Half-year Report

HomeServe plc

Interim results for the six months ended 30 September 2019

Strong financial performance in Membership enables further investment in growth initiatives.

·; Revenue up 13% with strong organic growth and benefits from HVAC (Heating, Ventilation and Air Conditioning) M&A

·; Adjusted operating profit up 2% to £37.7m reflecting good operational performance in the seasonally quieter first half across Membership and a modest FX benefit, together with planned investment in Home Experts

·; Continued profitable growth in North America with customers up 13% to 4.2m and adjusted operating profit up 24% to $23.4m

·; Other Membership businesses performing well: efficiency driven growth in UK (adjusted operating profit up 38% to £14.0m); strongest customer growth in France for four years (up 5%); promising business development and continuing co-operation with Endesa in Spain

·; Checkatrade revenue up 34%: trades up 21% to 38k; web visitors up 28% to 11.5m

·; Agreement to acquire 79% of eLocal for c.$140m on a "debt free, cash free" basis provides a profitable entry to Home Experts in the US: $5m uplift to adjusted operating profit expected in FY20; $16m in FY21.

·; Statutory operating profit up 17% to £28.8m reflecting exceptional gains of c.£7m on sale of Italian associate and acquisition of remaining 30% of Habitissimo, partially offset by increases in amortisation charges as a result of prior period M&A activity

·; Reductions in adjusted PBT and adjusted EPS due principally to expected increase in interest charges from fixed rate borrowings agreed in the prior period, together with higher net debt: net debt increase reflects inclusion of lease liabilities in accordance with IFRS 16 and investments in growth opportunities

·; Basic EPS up 9% to 5.0p with strong operating performance and exceptional items offsetting Home Experts investment and increased amortisation and interest charges

·; Strong financial position: within target leverage range at 1.9x Net Debt: Adjusted EBITDA

·; Interim dividend up 12% to 5.8p, reflecting continued confidence in the Group's growth prospects. 

Richard Harpin, Founder and Group Chief Executive, HomeServe plc, commented: "I am very pleased with our financial performance and strategic progress in the first half of this year. All of our Membership businesses performed well, with North America continuing to deliver strong growth, and interesting opportunities in all our European businesses to develop new partnerships, harness new technology and continue to improve customer service and efficiency. Our buy-and-build approach to HVAC added five profitable new acquisitions and will become a significant business line for us for the first time this year. In Home Experts, we have another business line with global appeal. Checkatrade and Habitissimo are both market leaders and in eLocal, we have agreed to acquire a majority stake in a high growth business which gives us a profitable entry into Home Experts in North America."

Outlook

The Membership and HVAC businesses are performing at the top end of HomeServe's expectations, giving scope to increase net P&L investment in New Markets and Home Experts in FY20 from £12-15m to around £19m. This additional investment will fund the new commercial plan for Habitissimo being developed by the incoming CEO, further testing of the Home Experts model in France, and continued international business development. Given the strong performance of Membership and HVAC, the only change to HomeServe's overall outlook for FY20 is the addition of $5m of adjusted operating profit from eLocal.

¹These are the first results which HomeServe has presented under IFRS 16. HomeServe has adopted IFRS 16 using the modified retrospective 'Asset = Liability' approach with a date of initial application of 1 April 2019. Comparative information provided in this announcement has not been restated.

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

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

Results presentation

A presentation for analysts and investors will take place at 9am this morning at UBS, 5 Broadgate, London EC2M 2QS. There will be an audio webcast with a facility to ask questions, available via www.homeserveplc.com.

This is accompanied by a listen-only conference call with details as follows;

Enquiries

Forward Looking Statements

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

About HomeServe

HomeServe is an international home repairs and improvements business which provides homeowners with access to tradespeople and technology to make home repairs and improvements easy. HomeServe is listed on the London Stock Exchange, with a market capitalisation of c.£4.0 billion.

Strategic update

HomeServe continues to make strong progress on all its strategic initiatives and specifically the milestone targets set at the Investor Day in June of $230m adjusted operating profit from Membership and HVAC in North America and £45-90m adjusted operating profit from Checkatrade.

In Membership, the largest opportunity remains North America. The 13% growth in customers and 24% increase in adjusted operating profit illustrates that the North American business is well on track to deliver its medium to long-term profit targets.

The other Membership businesses also performed well. The UK delivered a notable increase in profitability as it benefitted from changes made in the prior year to make it a leaner and more efficient business. The UK is also leading the development of the HomeServe Now initiative aimed at using technology to transform the customer experience and further improve the efficiency of the network.

In France, there was a 5% increase in customer numbers to 1.1m, reflecting the strength of both HomeServe's core water utility partnerships with Veolia, Suez and Saur and also new partnerships with retail energy providers and online aggregators such as Mint Energy, Hellowatt, JeChange and Papernest. This is the strongest customer growth in France for four years.

In Spain, revenue increased, reflecting higher volumes in the Claims business and HVAC acquisitions, partially offset by the expected run off of the Endesa policy book. The relationship with Endesa remains productive, with a new agreement signed in July to secure billing arrangements on the renewal book for another five years. Improvements in the retention rate, the extension of billing arrangements with Endesa and the continued strength of the Claims business mean that Spain will maintain its current levels of profitability on a full year basis through FY21.

