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Homeserve Plc (HSV)

  Print      Mail a friend       Annual reports

Tuesday 22 May, 2012

Homeserve Plc

Final Results

RNS Number : 8029D
Homeserve Plc
22 May 2012
 

HomeServe plc

Preliminary results for the year ended 31 March 2012

 


2012

2011

Change

Revenue

£534.7m

£467.1m

+14%

Adjusted Operating profit1

£128.2m

£119.2m

+8%

Adjusted Profit before tax2

£126.0m

£117.1m

+8%

Adjusted Earnings per share3

28.0p

25.9p

+8%





Statutory Profit before tax

£138.0m

£104.8m

+32%

Basic Earnings per share

35.4p

24.0p

+48%

Dividend per share

11.3p

10.3p

+10%

 

 

·     Financial summary

-     Revenue up 14% to £535m

-     Adjusted group operating profit1 up 8% to £128m

-     EstablishedInternational businesses adjusted operating profit1 up 78% to £29m

-     Free cashflow of £64m with net debt of £66m at 31 March 2012

-     Statutory results include £24m of one-off UK costs

 

·     Restoring our customer focus in the UK

-     Retention rate is strong and stable at 80%

-     Addressing sales and marketing, complaints handling and governance and controls

-     Constructive relationship with the FSA; commencement of investigation into past issues

-     Customer numbers down 9% as a result of reduced marketing activity and effectiveness

-     Planned reduction in customers to 2.2-2.4m during FY2013

 

·     Strong growth in International earnings and customer numbers

-     International customers up 14% to 2.2m, including a 16% increase to 1.1m in the USA

-     Retention rate remains strong at 83% across our International businesses

-     Acquired full control of Doméo in France

-     Customer and policy numbers in Spain up over 50% in the past 12 months

-     Signed a test marketing agreement with BS Energy in Germany

 

Richard Harpin, Chief Executive, commented:

"It has been a challenging year for our UK business, however, we continue to make strong progress in developing our International businesses.

 

We took swift and comprehensive action to address the issues that we identified in the UK and are totally committed to restoring our customer focus.  We are strengthening our management teams, retraining staff and continuing to make significant investments in customer service.

 

In the UK we are planning to create a smaller, more focused and sustainable business from which to grow.  We remain excited about the growth opportunities in our International markets.

 

We carried out over 1.6m repairs for customers last year, demonstrating that our products and services continue to meet real customer needs both in the UK and our International markets."

 

1.     Excluding amortisation of acquisition intangibles, joint venture taxation and exceptional expenditure, see Financial review and note 3.

2.     Excluding amortisation of acquisition intangibles, joint venture taxation, exceptional expenditure and re-measurement of joint venture interest on acquisition of control, see Financial review.

3.     Excluding amortisation of acquisition intangibles, exceptional expenditure and re-measurement of joint venture interest on acquisition of control, see Financial review and note 7.


 

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 +44 203 140 0668, pin code 818709#, and also a live webcast available via www.homeserveplc.com.

 

HomeServe plc

Tel: 01922 427979

Richard Harpin, Chief Executive

David Bower, Interim Chief Financial Officer

Mark Jones, Head of Investor Relations

 

 

 



Tulchan Group

Tel: 0207 353 4200

Christian Cowley

Ed Orlebar

Martin Robinson


 

 

 

 

 

 

 

 

 

 

 

 

 


CHAIRMAN'S STATEMENT

 

The identification of the regulatory issues in our UK business in October 2011 has made this the most challenging year in HomeServe's history.  We took immediate action to address these issues and have implemented a thorough and extensive change programme in our UK business.  While this is taking longer and costing more to implement than originally planned, we are pleased with the progress we have made.

 

Our International businesses have continued to make strong progress throughout the past 12 months with 12 new affinity partnerships agreed, customer numbers growing by 14% to 2.2m and adjusted operating profit1 from our established businesses in the USA, France and Spain increasing to £28.5m (2011: £16.0m).

 

HomeServe's policies continue to free customers from the worry and inconvenience of home emergencies and repairs with over 1.6m emergency repairs carried out over the past 12 months.   These jobs were carried out using a network of over 4,000 directly employed, franchised and sub-contract engineers and with a continued investment in our service delivery capabilities.

 

Results

In the year, revenue was up 14% to £534.7m (2011: £467.1m) and adjusted profit before tax2 was up 8% to £126.0m (2011: £117.1m).  The growth principally reflects continued development in our International businesses and the benefit of acquiring full control of Doméo in France in December 2011 (originally a joint venture), partially offset by a reduction in UK operating profit1 as a result of the suspension of sales and marketing activity.  Adjusted earnings per share3 increased by 8% to 28.0p (2011: 25.9p).

 

The business continues to have a strong balance sheet and generates high levels of free cash flow.  Net debt at 31 March 2012 was £66.0m (2011: £11.8m) and reflects the acquisition of the remaining 51% shareholding in Doméo for £82m.

 

On a statutory basis, revenue increased by 14% to £534.7m, profit before tax increased by 32% to £138.0m and earnings per share increased by 48% to 35.4p.  The Group's statutory result includes a gain of £55m due to the re-measurement to fair value of our original 49% shareholding in Doméo at the time of the acquisition of the remaining 51% as well as £24m of one-off costs relating to addressing our UK issues.

 

UK

During the year, our UK business identified a number of potential failings in its sales and marketing, complaints handling and associated governance and controls.  The UK business is making progress in implementing the necessary steps to restore its customer focus and ensure its customers are receiving the high standards of service that we expect to deliver.  This includes strengthening the UK management team as well as the UK Board. 

 

The UK management team has a constructive relationship with the Financial Services Authority (FSA), with regard to the business improvement initiatives being undertaken.

 

The FSA has informed us that they intend to investigate certain historic issues.  The FSA's investigation will take a number of months to complete.

 

We re-started our UK sales and marketing activity on a phased basis, following its temporary suspension in October, as our retraining and process enhancements were completed and tested.  As mentioned above, it has taken longer than we originally anticipated to re-start activity, but we remain confident that the actions we are implementing are in the long-term interest of all stakeholders.


International business development

We have achieved strong growth in our International businesses during the year.

 

HomeServe USA has continued to sign up new affinity partners, including EPCOR Utilities Inc. (EPCOR), our first Canadian water utility and Florida Public Utilities, a gas and electric utility.  We now have over 1 million customers in the USA.

 

In France, we were very pleased to be able to take full control of Doméo in December 2011 with the purchase of the remaining 51% shareholding from Veolia, as well as agreeing a long-term marketing agreement with them.  Owning 100% of Doméo will enable us to develop the product range further and to sign new utility and appliance manufacturer affinity partners in France in the future.  The transition to full ownership by HomeServe has gone well and we are continuing to develop our plans for further growth in France.

 

In Spain, we have achieved strong growth in customer and policy numbers; whilst in our New Markets segment we are continuing to test acquisition marketing in Italy and have signed a test agreement with BS Energy in Germany.

 

Dividend

The Board is proposing a final dividend of 7.67p per share bringing the total dividend for the year to 11.3p (2011: 10.3p), an increase of 10%, reflecting its confidence in the long-term prospects of the business.

 

Management and Board changes

In July 2011, we announced that Jonathan King would return to the UK as Chief Executive Officer of our UK business, replacing Jon Florsheim.  Also in July we announced the appointment of Tom Rusin as Chief Executive Officer of HomeServe USA.

 

Following the announcement in October that Andrew Sibbald had stepped down as a Non-Executive Director, we announced the appointment of Ben Mingay to the Board as a Non-Executive Director in December 2011.  Ben is a Managing Partner of Smith Square Partners, an independent corporate finance advisory firm, and has more than 20 years' experience as a corporate finance adviser.  I would like to thank Andrew for his support and contribution to HomeServe over the past four years and welcome Ben to the Board.

 

In January 2012, we announced the creation of the new Board position of Chief Operating Officer and the appointment of Martin Bennett, previously Chief Financial Officer, to this new position.  Martin now has responsibility for the effective and efficient delivery of HomeServe's operating model, IT systems, best practice and risk management across all our geographies working closely with the country Chief Executive Officers.  Martin's initial priority is to support Jonathan King (UK Chief Executive Officer) and the UK business on claims and network management, underwriting, systems and efficiency.

 

We have today announced the forthcoming appointment of Johnathan Ford as Chief Financial Officer.  Johnathan is currently the Group Finance Director of NWF Group plc, an AIM listed specialist agricultural and distribution group.  Johnathan is expected to join HomeServe on 1 October 2012.  Until this time David Bower, Group Finance Director, will continue as Interim Chief Financial Officer and I would like to thank David for stepping into this role during this challenging period.

 

People

It has been a difficult year for HomeServe, and particularly our staff in the UK. The actions we are implementing to restore our customer focus are resulting in significant changes within the UK business, including a reduction in the number of people.  I would like to thank all of the UK team for their professionalism during this period of change and am confident that the actions we are taking will strengthen the quality and consistency of our service to customers and result in increased employee engagement in the future.

 

In our International businesses, we continue to increase the number of people we employ as we grow our customer and policy numbers. 

 

On behalf of the Board, I would like to thank all of our people for their contribution in what has been a challenging year for the Company.

 

Summary and outlook

HomeServe's products continue to meet clear customer needs and our business model continues to deliver long-term value.  We are addressing the shortfall in standards that we identified in our UK business and have already taken a number of actions to improve the business.

 

We are confident that we can create a smaller, more customer focused UK business from which to grow, whilst achieving strong progress in our International markets.

 

JM Barry Gibson

Chairman

22 May 2012

 


CHIEF EXECUTIVE'S REVIEW

 

HomeServe is committed to providing a membership service which frees our customers from the worry and inconvenience of home emergencies and repairs both in the UK and internationally.  At HomeServe our values are to put the customer at the heart of everything we do, develop and engage great people who are passionate about taking responsibility and making things happen, combine relentless innovation with integrity and professionalism and strive to be the best in the world at what we do.  It was therefore disappointing to identify sales and marketing, complaints handling and governance and control issues in our UK business during the year.

 

Having identified the issues in our UK business, we took immediate action to address the root cause of the problems.  The temporary suspension of our sales and marketing activity in the second half of the year has had a significant impact on our UK customer and policy numbers and the extensive change programme we are now implementing in the UK business has resulted in a high level of exceptional costs.  We believe that these actions were the right ones to take, despite the impact on our reported results. 

