Watchstone Group plc

 

("Watchstone" or the "Group")

 

Pre-close trading update

 

 

Watchstone Group plc (LON:WTG) today issues a pre-close trading update ahead of its results for the year ended 31 December 2016.

 

The Board announces that for the year ended 31 December 2016 overall trading results (unaudited) are expected to be in line with expectations ¹.  Underlying EBITDA for 2017 is not expected to be positive due to the need for continued investment in new products and business lines as further discussed below.

 

Group cash and deposits stood at £81.3m at 31 December 2016 ².

 

Revenue (unaudited):

 

Revenue £'m	2016	2015 (restated*)	% Chg
Healthcare services	28.1	25.1	12%
Hubio	15.0	14.4	4%
Ingenie	13.9	12.5	11%
BAS	3.7	2.8	32%
Total Underlying*	60.7	54.9	11%
Non-underlying	3.1	3.9	(21%)
Total Group	63.8	58.8	9%

 

* Maine Finance and Road Angel were closed during the year and have consequently been reclassified as Non-underlying including 2015.

 

2016 saw continued significant change for the Group, with management activities focussed on the operational objectives outlined to shareholders at the beginning of 2016: to deal with the Group's losses and to establish a platform to create shareholder value from the Group's businesses.

 

The sale or closure of non-core assets and restructuring resulted in the elimination of losses of over £14m on an annualised basis. Property Services and Quintica were sold, Maine Finance and Road Angel closed and a significant restructuring of Hubio was executed.

 

ptHealth and ingenie are now both profitable and growing.

 

Building on the strategy outlined in January 2016, a plan of action was created and is being executed for each of the businesses. In 2016, we launched Hubio, Hubio Fleet, InnoCare, BAS Corporate and developed ingenie's B2B technology platform.

 

Taking each of the operating businesses in turn:

 

Healthcare services:

 

ptHealth treated a record number of patients in 2016 and conducted a record number of patient assessments up 6% vs. 2015. All clinics that were loss making in 2015 have either been sold or were profitable during 2016.

 

InnoCare launched in Q2 2016 and has since been developing momentum, including growth in the network to 167 clinics from 152 clinics. From September 2016, investment in sales and business development has resulted in a substantial growth in its sales pipeline. InnoCare Charting, a market leading software tool to help clinicians be more efficient and so treat more patients was launched in November 2016. Whilst early signs are positive, it is too early to say how quickly sales will be delivered. The required investment in the InnoCare product and associated marketing will impact its earnings for the immediate future.

 

Hubio:

 

The Hubio brand was launched in January 2016 to bring together the insurance software parts of the Group and has since become a recognised brand in its sectors. By pulling three previously separate companies together under common management, we were able to better assess our capabilities and address our opportunities and challenges.

 

As previously outlined, the development of the usage based insurance (UBI) business has been disappointing and 2016 was a year of intensive work externally to understand and to better qualify market opportunities and internally to optimise and focus resources. As a result, we start 2017 with a significantly streamlined organisation and plan to launch an updated UBI proposition by the end of Q1 2017 which will combine the best elements of Hubio and ingenie's technology, intellectual property and business process capabilities.

 

Hubio Fleet was launched in September 2016 and has made an encouraging start successfully signing up customers on multi-year contracts. Investment in sales, operations and development means the business comes into 2017 with a strong pipeline of opportunities and an expectation of profitable growth during 2017.

 

Hubio EIS, our enterprise insurance solutions business,  was restructured during 2016 resulting in this unit returning to profitability by Q3 2016. Hubio EIS's solutions continue to receive industry and customer acclaim but the key focus remains new business and to this end, the sales pipeline is now at its strongest level in its history.

 

The Hubio business in Canada is re-focussing on its Iter8 insurance software platform. An exciting partnership with Guidewire Inc was announced in November 2016 and this has already resulted in a strong uplift in opportunities. The Farm Portal, which launched in 2016, has a solid pipeline which is expected to result in at least 2 new deals in 2017.

 

As noted in the results for the six months ended 30 June 2016, in respect of Hubio the Board determined that, in line with accounting standards and the practice of peers, all internal development expenditure will be expensed rather than capitalised until profitable product and service delivery is expected to be feasible and probable. This results in approximately £1.5m of additional expense included within EBITDA on an ongoing basis.

 

While significant progress has been made in dealing with the various opportunities and challenges across the Hubio businesses, it will be 2018 before we see profits or positive cash flows. However, the Board remains confident in the underlying technologies in Hubio, the associated significant market opportunities and the ability to see growth in 2017.

 

ingenie:

 

2016 was another successful year for ingenie with a 17% year on year increase in new business sales and a 22% increase of in force policies.  Significant improvements were also achieved in customer retention during the year. The business remains profitable and is expected to grow revenue further during 2017 through new product initiatives.

 

As previously detailed, our technology has been used to create a white label proposition which can be licensed to third party brands/insurers who wish to create their own telematics based offering. ingenie is looking to find further high quality partners like ANWB for this product offering.

 

BAS:

 

In 2016, BAS launched a division targeting larger corporate opportunities in addition to its traditional SME customers. The first major corporate customer was won (providing energy procurement services for Suffolk County Council) and a further pipeline has been developed. Total new business sales were a record and up approximately 30% vs. 2015 resulting in the revenue growth seen above. 2017 will be a year to build on the foundations laid during 2016. 

 

Central overheads and cash:

 

Group cash and deposits stood at £81.3m at 31 December 2016 ². Net cash outflows during the year of £21.9m have been kept below expectations with several matters being favourably resolved. Excluding restructuring and other non-recurring items, operating businesses consumed a net £3.3m. Also excluding non-recurring items, central spend (not including movements on creditors and provisions) was £9.5m. Overall spend on restructuring and other non-recurring items including businesses sold or closed and net of receipts was £9.1m.  There remain material provisions, primarily related to taxation, which are expected to be substantially resolved and settled during 2017.

 

2017 Outlook:

 

2017 will be another year of significant development for the Group. The continued reduction of losses and cash outflow will continue and the Board remains committed to maximise shareholder value and seek returns for these businesses in the most effective way and the Board will consider disposals where appropriate.

 

ptHealth and ingenie both continue to grow profitably. BAS is now demonstrating its capacity to be profitable and cash generative. Central costs will continue to be managed carefully at reduced levels consistent with the unresolved legacy matters and the needs of the organisation. The initiatives, restructuring and new launches in Hubio will now mean it will be 2018 before we see profits or positive cash flows for both Hubio and the Group as a whole. 

 

Indro Mukerjee, Group Chief Executive Officer said:

"We have made good progress in dealing with losses and those businesses that were not viable or non-core as well as developing profitable platforms in ptHealth, ingenie and BAS. Hubio, will take longer and we have restructured the businesses in that division appropriately. Our offerings remain relevant in segments that will see substantial growth in the next few years and we are focussed on building propositions for growing markets."

 

For further information:

 

Watchstone Group plc	Tel: 03333 448048
Peel Hunt LLP, Nominated Adviser and broker	Tel: 020 7418 8900
Dan Webster

 

1.     Market expectations for the year ended 31 December 2016 were minimum revenues of £55.5m and a maximum EBITDA loss of £14.9m.

2.     Group cash and deposits do not include the £50.0m that remains, as announced on 29 November 2016, in escrow pending resolution or determination of purported warranty claims by Slater & Gordon Limited ("S&G") in respect of its purchase of the Professional Services Division. At this stage, no proceedings have been commenced by S&G.