HomeServe's HVAC buy-and-build strategy creates an opportunity in all established territories to grow installation revenue from new customers and the existing Membership customer base and to sell policies and services to new customers following an installation. There are over 100,000 HVAC providers in North America alone and HomeServe is building a pipeline of quality acquisition targets. In the first half HomeServe completed two HVAC acquisitions in North America and a further three acquisitions in Spain for a combined total consideration of £11.1m.

Checkatrade has the management, resources and expertise in place to test, learn and develop a business model with global appeal. Checkatrade's most important short-term objective is to expand its reach by growing numbers of trades and consumer visits outside its stronghold in the South East of England. Total trades increased by 21% to 38k as the business continued to refine its trade acquisition model. The current offer including a free trial period is proving attractive and is driving record numbers of inbound sales.

At Habitissimo, the acquisition of the remaining 30% of the business and the appointment of Sarah Harmon as its CEO have already given the business fresh impetus and direction, with Habitissimo soon to launch Directory Extra, the model being developed by Checkatrade and tested by Home Experts France.

As announced separately today, the agreement to acquire 79% of eLocal for c.$140m on a "debt free, cash free" basis, reached on 18 November gives HomeServe a profitable foundation on which to build a Home Experts business in North America. eLocal has a network of 11,600 paying trades plus a directory of 3.3m home services businesses and is expected to generate c.$80m revenue and c.$14m of adjusted operating profit this calendar year. It is expected to add $5m adjusted operating profit in FY20, rising to around $16m in FY21 and delivering high single digit percentage profit growth after investment thereafter. The impact on Group PBTA post transaction and interest costs is expected to be c.£2m in FY20 and c.£6m in FY21. The founders are staying with the business to help build HomeServe's Home Experts business in North America. The transaction is anticipated to close in early December 2019, subject to US competition clearance (Hart-Scott-Rodino).

HomeServe's Smart Home initiative, LeakBot, has reached another key milestone with its first operational roll out agreed in the UK, in partnership with high net worth insurer Hiscox. The search for a strategic partner is under way, to support scaling the LeakBot business in the US.

Financing and leverage

From a financial perspective, the Group's balance sheet is strong and with its high free cash flow generation, HomeServe retains the capacity for further M&A such as HVAC businesses or policy books, should any become available. Net debt at 30 September increased to £451.4m (HY19: £291.9m) due principally to the inclusion of £57.4m of IFRS 16 lease liabilities and further M&A activity. Headroom against the Group's total debt facilities was over £300m and leverage of 1.9x was within the Group's target range of 1.0x to 2.0x net debt: adjusted EBITDA.

These are the first results published since the Group adopted IFRS 16 which, as noted above, had a £57.4m effect on net debt, a c.£6m impact on adjusted EBITDA and a 0.1x impact on leverage.

Dividend

The interim dividend of 5.8p per share (HY19: 5.2p), an increase of 12%, will be paid on 7 January 2020 to shareholders on the register on 6 December 2019.

SEGMENTAL OVERVIEW

Financial performance for the six months ended 30 September

Inter-segment revenue principally includes royalty charges between the UK and international businesses.

Membership KPIs

Home Experts KPIs

UK

Financial performance

UK financial performance was strong with adjusted operating profit up 38% to £14.0m as the business benefitted from organisational changes made in the prior year and a continued focus on service efficiency.

Net policy income increased to £88.0m (HY19: £86.5m) driven by an 18% uplift in income per customer to £129. This continued the trend of recent years whereby customers who value the high levels of service provided by HomeServe continued to select and renew onto fuller product coverage.

Repair network revenue decreased by 16% reflecting a 19% reduction in job volumes as a result of a lower policy base year on year and benign weather throughout the first half. There was no material impact on profitability as a result of the lower volume of jobs, with the employed network of engineers completing a higher proportion of claims in-house.

HVAC revenue reduced by 11%, as the business focused on higher margin work, completing fewer installs in total (HY20: 4.8k installs, HY19: 5.0k). With the Help-Link business now fully integrated within the UK Membership business, HomeServe is building a pipeline of further HVAC buy-and-build opportunities in the UK.

Other revenue of £5.6m (HY19: £5.5m) principally included transactions with other Group companies and income for uninsured, on demand jobs.

Adjusted operating costs decreased by 8% as a result of the lower number of claims and due to organisational changes made in the prior year. Headcount reductions made in the final quarter of FY19 and a continuing focus on improved efficiency have resulted in a £3.8m increase in adjusted operating profit and a 2ppts increase in the margin to 9%.

Operational performance

Total UK customers were 1.9m (HY19: 2.1m) with retention broadly in line at 78% (HY19: 79%). HomeServe's customer proposition remains as popular as ever with homeowners who want a reliable, easy way to deal with home repairs and emergencies. The UK business continues to focus on serving its core customer base, and is placing less emphasis on attracting and retaining marginal customers through deep discounts. Future growth in the UK customer book is most likely to be driven by policy book M&A.

