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Edited Transcript of HSV.L earnings conference call or presentation 19-Nov-19 9:00am GMT

Half Year 2020 HomeServe PLC Earnings Call

London Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of HomeServe PLC earnings conference call or presentation Tuesday, November 19, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Bower

HomeServe plc - Co-COO & Group CFO & Director

* Richard David Harpin

HomeServe plc - Founder, CEO, Co-COO & Director

* Thomas J. Rusin

HomeServe plc - Co-COO & Global CEO of HomeServe Membership & Executive Director

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Conference Call Participants

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* Alexander Mees

JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research

* Andrew Nussey

Peel Hunt LLP, Research Division - Analyst

* Anvesh Agrawal

Morgan Stanley, Research Division - Equity Analyst

* George Nicholas Gregory

Exane BNP Paribas, Research Division - Research Analyst

* Jane Linsdey Sparrow

Barclays Bank PLC, Research Division - Director

* Joe Brent

Liberum Capital Limited, Research Division - Head of Research and Equity Analyst

* Nicole Manion

UBS Investment Bank, Research Division - EMEA Equity Research Analyst of Support Services

* Samuel Frost Dindol

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [1]

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Good morning, everyone, and welcome to our half year results presentation. HomeServe had another very good 6 months. I'm looking forward to taking you through the highlights and giving you an update on our key growth initiatives. Joined this morning by David Bower, our CFO, who will take you through the financials; and Tom Rusin, Global CEO of the Membership business, who will talk you through Membership and HVAC. And I'll come back at the end and talk through what progressed on international development, Leakbot and Home Experts.

So let me just start by giving you the highlights. We've had another strong half, and we're pleased, not only with our financial performance, but also the progress that we're making strategically to deliver those growth initiatives. All of our Membership businesses performed well, and most notably, North America. Profits rose 24% and we added 0.5 million new customers. We saw good growth in the U.K. with significant efficiency gains.

In France, we had our biggest increase in customer numbers for 4 years. We've strengthened our foundations in Spain with a new billing arrangement for the Endesa back book and an agreement to carry out reactivation marketing under the Endesa brand. And we saw some new partnerships in the Claims business. Our HVAC buy and build strategy made good progress with 5 acquisitions in the first half. So we expect HVAC to become a meaningful business line. In Home Experts, revenue grew 31%, and we continue to test and learn and make progress with all 3 of our businesses, Checkatrade, Habitissimo and Home Experts France.

And I'm delighted this morning to announce the acquisition of elocal, which will give us profitable entry into the Home Experts market in our biggest territory, the U.S., and more opportunities to learn and grow. More on that later. Over to David for the finances.

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David Bower, HomeServe plc - Co-COO & Group CFO & Director [2]

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Thank you, Richard, and good morning, everyone. So I'll start with our group financial summary. As Richard just said, reported revenue is up 13% to GBP 458 million, with adjusted operating profit up 2% to GBP 37.7 million. And this reflects a good operational performance across our Membership businesses, where adjusted operating profit is up [19%]. This is offset in part by our planned investments in both Home Experts and New Markets. As you can see on the Slide, these results were aided by sterling's weakness against the dollar and the EUR to the tune of about GBP 1.3 million of the adjusted operating profit level.

Given recent currency movements, however, if today's rates prevail, we wouldn't expect to see any further significant impact from currency movements for the balance of the year. Adjusted profit before tax was down 10%, driven by the increase in interest due to both a higher interest net debt balance of -- higher net debt balance of GBP 451 million, and our weighted-average interest cost.

Of the GBP 160 million increase in net debt since this time last year, GBP 57 million or roughly 1/3 of it is due to the inclusion of lease liabilities under IFRS 16, whilst the rest reflects our continued investment in growth initiatives. The increase in the interest rate is due to the fixed rate borrowings drawn in the second half of last year as we lengthened the maturity profile of our debt.

On a statutory basis, profit before tax was up 2%, reflecting 2 exceptional gains. Firstly, a gain of GBP 3.8 million, arising on our exit from Italy. And then secondly, a further GBP 3.6 million gain arising on the acquisition of the remaining 30% of Habitissimo. So below the adjusted operating profit level, the increase in interest expense and acquisition amortization were more than offset during the period by those exceptional gains. As is usual at this time of the year, I'll remind you that our operations remain highly seasonal with over 80% of our profits historically generated in the second half, though, our investments are more evenly spread throughout the year. The interim dividend is up 12% to 5.8p per share, and we expect our full year dividend to continue to grow in line with earnings.

So moving on to the divisional financial summary. In the U.K., total revenue was down 5% despite an increase of 2% in net policy income. This was as repair network revenue decreased as we carried out fewer jobs across the smaller policy base. And HVAC revenue also reduced slightly, as the U.K. business focused on higher margin work, completing fewer installs in total. By contrast, the U.K. adjusted operating profit grew very well at 38%, reflecting efficiency gains, which Tom will talk through shortly.

In North America, revenue grew 30% at constant currency, as the Membership business delivered 13% growth in customers and 5% growth in net income per customer. Key proof points for our growth path, we described on our Investor Day back in June. U.S. HVAC also grew well, driven by 3 profitable acquisitions in the second half of FY '19 and a further 2 in the first half of this year.

