47,408		52,688
Prepayments		2,943		3,954		3,198
Income tax receivable		704		-		-
Other financial assets		166		177		174
Cash and cash equivalents		41,058		25,578		36,519
		100,604		77,117		92,579
TOTAL ASSETS		211,715		209,545		202,569
EQUITY AND LIABILITIES
Attributable to equity holders of the parent
Equity share capital		18,709		13,000		14,284
Share premium		42,337		37,717		41,187
Merger reserve		17,696		2,121		2,121
Foreign currency translation		7,100		12,564		6,677
Put option reserve		-		(2,225)		-
Unrealised gains and losses		(1,163)		-		(774)
Retained earnings		15,399		38,503		19,133
		100,078		101,680		82,628
Minority interests		3,210		3,122		2,163
TOTAL EQUITY		103,288		104,802		84,791
Non current liabilities
Trade and other payables	9	105		368		231
Deferred income		1,765		1,423		1,661
Interest bearing loans and borrowings	10	16,031		15,940		16,844
Other financial liabilities		1,163		534		774
Deferred tax liabilities		3,701		4,148		3,820
Provisions		415		183		397
		23,180		22,596		23,727
Current liabilities
Trade and other payables	9	69,207		60,725		72,018
Deferred income		10,570		9,162		10,773
Interest bearing loans and borrowings	10	2,818		8,083		7,969
Income tax payable		-		-		407
Provisions		2,652		4,177		2,884
		85,247		82,147		94,051
TOTAL LIABILITIES		108,427		104,743		117,778
TOTAL EQUITY AND LIABILITIES		211,715		209,545		202,569

 

 

 

The Innovation Group plc

Unaudited Consolidated Statement of Changes in Shareholders Equity

As at 31 March 2010

 

	Issued capital	Share premium	Merger reserve	Retained earnings	Unrealised gains and losses	Trans-lation reserves	Put option reserve	Total	Minority interest	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 October 2008	13,000	37,717	2,121	37,834	-	447	(2,225)	88,894	2,422	91,316
(Loss) / profit for the period	-	-	-	(51)	-	-	-	(51)	577	526
Currency translation differences	-	-	-	-	-	12,117	-	12,117	408	12,525
Hedging derivatives	-	-	-	(534)	-	-	-	(534)	-	(534)
Total comprehensive income for the period	-	-	-	(585)	-	12,117	-	11,532	985	12,517
Dividends (note 7)	-	-	-	(325)	-	-	-	(325)	(285)	(610)
Share-based payment charge	-	-	-	1,579	-	-	-	1,579	-	1,579
At 31 March 2009	13,000	37,717	2,121	38,503	-	12,564	(2,225)	101,680	3,122	104,802
Loss for the period	-	-	-	(22,257)	-	-	-	(22,257)	(316)	(22,573)
Currency translation differences	-	-	-	-	-	(5,929)	-	(5,929)	19	(5,910)
Hedging derivatives	-	-	-	534	(774)	-	-	(240)	-	(240)
Total comprehensive income for the period	-	-	-	(21,723)	(774)	(5,929)	-	(28,426)	(297)	(28,723)
Dividends (note 7)	-	-	-	-	-	-	-	-	(442)	(442)
Issue of share capital	1,284	3,470	-	-	-	-	-	4,754	-	4,754
Share-based payment charge	-	-	-	1,250	-	-	-	1,250	-	1,250
De-recognition of minority interest	-	-	-	178	-	42	-	220	(220)	-
Cancellation of put option	-	-	-	925	-	-	2,225	3,150	-	3,150
At 30 September 2009	14,284	41,187	2,121	19,133	(774)	6,677	-	82,628	2,163	84,791
(Loss) / profit for the period	-	-	-	(2,400)	-	-	-	(2,400)	806	(1,594)
Currency translation differences	-	-	-	-	-	423	-	423	241	664
Hedging derivatives	-	-	-	-	(389)	-	-	(389)	-	(389)
Total comprehensive income for the period	-	-	-	(2,400)	(389)	423	-	(2,366)	1,047	(1,319)
Dividends (note 7)	-	-	-	-	-	-	-	-	-	-
Issue of share capital (note 11):
Placing & open offer	4,200	-	15,575	-	-	-	-	19,775	-	19,775
Consideration shares	225	1,150	-	-	-	-	-	1,375	-	1,375
Share-based payment credit	-	-	-	(1,334)	-	-	-	(1,334)	-	(1,334)
At 31 March 2010	18,709	42,337	17,696	15,399	(1,163)	7,100	-	100,078	3,210	103,288