Technology is already improving and will go on to transform both the customer experience and the efficiency of HomeServe's operations. HomeServe's new core customer management system went live with c.5k customers, and larger volumes will now move over from the legacy system. The new system offers an enhanced customer experience, with faster identification of customer needs, more intuitive screens and fewer clicks helping to shorten call times and improve agent interaction with customers. An enhanced ability to upgrade and downgrade cover will offer even more customer choice and enable more flexibility to tailor products to customers' changing needs.

HomeServe Now has the potential to transform how customers schedule a repair in their home. First demonstrated at HomeServe's investor day in June, HomeServe Now uses Natural Language Processing and App-based technologies to swiftly identify a customer's need and directly connect them with an available engineer in close proximity to their home without the need for intervention from a contact centre. HomeServe Now has been successfully trialled for electrics, plumbing and drainage and gas claims in certain regions in the UK and will now be trialled in North America.

In October 2019 the FCA released a report on pricing practices in General Insurance with a detailed market study into pricing in home and motor insurance. While HomeServe was not specifically included in the original study, there is a read-across to its own business activity and certain General Insurance themes discussed in the report are relevant at HomeServe, for example discounts offered to attract and retain customers as well as auto-renewal. HomeServe's base product price remains the same for all customer vintages once customers have completed the introductory pricing journey. HomeServe promotes clear communication with its customers and exceeds current regulatory disclosure requirements to ensure customers are fully aware of pricing changes and their auto-renewal timetable. HomeServe notes the study and awaits publication of the final report, scheduled for Q1 2020.

HomeServe's focus on developing products that customers value ensured customer satisfaction remained high in the period with scores of 4.4 on Trustpilot (HY19: 4.4) and 96% on Reevoo (HY19: 96%). The 0.5m jobs in the period (HY19: 0.6m) were completed by HomeServe's network of 904 directly employed engineers (HY19: 1,035) and 317 contractors (HY19: 249).

North America

Financial performance

Total revenue increased by 30% to $225.9m driven by strong increases in all income streams. Net policy income increased by 13% to $179.0m, driven by a 13% increase in customers and a 5% increase in income per customer. Average policies per customer increased to 1.7 (HY19: 1.6) and total policies exceeded 7m for the first time.

Repair network revenue (up 526% to $30.7m) and HVAC revenue (up 83% to $15.6m) both grew strongly due to the FY19 acquisitions of Cropp Metcalfe, Gregg Mechanical and Geisel and the current year acquisitions of Fred's Home Services and Fab Electric. These acquisitions increased the number of HVAC installations completed in the period by 78% to c.3.9k. Due to their location in existing areas of high policy density, engineers were also utilised to complete repairs for the Membership customer base.

Other revenue principally comprised on demand repair work and services undertaken for non Membership customers.

Adjusted operating profit rose 24% to $23.4m with a 1ppt reduction in margin to 10% due to the higher proportion of lower margin HVAC revenue in the first half.

Operational performance

HomeServe made very good progress towards the new milestone targets set out at its Investor Day in June 2019. Over the medium to long term HomeServe sees its North American business generating c.$230m of adjusted operating profit from a Membership customer base of 6m to 7m and with a contribution from its growing HVAC business in the range of $30m to $45m.

Total customers increased 13% on the prior year to 4.2m. The increase reflects the continued success of HomeServe's marketing campaigns with its utility partners, c.150k customers acquired with the second tranche of the policy book of Dominion Products and Services (DPS) in October 2018 and a small policy book (13k customers) acquired in the period.

HomeServe achieves strong take up rates on all its North American marketing campaigns but the best returns continue to be made on activity with new partners. Total affinity partner households increased to 62m, including c.3m from DPS. HomeServe now works with over 750 utility providers out of a target list of c.8,000. The pipeline of new partners remains very strong and HomeServe anticipates maintaining a run rate of c.5-6m new households added through its business development activities for the full year.

Retention remained high at 82% (HY19:83%) and is expected to remain around this level for the full year. The appeal of HomeServe's offer to its partners is not just the ongoing commission income stream but also the high standards of customer service which HomeServe provides to the shared customer base.

Income per customer grew 5% to $98 and HomeServe aims to grow this to $120 - $125 as it progresses towards its milestone targets. Year 2+ customers already generate $123 today and there is the potential to increase this further following the launch of HomeServe's Total Home Warranty proposition.

Whole Home Warranty is a large, fragmented market with very mixed levels of customer service from other providers. HomeServe believes there is an opportunity to differentiate based on its strong customer satisfaction and its 750 utility partnerships. Traditionally competitor products have been sold via real estate channels but with recent growth online and via TV advertising there is also the opportunity to reach a younger homeowner who wants a cover-all, hassle free approach to home maintenance. HomeServe launched its own Total Home Warranty product during the period and is accompanying this with its own TV campaign. HomeServe's acquisition of American Home Guardian in June 2019 for total consideration of $4.2m brought 5k policies and existing expertise, particularly in the real estate channel. This has been supplemented after the half year by the acquisition of Nations Home Warranty, with 10k policies, which operates in the same territory.

Key to attracting and retaining younger homeowners is a more rounded digital experience that encompasses an enriched HomeServe App. The investment in Centriq in January 2019 enabled HomeServe to launch a new App in North America. The App is free to all consumers, not just HomeServe customers, and offers a facility to catalogue appliances around the home and provide users with product recall alerts, self-help guides to remedy problems and a facility to contact an appropriate technician when the need arises. App downloads are growing month on month following a soft launch and reached 24k at the half year. Demographic analysis shows that HomeServe App users are younger and more affluent than the current HomeServe customer base. This analysis will be applied to position in-App offers as the product is marketed more overtly in the second half through HomeServe's digital channels and utility partnerships.

