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Edited Transcript of HSV.L earnings conference call or presentation 20-Nov-18 10:00am GMT

Half Year 2019 HomeServe PLC Earnings Call

London Nov 20, 2018 (Thomson StreetEvents) -- Edited Transcript of HomeServe PLC earnings conference call or presentation Tuesday, November 20, 2018 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Bower

HomeServe plc - Group CFO & Director

* Richard David Harpin

HomeServe plc - Founder, CEO & Director

* Thomas J. Rusin

HomeServe plc - 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

* Enel Jarving

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

* Michael Goltsman

Citigroup Inc, Research Division - VP

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

* Samuel Frost Dindol

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

* William Kirkness

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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

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Good morning, everyone, and welcome to our Interim Results Presentation. I'm joined this morning by David Bower, our CFO; and Tom Rusin, our global Chief Exec of our membership business. We've got off to a really good start to our 2019 financial year, and we're on track for continued strong growth for the full year. Revenue and profit are both up by 10%, which is good, given the normal seasonally quieter first half. North America delivered another outstanding performance with customers up 19% to 3.7 million and adjusted operating profit up 28% to $18.9 million. Plus a very good performance from the U.K. Operating profits were up 11%, and we signed 3 new energy utility partnerships. There's also been some really good progress in France with our key partnership with Veolia extended until 2026 and other new partnerships in the pipeline. We've also made excellent progress at Checkatrade and I will come back and talk a bit more about that after you've heard from David and Tom.

So on that note, I'll hand over to David to talk you through the financials.

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

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Thank you, Richard, and good morning, everyone. I'll start with the group financial summary. As Richard just said, reported revenues up 10% to GBP 404 million, which was 11% on a constant currency basis as we saw a small FX headwind of around GBP 3 million, principally in relation to the dollar. Adjusted profit before tax was similarly up 10% to almost GBP 32 million, which was 12% on a constant currency basis with a GBP 0.6 million headwind again, principally on the dollars. Closing net debt was GBP 292 million and our leverage was 1.4x our last 12 months EBITDA in line with our expectations. The interim dividend is up 11% to 5.2p per share, and we expect our full year dividend to continue to grow in line with earnings.

If we move on to the divisional performance. U.K. revenue increased 9% to GBP 156 million, with increases in both net policy income and repair network revenue as customers continue to take out more cover and use our products more frequently. Reported HVAC revenue also increased more than double that in the first half last year, principally due to having a full 6-month period of Help-Link. U.K. profit was GBP 10.2 million, and that's up 11% on the prior year reflecting a much-improved performance, which Tom will talk through shortly.

In North America, revenue was up GBP 131 million. That's up 14% of constant currency reflecting continued customer growth. First half profit in North America was the largest in the group, up 28% at a constant currency to GBP 14 million as increased size and scale of the business continued to deliver operating efficiencies.

In France, revenue was GBP 37 million. That's up 4% in constant currency due principally to our HVAC acquisition of Electrogaz made in December last year. Operating profit in France was GBP 7.5 million. That's down GBP 2 million reflecting an increase in business development and marketing spend across both the membership and HVAC business lines.

In Spain, membership revenue grew as more customers renewed a full price, while the claims revenue reduced slightly due to change in the mix of completed jobs. Operating profit in Spain was up 9% at GBP 8.6 million as an expected reduction in new customer revenue was offset by lower marketing and commission spend. We continued to invest in new markets with spend of GBP 3.2 million in the first half, principally on our Home Experts and International business development activity. To the extent any of our businesses outperform our internal plans at the advance of the year, we will look to increase our investment in appropriate new market opportunities.

And now looking at cash. Net debt increased by around GBP 54 million in the first half, which reflects our usual working capital seasonality and payment of our final dividend, together with our capital investments at around GBP 18 million in respect of M&A during the period. The working capital investment was GBP 4.3 million following the usual seasonal reduction in both receivables and payables, offset by the continued growth in the group and the introduction of monthly payment option for trades and Checkatrade. We continue to expect full year working capital absorption to be in line with prior year at around GBP 40 million for this year, and we expect then reduce to about half this level in future years. As a result, we continue to expect full year cash conversion to exceed 100% in this and future years, which reflects the cash tentative nature of our business.

M&A outflows include the HVAC acquisitions of Oscagas in Spain and Gregg Mechanical in the U.S. and deferred payments in respect of our prior period transactions. We've also completed the second tranche of the Dominion transaction in October and paid the related consideration of around $55 million at that time. So absent further M&A, we continue to expect to be within our target leverage range of the year-end of 1 to 2x net debt-to-EBITDA. At the half year, we had around GBP 200 million of headroom against the group's total available debt facilities. And subsequent to the period at the end of October, we raised around GBP 175 million of additional funding by U.S. private placement with notes denominated both sterling and dollars and with tenders in the range 7 to 12 years. This fixes a portion of our debt and interest expense and plays for the long-term balance maturity profile through payment of the group's debt facilities over the coming years, further strengthening our balance sheet.

