Final Results

HomeServe plc

Preliminary results for the year ended 31 March 2011

'GOOD GROWTH IN THE UK

AND INCREASING MOMENTUM IN OUR INTERNATIONAL BUSINESSES'

·; A loyal and growing customer base worldwide

- Access to 68m households

- 4.9m customers, up 14%

- 11.4m policies, up 15%

- Global retention rate remains high at 83.6% (2010: 83.6%)

·; Excellent financial results

- Underlying revenue(1) up 15%

- Adjusted profit before tax(2) up 16% and adjusted earnings per share(3) up 17%

- Free cash flow(4) of £86.1m, up from £26.3m in 2010

·; Good growth in the UK

- Customer numbers up 4% to 3m, policy numbers up 6% to 7.5m

- Retention rate remains high at 82.7%, exceeding our target of 82%

- Robust underlying operating margin(1)

- Increasing momentum in our International operations

- Growing US footprint with organic and acquisitive partner growth

- Strong organic growth with US gross new policies up 55% to 0.45m

- US adjusted operating profit(2) of £6.1m, up from £1.5m in 2010

- Doméo adjusted operating profit(2) up £2.5m to £8.2m, with strong customer and policy growth

- Increased investment in our New Markets with positive results from test marketing in Italy with Enel, and manufacturer warranties with Indesit and Mistergooddeal in Europe

Richard Harpin, Chief Executive, commented:

"HomeServe has delivered another excellent set of financial results with adjusted profit before tax(2) up 16% to £117.1m and adjusted earnings per share(3) up 17% to 25.9p.

The strength and resilience of our business model is demonstrated with worldwide customer numbers increasing 14% and high levels of retention with a global retention rate of 83.6%.

Reflecting our confidence in future prospects and excellent cash generation we have increased the dividend by 17% year on year.

Our UK business continues to grow, and achieved our key customer growth and exceeded our retention targets, with adjusted operating profit(2) up 9%.

Our established international operations in France, USA and Spain have more than doubled their adjusted operating profit(2) in the year to £16m. This has been driven by increasing organic and acquisitive growth in the US and strong earnings growth in Doméo.

Furthermore we have increased our investment in our New Markets operations in Belgium, Italy and SFG in France which is delivering encouraging results.

HomeServe has made a good start to the new financial year in each of our markets and remains well positioned for the future. We look forward to another year of strong growth."

Enquiries

A presentation for analysts and investors will take place at 9am this morning at UBS, 100 Liverpool St, London, EC2M 2RH. There will also be a live webcast available via www.homeserveplc.com.

2. Excluding amortisation of acquisition intangibles, joint venture taxation and exceptional revenue, see Financial Review and notes 3 and 4.

3. Excluding the amortisation of acquisition intangibles and exceptional revenue, see Financial Review and note 7.

4. See Cash flow statement in the Financial Review.

CHAIRMAN'S STATEMENT

I am pleased to report that HomeServe has delivered against all of the targets we set at the start of the year, including a 4% increase in customer numbers and a retention rate of 82.7% in the UK and £6.1m adjusted operating profit(2) in the US.

We now have over 68m affinity partner households worldwide and have grown our worldwide customer numbers by 14% to 4.9m. The continued development of our customer portfolio, together with increasing policies per customer and high and stable retention rates have delivered another year of strong earnings growth in all of our established markets.

Results

In the year, underlying revenue(1) was up 15% and adjusted operating profit(2) up by 14% to £119.2m (2010: £104.4m). Adjusted profit before tax(2) was up 16% to £117.1m (2010: £100.6m) and adjusted earnings per share(3) up 17% to 25.9p (2010: 22.2p) reflecting the growth in customer numbers, increased income per customer and the strong retention performance in all regions.

Free cash flow(4) was £86.1m, up from £26.3m in the prior year with net debt at the end of the year of £11.8m (2010: £52.9m). Our balance sheet remains strong and the business continues to be highly cash generative.

On a statutory basis, revenue increased by 27% to £467.1m, profit before tax has increased by 3% to £104.8m and earnings per share has increased by 5% to 24.0p.

Business developments

In the UK, our core utility marketing campaigns, together with our customer growth initiatives, have delivered a 4% increase in customer numbers (2010: 2.4%) with both water and heating policies higher than a year ago. In addition, our customers remain loyal with our UK retention rate stable at 82.7% (2010: 83.0%), providing continued high visibility of our future earnings.

In the US we have achieved strong organic growth during the year with gross new policy sales of 0.45m, 55% higher than a year ago, and we continue to make good progress in signing new affinity partners and acquiring existing home emergency policy books. In addition to the agreements announced with National Grid Energy Services and Southern California Gas in April 2011, we also signed new affinity agreements with two utilities representing 1m households. Since the year end we have signed two further agreements representing 0.15m households together with 10k existing policies. Our US business now serves 0.9m customers holding 1.4m policies, up 57% and 83% respectively on a year ago.

Doméo, our French joint venture, has delivered an 11% increase in customer numbers and our share of adjusted operating profit(2) has increased by 44% to £8.2m. Gross new policy sales in the second half of the year were over 10% higher than in the same period last year, with the new marketing initiatives introduced during the year delivering good results.

In Spain we now have 0.17m customers holding 0.22m policies, more than double the number a year ago. We have developed our sales channels during the year, introducing an outbound telesales operation and we are expanding our product range with the management of Indesit's manufacturer warranty programme.

