Interim Results

Interior Services Group PLC

("ISG" or "the Group")

Interim results for the half year ended 31 December 2010

YEAR ON YEAR revenue and PROFIT GROWTH

Interior Services Group plc, the international construction services group, today announces its interim results for the half year ended 31 December 2010.

1 from continuing operations

2 from continuing operations before exceptional items and amortisation of intangible assets

Group Highlights

·; 2012 Olympic Velodrome successfully handed over

·; Significant year on year increase in revenue and profits

·; Signs of recovery in some of our markets though trading environment continues to be challenging overall

·; Group benefits from diverse market and geographic revenue streams with 80% of Group trading operating profits emanating from private sector

·; Net cash position increased to £37.4m reflecting increased revenue in the period

·; Order book of £797m (2009 - £780m)

·; Interim dividend up 5%

Divisional Highlights

UK Fit Out

·; Strong revenue performance up 39% to £193m (2009 - £139m)

·; Competitive pressures reduced margins to 1.7% (2009 - 2.7%)

·; Financial services sector has begun to improve; professional services sector robust in the period

·; Retail banking remains strong, 570 projects undertaken in the calendar year for the main UK clearing banks

·; Order book of £178m (2009 - £190m) with project size reducing and more project refurbishment

Europe Fit Out

·; Revenue more than tripled to £41m (2009 - £13m) based on solid demand from multinational client base

·; Parisian office market improving

·; Profitable in the period in comparison to a loss in prior year

·; Successfully launched retail offering in the region

·; Order book £20m (2009 - £29m)

Middle East Fit Out

·; Joint venture arrangement dissolved and now focused purely on fit out with £10m revenue

·; New trading licence established in Abu Dhabi

·; Order book of £11m (2009 - £7m)

Asia Fit Out

·; Revenue decreased by 11% to £33m (2009 - £36m) and profits were £0.2m (2009 - £0.4m)

·; Period characterised by lack of larger projects, but two secured in Singapore for 2011

·; Continued success with retailers in China and Hong Kong

·; Order book of £32m (2009 - £44m)

·; Agreed terms to acquire small fit out business in China

Food Retail

·; Revenue more than doubled to £107m (2009 - £51m)

·; Operating profit doubled to £2.3m (2009 - £1.1m) but margin pressure continues

·; Substantial growth at Tesco, Asda, Sainsbury's and Marks and Spencer. Awarded first ever framework from Morrisons

·; Order book of £148m (2009 - £90m)

Construction

·; Robust performance in challenging conditions with revenue held at £248m (2009 - £244m)

·; New offices opened in Glasgow and Cardiff

·; 2012 Olympic Velodrome successfully handed over

·; Order book of £408m (2009 - £420m) with private:public split 51:49 (2009 - 34:66)

David Lawther, Chief Executive, said:

"This is a strong performance, especially in the UK. We expect to see a more complete recovery of the London fit out market as we move through 2012. Our blue chip client base will go on providing demand outside the UK. We are emerging from the recession in good health with strong finances, diverse revenue streams and market leading positions in commercial office fit out, food retail and retail banking. We will continue to target growth both organically and via acquisition."

8 March 2011

ENQUIRIES:

CHIEF EXECUTIVE'S HALF YEAR STATEMENT

Results

I am pleased to report a strong set of interim results, in line with expectations and ahead of this point last year. There have been signs of recovery in some of our markets, though the trading environment continues to be challenging overall. I am also pleased to report further progress in building on our geographic spread and service offering in our key markets.

For the six months ended 31 December 2010, adjusted profit before tax1 was £5.7m (2009 - £5.2m) on revenue2 of £635m (2009 - £483m). Adjusted earnings per share1 increased by 15% to 13.05p (2009 - 11.33p).

Net cash as at 31 December 2010 of £37.4m was ahead of the prior year (2009 - £32.0m). In the period the Group repaid £2.8m (2009 - £3.0m) of bank borrowings and letters of credit. There was a strong net cash inflow from operating activities2 for the period of £10.7m (2009 - £4.3m) resulting from the higher revenue. In addition, we retain an undrawn working capital revolving credit facility of £10.0m which expires in 2013.

