Chief Executive's review

This has been a very good year for the Group, delivering 9% adjusted profit growth to £93.0m and 11% customer growth to 7.0m, with over two thirds of our customers now outside the UK.

The USA is our most significant opportunity and we are particularly pleased with the recently announced agreement to acquire Utility Service Partners Inc. (USP) which will increase our US utility partner footprint to 42m households.

Our business is built on developing long-term relationships with our affinity partners. Through a membership model we offer our customers heating, plumbing and electrical repairs and services. In the UK and USA we also offer heating installation services. Our extensive repair network comprises directly employed, franchised and sub-contract networks of engineers.

The Group has five operating segments: UK, USA, France, Spain and New Markets. The New Markets division comprises our business in Italy, investment in innovation and digital initiatives and our international development activities. Prior to its disposal on 1 September 2015, New Markets also included our investment in developing a German business.

Focusing on our strategic priorities, we have made good progress across a number of areas of the business. We have added 11 new partnerships in the USA and renewed six long-term agreements in the UK such that we now work with over 90 affinity partners across the Group. We continue to invest in business development in all of our markets to establish relationships and sign new affinity partners.

Customer numbers increased 11% from 6.3m to 7.0m with good growth across all the businesses. In the UK we ended the year with 2.2m customers, up 3% on the prior year (FY15: 2.1m), principally reflecting good marketing performance combined with 0.1m customers added through the acquisition of Home Energy Services Limited. Response rates remain strong in the USA, where we have added 0.7m gross new customers and have increased year end customer numbers by 17% to 2.3m (FY15: 2.0m).

Financial performance for the year ended 31 March

  Revenue Adjusted operating
profit/(loss)
Adjusted operating
margin
£million 2016 2015 2016 2015 2016 2015
UK 291.8 285.5 58.0 56.4 20% 20%
Established International            
USA 152.6 125.3 12.1 6.4 8% 5%
France 77.4 74.9 23.2 23.4 30% 31%
Spain 97.5 90.9 9.9 7.5 10% 8%
  327.5 291.1 45.2 37.3 14% 13%
New Markets 20.1 13.8 (5.9) (5.9) - -
Inter-segment (6.2) (6.2) - - - -
Group 633.2 584.2 97.3 87.8 15% 15%

Adjusted operating margin is adjusted operating profit/(loss) divided by revenue.

Performance metrics for the year ended 31 March

  Affinity
partner households (m)
Customer
numbers (m)
Policy retention
rate
£million 2016 2015 2016 2015 2016 2015
UK 24 24 2.2 2.1 82% 83%
Established International            
USA 32 29 2.3 2.0 82% 82%
France 15 15 1.0 0.9 89% 89%
Spain 15 15 1.2 1.1 77% 79%
  62 59 4.5 4.0 83% 84%
New Markets 6 6 0.3 0.2 - -
Group 92 89 7.0 6.3 83% 83%

Affinity partner households does not include Utility Service Partners (USP) or AARP households in the USA.

Very pleasingly we have seen renewed sales momentum in France, following the signing of Lyonnaise des Eaux last year. We have delivered 7% customer growth, achieving the 1.0m customer milestone (FY15: 0.9m). Spain increased customer numbers by 11% to 1.2m following continued success with its largest partner Endesa (FY15: 1.1m).

This year we completed over 2m repairs (FY15: 1.8m) across the Group and once again delivered an improved customer experience, with a reduction in customer complaints and increased levels of customer satisfaction. Customer loyalty also remains strong with a Group retention rate of 83%, consistent with the prior year.

During the year we completed the acquisition of Home Energy Services Limited in the UK which, combined with our existing franchise and sub-contractor network, significantly increases our gas delivery capability in the UK. Focusing on heating services, we now offer heating installations services in the USA with investment planned in the UK to further develop our franchised heating installation network.

In addition to good customer growth, we also achieved good profit growth across the Group with a 9% increase in Group adjusted profit to £93.0m (FY15: £85.4m) and 15% adjusted EPS growth. Underpinning this growth was the USA, with adjusted operating profit up 89% to £12.1m (FY15: £6.4m) together with increases in the UK and Spain. Adjusted operating profit in France increased 7% in local currency although Sterling profit of £23.2m, was £0.2m lower than the prior year, reflecting adverse foreign exchange movements of £1.4m.

