RAC plc 2004 preliminary results statement

Article date: 16 February 2005

RAC plc continues to deliver growth

Highlights

  • Revenue growth from continuing operations up 8%
  • Profit before goodwill amortisation, exceptional items and taxup by 2% to £88.6m (2003, £86.7m) - earnings per share on thisbasis up 2% to 55.7p (2003, 54.4p)
  • Profits from continuing operations (excluding Paccar) up 12%to £71.2m (2003, £63.6m)
  • Contribution from discontinuing Paccar activities down to£17.4m (2003, £25.6m)
  • Profit before tax £77.7m (2003, £25.7m)
  • FRS 14 earnings per share 45.8p (2003, 8.3p)
  • Continuing strong cash flow, with net debt down £14.5m to£139.8m (2003, £154.3m)
  • Full year dividend up 6.2% to 25.8p (2003, 24.3p)
  • RAC Business Solutions profits up 271%
  • Lex Vehicle Leasing profits up 16%
  • No.1 in Roadside Assistance provider – JD Powersurvey
  • Financial services strategy strengthened through AXAtransaction

Andy Harrison, Chief Executive, RAC plc,commented:
“The continuing RAC businesses are growing strongly, withdouble digit profit growth, together with further improvements inour service levels. In addition, we have opened up a big andexciting new opportunity in financial services, following lastyear’s AXA transaction. The new financial year has startedwell and I remain confident in our future prospects.”

Notes:
A final dividend of 15.6p will be paid on 5 May 2005 toshareholders on the register on 8 April 2005.

A reconciliation between profit before goodwill amortisation,exceptional items and tax, and profit before tax, can be found inNote 1 of this preliminary statement.

A reconciliation between earnings per share on profit beforegoodwill amortisation, exceptional items and tax, and earnings pershare on an FRS 14 basis, can be found in Note 10 of thispreliminary statement.

For more information contact:
Andy Harrison

Chief Executive, RAC plc 0207 705 1257

Richard Pennycook
Group Finance Director RAC plc 07889 309988

Niall Addison
Group Finance and Investor Relations Manager, RAC plc
07764 624701

Neil Lovell
Corporate Communications Director, RAC plc 07768 298636

E-mail racplc@rac.co.uk

Building on our strengths

RAC plc is a leading motoring services company with strong,trusted brands recognised for service excellence across consumerand business markets. Our goal is to be regarded by our customersas providing the “best in motoring services” and wewill achieve this through delivering inspirational service to them.In 2004 we took important steps toward achieving this goal.

We have strong brands in RAC, Lex and BSM. Our strategy is todeliver growth by leveraging their strength and our customer base.During 2004, we undertook extensive research on the RAC brand, andwere pleased when it confirmed that our customers find us one ofthe most trustworthy brands in the UK, and rated us excellent forservice. The internal research was confirmed by external awards,with our success as “The No.1 Roadside Assistanceprovider” in the annual JD Power survey and a near cleansweep for all our brands in the annual Fleet Excellence awards.

Our most important strategic step in 2004 was the restoration,in the autumn, of full ownership of our Financial Servicesbusiness, through buying out our joint venture with AXA and theassociated acquisition of renewal rights to AXA Direct's motor andhome insurance policyholders. With a highly trusted brand we areambitious in financial services.

For a number of years, the Group has anticipated the cessationof our parts distribution relationship with Paccar, the worldwidetruck manufacturer. A disengagement was agreed in November 2004,although it will be late 2005 before this is completed. This willmark the conclusion of a highly cash generative tradingrelationship.

Financial Highlights

The continuing RAC businesses have been growing rapidly and itis encouraging that in 2004 the profits in these continuingbusinesses, excluding the contribution from Paccar, grew by 12% to£71.2m (2003, £63.6m). In 2004 the profit contribution from ourPaccar contract reduced to £17.4m (2003, £25.6m).

Revenue growth from continuing operations was strong, up 8% to£1,509.1m (2003, £1,401.5m). Total revenues increased by 1% to£1,539.4m (2003, £1,526.2m) reflecting the disposal of ourmechanical handling businesses.

