Interim Results - Part 1

3i Group PLC 23 November 2000 Part 1 3i GROUP PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2000 Sir George Russell, chairman of 3i Group plc, commenting on the results, said: '3i achieved good results for the six months to 30 September 2000, generating a total return of £1,040 million, a return of 20% on opening shareholders' funds. The Directors have announced an interim dividend of 4.9p, an increase of 6.5% over last year.' RESULTS HIGHLIGHTS - Total return of £1,040 million - Return on opening shareholders' funds of 20%, outperforming all major stock market indices - Diluted net asset value per share increased from 847p to 1011p - Interim dividend of 4.9p per share, up 6.5% - Investment of £902 million Brian Larcombe, chief executive of 3i Group plc, said: 'I am pleased with 3i's performance in the six months to 30 September and particularly with the progress that we have made in building the business. 3i's international network is enabling us to invest in exciting businesses across the world and to achieve good returns from these investments.' In the UK, investment rose to £511 million compared with £327 million in the same period last year. Investment in continental Europe increased by 79% to £352 million, with particularly strong growth in Germany and Spain. Quoted markets were receptive to good quality technology IPOs for most of the period. There were 27 IPOs of 3i backed companies in Europe compared with 17 in the whole of the previous financial year. Of these IPOs, 12 were in the UK and 10 were in Germany. There were 67 trade sales compared with 59 in the same period last year. 3i's European network has expanded with the acquisition of Helsinki-based SFK Finance and the opening of an office in Zurich. Since September, 3i has also acquired Bank Austria TFV, an Austrian technology venture capital investor. 3i's US offices in Boston and Palo Alto add value to 3i's overall technology portfolio, as well as providing good investment opportunities. 3i made eight investments during the six months, investing £29 million. Since opening in the US last year, 17 investments have been made, with 3i leading nine of these investments. The Group is very pleased with the continued development of this business. In Singapore 3i's business has continued to develop, focussing on technology companies and other fast growth businesses with the capacity to establish international operations. 3i has built a good team in Japan but the buy-out market there continues to develop slowly. 3i currently manages around £2.3 billion of unquoted third party funds which are invested alongside 3i's own capital. 3i is the investment manager to four quoted investment companies, with the launch of 3i European Technology Trust in early April. By managing these assets 3i builds on its expertise to manage quoted investments in certain specialist areas which helps 3i to manage its quoted portfolio. FINANCIAL REVIEW Total return for the six months was £1,040 million, a return on opening shareholders' funds of 20.1%. This return compares very favourably with total returns of the FTSE 100 and the TechMARK 100 which were down 2.7% and 15% respectively. In line with recent trends, an increasing proportion of total return comprised realised and unrealised capital profits, with revenue profits marginally lower than last year. Technology investments accounted for all of the Group's total return. Performance of 3i's non-technology, buy-out and growth capital businesses was satisfactory given difficult trading conditions in certain sectors. 3i's European businesses performed well with the UK making a total return of £909 million and continental Europe a return of £174 million. REVIEW OF STRATEGIC OBJECTIVES 3i has achieved the strategic objectives which were set out three years ago. As a result, 3i has taken the opportunity to set further objectives that reinforce the Group's international ambition. - Increase investment in continental Europe to at least 30% of the total portfolio by 2006 - Increase the US portfolio to at least 10% of 3i's portfolio by 2006 - Increase the portfolio in Asia Pacific to at least 5% of the Group's portfolio by 2006 - Continued innovation in the UK to maintain 3i's market leading position 3i has exceeded the objectives set for investment in technology companies. The investment policy is to invest in growth companies and it is becoming increasingly difficult to define those