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RNS
Homeserve Plc  -  HSV   

Annual Financial Report

Released 07:00 22-May-2018

RNS Number : 7978O
Homeserve Plc
22 May 2018
 

 

HomeServe plc

                               Preliminary results for the year ended 31 March 2018

 


2018

2017

Change

Revenue

£899.7m

£785.0m

+15%

Statutory operating profit

£135.0m

£104.7m

+29%

Statutory profit before tax

£123.3m

£98.3m

+25%

Basic earnings per share

30.2p

24.0p

+26%





Adjusted operating profit1

£153.4m

£118.8m

+29%

Adjusted profit before tax1

£141.7m

£112.4m

+26%

Adjusted earnings per share1

33.6p

27.0p

+24%

EBITDA1

£197.6m

£154.2m

+28%





Ordinary dividend per share

19.1p

15.3p

+25%

Net debt

£237.8m

£261.4m

-9%

Total number of customers

8.4m

7.8m

+7%

 

Record profit growth driven by outstanding performance in North America

 

·      Statutory operating profit up 29% to £135.0m, with basic earnings per share up 26% to 30.2p as total customers increased 7% to 8.4m

·      Further step change in North America: 146% increase in adjusted operating profit to $64.4m; customers up 20% to 3.6m

·      UK adjusted operating profit of £61.1m (FY17: £63.2m) as the business invested in strategic initiatives to increase efficiency, expand partnerships and grow Heating and LeakBot opportunities

·      France and Spain both delivered double digit growth in adjusted operating profit, up 13% and 20% respectively

·      Acquisition of 100% of Checkatrade in November 2017 to accelerate the development of an online, on demand Home Experts marketplace

·      Group remains highly cash generative and well financed: 107% cash conversion¹; net debt within target range at 1.2x EBITDA; successful equity placing in October 2017 raised gross proceeds of £125m

·      Proposed final dividend of 14.4p, to take the total dividend for the year to 19.1p, up 25%

 

Richard Harpin, Founder and Chief Executive, HomeServe plc, said: "This has been another great year for HomeServe, with record profit growth and another step change in our growth in North America. Our core Membership proposition continues to resonate strongly with consumers seeking to run their homes more easily, and we are delighted to serve 8.4m customers worldwide at an annual policy retention rate of 82%.

"We have made good progress this year on developing three new business lines - Home Experts; Heating, Ventilation and Air Conditioning (HVAC); and Smart Home. In HVAC we completed acquisitions in the UK and France and in Smart Home our LeakBot innovation is starting to gain real traction with insurers. I am particularly excited by the progress we have made on developing our online Home Experts marketplace since we acquired 100% of Checkatrade in November 2017."

 

Outlook

HomeServe has good prospects for growth in FY19 with attractive strategic opportunities in all its geographies. In particular, continued strong organic growth is expected in North America, with acquisitions providing opportunities to further accelerate business development across the Group.

¹HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. APMs used in this announcement are non-GAAP measures which address profitability, leverage and liquidity and together with operational KPIs give an indication of the current health and future prospects of the Group. Definitions of APMs and the rationale for their usage are included in the Glossary at the end of this announcement with a reconciliation, where applicable, back to the equivalent statutory measure.

 

Change in director's responsibilities

In a separate announcement this morning, HomeServe confirmed that Martin Bennett, CEO, HomeServe UK, will step down from the Board at the Annual General Meeting on 20 July and will leave the business later in 2018.

 

Results presentation

A presentation for analysts and investors will take place at 9am this morning at UBS, 5 Broadgate, London EC2M 2QS.

 

There will be an audio webcast with a facility to ask questions, available via www.homeserveplc.com. This is accompanied by a listen-only conference call with details as follows;

 

·      United Kingdom Toll-Free

0800 358 9473

PIN: 44371287#

·      United Kingdom Toll

+44 3333 000 804

PIN: 44371287#

 

 

Enquiries

HomeServe

Tulchan Group

Miriam McKay - Group Communications and IR Director

Miriam.McKay@homeserve.com

+44 7795 062564

 

Simon Lewis - Head of Investor Relations

Simon.Lewis@homeserve.com

+44 7970 840694

Martin Robinson

Lisa Jarrett-Kerr

 

 

homeserve@tulchangroup.com

+44 207 353 4200

 

About HomeServe

 

HomeServe is an international home repairs and improvements business which provides people with access to tradespeople and technology to run their homes more easily. HomeServe is listed on the London Stock Exchange, with a market capitalisation of c.£2.7 billion. 

 

 


CHIEF EXECUTIVE'S REVIEW

 

Progress in FY18

When we look back in a few years' time on our 2018 financial year, I think we may see it as the year when we further step changed HomeServe's growth opportunities. Our business continued to perform well and the strategic decisions we took will have a major influence on our long term growth prospects.

                                                                                      

Our most exciting growth area in the short to medium term is North America. This year's 20% increase in customers was split 50:50 between organic growth and the first tranche of customers acquired with our largest ever acquisition - the policy book of Dominion Products and Services Inc (DPS). Our North American team have been signing new partners at a rate of two per week, and I would like to congratulate them for their dedication and hard work in taking our North American business to scale. 

 

The UK is our most developed, cash generative business. Our UK Membership base is stable at around 2.2m customers, and we continue to see opportunities to improve its size and value through product development, marketing and selective policy book acquisitions. The UK team maintained high levels of customer service all year, including during adverse winter weather conditions, thanks to improved facilities to serve customers online and redeploying an increasingly multi-skilled workforce as the need arose. Looking forward, our priorities in the UK are to broaden our affinity partnerships in new areas such as energy, with partnerships signed this year with e.on and Octopus Energy; to increase the efficiency of our operations; to develop our Heating, Ventilation and Air Conditioning (HVAC) business; and to continue the roll-out of LeakBot, which is looking very promising. 

 

In France, we continue to enjoy strong relationships with our main partners Veolia and Suez and remain focused on business development opportunities that could unlock new partnerships and opportunities for future growth. We took our first step into HVAC installations in France in December 2017, with the acquisition of Electrogaz.

 

In Spain, revenue growth in our Membership business and increased efficiency in Claims drove strong profit growth. The current partnership with Endesa draws to a close in the coming weeks. Discussions continue to define a future relationship, which could be a non-exclusive claims handling and service only arrangement. This would enable us to enter discussions with other energy companies. The net effect of not marketing with Endesa is expected to have no significant impact on adjusted operating profit in Spain over the next two years.

                                        

Our partnership with Edison Energia in Italy continued to make progress, with Edison marketing HomeServe products as part of their strategy to gain market share in the domestic Italian energy supply market. We continue to develop opportunities to expand our Membership model into new markets, and will ensure that new entries are supported by large and committed utility partners.

 

Positioning for future growth

I see it as crucial to my role as founder and CEO of HomeServe to position our business for the future as well as the present. This year, we continued to develop our five strategic priorities - our people, our affinity partnerships, our local repair networks, our digital capabilities and the financial resources at our disposal. These capabilities create the opportunity to expand beyond our traditional Membership business and to this end, we have created four global business lines to expand our business model:

·      Membership - our core subscription based home assistance service covering plumbing, heating, electrical, locks, glazing, pest control and technology, which we have rolled out successfully in the UK, North America, France, Spain and Italy

·      Home Experts - an online, on demand marketplace which matches younger, non insurance minded consumers with vetted and reviewed local tradespeople to carry out a range of household repairs and improvements

·      HVAC - a complete solution to the installation, repair, maintenance and financing of heating, ventilation and air conditioning

·      Smart Home - developing and distributing technology to enable home automation, including LeakBot, smart thermostats and connected boilers.

I am delighted to have been able to promote members of my management team to make the most of these new opportunities, in particular Tom Rusin, who is now Global CEO of our Membership business. Tom has been instrumental to our recent success in North America and will bring invaluable insight and energy to drive all of our Membership businesses forward. He has a worthy successor - John Kitzie - already in place in North America, and will continue to be based in Norwalk, Connecticut.

 

Home Experts

For me, one of the most significant decisions we took this year was to purchase the remaining 60% of Checkatrade, to give us full control of that business. As we develop our Home Experts strategy, Checkatrade brings a strong UK brand and a great process for certifying reputable tradespeople. Over time, we will combine this with the innovative digital capabilities we have access to at Habitissimo, as well as Habitissimo's ability to test different revenue models and to expand effectively into new markets: they are already present in Spain, France, Italy, Portugal, Brazil, Mexico, Argentina, Chile and Columbia. With the financial resources HomeServe can add to the mix, we see enormous potential to develop a scalable, global Home Experts marketplace.

 

My interest in Home Experts began with an analysis of our wider market, including not only home repairs but also home improvements. Our core Membership subscription business continues to appeal to around a third of addressable households - homeowners who want to avoid unexpected costs and who value our reliable customer service when fixing problems that occur around their homes. However there is great growth potential with opportunities outside our traditional base - amongst a younger demographic, who are less likely to buy an insurance-type product and more likely to look online for a tradesperson when the need arises. We can deploy our core capabilities to service these consumers and offer a wider range of home improvements as well as repairs.

 

HVAC and Smart Home

We also made progress in FY18 on defining our HVAC and Smart Home propositions. Based upon the success of our boiler and furnace installation and repair business in North America, we have started to develop this business line in the UK and France via the acquisitions of Help-Link and Electrogaz respectively. HVAC is a highly fragmented market and one where we see potential to grow our market share amongst a new group of high value Membership customers. In the Smart Home market, we will engage in areas adjacent to our other businesses, for example smart thermostats and plumbing-related products. I am delighted that our LeakBot smart water leak detector is starting to gain traction and we have developed a WiFi version to facilitate broader coverage. Further test agreements have been signed and the first sizeable volume orders agreed with partners in Denmark and the UK.  

 

Looking forward to FY19

We will remain true to our growth strategy. Our priorities in delivering our growth strategy are as follows:

·      To continue to grow our core Membership businesses

in North America where we expect to complete the second tranche of DPS this autumn and through further organic and acquisition opportunities

in the UK, France and Spain by continuing to develop our affinity partnerships and increasing the efficiency of our operations

in new geographies by exploring opportunities for joint ventures with utility partners

·      To further develop our Home Experts proposition and scale our Checkatrade business in the UK by recruiting more tradespeople and attracting more consumers and internationally via Habitissimo

·      To roll out our HVAC proposition in the UK, North America, France and Spain

·      To progress Smart Home initiatives, including converting LeakBot test agreements to volume orders and signing further insurance partners.

 

With significant initiatives under way in all four business lines, we have made notable progress this year towards our vision of becoming the world's most trusted provider of home repairs and improvements. We have done so by remaining true to our purpose - to help people run their homes more easily - and to our customer centric values. Every day, I hear heartwarming stories about the lengths our people go to in delivering service to our customers - the Customer Stories featured in this year's Annual Report give you a flavour of this. It is this commitment and enthusiasm above all which powers our business, and I would like to conclude by thanking everyone at HomeServe for their hard work this year.

 

 

 

Richard Harpin

Founder and Chief Executive

 

BUSINESS REVIEW

 

HomeServe had a very good year with strong underlying performance boosted by strategic acquisitions, notably in North America with the policy book of Dominion Products and Services Inc. (DPS); in the UK with Help-Link Limited and the AA's home emergency policy book; and in France where the acquisition of Electrogaz marked a first step into HVAC installations.

 

Total customers increased to 8.4m from 7.8m and the Group now has over 570 affinity partner relationships that provide access to 109m households, up from 102m in the prior year. Customers continue to value HomeServe's products and the Group retention rate remained strong at 82%.

 

The continued organic success of the North American business allied to the acquisition of DPS and the successful integration of Utility Service Partners (USP) saw North American adjusted operating profit grow by 129% to £48.6m, as the Group delivered total adjusted operating profit of £153.4m, up 29%.

 

Over half of the Group's profits are now generated overseas, with further profit progression in France and Spain complementing outstanding growth in North America. The UK remains highly cash generative and the largest single contributor to Group profits.

 

The New Markets segment contains the Group's investments in international development, the Home Experts opportunity via Checkatrade and Habitissimo and its Italian associate.

 

 

Financial performance for the year ended 31 March

£million

Revenue

Statutory operating profit/(loss)

Adjusted operating profit/(loss)


2018 

2017 

2018 

2017 

2018 

2017 

UK

365.6 

326.5 

59.3 

62.0 

61.1 

63.2 

North America

282.1 

227.8 

40.5 

14.7 

48.6 

21.2 

France

100.0 

91.1 

25.1 

21.1 

31.5 

27.1 

Spain

141.3 

130.2 

16.5 

13.0 

16.6 

13.3 

New Markets

18.6 

16.6 

(6.4)

(6.1)

(4.4)

(6.0)

Inter-segment

(7.9)

(7.2)

Group

899.7 

785.0 

135.0 

104.7 

153.4 

118.8 

 

 

Performance metrics for the year ended 31 March


Affinity partner households (m)

Customer numbers (m)

Policy retention rate


2018

2017

2018

2017

2018

2017

UK

26

24

2.2

2.2

79%

80%

North America

55

50

3.6

3.0

83%

82%

France

15

15

1.1

1.0

88%

89%

Spain

12

12

1.3

1.3

78%

78%

New Markets

1

1

0.2

0.3

-

-

Group

109

102

8.4

7.8

82%

82%

 



 

BUSINESS REVIEW (continued)

 

UK

 

As HomeServe's most developed business, the UK is highly cash generative and the largest contributor to the Group's operating profit. It has made good strategic progress in FY18 with further investment in growth opportunities including LeakBot and boiler installations.

