Vertu Motors plc Resilient half year profits

Vertu Motors Plc

Vertu Motors plc (LON: VTU), the automotive retailer with a network of 123 sales and aftersales outlets across the UK, announced today its interim results for the six months ended 31st August 2019.



· Values driven business with well invested systems infrastructure and experienced leadership team

· Financial position enables growth of franchised businesses with Manufacturer partners

· Developing omni-channel retailing to be at the forefront of the transformation of the automotive retail experience

· Strong portfolio management and capital allocation including divestment of sub-scale outlets, disposal of surplus properties, share buyback programme and further acquisitions being assessed


· £86.7m (5.6%) growth in total revenues to £1.6bn, with like-for-like revenue growth of 2.3%

· Strong cost disciplines exhibited, like-for-like operating expense growth in the Period slowed to 1.0% (2018 H1: 7.0%)

· Operating profit of £20.3m (2018 H1: £18.6m)

· Adjusted1 operating profit of £19.6m (2018 H1: £19.4m)

· Profit before tax of £16.1m (2018 H1: £17.3m)

· Adjusted1 profit before tax of £17.1m (2018 H1: £18.1m)

· Interim dividend of 0.6p per share, up 9.1% (2018 H1: 0.55p per share)

· Excellent cash conversion of profits with Free Cash Flow1 of £14.6m generated (2018 H1: £1.9m)

1 Adjusted to remove non-underlying items: including share-based payments, amortisation of intangible assets and the impact of adoption of IFRS 16 on the FY20 figures

Capital Structure

· Significant increase in the level of Adjusted2 Net Cash up to £29.1m (2018 H1: £10.5m) reflecting strong focus on working capital management

· Strong balance sheet to fund future growth with real estate backing

· Used car stocking funding utilised of £22.5m (cover of 4.7 times used car stock value) (H1 2018: £19.2m). Substantially lower usage than industry peer group reflecting resilient balance sheet

· £2.7m of shares bought back in FY20, representing 2.0% of the opening shares in issue, £1.3m of the £3m programme announced at the AGM has been utilised to date.

2 Adjusted to remove used car stocking loans and excludes IFRS 16 lease liabilities

Current Trading and Outlook

· September like-for-like new retail volumes down 1.6%

· Used car revenues and high margin service revenues continued growth on like-for-like basis

· Used car values stable in volume franchises: premium franchise residual values continue to be impacted by new car oversupply in certain franchises

· September profitability ahead of prior year levels

· Continuing political uncertainty has potential to undermine consumer demand notwithstanding continued UK economic growth and record employment levels

· New vehicle supply side issue considerations:

o Sterling fluctuations impacting Manufacturer margins and consequent price changes to consumers

o EU emission legislation changes and targets may change supply side model mix in late 2019 and 2020 as Manufacturers seek to hit new emission targets

o Potential impact of UK departure from EU

· The Board believes the Group remains on track to meet its overall expectations for the full year

Six months ended 31 August 2019
Increase (decrease) period-on-period
                     Total         Like-for-LikeSMMT UK
Group Revenues5.60%2.30%
Service Revenues312.20%8.50%
Used retail vehicles2.80%1.60%
New retail vehicles-7.90%-10.10%-4.20%
New Motability vehicles-2.30%-3.00%6.60%
New fleet cars419.60%13.80%-1.30%
New commercial vehicles415.20%2.00%12.40%

3 Includes internal and external revenues

4 Includes agency volumes

Commenting on the results, Robert Forrester, Vertu Motors Chief Executive, said:

“The Group performed well in the first half against a more challenging backdrop. We have an experienced leadership team, well invested systems and operationally we are keeping our discipline by doing all the basics very well, delivering a strong customer experience, and leaving the Group in a position to outperform. The Board is pleased to see continued growth in high margin aftersales revenues and the continued growth in used car volumes. Cost and excellent working capital control has again been exhibited.

Our omni-channel retailing strategy and discipline around the allocation of capital, coupled with a net cash position, underpins the Board’s confidence in the future.”


This is my first Chairman’s statement since taking the role on 25 July. Peter Jones had a remarkable influence and impact on the Group as Non-Executive Chairman and, as the sector undergoes a period of transformation in the next few years, the Board is very confident that the Group’s strategy and execution will set it apart. I am personally very excited to be involved with a Group with a strong set of Values, well invested systems and much potential.

I am pleased to report that the Group has delivered a resilient result for the Period against a backdrop of continued Sterling weakness, weaker consumer confidence and pricing instability in the used vehicle market. Overall the Group has remarkably delivered higher operating profits in the Period and the Board believes the Group remains on track to meet its overall expectations for the full year.

The Group generated higher levels of Free Cash Flow than the prior year period, aided by the expected reduced capital expenditure and robust control of cost and working capital in the Period. The Group continued to buyback shares, purchasing 2.0% of the share capital in the Period. A 9% increase in the interim dividend to 0.6p per share is proposed as the Board recognises the importance of dividends to Total Shareholder Returns.

