Lookers plc emerged in a strong position from lockdown and well equipped for a second

Lookers plc (LON:LOOK)

Lookers plc (LON:LOOK), one of the leading UK motor retail and aftersales service groups, has published its annual financial reports comprising the audited financial statements, management report and responsibility statements for the financial year ended 31 December 2019.

Key financials:

FYR 2019FYR 2018*
Revenue £m£4,787.2m£4,828.3m
(Loss)/profit before tax £m(£45.5m)£41.9m
Underlying profit before tax £m **£4.2m£42.8m
Underlying earnings per share (p) **0.87p8.78p
(Loss)/earnings per share (p)(10.69p)8.26p
Total dividend per share (p)1.48p4.08p
Net debt £m ***£59.5m£85.9m

*The 2018 previously audited and published financial results have been restated to reflect the impact of adjustments arising from the Grant Thornton investigation and internal review, IFRS 16 and voluntary presentational changes.

**Underlying profit before tax is profit before tax and non-underlying items. Underlying earnings per share is (Loss)/earnings per share after tax and before non-underlying items. 

*** Bank loans and overdrafts less cash and cash equivalents, excluding stocking loans and lease liabilities under IFRS16.

2019 Results Summary:

·      The audited 2019 results published today reflect the additional work carried out by Grant Thornton UK LLP, our internal team and our auditor, Deloitte LLP.

·      Total revenue for the year was £4,787.2m (2018: £4,828.3m) driven principally by the total 5.0% increase in used car revenue and a total 6.7% increase in aftersales revenue.

·      Adjustments identified as relating to 2019 reflect adjustments to previously unpublished results, and adjustments to 2018 and earlier reflect adjustments to previously published and audited results.

·      A total of £25.5m of non-cash adjustments are necessary to correct misstatements in PBT over a number of years.

·      Adjustments reduce PBT by £10.9m in 2019 and £7.2m in 2018 with the balance cumulatively decreasing PBT by £7.4m in 2017 and earlier.

·      Statutory loss before taxation of £45.5m compared with a profit before taxation of £41.9m in the prior year.

·      Despite the impact of the adjustments and as previously indicated, 2019 remains profitable at the underlying PBT level £4.2m (2018: £42.8m).

·      Net total non-underlying charges for the year totalled £49.7m (2018: £0.9m) reflecting significant restructuring activity, non-cash impairment charges, gain on property disposals and a provision of £10.4m for potential liabilities arising from the ongoing Financial Conduct Authority (FCA) investigation.

·      The investigations identified a cash expenses fraud which led to a loss of £327k in a single division and which accumulated over several years.

·      As previously announced, no final dividend for 2019 was recommended.

·      Continued strong focus on cash management reduced net debt to £59.5m (2018: £85.9m).

2019 Operational Summary:

·      Difficult but necessary decisions made to implement the right dealership portfolio and staffing profiles, which led to site closures and the unfortunate redundancy of a number of our colleagues.

·      Decisive restructuring activity commenced continuing into the current financial year to reduce costs to sustainable levels.

2020 Trading and Outlook:

·      Temporary closure of the Group’s dealerships throughout the initial lockdown had a significant impact on financial performance, with the Group expecting to report a material underlying loss before tax in H1.

·      Trading in Q3 was better than expected with underlying PBT significantly ahead of last year.

·      Q4 will benefit from the full impact of the Group’s restructuring activity although the financial performance for the remainder of the year will inevitably be impacted by the closure of our dealerships under the second lockdown in England which commenced on 5 November 2020, and any further regional restrictions.

·      The Group’s net debt has improved during the year and was £54.4m at the end of October (£59.5m at end December 2019). The Group has recently agreed revised covenants with its banks and is currently in discussions to refinance its £250m banking facilities which are in place until March 2022.

·      Despite resilient liquidity and before mitigating actions, ongoing uncertainties of COVID-19 and Brexit mean severe but plausible downside sensitivities indicate material uncertainty regarding going concern.

·      Activity is underway to enhance systems, controls and policies and procedures to prevent recurrence of the issues which led to the adjustments to our accounts. 

·      The Group will publish its full Annual Report and Accounts for the year end 31 December 2019 within two working days.

·      The Group will publish its interim results for 2020 as soon as possible in December and expects to submit a request to the FCA seeking to restore the listing of the Company’s shares after the publication of its interim results.

