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RNS
Homeserve Plc   -  HSV   

Final Results

Released 07:00 21-May-2019

RNS Number : 6219Z
Homeserve Plc
21 May 2019
 

 

 

HomeServe plc

                               Preliminary results for the year ended 31 March 2019

 

 

2019

2018¹

Change²

Revenue

£1,003.6m

£899.7m

+12%

Statutory operating profit

£152.6m

£135.0m

+13%

Statutory profit before tax

£139.5m

£123.3m

+13%

Basic earnings per share

32.7p

30.2p

+8%

 

 

 

 

Adjusted operating profit³

£174.8m

£153.4m

+14%

Adjusted profit before tax³

£161.7m

£141.7m

+14%

Adjusted earnings per share³

37.5p

33.6p

+12%

Adjusted EBITDA³

£221.9m

£197.6m

+12%

 

 

 

 

Ordinary dividend per share

21.4p

19.1p

+12%

Net debt

£304.7m

£237.8m

+28%

Total number of customers

8.4m

8.4m

 

Strong results across the Group with North America now HomeServe's largest business

 

·      Group revenue exceeded £1.0bn (FY18: £899.7m)

·      Adjusted operating profit up 14% to £174.8m with statutory operating profit up 13% to £152.6m

·      UK adjusted operating profit up 8% to £66.0m, with income per customer up 15% as the business continued its focus on delivering additional products to customers

·      Adjusted operating profit in North America up 37% to $88.1m; with an adjusted operating margin of 20% (FY18: 17%) as customers reached 4.0m (FY18: 3.6m). France and Spain both delivered good growth in adjusted operating profit, up 6% and 5% respectively

·      Established presence in Japan via a joint venture agreement with Mitsubishi Corporation

·      Pro forma revenue growth of 33% at Checkatrade and a 23% increase in trades to 36k

·      Group remains highly cash generative with a strong financial position: 116% cash conversion³; within target leverage range at 1.4x Net Debt: Adjusted EBITDA

·      Proposed final dividend of 16.2p, to take the total dividend for the year to 21.4p, up 12%, in line with earnings

 

Richard Harpin, Founder and Chief Executive, HomeServe plc, said: "HomeServe delivered another very good year with further profit growth across the Group. North America was once again the outstanding performer and our progress there continues at pace. Allied to good performances in the UK, France and Spain, our Membership business is strong and I remain excited about its prospects.

"Checkatrade is already making great strides to strengthen its position as the UK market leader and offer an even better trade and consumer experience. In Home Experts we have a business line with huge potential. The progress we have made this year has confirmed that we are developing a winning model and gives us the confidence to increase our annual investment.

 

"Our mission is to make home repairs and improvements easy for both homeowners and trades and I remain as passionate as ever about our efforts to provide great service to achieve this."

 

Outlook

HomeServe expects to deliver further strong growth in FY20, with increased P&L investment in Home Experts expected to be offset by strong performance in Membership, particularly North America. HomeServe increased its P&L investment in Home Experts and New Markets to £9.8m in FY19 (FY18: £4.4m), and expects to increase it to between £12m to £15m across these two areas in FY20.

 

¹The Group's results are being reported under IFRS 9 and IFRS 15 for the first time in 2019 following the mandatory adoption of the standards from 1 April 2018. In accordance with the transitional provisions of the standards, comparatives have not been restated. See Note 2.

 

²Percentage movements throughout this announcement are based on full underlying results, not the rounded figures in the tables

 

³HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. Headline financial results and the operating reviews of each segment within this announcement all refer to APMs. 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 reconciliations, where applicable, back to the equivalent statutory measure.

 

Results presentation and Investor Day

A presentation for analysts and investors will take place at 10am 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: 49679995#

·      United Kingdom Toll

+44 3333 000 804

PIN: 49679995#

 

HomeServe will hold an Investor Day for analysts and institutional investors on 20 June 2019 at Checkatrade's new offices in Portsmouth. To register attendance, please visit https://homeserveevent.co.uk/investor

 

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

 

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.

 

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.£3.6 billion. 

 

 

 

CHIEF EXECUTIVE'S REVIEW

 

HomeServe made very good progress in FY19 on a number of fronts as we continued to advance our strategic growth initiatives and focused on our purpose of making home repairs and improvements easy.

 

Our Membership business line remains the core of our business today and it was great to see North America continue its strong growth trajectory as it became our largest business as well as to see good performances in our other Membership businesses with increased profits across the board.

 

With our buy and build strategy in HVAC (our installations, repairs and service business for heating, ventilation and air conditioning) also taking shape and contributing to the Group's performance, it was the combined team effort of all business lines that gave me confidence to increase our annual Home Experts investment. The potential of Home Experts is significant and we have the right team in place at Checkatrade to deliver our ambitions.

 

With all Membership businesses now under Tom Rusin's leadership we are seeing greater collaboration and sharing of best practice and we are becoming more sophisticated in how we test and learn from new initiatives, as well as how we deploy our investments across our businesses for the best returns. Membership and HVAC in North America continue to be our principal near-term sources of growth, but all of our Membership businesses have opportunities to grow. New partners, products and channels drive top line growth and the increasing use of data and technology transforms our customer service and delivers greater operational scale and efficiency.

 

I was pleased to see our Membership businesses strengthening and expanding their utility partnerships. France extended the Group's single largest partnership, with Veolia, until 2026, and began a partnership with Saur, France's third largest water utility. In the UK we signed four new energy partners and Spain followed the UK lead and is now witnessing the early signs of success with a small challenger energy partner. With retention also increasing and the Claims side of the business in good health, our Spanish business is well placed as it seeks to bring on board new affinity partners in place of Endesa. Finally, in North America we have further accelerated our business development activity and are now signing new partners at the rate of three a week.

 

As well as initiatives to grow our revenue, we are equally focused on transforming our service for ever evolving customer demands and needs. Better use of technology can offer HomeServe a real competitive advantage and increased scale and efficiencies. By freeing our people from simpler tasks, such as routine claims handling and appointment scheduling, we can retain them for more interesting and challenging calls. This not only improves job satisfaction and engagement but also ensures our best people are available to provide the best service when our customers need their direct intervention the most.

 

Adding to our Membership highlights this year was our joint venture with Mitsubishi Corporation. The Japanese market meets all of the search criteria we apply to new markets, notably a strong economy, a large and high quality housing stock and the potential to form strong utility partnerships. Mitsubishi is not itself a utility but has unrivalled market knowledge and is well placed to introduce the new JV to potential utility partners.

 

FY19 was our first year of full ownership of Checkatrade, our UK Home Experts business, and we have used this to start accelerating some fundamental changes. Over the last 12 months the number of trade members has grown by 23% to 36k and consumer web visits are up by 11% to 18m a year. This demonstrates strong progress, but we have plans to step change this growth. To support this, the business has moved to new offices at Lakeside, Portsmouth Harbour and it was great that so many of Checkatrade's experienced people who have been with the company for many years chose to move with the business. They join us on the next phase of Checkatrade's journey as we look to transform the business under the leadership of a new senior management team with experience in fast growing digital businesses.

 

I firmly believe that an online directory of trusted and vetted trades is the winning solution for our trade members and for consumers who use the site. Checkatrade's vetting process is unique and highly valued by consumers and has helped make it the UK market leader today. We do, however, need new functionality and new products in order to improve the experience for consumers and trades alike. We are developing new initiatives such as "search for me" for consumers who simply want us to select a trade on their behalf and Checkatrade Now, a solution for obtaining an emergency repair. We are pursuing our plans to accelerate trade numbers and to increase web visitors so that ultimately we 'make the phone ring' even more for our members and help them improve and grow their own businesses.

 

Habitissimo had a good year but it is clear from our experiences with Checkatrade and our Home Experts market research that an online directory combined with a "search for me" facility is the best model. We intend to introduce our preferred model into Habitissimo's markets over the course of the next year.

 

On Smart Home we have a leak detection device that works well, is easy to install and we have the plumbing network to detect and fix the identified leaks. With the WIFI version of LeakBot now proven, we are targeting 3.6m homes in the UK where we know we have an attractive model for both the home insurer and HomeServe.  These are larger homes where the savings the home insurer makes from preventing sizeable water damage claims will cover the rental and service charges the home insurer pays to HomeServe for the LeakBot units and the leak finding and fixing service.

 

Three insurance partners to date have moved out of test and in to a wider roll-out. We continue to work with other insurers to highlight the consumer benefits of LeakBot and to demonstrate the returns insurers can achieve by reducing water damage claims when adopting our end to end solution.

 

People and leadership

HomeServe has a strong history of growth in all of its businesses and we have ambitious plans in place for the future. Having the right people is key to achieving our goals and HomeServe's success owes much to the dedication of our people around the world. I am proud and thankful for the service they provide to our customers every day. I believe that HomeServe is a great place to develop a rewarding and fulfilling career and look forward to seeing our people share in HomeServe's success.

 

There have been significant changes in personnel across the group in the past year, which have been overseen carefully by the Board. Martin Bennett, CEO, HomeServe UK, and Johnathan Ford, COO, both departed with our good wishes and I also recently made changes to HomeServe's Executive Committee, introducing greater diversity and stronger representation from operational management.

 

Deb Dulsky (Global CEO, HVAC), Fernando Prieto (CEO Spain), Greg Reed (CEO UK), John Kitzie (CEO North America) and Mike Fairman (CEO Checkatrade) joined my HomeServe plc Executive Committee with effect from 1 April 2019. They join existing members David Bower (Chief Financial Officer), Guillaume Huser (CEO France), H Stephen Phillips (CEO Global Partnerships) and Tom Rusin (Global CEO Membership). The change will bring fresh perspectives to the Executive Committee and also serves to demonstrate the depth of management we now have in the business.

 

Outlook

HomeServe expects to deliver further strong growth in FY20, with increased P&L investment in Home Experts expected to be offset by strong performance in Membership, particularly North America. HomeServe increased its P&L investment in Home Experts and New Markets to £9.8m in FY19 (FY18: £4.4m), and expects to increase it to between £12m to £15m across these two areas in FY20.

 

 

Richard Harpin

Founder and Chief Executive

 

 

 

 

 

BUSINESS REVIEW

 

HomeServe had another very good year, and continues to serve over 8m customers around the world as the Group delivered 14% growth in adjusted profit before tax to £161.7m (FY18: £141.7m). North America, in particular, enjoyed another very successful 12 months and is now the Group's largest business.

 

Total customers at the year end were 8.4m (FY18: 8.4m) as strong growth in North America was offset by expected declines in Spain following the end of the Endesa partnership in May 2018 and in the UK, in the absence of a policy book acquisition this year. France grew slightly with 1.1m customers (FY18: 1.1m). The Group retention rate remained strong at 82% (FY18: 82%).

 

In Membership, the Group continues to achieve its best returns on marketing investment in North America. In order to benefit from this, HomeServe is increasingly more sophisticated in how it makes its investments, prioritising them for the best returns. In North America, HomeServe will continue to drive customer acquisition and grow HomeServe's customer base. Similarly in France, the extended partnership with Veolia until 2026 and the new partnership with Saur, France's third largest water utility, both present an opportunity to invest for further customer growth. In Spain the focus remains on establishing new partnerships for the Membership business whilst the Claims business continues to grow the total number of jobs completed for its bancassurer partners.

 

In the UK an improved, coordinated approach to pricing 'returning customers' contributed to the reduction in customer numbers but drove a further strong increase in income per customer as the business prioritised delivering additional products to existing customers, rather than recruiting marginal customers who frequently 'dip in' and 'drop out', and only ever on highly discounted offers.

 

North America, France and Spain all made progress implementing HomeServe's buy-and-build HVAC strategy, acquiring well-run, local HVAC businesses, which provide standalone installation capability and complement the Membership business with the opportunity to provide annual services and assistance cover. Total consideration in respect of HVAC acquisitions was c. £35m. Meanwhile the UK continued to integrate the Help-Link business acquired in FY18 and to develop channels to service the Membership customer base.

 

HomeServe now reports Home Experts as a separate segment, reflecting the size of the opportunity and how management operates and reviews the business. The segment contains the results of Checkatrade in the UK, Habitissimo in Spain and our newly launched Home Experts France. New Markets contains HomeServe's international development initiatives, including its Italian associate and its Japanese joint venture.

 

Financial performance for the year ended 31 March

 

 

Revenue

Statutory operating profit/(loss)

Adjusted operating profit/(loss)

£million

2019 

2018 

2019 

2018 

2019 

2018 

UK

391.7 

365.6 

68.4 

59.3 

66.0 

61.1 

North America

333.4 

282.1 

54.7 

40.5 

67.6 

48.6 

France

104.6 

100.0 

26.8 

25.1 

33.3 

31.5 

Spain

140.8 

141.3 

17.5 

16.5 

17.7 

16.6 

Home Experts

40.4 

18.6 

(12.4)

(4.8)

(7.4)

(2.8)

New Markets

(2.4)

(1.6)

(2.4)

(1.6)

Inter-segment¹

(7.3)

(7.9)

Group

1,003.6

899.7 

152.6 

135.0 

174.8

153.4 

¹Inter-segment revenues include transactions with other Group companies removed on consolidation and principally comprise royalty and other similar charges.

 

 

Membership performance metrics for the year ended 31 March

 

Customer numbers (m)

Income per customer

Policy retention rate

 

2019

2018

2019

2018

2019

2018

UK

2.0

2.2

£122

£106

79%

79%

North America

4.0

3.6

$96

$91

83%

83%

France

1.1

1.1

€109

€106

89%

88%

Spain

1.1

1.3

€57

€47

80%

78%

New Markets

0.2

0.2

-

-

-

-

Group

8.4

8.4

n/a

n/a

82%

82%

 

 

 

UK

 

£million

 

2019

2018

Change

Revenue 

 

 

 

 

Net policy income

 

244.0 

221.6

10%

Repair network

 

108.9 

106.3

2%

Membership

 

352.9 

327.9

8%

HVAC

 

25.5 

21.1

21%

Other

 

13.3 

16.6

(20%)

Total revenue

 

391.7 

365.6

7%

Adjusted operating costs

 

(325.7)

(304.5)

7%

Adjusted operating profit

 

66.0 

61.1

8%

Adjusted operating margin

 

17% 

17%

- 

 

 

Performance metrics

 

 

2019 

2018 

Change

Affinity partner households

M

m

26

26

Customers

M

m

2.0

2.2

(10%) 

Income per customer

£

£

122

106

15%

Policies 

M

m

5.4

5.9

(8%)

Policy retention rate

%

%

79

79

-

 

Financial performance

 

Net policy income increased by 10% as reduced customer numbers were more than offset by a 15% increase in income per customer as the depth of cover of the average policy holding of UK customers continued to increase.

 

Repair network income was up 2% as HomeServe completed 1.2m jobs (FY18: 1.2m) for its customers with a greater proportion of higher value jobs completed this year.

 

HVAC revenue rose by 21% to £25.5m reflecting a full year's ownership of Help-Link, a HVAC installation business acquired in August 2017.

 

Other revenue of £13.3m (FY18: £16.6m) included transactions with other Group companies and revenue from Leakbot sales to home insurers.

