24th May 2005 07:02
Homeserve Plc24 May 2005 Homeserve plc Preliminary Results for the year ended 31 March 2005 Highlights of the Year Continuing Operations 2005 2004 IncreaseTurnover + £223.1m £169.2m 31.8%Operating profit* £42.4m £32.4m 30.8%Profit before tax* £42.0m £32.5m 29.3%Earnings per share* 46.7p 36.0p** 29.7% Total Group 2005 2004Turnover + £283.3m £323.0mOperating profit £31.0m £49.1mBasic (loss) / earnings per share (34.3p) 35.2pEarnings per share* 48.7p 51.0p • Homeserve now focused on home emergency services following completion of disposal programme • 29.3% increase in profit before tax* from continuing operations to £42.0m • Underlying earnings per share* increased by 29.7% • Record year for utility branded policy growth, up 32% to 3.88m • Further development of our repair network with the acquisition of Sergon and post year end acquisition of Chem-Dry • Strong profit performance from employed network • International progressing well with France in profit and policies of 0.3million • Acquisition of 41,000 United Water Leakguard policies in the USA Brian Whitty, Executive Chairman, commented: "This has been an excellent year for Homeserve with our underlying operatingprofits* increasing by over 30%. In the UK we have achieved record policy growthand significantly increased the profitability of our directly employed networks.Overseas we are making good progress in France, which is now profitable, andhave just signed United Water as our third US Partner. We are delighted with the progress we are making as a highly focused home emergency business." For further information, please contact: Homeserve plc Tel: 01922 427907Brian Whitty, Executive ChairmanRichard Harpin, Chief ExecutiveAndrew Belk, Group Finance Director Tulchan Communications Tel: 0207 353 4200Andrew HonnorStephen Malthouse + including share of joint ventures (see note 2)* excluding goodwill and exceptional costs (see profit and loss account andnotes 2 and 3 and 7)** adjusted to reflect the 4 for 5 share consolidation Chairman's Statement Introduction Homeserve has made significant progress in its first 12 months following thedemerger of its Water Supply operation. The core home emergency businesses havecontinued to deliver outstanding organic growth in both profitability and policymembership. To support this, we have been investing in the depth of managementwe require to continue to deliver sustained growth both in the UK and overseas. We have completed our programme of disposals relating to the CommercialOutsourcing businesses. These have been replaced in the year with investment ina number of complementary acquisitions, principally relating to our EmergencyRepair businesses, broadening the range of skills that we offer to our HouseholdInsurer customers. We have also recently rebranded our Emergency Repairbusinesses as Homeserve, to provide increased clarity of service delivery forour customers. Results Turnover from continuing operations, including share of joint ventures,increased by 31.8% to £223m (2004: £169m). Profit before tax* increased by 29.3%to £42.0m (2004: £32.5m) and earnings per share* increased by 29.7% to 46.7p(2004: 36.0p). When the impact of the discontinued operations is included, turnover includingshare of joint ventures decreased by 12.3% to £283m (2004: £323m) and adjustedearnings per share* decreased by 4.7% to 48.7p (2004: 51.0p). Exceptional coststotaling £41.9m principally result from the execution of our strategic decisionto dispose of our Commercial Outsourcing operations. These changes will enableus to focus on our Home Emergency businesses, where we see better opportunitiesfor growth and higher operating margins. These exceptional costs combined withgoodwill amortisation of £10.4m (2004: £7.2m) result in a statutory loss beforetax for the year of £8.6m (2004: profit £37.8m). The Board is proposing a final dividend of £6.8m (being 10.9p per share). This,combined with Homeserve's interim dividend of £3.2m (being 5.1p per share)brings the total for the year to £10.0m, representing a total dividend per shareof 16.0p. In 2004, total dividends payable were £12.7m, of which the demergedWater Supply operation paid £5.9m. After taking into account the shareconsolidation on 6 April 2004 and the dividend paid by the Water Supplyoperation, the current year dividend per share of 16.0p represents a 19.4%increase compared to the prior year. Net cash at 31 March 2005 amounted to £11.2m (2004: net debt of £93.5m, of which£94.1m related to the Water Supply operation). In line with Homeserve's current internal reporting structure, we have nowanalysed our core Home Emergency businesses between "Policy Membership" and"Emergency Repair". Policy Membership The Policy Membership business has increased turnover to £131m (2004: £100m),with operating profits* increasing by 26.3% to £37.5m (2004: £29.7m). Thisincrease is principally the result of continued organic profit growth in theutility branded businesses. International is progressing well, with France reporting a full year operatingprofit for the first time having achieved policy growth of 75% to 0.28 million.In the US we have just signed our third partner, United Water, which includedthe acquisition of 41,000 existing service line policies. As reported at the interim results, our furniture warranty business has beenaffected by the difficult trading conditions in that market. In particular, theappointment of an administrator to Courts Plc has resulted in an exceptionaloperating cost of £2.8m relating to provisions against amounts owing toHomeserve. We do however believe that there continue to be significant newbusiness opportunities in both retail and manufacturer warranty schemes. Emergency Repair The Emergency Repair business has increased turnover to £100m (2004: £73m), withoperating profits* increasing by 80.7% to £4.8m (2004: £2.7m). This increase isprincipally due to the continuation of the improved performance in our directlyemployed network for glazing, locks, plumbing and drainage repairs, resulting inan operating profit* in that business of £3.1m (2004: £0.3m). The improvementhas been achieved by better branch management and engineer productivity,together with growth in the directly employed network of plumbing and drainageengineers working for our Household Insurer customers. We have made progress this year in extending our