Let me talk about capital expenditure and investment plans. We have invested GBP 30 million in capital in the first half. As usual, this is made up of a mix of partner payments and technology spend. Our partner payments of GBP 9 million were in line with the prior year. As expected, customer acquisition activity with Endesa ceased at the end of May and so new capital expenditure in this -- in relation to this has reduced. We obviously have the cash out flow related to the year-end credited to settle. In addition, we've also seen a continuation activity with Suez and an increase in Veolia's partner sales, both in France. Our GBP 21 million investment in capital projects related mostly to technology, improvements in the customer journey, which drive efficiency and improve the customer experience. Tom will speak about this -- an example of this shortly, and particularly new smart IVR in our North American business.

We continue to expect a slight reduction in our full year CapEx spend from GBP 71 million in the prior year. We're nearing completion of our CRM and claims handling upgrades, and only have modest CapEx assumptions for Home Experts at this time. So barring any significant increase in partner payment activity, we do expect total CapEx to reduce further in FY '20.

So now let me hand you over to Tom to look at the performance of the operating businesses.

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

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Thank you, David. Let me start first with the U.K. The U.K. business performed well in the first half with the headcount reductions made towards the end of last year, helping drive adjusted operating profit up 11% to GBP 10.2 million. As usual, the majority of our activity will come in the second half with a higher number of renewals and a busier more efficient engineer network. Retention of 79% was down 1 percentage point on last half year, but made in -- remained in line with the FY '18 year-end. As previous mentioned, the U.K. customer book is stable at around the 2.1 million customer level with complementary M&A such as the policy books of npower and the AA lifting this to 2.2 million customers in recent periods. We expect the customer base to remain at around this level as we acquire and retain customers who value and use our products. Further policy book M&A to increase customer count remains an option with a pipeline of opportunities under active consideration.

The value of the U.K. customer book is increasing with average policies per customer up 8% to 2.7 and a resultant GBP 12 rise in net income per customer to GBP 109. Customers are using our products more with claims up 8% to GBP 0.5 million. We are focused on expanding the depth of coverage with our existing customers as well as adding new partners.

Our new challenger energy partners Green Energy, SO Energy and Tonik complement the additions of E.ON and Octopus last year, and we think this is an exciting new channel to acquire customers through. We see a lot of opportunity in the retail energy market. It is a great place to offer our policies, and although our initial partners are small, the results are quite strong. This is something we will be pursuing in all of our membership territories.

Next, let's look at France. Operating profits were down to EUR 8.6 million, but for good reason. The timing of marketing campaigns and business development spend and increased investment to develop our HVAC business line. The customer count remains steady at 1.1 million customers and retention continues to be the highest in the group at 88%, in line with the year-end. We are delighted to extend the partnership with our oldest partner, Veolia, until 2026. This early renewal not only secures the relationship for another 8 years, but also brings a welcome opportunity to explore new channels and routes to market for customer acquisition activity.

Beyond Veolia, there are a couple of other interesting opportunities in the pipeline, both in the membership and the HVAC businesses, and I hope to be able to update you on those in the future.

Now let's turn to Spain. We are pleased to report a solid 6-month performance in Spain that was in line with our expectations. Customer acquisition activity reduced due to the end of the Endesa partnership in May, and as a consequence, total customers decreased to 1.2 million. However, the retention rate rose to 80% and profits increased to EUR 9.8 million as lower marketing activity and associated commissions offset the reduced income from new sales. We now have our first HVAC business in Spain after we completed the acquisition of Oscagas in August. Given the ending of our previous exclusive partnership with Endesa, we are in early active discussions with potential new energy partners and there are also opportunities on the claims side of the business.

And I'd like to pay tribute to our very strong team in Spain and the hard work they're putting in to lay the foundations for new growth.

Now let's turn to look at North America, which continues to have outstanding performance. Customer numbers increased 19% year-on-year to 3.7 million, which was made up of 10% organic growth and 9% growth from the first tranche of customers acquired from Dominion. Our retention rate improved as our policy book matured up 1 percentage point to 83% and we signed another 74 partners in the first half to take our total to over 600. We added 300,000 customers from the first tranche of the Dominion acquisition and we have now moved on to tranche 2, which completed as expected on the 26th of October. We will start marketing to the 200,000 customers and 3 million new households, which tranche 2 adds before the end of this month.