We continue to invest in our New Markets operations. In Société Francaise de Garantie (SFG), our French warranty business, we are developing a post point of sale and manufacturer warranty business and have signed agreements with Indesit and Mistergooddeal during the year. We were also pleased to commence a 15 month test marketing agreement with Enel Energia in Italy.

Across the world our membership businesses managed over 1.3m repairs, an increase of over 13% over the past 12 months, with increasing customer satisfaction levels.

Shares and Dividend

On 2 August 2010 a 5 for 1 sub division of the Company's share capital was implemented to improve the liquidity and marketability of the ordinary shares of the company.

The Board is proposing a final dividend of 7p per share bringing the total dividend for the year to 10.3p (2010: 8.8p). The dividend increase of 17% is consistent with our objective of increasing our dividend in line with adjusted earnings per share(3).

People

On behalf of the Board I would like to thank all of our people for their contribution to another excellent set of results. In particular, thank you to our engineers and call centre agents who worked so hard to maintain customer service levels during the difficult winter weather conditions experienced in a number of our operations.

In the UK our people have worked closely with the charity, Marie Curie Cancer Care, on a number of initiatives and we are making good progress towards achieving our target of raising £1m over 3 years.

Board

During the year we have continued to review the structure of the Board and took the decision to strengthen it with two new appointments. On 5 July we appointed Jonathan King, Chief Executive of HomeServe USA, as an Executive Director and on 23 November we appointed Stella David, Chief Executive Officer at William Grant & Sons, as a Non-Executive Director. I would like to formally welcome them both to the Board.

Summary

We have delivered another excellent set of financial results whilst continuing to invest in growing the business. Whilst recognising that a number of global economic uncertainties remain, we are continuing to implement our clear and focused strategy, delivering growth in both our UK and International operations.

Our 'business to consumer' membership business model is delivering excellent results. HomeServe remains well positioned for the future and we look forward to another year of strong growth.

JM Barry Gibson

Chairman

24 May 2011

CHIEF EXECUTIVE'S REVIEW

HomeServe's vision is to be the first place people turn to for home emergencies and repairs. We are achieving this by providing a membership service which frees our customers from the worry and inconvenience of home emergencies and repairs. 

Our business model of building long-term relationships with business partners, leveraging our product development expertise, producing leading sales and marketing materials and delivering excellent customer service with high renewal rates continues to deliver strong returns for shareholders with growth in adjusted profit before tax(2) and adjusted earnings per share(3).

We continue to grow our UK business, with an increased customer base and income per customer whilst replicating this proven model internationally in the USA, Spain and, through our joint venture Doméo, in France. Each of these international businesses trades profitably and delivered excellent growth in operating margins and adjusted operating profits(2) in 2011.

We are also investing in our New Markets where we are building our French manufacturer warranty business, Société Francaise de Garantie (SFG), consistent with our UK warranty business, as well as utility based membership businesses in Belgium and Italy.

Worldwide gross new policy sales increased by 18% to 2.9m (2010: 2.5m) which, combined with high stable retention rates, has driven total policy numbers up 15% to 11.4m (2010: 9.9m). Total customer numbers across all our businesses have increased by 14% to 4.9m (2010: 4.3m) driven by particularly strong performances in both the UK and USA.

Our International operations currently deliver a relatively small, but fast growing, proportion of the Group's profit. In 2011, adjusted operating profit(2) from our established International operations in USA, Doméo and Spain more than doubled to £16.0m. Our International adjusted operating profit(2), including the investment we have made in our New Markets operations of £1.1m was £14.9m, a 71% increase over the past twelve months. The penetration of our International households has increased from 3.2% to 4.3% over the past year and we believe this can grow further in the future enabling us to significantly increase the contribution from our International businesses in the medium term.

Across the world our membership businesses managed over 1.3m repairs, an increase of over 13% over the past 12 months. We have a high quality network of engineers all of whom are vetted and managed by experienced contractor managers. We manage the performance of our engineers using a series of performance indicators and customer surveys. During 2011 over 94% of all customers who had a claim were satisfied with the service they received, higher than a year ago.

The table shows our performance metrics on a global basis as at 31 March 2011.

The following sections report on the performance of each of our business segments. Since last year we have reviewed our segmental presentation and now provide separate disclosure relating to each of our established businesses (UK, USA, Spain and Doméo, our joint venture in France), with those businesses that we are currently developing now classified together as "New Markets".

UK

We are pleased to report that we have achieved our customer growth target in the UK with customer numbers of 3.0m, 4% higher than a year ago (2010: 2.9m). We achieved gross new policy sales of 1.8m (2010: 1.6m), with total policy numbers increasing by 6% to 7.5m (2010: 7.1m). The growth in customer and policy numbers reflects the continued success of our core utility marketing campaigns, the growth in our manufacturer warranty business, as well as the contribution from our customer growth initiatives, including 'One Contact', landlord products and financial services partners.

We have had an excellent year in terms of retention with the rate remaining high at 82.7%, as a result of a number of ongoing initiatives. Our retention call centre agents' productivity and effectiveness has improved, further reflecting increased staff tenure, better training and coaching as well as the development of new retention products and propositions.

Our growth in the number of customers and our strong retention performance is particularly pleasing given the continuing uncertain economic climate and the perceived increase in competition following a number of high profile media campaigns from both new and existing home emergency providers.