service offering to insurersthrough two key acquisitions. In December 2004 we invested £11.4m in theacquisition of Sergon BRM, one of the UK's leading home insurance sub-contractrepair networks for water, fire, storm and other accidental damage. Additionally, in April 2005, we acquired Chem-Dry, one of the UK's leading fireand flood disaster restoration and carpet and upholstery franchise cleaningnetworks, for £18.9m. The integration of these trades into our overall service offering is progressingwell. Demerged and disposed businesses The Water Supply operation was demerged on 6 April 2004, and in the period todemerger, contributed turnover of £1.0m (2004: £72m), and an operating profit*of £0.2m (2004: £21.3m). The Commercial Outsourcing businesses contributedturnover of £59m (2004: £81m) and operating profit of £1.7m (2004: £5.0m). Thesale proceeds from the disposal of the Commercial Outsourcing businesses amountto £22.4m. Board Changes On 30 November 2004 Ian Carlisle was appointed to the Board as an executivedirector, with responsibility for the Emergency Repair business. Ian joinedHomeserve in 2003 as Chief Executive of the glazing and locks network and waspreviously the Managing Director of Autoglass Ltd. Following the disposal of the Commercial Outsourcing businesses, Robert Harley stepped down as a director of Homeserve on 24 March 2005. On behalf of the Board, I should like to thank Robert for his significant contribution to the business during his four years as a director. Employees The commitment of our employees has ensured that this has been a very successfulyear and I should like to thank them for their hard work and dedication. Prospects Homeserve is now focused on developing its Home Emergency businesses where webelieve there are substantial opportunities for continued growth. Our Policy Membership business is expected to continue to increase its marketpenetration in the UK and expand its international operations, particularly inthe USA. This policy model continues to generate high levels of recurringrevenue which provide good visibility of future profits. Our Emergency Repair business is continuing to generate improved margins. Thebroader range of services we now provide support both our Policy Membershipoperation and create a unique offering for our Household Insurer customers. Over the coming year we will seek to complement our expected organic growth withstrategic acquisitions both for Policy Membership and Emergency Repairoperations. We will continue to invest in our International businesses and instrengthening our management teams to support sustained growth in the longerterm. Brian WhittyExecutive Chairman23 May 2005 * Pre goodwill and exceptional items (see profit & loss account and notes 2,3and 7) Chief Executive's Review Introduction Our vision is for Homeserve to be "Your Home Emergency Service Worldwide". Thismeans selling policies to cover home emergencies and carrying out high qualityrepairs for a complete range of home emergencies. Having disposed of all of our Commercial Outsourcing operations in the year weare now focusing all of our resource on developing our core Home Emergencybusiness. The acquisition of Sergon and, subsequent to the year end, ofChem-Dry, significantly enhance our repair service offering and place Homeservein a unique position to provide a fully integrated service to our HouseholdInsurance Business Partners. Our Policy Membership business provides underwritten cover for a range ofdomestic emergencies including plumbing and drains, electrical wiring, gas,central heating, electrical and other appliances and furniture. We also reinsurehalf of the risks underwritten for water and utilities branded policies, throughour offshore captive insurance company to share in the insurance profits fromthese policies. Our own membership policies are affinity branded to our BusinessPartners in the utilities, appliance manufacturing and retail sectors. Our Emergency Repair business is now a clear market leader in carrying out abroad range of claims repairs on behalf of Household Insurers, from fire andflood restoration, glazing, locks, window and door frames, drainage repairs andpermanent building repairs (plastering, painting and decorating). These tradesare delivered through a combination of employed, subcontract and franchisedrepairers. In April 2005, we rebranded our directly employed Emergency Repairoperation as Homeserve in order to increase awareness of our name for homeemergency repairs. Homeserve now has over 3,300 employees, including over 700 directly employedengineers and operates a network of over 4,600 subcontract and franchisedengineers providing a comprehensive range of trades nationally. Homeserve has again delivered strong operating profit* performance and recordlevels of new customer and policy membership growth with continuing operationsgenerating turnover including share of joint ventures of £223m and operatingprofits* of £42.4m. Policy Membership Turnover including share of joint ventures and operating profit* from thesebusinesses increased by 30.1% and 30.8% to £131m and £42.4m respectively. Homeserve GB Our utilities branded policy business is the market leader in the provision ofplumbing and drainage cover as well as a range of other emergency policies, tocustomers of water and energy companies. This business had an outstanding yearfor policy, customer and profit growth, achieving excellent response rates forboth direct mail and telesales operations. Total UK policies increased by 32%from 2.93m to 3.88m; €2.76m in plumbing and drains (2004: 2.10m) €0.60m in electrical (2004: 0.57m) and €0.52m in other including gas supply pipe and domestic heating policies (2004: 0.26m). The record level for new policies sold of 1.36m (2004: 0.93m) reflects a healthyincrease in the number of customers of 21% to 2.36m and an improved averagenumber of policies per customer of 1.65 compared with 1.50 last year. Successful new creative styles for our direct mailings were introduced duringthe year. These were one page mailings, containing an application form without aleaflet, which cost less to produce but resulted in increased take up. Inaddition, our water supply pipe mailings performed well, bringing in newcustomers as well as being cross sold to existing plumbing and drains members,with 0.5m new policies added during the year. The recently