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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 May 2019 to May 2024
TIDMHSV
RNS Number : 6219Z
Homeserve Plc
21 May 2019
HomeServe plc
Preliminary results for the year ended 31 March 2019
Hot Features
Premium
2019 2018(1) Change(2)
--------------------------- ------------ ---------- ----------
Revenue GBP1,003.6m GBP899.7m +12%
Statutory operating
profit GBP152.6m GBP135.0m +13%
Statutory profit before
tax GBP139.5m GBP123.3m +13%
Basic earnings per
share 32.7p 30.2p +8%
Adjusted operating
profit(3) GBP174.8m GBP153.4m +14%
Adjusted profit before
tax(3) GBP161.7m GBP141.7m +14%
Adjusted earnings
per share(3) 37.5p 33.6p +12%
Adjusted EBITDA(3) GBP221.9m GBP197.6m +12%
Ordinary dividend
per share 21.4p 19.1p +12%
Net debt GBP304.7m GBP237.8m +28%
Total number of customers 8.4m 8.4m -
--------------------------- ------------ ---------- ----------
Strong results across the Group with North America now HomeServe's largest business
-- Group revenue exceeded GBP1.0bn (FY18: GBP899.7m)
-- Adjusted operating profit up 14% to GBP174.8m with statutory operating profit up 13% to GBP152.6m
-- UK adjusted operating profit up 8% to GBP66.0m, with income per customer up 15% as the business continued its focus on delivering additional products to customers
-- Adjusted operating profit in North America up 37% to $88.1m; with an adjusted operating margin of 20% (FY18: 17%) as customers reached 4.0m (FY18: 3.6m). France and Spain both delivered good growth in adjusted operating profit, up 6% and 5% respectively
-- Established presence in Japan via a joint venture agreement with Mitsubishi Corporation -- Pro forma revenue growth of 33% at Checkatrade and a 23% increase in trades to 36k
-- Group remains highly cash generative with a strong financial position: 116% cash conversion(3); within target leverage range at 1.4x Net Debt: Adjusted EBITDA
-- Proposed final dividend of 16.2p, to take the total dividend for the year to 21.4p, up 12%, in line with earnings
Richard Harpin, Founder and Chief Executive, HomeServe plc, said: "HomeServe delivered another very good year with further profit growth across the Group. North America was once again the outstanding performer and our progress there continues at pace. Allied to good performances in the UK, France and Spain, our Membership business is strong and I remain excited about its prospects.
"Checkatrade is already making great strides to strengthen its position as the UK market leader and offer an even better trade and consumer experience. In Home Experts we have a business line with huge potential. The progress we have made this year has confirmed that we are developing a winning model and gives us the confidence to increase our annual investment.
"Our mission is to make home repairs and improvements easy for both homeowners and trades and I remain as passionate as ever about our efforts to provide great service to achieve this."
Outlook
HomeServe expects to deliver further strong growth in FY20, with increased P&L investment in Home Experts expected to be offset by strong performance in Membership, particularly North America. HomeServe increased its P&L investment in Home Experts and New Markets to GBP9.8m in FY19 (FY18: GBP4.4m), and expects to increase it to between GBP12m to GBP15m across these two areas in FY20.
(1)The Group's results are being reported under IFRS 9 and IFRS 15 for the first time in 2019 following the mandatory adoption of the standards from 1 April 2018. In accordance with the transitional provisions of the standards, comparatives have not been restated. See Note 2.
(2)Percentage movements throughout this announcement are based on full underlying results, not the rounded figures in the tables
(3)HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. Headline financial results and the operating reviews of each segment within this announcement all refer to APMs. APMs used in this announcement are non-GAAP measures which address profitability, leverage and liquidity and together with operational KPIs give an indication of the current health and future prospects of the Group. Definitions of APMs and the rationale for their usage are included in the Glossary at the end of this announcement with reconciliations, where applicable, back to the equivalent statutory measure.
Results presentation and Investor Day
A presentation for analysts and investors will take place at 10am this morning at UBS, 5 Broadgate, London EC2M 2QS.
There will be an audio webcast with a facility to ask questions, available via www.homeserveplc.com. This is accompanied by a listen-only conference call with details as follows;
0800 358 9473 PIN: 49679995#
* United Kingdom Toll-Free
+44 3333 000 804 PIN: 49679995#
* United Kingdom Toll
HomeServe will hold an Investor Day for analysts and institutional investors on 20 June 2019 at Checkatrade's new offices in Portsmouth. To register attendance, please visit https://homeserveevent.co.uk/investor
Enquiries
HomeServe Tulchan Group
Miriam McKay - Group Communications Martin Robinson
and IR Director Lisa Jarrett-Kerr
Miriam.McKay@homeserve.com
+44 7795 062564
homeserve@tulchangroup.com
Simon Lewis - Head of Investor Relations +44 207 353 4200
Simon.Lewis@homeserve.com
+44 7970 840694
Forward Looking Statements
This report contains certain forward looking statements, which have been made in good faith, with respect to the financial condition, results of operations, and businesses of HomeServe plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. The statements have been made with reference to forecast price changes, economic conditions, the current regulatory environment and the current interpretations of IFRS applicable to past, current and future periods. Nothing in this announcement should be construed as a profit forecast.
About HomeServe
HomeServe is an international home repairs and improvements business which provides people with access to tradespeople and technology to run their homes more easily. HomeServe is listed on the London Stock Exchange, with a market capitalisation of c.GBP3.6 billion.
CHIEF EXECUTIVE'S REVIEW
HomeServe made very good progress in FY19 on a number of fronts as we continued to advance our strategic growth initiatives and focused on our purpose of making home repairs and improvements easy.
Our Membership business line remains the core of our business today and it was great to see North America continue its strong growth trajectory as it became our largest business as well as to see good performances in our other Membership businesses with increased profits across the board.
With our buy and build strategy in HVAC (our installations, repairs and service business for heating, ventilation and air conditioning) also taking shape and contributing to the Group's performance, it was the combined team effort of all business lines that gave me confidence to increase our annual Home Experts investment. The potential of Home Experts is significant and we have the right team in place at Checkatrade to deliver our ambitions.
With all Membership businesses now under Tom Rusin's leadership we are seeing greater collaboration and sharing of best practice and we are becoming more sophisticated in how we test and learn from new initiatives, as well as how we deploy our investments across our businesses for the best returns. Membership and HVAC in North America continue to be our principal near-term sources of growth, but all of our Membership businesses have opportunities to grow. New partners, products and channels drive top line growth and the increasing use of data and technology transforms our customer service and delivers greater operational scale and efficiency.
I was pleased to see our Membership businesses strengthening and expanding their utility partnerships. France extended the Group's single largest partnership, with Veolia, until 2026, and began a partnership with Saur, France's third largest water utility. In the UK we signed four new energy partners and Spain followed the UK lead and is now witnessing the early signs of success with a small challenger energy partner. With retention also increasing and the Claims side of the business in good health, our Spanish business is well placed as it seeks to bring on board new affinity partners in place of Endesa. Finally, in North America we have further accelerated our business development activity and are now signing new partners at the rate of three a week.
As well as initiatives to grow our revenue, we are equally focused on transforming our service for ever evolving customer demands and needs. Better use of technology can offer HomeServe a real competitive advantage and increased scale and efficiencies. By freeing our people from simpler tasks, such as routine claims handling and appointment scheduling, we can retain them for more interesting and challenging calls. This not only improves job satisfaction and engagement but also ensures our best people are available to provide the best service when our customers need their direct intervention the most.
Adding to our Membership highlights this year was our joint venture with Mitsubishi Corporation. The Japanese market meets all of the search criteria we apply to new markets, notably a strong economy, a large and high quality housing stock and the potential to form strong utility partnerships. Mitsubishi is not itself a utility but has unrivalled market knowledge and is well placed to introduce the new JV to potential utility partners.
FY19 was our first year of full ownership of Checkatrade, our UK Home Experts business, and we have used this to start accelerating some fundamental changes. Over the last 12 months the number of trade members has grown by 23% to 36k and consumer web visits are up by 11% to 18m a year. This demonstrates strong progress, but we have plans to step change this growth. To support this, the business has moved to new offices at Lakeside, Portsmouth Harbour and it was great that so many of Checkatrade's experienced people who have been with the company for many years chose to move with the business. They join us on the next phase of Checkatrade's journey as we look to transform the business under the leadership of a new senior management team with experience in fast growing digital businesses.
I firmly believe that an online directory of trusted and vetted trades is the winning solution for our trade members and for consumers who use the site. Checkatrade's vetting process is unique and highly valued by consumers and has helped make it the UK market leader today. We do, however, need new functionality and new products in order to improve the experience for consumers and trades alike. We are developing new initiatives such as "search for me" for consumers who simply want us to select a trade on their behalf and Checkatrade Now, a solution for obtaining an emergency repair. We are pursuing our plans to accelerate trade numbers and to increase web visitors so that ultimately we 'make the phone ring' even more for our members and help them improve and grow their own businesses.
Habitissimo had a good year but it is clear from our experiences with Checkatrade and our Home Experts market research that an online directory combined with a "search for me" facility is the best model. We intend to introduce our preferred model into Habitissimo's markets over the course of the next year.
On Smart Home we have a leak detection device that works well, is easy to install and we have the plumbing network to detect and fix the identified leaks. With the WIFI version of LeakBot now proven, we are targeting 3.6m homes in the UK where we know we have an attractive model for both the home insurer and HomeServe. These are larger homes where the savings the home insurer makes from preventing sizeable water damage claims will cover the rental and service charges the home insurer pays to HomeServe for the LeakBot units and the leak finding and fixing service.
Three insurance partners to date have moved out of test and in to a wider roll-out. We continue to work with other insurers to highlight the consumer benefits of LeakBot and to demonstrate the returns insurers can achieve by reducing water damage claims when adopting our end to end solution.
People and leadership
HomeServe has a strong history of growth in all of its businesses and we have ambitious plans in place for the future. Having the right people is key to achieving our goals and HomeServe's success owes much to the dedication of our people around the world. I am proud and thankful for the service they provide to our customers every day. I believe that HomeServe is a great place to develop a rewarding and fulfilling career and look forward to seeing our people share in HomeServe's success.
There have been significant changes in personnel across the group in the past year, which have been overseen carefully by the Board. Martin Bennett, CEO, HomeServe UK, and Johnathan Ford, COO, both departed with our good wishes and I also recently made changes to HomeServe's Executive Committee, introducing greater diversity and stronger representation from operational management.
Deb Dulsky (Global CEO, HVAC), Fernando Prieto (CEO Spain), Greg Reed (CEO UK), John Kitzie (CEO North America) and Mike Fairman (CEO Checkatrade) joined my HomeServe plc Executive Committee with effect from 1 April 2019. They join existing members David Bower (Chief Financial Officer), Guillaume Huser (CEO France), H Stephen Phillips (CEO Global Partnerships) and Tom Rusin (Global CEO Membership). The change will bring fresh perspectives to the Executive Committee and also serves to demonstrate the depth of management we now have in the business.
Outlook
HomeServe expects to deliver further strong growth in FY20, with increased P&L investment in Home Experts expected to be offset by strong performance in Membership, particularly North America. HomeServe increased its P&L investment in Home Experts and New Markets to GBP9.8m in FY19 (FY18: GBP4.4m), and expects to increase it to between GBP12m to GBP15m across these two areas in FY20.
Richard Harpin
Founder and Chief Executive
BUSINESS REVIEW
HomeServe had another very good year, and continues to serve over 8m customers around the world as the Group delivered 14% growth in adjusted profit before tax to GBP161.7m (FY18: GBP141.7m). North America, in particular, enjoyed another very successful 12 months and is now the Group's largest business.
Total customers at the year end were 8.4m (FY18: 8.4m) as strong growth in North America was offset by expected declines in Spain following the end of the Endesa partnership in May 2018 and in the UK, in the absence of a policy book acquisition this year. France grew slightly with 1.1m customers (FY18: 1.1m). The Group retention rate remained strong at 82% (FY18: 82%).
In Membership, the Group continues to achieve its best returns on marketing investment in North America. In order to benefit from this, HomeServe is increasingly more sophisticated in how it makes its investments, prioritising them for the best returns. In North America, HomeServe will continue to drive customer acquisition and grow HomeServe's customer base. Similarly in France, the extended partnership with Veolia until 2026 and the new partnership with Saur, France's third largest water utility, both present an opportunity to invest for further customer growth. In Spain the focus remains on establishing new partnerships for the Membership business whilst the Claims business continues to grow the total number of jobs completed for its bancassurer partners.
In the UK an improved, coordinated approach to pricing 'returning customers' contributed to the reduction in customer numbers but drove a further strong increase in income per customer as the business prioritised delivering additional products to existing customers, rather than recruiting marginal customers who frequently 'dip in' and 'drop out', and only ever on highly discounted offers.
North America, France and Spain all made progress implementing HomeServe's buy-and-build HVAC strategy, acquiring well-run, local HVAC businesses, which provide standalone installation capability and complement the Membership business with the opportunity to provide annual services and assistance cover. Total consideration in respect of HVAC acquisitions was c. GBP35m. Meanwhile the UK continued to integrate the Help-Link business acquired in FY18 and to develop channels to service the Membership customer base.
HomeServe now reports Home Experts as a separate segment, reflecting the size of the opportunity and how management operates and reviews the business. The segment contains the results of Checkatrade in the UK, Habitissimo in Spain and our newly launched Home Experts France. New Markets contains HomeServe's international development initiatives, including its Italian associate and its Japanese joint venture.
Financial performance for the year ended 31 March
Statutory operating Adjusted operating
Revenue profit/(loss) profit/(loss)
GBPmillion 2019 2018 2019 2018 2019 2018
------------------ -------- ------ ------------- ----------- ------------ -----------
UK 391.7 365.6 68.4 59.3 66.0 61.1
North America 333.4 282.1 54.7 40.5 67.6 48.6
France 104.6 100.0 26.8 25.1 33.3 31.5
Spain 140.8 141.3 17.5 16.5 17.7 16.6
Home Experts 40.4 18.6 (12.4) (4.8) (7.4) (2.8)
New Markets - - (2.4) (1.6) (2.4) (1.6)
Inter-segment(1) (7.3) (7.9) - - - -
------------------ -------- ------ ------------- ----------- ------------ -----------
Group 1,003.6 899.7 152.6 135.0 174.8 153.4
------------------ -------- ------ ------------- ----------- ------------ -----------
(1)Inter-segment revenues include transactions with other Group companies removed on consolidation and principally comprise royalty and other similar charges.
Membership performance metrics for the year ended 31 March
Customer numbers Policy retention
(m) Income per customer rate
2019 2018 2019 2018 2019 2018
--------------- --------- -------- ---------- ---------- --------- --------
UK 2.0 2.2 GBP122 GBP106 79% 79%
North America 4.0 3.6 $96 $91 83% 83%
France 1.1 1.1 EUR109 EUR106 89% 88%
Spain 1.1 1.3 EUR57 EUR47 80% 78%
New Markets 0.2 0.2 - - - -
--------------- --------- -------- ---------- ---------- --------- --------
Group 8.4 8.4 n/a n/a 82% 82%
--------------- --------- -------- ---------- ---------- --------- --------
UK
GBPmillion 2019 2018 Change
--------------------------- -------- -------- -------
Revenue
Net policy income 244.0 221.6 10%
Repair network 108.9 106.3 2%
---------------------------- -------- -------- -------
Membership 352.9 327.9 8%
HVAC 25.5 21.1 21%
Other 13.3 16.6 (20%)
Total revenue 391.7 365.6 7%
---------------------------- -------- -------- -------
Adjusted operating costs (325.7) (304.5) 7%
---------------------------- -------- -------- -------
Adjusted operating profit 66.0 61.1 8%
---------------------------- -------- -------- -------
Adjusted operating margin 17% 17% -
---------------------------- -------- -------- -------
Performance metrics 2019 2018 Change
----------------------------- ----- -------- ----- ----- -------
Affinity partner households M m 26 26 -
Customers M m 2.0 2.2 (10%)
Income per customer GBP GBP 122 106 15%
Policies M m 5.4 5.9 (8%)
Policy retention rate % % 79 79 -
----------------------------- ----- -------- ----- ----- -------
Financial performance
Net policy income increased by 10% as reduced customer numbers were more than offset by a 15% increase in income per customer as the depth of cover of the average policy holding of UK customers continued to increase.
Repair network income was up 2% as HomeServe completed 1.2m jobs (FY18: 1.2m) for its customers with a greater proportion of higher value jobs completed this year.
HVAC revenue rose by 21% to GBP25.5m reflecting a full year's ownership of Help-Link, a HVAC installation business acquired in August 2017.
Other revenue of GBP13.3m (FY18: GBP16.6m) included transactions with other Group companies and revenue from Leakbot sales to home insurers.
Adjusted operating profit increased 8% to GBP66.0m due to the higher revenue and the full year impact of cost reductions made in the prior year. The adjusted operating margin was maintained at 17%.
The UK incurred two items recorded as exceptional in the year due to their size and incidence; an exceptional gain of GBP10.1m and an exceptional cost of GBP5.5m, both of which are excluded from adjusted performance measures in the table above. A reconciliation between the GBP66.0m adjusted operating profit and GBP68.4m statutory operating profit is provided within the glossary at the end of this announcement.
The exceptional gain related to contingent payments due to the past-owners of Help-Link, which had been payable upon hitting certain volumes of boiler installations. The business has now been fully integrated with the UK Membership business and although the volume of installs continues to increase, HomeServe does not expect to achieve the stretch targets required to trigger the contingent payments that would be due to the previous owners. As such, and in accordance with IFRS, the fair value of the associated liability has been reduced to nil and taken to the income statement as an exceptional gain for the year.
The exceptional cost mostly related to redundancies and other associated charges incurred in respect of changes to the organisational design of the UK business. Marketing and other support headcount decreased, as the business reduces its reliance on direct mail activity and prepares for the launch of new system implementations and operational improvements.
