21st May 2007 07:02
Homeserve Plc21 May 2007 HOMESERVE PLC RESULTS FOR THE YEAR ENDED 31 MARCH 2007 Highlights of the Year 2007 2006 IncreaseRevenue £477m £367m 30%Operating profit * £70.2m £54.4m 29%Profit before tax * £67.7m £53.6m 26%Profit before tax £61.1m £50.0m 22%Earnings per share ** 74.7p 59.2p 26%Earnings per share 67.3p 55.1p 22% • Strong growth across all divisions • Significant cash flow generated by operations of £73.6m • Dividend per share increased by 25% to 25p • Over 7m policies (2006: 5.7m) • UK new policy sales of 1.6m in line with 2006 • France and USA policy levels doubled to over 1m • Retail Warranties trading profitably • Emergency Services multi-trade offering well advanced Brian Whitty, Chairman, commented; "We are delighted to be announcing this excellent set of results, which onceagain represent growth in excess of 20%. As well as continuing to grow our UKPolicy Business we have increased investment in our Emergency Services andInternational divisions as we look to capitalise on the many excitingopportunities we see in our markets. Homeserve is well placed for the year ahead." * Excluding amortisation of acquisition intangibles and joint venture taxation, see Financial Review and notes 2 and 4.** Excluding amortisation of acquisition intangibles, see Financial Review and notes 2 and 4. 21 May 2007Enquiries:Homeserve plcBrian Whitty, Executive Chairman Tel: 01922 427900Richard Harpin, Chief Executive Tel: 01922 659701Jonathan Simpson-Dent, Chief Financial Officer Tel: 01922 427903 Tulchan GroupAndrew Honnor Tel: 020 7353 4200Stephen Malthouse CHAIRMAN'S STATEMENT Homeserve has had another excellent year, delivering strong growth across all ofits businesses. The business has again delivered earnings growth well in excessof 20% whilst achieving high levels of new policy sales in the UK, France andUSA. The continued investment in an integrated network of tradesmen across theUK has been a key factor in developing a unique offering for Household Insurers. ResultsRevenue from continuing operations increased by 30% to £477m (2006: £367m).Profit before tax* increased by 26% to £67.7m (2006: £53.6m) and earnings pershare** increased by 26% to 74.7p (2006: 59.2p). Statutory profit before tax increased by 22% to £61.1m (2006: £50.0m) and totalbasic earnings per share increased by 22% to 67.3p (2006: 55.1p). Continuing its policy of increasing dividends in line with earnings growth, theBoard is proposing a final dividend of 17.5p per share to be paid on 6 August2007, which brings the full year dividend to 25.0p per share, a year on yearincrease of 25%. Cash generated by operations of £73.6m (2006: £55.6m), represented 105% (2006:102%) of operating profit*, leaving net debt at 31 March 2007 of £27.1m (2006:£16.3m). During the year we spent £30.2m (2006: £34.7m) on acquisitions in theyear and deferred consideration in respect of prior years. Policy MembershipThe Policy Membership business increased revenue by 19% to £192m (2006: £161m),with operating profit* increasing by 31% to £54.2m (2006: £41.3m). Our utilitybranded Policy Membership businesses in the UK and overseas, together with ourManufacturer Warranty business, have grown to a total of 7.1m (2006: 5.7m)policies in the year and 3.8m (2006: 3.3m) customers. The Homeserve GB utility branded policy business combined strong growth inprofits of 20%, with new policy sales in the year of 1.6m (2006: 1.6m). Policyrenewal rates have remained high at 86% (2006: 87%) with activities in the yearbeing concentrated on increased penetration to existing customers. Averagepolicies per customer are now 1.92 compared to 1.78 last year. Total policycount in the UK reached 5.8m (2006: 5.0m). The net investment in our international operations was £2.4m (2006: £2.6m).Domeo, our French operation is continuing to perform strongly with our 49% shareof the joint venture contributing £1.1m to our operating profits beforemanagement recharges with the number of policies doubling to 0.86m (2006:0.42m). The US operation also doubled its policy base to 0.26m (2006: 0.13m)achieving excellent take up rates, including FirstEnergy with which we signed afive year marketing agreement in August 2006. As initial results of theelectrics product test with Endesa in Spain were inconclusive, a further testwas agreed and was sent out at the beginning of May 2007. The new Warranties management team has made considerable progress in developingour warranty activities. Our Retail Warranties business has achieved anexcellent turnaround in performance generating an operating profit of £0.9m(2006: £1.5m loss). This reflects new customer signings combined with improvedoperational efficiencies. Emergency ServicesThe Emergency Services business increased revenue by 36% to £297m (2006: £218m)with operating profit* increasing by 22% to £16.0m (2006: £13.1m). The Emergency Services businesses have delivered another year of excellentperformance, having experienced high levels of activity. Over the last 12 monthswe have made enormous progress in developing our multi-trade offering and thisis set to continue as we complete the roll out of common operating platforms andadd content validation and fulfilment to our unique model. Reaching agreementwith a major insurer to provide a fully integrated multi-trade and claimsmanagement service is a first in the industry and represents a milestone in thedevelopment of this business. Our networks responded well to the sharp increase in claims volumes followingthe December and January storms, particularly for glazing and building repairs,providing high profile support for our Household Insurer partners. EmployeesHomeserve now has over 4,000 employees including 1,000 directly employedengineers. Each has made a valuable contribution during the year and I shouldlike to thank them all for their commitment, dedication and efforts in anotheroutstanding year. Board ChangesWe are continuing to strengthen the Board with senior level appointments at bothexecutive and non-executive level. Jon Florsheim joined the Board in March 2007 as Chief Executive of Homeserve GB.Jon was previously Chief Marketing Officer and Managing Director Customer Groupat British Sky Broadcasting. Jonathan Simpson-Dent was appointed on 30 March 2007 as Chief Financial Officerreplacing Andrew Belk who resigned from the Board on the same date. Jonathan isa Chartered Accountant with significant commercial experience at GeneralHealthcare Group, PepsiCo and McKinsey. In January 2007, Ian Chippendale joined the Board as an independent non-executive director, following his retirement as Executive Chairman of RBS Insurance and many years in the insurance services sector. He is currently Senior Independent Director of Thus plc. We are also announcing today that Andrew Sibbald is to join the Board as anindependent non-executive director with effect from 1 June 2007. Andrew is anexperienced corporate financier, currently Managing Director and co-founder ofLexicon Partners which specialise in the utility and