 Introduction
The UK economy has shown little improvement since July when we reported the results
for the twelve months to 30 April 2009. Activity in the motor dealership sector
has remained subdued, particularly within our core prestige market, as have road
traffic volumes and the associated frequency of accidents. In turn, this has continued
to reduce the workload of the UK vehicle repair network although we did see a small
increase in rental lengths during the second quarter.
In addition to the operational and financial effects of the economic climate, we
have been affected materially by evidence provided by Autofocus and used by defendant
insurers against the Group’s vehicle hire charges. We consider the Autofocus evidence
to be dishonest in light of discoveries that we made towards the end of August 2009,
and we continue to take steps to secure a judicial finding of fact against Autofocus
and / or its remaining and previous employees. In the case of two of their former
employees we have obtained leave of the Court to commence committal proceedings
for contempt on the basis that the trial judge found there to be ‘more than a reasonable
prima facie case’ that false statements were made by the individual acting as a
witness.
We consider the adverse impact of Autofocus to have been twofold: first, we believe
insurers have actively slowed down payments to the Group as they expected to benefit
from the additional timeline of us litigating unpaid claims; secondly, insurers
anticipated achieving a significant reduction to our charges in Court proceedings
as, it is our contention, Autofocus evidence has influenced judges to award significantly lower amounts than we believe are justified.
In the face of these considerable challenges and ongoing illiquidity amongst insurers your Board has, as announced in our trading update of 27 November 2009, determined
to take prompt and strong action to reduce the cost base to a level appropriate
to these conditions, resulting in a smaller, refocused business.
Trading
Whilst rental days of 585,000 were
slightly ahead of the comparative period (2008: 570,000), adjusted* Accident Management
Revenue was 17% lower than H1 last year reflecting
changes in the mix of vehicles
on rent..
During the period we cut back funding of our low margin credit repair activities,
enabling the Group to benefit from both reduced working capital consumption and
from increased average hire lengths as insurers are slower at organising the approval
of repairs resulting in longer repair periods. Previously where we did credit repair
we would have organised the approval of the repair by the same independent engineer
more efficiently resulting in shorter repair periods.
Settlement Levels
Reflecting the economic and
sector issues set out above, the level of settlement adjustments conceded to drive
sufficient cash collections over the period has been materially greater than management's
expectations. The effect of these higher settlement adjustments has resulted in
the Group reporting a loss for the current period.
In addition to the under-recoveries reported against the trading profit for the
period, as a consequence of the issues associated with the allegedly dishonest rate
evidence supplied to the Courts by Autofocus, which became apparent during the period,
the Group has charged a further exceptional settlement adjustment of £9.9 million in respect of trade receivables that existed as at 30 April 2009, over and
above the exceptional settlement adjustment recognised in the accounts for the period
ended on that date. This includes both amounts realised on the final settlement
of receivables during the six month period ended 31 October 2009 (£2.5 million),
as well as an additional adjustment of £7.4 million that has been made in respect
of trade receivables that still remain outstanding as at 31 October 2009.
The exceptional settlement adjustment provision of £7.4 million is a non-cash charge
in the period and will continue to be reviewed based on the actual level of settlement
adjustments over the second half of the year; a period where we will continue to
demonstrate to the Courts and to insurers that their use of Autofocus rate evidence
is unsafe, whilst also seeking to ensure that ongoing cash collections meet required
levels.
Autofocus
We continue to quantify the scale of under-recoveries attributable to the use by
insurers of Autofocus’ evidence on spot hire rates over the last 12 months or so.
We have identified over 6,500 cases where Autofocus evidence appears to have been
deployed and over 2,600 cases where the claim has already been concluded, in many
cases at an undervalue.
Accident Exchange Limited
issued proceedings against Autofocus in the High Court
in October 2009 alleging deceit, conspiracy to cause harm by unlawful means and
conspiracy to cause harm to our business. In cases involving the recovery of hire
charges from an at-fault insurer most insurers appear to have ceased to rely on
the evidence of Autofocus.
It remains our intention to secure a judicial finding of fact and to make applications
to the Courts to seek leave to appeal out of time in those cases where it is clear
that acceptance of the Autofocus evidence by the trial Judge produced an under-recovery
to the Group based on unsound evidence. We understand that 13 of the 17 individuals
against whom we have evidence of dishonesty have now left the employment of Autofocus.