Operational performance
UK customers were 2.0m (FY18: 2.2m) and retention remained strong at 79% (FY18: 79%) with the lower customer count principally reflecting the absence of policy book acquisitions in the year and a focus on 'returning customers'. Policy book opportunities continue to be appraised but no acquisitions were completed in FY19 as there had been in previous years.
A small proportion of customers each year take advantage of HomeServe's introductory low pricing, but then go on to claim at higher than average frequencies for what are often pre-existing problems. These are generally customers who have already benefited from an introductory offer in prior years. With improved insight from new systems, HomeServe is better able to identify these customers and tailor its offers to them. In particular, while such returning customers are welcome to rejoin, introductory rates are removed to prevent 'dipping in and dropping out' and, importantly, to reduce the burden the associated higher costs place on its loyal customer base. This change in strategy, together with the termination of certain low priced stand-alone products, has resulted in a reduction in customers this year, but has removed a largely unprofitable element of the customer base and has contributed to the 15% increase in income per customer.
During the year, the UK signed four new partners in the retail energy sector: Co-Op Energy, Green Star Energy, SO Energy and Tonik. There are an estimated 0.5m energy switchers in the UK each month and the new partnerships present an exciting opportunity for HomeServe to introduce its products within the switching process.
Two new systems will go fully live in the UK in FY20: the core customer management system and the claims / network management system. As previously reported, the customer management system will provide a single, holistic view of our customers, which in turn will drive better conversations between agents and customers and offer improved cross sell and retention tools as well as driving down average call times. The network management system will improve claims handling and job deployment and will drive efficiencies in the field with both HomeServe's directly employed and subcontracted engineers. While these systems will give rise to a higher ongoing amortisation charge, this charge is expected to be offset by operational benefits and efficiencies.
The UK network of 989 directly employed engineers and 315 subcontractors completed 1.2m jobs (FY18: 1.2m). The directly employed network continues to fulfil almost 90% of water jobs and 60% of heating jobs with the remainder of work completed by the subcontract network. In the HVAC business line, Help-Link completed 11.1k boiler installations (FY18: 9.5k).
Customer satisfaction remains high with Trustpilot and Reevoo scores of 8.6 and 96% (FY18: 8.2 and 95%)
The focus for LeakBot has been on turning test relationships with insurers into larger volume deals. The device itself is proven and the wifi model delivers the potential to scale the opportunity. HomeServe now has an approach which is attractive for both HomeServe and home insurers based upon a rental model for the LeakBot devices plus insurers paying HomeServe for a leak finding and fixing service.
Looking forward the UK business will lead certain global Membership initiatives aimed at reinventing customer service and product offers. Already live is a test for HomeServe Now, a technology-led claims process utilising Smart IVR and routing customer calls directly to available engineers in a local radius with engineers accepting the job on a 'fastest finger first' basis and attending within an hour. This is a quick and easy experience and one that can improve efficiency for HomeServe and the claims experience for the customer.
North America
USD million 2019 2018 Change --------------------------- -------- -------- ------- Revenue Net policy income 396.8 349.1 14% Repair network 20.5 12.0 69% ---------------------------- -------- -------- ------- Membership 417.3 361.1 16% HVAC 17.6 14.1 27% Other 1.3 - 100% Total revenue 436.2 375.2 16% ---------------------------- -------- -------- ------- Adjusted operating costs (348.1) (310.8) 12% ---------------------------- -------- -------- ------- Adjusted operating profit 88.1 64.4 37% ---------------------------- -------- -------- ------- Adjusted operating margin 20% 17% 3ppts ---------------------------- -------- -------- ------- GBP million 2019 2018 Change --------------------------- -------- -------- ------- Revenue Net policy income 303.3 262.4 16% Repair network 15.7 9.6 64% ---------------------------- -------- -------- ------- Membership 319.0 272.0 17% HVAC 13.4 10.1 28%
Other 1.0 - 100% Total revenue 333.4 282.1 18% ---------------------------- -------- -------- ------- Adjusted operating costs (265.8) (233.5) 14% ---------------------------- -------- -------- ------- Adjusted operating profit 67.6 48.6 39% ---------------------------- -------- -------- ------- Adjusted operating margin 20% 17% 3ppts ---------------------------- -------- -------- ------- Performance metrics 2019 2018 Change ----------------------------- --- ----- ----- ------- Affinity partner households m 60 55 11% Customers m 4.0 3.6 13% Income per customer $ 96 91 5% Policies m 6.7 5.6 19% Policy retention rate % 83 83 - ----------------------------- --- ----- ----- -------
Financial Performance
Total revenue increased by 16% to $436.2m driven by another strong Membership performance. Net policy income increased by 14% to $396.8m due principally to higher customer numbers year on year as a result of continued strong growth and the successful completion of the second tranche of the Dominion Products and Services (DPS) policy book in October 2018.
Repair network revenue comprises jobs completed by the directly employed network and reflects the growing volume of claims from the larger customer base.
Total HVAC revenue grew 27% to $17.6m due principally to a 20% increase in total installations to c. 5k and a rise in the average revenue per install driven by an increased proportion of higher value jobs.
With the DPS policy book now fully integrated and an increase in the number of policies held per customer, income per customer rose 5% to $96.
Adjusted operating costs rose 12% to $348.1m due to continued business growth, but at a lower rate than revenue, reflecting the increasing scale and operational leverage of the North American business. This resulted in an adjusted operating margin of 20%, up by three percentage points compared to the prior year.
With the continued success of the North American business, its stated target of $160m of adjusted operating profit is within sight and with good progress in already achieving a 20% margin and income per customer getting close to $100, it is clear that $160m will be a milestone and not the end point for the North American business.
Operational performance
North America is now HomeServe's largest business in terms of both customer numbers and adjusted operating profit, overtaking the UK. Customer numbers increased by 13% to 4.0m including 0.2m added following the successful integration of the second tranche of Dominion. US homeowners continue to be highly receptive to HomeServe's products and 1.2m gross new customers were added in the year through annual marketing campaigns.
The policy retention rate remained high at 83% (FY18: 83%), and allied to a Better Business Bureau rating maintained at A+, is a good indicator of high customer satisfaction. The business was also honoured with 33 Stevie Awards for Sales & Customer Service and received a Grand Stevie Award, recognising HomeServe as the third most honoured organisation in the competition.
Utilities value the ongoing commission streams generated by partnering with HomeServe but they also value the high levels of service HomeServe provides to their customer base. This forms a key part of the proposal to win new partnerships. Successful business development led to an average of three new partners being signed every week and HomeServe North America now works with almost 700 partners with access to 60m households under a utility brand. The National League of Cities endorsement was renewed in the year and HomeServe also works with 16 individual State Leagues, bringing further endorsement at a more localised, State level.
HomeServe's network of c.5k contractors and 453 directly employed engineers (FY18: c.4k contractors and 170 employees) completed 0.5m jobs in FY19, up 21% on the prior year. HomeServe provides a steady stream of work for its contractors and shares technology (job scheduling, job routing software) that improves their efficiency and service. Consequently there is high demand to join the network, but of all contractors applying only c.10% are approved; this means that HomeServe works with only the very best contractors who provide the excellent levels of service that HomeServe and its customers demand. The number of directly employed engineers increased as a result of the HVAC acquisitions in the year.
In January 2019 HomeServe made a strategic investment in consumer technology company Centriq, purchasing a 20% stake for $5m. Centriq's app makes it easy for users to capture the details of items in their home, e.g. electronics and appliances simply by taking a photo of the product label. Having captured details, the app then provides users with resources to troubleshoot problems themselves, or with the details to obtain repair help and access to technicians when service is needed. A HomeServe branded version of the app will prove valuable in further engaging the existing 4.0m customer base and is a potential way to help acquire new customers.
Centriq is one of several initiatives to engage more customers digitally and to take advantage of technology that could improve the customer journey or increase operating efficiency. A smart IVR was launched during the year to enable customers to book tune-ups over the phone without agent intervention. This has proven to be a slick process for the customer and frees up agents to dedicate their time to providing high levels of customer service on more complicated calls. After its successful roll out in North America, the technology is now being introduced into the UK, France and Spain.
North America continues to lead on the Group's HVAC strategy and acquired three new HVAC businesses in the year, of which Cropp Metcalfe in March 2019 was the largest. The acquisition nearly doubles HomeServe's employed HVAC workforce and is the next step in building a share of the estimated $29bn annual HVAC market in the US. Cropp Metcalfe meets HomeServe's criteria of a well-run, owner-managed business with a strong local reputation and will continue to provide its services to its existing customer base as well as now also providing installation services and repairs in an area (Washington D.C.) of existing high policy density.
France
EURuro million 2019 2018 Change --------------------------- ------- ------- ------- Revenue Net policy income 115.6 111.7 3% Repair network 0.5 0.5 (2%) ---------------------------- ------- ------- ------- Membership 116.1 112.2 3% HVAC 1.7 1.0 67% Other 0.9 - 100% Total revenue 118.7 113.2 5% ---------------------------- ------- ------- ------- Adjusted operating costs (80.9) (77.5) 4% ---------------------------- ------- ------- ------- Adjusted operating profit 37.8 35.7 6% ---------------------------- ------- ------- ------- Adjusted operating margin 32% 32% - ---------------------------- ------- ------- ------- GBP million 2019 2018 Change --------------------------- ------- ------- ------- Revenue Net policy income 101.9 98.6 3% Repair network 0.4 0.4 (3%) ---------------------------- ------- ------- ------- Membership 102.3 99.0 3% HVAC 1.5 1.0 50% Other 0.8 - 100% Total revenue 104.6 100.0 5% ---------------------------- ------- ------- ------- Adjusted operating costs (71.3) (68.5) 4% ---------------------------- ------- ------- ------- Adjusted operating profit 33.3 31.5 6% ---------------------------- ------- ------- ------- Adjusted operating margin 32% 32% - ---------------------------- ------- ------- ------- Performance metrics 2019 2018 Change ----------------------------- ----- ----- ----- ------- Affinity partner households m 18 15 20% Customers m 1.1 1.1 2% Income per customer EUR 109 106 3% Policies m 2.3 2.3 - Policy retention rate % 89 88 1ppt ----------------------------- ----- ----- ----- -------
Financial performance
Total revenue increased by 5% to EUR118.7m (FY18: EUR113.2m) primarily due to the higher customer count and an increase in HVAC revenue as a result of a full year's income from Electrogaz, a business acquired part way through the prior year.
Adjusted operating costs rose slightly, by 4%, to EUR80.9m largely linked to the HVAC growth. Adjusted operating margin was 32%, in line with the prior year, as adjusted operating profit grew 6% to EUR37.8m. The future adjusted operating margin is expected to be around 30% as the business invests in its business development opportunities, notably HVAC and customer acquisition with new partners.
Operational performance
France had a strong year as it once again returned the highest retention rate in the Group, up one percentage point to 89% (FY18: 88%), and total customers increased by 2% to 1.1m. For the third year running, France's focus on maintaining high customer service standards was reflected in the award of Élu Service Client de l'Année.
A key component of HomeServe's success in France has been its partnership with Veolia. The partnership began as a joint venture when HomeServe first entered France in 2001, continued as a 10 year affinity marketing agreement after HomeServe bought Veolia's share in 2011 and has now been extended early until 2026. The deal secures ongoing support for direct mail and renewal activities and also introduces new channels and opportunities to drive further growth through Veolia's HomeFriend initiative. As well as new telephony and digital channels, Veolia, through HomeFriend, will sell HomeServe's products directly in its own call centre, giving rise to similar partner payments within capital expenditure as seen with Suez (also in France) and previously Endesa in Spain.
The French business now works with the top three French water utilities having signed a new partnership with the third largest provider, Saur, in December 2018. The Saur relationship will enable marketing campaigns under a fresh brand to c.4.0m households. Having signed the partnership in December, test campaigns were quickly launched in the final quarter of FY19 with encouraging early results.
Approximately 10m French households receive their water supply from small to mid-sized municipals and the French team has now commenced attempts to access this channel by learning from the successful programme in North America where HomeServe already works with a large number of municipals.
Deregulation in the Energy sector in France is accelerating with more than 40 energy retailers taking market share from the larger incumbents and the French business has started to build a strong business development pipeline to partner with the new challengers.
Following the acquisition of Electrogaz, an HVAC business in the south of France, last financial year, the French business made two further HVAC acquisitions in FY19, Société V.B. Gaz and Etablissements Descamps. Descamps adds to HomeServe's HVAC presence in the South of France and complements last year's acquisition of Electrogaz whilst V.B. Gaz is based just outside Paris. Annual domestic boiler services are mandatory in France, so the HVAC market is a particularly attractive opportunity and the two acquisitions represent a further step in HomeServe's buy-and-build strategy to capture more of the revenue generated in the HVAC lifecycle from installation to annual service contract and one-off repairs.
Spain
EURuro million 2019 2018 Change --------------------------- -------- -------- ------- Revenue Net policy income 62.7 63.0 (1%) Repair network 92.0 97.1 (5%) ---------------------------- -------- -------- ------- Membership 154.7 160.1 (3%) HVAC 5.0 - 100% Total revenue 159.7 160.1 - ---------------------------- -------- -------- ------- Adjusted operating costs (139.9) (141.2) (1%) ---------------------------- -------- -------- ------- Adjusted operating profit 19.8 18.9 5% ---------------------------- -------- -------- ------- Adjusted operating margin 12% 12% - ---------------------------- -------- -------- ------- GBP million 2019 2018 Change --------------------------- -------- -------- ------- Revenue Net policy income 55.3 55.6 (1%) Repair network 81.1 85.7 (5%) ---------------------------- -------- -------- ------- Membership 136.4 141.3 (3%) HVAC 4.4 - 100% Total revenue 140.8 141.3 - ---------------------------- -------- -------- ------- Adjusted operating costs (123.1) (124.7) (1%) ---------------------------- -------- -------- ------- Adjusted operating profit 17.7 16.6 5% ---------------------------- -------- -------- ------- Adjusted operating margin 13% 12% 1ppt ---------------------------- -------- -------- ------- Performance metrics 2019 2018 Change ----------------------------- ----- ----- ----- ------- Affinity partner households m - 12 (100%) Customers m 1.1 1.3 (16%) Income per customer EUR 57 47 19% Policies m 1.3 1.5 (15%) Policy retention rate % 80 78 2ppts ----------------------------- ----- ----- ----- -------
Financial performance
Total revenue was broadly flat at EUR159.7m as lower repair network revenue was offset by new HVAC revenue generated by Oscagas, a company acquired in July 2018.
Repair network revenue was down 5% principally due to the mix of completed work as the Claims business closed 0.8m jobs (FY18: 0.8m).
Net policy income fell by 1% to EUR62.7m as the effect of the lower customer count following the end of the Endesa partnership was offset by a maturing policy book and a 19% increase in income per customer to EUR57.
Adjusted operating costs fell 1% to EUR139.9m due to the mix of work in the Claims business and lower marketing and commission spend following the end of the Endesa partnership in May 2018, offset by costs incurred in the new HVAC business.
Operational performance
As announced last year end, the Endesa partnership in Spain came to an end in May 2018. Acquisition marketing ceased from this date and Endesa was removed from the Spanish household count. As expected total customers therefore reduced in Spain and at the year end were down by 16% to 1.1m.
With a maturing book and fewer Year 1 customers, the retention rate rose by 2 percentage points to 80%, and income per customer increased by 19% to EUR57: a strong result which underpins the Membership revenue in the short term as the business continues to explore new partnership opportunities.
As well as attempting to unlock another sizeable partnership, the Spanish business is also pursuing opportunities with retail energy providers, water municipals and telcos. The retail energy opportunity looks to exploit the nascent switching market in Spain and although only small volumes so far, the take up rates with a new partner, PODO, have been very encouraging.
The Spain team is also exploring opportunities in the water sector as it looks to agree new partnerships with water municipals.
The Claims business ("Repair network") continued working with a number of Spain's largest bancassurers, managing a large volume of claims across multiple trades and is exploring business development opportunities to expand its partnerships further. Jobs continue to be completed by a network of over 1,907 sub contractors and 190 franchisees (FY18: 1,838 subcontractors and 192 franchisees).
The strong retention rate in the Membership business and the continued strength of the Claims business means that HomeServe expects no significant impact on adjusted operating profit through FY21 as it continues to seek new partnerships.
Home Experts
GBPmillion 2019 2018 Change
-------------------------- -------- ------- ----------
Revenue
Checkatrade 29.8 8.3 +258%
Habitissimo 10.6 10.3 +2%
--------------------------- ------- ------- --------
Total revenue 40.4 18.6 +116%
--------------------------- ------- ------- --------
Adjusted operating costs (47.8) (21.4) +123%
--------------------------- ------- ------- --------
Adjusted operating loss (7.4) (2.8) +164%
--------------------------- ------- ------- --------
Performance metrics 2019 2018 Change
-------------------------- --- ----- ----- -------
Checkatrade trades k 36 29 +23%
Habitissimo trades k 28 29 (2%)
Checkatrade website hits m 17.9 16.1 +11%
Habitissimo website hits m 83.2 81.3 +2%
-------------------------- --- ----- ----- -------
Financial Performance
FY19 was the first year of full ownership of Checkatrade. On a pro forma 12 month basis, revenue increased strongly by 33% from GBP22.4m to GBP29.8m driven by pricing initiatives implemented in the year and a 23% growth in the number of trades. The increased revenue has been reinvested to drive future growth.
Habitissimo revenue was broadly flat year on year as HomeServe focused on proving out the preferred subscription model with Checkatrade. This model will be introduced to Habitissimo's core market in Spain over the course of the next 12 months.
The increased adjusted operating loss of GBP7.4m (FY18: GBP2.8m) was principally due to a full year's ownership of Checkatrade and increased investment in initiatives to drive trades and consumer growth as well as the launch of Home Experts in France.