Dividends

The Board has approved an increase of 5% in the level of interim dividend to 4.41p (paid in April 2010 - 4.20p). The dividend will be payable on 19 April 2011 to shareholders on the register on 18 March 2011.

The ex-dividend date will be 16 March 2011. The closing date for elections for the Dividend Re-Investment Plan is 25 March 2011. The final dividend for the previous financial year of 10.14p was paid in December 2010.

Overview

The following is a summary of the revenue and order book for each of the Group's business segments:

1 from continuing operations before exceptional items and amortisation of intangible assets

2 from continuing operations

3 of the total order book, £472m (June 2010 - £704m, December 2009 - £442m) relates to the current financial year

The overall picture is one of revenues increasing, which is offsetting pressure from tighter margins. Our business continues to be 80% weighted by profits towards the private sector. The commercial office fit out market in London has shown good signs of recovery, though the overall trend is currently towards smaller projects and refurbishment. Both our retail banking fit out and food retail markets are particularly strong with revenues in these areas significantly increased.

Our multinational clients are recommencing their international expansion programmes and this has improved our non-UK revenues. In line with this, we continue to strengthen our offer and delivery outside of the UK in anticipation of continued improvement in these markets.

Our Construction business - the only part of the Group's activities exposed to the UK public sector - has broadly held its revenues, showing a slight improvement on the previous year.

At the end of December 2010, our total order book was £797m (2009 - £780m), of which £472m (2009 - £442m) is for delivery in the current financial year and £313m (2009 - £320m) for the next financial year. Our order book is heavily weighted towards the private sector at 75% (2009 - 63%), with the public sector at 25% (2009 - 37%).

Our strategy continues to be to support and extend the Group's three principal markets:

·; for multinational corporate office and retail fit out customers the Group is able to provide a broad range of services on a multi-location basis across the UK, Europe, Middle East and Asia

·; for food retail customers the Group is able to provide a broad range of services on a multi-location basis across the UK

·; for construction customers the Group is able to provide a network of regionally based construction businesses with significant local presence and knowledge operating on a nationally co-ordinated basis across UK.

When working with our multinational corporate office and retail fit out customers as well as our food retail customers we will continue to identify opportunities to extend the breadth of our services both in terms of range and geography via organic growth and acquisition. We are presently delivering to key customers such as Barclays Bank, Royal Bank of Scotland, Standard Chartered Bank, Tesco, Asda, Pfizer, ExxonMobil and Google across a broad range of services and geographies.

We have continued to expand and strengthen our office network. In line with our commitment to aim to be near key customers, employ local people and use local supply chains where possible, in the UK we have opened new offices in Glasgow and Cardiff. Our non-UK operations have also been strengthened and in the period we dissolved our joint venture arrangement in the Middle East, where we now operate an independent fit out business and we also established a trading licence in Abu Dhabi. In addition we have been managing the integration of our new Moscow operations into the Group. We have also signed heads of terms to acquire a small design-led project management business in Shanghai.

UK Fit Out

We experienced a strong increase in activity of our UK Fit Out business in the period, with revenue increasing by 39% to £193m (2009 - £139m). Operating profits were 14% lower at £3.3m (2009 - £3.8m) as a result of competitive pressures reducing margins to 1.7% (2009 - 2.7%).

In line with the market, project size has reduced so the current order book comprises many more individual projects and a stronger focus on refurbishment.

The office fit out market for the financial services sector has begun to improve but the overall success in the period was underpinned by commercial office projects in the professional services sector for Pinsent Masons, K&L Gates, Dickson Minto and Stephenson Harwood, which totalled 467,000 sq ft.

