Inchcape Regulatory News (INCH)

Inchcape plc, the leading independent global automotive distributor, announces its half year results for the six months to 30 June 2022

Strong first half; executing on our strategic priorities

Duncan Tait, Group CEO, commented:

"Inchcape has had a great first half. Continued strong consumer demand and fantastic execution from our teams has driven growth in revenue, profit and cash. We've also made excellent progress with the two strategic growth priorities of our Accelerate strategy. Firstly, we have continued to extend our global leadership in automotive distribution, adding new OEMs through acquisitions and contract-wins, and invested further in digital and data analytics - a key differentiator that is driving growth. Secondly, we are making progress on capturing more of a vehicle's lifetime value with the rollout of bravoauto, and will be launching the platform in several markets in the second half.

Today's announcement of the acquisition of Derco, the largest independent automotive distributor in Latin America, is an important milestone in the execution of this strategy. It provides a step-change in the scale of our distribution business and increases our exposure to the highly attractive, fast growth region of Latin America.

With a clear strategy, driven by our ambition to be both better and bigger, Inchcape is well positioned to capitalise on further opportunities for organic growth and market consolidation, and I am confident we will continue to deliver sustainable long term value for all our stakeholders."

Financial highlights (stated on the basis of continuing operations)

§ Group revenue of £3.9bn: up 12% on an organic basis and 8% reported

§ Adjusted PBT of £184m (1H21: £121m), driven by topline growth and improved operating margins

§ Statutory profit before tax of £188m (1H21: £33m), reflects a small gain (£3m) from adjusting items

§ High cash generation, 1H22 free cash flow of £224m, improved our net cash position (£439m) post M&A and cash-returns

§ Cash returns: interim dividend of 7.5p (2021 interim: 6.4p); £50m share buyback completed in July

Strategic highlights

§ Accelerate strategy, executing on two exciting growth pillars: Distribution Excellence and Vehicle Lifecycle Services (VLS)

§ Proposed acquisition of Derco accelerates the growth of our global distribution footprint (see separate announcement)

§ Broadening OEM footprint: added Porsche, Volvo and JLR in Chile (Q2), and expanding in Ecuador with Geely (2023)

§ Exited Russia: disposed of our remaining Retail-only business in Russia to local management in Q2

§ Accelerated our digital adoption: rolled-out omnichannel capability (DXP), now live in 31 OEM markets (Dec-20: one)

§ VLS: further roll-out of bravoauto, a multi-brand digital-first used car platform, to commence in the second half

Outlook:

Our 2022 outlook remains unchanged from our update on 16 June 2022. Based on the performance to date and our expectation for the second half, with an improved outlook for vehicle supply and robust demand, we expect to deliver FY22 adjusted PBT from continuing operations between £350m and £370m at prevailing exchange rates.

The strength of our business model and financial position means Inchcape is well placed to continue to grow profits and generate cash, and we are confident in the medium-term outlook set out at the Capital Markets Day in November.

1. Restated to adjust for disposal, during 2Q22, of the remaining business in Russia (classified as a discontinued operation), see note 1

2. These measures are Alternative Performance Measures, see note 17

3. Organic growth is defined as revenue growth in operations that have been open for at least a year at constant foreign exchange rates

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Results presentation today

A virtual presentation for analysts and investors will be held today, Thursday 28th July, at 08:30 (UK time). To register please follow this link: https://openexc.zoom.us/webinar/register/WN_lsimiu4ZQNiZZItK8pvtTA

A replay of the presentation will be available via the Company's website, www.inchcape.com.

Financial calendar

Contacts

About Inchcape

Inchcape is the leading independent multi-brand global automotive distributor, operating in over 40 markets and territories with a portfolio of the world's leading automotive brands. Inchcape has diversified multi-channel revenue streams including sale of new and used vehicles, parts, service, finance and insurance. The Company has been listed on the London Stock Exchange (INCH) since 1958, and is classified within the 'Business Support Services' sector. The Group is headquartered in London and employs around 14,500 people globally. www.inchcape.com.

Our results are stated at actual exchange rates. However, to enhance comparability we also present year-on-year changes in revenue and adjusted operating profit in constant currency, thereby isolating the impact of translational exchange rate effects. Unless otherwise stated, the commentary below is expressed in constant currency and before adjusting items.

