HomeServe : Preliminary Results Transcript

HomeServe plc

Preliminary Results

18 May 2021

Transcript

Disclaimer

This transcript is derived from a recording of the event. Every possible effort has been made to transcribe accurately. However, neither HomeServe plc nor BRR Media Limited shall be liable for any inaccuracies, errors, or omissions.

Richard Harpin:	Good morning everyone and welcome to our FY21 results webcast. I'm Richard
	Harpin, Founder and CEO of HomeServe. With me on the line today from
	America is Tom Rusin, CEO of our North American business. Here in London,
	socially distanced of course, are David Bower, our CFO; Ross Clemmow, our new
	CEO of EMEA; and Miriam McKay, Communications Director. I'm sure you'll join
	me in welcoming Ross to his first HomeServe results presentation. Over the next
	40 minutes or so, we'll talk you through the results and also update you on our
	thinking about the future. We'll leave plenty of time to take your questions at
	the end. So let me start with my key messages for today.
Richard Harpin:	We're delighted with this year's results. To grow revenue by 15% and adjusted
	PBT by £10m in the face of a global pandemic is a great achievement, and
	proves the resilience of our business model and the dedication of all our people
	to keeping our business growing. A tough decision which we've taken in the last
	few days is to fully write down our investment in our UK CRM system, eServe.
	eServe was becoming increasingly inflexible and costly to implement, so we've
	decided to stop the customer migration and roll back to our tried and tested
	current system, Ensura, while we plan to move over time to Salesforce, which
	we've recently implemented successfully in France and are planning to
	implement in North America. We'll learn our lessons from this, but we can now
	move forward and standardise across the Group on a proven, industry-leading
	solution. 4 This has been a big year for us strategically. With Ross's arrival, we're
	now running the business in three divisions, all with different financial profiles.
	We now have four executive directors, and more bandwidth to focus on growth
	opportunities across the Group.
Richard Harpin:	The Board is proposing a final dividend of 19.8p to take the total dividend for
	the year to 26p - an increase of 10%. This is underpinned by the resilience of our
	business model and strong cash flow generation, and is an indicator of the
	strong future growth potential of the business. With that, I'll hand over to David
	to take you through the financials.
David Bower:	Thanks Richard and good morning everyone..
David Bower:	I'll start with our Group financial summary. We were really pleased to see
	revenue growth of 15% for the year, to slightly exceed £1.3bn. Both of our key
	adjusted profit measures grew 6%, with the big driver being continued excellent
	growth in our North American Membership business. As I am sure you are
	aware, FY21 saw a marked strengthening of Sterling against the US dollar,
	particularly during our second half, which caused a year over year impact of
	£5m. For reference, at current exchange rates we would expect to see a further
	headwind of around £10m in FY22 when compared to the average rate seen
	during FY21. Focusing for a moment on the statutory numbers, as Richard has
	already said, we have taken the decision to fully impair the value of our eServe
	CRM system and other assets in the UK. This makes up £88m of the £92m
	exceptional charge incurred this year. We are not expecting any near-term step
	up in system or other operating costs as we take a different approach. And in
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	any case, cloud-based systems like Salesforce are significantly less capital
	intensive to implement
David Bower:	Also, having started to amortise eServe in September 2019, our amortisation
	charge in the UK will be £9m lower in the future. The remaining £4m of the
	exceptional charge was recognised as we restructured our international
	business development activities, to focus on territories adjacent to our
	established Membership businesses and refocused some corporate functions to
	be more aligned with our operating businesses going forward. We again saw the
	typical second half weighting of group profits and cash flow. Given continued
	investment in M&A, principally HVAC, year end net debt was £514m, broadly in
	line with the prior year. So with EBITDA up 6%, leverage reduced slightly year
	over year. Now let us turn to look at each of the businesses in more detail.
David Bower:	In North America, revenue grew 22% at constant currency, driven by growth in
	policies and customers. The $7m of marketing which came out in the first half
	was spent the second half, giving us particularly strong sequential growth in
	customers of over 5% in the final six months, with some further new joins from
	this second half activity falling into April. There was also good progression in the
	adjusted operating margin to 21% for the year, and the North American
	business saw a 27% increase in adjusted operating profit at constant currency.
	In the UK, where we put in new management last September and now have a
	transformation plan in place, revenue declined by 9%, mainly driven by the
	lower customer number in the Membership business but also due to the lower
	number of repair and HVAC jobs completed in the first half. Across the year,
	adjusted operating costs largely fell in line with lower revenue to give an
	adjusted operating profit of £72.5m, down 10%.
David Bower:	In France, revenue grew 16%, driven by customer growth in Membership as well
	as the contribution from HVAC M&A. Investment in existing and new affinity
	partnerships meant that profit growth was lower, at 2%, with margins down to
	27% reflecting the investment to grow the business. In Spain, revenue grew
	24%, as growth in the Claims and HVAC business more than offset the decline in
	the Endesa book of customers. Adjusted operating profit declined by 14%. You
	will remember from our first half results that we scaled up our Claims resources
	in anticipation of significantly higher volumes, only to see a significant reduction
	in job volumes during Lockdown 1. The Claims business operated more normally
	during the second half, which meant that Spain returned to profit growth and
	exited the year strongly. Turning to New Markets, around a third of the
	operating loss of £6.3m related to prospecting activities. These are now
	concluded, and we 10 have decided to concentrate on near neighbour
	opportunities, like Belgium, Portugal and Canada, as well as our joint venture in
	Japan. Thanks to the encouraging results so far, we were happy to slightly up
	our investment in Japan compared to the prior year, and we anticipate
	investment in our share of the Japanese joint venture to be around £4m per
	annum over the next 2-3 years. In Home Experts, revenue nearly doubled, up to
	just short of £140m. This growth was almost all driven by eLocal, where we saw
	a full 12 months of consolidation versus just four months in the prior year. That
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	said, eLocal had a record year, with revenue up 33% on an annualised basis -
	driven by significantly higher volumes of monetised calls. At Checkatrade,
	revenue was broadly flat, principally due to the temporary support packages of
	discounted and free trade subscriptions which we offered to our trades during
	the first three months of the year, that cost us around £5m. Overall, the
	combined operating loss of our Home Experts businesses narrowed by around
	£4m year-on-year. The COVID discounts at Checkatrade caused a larger
	operating loss, but this was more than offset by the adjusted operating profit of
	$18m at eLocal.
David Bower:	Looking now at organic growth. Here, group organic revenue growth was 4.3%
	in FY21, that is up slightly on the 4% seen in the first half of the year and the
	3.2% in FY20. North American Membership had further strong organic revenue
	growth in FY21 of 9%, a slight increase from 8% seen in the first half. UK
	Membership, as mentioned earlier, continued to see revenue decline, whilst
	there was good organic growth in the Membership businesses in both France
	and Spain. The 24% organic revenue growth in Home Experts was all driven by
	eLocal, with around £90m of revenue this year. However, bear in mind that this
	organic growth metric represents the growth over and above 12 the revenue we
	would have seen had we owned eLocal for the full 12 months of FY20. We have
	included a slide as an appendix in the presentation deck which sets out the
	numbers behind our organic growth calculations. Looking ahead to FY22, we
	would expect to see further improvement in group organic revenue growth,
	with a more significant contribution from Checkatrade in particular, given the
	return to full priced subscriptions and the trades growth seen in FY21. Turning
	to look at cash flow and capital allocation.
David Bower:	We now very much think of the Group as three divisions. While these each have
	different financial profiles, they are all capital light and have short working
	capital cycles. As Home Experts heads towards profitability this year and
	Membership & HVAC continue to deliver strong returns, particularly in North
	America, we will see returns on capital improve further, continuing to deliver
	well in excess of our cost of capital across the Group. The Membership business
	model continues to be very cash generative…and was the key driver of the
	conversion of more than 100% of adjusted operating profit into operating cash
	flow. This was further aided by lower working capital absorption than the prior
	year reflecting the strengthening of sterling, with its impact on closing
	receivables in North America, the growth in HVAC, as well as the timing of some
	partner payments around year end. Even with slightly higher interest and tax
	payments we saw cash flow from operations increase 15% to £278m. During the
	year we allocated £71m to capital expenditure, principally in relation to
	automation projects in Membership, further development of the Home Experts
	platform and general growth capex given our continued expansion. As expected,
	capex was down on the prior year, with capitalised payments to partners for
	their direct selling activity lower year-overyear and many of the key technology
	programmes in Membership and at Checkatrade now nearing completion.
	Overall, therefore, we saw further growth in free cash flow to £135m, an
	increase of 45%. We invested 81m in M&A during the year… largely related to
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the HVAC buy and build strategy. These movements, combined with our dividends, left net debt largely unchanged on the prior year end in absolute terms. Absent the spend on M&A, year-end leverage would have been around