Operating Performance
In FY19 Checkatrade made significant progress as it began to position itself for future growth. Central to this has been the recruitment of a new senior management team with experience in fast growing digital businesses, under the leadership of new CEO Mike Fairman, formerly CEO of giffgaff.
The Checkatrade model of a free to access directory of trusted, local trades is the one preferred by consumers. In order to achieve HomeServe's ambitious plans to expand and grow this model, the new Checkatrade team is progressing a number of initiatives to increase trades supply, increase consumer demand and transform its operations into a fully digital business.
The balance of supply and demand is fundamental to recruiting and retaining a satisfied trades base and Checkatrade is dedicated to generating work and helping trades to grow their business. Trades value the benefits their membership brings; the endorsement of being extensively checked and approved, procurement discounts, a webpage and online presence, but more than any other factor, trades join Checkatrade to obtain a consistent flow of consumer enquiries and jobs.
There are an estimated 600,000 trades in the UK, all of whom could benefit from Checkatrade membership and Checkatrade has an ambition to recruit 200,000 of these. Owning the supply of trades will create a virtuous circle where consumers come to Checkatrade because it has the most trusted, local trades and in turn trades join and remain on Checkatrade because it is the site consumers use.
Trades recruitment becomes much easier when trades can be shown the consumer demand in their area that will generate work for them and more than justify their monthly membership fee. FY19 saw an 11% increase in website visits and a 23% increase in the number of trades to 36k. Checkatrade has the largest number of active, paying trades of any platform in the UK today. As the business grows consumer demand, and with outbound telemarketing to trades now live, the aim remains to step change the number of trades on the platform towards the target of 200,000.
Checkatrade has built a market leading position from its reputation for extensive background checks and vetting and by building its brand through TV and radio advertising and sponsorship of sporting events, e.g. the Checkatrade Trophy. Under the guidance of the new management team, the business is becoming more sophisticated in how it appraises marketing spend and more selective as to where it allocates its investments. TV and radio advertising will continue to build the brand and drive consumers directly to the website but it is now accompanied by targeted online marketing, e.g. purchase of search terms, and affiliate referral arrangements to drive a greater proportion of existing online searches for repairs and improvements to Checkatrade.com.
Complementing extensive vetting and checks is the ongoing independent feedback provided by consumers. There are now over 4.4m reviews on Checkatrade.com with over 50k new reviews added every month.
An element lacking in the consumer offer today is trade availability. Trades are often booked up far in advance and consumers may need to contact several trades before finding one with availability. Checkatrade Now connects consumers with an available trade for an urgent job request. Next to be developed is a "search for me" function for consumers who simply want an available trade and do not want to search the directory themselves.
Shortly after the year end HomeServe launched Home Experts in France, initially in Lyon. The Lyon test area will prove out the Checkatrade model in a 'greenfield' market, growing supply and demand in the Lyon area before expanding to other regions.
As well as helping to launch Home Experts in France, Habitissimo continued to deploy its lead generation model in Spain and in its other markets in Europe and LATAM. Trade and website visitor numbers remained flat for FY19 but the focus will be on growing these in FY20 as Habitissimo also starts to adopt the preferred user experience.
New Markets
HomeServe's New Markets segment now contains the results of its international development operations including its Italian associate, Japanese joint venture and business development initiatives in other new geographies.
New Markets (GBPmillion) 2019 2018 Change -------------------------- ------ ------ -------- Adjusted operating loss (2.4) (1.6) +150% --------------------------- ------ ------ --------
Total investment in New Markets was GBP2.4m (FY18: GBP1.6m) with the increase principally driven by a larger international development team and activities to agree the joint venture with Mitsubishi Corporation in Japan. HomeServe expects an ongoing annual investment of between GBP2m to GBP3m in this area.
The Italian associate, in partnership with Edison Energia, had 0.2m customers in line with the prior year.
On 14 February 2019, HomeServe entered into an agreement with Mitsubishi Corporation to establish a joint venture in Japan. Japan is the world's third largest economy with 53 million residential households and recent liberalisation of the gas and electricity markets, together with access to the water market for private concessions, has created a positive environment for HomeServe's utility branded home assistance model.
Mitsubishi Corporation is not itself a utility but it does have wide ranging relationships with private and public utilities throughout Japan, which should enable HomeServe Japan to agree utility partnerships and build a business to provide home emergency and repair services in electrics, plumbing, gas, heating, ventilation and air conditioning. The business will be based on a Membership model, and will also offer on-demand services to residential customers.
HomeServe and Mitsubishi Corporation have each agreed an initial cash investment of GBP2 million into the joint venture with the ongoing annual investment by HomeServe to be covered within the overall New Markets spend.
FINANCIAL REVIEW
These financial results have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use by the European Union.
Group statutory results
The headline statutory financial results for the Group are presented below.
GBPmillion 2019 2018
------------------------------------------------- -------- -------
Total revenue 1,003.6 899.7
Operating profit 152.6 135.0
Net finance costs (13.1) (11.7)
------------------------------------------------- -------- -------
Adjusted profit before tax 161.7 141.7
Amortisation of acquisition intangibles (26.8) (18.4)
Exceptional items
Restructuring costs (5.5) -
Fair value movement on contingent consideration 10.1 -
liabilities
------------------------------------------------- -------- -------
Statutory profit before tax 139.5 123.3
Tax (31.2) (27.4)
Profit for the year 108.3 95.9
------------------------------------------------- -------- -------
Attributable to:
Equity holders of the parent 108.5 96.3
Non-controlling interests (0.2) (0.4)
108.3 95.9
------------------------------ ------ ------
Profit before tax
The Group delivered 13% growth in profit before tax to GBP139.5m driven principally by further strong growth in North America. The performance of HomeServe's individual businesses is considered in the Business Review.
Net finance costs
Net finance costs rose to GBP13.1m (FY18: GBP11.7m) due to the unwinding of interest on deferred consideration in relation to previous M&A activity, the higher average net debt balance year on year and the fixing of a portion of interest as a result of the new private placement.
Exceptional items
The Group incurred two exceptional items in the year (FY18: nil).
An exceptional cost of GBP5.5m, mostly related to redundancies and other associated charges incurred in respect of changes to the organisational design of the UK business. Marketing and other support headcount decreased, as the business reduces its reliance on direct mail activity and prepares for the launch of new system implementations and operational improvements.
Offsetting the charge was an exceptional gain of GBP10.1m relating to a fair value movement on contingent consideration payable to the previous owners of Help-Link upon hitting certain stretch target volumes of boiler installations. At 31 March 2019 the Group determined that the likelihood of hitting these targets was now remote and that the fair value of the outstanding liabilities was GBPnil.
Amortisation of acquisition intangibles
Statutory profit before tax is reported after the amortisation of acquisition intangibles and the exceptional items noted above.
Such amortisation relates to customer and other contracts held by businesses, which were acquired by HomeServe as part of business combinations and asset purchases.
The amortisation of acquisition intangibles of GBP26.8m (FY18: GBP18.4m) increased principally due to annual charges relating to the acquisition of tranche 1 of the policy book of Dominion Products and Service Inc. (DPS) in North America and Checkatrade in the UK, which were acquired part way through the prior year together with the completion of tranche 2 of DPS on 26 October 2018.
A reconciliation between adjusted and statutory amounts is included with the Glossary at the end of this announcement along with commentary on HomeServe's use of adjusted items as an Alternative Performance measure.
Tax strategy
The Group has continued to operate within the tax strategy approved by the Board in May 2018. The tax strategy is subject to annual review and reflects HomeServe's status as a plc, and the regulated nature of its business which requires strong governance and consideration of reputation as well as compliance with local laws, regulations and guidance. The UK elements of the tax strategy document are publicly available on the Homeserve plc website as required by UK legislation.
The Group tax strategy covers how HomeServe:
(i) applies tax governance on an ongoing basis and maintains strong internal controls in order to substantially reduce tax risk;
(ii) will not engage in artificial transactions the sole purpose of which is to reduce tax;
(iii) holds a strategic aim to retain its low tax risk rating as determined by the UK Tax Authority's Business Risk Review process; and
(iv) works with all tax authorities in an open, honest and transparent manner.
Tax charge and effective tax rate
The Group's tax charge in the financial year was GBP31.2m (FY18: GBP27.4m), representing an effective tax rate of 22% (FY18: 22%). The corporate income tax rates in the overseas countries in which the Group operates continue to be higher than the UK corporate income tax rate of 19% (FY18: 19%), which results in a Group effective rate higher than the headline UK rate. As the proportion of the Group's profits earned overseas continues to grow, the effective tax rate is expected to increase slightly.
Cash flow and financing
HomeServe's business model continues to be highly cash generative with cash generated by operations in FY19 of GBP202.2m (FY18: GBP164.2m), representing a cash conversion ratio against adjusted operating profit of 116% (FY18: 107%). The cash conversion ratio is expected to remain in excess of 100%.
GBPmillion 2019 2018 ----------------------------------------------- -------- -------- Adjusted operating profit 174.8 153.4 Exceptional items 4.6 - Amortisation of acquisition intangibles (26.8) (18.4) ----------------------------------------------- -------- -------- Operating profit 152.6 135.0 Impact of exceptional items (4.6) - Depreciation and amortisation 73.9 62.6 Non-cash items 10.7 9.0 Increase in working capital (30.4) (42.4) ----------------------------------------------- -------- -------- Cash generated by operations 202.2 164.2 Net interest and associated borrowing costs (9.9) (10.5) Taxation (31.7) (27.2) Capital expenditure (66.9) (71.1) Repayment of finance leases (0.6) (0.6) ----------------------------------------------- -------- -------- Free cash flow 93.1 54.8 Acquisitions of investments (5.4) - Acquisitions of subsidiaries (37.5) (54.2) Acquisitions of policy books (48.8) (53.6) Dividend from associate - 0.4 Equity dividends paid (65.0) (50.4) Issue of shares (net of associated issue costs) 2.2 123.3 ----------------------------------------------- -------- -------- Net movement in cash and bank borrowings (61.4) 20.3 Impact of foreign exchange and other non-cash items (5.2) 2.9 Net debt acquired (0.1) (0.1) Finance leases (0.2) 0.5 Opening net debt (237.8) (261.4) ----------------------------------------------- -------- -------- Closing net debt (304.7) (237.8) ----------------------------------------------- -------- --------
Working capital
Working capital increased by GBP30.4m in FY19 reflecting continued growth in all businesses, in particular in North America following tranche 2 of Dominion and in Home Experts due to the changes being implemented at Checkatrade, offset by the timing of certain supplier and underwriter payments.
Capital expenditure
Capital expenditure included GBP51.9m in relation to ordinary and transformational capital expenditure, the largest elements of which related to customer facing systems throughout the Group including the core customer management system and claims handling and job deployment systems in the UK. These systems are in the final stages of user testing before being rolled out during the coming year. This will give rise to an increased annual software amortisation charge, which is expected to be offset by increased agent efficiency through shorter call handling times, higher engineer utilisation rates and more targeted cross sell and retention marketing opportunities.
Total partner payments and contract costs amounted to GBP15.0m an expected reduction on the prior year (FY18: GBP16.5m), due to the end of the Endesa contract in Spain.
Capital expenditure in FY20 is expected to be in line with FY19. Membership capex is expected to reduce, in line with previous guidance and HomeServe now expects to invest more in Home Experts to support its growth plans as it seeks to transform the digital experience at Checkatrade and to scale the business efficiently
Acquisitions
The GBP5.4m acquisition of investments related to a 20% investment in consumer technology company Centriq amounting to $5.0m and an initial GBP1.5m cash outflow in relation to the GBP2m of investment that HomeServe has committed to its joint venture with Mitsubishi Corporation in Japan.
The Group incurred a net cash outflow in respect of business combinations of GBP37.5m in the year (FY18: GBP54.2m), principally in respect of GBP27.1m from the acquisition of HVAC businesses to advance the Group's buy and build initiative, including Cropp Metcalfe, Gregg Mechanical and Geisel in North America, Oscagas in Spain and VB Gaz in France.
In addition, there was a further outflow of GBP10.4m relating to deferred consideration in respect of business combinations in prior periods, principally Checkatrade and Help-Link in the UK.
A cash outflow of GBP48.8m was incurred in relation to policy book acquisitions in North America and the UK. Tranche 2 of the policy book of DPS in North America completed on 26 October 2018 at a cost of GBP41.6m. The balance related to deferred payments from the prior year acquisitions of tranche 1 of DPS and also the policy book acquisition from the AA in the UK.
HomeServe continues to identify and assess M&A opportunities in all of its businesses, including further HVAC investment as it expands its buy and build initiative. Policy book M&A remains a low risk approach to accelerating growth and HomeServe continues to attempt to unlock opportunities in all countries but especially in North America.
Earnings per share
Basic earnings per share for the year increased from 30.2p to 32.7p, an increase of 8%. On an adjusted basis, earnings per share increased 12% from 33.6p to 37.5p. The weighted average number of shares increased from 318.9m to 331.7m principally due to the equity placing which occurred part way through the prior year on 19 October 2017 and new shares issued in fulfilment of a number of share schemes that vested in the year.
Dividends
Given the Group's good performance and the Board's confidence in its future prospects, the Board is proposing to increase the final dividend to 16.2p per share (FY18: 14.4p) to be paid on 2 August 2019 to shareholders on the register on 5 July 2019.
Together with the interim dividend declared in November 2018 of 5.2p (November 2017: 4.7p), this represents a 12% increase in the total ordinary dividend payment for the year of 21.4p (FY18: 19.1p), which is 1.75x covered by the FY19 adjusted earnings per share (FY18: 1.76x). As previously indicated, the Board continues to adopt a progressive dividend policy.
Financing
In FY19 the Group continued to target net debt in the range of 1.0-2.0x adjusted EBITDA, measured at 31 March each year. With net debt of GBP304.7m and adjusted EBITDA of GBP221.9m the Group was inside this range at 1.4x and well within its total facilities of c. GBP700m at the year end.
Given its strong financial position, the Group is prepared to see leverage outside this range for reasonable periods of time if circumstances warrant, and the range itself remains subject to periodic review. Due to the ordinary seasonality of the business, net debt is expected to increase at the next half year.
On 25 October 2018 HomeServe arranged GBP174.2m funding via a US Private Placement, with a number of notes totalling $125.0m and GBP80.0m and with maturity dates in the range of 7 to 12 years.
Net interest and borrowing costs paid reduced slightly to GBP9.9m (FY18: GBP10.5m) as the prior year included higher one-off costs associated with the renewal of the Group's bank debt facilities.
Foreign exchange impact
The impact of changes in the Euro and USD exchange rates between FY18 and FY19 resulted in a GBP5.3m increase in the reported revenue and a GBP1.5m increase in adjusted operating profit of the international businesses as summarised in the table below, largely as a result of a beneficial movement in the US dollar. There was no material difference for the impact of foreign exchange on statutory operating profit.
Effect on (GBPm)
Average exchange rate Revenue Adj. operating
profit
2019 2018 Change 2019 2019
--------------------- ----- ----------- ----------- ------- -------- ---------------
North America $ 1.31 1.33 (2)% 5.5 1.6
France EUR 1.13 1.13 - (0.2) (0.1)
Spain EUR 1.13 1.13 - - -
Home Experts(1) EUR 1.13 1.13 - - -
--------------------- ----- ----------- ----------- ------- -------- ---------------
Total International 5.3 1.5
---------------------------- ----------- ----------- ------- -------- ---------------
(1)Home Experts is reported in GBP due to the different currencies used by the operating businesses within the segment. This table shows the impact of foreign exchange movements in the Euro for the results of Habitissimo
With an increasing proportion of HomeServe's profits generated overseas, the potential translation impact of foreign exchange movements on reported profits may have a larger impact. A ten cent movement in the FY19 average USD rate of 1.31 and the Euro rate of 1.13 would have had approximately a GBP5.2m and GBP4.5m impact respectively on full year adjusted operating profit. The impact of future movements in the Yen in FY20 following HomeServe's new joint venture in Japan is not expected to be material.
Accounting standards
FY19 is the first year the Group has prepared results under IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. IFRS 15 has not had a material impact on the timing of the Group's revenue recognition, with the principal effects being limited to material reclassifications to the presentation of certain contract, receivable and payables balances in the Group Balance Sheet. None of these amendments had any impact on income, net assets or working capital. IFRS 9 had no significant impact on the financial statements. Further details are included in note 2 of the condensed consolidated financial statements.
IFRS 16 Leases is effective for the Group from 1 April 2019. IFRS 16 will cause a material decrease in operating costs largely offset by a material increase in the combined depreciation and interest expenses, resulting in an increase to adjusted EBITDA but a net immaterial impact on profit before tax. The operating lease charge recorded in operating costs in FY19 was GBP12.9m (FY18: GBP12.7m). Non-current assets and gross liabilities are both expected to increase by between GBP45.0m to GBP60.0m with net assets remaining unchanged.
Customers
IFRS15 defines a customer as 'a party that has contracted with an entity to obtain goods or services'. In the Membership businesses where the Group acts as an intermediary selling contracts and insurance policies to end consumers, the 'IFRS 15 customer' is considered to be the underwriter with which the Group has contracted to sell policies.
This is different, however, from how the Group markets and communicates the value of its products and services to end consumers. Here, the businesses strategy and communications (both internally and externally) refer to the end consumer as the customer. As a result, for the purposes of describing the strategy and operational performance of the business, the Strategic Report and the Group's KPIs refer to the end consumer as the customer of the Group, rather than the underwriter. However, for the purposes of preparing the financial statements, the accounting transactions are recorded in accordance with IFRS 15 where the customer is the underwriter.
