14<strong>Inchcape</strong> plc Annual report and accounts 2006Operating and financial reviewcontinuedFinancial ReviewJoint venture and associatesThe share of profit after tax of jointventures has decreased to £5.9m in 2006from £6.2m in 2005. This is mainly due toa reduced contribution from our financialservices joint venture in the UK followingthe implementation of a market forcesmodel by our UK Retail business.In December 2006 weannounced the disposal of <strong>Inchcape</strong>’s50% stake in Inchroy Credit CorporationLtd, a financial services joint venture.This disposal was completed in January2007 at a profit to the Group of c.£15.0m,and we are now implementing a marketforces finance and insurance modelsimilar to that successfully used in the UK.Exceptional ItemsThe exceptional tax credit of £8.0mreflects the favourable settlements in2006 of corporation tax treatment of theVAT recovery and associated net interestincome received by the Group in 2003and 2004.Net finance costsThe net finance charge of £5.9m for 2006was £0.6m higher than 2005. The financecharge benefited by £2.4m from animprovement in notional pension interestincome partly due to a lower discountrate in 2006 but also due to the £37.6mone-off contributions made to thepension funds. This was offset by higherfinancing costs primarily due to the Lindacquisition undertaken in July 2006.TaxThe subsidiaries Headline tax rate beforeexceptional items for 2006 is 21.7%,reduced from 25.5% in 2005.Following the resolution of certainprior year issues, including tax treatmentof capital expenditure together withimproved performance in our UKbusinesses, the Group has been ableto re-assess its deferred tax position ontherecognition of losses and availableallowances. As a result a deferred taxasset has been recognised which,together with the successful resolutionof overseas tax audits, has contributedto the lower rate of 21.7%.For 2007, it is expected that therate will increase towards the blendedrate of approximately 25%.Minority interestsProfits attributable to minority interestsdecreased from £3.8m in 2005 to £2.9min 2006. This is due to the acquisition ofthe minority shares of TM Auto Ltd inBulgaria in March 2006.Cash flowThe Group’s working capital is £84.5m.This is c.£42.0m better than last year dueto tight management control and isdespite a 7.9% increase in sales in 2006.The Group continues to bestrongly cash generative with cash flowfrom operations of £236.8m, which is111% of operating profit. During theyear the Group returned £86.6m toshareholders with £52.6m throughdividend payments and £34.0m throughthe share buy back programme.In addition the Group invested£190.3m in acquisitions and net capitalexpenditure in 2006 and acquired18.55% of the shares in EMH for £49.2m.Overall the Group had a net debtposition of £19.0m at 31 December2006 compared to net cash of £158.0mat 31 December 2005.PensionsDuring the year, the Trustees Boards oftwo of the Group’s UK defined benefitpension schemes carried out theirtriennial valuation of the pension funds.In March 2006, in advance of thesevaluations the Group agreed a fundingprogramme to address the deficits inthese schemes. This programme includedmaking one-off contributions totalling£37.6m to the schemes during 2006.This, together with improved return onassets during the year, has reducedthe pension deficit from £69.4m at31 December 2005 to £22.7m at31 December 2006. It is anticipatedthat additional contributions of c.£49.0mwill be made to two of the Group’s UKdefined benefit pension schemes overthe following five years to address theirfunding deficit.Acquisitions and disposalsThe Group announced significantexpansion during the year, investing£147.9m in acquisitions. Of this, £94.3mof this related to the acquisition of Lindin July 2006. Including net debt acquiredthe total acquisition cost was £107.9m.This sizeable acquisition enhancedthe geographic coverage of our Retailoperations in the south and eastof England.In December 2006 <strong>Inchcape</strong>entered the St Petersburg market inRussia with the acquisition of 75.1% ofthe scale Toyota/Lexus operationsformerly owned by Olimp Group, fora consideration of £34.5m. Also, inDecember the Group announced itsoffer for the acquisition of the shares ofEMH. As part of this, in mid Decemberit acquired an 18.55% stake for £49.2m.The £262.9m acquisition was completedon 29 January 2007 from which date theresults of EMH will be consolidated intothe Group figures.Capital expenditureThe Group maintained its policy ofinvesting to improve the quality andoperating standards of its retail centresand to develop new greenfield retailcentres. Net capital expenditureof £42.4m was made in the period,principally in UK Retail, Belgiumand Romania.Risk factorsRisk is an accepted part of doingbusiness. The Group has a risk assessmentprocess that facilitates the identificationand mitigation of risk and animprovements in the control environmentand risk management process wherenecessary. Through this process thebusinesses experience benefits whichinclude: the maximum use of recourcesthrough prioritisaton of critical issues,benchmarking between units, crisismanagement and internal focus onbest practice processes.
15<strong>Inchcape</strong> plc Annual report and accounts 2006Risks are considered in the key areasof Performance; Competition (by valuedriver); Fraud; Regulatory; Environmental;Organisation and Capability;Technology;Capital; and external factors such aseconomic and political conditions.The principal business risks identified bythe Executive Committee and notedby the Board are currently in thefollowing areas:– Brand partner relationships andsufficiently aligning <strong>Inchcape</strong> objectiveswith those of the brand partners.– Attracting, developing and retainingsufficient talent with the skills requiredto run the existing and future business.– Integrating acquisitions and newoperations and managing thosebusinesses to perform andgenerate synergies.– Implementation of key strategicchange projects on time and cost,effectively managing the pace ofchange to achieve optimum results.– Identifying and reacting to changingcustomer requirements.– Identifying, monitoring and reactingto anticipated regulatory activityincluding environmental and emissionissues and competition laws (e.g. Endof life directive; changes to blockexemption; EU emissions targets).– Integrated IS strategy and executionboth across and within divisions.– Effective corporate governanceof Joint Ventures and thirdparty arrangements.– Appropriate level and cost of fundingbeing available.– Changes in economic or politicalconditions in key markets.– Environmental, Health and Safety (seeCorporate and Social Responsibility).
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