Our customer service proposition of directly employed, franchised and sub-contract engineers is delivering improved customer service with 93% of customers satisfied. Our network of around 300 directly employed plumbers completed over 80% of all our water related repairs over the past 12 months with 92% of jobs completed at the first visit. The coldest winter in 100 years presented a number of challenges for our engineers and we were satisfied with the level of service we delivered during this period despite record levels of emergency calls. 

We are pleased to report that we have continued to grow the number of our core water related policies. Water utilities continue to be key partners to our UK business and we are delighted that we completed the re-signing of all our partners that were due to renew during the year. We have now renewed all of our water utility partners, most for the third time, with the majority now being on long term contracts.

Manufacturer warranties remain a key part of our business with core renewable policies (where we have a direct ongoing relationship with the customer) increasing by 30% to 503k. Over the past twelve months we have commenced marketing and administrating Dyson's manufacturer warranty scheme in the UK, and subsequent to the year end, in April 2011, we have signed a deal with Ferroli, an Italian boiler manufacturer, to take over management of their warranty programme.

'Other' policies which includes pest and home appliance cover are particularly popular with Combined policy holders. Combined policies, which enable customers to consolidate multiple elements of cover into a single policy, continue to grow, and now represent 21% (2010: 19%) of UK customers. On average a combined policy customer holds six policy elements.

The success of One Contact, our 'pay on use' service, in delivering new membership customers is now becoming evident with the number of emergencies repaired during the year more than doubling. The proportion of customers converted into full policy members has also increased, finishing the year at over 80%. In 2012, we will focus on increasing the number of One Contact emergencies repaired whilst maintaining the high job to member conversion rate.

Subsequent to the year end, we aired a new TV and radio advertising campaign in the Granada TV region, promoting the HomeServe brand and our '0800 247 999' telephone number. Whilst the campaign is targeted at developing our One Contact service, our utility partners in the region are very supportive of the campaign as it increases awareness of HomeServe and therefore the likelihood of customers buying policies in the future. Initial analysis of call volumes and policy sales is showing a positive impact from the campaign.

Over the past year we have made good progress in developing and rolling out our customer growth initiatives in the UK:

- We have seen a good take-up of our landlord and flat policies which have been sold through a mix of marketing activity including outbound telephony and direct advertising under the HomeServe brand.

- We have also had a successful year with the sales of our home assistance membership policies through our partnerships with financial services companies. Marketing is primarily via telesales activity and this represents a cost effective form of customer acquisition. During the past year we have worked with Santander, Northern Rock and a UK credit card company and are planning to further increase our financial services partnerships in the future.

- We have also signed affinity relationships with GB Oils, NWF Fuels and Total Butler who are the major distributors of oil to UK households who use this as their main source of fuel. We are continuing to develop and test our oil boiler breakdown marketing to identify the best creative and channel in order to maximise sales with customers of these partners.

Income per customer in the UK increased by 9% to £89 over the past 12 months. This reflects the strengthening of our customer relationships, with the number of policies per customer increasing to 2.52 (2010: 2.47), as well as an increase in policy prices together with enhanced cover. 

Underlying revenue(1) in the UK increased by 10% reflecting the growth in customer and policy numbers as well as an increase in income per customer. The underlying operating margin(1) in the UK was stable and adjusted operating profit(2) increased by 9% to £104.3m (2010: £95.7m).

The legislation for the proposed transfer of private sewers and lateral drains from homeowners into the ownership of the utility companies is currently passing through Parliament. This bill will help provide clarification to homeowners as to who is responsible for the drainage in and around their property. We estimate that the majority of our drainage related emergencies occur either within the property or in the external drain both of which will remain the homeowners responsibility and therefore we believe the proposed change will not impact our products and services. In fact we believe the legislation and clarification of responsibilities between the homeowner and the utility may provide us with an opportunity for additional sales of water related services.

We have decided to cease operating through the low margin, point of sale furniture warranties channel as we focus on growing relationships with our core utility and manufacturer partner customer base.

United States of America

During the year we have gained significant momentum in signing new partners and acquiring existing home emergency programmes. We announced new affinity relationships with Southern California Gas and Millennium Energy, neither of whom have previously operated a programme. Southern California Gas serves over 5m residential customers whilst Millennium Energy serves 0.6m households through its Tuscon Power subsidiary (0.4m) and Unisource Energy (0.2m) subsidiaries in Arizona.

In addition, we completed the acquisition and successful integration of National Grid Energy Services (NGES) in August, which included 0.18m customers, and we also agreed the terms in March on which we would renew the existing 0.06m home assistance customers of South Jersey Energy Services Plus as they become due for renewal from mid 2011.

We are also pleased to have reached two further agreements since the year end with Contra Costa and Middlesex Water, both water utilities. These two utilities service around 0.15m households across California, New Jersey and Delaware and the agreements will allow us to bill customers via their utility bill. We have also agreed to purchase Middlesex's existing 10k home emergency policies.

We now have 21m affinity partner households in the US with an average penetration rate of 4%. Whilst the overall penetration in the US is lower than in the UK, there is significant variation by individual partner, with rates ranging from less than 1% with our newer partners up to around 30% with one of our oldest water utility partners. 

The penetration rate also varies by the type of utility. Of our 21m US affinity partner households, 2m are water and 19m are energy (gas and electric) households. We have achieved an average penetration rate of 15% across our water partners so far and we continue to see significant potential to increase the average penetration rate in our energy partners, where the highest penetration rate is around 20% with South Jersey Energy Services Plus.