Following the disposal of our remaining Retail-only business in Russia (Moscow), all figures quoted in the 'Operational' and 'Operating and financial' reviews are on a 'continuing operations' basis and therefore exclude any contribution from Russia in 2022. However, while the comparative period (1H21) excludes the contribution from the Moscow operation, it does include c.£110m of revenue and c.£10m of profit from the St. Petersburg operation (disposed towards the end of 2Q21).

Operational review

Key performance indicators

1. Restated to adjust for disposal, during 2Q22, of the remaining business in Russia (classified as a discontinued operation), see note 1

2. See note 17 for definition of Alternative Performance Measures

3. Organic growth is defined as revenue growth in operations that have been open for at least a year at constant foreign exchange rates

Performance review: first half 2022

The Group made a great start to 2022, with both distribution and retail delivering strong revenue growth and margins. The performance was driven by a combination of robust consumer demand and price-mix tailwinds against the backdrop of new vehicle supply shortages - which is gradually improving. Performance of used vehicles continued to be robust, and our aftermarket business performed well.

In the first half, the Group generated revenue of £3.9bn, adjusted operating profit before adjusting items of £204m and free cash flow of £224m.

Group revenue of £3.9bn rose 8% year-on-year reported and 9% in constant currency. The growth rate is supported by the addition of four new distribution businesses over the past 12 months, including Geely (Chile), commercial vehicles in Guam and Micronesia, Ditec (Chile) and Simpson Motors (Caribbean).

On an organic basis, excluding currency effects and net M&A, revenue increased by 12%, with the strongest performance in the Americas and in Europe, driven by a combination of continued (albeit still gradual) volume recovery and price-mix tailwinds.

The Group delivered an adjusted operating profit of £204m, up 49% year-on-year in both reported and constant currency. The strong rebound reflects the topline increase and the year-on-year operating margin improvement.

Adjusted profit before tax (PBT) of £184m (1H21: £121m) reflects the strong improvement in revenue and operating profit. The net interest expense of £20m is slightly higher than the prior year due to higher finance costs.

During the first half adjusting items amounted to a £3m gain. This is the net of a gain relating to pensions (£20m) and expenses owing to asset amortisation (£10m) and costs related to acquisitions (£7m).

The highly cash-generative nature of our business model was evident with free cash flow generation of £224m (1H21: £174m). In addition to the improvement in profitability, during the period we benefitted from a net working capital inflow of £80m, arising primarily as a result of lower net inventories, and a low level of net capital expenditure (£18m).

Other notable elements of the cash flow bridge include: net acquisitions and disposals, which amounted to an outflow of £110m (acquisitions of Ditec, distribution of Porsche, Volvo and JLR in Chile, and Simpson Motors, distribution of Suzuki, Mercedes-Benz, Subaru and Chrysler in Barbados and neighbouring islands, and includes cash disposed as part of the Russia sale) and dividend payments of £61m. We launched a £100m share buyback programme in February, of which c.£40m was complete by the end of the period. In view of the proposed acquisition of Derco, the Board has decided not to proceed with the second tranche (£50m).

The Group closed the reporting period in a net cash position of £439m (excluding lease liabilities), which compares to £379m at the end of December 2021, and £435m as at 30 June 2021. On an IFRS 16 basis (including lease liabilities), we ended the period with net funds of £98m (December 2021: net funds of £59m).

Return on capital employed based on the performance over the past 12 months was 35%, compared to 22% for the comparative period. The increase was primarily driven by the recovery in Group profit, and supported by our portfolio shift towards Distribution.

Second quarter 2022

Group revenue for the second quarter was £2.1bn, up 10% reported. On an organic basis revenue increased 10%, compared to a 13% increase in Q1 - the lower growth rate is primarily owing to the bounce-back in Q2 2021 following the impact of the pandemic earlier in the year. During the quarter Group revenue was higher across both new and used vehicles and in aftersales.

In Distribution, revenue increased 16% organically, following an 11% increase in Q1. The performance was driven by an improvement in new vehicle supply and a strong aftersales performance.

In Retail, revenue fell 1% an organic basis (Q1: up 18%). While the comparator in Q2 was more challenging, owing to the post- bounce-back, this was in part offset by an improvement in new vehicle supply and growth of our bravoauto business.

Strategic priorities

In 2021 we launched our new strategy, Accelerate, focussing on two growth opportunities: Distribution Excellence and Vehicle Lifecycle Services.

