FINANCIAL REVIEW. Financial Review INCOME STATEMENT Reported

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1 Financial Review OVERVIEW The Group made good progress in 2016 as we continued to drive growth in relatively challenging market conditions. To a large extent, the non-discretionary nature of our services has insulated us from volatility and the lack of positive economic sentiment. Our biggest asset is our client base, which we believe is the best in the industry. We retained 100% of our FTSE 100 clients and our average client relationship is over 20 years. We continued to deliver organic growth, continued to cross-sell to our strategic clients and increased our offshoring capability with 760 people in our Chennai centre. Margin progression, cash conversion and leverage reduction continued in line with expectations. revenue grew by 3.7% to 382.6m (: 369.0m) during the year, with organic revenue growth of 2.1%. EBITDA prior to exceptional items increased by 7.2% to 92.4m (: 86.2m). EBITDA post exceptional items for the year was 87.4m (: 53.4m). The Group s free cash flow was 92.6m, resulting in a strong free cash flow conversion of 100% before capital expenditure. Net debt was at 251.2m at year end. This represented a reduction of 11.5m over 2016, and a ratio of 2.7 times net debt to EBITDA at 31 December 2016 (31 December : 3.0 times on a pro forma basis). INCOME STATEMENT The key lines of the income statement for the year are summarised below and include analysis of revenue, EBITDA prior to exceptional items, exceptional items, EBIT and profit before tax. Proforma adjustments have been made to the prior year to remove IPO-related exceptional costs and record finance costs in relation to the new debt structure, to enable us to compare like-for-like performance. An adjustment to tax has been made to reflect the Group s expected ongoing effective cash tax rate of 14% (: 15%) Proforma Adjustment Revenue EBITDA prior to exceptional items Depreciation (5.4) (4.4) (4.4) Amortisation software (16.0) (15.8) (15.8) Amortisation acquired intangibles (25.3) (23.0) (23.0) EBIT prior to exceptional items Exceptional items (5.0) (10.3) (10.3) EBIT prior to IPO costs IPO related exceptionals operating costs 22.5 (22.5) EBIT IPO related exceptionals finance costs 21.2 (21.2) Net finance costs 1 (12.2) (13.0) 47.7 (60.7) Profit / (loss) before tax (71.7) Taxation (3.0) (28.9) 25.9 Profit / (loss) after tax (45.8) Non-controlling interests (2.9) (4.6) (4.6) Profit/ (loss) attributable to ordinary shareholders (50.4) 1 proforma net finance costs has been presented to better reflect the cost that would have been incurred had the Group s current debt structure been in place throughout the current and prior year including the associated swap agreements. 2 proforma taxation has been presented to better reflect the tax charge that would have been incurred had the Group s current debt structure been in place throughout the current and prior year at an estimated effective tax rate for the Group of 15% in and 14% in

2 REVENUE revenue increased by 3.7% to 382.6m (: 369.0m) during the year whilst proforma revenue adjusted for acquisitions grew organically by 2.1%. Investment delivered strong growth benefitting from organic growth through corporate actions, share plans and project work with existing clients, along with the acquisition of TransGlobal Payment (TransGlobal) in September. Intelligent also delivered strong growth, benefitting from the acquisitions of KYCnet and RiskFactor in March 2016, along with strong organic growth driven by an increase in technology sales in complaints management and on-boarding of new clients. Pension revenue declined as anticipated, as a result of the conclusion of the MyCSP roll-out in the fourth quarter of, whilst the rest of the pensions business was stable over Revenue from interest was 20.4% higher than the prior year due to higher average client cash balances and the full year benefit of interest rate swaps put in place in August. EBITDA PRIOR TO EXCEPTIONAL ITEMS EBITDA prior to exceptional items is a key measure of the Group s performance. It reflects profit before finance costs, taxation, depreciation and amortisation and exceptional items. EBITDA prior to exceptional items of 92.4m increased by 7.2% in 2016, reflecting the impact of acquisitions made in the current and prior year, organic growth and improved cost management. REPORTABLE SEGMENTS The Group reports its results in four segments: Investment, Intelligent, Pension and Interest Income, supported by central functions. The Board monitors the performance of the four segments through revenue and pre-exceptional EBITDA. The results of these segments were as follows: Reportable segments Revenue () Investment Intelligent 2016 * Change % Organic Change % Pension (7.8) (7.8) Interest Income Equiniti Group EBITDA prior to exceptional items () Investment Intelligent Pension (9.0) Interest Income Central Costs (11.2) (8.1) 38.3 Equiniti Group * restated to reflect Company Secretariat business transfer from Investment to Intelligent ( 2.7m revenue and 0.3m EBITDA). ORGANIC REVENUE Organic revenue growth is reported revenue growth adjusted for acquisitions on a like-for-like basis. Here we retstate for the period acqusitions have been owned in 2016 to create a like-forlike comparison of year on year progress. This is calculated as follows: Revenue () 1 Acquisition of Selftrade. 