Half Yearly Report

HomeServe plc

Interim results for the six months ended 30 September 2014

· The UK business ended the period with 2.1m customers (HY14: 2.2m)

- Gross new customers increased to 110k (HY14: 80k)

- Retention rate stable at 82% (HY14: 81%; FY14: 82%)

- Delivering high levels of customer satisfaction

· International customer numbers up 31% to 3.8m

- USA

- Customer numbers up 20% to 1.7m

- Retention rate up to 82% (HY14: 80%; FY14: 81%)

- Signed five new utility partners and extension of an existing agreement, adding 1.6m households

- Signed an agreement with AARP, one of the largest membership organisations in the USA with 22m households

- Spain

- Customer numbers up 77% to 1.0m

- Retention rate up to 79% (FY14: 75%)

- France - solid financial performance

- New Markets - gaining momentum in Italy 

· Strong balance sheet

- Net debt was £75.8m (FY14: £42.3m); net debt to Adjusted EBITDA remains low at 0.7x (FY14:0.4x)

- Intend to adjust capital structure to achieve leverage of 1.0-1.5x Adjusted EBITDA

Richard Harpin, Chief Executive HomeServe plc, commented:

"I am pleased with the performance in the first half of the year. Our UK business ended the period with 2.1m customers and is on track to acquire around 0.3m gross new customers in the year. The International businesses continue to deliver strong growth in customer numbers. In the USA, we have signed six new partnerships, including one with AARP, an organisation with 22m member households. Across the Group we continue to focus on delivering consistently high levels of customer service. We remain confident in meeting our expectations for the full year. "

Enquiries

A presentation for analysts and investors will take place at 9am this morning at UBS, 1 Finsbury Avenue, London, EC2M 2PP.

There will be a listen-only conference call via +44 203 139 4830, pin code 15788603#, and also a live webcast available via www.homeserveplc.com.

All references to adjusted operating profit or loss, adjusted profit before tax, adjusted EBITDA and adjusted earnings per share throughout the announcement are to adjusted figures, as reconciled to their statutory equivalents in the Financial Review.

Interim Management Report

Summary

Our business is built on developing long-term relationships with our affinity partners and offering our customers home assistance in respect of water, gas and electrical related emergencies and repairs. We have 5.9m customers, up 16%, compared to a year ago. We have businesses located in the UK, USA, France, Spain, Italy and Germany.

Our UK business ended the period with 2.1m customers and we expect to end the year at a level of just over 2.0m customers, which we consider to be sustainable going forward. The policy retention rate in the UK was 82% in the period, in line with that experienced during FY14. The UK business acquired 110k gross new customers in the period, up from 80k in the same period last year and we continue to expect to acquire around 0.3m gross new customers during the full year. The UK business is making good progress with its connected home strategy offering smart thermostat devices to HomeServe customers.

Our Established International businesses continue to deliver strong customer growth, closing the period with 3.6m customers, up 25% compared to the prior half year. Our Established International businesses delivered £8.4m of adjusted operating profit, up £1.7m compared to the prior period. The appreciation of sterling in the period has had some impact on the Group. At constant exchange rates, profit would have been £0.5m higher and revenue £8.6m higher than that reported.

We continue to see good momentum in business development in the USA. During the year we signed five utility partnerships and an extension to an existing agreement, increasing our affinity partner households to 28m households in the USA. In addition, we recently announced the signing of a major new US agreement with AARP, formerly the "American Association of Retired Persons", to offer our home assistance products to their 22m member households. 

The table below shows our performance metrics as at 30 September 2014.

* Not disclosed

The Group has five operating segments UK, USA, France, Spain and New Markets. The New Markets division combines the results of our businesses in Italy and Germany, together with investment in innovation. In the prior period, it also included SFG in France. The following section reports on the performance of each of our business segments.

