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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Homeserve Plc | LSE:HSV | London | Ordinary Share | GB00BYYTFB60 | ORD 2 9/13P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 1,198.00 | 1,198.00 | 1,199.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMHSV
RNS Number : 7978O
Homeserve Plc
22 May 2018
HomeServe plc
Preliminary results for the year ended 31 March 2018
Hot Features
Premium
2018 2017 Change
--------------------- ---------- ---------- -------
Revenue GBP899.7m GBP785.0m +15%
Statutory operating
profit GBP135.0m GBP104.7m +29%
Statutory profit
before tax GBP123.3m GBP98.3m +25%
Basic earnings
per share 30.2p 24.0p +26%
Adjusted operating
profit(1) GBP153.4m GBP118.8m +29%
Adjusted profit
before tax(1) GBP141.7m GBP112.4m +26%
Adjusted earnings
per share(1) 33.6p 27.0p +24%
EBITDA(1) GBP197.6m GBP154.2m +28%
Ordinary dividend
per share 19.1p 15.3p +25%
Net debt GBP237.8m GBP261.4m -9%
Total number
of customers 8.4m 7.8m +7%
--------------------- ---------- ---------- -------
Record profit growth driven by outstanding performance in North America
-- Statutory operating profit up 29% to GBP135.0m, with basic earnings per share up 26% to 30.2p as total customers increased 7% to 8.4m
-- Further step change in North America: 146% increase in adjusted operating profit to $64.4m; customers up 20% to 3.6m
-- UK adjusted operating profit of GBP61.1m (FY17: GBP63.2m) as the business invested in strategic initiatives to increase efficiency, expand partnerships and grow Heating and LeakBot opportunities
-- France and Spain both delivered double digit growth in adjusted operating profit, up 13% and 20% respectively
-- Acquisition of 100% of Checkatrade in November 2017 to accelerate the development of an online, on demand Home Experts marketplace
-- Group remains highly cash generative and well financed: 107% cash conversion(1); net debt within target range at 1.2x EBITDA; successful equity placing in October 2017 raised gross proceeds of GBP125m
-- Proposed final dividend of 14.4p, to take the total dividend for the year to 19.1p, up 25%
Richard Harpin, Founder and Chief Executive, HomeServe plc, said: "This has been another great year for HomeServe, with record profit growth and another step change in our growth in North America. Our core Membership proposition continues to resonate strongly with consumers seeking to run their homes more easily, and we are delighted to serve 8.4m customers worldwide at an annual policy retention rate of 82%.
"We have made good progress this year on developing three new business lines - Home Experts; Heating, Ventilation and Air Conditioning (HVAC); and Smart Home. In HVAC we completed acquisitions in the UK and France and in Smart Home our LeakBot innovation is starting to gain real traction with insurers. I am particularly excited by the progress we have made on developing our online Home Experts marketplace since we acquired 100% of Checkatrade in November 2017."
Outlook
HomeServe has good prospects for growth in FY19 with attractive strategic opportunities in all its geographies. In particular, continued strong organic growth is expected in North America, with acquisitions providing opportunities to further accelerate business development across the Group.
(1)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 are non-GAAP measures which address profitability, leverage and liquidity and together with operational KPIs give an indication of the current health and future prospects of the Group. Definitions of APMs and the rationale for their usage are included in the Glossary at the end of this announcement with a reconciliation, where applicable, back to the equivalent statutory measure.
Change in director's responsibilities
In a separate announcement this morning, HomeServe confirmed that Martin Bennett, CEO, HomeServe UK, will step down from the Board at the Annual General Meeting on 20 July and will leave the business later in 2018.
Results presentation
A presentation for analysts and investors will take place at 9am this morning at UBS, 5 Broadgate, London EC2M 2QS.
There will be an audio webcast with a facility to ask questions, available via www.homeserveplc.com. This is accompanied by a listen-only conference call with details as follows;
0800 358 9473 PIN: 44371287#
* United Kingdom Toll-Free
+44 3333 000 PIN: 44371287#
* United Kingdom Toll 804
Enquiries
HomeServe Tulchan Group
Miriam McKay - Group Communications Martin Robinson
and IR Director Lisa Jarrett-Kerr
Miriam.McKay@homeserve.com
+44 7795 062564
homeserve@tulchangroup.com
Simon Lewis - Head of Investor +44 207 353 4200
Relations
Simon.Lewis@homeserve.com
+44 7970 840694
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.GBP2.7 billion.
CHIEF EXECUTIVE'S REVIEW
Progress in FY18
When we look back in a few years' time on our 2018 financial year, I think we may see it as the year when we further step changed HomeServe's growth opportunities. Our business continued to perform well and the strategic decisions we took will have a major influence on our long term growth prospects.
Our most exciting growth area in the short to medium term is North America. This year's 20% increase in customers was split 50:50 between organic growth and the first tranche of customers acquired with our largest ever acquisition - the policy book of Dominion Products and Services Inc (DPS). Our North American team have been signing new partners at a rate of two per week, and I would like to congratulate them for their dedication and hard work in taking our North American business to scale.
The UK is our most developed, cash generative business. Our UK Membership base is stable at around 2.2m customers, and we continue to see opportunities to improve its size and value through product development, marketing and selective policy book acquisitions. The UK team maintained high levels of customer service all year, including during adverse winter weather conditions, thanks to improved facilities to serve customers online and redeploying an increasingly multi-skilled workforce as the need arose. Looking forward, our priorities in the UK are to broaden our affinity partnerships in new areas such as energy, with partnerships signed this year with e.on and Octopus Energy; to increase the efficiency of our operations; to develop our Heating, Ventilation and Air Conditioning (HVAC) business; and to continue the roll-out of LeakBot, which is looking very promising.
In France, we continue to enjoy strong relationships with our main partners Veolia and Suez and remain focused on business development opportunities that could unlock new partnerships and opportunities for future growth. We took our first step into HVAC installations in France in December 2017, with the acquisition of Electrogaz.
In Spain, revenue growth in our Membership business and increased efficiency in Claims drove strong profit growth. The current partnership with Endesa draws to a close in the coming weeks. Discussions continue to define a future relationship, which could be a non-exclusive claims handling and service only arrangement. This would enable us to enter discussions with other energy companies. The net effect of not marketing with Endesa is expected to have no significant impact on adjusted operating profit in Spain over the next two years.
Our partnership with Edison Energia in Italy continued to make progress, with Edison marketing HomeServe products as part of their strategy to gain market share in the domestic Italian energy supply market. We continue to develop opportunities to expand our Membership model into new markets, and will ensure that new entries are supported by large and committed utility partners.
Positioning for future growth
I see it as crucial to my role as founder and CEO of HomeServe to position our business for the future as well as the present. This year, we continued to develop our five strategic priorities - our people, our affinity partnerships, our local repair networks, our digital capabilities and the financial resources at our disposal. These capabilities create the opportunity to expand beyond our traditional Membership business and to this end, we have created four global business lines to expand our business model:
-- Membership - our core subscription based home assistance service covering plumbing, heating, electrical, locks, glazing, pest control and technology, which we have rolled out successfully in the UK, North America, France, Spain and Italy
-- Home Experts - an online, on demand marketplace which matches younger, non insurance minded consumers with vetted and reviewed local tradespeople to carry out a range of household repairs and improvements
-- HVAC - a complete solution to the installation, repair, maintenance and financing of heating, ventilation and air conditioning
-- Smart Home - developing and distributing technology to enable home automation, including LeakBot, smart thermostats and connected boilers.
I am delighted to have been able to promote members of my management team to make the most of these new opportunities, in particular Tom Rusin, who is now Global CEO of our Membership business. Tom has been instrumental to our recent success in North America and will bring invaluable insight and energy to drive all of our Membership businesses forward. He has a worthy successor - John Kitzie - already in place in North America, and will continue to be based in Norwalk, Connecticut.
Home Experts
For me, one of the most significant decisions we took this year was to purchase the remaining 60% of Checkatrade, to give us full control of that business. As we develop our Home Experts strategy, Checkatrade brings a strong UK brand and a great process for certifying reputable tradespeople. Over time, we will combine this with the innovative digital capabilities we have access to at Habitissimo, as well as Habitissimo's ability to test different revenue models and to expand effectively into new markets: they are already present in Spain, France, Italy, Portugal, Brazil, Mexico, Argentina, Chile and Columbia. With the financial resources HomeServe can add to the mix, we see enormous potential to develop a scalable, global Home Experts marketplace.
My interest in Home Experts began with an analysis of our wider market, including not only home repairs but also home improvements. Our core Membership subscription business continues to appeal to around a third of addressable households - homeowners who want to avoid unexpected costs and who value our reliable customer service when fixing problems that occur around their homes. However there is great growth potential with opportunities outside our traditional base - amongst a younger demographic, who are less likely to buy an insurance-type product and more likely to look online for a tradesperson when the need arises. We can deploy our core capabilities to service these consumers and offer a wider range of home improvements as well as repairs.
HVAC and Smart Home
We also made progress in FY18 on defining our HVAC and Smart Home propositions. Based upon the success of our boiler and furnace installation and repair business in North America, we have started to develop this business line in the UK and France via the acquisitions of Help-Link and Electrogaz respectively. HVAC is a highly fragmented market and one where we see potential to grow our market share amongst a new group of high value Membership customers. In the Smart Home market, we will engage in areas adjacent to our other businesses, for example smart thermostats and plumbing-related products. I am delighted that our LeakBot smart water leak detector is starting to gain traction and we have developed a WiFi version to facilitate broader coverage. Further test agreements have been signed and the first sizeable volume orders agreed with partners in Denmark and the UK.
Looking forward to FY19
We will remain true to our growth strategy. Our priorities in delivering our growth strategy are as follows:
-- To continue to grow our core Membership businesses
o in North America where we expect to complete the second tranche of DPS this autumn and through further organic and acquisition opportunities
o in the UK, France and Spain by continuing to develop our affinity partnerships and increasing the efficiency of our operations
o in new geographies by exploring opportunities for joint ventures with utility partners
-- To further develop our Home Experts proposition and scale our Checkatrade business in the UK by recruiting more tradespeople and attracting more consumers and internationally via Habitissimo
-- To roll out our HVAC proposition in the UK, North America, France and Spain
-- To progress Smart Home initiatives, including converting LeakBot test agreements to volume orders and signing further insurance partners.
With significant initiatives under way in all four business lines, we have made notable progress this year towards our vision of becoming the world's most trusted provider of home repairs and improvements. We have done so by remaining true to our purpose - to help people run their homes more easily - and to our customer centric values. Every day, I hear heartwarming stories about the lengths our people go to in delivering service to our customers - the Customer Stories featured in this year's Annual Report give you a flavour of this. It is this commitment and enthusiasm above all which powers our business, and I would like to conclude by thanking everyone at HomeServe for their hard work this year.
Richard Harpin
Founder and Chief Executive
BUSINESS REVIEW
HomeServe had a very good year with strong underlying performance boosted by strategic acquisitions, notably in North America with the policy book of Dominion Products and Services Inc. (DPS); in the UK with Help-Link Limited and the AA's home emergency policy book; and in France where the acquisition of Electrogaz marked a first step into HVAC installations.
Total customers increased to 8.4m from 7.8m and the Group now has over 570 affinity partner relationships that provide access to 109m households, up from 102m in the prior year. Customers continue to value HomeServe's products and the Group retention rate remained strong at 82%.
The continued organic success of the North American business allied to the acquisition of DPS and the successful integration of Utility Service Partners (USP) saw North American adjusted operating profit grow by 129% to GBP48.6m, as the Group delivered total adjusted operating profit of GBP153.4m, up 29%.
Over half of the Group's profits are now generated overseas, with further profit progression in France and Spain complementing outstanding growth in North America. The UK remains highly cash generative and the largest single contributor to Group profits.
The New Markets segment contains the Group's investments in international development, the Home Experts opportunity via Checkatrade and Habitissimo and its Italian associate.
Financial performance for the year ended 31 March
GBPmillion Revenue Statutory operating Adjusted operating
profit/(loss) profit/(loss)
2018 2017 2018 2017 2018 2017
--------------- ------ ------ ------------ ------------ ------------ -----------
UK 365.6 326.5 59.3 62.0 61.1 63.2
North America 282.1 227.8 40.5 14.7 48.6 21.2
France 100.0 91.1 25.1 21.1 31.5 27.1
Spain 141.3 130.2 16.5 13.0 16.6 13.3
New Markets 18.6 16.6 (6.4) (6.1) (4.4) (6.0)
Inter-segment (7.9) (7.2) - - - -
--------------- ------ ------ ------------ ------------ ------------ -----------
Group 899.7 785.0 135.0 104.7 153.4 118.8
--------------- ------ ------ ------------ ------------ ------------ -----------
Performance metrics for the year ended 31 March
Affinity partner Customer numbers Policy retention
households (m) rate
(m)
2018 2017 2018 2017 2018 2017
--------------- --------- -------- ----------- ---------- ----------- ----------
UK 26 24 2.2 2.2 79% 80%
North America 55 50 3.6 3.0 83% 82%
France 15 15 1.1 1.0 88% 89%
Spain 12 12 1.3 1.3 78% 78%
New Markets 1 1 0.2 0.3 - -
--------------- --------- -------- ----------- ---------- ----------- ----------
Group 109 102 8.4 7.8 82% 82%
--------------- --------- -------- ----------- ---------- ----------- ----------
BUSINESS REVIEW (continued)
UK
As HomeServe's most developed business, the UK is highly cash generative and the largest contributor to the Group's operating profit. It has made good strategic progress in FY18 with further investment in growth opportunities including LeakBot and boiler installations.
UK results GBPmillion 2018 2017 Change
------------------------------ -------- -------- -------
Revenue
Net policy income 221.6 213.4 +4%
Repair services 106.3 100.3 +6%
Other 37.7 12.8 +193%
------------------------------- -------- -------- -------
Total revenue 365.6 326.5 +12%
Adjusted operating costs (304.5) (263.3) +16%
------------------------------- -------- -------- -------
Adjusted operating profit 61.1 63.2 -3%
------------------------------- -------- -------- -------
Adjusted operating margin 17% 19% -2ppts
------------------------------- -------- -------- -------
UK performance metrics 2018 2017 Change
------------------------ ----- -------- -------- -------- -----------
Affinity partner
households M m 26 24 +12%
Customers M m 2.2 2.2 -1%
Income per customer GBP GBP 106 96 +10%
Policies M m 5.9 5.6 +6%
Policy retention
rate % % 79 80 -1ppt
------------------------ ----- -------- -------- -------- -----------
Operational performance
Adjusted operating profit of GBP61.1m (FY17: GBP63.2m) was down on the prior year, having incurred a one-off cost of c. GBP2.5m as headcount was reduced as part of an ongoing drive to reduce complexity and introduce further efficiency into the UK operations.