 

Adjusted operating profit increased 8% to £66.0m due to the higher revenue and the full year impact of cost reductions made in the prior year. The adjusted operating margin was maintained at 17%.

 

The UK incurred two items recorded as exceptional in the year due to their size and incidence; an exceptional gain of £10.1m and an exceptional cost of £5.5m, both of which are excluded from adjusted performance measures in the table above. A reconciliation between the £66.0m adjusted operating profit and £68.4m statutory operating profit is provided within the glossary at the end of this announcement.

 

The exceptional gain related to contingent payments due to the past-owners of Help-Link, which had been payable upon hitting certain volumes of boiler installations. The business has now been fully integrated with the UK Membership business and although the volume of installs continues to increase, HomeServe does not expect to achieve the stretch targets required to trigger the contingent payments that would be due to the previous owners. As such, and in accordance with IFRS, the fair value of the associated liability has been reduced to nil and taken to the income statement as an exceptional gain for the year.

 

The exceptional cost mostly related to redundancies and other associated charges incurred in respect of changes to the organisational design of the UK business. Marketing and other support headcount decreased, as the business reduces its reliance on direct mail activity and prepares for the launch of new system implementations and operational improvements.

 

Operational performance

 

UK customers were 2.0m (FY18: 2.2m) and retention remained strong at 79% (FY18: 79%) with the lower customer count principally reflecting the absence of policy book acquisitions in the year and a focus on 'returning customers'. Policy book opportunities continue to be appraised but no acquisitions were completed in FY19 as there had been in previous years.

 

A small proportion of customers each year take advantage of HomeServe's introductory low pricing, but then go on to claim at higher than average frequencies for what are often pre-existing problems. These are generally customers who have already benefited from an introductory offer in prior years. With improved insight from new systems, HomeServe is better able to identify these customers and tailor its offers to them. In particular, while such returning customers are welcome to rejoin, introductory rates are removed to prevent 'dipping in and dropping out' and, importantly, to reduce the burden the associated higher costs place on its loyal customer base. This change in strategy, together with the termination of certain low priced stand-alone products, has resulted in a reduction in customers this year, but has removed a largely unprofitable element of the customer base and has contributed to the 15% increase in income per customer.

 

During the year, the UK signed four new partners in the retail energy sector: Co-Op Energy, Green Star Energy, SO Energy and Tonik. There are an estimated 0.5m energy switchers in the UK each month and the new partnerships present an exciting opportunity for HomeServe to introduce its products within the switching process.

 

Two new systems will go fully live in the UK in FY20: the core customer management system and the claims / network management system. As previously reported, the customer management system will provide a single, holistic view of our customers, which in turn will drive better conversations between agents and customers and offer improved cross sell and retention tools as well as driving down average call times. The network management system will improve claims handling and job deployment and will drive efficiencies in the field with both HomeServe's directly employed and subcontracted engineers.  While these systems will give rise to a higher ongoing amortisation charge, this charge is expected to be offset by operational benefits and efficiencies.

 

The UK network of 989 directly employed engineers and 315 subcontractors completed 1.2m jobs (FY18: 1.2m). The directly employed network continues to fulfil almost 90% of water jobs and 60% of heating jobs with the remainder of work completed by the subcontract network. In the HVAC business line, Help-Link completed 11.1k boiler installations (FY18: 9.5k).

 

Customer satisfaction remains high with Trustpilot and Reevoo scores of 8.6 and 96% (FY18: 8.2 and 95%)

 

The focus for LeakBot has been on turning test relationships with insurers into larger volume deals. The device itself is proven and the wifi model delivers the potential to scale the opportunity. HomeServe now has an approach which is attractive for both HomeServe and home insurers based upon a rental model for the LeakBot devices plus insurers paying HomeServe for a leak finding and fixing service.

 

Looking forward the UK business will lead certain global Membership initiatives aimed at reinventing customer service and product offers. Already live is a test for HomeServe Now, a technology-led claims process utilising Smart IVR and routing customer calls directly to available engineers in a local radius with engineers accepting the job on a 'fastest finger first' basis and attending within an hour. This is a quick and easy experience and one that can improve efficiency for HomeServe and the claims experience for the customer.

 

 

 

 

North America

 

USD million

 

2019

2018

Change

Revenue 

 

 

 

 

Net policy income

 

396.8 

349.1 

14%

Repair network

 

20.5 

12.0 

69%

Membership

 

417.3 

361.1 

16%

HVAC

 

17.6 

14.1 

27%

Other

 

1.3 

100%

Total revenue

 

436.2 

375.2 

16%

Adjusted operating costs

 

(348.1)

(310.8)

12%

Adjusted operating profit

 

88.1 

64.4 

37%

Adjusted operating margin

 

20% 

17% 

3ppts

 

£ million

 

2019

2018

Change

Revenue 

 

 

 

 

Net policy income

 

303.3 

262.4 

16%

Repair network

 

15.7 

9.6 

64%

Membership

 

319.0 

272.0 

17%

HVAC

 

13.4 

10.1 

28%

Other

 

1.0 

-  

100% 

Total revenue

 

333.4 

282.1 

18%

Adjusted operating costs

 

(265.8)

(233.5)

14%

Adjusted operating profit

 

67.6 

48.6 

39%

Adjusted operating margin

 

20% 

17% 

3ppts

 

Performance metrics

 

2019 

2018 

Change

Affinity partner households

m

60 

55  

11%

Customers

m

4.0 

3.6  

13%

Income per customer

$

96 

91  

5%

Policies

m

6.7 

5.6  

19%

Policy retention rate

%

83 

83  

-

 

 

Financial Performance

 

Total revenue increased by 16% to $436.2m driven by another strong Membership performance. Net policy income increased by 14% to $396.8m due principally to higher customer numbers year on year as a result of continued strong growth and the successful completion of the second tranche of the Dominion Products and Services (DPS) policy book in October 2018.

 

Repair network revenue comprises jobs completed by the directly employed network and reflects the growing volume of claims from the larger customer base.

 

Total HVAC revenue grew 27% to $17.6m due principally to a 20% increase in total installations to c. 5k and a rise in the average revenue per install driven by an increased proportion of higher value jobs.

 

With the DPS policy book now fully integrated and an increase in the number of policies held per customer, income per customer rose 5% to $96.

 

Adjusted operating costs rose 12% to $348.1m due to continued business growth, but at a lower rate than revenue, reflecting the increasing scale and operational leverage of the North American business. This resulted in an adjusted operating margin of 20%, up by three percentage points compared to the prior year.

 

With the continued success of the North American business, its stated target of $160m of adjusted operating profit is within sight and with good progress in already achieving a 20% margin and income per customer getting close to $100, it is clear that $160m will be a milestone and not the end point for the North American business.

 

Operational performance

 

North America is now HomeServe's largest business in terms of both customer numbers and adjusted operating profit, overtaking the UK. Customer numbers increased by 13% to 4.0m including 0.2m added following the successful integration of the second tranche of Dominion. US homeowners continue to be highly receptive to HomeServe's products and 1.2m gross new customers were added in the year through annual marketing campaigns.

 

The policy retention rate remained high at 83% (FY18: 83%), and allied to a Better Business Bureau rating maintained at A+, is a good indicator of high customer satisfaction. The business was also honoured with 33 Stevie Awards for Sales & Customer Service and received a Grand Stevie Award, recognising HomeServe as the third most honoured organisation in the competition.

 

Utilities value the ongoing commission streams generated by partnering with HomeServe but they also value the high levels of service HomeServe provides to their customer base. This forms a key part of the proposal to win new partnerships. Successful business development led to an average of three new partners being signed every week and HomeServe North America now works with almost 700 partners with access to 60m households under a utility brand. The National League of Cities endorsement was renewed in the year and HomeServe also works with 16 individual State Leagues, bringing further endorsement at a more localised, State level.

 

HomeServe's network of c.5k contractors and 453 directly employed engineers (FY18: c.4k contractors and 170 employees) completed 0.5m jobs in FY19, up 21% on the prior year. HomeServe provides a steady stream of work for its contractors and shares technology (job scheduling, job routing software) that improves their efficiency and service. Consequently there is high demand to join the network, but of all contractors applying only c.10% are approved; this means that HomeServe works with only the very best contractors who provide the excellent levels of service that HomeServe and its customers demand. The number of directly employed engineers increased as a result of the HVAC acquisitions in the year.

 

In January 2019 HomeServe made a strategic investment in consumer technology company Centriq, purchasing a 20% stake for $5m. Centriq's app makes it easy for users to capture the details of items in their home, e.g. electronics and appliances simply by taking a photo of the product label. Having captured details, the app then provides users with resources to troubleshoot problems themselves, or with the details to obtain repair help and access to technicians when service is needed. A HomeServe branded version of the app will prove valuable in further engaging the existing 4.0m customer base and is a potential way to help acquire new customers.

 

Centriq is one of several initiatives to engage more customers digitally and to take advantage of technology that could improve the customer journey or increase operating efficiency. A smart IVR was launched during the year to enable customers to book tune-ups over the phone without agent intervention. This has proven to be a slick process for the customer and frees up agents to dedicate their time to providing high levels of customer service on more complicated calls. After its successful roll out in North America, the technology is now being introduced into the UK, France and Spain.

 

North America continues to lead on the Group's HVAC strategy and acquired three new HVAC businesses in the year, of which Cropp Metcalfe in March 2019 was the largest. The acquisition nearly doubles HomeServe's employed HVAC workforce and is the next step in building a share of the estimated $29bn annual HVAC market in the US. Cropp Metcalfe meets HomeServe's criteria of a well-run, owner-managed business with a strong local reputation and will continue to provide its services to its existing customer base as well as now also providing installation services and repairs in an area (Washington D.C.) of existing high policy density. 

 

 
 

France

 

€uro million

 

2019

2018

Change

Revenue 

 

 

 

 

Net policy income

 

115.6 

111.7 

3%

Repair network

 

0.5 

0.5 

(2%)

Membership

 

116.1 

112.2 

3%

HVAC

 

1.7 

1.0 

67%

Other

 

0.9 

100%

Total revenue

 

118.7 

113.2 

5%

Adjusted operating costs

 

(80.9)

(77.5)

4%

Adjusted operating profit

 

37.8 

35.7 

6%

Adjusted operating margin

 

32% 

32% 

 

£ million

 

2019

2018

Change

Revenue 

 

 

 

 

Net policy income

 

101.9 

98.6 

3%

Repair network

 

0.4 

0.4 

(3%)

Membership

 

102.3 

99.0 

3%

HVAC

 

1.5 

1.0 

50%

Other

 

0.8 

100%

Total revenue

 

104.6 

100.0 

5%

Adjusted operating costs

 

(71.3)

(68.5)

4%

Adjusted operating profit

 

33.3 

31.5 

6%

Adjusted operating margin

 

32% 

32% 

 

Performance metrics

 

2019 

2018 

Change

Affinity partner households

m

18 

15

20%

Customers

m

1.1 

1.1

2%

Income per customer

109 

106

3%

Policies

m

2.3 

2.3

Policy retention rate

%

89 

88

1ppt

 

 

Financial performance

 

Total revenue increased by 5% to €118.7m (FY18: €113.2m) primarily due to the higher customer count and an increase in HVAC revenue as a result of a full year's income from Electrogaz, a business acquired part way through the prior year.

 

Adjusted operating costs rose slightly, by 4%, to €80.9m largely linked to the HVAC growth. Adjusted operating margin was 32%, in line with the prior year, as adjusted operating profit grew 6% to €37.8m. The future adjusted operating margin is expected to be around 30% as the business invests in its business development opportunities, notably HVAC and customer acquisition with new partners.

 

Operational performance

 

France had a strong year as it once again returned the highest retention rate in the Group, up one percentage point to 89% (FY18: 88%), and total customers increased by 2% to 1.1m. For the third year running, France's focus on maintaining high customer service standards was reflected in the award of Élu Service Client de l'Année.

 

A key component of HomeServe's success in France has been its partnership with Veolia. The partnership began as a joint venture when HomeServe first entered France in 2001, continued as a 10 year affinity marketing agreement after HomeServe bought Veolia's share in 2011 and has now been extended early until 2026. The deal secures ongoing support for direct mail and renewal activities and also introduces new channels and opportunities to drive further growth through Veolia's HomeFriend initiative. As well as new telephony and digital channels, Veolia, through HomeFriend, will sell HomeServe's products directly in its own call centre, giving rise to similar partner payments within capital expenditure as seen with Suez (also in France) and previously Endesa in Spain.

 

The French business now works with the top three French water utilities having signed a new partnership with the third largest provider, Saur, in December 2018. The Saur relationship will enable marketing campaigns under a fresh brand to c.4.0m households. Having signed the partnership in December, test campaigns were quickly launched in the final quarter of FY19 with encouraging early results.

 

Approximately 10m French households receive their water supply from small to mid-sized municipals and the French team has now commenced attempts to access this channel by learning from the successful programme in North America where HomeServe already works with a large number of municipals.

 

Deregulation in the Energy sector in France is accelerating with more than 40 energy retailers taking market share from the larger incumbents and the French business has started to build a strong business development pipeline to partner with the new challengers.

 

Following the acquisition of Electrogaz, an HVAC business in the south of France, last financial year, the French business made two further HVAC acquisitions in FY19, Société V.B. Gaz and Etablissements Descamps. Descamps adds to HomeServe's HVAC presence in the South of France and complements last year's acquisition of Electrogaz whilst V.B. Gaz is based just outside Paris. Annual domestic boiler services are mandatory in France, so the HVAC market is a particularly attractive opportunity and the two acquisitions represent a further step in HomeServe's buy-and-build strategy to capture more of the revenue generated in the HVAC lifecycle from installation to annual service contract and one-off repairs.

 

 

 

 

Spain

 

€uro million

 

2019

2018

Change

Revenue 

 

 

 

 

Net policy income

 

62.7 

63.0 

(1%)

Repair network

 

92.0 

97.1 

(5%)

Membership

 

154.7 

160.1 

(3%)

HVAC

 

5.0 

100% 

Total revenue

 

159.7 

160.1 

-  

Adjusted operating costs

 

(139.9)

(141.2)

(1%)

Adjusted operating profit

 

19.8 

18.9 

5%

Adjusted operating margin

 

12% 

12% 

-  

 

£ million

 

2019 

2018

Change

Revenue 

 

 

 

 

Net policy income

 

55.3 

55.6 

(1%)

Repair network

 

81.1 

85.7 

(5%)

Membership

 

136.4 

141.3 

(3%)

HVAC

 

4.4 

100% 

Total revenue

 

140.8 

141.3 

Adjusted operating costs

 

(123.1)

(124.7)

(1%)

Adjusted operating profit

 

17.7 

16.6 

5% 

Adjusted operating margin

 

13% 

12% 

1ppt 

 

Performance metrics

 

2019 

2018 

Change

Affinity partner households

m

12 

(100%)

Customers

m

1.1 

1.3 

(16%)

Income per customer

57 

47 

19% 

Policies

m

1.3 

1.5 

(15%)

Policy retention rate

%

80 

78 

2ppts 

 

 

Financial performance

 

Total revenue was broadly flat at €159.7m as lower repair network revenue was offset by new HVAC revenue generated by Oscagas, a company acquired in July 2018.

