Chief Executive's review

HomeServe has had another very good year with strong underlying performance enhanced by foreign exchange tailwinds. Affinity partner households increased by 10m to 102m, with a significant increase in North America. This is in addition to 11% Group customer growth, with customer numbers now at 7.8m. Statutory operating profit was up 20% to £104.7m, and adjusted operating profit increased 22% to £118.8m, both included a £10.3m foreign exchange benefit.

A solid performance in the UK delivered over half of the Group’s operating profit, while we also continued to invest in new partnerships, network capability, LeakBot and heating services.

The business in North America had a transformational year, completing the acquisition and integration of Utility Service Partners Inc. (USP) while continuing to sign new partners organically. As a result, we made rapid progress towards the targeted 80m affinity partner households, where 18m households were added during FY17, taking total access to 50m households. Organic customer growth was 10% and, together with USP, customer numbers increased to 3.0m, up 28% on the prior year.

We have seen good customer growth and profit progression in our established businesses in France and Spain with customer numbers increasing 4% to 1.0m and 7% to 1.3m respectively. The Group retention rate was strong at 82% (FY16: 83%).

We invested £6.0m in the New Markets segment, as planned (FY16: £5.9m). Our Italian business established a joint venture with Edison Energia and we progressed our expansion into new countries and development of an online on demand home repair and improvement offering – our “Home Experts” platform.

Our investment in Checkatrade and acquisition of Habitissimo are a major step forward and position us at the fore of the online revolution we are seeing in home services. The Home Experts online platform will connect a wider consumer demographic to a broader range of expert tradespeople.

HomeServe has five operating segments: the UK; the three established international businesses of North America (previously named USA), France and Spain; and New Markets. The New Markets segment comprises our business in Italy, investment in innovation and digital initiatives, together with international development.

Financial performance for the year ended 31 March

  Revenue Statutory operating
profit/(loss)
Adjusted operating
profit/(loss)
£million 2017 2016 2017 2016 2017 2016
UK 326.5 291.8 62.0 57.4 63.2 58.0
             
North America 227.8 152.6 14.7 7.8 21.2 12.1
France 91.1 77.4 21.1 18.0 27.1 23.2
Spain 130.2 97.5 13.0 9.6 13.3 9.9
  449.1 327.5 48.8 35.4 61.6 45.2
New Markets 16.6 20.1 (6.1) (5.9) (6.0) (5.9)
Inter-segment (7.2) (6.2) - - - -
Group 785.0 633.2 104.7 86.9 118.8 97.3

Adjusted operating profit/(loss) excludes amortisation of acquisition intangibles as reconciled to the statutory equivalent on the next page.

Performance metrics for the year ended 31 March

  Affinity
partner households (m)
Customer
numbers (m)
Policy retention
rate
  2017 2016 2017 2016 2017 2016
UK 24 24 2.2 2.2 80% 82%
             
North America 50 32 3.0 2.3 82% 82%
France 15 15 1.0 1.0 89% 89%
Spain 12 15 1.3 1.2 78% 77%
  77 62 5.3 4.5 83% 83%
New Markets 1 6 0.3 0.3 - -
Group 102 92 7.8 7.0 82% 83%

The Group uses adjusted operating profit, EBITDA, adjusted profit before tax and adjusted earnings per share as its primary performance measures. These are non-IFRS measures which exclude the impact of the amortisation of acquisition intangible assets (FY17: £14.1m, FY16: £10.4m). Acquisition intangible assets principally arise as a result of the past actions of the former owners of businesses in respect of marketing and business development activity. Therefore, the adjusted measures reflect the post acquisition revenue attributable to, and operating costs incurred by, the Group.

A reconciliation between the adjusted and statutory equivalent is included in the Financial review.

As at 31 March 2017, the net book value of the acquisition intangible asset was £114.0m (FY16: £75.3m) and the related amortisation charge in FY17 was £14.1m (FY16: £10.4m).

The tables below provides a reconciliation between the statutory and adjusted items.