Adjusted operating profit in North America increased 24% at constant currency, reflecting continued growth in Membership and also the profit contributed albeit at a slightly lower margin by the HVAC business. France grew revenue and adjusted operating profit by 9% and 4%, respectively, at constant currency, driven by higher customer numbers as well as increased HVAC activity. And in Spain, revenue was up 5%, reflecting higher claims volumes and our growing HVAC business, but partially offset by the expected runoff of the Endesa policy book.

The adjusted operating profit in Spain was down 12% at constant currency due principally to increased investment in business development and claims and Membership management. The GBP 2.3 million reported loss in New Markets reflects losses in our Italian business prior to its divestment, the ongoing prospecting for further international opportunities and our investment in our Japanese joint venture.

And finally, in Home Experts. The increased net loss of GBP 8 million largely reflects investment in people, marketing and technology at Checkatrade. The net loss run rate reduces in the second half, given the higher revenue growth expected in that period.

So moving on to look at the cash flow. Our free cash flow remained very healthy at GBP 37.5 million, demonstrating that previous investments are paying off. The slide shows you all the movements in net debt since the year-end. The GBP 57.4 million associated with IFRS 16, increased our leverage by 0.1x at the half year. And for keen students of IFRS 16, there's a slide in the appendix which shows you all of the moving parts.

Apart from the IFRS 16 impact, the main drivers of the increase in our net debt were capital expenditure associated with technology transformation, partner payments and policy book M&A, an outflow of GBP 22.5 million, principally from HVAC acquisitions and the remaining 30% of Habitissimo and of course, the payment of our final full year dividend. Our net debt-to-EBITDA ratio 1.9x, was at the upper end of our target year-end range, but we do remain very comfortable with this.

Looking in more detail at our capital investments. We invested around GBP 67 million in capital items in the first half across 5 main categories. The capital investment required in relation to technology enhancements across our Membership business was higher at GBP 22.4 million in the period. This does include the unwind of GBP 5 million of year-end capital creditor. As the underlying investment activity in Membership has reduced in the period as expected due to the upgrades we've been working on to our CRM and claims handling systems nearing completion. Partner payments of GBP 7.7 million continue to reduce because we're no longer acquiring customers with Endesa in Spain. But in France, capital payments to partners in return for direct help with marketing remains highly effective and have remained broadly stable period-over-period.

Policy book acquisitions remain a surefire way to grow our business. And therefore, are one of our preferred types of capital investment. The GBP 6.9 million investment in the period, delivered 2 new policy books across our Membership businesses, both of which have been quickly and seamlessly integrated into the local operating businesses. As mentioned at the year-end, we are investing more in infrastructure Checkatrade, amounting to GBP 7 million this period. And while the business is inherently capital-light, we have a 2-year road map in place to transform our technology stack and build a state-of-the-art digital experience, for both trade and consumers.

Finally, M&A spend was GBP 22.5 million in the period, which included GBP 7.7 million to acquire the remaining 30% of Habitissimo and around GBP 12 million in relation to the execution of our HVAC buy-and-build strategy.

So let me finish by summarizing our guidance for the full year. You remember that at our full year results in May, we said that we expected further strong growth this year with increased P&L investment in Home Experts, financed by a strong performance in Membership, particularly in North America. Membership in HVAC are, in fact, performing at the top end of our expectations, which gives us scope to increase our net P&L investment in New Markets and our Home Experts businesses to around GBP 19 million from the initial expectation of GBP 12 million to GBP 15 million.

We expect this increased investment to fund the new commercial plan for Habitissimo being developed by the incoming CEO, Sarah Harmon, as well as the continued development of Home Experts in France and the activities of our international business development team. Taking into account the strong performance in Membership and HVAC and the increased investment in Home Experts and New Markets just mentioned, our overall outlook for the total operating result of those businesses remains unchanged. That said, the agreement to acquire elocal announced today, which Richard will talk about in little more detail shortly, is expected to add around $5 million to this year's adjusted operating profit and then a total of around $16 million to adjusted operating profit in FY '21. After transaction costs and the associated interest charges, this will then equate to an expected increase in adjusted profit before tax of around GBP 2 million in FY '20 and then around GBP 6 million in FY '21. So at a group level and below operating profit, including the interest associated with the elocal transaction, we expect interest to be at around GBP 18 million for the full year. The tax rate is likely to be slightly higher than last year's 22%, given our growth in the international markets, all of which have higher tax rates than in the U.K.

We don't expect any major change in working capital absorption compared to last year, and we continue to expect our technology and operating CapEx to trend down overtime. Cash conversion will continue to exceed 100%, and free cash flow will continue to grow. But given the recent M&A, including elocal, we would expect our net debt-to-EBITDA ratio to continue to be towards the upper end of our target range at the year-end. And on that note, I'll hand over to Tom.

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Thomas J. Rusin, HomeServe plc - Co-COO & Global CEO of HomeServe Membership & Executive Director [3]

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Thank you, David, and good morning, everyone. Before I talk through our individual businesses, I'll provide a quick summary of Membership and the HVAC business lines overall. As Richard has already said, we are pleased with the performance of all of our Membership businesses so far this year. Membership is an exciting business, which is proven and scalable. And it is great that our strong delivery is able to fund growth in Home Experts. Across Membership, we are taking a global approach to growth, while each country focuses on its best opportunities. So in North America, we are focused on maximizing the strong organic growth opportunity and is still largely untapped market.