For all other sources of revenue, it is the party that has contracted with the Group to obtain goods and services that is classified as the customer. The following table summarises this position:
Revenue Stream IFRS 15 'contracted' Customer as referred
customer to in the Business and
Operating Reviews
Policy Income - insurance Underwriters
intermediary commissions End user of the service
--------------------- --------------------------
Policy Income - repairs Underwriters or other B2B contracted parties
-------------------------------------------------
Policy Income - home End user of the service
assistance
-------------------------------------------------
Home Experts
--------------------- --------------------------
HVAC
Other
--------------------- --------------------------
Principal Risks and Uncertainties
HomeServe has a robust risk management framework which encompasses the Group's risk policy and overall risk appetite. The framework provides a disciplined and consistent approach across all of HomeServe, ensuring a structured response at all levels throughout the Group and across all businesses and geographies, to capture, monitor and mitigate risk.
Risk Framework
The Board retains responsibility for the overall evaluation of
the Group's risk management process
Group Risk Management Audit & Risk Committee
Team * Advises the Board on risk appetite and risk strategy,
* Proposes the risk framework across the Group ensures the quality and effectiveness of risk
management processes and receives regular updates
from the Group Risk Management Team
* Supports implementation
* Composed and chaired by independent Non-Executive
* Monitors risk management Directors
* Internal and external auditors, CFO, CEO and Chairman
are invited, but not entitled, to attend all meetings
* Other Executive Directors attend where appropriate
-------------------------------------------------------------
Executive Committee - Risk discussion three
times per year
* Risk discussion chaired by the CFO
* Composed of Executive Directors and representatives
from each Group business
* Discussions are reported on at the Audit & Risk
Committee
-------------------------------------------------------------
Local risk registers
* Maintained and reviewed by all businesses
-------------------------------------------------------------
Changes in FY19
In FY19 HomeServe formalised the process by which it groups local risks and thereby identifies Group Enterprise Risks. Group Enterprise Risks are considered to represent the most significant threats to HomeServe's ongoing strategy and operations. Risk registers continue to be maintained at a local level in every business and are formally reviewed by the Audit & Risk Committee at each of its meetings together with Group Enterprise Risks.
The following table sets out what the Board believes to be the principal risks and uncertainties facing the Group, the mitigating actions for each, and an update on any change in the profile of each risk during the past year. All risks carry equal importance and weighting for the Board, however additional focus and priority may be given to specific risks for a period of time in certain circumstances e.g. following a material acquisition or to implement plans to reduce any risk which exceeds the appetite threshold.
Membership continues to be the largest business line in each geographic segment and as such continues to dominate the Principal Risks. However with the growth in other business lines, in particular Home Experts, there have been movements in certain risks.
The principal risks and uncertainties should be read in conjunction with the Business Review and the Financial Review. Additional risks and uncertainties of which HomeServe is not currently aware or which are believed not to be significant may also adversely affect strategy, business performance or financial condition in the future.
Risk Appetite
In accordance with the Group's Risk Management policy, the Group Risk Appetite is subject to an annual review of its definition, content and criteria for assessment scores.
The Board's assessment of risk appetite is guided by our vision to become the world's most trusted provider of home repairs and improvements and by our purpose to make home repairs and improvements easy. HomeServe's values reflect our commitment to our customers, our people, to innovation and integrity and being the best at what we do. HomeServe's risk appetite is comparatively low, recognising; firstly our status as a plc which requires strong governance and reputation, together with delivering returns for our shareholders and; secondly our regulated status which requires compliance with local laws, rules and guidance.
Risks are assessed at a local level on a gross basis using a matrix approach, to score likelihood and impact, and on a net basis after considering any mitigations which have been applied.
Brexit
Brexit is not one of HomeServe's enterprise risks but does continue to be monitored at a local and a Group level. Brexit is potentially one of the most significant economic events for the UK and at the date of this statement, the full range, scale and timing of potential outcomes and impacts are uncertain. However, HomeServe continues to believe the impact of the UK's decision to leave the EU and the current delay in implementing this decision on the underlying performance of the Group will be limited.
The HomeServe business model is resilient and in previous periods of consumer uncertainty and economic downturn, for example during the financial crisis in c. 2007 to 2009, no negative impact on business performance was observed.
In addition, all of HomeServe's businesses trade exclusively within their own borders and HomeServe is not exposed to any cross border transactional currency risk. The Group has a strong balance sheet and retains a range of financing facilities with medium to long term maturities, which provide access to additional resources across a range of currencies. The Group remains subject to translation risk on the presentation of results in Sterling however this is within the ordinary course of business.
1. Market Disruption 2. Partnerships 3. International Development
================================================================= ============================================================== ===============================================================
Overview
Competition exists in Underpinning HomeServe's HomeServe has enjoyed
all business lines but success in its chosen success with its Membership
is strongest in Home markets are close commercial model in markets outside
Experts as competitors relationships (affinity of the UK and intends
seek to gain a share partner relationships) to expand to other regions.
of a market as it undergoes principally with utility
a meaningful shift online. companies, and municipal
Competitive threats utility providers. The
include, but are not loss of one of these
limited to; relationships could
* Utilities running Membership programmes in-house impact HomeServe's future
customer and policy
growth plans and retention
* Adjacent products e.g. Whole Home Warranty rates. Growth plans,
particularly in North
America, focus on signing
* Existing competitors moving into other geographies new partners to extend
reach and provide new
marketing opportunities
* New entrants e.g. Amazon or Google investing heavily to grow the business.
to enter the home services space with new products or HomeServe has benefitted
technologies which erode HomeServe's market share from government policy
changes in certain regions
to form new partnerships
* Incumbent competitors to Home Experts in the UK e.g. e.g. liberalisation
Rated People, MyBuilder of energy markets in
Spain. Any reversal
e.g. to renationalise
utilities could have
an adverse impact albeit
HomeServe does have
strong experience working
with public sector municipals
in North America.
-------------------------------------------------------------- ---------------------------------------------------------------
Impact(s)
Over time there could With c.700 partners HomeServe has enjoyed
be a negative impact across the Group it success in France, Spain
on KPIs such as customers is inevitable that a and North America but
and retention rate, few partners each year has been unsuccessful
in Membership and trade may choose not to renew in past attempts to
and website visitor a contract as priorities enter Australia, Belgium
numbers in Home Experts or commercial pressures and Germany.
as well as on financial change. In the UK and Failure to succeed could
metrics such as adjusted North America where divert investment and
operating profit and the partner bases are management time incurring
adjusted operating margin more diversified the not only losses in the
as customers are lost impact is considered new country but also
or we are forced to small. In France the reduced performance
compete more on price. loss of e.g. Veolia (including, for example,
would have a bigger loss of customers, lower
impact similar to that profitability) in the
of Endesa in Spain where core markets.
the back book is now
in run-off. Any partner
loss or failure to sign
new partners could impact
households, customers
and also retention rates,
without use of the partner
brand.
-------------------------------------------------------------- ---------------------------------------------------------------
Mitigation(s)
* We demonstrate to utilities that they can benefit * A portfolio of partners in each business diversifies * Strict criteria to identify attractive markets
more by partnering with HomeServe due to our long risk
term investment horizon
* Joint venture structure diversifies risk and
* Partners signed on long term contracts with minimises investment
* Regular market reviews in each business identify new beneficial financial terms for each party
entrants and increases in competitor activity e.g.
aggressive pricing initiatives. * JV partner brings local market knowledge and contacts
* HomeServe seeks to renew contracts early, ahead of
any expiration date
* Agile product development responds to changing * HomeServe brings membership model systems and process
consumer needs expertise
* Regular dialogue with all partners, particularly in
markets with more concentrated partner relationships
* Shared learning between our markets e.g. France
-------------------------------------------------------------- ---------------------------------------------------------------
Update
We continue to develop We are signing partners In February 2019 HomeServe
our Home Experts proposition at a rate of almost announced it had agreed
which diversifies our three a week in North a joint venture with
product offering and America, we have renewed Mitsubishi Corporation
ensures we appeal to Veolia until 2026 and to form a Membership
a broader range of home signed Saur in France business in Japan. As
owners. We have continued and in the UK we have the world's third largest
to invest; evolving signed a number of new economy, Japan is an
our products in all retail energy challengers. attractive market. Mitsubishi
businesses, acquiring In May 2018 the long and HomeServe will each
further HVAC businesses term partnership with provide staff to the
and investing revenue Endesa was not renewed local management team
growth in Checkatrade as Endesa sought to and have shared the
back into marketing provide home assistance initial investment with
to ensure we maintain services in-house. We each agreeing to contribute
the leading UK brand are actively engaged GBP2m into the new JV.
in this space. in finding new partners HomeServe continues
In Membership there in Spain and we have to prospect other potential
has been more focus also commenced a new markets.
on competing / adjacent JV partnership with
products following a Mitsubishi Corporation
recent stock market in Japan.
listing of a Whole Home
Warranty Provider in
the US.
-------------------------------------------------------------- ---------------------------------------------------------------
4. M&A Strategy 5. HVAC Integration 6. Cyber
Security
============================================================= =============================================================== =================
Overview
M&A is focussed on two The higher volume of In line with
primary areas; the acquisition HVAC acquisitions requires other
of Membership policy disciplined and often businesses,
books in all markets standardised processes HomeServe is
and a buy-and-build to ensure successful subject
strategy to grow the integration into HomeServe, to the
HVAC business line. creating strong links increased
Policy book M&A is considered to the Membership business prevalence
a proven, low-risk method and achieving synergies and
to accelerate growth with e.g. Marketing, sophistication
and HomeServe has a back-office functions of
strong track record etc. cyber-attacks,
of buying these books, which
especially in North could result
America as demonstrated in
most recently with Dominion. unauthorised
HVAC buy-and-build typically access to
requires lower investment customer and
as the strategy focuses other data or
on acquiring smaller, cause
well-run HVAC businesses business
with strong local reputations. disruption
to services.
--------------------------------------------------------------- -----------------
Impact(s)
HomeServe could overpay Failure to integrate A successful
for transactions or acquisitions quickly cyber attack
underestimate the time and effectively could might have a
and resource required fail to deliver synergies, significant
to integrate new businesses, and increase costs, impact on
potentially leading resulting in failure reputation,
to lower than anticipated to achieve predicted reducing the
cash inflows and revenue, revenues and potentially trust that
increased costs, reduced lead to impairment. customers
profitability and an place in
increased likelihood HomeServe
of impairment. and could lead
By contrast, a successful to legal
M&A strategy should liability,
diversify risk by, for regulatory
example, introducing action and
new partners and channels, increased
increasing profitability costs to
and should lead to increases rectify. A
in KPIs such as customers lapse in
and policies. internal
controls
and a
subsequent
data
breach or loss
would
have a similar
impact.
Total customer
numbers
and policy
retention
rates may
reduce and
partners may
terminate
affinity
relationships
if they
perceive
customer
data to be at
risk.
--------------------------------------------------------------- -----------------
Mitigation(s)
* Strict criteria when building a prospects pipeline * Integration plans form part of all business case HomeServe has
approvals a number
of defensive
* Independent advisers engaged in due diligence and proactive
processes * Post-investment reviews feed learning back for future practices
acquisitions across the
Group to
* Local management expertise with oversight from mitigate this
central plc function * Dedicated teams and resources and retention of key risk. There is
management personnel in the acquiree a detailed
information
* Investment hurdles security
policy, which
is
* All investments require local and, where applicable, communicated
plc Board approval across the
Group and
training is
* Post-investment reviews conducted at local levels provided
with findings communicated to plc Board and used to as required.
inform future acquisitions and integration processes Regular
penetration
testing
is in place to
assess
defences and
HomeServe
continues to
invest
in IT
security,
ensuring
a secure
configuration,
access
controls, data
centre
security and
effective
communication
of policies
and procedures
to all
employees.
--------------------------------------------------------------- -----------------
Update
In FY19 HomeServe made Of the six acquisitions Managing this
six HVAC acquisitions in FY19, four have been risk continues
and successfully completed successfully integrated, to be a key
the second tranche of with the remaining two area of
the Dominion Products having taken place just focus for the
and Services policy before the year end. Group.
book. Key management has been Attention on
retained and the acquired continuous
businesses continue improvement,
to perform HVAC installations delivering
as well as marketing our strategic
HomeServe's products. objectives
and monitoring
evolving
threats has
meant that
the Group has
continued
to invest in
developing
and improving
countermeasures
and controls to
mitigate
the risk. In
addition,
frameworks have
been
put in place to
continue
to increase the
maturity
with which we
manage
our controls
and monitor
their
effectiveness.
A comprehensive
suite
of Policies and
Standards
remain in force
with
cyber audits
completed
in FY19 as part
of the
annual
assurance plan.
--------------------------------------------------------------- -----------------
7. Underwriting capacity 8. Regulation & Customer 9. People
and concentration Focus
============================================================== ============================================================== ================
Overview
The Membership business HomeServe is subject HomeServe's
line markets and administers to regulatory requirements ability
policies that are underwritten relating to e.g. product to meet
by independent third design, marketing materials, growth
party underwriters. sales processes and expectations
HomeServe acts as an data protection. and compete
insurance intermediary HomeServe believes that effectively
and does not take on regulation has a positive is, in part,
any material insurance impact and encourages dependent
risk. a culture that promotes on the
customers' interests skills,
and will improve HomeServe's experience
prospects over both and
the short and long term. performance
Like many companies of its
HomeServe is also subject personnel.
to wider regulation Retention of
concerning e.g. anticorruption, People
anti-fraud and bribery, in
modern slavery etc. established
Specific policies can businesses
be found at is key as is
http://www.homeserveplc.com/about-us/corporate-governance/p recruitment
olicies.aspx of talented
People in
growth
businesses
e.g.
Home Experts.
-------------------------------------------------------------- ----------------
Impact(s)
If current underwriters Failure to comply with The inability
were unable or unwilling regulatory requirements to attract,
to underwrite the current in any of its countries motivate or
book and if HomeServe could result in the retain key
were unable to find suspension, either temporarily talent could
alternative underwriters or permanently, of certain impact
it would require the activities. Much regulation overall
risk to be underwritten is intended to protect business
directly, thereby exposing the rights and needs performance.
the business to material of customers and failure The Home
insurance risk, which to adhere to the high Experts
is contrary to its preferred expectations customers businesses
operating model. Obtaining have for HomeServe could have
relevant regulatory lead to reduced retention ambitious
approvals for a new and higher customer growth
underwriter may take losses. In addition, plans and
time, leading to business legislative changes require
disruption. A material relating to partners different
change in the operating may change their obligations skills to the
model would also drive with regard to the infrastructure Membership
a change in accounting they currently manage business.
policy that could affect and hence the products
short term profitability. and services HomeServe
Customer numbers and can offer to customers.
retention rates may It is possible such
fall if customers experience legislative changes
reduced service levels could reduce, or even
or are not covered throughout remove, the need for
any period of disruption. some of HomeServe products
and services.
-------------------------------------------------------------- ----------------
Mitigation(s)
* With the exception of the UK, at least two * Compliance with local regulation as a minimum to Employment
underwriters share the policy books in each country ensure products are designed, marketed and sold in policies,
accordance with all relevant legal and regulatory remuneration
requirements and that the terms and conditions are and benefits
* In the UK, HomeServe maintains relationships with a appropriate and meet the needs of customers packages and
number of other underwriters who are willing and able long-term
to underwrite the business incentives
* Best practice shared across the Group are regularly
reviewed and
* Regular (at least 6 months) reviews with all designed
underwriters to ensure that current product * Regulatory specialists, compliance teams and to be
performance and trends are understood. Non-Executive Directors in each business competitive
with
other
* HomeServe maintains regular dialogue with the FCA in companies.
the UK. In North America, there is regular contact Employee
with the Attorneys General. surveys,
performance
reviews and
regular
communication
of business
activities
are used
to understand
and respond
to employee
views and
needs.
Processes
exist to
identify
high
performing
individuals
and ensure
that they
have
fulfilling
careers,
and HomeServe
is managing
succession
planning
effectively.
-------------------------------------------------------------- ----------------
Update
There have been no new There is increased scrutiny A new employee
underwriters this year across multiple industries engagement
and existing relationships in the UK (Telecoms, survey was
remain strong. TV, General Insurance) implemented
In the UK, HomeServe following a Competitions to provide
and Aviva have commenced and Markets Authority consistent,
discussions regarding complaint to the FCA comparable
contract renewal prior regarding pricing practices results across
to the expiry of the for loyal customers. businesses.
current contract in HomeServe continues Results
18 months time and HomeServe to exceed pricing disclosure will be
continues to assess requirements and policies available in
the possibility to add are priced equally, early June
a second underwriter. regardless of customer 2019.
vintage once customers A new
move off an introductory management
price. team
with
experience in
growing
fast-paced
digital
businesses
is now in
place at
Checkatrade.
-------------------------------------------------------------- ----------------
10. Investment in Technology 11. Digital & Innovation 12.
Financial
risks
============================================================== ============================================================== ================
Overview Key financial
The Group relies on Consumers in all businesses risks
several key systems increasingly wish to include the
to manage its Membership engage with HomeServe availability
customer interactions. by digital means: joining of short-term
Appropriate and timely online and maintaining and long-term
maintenance and investment details or making a funding to
is required to ensure claim via HomeServe's meet business
systems continue to website and app or posting needs and take
meet the changing needs onto social media channels advantage
of the business and such as Twitter and of strategic
its customers. Facebook. priorities
Home Experts, particularly Technology is also crucial such as M&A
Checkatrade, is embarking for the networks with opportunities,
on a programme of transformation Home Experts developing the risk of
to ready the business a trades app and Membership policyholders
for its ambitious growth sharing technology with not paying
plans. its own subcontract monies owed,
network. Both are intended and
to improve the efficiencies fluctuations
and customer service in
of both HomeServe and interest rates
the businesses it partners and exchange
with. rates.
Interest rate
risk
HomeServe's
policy is
to manage
interest cost
using a mix of
fixed
and variable
rate
borrowings.
Where
necessary,
this
is achieved by
entering
into interest
rate swaps
for certain
periods,
in which
HomeServe
agrees
to exchange,
at specified
intervals, the
difference
between fixed
and variable
rate interest
amounts
calculated by
reference
to an agreed
notional
principal
amount. These
swaps are
designated
to
economically
hedge
underlying
debt
obligations.
