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Mccarthy - Audited Results For The Year Ended 30 June 2003
Release Date: 01/09/2003 08:06:45 Code(s): MCC MCCD MCCP
McCarthy - Audited results for the year ended 30 June 2003
McCarthy Limited
Registration number 1991/003245/06
Incorporated in the Republic of South Africa
("McCarthy" or "the group")
Ordinary shares: Preference shares: Debentures:
JSE code MCC JSE code MCCP JSE code MCCD
ISIN: ZAE000034823 ISIN: ZAE000034831 ISIN: ZAE000034849
Audited results for the year ended 30 June 2003
Highlights
Growth in headline earnings
Operating margin improvement
Debt equity ratio reduced to nil
Profit growth in motor and financial services
CONSOLIDATED INCOME STATEMENT
June 2003 June 2002
R000s R000s
Revenue 11 889 426 11 225 308
Continuing operations 10 554 112 8 774 068
Discontinued/discontinuing operations 1 335 314 2 451 240
Cost of sales 10 145 475 9 574 337
Continuing operations 8 959 896 7 427 800
Discontinued/discontinuing operations 1 185 579 2 146 537
Gross profit 1 743 951 1 650 971
Continuing operations 1 594 216 1 346 268
Discontinued/discontinuing operations 149 735 304 703
Operating expenses 1 379 972 1 390 609
Continuing operations 1 276 413 1 127 174
Discontinued/discontinuing operations 103 559 263 435
Operating income before interest 363 979 260 362
Continuing operations 317 803 219 094
Discontinued/discontinuing operations 46 176 41 268
Net operating interest paid 116 968 90 663
Preference share financing cost 2 113 2 935
Convertible debenture interest 5 036 9 268
Income before taxation and non-trading 239 862 157 496
items
Continuing operations 182 508 113 399
Discontinued/discontinuing operations 57 354 44 097
Non-trading items - net surplus 34 306 264
Taxation 74 215 55 101
Income after taxation 199 953 102 659
Share of net income of associate 1 315 1 183
companies
Income attributable to outside 5 584 7 384
shareholders of subsidiaries
Net income attributable to ordinary 195 684 96 458
shareholders
Determination of headline earnings:
Net income attributable to ordinary 195 684 96 458
shareholders
Preference share financing cost 2 113 2 935
Convertible debenture interest 5 036 9 268
Tax saving from convertible debenture (9 463) (9 463)
interest
Diluted earnings 193 370 99 198
Non-trading items - net surplus 30 909 220
Profit on sale of dealerships, 45 422 1 596
investments and properties
Impairment of goodwill (11 116) -
Impairment of properties - (1 332)
Non-trading items before taxation 34 306 264
Taxation (1 846) -
Attributable to outside shareholders (1 551) (44)
Fully diluted headline earnings 162 461 98 978
Restatement of previously reported fully
diluted headline earnings in terms of
SAICA circular 7/2002:
Fully diluted headline earnings as 154 351
previously reported
Adjustments required in terms of circular (55 373)
7/2002
Losses incurred on restructure (3 000)
Impairment of investment in RAG (35 304)
Provision for future net rental (17 069)
expenditure on onerous contracts
Restated fully diluted headline earnings 98 978
CONSOLIDATED BALANCE SHEET
June 2003 June 2002
R000s R000s
ASSETS
Non-current assets 405 158 558 962
Property, plant and equipment 176 541 157 599
Deferred taxation 88 973 144 263
Investments - listed 39 963 142 311
- unlisted 47 310 48 723
Bank balances held by insurance companies 52 371 38 401
Insurance company technical assets - 27 665
Current assets 1 807 209 1 887 362
TOTAL ASSETS 2 212 367 2 446 324
EQUITY AND LIABILITIES
Capital and reserves 699 814 531 348
Ordinary shareholders" funds 493 717 321 189
Equity portion of convertible debentures 22 184 22 184
Equity portion of convertible preference 133 693 133 693
shares
Outside shareholders" interest 50 220 54 282