Individual Business Performance

United Kingdom

· Customer numbers ended the period at 2.1m (HY14: 2.2m)

· Effective multi-channel marketing acquired 110k gross new customers (HY14: 80k)

· Stable retention at 82%

*Income per customer is defined as the last twelve months policy revenue, net of sales taxes and underwriting, divided by the total number of customers

The UK reported revenue of £120.2m which was, as expected, £7.0m lower than the prior year (HY14: £127.2m) principally reflecting the reduction in customer numbers. Adjusted operating profit was £21.1m (HY14: £22.0m) with the reduction in revenue being partially offset by lower costs.

Our multi-channel marketing approach has performed in line with our expectations. Our digital and partner channels are an increasingly important part of this activity, with gross new customers acquired from these channels more than double that of a year ago. In developing our connected homes strategy we have recently commenced distributing the Tado branded smart thermostat device, both as a standalone product and also as part of a home assistance policy offering. In addition, we have partnered with Nest to install their device in customer homes.

Gross new customers in the first half of the year were 110k, up from 80k in HY14. Gross new policy sales in the first half of the financial year increased to 240k (HY14: 170k), with continued growth in sales of our HomeServe Cover 8 product which offers customers cover for multiple home emergencies. At the end of September 2014 total policy numbers were 4.9m (HY14: 5.2m).

The retention rate of 82% was one percentage point higher than the prior period and in line with that achieved in FY14. The increase in retention, relative to the prior period, reflects the improvements in customer service and product enhancements introduced over the past two years.

Customer numbers at 30 September 2014 were 2.1m (FY14: 2.1m, HY14: 2.2m). Over the past six months we have increased customer acquisition activity and whilst our peak marketing and renewal months are in the second half of the year, our performance in the first six months gives us confidence that we will achieve our target of 0.3m gross new customers in FY15, compared to 0.2m in FY14. When combined with the current retention rate we believe that our customer numbers will stabilise at a level of just over 2.0m.

During the period, income per customer was £99, a reduction of £7 since HY14 and £2 since the year end, reflecting the mix of policies sold, the higher cost of improving the level of cover in our plumbing and drainage product which now includes maintenance (e.g. dripping taps and repair of ball valves) and the higher proportion of gross new customers who typically join at a discounted rate.

We are focussed on delivering high quality service to all of our customers, while also generating efficiencies within the business. We are increasingly providing our customers with self serve options from policy administration through to making a claim online. We also encourage our customers to leave feedback about their experience through Reevoo and Trust Pilot.

During the period, our network of 360 directly employed engineers and over 230 subcontractors completed 0.3m repairs (HY14: 0.3m).

United States of America

· Customer numbers up 20% to 1.7m

· Retention rate at 82%, up from 80% in HY14

· Five new utility partnerships and extension of an existing one (1.6m households in total)

· New partnership with AARP one of the largest membership organisations in the USA with 22m households

Revenue in the USA in local currency increased by 14% to $80.2m (HY14: $70.5m) due to increased customer numbers, offset in part by lower net income per customer. In sterling terms, revenue was £47.8m (HY14: £45.8m), an increase of just 5% reflecting the impact of exchange rates. The adjusted operating loss of £1.3m (HY14: £0.1m) reflects the normal seasonal trend, together with an increased investment in marketing and business development in the current year.

Total customer numbers increased by 20% to 1.7m (HY14: 1.4m) with policy numbers increasing to 2.6m (HY14: 2.2m). In the first half of the year we acquired 0.3m gross new customers (HY14: 0.2m). This growth has been achieved through marketing campaigns with both new and existing affinity partners as well as our 'own brand' activity. Response rates continue to be attractive and in line with our expectations.

Retention performance has been good, increasing to 82%, two percentage points higher than the same period last year and one percentage point higher than FY14 principally reflecting our focus on delivering high quality customer service throughout the customer journey and a more proactive approach to retaining our customers.

Income per customer was lower at $100, $4 lower than FY14 and $9 lower than a year ago, principally reflecting an increasing proportion of water and electric related policies, which have a lower net income than Heating Ventilation Air Conditioning (HVAC) policies, and a higher level of service.

