# INTERVIEW: Marshall Motor Holdings Strong outperformance of market; outlook in line

- Link: https://www.directorstalkinterviews.com/interview-marshall-motor-holdings-strong-outperformance-of-market-outlook-in-line/412790227
- Published: 2019-08-13T07:23:52+01:00
- Author: Giles Arbor

**Marshall Motor Holdings plc** ([LON: MMH](https://www.directorstalkinterviews.com/company/marshall-motor-holdings/mmh.l)),
one of the UK’s leading automotive retail groups, announced today its unaudited 
interim results for the six months ended 30th June 2019. DirectorsTalk caught up
with CEO Daksh Gupta and CFO Richard Blumberger to talk us through the highlights,
how the balance sheet looks post IFRS16, how margins have held up and the outlook
for the remainder of the year and beyond.

**Financial Summary**

|   | H1 2019 | H1 2018 | Var % | 
|   |   | (restated for   IFRS 16) |   | 
| Underlying: |   |   |   | 
| Like-for-like^(1) revenue (£m) | 1,160.6 | 1,150.0 | +0.9% | 
| Profit before tax^(2) (‘PBT’) (£m) | 15.2 | 16.0 | (5.3%) | 
| Basic earnings per share (p) | 15.0 | 16.1 | (6.8%) | 
|   |   |   |   | 
| Reported: |   |   |   | 
| Revenue (£m) | 1,183.3 | 1,162.9 | +1.8% | 
| Profit before tax (£m) | 14.8 | 16.2 | (9.0%) | 
| Basic earnings per share (p) | 14.6 | 16.3 | (10.4%) | 
|   |   |   |   | 
| Dividend per share (p) | 2.85 | 2.15 | +32.6% | 
|   |   |   |   | 
| Adjusted Net Cash / (Debt)^(3) (£m) | 5.8 | 0.9 | +544.4% | 
| Reported Net Cash / (Debt)^(4) (£m) | (82.2) | (92.7) | +11.3% | 
|   |

**Highlights**

• Strong financial performance in a challenging market; H1 result in line with the
Board’s expectations

• Market outperformance in all core metrics during the Period:

• Like-for-like new unit sales to retail customers down 0.4% compared to a market5
decline of 3.2%;

• Like-for-like new unit sales to fleet customers down 1.1% compared to a market5
decline of 3.6%;

• Continued strong like-for-like used unit sales growth of 7.2%;

• Like-for-like aftersales revenue up 1.8%

• Gross margin maintained at 11.4% (H1 2018: 11.4%), with higher new vehicle margins
offsetting margin pressure in used vehicles and aftersales

• Like-for-like net operating expense growth of 1.6%, 2.0% excluding impact of lease
disposal, benefitted from a number of one-off management actions

• Adjusted net cash of £5.8m as at 30 June 2019 (30 June 2018: £0.9m), reflecting
disciplined working capital management and working with our brand partners to control
capital expenditure. Reported net debt reflects previously highlighted effect of
adopting IFRS16

• Continued investment in the Group’s property portfolio; £8.8m capital expenditure
during the Period, including the purchase of the Northampton ŠKODA freehold for 
£1.7m

• Acquisition of six ŠKODA franchised dealerships making the Group ŠKODA’s largest
UK retailer

• Continued strong balance sheet with net assets at 30 June 2019 of £200.7m, equivalent
to £2.57 per share (30 June 2018: £195.1m, £2.51 per share) including £123.9m of
freehold property

• Interim dividend 2.85p per share (2018: 2.15p), up 32.6% aided by recently revised
dividend policy

**Daksh Gupta, Marshall Motor Holdings Chief Executive Officer, said:**

> “Despite challenging market conditions, the Group has delivered a strong H1 unit
> sales performance, ahead of both the new and used car markets and underlying profit
> before tax in line with the Board’s expectations
> “Given continued weak consumer confidence as a result of ongoing political uncertainty
> over Brexit, ongoing cost headwinds for the retail sector and further potential
> new vehicle supply constraints in the lead up to the implementation of further
> emissions-related regulations on 1 September 2019, the Board believes it is right
> to remain cautious regarding the outlook for the remainder of the year. Nevertheless,
> the Board’s current outlook for the full year remains unchanged.”