In the period we undertook commercial office projects for the Royal Bank of Scotland, HSBC, Man Group and GE Capital. In December 2010, we secured the refurbishment of 160,000 sq ft headquarters for a global financial organisation - one of the largest fit out projects to come to the London commercial office fit out market during the period. Other significant wins in the period included the fit out of the John Lewis Partnership Services headquarters, a 36,000 sq ft development located at Bracknell, and the fit out of the extension of Marks and Spencer's Paddington head office.

Our retail banking framework roll-outs continue to be a highlight. For the calendar year 2010, 570 projects were completed for our framework customers - Barclays Bank, Lloyds Banking Group, Royal Bank of Scotland and HSBC. We continue to be a leading supplier to our framework customers, and this was recognised at this year's Global Retail and Leisure International Awards by being named "Shopfitter of the Year".

Despite the continued weakness of the High Street retail market, we continued to deliver projects in the sector including Mulberry, New Bond Street, Oliver Sweeney in Manchester and Cheapside, and Selfridges new shoe gallery which attracted international press attention.

At 31 December 2010 our UK Fit Out business had an order book of £178m (2009 - £190m), of which £102m is to be delivered in the current financial year (2009 - £106m). We expect the improvement in revenue experienced in the first half in the commercial office and retail banking fit out markets to be sustained in the second half. Hence we anticipate revenue being substantially ahead in the current financial year.

Europe Fit Out

There is a solid demand from our multinational client base across Europe and in line with this we have seen an increase in revenues. Revenues have improved in the period by 228% to £41m (2009 - £13m) and the business has run at an operating profit of £0.1m (2009 - loss of £0.9m). The increase in profit in the period is not as strong as the rise in revenues. This is mainly due to two very large projects which proved to be highly complex to deliver.

Our list of repeat customers - including Google, Barclays Corporate, ExxonMobil and Standard Chartered Bank - continues to grow and is underpinning strong demand, particularly in the Parisian market, for our commercial fit out offer in Europe. Additionally, we have launched our retail offering in the region, winning work with leading retailers such as Hollister, Nike, Hackett and Foot Locker. We expect a high demand for this service going forward.

To further strengthen our offer we have continued to recruit new talent into our European offices and during the period we appointed a new Country Manager for Italy.

As at December 2010 we have an order book of £20m (2009 - £29m), of which £18m is to be delivered in the current financial year (2009 - £18m). We expect the improvement in revenue experienced in the first half to be maintained, hence we anticipate revenue in the current financial year to be substantially ahead of the prior year.

Middle East Fit Out

We have dissolved our joint venture arrangement in the Middle East and now operate a fit out business independently of Al Habtoor Leighton Group. An exceptional loss arising from the separation has been recorded in the period. The business delivers commercial office fit out projects for our traditional customer base. It generated revenue of £10m in the period and made a positive contribution of £0.2m (2009 - £0.1m). Projects in the period included work for Pfizer and ExxonMobil, and we continue to build a strong pipeline of opportunities in Dubai and Abu Dhabi.

A trading licence has been established in Abu Dhabi and we have already won our first two fit out projects in Sowwah Square - adjacent to the Abu Dhabi Stock Exchange - a flagship commercial development on Sowwah Island.

The order book at the end of December 2010 is £11m (2009 - £7m). With the current level of order book we anticipate activity levels in the second half being ahead of the first half.

Asia Fit Out

With the lack of larger projects in South East Asia in the period, the activity of our Asia operations will be weighted towards the second half of the year. Revenue in North Asia increased in the period - albeit against a picture of tightening margins. Overall revenue has decreased by 11% to £33m (2009 - £36m), and in line with this operating profit declined to £0.2m (2009 - £0.4m), resulting in an operating margin on revenue of 0.6% (2009 - 1.2%).

In South East Asia, during the period we have secured two larger projects in Singapore for delivery in 2011. After fitting out two projects for Marina Bay Sands Casino last year, we have secured the fit out of the flagship Louis Vuitton store at Marina Bay Sands. Also, we have secured the 100,000 sq ft fit out of offices for Nomura in the new Marina Bay Finance District. In the period we had further success in Malaysia, where we completed work on Tesco's Malaysia Corporate Headquarters and also Amway's Brand Centre, Kuala Lumpur.