 

Repair network revenue was down 5% principally due to the mix of completed work as the Claims business closed 0.8m jobs (FY18: 0.8m).

 

Net policy income fell by 1% to €62.7m as the effect of the lower customer count following the end of the Endesa partnership was offset by a maturing policy book and a 19% increase in income per customer to €57.

 

Adjusted operating costs fell 1% to €139.9m due to the mix of work in the Claims business and lower marketing and commission spend following the end of the Endesa partnership in May 2018, offset by costs incurred in the new HVAC business.

 

Operational performance

 

As announced last year end, the Endesa partnership in Spain came to an end in May 2018. Acquisition marketing ceased from this date and Endesa was removed from the Spanish household count. As expected total customers therefore reduced in Spain and at the year end were down by 16% to 1.1m.

 

With a maturing book and fewer Year 1 customers, the retention rate rose by 2 percentage points to 80%, and income per customer increased by 19% to €57: a strong result which underpins the Membership revenue in the short term as the business continues to explore new partnership opportunities.

 

As well as attempting to unlock another sizeable partnership, the Spanish business is also pursuing opportunities with retail energy providers, water municipals and telcos. The retail energy opportunity looks to exploit the nascent switching market in Spain and although only small volumes so far, the take up rates with a new partner, PODO, have been very encouraging.

 

The Spain team is also exploring opportunities in the water sector as it looks to agree new partnerships with water municipals.

 

The Claims business ("Repair network") continued working with a number of Spain's largest bancassurers, managing a large volume of claims across multiple trades and is exploring business development opportunities to expand its partnerships further. Jobs continue to be completed by a network of over 1,907 sub contractors and 190 franchisees (FY18: 1,838 subcontractors and 192 franchisees).

 

The strong retention rate in the Membership business and the continued strength of the Claims business means that HomeServe expects no significant impact on adjusted operating profit through FY21 as it continues to seek new partnerships.

 

                                                       

Home Experts

 

£million

 

2019 

 2018 

 Change

Revenue

 

 

 

 

 

Checkatrade

 

29.8 

8.3 

+258% 

 

Habitissimo

 

10.6 

10.3 

+2% 

 

Total revenue

 

40.4 

18.6 

+116% 

 

Adjusted operating costs

 

(47.8)

(21.4)

+123% 

 

Adjusted operating loss

 

(7.4)

(2.8)

+164% 

 

               

 

 

Performance metrics

 

2019 

2018 

Change

Checkatrade trades  

k

36 

29 

+23% 

Habitissimo trades

k

28 

29 

(2%)

Checkatrade website hits

m

17.9 

16.1 

+11% 

Habitissimo website hits

m

83.2 

81.3 

+2% 

 

Financial Performance

 

FY19 was the first year of full ownership of Checkatrade. On a pro forma 12 month basis, revenue increased strongly by 33% from £22.4m to £29.8m driven by pricing initiatives implemented in the year and a 23% growth in the number of trades. The increased revenue has been reinvested to drive future growth.

 

Habitissimo revenue was broadly flat year on year as HomeServe focused on proving out the preferred subscription model with Checkatrade. This model will be introduced to Habitissimo's core market in Spain over the course of the next 12 months.

 

The increased adjusted operating loss of £7.4m (FY18: £2.8m) was principally due to a full year's ownership of Checkatrade and increased investment in initiatives to drive trades and consumer growth as well as the launch of Home Experts in France.

 

Operating Performance

 

In FY19 Checkatrade made significant progress as it began to position itself for future growth. Central to this has been the recruitment of a new senior management team with experience in fast growing digital businesses, under the leadership of new CEO Mike Fairman, formerly CEO of giffgaff.

 

The Checkatrade model of a free to access directory of trusted, local trades is the one preferred by consumers. In order to achieve HomeServe's ambitious plans to expand and grow this model, the new Checkatrade team is progressing a number of initiatives to increase trades supply, increase consumer demand and transform its operations into a fully digital business.

 

The balance of supply and demand is fundamental to recruiting and retaining a satisfied trades base and Checkatrade is dedicated to generating work and helping trades to grow their business. Trades value the benefits their membership brings; the endorsement of being extensively checked and approved, procurement discounts, a webpage and online presence, but more than any other factor, trades join Checkatrade to obtain a consistent flow of consumer enquiries and jobs.

 

There are an estimated 600,000 trades in the UK, all of whom could benefit from Checkatrade membership and Checkatrade has an ambition to recruit 200,000 of these. Owning the supply of trades will create a virtuous circle where consumers come to Checkatrade because it has the most trusted, local trades and in turn trades join and remain on Checkatrade because it is the site consumers use.

 

Trades recruitment becomes much easier when trades can be shown the consumer demand in their area that will generate work for them and more than justify their monthly membership fee.  FY19 saw an 11% increase in website visits and a 23% increase in the number of trades to 36k. Checkatrade has the largest number of active, paying trades of any platform in the UK today. As the business grows consumer demand, and with outbound telemarketing to trades now live, the aim remains to step change the number of trades on the platform towards the target of 200,000.

 

Checkatrade has built a market leading position from its reputation for extensive background checks and vetting and by building its brand through TV and radio advertising and sponsorship of sporting events, e.g. the Checkatrade Trophy. Under the guidance of the new management team, the business is becoming more sophisticated in how it appraises marketing spend and more selective as to where it allocates its investments. TV and radio advertising will continue to build the brand and drive consumers directly to the website but it is now accompanied by targeted online marketing, e.g. purchase of search terms, and affiliate referral arrangements to drive a greater proportion of existing online searches for repairs and improvements to Checkatrade.com.

 

Complementing extensive vetting and checks is the ongoing independent feedback provided by consumers. There are now over 4.4m reviews on Checkatrade.com with over 50k new reviews added every month.

 

An element lacking in the consumer offer today is trade availability. Trades are often booked up far in advance and consumers may need to contact several trades before finding one with availability. Checkatrade Now connects consumers with an available trade for an urgent job request. Next to be developed is a "search for me" function for consumers who simply want an available trade and do not want to search the directory themselves.

 

Shortly after the year end HomeServe launched Home Experts in France, initially in Lyon. The Lyon test area will prove out the Checkatrade model in a 'greenfield' market, growing supply and demand in the Lyon area before expanding to other regions.

 

As well as helping to launch Home Experts in France, Habitissimo continued to deploy its lead generation model in Spain and in its other markets in Europe and LATAM. Trade and website visitor numbers remained flat for FY19 but the focus will be on growing these in FY20 as Habitissimo also starts to adopt the preferred user experience.

 

New Markets

 

HomeServe's New Markets segment now contains the results of its international development operations including its Italian associate, Japanese joint venture and business development initiatives in other new geographies.

 

New Markets (£million)

 

2019 

 2018 

 Change

Adjusted operating loss

 

(2.4) 

(1.6) 

+150%

 

 

Total investment in New Markets was £2.4m (FY18: £1.6m) with the increase principally driven by a larger international development team and activities to agree the joint venture with Mitsubishi Corporation in Japan. HomeServe expects an ongoing annual investment of between £2m to £3m in this area.

 

The Italian associate, in partnership with Edison Energia, had 0.2m customers in line with the prior year.

 

On 14 February 2019, HomeServe entered into an agreement with Mitsubishi Corporation to establish a joint venture in Japan. Japan is the world's third largest economy with 53 million residential households and recent liberalisation of the gas and electricity markets, together with access to the water market for private concessions, has created a positive environment for HomeServe's utility branded home assistance model.

 

Mitsubishi Corporation is not itself a utility but it does have wide ranging relationships with private and public utilities throughout Japan, which should enable HomeServe Japan to agree utility partnerships and build a business to provide home emergency and repair services in electrics, plumbing, gas, heating, ventilation and air conditioning. The business will be based on a Membership model, and will also offer on-demand services to residential customers.

 

HomeServe and Mitsubishi Corporation have each agreed an initial cash investment of £2 million into the joint venture with the ongoing annual investment by HomeServe to be covered within the overall New Markets spend.

 

 

FINANCIAL REVIEW

 

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

 

Group statutory results

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

 

£million

2019 

2018 

Total revenue

1,003.6 

899.7 

 

 

 

Operating profit

152.6 

 135.0 

Net finance costs

(13.1)

(11.7)

Adjusted profit before tax

161.7 

 141.7 

Amortisation of acquisition intangibles

(26.8)

(18.4)

Exceptional items

 

 

Restructuring costs

(5.5)

Fair value movement on contingent consideration liabilities

10.1 

 

 

 

Statutory profit before tax

139.5 

 123.3 

Tax

(31.2)

(27.4)

Profit for the year

108.3 

95.9 

 

Attributable to:

 

 

Equity holders of the parent

108.5 

96.3 

Non-controlling interests

(0.2)

(0.4)

 

108.3 

95.9 

 

 

Profit before tax

The Group delivered 13% growth in profit before tax to £139.5m driven principally by further strong growth in North America. The performance of HomeServe's individual businesses is considered in the Business Review.

 

Net finance costs

Net finance costs rose to £13.1m (FY18: £11.7m) due to the unwinding of interest on deferred consideration in relation to previous M&A activity, the higher average net debt balance year on year and the fixing of a portion of interest as a result of the new private placement.

 

Exceptional items

The Group incurred two exceptional items in the year (FY18: nil).

An exceptional cost of £5.5m, mostly related to redundancies and other associated charges incurred in respect of changes to the organisational design of the UK business. Marketing and other support headcount decreased, as the business reduces its reliance on direct mail activity and prepares for the launch of new system implementations and operational improvements.

 

Offsetting the charge was an exceptional gain of £10.1m relating to a fair value movement on contingent consideration payable to the previous owners of Help-Link upon hitting certain stretch target volumes of boiler installations. At 31 March 2019 the Group determined that the likelihood of hitting these targets was now remote and that the fair value of the outstanding liabilities was £nil.

 

Amortisation of acquisition intangibles

Statutory profit before tax is reported after the amortisation of acquisition intangibles and the exceptional items noted above.

Such amortisation relates to customer and other contracts held by businesses, which were acquired by HomeServe as part of business combinations and asset purchases.

The amortisation of acquisition intangibles of £26.8m (FY18: £18.4m) increased principally due to annual charges relating to the acquisition of tranche 1 of the policy book of Dominion Products and Service Inc. (DPS) in North America and Checkatrade in the UK, which were acquired part way through the prior year together with the completion of tranche 2 of DPS on 26 October 2018.

A reconciliation between adjusted and statutory amounts is included with the Glossary at the end of this announcement along with commentary on HomeServe's use of adjusted items as an Alternative Performance measure.

 

Tax strategy

The Group has continued to operate within the tax strategy approved by the Board in May 2018. 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.  The UK elements of the tax strategy document are publicly available on the Homeserve plc website 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 £31.2m (FY18: £27.4m), representing an effective tax rate of 22% (FY18: 22%).  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% (FY18: 19%), which results in a Group effective rate higher than the headline UK rate. As the proportion of the Group's profits earned overseas continues to grow, the effective tax rate is expected to increase slightly.

 

Cash flow and financing

HomeServe's business model continues to be highly cash generative with cash generated by operations in FY19 of £202.2m (FY18: £164.2m), representing a cash conversion ratio against adjusted operating profit of 116% (FY18: 107%).  The cash conversion ratio is expected to remain in excess of 100%.

 

£million

2019 

2018 

Adjusted operating profit

174.8 

153.4 

Exceptional items

4.6 

Amortisation of acquisition intangibles

(26.8)

(18.4)

Operating profit

152.6 

135.0 

Impact of exceptional items

(4.6)

Depreciation and amortisation

73.9 

62.6 

Non-cash items

10.7 

9.0 

Increase in working capital

(30.4)

(42.4)

Cash generated by operations

202.2 

164.2 

Net interest and associated borrowing costs

(9.9)

(10.5)

Taxation

(31.7)

(27.2)

Capital expenditure

(66.9)

(71.1)

Repayment of finance leases

(0.6)

(0.6)

Free cash flow

93.1 

54.8 

Acquisitions of investments

(5.4)

Acquisitions of subsidiaries

(37.5)

(54.2)

Acquisitions of policy books

(48.8)

(53.6)

Dividend from associate

0.4 

Equity dividends paid

(65.0)

(50.4)

Issue of shares (net of associated issue costs)

2.2 

123.3 

Net movement in cash and bank borrowings

(61.4)

20.3 

Impact of foreign exchange and other non-cash items

(5.2)

2.9 

Net debt acquired

(0.1)

(0.1)

Finance leases

(0.2)

0.5 

Opening net debt

(237.8)

(261.4)

Closing net debt 

(304.7)

(237.8)

 

Working capital

Working capital increased by £30.4m in FY19 reflecting continued growth in all businesses, in particular in North America following tranche 2 of Dominion and in Home Experts due to the changes being implemented at Checkatrade, offset by the timing of certain supplier and underwriter payments.

 

Capital expenditure

Capital expenditure included £51.9m in relation to ordinary and transformational capital expenditure, the largest elements of which related to customer facing systems throughout the Group including the core customer management system and claims handling and job deployment systems in the UK. These systems are in the final stages of user testing before being rolled out during the coming year. This will give rise to an increased annual software amortisation charge, which is expected to be offset by increased agent efficiency through shorter call handling times, higher engineer utilisation rates and more targeted cross sell and retention marketing opportunities.

 

Total partner payments and contract costs amounted to £15.0m an expected reduction on the prior year (FY18: £16.5m), due to the end of the Endesa contract in Spain.

 

Capital expenditure in FY20 is expected to be in line with FY19. Membership capex is expected to reduce, in line with previous guidance and HomeServe now expects to invest more in Home Experts to support its growth plans as it seeks to transform the digital experience at Checkatrade and to scale the business efficiently

Acquisitions

The £5.4m acquisition of investments related to a 20% investment in consumer technology company Centriq amounting to $5.0m and an initial £1.5m cash outflow in relation to the £2m of investment that HomeServe has committed to its joint venture with Mitsubishi Corporation in Japan.

 

The Group incurred a net cash outflow in respect of business combinations of £37.5m in the year (FY18: £54.2m), principally in respect of £27.1m from the acquisition of HVAC businesses to advance the Group's buy and build initiative, including Cropp Metcalfe, Gregg Mechanical and Geisel in North America, Oscagas in Spain and VB Gaz in France.

 

In addition, there was a further outflow of £10.4m relating to deferred consideration in respect of business combinations in prior periods, principally Checkatrade and Help-Link in the UK.

A cash outflow of £48.8m was incurred in relation to policy book acquisitions in North America and the UK. Tranche 2 of the policy book of DPS in North America completed on 26 October 2018 at a cost of £41.6m. The balance related to deferred payments from the prior year acquisitions of tranche 1 of DPS and also the policy book acquisition from the AA in the UK.

HomeServe continues to identify and assess M&A opportunities in all of its businesses, including further HVAC investment as it expands its buy and build initiative. Policy book M&A remains a low risk approach to accelerating growth and HomeServe continues to attempt to unlock opportunities in all countries but especially in North America.

