Article date: 26 February 2003
RAC plc announces another year of good progress
|Strong operationalcashflow of £73 million.|
|Underlyingprofit* up 8% to £70.2million.|
|Underlying earningsper share* up 5% to43.9p.|
|Profit before tax£23.1 million (2001 - £62.3 million)**; FRS14 earnings per share 8.5p|
RAC Consumer Services profitincreased to £45.2 million:
|Roadside revenuesup 5% to £183 million;|
|Non-roadsiderevenues up 22% to £51 million.|
|Lex Vehicle Leasingprofit up 11% to £17.5 million (our half share).|
|Lifetime revenuesfrom new contract wins of £620 million.|
|Full year dividendup 5% to 23.0p.|
Andy Harrison, ChiefExecutive, RAC plc, commented:
"RAC hasdelivered another robust performance with an 8% growth inunderlying profit, backed up by strong cash flow. The quality ofour underlying earnings continues to improve, with further growthin RAC Consumer Services including 22% growth in non-roadsideservices as we build on the strength of the RAC brand. We also wonnew business services contracts with lifetime revenues of £620million.
"Our financial strength increased, with debt falling by £44.2million, and we have taken active steps to manage our pensiondeficit. We believe all the ingredients are in place for anothergood year in 2003. This is supported by the Board's decision toincrease the dividend by 5% to 23p."
* Before goodwill amortisation,exceptional items and tax
** Reduction primarily due togoodwill and other write-offs in Mechanical Handling compared withan exceptional gain on the sale of our investment in Synnex in2001.
For more informationcontact:
Paul Hewitt, Group Finance Director, RAC plc 01628 843703
Niall Addison, Group Finance & Investor Relations Manager, RACplc 07764 624701
Anita Scott / Stuart Bruseth, Brunswick Group 020 7404 5959
Preliminary results for the year to 31 December 2002
Another year of goodprogress
In 2002 we made good progress towards our goal of being the firstchoice provider of motoring and vehicle solutions for consumers andbusinesses. We will continue to grow the business by selling moreservices to our growing customer base, building on the strength ofour brands, our service delivery and our unique motoring andvehicle expertise.
In Consumer Services we are growing our customer base,increasing the range and quality of our services and encouragingmore members to buy multiple services. We continued the growth inour customer base in 2002 and now deliver roadside service to 6.5million consumers across RAC Consumer Services and RAC BusinessSolutions. There is increasing customer loyalty in the individualmembership base, as evidenced by the growing number (83.8%) whorenewed their membership with RAC in 2002. Our investment incustomer relationship management systems and infrastructure willenable us to understand more of our customers? individual motoringneeds and provide tailored solutions from our expanding range ofservices. The systems are already delivering benefits includinghigher quality information and more effective direct marketing, andwill be fully implemented in the middle of the year. At present 7%of individual customers buy more than one service; our goal is toincrease this to 15%.
In the corporate market we have a number of businesses whichhave competitive strength in their own right. We aim to leveragethese strengths by providing additional services to existingcustomers and by using our unique range of skills to supplytailored multi-service solutions for major customers. For example,we have won new contracts with the Ministry of Defence, includingthe renewal of our RAF White Fleet contract, and have broadened therange of services we provide to Norwich Union. These developmentsdemonstrate our proven track record of building long termpartnerships with customers such as these to add substantial valueto their organisations.
The benefits of these long term relationships and organic growthcan be seen in the quality of the group's earnings and our steadyunderlying profit growth over the past two years. The lifetimerevenue of new contract wins in 2002 was £620 million, increasingthe total lifetime value of our long term business to £2.83 billionin 2002 (2001 - £2.73 billion).
2002 saw another milestone in our development as a uniquesupport services company as we renamed the company RAC plc toleverage the value of our strongest brand. We shall continue todevelop the Lex brand in its business to business markets.
Revenue increased by 4% to £1508 million. Underlying profit grew by8% to £70.2 million (2001 - £65.1 million). This was after a £7million increase in pension costs and includes a full yearcontribution from RAC Auto Windscreens (2001 - nine months).Underlying earnings per share increased by 5% to 43.9p (2001 -41.9p). Profit before tax was £23.1 million (2001 - £62.3 million)with earnings per share calculated in accordance with FRS14 of 8.5p(2001 - 39.5p).
The Group tax rate on underlying profit increased to 28% asexpected (2001 - 26%). This is before a one-off credit of £7million in respect of deferred tax provided in previous years thatis no longer required. The underlying tax rate is expected toremain at 28% in 2003 and then to rise to 31% over the followingtwo years.
A reconciliation between underlying profit and profit before taxis included in note 2 and explained in this statement in thesection entitled Significant Financial Items on page 7.
As a result of strong cashflow of £44.2 million, net debtreduced to £155 million from £200 million at the end of 2001, asset out in note 5.
The Board proposes a final dividend of 13.8p (2001 - 13.2p)which, together with the interim dividend of 9.2p (2001 - 8.8p),increases the total dividend for 2002 by 5% to 23.0p per share(2002 - 22.0p). Subject to the approval of shareholders at theAnnual General Meeting to be held on 30 April 2003, the finaldividend will be paid on 2 May 2003 to members registered at theclose of business on 4 April 2003.
RAC Consumer Services sells a comprehensive range of motoringsolutions to private motorists, including financial, legal andtravel services, breakdown cover, insurance, vehicle glass anddriving tuition. This part of the business now accounts for overhalf of the group's underlying PBIT and has significant potentialfor continued growth.
In 2002 RAC Consumer Services maintained the strong growth ithas achieved over the past three years. Revenue grew by 6% to £339million, which includes £96 million from RAC Auto Windscreens (9months to 31 December 2001 - £72 million). RAC Consumer Servicesgrew profit to £45.2 million (2001 - £37.7 million). Profit grew by7% on a like for like basis.
The roadside business continues to grow and the number ofindividual memberships increased by 6% to 2.15 million, with over3.1 million people covered. Revenue from roadside operations grewby 5% to £183 million.
This is a strong business with high customer loyalty; renewalrates increased to 83.8% from 82.9%. Our long term relationshipwith members, together with the improved information provided byour customer relationship management systems, forms a soundplatform for the continued growth of our non-roadside services,enabling us to meet an increasing range of our members' motoringneeds.
Growth in non-roadside services, excluding RAC Auto Windscreens,accelerated in 2002, with revenue increasing by 22% to £51 million(2001 - £42 million). During 2002 we continued to broaden ourservice offering with the development of a range of newproducts.
RAC Auto Windscreens' performance was broadly in line with theprevious year and we continue to develop synergies with RAC.Revenue was £96 million in 2002 (nine months from acquisition in2001 - £72 million).
RAC Legal Services grew revenue by 33% and profit by 36%. Thebusiness grew the number of legal expense policy holders by 13% to1.8 million and now has an 11% share of the motor legal expensesinsurance market. Legal Services successfully launched RAC AccidentSolutions, providing a range of co-ordinated services to members inthe event of an accident, from vehicle recovery and legal advice topersonal injury cases. This is a unique service whichdifferentiates RAC in the marketplace. RAC Legal Services launchedan accident care scheme with Avon and Somerset Constabulary during2002 and is negotiating with a number of other police forces toexpand the service across other parts of the UK. We believe thequality and range of the services we offer, together with ourtrusted brand name, can make legal services more accessible topeople beyond our membership base.
RAC Financial Services, our joint venture with AXA, achievedrevenue growth of 96% and profit growth of 126%. We renegotiatedthe joint venture terms with effect from 1 January 2003, providingthe foundation for significant further growth in financialservices. Under the new agreement RAC's share of profits willincrease to 42% in 2003, rising to 50% in 2006 and 100% after 2011.We expect the number of our motor insurance policyholders to growfurther with the launch of 'RAC Insure', which offers a brokerpanel drawn from the UK's leading insurers, enabling people to findcompetitive car insurance quickly and easily. We are working withMBNA to supply motor loans under the RAC brand.
RAC Travel Services increased revenue by 20% and profit by 76%in 2002. The renewal rate for travel insurance improved as a resultof a focused renewals strategy. This area of the business isalready benefiting from our investment in customer relationshipmanagement systems, which enabled us to generate significantlyhigher sales than in previous years from direct marketingactivity.
BSM grew revenue by 17% and profit by 19%. The business is thelargest driving school in the UK and has a 19% share of the drivertuition market. The average number of instructors during the yearincreased by 11% to 2,556 while the number of driving students grewby 8% to 145,000. Pass rates on both theory and practical testsincreased. BSM has pioneered interactive tuition methods andlobbied successfully for the government to include a hazardperception assessment in the driving test. BSM's branding wasrefreshed in 2002 to strengthen its links with the RAC brand andfurther support our efforts to promote our full range of servicesto customers.
Systems: We are in the final stages ofcompleting a major investment programme in RAC's core systems. Thisinvestment in our infrastructure will improve customer service andefficiency. It will also support future growth for both RACConsumer Services and RAC Business Solutions by enhancing servicedelivery and enabling us to understand each individual customer andprovide tailored solutions to their motoring needs.
The implementation of the new £5 million automated patroldespatch system (ICAD) was completed in 2002. The implementationcaused some service disruptions during the summer of 2002, but isnow working well and delivering benefits in service and efficiency.The system coped robustly with the pressures caused by the recentsevere weather, and can handle greater volumes than the previoussystem. Enhancements such as call line identification and textmessaging will be introduced in 2003.
The implementation of our customer relationship managementsystem will be completed in mid-2003, with a capital investment of£26 million. A data warehouse is already operational and providinghigher quality information to the business to improve accuracy intarget marketing. The front office system is fully implemented inRAC Business Solutions and provides a flexible platform for thecontinuing development of new services. There were additionalimplementation costs of £4.2 million in 2002 with a further £3million expected in the first half of 2003.
We expect benefits, after taking into account additionaldepreciation, of £1 million from these systems in 2003, rising to£4 million annually in future years. In addition, the customerrelationship management systems will support us in growing theproportion of customers who buy more than one service from itscurrent level of 7% to our target of 15%.
Revenue from business services grew to £557 million in 2002 (2001 -£533 million). Profit of £19.2 million was in line with last year(£19.3 million).
Our business services operations are focused on working togetherto provide a broad range of co-ordinated services to customers withwhom we can develop strong partnerships, and the potential forcontinued growth remains good.
We continue to develop our relationship with the Ministry ofDefence, through successful service delivery on existing contractsand the provision of new services such as a £12 million drivertraining contract and a £35 million hardware spares supportcontract, both signed in 2002. These were followed in February 2003by the renewal of the Lex Defence White Fleet contract to supplythe 3,300 strong RAF non-combatant fleet for a further eight years,extending the total number of vehicles we supply the armed forcesto 12,500, with a combined lifetime contract value of over £600million. We are shortlisted for a further two defence contractswith a potential revenue of £1400 million over 15 years.
We have broadened the services we provide to Norwich Union andRAC Business Solutions now supplies claims management, legalservices, roadside services, windscreens and engineer deploymentfor the insurer. In addition, Lex Auto Logistics has successfullypiloted a vehicle parts supply project with Norwich Union, withsignificant potential revenues.
RAC Business Solutions sells motoring and related businesssolutions to business customers and manages complex outsourcingbids for large public and private sector organisations. Thebusiness grew revenue by 16% to £146 million (2001 - £126 million)and grew profit to £2.3 million (2001 - £1.0 million).
New business wins for RAC Business Solutions in 2002 illustratethe potential to broaden the range of services we provide toexisting customers. We signed contracts with the Volkswagen AudiGroup to provide call centre support for Volkswagen's UK retailunits and a dedicated network of Audi roadside technicians. Toyotaadded a vehicle inspections contract to the roadside assistanceservices already provided. New insurance claims managementcontracts were won with NFU Mutual and Lloyds TSB.
The quality of service we provide to business customers has beenrecognised in 2003 with a number of Fleet Excellence awards, votedfor by fleet managers. RAC Business Solutions won awards for BestAccident Management Services provider, Top Fleet Software providerfor RAC Software Solutions, and RAC also received commendations forVehicle Recovery and Windscreens.
Our half share of profit from LexVehicle Leasing, our joint venture with HBOS grew 11% to £17.5million in 2002 from £15.7 million in 2001. The fleet undercontract increased to 95,700 in 2002 (2001 - 93,700) and thequality of new business remains high.
In 2002, Lex Vehicle Leasing completed the £12 millionimplementation of new systems which provide an integrated platformfor managing customers and suppliers. The systems are providingdifferentiated levels of service and reducing costs. A Six SigmaQuality programme, Q6, was also launched and has significantpotential to enhance future performance. The business won FleetExcellence Awards for Best Service Supplier and Best Contract HireCompany, and a commendation for Fleet Management.
Disposal losses on vehicles reaching the end of their contractswere comfortably absorbed within the £45 million provision we madeat the end of 2000. We remain confident that the provision will besufficient to meet future disposal losses.
Lex Industrial Solutions includes the hire, maintenance and fleetmanagement of a range of commercial vehicles, mechanical handlingand other industrial equipment. The business incurred a loss of£0.6 million in 2002 (2001 - £2.6 million profit). This result wasbefore a number of one-off and exceptional costs affectingMechanical Handling which are explained in the SignificantFinancial Items section below.
Lex Transfleet, our commercial vehicle contract hire, vehiclerental and fleet management business achieved a record year,growing revenue, profit and new business. Our fleet managementbusiness grew to 17,500 trucks (2001 - 15,300). This progress wasoffset by a difficult year for Mechanical Handling, whichexperienced continued market difficulties. The underlying businessremains profitable; however restructuring costs were incurred asthe business was reorganised to become more customer-focused andefficient. We have also been exploring alternative approaches tocreate value, for example by reworking our relationship with lifttruck manufacturers. As we signalled at the half year, we do notexpect significant profit improvement before 2004.
Manufacturer Support Services provide outsourced marketing andinventory management services, primarily to vehicle manufacturers.Revenue grew to £607 million in 2002 (2001 - £563 million) andprofit increased to £23.2 million in 2002 (2001 - £21.9 million).These figures are before the one-off items set out in theSignificant Financial Items section below.
Lex Auto Logistics has developed a strong pipeline for newbusiness and won new contracts with £226 million lifetime revenuein 2002. Paccar, the parent company of DAF and Leyland, did notrenew its contract to supply DAF parts, which ends in June 2003;however, the financial impact of this was offset by an additional£8.4 million profit in 2002 from the contract to supply Leylandparts (set out in the Significant Financial Items section below).Total Paccar profits are expected to continue at the same level in2003 and then at lower levels until 2006. Lex Auto Logistics' baseprofit, excluding Paccar, is around £5 million, with good potentialto increase with new contract wins, such as the parts supplyinitiative with Norwich Union.
Hyundai maintained its market share at 1.1% and grewregistrations to 29,300 (2001 - 27,800). The company has a strongmodel range, including the new Getz and Coupe which were launchedin 2002 to critical acclaim. The Getz has been named the What Car?Budget Car of the Year 2003. Hyundai's reputation for service andreliability was strengthened when the company pioneered a newindustry standard with the launch of a five-year warranty. Profitsfrom the sale of Hyundai parts, a source of high quality earnings,continued to grow in 2002.
Our truck businesses, Lex Commercials and Isuzu Truck, made goodprogress in 2003.
As mentioned in our December tradingupdate, the financial results for 2002 include several one-off andexceptional items. These relate to:
Mechanical Handling: falling lift truck prices and a weaktrading performance has led to an asset write-down of £7.2 millionin the UK, the bulk of which relates to accelerated depreciation offork lift trucks; and a £6.4 million impairment in our French forklift truck business. In the light of these issues we have prudentlywritten off acquired goodwill of £22.2 million.
Changing Group Structure: one of the group's major contracts iswith Paccar for the distribution of Leyland and DAF parts. LastSeptember Paccar decided to bring the contract in-house and in 2002we benefited from £8.4 million of additional Leyland margin as thecontract winds down. In 2002 we incurred a cost of £2.9 millioncompleting the integration of RAC Auto Windscreens, which wasacquired in March 2001. Disposals of businesses, primarily the saleof Lex Autocentres in April 2002, led to an exceptional cost of£9.5 million.
Systems: the cost of implementing new systems for automaticdespatch and customer relationship management in RAC MotoringServices (£4.2 million).
For reporting purposes these items are treated differently. Thetable below shows their classification in the results:
|Mechanical handling||Group structure||Systems||Other||Total|
|Profit before one-off & exceptional charges||73.2|
|Profit before tax||23.1|
The exceptional charge of £8.5 million in 2002 compares with anexceptional credit of £9.3 million in 2001, which included a profitof £25.3 million from the sale of our investment in Synnex, theTaiwanese electronic components distributor.
At the end of 2002 the pension deficit calculated under theaccounting standard FRS17 was £129 million after tax. As announcedin December the Company will increase its cash contribution by £2.5million in the second half of 2003 and by £5 million a yearthereafter. We are maintaining our final salary scheme which webelieve is an important and competitive benefit to provide for ouremployees. We have taken steps to reduce the ongoing cost of thescheme, which are described in the attached statement onpensions.
The sustained growth and improved quality of earnings we haveachieved over the past two years show the benefits of ourtransformation as a unique support serices company. There issignificant opportunity for continued growth in both our consumerand business markets by increasing the number of services weprovide to our customers. Our investments in systems should enhanceour growth potential; the benefits are already beginning to flowthrough in terms of service delivery, higher quality informationand improved sales targeting.
In addition, our strong cash flow has further strengthened ourfinancial position. We expect our organic growth to continue todrive improved performance in 2003.