HomeServe plc Interim results for the six months ended 30 September 2012

Transcription

1 HomeServe plc Interim results for the six months ended 30 September 2012 September 2012 September 2011 Change Revenue 229.6m 213.1m +8% Adjusted Operating profit m 24.3m +12% Adjusted Profit before tax m 23.5m +9% Adjusted Earnings per share 2 5.6p 5.2p +7% Statutory Profit before tax 19.1m 18.2m +5% Basic Earnings per share 4.2p 4.2p +1% Dividend per share 3.63p 3.63p - Half year summary - Revenue up 8% to 229.6m - Adjusted profit before tax 1 up 9% principally as a result of full ownership of Doméo - Adjusted earnings per share 2 up 7% to 5.6p - Interim dividend maintained at 3.63p per share - Free cash flow 3 of 10.3m (HY12: 2.3m) - Net debt 78.1m (FY12: 66.0m, HY12: 36.6m) Refocusing the UK business - Customer numbers down to 2.5m (HY12: 3.0m, FY12: 2.7m) - Retention rate 78% (HY12: 82%, FY12: 80%) - Renewed two of our larger UK water affinity partners on long-term deals - Increased customer satisfaction with 42% fewer customer complaints - Testing the effectiveness of new marketing and products to give greater visibility on the future size of the business - FSA investigation is ongoing Continued growth in our international businesses - Strong customer and policy growth o USA customers up 20%, policy numbers up 25% o Spain customers up 42%, policy numbers up 36% - Retention remains strong in our established international markets o 87% in Doméo o 79% in the USA - Strong financial performance in Doméo, with adjusted operating profit 1 of 5.6m - Five new affinity partners including a policy book acquisition in the USA - In Italy, signed long-term agreements with Enel Energia, enabling us to market to 3.5m households and Veritas with over 200,000 marketable households - Started our test marketing activity in Germany 1. Excluding amortisation of acquisition intangibles and joint venture taxation, see Financial Review and note Excluding amortisation of acquisition intangibles see Financial Review and note Free cash flow is defined on page 13 Page 1

2 Richard Harpin, Chief Executive, commented: HomeServe is making progress in transitioning its UK business to a smaller, more customer focused operation and has delivered good growth in its International businesses in the first half of the year. In the UK we are currently testing a number of new marketing and product propositions, the effectiveness of which will determine the future shape and size of our UK business. Our business improvement initiatives are delivering increased customer satisfaction, significantly reduced complaint numbers and strengthened governance and control processes in the UK. Our International businesses continue to grow with USA and Spain customer numbers up 20% and 42% respectively. We expect our results for the full year to be in line with our expectations. 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 , pin code #, and also a live webcast available via HomeServe plc Tel: Richard Harpin, Chief Executive Johnathan Ford, Chief Financial Officer Mark Jones, Head of Investor Relations Tulchan Group Tel: Christian Cowley Ed Orlebar Page 2

3 CHAIRMAN S STATEMENT We have delivered a set of financial results in line with expectations in the first half of FY13. At 30 September 2012 we had over 4.8m customers holding 10.6m policies and retention rates remain high. Homeowners continue to value and use our policies and services with 680,000 jobs carried out in the first half of the year. In the first half of the year our UK business has made progress in transitioning to a smaller, more customer focused operation and our International businesses have delivered good growth. Results In the first six months of the financial year revenue was up 8% to 229.6m (HY12: 213.1m) and adjusted operating profit 1 was up by 12% to 27.1m (HY12: 24.3m). Adjusted profit before tax 1 was 25.6m, up by 9%, and adjusted earnings per share 2 increased by 7% to 5.6p (HY12: 5.2p). Our balance sheet remains strong and the business continues to be cash generative. Net debt was 78.1m at 30 September The increase from 36.6m at 30 September 2011 was principally a result of the acquisition of full control of Doméo in December 2011 for 82m, partly offset by high levels of free cash flow. On a statutory basis, profit before tax increased by 5% to 19.1m (HY12: 18.2m) and basic earnings per share was 4.2p (HY12: 4.2p). UK Our UK business is making progress in creating a smaller, more customer focused operation with customer satisfaction increasing and complaint numbers, in the first six months of the year, reducing by 42% compared to the same period last year. The business continues to work towards achieving its full year customer number target and has renewed two of its larger utility affinity partner relationships on long-term agreements. The current priorities are to more fully embed a customer focused culture, to test the effectiveness of new marketing and product propositions and to improve retention and operating efficiency. The Financial Services Authority s (FSA) investigation, which is focused on certain historic issues, is continuing and is expected to take a number of months to complete. At this time, the FSA is continuing to gather and review information and we have not had any discussions with them regarding any potential findings. Therefore, at this stage no provisions have been made for a fine, should one arise, or the costs of the FSA investigation. We expect the costs of the actions we are taking to address the sales and marketing, controls and governance and complaints handling issues in our UK business to remain in line with our previous expectations. International business developments We have a profitable International business in which we are continuing to invest for further growth in the future. In the first half of the year we have delivered strong growth in customer and policy numbers in the USA and Spain and a good financial performance in Doméo. We are continuing to increase the number of International partners with five new affinity partnerships signed in the USA and two in Italy. We are pleased to announce today the proposed acquisition in the USA of Montana Dakota Utilities Combined Gas & Electrical Contract business (MDU). MDU serves 260,000 households and has 26,000 home services customers with 52,000 policies. This acquisition is expected to complete in March Excluding amortisation of acquisition intangibles and joint venture taxation, see Financial Review and note Excluding amortisation of acquisition intangibles see Financial Review and note 6. Page 3