Our network of 134 directly employed engineers and around 690 subcontractors completed over 0.1m jobs during HY15 (HY14: 0.1m).

During HY15 we continued to invest in business development and in the first six months of the year we signed five new affinity partnerships (excluding AARP, which was signed after the period end) and extended our relationship with an existing partner adding a total of 1.6m new households. Our pipeline of new partnerships continues to remain strong with potential agreements at all stages of the process.

We recently announced the signing of an affinity agreement with AARP. AARP is a membership organisation that provides products and services to people over the age of fifty. AARP is a national organisation with 37m members across 22m households and is one of the largest membership organisations in the USA.

HomeServe USA plans to offer home emergency cover to the proportion of AARP's members who are most insurance minded. Initial test marketing is due to commence in December 2014 with rollout during FY16 and into FY17.

France

· Continued good financial performance with adjusted operating profit of £7.5m

· Strong retention rate at 89%

· Focus on developing new partner relationships

*Excludes apartments

Revenue in France in local currency was €34.2m (HY14: €34.0m). In sterling terms, reported revenue was £27.5m, £1.4m lower than HY14 reflecting the impact of exchange rates in the period. Adjusted operating profit was £7.5m (HY14: £5.8m) with the increase primarily reflecting the timing of marketing spend as we plan to invest more in the second half of the current year relative to the prior year. At constant exchange rates, revenue would have been £1.6m higher and operating profit would have been £0.5m higher.

Customer numbers at 30 September 2014 were in line with the prior year. The majority of customers in France continue to be acquired through the direct mail channel, although sales through our partner channel are increasing. Policy numbers were down, reflecting the lower level of marketing and gross new customers in the period.

Our retention rate remains strong at 89% (HY14: 89%). We still expect a change in French law during 2015, which would allow customers to cancel insurance policies other than at the normal renewal date, although we do not expect this to have a material impact on our retention rate.

Income per customer was €102 in the period an increase of €3 compared to HY14, reflecting the mix and price of policies held by customers.

The key to increasing customer numbers remains the signing of a new partner and we continue to have active discussions with a number of utilities and other potential partners.

Spain

· Strong customer growth closing with 1.0m customers

· Retention rate up from 75% in FY14 to 79%

* As the Spanish policy base was relatively small, retention rate and income per customer were not reported prior to FY14

Revenue in Spain in local currency increased 20% to €51.0m (HY14: €42.5m) due to increased customer numbers. In sterling terms, reported revenue was £41.1m (HY14: £36.2m), an increase of 13%, reflecting the impact of exchange rates. Adjusted operating profit was £2.2m (HY14: £1.0m) reflecting higher customer numbers.

Customer numbers continue to show strong growth, increasing by 0.4m in the twelve month period and 0.2m during HY15, passing the 1m customer milestone during September 2014. The majority of gross new customers were originated by Endesa, through its sales channels, the cost of which is capitalised and amortised over the life of the affinity agreement. We recently launched marketing with our water partner Aqualia and initial performance is in line with our expectations.

Retention in the period was 79%, up from 75% in FY14, which although lower than the Group average rate of 83%, is improving as the book of policies matures.

Income per customer was €30, in line with that reported in FY14 and reflects the dominance of the electrical assistance product in the portfolio, which is offered at half price in the first year.

Our claims handling business in Spain continues to perform well with a 10% increase in job volumes during the first six months of the year. During the period, our network of 2,000 sub-contractor and 165 Reparalia franchised engineers completed 0.3m repairs (HY14: 0.3m).

New Markets

· Gaining momentum in Italy with 0.2m customers

· Continuing to test marketing in Germany

· Investment in innovation

Our New Markets segment consists of our developing businesses in Italy, Germany and our investment in innovation. New Markets reported an adjusted operating loss of £2.0m (HY14: £1.9m). The operating loss principally reflects continued investment in our Italian business, ongoing test marketing in Germany and investment in innovation through HomeServe Alliance.