Earnings per share

Basic earnings per share for the year increased from 30.2p to 32.7p, an increase of 8%.  On an adjusted basis, earnings per share increased 12% from 33.6p to 37.5p.  The weighted average number of shares increased from 318.9m to 331.7m principally due to the equity placing which occurred part way through the prior year on 19 October 2017 and new shares issued in fulfilment of a number of share schemes that vested 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 16.2p per share (FY18: 14.4p) to be paid on 2 August 2019 to shareholders on the register on 5 July 2019.

 

Together with the interim dividend declared in November 2018 of 5.2p (November 2017: 4.7p), this represents a 12% increase in the total ordinary dividend payment for the year of 21.4p (FY18: 19.1p), which is 1.75x covered by the FY19 adjusted earnings per share (FY18: 1.76x).  As previously indicated, the Board continues to adopt a progressive dividend policy.

 

Financing

In FY19 the Group continued to target net debt in the range of 1.0-2.0x adjusted EBITDA, measured at 31 March each year. With net debt of £304.7m and adjusted EBITDA of £221.9m the Group was inside this range at 1.4x and well within its total facilities of c. £700m at the year end.

 

Given its strong financial position, the Group is prepared to see leverage outside this range for reasonable periods of time if circumstances warrant, and the range itself remains subject to periodic review. Due to the ordinary seasonality of the business, net debt is expected to increase at the next half year.

 

On 25 October 2018 HomeServe arranged £174.2m funding via a US Private Placement, with a number of notes totalling $125.0m and £80.0m and with maturity dates in the range of 7 to 12 years.

 

Net interest and borrowing costs paid reduced slightly to £9.9m (FY18: £10.5m) as the prior year included higher one-off costs associated with the renewal of the Group's bank debt facilities.

 

Foreign exchange impact

The impact of changes in the Euro and USD exchange rates between FY18 and FY19 resulted in a £5.3m increase in the reported revenue and a £1.5m increase in adjusted operating profit of the international businesses as summarised in the table below, largely as a result of a beneficial movement in the US dollar. 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

 

 

2019

2018

Change

2019

2019

North America

$

1.31

1.33

(2)%

5.5 

1.6 

France

1.13

1.13

-

(0.2)

(0.1)

Spain

1.13

1.13

-

Home Experts¹

1.13

1.13

-

Total International

 

 

 

 

5.3 

1.5 

               

¹Home Experts is reported in GBP due to the different currencies used by the operating businesses within the segment. This table shows the impact of foreign exchange movements in the Euro for the results of Habitissimo

 

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 FY19 average USD rate of 1.31 and the Euro rate of 1.13 would have had approximately a £5.2m and £4.5m impact respectively on full year adjusted operating profit. The impact of future movements in the Yen in FY20 following HomeServe's new joint venture in Japan is not expected to be material.

 

Accounting standards

FY19 is the first year the Group has prepared results under IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. IFRS 15 has not had a material impact on the timing of the Group's revenue recognition, with the principal effects being limited to material reclassifications to the presentation of certain contract, receivable and payables balances in the Group Balance Sheet. None of these amendments had any impact on income, net assets or working capital. IFRS 9 had no significant impact on the financial statements. Further details are included in note 2 of the condensed consolidated financial statements.

IFRS 16 Leases is effective for the Group from 1 April 2019. IFRS 16 will cause a material decrease in operating costs largely offset by a material increase in the combined depreciation and interest expenses, resulting in an increase to adjusted EBITDA but a net immaterial impact on profit before tax. The operating lease charge recorded in operating costs in FY19 was £12.9m (FY18: £12.7m).  Non-current assets and gross liabilities are both expected to increase by between £45.0m to £60.0m with net assets remaining unchanged.

 

 

Customers

IFRS15 defines a customer as 'a party that has contracted with an entity to obtain goods or services'.  In the Membership businesses where the Group acts as an intermediary selling contracts and insurance policies to end consumers, the 'IFRS 15 customer' is considered to be the underwriter with which the Group has contracted to sell policies.

 

This is different, however, from how the Group markets and communicates the value of its products and services to end consumers.  Here, the businesses strategy and communications (both internally and externally) refer to the end consumer as the customer.  As a result, for the purposes of describing the strategy and operational performance of the business, the Strategic Report and the Group's KPIs refer to the end consumer as the customer of the Group, rather than the underwriter.  However, for the purposes of preparing the financial statements, the accounting transactions are recorded in accordance with IFRS 15 where the customer is the underwriter.

 

For all other sources of revenue, it is the party that has contracted with the Group to obtain goods and services that is classified as the customer.  The following table summarises this position:

 

Revenue Stream

IFRS 15 'contracted' customer

Customer as referred to in the Business and Operating Reviews

Policy Income - insurance intermediary commissions

Underwriters

 

End user of the service

 

Policy Income - repairs

Underwriters or other B2B contracted parties

Policy Income - home assistance

End user of the service

Home Experts

HVAC

Other

 

 

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, ensuring a structured response at all levels throughout the Group and across all businesses and geographies, to capture, monitor and mitigate risk.

 

Risk Framework

The Board retains responsibility for the overall evaluation of the Group's risk management process

 

 

 

Group Risk Management Team

Proposes the risk framework across the Group

Supports implementation

Monitors risk management

 

 

Audit & Risk Committee

Advises the Board on risk appetite and risk strategy, ensures the quality and effectiveness of risk management processes and receives regular updates from the Group Risk Management Team

Composed and chaired by independent Non-Executive Directors

Internal and external auditors, CFO, CEO and Chairman are invited, but not entitled, to attend all meetings

Other Executive Directors attend where appropriate

 

 

 

 

Executive Committee - Risk discussion three times per year

Risk discussion chaired by the CFO

Composed of Executive Directors and representatives from each Group business

Discussions are reported on at the Audit & Risk Committee

 

 

 

Local risk registers

Maintained and reviewed by all businesses

 

 

Changes in FY19

In FY19 HomeServe formalised the process by which it groups local risks and thereby identifies Group Enterprise Risks. Group Enterprise Risks are considered to represent the most significant threats to HomeServe's ongoing strategy and operations. Risk registers continue to be maintained at a local level in every business and are formally reviewed by the Audit & Risk Committee at each of its meetings together with Group Enterprise Risks.

 

The following table 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.

 

Membership continues to be the largest business line in each geographic segment and as such continues to dominate the Principal Risks. However with the growth in other business lines, in particular Home Experts, there have been movements in certain risks.

 

The principal risks and uncertainties 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.

 

Risk Appetite

In accordance with the Group's Risk Management policy, the Group Risk Appetite is subject to an annual review of its definition, content and criteria for assessment scores.

 

The Board's assessment of risk appetite is guided by our vision to become the world's most trusted provider of home repairs and improvements and by our purpose to make home repairs and improvements easy. HomeServe's values reflect our commitment to our customers, our people, to innovation and integrity and being the best at what we do. HomeServe's risk appetite is comparatively low, recognising; firstly our status as a plc which requires strong governance and reputation, together with delivering returns for our shareholders and; secondly our regulated status which requires compliance with local laws, rules and guidance.

 

Risks are assessed at a local level on a gross basis using a matrix approach, to score likelihood and impact, and on a net basis after considering any mitigations which have been applied.

 

Brexit

Brexit is not one of HomeServe's enterprise risks but does continue to be monitored at a local and a Group level. Brexit is potentially one of the most significant economic events for the UK and at the date of this statement, the full range, scale and timing of potential outcomes and impacts are uncertain. However, HomeServe continues to believe the impact of the UK's decision to leave the EU and the current delay in implementing this decision on the underlying performance of the Group will be limited.

The HomeServe business model is resilient and in previous periods of consumer uncertainty and economic downturn, for example during the financial crisis in c. 2007 to 2009, no negative impact on business performance was observed.

In addition, all of HomeServe's businesses trade exclusively within their own borders and HomeServe is not exposed to any cross border transactional currency risk. The Group has a strong balance sheet and retains a range of financing facilities with medium to long term maturities, which provide access to additional resources across a range of currencies. The Group remains subject to translation risk on the presentation of results in Sterling however this is within the ordinary course of business.

 

 

 

1. Market Disruption

2. Partnerships

3. International Development

Overview

Competition exists in all business lines but is strongest in Home Experts as competitors seek to gain a share of a market as it undergoes a meaningful shift online.

Competitive threats include, but are not limited to;

•       Utilities running Membership programmes in-house

•       Adjacent products e.g. Whole Home Warranty

•       Existing competitors moving into other geographies

•       New entrants e.g. Amazon or Google investing heavily to enter the home services space with new products or technologies which erode HomeServe's market share

•       Incumbent competitors to Home Experts in the UK e.g. Rated People, MyBuilder

 

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. Growth plans, particularly in North America, focus on signing new partners to extend reach and provide new marketing opportunities to grow the business.

HomeServe has benefitted from government policy changes in certain regions to form new partnerships e.g. liberalisation of energy markets in Spain. Any reversal e.g. to renationalise utilities could have an adverse impact albeit HomeServe does have strong experience working with public sector municipals in North America.

 

HomeServe has enjoyed success with its Membership model in markets outside of the UK and intends to expand to other regions.

Impact(s)

Over time there could be a negative impact on KPIs such as customers and retention rate, in Membership and trade and website visitor numbers in Home Experts as well as on financial metrics such as adjusted operating profit and adjusted operating margin as customers are lost or we are forced to compete more on price.

 

With c.700 partners across the Group it is inevitable that a few partners each year may choose not to renew a contract as priorities or commercial pressures change. In the UK and North America where the partner bases are more diversified the impact is considered small. In France the loss of e.g. Veolia would have a bigger impact similar to that of Endesa in Spain where the back book is now in run-off. Any partner loss or failure to sign new partners could impact households, customers and also retention rates, without use of the partner brand.

 

HomeServe has enjoyed success in France, Spain and North America but has been unsuccessful in past attempts to enter Australia, Belgium and Germany.

Failure to succeed could divert investment and management time incurring not only losses in the new country but also reduced performance (including, for example, loss of customers, lower profitability) in the core markets.

Mitigation(s)

•     We demonstrate to utilities that they can benefit more by partnering with HomeServe due to our long term investment horizon

•     Regular market reviews in each business identify new entrants and increases in competitor activity e.g. aggressive pricing initiatives.

•     Agile product development responds to changing consumer needs

•     Shared learning between our markets

 

•     A portfolio of partners in each business diversifies risk

•     Partners signed on long term contracts with beneficial financial terms for each party

•     HomeServe seeks to renew contracts early, ahead of any expiration date

•     Regular dialogue  with all partners, particularly in markets with more concentrated partner relationships e.g. France

 

•     Strict criteria to identify attractive markets

•     Joint venture structure diversifies risk and minimises investment

•     JV partner brings local market knowledge and contacts

•     HomeServe brings membership model systems and process expertise

Update                               

We continue to develop our Home Experts proposition which diversifies our product offering and ensures we appeal to a broader range of home owners. We have continued to invest; evolving our products in all businesses, acquiring further HVAC businesses and investing revenue growth in Checkatrade back into marketing to ensure we maintain the leading UK brand in this space.

In Membership there has been more focus on competing / adjacent products following a recent stock market listing of a Whole Home Warranty Provider in the US.

We are signing partners at a rate of almost three a week in North America, we have renewed Veolia until 2026 and signed Saur in France and in the UK we have signed a number of new retail energy challengers. In May 2018 the long term partnership with Endesa was not renewed as Endesa sought to provide home assistance services in-house. We are actively engaged in finding new partners in Spain and we have also commenced a new JV partnership with Mitsubishi Corporation in Japan.

In February 2019 HomeServe announced it had agreed a joint venture with Mitsubishi Corporation to form a Membership business in Japan. As the world's third largest economy, Japan is an attractive market. Mitsubishi and HomeServe will each provide staff to the local management team and have shared the initial investment with each agreeing to contribute £2m into the new JV.

HomeServe continues to prospect other potential markets.

 

4. M&A Strategy

5. HVAC Integration

6. Cyber Security

Overview

M&A is focussed on two primary areas; the acquisition of Membership policy books in all markets and a buy-and-build strategy to grow the HVAC business line. Policy book M&A is considered a proven, low-risk method to accelerate growth and HomeServe has a strong track record of buying these books, especially in North America as demonstrated most recently with Dominion.

HVAC buy-and-build typically requires lower investment as the strategy focuses on acquiring smaller, well-run HVAC businesses with strong local reputations.

 

The higher volume of HVAC acquisitions requires disciplined and often standardised processes to ensure successful integration into HomeServe, creating strong links to the Membership business and achieving synergies with e.g. Marketing, back-office functions etc.

 

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.

Impact(s)

HomeServe could overpay for transactions or underestimate 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.

 

Failure to integrate acquisitions quickly and effectively could fail to deliver synergies, and increase costs, resulting in failure to achieve predicted revenues and potentially lead to impairment.

 

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.

Mitigation(s)

•     Strict criteria when building a prospects pipeline

•     Independent advisers engaged in due diligence processes

•     Local management expertise with oversight from central plc function

•     Investment hurdles

•     All investments require local and, where applicable, plc Board approval

•     Post-investment reviews conducted at local levels with findings communicated to plc Board and used to inform future acquisitions and integration processes

 

•     Integration plans form part of all business case approvals

•     Post-investment reviews feed learning back for future acquisitions

•     Dedicated teams and resources and retention of key management personnel in the acquiree

 

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.

Update                                

In FY19 HomeServe made six HVAC acquisitions and successfully completed the second tranche of the Dominion Products and Services policy book.

 

Of the six acquisitions in FY19, four have been successfully integrated, with the remaining two having taken place just before the year end. Key management has been retained and the acquired businesses continue to perform HVAC installations as well as marketing HomeServe's products.

Managing this risk continues to be a key area of focus for the Group. Attention on continuous improvement, delivering our strategic objectives and monitoring evolving threats has meant that the Group has continued to invest in developing and improving countermeasures and controls to mitigate the risk. In addition, frameworks have been put in place to continue to increase the maturity with which we manage our controls and monitor their effectiveness. A comprehensive suite of Policies and Standards remain in force with cyber audits completed in FY19 as part of the annual assurance plan.

 

 

 

 

7. Underwriting capacity

and concentration

8. Regulation & Customer Focus

9. People

Overview

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.

 

HomeServe is subject to regulatory requirements relating to e.g. product design, marketing materials, sales processes and data protection.

HomeServe believes that regulation has a positive impact and encourages a culture that promotes customers' interests and will improve HomeServe's prospects over both the short and long term.

Like many companies HomeServe is also subject to wider regulation concerning e.g. anticorruption, anti-fraud and bribery, modern slavery etc. Specific policies can be found at http://www.homeserveplc.com/about-us/corporate-governance/policies.aspx

 

HomeServe's ability to meet growth expectations and compete effectively is, in part, dependent on the skills, experience and performance of its personnel.

Retention of People in established businesses is key as is recruitment of talented People in growth businesses e.g. Home Experts.

Impact(s)

If current underwriters were unable or unwilling to underwrite the current book and if 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.

 

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 customers 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.

 

The inability to attract, motivate or retain key talent could impact overall business performance.