We also see good growth opportunities through the increased penetration of our existing affinity partners as well as deepening our relationships with these customers through increased cross-sell activity.

At the same time, we are actively talking to new potential partners whose customers have not previously been offered home emergency cover as well as actively discussing opportunities to acquire existing programmes run, for example, by utilities. We estimate that there are around 35 programmes currently operated by utilities and we believe that we can grow them at a significantly faster rate than the existing utilities, as we have evidenced with those previously run by California Water, United Water and First Energy.

2011 has seen a significant change in the size of our US business with customer numbers up 57% to 0.91m (2010: 0.58m), reflecting a strong increase in new customers as well as the 0.18m customers acquired from NGES. Gross policy sales (excluding policies acquired with NGES) were 0.45m an increase of 55% (2010: 0.29m).

Our marketing programmes in the US are focused on direct mail with outbound telesales representing a smaller part of our overall marketing activity compared to the UK. We ran a number of campaigns across the autumn and winter months to NGES customers promoting policies including HVAC (Heating, Ventilation & Air Conditioning), water heater and electrics and we launched our first marketing campaign promoting 'interior gas' cover to Southern California Gas customers at the end of the financial year.

As well as growing our affinity partner customers and policies, we are also seeing strong growth in the sale of our own 'HomeServe USA' branded policies in areas where we do not currently have an affinity partner. Our primary focus remains on expanding our affinity partner footprint, though sales through the HomeServe branded channel, which have slightly lower take-ups and lower first year retention rates, do represent a profitable channel for customer acquisition and a source of credentials to prospective new partners.

Our US retention rate remains high at 81.8% (2010: 82.6%) with 70% of policies paid on their utility bill or by other continuous payment methods such as credit card or E-Z pay (a form of direct debit).

Income per customer was up 22% to $85 in 2011 reflecting an increase in the number of products per customer from 1.30 to 1.52 and the increasing proportion of higher net income NGES policies. The increased average number of policies held per customer reflects the success of our cross-selling campaigns as well as the higher policies per customer within the acquired NGES business.

Revenue in the US was £52.6m, 105% higher than a year ago (2010: £25.7m) reflecting the strong growth in customer and policy numbers and the US reported an adjusted operating profit(2) of £6.1m (2010: £1.5m).

We continue to invest in both the infrastructure and people in our US operations, with a particular focus on growing our business development, corporate development and marketing teams over the past year. We are also investing in our customer service capability and opened our second US call centre, in Chattanooga, Tennessee, in November. This gives us initial capacity for a further 140 claims agents to manage our growing customer base as well as providing us with a back up for our existing call centre in Miami, Florida.

Doméo

Doméo, our joint venture in France with Veolia, has reported strong growth in both customer and policy numbers over the past year. The number of customers has increased by 11% to 0.86m (2010: 0.77m) with policies increasing by 15% to 2.2m (2010: 1.9m) over the same period. Our French customers are very insurance minded and this, combined with a high proportion of payments made by direct debit and a high standard of customer service, has ensured that our retention rate remains high at 88.4% (FY10: 88.3%).

Gross new policy sales were 0.5m (2010: 0.5m). Sales in the second half of the year of 0.34m were up over 10% on the same period in 2010 reflecting the successful implementation of a number of new initiatives last summer. The initiatives, which were developed by a joint UK and French team, included new marketing creatives, improved data selection and new pricing strategies and have all delivered good results demonstrating the benefit of sharing best practice across our operations.

A key focus for Doméo in 2012 is to continue to test initiatives to increase the activity between its call centre and that of its affinity partners. In addition, while we achieve good take-up rates both in and outside Veolia regions, we are continuing to discuss opportunities with new potential partners.

Income per customer increased by 5% to €93 with the benefit from an increase in the number of policies per customer offset by initial pricing dilution from the successful new customer acquisition programme.

Doméo has increased its adjusted operating profit(2) by 44%, with our 49% share contributing £8.2m (2010: £5.7m) to our Group result. The strong growth principally reflects the high retention rate and increased renewal revenue.

Spain

Given the relative size of the Spanish policy business, the retention rate and income per customer metrics have not been presented.

In Spain, despite the country's difficult economic conditions, we have more than doubled the number of customers and policies to 0.17m and 0.22m respectively, whilst gross new policy sales were 0.16m (2010: 0.05m).

The majority of our marketing activity over the past 12 months has been targeted at the Endesa customer base, with good take-up rates on both acquisition and cross-sell campaigns. During the latter part of the year we commenced mailings to Agbar customers and will be rolling out a full programme of campaigns over the coming year.

We have introduced a number of new marketing initiatives in Spain over the past 12 months. Our new outbound telesales operation has had particular success, selling Electrical wiring cover to Endesa's gas customers and we have also trialled the use of utility bill marketing inserts with good take-up results.

We are making good progress in developing our product portfolio in Spain. In addition to our traditional electric and water policies, we are seeing good growth in our 'Club' product which gives members priority access to our repair network including two hours of free handy man labour. During the year we have also taken on the operation of Indesit's manufacturer warranty programme in Spain, following the signing of a similar deal with SFG in France. We have seen good take-up rates from our initial 'inbox' registration card marketing activity and will be expanding the number of channels used over the coming year.

Our claims handling and repair network operation continues to support our growing membership business, as well as its existing insurance partners, and celebrated its tenth anniversary during the year. Revenue from the membership business has more than doubled as a result of increasing renewal income and this has contributed to Spain reporting an adjusted operating profit(2) of £1.7m, significantly higher than the £0.4m reported last year.