Phil White, Lookers plc Executive Chairman said: 

“The last twelve months has been extremely challenging for Lookers with the ongoing impact of COVID-19 and the accounting issues. Significant restructuring activity has been necessary to ensure we lay the right foundations for the future. On behalf of the Board I would like to thank all of our employees for their efforts and our wider stakeholders for their patience and ongoing support. Despite our recent challenges, we are extremely proud of how our people have responded, showing real dedication and flexibility particularly through maintaining critical vehicle servicing for key workers who have needed to remain on the road.”

“The Investigation into our financial systems and accounting controls, the delay in the publication of our 2019 results and the subsequent temporary suspension of our shares have been a great disappointment. As Chairman of Lookers, I would like to apologise unreservedly to all our stakeholders for the uncertainty this has caused.”

“We emerged from the initial lockdown in a strong position and are well equipped to deal with the second lockdown in England. We have an industry leading portfolio, underpinned by a talented and dedicated team which means that we can look to the future with confidence.”

“My focus now is to restore the listing of our shares and to strengthen the Board to take advantage of the many opportunities that lie ahead for Lookers, which is fundamentally a great business.”

Publication of 2019 statutory accounts

The financial information for the year ended 31 December 2018 is derived from the statutory accounts for that year, which have been delivered to the Registrar of Companies and which have been subsequently restated. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under s498(2) or (3) of the Companies Act 2006.

The statutory financial statements for the year ended 31 December 2019 will be filed with the Registrar of Companies following a General Meeting to approve those accounts. The report of the auditor dated 25 November 2020 was unqualified and did not contain a statement under s498(2) or (3) of the Companies Act 2006, but did include a section highlighting a material uncertainty that may cast significant doubt on the Group and Company’s ability to continue as a going concern given the possible impact of the COVID-19 pandemic and the effect of Brexit on both customer confidence and the Group’s supply chain.

CHAIRMAN’S STATEMENT

Introduction

2019 was a difficult year for Lookers. The Group faced a series of sector-wide challenges including a declining new car market, Brexit-related political and economic uncertainty and increased operating costs.

These challenges were compounded during 2020 by the lockdown of our business for over two months in the face of the global COVID-19 pandemic and subsequent restrictions. This pandemic and the eventual return to normality pose considerable uncertainty for the motor retail sector and the wider global economy.

In addition to this we delayed the publication of our 2019 financial results as we identified potentially fraudulent transactions in one of our operating divisions. In conjunction with Grant Thornton LLP (Grant Thornton) the Board immediately commenced a two-stage investigation (The Investigation). Initially the first stage conducted by Grant Thornton reviewed the operating division concerned and subsequently the Board extended the work performed by Grant Thornton and also implemented an extensive internal review. This process has now been completed to the Board’s satisfaction.

The Investigation and review identified a number of historic adjustments required to the income statement and balance sheet. These items gave rise to an additional net cumulative one-off charge of £7.4m in the periods up to and including 31 December 2018, a net one-off charge of £7.2m in the year to 31 December 2018 and the restatement of the balance sheets at those dates. As a consequence of these the Group’s prior year results have been restated. Further details of this restatement and its causes can be found in the Financial Review. As explained in the Financial Review in light of the Group’s financial performance in 2019 the Board is not recommending a final dividend for the year.

Despite the impact of the above adjustments the Group remained profitable on an underlying profit basis during 2019 with an underlying profit before tax of £4.2m (2018: £42.8m). Notwithstanding this there were a number of non-underlying credits and charges to the profit and loss account which led to a statutory loss before tax of £45.5m (2018: Profit £41.9m). The loss has largely arisen from additional operating costs including increases in staff and related costs (£15.4m) and non-underlying costs primarily arising from the impairment of goodwill (£30.4m), restructuring costs (£14.3m) and costs and liabilities arising from the FCA investigation (£15.1m).

The Board considers the issues that were identified as being varied in nature arising from weaknesses in the design and implementation of policies and procedures, an insufficiently resourced and skilled finance function and instances of failure to follow policies and procedures where they existed.

Details of the causes of the adjustments are identified in the Financial Review. Given the additional procedures we had to perform to finalise the Group’s 2019 results we concluded that it would not be possible to publish our 2019 audited financial statements by the required deadline of 30 June 2020. In light of this and following consultation with the FCA we requested that trading of our ordinary shares should be temporarily suspended with effect from the 1 July 2020.