4 In our New Markets segment we are continuing to increase the scale of our operation in Italy with new long-term agreements with the energy utility Enel Energia and with Veritas, a water utility serving the Veneto region. We have also started test marketing in Germany. Dividend The Board is proposing an interim dividend of 3.63p per share (HY12: 3.63p). Board changes Johnathan Ford was appointed as Chief Financial Officer (CFO) on 27 September Johnathan was previously the Group Finance Director of NWF Group plc, an AIM listed specialist agricultural and distribution group. Prior to joining NWF in March 2009 he spent four years at HomeServe, firstly as Group Commercial Director and later as Finance Director of the Emergency Services Division. I would like to welcome Johnathan back to HomeServe and thank David Bower for stepping into the CFO role over the past nine months. Summary Our products and services meet clear customer needs and we are confident that our business model continues to deliver long-term value. The transition to a smaller, more customer focused UK business will take time to complete. The test marketing currently underway will give us greater visibility over the future shape and size of the UK business and in our International operations we have delivered good growth in customer numbers and profit. We expect our results for the full year to be in line with our expectations. JM Barry Gibson Chairman 20 November 2012 Page 4

5 CHIEF EXECUTIVE S REVIEW HomeServe remains committed to its vision To be the first place people turn to for home emergencies and repairs and to achieving this through its affinity branded membership business model. Across all our operations we are: embedding and reinforcing a customer focused culture; focusing our affinity partnerships on utilities, manufacturers of installed appliances and financial services companies; seeking to accelerate new affinity partner signings through the development of new propositions which meet the needs of partners and customers as well as creating value for HomeServe; improving our cost efficiency by reducing complexity, sharing best practice and investing in new systems and technology. In the UK, we are making progress in refocusing the business on a smaller, higher quality customer base and at 30 September 2012 customer numbers were 2.5m (HY12: 3.0m) with policy numbers of 6.0m (HY12: 7.5m). In our International businesses, customer numbers are up by 14% to 2.3m and policy numbers 12% higher at 4.6m. Across all our operations, customers total 4.8m (HY12: 5.1m) with 10.6m (HY12: 11.6m) policies. Globally, income per customer has increased by 8% to 89 (HY12: 82) with adjusted profit before tax 1 growing by 9% to 25.6m (HY12: 23.5m). The table below shows our performance metrics on a global basis as at 30 September UK International Total HY13 HY12 HY13 HY12 HY13 HY12 Affinity partner households m Customers m Penetration of affinity households % Income per customer Policies m Policies per customer Policy retention rate % Adjusted operating profit 1 / (loss) (1.5) During the first six months of the financial year, we have continued to invest in the development of our information systems as we aim to improve our operational efficiency. In the first half of the year we have commenced the implementation of a new group-wide financial management system as well as completing work on the UK s network transformation project, which gives customers increased flexibility when booking appointments and improves our ability to monitor the progress of jobs. During the second half of the year we will also be evaluating a number of options for the redevelopment of our core operational systems. We are making good progress in all our businesses embedding and reinforcing a customer focused culture with increasing customer satisfaction and lower customer complaints. Customer complaints in the first six months of the year have reduced, with the number in the UK down by 42% demonstrating the success of our renewed customer focus. The following sections report on the performance of each of our business segments. 1. Excluding amortisation of acquisition intangibles and joint venture taxation, see Financial Review and note Excluding amortisation of acquisition intangibles see Financial Review and note 6. Page 5