UK customers totalled 2.2m at year end, reflecting a retention rate of 79% (FY17: 80%) and 0.3m new customers added through marketing campaigns (FY17: 0.4m). Included in the year end total are 0.1m customers who are expected to transfer to HomeServe over the course of FY19 following the acquisition of the AA's home emergency services policy book. This acquisition also saw 70 AA plumbing and gas engineers move over to join HomeServe's 1,000-plus strong national network of directly employed engineers (FY17: 850 engineers), further strengthening HomeServe's position in the UK Home Assistance market.
The value of HomeServe's UK customer base is increasing, with customers taking advantage of more cover, with a resultant 10% increase in income per customer and average policies per customer up to 2.7 (FY17: 2.5).
New affinity partnerships were agreed in the year with E.ON and Octopus Energy. The partnership with Octopus is an opportunity to work with an innovative challenger in the energy space and there is great potential from partnering with E.ON to market products to their customers. Both partnerships offer an opportunity to expand beyond the UK's traditional base of water utility partners.
Customer satisfaction remains very high, as evidenced by strong scores on independent sites such as Reevoo (95%) and Trustpilot (8.2), (FY17: 93% and 8.3 respectively). The ability to use products effectively when customers most need HomeServe is critical to maintaining high satisfaction. In FY18 the UK network completed a record number of 1.2m jobs, up 12% on FY17. On average the UK network was in a customer's home once every 26 seconds. There is a strong correlation between staff engagement and customer satisfaction, which is why it was important to HomeServe to have maintained its Top 10 position on Glassdoor's Top Places to Work.
Customers are increasingly choosing to interact online. Investment in the core customer management and claims systems has supported this, together with the launch of a new customer App. The ability to enrol, manage and claim online aids efficiency in the business, provides alternative solutions for customers and alleviates pressure on contact centres during times of high volumes - as happened at the end of FY18 with the extreme cold weather. An increase in the ability to provide claims solutions over the phone or by helpful hints and tips on the website also has the potential to provide remedies for customers who are happy to be guided through 'self-fix' steps to fix common plumbing or heating problems.
The acquisition of Help-Link Limited in August 2017 expanded HomeServe's boiler installation resources and formed an end-to-end heating business encompassing installation, assistance cover, service and repair. Of the one million domestic boiler installations in the UK every year, the vast majority are undertaken by local and regional tradespeople. There is significant opportunity for HomeServe to gain market share and offer customers access to a local tradesperson, combined with the scale and expertise of a national network with a wider choice of complementary products including smart thermostats.
There was good progress on Smart Home with LeakBot, HomeServe's smart water leak detector. Additional investment was made in the year to support the development and launch of a WiFi version that will facilitate broader coverage and appeal and enable a faster roll out. Further test agreements have been signed with a number of other insurers and the first sizeable orders agreed with partners in Denmark and the UK.
The 100% investment in Checkatrade presents additional exciting opportunities for synergies with the existing UK business, particularly around heating, which will be assessed and pursued throughout FY19. Checkatrade is discussed in more detail under the New Markets section.
Financial performance
Net policy income increased by 4% to GBP221.6m as a result of the increase in net income per customer as customers continued to take richer products with more cover. This was in part offset by the slight reduction in the total customer count. The 0.1m customers from the AA expected to transfer in FY19 did not contribute any revenue to the FY18 results.
Repair network income rose due to the increased number of jobs completed for customers.
Other revenue includes transactions with other Group companies and income from the installation of boilers and smart thermostats. The rise in FY18 was due to the additional revenue generated from boiler installations following the acquisition of Help-Link.
Adjusted operating costs increased 16% reflecting the increased repair cost to complete 12% more jobs. There was also additional one-off investment incurred to integrate Help-Link and remove the previous heating franchise model. In the second half of the year, HomeServe took action to structure its UK business more effectively, resulting in headcount reductions and a one-off cost of c. GBP2.5m. Although this represents a small proportion of the overall UK workforce, it was a difficult decision but one reached without any impact on customer facing roles and to ensure that the business is placed well for the future.
The two percentage point reduction in adjusted operating margin was largely a result of the increased number of repair jobs which carry little margin, costs associated with the headcount reduction and the effect of additional revenue from Help-Link which was loss making in the year due to integration and associated transaction costs.
North America
North America is HomeServe's largest current opportunity. FY18 saw an outstanding performance as continued double digit organic expansion was supplemented by strategic M&A to accelerate ambitious growth plans. Adjusted operating profit more than doubled to $64.4m, demonstrating the ability of the business to scale and integrate its growth opportunities efficiently.
North America results
$million 2018 2017 Change
------------------------------- -------- -------- --------
Revenue
Net policy income 349.1 273.5 +28%
Repair services 12.0 7.7 +57%
Other 14.1 11.8 +19%
------------------------------- -------- -------- --------
Total revenue 375.2 293.0 +28%
Adjusted operating
costs (310.8) (266.8) +17%
------------------------------- -------- -------- --------
Adjusted operating
profit 64.4 26.2 +146%
------------------------------- -------- -------- --------
Adjusted operating
margin 17% 9% +8ppts
------------------------------- -------- -------- --------
North America results 2018 2017 Change
GBPmillion
------------------------------ -------- -------- -------
Revenue
Net policy income 262.4 212.7 +23%
Repair services 9.6 6.0 +58%
Other 10.1 9.1 +12%
------------------------------- -------- -------- -------
Total revenue 282.1 227.8 +24%
------------------------------- -------- -------- -------
Adjusted operating
costs (233.5) (206.6) +13%
------------------------------- -------- -------- -------
Adjusted operating
profit 48.6 21.2 +129%
------------------------------- -------- -------- -------
Adjusted operating
margin 17% 9% +8ppts
------------------------------- -------- -------- -------
North America performance 2018 2017 Change
metrics
----------------------------- --- ----- ----- -------
Affinity partner households m 55 50 +10%
Customers m 3.6 3.0 +20%
Income per customer $ 91 97 -6%
Policies m 5.6 4.5 +25%
Policy retention rate % 83 82 +1ppt
----------------------------- --- ----- ----- -------
Operational performance
The North American business continues to go from strength to strength with a proven track record of strong organic growth supported by the successful integration of acquired policy books. This year Utility Service Partners Inc. (USP) and the policy book of Dominion Products and Services Inc. (DPS) have both been efficiently integrated with existing systems and processes, bringing a key step up in operating leverage and increased margin traction.
Customer numbers increased 20% to 3.6m (FY17: 3.0m). Customer satisfaction remained very high and was reflected in the strong retention rate of 83% (FY17: 82%), and successful marketing campaigns added 1.0m gross new customers (FY17: 0.8m). Double digit organic customer growth of 11% was further enhanced by HomeServe's largest ever acquisition; the policy book of DPS.
The purchase of the DPS policy book was announced on 19 October 2017. It brings a total of c. 0.5m customers and marketing opportunities to c.7m households, for a total enterprise value of $143m. It is structured to complete in two tranches. The first tranche completed on 18 December 2017 and delivered an initial 0.3m customers. Tranche 2 is expected to complete in Autumn 2018, bringing the remaining 0.2m customers. DPS is a highly complementary policy book and marketing has already commenced utilising the Dominion Energy brand to 4m households under tranche 1. The second tranche is expected to bring an additional 3m households and further marketing opportunities with Dominion Energy's own partners.
Total affinity partner households increased to 55m from 50m in FY17 as HomeServe signed an average of two new partners every week, a total of over a hundred new partners for the year with access to around 10m utility households (including tranche 1 of DPS). HomeServe now works with a wide portfolio of almost 550 water, electric and energy utilities and municipals.
It is inevitable that as the number of partners continues to grow, HomeServe or a partner may choose not to renew or extend agreements as circumstances and corporate priorities change. The large portfolio now present in North America ensures that there is no over-reliance on any one partner. During the year the partnerships with Duke Energy and AARP ended with the removal of 5m households from the household count but with no change to our growth expectations.
The pipeline of potential partner opportunities remains strong and HomeServe remains confident of increasing its number of partners throughout FY19. The National League of Cities (NLC) relationship that was acquired with USP has been renewed and its endorsement and support will continue to play an important role.
The existing Membership customer base offers great prospects for Homeserve to market its installation products. Total HVAC installations in the year increased 15% as HomeServe installed furnaces and boilers to meet the wider needs of the customer base beyond simply providing emergency repairs.
The team in North America was recognised with 18 awards at the annual Stevie Awards for Sales & Customer Service, including 3(rd) place overall, rewarding its focus on delivering great customer service.
HomeServe has continued to invest at various stages of the customer journey to further improve the customer experience. Digital channels experienced the largest growth in FY18 with even more customers now choosing to join online. Other technology initiatives such as new field management software have enhanced the operational efficiency of the network and further improved engineer attendance, ensuring customers receive visits at the appointed time. The network of 170 directly employed engineers and over 1,300 sub contractors completed 0.4m jobs, up 12% on FY17.
The Connecticut head office was once again recognised as a Top Place to Work and investment in a new contact centre in Chattanooga will greatly improve staff engagement and establish a hub for customer service excellence. Having begun in Chattanooga with just 35 employees in 2010, the new facility with 350 employees officially opened on 25 April 2018 and is a great indicator of the progress made by HomeServe in North America in less than a decade.
Financial Performance
Net policy income increased 28% to $349.1m (FY17: $273.5m) reflecting the larger customer base and the successful integration of USP and the first tranche of DPS. Repair services income includes the jobs completed by the directly employed network and reflects the growing claim volumes from a higher customer base. Other income includes installation revenue and rose 19%, illustrating the growing HVAC installation volumes.
As expected, income per customer fell slightly to $91 (FY17: $97) due to the inclusion of USP and DPS customers who hold a different product mix and who were not in the prior year metric. A medium term target of $100 net income per customer remains achievable, particularly as excluding the impact of USP and DPS, the income per customer increased to $101 (FY17: $97).
Adjusted operating costs rose 17% to $310.8m (FY17: $266.8m) reflecting continued business growth, a full year of USP and integration costs associated with DPS. The significant increase in the adjusted operating margin, up 8 percentage points to 17%, demonstrates the ability of the business to scale efficiently and integrate the policy books of USP and DPS without incurring substantial additional operating costs.
France
HomeServe France's core Membership business is highly profitable and cash generative. Growth opportunities were pursued with potential new partners and in December 2017 the French business made its first step into providing heating installations through the acquisition of Electrogaz.
France results EURmillion 2018 2017 Change
------------------------------ ------- ------- --------
Revenue
Net policy income 111.7 106.9 +5%
Repair services 0.5 0.5 -4%
Other income 1.0 - +100%
------------------------------- ------- ------- --------
Total revenue 113.2 107.4 +5%
Adjusted operating
costs (77.5) (75.9) +2%
------------------------------- ------- ------- --------
Adjusted operating
profit 35.7 31.5 +13%
------------------------------- ------- ------- --------
Adjusted operating
margin 32% 30% +2ppts
------------------------------- ------- ------- --------
France results GBPmillion 2018 2017 Change
------------------------------ ------- ------- -------
Revenue
Net policy income 98.6 90.7 +9%
Repair services 0.4 0.4 +2%
Other income 1.0 - +100%
Total revenue 100.0 91.1 +10%
------------------------------- ------- ------- -------
Adjusted operating costs (68.5) (64.0) +7%
------------------------------- ------- ------- -------
Adjusted operating profit 31.5 27.1 +16%
------------------------------- ------- ------- -------
Adjusted operating margin 32% 30% +2ppts
------------------------------- ------- ------- -------
France performance metrics 2018 2017 Change
----------------------------- ----- ----- ----- -------
Affinity partner households m 15 15 -
Customers m 1.1 1.0 +1%
Income per customer EUR 106 101 +5%
Policies m 2.3 2.3 -1%
Policy retention rate % 88 89 -1ppt
----------------------------- ----- ----- ----- -------
Operational performance
Total customers increased to 1.1m as France continued to have the highest retention rate in the Group at 88% (FY17: 89%). Customer service standards remained very high as evidenced by achieving the Élu Service Client de l'Année for the second year running. Partner relationships with Veolia and Suez are strong and delivered 0.1m new customers (FY17: 0.2m).
Key to further growth in the Membership business is unlocking a new partnership and there is a pipeline of opportunities at various stages of discussion with energy and water partners. Additional partnership opportunities have been agreed with Veolia to launch a multi-channel approach to marketing, reducing reliance on direct mail and taking advantage of increased calls into Veolia's centralised contact centre to grow the number of sales made directly by the partner, similar to the approach undertaken with Suez. In energy, HomeServe has worked with Butagaz for a number of years and will now partner with them to sell membership products as Butagaz looks to grow its share of the mains domestic gas and electric supply market.
Initial steps were made in FY18 to pursue HomeServe's strategy in heating installations with the acquisition of Electrogaz, a business in the South of France with almost 60 years of expertise in the repair, maintenance and installation of hot water and heating systems, renewable energy devices and domestic air conditioning and ventilation systems. The business has already been successfully integrated and is actively trading as Electrogaz...A HomeServe Company. FY19 will focus on proving out this opportunity and assessing potential to increase presence in this market.
France is also focused on becoming a digital-first business, looking to further improve customer interaction and introduce greater operational efficiency. FY18 focused on enhancing the website and providing the functionality for customers to manage their policy details online. These efforts will be continued by providing customers in France with the same opportunities as those in the UK to also use a HomeServe App and to make a claim online.
Financial performance
Total revenue increased by 5% to EUR113.2m (FY17: EUR107.4m) primarily due to a 5% increase in income per customer which itself benefitted from improved network efficiencies and a reduced cost to serve. Included in other income is EUR1m of post acquisition income from Electrogaz, which was acquired during the year.
Adjusted operating costs were broadly stable at EUR77.5m (FY17: EUR75.9m) resulting in two percentage points improvement in the adjusted operating margin to 32% as revenue increases directly benefitted the bottom line. Adjusted operating margin is expected to remain at around 30%.
Spain
Good revenue growth from the maturing Membership policy book, together with increased efficiency in the repair services (Claims) business delivered increased profitability in Spain.