On 31 March 2016, we signed an agreement to acquire USP, which is expected to complete in the first half of FY17 following normal course regulatory approvals. USP brings 0.4m customers, 9.4m households, over 300 partnerships and a relationship with the National League of Cities, an organisation dedicated to helping city leaders and an advocate for 19,000 cities, towns and villages across the USA. We expect this acquisition to be earnings neutral in FY17 and then to add $15m of EBITDA in FY18.

We continued to invest in digital innovation, establishing a digital hub to develop an end to end, consistent, digital experience for our customers enhancing the self-serve customer journey and enabling more effective product sales.

While still early days, we have commenced appraisal of extending our services to other international markets with a view to entering the home services market in partnership with local utilities.

Technology investment

We have invested in our core customer system and other digital and technology solutions to make us more efficient and to improve our customer service. We are pleased with the progress we are making with the implementation of our new core Pega Customer Management System, which will be operational in the UK business in FY17 with rollout to the USA thereafter. This system provides a single view of the customer and all their interactions with us. This will enable more informed discussions with customers, reduce the customer effort, improve our marketing effectiveness and reduce our cost to serve.

We also now intend to invest in upgrading our claims handing and contractor deployment technology to improve the claims process for our customers giving them better visibility over the progress of their claim and their engineer.

People

During the year we continued to invest in strengthening our team, appointing Chris Havemann as a new Non-Executive Director to the Board, Rafaele Petruzzo as our Chief Digital Officer to lead our digital hub investment and Giles Desforges as Chief Executive of Global Partnerships to lead our International expansion. Our total headcount now stands at over 4,800 (FY15: 4,025), a good indicator of our strong performance and growth. Our people continue to deliver great service to our customers and we are therefore delighted employee engagement is now 81%, 3 percentage points higher than last year.

Dividend

Given the Group’s good performance and the Board’s confidence in its future prospects, the Board is proposing a 13% increase in the final dividend to 8.9p per share, bringing the total ordinary dividend for the year to 12.7p (FY15: 11.5p) an increase of 10% which is 1.72x covered by the FY16 adjusted earnings per share compared to 1.65x in FY15. A special dividend of 30p per share (£99.4m) proposed in the prior year was paid to shareholders in July 2015.

Outlook

All of our businesses are performing well and have good prospects. Looking ahead, we expect Group growth to be driven primarily by our international businesses, with the UK continuing to deliver a solid performance. We are particularly excited by the prospects for our US business where profits increased significantly in FY16 whilst at the same time delivering strong customer growth. As previously announced, the acquisition of Utility Service Partners will be earnings neutral in FY17 due to increased marketing investment and integration costs however, we expect adjusted EBITDA in FY18, the first full year of ownership of USP, to be enhanced by around $15m.

The Group anticipates further good growth in FY17, alongside continued investment in marketing, business development, international expansion and innovation initiatives.

United Kingdom

  • Solid business with 2.2m customers delivering a 3% increase in profit to £58.0m (FY15: 2.1m; £56.4m)
  • Acquisition of heating services business brings gas capability and 0.1m customers
  • Good marketing performance adding 0.4m gross new customers (FY15: 0.3m)
  • Increased loyalty and income from Year 2 + customers reflecting the quality of our service

This has been a good year for the UK business as we continued our focus on delivering great customer service. We have invested in our networks and are seeing this investment rewarded with reduced claims related complaints and improved customer satisfaction. We have renewed a number of affinity partnerships, acquired a heating services business and invested in business development, marketing and innovation. We expect continued investment in FY17 in partner opportunities and innovation initiatives including the launch and distribution of our water leak detector.

UK results

£million 2016 2015 Change
Revenue      
Net policy income 200.2 198.3 +1%
Repair network 81.0 76.8 +5%
Other 10.6 10.4 +2%
Total revenue 291.8 285.5 +2%
Adjusted operating costs (233.8) (229.1) +2%
Adjusted operating profit 58.0 56.4 +3%
Adjusted operating margin 20% 20% -

Net policy income is defined as policy revenue net of sales taxes and underwriting.