insurance sectors. These appointments follow the resignation of Justin Jewitt as a non-executivedirector in January 2007 having completed his three year term of office. ProspectsOur Policy Membership businesses in the UK are expected to continue to achievethe high levels of policy sales achieved historically through increasedpenetration with existing customers and broadening our customer base byexpanding product ranges and affinity partnership relationships. International markets continue to represent an exciting opportunity.International investment will continue to improve the pipeline of new partnerprospects in the USA and Spain. We expect the good progress made in our jointventure in France to continue. We will continue the growth of our network of directly employed tradesmen and weexpect to see an increasing demand for Household Insurers in our integrated'hub' offering. Homeserve is well positioned for continued organic growth over the coming year.We will supplement this growth with acquisitions where they enhance our growthprofile and advance our strategic goal to become the market leading provider ofemergency services to the home. Brian WhittyExecutive Chairman21 May 2007 CHIEF EXECUTIVE'S REVIEW INTRODUCTION Homeserve's value proposition is the provision of quality solutions for domesticemergencies. Policy Membership is an affordable way of providing peace of mindto over 3m households in the UK. This membership is supported by a nationaltrade network that delivers high quality services to households. We continue to develop strategic partnerships with utilities and HouseholdInsurers. These partnerships provide access to a broad customer base under theirwell known and trusted brands, and enable the partner to offer additionalvalue-added services to its customers. Our performance in France and the US clearly demonstrates that the Homeservemodel is replicable overseas. We will continue to develop our Internationalbusiness by ensuring that we build firm foundations in carefully selectedmarkets. I am delighted by the progress we have made in executing this strategy acrossall our businesses during the last 12 months. POLICY MEMBERSHIP Our Policy Membership businesses provide underwritten cover for a broad range ofdomestic emergencies branded to our business partners in the utilities,appliance manufacturing and retail sectors. Our policies include cover forplumbing and drains and water supply pipes, electrical wiring, gas centralheating and appliances, gas supply pipe cover, electrical appliances andfurniture. During the year, these businesses increased revenue and operating profit* by 19%and 31% to £192m and £54.2m respectively. Our UK Policy, International andManufacturer Warranty businesses now have a total of 7.1m policies (2006: 5.7m)and 3.8m customers (2006: 3.3m). Homeserve GB Homeserve GB continues to demonstrate strong underlying growth driven by newpolicy sales of 1.6m (2006: 1.6m) and retention rates of 86% (2006: 87%). As a result we have continued to increase our penetration in the UK market wherepolicies increased from 5.0 m to 5.8m over the year: - 3.93m in plumbing and drains and water supply pipe (2006: 3.35m)- 0.77m in electrical (2006: 0.76m)- 1.09m in other including gas supply pipe and housebuilder (2006: 0.86m) Homeserve GB's customers increased by 0.21m to 3.0m (2006: 2.79m) achieving 1.92policies per customer compared to 1.78 in March 2006. Our ability to developrelevant and affordable products, together with the provision of excellentservice delivery, is critical to growing the customer base. We continue to deliver very high levels of customer service as measured by our48 hour call back process to customers who have made a claim. This enables us todirectly measure customer satisfaction following a repair and to monitor andimprove the performance of our repair networks. Customer satisfaction for thecore plumbing and drains service remains at a high level of 95% (2006: 96%) andimportantly, the proportion of customers rating our service as outstanding hasincreased from 20% to 26%. The overall policy retention rate for the year remains high at 86% (2006: 87%).Where we have a longer established customer relationship the retention ratescontinue to perform strongly. We continue to invest in our product development, with the current focus onCombined Policies. These will assist in enhancing our cross sell opportunitiesand we expect to roll out this initiative from September 2007. International Our International strategy remains one of replicating the proven UK model inmarkets with similar customer and utility profiles, initially working with waterand energy companies to provide emergency policies to householders offered viadirect marketing and outbound telesales. During the year we doubled the number of International policies to 1.12m (2006:0.55m). Our French joint venture has significantly increased its operatingprofit and we have increased our investment in the US by £0.8m to £3.2m. Domeo, our 49% owned joint venture in France with Veolia, performed well duringthe year, contributing £1.1m to our operating profits before managementrecharges (2006: £0.5m). This has been an outstanding year for the business,which more than doubled its policies to 0.86m (2006: 0.42m) and achievedpolicies per customer of 2.0 (2006: 1.5). Retention rates increased to 88%(2006: 87%) and customer satisfaction levels were in excess of 94% (2006: 95%). Claims handling was brought in house in February 2006 and since then the focushas been on developing our own network of sub contractors, increasing thequality of service delivery and providing extra credibility to the operations toassist in winning new business partners in France. Domeo now markets to 10.6m (2006: 9.1m) of the 12m owner occupied houses inFrance under the water brand of the Veolia Group following the agreement duringthe year to market to a further 1.0m households throughout France. In addition,Domeo markets to a further 0.3m households under the Proxitherm and Gaz deBordeaux brands. Home Service, our business in the US, is continuing to perform well with itsexisting affinity partners, which provide access to 5m households. Totalpolicies increased to 0.26m (2006: 0.13m). Over the last 12 months we have clearly demonstrated that that we can addsignificant value when acquiring existing policy books from both water andenergy companies. We signed our largest affinity partner agreement with FirstEnergy Corp, a powerutility, in August 2006 which provided access to 3.4m households. As part of thetransaction we acquired 20,000 existing electrical wiring, gas supply pipe,water and sewer line policies, which we have grown by 180% in 7 months to 56,000policies. In addition, we have continued to grow the number of policies withUnited Water, which now total 116,000 compared to 41,000 at acquisition in May2005. The number of policies per customer in the US remained at 1.2 (2006: 1.2) andretention rates where we are able to 'bill on the bill' or use a continuouspayment method are