2 Acquisition of KYCNet, RiskFactor, Top Level and Marketing Source. 3 Acquisition of Selftrade. Investment Adjustment Proforma Investment Intelligent Pension Interest Income Total Group Revenue increased by 7.6% to 123.6m, with strong organic growth including corporate action activity of 7.9m (: 6.2m) as well as the contribution from acquisitions. Revenue grew organically by 6.7%. EBITDA prior to exceptional items grew by 10.0% driven by strong organic growth. Strong margin progression resulted from continued focus on offshoring, service innovation and lean methodologies. Intelligent Revenue increased by 13.8% to 116.4m, as a result of organic growth of 8.9%, driven by continued strength in demand for technology solutions in complaints management. The acquisitions of KYCnet and RiskFactor in March 2016, Toplevel Computing in July 2016, and Marketing Source in December 2016 contributed to reported growth. EBITDA prior to exceptional items increased by 27.2% as a result of strong revenue growth and an increasing proportion of the business being driven by technology sales. Pension Revenue in Pension decreased by 7.8% to 131.4m with a decrease in EBITDA prior to exceptional items of 9.0% to 24.3m. This was due to the expected decline in project work in MyCSP with its software roll-out to the Civil Service concluding in Q4. Excluding MyCSP, the financial performance of Pension was stable over MyCSP earnings have now stablised. Interest Revenue from interest was 20.4% higher than the prior year, due to higher average client cash balances of 1,917m (: 1,296m), and includes the benefit that the Group has secured through entering into three-year interest rate swaps at a blended rate of 1.03%, relating to 650.0m of cash balances. The interest rate swaps expire in July and August SECTION 01 STRATEGIC REPORT Equiniti Group plc Annual Report

3 EARNINGS BEFORE INTEREST AND TAX EBIT 2016 Exceptional items 2016 Operating costs Acquisition, restructuring and other costs IPO-related costs 22.5 Operating costs exceptional items Finance costs Write off of unamortised fees of previous finance arrangement EBITDA prior to exceptional items Depreciation (5.4) (4.4) 22.7 Amortisation software (16.0) (15.8) 1.3 Amortisation acquired intangibles (25.3) (23.0) 10.0 EBIT prior to exceptional items Exceptional items non-ipo related (5.0) (10.3) (51.5) EBIT prior to IPO costs EBIT remains an important measure of the Group s performance, reflecting profit before finance costs and taxation. In 2016, reported EBIT prior to IPO-related exceptional costs was 40.7m, an increase of 8.0m (24.5%) compared with the prior year ( 32.7m). EBIT growth was partially offset by an increase in amortisation of acquired intangibles, which rose through our acquisition programme Other financing fees 8.9 Finance costs exceptional items 21.2 Exceptional operating costs of 5.0m (: 32.8m) primarily relate to acquisition-related expenses, including transactional fees and changes in expected contingent consideration, and restructuring and other costs related to building an offshore centre in Chennai, and driving the Group s efficiency agenda. NET FINANCE COSTS Group net finance costs before exceptional items fell by 48.5m to 12.2m (: 60.7m) reflecting the benefits of the Group s new capital structure and loan agreements from October. PROFIT BEFORE TAX The Group made a profit for the year of 28.5m, compared to a loss of 71.7m in. % EARNINGS PER SHARE Earnings per share 2016 Basic earnings per share Profit / (loss) attributable to shareholders () 30.5 (50.4) Weighted average shares (m) Basic earnings / (loss) per share (pence) 10.2 (92.8) The Group made a basic earnings per share of 10.2 pence (: loss per share of 92.8 pence) which is based on weighted average shares of million (: 54.3million). UNDERLYING EARNINGS PER SHARE (UNAUDITED) The Group s stated dividend policy is a pay-out of around 30% of normalised profit after tax. Underlying profit excludes exceptional items and amortisation of acquisition related intangible assets and includes finance expenses on a