Caffyns Regulatory News (CFYN)

Caffyns plc

Preliminary Results for the year ended 31 March 2018

Summary

Overview

· Like-for-like new car unit sales down 9.2% against a 12.5% fall in our market sector

· Like-for-like used car unit sales flat against 2017

· Revenue from continuing operations up 0.5% to £213.7 million

· Underlying profit before tax reduced to £1.4 million (2017: £2.1 million) in challenging market conditions

· Recommended dividend per ordinary share for the year maintained at 22.5 pence (2017: 22.5 pence)

· Property portfolio revaluation as at 31 March 2018 showed a £10.3 million (2017: £10.1 million) surplus to net book value (not recognised in the accounts)

Commenting on the results, Simon Caffyn, Chief Executive said:

"We closed the year with a strong performance in the registration-plate change month of March and entered the current financial year with a stronger forward-order book than in the previous year, which is a source of encouragement, although we remain cautious about the outlook for the current year and recognise our dependence on the key trading months of September and March."

Enquiries:

Operational and Business Review

The year under review has been a very challenging one for the motor retail sector, but despite this I can report that Caffyns Plc (the "Company") produced an underlying profit before tax of £1.4 million (2017: £2.1 million).

The challenges in the year came on three main fronts:

· A declining new car market which showed an overall year-on-year fall of 11.0% in UK new car registrations, with a significant fall of 26% in diesel registrations;

· Rates of vehicle excise duty were increased at the start of our financial year on 1 April 2017 which caused some customers to accelerate the timing of their purchases from April 2017 into March 2017. Whilst this benefitted our previous financial year, it resulted in a very slow start to this current financial year with a consequent negative impact on profitability;

· The Government's re-rating of commercial properties was implemented in April 2017 which resulted in an increase in the Company's cost of business property rates in the current financial year of £0.25 million.

Profit before tax was £1.2 million (2017: £6.3 million). The prior financial year included a one-off gain of £4.7 million from the disposal of the Company's Land Rover business. Basic earnings per share were 38.2 pence (2017: 186.3 pence). Underlying earnings per share for the year were 45.6 pence (2017: 58.0 pence).

Despite the challenging market, our own revenue from continuing operations recorded a small increase to £213.7 million (2017: £212.6 million), largely due to the resilience of our service and parts operations.

In March 2018, the Company successfully completed the scheduled refinancing of its bank facilities. Our Audi development at Angmering remains on schedule to become operational in June 2018.

New and used cars

Our new unit sales fell by 9.2% on a like-for-like basis in the year compared to the 11.0% reduction in total UK new car registrations. Within this total, new car registrations in the private and small business sector in which we principally operate fell by 12.5%, so we again outperformed our specific sector. However, we experienced pressure on new car margins and the achievement of manufacturer volume-related bonus targets with the result that new car gross profits were considerably down on last year.

For used cars, unit sales volumes remained flat on a like-for-like basis, although with an improvement in unit used car margins. Over the last four-year period, the Company has recorded a 34% like-for-like growth in the number of used cars sold and we continue to see this business providing a major opportunity for further future growth. The number of used cars sold exceeded the number of new cars sold in the year.

Throughout the year under review, we continued to upgrade our website with multiple enhancements to our customers' online searching capabilities, leading to an easier, more enjoyable car-buying experience.

Aftersales

Despite the falls in the UK new car market in the financial year under review, the number of one to three-year old cars in circulation remains historically at very high levels. Our three-year car parc has grown over the last four years and we are encouraged that our service revenues in the year have continued to rise, by 3.5% on a like-for-like basis. We continue to place great emphasis on our customer retention programmes and in growing sales of service plans. Our parts business also reported sales growth, up by 3.2% on a like-for-like basis over the previous year.

Operations and redevelopment

Our Audi dealership in Angmering, developed to facilitate the relocation and expansion of our Worthing business, is expected to open for business as scheduled in June 2018. This facility will comprise two state-of-the-art new car configurator areas in addition to a ten-car showroom as well as extended used car display areas. The aftersales facility will comprise a fourteen-bay workshop and innovative drive-through service reception area. Once relocated, the facility will enable the Worthing business to grow considerably and benefit from the development of new housing in the area. Our other two Audi businesses, at Brighton and at Eastbourne, both performed well in the year with the Audi division making a significant contribution to the Company's result.