 

 

UK results £million


2018 

2017 

Change

Revenue 





Net policy income


 221.6 

213.4 

+4%

Repair services


 106.3 

100.3 

+6%

Other


37.7 

12.8 

+193%

Total revenue


365.6 

326.5 

+12%

Adjusted operating costs


(304.5)

(263.3)

+16%

Adjusted operating profit


61.1 

63.2 

-3%

Adjusted operating margin


17%

19% 

-2ppts

 

 

UK performance metrics



2018 

2017 

Change

Affinity partner households

M

m

26 

24 

+12%

Customers

M

m

2.2 

2.2 

-1%

Income per customer

£

£

106 

96 

+10%

Policies

M

m

5.9 

5.6 

+6%

Policy retention rate

%

%

79 

80 

-1ppt

 

Operational performance

 

Adjusted operating profit of £61.1m (FY17: £63.2m) was down on the prior year, having incurred a one-off cost of c. £2.5m as headcount was reduced as part of an ongoing drive to reduce complexity and introduce further efficiency into the UK operations.

 

UK customers totalled 2.2m at year end, reflecting a retention rate of 79% (FY17: 80%) and 0.3m new customers added through marketing campaigns (FY17: 0.4m). Included in the year end total are 0.1m customers who are expected to transfer to HomeServe over the course of FY19 following the acquisition of the AA's home emergency services policy book. This acquisition also saw 70 AA plumbing and gas engineers move over to join HomeServe's 1,000-plus strong national network of directly employed engineers (FY17: 850 engineers), further strengthening HomeServe's position in the UK Home Assistance market.

 

The value of HomeServe's UK customer base is increasing, with customers taking advantage of more cover, with a resultant 10% increase in income per customer and average policies per customer up to 2.7 (FY17: 2.5).

 

New affinity partnerships were agreed in the year with E.ON and Octopus Energy. The partnership with Octopus is an opportunity to work with an innovative challenger in the energy space and there is great potential from partnering with E.ON to market products to their customers. Both partnerships offer an opportunity to expand beyond the UK's traditional base of water utility partners.

 

Customer satisfaction remains very high, as evidenced by strong scores on independent sites such as Reevoo (95%) and Trustpilot (8.2), (FY17: 93% and 8.3 respectively). The ability to use products effectively when customers most need HomeServe is critical to maintaining high satisfaction. In FY18 the UK network completed a record number of 1.2m jobs, up 12% on FY17. On average the UK network was in a customer's home once every 26 seconds. There is a strong correlation between staff engagement and customer satisfaction, which is why it was important to HomeServe to have maintained its Top 10 position on Glassdoor's Top Places to Work.

 

Customers are increasingly choosing to interact online. Investment in the core customer management and claims systems has supported this, together with the launch of a new customer App. The ability to enrol, manage and claim online aids efficiency in the business, provides alternative solutions for customers and alleviates pressure on contact centres during times of high volumes - as happened at the end of FY18 with the extreme cold weather. An increase in the ability to provide claims solutions over the phone or by helpful hints and tips on the website also has the potential to provide remedies for customers who are happy to be guided through 'self-fix' steps to fix common plumbing or heating problems.

The acquisition of Help-Link Limited in August 2017 expanded HomeServe's boiler installation resources and formed an end-to-end heating business encompassing installation, assistance cover, service and repair. Of the one million domestic boiler installations in the UK every year, the vast majority are undertaken by local and regional tradespeople. There is significant opportunity for HomeServe to gain market share and offer customers access to a local tradesperson, combined with the scale and expertise of a national network with a wider choice of complementary products including smart thermostats.

There was good progress on Smart Home with LeakBot, HomeServe's smart water leak detector. Additional investment was made in the year to support the development and launch of a WiFi version that will facilitate broader coverage and appeal and enable a faster roll out. Further test agreements have been signed with a number of other insurers and the first sizeable orders agreed with partners in Denmark and the UK.

 

The 100% investment in Checkatrade presents additional exciting opportunities for synergies with the existing UK business, particularly around heating, which will be assessed and pursued throughout FY19. Checkatrade is discussed in more detail under the New Markets section.

 

Financial performance

 

Net policy income increased by 4% to £221.6m as a result of the increase in net income per customer as customers continued to take richer products with more cover. This was in part offset by the slight reduction in the total customer count. The 0.1m customers from the AA expected to transfer in FY19 did not contribute any revenue to the FY18 results.

 

Repair network income rose due to the increased number of jobs completed for customers.

 

Other revenue includes transactions with other Group companies and income from the installation of boilers and smart thermostats. The rise in FY18 was due to the additional revenue generated from boiler installations following the acquisition of Help-Link.

 

Adjusted operating costs increased 16% reflecting the increased repair cost to complete 12% more jobs. There was also additional one-off investment incurred to integrate Help-Link and remove the previous heating franchise model. In the second half of the year, HomeServe took action to structure its UK business more effectively, resulting in headcount reductions and a one-off cost of c. £2.5m. Although this represents a small proportion of the overall UK workforce, it was a difficult decision but one reached without any impact on customer facing roles and to ensure that the business is placed well for the future.

 

The two percentage point reduction in adjusted operating margin was largely a result of the increased number of repair jobs which carry little margin, costs associated with the headcount reduction and the effect of additional revenue from Help-Link which was loss making in the year due to integration and associated transaction costs.



 

North America

 

North America is HomeServe's largest current opportunity. FY18 saw an outstanding performance as continued double digit organic expansion was supplemented by strategic M&A to accelerate ambitious growth plans. Adjusted operating profit more than doubled to $64.4m, demonstrating the ability of the business to scale and integrate its growth opportunities efficiently.

 

North America results $million


 2018 

 2017 

 Change

Revenue





Net policy income


349.1 

273.5 

+28%

Repair services


12.0 

7.7 

+57%

Other


14.1 

11.8 

+19%

Total revenue


375.2 

293.0 

+28%

Adjusted operating costs


(310.8)

(266.8)

+17%

Adjusted operating profit


64.4 

26.2 

+146%

Adjusted operating margin


17% 

9% 

+8ppts

 

North America results £million


2018 

2017 

Change

Revenue





Net policy income


 262.4 

212.7 

+23%

Repair services


9.6 

6.0 

+58%

Other


 10.1 

9.1 

+12%

Total revenue


 282.1 

227.8 

+24%

Adjusted operating costs


(233.5)

(206.6)

+13%

Adjusted operating profit


48.6 

21.2 

+129%

Adjusted operating margin


17% 

9% 

+8ppts

 

North America performance metrics


2018 

2017 

Change

Affinity partner households

m

55 

50 

+10%

Customers

m

3.6 

3.0 

+20%

Income per customer

$

91 

97 

-6%

Policies

m

5.6 

4.5 

+25%

Policy retention rate

%

83 

82 

+1ppt

 

 

Operational performance

 

The North American business continues to go from strength to strength with a proven track record of strong organic growth supported by the successful integration of acquired policy books. This year Utility Service Partners Inc. (USP) and the policy book of Dominion Products and Services Inc. (DPS) have both been efficiently integrated with existing systems and processes, bringing a key step up in operating leverage and increased margin traction.

 

Customer numbers increased 20% to 3.6m (FY17: 3.0m). Customer satisfaction remained very high and was reflected in the strong retention rate of 83% (FY17: 82%), and successful marketing campaigns added 1.0m gross new customers (FY17: 0.8m). Double digit organic customer growth of 11% was further enhanced by HomeServe's largest ever acquisition; the policy book of DPS.

 

The purchase of the DPS policy book was announced on 19 October 2017. It brings a total of c. 0.5m customers and marketing opportunities to c.7m households, for a total enterprise value of $143m. It is structured to complete in two tranches. The first tranche completed on 18 December 2017 and delivered an initial 0.3m customers. Tranche 2 is expected to complete in Autumn 2018, bringing the remaining 0.2m customers. DPS is a highly complementary policy book and marketing has already commenced utilising the Dominion Energy brand to 4m households under tranche 1. The second tranche is expected to bring an additional 3m households and further marketing opportunities with Dominion Energy's own partners.

 

Total affinity partner households increased to 55m from 50m in FY17 as HomeServe signed an average of two new partners every week, a total of over a hundred new partners for the year with access to around 10m utility households (including tranche 1 of DPS). HomeServe now works with a wide portfolio of almost 550 water, electric and energy utilities and municipals.

 

It is inevitable that as the number of partners continues to grow, HomeServe or a partner may choose not to renew or extend agreements as circumstances and corporate priorities change. The large portfolio now present in North America ensures that there is no over-reliance on any one partner. During the year the partnerships with Duke Energy and AARP ended with the removal of 5m households from the household count but with no change to our growth expectations.

 

The pipeline of potential partner opportunities remains strong and HomeServe remains confident of increasing its number of partners throughout FY19. The National League of Cities (NLC) relationship that was acquired with USP has been renewed and its endorsement and support will continue to play an important role.

 

The existing Membership customer base offers great prospects for Homeserve to market its installation products. Total HVAC installations in the year increased 15% as HomeServe installed furnaces and boilers to meet the wider needs of the customer base beyond simply providing emergency repairs.

                                                  

The team in North America was recognised with 18 awards at the annual Stevie Awards for Sales & Customer Service, including 3rd place overall, rewarding its focus on delivering great customer service.

                                                                                                                                               

HomeServe has continued to invest at various stages of the customer journey to further improve the customer experience. Digital channels experienced the largest growth in FY18 with even more customers now choosing to join online. Other technology initiatives such as new field management software have enhanced the operational efficiency of the network and further improved engineer attendance, ensuring customers receive visits at the appointed time. The network of 170 directly employed engineers and over 1,300 sub contractors completed 0.4m jobs, up 12% on FY17.

 

The Connecticut head office was once again recognised as a Top Place to Work and investment in a new contact centre in Chattanooga will greatly improve staff engagement and establish a hub for customer service excellence. Having begun in Chattanooga with just 35 employees in 2010, the new facility with 350 employees officially opened on 25 April 2018 and is a great indicator of the progress made by HomeServe in North America in less than a decade.

 

 

Financial Performance

 

Net policy income increased 28% to $349.1m (FY17: $273.5m) reflecting the larger customer base and the successful integration of USP and the first tranche of DPS. Repair services income includes the jobs completed by the directly employed network and reflects the growing claim volumes from a higher customer base. Other income includes installation revenue and rose 19%, illustrating the growing HVAC installation volumes.

 

As expected, income per customer fell slightly to $91 (FY17: $97) due to the inclusion of USP and DPS customers who hold a different product mix and who were not in the prior year metric. A medium term target of $100 net income per customer remains achievable, particularly as excluding the impact of USP and DPS, the income per customer increased to $101 (FY17: $97).

 

Adjusted operating costs rose 17% to $310.8m (FY17: $266.8m) reflecting continued business growth, a full year of USP and integration costs associated with DPS. The significant increase in the adjusted operating margin, up 8 percentage points to 17%, demonstrates the ability of the business to scale efficiently and integrate the policy books of USP and DPS without incurring substantial additional operating costs.

 

 



 

 

France

 

HomeServe France's core Membership business is highly profitable and cash generative. Growth opportunities were pursued with potential new partners and in December 2017 the French business made its first step into providing heating installations through the acquisition of Electrogaz.

 

France results €million


2018 

 2017

 Change

Revenue





Net policy income


111.7 

106.9 

+5%

Repair services


0.5 

0.5 

-4%

Other income


1.0 

+100%

Total revenue


113.2 

107.4 

+5%

Adjusted operating costs


(77.5)

(75.9)

+2%

Adjusted operating profit


35.7 

31.5 

+13%

Adjusted operating margin


32% 

30%

+2ppts

 

France results £million


2018 

2017 

Change

Revenue 





Net policy income


98.6 

90.7 

+9%

Repair services


0.4 

0.4 

+2%

Other income


1.0 

-  

+100%

Total revenue


100.0 

91.1 

+10%

Adjusted operating costs


(68.5)

(64.0)

+7%

Adjusted operating profit


31.5 

27.1 

+16%

Adjusted operating margin


32%

30%

+2ppts

 

France performance metrics


2018 

2017 

Change

Affinity partner households

m

15 

15 

Customers

m

1.1 

1.0 

+1%

Income per customer

106 

101 

+5%

Policies

m

2.3 

2.3 

-1%

Policy retention rate

%

88 

89 

-1ppt

 

Operational performance

 

Total customers increased to 1.1m as France continued to have the highest retention rate in the Group at 88% (FY17: 89%). Customer service standards remained very high as evidenced by achieving the Élu Service Client de l'Année for the second year running. Partner relationships with Veolia and Suez are strong and delivered 0.1m new customers (FY17: 0.2m).

 

Key to further growth in the Membership business is unlocking a new partnership and there is a pipeline of opportunities at various stages of discussion with energy and water partners. Additional partnership opportunities have been agreed with Veolia to launch a multi-channel approach to marketing, reducing reliance on direct mail and taking advantage of increased calls into Veolia's centralised contact centre to grow the number of sales made directly by the partner, similar to the approach undertaken with Suez. In energy, HomeServe has worked with Butagaz for a number of years and will now partner with them to sell membership products as Butagaz looks to grow its share of the mains domestic gas and electric supply market.

 

Initial steps were made in FY18 to pursue HomeServe's strategy in heating installations with the acquisition of Electrogaz, a business in the South of France with almost 60 years of expertise in the repair, maintenance and installation of hot water and heating systems, renewable energy devices and domestic air conditioning and ventilation systems. The business has already been successfully integrated and is actively trading as Electrogaz...A HomeServe Company. FY19 will focus on proving out this opportunity and assessing potential to increase presence in this market.

 

France is also focused on becoming a digital-first business, looking to further improve customer interaction and introduce greater operational efficiency. FY18 focused on enhancing the website and providing the functionality for customers to manage their policy details online. These efforts will be continued by providing customers in France with the same opportunities as those in the UK to also use a HomeServe App and to make a claim online.

 

 

Financial performance

 

Total revenue increased by 5% to €113.2m (FY17: €107.4m) primarily due to a 5% increase in income per customer which itself benefitted from improved network efficiencies and a reduced cost to serve.  Included in other income is €1m of post acquisition income from Electrogaz, which was acquired during the year.

 

Adjusted operating costs were broadly stable at €77.5m (FY17: €75.9m) resulting in two percentage points improvement in the adjusted operating margin to 32% as revenue increases directly benefitted the bottom line. Adjusted operating margin is expected to remain at around 30%.