UK performance metrics

 2016 2015 Change
Affinity partner households m 24 24 -
Customers m 2.2 2.1 +3%
Income per customer £ 94 93 +1%
Policies m 5.5 5.1 +8%
Policy retention rate % 82 83 -1ppt

Income per customer is calculated by dividing net policy income by the number of customers.

Operational performance

We continue to have strong relationships with our partners and we are pleased to confirm that during the year we renewed six of our utility partnerships on similar commercial terms. We proactively engage our partners in developing successful marketing campaigns, with an increasing number of new customers referred to us through our partners’ call centres. During October, we signed a five year agreement for Aviva to underwrite our home assistance products and we are also developing a home assistance offering for Aviva’s UK customers.

Customer numbers increased 3% from 2.1m to 2.2m principally reflecting a good marketing performance combined with 0.1m customers added through the acquisition of Home Energy Services Limited.

Leading with our comprehensive water product, we acquired 0.4m gross new customers (FY15: 0.3m), the majority of which were acquired through direct mail as this continues to perform well. We continue to see customers buying multiple policies through our digital channels and have also seen strong momentum in our partner channels, doubling the number of new customers acquired through this channel.

As expected, retention has reduced slightly as the number of year one customers, who typically have lower renewal rates, has increased. Importantly we continue to see strong retention rates for customers who have been with us for more than a year. In this case, the retention rate for customers in years two and beyond was 87% in FY16 (FY15: 85%). In light of the increased number of new customers in FY16, we expect the blended retention rate will reduce slightly in FY17 with year end customer numbers of around 2.2m.

During the year we acquired a gas services business, Home Energy Services Limited, for net cash outflow of £3.2m in the year. This business, based in Nottingham, combined with our existing network, significantly increases our gas delivery capability and serves as a platform for further development.

Delivering good customer service is central to our business and during the year we enhanced the claims experience, enabling more digital interaction, while also investing in our engineer network. We now have over 700 directly employed engineers, up from 444 last year. Our customers continue to benefit from the comprehensive levels of cover in our products and this year we completed 0.8m repairs, 0.1m more than last year. We see good levels of satisfaction, as indicated informally on Reevoo and Trust Pilot where our scores are currently 93% and 8.3 respectively (FY15: 94% and 8.2 respectively).

We invested in business development and innovation building good momentum and prospects as we enter FY17. We now have a pipeline of partner opportunities with a mix of utilities and non utilities, some with small policy books. Signing new partners along with the opportunity to acquire small policy books will be an important factor in enabling the UK business to grow further in the future. We have developed and tested a water leak detector which can identify water leaks with functionality to automatically notify the homeowner, enabling them to then book a repair with us. The product will be available through certain partnerships during FY17. We continue to evolve our smart home plans and while still small in scale, we have developed a franchised heating installation network which we expect to extend in FY17.

Financial performance

Revenue in the year was 2% higher than the prior year at £291.8m (FY15: £285.5m) principally reflecting a small increase in policy income, the acquisition of Home Energy Serves Limited and repair network revenue.

Revenue in the UK business is analysed as policy income of £200.2m (FY15: £198.3m), which included post acquisition income from Home Energy Services Limited (£4.2m), repair network revenue of £81.0m (FY15: £76.8m) and other income of £10.6m (FY15: £10.4m). Other income relates to revenue in respect of pay on use repairs, third party claims handling services and transactions with other Group companies.

The increase in repair network revenue again reflects the increase in the number of repair jobs completed in the year.

Income per customer was £94 (FY15: £93) with a £7 increase in income from our Year 2+ customers to £125 (FY15: £118) reflecting price initiatives and increasing levels of cover taken by customers, which was, in part offset by the higher proportion of new customers who typically join on an introductory offer. Going forward, we expect net income per customer to increase as we see the benefits of more targeted customer engagement following implementation of the new Pega Customer Management System.

Adjusted operating costs were £233.8m (FY15: £229.1m), 2% higher than prior year, with indirect cost savings more than offset by an increase in direct costs due to higher volumes of activity and post acquisition costs from Home Energy Services Limited. Adjusted operating profit was £58.0m, 3% higher than the prior year (FY15: £56.4m) resulting in a sustainable 20% profit margin.