In Italy, we are continuing to develop our relationship with Enel and have seen good results selling our policies through its sales channels and now have a total of 0.2m customers.

In Germany, we are testing our business model with RWE and Maingau, two energy companies. We are testing a number of sales channels including offering our home emergency cover as part of an energy sale, utilising the partners' sales channels and direct mail marketing.

We are increasing our investment in innovation and we are at an early stage of developing HomeServe Alliance in the UK. This initiative uses our marketing expertise to generate extra boiler installations for independent heating installation and repair businesses via a franchised model, with a view, in the future, to potentially offer home emergency cover.

Our New Markets investment, including our investment in HomeServe Alliance, will continue to be around £6m.

Investment in IT

As outlined previously we are upgrading our core customer IT system and the project is progressing on plan and within budget.

Capital structure

Our balance sheet remains strong and the business continues to be cash generative. Against this background and our confidence in the business, we intend to adjust the capital structure in order to achieve leverage in the range 1.0-1.5x Adjusted EBITDA and during the second half of the year, we intend to review the details of a possible return of capital to shareholders. We will provide further information with our preliminary results in May 2015.

Dividend

The interim dividend of 3.63p per share (HY14: 3.63p) will be paid on 2 January 2015 to shareholders on the register on 5 December 2014.

Outlook

In the UK, we continue to expect to acquire around 0.3m gross new customers and maintain the current policy retention rate of 82% which will result in our UK business stabilising at a level of just over 2.0m customers. Our businesses in France, Spain and Italy are trading well.

In light of our confidence in our US business, as recently announced, we plan to invest an incremental £5m in marketing and additional business development in the USA in FY15, which will reduce the FY15 performance in the USA by this additional investment and will drive customer growth and incremental affinity partner signings. The net impact of this incremental investment in FY15 is expected to be fully offset by positive trading performance in other markets.

The results of our initial testing with AARP over the next six months will help determine the amount we ultimately invest in marketing in the USA. In FY16, we currently expect a net investment cost of around £6m as we invest in marketing to the AARP customer base. This additional expenditure is expected to be partially offset by a combination of reduced own brand marketing in the USA and savings across the Group as a whole. By FY17, the investment in AARP is expected to be accretive to our US business.

Financial Review

These financial results have been prepared in accordance with the International Financial Reporting Standards (IFRSs).

Going Concern

As stated in note 2 to the condensed financial statements, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Segmental Results

The Group has five operating segments: UK, USA, France, Spain and New Markets. The New Markets segment combines the results of our businesses in Italy, Germany and a new initiative, HomeServe Alliance and in the prior year, SFG in France. The revenue and adjusted operating profit for each of these segments are set out in the table below.

*The operating segment France was formerly known as Doméo

Group revenue was £241.7m in the period (HY14: £241.3m) with increased revenue in our Established International businesses and New Markets partially offset by the reduction in UK revenue. Revenue would have been £8.6m higher than that reported at constant exchange rates. The reduction in UK revenue was principally due to the lower number of customers and a lower income per customer compared to the prior period. The increase in Established International revenue reflected the increase in customer numbers in the USA and Spain.

Adjusted operating profit increased to £27.5m in HY15 (HY14: £26.8m) with higher profits in France and Spain offsetting lower profits in the UK and the USA. At constant exchange rates, adjusted operating profit would have been £0.5m higher than reported.

United Kingdom

*Annual net income is calculated by multiplying income per customer by the number of customers

Our UK business reported revenue of £120.2m (HY14: £127.2m), a reduction of £7.0m compared to the prior period. Revenue in the UK business can be analysed as net income of £83.1m (HY14: £90.5m), with the remaining income of £37.1m (HY14: £36.7m), representing £32.2m of repair network revenue (HY14: £30.7m) and other income of £4.9m (HY14: £6.0m), which includes third party claims handling revenue and revenue from transactions with other Group companies. 

