Interim results for six months ended 30 Sep 2022

HomeServe plc

Interim results for the six months ended 30 September 2022

Very strong financial performance, with acquisition by Brookfield on track to complete by early 2023 at the latest

· Constant currency2 revenue growth of 10% and adjusted operating profit growth of 14%, reflecting strong financial performance across the Group.

· HomeServe policies continued to be valued by homeowners in tough economic conditions, as the business demonstrated its characteristic resilience: 8.3m Membership customers worldwide (HY22: 8.3m) and global policy retention of 83% (HY22: 84%).

· North American Membership & HVAC delivered adjusted operating profit growth of 6% on a constant currency basis. The business continued to deliver excellent levels of customer service at an average 4.80 out of 5 stars (HY22: 4.79) as measured by internal surveys.

· EMEA Membership & HVAC saw a 29% rise in adjusted operating profit on a constant currency basis, largely driven by improved performance in the UK.

o  The UK cost base benefited from increased operational efficiency, with a higher proportion of jobs completed by directly employed engineers.

o  HomeServe Spain signed an innovative service customer agreement with one of the country's largest energy providers to expand its Membership customer base by 0.2m.

o  In France, HomeServe purchased 75% of EnergyGo shortly after the end of the half, which will strengthen its participation in residential infrastructure and energy efficiency.

· Home Experts made good progress, with growth in adjusted operating profit of 8% in constant currency terms. Checkatrade continued to see excellent progression on monetisation as it delivered more value to trades, closing the half year with average revenue per trade of £1,358 (HY22: £1,125).

· Net debt at 30 September 2022 was 2.1x the last 12 months' EBITDA (HY22: 2.1x), reflecting the foreign exchange translation impact of US dollar denominated borrowings and typical first half seasonality.

· Given the shareholder-approved cash offer for the Group, an interim dividend will not be paid.

Richard Harpin, Founder and Group Chief Executive, HomeServe plc, commented: "Up to and including the last six months, our business has proved resilient in good times and bad, because of the value our people deliver every day to our customers. We complete over 340 jobs every hour for homeowners worldwide. I want to take this opportunity to pay tribute to everyone at HomeServe who has served our customers with dedication and expertise over the last thirty years.

"With Brookfield we share a common vision of investment and growth in residential infrastructure, and of the importance of decarbonisation to the societies in which we live. New ownership will bring new opportunities to HomeServe and the acquisition of HomeServe by Brookfield is on track to complete by early 2023 at the latest."

Transaction update

A recommended offer for HomeServe by Hestia Bidco Limited (an indirect subsidiary of funds advised or managed by affiliates of Brookfield Infrastructure Partners L.P. [hereafter "Brookfield Infrastructure"]) was announced on 19 May 2022 at £12 per share, which values HomeServe's issued share capital at approximately £4.1 billion. This offer was approved by HomeServe shareholders at the Court Meeting and General Meeting on 22 July, with 97% voting in favour.

All necessary regulatory and competition approvals have now been obtained in the UK and Continental Europe. In the United States, the only outstanding approvals required are from two state insurance regulators. If the remaining approvals do not arrive in time to complete the transaction before the end of 2022, completion is expected to occur early in 2023.

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 that makes home repairs and improvements easy by matching customers to trades to generate repeat and recurring income. HomeServe re-joined the FTSE 100 in September 2022, and will continue to trade on the London Stock Exchange until its acquisition by Hestia Bidco Limited, which is on track to complete by early 2023 at the latest.

SEGMENTAL OVERVIEW

Financial performance for the six months ended 30 September 2022

1Inter-segment revenue principally includes royalty charges between the UK and international businesses.

2Unallocated charges of £8.1m are in respect of exceptional transaction costs which principally relate to the proposed acquisition of the Group by Brookfield.

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 reconciliations, where applicable, back to the equivalent statutory measure.

The net impact of changes in the Euro and US dollar exchange rates between HY22 and HY23 resulted in a £43.9m increase in the reported revenue and a £6.3m increase in adjusted operating profit.

Membership KPIs

4Total group customers of 8.3m also comprises those in New Markets territories not separately presented in the table immediately above.

MEMBERSHIP & HVAC - NORTH AMERICA

1HomeServe 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 reconciliations, where applicable, back to the equivalent statutory measure.

The North American Membership & HVAC business continued to execute its strategy of partnering with utilities to offer a worry-free, swift and cost-effective solution for home emergencies to homeowners. In the first half, affinity partnerships were signed with utilities covering a further 3.3m households (HY22: 6.1m), meaning that HomeServe now has access to over half of all households in the United States and Canada.

Revenue growth of 8% on a constant currency basis was principally driven by strong growth in HVAC. Net policy income grew by 1%, as good growth in income per customer, and policies per customer, was offset by slightly lower customer acquisition in the typically quieter first half, as well as the impact of the sale of the second tranche of customers back to Piedmont Natural Gas. The business continued to deliver excellent levels of service to customers, a key differentiator for HomeServe, at an average 4.80 out of 5 stars (HY22: 4.79) as measured by internal surveys, and policy retention remained strong at 84% (HY22: 86%).

Adjusted operating costs grew by 8% on a constant currency basis, in line with total revenue growth, driven by higher variable costs from the growing portfolio of locally branded HVAC companies.

Following the successful trial in New York State of "HVAC as a Service" - which offers homeowners access to new, more efficient HVAC equipment, a repair plan and utility bill savings, all for a fixed monthly fee - this proposition was launched to the wider market during the first half. Branded the HomeServe Advantage Program, it positions the North American Membership & HVAC business to support homeowners as the transition to less carbon-intensive forms of residential heating continues to accelerate.

MEMBERSHIP & HVAC - EMEA

The EMEA division comprises the established Membership & HVAC businesses in the UK, France and Spain, HomeServe's share of the joint venture operation with Mitsubishi Corporation in Japan and expansion initiatives into adjacent territories in Europe.

UK

1HomeServe 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 reconciliations, where applicable, back to the equivalent statutory measure.

During the first half, the UK business made further good progress on its transformation plan to broaden its HVAC capabilities and, following the acquisition of CET in FY22, its Claims Assistance business. 18% of UK revenue now comes from non-Membership activities (HY22: 6%). Technology upgrades have continued to drive service improvement for Membership customers, with 1 in 3 claims notification calls now triaged with no human intervention required (HY22: 1 in 5).

Revenue growth of 12% was driven by increases in repair income following the acquisition of CET in October 2021, and in HVAC installations, reflecting a full six-month contribution from FY22 acquisitions. 

Net policy income was broadly flat to the prior year (declining by 1%), with the decline in customers marginally outweighing growth in income per customer.

Adjusted operating costs rose by 6%, below the growth in total revenue, reflecting strong cost management and increasing operational efficiency as a higher proportion of jobs were completed by the directly employed engineer network.

France

1HomeServe 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 reconciliations, where applicable, back to the equivalent statutory measure.

HomeServe France continues to benefit from its diversified, multi-channel distribution model in Membership and its well-advanced HVAC installation business.

Constant currency revenue growth of 21% was driven by strong growth in HVAC installations, as well as growth in net policy income of 7%, with progression in both customer numbers and income per customer.

Adjusted operating costs rose by 29% in constant currency terms, ahead of total revenue growth, reflecting higher direct costs in HVAC from FY22 acquisitions - where revenues are more weighted to the second half.

Shortly after the end of the first half, HomeServe France acquired a 75% stake in EnergyGo, a key player in the residential energy efficiency market. The agreement also provides HomeServe with options to acquire the remaining 25% of EnergyGo by FY31. Societal norms, consumer demand and government policy continue to accelerate the shift to a low carbon economy - with more energy efficient housing stock an integral part of the mix. EnergyGo offers homeowners a one stop shop solution, from initial energy efficiency diagnostics to appointment of tradespeople, collection of relevant government subsidies and after sales service. It will complement HomeServe's existing HVAC portfolio and positions HomeServe in the growing residential renovation market in France.

Spain

1HomeServe 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 reconciliations, where applicable, back to the equivalent statutory measure.

During the first half, HomeServe Spain made significant early steps in converting the market opportunity created by the service customer model. Most notably, the business signed a service customer agreement with one of the largest Spanish energy providers, delivering 0.2m new customers and further underpinning the value proposition as the business seeks to convert an active pipeline.

Constant currency revenue growth of 2% was driven by 9% growth in net policy income, reflecting the contribution from continued strong growth in the stock of HVAC maintenance policies. The 26% reduction in income per customer reflects the expected mix impact from diversification into service customer partnerships.

Adjusted operating costs grew by 1% in constant currency terms, broadly in line with the growth in total revenue.

HOME EXPERTS

Home Experts comprises the Group's online platform businesses, being Checkatrade in the UK, eLocal in North America and Habitissimo in Continental Europe.

Checkatrade

Checkatrade continued to deliver good value to its base of paying trades during the first half. The number of paying trades held steady at 47k (in line with the FY22 closing position) during the traditionally quieter first half for member acquisition. Trades who are looking for more work value having access to additional postcodes and trade categories. This drove further progression in average revenue per trade ("ARPT"), which grew 21% on the comparative prior year period to £1,358.

Total revenue growth of 21% was driven by the larger base of paying trades and continued progress in growing ARPT. Adjusted operating costs broadly rose in line with revenue as the business continued to invest in marketing and people to strengthen its position.

eLocal

1HomeServe 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 reconciliations, where applicable, back to the equivalent statutory measure.

In line with the second half of FY22, eLocal continued to annualise tough prior year comparatives on consumer demand - with the volume of monetised calls falling 13% as a result. Notwithstanding this, eLocal's sophisticated matching model enabled it to monetise the available calls at higher levels, offsetting the volume impact to leave total revenue marginally higher than the prior year period. Adjusted operating profit rose by 13% in constant currency terms, reflecting a favourable mix impact with a greater proportion of calls in higher margin verticals.

Habitissimo

1HomeServe 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 reconciliations, where applicable, back to the equivalent statutory measure.

At Habitissimo, the fall in total revenue reflects the transition to the Directory Extra model which resulted in a short term expected impact on paying trades. Adjusted operating costs also fell, reflecting the decision to focus the development of the business in Continental Europe.

FINANCIAL REVIEW

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

Group statutory results

The headline statutory financial results for HomeServe are presented below.

Profit before tax

Adjusted profit before tax rose by 29% to £54.6m. Statutory profit before tax is reported after the amortisation of acquisition intangibles, certain transaction related costs (or income) and exceptional items. On this basis profit before tax was £22.4m (HY22: £18.9m).

Net finance costs

Net finance costs rose to £14.9m (HY22: £13.2m) reflecting the higher average net debt and increases to variable borrowing rates.

Amortisation of acquisition intangibles

Acquisition amortisation relates to customer and other contracts held by businesses which were acquired by HomeServe as part of business combinations and asset purchases.

The amortisation of acquisition intangibles of £24.7m rose versus the prior first half period (HY22: £21.6m) principally due to the impact of foreign exchange movements on carrying values as well as FY22 acquisitions.

Amortisation of acquisition intangibles is excluded from the adjusted performance measures reported by HomeServe in each specific reporting period, ensuring that these measures only reflect the revenue attributable to, and costs incurred by, HomeServe in managing and operating its businesses and assets at that time in each reporting period.

Certain transaction related costs (or income)

Certain transaction related income of £0.6m (HY22: costs of £1.7m) were incurred mainly in respect of fair value movements on financial instruments.

A reconciliation between adjusted and statutory amounts is included within the Glossary at the end of this announcement along with further commentary on HomeServe's use of adjusted items as an Alternative Performance Measure.

Exceptional items

Exceptional transaction costs principally relate to the proposed acquisition of the Group by Brookfield Infrastructure. At both the reporting date and the date of authorisation of these condensed consolidated financial statements, the Group assesses that approximately £48m of additional exceptional transaction costs to be incurred in the second half of FY23 associated with the acquisition of the Group by Brookfield Infrastructure, meet the definition of contingent liabilities under IAS 37.

Taxation

The tax charge in the period was £6.6m (HY22: £5.1m). The pre-exceptional effective tax rate was 24% (HY22: 27%). Under IAS 34 HomeServe's interim effective tax rate is in line with the estimated weighted average annual effective tax rate for FY23 of 24% (FY22: 25%) on a pre-exceptional basis. HomeServe estimates and applies a separate average annual effective tax rate (ETR) for each tax jurisdiction in calculating the interim tax charge.

Cash flow and financing

Cash generated from operations in the period to 30 September 2022 was £113.3m (HY21: £97.3m).

During the period 1 April to 30 September 2022, net debt increased by £50.5m to £693.3m.

Working capital decreased by £15.9m in the period (HY22: £4.1m), reflecting typical first half seasonality.