The Home Experts businesses have ambitious growth plans and require different skills to the Membership business.

Mitigation(s)

•     With the exception of the UK, at least two underwriters share the policy books in each country

•     In the UK, HomeServe maintains relationships with a number of other underwriters who are willing and able to underwrite the business

•     Regular (at least 6 months) reviews with all underwriters to ensure that current product performance and trends are understood.

 

•     Compliance with local regulation as a minimum to ensure products 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

•     Best practice shared across the Group

•     Regulatory specialists, compliance teams and Non-Executive Directors in each business

•     HomeServe maintains regular dialogue with the FCA in the UK. In North America, there is regular contact with the Attorneys General.

 

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 used to understand and respond to employee views and needs.

Processes exist to identify high performing individuals and ensure that they have fulfilling careers, and HomeServe is managing succession planning effectively.

Update                                

There have been no new underwriters this year and existing relationships remain strong.

In the UK, HomeServe and Aviva have commenced discussions regarding contract renewal prior to the expiry of the current contract in 18 months time and HomeServe continues to assess the possibility to add a second underwriter.

There is increased scrutiny across multiple industries in the UK (Telecoms, TV, General Insurance) following a Competitions and Markets Authority complaint to the FCA regarding pricing practices for loyal customers. HomeServe continues to exceed pricing disclosure requirements and policies are priced equally, regardless of customer vintage once customers move off an introductory price.

A new employee engagement survey was implemented to provide consistent, comparable results across businesses. Results will be available in early June 2019.

A new management team with experience in growing fast-paced digital businesses is now in place at Checkatrade.

 

10. Investment in Technology

11. Digital & Innovation

12. Financial risks

Overview

The Group relies on several key systems to manage its Membership 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.

Home Experts, particularly Checkatrade, is embarking on a programme of transformation to ready the business for its ambitious growth plans.

 

Consumers 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.

Technology is also crucial for the networks with Home Experts developing a trades app and Membership sharing technology with its own subcontract network. Both are intended to improve the efficiencies and customer service of both HomeServe and the businesses it partners with.

Key financial risks include 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.

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.

Impact(s)

Failure to invest appropriately to manage customer interactions and provide high quality service may result in lower retention and higher customer losses.

Failure in back office systems 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.

 

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.

If software solutions shared with partners are not delivered or do not generate the intended efficiencies, costs may increase, partners may leave and customer service standards may fall.

Mitigation(s)

All 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.

 

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.

Recruitment is increased in areas short on  the required expertise.

Update                                 ↔

The UK's new core customer management system is in the final stages of user testing. 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.

A new CTO has been appointed at Checkatrade to lead the digital transformation required for consumers and trades.

 

On 25 October 2018, HomeServe arranged an additional £174.2m of funding via a US Private Placement. This expands the Group's existing facilities, locks in a proportion of its interest charge at fixed rates and creates a balanced maturity profile.

HomeServe is implementing a treasury management system to improve global cash visibility, bank connectivity and process efficiency. The system is expected to launch in FY20.

Key

↔ No change

↗   Risk increased

↙   Risk decreased

 

 

Group Income Statement

Year ended 31 March 2019

 

 

 

 

2019 

2018*

 

Notes

£m 

£m 

Continuing operations

 

 

 

Revenue

3

1,003.6 

899.7 

Operating costs

 

(850.7)

(765.7)

Share of results of equity accounted investments

 

(0.3)

1.0 

Operating profit

 

152.6 

 135.0 

Investment income

 

0.2 

0.1 

Finance costs

 

(13.3)

(11.8)

Adjusted profit before tax

 

161.7 

 141.7 

Amortisation of acquisition intangibles

 

(26.8)

(18.4)

 

 

 

 

Exceptional items

 

 

 

Restructuring costs

4

(5.5)

- 

Fair value movement on contingent consideration liabilities

4

10.1 

- 

Profit before tax

 

139.5 

 123.3 

Tax

5

(31.2)

(27.4)

Profit for the year

 

108.3 

 95.9 

 

 

 

 

Attributable to:

 

 

 

Equity holders of the parent

 

108.5 

96.3 

Non-controlling interests

 

(0.2)

(0.4)

 

 

108.3 

95.9 

 

 

 

 

Dividends per share, paid and proposed

6

21.4p

19.1p

 

 

 

 

Earnings per share

 

 

 

Basic

7

32.7p

30.2p

Diluted

7

32.3p

29.7p

 

* The Group's results are being reported under IFRS 9 and IFRS 15 for the first time in 2019 following the mandatory adoption of the standards from 1 April 2018. In accordance with the transitional provisions of these standards, comparatives have not been restated. See Note 2.

 

 

Group Statement of Comprehensive Income

Year ended 31 March 2019

 

 

2019 

2018

 

£m 

£m 

Profit for the year

108.3 

95.9 

 

 

 

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

 

 

Actuarial (loss)/gain on defined benefit pension scheme

(0.4)

2.1 

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

0.1 

(0.4)

Fair value gain on "fair value through other comprehensive income" (FVTOCI) investment in equity instruments

0.7 

Deferred tax charge relating to fair value gain on FVTOCI investment in equity instruments

(0.2)

 

0.2 

1.7

Items that may be reclassified subsequently to profit and loss:

 

 

Exchange movements on translation of foreign operations

6.8 

(10.2)

Fair value losses on cash flow hedges

(0.5)

 

6.8 

(10.7)

Total other comprehensive income/(expense)

7.0 

(9.0)

Total comprehensive income for the year

115.3 

86.9 

 

 

 

Attributable to:

 

 

Equity holders of the parent

115.5 

87.3 

Non-controlling interests

(0.2)

(0.4)

 

115.3 

86.9 

 

 

Group Balance Sheet

31 March 2019

 

 

 

2019 

2018 

 

Notes

£m 

£m 

 

Non-current assets

 

 

 

Goodwill

 

407.9 

386.6 

Other intangible assets

8

418.6 

384.8 

Contract costs

 

27.5 

Property, plant and equipment

 

42.8 

39.9 

Equity accounted investments

 

10.6 

5.5 

Other investments

 

9.2 

8.7 

Deferred tax assets

 

7.4 

6.8 

Retirement benefit assets

 

6.4 

4.7 

 

 

930.4 

837.0 

 

Current assets

 

 

 

Inventories

 

7.0 

4.3 

Trade and other receivables

 

424.6 

515.7 

Cash and cash equivalents

 

72.6 

57.8 

 

 

504.2 

577.8 

Total assets

 

1,434.6 

1,414.8 

 

 

 

 

Current liabilities

 

 

 

Trade and other payables

 

(382.3)

(508.5)

Bank and other loans

 

(39.7)

(38.0)

Current tax liabilities

 

(6.0)

(10.4)

Provisions

 

(5.7)

Obligations under finance leases

 

(0.5)

(0.5)

 

 

(434.2)

(557.4)

Net current assets

 

70.0

20.4 

 

 

 

 

Non-current liabilities

 

 

 

Bank and other loans

 

(336.4)

(256.7)

Deferred tax liabilities

 

(26.4)

(25.5)

Other financial liabilities

 

(23.3)

(23.4)

Obligations under finance leases

 

(0.7)

(0.4)

 

 

(386.8)

(306.0)

Total liabilities

 

(821.0)

(863.4)

Net assets

 

613.6 

551.4

 

 

 

 

Equity

 

 

 

Share capital

9

9.0

8.9 

Share premium account

 

180.7

171.8 

Share incentive reserve

 

23.3

22.1 

Currency translation reserve

 

22.9

16.1 

Investment revaluation reserve

Other reserves

 

2.3

82.2

1.8 

82.2 

Retained earnings

 

293.0

248.1 

Attributable to equity holders of the parent

 

613.4

551.0 

Non-controlling interests

 

0.2

0.4 

Total Equity

 

613.6

551.4 

 

 

 

 

 

Group Statement of Changes in Equity

 

Year ended 31 March 2019

 

 

Share capital

£m

Share premium

account

£m

Share incentive

reserve

£m 

Currency translation reserve

£m 

Investment

revaluation reserve1

£m

Other reserves2

£m

Retained earnings

 £m

Attributable

to equity holders of the parent

£m 

Non- controlling interest

£m 

Total Equity

£m 

Balance at 1 April 2018

8.9

171.8

22.1 

16.1

1.8

82.2

248.1 

551.0 

0.4 

551.4 

Opening adjustment for the impact of IFRS 15 (note 2)

(2.1)

(2.1)

(2.1)

Opening balance under IFRS 15

8.9

171.8

22.1 

16.1

1.8

82.2

246.0 

548.9 

0.4 

549.3 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

108.5 

108.5 

(0.2)

108.3 

Other comprehensive income for the year

 

 

 

 

6.8 

 

0.5 

 

 

                (0.3)

 

7.0 

 

 

7.0 

Total comprehensive income

6.8 

0.5 

108.2 

115.5 

(0.2)

115.3 

Dividends paid (note 6)

(65.0)

(65.0)

(65.0)

Issue of share capital

0.1

8.9

9.0 

9.0 

Share-based payments

8.8 

8.8 

8.8 

Share options exercised

(7.6)

0.8 

(6.8)

(6.8)

Tax on exercised share options (note 5)

2.7 

2.7 

2.7 

Deferred tax on share options (note 5)

0.3 

0.3 

0.3 

Balance at 31 March 2019

9.0 

180.7 

23.3 

22.9 

2.3 

82.2 

293.0 

613.4 

0.2 

613.6 

 

 

 

Year ended 31 March 2018

 

 

Share capital

£m

Share premium

account

£m

Share incentive

reserve

£m 

Currency translation reserve

£m

Available for sale

 reserve1

£m

Other reserves2

£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 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 6)

(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 5)

2.8 

2.8 

2.8 

Deferred  tax on share options (note 5)

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 

 

1 The available for sale reserve was renamed the investment revaluation reserve upon adoption of IFRS 9 on 1 April 2018.

2 Other reserves comprise of the Merger, Own shares, Capital redemption and Hedging reserves.

 

 

Group Cash Flow Statement

Year ended 31 March 2019

 

 

2019 

2018 

 

Notes

£m 

£m 

Operating profit

 

152.6 

135.0 

 

 

 

 

Adjustments for:

 

 

 

Depreciation of property, plant and equipment

 

9.1 

8.0 

Amortisation of acquisition intangible assets

8

26.8 

18.4 

Amortisation of other intangible assets

8

23.1 

36.2 

Amortisation of contract costs

 

14.9 

Share-based payments expense

 

9.8 

9.1 

Share of results of equity accounted investees

 

0.3 

(1.0)

Loss on disposal of property, plant and equipment and software

 

0.6 

2.1 

Gain on re-measurement of associate on acquisition of control

 

- 

(0.9)

Impact of exceptional items

 

(4.6)

Decrease in other financial liabilities

 

- 

(0.3)

Operating cash flows before movements in working capital

 

232.6 

206.6

 

 

 

 

Increase in inventories

 

(0.7)

(1.4)

Decrease/(increase) in receivables

 

104.0 

(60.7)

(Decrease)/increase in payables and provisions

 

(133.7)

19.7 

Net movement in working capital

 

(30.4)

(42.4)

 

 

 

 

Cash generated by operations

 

202.2 

164.2 

 

 

 

 

Income taxes paid

 

(31.7)

(27.2)

Interest paid

 

(8.5)

(7.5)

Net cash inflow from operating activities

 

162.0 

129.5 

 

 

 

 

Investing activities

 

 

 

Interest received

 

0.2 

0.1 

Proceeds on disposal of fixed assets

 

0.3 

0.6 

Purchases of intangible assets

 

(99.1)

(114.3)

Contract costs

 

(7.9)

Purchases of property, plant and equipment

 

(9.0)

(11.0)

Dividend received from associate

 

0.4 

Acquisition of equity accounted investments

 

(5.4)

Acquisition of subsidiaries

11

(37.5)

(50.3)

Net cash used in investing activities

 

(158.4)

(174.5)

 

 

 

 

Financing activities

 

 

 

Dividends paid

6

(65.0)

(50.4)

Repayment of finance leases

 

(0.6)

(0.6)

Acquisition of subsidiaries

 

(3.9)

Proceeds on issue of share capital

 

2.2 

124.1 

Costs associated with issue of share capital

 

(0.8) 

New bank and other loans raised

 

174.2 

221.0 

Costs associated with new bank and other loans raised

 

(1.6)

(3.1) 

Movement in bank and other loans

 

(98.9)

(226.5)

Net cash generated by financing activities

 

10.3 

59.8 

 

 

 

 

Net increase in cash and cash equivalents

 

13.9 

14.8 

Cash and cash equivalents at beginning of year

 

57.8 

46.2 

Effect of foreign exchange rate changes

 

0.9 

(3.2)

Cash and cash equivalents at end of year

 

72.6 

57.8 

 

 

 

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 2019.

 

The financial information set out above does not constitute the Group's statutory financial statements for the years ended 31 March 2019 or 31 March 2018, but is derived from those financial statements.  Statutory financial statements for FY18 prepared under IFRSs have been delivered to the Registrar of Companies and those for FY19 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 21 May 2019.

 

2.         Significant 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 2018 audited financial statements, except as described below.

 

Adoption of new or revised standards and accounting policies

The following accounting standards, interpretations and amendments have been adopted in the year:

IFRIC 22                                                Foreign Currency Transactions and Advance Consideration

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 IAS 12                            Recognition of Deferred Tax Assets for Unrealised Losses

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

 

None of the items listed above have had any material impact on the amounts reported in this consolidated set of financial statements. The impact of the following standards and clarifications are discussed under 'Changes in accounting policies' and 'Impact of adoption of IFRSs 9 & 15' below:

IFRS 9                                                   Financial Instruments

IFRS 15                                                 Revenue from Contracts with Customers

Clarifications to IFRS 15                          Revenue from Contracts with Customers

 

Changes in accounting policy

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest audited financial statements, with the exception of standards, amendments and interpretations effective as of 1 April 2018 including IFRS 9 and IFRS 15 (including clarifications). In accordance with the transitional provisions of these standards, comparatives have not been restated. The impacted accounting policies for the years ended 31 March 2019 and 31 March 2018 are outlined below:

 

 

 

2.         Significant accounting policies (continued)

 

Revenue recognition (applicable from 1 April 2018)

The Group records revenue in accordance with the five-step recognition model outlined in IFRS 15:

 

1)   Identify the contract with the customer

2)   Identify the performance obligations in the contract

3)   Determine the transaction price

4)   Allocate the transaction price to the performance obligations

5)   Recognise revenue when (or as) each performance obligation is satisfied

 

Revenue is recognised, net of discounts, VAT, Insurance Premium Tax and other sales related taxes, either at the point in time a performance obligation has been satisfied or over time as control of the asset associated with the performance obligation is transferred to the customer.

 

For all contracts identified, the Group determines if the arrangement with the customer creates enforceable rights and obligations. For contracts with multiple components to be delivered, such as those with underwriters to sell policies on behalf of the underwriter as well as deliver handling and administration services, management applies judgement to consider whether those promised goods and services are:

 

i)          distinct - to be accounted for as separate performance obligations;

ii)         not distinct - to be combined with other promised goods or services until a bundle is identified that is distinct; or

iii)         part of a series of distinct goods and services that are substantially the same and have the same pattern of transfer to the customer.