Credit risk
The risk
associated
with cash and
cash
equivalents
is managed by
only
depositing
funds with
reputable
and
creditworthy
banking
institutions.
The risk
of a
policyholder
defaulting
is mitigated
as any
policy cover
will cease
as and when
any premium
fails to be
paid.
Liquidity risk
HomeServe
manages
liquidity
risk by
maintaining
adequate
reserves and
banking
facilities and
continuously
monitoring
forecast and
actual
cash flows.
Foreign
exchange risk
Short term
foreign
exchange
risk is
mitigated with
the natural
hedging
provided by
the
geographical
spread of the
businesses.
While this
will protect
against some
of the
transaction
exposure,
HomeServe's
reported
results would
still
be impacted by
the
translation
of non-UK
operations.
-------------------------------------------------------------- ----------------
Impact(s)
Failure to invest appropriately If HomeServe is not
to manage customer interactions flexible enough to respond
and provide high quality to changing needs, customers
service may result in may explore competitor
lower retention and products and choose
higher customer losses. not to renew. There
Failure in back office is also a reputational
systems may lead to risk as complaints logged
business interruption via social media can
and could jeopardise quickly escalate if
the ability to analyse not dealt with in an
performance indicators appropriate and timely
and react to any trends. manner.
Over investment in any If software solutions
new initiatives could shared with partners
see investment outweigh are not delivered or
future benefits and do not generate the
lead to impairment. intended efficiencies,
costs may increase,
partners may leave and
customer service standards
may fall.
-------------------------------------------------------------- ----------------
Mitigation(s)
All decisions are subject HomeServe continues
to the Group's strict to review and respond
investment criteria to customer comments
and hurdles. Major IT and needs and customers
programmes are allocated are offered a number
specific governance of channels through
structures and oversight which they can engage
with members of senior with HomeServe: telephone,
management sitting on website, Digital Live
the Programme Board. Chat, paper, email and
HomeServe engages a social media.
number of external advisers Recruitment is increased
on large software projects in areas short on the
to provide appropriate required expertise.
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.
-------------------------------------------------------------- ----------------
Update
The UK's new core customer A new CTO has been appointed On 25 October
management system is at Checkatrade to lead 2018,
in the final stages the digital transformation HomeServe
of user testing. This required for consumers arranged an
is a significant project and trades. additional
intended to deliver GBP174.2m
an improved customer of funding via
experience and a number a US
of marketing opportunities Private
and operational efficiencies. Placement.
Any significant delays This
in the project or faults expands the
in its design or implementation Group's
could adversely impact existing
the intended benefits facilities,
and lead to increased locks in a
costs, reduced revenues proportion
and asset impairment. of its
interest
charge
at fixed rates
and creates
a balanced
maturity
profile.
HomeServe is
implementing
a treasury
management
system to
improve global
cash
visibility,
bank
connectivity
and process
efficiency.
The system
is expected to
launch
in FY20.
-------------------------------------------------------------- ----------------
Key
No change
Risk increased
Risk decreased
Group Income Statement
Year ended 31 March 2019
2019 2018*
Notes GBPm GBPm
------------------------------------------------- ------ -------- --------
Continuing operations
Revenue 3 1,003.6 899.7
Operating costs (850.7) (765.7)
Share of results of equity accounted
investments (0.3) 1.0
Operating profit 152.6 135.0
Investment income 0.2 0.1
Finance costs (13.3) (11.8)
Adjusted profit before tax 161.7 141.7
Amortisation of acquisition intangibles (26.8) (18.4)
Exceptional items
Restructuring costs 4 (5.5) -
Fair value movement on contingent consideration
liabilities 4 10.1 -
Profit before tax 139.5 123.3
Tax 5 (31.2) (27.4)
------------------------------------------------- ------ -------- --------
Profit for the year 108.3 95.9
------------------------------------------------- ------ -------- --------
Attributable to:
Equity holders of the parent 108.5 96.3
Non-controlling interests (0.2) (0.4)
------------------------------------------------- ------ -------- --------
108.3 95.9
------------------------------------------------- ------ -------- --------
Dividends per share, paid and proposed 6 21.4p 19.1p
Earnings per share
Basic 7 32.7p 30.2p
Diluted 7 32.3p 29.7p
------------------------------------------------- ------ -------- --------
* The Group's results are being reported under IFRS 9 and IFRS 15 for the first time in 2019 following the mandatory adoption of the standards from 1 April 2018. In accordance with the transitional provisions of these standards, comparatives have not been restated. See Note 2.
Group Statement of Comprehensive Income
Year ended 31 March 2019
2019 2018
GBPm GBPm
---------------------------------------------------- ------ -------
Profit for the year 108.3 95.9
Items that will not be reclassified subsequently
to profit and loss:
Actuarial (loss)/gain on defined benefit pension
scheme (0.4) 2.1
Deferred tax credit/(charge) relating to actuarial
re-measurements 0.1 (0.4)
Fair value gain on "fair value through other 0.7 -
comprehensive income" (FVTOCI) investment
in equity instruments
Deferred tax charge relating to fair value (0.2) -
gain on FVTOCI investment in equity instruments
---------------------------------------------------- ------ -------
0.2 1.7
Items that may be reclassified subsequently
to profit and loss:
Exchange movements on translation of foreign
operations 6.8 (10.2)
Fair value losses on cash flow hedges - (0.5)
6.8 (10.7)
Total other comprehensive income/(expense) 7.0 (9.0)
Total comprehensive income for the year 115.3 86.9
---------------------------------------------------- ------ -------
Attributable to:
Equity holders of the parent 115.5 87.3
Non-controlling interests (0.2) (0.4)
---------------------------------------------------- ------ -------
115.3 86.9
---------------------------------------------------- ------ -------
Group Balance Sheet
31 March 2019
2019 2018
Notes GBPm GBPm
--------------------------------------- ------ -------- --------
Non-current assets
Goodwill 407.9 386.6
Other intangible assets 8 418.6 384.8
Contract costs 27.5 -
Property, plant and equipment 42.8 39.9
Equity accounted investments 10.6 5.5
Other investments 9.2 8.7
Deferred tax assets 7.4 6.8
Retirement benefit assets 6.4 4.7
--------------------------------------- ------ -------- --------
930.4 837.0
--------------------------------------- ------ -------- --------
Current assets
Inventories 7.0 4.3
Trade and other receivables 424.6 515.7
Cash and cash equivalents 72.6 57.8
--------------------------------------- ------ -------- --------
504.2 577.8
--------------------------------------- ------ -------- --------
Total assets 1,434.6 1,414.8
--------------------------------------- ------ -------- --------
Current liabilities
Trade and other payables (382.3) (508.5)
Bank and other loans (39.7) (38.0)
Current tax liabilities (6.0) (10.4)
Provisions (5.7) -
Obligations under finance leases (0.5) (0.5)
(434.2) (557.4)
--------------------------------------- ------ -------- --------
Net current assets 70.0 20.4
--------------------------------------- ------ -------- --------
Non-current liabilities
Bank and other loans (336.4) (256.7)
Deferred tax liabilities (26.4) (25.5)
Other financial liabilities (23.3) (23.4)
Obligations under finance leases (0.7) (0.4)
--------------------------------------- ------ -------- --------
(386.8) (306.0)
--------------------------------------- ------ -------- --------
Total liabilities (821.0) (863.4)
--------------------------------------- ------ -------- --------
Net assets 613.6 551.4
--------------------------------------- ------ -------- --------
Equity
Share capital 9 9.0 8.9
Share premium account 180.7 171.8
Share incentive reserve 23.3 22.1
Currency translation reserve 22.9 16.1
Investment revaluation reserve 2.3 1.8
Other reserves 82.2 82.2
Retained earnings 293.0 248.1
--------------------------------------- ------ -------- --------
Attributable to equity holders of the
parent 613.4 551.0
--------------------------------------- ------ -------- --------
Non-controlling interests 0.2 0.4
--------------------------------------- ------ -------- --------
Total Equity 613.6 551.4
--------------------------------------- ------ -------- --------
Group Statement of Changes in Equity
Year ended 31 March 2019
Attributable
to equity
Share Share Currency Investment holders Non-
Share premium incentive translation revaluation Other Retained of the controlling Total
capital account reserve reserve reserve(1) reserves(2) earnings parent interest Equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- -------- ---------- ------------ ------------ ------------ --------- ------------- ------------ -------
Balance at 1 April
2018 8.9 171.8 22.1 16.1 1.8 82.2 248.1 551.0 0.4 551.4
Opening adjustment
for the impact of
IFRS 15 (note 2) - - - - - - (2.1) (2.1) - (2.1)
------------------- -------- -------- ---------- ------------ ------------ ------------ --------- ------------- ------------ -------
Opening balance
under IFRS 15 8.9 171.8 22.1 16.1 1.8 82.2 246.0 548.9 0.4 549.3
Profit for the
year - - - - - - 108.5 108.5 (0.2) 108.3
Other
comprehensive
income for
the year - - - 6.8 0.5 - (0.3) 7.0 - 7.0
------------------- -------- -------- ---------- ------------ ------------ ------------ --------- ------------- ------------ -------
Total
comprehensive
income - - - 6.8 0.5 - 108.2 115.5 (0.2) 115.3
Dividends paid
(note
6) - - - - - - (65.0) (65.0) - (65.0)
Issue of share
capital 0.1 8.9 - - - - - 9.0 - 9.0
Share-based
payments - - 8.8 - - - - 8.8 - 8.8
Share options exercised - - (7.6) - - - 0.8 (6.8) - (6.8) Tax on exercised share options (note 5) - - - - - - 2.7 2.7 - 2.7 Deferred tax on share options (note 5) - - - - - - 0.3 0.3 - 0.3 ------------------- -------- -------- ---------- ------------ ------------ ------------ --------- ------------- ------------ ------- Balance at 31 March 2019 9.0 180.7 23.3 22.9 2.3 82.2 293.0 613.4 0.2 613.6 ------------------- -------- -------- ---------- ------------ ------------ ------------ --------- ------------- ------------ -------
Year ended 31 March 2018
Attributable
to equity
Share Share Currency Available holders Non-
Share premium incentive translation for sale Other Retained of the controlling Total
capital account reserve reserve reserve(1) reserves(2) 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 for
the
year - - - (10.2) - (0.5) 1.7 (9.0) - (9.0)
------------------- -------- -------- ---------- ------------ ----------- ------------ --------- ------------- ------------ --------
Total
comprehensive
income - - - (10.2) - (0.5) 98.0 87.3 (0.4) 86.9
Dividends paid
(note
6) - - - - - - (50.4) (50.4) - (50.4)
Issue of share
capital 0.5 126.1 - - - 10.0 - 136.6 - 136.6
Share-based
payments - - 8.1 - - - - 8.1 - 8.1
Share options
exercised - - (4.3) - - - 1.0 (3.3) - (3.3)
Basis adjustments
on hedged items - - - - - 0.5 - 0.5 - 0.5
Tax on exercised
share options
(note
5) - - - - - - 2.8 2.8 - 2.8
Deferred tax on
share options
(note
5) - - - - - - 0.2 0.2 - 0.2
------------------- -------- -------- ---------- ------------ ----------- ------------ --------- ------------- ------------ --------
Balance at 31
March
2018 8.9 171.8 22.1 16.1 1.8 82.2 248.1 551.0 0.4 551.4
------------------- -------- -------- ---------- ------------ ----------- ------------ --------- ------------- ------------ --------
(1) The available for sale reserve was renamed the investment revaluation reserve upon adoption of IFRS 9 on 1 April 2018.
(2) Other reserves comprise of the Merger, Own shares, Capital redemption and Hedging reserves.
Group Cash Flow Statement
Year ended 31 March 2019
2019 2018
Notes GBPm GBPm
------------------------------------------------ ------ -------- --------
Operating profit 152.6 135.0
Adjustments for:
Depreciation of property, plant and equipment 9.1 8.0
Amortisation of acquisition intangible
assets 8 26.8 18.4
Amortisation of other intangible assets 8 23.1 36.2
Amortisation of contract costs 14.9 -
Share-based payments expense 9.8 9.1
Share of results of equity accounted investees 0.3 (1.0)
Loss on disposal of property, plant and
equipment and software 0.6 2.1
Gain on re-measurement of associate on
acquisition of control - (0.9)
Impact of exceptional items (4.6) -
Decrease in other financial liabilities - (0.3)
------------------------------------------------ ------ -------- --------
Operating cash flows before movements
in working capital 232.6 206.6
Increase in inventories (0.7) (1.4)
Decrease/(increase) in receivables 104.0 (60.7)
(Decrease)/increase in payables and provisions (133.7) 19.7
Net movement in working capital (30.4) (42.4)
Cash generated by operations 202.2 164.2
Income taxes paid (31.7) (27.2)
Interest paid (8.5) (7.5)
------------------------------------------------ ------ -------- --------
Net cash inflow from operating activities 162.0 129.5
------------------------------------------------ ------ -------- --------
Investing activities
Interest received 0.2 0.1
Proceeds on disposal of fixed assets 0.3 0.6
Purchases of intangible assets (99.1) (114.3)
Contract costs (7.9) -
Purchases of property, plant and equipment (9.0) (11.0)
Dividend received from associate - 0.4
Acquisition of equity accounted investments (5.4) -
Acquisition of subsidiaries 11 (37.5) (50.3)
Net cash used in investing activities (158.4) (174.5)
------------------------------------------------ ------ -------- --------
Financing activities
Dividends paid 6 (65.0) (50.4)
Repayment of finance leases (0.6) (0.6)
Acquisition of subsidiaries - (3.9)
Proceeds on issue of share capital 2.2 124.1
Costs associated with issue of share capital - (0.8)
New bank and other loans raised 174.2 221.0
Costs associated with new bank and other
loans raised (1.6) (3.1)
Movement in bank and other loans (98.9) (226.5)
------------------------------------------------ ------ -------- --------
Net cash generated by financing activities 10.3 59.8
------------------------------------------------ ------ -------- --------
Net increase in cash and cash equivalents 13.9 14.8
------------------------------------------------ ------ -------- --------
Cash and cash equivalents at beginning
of year 57.8 46.2
Effect of foreign exchange rate changes 0.9 (3.2)
------------------------------------------------ ------ -------- --------
Cash and cash equivalents at end of year 72.6 57.8
------------------------------------------------ ------ -------- --------
Notes to the condensed set of financial statements
1. Basis of preparation
While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs) adopted for use by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs in June 2019.
The financial information set out above does not constitute the Group's statutory financial statements for the years ended 31 March 2019 or 31 March 2018, but is derived from those financial statements. Statutory financial statements for FY18 prepared under IFRSs have been delivered to the Registrar of Companies and those for FY19 will be delivered following the Company's Annual General Meeting. The auditor, Deloitte LLP, has reported on those financial statements; its reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006. These financial statements were approved by the Board of Directors on 21 May 2019.
2. Significant accounting policies
The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's 31 March 2018 audited financial statements, except as described below.
Adoption of new or revised standards and accounting policies
The following accounting standards, interpretations and amendments have been adopted in the year:
IFRIC 22 Foreign Currency Transactions and Advance Consideration
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions
Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses
Amendments to IAS 40 Transfers of Investment Property Annual Improvements to IFRSs 2014-2016 Cycle - IFRS 1 and IAS 28 Amendments Annual Improvements to IFRSs 2014-2016 Cycle - IFRS 12 Amendments
None of the items listed above have had any material impact on the amounts reported in this consolidated set of financial statements. The impact of the following standards and clarifications are discussed under 'Changes in accounting policies' and 'Impact of adoption of IFRSs 9 & 15' below:
IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers Clarifications to IFRS 15 Revenue from Contracts with Customers
Changes in accounting policy
The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest audited financial statements, with the exception of standards, amendments and interpretations effective as of 1 April 2018 including IFRS 9 and IFRS 15 (including clarifications). In accordance with the transitional provisions of these standards, comparatives have not been restated. The impacted accounting policies for the years ended 31 March 2019 and 31 March 2018 are outlined below:
2. Significant accounting policies (continued)
Revenue recognition (applicable from 1 April 2018)
The Group records revenue in accordance with the five-step recognition model outlined in IFRS 15:
1) Identify the contract with the customer 2) Identify the performance obligations in the contract 3) Determine the transaction price 4) Allocate the transaction price to the performance obligations 5) Recognise revenue when (or as) each performance obligation is satisfied
Revenue is recognised, net of discounts, VAT, Insurance Premium Tax and other sales related taxes, either at the point in time a performance obligation has been satisfied or over time as control of the asset associated with the performance obligation is transferred to the customer.
For all contracts identified, the Group determines if the arrangement with the customer creates enforceable rights and obligations. For contracts with multiple components to be delivered, such as those with underwriters to sell policies on behalf of the underwriter as well as deliver handling and administration services, management applies judgement to consider whether those promised goods and services are:
i) distinct - to be accounted for as separate performance obligations;
ii) not distinct - to be combined with other promised goods or services until a bundle is identified that is distinct; or
iii) part of a series of distinct goods and services that are substantially the same and have the same pattern of transfer to the customer.
At contract inception the total transaction price is estimated, being the amount to which the Group expects to be entitled and has present enforceable rights to under the contract. Where applicable, this includes management's best estimate of any variable consideration to be included in the transaction price based on the expected value or most likely amount approach, and only to the extent that it is highly probable that no significant revenue reversal will occur.
Once the total transaction price is determined, the Group allocates this to the identified performance obligations in proportion to their relative standalone selling prices and recognises revenue when (or as) those performance obligations are satisfied.
Where available, observable prices of goods or services are utilised, when that good or service is sold separately, to similar customers in similar circumstances. Where a stand-alone selling price is not directly observable the Group applies judgment to determine an appropriate estimated standalone selling price, typically using an expected cost plus margin, adjusted market assessment or residual approach.