United States of America

  • Significant profit growth, up 81% to $17.5m (FY15: $9.7m)
  • Customer numbers up 17% to 2.3m reflecting strength of marketing and customer loyalty (FY15: 2.0m)
  • Strong partner pipeline with 2.8m households added in the year
  • Agreement to acquire Utility Service Partners Inc. (USP) increasing footprint by 9.4m households

Our business continues to grow strongly, and with a solid foundation of almost 70 partners and 2.3m customers, the business has made a step change in its expansion, with the agreement to acquire USP, a business with over 300 partnerships and 0.4m customers.

Operational performance

The USA remains our most significant opportunity with 128m households of which we now have affinity partner relationships that provide services to 32m. On 31 March 2016, we entered into an agreement to acquire USP, a leading provider of home assistance policies, which once completed will increase our footprint by a further 9.4m households.

During the year we signed 11 new utility affinity partnerships and extended our relationship with certain current partners, adding a total of 2.8m utility households. Our pipeline of potential partnerships is strong, with negotiations at all stages of the process.

The agreement with USP marks a step change in the expansion of the business in the USA. USP employs a similar business model to us, having partnerships with around 300 water municipals and a small number of utility companies. USP is the exclusive home warranty partner of the National League of Cities, an organisation dedicated to helping city leaders and an advocate for 19,000 cities, towns and villages across the USA. USP has 0.4m customers and 0.6m policies. This acquisition will bring significant opportunity to increase penetration of the existing 9.4m USP partner households and provide customers with a broader range of home assistance products. Combining USP with our business, we will offer our products to 42m households through an affinity brand and serve over 2.7m customers. The acquisition is expected to complete in the first half of FY17, following ordinary course regulatory approvals.

During FY15 we signed an affinity partnership with AARP, a membership organisation providing services to over 22m households in the USA. Having now established our relationship with AARP, we are growing the number of customers and expect that it will become one of our largest partners in the USA.

Customer numbers increased 17% to 2.3m (FY15: 2.0m) with 0.7m gross new customers added in the year (FY15: 0.7m). Direct mail continues to be the most significant channel but we have also seen an increase in new customers acquired through our partner and digital channels. Our response rates and payback periods have continued to be attractive and in line with our expectations.

A focus on customer service combined with a number of operational improvements to our retention processes, has ensured we continue to maintain our high level of retention at 82% (FY15: 82%). Moreover, this is despite the continued increase in new customers, who typically have a lower year one retention rate.

Our network of 152 directly employed technicians and almost 1,000 sub-contractors completed 0.4m jobs with an increasing number of water heater installations (FY15 jobs: 0.3m).

Financial performance

Revenue was up 14% to $228.4m (FY15: $199.8m) due to higher renewal income and marketing activity. Income per customer was $91 (FY15: $94) principally reflecting the number of new customers who join with just one product, the mix of products and an increasing repair cost as we expand product coverage. Excluding the impact of USP, we expect income per customer to be broadly stable in FY17.

Adjusted operating costs in the USA were $210.9m, up 11% on prior year (FY15: $190.1m) principally reflecting the increase in customer numbers, partner commissions and continued investment in business development and marketing. Adjusted operating profit increased 81% to $17.5m (FY15: $9.7m) while the adjusted operating profit margin increased 3 percentage points to 8% from 5% in the prior year. We are confident that, in the longer-term, adjusted operating margin will be around 20%, similar to that achieved in the UK.

USA results

$million 2016 2015 Change
Total revenue 228.4 199.8 +14%
Adjusted operating costs (210.9) (190.1) +11%
Adjusted operating profit 17.5 9.7 +81%
Adjusted operating margin 8% 5% +3ppts

USA results

£million 2016 2015 Change
Total revenue 152.6 125.3 +22%
Adjusted operating costs (140.5) (118.9) +18%
Adjusted operating profit 12.1 6.4 +89%
Adjusted operating margin 8% 5% +3ppts

USA performance metrics

  2016 2015 Change
Affinity partner households m 32 29 +14%
Customers m 2.3 2.0 +17%
Income per customer $ 91 94 -2%
Policies m 3.5 3.0 +17%
Policy retention rate % 82 82 -

Affinity partner households does not include Utility Service Partners (USP) or AARP households.