£million 2017 2016
Operating profit (statutory) 104.7 86.9
Depreciation 6.9 5.4
Amortisation 28.5 20.0
Amortisation of acquisition intangibles 14.1 10.4
EBITDA 154.2 122.7
Operating profit (statutory) 104.7 86.9
Amortisation of acquisition intangibles 14.1 10.4
Adjusted operating profit 118.8 97.3
Profit before tax (statutory) 98.3 82.6
Amortisation of acquisition intangibles 14.1 10.4
Adjusted profit before tax 112.4 93.0
Pence per share    
Earnings per share (statutory) 24.0 19.6
Amortisation of acquisition intangibles 3.0 2.2
Adjusted earnings per share 27.0 21.8

United Kingdom

£million 2017 2016 Change
Revenue      
Net policy income2 213.4 200.2 +6%
Repair network 100.3 81.0 +23%
Other 12.8 10.6 +21%
Total revenue 326.5 291.8 +12%
Adjusted operating costs (263.3) (233.8) +13%
Adjusted operating profit 63.2 58.0 +9%
Adjusted operating margin 19% 20% -1ppt

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

  • Solid performance with 2.2m customers
  • Expanded partnership with Aviva, launching a range of new home assistance products
  • Strengthened heating capability with the acquisition of npower’s service contracts business
  • Voted 3rd on Glassdoor’s Best Places to Work, with a highly-engaged and focused team

The strength of our affinity partnerships and continued investment in networks, heating services and product innovation, provided the base for a solid and profitable performance in FY17 and ensures good medium-term prospects. Staff engagement remains high and is continuing to drive high levels of customer service and satisfaction.

Operational performance

Through affinity partner relationships, HomeServe offers home assistance products, under a utility brand, to around 90% of the addressable UK market. One of our largest affinity partnerships was successfully renewed in the year and we were also pleased to sign a new partnership in July 2016 with Dee Valley Water, which provides water services to over 250,000 customers.

In February, our partnership with Aviva, the UK’s largest general insurer, was expanded as we jointly launched Aviva Home Response, a range of products, powered by HomeServe and sold through Aviva’s marketing channels, offering cover for heating, plumbing, electrics and security. This exciting opportunity enables HomeServe to market heating-led products under the widely-recognised Aviva brand.

Our multi-channel marketing activity added 0.4m gross new customers in the year (FY16: 0.4m) and we are pleased that new customers joining us do so on fuller products, enjoying the benefits of higher usage and increasing our average net income per customer.

The policy retention rate was good at 80% (FY16: 82%) with more Year 1 customers choosing to renew with us than in the prior year. New customers typically enrol on an introductory offer and so we expect our policy retention rate in year 1 to be lower than subsequent years. Customer retention also continues to perform well, with the overall rate maintained at 82% (FY16: 82%).

We continue to invest in our network of contractors and engineers and during December 2016 we extended the directly-employed heating network with the acquisition of npower’s ‘domestic care and maintenance’ contracts business together with its 76 heating engineers. Combined with our plumbing engineers and the successful integration of the Home Energy Services Limited (HESL) business that was acquired in FY16, our network now comprises over 850 directly-employed engineers, up from 700 last year.

Our heating business previously focused on boiler repairs and services; but we have now expanded our services to include boiler and smart thermostat installations. Although early days, this installation business is growing month-on-month and we aim to expand it nationally, through both organic growth and further appropriate bolt-on opportunities.

During the year, we completed 0.9m jobs, up from 0.7m in the prior year while still retaining high levels of customer service. Internally we measure customer satisfaction at different contact points along the customer journey (e.g. when the customer buys the policy / when the customer makes a claim), and this increased in the year. Our ratings on TrustPilot (the leading third party review provider in the UK) and Reevoo (an independent customer ratings provider) remain high at 8.3 and 93% (FY16: 8.3 and 93%) respectively.

In February 2017, we were recognised by the Institute of Customer Service as the only company to have consistently improved customer service since January 2014. Our satisfaction rating of 79.9 placed us in the top three UK “Services” companies for customer satisfaction in 2017.

This great customer service is due to the hard work and dedication of our people across all areas of the business, so we were delighted to receive the accolade of 3rd on Glassdoor’s Best Places to Work in 2017.

Our investment in innovation resulted in the launch of LeakBot, a smart home water leak detector that enables early leak detection, preventing or limiting damage to customers’ homes. The product appeals to the home insurance market, with escape of water the biggest expense incurred by home insurers. We have launched tests with home insurers including Aviva and, more recently, RSA and its More Than brand. Results are encouraging and support our focus on innovation.