During the period HomeServe acquired two HVAC providers, FAB Electric and Fred's Home Services, for total combined gross consideration of $5.7m. There are over 100,000 HVAC providers in North America and HomeServe is building a pipeline of potential acquisitions. Key targets are comparatively small, profitable businesses, most with their own local policy book and all with an engineer network. HVAC is highly complementary to the Membership business with installations a channel for new policy sales and the existing Membership base presenting an opportunity to generate installation volumes and repair work to fully utilise the employed networks. With an average lifespan of 15 years, around 280k of HomeServe's 4.2m customers replace their HVAC appliance every year.

France

Financial performance

Total revenue increased by 9% to €45.5m driven by higher customer numbers in Membership and increasing HVAC activity.

Net policy income grew 6% to €42.0m due to a 5% increase in customer numbers. HVAC revenue increased by 66% to €2.8m, due largely to acquisitions in the prior year including V.B. Gaz.

Operating costs increased 11% to €36.6m due to direct costs associated with HVAC and additional marketing costs for new customer acquisition activity.

The adjusted operating margin of 20% reflects the usual seasonality, with the full year margin expected to remain the highest in the Group at around 30%.

Operational performance

The first half of FY20 has seen the highest level of customer growth in France in four years and also saw an increase in the retention rate to 89% (HY19: 88%) as total customers increased by 5%.

Direct sales via Veolia's HomeFriend initiative continues to be the largest, most successful channel, but Suez and Saur, France's third largest utility and HomeServe's newest water partner in France, are also performing very well. Partnerships with online aggregators and retail energy partners are also showing encouraging early results, giving confidence in continued higher customer growth in France for the full year.

HomeServe France signed a partnership with JeChange at the end of FY19, launching activity early in FY20. JeChange is a leading online site for switching services, helping consumers to reduce their bills across insurance, telecoms, energy and other sectors. HomeServe has partnered with JeChange to offer electric and gas Membership products, a new product for protecting smart devices around the home and also on demand repairs. Around eight thousand customers joined via this channel in HY20 and HomeServe is hopeful of replicating this success with other switching sites and directly with challenger energy partners. Agreements have so far been signed with the switching site Papernest and with challenger companies Mint and Hellowatt.

France is leading on HomeServe's on demand to policy initiative which seeks to use HomeServe's network to provide a solution for non HomeServe customers in urgent need of a repair. A successful job then creates a channel to cross sell an annual Membership product to cover the customer in the event of any future repair. A product offer is live on the HomeServe website and also on co-branded websites with Suez, JeChange and Selectra. It is anticipated that Veolia and Saur will launch in the second half.

HomeServe acquired two HVAC providers in the prior year which are being integrated with the existing HVAC operations and expertise is being shared by Electrogaz, HomeServe France's first HVAC acquisition and by the core Membership team to improve marketing and sales success. The pipeline of HVAC opportunities is strong and HomeServe expects to add further similar sized providers as part of its HVAC buy-and-build strategy.

Spain

Financial performance

Net policy income was €28.0m compared to €30.0m in the prior year due to the expected fall in the total customer number as a result of the end of Endesa partnership in May 2018.

Repair network revenue increased by 6% to €46.3m as the Claims business completed 423k jobs, up 7% on the prior half year for its bancassurer partners.

HVAC revenue rose significantly to €3.6m due to the acquisition of Oscagas which occurred at the end of July 2018 and therefore contributed only two months of revenue in the prior period.

Adjusted operating profit was €8.6m with additional business development investment in the Claims business and lower margin HVAC revenue diluting the overall margin to 11% (HY19: 13%).

Operational performance

The Membership business continues to perform well with retention up to 81% (HY19: 80%) and income per customer up 18% to €60. Both KPIs have improved due to the increasing maturity of the policy book and lower levels of new customer acquisition following the end of the Endesa contract.

Total customers reduced to 1.0m reflecting the expected run off of the Endesa back book, offset slightly by the acquisition of a small book of c.30k policies from Sareteknika.

The relationship with Endesa remains productive and in July an agreement was signed to secure the ongoing billing arrangements for the back book for a further five years. HomeServe has agreed to pay Endesa a higher renewal commission throughout this period in order to secure the use of on-bill arrangements for existing customers, which will support the ongoing strong retention rate.

The profitability of the Claims business reduced slightly in the period as a result of investments made to further enhance the service offering provided to larger bancassurer partners. The extra investment in dedicated account teams secures certain key contracts and enhances the offering as the business continues to focus on winning new partners. After the period end the Claims business signed a new partnership with Bansabadell Seguros Generales, which will deliver further job volume to the network.

Spain made three HVAC acquisitions for a total cash outflow of €5.6m. Somgas, Linacal and Tecno Arasat were acquired in July and will be integrated over the course of the second half and will contribute to further revenue growth for the full year.