Spain results EURmillion 2018 2017 Change
--------------------------- -------- -------- -------
Revenue
Net policy income 63.0 57.2 +10%
Repair services 97.1 97.1 -
---------------------------- -------- -------- -------
Total revenue 160.1 154.3 +4%
Adjusted operating costs (141.2) (138.5) +2%
---------------------------- -------- -------- -------
Adjusted operating profit 18.9 15.8 +20%
---------------------------- -------- -------- -------
Adjusted operating margin 12% 10% +2ppts
---------------------------- -------- -------- -------
Spain results GBPmillion 2018 2017 Change
--------------------------- -------- -------- -------
Revenue
Net policy income 55.6 48.3 +15%
Repair services 85.7 81.9 +5%
---------------------------- -------- -------- -------
Total revenue 141.3 130.2 +9%
Adjusted operating costs (124.7) (116.9) +7%
---------------------------- -------- -------- -------
Adjusted operating profit 16.6 13.3 +26%
---------------------------- -------- -------- -------
Adjusted operating margin 12% 10% +2ppts
---------------------------- -------- -------- -------
Spain performance 2018 2017 Change
metrics
--------------------- ----- ----- ----- -------
Affinity partner
households m 12 12 -
Customers m 1.3 1.3 +1%
Income per customer EUR 47 43 +11%
Policies m 1.5 1.5 +2%
Policy retention
rate % 78 78 -
--------------------- ----- ----- ----- -------
Operational performance
Total customers rose 1% to 1.3m as the business in Spain continued to add customers through its current affinity partnership with Endesa. After a strong first half, political unrest and legislative change in Catalonia, as well as launch delays in other regions, slowed customer acquisition in the final six months, with a total of 0.4m gross new customers (FY17: 0.5m) added in the year.
The current partnership with Endesa draws to a close in the coming weeks. Discussions continue to define a future relationship, which could be a non-exclusive claims handling and service only arrangement. This would enable HomeServe to enter discussions with other energy companies. The net effect of not marketing with Endesa is expected to have no significant impact on adjusted operating profit in Spain over the next two years.
The retention rate remained stable at 78% and an increasing number of renewers year on year has driven strong progression in income per customer.
The Claims business ("Repair services"), works with a number of Spain's largest bancassurers managing a large volume of claims across multiple trades and closed 0.8m jobs, in line with the prior year. Jobs continue to be completed by a wide network of over 2,400 sub contractors and 198 franchisees (FY17: 1,972 subcontractors and 197 franchisees).
The Spanish business also intends to pursue an HVAC strategy similar to the approach in the UK and France and is exploring opportunities to enter this space.
Financial performance
Total revenue increased 4% to EUR160.1m driven principally by the maturity of the Membership book and the resultant 11% rise in income per customer to EUR47.
Tight control ensured operating costs rose at a lower rate than revenue, increasing by only 2% on prior year to EUR141.2m. The higher income per customer in Membership, a focus on operating efficiencies in the Claims business and an increasing mix of larger value jobs contributed to the two percentage point increase in the adjusted operating margin.
New Markets
Results - GBPm 2018 2017 Change
------------------------- ------- ------ ----------
Revenue
Italy - 14.8 -100%
Home Experts 18.6 1.8 +958%
-------------------------- ------ ------ --------
Total Revenue 18.6 16.6 +12%
-------------------------- ------ ------ --------
Adjusted operating loss (4.4) (6.0) +29%
-------------------------- ------ ------ --------
Home Experts performance 2018 2017 Change
metrics
-------------------------- --- ----- ----- -------
Checkatrade tradespeople k 29 25 +17%
Habitissimo tradespeople k 29 22 +29%
Checkatrade website
hits m 16.1 15.7 +3%
Habitissimo website
hits m 81.3 55.7 +46%
Operational performance
HomeServe's New Markets segment contains its operations in Italy, business development activities to expand into new geographies and the results of Checkatrade and Habitissimo, its Home Experts initiatives.
The Italian associate, in partnership with Edison Energia, had 0.2m customers (FY17: 0.3m) and continued to market HomeServe's products as part of its own strategy to gain market share of the domestic Italian energy supply market.
Although no new partnerships have yet been established, active business development discussions remain ongoing with a number of prospective utility partners in other geographies. HomeServe continues to believe that its products offer utilities a good opportunity to improve their own profiles and increase the engagement and loyalty of their customers.
Notable progress was made in Home Experts as HomeServe secured full ownership of Checkatrade. Through the initial 40% investment on 13 December 2016, HomeServe had the option to increase its investment by a further 35% in mid 2019 but on 17 November 2017 the option was superseded and HomeServe secured the remaining 60% to take full 100% control.
Securing a controlling stake has facilitated faster development and testing to prove out the proposed model and growth plans. The additional investment that HomeServe can provide has already enabled new payment methods for tradespeople, such as monthly direct debits. Due to working capital constraints Checkatrade previously only offered annual payments but the new options will now attract more tradespeople and enable the introduction of different pricing initiatives. Since taking full control in November 2017, total tradespeople has already increased 9% to 29k and the final quarter of FY18 saw three record months for new tradespeople joining Checkatrade. The pricing initiatives introduced have also already lifted Checkatrade's average revenue per trader.
Key to the long term success of Checkatrade is defining and refining the optimum model for the benefit of consumers as well as tradespeople. Checkatrade continues to attract over a million unique users to the website each month and will look to increase this through further investment in advertising, funded primarily by the new pricing initiatives. Product development such as priority membership options for homeowners that reward repeat usage are also being assessed, as is an emergency on demand product. Attracting more consumers to the website and increasing consumer usage will be a critical factor in simultaneously increasing the number of tradespeople.
Habitissimo, the Spanish Home Experts business, also had a successful year, continuing to grow the number of leads it generates for its tradespeople, increasing to 2.1m from 1.4m in FY17. Habitissimo possesses considerable technical expertise and its digital capabilities have enabled it to quickly and efficiently test a number of additional products and routes to markets. Habitissimo has also developed and piloted software which will increase the engagement of its tradespeople by providing a tool for them to efficiently manage and track their businesses. Checkatrade will continue to develop and test in the UK, but as the two businesses work more closely together, Habitissimo may ultimately provide the technical skills and capabilities to roll the model out efficiently into other markets as it has already demonstrated with a light footprint in Latin America.
Financial Performance
HomeServe accounts for the net result of its Italian operation as an associate with its result included in the overall New Markets investment. Consequently there was no revenue recorded for the year ended 31 March 2018.
The increase in Home Experts revenue was driven largely by a full year's ownership of Habitissimo and acquiring 100% of Checkatrade. Upon taking control on 17 November 2017, Checkatrade became a subsidiary and all results after this date have been fully consolidated. The results of Habitissimo have been consolidated for the full period.
Total investment in New Markets was GBP4.4m (FY17: GBP6.0m), GBP5.7m on an underlying basis, having benefitted from a one-off re-measurement gain of GBP1.3m before deal costs, associated with the acquisition of the remaining 60% of Checkatrade.
FINANCIAL REVIEW
These financial results have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use by the European Union.
Group statutory results
The headline statutory financial results for the Group are presented below.
GBPmillion 2018 2017
----------------------------------------- ------- -------
Total revenue 899.7 785.0
Operating profit 135.0 104.7
Net finance costs (11.7) (6.4)
----------------------------------------- ------- -------
Adjusted profit before tax 141.7 112.4
Amortisation of acquisition intangibles (18.4) (14.1)
----------------------------------------- ------- -------
Statutory profit before tax 123.3 98.3
Tax (27.4) (23.9)
Profit for the year 95.9 74.4
----------------------------------------- ------- -------
Attributable to:
Equity holders of the parent 96.3 74.4
Non-controlling interests (0.4) -
95.9 74.4
------------------------------ ------ -----
The Group delivered 25% growth in profit before tax to GBP123.3m. Operating profit growth was up 29% to GBP135.0m but was offset by an increase in net finance costs to GBP11.7m (FY17: GBP6.4m). Net finance costs rose principally as a result of unwinding interest on deferred consideration in relation to previous M&A activity and costs associated with refinancing HomeServe's debt facilities at the beginning of the financial year.
Statutory profit before tax is reported after the amortisation of acquisition intangibles. The individual financial performance of each business is considered in the business review.
Amortisation of acquisition intangibles
The amortisation of acquisition intangibles of GBP18.4m (FY17: GBP14.1m) relates to customer and other contracts held by businesses, which were acquired as part of business combinations and asset purchases and has increased this year principally due to the acquisition of the policy book of Dominion Products and Service Inc. (DPS) in North America and Checkatrade in the UK.
Tax strategy
The Group has continued to operate within the tax strategy approved by the Board during the financial year ended 31 March 2017. The tax strategy is subject to annual review and reflects HomeServe's status as a plc, and the regulated nature of its business which requires strong governance and consideration of reputation as well as compliance with local laws, regulations and guidance. HomeServe made the UK elements of the tax strategy document publicly available in April 2017 as required by UK legislation.
The Group tax strategy covers how HomeServe:
(i) applies tax governance on an ongoing basis and maintains strong internal controls in order to substantially reduce tax risk;
(ii) will not engage in artificial transactions the sole purpose of which is to reduce tax;
(iii) holds a strategic aim to retain its low tax risk rating as determined by the UK Tax Authority's Business Risk Review process; and
(iv) works with all tax authorities in an open, honest and transparent manner.
Tax charge and effective tax rate
The Group's tax charge in the financial year was GBP27.4m (FY17: GBP23.9m), representing an effective tax rate of 22% (FY17: 24%). The corporate income tax rates in the overseas countries in which the Group operates continue to be higher than the UK corporate income tax rate of 19% (FY17: 20%), which results in a Group effective rate higher than the headline UK rate.
Changes to the corporate income tax rates across a number of countries in which the Group operates have been announced. The UK corporation tax rate of 19% in FY18 is also expected to apply in FY19 and FY20, with a reduction to 17% in FY21 onwards.
During December 2017, the US enacted a comprehensive overhaul of its tax system, which has resulted in a blended (Federal/State) rate of 38% in FY18 (FY17: 40%), which will reduce to 27% in FY19 onwards.
France also enacted new tax legislation in December 2017 which will see its main rate of corporate income tax reduce from 33% in FY18 (FY17: 33%) to 25% as of FY22. Meanwhile, Spain's corporate income tax rate continues to be 25% (FY17: 25%).
As the proportion of the Group's profits earned overseas continues to grow, the effective tax rate of 22% (FY17: 24%) is expected to increase slightly in future years.
Cash flow and financing
HomeServe's business model continues to be highly cash generative with cash generated by operations in FY18 of GBP164.2m (FY17: GBP139.9m), representing a cash conversion ratio against adjusted operating profit of 107% (FY17: 118%). The cash conversion ratio is expected to remain in excess of 100%.
GBPmillion 2018 2017 ----------------------------------------- -------- -------- Adjusted operating profit 153.4 118.8 Amortisation of acquisition intangibles (18.4) (14.1) ----------------------------------------- -------- -------- Operating profit 135.0 104.7 Depreciation and amortisation 62.6 49.5 Non-cash items 9.0 6.8 Increase in working capital (42.4) (21.1) ----------------------------------------- -------- -------- Cash generated by operations 164.2 139.9 Net interest (10.5) (6.4) Taxation (27.2) (20.0) Capital expenditure - Ordinary (54.6) (44.4) Capital expenditure - Partner Payments (16.5) (14.1) Repayment of finance leases (0.6) (1.0) ----------------------------------------- -------- -------- Free cash flow 54.8 54.0 Acquisition of associate - (24.7) Acquisitions of subsidiaries (54.2) (74.2) Acquisition of policy book (53.6) - Dividend from associate 0.4 - Disposal of subsidiary - (1.7) Equity dividends paid (50.4) (40.3) Issue of shares (net of associated issue costs) 123.3 0.9 ----------------------------------------- -------- -------- Net movement in cash and bank borrowings 20.3 (86.0) Impact of foreign exchange 2.9 (6.3) Net debt acquired (0.1) (0.4) Finance leases 0.5 0.8 Opening net debt (261.4) (169.5) ----------------------------------------- -------- -------- Closing net debt (237.8) (261.4) ----------------------------------------- -------- --------
Working capital increased by GBP42.4m in FY18 reflecting the timing of certain supplier payments and continued growth in all businesses.
Capital expenditure included GBP54.6m in relation to ordinary and transformational capital expenditure, the largest elements of which related to the core customer management system in the UK; claims handling and job deployment systems in the UK, North America and Spain; ongoing digitisation in all businesses and the development of a WiFi version of LeakBot in the UK. Total partner payments amounted to GBP16.5m (FY17: GBP14.1m) in respect of the acquisition of customers originated by Endesa in Spain and Suez in France.
The core customer management system is being replaced in the UK. It is anticipated that this new customer-centric system will improve agent processes and provide more opportunity to identify and offer the best solutions for customers' needs. Investments in the engineer and contractor networks in the UK, North America and Spain will improve customer service and enable claims handling and job deployment efficiencies.
An increasing proportion of customers wish to engage with HomeServe digitally at all stages of the customer journey and further investment was made to support this, improving websites in all businesses and enhancing the online claims journey in the UK. This area remains a focus in FY19 with plans to expand the online and mobile self-serve functionality in all businesses.
HomeServe will continue to invest in all of its businesses, including in its new global business lines where it sees significant opportunity to develop its presence in HVAC, Smart Home and Home Experts. Capital expenditure in FY19 is expected to be slightly lower than FY18 before trending towards a normalised rate of GBP35m per annum in FY20 and beyond.
Acquisitions
The Group has incurred a net cash outflow in respect of business combinations of GBP54.2m in the year.
There were three key cash outflows resulting from business combinations in the year ended 31 March 2018;
On 2 August 2017 HomeServe acquired 100% of the issued share capital and obtained control of Help-Link UK Limited for a total cash outflow in the period of GBP6.7m.
On 17 November 2017 HomeServe increased its investment in Sherrington Mews Limited, the holding company of the Checkatrade Group, by 60%, taking its total holding up to 100%. The consideration for the remaining 60% was GBP50m which resulted in a net cash outflow of GBP38.4m for the year. Of the GBP50m, GBP10m was utilised by Checkatrade's founder to subscribe for the allotment and issue of 1,193,317 HomeServe plc shares at a price of GBP8.38 per share (calculated by reference to the closing price on 16 November 2017).
On 29 December 2017 HomeServe acquired 100% of the issued share capital of PXB Invest SAS, the holding company of Electrogaz, a provider of heating installations in France, incurring a net cash outflow of GBP4.6m
In addition to the net cash outflow on the acquisitions above of GBP49.7m, there was a further outflow of GBP4.5m relating to deferred consideration in respect of business combinations in prior periods and an immaterial acquisition in the UK (FY17 GBP3.1m).
A cash outflow of GBP53.6m was also incurred in relation to the policy book of DPS following completion of tranche 1 of the acquisition on 18 December 2017 by HomeServe.