 

 



 

Spain

Good revenue growth from the maturing Membership policy book, together with increased efficiency in the repair services (Claims) business delivered increased profitability in Spain.

 Spain results €million


2018 

2017 

Change

Revenue 





Net policy income


63.0 

57.2 

+10%

Repair services


97.1 

97.1 

Total revenue


160.1 

154.3 

+4%

Adjusted operating costs


(141.2)

(138.5)

+2%

Adjusted operating profit


18.9 

15.8 

+20%

Adjusted operating margin


12%

10%

+2ppts

 

 

Spain results £million


2018 

2017 

Change

Revenue 





Net policy income


55.6 

48.3 

+15%

Repair services


85.7 

81.9 

+5%

Total revenue


141.3 

130.2 

+9%

Adjusted operating costs


(124.7)

(116.9)

+7%

Adjusted operating profit


16.6 

13.3 

+26%

Adjusted operating margin


12%

10%

+2ppts

 

Spain performance metrics


2018 

2017 

Change

Affinity partner households

m

12 

12 

-

Customers

m

1.3 

1.3 

+1%

Income per customer

47 

43 

+11%

Policies

m

1.5 

1.5 

+2%

Policy retention rate

%

78 

78 

-






 

Operational performance

 

Total customers rose 1% to 1.3m as the business in Spain continued to add customers through its current affinity partnership with Endesa. After a strong first half, political unrest and legislative change in Catalonia, as well as launch delays in other regions, slowed customer acquisition in the final six months, with a total of 0.4m gross new customers (FY17: 0.5m) added in the year.

 

The current partnership with Endesa draws to a close in the coming weeks. Discussions continue to define a future relationship, which could be a non-exclusive claims handling and service only arrangement. This would enable HomeServe to enter discussions with other energy companies. The net effect of not marketing with Endesa is expected to have no significant impact on adjusted operating profit in Spain over the next two years.  

 

The retention rate remained stable at 78% and an increasing number of renewers year on year has driven strong progression in income per customer.

                                      

The Claims business ("Repair services"), works with a number of Spain's largest bancassurers managing a large volume of claims across multiple trades and closed 0.8m jobs, in line with the prior year. Jobs continue to be completed by a wide network of over 2,400 sub contractors and 198 franchisees (FY17: 1,972 subcontractors and 197 franchisees).

 

The Spanish business also intends to pursue an HVAC strategy similar to the approach in the UK and France and is exploring opportunities to enter this space.

           

 

 

 

Financial performance

 

Total revenue increased 4% to €160.1m driven principally by the maturity of the Membership book and the resultant 11% rise in income per customer to €47.

 

Tight control ensured operating costs rose at a lower rate than revenue, increasing by only 2% on prior year to €141.2m. The higher income per customer in Membership, a focus on operating efficiencies in the Claims business and an increasing mix of larger value jobs contributed to the two percentage point increase in the adjusted operating margin.

 

 

 

 



 

New Markets

 

Results - £m


2018 

 2017 

 Change

Revenue





 

Italy


-  

14.8  

-100%

 

Home Experts


18.6 

1.8  

+958%

 

Total Revenue


18.6 

16.6 

+12%

 

Adjusted operating loss


(4.4) 

(6.0) 

+29%

 

 

 

Home Experts performance metrics


2018 

2017 

Change

Checkatrade tradespeople  

k

29 

25 

+17%

Habitissimo tradespeople

k

29 

22 

+29%

Checkatrade website hits

m

16.1 

15.7 

+3%

Habitissimo website hits

m

81.3 

55.7 

+46%






 

Operational performance

 

HomeServe's New Markets segment contains its operations in Italy, business development activities to expand into new geographies and the results of Checkatrade and Habitissimo, its Home Experts initiatives.

 

The Italian associate, in partnership with Edison Energia, had 0.2m customers (FY17: 0.3m) and continued to market HomeServe's products as part of its own strategy to gain market share of the domestic Italian energy supply market.

 

Although no new partnerships have yet been established, active business development discussions remain ongoing with a number of prospective utility partners in other geographies. HomeServe continues to believe that its products offer utilities a good opportunity to improve their own profiles and increase the engagement and loyalty of their customers.

 

Notable progress was made in Home Experts as HomeServe secured full ownership of Checkatrade. Through the initial 40% investment on 13 December 2016, HomeServe had the option to increase its investment by a further 35% in mid 2019 but on 17 November 2017 the option was superseded and HomeServe secured the remaining 60% to take full 100% control.

 

Securing a controlling stake has facilitated faster development and testing to prove out the proposed model and growth plans. The additional investment that HomeServe can provide has already enabled new payment methods for tradespeople, such as monthly direct debits. Due to working capital constraints Checkatrade previously only offered annual payments but the new options will now attract more tradespeople and enable the introduction of different pricing initiatives. Since taking full control in November 2017, total tradespeople has already increased 9% to 29k and the final quarter of FY18 saw three record months for new tradespeople joining Checkatrade. The pricing initiatives introduced have also already lifted Checkatrade's average revenue per trader.

 

Key to the long term success of Checkatrade is defining and refining the optimum model for the benefit of consumers as well as tradespeople. Checkatrade continues to attract over a million unique users to the website each month and will look to increase this through further investment in advertising, funded primarily by the new pricing initiatives. Product development such as priority membership options for homeowners that reward repeat usage are also being assessed, as is an emergency on demand product. Attracting more consumers to the website and increasing consumer usage will be a critical factor in simultaneously increasing the number of tradespeople.

 

Habitissimo, the Spanish Home Experts business, also had a successful year, continuing to grow the number of leads it generates for its tradespeople, increasing to 2.1m from 1.4m in FY17. Habitissimo possesses considerable technical expertise and its digital capabilities have enabled it to quickly and efficiently test a number of additional products and routes to markets. Habitissimo has also developed and piloted software which will increase the engagement of its tradespeople by providing a tool for them to efficiently manage and track their businesses.  Checkatrade will continue to develop and test in the UK, but as the two businesses work more closely together, Habitissimo may ultimately provide the technical skills and capabilities to roll the model out efficiently into other markets as it has already demonstrated with a light footprint in Latin America.

 

Financial Performance

 

HomeServe accounts for the net result of its Italian operation as an associate with its result included in the overall New Markets investment. Consequently there was no revenue recorded for the year ended 31 March 2018.

 

The increase in Home Experts revenue was driven largely by a full year's ownership of Habitissimo and acquiring 100% of Checkatrade. Upon taking control on 17 November 2017, Checkatrade became a subsidiary and all results after this date have been fully consolidated. The results of Habitissimo have been consolidated for the full period.

 

Total investment in New Markets was £4.4m (FY17: £6.0m), £5.7m on an underlying basis, having benefitted from a one-off re-measurement gain of £1.3m before deal costs, associated with the acquisition of the remaining 60% of Checkatrade.



 

FINANCIAL REVIEW

 

These financial results have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use by the European Union.

 

Group statutory results

 

The headline statutory financial results for the Group are presented below.

 

£million

2018 

2017 

Total revenue

899.7 

785.0 




Operating profit

 135.0 

104.7 

Net finance costs

(11.7)

(6.4)

Adjusted profit before tax

 141.7 

112.4 

Amortisation of acquisition intangibles

(18.4)

(14.1)




Statutory profit before tax

 123.3 

98.3 

Tax

(27.4)

(23.9)

Profit for the year

95.9 

74.4 

 

Attributable to:



Equity holders of the parent

96.3 

74.4 

Non-controlling interests

(0.4)

- 


95.9 

74.4 

 

The Group delivered 25% growth in profit before tax to £123.3m. Operating profit growth was up 29% to £135.0m but was offset by an increase in net finance costs to £11.7m (FY17: £6.4m). Net finance costs rose principally as a result of unwinding interest on deferred consideration in relation to previous M&A activity and costs associated with refinancing HomeServe's debt facilities at the beginning of the financial year.

 

Statutory profit before tax is reported after the amortisation of acquisition intangibles.  The individual financial performance of each business is considered in the business review.

 

Amortisation of acquisition intangibles

The amortisation of acquisition intangibles of £18.4m (FY17: £14.1m) relates to customer and other contracts held by businesses, which were acquired as part of business combinations and asset purchases and has increased this year principally due to the acquisition of the policy book of Dominion Products and Service Inc. (DPS) in North America and Checkatrade in the UK.

 

Tax strategy

The Group has continued to operate within the tax strategy approved by the Board during the financial year ended 31 March 2017. The tax strategy is subject to annual review and reflects HomeServe's status as a plc, and the regulated nature of its business which requires strong governance and consideration of reputation as well as compliance with local laws, regulations and guidance.  HomeServe made the UK elements of the tax strategy document publicly available in April 2017 as required by UK legislation. 

 

The Group tax strategy covers how HomeServe:

(i)         applies tax governance on an ongoing basis and maintains strong internal controls in order to substantially reduce tax risk;

(ii)        will not engage in artificial transactions the sole purpose of which is to reduce tax;

(iii)       holds a strategic aim to retain its low tax risk rating as determined by the UK Tax Authority's Business Risk Review process; and

(iv)       works with all tax authorities in an open, honest and transparent manner.





 

Tax charge and effective tax rate

 

The Group's tax charge in the financial year was £27.4m (FY17: £23.9m), representing an effective tax rate of 22% (FY17: 24%).  The corporate income tax rates in the overseas countries in which the Group operates continue to be higher than the UK corporate income tax rate of 19% (FY17: 20%), which results in a Group effective rate higher than the headline UK rate.

 

Changes to the corporate income tax rates across a number of countries in which the Group operates have been announced.  The UK corporation tax rate of 19% in FY18 is also expected to apply in FY19 and FY20, with a reduction to 17% in FY21 onwards.

 

During December 2017, the US enacted a comprehensive overhaul of its tax system, which has resulted in a blended (Federal/State) rate of 38% in FY18 (FY17: 40%), which will reduce to 27% in FY19 onwards.

 

France also enacted new tax legislation in December 2017 which will see its main rate of corporate income tax reduce from 33% in FY18 (FY17: 33%) to 25% as of FY22. Meanwhile, Spain's corporate income tax rate continues to be 25% (FY17: 25%).

 

As the proportion of the Group's profits earned overseas continues to grow, the effective tax rate of 22% (FY17: 24%) is expected to increase slightly in future years.

 

 

Cash flow and financing

HomeServe's business model continues to be highly cash generative with cash generated by operations in FY18 of £164.2m (FY17: £139.9m), representing a cash conversion ratio against adjusted operating profit of 107% (FY17: 118%).  The cash conversion ratio is expected to remain in excess of 100%. 

 

£million

2018 

2017 

Adjusted operating profit

153.4 

118.8 

Amortisation of acquisition intangibles

(18.4)

(14.1)

Operating profit

135.0 

104.7 

Depreciation and amortisation

62.6 

49.5 

Non-cash items

9.0 

6.8 

Increase in working capital

(42.4)

(21.1)

Cash generated by operations

164.2 

139.9 

Net interest

(10.5)

(6.4)

Taxation

(27.2)

(20.0)

Capital expenditure - Ordinary

(54.6)

(44.4)

Capital expenditure - Partner Payments

(16.5)

(14.1)

Repayment of finance leases

(0.6)

(1.0)

Free cash flow

54.8 

54.0 

Acquisition of associate

(24.7)

Acquisitions of subsidiaries

(54.2)

(74.2)

Acquisition of policy book

(53.6)

Dividend from associate

0.4 

Disposal of subsidiary

(1.7)

Equity dividends paid

(50.4)

(40.3)

Issue of shares (net of associated issue costs)

 123.3 

0.9 

Net movement in cash and bank borrowings

20.3 

(86.0)

Impact of foreign exchange

2.9 

(6.3)

Net debt acquired

(0.1)

(0.4)

Finance leases

0.5 

0.8 

Opening net debt

(261.4)

(169.5)

Closing net debt 

(237.8)

(261.4)

 

 

Working capital increased by £42.4m in FY18 reflecting the timing of certain supplier payments and continued growth in all businesses.  

Capital expenditure included £54.6m in relation to ordinary and transformational capital expenditure, the largest elements of which related to the core customer management system in the UK; claims handling and job deployment systems in the UK, North America and Spain; ongoing digitisation in all businesses and the development of a WiFi version of LeakBot in the UK. Total partner payments amounted to £16.5m (FY17: £14.1m) in respect of the acquisition of customers originated by Endesa in Spain and Suez in France.

 

The core customer management system is being replaced in the UK. It is anticipated that this new customer-centric system will improve agent processes and provide more opportunity to identify and offer the best solutions for customers' needs. Investments in the engineer and contractor networks in the UK, North America and Spain will improve customer service and enable claims handling and job deployment efficiencies.

 

An increasing proportion of customers wish to engage with HomeServe digitally at all stages of the customer journey and further investment was made to support this, improving websites in all businesses and enhancing the online claims journey in the UK. This area remains a focus in FY19 with plans to expand the online and mobile self-serve functionality in all businesses.

 

HomeServe will continue to invest in all of its businesses, including in its new global business lines where it sees significant opportunity to develop its presence in HVAC, Smart Home and Home Experts. Capital expenditure in FY19 is expected to be slightly lower than FY18 before trending towards a normalised rate of £35m per annum in FY20 and beyond.

 

Acquisitions

The Group has incurred a net cash outflow in respect of business combinations of £54.2m in the year.

 

There were three key cash outflows resulting from business combinations in the year ended 31 March 2018;

 

On 2 August 2017 HomeServe acquired 100% of the issued share capital and obtained control of Help-Link UK Limited for a total cash outflow in the period of £6.7m.

 

On 17 November 2017 HomeServe increased its investment in Sherrington Mews Limited, the holding company of the Checkatrade Group, by 60%, taking its total holding up to 100%. The consideration for the remaining 60% was £50m which resulted in a net cash outflow of £38.4m for the year. Of the £50m, £10m was utilised by Checkatrade's founder to subscribe for the allotment and issue of 1,193,317 HomeServe plc shares at a price of £8.38 per share (calculated by reference to the closing price on 16 November 2017).

