Annual Report & Accounts 2022 Making home repairs and improvements easy for homeowners and trades HomeServe plc Registered Office: Cable Drive, Walsall, WS2 7BN Registered in England No. 2648297 Tel: 01922 426262 homeserveplc.com
Strategic report Governance Financial statements Other information HomeServe plc Annual Report & Accounts 2022 1 Contents Strategic report 2 At a glance 4 Chairman’s statement 6 Chief Executive’s review 10 Market overview 12 Business model and strategy 18 Key performance indicators 20 Responsible business 29 Task Force on Climate-related Financial Disclosures 32 Principal risks and uncertainties 40 Operating review 52 Financial review 56 Section 172(1) statement 58 Viability statement 59 Going concern 60 Non-financial information statement Governance 62 Corporate governance statement 62 Chairman’s overview 63 Compliance and other statements 66 Board leadership and company purpose 69 Division of responsibilities 74 Composition, succession and evaluation 74 Our Board 76 Our Executive Team 80 Nomination Committee report 82 People Committee report 84 Audit, risk and internal control 86 Audit & Risk Committee report 92 Directors’ remuneration report 92 Annual statement 93 Remuneration at a glance 97 Directors’ remuneration policy 106 Annual report on remuneration 121 Directors’ report 124 Statements of responsibilities 125 Independent Auditor’s report Financial statements 138 Group financial statements 196 Company financial statements Other information 217 Glossary 224 Shareholder information Group performance highlights Every day, our people serve our customers with courage, persistence and integrity, to make home repairs and improvements easy. Thanks to the c.9,000 people who now work for the HomeServe family worldwide, we are emerging from the Covid-19 pandemic stronger than ever. HomeServe emerged from the Covid-19 pandemic well positioned across all three business divisions, with our key profit measure - adjusted profit before tax - up 15% to £220.3m (FY21: £191.3m). Statutory profit before tax increased by 271% to £175.1m, driven by the absence of any exceptional charges, as seen in the prior year, as well as good underlying growth. Demand for our products and services remained strong as consumers continued to spend more time and money at home. All of our businesses performed well, thanks to our dedicated staff, contractors and partners. We are building innovative new capabilities such as HVAC as a Service to deepen our relationships with our affinity partners and help homeowners participate in the green homes revolution. We continue to expand our geographic footprint, and now have businesses in Belgium, Portugal and Germany as well as North America, the UK, France, Spain and Japan. 1 FY21 statutory operating profit and basic EPS after exceptional charge of £92.4m. 2 In light of the recommended cash offer for the Group announced on 19 May 2022, the Board is not recommending a final dividend. The total dividend for the year therefore consists of the interim dividend of 6.8p per share declared in November 2021. HomeServe uses a number of alternative performance measures (APMs) to assess the performance of the Group and its individual segments. These are used in headline financial results and throughout the Strategic report. APMs are non-GAAP measures which address profitability, leverage and liquidity and together with operational key performance indicators give an indication of the current health and future prospects of the Group. Definitions of APMs and the rationale for their usage are included in the Glossary at the end of this report with reconciliations, where applicable, back to the equivalent statutory measure. The key APMs used in the strategic report are adjusted operating profit and adjusted profit before tax. To view this report online, go to homeserveplc.com Statutory operating profit £202.6m +182% £202.6m £71.8m 1 FY22 FY21 Ordinary dividend per share 6.8p -74% 6.8p 2 26.0p FY22 FY21 Revenue £1,429.3m +10% £1,429.3m £1,304.7m FY22 FY21 Basic earnings per share 39.5p +327% 39.5p 9.3p 1 FY22 FY21 EMEA MEMBERSHIP & HVAC HOME EXPERTS NORTH AMERICAN MEMBERSHIP & HVAC
Strategic report HomeServe plc Annual Report & Accounts 2022 2 Statutory operating profit £202.6m +182% £202.6m £71.8m 1 FY22 FY21 Strategic report Governance Financial statements Other information HomeServe plc Annual Report & Accounts 2022 3 HomeServe’s purpose is to make home repairs and improvements easy, and our vision is to be the world’s largest, most trusted provider of home repairs and improvements. We aspire to be able to do every job, in every home. We run our business in three largely autonomous divisions, which benefit from shared expertise and experience. Capital allocation decisions are made at Group level, for the benefit of the business as a whole. We expect to achieve strong earnings growth by sustaining our growth in the under-penetrated North American Membership & HVAC market; maintaining and growing our Membership & HVAC businesses in EMEA; and developing a new business model in Home Experts. Our Responsible business framework spans our three divisions and defines the way we work. We share expertise in managing environmental, social and governance risks. We are passionate about contributing to positive change in our industry – for example by promoting environmentally friendly sources of heating and cooling and creating trades apprenticeships. See page 20 Responsible business. At a glance EMEA MEMBERSHIP & HVAC Established, cash-generative businesses in the UK, France and Spain with innovation to fuel future growth; new businesses launched in Portugal, Belgium and Germany; exciting joint venture in Japan. The UK is our most established Membership business. We have a 2-3 year transformation plan to stabilise our UK business and return it to profitable growth. We are rolling out our successful HVAC buy and build strategy, seeking to partner more with energy utilities and expanding into Claims Assistance with the acquisition of CET Structures Ltd in October 2021. In France and Spain, we have already diversified into multi-product, multi-channel businesses to support stable, profitable growth. Our near neighbour geographic expansion strategy leverages our know-how in existing markets to develop new opportunities in Belgium, Portugal and Germany. Our Japanese joint venture is developing well. FY22 performance In the UK, there was good early progress on the business’s transformation plan. Adjusted operating profit ended the year up 1% at £72.9m (FY21: £72.5m), customer