Earnings per share
Basic earnings per share for the year increased from 24.0p to 30.2p, an increase of 26%. On an adjusted basis, earnings per share increased 24% from 27.0p to 33.6p. The weighted average number of shares increased from 309.9m to 318.9m primarily due to the equity placing on 19 October 2017 and also due to shares issued in part consideration for the Checkatrade acquisition and new shares issued in fulfilment of a number of share schemes in the year.
Dividends
Given the Group's good performance and the Board's confidence in its future prospects, the Board is proposing to increase the final dividend to 14.4p per share (FY17: 11.2p) to be paid on 2 August 2018 to shareholders on the register on 6 July 2018.
Together with the interim dividend declared in November 2017 of 4.7p (November 2016: 4.1p), this represents a 25% increase in the total ordinary dividend payment for the year of 19.1p (FY17: 15.3p), which is 1.76x covered by the FY18 adjusted earnings per share (FY17: 1.76x). As previously indicated, the Board continues to adopt a progressive dividend policy.
Financing
In FY18 the Group targeted net debt in the range of 1.0-1.5x EBITDA, measured at 31 March each year. With net debt of GBP237.8m and EBITDA of GBP197.6m the Group was inside this range at 1.2x.
It is four years since the Board last reviewed its capital structure policy, during which time the Group has grown considerably, made and integrated a number of significant acquisitions, and diversified its revenue streams.
Accordingly, the Board has determined that the Group can now support a leverage policy range of 1-2x Net Debt:EBITDA at March year-ends, compared to the previous policy of 1-1 1/2 x. As at present, the Group will be prepared to see leverage outside the new range for reasonable periods of time if circumstances warrant, and the new range itself will be subject to periodic review. With the ordinary seasonality of the business, net debt is expected to increase at the next half year.
During the year, the Group entered into a new multi-currency revolving credit facility with both existing and new banking partners. The new terms of the facility provide committed credit of GBP400m which runs until 31 July 2022 with two one-year extension options, subject to agreement by the banking partners, which would extend the maturity to 31 July 2024. Loans have variable interest rates linked to LIBOR or EURIBOR. With other funding, principally from Private Placements, the Group had over GBP270m headroom against its available sources of debt at the year end.
Net interest paid increased to GBP10.5m (FY17: GBP6.4m) due principally to costs associated with the renewal of the Group's debt facilities in early FY18.
On 19 October 2017, HomeServe placed 15,243,903 of new ordinary shares in HomeServe plc at a price of 820 pence per share, raising gross proceeds of GBP125m. The Placing Shares issued represented, in aggregate, approximately 4.9 per cent of HomeServe's issued ordinary share capital. The successful placing funded the acquisition of DPS and retained balance sheet strength and liquidity to provide the flexibility for future inorganic investment opportunities, including the subsequent purchase of the remaining 60% of Checkatrade.
Foreign exchange impact
The impact of changes in the Euro and USD exchange rates between FY17 and FY18 resulted in a GBP1.6m increase in the reported revenue and a GBP0.8m decrease in adjusted operating profit of the international businesses as summarised in the table below. Beneficial movements in the Euro have been more than offset by a strengthening of Sterling against the USD, particularly in the second half of the year when HomeServe generated the majority of its profits. There was no material difference for the impact of foreign exchange on statutory operating profit.
Effect on (GBPm)
Average exchange Revenue Adj. operating
rate profit
2018 2017 Change 2018 2018
--------------------- ----- -------- --------- ------- -------- ---------------
North America $ 1.33 1.31 2 % (9.1) (2.9)
France EUR 1.13 1.19 (5)% 3.9 1.2
Spain EUR 1.13 1.19 (5)% 6.3 0.9
New Markets EUR 1.13 1.19 (5)% 0.5 -
--------------------- ----- -------- --------- ------- -------- ---------------
Total International 1.6 (0.8)
---------------------------- -------- --------- ------- -------- ---------------
With an increasing proportion of HomeServe's profits generated overseas, the potential translation impact of foreign exchange movements on reported profits may have a larger impact. A ten cent movement in the FY18 average USD rate of 1.33 and the Euro rate of 1.13 would each have had approximately a GBP3.5m impact on full year adjusted operating profit.
Principal Risks and Uncertainties
HomeServe has a robust risk management framework which encompasses the Group's risk policy and overall risk appetite. The framework provides a disciplined and consistent approach across all of HomeServe's business, ensuring a structured response at all levels throughout the Group and across all businesses and geographies, to capture, monitor and mitigate risk.
-- The Audit & Risk Committee is chaired by one of the Non-Executive Directors and is composed of independent Non-Executive directors. The internal and external auditors, the Chief Financial Officer, the Chief Executive Officer and the Chairman are invited, but are not entitled, to attend all meetings. Where appropriate, other Executive Directors and managers also attend meetings at the Chairman's invitation. The external and internal auditors are provided with the opportunity to raise any matters or concerns that they may have, in the absence of the Executive Directors, whether at Committee meetings or, more informally, outside of them.
The Audit & Risk Committee advises the Board on risk appetite and risk strategy, maintains the quality and effectiveness of risk management processes under review and receives regular reports from the Group Risk Committee.
-- The Group Executive Risk Committee is chaired by the Group Chief Financial Officer, it is composed of the Executive Directors and other representatives of each of the Group businesses. The Committee reports to the Audit & Risk Committee. The Board retains the responsibility for the overall evaluation of the Group's risk management processes.
-- The Group Risk Management Team proposes the risk framework across the Group and supports the businesses with the implementation, monitoring of the risk maturity and progress of everyday risk management across each business in the Group.
All risks could negatively impact HomeServe's success or reputation and together have the potential to lead to reduced profitability, higher cash outflows, reduced cash inflows and ultimately lower returns for all stakeholders including employees, partners, creditors and shareholders. HomeServe's robust risk management framework ensures that risks do not go unchecked and controls and mitigations are put in place to reduce exposure and promote the continued success of the business.
Strategic risks are specific to HomeServe's business model and strategy and may pose a fundamental challenge to its future prospects. They include decisions made and actions taken, or indeed not taken, by the Board to determine HomeServe's direction and positioning within the home repairs and improvements market in multiple geographies.
Operational risks relate to failure in HomeServe's processes. Examples include human error, system failure, failure to comply with prevailing legal and regulatory frameworks etc and may lead to, amongst others, business interruption, financial losses and reputational damage.
Financial risks relate to an inability to secure an adequate amount or appropriate mix of short-term and long-term funding (from capital and debt), failure to comply with debt covenants or failure to allocate or invest capital appropriately or on a timely basis.
Risk registers are maintained by the management of each business and are reviewed by the Audit and Risk Committee at each of its meetings. Risks are scored on a gross basis following a standard framework according to likelihood and impact and are reduced on a net basis after consideration and application of relevant mitigations and controls. On a 6x6 matrix, where the highest risk would return '36', HomeServe's risk appetite is relatively low, targeting scores with a maximum rating of 12.
Changes in principal risks in FY18
As the largest business line in each geographic segment, Membership forms the spine of HomeServe's strategic risks and there is considerable overlap with the other three areas; Home Experts, Smart Home and HVAC. As a result the substance of the majority of the strategic risks remains unchanged since the prior year. However, the crystallisation of four distinct areas to support HomeServe's vision to be the world's most trusted provider of home repairs and improvements has leant additional emphasis to certain areas and risks have now been categorised to provide further clarity. Financial and operational risks also remain largely unchanged and are believed to affect all four areas of the vision and strategy equally.
The table below sets out what the Board believes to be the principal risks and uncertainties facing the Group, the mitigating actions for each, and an update on any change in the profile of each risk during the past year. All risks carry equal importance and weighting for the Board, however additional focus and priority may be given to specific risks for a period of time in certain circumstances e.g. following a material acquisition or to implement plans to reduce any risk which exceeds the appetite threshold.
The principal risks and uncertainties below should be read in conjunction with the Business Review and the Financial Review. Additional risks and uncertainties of which HomeServe is not currently aware or which are believed not to be significant may also adversely affect strategy, business performance or financial condition in the future.
1. Market Disruption (Strategic risk)
-------------------------------------------------------------------------
There are a number of competitors providing similar
products and services in HomeServe's existing
markets. There is the potential for competitors
to expand into other geographies and for new
entrants to introduce new products or new technologies
that erode HomeServe's market share.
Over time market disruption may have a negative
impact on KPIs such as customers and policy retention
rates. Net income per customer may decrease if
HomeServe is forced to reduce prices to retain
market share and affinity partner households
may reduce if a partner were lost to a competitor
or decided to offer competing products in-house.
FY18 update
HomeServe's acquisition of 100% of Checkatrade
in FY18 and 70% of Habitissimo in FY17 marked
an entry into the online home repairs and improvements
sector. As one of the few remaining industries
to undergo a substantial shift online there are
a number of companies exploring opportunities
in this sector. There have been no new competitive
entrants in Membership.
Mitigation(s)
HomeServe believes that home assistance cover
and the online model as offered by Checkatrade
serve different customer demographics and needs
so there is little cannibalisation expected of
the existing 8.4m membership customers and it
should not interfere with growth plans for that
area of the business.
-------------------------------------------------------------------------
2. Commercial Partnerships (Strategic Risk)
-------------------------------------------------------------------------
Underpinning HomeServe's success in its chosen
markets are close commercial relationships (affinity
partner relationships) principally with utility
companies, and municipal utility providers. The
loss of one of these relationships could impact
HomeServe's future customer and policy growth
plans and retention rates. Similarly growth plans,
particularly in North America, are focused on
signing new partners to extend reach and provide
new marketing opportunities to grow the business.
FY18 update
HomeServe's North American business signed over
100 partners in FY18 and received Hart-Scott
Rodino competition clearance for the Dominion
Products and Services Inc. (DPS) policy book
acquisition. Tranche 1 completed on 18 December
2017 and tranche 2 is expected to complete in
autumn 2018, bringing additional partner opportunities.
In the UK HomeServe signed new deals with E.ON
and Octopus Energy and HomeServe continues to
work with key partners in France. In Spain the
current partnership with Endesa draws to a close
in the coming weeks. Discussions continue to
define a future relationship, which could be
a non-exclusive claims handling and service only
arrangement. This would enable HomeServe to enter
discussions with other energy companies. The
net effect of not marketing with Endesa is expected
to have no significant impact on adjusted operating
profit in Spain over the next two years.
Mitigation(s)
With over 570 partners across the Group it is
inevitable that HomeServe or a partner may choose
not to renew a partnership as circumstances and
priorities change. With wider portfolios of partners
in the UK and North America this is less of an
issue. Where relationships are more concentrated
e.g. France and Spain HomeServe regularly monitors
partnerships and maintains frequent two-way dialogue.
The majority of partnerships are secured under
long-term contracts which HomeServe will often
seek to proactively renew prior to the end of
the contract term.
-------------------------------------------------------------------------
3. International Development (Strategic Risk)
-------------------------------------------------------------------------
Part of HomeServe's stated strategy is to pursue
opportunities to expand into new geographies
via a joint venture with a utility partner. There
is a risk that this strategy is not executed
due, for example, to an inability to find a suitable
partner. As a consequence HomeServe may incur
investment in management time and company resources
that does not provide a return. There is also
the risk that a partner may be signed and at
a later date either the partner or the geography
are found to be inappropriate.
If no new geographies are entered, there will
be slower progress in increasing Affinity Partner
Households and there may be a decline in other
KPIs and profitability generally if management
time and resource becomes strained.
FY18 update
HomeServe continues to explore international
development opportunities. As yet no firm agreement
has been reached but there remains a pipeline
of active partner discussions.
Mitigation(s)
HomeServe conducts thorough market research on
all potential geographies and will only enter
those perceived as lower risk on the basis of
micro and macro factors including, amongst others,
corruption index, ease of doing business, quality
of housing stock, quality and experience of potential
utility partners. A dedicated International Development
team ensures sufficient management bandwidth
for the overall business.
-------------------------------------------------------------------------
4. M&A strategy (Strategic Risk)
-------------------------------------------------------------------------
HomeServe has increased its M&A activity in recent
years as a means to accelerate a number of strategic
goals e.g. partner and customer growth in North
America, customer acquisition in the UK. There
is a risk that HomeServe overpays for transactions
or underestimates the time and resource required
to integrate new businesses, potentially leading
to lower than anticipated cash inflows and revenue,
increased costs, reduced profitability and an
increased likelihood of impairment. By contrast
a successful M&A strategy should diversify risk
by, for example, introducing new partners and
channels, increasing profitability and should
lead to increases in KPIs such as customers and
policies.
FY18 update
During FY18 HomeServe completed a number of acquisitions,
the largest of which were the policy book of
DPS in North America, the remaining 60% share
of Checkatrade and Help-Link in the UK.
Mitigation(s)
HomeServe conducts thorough due diligence and
consults with experienced advisers when considering
any transaction. The Group has strict investment
hurdles and all transactions are expected to
clear these. All transactions are subject to
local Board approval with Plc Board approval
required for all material transactions. There
are dedicated transformation and integration
teams in all businesses and HomeServe may seek
to retain key management and personnel to provide
greater surety around the achievement of the
associated investment cases.
-------------------------------------------------------------------------
5. HVAC Integration (Strategic Risk)
-------------------------------------------------------------------------
The acquisition and integration of smaller HVAC
businesses is a way to accelerate HomeServe's
progress in this business line. As distinct from
the M&A risk listed above, the integration risk
relates specifically to integrating the HVAC
businesses with HomeServe's existing Membership
businesses and its ability to provide HVAC products,
like installations, to Membership customers and
also provide HVAC customers with Membership products.
Failure to integrate businesses quickly and effectively
could increase cost, resulting in failure to
achieve predicted revenues and potentially lead
to impairment.
FY18 update
There has been an HVAC acquisition in each of
the UK and France.
Mitigation(s)
There are dedicated teams in each business tasked
with business change and transformation and ensuring
businesses are integrated and their subsequent
performances are appraised. The single acquisitions
in the UK and France will enable a blueprint
for successful integration and best practice
for any further similar acquisitions.
-------------------------------------------------------------------------
6. IT & Cyber Security (Operational Risk)
-------------------------------------------------------------------------
In line with other businesses HomeServe is subject
to the increased prevalence and sophistication
of cyber-attacks which could result in unauthorised
access to customer and other data or cause business
disruption to services. A successful cyber attack
might have a significant impact on reputation,
reducing the trust that customers place in HomeServe
and could lead to legal liability, regulatory
action and increased costs to rectify. A lapse
in internal controls and a subsequent data breach
or loss would have a similar impact.
