Preliminary Results 2004

Inchcape PLC 28 February 2005 28 February 2005 Inchcape plc preliminary results Strong operating performance underpins another set of excellent results Inchcape plc, the international automotive services group, announces its results for the full year to 31 December 2004. Financial highlights: • Operating profit, before goodwill amortisation and exceptional items, up by 25.1% at £176.2m • Headline profit before tax* up 26.7% at £172.0m • Operating profit up 8.3% at £163.1m • Profit before tax down £13.0m at £155.3m mainly due to the £37.5m exceptional VAT recovery in 2003 • Proposed final dividend up 34.6% at 35.0p per share, resulting in a total dividend of 50.0p per share up 31.6% • dividend has more than doubled since 2000 • Strong operating cash flow at £177.2m • Share buy back of £65.0m announced * Before goodwill amortisation and exceptional items Operational highlights: • Encouraging progress made with UK Retail margins, operating profit up 32.0% at £16.9m • Toyota market leadership maintained in Greece, Hong Kong and Singapore • Subaru Australia achieves year on year volume growth for ninth successive year • Eastern Europe offers further exciting growth prospects • exclusive Importer and Retailer for Mazda in Estonia • two BMW dealerships opened in Poland • further developments to come Peter Johnson, Group Chief Executive of Inchcape plc, commented: 'The Group has again performed at a very high level in 2004, with continued profit growth and further strong cash generation. 'Our strategic growth plans remain broadly based and encompass UK Retail as well as further developments in Eastern Europe. We also have expansion programmes in place for Greece and Australia, and we will continue our research into emerging markets such as China. 'As a result of the consistent strong operational performance in recent years, and the receipt of significant one off cash contributions, the strength of our balance sheet is such that we have capital surplus to that required to fund our strategic growth plans. We therefore intend to return £65m to our shareholders through an on market share buy back programme. 'Even after this we will still have substantial financial capacity, which will enable us to deliver our strategy in 2005 and beyond.' Financial summary: £m 2004 2003 Turnover 4,170.3 3,855.2 Operating profit, before goodwill amortisation and exceptional items 176.2 140.8 Goodwill amortisation (5.5) (5.5) Goodwill impairment (9.4) - VAT exceptional income 1.8 15.3 -------------- -------------- Operating profit 163.1 150.6 Interest** - 17.2 Other exceptional items (7.8) 0.5 -------------- -------------- Profit before tax 155.3 168.3 -------------- -------------- Headline profit before tax* 172.0 135.8 Headline earnings per share* 161.4p 132.4p Basic earnings per share 139.4p 164.8p * Before goodwill amortisation and exceptional items ** Includes income of £4.2m in 2004 and £22.2m in 2003 relating to the VAT exceptional Planned Board changes: The Board has announced today that Sir John Egan, Non-executive Chairman, intends to step down from that role by the AGM in May 2006 and it is planned that, at that time, Peter Johnson will succeed Sir John as Non-executive Chairman. A full explanation of these planned Board changes is contained in a separate statement issued today. Notes to editors A copy of the preliminary results, for the full year to 31 December 2004, follows this release. High resolution photographs are available for the media to view and download free of charge at www.vismedia.co.uk For further information, please contact: Group Communications, Inchcape plc 020 7546 0022 Hogarth Partnership Limited (John Olsen/Barnaby Fry) 020 7357 9477 Inchcape, an international automotive services group, provides quality representation for its manufacturer partners, a choice of channels to market and products for its retail customers and a range of business services for its corporate customers. Operations are focused on the UK, Greece, Belgium, Australia, Hong Kong and Singapore. Inchcape's activities include exclusive Import, Distribution and Retail, Business Services, automotive E-commerce and Financial Services. Our key manufacturer partners are Toyota/Lexus, Subaru, BMW, the Premier Automotive Group of Ford, Mazda, Mercedes-Benz and Volkswagen. For further information, visit us at www.inchcape.com Inchcape plc Preliminary results for the full year to 31 December 2004 Results overview A strong operating performance from all of our key markets underpins yet another set of excellent results. Operating profit before goodwill amortisation and exceptional items (see note 1b) rose 25.1% in the year, and has risen by an average 23.4% per annum since 2000, our first full year as a purely international automotive services group. Operating cash flow in the year was £177.2m representing some 105.2% of subsidiaries' operating profit before goodwill amortisation and exceptional items. Cash generation is a key performance indicator for the Group and operating cash flow has averaged over £150.0m per year in the period 2000 to 2004. Operationally we have again performed very well retaining market leadership in Hong Kong, Singapore and Greece with Toyota. In Australia, Subaru achieved year on year growth in volumes for the ninth consecutive year. In the UK our Retail business has significantly increased its operating margin in what was a more difficult market than 2003. Acquisitions and disposals In the UK, dealer consolidation is continuing and there are many quality businesses that would fit well within our portfolio. We continue to balance strategic fit, price, value and timing in our discussions with vendors. In 2004 we acquired five Mercedes-Benz dealerships in the East Midlands, which adjoin our existing Mercedes-Benz market area. This combination has created the largest independent Mercedes-Benz territory in the country. We have also increased our Toyota and Volkswagen representation in the year. Outside the UK we are expanding our footprint in the fast growing markets of Eastern Europe. In Estonia we acquired two Mazda dealerships and as a result we are now the exclusive Importer and Retailer for Mazda in this 'city state' market. Over 1,260 Mazda vehicles were sold in Estonia in 2004 and the brand achieved a market share of 7.7%. We are also investing in new start up businesses and during the year entered the Polish market, where we set up BMW/MINI dealerships in Warsaw and Wroclaw. Total spend on acquisitions was £25.1m of which £20.5m related to UK Retail. Cash inflow in relation to disposals totalled £23.7m of which £19.3m related to the sale of two 40.0% associates: MCL Group Limited (MCL) and Automotive Group Limited (AGL). These associates were not core businesses. Financial performance Turnover of £4.2bn was up by 8.2% over 2003. Operating profit before goodwill amortisation and exceptional items was £176.2m, which is 25.1% higher than 2003. After adjusting for the VAT recovery, which was £13.5m higher in 2003 than 2004, and goodwill, including the £9.4m impairment charge relating to Inchcape Automotive, total operating profit was £163.1m. This is 8.3% ahead of 2003. Headline profit before tax was up 26.7% on 2003 at £172.0m despite an adverse currency effect of c. £9.0m. The increase on 2003 would have been 33.3% at constant exchange rates. Headline earnings per share rose by 21.9% to 161.4p. Profit before tax of £155.3m was impacted by: the VAT exceptional income of £6.0m, the £9.4m goodwill impairment charge and other net exceptional losses of £7.8m. These exceptional losses mainly related to the sale of our MCL and AGL shareholdings and the exit from the Ferrari/Maserati Distribution businesses in the UK and Belgium. These were partially offset by the release of litigation provisions relating to non-motors disposals. Net cash movement in the year was £74.7m including £37.0m in relation to the VAT recovery. As a result the year end net cash position improved to £153.8m. Balance sheet strength Our businesses have consistently generated high levels of free cash flows