Variable consideration is allocated to an entire contract or a specific part of a contract depending on:
i) whether allocating the variable amount entirely to part of the contract depicts the amount of consideration the Group expects to be entitled in exchange for transferring the promised good or service to the customer; or
ii) the terms of the variable payment relate specifically to the satisfaction of an individual performance obligation
The Group's variable consideration primarily relates to intermediary commissions received on contracts with underwriters to sell policies and provide handling and administration services. Amounts are typically allocated to the entire contract.
Discounts are allocated proportionally across all performance obligations in the contract unless directly observable evidence exists that the discount relates to one or more, but not all, performance obligations.
For each performance obligation, the Group determines if revenue will be recognised over time or at a point in time. For each performance obligation to be recognised over time, the Group applies a revenue recognition method that faithfully depicts the Group's performance in transferring control of the goods or services to the customer. This decision requires assessment of the nature of the goods or services
2. Significant accounting policies (continued)
that the Group has promised to transfer to the customer. The Group applies the relevant output or input method, typically based on the expected profile of the deferral event (for example claims handling cost through the policy term or time elapsed).
Revenue by category
The Group disaggregates revenue from contracts with customers between Net Policy Income, Repair Income, Home Experts, HVAC and Other as management believe this best depicts how the nature, amount, timing and uncertainty of the Group's revenue and cash flows are effected by economic factors. The following table outlines the principal activities from which the Group derives revenue and how it is recognised:
Revenue stream Nature and timing of satisfaction Significant payment
of performance obligations terms
======================= ================================================ ====================
Membership Includes commissions received for Billed and paid
- Net Policy the obligation to sell policies, over the term
Income - Intermediary handle claims and provide administration of the contract
commissions services for underwriters. The Group
satisfies its obligation to sell
policies over time, recognising revenue
as each policyholder is contracted
on behalf of the Group's customers,
the underwriters.
The transaction prices of the Group's
arrangements with underwriters are
entirely variable and measured based
on the commission due to the Group
for the number of policies sold,
net of a refund liability. This refund
liability reflects management's best
estimate of mid-term policy cancellations
ensuring that a significant reversal
of revenue will not arise in the
future.
Handling and administration service
obligations are satisfied over the
term of a policy, which is typically
12 months. The portion of the total
transaction price allocated to these
performance obligations is deferred,
as a deferred income contract liability,
and recognised as revenue over the
profile of claims throughout the
policy term.
The determination of the amount of
transaction price to allocate to
claims handling and administration
services takes account of the expected
numbers of claims and the estimated
cost of handling those claims, which
are validated through historic experience
of actual costs, as well as incorporating
an appropriate profit margin for
the service provided to the underwriter.
Revenue associated with the commissions
received for the obligation to sell
policies is allocated using the residual
method at the point of policy inception
or renewal.
Where the Group's role on behalf
of the underwriter is only as an
intermediary in the cash collection
process, such amounts are not included
in revenue. Consequently, net policy
income consists of only a component
of the overall policy price, representing
the commission receivable for the
services the Group provides to the
underwriter, stated net of sales
related taxes.
======================= ================================================ ====================
2. Significant accounting policies (continued)
Revenue stream Nature and timing of satisfaction Significant payment
of performance obligations terms
===================== =============================================== ========================
Membership Includes arrangements whereby the Billed and paid
- Net Policy Group contracts directly with the over the term
Income - Home end user to provide home assistance of the contract
assistance services (such as repair network
access, emergency assistance and
non-urgent engineer visits). Revenue
is recognised rateably over the life
of the member's contract.
===================== =============================================== ========================
Membership Includes repair services provided Billed and paid
- Repair Income to third parties, including underwriters over the term
and insurance companies, subject of the contract
to separate contractual arrangements. with the relevant
Revenue is recognised over time as third party
each repair job is completed.
===================== =============================================== ========================
Home Experts Includes website subscriptions and Billed and paid
- Web and directory directory advertising fees from contracted over the term
members (trades). For website subscriptions of the contract
revenue is recognised evenly over
the contractual term, for directory
membership fees revenue is recognised
as each directory is delivered throughout
the contractual term.
===================== =============================================== ========================
Home Experts Includes commissions received for Billed and paid
- Lead generation the provision of job leads to trades. as leads are delivered
Revenue is recognised at the point
in time a lead is transferred.
===================== =============================================== ========================
HVAC Includes the provision of installation Billed and paid
services at the point in time the upon completion
installation or service is complete. of the installation
===================== =============================================== ========================
Other Principally includes services provided Billed and paid
to customers who do not hold policies. following the
Revenue is recognised at the point performance of
in time the service is complete. the services provided
===================== =============================================== ========================
2. Significant accounting policies (continued)
Contract related assets and liabilities (applicable from 1 April 2018)
As a result of the contracts which the Group enters into with its customers, the following assets and liabilities are recognised on the Group's balance sheet:
- Assets generated from the capitalisation of costs to obtain a contract
- Trade receivables (see financial instruments accounting policies below)
- Accrued income
- Deferred income
Capitalisation of costs to obtain a contract
The incremental costs of obtaining a contract with the Group's direct customers are recognised as an asset if the Group expects to recover them. Primarily, such costs relate to fees payable to Affinity Partners or other third parties authorised to enter into new contracts on behalf of a Group entity. Only fees which are directly related to acquiring contracts with the Group's direct customers are capitalised as incremental contract costs under IFRS 15.
Accrued and deferred income
Where payments made are greater than the revenue recognised at the period end date, the Group recognises a deferred income contract liability for this difference. Where payments made are less than the revenue recognised at the period end date, the Group recognises an accrued income contract asset for this difference.
Revenue recognition (applicable up to 31 March 2018)
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT, Insurance Premium Tax and other sales related taxes.
Net policy income
Revenue recorded by the Group includes commissions receivable in the Group's role as an intermediary for the householder in the policy sale and policy administration process. Any third-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement, or where the Group's role is only as an intermediary in the cash collection process for the principal, are not included in revenue. Consequently, on the sale of a policy, gross revenue consists of only a component of the overall policy price, representing the commission receivable for the marketing, sale and administration of the policy, stated net of sales related taxes.
Where a contractual arrangement consists of two or more separate arrangements that can be provided to customers either on a stand-alone basis or as an optional extra, revenue is recognised for each element as if it were an individual contract. Accordingly, revenue is recognised on the sale of a policy except where an obligation exists to provide future services, typically claims handling and policy administration services. In these situations, a proportion of revenue, sufficient to cover future claims handling costs and margin, is deferred over the life of the policy, as deferred income. The assessment of future claims handling takes account of the expected numbers of claims and the estimated cost of handling those claims, which are validated through experience of historical actual costs. Revenue deferred for the performance of claims handling services is released over the expected profile of anticipated claims.
To the extent that policies are expected to cancel mid-term, and hence all of the economic benefits associated with those policies are not expected to flow to the Group, a provision is made to ensure that the related revenue is not recognised at the point that the policy incepts.
Repair services revenue
Repair revenue relates to repairs undertaken on behalf of underwriters subject to separate contractual arrangements. Such revenue is recognised on completion of the repair.
Other revenue
Revenue in respect of boiler installations and uninsured jobs is recognised when our performance obligations are complete.
2. Significant accounting policies (continued)
Annual service revenue is recognised on completion of the annual service. Ongoing service revenue is recognised in equal instalments over the life of the policy.
Revenue generated in HomeServe's 'Home Experts' businesses is derived from three principal streams:
- Website subscriptions: recognised evenly over the period of the contract, which is typically 12 months;
- Directory advertising fees: recognised at the point the obligation to the customer is fulfilled; and
- Lead generation revenue (representing commissions received from trades people): recognised at the point of purchase.
Financial instruments (applicable from 1 April 2018)
Other investments
At each balance sheet date the Group conducts a fair value assessment of its investments, the difference between the fair value and carrying value is charged or credited to the Statement of Comprehensive Income accordingly and held in the investment revaluation reserve.
Trade receivables
Trade receivables do not carry any interest and are stated at amortised cost as reduced by appropriate allowances for estimated irrecoverable amounts. They are recognised when the Group's right to consideration is only conditional on the passage of time. Allowances incorporate an expectation of life-time credit losses from initial recognition and are determined using an expected credit loss approach.
Financial instruments (applicable up to 31 March 2018)
Available for sale investments
At each balance sheet date the Group conducts a fair value assessment of its investments, the difference between the fair value and carrying value is charged or credited to the Statement of Comprehensive Income accordingly and held in the available for sale reserve.
Trade receivables
Trade receivables do not carry any interest and are stated at amortised cost as reduced by appropriate allowances for estimated irrecoverable amounts.
Impact of adoption of IFRSs 9 & 15
a) IFRS 15 (and Clarifications to IFRS 15) Revenue from Contracts with Customers
IFRS 15 replaces IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The Group has adopted IFRS 15 from 1 April 2018 utilising the cumulative effect method. The adoption of IFRS 15 has not had a material impact on the timing of revenue recognition and comparative information has not been restated. All of the Group's revenue is in scope of IFRS 15.
The following abridged statements summarise the impact of adopting IFRS 15 on the Group's Consolidated Balance Sheet and its Consolidated Cash Flow Statement at 31 March 2019. There was no material impact to the Consolidated Income Statement, year on year.
2. Significant accounting policies (continued)
Impact on the consolidated balance sheet
As reported
at IFRS 15 Amounts without
31 March 2019 adjustments adoption
Ref GBPm GBPm GBPm
------------------------------- ---------- --------------- ------------- ----------------
Non-current assets
Intangible assets i) 418.6 (27.5) 446.1
Contract costs i) 27.5 27.5 -
Deferred tax assets iii) 7.4 0.5 6.9
Others 476.9 - 476.9
------------------------------------------- --------------- ------------- ----------------
930.4 0.5 929.9
------------------------------------------ --------------- ------------- ----------------
Current assets ii), iv)
Trade and other receivables & v) 424.6 (165.0) 589.6
Others 79.6 - 79.6
------------------------------------------- --------------- ------------- ----------------
504.2 (165.0) 669.2
------------------------------------------ --------------- ------------- ----------------
Total assets 1,434.6 (164.5) 1,599.1
------------------------------------------- --------------- ------------- ----------------
Current liabilities
Trade and other payables ii) - v) (382.3) 162.4 (544.7)
Others (51.9) - (51.9)
------------------------------------------- --------------- ------------- ----------------
(434.2) 162.4 (596.6)
------------------------------------------ --------------- ------------- ----------------
Net current assets 70.0 (2.6) 72.6
------------------------------------------- --------------- ------------- ----------------
Non-current liabilities (386.8) - (386.8)
=========================================== =============== ============= ================
Total liabilities (821.0) 162.4 (983.4)
------------------------------------------- --------------- ------------- ----------------
Net assets 613.6 (2.1) 615.7
------------------------------------------- --------------- ------------- ----------------
Equity
Retained earnings iii) 293.0 (2.1) 295.1
Others 320.6 - 320.6
------------------------------------------- --------------- ------------- ----------------
613.6 (2.1) 615.7
------------------------------------------ --------------- ------------- ----------------
2. Significant accounting policies (continued)
Impact on the consolidated cash flow statement
As reported
at
31 March IFRS 15 Amounts without
2019 adjustments adoption
Ref GBPm GBPm GBPm
------------------------------------ ---------- ------------ ------------- ----------------
Operating profit 152.6 - 152.6
Adjustments for:
Amortisation of other intangibles i) 23.1 (14.9) 38.0
Amortisation of contract
costs i) 14.9 14.9 -
Others 42.0 - 42.0
------------------------------------------------ ------------ ------------- ----------------
Operating cash flows before
movements in working capital 232.6 - 232.6
ii), iv)
Decrease/(increase) in receivables & v) 104.0 165.0 (61.0)
(Decrease)/increase in payables ii) -
and provisions v) (133.7) (165.0) 31.3
Others (0.7) - (0.7)
------------------------------------------------ ------------ ------------- ----------------
Net movement in working
capital (30.4) - (30.4)
------------------------------------------------ ------------ ------------- ----------------
Cash generated by operations 202.2 - 202.2
------------------------------------------------ ------------ ------------- ----------------
Others (40.2) - (40.2)
------------------------------------------------ ------------ ------------- ----------------
Net cash inflow from operating
activities 162.0 - 162.0
------------------------------------------------ ------------ ------------- ----------------
Investing activities
Purchases of intangible
assets i) (99.1) 7.9 (107.0)
Contract costs i) (7.9) (7.9) -
Others (51.4) - (51.4)
------------------------------------------------ ------------ ------------- ----------------
Net cash used in investing
activities (158.4) - (158.4)
------------------------------------------------ ------------ ------------- ----------------
Net cash used in financing
activities 10.3 - 10.3
------------------------------------------------ ------------ ------------- ----------------
Net movement in cash and
cash equivalents 13.9 - 13.9
------------------------------------------------ ------------ ------------- ----------------
References
i) Historically the Group has capitalised the value attributable to the portfolios of renewable customer policies created by Affinity Partners through their own sales and marketing activity and subsequently purchased by the Group as intangible assets. Where these capitalised costs are incremental to the cost of obtaining the contract with HomeServe's direct customer they are now capitalised under IFRS 15, which provides specific guidance in this area.
ii) Under IAS 18 the Group held a cancellation provision in respect of policies that may be cancelled by the policyholder part way through the contractual term, to ensure the appropriate amount of revenue was recognised at the point the policy incepts. This balance reduced trade and other receivables on the balance sheet. Under IFRS 15 a refund liability is held in liabilities to ensure a significant revenue reversal does not occur in the future due to mid-term cancellations. This reclassification increased closing trade receivables and trade and other payables by GBP17.7m respectively, with no impact on net assets, cash generated by operations or working capital.
iii) IFRS 15 is applied to the contractual period in which parties to the contract have present enforceable rights and obligations. A small population of service agreements was identified whereby the Group's right to a portion of the contractual revenue is not deemed enforceable under IFRS 15 at the point the revenue was previously booked under IAS 18. At 1 April 2018 this opening adjustment resulted in a GBP2.6m increase to deferred income, a GBP2.1m decrease to retained earnings and a GBP0.5m increase to deferred tax assets. There was no material in year income statement impact.
2. Significant accounting policies (continued)
iv) The Group has revised its balance sheet presentation in relation to customer contract balances in accordance with the definitions provided for contract assets and liabilities under IFRS 15. The Group presents these balances as accrued and deferred income respectively, as permitted by paragraph 109 of IFRS 15. This reclassification decreased closing trade receivables and trade and other payables by GBP42.2m respectively, with no impact on net assets, cash generated by operations or working capital.
v) Under IFRS 15 a receivable cannot be recorded in relation to a cancellable contract until the Group has an unconditional right to consideration. HomeServe have historically recorded receivables in relation to the third party insurance premiums on cancellable contracts, alongside a corresponding payable, to recognise the corresponding liability due to the relevant underwriter. As these contracts are cancellable, receivables and payables are only recognised to the extent the policy has completed. This reclassification decreased closing trade receivables and trade and other payables by GBP140.5m respectively, with no impact on net assets, cash generated by operations or working capital.
b) IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. The Group adopted IFRS 9 from 1 April 2018 and in accordance with the transitional provisions in the Standard, comparatives have not been restated. Adoption of IFRS 9 had no impact on any of the financial statements.
Classification and measurement of financial instruments
IFRS 9 requires the use of two criteria to determine the classification of financial assets: the entity's business model for the financial assets and the contractual cash flow characteristics of the financial assets. The Standard identifies three categories of financial assets:
- amortised cost; - fair value through profit or loss (FVTPL); - fair value through other comprehensive income (FVTOCI).
IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. The adoption of IFRS 9 has not had a significant effect on the Group's accounting policy related to financial liabilities.
A summary of all reclassifications, which have resulted in no change to the carrying value of any financial instrument, is shown below. All other financial instruments classifications and carrying amounts remain the same.
Carrying amount
at 1 April
Type of financial instrument IAS 39 classification IFRS 9 classification 2018 (GBPm)
-------------------------------- ----------------------- ----------------------- ----------------
Non-current financial
assets
Other investments Available-for-sale FVTOCI 8.7
Current financial assets
Trade and other receivables Loans and Receivables Amortised cost 498.1
Cash and cash equivalents Loans and Receivables Amortised cost 57.8
-------------------------------- ----------------------- ----------------------- ----------------
Impairment
IFRS 9 mandates the use of an expected credit loss model to calculate impairment losses rather than an incurred loss model, and therefore it is not necessary for a credit event to have occurred before credit losses are recognised. The Group has elected to measure loss allowances utilising probability-weighted estimates of credit losses for trade receivables at an amount equal to lifetime expected credit losses. As the Group's financial assets primarily comprise its portfolio of current trade receivables which have a consistent history of low levels of impairment, the inclusion of specific expected credit loss considerations did not have a material impact on transition.
Hedging
The Group has no existing open hedging relationships at the transition or reporting date.
2. Significant accounting policies (continued)
Standards in issue but not yet effective
At the date of authorisation of these financial statements the following Standards and Interpretations, which have not been applied in these financial statements, were in issue but not yet effective (not all of which have been endorsed by the EU):
IFRS 16 Leases IFRS 17 Insurance Contracts IFRIC 23 Uncertainty over Income Tax Treatments Amendments to IFRS 3 Definition of a Business Amendments to IFRS 9 Prepayment Features with Negative Compensation
Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
Amendments to IAS 1 and IAS 8 Definition of Material Amendments to IAS 19 Plan Amendment, Curtailment or Settlement
Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures
Annual Improvements to IFRSs 2015-2017 Cycle
Conceptual Framework Amendments to References to the Conceptual Framework in IFRS Standards
IFRS 16 Leases
IFRS 16 is effective for the Group from 1 April 2019 and will change lease accounting for lessees under operating leases. Such agreements will require recognition of an asset, representing the right to use the leased item, and a liability, representing future lease payments. Lease costs (e.g. rent charges) will be recognised as depreciation and interest, rather than as an operating cost.