Profit before goodwill amortisation, exceptional items andtaxation grew by 2% to £88.6m (2003, £86.7m). This reflected the£7.6m reduction in the Paccar contribution as well as restructuringcharges of £4.4m relating to the integration of the AXA Directbusiness and other business efficiency improvements, and costs of£2.0m in relation to the implementation of the Insurance MediationDirective. Earnings per share on this basis increased by 2% to55.7p (2003, 54.4p).

After exceptional items, primarily associated with businessdisposals and VAT repayments from prior periods, profit before taxwas £77.7m (2003, £25.7m) and earnings per share calculated inaccordance with FRS 14 were 45.8p (2003, 8.3p).

The Group continued to generate cash, investing £31m in the AXAtransaction and injecting capital into Lex Vehicle Leasing tosupport the Ford Financial transaction. Net debt fell by £14.5m to£139.8m (2003, £154.3m).

The Board proposes a final year dividend of 15.6p to bring thetotal dividend for the year to 25.8p, an increase of 6.2% on 2003(24.3p).

Operating review

RAC Consumer Services

The RAC brand is one of the most trusted in the UK. We givepeace of mind to millions of customers through our 24 hour roadsideand replacement windscreen services, our range of motor, legal andhome insurance products and advice on personal injury claims. InBSM we are the market leader in driving tuition, providing trainingto 157,000 pupils each year, from beginners starting on our uniquesimulators to experienced drivers requiring advanced skills forpersonal or business use.

Consumer Services has grown steadily in recent years and nowcontributes over half the Group’s operating profit.

Highlights

  • Total revenues up 6% to £374.8m, (2003, £353.1m)
  • Roadside revenues up 3%
  • Motoring Services (Financial Services, Legal Services, BSM),revenues up 29%
  • Underlying profits up 5%, after adjusting for restructuringcharges associated with the integration of the acquired AXAbusiness and other business efficiency improvements, and the costsof implementing the Insurance Mediation Directive
  • Major strategic step forward in financial services through theacquisition of renewal rights for AXA Direct’s 270,000 motorand home insurance policyholders
  • Voted No.1 Roadside Assistance provider, by customers, in theJD Power survey

Roadside
2004 saw us deliver our best service standards ever at theroadside, with customers voting our breakdown business No.1 inRoadside Assistance in the JD Power annual customer survey, andNo.1 breakdown provider in the Fleet Service awards. This successcomes on the back of investment made over the last few years instate of the art equipment and diagnostic tools for our patrolforce and customer service teams.

Revenue grew in 2004 by 3% to £205.4m (2003, £198.7m);membership remained static at 2.2 million members after a number ofyears of strong growth. Following the implementation of newcustomer management systems late in 2003, we encountereddifficulties with call handling times in our contact centres andsome issues with collecting cash from customers whose bank orcredit card details had changed since we last took payment. Weworked hard to minimise the impact on our customers, and sawprogressive improvement in these issues as the year progressed.There was a resulting dip in our high renewal rate, from 83% in2003 to 80% in 2004 as a whole, but it is encouraging to note thatthe rate for December was back above 82% and that this has beenmaintained in January.

Motoring Services: -

Financial Services
With strong brand recognition, high renewal rates and access to ourRoadside membership base, developing RAC Financial Services is oneof our biggest strategic opportunities. In 2004 we took a majorstep towards exploiting this strategy through acquiring the renewalrights to AXA Direct’s 270,000 motor and home insurancepolicyholders, and regaining ownership of the RAC FinancialServices brand, previously jointly owned with AXA. Theseinitiatives should increase our motor, home and personal insurancepolicy book to approximately 450,000 by the end of 2005.

Integration costs for this acquisition were £1.9m in 2004, andwe expect the acquisition to be earnings enhancing (before goodwillamortisation) in 2005, and substantially so beyond that. Revenuesgrew by 59% to £13.8m, (2003, £8.7m), including organic growth of16%.

Legal Services
We provide legal expense insurance and assistance in personalinjury claims for both members and non-members. Our customers trustus to pursue their claims honestly and professionally, and insurersknow that we will not pursue frivolous claims. We have been growingour in-house legal practice strongly and now employ 45 lawyers aswell as a panel of 24 firms of solicitors around the UK. Personalinjury claims handled increased by 10% to 21,400 (2003, 19,400) andthe number of legal expense policies sold grew by 14% to 2.4m,(2003, 2.1m) with total revenues growing by 46% to £15.0m (2003,£10.3m).

BSM
The UK’s largest driving school, BSM, welcomed its 3000thinstructor in June this year and provided tuition to 157,000 newand experienced drivers. BSM utilises the latest techniques - suchas on-line training tools and driving simulators - to give thosenew to driving the best start and those looking for additionalskills the right support and access to advanced training. Thedynamics of the market remain attractive, with the young driverpopulation growing, tests getting progressively harder and thedemand for further tuition beyond the test (which can enable youngdrivers to obtain favourable insurance rates) increasing. Revenuesgrew by 10% to £34.9m (2003, £31.8m).

RAC Auto Windscreens
Auto Windscreens experienced challenging trading conditions,reflected in a reduction in margins, when a number of insurersopted for a single source of supply in 2003 and Auto Windscreenswas unsuccessful in the tenders. The new management team tookaction to reduce costs and are introducing new, more flexible,working conditions into the business. Towards the end of the yearthere were encouraging signs of success in our sales activities,most notably with Co-operative Insurance Services where we havebecome the preferred supplier for all its automotive glass repairand replacement work.

Sales in 2004 were down by 2% at £95.2m (2003, £96.9m). Thebusiness continues to make an attractive return on sales, to coverits cost of capital, and to be cash generative.

Whilst 2004 was a mixed year for RAC Consumer Services, wenonetheless saw revenue growth and underlying profit momentum, anda vitally important strategic move into financial services. Themajor priorities for 2005 are to stimulate growth in our Roadsidemembership base and, through a £5m increase in marketingexpenditure, maximise the opportunity presented by our Financialand Legal Services businesses. Success in these areas will help usmove towards our goal of 20% of members buying more than oneservice, from the 13% level seen in 2004.

Nick Hughes has been appointed as Managing Director of RACConsumer with effect from 1st May 2005. Nick joins RAC fromAmerican Express where he has been European Head of Marketing forthe last three years. His previous experience includes McKinsey& Co and South African Breweries.

Jon Walden has resumed his role as Managing Director of LexVehicle Leasing.

Business Services

We have strong business to business credentials through our Lexand RAC brands, and provide extensive vehicle and customer servicesincluding roadside assistance, motor claims handling, contactcentres, fleet management, vehicle finance, supply chain managementand vehicle distribution and sales. Our customers include theMinistry of Defence, British Airways, Norwich Union, Ford and Audi.We provide support and service around the clock, 365 days ayear.

As a Company our individual businesses work together to provideservices across a number of sectors. In particular, we haveidentified five key areas: motor and vehicle manufacturers,defence, insurance, utilities, and airside operations, wherecustomers benefit from our knowledge and expertise to bringoperational and efficiency benefits. The opportunities within thesesectors are considerable and we estimate that our current orderbook has a revenue value of approximately £2bn. Our sales to thesesectors increased by 10% to £303m in 2004.

Highlights

  • Lex Vehicle Leasing sales increased by 17%, and profits by16%
  • RAC Business Solutions sales up 6% and profits up 271%
  • Record new car sales in Hyundai, topping 37,000 vehicles andtaking market share to 1.5% (2003, 1.3%)
  • LVL successfully integrated business acquired from BusinessPartner, the contract hire arm of Ford Financial in the UK
  • Orderly disengagement from Leyland parts distributionnegotiated with Paccar

Our Business Services’ operations performed well in 2004,with revenues from continuing activities up 8% to £1,131.8m (2003,£1,045.1m) and profits, after absorbing the anticipated reductionin Paccar contribution, increasing by 3% to £54.7m (2003, £53.0m).We strengthened the range of RAC’s services sold into thebusiness to business market. In particular, the work we carry outin claims handling for the insurance market, and services to motormanufacturers, including an agreement to manage service bookingsfor a major UK motor manufacturer, have helped RAC BusinessSolutions grow revenues by 6%, and profit by 271%.

Lex Vehicle Leasing
Lex Vehicle Leasing, our joint venture with HBOS, had anotherexcellent year. Our half share of profits grew 16% to £22.7m,(2003, £19.6m), on revenue up 17% to £241.8m (2003, £207.2m).Organic sales growth accounted for 4% of the increase, and the newbusiness with Ford Financial the remaining 13%.

The company increased its fleet size by 21% to 123,600 vehicles(2003, 102,300 vehicles), reflecting both the successfulintegration of the Ford Financial outsourcing contract and organicsales growth, with particularly good performances with large fleetcustomers. Profit growth was further aided by good cost control andthe continued delivery of benefits from the company’sSix-Sigma quality programme which is now being adopted elsewhere inRAC.

The used car market was better than expected throughout theyear, resulting in lower than anticipated disposal losses.

The business’ market-leading service reputation wasconfirmed by the award, for the sixth year out of seven, of“UK’s Best Contract Hire Company” by Fleet Weekand Fleet Management, and additionally being named “UKLeasing Specialist of the year” by the Institute of TransportManagement.

RAC Business Solutions
Revenues grew by 6% to £169.8m (2003, £160.8m), and profitsincreased by 271% to £5.2m (2003, £1.4m).

During 2004 we were successful with both existing and newcustomers, strengthening our relationships with motormanufacturers, fleet operators and insurance companies. We renewedimportant contracts with Motability, for roadside assistance andvehicle inspection, and Norwich Union, for claims handling.

We broadened the range of products we offer to our customers,helped by the successful implementation of new claims handling andcustomer management systems, and now have a comprehensive range ofservices, including outsourcing of customer and dealer contactcentres, vehicle inspections, automotive technical support andthird party care for insurers. Our new products include servicebooking solutions for both motor manufacturers and fleet operators,automated vehicle license checking, and a new accident managementservice for fleets and insurers, at our operation in France.

Manufacturing Support Services
Included in this division are: Lex Defence; Hyundai, our carimportership; Lex Auto Logistics, our supply chain managementbusiness; Lex Commercials, our truck dealership group and LexTransfleet, our commercial vehicle contract hire, rental and fleetmanagement business, (jointly owned with Lombard - part of theRoyal Bank of Scotland Group).

We are the preferred bidder, in partnership with Amey, for theMinistry of Defence “C” Vehicle contract to supply andmaintain construction vehicles, plant equipment and rough terrainmechanical handling equipment operated by the British armed forcesworld-wide. We anticipate the contract will be awarded in theSpring of 2005, with full implementation by April 2006. This willextend our long-standing relationship with the Ministry of Defence,our biggest vehicle services client.

Hyundai had an excellent year with strong growth in sales,outperforming a buoyant new car market. The model range continuedto strengthen, with the award winning Getz and highly regardedCoupe supported by the successful launch of the Tucson,Hyundai’s mid-range 4x4. Registrations were up 17% to 37,600,and market share increased to 1.5% (2003, 1.3%).

Lex Auto Logistics concluded negotiations with Paccar for thecessation of our Leyland parts distribution activities, which willnow revert to Paccar towards the end of 2005. As a result of thenegotiation, Lex Auto Logistics will continue to benefit from thecontract until September 2005, but additionally will receive anexceptional profit of £18.0m, with £4.5m reported in 2004 and theremaining £13.5m in 2005. Management have initiated a restructuringplan to minimise the effect of the lost contribution from thecontract, including a move to smaller premises planned for early2006.

Lex Commercials had a good year with revenues up by 3% to£162.8m (2003 £158.6m) aided by strong demand for new vans andtrucks. During 2004, Lex Commercials signed additional franchisesfor Foden and Isuzu trucks, acquired a further DAF/LDV outlet and aspecialist commercial workshop. This business continues to supporta number of Group companies in the delivery of complex bids.

During the year we completed the exit from our mechanicalhandling businesses, through the disposal of Lex Komatsu South, LexHavelange in Belgium, and Lex Manutention in France. We alsonegotiated the management buy-out of Isuzu Truck and disposed ofMultipart Universal.

Our people

Core to our business success is the service we deliver to ourcustomers, and we have a strong belief in the role that ourcolleagues play in achieving service excellence. In 2004 we werepleased to receive further recognition of the positive steps we aretaking towards our aim of delivering inspirational service -internally, we achieved an increase in overall colleaguesatisfaction, and externally received a record number of customerservice awards across our consumer and business services. We aregrateful to all our colleagues who have delivered outstandingservice to our customers throughout the year.

Public policy

RAC has been synonymous with motoring for over a century andcontinues to provide comment on the key issues of the day –from congestion and road safety, to driving standards and transportinvestment. In conjunction with our partners at the RAC Foundation,we engage at all levels of government and through the media topromote the interests of motorists.

Our annual ‘Report on Motoring’ is now in its 16thyear. Our 2005 report looks at the various agonies and ecstasies ofmotoring today. The report investigates the major factors impactingnegatively on the motorist, focusing particularly on thoserepresenting the biggest challenges to policy makers looking tomake our roads safer. By focusing on these major road safetyfactors, the RAC Report on Motoring supports the currentlegislative agenda which aims to reduce the 38,000 deaths andserious injuries that are suffered on our roads every year, and somake them a safer and more enjoyable place to be.

Outlook

Over the past three years our continuing operating profits,excluding the discontinuing Paccar income, have grown by 12% pa. In2004 we delivered good revenue growth in both Consumer and BusinessServices driven by the strength of our brands, our customer base,and improvements in customer service. We have started the newfinancial year well and remain confident in our futureprospects.

Financial Review 2004

Segmental analysis
The segmental analysis of turnover, profit and loss and net assets,showing continuing and discontinued activities, before goodwillamortisation, exceptional items and tax is detailed in note 1 tothe accounts. A summary of the segmental profit analysis is shownin the following table:

Continuing Operations 2004

Discont-
inued Operations 2004

Total 2004

Continuing Operations 2003

Discont-
inued Operations 2003

Total 2003

£m

£m

£m

£m

£m

£m

RAC Consumer Services

47.5

-

47.5

51.3

-

51.3

RAC Business Solutions

5.2

-

5.2

1.4

-

1.4

Lex Vehicle Leasing

22.7

-

22.7

19.6

-

19.6

Lex
Industrial Solutions

-

0.1

0.1

-

(2.4)

(2.4)

- Leyland parts distribution and related activities

17.4

-

17.4

25.6

-

25.6

- All other activities

9.4

(0.1)

9.3

6.4

(0.1)

6.3

Manufacturer Support Services

26.8

(0.1)

26.7

32.0

(0.1)

31.9

Other

(4.7)

-

(4.7)

(5.7)

-

(5.7)

Profit before interest, goodwill amortisation, exceptionalsand taxation

97.5

-

97.5

98.6

(2.5)

96.1

Interest

(8.9)

-

(8.9)

(9.4)

-

(9.4)

Profit before goodwill amortisation,exceptionals and taxation

88.6

-

88.6

89.2

(2.5)

86.7

The RAC Consumer Services result is after:

  • £1.9 million of integration costs relating to the buy out ofAXA’s interest in RAC Financial Services and the acquisitionof the renewal rights of AXA Direct.
  • £2.0 million of costs in relation to preparation forregulation under the Insurance Mediation Directive, which areexpected to continue through 2005,
  • and £2.5 million of restructuring costs relating primarily tothe outsourcing of IT support and the reshaping of our carinspections activities.

Lex Vehicle Leasing’s result included a first-timecontribution from the contract to supply vehicles for FordFinancial, which began in 2004.

The contribution to Manufacturer Support Services profits of theLeyland parts distribution activity, which will transfer to Paccarin September 2005, has been disclosed in a separate line to giveclarity. A receipt of £4.5 million in 2004 has been treatedseparately as an exceptional item.

Profit from continuing operations before goodwill, exceptionalitems and tax fell by £0.6 million to £88.6 million, but excludingthe non-recurring costs referred to above, it grew by £3.8 million(4.3%). Profit before tax for the year was £77.7 million (2003 -£25.7 million). The large increase reflects operating exceptionalincome in 2004 compared with operating exceptional charges in theprior year as described below. Additionally the comparative periodhad a significantly higher level of exceptional charges from assetdisposals and impairments principally relating to our divestment ofmechanical handling businesses. Whilst the last disposals werecompleted in the first half of 2004, the material impairments weretaken in 2003.

Interest
Average net non-contract hire debt in 2004 was virtually unchangedon the 2003 level as a result of the investments referred to in theCash flow and debt section below. The Group’s exposure tointerest rate rises was limited by outstanding interest rate swapswhich had been established in previous years. Overall, the interestcharge fell by £0.5 million to £8.9 million, giving a reducedinterest rate of 6.9%. The falling average rate reflects a numberof factors including reduced average margins and commitment feespaid to lenders and the maintenance of slightly lower levels ofcash and investments (held mainly in the insurance relatedbusinesses for regulatory reasons).

Goodwill amortisation Goodwill amortisation totalled £7.8million (2003 - £5.6 million). The £2.2 million increase relates tothe part-year amortisation of goodwill on the acquisition ofinsurance assets from AXA (£1.5 million) and on our share of theLex Vehicle Leasing contract with Ford Financial (£0.7million).

Exceptional items
The Group recorded a net exceptional loss (operating, non-operatingand VAT interest income) of £3.1 million.

Exceptional items

2004

£m

Operating exceptional items (including VATinterest income):

Leyland transfer fee (first receipt)

4.5

VAT recovery:

- principal amount

3.0

- interest income (credited to net interestpayable and similar charges)

3.3

10.8

Non-operating exceptional items:

Manufacturer Support Services and LexIndustrial Solutions:

- loss on disposal

(5.7)

- goodwill previously written off toreserves

(9.4)

Total loss on disposal of discontinuedoperations

(15.1)

Profit on sale of fixed assets

1.2

(13.9)

Net exceptional items

(3.1)

There were operating exceptional credits, including VAT interestincome, of £10.8 million (2003 – charge of £30.2 million).These were made up of the £4.5 million first payment on transfer ofthe Leyland parts distribution contract, and £6.3 million of VATand interest recovered as a result of claims in relation to pastVAT payments. These items are disclosed separately in order topresent a more accurate view of the Group's underlying tradingperformance.

In addition to the operating exceptional credits, there wereexceptional losses of £13.9 million. The most significant itemswere a £9.4 million write off of goodwill which had previously beencharged to reserves in relation to disposal of the mechanicalhandling businesses, and £5.7 million loss on disposal of thoseremaining mechanical handling businesses together with twoManufacturer Support Services businesses, Isuzu Truck and MultipartUniversal. These losses have been partially offset by £1.2 millionprofit on fixed asset disposals.

The net loss on the disposal and closure of these operationsreduced the current year tax charge by £2.5 million.

Group tax rate
The underlying group tax rate was 28% (2003 - 28%).

Earnings per share
Earnings per share on an FRS14 basis were 45.8 p (2003 - 8.3p)after exceptional items and goodwill amortisation. The rise inprofits before goodwill amortisation and exceptional items hasresulted in a modest increase in earnings per share on this basisto 55.7 p (2003 – 54.4p), up 2% on last year.

Dividends
The proposed final dividend of 15.6p per share would bring thetotal dividend for the year to 25.8p (2003 – 24.3p). Theincrease of 6.2% on last year (2003 – 5.7% increase)underlines our confidence in the prospects for growth in bothprofits and cash generation, as does our intention to effect amodest £20 million share buyback programme, announced in December.Dividend cover on profit before goodwill amortisation andexceptional items, after tax is 2.2 times (2003 – 2.2times)

Shareholders funds
Shareholders funds have increased by £28.5 million to £427.7million. The key factors were the retained profit for the year of£23.0 million and the add back of £9.4 million of goodwill ondisposals previously written off to reserves. This increase ispartially offset by a £7.7 million increase in own shares held inrelation to share option schemes.

Capital expenditure
Gross capital expenditure was £70.9 million (2003 - £89.7 million),a reduction of £18.8 million compared with the high levels of 2003.This reflects the change in structure of the Group following thedisposal of the last mechanical handling businesses (which werecapital intensive), and the large systems investments which tookplace in 2003. Our total net capital expenditure, includingdisposals, fell by £15.8 million to £25.5 million. The level ofgross capital expenditure and disposals is affected by BSM drivertraining vehicles which we retain for approximately six monthsbefore selling them back to the manufacturer.

Cash flow and debt
Net cash inflow from operating activities was £110.0 million (2003- £117.9 million). We invested £25.5 million net (2003 - £41.3million) in capital expenditure and £30.8 million in acquiringinsurance assets from AXA. The disposal of the last mechanicalhandling businesses generated £10.6 million, excluding disposalexpenses. Additionally, the financing of the Ford Financialtransaction in Lex Vehicle Leasing was funded through a smallcapital injection of £7.5 million and the foregoing of our firsthalf dividend from that joint venture, which would have been £6.5million.

Despite the investment activity described above, total net debtdecreased by £14.5 million to £139.8 million.

The financial ratios of the group have remained strong withinterest cover at 11.0 times (2003 – 10.2 times) and a netdebt to EBITDA ratio of 1.1 times (2003 – 1.3 times).

Pensions
In common with many other companies, our pension fund continued tobe in deficit. Under FRS17 the total deficit at the end of theyear, net of deferred tax, was estimated at £148 million (2003 -£123 million). To begin to address this shortfall additionalcontributions of over £5 million were made in 2004 and are ongoing.In addition a number of changes have been made to reduce the normalannual cost of the scheme by approximately £5 million. Animprovement of £62 million in the market value of fund assets to£529 million (2003 - £467 million) was insufficient to offset theincrease of £98 million in the valuation of pension liabilities to£740 million (2003 - £642 million) primarily caused by falling bondyields, an increase in our future inflation assumptions, and betterestimates of actuarial experience.

Unlike many defined benefit schemes, the trustees of the Grouppension scheme are entitled to set the contribution rate requiredfrom the Group. As set out in Note 33, an actuarial valuation tookplace on 5 April 2004. In the light of this valuation, it wasagreed by the trustees that no change in contribution rates wouldbe demanded for 2005, but it was noted that actuarial assumptionsregarding life expectancy are under review by the pensions industryand that conclusions may start to be drawn during 2005. Thetrustees and Group management have therefore agreed that a furtherreview of Group pensions provision will be undertaken during thecourse of 2005.

Risks
The group’s financial risk policy identifies risks and setsout a control framework for managing exposures. This policy isapproved by the Board and covers financial risks as follows:

Liquidity risks
Committed facilities are maintained at levels which are in excessof current funding requirements. In addition the availability offacilities over the next five years is managed in accordance withpolicies which link the required minimum level of committed linesto planned needs. Compliance with the policies is monitoredregularly throughout the year.

The businesses are able to access liquidity through overdraftaccounts which, as they are subject to netting arrangements, ensurethat short-term cash balances are directly offset againstoverdrafts.

Interest rate risks
Board policies dictate a range for the amount of debt upon whichinterest rates must be fixed. The policies cover the next fiveyears, and ensure that interest rate exposure management is linkedto the interest cover covenants contained within our variousfunding agreements.

A key part of the activities of our joint venture contract hirecompanies is the management of funding. Substantially all of theinterest rate exposures of these companies are managed through termborrowings or the use of derivatives. The companies aim toeliminate their exposures rather than seek to make any gain fromthe future movement in interest rates.

Exchange rate risks
The Group has very limited currency denominated transactions. Wheretransaction exposures do arise they are largely hedged. Similarlyas the Group's overseas activities are small there are fewtranslation exposures. Currently no translation exposures arehedged. Should exposures increase beyond a specified de minimiscurrent policies dictate that appropriate hedging will beinitiated.

International Financial Reporting Standards(IFRS)
RAC plc will report 2005 interim and full year results under IFRS,including comparative information for 2004. We will alsocommunicate the 2004 results restated for IFRS, and the openingbalance sheet, to shareholders and the wider financial community inthe first half of 2005. We consider ourselves to be well preparedfor these changes.

The following new accounting standards will have most effect onRAC:

Share-based payments (IFRS 2)
Share option awards are not currently charged to earnings, on thebasis that such awards have been granted either at the market valueof the underlying share or under an approved SAYE scheme. UnderIFRS the fair value of the option grant will be measured andcharged to earnings over the vesting period.

Goodwill amortisation and Intangibles (IFRS 3 and IAS 36& 38)
Current policy is either to amortise goodwill over its estimateduseful life, or to perform an annual review for impairment. UnderIFRS we will cease to amortise goodwill, but will continue with theannual impairment reviews. At the same time, a wider range ofintangible assets will be recognised than under UK GAAP foracquisitions occurring after 1 January 2004, and these willcontinue to be amortised. The acquisition of renewal rights inrelation to the AXA Direct business undertaken in 2004 will betreated accordingly.

Pensions (IAS 19)
Under IAS 19, in addition to the service cost for pensions, whichis charged to payroll costs (and is broadly comparable to SSAP 24)there will be a financing charge on the scheme deficit which willappear within net financing charges. Also, under IFRS, pensionscheme assets and liabilities will be carried on the balance sheetat fair value. Actuarial gains and losses will be recognisedimmediately in the statement of recognised income andexpenditure.

Leases (IAS 16,17 & 18)
IFRS require depreciation to be charged on a straight line basis,rather than on the actuarial after tax (AAT) basis used in LexVehicle Leasing. IFRS also require changes in the basis formaintenance cost accounting which will affect both Lex VehicleLeasing and Lex Transfleet. These changes have no pre-tax cashimpact on our contract-hire businesses, and no impact on profitsover the life of an individual lease. However, they will tend tochange the profile of profits during the life of the vehicle lease,and in a growing business will have the effect of deferring profitrecognition in comparison with our current UK GAAP treatment.

Legal revenue recognition (IAS 18)
Under IFRS, revenue in our legal practice will be recognised basedon an assessment of the proportion of the case which has beencompleted, rather than on the current basis of payments received.Given that payments are typically made only on case completion,this will have the effect of bringing forward revenuerecognition.

The first three areas will affect RAC in common with many UKpublic companies, The final two (leases and legal revenuerecognition) are more specific to RAC and, taken together, are notexpected to be material to RAC’s operatingprofitability).

Insurance Mediation Directive
Parts of RAC plc, particularly the Consumer business, have becomeregulated by the FSA under the General Insurance Regulationprovisions with effect from 14 January 2005. The Regulation covers,amongst other things, the conduct of business, risk assessmentprocedures and capital adequacy considerations in respect of theGroup’s roadside breakdown, motor insurance and other generalinsurance activities.

Ends

Profit and loss account, balance sheet, cash flow and notesfollow.

The financial information set out below does not constitute thecompany’s statutory accounts for years ended 31 December 2004or 2003 but is derived from those accounts. Statutory accounts forthe year ended 31 December 2003 have been delivered to theregistrar of companies, and those for the year ended 31 December2003 will be delivered following the company’s annual generalmeeting. The auditors have reported on those accounts; theirreports were unqualified and did not contain statements undersection 237 (2) or (3) of the Companies Act 1985.

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