Interim Results to 30 June 2015

Issued: 04 August 2015                                                                                                      Press release

PENDRAGON PLC - The UK's Leading Automotive Retailer

Announces Interim Results to 30 June 2015

"Profits exceeding expectations, up 23% to £40.3 million, with market leading initiatives in place for future growth."

Financial Highlights

·  Anticipated outturn for the full year is comfortably ahead of expectations.

·  Underlying profit before tax up £7.5 million (+22.9%), from £32.8 million to £40.3 million. Underlying profit has more than doubled in three years.

·  Strong operating leverage continues, with gross profit up 5.7% and underlying operating profit up 17.0%.

·  Underlying earnings per share up 0.41p (+23.8%), from 1.72p to 2.13p.

·  Interim dividend doubled to 0.6p per share following our 2014 final dividend of 0.6p per share.

Operational Highlights

·  Record used performance with gross profitability up £6.0 million (+8.3%), like for like, assisted by market leading initiatives.

·  Aftersales gross profit increased by £6.2 million (+6.7%), like for like, as we benefit from the growing vehicle market, which is set to continue.

·  New gross profit increased, like for like, by £8.5 million (+11.3%).

·  Visits to Evanshalshaw.com and Stratstone.com increased by 3.1 million (+39.7%), from 7.8 million to 10.9 million.

Trevor Finn, Chief Executive, commented:

"Our business continues to perform strongly across all sectors, owing to a combination of our strategy, market leading initiatives and favourable market conditions.  We continue to be excited by the initiatives launched last year, 'Sell Your Car' and 'Move Me Closer', which appeal to customers from our key brands of Evanshalshaw.com and Stratstone.com.  We plan to expand our footprint, by adding sites particularly in areas where we have no representation, which will provide further convenience to our customers.  We have doubled our interim dividend in the period, aligning to our higher year dividend for 2014.  The Group has had an encouraging start to the year and our anticipated outturn for the full year is comfortably ahead of expectations."

Summary of Contents

1.  Financial Overview

2.  Segmental Results

3.  Strategic Progress

4.  Industry Insight and Outlook

5.  Detailed Financials

1. Financial Overview

* Underlying results, where stated, exclude items that have non-trading attributes due to their size, nature or incidence.

NOTE:   Within this document, like for like results include only current trading businesses which have a 12 month comparative history.  All percentages shown are the calculated value from the table shown and may vary from the actual numbers due to rounding.  Year on year percentage variances for margins show the absolute percentage movement only.  All commentary is versus the prior period, unless stated.

Income Statement Highlights

Revenue increased by £222.1 million, up 10.7% on the prior year, mainly due to increases within the used and new vehicle departments.  On a like for like basis, revenue increased by £264.6 million (+13.4%).  We improved used revenues by 11.8%, new revenues by 16.5% and aftersales revenues by 5.0% on a like for like basis.

Underlying gross profit increased by £15.2 million (+5.7%) in the period and on a like for like basis by £21.9 million (+8.5%) over the prior year.  We achieved another record performance in our used vehicle sector, with gross profit up £6.0 million (+8.3%) on a like for like basis.  In the used vehicle sector, we continue to grow our presence and reputation.  The new sector has increased gross profit by £8.5 million (+11.3%) on a like for like basis as the new car market continues to grow.  Aftersales has grown by £6.2 million (+6.7%) on a like for like basis as a result of new car sales growth and growth in used vehicle sales increasing the vehicle parc.  In the period, overall underlying gross margin reduced by 50 basis points, primarily as a result of the dilution effect of increased new and used vehicle sales.

Operating costs increased on a like for like basis by £12.2 million (+5.8%), of which more than half relates to variable costs (+10.2%) and the remainder to indirect costs.  We have invested in television and internet advertising as part of the launch of 'Sell Your Car' and 'Move Me Closer', which we continue to roll out in Evans Halshaw.  This has helped generate a 39.7% increase in website visits and contributed to our used performance exceeding the market.

Underlying operating profit increased by £8.2 million in the period and increased by £9.4 million on a like for like basis.  Underlying interest costs increased by £0.7 million in the period, largely as a result of investment in vehicle stock.  Our operating profit margin of 2.5% is a 20 basis points improvement on the prior year, assisted by strong operating leverage in the period.

Balance Sheet and Cash Flow

The Group has a strong balance sheet and low debt level and is in a strong position to reinvest at the appropriate return on investment.  The following table summarises the cash flows and net debt of the Group for the six month periods ended 30 June 2015 and 30 June 2014 as follows:

The Group's net debt was £53.1 million at 30 June 2015, a reduction of £55.7 million from 31 December 2014.  Within the period the Group received proceeds of £22.4 million with respect to the disposal of the King Arthur Property S.a.r.L property investment of £10.0 million.

As a consequence of this lower debt level and strong EBITDA performance, the debt : underlying EBITDA ratio has reduced from 0.8 at 31 December 2014 to 0.4 at 30 June 2015 and remains below our target range of 1.0 to 1.5.  This reflects the appropriate balance of capital efficiency and growth potential, providing both a strong balance sheet and, with our strong cashflow generation and realisations from low performing assets, the ability to invest for the future.

Property, acquisitions and disposals

Our property portfolio is an important aspect of our business, with the Group operating from both leasehold and freehold properties.  In addition, through strategic investment choices, including the decision to close some franchise points, we have a number of vacant property assets which we hold for sale.  At 30 June 2015, the Group had £177.9 million of land and property assets (2014: £155.4 million).  Additionally, the Group held property assets for sale of £11.6 million (2014: £13.5 million).  Business disposals resulted in a profit on disposal of £8.0 million and property disposals resulted in a loss of £0.1 million.  During the period, the Group reduced its franchise points by four, which included businesses which were low performing, requiring significant investment or surplus to requirements, and added four used vehicle points.

Pensions

The net liability for defined benefit pension scheme obligations has decreased from £66.4 million at 31 December 2014 to £47.6 million at 30 June 2015 (2014: £52.1 million).  This reduction in obligations of £18.8 million is largely due to an appropriate increase in the discount rate applied. 

Dividend

Following a final dividend of 0.6p per share in respect of 2014, we are delighted to announce an interim dividend of 0.6p per share taking our annualised dividend to 1.2p per share.  We intend to maintain a progressive dividend approach in the future.

The interim dividend will be paid on 23 October 2015 for those shares registered on 25 September 2015.

Capital allocation

We have demonstrated a very strong record of cashflow generation and capital management, with a reduction in net debt of £293.6 million in the last five years.  We operate a target of maintaining our debt : underlying EBITDA ratio between 1.0 and 1.5 times and since our interim report of last year, this ratio has been below 1 times (currently 0.4 times).  We continue to expect strong cashflow generation and we have doubled the annualised dividend payable to shareholders.

We are also working to expand our UK footprint by investing in 40 additional sites.  This investment will take place over the coming five year period and is expected to amount to approximately £100 million investment (assuming all additional sites are freehold).  We will also continue to seek investment opportunities that exceed our cost of capital to add to our existing US operations.

In May 2016 the three year call period on the £175 million bond comes to an end.  We are examining our funding structure opportunities in the context of our strong cashflow generation and investment plans whilst optimising shareholder returns and maintaining financial security.

Non-underlying Items

Non-underlying items for the six month periods ended 30 June 2015 and 30 June 2014:

In the period, the Group sold its £10.0 million 6% investment in King Arthur Properties S.a.r.L for £23.8 million, which realised a profit of £13.8 million.

In the period, property and business disposal profits, net of impairments and associated property and business disposal costs, enhanced profitability by £7.9 million (2014: £1.3 million).  The Group sold five franchise points in the period, yielding proceeds of £13.1 million.

Non-underlying pension costs relate to pension obligations in respect of defined benefit schemes closed to future accrual, shown as non-underlying due to the volatility and non-trading nature of this amount.

2. Segmental Results

The Group has three segments which, combined, we refer to as the Motor Segment and three segments which, combined, we refer to as the Support Segment.  The Motor Segment consists of: Stratstone, Evans Halshaw and California.  In 2015, we have rebranded our Quicks businesses as Evans Halshaw and accordingly we have moved the Quicks segment as previously reported into the Evans Halshaw segment.  A reconciliation of this change can be found in note 7 within the condensed interim financial statements at the end of this document.  The Support Segment consists of: Pinewood, Leasing and Quickco.  The following table shows the revenue, gross profit, operating costs and operating profit by segment for our Motor Segment for the six month periods ended 30 June 2015 and 30 June 2014:

Stratstone (Stratstone.com)

Our Stratstone business is one of the UK's leading premium motor car retailers, with 76 franchise points.  Stratstone holds franchises to retail and service Aston Martin, BMW, Ferrari, Jaguar, Land Rover, Mercedes-Benz, MINI, Morgan, Porsche and Smart vehicles as well as three motor-cycle franchises.  This segment also contains our retail and service outlets for DAF commercial vehicles, under our Chatfields brand name.

Stratstone.com has had a strong year to date, on a like for like basis, operating profit increased by £3.6 million (+20.3%).  The new department improved like for like gross profit by 19.1% as a result of strong retail growth performances in Land Rover, Mercedes-Benz, MINI and Porsche.  Used revenue was up by 9.5% on a like for like basis in the period, albeit at a lower margin, resulting in a slight fall in used profitability.  Aftersales has grown strongly in the period, with gross profit up 5.4% on a like for like basis as we benefit from a strong aftersales market in a number of franchises.  We have now fully implemented and rolled out high definition video within used vehicles and within our aftersales activities.

Evans Halshaw (Evanshalshaw.com)

Our Evans Halshaw business is the UK's leading volume motor car retailer, with 124 franchise points.  Evans Halshaw holds franchises to retail and service Citroen and DS, Dacia, Ford, Honda, Hyundai, Kia, Nissan, Peugeot, Renault, SEAT and Vauxhall vehicles.

Evanshalshaw.com increased like for like operating profit by a significant £7.6 million (+42.7%), with outstanding growth in the used vehicle department.  On a like for like basis, used sales increased by 13.0% in the period and used gross profitability increased by 17.3%.  Used continues to be a strategic area of focus for our business.  We are benefiting from our market leading initiatives and a recovery in the used market.

Aftersales like for like gross profit increased by £3.3 million (+6.4%) as result of strong market conditions and our own initiatives. This is a key profit area and we are encouraged by this improvement in profitability.  At Evans Halshaw, consumers can choose how they transact, from a variety of methods and channels for aftersales services.  We believe our innovation and responsiveness to consumers' needs in this area gives us a competitive advantage.  We increased our like for like new vehicle gross profit in the period by £1.4 million as a result of growing new vehicle volumes.

Our Quicks segment was set up to test and deploy new strategies and now has been integrated into the Evans Halshaw segment in the period. 

California

Our motor retail business in the US continues to achieve strong results from its nine franchise points in Southern California, which represent the Aston Martin, Jaguar and Land Rover brands.  Operating profit is marginally behind the prior year as a result of an exceptionally strong comparator.  New car performance continues to improve and the vehicle parc is growing for our brands.  We continue to explore earnings enhancing opportunities to add to our existing US operations.

Support Businesses

Our Support businesses provide a broad range of services, both to the Group and to external customers.  These specialist businesses consist of Pinewood for dealer management systems, Leasing for fleet and contract hire vehicles and Quickco for wholesale vehicle parts.

The following table shows the revenue and operating profit for our Support Segment and the Group results, for each of the six month periods ended 30 June 2015 and 30 June 2014:

* Group comprises the total of the Motor Segment and Support Segment.

3. Strategic Progress

Strategy

Our strategy is to grow profitability in used, aftersales and new and we represent this by our four strategic pillars.  These strategic pillars are: Choice, Value, Service and Convenience and are supported by the 'Our People' foundation.

Choice

Our 'Choice' pillar is our strategy to ensure that our consumers can access the largest and best choice of vehicles and servicing in the UK.  Visits to Stratstone.com and Evanshalshaw.com increased by 21.1% over the prior year, to 18.8 million visitors on a rolling 12 months basis.  Overall, we are attracting over 10.5 million online visitors more than we did five years ago.  This channel is becoming a key aspect of our business to ensure we can give choice to our consumers.

We have been operating our 'Sell Your Car' initiative for a nearly a year.  This initiative enables the consumer to have the choice to sell their car direct to us at Evanshalshaw.com (www.evanshalshaw.com/sell-your-car/).  We will guarantee to pay more than 'webuyanycar.com' giving consumers a value choice too.  This initiative is, in turn, enabling us to provide a greater selection of choice and value to consumers and to turn stock more quickly, given that this source of stock is acquired directly at our vehicle preparation and retailing premises.

In February 2015, we launched 'Move Me Closer' which enables the consumer to reserve a vehicle direct from their electronic device and choose to have it physically delivered to their nearest store location (www.evanshalshaw.com/move-me-closer/).  Through this service, consumers can research and view online over 20,000 vehicles then inspect the vehicle they reserved at a physical location convenient to them.

Value

Our 'Value' pillar ensures that consumers get value with every single purchase via our frequently researched prices at both local and national levels.  We have been operating our value pricing methodology since 2008, enabling us to provide pricing transparency to our customers.

Service

Our 'Service' pillar is ensuring that our consumers can transact easily with our business, with outstanding customer service.  We monitor our customer satisfaction scores closely and regard as a key measure of our success the proportion of customers who have given us a four or five star rating for vehicle sales and aftersales service.  We are pleased to report that on this measure our performance has increased from 83.4% at 31 December 2013 to 85.3% at 31 December 2014 to 85.6% at 30 June 2015.  We continue to put the customer first in all we do.

Convenience

Our business has the largest motor retail footprint and scale in the UK, giving consumers local and national convenience.  For both vehicle selection and purchasing, and for aftersales services, customers can visit our stores at locations convenient to them.  We have commenced a programme to invest and open stores in the key market areas in the UK where we do not yet have a significant presence.  This investment will bring us even closer to existing and potential customers, by further enhancing the offering of choice, convenience of contact and service and our unique used car consumer proposition. 

We have added three more Evans Halshaw sites in the period towards our plan of achieving 40 additional sites.  We expect to add further locations in the second half of the year, financed by our cashflow and by recycling low performing assets.

Our 'Sell Your Car' initiative is now available at 42 retail locations in the UK, giving further convenience to our consumer and also providing an inflow of used cars for the business sourced directly from consumers.

Our People

Our people are key to the success of our business.  We have always placed a significant focus on our team members to define and refine how we do business, communicate, and engage with our customers.  As a result our people are the driver behind new processes and propositions for our customers.

We wish to thank our team members, who continue to be part of the journey at Pendragon PLC, and who enjoy the experience of being with a growing and forward-looking organisation.

4. Industry Insight and Outlook

New Sector

The new vehicle sector consists of the first registration of cars and commercial vehicles.  In 2014, the UK new car market, the second largest market in Europe, increased by 9.3% over the prior year, with 2.476 million registrations (2013: 2.265 million).  In the first half of 2015, the UK new market has increased by 7.0% over the prior year, with 1.377 million registrations.

The UK new car market is primarily divided into retail and fleet markets.  The retail market is the direct selling of vehicle units to individual consumers and operates at a higher margin than the fleet market.  The fleet market represents selling of multiple vehicles to businesses, and is predominantly transacted at a lower margin and consumes higher levels of working capital than retail.  The retail market is the key market opportunity for the Group and represents just under half of the total UK market.

The following table summarises the UK new car vehicle market, separating the retail and fleet components for the six month periods ended 30 June 2015 and 30 June 2014:

Source: new car vehicle registrations data from the 'Society of Motor Manufacturers and Traders'.

* Group Represented is defined as national registrations for the franchised brands that the Group represents as a franchised dealer. 

The UK commercial vehicle market, consisting of light commercial vehicles and trucks, had a market size of 363 thousand units in 2014, an increase of 11% over the prior year.  At 30 June 2015, the market had increased by 21.8% over the prior year.

The Group has a small and successful representation in California.  The USA new vehicle market was 16.4 million in 2014, an increase of 6% over 2013 and the highest vehicle market since 2006.  The National Automobile Dealers' Association expects the USA market to be 16.9 million vehicles in 2015, an increase of 3%. 

New Industry Insight

In previous statements we have shared our belief that the UK 2015 market will return to more normal growth than the prior year.  We maintain these expectations.  This is already being demonstrated, with the growth in retail registrations in the period being 2.1%, representing a more natural level of growth.  We expect the second half rate of growth in retail sales to be a reduced rate to the first half and the current year's total new car market to reach 2.55 to 2.60 million units by the end of 2015.  From 2016 we believe the UK new car market should run at a "natural" 2.5 million to 2.6 million units per annum level.

Used Sector

The used vehicle sector comprises the selling of vehicles by one party to another for all vehicles except newly registered vehicles.  We had previously expected the market to grow by around 1.6% in 2015.  In the first quarter of 2015, the used car market was 1.759 million, with growth of 0.5% on 2014 but we expect the growth rate to accelerate in the remaining quarters of the year.  Around half of these transactions are conducted by franchised dealers and the balance by independent dealers and private individuals.

Used Industry Insight

We have previously modelled the impact of the new market volumes on the used car market and still believe we will see steady growth of 1% to 2% per annum over the next three years.  When we segment the used market by age of vehicle, our analysis shows that the supply of vehicles that are less than six years old will continue to grow more rapidly for the next three years than vehicles older than six years.  We have been tracking our used volume vehicle performance to the used vehicle market for those cars aged between 1 and 8 years old which represents our key market segment.  Since 2009 and the implementation of our used car initiatives and strategies, we have doubled our market share from 2.5% to 4.9%.

Aftersales Sector

Aftersales encompasses the servicing, maintenance and repair of motor vehicles, including bodyshop repairs, and the retailing of parts and other motor related accessories.  The main determinant of the aftersales market is the number of vehicles on the road, known as the 'vehicle parc'.  The vehicle parc in the UK has risen to 33 million vehicles (cars only), having been typically around 32 million vehicles in the prior three years.  The car parc can also be segmented into markets representing different age groups.  Typically, around 20% of the car parc is represented by less than three year old cars, around 17% is represented by four to six year old cars and 63% is greater than seven year old cars.

The size of each of these age groups within the car parc is determined by the number of new cars entering the parc and the number exiting the parc.  The demand for servicing and repair activity is less impacted by any adverse economic conditions than other sectors, as motor vehicles require regular maintenance and repair for safety, economy and performance reasons.

Aftersales Industry Insight

The aftersales servicing and repair business will benefit from increased new and used car activity.  As a result of the increased new vehicle supply, we are anticipating growth in the less than three year old car parc of around 8%.  Interestingly in 2015, within the four to six year old vehicle parc, we are expecting growth of around 2% following a number of years of decline.  Overall we expect good continuing growth in the vehicle parc for cars up to six years old for at least the next three years.

Outlook

The Group has delivered a strong performance across the used, aftersales and new sectors in the period owing to a combination of our own strategy and initiatives and favourable market conditions.  The last four years of growth in new car sales will drive favourable market conditions in our aftersales and used car sectors for the medium term and we expect the new car market to be stable.  We continue to be excited by our innovations from 'Sell Your Car' and 'Move Me Closer'.  We have been investing in marketing spend on these initiatives and will continue this investment in the second half of the year to help drive brand recognition and sales.  In the medium term we are highly focussed on the further roll-out of footprint in the UK, particularly by adding sites in areas of where we have no representation, to provide further convenience to our customers.  The Group has had an encouraging start to the year and our anticipated outturn for the full year is comfortably ahead of expectations.

5. Detailed Financials

All amounts are unaudited

* As restated - see above