1 “Like-for-like” businesses are defined as those which traded under the Group’s
ownership throughout both the period under review and the whole of the corresponding
comparative period

2 Underlying profit before tax is presented excluding non-underlying items (see 
Note 6)

3 Adjusted net debt is presented excluding the impact of the recognition of lease
liabilities under IFRS16 (see Note 3a)

4 Reported net debt includes the impact of the recognition of lease liabilities 
under IFRS16. (see Note 3a)

5 Registrations as reported by the Society of Motor Manufacturers and Traders

**Operating Review**

**Introduction**

Our unaudited interim results for the six months ended 30 June 2019 (“H1” or the“
Period”) reflect a strong unit sales performance, outperforming the new retail, 
new fleet and used car markets, together with further growth in aftersales revenues.
The Group has delivered an underlying profit before tax of £15.2m (H1 2018: £16.0m).
This was a strong performance given the challenging market conditions and ongoing
cost headwinds, and was in line with the Board’s expectations.

As announced in March 2019, the Group completed two acquisitions during the Period
comprising six ŠKODA franchised dealerships, as a result of which the Group became
ŠKODA’s largest UK retailer and now represents the brand in 11 locations. These 
acquisitions demonstrated our commitment to our stated strategy to grow with existing
brand partners in new geographic territories. The aggregate cash consideration paid
for the goodwill and fixed assets of the acquired businesses was £3.5m and the Group
also subsequently took the opportunity to separately acquire the freehold property
at Northampton ŠKODA for £1.7m. The integration of these businesses is progressing
according to plan and performance to date has been in line with our expectations.

The Group operates a well balanced portfolio of volume, premium and alternative 
premium brands which, at 30 June 2019, accounted for 27.4%, 48.1% and 24.5% respectively
of the Group’s total franchises (by number). The Group’s diverse portfolio means
it represents manufacturer brands accounting for over 80% of all new vehicle sales
in the UK. The Board continues to believe that this scale and diversified spread
of representation helps protect the Group from the effect of the cyclical nature
of individual brand performance.

**Six months ended 30 June 2019**

|   |               Revenue |              Gross Profit | 
|   | £m | mix* | £m | mix* | 
| New Car | 569.1 | 47.1% | 43.6 | 32.3% | 
| Used Car | 509.6 | 42.2% | 33.5 | 24.9% | 
| Aftersales | 129.5 | 10.7% | 57.8 | 42.8% | 
| Internal Sales / Other | (25.0) | – | 0.2 | – | 
| Total | 1,183.3 | 100.0% | 135.0 | 100.0% |

**Six months ended 30 June 2018**

|   |              Revenue |              Gross Profit | 
|   | £m | mix* | £m | mix* | 
| New Car | 584.6 | 49.3% | 40.5 | 30.5% | 
| Used Car | 474.6 | 40.0% | 34.2 | 25.7% | 
| Aftersales | 126.4 | 10.7% | 58.1 | 43.8% | 
| Internal Sales / Other | (22.7) | – | 0.1 | – | 
| Total | 1,162.9 | 100.0% | 133.0 | 100.0% |

*Revenue and gross profit mix calculated excluding internal sales / other

**New Vehicles**

|   | H1 | H1 |             Variance | 
|   | 2019 | 2018 | Total | LFL | 
| New Retail Units | 16,108 | 15,803 | 1.9% | (0.4%) | 
| Fleet Units | 9,199 | 9,396 | (2.1%) | (1.1%) | 
| Total New Units | 25,307 | 25,199 | 0.4% | (0.7%) |

Total new car revenue in the Period was £569.1m (H1 2018: £584.6m), like-for-like
£559.7m (H1 2018: £580.7m) was down 3.6%.

