# Vertu Motors above expectation results for FY21 and a strong start to FY22

- Link: https://www.directorstalkinterviews.com/vertu-motors-above-expectation-results-for-fy21-and-a-strong-start-to-fy22/412988185
- Published: 2021-05-12T07:13:42+01:00
- Author: Giles

**Vertu Motors plc** (LON:VTU), the automotive retailer with a network of 149 sales
and aftersales outlets across the UK, has announced its final results for the year
ended 28 February 2021 (“Year”).

> **Commenting on the results, Robert Forrester, Chief Executive Officer, said:**
> “These results, which are ahead of expectations, are outstanding in the Covid 
> interrupted circumstances.  I am proud of the entire Vertu team for their adaptability
> and effort to deliver these remarkable results.
> The Group has significantly evolved during the year, with accelerated delivery
> of its strategy in achieving enhanced online sales capability via its inhouse 
> developed Click2Drive technology platform, reduced cost base due to productivity
> gains and significantly grown the number of sales outlets. 
> We have started the new financial year very strongly, have generated record levels
> of cash and have a very strong balance sheet.  We have now re-instated guidance.
> Brexit uncertainty is now behind us, and we are exceedingly well placed to benefit
> from the changes and opportunities which are ahead of us.”

**OPERATIONAL HIGHLIGHTS**

·    Adjusted^(1) profit before tax of £24.6m ahead of Analysts’ forecasts (2020:
£23.0m)

·   18 sales outlets added to the Group since 1 March 2020, including the addition
of 3 new franchise partners to the Group’s portfolio – BMW, MINI and BMW Motorrad

·    Strong, stable management, supported by scalable, sector-leading in-house developed
technology and systems, provides assurance of tight control of operations and swift
execution of strategies

·    Substantial growth in online retailing using the Group’s Click2Drive sales 
technology platform 

·    Increased efficiency of transaction processing including use of robotic process
automation

·   38,446 new and used vehicles delivered from 1 January to 31 March 2021, despite
lockdown restrictions keeping showrooms closed

·   Increased awareness of the Group’s core brands delivered through strong, effective
marketing campaigns including significant TV advertising campaigns

·    Excellent customer experiences delivered in the new environment: Used Car Net
Promoter Score in H2 of 84%

**OUTLOOK HIGHLIGHTS**

·    Strong start to new financial year with trading profits at a record level in
the two months to April 2021. Adjusted profit before tax in the two months of £19.2m
compared to £14.8m in the same months in 2019

·    The Board expect the Group will deliver an adjusted profit before tax for the
year ending 28 February 2022 in the range of £24.0m to £28.0m

·    The Board is confident that, dependent on the financial performance of the 
Group, dividends can recommence in January 2022

**FINANCIAL HIGHLIGHTS**

·    Group revenues of £2.5bn (2020: £3.1bn) (like-for-like decline of 21.6%) impacted
by Government imposed lockdowns

·    Gross margin increased to 11.8% (2020: 10.9%)

·    Cost reductions^(2) exhibited delivering a £16.0m (7.2%) reduction in like-
for-like operating expenses in the nine months from 1 June to 28 February

·    Growth in Adjusted^(1) operating profit to £33.8m (2020: £32.2m)

·    Profit before tax of £22.4m (2020: £7.3m)

·    Underlying earnings per share increased to 5.27p (2020: 4.99p)

·    No final dividend recommended in light of the Government support received during
the Year

·    Net tangible assets per share of 50.2p (2020: 46.0p) reflecting very strong
asset base

·    Record Free Cash Flow^(3) of £48.4m delivered

·    Adjusted^(4) net cash of £1.4m at 28 February 2021 (2020: net debt £2.8m)

^(1 )Excludes non-underlying items.

^(2) Excludes grant receipts in respect of the furlough scheme.

^(3 )Net cash flow from operating activities less net capital expenditure incurred
and lease cash flows.

^(4) Excludes amounts drawn on used vehicle stocking loans and IFRS 16 lease liabilities.