Our 10% organic customer growth help drive revenue growth of 11%. This, combined with improved operating leverage, drove a 28% increase in first half adjusted operating profit to $18.9 million and a 1 percentage point improvement in our margin to 11%. What is most exciting about the North American business is that the growth rates that we see at present are sustainable. And here's why. It starts with the fact that customers really like our products as evidenced by our Better Business Bureau A+ rating. When we introduce our products through new partnerships, we see the highest response rates across the group. This success breeds success. As more utilities and municipalities see their peers signing up with us, the sales cycle can shorten, which is why you've seen us keep adding 2 partners a week for the last 18 months. We have the right resources in place to keep this going, and there are still tens of thousands of potential new partners in North America.

We also continue to pursue policy book M&A to supplement our growth. Having done 14 policy book acquisitions now, we feel confident that future acquisitions will continue to be relatively straightforward and a low risk. While we can't guarantee that we'll get any specific acquisition done, we do have a strong pipeline and several active discussions. And, although, it is already great, we are constantly working to improve our customer experience. As just one example, we recently launched Smart IVR booking for tune-ups or services as you call them here, which is now enabling customers to book their tune-ups in half the usual time without needing to speak with a live agent. This saves our agents for more complicated calls. It improves the customer experience, and it improves our margin. We are launching this for claims in the second half in the U.S., and we will eventually launch this in all our membership businesses. All of the investments we've made in setting up our U.S. business for growth are starting to pay off. We've made considerable improvements, mostly in service efficiency from a brand new state-of-the-art purpose-built contact center to technician routing software to ensure we drive the fewest miles per claim. As the business continues to scale, the operating leverage these investments give us will continue to come through. I see no reason why the U.S. business shouldn't operate at a 20% margin on a sustainable basis.

The target we published for North America is to reach $160 million of adjusted operating profit, and we are well on track to achieving this. And let me be clear, we see this target very much as a milestone and not the end game.

What I want to do now is talk a little bit about how I see the global membership and global HVAC businesses developing. I'll start with membership. What I'm really excited about the opportunity to substantially expand our reach. In the 5 markets where we currently operate, there are around 250 million households. So assuming that 30% of these households are insurance-minded, which is an assumption born out of our most mature market, the U.K., we're talking about a target market of 75 million households for our membership businesses. Today, we have a little over 8 million members, so that's 67 million households who don't have our services.

Across these 5 markets, we have access to 97 million of the 250 million households through current partnerships. That's just 39%. So 60% of the market may have never heard of us. And that's simply because we haven't yet signed a utility or a municipality to offer our policies and partnership with. In these 5 markets, there are thousands of utilities, municipalities and retail energy providers. Now it's fair to point out that some of these utilities, strategies will never allow us -- never allow them to partner with us, it still represents a very substantial growth opportunity.

We know what we have works. We've shown you already we know how to deliver great customer service. We know how to develop strong partnerships. We know a thing or 2 about marketing. Our products are great, and our customers really like them. So the opportunity is to make the most of the expertise we've developed worldwide, share our knowledge and expand our distribution through more partners. As I've mentioned, we are in discussions with retail energy providers in all of our markets and we've also now established teams to look at the municipal markets in France and Spain. There are millions of customers in both of those markets for whom their municipality is their utility. This is a very successful channel in the U.S., which we may be able to develop in Europe.

I hope this brings to life for you the opportunity that we have to broaden our partnership base, and as I've already showed you -- shown you that is a very powerful driver for top line growth.

Now let me spend just a minute on HVAC. The reason I find HVAC such an exciting market is that the installation capability we are building is relevant to 100% of homeowners compared to the mere 30%, who may buy a policy. It's also recession proof, in my opinion. Your heating system does not care who is in the White House or 10 Downing Street. It is going to break when it is going to break. We've developed a proven and profitable model in the U.S. and are now looking to replicate it in the U.K., France and Spain. We've begun a buy and build strategy and have made acquisitions in the last year in each country, most recently Gregg Mechanical in the U.S. and Oscagas in Spain. We've a very clear set of criteria for these acquisitions, which you can see on the screen. What we're looking to establish in HVAC is a virtuous circle. Where we're there for a customer when their boiler breaks down, where we can replace their boiler if it's beyond repair, where we can offer the customer an annual service, and of course, a maintenance contract. With its potential to build a new community of policyholders, HVAC has clear synergies with our membership business. And just as we're modernizing our service offering and membership, there is huge potential to do the same in HVAC. We can expand our technologies to the HVAC businesses we acquire, which will improve their customer service and will also improve their margin. Just one example, is our self-fix capability, which we're currently using in the U.K. and now getting ready to trial in the U.S.

So I hope this has given you a sense of the potential and plans we have for 2 of our business lines.

And now I'll hand you back to Richard to complete the picture.

