RAC plc 2003 preliminary results statement

Article date: 25 February 2004

RAC plc announces further growth

Highlights

  • Profit before goodwill amortisation, exceptional items and taxup by 24% to £86.7 million
  • Earnings per share on this basis up by 24% to 54.4p
  • Profit before tax £25.7 million (2002 - £23.1 million)
  • FRS 14 earnings per share 8.3p (2002 - 8.5p)
  • Strong cashflow: debt reduces to £154 million (2002 - £282million)
  • RAC Consumer Services' profit increased by 21% to £51.3million
  • Revenue growth of 6% from continuing operations;
  • Consumer Services up 7%
  • Business Services up 6%
  • Lex Vehicle Leasing profits up 12% to £19.6 million (our halfshare)
  • Major new business wins - Ford, MOD, British Airways
  • Full year dividend up 5.7% to 24.3p

Andy Harrison, Chief Executive, RAC plc, commented:
"2003 was our best year yet. We delivered good revenue growth, withsales in Consumer Services up 7% on a continuing basis and recordnew contract wins in Business Services, together with profits up24% and a strong cashflow.

"In addition we have invested in new systems and infrastructureto increase efficiency and deliver improved service to ourcustomers. We are confident that our strong brands, broad customerbase and unique range of capabilities in motoring and vehicleservices position RAC well for the future."

Notes:

A final dividend of 14.6p will be paid on 5 May 2004 toshareholders on the register on 2 April 2004.

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 020 7705 1257

Richard Pennycook,
Group Finance Director, RAC plc 07899 309988

Niall Addison,
Group Finance and Investor Relations Manager, RAC plc 07764624701

Anita Scott/Kate Holgate,
Brunswick Group 020 7404 5959

E-mail: racplc@rac.co.uk

A year of investment and growth
Over the past few years RAC plc has been reshaped with a strategyto be the leading provider of motoring and vehicle services toconsumers and businesses. We are pleased to report further goodprogress in 2003.

We have strong brands in RAC, Lex and BSM. Our strategy is todeliver growth by leveraging the strength of these brands and ourcustomer base, together with our unique range of motoring andvehicle services. In this regard 2003 was a good year for us. InConsumer Services we successfully implemented our new customerrelationship management system which will help us to provide morecarefully targeted services to our individual customers. InBusiness Services we won more large, long-term contracts.

Our success depends crucially on our colleagues and on theservice they provide to our customers. In the past year we weredelighted to win a number of important awards as both an employerand as a service provider, with RAC plc, Lex Vehicle Leasing, LexCommercials, RAC Business Solutions, Lex Auto Logistics and LexTransfleet all receiving recognition.

Financial highlights

In 2003 our total revenues increased by just 1% to £1,526million (2002 - £1,508 million), reflecting the impact ofdisposals. Profit before goodwill amortisation, exceptional itemsand tax grew by 24% to £86.7 million (2002 - £70.2 million).Earnings per share on this basis increased by 24% to 54.4p (2002 -43.9p). After exceptional items, primarily associated with ourwithdrawal from the mechanical handling businesses, profit beforetax was £25.7 million (2002 - £23.1 million) and earnings per sharecalculated in accordance with FRS 14 were 8.3p (2002 - 8.5p).

The revenues from our continuing operations increased by 6% to£1,469 million (2002 - £1,390 million) with profit before goodwillamortisation, exceptional items and tax from these businesses up by15% to £87.0 million (2002 - £75.7 million).

The Group continued to generate cash, while at the same timeinvesting significantly in future growth. Total net debt reduced by£127.9 million from £282.2 million in 2002 to £154.3 million.

The Board proposes a final dividend of 14.6p, to bring the totaldividend for the year to 24.3p, an increase of 5.7% on 2002.

Operating Review

RAC Consumer Services
RAC Consumer Services provides a comprehensive range of motoringservices to motorists, including breakdown cover, replacementwindscreens, driving tuition, legal support, travel services,insurance and car loans. This division has grown strongly overrecent years, and now accounts for over half of total OperatingProfit.