CHAIRMAN’S STATEMENT

I am pleased to report that the Group has delivered a resilient, profitable result,
in excess of Analysts’ forecasts in this unprecedented year.  This result reflects
positively on all management and colleagues within the Group, who have adapted to
new ways of working and executed exceptionally well in the most challenging of circumstances.
I would like to personally express my appreciation and thanks to the whole Vertu
team.  The Board is also extremely grateful for the significant Government support
received both in respect of furloughed colleagues and business rates relief, and
the assistance provided by its Manufacturer partners.  The latter demonstrates the
partnership approach and a key strength of the franchised dealer model.

On 1 June 2020, the business emerged from the first lockdown stronger in many ways
for the experience.  Trading conditions throughout the summer months that followed
were bolstered by pent-up consumer demand.  The period also saw the additional benefit
of cost reductions, achieved through the roll out of technology developed during
the lockdown, which enhanced efficiency across a number of different areas of the
business.

When the UK faced further restrictions from November onwards, the Group’s showrooms
were again closed to customers.  The Group’s strengthened customer and online offering,
together with its strong brands and local presence, meant that vehicle sales continued
on a click and collect/home delivery basis, despite the restrictions, at much higher
levels than were seen in the first lockdown.  The Group’s customers could choose
to buy their used car fully online or complete part of their buying journey online
and part in direct remote contact with either our local dealership or central teams.
Central sales and aftersales enquiries were handled efficiently by the Group’s customer
contact centre which was able to switch seamlessly between home and office working
using the Group’s digital telephony technology.  To illustrate the progress made,
38,446 vehicles were delivered during the latest restrictions when showrooms were
closed from 1 January to 31 March, demonstrating the strength of the Group’s online
offering, customer propositions, strong brands, national footprint and reputation
for strong customer service.

The Board is mindful that the immediate future of the Group will be affected by 
the continued uncertainty around COVID-19 and the Government’s reaction to it. The
Group is, however, strong and resilient. It has one of the strongest balance sheets
in the sector, and this was further enhanced in the year through the generation 
of a record level of Free Cash Flow of £48.4m.  Costs were well controlled throughout
and, whilst it was regrettable that many of the Group’s colleagues have been furloughed
at times during the year, capacity levels were carefully matched to demand as the
Group moved between lockdowns. 

The Board is optimistic that the Group’s proven track record of execution and strong
balance sheet will allow the continued expansion of the Group, to deliver a business
of greater scale and efficiency.  The forthcoming post COVID-19 period will again
evidence some consolidation in the Retail sector.  Vertu is in a strong position
to take advantage of this environment as appealing opportunities arise.  Our strong
financial position, healthy appetite for growth, considerable digital expertise 
and first-class leadership means that we can look forward with optimism.

The business is fifteen years old in November 2021 and has achieved much in that
timeframe.  From floating as a cash shell in December 2006, the business is now 
one of the largest and strongest operations in the UK automotive retail sector. 
Whilst justifiably proud of these achievements, the Board remains focused on the
future and building on the very successful platform put in place.   We guard against
complacency.

Andy Goss, Chairman

CHIEF EXECUTIVE’S REVIEW

Update on Strategy Execution and Associated Risks

The Group is now in its fifteenth year and has executed a consistent strategy to
build a scaled UK automotive retailer with a strong culture, a reputation for execution
and excellent relations within its Manufacturer Partners.  The Group now has normalised
annual revenues of £3.7bn and has built a substantial base of tangible net assets.

The Group’s key long-term strategic objectives remain:

·    To grow as a major scaled franchised dealership group and to develop our portfolio
of Manufacturer partners, whilst being mindful of industry development trends, to
maximise long-run returns.

•     To be at the forefront of online retailing and digitalisation in the sector,
delivering a cohesive ‘bricks and clicks’ strategy.

•     To reduce the cost base of the Group through scale economies and digitalisation
of processes.

•     To develop and motivate the Group’s colleagues to ensure consistency of operational
delivery across the business.

•     To develop ancillary businesses to add revenue and returns which complement
the core business.