HomeServe generated free cash flow of £43.0m (HY22: £18.0m). Ordinary capital expenditure of £36.8m (HY22: £36.6m) included £7.3m (HY22: £7.2m) of payments made to partners who undertake marketing activity to acquire customers on HomeServe's behalf. The balance of £29.5m (HY22: £29.4m) was broadly in line with the prior year. Partially offsetting ordinary capital expenditure were proceeds of £11.2m (HY22: nil) which predominantly relate to the disposal of the second tranche of the Piedmont policy book in North America as reported in the year ended 31 March 2022.

Dividend

Given the shareholder-approved cash offer for the Group, an interim dividend will not be paid. However, if the offer terminates, the Board will look to declare an interim dividend in accordance with the Company's Articles of Association.

Earnings per share

Adjusted earnings per share of 12.1p increased 34% on the prior period (HY22: 9.0p), whilst on a statutory basis earnings per share rose to 4.6p (HY22: 3.9p), with both reflective of the strong trading performance.

Net debt and finance costs

Net debt at 30 September 2022 was £693.3m (HY22: £625.1m), well within the total financial facilities of c.£1,066m at the half year.

HomeServe 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, leverage was slightly above the top of this range with net debt to last twelve months adjusted EBITDA of 2.1x (HY22: 2.1x).

Net interest paid was £13.8m, £2.2m higher than HY22, principally due to higher net debt and increased variable market rates.

Foreign exchange impact

The impact of changes in the Euro and USD exchange rates between HY23 and HY22 has resulted in a £43.9m increase in reported revenue and a £6.3m increase in adjusted operating profit of the international businesses as summarised in the table below.

Going concern

HomeServe's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic report of the Annual Report & Accounts 2022. The Directors have reviewed HomeServe's budget, forecast and cash flows for FY23 and beyond, and concluded that they are in line with their expectations with regards to HomeServe's strategy and future growth plans.

Having also reviewed HomeServe's position in respect of other material uncertainties, as set out within principal risks and uncertainties, the Directors 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 HomeServe has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

In adopting the going concern basis for preparation of these condensed consolidated accounts, management have considered current macro-economic conditions in the territories in which they operate, including, but not limited to, the impact of inflation and increasing interest rates in these economies. The Group's business model continues to prove resilient during challenging economic conditions with customer retention rates remaining consistently high and therefore management are satisfied that the current macro-economic conditions do not impact the basis of preparation of these financial statements.

Principal risks and uncertainties

The principal risks and uncertainties, together with mitigating activities, are detailed on pages 34-39 of HomeServe's Annual Report & Accounts 2022. In that Report, the Directors confirmed that they have carried out a robust assessment of the principal risks facing HomeServe.

The risks which continue to have the potential to impact HomeServe's performance are summarised as follows:

Strategic Risks

Competition

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.

Information security and cyber resilience

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.

Data privacy

In the operation of its businesses HomeServe collects customer, employee, commercial and other data. Without appropriate mitigating controls there is a risk that such data could be inappropriately collated, processed, stored or disclosed, or indeed lost or compromised.

Climate risk

Though climate change is also an opportunity for HomeServe, the expected increase in the frequency of severe weather such as storms and floods could lead to a range of challenges for HomeServe's operations, whilst emerging regulation could impact HomeServe's businesses in a number of ways, including increased operating costs as a result of higher energy, fuel and parts prices.

M&A strategy

Whilst HomeServe's 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.

Operational Risks

Digital transformation

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.

Regulation

HomeServe is subject to regulatory requirements relating to areas such as product design, marketing materials, sales processes and data protection. In the UK, 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.

Underwriting capacity and concentration

The Membership business markets and administers policies that are underwritten by independent third- party underwriters. If the business was 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.

Technology investment

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.

Partner loss

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

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.

Failure to deliver strategic growth

HomeServe continues to have a number of opportunities to develop its businesses. There is a risk that it fails to determine where to focus energy, time and resources and, as a result, does not deliver strategic growth or achieve the expected or desired outcomes.

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.

Health and safety

Given HomeServe's HVAC buy and build strategy, there is a potential of an increased risk profile due to the rise in the number of HVAC engineers.

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, 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 pages 184-185 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 2022

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2022

Condensed consolidated balance sheet

As at 30 September 2022

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2022 (Reviewed)

For the six months ended 30 September 2021 (Reviewed)

For the year ended 31 March 2022 (Audited)

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

Condensed consolidated cash flow statement

For the six months ended 30 September 2022