In France and Spain, we are focused on diversifying our partners and our products to sustain our growth. And here in the U.K., we are leading the charge with continuous improvements in customer service and efficiency. Then best practices from all these initiatives are shared and implemented globally. HVAC installations, which is also run globally, is bringing a significant source of new revenue and profit improvement across all our membership territories. We have now acquired around a dozen businesses across our 4 geographies, and this is starting to represent a meaningful global business line.

Running HVAC, adjacent to our Membership business, means that we can focus on selling -- on cross-sell opportunities, like selling HVAC systems to our policyholders and policies to those who get installations and tune ups. We also obtained cost synergies through better utilization of the engineers we acquire with these HVAC businesses. So now let me spend just a little time on each country individually. In the U.K., our success has been in improving the operational efficiency of the business, which has driven a 38% increase in adjusted operating profit to GBP 14 million. We expect to deliver a full year increase, somewhat shy of this level, but impressive nonetheless. This is before profit growth moderates in the years to come. That said, we think we can continue to harness technology to deliver service and efficiency improvements, which will ensure sustainable levels of profit in the future despite a slightly smaller customer base.

There are two main drivers of this half's improvement: people and technology. With the capital investments, David described, really starting to deliver value. As we transform the way we work, we have been making organizational changes to match, in particular, slimming down our U.K. management structure. These changes are never easy, but our U.K. team has adapted very well and the results in terms of improved efficiency and more seamless customer service are really beginning to show through.

Our focus in the U.K. is on serving -- servicing our core customer base who value our services rather than chasing marginal customers through deep discounts. We think this approach chimes well with the recent FCA study on pricing practices. Within the general insurance industry, which calls for above all, transparency and fairness. We look forward to the publication of the final report in Q1 next year, but feel that we are well-aligned for its outcomes.

Overall, our U.K. business continues to do a great job for our core customers, with net income per customer up 18% and retention steady at 78%. Our customer satisfaction scores on Trust Pilot and Reevoo remained around all-time highs of 96% on Reevoo and 4.4 on Trust Pilot. And our 900 engineers completed 0.5 million jobs in the period. But what does the future hold? As far as customer service at HomeServe is concerned, the future is now, HomeServe now. And in -- and the U.K. is leading the way on this important project to revolutionize the way we serve our customers.

HomeServe now uses natural language processing and app-based technologies to connect customers quickly and directly to an available and local engineer who can fix their problem now. Overtime, HomeServe Now will help us provide a different class of service to our customers and enable us to use our engineering and customer service resources, much, much more efficiently. HomeServe Now has been successfully trialed for electrics, plumbing and drainage, and gas claims in specific regions in the U.K. and will now be trialed in North America. We already have thousands of jobs done, and all the metrics that we look at to measure success, things like average job cost, speed of technician arrival, customer satisfaction all of these metrics are exceeding our expectations. And in the U.S. and the U.K., we've trialed Smart IVR and intelligent automated call handling. We've now done several hundred thousand calls with this new technology. And again, our expectation on success metrics have been exceeded. So we are working on rolling this out globally.

Next, let's have a look at France. I'm really excited to report the strongest customer growth for 4 years in our French business, up 5% and still with the strongest retention rate in the group at 89%. We are seeing growth in France from partners, old and new. With our oldest partner, Veolia, we are seeing good results from direct sales via Veolia's home friend initiative. We are expanding our direct sales with Saur, we are about to expand our branded marketing with Suez. But we aren't just seeing success in the water channel. France has done a great job expanding in the retail energy space. We're really pleased with the progress that we are making to open up with new partners at switching sites like JeChange and Papernest and with challenger energy companies like Mint and Hellowatt. And we have a solid pipeline of potential new retail energy partners. So let's move on to Spain.

The Spanish business continues to operate well. Our Spanish team has shown great dedication as it looks to forge new partnerships and drive growth across the existing Membership and Claims business and build its own business in HVAC. While still small, we have launched a variety of new partnerships in the retail and municipal channels. And again, still early days, but we are also seeing good results with our 3 new retail energy partners. And we've acquired a small policy book from [Seritecnica]. Retention is up to 81%, as the Endesa book matures. While we no longer have any front book marketing with Endesa, the relationship remains productive. And in July, we signed an agreement to secure the billing arrangements for the back book for another 5 years. This will continue to support the retention rate, but also provides us the opportunity for customer reactivation under the Endesa brand, which has always been a very strong channel in terms of response across all of HomeServe. Reactivation marketing with Endesa will begin this month. The profitability of the claims business reduced slightly in the period as we invested in business development and in the service levels we provide to our large bancassurer customers. Earlier this month, we signed a new partnership with Bansabadell Seguros Generales, which will deliver more job volume into the Claims network. Finally, in partnership with Habitissimo, our Spanish Home Experts business, we've seen early success with our on demand to policy offering. This is something we'll be expanding in Spain and working to take to our other membership countries.