In North Asia, in line with our continued success with international luxury retailers, we delivered the fit out of three projects for Tod's in China and projects for Miu Miu in Hong Kong and Apple in Beijing. Additionally, in Hong Kong we are delivering a bank branch refurbishment programme for Citibank, the Qantas Lounge at Hong Kong International Airport and a trading floor at the iconic HSBC Main Building.

The business is carrying forward an order book of £32m as at 31 December 2010 (2009 - £44m). We expect revenues to pick up significantly in the second half - as occurred in the prior year.

Food Retail

Our Food Retail operations saw a very strong increase in demand over the period with revenue more than doubling at 112% to £107m (2009 - £51m). Our diverse service offering in this sector runs from fit out, through to refurbishment, extension and increasingly new build.

Operating profit increased by 110% to £2.3m (2009 - £1.1m). Margin pressures continue to be a factor as our clients continue to search for procurement efficiencies. Although margins are in line with the previous period at 2.1% (2009 - 2.1%) we anticipate increased pressure in the second half of the current financial year.

Highlights of this strong performance include:

Tesco: substantial growth and a diversified portfolio which now ranges from Tesco Express fit out work to the building of major new stores and distribution centres. Our innovative approach to complex issues has led to our appointment at Tesco Seaton - a highly challenging coastal development.

Sainsbury's: our performance over the period has led to a doubling in our work going forward, including our first new build Sainsbury's store.

Asda: we are working on our second new build project at Asda Gorseinon with a target of zero waste to landfill. We have also been appointed to 50% of the Netto-to-Asda conversion projects.

Morrisons: the period has seen us successfully handover our first new build project for Morrisons and we are appointed to their first ever framework.

Marks and Spencer: we have delivered a major store extension in Torbay and we have also been appointed to two major projects for early 2011.

The order book at the end of December 2010 is £148m (2009 - £90m). Hence we expect revenue to be substantially ahead in the current financial year.

Construction

Against a backdrop of a highly challenging market, our construction business has held its position when compared to last year with revenue of £248m (2009 - £244m) - though margins continue to be under pressure. Operating profit for the period stands at £2.3m (2009 - £3.2m) with operating margins standing at 0.9% (2009 - 1.3%).

Our strategy to expand our office network to provide infrastructure for new growth continues to succeed as we help our customers get their projects to site.

Our new offices in Glasgow and Cardiff soon reported wins, with Cardiff delivering Ysgol Glantaf School. The office in Glasgow secured over £40m worth of contracts, including two high-profile projects for Diageo, a social housing scheme for Home Scotland and a luxury accommodation development for Golf Resort International Ltd in St Andrews.

Elsewhere, notable wins included the Siemens Urban Sustainability Centre, a major London Docklands development promoting sustainable science, engineering and technology. Our credentials in sustainability were central to achieving this win. Exeter County Council has selected us to build the UK's first PassivHaus development, one of the most sustainable affordable housing schemes ever. Shortly after the end of the reporting period we successfully handed over the 2012 Olympic Velodrome - the most sustainable project on the Olympic Park and also the first to complete.

In the period we completed Nido's Spitalfields tower - the world's tallest student accommodation building. We also completed one of Suffolk's largest ever construction projects - Suffolk One further education college. After a relationship spanning ten years and 35 projects, we have secured our largest project yet with Imperial College - a circa £40m student accommodation scheme in West London. Another notable education sector success was our appointment to Dudley Evolve - a major new development for Dudley College.

Strong relationships with our customers continue to support our growth and in line with this our framework wins included the four-year North West public sector framework and also Network Rail's three-year national property framework programme. Additionally we were appointed as the sole contractor on the Two Rivers Housing Association framework and reappointed to the much-expanded Sovereign Housing Association framework after our success with them over the past four years.