expanded gas supplypipe cover, sold through our Energy Partners and as a cross sell product towater company customers, has also started well with 0.1m new policies sold inthe year. Average acquisition costs per policy were lower reflecting the improvedperformance of the new mailings, particularly water supply pipe, and reducedmail pack prices. This has been combined with the continued cost effective useof outbound telesales where the number of agents has increased to 220 from 200last year, achieving over 0.4m sales. We have maintained our high policy retention rate at 88%, reflecting our focuson increasing the proportion of customers using continuous payment methods suchas direct debit and the excellent performance of our repair networks. Wecontinually monitor our repair performance and customer satisfaction using 48hour call backs and achieved 96% customer satisfaction levels on the coreplumbing product. During the year we successfully renewed 14 of the 17 long term marketingagreements with our water company affinity partners. The renewed agreementsrepresent 92% of our water company policy customer base. The exceptions wereWessex Water, Bristol Water and Welsh Water (representing 0.27m policies intotal), where contracts expire in June 2005, July 2005 and November 2005, andwill not be renewed. We will retain ownership and revenue for all of theexisting policies and shall continue to renew these policies without paying acommission to these water companies. International The development of Homeserve International is progressing well. Our strategy isto replicate the proven UK model of water company branded plumbing and drainageand water supply pipe cover offered via direct marketing, with fullyunderwritten policies. Our organic growth will be supplemented by theacquisition of home assistance policies which can be integrated into ourexisting operations. Turnover from the international operations increased by124% to £3m with total policies of 0.3m. Domeo, the joint venture in France with Veolia Water, in which our shareincreased to 49% from 40% in November 2004, made its first full year operatingprofit and grew the number of policies by 75% to 0.28m (2004: 0.16m). Domeo nowemploys 49 staff, including 12 outbound telesales agents. There areapproximately 12 million owner occupied houses in France of which Veoliaprovides water to 4.5 million using the Generale Des Eaux brand. During the yearwe sent out 11 million door to door and solus mailings across the whole ofFrance, marketing to 8.3 million households of which 40% were in areas wherewater is supplied by Generale des Eaux, achieving satisfactory take up rates inall areas. We have successfully cross sold the full plumbing and drains policyto existing supply pipe members and introduced an emergency electrical policy.Retention rates and customer satisfaction both remained at high levels. The US business, which is based in Miami with 18 employees, completed its firstfull year of trading with 33,000 (2004: 13,000) policies and in the second halfsigned its second business partner, Connecticut Water Services Inc. ConnecticutWater is relatively small with less than 0.1m households, but is neverthelessimportant at this early stage of development. The water supply pipe product hasbeen complemented by the successful launch of the full plumbing and drainsproduct as a cross sell and is achieving satisfactory take up rates. Our 48 hourcall backs are reporting similar levels of customer satisfaction to thoseachieved in the UK. In May 2005 we acquired United Water's Leakguard business in New Jersey andIdaho, including 41,000 existing policies, similar to the water supply pipeproduct marketed in the UK. This acquisition includes a 10 year marketingagreement to use the United Water brand providing access to over 0.5 millionhouseholds in eight States with the potential to extend the offer out of areaand upsell plumbing and drains cover. The US market offers enormous potential for Homeserve, with 57 million owneroccupied houses and a general propensity to purchase insurance products.However, progress in signing up new water company partners has been slower thanexpected, although we are in discussions with a number of the larger watercompanies and interest from potential partners is high. The market is fragmentedand our ability to sign up new water company partners will determine the speedof our success. We plan to significantly strengthen our management and resourcesin this business during the coming year. During the year we commenced test marketing in Australia with our first partner,South Australian Water, which provides access to almost 0.5 million households.This operation is still at an early stage and is dependent on reaching agreementwith other Australian water companies. Our ongoing objective is to test in one new country each year. Retail and Manufacturer Warranties During the year we significantly strengthened our resource in this business,combining our small but developing appliance manufacturer warranty operation andthe existing furniture warranty business, under a newly recruited and highlyexperienced CEO. These businesses share the same characteristics of longer-termpolicies (three to five years compared to annual) and significant potential fordirect marketing to 'in box' registrations for manufacturer warranty and tocustomers who chose not to purchase retail furniture warranties at the point ofsale. We have significantly strengthened our manufacturer appliance warrantyoperation, which operates out of our new London office. Additional seniormanagement has been appointed with specific manufacturer warranty sales andmarketing experience. In September, we won the business of The Vaillant Group,now the largest boiler manufacturer in the UK, and are due to begin marketingpolicies for Rangemaster, part of Aga Foodservice Group in June 2005. Theservices we provide include the marketing and administration of their 'in box'first year warranty scheme, direct mail campaigns and outbound telesalestogether with initial claim verification and out of hours call handling. Ourexisting clients include Ideal Boilers, Mira Showers, Creda Heating, SimeBoilers, Redring and Xpelair. We have now signed up 359,000 (2004: 138,000)customers on our warranty programmes and now have 90,000 (2004: nil) extendedwarranty policies. Our furniture warranty business