The Group plans on adopting the modified retrospective approach with the "right of use" (RoU) asset equal to the lease liability at transition date, less any lease incentives received. Adoption of IFRS 16 will cause a material decrease to operating costs largely offset by a material increase to the combined depreciation and interest expenses, resulting in a net immaterial impact to profit before tax. Non-current assets and gross liabilities are both expected to increase by between GBP45.0m to GBP60.0m with net assets remaining unchanged. Although total cash outflows will remain consistent, rental outflows will now be presented under financing activities, where they were previously recorded as operational outflows, thereby increasing the Group's cash conversion percentage.
The Group has elected not to recognise RoU assets and lease liabilities for short-term leases (with a term of 12 months or less) or low-value assets (where the cost of the asset new would be approximately GBP3,800). The Group will continue to expense the lease payments associated with these leases on a straight line basis over the lease term.
The Directors do not expect that the adoption of the other Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future years.
3. Segmental analysis
IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker, who is considered to be the Chief Executive, to allocate resources to the segments and to assess their performance. The operating segments are consistent with those set out in the Business Review. During 2019 the Group's 'Home Experts' businesses met the definition of an operating segment under IFRS 8 and are now presented separately from 'New Markets'. Comparative information in this note has been re-presented to illustrate the impact of this change. The segment contains the results of Checkatrade, Habitissimo and Home Experts France. New Markets includes the Group's international development initiatives, including its Italian associate and its Japanese joint venture.
Segment operating profit/(loss) represents the result of each segment including allocating costs associated with head office and shared functions, but without allocating investment income, finance costs and tax. This is the measure reported to the Chief Executive for the purposes of resource allocation and assessment of segment performance.
The accounting policies of the operating segments are the same as those described in note 2 of the Annual Report and Accounts 2018 with the exception of the changes in accounting policies described in note 2 of these condensed consolidated financial statements. Group cost allocations are deducted in arriving at segmental operating profit. Inter-segment revenue relates to transactions with other Group companies, removed on consolidation, and principally comprises royalty and other similar charges charged at prevailing market prices. Disaggregation of revenue by both line of business and geography are disclosed below. Management believes that these are the most relevant categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The line of business analysis also illustrates the Group's revenue by major products and services.
North Home
UK America France Spain Experts New Markets Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ --------- ------- ------ --------- ------------ --------
Revenue
Net policy income 244.0 303.3 101.9 55.3 - - 704.5
Repair income 108.9 15.7 0.4 81.1 - - 206.1
Home Experts - - - - 40.4 - 40.4
HVAC 25.5 13.4 1.5 4.4 - - 44.8
Other 13.3 1.0 0.8 - - - 15.1
----------------------------- ------ --------- ------- ------ --------- ------------ --------
Total revenue 391.7 333.4 104.6 140.8 40.4 - 1,010.9
Inter-segment (7.3) - - - - - (7.3)
External revenue 384.4 333.4 104.6 140.8 40.4 - 1,003.6
----------------------------- ------ --------- ------- ------ --------- ------------ --------
Result
Segment adjusted operating
profit/(loss) 66.0 67.6 33.3 17.7 (7.4) (2.4) 174.8
Exceptional items 4.6 - - - - - 4.6
Amortisation of acquisition
intangibles (2.2) (12.9) (6.5) (0.2) (5.0) - (26.8)
Operating profit/(loss) 68.4 54.7 26.8 17.5 (12.4) (2.4) 152.6
----------------------------- ------ --------- ------- ------ --------- ------------ --------
Investment income 0.2
Finance costs (13.3)
Profit before tax 139.5
Tax (31.2)
----------------------------- ------ --------- ------- ------ --------- ------------ --------
Profit for the year 108.3
----------------------------- ------ --------- ------- ------ --------- ------------ --------
3. Segmental analysis (continued)
North Home
UK America France Spain Experts New Markets Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ --------- ------- ------ --------- ------------ -------
Revenue
Net policy income 221.6 262.4 98.6 55.6 - - 638.2
Repair income 106.3 9.6 0.4 85.7 - - 202.0
Home Experts - - - - 18.6 - 18.6
HVAC 21.1 10.1 1.0 - - - 32.2
Other 16.6 - - - - - 16.6
----------------------------- ------ --------- ------- ------ --------- ------------ -------
Total revenue 365.6 282.1 100.0 141.3 18.6 - 907.6
Inter-segment (7.9) - - - - - (7.9)
External revenue 357.7 282.1 100.0 141.3 18.6 - 899.7
----------------------------- ------ --------- ------- ------ --------- ------------ -------
Result
Segment adjusted operating
profit/(loss) 61.1 48.6 31.5 16.6 (2.8) (1.6) 153.4
Amortisation of acquisition
intangibles (1.8) (8.1) (6.4) (0.1) (2.0) - (18.4)
Operating profit/(loss) 59.3 40.5 25.1 16.5 (4.8) (1.6) 135.0
----------------------------- ------ --------- ------- ------ --------- ------------ -------
Investment income 0.1
Finance costs (11.8)
Profit before tax 123.3
Tax (27.4)
----------------------------- ------ --------- ------- ------ --------- ------------ -------
Profit for the year 95.9
----------------------------- ------ --------- ------- ------ --------- ------------ -------
Segment information
Depreciation,
amortisation
and
Assets Liabilities Capital additions impairment
2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------- -------- --------- --------- --------- --------- -------------- -----
UK 953.8 897.7 468.0 472.6 27.6 43.0 16.9 17.3
North America 436.6 352.6 441.3 361.5 64.2 73.2 23.8 16.7
France 225.4 219.9 152.1 155.0 9.8 3.5 10.0 8.9
Spain 113.3 140.0 78.6 104.1 8.7 18.2 16.6 17.0
Home Experts 77.5 94.3 31.1 36.5 4.7 1.6 6.6 2.7
New Markets 6.9 5.5 28.8 28.9 - - - -
Inter-segment (378.9) (295.2) (378.9) (295.2) - - - -
--------------- -------- -------- --------- --------- --------- --------- -------------- -----
Total 1,434.6 1,414.8 821.0 863.4 115.0 139.5 73.9 62.6
--------------- -------- -------- --------- --------- --------- --------- -------------- -----
All assets and liabilities including inter-segment loans and trading balances are allocated to reportable segments.
3. Segmental analysis (continued)
Information about major customers
During the periods presented four underwriters were customers of the Group that individually accounted for over 10% of the Group's revenues:
2019 2018
% %
--- ------------------------------------------------- ------ ------
Customer 1 - UK 32.6 34.4
Customer 2 - North America 16.7 13.6
Customer 3 - North America 13.6 13.7
Customer 4 - France 9.0 10.1
Other customers individually representing below
10% of Group revenue 28.1 28.2
100.0 100.0
----- ------------------------------------------------- ------ ------
4. Exceptional items
Exceptional items, booked to operating costs, comprised the following:
2019 2018
GBPm GBPm
-------------------------------------------------- ------ -----
Fair value movement on contingent consideration 10.1 -
liabilities
Restructuring costs (5.5) -
------------------------------------------------------------ ------ -----
Exceptional items included within Group operating 4.6 -
profit before tax
------------------------------------------------------------ ------ -----
Net taxation on exceptional items (0.2) -
Net exceptional items after 4.4 -
tax
-------------------------------------------------------- ------ -----
Fair value movement on contingent consideration liabilities
At 31 March 2019 the Group reassessed the fair value of outstanding consideration payments due to the previous owners of Help-Link Limited, conditional on the number of boiler installations performed from the point of acquisition until July 2020. At this point the Group determined that the likelihood of the conditions being met that would trigger either of the two outstanding payments (a gross undiscounted cash outflow totalling GBP10.5m) was now remote and therefore the fair value of the outstanding liabilities was GBPnil. At the point the fair value exercise was performed the balance held on the balance sheet of GBP10.1m, representing the original discounted value of the liabilities and any associated interest accreted to 31 March 2019, was released to the income statement in accordance with IFRS 3 and treated as exceptional due to its size and incidence.
Restructuring costs
Charges of GBP5.5m were incurred during FY19, mostly related to redundancies and other associated charges incurred in respect of changes to the organisational design of the UK business. Marketing and other support headcount was reduced, as the business moves away from an over reliance on direct mail activity and prepares for the implementation of new systems. Costs related to these programmes have been treated as exceptional due to their size and incidence.
5. Taxation
2019 2018
GBPm GBPm
--------------------------------- ------ ------
Current tax
Current year charge 31.8 30.9
Adjustments in respect of prior
years (1.9) (0.1)
Total current tax charge 29.9 30.8
----------------------------------- ------ ------
Deferred tax charge/(credit) 1.3 (3.4)
Total tax charge 31.2 27.4
---------------------------------- ------ ------
UK corporation tax is calculated at 19% (FY18: 19%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions, these being a blended (Federal/State) rate of 27% in the US (FY18: 38%) as a result of the US enacting new tax legislation in December 2017 effective from 1 January 2018, 33% in France (FY18: 33%) and 25% in Spain (FY18: 25%), which explains the 'Overseas tax rate differences' below.
The charge for the year can be reconciled to the profit per the income statement as follows:
2019 2018
GBPm GBPm
-------------------------------------------------- ------ ------
Profit before tax on continuing
operations 139.5 123.3
----------------------------------------------------- ------ ------
Tax at the UK corporation tax rate of 19% (FY18:
19%) 26.5 23.4
Tax effect of items that are not taxable in
determining taxable profit (0.6) (0.5)
Adjustments in respect of prior years - current
tax (1.9) (0.1)
Overseas tax rate differences 7.2 4.6
Tax expense for the year 31.2 27.4
---------------------------------------------------- ------ ------
Given the UK parented nature of the Group, the majority of financing that the overseas businesses require is provided from the UK, and as such the UK has provided a number of intra-group loans to its overseas operations in order to fund their growth plans. In light of the different tax rates applicable in each of the markets in which the Group operates, as noted above, these loans result in a reduction in the Group's effective tax rate, which is included in 'Overseas tax rate differences' in the table above.
As the proportion of the Group's profit earned overseas continues to grow, the effective tax rate of 22% (FY18: 22%) is expected to increase slightly in future years.
A retirement benefit tax credit amounting to GBP0.1m (FY18: GBP0.4m charge) has been recognised directly in other comprehensive income. In addition to the amounts (charged)/credited to the income statement and other comprehensive income, the following amounts relating to tax have been recognised directly in equity:
2019 2018
GBPm GBPm
--------------------------------------------------- ----- -----
Current tax
Excess tax deductions related to share-based
payments on exercised options 2.7 2.8
Deferred tax
Opening impact of IFRS 15 (see note 2) 0.5 -
Change in estimated excess tax deductions related
to share-based payments 0.3 0.2
Total tax recognised directly
in equity 3.5 3.0
------------------------------------------------------ ----- -----
6. Dividends
2019 2018
GBPm GBPm
--------------------------------------------------- ----- -----
Amounts recognised as distributions to equity
holders in the year:
Final dividend for the year ended 31 March 2018
of 14.4p (2017: 11.2p) per share 47.8 35.0
Interim dividend for the year ended 31 March 2019
of 5.2p (2018: 4.7p) per share 17.2 15.4
65.0 50.4
--------------------------------------------------- ----- -----
The proposed final dividend for the year ended 31 March 2019 is 16.2p per share amounting to GBP53.9m (FY18: 14.4p per share amounting to GBP47.8m). The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The payment of this dividend will not have any tax consequences for the Group.
7. Earnings per share
2019 2018
pence pence
------------------ ------ ------
Basic 32.7 30.2
Diluted 32.3 29.7
------------------ ------ ------
Adjusted basic 37.5 33.6
Adjusted diluted 37.0 33.1
------------------ ------ ------
The calculation of the basic and diluted earnings per share is based on the following data:
Number of shares 2019 2018
m m
----------------------------------- ------ ------
Weighted average number of shares
Basic 331.7 318.9
Dilutive impact of share options 3.9 5.0
Diluted 335.6 323.9
----------------------------------- ------ ------
Earnings 2019 2018
GBPm GBPm
--------------------------------------------------- ------ ------
Profit for the year attributable to equity
holders of the parent 108.5 96.3
Amortisation of acquisition intangibles 26.8 18.4
Exceptional items (note 4) (4.6) -
Tax impact arising on amortisation of acquisition
intangibles and exceptional items (6.4) (5.7)
One-off deferred tax impact of US and French
tax reforms - (1.7)
--------------------------------------------------- ------ ------
Adjusted profit for the year attributable
to equity holders of the parent 124.3 107.3
--------------------------------------------------- ------ ------
Basic and diluted earnings per ordinary share have been calculated in accordance with IAS 33 Earnings Per Share. Basic earnings per share is calculated by dividing the profit or loss in the financial period by the weighted average number of ordinary shares in issue during the period. Adjusted earnings per share is calculated excluding exceptional items, the amortisation of acquisition intangibles and the associated tax impacts. In FY18 adjustments were also made for the one-off impact of tax reforms in the USA and France.
The Group uses adjusted operating profit, adjusted operating margin, EBITDA, adjusted profit before tax and adjusted earnings per share as its primary performance measures. These are non-IFRS measures which exclude exceptional items, the impact of the amortisation of acquisition intangibles and the associated tax effects. For further details refer to the 'Profitability' section of the Glossary.
Diluted earnings per share includes the impact of dilutive share options in issue throughout the year.
8. Other intangible assets
Acquisition intangibles include acquired access rights, acquired customer databases and acquired brands. Other intangibles include trademarks, access rights, customer databases and software.
Acquired 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 2017 47.5 159.1 - 206.6 33.2 76.6 174.4 490.8
Additions 45.1 20.1 - 65.2 3.0 16.0 44.3 128.5
Acquisition
of subsidiaries - 17.0 13.9 30.9 - - 0.9 31.8
Disposals - - - - (0.9) - (4.4) (5.3)
Exchange
movements (4.9) (4.7) - (9.6) (1.2) 1.5 (3.5) (12.8)
------------------ --------- ----------- --------- ------------ ----------- ----------- --------- ------------
At 1 April 2018 87.7 191.5 13.9 293.1 34.1 94.1 211.7 633.0
IFRS 15
reclassification - - - - - (85.0) - (85.0)
Additions 28.2 20.6 - 48.8 1.3 8.8 42.0 100.9
Acquisition
of subsidiaries 12.4 2.6 - 15.0 - - - 15.0
Disposals - - - - - - (1.1) (1.1)
Transfers (6.1) 6.4 - 0.3 0.6 - (0.9) -
Exchange
movements 4.3 3.8 - 8.1 1.4 (0.3) 1.9 11.1
------------------ --------- ----------- --------- ------------ ----------- ----------- --------- ------------
At 31 March
2019 126.5 224.9 13.9 365.3 37.4 17.6 253.6 673.9
------------------ --------- ----------- --------- ------------ ----------- ----------- --------- ------------
Accumulated Amortisation
At 1 April 2017 23.5 69.1 - 92.6 24.6 31.8 53.2 202.2
Charge for the
year 4.8 13.0 0.6 18.4 3.5 16.8 15.9 54.6
Disposals - - - - (0.3) - (2.5) (2.8)
Exchange movements (0.9) (3.5) - (4.4) (0.8) 0.5 (1.1) (5.8)
At 1 April 2018 27.4 78.6 0.6 106.6 27.0 49.1 65.5 248.2
IFRS 15 reclassification - - - - - (46.5) - (46.5)
Charge for the
year 7.5 17.6 1.7 26.8 3.0 2.3 17.8 49.9
Disposals - - - - - - (0.1) (0.1)
Transfers 0.1 - - 0.1 (0.1) - - -
Exchange movements 0.7 2.0 - 2.7 0.5 (0.1) 0.7 3.8
-------------------------- ------ ------ ---- ------ ------ ------- ------ -------
At 31 March
2019 35.7 98.2 2.3 136.2 30.4 4.8 83.9 255.3
-------------------------- ------ ------ ---- ------ ------ ------- ------ -------
Carrying amount
At 31 March
2019 90.8 126.7 11.6 229.1 7.0 12.8 169.7 418.6
------------- ----- ------ ----- ------ ---- ----- ------ ------
At 31 March
2018 60.3 112.9 13.3 186.5 7.1 45.0 146.2 384.8
------------- ----- ------ ----- ------ ---- ----- ------ ------
*On 1 April 2018 assets with a total net book value of GBP38.5m were transferred out of customer databases and reclassified as contract cost assets under IFRS 15.
Software includes GBP81.8m (FY18: GBP72.3m) in respect of the new Customer Relationship Management (CRM) system which will be rolled out in the UK business during FY20. The asset will be amortised over 10 years on a straight-line basis from the point at which it is available for use.
On 26 October 2018 and 18 December 2017 HomeServe US Repair Management Corporation acquired certain intangible assets of the home assistance policy business of Dominion Products and Services, Inc. ("DPS"), a wholly owned subsidiary of Dominion Energy, Inc. At 31 March 2019 acquired access rights included GBP54.4m and acquired customer databases included GBP45.3m in respect of the marketing agreement and policy book acquired as part of this transaction. These assets are being amortised over periods ranging from 9 to 13 years, on a straight-line basis.
9. Share capital
2019 2018
GBPm GBPm
--------------------------------------------- ------ ------
Issued and fully paid 332,490,377 ordinary
shares of 2 9/13p each (FY18: 329,776,766) 9.0 8.9
--------------------------------------------- ------ ------
The Company has one class of ordinary shares which carry no right to fixed income. Share capital represents consideration received or amounts, based on fair value, allocated to LTIP and One Plan participants on exercise, or amounts, based on fair value of the consideration for acquired entities. The nominal value was 2 9/13p per share on all issued and fully paid shares.
During the period from 1 April 2018 to 31 March 2019 the Company issued 2,713,611 shares with a nominal value of 2 9/13p creating share capital of GBP0.1m and share premium of GBP8.9m.