 

 

The Innovation Group plc

Unaudited Consolidated Cash Flow Statement

For the six months ended 31 March 2010

 

		Unaudited		Unaudited		Audited
		6 months to		6 months to		Year to
		31 March		31 March		30 September
		2010		2009		2009
		£'000		£'000		£'000
Cash flows from operating activities
Operating (loss)/profit		(1,496)		1,662		(19,794)
Adjustments to reconcile group operating (loss)/profit to net cash inflows from operating activities
Depreciation of property, plant and equipment		1,786		1,725		3,623
Loss on disposal of property, plant and equipment		(13)		-		(50)
Amortisation of intangible assets		2,752		2,106		5,000
Impairment of goodwill and financial assets		-		-		21,470
Share-based payment (credit)/charge		(1,334)		1,579		2,829
Share of profit from associate		-		151		234
Utilisation of pre-acquisition brought forward tax losses		-		-		98
(Increase) in receivables		(3,010)		(5,808)		(2,766)
(Decrease)/increase in payables		(1,532)		(1,435)		2,411
Income taxes paid		(1,717)		(3,447)		(4,744)
Net cash flows from operating activities		(4,564)		(3,467)		8,311
Cash flows from investing activities
Sale of property, plant and equipment		51		-		68
Purchases of tangible and intangible fixed assets		(3,447)		(5,622)		(10,148)
Purchase of subsidiary undertakings		(515)		-		-
Payment of contingent consideration		-		-		(200)
Cash acquired with subsidiaries		(1)		-		-
Purchase of fixed asset investments		-		-		(66)
Interest received		438		683		1,120
Net cash flows used in investing activities		(3,474)		(4,939)		(9,226)
Cash flows from financing activities
Interest paid		(782)		(1,137)		(1,973)
Dividend paid to minorities		-		(285)		(804)
Dividend paid to shareholders		-		(325)		(325)
Repayment of borrowings		(6,607)		(1,086)		(1,804)
New bank loans		-		-		-
Repayment of capital element of finance leases		(445)		(373)		(1,084)
Proceeds from issue of shares		19,775		-		4,754
Net cash flows from financing activities		11,941		(3,206)		(1,236)
Net increase/(decrease) in cash and cash equivalents		3,903		(11,612)		(2,151)
Cash and cash equivalents at beginning of period		36,519		34,749		34,749
Effect of exchange rates on cash and cash equivalents		636		2,441		3,921
Cash and cash equivalents at the period end		41,058		25,578		36,519

 

 

 

The Innovation Group plc

Notes to the Unaudited Results

For the six months ended 31 March 2010

 

1. BASIS OF PREPARATION

 

The 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 31 September 2009 with the exception of the new accounting standard implemented in the period as described below, and a change in accounting estimate for recognising deferred administration fees in the UK subsidence business.

 

During the first half of 2010 a change in accounting estimate enabled the Group to recognise additional revenue of £822,000. The change in accounting estimate resulted from increased data and maturity of the claims book within the UK subsidence business, leading to a change in the recognition of revenue in accordance with identifiable milestones in the claims progression process.

 

This condensed consolidated interim financial information for the six months ended 31 March 2010 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 2009, 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. The interim financial statements were approved by the Board of Directors on 25 May 2010.