numbers were in line with expectations at 1.5m (FY21: 1.6m) and policy retention was up for the first time in seven years to 79% (FY21: 78%). In our French business, we continue to make good progress, with adjusted operating profit up 8% to €43.0m (FY21: €39.8m) and a growing customer base, thanks to strong partnerships with water utilities and innovative digital relationships with home moving aggregators and price comparison websites. In our Spanish business, adjusted operating profit growth of 24% to €24.6m (FY21: €19.8m) was driven by good progress in Claims Assistance in Spain and Portugal, and in HVAC, where our Iberian businesses have a strong policy component and therefore have attractive recurring revenue characteristics. HOME EXPERTS Highest potential growth in the long-term. With Checkatrade in the UK, Habitissimo in Iberia and Italy, and eLocal in North America, our Home Experts platforms match homeowners with quality trades, on demand and online, to get jobs done well. Home Experts covers a much broader range of home repairs and improvements than Membership, from landscape gardening to carpet cleaning. FY22 performance Home Experts achieved the key milestone of divisional profitability this financial year, generating £4.3m of adjusted operating profit (FY21: £(10.2)m). The principal driver of this improvement was a much lower adjusted operating loss at Checkatrade, which continued to strengthen its position as the UK’s leading online platform for matching homeowners with quality trades. NORTH AMERICAN MEMBERSHIP & HVAC Strong, sustainable profit growth in an under-penetrated market; our most exciting near term growth opportunity. Our Membership policies give homeowners the peace of mind of knowing that they have one number to call if they need assistance with plumbing, heating, electrics and other core services. Our growing HVAC installation business gives us the opportunity to participate in the green energy revolution, and help homeowners to transition to more eco-friendly heating. FY22 performance North American Membership & HVAC delivered a strong financial performance, with adjusted operating profit up 15% to $159.1m (FY21: $137.9m). The key driver of revenue and profit growth was strong growth in policies (up 6% to 8.7m), as existing customers upgraded their coverage in response to successful cross-sell marketing and continued high levels of customer service. HomeServe’s HVAC buy and build strategy is most advanced in North America, with a portfolio of 16 locally branded companies acquired over the last four years. HVAC contributed $17.8m (FY21: $9.8m) in adjusted operating profit for the year, and is a fundamentally important component of our major initiatives to drive future growth in North America. Adjusted operating profit/ (loss) £4.3m £4.3m (£10.2m) FY22 FY21 Revenue £155.2m +11% £155.2m £139.8m FY22 FY21 Revenue $794.9m +19% $794.9m $665.8m FY22 FY21 Adjusted operating profit $159.1m +15% $159.1m $137.9m FY22 FY21 Revenue £698.5m +5% £698.5m £667.2m FY22 FY21 Adjusted operating profit £124.5m +4% £124.5m £119.5m FY22 FY21 See page 12 Business model and strategy. Adjusted operating profit £246.5m +15% £246.5m £214.3m FY22 FY21 Group Revenue £1,429.3m +10% £1,429.3m £1,304.7m FY22 FY21
Strategic report Governance Financial statements Other information HomeServe plc Annual Report & Accounts 2022 HomeServe plc Annual Report & Accounts 2022 5 4 The financial year in review North American Membership & HVAC delivered its seventh consecutive year of double digit adjusted operating profit growth, with adjusted operating profit up 15% to $159.1m (FY21: $137.9m). The business continues to expand its customer propositions to drive further growth, to help homeowners participate in the green homes revolution and to align with partners’ decarbonisation ambitions. Across EMEA Membership & HVAC, the division continued to deliver on its transformation and growth agendas and returned to profit growth, with adjusted operating profit up 4% to £124.5m (FY21: £119.5m). In the UK, there was good early progress on the business’s transformation plan, with customer numbers ending the year at 1.5m (FY21: 1.6m), in line with our expectations, and policy retention up to 79% (FY21: 78%). France and Spain performed well, with further good growth in job volumes in the Spanish claims handling business. HomeServe’s Japanese joint venture is making good progress, and now has access to 25% of households through four electric utility partnerships. As expected, the Home Experts division was profitable for the first time on a full year basis, thanks to a profitable contribution from eLocal and progress at Checkatrade, which continued to strengthen its position as the UK’s leading online platform for matching homeowners with quality trades. See page 40 Operating review. The Board and its agenda this year HomeServe has an effective, experienced Board. All three business divisions, plus Group matters, are comprehensively represented by our four Executive Directors, with the addition of Ross Clemmow ensuring that EMEA Membership & HVAC is directly represented. One of the main areas identified for continuing development in the FY21 Board evaluation was improving the Non-Executive pipeline with a specific focus on increased diversity. Non-Executive recruitment was paused to give me the opportunity to assess the Board dynamic and consider skills gaps and succession. An offer made to a very suitable candidate in March 2022 coincided with Brookfield emerging as a potential bidder for HomeServe, and was not finalised. Major items on the Board’s agenda beyond standing items this year included a review of the decision to halt investment in our UK CRM system and detailed consideration of lessons learnt. We also made good progress on evaluating climate risks and opportunities, and agreed our Scope 3 carbon footprint targets. Going forward, we are going to combine our People and Corporate Responsibility committees to form a new Board-level committee, to accelerate activity in all areas of our responsible business strategy. The Board’s time this year has been carefully balanced between strategy and governance. Our discussions positioned us well to respond to the announcement on 24 March 2022 that Brookfield was considering a bid for HomeServe. As this process plays out, the Board will act with a clear, independent focus on doing what is right for all of our stakeholders. See page 56 Section 172 (1) statement. Dividend In light of the recommended cash offer for the Group announced on 19 May 2022, the Board