Total customer numbers and policy retention rates
may reduce and partners may terminate affinity
relationships if they perceive customer data
to be at risk.
FY18 update
Managing this risk remains a key area of focus
and a high priority. A permanent Group Chief
Information Security Officer to oversee information
security strategy and governance across the Group
is now in position. HomeServe has a dedicated
role responsible for information security in
each business and during the year, defined an
Information and Cyber Security Strategy to focus
improvement activities over the next 4 years.
HomeServe continued to complete cyber audits
as part of its annual assurance plan and will
continue to do so in FY19.
General Data Protection Regulation (GDPR) regulation
introduces wide ranging changes affecting data
protection and data privacy. A Group initiative
has been led by HomeServe's Data Protection Officer
to ensure compliance ahead of the 25 May 2018
enforcement date.
Mitigation(s)
HomeServe has a number of defensive and proactive
practices across the Group to mitigate this risk.
There is a detailed information security policy,
which is communicated across the Group and training
is provided as required. Regular penetration
testing is in place to assess defences and HomeServe
continues to invest in IT security, ensuring
a secure configuration, access controls, data
centre security and effective communication of
policies and procedures to all employees.
-------------------------------------------------------------------------
7. Underwriting Capacity and Concentration (Operational
Risk)
-------------------------------------------------------------------------
The Membership business line markets and administers
policies that are underwritten by independent
third party underwriters. HomeServe acts as an
insurance intermediary and does not take on any
material insurance risk. If underwriters were
unable or unwilling to underwrite these risks
and HomeServe were unable to find alternative
underwriters it would require the risk to be
underwritten directly, thereby exposing the business
to material insurance risk, which is contrary
to its preferred operating model. Obtaining relevant
regulatory approvals for a new underwriter may
take time, leading to business disruption. A
material change in the operating model would
also drive a change in accounting policy that
could affect short term profitability. Customer
numbers and retention rates may fall if customers
experience reduced service levels or are not
covered throughout any period of disruption.
FY18 update
Underwriting capacity was increased in FY17 with
additional underwriters added in North America,
France and Spain. There have been no new relationships
entered into this year but all existing relationships
remain strong.
Mitigation(s)
Regular meetings take place in all territories
to review and understand underwriting performance
and to accommodate growth in the customer and
policy books as a result of M&A activity. With
the exception of the UK, HomeServe works with
a number of different underwriters so is not
materially dependent on one sole provider. In
the UK where there is one main underwriter, HomeServe
maintains relationships with a number of other
underwriters who are willing and able to underwrite
the business. HomeServe undertakes regular reviews
with all underwriters to ensure that current
product performance and trends are understood.
-------------------------------------------------------------------------
8. Regulation & Customer Focus (Operational Risk)
-------------------------------------------------------------------------
HomeServe is subject to regulatory requirements
in each of its markets, particularly relating
to product design, marketing materials, sales
processes and data protection. Failure to comply
with regulatory requirements in any of its countries
could result in the suspension, either temporarily
or permanently, of certain activities.
Much regulation is intended to protect the rights
and needs of consumers and failure to adhere
to the high expectations customers have for HomeServe
could lead to reduced retention and higher customer
losses.
In addition, legislative changes relating to
partners may change their obligations with regard
to the infrastructure they currently manage and
hence the products and services HomeServe can
offer to customers. It is possible such legislative
changes could reduce, or even remove, the need
for some of HomeServe products and services.
HomeServe is also subject to wider regulation
concerning companies outside of its industry
including e.g. anti-corruption, anti-fraud and
bribery, modern slavery etc. Specific policies
can be found at
http://www.homeserveplc.com/about-us/corporate-governance/policies.aspx
FY18 update
New regulation came into effect in the UK in
FY18 affecting the whole insurance industry,
which requires companies to disclose prior year
prices on customer renewal documents. HomeServe
has ensured all renewal documents are compliant
and changes were made in line with the required
timescale.
The Insurance Distribution Directive (IDD) is
a further piece of EU-led regulation affecting
all of HomeServe's European businesses, applied
from February 2018 and requiring that all sales
adequately assess and demonstrate customer demands
and needs for HomeServe's products. Steps have
been taken in each of the UK, France and Spain
to ensure full compliance.
In the prior year the primary regulator in the
UK, the Financial Conduct Authority (FCA), reduced
the intensity of its supervision. The reduced
level of supervision has continued throughout
this financial year.
Mitigation(s)
HomeServe believes that regulation has a positive
impact on the business and encourages a culture
that promotes customers' interests and will improve
HomeServe's prospects over both the short and
long term. HomeServe complies with local regulation
in all of its businesses as a minimum but will
also seek to take best practice from one business
and apply it to all others.
HomeServe has regulatory specialists, compliance
teams and Non-Executive Directors in each business
to help ensure that all aspects of the legislative
regime in each territory are fully understood
and adopted as required.
Specifically in the UK, HomeServe maintains regular
dialogue with the FCA, while in North America
there is regular contact with the Attorneys General.
In other businesses, dialogue is maintained with
local regulators.
HomeServe keeps up to date with changes in government
and regulatory policy, which ensures that products
and services are designed, marketed and sold
in accordance with all relevant legal and regulatory
requirements and that the terms and conditions
are appropriate and meet the needs of customers.
-------------------------------------------------------------------------
9. Recruitment & Talent (Operational Risk)
-------------------------------------------------------------------------
HomeServe's ability to meet growth expectations
and compete effectively is, in part, dependent
on the skills, experience and performance of
its personnel. The inability to attract, motivate
or retain key talent could impact overall business
performance.
FY18 update
HomeServe continued to enjoy growth throughout
FY18. The Group is larger than 12 months ago
and engaging skilled personnel remains of utmost
importance.
Mitigation(s)
Employment policies, remuneration and benefits
packages and long-term incentives are regularly
reviewed and designed to be competitive with
other companies.
Employee surveys, performance reviews and regular
communication of business activities are just
some of the methods used to understand and respond
to employees' views and needs.
Processes are in place to identify high performing
individuals and to ensure that they have fulfilling
careers, and HomeServe is managing succession
planning effectively. A Director of Group Talent
was appointed in FY18, looking at how HomeServe
develops and promotes its best talent and future
leaders.
-------------------------------------------------------------------------
10. IT Investment (Operational Risk)
-------------------------------------------------------------------------
The Group relies on several key systems to manage
its customer interactions. Appropriate and timely
maintenance and investment is required to ensure
systems continue to meet the changing needs of
the business and its customers. Failure to invest
appropriately to manage customer interactions
and provide high quality service may result in
lower retention and higher customer losses. There
is also a dependence on quality 'back-office'
systems and any failure in those may lead to
business interruption and could jeopardise the
ability to analyse performance indicators and
react to any trends. Over investment in any new
initiatives could see investment outweigh future
benefits and lead to impairment.
FY18 update
The UK continues to develop its replacement customer
management system. This is a significant project
intended to deliver an improved customer experience
and a number of marketing opportunities and operational
efficiencies. Any significant delays in the project
or faults in its design or implementation could
adversely impact the intended benefits and lead
to increased costs, reduced revenues and asset
impairment.
There has also been investment in the core claims
handling and network management software in the
UK, North America and Spain. Such investments
enable an effective customer journey and efficient
and scalable management of networks.
Mitigation(s)
All investment decisions are subject to the Group's
strict investment criteria and hurdles. Major
IT programmes are allocated specific governance
structures and oversight with members of senior
management sitting on the Programme Board.
HomeServe engages a number of external advisers
on large software projects to provide appropriate
breadth and depth of experience and expertise
to ensure there is no over-reliance on any one
supplier and to support management in project
delivery.
-------------------------------------------------------------------------
11. Digital & Innovation (Operational Risk)
-------------------------------------------------------------------------
As in other industries, customers in all businesses
increasingly wish to engage with HomeServe by
digital means: joining online and maintaining
details or making a claim via HomeServe's website
and App or posting onto social media channels
such as Twitter and Facebook. If HomeServe is
not flexible enough to respond to changing needs,
customers may explore competitor products and
choose not to renew. There is also a reputational
risk as complaints logged via social media can
quickly escalate if not dealt with in an appropriate
and timely manner.
There is also an increasing demand for innovative
products in HomeServe's markets and the adoption
of 'Smart Home' products continues to grow.
FY18 update
A comprehensive HomeServe App was launched in
the UK in FY18 enabling customers to manage details,
make claims and explore hints and tips from their
smart phone.
HomeServe owns a stake in Tado, a smart thermostat
manufacturer and developed a WiFi version for
its smart water leak detector "LeakBot" in FY18.
Mitigation(s)
HomeServe continues to review and respond to
customer comments and needs and customers are
offered a number of channels through which they
can engage with HomeServe: telephone, website,
Digital Live Chat, paper, email and social media.
The developing Home Experts business also offers
an alternative for customers seeking a fully
digital experience.
-------------------------------------------------------------------------
12. Financial
-------------------------------------------------------------------------
The main financial risks are the availability
of short-term and long-term funding to meet business
needs and take advantage of strategic priorities
such as M&A opportunities, the risk of policyholders
not paying monies owed, and fluctuations in interest
rates and exchange rates. Following the UK's
decision to leave the European Union the Group
could be subject to higher exchange rate fluctuations.
FY18 update
On 1 August 2017, the Group entered into a new
multi-currency revolving credit facility with
both existing and new banking partners. The new
terms of the facility provide committed credit
of GBP400m which runs until 31 July 2022 with
two one-year extension options, subject to agreement
by the banking partners, which would extend the
maturity to 31 July 2024. Loans have variable
interest rates linked to LIBOR or EURIBOR. With
other funding, principally from Private Placements,
HomeServe had over GBP270m headroom against its
available sources of debt at the year end.
HomeServe completed a successful GBP125m equity
placing on 19 October 2017 retaining balance
sheet strength and liquidity and providing flexibility
for the acquisition of DPS and for future inorganic
investment opportunities.
Interest rate risk
HomeServe's policy is to manage interest cost
using a mix of fixed and variable rate borrowings.
Where necessary, this is achieved by entering
into interest rate swaps for certain periods,
in which HomeServe agrees to exchange, at specified
intervals, the difference between fixed and variable
rate interest amounts calculated by reference
to an agreed notional principal amount. These
swaps are designated to economically hedge underlying
debt obligations.
Credit risk
The risk associated with cash and cash equivalents
is managed by only depositing funds with reputable
and creditworthy banking institutions. The risk
of a policyholder defaulting is mitigated as
any policy cover will cease as and when any premium
fails to be paid.
Liquidity risk
HomeServe manages liquidity risk by maintaining
adequate reserves and banking facilities and
continuously monitoring forecast and actual cash
flows.
Foreign exchange risk
Short term foreign exchange risk is mitigated
with the natural hedging provided by the geographical
spread of the businesses. While this will protect
against some of the transaction exposure, HomeServe's
reported results would still be impacted by the
translation of non-UK operations.
-------------------------------------------------------------------------
Viability statement
In accordance with provision C.2.2 of the UK Corporate Governance Code 2014, the Directors have assessed the viability of the Group over a three year period to 31 March 2021. The Directors believe that a three year forward looking period is appropriate as it is aligned to the timeframe that management focus upon, the performance period in respect of the long-term incentive scheme for senior management and it is the period of assessment for recoverable values of cash generating units.
The Group has a formalised process of budgeting, reporting and review along with procedures to forecast its profitability, capital position, funding requirement and cash flows. These plans provide information to the Directors which is used to ensure the adequacy of resources available for the Group to meet its business objectives, both on a short-term and strategic basis. The plans for the period commencing on 1 April 2018 were reviewed by the Executive Committee in February and then approved by the Board in March 2018.
In making this statement, the Board carried out a robust assessment of the principal risks facing the Group. The Principal Risks and Uncertainties sets out the principal strategic, operational and financial risks which could threaten HomeServe's business model, future performance and growth plans and its liquidity or solvency. HomeServe has a robust risk management framework which addresses its risk appetite and risk policy. All major risks are scored based on their potential impact and likelihood and are reviewed regularly by the Audit & Risk Committee.
Various severe but plausible stress tests have been performed both on individual and combined scenarios which modelled;
-- the impact of the loss of a key commercial partner
-- the impact of a reduced customer focus and a resultant reduction in customer satisfaction and retention
-- market disruption from a new competitor -- the impact of new or amended regulation and legislation -- the impact of losing a key underwriting relationship
Stress tests indicated that no single scenario would impact the viability of the Group over the next three years. As might be expected the impact increases if different risks were to materialise simultaneously, however it is considered unlikely that such a scenario would occur given the nature and relative diversification of the business. In such scenarios HomeServe would also be able to take decisions to protect the profitability of the business over a three year period by, for example, scaling back marketing investment to offset any reductions in income.
The Directors' assessment has been made with reference to the geographical spread of HomeServe's operations and its strong financial position resulting from a large portfolio of commercial partnerships and high customer retention.
The business is geographically spread across the UK, Continental Europe and North America; in each established territory, the business has long-term contractual relationships with utility businesses providing access to in excess of 109m households under Affinity Partner brands. Retention rates are high across all established businesses, resulting in stable and recurring cash flows from a large, diverse customer base.
Considering the Group's current position, the principal risks and the Board's assessment of the Group's future, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over a period of at least three years to 31 March 2021.
Going concern
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the strategic report.
The Directors have reviewed the Group's budget, forecast and cash flows for FY19 and beyond, and concluded that they are in line with their expectations with regards to HomeServe's strategy and future growth plans. In addition, the Directors have reviewed the Group's position in respect of material uncertainties and have concluded that there are no items that would affect going concern or that should be separately disclosed.