France

  • Renewed sales momentum following Lyonnaise des Eaux partnership
  • Strong customer growth, up 7% to 1.0m (FY15: 0.9m)
  • Good profit growth, up 7% to €31.4m (FY15: €29.5m)

This has been an excellent year for our French business which has recently rebranded to HomeServe France (formerly Doméo). The partnership with Lyonnaise des Eaux (LDE) has provided fresh sales momentum with resulting strong growth in customer numbers. The business now has a dedicated business development team and is building a pipeline of affinity partner prospects.

Operational performance

We continue to have a strong relationship with Veolia, the leading water provider in France, and have introduced call transfers from their call centres to assist with new customer acquisition activity.

Our partnership with LDE, which was signed at the end of FY15, gained momentum in the first full year of working together. LDE offers our products in its call centres and has achieved good results, with around a third of the gross new customers acquired in the current year being under the LDE brand.

With renewed sales momentum across the business, customer numbers were up 7% and we passed the 1.0m milestone, having added 0.2m gross new customers in the year (FY15: 0.1m). Direct mail continues to be an important channel and is performing as we anticipated. However, sales through our partners’ sales channels have developed well and following the launch of the new partnership with LDE, we have seen a particular increase in this channel in the year. Customer loyalty remains high with a retention rate of 89% (FY15: 89%).

All of our repairs in France are managed through our network of around 700 sub-contractors (FY15: 700), who broadly completed the same number of repairs as the prior year.

Financial performance

Revenue was up 9% to €105.0m (FY15: €96.1m) due to continued strong renewals and the strength of sales through the LDE affinity partnership. Adjusted operating costs increased by 11% to €73.6m principally reflecting increased investment in marketing, business development, partner commissions and relocation costs associated with the move from two sites to one purpose built facility in Lyon.

Despite this increased investment, adjusted operating profit was €31.4m, 7% higher than the prior year, principally due to the benefit of higher customer numbers and our pricing strategy. Adjusted operating profit margin remained high at 30% (FY15: 31%).

In line with the prior year, income per customer was €101 (FY15: €101) reflecting the current maturity of the customer base, although this may reduce slightly in the future as the proportion of new customers increases, given they typically initially only hold one policy.

In accordance with Group policy, where a partner originates customers on our behalf, the cost of acquisition is capitalised, held as an intangible asset and amortised as an operating expense. During FY16, we paid €4.2m (FY15: €nil) in respect of customers acquired by LDE, the associated amortisation during the year was €0.4m (FY15: €nil).

France results

€million 2016 2015 Change
Total revenue 105.0 96.1 +9%
Adjusted operating costs (73.6) (66.6) +11%
Adjusted operating profit 31.4 29.5 +7%
Adjusted operating margin 30% 31% -1ppts

France results

£million 2016 2015 Change
Total revenue 77.4 74.9 +3%
Adjusted operating costs (54.2) (51.5) +5%
Adjusted operating profit 23.2 23.4 -1%
Adjusted operating margin 30% 31% -1ppts

France performance metrics

2016 2015 Change
Affinity partner households m 15 15 -
Customers m 1.0 0.9 +7%
Income per customer 101 101 -
Policies m 2.3 2.3 +3%
Policy retention rate % 89 89 -

Spain

  • Strong profit growth, up 46% to €13.9m (FY15: €9.5m)
  • Customer numbers up 11% from 1.1m to 1.2m
  • Continued strong partnership with Endesa

The Spanish business has delivered good customer and strong profit progression principally reflecting the growth of the Membership business.

Operational performance

Endesa, our largest partner in Spain, has continued to offer our products through its sales channels and we are pleased that we have also agreed terms for our FY17 marketing campaigns. We have an active business development pipeline and are in discussions with other potential partners.

Customer numbers increased 11% to 1.2m at the end of March 2016. The majority of new customers were acquired through Endesa’s sales channels where customers are offered an electrical assistance product on an introductory offer, typically at a discount of 50%, with renewals at the full price of €69 in the second year.