 

At contract inception the total transaction price is estimated, being the amount to which the Group expects to be entitled and has present enforceable rights to under the contract. Where applicable, this includes management's best estimate of any variable consideration to be included in the transaction price based on the expected value or most likely amount approach, and only to the extent that it is highly probable that no significant revenue reversal will occur.

 

Once the total transaction price is determined, the Group allocates this to the identified performance obligations in proportion to their relative standalone selling prices and recognises revenue when (or as) those performance obligations are satisfied.

 

Where available, observable prices of goods or services are utilised, when that good or service is sold separately, to similar customers in similar circumstances. Where a stand-alone selling price is not directly observable the Group applies judgment to determine an appropriate estimated standalone selling price, typically using an expected cost plus margin, adjusted market assessment or residual approach.

 

Variable consideration is allocated to an entire contract or a specific part of a contract depending on:

 

i)          whether allocating the variable amount entirely to part of the contract depicts the amount of consideration the Group expects to be entitled in exchange for transferring the promised good or service to the customer; or

ii)         the terms of the variable payment relate specifically to the satisfaction of an individual performance obligation

 

The Group's variable consideration primarily relates to intermediary commissions received on contracts with underwriters to sell policies and provide handling and administration services. Amounts are typically allocated to the entire contract.

 

Discounts are allocated proportionally across all performance obligations in the contract unless directly observable evidence exists that the discount relates to one or more, but not all, performance obligations. 

 

For each performance obligation, the Group determines if revenue will be recognised over time or at a point in time. For each performance obligation to be recognised over time, the Group applies a revenue recognition method that faithfully depicts the Group's performance in transferring control of the goods or services to the customer. This decision requires assessment of the nature of the goods or services

2.         Significant accounting policies (continued)

 

that the Group has promised to transfer to the customer. The Group applies the relevant output or input method, typically based on the expected profile of the deferral event (for example claims handling cost through the policy term or time elapsed).

 

Revenue by category

The Group disaggregates revenue from contracts with customers between Net Policy Income, Repair Income, Home Experts, HVAC and Other as management believe this best depicts how the nature, amount, timing and uncertainty of the Group's revenue and cash flows are effected by economic factors. The following table outlines the principal activities from which the Group derives revenue and how it is recognised: 

 

Revenue stream

Nature and timing of satisfaction of performance obligations

Significant payment terms

Membership - Net Policy Income - Intermediary commissions

Includes commissions received for the obligation to sell policies, handle claims and provide administration services for underwriters. The Group satisfies its obligation to sell policies over time, recognising revenue as each policyholder is contracted on behalf of the Group's customers, the underwriters.

 

The transaction prices of the Group's arrangements with underwriters are entirely variable and measured based on the commission due to the Group for the number of policies sold, net of a refund liability. This refund liability reflects management's best estimate of mid-term policy cancellations ensuring that a significant reversal of revenue will not arise in the future.

 

Handling and administration service obligations are satisfied over the term of a policy, which is typically 12 months. The portion of the total transaction price allocated to these performance obligations is deferred, as a deferred income contract liability, and recognised as revenue over the profile of claims throughout the policy term.

 

The determination of the amount of transaction price to allocate to claims handling and administration services takes account of the expected numbers of claims and the estimated cost of handling those claims, which are validated through historic experience of actual costs, as well as incorporating an appropriate profit margin for the service provided to the underwriter.

 

Revenue associated with the commissions received for the obligation to sell policies is allocated using the residual method at the point of policy inception or renewal.

 

Where the Group's role on behalf of the underwriter is only as an intermediary in the cash collection process, such amounts are not included in revenue. Consequently, net policy income consists of only a component of the overall policy price, representing the commission receivable for the services the Group provides to the underwriter, stated net of sales related taxes.

Billed and paid over the term of the contract

 

 

2.         Significant accounting policies (continued)

 

Revenue stream

Nature and timing of satisfaction of performance obligations

Significant payment terms

Membership - Net Policy Income - Home assistance

Includes arrangements whereby the Group contracts directly with the end user to provide home assistance services (such as repair network access, emergency assistance and non-urgent engineer visits). Revenue is recognised rateably over the life of the member's contract.

 

Billed and paid over the term of the contract

Membership - Repair Income

Includes repair services provided to third parties, including underwriters and insurance companies, subject to separate contractual arrangements. Revenue is recognised over time as each repair job is completed.

 

Billed and paid over the term of the contract with the relevant third party

Home Experts - Web and directory

Includes website subscriptions and directory advertising fees from contracted members (trades). For website subscriptions revenue is recognised evenly over the contractual term, for directory membership fees revenue is recognised as each directory is delivered throughout the contractual term. 

 

Billed and paid over the term of the contract

Home Experts - Lead generation

Includes commissions received for the provision of job leads to trades. Revenue is recognised at the point in time a lead is transferred.

 

Billed and paid as leads are delivered

HVAC

Includes the provision of installation services at the point in time the installation or service is complete.

 

Billed and paid upon completion of the installation

 

Other

Principally includes services provided to customers who do not hold policies. Revenue is recognised at the point in time the service is complete.

Billed and paid  following the performance of the services provided

 

 

 

 

 

2.         Significant accounting policies (continued)

 

Contract related assets and liabilities (applicable from 1 April 2018)

As a result of the contracts which the Group enters into with its customers, the following assets and liabilities are recognised on the Group's balance sheet:

 

- Assets generated from the capitalisation of costs to obtain a contract

- Trade receivables (see financial instruments accounting policies below)

- Accrued income

- Deferred income

 

Capitalisation of costs to obtain a contract

The incremental costs of obtaining a contract with the Group's direct customers are recognised as an asset if the Group expects to recover them. Primarily, such costs relate to fees payable to Affinity Partners or other third parties authorised to enter into new contracts on behalf of a Group entity. Only fees which are directly related to acquiring contracts with the Group's direct customers are capitalised as incremental contract costs under IFRS 15.

 

Accrued and deferred income

Where payments made are greater than the revenue recognised at the period end date, the Group recognises a deferred income contract liability for this difference. Where payments made are less than the revenue recognised at the period end date, the Group recognises an accrued income contract asset for this difference.

 

Revenue recognition (applicable up to 31 March 2018)

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT, Insurance Premium Tax and other sales related taxes.

Net policy income

Revenue recorded by the Group includes commissions receivable in the Group's role as an intermediary for the householder in the policy sale and policy administration process. Any third-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement, or where the Group's role is only as an intermediary in the cash collection process for the principal, are not included in revenue. Consequently, on the sale of a policy, gross revenue consists of only a component of the overall policy price, representing the commission receivable for the marketing, sale and administration of the policy, stated net of sales related taxes.

Where a contractual arrangement consists of two or more separate arrangements that can be provided to customers either on a stand-alone basis or as an optional extra, revenue is recognised for each element as if it were an individual contract. Accordingly, revenue is recognised on the sale of a policy except where an obligation exists to provide future services, typically claims handling and policy administration services. In these situations, a proportion of revenue, sufficient to cover future claims handling costs and margin, is deferred over the life of the policy, as deferred income. The assessment of future claims handling takes account of the expected numbers of claims and the estimated cost of handling those claims, which are validated through experience of historical actual costs. Revenue deferred for the performance of claims handling services is released over the expected profile of anticipated claims.

To the extent that policies are expected to cancel mid-term, and hence all of the economic benefits associated with those policies are not expected to flow to the Group, a provision is made to ensure that the related revenue is not recognised at the point that the policy incepts.

Repair services revenue

Repair revenue relates to repairs undertaken on behalf of underwriters subject to separate contractual arrangements. Such revenue is recognised on completion of the repair.

Other revenue

Revenue in respect of boiler installations and uninsured jobs is recognised when our performance obligations are complete.

 

 

2.         Significant accounting policies (continued)

 

Annual service revenue is recognised on completion of the annual service. Ongoing service revenue is recognised in equal instalments over the life of the policy.

Revenue generated in HomeServe's 'Home Experts' businesses is derived from three principal streams:

-       Website subscriptions: recognised evenly over the period of the contract, which is typically 12 months;

-       Directory advertising fees: recognised at the point the obligation to the customer is fulfilled; and

-       Lead generation revenue (representing commissions received from trades people): recognised at the point of purchase.

 

Financial instruments (applicable from 1 April 2018)

Other investments

At each balance sheet date the Group conducts a fair value assessment of its investments, the difference between the fair value and carrying value is charged or credited to the Statement of Comprehensive Income accordingly and held in the investment revaluation reserve.

 

Trade receivables

Trade receivables do not carry any interest and are stated at amortised cost as reduced by appropriate allowances for estimated irrecoverable amounts. They are recognised when the Group's right to consideration is only conditional on the passage of time. Allowances incorporate an expectation of life-time credit losses from initial recognition and are determined using an expected credit loss approach.

 

Financial instruments (applicable up to 31 March 2018)

Available for sale investments

At each balance sheet date the Group conducts a fair value assessment of its investments, the difference between the fair value and carrying value is charged or credited to the Statement of Comprehensive Income accordingly and held in the available for sale reserve.

 

Trade receivables

Trade receivables do not carry any interest and are stated at amortised cost as reduced by appropriate allowances for estimated irrecoverable amounts.

Impact of adoption of IFRSs 9 & 15

a)  IFRS 15 (and Clarifications to IFRS 15) Revenue from Contracts with Customers

 

IFRS 15 replaces IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The Group has adopted IFRS 15 from 1 April 2018 utilising the cumulative effect method. The adoption of IFRS 15 has not had a material impact on the timing of revenue recognition and comparative information has not been restated. All of the Group's revenue is in scope of IFRS 15.

 

The following abridged statements summarise the impact of adopting IFRS 15 on the Group's Consolidated Balance Sheet and its Consolidated Cash Flow Statement at 31 March 2019. There was no material impact to the Consolidated Income Statement, year on year.

 

 

2.         Significant accounting policies (continued)

 

Impact on the consolidated balance sheet

 

 

 

 

 

Ref

As reported at

31 March 2019

£m

IFRS 15

adjustments

£m

Amounts without adoption

£m

Non-current assets

 

 

 

 

Intangible assets

i)

418.6 

(27.5)

446.1 

Contract costs

i)

27.5 

27.5 

Deferred tax assets

iii)

7.4 

0.5 

6.9 

Others

 

476.9 

476.9 

 

 

930.4 

0.5 

929.9 

 

Current assets

Trade and other receivables

ii), iv) & v)

424.6 

(165.0)

589.6 

Others

 

79.6 

79.6 

 

 

504.2 

(165.0)

669.2 

 

 

 

 

 

Total assets

 

1,434.6 

(164.5)

1,599.1 

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

ii) - v)

(382.3)

162.4 

(544.7)

Others

 

(51.9)

(51.9)

 

 

(434.2)

162.4 

(596.6)

 

 

 

 

 

Net current assets

 

70.0 

(2.6)

72.6 

 

 

 

 

 

Non-current liabilities

 

(386.8)

(386.8)

 

 

 

 

 

Total liabilities

 

(821.0)

162.4 

(983.4)

 

 

 

 

 

Net assets

 

613.6 

(2.1)

615.7 

 

 

 

 

 

Equity

 

 

 

 

Retained earnings

iii)

293.0 

(2.1)

295.1 

Others

 

320.6 

320.6 

 

 

613.6 

(2.1)

615.7 

 

 

 

 

2.         Significant accounting policies (continued)

 

Impact on the consolidated cash flow statement

 

 

 

 

 

Ref

As reported at

31 March 2019

£m

IFRS 15

adjustments

£m

Amounts without adoption

£m

Operating profit

 

152.6 

152.6 

Adjustments for:

 

 

 

 

Amortisation of other intangibles

i)

23.1 

(14.9)

38.0 

Amortisation of contract costs

i)

14.9 

14.9 

Others

 

42.0 

42.0 

Operating cash flows before movements in working capital

 

232.6 

232.6 

 

 

 

 

 

Decrease/(increase) in receivables

ii), iv) & v)

104.0 

165.0 

(61.0)

(Decrease)/increase in payables and provisions

ii) - v)

(133.7)

(165.0)

31.3 

Others

 

(0.7)

(0.7)

Net movement in working capital

 

(30.4)

(30.4)

 

 

 

 

 

Cash generated by operations

 

202.2 

202.2 

Others

 

(40.2)

(40.2)

Net cash inflow from operating activities

 

162.0 

162.0 

 

 

 

 

 

Investing activities

 

 

 

 

Purchases of intangible assets

i)

(99.1)

7.9 

(107.0)

Contract costs

i)

(7.9)

(7.9)

Others

 

(51.4)

(51.4)

Net cash used in investing activities

 

(158.4)

(158.4)

 

 

 

 

 

Net cash used in financing activities

 

10.3 

10.3 

 

 

 

 

 

Net movement in cash and cash equivalents

 

13.9 

13.9 

 

References

 

i)          Historically the Group has capitalised the value attributable to the portfolios of renewable customer policies created by Affinity Partners through their own sales and marketing activity and subsequently purchased by the Group as intangible assets. Where these capitalised costs are incremental to the cost of obtaining the contract with HomeServe's direct customer they are now capitalised under IFRS 15, which provides specific guidance in this area.

 

ii)         Under IAS 18 the Group held a cancellation provision in respect of policies that may be cancelled by the policyholder part way through the contractual term, to ensure the appropriate amount of revenue was recognised at the point the policy incepts. This balance reduced trade and other receivables on the balance sheet. Under IFRS 15 a refund liability is held in liabilities to ensure a significant revenue reversal does not occur in the future due to mid-term cancellations. This reclassification increased closing trade receivables and trade and other payables by £17.7m respectively, with no impact on net assets, cash generated by operations or working capital.

   

iii)         IFRS 15 is applied to the contractual period in which parties to the contract have present enforceable rights and obligations. A small population of service agreements was identified whereby the Group's right to a portion of the contractual revenue is not deemed enforceable under IFRS 15 at the point the revenue was previously booked under IAS 18. At 1 April 2018 this opening adjustment resulted in a £2.6m increase to deferred income, a £2.1m decrease to retained earnings and a £0.5m increase to deferred tax assets. There was no material in year income statement impact.

 

 

2.         Significant accounting policies (continued)

 

iv)         The Group has revised its balance sheet presentation in relation to customer contract balances in accordance with the definitions provided for contract assets and liabilities under IFRS 15. The Group presents these balances as accrued and deferred income respectively, as permitted by paragraph 109 of IFRS 15. This reclassification decreased closing trade receivables and trade and other payables by £42.2m respectively, with no impact on net assets, cash generated by operations or working capital.

 

v)             Under IFRS 15 a receivable cannot be recorded in relation to a cancellable contract until the Group has an unconditional right to consideration. HomeServe have historically recorded receivables in relation to the third party insurance premiums on cancellable contracts, alongside a corresponding payable, to recognise the corresponding liability due to the relevant underwriter. As these contracts are cancellable, receivables and payables are only recognised to the extent the policy has completed. This reclassification decreased closing trade receivables and trade and other payables by £140.5m respectively, with no impact on net assets, cash generated by operations or working capital.

