Lex Service PLC: Interim results for the six months to 30 June 2002

Lex Service PLC, the motoring and vehicle solutions company, announces the following results for the six months to 30 June 2002:

• Before goodwill amortisation, exceptional items and tax of Ł33.2 million, up 6% from Ł31.4 million in the first half of 2001.
• Sustained growth in RAC Consumer Services: like for like revenue increased 8% at healthy margins.
• Significant new business wins, with new contracts worth a lifetime revenue of Ł290 million won in the first half of 2002.
• Underlying earnings per share increased to 20.9p (30 June 2001 - 20.2p).
• Cash inflow of Ł40 million reduced net debt to Ł160 million.
• Interim dividend of 9.2p per share, up 4.5% from 8.8p in 2001.
• Continued steady growth expected.

Andy Harrison, Chief Executive of Lex Service PLC, commented:

"We have delivered another robust performance, with a 6% growth in profit backed up by strong cash flow. We see good opportunities for future growth using our unique motoring and vehicle management expertise, building upon the strength of the RAC brand and developing our business outsourcing opportunities. "The company will be renamed RAC plc in September and our aim is to be the first choice in motoring and vehicle solutions for consumers and businesses."

For more information contact:

Paul Hewitt,
Group Finance Director, Lex Service PLC 07703 341 723
Niall Addison,
Group Finance & Investor Relations Manager 07764 624 701
Kate Holgate / Michael Webster,
Brunswick Group 020 7404 5959

E-mail: lex@lex.co.uk
Website: www.lex.co.uk

Interim results for the six months to 30 June 2002

Lex Service will be renamed RAC plc on 2 September. Our aim is to be the first choice provider of motoring and vehicle solutions for consumers and businesses, building upon the strength of our brands, our unique range of motoring and vehicle expertise and cross-selling more services to our customers. We see substantial growth opportunities in consumer motoring services building upon the strength of the RAC brand, and in business services using the Lex and RAC brands. We shall continue to cross-sell more services to our 6.6 million individual customers and our 20,000 business customers. In addition, we are tendering for an unprecedented number of large contracts which bring together our unique capabilities. The first six months of 2002 show good progress towards these aims, with 8% like for like growth in RAC Consumer Services and new contracts with lifetime revenues of Ł290 million.

Financial results

Profit before goodwill amortisation, exceptional items and tax grew by 6% to Ł33.2 million (first half 2001 - Ł31.4 million). This was after charging a Ł3.8 million increase in pension costs and includes a full six month contribution from RAC Auto Windscreens. This business was acquired on 31 March 2001 and contributed, after deducting interest on its acquisition price, Ł4.0 million in the half year to 30 June 2002 (Ł2.7 million in the quarter to 30 June 2001). Earnings per share on this basis grew by 3.5% to 20.9 pence (first half 2001 - 20.2 pence), with a tax charge increasing as expected from 26% to 28%. Operating exceptional costs of Ł0.6 million include RAC Auto Windscreens integration costs. After exceptional charges of Ł9.9 million, primarily incurred on the sale of the loss-making Lex Autocentres, of which Ł8.5 million was in respect of goodwill previously written off, profit before tax was Ł20.0 million (first half 2001 - Ł43.4 million, including an exceptional profit of Ł16.3 million on the sale of our stake in Synnex). Earnings per share on this basis were 9.3 pence (first half 2001 - 30.5 pence). As a result of our strong cash flow, net debt reduced to Ł160 million from Ł200 million at the end of 2001. The Board has declared an interim dividend of 9.2 pence, an increase of 4.5% on the 2001 interim dividend of 8.8 pence.

Operating results

Our results for previous reporting periods have been reformatted to the organisational structure we announced in January 2002 to provide a like for like comparison of performance.

RAC Consumer Services

RAC Consumer Services sells a comprehensive range of motoring solutions to individual customers, including financial, legal and travel services, RAC Auto Windscreens and BSM driver tuition. In the first half of the year RAC Consumer Services sustained the growth trend established since RAC's acquisition by Lex in 1999. Revenue grew by 16% to Ł172.3 million and like for like revenue grew 8%. Profit increased by 14% to Ł21.5 million. The individual membership base continues to grow, with a 5% increase to 2.08 million memberships at 30 June 2002 (30 June 2001 - 1.98 million memberships), covering three million people. This sustained growth in membership provides a strong platform for cross-selling the full range of RAC's services. Non-roadside services grew like for like revenue by 24% on the first half 2001, excluding RAC Auto Windscreens, and we see significant potential for continued growth.

Legal Services grew revenue by 27% and profit by 33% on the first half of 2001. We now have over 1.8 million legal expenses insurance policyholders, primarily through partnerships with the major insurance companies. Legal claims handled increased by 61% to 46,000 and personal injury claims handled grew by 17% to 7,000. Legal Services launched an accident solutions service, providing a variety of services to our members in the event of an accident, from recovery of the vehicle and legal advice to personal injury cases. We are widening our legal portfolio through new partnerships, such as an accident management initiative with the Avon & Somerset police. This provides motorists with comprehensive help and advice should they be involved in a collision, including details of RAC's free 24-hour 'collision help-line'.

RAC Financial Services increased profit substantially in the first half of 2002. We continue to achieve strong growth in RAC loans. We have renegotiated our agreement with AXA to market RAC-branded insurance and financial services. RAC's share of the joint venture's profits will increase to 42% in 2003 and then to an effective 80% in 2011.

BSM grew revenue by 17% and profit by 14%. New pupil numbers in the half year to 30 June 2002 grew by 6,000 to 73,000, while the number of instructors grew by 10% to reach 2,354 at 30 June 2002. In addition to providing driving tuition to individuals, BSM also serves the business market, where advanced driver training is increasingly in demand as emphasis grows on corporate responsibility for health and safety issues. BSM was awarded a Ł12 million contract to provide driver training services to the Ministry of Defence, adding to the broad range of services we provide to the military.

On a like for like basis, revenue and profit from RAC Auto Windscreens in the first half of the year were down on the exceptional first half of 2001, when poor weather conditions led to unusually strong demand for windscreen replacements. Despite this the business is making a strong contribution, with pre-tax profit of Ł12.8 million for the year from 30 June 2001, which represents an 11% return on investment on the acquisition price of Ł112 million. Lex Autocentres incurred a loss of Ł0.8 million before its sale in April 2002 (loss of Ł0.6 million in the first half of 2001).

RAC Consumer Services continues to achieve high quality earnings based on the strength of the RAC brand. Strong customer loyalty is demonstrated by the continued increase in our membership renewal rates, which reached 83.3% in the first half 2002.

Systems investment

Future growth, both in RAC Consumer Services and RAC Business Solutions, will be significantly enhanced by the delivery of our Ł30 million investment in infrastructure. We have implemented a new Ł6 million automated patrol despatch system which will improve response times and increase efficiency. The changeover from the previous system temporarily impacted on service levels during the transition but this is now being resolved.

Our customer relationship management system will be implemented on a phased basis over the second half of the year. The system will deliver annual savings in legacy system costs and marketing costs and will also yield considerable revenue benefits by supporting cross-selling. There is significant potential to grow the percentage of members who buy more than one service from its current level of 3.5%.

The implementation of these systems is expected to reduce profit by Ł4 million in 2002, with the majority of the impact arising in the second half of the year, before benefits start to flow through in 2003.

Business Services

Services to business customers are largely provided by RAC Business Solutions, Lex Vehicle Leasing and Lex Industrial Solutions. Lex's share of the revenue from these businesses was Ł269.5 million in the first six months (first half 2001 - Ł264.8 million). The total profit from Business Services in the first half was Ł8.8 million, compared with Ł9.0 million in the first half 2001. There are significant opportunities for growth in corporate vehicle solutions, mobile maintenance, claims handling and inventory management, particularly in the defence, insurance and automotive sectors. For example, our two biggest customers, the Ministry of Defence and Norwich Union, spend Ł50 million and Ł30 million respectively with us each year on a broad range of services involving BSM, RAC Business Solutions, Lex Vehicle Leasing, Lex Industrial Solutions and Manufacturer Support Services. In the first half of the year the Ministry of Defence increased the services it buys from Lex with the BSM driver training contract mentioned earlier, and a new contract with Lex Multipart to provide general engineering hardware spares support, worth up to Ł35 million in revenue over its seven year term.

We are tendering for a number of large multi-activity contracts, including bids with the Ministry of Defence for contracts to support construction vehicles and airfield vehicles, and opportunities in the insurance and automotive sectors. We account for these bids conservatively, writing off bid costs until we are named preferred bidder and the contract is almost certain. Any success fees are spread over the life of the contract. Capitalised bid costs at 30 June 2002 were Ł2.4 million, Ł1.9 million of which was incurred on contracts that have already been signed. Bid costs of Ł1.7 million were charged directly to profit in the first half of the year.

RAC Business Solutions

RAC Business Solutions is a growing business which sells motoring and related business solutions to business customers and manages complex outsourcing bids for large public and private sector organisations. RAC Business Solutions grew revenue by 17% to Ł70.3 million in the first half of the year (first half 2001 - Ł60.1 million) and made a profit of Ł0.4 million (first half 2001 - loss of Ł0.7 million).

New business wins in the first half of 2002 further demonstrate the potential for cross-selling services to major corporations in our key markets. RAC Business Solutions developed its partnership with Volkswagen Audi Group UK with a contract to provide a dedicated national network of Audi UK roadside technicians; and a contract to provide call centre support to Volkswagen's 265 retail units across the UK, which will be managed from Volkswagen's premises. Other new business wins include a contract to provide vehicle inspections to Toyota, adding to the roadside assistance services RAC Business Solutions already provides to the motor manufacturer; and an insurance claims management contract with Lloyds TSB.

Lex Vehicle Leasing

Lex Vehicle Leasing, our joint venture with HBOS plc, generated revenue of Ł95.2 million (Lex's half share) in the first half of 2002 (first half 2001 - Ł95.0 million). Our half share of profit increased by 9% to Ł8.2 million (first half 2001 - Ł7.5 million). We have consciously focused on increasing the quality of our business, which caused a marginal reduction in the fleet size to 91,800 (30 June 2001 - 92,100).

Disposal losses on company cars reaching the end of their contracts during the first half were comfortably absorbed within the Ł45 million provision Lex made at the end of 2000. Used car prices remain within the conservative projections made at the time of the provision and we remain confident that the provision will be sufficient to meet future disposal losses. New contracts are priced on the assumption of a continued decline in used car prices.

Lex Industrial Solutions

Lex Industrial Solutions includes the hire, maintenance and fleet management of a range of commercial vehicles, mechanical handling and other industrial equipment. It brings together activities with similar types of customer and operations and has core capabilities in mobile maintenance and commercial vehicle solutions which underpin a number of significant business services growth opportunities.

Lex Industrial Solutions contributed Ł0.2 million in the first half of 2002 (first half 2001 - Ł2.2 million) on revenue of Ł104.0 million (first half 2001 - Ł109.7 million). The business absorbed a large share of the increase in pension costs due to its high number of long serving employees, and also incurred restructuring costs in the first half of the year.

Our mechanical handling business is being restructured to become more customer-oriented and cost-efficient, and is focusing for the future on the opportunities to develop its national mobile maintenance capabilities. Costs were incurred in improving operational efficiency, through better utilisation of the lift truck fleet. Given the level of change in the business, we do not expect a significant profit recovery until 2004.

Lex Transfleet, which is a joint venture with Lombard, maintained the strong growth levels established in 2001 and grew the fleet under management by 1,000 to 27,000. Major contract wins include a five year contract to provide 400 commercial vehicles to the National Blood Authority and the renewal of a significant contract with Dumfries and Galloway Regional Council. Prospects for continued growth remain good as Lex Transfleet has a strong business development pipeline.

Manufacturer Support Services

Manufacturer Support Services provide outsourced marketing and inventory management services, primarily to vehicle manufacturers. These businesses achieved profit of Ł10.6 million in the first half of 2002 (first half 2001 - Ł10.9 million) and generated revenue of Ł301.0 million (first half 2001 - Ł291.0 million). Lex Multipart won significant new contracts in the first half of the year, with a combined lifetime revenue of Ł215 million. These include a 10 year contract to provide a range of aftermarket parts support services to Dennis Eagle, with lifetime revenues of up to Ł120 million; a five year contract to support Fleetguard, a world leader in filtration and exhaust systems for heavy-duty diesel engine applications; a five year contract with Valtra Tractors; and the contract to provide general engineering parts support to the Ministry of Defence.

Negotiations continue with Paccar over the possible extension of Lex Multipart's contract to distribute DAF parts. The business has two Paccar contracts: one providing parts support to Leyland vehicles until 2013, and the DAF contract which expires in June 2003. In 2001 Lex Multipart earned Ł10 million profit from the Paccar contracts. Irrespective of the DAF contract renewal there will be no financial impact until 2005. Thereafter there will be a decline in margin. Lex Multipart is successfully building new business, as demonstrated by the new contracts won in the first half, and is pursuing several further opportunities in the defence and insurance sectors.

Hyundai grew registrations by 10% to 15,021 in the first half of the year (first half 2001 - 13,656) and maintained market share at 1.1%. Hyundai now has a strong product line-up across all sectors of the market and launched the new Coupe in the first quarter, which is a key profit generator for the business. Parts sales, a stable and predictable source of profit, are increasing as the relatively new Hyundai brand becomes more established in the UK market.

Board Changes

We are pleased to announce the appointment of Alan Bowkett as non-executive Chairman from 1 January 2003, succeeding Sir Trevor Chinn who retires at the end of 2002. Further details can be found in the separate statement being issued today. In April 2002 Bill Cockburn stood down as a non-executive director. We thank Bill for his significant contribution over the past nine years. We welcome Dianne Thomson, Chief Executive of Camelot plc, and John Poulter, Chairman of Spectris plc, who joined the Board as non-executive directors in February and April respectively.

Outlook

The renaming of the company to RAC plc is another milestone in the transformation which has taken place over the past three years. The benefits of these changes are evident in our robust first half performance. The considerable opportunities to win new business and cross-sell our services should enable us to continue to deliver steady growth for the future.

Profit and loss account, balance sheet, cash flow and notes to follow.