 

We have made significant changes to our UK board and management team during the second half of the year.  We have also changed the way in which we incentivise management and staff across both the UK and International businesses to ensure that customer service and quality metrics have an appropriate weighting.  We have introduced two customer service goals focused on increasing customer satisfaction and minimising complaints.

 

The issues in our UK business have not impacted our International businesses' results which have shown strong growth over the past 12 months.  Our International customer numbers have increased by 14% to 2.2m and profits1 from our established International businesses, in the USA, Spain and France, increased by 78% to £28.5m.

 

The strong growth in the number of International customers has offset the reduction in the UK following the temporary suspension and phased restart of sales and marketing activity.  Global customers at 31 March 2012 were 4.9m (2011: 4.9m) with policy numbers at 11.0m (2011: 11.4m), a reduction of 0.4m over the past year.  Income per customer has increased by 9% to £86 (2011: £79) with adjusted profit before tax2 growing by 8% to £126.0m (2011: £117.1m).

 

The table below shows our performance metrics on a global basis as at 31 March 2012.

 



UK

International

Total

Change



2012

2011

2012

2011

2012

2011


Affinity partner households

m

24

23 

47

45 

71

68 

+4%

Customers

m

2.7

3.0 

2.2

1.9 

4.9

4.9 

-

Penetration of affinity households

%

11.5

12.8 

4.7

4.3 

6.9

7.2 

-0.3ppts

Income per customer

£

99

89 

71

64 

86

79 

+9%

Policies

m

6.7

7.5 

4.3

3.9 

11.0

11.4 

-3%

Policies per customer


2.5

2.5 

2.0

2.0 

2.3

2.3 

-

Retention rate

%

80

83 

83

86 

81

84 

-3ppts

Operating profit1

£m

103.1

104.3 

25.1

14.9 

128.2

119.2 

+8%

 

The following sections report on the performance of each of our business segments.


UK

At 31 March 2012, our UK business had 2.7m customers with 6.7m policies.  In the past 12 months we have completed over 0.9m home emergency repairs through our network of over 750 directly employed plumbing and drainage and sub-contract engineers, with 94% of customers satisfied with the service they received.

 

During the year, our UK business identified a number of potential failings in its sales and marketing, complaints handling and associated governance and controls which are discussed in more detail below.  Addressing these issues has had a significant impact on the UK's financial and operational results in the year.

 

Over the next 12 months the UK business will refocus on the partner markets of water utilities, manufacturers of installed appliances and financial services companies.  We will reduce the number of customers acquired on high discounts and those where we have limited cross-sell potential and rebase the business to a level from which we will be able to grow higher quality and sustainable earnings in the future.

 

Customer complaints

The winter of 2010 saw the most extreme weather for over 100 years and, in the majority of cases, we believe that we provided the best service we could in light of the unprecedented demand from our customers.  We did, however, receive an unusually high number of customer complaints, predominantly due to the number of customer calls and emergency repairs undertaken during the period.  The majority of the complaints related to the grade of service in response to a customer's emergency and none went unanswered.

 

We have developed a plan to review all the complaints that were received during the period in which our procedures may not always have operated correctly.  All customers that may not have received a fair outcome are being re-contacted and, where appropriate, compensated.  The expected cost of this re-contact exercise, including any compensation payments, has been included in the UK exceptional expenditure.

 

The number of customer complaints has fallen significantly during the past 12 months, partly due to our winter planning which included the recruitment of an extra 140 call centre agents at our 24 hour claims centre in Preston.  This gave us increased capacity over the 2011 winter period and was successful in ensuring that we maintained our service standards throughout the peak period.

 

In addition, we have invested £2.5m in our Claims operations systems, which improves the process for booking sub-contract engineers following a customer's call and enhances our ability to manage those jobs, improving the overall customer experience.

 

Sales and marketing activity

Sales and marketing is one of our core value drivers and is at the heart of our relationships with customers and our business partners.  HomeServe is committed to operating to the highest standards of sales practices in respect of both our existing and potential customers.

 

During the year, our UK compliance function continued its monitoring activities and in order to supplement this work the business commissioned an independent report from external consultants.  This report raised a number of points including a potential issue around the way in which 'Complete Cover' policies had been sold as an upgrade to existing customers by telesales staff.  We took the decision on 28 October to temporarily suspend all sales and marketing activity in the UK and since then we have developed new telesales scripts, re-trained sales agents, improved compliance and monitoring processes across the whole business, and reviewed and revised how we incentivise our sales staff.  We have also made improvements to the clarity of our sales and marketing materials.

 

We are re-contacting any customers where there is a risk that they may have suffered detriment as a result of the way in which they were sold their policy.  The expected cost of this exercise has been included in the UK exceptional expenditure.

 

We re-started our inbound call centre activity in early November on a phased basis, while direct mail activity for new customer acquisition and cross-sell re-started from January.  We have had mixed results to date from our direct mail activity, with the acquisition campaigns under-performing our response rate expectations, while cross-sell has delivered good results.  We will continue to test alternative marketing approaches over the next few months as we aim to improve the response rates and meet our internal targets, while maintaining clarity in all our communications.

 

We have also reviewed our channel strategy and concluded in February that our outbound telephony channel would, in the future, focus primarily on cross-selling policies to existing customers.  While this will reduce the number of new customers acquired in the short-term, we believe the benefits in terms of retention, reputation and value will offset this in the long-term.

We are pleased to confirm that we recommenced outbound cross-sell activity with a pilot in early April.  We are monitoring the results of this pilot closely and expect to roll out further activity over the coming weeks.

 

In July 2011 Ofcom announced an investigation into outbound marketing calls made on behalf of HomeServe by one specific outsourced supplier.  This concerned non-compliance with rules regarding silent, abandoned or repeat calls between 1 February 2011 and 21 March 2011.  As a result of the investigation Ofcom imposed a fine of £750,000 in April 2012.  We can confirm that all of our dialler systems have been fully compliant with Ofcom regulations since 22 March 2011. 

 

UK management changes

In August, Jonathan King returned from the US, where he had served as CEO of HomeServe USA for six years, to take over the leadership of the UK business.  The UK management team has seen significant change since the first half of FY2012.  We have appointed an experienced Compliance Director, a new Customer Relations Director and are in the process of appointing a new Marketing Director who has extensive experience in financial services.  The UK team is also benefitting from the support of Martin Bennett, Chief Operating Officer, who is supporting the UK on claims and network management, underwriting, systems and efficiency.

 

We also further enhanced the Board of Directors of the UK business.  In November, we appointed Diana Miller, who was previously Compliance Director at Legal & General, as a Non-Executive Director and we are in the process of finalising the appointment of an Independent Non-Executive Chairman, who will provide significant experience of working in the financial services industry.

 

Improving controls & governance

We have commissioned an external review of our governance and controls and a number of measures have already been implemented, including the strengthening of the UK board and the implementation of new incentive schemes.

 

We believe that Jonathan King and his management team, supported and challenged by the new independent Non-Executive Directors, will be able to identify and complete the implementation of the changes necessary to improve our controls and governance procedures and put the customer back at the centre of the business. The team has developed a constructive relationship with the FSA over the past nine months with regard to the business improvement initiatives being undertaken and our future plans in the UK.



UK performance

·    Lower customer and policy numbers as a result of less sales and marketing activity in the second half of the year

·    Retention rate remains high at 80%

 

UK performance metrics


2012

2011

Change

Affinity partner households

m

24

23

+1%

Customers

m

2.7

3.0

-9%

Penetration of affinity households

%

11.5

12.8

-1.3ppts

Income per customer

£

99

89

+11%

Total policies

m

6.66

7.53

-12%

Policies per customer


2.46

2.52

-0.06

Policy retention rate

%

80

83

-3ppts

 

UK policies split by type


2012

2011

Water

'000

3,731

4,227

Electrical

'000

674

777

Heating, ventilation, air conditioning (HVAC)

'000

773

928

Manufacturer warranties

'000

520

503

Other

'000

963

1,095

Total policies

'000

6,661

7,530

 

UK revenue reduced by £5.4m to £353.5m (2011: £358.9m) principally due to the temporary suspension of sales and marketing activity in October.  In addition, revenues in the prior year included £8m from the sale of furniture warranties, which we ceased selling in June 2011.

 

Income per customer has increased, primarily as a result of the favourable mix impact of fewer new customers in the year, where policy prices are heavily discounted, together with the benefit of the annual increase in prices.  Adjusted operating profit1 in the UK was £103.1m, a reduction of £1.2m compared to the prior year (2011: £104.3m).  There was also exceptional one-off expenditure of £24.2m which reflects the cost of addressing the issues identified in the UK business during the year.

 

We were pleased to announce in December that we had signed a new long-term partnership with Sembcorp Bournemouth Water (SBW) with whom we did not previously work.  The addition of SBW as an affinity partner increased our UK affinity partner marketable households to 23.6m UK households. 

 

Our UK gross new policy sales, and customer and policy numbers have all reduced during the year as a result of significantly lower sales and marketing activity in the second half of the year.  We initially suspended all of our sales and marketing activity at the end of October before re-starting activity on a phased basis when we were confident that our processes were able to deliver the standards of service that we and our customers expect.

 

As already noted, it took longer than we originally expected to restart our sales and marketing operations and the results of this activity during the final quarter of the year have been mixed.  Customer numbers at 31 March 2012 were down 9% to 2.7m (2011: 3.0m) whilst policy numbers fell 12% on a year ago to 6.7m (2011: 7.5m), resulting in an average number of policies held of 2.46 (2011: 2.52).  Gross new policy sales were 0.7m, significantly below the 1.8m policies sold in the prior year.

 

We announced plans to reduce the UK headcount by around 200 in February and announced yesterday plans for a further reduction of 250, as we align our sales and support functions with our marketing plans and the lower customer base.

 

The retention rate for policies which have been held for two or more years has remained stable and continues to be significantly above the overall reported rate of 80% (2011: 83%).  The reduction in the reported rate primarily reflects a lower retention rate on policies renewing for the first time and the effect of suspending our retention call centre agent incentive schemes for the majority of the second half of the year.