running at 90%. Customer satisfaction as measured by 48 hourcall backs following a repair, is consistently running at over 95%. The prospects for potential new water and power company partners are developingwell. The prolonged time to agree final contractual terms reflects therelatively early stage in our development of the model in the US and theconservatism typical of the utility sector worldwide. In addition, we subjectall potential transactions to stringent due diligence investigations, tradingrapid development for robust commercial arrangements to ensure that we build aUS business with solid foundations. Claims management was successfully brought in house in September 2006 and hasenabled us to reduce average repair costs through more direct management of thecontractor network. The move to larger premises in Miami to accommodate ourplanned future growth was successfully completed in September 2006. The results of our first test in Spain with Endesa over the winter wereinconclusive. Further test campaigns, which used more traditional UK stylemarketing creatives were agreed and sent out at the beginning of May 2007. Retail and Manufacturer Warranties Our retail warranty businesses delivered an excellent turnaround in performanceduring the year, improving profits by £2.4m year on year. Integral to thisimprovement has been the development of bespoke service propositions to ourcustomers, backed up by greater efficiency across the operation. During the year, we have developed our warranty offering expanding into a numberof new sectors. In the retail division we have expanded our services into theleisure and internet sectors, including Halfords, Halls, Warehouse Express and anumber of independent retailers. In the manufacturer division we have signedagreements with Nikon, DeDietrich, Gainsborough, Halstead and Alpha Boilers. Within our manufacturer warranties business, we have clearly demonstrated thatwe can leverage our direct marketing and outbound telesales competencies toincrease warranty card registration rates and conversion of those registeredcustomers to fully paid warranties and related service policies. We have grown the number of manufacturer policies by 32% to 190,000 (2006:144,000). As with our utility branded policies, these warranty and policy salesare generally on products with longer lifecycles, principally boilers, andtherefore have a good renewal income stream thereby creating an attractivebusiness model. We have been actively cross selling our Homeserve GB policies to ourmanufacturer warranty customer base using manufacturer brands. These areperforming well and we have increased our policies per customer to 1.25 (2006:1.1). EMERGENCY SERVICES We now employ 1,000 of our own engineers, and operate subcontract and franchisenetworks of over 4,000 engineers. Our strategy is to increase the proportion ofwork we do using our own Homeserve branded directly employed tradesmen as theseenable us to deliver increased customer service, quality and productivitythrough more direct control. The use of subcontract and franchise operativesdoes, however, enable us to reduce the risks of operational leverage associatedwith a full directly employed model. During the year, revenue from these businesses increased by 36% to £297m andoperating profit* increased by 22% to £16.0m. Our strategy has been to build a network of businesses offering complementaryrepair and replacement solutions in order to create a unique integrated range ofemergency repair services for homeowners via their Household Insurers, as wellas for the Policy Membership division's own customers. In order to deliver a complete multi-trade solution from first notification ofloss through to a permanent building repair, we have been investing in thedevelopment and implementation of common claims management (based on Guidewire'sClaimCenter product) and work flow management (Mercury) systems. These willprovide improved functionality and control to our businesses and we expect bothsystems to be live in Autumn 2007. These will enable us to further enhance theefficiency of claims handling and completion, reduce costs and increase bothhouseholder and insurer satisfaction levels. Operating margins* have decreased slightly to 5.4% (2006: 6.0%) partlyreflecting the investments made during the year bringing our multiple businessestogether to offer an integrated solution. These investments will allow forgreater operational leverage and effectiveness, resulting in improved margins infuture years. In addition, we have achieved significant growth through oursubcontract business, which has diluted margins overall. Following on from our multi-trade outsource contract for Liverpool Victoriareported last year, we have achieved a further milestone by reaching agreementfor a three year contract with another major insurer to provide a fullyintegrated multi-trade and claims management service. As part of this landmark agreement, which is due to commence in Autumn 2007, wewill provide claims handling and management through our ClaimCenter and Mercurysystems. We will continue to be the solus provider of glazing repairs, and willprovide all the building repairs, half the drainage repairs, as well as twothirds of the restoration and recovery services. We are confident that thisservice will prove to be attractive to other Household Insurers. The severe weather experienced in December 2006 and January 2007 fully testedthe responsiveness of our network. Our employed and subcontractor networksremained open and fully operational at a time when many other networkseffectively closed for further business, unable to cope with the demand. As aresult, we were able to support our Household Insurer partners during thisdifficult period. This drove higher activity levels in the final quarter. Glass and Locks The operational improvements achieved in this business through theimplementation of improved workflow management systems have enabled theconversion of insurance leads to sales to be increased for the fourth yearrunning to 92% from 90%, a key measure of our efficiency. During the year we have renewed a number of our key customer contracts,including in January 2007 our glazing contract with Norwich Union, our largestinsurance partner, for a further three years. Pilkington Glazing was acquired in April 2006 with the central functions beingmerged into our Norwich office during the year, enabling the benefits to beacheived from sharing our common operating platforms. The acquisition brought aglazing capability for small and medium sized enterprises which is an importantstep in providing full support to a number of our insurance partners fortenanted premises and small shops. Plumbing and Drains We have increased the focus on our Plumbing and Drains network with theappointment of a dedicated Managing Director. We are continuing the expansion ofour directly employed capability in this area and have increased the proportionof work undertaken on behalf of our Policy Membership business. Property Repair