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [4]

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Thanks, Tom. Tom has given you some insight into the potential we see in 2 of our business lines. I'm going to be covering Home Experts and Smart Home in just a minute. But I wanted to start by talking about the way we've strengthened our management team over the last 6 months to make sure that we can develop the opportunities ahead of us in all 4 of our global business lines.

We've changed our management structure so that Tom is now directly responsible for both membership and HVAC, and with me leading on Home Experts and Smart Home. Stephen Phillips, who founded our business in Spain, heads-up new countries and is making good progress on a couple of promising opportunities. Johnathan Ford is moving on, and I'd like to take this opportunity to thank him for his considerable contribution since he joined HomeServe in 2012. Thank you, Johnathan. We already have the right leaders in place in our membership businesses, with Tom providing new emphasis to grow that business line.

In HVAC, we've taken the opportunity to bring in 2 senior hires from outside HomeServe and also to promote Deb Dulsky to a global role after a successful spell leading HVAC in the U.S. With the arrival of Mike Fairman, formerly CEO of giffgaff as Chief Executive of Checkatrade last month, we've made good progress on strengthening the team at Checkatrade. Mike will be supported by Linda Hardy who is well known to many of you, as COO, plus a new CTO and a new Chief Marketing Officer. Checkatrade are in the process of moving to new offices at Portsmouth Harbor, which will give them space to grow and make recruitment easier.

So let me move on and talk a bit more about Checkatrade. Firstly, on the trade side, growth in trade numbers has accelerated since we acquired our 40% share, growing from 24,000 in December 2016 to 31,000, that's up 29% since then. Our target is to create a platform of 200,000 trades. Close to its roots in the south of England, Checkatrade already has 1 trade for every 150 homes, whereas in Yorkshire where I live, it's 1 trade for every 2,000 homes. If we achieved the same trades density across the whole of the country as we have in Hampshire and Surrey today, we'll reach our 200,000 trade target. And that would represent around 50% of all U.K. trades.

Plans to step change that trades acquisition are up and running, with resources now dedicated to trades recruitment via outbound telesales. There's also a renewed focus on retention and making sure that trades make the most of membership and know how best to get value from the platform.

We've also seen an increase in the average trade subscription paid. We've replaced the single subscription price with fairer pricing bands. These link subscriptions to the value of the work trade receive through the platform. This means that trades will be paying between GBP 70 and GBP 100 a month depending upon how much work they get, which averages out at about GBP 900 a year. At the same time that we change the pricing structure, we introduced monthly payments to help trades manage their cash flow more efficiently. And we've introduced a buying club, which offers discounts on fuel, insurance and vehicles. The value of these can account for a significant proportion of their annual fee.

In future, we see further opportunity to help trades build the businesses with premium price bands for those trades who are interested in using the platform to generate significantly more volumes of work.

What I've shown you is a potential to increase revenue through growing the number of trades on the platform and through price increases. And the more trades that we have on the platform, the more valuable Checkatrade will be for consumers. So let me now turn to the consumer side of the platform.

We're making very good progress on building consumer demand. This has been driven by a tripling of our marketing spend to GBP 15 million with TV and radio advertising and sponsorship deals to drive up consumer awareness.

So let me just show you our latest TV advertising.

(presentation)

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

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Don't you just love that jingle? What also works well is our Checkatrade directory leaflets. We have a different one of these for every 50,000 homes. But today, we're only covering 30% of homes. So we got a plan to get them to 80% of homes and increase the mailing frequency from 2 to 4 times a year. And with Yellow Pages stopping printing, this will make our directories even more useful to homeowners.

One of the biggest consumer benefits that Checkatrade provides is feedback. As many as 40% of customers provide that feedback. We've now got 4 million reviews posted on the platform, and that's growing at the rate of 60,000 new reviews a month. So Checkatrade is well on track to becoming the TripAdvisor for trades, a proven alternative to the real competitor in this space, which is word of mouth.

We're testing a new service called Checkatrade Now. This connects consumers with an available trade to handle emergency job requests. Initial results have been very promising, giving us the confidence to plant a wider rollout.

Our next move is to test how quickly we can establish the new Checkatrade model from scratch outside the U.K. And we're going to be doing that in Lyon in France early next calendar year and using the Habitissimo technology. That Habitissimo technology is well suited to rapid development in new territories as they've just proved in their launch of their business in Peru. They continue to make good progress on generating leads for their trades, not least because their website does a great job of featuring successful home-improvement stories, and this is key to driving traffic to their site.