As expected, net income decreased by 8% in the first half of the year principally reflecting the reduction in customer numbers, a lower net income per customer due to higher service costs which are deducted from the retail price in arriving at reported revenue and a higher proportion of year one customers who are acquired at discounted policy prices. Total operating costs were £6.1m lower than the prior period with indirect cost savings offsetting an increase in network costs and marketing investment. Adjusted operating profit was £21.1m, £0.9m lower than the prior period (HY14: £22.0m).

United States of America

Revenue in the USA was £47.8m (HY14: £45.8m), 5% higher than the prior period reflecting a higher number of customers. At constant exchange rates, revenue would have been £4.2m higher at £52.0m, 14% higher than in the prior year.

Adjusted operating loss was £1.3m (HY14: £0.1m) reflecting the seasonal nature of the business and the planned increase in our marketing and business development investment relative to the prior period. The increased marketing investment has resulted in a 30% increase in the number of gross new customers relative to the same period last year. At constant currency the operating loss would have been £1.2m.

France

Revenue in France was 5% lower at £27.5m (HY14: £28.9m). At constant exchange rates, revenue would have been £1.6m higher and operating profit would have been £0.5m higher than that reported. Adjusted operating profit was £7.5m, an increase of £1.7m compared to the prior period (HY14: £5.8m), primarily due to the timing of marketing spend in HY15 compared to HY14, with more marketing activity expected in the second half of FY15.

Spain

In Spain, revenue was £41.1m, £4.9m higher than in the prior period. Membership revenue was 74% higher at £11.8m compared to the prior period driven by the increase in customer numbers. Reported claims handling revenue was broadly flat, as the benefit of a higher number of jobs was offset by currency movements in the period. At constant exchange rates, revenue would have been £2.4m higher than that reported.

Adjusted operating profit was £2.2m in the period, an increase of £1.2m compared to the prior period, reflecting higher revenue in the Membership business, partially offset by the expected increase in amortisation in the period. In Spain, the cost of acquiring policies originated by Endesa, is capitalised and held as an intangible asset and amortised over the life of the affinity agreement. During HY15 we invested £8.7m (HY14: £6.3m) in respect of customers acquired by Endesa and as at 30 September 2014, the intangible assets in relation to these customers was £25.2m (HY14: £10.7m). As expected, amortisation in HY15 at £3.1m was higher than in the prior period (HY14: £1.0m).

New Markets

New Markets reported revenue of £7.0m (HY14: £5.9m) and an adjusted operating loss of £2.0m (HY14: £1.9m). Revenue in the current period principally related to sales in Italy. The operating loss during HY15 principally reflects the investment in business development and marketing in both Italy and Germany and investment in innovation through HomeServe Alliance.

Cash flow and financing

Cash generated by operations in the first six months of FY15 amounted to £25.6m (HY14: £52.4m).

Net debt at 30 September 2014 was £75.8m (HY14: £40.7m), £33.5m higher than the year end position (FY14: £42.3m) reflecting an increase in working capital, ongoing capital investment and payment of the final dividend of £25.1m in the period.

As expected, the increase in working capital of £13.3m principally related to a reduction in creditors reflecting payment of affinity partner commissions relating to FY14, the growth in customer numbers, particularly in Spain and New Markets and stabilisation of the UK business, partially offset by lower receivables due to timing of policy renewals and acquisition activity which are weighted toward the second half of the year.

During the first six months of the financial year, we incurred capital expenditure of £22.6m (HY14: £15.0m). This expenditure included payments of £8.7m to Endesa in Spain in respect of the acquisition of customers that Endesa originated, investment in upgrading our core customer IT system (£5.2m) and other IT investment of £4.3m. During the period we also invested £4.8m in respect of our connected homes strategy.

The provisions for addressing the historical UK matters, the FCA investigation and reorganisation costs, which were originally created in the year ended 31 March 2012 decreased by £5.3m in the period.