 

United States of America

·    8 new affinity partnerships signed during the year

·    1 million customer milestone reached

·    Expanded US footprint - now operating in 41 US states and Alberta, Canada

 

USA performance metrics


2012

2011

Change

Affinity partner households

m

21

21

+3%

Customers

m

1.1

0.91

+16%

Penetration of affinity households

%

5.0

4.4

+0.6ppts

Income per customer

$

113

85

+33%

Total policies

m

1.71

1.39

+23%

Policies per customer


1.62

1.52

+0.1

Policy retention rate

%

79

82

-3ppts

 

USA policies split by type


2012

2011

Water

'000

833

689

Electrical

'000

103

93

Heating, Ventilation, Air Conditioning (HVAC)

'000

324

212

Other

'000

449

391

Total policies

'000

1,709

1,385

 

Revenues in the USA were £82.3m (2011: £52.6m), 56% higher than a year ago, and adjusted operating profit1 was £9.0m (2011: £6.1m), up £2.9m.  The growth reflects a full 12 months of income from the National Grid businesses acquired in August 2010 and a 16% increase in customer numbers.

 

During the past year, we have signed a record number of new affinity partners in the USA.  We announced new utility partner agreements with Middlesex Water in New Jersey, Contra Costa in California, Biddeford & Saco in Maine, Water One in Kansas and EPCOR in Canada; and manufacturer warranty partnerships with A O Smith and Rinnai.  We have also recently signed a marketing agreement with Florida Public Utilities (FPU) a gas and electric utility serving 0.1m households.

 

During the year, we have successfully integrated the policies acquired from Middlesex Water and South Jersey Energy Services Plus as they have come due for renewal.  Acquiring existing home emergency programmes run by a number of utilities in the USA remains one of our key strategies for accelerating the growth of our business alongside signing more organic marketing agreements.  We continue to meet whenever possible with the management team of each of the programmes where we believe there is the greatest likelihood of a potential transaction so that we are ready to progress a partnership as and when the catalyst for change occurs.

 

We now work with partners that have access to over 21m marketable households in the US and Canada and are also targeting around 7m households in 39 states who we market to under our own name until we sign a utility in the area.  We are building a truly national business and are now licensed to operate in 49 states with work already underway to gain approval for the final state of Wisconsin. 

 

We have made good progress in getting our partners' agreement to broaden the range of sales channels and products that we can use and promote to their customers.  As a result, gross new policy sales during the year were 0.6m (2011: 0.4m).  This growth, together with a good retention performance, has resulted in customer numbers increasing by 16% to 1.1m (2011: 0.9m) and policy numbers increasing by 23% to 1.71m (2011: 1.39m).  As a result, policies per customer have increased from 1.52 to 1.62.

 

The increasing proportion of higher value heating, ventilation, and air conditioning (HVAC) policies, together with the growth in the number of policies per customer, has resulted in income per customer increasing by 33% to $113 (2011: $85).

 

The US retention rate was 79% (2011: 82%) and reflects a combination of the growing proportion of own brand policies, the increased proportion of first year renewing policies and an increased proportion of 'off-bill' customers, principally following the acquisition of National Grid, where retention rates are lower.

 

We are continuing to develop our product range in the USA and are currently working on electrical surge protection and appliance protection products.  In addition, we have recently started to market our manufacturer warranty policies to the water heater customers of A O Smith and Rinnai.

 

As part of our plans to continue the growth of our own brand marketing activity, we are implementing a new programme to raise the awareness of homeowners of their responsibilities for the pipes and wires in and around their homes.  As part of this activity we also highlight HomeServe's products and service standards to key stakeholders in each community, in advance of entering a new territory.

 

In the USA, we completed 0.24m jobs during FY2012 with customer satisfaction averaging over 96%.  These jobs were completed by our 139 directly employed technicians in the National Grid territories and our network of over 700 high quality sub-contractors covering the rest of the country.  Over the past 12 months we have expanded our network of sub-contractor engineers, establishing networks in eight new US States and Canada to service our new affinity partner households as well as the growth in our Own Brand policies.

 

Doméo

·    Acquired full control of the business, buying the 51% shareholding from Veolia for £82m

·    High retention rate of 88% maintained

 

Doméo performance metrics


2012

2011

Change

Affinity partner households (excluding apartments)

m

14

14

-

Customers

m

0.89

0.86

+4%

Penetration of affinity households

%

6.3

6.0

+0.3ppts

Income per customer

96

93

+3%

Total policies

m

2.33

2.22

+5%

Policies per customer


2.61

2.60

+0.01

Policy retention rate

%

88

88

-

 

Doméo policies split by type


2012

2011

Water

'000

1,903

1,831

Electrical

'000

253

257

Other

'000

169

136

Total policies

'000

2,325

2,224

 

Doméo was originally established as a joint venture with Veolia in 2001 and has grown successfully over the past 10 years.  In December 2011 we were delighted to announce that we had reached agreement with Veolia to acquire their 51% share of Doméo and take full control of the business.  As part of the acquisition we also agreed a long-term marketing agreement with Veolia, providing Doméo with continued use of their brands in France.  This acquisition completed on 7 December with net cash consideration amounting to £82m for the 51% shareholding.

 

While HomeServe has historically provided the majority of the day to day management expertise to Doméo, we have not been able to significantly expand its affinity partner relationships beyond Veolia.  However, by obtaining full control of Doméo, we now have a good opportunity to develop the product range further and broaden the range of affinity partners in France.  In particular, we can now discuss potential agreements with heating manufacturers as well as other water utilities, neither of which were possible under the original joint venture shareholder agreement.  In addition, Doméo and our other French business, SFG, will be able to work much more closely together to maximise cross-sell opportunities and share expertise where appropriate.

 

Doméo contributed revenues for the eight months during which it was a joint venture and the four months during which it was wholly owned of £51.8m (2011: £32.3m).  French customers continue to remain very loyal with the policy retention rate remaining high at 88% (2011: 88%).  This, together with increased renewal revenues, has resulted in Doméo's adjusted operating profit1 contribution increasing to £16.7m (2011: £8.2m). 

 

Customer numbers increased by 4% to 0.89m (2011: 0.86m) during the year, with policy numbers growing by 5% to 2.3m (2011: 2.2m).  Customers in France continue to have the highest number of polices per customer of any of our regions with 2.61 policies (2011: 2.60).  Income per customer increased by 3% to €96 (2011: €93), reflecting the growth in customer and policy numbers, partly offset by the mix of policies held by customers.

 

Doméo achieved gross new policy sales of 0.4m (2011: 0.5m) with strong sales of water supply pipe policies and coverage relating to taps.  We are continuing to test different marketing initiatives in order to make further progress with the apartment segment of the market, which is significant in France, as well as increasing the number of Veolia call centres that transfer calls into our sales teams.

 

All of our repairs in France are managed through our network of 980 sub-contract engineers with over 96% of customers who have had a claim being satisfied with the service they received.

 

Spain

§ Customer and policy numbers up over 50%

§ Gross new policy sales up over 48%, with strong growth in 'Club' policies

 

Spain performance metrics


2012

2011

Change

Affinity partner households

m

12

10

+17%

Customers

m

0.26

0.17

+55%

Penetration of affinity households

%

2.2

1.7

+0.5ppts

Total policies

m

0.34

0.22

+57%

Policies per customer


1.31

1.29

+0.02

As the Spanish policy book is relatively small and growing quickly we do not currently report the retention rate

and income per customer metrics

 



 

Spain policies split by type


2012

2011

Water

'000

97

30

Electrical

'000

128

107

Other

'000

112

78

Total policies

'000

337

215

 

In Spain, revenue increased by 23% to £60.2m (2011: £48.8m) and adjusted operating profit1 by 65% to £2.8m (2011: £1.7m) reflecting growth in customer numbers as well as higher claims handling volumes and margins, despite the very difficult economic conditions in Spain. 

 

We increased our investment in marketing in Spain over the past twelve months as we rolled out activity to Agbar, whilst continuing to target sales to Endesa households.  This has resulted in gross new policy sales increasing by 48% to 239k (2011: 161k).  We continue to find outbound telesales particularly successful in Spain with around 46% of gross new policy sales coming through this channel.

 

Customer and policy numbers continue to show strong growth.  Customer numbers have increased by 55% to 258k (2011: 167k) and policy numbers are up 57% to 337k (2011: 215k).

 

We continue to have particular success in selling our 'Club' product in Spain.  Club provides customers with access to our repair network and one hour's free labour per annum across a range of 25 trades.  The Club product is essentially an 'entry' level product and our goal for the future is to retain and up sell these customers a full water or electrical emergency cover policy thereby increasing income per customer and the membership operating margin.

 

Our claims handling business in Spain continues to perform well with continued growth in the number of claims managed and a tight control on margins.

 

Our network of 1,450 sub-contract and Reparalia franchised engineers completed over 0.35m repairs over the past twelve months, with 91% of customers satisfied with the service they received.

 

New Markets

·    Continuing to test acquisition marketing activity in Italy

·    Good progress in developing SFG's manufacturer warranty operation

·    Exited Belgium, as a result of being unable to sign a large utility partner

·    Signed a test marketing agreement in Germany

 

Our New Markets segment now includes our developing businesses in France, via our warranty business Société Francaise de Garantie (SFG), Italy and Germany.

 

Despite positive discussions with a number of potential affinity partners in Belgium, we have been unable to reach agreement on any long-term partnership.  We have therefore sold the businesses we acquired to enter Belgium and refocused our European management efforts and marketing spend on France, Italy and on launching in Germany with our first utility partner, BS Energy.

 

The New Markets businesses, including those in Belgium, reported revenue of £11.6m (2011: £9.9m) and an adjusted operating loss1 of £3.4m which was in line with our expectations (2011: £1.1m) and reflects additional investment in marketing activity in SFG and our Italian businesses.  We expect to maintain this level of investment in our New Markets businesses in future years as we aim to grow in Italy, Germany and the French warranty market.

 

Our test marketing with Enel in Italy has proved successful in acquiring new customers and we have therefore extended our original test agreement to ensure that we can also test renewal activity.  In parallel, we are discussing the opportunity to agree a long-term affinity partnership with access to an increased number of households.  We have also achieved encouraging results from our marketing with Veolia Acqua, a small Italian water utility, in addition to discussing potential agreements with a number of other Italian water companies.

 

In SFG, we have continued to invest in the development of a post-point of sale and manufacturer warranty operation with marketing activity with Indesit and Mistergooddeal.  We are making good progress in developing the manufacturer warranty operation and are pleased to have signed a new longer-term agreement with Indesit.  Revenues from the original retail warranty customer base have, as we expected, reduced during the year.

 

We are pleased to have signed BS Energy (part of the Veolia group) as our first partner in Germany and will shortly start our test marketing activity.  We will be promoting plumbing, electric and gas home emergency services to BS Energy's 150k water, gas and electric households in Lower Saxony.