During the year we started the process of fully integrating our two permanentbuilding repair businesses, which is expected to be complete by September 2007.This will create a market leading permanent repair network, providing domesticrepairs including plastering and decorating arising from the escape of water,storm, fire and accidental damage. This single building repair business willoperate using our common claims handling and job management systems,significantly improving efficiency and reducing the duplication of cost and backoffice processing. The Property Repair businesses have experienced a significant increase in thelevel of claims volumes in the year, particularly as a result of the severeweather noted above, with over 105,000 repairs being performed (2006: 70,000).The majority of this work was completed by the extensive subcontract network,though our strategy is to increase the proportion of repairs completed by ourown directly employed engineers. Fire and Flood Restoration Chem-Dry operates a national network of over 230 franchisees and provides fireand flood restoration services on behalf of Household Insurers as well as carpetand upholstery cleaning services. This business often provides the first repairservice in a home following a disaster, placing us in a unique position to offera fully integrated service from initial clean up through to a permanent buildingrepair. Claims Management With the commencement of our new multi-trade deal in Autumn 2007, this businesswill undertake the claims handling function for householders for the entireclaim, ensuring the smooth passage of the claim through our integrated repairnetwork or the subcontract and franchise networks as appropriate. This isexpected to significantly reduce the average cycle time of a claim, increasingcustomer service and satisfaction. Over 90% of all claims are now deployed electronically (2006: 80%), which whencombined with the investments made by a number of our subcontractors enablesthem to accept electronic deployment and job management. This speeds upcontractor arrival times and improves visibility of a claim from start tofinish. As a result of the above investments, we have significantly increasedthe level of 'customer delight', defined as exceeding expectations, which isrunning in excess of 50% for both plumbing and drains and electrical repairs. Contents Services The acquisition of Digital Insurance Services, now renamed Homeserve ContentsServices, has strengthened our offering to Household Insurers, by providing themwith claims validation and fulfilment services. Our objectives over the comingyear are to develop its Valid8 claims handling and product identification systemand extend the range of consumer products covered, rolling this out to otherHousehold Insurers. SUMMARY Homeserve's strategy remains clear, leveraging the benefits of our integratedpolicy and service delivery business in the UK, while replicating it in othercarefully defined markets. We will continue to focus on the organic growth of our existing businesses. Inaddition we will complement this with acquisitions that broaden and deepen ourPolicy Membership and Emergency Services offering whilst also meeting our strictappraisal criteria. We have continued to invest in the recruitment and development of high qualitypeople, ensuring that our management team has the necessary skills and resourcesto deliver our strategic priorities. Richard HarpinChief Executive21 May 2007 FINANCIAL REVIEW These results have been prepared in accordance with International FinancialReporting Standards (IFRSs), using policies consistent with the prior year.Accounting standards that have been issued but not yet enacted are not expectedto have a significant impact on the Group. The headline financial results are: £'million 2007 2006Revenue 477.4 367.0Operating profit (statutory) 63.6 50.8Profit before tax (statutory) 61.1 50.0 Cash generated by operations 73.6 55.6 Net debt 27.1 16.3Net assets 230.4 201.1 Pence per shareEarnings per share (statutory) 67.3 55.1Dividend per share 25.0 20.0 Group Results For managerial purposes, we continue to consider that profits before theamortisation of acquisition intangibles and the tax charge of our joint venturein France represent an important measure for monitoring the performance of thebusiness. The reconciliations between the statutory results and these pro-formamanagerial measures are as follows: £'million 2007 2006Operating profit (statutory) 63.6 50.8Amortisation of acquisition intangibles 6.5 3.6Tax recognised by joint venture 0.1 --------------------------------------------------------------------------------Operating profit* 70.2 54.4 Profit before tax (statutory) 61.1 50.0Amortisation of acquisition intangibles 6.5 3.6Tax recognised by joint venture 0.1 --------------------------------------------------------------------------------Profit before tax* 67.7 53.6 Earnings per share (statutory) 67.3p 55.1pAmortisation of acquisition intangibles 7.4p 4.1p-------------------------------------------------------------------------------Earnings per share** 74.7p 59.2p Total revenue has increased by 30% to £477m (2006: £367m) reflecting continuedgrowth across our businesses with acquisitions contributing £13m. Operating profit* has increased by 29% to £70.2m (2006: £54.4m), with operatingmargins* stable at 15%. The impact of recording the fair value of share schemeawards has reduced operating profit by £3.4m (2006: £2.1m), and remains withinour guidance of 5% of operating profit*. The amortisation of acquisition intangibles amounts to £6.5m (2006: £3.6m) andprincipally relates to customer and other contracts held by the acquiredentities at the time of acquisition. The year on year increase reflects theimpact of Pilkington Glazing and Homeserve Contents Services acquired during theyear and the full year impact of National Property Solutions and Improvelineacquired in 2006. In accordance with IFRSs, statutory operating profit includes our share of theoperating result of our joint venture in France. For these purposes, theoperating result is defined as profit after tax and hence £0.1m (2006: £nil) isreported within operating profit and profit before tax. Statutory operatingprofit has increased by 25% to £63.6m (2006: £50.8m). The net interest charge for the year amounts to £2.6m (2006: £0.8m), which wascovered 27 times by operating profit*. The year on year increase reflects theincreased average net debt during the year driven by the phasing of acquisitionsand capital expenditure at the end of 2006 and early 2007. The effective rate of tax for 2007 is 31.3% (2006: 31.1%) and has increasedprincipally as a result of the additional investment in our US operations. Earnings per share** is 74.7p (2006: 59.2p), an increase of 26%. Total basicearnings per share, amounts to 67.3p (2006: 55.1p), an increase of 22%. Acquisitions Homeserve completed a number of acquisitions during the year, investing £30.2m,including deferred consideration relating to prior years, with