During the first half of the year, the Group renewed its credit facility, increasing the facility available to £300m for a five year period. Terms of the renewed facility are broadly similar to the previous arrangement.

Capital structure

Our balance sheet remains strong and the business continues to generate high levels of cash from operations. Net debt was £75.8m at 30 September 2014, and leverage (measured as net debt to the previous 12 months' Adjusted EBITDA) was 0.7x, having been 0.4x at 31 March 2014.

Against the background of continued strong cashflow and our confidence in the business, we intend to adjust the capital structure in order to achieve leverage in the range 1.0-1.5x Adjusted EBITDA. We believe this appropriately balances our objectives of an efficient capital structure, good risk management, and the ability to grow the business both organically and by acquisition. We will be prepared to see leverage outside that range for reasonable periods of time if circumstances warrant that, and the range itself will be subject to periodic review.

During the second half of the year, we intend to review the details of a possible return of capital to shareholders. This review will conclude where in the range to initially set leverage and the mechanism to achieve any return, if made. We will provide further information with our preliminary results in May 2015.

Group statutory results

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

Statutory profit before tax was £25.3m (HY14: £0.6m). Statutory profit in HY15 includes £4.6m of exceptional income (HY14: £19.0m exceptional expense). Statutory profit before tax was also reported after the amortisation of acquisition intangibles as set out below.

Amortisation of acquisition intangibles

The amortisation of acquisition intangibles of £5.3m (HY14: £6.0m) principally relates to customer and other contracts held by businesses which were acquired as part of the related business combinations.

Exceptional items

Exceptional income of £4.6m has been recognised in the period relating to the reimbursement of certain costs by our insurers associated with our historical UK matters amounting to £2.9m together with the release of £1.7m of the provision, originally created in the year ended 31 March 2012 and increased in subsequent periods, to address these UK issues, which is now considered to be surplus. In the prior period, exceptional expenditure of £19.0m was incurred in the UK relating to the additional expected cost of completing the UK customer re-contact exercise.

Finance costs

The Group's net finance costs in the first six months of the financial year were £1.5m (HY14: £1.2m), £0.3m higher than in the same period last year reflecting a higher average level of debt.

Taxation

The tax charge in the first half of the financial year was £6.9m (HY14: £0.2m). The effective tax rate was 27.1% compared to 29.9% in HY14 and represents the estimated tax rate for the full year. The reduction in the tax rate principally reflects the lower UK tax rate partially offset by the higher international tax rates. We expect the adjusted effective tax rate to remain broadly the same going forward.

Earnings per share

Adjusted earnings per share for the period was 5.6p (HY14: 5.5p). The average number of shares in issue was 326m (HY14: 325m). On a statutory basis, earnings per share was 5.6p (HY14: 0.1p).

Dividend

The interim dividend of 3.63p per share (HY14: 3.63p) will be paid on 2 January 2015 to shareholders on the register on 5 December 2014.

Foreign exchange impact

During the period, the US dollar and Euro weakened relative to sterling. At constant exchange rates, Group revenue would have been £8.6m higher and adjusted operating profit would have been £0.5m higher than that reported in the period. The impact of the foreign exchange rate movements on the individual businesses is summarised in the table below.

Statutory and pro-forma reconciliations

The Group continues to believe that Adjusted Operating Profit, Adjusted Profit Before Tax, Adjusted EBITDA and Adjusted EPS, which exclude the amortisation of acquisition intangibles and exceptional items, are important performance indicators for monitoring the business. This report uses a number of pro-forma measures to highlight the Group's results excluding the above amounts. These measures are reported to the Chief Executive and Board for the purposes of resource allocation and assessment of segment performance. The following tables provide a reconciliation between the statutory and pro-forma items.