 

On 29 December 2017 HomeServe acquired 100% of the issued share capital of PXB Invest SAS, the holding company of Electrogaz, a provider of heating installations in France, incurring a net cash outflow of £4.6m

 

In addition to the net cash outflow on the acquisitions above of £49.7m, there was a further outflow of £4.5m relating to deferred consideration in respect of business combinations in prior periods and an immaterial acquisition in the UK (FY17 £3.1m).

A cash outflow of £53.6m was also incurred in relation to the policy book of DPS following completion of tranche 1 of the acquisition on 18 December 2017 by HomeServe.

Earnings per share

Basic earnings per share for the year increased from 24.0p to 30.2p, an increase of 26%.  On an adjusted basis, earnings per share increased 24% from 27.0p to 33.6p.  The weighted average number of shares increased from 309.9m to 318.9m primarily due to the equity placing on 19 October 2017 and also due to shares issued in part consideration for the Checkatrade acquisition and new shares issued in fulfilment of a number of share schemes in the year.

 

 

Dividends

Given the Group's good performance and the Board's confidence in its future prospects, the Board is proposing to increase the final dividend to 14.4p per share (FY17: 11.2p) to be paid on 2 August 2018 to shareholders on the register on 6 July 2018.

Together with the interim dividend declared in November 2017 of 4.7p (November 2016: 4.1p), this represents a 25% increase in the total ordinary dividend payment for the year of 19.1p (FY17: 15.3p), which is 1.76x covered by the FY18 adjusted earnings per share (FY17: 1.76x).  As previously indicated, the Board continues to adopt a progressive dividend policy.

 

Financing

In FY18 the Group targeted net debt in the range of 1.0-1.5x EBITDA, measured at 31 March each year.  With net debt of £237.8m and EBITDA of £197.6m the Group was inside this range at 1.2x.

 

It is four years since the Board last reviewed its capital structure policy, during which time the Group has grown considerably, made and integrated a number of significant acquisitions, and diversified its revenue streams.

 

Accordingly, the Board has determined that the Group can now support a leverage policy range of 1-2x Net Debt:EBITDA at March year-ends, compared to the previous policy of 1-1½x. As at present, the Group will be prepared to see leverage outside the new range for reasonable periods of time if circumstances warrant, and the new range itself will be subject to periodic review. With the ordinary seasonality of the business, net debt is expected to increase at the next half year.

 

During the year, the Group entered into a new multi-currency revolving credit facility with both existing and new banking partners. The new terms of the facility provide committed credit of £400m which runs until 31 July 2022 with two one-year extension options, subject to agreement by the banking partners, which would extend the maturity to 31 July 2024. Loans have variable interest rates linked to LIBOR or EURIBOR. With other funding, principally from Private Placements, the Group had over £270m headroom against its available sources of debt at the year end.

 

Net interest paid increased to £10.5m (FY17: £6.4m) due principally to costs associated with the renewal of the Group's debt facilities in early FY18.

 

On 19 October 2017, HomeServe placed 15,243,903 of new ordinary shares in HomeServe plc at a price of 820 pence per share, raising gross proceeds of £125m. The Placing Shares issued represented, in aggregate, approximately 4.9 per cent of HomeServe's issued ordinary share capital.  The successful placing funded the acquisition of DPS and retained balance sheet strength and liquidity to provide the flexibility for future inorganic investment opportunities, including the subsequent purchase of the remaining 60% of Checkatrade.

 



Foreign exchange impact

The impact of changes in the Euro and USD exchange rates between FY17 and FY18 resulted in a £1.6m increase in the reported revenue and a £0.8m decrease in adjusted operating profit of the international businesses as summarised in the table below. Beneficial movements in the Euro have been more than offset by a strengthening of Sterling against the USD, particularly in the second half of the year when HomeServe generated the majority of its profits. There was no material difference for the impact of foreign exchange on statutory operating profit.

 




Effect on (£m)



Average exchange rate

Revenue

Adj. operating profit



2018

2017

Change

2018

2018

North America

$

1.33

 1.31

2 %

(9.1)

 (2.9)

France

1.13

 1.19

(5)%

3.9 

1.2 

Spain

1.13

1.19

(5)%

6.3 

0.9 

New Markets

1.13

 1.19

(5)%

0.5 

-  

Total International





1.6 

(0.8)

 

With an increasing proportion of HomeServe's profits generated overseas, the potential translation impact of foreign exchange movements on reported profits may have a larger impact. A ten cent movement in the FY18 average USD rate of 1.33 and the Euro rate of 1.13 would each have had approximately a £3.5m impact on full year adjusted operating profit.

 

 



 

Principal Risks and Uncertainties

HomeServe has a robust risk management framework which encompasses the Group's risk policy and overall risk appetite. The framework provides a disciplined and consistent approach across all of HomeServe's business, ensuring a structured response at all levels throughout the Group and across all businesses and geographies, to capture, monitor and mitigate risk.

 

·      The Audit & Risk Committee is chaired by one of the Non-Executive Directors and is composed of independent Non-Executive directors. The internal and external auditors, the Chief Financial Officer, the Chief Executive Officer and the Chairman are invited, but are not entitled, to attend all meetings. Where appropriate, other Executive Directors and managers also attend meetings at the Chairman's invitation. The external and internal auditors are provided with the opportunity to raise any matters or concerns that they may have, in the absence of the Executive Directors, whether at Committee meetings or, more informally, outside of them.

 

The Audit & Risk Committee advises the Board on risk appetite and risk strategy, maintains the quality and effectiveness of risk management processes under review and receives regular reports from the Group Risk Committee.

 

·      The Group Executive Risk Committee is chaired by the Group Chief Financial Officer, it is composed of the Executive Directors and other representatives of each of the Group businesses. The Committee reports to the Audit & Risk Committee. The Board retains the responsibility for the overall evaluation of the Group's risk management processes.

 

·      The Group Risk Management Team proposes the risk framework across the Group and supports the businesses with the implementation, monitoring of the risk maturity and progress of everyday risk management across each business in the Group.

 

All risks could negatively impact HomeServe's success or reputation and together have the potential to lead to reduced profitability, higher cash outflows, reduced cash inflows and ultimately lower returns for all stakeholders including employees, partners, creditors and shareholders. HomeServe's robust risk management framework ensures that risks do not go unchecked and controls and mitigations are put in place to reduce exposure and promote the continued success of the business.

 

Strategic risks are specific to HomeServe's business model and strategy and may pose a fundamental challenge to its future prospects. They include decisions made and actions taken, or indeed not taken, by the Board to determine HomeServe's direction and positioning within the home repairs and improvements market in multiple geographies.

 

Operational risks relate to failure in HomeServe's processes. Examples include human error, system failure, failure to comply with prevailing legal and regulatory frameworks etc and may lead to, amongst others, business interruption, financial losses and reputational damage.

 

Financial risks relate to an inability to secure an adequate amount or appropriate mix of short-term and long-term funding (from capital and debt), failure to comply with debt covenants or failure to allocate or invest capital appropriately or on a timely basis. 

 

Risk registers are maintained by the management of each business and are reviewed by the Audit and Risk Committee at each of its meetings. Risks are scored on a gross basis following a standard framework according to likelihood and impact and are reduced on a net basis after consideration and application of relevant mitigations and controls. On a 6x6 matrix, where the highest risk would return '36', HomeServe's risk appetite is relatively low, targeting scores with a maximum rating of 12.

 

Changes in principal risks in FY18

 

As the largest business line in each geographic segment, Membership forms the spine of HomeServe's strategic risks and there is considerable overlap with the other three areas; Home Experts, Smart Home and HVAC. As a result the substance of the majority of the strategic risks remains unchanged since the prior year. However, the crystallisation of four distinct areas to support HomeServe's vision to be the world's most trusted provider of home repairs and improvements has leant additional emphasis to certain areas and risks have now been categorised to provide further clarity. Financial and operational risks also remain largely unchanged and are believed to affect all four areas of the vision and strategy equally.

 

The table below sets out what the Board believes to be the principal risks and uncertainties facing the Group, the mitigating actions for each, and an update on any change in the profile of each risk during the past year. All risks carry equal importance and weighting for the Board, however additional focus and priority may be given to specific risks for a period of time in certain circumstances e.g. following a material acquisition or to implement plans to reduce any risk which exceeds the appetite threshold.

 

The principal risks and uncertainties below should be read in conjunction with the Business Review and the Financial Review.  Additional risks and uncertainties of which HomeServe is not currently aware or which are believed not to be significant may also adversely affect strategy, business performance or financial condition in the future.

 

1.     Market Disruption (Strategic risk)

There are a number of competitors providing similar products and services in HomeServe's existing markets. There is the potential for competitors to expand into other geographies and for new entrants to introduce new products or new technologies that erode HomeServe's market share.

 

Over time market disruption may have a negative impact on KPIs such as customers and policy retention rates. Net income per customer may decrease if HomeServe is forced to reduce prices to retain market share and affinity partner households may reduce if a partner were lost to a competitor or decided to offer competing products in-house.

 

FY18 update

HomeServe's acquisition of 100% of Checkatrade in FY18 and 70% of Habitissimo in FY17 marked an entry into the online home repairs and improvements sector. As one of the few remaining industries to undergo a substantial shift online there are a number of companies exploring opportunities in this sector. There have been no new competitive entrants in Membership.

 

Mitigation(s)

HomeServe believes that home assistance cover and the online model as offered by Checkatrade serve different customer demographics and needs so there is little cannibalisation expected of the existing 8.4m membership customers and it should not interfere with growth plans for that area of the business.

 

2.     Commercial Partnerships (Strategic Risk)

Underpinning HomeServe's success in its chosen markets are close commercial relationships (affinity partner relationships) principally with utility companies, and municipal utility providers.  The loss of one of these relationships could impact HomeServe's future customer and policy growth plans and retention rates. Similarly growth plans, particularly in North America, are focused on signing new partners to extend reach and provide new marketing opportunities to grow the business.

 

FY18 update

HomeServe's North American business signed over 100 partners in FY18 and received Hart-Scott Rodino competition clearance for the Dominion Products and Services Inc. (DPS) policy book acquisition. Tranche 1 completed on 18 December 2017 and tranche 2 is expected to complete in autumn 2018, bringing additional partner opportunities. In the UK HomeServe signed new deals with E.ON and Octopus Energy and HomeServe continues to work with key partners in France. In Spain the current partnership with Endesa draws to a close in the coming weeks. Discussions continue to define a future relationship, which could be a non-exclusive claims handling and service only arrangement. This would enable HomeServe to enter discussions with other energy companies. The net effect of not marketing with Endesa is expected to have no significant impact on adjusted operating profit in Spain over the next two years.

 

Mitigation(s)

With over 570 partners across the Group it is inevitable that HomeServe or a partner may choose not to renew a partnership as circumstances and priorities change. With wider portfolios of partners in the UK and North America this is less of an issue. Where relationships are more concentrated e.g. France and Spain HomeServe regularly monitors partnerships and maintains frequent two-way dialogue. The majority of partnerships are secured under long-term contracts which HomeServe will often seek to proactively renew prior to the end of the contract term.

 

3.     International Development (Strategic Risk)

Part of HomeServe's stated strategy is to pursue opportunities to expand into new geographies via a joint venture with a utility partner. There is a risk that this strategy is not executed due, for example, to an inability to find a suitable partner. As a consequence HomeServe may incur investment in management time and company resources that does not provide a return. There is also the risk that a partner may be signed and at a later date either the partner or the geography are found to be inappropriate.

 

If no new geographies are entered, there will be slower progress in increasing Affinity Partner Households and there may be a decline in other KPIs and profitability generally if management time and resource becomes strained.

 

FY18 update

HomeServe continues to explore international development opportunities. As yet no firm agreement has been reached but there remains a pipeline of active partner discussions.

 

Mitigation(s)

HomeServe conducts thorough market research on all potential geographies and will only enter those perceived as lower risk on the basis of micro and macro factors including, amongst others, corruption index, ease of doing business, quality of housing stock, quality and experience of potential utility partners. A dedicated International Development team ensures sufficient management bandwidth for the overall business.

4.     M&A strategy (Strategic Risk)

HomeServe has increased its M&A activity in recent years as a means to accelerate a number of strategic goals e.g. partner and customer growth in North America, customer acquisition in the UK. There is a risk that HomeServe overpays for transactions or underestimates the time and resource required to integrate new businesses, potentially leading to lower than anticipated cash inflows and revenue, increased costs, reduced profitability and an increased likelihood of impairment. By contrast a successful M&A strategy should diversify risk by, for example, introducing new partners and channels, increasing profitability and should lead to increases in KPIs such as customers and policies.

 

FY18 update

 

During FY18 HomeServe completed a number of acquisitions, the largest of which were the policy book of DPS in North America, the remaining 60% share of Checkatrade and Help-Link in the UK.

 

Mitigation(s)

HomeServe conducts thorough due diligence and consults with experienced advisers when considering any transaction. The Group has strict investment hurdles and all transactions are expected to clear these. All transactions are subject to local Board approval with Plc Board approval required for all material transactions. There are dedicated transformation and integration teams in all businesses and HomeServe may seek to retain key management and personnel to provide greater surety around the achievement of the associated investment cases.

 

5.     HVAC Integration (Strategic Risk)

The acquisition and integration of smaller HVAC businesses is a way to accelerate HomeServe's progress in this business line. As distinct from the M&A risk listed above, the integration risk relates specifically to integrating the HVAC businesses with HomeServe's existing Membership businesses and its ability to provide HVAC products, like installations, to Membership customers and also provide HVAC customers with Membership products. Failure to integrate businesses quickly and effectively could increase cost, resulting in failure to achieve predicted revenues and potentially lead to impairment.

 

FY18 update

There has been an HVAC acquisition in each of the UK and France.

 

Mitigation(s)

There are dedicated teams in each business tasked with business change and transformation and ensuring businesses are integrated and their subsequent performances are appraised. The single acquisitions in the UK and France will enable a blueprint for successful integration and best practice for any further similar acquisitions.

