Caffyns Regulatory News (CFYN)

31 Jul 2009 15:56



31 July 2009

Caffyns plc ("Caffyns" or the "Company")

The Chairman, Brian Birkenhead, is writing to all shareholders in response to the letter from EPS Enhancing Earnings Limited, formerly New Fortress Holdings Limited ("New Fortress"), released on 29 July 2009 by London Trust Limited. The text of the letter from the Chairman is set out below.

Dear Shareholder

You have recently been sent a letter from New Fortress regarding the Company's performance, strategy and capital structure. The Board strongly rejects the comments contained in the letter and continues to seek to deliver value for all shareholders during these difficult times. Yesterday the Board issued the following announcement:

"AGM INTERIM MANAGEMENT STATEMENT

We are pleased to announce that we have made a profit, ahead of our plan, in the first quarter of the current financial year which continues the improvement that resulted in a profit in the last quarter of the previous financial year. The strategy we adopted last year to deal with an unprecedented decline in our market has turned last year's losses into profits in two successive quarters.

Our new car sales in the quarter to June were down 3% against a reported fall of 13.7% in the private and business market. Improved effectiveness of our marketing to both new and existing customers, allied to enhanced design of our internet site and also good use of the Government's scrappage scheme, have resulted in this improvement in our market share. In July, our new car sales are over 40% up on last year. We have new car orders in hand for delivery in the new registration month of September which are double the level at this time last year.

We continue to make good progress selling used cars and unit sales are up 17% on a like for like basis in the quarter to June and gross profit margins are significantly improved. Used car prices have remained strong, partly due to a shortage of supply, and we have also significantly strengthened the effectiveness of our supply chain management.

Management of working capital has resulted in lower levels of new and used car stocks and we have achieved a stock turn rate for used cars which is significantly better than the national average.

The cost reduction programme, which was a crucial element of our overall strategy, has continued and costs in the quarter to June are £0.7m lower than in the previous year and we are on track to deliver an annual saving in excess of £2.5m.

The outlook remains challenging but we will continue to focus on our 7 point strategy as follows:

Improve sales performance, concentrating on lower priced and fuel efficient vehicles with increased focus on used vehicles.

Enhance margins through marketing innovation and improved use of internet.

Reduce costs through closure of underperforming branches and reduction in staff numbers. 

Reduce stocks and increase stock turnover.

Reduce future capital expenditure.

Allocate franchises to facilities to maximise profits.

Negotiate with manufacturers to set lower sales and bonus targets.

The Board has noted the announcement made yesterday by London Trust Limited commenting on the Company's performance, capital structure and strategy. The Board strongly rejects these comments and continues to seek to deliver value for all shareholders during these difficult times.

We are encouraged by the progress we have made in executing our strategy and the Company is now in a strong position to benefit even further as the economy recovers from the current recession."

In addition to this announcement of improved performance we should like to make further comment about the New Fortress letter.

Share price and performance

The Board does not believe that the comparisons of performance made by New Fortress are valid for this Company. We believe it is more appropriate to compare ourselves with the sector as a whole and compare our operational performance against manufacturers' statistics based upon each dealer network, including such measures as return on sales, market penetration and customer satisfaction. With the generally higher cost base in the south east of England, we also review the performance of other motor dealers operating in our geographical area.

However, we are conscious of the reduction in our share price of late and we are seeking to address this by driving our operational performance to a higher level, increasing profitability and return on assets. This is the principal means by which the management of the Company can improve the share price.

Strategy and investment

The Board believes that our past strategy of focusing on selective acquisitions, whilst not overpaying for assets, thus maintaining a low level of debt on the balance sheet, has left us well positioned to take advantage of any economic recovery. We do not believe there to be a direct correlation between size and performance but seek to focus on improving profitability in each dealership within our network. We shall continue to investigate potential acquisitions and apply vigorous financial assessment of those opportunities. Over the last five years, we have invested £16m in property and equipment to ensure that we have facilities that comply with the requirements of our manufacturer partners.

Capital structure

As we have already outlined in our letter to shareholders dated 23 July 2008, the second preference shares have been in issue for over 45 years. Details of the capital structure are set out in the annual report which is available to all potential purchasers of Caffyns' ordinary shares. 

The Board is focussed on profitability which directly correlates to share performance and it is our intention to return the dividend to historic levels as soon as practicable.

You will note in the letter from New Fortress that they intend to bring a claim for a Derivative Action under the Companies Act. At the time of writing this letter, we have no knowledge of anything that would justify such an action. The Board considers any such claim would divert it from its main task of enhancing shareholder value by increasing earnings per share.

The Board continues to engage in constructive dialogue with its shareholders where possible and will continue to work hard to execute its strategy in order to deliver value for all shareholders. 

Yours faithfully

S Brian Birkenhead

Chairman