INCH Inchcape Plc

Basis of preparation

The condensed consolidated interim financial statements for the period ended 30 June 2024 have been prepared on a going concern basis in accordance with UK-adopted International Accounting Standard 34 'Interim Financial Reporting' and the Disclosure and Transparency Rules of the Financial Conduct Authority. These condensed consolidated interim financial statements should be read in conjunction with the Annual Report and Accounts 2023, which have been prepared in accordance with UK-adopted International Financial Reporting Standards (IFRS) and the Companies Act 2006 applicable to companies reporting under IFRS.

These condensed consolidated interim financial statements are unaudited but have been reviewed by the external auditors. The condensed consolidated interim financial statements in the Interim Report do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Group's published consolidated financial statements for the year ended 31 December 2023 were approved by the Board of Directors on 4 March 2024 and delivered to the Registrar of Companies.

The report of the auditors on those accounts was unqualified and did not contain an emphasis of matter paragraph or a statement under section 498 of the Companies Act 2006. The condensed consolidated interim financial statements on pages 10 to 40 were approved by the Board of Directors on 29 July 2024.

Going concern

Based on the Group's cash flow forecasts and projections, the Board is satisfied that the Group will be able to operate within the level of its committed facilities for the foreseeable future. For this reason, the Board continues to adopt the going concern basis in preparing its financial statements. In making this assessment the Group has considered available liquidity in relation to net debt and committed facilities, the Group's latest forecasts for  2024 and 2025 cash flows together with appropriate sensitivities.

Committed bank facilities and Private Placement borrowings amount to £1,290m, of which £520m was drawn at 30 June 2024. In addition, the Group issued a £350m bond in June 2023 with a coupon of 6.5% which is due to mature in June 2028.

The Private Placement Loan notes and the Term Loan (due to mature in December 2024) are subject to the same interest cover covenant based on an adjusted EBITA measure to interest on consolidated borrowings measured on a trailing 12-month basis at June and December.

The latest Group forecasts for 2024 and 2025 indicate that the Group is expected to be compliant with this covenant throughout the forecast period and to have sufficient liquidity to continue operating throughout that period.

A range of sensitivities has been applied to the forecasts to assess the Group's compliance with its covenant requirements over the forecast period. These sensitivities included:

•      a reduction in New and Used vehicle revenue and margins in 2025 resulting from a decreasing consumer demand in response to fiscal tightening and resulting economic downturns;

•      a reduction in reported GBP earnings resulting from the strengthening of sterling relative to other currencies;

•      a general liquidity reduction impacting working capital from 2025;  with no mitigating actions applied in relation to the sensitivities described above.

In scenarios where all of the above sensitivities occur at the same time, the Group has modelled the possibility of the interest cover covenant being breached in 2024 and 2025. With the interest cover covenant measured on a trailing 12-month basis, the sensitised forecasts indicate that the Group is not expected to breach any covenants and would be compliant with the interest cover requirements throughout the forecast period. Additionally, under these circumstances, the Group expects to have sufficient funds to meet cash flow requirements.

A reverse stress test scenario analysis, concluded that a set of circumstances in which the Group would breach its covenant or have insufficient funds to meet cash flow requirements are considered to be remote, relative to the sensitivities referred to above.

The Board therefore concluded that the Group will be able to operate within the level of its committed facilities for the foreseeable future and the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements.

Accounting policies

The condensed set of consolidated financial information has been prepared using accounting policies consistent with those in the Group's Annual Report and Accounts 2023 with the exception of the following standards, amendments and interpretations which have been newly adopted from 1 January 2024:

Newly adopted accounting standards

From 1 January 2024, the following standards became effective for the Group's consolidated financial statements:

Amendments to IAS 1 - Non-current liabilities with covenants

Amendments to IAS 1 - Classification of Liabilities as Current or Non-current

Amendments to IFRS 16 - Leases on sale and leaseback

Amendments to IAS 7 and IFRS 7 - Supplier finance

Amendments due to Finance (No. 2) Act 2023 for Pillar Two income inclusion (IIR)

The adoption of the standards and interpretations listed above has not led to any material impact on the financial position or performance of the Group.