Retention in the year was 77%, marginally lower than the prior year (FY15: 79%), reflecting the high proportion of customers in the first renewal cycle, where retention rates are lower than more mature customers.

Our claims handling business in Spain continues to perform well. In line with the prior year the business completed 0.7m jobs (FY15: 0.7m). Our network comprises around 2,000 sub-contractors and 174 Reparalia franchised engineers.

Financial performance

Revenue increased by 15% to €132.8m (FY15: €115.9m) driven by a 37% increase in Membership revenue to €50.4m (FY15: €36.9m) and a 4% increase in revenue in the Claims business to €82.4m (FY15: €79.0m). The increase in the Membership business reflects a higher number of customers renewing on full price products, while the Claims business benefited from a small increase in job volumes.

Income per customer increased by €7 to €41 (FY15: €34), again reflecting the higher mix of renewing customers in part offset by new customers who joined on the introductory offer.

The increase in operating costs principally related to higher customer numbers in the Membership business and slightly higher volumes in the Claims business.

Adjusted operating profit increased €4.4m to €13.9m (FY15: €9.5m), reflecting higher revenue in the Membership business, partially offset by the expected increase in amortisation in the period. Spain reported an adjusted operating margin of 10%, two percentage points higher than the prior year, reflecting the increase in Membership profits.

In accordance with Group policy, where a partner originates customers on our behalf, the cost of acquisition is capitalised, held as an intangible asset and amortised as an operating expense. During FY16, we paid €20.2m (FY15: €20.3m) in respect of customers acquired by Endesa and as at 31 March 2016, the intangible asset amounted to €42.1m (FY15: €35.9m). Amortisation in FY16 was €9.9m, €2.4m higher than the prior year (FY15: €7.5m).

Spain results

€million 2016 2015 Change
Revenue      
Membership 50.4 36.9 +37%
Claims handling 82.4 79.0 +4%
Total revenue 132.8 115.9 +15%
Adjusted operating costs (118.9) (106.4) +12%
Adjusted operating profit 13.9 9.5 +46%
Adjusted operating margin 10% 8% +2ppts

Spain results

£million 2016 2015 Change
Revenue      
Membership 37.1 28.9 +28%
Claims handling 60.4 62.0 -3%
Total revenue 97.5 90.9 +7%
Adjusted operating costs (87.6) (83.4) +5%
Adjusted operating profit 9.9 7.5 +33%
Adjusted operating margin 10% 8% +2ppts

Spain performance metrics

2016 2015 Change
Affinity partner households m 15 15 -
Customers m 1.2 1.1 +11%
Income per customer 41 34 +22%
Policies m 1.4 1.3 +10%
Policy retention rate % 77 79 -2ppts

New markets - (including digital innovation)

  • 0.3m customers in Italy
  • Investment in digital technology
  • Intention to expand to further international territories

Our New Markets segment consists of our investment in new territories, digital and innovation initiatives. During the year we successfully exited our German business with no material loss on the sale.

In Italy, we have 0.3m customers through our test agreement with Enel (FY15: 0.2m) and we have commenced the testing of alternative products and channels with other potential partners. Key to establishing a sustainable business in Italy is the signing of a long-term agreement with a leading utility.

We have established a digital hub to develop an end to end, consistent, user friendly digital experience for our customers. A new Chief Digital Officer has been appointed to lead this activity and to enhance self-serve functionality at all stages of the customer journey and enable more effective product sales. We have committed to provide £2m seed funding to a digital start-up called DAD. DAD connects consumers to DIY experts to help fix home repairs.

We have also commenced the appraisal of extending our services to other international markets with a view to entering the home services market in partnership with local utilities, similar to the initial successful joint ventures with South Staffordshire Water in the UK and Veolia in France. While still early days, we have identified a number of attractive markets where, through our current affinity partnerships, we believe we can partner with local utilities.

Financial performance

Our New Markets businesses reported revenue of £20.1m (FY15: £13.8m) reflecting the higher number of customers in Italy. Our investment in New Markets resulted in a loss of £5.9m (FY15: £5.9m) and we would expect a similar level of investment in FY17.

Richard Harpin
Chief Executive
24 May 2016