is not recommending a final dividend. The total dividend for the year therefore consists of the interim dividend of 6.8p per share declared in November 2021. Conclusion HomeServe is a very high-quality business with a clear strategy and strong management team, which has been led entrepreneurially by its founder, Richard Harpin, for almost 30 years. The offer from Brookfield recognises the quality of our business, our people and our future growth potential, and allows shareholders to realise their investment at an attractive valuation. The Board is unanimous in its support of the acquisition recommendation. Tommy Breen Chairman 24 May 2022 Recommended cash offer for HomeServe On 19 May 2022, it was announced that the boards of Hestia Bidco Limited (“Bidco”), an indirect subsidiary of Brookfield Infrastructure Funds, and HomeServe have reached agreement on a recommended cash offer made by Bidco to acquire the entire issued share capital of HomeServe. Under the terms of the acquisition, HomeServe shareholders will be entitled to receive 1,200 pence for each HomeServe share, valuing HomeServe at £4.1bn on a fully diluted basis. This represents a premium of 71% to the undisturbed closing price on 23 March 2022. The HomeServe Board is unanimously recommending the acquisition and believes that it gives shareholders the opportunity to realise their investment for cash at a fair and reasonable value. The Board believes that Brookfield would be a good owner for HomeServe. Brookfield is a long-term investor with a strong track record of accelerating companies’ growth through sector expertise and access to capital. Brookfield owns high quality businesses in utility and residential sectors, and can bring operational expertise and new relationships across HomeServe’s three businesses. Brookfield’s experience in the energy transition space will support HomeServe’s ambitions in this area. The acquisition is currently expected to complete during the fourth quarter of 2022 via a court-sanctioned scheme of arrangement, subject to HomeServe shareholder approval and various regulatory clearances. Irrevocable undertakings to vote in favour of the scheme of arrangement have been obtained from c.12.77% of HomeServe’s shareholders, principally members of HomeServe’s Board. Strategic report Chairman’s statement Tommy Breen This is my first statement since I was appointed Chairman of HomeServe in May 2021. I first came across HomeServe and Richard Harpin while I was CEO of DCC plc. With Richard’s presence as its Founder and CEO, I realised the importance of good chemistry, of a balanced, productive relationship between the Chairman and CEO, and of achieving clear recognition of the respective responsibilities of the Executives and Non-Executives on the Board. It is a privilege and a pleasure to have been entrusted with this role. First impressions As I have got to know HomeServe, I find that it is driven by a clear sense of purpose – to make home repairs and improvements easy. HomeServe cares passionately about its customers, its partnerships and above all, its people. Its culture is healthy and open – highly commercial, no nonsense, but caring. Doing business responsibly is part of its DNA, particularly in its customer relationships and the way it treats the people it works with. It is at the beginning of a journey to harness green energy, and is working hard to develop opportunities and manage risk in this vitally important area. Richard has surrounded himself with a strong executive team. While there is a way to go to achieve the diversity metrics expected of us as a public company, I am impressed by the constructive diversity of thought and the level of challenge the team displays. The growth prospects of the company are strong and sustainable. See page 20 Responsible business. In the course of this year, we reinforced our view that the right way to run our business is in three business divisions, aligned by our common purpose. Each division has autonomy to respond to the needs of its individual markets, and has access to the shared resources, experience and expertise available across the Group. Capital allocation decisions are taken at Group level, and our target is for all of our investments to deliver double our cost of capital. I am particularly impressed with the way capital is being deployed globally to build our HVAC business: the rates of return available to us in this growing, green space are exemplary. Group ROIC (return on invested capital) this year was 15%. This measure will be added as a component of Executive Director reward from July 2022, reflecting my belief that a real focus on how we deploy our capital is an excellent way to deliver shareholder value in the medium-term. We aim to deliver strong, consistent earnings growth, and expect to achieve this by sustaining good growth in the under-penetrated North American Membership & HVAC market; maintaining and growing our Membership & HVAC businesses in EMEA; and developing a market-leading business model in Home Experts. See page 12 Business model and strategy. Turbulent market backdrop As for most companies, this has been a tumultuous period. All of our businesses are emerging from the Covid-19 pandemic on different timetables, and all have had to manage a return to office-based working and continued disruption to supplier interaction. On top of this came a catalogue of geo-political and economic events which present major issues for homeowners globally: significant inflationary pressure, cost of living rises and the fuel crisis; skills and materials shortages; and more urgent focus on climate change. See page 10 Market overview. Resilient business model and clear strategy In the face of these pressures, HomeServe’s business model proved resilient and our strategy enabled us to continue to make progress. As we had planned, we delivered improvements across our strategic and financial KPIs. Our key Group profit measure – adjusted profit before tax – was up 15% to £220.3m (FY21: £191.3m) and basic earnings per share increased to 39.5p (FY21: 9.3p). In our Membership businesses, customer numbers held steady at 8.4m worldwide (FY21: 8.4m) and policy retention was up slightly at 84% (FY21: 83%). In Home Experts, the number of paying trades on Checkatrade grew 7% to 47k (FY21: 44k) and average revenue per trade grew 31% to £1,229 (FY21: £939). “As part of my due diligence for the role of Chairman, I discovered an ambitious company with an exciting vision – to be the world’s largest and most trusted provider of home repairs and improvements.”