As expected, the UK new car market continued to decline during the Period. The Society
of Motor Manufacturers and Traders (‘SMMT’) has reported that during the Period,
new car registrations to retail and fleet customers declined by 3.2% and 3.6% respectively
with total registrations of new vehicles in the UK, including the impact of dealer
self-registration activity, declining by 3.4%. In the first quarter of 2019, the
overall market declined by 2.4% however, the second quarter of 2019 became more 
challenging with the overall market declining 4.6%.

The Group’s like-for-like sales of new units to retail customers decreased by 0.4%,
a strong market out-performance. The supply challenges reported in the second half
of 2018 were alleviated for a number of our brand partners and following a well-
reported decline in demand for diesel vehicles, all premium brands have increased
the proportion of petrol, hybrid and electric vehicle derivatives being produced
to address current consumer demand.

The Group’s like-for-like sales of new units to fleet customers decreased by 1.1%
which was also a market out-performance. Sales of new vehicles to fleet customers
have been impacted by the deferral of vehicle purchases as a result of a combination
of continued economic uncertainty and the current lack of clarity in relation to
the future tax implications of diesel vehicles which have typically formed a greater
share of the market for fleet customers.

Despite these challenges, new car gross margin strengthened during the Period to
7.7%, up 73bp compared with the same period last year (H1 2018: 6.9%). This positive
margin performance in new vehicle sales was driven by a combination of the Group’s
achievement of our brand partners’ sales targets without material pre-registration
activity and improved product mix in certain brands compared to last year.

**Used Vehicles**

|   | H1 | H1 |           Variance | 
|   | 2019 | 2018 | Total | LFL | 
| Total Used Units | 24,330 | 22,659 | 7.4% | 7.2% |

Total used car revenue in the Period was £509.6m (H1 2018: £474.6m), like-for-like
£498.8m (H1 2018: £467.0m) was up 6.8%.

Like-for-like sales of used units during the Period were up 7.2% versus the corresponding
period last year, a continuation of the strong performance in the second half of
last year.

As has been widely reported, the used car market experienced margin pressure during
the Period, particularly during the second quarter of 2019. Seasonal declines in
used car values during the Period were sharper than historic norms as a result of
a number of factors including strong comparable values in 2018 as a result of WLTP-
related supply shortages in the new car market, together with an increased volume
of 3-4 year old used cars in the market in the Period. A return to a more historic
used car values profile is anticipated for the remainder of this year.

Through the Group’s robust operating controls, in particular, our prudent 56-day
stocking policy, together with continued enhancement of the Group’s management information
system Phoenix 2, the Group was able to contain its used car margin reduction to
63bps at 6.6% (H1 2018: 7.2%).

**Aftersales**

|   | H1 | H1 | Variance | 
|   | 2019 | 2018 | Total | LFL | 
| Revenue (£m) | 129.5 | 126.4 | 2.4% | 1.8% |

In addition to the servicing, maintenance and repair of vehicles in our franchised
retail centres, the Group also operates five standalone bodyshops, five Trade Parts
Centres and one standalone central PDI facility.

Total aftersales revenue in the Period was £129.5m (H1 2018: £126.4m) with the Group
continuing to deliver consistent like-for-like aftersales revenue growth, up 1.8%.

Aftersales margin during the Period was 44.6% (H1 2018: 46.0%). The reduction in
aftersales margin during the Period was due in part to an increased mix of lower
margin parts sales, which also experienced margin pressure, together with an increase
in operational costs. We are expecting to see some margin recovery in the second
half of the year.

At 30 June 2019, the Group had over 70,000 customers in live service plans. Service
plans continue to form a key part of the Group’s retention strategy, allowing customers
to spread the maintenance cost of their vehicle whilst providing us with a greater
level of certainty over future aftersales profits.

Total aftersales gross profit was down 0.6% to £57.8m (H1 2018: £58.1m) as a result
of the issues referred to above and accounted for 42.8% of the Group’s total gross
profit (H1 2018: 43.8%).

**Operating Costs**

Overall Group costs increased by 2.5% to £114.9m (H1 2018: £112.1m), in part driven
by the Group’s recent acquisitions. Like-for-like operating costs increased by 1.6%
to £112.3m (H1 2018: £110.5m). This performance benefitted from £0.6m in relation
to a lease disposal, without which like-for-like costs would have been up by 2.0%.
This was a strong result which benefited from a number of one-off management actions.