provides fully underwritten furniture cover,supported by an employed network of 110 upholsterers and cleaners providing aservice for furniture retailers and manufacturers. This business suffered a setback following the appointment of administrators to Courts, its largestcustomer, combined with the difficult furniture retail market. Our priority isto develop existing sales opportunities with our existing Retailer BusinessPartners and to secure new national and regional retailers to replace the lostbusiness. We have appointed a new Sales Director with significant experience inselling to national retailers and are progressing discussions with a number ofleading national retailers and larger independents for furniture warranty. Inaddition we are developing our range of warranty products to include cover forfitted kitchen cabinets and appliances. The manufacturer and retail warrantymarkets are an important element of our overall warranty strategy, where webelieve there are significant opportunities for growth. Emergency Repair Turnover and operating profit* from these businesses increased by 37.2% and80.7% to £100m and £4.8m respectively, including £12.9m of turnover from Sergon,acquired in December 2004. Homeserve Emergency Services is now a market leader in providing repairs tohomeowners relating to insurance claims paid for by Household Insurers. TheHousehold Insurance repairs market is worth an estimated £2bn and is highlyfragmented with most claims still being carried out by local jobbing builderswith a long cycle time from start to finish. Homeserve's ability to offer fireand flood restoration followed by permanent repair puts us in a unique positionto provide a complete repair service to Household Insurers. We operate acombination of employed, sub contract and franchised networks which enables usto achieve optimum efficiency and provide capacity for exceptional peaks ininsurance claims. Glazing, Locks, Plumbing and Drains Homeserve's glazing and locks network is the UK's largest national directlyemployed repair network working for Household Insurers, providing a range ofservices including the repair and replacement of glass, frames, locks, garagedoors, greenhouses and conservatories. This business has over 500 directlyemployed engineers operating from 37 branches nationally and has continued toachieve a strong turnaround in operating and profit performance despite thecontinued industry wide reduction in claims, particularly for crime and weatherrelated damage. The conversion of insurance leads to invoiced sales hasincreased from 80% to 85% reflecting improved workflow management systemsfollowing the successful implementation of major IT system changes. This hasresulted in better job tracking, taking over one million pieces of paper out ofthe business together with more efficient branch management and reducedadministration. Eleven of the branches now have new branch managers and this isreflected in the improvement in all aspects of branch and engineer performance. Our business model is local branches with managers controlling an average of 12engineers and three deployment staff for a single trade with national coverageand consistency of quality and pricing for insurers. The glazing and locks operation has won a number of important new accountsduring the year with potential turnover of up to £9m once the accounts reachtheir full run-rate. We were recently awarded 75% of the Royal Bank of ScotlandInsurance glazing volumes, having previously serviced one third; this additionalwork will commence in June 2005. In addition, we secured further volumes fromRoyal and Sun Alliance for small scale commercial glazing repairs, where wealready provide services for domestic emergencies. The directly employed plumbing and drainage network working for HouseholdInsurers, established two years ago, is now one of the market leaders,performing work last year for Norwich Union, Royal and Sun Alliance and RoyalBank of Scotland Insurance as well as our own plumbing and drainage policy base.In February 2005 we were awarded one third of the volume for Royal Bank ofScotland Insurance Group's account, including Direct Line, Nationwide andChurchill, as well as securing half of Zurich Insurance's volumes in thismarket, which began in March 2005. We plan to increase the productivity and quality of our employed network throughthe introduction of 'Fitter Package', our engineer incentive scheme, which iscurrently being trialled in a number of glazing and locks branches. The schemecontinues to pay a basic salary but with significant additional payments,calculated on a fortnightly basis, for improved productivity and providesexcellent remuneration packages for higher first time fix rates and reducedreattends. The trial results are encouraging and demonstrate that significantincreases in productivity combined with higher customer satisfaction areachievable. Our intention is to roll this scheme out to all glazing and locksbranches during the coming year, and for plumbing and drains, fire and flood andpermanent repair over the next 18 months. In December 2004 we opened our newengineer training and assessment centre in Birmingham for glazing and associatedskills and this is already having a significant impact on improving the qualityof the work that we perform. Customer satisfaction has also reached recordlevels, improving significantly during the year, from 94% to 96%. Claims Management Homeserve Claims Management provides claims handling for our own policyholdersand a home assistance helpline for emergency repairs for Household Insurers andother financial sector customers. Homeserve Claims Management operates a highquality national subcontract network across a broad range of trades. Last yearwe received over two million inbound emergency calls, an increase of 20% andmanaged over 520,000 claims. In order to manage the increase in activity, theplanned move to a purpose built call centre close to the original operation inPreston, was completed in July 2004, more than doubling our operationalcapacity. During the year, we introduced a number of new initiatives to improvefurther the already high levels of customer service, including performanceleague tables for individual engineers together with a trial of electronic jobtracking to enable better engineer management and customer communication. Permanent Repair In