Half Yearly Report

HomeServe plc

Interim results for the period ended 30 September 2015

Positive start - full year on track for good growth

UK - Solid start to the year, ending the period with 2.1m customers (HY15/FY15: 2.1m)

- Increased marketing activity, 131,000 gross new customers added in the year, up 20%

- Retention performance at 83% (HY15: 82%)

- Increased gas delivery capability, with the recent acquisition of a heating business with over 150 engineers

USA - Customer numbers up 24% to 2.1m

- Increased marketing investment delivering good customer growth

- Stable retention rate at 82% (HY15: 82%)

- Signed six new partners adding 1.4m households, with a strong partner pipeline at all stages of negotiation

France - Customer numbers up 6%, ending the period with 1.0m customers

- Renewed momentum with good financial performance

- Strong start to new partnership with Lyonnaise Des Eaux (LDE)

- Continued high retention rate at 89% (HY15: 89%)

Spain - Customer numbers up 11% to 1.1m with strong profit growth

- Adjusted operating profit increased to £3.7m (HY15: £2.2m)

New Markets - Continued investment of up to £6m per year in Italy and innovation initiatives

Group - Strong balance sheet and cash generative

- At constant currency adjusted profit before tax would have been up 8% to £28.0m

- £99.4m special dividend paid in July 2015 with resulting increase in net debt

- Secured £50m medium-term funding via a Private Placement supplementing existing £300m facility

_____________________________________________________________________________________

Richard Harpin, Chief Executive, HomeServe plc, commented:

"We have made a good start to the year, increasing our customer numbers by 12% to 6.6m with over two-thirds of customers now outside the UK. In addition to delivering good customer service, the UK business has increased gas service delivery capability with the recent acquisition of a heating business based in Nottingham with over 150 gas engineers. We are also delighted that our new partnership with Lyonnaise des Eaux in France has had a strong start. In the USA, customer numbers are up 24% and we continue to see excellent growth prospects as we signed a further six new partners, now serving 31m households. We remain confident in our expectations of good growth for the full year."

1. All references to adjusted EBITDA, adjusted operating profit or loss, adjusted profit before tax and adjusted earnings per share throughout the announcement exclude exceptional items and the amortisation of acquisition intangibles, as reconciled to their statutory equivalents in the Financial Review.

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 88824169#, and also a live webcast available via www.homeserveplc.com.

BUSINESS REVIEW

HomeServe is built on developing long-term relationships with our affinity partners. We provide our customers with a membership proposition to deliver plumbing, heating and electrical repairs and services. We have 6.6m customers, an increase of 12% compared to a year ago, with more than two-thirds of our customers now outside the UK. The Group has five operating segments: UK, USA, France, Spain and New Markets.

During the period, the Group traded in line with our expectations with good progress across all businesses.

Our UK business ended the period with 2.1m customers, with increased marketing activity and an 83% retention rate. During October we acquired Home Energy Services, a heating repair business with over 150 directly employed engineers, as part of our strategy for developing a leading national heating repair, services and installation business.

The USA is our greatest opportunity and we continue to invest for customer growth. Our US business now has the highest number of customers with an increase of 24% over the year. We have seen continued good momentum in business development activity, signing six new partnerships and are now serving 31m households, with a strong pipeline at all stages of negotiation. The Lyonnaise des Eaux (LDE) partnership in France, signed in March 2015, has delivered good customer growth in the first six months of the year.

Financial performance for the period ended 30 September

Adjusted operating margin is adjusted operating profit divided by revenue

Performance metrics for the period ended 30 September

The following sections report on the operational and financial performance of each of our operating segments.

UK

· Period end customer numbers of 2.1m (HY15: 2.1m)

· Increased marketing activity adding 131k gross new customers

· In October, acquired Home Energy Services, a gas services business

· Continued investment in technology to deliver customer service benefits and efficiencies

Net policy income is defined as policy revenue net of sales taxes and underwriting

Income per customer is calculated by dividing last twelve months net policy income by the number of customers

"Other" principally includes pest, keycare, heating services and appliance related policies

Operational performance

The UK business ended the period with 2.1m customers (HY15: 2.1m), reflecting increased marketing activity and a good retention performance. While the majority of marketing and renewal activity takes place in the second half of the year, we are pleased with the first half performance where we acquired 131k gross new customers (HY15: 110k), 20% more customers than in the same period last year. Direct mail continues to perform well and we are seeing good results from our partner and digital channels.

The retention rate was 83% (HY15: 82%). Due to the higher proportion of year one customers, there may be a slight reduction in the year end rate. However given the good marketing performance we expect stable customer numbers.

We continue to have good relationships with our partners, renewing three partnerships during the period. During October, we signed a five year agreement for Aviva to underwrite our home assistance products and we are also developing a home assistance offering for Aviva's UK customers.

During the period, our network of 450 directly employed engineers and around 200 sub-contractors completed 0.4m repairs. In the prior period 360 directly employed engineers and over 230 sub-contractors completed 0.3m repairs.

Customers are benefiting from our comprehensive water and heating products and are using them more than in the past which, while increasing repair costs, is delivering a good customer experience and demonstrates our continued focus on customer satisfaction.

As previously outlined, creating a combined heating installation and repair business is central to our service offering. We expect to deliver this service through a comprehensive network of directly employed engineers, heating franchisees and sub-contractors. During October, we acquired Home Energy Services Limited, formerly part of the E.ON group, for a consideration of £8.4m of which £3.3m was paid at completion. This business is based in Nottingham with over 150 directly employed engineers and combined with our existing franchise and subcontract network, significantly increases our gas delivery capability and serves as a platform for further development.

We are pleased with the investment and progress we are making in the implementation of our new core Pega Customer Management System which is expected to go live during the second half of 2016. We have implemented a limited version of the new system in the UK and are confident that we have the right technology solution to allow us to significantly improve how we interact with our customers and reduce our cost to serve.

We are the leading UK installer for Nest and tado° smart thermostats, and while it is still early days in the evolution of the Smart Home marketplace, we are well placed to capture the opportunity.

Financial performance

Our UK business reported revenue of £123.6m (HY15: £120.2m), an increase of £3.4m. Revenue in the UK business is analysed as net policy income of £81.3m (HY15: £83.1m), with the remaining income being £38.7m of repair network revenue (HY15: £32.2m) and other income of £3.6m (HY15: £4.9m), which includes revenue in respect of pay on use repairs and transactions with other Group companies.

Net policy income decreased by 2% to £81.3m (HY15: £83.1m), reflecting a lower income per customer of £93 (FY15: £93; HY15: £99) which we expect to be broadly flat for the full year. This was principally due to a higher proportion of new customers who typically join on an introductory offer and the higher repair cost of our plumbing and drains product since adding elements of maintenance cover to the product. From November 2015 Insurance Premium Tax (IPT) increases by 3.5 percentage points to 9.5%, but this is not expected to have a material impact on reported profit or customer numbers.

Total operating costs were £102.9m, 4% higher than the prior period, reflecting the increase in the number of repairs completed and a higher depreciation charge, in part offset by lower indirect costs. Adjusted operating profit was £20.7m, £0.4m lower than the prior year (HY15: £21.1m), with a margin of 17%. For the full year we expect the business performance to be stable. The full year operating profit margin, which is considered sustainable, was 20% in FY15.

United States of America

· Customer numbers up 24% to 2.1m

· Six new utility partnerships adding 1.4m new utility households

· Continued to develop relationship with AARP

Affinity partner households does not include AARP households

HVAC includes water heater and gas line policies

Operational performance

The USA remains our most significant opportunity with 128m households, of which we now have affinity partnerships with utilities that provide services to 31m households. We continued to invest in business development, increasing the team from 20 to 27 during the period, and we signed six new partnerships adding 1.4m utility households. Our pipeline of potential new partnerships is strong, with negotiations at all stages of the process.

Similar to the UK, while the majority of marketing and renewal activity takes place in the second half of the year, we continued to see good retention performance at 82% (HY15: 82%) and added 0.3m gross new customers in the period. Customer numbers increased by 24% to 2.1m compared to the prior year (HY15: 1.7m).

Direct mail is our largest marketing channel and we continue to develop our digital and partner channels. Our response rates and payback periods are attractive and in line with our expectations.

During the period, we continued to develop and strengthen our relationship with AARP. The marketing is achieving higher response than our own brand marketing but, as expected, lower than our utility marketing. During the second half of the year, as planned, we will refine the marketing material and product offering.

Our network of 139 directly employed technicians and 874 sub-contractors completed over 0.2m jobs in the period. This compares with 0.1m repairs completed in the prior period, through a network of 134 directly employed technicians and 690 sub-contractors.

Financial performance

Revenue was up 14% to $91.1m (HY15: $80.2m) due to higher renewals income and acquisition activity. Operating costs were up 13% reflecting the increase in customer numbers, and continued investment in marketing and business development.

Income per customer was $92, broadly in line with FY15. The reduction relative to HY15 principally reflects the higher number of new customers with just one product, the product mix, and a higher repair cost as we expand product coverage and therefore respond to more claims. Going forward we expect net income per customer to be broadly stable.

Currency movements did not have a material impact on reported adjusted operating profit in the USA. During the period the USA Dollar strengthened relative to Sterling with an average rate of $1.54 (HY15: $1.68). In sterling terms, reported revenue was £59.2m, up 24% relative to the prior year (HY15: £47.8m). At constant exchange rates, revenue would have been £5.0m lower and the operating loss would have been £0.1m lower than that reported.

France

· Customer numbers up 6%, ending the period with 1.0m customers

· Strong start to new partnership with Lyonnaise des Eaux

· Continued high retention rate at 89%

Affinity partner households includes all partner households including flats (HY15: all households, excluding flats).

Operational performance

Our partnership with Lyonnaise des Eaux (LDE), which was signed in FY15, has made a strong start to the year. During the period, LDE commenced selling our products in its call centre with good results. As outlined previously, the amounts paid to LDE in relation to customers acquired on our behalf are capitalised and amortised over six years.

Customer numbers were up 6%, with the number of new customers acquired in the period more than double that of a year ago. In addition to the activity with LDE, we continue to acquire customers with Veolia through the direct mail channel and transferred calls from their call centres. We have also developed a business development pipeline to further expand our affinity partners in France.

Our retention rate remains strong at 89% (HY15: 89%). As a result of the good acquisition performance and continued strong retention rate, we closed the period with 1.0m customers, up from 0.9m at the end of March 2015.

Repairs in France are managed through our network of around 700 sub-contractors (HY15: 700).

Financial performance

Revenue was up 11% to €38.1m (HY15: €34.2m) reflecting the higher number of customers. Operating costs were up 14% due to an increase in marketing investment, the timing of campaigns and additional activity with LDE. Despite this increased investment, operating profit was up 4% to €9.7m. Adjusted operating profit margin was 26%, 1ppt lower than the prior year, as a result of the additional investment.

Income per customer was €101 (HY15: €102), 1% lower than the prior year, reflecting the mix of policy sales.

Currency movements had a negative impact on sterling reported French revenue and adjusted operating profit in the period. During the period the Euro weakened relative to Sterling with an average rate of €1.39 (HY15: €1.24). In sterling terms, reported revenue was broadly flat at £27.5m and adjusted operating profit was £7.1m (HY15: £7.5m). At constant exchange rates, revenue would have been £3.1m higher and operating profit would have been £0.8m higher than that reported.

Spain

· Customer numbers up 11% to 1.1m

· Significant profit growth, up 89% to €5.3m

· Continued strong partnership with Endesa

Operational performance

Endesa, our largest partner in Spain, with whom we agree annual marketing plans, continues to offer our products through its sales channels. Customer numbers were up 11% to 1.1m at the end of September 2015. During FY16 the majority of new customers in Spain will be acquired through Endesa's sales channels.

The retention rate in the period was 78%, marginally lower than the prior year reflecting a high number of year one customers who typically renew at a lower rate.

Our claims handling business in Spain continues to perform well, completing 0.3m repairs through our network of around 1,900 sub-contractors and 176 franchised engineers. This is 8% more repairs than the comparative period last year, during which 2,000 sub-contractors and 165 franchised engineers completed 0.3m repairs.

Financial performance

Revenue was up 21% to €61.6m (HY15: €51.0m) with an increase in both the Membership and the Claims business. The increase in the Membership business principally reflects the higher number of customers and a higher proportion of customers renewing on full price products, while the Claims business benefited from an increase in job volumes. Operating costs were up 17% in part due to higher customer numbers in the Membership business and greater volumes in the Claims business. Adjusted operating profit margin was 9%, 4 percentage points higher than the prior year, driven by the Membership business.

Income per customer increased by €9 to €39 which reflects the higher mix of renewing customers, partially offset by new customers that typically join with a first year discount.

Currency movements had an impact on Sterling reported Spanish revenue and adjusted operating profit in the period. In Sterling terms, reported revenue was £44.4m (HY15: £41.1m) and adjusted operating profit was £3.7m (HY15: £2.2m). At constant exchange rates, revenue would have been £5.2m higher and operating profit would have been £0.8m higher than that reported.

New Markets (including innovation initiatives)

· Customer numbers up to 0.3m in Italy

· Continued investment in digital and innovation initiatives

· German exit completed

Our New Markets segment now consists of our investment in new territories, digital and innovation initiatives. Prior to 1 September 2015, New Markets also included our investment in developing a German business. During the period we successfully exited our German business with no material loss on the sale of the business.

In Italy, we have 0.3m customers (HY15: 0.2m) through our test agreement with Enel, which were principally acquired through its sales channel. We are also in active discussions with other potential partners.

We are starting to again look at further international opportunities with a view to entering the home services market either through joint ventures or other arrangements with local utilities.

We have established a digital hub in London to fast track our digital journey, delivering consistent digital platforms and know-how across our established businesses. We continue to explore smart home and other related innovations which may be delivered in partnership with a digital start up business.

Financial performance

Our New Markets businesses reported revenue of £9.9m (HY15: £7.0m) reflecting the higher number of customers in Italy. Our investment in New Markets generated a loss of £2.3m (HY15: £2.0m) and the full year investment will be in the range of up to £6.0m.

Dividend

The interim dividend of 3.8p per share (HY15: 3.63p), an increase of 5%, will be paid on 8 January 2016, to shareholders on the register on 11 December 2015.

Outlook

We have made good progress across all of our businesses and remain confident of achieving good growth in 2016.

Richard Harpin

Chief Executive

17 November 2015

FINANCIAL REVIEW

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

Group statutory results

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

Statutory profit before tax was £21.3m, £4.0m lower than HY15 (HY15: £25.3m), which benefited from £4.6m of exceptional income. 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 £4.9m (HY15: £5.3m) principally relates to customer and other contracts, which were acquired as part of business combinations.

Exceptional items

The prior year exceptional income of £4.6m related to past UK issues of which £1.7m related to the release of a surplus provision. All matters were settled in full during the prior year.

Cash flow and financing

Cash generated by operations in the period to 30 September 2015 was £25.2m (HY15: £25.6m), representing a cash conversion ratio against adjusted operating profit of 90% (HY15: 93%).

During the period, net debt increased by £126.4m to £202.2m, principally due to the payment of a special dividend of £99.4m and £29.2m of capital expenditure.

There was an increase of £16.7m in working capital in the period (HY15: £13.3m). There was a reduction in creditors reflecting the timing of payments to affinity partners, underwriters and other suppliers, offset in part by the seasonal reduction in trade receivables. In the prior period, the exceptional provision related to past UK issues.

During the period we invested capital expenditure of £29.2m (HY15: £22.6m). This expenditure included payments of £7.8m principally in respect of the acquisition of customers originated by Endesa in Spain and LDE in France, investment in our new core customer system, together with normal investment, primarily technology related, across the businesses.

During FY16, we expect to invest a total of £50m in systems and technology and £20m in respect of partner payments. Total investment is expected to decrease to around £35m in 2017 before normalising at £25m from 2018.

Acquisition spend of £0.1m principally related to deferred consideration in respect of acquisitions completed in prior periods (HY15: £0.2m).

Purchase of investments in HY15 and HY16 related to our investment in respect of our connected home strategy.

In July 2015, the Group paid a special dividend of 30p per share amounting £99.4m followed by an ordinary dividend payment of £25.9m.

Net debt and finance costs

Net debt at 30 September 2015 was £202.2m (FY15: £64.1m; HY15: £75.8m), well within our revolving credit facility of £300m, which is committed through to 2019. As previously announced, the Group targets year end leverage in the range of 1.0-1.5x adjusted EBITDA, measured at 31 March each year. As expected, half year net debt to EBITDA is outside of this range at 1.8x due to the payment of dividends. Excluding any M&A activity, year end leverage is expected to move into the target range of 1.0-1.5x by 31 March 2016.

During October the Group secured £50m medium-term funding in the form of a Private Placement due for repayment in 2022.

The Group's net finance costs were £1.6m, £0.1m higher than in the prior year principally reflecting higher average levels of debt during the period.

Taxation

The tax charge in the financial year was £5.4m (HY15: £6.9m). The effective tax rate was 26% (HY15: 27%), primarily reflecting changes in tax rates in the UK and Spain. UK corporation tax is calculated at 20%. Taxation for other jurisdictions is calculated at the rates prevailing in the respective countries which are higher than the UK rate.

Earnings per share

Adjusted earnings per share for the period increased from 5.6p to 6.0p. During the period a special dividend was paid, accompanied by a consolidation of the Company's ordinary issued share capital. The consolidation replaced every 14 existing ordinary shares of 2.5 pence each with 13 new ordinary shares of 2 9/13 pence each. As a result, the weighted average number of shares decreased from 326.4m to 320.2m.

Dividend

The interim dividend of 3.8p (HY15: 3.63p) will be paid on 8 January 2016 to shareholders on the register on 11 December 2015.

Foreign exchange impact

The impact of changes in the Euro and Dollar exchange rates between HY15 and HY16 has resulted in a £4.3m reduction in the reported revenue and a £1.8m reduction in adjusted operating profit of our international businesses as summarised in the table below.

Statutory and pro-forma reconciliations

The Group believes that adjusted EBITDA, adjusted operating profit, adjusted profit before tax and adjusted earnings per share, all of 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. The table below provides 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 28 - 34 of the Group's 2015 Annual Report & Accounts, continue to have the potential to impact the Group's performance and are as follows:

· 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

· 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 154-158 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 2015

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2015

Condensed consolidated balance sheet

As at 30 September 2015

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2015

For the six months ended 30 September 2014

For the year ended 31 March 2015

Condensed consolidated cash flow statement

For the six months ended 30 September 2015

Notes to the condensed set of financial statements

For the six months ended 30 September 2015

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 2015 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. The condensed set of financial statements for the six months ended 30 September 2015 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 17 November 2015.

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:

Amendment to IAS19 Defined Benefit Plans: Employee Contributions

IFRIC21 Levies

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, tax, amortisation of acquisition intangible assets and exceptional items. 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.

Business segments (continued)

For the six months ended 30 September 2015 (unaudited)

For the six months ended 30 September 2014 (unaudited)

For the year ended 31 March 2015 (audited)

4. Exceptional items

There were no exceptional items in the current period. In the prior period exceptional income of £4.6m was recognised in respect of historical UK issues, of which £1.7m related to the release of a surplus provision. All matters were settled in full during the prior year.

5. Tax

The effective tax rate for the six months ended 30 September 2015 is 26% (HY15: 27%).

6. Dividends

The interim dividend of 3.8p per share (HY15 3.63p per share) will be paid on 8 January 2016 to shareholders on the register on 11 December 2015. The interim dividend has not been included as a liability in these financial statements.