Liability portion of convertible - 26 506
debentures
Liability portion of convertible 6 356 11 742
preference shares
Life assurance fund 4 442 6 325
Borrowings 29 906 149 974
Long-term 25 807 3 000
Short-term 4 099 146 974
Current liabilities 1 471 849 1 720 429
TOTAL EQUITY AND LIABILITIES 2 212 367 2 446 324
SALIENT FEATURES
June 2003 June 2002
Earnings per share (cents)
Undiluted 9.8 4.8
Fully diluted 6.7 3.5
Fully diluted headline 5.7 3.4
Ordinary shares in issue (000s)
Undiluted 2 003 921 2 003 921
Weighted average 2 003 921 2 003 921
Fully diluted 2 869 344 2 873 742
Dividends per share (cents) Nil Nil
Convertible debentures in issue (000s) 25 644 25 644
Preference shares in issue (000s) 833 333 833 333
Preference dividend per share (cents) 0.9 0.9
Borrowings less cash/permanent capital - 14.2
(%)
Interest cover (times)
Including convertible debenture interest 2.9 2.5
and preference share financing cost
Excluding convertible debenture interest 3.1 2.9
and preference share financing cost
Operating margin (%)
Inclusive of wholesale turnover 3.1 2.3
Exclusive of wholesale turnover 3.3 2.4
Capital expenditure commitments (R000s) 28 998 29 775
Contingent liabilities (R000s) 107 181 2 533
Market value of listed investments 39 963 142 311
(R000s)
Directors" valuation of unlisted 47 310 48 723
investments (R000s)
Net asset value per share - fully diluted 23.1 18.4
(cents)
SUMARISED CONSOLIDATED CASH FLOW STATEMENT
June 2003 June 2002
R000s R000s
Cash generated by operations 383 068 377 662
Increase in working capital (180 004) (81 185)
Cash generated by operating activities 203 064 296 477
Financing costs (148 510) (122 695)
Taxation paid (9 874) (7 415)
Dividends paid (8 675) (8 056)
Cash flows from operating activities 36 005 158 311
Cash flows from investing activities 161 636 (13 423)
Net cash inflow before financing 197 641 144 888
activities
Cash flows from financing activities (120 068) (155 815)
Movement in bank balances 77 573 (10 927)
Bank balances at beginning of the year 74 386 85 313
Bank balances at end of the year 151 959 74 386
CONSOLIDATED STATEMENT OF CHANGES IN ORDINARY SHAREHOLDERS" FUNDS
Non- Reserves/
Stated distributable (accumulated
capital reserves deficit) Total
R000s R000s R000s R000s
Balance at 30 1 030 312 89 113 (908 268) 211 157
June 2001
Share issue (2 681) - - (2 681)
expenses
Redemption of - (4 499) - (4 499)
convertible
debentures
Foreign currency - 20 754 - 20 754
translation gain
Transfer to non- - 24 734 (24 734) -
distributable
reserves
Net income - - 96 458 96 458
attributable to
ordinary
shareholders
Balance at 30 1 027 631 130 102 (836 544) 321 189
June 2002
Reinsurance - - (5 411) (5 411)
adjustment
Foreign currency - (17 745) - (17 745)
translation loss
Transfer to non- - 26 111 (26 111) -
distributable
reserves
Net income - - 195 684 195 684
attributable to
ordinary
shareholders
Balance at 30 1 027 631 138 468 (672 382) 493 717
June 2003
Segmental Analysis - Continuing Operations
McCarthy Motor Holdings
Motor Franchises
R000s June 2003 June 2002 %
Revenue 9 441 040 7 772 023 21.5
Income/(loss) before interest 215 733 153 547 40.5
and taxation
Income/(loss) before taxation 185 915 146 970 26.5
and non-trading items
Total assets 1 622 545 1 689 714 (4.0)
Total liabilities 1 148 075 1 239 619 (7.4)
McCarthy Motor Holdings
Other Motor Operations
R000s June 2003 June 2002
Revenue 667 081 584 158
Income/(loss) before interest 25 381 26 070
and taxation
Income/(loss) before taxation 3 607 6 796
and non-trading items
Total assets 224 257 263 028
Total liabilities 171 591 236 474
McCarthy Motor Holdings
Yamaha Distributors
R000s June 2003 June 2002 %
Revenue 374 050 353 250 5.9