December 2004 we acquired Sergon, one of the UK's leading permanent repairnetworks working for Household Insurers, with over 280 independent contractorscompleting 5,000 repairs per month. Sergon provides emergency and permanentrepairs, such as plastering and decorating, arising from the escape of water,storm, fire and accidental damage. Sergon has established relationships withseven Household Insurers and as part of Homeserve now has access to customerrelationships with the majority of Household Insurers. Sergon currently has 90employees working from its national control centre near Nottingham. Since itsacquisition, we have appointed a new Managing Director and an OperationsDirector with experience of running a national building trades business. As aresult, the number of completed claims by the network have increasedsignificantly, customer service has improved and the average claims cycle timehas reduced from 78 to 61 days. Fire and Flood Restoration Our range of disaster restoration trades was further complemented by theacquisition of Chem-Dry in April 2005. Chem-Dry is a market leader in the fireand flood restoration market with an estimated 30% share of a market worth£100m. Chem-Dry has 230 franchisees providing national coverage for eightleading Household Insurers for fire and flood restoration and carpet andupholstery cleaning, with the potential to expand the number of insurersChem-Dry is working with. The ability to deal with fire and flood emergenciesenables Homeserve to be of the first business into a customer's home followingan emergency. This places us in a unique position to offer a fully integratedservice to insurers, from the answering of the initial claim right through tocompletion of the permanent repair. Richard Harpin Chief Executive23 May 2005 * Pre goodwill and exceptional items (see profit & loss account and notes 2,3and 7) Financial Review On 6 April 2004, Homeserve completed the demerger of its Water Supply operation.In addition, during the year we have completed the programme of disposals inrespect of our Commercial Outsourcing businesses. Consequently, the results forthe current year are analysed between "continuing" operations, representingthose operations still held at 31 March 2005, and "discontinued" operations,being those demerged and disposed of during the year. As the demerger and the acquisition of the minority interest were completedduring the current financial year, the assets and liabilities of the demergedWater Supply operation and the amount attributable to the minority interests areincluded in the balance sheet of Homeserve at 31 March 2004. Group Results Turnover from continuing operations including share of joint ventures was £223m(2004: £169m), an increase of 31.8%. This principally reflects strong growth inthe number of policies sold and high retention rates which generate significantrenewals income within our utility branded policy membership business. Turnoverfor the year, including share of joint ventures and discontinued operations,decreased by 12.3% to £283m (2004: £323m) reflecting the fact that the prioryear results include the discontinued operations for a full year. Total operating profit* for the continuing operations increased by 30.8% to£42.4m (2004: £32.4m), which substantially resulted from organic growth in thepolicy membership businesses and improved performance in the glazing and locksoperation. As a result of the demerger and disposals, total operating profit*, whichincludes these discontinued operations, decreased by 24.7% to £44.2m (2004:£58.7m). In line with Homeserve's current internal reporting structure, we havenow analysed our core Home Emergency business between "Policy Membership" and"Emergency Repair". The Policy Membership business achieved operating profit* growth of 26.3% to£37.5m (2004: £29.7m), principally as a result of continued growth of ourutility branded policy sales. The expansion of our affinity branded business model overseas is progressingwell, with our first venture in France reporting a full year operating profitonly three years after its commencement. The Emergency Repair business achieved operating profit* growth of 80.7% to£4.8m (2004: £2.7m). This follows the successful turnaround of the glazing,locks, plumbing and drains directly employed business, which contributed anoperating profit of £3.1m (2004: £0.3m), and the continued growth in profits atour claims management business. The disposed businesses, including the demerged Water Supply and CommercialOutsourcing operation, contributed turnover, excluding inter-divisionalturnover, of £60.2m (2004: £153.7m) and operating profit* of £1.8m (2004:£26.3m) prior to their disposal. Adjusted profit before tax*, including discontinued operations, was £43.7m(2004: £51.7m), a decrease of 15.4% reflecting the demerger and disposals. Thenet interest charge decreased to £0.5m (2004: £7.0m), reflecting the demerger ofthe Water Supply operation that included an index linked bond amounting to£87.9m at 31 March 2004. The goodwill charge increased to £10.4m (2004: £7.2m) principally due to theamortisation of goodwill arising on the acquisition of the minority interests on6 April 2004. During the year, exceptional operating costs of £2.8m were incurred relating tothe provision of amounts due from Courts Plc following the appointment of anadministrator in November 2004. In addition, exceptional costs of £39.1mrelating to the disposal of the Commercial Outsourcing businesses have beenincurred. The total proceeds received in respect of the disposals amounted to£22.4m. The net book value of assets, excluding goodwill, was £19.7m. Inaddition, goodwill amounting to £37.9m was attributable to the businessesdisposed of during the year. The carrying value of the goodwill related to the continuing operations has beenreviewed based on the current budgets and business plans. No impairment isconsidered necessary. After taking account of goodwill amortisation and these exceptional costs, thestatutory loss before taxation for the year was £8.6m (2004: profit £37.8m). Taxation The effective rate of tax for the year, based on profits excluding goodwill andexceptional costs, was 30.9%. In the prior year, the effective tax rate for theGroup, excluding the demerged Water Supply operations, was 30.6%. The increasein the current year reflects the losses experienced in our