Whilst having a framework in place for its financial planning and controls the Board recognises that historically these were insufficient and is undertaking all the necessary improvements to ensure that it is sufficiently robust to prevent any recurrence of these issues. Consequently, the Board has implemented a review and improvement programme for financial reporting, which will formalise procedures and processes. In addition, we acknowledged that there were some behavioural and cultural issues within the Group. We have established an independent Board sub-committee comprised of the most recently appointed Non-Executive Directors to provide oversight of the proper implementation of the actions identified in the conduct investigation. This sub-committee will stand down once they are satisfied each action has been delivered and monitored through the appropriate existing Governance forum by the Executive and the Board.

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Regulatory Relations

As previously reported, we have been assisting the FCA with a review of our governance, systems and controls of our regulated activity. This programme of work included the design and implementation of revised sales and oversight processes, a robust risk management framework, governance arrangements and systems and controls. This work was sponsored and overseen by the Board and subject to the independent assurance provided by FCA Skilled Person Reports. The work included the appointment of a Chief Risk Officer and two additional Non-Executive Directors with experience in financial services and regulated businesses. Having concluded these reviews we are now focused on ensuring that all the actions arising from this programme of work are embedded in 2020 and 2021.

The FCA’s Investigation into past sales processes is continuing and we are cooperating fully with the regulator.  The Group has made a £10.4m provision against any liabilities which may arise from the Investigation in addition to the in year non underlying cost of £4.7m.

Delay in publishing the Annual Report and Accounts (ARA) and the suspension of shares

The Board is undertaking a full review of its continuing obligations under the Listing Rules and will take steps to enhance its existing systems and controls where it deems that to be appropriate.

COVID-19

On 23 March 2020 in order to protect the safety and welfare of our people and customers and in response to the UK Government’s social distancing advice the Board took the decision to temporarily close all its trading locations. Following the introduction of new operating measures, the Group partly reopened 31 locations to provide essential repairs and maintenance to key workers’ vehicles alongside 10 parts distribution centres. We also ensured that where possible we had the technology and flexibility to allow for home working.

From the middle of May, we progressively opened all our locations in a manner consistent with appropriate local regulations and ensuring the safety of our colleagues and customers. We have implemented new operational processes to ensure the appropriate COVID-19 secure protocols are in place protecting both staff and customers. This has included the complete redesign of our sales processes to offer a fully contactless experience if that is what our customer wants. Our sites are well positioned for social distancing with a large proportion of customer interaction taking place outside on the forecourt and within our spacious showrooms.

Following the recent announcement of new lockdown restrictions which took effect from 5 November, we are providing our customers with pre-booked aftersales appointments and have continued to provide both new and used vehicles sales using our Click and Drive contactless solution. We remain committed to providing the best possible service whilst maintaining the well-being of both our colleagues and customers.

Post year end restructuring

The Board has considered the future operating model of Lookers in light of potential demand, a reduced dealership estate and structural changes taking place across the industry. As a result, the Board took the difficult decision to commence redundancy consultations across all areas of the business, which has resulted in approximately 1,500 redundancies and the closure or consolidation of 12 sites. The Board carefully considered all options and regrettably considered this action as being necessary in the current environment to sustain and protect the Lookers business over the long term.

Performance in 2019

We will look back on 2019 as a challenging year for the business, one where hard but necessary actions had to be taken to position our business for the future. For the third consecutive year the UK new car market continued to contract and UK new car registrations declined by 2.4% to 2.31m. Those challenging market conditions, combined with margin pressure and excess cost growth, resulted in a material reduction in profitability.

Management and Board changes

We have made a number of significant changes to our Board in 2019 and 2020.

Mark Raban was appointed Chief Financial Officer when Robin Gregson stepped down on 5 July 2019. Andy Bruce and Nigel McMinn stepped down on 1 November 2019 as Chief Executive Officer and Chief Operating Officer respectively.

On 5 February 2020 we announced the appointment of Mark Raban as Chief Executive Officer.

Heather Jackson and Victoria Mitchell were also appointed to the Board in November and December 2019 respectively as Non-Executive Directors.

On 30 March 2020 Jim Perrie was appointed as interim Chief Financial Officer although he has not joined the Board.