which are technology businesses and those whose growth will be driven by the application of new technology. For this reason, a specific technology objective has not been reset. Brian Larcombe commented: '3i has achieved good results and the Group continues to develop its international network, making significant progress in key markets. Investment activity and realisations since 30 September have continued at a high level.' FOR FURTHER INFORMATION, PLEASE CONTACT: Brian Larcombe, Chief Executive Tel: 020 7975 3386 3i Group plc Michael Queen, Finance Director Tel: 020 7975 3400 3i Group plc Liz Hewitt, Director Corporate Affairs Tel: 020 7975 3283 3i plc Issued by: Philip Gawith Tel: 020 7379 5151 The Maitland Consultancy NOTES TO EDITORS: 3i brings capital, knowledge and connections to the creation and development of businesses around the world. It invests in a wide range of opportunities from start-ups to buy-outs and buy-ins, focusing on businesses with high growth potential and strong management. 3i invests in businesses across three continents through local investment teams in Europe, Asia Pacific and the USA. To date, 3i has invested almost £13 billion (including co-investment funds). In the six months to September 2000, an average of £7.2 million (including co-investment funds) was invested each working day. 3i's current investment portfolio is valued at almost £7 billion. The Interim Results press release, the presentation and speeches given by Brian Larcombe, chief executive and Michael Queen, finance director, announcing the Interim Results will be published from 10:00: 23 November 2000 on 3i's website: www.3i.com/investor. CHAIRMAN'S STATEMENT 3i achieved good results for the six months to 30 September 2000, generating a total return of £1,040 million, a return of 20% on opening shareholders' funds. The Directors have announced an interim dividend of 4.9p, an increase of 6.5% over last year. Worldwide venture capital markets have continued to grow at a fast rate. Against this backdrop, 3i's international expansion has continued, both organically and through acquisition. In May, we opened an office in Zurich, our first in Switzerland, and in June acquired one of Finland's leading venture capital investors, SFK Finance. Since 30 September, we have established 3i Austria through the acquisition of Bank Austria TFV, a specialist high technology venture capital investor. By building our international network we can deliver specialist knowledge and skills in our main markets in Europe, the US and Asia Pacific. Looking forward, economic fundamentals in the countries in which we operate are sound and this creates a positive medium term outlook. Despite this, we have seen volatility in quoted markets which may continue and this has created uncertainty and a fall in confidence in certain sectors. We are committed to investing in unquoted growth companies that provide good investment returns irrespective of fluctuating quoted markets. We have achieved the strategic objectives which were set out three years ago. As a result, we have taken the opportunity to set further objectives which reinforce our international ambitions. SIR GEORGE RUSSELL CBE CHAIRMAN 22 November 2000 OPERATING and FINANCIAL REVIEW I am pleased with 3i's performance in the six months to 30 September and particularly with the progress that we have made in building the business. 3i's international network is enabling us to invest in exciting businesses across the world and to achieve good returns from these investments. PERFORMANCE 3i achieved a total return of £1,040 million, largely from increases in the value of investments in our technology portfolio and from strong realisations. A feature of the six months is that a small number of IPOs, in the communications, healthcare and software and computer services sectors, made a significant contribution to the total return. Performance across the portfolio was mixed, with a number of companies experiencing difficult trading conditions. Market growth in Europe, combined with the expansion of our operations in the US and Asia Pacific, has resulted in higher investment. We invested £902 million (1999: £532 million) in 440 businesses of which 62% was in technology businesses and £352 million was in continental Europe. STRATEGY Our objective is to be the leading international venture capital company with a strong position in all of the major venture capital markets. Our strategy to