6.     IT & Cyber Security (Operational Risk)

In line with other businesses HomeServe is subject to the increased prevalence and sophistication of cyber-attacks which could result in unauthorised access to customer and other data or cause business disruption to services.  A successful cyber attack might have a significant impact on reputation, reducing the trust that customers place in HomeServe and could lead to legal liability, regulatory action and increased costs to rectify. A lapse in internal controls and a subsequent data breach or loss would have a similar impact.

 

Total customer numbers and policy retention rates may reduce and partners may terminate affinity relationships if they perceive customer data to be at risk.

 

FY18 update

Managing this risk remains a key area of focus and a high priority. A permanent Group Chief Information Security Officer to oversee information security strategy and governance across the Group is now in position.  HomeServe has a dedicated role responsible for information security in each business and during the year, defined an Information and Cyber Security Strategy to focus improvement activities over the next 4 years. HomeServe continued to complete cyber audits as part of its annual assurance plan and will continue to do so in FY19.

 

General Data Protection Regulation (GDPR) regulation introduces wide ranging changes affecting data protection and data privacy. A Group initiative has been led by HomeServe's Data Protection Officer to ensure compliance ahead of the 25 May 2018 enforcement date.

 

Mitigation(s)

HomeServe has a number of defensive and proactive practices across the Group to mitigate this risk. There is a detailed information security policy, which is communicated across the Group and training is provided as required.  Regular penetration testing is in place to assess defences and HomeServe continues to invest in IT security, ensuring a secure configuration, access controls, data centre security and effective communication of policies and procedures to all employees.

 

7.     Underwriting Capacity and Concentration (Operational Risk)

The Membership business line markets and administers policies that are underwritten by independent third party underwriters. HomeServe acts as an insurance intermediary and does not take on any material insurance risk.  If underwriters were unable or unwilling to underwrite these risks and HomeServe were unable to find alternative underwriters it would require the risk to be underwritten directly, thereby exposing the business to material insurance risk, which is contrary to its preferred operating model.  Obtaining relevant regulatory approvals for a new underwriter may take time, leading to business disruption. A material change in the operating model would also drive a change in accounting policy that could affect short term profitability. Customer numbers and retention rates may fall if customers experience reduced service levels or are not covered throughout any period of disruption.

 

FY18 update

Underwriting capacity was increased in FY17 with additional underwriters added in North America, France and Spain. There have been no new relationships entered into this year but all existing relationships remain strong.

 

 

Mitigation(s)

Regular meetings take place in all territories to review and understand underwriting performance and to accommodate growth in the customer and policy books as a result of M&A activity. With the exception of the UK, HomeServe works with a number of different underwriters so is not materially dependent on one sole provider. In the UK where there is one main underwriter, HomeServe maintains relationships with a number of other underwriters who are willing and able to underwrite the business. HomeServe undertakes regular reviews with all underwriters to ensure that current product performance and trends are understood.

 

8.     Regulation & Customer Focus (Operational Risk)

HomeServe is subject to regulatory requirements in each of its markets, particularly relating to product design, marketing materials, sales processes and data protection.  Failure to comply with regulatory requirements in any of its countries could result in the suspension, either temporarily or permanently, of certain activities.

 

Much regulation is intended to protect the rights and needs of consumers and failure to adhere to the high expectations customers have for HomeServe could lead to reduced retention and higher customer losses.

 

In addition, legislative changes relating to partners may change their obligations with regard to the infrastructure they currently manage and hence the products and services HomeServe can offer to customers. It is possible such legislative changes could reduce, or even remove, the need for some of HomeServe products and services.

 

HomeServe is also subject to wider regulation concerning companies outside of its industry including e.g. anti-corruption, anti-fraud and bribery, modern slavery etc. Specific policies can be found at

 http://www.homeserveplc.com/about-us/corporate-governance/policies.aspx

 

FY18 update

New regulation came into effect in the UK in FY18 affecting the whole insurance industry, which requires companies to disclose prior year prices on customer renewal documents. HomeServe has ensured all renewal documents are compliant and changes were made in line with the required timescale.

 

The Insurance Distribution Directive (IDD) is a further piece of EU-led regulation affecting all of HomeServe's European businesses, applied from February 2018 and requiring that all sales adequately assess and demonstrate customer demands and needs for HomeServe's products. Steps have been taken in each of the UK, France and Spain to ensure full compliance.

 

In the prior year the primary regulator in the UK, the Financial Conduct Authority (FCA), reduced the intensity of its supervision. The reduced level of supervision has continued throughout this financial year.

 

Mitigation(s)

HomeServe believes that regulation has a positive impact on the business and encourages a culture that promotes  customers' interests and will improve HomeServe's prospects over both the short and long term. HomeServe complies with local regulation in all of its businesses as a minimum but will also seek to take best practice from one business and apply it to all others.

 

HomeServe has regulatory specialists, compliance teams and Non-Executive Directors in each business to help ensure that all aspects of the legislative regime in each territory are fully understood and adopted as required.

 

Specifically in the UK, HomeServe maintains regular dialogue with the FCA, while in North America there is regular contact with the Attorneys General.  In other businesses, dialogue is maintained with local regulators.

 

HomeServe keeps up to date with changes in government and regulatory policy, which ensures that products and services are designed, marketed and sold in accordance with all relevant legal and regulatory requirements and that the terms and conditions are appropriate and meet the needs of customers.

 

9.     Recruitment & Talent  (Operational Risk)

HomeServe's ability to meet growth expectations and compete effectively is, in part, dependent on the skills, experience and performance of its personnel.  The inability to attract, motivate or retain key talent could impact overall business performance.

 

FY18 update

HomeServe continued to enjoy growth throughout FY18. The Group is larger than 12 months ago and engaging skilled personnel remains of utmost importance.

 

Mitigation(s)

Employment policies, remuneration and benefits packages and long-term incentives are regularly reviewed and designed to be competitive with other companies.

 

Employee surveys, performance reviews and regular communication of business activities are just some of the methods used to understand and respond to employees' views and needs.

 

Processes are in place to identify high performing individuals and to ensure that they have fulfilling careers, and HomeServe is managing succession planning effectively. A Director of Group Talent was appointed in FY18, looking at how HomeServe develops and promotes its best talent and future leaders.

 

 

10.   IT Investment (Operational Risk)

The Group relies on several key systems to manage its customer interactions. Appropriate and timely maintenance and investment is required to ensure systems continue to meet the changing needs of the business and its customers. Failure to invest appropriately to manage customer interactions and provide high quality service may result in lower retention and higher customer losses. There is also a dependence on quality 'back-office' systems and any failure in those may lead to business interruption and could jeopardise the ability to analyse performance indicators and react to any trends. Over investment in any new initiatives could see investment outweigh future benefits and lead to impairment.

 

FY18 update

The UK continues to develop its replacement customer management system. This is a significant project intended to deliver an improved customer experience and a number of marketing opportunities and operational efficiencies. Any significant delays in the project or faults in its design or implementation could adversely impact the intended benefits and lead to increased costs, reduced revenues and asset impairment.

 

There has also been investment in the core claims handling and network management software in the UK, North America and Spain. Such investments enable an effective customer journey and efficient and scalable management of networks.

 

Mitigation(s)

All investment decisions are subject to the Group's strict investment criteria and hurdles. Major IT programmes are allocated specific governance structures and oversight with members of senior management sitting on the Programme Board.

 

HomeServe engages a number of external advisers on large software projects to provide appropriate breadth and depth of experience and expertise to ensure there is no over-reliance on any one supplier and to support management in project delivery. 

 

11.   Digital & Innovation (Operational Risk)

As in other industries, customers in all businesses increasingly wish to engage with HomeServe by digital means: joining online and maintaining details or making a claim via HomeServe's website and App or posting onto social media channels such as Twitter and Facebook. If HomeServe is not flexible enough to respond to changing needs, customers may explore competitor products and choose not to renew. There is also a reputational risk as complaints logged via social media can quickly escalate if not dealt with in an appropriate and timely manner.

 

There is also an increasing demand for innovative products in HomeServe's markets and the adoption of 'Smart Home' products continues to grow.

 

FY18 update

A comprehensive HomeServe App was launched in the UK in FY18 enabling customers to manage details, make claims and explore hints and tips from their smart phone.

 

HomeServe owns a stake in Tado, a smart thermostat manufacturer and developed a WiFi version for its smart water leak detector "LeakBot" in FY18.

 

Mitigation(s)

HomeServe continues to review and respond to customer comments and needs and customers are offered a number of channels through which they can engage with HomeServe: telephone, website, Digital Live Chat, paper, email and social media. The developing Home Experts business also offers an alternative for customers seeking a fully digital experience.

 

12.   Financial

The main financial risks are the availability of short-term and long-term funding to meet business needs and take advantage of strategic priorities such as M&A opportunities, the risk of policyholders not paying monies owed, and fluctuations in interest rates and exchange rates. Following the UK's decision to leave the European Union the Group could be subject to higher exchange rate fluctuations.

 

FY18 update

On 1 August 2017, the Group entered into a new multi-currency revolving credit facility with both existing and new banking partners. The new terms of the facility provide committed credit of £400m which runs until 31 July 2022 with two one-year extension options, subject to agreement by the banking partners, which would extend the maturity to 31 July 2024. Loans have variable interest rates linked to LIBOR or EURIBOR. With other funding, principally from Private Placements, HomeServe had over £270m headroom against its available sources of debt at the year end.

 

HomeServe completed a successful £125m equity placing on 19 October 2017 retaining balance sheet strength and liquidity and providing flexibility for the acquisition of DPS and for future inorganic investment opportunities.

 

Interest rate risk

HomeServe's policy is to manage interest cost using a mix of fixed and variable rate borrowings.  Where necessary, this is achieved by entering into interest rate swaps for certain periods, in which HomeServe agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed notional principal amount.  These swaps are designated to economically hedge underlying debt obligations.

 

Credit risk

The risk associated with cash and cash equivalents is managed by only depositing funds with reputable and creditworthy banking institutions. The risk of a policyholder defaulting is mitigated as any policy cover will cease as and when any premium fails to be paid.

 

 

 

Liquidity risk

HomeServe manages liquidity risk by maintaining adequate reserves and banking facilities and continuously monitoring forecast and actual cash flows.

 

Foreign exchange risk

Short term foreign exchange risk is mitigated with the natural hedging provided by the geographical spread of the businesses.  While this will protect against some of the transaction exposure, HomeServe's reported results would still be impacted by the translation of non-UK operations.

 

Viability statement

 

In accordance with provision C.2.2 of the UK Corporate Governance Code 2014, the Directors have assessed the viability of the Group over a three year period to 31 March 2021. The Directors believe that a three year forward looking period is appropriate as it is aligned to the timeframe that management focus upon, the performance period in respect of the long-term incentive scheme for senior management and it is the period of assessment for recoverable values of cash generating units.

The Group has a formalised process of budgeting, reporting and review along with procedures to forecast its profitability, capital position, funding requirement and cash flows. These plans provide information to the Directors which is used to ensure the adequacy of resources available for the Group to meet its business objectives, both on a short-term and strategic basis. The plans for the period commencing on 1 April 2018 were reviewed by the Executive Committee in February and then approved by the Board in March 2018.

In making this statement, the Board carried out a robust assessment of the principal risks facing the Group. The Principal Risks and Uncertainties sets out the principal strategic, operational and financial risks which could threaten HomeServe's business model, future performance and growth plans and its liquidity or solvency.  HomeServe has a robust risk management framework which addresses its risk appetite and risk policy. All major risks are scored based on their potential impact and likelihood and are reviewed regularly by the Audit & Risk Committee.

                  

Various severe but plausible stress tests have been performed both on individual and combined scenarios which modelled;

 

·      the impact of the loss of a key commercial partner

·      the impact of a reduced customer focus and a resultant reduction in customer satisfaction and retention

·      market disruption from a new competitor

·      the impact of new or amended regulation and legislation

·      the impact of losing a key underwriting relationship

                                                    

Stress tests indicated that no single scenario would impact the viability of the Group over the next three years. As might be expected the impact increases if different risks were to materialise simultaneously, however it is considered unlikely that such a scenario would occur given the nature and relative diversification of the business. In such scenarios HomeServe would also be able to take decisions to protect the profitability of the business over a three year period by, for example, scaling back marketing investment to offset any reductions in income.

 

The Directors' assessment has been made with reference to the geographical spread of HomeServe's operations and its strong financial position resulting from a large portfolio of commercial partnerships and high customer retention.

 

The business is geographically spread across the UK, Continental Europe and North America; in each established territory, the business has long-term contractual relationships with utility businesses providing access to in excess of 109m households under Affinity Partner brands.  Retention rates are high across all established businesses, resulting in stable and recurring cash flows from a large, diverse customer base.

 

Considering the Group's current position, the principal risks and the Board's assessment of the Group's future, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over a period of at least three years to 31 March 2021.

 

 

 

Going concern

 

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the strategic report.

 

The Directors have reviewed the Group's budget, forecast and cash flows for FY19 and beyond, and concluded that they are in line with their expectations with regards to HomeServe's strategy and future growth plans. In addition, the Directors have reviewed the Group's position in respect of material uncertainties and have concluded that there are no items that would affect going concern or that should be separately disclosed.