As a result of operational performance issues, the financial results from our Volkswagen division in the year were very disappointing with new and used car sales declining from last year's levels. However, we remain confident that the strength of the brand, the excellent model range and exciting new products will quickly lead to improvements in its future trading performance.

Our Volvo business in Eastbourne is in a period of transition as we look to develop further our site and the manufacturer continues to launch new models such as the XC40 (European Car of the Year) which has been very positively received by customers. We are assessing plans to expand our showroom facility to better accommodate these extra models and the purchase in August 2017 of a nearby commercial property will facilitate this expansion by allowing our aftersales departments to be relocated into the newly acquired building. The business traded profitably in the year and we expect further profit growth for the business in the current financial year.

In Tunbridge Wells, our SEAT business continued to perform well and, in conjunction with the adjacent Skoda business, continues to deliver healthy levels of profitability. Our Skoda business in Ashford also performed well.

Our Vauxhall business in Ashford experienced very difficult trading conditions in the year with customers' confidence in the brand nationally at a low level. Vauxhall's new car registrations in the year were down by almost a quarter and the impact of that very significant reduction resulted in the business remaining in a loss-making position. The takeover of Vauxhall in the UK by the PSA Group and the recent announcement of a reduction in the number of dealers should improve the profitability of the remaining operators, of which the manufacturer has informed us we are one.

Caffyns Motorstore, our used car business in Ashford, continued to expand rapidly with further significant increases achieved in sales volumes and in levels of profitability. The concept has been very well received by our customers who particularly value the reassurance of the Caffyns brand.

Groupwide projects

We remain focused on generating further improvements in the three key areas of used car sales, used car finance and aftersales. These helped to minimise the reductions in profitability in the year under review, with very pleasing growth continuing to be recorded in service labour sales. In addition, we continue to make very good progress utilising technology to enhance the customer-buying experiences from their first point of contact right through the showroom buying process, as well as improving aftersales retention.

Property

We operate primarily from freehold sites and our property portfolio provides additional stability to our business model. As in previous years, our freehold premises were revalued at the balance sheet date by chartered surveyors CBRE Limited based on an existing use valuation. The excess of the valuation over net book value of our freehold properties at 31 March 2018 was £10.3 million (2017: £10.1 million). In accordance with our accounting policies (which reflect those generally utilised throughout the motor retail industry), this surplus has not been incorporated into our accounts.

During the year, we incurred capital expenditure of £5.55 million (2017: £4.64 million). This included assets in the course of construction, primarily the Audi development at Angmering, of £3.87 million.

In August 2017, we acquired a commercial warehouse building in Eastbourne which is located close to our existing Volvo business. The intention is that this building will house our Volvo aftersales operation which will in turn facilitate the expansion of the car showroom at the existing site.

The Government implemented its rating revaluation for all commercial property in April 2017. Although nationally this was not targeted to raise additional revenues, the increases have fallen disproportionately on the South-East region in which we operate, where property values have increased the most over the previous seven years since the last valuation exercise was undertaken. This impact, net of a rates rebate in the year, resulted in our cost of business property rates rising by £0.22 million to £1.03 million.

In the prior financial year, we acquired 2.1 acres of land adjacent to our used car centre in Ashford which almost doubled the footprint of our operations at Ashford and will enable us to grow further our exciting Motorstore used car concept as well as benefitting our Vauxhall and Skoda operations at the site.

As part of the sale of the Land Rover business in the prior financial year, our freehold premises in Lewes were initially leased to the purchaser for a minimum two-year period to April 2018, with a further one-year extension available at the leaseholder's option. During the current financial year, we agreed a further one-year extension which has now secured the tenancy until April 2020. The Board continues to evaluate future opportunities for the site.