2003 saw further good progress from continuing operations, withrevenues up 7% to £353.1 million (2002 - £330.1 million) andprofits up 19% to £51.3m (2002 - £43.2 million). The Roadsidebusiness had another strong year. Individual memberships increasedby 4%, and revenues were up 9% at £198.7 million. We maintained astrong renewal rate, with 83% of our members renewing. Throughinnovation, we continued to deliver improved services to ourmembers in 2003. The new despatching system introduced in 2002 hasproved highly effective in improving the efficiency of our patrols- both in deploying them more quickly and in helping us to diagnosemore accurately the particular fault being experienced by themember. We also developed and introduced a new rapid deploymenttrailer. Carried in the back of the patrol van, this device iseasily deployed to tow vehicles that cannot be repaired at theroadside, minimising the need for additional vehicles to attend andtherefore speeding up our members' recovery time. Theseinnovations, combined with an 11% increase in our patrol force to1,500 at the end of the year, resulted in record levels of customerservice delivery. We were innovative in the development of newproducts too, with the launch of RAC Solutions mid-year. This rangeof products includes a no-claims discount for members who do notcall us out and - to help them avoid breakdowns - a comprehensiveannual vehicle inspection, which has been extremely well received.320,000 members transferred to the new products in the first sixmonths following launch.

BSM, the UK's largest driving tuition school, had another goodyear in 2003. Revenues grew 12% to £31.8 million, the thirdconsecutive year of double digit growth, and more instructorstaught more pupils than ever before. The business continued toinnovate, for example with the increasing use of driving simulatorsto keep initial costs down for students and with the use of on-linetraining for the theory and hazard perception tests. A constantchallenge is to retain the best instructors. A number ofinitiatives were introduced to improve instructor retention,including upgrading the BSM fleet to larger, more comfortablevehicles.

The Group's legal practice, RAC Legal Services, continued togrow strongly, with revenues up 27% to £10.3 million and profits up36%. With the increase in the case load, work in progress doubledcovering some 4,300 cases at year end. Policy holders grew by 18%to 2.1 million, further increasing our share of the motor legalexpenses market. Following the success of the accident care schemetrialled with Avon and Somerset Constabulary in 2002, we are now inpartnership with 13 police forces offering this innovative serviceto victims of road traffic accidents.

RAC Financial Services continued to grow strongly from a smallbase, and revenues were up 28% to £3.2 million. RAC Insure, our newbroker panel business, overcame the operational difficultiesexperienced in the first half of the year and is making steadyprogress. This service, backed by the UK's leading car insurers,offers members and other customers a simple route to competitivecar insurance. Our loans business grew in the year, and we launchedan RAC credit card. We see significant opportunities for growth infinancial services, using the trusted attributes of the RAC brandto assure customers of good value, and we are reinforcing themanagement of the business to accelerate the pace of expansion.

RAC Auto Windscreens had a challenging year in 2003 and, despitea marginal increase in sales (0.9%) to £96.9 million, profits weredown 15%. We made significant changes to the senior management teamin the early part of the year. The new team dealt well with asupplier recall later in the year, caused by a faulty batch ofadhesive, and approximately 9,000 windscreens were refitted, with aminimum of inconvenience to customers. There are a number ofbusiness improvement programmes underway, but it will take time forthese to take effect and trading remains challenging.

A significant achievement in Consumer Services in 2003 was thecutover to our new customer relationship management system in thefinal quarter. This operation was successful, despite itscomplexity, and was the culmination of three years' effort. The newplatform will enable us to understand and interact with our memberswith much greater insight. We are confident that the benefits wewill derive over the coming years will justify the investment made.The new database provides greater visibility on our business thanever before, and as a result we have marginally adjusted previouslyreported membership and customer penetration figures. Ourmembership grew 4% to 2.19million (2002 restated - 2.11 million)and the number of customers buying more than one product rose to13% (2002 restated - 11%).

Alongside the launch of the RAC Solutions products mid year, werefreshed our brand advertising with the introduction of thedistinctive "helping hand" and the strapline "Always there". Thenew treatment has been well received, with a measurable improvementin consumer response to the brand.