Strategic report Strategic report Governance Financial statements Other information HomeServe plc Annual Report & Accounts 2022 HomeServe plc Annual Report & Accounts 2022 7 6 Chief Executive’s review Richard Harpin HomeServe had another successful year, financially and strategically. In line with our expectations, we delivered an acceleration in our financial performance, with our key profit measure, adjusted profit before tax up 15% at £220.3m. Statutory profit before tax rose by 271% to £175.1m, driven by the absence of any exceptional charges, as seen in the prior year, as well as good underlying growth. Our growth was well balanced between organic revenue growth and a successful acquisition strategy, particularly in HVAC buy and build and with the acquisition of CET to create a market- leading Claims Assistance business in the UK. Organic revenue rose by 7.0% (FY21: 1.6%) and we spent a total of £146m on M&A, of which £112m was in respect of FY22 acquisitions. ROIC for the year was 15% (FY21: 14%). We made good progress on all three of our strategic priorities: to continue to drive growth in North America; to broaden and transform our UK business; and in Home Experts, to perfect a market leading platform to match consumers with high quality trades. People first Having the right people in the right roles is fundamental to the success of any business. This year, we achieved a smooth transition to our new Chairman, Tommy Breen, and with the arrival of Ross Clemmow in the new role of CEO, EMEA, all three of our business divisions are directly represented at Board level. This gives us a good balance between operational insight and Group- level strategic direction. Throughout our business, teams continue to perform with the courage, persistence and integrity service to our customers. We know from experience that our Membership customers worry about the cost of an unexpected repair to their home, and are reluctant to lose the protection we provide them when the cost of living is rising. North American Membership & HVAC – strong financial performance and continued growth potential North American Membership & HVAC delivered a strong financial performance, with adjusted operating profit up 15% to $159.1m (FY21: $137.9m). Business development and networking activities regained momentum and delivered access to an additional net 7m new households (FY21: 2m). We now have access to 73m households (FY21: 66m), almost 50% of the total. The market remains under-penetrated and the pipeline for new partner signings remains very encouraging. Marketing launches with new partners were delayed in H2 due to Covid-19 related staff shortages in their call centres, which temporarily limited customer growth from these new relationships. The key driver of revenue and profit growth in the period was strong growth in policies (up 6% to 8.7m), as existing customers upgraded their coverage in response to successful cross- sell marketing and continued high levels of customer service. HomeServe’s HVAC buy and build strategy is most advanced in North America, with a portfolio of 19 locally branded companies acquired over the last four we expect of our people, and we are delighted to report that employee engagement remained above its pre Covid-19 level, at 75% (FY21: 78%). Business model resilience Over the course of the year, our people have continued to manage and adapt as the status of Covid-19 transitioned from pandemic to endemic. Hybrid working has become the norm for office-based roles across our business, and this universal trend has driven a shift in customer behaviour. As we spend more time in our homes, our customers are using and valuing our repair and maintenance products even more which means that in our Membership businesses, claims frequencies have increased and policy retention has risen to 84%. In Home Experts, consumer demand for home repairs and improvements remains high. The April 2022 Checkatrade Home Improvement Price Index shows a 23.3% increase in searches for tradespeople in the period January to March 2022, with early signs of a shift of emphasis from changes such as kitchen and bathroom replacements to projects focused on alternative energy sources and cost savings (insulation, for example). The effects of economic headwinds such as inflation, labour shortages and supply chain disruption have so far proved manageable, demonstrating the resilience of our business model. We are managing to balance cost inflation with price rises and in our Membership businesses, the strength of our repair networks means that we can continue to deliver excellent years. In the period, HVAC installation revenue saw good organic growth of 19%, which, together with the five acquisitions completed in the period, drove growth of 60% to $121.6m (FY21: $76.0m). HVAC as a whole (installations and servicing) contributed $17.8m (FY21: $9.8m) in adjusted operating profit for the year, and is a fundamentally important component of our major initiatives to drive future growth in North America. We have a key role to play in helping homeowners participate in the green homes revolution, and in helping our utility partners achieve their decarbonisation and energy conservation ambitions. After a successful trial with a large utility in New York State, HVAC as a Service (HaaS) is now launched, and provides homeowners with worry-free upgrades to new, more efficient heating and air conditioning equipment, together with an annual tune-up and breakdown cover, for a fixed monthly payment. HomeServe’s installation and maintenance proposition for domestic electric vehicle charging is now available to 9m households, and is opening doors to new utility relationships. Furthermore, there is excellent growth in HomeServe’s water loss cover product, up 27% to 0.8m customers (FY21: 0.6m), offered on bill via municipal water utilities to insure their customers against unexpectedly high costs from domestic water leakage. We have marketing rights to cross sell our Membership products to over 30% of these customers, and see significant potential to build this new channel. Continued strong performance across Membership & HVAC, early success with innovative new products and excellent management, mean that North America is ahead of its original plan to achieve its Milestone 2 target of $230m of adjusted operating profit, and will continue to grow strongly beyond this point. EMEA