Bank facilities

During the period the Company renewed and expanded its banking facilities with HSBC Bank, now comprising a term loan of £7.5 million repayable over twenty years and a revolving-credit facility of £7.5 million, both of which will become renewable in March 2023. HSBC Bank also provides an overdraft facility of £3.5 million, renewable annually. In addition, we have an overdraft facility of £7.0 million provided by Volkswagen Bank, renewable annually, together with a term loan, originally of £5.0 million, which is repayable over the ten years to November 2023.

Bank borrowings, net of cash balances, at 31 March 2018 were £14.0 million (31 March 2017: £8.6 million) and as a proportion of shareholders' funds at 31 March 2018 were 52% (2017: 31%). The increase in gearing in the year was primarily the result of the investment in the Audi development at Angmering and the purchase of an additional freehold building.

Taxation

The tax charge for the year ended 31 March 2018 was £0.1 million (2017: £1.2 million) which equated to an effective tax rate on profits of 11.6% (2017: 18.4%). The current year effective tax rate is lower than the standard rate of corporation tax in force for the year of 19% due to an adjustment for an over-provision of tax of £0.14 million (2017: £Nil) in a prior period. The lower effective tax rate in the previous financial year was the result of a large tax-deductible expense arising from the crystallisation of the Company's Save As You Earn share scheme in September 2016.

The Company extinguished its brought forward capital losses in the prior financial year and therefore has no current outstanding trading or capital losses awaiting relief. Capital gains which remain unrealised, where potentially taxable gains arising from the sale of properties and goodwill have been rolled over into replacement assets, amount to £11.9 million (2017: £12.1 million) which could equate to a future potential tax liability of £2.0 million (2017: £2.0 million). The Company also has an amount of £1.1 million (2017: £1.1 million) of recoverable Advanced Corporation Tax ("ACT") and £0.8 million (2017: £0.9 million) of Shadow ACT. The directors remain confident in the recoverability of the ACT although the Shadow ACT must first be fully absorbed before the ACT balance itself can become available to be utilised.

Pension Scheme

The Company's defined benefit scheme was closed to future accrual in 2010. In common with many companies, the Board has little control over the key assumptions in the valuation calculations as required by the accounting standards and the unprecedented low yields of gilts and bonds continues to have a significant impact on the net funding position of the scheme. Although it was pleasing to note no further deterioration in the level of the discount rate in the year, the deficit at 31 March 2018 widened to £9.5 million (31 March 2017: £8.6 million), mainly due to changes in the membership demographic. The deficit, net of deferred tax, was £7.9 million (31 March 2017: £7.1 million).

During the year, the trustees appointed a fiduciary manager to the Scheme and the Board, together with the independent pension fund trustees, continues to review options to reduce the cost of operating the Scheme. As part of the migration of the Scheme's investment assets to the control of the fiduciary manager, actions have been taken to reduce the risk profile of the assets and more closely match the nature of the Scheme's assets to its liabilities. Any additional actions that could further reduce the deficit over the medium and longer term continue to be considered.

The pension cost under IAS 19 continues to be charged as a non-underlying cost and amounted to £236,000 in the year (2017: £199,000).

A formal triennial valuation of the Scheme was last carried out as at 31 March 2014 and, in line with the recovery plan agreed with the trustees following that valuation, the Company made a cash payment into the scheme in the year of £313,650 (2017: £306,750). This recovery plan payment for the coming and each subsequent year will increase by 2.25% until superseded by a new recovery plan to be agreed between the Company and the trustees. A formal triennial actuarial valuation of the scheme is currently being prepared as at 31 March 2017 and the Company remains confident that this valuation, and an associated recovery plan, will be completed before the scheduled deadline of 30 June 2018 as stipulated by the Pension Regulator.

People

I am very grateful for the dedication of our employees and the effort they apply to provide our customers with a first-class purchasing experience. Across the Company the hard work and professional application of our employees has helped to minimise the fall in car sales volumes and to continue to grow our aftersales operations.

Apprenticeships

The Company has a long tradition of investing in apprenticeship programmes and this continued alongside the new Government apprenticeship levy that was implemented from the start of our financial year in April 2017. Despite early teething problems experienced with the registration and accreditation processes of the new levy regime, our own apprenticeship numbers have increased year-on-year and we continue to see the benefits flow through the business as more apprentices complete their training and become fully qualified. As levy payments must currently be utilised within only a two-year period, we do not anticipate we will be able to fully utilise these and have accordingly expensed a proportion of the levy payments made against our current year results. We remain firmly committed to the long-term benefits of apprenticeships and our recruitment programme continues with the aim of taking on an increasing complement in the coming year to assist the Company to grow.

Dividend

The Board remains confident in the future prospects of the Company and has therefore declared an unchanged final dividend of 15.0 pence per ordinary share. If approved at the Annual General Meeting, this will be paid on 3 August 2018 to ordinary shareholders on the register at close of business on 6 July 2018.

Together with the interim dividend of 7.5 pence per Ordinary share (2017: 7.5 pence) paid during the year, the total dividend for the year will be 22.5 pence per Ordinary share (2017: 22.5 pence).

Strategy

The strategy to focus on representing premium and premium-volume franchises as well as maximising opportunities for premium used cars continues to be the right one in what is a rapidly changing environment and the strength of our balance sheet allows us to continue to invest in the future growth of our businesses.

We are concentrating on larger business opportunities in stronger markets to deliver higher returns on capital from fewer but bigger sites. We continue to deliver performance improvement, in particular in our used car and aftersales operations.

Outlook

We closed the year with a strong performance in the registration-plate change month of March and entered the current financial year with a stronger forward-order book than in the previous year, which is a source of encouragement. The current consensus for the 2018 calendar year is for a further single-digit fall in the UK new car market so we are cautious about the outlook and remain dependent on the key months of September and March. Our balance sheet is appropriately funded and our freehold property portfolio is a source of stability, so we remain confident in the longer-term prospects for the Company and ready to exploit future business opportunities as they may arise.

S G M Caffyn

Chief Executive

30 May 2018

Group Income Statement

for the year ended 31 March 2018

Group Statement of Comprehensive Income

for the year ended 31 March 2018

Group Statement of Financial Position

at 31 March 2018

Group Statement of Changes in Equity

for the year ended 31 March 2018

for the year ended 31 March 2017

Group Cash Flow Statement

for the year ended 31 March 2018

Notes

1. GENERAL INFORMATION

Caffyns plc is a company domiciled in the United Kingdom. The address of the registered office is Saffrons Rooms, Meads Road, Eastbourne BN20 7DR. The registered number of the Company is 105664.

This financial information has been extracted from the consolidated financial statements which were approved by the Directors on 30 May 2018.

2. ACCOUNTING POLICIES

The financial information has been prepared under International Financial Reporting Standards (IFRSs) issued by the IASB and as adopted by the European Commission (EC). This financial information has been prepared on the same basis as in 2017.

Whilst the financial information included in this announcement has been computed in accordance with IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2018 or 2017, but is derived from those accounts. Statutory accounts for the year ended 31 March 2017 have been delivered to the Registrar of Companies and those for the year to 31 March 2018 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under section 498(2) or (3) Companies Act 2006 or equivalent preceding legislation.

A copy of the annual report for the year ended 31 March 2018 will be available at www.caffynsplc.co.uk and will be posted to shareholders by 25 June 2018.

Segmental reporting

Based upon the management information reported to the chief operating decision maker, the Chief Executive, in the opinion of the directors, the Company only has one reportable segment. There are no major customers amounting to 10% or more of the Company's revenue. All revenue and non-current assets derive from, or are based in, the United Kingdom.

3. GOING CONCERN

The financial statements have been prepared on a going concern basis which the directors consider appropriate for the reasons set out below.

The Company meets its day to day working capital requirements through short-term stocking loans and bank overdraft and medium-term revolving credit facilities and term loans. At the year-end, the medium-term banking facilities included a term loan of £7.5 million and a revolving credit facility of £7.5 million from HSBC, its primary bankers, both facilities are renewable in March 2023, and a short-term overdraft facility of £3.5 million which is renewed annually in August. The Company also has a 10-year term loan from VW Bank with a balance outstanding at 31 March 2018 of £2.875 million which is renewable in 2024 and a short-term overdraft facility of £7.0 million which is renewed annually in August. In the opinion of the directors, there is a reasonable expectation that all facilities will be renewed at their scheduled expiry dates. The overdraft and revolving credit facilities include certain covenant tests which were passed at 31 March 2018. The failure of a covenant test would render these facilities repayable on demand at the option of the lenders.

The directors have undertaken a detailed review of trading and cash flow forecasts for a period in excess of one year from the date of this Annual Report which projects that the facility limits are not exceeded over the duration of the forecasts. These forecasts have made assumptions in respect of future trading conditions, particularly volumes and margins of new and used car sales, aftersales and operational improvements together with the timing of capital expenditure. The forecasts take into account these factors to an extent which the directors consider to be reasonable, based on the information that is available to them at the time of approval of these financial statements. These forecasts indicate that the Company will be able to operate within the financing facilities that are available to it and meet the covenant tests with sufficient margin for reasonable adverse movements in expected trading conditions.

 The directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For those reasons, they continue to adopt the going concern basis in preparing the 2018 Annual Report.

4. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing the consolidated financial statements, the significant judgements made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 March 2017.

5. NON-UNDERLYING ITEMS

The following amounts have been presented as non-underlying items in these financial statements:

There were no management redundancy costs (2017: £43,000).

In the prior year, the Company notified its intention to exercise a break clause of its lease for a site in Tonbridge and made a provision of £149,000 for remedial work on the property and professional fees associated with the break. In June 2017 the Company duly exercised the break clause and negotiated a total cost for the remedial work on the property of £80,000 with a further £9,000 incurred in associated professional fees in the year. The remaining provision held of £60,000 was credited to operating expenses as a non-underlying item.

In September 2017, the Company received a periodic VAT inspection from HM Revenue & Customs which identified certain items of non-compliance with relevant legislation. To date, a sum of £20,000 has been settled and a further provision of £60,000 has been taken against current year profits as a non-underlying item to allow for items still to be resolved.

6. FINANCE EXPENSE

7. DISCONTINUED OPERATIONS

In the prior financial year, in April 2016, the Company sold the business and assets (excluding the freehold property) of its Land Rover business to Harwoods Limited ("Harwoods"). Cash consideration of £7.5 million comprised £5.5 million for goodwill together with £0.2 million for property, plant and equipment and £1.9 million for inventories less £0.1 million in respect of liabilities transferred. The total consideration was received at completion on 29 April 2016. Ownership of the freehold property in Lewes from which Harwoods will continue to operate the Land Rover business remains with the Company, and is being leased to Harwoods for a period of up to three years from 29 April 2016 subject to a two-year tenant-only break clause.

As a result of this transaction, the operating activities attributed to that business, as set out below, have been disclosed as a discontinued operation.

The results of the business shown above represent its trading from the start of the prior financial year until disposal on 29 April 2016. Depreciation charged in arriving at these results was £nil (2017: £18,000).

The carrying value of assets and liabilities on disposal are shown below.

8. TAXATION

9. EARNINGS PER SHARE

The number of fully paid ordinary shares in circulation at the year-end was 2,694,790 (2017: 2,694,790). The weighted average shares in issue for the purposes of the earnings per share calculation were 2,694,790 (2017: 2,750,015). The shares granted under the Company's SAYE scheme are dilutive and the weighted average number of dilutive shares under option at fair value was 7,616 (2017: 45,703) giving a total diluted weighted average number of shares of 2,702,406 (2017: 2,805,074).

10. DIVIDENDS

11. NOTES TO THE CASH FLOW STATEMENT

In 2017, within the amount of net cash derived from operating activities is cash inflow of £664,000 attributable to discontinued operations. Accordingly, the net cash from operating activities in respect of continuing operations during 2017 was £1,079,000.

Reconciliation of net debt