Our Construction business is the only part of our operations with exposure to the public sector. We are moving quickly with market opportunity and our Construction order book is currently weighted 51% (2009 - 34%) private sector compared to 49% (2009 - 66%) public sector.

The order book at 31 December 2010 is maintained at £408m (2009 - £420m). With the expansion of our network we anticipate that revenue in the current financial year with be slightly ahead of prior year. However, we are planning for an increase in competitive pressures due to the likelihood of reduced volumes and project sizes in public sector work and flat private sector demand outside London and the South East.

Outlook

ISG as a whole has a unique offering with its blend of businesses both in and outside the UK. No one else can offer the same delivery capability across such a diverse range of geographies.

In the UK, the recovery of the corporate office fit out market continues in line with an overall improvement in the private sector. We expect to see a full recovery in the London market over the next 18 to 24 months. Our strong relationships with major blue chip clients continue to provide a rich vein of work resulting in the balance of our order book being 75% (2009 - 63%) biased towards the private sector. This will help protect revenues from upcoming UK public sector cuts.

In Europe and the Middle East, our major international clients are continuing their capital investment plans and we expect increasing demand for our services. While our Asian markets are challenging, we are confident that there is significant opportunity and will continue to strengthen and broaden our offer in line with demand and opportunity. Our non-UK businesses will have higher activity levels in the second half of the current financial year, with results similarly weighted.

ISG will continue to target growth both organically and via acquisition. We continue to emerge from the recession in good health, feeling confident that the Group is well placed to resume growth in line with the anticipated private sector recovery.

David Lawther

Chief Executive

8 March 2011

The foreign currency translation reserve is used to record cumulative translation differences on the goodwill and other intangibles of foreign operations (Notes 8 and 9). The cumulative translation differences are recycled to the income statement on disposal of the foreign operation.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of preparation and significant accounting policies

General information

The results for the half years ended 31 December 2009 and 2010 and the balance sheets as at those dates have not been audited and do not constitute statutory accounts. The financial information for the year ended 30 June 2010 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the audit report and did not contain statements under section 498 of the Companies Act 2006.

The Group's activities and the key risks facing its future development, performance and position are set out in the half year report. The directors have reviewed the current and projected position of the Group and have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half yearly condensed consolidated financial statements.

Statement of compliance

The condensed set of financial statements included in this interim report has been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting', as adopted by the European Union and the Disclosure and Transparency Rules of the Financial Services Authority. The Group condensed financial statements should be read in conjunction with the annual financial statements for the year ended 30 June 2010, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

Restatement of companies' balances

Certain prior period comparative balances have been reclassified to conform to the prior year end's presentation of the discontinued operations. The directors consider that the restatement of the income statement has no material impact on the Group's reported balance sheet at 31 December 2009 and consequently no comparative balance sheet for the six months to 31 December 2008 has been presented in these financial statements.

Accounting policies

The same accounting polices and methods of consolidation are followed in this condensed set of financial statements as applied in the Group's latest annual report and accounts for the year ended 30 June 2010.

During the current period, the following accounting standards were adopted and either had no impact on the financial statements or resulted in changes to presentation and disclosure only:

● IAS 32 (Amendment) 'Financial Instruments: Presentation - Classification of Right Issues'

● IFRIC 19 'Extinguishing Financial Liabilities with Equity Instruments'

2. Seasonality

The Group's activities are generally not subject to significant seasonal variation.

3. Segmental information

For management purposes, the Group is organised into operating segments on both a product and geographic perspective. The performances of these segments are considered by the Board when making strategic decisions. These segments include Fit Out, Food Retail and Construction, whilst Fit Out is further segregated by geography into the UK, Europe, Middle East and Asia. This segmentation is revised from prior years, as previously announced in the Annual Report and Accounts 2010. The prior period comparatives have been restated to reflect this new segmentation.

Although the Europe, Middle East and Asia geographical segments do not meet the quantitative thresholds required by IFRS 8 'Operating Segments', management has concluded that these segments should be reported. All are closely monitored by the Board as potential growth regions and are expected to materially contribute to Group revenue in the future.

The principal activities of each of these divisions are as follows:

The segmental information provided to the Board for the reportable segments for the period ended 31 December 2010, 31 December 2009 and 30 June 2010 is as follows:

4. Exceptional items

With effect from 1 July 2010, the Al Habtoor ISG International LLC joint venture agreement was terminated with the Group retaining the fit out business and our former joint venture partner retaining the joinery business. The Group has incurred costs during the course of the joint venture separation which have been treated as a loss on disposal of joint venture.

As reported in last year's financial statements, Pearce Construction (Midlands) Limited, a dormant subsidiary of ISG Pearce Limited, was investigated by the Office of Fair Trading (OFT) for technical breaches of competition law in earlier years prior to ISG's ownership.

Pearce Construction (Midlands) Limited was issued with a Statement of Objections and has been defending its position. ISG has a £2.0m cash backed indemnity from the vendors of ISG Pearce Holdings Limited, being cash of £1.0m held in an escrow bank account and the remainder being the outstanding deferred consideration from the original acquisition of ISG Pearce Holdings Limited.

On 20 September 2009, the OFT published a list of fines for 103 UK construction companies, including Pearce Construction (Midlands) Limited. The OFT subsequently announced the findings of its investigation on 20 November 2009.

The OFT has fined Pearce Construction (Midlands) Limited £5.2m of which £4.4m is on a joint and several basis with the company's former owner, Crest Nicholson plc. Appeals were submitted to the Competition Appeal Tribunal on 24 November 2009 in respect of the quantum of fine imposed, the methodology upon which the fine was calculated, and the inclusion of ISG Pearce Limited as an entity responsible for the infringement. Crest Nicholson plc has also lodged an appeal. As a result, the fine has not been paid and an application has been made to pay any resultant fine due over a three year period. The appeals were heard by the Competition Appeal Tribunal in July 2010 and we await their findings.

As at the date of issuing these accounts, no agreement has been reached with Crest Nicholson plc over the apportionment of the fine and the results of the various appeals to the OFT are not known.

The Board has considered all the information available and assessed potential outcomes relating to the above fines, the joint and several liability with Crest Nicholson plc and estimated legal costs of the appeal, and a provision has been made in these accounts.

Given the nature of these items, the Board has considered that they should be treated as exceptional items in accordance with the Group's accounting policies.

5. Taxation

Income tax for the six month period is charged at 28% (Dec 2009 - 28%), being the estimated annual effective tax rate expected for the full financial year, applied to the profit before income tax expense excluding the share of net profit/loss of equity accounted joint ventures for the six month period (which are stated net of income tax).

6. Dividends

In accordance with IAS 10 'Events after the Reporting Date', dividends are accounted for in the period in which they are paid and approved by the shareholders. Accordingly the interim dividend proposed in respect of the half year ended 31 December 2010 has not been included as a liability as at 31 December 2010.

7. Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares during the period, determined in accordance with the provisions of IAS 33 'Earnings per Share'.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all dilutive potential ordinary shares. The Group has only one category of dilutive potential ordinary shares, being share options granted where the exercise price is less than the average price of the company's ordinary shares during the period.

Adjusted basic earnings per share is calculated by dividing the earnings attributed from continuing operations to ordinary shareholders, before exceptional items and amortisation of intangible assets, by the weighted average number of ordinary shares during the period. The Group believes that this measure of earnings from continuing operations before exceptional items is more reflective of the ongoing trading of the Group.

A total of 3,248,336 share options that could potentially dilute earnings per share in the future were excluded from the below calculations because they were fairly priced and were neither dilutive nor anti-dilutive at 31 December 2010 (Dec 2009 - 5,631,768).

1 Post tax exceptional items as at 31 December 2009 have been restated in line with the audited balance as at 30 June 2010 following confirmation of the appropriate tax treatment of these items from HMRC.