The positive effects of unearthing the Autofocus issue are still emerging and, in
particular, there has been an improvement over the past few weeks in the engagement
of both insurers and solicitors representing insurers regarding the settlement of
claims without us having to progress claims to Court. This is beginning to facilitate
the acceleration of claim settlement with certain insurers and their solicitors
and negotiations are underway over the block settlement of certain claims with certain
insurers. In addition, we have reached agreement with a leading insurer to fix the
future cost of our hire services in return for reduced operational and administrative
effort and improved payment terms.
We are, however, continuing to use litigation when all reasonable avenues of compromise
and negotiation have failed to close the claim.
Net debt, working capital and fleet financing
Net debt has reduced to £144.3 million from £174.0 million a year ago (30 April 2009: £149.8 million), reflecting primarily a £52.3 million reduction in fleet
related finance lease debt to £54.2 million as at 31 October 2009 (2008: £106.5
million) and a £19.7 million increase in net bank debt to £38.1 million (2008: £18.4
million).
Reduction in the total fleet to 4,658 vehicles as at 31 October 2009 (2008: 5,992
vehicles) and the elimination of more than £40.0 million of future fleet purchase
commitments in the second half of last year has enabled an increase in the age profile
of the fleet with the consequent reduction in fleet finance lease debt and an improvement
in overall utilisation to 66% in the period (2008: 60%).
The increase in net bank debt reflects the impact of the credit crunch and the issues
narrated above regarding the impact of Autofocus rate evidence on cash collection
levels and claim recoveries. Managing working capital remains the Group's primary objective, a task that the Board believes is benefitting, and will continue to benefit,
from the actions of Autofocus having been exposed, together with the planned reduced
cost base and lower working capital requirements of reduced trading levels consequent
from the above.
In light of our intention to refocus and reduce the size of the business and as
the Group's three year working capital facility expires on 30 September 2010, the
Group is engaged in discussions with its principal banker and is currently nearing
the conclusion of a review of its financing structure with a view to extending or
refinancing its working capital facilities.
However, until new working capital facilities are concluded, and as there continues
to exist a material uncertainty that cash collection and settlement levels may be
lower than the Board is forecasting then, to the extent they are lower, and as set
out in note 1, the Group continues to face uncertainty as regards its ability to
continue to comply with existing covenants, operate within its existing bank facilities
and be able to renegotiate, repay or refinance these working capital facilities.
Uncertainty also exists as regards the Group having either sufficient funding to
finance its planned vehicle acquisition volumes or to be able to source vehicles
from alternate rental providers so as to be able to replace maturing fleet and manage
the size and mix of the fleet in response to levels of business.
Historically, we have used a wide variety of funders to finance the purchase of the Group’s vehicle fleet. These facilities have ordinarily been of an uncommitted nature and several of the Group’s funders withdrew available facilities earlier this year as they themselves responded to the pressures brought on them by the credit crunch. The review of the Group’s funding structure also extends, at their request, to several of those funders who withdrew their facilities, with a view to securing longer term committed facilities on amended terms. We believe that these discussions can be concluded satisfactorily; however, the availability and terms of these facilities
are still to be determined and there is no guarantee that they will either be obtained or that they will be obtained on terms acceptable to the Board.
Strategic refocus and cost reductions
We have
also embarked on a programme of strategic change to refocus the Group's activities
on higher margin prestige business from our automotive and manufacturer referral
partners, historically the mainstay of operations. We have already secured two significant
new prestige manufacturer referral contracts and have allowed one low margin referral
relationship to lapse.
Over the next few months we will reduce the size of our mainstream fleet further, commence materially fewer lower margin hire starts and so reduce the working capital
requirements of the business. To align the cost base of the refocused business and,
after a period of consultation with our staff, as announced recently, annualised
reductions in fleet and employment related costs of around £24 million are targeted
to be attained by the end of the current financial year at an estimated cost of
c.£2 million to be incurred in the second half of the current financial year.
People
I would like to thank our staff, who
have continued to work hard through these difficult trading conditions and at a
time when our cost reduction plan adds personal uncertainty. Their commitment and
dedication has been outstanding.
Outlook
The financial crisis and the recession
that has followed have altered operating conditions, imposed new challenges and
exacerbated existing ones. Having discovered the systemic dishonesty in Autofocus’
rate evidence during the period, we are pursuing a legal remedy against them and
have also made some progress in accelerating claim settlement by improving the subsequent
engagement of insurers and their defendant solicitors. Much remains to be done,
however, and your Board is focused upon the recently announced strategic refocus
and delivering the anticipated cost reductions.
David Galloway
Non-Executive Chairman
30 December 2009
|