Membership & HVAC HomeServe’s strategy in EMEA Membership & HVAC is to grow broad- based businesses covering Membership, HVAC and Claims Assistance in the UK, France and Spain, and to expand into adjacent territories. We are also building a new business in Japan in a joint venture with Mitsubishi Corporation, and have recently established a new presence in Germany. In the UK, there was good early progress on the business’s transformation plan. Adjusted operating profit ended the year at £72.9m (FY21: £72.5m); customer numbers were in line with our expectations at 1.5m (FY21: 1.6m); and policy retention was up for the first time in seven years to 79% (FY21: 78%) thanks to continued strong customer service. There was good progress on strengthening and deepening our partnerships with water utilities; HVAC business acquisitions are bringing HomeServe’s successful buy and build strategy into the UK; and CET, acquired in October 2021 to give HomeServe a strong position in the UK Claims Assistance market, delivered a good in-year contribution to adjusted operating profit. We continue to see the energy sector as a good source of medium-term growth, but our energy partners are currently focused on conserving existing customer business in the face of market turmoil and severe price pressure, with little opportunity to market additional services. Nevertheless, our relationships with E.On and Shell Energy remain strong and the number of households they serve has grown from 5.7m in May 2021 to 6.2m in March 2022, so we are well placed to scale up these relationships when market conditions stabilise. Following last year’s decision to de-commission eServe, all customers have now been successfully migrated back to Ensura, simplifying the operation of the business. In our French business, we continue to make good progress, with adjusted operating profit up 8% to €43.0m (FY21: €39.8m). Gross new Membership customer additions were at record levels, growing by 12% in the period, thanks to strong partnerships with water utilities and innovative digital relationships with home moving aggregators and price comparison websites. Our French HVAC businesses are leading the way in the promotion of low carbon forms of heating and cooling, which accounted for 60% of installations in the period. We made progress in Belgium, servicing our first Membership customers through our partnership with Eneco and adding an HVAC business. In our Spanish business, adjusted operating profit growth of 24% to €24.6m (FY21: €19.8m) was driven by good progress in Claims Assistance in Spain and Portugal, and in HVAC, where our Iberian businesses have a strong policy component and therefore attractive recurring revenue characteristics. The team’s deep expertise in Claims Assistance has helped develop a new proposition – the service customer model – which enables large utilities to purchase an à la carte set of services from HomeServe (for example marketing, campaign execution, network management), while retaining ownership of the end customer. The first partnerships for this model have been formed in Spain and Portugal, and there is a strong pipeline of opportunities for FY23. “We made good progress on all three of our strategic priorities: to continue to drive growth in North America; to broaden and transform our UK business; and in Home Experts, to perfect a market leading platform to match consumers with high quality trades. I am delighted to report that we made good progress on all three.”
Strategic report Governance Financial statements Other information HomeServe plc Annual Report & Accounts 2022 HomeServe plc Annual Report & Accounts 2022 9 8 HomeServe. The Do-It-For-You Experts™ For almost 20 years, we’ve been serving our 4.8 million Membership customers in the US and Canada with one mission in mind: to be the first place people turn to for emergency home repairs. With a home repair plan from HomeServe, you have the peace of mind knowing that the Do-It-For-You Experts will be there to fix it. We send local, licensed and expert technicians to fix your repair, helping free you from the worry and inconvenience that comes with emergency home repairs. NORTH AMERICAN MEMBERSHIP & HVAC HomeServe plc Annual Report & Accounts 2022 9 Other information Governance Financial statements Conclusion HomeServe has emerged from the Covid-19 pandemic with all three of our business divisions performing strongly. Our Membership-based business model continues to be resilient, predictable and highly cash generative, and we are well positioned for continued growth. The strong growth we are seeing in North American Membership & HVAC is sustainable, thanks to disciplined management and innovation focused on the green homes revolution. In EMEA Membership & HVAC, we are building multiple new opportunities and managing a productive transformation of our UK business. In Home Experts, we have built a market-leading platform to match homeowners with quality trades, which works better than word of mouth. Brookfield has made an offer for HomeServe which recognises the high quality of our businesses and our people as well as our future growth potential, and allows shareholders to realise their investment at an attractive valuation. Brookfield is committed to providing long- term capital and global expertise, which I am confident will accelerate progress towards our vision to be the world’s largest, most trusted provider of home repairs and improvements, delivering for customers and tradespeople. Richard Harpin Founder and Chief Executive 24 May 2022 with consumers and trades alike. I am delighted with the way that Checkatrade is building its position as a recognised, differentiated market leader, helped by the next instalment of our proven Julius Caesar TV advertising campaign, which promotes the Checkatrade Guarantee. The business remains on track to be profitable in FY23, and continues to make progress towards its Milestone 1 operating profit target of £45-90m. Elsewhere in Home Experts, in North America eLocal’s adjusted operating profit declined by 15% to $14.5m (FY21: $17.1m) as consumer demand fell from last year’s Covid-19 driven peak levels. Nevertheless, eLocal’s sophisticated pay- for-performance model delivered good momentum in monetisation, with revenue per monetised call growing by 5%, and the signing of a new strategic agreement with a key affiliate reinforced eLocal’s strong position in search engine management for lead generation. In Iberia and Italy, Habitissimo continues to improve its operating model and halved its operating losses. Our Japanese joint venture completed its third full financial year. It continues to sign new partnerships, and now has access to 25% of Japanese households through four electric utility relationships. Customer numbers are building steadily, and policy retention is very high at 91%. We signed our first municipal water partner in the second half of the year, giving confidence that our proposition will work for the municipalities who dominate domestic water supply. Home Experts – significant progress at Checkatrade As expected, Home Experts achieved the key milestone of overall profitability this financial year, generating £4.3m of adjusted operating profit (FY21: loss of £10.2m). The principal driver of this improvement was a much lower adjusted operating loss at Checkatrade. Checkatrade continued to strengthen its position as the UK’s leading online platform for matching homeowners with quality trades, with nearly a fifth of consumers who used a trade (tradesperson) in the 12 months to February 2022 having done so via Checkatrade. The number of paying trades on the platform grew by 7% to 47k (FY21: 44k), and average revenue per trade exceeded our Milestone 1 target at £1,229 (FY21: £939), an increase of 31%. We are continuing to develop our offer to trades, to ensure that we deliver value and stay relevant whether their order books are full or not, and the introduction of the £1,000 Checkatrade Guarantee resonates well Chief Executive’s review continued Strategic report Governance Financial statements HomeServe plc Annual Report & Accounts 2022 9 Reforestation project HomeServe Spain
Strategic report Strategic report Governance Financial statements Other information HomeServe plc Annual Report & Accounts 2022 HomeServe plc Annual Report & Accounts 2022 11 10 FY22 update As the response to Covid-19 transitions from pandemic to endemic, the secular shifts that will remain permanent features for many societies are becoming clearer. One that is of significant relevance for HomeServe is the greater proportion of time that many homeowners are now spending working from home. This benefits both the Membership & HVAC divisions and Home Experts. In Membership, product usage (as seen in claims frequencies) has settled at a higher level than the pre-pandemic baseline, with more time spent working from home resulting in higher levels of wear and tear on key home systems (e.g. toilet flushes). In Home Experts, more home working is likely to see homeowners continue to seek improvements to their homes to make the home environment flexible, pleasant and productive. Recent research from Checkatrade detects a shift in focus from cosmetic improvements to projects which deliver environmental or cost of living benefits, such as insulation. Market overview Our target market Homeowners Based on our experience worldwide over our three decades of trading, we have insight into the typical levels of consumer adoption of home assistance policies which enables us to segment homeowners into three groups. Home Experts This is a much broader market, covering trades from plumbing to kitchen fitting, carpet cleaning to garden design. It is an expanding market, as more and more trades are developed to serve the needs of modern-day homeowners – for example, professional flat pack furniture assemblers and home WiFi gurus did not exist fifteen years ago. We expect it eventually to follow property, car purchases and travel, all of which are now over 60% online in terms of consumer demand. Membership & HVAC This is our traditional market in the geographies where we are currently established, and essentially covers specialist home emergency cover for plumbing, heating and electricals. Membership was HomeServe’s first business, which we have been operating since 1993. More recently, we have been adding to our HVAC installation capabilities in the UK, North America, France and Spain, to be able to replace equipment for customers as well as repair and service it. Home Assistance penetration There is a marked difference in penetration between our most mature market, the UK, and our highest growth market in North America. Our experience shows that with most affinity partners, maximum uptake amongst their customer base is around 30%. This holds across each of our established territories and therefore drives our view of the addressable market. UK addressable market North America addressable market Total households: 28m The UK market, where our historical focus has been on water, is nearing maturity. The UK is the only market where HomeServe has a bigger competitor, but the competitive dynamic is stable. As conditions stabilise in the retail energy supply market, HomeServe has opportunities to win more customers through this channel. Additionally, the adjacent segment of Claims Assistance has been growing in recent years, and HomeServe has a strong position in this market through its CET business. See page 43 Operating review Total households: 151m North America remains a significantly under-penetrated market. The key to growth is to sign more affinity partners to reach the over 50% of households who have yet to see a HomeServe offer from their utility. There are various whole home warranty providers including Frontdoor, and a handful of utilities still operating their own in-house programs. HomeServe has exciting product development opportunities through offerings like HVAC as a Service and water loss cover (i.e. ServLine). See page 41 Operating review HomeServe 45m Homes Unserviced Whole Home Warranty Acquirable utility policy books American Water Home assistance market value £14bn Market size Home repairs and improvements market value £450bn “What we are seeing is that customers are more astute about the build process - specifically where planning stipulates an older or heritage property. Here we are asked to source sustainable materials and request fitting, such as heat pumps and triple glazing. But outside of this, we are seeing more customers wanting to spend their money on fancy bespoke kitchens, media walls, cinema rooms and lighting too.