proforma basis. Cash tax is deducted at 14% (: 15%), to reflect the Group s estimated effective cash tax rate over the medium term. This better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. Underlying earnings per share is calculated as follows: Underlying earnings per share 2016 EBITDA prior to exceptional items Depreciation (5.4) (4.4) Amortisation software (16.0) (15.8) Net finance costs ( proforma) (12.2) (13.0) Underlyting PBT Cash tax (8.2) (8.0) Underlying PAT Non-controlling interest (2.9) (4.6) Underlying profit attributable to ordinary shareholders Number of shares (m) Underlying earnings per share (pence) Underlying earnings per share was 15.9 pence compared to the prior year adjusted earnings per share of 13.5 pence, based on the number of shares in issue at 31 December DIVIDEND The recommended final dividend payable in respect of the year ended 31 December 2016 is 9.4m or 3.11 pence per share, giving a total dividend for the year of 4.75 pence per share. This is in line with the Group s stated policy and shows growth of 16.4% compared to the proforma maiden dividend of 4.08 pence per share in. 40

4 CASH FLOW The Group generated a free cash flow of 92.6m (: 97.6m) representing a conversion of EBITDA prior to exceptional items to free cash flow of 100% (: 113%). The main movements in cash flow are summarised below: 2016 EBITDA (pre-exceptional) Working capital movement Free cash flow Cash flow conversion 100% 113% Capital expenditure (28.2) (18.4) Net interest costs (9.9) (29.4) Proceeds from issue of share capital Net increase / (decrease) in borrowings (14.0) Repayment of loans (706.9) Exceptional items IPO/refinancing (14.8) Exceptional items/provisions other, including IPO costs (28.7) (24.2) Investment in current year acquisitions (12.0) (19.9) Payment of deferred consideration (7.3) (3.9) Dividends paid (10.3) Taxes paid (2.2) (1.5) Other 0.1 (1.7) Net cash movement (19.9) 46.4 Free cash flow Free cash flow is EBITDA plus the change in working capital, both prior to exceptional items, and is a key performance indicator. The movement in working capital of 0.2m excludes cash flows relating to exceptional items and is indicative of the Group s commitment to improve its working capital position through automating invoice generation and improving payment terms. Capital expenditure Net expenditure on tangible and intangible assets was 28.2m (: 18.4m). This represents 7.3% of revenue (: 5.0%) reflecting the Group s commitment to developing industry leading software. Net interest costs Net interest paid decreased by 19.5m to 9.9m (: 29.4m) as we started to see savings from the change in capital structure in October. Total interest bearing loans decreased from 320.0m to 306.0m, at a lower rate of interest. Exceptional items Exceptional items of 5.0m primarily relate to costs associated with building an offshore centre with scale in Chennai and driving the Group s efficiency agenda. Investment in current year acquisitions Net cash outflow on current year acquisitions was 12.0m (: 19.9m). A further 7.3m (: 3.9m) was spent on deferred consideration for prior year acquisitions. Details of acquisitions are given later in this financial review. Tax paid The Group continues to pay tax in relation to MyCSP and our Indian operations. In addition, in 2016 the Group also started to make payments on account in respect of its year-end tax liability. The Group has become tax paying as a result of the change in capital structure following its IPO in October. The tax cash rate of 14% (: 15%) is significantly less than the effective tax rate in the UK due to the utilisation of deferred tax assets in respect of tax losses brought forward and unclaimed intangible assets and capital allowances. BANK BORROWING AND FINANCIAL COVENTANTS At the end of December 2016, net debt was 251.2m (: 246.0m) Proforma Cash and cash equivalents (56.7) (58.2) (76.5) Senior debt Revolving credit facility Other Net debt Net debt/ebitda prior to exceptional items (times) On a proforma basis, allowing for the timing of IPO costs, net debt reduced by 11.5m in The fully drawn senior term debt facility and the revolving credit facility are available to October m of the 150.0m revolving credit facility was undrawn at the year end. The Group has substantial liquidity to support its growth ambitions and ongoing working capital needs. SECTION 01 STRATEGIC REPORT Equiniti Group plc Annual Report