6 United Kingdom Continue to expect customer numbers to reduce to between 2.2 and 2.4m in FY13 Renewed two of our larger water affinity partners on long term agreements Increased customer satisfaction with complaint numbers reduced by 42% Testing the effectiveness of product enhancements and new marketing materials FSA investigation is ongoing UK performance metrics Sept Sept Change Affinity partner households m % Customers m % Penetration of affinity households % ppts Income per customer % Total policies m % Policies per customer Policy retention rate % ppts UK policies split by type Sept 2012 Sept 2011 Water 000 3,401 4,174 Electrical Heating, ventilation, air conditioning (HVAC) Manufacturer warranties Other ,090 Total policies 000 6,035 7,470 In the UK, revenue reduced by 11% to 134.5m (HY12: 150.9m) reflecting the reduction in customer numbers and related repair income. Adjusted operating profit 1 was 26.0m (HY12: 25.8m) with the reduction in revenue being offset by good cost control. The lower costs are a result of a reduced headcount and lower marketing expenditure partially offset by increased governance and control costs. Our customers continue to use our services with over 300,000 jobs completed in the UK during the first half of the year. Customer numbers at 30 September 2012 were 2.5m, which was in line with our expectations (FY12: 2.7m, HY12: 3.0m). The reduction reflects the low level of new customer acquisition marketing activity in the first half of the current financial year. Retention was in line with our expectations. Our target for customer numbers of between 2.2m and 2.4m at 31 March 2013 remains unchanged. Gross new policy sales in the first half of the financial year were 67,000 (HY12: 0.6m), reflecting the limited marketing activity in the first half of the year as we focused on the development of new marketing test materials and product enhancements and the restructuring of our call centre operations. Total policies at the end of September 2012 were 6.0m, a 19% reduction on the prior year (HY12: 7.5m), similar to the reduction in customer numbers. Income per customer increased by 14% to 105 (HY12: 92) reflecting the benefit from price rises in September 2011, as well as the reduction in the number of customers on highly discounted first year policies. The policy retention rate in the first half of the year was 78% (HY12: 82%). We expect this to increase in the second half of the year as there is a significant reduction in the number of first year policies, which have a lower retention rate, and a number of ongoing retention initiatives. Page 6

7 Our affinity partners continue to remain supportive of our plans and actions and we are pleased to confirm that two of our larger water utilities have signed new long-term agreements. The majority of our UK utility partnerships are now not due for renewal until 2014 or beyond. During the first half of the year we have significantly restructured our call centre and customer administration operations, with around 400 less roles as a result of the reduction in customer numbers and our decision, in the UK, to stop acquiring new customers through the outbound telephony channel. Our new customer acquisition marketing activity is now focused on the direct mail, inbound telephony and online channels with outbound telephony focusing on cross sell activity. During the first half of the year our telephony activity has slowly gained momentum as our call centre agents completed their training programmes and became more familiar with the new scripts and procedures. During the past six months the majority of our policy sales have been via the mail or inbound telephony channels. We are also looking at opportunities to enhance our internet and digital channels. We are currently testing a number of new marketing designs and product enhancements including increased affinity partner branding on mailings, lower discounts and alternative pricing structures together with an enhanced plumbing and drainage product which, as part of the current test, includes cover for non-emergency items such as dripping taps and leaking overflows. The effectiveness of our marketing campaigns and our retention rate are the key drivers that will determine the future shape and size of the UK business. In November 2011 we commenced a number of business improvement initiatives, which were consistent with the feedback received from our Supervisory team at the Financial Services Authority (FSA). These initiatives focus on our sales and marketing, controls and governance and complaints handling issues. We are making good progress in implementing these initiatives. The FSA s investigation is continuing and is expected to take a number of months to complete. Our revised sales and marketing processes, including new product terms and conditions, together with the introduction of our customer charter and a new customer complaint handling process have all contributed to increasing customer satisfaction levels. We have made many improvements to our controls and governance within the UK business over the past year. These included strengthening the HomeServe Membership Limited Board with the appointment of David Bennett as Non-Executive Chairman and the appointment of a new Marketing Director who has significant experience in affinity partner and internet marketing in the UK financial services sector. We have revised our employment and remuneration terms and conditions across the business. Our call centre agent incentive schemes are now increasingly linked to the quality of a sales call, further aligning them with our customer focused culture. We are also making progress in completing our customer re-contact exercises and have made good progress in reviewing the complaints that were received during winter 2010 when our procedures may not always have operated correctly. We have also completed a pilot exercise for those customers who may have suffered detriment as a result of the way in which they were sold their policy and, having reviewed the results, are finalising the process that will be rolled out in Jonathan King and his management team are making progress in transitioning the UK to a smaller more customer focused business, but as we have said before, this transition will take time to complete. Page 7