estimateddeferred and contingent consideration of £6.5m. On 21 April 2006, the Group acquired certain of the trade and assets ofPilkington United Kingdom Limited relating to the glazing division of PilkingtonBuilding Products. The business undertakes glazing repairs on a nationwidebasis. The total consideration amounted to £6.7m and goodwill amounting to £2.7marose as a result of this acquisition. On 17 August 2006, the Group acquired 20,000 Home Assistance policies fromFirstEnergy and simultaneously signed a marketing agreement with FirstEnergyCorp providing access to up to 3.4m households. The total consideration amountsto £4.3m, of which £1.5m is deferred and is payable over the 5 year life of themarketing agreement. No goodwill arose as a result of this acquisition. On 26 October 2006, the Group acquired 100% of the share capital of DigitalInsurance Services Limited, a provider of home insurance and contents claimsvalidation and fulfilment services. The initial consideration was £3.3m, with upto a further £9.0m payable in the future contingent upon the futureprofitability of the company. Of the contingent payment, £5.0m is currentlyincluded within deferred consideration. Goodwill amounting to £4.9m arose as aresult of this acquisition. In addition, during the year a number of smaller acquisitions have beencompleted for a combined consideration of £1.1m. Goodwill amounting to £0.1marose as a result of these acquisitions. The impact of these acquisitions on the financial performance of the Group forthe year was to increase revenues and operating profits* by £13m and £0.3mrespectively. Cash Flow and Net Debt £'million 2007 2006Continuing operations:Cash generated by operations 73.6 55.6Interest, tax, dividends (33.4) (25.3)Net capital expenditure (16.5) (15.7)Acquisitions/disposals (30.2) (36.0)Share purchases (8.3) (8.2)Financing 1.4 3.5--------------------------------------------------------------------------------Total continuing operations (13.4) (26.1)Discontinued operations, net cash flow - 1.4--------------------------------------------------------------------------------Net movement in cash and bank borrowings (13.4) (24.7)-------------------------------------------------------------------------------- Homeserve continues to achieve strong cash conversion, generating cash fromoperations of £73.6m (2006: £55.6m). Overall there was a net movement in cashand bank borrowings of £13.4m outflow (2006: £24.7m outflow) after interest, taxand dividends of £33.4m, net capital expenditure of £16.5m, acquisitions anddisposals of £30.2m, purchase of shares by the Homeserve Employee Trust of £8.3mand other financing inflows of £1.4m. Net debt at the year end was £27.1m (2006: £16.3m). Homeserve manages itsliquidity principally through a combination of overdrafts and short and mediumterm revolving credit facilities. Substantially all of the Group's borrowingsand undrawn facilities are at floating rates linked to LIBOR. At 31 March 2007,the Group had undrawn, committed facilities amounting to £48m. Segmental Analysis Homeserve reports its results under two primary segments: Policy Membership andEmergency Services. £'million 2007 2006Revenue- Policy Membership 192.0 161.4- Emergency Services 297.2 218.0- Elimination of inter segment revenue (11.8) (12.4)-------------------------------------------------------------------------------- 477.4 367.0Operating profit*- Policy Membership 54.2 41.3- Emergency Services 16.0 13.1-------------------------------------------------------------------------------- 70.2 54.4-------------------------------------------------------------------------------- The Policy Membership business achieved an operating profit* of £54.2m (2006:£41.3m), an increase of 31%. This is after a net investment in International of£2.4m (2006: £2.6m) and an operating profit* of £0.9m (2006: £1.5m loss) inRetail Warranties. Homeserve GB increased its operating profit* by 20%.Statutory operating profit of the Policy Membership business was £53.2m (2006:£40.9m). The Emergency Services businesses achieved an operating profit* of £16.0m (2006:£13.1m), an increase of 22%, including £0.3m from acquisitions made during theyear and the full year contribution from acquisitions made in the previous year.Statutory operating profit of the Emergency Services business was £10.4m (2006:£9.8m). Operating margins* have remained stable during the year at 15% (2006: 15%).Within Policy Membership, operating margin* increased to 28% (2006: 25%) as aresult of the increased investment in our International businesses, offset bythe move into profit in the year by the Retail Warranties operation andcontinued margin improvement within Homeserve GB. The Emergency Services'operating margin* decreased to 5.4% (2006: 6.0%) following investment to furtherdevelop the fully integrated claims handling and job management systems andincreased volumes through our subcontractor network. Share scheme chargesincreased during the year to £3.4m (2006: £2.1m). The adjustment necessary to eliminate inter segment revenue is £11.8m (2006:£12.4m) and relates to the activity undertaken by our repair trades on behalf ofPolicy Membership customers. In order to assist in the management of the business and to provide evidence ofachieving its strategic priorities, the Board regularly reviews a number of keyperformance indicators as follows: 2007 2006Total GroupProfit before tax* £67.7m £53.6mEarnings per share** 74.7p 59.2pPolicy MembershipOperating profit* £54.2m £41.3mTotal policy numbers 7.1m 5.7mRetention rates (UK utility branded) 86% 87%Emergency ServicesOperating profit* £16.0m £13.1mCompleted repairs 1.2m 1.1mOperating margin* 5.4% 6.0% Policy numbers represent the total number of policies held by our utilitybranded businesses in the UK, France, USA and Spain, together with manufacturerwarranties where the customer has purchased an extension to the initialmanufacturer guarantee period. The retention rate currently includes only the UK utility branded policies asthese have the greatest significance on earnings in the following period.Retention rate is defined as the number of policies renewing divided by thenumber of active policies in the prior year. Completed repairs include all repairs performed and closed by our directlyemployed, subcontract and franchise network during the year. Summary The results for the year continue to represent an appropriate balance betweenthe delivery of double digit growth in profits and investing for the futuredevelopment of all our businesses. Our financial position remains strong,providing a platform for the delivery of our strategy. Jonathan Simpson-DentChief Financial Officer21 May 2007 HOMESERVE PLC GROUP INCOME STATEMENTyear ended 31 March 2007 Note 2007 2006 £'000 £'000--------------------------------------------------------------------------------Continuing operations Revenue 2 477,362 367,001Operating costs:Amortisation of acquisition intangibles (6,451) (3,658)Other operating costs (407,822 (312,919)--------------------------------------------------------------------------------Operating costs (414,273) (316,577) Share of results of joint ventures 2 555 328-------------------------------------------------------------------------------- Operating profit 2 63,644 50,752 Investment income 1,030 702Finance costs (3,596) (1,478)--------------------------------------------------------------------------------Profit before tax, amortisation of acquisitionintangibles and tax on joint ventures 67,683 53,634 Tax on joint ventures (154) -Amortisation of acquisition intangibles (6,451) (3,658)-------------------------------------------------------------------------------- Profit before tax 61,078 49,976Tax 3 (19,118) (15,527)-------------------------------------------------------------------------------- Profit for the year, being attributable to equityholders of the parent 41,960 34,449-------------------------------------------------------------------------------- Dividends per share 5 25.0p 20.0p Earnings per share 4Basic 67.3p 55.1pDiluted 64.8p 53.6p GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSEyear ended 31 March 2007 2007 2006 Note £'000 £'000-------------------------------------------------------------------------------- Exchange differences on translation of foreignoperations 7 (56) 120Actuarial gains/(losses) on defined benefit pensionscheme 654 (422)Current tax on additional pension contribution 132 468Tax on items taken directly to equity (32) (415)--------------------------------------------------------------------------------Net income/(expense) recognised directly in equity 698 (249) Profit for the year 41,960 34,449--------------------------------------------------------------------------------Total recognised income and expense for the yearattributable to equity holders of the parent 42,658 34,200-------------------------------------------------------------------------------- GROUP BALANCE SHEET31 March 2007 2007 2006 Note £'000 £'000 (Restated - see note 9)--------------------------------------------------------------------------------Non-current assetsGoodwill 191,722 185,437Other intangible assets 42,072 31,824Property, plant and equipment 38,020 30,727Interests in joint ventures 1,747 1,192Deferred tax assets 211 --------------------------------------------------------------------------------- 273,772 249,180--------------------------------------------------------------------------------Current assetsInventories 7,236 5,708Trade and other receivables 158,692 127,913Cash and cash equivalents 14,885 17,081-------------------------------------------------------------------------------- 180,813 150,702-------------------------------------------------------------------------------- Total assets 454,585 399,882-------------------------------------------------------------------------------- Current liabilitiesTrade and other payables (161,435) (133,339)Current tax liabilities (11,523) (9,994)Bank overdrafts and loans (42,026) (33,411)-------------------------------------------------------------------------------- (214,984) (176,744)-------------------------------------------------------------------------------- Net current liabilities (34,171) (26,042)-------------------------------------------------------------------------------- Non-current liabilitiesOther financial liabilities (8,506) (18,785)Retirement benefit obligation (647) (1,156)Deferred tax liabilities - (2,088)-------------------------------------------------------------------------------- (9,153) (22,029)-------------------------------------------------------------------------------- Total liabilities (224,137) (198,773)-------------------------------------------------------------------------------- Net assets 230,448 201,109-------------------------------------------------------------------------------- EquityShare capital 8,119 8,075Share premium account 31,379 29,998Merger reserve 70,992 70,992Own shares reserve (25,047) (16,668)Share incentive reserve 4,727 1,626Capital redemption reserve 1,200 1,200Currency translation reserve 64 120Retained earnings 139,014 105,766-------------------------------------------------------------------------------Total equity 7 230,448 201,109------------------------------------------------------------------------------- GROUP CASH FLOW STATEMENTyear ended 31 March 2007 2007 2006 Note £'000 £'000-------------------------------------------------------------------------------- Operating profit 63,644 50,752Adjustments for:Depreciation of property, plant and equipment 5,169 4,115Amortisation of on acquisition intangibles 6,451 3,658Amortisation of other intangible assets 1,738 1,468Share based payments expense 3,361 2,058Share of profits in joint ventures (555) (328)(Profit)/loss on disposal of property, plant andequipment (308) 128Additional pension contributions - (2,000)--------------------------------------------------------------------------------Operating cash flows before movements in workingcapital 79,500 59,851 Increase in inventories (1,363) (513)Increase in receivables (28,453) (27,786)Increase in payables 23,957 24,077--------------------------------------------------------------------------------Net movement in working capital (5,859) (4,222) Cash generated by operations 73,641 55,629Income taxes paid (17,313) (13,871)Interest paid (3,790) (1,478)--------------------------------------------------------------------------------Net cash flow from continuing operating activities 52,538 40,280--------------------------------------------------------------------------------Net cash flow from discontinued operating activities - 766--------------------------------------------------------------------------------Net cash from operating activities 52,538 41,046-------------------------------------------------------------------------------- Investing activitiesInterest received 1,030 702Proceeds on disposal of property, plant and equipment 611 301Purchases of intangible assets (4,519) (1,572)Purchases of property, plant and equipment (12,609) (14,468)Net cash outflow on acquisitions 8 (30,171) (34,674)Disposal of subsidiary undertakings - (1,342)Net cash flow from discontinued investing activities - 669--------------------------------------------------------------------------------Net cash used in investing activities (45,658) (50,384)-------------------------------------------------------------------------------- Financing activitiesDividends paid (13,367) (10,688)Repayments of borrowings - (2)Repayments of obligations under finance leases - (30)Purchase of own shares (8,379) (8,221)Proceeds on issue of share capital 1,425 3,510Increase in bank overdrafts 11,245 27,097--------------------------------------------------------------------------------Net cash (used in)/from financing activities (9,076) 11,666-------------------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents (2,196) 2,328Cash and cash equivalents at beginning of year 17,081 14,753--------------------------------------------------------------------------------Cash and cash equivalents at end of year 14,885 17,081-------------------------------------------------------------------------------- 1. General Information While the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company will publish full financial statements thatcomply with IFRSs on 12 June 2007. The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 March 2007 or 2006, but is derivedfrom those accounts. Statutory accounts for 2006 prepared under IFRSs have beendelivered to the Registrar of Companies and those for 2007 will be deliveredfollowing the Company's annual general meeting. The auditors have reported onthose accounts; their reports were unqualified and did not contain statementsunder s 237 (2) or (3) Companies Act 1985. These financial statements were approved by the Board of Directors on 21 May2007. 