New Markets

Following the announcement of HomeServe's joint venture with Mitsubishi Corporation in Japan, an office has now been established and an initial team put in place with a combination of members from Mitsubishi, HomeServe and new recruits. The relationship with Mitsubishi is working very well, and is facilitating introductions to Japanese energy utilities.

HomeServe saw limited opportunities for Membership growth in Italy, so in line with its discipline of focusing resources on the Group's largest opportunities, the decision was taken to exit the Italian operations. HomeServe sold its 49% share in its Italian associate and 0.2m customers to its partner and existing 51% shareholder Edison Energia for cash consideration of £8.4m, giving rise to a £3.8m exceptional gain.

The £2.3m adjusted operating loss represents HomeServe's share of the start-up costs of the Japanese operations, losses from its Italian associate and ongoing efforts to prospect other potential markets.

Home Experts

Financial Performance

Home Experts revenue grew strongly by 31% to £23.8m with increases at both Checkatrade and Habitissimo as Checktrade grew its total trades and Habitissimo grew the number of leads and the average revenue per lead.

Adjusted operating costs grew by 46% to £31.8m principally as a result of the investments being made at Checkatrade to support future growth. Increased advertising and marketing spend will drive trade numbers and increase consumer awareness now that the right models for each have been successfully tested. Investments in people and technology will support product development and promote efficient and controlled growth.

Due to increasing revenue and the timing of marketing investments, the second half adjusted operating loss is expected to be lower than the £8.0m net loss incurred in the first half.

In acquiring its initial 70% stake in Habitissimo, HomeServe acquired a call option over the remaining 30% which was carried at a value of €12.9m in the Group's balance sheet. The acquisition of the remaining 30% for €8.6m gave rise to an exceptional gain of €3.9m (£3.6m), representing the difference between the cash paid, transaction costs incurred, and the value of the option liability at the time of exercise.

Checkatrade

HomeServe's milestone targets for Checkatrade include reaching 150k to 200k trades, average revenue per trade of between £1,200 and £1,300, an adjusted operating margin in the range of 25% to 35% and adjusted operating profit of £45-90m.

Key to achieving these targets is the development of attractive trade and consumer propositions. Trades want the flexibility to dial up or dial down their membership according to their work and growth aspirations and consumers want to be able to confidently find the vetted trade they need. The directory model is well suited for larger jobs and for consumers who wish to take time reading feedback and evaluating trades but there are certain jobs, for example emergency repairs, and certain consumers for whom the lead generation model is preferable.

Checkatrade's solution is the Directory Extra model. Directory Extra uses an open directory of checked and vetted trades, which Checkatrade's research shows that 70% of homeowners prefer compared to the lead generation model, which sells homeowner enquiries to trades and does not reveal the trade's details. The directory is enhanced with the added functionality of 'Shortlist' and 'Match' for the 30% of consumers who prefer lead generation and 'Now' for those who urgently need an available trade. These features and the ability to 'dial up or dial down' their visibility on the site will deliver the flexible membership options that will encourage trades to remain on the site even when they are busy and ensures that they do not need to go to another platform to find additional work.

Trades increased by 21% to 38k with a slower run rate in the quieter first half already accelerating subsequent to the half year. Testing of a range of trade recruitment offers has identified an offer with an initial free period that is now driving record numbers of inbound enquiries.

Striking the optimum balance between trade supply and consumer demand was a core part of HomeServe's "Mega City Trial" in the Granada TV region around the Manchester and Liverpool areas. Checkatrade has always been strong close to its roots on the South coast of England and the test also served to prove out the approach for Checkatrade's plans for geographic expansion. New trade sales in the test area rose 32% compared to the average monthly sales pre-launch and website visitors increased c.60% in the North West region¹.

Total web visits increased by 28% due to increased advertising on TV and radio and a higher volume of paid Google ads and pay per click activity. Latest brand tracking shows Checkatrade's high prompted brand awareness has grown to 77%². A new TV campaign launched in October 2019 showcasing Checkatrade's unrivalled vetting process and presenting the platform as THE place to find checked and vetted trades. The campaign should continue to drive up brand awareness and web visits whilst further educating homeowners on Checkatrade's competitive advantage.

Habitissimo

Total trades at Habitissimo remained broadly flat at 28k with a focus on driving more volume and higher value leads to trades to increase average revenue per trade (HY20: €35, HY19: €34). In June 2019 HomeServe acquired the remaining 30% of Habitissimo and appointed Sarah Harmon, previously CEO of LinkedIn Spain and Portugal, as its new CEO. Under Sarah's leadership, Habitissimo's priorities are to refine and improve the existing lead gen business through a focus on key accounts and affiliate programmes and to launch the Directory Extra model in Spain in the second half of the year.

Home Experts France

Home Experts France is making encouraging progress less than 6 months after going live, with the first trades signed up, local directory leaflets launched and a total of c.70k visits to the website in September.

Richard Harpin

Founder and Group Chief Executive

19 November 2019

¹Source: Google analytics June and July 2018 vs. June and July 2019

²Source: November 2019 survey of 1,227 respondents

FINANCIAL REVIEW

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

Group statutory results

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

Statutory profit before tax was £19.7m, £0.4m higher than the prior period (HY19: £19.3m) following a strong trading performance from Membership and exceptional gains relating to the Italy sale and purchase of the remaining 30% of Habitissimo. This was mostly offset by investment in Home Experts, higher finance costs and higher straight-line amortisation charges as a result of the investments made in FY19. Statutory profit before tax is reported after the amortisation of acquisition intangibles and exceptional items as detailed below.

