Final Results - Year Ended 31 December 1999

Pendragon PLC 25 February 2000 PRELIMINARY RESULTS TO DECEMBER 31 1999 Pendragon PLC, the UK's largest car dealership group today reports preliminary results for the full year to 31 December 1999. Highlights: * Group turnover up 38% to £1.75 billion. * Net cash inflow from operating activities up 2.7 times to £75.0 million * Dividend per share up 10% to 13.2 pence * Integration of Evans Halshaw successfully completed * Imminent launch of nationally branded Internet capability to sell and distribute new and used motor vehicles on-line Trevor Finn, Chief Executive, commented: 'In a volatile and uncertain market place the group has further consolidated its position, and is well positioned for growth when the trading environment recovers'. 'In a sector that has traditionally ignored the opportunity for innovation, Pendragon remains at the forefront of change. We believe our strategy of focused partnerships with manufacturers will improve customer service and drive the organic growth of the business. The centralisation of processes and activities that cannot be as efficiently carried out within individual dealerships will also deliver significant operational efficiencies going forward'. Enquiries: Pendragon PLC Trevor Finn, Chief Executive Tel: 01623 725 000 David Forsyth, Finance Director Finsbury Rupert Younger Tel: 0171 251 3801 Patrick Diamond Charlotte Festing CHIEF EXECUTIVE'S OPERATIONAL REVIEW Results and Dividend Profit before tax for the full year ended 31 December 1999 increased by 2.7% to £19.2 million compared to £18.7 million in 1998. This was after charging £4.5 million of exceptional costs, goodwill amortisation of £1.8 million, and £0.6 million of notional interest. Included in the results is £9.6 million of profit on the disposal of dealerships, including profit from the Ford Motor Company Limited's subscription for 49% of the shares of our Ford franchise subsidiary. Earnings per ordinary share were 21.4 pence compared to 21.2 pence in 1998. The exceptional costs of £4.5 million are made up of £3 million relating to the integration and reorganisation of the acquired Evans Halshaw Holdings plc business, and £1.5 million relating to one off project costs in respect of relocating certain dealership activities to our new customer service centre at Loxley House, Nottinghamshire. The board has declared a full year dividend of 13.2 pence per ordinary share, a 10% increase over the full year dividend of 12.0 pence per share in 1998. Trading Trading in the first half was adversely affected by our decision to reduce stocks of new, demonstrator and used vehicles in the light of increasing speculation over the potential harmonisation of UK and European car prices. The speculation and uncertainty has persisted throughout the second half and led to some customers deferring purchases of new cars. This resulted in the group operating profit before exceptional costs and goodwill amortisation being approximately the same level as we achieved in 1998. In 1999, new vehicle sales accounted for 34% of gross profit compared to 38% of gross profit in the previous year. In the period prior to September the pricing of cars in the UK market was becoming more of an issue for customers. During September this reached its climax when many customers became convinced that cars were overpriced and that prices would fall in January 2000. As a result some new car buyers have deferred their purchasing decisions. Used car sales accounted for 15% of gross profit in 1999 compared to 14% of gross profit in 1998. Used car profitability has been impacted during the year as the market adjusted values in anticipation of price realignment of new cars to harmonise them with prices in Europe. By increasing stock turn it was possible to mitigate the effect of falling inventory values. Our contract hire business was affected by the fall in used car prices and although we continued to make profits on disposal they were lower than anticipated when the cars were contracted out two to three years ago. Aftersales, which comprise the provision of services and parts, accounted for 47% of gross profits as compared with 45% in 1998. Profitability in this area has remained robust and as new car purchases are deferred this area generally benefits, although not to compensate fully for the loss of new vehicle profits. Structure The group is organised in brand focused groups. These groups have leadership that is exclusive to the manufacturer concerned. This gives a focused approach to the market and allows clearer lines of communication with the manufacturer. As we increase the scale of the relationships with the manufacturers, efficiencies and economies can be gained that are not as easily available