 

b)  IFRS 9 Financial Instruments

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. The Group adopted IFRS 9 from 1 April 2018 and in accordance with the transitional provisions in the Standard, comparatives have not been restated. Adoption of IFRS 9 had no impact on any of the financial statements.

 

Classification and measurement of financial instruments

IFRS 9 requires the use of two criteria to determine the classification of financial assets: the entity's business model for the financial assets and the contractual cash flow characteristics of the financial assets. The Standard identifies three categories of financial assets:

 

-     amortised cost;

-     fair value through profit or loss (FVTPL); 

-     fair value through other comprehensive income (FVTOCI).

 

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. The adoption of IFRS 9 has not had a significant effect on the Group's accounting policy related to financial liabilities.

 

A summary of all reclassifications, which have resulted in no change to the carrying value of any financial instrument, is shown below. All other financial instruments classifications and carrying amounts remain the same.

 

 

Type of financial instrument

IAS 39 classification

IFRS 9 classification

Carrying amount at 1 April 2018 (£m)

Non-current financial assets

 

 

 

Other investments

Available-for-sale

FVTOCI

8.7

Current financial assets

 

 

 

Trade and other receivables

Loans and Receivables

Amortised cost

498.1

Cash and cash equivalents

Loans and Receivables

Amortised cost

57.8

 

Impairment

IFRS 9 mandates the use of an expected credit loss model to calculate impairment losses rather than an incurred loss model, and therefore it is not necessary for a credit event to have occurred before credit losses are recognised. The Group has elected to measure loss allowances utilising probability-weighted estimates of credit losses for trade receivables at an amount equal to lifetime expected credit losses. As the Group's financial assets primarily comprise its portfolio of current trade receivables which have a consistent history of low levels of impairment, the inclusion of specific expected credit loss considerations did not have a material impact on transition.

 

Hedging

The Group has no existing open hedging relationships at the transition or reporting date.   

 

 

 

2.         Significant accounting policies (continued)

 

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 16                                                 Leases                          

IFRS 17                                                 Insurance Contracts

IFRIC 23                                                Uncertainty over Income Tax Treatments

Amendments to IFRS 3                            Definition of a Business

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 1 and IAS 8               Definition of Material

Amendments to IAS 19                            Plan Amendment, Curtailment or Settlement

Amendments to IAS 28                            Long-term Interests in Associates and Joint Ventures

Annual Improvements to IFRSs                 2015-2017 Cycle

Conceptual Framework                           Amendments to References to the Conceptual Framework in IFRS Standards

 

IFRS 16 Leases

IFRS 16 is effective for the Group from 1 April 2019 and will change lease accounting for lessees under operating leases. Such agreements will require recognition of an asset, representing the right to use the leased item, and a liability, representing future lease payments. Lease costs (e.g. rent charges) will be recognised as depreciation and interest, rather than as an operating cost.

 

The Group plans on adopting the modified retrospective approach with the "right of use" (RoU) asset equal to the lease liability at transition date, less any lease incentives received. Adoption of IFRS 16 will cause a material decrease to operating costs largely offset by a material increase to the combined depreciation and interest expenses, resulting in a net immaterial impact to profit before tax. Non-current assets and gross liabilities are both expected to increase by between £45.0m to £60.0m with net assets remaining unchanged. Although total cash outflows will remain consistent, rental outflows will now be presented under financing activities, where they were previously recorded as operational outflows, thereby increasing the Group's cash conversion percentage.

 

The Group has elected not to recognise RoU assets and lease liabilities for short-term leases (with a term of 12 months or less) or low-value assets (where the cost of the asset new would be approximately £3,800). The Group will continue to expense the lease payments associated with these leases on a straight line basis over the lease term.

 

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. During 2019 the Group's 'Home Experts' businesses met the definition of an operating segment under IFRS 8 and are now presented separately from 'New Markets'. Comparative information in this note has been re-presented to illustrate the impact of this change. The segment contains the results of Checkatrade, Habitissimo and Home Experts France. New Markets includes the Group's international development initiatives, including its Italian associate and its Japanese joint venture.

 

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 with the exception of the changes in accounting policies described in note 2 of these condensed consolidated financial statements. Group cost allocations are deducted in arriving at segmental operating profit. Inter-segment revenue relates to transactions with other Group companies, removed on consolidation, and principally comprises royalty and other similar charges charged at prevailing market prices. Disaggregation of revenue by both line of business and geography are disclosed below. Management believes that these are the most relevant categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The line of business analysis also illustrates the Group's revenue by major products and services.

 

UK 

North America

France 

Spain 

Home Experts

New Markets

Total 

2019

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Revenue

 

 

 

 

 

 

 

Net policy income

244.0 

303.3 

101.9 

55.3 

- 

- 

704.5 

Repair income

108.9 

15.7 

0.4 

81.1 

- 

- 

206.1 

Home Experts

- 

- 

- 

- 

40.4 

- 

40.4 

HVAC

25.5 

13.4 

1.5 

4.4 

- 

- 

44.8 

Other

13.3 

1.0 

0.8 

- 

- 

- 

15.1 

Total revenue

391.7 

333.4 

104.6 

140.8 

40.4 

- 

1,010.9 

Inter-segment

(7.3)

(7.3)

External revenue

384.4 

333.4 

104.6 

140.8 

40.4 

- 

1,003.6

 

 

 

 

 

 

 

 

Result

 

 

 

 

 

 

 

Segment adjusted operating profit/(loss)

66.0 

67.6 

33.3 

17.7 

(7.4)

(2.4)

174.8 

Exceptional items

4.6 

- 

- 

- 

- 

- 

4.6 

Amortisation of acquisition intangibles

(2.2)

(12.9)

(6.5)

(0.2)

(5.0)

- 

(26.8)

Operating profit/(loss)

68.4 

54.7 

26.8 

17.5 

(12.4)

(2.4)

152.6 

Investment income

 

 

 

 

 

 

0.2 

Finance costs

 

 

 

 

 

 

(13.3)

Profit before tax

 

 

 

 

 

 

139.5 

Tax

 

 

 

 

 

 

(31.2)

Profit for the year

 

 

 

 

 

 

108.3 

 

 

 

3.         Segmental analysis (continued)

 

 

UK 

North America

France 

Spain 

Home Experts

New Markets

Total 

2018

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Revenue

 

 

 

 

 

 

 

Net policy income

221.6 

262.4 

98.6 

55.6 

- 

- 

638.2 

Repair income

106.3 

9.6 

0.4 

85.7 

- 

- 

202.0 

Home Experts

- 

- 

- 

- 

18.6 

- 

18.6 

HVAC

21.1 

10.1 

1.0 

- 

- 

- 

32.2 

Other

16.6 

- 

- 

- 

- 

- 

16.6 

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 adjusted operating profit/(loss)

61.1 

48.6 

31.5 

16.6 

(2.8)

(1.6)

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 

(4.8)

(1.6)

135.0 

Investment income

 

 

 

 

 

 

0.1 

Finance costs

 

 

 

 

 

 

(11.8)

Profit before tax

 

 

 

 

 

 

123.3 

Tax

 

 

 

 

 

 

(27.4)

Profit for the year

 

 

 

 

 

 

95.9 

 

Segment information

 

Assets

 

Liabilities

Capital additions

Depreciation, amortisation and

impairment

 

 

2019 

2018 

2019 

2018 

2019

2018

2019

2018

 

£m 

£m 

£m 

£m 

£m

£m

£m

£m

UK

953.8 

897.7 

468.0 

472.6 

27.6

43.0

16.9

17.3

North America

436.6 

352.6 

441.3 

361.5 

64.2

73.2

23.8

16.7

France

225.4 

219.9 

152.1 

155.0 

9.8

3.5

10.0

8.9

Spain

113.3 

140.0 

78.6 

104.1 

8.7

18.2

16.6

17.0

Home Experts

77.5 

94.3 

31.1 

36.5 

4.7

1.6

6.6

2.7

New Markets

6.9 

5.5 

28.8 

28.9 

-

-

-

-

Inter-segment

(378.9)

(295.2)

 (378.9)

 (295.2)

-

-

-

-

Total

1,434.6 

1,414.8 

821.0 

863.4 

115.0

139.5

73.9

62.6

 

 

 

                   

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

 

 

 

3.         Segmental analysis (continued)

 

Information about major customers

During the periods presented four underwriters were customers of the Group that individually accounted for over 10% of the Group's revenues:

 

 

 

 

 

 

 

2019 

2018 

 

 

 

 

 

 

Customer 1 - UK

 

 

32.6 

34.4 

Customer 2 - North America

 

16.7 

13.6 

Customer 3 - North America

 

13.6 

13.7 

Customer 4 - France

 

9.0 

10.1 

Other customers individually representing below 10% of Group revenue

 

28.1 

28.2 

 

 

 

 

100.0 

 

 

4.         Exceptional items

 

Exceptional items, booked to operating costs, comprised the following:

 

 

 

 

 

 

 

2019 

2018

 

 

 

 

 

 

£m 

£m

Fair value movement on contingent consideration liabilities

10.1 

Restructuring costs

(5.5)

Exceptional items included within Group operating profit before tax

4.6 

Net taxation on exceptional items

(0.2)

Net exceptional items after tax

 

 

4.4 

 

Fair value movement on contingent consideration liabilities

At 31 March 2019 the Group reassessed the fair value of outstanding consideration payments due to the previous owners of Help-Link Limited, conditional on the number of boiler installations performed from the point of acquisition until July 2020. At this point the Group determined that the likelihood of the conditions being met that would trigger either of the two outstanding payments (a gross undiscounted cash outflow totalling £10.5m) was now remote and therefore the fair value of the outstanding liabilities was £nil. At the point the fair value exercise was performed the balance held on the balance sheet of £10.1m, representing the original discounted value of the liabilities and any associated interest accreted to 31 March 2019, was released to the income statement in accordance with IFRS 3 and treated as exceptional due to its size and incidence.  

Restructuring costs

Charges of £5.5m were incurred during FY19, mostly related to redundancies and other associated charges incurred in respect of changes to the organisational design of the UK business. Marketing and other support headcount was reduced, as the business moves away from an over reliance on direct mail activity and prepares for the implementation of new systems. Costs related to these programmes have been treated as exceptional due to their size and incidence.

 

 

 

5.         Taxation

 

 

 

 

 

 

 

2019 

2018 

 

 

 

 

 

 

£m 

£m 

Current tax

 

 

 

 

 

 

Current year charge

 

 

 

 

31.8 

30.9 

Adjustments in respect of prior years

 

 

(1.9)

(0.1)

Total current tax charge

 

 

 

29.9 

30.8 

 

 

 

 

 

 

 

 

Deferred tax charge/(credit)

 

 

 

 

1.3 

(3.4)

Total tax charge

 

 

 

 

31.2 

27.4 

 

UK corporation tax is calculated at 19% (FY18: 19%) 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 27% in the US (FY18: 38%) as a result of the US enacting new tax legislation in December 2017 effective from 1 January 2018, 33% in France (FY18: 33%) and 25% in Spain (FY18: 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:

 

 

 

 

 

 

 

 

2019 

2018 

 

 

 

 

 

 

£m 

£m 

Profit before tax on continuing operations

 

 

139.5 

123.3 

Tax at the UK corporation tax rate of 19% (FY18: 19%)

 

26.5 

23.4 

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

 

(0.6)

(0.5)

Adjustments in respect of prior years - current tax

 

(1.9)

(0.1)

Overseas tax rate differences

 

 

 

7.2 

4.6 

Tax expense for the year

 

 

 

31.2 

 

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% (FY18: 22%) is expected to increase slightly in future years. 

A retirement benefit tax credit amounting to £0.1m (FY18: £0.4m charge) 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:

 

 

 

 

 

 

2019 

2018

 

 

 

 

 

 

£m 

£m

Current tax

 

 

 

 

 

 

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

2.7 

2.8 

Deferred tax

 

 

 

 

 

 

Opening impact of IFRS 15 (see note 2)

0.5 

- 

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

0.3 

0.2 

Total tax recognised directly in equity

 

 

3.5 

3.0 

 

 

6.         Dividends

 

 

2019

2018

 

£m

£m

Amounts recognised as distributions to equity holders in the year:

 

 

Final dividend for the year ended 31 March 2018 of 14.4p (2017: 11.2p) per share

47.8

35.0

Interim dividend for the year ended 31 March 2019 of 5.2p (2018: 4.7p) per share

17.2

15.4

 

65.0

50.4

 

The proposed final dividend for the year ended 31 March 2019 is 16.2p per share amounting to £53.9m (FY18: 14.4p per share amounting to £47.8m). 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. The payment of this dividend will not have any tax consequences for the Group.

 

7.         Earnings per share

 

 

2019 

2018 

 

pence 

pence 

Basic

32.7 

30.2 

Diluted

32.3 

29.7 

Adjusted basic

37.5 

33.6 

Adjusted diluted

37.0 

33.1 

 

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

Number of shares

2019 

2018 

 

Weighted average number of shares

 

 

Basic

331.7

318.9 

Dilutive impact of share options

3.9

5.0 

Diluted

335.6

323.9 

 

Earnings

2019 

2018 

 

£m 

£m 

Profit for the year attributable to equity holders of the parent

108.5 

96.3 

Amortisation of acquisition intangibles

26.8 

18.4 

Exceptional items (note 4)

(4.6)

- 

Tax impact arising on amortisation of acquisition intangibles and exceptional items

(6.4)

(5.7)

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

124.3 

107.3 

 

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 period by the weighted average number of ordinary shares in issue during the period. Adjusted earnings per share is calculated excluding exceptional items, the amortisation of acquisition intangibles and the associated tax impacts. In FY18 adjustments were also made for the one-off impact of tax reforms in the USA and France.

 

The Group uses adjusted operating profit, adjusted operating margin, EBITDA, adjusted profit before tax and adjusted earnings per share as its primary performance measures. These are non-IFRS measures which exclude exceptional items, the impact of the amortisation of acquisition intangibles and the associated tax effects. For further details refer to the 'Profitability' section of the Glossary.

 

Diluted earnings per share includes the impact of dilutive share options in issue throughout the year.

 

 

 

8.         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 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 1 April 2018

87.7 

191.5 

13.9 

293.1 

34.1 

94.1 

211.7 

633.0 

IFRS 15 reclassification

(85.0)

(85.0)

Additions

28.2 

20.6 

48.8 

1.3 

8.8 

42.0 

100.9 

Acquisition of subsidiaries

12.4 

2.6 

15.0 

15.0 

Disposals

(1.1)

(1.1)

Transfers

(6.1)

6.4 

0.3 

0.6 

(0.9)

Exchange movements

4.3 

3.8 

8.1 

1.4 

(0.3)

1.9 

11.1 

At 31 March 2019

126.5 

224.9 

13.9 

365.3 

37.4 

17.6 

253.6

673.9 

 

Accumulated Amortisation

 

 

 

 

 

 

 

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 1 April 2018

27.4 

78.6 

0.6 

106.6 

27.0 

49.1 

65.5 

248.2 

IFRS 15 reclassification

(46.5)

(46.5)

Charge for the year

7.5 

17.6 

1.7 

26.8 

3.0 

2.3 

17.8 

49.9 

Disposals

(0.1)

(0.1)

Transfers

0.1 

0.1 

(0.1)

Exchange movements

0.7 

2.0 

2.7 

0.5 

(0.1)

0.7 

3.8 

At 31 March 2019

35.7 

98.2 

2.3 

136.2 

30.4 

4.8 

83.9 

255.3 

 

Carrying amount

 

 

 

 

 

 

 

At 31 March 2019

90.8 

126.7 

11.6 

229.1 

7.0 

12.8 

169.7 

418.6 

At 31 March 2018

60.3 

112.9 

13.3 

186.5 

7.1 

45.0 

146.2 

384.8 

 

*On 1 April 2018 assets with a total net book value of £38.5m were transferred out of customer databases and reclassified as contract cost assets under IFRS 15. 