Income/(loss) before interest 57 434 40 993 40.1
and taxation
Income/(loss) before taxation 58 624 41 915 39.9
and non-trading items
Total assets 144 613 117 787 22.8
Total liabilities 67 063 74 602 (10.1)
McCarthy Financial Services
R000s June 2003 June 2002 %
Revenue 66 029 53 243 24.0
Income/(loss) before interest 39 278 42 579 (7.8)
and taxation
Income/(loss) before taxation 45 417 46 859 (3.1)
and non-trading items
Total assets 107 944 106 735 1.1
Total liabilities 55 236 63 993 (13.7)
McCarthy On-Line
R000s June 2003 June 2002
Revenue 5 912 11 394
Income/(loss) before interest 1 561 776
and taxation
Income/(loss) before taxation 2 050 1 009
and non-trading items
Total assets 1 157 2 078
Total liabilities 1 526 2 213
Corporate Services
R000s June 2003 June 2002
Revenue
Income/(loss) before interest (21 584) (44 871)
and taxation
Income/(loss) before taxation (113 105) (130 150)
and non-trading items
Total assets 111 851 266 982
Total liabilities 69 062 298 075
Total
R000s June 2003 June 2002 %
Revenue 10 554 112 8 774 068 20.3
Income/(loss) before interest 317 803 219 094 45.1
and taxation
Income/(loss) before taxation 182 508 113 399 60.9
and non-trading items
Total assets 2 212 367 2 446 324 (9.6)
Total liabilities 1 512 553 1 914 976 (21.0)
Review of Results
INTRODUCTION
The Board is pleased to announce an excellent set of results.
Fully diluted headline earnings increased 64,1% from R98,9 million in the prior
year to R162,5 million for the year under review. This translates into increased
fully diluted headline earnings per share of 5,7 cents compared to 3,4 cents.
OPERATING PERFORMANCE
The following are the key highlights with reference to the continuing
operations:
* Revenue increased by 20,3% from R8,8 billion to R10,6 billion. All major
business units contributed to this growth.
* Operating income before interest increased by 45,1% to R317,8 million, an
improvement in operating margin from 2,4% to 3,3%. This is the highest margin
achieved in the last ten years.
* Income before tax and non-trading items of R182,5 million was 60,9% above the
R113,4 million of the prior year.
* The motor franchise operations experienced an excellent trading year reporting
a 21,5% increase in revenue to R9,4 billion and a 26,5% increase in pre-tax
profit from R146,9 million to R185,9 million. Outstanding results were recorded
in most franchises, with new vehicle retail sales amounting to 30 483 units
representing 12,9% of the national dealer market, while 30 487 used retail
vehicles were sold, representing a 10,7% market share. The growth in pre-tax
profit was achieved despite the disposal of nine DaimlerChrysler and four BMW
dealerships during the course of the year.
* Whilst each of the businesses comprising "other motor operations" namely
Budget Rent a Car, Burchmore"s Car Auctions and McCarthy Fleet Services, was
profitable, they had, in aggregate, a disappointing year reporting a 46,9%
decrease in profit before tax from R6,8 million to R3,6 million. Budget Rent a
Car reported a reduction in pre-tax profit from R5,7 million to R1,0 million
mainly due to the impact of increased new vehicle prices and the cost of
finance, both of which materially increased the fleet holding cost, without a
corresponding increase in average daily rental rates being achievable.
Burchmore"s pre-tax profit reduced from R5,1 million to R1,5 million primarily
due to the level of bank repossessions falling to an all time low.
* Yamaha Distributors again produced an outstanding set of results, increasing
profit before tax by 39,9% from R41,9 million to R58,6 million. Balanced Audio
which was acquired effective 1 December 2002, added Yamaha audio and home
theatre products to the product range.
* McCarthy Financial Services, comprising the group"s insurance and financing
activities, reported a 24% increase in revenue but showed a 3,1% decrease in
profit before tax. This reduction is mainly as a result of the group"s share of
McCarthy Finance income reducing from R21,3 million to R15,7 million, which
arose from increased pressure from vehicle manufacturers to allocate more of the
vehicle finance business to their in-house finance operations. The insurance
operations pre-tax income improved 16,2% from R25,6 million to R29,7 million
despite a disappointing performance from the equity investment portfolios.
Net operating interest paid increased from R90,7 million to R116,9 million as a
result of the following:
* A 2,8% increase in the cost of funds borrowed due to the substantially higher
prime overdraft lending rate which prevailed;
* a higher level of working capital during the year (refer reasons noted under
cash flow); and
* the group no longer receiving interest from its investment in the Retail
Apparel Group Limited ("RAG") convertible debentures, a negative impact of R10
million.
Interest cover however improved to 2,9 times despite the increase in the quantum
of interest paid.
The net non-trading surplus of R34,3 million consisted of a profit of R45,4
million on the disposal of various dealerships, offset by impairment adjustments
raised against the carrying value of goodwill.
Taxation of R74,2 million largely comprised a deferred tax charge of R58,6
million arising from the utilisation of the deferred tax asset raised on the
accumulated assessed loss.
The impact of all of the above has resulted in a 102,9% increase in income
attributable to ordinary shareholders from R96,5 million to R195,7 million.
DISCONTINUED/DISCONTINUING OPERATIONS
As reported in the half-year results announcement dated 3 March 2003, due to
changed manufacturer representation strategies, the group had to dispose of nine
DaimlerChrysler dealerships and four BMW dealerships during the course of the
year. The trading from these operations to the date of their disposal has been
disclosed as discontinued/discontinuing operations.
On the positive side, the disposal of these dealerships generated a R168,1
million inflow of cash, which was used to reduce interest bearing bank debt.
Also, as part of the new DaimlerChrysler representation strategy, the group
acquired two additional dealerships effective 1 November 2002. The trading
results of these dealerships together with the reduction in interest will only
partly reduce the negative impact arising from the disposal of these operations.
FINANCIAL POSITION AND CASH FLOW
The group reached a new milestone by concluding the year in a net positive cash
position of R122,1 million, compared to a net borrowed position of R75,5 million
at 30 June 2002. The source of this R197,6 million turnaround is reflected in
the cash flow statement.
In total R383,1 million cash was generated by operations which was offset mainly
by a R180 million increase in working capital and R148,5 million in financing
costs, resulting in a net R36 million positive cash inflow from operating
activities.
The increase in the net financing costs has been explained above, while the
increase in working capital was largely as a result of:
* Changes to manufacturer creditor terms resulting in a lower level of creditor
funding;
* above average new vehicle price increases during the year. This not only
increased the holding cost of new vehicle inventory, but as used vehicle prices
follow new vehicle price increases, there was a corresponding increase in the
holding cost of used vehicle inventory; and
* inventory levels exceeded our benchmarks in some franchises due to lower than
expected demand for new vehicles.
The R161,6 million generated from investing activities was derived mainly from
the receipt of the RAG interim liquidation dividend together with the proceeds
on disposal of the dealerships, offset by the cost of acquiring property, plant
and equipment, Balanced Audio and the two DaimlerChrysler dealerships.
The carrying value of listed investments decreased to R39,9 million mainly as a
result of receiving the advance R105,9 million liquidation dividend from Retail
Apparel (Pty) Ltd ("RAP"). This is more fully explained below.
The increase in long-term borrowings arises from the financing of property
acquisitions by McCarthy Motor Holdings (UK).