Finally, on to North America. Our North American business continues to make excellent progress toward the milestone to target of $230 million of operating profit. The key driver of revenue and profit growth is the 13% growth in our customer numbers and crossing the landmark threshold of over 7 million policies. With around 150,000 new customers from tranche 2 of the Dominion policy book, the remainder of the growth over 9% comes from the success of our own organic marketing activity. We continue to sign new partnerships in the U.S. at the rate of 2 to 3 a week. And since the half year, our numbers have been boosted by the expansion of our agreements with CenterPoint and AEP, adding over 800,000 new households. We also have several active policy book acquisition discussions.

HVAC, also made a strong contribution to the revenue growth in the period, growing 83% to $15.6 million. Because the 5 businesses we've acquired so far are in areas of high policy density, we are able to use their engineers for Membership repairs and improve our overall efficiency, which, overtime, will bring down our underwriting costs and benefit our income per customer. We continue to expand our existing membership model in the U.S., but we also have a brand-new opportunity with Total Home Warranty.

Whole Home warranty is a large, fragmented market, whose target market includes younger homeowners who are used to rely upon subscription services. It is a market characterized by a much higher price point per customer than we're used to at HomeServe, but with patchy levels of customer service from the competition. So this is a market where we think our own high standards can make a significant difference, not least of all, by marketing Total Home Warranty via our network of over 750 utility partners, which is a channel that is unique to us.

Our acquisition of American Home Guardian brought 5,000 policies and considerable expertise into our business, particularly in the real estate channel. And I'm happy to announce today that we've made an additional acquisition of Nations Home Warranty that will add an additional 10,000 policies. It is a small strategic home warranty add-on that operates right in AHG's territory. As a result, it is an accretive deal with operational synergies. We are already seeing inbound requests from the real estate space who are looking for a Whole Home product that provides better service.

We've also signed Mike Rowe as a spokesperson to help us tell the story around our exceptional customer service. Mike was the host of a highly rated TV show on Discovery called Dirty Jobs. The show is nominated for 5 Prime Time Emmys, and Mike was called one of America's most trusted celebrities by Forbes Magazine. Now we had planned to do only Whole Home Warranty on TV with Mike, but he was so impressed with our core Membership products that we filmed spots for those too.

Our utility partners are also very excited about having Mike indoors HomeServe as they expect to see an increase in marketing response. So here's a taste of TV marketing U.S. style.

(presentation)

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Thomas J. Rusin, HomeServe plc - Co-COO & Global CEO of HomeServe Membership & Executive Director [4]

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We've also made progress with the HomeServe app which has now been downloaded by around 30,000 users who don't need to be existing HomeServe customers. The app helps homeowners do away with their paper appliance manuals and also shares product recall alerts, self-help guides and technician contacts. We get great user data and insight from downloads, which will help us develop an excellent new direct marketing channel. So all in all, I hope this gives you a picture of our healthy growth in North America and which that -- and with that, over to Richard.

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [5]

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Thanks, Tom. So I'll round off the presentation with updates on our international business development plans, next steps for Leakbot, and of course, Home Experts. You'll remember that back in February, we announced our joint venture with Mitsubishi Corporation in Japan, with each of us committed to an initial cash investment of GBP 2 million into the JV. The joint venture has started well, run by a team of Mitsubishi and HomeServe secondees, plus some new recruits.

Now one of Mitsubishi's key roles was to introduce the JV to energy utilities. We're targeting a first signing before Christmas to enable marketing to commence before the financial year-end.

We announced in July that we'd exited Italy. We saw limited opportunity for our membership business there, so we decided to sell our 49% shareholding to Edison. And that's very much in keeping with our discipline of focusing time and resources on our biggest opportunities. On Leakbot, after years of testing, we now have our first rollout deal here in the U.K. and that's with Hiscox, the high net-worth insurer, and that commences at the beginning of February. They'll be offering Leakbot free to their 40,000 high net-worth customers, and they'll pay us a monthly fee for each Leakbot sent to their customer base. The benefit to Hiscox comes from reduced water damage claims because leaks are discovered early. The Leakbot team have also just got an agreement with the insurance broker, iGo4 to launch Leakbot as a black box device for customer acquisition and available on comparison websites where consumers get a reduced premium for fitting and using our Leakbot. And we've started testing Leakbot in the U.S. So we're now looking for a strategic partner, such as a large Internet of things or smart home player in the U.S. to help us quickly scale the Leakbot business over there.

Last, but not least, Home Experts. In Home Experts, we've made substantial progress in the period in developing our business in 3 out of our 4 Membership territories.

Checkatrade and Habitissimo are both market leaders, they attract substantial numbers of website hits and are delivering encouraging revenue growth. Our increased net P&L investment of GBP 8 million in the first half was focused on people, technology and marketing at Checkatrade. In the second half, our investment will be across all 3 Home Experts businesses with increased focus on Habitissimo. At Habitissimo, we now have 100% ownership of the business. Sarah Harmon is putting in place a new, more ambitious commercial plan. We're going to continue to develop Habitissimo's lead generation model by looking at generating leads from affiliates and embedding large key accounts into our trades network. And alongside this, we'll launch our preferred Directory Extra model in Madrid next spring.