 

The Directors have concluded that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 

David Bower

Chief Financial Officer

22 May 2018



Group Income Statement

Year ended 31 March 2018

 

 



2018 

2017 


Notes

£m 

£m 

Continuing operations




Revenue

3

899.7 

785.0 

Operating costs


(765.7)

(680.5)

Share of results of associates


1.0 

0.2 

Operating profit


135.0 

 104.7 

Investment income


0.1 

0.3 

Finance costs


(11.8)

(6.7)

Profit before tax and amortisation of acquisition intangibles


141.7 

 112.4 

Amortisation of acquisition intangibles


(18.4)

(14.1)

Profit before tax


123.3 

 98.3 

Tax

4

(27.4)

(23.9)

Profit for the year


95.9 

 74.4 





Attributable to:




Equity holders of the parent


96.3 

74.4 

Non-controlling interests


(0.4)



95.9 

74.4 





Dividends per share, paid and proposed

5

19.1p

15.3p





Earnings per share




Basic

6

30.2p

24.0p

Diluted

6

29.7p

23.6p

 



 

Group Statement of Comprehensive Income

Year ended 31 March 2018

 


2018 

2017 


£m 

£m 

Profit for the year

95.9 

74.4 




Items that will not be reclassified subsequently to profit and loss:



Actuarial gain/(loss) on defined benefit pension scheme

2.1 

(3.4)

Deferred tax (charge)/credit relating to actuarial re-measurements

(0.4)

0.6 


1.7 

(2.8)

Items that may be reclassified subsequently to profit and loss:



Exchange movements on translation of foreign operations

(10.2)

20.8 

Fair value losses on cash flow hedges

(0.5)


(10.7)

20.8 

Total other comprehensive (expense)/income

(9.0)

18.0 

Total comprehensive income for the year

86.9 

92.4 




Attributable to:



Equity holders of the parent

87.3 

92.4 

Non-controlling interests

(0.4)


86.9

92.4 

 



 

Group Balance Sheet

31 March 2018

 



2018 

2017 


Notes

£m 

£m 

 

Non-current assets




Goodwill


386.6 

301.9 

Other intangible assets

7

384.8 

288.6 

Property, plant and equipment


39.9 

37.0 

Interests in associates


5.5 

32.1 

Other investments


8.7 

8.5 

Deferred tax assets


6.8 

7.6 

Retirement benefit assets


4.7 

0.7 



837.0 

676.4 

 

Current assets




Inventories


4.3 

2.7 

Trade and other receivables


515.7 

455.1 

Cash and cash equivalents

8

57.8 

46.2 



577.8 

504.0 

Total assets


1,414.8 

1,180.4 





Current liabilities




Trade and other payables


(508.5)

(456.2)

Current tax liabilities


(10.4)

(9.2)

Obligations under finance leases

8

(0.5)

(0.6)

Bank and other loans

8

(38.0)

(35.9)



(557.4)

(501.9)

Net current assets


20.4 

2.1 





Non-current liabilities




Bank and other loans

8

(256.7)

(270.1)

Other financial liabilities


(23.4)

(14.4)

Deferred tax liabilities


(25.5)

(23.0)

Obligations under finance leases

8

(0.4)

(1.0)



(306.0)

(308.5)

Total liabilities


(863.4)

(810.4)

Net assets


551.4 

370.0





Equity




Share capital

9

8.9 

8.4 

Share premium account


171.8 

45.7 

Share incentive reserve


22.1 

18.3 

Currency translation reserve


16.1 

26.3 

Available for sale reserve

Other reserves


1.8 

82.2 

1.8 

72.2 

Retained earnings


248.1 

196.5 

Attributable to equity holders of the parent


551.0 

369.2 

Non-controlling interests


0.4 

0.8 

Total Equity


551.4 

370.0 

 

 

 



 

Group Statement of Changes in Equity

 

Year ended 31 March 2018

 


Share capital

£m

Share premium

account

£m

Share incentive

reserve

£m 

Currency translation reserve

£m 

Available

for sale reserve

£m

Other reserves

£m

Retained earnings

 £m 

Attributable

to equity holders of the parent

£m 

Non controlling interest

£m 

Total Equity

£m 

Balance at 1 April 2017

8.4

45.7

18.3 

26.3

1.8

72.2

196.5 

369.2 

0.8 

370.0 

Profit for the year

96.3 

96.3 

(0.4)

95.9 

Other comprehensive (expense) / income for the year

 

 

 

 

(10.2)

 

 

(0.5)

 

1.7 

 

(9.0)

 

 

(9.0)

Total comprehensive income

(10.2)

(0.5)

98.0 

87.3 

(0.4)

86.9 

Dividends paid (note 5)

(50.4)

(50.4)

(50.4)

Issue of share capital

0.5

126.1

10.0 

136.6 

136.6 

Share based payments

8.1 

8.1 

8.1 

Share options exercised

(4.3)

1.0 

(3.3)

(3.3)

Basis adjustments on hedged items

0.5 

0.5 

0.5 

Tax on exercised share options (note 4)

2.8 

2.8 

2.8 

Deferred tax on share options (note 4)

0.2 

0.2 

0.2 

Balance at 31 March 2018

8.9 

171.8 

22.1 

16.1 

1.8 

82.2 

248.1 

551.0 

0.4 

551.4 

 

 

 

Year ended 31 March 2017

 


Share capital

£m

Share premium

account

£m

Share incentive

reserve

£m 

Currency translation reserve

£m

Available

for sale reserve

£m

Other reserves

£m

Retained earnings

 £m 

Attributable to equity holders of the parent

£m 

Non controlling interest

£m

Total Equity

£m 

Balance at 1 April 2016

8.3

41.1

16.0 

5.5

1.8

72.1

171.8 

316.6 

-

316.6 

Profit for the year

-

-

-

-

-

74.4 

74.4 

-

74.4 

Other comprehensive income / (expense) for the year

 

-

 

-

 

 

20.8

 

-

 

-

 

(2.8)

 

18.0 

 

-

 

18.0 

Total comprehensive income

-

-

20.8

-

-

71.6 

92.4 

-

92.4 

Dividends paid (note 5)

-

-

-

-

-

(40.3)

(40.3)

-

(40.3)

Issue of share capital

0.1

4.6

-

-

-

4.7 

-

4.7 

Issue of trust shares

-

-

-

-

0.1

(0.1)

-

Share based payments

-

-

6.6 

-

-

-

6.6 

-

6.6 

Share options exercised

-

-

(4.3)

-

-

-

0.4 

(3.9)

-

(3.9)

Changes in non-controlling interest

-

-

-

-

-

0.8

0.8 

Obligation under put option

-

-

-

-

-

(9.3)

(9.3)

-

(9.3)

Tax on exercised share options (note 4)

-

-

-

-

-

2.0 

2.0 

-

2.0 

Deferred  tax on share options (note 4)

-

-

-

-

-

0.4 

0.4 

-

0.4 

Balance at 31 March 2017

8.4

45.7

18.3 

26.3

1.8

72.2

196.5 

369.2 

0.8

370.0 

 

 

Other reserves comprise of the Merger, Own shares, Capital redemption and Hedging reserves. Full details of these reserves are included in Note 26 of the Annual Report and Accounts 2018.

 



Group Cash Flow Statement

Year ended 31 March 2018

 



2018 

2017 


Notes

£m 

£m 

Operating profit


135.0 

104.7 





Adjustments for:




Depreciation of property, plant and equipment


8.0 

6.9 

Amortisation of intangible assets

7

54.6 

42.6 

Share-based payments expense


9.1 

7.4 

Share of profit of associates


(1.0)

(0.2)

Loss on disposal of property, plant and equipment and software


2.1 

0.4 

Gain on re-measurement of associate on acquisition of control


(0.9)

Decrease in other financial liabilities


(0.3)

Bargain purchase on acquisition


(0.7)

Profit on disposal of subsidiary


(0.1)

Operating cash flows before movements in working capital


206.6 

161.0 





(Increase)/decrease in inventories


(1.4)

0.4 

Increase in receivables


(60.7)

(75.5)

Increase in payables


19.7 

54.0 

Net movement in working capital


(42.4)

(21.1)





Cash generated by operations


164.2 

139.9 





Income taxes paid


(27.2)

(20.0)

Interest paid


(7.5)

(6.7)

Net cash inflow from operating activities


129.5 

113.2 





Investing activities




Interest received


0.1 

0.3 

Proceeds on disposal of fixed assets


0.6 

Disposal of subsidiary


(1.7)

Purchases of intangible assets


(114.3)

(50.9)

Purchases of property, plant and equipment


(11.0)

(7.6)

Acquisition of investment in associate


(24.7)

Dividend received from associate

Net cash outflow on acquisition of subsidiaries

11

0.4 

(50.3)

(74.2)

Net cash used in investing activities


(174.5)

(158.8)





Financing activities




Dividends paid

5

(50.4)

(40.3)

Repayment of finance leases


(0.6)

(1.0)

Deferred and contingent consideration paid on acquisition of subsidiaries

11

 

(3.9)

 

Issue of shares from the employee benefit trust


0.1 

Proceeds on issue of share capital


124.1 

0.8 

Costs associated with issue of share capital


(0.8)

New bank and other loans raised


221.0 

103.3 

Costs associated with new bank and other loans raised


(3.1)

Decrease in bank and other loans


(226.5)

(29.8)

Net cash generated by financing activities


59.8 

33.1 





Net increase/(decrease) in cash and cash equivalents


14.8 

(12.5)

Cash and cash equivalents at beginning of year


46.2 

54.2 

Effect of foreign exchange rate changes


(3.2)

4.5 

Cash and cash equivalents at end of year


57.8 

46.2 

 

 

 

Notes to the condensed set of financial statements

 

1.         Basis of preparation

 

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs) adopted for use by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs.  The Company will publish full financial statements that comply with IFRSs in June 2018.

 

The financial information set out above does not constitute the Group's statutory financial statements for the years ended 31 March 2018 or 31 March 2017, but is derived from those financial statements.  Statutory financial statements for FY17 prepared under IFRSs have been delivered to the Registrar of Companies and those for FY18 will be delivered following the Company's Annual General Meeting.  The auditor, Deloitte LLP, has reported on those financial statements; its reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006.  These financial statements were approved by the Board of Directors on 22 May 2018.

 

2.         Accounting policies 

 

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's 31 March 2017 audited financial statements, except as described below.

 

Adoption of new or revised standards and accounting policies

The following amendments to accounting standards have been adopted in the year:

Amendments to IAS 7                             Disclosure Initiative

Amendments to IAS 12                           Recognition of Deferred Tax Assets for Unrealised Losses

 

None of the amendments listed above have had any material impact on the amounts reported in this consolidated set of financial statements.

Standards in issue but not yet effective

At the date of authorisation of these financial statements the following Standards and Interpretations, which have not been applied in these financial statements, were in issue but not yet effective (not all of which have been endorsed by the EU):

IFRS 9                                                   Financial Instruments

IFRS 15                                                 Revenue from Contracts with Customers

IFRS 16                                                 Leases                         

IFRS 17                                                 Insurance Contracts

IFRIC 22                                                Foreign Currency Transactions and Advance Consideration

IFRIC 23                                                Uncertainty over Income Tax Treatments

Amendments to IFRS 2                           Classification and Measurement of Share-based Payment Transactions

Amendments to IFRS 4                           Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

Amendments to IFRS 9                           Prepayment Features with Negative Compensation

Amendments to IFRS 10 and IAS 28         Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

Amendments to IAS 19                           Plan Amendment, Curtailment or Settlement

Amendments to IAS 40                           Transfers of Investment Property

Annual Improvements to IFRSs               2014-2016 Cycle - IFRS 1 and IAS 28 Amendments

Annual Improvements to IFRSs               2014-2016 Cycle - IFRS 12 Amendments

Annual Improvements to IFRSs               2015-2017 Cycle

 

2.         Accounting policies (continued)

Standards in issue but not yet effective (continued)

Clarifications to IFRS 15                         Revenue from Contracts with Customers

Conceptual Framework                           Amendments to References to the Conceptual Framework in

IFRS Standards

 

At 31 March 2018 the status of the Group's analysis as to the impact that IFRSs 9, 15 and 16 will have on the financial statements for the years ended 31 March 2019 (IFRSs 9 and 15) and 31 March 2020 (IFRS 16) has concluded the following:

 

-     IFRS 9 will not have a material effect on the financial statements, with only limited amendments expected to the classification of financial assets, the timing of credit loss recognition under the expected credit loss model for impairment, and disclosures. This is due to the nature of the business model where the majority of customers pay in advance.

 

The Group intends to adopt this standard for the year ended 31 March 2019, in line with its mandatory effective date.

 

-     IFRS 15 will not have a material effect on the financial statements. The Group's assessment indicates that, while changes to revenue disclosures will be required together with the re-categorisation of certain existing intangible assets that represent contract costs under IFRS 15, the impact on existing revenue recognition patterns will be immaterial.

 

The Group intends to adopt this standard for the year ended 31 March 2019, in line with its mandatory effective date.

 

-     IFRS 16 will have a significant impact on the Group Balance Sheet through the recognition of 'Right of Use' (RoU) assets and liabilities for lease payments in respect of arrangements previously classified as operating leases under IAS 17. Additional disclosures will also be required. Although the standard is not expected to have a material impact on profit after tax, Group EBITDA will increase due to a reduction in operating rental costs, replaced by higher interest and depreciation charges. Further, while total cash flows will remain consistent, rental outflows will now be presented under financing activities, where they were previously recorded as operational outflows, increasing the Group's cash conversion percentage.

 

The Group's operating lease commitments as at 31 March 2018 (see note 31 of the Annual Report and Accounts 2018) of £37.8m are the best indicator of the estimated size of the RoU assets and lease liabilities likely to be recognised on balance sheet at transition. The transition values are subject to change due to:

 

-       Judgements inherent in calculating lease liabilities (e.g. determining the lease term, the discount rate and assessing variable lease payments)   

-       The impact of the Group's operational activities on its lease obligations between 31 March 2018 and the date of transition to IFRS 16

 

The Group intends to adopt this standard for the year ended 31 March 2020, in line with its mandatory effective date.

 

The Group will continue to progress its impact assessment regarding IFRS 16 during the first half of FY19 and will provide a further update in the interim report for the period ending 30 September 2018.

 

The Directors do not expect that the adoption of the other Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future years.

 

 

 



 

3.         Segmental analysis

 

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker, who is considered to be the Chief Executive, to allocate resources to the segments and to assess their performance. The operating segments are consistent with those set out in the Business Review.