In the face of ongoing well documented cost headwinds for the retail sector, we 
continue to be disciplined in our approach to cost management, with rigorous policies
and procedures in place to control all areas of discretionary spend.

**Portfolio Management**

As announced on 4 March 2019, the Group acquired the business and assets of Leicester
and Nottingham ŠKODA from Sandicliffe Limited on 31 January 2019 and the business
and assets of Bedford, Harlow, Letchworth and Northampton ŠKODA from Progress Bedford
Limited on 28 February 2019. The Group also took the opportunity to separately acquire
the freehold property at Northampton ŠKODA for £1.7m during the Period.

The Group continues to review its portfolio on an ongoing basis to maximise shareholder
value. The Group’s stated strategy is to grow scale with existing brand partners
and extend our geographic footprint into new regions. However, our focus will remain
on ensuring a strong strategic and financial case for any acquisition opportunities.
We have further headroom to grow with all brand partners in what we believe, with
continuing market uncertainty, will still be a consolidating market in which larger
dealer groups with diversified franchise portfolios will be better placed.

**Capital Investment**

During the Period, the Group invested £8.8m of capital expenditure into its retail
centres, including £1.7m to acquire the freehold of Northampton ŠKODA. Due to the
postponement of certain developments until 2020, we now expect capital expenditure
over the full year to be lower than our initial expectations.

During the Period, the Group completed the following developments:

• Lincoln Jaguar Land Rover: this development brought together Lincoln Jaguar and
Lincoln Land Rover, previously two separate leasehold sites, on one purpose-built
freehold site providing a significant increase in capacity for both vehicle and 
aftermarket sales

• Cambridge Ford Store: this relocated our existing leasehold showroom on Newmarket
Road to a state-of-the-art Ford Store on long leasehold property and provides a 
significantly improved customer experience

• Lincoln Nissan: relocation to the Group’s former Lincoln Land Rover leasehold 
premises

After recent investments, the net book value of Group’s freehold and long-leasehold
property portfolio increased to £123.9m (H1 2018: £116.6m).

**People Centric**

The Group was excited to, once again, achieve ‘Great Place to Work’ status by The
Great Place to Work Institute for the ninth consecutive year. The Group was ranked
11th in the super large category based on the 2018 survey. As a result of being 
named as one of the UK’s Best Workplaces for the fifth consecutive year, the Group
was recognised with a Laureate award. The Group remains the number one ranked automotive
business in the survey for the third consecutive year.

**Technology and Online**

The use of technology, online and social media are key drivers to increasing customer
engagement levels as well as supporting the day-to-day operation of the business.
The Group’s website remains the 6th most visited dealer website in the UK and we
remain one of the leading innovators in utilising social media channels. This was
further recognised in the Period with the Group winning both ‘Best Use of Social
Media’ at the 2019 Automotive Management Awards and the ‘Social Media’ category 
at the 2019 Motor Trader awards.

The Group’s management information system, Phoenix 2, continues to drive operational
effectiveness. Its continued development and disciplined use throughout the business
is one of the key drivers to the continued market outperformance by the Group.

**Worldwide Harmonised Light Vehicle Test Procedure**

The introduction of the Worldwide Harmonised Light Vehicle Test Procedure (“WLTP”)
for commercial vehicles from 1 September 2019, together with changes to the Real
Driving Emissions Test with effect from the same date, each have the potential to
impact supply of new vehicles in the second half of 2019. The extent of this impact
is not yet known and it will vary by manufacturer and by vehicle model. As with 
WLTP, industry forecasts suggest there is likely to be some impact on vehicle supply
and longer lead times for some models and brands of new vehicles, albeit at this
stage, it is anticipated that the impact will be less than that experienced in 2018.