In our Home Experts trial in France, we are trialing out a different trade acquisition strategy to build the number of trades on the platform much more quickly, adding them to the platform free of charge after a basic set of checks. We then seek to upgrade them to full vetting on a monthly fee, once they've received the first customer contacts. We're attracting customers to the platform via leaflet directories and search engine marketing. And already, we're getting over 70,000 web visits a month in France. So we're pleased with our progress so far at building a Home Experts business from scratch in our French marketplace.

We're building Checkatrade like building a house with the foundations being trust, scalability and people. The 2 floors of our house are the right models for consumers and the right model for trades. The roof is a brand famous for being the best place to find checked and better trades, and we're making good progress on all of these. Not much of our learning has come from what we call our Mega City Trial. We started in the Grenada TV region, covering Liverpool and Manchester, and it's now been rolled out to 4 additional areas covering around half of U.K. households, including Checkatrade's traditional stronghold in the Southeast. And its geographical expansion, that's the key to getting 80% of our target for trade recruitment. So the extension of the trial is very significant. A key part of the Mega City Trial has been testing a new way to recruit trades involving a free trial and a rolling monthly contracts. That allows trades to dial up and down their subscription, depending upon how much work they actually need. And early results have been really good, a 32% uplift in the take-up rates in Granada with this recruitment model.

Now growth in trade numbers is the key driver towards our medium- to long-term target of GBP 45 million to GBP 90 million of operating profit. We saw a 21% increase in trades to 38,000 in the quieter first half, and that rate of acquisition has started to accelerate in the last few months. Average revenue per trade continues to build gradually and now stands at GBP 957 per year per trade.

On the consumer side, we've improved the user experience with the launch of Shortlist and Click to Call, which have had a very positive impact. Next improvement to launch will be matching a consumer to a trade with more availability to do their job and this will be live early in the new year. Checkatrade Now, for emergency jobs, is in the final stages of testing before its rollout. So we're making good progress towards implementing what we call our Directory Extra model.

We've also made a big step-up on brand awareness with the launch of our new TV ad in our Mega City regions and here in London. The ad focuses on Checkatrade's key differentiator, checked and better trades. So here it is.

(presentation)

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [6]

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Moving on to the U.S., I'm really excited to be announcing this morning the acquisition of eLocal, which gives us an excellent foundation for our Home Experts business in our biggest market, the U.S. It's profitable, it's growing fast, and it's got a really interesting business model that we can learn from here in Europe. eLocal is a pay per lead platform, which is smart in the way that it generates the leads. It pays affiliate marketing partners per lead, which eliminates marketing risk. Trades pay for leads and sign up to a free directory model, which forms a really valuable prospect list and will be an excellent starting point for introducing our Directory Extra model in a year's time when we have the perfect model from all of our learning in the U.K., Spain and France.

Now consumers have 3 ways to use eLocal. They can be matched automatically with up to 4 trades, and that's the Habitissimo model or they call a hotline, and they're connected to a trade via IVR, very much like HomeServe now or they call a trade listed in the directory like Checkatrade. Now eLocal is already a substantial business. It's based in Philadelphia, but also has offices in New York and in California, with around 130 staff. It has a network of 11,600 paying trades and 3.2 million home services trades actually listed in their free directory.

Revenue this calendar year is expected to more than double to around $80 million, following an acquisition that they made last year, with organic growth within that of over 40%. And 2019 calendar year profits are expected to be around $14 million. As we integrate eLocal, we expect to add, as David said, $5 million adjusted operating profit in FY '20 and $16 million of adjusted operating profit next year in FY '21. As David said, after integration costs and interest, that's GBP 2 million of PBITA this year and GBP 6 million next year. Our ambition for eLocal is to continue to deliver high single-digit profit growth while also investing to scale and grow our Home Experts model in America. We paid around $140 million for 79% stake, financed through our existing debt facilities. The other 21% of eLocal is owned by the management team and a private equity group who first invested back in 2017. The founders are going to stay with us to run and grow the business, and they will report directly to me, so that we can continue to share learning across all of our Home Experts businesses and avoid distracting our existing U.S. management team from their exciting Membership and HVAC growth.

So let me summarize. I'm delighted with the way HomeServe has performed in the last 6 months. Under Tom's leadership, all of our Membership and HVAC businesses are seeing constant innovation, be it in improving and transforming customer service, developing our partnerships or opening up new products and channels. We've continued to make good progress at Checkatrade. We've got renewed focus at Habitissimo in Spain. And we're building momentum following the launch of Home Experts, France. And with our acquisition of eLocal, we now have a Home Experts foothold in all of our existing Membership territories.

We're being really disciplined about where we invest our capital and where we choose to divest, as you've seen in Italy. And we're constantly investing in our teams to make sure that we've got the management capability for all of our growth initiatives. So I'd like to finish by thanking everyone at HomeServe and all of our stakeholders for your support and hard work in the last 6 months. The second half has got off to an excellent start, and I'm confident that we'll be able to report strong growth for the full year. So on that note, let me open up the meeting to your questions. Thank you.

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Questions and Answers

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Nicole Manion, UBS Investment Bank, Research Division - EMEA Equity Research Analyst of Support Services [1]

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It's Nicole from UBS. Just one question on Checkatrade and then one on HVAC, if that's okay. In fact, the first question, I suppose is more broadly about Home Experts. Increasingly, it looks like you're internationalizing the model, which is obviously great. But I wonder what that means for the trades target in Checkatrade and how you think about that and if that still makes sense? That's the first one. And the second one is just the profit run rate in HVAC. I think it was, sort of, low single-digit in the U.S. last year as an absolute number. Just where that's sort of moving towards and whether you've got anything sort of outside the U.S. now in terms of a profit number?