So finally, on to Smart Home. Our focus on Smart Home is on developing and distributing unique technology with clear links to our core business. And Leakbot is the first example of this. And we're now at the point of turning our invention into a high-volume recurring income business. Leakbot started life as a clever innovation looking for a customer. That customer, we're clear, is home insurers for whom cost associated with water damage is a GBP 25 billion a year problem. A problem for them means a big opportunity for us. The commercial model that we've developed is charging home insurers a modest monthly fee for each Leakbot. That represents a proportion of the saving that they'll make on reducing water damage claims when leaks are discovered early.

So far, we have 75,000 units sold. So this model is starting to gain traction, particularly now we have the Wi-Fi version. We now have 10 active partnerships in the U.K., which we're looking to expand. We've launched Leakbot recently in the U.S. at the InsureTech show in Las Vegas last month, and they've already started testing in the U.S. market. So now, it's just about securing those high-volume insurance orders.

There is also potential Smart Home capabilities in the HVAC market. We're in the early stages of development of a device called [BoilerBot]. This provides proactive fault diagnosis and is retrofitted to customers' existing boilers.

So our short-term focus is on scaling Leakbot, but with more ideas to come. So let me summarize. We've had a good first half and are very confident about our future prospects. I've got a strengthened and very experienced management team to deliver this future growth. We now have the foundations to move from 1 recurring income membership model to 4 with HVAC, Home Experts and Smart Home. We are well-financed and our M&A focus will continue to be on high-value, low-risk policy book acquisitions plus local HVAC businesses. We have some really exciting opportunities over the coming months. We have a very strong affinity partner pipeline, as you heard from Tom, and particularly in North America, but also in the U.K., Spain and France.

Our HVAC buy and build plans are really starting to take shape. We've upped our game at Checkatrade with new people, a new office and a clear growth plan in place. And we are finally getting some commercial traction with Leakbot. And our new country openings after a gap of 2 years, were now making good progress. It's 25 years this year since I founded HomeServe, and as you can all tell, I'm as excited about the business as I was back then. I see a really bright future ahead of us doing every job in every home.

Thank you. And on that note, we'll open up the meeting for your questions.

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Questions and Answers

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

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Joe?

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [2]

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Joe Brent at Liberum. 2 questions, if I may. Firstly, on the policy membership business, there is now quite a difference in retention between the U.K. and the U.S., which is going to be higher. How do you see that retention difference in future? And then secondly, on Leakbot. Could you tell us a little bit more about your partnering arrangements? And how you see that model developing?

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [3]

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Tom, do you want to take the first one?

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

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Sure. From a retention perspective, there is a lot of things that drive retention with some of the new customers you're bringing on the maturity of the policy books. But I think if you were you to look at the rates we're reporting for both countries to your question Joe, I think both are good rates to kind of look at for the future as well. I think we'll stay about where we are in the U.K. and stay about where we are in the U.S.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [5]

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And why do you think the U.S. is higher than the U.K. now?

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Thomas J. Rusin, HomeServe plc - Global CEO of HomeServe Membership & Executive Director [6]

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We have a larger more maturing policy book there in the U.K. So the -- in the U.S. -- excuse me, the U.S. passed the U.K. in terms of number of customers, so we're seeing that their underlying maturing base, and as your base matures, your retention rates rise. So the majority of the driver of that is the makeup of the base. We also do a lot of bill-on-bill billing in the U.S., which has a slightly higher retention rate than direct-bill billing, so that's also driving the U.S. retention rate up. So it's really just a mathematical output of the mix and the tenure of the book.

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

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And on Leakbot, it's really now getting those 10 insurers that we talked about, the latest signing was Hiscox, getting them to now place some big rental orders and that's the #1 focus of the team. So we remain confident over the next 12 months that we'll see some bigger rental orders coming through.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [8]

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It's Alex Mees from JPMorgan. 3 please, Richard. The first one, actually, Tom, you referred to the HVAC business as being recession proof. I'm just wondering, how is it linked? Do you expect the membership business to be -- whether to be a recession? And secondly, maybe one for David, the balance sheet capacity that you have for M&A at the moment, what are your tolerances around gearing? And, finally, Richard, the Leakbot product. I wonder if you see potential to move this business into your other European markets and, indeed, outside of your markets altogether?

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

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Okay, great. Tom, do you want to take that first one?

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Thomas J. Rusin, HomeServe plc - Global CEO of HomeServe Membership & Executive Director [10]

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Yes. So for the first one, if you look at the how our membership businesses have performed through various recessions. We've always seen strong growth whether there's been a recession economy or a growing economy. And I think that's because there's a lot of different reasons people buy our policies. So if you're worried about your income, a membership policy is a great way to flatline your potential expenses for any emergency that may come up. On the other hand, it's also a great way to save yourself on time if you're working really hard time to making lots of money, you don't want to deal with something on a break. So if you look at -- and Spain went through a really difficult economy, we didn't [sit] on the growth. If you look at when the U.S. went through a really different economy, we didn't see a slowdown in growth. So, what I meant about it from the HVAC business is that, all this installed equipment, whether it's a boiler or a furnace in the U.S. or a hot water heater or an air-conditioner, they'll have a useful life. That useful live is around 15 years depending on the appliance. So all the installed base in our countries is just simply going to break when it's going to break, and hopefully we'll be there to capitalize upon that, we'd go out and a make repair if we can, settle a policy if we can and also sell and install.