Distribution Excellence: extending our leadership in automotive distribution (vehicles and parts)

In the Group's core operations, we create the vital link between OEM brands and end-customers, with our full-spectrum distribution capability. This includes deciding which vehicle models and parts to order, the pricing structure in a market, arranging the importation of vehicles and parts, the building of the brand including marketing and the provision of finance and insurance products (FIP), the creation and management of the digital and physical network, in-market distribution of vehicles and parts for the aftermarket, and finally, when we choose to operate dealerships ourselves, we perform retail and aftersales services.

Over the past six months we have made excellent progress:

§ Digital, Data & Analytics is a key enabler of Accelerate, and we are seeing our focus on this element of our strategy translate into tangible positive results, which is impressing our OEM partners.

o  We have continued to roll-out our omnichannel (DXP) capability, which is live in 31 OEM markets (Dec-20: one), across 12 brand partners (Dec-20: one). We are seeing the platform drive better sales conversion rates.

o  We have built significant internal analytical capability (DAP), to leverage our data and drive smarter, faster and better business decisions. Over the past six months we have developed several algorithms to improve our Aftersales performance - including analytics relating to ordering of parts and optimisation of pricing.

o  Our two digital delivery centres (DDCs), one in each of Colombia and Philippines, celebrated their one year anniversary in July, and today have 750 'Inchcapers' working in the centres providing 24x7 solutions and cost-efficient services to the Group's global operations. The DDCs have significantly increased our internal digital delivery capability.

Inchcape is already the leading global automotive distributor operating in a highly fragmented industry, and we are extending this leadership with our investment in technological capability (digital and data analytics). Our 'plug and play' distribution platform will help drive both organic and inorganic growth within our current geographic footprint, with the addition of complementary brands, and even faster expansion in new markets, with both existing and new partners.

§ In line with our focus on markets with high growth potential, we continued to further expand our distribution footprint. These deals leverage our existing geographic and brand footprint, as well as giving us access to a number of new brand partners.

o  In Chile, a market we have been operating in since 1993, the acquisition of Ditec added JLR and two brands that are first-time distribution relationships for the Group: Porsche and Volvo.

o  In Ecudaor, a market we have been operating in since 2019, we were awarded the distribution of Geely vehicles. This follows the excellent performance in Chile, where we began distributing earlier this year. The contract in Ecuador will begin in 2023.

Vehicle Lifecycle Services: capturing more lifetime value - of customers and vehicles

§ We are making progress with the opportunities identified to capture more of a vehicle's lifecycle value where we believe there is significant untapped potential, that the Group has not fully realised in the past. During 2021 we created our new multi-brand, digital-first, used car platform bravoauto, which we initially launched in the UK, and in the first half of 2022 we have been readying some of our other markets for the roll-out of bravoauto which will commence in the second half of the year.

We made great progress with our Responsible Business pillars; hosted Inclusion & Diversity workshops, partnered with charities to support our communities, continued to improve our practices and launched a partnership to support EVs in Singapore.

Capital allocation

Our capital allocation policy remains unchanged: 1) to invest in the business to strongly position it for the future; 2) to make dividend payments; 3) to conduct value-accretive M&A; and, in the absence of any opportunities, 4) consider share buybacks.

Our dividend policy targets a 40% annual payout ratio of basic adjusted EPS with the interim dividend set at one-third of the prior year's total dividend. As such, based on the 2021 dividend of 22.5p, the Board has declared an interim dividend of 7.5p (1H21: 6.4p). We launched another £100m share buyback programme in February, of which we have completed £50m. In view of the proposed acquisition of Derco, the Board has decided not to proceed with the second tranche (£50m).

Investment proposition

Inchcape is the leading global automotive distributor. Combining our exposure to higher growth markets and diversified revenue streams, with our history of market outperformance, we expect to deliver strong organic growth. By leveraging our scale, operational improvements and focus on higher margin activities, we can drive margin expansion. The highly fragmented nature of distribution, and our strong financial position, also provides significant consolidation opportunities.

In addition to the attractive growth prospects, the business is asset-light with excellent financial characteristics: high returns and cash conversion. Combined with a disciplined approach to capital allocation we believe these should enable the Group to maintain its long track record of delivering significant value through organic growth, consolidation and attractive shareholder returns.