8 United States of America Customers up 20% and policy numbers up 25% Acquiring Montana Dakota Utilities Combined Gas & Electrical Contract business Five new affinity partners with over 400,000 marketable households More than doubled the number of marketing mailings, with continued good take-ups USA performance metrics Sept Sept Change Affinity partner households m Customers m % Penetration of affinity households % ppts Income per customer $ % Total policies m % Policies per customer Policy retention rate % ppts USA policies split by type Sept 2012 Sept 2011 Water Electrical Heating, Ventilation, Air Conditioning (HVAC) Other Total policies 000 1,899 1,525 Revenue in the USA was 39.3m (HY12: 30.2m), 30% higher than a year ago, principally due to the strong growth in customer and policy numbers over the past 12 months. The USA reported an adjusted operating loss 1 of 2.0m (HY12: loss of 0.8m). This result includes a doubling of marketing expenditure in the first half of the year, as well as the usual seasonality of the business. The increased marketing investment has enabled us to accelerate the rate of growth in the USA customer number. Retention in the USA remains high at 79% (HY12: 80%) despite significant growth in own brand policies which typically have a lower retention rate than utility branded policies and high levels of year one customers. Retention remains highest, at 89%, for those policies paid via a customer s utility bill and we therefore continue to look for opportunities to convert other partners onto this billing arrangement. We are making progress in developing our cross-selling activity in the USA with the average number of policies per customer at Income per customer has increased by 12% to $114 principally as a result of the mix of policies held. We have continued to make progress in increasing our affinity partner households in the USA and are pleased to announce today the acquisition of Montana Dakota Utilities Combined Gas & Electrical Contract business (MDU). HomeServe USA is acquiring the home assistance policies of MDU, a gas and electric utility serving 260,000 households in the states of North and South Dakota, Montana and Wyoming. MDU has 52,000 home assistance policies providing protection for a property s primary heating appliance and water heater across 26,000 customers. These policies will transfer to HomeServe on completion, which is expected in March As part of the acquisition, HomeServe USA has also entered into a long term marketing agreement with MDU. Page 8

9 In addition to the partnership announced in July with Alameda County Water District, a municipal water utility, which serves 80,000 households in California, we are also announcing today that we have signed three new affinity partner agreements. These agreements are with City of Pensacola, a gas utility in Florida serving 50,000 households; West Bay Sanitary District, a water utility serving 17,000 households in California; and Bethpage, our first municipal water partner in New York with 9,000 households. We are now licensed to operate in all 50 USA States and have significantly increased our own brand marketing in the first half of this year, through increased activity within existing States as well as mailing into new regions. Direct mail continues to be our primary sales channel in the USA and over the past six months we have more than doubled the number of mailings compared to the same period last year. Despite the significant growth in our direct marketing activity, response rates and payback periods have continued to be attractive and in line with our expectations. There remain significant opportunities for growth in the USA and Canada and we are therefore continuing to evaluate opportunities to increase marketing further in the second half of the year, subject to it meeting our usual payback criteria. We are not only investing in increased marketing but also in additional resources and infrastructure to accelerate our growth. Over the past six months, we have further increased the size of our business development team and strengthened our senior management team with a number of new positions. In parallel with this investment, we are focusing on maintaining and improving our efficiency and have, for example, outsourced the processing of postal policy applications to a third party specialist. We continue to fix our customers emergencies through our 136 directly employed technicians in the New York and Massachusetts territories and our network of over 550 high quality subcontractors. In the first half of FY13 we completed 7% more repair jobs than in the same period last year. Doméo Good financial performance with adjusted operating profit 1 of 5.6m Retention remains high at 87% Increased focus and resource allocated to new partner development Doméo performance metrics Sept Sept Change Affinity partner households (excluding apartments) m Customers m Penetration of affinity households % Income per customer % Total policies m % Policies per customer Policy retention rate % ppts Doméo policies split by type Sept 2012 Sept 2011 Water 000 1,920 1,902 Electrical Other Total policies 000 2,326 2,306 Page 9