2. Segmental analysis For management purposes, the Group is organised into two operating divisions,Policy Membership and Emergency Services. Policy Emergency Consolidated Membership Services 2007 2007 2007 £'000 £'000 £'000-------------------------------------------------------------------------------Revenue Total revenue 192,007 298,903 490,910Intra-segment sales - (1,694) (1,694)-------------------------------------------------------------------------------- 192,007 297,209 489,216Inter-segment sales (11,854)--------------------------------------------------------------------------------External sales 477,362--------------------------------------------------------------------------------Intra-group sales are charged atprevailing market prices.ResultSegment result before jointventures and amortisation ofacquisition intangibles 53,563 15,977 69,540Share of pre tax results of jointventures 709 - 709-------------------------------------------------------------------------------- 54,272 15,977 70,249Tax on joint ventures (154) - (154)Amortisation of acquisitionintangibles (884) (5,567) (6,451)--------------------------------------------------------------------------------Operating profit 53,234 10,410 63,644Investment income 1,030Finance costs (3,596)--------------------------------------------------------------------------------Profit before tax 61,078Tax (19,118)--------------------------------------------------------------------------------Profit for the year beingattributable to equity holders ofthe parent 41,960-------------------------------------------------------------------------------- Policy Emergency Consolidated Membership Services 2006 2006 2006 £'000 £'000 £'000--------------------------------------------------------------------------------Revenue Total revenue 161,394 218,106 379,500Intra-segment sales - (128) (128)-------------------------------------------------------------------------------- 161,394 217,978 379,372Inter-segment sales (12,371)--------------------------------------------------------------------------------External sales 367,001--------------------------------------------------------------------------------Intra-group sales are charged atprevailing market prices.ResultSegment result before jointventures and amortisation ofacquisition intangibles 41,005 13,077 54,082Share of pre tax results of jointventures 328 - 328-------------------------------------------------------------------------------- 41,333 13,077 54,410Tax on joint ventures - - -Amortisation of acquisitionintangibles (422) (3,236) (3,658)--------------------------------------------------------------------------------Operating profit 40,911 9,841 50,752Investment income 702Finance costs (1,478)--------------------------------------------------------------------------------Profit before tax 49,976Tax (15,527)Result of discontinued operations ---------------------------------------------------------------------------------Profit for the year beingattributable to equity holders ofthe parent 34,449-------------------------------------------------------------------------------- 3. Taxation The overall rate of tax for the Group, including deferred tax, based on profitbefore tax, was 31.3%. The corresponding rate in 2006 was 31.1%. In March 2007the UK Government announced that they would introduce legislation that wouldreduce the corporation tax rate to 28% with effect from 1 April 2008. Thislegislation is expected to be substantially enacted in July 2007. If the changeis enacted the deferred tax assets and liabilities, currently stated at 30% ofthe temporary differences, will be restated at 28% of those amounts. Inaddition the effective tax rate for the period to 31 March 2009 is expected toreduce accordingly. 4. Earnings per share Basic and diluted earnings per ordinary share have been calculated in accordancewith IAS 33 'Earnings Per Share'. Basic earnings per share is calculated bydividing the profit or loss in the financial year by the weighted average numberof ordinary shares in issue during the period. Adjusted earnings per share iscalculated excluding amortisation of acquisition intangibles. Diluted earningsper share includes the impact of dilutive share options in issue throughout theperiod. The adjusted earnings per share has been calculated by excluding theamortisation of acquisition intangibles. This is considered to be a betterindicator of the performance of the Group. As profit for the year and adjustedprofit for the year are stated after tax, it is not considered necessary toinclude in the reconciliation below the impact of the adjustment for the tax onjoint ventures of £154,000 (2006: £nil). 2007 2006 £'000 £'000--------------------------------------------------------------------------------Profit for the year 41,960 34,449Amortisation of acquisition 6,451 3,658intangiblesTax impact arising onamortisation of (1,875) (1,097)acquisition intangibles --------------------------------------------------------------------------------Adjusted profit for the year 46,536 37,010-------------------------------------------------------------------------------- Weighted average number ofshares (000's)Basic 62,303 62,474Dilutive impact of share 2,412 1,741options --------------------------------------------------------------------------------Diluted 64,715 64,215-------------------------------------------------------------------------------- 2007 2006 Adjusted Basic 74.7p 59.2pAdjusted Diluted 71.9p 57.6p 5. Dividends per share A final dividend of 17.5p per share amounting to £10,900,000 (2006: 13.9p pershare amounting to £8,668,000) is proposed and will be paid on 6 August 2007 toshareholders on the register at the close of business on 1 June 2007. The exdividend date is 30 May 2007. An interim dividend of 7.5p per share amounting to£3,858,000 (2006: 6.1p per share amounting to £4,699,000) was paid during theyear. 