 

Adoption of new and revised International Financial Reporting Standards

 

The following revised standard was effective during the period to 31 March 2010 and has been adopted in this interim financial report: 

 

IAS 1 Presentation of Financial Statements (Revised) - The amendment to gives entities the option to choose whether to present one performance statement (the statement of comprehensive income) or two performance statements (the income statement and statement of comprehensive income). The Group has chosen to present two performance statements. There are other changes bought about by this standard however these have not impacted the group in the half year.

 

A number of other new, revised or amended standards and interpretations are effective for the current financial year, but none of them has 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 31 September 2009 with the exception of a change in accounting estimate for recognising deferred administration fees in the UK subsidence business. During the first half of 2010 a change in accounting estimate enabled the Group to recognise additional revenue of £822,000. The change in accounting estimate resulted from increased data and maturity of the claims book within the UK subsidence business, leading to a change in the recognition of revenue in accordance with identifiable milestones in the claims progression process.

 

 

Restatement of comparatives

 

The comparatives for the half year ended 31 March 2009 have been restated to reflect a foreign exchange translation overstatement which affected both intangible assets and translation reserves on the balance sheet. The net impact of this adjustment has been a decrease to net assets as at 31 March 2009 of £19,269,000. There is no impact to the profit of the Group and the restatement was limited to the half year ended 31 March 2009 comparatives only as the adjustment was reflected in the 30 September 2009 financial statements. The net assets as at 1 October 2009 and 31 March 2010 are unaffected by this restatement. As a result the presentation of certain prior year figures have been adjusted, so disclosure is on a consistent basis with the current year figures.

 

 

2. SEGMENT INFORMATION

 

The Group is organised into regional business units and a central cost centre. 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 and Japan, 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. Segment adjusted profit as reflected below, includes royalty charges made by the UK segment to: Asia Pacific £0.6m (six months ended 31 March 2009 £0.7m, year to 30 September 2009 £1.2m) and North America £0.4m (six months ended 31 March 2009 £0.6m, year to 30 September 2009 £1.8m).

 

The Group's revenues are derived from the following products and services:

 

- Motor Business Process Outsourcing (BPO) and networks;

- Property Business Process Outsourcing (BPO) and networks;

- Other Business Process Outsourcing (BPO) and networks; and

- Software.

 

During 2009 the Group implemented a transfer pricing process for reallocating Group management costs. This process recharges specific group management costs from the central cost centre to the regional business units. As at 31 March 2010 the Group management cost recharges were based on management's best estimate as follows: UK £0.3m (six months ended 31 March 2009 £0.4m, year to 30 September 2009 £0.5m), Germany £0.06m (six months ended 31 March 2009 £0.2m, year to 30 September 2009 £0.1m), Rest of Europe £0.1m (six months ended 31 March 2009 £0.1m, year to 30 September 2009 £0.1m), South Africa £0.2m (six months ended 31 March 2009 £0.6m, year to 30 September 2009 £0.3m), North America £0.2m (six months ended 31 March 2009 £0.5m, year to 30 September 2009 £0.7m) and Asia Pacific £0.07m (six months ended 31 March 2009 £0.1m, year to 30 September 2009 £0.1m).

 

The Group's revenues are attributed to business units based on customer location. The total external revenue attributable to all countries other than the UK was £60.9m (H1 2009: £57.0m).

 

A reconciliation of the total adjusted profit for reportable segments to the Group's profit before tax is shown in the Income Statement.

 

Six months ended 31 March 2010

 

	UK	Germany	Rest of Europe	South Africa	North America	Asia Pacific	Central Costs**	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Motor BPO & Networks ***	6,764	19,577	4,664	14,623	4,970	4,045	-	54,643
Property BPO & Networks	5,135	2,831	-	-	596	-	-	8,562
Other BPO & Networks	266	-	-	2,222	1,975	-	-	4,463
Software ****	3,917	-	-	949	3,311	1,104	-	9,281
Total external revenue	16,082	22,408	4,664	17,794	10,852	5,149	-	76,949
EBITDA *	541	2,488	200	3,470	(424)	582	(2,074)	4,783
Depreciation	(608)	(73)	(63)	(376)	(342)	(83)	(241)	(1,786)
Net finance income / (costs)	(27)	4	2	(216)	(6)	8	745	510
Share of loss of associate	-	-	-	(40)	-	-	-	(40)
Amortisation non-acquired intangibles	(9)	(100)	-	-	-	(10)	(860)	(979)
Adjusted profit/(loss)	(103)	2,319	139	2,838	(772)	497	(2,430)	2,488
EBITDA %	3%	11%	4%	20%	(4%)	11%	-	6%

 

 

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

and exceptional items.