5 ACQUISITIONS During the year the Group made four acquisitions. It also completed a further acquisition in January On 3 March 2016, the Group acquired KYCnet. KYCnet provides cutting edge workflow technology for on-boarding and monitoring of commercial and retail clients and has broad applicability across financial services as well as retail, travel and legal services. On 4 March 2016, the Group acquired RiskFactor, a UK-based provider of credit decisioning and risk profiling software for commercial lending, with deep client relationships and broad applicability across lending products. RiskFactor complements our other control risk capabilities within our Intelligent division. On 22 July 2016, the Group acquired Toplevel Computing. Toplevel is a digital services technology provider of large-scale digital case management solutions. This acquisition will add to our technology-based services and demonstrates progress on our strategy. Digitisation of the customer journey is a key focus for our clients and we see a material cross-sell opportunity into our extensive financial services client base. The Group took control of Marketing Source on 1 December 2016 for a total consideration of 14.0m (net of cash acquired) with a further earn-out of up to 2.5m payable in 2019 and up to 4.7m payable in 2021, dependent on growth. Marketing Source is a data analytics and cyber security business which helps clients mitigate risk and improve effective customer targeting through data analytics, identity checking and cyber security products. For full year 2017, Marketing Source is expected to deliver c 5m of revenue and c 2m of EBITDA post acquisition costs. In January 2017, the Group acquired Gateway2Finance for a total consideration of 200k with a further earn-out of up to 1.0m payable in 2020, dependent on growth. Gateway2Finance is an FCA authorised entity acting as a consumer finance intermediary, securing loans for clients referred by financial services companies and price comparison websites. Post-acquisition costs, contribution from Gateway2Finance will be negligible for FY2017. The acquisitions will enhance our capabilities in compliance for Financial Services and will contribute to organic growth as we leverage our ability to cross-sell to existing clients. RETIREMENT BENEFITS The Group operates three defined benefit pension schemes, which are all closed to new members. These are the Paymaster Pension Scheme, the ICS Pension Scheme and the MyCSP Limited Pension Scheme. The aggregate deficit across all three schemes is 23.9m (: 13.5m) with a funding plan in place to clear these deficits over the next 10 years. During the year, the Group has closed all schemes to future accrual, as well as consolidating its defined contribution pension plans into a single provider. TAXATION Equiniti Group plc is a UK-based Group, with some support services based in India. Following the Group s IPO in October, the net external debt on which the Group pays interest reduced. The Group is now forecast to pay corporate income tax in the UK, Holland (acquisition during the year) and India, totalling 2.2m (: 1.2m). Equiniti has the following tax assets to utilise: Schedule D1 trading losses of 236m (: 224m) Intangible assets of 378m (: 400m) Other tax assets of 35m (: 33m) This will allow the Group to benefit from a low effective cash tax rate for the foreseeable future. For 2017, this is estimated at approximately 14% of pre-tax profit. The Group undertakes research and development (R&D) activities in relation to enhancements to its software platforms. Some of this R&D activity qualifies for R&D tax credits under HMRC rules. The Group continues to monitor its R&D activities and will apply for tax credits for all qualifying expenditure. John Stier Chief Financial Officer 7 March

6 ADJUSTED* REVENUE () FREE CASH CONVERSION (%) UNDERLYING EPS (UNAUDITED) (PENCE) % 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% % 113% 109% 104% 100% SECTION 01 STRATEGIC REPORT ADJUSTED* REVENUE GROWTH (%) LEVERAGE NET DEBT: EBITDA (x) Underlying EPS has not been stated before 2014 with the business operating under a fundamentally different capital structure before then. 30.0% 8.0x 25.0% 20.0% 26.2% 7.0x 6.0x 5.0x 5.5x 5.6x 6.5x 15.0% 4.0x 10.0% 5.0% 0.0% 7.7% 11.0% 3.7% 3.0x 2.0x 1.0x 0.0x 3.0x 2.7x * leverage is proforma, calculated as net debt/ EBITDA, adjusted for IPO costs paid in H ADJUSTED* EBITDA PRIOR TO EXCEPTIONAL ITEMS () ADJUSTED* EBITDA MARGIN (%) % % 20.0% 15.0% 10.0% 25.2% 25.0% 23.1% 23.4% 24.2% % 0.0x 0.0% Financial history has been provided for the financial years from 2012, where the metric is available, to correspond with the financial history presented in the Equiniti Group plc prospectus for the Initial Public Offering in. This will expand to a five year history in future reporting periods. * Revenue and EBITDA have been adjusted in to reflect the impact of fundamental changes to the business, as outlined in the Group's prospectus. No adjustments have been made to or 2016 revenue and EBITDA. Equiniti Group plc Annual Report