enabling us to continue the investment in our core markets. This has helped drive the strong earnings growth, which has been delivered in recent years. It has also enabled increasing returns to be given to shareholders. Dividends have more than doubled over the last five years and with a £45.0m share buy back being completed in 2001, over £160.0m has been returned to shareholders since mid 1999. A large amount of cash is generated in our international markets. This has resulted in a mismatch between cash held in those markets and debt in the UK, due to the difficulty of repatriating the cash in a fiscally efficient manner. This had an adverse effect on the Group's interest charge due to interest rate differentials. During late 2004 we permanently repatriated cash of c. £135.0m to the UK and created the ability to repatriate further amounts over the coming years. The associated tax cost is not material but the impact on the interest charge is positive and significant. The cash position has also been strengthened this year by the sale of two UK associates and the VAT recovery of some £37.0m. In 2005 our cash flow has also benefited from the £6.0m VAT claim recognised in 2004. As a result of all of this, we are extremely well placed to fund our strategic growth plans. These remain broadly based and encompass further expansion in UK Retail as we aim to represent between 5.0% to 10.0% of our chosen partners' national sales volumes. Eastern Europe is also a major area of focus as we look to take advantage of fast growth rates in these developing markets. Discussions continue with several manufacturers regarding further investments in a number of countries in the region. Our experience in the Balkans illustrates the benefits of establishing an early footprint in those markets where we can invest in retail in the key capital cities. We also have plans for further expansion of our Retail activities in Greece and Australia and remain committed to keeping a watching brief on markets such as China. Given the strength of our cash position, which has benefited from the VAT recoveries and the disposal of UK associates, we have identified that we have funds available, which are not required for investment purposes. We therefore intend to return the approximate value of these one offs, £65.0m, to our shareholders through a share buy back programme, which may include buying shares into treasury. The Board has the powers to purchase up to 10.0% of the Company's capital and we intend to renew that authority at the forthcoming Annual General Meeting (AGM). This return of surplus capital will still leave us with substantial financial capacity, which will enable us to deliver our stated strategy. Any additional return of capital would only arise if further funds became available, which are not required for investment purposes. Dividend The Board recommends the payment of a final ordinary dividend for the year of 35.0p (2003 - 26.0p). This gives a total dividend for the year of 50.0p, which is some 31.6% above the 2003 dividend of 38.0p. This substantial increase means that the dividend has risen by 127.3% since 2000, a clear demonstration of the Board's progressive dividend policy. However, our record of significant dividend growth has not resulted in low levels of dividend cover. This year's cover is 3.2 times Headline earnings per share (2003 - 3.5 times), a more than comfortable level, which leaves us well placed to continue our progressive policy. Subject to approval at the AGM on 12 May 2005, the final dividend will be paid on 16 June 2005 to shareholders on the register on 20 May 2005. Board changes I am delighted to welcome Will Samuel and David Scotland to the Board. Will, who joined the Board on 26 January 2005, having worked for Schroders for over twenty years, brings a wealth of city experience with him. David, who is Excetuive Director and President - World Wines of Allied Domecq PLC, has broad international experience, which includes managing operations in Eastern Europe. David joined the Board on 24 February 2005. Trevor Taylor retired from the Board at the end of 2004. Trevor has made an enormous contribution to Inchcape since he joined the Group in 1987 as Deputy Managing Director of Toyota (GB). Simon Robertson will be retiring from the Board at our AGM in May 2005. Simon has added immense value to the Group since joining the Board in May 1996. During his time on the Board the Group has undergone significant change and Simon's wise counsel during that process has been invaluable. Both Trevor and Simon will be missed. However I am very pleased that they have been replaced by people of the quality of Will and David. We also announced today that I intend to step down from the Inchcape Board by the AGM in May 2006 and it is planned that Peter Johnson will succeed me as Non-executive Chairman. The Board believes that this is the right decision for all our stakeholders and, indeed as part of our planning process, we consulted with a number of our largest institutional shareholders and manufacturer partners, and they were all supportive. The search for Peter's successor has now commenced and we will announce the appointment at the appropriate time. Operational review Operating profit before goodwill amortisation and exceptional items has been defined as trading profit throughout the Operational review including the summary below. £m 2004 2003 Operating Goodwill Trading Operating Goodwill Trading profit amortisation profit profit amortisation profit United Kingdom 23.1 4.0 27.1 17.1 3.8 20.9 Greece/Belgium 34.2 0.1 34.3 32.3 0.4 32.7 Australia/ New Zealand 27.1 0.5 27.6 21.2 0.5 21.7 Hong Kong 29.8 - 29.8 22.6 - 22.6 Singapore/Brunei 55.4 0.7 56.1 46.9 0.8 47.7 Other 18.7 0.2 18.9 12.8 - 12.8 Central costs (17.6) - (17.6) (17.6) - (17.6) ________________________________________________________________ Total Group 170.7 5.5 176.2 135.3 5.5 140.8 ___________ ___________ Operating exceptional items (7.6) - 15.3 - ___________ _________________ _______ Operating profit 163.1 176.2 150.6 140.8 ___________ _________________ _______ United Kingdom The new car market ended the year slightly below the record achieved in 2003. Manufacturer registrations for the franchises represented by our UK Retail operations fell by 2.4% in the year. However our UK Retail dealerships achieved a 7.4% increase in new unit sales on a like for like basis. This was due to strong performances in particular from BMW/MINI, Jaguar and Vauxhall. UK Retail trading profits and related Financial Services profits (included within Financial Services), before stock holding interest, rose by 31.2% to £22.7m. The resultant trading profit margin of 2.1% is significantly higher than the 1.8% achieved in 2003, and moves us closer to our initial target of 2.5%. This reflects our success at integrating new dealerships and achieving organic growth from existing dealerships through improved business processes. On a like for like basis dealership trading profits increased by 14.6%, mainly due to strong performances from BMW/MINI, Volkswagen and Toyota/Lexus. The growth was achieved through improved performances across all areas of the business. New car sales were up and there was also a 4.7% increase in used units, a 4.0% rise in service hours sold, increased finance and insurance income per unit, and improved finance penetration. The integration of the BMW/MINI dealerships acquired in 2003 is going well and the benefits of the new larger contiguous territory and improved processes are being seen. Brooklands, the new pre-delivery inspection centre serving our dealerships to the south of London, opened in the year and will start to have a positive impact in 2005. The Mercedes-Benz dealerships acquired in June 2004 are performing well, in what has proven to be a difficult year for this marque, and have contributed positively in their first six months. Inchcape Automotive has experienced a further difficult year. The car rental companies, which provide a substantial portion of our volumes, have experienced significant operational volatility causing