Trading Statement

HomeServe plc

Business Update

HomeServe plc, the international home emergency business, today publishes the following business update, setting out more details on how its UK and International businesses are expected to develop in the medium term.

Richard Harpin, Chief Executive HomeServe plc, commented:

"We are on track to achieve our FY13 expectations with UK customer numbers of around 2.25m and strong growth in our International businesses.

Our UK business is making progress improving the effectiveness of its sales and marketing activity and we have clear plans for increasing both customer acquisition and retention over the next 2 years. We expect the UK customer base to stabilise at around 1.9m customers by March 2014 and this will reduce the UK financial performance in FY14 and FY15. As a result we are announcing the loss of 300 roles in the UK business.

With the continued strong growth in our International business, this will allow the Group to return to modest growth in FY15."

FY13 Performance

HomeServe continues to expect its adjusted profit before tax (before exceptional costs)1 for the year ending 31 March 2013 to be consistent with its expectations2. Each of our businesses has continued to trade in line with the guidance provided in our interim management statement published on 6 February 2013.

In particular, UK customer numbers are expected to be around 2.25m at 31 March 2013 with the retention rate for the full year increasing to around 79% and over 80% in the final quarter. In the US, customer growth will be over 20% and in Doméo in France, retention remains high at around 88%. In Spain, customer and policy growth will both be over 30%.

The Financial Services Authority (FSA) investigation into our past issues is ongoing and is expected to continue for a number of months. Our customer re-contact exercise is on track with the cost remaining in line with our expectations.

Our results for the year ending 31 March 2013 will include two exceptional items. There will be a charge of around £4m relating to a reduction of around 300 roles in the UK business which has been announced today; and we are also writing down the £15m remaining carrying value of SFG, our French warranty business, to reflect the challenging conditions in the electrical retail market there.

Outlook

We expect the Group's performance in FY14 to reflect the impact of a further reduction in UK customer numbers. As UK customer numbers stabilise at around 1.9m at the end of FY14, as detailed below, and we continue to develop our International businesses, we expect the Group to return to modest growth in FY15.

·; UK

In the UK we have now strengthened our controls and governance, enhanced our focus on the customer and are making good progress improving customer service and customer satisfaction with 41% fewer complaints received compared to the previous year. We have also identified areas for improved operational efficiency and are investing in redesigning processes and systems, as well as ensuring our headcount is better aligned with our customer numbers.

The UK business is making progress improving the effectiveness of its sales and marketing activity, although this has taken us longer than originally expected to implement. In FY14 we are planning to recruit around 200k new customers, compared to around 100k in FY13, as we develop and increase the scale of our marketing activity. By FY15 we are planning to recruit around 300k new customers a year enabling us to stabilise the UK customer base at around 1.9m customers. The planned increase in new customer acquisition volumes will be supported by the roll-out of new products, including Premier Plumbing and Drainage, which offer our customers increased cover. We are also planning for more support from our water affinity partners with an increasing proportion of sales coming from their call centres and the development of our internet and digital sales channels. In the medium term direct mail will remain an important channel for new customer acquisition with outbound telephony expected to continue to focus on offering additional products to existing customers only.

We continue to expect the full year UK underlying retention rate (excluding losses from the run-off of non-core manufacturer warranties and customer re-contact exercise) to increase to around 80% in FY14 and would expect it to increase further in future years as we benefit from the roll-out of new products and increasing customer satisfaction.

In FY14 the reduction in the number of customers renewing will result in around £35m of lower contribution, which is expected to be partially offset by headcount savings of around £10m.

UK revenue in FY15 is expected to reduce further by around £20m as a result of a lower number of renewing customers and the continued marketing and roll-out of new enhanced products. This reduction will be partially offset by full year savings in direct costs and further operating efficiencies.

·; International Businesses

In our International businesses we are confident that we will continue to deliver strong and sustainable growth in customers and earnings. As a result, we expect our established International businesses to deliver over 50% of the Group's operating profit in the medium term.

USA

Our North American business provides our most significant growth opportunity.

The strong growth in customers, over 20% in FY13, is being driven by the signing of an increasing number of new affinity partners and the continued success of own brand marketing. In FY14 we expect our US business to significantly benefit from this customer growth and we plan to continue to deliver a high customer growth rate in future years.

We are today announcing a new partnership with San Jose Water, which serves 226,000 households in California and we have also been approved by the City of Houston (550,000 water and sewer households) to provide their customers with a water and sewer line repair programme on a non-exclusive basis. We now have around 1.3m customers with 35 partners serving 22m affinity partner households and we have a strong pipeline of potential affinity partner opportunities. In addition, we also market to around 9m households using the HomeServe USA brand.

We are also pleased to announce an association with former New York City Mayor Rudy Giuliani and Giuliani Partners to advise us in increasing awareness of the need for water and sewer infrastructure investment and consumer protection nationwide.

France

In France, Doméo is focused on maintaining its high retention rate and growing its net income per customer. We expect customer numbers to increase although the rate of customer and profit growth is likely to be modest. The key to increasing customer growth in France will be the signing of additional utility affinity partners.

Spain

In Spain, we are planning for continued strong growth in customer and policy numbers in our membership business as we continue to invest in our marketing activity and grow our renewal revenue. In particular, in FY14 Endesa, our energy affinity partner, is increasing its support for sales of our electrical assistance product and as a result we are expecting a significant increase in customer and policy numbers. This growth will be driven primarily by sales through Endesa's sales channels.

New Markets

We will continue to invest in our New Markets businesses in Italy and Germany. In Italy, we will be rolling out marketing to our affinity partners, Enel Energia and Veritas, whilst developing further partnership opportunities. In Germany, our principal focus will be on signing additional partnerships. As these businesses invest in growing their customer numbers we expect our New Markets segment to continue to report an operating loss of around £6m p.a.

·; Investment in growth and operational efficiency

To support our growth plans and improve our operational efficiency, the Board has agreed to invest in a new packaged IT system which will be implemented across the entire business. This investment, amounting to around £30m over the next three years (FY14 - 16), will start to deliver operational benefits in FY15 with financial benefits starting to accrue from FY16.

In our US business, the new system will enable us to on-board affinity partners and integrate our charging processes into their billing systems more quickly while in the UK, it will improve our marketing effectiveness, reduce our costs and improve our compliance and control processes. Across the Group, the system will provide call centre agents in all parts of the business with a single view of the customer.

Our total capital expenditure, including the new system, is expected to be around £30m p.a. over the next three years (FY14 - 16).

Financial Position

The business remains highly cash generative and our net debt at 31 March 2013 is expected to have reduced further from the £60m reported at 31 December 2012.

Conference call

There will be a conference call for analysts and investors at 8.00am this morning. You can dial into the conference call by dialling +44 (0)20 3139 4830 and pin code 55108225#. A replay will be available on +44 (0)20 3426 2807 and pin code 637800#.

HomeServe will publish its results for the year ended 31 March 2013 on 21 May 2013.

Enquiries

Notes

1. Adjusted profit before tax excludes the amortisation of acquisition intangibles and exceptional items.

2. The range of analyst forecasts for adjusted profit before tax for the year ending 31March 2013 is £102.9m to £110.0m based on forecasts as at 21 March 2013. The average of these forecasts is £105.7m.

Forward Looking Statements and Other Information

This announcement 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 and forecasts 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 and forecasts. Nothing in this announcement should be construed as a profit forecast.