INTERIM RESULTS TO 30 JUNE 2008

Pendragon PLC, the UK's leading motor car retailer, today reports interim results for the six months to 30 June 2008.

Summary:

Trevor Finn, Chief Executive, commented:  

"The UK motor retail sector has faced a challenging six months through weak demand and rising vehicle ownership costs. We have reacted quickly to the market changes, improving our competitiveness in used cars, cutting our cost base and reducing borrowings.

 Our aftersales and support businesses will continue to underpin the profitability of the group and the experienced management team will guide the group successfully through what we expect to be difficult trading conditions for the remainder of this year and next." 

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CHIEF EXECUTIVE'S OPERATIONAL REVIEW

Introduction

We highlighted earlier in the year that the tough trading conditions seen in the second half of last year were continuing in the new and used car markets in 2008. National UK new car registrations overall have declined 1.6%, and private sector registrations 4.9% in the first six months of 2008. Private sector registrations were down nearly 12% in June. Also in June wholesale used car prices witnessed the biggest single monthly reduction in over five years with large executive and off road vehicles hardest hit. These market conditions are causing volume and margin pressure. In addition, like most other companies in the UK, we have been affected by rising costs which we have already taken action to mitigate.

Against this background we have produced a profit before tax of £21.1 million (2007: £33.5 million), operating profit of £41.2 million (2007: £62.1 million) and profit before tax and exceptional items of £13.4 million (2007: £32.7 million) which includes £3.3 million of losses in businesses which were closed in the first half of this year and £1.9 million in respect of redundancy costs.  

Whilst we have seen overall vehicle volumes decline, our aftersales, leasing and technology businesses continue to perform well. The group has continued to generate cash which has been used to reduce borrowings by £44.4 million in the first six months.

We are reporting adjusted earnings per share of 1.5 pence for the period compared to 3.5 pence in 2007 and an interim dividend of 0.5 pence per share compared to an interim of 2.0 pence in 2007. The reduction in dividend reflects the current trading environment and is covered three times by first half trading profits after tax.

We have realised profits of £2.1 million and cash proceeds of £8.4 million on the sale of businesses and surplus properties. £14.9 million of cash has been received in respect of VAT which we were able to reclaim as a consequence of recent case law. We have included goodwill and fixed asset impairments of £9.3 million mainly in relation to assets which we anticipate will be disposed of in the next 12 months. Whilst in these markets it is difficult to predict when disposals will happen we are planning internally to continue to realise cash from surplus properties which will be used to reduce borrowings further.

The market conditions we face are challenging and we have taken a number of strategic actions to improve our competitiveness. During the first half of the year we have continued to roll out changes to our used car sales processes which have enabled us to better utilise low cost internet advertising and offer cars in lower price brackets. This has proven effective in holding margins and maintaining margins after marketing costs. We have undertaken cost reductions through targeted dealership closures and redundancies. Debt has been reduced by £44.4 million since the beginning of the year through good operating cash flow, working capital focus and selective disposals.    

Results 

The results for the six months to 30 June 2008 are summarised as follows:

Revenue is down £170 million on a like for like basis excluding support businesses. A large element of this reduction is due to average vehicle unit sales price reductions as we have added lower price bracket vehicles in our used car business.

Underlying operating profit was £41.8 million compared to £61.3 million in the first half of last year. The underlying operating profit margin was 1.7% against 2.3% for the same period in 2007.  Although gross margins have reduced, the main factor contributing to the fall in operating margin has been lower activity levels leading to a relative increase in operating costs per unit sold. We have taken action in the first half to reduce the level of operating costs mainly by reducing advertising and marketing expenditure through better internet use and by making around 500 jobs redundant. The cost of the redundancy programme was £1.9 million which was taken in the first half and we estimate the cost saving in the second half to be £5.1 million with a similar further saving in the first half of 2009 giving an annual saving of approximately £10 million. Also taken against operating profits are £3.3 million of trading losses and closure costs relating to dealerships sold or closed in the first half.

We are pleased with the results of our support businesses which have continued to perform well, delivering operating profits of £9.9 million which includes good profits from our leasing and technology businesses.  

Exceptional operating costs include impairments of goodwill and other assets and an exceptional VAT refund. Goodwill has been impaired by £6.8 million. This is in respect of three BMW dealerships, two of which are being disposed and one which will close in the second half and 6 other dealerships which will close in the second half. In the first half of 2008 these dealerships made a net loss of £0.7 million. An impairment of £2.5 million has been carried out on some property assets held for resale as we have reduced our expectations of sales proceeds, in line with a weaker property market. An amount of £6.6 million was received in the first half relating to VAT reclaimed for the period 1973 to 1996 which, together with an additional amount of £8.3 million in respect of interest on this VAT amount received and shown as an exceptional interest income, brings the total receipt to £14.9 million.

Other income includes the disposal of Extra Leasing, a non-core part of our leasing business. This company was acquired as part of the CD Bramall acquisition and had not traded for many years other than to run down its lease book as leases came to an end. This disposal generated a profit of £1.5 million.  

We disposed of three dealerships during the first half at a cost of £0.8 million. These businesses lost £1.2 million in the first half. We also sold three surplus properties in the first half generating proceeds of £5.3 million and profits of £1.4 million. Profits from the sale of surplus properties have been a regular feature of our business over recent years and, whilst the market has become more difficult this year, we expect to generate further surplus property sale proceeds in the second half. There are surplus properties held for sale amounting to £55.7 million which are being actively marketed.

Financing costs of £28.9 million, which excludes exceptional VAT refund interest income of £8.3 million, have remained in line with the prior year. Within this figure net bank interest reduced from £13.5 million to £12.6 million and stocking interest reduced from £15.8 million to £15.1 million. We have been adversely affected by disruption in the LIBOR markets but have been able to offset higher LIBOR rates by reducing our funding requirements year on year to give a net saving overall of £1.6 million.  

Adjusted profit before tax of £13.4 million (2007: £32.7 million) is underlying operating profit of £41.8 million (2007: £61.3 million) less finance costs and share of joint venture profit of £28.4 million (2007: £28.6 million).

A summary of revenues and operating profits by division is shown below:

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 343 franchise points, of which 11 are in the USA.  

UK  national new car registrations declined by 1.6% in the first six months of this year compared to the first six months of 2007.  This overall decline disguises a more aggressive one in registrations to private and small business users especially in the second quarter of the year. Private customer registrations declined by 4.9% in the first half. This decline was more marked in the second quarter at 7.9%. This is a reflection of falling consumer confidence and consumers deferring vehicle purchases. Registrations in the fleet sector have increased by 2% year on year and now account for just over 50% of total national registrations. Registrations for manufacturers we represent fell by 1.9% with Stratstone brands up 1.7% and Evan Halshaw brands down 3.2%. We believe that registration levels are now starting to reflect the real level of demand in the market whereas for the last 12 months cars were being pushed aggressively into the market by manufacturers. This has had a knock on effect in putting pressure on used car prices where we have done well to maintain gross margin on a like for like basis.

Up to date information on activity levels nationally in the used car market is not readily available due to the size and diversity of the market, which includes private to private sales. However, we are able to see the effect that the downturn is having on demand which is reflected through a weakening of prices in the wholesale markets. In April and May wholesale and retail price reductions for used cars were fairly well aligned at about 3% per month which is 1% more than we would expect in normal market situations. Nationally, retail activity stepped down in May with the associated realisation by dealers that replenishment of stock in coming months would be at lower levels. This has in turn led to wholesale prices being reduced more aggressively in June and into July.  

We expect that the current price correction in the used car market has some way to go, although we anticipate that it will have run its course by the end of the year. Our focus has been on stock turn which is key in this environment and we have increased used car stock turn compared to last year and will be looking to maintain this improvement into the second half leading to a like for like stock reduction first half versus second half.

There has been no marked change in our ability to source finance for customers and we have seen income from this source remain in line with overall sales volumes although credit underwriting terms have tightened. 

In the UK we operate 332 franchised points of which 160 are prestige, branded as Stratstone, 151 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:

Revenues were down by 9.7% year on year and down 7.8% on a like for like basis. Units sold within our Stratstone franchises are up 0.9% on last year and on a like for like basis they were up 0.4%. The reduction in overall revenue is principally due to lower price bracket cars being sold. Margins have improved mainly due to the impact of disposed businesses. Our focus going forward is to force down the operating costs per unit in order to retain more of the improved gross margin.

Like for like aftersales margins are holding up very well at 45.7% in the car business and 34.1% in the truck business. The aftersales business has produced just under 50% of the gross profits of the division which is similar to last year.  

Evans Halshaw is the leading volume car retailer in the UK and its results for the first six months of this year are as follows:

Total sales revenues were down 6.0% with like for like revenues falling by 5.0%. Total vehicle sales volumes were down 4.0% and down 5.7% on a like for like basis. The Dixons dealerships acquired in the second half of 2007 account for 7,842 increase in total vehicle volume. Gross profits have declined by £21.2 million year on year whereas underlying operating profits have declined by only £9.0 million. This is due to action taken to reduce direct sales costs.

Aftersales has held up well and in June we launched a service package designed to retain servicing work in our workshops for customers with older vehicles. Our update to the used car sales process together with related marketing cost savings has resulted in used car gross margin, after marketing costs, remaining at a similar level to last half year.

USA national market for new cars in the first half of 2008 was down by 10% to 7.4 million registrations. We represent a small number of brands in California: Jaguar, Land Rover and Aston Martin. Nationally, Jaguar sales were in line with last year, with the launch of the Jaguar XF contributing 52% of the overall Jaguar volumes and offsetting the reduction in other model sales.

The results for the first half of 2008 are summarised as follows:

Revenue is down due to two principal factors: in January 2008 we disposed of the loss making Saab store which in the first half of 2007 contributed sales of £7.3 million. Land Rover volumes were also down year on year. We have been able to mitigate this by an increase in revenue from the used vehicle sales operation following the implementation of our used car sales programme.  Gross margins have weakened slightly as a result of the shift in sales mix towards used vehicles.

Overall operating profits are down as a result of the decline in new Land Rover sales combined with the effect of annual rent increases in our Los Angeles stores and operating losses generated in our Saturn store.  The Saturn store was closed at the end of July.

Support Services provides a broad range of services both to the Pendragon group and to external customers. The services are provided by a number of specialist businesses which consist of contract hire and leasing, dealership management software systems and wholesale parts distribution.

The results for the first half of 2008 are summarised as follows:

Within the results is a particularly pleasing performance from our contract hire and leasing business which returned an operating profit improvement of £1.6 million to £6.2 million for the first six months. The business has improved its operating margin from 15.9% to 26.6% as a consequence of the prudent approach it has taken to setting residual values over recent years. The cautious approach to residual value setting has, however, led to a reduction in the fleet size to 16,192 from 17,589 at the beginning of the year.  

Pinewood Technologies, our computer software company, continues to enjoy strong demand for its Pinnacle DMS solution. The roll out to the Pendragon Group car dealerships has been completed, allowing the group to benefit from a single DMS platform. Pinewood made £3.6 million operating profit in the first half of 2008 compared to £4.0 million in the first half of 2007. 

Finance

We have been focused in the first half of 2008 on maintaining strong control over our balance sheet and financing in these difficult trading conditions. New car stocks increased towards the end of the second quarter as demand continued to slow. Steps have been taken to bring this back in line in the second half. More importantly we have reduced used and demonstrator stocks by £25.2 million versus 2007 and increased used stock turn since the beginning of the year. Trade debtors are down by £14.4 million compared to June 2007. 

Net borrowings have reduced to £287.6 million from the year end figure of £332.0 million which gives debt to equity gearing of 85%.  Operating cash inflow for the first six months was £94.4 million, which compares with £128.7 million generated in 2007.  The operating cash flow includes a reduction in working capital investment of £18.3 million (2007: £37.2 million). 

Net investment in property, plant and equipment for the six months was £22.4 million (2007: £20.8 million). This includes a £2.1 million investment in a new property in the USA, refurbishments, a net increase in plant and machinery, and the contract hire fleet and service loan cars. Proceeds from property disposals were £5.3 million (2007: £25.5 million). In addition to this, £3.1 million was raised from business disposals (2007: £17.9 million).

Risks and uncertainties

We set out in our 2007 annual report the risk factors we believed could cause our actual future group results to differ materially from expected results. The risks identified were: business conditions and the general economy, franchise agreements, vehicle manufacturer dependencies, liquidity and financing, regulatory compliance risk, competition, reliance on certain members of management staff, failure of information systems, reliance on the use of significant estimates, internal control risks and health and safety risks. These were set out on pages 15-16, 21-26 and 28 of the 2007 annual report.  The Board has recently reviewed the risk factors and confirms that they should remain valid for the rest of the year. For the remainder of the year the Board considers the main areas of risk and uncertainty that could impact profitability to be the general economy and consumer demand in particular.

During the period, following a change in case law, the group received a refund of VAT amounting to £14.9 million including interest.  In common with other companies in the industry the group is in discussion with HM Revenue and Customs over a number of issues arising from recent developments in case law, the treatment of partial exemption within our finance and insurance operations and the VAT treatment of sales of vehicles to certain disabled customers. Additional amounts of VAT receivable and payable may be recognised in future periods in relation to these outstanding matters and, although these amounts, if any, could potentially be significant it is not possible at present to quantify them.  Accordingly, no further gain or loss has been included in these interim financial statements.

Current Trading and Prospects

In our pre close statement we said that markets would be difficult to predict for the remainder of this year. Since making this statement we have seen unexpected and significant downward movements in wholesale prices for used cars in June through to August due to falling retailer and consumer confidence in the UK. We continue to believe, like most commentators, that trading conditions in the UK will continue to be difficult for the remainder of this year and throughout 2009.

As a consequence we have reacted quickly taking action to reduce our operating costs in line with current levels of activity in the market. This should enable the year to end in profit, albeit significantly down on last year, and be cash generative to maintain borrowings at acceptable levels. The full effect of the actions we have taken on cost reductions will come through in 2009 when we should see improvements in margins and profitability subject to no further significant downturn in our markets.

TREVOR FINN

Chief Executive

28 August 2008

  Condensed Consolidated Income Statement

Interim Results

for the six months ended 30 June 2008

All amounts are unaudited

  Condensed Consolidated Balance Sheet