Looking ahead

Our 2022 outlook remains unchanged from our update on 16 June 2022. Based on the performance to date and our expectation for the second half, with an improved outlook for vehicle supply and robust demand, we expect to deliver FY22 adjusted PBT from continuing operations between £350m and £370m at prevailing exchange rates.

The strength of our business model and financial position means Inchcape is well placed to continue to grow profits and generate cash, and we are confident in the medium-term outlook set out at the Capital Markets Day in November:

§ Distribution Excellence: mid-to-high single digit profit CAGR plus M&A

§ Vehicle Lifecycle Services: >£50m of incremental profit

Operating and financial review

Distribution

The Distribution segment reported revenue of £2.7bn increasing 16% year-on-year, with a particularly strong performance in both the Americas and in Europe. The combination of an encouraging topline and margin improvement resulted in an adjusted operating profit1 of £174m (1H21: £120m). The adjusted operating margin1 rose 120bps to 6.3%.

§ APAC revenue declined 7% year-on-year, and operating profit was down 2%. While the trading conditions in Hong Kong and Singapore were unfavourable, better results in other markets and cost-mitigation measures supported our performance. In the case of Hong Kong, pandemic related restrictions weighed on our first half results. Our performance towards the end of the half improved, with vehicle deliveries and aftersales at its highest level for several quarters. In Singapore our performance was impacted by lower availability of vehicle licences compared to 1H21, which was helped by the government's phasing of missed licences (following the 2020 pandemic restrictions). We nevertheless gained market share and grew our Aftersales business. We consciously reduced overheads in both markets which helped mitigate the profit impact. While Hong Kong and Singapore remain significantly below historic levels, we are confident in how our business is positioned in both markets and the tailwind it will provide for the region in the years ahead. The trends across the rest of Asia continue to be encouraging, with revenue and profit above both the prior year and the second half of 2021. In terms of our newest distribution businesses (JLR in Indonesia, and commercial vehicles in Guam), the initial performance of both has exceeded our expectations. In Australasia, while our topline performance was weighed-down by lower vehicle supply this was compensated for by improved pricing. Elsewhere, growth in our Aftersales business and strict cost control helped drive the profitability increase.

§ Europe revenue was up 34% year-on-year with operating profit rising 108%. We continued to gain share across our key markets - Belgium, Bulgaria, Greece and Romania - driven by strong execution, and the popularity of new models, specifically the Land Rover Discovery and Toyota Yaris Cross. Demand for vehicles continues to be robust, with record order books across many of our markets. In terms of vehicle supply, we have seen some improvement although it remains significantly below normal levels. JLR Poland, our most recent addition to the region, is tracking ahead of expectations, and started to benefit from an improvement in vehicle supply towards the end of the period.

§ Americas & Africa revenue grew 47% year-on-year, driving operating profit up 120%. The Americas delivered strong performance across all major markets, driven by the combination of robust consumer demand and a lack of vehicle supply. The comparative period was impacted by some pandemic related disruptions, which is supporting the growth rate. During the first half we completed the acquisition of two distribution businesses (Simpson Motors and Ditec), which will add an aggregate c.£250m of annualised revenue. In Africa, our performance continues to be solid. Looking further ahead, as we detailed during our 'In the driving seat: Spotlight on Americas' webinar, given the low penetration of vehicles per capita in the Americas region, we are optimistic about the region's growth prospects over the medium and long term.

Retail

Following a significant disposal programme, the Retail segment only includes the results of the UK and Poland franchise dealerships and our bravoauto business in the UK.

§ UK and Europe delivered organic revenue growth of 8% and operating profit1 rose 83%, resulting in an operating margin of 2.6%. Demand for vehicles (new and used) remained strong, which against a backdrop of constrained supply has continued to support vehicle margins. Aftersales was solid, delivering good growth throughout the period. As indicated at our Capital Markets Day (17 November 2021), as and when the supply situation normalises we expect margins will trend towards c.1.5%. The results of the first half of 2021 include c.£110m of revenue and c.£10m of profit from our operations in St. Petersburg disposed in 2Q21.

Value drivers

We provide disclosure on the value drivers behind our gross profit. This includes:

§ Gross profit attributable to Vehicles: New Vehicles, Used Vehicles and the associated F&I (Finance & Insurance) income; and

§ Gross profit attributable to Aftersales: Service and Parts.