overseas businesses,which can only be utilised against future profits in those businesses. Earnings per Share Earnings per share* after adjusting for the four for five share consolidation,for the continuing operations increased by 29.7%, from 36.0p to 46.7p. Basicearnings per share, which includes the discontinued operations and exceptionalcosts, was a loss of 34.3p (2004: earnings of 35.2p). Dividends The Board is proposing a final dividend of £6.8m being 10.9p per share. This,combined with the Group's interim dividend of £3.2m (being 5.1p per share)brings the total for the year to £10.0m, giving a total dividend per share of16.0p. After adjusting for the four for five share consolidation and minoritydividend, this represents an increase in dividend per share of 19.4% in theyear. In 2004, total dividends payable were £12.7m, of which the demerged watersupply operation paid £5.9m. Acquisitions The Group has completed a number of incremental acquisitions during the year,investing £14.1m, net of cash acquired of £1.0m, together with estimateddeferred consideration of £0.2m. As reported in the prior year, on 6 April 2004, we acquired the minorityinterests in the original Homeserve business through a share for share exchange.We issued 11.6m shares to the minority interest shareholders in return for their24.98% shareholdings in those businesses. Goodwill amounting to £66.9m arose asa result of this acquisition. Principal Choice was acquired on 28 May 2004 for cash consideration of £1.3m,net of cash acquired of £0.1m, plus estimated deferred consideration of £0.2m.Goodwill amounting to £1.5m arose as a result of this acquisition. Disaster Restoration Limited was acquired on 29 July 2004 for cash considerationof £0.8m including expenses. Goodwill amounting to £0.3m arose as a result ofthis acquisition, which has been fully provided in the current year due to itsproposed integration with Chem-Dry. On 29 November 2004, we acquired a further 9% of the issued share capital ofDomeo SA, from our Joint Venture partner in France, for cash consideration of£0.9m. This increases our shareholding to 49%. Goodwill amounting to £1.0m aroseas a result of this acquisition. Sergon BRM Limited was acquired on 21 December 2004 for cash consideration of£10.5m, net of cash acquired of £0.9m. Goodwill amounting to £11.7m arose as aresult of this acquisition. Goodwill in respect of these acquisitions is currently being amortised over itsestimated useful economic life, of up to 20 years. As noted below, underInternational Financial Reporting Standards, goodwill will no longer beamortised, but rather will be tested for impairment every year. After the year-end, on 14 April 2005, Chem -Dry UK Limited and its relatedbusinesses were acquired for cash consideration of £18.9m. Goodwill amounting toan estimated £14.1m arose as a result of this acquisition. Disposals On 6 April 2004, the Water Supply operation and closely related businesses weredisposed of to the Group's existing shareholders. This transaction resulted in adistribution to shareholders and has been treated as a dividend in specieamounting to £28.5m. The remaining Commercial Outsourcing businesses were disposed of during the yearfor cash consideration of £22.4m, less net cash balances of £4.2m, resulting ina total loss on disposal of £37.0m. Capital Expenditure Capital expenditure in the year totalled £9.8m (2004: £34.4m). The significantreduction compared to the prior year follows the demerger of the Water Supplyoperation, which required significant investment in fixed assets. Cash Flow and Borrowings Homeserve generated cash of £43.4m in the year from operating activities, £42.9mof which was generated by the continuing operations. The Group achieved a netcash inflow of £9.3m, compared to a cash inflow of £10.3m in the previous year.This was after net capital expenditure of £8.9m, interest, tax and dividendstotaling £20.8m, investment in subsidiaries and joint ventures of £20.3m,disposal of subsidiaries of £19.0m, purchase of own shares of £8.4m andfinancing inflows of £5.3m. Net debt decreased significantly following thedemerger of the Water Supply operations, which included the index-linked bondamounting to £87.9m. At 31 March 2005, the Group had net cash of £11.2m. Share capital As part of the demerger of the Water Supply operation on 6 April 2004, the Groupundertook a share consolidation of four shares for every five held, in order tomaintain the existing share price to enable the comparability of historic andfuture per share data and to preserve the value of employee share options. Asnoted above the Group also acquired the minority shareholding in the originalHomeserve business, in a share for share exchange involving the issue of 11.6mshares by the Group, equivalent to approximately 18.6% of the enlarged sharecapital of Homeserve plc. Pensions Pension costs relating to the Group's defined benefit pension scheme continue tobe accounted for in accordance with SSAP 24. The actuarial valuation of thescheme at 1 April 2002 showed a surplus of £4.9m. Following the demerger of theWater Supply operation, a separate sub fund was established for Homeserve,replicating the rules and the benefit basis for employees. Active membersemployed by Homeserve together with the relevant deferred members have beentransferred into the new sub fund. The additional disclosures presented under the transitional arrangements for FRS17, Retirement Benefits, show a pension deficit net of deferred tax, of £1.8m(2004: £1.6m) in respect of the Homeserve sub fund. Financial Reporting We have assessed the impact of International Financial Reporting Standards("IFRS") on the Group. There are four main impacts: • Share Based Payments will result in a charge to the profit and loss account over the vesting period, based on the fair value of the awards at grant date; • The expense of the Group's defined benefit pension scheme on Homeserve's profit and loss account will be similar to that using current accounting standards. However, any pension surplus or deficit will be shown on the balance sheet, with actuarial gains and losses being recognised immediately through reserves; • The routine amortisation of goodwill arising from acquisitions will cease, but will be held on the balance sheet subject to an annual impairment test; and • Profits arising from Domeo will only be recognised once