** Central costs include unallocated corporate costs, expensed development costs and transfer

pricing royalties.

*** Included within Motor BPO and networks is an amount relating to the sale of goods (motor parts) of £10,486,000.

**** Included within Software is an amount relating to the sale of goods (software licences) of £620,000.

 

 

Six months ended 31 March 2009

 

	UK	Germany	Rest of Europe	South Africa	North America	Asia Pacific	Central Costs**	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Motor BPO & Networks ***	6,821	16,559	3,632	12,287	5,465	2,861	-	47,625
Property BPO & Networks	5,764	3,448	-	-	557	-	-	9,769
Other BPO & Networks	1,001	-	-	1,873	2,652	-	-	5,526
Software ****	4,850	-	-	727	5,258	1,695	-	12,530
Total external revenue	18,436	20,007	3,632	14,887	13,932	4,556	-	75,450
EBITDA *	2,241	2,949	154	1,946	(695)	691	(212)	7,074
Depreciation	(589)	(56)	(70)	(292)	(411)	(59)	(248)	(1,725)
Net finance income / (costs)	40	19	14	(111)	(15)	14	(415)	(454)
Share of profit of associate	-	-	-	151	-	-	-	151
Amortisation non-acquired intangibles	(24)	(84)	-	-	-	(12)	-	(120)
Adjusted profit/(loss)	1,668	2,828	98	1,694	(1,121)	634	(875)	4,926
EBITDA %	12%	15%	4%	13%	(5%)	15%	-	9%

 

 

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

and exceptional items.

** Central costs include unallocated corporate costs, expensed development costs and transfer

pricing royalties.

*** Included within Motor BPO and networks is an amount relating to the sale of goods (motor parts) of £8,556,000.

**** Included within Software is an amount relating to the sale of goods (software licences) of £1,952,000.

 

 

Year ended 30 September 2009

 

	UK	Germany	Rest of Europe	South Africa	North America	Asia Pacific	Central Costs**	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Motor BPO & Networks ***	14,007	33,885	7,729	24,535	10,834	6,418	-	97,408
Property BPO & Networks	9,845	6,329	-	-	1,125	-	-	17,299
Other BPO & Networks	1,274	-	-	4,238	4,774	-	-	10,286
Software ****	14,350	-	-	1,807	12,161	2,554	-	30,872
Total external revenue	39,476	40,214	7,729	30,580	28,894	8,972	-	155,865
EBITDA*	6,323	6,106	190	4,995	(1,206)	630	(1,288)	15,750
Depreciation	(449)	(145)	(135)	(671)	(835)	(137)	(1,251)	(3,623)
Net finance income / (costs)	8	42	10	(222)	(46)	15	(69)	(262)
Share of profit of associate	-	-	-	234	-	-	-	234
Amortisation non-acquired intangibles	(714)	(189)	-	-	-	-	(23)	(926)
Utilisation of pre-acquisition brought forward tax losses	-	-	98	-	-	-	-	98
Adjusted profit/(loss)	5,168	5,814	163	4,336	(2,087)	485	(2,608)	11,271
EBITDA %	16%	15%	2%	16%	(4)%	7%	-	10%

 

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

and exceptional items.

** Central costs include unallocated corporate costs, expensed development costs and transfer

pricing royalties.