The Group’s core strategy remains unchanged, which is to grow a scaled franchised automotive retail group, working in conjunction with major Manufacturer partners. This will facilitate the increasing growth of market leading retail brands in the sector with strong, efficient marketing and digital scale to grow market share in the UK. Investment in the development of omni-channel retailing continues to be vital as customer behaviour and expectations evolve. Our aim is to deliver outstanding customer service and to build long term value through the delivery of sustainable growth in cash flows and earnings per share.

Andy Goss, Chairman


The purpose of this interim report is to inform all stakeholders on how the Group has performed in the six-month Period to 31 August 2019, through the provision of a detailed analysis of financial performance. It also appraises the challenges and opportunities the Group faces and provides an update on progress towards the strategic objectives of the Group, outlined in the last Annual Report.

Strategic Overview

Economic Backdrop

UK employment remains at record levels and economic growth has continued. The Period saw a softening in both consumer demand for cars and a further weakening of the Sterling exchange rate against the major currencies. A weak Sterling exchange rate both discourages Manufacturer supply into the UK and inevitably increases prices for consumers. This has impacted on retail vehicle sales in the UK, with the SMMT reporting a fall in the number of new retail vehicles registered in the Period compared to last year of 4.2%.

The used vehicle market was also affected by demand and supply imbalances, resulting in a more pronounced than normal decline in values, particularly from April to June 2019. Prices in the used vehicle market have now stabilised, in particular in volume used cars, whilst values remain under pressure in the premium segment, driven by continued oversupply of new vehicles in certain franchises.

The clarification of the UK company vehicle tax regime, issued in July and taking effect from 1 April 2020 now provides certainty to the fleet and company car market, whilst potentially causing demand shifts pre and post the implementation date as users will seek to optimise their tax position.

Network Change – physical dealerships in an on-line world

The Group has established and maintains positive relationships with its chosen Manufacturer partners, and therefore remains well placed to benefit from the potential future changes in the composition and structure of the UK franchise dealership network. Physical dealership locations remain vital in the delivery of convenient and localised customer service, whilst the Group also continued to invest heavily in its on-line presence and the development towards omni-channel retailing. Omni-channel retailing is a multichannel approach to retailing that seeks to provide customers with a seamless shopping experience, whether they’re shopping on-line from a desktop, mobile device, telephone or in a bricks and mortar outlet.

The Board envisages a significant reduction in the number of franchise outlets in the UK between now and 2023 as networks are restructured, made fit for purpose for the digital age and reflect the changing economics in the European automotive sector in general. Given strong relationships with the Group’s Manufacturer partners, the Board is confident the Group will be a net beneficiary of these changes, particularly if scale can be further enhanced to drive cost and marketing efficiencies.

Technological change

Our Manufacturer partners continue to invest heavily in the development of alternative power train vehicles, in order to meet increasing EU regulatory standards on emissions. New emission testing regimes came into force on 1 September 2019, namely the ‘Real Driving Emissions’ (“RDE”) regulations for passenger vehicles and the EU ‘Worldwide Harmonised Light Vehicle Test Procedure’ (“WLTP”) regulations for commercial vehicles. As anticipated, the overall impact of the introduction of these regulations on UK vehicle supply was not as disruptive as the impact on cars seen in FY19. The supply of commercial vehicles has been more challenging as Manufacturers balance compliant and non-compliant supply.

New emissions targets in the EU for Manufacturers are set to come in force from 1 January 2020. These complex regulations seek to drive down CO2 emissions from new vehicle registrations and are likely to lead to a changing profile of vehicles sold, such as an increase in pure electric (BEV) and hybrid vehicles. Potential fines on Manufacturers who fail to meet targets will generate significant supply changes, irrespective of consumer demand, and automotive retailers will be expected to retail the correct mix and are likely to be targeted to do so. In the medium term, margins on new vehicles are likely to come under pressure due to the resulting supply and demand potential imbalances and the higher production cost of non-petrol/diesel powertrains. The impact on the supply of small vehicles may be marked since this segment is disproportionately affected by the costs of new technology and high emissions to weight ratios.

Regulatory change

In addition to regulatory changes in respect of vehicle emissions, the Financial Conduct Authority (“FCA”) continues its motor finance review and thematic review on general insurance sales. The Group has been actively engaged in the consultation process; however, we do not know what, if any, changes will arise from the findings which are not expected to apply until 2020.