10 Doméo revenue was 26.6m (HY12: 12.5m), with the increase principally reflecting full ownership of the business (49% in the prior period) as well as an 8% increase in income per customer (on a local currency basis), partially offset by a weaker exchange rate. The growth in revenue, together with good cost control and lower marketing activity than in prior periods, has resulted in an adjusted operating profit 1 of 5.6m (HY12: 1.3m). In the first half of the year, we have undertaken less marketing activity than in previous periods as well as rotating the type of campaigns undertaken. Our marketing and retention activity has resulted in 0.9m customers at 30 September 2012 (HY12: 0.9m) with 2.3m policies (HY12: 2.3m). During the second half of the year we are planning to increase our marketing activity with plans for a number of product enhancements and new marketing materials currently being developed. The retention rate in Doméo has remained high at 87% (HY12: 88%). This high rate reflects the proportion of customers using a continuous payment method to buy their policy, a consistently high level of customer satisfaction and a low level of customer complaints. We continue to develop our existing partnership with Veolia with an increasing number of their call centres now transferring potential sales calls to our own sales teams. We are also looking at opportunities for our two French businesses, Doméo and SFG, to work more closely together. One of the benefits of acquiring 100% control of Doméo in December 2011 was the opportunity to broaden our range of affinity partners in France. Over the past six months we have reorganised the business to increase the focus and resource allocated to new partner development, and have started early stage discussions with a number of utilities. In France, customers repairs are completed by our network of sub-contract engineers who completed 12% more jobs in the first half of the current financial year compared to the prior period. Spain Customers up 42% and policy numbers up 36% Adjusted operating loss 1 reduced to 0.1m (HY12: 1.0m) Spain performance metrics Sept Sept Change Affinity partner households m Customers m % Penetration of affinity households % ppts Total policies m % Policies per customer 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 Sept 2012 Sept 2011 Water Electrical Other Total policies In Spain, the reduced adjusted operating loss 1 of 0.1m (HY12: 1.0m) reflects the growth in membership revenue and the improved operating efficiency of our claims handling operation. On a local currency basis, membership revenue increased from 3.2m to 4.7m, reflecting the strong growth in customer and policy numbers, whilst claims handling revenue reduced by 0.5m to 27.5m as a result of a reduction in the average claim value. Reported revenue reduced by 6% to 25.8m (HY12: 27.5m) as a result of a weaker exchange rate. Page 10

11 We continue to achieve strong growth, with customer numbers increasing by 42% to 0.28m (HY12: 0.20m) and policy numbers up 36% to 0.36m (HY12: 0.26m). We have seen good growth in sales of water supply pipe, electrics and our Club products during the period. Telephony channels continue to be a good source of new business in Spain. We have seen strong growth in sales via our outsourced outbound telephony operation as well as a growing proportion of sales being generated via calls from both the Endesa and Agbar call centres. In the second half of the year we are planning to increase our marketing activity with both Endesa and Agbar as we look to continue to increase customer and policy numbers. Our claims handling business in Spain continues to perform well with growth in the number of claims managed. In Spain, our network of 1,450 sub-contract and Reparalia franchised engineers have completed over 200,000 repairs over the past six months, a 5% increase compared to the same period last year. New Markets New long term agreement with Enel Energia enabling us to market to 3.5m households Started test marketing in Germany Our New Markets segment includes our developing businesses in Italy and Germany and SFG in France. These businesses reported revenue of 4.6m (HY12: 6.0m) and an adjusted operating loss 1 of 2.4m (HY12: 1.0m). The higher operating loss reflects the increased investment in Italy and Germany and a lower contribution from retail warranties as we continue to invest in our point of sale and manufacturer warranty operation in SFG. The results for the prior period also included 0.9m of revenue and a 0.2m adjusted operating profit 1 from our Belgian businesses which were sold in March In Italy we have now signed a long-term agreement with the energy utility Enel Energia, enabling us to market to 3.5m households. As part of the agreement we are also able to bill the customer on their utility bill which we know from our experience in the USA provides the best results in terms of renewal and retention rates. We have also recently signed an affinity partnership with Veritas, a water utility serving over 200,000 marketable households in the Veneto region of Italy. In Germany we have started our test marketing with BS Energy and are also discussing potential affinity partnerships with a number of other utilities. In SFG, we continue to develop our post point of sale and manufacturer warranty operation. Summary and outlook In the first half of the year we have made progress in making improvements to our UK business, and have continued to grow our International businesses. In the UK the transition to a smaller, more customer focused business will take time to complete and the effectiveness of our marketing campaigns and our retention rate are the key drivers that will determine the future shape and size of the business. In our International business we are planning for continued growth in affinity partners, customers and profit. We expect our results for the full year to be in line with our expectations. Richard Harpin Chief Executive 20 November 2012 Page 11

12 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 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 Italy, Germany and SFG in France. The revenue and adjusted operating profit 1 for each of these segments are set out in the table below. illion Revenue Adjusted operating profit / (loss) 1 Adjusted operating margin Six months ended September 2012 Six months ended September 2011 Six months ended September 2012 Six months ended September 2011 Six months ended September 2012 Six months ended September 2011 UK % 17.1% USA (2.0) (0.8) -5.1% -2.8% Doméo % 10.0% Spain (0.1) (1.0) -0.5% -3.8% New Markets (2.4) (1.0) - - JV/inter-division (1.2) (14.0) Group % 11.4% Group revenue has increased by 8% to 229.6m (HY12: 213.1m), and adjusted operating profit 1 by 12% to 27.1m (HY12: 24.3m) in the first half of the financial year. The increase in both revenue and profit is principally due to growth in our International businesses. The Group adjusted operating margin (adjusted operating profit/(loss) 1 divided by revenue) has remained broadly stable at 11.8% (HY12: 11.4%), with increased margins in the UK and Doméo being offset by increased investment in our USA and New Market businesses. UK Our UK business reported revenue of 134.5m (HY12: 150.9m) which can be analysed as net income (income per customer multiplied by the number of customers) of 101m (HY12: 110m), with the remaining income of 34m (HY12: 41m), representing 28m of repair network revenue (HY12: 34m) and other income of 6m (HY12: 7m). UK operating costs have reduced by 17m in the first half of the year with the increased costs of governance and controls being more than offset by lower marketing expenditure and lower staff numbers. Adjusted operating profit 1 was 26.0m, in line with the prior period (HY12: 25.8m). In the second half of the year, we will be increasing our test marketing activity and this, together with the expected reduction in customer numbers, will result in the UK operating profit for the full year being lower than in FY12. International In our International businesses, revenue in the USA has increased as a result of the strong growth in customer numbers and Doméo s results reflect full ownership of the business and a strong 1. Excluding amortisation of acquisition intangibles and joint venture taxation, see Financial Review and note Excluding amortisation of acquisition intangibles see Financial Review and note 6. Page 12

13 retention performance. Reported revenue in our European businesses has been impacted by a weaker euro exchange rate as shown in the table below. Doméo s adjusted operating profit 1 was 5.6m (HY12: 1.3m) as a result of increased revenue, lower marketing expenditure and good cost control, partially offset by the effect of a weaker exchange rate. The adjusted operating loss 1 in Spain has reduced to 0.1m (HY12: 1.0m) as a result of the strong growth in the membership business and improved efficiency in our claims handling operation. Adjusted operating losses 1 in the USA and New Markets segments are higher than in the prior period as a result of increased marketing and continued investment in people and infrastructure. New Markets HY12 result also included 0.9m of revenue and 0.2m of operating profit 1 from our former Belgian businesses, which were sold in March Foreign exchange impact The impact of changes in the and $ exchange rates for the relevant periods has resulted in the reported revenue and adjusted operating profit 1 of our International businesses reducing by 4.7m and 0.3m respectively. The impact of the foreign exchange rate movements on the individual businesses is summarised in the table below. Exchange rate HY 13 HY 12 effect on () Million Revenue Average Revenue Average Revenue Profit (local currency) exchange rate (local currency) exchange rate USA ($) Doméo ( ) (2.6) (0.5) Spain ( ) (2.5) - New Markets ( ) (0.5) 0.2 Total (4.7) (0.3) International Cash flow and financing Our business model continues to be cash generative. Cash generated by operations in the first six months of FY13 amounted to 42.7m (HY12: 21.1m). illion September 2012 September 2011 Adjusted operating profit Tax on joint venture and amortisation of acquisition intangibles (6.5) (5.3) Operating profit Depreciation, amortisation and other non-cash items Decrease / (increase) in working capital 7.4 (10.3) Cash generated by operations Net interest (1.2) (2.3) Taxation (11.8) (14.2) Capital expenditure (19.1) (5.8) Repayment of finance leases (0.3) - Doméo dividend received Free cash flow Acquisitions / disposals (0.8) (3.0) Equity dividends paid (24.8) (22.5) Issue of shares Net movement in cash and bank borrowings (14.8) (22.3) Impact of foreign exchange 3.6 (1.3) Finance leases (0.9) (0.7) Opening net debt (66.0) (12.3) Closing net debt (78.1) (36.6) Page 13

14 The working capital inflow principally reflects the reduction in the size of the UK business, partially offset by the growth in our International businesses and 6.3m of expenditure related to addressing the UK issues. During the first six months of the financial year, we incurred capital expenditure of 19.1m (HY12: 5.8m). Capital expenditure in respect of the development of information systems included commencing the implementation of a new group-wide financial management system as well as completing work on the network transformation project in the UK. Capital expenditure also includes payments made to affinity partners for the long term provision of exclusive database access and branding rights. In the second half of the year we expect capital expenditure to remain higher than in previous periods as we continue the implementation of our group-wide finance system and re-engineer processes in our UK business. We will also be evaluating a number of options for the redevelopment of our core operational systems in future periods. Free cashflow in the first half of the year was 10.3m. This is higher than the 2.3m achieved in HY12 due to the working capital decrease, lower taxation and interest payments partially offset by the higher capital expenditure noted above. At 31 March 2012, we had a balance sheet provision of 21.0m in respect of expenditure relating to addressing the issues in the UK, including the 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 had been handled or their policy purchased. During the period, expenditure of 6.3m has been incurred in respect of addressing the UK issues, resulting in a provision of 14.7m at 30 September Net debt at 30 September 2012 was 78.1m (HY12: 36.6m), an increase of 41.5m over the 12 month period principally due to the 82m spent acquiring full control of our French subsidiary Doméo in December 2011, offset by continued strong free cash flow. Net debt increased from 66.0m at 31 March 2012 principally as a result of the payment of the FY12 final dividend in August. Group statutory results The headline statutory financial results for the Group are presented below. illion September 2012 September 2011 Total revenue Operating profit Net finance costs (1.5) (0.8) Adjusted Profit before tax Amortisation of acquisition intangibles (6.5) (4.9) Tax on JV - (0.4) Statutory Profit before tax Tax (5.4) (4.7) Profit for the period, being attributable to equity holders of the parent Statutory operating profit, after the amortisation of acquisition intangibles and tax on joint ventures (in the prior period) was 20.6m (HY12: 19.0m). Statutory profit before tax includes the amortisation of acquisition intangibles of 6.5m (HY12: 4.9m) which principally relates to Page 14

15 customer and other contracts held by the acquired entities at the date of acquisition. The increase in the amortisation of acquisition intangibles reflects the acquisition of the 51% shareholding in Doméo in December Statutory profit before tax was up 0.9m to 19.1m (HY12: 18.2m) as a result of higher operating profit and no joint venture tax charge, partially offset by higher finance and amortisation charges. There are no exceptional costs in the period, with the cost of the actions to address the issues in our UK business remaining in line with our previous provision. As stated in our 2012 preliminary results announcement there remains no certainty as to the nature or extent of any actions that the Financial Services Authority (FSA) may seek to take once their investigation is concluded. At this time the FSA is continuing to gather and review information and we have not had any discussions with them regarding any potential findings. Therefore at this stage no provisions have been made for a fine, should one arise, or the costs of the FSA investigation. Earnings per share Adjusted earnings per share 2 for the period increased by 7% from 5.2p to 5.6p. The increase in adjusted earnings per share is lower than the 9% increase in adjusted profit before tax 1 reflecting a higher tax rate and an increase in the average number of shares in issue from 322m to 324m. On a statutory basis, earnings per share was 4.2p (HY12: 4.2p). Finance costs The Group s net finance costs in the first six months of the financial year were 1.5m (HY12: 0.8m), 0.7m higher than in the same period last year. The increased charge reflects the higher level of debt during the period following the acquisition of full control of Doméo in December Taxation The tax charge in the first half of the financial year was 5.4m (HY12: 4.7m). The effective tax rate was 28.5% which is comparable to the 28.4% underlying joint venture adjusted tax rate reported for FY12. We continue to expect the tax rate to increase in future years as our overseas businesses, which are based in countries which have a higher tax rate than the UK, represent a higher proportion of our earnings. The effective rate in the first half of the year represents the estimated tax rate for the full year. Dividend The interim dividend of 3.63p per share (HY12: 3.63p) will be paid on 3 January 2013 to shareholders on the register on 7 December Acquisitions Acquisition spend during the period totalled 0.8m (HY12: 3.0m) the majority of which reflects a small acquisition to support the continued development of our directly employed network of plumbers in UK. The acquisition of Montana Dakota Utilities (MDU) Combined Gas & Electrical Contract business in the USA is expected to complete in March Page 15

16 Statutory and pro-forma reconciliations The Group continues to believe that adjusted operating profit 1 and adjusted profit before tax 1, which exclude the amortisation of acquisition intangibles and tax on joint ventures (in prior periods), 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 following tables provide a reconciliation between the statutory and proforma items. September 2012 September 2011 illion Operating profit (statutory) Amortisation of acquisition intangibles Tax on joint ventures Adjusted operating profit illion Profit before tax (statutory) Amortisation of acquisition intangibles Tax on joint ventures Adjusted profit before tax Pence per share Earnings per share (statutory) Amortisation of acquisition intangibles Adjusted earnings per share Principal risks and uncertainties The principal risks and uncertainties, together with the mitigating activities, detailed on pages of the Group's 2012 Annual Report and Financial Statements, continue to have the potential to impact the Group's performance and are as follows: The financial cost of customer re-contact exercises The potential loss of a commercial relationship Ability to implement an updated strategy successfully within the UK business The impact of competition A change in customer loyalty and retention Our marketing effectiveness Exposure to legislation or regulatory requirements Availability of underwriters The quality of customer service Recruitment and retention of skilled personnel Exposure to country and regional risks Financial and treasury risks including credit risk. Our marketing effectiveness is a key area of focus in our UK business in the second half of FY13 as we complete our current test marketing activity. The success of these tests, together with our ability to stabilise or increase our customer loyalty and policy retention rate, will determine the number of UK customers and policies which are key drivers of the UK financial performance. The FSA s investigation is ongoing and therefore as stated in our 2012 preliminary results announcement there remains no certainty as to the nature or extent of any actions that they may Page 16