*** Included within Motor BPO and networks is an amount relating to the sale of goods (motor parts) of £17,403,000.

**** Included within Software is an amount relating to the sale of goods (software licences) of £10,012,000

 

 

3. EXCEPTIONAL ITEMS

 

a. Restructuring costs

 

	Unaudited	Unaudited	Audited
	6 months to	6 months to	12 months to
	31 March 2010	31 March 2009	30 September 2009
	£'000	£'000	£'000
Restructuring costs
Restructuring costs:
- Global Technology	290	-	657
- UK	1,518	-	705
- Germany	-	-	196
- Rest of Europe	-	-	90
- South Africa	-	-	168
- North America	1,015	-	584
- Asia Pacific	-	-	127
Netherlands closure costs	252	-	44
Poland closure costs	-	-	51
	3,075	-	2,622

 

b. Share-based payment credit

 

As part of the Group's global restructuring programme a number of individuals left the Group causing their options to lapse in accordance with the scheme rules, and the cumulative share-based payment charges reversed.

For the six months ended 31 March 2010 the IFRS 2 share-based payment credit is £1,334,000 (six months ended 31 March 2009: £1,579,000 charge, year to 30 September 2009 £2,829,000 charge).

 

 

4. FINANCE INCOME

 

Included within finance income is £850,000 relating to the write back of a loan which was waived in the period.

 

 

5. TAXATION

 

The effective tax rate for the six months ended 31 March 2010 has been calculated to be 35%. The anticipated effective tax rate for the group for the year ending 30 September 2010 is expected to be approximately 35% (six months ended 31 March 2009: 23%, year to 30 September 2009: 25%) but will be dependent on the location of trading profits in the remainder of this year.

 

	Unaudited		Unaudited		Audited
	6 months to		6 months to		Year to
	31 March		31 March		30 September
	2010		2009		2009
	£'000		£'000		£'000
Current taxation
UK taxation	27		55		-
Overseas taxation	613		648		2,078
Adjustments in respect of prior periods	-		-		19
Total current tax	640		703		2,097
Deferred taxation Origination and reversal of timing differences	(72)		130		128
Total tax charge	568		833		2,225

 

 

6. EARNINGS PER SHARE

 

	Unaudited		Unaudited		Audited
	6 months to		6 months to		Year to
	31 March		31 March		30 September
	2010		2009		2009
	pence		pence		pence
Basic loss per share	(0.29)		(0.01)		(3.19)
Diluted loss per share	(0.29)		(0.01)		(3.19)
Basic loss per share	(0.29)		(0.01)		(3.19)
Adjustments
- amortisation	0.21		0.31		0.58
- impairment of assets	-		-		3.07
- share-based payments (credit) / charge	(0.16)		0.25		0.40
- exceptional restructuring costs	0.37		-		0.39
- utilisation of pre-acquisition brought forward tax losses	-		-		0.01
- tax effect of the above	0.04		(0.09)		(0.21)
Adjusted basic earnings per share	0.17		0.46		1.05
Adjustment for dilutive potential ordinary shares	-		(0.01)		(0.02)
Adjusted diluted earnings per share	0.17		0.45		1.03

 

Earnings per share is calculated as follows:

 

Number of shares (thousand)
Weighted average number of shares in issue used to calculate basic and adjusted basic earnings per share	833,847		650,018		698,659
Dilutive potential ordinary shares
- add share options	11,597		8,655		13,506
Shares used to calculate diluted and adjusted diluted earnings per share	845,444		658,673		712,165
Basic and diluted earnings (£'000)
Basic and diluted loss for the period	(2,400)		(51)		(22,308)
- add amortisation	1,773		1,988		4,074
- add impairment of assets	-		-		21,470
- add share-based payments (credit) / charge	(1,334)		1,579		2,829
- add exceptional restructuring costs	3,075		-		2,622
- add utilisation of pre-acquisition brought forward tax losses	-		-		98
- less tax effect of the above	292		(557)		(1,439)
Adjusted and diluted earnings for the period	1,406		2,959		7,346

 

 

7. DIVIDENDS

 