We operate across the automotive value chain, and during the period we generated 33% of gross profit through Aftersales, compared to 36% in the first half of 2021. This reflects the greater gross profit contribution from vehicles as volumes improved and the benefit from higher vehicle gross margins.

Other financial items

Adjusting items: In the first half of the year, we have reported adjusting items representing a gain of £3m (2021: a loss of £88m). The gain comprised of £20m relating to a change in pensions indexation linkage from RPI to CPI, partially offset by £10m of accelerated amortisation on software assets and £7m of acquisition and integration costs. Further details can be found in note 3 to the interim financial statements.

Net financing costs: Net finance costs were £20m (2021: £16m). The interest charge is stated on an IFRS 16 basis and, excluding interest relating to leases, our net finance charge was £15m compared to £11m in 2021.

Tax: The effective tax rate on adjusted profit is 26% (2021: 27%), and on a statutory basis is 25% (2021: 93%). The effective tax rate on a statutory basis is not comparable to the prior period since the current year rate considers only continuing operations and thus excludes the impact of the Russian disposal whereas in the prior year the rate included the impact of disposals and restructuring costs.

Non-controlling interests: Profits attributable to our non-controlling interests were £4m (2021: £3m). The Group's non-controlling interests comprise a 40% holding in PT JLM Auto Indonesia, a 33% share in UAB Vitvela in Lithuania, a 30% share in NBT Brunei, a 30% share in Inchcape JLR Europe, a 30% share in Ditec in Chile, a 10% share of Subaru Australia and 6% of the Motor Engineering Company of Ethiopia.

Dividend: The Board has declared a final dividend of 7.5p per ordinary share which will be paid on 2 September 2022 to shareholders on the register at close of business on 5 August 2022. The Dividend Reinvestment Plan is available to ordinary shareholders and the final date for receipt of elections to participate is 12 August 2022.

Capital expenditure: During the first half of 2022, the Group incurred net capital expenditure of £18m (2021: £19m), consisting of £26m of capital expenditure and £8m of proceeds from the sale of property. In 2022, we expect net capital expenditure will be less than 1% of sales.

Financing: As at 30 June 2022, the committed funding facilities of the Group comprised a syndicated revolving credit facility of £700m (2021: £700m) and sterling Private Placement loan notes totalling £210m (2021: £210m). As at 30 June 2022, none of the £700m syndicated revolving credit facility was drawn (£nil as at 31 December 2021 and 30 June 2021).

Pensions: As at 30 June 2022, the IAS 19 net post-retirement surplus was £153m (£82m as at 31 December 2021), with the increase driven largely by a rise in the discount rate used to determine the value of scheme liabilities, partially offset by lower than expected returns on scheme assets. In line with the funding programme agreed with the Trustees, the Group made additional cash contributions to the UK pension schemes amounting to £2m (2021: £5m).

Discontinued operations: During the period the Group agreed the sale of its remaining retail-only operations in Russia. In the first half of 2022 the operations generated revenue of £237m and operating profit of £21m. This has been classified within discontinued operations. The total loss reported was £240m, where we realised £99m of accumulated foreign exchange losses upon disposal.

Our financial metrics

The following table shows the key profit measures that we use throughout this report to most accurately describe operating performance and how they relate to statutory measures.

Risks

Principal business risks

The Board has reassessed the principal business risks which could impact the performance of the Group. These include:

Strategic risks, including:

§  Loss of OEM distribution contract;

§  Margin pressure arising from changing routes to market and lower margin availability for all participants in the electric vehicle value chain;

§  New entrants - business models and technologies;

§  Delivery of change programmes;

§  The attraction and development of future skill sets;

§  Electric vehicle transition - optimising the supply of electric vehicles and charging infrastructure to meet changing demand;

§  Political risks / social unrest; and

§  Achieving optimal returns from acquisitions.

Material operational risks, including:

§  Disruption to the supply of vehicles and parts;

§  A major cyber incident / data breach;

§  Loss of technology systems;

§  Health, safety and environmental incidents;

§  Legal / regulatory compliance;

§  Foreign exchange volatility; and

§  Risks of fraud or financial mis-statement.