achieve this objective is to expand our international network and combine this local strength with specialist sector knowledge. International expansion enables 3i to take advantage of the growth in venture capital markets and to use our scale and network as a unique competitive advantage. Three years ago we announced a number of strategic objectives for 3i which we have now achieved. I think all our staff can be proud of this success. As a result, we are now setting new objectives. In the UK, we aim to maintain the leading position we have held for many years through continued innovation and customer focus. We continue to see continental Europe as a major growth market and have further expanded our network. We are now planning to increase our activity so that at least 30% of the total portfolio will be in continental Europe by 2006. The US is the world's leading technology and venture capital market and it is important to have a strong presence in the US. Our business there is developing well and we expect that the US will represent at least 10% of 3i's portfolio by 2006. The venture capital market in Asia Pacific is much less developed than in the US and Europe. However, there is strong growth and we expect to have around 5% of the Group's portfolio in Asia Pacific by 2006. We have exceeded the objective which was set for investment in technology companies. Our investment policy is to invest in growth companies and it is becoming increasingly difficult to define those which are technology businesses and those whose growth will be driven by application of new technologies. For this reason, we have not reset a specific technology objective. These objectives underline our commitment to grow our international activities and they provide guidance for the future direction of the business. OPERATING REVIEW EUROPE In Europe, we invested £863 million compared with £524 million last year. Investment in European technology companies continued to increase, with £523 million invested in 299 companies across a broad range of sectors. Although there have been lower levels of activity in the buy-out market, overall we made more investments. The average size of these investments was also higher and we invested £300 million (1999: £202 million) in total. In the UK, investment rose to £511 million compared with £327 million in the same period last year. Investment in continental Europe increased by 79% to £352 million, with particularly strong growth in Germany and Spain. Quoted markets were receptive to good quality technology IPOs for most of the period. There were 27 IPOs of 3i backed companies in Europe compared with 17 in the whole of the previous financial year. Of these IPOs, 12 were in the UK and 10 were in Germany. There were 67 trade sales compared with 59 in the same period last year. Our European network has expanded with the acquisition of Helsinki-based SFK Finance and the opening of an office in Zurich. Since September, we have also acquired Bank Austria TFV, an Austrian technology venture capital investor. USA Our offices in Palo Alto and Boston add value to our overall technology portfolio, as well as providing good investment opportunities. We made eight investments in the six months, investing £29 million. Since opening our offices in the US last year, we have made 17 investments and are the leading investor in nine of them. We are very pleased with the continued development of this business. ASIA PACIFIC In Singapore, our business has continued to develop, focussing on technology companies and other fast growth businesses with the capacity to establish international operations. We have built a good team in Japan but the buy-out market there continues to develop slowly. FUNDS UNDER MANAGEMENT 3i currently manages around £2.3 billion of unquoted third party funds which are invested alongside 3i's own capital. 