On 19 October 2017, the Company placed 15,243,903 new ordinary shares at a price of 820 pence per share, raising gross proceeds of approximately 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.
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 GBP0.1m and share premium of GBP4.9m. 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.
10. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Transactions with equity accounted investees
Related party transactions with equity accounted investees during FY19 principally related to recharged consultancy and contractor costs and amounted to GBP0.3m (FY18: GBP0.5m).
Other related party transactions
Other related party transactions during FY19 were similar in nature to those in FY18 and amounted to GBP0.5m (FY18: GBP0.5m).
Full details of the Group's related party transactions are included in the Annual Report and Accounts 2019.
11. Business combinations
The Group has incurred a net cash outflow in respect of business combinations of GBP37.5m in the year (FY18: GBP54.2m).
There were two material acquisitions in the year ended 31 March 2019.
-- On 7 March 2019 HomeServe HVAC LLC, a Group company, acquired 100% of the issued share capital and obtained control of Cropp-Metcalfe Air Conditioning and Heating Company Inc. ('Cropp').
-- On 29 March 2019 HomeServe Energy Services Holding HVAC, a Group company, acquired 100% of the issued share capital and obtained control of Societe V.B. Gaz ('V.B. Gaz').
Additionally there were four immaterial acquisitions in the year ended 31 March 2019.
-- On 29 June 2018, HomeServe USA Energy Services LLC, a Group company, acquired 100% of the issued share capital and obtained control of Gregg Mechanical Corp ('Gregg Mechanical').
-- On 26 July 2018, HomeServe Spain, S.L.U, a Group company, acquired 100% of the issued share capital and obtained control of Oscagas Hogar, S.L.U ('Oscagas').
-- On 1 October 2018, HomeServe Energy Services Holding HVAC, a Group company, acquired a group of assets constituting a business under IFRS 3 from Etablissements Descamps SAS ('Descamps').
-- On 29 November 2018, HomeServe HVAC LLC, a Group company, acquired 100% of the issued share capital and obtained control of Geisel Heating, Air Conditioning & Plumbing, Inc. ('Geisel').
All acquisitions made during FY19 enhance the scale and scope of the Group's HVAC installation capabilities and increase the opportunity for future growth related to new HVAC system installations.
11. Business combinations (continued)
The provisional fair values of identifiable assets acquired and liabilities assumed are set out below:
Cropp V.B. Gaz Other Total
At fair value GBPm GBPm GBPm GBPm
Property, plant and equipment 1.6 0.4 0.2 2.2
Cash and cash equivalents 1.8 0.3 0.4 2.5
Inventories 0.9 0.1 0.9 1.9
Trade and other receivables 0.6 0.3 1.4 2.3
Trade and other payables (3.4) (0.3) (1.9) (5.6)
Bank and other loans - (0.1) - (0.1)
Deferred income (2.5) (0.7) - (3.2)
Intangible assets identified
on acquisition 11.7 2.3 1.0 15.0
Deferred tax on acquisition
intangibles - (0.6) - (0.6)
----------------------------------- ------ --------- ------ ------
Net assets acquired 10.7 1.7 2.0 14.4
Goodwill 8.8 6.9 5.3 21.0
----------------------------------- ------ --------- ------ ------
Total consideration 19.5 8.6 7.3 35.4
----------------------------------- ------ --------- ------ ------
Satisfied by:
Cash 14.7 8.6 6.3 29.6
Contingent consideration at
fair value - - 0.1 0.1
Deferred consideration 4.8 - 0.9 5.7
19.5 8.6 7.3 35.4
----------------------------------- ------ --------- ------ ------
Net cash outflow arising on
acquisition:
Cash consideration 14.7 8.6 6.3 29.6
Cash and cash equivalent balances
acquired (1.8) (0.3) (0.4) (2.5)
----------------------------------- ------ --------- ------ ------
12.9 8.3 5.9 27.1
----------------------------------- ------ --------- ------ ------
The goodwill arising on the excess of consideration over the fair value of the assets and liabilities acquired represents the expectation of synergy benefits and efficiencies. None of the goodwill is expected to be deducted for tax purposes. The gross contracted amounts due are equal to the fair value amounts stated above for trade and other receivables.
The provisional fair values for Oscagas and Gregg Mechanical disclosed as part of the Group's interim results as at 30 September 2018 have been updated, resulting in a decrease to goodwill of GBP0.2m at 31 March 2019.
The post-acquisition revenue, operating profit and acquisition-related costs (included in operating costs) from these acquisitions in the year ended 31 March 2019 were as follows:
Cropp V.B. Gaz Other Total
GBPm GBPm GBPm GBPm
--------------------------- ------ --------- ------ ------
Revenue 2.1 - 8.0 10.1
Operating profit/(loss) - - (0.1) (0.1)
Acquisition-related costs 0.6 0.1 0.2 0.9
--------------------------- ------ --------- ------ ------
If all of the acquisitions had been completed on the first day of the financial year, Group revenues for the period would have been GBP1,050.3m and Group profit before taxation would have been GBP141.9m.
In addition to the net cash outflow on the acquisitions above of GBP27.1m, deferred and contingent consideration payments related to business combinations in year totalled GBP10.4m (FY18: GBP3.9m).
12. Events after the balance sheet date
There were no post balance sheet events between the balance sheet date and the signing of the financial statements.
13. Other information
The Annual Report and Accounts for the year ended 31 March 2019 were approved by the Board on 21 May 2019 and will be made available on the Company's website and posted to those shareholders who have requested it in June 2019. Copies will be available from the registered office at Cable Drive, Walsall, WS2 7BN.
GLOSSARY
HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. APMs used in this announcement address profitability, leverage and liquidity and together with operational KPIs give an indication of the current health and future prospects of the Group.
Definitions of APMs and the rationale for their usage are included below with a reconciliation, where applicable, back to the equivalent statutory measure.
Profitability
The Group uses adjusted operating profit, adjusted EBITDA, adjusted profit before tax and adjusted earnings per share as its primary profit performance measures. These are non-IFRS measures which exclude the impact of the amortisation of acquisition intangible assets. Acquisition intangible assets are calculated using the estimated and discounted incremental future cash flows resulting from the affinity relationship or future policy renewals as appropriate, which will include the impact of the past actions of the former owners. These past actions will include historic marketing and business development activity, including but not limited to, the staff and operational costs of the business. In addition the specific construct of the policy terms and conditions and the current and expected future profitability to be derived from the acquired business or asset is also a factor in determining the valuation of acquisition intangible assets.
The on-going service and operating costs incurred by the Group in managing the acquired businesses or assets, including but not limited to print, postage, telephony, claims costs and overheads are recognised as operating costs within these adjusted measures in the reporting period in which they are incurred.
Accordingly, by excluding the amortisation of acquisition intangibles from the adjusted performance measures reported by the Group in each specific reporting period ensures that these measures only reflect the revenue attributable to, and costs incurred by, the Group in managing and operating those businesses and assets at that time in each reporting period and do not include the impact of the historic costs of the vendor or considerations of the future profits to be derived from the acquired business or assets.
Reconciliations of statutory to adjusted profit measures
TOTAL GROUP
GBPmillion 2019 2018
----------------------------------------- ------- ------
Operating profit (statutory) 152.6 135.0
Exceptional restructuring costs 5.5 -
Exceptional fair value movement on (10.1) -
contingent consideration
Amortisation of acquisition intangibles 26.8 18.4
Adjusted operating profit 174.8 153.4
----------------------------------------- ------- ------
Operating profit (statutory) 152.6 135.0
Exceptional restructuring costs 5.5 -
Exceptional fair value movement on (10.1) -
contingent consideration
Depreciation 9.1 8.0
Amortisation of acquisition intangibles 26.8 18.4
Amortisation of other intangibles 23.1 36.2
Amortisation of contract costs 14.9 -
Adjusted EBITDA 221.9 197.6
----------------------------------------- ------- ------
Profit before tax (statutory) 139.5 123.3
.
Exceptional restructuring costs 5.5 -
Exceptional fair value movement on (10.1) -
contingent consideration
Amortisation of acquisition intangibles 26.8 18.4
Adjusted profit before tax 161.7 141.7
----------------------------------------- ------- ------
Pence per share
----------------------------------------------- ------ ------
Earnings per share (statutory) 32.7 30.2
Exceptional restructuring costs (net 1.3 -
of tax)
Exceptional fair value movement on contingent (2.6) -
consideration (net of tax)
Amortisation of acquisition intangibles
(net of tax) 6.1 3.9
One-off deferred tax impact of US &
French tax reform - (0.5)
Adjusted earnings per share 37.5 33.6
----------------------------------------------- ------ ------
SEGMENTAL
2019 North Home New GBPmillion UK America France Spain Experts Markets ----------------------------------- ------- --------- ------- ------ --------- --------- Revenue 391.7 333.4 104.6 140.8 40.4 - Statutory operating profit/(loss) 68.4 54.7 26.8 17.5 (12.4) (2.4) Operating Margin % 17% 16% 26% 12% - - Adjusting items Exceptional restructuring 5.5 - - - - - costs Exceptional fair value movement (10.1) - - - - - on contingent consideration Amortisation of acquisition intangibles 2.2 12.9 6.5 0.2 5.0 - ----------------------------------- ------- --------- ------- ------ --------- --------- Total adjusting items (2.4) 12.9 6.5 0.2 5.0 - Effect on operating margin
% - 4% 6% 1% - - Adjusted operating profit/(loss) 66.0 67.6 33.3 17.7 (7.4) (2.4) Adjusted operating margin % 17% 20% 32% 13% - - ----------------------------------- ------- --------- ------- ------ --------- --------- 2018 North Home GBPmillion UK America France Spain Experts New Markets ----------------------------------- ------ --------- ------- ------ --------- ------------ Revenue 365.6 282.1 100.0 141.3 18.6 - Statutory operating profit/(loss) 59.3 40.5 25.1 16.5 (4.8) (1.6) Operating Margin % 16% 14% 25% 12% - - Adjusting items* Amortisation of acquisition intangibles 1.8 8.1 6.4 0.1 2.0 - Effect on operating margin % 1% 3% 7% - - - Adjusted operating profit/(loss) 61.1 48.6 31.5 16.6 (2.8) (1.6) Adjusted operating margin % 17% 17% 32% 12% - - ----------------------------------- ------ --------- ------- ------ --------- ------------
*There were no exceptional items recorded in the prior year
North Home New
2019 UK America France Spain Experts Markets
Local currency million GBP $ EUR EUR GBP GBP
----------------------------------- ------- --------- ------- ------ --------- ---------
Revenue 391.7 436.2 118.7 159.7 40.4 -
Statutory operating profit/(loss) 68.4 71.3 30.4 19.6 (12.4) (2.4)
Operating Margin % 17% 16% 26% 12% - -
Adjusting items
Exceptional restructuring 5.5 - - - - -
costs
Exceptional fair value movement (10.1) - - - - -
on contingent consideration
Amortisation of acquisition
intangibles 2.2 16.8 7.4 0.2 5.0 -
----------------------------------- ------- --------- ------- ------ --------- ---------
Total adjusting items (2.4) 16.8 7.4 0.2 5.0 -
Effect on operating margin
% - 4% 6% - - -
Adjusted operating profit/(loss) 66.0 88.1 37.8 19.8 (7.4) (2.4)
Adjusted operating margin
% 17% 20% 32% 12% - -
----------------------------------- ------- --------- ------- ------ --------- ---------
North Home
2018 UK America France Spain Experts New Markets
Local currency million GBP $ EUR EUR GBP GBP
----------------------------------- ------ --------- ------- ------ --------- ------------
Revenue 365.6 375.2 113.2 160.1 18.6 -
Statutory operating profit/(loss) 59.3 53.6 28.5 18.8 (4.8) (1.6)
Operating Margin % 16% 14% 25% 12% - -
Adjusting items*
Amortisation of acquisition
intangibles 1.8 10.8 7.2 0.1 2.0 -
Effect on operating margin
% 1% 3% 7% - - -
Adjusted operating profit/(loss) 61.1 64.4 35.7 18.9 (2.8) (1.6)
Adjusted operating margin
% 17% 17% 32% 12% - -
----------------------------------- ------ --------- ------- ------ --------- ------------
*There were no exceptional items recorded in the prior year
Leverage
In FY19 the Group targeted net debt in the range of 1.0 to 2.0x EBITDA measured at the year end and will continue to do so in FY20.
The range reflects HomeServe's relatively low risk appetite. Due to the seasonality of the business and depending on M&A opportunities, HomeServe is able to operate outside 1.0 to 2.0x for periods of time but with a highly cash generative business model HomeServe will seek to return to its target range. The leverage ratio is also important as it factors into the Group's banking covenants and the rolling 12 month rate at the half year influences the forward interest rates payable on the Group's Revolving Credit Facility.
Certain of the Group's segmental bonus measures relate to net cash. Net cash is defined and calculated in the same way as net debt but returns a positive closing balance.
The 2019 Annual Report provides a full reconciliation of the movements in liabilities arising from borrowings and finance leases. The closing balances at 31 March were as follows:
GBPmillion 2019 2018
----------------------------------------- ------- -------
Current liabilities from borrowings and
finance leases
Finance leases 0.5 0.5
Bank and other loans 39.7 38.0
----------------------------------------- ------- -------
40.2 38.5
Non-current liabilities from borrowings
and finance leases
Finance leases 0.7 0.4
Bank and other loans 336.4 256.7
----------------------------------------- ------- -------
337.1 257.1
----------------------------------------- ------- -------
Total liabilities from borrowings and
finance leases 377.3 295.6
----------------------------------------- ------- -------
Cash and cash equivalents (72.6) (57.8)
----------------------------------------- ------- -------
Net Debt 304.7 237.8
----------------------------------------- ------- -------
Adjusted EBITDA 221.9 197.6
----------------------------------------- ------- -------
Leverage 1.4x 1.2x
----------------------------------------- ------- -------
Liquidity
Cash conversion % is defined as cash generated by operations divided by adjusted operating profit. The measure demonstrates the cash generative nature of the ordinary trading operations of HomeServe's business model and the ability to produce positive cashflows that can be invested for future growth initiatives or in capital projects to maintain customer service initiatives, digital enhancements or efficiencies that benefit the long-term health of the business.
Free cash flow is stated after capital expenditure, tax and interest obligations and is an indication of the strength of the business to generate funds to meet its liabilities and repay borrowings. It also shows the funds that might be made available to pursue M&A activities and to pay dividends.
GBPmillion 2019 2018 ----------------------------------------------- ------- ------- Adjusted operating profit 174.8 153.4 Exceptional restructuring costs (5.5) - Exceptional fair value movement on contingent 10.1 - consideration Amortisation of acquisition intangibles (26.8) (18.4) ----------------------------------------------- ------- ------- Operating profit 152.6 135.0 Impact of exceptional items (4.6) - Depreciation and amortisation 73.9 62.6 Non-cash items 10.7 9.0 Increase in working capital (30.4) (42.4) ----------------------------------------------- ------- ------- Cash generated by operations 202.2 164.2 Net interest and borrowing costs (9.9) (10.5) Taxation (31.7) (27.2) Capital expenditure (66.9) (71.1) Repayment of finance leases (0.6) (0.6) ----------------------------------------------- ------- ------- Free cash flow 93.1 54.8 ----------------------------------------------- ------- ------- GBPmillion 2019 2018 ------------------------------ ------ ------ Adjusted operating profit 174.8 153.4 Cash generated by operations 202.2 164.2 ------------------------------ ------ ------ Cash conversion 116% 107% ------------------------------ ------ ------
KPIs
The Group uses a number of operational key performance indicators that provide insight into past performance and are an indicator of the future prospects of the Group as a whole and its individual segments.
Affinity partner households tracks the growth in addressable market delivered through existing and new partnerships with utilities and municipals. Customers tracks success in converting addressable market into revenue-generating customers, by delivering great products and service. Retention rate reflects ability to deliver fit-for-purpose product and great service to customers. Policies illustrates ability to grow the product line through customer focus and innovation. Income per customer measures ability to design and market increasingly valuable products, and sell them efficiently. Due to currency differences, this measure is tracked at a geographic level. Income per customer is calculated as the last 12 months' net policy income divided by customers. Trades are customers in the Home Experts business. Growing the network of vetted and reviewed trades will enable HomeServe to meet consumer needs and grow its business. Adjusted profit before tax is the key profit measure by which business growth, efficiency and sustainability are monitored. Net debt to EBITDA is the key cash ratio, which is used to monitor usage of financial resources within agreed risk parameters.
Customers
2019 is the first year the Group has presented its results under IFRS15 Revenue from contracts with customers. IFRS15 defines a customer as 'a party that has contracted with an entity to obtain goods or services'. In the Membership businesses where the Group acts as an intermediary selling contracts and insurance policies to end consumers, the 'IFRS 15 customer' is considered to be the underwriter with which the Group has contracted to sell policies.
This is different, however, from how the Group markets and communicates the value of its products and services to end consumers. Here, the businesses strategy and communications (both internally and externally) refer to the end consumer as the customer. As a result, for the purposes of describing the strategy and operational performance of the business, the Business review and the Group's KPIs refer to the end consumer as the customer of the Group, rather than the underwriter. However, for the purposes of preparing the financial statements, the accounting transactions are recorded in accordance with IFRS 15 where the customer is the underwriter.
For all other sources of revenue, it is the party that has contracted with the Group to obtain goods and services that is classified as the customer. The following table summarises this position:
Revenue Stream IFRS 15 'contracted' Customer as referred
customer to in the Business and
Operating Reviews
Policy Income - insurance Underwriters
intermediary commissions End user of the service
--------------------- --------------------------
Policy Income - repairs Underwriters or other B2B contracted parties
-------------------------------------------------
Policy Income - home End user of the service
assistance
-------------------------------------------------
Home Experts
--------------------- --------------------------
HVAC
Other
--------------------- --------------------------
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May 21, 2019 02:01 ET (06:01 GMT)
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