“ Emma Kemp, Director at I-furb Bespoke Construction Competitive positioning In Membership, HomeServe has clear market leadership in North America, and is also the largest independent provider in France and Spain. HomeServe’s utility-partnership model remains largely unique across each of its territories, reflecting the large barriers to entry for new players to build relationships with typically risk averse utilities. In Home Experts, Checkatrade and Habitissimo are leaders in their respective markets, whilst eLocal will be able to build further scale in the vast US market. 30% Insurance minded Overview • Drawn to the convenience of a trusted solution for dealing with a problem in their home • Like to budget carefully and avoid unexpected repair bills • Have historically tended to be an older demographic often on fixed incomes, however millennials are now attaining home ownership at greater scale. HomeServe offer: Membership & HVAC 20% DIYers Overview • Have the knowledge, skills and motivation to carry out repair work themselves • These homeowners may call on a third party for jobs requiring specialist skills, equipment or qualifications HomeServe offer: HVAC & Home Experts 50% Home Improvers Overview • Find a trade when needed – by word of mouth, paper directories and increasingly online • Finding a high-quality trade, without hassle, is often just as important as financial considerations • Typically appeals to a younger demographic whose instincts are to search online HomeServe offer: Home Experts What’s changing? This segment is evolving, reflecting wider demographic shifts in home ownership, notably as millennials come to the fore. The growth in share of home ownership by millennials has also been correlated with a slightly more affluent, digitally conversant consumer than seen historically. What’s changing? In most countries, there are fewer confident DIYers and younger homeowners are less likely to live closer to the support network provided by their family. What’s changing? There is a significant opportunity to accelerate the shift in consumer demand online in searching for reputable tradespeople, as has already been seen for property, cars and travel. HomeServe Unserviced British Gas 8m Homes Other
Strategic report HomeServe plc Annual Report & Accounts 2022 HomeServe plc Annual Report & Accounts 2022 13 12 Strategic report What we do To insurance-minded homeowners, we provide policies to cover a range of home emergencies via subscription-based Membership services. The cost of repairs covered under our policies is underwritten by third-party insurers, to insulate us from surges in demand and ensure that we can always put our customers’ needs first. Our HVAC installation, repairs and servicing capabilities mean that we can participate in the domestic green energy revolution by promoting eco-friendly sources of heat and cooling. In Membership & HVAC, our established route to market is via partnerships with utilities and municipalities, for whom we are an important source of added value. Our data-rich marketing approach and careful product design help us to grow our customer base. Our customers stay with us because of the excellence of our customer service and the peace of mind our annual cover gives them. Our local networks of employed and subcontracted trades ensure consistently high service standards whenever we visit a customer’s home. For people who prefer to deal with issues as they arise (‘Home improvers’), and DIYers who need specialist help, we have online, on-demand Home Experts platforms that match homeowners with local trades (tradespeople) – Checkatrade in the UK; eLocal in North America; Habitissimo, principally in Spain, Portugal and Italy; plus a minority interest in maison.fr in France. In Home Experts, trades are our customers, and our job is to match them with consumers who need their services in their local area. We help them to grow their business by providing customer contacts and quote requests, and also manage their reputation with trustworthy online reviews. We run our business in three largely autonomous divisions, which all benefit from our five key sources of value, these evolve as our business grows. Capital allocation decisions are made at Group level, for the benefit of the business as a whole. Our Responsible business framework spans our three divisions and defines the way we work. We share expertise in managing environmental, social and governance risks. We are passionate about contributing to positive change in our industry – for example by promoting environmentally friendly energy sources and creating trades apprenticeships. By giving our businesses autonomy, and collaborating to share expertise and experience, we aim to deliver strong, consistent earnings growth and move towards our vision of being the world’s largest and most trusted provider of home repairs and improvements. We aspire to be able to do every job, in every home. See page 10 for Market overview. See page 20 for our Responsible business. See page 32 for Principal risks and uncertainties. Business model and strategy N O R T H A M E R I C A N M E M B E R S H I P & H V A C H O M E E X P E R T S Partnerships: we create connections which generate value for all parties. In Membership & HVAC, we connect utilities and municipalities, homeowners and trades, in a network of relationships which is unique to us. In Home Experts, we connect consumers and trades and provide unique value add, such as the Checkatrade Guarantee. Our expertise at forming strong partnerships has taken years to build and is a competitive differentiator. Capacity for innovation: in Membership & HVAC, we are constantly refreshing our customer and partner propositions to optimise customer growth and develop our affinity partnerships. Green energy is a key current focus, where we are promoting solutions to challenging aspects of the green homes revolution such as the cost of moving to an alternative heating and cooling source. In Home Experts, we are developing a unique business model to match consumers with quality trades to get jobs done well. Customer obsession: we cherish our reputation for strong customer service by putting our customers at the heart of everything we do. In Membership & HVAC, our customers are homeowners and in Home Experts, our trades are our customers. Trades network management: in both Membership and Home Experts, we create and manage networks of trades to deliver great service to consumers. These networks have taken years to optimise and perfect. Financial resources and expertise: we are disciplined in the way we deploy capital and have clear processes in place to decide where we will, and will not, invest. Our key sources of value David Bower, Chief Financial Officer, HomeServe plc “HomeServe is built on five key sources of value, the combination of which is unique to us.“ Other information Governance Financial statements E n v i r o n m e n t P e o p l e E M E A M E M B E R S H I P & H V A C C o m m u n it i e s C u s t o m e r s R e s p o n s i b l e b u s i n e s s Sources of value
Strategic report HomeServe plc Annual Report & Accounts 2022 HomeServe plc Annual Report & Accounts 2022 15 14 Strategic report Business model and strategy continued TARGETS North American Membership & HVAC is our biggest short to medium-term growth opportunity. Tom Rusin, CEO, North American Membership & HVAC Ross Clemmow, CEO, EMEA Membership & HVAC North American Membership & HVAC is focussed on providing exceptional customer service; on continuing to sign new affinity partnerships to give us access to more households; on developing the best products and services to match the needs of our customers and our utility partners; and on marketing effectively and engagingly through affinity partner and local HVAC brands. We operate a high-quality network of vetted tradespeople through a combination of directly employed and network contractors. We use M&A to acquire existing policy books as well as high quality, profitable HVAC businesses. By doing all of this, we generate repeat and recurring income and a strong return on invested capital (ROIC). Our priorities include continuing to develop our relationships with our affinity partners. We built our business using direct mail to reach customers, and are now making our business more digital across the board. We are broadening our product range to appeal to millennials as well as older demographics. We are constantly building and refreshing our team of outstanding leaders, who have proven ability to lead with courage, persistence and integrity. We are committed to doing business responsibly, and to building a diverse workforce right across our organization with the skills and capabilities we need to continue to grow. See page 41 for North America Membership & HVAC Operating review. In EMEA Membership & HVAC, we are passionate about solving everyday home emergencies and improving sustainability in the home. We aspire to being best in the world at connecting trades with customers to get home repairs done easily. We drive profitable, recurring revenue through Membership and repeat jobs, and are building three key capabilities – Membership, HVAC and Claims Assistance. Our dedicated and experienced local management teams are developing highly efficient, multi-skilled networks of marketers, customer service experts and technicians capable of creating and supporting market leading products and services, including electric vehicle charging and green heating solutions. Across EMEA, we are driving to make our businesses more digital. UK Membership is our most established business. While the competitive landscape is stable, it is the only one to operate with a larger competitor. Customer numbers for our traditional plumbing and drainage products are past their peak, so we are looking to expand our product line and partnerships to stabilise our customer book at around 1.5m customers. We have established a 2-3 year transformation plan to stabilise our UK business and return it to profitable growth, which will build a more efficient, multi- channel, multi-product business. We are rolling out our successful HVAC buy and build strategy, increasing our presence in the energy markets and expanding into Claims Assistance with the acquisition of CET in October 2021. In France and Spain, we have already diversified into multi-product, multi-channel businesses to support stable, profitable growth. In Spain, we have developed a new model (“service customer”) to return our Membership business to growth following the end of our partnership with Endesa. Our near neighbour geographic expansion strategy leverages our know-how in existing markets to develop new opportunities in Belgium, Portugal and Germany. We have a promising joint venture in Japan with Mitsubishi Corporation. See page 43 for EMEA Membership & HVAC Operating review. See page 32 for Principal risks and uncertainties. Key performance indicators 1. New Membership customer additions (m) 2. Net income per Membership customer ($) 3. Retention rate (%) 4. HVAC adjusted operating profit ($m) See page 32 for Principal risks and uncertainties. Key performance indicators 1. New customer additions (m) 2. Retention rate (%) 3. Proportion of revenue from non- Membership businesses (%) EMEA MEMBERSHIP & HVAC STRATEGY NORTH AMERICAN MEMBERSHIP & HVAC STRATEGY Membership customers 4.8m +3% Medium-term target 6-7m 4.8m 4.7m FY22 FY21 Margin (policies) 25% – Medium-term target 24-26% 25% 25% FY22 FY21 HVAC adjusted operating profit $17.8m +79% Medium-term target $30-45m $17.8m $9.8m FY22 FY21 Adjusted operating profit ($m) $159.1m +15% Medium-term target $230m $159.1m $137.9m FY22 FY21 Income per Membership customer $113 +5% Medium-term target $120-125 $113 $108 FY22 FY21 IN A NUTSHELL We are growing broad-based businesses in the UK, France, Spain, Belgium, Portugal, Germany and Japan based on three key capabilities: Flywheel Best products that solve everyday problems and save water & energy in the home Flexible, value-added diverse partnerships Drive profitable jobs in high volumes to our broad network of trades Access to more households with multi- product relationships & recurring revenues Service excellence & efficiency through people, scale & technology Membership Home emergency policies covering plumbing, heating and electricals. HVAC Installation, maintenance and repair of heating, ventilation and air conditioning systems. Claims Assistance Home emergency assistance for home insurance policy holders. Other information Governance Financial statements First choice for Home Assistance & Repairs Flywheel Develop the best products & services to match customer needs Invest in more marketing Invest in a high quality repair & installation network Provide an exceptional customer experience Invest in partnerships, technology & innovation Accelerate customer growth & profit per customer The most trusted provider of home repairs, installations and services