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [2]

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Yes. So I'll take the first one, Checkatrade, ask David on the profit run rate for HVAC. So yes, absolutely confident in our medium to long-term target in Checkatrade, which was to get to between 150,000 and 200,000 trades. It will be a hockey stick effect. We're learning and optimizing. The model still on trade recruitment, and we will see continued growth this year and acceleration in future years.

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David Bower, HomeServe plc - Co-COO & Group CFO & Director [3]

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In terms of the HVAC profits in North America, we'd expect to see some good growth -- percentage growth on that U.S. number and then a broadly similar number in the whole of Europe for the full year.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [4]

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Joe Brent at Liberum. Three questions, if I may. Firstly, eLocal, that's an exciting acquisition. Could you tell us how you expect to sort of invest in that business, grow it and what the road map is for North America Home Experts? Detailed financial question for David. On the revenues for eLocal, you've given us the calendar year '19 number. I think there's an annualization effect from the acquisition. Could you give us some indication of what the FY '21 revenue might be in that business? And thirdly, in Checkatrade U.K., could you tell us how successful you're being at utilizing the tradesmen network, which, I think, in the past, has been a bit of a challenge that 80% of the jobs have gone to 20% of the trades. Are you managing to get an even flow of work to a broader number of tradesmen?

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [5]

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Okay. Yes. So the first one of those was investing and growing eLocal. So the focus is, they've got a great model, lots of stuff that we can learn from. Ping and post, which is their equivalent of HomeServe now that we can learn from. So they're taking leads from around 200 affiliates, go through largely telephone calls into an automated IVR and then passing them out to trades that are pre-registered to buy a number of leads. So the key bit actually is in taking the learning, continuing their attractive growth rate. And then once we've perfected the Directory Extra model over the next 12 months in Europe, we can then -- they can start to put that into their already established free directory model, which will mean doing vetting and checking in the way that we do here. So I think really exciting growth plan and able to do it while continuing to grow single-digit profitability of that eLocal business in our largest territory.

Revenues for eLocal?

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David Bower, HomeServe plc - Co-COO & Group CFO & Director [6]

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In terms of the full year annualized run rate revenue, probably expect to see around about the 100 million mark in dollars, in FY '21.

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [7]

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And there was one further question that Joe had on Checkatrade. About 20% of the trades are getting 50% of the work today. So we're working on continuing to make sure that we've got fair distribution of that work relative to how much the trades are paying and making sure that new trades coming on board, particularly in the newer areas are getting work so that we achieve good levels of retention.

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Jane Linsdey Sparrow, Barclays Bank PLC, Research Division - Director [8]

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Jane Sparrow from Barclays, 3 questions as well, please. Just on the U.K., I know you said profit growth more moderate going forward, but can you also just give a comment on customer number outlook there. Whether we should expect that to continue to go backwards? Second question, I think you said you acquired 2 policy books. Apologies if I missed it, but which regions were those 2 policy books in? And then the final one, just on Italy, have you taken any learnings from why that specific market didn't work? And what you can read from that from perspective of the new countries that you're targeting?

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [9]

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Yes. So David will talk about U.K. policy, profit growth. Tom will talk about the policy books that we've been acquiring, and I'll talk about Italy.

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David Bower, HomeServe plc - Co-COO & Group CFO & Director [10]

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Yes, if you look at the profit growth in the U.K., wait, look at it for the full year -- take the half year numbers, if you adjust for the repair revenue down then you can see the underlying cost savings. They will effectively flow through for the balance of the year. And then obviously, a little bit of income per customer growth on the policy side, which will drive the policy and come up a bit further.

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Thomas J. Rusin, HomeServe plc - Co-COO & Global CEO of HomeServe Membership & Executive Director [11]

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Yes. So from a customer perspective, I think you should think of them about being around where they are. But to be perfectly honest, it wouldn't have set me if they slipped a little bit. We're not really focused on recruiting marginal customers for the sake of the customer number in the U.K. Our strategy is focused on those customers who really see value in what we do and are willing to pay a fair price for our service. We've gotten those customers out of the mix who were coming in on a discount and then canceling and coming back and on a discount. And that removed a lot of customers from the customer count. But if it goes down a little bit, it wouldn't bother. We're really focused on those customers who value our products and services. In terms of policy books, the 2 acquisitions were in Spain, in the U.S., I believe, we are having policy book discussions in all our territories, though. And that's one thing that I'm optimistic about. You can never ever forecast these things. But as we've gone out to the marketplace, there are policy books to acquire in every territory. And it's great that we've got one done in Spain.

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [12]

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The third one from Jane was on Italy and the learning. Have we got any Italians in the audience? Italy is quite a tough country to do business in, but the real reason why we decided to sell our shareholding was Edison didn't grow in the way that we expected. They still only have around 1 million energy customers, and that really wasn't enough in order to build a substantial policy book in Italy. So we do have a disciplined approach. And if something is not working, then we will exit and focus our resources on the stuff that's growing fast.