Principal risks and uncertainties

The principal risks and uncertainties, together with the mitigating activities, detailed on pages 36 - 42 of the Group's 2014 Annual Report & Accounts, continue to have the potential to impact the Group's performance and are as follows:

· Ability to implement an updated strategy successfully within the UK business

· The potential loss of a commercial relationship

· The impact of competition

· A change in customer loyalty and retention

· Our marketing effectiveness

· Exposure to legislation or regulatory requirements

· Financial cost of customer re-contact exercises

· Availability of underwriters

· The quality of customer service

· Recruitment and retention of skilled personnel

· Exposure to country and regional risks

· Our IT systems become a constraint to growth and drive inefficiency instead of efficiency improvements

· Financial and treasury risks including credit risk.

Information on financial risk management is also set out on pages 151-155 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 2014

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2014

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2014

For the six months ended 30 September 2013

For the year ended 31 March 2014

Condensed consolidated balance sheet

30 September 2014

Condensed consolidated cash flow statement

For the six months ended 30 September 2014

Notes to the condensed set of financial statements

For the six months ended 30 September 2014

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 2014 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 auditors 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. The condensed set of financial statements for the six months ended 30 September 2014 are unaudited, but have been reviewed by the auditors 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 18 November 2014.

2. Accounting policies

Basis of preparation

The condensed set of financial statements has been prepared using accounting policies consistent with International Financial Reporting Standards (IFRSs) and in accordance with International Accounting Standards (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.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, 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, except for the adoption of the following International Accounting Standards: 

3. Business and geographical segments

Business segments

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. 

Segment profit/loss represents the result of each segment including allocated costs associated with head office and shared functions, but before allocating investment income, finance costs, and tax. This is the measure reported to the 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 in the Group's latest audited financial statements. Group cost allocations are deducted in arriving at segmental operating profit. Inter-segment revenue is charged at prevailing market prices. The sale and renewal of policies across our business are more heavily weighted towards the second half of our financial year. The operating segment France was formerly known as Doméo and the New Markets segment includes our investment in innovation through HomeServe Alliance. New Markets also included the SFG business up until its sale in March 2014.

For the six months ended 30 September 2014 (unaudited)

For the six months ended 30 September 2013 (unaudited)

For the year ended 31 March 2014 (audited)

4. Exceptional items

Exceptional income of £4.6m has been recognised in the period relating to the reimbursement of certain costs by our insurers associated with our historical UK matters, amounting to £2.9m, together with the release of £1.7m of the provision, originally created in the year ended 31 March 2012 and increased in subsequent periods, to address these UK issues, which is now considered to be surplus. 

In the prior period, exceptional expenditure of £19.0m was incurred in the UK relating to the additional expected cost of completing the UK customer re-contact exercise.

5. Tax

The effective tax rate for the six months ended 30 September 2014 is 27.1% (six months ended 30 September 2013: 29.9%). The tax charge on the exceptional income was £0.9m (HY14: tax credit of £4.1m).

6. Dividends

An interim dividend of 3.63p per share amounting to £11.9m will be paid on 2 January 2015 to the shareholders on the register at 5 December 2014. The interim dividend has not been included as a liability in these financial statements.

7. Earnings per share

Basic earnings per share is calculated by dividing the profit or loss for the financial period 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 items. This is considered to be a better indicator of the performance of the Group. Diluted earnings per share includes the impact of share options in issue throughout the period.

The calculation of basic and diluted earnings per share is based on the following:

8. Analysis of net debt

9. Provisions

For the six months ended 30 September 2014 (unaudited)

For the six months ended 30 September 2013 (unaudited)

For the year ended 31 March 2014 (audited)

The provision for the cost of addressing the historical UK matters, the FCA investigation and reorganisation costs, originally created in the year ended 31 March 2012, has reduced from £7.7m at 31 March 2014 to £2.4m at 30 September 2014. This reflects the customer re-contact exercise, including the payment of reimbursements to customers, the costs of managing the FCA investigation and related organisational changes. The remaining provision of £2.4m in respect UK Matters will be utilised during the remainder of FY15. 

10. Share capital