Amortisation of acquisition intangibles

The amortisation of acquisition intangibles of £16.3m (HY19: £12.5m) increased due principally to the acquisition of the second tranche of the policy book of Dominion Products and Services (DPS) in North America in October 2018.

Exceptional items

An exceptional gain of £3.8m was recorded in relation to the sale of HomeServe's Italian associate, Assistenza Casa, principally representing the excess of the total £8.4m sale proceeds over the carrying value of the investment in the Group's balance sheet.

A further exceptional gain of £3.6m was recorded in relation to the purchase of the remaining 30% stake in Habitissimo, principally representing the lower consideration paid of £7.7m compared to the carrying value of the option liability in the Group's balance sheet.

IFRS 16

HomeServe has adopted IFRS 16 using the modified retrospective 'Asset = Liability' approach with a date of initial application of 1 April 2019. Comparative information provided in this announcement has not been restated. The effect of IFRS 16 on the income statement is to remove operating lease charges previously shown within 'operating costs', replacing them with depreciation and interest charges that now result from the capitalisation of "Right of Use Assets" and the recording of "Lease Liabilities" in the consolidated balance sheet (see Note 2 Accounting Policies).

There is no material impact on HY20 PBTA as a result of adopting IFRS 16. The effect on adjusted operating profit at a Group level is £0.1m with the segmental breakdown shown in the Glossary, at the end of this announcement.

Taxation

The tax charge in the period was £3.0m (HY19: £4.6m). The adjusted effective tax rate was 24% (HY19: 24%). UK corporation tax is calculated at 19% in FY20. Taxation for other jurisdictions is calculated at the rates prevailing in the respective countries, all of which are higher than the UK rate.

Cash flow and financing

Cash generated by operations in the period to 30 September 2019 was £61.4m (HY19: £60.5m).

During the period 1 April to 30 September 2019, net debt increased by £146.7m to £451.4m, including £57.4m from lease liabilities as a result of the adoption of IFRS 16.

Cash generation remained strong with free cash flow of £37.5m (HY19: £44.1m). The primary uses for capital in the first half continued to be investment in capital expenditure, policy book acquisitions and the HVAC buy-and-build strategy.

Intangible capex of £38.7m (HY19: £22.8m) included £6.9m (HY19: £0.1m) for the acquisition of policy books in the Membership business. The balance of £31.8m included technology spend to continue to improve efficiency and the customer experience in the Membership business and further technology spend in Home Experts as Checkatrade delivers its two year roadmap to transform its systems into a more digital and scalable platform. Membership also invested £7.7m (HY19: £8.2m) in partner payments, principally in relation to customer acquisition activity in France.

A £14.8m outflow was incurred relating to acquisitions of subsidiaries, including £10.0m in relation to Membership and HVAC businesses in North America and Spain and £4.7m deferred and contingent consideration relating to business combinations in prior periods. The £17.6m investment in the prior period also related to HVAC investments and deferred and contingent consideration.

A £7.7m outflow was also incurred as the Group acquired the remaining 30% shareholding in Habitissimo and proceeds of £8.4m were received relating to the sale of HomeServe's Italian associate to Edison Energia.

The Group remains highly cash generative and full year cash conversion is expected to be in excess of 100% (FY19: 100%).

Earnings per share

Adjusted earnings per share of 6.5p was 13% down on the prior period (HY19: 7.5p) due to an expected increase in net interest charges to £9.1m (HY19: £5.3m).

On a statutory basis, earnings per share was up 9% from 4.6p to 5.0p with the exceptional gains recorded in relation to Habitissimo and Italy more than offsetting higher acquisition amortisation charges and a higher weighted average number of shares.

Net debt and finance costs

Net debt at 30 September 2019 was £451.4m (FY19: £304.7m; HY19: £291.9m) including the £57.4m effect of IFRS 16. The Group remained well within its total financial facilities of c.£728m at the half year.

The Group targets leverage in the range of 1.0 to 2.0x adjusted EBITDA, measured at 31 March each year. At the seasonally high half year, the Group was towards the top of this range with net debt to last twelve months adjusted EBITDA of 1.9x (HY19: 1.4x).

The additional depreciation and interest charges incurred due to the adoption of IFRS 16 have resulted in an increase to last six months adjusted EBITDA of c.£7m. Total lease liabilities outstanding at 30 September have increased net debt by £57.4m. The overall effect of the adoption of IFRS 16 on leverage is an increase of 0.1x.

The Group's net interest paid was £8.0m, £2.9m higher than HY19, principally due to the higher net debt figure year on year and the fixed interest on the c.£175m US Private Placement agreed in October 2018.

Foreign exchange impact

The impact of changes in the Euro and USD exchange rates between HY20 and HY19 has resulted in a £10.4m increase in reported revenue and a £1.3m increase in adjusted operating profit of the international businesses as summarised in the table below.