New Markets

The success of our established international operations in the US, Spain and Doméo in France demonstrates that the HomeServe business model is transferable to countries outside the UK and that such investment can create significant shareholder value. We are therefore investing in infrastructure, people and test marketing programmes in new businesses in Belgium, France (via our warranty business Société Francaise de Garantie (SFG) and Italy.

In SFG, our wholly owned warranty business based in France, we are investing in the development of a post-point of sale and manufacturer warranty operation, which in the medium term will reduce the concentration of the existing retail warranty customer base. During the year we announced two new partnerships to start selling warranties to the customers of Indesit and Mistergooddeal, a leading French online retailer. Initial marketing campaigns have delivered results in line with our expectations and we are planning additional investment in the coming year.

In Belgium, while we have not yet found a suitable affinity partner, we are continuing discussions with a number of potential partners.

In the first half of the year we opened our Milan office and agreed a 15 month test marketing agreement with Enel Energia, part of the Enel group, Italy's largest energy company. We also signed an affinity partnership with Unicasa, an Italian property management company. We have undertaken a number of test mailings with these two partners promoting plumbing and drainage cover, gas supply pipe cover as well as electrical wiring cover, with take-ups in line with our expectations. We are planning to invest in additional marketing in the current financial year before reviewing the success of these agreements.

Our New Markets operations reported revenue of £9.9m (2010: £9.7m) and an adjusted operating loss(2) of £1.1m (2010: adjusted operating profit(2) £1.1m). The adjusted operating loss(2) reflects the additional investment in infrastructure, people and test marketing programmes. We expect to further increase our investment in these countries in 2012, reflecting our confidence in their prospects as evidenced by the good take-up rates achieved in our test marketing activity in 2011.

Outlook and Summary

Our UK business has grown its customer numbers and delivered good growth in adjusted operating profit(2) in 2011. In 2012 we are confident that we can continue to grow UK customer numbers by around 3% and maintain a robust operating margin.

Our International businesses already have around double the number of affinity partner households than the UK, although customer penetration and income per customer are currently lower. We are focused on improving our performance in our International businesses through the continued development of our product range and increased customer acquisition and cross-sell marketing programmes. We will also continue to target new affinity partners in each of our markets and expect the number of affinity partner households in the US to exceed the UK over the coming years. We are planning for our established International businesses to continue to increase operating margins and achieve significant growth in adjusted operating profit(2).

Finally, we will build on the success of our initial test marketing activities in our New Markets businesses by increasing the amount of investment in 2012 by around £3m as well as continuing to research opportunities in other new countries.

We are pleased to report an excellent set of financial results with strong adjusted earnings growth(3) and a robust operational performance. Our UK business continues to deliver good growth with our established international business gaining momentum. Our business is highly cash generative and this has enabled us to reduce our net debt to £11.8m.

We have made a good start to the new financial year and expect to deliver another year of strong growth.

Richard Harpin

Chief Executive

24 May 2011

FINANCIAL REVIEW

These financial results have been prepared in accordance with International Financial Reporting Standards (IFRS) and the accounting policies used are consistent with those at 31 March 2010, except for the implementation of IFRS3 "Business Combinations" (Revised 2008) and IAS27 revised, as set out in note 2.

Segmental Results

During the year the Group has reviewed the way in which it presents its segmental information. We now report five operating segments, providing separate disclosures around our established businesses, being the UK, US, Spain and Doméo (our joint venture in France), while aggregating those business that we are currently developing, now referred to as 'New Markets'.

The New Markets division therefore includes the results of our businesses in Belgium, SFG in France and Italy. The revenue and adjusted operating profit(2) for each of these segments are set out in the table below.

Group revenue(1) has increased by 27% to £467.1m, which includes £41.7m relating to repairs undertaken by UK sub-contract engineers (2010: nil) following a change in our commercial relationship with our underwriter, but excludes exceptional revenue which in 2010 amounted to £10.2m. Excluding the income from UK sub-contract repairs, Group underlying revenue(1) in 2011 increased by 15%.

Group adjusted operating profit(2) increased by 14% to £119.2m (2010: £104.4m).

The Group operating margin (adjusted operating profit/(loss)(2) divided by revenue(1)) has reduced from 28.3% to 25.5%, as a result of the change in sub-contract revenue in the UK and the increased investment in our New Markets businesses. If the change in UK sub-contract revenue and the investment in our New Markets business were excluded, the underlying Group margin in our UK and established international businesses increased from 28.8% to 29.0%.

In 2012 we plan to maintain our UK operating margin while the margins in our established International businesses are expected to increase as their renewal income grows and we achieve economies of scale. We will continue to invest in our UK and established International businesses as well as significantly increasing the investment in our New Markets businesses.

UK

Our UK business reported revenue of £358.9m, an increase of 25% (underlying 10%), driven by a strong performance in renewal income, the continued high level of gross policy sales and the change in our contractual relationship with our principal underwriting partner in the UK.

From 1 April 2010 our UK financial results include the revenue and costs of repair jobs undertaken by sub-contract engineers, reflecting a change in HomeServe's commercial relationship with its underwriter where we now provide a full repair service for our underwriter instead of the previous administration only service. This change, which has increased both revenue and costs by £41.7m in the current reporting period, only affects the UK and there is no impact on profits. Excluding the impact of this change, underlying UK revenue increased by 10%.