0.2 - 0.3 of a turn lower. In terms of the capital structure, at March 31 we had over £570m of headroom against our total debt facilities, which are slightly north of £1bn.

David Bower:	I want to end my report on the year by talking more broadly about our focus on
	doing business responsibly. People's homes are precious to them, which means
	that for us, doing business responsibly is key to the long-term sustainability of
	our business. This is deeply engrained in our culture, and this year we matched
	this with increased prominence on our Board agenda, where we agreed the four
	key areas of focus you can see on the slide. In terms of delivering for our
	customers, we measure customer satisfaction, or more precisely, customer
	dissatisfaction at a variety of touchpoints, and it is a bonus target for all our
	executive and management bonus schemes. 17 This year, we achieved our
	target by limiting dissatisfaction to 5.5% of customer interactions. When it
	comes to building the workforce for the future, our key measure is employee
	engagement. Here, one of our proudest achievements is to have registered a
	global engagement score ahead of our pre-COVID levels. We are also highly
	focused on diversity and inclusion and while we ended the year one hire away
	from meeting the Hampton Alexander target for one third female Board
	representation, our senior leader population is already one third female.
	Relationships with our communities are important too, and here I would call out
	the launch of The HomeServe Foundation in the UK. They have already done
	some great work to champion recruitment of trades apprentices. Lastly, we are
	now committed to a carbon reduction pathway of 1.5 degrees by 2030, a 42%
	reduction on our 2020 baseline, which will see us make the move towards
	renewable energy sources for our buildings and the electrification of our vehicle
	fleet. We also see plenty of opportunities to help homeowners participate in the
	green revolution. 18 So to summarise, we see doing business responsibly as
	both a differentiator and an opportunity, and we are looking forward to
	continuing to deliver sustainable benefits. I will finish by pointing out that there
	is a useful slide in the appendix to the slide pack which summarises all the
	guidance points I have mentioned. And with that, I will hand you over to Tom in
	the US to take you through the North American business.

Tom Rusin:	Thanks David. Our North American business had a great year. Despite the
	pandemic, and reduced marketing volumes in Q1 and very early Q2, we
	achieved 7% customer growth, the majority of it organic, 22% revenue growth,
	27% profit growth and improved our overall margin by a full percentage point.
	Additionally, we signed 6m gross new households and improved our retention
	rate a full 2 percentage points to 85%. Our HVAC business also had an
	outstanding year, with revenue growth from installs of 43% to $76m. We
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