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [11]

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David, on M&A capacity?

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David Bower, HomeServe plc - Group CFO & Director [12]

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Yes, on the financing capacity, we've obviously got a leverage policy of 1 to 2x net debt-to-EBITDA comfortably in that range at the moment. We've also said, however, that we are also very happy to be outside of that range if good opportunities arise. I think the thing to therefore remember underpins a lot is we have a very strong cash generating business, we typically see absent the M&A of 0.3 or 0.4x deleveraging over each year. So 1 to 2x is our sort of like go-to range, that's where we want to try and be, but happy to be slightly north of there if need to be.

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [13]

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And on Leakbot, we do see Leakbot is a global opportunity because it's a global home insurer water damage problem. We are already testing in France and Spain. So the addition was to start testing and launching in the U.S. So the focus will be on our existing territories, but in due course, then we could potentially have Leakbot-only territories.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [14]

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It's Rory McKenzie from UBS. I know H1 is small, but with U.S. margin up 1 percentage point, it's kind of racing towards your targets. In H2, as tranche 2 comes in and new partners keep accelerating, will that margin expansion still at all? Or should we expect still a good leverage there? And then secondly, on Checkatrade, and I think you were 29,000 trades back in May. So only adding 2,000 over the past summer. Is there a similar seasonal pattern to the adds that we expect a lot we have in the membership? And so, do you think that will start to really accelerate the growth additions in H2?

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [15]

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Yes, let me -- I'll take both of those. I'll comment on the U.S. margin, which is -- so it's 11% for the half year as you saw. If you look at the prior 12 months, then the net profit margin was 17%. We would see that creeping up a bit for the full year. So we're not very far off our stated medium-term target of 20% net, so well that's doing really well. On Checkatrade, absolutely, trade recruitment is seasonal. We had our best-ever recruitment in October in the history of the business. And we would see that trades recruitment accelerating in the second half. And then, the full effect of putting in outsourced incremental outbound telesales, which the business really had never done before. They waited for trades to call up and say, I've seen the consumer advertising, how do I join and get a slug of that work? Now doing proactive marketing in a way that we do in our consumer membership business. So we would see that ramping up. We haven't set a date for when we'll get to our national coverage 200,000 target, but we have got an internal plan on that.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [16]

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And just on the trades. Can you talk at all about the retention or the average life of the people in the platform, whether you mean monthly pricing -- your monthly pricing maybe dropping on and off a bit. So how do you think about that and the life of some of the people?

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [17]

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Yes. In due course, we will be at some stage reporting externally the retention rate. We've seen it drop very slightly as a result of big pricing increases that we put through. We will see the net income creep up again. And -- but that's a very attractive retention rate similar sort of levels to we get in our membership business.

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William Kirkness, Jefferies LLC, Research Division - Equity Analyst [18]

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It's Will Kirkness from Jefferies. I've got 3 questions, please. Firstly, just on the U.K. with the call-outs increasing, just wondering if there is any implication for the underwriting fee going forward? And then a couple on international. And if you look at the progress in the U.S. versus the European progress, it's been quite materially different. I just wondered if you could talk about some of the things they've been holding you back? And why you're more confident going forward? And then, second, if you could just talk about those other countries you've seen to be adjusting something soon?

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [19]

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Tom, do you want to talk about the U.K. call-outs increasing?

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Thomas J. Rusin, HomeServe plc - Global CEO of HomeServe Membership & Executive Director [20]

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Yes. So call-outs are just -- my perspective on that is a sort of a different version of a product. It allows the customer to manage their claims expense by deciding if they want to do a claim depending upon what the particular job is. And that can have an effect on underwriting rates, but if you look at the U.S. and the U.K. underwriting rates in general, we're seeing them sort of track along line with the claims rate increase. And then, that sort of nicely offset by the incremental cover that people are taking as well. So I feel, I guess, the best way to answer your question is, I think the call-out is a good new version of the -- product with an excess is a good new version of the product. And we're happy with the progression of the product and the margin that it's generating for us, I hope that answers your question or not.