**Growth**

**Portfolio Development and Changes**

As part of the strategy for scale, the Group historically has sought to add additional
Manufacturer partners, not represented in the portfolio, to facilitate additional
growth opportunities.  A noticeable gap in the Group’s portfolio of Manufacturer
partners was closed in December 2020, with the addition of the much sought-after
BMW, MINI and BMW Motorrad franchises.  Both BMW and MINI are extremely well positioned
to take advantage of the electrification of the UK automotive market over the next
decade and the addition of these franchises had long been a strategic objective 
of the Group.  The Group now operates 32 car, van and motorcycle franchises which
is more than any other UK player.

The well-timed acquisition of a BMW/MINI market area of 12 sales outlets in five
locations: York, Sunderland, Teesside, Durham and Malton, achieved immediate scale
in a region where the Group is headquartered and already has strong representation.
The outlets were acquired from The Cooper Group Limited, part of Inchcape plc, for
total consideration of £19.6m.  The assets acquired include £16m of freehold and
long leasehold properties and a payment was made in respect of goodwill of £0.8m.

For the year ended 31 December 2019, these dealerships generated revenues of £305m
and a loss before tax of £6.0m.  The Group has developed a clear plan to drive performance
improvements over a three-year period and the integration of these businesses into
the Group has proceeded in line with this plan.  The Group’s systems and processes
were implemented immediately on acquisition, in order to facilitate business improvements
in the areas of customer experience and financial performance.  Despite the COVID-
19 related restrictions imposed immediately post acquisition, the acquired businesses
have performed ahead of the business plan, which has not been adjusted for the impact
of these restrictions.  The Board is therefore optimistic of a progressive turnaround
of these businesses and the generation of significant shareholder value, particularly
given the minimal levels of goodwill paid for the businesses.  The businesses have
been branded Vertu, reflecting the continued growth of the Vertu brand in Premium
franchises in the UK and supported by the increasingly successful website, vertumotors.
com.

Following the Group’s entry into the Kia franchise in January 2020, further growth
with the Kia franchise was achieved when, on 1 October, the Group acquired the Nottingham
Kia business from Sandicliffe for £1.9m, taking a short-term lease on the dealership
premises.  This business will be relocated this month into existing large Group 
leasehold dealership premises in Nottingham.  This location currently represents
one of two Group Volkswagen franchise outlets located in the city and, whilst new
vehicle activity will be consolidated in the remaining flagship Nottingham Volkswagen
dealership at West Bridgeford, Volkswagen authorised repair and approved used vehicle
sales activity will continue in this location, alongside the relocated Kia franchise.

Subsequent to the financial year end, on 1 March 2021 the Group opened a Macklin
Motornation used vehicle outlet in Glasgow, following the acquisition in late 2020
of a vacant freehold dealership from Lookers plc.  Further on 12 March 2021, the
Group acquired the trade and assets of a Honda car dealership in Huddersfield from
Hepworth Motor Group.  The purchase of this leasehold dealership complements the
Group’s existing Honda outlets in Yorkshire and the consideration, settled in cash,
was £0.8m. The Group now has considerable scale in Yorkshire, operating 23 outlets
in the county.

The Group continues to actively manage its dealership portfolio including the regular
assessment of viability and returns achieved from each business and franchise and
the potential for property gains and cash generation from the portfolio.  Execution
of multi-franchising, in order to maximise potential returns of each location, is
seen as a key element of the Group’s strategy in this regard.  Increased flexibility
of Manufacturer representation requirements and varying formats will aid this process,
allowing investment levels to be reasonable and multi-franchising to be increased.

During the Year the Group added the Citroen brand to its existing Ford dealership
operations in Worcester and Macclesfield.  The Group also added the Peugeot franchise
to the Group’s Edinburgh dealership which already represented Kia, Suzuki and Mitsubishi.
Further multi-franchising activity is planned to be delivered in the coming months,
with several projects currently being progressed.

Further network changes and consolidation for franchised retailers are anticipated.
Potential opportunities for growth for those established retail groups with a proven
track record, strong financial position and positive relationship with Manufacturers
remain strong. 