	Unaudited		Unaudited			Audited
	6 months to		6 months to			Year to
	31 March		31 March			30 September
	2010		2009			2009
	£'000		£'000				£'000
Declared and paid during the period:
Equity dividend on ordinary shares to shareholders - Final dividend of nil pence per share for 2009 (2008: 0.05 pence per share)	-		325			325
Interim and final equity dividends on ordinary shares paid to minority shareholders:	-		285			727
	-		610			1,052

 

 

8. TRADE AND OTHER RECEIVABLES

 

	Unaudited		Unaudited			Audited
	31 March		31 March			30 September
	2010		2009			2009
	£'000		£'000				£'000
Trade receivables	38,767		29,856			36,555
Other debtors	3,146		3,845			3,945
Accrued income	13,820		13,707			12,188
	55,733		47,408			52,688

 

Included within trade receivables is a balance of £1,581,000 (six months ended 31 March 2009: £nil, year to September 2009: £2,214,000) which is due after one year. All other amounts are due within one year.

 

 

9. TRADE AND OTHER PAYABLES

 

	Unaudited		Unaudited		Audited
	31 March		31 March		30 September
	2010		2009		2009
	£'000		£'000		£'000
Current
Trade payables	34,603		32,896		35,058
Other payables	20,233		15,133		21,691
Accruals	11,177		8,899		10,417
Proposed dividend	-		-		320
Social security and other taxes	3,194		3,797		4,532
	69,207		60,725		72,018
Non current
Other payables	105		368		231

 

 

10. INTEREST BEARING LOANS AND BORROWINGS

 

	Unaudited		Unaudited			Audited
	31 March		31 March			30 September
	2010		2009			2009
	£'000		£'000				£'000
Current
Bank loans and overdrafts	1,841		7,064			7,042
Obligations under finance leases and hire purchase agreements	977		1,019			927
	2,818		8,083			7,969
Non current
Bank loans and overdrafts	15,148		14,930			15,877
Obligations under finance leases and hire purchase agreements	883		1,010			967
	16,031		15,940			16,844

 

 

11. SHARE CAPITAL

 

The following share issues took place during the six months ended 31 March 2010:

 

Date of issue	Description	No. of shares	Price £	Consideration £
22 December 2009	Firm placing and placing and open offer	210,019,700	0.10	21,001,970
26 January 2010	Innovation Parts GmbH consideration	11,239,857	0.12	1,379,692

 

The consideration of £21,001,970 for the firm placing and open offer was before costs of £1,227,000. The consideration of £1,379,692 for the shares issued for the remaining 40% of Innovation Parts GmbH was before costs of £5,000.

 

The total number of shares in issue as at 31 March 2010 was 935,427,013 (31 March 2009: 650,018,142).

 

There were no movements in the issued share capital of the Company in the six months ended 31 March 2009.

 

 

12. RISKS AND UNCERTAINTIES

 

While we are confident about our future prospects, significant risks and uncertainties exist that we need to mitigate and manage.

 

A list of some of the main risk areas, not all of which are within the Directors' control, is given below:

 

·; the economic environment and continued uncertainty which may adversely affect revenues and

·; profits

·; the financial or operational failure of key customers

·; the ability to deliver services in accordance with SLAs in order to protect and develop the

·; Group's reputation

·; reliance on relationships with supplier networks

·; software solutions must remain technologically competitive and these must be properly protected

·; exposure to certain external risks including exchange translation risks as over 75% of Group revenues are generated outside of the UK

 

Other factors may also affect the Group.

 

 

 

Responsibility Statement by the Management Board

 

To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group, and the interim management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities, risks and uncertainties associated with the expected development of the Group for the remaining months of the financial year.

      For and on behalf of the Board     Jane Hall Group Finance Director       Independent Review Report to the Innovation Group plc

 

Introduction We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2010 which comprises the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Cash Flow Statement, Consolidated Statement of Changes in Equity, and the related notes 1 to 12. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed. Directors' Responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union. Our Responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. Scope of Review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. Ernst & Young LLP Southampton

26 May 2010