 

The Future

We are confident that our membership business model can continue to deliver value for customers, affinity partners and shareholders.  We believe that we can make the necessary changes to our UK business while at the same time growing and investing in our International operations.  The business remains very cash generative and we are confident of continuing to deliver a robust financial performance.

 

UK

The next 12 months will be a year of transition as we refocus on the partner markets of water utilities, manufacturers of installed appliances and financial services companies.  By reducing the use of high discounts and focusing on these markets, we expect the number of new customers acquired to reduce and for total UK customer numbers to fall from 2.7m to between 2.2m and 2.4m by the end of FY2013.  We expect the underlying UK retention rate to remain stable in FY2013 and to increase in the next few years as we focus more on the value of customers and less on the quantity. 

 

The customer need is unchanged, with customers wanting to buy plumbing cover from their water utility and heating cover from the appliance manufacturer.  We will be developing and testing a number of new propositions over the next 12 months, including offering our pay on use services under water company names for plumbing and boiler manufacturer names for heating emergencies.

 

We are planning to improve our cost efficiency by reducing the complexity of the UK business.  The continued investment in new technology and system improvements will be just one of the ways in which we aim to achieve this goal.  Whilst we test new marketing activity in FY2013, we will manage this expenditure carefully.  Savings in marketing costs will also be supported by other initiatives, as we align our people, infrastructure and marketing activity with our smaller customer base. 

 

Our expectations for UK profit remain unchanged for FY2013.  As a result of the lower customer numbers at the end of FY2013, we expect FY2014 renewals revenue to reduce accordingly, partly offset by lower operating costs.

 

International

In our established International businesses we will be targeting continued growth by increasing the penetration of existing partner households, new partner signings and the acquisition of policy books.

 

We expect to increase our marketing activity in our established International businesses in FY2013 as we build on the progress achieved over the past 12 months.

 

We will also be continuing to invest in the development of our New Markets businesses with the expected operating loss in FY2013 increasing as a result of an additional £2m of marketing investment in Italy and Germany.

 

Summary

2012 was a challenging year for HomeServe with continued growth in our International businesses being overshadowed by issues in our UK business.

 

We took significant, pro-active action to tackle the UK problems.  We are determined to put the customer at the heart of everything we do and deliver against all our values. 

 

Our International businesses were not affected by our UK issues and delivered strong growth.  We are planning to invest in additional marketing expenditure in both our established and new International businesses over the next 12 months as we target continued customer and policy growth.

 

We are confident that HomeServe can complete the necessary changes in our UK business and at the same time continue to grow our International operations and deliver a robust financial performance. 

 

Richard Harpin

Chief Executive

22 May 2012


FINANCIAL REVIEW

 

These financial results have been prepared in accordance with International Financial Reporting Standards (IFRS) and the accounting policies used are consistent with those at 31 March 2011.

 

Segmental Results

The Group has five operating segments - UK, USA, Doméo, Spain, and New Markets.  The New Markets division combines the results of our businesses in Belgium, SFG in France, Italy and Germany.  The revenue and adjusted operating profit1 for each of these segments are set out in the table below.

 

£million

Revenue

Adjusted operating
profit / (loss)1

Adjusted operating margin


2012

2011

2012

2011

2012

2011

UK

353.5

358.9

103.1

104.3 

29.2%

29.1%

USA

82.3

52.6

9.0

6.1 

11.0%

11.6%

51.8

32.3

16.7

8.2 

32.2%

25.4%

Spain

60.2

48.8

2.8

1.7 

4.7%

3.5%

11.6

9.9

(3.4)

(1.1)

-29.8%

-12.0%

JV/inter-division

(24.7)

(35.4)

-

-  

-  

Group

534.7

467.1

128.2

119.2 

24.0%

25.5%

 

Group revenue has increased by 14% to £534.7m (2011: £467.1m), and adjusted operating profit1 by 8% to £128.2m (2011: £119.2m), principally due to the growth in our International businesses and the full ownership of Doméo from December 2011.

 

UK revenue has reduced by £5.4m to £354m as result of the 9% reduction in customer numbers and the exit from the sale of furniture warranties in June 2011.  The growth in our International revenues reflects higher customer numbers as well as the benefit of owning 100% of Doméo from December 2011 (previously 49%). 

 

The Group adjusted operating margin (adjusted operating profit/(loss)1 divided by revenue) has reduced from 25.5% to 24.0% principally as a result of the increased investment in marketing in our New Markets businesses.

 

UK

 

Our UK business reported revenue of £353.5m (2011: £358.9m), a reduction of £5.4m and adjusted operating profit1 of £103.1m, a reduction of £1.2m compared to the prior year (2011: £104.3m).  The reductions were principally due to the suspension of sales and marketing activity in October and the suspension of retention call centre incentives.  In addition, revenues in the prior year included £8m from the sale of furniture warranties, which we ceased to sell from June 2011. 

 

Revenue in the UK business can be analysed as 'net income' (income per customer multiplied by the number of customers) of £268m (2011: £267m), with the remaining income of £86m (2011: £92m) representing £71m of repair network revenue (2011: £66m) and other income of £15m (2011: £26m), including third party claims handling revenue. 

 


Income per customer increased by £10 to £99 (2011: £89) driven by the mix impact of having a lower proportion of new customers in the year, where policies are heavily discounted, and a higher proportion of policies renewing in the year, where prices are higher.

 

Operating costs within the UK business reduced by £4m compared to the previous year. This was driven by lower marketing expenditure in the second half of the year and the exit from the sale and servicing of furniture warranties in June 2011, partially offset by the additional ongoing costs of maintaining our customer focus.  Within the UK business the most significant costs are the repair network and marketing costs.  The repair network costs are driven by the number of customers and policies whilst the marketing costs are variable and are driven by our customer acquisition and cross sell plans.

 

The UK adjusted operating margin was 29.2%, 0.1ppt increase compared to the previous year and has benefited from exiting the low margin furniture warranty sales and the cost savings from lower marketing activity in the second half of the year. 

 

USA

 

In the USA, revenue has increased by 56% to £82.3m (2011: £52.6m) and adjusted operating profit1 increased from £6.1m to £9.0m.  This reflects the growth in customer and policy numbers as well as the full 12 month benefit from the National Grid businesses acquired in August 2010. 

 

The ongoing investment in marketing with both new and existing partners and our own brand, as well as the investment in infrastructure and people, has resulted in the adjusted operating margin remaining broadly stable at 11.0% (2011: 11.6%).

 

Doméo

 

Doméo contributed revenue for the eight months during which it was our joint venture (49% owned by HomeServe) and the four months during which it was 100% owned by HomeServe of £51.8m (2011: £32.3m) and adjusted operating profit1 of £16.7m (2011: £8.2m).  £20.6m of the revenue reflects our 49% share of the joint venture prior to our acquisition of the remaining 51% shareholding in December 2011.

 

On a like for like basis, revenue and operating profit1 increased by 11% and 25% respectively, where the growth reflects the increased renewal revenue as well as good cost control.

 

The adjusted operating margin has increased from 25.4% in 2011 to 32.2% in 2012.  The adjusted operating margin on a like for like basis increased to 29.1%, reflecting the strong retention rate and increasing proportion of renewal revenue.

 

Spain

 

In Spain, revenue was £60.2m, £11.4m higher and adjusted operating profit1 was £2.8m (2011: £1.7m), £1.1m higher compared to the same period last year. Membership revenue increased by over 50% to £8.6m (2011: £5.6m) reflecting the growth in customer and policy numbers.  Claims handling revenue increased by around 20% as a result of increased volumes and a higher price per job.

 

Spain has reported an adjusted operating margin of 4.7% (2011: 3.5%).  The increased margin reflects the growth in claims volumes and improved network management partially offset by increased investment in membership marketing activity.

 

New Markets

 

Our New Markets businesses reported revenue of £11.6m (2011: £9.9m) and an adjusted operating loss1 of £3.4m (2011: £1.1m).  The increased operating loss1 reflects the increased investment in marketing activity in Italy and SFG in France, as well as set-up costs for our German business.  Our Belgian businesses, which have now been sold, contributed £1.9m of revenue and £0.5m of adjusted operating profit1.

 

Cash flow and financing

Our business model continues to be highly cash generative with cash generated by operations in 2012 amounting to £114.3m, representing a cash conversion ratio of 134% (2011: 111%). 

 

£million

2012

            2011

Adjusted operating profit1

128.2 

119.2 

Exceptional items, tax on joint venture and amortisation of acquisition intangibles

(42.9)

(12.3)

Operating profit

85.3 

106.9 

Depreciation, amortisation and other non-cash items

30.2 

17.1 

Increase in working capital

(1.2)

(5.0)

Cash generated by operations

114.3 

119.0 

Net interest

(3.2)

(1.3)

Taxation

(33.3)

(23.8)

Capital expenditure

(16.9)

(11.5)

Doméo dividend received

3.5 

3.7 

Free cash flow

64.4 

86.1 

Acquisitions / disposals

(87.8)

(16.2)

Equity dividends paid

(34.2)

(31.3)

Issue of shares

2.2 

2.4 

Net movement in cash and bank borrowings

(55.4)

41.0 

Impact of foreign exchange

2.2 

0.1 

Finance leases

(1.0)

Opening net debt

(11.8)

(52.9)

Closing net debt

(66.0)

(11.8)

 

 

The reported increase in working capital is lower than previous years principally due to £21.0m of the costs relating to addressing the UK issues not being paid at 31 March 2012.  Excluding the impact of these amounts, working capital increased by £22.2m.  This is significantly higher than the increase in the prior period, as this was itself lower than usual due principally to the timing of the declaration of our second interim dividend for the year ended 31 March 2010.

 

During the year, we incurred net capital expenditure of £16.9m (2011: £11.5m) primarily in support of information systems and access rights to affinity partner customer databases.

 

Free cashflow during the period was £64.4m (2011: £86.1m).  The reduction primarily reflects increased taxation payments, higher capital expenditure and certain of the one-off costs related to addressing the UK issues.  Taxation payments in the prior period benefited from the utilisation of tax losses generated from the closure of certain parts of the discontinued Emergency Services division.

 

During the first half of the year we renewed our banking facilities.  As part of the agreement we increased the size of the facility from £150m to £250m and increased the number of banks with whom we work.  The new facility, which has a similar cost to the previous arrangement, will ensure we maintain our financial flexibility over the next few years.

 

Net debt at 31 March 2012 was £66.0m (2011: £11.8m), an increase of £54.2m over the 12 month period.  The increase in net debt is primarily as a result of the £82m spent acquiring full control of our French subsidiary Doméo.  We continue to have a strong balance sheet with our net debt significantly below our facility limit.