3i is the investment manager to four quoted investment companies, with the launch of 3i European Technology Trust in early April. By managing these assets we build our expertise to manage quoted investments in certain specialist areas which helps us to manage our own quoted portfolio. FINANCIAL REVIEW TOTAL RETURN Total return for the six months was £1,040 million, a return on opening shareholders' funds of 20.1%. This return compares very favourably with total returns of the FTSE100 and the TechMARK 100 indices which were down 2.7% and 15.0% respectively. In line with recent trends, an increasing proportion of total return comprised realised and unrealised capital profits, with revenue profits marginally lower than last year. Returns generated by technology investments accounted for all of the Group's total return. Performance of our non-technology, buy- out and growth capital businesses was satisfactory given the difficult trading conditions in certain sectors. Our European businesses have performed well with the UK making a total return of £909 million and continental Europe a return of £174 million. REVENUE PROFIT Revenue profit after tax was £69 million, £1 million lower than last year. The increased focus on technology investments resulted in lower underlying income yields and equity dividend income included some large dividends received on the sale of investments. Fee income for the six months increased to £35 million (1999: £24 million), as a result of a rise in fees received from the management of unquoted and quoted funds. Total administrative expenses increased to £78 million from £57 million, because of our continued international expansion and the inclusion for the first time of the operating costs of newly acquired businesses in Finland and Germany. Costs are allocated between capital and revenue based on the expected future split of returns, between capital gains and income. Following a review, the expected proportion of returns in the form of capital has been increased from 70% to 80%, in accordance with increasing investment in technology companies which generate higher capital returns. The expenses allocated to the capital reserve have increased from £15 million to £26 million. Despite the cost increase, net costs (costs less fees received) as a percentage of shareholders' funds are lower than last year. REALISED CAPITAL PROFITS Realised profits on the sale of investments were significantly higher at £302 million compared with £58 million in the first half of last year. This was mainly as a result of the sale of part of our holding in investments that achieved an IPO during the period. Proceeds from the sale of equity investments amounted to £713 million (1999: £280 million). The average uplift over the book value at 31 March 2000 achieved on the sale of equity investments was 79% (1999: 39%). Profit over cost amounted to £570 million, an uplift of 400% over cost. UNREALISED VALUE GROWTH As a result of difficult trading conditions, we have reduced the valuation of the portfolio by £144 million in respect of companies we consider may fail (1999: £85 million). Despite this, the value of companies held throughout the period increased by £712 million. This is due mainly to a relatively small number of technology investments. BALANCE SHEET AND CASH FLOW The valuation of the Group's investment portfolio has increased by £919 million to £7.1 billion. An increasing trend has been the IPO of technology companies at an earlier stage in their life cycle, leading to venture capital businesses having larger proportions of their portfolios in quoted stocks. As a result of this, 3i's quoted portfolio (including those companies quoted on secondary markets) has increased to £2.3 billion. Since 30 September 2000 quoted markets have been volatile with technology companies seeing falls in their share prices. If 3i's £2.3 billion quoted portfolio was adjusted for market movements up to 22 November its value would be approximately £575 million lower. A schedule of the ten largest investments is included in this report. These are all investments in technology based companies in which 3i invested when they were much smaller unquoted companies. The analysis given at the end of this announcement provides a more complete picture of the portfolio as a whole. A net cash inflow of £133 million (1999: £64 million) resulted from record proceeds on the sale of investments which exceeded investment for the six months. Gearing has fallen to 17%, as a result of the increase in the valuation of the portfolio and the consequent increase in shareholders' funds relative to debt. SUMMARY 3i has achieved good results for the six months to 30 September 2000. The Group continues to develop its international network, making significant progress in key markets. Investment activity and realisations since 30 September have continued at a high level. BRIAN LARCOMBE CHIEF EXECUTIVE 22 November 2000 CONSOLIDATED STATEMENT OF TOTAL RETURN FOR THE SIX MONTHS TO 30 SEPTEMBER 2000 6 months to 30 6 months to 30 12 