2013 ANNUAL REPORT The UK’s leading car retailer CONTENTS AT A GLANCE 2 OUR OPERATIONAL AND FINANCIAL HIGHLIGHTS 7 OUR CHAIRMAN 11 OUR MARKETS AND BUSINESSES 12 Our Markets 12 Our Businesses 20 OUR BUSINESS MODEL AND STRATEGY 26 Business Model 26 STRATEGIC REVIEW Strategy 28 Key Performance Indicators 30 Risk Overview and Management 34 Our People 38 OPERATIONAL AND FINANCIAL REVIEW 40 Operational Review 40 Financial Review 44 DIRECTORS' REPORTS 50 Board of Directors 51 Chairman's Corporate Governance Letter to Shareholders 52 Corporate Governance Report 53 Corporate Social Responsibility Report 59 Committee Reports 62 Directors' Remuneration Report 68 GOVERNANCE Directors' Report 90 Directors' Responsibility Statement 96 INDEPENDENT AUDITORS REPORT 98 FINANCIAL STATEMENTS 102 Consolidated Income Statement 102 Consolidated Statement of Comprehensive Income 103 Consolidated Statement of Changes in Equity 104 Consolidated Balance Sheet 105 Consolidated Cash Flow Statement 106 Reconciliation of Net Cash Flow to Movement in Net Debt 107 FINANCIALS Notes to the Financial Statements 108 Company Balance Sheet 171 Reconciliation of Movements in Shareholders’ Funds of the Company 172 Notes to the Financial Statements of the Company 173 Shareholder Information 180 5 Year Group Review 181 AT A GLANCE THE UK’S LEADING AUTOMOTIVE RETAILER 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 dealership management system, leasing and wholesales parts markets. Brands Stratstone California 02 Mercedes-Benz GL 63 AMG available from Stratstone.com 02 AT A GLANCE What we do The UK's leading automotive retailer in the UK with 225 franchise points selling new and used vehicles and conducting service and repair activity (aftersales). We primarily operate in the UK under the brands of 'Stratstone' for the premium segment, 'Evans Halshaw' for the volume segment and 'Quicks' for the value segment. We also have a vehicle operation in California. We have a number of complementary businesses within the Group which are: 'Pinewood' for dealership management systems, 'Leasing' for fleet and contract hire vehicles and 'Quickco' for wholesale vehicle parts. Our Operational and Financial Highlights 7 Underlying profit before tax up £7.8m (21%). Underlying EBITDA : Net debt ratio of 1.2 times. Our Chairman’s view 11 Pendragon continues to build its performance across all sectors – we are pleased with the results and our strategic direction. Our Markets and Businesses 12 Our key automotive markets are: aftersales, used and new. Our businesses are: Stratstone, Evans Halshaw, Quicks, California, Pinewood, Leasing and Quickco. Our Business Model and Strategy 26 The full outline of the Group's business model, strategy, key performance indicators and risks. Operational and Financial Review 40 Segmental and sector operational and financial performance review for 2013. Our Governance 50 Effective Governance is a prerequisite to success for all our stakeholders. Our Financial Statements 102 Full detailed Financial Statements. 03 03 AT A GLANCE 265,000 £500m NEW & USED UNIT SALES GROSS PROFIT 13.3m 225 WEBSITE HITS FRANCHISE POINTS >1MILLION 7% AFTERSALES TRANSACTIONS USED CAR UNIT GROWTH 9,171 26 EMPLOYEES WORLDWIDE BRANDS £38.9m PROFIT BEFORE TAX £3.8bn TURNOVER With its balanced, sporty and sophisticated design, the Peugeot RCZ is one truly stunning coupe. 04 AT A GLANCE LOCATIONS Evans Halshaw 132 Stratstone 84 California/Others 21 Used Non-franchise 8 Quicks 7 *Map does not show support business locations nor those in California 05 Peugeot RCZ available at Evanshalshaw.com Range Rover Evoque optimises performance and capability in all on and off-road conditions. Range06 Rover Evoque available from Stratstone.com OUR OPERATIONAL AND FINANCIAL HIGHLIGHTS “Continued strong performance in the used, aftersales and new HIGHLIGHTS AND FINANCIAL OPERATIONAL sectors has generated a material step forward in profitability. Underlying profit before tax is up 21% in the period and the Group continues to achieve record used performance, with volume growth of 7%. We are very encouraged by the second half performance in aftersales which provides verification that the vehicle parc is recovering, as a result of the growth in new car sales. Our online performance continues to surpass expectations growing by 22% in the year with over 13 million website visits to Evanshalshaw.com, Stratstone.com and Quicks.co.uk. The Group is in a strong position with its leading UK retail business, strong balance sheet and the continued delivery of strategy in the used vehicle sector. The Board is delighted to announce a final dividend of 0.3p per share, bringing the total dividend for 2013 to 0.4p, a 300% increase on last year. We would like to thank our teams for helping deliver a strong performance in 2013 and we look forward to their continued engagement and commitment in 2014. We are confident that 2014 will be another year of good performance, with Group performance in line with expectations for the year.” Operational Highlights Financial Highlights • Online visitors grew 22%, reflecting the growth of • Underlying earnings per share of 2.3p, up from 2.0p in the Evanshalshaw.com, Stratstone.com and Quicks.co.uk prior year (+15%). generating 13.3 million website visitors. • Underlying profit before tax up £7.8 million to £44.2 • Aftersales, our largest area of profitability, grew retail million (+21%). sales by 3% in the second half following the trend in new car sales. • Proposed final dividend of 0.3p per share, following an interim dividend of 0.1p per share represents a 300% • Used performance continued to outperform the market increase on the 2012 final and interim dividend. with volume up 7% on a like for like basis and stable margins. • Profit before tax up £4.9million to £38.9 million (+14%). • New UK retail sales grew on a like for like basis by 18%. • Completing the comprehensive refinancing, a net debt reduction £76.8m and early achievement of the Group’s debt : underlying EBITDA target of 1.5 establishes a strong capital structure. 0707 OUR OPERATIONAL AND FINANCIAL HIGHLIGHTS UNDERLYING UNDERLYING GROSS REVENUE GROSS PROFIT MARGIN £3,848.9m £499.9m 13.0% 3,848.9 499.9 3,635.1 13.6% 481.3 13.2% 3,418.2 468.1 13.0% 2011 2012 2013 2011 2012 2013 2011 2012 2013 UNDERLYING 3 YEAR UNDERLYING OPERATING PROFIT OPERATING MARGIN FINANCIAL £77.1m 2.0% HISTORY 77.1 2.2% 74.4 2.0% 2.0% 71.8 2011 2012 2013 2011 2012 2013 UNDERLYING UNDERLYING PROFIT NET EPS BEFORE TAX DEBT 2.3p £44.2m £139.6m 44.2 2.3 2.3 2.0 36.4 30.8 246.8 216.4 139.6 2011 2012 2013 2011 2012 2013 2011 2012 2013 08 OUR OPERATIONAL AND FINANCIAL HIGHLIGHTS REVENUE UNDERLYING REVENUE HIGHLIGHTS AND FINANCIAL OPERATIONAL BY SECTOR BY SEGMENT Aftersales Stratstone £300.9m £1,467.9m Used Evans Halshaw £1,575.7m £2,056.6m New California £1,891.7m £194.9m Support Support/Quicks £80.6m £129.5m GROSS PROFIT UNDERLYING OPERATING PROFIT BY SECTOR BY SEGMENT Aftersales Stratstone £188.0m £26.9m Used Evans Halshaw £137.6m £27.4m New California £144.4m £9.0m Support Support/Quicks £29.9m £13.8m GROSS PROFIT MARGIN UNDERLYING OPERATING MARGIN BY SECTOR BY SEGMENT 62.5% Aftersales 1.8% Stratstone 8.7% Used 1.3% Evans Halshaw 7.6% New 4.6% California 37.1% Support 10.7% Support/Quicks 09 Powerful, refined and more stylish, both inside and out, we’re proud to reveal the Ford Kuga, our smartest SUV yet. Ford Kuga10 available at Evanshalshaw.com OUR CHAIRMAN “The UK’s leading car retailer continues to deliver improved results from its Evanshalshaw.com, Stratstone.com and Quicks.co.uk brands. With underlying profit before tax up 21 per cent, the Group is looking forward to further OUR CHAIRMAN performance gains from its aftersales and vehicle sales in 2014.” Mel Egglenton, Chairman Overview our businesses and is able to contribute positively to the I am delighted to report strong financial results in my Board’s effectiveness in all aspects of our role. For further first year as Chairman. Having been with the Group since information on governance, please see the ‘Chairman’s December 2010, it is no surprise, given the strength of the Corporate Governance Letter to Shareholders’ on page 52. executive and non-executive team that the Group continues to produce strong financial results and is delivering against Strategy its strategy. Our people continue to play a vital role in our The Group remains focussed on maximising returns from success, so I would like to thank them for their continued our three key sectors: aftersales, used and new. The Group’s input, energy and delivery for our business and our strategy is focussed on continuing the upward trajectory customers. in the used and aftersales sectors together with delivering first class customer service. The full detail of the Group's Financial Performance business model, strategy and key performance indicators The Group has achieved strong financials in 2013, with profit can be found in the ‘Our Business Model and Strategy’ before tax up £4.9 million to £38.9 million and underlying section on page 26. profit before tax up £7.8 million to £44.2 million. Underlying earnings per share has increased from 2.0p to 2.3p, an Outlook increase of 15%. The Group has reduced debt by £76.8 The Group is in a strong position with its leading UK retail million in the period, with net debt of £139.6 million at the business, strong balance sheet and continued delivery of end of 2013. our strategy in the used vehicle sector. The Group is very encouraged by the second half performance in aftersales, Shareholders which provides verification that the vehicle parc, in the The Board is delighted to announce an increase in the less than three year old category is beginning to rise.