Revenue in the UK business can be analysed as 'net income' (income per customer * no. of customers) of £267m, with the remaining income of £92m representing £66m of repair network revenue (including One Contact revenue), furniture warranty revenues of £8m and other income of £18m including third party claims handling revenue.

The underlying UK operating margin(1),which excludes £41.7m of revenue and operating costs relating to the jobs undertaken by our UK sub-contract workforce (2010: nil) has reduced from 33.2% to 32.9%. The reported UK operating margin reduced from 33.2% to 29.1%.

The UK business continues to deliver good growth with adjusted operating profit(2) increasing by 9% to £104.3m (2010: £95.7m).

United States of America

In the US, the strong growth in the number of customers and policies combined with the high retention rate has resulted in revenue increasing by 105% (local currency 104%) to £52.6m. We continue to invest in the development of our US business. In November 2010 we opened our second US call centre, in Chattanooga, Tennessee, and currently have 73 agents servicing both sales and emergency repair calls. We have also strengthened our business development and corporate development teams as we continue to target new affinity partners and the acquisition of existing home emergency programmes. Our marketing activity in the US continues to expand as we rollout programmes with new partners as well as introducing cross-sell campaigns to existing customers.

The strong revenue growth driven by increasing renewal income and the integration of NGES customers has resulted in the US operating margin doubling from 5.8% to 11.6% and an adjusted operating profit(2) of £6.1m (2010: £1.5m).

Doméo

Our share in the French joint venture Doméo, has generated revenue of £32.3m, an increase of 8% (local currency 13%). The growth in revenue has been driven by an 11% increase in customer numbers partially offset by the introduction of discounted acquisition pricing.

Doméo's operating margin has increased from 19.0% to 25.4% principally driven by the growth in renewal income. Our share in the joint venture contributed an adjusted operating profit(2) of £8.2m (2010: £5.7m). 

Spain

In Spain, revenue was £48.8m, £1.8m higher than last year (4% increase, 8% in local currency). Membership revenue more than doubled to £5.6m, although this was largely offset by a slight reduction in claims handling revenue. Claims handling revenue fell as a result of the average value of claims decreasing through improved network management in the first half of the year. The margin benefits from this initiative have been gaining momentum during the second half of the year. 

Spain's operating margin has increased from 0.8% to 3.5% driven by the growing membership renewal income and the improving operating margin in the claims handling business.

The growth in the membership renewal revenue has resulted in Spain reporting an adjusted operating profit(2) of £1.7m, up £1.3m compared to the same period last year.

New Markets

Our New Markets reported revenue of £9.9m (2010: £9.7m) and an adjusted operating loss(2) of £1.1m (2010: adjusted operating profit(2) £1.1m). This result reflects the investment in people, infrastructure and test marketing activity in our businesses in Belgium, SFG in France and Italy. During 2011 we opened our Italian office in Milan and started our test marketing programme with Enel Energia. We have also made good progress in developing our European manufacturer warranty business through SFG, with test marketing activity with Indesit.

Cash flow and financing

Our business model continues to be highly cash generative with cash generated by operations in 2011 amounting to £119.0m, representing a cash conversion ratio of 111% (2010: 93%). Free cash flow during the period was £86.1m (2010: £26.3m). 

In the year we had a working capital outflow of £5.0m reflecting the growth in policy numbers and an increase in the number of customers who have converted from an annual policy payment to instalments.

The working capital outflow is lower than in previous years reflecting one-off benefits from a number of working capital management initiatives implemented during the year.

During the year, we incurred net capital expenditure of £11.5m (2010: £25.5m) primarily in respect of information systems to support our growing membership businesses. Capital expenditure in the prior year included one-off payments to purchase the HomeServe USA trademark as well as additional access rights to an affinity partner's customer database.

Net debt at 31 March 2011 was £11.8m (2010: £52.9m), a reduction of £41.1m over the 12 month period. In addition to reducing the Group's net debt, free cash flow was used to finance acquisition expenditure of £16.2m (2010: £25.8m) and equity dividend payments of £31.3m (2010: £23.2m).

Group statutory results

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

Statutory profit before tax, after the amortisation of acquisition intangibles, tax on joint ventures and exceptional items was £104.8m (2010: £102.2m). Statutory profit before tax includes the amortisation of acquisition intangibles of £9.3m (2010: £6.5m) which principally relates to customer and other contracts held by the acquired entities at the date of acquisition. The increase compared to the comparative period principally reflects the impact of the National Grid Energy Services acquisition completed in August 2010.

For Doméo, our joint venture in France, the operating result is defined under IFRS as profit after tax and therefore a charge of £3.0m (2010: £2.0m) of joint venture tax is reported within statutory operating profit and statutory profit before tax.

Earnings per share

Adjusted earnings per share(3) for the period increased by 17% from 22.2p to 25.9p. The increase in earnings per share is slightly higher than the 16% increase in adjusted profit before tax(2) with the reduction in the corporation tax charge more than offsetting increases in the average number of shares in issue from 317m to 321m and the tax rate applied to the amortisation of acquisition intangibles due to the increasing proportion relating to our US business.

On a statutory basis, earnings per share increased by 5% to 24.0p. The statutory result also includes £10.2m of exceptional revenue in the prior year.

Finance costs

The Group's finance cost for the financial year was £2.1m (2010: £3.9m), £1.8m lower than in the same period last year. The reduction reflects both a lower level of debt throughout the period and a lower average interest rate.