 

Segment operating profit/(loss) represents the result of each segment including allocating costs associated with head office and shared functions, but without allocating investment income, finance costs, and tax. This is the measure reported to the Chief Executive for the purposes of resource allocation and assessment of segment performance.

The accounting policies of the operating segments are the same as those described in note 2 of the Annual Report and Accounts 2018. Group cost allocations are deducted in arriving at segmental operating profit. Inter-segment revenue is charged at prevailing market prices.

 


UK 

North America

France 

Spain 

New Markets

Total 

2018

£m 

£m 

£m 

£m 

£m 

£m 

Revenue







Total revenue

365.6 

282.1 

100.0 

141.3 

18.6 

907.6 

Inter-segment

(7.9)

(7.9)

External revenue

357.7 

282.1 

100.0 

141.3 

18.6 

899.7 








Result







Segment operating profit/(loss) pre amortisation of acquisition intangibles

61.1 

48.6 

31.5 

16.6 

(4.4)

153.4 

Amortisation of acquisition intangibles

(1.8)

(8.1)

(6.4)

(0.1)

(2.0)

(18.4)

Operating profit/(loss)

59.3 

40.5 

25.1 

16.5 

(6.4)

135.0 

Investment income






0.1 

Finance costs






(11.8)

Profit before tax






123.3 

Tax






(27.4)

Profit for the year






95.9 

 

 


UK 

North America

France 

Spain 

New Markets

Total 

2017

£m 

£m 

£m 

£m 

£m 

£m 

Revenue







Total revenue

326.5 

227.8 

91.1 

130.2 

16.6 

792.2 

Inter-segment

(7.2)

(7.2)

External revenue

319.3 

227.8 

91.1 

130.2 

16.6 

785.0 








Result







Segment operating profit/(loss) pre amortisation of acquisition intangibles

63.2 

21.2 

27.1 

13.3 

(6.0)

118.8 

Amortisation of acquisition intangibles

(1.2)

(6.5)

(6.0)

(0.3)

(0.1)

(14.1)

Operating profit/(loss)

62.0 

14.7 

21.1 

13.0 

(6.1)

104.7 

Investment income






0.3 

Finance costs






(6.7)

Profit before tax






98.3 

Tax






(23.9)

Profit for the year






74.4 

 

 

 

 

 

 

 

 

 

 

3.         Segmental analysis (continued)

 


Assets

 

Liabilities

Capital Additions

Depreciation, Amortisation,

Impairment

 


2018 

2017 

2018 

2017 

2018

2017

2018

2017


£m 

£m 

£m 

£m 

£m

£m

£m

£m

UK

897.7 

817.8 

472.6 

472.5 

43.0

36.1

17.3

16.1

North America

352.6 

279.8 

317.2 

73.2

11.7

16.7

13.1

France

219.9 

208.8 

153.4 

3.5

3.9

8.9

7.8

Spain

140.0 

137.0 

108.2 

18.2

17.5

17.0

12.3

New Markets

99.8 

15.6 

37.7 

1.6

0.2

2.7

0.2

Inter-segment

(295.2)

(278.6)

 (295.2)

 (278.6)

-

-

-

-

Total

1,414.8 

1,180.4 

863.4 

810.4 

139.5

69.4

62.6

49.5



 

 

All assets and liabilities including inter-segment loans and trading balances are allocated to reportable segments.

 

4.         Tax

 







2018 

2017 







£m 

£m 

Current tax







Current year charge





30.9 

23.6 

Adjustments in respect of prior years



(0.1)

1.3 

Total current tax charge




30.8 

24.9 









Deferred tax credit





(3.4)

(1.0)

Total tax charge





27.4 

23.9 

 

UK corporation tax is calculated at 19% (FY17: 20%) of the estimated assessable profit for the year.  Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions, these being a blended (Federal/State) rate of 38% in the US (FY17: 40%) as a result of the US enacting new tax legislation in December 2017 effective from 1 January 2018, 33% in France (FY17: 33%) and 25% in Spain (FY17: 25%), which explains the 'Overseas tax rate differences' below.

The charge for the year can be reconciled to the profit per the income statement as follows:

 

 

 






2018 

2017 







£m 

£m 

Profit before tax on continuing operations



123.3 

98.3 

Tax at the UK corporation tax rate of 19% (FY17: 20%)


23.4 

19.7 

Tax effect of items that are not taxable in determining taxable profit


(0.5)

(0.2)

Adjustments in respect of prior years - current tax


(0.1)

1.3 

Overseas tax rate differences




4.6 

2.7 

Movement in deferred tax liability



- 

0.4 

Tax expense for the year




27.4 

23.9 

 

 

 

4.         Tax (continued)

Given the UK parented nature of the Group, the majority of financing that the overseas businesses require is provided from the UK, and as such the UK has provided a number of intra-group loans to its overseas operations in order to fund their growth plans. In light of the different tax rates applicable in each of the markets in which the Group operates, as noted above, these loans result in a reduction in the Group's effective tax rate, which is included in 'Overseas tax rate differences' in the table above.

As the proportion of the Group's profit earned overseas continues to grow, the effective tax rate of 22% (FY17: 24%) is expected to increase slightly in future years. 

A retirement benefit tax charge amounting to £0.4m (FY17: £0.6m credit) has been recognised directly in other comprehensive income. In addition to the amounts (charged)/ credited to the income statement and other comprehensive income, the following amounts relating to tax have been recognised directly in equity:







2018 

2017







£m 

£m

Current tax







Excess tax deductions related to share-based payments on exercised options

2.8 

2.0 

Deferred tax







Change in estimated excess tax deductions related to share-based payments

0.2 

0.4 

Total tax recognised directly in equity



3.0 

2.4 

 

 

 

5.         Dividends

 


2018

2017


£m

£m

Amounts recognised as distributions to equity holders in the year:



Final dividend for the year ended 31 March 2017 of 11.2p (2016: 8.9p) per share

35.0

27.6

Interim dividend for the year ended 31 March 2018 of 4.7p (2017: 4.1p) per share

15.4

12.7


50.4

40.3

 

The proposed final dividend for the year ended 31 March 2018 is 14.4p per share amounting to £47.5m (FY17: 11.2p per share amounting to £35.0m). The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

 



 

6.         Earnings per share

 

 


2018 

2017 


pence 

pence 

Basic

30.2 

24.0 

Diluted

29.7 

23.6 

Adjusted basic

33.6 

27.0 

Adjusted diluted

33.1 

26.5 

 

The calculation of the basic and diluted earnings per share is based on the following data:

Number of shares

2018 

2017 


Weighted average number of shares



Basic

318.9

309.9 

Dilutive impact of share options

5.0

5.4 

Diluted

323.9

315.3 

 

Earnings

2018 

2017 


£m 

£m 

Profit for the year attributable to equity holders of the parent

96.3 

74.4 

Amortisation of acquisition intangibles

18.4 

14.1 

Tax impact arising on amortisation of acquisition intangibles

(5.7)

(4.9)

One-off deferred tax impact of US and French tax reforms

(1.7)

Adjusted profit for the year attributable to equity holders of the parent

107.3 

83.6 

 

Basic and diluted earnings per ordinary share have been calculated in accordance with IAS 33 Earnings Per Share.  Basic earnings per share is calculated by dividing the profit or loss in the financial year attributable to the equity holders of the parent by the weighted average number of ordinary shares in issue during the year. Adjusted earnings per share is calculated excluding amortisation of acquisition intangibles and the associated tax impact. In FY18, an adjustment has also been made for the one-off impact of tax reforms in the USA and France (see note 4). The Group uses adjusted operating profit, EBITDA, adjusted profit before tax and adjusted earnings per share as its primary performance measures.  These are non-IFRS measures which exclude the impact of the amortisation of acquisition intangible assets (FY18: £18.4m, FY17: £14.1m) and the associated tax effects (FY18: £5.7m, FY17: £4.9m).  Acquisition intangible assets principally arise as a result of the past actions of the former owners of businesses in respect of marketing and business development activity. Therefore, the adjusted measures reflect the post acquisition revenue attributable to, and operating costs incurred by, the Group.  Diluted earnings per share includes the impact of dilutive share options in issue throughout the period.



 

7.         Other intangible assets

 

Acquisition intangibles include acquired access rights, acquired customer databases and acquired brands. Other intangibles include trademarks, access rights, customer databases and software.

 


Acquired access rights

Acquired customer databases

Acquired brands

Total acquisition intangibles

Trademarks & access rights

Customer databases

Software

Total intangibles


£m

£m

£m

£m

£m

£m

£m

£m

Cost









At 1 April 2016

27.2 

118.8 

146.0 

31.6 

55.0 

125.7 

358.3 

Additions

- 

0.3 

16.7 

44.4 

61.4 

Acquisition of subsidiaries

16.3 

28.0 

44.3 

1.3 

45.6 

Disposals

- 

(0.2)

(0.2)

Exchange movements

4.0 

12.3 

16.3 

1.3 

4.9 

3.2 

25.7 

At 1 April 2017

47.5 

159.1 

206.6 

33.2 

76.6 

174.4 

490.8 

Additions

45.1 

20.1 

65.2 

3.0 

16.0

44.3 

128.5 

Acquisition of subsidiaries

17.0 

13.9 

30.9 

0.9 

31.8 

Disposals

(0.9)

(4.4)

(5.3)

Exchange movements

(4.9)

(4.7)

(9.6)

(1.2)

1.5 

(3.5)

(12.8)

At 31 March 2018

87.7

191.5

13.9

293.1

34.1

94.1

211.7

633.0

 

Accumulated Amortisation








At 1 April 2016

18.6 

52.1 

70.7 

19.5 

18.3 

39.8 

148.3 

Charge for the year

2.8 

11.3 

14.1 

4.5 

11.6 

12.4 

42.6 

Disposals

(0.2)

(0.2)

Exchange movements

2.1 

5.7 

7.8 

0.6 

1.9 

1.2 

11.5 

At 1 April 2017

23.5 

69.1 

92.6 

24.6 

31.8 

53.2 

202.2 

Charge for the year

4.8 

13.0 

0.6 

18.4 

3.5 

16.8 

15.9 

54.6 

Disposals

(0.3)

(2.5)

(2.8)

Exchange movements

(0.9)

(3.5)

(4.4)

(0.8)

0.5 

(1.1)

(5.8)

At 31 March 2018

27.4 

78.6 

0.6 

106.6 

27.0 

49.1 

65.5 

248.2 

 

Carrying amount








At 31 March 2018

60.3 

112.9 

13.3 

186.5 

7.1 

45.0 

146.2 

384.8 

At 31 March 2017

24.0 

90.0 

114.0 

8.6 

44.8 

121.2 

288.6 

 

On 18 December 2017 HomeServe US Repair Management Corporation acquired certain intangible assets of the home assistance policy business of Dominion Products and Services, Inc. ("DPS"), a wholly owned subsidiary of Dominion Energy, Inc. At 31 March 2018 acquired access rights included £35.4m and acquired customer databases included £19.7m in respect of the marketing agreement and policy book acquired as part of this transaction. These assets will be amortised over 13 and 9 years respectively, on a straight-line basis. 

 

 

8.         Analysis of net debt


2018 

2017 


£m 

£m 

Cash and cash equivalents

(57.8)

(46.2)

Bank and other loans due within 1 year

38.0 

35.9 

Bank and other loans due after 1 year

256.7 

270.1 

Obligations under finance leases

0.9 

1.6 

Net debt

237.8 

261.4 

 

 

 

 

 

 

9.         Share capital


2018  

2017 


£m  

£m 

Issued and fully paid 329,776,766 ordinary shares of 2 9/13p each (FY17:310,689,548)

 

8.9 

 

8.4 

 

The Company has one class of ordinary shares which carry no right to fixed income. Share capital represents consideration received or amounts, based on fair value, allocated to LTIP and One Plan participants on exercise, or amounts, based on fair value of the consideration for acquired entities. The nominal value was 2 9/13p per share on all issued and fully paid shares.

 

On 19 October 2017, the Company placed 15,243,903 new ordinary shares at a price of 820 pence per share, raising gross proceeds of approximately £125.0m. The Placing Shares issued represented, in aggregate, approximately 4.9 per cent of HomeServe's issued ordinary share capital prior to the Placing. Transaction costs associated with the Placing of £3.4m were accounted for as a deduction from equity (FY17: £nil). 

 

During the period from 1 April 2017 to 31 March 2018 the Company issued a further 3,843,315 shares with a nominal value of 2 9/13p creating share capital of £103,474 and share premium of £4,907,972. Of this total, 1,193,317 shares, issued at 838 pence per share represented £10.0m of the fair value of the consideration for the acquisition of Sherrington Mews Limited on 17 November 2017 (see note 11).

 

During the period from 1 April 2016 to 31 March 2017 the Company issued 2,797,122 shares with a nominal value of 2 9/13p creating share capital of £75,307 and share premium of £4,696,129.

 

10.       Related party transactions

 

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. 

 

Transactions with associates

 

Related party transactions with associate interests during FY18 principally related to recharged consultancy and contractor costs and amounted to £0.5m (FY17: £nil).

 

Other related party transactions

 

Other related party transactions during FY18 were similar in nature to those in FY17 and amounted to £0.5m (FY17: £0.5m).  

 

Full details of the Group's related party transactions are included in the Annual Report and Accounts 2018.

 



 

11.       Business combinations

 

The Group has incurred a net cash outflow in respect of business combinations of £54.2m in the year (FY17: £74.2m).

There were two material acquisitions in the year ended 31 March 2018.

On 2 August 2017 HomeServe Assistance Limited, a Group company, acquired 100% of the issued share capital and obtained control of Help-Link UK Limited (Help-Link). The acquisition of Help-Link enhances the scale and scope of the UK business' heating installation capability and increases the opportunity for future growth related to new heating system installations.

On 17 November 2017 HomeServe Assistance Limited increased its investment in its associate, Sherrington Mews Limited, the holding company of the Checkatrade Group (Checkatrade), by 60%, taking its total holding up to 100% and thereby obtaining control of Checkatrade allowing the Group to progress its growth strategy in the Home Experts market.  