As we emerged from lockdown, we recognised that the Board needed to bring in new skills and experience to guide the business through the next stage of its development. As a result, we agreed an orderly transition to refresh the Board over the coming year.

Richard Walker, Senior Independent Director and Sally Cabrini, Non-Executive Director and Chair of Remuneration Committee, decided that they would not stand for re-election at our 2020 AGM held in June. Stuart Counsell has agreed to stay on the Board until the completion of the 2019 results and the appointment of his successor as Chair of the Audit and Risk Committee.

Tony Bramall, Non-Executive Director has decided to retire at the end of December 2020.

At the request of the Board I assumed the role of Executive Chairman in July 2020 to oversee this transition period but will not stand for re-election to the Board at the 2021 AGM.

Heather Jackson took over the role of Senior Independent Director from Richard Walker on 1 July 2020. She will become Chair of the Remuneration Committee at the completion of the 2019 results.

Victoria Mitchell has assumed the role of Chair of Lookers Motor Group Limited, the FCA-regulated entity from 1 July 2020 subject to FCA approval.

Now these financial statements have been concluded we will recommence the search for a new Non-Executive Chairman during the remainder of 2020 and 2021. We expect that recruitment process to conclude before the next AGM. In addition, the Company is finalising the recruitment of a new Chair of the Audit and Risk committee during 2020 and into 2021 will appoint an additional Non-Executive Director.

Current trading and financial outlook

The temporary closure of the Group’s dealerships throughout the lockdown period had a significant impact on the Group’s financial performance during the six-month period of 2020 (“H1”). As a consequence, the Group expects to report a material underlying loss before tax in H1.

As previously reported trading in the three months ended 30 September 2020 (“Q3”) resulted in underlying PBT significantly ahead of last year.

During 2020 the Group has maintained significant levels of headroom in its funding which has ensured adequate liquidity for the Business. Despite this resilient liquidity and before considering appropriate mitigating actions, the ongoing uncertainties presented by COVID-19 and Brexit mean severe but plausible downside sensitivities indicate material uncertainty regarding going concern.

Our OEM partners supported us with extended funding during the first lockdown period and in addition the Group has accessed the Job Retention Scheme for furloughed staff. Additionally, the Group has deferred payment of VAT and initially deferred the payment of payroll taxes although these have now been paid.

The announcement of the second COVID-19 lockdown and potential impact of Brexit means that there is material uncertainty around trading in the remainder of 2020 and 2021. However, we will benefit from the full impact of the Group’s restructuring activities which we expect to mitigate some of the risk and we will continue to access the Job Retention Scheme where appropriate. Against this background the Board is not reinstating guidance at this point.

Conclusion

The Board’s key focus remains to safeguard colleagues and customers, strengthen our governance and systems and controls and to ensure sustainable long-term liquidity.

Our Annual General Meeting was held on 29 June 2020. At that point the investigation remained ongoing and in order to give this as much time as possible to conclude to our satisfaction we took the decision that the standard Shareholders’ resolutions, including receiving these audited financial statements and the Auditors’ and Directors’ reports and approving the Directors’ Remuneration Report and Policy would not be tabled. Consequently, a separate General Meeting of the Shareholders is to be convened during December to consider these matters.

We are extremely proud of how our people have responded showing real dedication and flexibility particularly through maintaining critical vehicle servicing for key workers who have needed to remain on the road. I would like to personally thank the whole Lookers Team for their understanding and dedication during such a challenging time for the Group.

Lookers is predominantly a franchise business and we have always enjoyed strong relationships with our brand partners. We are grateful for their support across a range of financial and other measures.

I am also pleased that we continue to receive the support of our banks and we have agreed revised covenants reflecting the post COVID-19 environment.

The Investigation into our financial systems and accounting controls, the delay in the publication of our 2019 results and the subsequent temporary suspension of our shares have been a great disappointment. As Chairman of Lookers plc, I would like to apologise unreservedly to all our stakeholders and Team members for the uncertainty this has caused.

Lookers is a great business with great brands and great people. It is difficult to look too far ahead at the moment but I am reassured that we have the resilience to weather the current storm and the agility to emerge as a business which can build on its strong foundations. We can now move forward from here focussing on the many thousands of customers who rely on us for their mobility.

Phil White

Executive Chairman

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