Taxation

The tax charge in the financial year, prior to adjusting for tax on joint ventures, was £27.9m (2010: £29.5m), resulting in an effective rate of 26.6% (2010: 28.9%).

In order to calculate an effective tax rate, that reflects the tax burden of the Group, it is necessary to take account of the effect of joint venture results on the Group's profits and tax for the year. The earnings of our Doméo joint venture are shown net of tax within statutory profit before tax (in the above table). Adjusting the tax charge to include the tax relating to joint ventures (an adjusted tax charge of £30.9m) and similarly grossing up for the joint venture tax on the statutory profit before tax, the joint venture adjusted tax rate is 28.6% (2010: 30.3%). The reduction in the rate is primarily due to the availability of brought forward tax losses in international businesses which can be utilised as those businesses reach profitability.

We anticipate that the planned reduction in the headline rate of UK Corporation tax will offset the impact of higher effective tax rates on our increasing International profits resulting in a stable joint venture adjusted tax rate over the medium term.

Statutory and pro-forma reconciliations

The Group continues to believe that adjusted profit(2) measures, which exclude the amortisation of acquisition intangibles, tax on joint ventures and exceptional items, are important performance indicators for monitoring the business.

This report therefore uses a number of pro-forma measures to highlight the Group's results excluding the above amounts. The table below provides a reconciliation between the statutory and pro-forma items.

Dividend

The proposed final dividend of 7p per share together with the payment of the interim dividend of 3.3p per share brings the total dividend for the year to 10.3p (2010: 8.8p). The dividend increase of 17% is consistent with our objective of increasing our dividend in line with adjusted earnings per share(3). The final dividend, subject to shareholder approval, will be paid on 3 August 2011 to shareholders on the register on 1 July 2011. 

Foreign exchange impact

The financial performance of our international business and comparisons with the prior year are impacted by foreign exchange movements on translation. The total reported International adjusted operating profit(2) of £14.9m was reduced by £0.5m as a result of foreign currency movements.

The impact of foreign exchange rate movements on the individual business is summarised in the table.

Acquisitions

These financial results reflect a combination of organic growth and acquisitions. Acquisition spend during the period totalled £16.2m (2010: £25.5m), which reflects the purchase of National Grid Energy Services (£9.7m), the acquisition of South Jersey Energy Services Plus home emergency policies as they renew over the coming year

(£1.8m) and £4.7m of deferred consideration in relation to acquisitions completed in prior periods.

Acquisitions of policy books enable HomeServe to accelerate its growth and penetration rate in a particular region. The price of policy books will vary depending on a number of factors including product economics, the current retention rate and the existing penetration rate together with the length and nature of the associated marketing agreement.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Chief Executive's Review. This financial review also includes the headline financial results, cash flow and financing information as well as details on the principal risks and uncertainties.

The Directors confirm that, after reviewing the Group's budget and cash flows, they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Summary

I am pleased to report an excellent financial performance for HomeServe for the year driven by strong growth in the number of customers and policies.

The UK has delivered another good year with customer numbers up 4% and a robust underlying operating margin. Our established International businesses have more than doubled adjusted operating profit(2) to £16.0m with increased customer and policy numbers and higher operating margins. We are also continuing to invest in our New Markets businesses and are seeing good results from our test marketing.

The business continues to generate strong levels of cash conversion and this combined with our strong balance sheet gives us significant flexibility to continue to implement both organic and acquisitive growth strategies. 

We believe HomeServe is well placed to continue to deliver further profitable growth this financial year and into the future.

Martin Bennett

Chief Financial Officer

24 May 2011

2. Excluding amortisation of acquisition intangibles, joint venture taxation and exceptional revenue, see Financial Review and notes 3 and 4.

3. Excluding the amortisation of acquisition intangibles and exceptional revenue, see Financial Review and note 7.

4. See Cash flow statement in the Financial Review.

Principal Risks and Uncertainties

HomeServe has a risk management process which provides a structured and consistent framework for identifying, assessing and responding to risks. These risks are assessed in relation to the Group's business performance, financial condition, prospects, liquidity and results. Risk management operates at all levels throughout the Group, across geographies and business lines.

Risks to HomeServe's business are either specific to HomeServe's business model, such as affinity partner relationships and underwriting, or more general, such as the impact of competition and regulatory compliance.

HomeServe has identified the following principal risks and uncertainties. These should be read in conjunction with the Chief Executive and Financial Reviews. Additional risks and uncertainties of which we are not currently aware or which we currently believe are immaterial may also adversely affect our business, financial condition, prospects, liquidity or results of operations in the future.

Responsibility statement

The responsibility statement below has been prepared in connection with the Company's full annual report for the year ending 31 March 2011. Certain parts thereof are not included within this announcement. 

We confirm to the best of our knowledge:

·; the preliminary financial information is prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·; the management report, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the board of directors on 24 May 2011 and is signed on its behalf by:

Richard Harpin

Chief Executive

Martin Bennett

Chief Financial Officer

Group Income Statement

Year ended 31 March 2011

1 In the prior year, exceptional revenue of £10,195,000 related to income arising from the successful recovery of previous years' Insurance Premium Tax.

Group Balance Sheet

31 March 2011

Group Statement of Comprehensive Income

Year ended 31 March 2011

Group Statement of Changes in Equity

Year ended 31 March 2011

Group Statement of Changes in Equity

Year ended 31 March 2010

Group Cash Flow Statement

Year ended 31 March 2011

Notes to the condensed set of financial statements

1. General information

While the financial information included in these results has been computed in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs) adopted for use by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs, these preliminary results do not contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs in June 2011.

