J20390 Interim Report 3/9/07 14:25 Page 2
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J20390_Interim Report 3/9/07 14:25 Page 2 Pendragon PLC Interim Report 2007 J20390_Interim Report 3/9/07 14:25 Page 3 FINANCIAL HIGHLIGHTS Unaudited) Unaudited) 6 months) 6 months) to 30.06.07) to 30.06.06) £m) £m) Revenue 2,702p 2,625p Profit before tax and exceptionals 32.7p 43.0p Underlying operating margin 2.3% 2.8% Profit before tax 33.5p 51.5p Adjusted earnings per share 3.5p 4.7p Dividend per share up 38% 2.00p 1.45p Net assets 337.3p 286.5p Gearing 86% 208%) 1 J20390_Interim Report 3/9/07 14:25 Page 4 CHIEF EXECUTIVE’S OPERATIONAL REVIEW Introduction Trading performance in the first six months of the year has been affected by a slowdown in consumer demand, as we highlighted in our June trading update. This has led to an oversupply of new cars, forced into the market by manufacturer incentives and pre registrations by dealers and, as a consequence, used car margins have declined. Pendragon’s aftersales business has performed well and we have had good results in our support businesses such as Pinewood Technologies and our leasing companies. The group has continued to generate significant amounts of cash which have been used to reduce borrowings and further strengthen our balance sheet. We are reporting adjusted earnings per share of 3.5 pence for the period compared to 4.7 pence in 2006 and an interim dividend of 2.0 pence per share compared to an interim dividend of 1.45 pence in 2006. The increase in dividend is in line with indications given in our AGM statement and represents an increase of 38%. Operating cash inflow of £128.7 million has enabled us to continue to reduce borrowings and bring gearing down to 86%. We have generated exceptional property profits of £7.6 million on the sale of nine surplus properties. We also incurred £2.8 million of costs related to closure of dealerships which we have treated as an ordinary trading item in the accounts. This is the first part of the £12.0 million of costs, excluding goodwill impairment, which we highlighted in our AGM statement, that would be incurred to cease operating and close 26 new car franchises. The impairment of goodwill relating to these 26 franchises is £6.8 million and is treated as an exceptional operating item. Our dealerships in Germany were sold at the end of June which brought to an end many years of operating in that market. Latterly the dealerships had become a relatively small part of the group and were no longer deemed to be a core activity. The results of the German operations are shown separately as a loss from discontinued operations of £1.5 million. Results The results for the six months to 30 June 2007 are summarised as follows: 2007) 2006) £m) £m) Revenue 2,702.4) 2,625.1) Underlying operating profit 61.3) 73.5) Exceptional operating costs (6.8) (3.4) Operating profit before other income 54.5) 70.1) Other income - gain on sale of property 7.6) 11.9) Operating profit 62.1) 82.0) Finance costs (28.8) (30.8) Share of joint venture profit 0.2) 0.3) Profit before tax 33.5) 51.5) Tax (4.2)) (15.7) Discontinued operation (1.5)) (0.7) Profit after tax 27.8)) 35.1) Earnings per share - basic 4.4p) 5.6p Earnings per share - adjusted 3.5p) 4.7p Dividend per share 2.00p) 1.45p Revenue The net effect of acquisitions and disposals of dealerships over the past eighteen months has been to increase revenues year on year by £77.3 million to £2,702.4 million. On a like for like basis revenue is down 3.0% which is principally due to reduction in the number of vehicle sales. This has been due to the difficult market for used car sales in the UK over the past six months and has meant that the number of used cars we have sold in the first half has been behind our planned volumes. Margins have been lower which are the main factors leading to profits being behind where we expected them to be for the first half. 2 J20390_Interim Report 3/9/07 14:25 Page 5 CHIEF EXECUTIVE’S OPERATIONAL REVIEW continued Underlying operating profit was £61.3 million compared to £73.5 million last year. The underlying operating profit margin was 2.3% against 2.8% for the same period in 2006. A number of factors have contributed to the movement in operating profits in addition to the reduction in margins on car sales. The other items relate to increased rents and dealership closure costs. Although having little impact on profit before tax, operating profits are reduced year on year by increased property rents of £8 million after our successful property joint venture sale and lease back at the end of 2006. We have also included in operating costs £2.8 million by way of one off dealership closure costs. We are pleased with the performance of our support businesses which have continued to perform well and have increased profits this year by £2.0 million. In the first half we have also had the benefit of savings relating to Vardy head office activities which were £2.0 million more than in the first six months last year. Exceptional operating costs of £6.8 million relate to the goodwill impaired on all the dealerships which are to be sold or closed as part of our accelerated closure of selected underperforming dealerships. Following the acquisition of Reg Vardy we reviewed the franchise portfolio and identified a number of dealership properties that had greater value for alternative use or where the level of dealership profitability was insufficient to justify continued trading and further investment. We announced the closure and disposal programme in our AGM statement against which we have incurred £2.8 million of costs in the first half. We have treated this as an ordinary trading item in the accounts. We aim to complete this closure programme by this time next year releasing an estimated £22 million of cash. Other income is the profit on the disposal of surplus property assets resulting from our ongoing active management of our property portfolio. The total proceeds of these sales were £25.5 million of which £7.6 million was profit. Profits from the sale of surplus properties have been a regular feature over the past years and we expect that a further £20 million of profits on property sales will be generated over the next 15 months. Financing costs have reduced by £2.0 million to £28.8 million. Our borrowings reduced at the end of 2006 following a property joint venture transaction. The benefit of this to our interest costs has in part been offset by the increase in interest rates since the first half of 2006. The increase in interest rates is equivalent to £4.0 million of additional cost. We have also financed the Vardy acquisition for the full six months this year whereas in 2006 it was for four months. Adjusted profit before tax of £32.7 million (2006: £43.0 million) is underlying operating profit of £61.3 million (2006: £73.5 million) less finance costs and share of joint venture profit of £28.6 million (2006: £30.5 million). A summary of revenues and operating profits by division is summarised below: £m 2007 2006 Revenue Operating Profit Revenue Operating Profit Stratstone 1,103.0 23.6 1,097.2 31.5 Evans Halshaw 1,450.3 22.8 1,366.9 28.7 USA 94.8 2.8 108.1 3.2 Support businesses 91.0 12.1 82.0 10.1 Motor Retail Business Our franchised motor retail activities are principally in the UK with a well established small business in the USA. We currently operate 359 franchise points, of which nine are in the USA. We also operate a number of franchised commercial truck businesses. UK Overall national new car registrations increased by 2.0% in the first six months of this year compared to the first six months of 2006. The manufacturers we represent achieved only 0.7% growth. However, registrations do not necessarily reflect consumer demand in the short term and we have seen a slowdown in consumers willing to commit to buying new cars. 3 J20390_Interim Report 3/9/07 14:25 Page 6 In order to keep registrations up in this type of environment we are seeing more manufacturer incentives and pre registrations by dealers which have led to an adverse impact mainly on used car margins. In the UK we operate 350 franchised points of which 165 are prestige, branded as Stratstone, 164 are Evans Halshaw volume dealerships and 21 are truck dealerships trading under the Chatfields brand. The results are summarised in the tables below. Chatfields is included in the results of Stratstone. Stratstone is the UK’s leading prestige motor car retailer and its results for the first six months of this year are as follows: £m Revenue Gross Gross Underlying) Underlying) Total Units Gross Profit Margin Operating) Operating) Sold ’000 Profit per % Profit) Margin %) Unit £ Existing 1,094.8 140.2 12.8 24.1) 2.2) Disposed 8.2 1.3 16.1 (0.5) (6.3) Total 2007 1,103.0 141.5 12.8 23.6) 2.1) 38.6 1,868 Total 2006 1,097.2 145.0 13.2 31.5) 2.9) 38.9 2,018 Revenue and units sold within our Stratstone franchises are in line with last year and on a like for like basis they were down 4%.