that business achieves a positive net asset position. We have completed the restatement of our opening reserves at 1 April 2004. Thesewill form the comparative results that we will disclose in our interimannouncement in respect of the six months ending 30 September 2005 and theannual report in respect of the year ending 31 March 2006. For internalreporting purposes, we have been reporting under IFRS since 1 April 2005. In respect of current UK GAAP, there have been no new accounting standards thathave had an impact on the Group's financial statements for the year, except forthe adoption of UITF 38. The impact of UITF 38 on Homeserve is the requirementto reclassify the investment in own shares from fixed assets, to a reduction inshareholders' funds. Andrew BelkGroup Finance Director23 May 2005 * Pre goodwill and exceptional items (see profit & loss account and notes 2,3and 7) CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED 31 MARCH 2005 2005 2004 Results Results for the for the year before year before goodwill Goodwill goodwill Goodwill amortisation amortisation amortisation amortisation and and Results and and Results exceptional exceptional for the exceptional exceptional for the Note charges charges year charges charges year £'000 £'000 £'000 £'000 £'000 £'000 Group and share of 283,265 - 283,265 322,955 - 322,955joint ventures'turnover Less share ofjointventures'turnover -continuing (2,375) - (2,375) (1,147) - (1,147) Less share ofjointventures'turnover -discontinued - - - (4,173) - (4,173)----------------------------------------------------------------------------------------------------------------------- 2 280,890 - 280,890 317,635 - 317,635Group turnoverContinuing 205,086 - 205,086 168,089 - 168,089operations Acquisitions 15,625 - 15,625 - - ----------------------------------------------------------------------------------------------------------------------- 220,711 - 220,711 168,089 - 168,089 Discontinued 60,179 - 60,179 149,546 - 149,546operations ---------------------------------------------------------------------------------------------------------------------- 280,890 - 280,890 317,635 - 317,635 Operatingcosts (236,693) (13,193) (249,886) (258,383) (9,615) (267,998)----------------------------------------------------------------------------------------------------------------------- Group operatingProfitContinuingoperations 41,802 (11,411) 30,391 32,641 (7,974) 24,667 Acquisitions 551 (697) (146) - - ----------------------------------------------------------------------------------------------------------------------- 42,353 (12,108) 30,245 32,641 (7,974) 24,667Discontinuedoperations 1,844 (1,085) 759 26,611 (1,641) 24,970---------------------------------------------------------------------------------------------------------------------- 44,197 (13,193) 31,004 59,252 (9,615) 49,637 Share of jointventures'operatingprofit/(loss)- continuing 5 - 5 (257) - (257) Share of jointventures'operating loss- discontinued - - - (307) - (307)-----------------------------------------------------------------------------------------------------------------------Totaloperatingprofitincludingjoint ventures 3 44,202 (13,193) 31,009 58,688 (9,615) 49,073 Loss ondisposal ofsubsidiaryundertakings -discontinued 5 - (39,149) (39,149) - - - Cost offundamentalreorganisation- continuing - - - - (4,216) (4,216) Net interestpayable 4 (483) - (483) (7,017) - (7,017)---------------------------------------------------------------------------------------------------------------------- Profit/(loss)on ordinaryactivitiesbeforetaxation 43,719 (52,342) (8,623) 51,671 (13,831) 37,840 Taxation onprofit/(loss)on ordinaryactivities 6 (13,525) 836 (12,689) (15,243) - (15,243)---------------------------------------------------------------------------------------------------------------------- Profit/(loss)on ordinaryactivitiesafter taxation 30,194 (51,506) (21,312) 36,428 (13,831) 22,597 Equityminorityinterests - - - (4,162) 3,823 (339)---------------------------------------------------------------------------------------------------------------------- Profit/(loss)for thefinancial year 30,194 (51,506) (21,312) 32,266 (10,008) 22,258 Dividends paidand proposed 8 (10,033) - (10,033) (12,733) - (12,733)Dividend inspecie (28,522) - (28,522) - - ---------------------------------------------------------------------------------------------------------------------- Retained(loss)/profitfor the year (8,361) (51,506) (59,867) 19,533 (10,008) 9,525---------------------------------------------------------------------------------------------------------------------- (Loss)/earningsper share Basic 7 (34.3p) 35.2p Basic beforegoodwill andexceptionalcharges 7 48.7p 51.0p Diluted 7 (34.3p) 34.9p Diluted beforegoodwill andexceptionalcharges 7 47.7p 50.6p CONSOLIDATED BALANCE SHEETAS AT 31 MARCH 2005 2005 2004 Note £'000 £'000 Fixed assetsGoodwill 10 154,008 108,223Tangible assets 22,613 186,242------------------------------------------------------------------------------ 176,621 294,465------------------------------------------------------------------------------ Current assetsStocks 1,985 6,887Debtors 88,556 90,221Cash at bank and in hand 14,753 10,497------------------------------------------------------------------------------ 105,294 107,605 Creditors - amounts falling due within one yearBorrowings 11 (3,537) (11,355)Other creditors (97,628) (120,909)------------------------------------------------------------------------------- (101,165) (132,264)------------------------------------------------------------------------------- Net current assets/(liabilities) 4,129 (24,659)-------------------------------------------------------------------------------Total assets less current liabilities 180,750 269,806 Creditors - amounts falling due after more than oneyearBorrowings 11 - (92,649)Other creditors - deferred consideration (4,421) (4,138)------------------------------------------------------------------------------- (4,421) (96,787) ------------------------------------------------------------------------------- Provisions for liabilities and charges (939) (10,301)Accruals and deferred income (15,109) (19,552)--------------------------------------------------------------------------------Net assets 160,281 143,166------------------------------------------------------------------------------- Capital and