The financial information set out above does not constitute the Company's statutory financial statements for the years ended 31 March 2011 or 31 March 2010, but is derived from those financial statements. Statutory financial statements for 2010 prepared under IFRSs have been delivered to the Registrar of Companies and those for 2011 will be delivered following the Company's Annual General Meeting. The auditors, Deloitte LLP, have reported on those financial statements; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006 or equivalent preceding legislation. These financial statements were approved by the Board of Directors on 24 May 2011.

2. Accounting policies

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest audited financial statements, except as described below.

Adoption of new or revised standards and accounting policies

The Group has adopted IFRS3 'Business Combinations' (revised 2008) and IAS27 'Consolidated and Separate Financial Statements' (revised 2008). The most significant changes to the Group's previous accounting policies for business combinations are that acquisition related costs, which previously would have been included in the cost of a business combination, are included in other operating costs in the period in which they are incurred.

The revised standards have been applied to the acquisitions in the current year, as described in note 11.

Adjustments to contingent consideration for acquisitions made prior to 31 March 2010 which result in an adjustment to goodwill continue to be accounted for under IFRS3(2004) and IAS27(2005).

Restatement

During the year, the contingent consideration payable on the 2009 acquisition of SPT (Belgium) was reduced by £1,755,000. Goodwill on the acquisition has been reduced accordingly, with the goodwill and contingent consideration being restated in the comparative period.

3. Segmental analysis

IFRS8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker, who is considered to be the Chief Executive, to allocate resources to the segments and to assess their performance. The internal reporting of the Group has changed during the year such that all established businesses are reviewed individually, and all other new operations are reviewed collectively as 'New Markets'. Prior year presentation has been restated to reflect this new segmental analysis.

Inter-segment revenue is charged at prevailing market prices. Segment profit/loss represents the result of each segment including allocating costs associated with head office and shared functions, but before allocating investment income, finance costs and tax. This is the measure reported to the Group's Chief Executive for the purposes of resource allocation and assessment of segment performance.

The accounting policies of the operating segments are the same as those described in Significant Accounting Policies except in relation to our joint venture, Doméo, in France where the following adjustments are made for segmental reporting purposes: (a) revenue is included in Total Revenue and (b) shareholder fees from Doméo are added back, and group cost allocations are deducted in arriving at segmental operating profit.

4. Exceptional revenue

In the prior year, exceptional revenue of £10,195,000 related to income arising from the successful recovery of previous years' Insurance Premium Tax. This was treated as revenue to reflect where this income would originally have been recorded.

5. Tax

In order to calculate an accurate effective tax rate it is necessary to take account of the effect of joint venture profits and tax. The earnings of Doméo, a joint venture, are shown net of tax within pre tax profit. With the increasing profitability (and tax impact of Doméo), it is appropriate to highlight the joint venture adjusted tax rate. Adjusting the tax rate to show the tax relating to joint ventures on a gross basis, the joint venture adjusted tax rate is 28.6% (2010: 30.3%). The reduction in the rate is primarily due to the availability of brought forward tax losses in international businesses which can be utilised as those businesses reach profitability.

6. Dividends per share

On 30 July 2010, shareholders of HomeServe plc approved a 5 for 1 split of the Company's shares which was effective on 2 August 2010. Comparative information in respect of dividends has been restated to take account of the share split.

An interim dividend of 3.3p per share amounting to £10,621,000 (2010: 2.3p per share amounting to £7,313,000) was paid on 4 January 2011.

In the prior year a second interim dividend of 4.8p per share amounting to £15,278,000 was paid on 1 April 2010 to shareholders on the register at the close of business on 5 March 2010. A second interim dividend was not paid in the current year.

The proposed final dividend for the year ended 31 March 2011 is 7.0p per share amounting to £22,520,000 (2010: 1.7p per share amounting to £5,446,000) will be paid on 3 August 2011 to the shareholders on the register at the close of business on 1 July 2011.

7. Earnings per share

Basic and diluted earnings per ordinary share have been calculated in accordance with IAS 33 Earnings Per Share. Basic earnings per share is calculated by dividing the profit or loss in the financial year by the weighted average number of ordinary shares in issue during the period. Adjusted earnings per share is calculated excluding amortisation of acquisition intangibles and exceptional revenue (note 4). This is considered to be a better indicator of the performance of the Group. As profit for the year and adjusted profit for the year are stated after tax, it is not considered necessary to include in the reconciliation below the impact of the adjustment for the tax charge on joint ventures of £2,983,000 (2010: £2,049,000). Diluted earnings per share includes the impact of dilutive share options in issue throughout the period.

On 30 July 2010, shareholders of HomeServe plc approved a 5 for 1 split of the Company's shares which was effective on 2 August 2010. Comparative information in respect of earnings per share has been restated to take account of the share split.

8. Discontinued operations

In the prior year, the Group exited from its Emergency Services Division through the disposal of a number of businesses and the closure of the Property Repairs business, resulting in a 2010 reported loss of £42,025,000. In the current year there was no profit or loss.

During the year, the discontinued operations had a net cash inflow of £1,824,000 (2010: outflow of £17,705,000) in respect of operating cash flows, paid £nil (2010: £962,000) in respect of investing activities and paid £nil (2010: £nil) in respect of financing activities.

9. Analysis of net debt