The Directors have concluded that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
David Bower
Chief Financial Officer
22 May 2018
Group Income Statement
Year ended 31 March 2018
2018 2017
Notes GBPm GBPm
------------------------------------ ------ -------- --------
Continuing operations
Revenue 3 899.7 785.0
Operating costs (765.7) (680.5)
Share of results of associates 1.0 0.2
Operating profit 135.0 104.7
Investment income 0.1 0.3
Finance costs (11.8) (6.7)
Profit before tax and amortisation
of acquisition intangibles 141.7 112.4
Amortisation of acquisition
intangibles (18.4) (14.1)
Profit before tax 123.3 98.3
Tax 4 (27.4) (23.9)
------------------------------------ ------ -------- --------
Profit for the year 95.9 74.4
------------------------------------ ------ -------- --------
Attributable to:
Equity holders of the parent 96.3 74.4
Non-controlling interests (0.4) -
------------------------------------ ------ -------- --------
95.9 74.4
------------------------------------ ------ -------- --------
Dividends per share, paid
and proposed 5 19.1p 15.3p
Earnings per share
Basic 6 30.2p 24.0p
Diluted 6 29.7p 23.6p
------------------------------------ ------ -------- --------
Group Statement of Comprehensive Income
Year ended 31 March 2018
2018 2017
GBPm GBPm
--------------------------------------------- ------- ------
Profit for the year 95.9 74.4
Items that will not be reclassified
subsequently to profit and loss:
Actuarial gain/(loss) on defined
benefit pension scheme 2.1 (3.4)
Deferred tax (charge)/credit relating
to actuarial re-measurements (0.4) 0.6
--------------------------------------------- ------- ------
1.7 (2.8)
Items that may be reclassified subsequently
to profit and loss:
Exchange movements on translation
of foreign operations (10.2) 20.8
Fair value losses on cash flow hedges (0.5) -
(10.7) 20.8
Total other comprehensive (expense)/income (9.0) 18.0
Total comprehensive income for the
year 86.9 92.4
--------------------------------------------- ------- ------
Attributable to:
Equity holders of the parent 87.3 92.4
Non-controlling interests (0.4) -
--------------------------------------------- ------- ------
86.9 92.4
--------------------------------------------- ------- ------
Group Balance Sheet
31 March 2018
2018 2017
Notes GBPm GBPm
---------------------------------- ------ -------- --------
Non-current assets
Goodwill 386.6 301.9
Other intangible assets 7 384.8 288.6
Property, plant and equipment 39.9 37.0
Interests in associates 5.5 32.1
Other investments 8.7 8.5
Deferred tax assets 6.8 7.6
Retirement benefit assets 4.7 0.7
---------------------------------- ------ -------- --------
837.0 676.4
---------------------------------- ------ -------- --------
Current assets
Inventories 4.3 2.7
Trade and other receivables 515.7 455.1
Cash and cash equivalents 8 57.8 46.2
---------------------------------- ------ -------- --------
577.8 504.0
---------------------------------- ------ -------- --------
Total assets 1,414.8 1,180.4
---------------------------------- ------ -------- --------
Current liabilities
Trade and other payables (508.5) (456.2)
Current tax liabilities (10.4) (9.2)
Obligations under finance leases 8 (0.5) (0.6)
Bank and other loans 8 (38.0) (35.9)
(557.4) (501.9)
---------------------------------- ------ -------- --------
Net current assets 20.4 2.1
---------------------------------- ------ -------- --------
Non-current liabilities
Bank and other loans 8 (256.7) (270.1)
Other financial liabilities (23.4) (14.4)
Deferred tax liabilities (25.5) (23.0)
Obligations under finance leases 8 (0.4) (1.0)
---------------------------------- ------ -------- --------
(306.0) (308.5)
---------------------------------- ------ -------- --------
Total liabilities (863.4) (810.4)
---------------------------------- ------ -------- --------
Net assets 551.4 370.0
---------------------------------- ------ -------- --------
Equity
Share capital 9 8.9 8.4
Share premium account 171.8 45.7
Share incentive reserve 22.1 18.3
Currency translation reserve 16.1 26.3
Available for sale reserve 1.8 1.8
Other reserves 82.2 72.2
Retained earnings 248.1 196.5
---------------------------------- ------ -------- --------
Attributable to equity holders
of the parent 551.0 369.2
---------------------------------- ------ -------- --------
Non-controlling interests 0.4 0.8
---------------------------------- ------ -------- --------
Total Equity 551.4 370.0
---------------------------------- ------ -------- --------
Group Statement of Changes in Equity
Year ended 31 March 2018
Attributable
to
equity
Available holders
Share Share Currency for of Non
Share premium incentive translation sale Other Retained the controlling Total
capital account reserve reserve reserve reserves earnings parent interest Equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ --------
Balance at 1
April 2017 8.4 45.7 18.3 26.3 1.8 72.2 196.5 369.2 0.8 370.0
Profit for the
year - - - - - - 96.3 96.3 (0.4) 95.9
Other
comprehensive
(expense) /
income for
the
year - - - (10.2) - (0.5) 1.7 (9.0) - (9.0)
------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ --------
Total
comprehensive
income - - - (10.2) - (0.5) 98.0 87.3 (0.4) 86.9
Dividends paid
(note 5) - - - - - - (50.4) (50.4) - (50.4)
Issue of share
capital 0.5 126.1 - - - 10.0 - 136.6 - 136.6
Share based
payments - - 8.1 - - - - 8.1 - 8.1
Share options
exercised - - (4.3) - - - 1.0 (3.3) - (3.3)
Basis adjustments
on hedged items - - - - - 0.5 - 0.5 - 0.5 Tax on exercised share options (note 4) - - - - - - 2.8 2.8 - 2.8 Deferred tax on share options (note 4) - - - - - - 0.2 0.2 - 0.2 ------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ -------- Balance at 31 March 2018 8.9 171.8 22.1 16.1 1.8 82.2 248.1 551.0 0.4 551.4 ------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ --------
Year ended 31 March 2017
Attributable
to
equity
Available holders
Share Share Currency for of Non
Share premium incentive translation sale Other Retained the controlling Total
capital account reserve reserve reserve reserves earnings parent interest Equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ -------
Balance at 1
April 2016 8.3 41.1 16.0 5.5 1.8 72.1 171.8 316.6 - 316.6
Profit for the
year - - - - - - 74.4 74.4 - 74.4
Other
comprehensive
income /
(expense)
for the year - - - 20.8 - - (2.8) 18.0 - 18.0
------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ -------
Total
comprehensive
income - - - 20.8 - - 71.6 92.4 - 92.4
Dividends paid
(note 5) - - - - - - (40.3) (40.3) - (40.3)
Issue of share
capital 0.1 4.6 - - - - - 4.7 - 4.7
Issue of trust
shares - - - - - 0.1 (0.1) - - -
Share based
payments - - 6.6 - - - - 6.6 - 6.6
Share options
exercised - - (4.3) - - - 0.4 (3.9) - (3.9)
Changes in
non-controlling
interest - - - - - - - - 0.8 0.8
Obligation under
put option - - - - - - (9.3) (9.3) - (9.3)
Tax on exercised
share options
(note 4) - - - - - - 2.0 2.0 - 2.0
Deferred tax
on share options
(note 4) - - - - - - 0.4 0.4 - 0.4
------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ -------
Balance at 31
March 2017 8.4 45.7 18.3 26.3 1.8 72.2 196.5 369.2 0.8 370.0
------------------- -------- -------- ---------- ------------ ---------- --------- --------- ------------- ------------ -------
Other reserves comprise of the Merger, Own shares, Capital redemption and Hedging reserves. Full details of these reserves are included in Note 26 of the Annual Report and Accounts 2018.
Group Cash Flow Statement
Year ended 31 March 2018
2018 2017
Notes GBPm GBPm
--------------------------------------- ------ -------- --------
Operating profit 135.0 104.7
Adjustments for:
Depreciation of property, plant
and equipment 8.0 6.9
Amortisation of intangible assets 7 54.6 42.6
Share-based payments expense 9.1 7.4
Share of profit of associates (1.0) (0.2)
Loss on disposal of property,
plant and equipment and software 2.1 0.4
Gain on re-measurement of associate (0.9) -
on acquisition of control
Decrease in other financial (0.3) -
liabilities
Bargain purchase on acquisition - (0.7)
Profit on disposal of subsidiary - (0.1)
--------------------------------------- ------ -------- --------
Operating cash flows before
movements in working capital 206.6 161.0
(Increase)/decrease in inventories (1.4) 0.4
Increase in receivables (60.7) (75.5)
Increase in payables 19.7 54.0
Net movement in working capital (42.4) (21.1)
Cash generated by operations 164.2 139.9
Income taxes paid (27.2) (20.0)
Interest paid (7.5) (6.7)
--------------------------------------- ------ -------- --------
Net cash inflow from operating
activities 129.5 113.2
--------------------------------------- ------ -------- --------
Investing activities
Interest received 0.1 0.3
Proceeds on disposal of fixed 0.6 -
assets
Disposal of subsidiary - (1.7)
Purchases of intangible assets (114.3) (50.9)
Purchases of property, plant
and equipment (11.0) (7.6)
Acquisition of investment in
associate - (24.7)
Dividend received from associate 0.4 -
Net cash outflow on acquisition
of subsidiaries 11 (50.3) (74.2)
Net cash used in investing activities (174.5) (158.8)
--------------------------------------- ------ -------- --------
Financing activities
Dividends paid 5 (50.4) (40.3)
Repayment of finance leases (0.6) (1.0)
Deferred and contingent consideration
paid on acquisition of subsidiaries 11 (3.9) -
Issue of shares from the employee
benefit trust - 0.1
Proceeds on issue of share capital 124.1 0.8
Costs associated with issue (0.8) -
of share capital
New bank and other loans raised 221.0 103.3
Costs associated with new bank (3.1) -
and other loans raised
Decrease in bank and other loans (226.5) (29.8)
--------------------------------------- ------ -------- --------
Net cash generated by financing
activities 59.8 33.1
--------------------------------------- ------ -------- --------
Net increase/(decrease) in cash
and cash equivalents 14.8 (12.5)
--------------------------------------- ------ -------- --------
Cash and cash equivalents at
beginning of year 46.2 54.2
Effect of foreign exchange rate
changes (3.2) 4.5
--------------------------------------- ------ -------- --------
Cash and cash equivalents at
end of year 57.8 46.2
--------------------------------------- ------ -------- --------
Notes to the condensed set of financial statements
1. Basis of preparation
While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs) adopted for use by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs in June 2018.
The financial information set out above does not constitute the Group's statutory financial statements for the years ended 31 March 2018 or 31 March 2017, but is derived from those financial statements. Statutory financial statements for FY17 prepared under IFRSs have been delivered to the Registrar of Companies and those for FY18 will be delivered following the Company's Annual General Meeting. The auditor, Deloitte LLP, has reported on those financial statements; its reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006. These financial statements were approved by the Board of Directors on 22 May 2018.
2. Accounting policies
The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's 31 March 2017 audited financial statements, except as described below.
Adoption of new or revised standards and accounting policies
The following amendments to accounting standards have been adopted in the year:
Amendments to IAS 7 Disclosure Initiative
Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses
None of the amendments listed above have had any material impact on the amounts reported in this consolidated set of financial statements.
Standards in issue but not yet effective
At the date of authorisation of these financial statements the following Standards and Interpretations, which have not been applied in these financial statements, were in issue but not yet effective (not all of which have been endorsed by the EU):
IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases IFRS 17 Insurance Contracts
IFRIC 22 Foreign Currency Transactions and Advance Consideration
IFRIC 23 Uncertainty over Income Tax Treatments
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions
Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
Amendments to IFRS 9 Prepayment Features with Negative Compensation
Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
Amendments to IAS 19 Plan Amendment, Curtailment or Settlement Amendments to IAS 40 Transfers of Investment Property Annual Improvements to IFRSs 2014-2016 Cycle - IFRS 1 and IAS 28 Amendments Annual Improvements to IFRSs 2014-2016 Cycle - IFRS 12 Amendments Annual Improvements to IFRSs 2015-2017 Cycle 2. Accounting policies (continued)
Standards in issue but not yet effective (continued)
Clarifications to IFRS 15 Revenue from Contracts with Customers
Conceptual Framework Amendments to References to the Conceptual Framework in
IFRS Standards
At 31 March 2018 the status of the Group's analysis as to the impact that IFRSs 9, 15 and 16 will have on the financial statements for the years ended 31 March 2019 (IFRSs 9 and 15) and 31 March 2020 (IFRS 16) has concluded the following:
- IFRS 9 will not have a material effect on the financial statements, with only limited amendments expected to the classification of financial assets, the timing of credit loss recognition under the expected credit loss model for impairment, and disclosures. This is due to the nature of the business model where the majority of customers pay in advance.
The Group intends to adopt this standard for the year ended 31 March 2019, in line with its mandatory effective date.
- IFRS 15 will not have a material effect on the financial statements. The Group's assessment indicates that, while changes to revenue disclosures will be required together with the re-categorisation of certain existing intangible assets that represent contract costs under IFRS 15, the impact on existing revenue recognition patterns will be immaterial.
The Group intends to adopt this standard for the year ended 31 March 2019, in line with its mandatory effective date.
- IFRS 16 will have a significant impact on the Group Balance Sheet through the recognition of 'Right of Use' (RoU) assets and liabilities for lease payments in respect of arrangements previously classified as operating leases under IAS 17. Additional disclosures will also be required. Although the standard is not expected to have a material impact on profit after tax, Group EBITDA will increase due to a reduction in operating rental costs, replaced by higher interest and depreciation charges. Further, while total cash flows will remain consistent, rental outflows will now be presented under financing activities, where they were previously recorded as operational outflows, increasing the Group's cash conversion percentage.
The Group's operating lease commitments as at 31 March 2018 (see note 31 of the Annual Report and Accounts 2018) of GBP37.8m are the best indicator of the estimated size of the RoU assets and lease liabilities likely to be recognised on balance sheet at transition. The transition values are subject to change due to:
- Judgements inherent in calculating lease liabilities (e.g. determining the lease term, the discount rate and assessing variable lease payments)
- The impact of the Group's operational activities on its lease obligations between 31 March 2018 and the date of transition to IFRS 16
The Group intends to adopt this standard for the year ended 31 March 2020, in line with its mandatory effective date.
The Group will continue to progress its impact assessment regarding IFRS 16 during the first half of FY19 and will provide a further update in the interim report for the period ending 30 September 2018.
The Directors do not expect that the adoption of the other Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future years.
3. Segmental analysis
IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker, who is considered to be the Chief Executive, to allocate resources to the segments and to assess their performance. The operating segments are consistent with those set out in the Business Review.
Segment operating profit/(loss) represents the result of each segment including allocating costs associated with head office and shared functions, but without allocating investment income, finance costs, and tax. This is the measure reported to the Chief Executive for the purposes of resource allocation and assessment of segment performance.
The accounting policies of the operating segments are the same as those described in note 2 of the Annual Report and Accounts 2018. Group cost allocations are deducted in arriving at segmental operating profit. Inter-segment revenue is charged at prevailing market prices.