 

 

 

Group statutory results

 

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

 

£million

         2012   

         2011




Total revenue

534.7 

467.1 




Operating profit

85.3 

106.9 

Net finance costs

(2.2)

(2.1)

Gain on re-measurement of joint venture interest on acquisition of control

 

 54.9 

Adjusted Profit before tax2

126.0 

       117.1 

Amortisation of acquisition intangibles

(10.4)

(9.3)

Exceptional expenditure

(31.1)

Gain on re-measurement of joint venture interest on acquisition of control

 54.9 

Tax on JV

(1.4)

(3.0)




Statutory Profit before tax

138.0 

104.8 

Tax

(23.7)

(27.9) 




Profit for the year, being attributable to equity holders of the parent

114.3 

76.9 

 

 

Statutory profit before tax was £138.0m, up £33.2m (2011: £104.8m).  Statutory profit before tax is after the amortisation of acquisition intangibles, exceptional costs, a gain on the re-measurement of our joint venture interest following the acquisition of the remaining 51% shareholding and tax on the earnings from Doméo during the period in which it was a joint venture.

 

Amortisation of acquisition intangibles and joint venture taxation

 

The amortisation of acquisition intangibles of £10.4m (2011: £9.3m) principally relates to customer and other contracts held by the acquired entities at the date of acquisition.  The £1.1m increase in the amortisation charge principally reflects the acquisition of the 51% shareholding in Doméo in December 2011. 

 

Doméo was a joint venture in France for the first eight months of the year and for this period the operating result is defined under IFRS as profit after tax and therefore a charge of £1.4m (2011: £3.0m) of joint venture tax is reported within statutory operating profit and statutory profit before tax.

 

Exceptional expenditure

 

The exceptional expenditure of £31.1m includes costs relating to addressing the issues in the UK, costs relating to the acquisition of the 51% shareholding in Doméo and a reduction in the carrying value of certain assets of our Belgian businesses, which have now been sold. 

 

 



 

·     UK exceptional expenditure

 

The £24.2m one-off charge of addressing the issues in the UK include our estimated cost of re-contacting and, if appropriate, compensating customers who may have suffered any detriment as a result of the way in which complaints have been handled or their policy purchased.  In addition, there are redundancy and reorganisation costs, costs related to reviewing and improving our controls and governance and sales and marketing materials and the Ofcom fine.  At the end of 2012, we had incurred £3.2m of actual expenditure, with the remaining £21.0m expected to be spent over the next 12 - 18 months.

 

The costs of re-contacting customers and the extent of any compensation due has been based on our best estimates at this time using the results of internal and external reviews as well as the early results from initial pilots.  It is possible that our assumptions regarding the number of customers, level of compensation payable, response rates and the upheld rate could be different to those currently assumed such that the amount currently recognised in this regard could be higher or lower.

 

Furthermore, there is currently no certainty as to the nature or extent of the action, if any, that the FSA may seek to take following the conclusion of its investigation and accordingly any related financial effect, which could include a fine, cannot be estimated reliably.  As a result, no provisions have been made in this regard in the current year.

 

·     Doméo acquisition costs and Belgium asset values

 

The exceptional expenditure also includes £3m of costs related to the acquisition of the 51% shareholding in Doméo and a £3.9m reduction in the carrying value of certain assets of our Belgian businesses, which have now been sold. 

 

·     Gain on re-measurement of joint venture interest on acquisition of control

 

As part of the acquisition of the remaining 51% shareholding in Doméo in December 2011 we are required to re-measure the value of our original 49% shareholding.  This re-measurement has resulted in a reported gain of £54.9m. 

 

Earnings per share

Adjusted earnings per share3 for the period increased by 8% from 25.9p to 28.0p.  The average number of shares in issue increased from 321m to 322m.

 

On a statutory basis, earnings per share increased by 47.8% to 35.4p.

 

Finance costs

The Group's net finance costs were £2.2m (2011: £2.1m).  The cost of servicing the higher level of debt following the acquisition of the remaining 51% shareholding in Doméo was broadly offset by a lower level of debt in the first nine months of the year.

 

Taxation

The tax charge in the financial year, prior to adjusting for tax on joint ventures, was £23.7m (2011: £27.9m).

 

In order to calculate an effective tax rate that reflects the ongoing tax burden of the Group, it is necessary to take account of the effect of joint venture results, which are shown net of tax within statutory profit before tax, on the Group's profits and tax for the year and also exclude both the £54.9m exceptional one-off gain as a result of the re-measurement of our 49% shareholding in Doméo following the acquisition of full control and the £3.9m reduction in the carrying value of certain assets in our Belgian businesses.

 

Adjusting the tax rate to include the tax relating to joint ventures and excluding the above exceptional items (an adjusted tax charge of £25.1m) and similarly grossing up for the joint venture tax on the statutory profit before tax (excluding the above exceptional items), the underlying joint venture adjusted tax rate is 28.4% (2011: 28.6%).  We expect the rate to gradually increase in future years as our International businesses, all of which are based in countries with a higher corporation tax rate than the UK, contribute an increasing proportion of profits.

 

Dividend

The proposed final dividend of 7.67p per share together with payment of the interim dividend of 3.63p per share brings the total dividend for the year to 11.3p (2011: 10.3p).  The final dividend, subject to shareholder approval, will be paid on 1 August 2012 to shareholders on the register on 29 June 2012.

 

Foreign exchange impact

The impact of changes in the € and $ exchange rates between FY2011 and FY2012 has resulted in the reported adjusted operating profit1 and revenue of our International businesses reducing by £0.1m.  The impact of foreign exchange rate movements on the individual businesses is summarised in the table below.

 

 


Average exchange rate

Effect on (£m)




Revenue

Adjusted operating profit1

 


2012

2011

Change

        2012

2012

 

USA ($)

1.59

1.56

+0.03

(0.8)

0.2

 

Doméo (€)

1.16

1.18

-0.02

(0.1)

(0.2)

 

Spain (€)

1.16

1.18

-0.02

0.6

(0.1)

 

New Markets (€)

1.16

1.18

-0.02

0.2

-

 

Total International




(0.1)

(0.1)

 

 

 

Acquisitions

Acquisition spend during the period totalled £87.8m (2011: £16.2m).  This expenditure includes the £82m spent acquiring full control of Doméo in December 2011 as well as deferred consideration of £4.5m in relation to acquisitions completed in prior periods.

 

Statutory and pro-forma reconciliations

The Group believes that adjusted operating profit1 and adjusted profit before tax2, which exclude the amortisation of acquisition intangibles, tax on joint ventures, exceptional expenditure and the gain on re-measuring the value of our 49% shareholding in Doméo following the acquisition of the remaining 51%, 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.

 


2012

2011

£million



Operating profit (statutory)

85.3

106.9 

Amortisation of acquisition intangibles

10.4

9.3 

Tax on joint ventures

1.4

3.0 

Exceptional expenditure

31.1

                   -

Adjusted operating profit1

128.2

119.2 




£million



Profit before tax (statutory)

138.0

104.8 

Amortisation of acquisition intangibles

10.4

9.3 

Tax on joint ventures

1.4

3.0 

Exceptional expenditure

31.1

                   -

Gain on re-measurement of joint venture interest on acquisition of control

(54.9)

                   -

Adjusted profit before tax2

126.0

117.1 

 

Pence per share



Earnings per share (statutory)

35.4

24.0 

Amortisation of acquisition intangibles

2.2

1.9 

Exceptional expenditure

7.4

                    -

Gain on re-measurement of joint venture interest on acquisition of control

(17.0)

                    -

Adjusted earnings per share3

28.0

25.9 

 

 

Principal Risks and Uncertainties

 

HomeServe has a risk management process which provides a structured and consistent framework for identifying, assessing and responding to risks.  These risks are assessed in relation to the Group's business performance, financial condition, prospects, liquidity and results.  Risk management operates at all levels throughout the Group, across geographies and business lines.

 

Risks to HomeServe's business are either specific to HomeServe's business model, such as affinity partner relationships and underwriting, or more general, such as the impact of competition and regulatory compliance.

 

The table below sets out what the Board believes to be the principal risks and uncertainties facing the Group, the mitigating actions for each, and an update on any change in the profile of each risk during the past year.  These should be read in conjunction with the Chief Executive's and Financial reviews.  Additional risks and uncertainties of which we are not currently aware or which we currently believe are immaterial may also adversely affect our business, financial condition, prospects, liquidity or results of operations in the future.



 

Risk

Description / Impact

Mitigation

Change since 2011 Annual Report

 

Financial cost of customer re-contact exercises

 



The cost of re-contacting customers and the possible compensation that may be paid to them if any detriment is identified have been based on our best estimates.  It is possible that the actual number of customers, response rates and level of compensation could be different.

 

The forecasts are based on our best estimates including initial pilot exercises.

 

The UK business is a cash generative, profitable business which, if necessary, could set aside additional funds to meet higher costs if required.

This is a new risk that was identified during FY2012.

 

The charge included in our FY2012 results is based on our best estimates taking into account the results of initial pilot exercises.

 

 

Ability to implement an updated strategy successfully within the UK business

 



The successful implementation of an updated strategy and the restoration of a customer focused culture in the UK business is of considerable importance to our future.

 

If we are not able to implement the strategy or achieve the restoration as effectively or as rapidly as we intend, the future performance of the UK business may be adversely affected, potentially materially.

 

There is no certainty as to scope and cost of the additional activities that we may need to undertake to achieve our desired culture.

 

We have strengthened the UK management team and recruited a dedicated programme director to oversee the development, testing and implementation of the updated strategy.

 

We are using a number of third-party specialists to assist in the implementation of projects which are designed to restore the customer focused culture.

 

The expected cost of restoring our customer focus has been provided for in the FY2012 results and the business has the financial strength to incur additional costs if necessary.

 

 

This is a new risk that was identified during FY2012.

 

At the end of FY2012 we believe we are making progress in re-invigorating our UK customer focus, although the implementation of initiatives and revised processes is taking longer than originally expected.

 

 



 

 

Commercial relationships

 



Underpinning the success in our chosen markets are close commercial relationships (affinity partner relationships) with utility companies and household appliance manufacturers.  The loss of one of these relationships could impact our future customer and policy growth plans.

 

While these partnerships are secured under long-term contracts, which increase the security of these relationships over the medium-term, they can be terminated in the event of non-compliance with laws or regulations and / or damage to reputation.