The Group has always considered regulatory compliance to be a core operational competence and vital to putting the customer first. Indeed it is central to the delivery of the longstanding Mission Statement of the Group “to deliver an outstanding customer motoring experience through honesty and trust”. The Group has for many years used one electronic showroom system to ensure consistency of process in this important area of regulatory compliance, as well as to provide customers with the right information to select the financial and other products which best suit their needs. The Group has a long-established Compliance Committee (with independent representation) which regularly reviews the Group’s sales process, key performance metrics and real time customer feedback to ensure that the Group continues to demonstrate appropriate compliance with all the relevant legislation. For example, used car customers are surveyed on their views on their experience including the explanation of finance and an extensive mystery shopping programme is in place providing data on the adherence to the Group sales process. The Group benefits from uniformity of its core systems platforms and its core sales and administration processes. The Group has an excellent, internally developed in-house management information system providing a holistic view to management on activity including customer outcomes. Acquisitions are brought on to these platforms quickly.

Importance of Management, Colleagues and Culture

The Group recognises the vital importance of its management and colleagues in the delivery of the Group’s Mission Statement and its strategic objectives. The Group seeks to maintain a consistent culture across all of its businesses and tests the application of the Group’s core values and processes through both an annual colleague satisfaction survey and the extensive mystery shopping programme. The latest annual colleague survey, completed in August 2019 by over 80% of the Group’s 5,500 colleagues, confirmed that 97% knew the Values and 90% believed the directors actively demonstrated them. In evidence of the Group’s commitment to the delivery of excellent customer service, the Group was delighted to be recognised in July by AutoTrader in winning their externally verified Customer Experience award.

The Group’s key long-term strategic objectives were summarised in the Annual Report and are re-iterated below:

  1. Continue to focus on capital allocation including the share buyback programme
  2. Build a scaled automotive retail group through targeted acquisitions
  3. Invest and develop on-line capability to deliver a seamless omni-channel retailing experience
  4. Manage costs
  5. Increase colleague retention to enhance productivity and customer experience

An update on the progress on these objectives is set out below.

1. Capital Allocation

At the AGM in July, the Group announced a further share buy-back programme committing an additional £3m for this purpose. Since 1 March, the Group has repurchased 7.4m shares for cancellation, representing 2.0% of shares in issue. The average price of shares purchased was 36.89p and £1.7m of the further £3m so earmarked remains. The Board intends to continue to buy-back shares at prices considered to be well below intrinsic value.

The Group continues to actively manage its dealership and asset portfolio. Since 1 March the Group has sold two surplus freehold dealership properties at above net book value as well as exiting two sub-scale dealership operations, one through sale and one through closure, in the Period. These activities have generated £3.0m of cash in the financial year to date, yielding a profit to net book value. Further surplus property asset disposals are in the process of being made. The Board continues to review the portfolio of dealerships operated by the Group to ensure appropriate allocation of capital and return.

2. Growth

The Group continues to pursue acquisition opportunities. Strict investment hurdle rates are rigorously applied in each case to ensure that the Group does not pay excessive consideration and capital allocation disciplines are applied. The Group’s acquisition pipeline is currently strong, including a number of Manufacturer led introduction.

3. Omni-channel retailing

The Group continues to invest in digital marketing/e-commerce expertise in order to ensure the business is at the forefront of the development of omni-channel retailing in the sector. Key developments in the period include:

· Buy-online functionality for used vehicles extended to all Group based websites

· Page load times of web pages significantly reduced to sector leading levels

· Attribution modelling capability increasingly developed to ensure marketing spend is targeted to high return on investment channels

· Development of chatbot functionality (Leo) now taking service bookings alongside on-line service booking capability

The Group continues to invest in brand-building marketing activity to encourage customers to engage with the Group’s websites A TV, cinema and radio campaign entitled “Upside down” has been launched to inform customers as to the omni-channel retailing options of the Group

4. Cost management

In an environment of constrained margins and sales volumes, the Group continues to prioritise cost management whilst seeking to deliver gross profit growth and outstanding customer experiences. In the Period, the rate of operating expense increase slowed to 1.0% on a like-for-like basis, with this increase predominantly arising from investment in the Group’s aftersales capacity. The higher cost base contributed to the strong aftersales growth in the Period. Ensuring that the Group invests only in those costs which will bring incremental benefit to Group profitability remains a continued focus of management and the Board is very pleased with the progress to date. Operating expenses as a percentage of revenue consequently fell from 9.4% to 9.3%.

5. Colleague retention

The retention of high performing colleagues within the Group is key to the delivery of both customer experience and financial performance. The Group has set a goal of 80% of all colleagues having 12 months or more of continuous service by February 2020. As at 31 August, the Group has colleague stability of 75%. Stability within the Group’s management colleagues has long exceeded this figure, whilst historically, greater turnover has been experienced in the roles of sales executive and service advisors. During the Period, the Group saw significantly reduced colleague turnover within these key roles, following a number of specific initiatives. Technician stability is at a high level and has returned to more normalised levels following increased turnover of technician colleagues in recent years. Further work remains to achieve the Group’s stated target, and this remains a major priority.

Robert Forrester, CEO

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