inefficiencies within our business. This, allied to £2.1m of one off costs, has produced a disappointing result for the year. New management, business processes, a broadened customer base and revised contracts with our major customers augur well for the future profitability of this business. At Inchcape Fleet Solutions the number of fleet management vehicles under contract has grown by over 37.0% during the year. This, coupled with improved disposal margins from contract hire vehicles, has resulted in a significant growth in profitability during the year. On 1 October 2004, the Ferrari/Maserati UK import and distribution business was transferred to Ferrari Maserati UK Ltd, a Ferrari Maserati Group company. We are continuing to manage the spare parts and classic parts businesses, and retail Ferrari/Maserati from our three dealerships in the south east of England. Increased distribution volumes and reduced expenses resulted in an increase in trading profits prior to disposal. New and used vehicle sales in our Retail business increased in 2004 by 44.5%, mainly due to the acquisition of the St Albans and Sevenoaks dealerships during 2003. Greece/Belgium In Greece we achieved a 20.6% increase in trading profit after adjusting for the £2.5m profit realised on the sale of our Greek Financial Services loan book in 2003. Overall the market grew 13.6% on the prior year stimulated in part by the Olympics. The supply constraints experienced by our Toyota Distribution business in the first half of the year were also felt in the second half although they had eased by year end. As a result market share fell slightly to 9.6%. However volumes rose 7.1% and we retained overall market leadership. Increased volumes, a richer sales mix, coupled with a lower marketing cost per unit drove an increase in trading margins and profits. We continue to invest in our Athens and Salonica Retail operations and opened two new Toyota dealerships in Athens during the year. Our operations in the Balkans continue to progress in the high growth markets in which they operate. Volumes grew by over 48.5% and trading profits rose by over £2.0m. In Romania the market increased by 39.1%, whilst we achieved growth of 64.9% in unit sales, with Toyota's market share increasing to 3.5%. In Bulgaria, where Toyota leads the passenger car market, we achieved a market share of 8.6% in a market up 44.7%. We continue to invest in these markets, particularly Romania where we plan to open two additional dealerships in Bucharest within the next couple of years. In Belgium trading profits fell slightly in a market which grew by 6.4% on the prior year, primarily as a result of the biennial Brussels Motor Show. Toyota supply constraints, which were more severe for diesel products, affected our market share, which fell to 4.9% from 5.1% last year. Lexus, whilst still an emerging brand in market share terms, increased unit sales by over 44.0% and the future product developments are very encouraging. Australia/New Zealand Our Subaru business in Australia benefited from the successful launch of the new Liberty and Outback models in October 2003 and the business established a new annual sales record of over 33,600 units in 2004. Subaru achieved year on year growth in volumes for the ninth consecutive year with an increase of 12.7% on 2003. Sales records were achieved for the Forester, Impreza and Outback models helping the marque to achieve a record full year market share of over 3.5%. This growth in units coupled with improved margins drove a significant year on year increase in trading profits. Our Melbourne Retail business continued to perform well and retailed over 6,000 new and used vehicles, a growth of 23.0% on the prior year. We also opened a new satellite facility in 2004, which increased our sales and service capacity. The growth in volumes, associated finance income and increased aftersales activities, resulted in a 28.6% increase in trading profit, and a trading margin of almost 4.0%. Our Sydney Retail business experienced a year of change in 2004. As a result of the continuing weak national sales volumes for Jaguar, Volvo and Volkswagen we re-engineered our network strategy and exited two underperforming dealerships. We also extended our Retail presence with Subaru, investing in two new dealerships. Whilst Sydney Retail was loss making in 2004, the restructuring significantly improved performance and in the last quarter it broke even. Towards the end of the year our Business Services operation, AutoNexus, won a three year parts warehousing and logistics contract for Volkswagen and Audi. Hong Kong Our businesses in Hong Kong reported a 31.9% growth in trading profit, despite a currency translation loss of £3.4m arising from the weakening Hong Kong dollar. Excluding this, underlying trading profits increased by 46.9%. Trading profit margins grew to 12.1%. Consumer confidence is now returning after the recent weak economic conditions and the impact of SARS in 2003. The automotive market is starting to recover, with the luxury segment improving at a faster rate than the total market. The market, excluding taxis, grew by 23.3% over last year but remains 3.9% down on 2002. Crown Motors, our Toyota/Lexus business, increased its total market share to 35.5% and once again retained market leadership in a highly competitive market. The success of the newly launched Alphard model and a strong performance from Lexus led to a richer mix of sales. This, together with the higher volumes, increased aftersales activity and lower than expected warranty costs, drove an improvement in trading margins and profits. The launch of the new Mazda3 in January 2004 helped our Mazda business to achieve an encouraging increase in units sold and a 3.6% market share. Inchroy, our Financial Services joint venture, achieved a 6.5% increase in trading profit at constant exchange rates, driven by the recovery in the economy which more than compensated for the effects of a lower interest rate spread. Singapore/Brunei Trading profits from our Singapore and Brunei businesses increased by 17.6%. However, after adjusting for the currency translation loss of £4.5m arising from the weakening Singapore dollar, underlying trading profits increased by 27.0%. Once again our Toyota/Lexus business in Singapore drove the increased trading profits in this region. Unit sales rose by 28.5%, helped by a market which increased 24.9%. The market continues to benefit from the fiscal incentive encouraging people to scrap or export their cars before the expiry of the Certificate of Entitlement, which lasts for ten years. Market share for Toyota/Lexus increased to 30.9% in 2004. We retained market leadership for the third consecutive year, and were once again awarded the Toyota Triple Crown. Recognising the recent growth in the Toyota vehicle parc we invested in our aftersales activities, either relocating or renovating our existing facilities to increase capacity and improve efficiency. Further investments are planned for 2005. Unit sales, associated finance income and aftersales profits all rose resulting in an increase in trading profits despite pressure on new vehicle margins. The trading profit margin increased to 8.2%. In Brunei, a 10.8% rise in unit sales plus increased income from aftersales drove a 14.1% increase in trading profits. Other The improvement in trading profit was mainly driven by our French and Latin American operations. Improved management and business processes coupled with the launch of new diesel product have supported a return to profitability in our French Retail business, which represents Jaguar, Land Rover, Volkswagen and Audi. New vehicle volumes in BMW Chile increased 73.9%, helped by a higher market as a result of a reduction in the luxury car tax. This led to a significant improvement in trading margins and profits. Our operations in Finland continued to perform well, despite a softening in the market after the strong start to the year. Mazda market share rose to 3.6%. In Guam we increased trading profits and market share. Central costs In 2004 we recovered a net £0.6m relating to the settlement of various litigation issues. Excluding this recovery the underlying costs of £18.2m are £1.1m higher than the equivalent underlying figure of £17.1m for 2003. This increase is due to higher staff, pension and recruitment costs. Current trading prospects The UK market is forecast to be slightly lower than 2004 but still a healthy 2.4 million units. In UK Retail, however, the focus is as much on margin as volumes. Whilst there was margin pressure in mid to late 2004, due to over supply, UK Retail still managed to improve margins over 2003. In 2005 we are targeting further improvements in both margins and volumes. Inchcape Fleet Solutions should continue to grow its profitability whilst Inchcape Automotive will recover from its poor year in 2004. In Greece and Belgium the markets are expected to be similar to last year. Better product availability and a slightly broader product range should help our performance in both markets. The Balkans is expected to continue showing strong growth. In Australia the car market is expected to be similar in size to 2004, as is Subaru's market share. Retail operations in Melbourne should see continued growth and there will be a significant profit recovery in Sydney Retail. The Hong Kong market is again expected to grow as it recovers from 2003, which was the worst car market in over twenty years. This should result in improved profitability. In Singapore it is expected that the market will be strong again in 2005, albeit some 10.0% lower than the exceptional 2004. Aftersales revenues and profits will continue to benefit from the expanding Toyota car parc. The interest charge will reflect the cash repatriation that took place in 2004 and the fact that more funds should be remitted during 2005. The effect on the charge will be positive and significant, and will only be partially offset by the impact of the share buy back programme. The 2005 results will be reported under International Financial Reporting Standards. Whilst work is still continuing on some aspects of how the standards will be interpreted, we currently expect that the effect on earnings will be broadly neutral provided we achieve hedge effectiveness for our foreign exchange transactions. If we do not, IAS 39 will introduce some volatility into our profit and loss account. However the underlying economics of the business and the cash flows will not change. Net assets, however, will be reduced mainly due to the inclusion of the net pension deficit on the balance sheet. The Group has again performed at a very high level in 2004. Our underlying performance will be strengthened as we invest further by taking advantage of the significant opportunities available to us. In 2005 we are well placed to continue with our record of profit growth and strong cash generation. CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2004 Before exceptional Exceptional items items Total 2004 2004 2004 £m £m £m Turnover including share of joint ventures and associates 4,170.3 - 4,170.3 Less: - share of joint ventures (16.9) - (16.9) - share of associates (30.7) - (30.7) Group turnover 4,122.7 - 4,122.7 Cost of sales (3,542.8) - (3,542.8) Gross profit 579.9 - 579.9 Net operating expenses (417.0) (7.6) (424.6) Operating profit 162.9 (7.6) 155.3 Share of profits of joint ventures 7.1 - 7.1 Share of profits of associates 0.7 - 0.7 Total operating profit 170.7 (7.6) 163.1 Net profit on sale of properties and investments - 1.2 1.2 Net loss on sale and termination of operations - (9.0) (9.0) Profit on ordinary activities before interest and taxation 170.7 (15.4) 155.3 Net interest (4.2) 4.2 - Profit on ordinary activities before taxation 166.5 (11.2) 155.3 Tax on profit on ordinary activities (42.3) (0.5) (42.8) Profit on ordinary activities after taxation 124.2 (11.7) 112.5 Minority interests (3.2) - (3.2) Profit for the financial year 121.0 (11.7) 109.3 Dividends (39.5) - (39.5) Retained profit for the financial year 81.5 (11.7) 69.8 Profit before tax (£m) 155.3 Basic earnings per share (pence) 139.4p Diluted earnings per share (pence) 137.6p Headline (before goodwill amortisation £5.5m (2003 - £5.5m) and exceptional items): - profit before tax (£m) 172.0 - earnings per share (pence) 161.4p Before exceptional Exceptional items items Total 2003 2003 2003 £m £m £m Turnover including share of joint ventures and associates 3,855.2 - 3,855.2 Less: - share of joint ventures (20.0) - (20.0) - share of associates (42.0) - (42.0) Group turnover 3,793.2 - 3,793.2 Cost of sales (3,223.3) - (3,223.3) Gross profit 569.9 - 569.9 Net operating expenses (445.5) 15.3 (430.2) Operating profit 124.4 15.3 139.7 Share of profits of joint ventures 10.0 - 10.0 Share of profits of associates 0.9 - 0.9 Total operating profit 135.3 15.3 150.6 Net profit on sale of properties and investments - 0.9 0.9 Net loss on sale and termination of operations - (0.4) (0.4) Profit on ordinary activities before interest and taxation 135.3 15.8 151.1 Net interest (5.0) 22.2 17.2 Profit on ordinary activities before taxation 130.3 38.0 168.3 Tax on profit on ordinary activities (31.8) (7.5) (39.3) Profit on ordinary activities after taxation 98.5 30.5 129.0 Minority interests (2.0) - (2.0) Profit for the financial year 96.5 30.5 127.0 Dividends (29.6) - (29.6) Retained profit for the financial year 66.9 30.5 97.4 Profit before tax (£m) 168.3 Basic earnings per share (pence) 164.8p Diluted earnings per share (pence) 162.1p Headline (before goodwill amortisation £5.5m (2003 - £5.5m) and exceptional items): - profit before tax (£m) 135.8 - earnings per share (pence) 132.4p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2003 £m £m Profit for the financial year 109.3 127.0 Effect of foreign exchange rate changes: - results for the year (0.7) (2.9) - foreign currency net investments: subsidiaries (12.3) (4.6) joint ventures and associates (2.3) (2.9) Total recognised gains for the financial year 94.0 116.6 NOTE OF HISTORICAL COST PROFITS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2003 £m £m Reported profit on ordinary activities before taxation 155.3 168.3 Difference between the historical cost and the actual depreciation charge 0.1 0.6 Historical cost profit on ordinary activities before taxation 155.4 168.9 Historical cost profit after taxation, minority interests and dividends 69.9 98.0 CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2004 2004 2003 restated £m £m Fixed assets: Intangible assets 67.6 60.9 Tangible assets 281.7 272.9 Investments: - joint ventures: share of gross assets 294.0 257.1 share of gross liabilities (256.2) (216.7) share of net assets 37.8 40.4 - associates 3.2 26.2 - other investments 1.5 0.8 391.8 401.2 Current assets: Stocks 643.6 597.8 Debtors: - amounts due within one year 197.3 235.0 - amounts due after more than one year 18.2 11.3 Investments 13.1 13.8 Cash at bank and in hand 171.2 102.9 1,043.4 960.8 Creditors - amounts falling due within one year: Borrowings (15.6) (23.2) Other (739.3) (709.1) (754.9) (732.3) Net current assets 288.5 228.5 Total assets less current liabilities 680.3 629.7 Creditors - amounts falling due after more than one year: Borrowings (1.8) (0.6) Other (45.0) (56.5) (46.8) (57.1) Provisions for liabilities and charges (82.3) (87.0) Net assets 551.2 485.6 Capital and reserves: Called-up share capital 119.5 118.4 Share premium account 110.8 109.1 Revaluation reserve 28.0 29.1 Capital redemption reserve 16.4 16.4 Profit and loss account 268.8 206.0 Equity shareholders' funds 543.5 479.0 Minority interests 7.7 6.6 551.2 485.6 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS 2004 2003 restated £m £m Operating profit 155.3 139.7 Amortisation 5.5 5.2 Impairment of goodwill 9.4 - Depreciation 27.3 26.6 (Profit) loss on sale of tangible fixed assets other than property (0.6) 1.7 Increase in stocks (28.9) (75.2) Decrease (increase) in trade debtors 10.1 (4.0) (Decrease) increase in trade creditors (12.7) 78.9 Payments in respect of termination of operations (1.5) (3.1) Other items* 13.3 (18.1) Net cash inflow from operating activities 177.2 151.7 CONSOLIDATED