6. Analysis of total net debt 2007 2006 £'000 £'000--------------------------------------------------------------------------------Revolving credit facilities, net ofcash at bank and cash equivalents 26,654 13,213Loan notes 487 3,117--------------------------------------------------------------------------------Net debt 27,141 16,330-------------------------------------------------------------------------------- 7. Reconciliation of movements in equity Own Share Capital Currency Share Share Merger shares incentive redemption translation Retained Total capital premium reserve reserve reserve reserve reserve earnings equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000----------------------------------------------------------------------------------------------------------------------At 1 April2006 8,075 29,998 70,992 (16,668) 1,626 1,200 120 105,766 201,109 Totalstatement ofrecognisedincome andexpense - - - - - - (56) 42,714 42,658 Dividends paid - - - - - - - (13,367) (13,367) Issue of sharecapital 44 1,381 - - - - - - 1,425 Purchase ofown shares - - - (8,379) - - - - (8,379) Deferred taxasset on shareoption gains - - - - - - - 2,727 2,727 Share basedpayments - - - - 3,361 - - - 3,361 Share optionsexercised - - - - (260) - - 260 - Tax onexercisedshare options - - - - - - - 914 914----------------------------------------------------------------------------------------------------------------------At 31 March 2007 8,119 31,379 70,992 (25,047) 4,727 1,200 64 139,014 230,448---------------------------------------------------------------------------------------------------------------------- 8. Acquisitions On 21 April 2006, the Group acquired certain of the trade and assets ofPilkington United Kingdom Limited relating to the glazing division of PilkingtonBuilding Products. The business undertakes glazing repairs on a nationwidebasis. On 17 August 2006, the Group acquired 20,000 Home Assistance policies fromFirstEnergy and simultaneously signed a marketing agreement with FirstEnergyCorp providing access to up to 3.4m households. On 26 October 2006, the Group acquired 100% of the share capital of DigitalInsurance Services Limited, a provider of home insurance and contents claimsvalidation and fulfilment services. Subsequent to the year end on 30 April 2007, the Group acquired 100% of theshare capital of Multimaster Ltd,a leading furniture warranty and serviceprovider. All these transactions have been accounted for by the purchase method ofaccounting. The provisional fair value of the identifiable assets andliabilities of the acquisitions were: Acquired by: Homeserve Home Service Homeserve Homeserve Assistance Ltd USA Corp Assistance Retail Ltd Warranties Ltd £'000 £'000 £'000 £'000 £'000 Pilkington FirstEnergy Digital Total Multimaster Insurance Ltd Services Ltd Net assetsacquired:Property,plant andequipment 130 - 26 156 1,327 Inventories 66 - 99 165 319 Trade andotherreceivables 1,849 - 477 2,326 2,109 Cash and cashequivalents - - 1 1 2 Trade andother payables (2,007) - (567) (2,574) (2,776) Deferred taxliabilities - - (1,432) (1,432) ------------------------------------------------------------------------------------------------ 38 - (1,396) (1,358) 981----------------------------------------------------------------------------------------------- Intangibleassetsidentified onacquisition 3,965 4,304 4,775 13,044 - Goodwill 2,666 - 4,929 7,595 4,318-----------------------------------------------------------------------------------------------Totalconsideration 6,669 4,304 8,308 19,281 5,299----------------------------------------------------------------------------------------------- Satisfied by:Cash 6,500 2,136 3,040 11,676 5,024 Contingentconsideration - 1,541 5,000 6,541 - Directlyattributablecosts 169 627 268 1,064 275----------------------------------------------------------------------------------------------- 6,669 4,304 8,308 19,281 5,299----------------------------------------------------------------------------------------------- Net cash outflow arisingon acquisition:Cashconsideration 6,669 2,763 3,308 12,740 5,299 Cash and cashequivalentsacquired - - (1) (1) (2)---------------------------------------------------------------------------------------------- 6,669 2,763 3,307 12,739 5,297---------------------------------------------------------------------------------------------- Total fair value adjustments of £425,000 were made on the acquisition ofPilkington, reducing the net assets to align accounting policies and reflect thefair value of certain trade and other receivables. There were no fair valueadjustments on the other acquisitions completed during the year. Intangible assets identified on the acquisition of Pilkington and DigitalInsurance Services Limited represent the director's estimate of the fair valueof the customer relationship at acquisition. Intangible assets identified onFirstEnergy reflect the director's estimate of the value of the acquiredcustomer database. An exercise to determine the intangible assets currently subsumed withingoodwill on Multimaster Limited is yet to be undertaken. This exercise will becompleted for the 2007/8 interim accounts. Goodwill represents future cross sell opportunities, efficiency savings,synergies and potential new client wins from these acquisitions. If all the acquisitions had been completed on the first day of the financialyear, Group revenues for the period and Group operating profit attributable toequity holders of the parent would have been £479,637,000 and £63,455,000respectively. In addition to the net cash outflow arising on acquisition above of £12,739,000,there were further cash outflows in respect of the acquisition of a number ofindividually immaterial acquisitions amounting to £1,124,000 resulting in£874,000 of intangible assets, £144,000 of goodwill and £106,000 of net assets.Contingent consideration of £16,308,000 was also paid in the year following the2002 acquisition of Highway Emergency Services Limited and the 2005 purchase ofNational Property Solutions Limited. 9. Restatement of deferred tax While not previously defined as provisional, during the year the directors havereassessed the recoverability of the unused tax losses of Recommend Limited, acompany acquired by the Group in 2006. Tax losses with a fair value of£1,585,000 have now been recognised which has resulted in a reduction ingoodwill of £1,585,000 at 31 March 2006 with a corresponding increase indeferred tax assets. The previously reported acquired net assets of Improveline were £2,344,000resulting in goodwill of £10,459,000 and identified intangibles of £9,093,000.Following the restatement, the reported net assets at acquisition were£3,939,000, resulting in goodwill of £8,874,000. All other acquired balancesremain unchanged. This adjustment has no impact on the reported earnings or netassets previously reported in 2006. 10. Other information An analysts presentation will be held at 11.00am on Monday 21 May 2007 at JPMorgan Cazenove Ltd, 20 Moorgate, London, EC2R 6DA. The Annual Report andAccounts for the year ended 31 March 2007 were approved by the Board on 21 May2007 and will be posted to shareholders on 12 June 2007. Further copies will beavailable from the registered office at Cable Drive, Walsall, WS2 7BN. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSV.L