From an overall growth perspective, if you take a step back and if you look at what really has driven growth for HomeServe over the past 25 years, new partners have always been a very key part of that growth. So one of the things I did initially when we got -- when I got into my new job is look out what really are our partner opportunities across all the countries? How does the country utility market differ? Or how -- or where are there similarities to the U.S. business? So the initiative for us to go start to talk to municipals in France and Spain, came out of this very successful market in the U.S. We did a deep dive into those municipal markets and learned they are really not that any different than the municipal markets in the U.S. And municipal markets are hard because you're dealing with public and private partnerships, but as long as you make sure you address all the relevant constituents, I think it could potentially be a good market for us. Then conversely, you have a very different deregulated energy environment here in Europe than we have in the U.S. Most of energy is deregulated, and those -- that activity of buying energy through an energy switcher, which are effectively what the new partners are in the U.K., they're retail energy providers, these are basically homeowners putting their hands up saying, I want to save money on my energy. They're very, very good policy buyers because they look at the policy as a great way to save money, and we're very underpenetrated in that retail energy market. And that's a market that exists not just in the U.K., every month in the U.K. there is 0.5 million people changing their energy. There is a similar number, a little less similar number that to France and Spain and the U.S., has a much bigger number, and only half the U.S. is deregulated. So that's a model that I think we're going to take from Europe and bring over to the U.S. Then if you look more specifically at say, France and Spain, in particular, we only work with those 3 big water companies. In France, we work with 2, having conversations with all the potential partners there, in addition to the retail energy providers. And then on the Spain side, as I said in my presentation, we had an exclusive partnership with Endesa. And now that exclusivity is gone, that enables us to go out and talk to all the energy providers in Spain. So no promises that we'll get a deal with any of them, but I'm a big believer that the way to drive growth in this business is to focus on new partners. We've done a lot of that in the U.S., and we're taking that across all our countries now. So that's why I feel somewhat positive and I've been out talking to all these guys, again. Nothing specifically to announce, but I just think what we do drive success for partners and we're just going to keep doing that in all our countries.

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [21]

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So I think, you can tell, renewed emphasis on the membership businesses and more growth to come in Europe. On the third question there was around other countries. And we've been disappointed in the last couple of years in terms of international development in terms of opening a new territory because we haven't opened 1. With Stephen Phillips leaving -- leading that drive, then we've got a couple of countries that are making really good progress. It'd be wrong for me to say exactly where they are or when they will sign, but we've seen a noticeable pickup. So hope that we make further progress over the coming months.

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Enel Jarving, Exane BNP Paribas, Research Division - Research Analyst [22]

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It's Enel from Exane. Just 3 questions, if I may. So firstly on Habitissimo, what's your pricing strategy in that business? Is there also fixed cost for the trades, who are on the platform or is there only variable cost for the leads? And have you changed anything in the business model as you have in Checkatrades? To secondly, then looking at how U.S. household growth, so the number of households has remained stable of 55 million compared to what you had in full year '18. Just if you could just elaborate the type of partners you've signed over the last 6 months? And do you expect this number to accelerate organically in H2? And then finally, you've seen material wage inflation in the U.S. So do you think it will impact your contractor cost to in the U.S. and eventually your underwriting cost as well?

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

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Okay. I'll take the first of those on Habitissimo. So the Habitissimo model is business as usual. So that is a lead gen, it's very similar model to HomeAdvisor in the U.S. We haven't been increasing prices in Habitissimo. That's been focused on continued growth in the model. The key decision that we'll need to make in due course is to, do we have 2 models for Home Experts? Or do we bring the 2 together? And a key part of the learning is looking at what success we can have in launching the Checkatrade model in France, in Lyon. And I think we've got some good learning on that to then decide whether we have 2 models or 1 common one in due course.

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Thomas J. Rusin, HomeServe plc - Global CEO of HomeServe Membership & Executive Director [24]

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And then on the U.S. household growth, it's really just a function of timing. If you look at the partner pipeline in the U.S., it really has never been stronger. And if you look at the kinds of partners we signed in the U.S., we signed everything from municipals and the thousands of households to big energy companies with millions of households. And there are all those kinds of partnerships and active discussions. So I'm, yes, feeling more confident about what you'll see from a household progression perspective in H2. I'd also point to what I mentioned in my presentation the fact that we completed tranche 2 of Dominion on the 26th of October, that alone brings over 3 million new households. So we're reporting households as of today instead of 55 million, it would be 58 million households for the U.S. And then, wage inflation in the U.S., great question. We look at our contractors as really kind of an extension of HomeServe and when you look at what drives success for a contractor, they want good work that's profitable, that's predictable, where they have a lot of efficiencies in the way they do their job, so their guys can do a lot of jobs per day. And we worked very hard to work closely with our contractors to create a real symbiotic relationship, so we drive them more jobs per day, we give them more tools so they can route their own guys more effectively. And as a result, that's actually strengthening our relationship with our contractors. So we have more contractors than ever before who moved on to rate sheets. And in many cases, we've actually lowered average job costs when we've done that, even though -- so they're going to take on more volume, but we're actually reduce our prices in a wage constrained environment. So I'm not really concerned about what we're seeing from wage growth in the U.S. because of that, because we give them the right kind of jobs that make their work really profitable.