CASH FLOW STATEMENT Net cash inflow from operating activities 177.2 151.7 Dividends from joint ventures 4.6 4.3 Dividends from associates 0.3 1.9 Returns on investments and servicing of finance* 15.5 (1.6) Taxation (36.9) (28.5) Capital expenditure and financial investment (34.8) (33.6) 125.9 94.2 Net cash outflow from acquisitions and disposals (1.4) (0.5) Equity dividends paid (32.2) (25.4) Net cash inflow before management of liquid resources and financing 92.3 68.3 Net cash (outflow) inflow from the management of liquid resources (44.1) 6.7 Net cash outflow from financing (15.4) (64.7) Increase in net cash 32.8 10.3 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Increase in net cash 32.8 10.3 Net cash outflow from decrease in debt and lease financing 18.3 67.2 Net cash outflow (inflow)from the management of liquid resources 44.1 (6.7) Change in net cash resulting from cash flows 95.2 70.8 Effect of foreign exchange rate changes on cash and debt (13.1) (8.3) Net loans and finance leases relating to acquisitions (7.4) - Movement in net funds 74.7 62.5 Opening net funds 79.1 16.6 Closing net funds 153.8 79.1 * Net cash inflows include £37.0m for the VAT receipt (note 3), of which £15.5m is reported within Other items and £21.5m (2003 - £1.4m) within Returns on investments and servicing of finance. In addition £(1.8)m (2003 - £(14.3)m) of non-cash is reported within Other items in respect of the VAT recovery. NOTES 1 SEGMENTAL ANALYSIS Group subsidiaries Share of joint ventures 2004 2003 2004 2003 a Turnover £m £m £m £m (i) By geographical market: UK 1,331.6 1,244.8 5.2 7.7 Greece/Belgium 879.3 820.5 1.9 2.9 Australia/New Zealand 597.6 529.3 - - Hong Kong 237.2 224.3 9.8 9.4 Singapore/Brunei 689.0 614.3 - - Other 388.0 360.0 - - 4,122.7 3,793.2 16.9 20.0 Share of associates Total 2004 2003 2004 2003 a Turnover £m £m £m £m (i) By geographical market: UK 28.6 40.0 1,365.4 1,292.5 Greece/Belgium 2.1 2.0 883.3 825.4 Australia/New Zealand - - 597.6 529.3 Hong Kong - - 247.0 233.7 Singapore/Brunei - - 689.0 614.3 Other - - 388.0 360.0 30.7 42.0 4,170.3 3,855.2 Group subsidiaries Share of joint ventures 2004 2003 2004 2003 a Turnover £m £m £m £m (ii) By activity: Import, Distribution and Retail 2,964.3 2,753.5 0.8 1.1 UK Retail 1,104.9 989.5 - - Financial Services 53.4 50.0 16.1 18.9 E-commerce 0.1 0.2 - - 4,122.7 3,793.2 16.9 20.0 Share of associates Total 2004 2003 2004 2003 a Turnover £m £m £m £m (ii) By activity: Import, Distribution and Retail 26.1 38.0 2,991.2 2,792.6 UK Retail - - 1,104.9 989.5 Financial Services 4.6 4.0 74.1 72.9 E-commerce - - 0.1 0.2 30.7 42.0 4,170.3 3,855.2 Geographical analysis of turnover is by origin and is not significantly different from turnover by destination. Turnover between segments is not material. Group subsidiaries Share of joint ventures 2004 2003 2004 2003 b Total operating profit £m £m £m £m (i) By geographical market: UK before exceptional item 21.2 15.5 1.8 1.2 Goodwill impairment (note 3) (9.4) - - - UK 11.8 15.5 1.8 1.2 Greece/Belgium 32.7 27.6 0.9 4.2 Australia/New Zealand 27.1 21.2 - - Hong Kong 25.4 18.0 4.4 4.6 Singapore/Brunei 55.4 46.9 - - Other 18.7 12.8 - - 171.1 142.0 7.1 10.0 Central costs (17.6) (17.6) - - VAT recovery, Central (note 3) 1.8 15.3 - - 155.3 139.7 7.1 10.0 Share of associates Total 2004 2003 2004 2003 b Total operating profit £m £m £m £m (i) By geographical market: UK before exceptional item 0.1 0.4 23.1 17.1 Goodwill impairment (note 3) - - (9.4) - UK 0.1 0.4 13.7 17.1 Greece/Belgium 0.6 0.5 34.2 32.3 Australia/New Zealand - - 27.1 21.2 Hong Kong - - 29.8 22.6 Singapore/Brunei - - 55.4 46.9 Other - - 18.7 12.8 0.7 0.9 178.9 152.9 Central costs - - (17.6) (17.6) VAT recovery, Central (note 3) - - 1.8 15.3 0.7 0.9 163.1 150.6 Group subsidiaries Share of joint ventures 2004 2003 2004 2003 b Total operating profit £m £m £m £m (ii) By activity: Import, Distribution and Retail before exceptional item 155.6 125.0 0.1 (0.7) Goodwill impairment (note 3) (9.4) - - - Import, Distribution and Retail 146.2 125.0 0.1 (0.7) UK Retail 16.9 12.8 - - Financial Services 7.8 4.9 7.0 10.7 E-commerce 0.2 (0.7) - - 171.1 142.0 7.1 10.0 Central costs (17.6) (17.6) - - VAT recovery, Central (note 3) 1.8 15.3 - - 155.3 139.7 7.1 10.0 Share of associates Total 2004 2003 2004 2003 b Total operating profit £m £m £m £m (ii) By activity: Import, Distribution and Retail before exceptional item (0.8) (0.9) 154.9 123.4 Goodwill impairment (note 3) - - (9.4) - Import, Distribution and Retail (0.8) (0.9) 145.5 123.4 UK Retail - - 16.9 12.8 Financial Services 1.5 1.8 16.3 17.4 E-commerce - - 0.2 (0.7) 0.7 0.9 178.9 152.9 Central costs - - (17.6) (17.6) VAT recovery, Central (note 3) - - 1.8 15.3 0.7 0.9 163.1 150.6 Group subsidiaries Share of joint ventures 2004 2003 2004 2003 b Total operating profit £m £m £m £m (iii) Operating profit before exceptional items and goodwill amortisation: Operating profit 155.3 139.7 7.1 10.0 VAT recovery (note 3) (1.8) (15.3) - - Goodwill impairment(note 3) 9.4 - - - Goodwill amortisation 5.5 5.2 - 0.3 168.4 129.6 7.1 10.3 Share of associates Total 2004 2003 2004 2003 b Total operating profit £m £m £m £m (iii) Operating profit before exceptional items and goodwill amortisation: Operating profit 0.7 0.9 163.1 150.6 VAT recovery (note 3) - - (1.8) (15.3) Goodwill impairment(note 3) - - 9.4 - Goodwill amortisation - - 5.5 5.5 0.7 0.9 176.2 140.8 Of the £5.5m (2003 - £5.2m) subsidiaries' goodwill amortisation, £4.0m (2003 - £3.5m) relates to the UK, £0.1m (2003 - £0.4m) to Greece/Belgium, £0.5m (2003 - £0.5m) to Australia/New Zealand, £0.7m (2003 - £0.8m) to Singapore/Brunei and £0.2m (2003 - £nil) to Other. The £nil (2003 - £0.3m) joint ventures' goodwill amortisation is included within the UK segment. Goodwill amortisation with the exception of £1.6m (2003 - £1.1m) in UK Retail, relates entirely to Import, Distribution and Retail. Note 4 provides a split of the exceptional profit (loss) by geographical market. Interest is not split by segment as this would not provide meaningful information. Group subsidiaries Share of joint ventures 2004 2003 2004 2003 restated c Net assets (liabilities) £m £m £m £m (i) By geographical market: UK 279.7 241.1 2.2 4.2 Greece/Belgium 4.5 4.8 2.4 2.7 Australia/New Zealand (8.7) (0.7) - - Hong Kong 27.2 27.6 33.2 33.5 Singapore/Brunei 68.8 58.3 - - Other 77.1 69.8 - - 448.6 400.9 37.8 40.4 Net cash 153.8 79.1 - - Other unallocated assets and liabilities* (92.2) (61.0) - - 510.2 419.0 37.8 40.4 Share of associates Total 2004 2003 2004 2003 restated c Net assets (liabilities) £m £m £m £m (i) By geographical market: UK 0.8 23.9 282.7 269.2 Greece/Belgium 2.4 2.3 9.3 9.8 Australia/New Zealand - - (8.7) (0.7) Hong Kong - - 60.4 61.1 Singapore/Brunei - - 68.8 58.3 Other - - 77.1 69.8 3.2 26.2 489.6 467.5 Net cash - - 153.8 79.1 Other unallocated assets and liabilities* - - (92.2) (61.0) 3.2 26.2 551.2 485.6 Group subsidiaries Share of joint ventures 2004 2003 2004 2003 restated c Net assets (liabilities) £m £m £m £m (ii) By activity: Import, Distribution and Retail 238.3 240.8 0.3 0.3 UK Retail 196.3 149.7 - - Financial Services 14.1 10.3 37.5 40.1 E-commerce (0.1) 0.1 - - 448.6 400.9 37.8 40.4 Net cash 153.8 79.1 - - Other unallocated assets and liabilities* (92.2) (61.0) - - 510.2 419.0 37.8 40.4 Share of associates Total 2004 2003 2004 2003 restated c Net assets (liabilities) £m £m £m £m (ii) By activity: Import, Distribution and Retail - 18.4 238.6 259.5 UK Retail - - 196.3 149.7 Financial Services 3.2 7.8 54.8 58.2 E-commerce - - (0.1) 0.1 3.2 26.2 489.6 467.5 Net cash - - 153.8 79.1 Other unallocated assets and liabilities* - - (92.2) (61.0) 3.2 26.2 551.2 485.6 * Other unallocated assets and liabilities include central provisions, VAT recovery, taxation, dividends and assets not directly related to operating activities. 