INVESTMENT IN RAG
As advised to shareholders previously, RAG"s wholly-owned subsidiary RAP, the
operating company which was placed into liquidation in May 2002, remains in
liquidation. On 31 December 2002 McCarthy received an interim liquidation
distribution of R105,9 million against the issuing of a bank guarantee,
conditional on the guarantee being able to be called up by the RAP liquidators
should the group"s secured claim be proven to be invalid. To date, the
liquidators have not legally challenged the security held by McCarthy and the
group"s legal advisors are still of the opinion that the security is valid and
enforceable. The provision of this guarantee has been shown as a contingent
liability.
McCarthy also has an unsecured claim against the RAG group. Based on a
conservative approach that it is unlikely that any liquidation proceeds will be
received on the unsecured claim, this claim together with the outstanding
balance on the secured claim were fully provided for in previous financial
years.
CORPORATE GOVERNANCE
The group trades in accordance with the principles as embodied in the Code of
Corporate Practice and Conduct in the King Report 2002 ("the Code"). The group
complies with the significant requirements incorporated in the Code and the JSE
Securities Exchange SA listing requirements.
ACCOUNTING POLICIES
The group has complied with SAICA circular 7/2002 relating to the determination
of headline earnings. Consequently, the prior year results have been restated
which has had the effect of reducing fully diluted headline earnings from R154,4
million to R98,9 million. A full reconciliation is provided in this
announcement.
Based on recent findings of the IASB project on insurance contracts, the short-
term reinsurance contracts of the group no longer qualify as valid reinsurance
arrangements as they do not transfer significant risk to the re-insurer. These
insurance contracts now fall within the ambit of AC133 and consequently an
adjustment of R5,4 million has been disclosed in the statement of changes in
ordinary shareholders" funds as an adjustment to opening reserves and the re-
insurer"s share of the insurance company"s technical assets are no longer
separately disclosed on the balance sheet.
Except for the application of SAICA circular 7/2002, the accounting policies
used in the preparation of the year end results are consistent with those
applied in the annual financial statements dated 30 June 2002 and comply with
the South African Statements of Generally Accepted Accounting Practice.
INDEPENDENT AUDIT
The group"s auditors, Deloitte & Touche, have audited the financial information
set out in this announcement. Their unqualified audit report is available at the
registered office of the company.
CHANGE TO THE BOARD
Mr AR Martin was appointed to the Board as a non-executive director effective 14
August 2003.
Dividend
The Board considered it premature to declare a dividend at this time
notwithstanding the good results reported in the current year.
PROSPECTS
Business confidence, interest rates and vehicle affordability are the key
drivers impacting the group"s trading environment. The current decreasing
interest rate scenario augurs well for increased business and consumer
confidence and hence improved trading conditions during the second half of the
financial year. Vehicle affordability, however, continues to inhibit sales.
Fortunately, vehicle price increases have slowed down dramatically due to the
stronger Rand and healthy vehicle and component exports.
As noted earlier, the most significant negative factor affecting the earnings
will be the full year loss of profit from the disposal of the DaimlerChrysler
and BMW dealerships. On the positive side will be the reduction in the group"s
interest expense as a result of interest rate reductions and the overall
decrease in debt levels.
We believe that continuing operations will deliver improved performance, but as
a consequence of the reduced dealer network, the group will be challenged to
show growth against this year"s headline earnings.
On behalf of the Board
Noel Phillips (Chairman)
Brand Pretorius (CEO)
Durban
1 September 2003
Directors:
N Phillips (Chairman); S G Pretorius* (Chief Executive Officer); H L Bosman; G D
Damp*; P M Goss; P J C Horne; Dr M T Lategan; A R Martin; S C McCarthy; W R
Parkhurst*; E G Roden*; A G W Williamson. *Executive
Registered Office:
McCarthy Centre, 203 North Ridge Road, Durban, 4001.
Transfer Secretaries:
Computershare Limited, 70 Marshall Street, Johannesburg, 2000.
Merchant Bank and Sponsor:
Rand Merchant Bank - Corporate Finance
1 Merchant Place, Cnr Fredman Drive & Rivonia Road, Sandton, Johannesburg, 2196.