Further to the regular review process outlined above, a number of disposals and 
closures have been implemented, in line with the Group’s capital allocation disciplines,
both during the year and post year end, to optimise the portfolio:

·    The Group sold the trade and assets of its Citroen dealership in Leicester 
to Manufacturer-owned Robins and Day on 28 February 2021.  The leasehold premises
were retained and the dealership is currently being redeveloped and refranchised
to reopen as a franchise outlet in the coming months.

·    Vertu Motors disposed of its ancillary wheelchair accessible vehicle (“WAV”)
business, Bristol Street Versa, to Gowrings Mobility, a well-established WAV operator
on 30 November 2020.  The Group will continue to supply commercial vehicles for 
conversion to the enlarged entity.  This disposal generated £1.7m of cash.  In FY20
the business delivered a loss before tax of £68,000.

·    On 26 April 2021, the Group closed a used car sales and Volkswagen service 
outlet at Whitchurch, Herefordshire. The vast majority of colleagues were transferred
to the Volkswagen dealership in Hereford and it is anticipated that a large proportion
of the dealership’s activity will be retained in Hereford.  The freehold property
was sold on 7 May 2021 yielding cash proceeds of £430,000, slightly in excess of
the book value.  In addition to the property disposal, working capital of approx.
£0.9m has been released to be re-invested in higher return assets.

·    Following the acquisition of BMW Sunderland, the Group operated two accident
repair centres in the city. On 1 April 2021, these operations were consolidated 
into one with a surplus freehold property now being marketed for sale.  

**Move to Agency Model**

The Board notes that it is likely that the next few years will see an evolution 
of the business model with regards to the sale of new cars in certain franchises.
The Group undertakes sales in a number of franchises on an agency basis in the fleet
market and anticipate that a number of Manufacturers will move new retail sales 
to an agency model in the next few years.  It is envisaged that such a move would
reduce reported revenues, increase reported operating margins and reduce working
capital investment. The Board will keep shareholders updated on developments in 
this area.

**Increasing Importance of Scale and Brand**

The Group’s strategy is to continue to grow through the acquisition of both volume
and premium franchised dealerships.  Scale benefits include: a national online and
offline co-ordinated marketing strategy based on a limited number of strong brands;
maximising the benefits of the Group’s national footprint; the Click2Drive platform;
scaled highly efficient contact centres; dedicated franchise management; purchasing
efficiencies; and, access to competitive consumer finance packages for the Group’s
customers.

Brand awareness is vital in an online environment, with increasingly more of the
sales process, either in the research or buying phase, completed online.  The Group
currently operates four brands in the UK, Bristol Street Motors (England Volume),
Macklin Motors (Scotland), Farnell (Jaguar Land Rover) and Vertu Motors (other premium
franchises).  Having more than one brand allows the Group the flexibility to differ
its offers and approach between geographies or between volume or premium franchises.
During the course of 2021, the Group’s Jaguar Land Rover dealerships will be rebranded
to Vertu, bringing all the Group’s premium businesses under this one brand.  When
this is complete, the Vertu brand will have 58 outlets in the UK, Bristol Street
Motors 77 and Macklin Motors 14.

Brand awareness is supported by the Group’s marketing activity, including extensive
TV advertising campaigns and sponsorship of Formula One coverage on Channel 4, secured
for a second consecutive year for the Macklin Motors and Bristol Street Motors brands.
In addition, sponsorship arrangements have commenced for the Vertu Motors brand 
with Yorkshire and Durham County Cricket Clubs to increase brand awareness in two
of the Group’s key regions of operation. The success of the Group’s marketing activity
is supported by a recent YouGov survey, which included responses from over 5,000
adults collected over the period from 1 October 2020 to 1 March 2021. Bristol Street
Motors currently has the highest prompted awareness of the Group’s brands, with 
over 42% awareness, the second highest of any automotive retail brand in the sector,
including the so-called ‘disruptors’.

The strength of our brands and marketing activity led to the Group’s websites collectively
receiving a monthly average of 1.4m unique visits over the Year (2020: 1.2m).  The
Group saw a 29% year on year increase in sales enquiries received from online sources
in the period from 1 June to 28 February, however, as expected in the light of restrictions,
walk in dealership visits were down year on year.

Of equal importance to brand awareness, is brand reputation.  The Group’s Mission,“
to deliver an outstanding customer motoring experience through honesty and trust”
recognises the importance of excellent customer service and high ethical standards.
The Group’s commitment to customer service is verified through customer satisfaction
feedback, gathered either by our Manufacturer partners or from a third-party survey(
Judge Service) in respect of used cars.  The Group’s dealerships regularly feature
in the top quartile of our Manufacturer’s customer service leagues and perform significantly
above average for the sector overall.  The Group consistently achieves a net promoter
score (“NPS”) in excess of 80% from Judge Service.  In H2 the Group received feedback
from over 10,400 Group used car customers via Judge Service averaging a NPS score
of 84%.

**Online and Omni-channel Retailing**

There is a significant degree of confusion over the terms online and omni-channel
retailing. Whilst online sales could be defined as pure ecommerce transactions with
no human involvement, convention in the sector is that online sales relate to any
sale where the enquiry originated from an online source.  The current automotive
retailing environment in the UK is certainly heavily digitised and omni-channel 
in nature – customers come in and out of the digital world, interacting by phone
and video call extensively with dealerships as well as undertaking dealership visits
and crucially, test drives.  No one customer’s journey is now the same, since the
options and flexibility offered by platforms such as the Group’s Click2Drive technology
platform puts the customer in the driving seat as to how to buy a car.  Given our
goal is firmly to sell a car, the Group is agnostic as to which journey the customer
chooses as long as a sale is achieved.  Our experience is that pure ecommerce online
transactions are a small percentage of retail sales and omni-channel retailing is
probably a better term to describe the current position.  Where the term online 
is used in this report, it is used in a much wider sense and is akin to omnichannel.
In time, greater definition of terms in the sector is vital to increase understanding.

The Group continues to be at the forefront of developments to provide customers 
with innovative ways to purchase and interact online.  The Group’s online functionality
is a fully integrated end to end process termed Click2Drive, allowing customers 
the flexibility of a purely online purchase, or one which includes interaction with
our sales teams through telephone or video appointments, should they require assistance
with their vehicle search or purchase.  If the Group’s customers choose to transact
fully online, they are able to value their part exchange, choose a suitable finance
option, make payment and arrange home delivery of their vehicle, including the collection
of any part exchange.  Every one of the Group’s used vehicles is prepared to a high
standard, in accordance with a strict vehicle preparation policy.  All used vehicle
customers also benefit from a 14-day money back guarantee and a 90-day warranty 
as standard.  This is superior to the current offering of disrupters.

The strength of this proposition, together with the Group’s established brands, 
national dealership network and reputation for excellent customer service, meant
that the Group delivered 38,446 new and used (retail and fleet) vehicles from 1 
January to 31 March 2021, despite customers being unable to visit showrooms or test
drive their chosen vehicles.  257 (0.7%) of these vehicles were purchased completely
online by the Group’s customers.  The majority of customers therefore elected to
interact with the Group’s dealerships within the sales process.  4,700 customers
have chosen to reserve their vehicle online, through the payment of a £99 deposit,
since this new feature was introduced in May 2020.  Use of this reservation facility
has been increasing over time, with over 1,100 deposits paid in January and February
2021.  Customers reserving vehicles in this way exhibit a very high conversion to
ultimate sale.

Disrupters who have recently entered the used car market have very little, if anything,
to add to the sector in terms of customer proposition or experience, and they do
not sell new cars or in some cases, support customers thereafter with their servicing
needs.  The best in class in the sector, and Vertu in particular, have a fully established“
bricks and clicks” platform and sell far more used vehicles than these new entrants.
The Group also builds relationships with customers over many years facilitating 
the supply of new and used cars and customer servicing activities.