The Group will apply the amendments to IAS7 and IFRS 7 for the first time in the current year. The amendments add a disclosure objective to IAS 7 stating that an entity is required to disclose information about its supplier finance arrangements that enables users of financial statements to assess the effects of those arrangements on the entity's liabilities and cash flows. In addition, IFRS 7 is amended to add supplier finance arrangements as an example within the requirements to disclose information about an entity's exposure to concentration of liquidity risk.  The Group has entered into vehicle funding arrangements to fund the purchase of vehicles (see note 10f) and will provide the required disclosures in its annual financial statements.

The Group has not early adopted other standards, amendments to standards or interpretations that have been issued but are not yet effective.

Standards not yet effective

The following standards were in issue but were not yet effective at the balance sheet date. These standards have not
yet been early adopted by the Group, and will be applied for the Group's financial years commencing on or after
1 January 2025:

Amendments to IAS 21 - Lack of exchangeability

IFRS 18 - Presentation and Disclosure in Financial Statements

Management are currently reviewing the new standards to assess the impact that they may have on the Group's reported position and performance. Management do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group.

Designation of Ethiopia as a hyperinflationary economy

The Group financial statements include adjustments for hyperinflation, following the application of IAS 29 Financial Reporting in Hyperinflationary Economies in relation to the Group's operations with a functional currency of Ethiopian Birr.

The Group's consolidated financial statements include the results and financial position of its Ethiopian operations restated to the purchasing power or inflationary measuring unit current at the end of the period, leading to a hyperinflationary loss in respect of monetary items being reported in finance costs, and treated as an adjusting item. The results of the Group's Ethiopian operations have been translated at the closing exchange rate, as required by IAS 21 The Effects of Change in Foreign Exchange Rates for hyperinflationary foreign operations.

Whilst IAS 29 Financial Reporting in Hyperinflationary Economies is applied in individual financial statements as though the relevant economy was always hyperinflationary, comparative amounts are not restated in consolidated amounts already presented in a stable currency. The resulting difference in the opening Ethiopian net assets has been presented as a translation adjustment in other comprehensive income.

The inflationary factors used by the Group are the official price indices published by the Central Statistical Agency of Ethiopia. Hyperinflationary adjustments have been calculated using the price index prevailing at 30 June 2024, which was a CPI index of 455.9 (31 December 2023: CPI index 425.1). The adjusted results and financial position of Ethiopia were translated at the period-end closing rate before being included in the Group's consolidated financial statements.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of these condensed consolidated interim financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge, actual results may ultimately differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

The Directors have made a number of estimates and assumptions regarding the future and made some significant judgements in applying the Group's accounting policies. The critical accounting judgements and key sources of estimation uncertainty remain consistent with those presented in the accounting policies note within the Group's 2023 Annual Report and Accounts. Those that are new or significant to the preparation of the interim financial statements are presented below.

Impairment of goodwill and other indefinite life intangible assets

The carrying amount of goodwill and other indefinite life intangible assets is shown below:

Goodwill acquired in a business combination is allocated to the cash generating units (CGUs) or group of CGUs (hereafter collectively referred to as 'CGU groups') that are expected to benefit from the synergies associated with that business combination. Indefinite-life intangible assets, principally distribution agreements acquired in a business combination,
are also allocated to the CGUs or CGU groups that are expected to benefit from the cash flows associated with the
relevant agreements.

Indicators of impairment in goodwill and other indefinite-life intangible assets

In accordance with the Group's accounting policy, goodwill and other indefinite-life intangible assets are tested at least annually for impairment and whenever events or circumstances indicate that the carrying amount may not be recoverable.