The growth of the business, particularly motoring services,resulted in increasing pressure on space in our facility at BradleyStoke in Bristol. Late in 2003 we agreed terms to lease anadditional 500 seat facility nearby, which will come on stream inthe spring of 2004. The annual cost of £1.8 million is a naturalconsequence of the continuing growth of the business.

Business Services
The continuing operations of Business Services grew further, withrevenues increasing by 6% to £1,112.9 million (2002 - £1,053.8million) and profits up by 8% to £50.8 million (2002 - £46.9million).

We aim to broaden our relationships with major corporatecustomers, using the full range of the Group's capabilities. Ourtarget sectors are defence, insurance, vehicle and truckmanufacturers, utilities and airside vehicles. 2003 saw importantcontract wins in three of these sectors and the long term nature ofthese contracts has improved the quality of our earnings.

During the year we took on the management of the British Airwaysfleet of specialist airside vehicles, such as the tugs that moveaircraft and crew buses. This is a 10 year contract with lifetimerevenues of £230 million, involving 6,300 vehicles, with serviceprovided through Lex Transfleet, supported by Lex Auto Logisticsand Lex Commercials. In December, we announced that we had beensuccessful in our bid to take on the contract hire services of FordFinancial in the UK, with a seven year term. The contract deepensour existing relationship with Ford, for whom we provide breakdownassistance as part of their new car warranties. Initially we willtake on some 20,000 vehicles through Lex Vehicle Leasing, our jointventure with HBOS, and have responsibility for all new contracthire business sold through the network of Ford, Volvo, Jaguar, LandRover and Aston Martin dealerships. Also in December, we werepleased to be confirmed, in partnership with Amey, as preferredbidder for the £500 million, 15 year Ministry of Defence C Vehiclecontract to supply and maintain the fleet of construction vehicles,plant equipment and rough terrain mechanical handling equipmentoperated by the British armed forces worldwide. The contract isexpected to be awarded by October 2004, leading to full serviceprovision by April 2006. This will extend our relationship with theMinistry of Defence, for whom we are the largest vehicle servicesprovider.

>RAC Business Solutions
RAC Business Solutions sells motoring and related vehicle servicesto businesses, including breakdown assistance, accident management,insurance claims processing, vehicle inspections and customercontact centres. Revenues grew 10% to £160.8 million (2002 - £146.3million) and profits by 56% to £1.4 million (2002 - £0.9million).

Following further success in tenders in 2003, this division nowprovides breakdown assistance for 41% of all new cars sold in theUK including Ford, Audi, Toyota, Nissan, Peugeot, Citroen and Kia.The division also provides breakdown services to six of the top tencontract hire fleet operators in the UK, often combining this withaccident management. In the insurance market Business Solutionsmanages motor claims on behalf of a number of companies includingNorwich Union and NFU Mutual.

Lex Vehicle Leasing
Our half share of profit from Lex Vehicle Leasing, a joint venturewith HBOS, grew 12% to £19.6 million on revenue up 5% to £207.2million. The fleet under contract increased from 95,700 to 105,400,making the company the largest in its sector to have grown purelyorganically.

The quality of its services was recognised with further FleetExcellence awards, this time including Best Contract Hire Companyand Best Service Supplier. New customers included Siemens, Honda,Marconi, TRW, Goodrich and Wyko.

In a better year for the used car market, disposal losses of£6.2 million (RAC share) were lower than anticipated and of the £45million provision (our share) created at the end of 2000, £16.3million remains. We have carried out an impairment test on theexisting fleet as required by FRS 11 which confirms that thisamount is sufficient to meet potential disposal losses. We continueto take a cautious view of the used car market in pricing ourcontracts.

Manufacturer Support Services
Revenues in this division grew 3% in 2003, to £627.9 million (2002- £606.7 million), whilst profits were flat at £31.2 million (2002- £31.6 million).

Lex Auto Logistics, our inventory management operation, faced achallenging year dealing with the implications of the non-renewal,previously reported, of its contract to supply DAF parts. Thiscontract expired in June 2003, resulting in a year on year profitsdecline from this source of approximately £4 million. However, theshortfall was made up in part by an increase to £11.8 million (2002- £8.4 million) in the additional profits arising from the relatedcontract to distribute Leyland parts which is anticipated tocontinue, with declining profitability, until at least 2005. Thebusiness took steps to position itself for the future, growing itsdistribution of parts to Norwich Union's accident repair networkand, subsequent to the year end, moving into a dedicatedwarehousing facility in the Midlands to support this newbusiness.

Hyundai, our car importership, had a successful year, growingmarket share in a record new car market to 1.3% and recording32,238 registrations, up 10%. The model range is increasinglystrong - the Getz traded well as a result of being the "What Car?Budget Car of the Year for 2003" and other models such as Matrix,Trajet and Santa Fe benefited from the unique five year warrantynow offered on all new Hyundai cars

Lex Commercials, our truck dealership network, had a good year,growing profits despite revenues being flat at £158.6 million. Thebusiness supported a number of Group companies in the delivery ofcomplex bids.

Isuzu Truck was recognised as being non-core for RAC, and we arewell advanced in our negotiations to sell this small importershipbusiness to its management.

Lex Industrial Solutions
Last year we highlighted our dissatisfaction with the returns beingachieved in our mechanical handling businesses, and ourdetermination to restore shareholder value was confirmed with thesale, announced in April 2003, of Lex Harvey and Lex Birchwood. InJanuary 2004 we disposed of Lex Havelange, our small Belgiansubsidiary and we are in active discussions with a number ofinterested parties concerning the disposal of Lex Manutention inFrance and Lex Komatsu South, our remaining UK Mechanical Handlingbusiness. We also announced the closure of the Managed Services armof Industrial Solutions. Our 2003 results include appropriateexceptional charges and asset impairments associated with theseprocesses and these are described in the Financial Review.

The remaining business within this division is Lex Transfleet,the commercial vehicle contract hire, vehicle rental and fleetmanagement business which is jointly owned by RAC and Lombard, apart of the Royal Bank of Scotland group. Revenues improved by 21%on a continuing basis, with strong performances from fleetmanagement which grew from 17,500 trucks to over 21,000, and withthe take-on of the British Airways Ground Fleet Servicescontract.

Our people
RAC has been supporting motorists for over a century, and the Grouphas developed a strong culture of service to its members andcustomers, for whom we are "Always there". Responsible for theservice are 12,000 colleagues, and we thank them for the countlesstimes when they have gone above and beyond the call of duty todeliver great service to our customers.

We are working hard to make RAC plc an attractive place forcolleagues to develop their careers. We are committed to strongvalues which guide our decision making and recruitment processes.We encourage open communication and feedback from all parts of theGroup - in 2003 our colleagues were engaged regularly in briefingsfrom their business managing directors and Executive Board members.Our 2003 colleague satisfaction survey showed good progress withboth an increased response rate and a higher level of overallsatisfaction. Last year we highlighted the importance of pensions.Our decision to keep open our defined benefit scheme and extend itsreach, was strongly supported by our colleagues and their union,and represents a valuable benefit to them.

At Board level, we welcomed Richard Pennycook in August and JohnWarren in September 2003. Richard joined as our Group FinanceDirector and John as a non-executive director.

Policy
RAC has always been an important voice of the motorist. Inconjunction with our partners in the RAC Foundation, we engage atall levels of government and through the media to promote theinterests of motorists. Our most recent Report on Motoring, now inits sixteenth year, highlighted the very significant cost ofmotoring with a quarter of average disposable family incomeabsorbed by the cost of car use and ownership. Driving on the roadsin Britain can be a miserable experience - only one in fourmotorists claims to enjoy driving, and our legal practice dealsdaily with the distress caused when our members are involved inaccidents with one of the one million drivers who are not properlytaxed and insured. RAC will continue to put forward constructiveand informed advice to policy makers to help make motoring inBritain safer, quicker and more enjoyable.

Outlook
RAC is a strong and unique motoring and vehicle services companywhich has delivered substantial growth in revenues and profits,together with strong cash flow.

We expect to see continuing growth in 2004, despite theanticipated reduction in profits from our contracts with Paccarwhich we have highlighted previously. Looking further ahead, thestrength of our brands, the breadth of our customer base and theinvestment we have made in systems and infrastructure will continueto offer significant growth opportunities in both Consumer andBusiness Services.

Ends

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