 

We have regular contact and reviews with the senior management of our affinity partners to ensure that we respond to their needs and deliver the service that they expect.

 

There are a number of partnerships across our markets, mitigating, in part, the impact of losing any single relationship.

We have continued to sign and renew affinity partnerships with utilities in the UK, France, and USA during the past 12 months.

 

We worked closely with all our UK partners to ensure they understood the UK issues that we identified and the corrective action we are implementing.

 

 

 

 

Competition

 



There are a number of businesses that provide services that are similar to those of the Group and could therefore compete in one or more of our chosen markets.  Increased competition could affect our ability to meet our expectations and objectives for the business in terms of the number of customers, policies or the financial returns achieved.

 

 

The market and the activities of other participants are regularly reviewed to ensure that the strategies and offerings of current and potential competitors are fully understood.

 

Both qualitative and quantitative research is undertaken to ensure that our products and services continue to meet the needs of our customers whilst retaining a competitive position in the market. 

 

We believe we have a compelling proposition for customers, providing them with real value.  This helps reduce the impact of increased competition.

 

There has been no significant change in the competitive landscape in any of the countries in which we operate.



 

 

Customer loyalty / retention

 



A key element of our business model is customer loyalty.  Any reduction in the proportion of customers renewing their policies could significantly impact our revenues.

 

The policy retention rate is one of our Key Performance Indicators.  Any variance to budget is carefully investigated to identify why customer behaviour is changing and to implement corrective action.

 

We have a wide range of tools available to manage retention rates including specific retention propositions.

 

There are also dedicated retention call centre agents who are trained and experienced in talking to customers who are considering not renewing their policy.

Retention remains high in all countries although the mix of new and older policyholders in the UK and the mix of utility branded and own brand policyholders in the USA have resulted in lower reported rates.

 

The UK rate did reduce slightly quicker than we expected as a result of the suspension of call centre agent's incentive schemes in October.  In March 2012, we implemented new schemes which reflect an improved balance between customer and commercial outcomes and we are confident that these will enable us to improve retention rates in the future.

 

We have closely monitored the impact of the media coverage on our reputation following the identification and announcement of the UK's sales and marketing issues.  To date, we do not believe the media coverage has had a significant impact on our customer loyalty.

 

Marketing effectiveness

 



A significant reduction in the response rates on direct marketing or telesales campaigns could have a significant impact on customer and policy numbers.

The performance of each marketing campaign is regularly reviewed, with any significant deviation to the expected response rate quickly identified and remedial action taken for subsequent campaigns.

 

In the UK, we have reviewed all our mailings and telesales scripts and made a number of changes to give greater clarity to customers. 

 

We have also decided to focus our UK outbound telesales activity on cross-selling activity in the future, thereby reducing new customer acquisition in FY2013.

 

 



 



The take-ups on the new UK direct mail creative introduced at the end of January 2012 were below our initial expectations and we will therefore be undertaking further test marketing activity in FY2013.

 

We are closely monitoring the impact of the media coverage on our reputation following the identification and announcement of the UK's sales and marketing issues.  To date we do not believe the media coverage has had a significant impact on new customer acquisition activity.

 

Exposure to legislation or regulatory requirements

 



We are subject to a broad spectrum of regulatory requirements in each of the markets in which we operate, particularly relating to product design, marketing materials, sales processes and data protection. 

 

Failure to comply with the regulatory requirements in any of our countries could result in us having to reduce the effectiveness or suspend either temporarily or permanently certain activities.

 

Any changes in the legislative, regulatory or judicial environment in the countries in which we operate, or failure to comply with regulations may adversely affect our ability to deliver our growth expectations.

 

 

We have regulatory specialists and compliance teams within each of our businesses to help ensure that all aspects of the legislative regime in each territory are fully understood and adopted as required.

 

We keep up to date on current government policies through our external advisors and this ensures products are designed, marketed and sold in accordance with relevant legal and regulatory requirements.

In the UK, we are maintaining a regular dialogue with the FSA and are ensuring that our actions are in line with their feedback.

 

During FY2012 we have been strengthening our UK governance and control processes and management team in our UK business.  This has included the appointment of a new Compliance Director and a stronger Board in the UK business with a new Non-Executive Director and good progress towards the appointment of a Non-Executive Chairman.

 

We have since November 2011 reviewed all of our UK sales and marketing materials and made a number of changes to ensure they meet all the regulatory requirements.

The FSA has informed us that they plan to investigate past issues, which will take a period of several months to complete.

 

The FSA have wide ranging powers, which include restrictions on business activities, customer redress and fines if they consider them appropriate under the circumstances.



 

 

Availability of underwriters

 



We use underwriters to minimise the impact of significant short-term deviations in claims frequencies and costs.

 

We need to ensure that policy pricing and claims frequency represent an acceptable risk that the underwriters are prepared to price.

 

We use a number of underwriters, with the main partner in the UK being separate to those in rest of Europe and the US.

 

Our principal underwriters are subject to medium-term agreements, with the rates subject to regular review.  In addition to this, we maintain relationships with a number of other underwriters and regularly review the market to ensure we understand current market rates and how these apply to our policies.

We continue to review our underwriting relationships on a regular basis to ensure they provide the best returns for customers and shareholders.

 

 

Quality of customer service

 



Our reputation is heavily dependent on the quality of our customer service. 

 

Any failure to meet our service standards or negative media coverage of poor service could have a detrimental impact on customer and policy numbers.

Processes have been established to ensure that all directly employed engineers and sub-contractors meet minimum standards. These include criminal record checks and minimum qualification requirements.

 

Service levels provided by both our directly employed and sub-contract engineers are monitored through the use of customer telephone call backs after a repair has been completed.  Any failure by the engineer to adhere to processes or deliver the appropriate standard of service is addressed by the engineer's line manager.

 

Our engineer network continues to provide a high quality service, with high levels of customer satisfaction with the quality of service provided.

 

During the year we did, however, identify issues with our UK complaints handling process.  We have, therefore, undertaken a re-training programme for all our UK complaints handling agents and have reviewed all of our complaints handling processes.

 

Any customers who may have suffered any detriment through the way in which their complaint was handled or the way in which they were sold 'Complete Cover' via the telephone are being re-contacted.

 



 

 

Dependence on recruitment and retention of skilled personnel

 



Our ability to meet growth expectations and compete effectively is, in part, dependent on the skills, experience and performance of our personnel.  The inability to attract, motivate or retain key talent could impact on our overall business performance.

Our employment policies, remuneration and benefits packages and long-term incentives are regularly reviewed and designed to be competitive with other companies.

 

Employee surveys, performance reviews and regular communication of business activities are just some of the methods used to understand and respond to employees' views and needs.

Processes are in place to identify high performing individuals and to ensure that they not only have fulfilling careers, but we are managing succession planning.

We have strengthened our management teams during FY2012 with key appointments in both the USA and UK.

 

 

 

Exposure to country and regional risk

 



As a result of our growing international footprint we are subject to increased economic, political and other risks associated with operating in overseas territories.

 

A variety of factors, including changes in a specific country's political, economic or regulatory requirements, as well as the potential for geographical turmoil including terrorism and war, could result in the loss of service.

 

The criteria for entering a new country include a full assessment of the stability of its economy and political situation, together with a review of the manner and way in which business is conducted.

 

When entering a new country, we generally do so with a small scale test basis.  This low risk entry strategy minimises the likelihood of any loss.

 

We plan to undertake test marketing activity in Germany in FY2013, having signed a test marketing agreement this year.

 



 

 

Financial strategy and treasury risk

 



The main financial risks are the availability of short and long-term funding to meet business needs, the risk of suppliers and policyholders not paying monies owed and fluctuations in interest rates.

Interest rate risk

 

Our policy is to manage our interest cost using a mix of fixed and variable rate debts.  Where necessary, this is achieved by entering into interest rate swaps for certain periods, in which it agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed notional principal amount.  These swaps are designated to hedge underlying debt obligations.

 

 

As a result of our relatively low level of bank borrowings and a stable interest environment we have not entered into any swaps during FY2011 or FY2012.


Credit risk

 



HomeServe trades only with creditworthy third parties.  All suppliers who wish to trade on credit terms are reviewed for financial stability.

 

There has been no change in the creditworthiness of our third party suppliers.

 

 


The risk associated with cash and cash equivalents is managed by only depositing funds with reputable and creditworthy banking institutions.

 



The risk of a policyholder defaulting is mitigated as any policy cover will cease as and when any premium fails to be paid.

 

There has been no significant change in the level of mid-term policy cancellations.

 


Liquidity risk

 



HomeServe manages liquidity risk by maintaining adequate reserves and banking facilities and continuously monitoring forecast and actual cash flows.

During FY2012, we renewed our banking facilities. As part of the renewal, we increased our facility from £150m to £250m.


 

Going concern and asset impairment

 

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's statement and Chief Executive's review.  This Financial review also includes the headline financial results, cash flow and financing information as well as details on the principal risks and uncertainties.

 

The Directors have reviewed the Group's forecasts and cash flows, including reviewing a number of scenarios in connection with the future financial performance of the UK business, and have concluded that they have a reasonable expectation that the Group 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 addition, the Directors have considered the issues facing the UK business at this time in relation to the carrying value of goodwill and other assets and have concluded that there is no impairment of these assets.

 

David Bower

Interim Chief Financial Officer

22 May 2012

 

 

Responsibility statement

 

The responsibility statement below has been prepared in connection with the Company's full annual report for the year ending 31 March 2012.  Certain parts thereof are not included within this announcement. 

 

We confirm to the best of our knowledge:

 

·      the financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

 

·      the management report, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

 

This responsibility statement was approved by the Board of Directors on 22 May 2012 and is signed on its behalf by:

 

 

 

Richard Harpin

Chief Executive

 

 

Martin Bennett

Chief Operating Officer


Group Income Statement

Year ended 31 March 2012

 



2012

2011


Note

£m

£m

Continuing operations




Revenue

3

534.7 

467.1 

Operating costs


(452.4)

(365.7)

Share of profit of joint ventures


3.0 

5.5 

Operating profit


85.3 

106.9 

Investment income


0.1 

0.1 

Finance costs


(2.3)

(2.2)

Gain on re-measurement of joint venture interest on acquisition of control

4

54.9 

Profit before tax, exceptional expenditure, amortisation of acquisition intangibles, re-measurement gain and tax on joint ventures


126.0 

117.1 

Exceptional expenditure

4

(31.1)

Amortisation of acquisition intangibles


(10.4)

(9.3)

Gain on re-measurement of joint venture interest on acquisition of control               

4

54.9 

Tax on joint ventures


(1.4)

(3.0)

Profit before tax


138.0 

104.8 

Tax

5

(23.7)

(27.9)

Profit for the year, being attributable to equity holders of the parent


114.3 

76.9 





Dividends per share, paid and proposed

6

11.3p

10.3p





Earnings per share

7



Basic


35.4p

24.0p

Diluted


34.6p

23.3p

 

 



Group Balance Sheet

31 March 2012

 



2012

2011


Note

£m

£m

 

Non-current assets




Goodwill


260.9 

192.1 

Other intangible assets


142.3 

65.6 

Property, plant and equipment


37.5 

38.5 

Interests in joint ventures


7.6 

Deferred tax assets


3.7 

5.6 



444.4 

309.4 

 

Current assets




Inventories


1.5 

2.0 

Trade and other receivables


291.1 

247.5 

Cash and cash equivalents

8

52.8 

16.1 



345.4 

265.6 

Total assets


789.8 

575.0 





Current liabilities




Trade and other payables


(230.8)

(222.9)

Current tax liabilities


(8.8)

(16.1)

Provisions

9

(21.0)

-

Obligations under finance leases


(0.4)

(0.3)

Bank and other loans

8

(27.9)



(261.0)

(267.2)

Net current assets/(liabilities)


84.4 

(1.6)





Non-current liabilities




Bank and other loans

8

(117.8)

Other financial liabilities


(15.8)

(19.4)

Retirement benefit obligation


(0.6)

(0.1)

Deferred tax liabilities


(27.6)

-

Obligations under finance leases


(0.6)

(0.1)



(162.4)

(19.6)

Total liabilities


(423.4)

(286.8)

Net assets


366.4 

288.2 





Equity




Share capital

10

8.2 

8.2 

Share premium account


38.1 

36.7 

Merger reserve


71.0 

71.0 

Own shares reserve


(19.1)

(21.5)

Share incentive reserve


8.6 

8.1 

Capital redemption reserve


1.2 

1.2 

Currency translation reserve


3.9 

7.8 

Retained earnings


254.5 

176.7 

Total equity


366.4 

288.2 

 



Group Statement of Comprehensive Income

Year ended 31 March 2012


2012 

2011 


£m 

£m 

Profit for the year

114.3 

76.9 

Exchange movements on translation of foreign operations

(3.9)

(0.9)

Actuarial (loss)/gain on defined benefit pension scheme

(1.2)

3.7 

Tax credit/(charge) relating to components of other
comprehensive income

0.1 

(1.3)

Total comprehensive income for the year attributable to equity holders of the parent

109.3 

78.4 

 

 

 

 

Group Statement of Changes in Equity

Year ended 31 March 2012


Share capital
£m

Share premium account

£m

Merger reserve

£m

Own shares reserve
£m

Share incentive
reserve
£m

Capital redemption reserve
£m

Currency translation reserve
£m

Retained earnings
£m

Total equity
£m

Balance at 1 April 2011

8.2

36.7

71.0

(21.5)

8.1 

1.2

7.8 

176.7 

288.2 

Total comprehensive income 

-

-

-

-

(3.9)

113.2 

109.3 

Dividends paid

-

-

-

-

(34.2)

(34.2)

Issue of share capital

-

1.4

-

-

1.4 

Issue of trust shares

-

-

-

2.4 

-

(1.6)

0.8 

Share-based payments

-

-

-

1.7 

-

1.7 

Share options exercised

-

-

-

(1.2)

-

1.2 

Tax on exercised share options

-

-

-

-

1.1 

1.1 

Deferred tax on share options

-

-

-

-

-    

(1.9)

(1.9)

Balance at 31 March 2012

8.2 

38.1

71.0

(19.1)

8.6 

1.2

3.9 

254.5 

366.4 

 

 

Year ended 31 March 2011


Share capital
£m

Share premium account

£m

Merger reserve

£m

Own shares reserve
£m

Share incentive
reserve
£m

Capital redemption reserve
£m

Currency translation reserve
£m

Retained earnings
£m

Total equity
£m

Balance at 1 April 2010

8.2

36.1

71.0

(24.9)

6.5 

1.2

8.7 

127.2 

234.0 

Total comprehensive income 

-

-

-

-

(0.9)

79.3 

78.4 

Dividends paid


-

-

-

(31.3)

(31.3)

Issue of share capital

-

0.6

-

-

0.6 

Issue of trust shares

-

-

-

3.4 

-

(1.5)

1.9 

Share-based payments

-

-

-

2.9 

-

2.9 

Share options exercised

-

-

-

(1.3)

-

1.3 

Tax on exercised share options

-

-

-

-

1.7 

1.7 

Balance at 31 March 2011

8.2

36.7

71.0

(21.5)

8.1 

1.2

7.8 

176.7 

288.2 

 



Group Cash Flow Statement

Year ended 31 March 2012

 



2012

2011


Note

£m

£m





Operating profit


85.3 

106.9 





Adjustments for:




Depreciation of property, plant and equipment


7.2 

4.9 

Amortisation of intangible assets


20.4 

15.0 

Impairment


3.9 

Share-based payments expense


1.7 

2.8 

Share of profit of joint ventures


(3.0)

(5.5)

Gain on disposal of property, plant and equipment and software


(0.1)

Operating cash flows before movements in working capital


115.5 

124.0 





Decrease/(increase) in inventories


0.5 

(0.1)

Increase in receivables


(0.4)

(10.4)

(Decrease)/Increase in payables


(1.3)

5.5 

Net movement in working capital


(1.2)

(5.0)





Cash generated by operations


114.3 

119.0 





Income taxes paid


(33.3)

(23.8)

Interest paid


(3.3)

(1.4)

Net cash inflow from operating activities


77.7 

93.8 





Investing activities




Interest received


0.1 

0.1 

Dividend from joint venture


3.5 

3.7 

Proceeds on disposal of property, plant and equipment


0.7 

0.9 

Purchases of intangible assets


(12.8)

(5.0)

Purchases of property, plant and equipment


(4.8)

(7.4)

Net cash outflow on acquisitions

11

(87.8)

(16.2)

Net cash used in investing activities


(101.1)

(23.9)





Financing activities




Dividends paid

6

(34.2)

(31.3)

Issue of shares from the employee benefit trust


0.8 

1.8 

Proceeds on issue of share capital


1.4 

0.6 

Increase/(decrease) in bank and other loans


92.7 

(50.4)

Net cash from/(used in) financing activities


60.7 

(79.3)





Net increase/(decrease) in cash and cash equivalents


37.3 

(9.4)

Cash and cash equivalents at beginning of year


16.1 

25.4 

Effect of foreign exchange rate changes


(0.6)

0.1 

Cash and cash equivalents at end of year


52.8 

16.1 

 

 



Notes to the condensed set of financial statements

 

1.   General information

 

While the financial information included in this preliminary announcement has been computed in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs) adopted for use by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs in June 2012.

 

The financial information set out above does not constitute the Company's statutory financial statements for the years ended 31 March 2012 or 31 March 2011, but is derived from those financial statements. Statutory financial statements for 2011 prepared under IFRSs have been delivered to the Registrar of Companies and those for 2012 will be delivered following the Company's Annual General Meeting. The auditors, Deloitte LLP, have reported on those financial statements; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006.  These financial statements were approved by the Board of Directors on 22 May 2012.

 

2.   Accounting policies

 

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 as described below.

 

Adoption of new or revised standards and accounting policies

IAS24 (2009) Related Party Disclosures, Amendments to IFRIC14 (2009), IFRIC19 and 'Improvements to IFRSs (2010)' have been adopted in the year but their adoption has not had any significant impact on the amounts reported in these financial statements.

 

3.   Segmental analysis

 

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 Group Chief Executive, to allocate resources to the segments and to assess their performance.


UK

Doméo

Spain

USA

New Markets

Total

£m

£m

£m

£m

£m

£m

Revenue







Total revenue

353.5 

51.8 

60.2

82.3

11.6

559.4 

Inter-segment

(4.1)

(4.1)

(20.6)

(20.6)

349.4 

31.2 

60.2

82.3

11.6

534.7 








Result







Segment operating profit/(loss) pre amortisation of acquisition intangibles, exceptional expenditure and tax on joint ventures

103.1 

16.7 

2.8 

9.0 

(3.4)

128.2 

Exceptional expenditure

(24.2)

(3.0)

(3.9)

(31.1)

Amortisation of acquisition intangibles

(1.1)

(1.5)

(1.7)

(4.0)

(2.1)

(10.4)

(1.4)

(1.4)

Operating profit/(loss)

77.8 

10.8 

1.1 

5.0 

(9.4)

85.3 

Investment income






0.1 

Finance costs






(2.3)






54.9 

Profit before tax






138.0 






(23.7)






114.3 

 



3. Segmental analysis (continued)

 


UK

Doméo

Spain

USA

New Markets

Total

£m

£m

£m

£m

£m

£m

Revenue







Total revenue

358.9 

32.3 

48.8 

52.6 

9.9 

502.5 

Inter-segment

(3.1)

(3.1)

(32.3)

(32.3)

355.8 

48.8 

52.6 

9.9 

467.1 








Result







Segment operating profit/(loss) pre amortisation of acquisition intangibles and tax on joint ventures

104.3 

8.2 

1.7 

6.1 

(1.1)

119.2 

Amortisation of acquisition intangibles

(1.4)

(1.7)

(2.6)

(3.6)

(9.3)

(3.0)

(3.0)

Operating profit/(loss)

102.9 

5.2 

3.5 

(4.7)

106.9 

Investment income






0.1 

Finance costs






(2.2)

Profit before tax






104.8 






(27.9)






76.9 

 

 

4. Exceptional items

 

Gain on re-measurement of joint venture interest on acquisition of control

The Group acquired the remaining 51% equity interest in Doméo (and its subsidiary Doméo Assistance) from its joint venture partner on 7 December 2011.  As required by IFRS3 (2008) Business Combinations, this acquisition has resulted in the joint venture interest being re-measured to its fair value at the acquisition date.  The deemed disposal of the former joint venture interest has generated a gain of £54.9m. The acquisition of control is shown in note 11.