reservesShare capital 7,987 6,366Share premium 26,576 18,902Merger reserve 70,992 -Capital redemption reserve 1,200 1,200Own shares (8,447) -Profit and loss account 61,973 110,532-------------------------------------------------------------------------------Equity shareholders' funds 160,281 137,000Minority shareholders' equity interests - 6,166------------------------------------------------------------------------------- 160,281 143,166------------------------------------------------------------------------------- CONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED 31 MARCH 2005 2005 2004 Note £'000 £'000 Reconciliation of operating profit to net cashinflow from operating activitiesTotal operating profit:Group and share of joint ventures 31,009 49,073Amortisation of goodwill 10,406 7,215------------------------------------------------------------------------------- 41,415 56,288 Exceptional costs - bad debt charge 2,787 -Exceptional costs - demerger of South Staffordshirebusiness (3,186) (1,030)Exceptional costs - UITF 17 charge - 2,400Depreciation and (profit)/loss on disposals ofassets 7,277 17,681Share of operating (profit)/loss in joint ventures (5) 564(Increase)/decrease in working capital (4,880) 1,951------------------------------------------------------------------------------- Net cash inflow from operating activities 43,408 77,854-------------------------------------------------------------------------------Returns on investments and servicing of finance:Net interest paid (459) (4,449)Dividends paid to minority interests (1,632) (1,714)-------------------------------------------------------------------------------- (2,091) (6,163)--------------------------------------------------------------------------------Corporation tax paid (10,996) (12,171)-------------------------------------------------------------------------------- Capital expenditure and financial investment:Purchase of tangible fixed assets (9,331) (38,195)Loan to joint ventures - (492)Sale of tangible fixed assets 458 1,341Capital contributions received - 4,782------------------------------------------------------------------------------- (8,873) (32,564)------------------------------------------------------------------------------- Acquisitions and disposals:Investment in subsidiary undertakings (1,222) (4,442)------------------------------------------------------------------------------- Equity dividends paid (7,686) (11,683)-------------------------------------------------------------------------------Financing:Issue of ordinary share capital 7,744 1,834Repayment of loan notes (1,180) (931)Purchase of own shares (8,447) -Finance lease and hire-purchase payments (1,319) (1,419)-------------------------------------------------------------------------------- (3,202) (516)-------------------------------------------------------------------------------- Increase in cash 9,338 10,315=============================================================================== Reconciliation of movement in net debt --------------------------------------------------------------------------------Increase/(reduction) in cash 4,256 (295)Decrease in bank overdraft 5,082 10,610-------------------------------------------------------------------------------- 9,338 10,315Debt repayments 2,499 2,350Demerged companies 92,757 -Disposed companies 605 -Assets purchased under finance leases (476) (527)Index linked bond - (2,524)--------------------------------------------------------------------------------Decrease in net debt in year 104,723 9,614Net debt brought forward (93,507) (103,121)--------------------------------------------------------------------------------Net funds/(debt) carried forward 11,216 (93,507)================================================================================ NOTES 1. Financial Reporting The Group's principal accounting policies are consistent with those adopted inthe financial statements for the year ended 31 March 2004, with the exception ofthe policy for the accounting for the ESOP trust following the adoption of UITF38. The Company's investment in its own shares is now reported as a reduction inshareholders' funds. The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 March 2005 or 2004, but is derivedfrom those accounts. Statutory accounts for 2004 have been delivered to theRegistrar of Companies and those for 2005 will be delivered following theCompany's Annual General Meeting. The auditors have reported on those accounts;their reports were unqualified and did not contain statements under s237(2) or(3) Companies Act 1985. This announcement was approved by the Board of Directors on 23 May 2005. 2. Segmental Turnover 2005 2004 Continuing Discontinued Continuing Discontinued Operations Acquisitions Operations Total Operations Operations Total £'000 £'000 £'000 £'000 £'000 £'000 £'000----------------------------------------------------------------------------------------------------------Homeservedomestic -Policy 129,794 778 - 130,572 100,337 - 100,337Membership -Emergency 85,396 14,847 - 100,243 73,079 - 73,079Repair Inter-division (7,729) - - (7,729) (4,180) - (4,180)---------------------------------------------------------------------------------------------------------- 207,461 15,625 - 223,086 169,236 - 169,236 Commercial - - 59,537 59,537 - 111,666 111,666Outsourcing Inter-division - - (494) (494) - (18,374) (18,374)---------------------------------------------------------------------------------------------------------- - - 59,043 59,043 - 93,292 93,292Regulated water supply - - 1,136 1,136 - 60,427 60,427--------------------------------------------------------------------------------------------------------Total turnover 207,461 15,625 60,179 283,265 169,236 153,719 322,955-------------------------------------------------------------------------------------------------------- Share of jointventures -PolicyMembership (2,375) - - (2,375) (1,147) - (1,147) -CommercialOutsourcing - - - - - (4,173) (4,173)----------------------------------------------------------------------------------------------------------Group turnover 205,086 15,625 60,179 280,890 168,089 149,546 317,635--------------------------------------------------------------------------------------------------------- 3. Segmental Profit Before Tax 2005 2004 Continuing Discontinued Continuing DiscontinuedRelated Shares:
HSV.L