months to 31 September 2000 September 1999 March 2000 (as restated)* (unaudited) (unaudited) (audited) Reven Capita Total Reven Capit Tota Reven Capita Total ue l ue al l ue l £m £m £m £m £m £m £m £m £m Capital profits Net realised profits over opening valuation 302 302 58 58 350 350 Net unrealis- ed value growth in the period 712 712 185 185 1,167 1,167 ------ ----- ----- ---- ------ ----- 1,014 1,014 243 243 1,517 1,517 Total operating income before interest payable 182 182 165 165 325 325 Interest payable (59) (1) (60) (51) - (51) (104) (1) (105) ----- ------ ----- ----- ----- ---- ----- ------ ----- 123 1,013 1,136 114 243 357 221 1,516 1,737 Admini- strative expenses (52) (26) (78) (42) (15) (57) (102) (33) (135) Amortisa- tion of goodwill - (8) (8) - - - - (2) (2) ----- ------ ----- ----- ----- ---- ----- ------ ----- Return before tax and currency transla- tion adjust- ment 71 979 1,050 72 228 300 119 1,481 1,600 Tax (2) (9) (11) (2) (5) (7) (4) (13) (17) ----- ------ ----- ----- ----- ---- ----- ------ ----- Return for the period before currency transla- tion adjust- ment 69 970 1,039 70 223 293 115 1,468 1,583 Currency transla- tion adjust- ment (7) 8 1 6 (4) 2 4 (8) (4) ----- ------ ----- ----- ----- ---- ----- ------ ----- Total 62 978 1,040 76 219 295 119 1,460 1,579 return ===== ====== ===== ===== ===== ==== ===== ====== ===== Total return per share Basic (pence) 10.2p 161.7p 171.9p 12.7p 36.8p 49.5p 19.9p 244.1p 264.0p Diluted (pence) 10.1p 159.5p 169.6p 12.6p 36.4p 49.0p 19.7p 241.7p 261.4p ===== ====== ===== ===== ===== ==== ===== ====== ===== 6 months to 6 months to 12 months to 30 September 30 September 31 March 2000 1999 2000 (unaudited) (unaudited) (audited) Movement in £m £m £m shareholders' funds Opening balance 5,174 3,604 3,604 ------ ------ ------ Revenue return 62 76 119 Capital return 978 219 1,460 ------ ------ ------ Total return 1,040 295 1,579 Dividends (29) (27) (72) Proceeds of issues 12 6 63 of shares ------ ------ ------ Movement in the 1,023 274 1,570 period ------ ------ ------ Closing balance 6,197 3,878 5,174 ====== ====== ====== * as restated to reflect the adoption of Financial Reporting Standard 16 - Current Tax. CONSOLIDATED REVENUE STATEMENT FOR THE SIX MONTHS TO 30 SEPTEMBER 2000 6 month to 6 month to 12 months to 30 September 30 September 31 March 2000 1999 2000 (as restated)* (unaudited) (unaudited) (audited) £m £m £m Interest receivable 51 46 87 on loan investments Fixed rate dividends 12 17 34 Other interest 20 14 31 receivable Interest payable (59) (51) (104) ------ ------ ------ Net interest income 24 26 48 Dividend income from 64 63 117 equity shares Income from joint (1) - (1) ventures Fees receivable 35 24 55 Other operating 1 1 2 income ------ ------ ------ Total operating 123 114 221 income Administrative (52) (42) (102) expenses ------ ------ ------ Profit on ordinary 71 72 119 activities before tax Tax on profit on (2) (2) (4) ordinary activities ------ ------ ------ Revenue profit for 69 70 115 the period Dividends Interim (29) (27) (27) Final (45) ------ ------ ------ Revenue profit 40 43 43 retained for the period ====== ====== ====== Dividends per share 4.9p 4.6p 12.2p (pence) ====== ====== ====== Earnings per share Basic (pence) 11.5p 11.7p 19.3p Diluted (pence) 11.3p 11.6p 19.1p ====== ====== ====== * as restated to reflect the adoption of Financial Reporting Standard 16 - Current Tax. CONSOLIDATED BALANCE SHEET AS AT 30 SEPTEMBER 2000 30 30 31 March September September 2000 1999 2000 (unaudited) (unaudited) (audited) Assets £m £m £m £m £m £m Treasury bills and other - 16 - eligible bills Loans and advances to 515 348 478 banks Debt securities held for 237 166 191 treasury purposes ----- ----- ----- Debt securities and other fixed income securities held as financial fixed asset investments Loan investments 1,363 1,120 1,292 Fixed income shares 504 668 594 Equity shares Listed 1,869 753 1,304 Unlisted 3,355 2,193 2,982 ----- ----- ----- 7,091 4,734 6,172 Interests in joint 55 62 122 ventures Goodwill 72 - 76 Tangible fixed assets 54 47 53 Other assets 253 200 189 ----- ----- ----- Total assets 8,277 5,573 7,281 ----- ----- ----- Liabilities Deposits by banks 140 83 190 Debt securities in issue 1,606 1,416 1,613 Other liabilities 285 196 271 Subordinated liabilities 49 - 33 ----- ----- ----- 2,080 1,695 2,107 ----- ----- ----- Share capital 303 299 302 Share premium and 328 263 317 redemption reserve Capital reserve 5,319 3,100 4,341 Revenue reserve 247 216 214 ----- ----- ----- Shareholders' funds 6,197 3,878 5,174 ----- ----- ----- Total liabilities 8,277 5,573 7,281 ===== ===== ===== Net asset value per share Basic (pence) 1022p 650p 857p Diluted (pence) 1011p 645p 847p ===== ===== ===== APPROVED BY THE BOARD 22 NOVEMBER 2000 CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX MONTHS TO 30 SEPTEMBER 2000 6 months to 6 months to 12 months to 30 September 30 September 31 March 2000 1999 2000 (unaudited) (unaudited) (audited) £m £m £m Operating activities Interest received and 56 60 114 similar income arising from debt securities and other fixed income securities held as financial fixed asset investments Other interest received 19 16 35 and similar income Interest paid on (57) (47) (103) borrowings Dividends received from 63 63 115 equity shares Fees and other net cash 34 25 54 receipts Operating and (55) (60) (109) administrative costs paid ----- ------ ----- Net cash inflow from 60 57 106 operating activities ----- ------ ----- Taxation (paid)/received (2) 13 19 ----- ------ ----- Capital expenditure and financial investment Investment in equity (715) (400) (1,278) shares, fixed income shares and loans Sale, repayment or 834 441 1,162 redemption of equity shares, fixed income shares and loan investments Investment administrative (26) (15) (33) expenses Investment interest paid (1) - (1) Net divestment of joint 21 6 7 ventures Disposal of investment 2 1 4 properties Purchase of tangible fixed (4) (4) (11) assets Sale of tangible fixed 1 - 1 assets ----- ------ ----- Net cash inflow/(outflow) 112 29 (149) from capital expenditure and financial investment ----- ------ ----- Acquisitions Acquisition of subsidiary (4) - (78) undertakings ----- ------ ----- Equity dividends paid (45) (41) (69) ----- ------ ----- Management of liquid (81) (63) (189) resources ----- ------ ----- Net cash inflow/(outflow) 40 (5) (360) before financing ----- ------ ----- Financing Debt due within one year (19) (7) 9 Debt due after more than (31) 13 309 one year Issue of shares 12 6 64 ----- ------ ----- Net cash (outflow)/inflow (38) 12 382 from financing ----- ------ ----- Increase in cash 2 7 22 ----- ------ ----- NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2000 1. Reconciliation of revenue profit before tax to net cash inflow from operating activities 6 months to 6 months to 12 months to 30 September 30 September 31 March 2000 1999 2000 (unaudited) (unaudited) (audited) £m £m £m Revenue profit before tax 71 72 119 Depreciation of equipment 3 3 6 and vehicles (Increase) in other (15) - (13) assets Tax on investment income (1) - (2) included within income from overseas companies (Increase) in prepayments (19) (9) (9) and accrued income Increase/(decrease) in 20 (8) 4 accruals and deferred income Reversal of - (1) 1 (profits)/losses of joint ventures less distributions received Loss on sale of tangible 1 - - fixed assets ----- ----- ----- Net cash inflow from 60 57 106 operating activities ----- ----- ----- 2. Reconciliation of cash flows to movements in net debt 6 months to 6 months to 12 months to 30 September 30 September 31 March 2000 1999 2000 (unaudited) (unaudited) (audited) £m £m £m Increase in cash in the 2 7 22 period Cash outflow from 81 63 189 management of liquid resources Cash outflow/(inflow) 66 (6) (309) from debt financing Cash (inflow) from (16) - (9) subordinated liabilities ------- ------- ------- Change in net debt from 133 64 (107) cash flows Debt acquired with - - (23) subsidiary undertakings Foreign exchange (9) 2 (2) movements ------- ------- ------- Movement in net debt in 124 66 (132) the period Net debt at start of (1,170) (1,038) (1,038) period ------- ------- ------- Net debt at end of (1,046) (972) (1,170) period ------- ------- ------- 3. Analysis of net debt Other 1 April non-cash Exchange 30 September 2000 Cash flow changes movement 2000 £m £m £m £m £m Cash and 42 2 - - 44 deposits repayable on demand Treasury 627 81 - - 708 bills, other loans, advances and treasury debt securities Deposits and (393) 19 (20) (9) (403) debt securities repayable within one year Deposits and (1,410) 47 20 - (1,343) debt securities repayable after one year Subordinated (33) (16) - - (49) liabilities Finance leases (3) - - - (3) ------- ---------- -------- -------- ------------ (1,170) 133 - (9) (1,046) ------- ---------- -------- -------- ------------ MORE TO FOLLOW

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