North New
UK America France Spain Markets Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ------ --------- ------- ------ --------- -------
Revenue
Total revenue 365.6 282.1 100.0 141.3 18.6 907.6
Inter-segment (7.9) - - - - (7.9)
External revenue 357.7 282.1 100.0 141.3 18.6 899.7
------------------------------ ------ --------- ------- ------ --------- -------
Result
Segment operating
profit/(loss) pre
amortisation of acquisition
intangibles 61.1 48.6 31.5 16.6 (4.4) 153.4
Amortisation of acquisition
intangibles (1.8) (8.1) (6.4) (0.1) (2.0) (18.4)
Operating profit/(loss) 59.3 40.5 25.1 16.5 (6.4) 135.0
------------------------------ ------ --------- ------- ------ --------- -------
Investment income 0.1
Finance costs (11.8)
Profit before tax 123.3
Tax (27.4)
------------------------------ ------ --------- ------- ------ --------- -------
Profit for the year 95.9
------------------------------ ------ --------- ------- ------ --------- -------
North New
UK America France Spain Markets Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ------ --------- ------- ------ --------- -------
Revenue
Total revenue 326.5 227.8 91.1 130.2 16.6 792.2
Inter-segment (7.2) - - - - (7.2)
External revenue 319.3 227.8 91.1 130.2 16.6 785.0
------------------------------ ------ --------- ------- ------ --------- -------
Result
Segment operating
profit/(loss) pre
amortisation of acquisition
intangibles 63.2 21.2 27.1 13.3 (6.0) 118.8
Amortisation of acquisition
intangibles (1.2) (6.5) (6.0) (0.3) (0.1) (14.1)
Operating profit/(loss) 62.0 14.7 21.1 13.0 (6.1) 104.7
------------------------------ ------ --------- ------- ------ --------- -------
Investment income 0.3
Finance costs (6.7)
Profit before tax 98.3
Tax (23.9)
------------------------------ ------ --------- ------- ------ --------- -------
Profit for the year 74.4
------------------------------ ------ --------- ------- ------ --------- -------
3. Segmental analysis (continued)
Depreciation,
Capital Amortisation,
Assets Liabilities Additions Impairment
2018 2017 2018 2017 2018 2017 2018 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------- -------- --------- --------- ------ ----- --------------- -----
UK 897.7 817.8 472.6 472.5 43.0 36.1 17.3 16.1
North America 352.6 279.8 361.5 317.2 73.2 11.7 16.7 13.1
France 219.9 208.8 155.0 153.4 3.5 3.9 8.9 7.8
Spain 140.0 137.0 104.1 108.2 18.2 17.5 17.0 12.3
New Markets 99.8 15.6 65.4 37.7 1.6 0.2 2.7 0.2
Inter-segment (295.2) (278.6) (295.2) (278.6) - - - -
--------------- -------- -------- --------- --------- ------ ----- --------------- -----
Total 1,414.8 1,180.4 863.4 810.4 139.5 69.4 62.6 49.5
--------------- -------- -------- --------- --------- ------ ----- --------------- -----
All assets and liabilities including inter-segment loans and trading balances are allocated to reportable segments.
4. Tax
2018 2017
GBPm GBPm
------------------------ ------ ------
Current tax
Current year
charge 30.9 23.6
Adjustments in respect
of prior years (0.1) 1.3
Total current
tax charge 30.8 24.9
-------------------------- ------ ------
Deferred tax
credit (3.4) (1.0)
Total tax charge 27.4 23.9
------------------------- ------ ------
UK corporation tax is calculated at 19% (FY17: 20%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions, these being a blended (Federal/State) rate of 38% in the US (FY17: 40%) as a result of the US enacting new tax legislation in December 2017 effective from 1 January 2018, 33% in France (FY17: 33%) and 25% in Spain (FY17: 25%), which explains the 'Overseas tax rate differences' below.
The charge for the year can be reconciled to the profit per the income statement as follows:
2018 2017
GBPm GBPm
---------------------------------------- ------ ------
Profit before tax on continuing
operations 123.3 98.3
------------------------------------------- ------ ------
Tax at the UK corporation tax rate
of 19% (FY17: 20%) 23.4 19.7
Tax effect of items that are not
taxable in determining taxable profit (0.5) (0.2)
Adjustments in respect of prior years
- current tax (0.1) 1.3
Overseas tax rate
differences 4.6 2.7
Movement in deferred tax
liability - 0.4
Tax expense for the
year 27.4 23.9
------------------------------------------ ------ ------
4. Tax (continued)
Given the UK parented nature of the Group, the majority of financing that the overseas businesses require is provided from the UK, and as such the UK has provided a number of intra-group loans to its overseas operations in order to fund their growth plans. In light of the different tax rates applicable in each of the markets in which the Group operates, as noted above, these loans result in a reduction in the Group's effective tax rate, which is included in 'Overseas tax rate differences' in the table above.
As the proportion of the Group's profit earned overseas continues to grow, the effective tax rate of 22% (FY17: 24%) is expected to increase slightly in future years.
A retirement benefit tax charge amounting to GBP0.4m (FY17: GBP0.6m credit) has been recognised directly in other comprehensive income. In addition to the amounts (charged)/ credited to the income statement and other comprehensive income, the following amounts relating to tax have been recognised directly in equity:
2018 2017
GBPm GBPm
------------------------------------------- ----- -----
Current tax
Excess tax deductions related to
share-based payments on exercised
options 2.8 2.0
Deferred
tax
Change in estimated excess tax deductions
related to share-based payments 0.2 0.4
Total tax recognised
directly in equity 3.0 2.4
---------------------------------------------- ----- -----
5. Dividends
2018 2017
GBPm GBPm
----------------------------------------- ----- -----
Amounts recognised as distributions
to equity holders in the year:
Final dividend for the year ended 31
March 2017 of 11.2p (2016: 8.9p) per
share 35.0 27.6
Interim dividend for the year ended
31 March 2018 of 4.7p (2017: 4.1p) per
share 15.4 12.7
50.4 40.3
----------------------------------------- ----- -----
The proposed final dividend for the year ended 31 March 2018 is 14.4p per share amounting to GBP47.5m (FY17: 11.2p per share amounting to GBP35.0m). The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
6. Earnings per share
2018 2017
pence pence
------------------ ------ ------
Basic 30.2 24.0
Diluted 29.7 23.6
------------------ ------ ------
Adjusted basic 33.6 27.0
Adjusted diluted 33.1 26.5
------------------ ------ ------
The calculation of the basic and diluted earnings per share is based on the following data:
Number of shares 2018 2017
m m
----------------------------------- ------ ------
Weighted average number of shares
Basic 318.9 309.9
Dilutive impact of share options 5.0 5.4
Diluted 323.9 315.3
----------------------------------- ------ ------
Earnings 2018 2017
GBPm GBPm
------------------------------------------- ------ ------
Profit for the year attributable
to equity holders of the parent 96.3 74.4
Amortisation of acquisition intangibles 18.4 14.1
Tax impact arising on amortisation
of acquisition intangibles (5.7) (4.9)
One-off deferred tax impact of US
and French tax reforms (1.7) -
------------------------------------------- ------ ------
Adjusted profit for the year attributable
to equity holders of the parent 107.3 83.6
------------------------------------------- ------ ------
Basic and diluted earnings per ordinary share have been calculated in accordance with IAS 33 Earnings Per Share. Basic earnings per share is calculated by dividing the profit or loss in the financial year attributable to the equity holders of the parent by the weighted average number of ordinary shares in issue during the year. Adjusted earnings per share is calculated excluding amortisation of acquisition intangibles and the associated tax impact. In FY18, an adjustment has also been made for the one-off impact of tax reforms in the USA and France (see note 4). The Group uses adjusted operating profit, EBITDA, adjusted profit before tax and adjusted earnings per share as its primary performance measures. These are non-IFRS measures which exclude the impact of the amortisation of acquisition intangible assets (FY18: GBP18.4m, FY17: GBP14.1m) and the associated tax effects (FY18: GBP5.7m, FY17: GBP4.9m). Acquisition intangible assets principally arise as a result of the past actions of the former owners of businesses in respect of marketing and business development activity. Therefore, the adjusted measures reflect the post acquisition
revenue attributable to, and operating costs incurred by, the Group. Diluted earnings per share includes the impact of dilutive share options in issue throughout the period.
7. Other intangible assets
Acquisition intangibles include acquired access rights, acquired customer databases and acquired brands. Other intangibles include trademarks, access rights, customer databases and software.
Acquired Acquired Total Trademarks
access customer Acquired acquisition & access Customer Total
rights databases brands intangibles rights databases Software intangibles
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------- ----------- --------- ------------- ----------- ----------- --------- -------------
Cost
At 1 April
2016 27.2 118.8 - 146.0 31.6 55.0 125.7 358.3
Additions - - - - 0.3 16.7 44.4 61.4
Acquisition
of
subsidiaries 16.3 28.0 - 44.3 - - 1.3 45.6
Disposals - - - - - - (0.2) (0.2)
Exchange
movements 4.0 12.3 - 16.3 1.3 4.9 3.2 25.7
---------------- --------- ----------- --------- ------------- ----------- ----------- --------- -------------
At 1 April
2017 47.5 159.1 - 206.6 33.2 76.6 174.4 490.8
Additions 45.1 20.1 - 65.2 3.0 16.0 44.3 128.5
Acquisition
of
subsidiaries - 17.0 13.9 30.9 - - 0.9 31.8
Disposals - - - - (0.9) - (4.4) (5.3)
Exchange
movements (4.9) (4.7) - (9.6) (1.2) 1.5 (3.5) (12.8)
---------------- --------- ----------- --------- ------------- ----------- ----------- --------- -------------
At 31 March
2018 87.7 191.5 13.9 293.1 34.1 94.1 211.7 633.0
---------------- --------- ----------- --------- ------------- ----------- ----------- --------- -------------
Accumulated Amortisation
At 1 April
2016 18.6 52.1 - 70.7 19.5 18.3 39.8 148.3
Charge for
the year 2.8 11.3 - 14.1 4.5 11.6 12.4 42.6
Disposals - - - - - - (0.2) (0.2)
Exchange
movements 2.1 5.7 - 7.8 0.6 1.9 1.2 11.5
At 1 April
2017 23.5 69.1 - 92.6 24.6 31.8 53.2 202.2
Charge for
the year 4.8 13.0 0.6 18.4 3.5 16.8 15.9 54.6
Disposals - - - - (0.3) - (2.5) (2.8)
Exchange
movements (0.9) (3.5) - (4.4) (0.8) 0.5 (1.1) (5.8)
------------------ -------- ------ ---- ------ ------ ----- ------ ------
At 31 March
2018 27.4 78.6 0.6 106.6 27.0 49.1 65.5 248.2
------------------ -------- ------ ---- ------ ------ ----- ------ ------
Carrying amount
At 31 March
2018 60.3 112.9 13.3 186.5 7.1 45.0 146.2 384.8
------------- ----- ------ ----- ------ ---- ----- ------ ------
At 31 March
2017 24.0 90.0 - 114.0 8.6 44.8 121.2 288.6
------------- ----- ------ ----- ------ ---- ----- ------ ------
On 18 December 2017 HomeServe US Repair Management Corporation acquired certain intangible assets of the home assistance policy business of Dominion Products and Services, Inc. ("DPS"), a wholly owned subsidiary of Dominion Energy, Inc. At 31 March 2018 acquired access rights included GBP35.4m and acquired customer databases included GBP19.7m in respect of the marketing agreement and policy book acquired as part of this transaction. These assets will be amortised over 13 and 9 years respectively, on a straight-line basis.
8. Analysis of net debt
2018 2017
GBPm GBPm
---------------------------------- ------- -------
Cash and cash equivalents (57.8) (46.2)
Bank and other loans due within
1 year 38.0 35.9
Bank and other loans due after 1
year 256.7 270.1
Obligations under finance leases 0.9 1.6
Net debt 237.8 261.4
---------------------------------- ------- -------
9. Share capital
2018 2017
GBPm GBPm
----------------------------------- ------ ------
Issued and fully paid 329,776,766
ordinary shares of 2 9/13p each
(FY17:310,689,548) 8.9 8.4
----------------------------------- ------ ------
The Company has one class of ordinary shares which carry no right to fixed income. Share capital represents consideration received or amounts, based on fair value, allocated to LTIP and One Plan participants on exercise, or amounts, based on fair value of the consideration for acquired entities. The nominal value was 2 9/13p per share on all issued and fully paid shares.
On 19 October 2017, the Company placed 15,243,903 new ordinary shares at a price of 820 pence per share, raising gross proceeds of approximately GBP125.0m. 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 GBP3.4m were accounted for as a deduction from equity (FY17: GBPnil).
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 GBP103,474 and share premium of GBP4,907,972. Of this total, 1,193,317 shares, issued at 838 pence per share represented GBP10.0m of the fair value of the consideration for the acquisition of Sherrington Mews Limited on 17 November 2017 (see note 11).
During the period from 1 April 2016 to 31 March 2017 the Company issued 2,797,122 shares with a nominal value of 2 9/13p creating share capital of GBP75,307 and share premium of GBP4,696,129.
10. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Transactions with associates
Related party transactions with associate interests during FY18 principally related to recharged consultancy and contractor costs and amounted to GBP0.5m (FY17: GBPnil).
Other related party transactions
Other related party transactions during FY18 were similar in nature to those in FY17 and amounted to GBP0.5m (FY17: GBP0.5m).
Full details of the Group's related party transactions are included in the Annual Report and Accounts 2018.
11. Business combinations
The Group has incurred a net cash outflow in respect of business combinations of GBP54.2m in the year (FY17: GBP74.2m).
There were two material acquisitions in the year ended 31 March 2018.
On 2 August 2017 HomeServe Assistance Limited, a Group company, acquired 100% of the issued share capital and obtained control of Help-Link UK Limited (Help-Link). The acquisition of Help-Link enhances the scale and scope of the UK business' heating installation capability and increases the opportunity for future growth related to new heating system installations.
On 17 November 2017 HomeServe Assistance Limited increased its investment in its associate, Sherrington Mews Limited, the holding company of the Checkatrade Group (Checkatrade), by 60%, taking its total holding up to 100% and thereby obtaining control of Checkatrade allowing the Group to progress its growth strategy in the Home Experts market.
The initial investment made on 13 December 2016 included a call option for HomeServe to purchase a further 35% in mid 2019 and a put option for Sherrington Mews Limited to require the Group to acquire a further 35% shareholding. The subsequent agreement to acquire the additional 60% of Checkatrade's ordinary share capital superseded these options, which were consequently extinguished and had no material fair value at 17 November 2017.
Upon obtaining control of Checkatrade, the Group assessed the fair value of the associate interest disposed of as part of the total consideration for the business combination. Based on a total business valuation of 100% of the share capital of the Sherrington Mews Limited, the fair value of the Group's existing 40% interest was assessed to be GBP29.9m.