within a multifranchise structure. As a result of this brand focused structure and leadership we have quickly absorbed the additional Evans Halshaw dealerships. We believe this structure has been instrumental to growth with manufacturers in an environment that is increasingly orientated towards partnerships of this nature. Our brand focused groups can be distinguished between our market area volume dealerships and specialist boutique businesses. Gross profits have increased in both following the acquisition of Evans Halshaw. The table below shows the gross profit contribution by business area. Gross Profit Table 1999 1998 % £'m £'m Change Market Areas 108.5 83.6 30 Boutique Businesses 101.8 68.3 49 Contract Hire 4.7 5.1 (8) Other 5.0 - Total 220.0 157.0 40 Other gross profit is mainly profits from our recently acquired technology companies, which had better results than normal due to the increase in workload associated with Y2K. Business Development The group has changed significantly during 1999. A number of actions have been implemented to ensure that the group has moved in line with our strategy: * To grow bigger with fewer manufacturer relationships * To operate brand focused groups giving an operating structure and team dedicated to individual manufacturers * To reduce the cost base through economies and efficiencies In February 1999 we completed the acquisition of Evans Halshaw Holdings plc. Evans Halshaw had been pursuing a similar strategy to Pendragon with emphasis on market area and boutique businesses. The business was acquired for £87.7 million. This acquisition increased our scale with several core manufacturers. During the year we have been making selected disposals from the Evans Halshaw group along with some existing Pendragon dealerships in order to reduce the number of manufacturers we deal with and reduce the level of gearing. Non core business disposals in the year generated £17.0 million of cash, excluding proceeds from our joint venture with Ford, and including the following sites: * VW Heathrow, Hayes, Watford, Chesterfield * Honda Oxford, Milton Keynes, Stockport * Audi Amersham, Stourbridge In addition we have also sold or closed several locations, which were either performing poorly or did not fit with the manufacturer plans. Those generated £15.1 million and included the following sites: * Peugeot Newcastle, Telford * Mercedes Milton Keynes * Ford Mansfield/Sutton, Winchester * Vauxhall Hemel Hempsted, Glasgow, Watford * Nissan Reading * Four Fiat points within the M25 Market Area * Volvo Erith, Loughborough During the year we acquired for a consideration of £89.3 million: * Evans Halshaw Holdings plc which consisted of 71 franchise locations * Telecom Services * Ford Potters Bar and Grantham * Vauxhall Gathurst Ford Joint Venture On 1 October 1999 the Ford Motor Company Limited subscribed for 49% of our subsidiary which holds our Ford dealerships for a cash consideration of £19.7 million. The proceeds were utilised to reduce the group borrowings. The net assets of the subsidiary, including goodwill, at the date of disposal were £40 million, which excluded the freehold and long leasehold properties occupied by the Ford franchises which were retained by the group. A number of these properties are being marketed for disposal. The joint venture enables both parties to input to the development of people, premises and processes with the mutual aim of improving investor returns. The joint venture does not affect our other franchise relationships with Ford, namely Aston Martin, Jaguar, Mazda and Volvo. E-commerce strategy The group has been developing its Internet capability for the sale and distribution of new and used motor vehicles. This will be a nationally branded Internet site that offers a complete 'clicks and mortar' solution for the car retail industry. By centralising certain administrative functions in a customer focused call centre facility we have the business model in place to deliver the UK's first comprehensive on line motor vehicle retail capability. This will position the group at the forefront of the industry trend. The launch of the site is imminent. Customer Service Centre In February 1999 the company commenced with the establishment of a customer service centre in Nottinghamshire. This facility is being developed to provide support services to our franchise groups and soon our Internet Company. The continuing costs associated with the project in terms of start up and additional fixed costs and depreciation relating to the facility's new computer systems and telephony, which are not as yet being fully utilised are likely to be £1.5 million in 2000. The pilot of the project has been taking place during the last nine months with extensive training and testing. Elements of the new processes and methods are currently undergoing rollout across the group. We see significant economies as a result of applying new telephone, computer and communications technology across the group. The full rollout of all these activities will take approximately two years. We expect the project to have a positive effect on earnings from 2001 onwards. Finance One of the group's principal goals for the year was to reduce gearing following the Evans Halshaw acquisition in February 1999. This has been successfully achieved with a positive operating cash inflow of £75.1 million. Average borrowings rose during the year mainly due to the acquisition of Evans Halshaw in February 1999 and the payment of deferred consideration on businesses acquired from Lex Retail Group Limited in 1997. As a consequence, the net interest charge rose by £4.0 million to £12.1 million in 1999 from £8.1 million in 1998. Interest cover for 1999 was 2.8 times, which compares with the 4.0 times reported in 1998. The interest cover is calculated after excluding notional interest. Bank interest cover, excluding notional interest, was 3.8 times compared to 5.6 times in 1998. Working capital has decreased by £39.6 million principally due to more efficient stocking levels across the enlarged group. Net capital expenditure was £16.2 million in 1999 compared to £14.8 million in 1998. Included in capital expenditure is an amount of £3.9 million in relation to the new customer service centre. Acquisitions, net of disposals, in the year amounted to £76.3 million which includes the final payment of £12.7 million to Lex Retail Group Limited for businesses acquired from them in 1997. The purchase consideration for Evans Halshaw was £114.5 million which includes acquired borrowings of £26.8 million. Business disposals amounted to £51.3 million, which includes the proceeds from the joint venture with Ford and the sale of selected dealerships. Borrowings at 31 December 1999 were £103.5 million compared to £48.2 million last year. Gearing has increased to 73% at 31 December 1999 from 37% at 31 December 1998. Prospects and current trading The current confusion surrounding pricing which is causing some customers to hold off buying cars will continue to impact profitability until resolved. Publication of the Competition Commission report currently being scrutinised by the Secretary of State for Trade and Industry should bring a degree of certainty back to the sector. Our other profit streams, principally aftersales and used cars remain unaffected. We anticipate that borrowings will be further reduced over the next 18 months by the disposal of low performing assets and selected properties occupied by our joint venture with Ford. We expect the proceeds to be at least £40 million and that the earnings impact will be neutral. The uncertain environment creates opportunities for further consolidation within the sector. As a strong player with a healthy balance sheet and competitive edge, we expect to benefit from this. We remain optimistic for our future prospects. Consolidated Profit and Loss Account Year ended 31 December 1999 1999 1999 1999 1998 Pre-exceptional Exceptional Total items items £000 £000 £000 £000 ---------------------------------------------------------------------------- Total turnover- group and 1,797,443 1,797,443 1,271,978 share of joint venture Less: share of joint (43,275) 0 (43,275) 0 venture turnover ---------------------------------------------------------------------------- Group turnover Existing operations 1,100,488 0 1,100,488 1,271,978 Acquisitions 653,680 0 653,680 0 ---------------------------------------------------------------------------- 1,754,168 0 1,754,168 1,271,978 Cost of sales (1,534,176) 0 (1,534,176) (1,114,971) ---------------------------------------------------------------------------- Gross profit 219,992 219,992 157,007 Net operating expenses (193,320) (4,525) (197,845) (130,030) Group operating profit Existing operations 15,016 (1,522) 13,494 26,977 Acquisitions 11,656 (3,003) 8,653 0 ---------------------------------------------------------------------------- 26,672 (4,525) 22,147 26,977 ----------------------------------------------------- Share of operating loss (1,119) 0 in joint venture ---------------------------------------------------------------------------- Total operating profit 21,028 26,977 Profit on sale of businesses 9,628 0 Profit / (loss) on disposal 600 (239) of fixed assets ---------------------------------------------------------------------------- Profit on ordinary activities 31,256 26,738 before interest Net interest payable Group (11,849) (8,075) Joint venture (248) 0 ---------------------------------------------------------------------------- (12,097) (8,075) Profit on ordinary activities 19,159 18,663 before taxation Taxation (6,129) (5,769) ---------------------------------------------------------------------------- Profit for the financial year 13,030 12,894 Dividends (7,929) (7,316) ---------------------------------------------------------------------------- Retained profit for the financial year 5,101 5,578 ---------------------------------------------------------------------------- Earnings per ordinary share 21.4 p 21.2 p Consolidated Balance Sheet At 31 December 1999 1999 1998 £000 £000 ---------------------------------------------------------------------------- Fixed assets Goodwill 14,271 5,606 Tangible assets 168,747 108,877 Investments Investment in joint venture Share of gross assets and preference shares 88,878 Share of gross liabilities (77,023) -------- 11,855 Other investments 1,500 -------- --- 13,355 0 -------- --- ---------------------------------------------------------------------------- 196,373 114,483 ---------------------------------------------------------------------------- Current assets Stocks 134,551 187,771 Repurchase commitments 74,827 84,349 Debtors 78,770 73,018 Cash at bank and in hand 3,033 1,150 ---------------------------------------------------------------------------- 291,181 346,288 ---------------------------------------------------------------------------- Creditors: amounts falling due within one year (206,954) (241,801) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net current assets 84,227 104,487 ---------------------------------------------------------------------------- Total assets less current liabilities 280,600 218,970 ---------------------------------------------------------------------------- Creditors: amounts falling due after more (136,464) (86,362) than one year Provisions for liabilities and charges (1,642) (580) ---------------------------------------------------------------------------- Net assets 142,494 132,028 ---------------------------------------------------------------------------- Capital and reserves Called up share capital 15,242 15,242 Share premium account 74,697 74,697 Other reserves 14,803 9,331 Profit and loss account 37,752 32,758 ---------------------------------------------------------------------------- Equity shareholders' funds 142,494 132,028 ---------------------------------------------------------------------------- Consolidated Cash Flow Statement Year ended 31 December 1999 1999 1998 £000 £000 ---------------------------------------------------------------------------- Cash flow from operating activities 75,141 27,432 ---------------------------------------------------------------------------- Interest received 39 539 Interest paid (11,679) (7,346) ---------------------------------------------------------------------------- Returns on investments and servicing of finance (11,640) (6,807) ---------------------------------------------------------------------------- Taxation paid (13,689) (3,404) ---------------------------------------------------------------------------- Payments to acquire tangible fixed assets (35,861) (36,051) Payments to acquire investments (1,500) 0 Receipts from sales of tangible fixed assets 21,184 21,263 ---------------------------------------------------------------------------- Capital expenditure (16,177) (14,788) ---------------------------------------------------------------------------- Business acquisitions (84,086) (13,320) Borrowings of acquired businesses (26,839) 0 Dividend paid to former shareholders of Evans Halshaw Holdings plc post acquisition (3,700) 0 Deferred consideration paid (12,710) (11,654) Cash sold on businesses disposal (278) 0 Business disposals 51,343 6,349 ---------------------------------------------------------------------------- Acquisitions and disposals (76,270) (18,625) ---------------------------------------------------------------------------- Equity dividends paid (7,520) (6,767) ---------------------------------------------------------------------------- Net cash flow before financing (50,155) (22,959) ---------------------------------------------------------------------------- Financing Repayment of unsecured bank loans 0 (13,997) Unsecured bank loans 54,367 36,069 ---------------------------------------------------------------------------- Net cash inflow from financing 54,367 22,072 ---------------------------------------------------------------------------- Movement in cash and overdrafts 4,212 (887) ---------------------------------------------------------------------------- Reconciliation of net cash flow to movement in net debt Movement in cash and overdrafts 4,212 (887) Cash inflow from increase in debt (54,367) (22,072) financing Loan notes issued on acquisition of Evans (5,194) 0 Halshaw Holdings plc ---------------------------------------------------------------------------- Movement in net debt in the year (55,349) (22,959) Net debt at 31 December 1998 (48,199) (25,240) ---------------------------------------------------------------------------- Net debt at 31 December 1999 (103,548) (48,199) ---------------------------------------------------------------------------- Group Statement of Total Recognised Gains and Losses For the year ended 31 December 1999 1999 1998 £000 £000 -------------------------------------------------------------------------- Profit for the financial year 13,030 12,894 Unrealised profit on disposal of businesses 5,100 0 Currency translation adjustments relating to net investments in foreign enterprises, net of tax effect (234) 77 -------------------------------------------------------------------------- Total recognised gains and losses relating to the year 17,896 12,971 -------------------------------------------------------------------------- The reported profit for the year is not materially different from the profit on an unmodified historical cost basis. Group Reconciliation of Movements in Shareholders' Funds For the year ended 31 December 1999 1999 1998 £000 £000 -------------------------------------------------------------------------- Profit for the financial year 13,030 12,894 Dividends (7,929) (7,316) -------------------------------------------------------------------------- 5,101 5,578 Exchange adjustment (234) 77 Unrealised profit on disposal of business 5,100 0 Goodwill written back on divestment 499 0 -------------------------------------------------------------------------- Net addition to shareholders' funds 10,466 5,655 Opening shareholders' funds 132,028 126,373 -------------------------------------------------------------------------- Closing shareholders' funds 142,494 132,028 -------------------------------------------------------------------------- Notes to the Financial Statements 1. Dividends 1999 1998 £000 £000 -------------------------------------------------------------------------- Ordinary shares Interim paid 4.4p per share (1998 - 4.0p) 2,643 2,439 Final proposed 8.8p per share (1998 - 8.0p) 5,286 4,877 -------------------------------------------------------------------------- 7,929 7,316 -------------------------------------------------------------------------- 2. Earnings per share a) Adjustments to basic earnings 1999 1999 1998 1998 per share, based on ordinary shares in issue Earnings Total Earnings Total per per share share pence £000 pence £000 -------------------------------------------------------------------------- Earnings 21.4 13,030 21.2 12,894 Goodwill amortisation 2.9 1,762 0.7 453 Notional interest on deferred 0.9 583 2.3 1,441 consideration Tax effect of notional interest (0.3) (176) (0.7) (447) Earnings excluding goodwill 24.9 15,199 23.5 14,341 amortisation and notional interest Non trading items : Exceptional items 7.4 4,525 0 0 Profit on business and fixed (16.8) (10,228) 0.4 239 assets disposals Tax effect of non trading items 2.9 1,725 (0.1) (74) Earnings excluding goodwill 18.4 11,221 23.8 14,506 amortisation, notional interest and non trading items b) Diluted earnings per share, 1999 1999 1998 1998 based on weighted average number of shares in issue. Diluted Total Dilute Total Earnings Earnings per per share share pence £000 pence £000 -------------------------------------------------------------------------- Earnings 21.3 13,030 21.1 12,894 -------------------------------------------------------------------------- c) Shares in issue number number -------------------------------------------------------------------------- Ordinary shares in issue 60,964,152 60,964,152 Weighted average number of 191,542 72,992 dilutive shares under option Weighted average number of 61,155,694 61,037,144 shares in issue taking account of applicable outstanding share options The directors consider that the adjusted earnings per share figures provides a better measure of comparative performance. 3. Annual Report The above financial information does not represent the full financial statements of the company. Full financial statements for the year ended 31 December 1998, containing an unqualified audit report have been delivered to the registrar of companies. Full financial statements for the year ended 31 December 1999, which have been reported on without qualification by the group's auditors, will shortly be posted to shareholders, and after adoption at the Annual General Meeting on 2 May 2000 will be delivered to the Registrar. Copies of this announcement are available from Pendragon PLC, Loxley House, 2 Oakwood Court, Little Oak Drive, Annesley, Mansfield, Nottinghamshire.

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