Final Results

HomeServe plc

Preliminary results for the year ended 31 March 2019

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

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

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

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

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

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

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

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

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

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

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

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

Outlook

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

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

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

³HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. Headline financial results and the operating reviews of each segment within this announcement all refer to APMs. APMs used in this announcement are non-GAAP measures which address profitability, leverage and liquidity and together with operational KPIs give an indication of the current health and future prospects of the Group. Definitions of APMs and the rationale for their usage are included in the Glossary at the end of this announcement with reconciliations, where applicable, back to the equivalent statutory measure.

Results presentation and Investor Day

A presentation for analysts and investors will take place at 10am this morning at UBS, 5 Broadgate, London EC2M 2QS.

There will be an audio webcast with a facility to ask questions, available via www.homeserveplc.com. This is accompanied by a listen-only conference call with details as follows;

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

Forward Looking Statements

This report contains certain forward looking statements, which have been made in good faith, with respect to the financial condition, results of operations, and businesses of HomeServe plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. The statements have been made with reference to forecast price changes, economic conditions, the current regulatory environment and the current interpretations of IFRS applicable to past, current and future periods. Nothing in this announcement should be construed as a profit forecast.

About HomeServe

HomeServe is an international home repairs and improvements business which provides people with access to tradespeople and technology to run their homes more easily. HomeServe is listed on the London Stock Exchange, with a market capitalisation of c.£3.6 billion.

CHIEF EXECUTIVE'S REVIEW

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

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

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

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

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

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

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

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

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

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

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

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

People and leadership

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

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

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

Outlook

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

Richard Harpin

Founder and Chief Executive

BUSINESS REVIEW

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

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

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

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

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

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

Financial performance for the year ended 31 March

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

Membership performance metrics for the year ended 31 March

UK

Financial performance

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

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

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

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

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

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

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

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

Operational performance

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

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

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

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

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

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

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

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

North America

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

Financial performance

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

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

Operational performance

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

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

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

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

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

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

Spain

Financial performance

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

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

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

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

Operational performance

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

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

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

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

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

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

Home Experts

Financial Performance

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

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

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

Operating Performance

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

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

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

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

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

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

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

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

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

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

New Markets

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

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

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

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

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

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

FINANCIAL REVIEW

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

Group statutory results

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

Profit before tax

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

Net finance costs

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

Exceptional items

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

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

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

Amortisation of acquisition intangibles

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

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

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

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

Tax strategy

The Group has continued to operate within the tax strategy approved by the Board in May 2018. The tax strategy is subject to annual review and reflects HomeServe's status as a plc, and the regulated nature of its business which requires strong governance and consideration of reputation as well as compliance with local laws, regulations and guidance. The UK elements of the tax strategy document are publicly available on the Homeserve plc website as required by UK legislation.

The Group tax strategy covers how HomeServe:

(i) applies tax governance on an ongoing basis and maintains strong internal controls in order to substantially reduce tax risk;

(ii) will not engage in artificial transactions the sole purpose of which is to reduce tax;

(iii) holds a strategic aim to retain its low tax risk rating as determined by the UK Tax Authority's Business Risk Review process; and

(iv) works with all tax authorities in an open, honest and transparent manner.

Tax charge and effective tax rate

The Group's tax charge in the financial year was £31.2m (FY18: £27.4m), representing an effective tax rate of 22% (FY18: 22%). The corporate income tax rates in the overseas countries in which the Group operates continue to be higher than the UK corporate income tax rate of 19% (FY18: 19%), which results in a Group effective rate higher than the headline UK rate. As the proportion of the Group's profits earned overseas continues to grow, the effective tax rate is expected to increase slightly.

Cash flow and financing

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

Working capital

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

Capital expenditure

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

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

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

Acquisitions

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

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

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

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

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

Earnings per share

Basic earnings per share for the year increased from 30.2p to 32.7p, an increase of 8%. On an adjusted basis, earnings per share increased 12% from 33.6p to 37.5p. The weighted average number of shares increased from 318.9m to 331.7m principally due to the equity placing which occurred part way through the prior year on 19 October 2017 and new shares issued in fulfilment of a number of share schemes that vested in the year.

Dividends

Given the Group's good performance and the Board's confidence in its future prospects, the Board is proposing to increase the final dividend to 16.2p per share (FY18: 14.4p) to be paid on 2 August 2019 to shareholders on the register on 5 July 2019.

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

Financing

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

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

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

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

Foreign exchange impact

The impact of changes in the Euro and USD exchange rates between FY18 and FY19 resulted in a £5.3m increase in the reported revenue and a £1.5m increase in adjusted operating profit of the international businesses as summarised in the table below, largely as a result of a beneficial movement in the US dollar. There was no material difference for the impact of foreign exchange on statutory operating profit.

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

With an increasing proportion of HomeServe's profits generated overseas, the potential translation impact of foreign exchange movements on reported profits may have a larger impact. A ten cent movement in the FY19 average USD rate of 1.31 and the Euro rate of 1.13 would have had approximately a £5.2m and £4.5m impact respectively on full year adjusted operating profit. The impact of future movements in the Yen in FY20 following HomeServe's new joint venture in Japan is not expected to be material.

Accounting standards

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

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

Customers

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

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

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

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.

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.

Group Income Statement

Year ended 31 March 2019

* 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

Group Balance Sheet

31 March 2019

Group Statement of Changes in Equity

Year ended 31 March 2019

Year ended 31 March 2018

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

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:

2. Significant accounting policies (continued)

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