The second half translation impact of sterling at prevailing rates is currently expected to be immaterial. A ten cent movement from current rates in the USD and the Euro would have impacts of approximately £5.0m and £3.5m respectively on full year adjusted operating profit.

Brexit

Brexit is not one of HomeServe's enterprise risks (discussed below) but it continues to be monitored at a local and a Group level and assessed for impacts on the core business model and other lower impact implications e.g. on future intra-group funding arrangements or the mobility of key people.

Brexit is potentially one of the most significant economic events for the UK and at the date of this statement, the full range, scale and timing of potential outcomes and impacts are uncertain. However, HomeServe continues to believe the impact of the UK's decision to leave the EU and the current delay in implementing this decision until 31 January 2020 on the underlying performance of the Group will be limited.

The HomeServe business model is resilient and in previous periods of consumer uncertainty and economic downturn, for example during the financial crisis in c.2007 to 2009, no negative impact on business performance was observed. In addition, all of HomeServe's businesses trade exclusively within their own borders and HomeServe is not exposed to any cross border transactional currency risk. The Group has a strong balance sheet and retains a range of financing facilities with medium to long term maturities, which provide access to additional resources across a range of currencies. The Group remains subject to translation risk on the presentation of results in Sterling however this is within the ordinary course of business.

Principal risks and uncertainties

The principal risks and uncertainties, together with mitigating activities, are detailed on pages 20-24 of the Group's 2019 Annual Report & Accounts. In that Report, the Directors confirmed that they have carried out a robust assessment of the principal risks facing the Group. The risks which continue to have the potential to impact the Group's performance are summarised as follows:

Strategic Risks

Market disruption

There is a risk that competitors erode our market share, including utilities running Membership programmes in-house or new entrants investing heavily to enter the home services space.

Commercial partnerships

Underpinning HomeServe's success are close commercial relationships, such as utility companies and municipal utility providers. The loss of one or more of these relationships could impact on HomeServe's future growth plans.

International development

There is a risk that by attempting to enter new markets, HomeServe could divert investment and management time incurring not only losses in the new country but reduced performance in the existing core markets.

M&A strategy

Whilst our M&A strategy is principally focused on low-risk policy book M&A and smaller, well-run HVAC businesses, there is a risk that HomeServe could overpay for transactions or underestimate the time and resource required to integrate new businesses.

HVAC Integration

With the higher volume of HVAC acquisitions, there is a risk that failure to integrate acquisitions quickly and effectively could result in the business falling short on the delivery of synergies which could potentially lead to impairment.

Operational Risks

Cyber Security

In line with other businesses, HomeServe is subject to increased prevalence and sophistication of cyber-attacks, which could result in unauthorised access to customer and other data or cause business disruption to services.

Underwriting Capacity and Concentration

The Membership business line markets and administers policies that are underwritten by independent third party underwriters. If the business were unable to source sufficient underwriting capacity Homeserve would need to underwrite the risk directly, thereby exposing the business to underwriting risk, which is contrary to our preferred model.

Regulation & Customer Focus

HomeServe is subject to regulatory requirements relating to areas such as product design, marketing materials, sales processes and data protection. HomeServe is in regular dialogue with the FCA as part of the normal course of business. Failure to comply with regulatory requirements could result in a suspension of certain activities.

People

HomeServe's ability to meet growth expectations and compete effectively is, in part, dependent on the skills, experience and performance of its personnel. The inability to attract, motivate or retain key talent could impact business performance.

Investment in Technology

The Group relies on several key systems to manage its interactions with customers. Appropriate maintenance and investment is required to ensure systems continue to meet the changing needs of the business and its customers. There is a risk that failure to invest appropriately could impact on our ability to provide higher quality service.

Digital & Innovation

Consumers increasingly wish to engage with HomeServe by digital means. There is a risk that if Homeserve is not flexible enough to respond to changing needs, customers may explore competitor products.

Financial Risk

Key financial risks include the availability of short-term and long-term funding to meet business needs and take advantage of M&A opportunities, mitigate the risk of policyholders not paying monies owed and fluctuations in interest rates and exchange rates.

Information on financial risk management is set out on page 163 of the Annual Report, a copy of which is available on the Group's website www.HomeServeplc.com.

Condensed consolidated income statement

For the six months ended 30 September 2019

1 The Group's results are being reported under IFRS 16 for the first time in 2019 following the mandatory adoption of the standard from 1 April 2019. In accordance with the transitional provisions of IFRS 16, comparatives have not been restated. See Note 2.

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2019

Condensed consolidated balance sheet

As at 30 September 2019

2 A review of balance sheet classifications in the second half of FY19 has resulted in the prior half year trade and other receivables and payables being restated, refer to note 17 for more details.

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2019 (Reviewed)

For the six months ended 30 September 2018 (Reviewed)

For the year ended 31 March 2019 (Audited)

3 Other reserves comprise the Merger, Own Shares and Capital Redemption reserves.  

Condensed consolidated cash flow statement

For the six months ended 30 September 2019

Notes to the condensed set of financial statements

For the six months ended 30 September 2019

1. General information

HomeServe plc is a company incorporated in the United Kingdom and its shares are listed on the London Stock Exchange. The address of the registered office is Cable Drive, Walsall, WS2 7BN. The information for the year ended 31 March 2019 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor reported on those accounts, the report was not qualified, did not draw attention to any matters by way of emphasis and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006. This condensed set of financial statements for the six months ended 30 September 2019 is unaudited, but has been reviewed by the auditor and their report to the Company is at the end of this statement. This condensed set of financial statements was approved by the Board of Directors on 19 November 2019.