The gain on re-measurement of the existing associate interest on obtaining control was therefore calculated as follows:
Total
GBPm
----------------------------------------------- -------
Fair value of associate interest previously
owned 29.9
Carrying value of associate interest
held by the Group at 17 November 2017 (27.3)
Acceleration of discount unwind on contingent
consideration payment associated with
purchase of initial 40% shareholding (1.3)
Acquisition related costs (0.4)
Gain on re-measurement of associate
on acquisition of control 0.9
----------------------------------------------- -------
Additionally there were two immaterial acquisitions in the year ended 31 March 2018.
On 30 November 2017 HomeServe Membership Limited, a Group company, acquired 100% of the issued share capital of Energy Insurance Services Limited (EISL) for a total cash consideration of GBP1.7m. EISL provides boiler, central heating and control system insurance policies to approximately 19,000 domestic customers. EISL has developed significant knowledge, experience and systems related to the self-fix of boilers, which will bring customer experience improvements and synergies to HomeServe's growing UK heating business.
On 29 December 2017 HomeServe France Holdings SAS, a Group company, acquired 100% of PXB Invest SAS, the holding company of the Electrogaz Group for a total cash consideration of EUR5.6m (GBP5.0m). Electrogaz provides customers end-to-end home heating services, combining the provision of boiler installations, servicing and repair, complimenting HomeServe's strategic objective to grow and develop the Group's heating capabilities internationally.
11. Business combinations (continued)
The provisional fair values of identifiable assets acquired and liabilities assumed are set out below:
Checkatrade Help-Link Other Total
At fair value GBPm GBPm GBPm GBPm
Property, plant and equipment 0.4 0.3 0.1 0.8
Intangible assets 0.8 - 0.1 0.9
Cash and cash equivalents 1.8 (1.7) 1.5 1.6
Inventories - 0.1 0.3 0.4
Trade and other receivables 9.2 1.4 0.9 11.5
Trade and other payables (3.3) (5.8) (1.2) (10.3)
Bank and other loans - - (0.1) (0.1)
Deferred income (10.5) - (1.0) (11.5)
Intangible assets identified
on acquisition 28.0 1.5 1.4 30.9
Deferred tax on acquisition
intangibles (4.9) (0.3) (0.4) (5.6)
------------------------------- ------------ ---------- ------ -------
Net assets/(liabilities)
acquired 21.5 (4.5) 1.6 18.6
Goodwill 58.6 23.6 5.1 87.3
------------------------------- ------------ ---------- ------ -------
Total consideration 80.1 19.1 6.7 105.9
------------------------------- ------------ ---------- ------ -------
Satisfied by:
Cash 40.2 5.0 6.7 51.9
Contingent consideration
at fair value - 14.1 - 14.1
Ordinary shares in HomeServe
plc 10.0 - - 10.0
Fair value of associate
interest previously owned 29.9 - - 29.9
80.1 19.1 6.7 105.9
------------------------------- ------------ ---------- ------ -------
Net cash outflow arising
on acquisition:
Cash consideration 40.2 5.0 6.7 51.9
Cash and cash equivalent
balances acquired (1.8) 1.7 (1.5) (1.6)
------------------------------- ------------ ---------- ------ -------
38.4 6.7 5.2 50.3
------------------------------- ------------ ---------- ------ -------
The goodwill arising on the excess of consideration over the fair value of the assets and liabilities acquired represents the expectation of synergy benefits and efficiencies. None of the goodwill is expected to be deducted for tax purposes. The gross contracted amounts due are equal to the fair value amounts stated above for trade and other receivables.
The provisional fair values for Help-Link disclosed as part of the Group's interim results as at 30 September 2017 have been updated, resulting in an increase to goodwill of GBP0.2m at 31 March 2018. The undiscounted range of outcomes associated with the contingent consideration payments, conditional on the number of boiler installations Help-Link complete during the period of contingency, remains from GBPnil to GBP15.5m.
The post-acquisition revenue, operating profit and acquisition-related costs (included in operating costs) from these acquisitions in the year ended 31 March 2018 were as follows:
Checkatrade Help-Link Other Total
GBPm GBPm GBPm GBPm
--------------------- ------------ ---------- ------ ------
Revenue 8.2 22.4 1.2 31.8
Operating loss (0.1) (0.4) - (0.5)
Acquisition-related
costs 0.3 0.5 0.3 1.1
--------------------- ------------ ---------- ------ ------
If all of the acquisitions had been completed on the first day of the financial year, Group revenues for the period would have been GBP925.2m and Group profit before taxation would have been GBP124.1m.
In addition to the net cash outflow on the acquisitions above of GBP50.3m, deferred and contingent consideration was paid relating to prior year business combinations of GBP3.9m (FY17 GBP3.1m).
12. Events after the balance sheet date
There were no post balance sheet events between the balance sheet date and the signing of the financial statements.
13. Other information
The Annual Report and Accounts for the year ended 31 March 2018 was approved by the Board on 22 May 2018 and will be made available on the Company's website and posted to those shareholders who have requested it in June 2018. Copies will be available from the registered office at Cable Drive, Walsall, WS2 7BN.
Forward Looking Statements
This report contains certain forward looking statements, which have been made in good faith, with respect to the financial condition, results of operations, and businesses of HomeServe plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. The statements have been made with reference to forecast price changes, economic conditions, the current regulatory environment and the current interpretations of IFRS applicable to past, current and future periods. Nothing in this announcement should be construed as a profit forecast.
GLOSSARY
HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. APMs used in this announcement address profitability, leverage and liquidity and together with operational KPIs give an indication of the current health and future prospects of the Group.
Definitions of APMs and the rationale for their usage are included below with a reconciliation, where applicable, back to the equivalent statutory measure.
Profitability
The Group uses adjusted operating profit, EBITDA, adjusted profit before tax and adjusted earnings per share as its primary profit performance measures. These are non-IFRS measures which exclude the impact of the amortisation of acquisition intangible assets. Intangible assets principally arise as a result of the past actions of the former owners of businesses in respect of marketing and business development activity. Therefore, the adjusted measures reflect the post acquisition revenue attributable to, and operating costs incurred by, the Group.
In FY18 the adjusted earnings per share measure also removes the one-off effect of a deferred tax benefit arising as a result of US and French tax reforms. This is considered a more accurate indicator of the underlying operational and financial performance of the Group and a more effective guide to future performance.
TOTAL GROUP
GBPmillion 2018 2017 ------------------------------ ------ ------ Operating profit (statutory) 135.0 104.7 Amortisation of acquisition intangibles 18.4 14.1 Adjusted operating profit 153.4 118.8 ------------------------------ ------ ------ Operating profit (statutory) 135.0 104.7 Depreciation 8.0 6.9 Amortisation of other intangibles 36.2 28.5 Amortisation of acquisition intangibles 18.4 14.1 EBITDA 197.6 154.2 ----------------------------------- ------ ------ Profit before tax (statutory) 123.3 98.3 Amortisation of acquisition intangibles 18.4 14.1 Adjusted profit before tax 141.7 112.4 ----------------------------------- ------ ------ Pence per share -------------------------------- ------ -----
Earnings per share (statutory) 30.2 24.0 Amortisation of acquisition intangibles (net of tax) 3.9 3.0 One-off deferred tax impact (0.5) - of US & French tax reform Adjusted earnings per share 33.6 27.0 -------------------------------- ------ -----
SEGMENTAL
2018 North New
GBPmillion UK America France Spain Markets
----------------------------- ------ --------- ------- ------ ---------
Revenue 365.6 282.1 100.0 141.3 18.6
Statutory operating
profit/(loss) 59.3 40.5 25.1 16.5 (6.4)
Operating Margin % 16% 14% 25% 12% -
Add back
Amortisation of Acquisition
Intangibles 1.8 8.1 6.4 0.1 2.0
Effect on operating
margin % 1% 3% 7% - -
Adjusted operating
profit/(loss) 61.1 48.6 31.5 16.6 (4.4)
Adjusted operating
margin % 17% 17% 32% 12% -
----------------------------- ------ --------- ------- ------ ---------
2017 North New
GBPmillion UK America France Spain Markets
----------------------------- ------ --------- ------- ------ ---------
Revenue 326.5 227.8 91.1 130.2 16.6
Statutory operating
profit/(loss) 62.0 14.7 21.1 13.0 (6.1)
Operating Margin % 19% 6% 23% 10% -
Add back
Amortisation of Acquisition
Intangibles 1.2 6.5 6.0 0.3 0.1
Effect on operating
margin % - 3% 7% - -
Adjusted operating
profit/(loss) 63.2 21.2 27.1 13.3 (6.0)
Adjusted operating
margin % 19% 9% 30% 10% -
----------------------------- ------ --------- ------- ------ ---------
North New
2018 UK America France Spain Markets
Local currency million GBP $ EUR EUR GBP
----------------------------- ------ --------- ------- ------ ---------
Revenue 365.6 375.2 113.2 160.1 18.6
Statutory operating
profit/(loss) 59.3 53.6 28.5 18.8 (6.4)
Operating Margin % 16% 14% 25% 12% -
Add back
Amortisation of Acquisition
Intangibles 1.8 10.8 7.2 0.1 2.0
Effect on operating
margin % 1% 3% 7% - -
Adjusted operating
profit/(loss) 61.1 64.4 35.7 18.9 (4.4)
Adjusted operating
margin % 17% 17% 32% 12% -
----------------------------- ------ --------- ------- ------ ---------
North
2017 UK America France Spain New
Local currency million GBP $ EUR EUR Markets
----------------------------- ------ --------- ------- ------ ---------
Revenue 326.5 293.0 107.4 154.3 16.6
Statutory operating
profit/(loss) 62.0 17.8 24.4 15.4 (6.1)
Operating Margin % 19% 6% 23% 10% -
Add back
Amortisation of Acquisition
Intangibles 1.2 8.4 7.1 0.4 0.1
Effect on operating
margin % - 3% 7% - -
Adjusted operating
profit/(loss) 63.2 26.2 31.5 15.8 (6.0)
Adjusted operating
margin % 19% 9% 30% 10% -
----------------------------- ------ --------- ------- ------ ---------
Leverage
In FY18 the Group targeted net debt in the range of 1.0 to 1.5x EBITDA measured at the year end. Following the growth of the Group since the last review of the capital structure policy, the Board has determined that the Group can now support a leverage policy range of 1.0 to 2.0x Net Debt: EBITDA at March year ends.
The range reflects HomeServe's relatively low risk appetite. Due to the seasonality of the business and depending on M&A opportunities, HomeServe is able to operate outside 1.0 to 2.0x for periods of time but with a highly cash generative business model HomeServe will seek to return to its target range. The leverage ratio is also important as it factors into the Group's banking covenants and the rolling 12 month rate at the half year influences the forward interest rates payable on the Group's Revolving Credit Facility.
Certain of the Group's segmental bonus measures relate to net cash. Net cash is defined and calculated in the same way as net debt but returns a positive closing balance.
The 2018 Annual Report provides a full reconciliation of the movements in liabilities arising from borrowings and finance leases. The closing balances at 31 March were as follows:
GBPmillion 2018 2017
------------------------------------- ------- -------
Current liabilities from borrowings
and finance leases
Finance leases 0.5 0.6
Bank and other loans 38.0 35.9
------------------------------------- ------- -------
38.5 36.5
Non-current liabilities from
borrowings and finance leases
Finance leases 0.4 1.0
Bank and other loans 256.7 270.1
------------------------------------- ------- -------
257.1 271.1
------------------------------------- ------- -------
Total liabilities from borrowings
and finance leases 295.6 307.6
------------------------------------- ------- -------
Cash and cash equivalents (57.8) (46.2)
------------------------------------- ------- -------
Net Debt 237.8 261.4
------------------------------------- ------- -------
EBITDA 197.6 154.2
------------------------------------- ------- -------
Leverage 1.2x 1.7x
------------------------------------- ------- -------
Liquidity
Cash conversion % is defined as cash generated by operations divided by adjusted operating profit. The measure demonstrates the cash generative nature of the ordinary trading operations of HomeServe's business model and the ability to produce positive cashflows that can be invested for future growth initiatives or in capital projects to maintain customer service initiatives, digital enhancements or efficiencies that benefit the long-term health of the business.
Free cash flow is stated after capital expenditure, tax and interest obligations and is an indication of the strength of the business to generate funds to meet its liabilities and repay borrowings. It also shows the funds that might be made available to pursue M&A activities and to pay dividends.
GBPmillion 2018 2017 ----------------------------------------- ------- ------- Adjusted operating profit 153.4 118.8 Amortisation of acquisition intangibles (18.4) (14.1) ----------------------------------------- ------- ------- Operating profit 135.0 104.7 Depreciation and amortisation 62.6 49.5 Non-cash items 9.0 6.8 Increase in working capital (42.4) (21.1) ----------------------------------------- ------- ------- Cash generated by operations 164.2 139.9 Net interest (10.5) (6.4) Taxation (27.2) (20.0) Capital expenditure - Ordinary (54.6) (44.4) Capital expenditure - Partner Payments (16.5) (14.1) Repayment of finance leases (0.6) (1.0) ----------------------------------------- ------- ------- Free cash flow 54.8 54.0 GBPmillion 2018 2017 ------------------------------ ------ ------ Adjusted operating profit 153.4 118.8 Cash generated by operations 164.2 139.9 ------------------------------ ------ ------ Cash conversion 107% 118% ------------------------------ ------ ------
KPIs
The Group uses a number of operational key performance indicators that provide insight into past performance and are an indicator of the future prospects of the Group as a whole and its individual segments.
Affinity partner households tracks the growth in addressable market delivered through existing and new partnerships with utilities and municipals. ----------------------------------------------------------- Customers tracks success in converting addressable market into revenue-generating customers, by delivering great products and service. ----------------------------------------------------------- Retention rate reflects ability to deliver fit-for-purpose product and great service to customers. ----------------------------------------------------------- Policies illustrates ability to grow the product line through customer focus and innovation. ----------------------------------------------------------- Income per customer measures ability to design and market increasingly valuable products, and sell them efficiently. Due to currency differences, this measure is tracked at a geographic level. Income per customer is calculated as the last 12 months' net policy income divided by customers. ----------------------------------------------------------- Tradespeople are customers in the Home Experts business. Growing the network of vetted and reviewed tradespeople will enable HomeServe to meet customer needs and grow its business. ----------------------------------------------------------- Adjusted profit before tax is the key profit measure by which business growth, efficiency and sustainability is monitored. ----------------------------------------------------------- Net debt to EBITDA is the key cash ratio, which is used to monitor usage of financial resources within agreed risk parameters. -----------------------------------------------------------
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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May 22, 2018 02:01 ET (06:01 GMT)
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