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Jane Linsdey Sparrow, Barclays Bank PLC, Research Division - Director [25]

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Jane Sparrow from Barclays. Just a couple on Checkatrade. You said you tripled the marketing spend. Would you, therefore, fight for a bit more than 12% increase in web visits. And then just following on from that, how do you measure how those visits translate to actual work for the trades people enrolled?

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Richard David Harpin, HomeServe plc - Founder, CEO & Director [26]

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Yes, the -- so roughly, the split, Jane, of marketing spend was doubling against consumer from 5 million to 10 million and then about 5 million on trades recruitments. And 12% is good growth in consumer visits. We have seen that increase even further in October. And again, it is seasonally related in the way that the trades recruitment is, people tend to have more jobs done across the autumn, winter. And then in terms of how do we measure, so we measure unique web visitors to the Checkatrade platform. And we then do some sampling of customers that are calling on our managed telephone numbers to find out what happened to their job, did it go ahead or not. So that gives us a clear picture of what sort of conversion do we get from a web visitor to a completed job with a Checkatrade contractor. And therefore, what's the revenue that we're getting monthly from the platform for the trade by monthly fee related to the amount of work they're doing. And therefore, whether we're prepared to spend together web visitor to drive incremental revenue. So that's a key part of the disciplines of the model that we've put together since ownership. And that will be a key part of the future growth model.

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Samuel Frost Dindol, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [27]

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Sam Dindol from Stifel. A couple for me on membership. On North America, as the operating margin were 17% and you have further operating leverage coming through, do you think a 20% target is a bit low? I mean, a medium term, it could be so close to mid-20s? And secondly, on Spain, on Endesa, can you give any color on the status you're in discussions to agree future terms, are they looking to do their own in-house thing there?

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

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Yes. So on the U.S. margin, I think the 20% sustainable margin is sort of the right margin for the business, which will allow us to continue to invest in a very significant growth. Even when we get to the $160 million of profit, we're still going to be very underpenetrated in the U.S. So I'd rather see us rather than let more margin dollars for the bottom line, I'd rather see us continue to invest in growth. So on Endesa, we are continuing to have conversations with Endesa and it's -- They're very amicable, and we're sort of working out what the plans going to look like. We have the rights to renew those customers for a couple of years, and we're going to continue to do that. The decision for them was really driven not from Endesa, we had a great relationship with the people at Endesa. It really came from the parent company Enel, who have made a strategic announcement that they were going to enter the services business on their own. We haven't really seen much from now from a services business perspective. So we continue to talk to Endesa about what the future is going to look like and at the same time, as I said before, we're out talking to all the other energy companies in Spain to see if we can create a similar program with someone else.

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Michael Goltsman, Citigroup Inc, Research Division - VP [29]

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Michael Goltsman from Citi. Just another 1 on Checkatrade. What's been the repeat customer usage rate? And how has this trended since your period of ownership? And also on the U.S. business, what's the gap between, I guess, the acquired DPS customers, the income per customer versus the rest of the book?

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

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So I'll take the first one and let David handle the second one. So on Checkatrade, we get around about 50% of the users on the platform are repeat business. We would expect that we're looking at how we get more communications with those existing homeowners. So there typically hasn't been any sort of e-mail follow-up ideas on new home improvements, quite a lot of the stuff that Habitissimo would do. And they're experts in free search and getting their customers to come back to the platform for home improvement ideas. There's none of that on Checkatrade today. So we see that as a real opportunity. And that would mean that we'd get more of the existing customers, the 50% that are repeats, we would expect to see that going up certainly in absolute numbers, and obviously, driving the other half by continued increases in marketing spend to bring new customers to the platform in the first place.

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David Bower, HomeServe plc - Group CFO & Director [31]

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And on the income per customer, it's roundabout sort of $20 to $30 difference and that principally reflects the fact that DPS customers are mostly online products, water service line. This gives us an opportunity to expand the holdings into sort of plumbing and drains, the heating, the furnaces, the water heaters that we sell across our products to our end customers.

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

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Okay. So great questions there. Thank you all very much. And thanks for taking the time to come this morning. Thank you.

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David Bower, HomeServe plc - Group CFO & Director [33]

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Thank you.

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Thomas J. Rusin, HomeServe plc - Global CEO of HomeServe Membership & Executive Director [34]

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Thank you.