**Financial Review**

**Impact of First Time Adoption of IFRS 16 Leases**

The Group has applied IFRS 16 for the first time in the Interim Report and Accounts
for the six months ended 30 June 2019; the standard has been adopted using the full
retrospective approach. The standard has no effect on the Group’s economic activity,
nor does it impact cash flows. However, adoption of the standard results in the 
recognition of new assets and liabilities, changes to the nature and timing of items
of expenditure as well as changes to the classification of cash flows relating to
lease contracts.

IFRS 16 removes the current distinction between operating leases and finance leases
and requires that, for all leases, a right-of use asset and a lease liability are
recognised in the Consolidated Balance Sheet. The asset represents the right to 
use the leased asset and the lease liability represents the commitments payable 
under the lease.

Operating lease rental charges in the Consolidated Statement of Comprehensive Income
are replaced by interest charges and depreciation expenses. The timing of the recognition
of these lease costs changes, with increased costs being recognised in the earlier
years of the lease due to interest being recognised at a constant rate on the carrying
value of the lease liability.

In the Group’s full year results announcement released in March 2019, the Group 
provided an initial estimate of IFRS 16; that it is likely to be marginally earnings
dilutive in the early years of adoption, with an initial 1%-2% impact on profit 
before tax. In addition, if the balance sheet at 31 December 2018 had been restated,
we estimated c£86.0m of right-of-use assets and c£92.5m of associated liabilities
would have been recognised in the Group’s balance sheet, resulting in a c£6.5m decline
in net assets.

The following tables summarises the actual impact of adoption of the new standard,
the net impact being broadly in line with that estimate given in March 2019:

| £m | 30-Jun-18 |   |   | 
|  | As originally presented | IFRS 16 Transition | Restated | 
| Underlying P&L extract |  |  |  | 
| Revenue | 1,162.90 | – | 1,162.90 | 
| Cost of sales | -1,029.90 | – | -1,029.90 | 
| Gross profit | 133 | – | 133 | 
| Net operating expenses | -113.3 | 1.2 | -112.1 | 
| Operating profit | 19.7 | 1.2 | 20.9 | 
| Net finance costs | -3.3 | -1.6 | -4.9 | 
| Profit before taxation | 16.4 | -0.4 | 16 | 
|  |  |  |  | 
| Balance sheet extract |  |  |  | 
| Right-of-use assets | – | 85.3 | 85.3 | 
| Freehold / long leasehold | 114.9 | -4.3 | 110.6 | 
| Other | 630.3 | 0.5 | 630.8 | 
| Total assets | 745.2 | 81.5 | 826.7 | 
|  |  |  |  | 
| Lease liabilities | – | 93.6 | 93.6 | 
| Other | 544 | -6 | 538 | 
| Total liabilities | 544 | 87.6 | 631.6 | 
|   |   |   |   | 
| Net assets | 201.2 | -6.1 | 195.1 | 
|  |  |  |  | 
| Net cash / (debt) | 0.9 | -93.6 | -92.7 |

Full details of the impact of IFRS 16 on the 2019 Interim Report and Accounts, including
the restatement of the comparative period, are set out in Note 3 ‘Changes in Accounting
Policies and Disclosures’ to the financial statements below.

The impact of IFRS 16 on the Group’s profit may vary (either positively or negatively)
dependent on the lease commitments either assumed or exited by the Group in each
financial period.

**Revenue**

Reported revenue increased by 1.8% to £1,183.3m (H1 2018: £1,162.9m) with like-for-
like revenue increasing by 0.9%. In addition, both used vehicle and aftersales revenues
continued to show growth against the comparable period last year. Like-for-like 
revenue from the sale of new vehicles (to both retail and fleet customers) declined
in the Period as a result of the declining UK new car market.

**Margin**

Gross margin was maintained at 11.4% (H1 2018: 11.4%), with higher new vehicle margins
offsetting margin pressure in used vehicles and aftersales. This positive margin
performance in new vehicle sales was driven by a combination of the Group’s achievement
of our brand partners’ sales targets without material pre-registration activity 
and improved product mix in certain brands compared to last year.

On a like-for-like basis, new vehicle margin improved by 73bps to 7.7%. As a result,
despite the decline in sales volumes of 0.4%, like-for-like gross profit increased
by £2.7m.