The materialisation of these risks could have an adverse effect on the Group's results or financial condition. If more than one of these risks occur, the combined overall effect of such events may be compounded. The Group faces many other risks which, although important and subject to regular review, have been assessed as less significant and are not listed here. These include, for example, natural catastrophe and business interruption risks and certain financial risks.

The Group has defined and implemented systems of risk management and internal control designed to address these risks. These systems can offer reasonable, but not absolute assurance, regarding the management of these risks to an acceptable level. In particular, the effectiveness of these systems may change over time, for example with acquisitions or disposals or as the business implements major change programmes. The effectiveness of these systems are reviewed annually by the Audit Committee and improvements are made as required.

Appendix - business models

Distribution

Retail

1: Following scale disposal of retail businesses in Australia, Retail is no longer reported as a separate segment in APAC

(+): indicates the base of the core distribution operations which also serves other neighbouring islands

See note 17 for further details of alternative performance measures.

The notes are an integral part of these condensed consolidated interim financial statements.

1. See note 15.

The notes are an integral part of these condensed consolidated interim financial statements.

The notes are an integral part of these condensed consolidated interim financial statements.

1. See note 15.

The notes are an integral part of these condensed consolidated interim financial statements.

Share-based payments include a deferred tax charge of £1.8m (30 June 2021 - deferred tax credit of £0.6m; 31 December 2021 - deferred tax credit of £1.6m).

1. See note 15.

The notes are an integral part of these condensed consolidated interim financial statements.

notes (unaudited)

1 BASIS OF PREPARATION AND ACCOUNTING POLICIES

Basis of preparation

The condensed consolidated interim financial statements for the period ended 30 June 2022 have been prepared on a going concern basis in accordance with UK adopted International Accounting Standard 34 'Interim Financial Reporting' and the Disclosure and Transparency Rules of the Financial Conduct Authority. These condensed consolidated interim financial statements should be read in conjunction with the Annual Report and Accounts 2021, which have been prepared in accordance with UK adopted International Financial Reporting Standards and International Financial Reporting Interpretation Committee (IFRIC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

These condensed consolidated interim financial statements are unaudited but have been reviewed by the external auditors. The condensed consolidated interim financial statements in the Interim Report do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Group's published consolidated financial statements for the year ended 31 December 2021 were approved by the Board of Directors on 25 February 2022 and delivered to the Registrar of Companies.

The report of the auditors on those accounts was unqualified and did not contain an emphasis of matter paragraph or a statement under section 498 of the Companies Act 2006. The condensed consolidated interim financial statements were approved by the Board of Directors on 27 July 2022.

Going concern

Based on the Group's cash flow forecasts and projections, the Board is satisfied that the Group will be able to operate within the level of its committed facilities for the foreseeable future. For this reason, the Board continues to adopt the going concern basis in preparing its financial statements. In making this assessment the Group has considered available liquidity in relation to net debt and committed facilities, the Group's latest forecasts for 2022 and 2023 cash flows together with appropriate sensitivities.

Given the global political and economic uncertainty resulting from the conflict in the Ukraine and inflationary pressures, we expect to see continued volatility, some business disruption and the impact of economic downturns in the markets in which the Group operates during the remainder of 2022 and into 2023.

Committed bank facilities and Private Placement borrowings totalling £910m, of which £210m was drawn at 30 June 2022, are subject to the same interest cover covenant based on an adjusted EBITA measure to interest on consolidated borrowings measured on a trailing 12-month basis at June and December.

The latest Group forecasts for 2022 and 2023 indicate that the Group is expected to be compliant with this covenant throughout the forecast period and to have sufficient liquidity to continue in operation throughout that period.

A range of sensitivities has been applied to the forecasts to assess the Group's compliance with its covenant requirements over the forecast period. These sensitivities included:

·  a reduction in New and Used vehicle sales due to a short-term shortage of semi-conductor chips, reducing gross profit in 2023 with no mitigating actions;

·  a general economic downturn in the markets in which the Group operates combined with an increase in costs due to ongoing inflationary pressures, impacting gross profit and operating expenses in 2023 with no mitigating actions;

·  an appreciation in Sterling against the Group's main trading companies; combined with

·  working capital sensitivities.

In scenarios where some, but not all, of the above sensitivities occur at the same time, the Group has modelled the possibility of the interest cover covenant being breached in 2022 and 2023. With the interest cover covenant measured on a trailing 12-month basis, the sensitised forecasts indicate that the Group is not expected to breach any covenants and would be compliant with the interest cover requirements at December 2022 and throughout the forecast period. Additionally, under these circumstances, the Group expects to have sufficient funds to meet cash flow requirements.

A reverse stress test scenario analysis, concluded that a set of circumstances in which the Group would breach its covenant or have insufficient funds to meet cash flow requirements are considered to be remote, relative to the sensitivities referred to above.

The Board therefore concluded that the Group will be able to operate within the level of its committed facilities for the foreseeable future and the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements.

Newly adopted accounting policies

The accounting policies adopted in the preparation of the condensed consolidated interim financial statements are consistent with those of the Group's Annual Report and Accounts 2021 with the exception of standards, amendments and interpretations, which have been newly adopted from 1 January 2022:

·  Amendments to IFRS 3 Business Combinations, reference to conceptual framework;

·  Amendments to IAS 16 Property Plant & Equipment, proceeds before intended use;

·  Amendments to IAS 37 Onerous Contracts, cost of fulfilling a contract; and

·  Annual Improvements to IFRS Standards 2018-2020.

The adoption of the standards and interpretations listed above has not led to any changes to the Group's accounting policies or had any other material impact on the financial position or performance of the Group.

The Group has not early adopted other standards, amendments to standards or interpretations that have been issued but are not yet effective.

Standards not yet effective

The following standards were in issue but were not yet effective at the balance sheet date. These standards have not yet been early adopted by the Group, and will be applied for the Group's financial years commencing on or after 1 January 2023:

·  IFRS 17 Insurance Contracts;

·  Amendments to IFRS 17 Insurance Contracts: Initial Application of IFRS 17 and IFRS 9 Comparative Information;

·  Amendments to IAS 12 relating to Deferred tax related to assets and liabilities arising from a single transaction;

·  Amendments to IFRS 4 when applying IFRS 9 Financial Instruments;

·  Amendments to IAS 1 Presentation of Financial Instruments, classification of liabilities as current or non-current; and

·  Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates.

Management are currently reviewing the new standards to assess the impact that they may have on the Group's reported position and performance. Management do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group.

Critical accounting judgements and sources of estimation uncertainty

The preparation of these condensed consolidated interim financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge, actual results may ultimately differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

The Directors have made a number of estimates and assumptions regarding the future and made some significant judgements in applying the Group's accounting policies. The critical accounting judgements and key sources of estimation uncertainty remain consistent with those presented in the accounting policies note within the Group's 2021 Annual Report and Accounts. Those that are new or significant to the preparation of the interim financial statements are presented below.

Impairment of goodwill and other indefinite life intangible assets

The carrying amount of goodwill and other indefinite life intangible assets has been allocated to CGU groups within the following reporting segments:

Goodwill acquired in a business combination is allocated to the cash generating units (CGUs) or group of CGUs (hereafter collectively referred to as 'CGU groups') that are expected to benefit from the synergies associated with that business combination. Indefinite-life intangible assets, principally distribution agreements acquired in a business combination, are also allocated to the CGUs or CGU groups that are expected to benefit from the cash flows associated with the relevant agreements.

In accordance with the Group's accounting policy, goodwill and other indefinite-life intangible assets are tested at least annually for impairment and whenever events or circumstances indicate that the carrying amount may not be recoverable.

In the first half of 2022, the Group carried out an assessment as to whether any impairment testing is required to be performed for the six months ending 30 June 2022. As set out in IAS 36 Impairment of Assets, the assessment involved the Group reviewing potential indicators of impairment to determine if any of the Group's assets should be tested.

The review included examining data trends on asset valuations, reviewing latest macro-economic data including forecast recovery of global economies, reviewing latest industry data including industry volumes and comparing the Group's results against cash flows used in previously prepared impairment models and latest forecasts. The conclusion reached from the review performed was that there was no requirement to test any assets or cash generating units for impairment for the six month period to 30 June 2022.

At 31 December 2021, the Group's value in use calculations prepared for the cash generating units represented by Central America business in the Americas were sensitive to a change in the key assumptions used. The recoverable amount calculated for the Central America CGU was £117.6m. Cash flows were discounted back to present value and resulted in the impairment of the goodwill balance of £12.9m and a partial reversal of the impairment of the distribution agreement recognised in 2020 of £12.9m. The cash flows used within the impairment model were based on assumptions which are sources of estimation uncertainty and small movements in these assumptions could therefore lead to a further impairment. The table below shows the sensitivity analysis performed on the key assumptions in the impairment model using reasonably possible changes in these key assumptions and what additional impairment charge / reversal would arise.

1 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED

Computer software, property, plant and equipment and right-of-use assets are reviewed for impairment if events or circumstances indicate that the carrying value may not be recoverable. When an impairment review is carried out, the recoverable value is determined based on the higher of value in use calculations, which require estimates to be made of future cash flows, or fair value less costs of disposal.

The assessment outlined above as to whether any impairment testing required performing for the six months ending 30 June 2022 also incorporated computer software, property, plant and equipment and right-of-use assets. The conclusion reached was that there was no requirement to test any of these assets for impairment for the six month period to 30 June 2022.

Disposal of businesses

During the period the Group agreed the sale of its remaining operations in Russia to management. Following the disposal in 2021 of the operations in St Petersburg in 2021, the sale represented a strategic withdrawal from the country. Although there is a call option in place which would enable the Group to benefit from any increase in value of the business over the next seven years, particularly in the event of its onward sale, the Group has no intention of re-entering the market. The Directors determined that the call option did not represent a substantive right to control the Russian business and that the disposal constituted a transfer of control. The Directors also concluded that the disposal of the Russian business represented withdrawal from a significant separate geographical area of operation and that disclosure as a discontinued operation was appropriate (see note 10).

The price agreed for the sale of the Russian business was €76m (c£63m), to be satisfied over a period of five years in annual instalments. Significant uncertainty exists with regards to the amount that will ultimately be recoverable given the precarious outlook for the Russian economy and the uncertainty regarding the continued supply of vehicles and parts by the OEMs. In estimating the amount to be recognised as at 30 June 2022, management have developed a number of scenarios for the possible performance of the business. Probabilities were applied to these scenarios which indicated that some of the receivable would be received over time. However, given the difficulties in remitting the proceeds and uncertainty over whether this will change in the future, management has concluded that £nil value should be assigned to the receivable at 30 June 2022.

Written put option - Ditec acquisition

The non-controlling interest has a written put option over its 30% equity ownership in the Ditec business. This permits the holder to sell their shares to the Group at a price determined by an EBITDA driven formula during a three year period post-acquisition.

The amount that may become payable under the option on exercise is initially recognised at the present value of the redemption amount within trade and other payables with a corresponding charge directly to equity. The charge to equity is recognised separately as written put options over non-controlling interests. The liability is subsequently remeasured through equity for any subsequent charges in value. In the event that the option expires unexercised, the liability is derecognised with a corresponding adjustment to equity.

Adjusting items

The Group has historically reported certain items as 'exceptional', items which in the judgement of the Group need to be disclosed separately by virtue of their nature, size or incidence. Effective 1 January 2022, the Group's terminology applied to such items has changed from 'exceptional' to 'adjusting', as the term 'adjusting' provides a broader measure of alternative performance over time, which ought to provide investors with a more meaningful measure of the underlying performance of the Group.

In the period, the Group has reported an aggregate pre-tax adjusting items gain of £3.3m (see note 3). The separate reporting of adjusting items helps provide additional useful information regarding the Group's underlying business performance and is used by management to facilitate internal performance analysis. Items that may be considered as adjusting items include gains or losses on the disposal of businesses, restructuring of businesses, acquisition costs, asset impairments and the tax effects of these items. Any reversal of an amount previously recognised as an adjusting item would also be recognised as an adjusting item in a subsequent period.

Alternative performance measures (APMs)

In the prior year, the consolidated income statement included presentation of certain alternative performance measures in addition to IFRS measures. In the current period, the consolidated income statement presents only IFRS measures which is in line with the basis of preparation disclosed in this note. The alternative performance measures used by the Group are included in note 17. This includes further information on the definitions, purpose and reconciliation to IFRS measures.

2 SEGMENTAL ANALYSIS

The Group has four reportable segments which have been identified based on the operating segments of the Group that are regularly reviewed by the chief operating decision-maker, which has been determined to be the Executive Committee, in order to assess performance and allocate resources. Operating segments are then aggregated into reporting segments to combine those with similar economic characteristics.

The following summary describes the operations of each of the Group's reportable segments: