Interim Management Statement

HomeServe plc

Interim Management Statement

HomeServe plc, the international home emergency business, today publishes its Interim Management Statement for the period from 1 October 2011.

Summary and Outlook

In the UK we are making progress in reinvigorating our customer focus and restarting marketing activity, although this is taking longer than we originally anticipated. Overall retention in the UK remains strong.

We continue to develop and grow our international operations, taking full ownership of Doméowith the purchase of Veolia's 51% shareholding on 7 December 2011 and the signing of a new water utility partner in the USA.

HomeServe expects its adjusted profit before tax1 for the year ending 31 March 2012 to be in line with market expectations2.

UK

All 15 of our water utility partners continue to be supportive of the actions we have taken to address our sales and marketing issues. We have recommenced inbound sales calls for 14 of our water partners, and we are currently awaiting final approval from the remaining utility. In addition, our direct mail marketing has restarted with our new Plumbing & Drains promotional material approved by affinity partners and sent to prospective customers in January.

Utility partner customer acquisition activity remains on track and in line with our previous guidance. However, our focus on our key utility partners has meant that other partner sales and marketing activity has taken longer to restart than we originally anticipated. As a result the reduction in total customer numbers in FY12 could now be around 8%, a 3ppt decline on our previous guidance. Overall we now expect renewal revenues in FY13 to be lower by up to £10m, some of which we expect to be offset by lower operating costs.

Overall retention remains strong in the UK. We expect the FY12 policy retention rate to be around 80% (FY11: 82.7%) with the retention rate for policies that have been held for two or more years continuing to be high and in line with our expectations. The retention rate for first year renewing policies has been slightly lower than expected due mainly to the suspension of staff incentives in our retention call centre.

As a result of having fewer customers in the UK and the continued refinement of our marketing and customer contact strategies we have commenced a consultation period with employees regarding a reduction in the UK headcount of around 200 (c. 7% of UK FTE) reflecting a smaller outbound telephony operation and a more focused marketing function. We now estimate the one-off costs in the UK, including the re-organisation and redundancy costs and additional third party support will be around £20m in FY12, compared to our previous guidance of £10m. The reduced headcount is expected to reduce operating costs by up to £5m in FY13. 

We have made good progress in improving our governance and controls and strengthening the UK management team. Last week we announced the appointment of Martin Bennett as Group Chief Operating Officer. His initial priority will be in the UK business on claims and network management, underwriting, systems and efficiency. We have also completed the recruitment of a new UK Compliance Director. We continue to have regular and constructive dialogue with the FSA, with all of our actions consistent with their feedback.

USA

We continue to make good progress in converting our pipeline of potential new partnerships and policy book acquisitions. We are pleased to announce today a new affinity relationship with WaterOne, a utility that provides water to over 100,000 households in Kansas.

We continue to see strong organic growth with gross new policy sales expected to be around 20% higher than in FY11. In January, our one millionth US customer joined and we expect customer numbers to increase by around 15% over the full year with policies increasing by a slightly higher rate reflecting growth in cross-selling.

Retention remains strong in the US. The policy retention rate is expected to be around 80%, slightly lower than last year, reflecting the increased proportion of first year and own brand renewing policies, both of which have a lower than average retention rate.

US revenue and operating profit is expected to show strong growth, reflecting the full year benefits from the National Grid acquisition completed in August 2010, as well as strong organic growth. The US adjusted operating margin is expected to remain at around 11% reflecting the ongoing investment in marketing and our US infrastructure.

France

We were pleased to complete the purchase of Veolia's 51% shareholding in Doméo on 7 December 2011. As part of the acquisition we signed a long term marketing agreement with Veolia that enables Doméo to continue to use their brands on marketing materials in France. Full ownership of Doméo gives us the opportunity to expand our market place beyond the Veolia brand in France and to work with other utilities, as well as the potential to extend our product range to include heating manufacturers in France. 

Gross new policy sales for the year are expected to be around 0.4m (FY11: 0.5m) with customer and policy growth expected to be around 6%. Retention in Doméo remains high at around 88% and it remains on track to deliver good growth in operating profit in FY12.

Spain

Reparalia, our Spanish business, continues to see strong growth in both customer and policy numbers with both expected to increase by over 50% during FY12 despite difficult economic conditions there.

New Markets

We continue to invest in our New Markets businesses and expect to maintain at least the current level of investment in future years. These businesses are expected to report an operating loss of around £4m in FY12 (FY11: £1.1m), in line with our expectations and reflecting the increased investment in marketing in Italy and the focus on the development of post-point of sale and manufacturer warranty operations in SFG in France. 

Financial position

Our net debt at 31 December was £109.7m (December 2010: £59.2m), which includes the cash consideration of £83m relating to the purchase of Veolia's 51% shareholding in Doméo, which completed on 7 December 2011. The business continues to be highly cash generative and we expect net debt at the year end to be around £70m (FY11: £11.8m).

Conference call

A conference call for analysts and investors will take place at 8.00am this morning. The conference call can be accessed by dialling +44 (0)20 3140 0668 and pin code 228975#. A replay of this call can be heard by dialling +44 (0)20 3140 0698 and pin code 382353# later in the day for a period of 2 weeks.

Enquiries

Notes

1. Adjusted profit before tax and adjusted operating margin excludes the amortisation of acquisition intangibles, joint venture taxation and exceptional items3. 

2. The range of analyst forecasts for adjusted PBT for the year ending 31March 2012 is £122m to £132m based on forecasts as at 7 February 2012. The average of these forecasts is £127m.

3. Exceptional items include: a gain of at least £50m as a result of re-measuring the value of our 49% shareholding in Doméo following the acquisition of the remaining 51%; around £20m of one-off costs in the UK business relating to reinvigorating its customer focus; and one-off costs of around £3.5m relating to the acquisition and integration of the 51% shareholding in Doméo.