In the first half of 2024 , the Group carried out an assessment as to whether any impairment testing is required to be performed for the six months to 30 June 2024. As set out in IAS 36 Impairment of Assets, the assessment involved the Group reviewing potential indicators of impairment to determine if any of the Group's assets should be tested.

The review included examining data trends on asset valuations, reviewing latest macro-economic data including global economic forecasts, reviewing latest industry data including forecasts of industry volumes and comparing the Group's results against cash flows used in previously prepared impairment models and latest forecasts. The conclusion reached from the review performed was that there was no requirement to test any assets or cash generating units for impairment for the six-month period to 30 June 2024.

At 31 December 2023, the Group's value in use calculations prepared for the cash generating units represented by Central America - Suzuki business in the Americas were sensitive to a change in the key assumptions used. The recoverable amount calculated for the Central America CGU was £170m. Cash flows were discounted back to present value using a pre-tax discount rate of 12.6%.

The cash flows used within the impairment model were based on assumptions which are sources of estimation uncertainty and small movements in these assumptions could lead to a further impairment. Management performed sensitivity analysis on the key assumptions in the indefinite-life intangible asset impairment model for Central America - Suzuki using reasonably possible changes in these key assumptions. The sensitivities were selected based on the inherent business volatility and the metrics that closely align to the consequences of climate change risks and opportunities detailed on pages 44 to 49 of the 2023 Annual Report and Accounts.

Other CGUs

The Group's value in use calculations are sensitive to a change in the key assumptions used. However, with the exception
of the Group's Hino business in South America, a reasonably possible change in a key assumption would not cause a material impairment of goodwill or indefinite-life intangible assets in any of the other CGU groups. The value in use calculations for the Hino distribution agreement in South America exceeded the carrying value by 24% as at 31 December 2023. A 1.4% increase in the discount rate, a 3.1% reduction in the long-term growth rate, or an 18% reduction in volumes in the forecast period, while holding all other assumptions constant, would eliminate this headroom.

Classification of vehicle funding arrangements

The Group finances the purchase of vehicles using vehicle funding facilities provided by various lenders including the captive finance companies associated with brand partners. In assessing whether the liabilities arising under these arrangements should be classified within trade and other payables rather than as an additional component of the Group's net debt within borrowings, the Group considers a number of factors including whether the arrangement is a requirement of the relationship with the OEM, in relation to specific, separately identifiable vehicles held as inventory and the duration of the finance. Each agreement entered into has its own terms and conditions and determining whether a new or renewed arrangement should be classified within trade and other payables requires significant management judgement (see note 10f).

Adjusting items

The Directors believe that adjusted profit and earnings per share measures provide additional useful information to shareholders on the performance of the business. These measures are consistent with how business performance is measured internally by the Board and Executive Committee. The operating profit before adjusting items and profit before tax and adjusting items measures are not recognised profit measures under IFRS and may not be directly comparable with such profit measures used by other companies. The classification of adjusting items requires significant management judgement after considering the nature and intentions of a transaction. The Group's definitions of adjusting items are outlined within the Group accounting policies and note 3 provides further details on current year adjusting items and their adherence to Group policy.

In the period, the Group has reported an aggregate pre-tax adjusting items expense of £31m (see note 3). The separate reporting of adjusting items helps provide additional useful information regarding the Group's underlying business performance and is used by management to facilitate internal performance analysis. Items that may be considered as adjusting items include gains or losses on the disposal of businesses, restructuring of businesses, acquisition and integration costs, asset impairments and the tax effects of these items. Any reversal of an amount previously recognised as an adjusting item would also be recognised as an adjusting item in a subsequent period.

Alternative performance measures (APMs)

The consolidated income statement presents only IFRS measures which is in line with the basis of preparation disclosed in this note. The alternative performance measures used by the Group are included in note 14. This includes further information on the definitions, purpose and reconciliation to IFRS measures.