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Andrew Nussey, Peel Hunt LLP, Research Division - Analyst [13]

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Andrew Nussey from Peel Hunt. Again, maintaining the theme of three questions. First of all, in terms of the U.K. and U.S. Membership business. Obviously, good rises in income per customer. Can you give us a feel for what the underlying inflation was within there, so we get a feel for the mix change? And secondly, in eLocal. I had a quick look at the website, and there's a number of professional services on that website. Is that something that you like the look of and might think about taking to another form of platform in your other territories? And thirdly, on underwriting. Can you remember us when the arrangements first underwriters come up for renewal? I'm just conscious, you've got a very strong handle on claims and real granular detail at a lower cost to serve, which one might expect you to benefit from.

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [14]

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Yes. So on to on U.K. Membership and U.S. Membership.

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Thomas J. Rusin, HomeServe plc - Co-COO & Global CEO of HomeServe Membership & Executive Director [15]

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Yes. From an inflationary perspective, it's largely just a couple of percent. So if you look at growth in the U.S., we said that in the script that we had 13% growth, 9% of that 13% was organic growth. And when you look at net income per customer, our price rises in all our territories are really inflationary. So it's really coming from deepening policy coverage with our customers.

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [16]

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I think the underwriting one for the next.

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David Bower, HomeServe plc - Co-COO & Group CFO & Director [17]

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So in terms of the underwriting arrangements, got numerous partners across the globe, most of which are on very long-term contracts after a number of years. Any point in time, we will be actively talking about renewing underwriting deals. But typically, we look to get signed at least around 12 months ahead of the termination of the existing deal.

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [18]

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And then on eLocal, yes, on their directory model, they have about 30% of the businesses on there are non-trades. So things like insurance services, legal services. And what we've decided is that we -- it's an integral part of the model that it will continue to grow. It won't be the focus. So -- but we're going to keep it, not dispose of that bit. But no plans to put that into any other sort of countries. So it will stay and grow, but is sort of only 30% of the total.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [19]

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Alex Mees at JP Morgan. Unimaginatively, three questions. Firstly, on your new toy. So look, I wonder if you could give some color on the competitive environment that you find there. And whether you intend to maintain eLocal as a primary brand or bring in Checkatrade or something else? And secondly, I wonder if the pay per lead model could work at Checkatrade in the U.K.? And if so, would that alter your profit targets for the business? And finally, David, the outlook for CapEx for this year, please?

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [20]

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So competitive environment for Home Experts in the U.S. There are 53 businesses operating in the space, as you probably expect in such a large country. A lot of them are very small and focused on the on-demand jobs and the majority are overvalued and losing a lot of money. So eLocal in our starting to do our research and understanding of the market stood out way above all the others, both in terms of the uniqueness of the model of ping and post, passing of leads. The focus on 85% of the leads are telephone traffic, so it's smaller jobs in real-time and strong profit growth. So I do think that we can get lots of learning from that model. And we were already putting in a pay per lead type model into Checkatrade. And that's the moving from directory to Directory Extra. We know that customers, 70% like the directory format. 30%, say, actually, I don't want to search the pages, you find 3 kitchen fitters for me to come and give a quote. So lead gen will be part of the Checkatrade model. That part of the model is the matching that I talked about, and will launch over the next 3 to 4 months.

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David Bower, HomeServe plc - Co-COO & Group CFO & Director [21]

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In terms of CapEx guidance then, we've talked about the underlying sort of technology CapEx across Membership and Home Expert has been around about GBP 50 million mark, continue to see that to be the case with the membership decreasing and around about 10 million or so at sort of Checkatrade, Home experts. Partner payments will, obviously, look to continue broadly the same run rate, so doubling what we've got today would not be unreasonable. And then with regards to the policy book and M&As and -- obviously, will depend on what becomes available.

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Anvesh Agrawal, Morgan Stanley, Research Division - Equity Analyst [22]

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This is Anvesh from Morgan Stanley. Just a couple of questions from me on Checkatrade. First, just extending the point on Directory Extra, is there a risk that, that model can cannibalize the subscription-based revenue in the longer term? And if not, how do you protect against that? And secondly, with the introduction of flexible subscription and rolling monthly subscription, should we expect more lumpiness in your Checkatrade revenue going forward? Or are you seeing the trades renewing on monthly basis fairly regularly?

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [23]

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Just talk to you, say, again, the first question around the cannibalization?

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Anvesh Agrawal, Morgan Stanley, Research Division - Equity Analyst [24]

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So if you've got a lead gen model, is there a risk that some of your subscription base will move from that business...