17 seek to take once their investigation is concluded. At this time the FSA is continuing to gather and review information and we have not had any discussions with them regarding any potential findings. Therefore at this stage no provisions have been made for a fine, should one arise, or the costs of the FSA investigation. Information on financial risk management is also set out on pages of the Annual Report, a copy of which is available on the Group's website 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. Johnathan Ford Chief Financial Officer 20 November 2012 Page 17

18 RESPONSIBILITY STATEMENT We confirm that to the best of our knowledge: (a) the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting ; (b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and (c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein). By order of the Board Chief Executive Officer Chief Financial Officer Richard Harpin Johnathan Ford 20 November November 2012 Page 18

19 CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2012 Note Six months ended 30 September 2012 Six months ended 30 September 2011 Year ended 31 March 2012 (Audited) Continuing operations Revenue Operating costs (209.0) (194.8) (452.4) Share of profit of joint ventures Operating profit Investment income Finance costs (1.6) (0.8) (2.3) Gain on re-measurement of joint venture interest on acquisition of control Profit before tax, exceptional expenditure, amortisation of acquisition intangibles, re-measurement gain and tax on joint ventures Exceptional expenditure - - (31.1) Amortisation of acquisition intangibles (6.5) (4.9) (10.4) Gain on re-measurement of joint venture interest on acquisition of control Tax on joint ventures - (0.4) (1.4) Profit before tax Tax 4 (5.4) (4.7) (23.7) Profit for the period, being attributable to equity holders of the parent Dividends per share p 3.63p 11.3p Earnings per share Basic 6 4.2p 4.2p 35.4p Diluted 6 4.2p 4.1p 34.6p Page 19

20 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 30 SEPTEMBER September September 2011 Year ended 31 March 2012 (Audited) Profit for the period Exchange movements on translation of foreign operations (4.4) (0.8) (3.9) Actuarial loss on defined benefit pension scheme (1.2) (1.4) (1.2) Tax credit relating to components of other comprehensive income Total comprehensive income for the period attributable to equity holders of the parent Page 20

21 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2012 Share Capital Share Premium Account Merger Reserve Own Shares Reserve Share Incentive Reserve Capital Redemption Reserve Currency Translation reserve Retained Earnings Balance at 1 April (19.1) Total comprehensive income (4.4) Dividends paid (24.8) (24.8) Issue of share capital Issue of trust shares (1.0) 0.4 Share-based payments Share options exercised (0.5) Deferred tax on share options Balance at 30 September (17.7) (0.5) Total Equity FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2011 Share Capital Share Premium Account Merger Reserve Own Shares Reserve Share Incentive Reserve Capital Redemption Reserve Currency Translation reserve Retained Earnings Balance at 1 April (21.5) Total comprehensive income (0.8) Dividends paid (22.5) (22.5) Issue of share capital Issue of trust shares (1.4) 0.8 Share-based payments Share options exercised (0.7) Tax on exercised share options Deferred tax on share options Balance at 30 September (19.3) Total Equity FOR THE YEAR ENDED 31 MARCH 2012 Share Capital Share Premium Account Merger Reserve Own Shares Reserve Share Incentive Reserve Capital Redemption Reserve Currency Translation reserve Retained Earnings Balance at 1 April (21.5) Total comprehensive income (3.9) Dividends paid (34.2) (34.2) Issue of share capital Issue of trust shares (1.6) 0.8 Share-based payments Share options exercised (1.2) Tax on exercised share options Deferred tax on share options (1.9) (1.9) Balance at 31 March 2012 (Audited) (19.1) Total Equity Page 21

22 CONDENSED CONSOLIDATED BALANCE SHEET 30 SEPTEMBER September September March 2012 (Audited) Note Non-current assets Goodwill Other intangible assets Property, plant and equipment Interests in joint ventures Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables (199.5) (177.7) (230.8) Current tax liabilities (2.6) (7.8) (8.8) Provisions 8 (14.7) - (21.0) Obligation under finance leases 7 (0.5) (0.4) (0.4) Bank and other loans 7 - (44.9) - (217.3) (230.8) (261.0) Net current assets/(liabilities) 81.1 (5.0) 84.4 Non-current liabilities Bank and other loans 7 (129.0) - (117.8) Other financial liabilities (13.0) (17.9) (15.8) Retirement benefit obligation (1.1) (1.1) (0.6) Deferred tax liabilities (25.6) - (27.6) Obligations under finance leases 7 (1.5) (0.8) (0.6) (170.2) (19.8) (162.4) Total liabilities (387.5) (250.6) (423.4) Net assets Equity Share capital Share premium account Merger reserve Own shares reserve (17.7) (19.3) (19.1) Share incentive reserve Capital redemption reserve Currency translation reserve (0.5) Retained earnings Total equity Page 22