2. Accounting policies

Basis of preparation

This condensed set of financial statements has been prepared using accounting policies consistent with International Financial Reporting Standards (IFRSs) and in accordance with International Accounting Standard (IAS) 34 "Interim Financial Reporting" as adopted by the European Union. The Group's annual financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the European Union and therefore comply with Article 4 of the EU IAS regulation.

The Group's business activities, together with the factors likely to affect its future development, including the potential impact of Brexit, performance and position are set out in our 2019 Annual Report & Accounts.

The Directors have reviewed the Group's budget, forecast and cash flows for 2020 and beyond, and concluded that they are in line with expectations with regards to the Group's strategy and future growth plans. In addition, the Directors have reviewed the Group's position in respect of material uncertainties and have concluded that there are no items that would affect going concern or that should be separately disclosed.

The Directors have concluded that 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 condensed financial statements.

Changes in accounting policy

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest audited financial statements, with the exception of standards, amendments and interpretations effective as of 1 April 2019. The nature and effect of these changes are disclosed below:

IFRS 16 Leases

IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective for annual periods beginning on or after 1 January 2019. The Group has adopted IFRS 16 using the modified retrospective approach with a date of initial application of 1 April 2019. Comparative information has not been restated.

Impact on lessee accounting

IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17. With the exception of low value assets (below £4k) and short term leases (with a term of 12 months or less), the Group now recognises right-of-use assets and lease liabilities in the consolidated balance sheet, initially measured at the present value of the future lease payments. The depreciation of the right-of-use asset and interest charges on the outstanding lease liability replace the IAS 17 straight-line rental expense previously booked to operating costs. Any lease incentives are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas under IAS 17 they resulted in the recognition of a lease incentive liability, amortised as a reduction of rental expenses on a straight line basis.

Under IFRS 16 the Group presents repayments of lease principal within financing activities and interest payments on lease liabilities within operating activities in the consolidated cash flow statement for leases that are on balance sheet. Under IAS 17 all operating lease payments were presented as operating cash outflows.

Right-of-use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This replaces the previous requirement to recognise a provision for onerous lease contracts.

The Group is not party to any material leases where it acts as a lessor, but does contract as lessee for a significant number of property and vehicle leases, which aggregate to a material commitment.

Approach to transition and practical expedients adopted

In respect of those leases the Group previously treated as operating leases, the Group has elected to measure right-of-use assets using the approach set out in IFRS 16.C8(b)(ii). Under this approach right-of-use assets are calculated at an amount equal to the lease liability, adjusted by any prepaid or accrued lease payments relating to the lease that were recognised in the consolidated balance sheet at 31 March 2019.

At 1 April 2019 right-of-use assets of £52.8m and lease liabilities of £53.8m, inclusive of grandfathered finance lease assets and liabilities of £1.7m and £1.2m respectively, were recognised on the balance sheet. The Group's weighted average incremental borrowing rate applied to lease liabilities as at 1 April 2019 was 2.5%.

The table below presents a reconciliation from IAS 17 operating lease commitments disclosed at 31 March 2019 to IFRS 16 lease liabilities recognised at 1 April 2019.

The complete impact on the consolidated income statement during the six month period to 30 September 2019 is presented under 'Financial impact of adoption of IFRS 16' below. During that period the Group recognised a £6.8m depreciation charge in relation to right-of-use assets and a £0.7m finance expense in relation to interest on lease liabilities.

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into or modified before 1 April 2019.

As part of the Group's adoption of IFRS 16 and application of the modified retrospective approach to transition, the Group also elected to use the following practical expedients:

- The Group has not made any adjustments on transition for leases for which the underlying asset is of low value (as described in paragraphs B3 - B8 of IFRS 16)

- The Group has adjusted the carrying amount of right-of-use assets at 1 April 2019 by the carrying amount of onerous lease provisions at 31 March 2019 instead of performing impairment reviews under IAS 36

Details of the Group's accounting policies under IFRS 16 are set out below, followed by a presentation of the financial impact of adopting IFRS 16. Judgements applied in the adoption of IFRS 16 included determining the lease term for those leases with termination or extension options and determining an incremental borrowing rate where the rate implicit in a lease could not be readily determined.

Accounting policy for leases (effective 1 April 2019)

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (where the value of the asset is below £4k). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease.

Lease liabilities

Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses a lease specific incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise:

·; fixed lease payments (including in substance fixed payments), less any lease incentives;

·; fixed service costs associated with the Group's property and vehicle lease portfolios (as the Group has elected to apply the expedient available under paragraph 15 of IFRS 16 not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement);

·; variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

·; the amount expected to be payable by the lessee under residual value guarantees;

·; the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

·; payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

Lease liabilities are subsequently measured at amortised cost using the effective interest method by increasing the carrying amount to reflect interest on the lease liability and by reducing the carrying amount to reflect the lease payments made. The Group re-measures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: