RAC plc: Interim results for the six months to 30 June 2003

Article date: 30 July 2003

30 July 2003

RAC plc is a motoring and vehicle services company with a strongcustomer base of both consumers and businesses. We are deliveringsustained organic growth by leveraging the RAC, Lex and BSM brands,our customer base and our unique motoring and vehiclecapabilities.

We delivered another strong performance in the first half of2003 and made good progress on the priorities outlined at thebeginning of the year:

-We have deliveredcontinued growth in consumer and business services, increasingour individual customer base and extending our track record ofwinning major outsourcing contracts.
-We are generatingsubstantial benefits from our systems investments:
-Lex Vehicle Leasing’s £12million systems investment, completed in 2002, is deliveringboth cost efficiencies and competitive advantage through theprovision of added value online customer services.
-RAC’s automated patroldespatch system is delivering improvements in customer serviceand efficiency, and our customer relationship management systemsare providing improved quality of information to support ourtargeted marketing campaigns. 9% of our members now buy morethan one service, up from 5% a year ago.
-We expect thebenefits from our investment in systems to increase.
-We are addressing the issues in MechanicalHandling through the disposal of Lex Harvey and Lex Birchwood toFinning (UK) Limited for £98.5 million, and have restructuredour remaining mechanical handling businesses.
-We have successfully introducedchanges to our pension scheme to address our pension deficit andthe increasing ongoing costs of pensions, whilst retaining afinal salary scheme for our employees.

Total turnover, including RAC’s share of joint ventures andassociates, increased by 6% to £786.9 million. Profit before tax,exceptionals and goodwill amortisation grew by 30% to £43.1 million(first half 2002 - £33.2 million). This included an additional £6.7million profit from our Leyland contract (first half 2002, £ nil)and £1.7 million of costs relating to dual running as we implementour customer relationship management systems (first half 2002, £0.5million). Earnings per share on this basis increased by 30% to 27.2pence (first half 2002 – 20.9 pence).

Profit before tax was £15.4 million (first half 2002 - £20.0million). This was after exceptional costs of £24.9 millionrelating to the disposal of the major part of our mechanicalhandling business. This gross figure is partly offset by therelease of a tax credit of £7.3 million within our tax charge.Costs associated with the restructuring of our remaining mechanicalhandling businesses were £2.8 million higher than were estimated atthe time of the announcement. £9.8 million relates to goodwillpreviously written off to reserves.

Earnings per share calculated in accordance with FRS14 were 8.3p(first half 2002 – 9.3 pence).

There was a net cash flow of £52 million, which reduced debt to£103 million from £155 million at the end of 2002.

The Board has increased the interim dividend to 9.7 pence, anincrease of 5.4% on the 2002 interim dividend of 9.2 pence. Thiswill be paid on 29 August 2003 to shareholders registered at theclose of business on 8 August 2003.

Operating results

RAC ConsumerServices
RAC Consumer Services sells a comprehensive range of motoringservices for individual motorists including roadside assistance,legal services, driver tuition, financial services and vehicleglass replacement. In the first half of 2003 this businessmaintained the strong profit growth it has delivered over the pastthree years. After adjusting for the disposal of Lex Autocentres in2002, like for like revenues increased by 6% and like for likeprofits grew by 15% when compared with the first half of 2002.Reported revenue grew by 1% to £173.6 million (first half 2002 -£172.3 million) and profit grew by 20% to £25.7 million (first half2002 - £21.5 million).

Roadside revenues grew by 8% to £96.6 million in the first half ofthe year (first half 2002 - £89.2 million). Service delivery andcustomer satisfaction have improved and cost efficiencies have beengained as a result of the new automated patrol despatch systemwhich was completed in 2002. The introduction of a unique rapiddeployment trailer enabling patrols to tow vehicles they cannot fixat the roadside is further improving customer service andefficiency. Additional service enhancements such as text messagingcapabilities are on track for delivery in the second half of2003.

RAC Solutions, an innovative new breakdown product was launchedin July. This combines a free car check for members with ano-claims discount. This helps to prevent breakdowns and supportscustomer loyalty by rewarding members who stay with us and call onour services less frequently. The service reinforces RAC’snew ‘always there’ brand positioning by deliveringvalue to members who do not need to use our services as well as tothose who do.

The individual roadside membership base continues to grow, witha 5% increase to 2.19 million in the first half of 2003 (30 June2003 – 2.08 million), covering over 3.1 million people. Therenewal rate remains high at 83%. This stable and growing customerbase provides a strong platform for developing long termrelationships with our members and providing additional motoringservices tailored to meet their individual needs.

The number of customers who buy more than one service increasedto 9% (first half 2002 – 5%), representing good progresstowards our next milestone of 15%. The completion of our customerrelationship management systems will support us in achieving this,by providing the information to better understand ourcustomers’ needs and to tailor services accordingly. Ourcustomer data warehouse, which now has 10.5 million records, isdelivering higher quality information and marketing efficiencies,and system testing is underway in RAC Consumer Services followingthe completion of the implementation in RAC Business Solutions. Thenew systems have delivered £1.1 million of benefits, which helpsoffset the additional £1.7 million of dual running costs incurredin the first half of the year.

Growth in non-roadside services remains strong, with revenuesincreasing by 12% on a like for like basis to £28.1 million in thefirst half of the year (first half 2002 - £25.0 million).

Legal Services maintained the double digit growth rate it hasestablished over the past three years, with revenue increasing by32% to £4.9 million (first half 2002 - £3.7 million) and profit by24% on the first half of 2002. The business operates with a panelof 24 solicitor firms around the UK and a team of 29 in-housesolicitors. Legal Services has 2.0 million legal expense policyholders, primarily through partnerships with major insurancecompanies. Legal claims handled grew by 14% to 38,100 and personalinjury claims increased by 25% to 9,600.

BSM delivered another strong performance with revenue growth of14% to £16.1 million (first half 2002 - £14.1 million) and profitgrowth of 27%. The number of instructors grew by 11% to 2,532(first half 2002 – 2,287). BSM’s branding has beenrefreshed to strengthen the connection with the RAC brand andsupport our goal of promoting our full range of services tocustomers.

In Financial Services our remodelled partnership with AXA cameinto effect on 1 January 2003 with the launch of RAC Insure. Thenew business’s operational infrastructure, including theestablishment of a panel of insurers and the development ofeffective systems links with underwriters, has been successfullyestablished and marketing expenditure recently increased. Revenueand profits were slightly down on the first half of 2002,reflecting the time invested in building a strong foundation forfuture growth. The range of financial services expanded with thelaunch of an RAC credit card in June 2003.

RAC Auto Windscreens’ revenues were slightly down at £48.9million (first half 2002 - £49.6 million). In the early part of theyear we made substantial changes to the management team.

We sell to businesses using the Lexbrand for vehicles and vehicle support services and the RAC brandfor motoring and related insurance activities.

In the first six months of 2003 business services’revenues grew by 7% to £611.8 million (first half 2002 - £570.5million) and profit increased by 35% to £26.2 million (first half2002 - £19.4 million). This included an additional £6.7 millionmargin on the Leyland contract.

In addition to the growth from our individual businesses we havefive target sectors for major account wins utilising the fullbreadth of our service capabilities:

-Defence: the Ministry ofDefence is our largest customer in terms of both revenue and therange of services provided. We continue to grow our partnershipthrough the provision of additional services and in February2003 renewed our contract to supply the 3,300 RAF non-combatantfleet, bringing the total number of vehicles we supply to thearmed forces to 13,100, with a combined lifetime contract valueof over £600 million. We are bidding for further substantialcontracts.
-Insurance: RAC BusinessSolutions provides a range of services such as roadsideassistance, claims management and legal services to insurancecustomers including NFU Mutual, Lloyds TSB and Norwich Union,our second largest customer. Lex Auto Logistics also works inpartnership with Norwich Union to provide parts supply to theinsurer’s 260 approved motor repair centres. The pipelinefor contracts to grow our business with other insurers isencouraging.
-Motor manufacturers: servicesto truck and car manufacturers include parts supply through LexAuto Logistics and roadside services from RAC. In addition, RACBusiness Solutions provides a range of customer serviceoperations to manufacturers under their own brands.
-Airside: our presence in this sector wasestablished in April 2003 when Lex Transfleet won a £230 million10 year contract to provide fleet management services to BritishAirways ground fleet services, with parts support from Lex AutoLogistics. The implementation is progressing well and thecontract has generated significant opportunities to provideservices to other companies in this sector.
-Utilities: Lex Transfleet andLex Vehicle Leasing provide vehicle services to a range ofutilities including Scottish & Southern, Thames Water, EastMidlands Electricity and Scottish Power, and there is potentialfor further growth in this sector.

RAC Business Solutions grew revenue by 12% to £78.7 million inthe first half of 2003 (first half 2002 - £70.3 million) anddoubled profits to £0.8 million (first half 2002 - £0.4 million).The margins in this business reflect the significant proportion ofsales of roadside services to fleets and motor manufacturers whichprovide an important contribution to supporting the infrastructurein the Consumer roadside business.

Lex Vehicle Leasing, our joint venture with HBOS, performedstrongly in the first six months of 2003. Our share of revenue grewby 8% to £102.5 million (first half 2002 - £95.2 million) andprofit by16% to £9.5 million (first half 2002 - £8.2 million). Thefleet grew to 99,600 in the first half of the year (first half 2002– 91,800) as a result of strong growth in new business andimproved retention of new customers. Disposal losses on vehiclesreaching the end of their contracts were comfortably absorbedwithin the £45 million provision made at the end of 2000. We remainconfident that the provision will be sufficient to meet potentialfuture disposal losses. New contracts are currently being priced inanticipation of a 10% reduction in used car prices over the nextthree years. Lex Vehicle Leasing is an important element in ourservice offering and creates significant value for shareholders,paying a net dividend to RAC plc of £65 million over the past 10years.

Lex Industrial Solutions incurred a loss of £1.6 million in thefirst half of 2003 (first half 2002 – profit of £0.2 million)on revenue of £103.2 million (first half 2002 - £104.0 million).Lex Transfleet, our joint venture with Lombard, continues toperform well, growing its fleet management business including the£230 million British Airways Ground Fleet Services contract, whichwas awarded in March 2003. Lex Transfleet also plays a key role indelivering the Ministry of Defence white fleet. Its progress wasoffset by the underperformance in our mechanical handlingbusinesses, which we are addressing through the sale of Lex Harveyand Lex Birchwood, completed in May, and by restructuring ourremaining businesses. These businesses remain unprofitable and wehave reduced costs significantly in the first half of the year.

Manufacturer Support Services grew revenue by 9% to £327.4million (first half 2002 - £301.0 million) and increased profit by65% to £17.5 million (first half 2002 - £10.6 million). Thisincludes £6.7 million increased margin from Lex AutoLogistics’ contract with Leyland, which will offset a loss ofprofit approaching £4 million in 2003 from the termination of theDAF contract in June; Leyland and DAF are both owned by Paccar. Thecontribution from the Leyland contract is expected to continueuntil at least 2005, albeit at a declining rate. Lex Auto Logisticsperformed well in the first half, expanding the services itprovides to Norwich Union and providing parts support to BritishAirways.

Also within Manufacturer Support Services, Hyundai grewregistrations by 11% whilst the overall market for UK vehicle carsales in the first half of the year was flat. The model mix hasimproved and margins were maintained. The parts business continuesto grow and will be a stable source of income in future years.

Peter Smith succeeded Sir Trevor Chinn as Chairman of RAC plcfollowing our Annual General Meeting on 30 April 2003. RichardPennycook will join us as our Finance Director on 4 August 2003.John Warren, Finance Director of WH Smith, will join the Board as anon-executive director on 1st September 2003.

The transformation over the past four years has built RAC plc intoa strong motoring and vehicle services company, with higher qualityearnings and substantial growth opportunities. This is demonstratedby a strong performance in the first half of 2003 in both ConsumerServices and Business Services, building around the strength of theRAC and Lex brands. The Board anticipates delivering a full yearperformance in line with expectations.

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