 

Software includes £81.8m (FY18: £72.3m) in respect of the new Customer Relationship Management (CRM) system which will be rolled out in the UK business during FY20. The asset will be amortised over 10 years on a straight-line basis from the point at which it is available for use. 

 

On 26 October 2018 and 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 2019 acquired access rights included £54.4m and acquired customer databases included £45.3m in respect of the marketing agreement and policy book acquired as part of this transaction. These assets are being amortised over periods ranging from 9 to 13 years, on a straight-line basis. 

 

 

 

 

 

 

9.         Share capital

 

2019  

2018 

 

£m  

£m 

Issued and fully paid 332,490,377 ordinary shares of 2 9/13p each (FY18: 329,776,766)

 

9.0 

 

8.9 

 

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.

 

During the period from 1 April 2018 to 31 March 2019 the Company issued 2,713,611 shares with a nominal value of 2 9/13p creating share capital of £0.1m and share premium of £8.9m.

 

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. 

 

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 £0.1m and share premium of £4.9m. 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.

 

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 equity accounted investees

 

Related party transactions with equity accounted investees during FY19 principally related to recharged consultancy and contractor costs and amounted to £0.3m (FY18: £0.5m).

 

Other related party transactions

 

Other related party transactions during FY19 were similar in nature to those in FY18 and amounted to £0.5m (FY18: £0.5m). 

 

Full details of the Group's related party transactions are included in the Annual Report and Accounts 2019.

 

 

 

11.       Business combinations

 

The Group has incurred a net cash outflow in respect of business combinations of £37.5m in the year (FY18: £54.2m).

There were two material acquisitions in the year ended 31 March 2019.

 

·      On 7 March 2019 HomeServe HVAC LLC, a Group company, acquired 100% of the issued share capital and obtained control of Cropp-Metcalfe Air Conditioning and Heating Company Inc. ('Cropp'). 

 

·      On 29 March 2019 HomeServe Energy Services Holding HVAC, a Group company, acquired 100% of the issued share capital and obtained control of Societe V.B. Gaz ('V.B. Gaz').

 

Additionally there were four immaterial acquisitions in the year ended 31 March 2019.

 

·      On 29 June 2018, HomeServe USA Energy Services LLC, a Group company, acquired 100% of the issued share capital and obtained control of Gregg Mechanical Corp ('Gregg Mechanical').

 

·      On 26 July 2018, HomeServe Spain, S.L.U, a Group company, acquired 100% of the issued share capital and obtained control of Oscagas Hogar, S.L.U ('Oscagas').

 

·      On 1 October 2018, HomeServe Energy Services Holding HVAC, a Group company, acquired a group of assets constituting a business under IFRS 3 from Etablissements Descamps SAS ('Descamps').

 

·      On 29 November 2018, HomeServe HVAC LLC, a Group company, acquired 100% of the issued share capital and obtained control of Geisel Heating, Air Conditioning & Plumbing, Inc. ('Geisel').

 

All acquisitions made during FY19 enhance the scale and scope of the Group's HVAC installation capabilities and increase the opportunity for future growth related to new HVAC system installations. 

 

 

 

11.       Business combinations (continued)

 

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

 

 

Cropp

V.B. Gaz

Other

Total

At fair value

£m 

£m 

£m 

£m 

Property, plant and equipment

1.6 

0.4 

0.2 

2.2 

Cash and cash equivalents

1.8 

0.3 

0.4 

2.5 

Inventories

0.9 

0.1 

0.9 

1.9 

Trade and other receivables

0.6 

0.3 

1.4 

2.3 

Trade and other payables

(3.4)

(0.3)

(1.9)

(5.6)

Bank and other loans

(0.1)

(0.1)

Deferred income

(2.5)

(0.7)

(3.2)

Intangible assets identified on acquisition

11.7 

2.3 

1.0 

15.0 

Deferred tax on acquisition intangibles

(0.6)

(0.6)

Net assets acquired

10.7 

1.7 

2.0 

14.4 

 

 

 

 

 

Goodwill

8.8 

6.9 

5.3 

21.0 

Total consideration

19.5 

8.6 

7.3 

35.4 

 

 

 

 

 

Satisfied by:

 

 

 

 

Cash

14.7 

8.6 

6.3 

29.6 

Contingent consideration at fair value

- 

0.1 

0.1 

Deferred consideration

4.8 

0.9 

5.7 

 

19.5 

8.6 

7.3 

35.4 

 

 

 

 

 

Net cash outflow arising on acquisition:

 

 

 

 

Cash consideration

14.7 

8.6 

6.3 

29.6 

Cash and cash equivalent balances acquired

(1.8)

(0.3)

(0.4)

(2.5)

 

12.9 

8.3 

5.9 

27.1 

 

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 Oscagas and Gregg Mechanical disclosed as part of the Group's interim results as at 30 September 2018 have been updated, resulting in a decrease to goodwill of £0.2m at 31 March 2019.

 

The post-acquisition revenue, operating profit and acquisition-related costs (included in operating costs) from these acquisitions in the year ended 31 March 2019 were as follows:

 

Cropp

£m

V.B. Gaz

£m

Other

£m

Total

£m

Revenue

2.1 

8.0 

10.1 

Operating profit/(loss)

(0.1)

(0.1)

Acquisition-related costs

0.6 

0.1 

0.2 

0.9 

 

If all of the acquisitions had been completed on the first day of the financial year, Group revenues for the period would have been £1,050.3m and Group profit before taxation would have been £141.9m.

In addition to the net cash outflow on the acquisitions above of £27.1m, deferred and contingent consideration payments related to business combinations in year totalled £10.4m (FY18: £3.9m).

 

 

 

 

 

 

 

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 2019 were approved by the Board on 21 May 2019 and will be made available on the Company's website and posted to those shareholders who have requested it in June 2019.  Copies will be available from the registered office at Cable Drive, Walsall, WS2 7BN.

 

 

 

 

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, adjusted 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. Acquisition intangible assets are calculated using the estimated and discounted incremental future cash flows resulting from the affinity relationship or future policy renewals as appropriate, which will include the impact of the past actions of the former owners.  These past actions will include historic marketing and business development activity, including but not limited to, the staff and operational costs of the business.  In addition the specific construct of the policy terms and conditions and the current and expected future profitability to be derived from the acquired business or asset is also a factor in determining the valuation of acquisition intangible assets.

 

The on-going service and operating costs incurred by the Group in managing the acquired businesses or assets, including but not limited to print, postage, telephony, claims costs and overheads are recognised as operating costs within these adjusted measures in the reporting period in which they are incurred.

 

Accordingly, by excluding the amortisation of acquisition intangibles from the adjusted performance measures reported by the Group in each specific reporting period ensures that these measures only reflect the revenue attributable to, and costs incurred by, the Group in managing and operating those businesses and assets at that time in each reporting period and do not include the impact of the historic costs of the vendor or considerations of the future profits to be derived from the acquired business or assets. 

 

 

Reconciliations of statutory to adjusted profit measures

 

TOTAL GROUP

£million

2019 

2018 

Operating profit (statutory)

152.6 

135.0

Exceptional restructuring costs

5.5 

-

Exceptional fair value movement on contingent consideration

(10.1) 

-

Amortisation of acquisition intangibles

26.8 

18.4

Adjusted operating profit

174.8 

153.4

 

Operating profit (statutory)

152.6 

135.0

Exceptional restructuring costs

5.5 

-

Exceptional fair value movement on contingent consideration

(10.1) 

-

Depreciation

9.1 

8.0

Amortisation of acquisition intangibles

26.8 

18.4

Amortisation of other intangibles

23.1 

36.2

Amortisation of contract costs

14.9 

-

Adjusted EBITDA

221.9 

197.6

 

 

 

Profit before tax (statutory)

139.5 

123.3

Exceptional restructuring costs

5.5 

-

Exceptional fair value movement on contingent consideration

(10.1) 

-

Amortisation of acquisition intangibles

26.8 

18.4

Adjusted profit before tax

161.7 

141.7

 

Pence per share

 

 

Earnings per share (statutory)

32.7  

30.2 

Exceptional restructuring costs (net of tax)

1.3  

Exceptional fair value movement on contingent consideration (net of tax)

(2.6) 

Amortisation of acquisition intangibles (net of tax)

6.1  

3.9 

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

-  

(0.5)

Adjusted earnings per share

37.5  

33.6 

 

 

 

SEGMENTAL

 

2019

£million

UK

North America

France

Spain

Home  Experts

New Markets

Revenue

391.7 

333.4

104.6

140.8

40.4 

 

 

 

 

 

 

 

Statutory operating profit/(loss)

68.4 

54.7

26.8

17.5

(12.4)

(2.4)

Operating Margin %

17% 

16%

26%

12%

 

 

 

 

 

 

 

Adjusting items

 

 

 

 

 

 

Exceptional restructuring costs

5.5 

-

-

-

Exceptional fair value movement on contingent consideration

(10.1)

-

-

-

Amortisation of acquisition intangibles

2.2 

12.9

6.5

0.2

5.0 

Total adjusting items

(2.4)

12.9

6.5

0.2

5.0 

Effect on operating margin %

4%

6%

1%

 

 

 

 

 

 

 

Adjusted operating profit/(loss)

66.0

67.6

33.3

17.7

(7.4)

(2.4)

Adjusted operating margin %

17%

20%

32%

13%

 

 

2018

£million

UK

North America

France

Spain

Home Experts

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

(4.8)

(1.6)

Operating Margin %

16%

14%

25%

12%

 

 

 

 

 

 

 

Adjusting items*

 

 

 

 

 

 

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

(2.8)

(1.6)

Adjusted operating margin %

17%

17%

32%

12%

 

*There were no exceptional items recorded in the prior year

 

2019

Local currency million

UK

£

North America

$

France

Spain

Home  Experts

£

New Markets

£

Revenue

391.7 

436.2

118.7

159.7

40.4 

 

 

 

 

 

 

 

Statutory operating profit/(loss)

68.4 

71.3

30.4

19.6

(12.4)

(2.4)

Operating Margin %

17% 

16%

26%

12%

 

 

 

 

 

 

 

Adjusting items

 

 

 

 

 

 

Exceptional restructuring costs

5.5 

-

-

-

Exceptional fair value movement on contingent consideration

(10.1)

-

-

-

Amortisation of acquisition intangibles

2.2 

16.8

7.4

0.2

5.0 

Total adjusting items

(2.4)

16.8

7.4

0.2

5.0 

Effect on operating margin %

4%

6%

 

 

 

 

 

 

 

Adjusted operating profit/(loss)

66.0

88.1

37.8

19.8

(7.4)

(2.4)

Adjusted operating margin %

17%

20%

32%

12%

 

 

2018

Local currency million

UK

£

North America

$

France

Spain

Home Experts

£

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

(4.8)

(1.6)

Operating Margin %

16%

14%

25%

12%

 

 

 

 

 

 

 

Adjusting items*

 

 

 

 

 

 

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

(2.8)

(1.6)

Adjusted operating margin %

17%

17%

32%

12%

 

*There were no exceptional items recorded in the prior year

 

 

 

 

 

Leverage

In FY19 the Group targeted net debt in the range of 1.0 to 2.0x EBITDA measured at the year end and will continue to do so in FY20.

 

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 2019 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

2019 

2018 

Current liabilities from borrowings and finance leases

 

 

Finance leases

0.5 

0.5 

Bank and other loans

39.7 

38.0 

 

40.2 

38.5 

Non-current liabilities from borrowings and finance leases

 

 

Finance leases

0.7 

0.4 

Bank and other loans

336.4 

256.7 

 

337.1 

257.1 

Total liabilities from borrowings and finance leases

377.3 

295.6 

 

 

 

Cash and cash equivalents

(72.6)

(57.8)

 

 

 

Net Debt

304.7 

237.8 

Adjusted EBITDA

221.9 

197.6 

Leverage

1.4x 

1.2x 

 

 

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

2019 

2018 

Adjusted operating profit                      

174.8 

153.4 

Exceptional restructuring costs

(5.5)

Exceptional fair value movement on contingent consideration

10.1 

Amortisation of acquisition intangibles

(26.8)

(18.4)

Operating profit

152.6 

135.0 

Impact of exceptional items

(4.6)

Depreciation and amortisation

73.9 

62.6 

Non-cash items

10.7 

9.0 

Increase in working capital

(30.4)

(42.4)

Cash generated by operations                        

202.2 

164.2 

Net interest and borrowing costs

(9.9)

(10.5)

Taxation

(31.7)

(27.2)

Capital expenditure

(66.9)

(71.1)

Repayment of finance leases

(0.6)

(0.6)

Free cash flow

93.1 

54.8 

 

 

 

£million

2019 

2018 

Adjusted operating profit                      

174.8 

153.4 

Cash generated by operations                        

202.2 

164.2 

Cash conversion

116% 

107% 

 

 

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.

Trades are customers in the Home Experts business. Growing the network of vetted and reviewed trades will enable HomeServe to meet consumer needs and grow its business.

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

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

 

Customers

 

2019 is the first year the Group has presented its results under IFRS15 Revenue from contracts with customers.  IFRS15 defines a customer as 'a party that has contracted with an entity to obtain goods or services'.  In the Membership businesses where the Group acts as an intermediary selling contracts and insurance policies to end consumers, the 'IFRS 15 customer' is considered to be the underwriter with which the Group has contracted to sell policies.

 

This is different, however, from how the Group markets and communicates the value of its products and services to end consumers.  Here, the businesses strategy and communications (both internally and externally) refer to the end consumer as the customer.  As a result, for the purposes of describing the strategy and operational performance of the business, the Business review and the Group's KPIs refer to the end consumer as the customer of the Group, rather than the underwriter.  However, for the purposes of preparing the financial statements, the accounting transactions are recorded in accordance with IFRS 15 where the customer is the underwriter.

 

For all other sources of revenue, it is the party that has contracted with the Group to obtain goods and services that is classified as the customer.  The following table summarises this position:

 

Revenue Stream

IFRS 15 'contracted' customer

Customer as referred to in the Business and Operating Reviews

Policy Income - insurance intermediary commissions

Underwriters

 

End user of the service

 

Policy Income - repairs

Underwriters or other B2B contracted parties

Policy Income - home assistance

End user of the service

Home Experts

HVAC

Other

 

 


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