2011 ANNUAL REPORT PENDRAGON PLC “THE UK’S LEADING AUTOMOTIVE RETAILER” Pendragon PLC OVERVIEW CONTENTS OVERVIEW 3. At a Glance OUR MARKETS 4. Our Business Summary 6. Accolades 7. Financial Highlights 8. Chairman’s Statement 9. Our Board 10. Q&A With Our Executive Team OUR MARKETS 12. Our Principal Markets 14. Our Support Markets OUR BUSINESS OUR BUSINESS 16. Stratstone 17. Evans Halshaw 18. Chatfields 19. California 20. Support Businesses OUR STRATEGY & PROGRESS 22. Our Business Model and Strategy 24. Operating Review & PROGRESS OUR STRATEGY 30. Financial Review DIRECTORS’ REPORT 34. Directors’ Report 44. Corporate Governance Report 54. Directors’ Remuneration Report 65. Directors’ Responsibilities Statement 66. Independent Auditor’s Report to the Members of Pendragon PLC FINANCIAL STATEMENTS DIRECTORS’ REPORT 67. Consolidated Income Statement 68. Consolidated Statement of Comprehensive Income 68. Consolidated Statement of Changes in Equity 69. Consolidated Balance Sheet 70. Consolidated Cash Flow Statement 71. Notes to the Financial Statements 132. Company Balance Sheet 133. Reconciliation of Movements in Shareholders’ Funds of the Company 133. Notes to the Financial Statements of the Company 140. Shareholder Information 141. 5 Year Group Review FINANCIAL STATEMENTS www.pendragonplc.com 02 OVERVIEW AT A GLANCE Pendragon at a Glance Pendragon is the UK’s leading automotive retailer with 235 worldwide franchise points. Pendragon PLC OUR MARKETS Pendragon’s principal markets are the retailing of new and used vehicles and the service and repair of vehicles (aftersales). Pendragon also operates in the wholesale parts, leasing and dealership management system markets. OUR BUSINESS We operate with seven main segments: Stratstone, Evans Halshaw, Chatfields, California, Leasing, Quickco and Pinewood. “The UK’s Leading Automotive Retailer” ✔ No.1 Internet Vehicle retailer by market share via Evanshalshaw.com and Stratstone.com. ✔ No.1 UK vehicle retailer by location with 226 UK nationwide locations. ✔ Leading and innovative used car and aftersales development programmes. ✔ Value Pricing our key proposition in the market. ✔ Growing and successful California business. ✔ Centralised UK call centre ensuring consistent communication and execution of services. ✔ Comprehensive range of support and complementary business ranging from parts distribution to fleet and contract hire activities. ✔ In-house software company in the top 3 within the marketplace delivering dealer systems. ✔ Dedicated, skilled and motivated employees. 03 OUR BUSINESS SUMMARY 14% USED CAR UNIT GROWTH £471mGROSS PROFIT 22 260 BRANDS WORLDWIDE RETAIL POINTS 9,521 BRANDS EMPLOYEES >1MILLION AFTERSALES TRANSACTIONS £3.5bn REVENUE 227,000 8.5m NEW & USED UNIT SALES WEBSITE HITS KEY MARKETS KEY BUSINESSES Stratstone The UK’s leading prestige motor car retailer with 93 franchise points including: Aston Martin, BMW, Ferrari, Honda, Jaguar, Land Rover, Lotus, Maserati, Mercedes- NEW Retailing a new vehicle Benz, MINI, Porsche and Smart. USED Evans Halshaw The UK’s leading volume motor car retailer Retailing a used vehicle with 125 franchise points including: Chevrolet, Citroen, Ford, AFTERSALES Hyundai, Kia, Nissan, Peugeot, Renault and Vauxhall. Completing service and repair PRIMARY Chatfields Commercial vans and trucks retailer with eight franchise points in the UK including: DAF, Ford, Nissan and Renault. California The prestige brands of Aston Martin, Land Rover and Jaguar with 9 franchise points in Southern California. IT Dealer Management Systems Leasing Fleet leasing and contract hire solutions in the UK. Parts Wholesale Quickco Independent parts wholesale business serving internal and external customers in the UK. Leasing & Contract Hire Pinewood In-house software company which supplies dealer management systems in the UK and South Africa. SECONDARY 04 OVERVIEW Stratstone 93 points Evans Halshaw 125 points Chatfields 8 points Quicks 7 points Motorhouse / Used 7 points California and others* 20 Points *Map does not show support business locations nor those in California 05 ACCOLADES BMW DEALER OF THE YEAR MINI DEALER OF THE YEAR We are delighted to report that Stratstone Tyneside have We are proud to report that Stratstone Derby have been been awarded the prestigious title of BMW Dealer of the awarded the prestigious accolade of MINI Dealer of the Year 2011. Year. The accolade is testament to the hard work of every The MINI Oscars Award Ceremony is held annually to team member at the Tyneside dealership and reflects our honour the best performers in the MINI UK network. The commitment to consistently deliver an outstanding five star nominations and selection process is carried out by the MINI experience at all times. Board with each part of the business assessed against the entire network for profitability, Each part of the business was measured against the entire targets and customer experience. BMW Network on performance, targets, profitability and customer experience before a winner was decided upon. Sandra Domagala, Dealer Principal was presented with the award by Jonathan Inman, Dealer Principal was presented with the Jochen Goller, Director of MINI UK award by the Managing Director of BMW UK, Tim Abbott at in recognition of the outstanding the Award ceremony in Portugal.. contribution made by the entire team at Stratstone Derby at the Oscars ceremony held in Oxford. 06 OVERVIEW FINANCIAL HIGHLIGHTS UNDERLYING REVENUE UNDERLYING PROFIT UNDERLYING REVENUE BY SEGMENT BEFORE TAX Stratstone £1,259m £3,418m Evans Halshaw £1,849m £30.8m Chatfields/California £244m Other £66m 30.8 25.2 4,026 3,534 3,418 3,173 10.1 (33.6) 2009 2010 2011 2008 2009 2010 2011 2008 UNDERLYING OPERATING UNDERLYING GROSS PROFIT PROFIT GROSS MARGIN BY SECTOR Aftersales £194.6m £74.4m 13.6% Used £124.7m New & Trade / Wholesale £117.5m Support £31.3m Stratstone £27.8m Evans Halshaw £22.6m Chatfields/California £6.8m 15.4% Support £17.2m 14.0% 13.1% 13.6% 2008 2009 2010 2011 UNDERLYING OPERATING MARGIN UNDERLYING EPS NET DEBT 2.2% 2.3p £246.8m 2.3 2.2% 357.3 2.1% 1.8 315.4 325.5 1.7% 0.8 246.8 (2.5) 2009 2010 2011 0.6% 2008 2009 2010 2011 2008 2008 2009 2010 2011 Note: Underlying results exclude items that are unusual due to their size, nature or incidence. 07 CHAIRMAN’S STATEMENT MIKE DAVIES Overview Our Strategy and Progress Despite uncertain and challenging trading conditions the The Group’s strategy is to focus on Aftersales, Used and Board is delighted to report strong trading performance then New market sectors. The Aftersales sector has become in 2011. Our strategy of focussing firstly on aftersales, a more challenging market given the change in profile of secondly on used and thirdly on new continues to assist the car parc but remains our most profitable area of the in driving profitability and differentiating Pendragon PLC business. The Used market is the Group’s primary growth from its peers. opportunity for profit and we will continue to maintain our high operational standards and initiatives in order to achieve Our Markets this objective. The Group understands the importance of The Group has been impacted in a reduction in the vehicle working closely with our manufacturing partners to drive car parc which varies by brand. In the UK the new car new profitability and this long-term partnership is key to market has fallen from 2.4 million vehicles in 2007 to 1.9 our success. million vehicles in 2011, this reduction in less than three year old vehicles represents a significant part of the aftersales Directors’ Report and Boards opportunity for the Group. The used car market has been The directors’ report can be found on pages 34 to 43. The stable in the last year and the latest available data shows continuity and experience of the management team remains the used market was flat year on year. a key strength for the Group working with our established partners. Our Business The Group is operating seven segments plus a central Financial Statements segment: Stratstone, Evans Halshaw, Chatfields, California, The detailed financial statements can be found on pages Leasing, Quickco, Pinewood. The Group will continue to 67 to 139. be selective about disposals or acquisitions after a period of right-sizing the the group in the last three years. Outlook Strong progress has been made by the Group in 2011 Our Performance despite the turbulent economic conditions. The used sector The Group is pleased to report that our two key divisions has been a key performance highlight for the Group for the of Stratstone and Evans Halshaw have maintained our prior year. This will remain our key strategic area of focus and we year performance. The California business continues to expect this momentum to continue during 2012. Aftersales have a successful growth story. Overall support businesses is still impacted by the reduced market opportunity in the profitability was in line with the prior year. Following the less than three year old vehicles group, but we will continue refinancing in 2011, the Group has a lower debt profile and to roll out our aftersales initiatives to assist our performance. consequently operates at a lower interest charge. In 2011 We again expect the new prestige sector to perform well in the interest saving for the Group versus 2010 was £6.3 2012 with the new volume retail sector being more adversely million. impacted by economic conditions, at least in the first half of 2012. Given our recent performance, strong cost control, lower finance costs and clear strategic goals we expect to maintain our momentum into 2012. Mike Davies Chairman 08 OVERVIEW OUR BOARD Mike Davies (64)* Trevor Finn (54)* Non-executive Chairman (N) (R) Chief Executive Joined as a non-executive director in 2004 and was Joined the vehicle division of Williams PLC in 1982 and appointed non-executive chairman of Pendragon in October subsequently became divisional managing director. He 2010. Mr Davies is non-executive chairman of the Royal was appointed chief executive of Pendragon prior to the Mint and The Manchester Airports Group PLC.