The initial investment made on 13 December 2016 included a call option for HomeServe to purchase a further 35% in mid 2019 and a put option for Sherrington Mews Limited to require the Group to acquire a further 35% shareholding. The subsequent agreement to acquire the additional 60% of Checkatrade's ordinary share capital superseded these options, which were consequently extinguished and had no material fair value at 17 November 2017.

Upon obtaining control of Checkatrade, the Group assessed the fair value of the associate interest disposed of as part of the total consideration for the business combination. Based on a total business valuation of 100% of the share capital of the Sherrington Mews Limited, the fair value of the Group's existing 40% interest was assessed to be £29.9m.

The gain on re-measurement of the existing associate interest on obtaining control was therefore calculated as follows:


Total


£m

Fair value of associate interest previously owned

29.9 

Carrying value of associate interest held by the Group at 17 November 2017

(27.3)

Acceleration of discount unwind on contingent consideration payment associated with purchase of initial 40% shareholding

(1.3)

Acquisition related costs

(0.4)

Gain on re-measurement of associate on acquisition of control 

0.9 

 

Additionally there were two immaterial acquisitions in the year ended 31 March 2018.

On 30 November 2017 HomeServe Membership Limited, a Group company, acquired 100% of the issued share capital of Energy Insurance Services Limited (EISL) for a total cash consideration of £1.7m. EISL provides boiler, central heating and control system insurance policies to approximately 19,000 domestic customers. EISL has developed significant knowledge, experience and systems related to the self-fix of boilers, which will bring customer experience improvements and synergies to HomeServe's growing UK heating business. 

On 29 December 2017 HomeServe France Holdings SAS, a Group company, acquired 100% of PXB Invest SAS, the holding company of the Electrogaz Group for a total cash consideration of €5.6m (£5.0m). Electrogaz provides customers end-to-end home heating services, combining the provision of boiler installations, servicing and repair, complimenting HomeServe's strategic objective to grow and develop the Group's heating capabilities internationally. 



 

11.       Business combinations (continued)

 

The provisional fair values of identifiable assets acquired and liabilities assumed are set out below:

 


Checkatrade

Help-Link

Other

Total

At fair value

£m 

£m 

£m 

£m 

Property, plant and equipment

0.4 

0.3 

0.1 

0.8 

Intangible assets

0.8 

0.1 

0.9 

Cash and cash equivalents

1.8 

(1.7)

1.5 

1.6 

Inventories

- 

0.1 

0.3 

0.4 

Trade and other receivables

9.2 

1.4 

0.9 

11.5 

Trade and other payables

(3.3)

(5.8)

(1.2)

(10.3)

Bank and other loans

(0.1)

(0.1)

Deferred income

(10.5)

(1.0)

(11.5)

Intangible assets identified on acquisition

28.0 

1.5 

1.4 

30.9 

Deferred tax on acquisition intangibles

(4.9)

(0.3)

(0.4)

(5.6)

Net assets/(liabilities) acquired

21.5 

(4.5)

1.6 

18.6 






Goodwill

58.6 

23.6 

5.1 

87.3 

Total consideration

80.1 

19.1 

6.7 

105.9 






Satisfied by:





Cash

40.2 

5.0 

6.7 

51.9 

Contingent consideration at fair value

- 

14.1 

- 

14.1 

Ordinary shares in HomeServe plc

10.0 

- 

- 

10.0 

Fair value of associate interest previously owned

29.9 

29.9 


80.1 

19.1 

6.7 

105.9 






Net cash outflow arising on acquisition:





Cash consideration

40.2 

5.0 

6.7 

51.9 

Cash and cash equivalent balances acquired

(1.8)

1.7 

(1.5)

(1.6)


38.4 

6.7 

5.2 

50.3 

The goodwill arising on the excess of consideration over the fair value of the assets and liabilities acquired represents the expectation of synergy benefits and efficiencies. None of the goodwill is expected to be deducted for tax purposes. The gross contracted amounts due are equal to the fair value amounts stated above for trade and other receivables.

The provisional fair values for Help-Link disclosed as part of the Group's interim results as at 30 September 2017 have been updated, resulting in an increase to goodwill of £0.2m at 31 March 2018. The undiscounted range of outcomes associated with the contingent consideration payments, conditional on the number of boiler installations Help-Link complete during the period of contingency, remains from £nil to £15.5m.

The post-acquisition revenue, operating profit and acquisition-related costs (included in operating costs) from these acquisitions in the year ended 31 March 2018 were as follows:


Checkatrade

£m

Help-Link

£m

Other

£m

Total

£m

Revenue

8.2 

22.4 

1.2 

31.8 

Operating loss

(0.1)

(0.4)

(0.5)

Acquisition-related costs

0.3 

0.5 

0.3 

1.1 

 

If all of the acquisitions had been completed on the first day of the financial year, Group revenues for the period would have been £925.2m and Group profit before taxation would have been £124.1m.

In addition to the net cash outflow on the acquisitions above of £50.3m, deferred and contingent consideration was paid relating to prior year business combinations of £3.9m (FY17 £3.1m).

 

 

 

12.       Events after the balance sheet date

 

There were no post balance sheet events between the balance sheet date and the signing of the financial statements.

 

13.       Other information

 

The Annual Report and Accounts for the year ended 31 March 2018 was approved by the Board on 22 May 2018 and will be made available on the Company's website and posted to those shareholders who have requested it in June 2018.  Copies will be available from the registered office at Cable Drive, Walsall, WS2 7BN.

 

Forward Looking Statements

 

This report contains certain forward looking statements, which have been made in good faith, with respect to the financial condition, results of operations, and businesses of HomeServe plc.  These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future.  There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts.  The statements have been made with reference to forecast price changes, economic conditions, the current regulatory environment and the current interpretations of IFRS applicable to past, current and future periods.  Nothing in this announcement should be construed as a profit forecast.

 



 

GLOSSARY

HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. APMs used in this announcement address profitability, leverage and liquidity and together with operational KPIs give an indication of the current health and future prospects of the Group.

 

Definitions of APMs and the rationale for their usage are included below with a reconciliation, where applicable, back to the equivalent statutory measure.

 

Profitability

The Group uses adjusted operating profit, EBITDA, adjusted profit before tax and adjusted earnings per share as its primary profit performance measures. These are non-IFRS measures which exclude the impact of the amortisation of acquisition intangible assets. Intangible assets principally arise as a result of the past actions of the former owners of businesses in respect of marketing and business development activity. Therefore, the adjusted measures reflect the post acquisition revenue attributable to, and operating costs incurred by, the Group.

 

In FY18 the adjusted earnings per share measure also removes the one-off effect of a deferred tax benefit arising as a result of US and French tax reforms. This is considered a more accurate indicator of the underlying operational and financial performance of the Group and a more effective guide to future performance.

 

TOTAL GROUP

£million

2018 

2017 

Operating profit (statutory)

135.0

104.7

Amortisation of acquisition intangibles

18.4

14.1

Adjusted operating profit

153.4

118.8

 

Operating profit (statutory)

135.0

104.7

Depreciation

8.0

6.9

Amortisation of other intangibles

36.2

28.5

Amortisation of acquisition intangibles

18.4

14.1

EBITDA

197.6

154.2




Profit before tax (statutory)

123.3

98.3

Amortisation of acquisition intangibles

18.4

14.1

Adjusted profit before tax

141.7

112.4

 

 

Pence per share



Earnings per share (statutory)

30.2 

24.0

Amortisation of acquisition intangibles (net of tax)

3.9 

3.0

One-off deferred tax impact of US & French tax reform

(0.5)

Adjusted earnings per share

33.6 

27.0

 



 

 

SEGMENTAL

 

2018

£million

UK

North America

France

Spain

New Markets

Revenue

365.6

282.1

100.0

141.3

18.6 







Statutory operating profit/(loss)

59.3

40.5

25.1

16.5

(6.4)

Operating Margin %

16%

14%

25%

12%







Add back






Amortisation of Acquisition Intangibles

1.8

8.1

6.4

0.1

2.0

Effect on operating margin %

1%

3%

7%

-







Adjusted operating profit/(loss)

61.1

48.6

31.5

16.6

(4.4)

Adjusted operating margin %

17%

17%

32%

12%

 

 

2017

£million

UK

North America

France

Spain

New Markets

Revenue

326.5

227.8

91.1

130.2

16.6







Statutory operating profit/(loss)

62.0

14.7

21.1

13.0

(6.1)

Operating Margin %

19%

6%

23%

10%

-







Add back






Amortisation of Acquisition Intangibles

1.2

6.5

6.0

0.3

0.1

Effect on operating margin %

-

3%

7%

-

-







Adjusted operating profit/(loss)

63.2

21.2

27.1

13.3

(6.0)

Adjusted operating margin %

19%

9%

30%

10%

 

 

2018

Local currency million

UK

£

North America

$

France

Spain

New Markets

£

Revenue

365.6

375.2

113.2

160.1

18.6 







Statutory operating profit/(loss)

59.3

53.6

28.5

18.8

(6.4)

Operating Margin %

16%

14%

25%

12%







Add back






Amortisation of Acquisition Intangibles

1.8

10.8

7.2

0.1

2.0

Effect on operating margin %

1%

3%

7%

-







Adjusted operating profit/(loss)

61.1

64.4

35.7

18.9

(4.4)

Adjusted operating margin %

17%

17%

32%

12%

 

2017

Local currency million

UK

£

North America

$

France

Spain

New Markets

Revenue

326.5

293.0

107.4

154.3

16.6







Statutory operating profit/(loss)

62.0

17.8

24.4

15.4

(6.1)

Operating Margin %

19%

6%

23%

10%

-







Add back






Amortisation of Acquisition Intangibles

1.2

8.4

7.1

0.4

0.1

Effect on operating margin %

-

3%

7%

-

-







Adjusted operating profit/(loss)

63.2

26.2

31.5

15.8

(6.0)

Adjusted operating margin %

19%

9%

30%

10%

 

Leverage

In FY18 the Group targeted net debt in the range of 1.0 to 1.5x EBITDA measured at the year end. Following the growth of the Group since the last review of the capital structure policy, the Board has determined that the Group can now support a leverage policy range of 1.0 to 2.0x Net Debt: EBITDA at March year ends.

 

The range reflects HomeServe's relatively low risk appetite. Due to the seasonality of the business and depending on M&A opportunities, HomeServe is able to operate outside 1.0 to 2.0x for periods of time but with a highly cash generative business model HomeServe will seek to return to its target range.  The leverage ratio is also important as it factors into the Group's banking covenants and the rolling 12 month rate at the half year influences the forward interest rates payable on the Group's Revolving Credit Facility.

 

Certain of the Group's segmental bonus measures relate to net cash. Net cash is defined and calculated in the same way as net debt but returns a positive closing balance.

                                                                     

The 2018 Annual Report provides a full reconciliation of the movements in liabilities arising from borrowings and finance leases. The closing balances at 31 March were as follows:

 

£million

2018 

2017 

Current liabilities from borrowings and finance leases


 

 

Finance leases

0.5 

0.6 

Bank and other loans

38.0 

35.9 


38.5 

36.5 

Non-current liabilities from borrowings and finance leases



Finance leases

0.4 

1.0 

Bank and other loans

256.7 

270.1 


257.1 

271.1 

Total liabilities from borrowings and finance leases

295.6 

307.6 




Cash and cash equivalents

(57.8)

(46.2)




Net Debt

237.8 

261.4 

EBITDA

197.6 

154.2

Leverage

1.2x 

1.7x

 



 

Liquidity

Cash conversion % is defined as cash generated by operations divided by adjusted operating profit. The measure demonstrates the cash generative nature of the ordinary trading operations of HomeServe's business model and the ability to produce positive cashflows that can be invested for future growth initiatives or in capital projects to maintain customer service initiatives, digital enhancements or efficiencies that benefit the long-term health of the business.

 

Free cash flow is stated after capital expenditure, tax and interest obligations and is an indication of the strength of the business to generate funds to meet its liabilities and repay borrowings. It also shows the funds that might be made available to pursue M&A activities and to pay dividends.

 

£million

2018 

2017 

Adjusted operating profit            

153.4 

118.8 

Amortisation of acquisition intangibles

(18.4)

(14.1)

Operating profit

135.0 

104.7 

Depreciation and amortisation

62.6 

49.5 

Non-cash items

9.0 

6.8 

Increase in working capital

(42.4)

(21.1)

Cash generated by operations          

164.2 

139.9 

Net interest

(10.5)

(6.4)

Taxation

(27.2)

(20.0)

Capital expenditure - Ordinary

(54.6)

(44.4)

Capital expenditure - Partner Payments

(16.5)

(14.1)

Repayment of finance leases

(0.6)

(1.0)

Free cash flow

54.8 

54.0 

 

£million

2018 

2017 

Adjusted operating profit            

153.4 

118.8 

Cash generated by operations          

164.2 

139.9 

Cash conversion

107% 

118% 

 

 

KPIs

The Group uses a number of operational key performance indicators that provide insight into past performance and are an indicator of the future prospects of the Group as a whole and its individual segments.

 

Affinity partner households tracks the growth in addressable market delivered through existing and new partnerships with utilities and municipals.

Customers tracks success in converting addressable market into revenue-generating customers, by delivering great products and service.

Retention rate reflects ability to deliver fit-for-purpose product and great service to customers.

Policies illustrates ability to grow the product line through customer focus and innovation.

Income per customer measures ability to design and market increasingly valuable products, and sell them efficiently. Due to currency differences, this measure is tracked at a geographic level.

Income per customer is calculated as the last 12 months' net policy income divided by customers.

Tradespeople are customers in the Home Experts business. Growing the network of vetted and reviewed tradespeople will enable HomeServe to meet customer needs and grow its business.

Adjusted profit before tax is the key profit measure by which business growth, efficiency and sustainability is monitored.

Net debt to EBITDA is the key cash ratio, which is used to monitor usage of financial resources within agreed risk parameters.  

 


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Annual Financial Report - RNS