Technology plays an increasingly important role in how we operate and in our interaction with customers. We are investing in upgrading our technology and are pleased with the implementation of our new Customer Relationship Management (CRM) system, which will be rolled out during FY18. The system is in live test with a small number of customer records, where agents are now presented with a single view of the customer, a system generated “next best customer action” and more intuitive screens. This is leading to better conversations between our agents and customers, and is expected to drive sales and efficiency benefits in the medium term. We are also investing in our extended network of engineers and plan to upgrade our claims management and deployment systems to deliver further operational efficiencies.

Financial performance

Revenue in the year was 12% higher than the prior year at £326.5m (FY16: £291.8m), principally reflecting an increase in net policy income and repair network revenue. Net policy income benefited from a slightly higher number of customers and higher income from each customer. Net income per customer was up £2 to £96, reflecting the mix of customers holding fuller cover products, and we expect further progression in net income per customer in FY18.

Repair network revenue increased by 23% to £100.3m (FY16: £81.0m), reflecting an increase in the number of jobs completed. Other income of £12.8m (FY16: £10.6m) includes transactions with other Group companies, on demand repairs, smart thermostat and boiler installations.

Adjusted operating costs increased 13% to £263.3m (FY16: £233.8m), reflecting the first full year of ownership of HESL and the integration of the engineer network of npower’s service contracts business. Adjusted operating margin was 19% (FY16: 20%), principally due to the increase in repair revenue. With continued high levels of repair revenue, we expect margins to remain at this level going forward.

North America

$million 2017 2016 Change
Revenue      
Net policy income 273.5 211.0 +30%
Other 19.5 17.4 +12%
Total revenue 293.0 228.4 +28%
Adjusted operating costs (266.8) (210.9) +26%
Adjusted operating profit 26.2 17.5 +50%
Adjusted operating margin 9% 8% +1ppt

 

£million 2017 2016 Change
Revenue      
Net policy income 212.7 141.1 +51%
Other 15.1 11.5 +31%
Total revenue 227.8 152.6 +49%
Adjusted operating costs (206.6) (140.5) +47%
Adjusted operating profit 21.2 12.1 +75%
Adjusted operating margin 9% 8% +1ppt

Income per customer is calculated by dividing the last twelve months’ net policy income by the number of customers. The policy retention rate and income per customer performance measures exclude USP, a business acquired in July 2016. FY17 policy income includes $27.7m in respect of USP.

  • Rapid progress adding 18m affinity partner households to reach 50m
  • Record new partner signings adding 100 partners
  • Significant customer growth up 28% to 3.0m
  • Integration of USP on track to deliver $15m EBITDA in FY18.

This was a transformational year for HomeServe in North America, with good underlying organic growth enhanced by the acquisition of Utility Service Partners Inc. (USP). We have achieved the milestone of 3.0m customers, added 100 new partners and reached 50m affinity partner households, making good progress towards our 80m household target.

Operational performance

North America achieved record partner signings, increase in households and gross new customers. We delivered a 50% increase in adjusted operating profit to $26.2m, driven by the continued success of our underlying business.

On 1 July 2016, we completed the acquisition of USP, a leading provider of home assistance services, for a net cash outflow of $72.6m (£54.5m). Like our existing business, USP operates an affinity partner model and it is also the exclusive home warranty partner of the National League of Cities (NLC), an organisation that advocates to around 19,000 towns and cities, covering 66m municipal households in the USA. The NLC relationship is a strong endorsement with smaller municipals. We have streamlined our approach for these prospects with a resulting increase in the number of municipals signed in the year. The operational integration of USP is largely complete and we are pleased to have retained the Canonsburg facility together with key personnel.

Our acquisition of USP advanced our expansion into Canada, a country with 13m households, and offers further good growth prospects for our business. USP made a strategic investment in Canada working with the Association of Municipalities of Ontario (AMO), an endorsing partner across Canada’s largest province. We have started marketing in Ontario, and now have 30 partnerships in this region.

We now offer our products to 50m utility households (FY16: 32m) and we are confident of reaching our stated goal of 80m utility households across North America. During the year, we signed 100 new utility partnerships and entered into a relationship with the American Public Gas Association (APGA) which is an endorsing body that works with 700 municipal gas distributors across the USA.

Our strategic plan is focused on our core policy business – developing, marketing and selling policies in partnership with utilities, municipals and membership organisations. We have invested in building an experienced business development capability, focused on driving new partnership signings. Our pipeline of potential partner opportunities is strong, with negotiations at all stages of the process.

Customer numbers increased 28% to 3.0m customers (FY16: 2.3m), with 0.4m customers acquired with the USP acquisition and a further 0.8m gross new customers added during the year (FY16: 0.7m). Direct mail continues to be the most significant marketing channel, with continued progress in sales through our partner channels. We re-launched our website, enabling more effective digital marketing, with a 55% increase in the number of new customers joining online. Retention remains strong at 82% (FY16: 82%).

Good customer service is central to the business and we have invested in technology across the claims process to improve the customer journey. We now deploy over 80% of all contractor jobs directly to technician’s mobile devices. Going forward we expect to make further investment in claims technology to enhance the customer experience and to drive operational efficiency.

Our network of 151 directly-employed engineers (FY16: 152) and almost 1,100 sub-contractors (FY16: 1,000) carried out 0.4m jobs during the year (FY16: 0.4m). In line with our strategy, we have progressed our HVAC (heating, ventilation and air conditioning) installation business, with a 15% increase in the number of units installed in FY17 compared to the prior year.

We were delighted to win a recognised ‘Top Places to Work’ award for the third year in a row together with a Grand Stevie Award for our high levels of customer satisfaction.

Financial performance

Revenue was up 28% to $293.0m (FY16: $228.4m), driven by a 30% increase in policy income, reflecting an increase in renewal income and $27.7m post-acquisition revenue from USP. Our growing installation volumes are reflected in the 12% increase in other income to $19.5m (FY16: $17.4m).

Income per customer was up 7% to $97 (FY16: $91), principally reflecting the higher proportion of renewals and a reduced cost to serve as we realised operational efficiencies in our network. Income per customer excludes USP customers who have yet to go through a full renewal cycle with HomeServe. Typically income per customer is lower in USP, reflecting the product mix, and as a result we expect to see a small reduction in net income per customer in FY18.

Adjusted operating costs in North America were $266.8m (FY16: $210.9m), up 26% on the prior year, due principally to continued investment in business development, marketing and the impact of USP. USP incurred a loss of $0.9m in the period post acquisition reflecting related transaction and integration costs. We continue to expect USP to add $15m incremental EBITDA in FY18, our first full year of ownership. Adjusted operating profit increased 50% to $26.2m, resulting in an adjusted operating margin of 9%, up from 8% in FY16. We remain confident of a longer-term adjusted operating profit margin of 20%.

France

€million 2017 2016 Change
Total revenue 107.4 105.0 +2%
Adjusted operating costs (75.9) (73.6) +3%
Adjusted operating profit 31.5 31.4 -
Adjusted operating margin 30% 30% -

 

£million 2017 2016 Change
Total revenue 91.1 77.4 +18%
Adjusted operating costs (64.0) (54.2) +18%
Adjusted operating profit 27.1 23.2 +17%
Adjusted operating margin 30% 30% -
  • Good sales momentum delivered a 4% increase in customer numbers to 1.0m
  • Outstanding customer loyalty reflected in 89% retention rate, the highest in the Group
  • Maintained strong adjusted operating profit margin of 30%.

HomeServe France demonstrated a solid performance this year via its two major partnerships with Veolia and Suez, while continuing to invest in business development, product development and digital initiatives.

Operational performance

Our strong partnership with Veolia, France’s largest water provider, continues to deliver customer growth and during the year we saw an increase in the number of customers joining through Veolia’s own sales channels. We continue to develop our relationship with Suez (formerly Lyonnaise des Eaux), which offers HomeServe products through its sales channel, and accounted for a third of all new sales during the year.

Across all of our marketing channels we added 0.2m gross new customers (FY16: 0.2m). This sales activity combined with a continued strong retention performance at 89% (FY16: 89%) resulted in a 4% increase in customer numbers to 1.0m (FY16: 1.0m).

Our business development team has a good pipeline of partner prospects, with some initial testing in progress. We have also signed a new partnership with SARP, part of the Veolia Group, to offer a new plumbing, drainage and septic tank product to its 0.6m customers.

We have enhanced the digital functionality across the customer journey from sale through to claim, which we believe has improved our relationship with both customers and contractors. We were proud to win a nationally-renowned award - Service Client de l’Annee 2017, Home Services sector - for the first time, reflecting our focus on delivering exceptional customer service.

All our repairs in France are completed by our network of over 900 contractors (FY16: 700). We now deploy over 50% of jobs direct to contractors’ mobile devices driving improved customer service, operational efficiencies and an enhanced relationship with these contractors.

Financial performance

Total revenue increased 2% to €107.4m (FY16: €105.0m), principally reflecting an increase in renewal income generated by Suez. Adjusted operating costs were up 3% to €75.9m (FY16: €73.6m), due to an increase in amortisation and further investment in business and product development. In line with the prior year, income per customer was €101 (FY16: €101).

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 FY17, we paid €3.0m (FY16: €4.2m) in respect of customers acquired by Suez, and as at March 2017, the net book value of the intangible asset was €5.9m (FY16: €4.3m). The associated amortisation during the year was €1.0m (FY16: €0.4m).

Adjusted operating profit increased to €31.5m, (FY16: €31.4m), maintaining a strong adjusted operating margin of 30% (FY16: 30%), while continuing to support customer growth.

Spain

€million 2017 2016 Change
Revenue      
Membership 57.2 50.4 +13%
Claims handling 97.1 82.4 +18%
Total revenue 154.3 132.8 +16%
Adjusted operating costs (138.5) (118.9) +16%
Adjusted operating profit 15.8 13.9 +13%
Adjusted operating margin 10% 10% -

 

£million 2017 2016 Change
Revenue      
Membership 48.3 37.1 +31%
Claims handling 81.9 60.4 +35%
Total revenue 130.2 97.5 +34%
Adjusted operating costs (116.9) (87.6) +33%
Adjusted operating profit 13.3 9.9 +34%
Adjusted operating margin 10% 10% -
  • Continued customer growth, up 7% to 1.3m
  • Strong adjusted operating profit growth, up 13% to €15.8m
  • Record number of jobs completed – up 19% across the network.

This year our Spanish business, Reparalia, rebranded as HomeServe Spain. We have achieved good growth in both our Membership and Claims businesses as we saw confidence returning to the Spanish market. Performance in the claims handling business was particularly strong, as we continued to gain market share and increased claims volumes across our third-party insurance network.

Operational performance

Endesa, our largest partner in Spain, continued to successfully offer our products through its sales channels and this will continue throughout FY18. We were unable to make the progress we wanted with Agbar, a water utility with 3m households and so, following a period of limited marketing activity, we agreed to end the partnership and removed it from our affinity partner household count. We have retained the 39,000 customers previously acquired and will look to renew them under our brand going forward. Our business development team is in active discussions with other potential partners.

Customer numbers increased 7% to 1.3m, reflecting continued good sales and retention. During the year, we developed new products to appeal to a broader market, including water products and “Tech Angel”, a 24/7 home technology support product, which has been well received. Retention in the year was 78%, marginally higher than the prior year (FY16: 77%).

Our claims business works with 16 Spanish insurance companies managing home insurance claims across 26 trades. During the year it completed 19% more jobs than in the prior year, closing a record 0.8m jobs (FY16: 0.7m), which reflects an increase in our market share together with our diversification into new channels. Our network comprises over 2,000 sub-contractors and 197 franchised engineers.

Financial performance

Revenue increased 16% to €154.3m (FY16: €132.8m) with increases in both Membership and Claims. Membership revenue was up 13% to €57.2m (FY16: €50.4m), reflecting the higher number of customers, while Claims revenue increased to €97.1m (FY16: €82.4m), benefitting from an increase in the number of completed jobs.

Income per customer (relating to the Membership business) was up 4% to €43 (FY16: €41), reflecting the increased maturity of the customer base.

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 FY17 we paid €13.5m (FY16: €20.2m), in respect of customers acquired by Endesa and, as at March 2017, the net book value of the intangible asset amounted to €46.0m (FY16: €42.1m). Amortisation in FY17 was €12.8m, €2.9m higher than the prior year (FY16: €9.9m).

Adjusted operating costs increased 16% to €138.5m (FY16: €118.9m), primarily reflecting the increase in direct costs to serve the higher job volumes in the Claims business and an increase in amortisation in the Membership business. Adjusted operating profit was up 13% to €15.8m (FY16: €13.9m) following good performance in both Membership and Claims.

New Markets

  • Our Italian business agreed a joint venture with Edison Energia, a major utility in Italy
  • Positive discussions in new international markets
  • Strategic investment in Checkatrade and acquisition of Habitissimo.

Our New Markets segment comprises our business in Italy, investment in innovation and digital initiatives, together with international development.

In Italy, we have 0.3m customers acquired through a test agreement with Enel. There continues to be good customer demand for our products but due to a change in Enel’s approach to home services, the test agreement was not extended. During March 2017, we established a joint venture with Edison Energia, Italy’s third-largest energy supplier and a member of the EDF Group, through its purchase of 51% of our Italian business (we retain a 49% share). We have commenced marketing a range of home assistance products, principally through Edison Energia’s sales channels, including television advertising.

We continue to progress our international development plans where we are targeting multiple countries under our preferred joint venture model.

We have invested in technology to drive enhanced performance across the Group. Consistent platforms across all of our businesses will deliver more effective product sales and efficiencies. During the year, we launched new customer-facing websites in the USA, France and Spain.

In line with our ambition to offer our services to more homeowners, we are developing a compelling online on demand service which we are calling Home Experts. This platform will connect customers to a range of expert tradespeople, enabling an end-to-end digital experience.

Our investment in Checkatrade, which is treated as an associate and acquisition of Habitissimo, which is fully consolidated, will accelerate the development of this proposition. Both businesses are established market leaders in home repairs and improvements. Combined, they have 45,000 local Home Experts carrying out an estimated £3.5 billion of home repairs and improvements annually.

Checkatrade is the UK’s most recognised and trusted online directory of high-quality, customer-recommended tradespeople with nearly 1m unique customer visits a month, resulting in approximately 1.3m jobs per annum. Our recent research indicates that around 50% of consumers go online to find a tradesman and of these, around 47% go directly to Checkatrade, making it a market leader in online home services.

Based in Mallorca, Habitissimo receives more than 3.6 million unique customer visits a month, resulting in approximately 0.25m jobs a year across four countries in Europe (Spain, Portugal, Italy and France), and also in Latin America.

Financial performance

Reported revenue was £16.6m, down £3.5m compared to the prior year (FY16: £20.1m), reflecting a reduction in customers due to the cessation of activity with Enel in June 2016. Following the formation of a joint venture with Edison Energia in March 2017, our business in Italy is treated as an associate and going forward we will not report annual revenue in respect of this business.

Our investment in New Markets resulted in a loss of £6.0m (FY16: £5.9m). We expect a similar level of investment in FY18, covering our continued investment in Italy, innovation and digital initiatives, together with international development.

Board changes

During the year David Bower was appointed as Chief Financial Officer and Johnathan Ford as Chief Operating Officer. We have also strengthened the Board with the appointment of three new Directors with effect from 23 May 2017. Tom Rusin has been appointed as an Executive Director and Katrina Cliffe and Edward Fitzmaurice have both been appointed as Non-Executive Directors. Katrina will also join the Audit & Risk Committee. Tom has been Chief Executive Officer of HomeServe USA since July 2011 and is currently a member of the HomeServe plc Executive Committee.

Outlook

All our businesses are performing well and have good prospects. Looking ahead, we expect further strong growth in FY18, principally driven by our rapidly-expanding business in North America. This reflects the increase in customer numbers, combined with the benefit of the USP acquisition, which we expect to deliver around $15m EBITDA this coming year.

We are excited about the future for all of our businesses. We have a strong platform for growth over the years ahead and our strategic focus on home assistance, repairs and improvements will enable us to meet the needs of a wide range of customers.

Richard Harpin
Chief Executive
23 May 2017