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [25]

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Got it. I don't think so because the key bit is selling the Membership model and what the Checkatrade like about the directory model is it builds that profile and reputation. There's a way that they can log their customer reviews, so it's building their reputation. And the key bit is moving their monthly membership fee up and down because if they're really busy then we want them to pay less, so that the guys that have got availability move up the rankings. And therefore, it's a win-win for the customer. So the key is to make sure that we keep them as monthly recurring income. And then if they have more availability, they can pay for that either by getting more directory calls and moving up the rankings or by doing it on a pay per lead model. I think we've proved that having a flexible subscription is the right model. So in fact, we've been trialing. If people want to be able to move their membership up or down or not commit to a whole year, they can pay 20% extra. And that's proved pretty popular. But I think the -- if we look back to when we first bought the business, the key barrier was you've got to pay the whole of your money upfront as a new trade before you know whether the model is working for you. So now there's a free 2-month trial and then you start paying monthly. And that's why we've seen the uplift in the trade acquisition rate.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [26]

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It's George Gregory from Exane BNP Paribas. I'll take 3 as well, I guess. Two on eLocal and 1 on the U.K. Starting with eLocal. My first question really is, it strikes me as a relatively attractive multiple for a business growing I think, David, you referenced 40% organically 10x EBIT. So what do you think enabled you to buy the business at that multiple? What do you think incentivized the vendors to sell it to you at that multiple? And secondly, on eLocal. Richard, you walked us through your strategy for Checkatrade in June, which is built around owning, supply and investing in building that supply. Why would you not do the same in the U.S. and therefore, guide to growing that business on a profitable basis? Final question is on the U.K., either for Tom or Richard, how would you expect your business to fare were the FCA to action restrictions on auto renewals and first and/or second year price discounting, please?

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [27]

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Okay. So I'll take the first two and let Tom take U.K. So we think it was an attractive multiple. Management team and LLR, the private equity owners, were, therefore, the business wasn't for sale. We found it and persuaded them. They bought into the exciting model and the ultimate synergies that we get between Membership and Home Experts. They bought into the fact there's a lot that they can learn from the -- what we're doing in Europe. And so wanted to stay in, which is great because they've got skin in the game as they grow the business, but were excited by joining HomeServe and the size of the opportunity. The number one learning on online marketplaces is about whoever gets the supply wins. And if you look at sort of the right move, if you look at Auto Trader, it's clear that, that's the right rule. So the fact that eLocal have got over 3 million trades already on a directory, 0.5 million of those have claimed their listing and added in more details to the profile. So that's a fantastic starting point to put in better than Checkatrade model, but we're not in a hurry to do it. I think it's far better. We let them continue to grow. We learn from each other. And in a year's time when we perfected the model and the user experience on Directory Extra then that would be the right time to put it into the U.S., but it's off a really strong base and a very capable management team. Tom?

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Thomas J. Rusin, HomeServe plc - Co-COO & Global CEO of HomeServe Membership & Executive Director [28]

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And on the third question, I really would want to speculate what the FCA would do, but personally, I think it's a little hard to believe that they would completely remove auto renewal. I think that would affect everything from -- we have customers calling today saying, my debit number changed, why didn't you transfer the policy over. Because we didn't have the new number. It would affect everything from your required auto insurance to your Netflix account. That being said, we already have a very clear and proactive renewal process. So when someone comes up for renewal today, we notify them of their renewal in writing. We send them a copy of their T&Cs. We notify them what their policy price was last year and what it's going to this year. And we find that the customer base is very engaged in that renewal process. So I would hope we'd be okay. With respect to first and second year discounting, we've actually already made some pretty significant changes with discounting. So we've gotten out, as I've mentioned a number of times, the folks who were taking advantage of a promotional discount over and over again. But also when members call in, we -- and somebody wants a discount, we only provide them a discount today if they move into a different product, so that everybody pays exactly the same price for the same product. So I think we've been very proactive with respect to discounting, and I think we'd be quite well.

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Samuel Frost Dindol, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [29]

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Samuel from Stifel. Just a couple from me. Firstly, on the HomeServe Now potentially expanding that in the U.S. Do you need a certain level of trade density to make that work? And how do you see that sort of progressing in terms of cities and rural areas and things like that? And then secondly, on the Home Warranty business and selling that via the partner channel. Will there be sort of 2 pieces of paper in terms of the Home Warranty than the typical policy? Or will you try and sort of put it into one piece, if either you want this or you want this. Any comment on that?

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [30]

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Yes, both of those for Tom.

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Thomas J. Rusin, HomeServe plc - Co-COO & Global CEO of HomeServe Membership & Executive Director [31]

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So there is a level of trade density that's required for HomeServe now, but that's actually a part of our testing. We've built a very robust model to predict the required trade density for a particular area. It is why when we've gone into testing. We've tested it regionally and have kind of expanded it city by city, and we continue to move into larger and larger cities to sort of prove out that trade density model. The HomeServe Now team from the U.K. was in the U.S. last week, working on exactly what are the cities we want to test in first and making sure that we can bring the required trade density into it. But what I'd tell you thus far is we haven't had an issue with trade density. And what we've learned is, even our very, very best traders who are in super high demand, both from HomeServe and from their own clients, they all have some time in their diary that's available. And that's where HomeServe Now really, really has power. With respect to the total Home Warranty business. Today, there are 2 separate pieces of paper. But overtime, we anticipate that moving into one. So marketing along the lines of -- it's great. You took your first step and sign up for this particular cover. We'd like to make you available that you can go all the way to complete Whole Home Warranty coverage, and that's just one policy.

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Richard David Harpin, HomeServe plc - Founder, CEO, Co-COO & Director [32]

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Okay. I'd like to say 20 questions, I think, is the most we've ever had in our 15-year history as a public company. And I think it does reflect the scale of opportunity that we have in this business. Thanks all for coming this morning, and see you again soon.