Exceptional expenditure

Exceptional expenditure of £31.1m has been incurred and provided in the following three areas:

 

UK matters

As a result of the sales, marketing and customer complaints handling issues identified during the year, there are a number of one-off charges amounting to £24.2m which include the following areas:

(i)    re-organisation and redundancy costs have been incurred and provided for as a result of the extensive change programme that is now being implemented in the UK business;

(ii)   additional third party support costs have been incurred and provided for in relation to reviewing scripts, policy documentation terms and conditions and call monitoring;

(iii)  costs in relation to the re-contacting of customers including, where appropriate, compensation payments, have been provided for; and

(iv)  the Ofcom regulatory fine imposed in April 2012 has been provided for.

 

The total costs settled in cash to date amount to £3.2m, the remainder is provided for as set out in note 9.

 

Items (i) to (iii) above are key sources of estimation uncertainty for the Group.  There are a number of significant assumptions supporting the expected level of expenditure including the number of customers, the amount of compensation awarded, response rate and upheld rate.  Moreover, these programmes of remediation are still in their early stages and hence there is limited comparable data available in the Group against which to assess these judgements.  As a result, the exceptional expenditure recognised, whilst representing the Directors' best estimate at the time, is subject to uncertainty and the outcome may be different.

 

Disposal of Belgian businesses

During the year, a loss of £3.9m was incurred relating to the reduction in the carrying value of goodwill in the Group's Belgian operations. After recording this charge, the business disposal process completed at nil gain or loss.

 

Doméo acquisition costs

In respect of the acquisition of the Doméo business, there were costs of £3.0m relating to legal and financial advisory services and other related costs.

 

5. Tax

 

In order to calculate an effective tax rate that reflects the ongoing tax burden of the Group, it is necessary to take account of the effect of joint venture results (which are shown net of tax within statutory profit before tax) on the Group's profits and tax for the year and also exclude both the £54.9m exceptional one-off gain on re-measurement of joint venture interest on acquisition of full control and the £3.9m reduction in the carrying value of goodwill in our Belgian businesses. Adjusting the tax rate to include the tax relating to joint ventures and excluding the above exceptional items (an adjusted tax charge of £25.1m) and similarly grossing up for the joint venture tax on the statutory profit before tax (excluding the above exceptional items), the underlying joint venture adjusted tax rate is 28.4% (2011: 28.6%). 

 


2012 

2011 


£m 

£m 

Current tax

23.1

32.1 

Deferred tax

0.6

(4.2)

Total tax charge

23.7

27.9 

 

 

6. Dividends per share

 

An interim dividend of 3.63p per share amounting to £11.7m (2011: 3.3p per share amounting to £10.6m) was paid on 3 January 2012.

 

The proposed final dividend for the year ended 31 March 2012 of 7.67p per share amounting to £24.8m (2011: 7.0p per share amounting to £22.5m) will be paid on 1 August 2012 to the shareholders on the register at the close of business on 29 June 2012, subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

 

7. Earnings per share

 

Basic and diluted earnings per ordinary share have been calculated in accordance with IAS33 Earnings Per Share.  Basic earnings per share is calculated by dividing the profit or loss in the financial year by the weighted average number of ordinary shares in issue during the period.  Adjusted earnings per share is calculated excluding exceptional items (note 4), amortisation of acquisition intangibles and the gain on re-measurement of joint venture interest on acquisition of control.  This is considered to be a better indicator of the performance of the Group.  As profit for the year and adjusted profit for the year are stated after tax, it is not considered necessary to include in the reconciliation below the impact of the adjustment for the tax charge on joint ventures of £1.4m (2011: £3.0m).  Diluted earnings per share includes the impact of dilutive share options in issue throughout the period.

 



 


2012

2011


pence

pence

Basic

35.4

24.0

Diluted

34.6

23.3

Adjusted basic

28.0

25.9

Adjusted diluted

27.3

25.2

 

 

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

Number of shares


2012

2011


m

m

Weighted average number of shares



Basic

322.5

320.8

Dilutive impact of share options

7.5

9.2

Diluted

330.0

330.0

 

 

Earnings


2012

2011


£m

£m

Profit for the year

114.3 

76.9 

Exceptional expenditure (note 4)

31.1 

Amortisation of acquisition intangibles

10.4 

9.3 

Gain on re-measurement of joint venture interest on acquisition of control (note 4)

(54.9)

Tax impact arising on amortisation of acquisition intangibles and exceptional costs

(10.7)

(3.0)

Adjusted profit for the year

90.2 

83.2 

 

 

8. Analysis of net debt

 


2012

2011


£m

£m

Cash and cash equivalents

(52.8)

(16.1)

Bank loans

117.8 

27.9 

Obligations under finance leases

1.0 

Net debt

66.0 

11.8 

 

 

9. Provisions and contingent liabilities

 

Provisions

 

UK matters

£m

At 1 April 2011

Created in the year

24.2 

Utilised

(3.2)

At 31 March 2012

21.0 

 

The above provision represents management's best estimate of the Group's liability relating to the UK issues identified in the year.  The provision is expected to be utilised within the next 12-18 months and is comprised of a number of one-off costs relating to re-organisation, redundancy, additional third party support, re-contacting of customers, compensation and the Ofcom fine.  The provision has been based on management's forecasts which include initial pilot re-contact exercises.  The assumptions used relating to the number of customers, level of compensation, response rate and upheld rate require the use of judgement and estimation. 

 

Contingent liabilities

 

As set out in the Chairman's statement, Chief Executive's review and Financial review, we continue to develop our responses to the issues identified in our UK business, including being in regular dialogue with the FSA.  There is currently no certainty as to the nature or extent of the action, if any, that the FSA may seek to take following the conclusion of its investigation and accordingly any related financial effect, which could include a fine, cannot be estimated reliably.  As a result, no provisions have been made in this regard in the current year.

 

10. Share capital

 


2012

2011


£m

£m

Issued and fully paid:



329,873,000 ordinary shares of 2.5p each (31 March 2011: 328,975,000 ordinary shares of 2.5p each)

8.2

8.2

 

During the year, the Company issued 898,000 shares with a nominal value of 2.5p creating share capital of £22,000 and share premium of £1,382,000. In the prior year, the Company issued 270,000 shares with a nominal value of 2.5p (adjusted for share split) creating share capital of £7,000 and share premium of £559,000.

 

11. Business Combinations

 

On 7 December 2011, the Group acquired 51% of the issued share capital of Doméo SA, formerly its joint venture interest in France of which the Group owned 49% prior to the acquisition date.  As a result of the acquisition, Doméo SA and its subsidiary Doméo Assistance SA (together Doméo) are now 100% owned by the Group. Doméo is a leader in the provision of insured home emergency policies in France with 0.89m customers and 2.33m policies.  The acquisition provides the Group with full control of Doméo and will enable it to develop Doméo's product range further and broaden the range of affinity partners in France.

As part of the acquisition, Veolia agreed a long term marketing agreement providing Doméo with continued use of Veolia's brands in France.



The recognised amounts of identifiable assets acquired and liabilities assumed are set out in the table below:

 


Doméo Fair Value


£m

Net assets acquired:


Intangible assets

86.9 

Property, plant, equipment

1.8 

Trade and other receivables

42.7 

Cash and cash equivalents

1.4 

Trade and other payables

(32.7)

Current tax liabilities

(4.5)

Deferred tax liabilities

(28.0)

Total identifiable net assets

67.6 

Goodwill

77.5 

Total consideration

145.1 

Satisfied by:


Cash

83.4 

Fair value of joint venture interest previously owned

61.7 


145.1 

 

Net cash outflow arising on acquisition:


Cash consideration

83.4 

Cash and cash equivalents acquired

(1.4)


82.0 

 

The accounting for this business combination has been prepared on a provisional basis as new information regarding the identifiable assets and liabilities as at the acquisition date may arise during the measurement period, being a period of not more than one year from the date of acquisition.

The provisional fair value adjustments recognised on the acquisition of Doméo relate to accelerated depreciation of accounting software and tax adjustments. Goodwill of £77.5m arose from the acquisition.

The goodwill arising on the excess of consideration over the fair value of the assets and liabilities acquired represents future cross-sell opportunities, efficiency savings and synergies.

Costs in respect of the acquisition of the business, relating to legal and financial advisory services and other related costs of £3.0m, were expensed to the operating results and presented as an exceptional item. Refer to note 4 for more details.

Doméo contributed £31.2m in revenue and a profit after tax of £7.1m since acquisition on 7 December 2011. If the acquisition had been completed on the first day of the financial year, group revenues for the period would have been £576.7m and group profit after tax for the year would have been £117.5m.

In addition to the Doméo acquisition set out above, the Group has also completed a number of smaller acquisitions for total consideration of £1.3m which resulted in an equal amount of acquisition intangibles being recognised.  Contingent and deferred consideration of £4.5m was also paid in the year which related to prior period acquisitions, resulting in a total net cash outflow of £87.8m.

 

12. Related party transactions

 

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its related parties are disclosed below.

 


Trading transactions

 

During the year, Group companies entered into the following transactions with related parties which are not members of the Group:

 


Provision of services

Purchases of services

Amounts owed by related parties

Amounts owed to

related parties


2012

2011

2012

2011

2012

2011

2012

2011


£m

£m

£m

£m

£m

£m

£m

£m

Harpin Limited

0.2

0.5

0.1

Joint ventures

1.1

1.7

0.2

0.9

0.4

0.4

 

Harpin Limited is a related party of the Group because it is controlled by Richard Harpin, Chief Executive Officer of the Group and Director of the parent company of the Group.

 

In addition to the transactions above, Home Service USA Corp purchased advisory services of £0.1m in the prior year from Lexicon Partners (US) LLC. Lexicon Partners (US) LLC, is a New York (USA) based subsidiary of the Lexicon Partnership LLP, a UK based limited liability partnership of which Andrew Sibbald, a former Non-Executive Director, was a Senior Partner. Evercore Partners International Limited LLP acquired Lexicon Partners and Andrew Sibbald serves as a Senior Managing Director of the enlarged business.

 

Provision of services to and the purchase of services from related parties were made at arm's length prices. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

 

13. Events after the balance sheet date

 

There were no post balance sheet events between the balance sheet date and the signing of the financial statements.

 

14. Other information

 

The Annual Report and Accounts for the year ended 31 March 2012 was approved by the Board on 22 May 2012 and will be made available on the Company's website and posted to those shareholders who have requested it in June 2012.  Copies will be available from the registered office at Cable Drive, Walsall, WS2 7BN.

 

 

Forward Looking Statements and Other Information

 

This preliminary announcement has been prepared solely to provide additional information to shareholders as a body to assess the Company's strategies and the potential for those strategies to succeed.  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 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.  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.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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