The Group’s national franchise dealer network, with a strong customer service reputation,
gives customers the confidence to transact purely online, however, many still choose
to interact with the Group in their buying journeys and we expect that this will
continue.  A local presence not only aids the building of brand awareness but remains
essential to the delivery of customer service, with the majority of customers preferring
to undertake a test drive prior to purchasing the big-ticket item of a car.  Local
aftersales support is also an important factor in many vehicle buying decisions.
The Group retains a high proportion of its vehicle sales customers into the higher-
margin service channel and this also aids overall long-term sales retention.  A “
bricks and clicks” model is therefore crucial in this sector, with the Group’s network
of physical dealerships across the UK at the centre of its customer offering and
vital for the delivery of service and repair work to our customers.  The fact disruptors
to the sector such as Cazoo and Tesla have been developing physical networks is 
illustrative of their recognition of the need to have a physical presence in addition
to their purely online capabilities.

**Cost Reduction**

Enhanced scale of operations allows Vertu Motors to maximise on purchasing benefits,
to provide process efficiencies with common systems and technology, and to gain 
marketing synergies from promoting a larger network for each of the Group’s brands.

A key feature of the Group’s digitalisation strategy has been to use system integration
and robotic process automation to enhance productivity and reduce the cost base 
of the Group. Enhanced integration of the Group’s sales showroom and financial systems
in FY21 facilitated significant efficiency improvements in processing vehicle sale
transactions.  By way of example, robotic processes have now automated the taxation
of each used vehicle the Group sells with the DVLA.  Similar technology has also
automated the invoicing of all vehicles traded at auction.  Such in-house developed
system automations have enabled the Group to reduce costs, with the delivery of 
a programme completed in July 2020 yielding anticipated annualised savings of £10m.
The Group continues to develop technology to maximise efficiency and aid decision
making.

**Motivated, Professional Colleagues**

The Group seeks one consistent culture across all its operations.  Delivery of the
Group’s Mission Statement (“To deliver an outstanding customer motoring experience
through honesty and trust”) through application of the Group’s Values (“Professionalism,
Passion, Recognition, Integrity, Respect, Opportunity and Commitment”) is at the
core of how the business operates.  The Group has high standards, with colleagues
expected to execute the basics of the business and delight customers, acting with
energy and urgency. 

The Group’s colleagues are therefore at the core of the delivery of the Group’s 
vision and strategy and their passion and commitment has certainly been demonstrated
over the Year.  It was regrettable that so many of the Group’s colleagues were put
into the Government Furlough scheme as virus restrictions closed substantial parts
of the business.  The Group provided enhanced benefits, designed to ensure that 
no colleague suffered undue hardship whilst unable to work.  The Group’s Board and
senior management teams also accepted reductions to their remuneration during the
Year. Colleague communication was vital so frequent and open dialogue was maintained
throughout the Year.  To measure the success of the Group’s colleague engagement,
the Group carries out an annual colleague satisfaction survey as well as shorter
quarterly surveys.  Over 4,200 (84%) of Group colleagues participated in this year’s
survey in October 2020.  Perhaps in recognition of the support given to colleagues
during the pandemic, 87.0% of responding colleagues considered the Group a great
place to work, up from 83.9% in the previous year.  In addition, 98.2% of colleagues
knew the Vertu Values and 93.3% believed that the Directors actively practiced these
Values.  These scores reflect the strength and consistency of the Group culture 
that has been built up over time.

I would like to personally thank every Vertu colleague for their hard work and commitment
during the Year.  I am proud to be the leader of such an exceptional team of people,
who treat others the way they themselves would like to be treated.

**Responding to Regulatory Change**

**Electrification and Alternative Powertrains**

Potential future development of the wider automotive sector has in recent years 
been linked to the development of Connected, Autonomous, Shared and Electric (CASE)
vehicles.  The ongoing impact of COVID-19 will almost certainly affect the ‘Shared’
element of mobility, with the potential that consumers shy away from public and 
shared transport modes, at least in the short-term.  It is also apparent that, whilst
increased autonomy is certainly assisting drivers, full autonomous capability remains
a long way off, with technological, regulatory and legal considerations weighing
heavily.

The UK Government’s stringent objective to achieve Net Zero in terms of Carbon emissions
is driving significant change to the powertrains used by new vehicles.  2030 is 
now the date the UK proposes to phase out internal combustion engines in respect
of new vehicle sales.  A glide path is therefore needed in terms of technological
advancement and Government support in terms of vehicle engineering, subsidies to
promote uptake and a national infrastructure for recharging which is capable of 
coping with significant growth in electric vehicle sales. The SMMT estimates that
a full, zero emission-capable UK new car market will require 1.7 million public 
charge points by the end of the decade and 2.8 million by 2035, costing some £16.7
billion.  The UK has a long way to go in this regard.

The level of customer adoption of electric and alternatively fuelled vehicles is
increasing in the UK reflecting higher supply, enhanced ranges and more interest
from customers.  The SMMT reported that 2020 was the best ever year for electric
cars, with battery and plug-in hybrid vehicle market share increasing to 10.7%, 
albeit in an overall reduced market, and with regulation requirements being the 
key driver rather than customer preference.  Group sales of electric and alternatively
fuelled vehicles doubled over the Year to 2,356 vehicles, representing 9.3% of the
Group’s sales of new retail vehicles.

The move to electric has undeniably put Manufacturer businesses, cash levels and
future returns under pressure, with this being exacerbated by the impact of COVID-
19.  A recent study by the Financial Times highlighted that the cost of production
of electric cars is expected to continue to exceed that of the combustion engine
vehicle until beyond 2030.  This is even after taking into account the expected 
reduction in the cost of battery production.  According to the SMMT, price is one
of the main factors holding 52% of today’s potential buyers back from purchasing
an electric vehicle.  This was perhaps recognised by the recent changes in the UK
to the plug-in grant scheme, which is now targeted exclusively at lower priced cars.

Over 40% of the Group’s gross profit has historically arisen from its aftersales
operations, namely the provision of servicing and repairs and the retailing and 
wholesaling of parts.  Pure electric vehicles require less mechanical service intervention
than those with an internal combustion engine, however, they will not form a majority
of the vehicle parc until well after 2030 (source: National Grid FES 2020 report).
Thereafter, the potential diminution in servicing, as a result of the electrification
of the parc, is expected to be mitigated by the need for increased specialist equipment,
technology and knowledge to maintain these vehicles, connectivity and a growth in
prepaid maintenance programmes, all retaining a greater share of maintenance work
within the franchise dealer network.  The Group is developing substantial expertise
in its service departments in the area of batteries. Leeds Volkswagen, for example,
is only one of 15 specialist battery centres in the Volkswagen network in the UK.
With our Manufacturer relationships, scale, financial strength and expertise, the
Board sees the drive train transition as an opportunity rather than a threat.

**FCA**

Following the publication of the FCA’s final findings in connection with their review
of motor finance, the Group amended its sales processes in January 2021 to ensure
that its arrangement with finance providers were aligned with the ban of discretionary
commission models.  These changes have been seamlessly introduced, aided by the 
Group’s in-house developed sales technology platform, Click2Drive. The changes have
not had a material impact on earnings from finance commission to date.

**UK withdrawal from the EU**

The UK’s future trading arrangements with the European Union are now clear, with
agreement having been reached prior to the 31 December 2020 deadline.  The SMMT 
reported that 7 out of 10 vehicles sold in 2020 in the UK were imported from Europe.
The application of zero tariffs and quota free trade was therefore critical to a
strong new car market in the UK.  Clarity over the UK’s future relationship with
the EU has removed a major sector uncertainty.

The Sterling Euro exchange rate remains an important factor in the pricing and import
of vehicles manufactured in Europe into the UK.  Since 1 January 2021, Sterling 
has strengthened against the Euro and a stronger pound helps make imported new cars
more affordable to UK buyers.

**Strategic Summary**

The Group’s stable and experienced management team and financial strength ensures
that the Group is well positioned to take advantage of opportunities arising and
we remain ambitious to do so.  We will ensure that capital is allocated to those
activities, locations and franchises that are best placed to meet the competitive
challenges arising, to provide the best growth opportunities and maximise return
on invested capital.

We will continue to innovate to meet changes in customers’ needs, leveraging our
brand strength, reputation for excellence in customer service and national footprint
to maximise on the available online opportunity.  We will execute cost saving initiatives,
enhance operational efficiency and pursue other new business opportunities which
complement the Group’s core activities.  The goal is to drive growth in the cash
flows of the business to provide returns for shareholders.

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