29th Sep 2008 07:00
29 September 2009
The Innovation Group plc
Trading update
The Innovation Group plc ('Innovation' or 'the Group'), the leading technology-led Business Process Outsourcing ('BPO') provider for the insurance sector, today provides a trading update for the 2008 year and an outlook for 2009. The current year has been mixed and turbulent. Strong organic revenue growth and the successful integration of Nobilas and National Service Network ("NSN") has contrasted with slower than expected volume ramp in the North American BPO business and other issues caused by both internal and external factors.
Operational Review
2008 has seen significant progress in establishing ourselves as a global leader of the combined BPO and software business model for the global insurance and risk carrier market. Our capability provides our clients with a flexible offering, enabling them to use both our world class insurance software and our BPO services to innovate new products, reduce costs, improve service, enter new markets or any combination of all four. As pioneers of this business model, our overall positioning is resulting in significant demand globally, which in turn in 2008 has resulted in substantial new contract wins with blue chip organisations across all areas of our business.
Market and client development
Our excellent momentum from 2007 has led to good overall growth in 2008. Global revenue has grown by around 28%, in line with expectations, and organic growth is expected to be well into double digits. Revenue from clients is in line with our business plans, with an excellent performance across Europe and Asia, and a good performance in South Africa, despite difficult economic conditions.
Regrettably, the US BPO business was impacted by a number of major US contracts either being delayed or signed later than expected. However, volumes on these new contracts are now rising rapidly and help to underpin our 2009 expectations. As a result of these contract and volume delays 2008 profits are £2.6m behind expectations.
Notwithstanding the profit impact of these delays, the US operations building on the FNS acquisition has made a major entry into this important large market, becoming established in the BPO market and achieving significant customer wins. This year we integrated FNS, Nobilas and Sureplan into one single US BPO business, as well as launching Auto Claims Management and Property Claims Management. With these complicated steps completed, our US region is now well established as a single integrated business, fully prepared for the volume ramp up in 2009 from the newly signed contracts.
Internal developments
We had an ambitious plan for 2008, and the principal business challenge has been to manage significant moving parts simultaneously. While coping with record demand and new commitments across all geographies, we have successfully integrated Nobilas, a £14m loss-making Company, into multiple territories, and we are pleased to note that it has been integrated within nine months. In addition, we have integrated NSN and established an IBM centre in India. We have also been working on Innovation Insurer, a new release of our services orientated architecture ("SOA") based system, which will be released to the market by March 2009.
Project Enterprise is the implementation of our own common technology platform to support our global BPO business using SOA based Innovation Insurer software. This multi-year global project is continuing to meet all our expectations in terms of quality, timescales and budgets. When implemented across the Company, Project Enterprise will lead to significant operational efficiencies and flexibility. This will benefit both our customers as well as our own operations, along with being the most technically advanced capability in our sector. As previously advised, costs will be capitalised both in the 2008 and 2009 financial years in recognition of the strategic and long term value of the asset.
Innovation Group has successfully developed into a unified Company, with a true sense of corporate identity and culture. With the many complex operational steps of 2008 now finished, it is expected that the more settled nature of the business will make it easier to assess the growth and returns we make in our business as we move into 2009.
Contract wins
Our customer delivery to existing clients is providing high levels of excellent referrals to new clients. This has led to new client wins and in the last four weeks we have signed a number of new major relationships. These include 5 new customers with 3 year agreements in the UK and the US which together will generate revenues of approximately £3m per annum
We are also pleased to announce a contract win in conjunction with IBM with a leading UK insurer. This contract is estimated to be worth £4.7m over the next two years - the major portion being earned in the 2008 financial year. The contract is a result of the Innovation Group's partnership with IBM which involves licensing the Innovation Policy software and the provision of services.
In addition, we are pleased to announce that we have renewed a significant contract with CIS General Insurance Limited (CISGIL), part of the Co-operative Financial Services Group. The contract extends an existing relationship which first began in 2003. Innovation Group will continue to handle all property subsidence claims on behalf of CISGIL. The renewed contract is estimated to be worth £7.0 million to Innovation Group over five years from the contract's start date of 1 January 2009.
Contract settlement
The parent company of one of our UK clients went into administration earlier this year and as a result the subsidiary with which we were contracting was rescued by a consortium of major banks. This business was subsequently restructured and as a result the client has now decided not to continue with the contract. Although legally it was accepted that our contractual position was good, in the wake of the recent high profile events in the banking sector a settlement of 50p in the pound was accepted with an immediate receipt of £2m and a write off of £2m to the 2008 income statement.
Executive team reorganisation
The Company has made some strategic changes to the organisation. These changes are a conclusion to the rapid integration of Nobilas and our objective to become one global Company servicing blue chip customers in multiple territories.
Eric Wadsworth, formerly Group Chief Operating Officer and head of North American BPO operations takes on the role of CEO of the newly integrated North American business reporting to the Group CEO, Hassan Sadiq. Eric's previous direct reports, the regional CEO's for Europe, South Africa and Asia Pacific will now also report directly to the Group CEO in a deliberate flattening of the organisation. We have also strengthened the corporate organisation with two new roles by appointing Denis Walker as Director of HR and Phil Gerrard as corporate COO.
Financial Review
Revenue growth for the 2008 financial year is expected to be approximately 28%, in line with expectations. However, the aggregate impact of the aforementioned contract settlement and US performance is an anticipated reduction in adjusted profit before tax of approximately £4.6m in the 2008 financial year compared to current market expectations.
Exceptional restructuring costs
As previously advised, the Company has incurred significant exceptional restructuring costs relating to the Nobilas acquisition. These costs are currently estimated to be in the region of £3m, which, when added to the capitalised Class 1 transaction costs of £2m, are well within our original estimate of £6.4m (€8.0m).
In addition the Company has decided to take further restructuring actions elsewhere in the business to improve operational efficiency, while maintaining a high level of customer service. These actions have resulted in an additional charge of £3.5m split as follows:
Following the successful integration of recent acquisitions we have taken the decision to eliminate certain positions across the world. This will result in a restructuring charge of approximately £1.2m.
In April 2007, Innovation Group completed its acquisition of Conversant Data Limited. Part of the Conversant business was a subsidiary in Poland which has subsequently proved to be unsuccessful. The subsidiary has now been closed down resulting in a restructuring charge of £0.6m.
In 2007 we set up an off-shore processing centre in South Africa in conjunction with a partner. In the current economic climate there is no longer sufficient demand for such a centre and we have decided to discontinue the arrangement resulting in a restructuring charge of £1.7m.
This aggregate charge of £3.5m, fully expensed in the 2008 financial year, will result in an annualised cost saving of approximately £3.8m in 2009. The majority of the cash impact of the £3.5m will be in the 2009 financial year.
Non recurring operating losses
It should be noted that in the 2009 financial year, the Company will benefit from not incurring significant operating losses amounting to approximately £4.0m. These non recurring losses in 2008 are mainly attributable to the following factors:
The trading losses relating to Nobilas amounting to approximately £2.7m;
Further costs relating to the integration of the US business amounting to approx. £0.7m.
Costs of approximately £0.6m from new BPO product launches in the US related to the cost of establishing these operations and will not recur. These costs relate mainly to the development and marketing of the products for which we are expecting revenues in 2009.
Cash
Operating cash inflow for the second half of the year is expected to be positive and the Company expects to be in a net cash position at the year end. As noted in the IMS statement of 19 August 2008, earlier this year we refinanced our bank loans and mortgages with Barclays Bank plc and have secured new facilities for general corporate purposes. We are operating satisfactorily within the terms of these banking facilities. Our balance sheet remains sound.
Dividend
There is significant uncertainty in the financial services sector and as a result the Board has concluded that it is prudent to take a defensive view of the market and expects to recommend the payment of a significantly reduced final dividend at the end of the current financial year.
Outlook
Our focus in 2009 will be predominantly to deliver growth from existing and recently secured contracts. We do not intend to make any material acquisitions during 2009 nor do we plan to make further exceptional restructuring changes.
The general outlook for the global economy is uncertain yet we are benefiting from this as our clients look for ways to reduce costs quickly as well as retaining a high quality of service.
2008 has been a difficult year for our South African business due to the political and economic environment and the nature of our warranty business, which we perform exclusively in the region, so we are more cautious in our outlook for 2009.
Our new product, Innovation Insurer, has been introduced to some of our global customer base, ahead of a general release in March 2009. This has resulted in new software orders in North America and Asia and we expect first production implementations of the system during 2009. However, as is normal with widely anticipated new products we expect customers to place orders after the product launch which will have an impact on software revenues for 2009 as a whole in comparison to 2008.
At product level our margins continue to improve whilst the overall Group margin reflects the mix of revenues. The usual seasonality of previous years will be seen in 2009, with the margin contribution being more weighted to the second half as a result of the product launch and the volume ramp-up of recently signed US contracts.
These factors, along with the non-recurrence of significant exceptional and other one-off operating costs referred to above, underpin our confidence that Innovation's financial performance will improve materially in 2009.
-ends-
Enquiries:
|
The Innovation Group Hassan Sadiq, Chief Executive Officer Paul Hemsley, Group Finance Director |
Tel: +44 (0) 1489 898300 |
|
Financial Dynamics Ed Bridges/Juliet Clarke |
Tel: +44 (0) 20 7831 3113 |
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