2 PRIOR YEAR ADJUSTMENT The adoption of UITF Abstract 38 Accounting for ESOP Trusts (and the consequent amendment to UITF Abstract 17 Employee Share Schemes) has resulted in a reclassification of own shares of £5.5m at 1 January 2003 and £6.4m at 31 December 2003 from investments to equity shareholders' funds. The associated share scheme creditor of £1.7m at 1 January 2003 and £2.3m at 31 December 2003 has been reclassified from creditors to equity shareholders' funds. This adjustment has no impact on profit in the current or prior year. The cash outflow of £0.9m for the year ended 31 December 2003 for the net purchase of own shares has been reclassified from other items to net cash outflow from financing. 3 EXCEPTIONAL ITEMS CHARGED BEFORE OPERATING PROFIT 2004 2003 £m £m VAT recovery, Central 1.8 15.3 Goodwill impairment, UK (9.4) - (7.6) 15.3 HM Customs and Excise has agreed a further element of the claims submitted in mid 2003 for the recovery of overpaid VAT for the period 1973 to 1994. This resulted in a further recovery of £1.8m (2003 - £15.3m) and £4.2m (2003 - £22.2m) of associated interest income. A charge for corporation tax of £0.5m (2003 - £7.5m) has been made in respect of this income. The goodwill impairment relates to Inchcape Automotive Limited, reflecting the more difficult trading conditions experienced by that business. In accordance with FRS 11 Impairment of Fixed Assets and Goodwill, the carrying value of Inchcape Automotive Limited's fixed assets have been compared to their estimated recoverable amount, represented by their value in use to the Group. This has been derived using cash flow projections discounted at a pre-tax rate of 11.5%. 4 EXCEPTIONAL ITEMS CHARGED AFTER OPERATING PROFIT 2004 2003 £m £m Net profit on sale of properties and investments: - subsidiaries - 0.6 - associates, UK 1.2 0.3 Total net profit on sale of properties and investments 1.2 0.9 Net loss on sale and termination of operations: - Ferrari, Belgium (includes capitalised goodwill written off £1.4m) (2.1) - - Ferrari, UK (includes goodwill in reserves written off £5.0m) (8.2) - - MCL and AGL, UK (includes goodwill in reserves written off £1.0m) (6.8) - - UK Retail dealerships (0.9) (4.6) - Provision releases arising from non-motors business exits, Central 8.6 4.0 - Other 0.4 0.2 Total net loss on sale and termination of operations (9.0) (0.4) Total exceptional items charged after operating profit (7.8) 0.5 The exceptional charge on Ferrari Belgium and Ferrari UK relates to the exit from the Import and Distribution businesses. This was as a result of the Ferrari strategy to assume control of their import and distribution throughout Europe. MCL Group Limited (MCL) and Automotive Group Limited (AGL), two non-core businesses, were sold to Itochu Corporation, the 60.0% majority shareholder. The provision releases arise from litigation provisions relating to non-motors disposals no longer required. 5 NET INTEREST 2004 2003 £m £m Interest payable and other charges relating to the Company and its subsidiaries: Bank loans and overdrafts falling due within five years 0.3 5.9 Loan notes falling due within five years 0.1 2.1 Other interest 8.4 4.8 8.8 12.8 Interest receivable relating to the Company and its subsidiaries: Bank and other interest (4.5) (7.6) VAT recovery (note 3) (4.2) (22.2) (8.7) (29.8) Net interest relating to the Company and its subsidiaries 0.1 (17.0) Share of associates' net interest (0.1) (0.2) - (17.2) 6 TAXATION Exceptional Headline items Total 2004 2004 2004 £m £m £m Analysis of tax charge for the year Current tax: - UK corporation tax at 30.0% (2003 - 30.0%) 7.1 4.9 12.0 - double tax relief (7.7) - (7.7) (0.6) 4.9 4.3 Overseas tax 46.3 - 46.3 45.7 4.9 50.6 Adjustments to prior year liabilities: - UK 0.3 - 0.3 - overseas (2.3) - (2.3) The Company and its subsidiaries' current tax 43.7 4.9 48.6 Share of joint ventures' current tax 1.8 - 1.8 Share of associates' current tax (0.4) - (0.4) Total current tax charge 45.1 4.9 50.0 The Company and its subsidiaries' deferred tax (2.6) (4.4) (7.0) Share of joint ventures' deferred tax (0.2) - (0.2) Total deferred tax (2.8) (4.4) (7.2) Tax on profit on ordinary activities 42.3 0.5 42.8 Exceptional Headline items Total 2003 2003 2003 £m £m £m Analysis of tax charge for the year Current tax: - UK corporation tax at 30.0% (2003 - 30.0%) 9.5 2.6 12.1 - double tax relief (10.0) - (10.0) (0.5) 2.6 2.1 Overseas tax 37.5 - 37.5 37.0 2.6 39.6 Adjustments to prior year liabilities: - UK (3.3) - (3.3) - overseas (0.7) - (0.7) The Company and its subsidiaries' current tax 33.0 2.6 35.6 Share of joint ventures' current tax 2.8 - 2.8 Share of associates' current tax (0.2) - (0.2) Total current tax charge 35.6 2.6 38.2 The Company and its subsidiaries' deferred tax (3.3) 4.9 1.6 Share of joint ventures' deferred tax (0.5) - (0.5) Total deferred tax (3.8) 4.9 1.1 Tax on profit on ordinary activities 31.8 7.5 39.3 Tax on Headline profit (note 7) amounts to £42.3m (2003 - £31.8m). Tax of £0.5m (2003 - £7.5m) has been provided on the VAT recovery and associated interest. There is no tax on other exceptional items (2003 - £nil). Of the £7.5m tax relating to last year's VAT recovery, £4.9m has been transferred from deferred tax to current tax this year. Of the Headline deferred tax credit, £2.4m (2003 - £3.5m) has arisen from the origination and reversal of timing differences. A credit of £0.4m (2003 - £0.3m) has arisen due to adjustments to the estimated recoverable amount of deferred tax arising in prior years. All of the deferred tax charge on the VAT recovery has arisen from the origination of timing differences. 7 EARNINGS PER ORDINARY SHARE Headline Basic 2004 2003 2004 2003 £m £m £m £m Headline profit before tax 172.0 135.8 172.0 135.8 Goodwill amortisation - - (5.5) (5.5) Goodwill impairment (note 3) - - (9.4) - VAT recovery (note 3) - - 6.0 37.5 Other exceptional items (note 4) - - (7.8) 0.5 Profit before tax 172.0 135.8 155.3 168.3 Taxation (note 6) (42.3) (31.8) (42.8) (39.3) Minority interests (3.2) (2.0) (3.2) (2.0) Earnings 126.5 102.0 109.3 127.0 Headline earnings per share 161.4p 132.4p Basic earnings per share 139.4p 164.8p Diluted earnings per share 137.6p 162.1p 2004 2003 number number Weighted average number of fully paid ordinary shares in issue during the year 79,241,664 78,101,215 Weighted average number of fully paid ordinary shares in issue during the year held by the Inchcape Employee Trust (840,828) (1,051,904) 78,400,836 77,049,311 Dilutive effect of potential ordinary shares 1,019,268 1,276,038 Adjusted weighted average number of fully paid ordinary shares in issue during the year 79,420,104 78,325,349 Headline profit before tax and earnings are presented to assist the reader in understanding the underlying performance of the Group. Headline and basic earnings per share are calculated by dividing the respective Headline and basic earnings for the year (as outlined above) by the weighted average number of fully paid ordinary shares in issue during the year, less those shares held by the Inchcape Employee Trust. Diluted earnings per share is calculated on the same basis as Headline and basic earnings per share with a further adjustment to the weighted average number of fully paid ordinary shares to reflect the effect of all dilutive potential ordinary shares. Dilutive potential ordinary shares comprise share options and deferred bonus awards. 8 DIVIDENDS 2004 2003 2004 2003 pence pence £m £m Interim - paid 13 September 2004 (2003 - paid 15 September 2003) 15.0 12.0 11.9 9.3 Final - proposed - payable 16 June 2005 (2003 - paid 17 June 2004) 35.0 26.0 27.6 20.3 50.0 38.0 39.5 29.6 If approved at the Annual General Meeting the final ordinary dividend will be paid to ordinary shareholders registered in the books of the Company at the close of business on 20 May 2005. Dividends above exclude £0.4m (2003 - £0.4m) payable on shares held by the Inchcape Employee Trust. 9 FOREIGN CURRENCY TRANSLATION The main exchange rates used for translation purposes are as follows: Average Year end rates rates 31 December 31 December 2004 2003 2004 2003 Australian dollar 2.48 2.53 2.45 2.38 Euro 1.47 1.45 1.41 1.42 Hong Kong dollar 14.22 12.75 14.92 13.90 Singapore dollar 3.09 2.86 3.13 3.04 10 BASIS OF PREPARATION The figures contained in this announcement have been prepared in accordance with the Companies Act 1985 and applicable accounting standards on the historical cost basis, modified to include the revaluation of certain tangible fixed assets. The financial information presented does not constitute the statutory financial statements of 2004 or 2003. The 2004 figures are extracted from the audited financial statements for that year which have not yet been approved by the shareholders and have not yet been delivered to the Registrar. The comparative figures are extracted from the latest published financial statements that have been delivered to the Registrar of Companies. These have been restated on adoption of UITF Abstract 38 Accounting for ESOP Trusts during 2004, per note 2. The auditors' reports in respect of both years were unqualified and did not contain a statement under either Section 237 (2) or Section 237 (3) of the Companies Act 1985. Financial review The trading performance of our businesses is explained in the Operational review. This review gives information on financial matters. Financial reporting and accounting standards The Financial statements have been prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP). The Group adopted UITF Abstract 38 Accounting for ESOP Trusts with effect from 1 January 2004. This requires that the value of the shares held by the ESOP Trust and the associated share scheme creditor are deducted from reserves. As a result a prior period adjustment of £4.1m has been made to reduce the net assets at 31 December 2003. As part of the UK's convergence with International Financial Reporting Standards (IFRS) the Accounting Standards Board issued eight new standards during 2004. These standards have had no impact on the Group in 2004 and the Group will instead be transitioning to the equivalent standards under IFRS from 1 January 2005. Transition to International Financial Reporting Standards The European Union (EU) requires that all listed companies prepare their financial statements in accordance with EU approved IFRS for accounting periods commencing on or after 1 January 2005. The Group's Annual report and accounts for the year ending 31 December 2005 will therefore be prepared under IFRS, as will the Interim report for the six month period ending 30 June 2005. Inchcape has undertaken a major project to assess the impact of these new standards on its accounts. Whilst there are still some issues to resolve we are confident that we have identified the areas where significant differences will arise between UK GAAP and IFRS. These are as follows: Pensions Under IAS 19 Employee Benefits, the Group will recognise the net deficit of its defined benefit retirement schemes on the balance sheet. In addition, we intend to apply the proposed option whereby actuarial gains or losses can be recognised in full in the Statement of total recognised gains and losses (or its equivalent under IFRS). IAS 19 is broadly similar to FRS 17 Retirement Benefits. Goodwill Under IFRS, goodwill is tested at least annually for impairment rather than being subject to annual amortisation. Impaired goodwill is written off to the profit and loss account. Goodwill previously written off to reserves is no longer recycled through the profit and loss account, as part of the profit or loss on disposal. Property leases Under IFRS, leasehold land is generally treated as an operating lease. It is reclassified, at historic cost, from tangible fixed assets to prepayments, with a reversal of any associated revaluation. Stock holding interest Under IAS 2 Inventories, where stock is purchased using supplier financing, the stock holding cost will be reclassified from operating costs to the interest charge in the profit and loss account. For 2004 the stockholding cost was approximately £7.2m. Contract hire Under IAS 18 Revenue, profits arising on the sale of vehicles, sourced from within the Group, for which a Group company retains a buy back commitment, are recognised over the term of the lease. These vehicles will be included in assets with the corresponding liability included in creditors. Share-based payments Under IFRS 2 Share-based Payment, the fair value of all share-based payments will be expensed to the profit and loss account over the period to which the service relates. This will cover all share-based payments, including executive share options and SAYE schemes. Financial instruments Under IAS 39 Financial Instruments: Recognition and Measurement, all derivatives should be measured at fair value. The Group has reviewed its hedge accounting practices and will endeavour to designate foreign exchange forward derivatives as cash flow hedges under IAS 39. From 1 January 2005, IAS 39 will be implemented by the Group and 2004 comparatives will not be restated on this basis. Overall we expect the transition to IFRS to be broadly neutral on profit before tax and earnings, subject to the achievement of hedge effectiveness under IAS 39. Furthermore, cash flow and the underlying economics of the business will not change, although net assets will be reduced, mainly due to the inclusion of the net pension deficit on the balance sheet. Comparatives for 2004 under IFRS will be published on 12 May 2005. Operating results Turnover increased by 8.2% on 2003 to £4.2bn in 2004. Operating profit before goodwill amortisation and exceptional items rose by 25.1% from £140.8m in 2003 to £176.2m in 2004, reflecting a very strong trading performance in the year. The resultant operating margins strengthened from 3.7% in 2003 to 4.2% in 2004. Once again our Toyota/Lexus business operating in Singapore delivered an excellent trading performance, stimulated by the sizeable increase in the vehicle market. Profits in our Hong Kong businesses also improved, boosted by the gradual recovery in the economy after the effects of SARS in 2003. Organic growth and acquisitions helped profits from our UK business grow strongly, whilst a record market in Australia helped this region to achieve another increase in profitability. The growth in Greece/Belgium is affected by a one off profit of £2.5m in 2003 and, excluding this, operating profit from the region increased by 13.6%, despite product supply constraints. Pensions The Group continues to account for retirement benefits in accordance with SSAP 24 Accounting for Pension Costs and provides additional disclosure as required by FRS 17 Retirement Benefits. The FRS 17 net deficit on the Group's principal schemes has increased from £44.8m at 31 December 2003 to £57.0m at 31 December 2004. Higher equity prices have increased the value of investments held. However, this is more than offset by higher pension liabilities as, in the UK, the assumed long term inflation rate has increased to 2.7% and the discount rate has marginally reduced to 5.3%. Exceptional VAT recovery and goodwill impairment HM Customs and Excise have agreed a further element of the claims we submitted in mid 2003 for the recovery of overpaid VAT for the period 1973 to 1994. This resulted in a further net VAT recovery of £1.8m. Consistent with the recovery made in 2003, this has been treated as an operating exceptional item, with associated interest of £3.6m included in the net interest charge. An additional £0.6m of interest was recognised in the year relating to claims settled in early 2004. A provision of £9.4m has been made against the carrying value of goodwill relating to Inchcape Automotive, reflecting the more difficult trading conditions experienced by that business. This has been treated as an operating exceptional item. Other exceptional items The other exceptional charge for the year was a net £7.8m. This principally comprised a £10.3m charge (including £5.0m of goodwill previously written off to reserves) relating to the exit from the Ferrari/Maserati import and distribution businesses, and a £6.8m loss on disposal (including £1.0m of goodwill previously written off to reserves) of the Group's 40.0% stakes in MCL Group Limited (MCL) and Automotive Group Limited (AGL) to Itochu Corporation, the 60.0% majority shareholder. These charges were partially offset by the release of litigation provisions relating to non-motors disposals. Net interest The net interest charge for the year was £nil, due to a £4.2m one off income relating to the Group's VAT recovery. Excluding this, the underlying interest charge was £4.2m (2003 - £5.0m). For a substantial part of the year, despite being in an overall net cash position, we suffered a mismatch between debt in the UK and cash held overseas in countries with low interest rates. The resultant adverse interest differential generated the net interest charge. In November 2004 approximately £135.0m of cash was repatriated to the UK and we also created the ability to remit more funds in a tax efficient manner over the next couple of years. Taxation The 2004 Headline tax rate is 24.6% compared to a rate of 23.4% in 2003. The tax rate in 2004 enjoyed a one off benefit of 1.3% due to the favourable settlement of Greek tax audits and the agreement of UK tax computations. Likewise, 2003 benefited from a one off provision release of 2.9% as a result of a favourable court ruling in the UK. The underlying rate at 25.9% in 2004 was similar to the prior year. We anticipate the tax rate in 2005 will be broadly in line with the Group's underlying tax rate in 2004. We are still in ongoing discussions with the Inland Revenue regarding the corporate tax treatment of the VAT recovery and associated interest. We have increased the provision from £7.5m to £8.0m in respect of the further recovery agreed. Minority interest Profit attributable to minorities has increased from £2.0m in 2003 to £3.2m in 2004. This is mainly due to increased profits in the Australian and Bulgarian businesses. Exchange rates Had the exchange rates in 2003 continued in 2004 Headline profit before tax would have been c. £9.0m higher. This effect primarily arose as a result of the weakening Singapore and Hong Kong dollars. Principal exchange rates are listed in note 9. Cash flow The Group continues to be highly cash generative with cash flow from operating activities in 2004 of £177.2m, including £15.5m VAT received. This was achieved despite an increase in working capital of £31.5m. This net increase reflects the higher levels of trading across the business and the impact of some timing differences at year end. We continue to focus on tight working capital management. Overall the Group's net cash position has increased from £79.1m at 31 December 2003 to £153.8m at 31 December 2004. Acquisitions and disposals During the year the Group acquired five Mercedes-Benz dealerships for £24.4m including £6.7m debt. This acquisition increased the Group's total UK representation to eight sites, creating the largest independent contiguous territory for Mercedes-Benz in the UK. As part of its expansion into Eastern Europe, the Group acquired Estonia's two independent Mazda retailers for £4.1m including £0.7m debt. We are now the exclusive Importer and Retailer for Mazda in this market. In line with Ferrari's strategy to assume control of import and distribution throughout Europe, the Group has exited its Ferrari/Maserati import and distribution businesses in the UK and Belgium. However, we will continue to retail Ferrari and Maserati cars through Maranello Sales Limited. We also disposed of our stakes in MCL and AGL, two non-core businesses. Capital expenditure Capital expenditure less disposal proceeds was £34.8m, some £7.5m in excess of the depreciation charge. The additional investment principally arose in UK Retail as we invested in new dealership facilities, particularly those of BMW, Toyota and Mercedes-Benz. We are also progressively investing in our Toyota Retail operations in Athens, Greece. Treasury management and policy The centralised treasury department manages the key financial risks of the Group encompassing funding and liquidity risk, interest rate risk, counterparty risk and currency risk. The treasury department operates as a service centre under Board approved objectives and policies. Speculative transactions are expressly forbidden. The treasury function is subject to regular internal audit. Funding and liquidity risk Group policy is to ensure that the funding requirements forecast by the Group can be met within available committed facilities. The Group has available a £250.0m committed revolving credit facility with a maturity date of July 2007. This facility was not drawn at the year end. Loan notes totalling £0.2m were redeemed in three tranches between March and June 2004. These notes were issued in December 2000/2001 following the acquisition of Inchcape Automotive Limited (formerly known as Eurofleet Ltd). A further £2.0m of loan notes were issued in June 2004 in relation to the acquisition of the Mercedes-Benz dealerships. At the year end loan notes totalling £2.2m were outstanding. Note maturities range from 30 November 2005 to 30 June 2006. In addition to the committed facilities the Group has available uncommitted borrowing lines made available by relationship banks. These facilities are used for liquidity management purposes. At the year end these facilities were not utilised. During November 2004 cash of approximately £135.0m was permanently repatriated to the UK from our overseas businesses in addition to normal dividend flows. We have also created the ability to repatriate further funds in 2005 and beyond. Cross border Group loans are made to optimise the use of those funds still domiciled locally. The principal overseas cash deposits at the year end were in euros and Singapore dollars. Cash is held locally ahead of payments to trade creditors. In Singapore cash deposits also support the significant requirement for Certificates of Entitlement necessary for new car sales. Interest rate risk Our interest rate policy has the objective of minimising net interest expense and the protection of the Group from material adverse movements in interest rates. Throughout 2004 the Group has borrowed at floating rates only. This approach reflects the continuing benign interest rate environment and the low level of gross debt. Should interest rate hedging activities be deemed appropriate in the future, the Board has approved the use of interest rate swaps, forward rate agreements, and options. Counterparty risk The amount due from counterparties arising from cash deposits and the use of financial instruments creates credit risk. Limits are in place which reduce credit risk by stipulating the aggregate amount and duration of exposure to any one counterparty dependent upon the applicable credit rating. Credit ratings and the appropriate limits are reviewed regularly. Currency risk The Group faces currency risk on its net assets and earnings, a significant proportion of which are in currencies other than sterling. On translation into sterling, currency movements can affect the Group balance sheet and profit and loss account. Group policy is to minimise balance sheet translation exposures, where fiscally efficient, by financing working capital requirements in local currency and maximising the remittances of overseas earnings into sterling. The Group has transactional currency exposures where sales or purchases by an operating unit are in currencies other than in that unit's reporting currency. For a significant proportion of the Group these exposures are removed as trading is denominated in the relevant local currency. In particular, local billing arrangements are in place for many businesses with our principals. For those businesses that continue to be billed in foreign currency, Group policy is that committed transactional exposures are hedged into the reporting currency of that business. If possible, foreign exchange exposures will be matched internally before being hedged externally. Hedging instruments are approved by the Board and are restricted to forward foreign exchange contracts, currency options and foreign exchange currency swaps. Foreign exchange currency swaps are also used to hedge transaction exposures arising on cross border Group loans. This information is provided by RNS The company news service from the London Stock Exchange

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