On a like-for-like basis, used vehicle gross margin at 6.6% was 62bps below the 
same period last year. Margin performance was impacted by well documented declines
in residual values in the second quarter, partly resulting from an exceptionally
strong market in the previous year. The Group mitigated the impact of these declines
with strong controls over inventory levels and rigorous application of our prudent
56 day stocking policy.

Like-for-like aftersales gross margin at 44.4% (H1 2018: 46.0%) was impacted in 
part to an increased mix of lower margin parts sales, which also experienced margin
pressure, together with an increase in operational costs.

**Costs**

Underlying operating costs of £114.9m were 2.5% higher than in the same period last
year, primarily driven by the impact of acquisitions. Like-for-like costs of £112.3m
increased by 1.6% (2018: £110.5m,) an increase which was anticipated due to on-going
cost headwinds. The Group continues to face a number of structural and inflationary
costs which have been contained by on-going tight control of costs.

Total finance costs of £5.0m were £0.1m higher than the same period last year, driven
by increased vehicle stocking charges as a result of higher levels of consignment
stock, including our newly acquired sites.

During the Period, the Group incurred £0.4m of non-underlying costs, primarily related
to acquisitions, disposals and restructuring.

**Tax**

The reported effective tax rate for the Period was 22.8% (H1 2018: 21.8%). The underlying
effective tax rate for the Period was 22.6% (H1 2018: 21.9%).

**Capital expenditure**

Capital expenditure during the Period was £8.8m. This was lower than originally 
expected due to the deferral of two large scale capital expenditure projects, partially
offset by the purchase of the Northampton ŠKODA freehold for £1.7m. At 30 June 2019,
the Group had £123.9m of freehold / long-leasehold property (30 June 2018: £116.6m),
equivalent to £1.58 per share.

**Financial position**

The Group continues to be cash generative, with cash of £10.8m generated in the 
Period, and the balance sheet remains strong. At 30 June 2019 the Group had adjusted
net cash of £5.8m compared to an adjusted net cash position of £0.9m at 30 June 
2018 and net debt of (£5.1m) at 31 December 2018. Reported net debt (post IFRS 16)
at 30 June 2019 was £82.2m (H1 2018: £92.7m)

The Group’s unutilised £120m revolving credit facility is in place until May 2021
and provides financial flexibility to take advantage of investment and growth opportunities
when they arise.

Over the longer term, the Board continues to believe it is in the best interests
of all stakeholders that the Group maintains a sound financial position. In this
respect, the Board targets net bank indebtedness (excluding the impact of IFRS 16)
of not more than 1.25x net debt/EBITDA. This leverage may rise for a period of time
towards the Group’s banking facility limit of not more than 3.0x (excluding the 
impact of IFRS 16) should an exceptional investment opportunity arise.

**Interim Dividend**

The Group’s recently revised dividend policy is for full year dividends to be covered
by between 2.5 to 3.5 times underlying earnings and paid in an approximate one-third(
interim dividend) and two-thirds (final dividend) split, subject to the Group’s 
trading prospects being satisfactory and taking into account potential investment
opportunities.

The Board is pleased to announce an interim dividend of 2.85p per share (2018 interim
dividend: 2.15p), up 32.6% aided by the revised dividend policy. The dividend will
be paid by 20 September 2019 to shareholders who are on the Company’s register at
close of business on 23 August 2019.

**Summary and Outlook**

Despite challenging market conditions, the Group has delivered a strong H1 unit 
sales performance, ahead of the new retail, new fleet and used car markets with 
underlying profit before tax in line with the Board’s expectations.

Whilst still early, our September order bank is building as expected. However, given
continued weak consumer confidence as a result of ongoing political uncertainty 
over Brexit, ongoing cost headwinds for the retail sector and further potential 
new vehicle supply constraints in the lead up to the implementation of further emissions-
related regulations on 1 September 2019, the Board believes it is right to remain
cautious regarding the outlook for the remainder of the year. Nevertheless, the 
Board’s current outlook for the full year remains unchanged.

Daksh Gupta

Chief Executive Officer

13 August 2019

Share on: