# Vertu Motors resilient, profitable result in an unprecedented period

- Link: https://www.directorstalkinterviews.com/vertu-motors-resilient-profitable-result-in-an-unprecedented-period/412862877
- Published: 2020-10-07T07:27:26+01:00
- Author: Giles Arbor

**Vertu Motors plc **(LON:VTU), the automotive retailer with a network of 135 sales
and aftersales outlets across the UK, has announced its interim results for the 
six months ended 31 August 2020.

**HIGHLIGHTS**

· The Group delivered Adjusted^(1) profit before tax of £4.7m with no exceptional
items in the Period, on sales of £1.12bn, despite 10 weeks of closed sales showrooms:

o  Quarter one saw a loss of £14.3m due to the lockdown

o  Quarter two, in contrast, generated a profit of £19.0m, significantly in excess
of the prior year period profit of £3.8m, emerging from lockdown with a very motivated
team

o  Result aided by government support in the form of the furlough grant and business
rates relief

· Very strong cash flow performance – operating cash flow of £80.0m in the period
and period end net cash^(2) of £36.5m

· Net tangible assets per share of 46.5p (2019: 46.1p)

· Delivered £10m of annualised cost savings

· Significantly progressed technology advancements driving Group’s omni-channel 
capabilities (with strong customer uptake) and higher colleague productivity levels

· Record trading performance delivered in key month of September

· The result for the 7 months to September 2020 gives the board confidence that 
a strong financial outcome will be delivered in the full financial year

· Group well positioned to benefit from continued consolidation

_^(1 )Adjusted to remove share-based payments and amortisation of intangible assets_

_^(2 )Excludes IFRS 16 liabilities and is net of used vehicle stocking loans_

> **Commenting on the results, Robert Forrester, Chief Executive, said:**
> “The energised Vertu team delivered a safe operating environment for customers
> and colleagues and an outstanding trading performance as lockdown was eased.  
> Individual records in used cars, aftersales and new cars were set across the Group.
> We did the basics well and have increased investment in omni-channel technology,
> which has been received enthusiastically by customers. Vertu made a profit in 
> the first half, we have taken £10m of annualised costs out of the business and
> period end net cash was £36m.  This is an exceptional performance in the circumstances.
> We are well placed for the opportunities that an uncertain future offers.
> I would like to thank all my colleagues, our manufacturer partners, our customers
> and our other key suppliers for their hard work and support during this unprecedented
> period.”

**Webcast details**

Vertu management will make a webcast available for analysts and investors this morning
on the Group’s website: [https://investors.vertumotors.com/results/](https://investors.vertumotors.com/results/)

**CHAIRMAN’S STATEMENT**

I am pleased to report that the Group has delivered a resilient, profitable result
in this unprecedented period.  This result is arguably better than other publicly
quoted motor retail groups and reflects well on all management and colleagues within
the Group.  I would like to personally express my appreciation and thanks to the
whole Vertu team.  The pandemic has been costly and traumatic for the automotive
industry and retail sector yet, in our case, some good has come from the challenges.
The Group moved quickly to new ways of working, providing a safe environment and
making sure the colleagues of the Group were supported and communicated with continually.
The business has emerged from the lockdown stronger in many ways for the experience
and colleagues have certainly repaid the support the Group provided.  We believe
the Group has outperformed what has been a strong market rebound in the last few
months.  The strength of the trading performance post 1 June and the strong result
in September, results in the Board being increasingly confident of a strong outturn
for the financial year as a whole.

The executive management of the Group, through clear communication and prompt and
decisive action, provided excellent leadership throughout the lockdown and with 
the strong support and involvement of all colleagues the Group has executed exceptionally
throughout the Period.  The following key themes illustrate this:

· **Financial stability**

The Group has always had one of the strongest balance sheets in the sector.  During
the Period stock levels were reduced, generating significant positive cash flow.
Costs were well controlled throughout, with capacity levels carefully matched to
demand as the Group emerged from the lockdown.  The actions taken led to the Group
being able to report an improved net cash position at the end of the Period.

· **Resilience**

At a time when customer communication was more vital than ever, the Group’s centralised
customer contact centre in Gateshead was able to switch seamlessly to home working
using the established telephony technology.  This enabled sales and aftersales enquiries,
as well as customer queries, to be handled efficiently.  A considerable vehicle 
order bank was built during the lockdown.  From the national lockdown on the 23 
March, vehicle repair operations were kept open in the vast majority of Group dealerships,
in order to keep key workers and essential businesses on the road.  The momentum
of building activity during the lockdown gave the business a head start with which
to take advantage of the favourable market conditions as the dealerships reopened.
The size and location of the Group’s dealership showrooms also helped to mitigate
some of the pandemic’s impact on the wider retail sector.  The dealerships tend 
to be in out of town locations, accessible by car and with plenty of space to ensure
social distancing can be maintained.

· **New ways of working**

The lockdown afforded the time and motivation to further develop the business, in
particular in the area of technology.  Colleagues took quickly to new ways of working
and this enabled the application of more speed in the roll out of process and systems
changes with less upheaval.  Enhanced omni-channel retail capability allows customers
to increasingly transact with the Group as seamlessly from home as they can in person
in a dealership.  Vehicles can be purchased contactlessly.  The Group’s in-house
development team, working tirelessly from home delivered further integration of 
systems to vastly improve operating efficiency.  Colleagues no longer accompanied
customers on test drives and this not only increased efficiency, but customers seem
to prefer it.  This is a great example of a “forced” innovation that is likely to
be kept in the business in the long-term.

The Board are optimistic that the Group’s proven track record of execution and strong
balance sheet will allow a new period of expansion to commence, to deliver a business
of greater scale.  An increased acquisition pipeline is in place and it was pleasing
to see the purchase of the first dealership since the lockdown on 1 October, with
more on the horizon.  I would like to thank colleagues at all levels for their extraordinary
effort in not only keeping the Group operating through lockdown, but in helping 
it emerge as a stronger business.

Andy Goss, Chairman

**CHIEF EXECUTIVE’S REVIEW**

**Update on Strategy Execution and Associated Risks**

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

· 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 omni-channel 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 using 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**

**Importance of Scale and Brand**

To deliver long-term value to the Group’s owners, the Group’s strategy is to continue
to grow through acquiring both volume and premium franchised dealerships.  Scale
benefits include: a national online and offline co-ordinated marketing strategy,
based on strong brands, to maximise the benefits of the Group’s unique national 
footprint, online platforms, scaled highly efficient contact centres, franchise 
management dedication, purchasing efficiencies and access to competitive consumer
finance packages for the Group’s customers.

Further consolidation of the sector by large-scale national brands is likely to 
continue in the months and years ahead.  The Group currently operates a small number
of brands in the UK, Bristol Street Motors, Macklin Motors, Farnell and Vertu Motors.
Bristol Street Motors remains one of the longest established and the number two 
automotive retail brand in the UK, despite only representing the Group’s volume 
franchises in England.  Bristolstreet.co.uk is one of the most visited websites 
in the sector and the brand is supported by extensive TV campaigns across England.
In Scotland, Macklin Motors is the Group’s sole brand north of the border, with 
strong and growing brand awareness.  Bristol Street Motors and Macklin Motors are
the current programme sponsors of Formula One coverage on Channel 4 south and north
of the border respectively. Farnell operates Jaguar Land Rover franchises in the
North of England and has been associated with the brands since 1948.  Vertu Motors
is the newest of the Group’s vehicle sales brands.  Customer awareness has been 
boosted recently by a TV marketing campaign in the Period and sponsorship of a Channel
4 car related series.  Vertumotors.com, was repositioned as a customer facing website,
rather than purely an investor web platform, to increase customer awareness of the
Group’s major premium franchises branded Vertu.  The Group will continue to invest
in the Vertu brand which it hopes to make a very major player in the premium franchised
dealership space in the UK.

**Portfolio Development and Changes**

As part of the strategy for scale, the Group seeks to add additional Manufacturer
partners, not currently represented in the portfolio, to facilitate additional growth
opportunities.  The Group also continues to evaluate and execute multi-franchising
actions in its locations to maximise the profitability of each location.  Increased
flexibility of formats and Manufacturer requirements are likely to aid this process
and the current pandemic is likely to also accelerate this trend.

Reflective of the above, the Group added the Citroen brand to its existing Ford 
dealership operations in Worcester in August, with a similar action anticipated 
in Macclesfield in January.

The Kia franchise in the UK is highly regarded by franchised retailers with the 
brand coming third in the recent NFDA dealer attitude survey out of all Manufacturers.
The Group was pleased to have acquired its first Kia outlets late in the previous
financial year, in Bradford and Edinburgh.  Further growth has now been undertaken
when on 1 October, the Group acquired Nottingham Kia from Sandicliffe for £1.9m,
including used vehicle inventory with a value of £1.8m, together with a short-term
lease on the dealership premises.  Relocation of the business is anticipated in 
due course.  The dealership acquired had revenues of £28.5m and loss before tax 
of £0.3m in 2019.  The Group’s entry into the Kia franchise and subsequent expansion
in 2020 added an excellent franchise to the Group’s portfolio and a partnership 
of increasing scale.

In the wake of the current situation, we anticipate an acceleration of network changes
for franchised retailers.  Potential opportunities for growth for those established
retail groups with a proven track record, strong financial position and positive
relationship with Manufacturers are therefore increasing. 

**Omni-channel Retailing**

**Digitalisation of Sales**

The environment in the first half has driven an acceleration in the role of omni-
channel capability for automotive purchases.  The Group has been at the forefront
of developments to provide customers with innovative ways to purchase and interact
online.  The Group was the first retailer in 2017 to offer full online retailing
of used cars in the UK.  That said, the relative complexity of a vehicle purchase
which potentially includes financing, warranty and other products, as well as a 
vehicle to trade in means the number of transactions completed ‘purely’ online within
automotive retail remains extremely low.

The Group continued its innovative approach to omni-channel retailing in the Period,
simplifying the customer journey to ensure that the online and physical buying experiences
are as identical, seamless and contactless as possible.  The following recent enhancements
have been built into our bespoke and internally developed showroom systems:

· Consumers can reserve a car online for a fee, so effectively taking the car off-
market while the deal is finalised.  Uptake of this functionality has been excellent,
with many more customers now starting their buying journey online but completing
their journey in a dealership.

· Customers can book a virtual or physical sales appointment online and these are
facilitated with sales executives who can share their screen as easily with customers
online as they can with customers physically on the premises.

· Sales documentation, including those of a compliance nature, are ‘signed’ via 
SMS to the customer’s mobile, avoiding the need for a dealership visit at all, if
that is the customer’s preference.

**A “Bricks and Clicks” Strategy**

Whilst more customers than ever before are starting their buying journey online,
most customers buy from their local dealership and the majority still want to undertake
a test drive.  The Group witnessed a reduction in enquiries initiated in person,
through dealership visits, post lockdown.  This reduction in ‘walk-in’ traffic was
more than offset by an increase in sales enquiries originating online or by phone.
Local sales and aftersales support is an increasingly important factor in many vehicle
buying decisions.  The Group retains a high proportion of its vehicle sales customers
into service and this aids overall long-term sales retention.  A “bricks and clicks”
model is 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.

**Cost Reduction**

Enhanced scale of operations allows the Group to maximise on purchasing benefits,
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 development (particularly using an increasing number of inhouse robotics specialists)
to enhance productivity and reduce the cost base of the Group. Enhanced integration
of the Group’s sales showroom and financial systems has facilitated significant 
efficiency improvements in processing vehicle sale transactions.  This has enabled
to Group to reduce cost in the key area of vehicle administration, for example. 
Further enhancements are being undertaken to expand the use of robotic processes
to provide improved efficiency, in areas such as vehicle invoicing and taxation.
These initiatives formed a key part of the cost reduction programme in the Period
which reduced Group headcount by 345, yielding expected annualised savings of £10m.
This programme was completed by July 2020 and the associated reorganisation costs
of £0.8m reduced underlying profits in the Period.

**Motivated, Professional Colleagues**

A key aspect of the Group, which drives performance and consistency, is to have 
one, consistent Group culture.  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 we do business. The 
Group must have the right people in management and colleague positions and have 
a culture that promotes excellence, energy and urgency and is intolerant of mediocrity.
In this way, the basics of the business are executed, and customers delighted.

To reinforce this culture in this strangest of periods, the Group undertook significant
communication direct to colleagues whether in the business or on furlough. Videos
were extensively utilised and feedback from colleagues was very appreciative. They
understood throughout, the challenges, opportunities and management actions being
undertaken.  Shorter term goal setting was used to focus all colleagues on key goals
as the Group reopened following the lockdown.  A three-month plan was established
from 1 May, which focused everyone on the following five areas:

· Keep colleagues and customers safe through appropriate safety and social distancing
measures.  One-way systems, daily temperature checking for colleagues, Perspex shields
and sanitisation stations were put in place in all of our business locations prior
to reopening and remain in place.

· Ensure a culture of working together to drive cross departmental, dealership and
divisional benefits.

· Balance colleague resource in the ramp back to full capacity.

· Fanatical focus on cost and cash management, including a goal to deliver a reduction
in used vehicle stock levels to generate cash.

· Management to lead from the front motivating colleagues.

By the end of July, when most of the Group’s dealerships were operating at close
to full capacity, a second two-month plan was launched.  This was aimed at maximising
performance in August and September, taking advantage of the favourable market conditions.
These two-month goals were focused on the pillars of ‘Speed’, ‘Simplicity’ and ‘
Confidence’ and required focus on consistent execution, as well as applying the 
changes in systems and processes developed to aid efficiency. We were delighted 
with the way colleagues understood and actioned these focus areas across the Group.
The Period has undoubtedly strengthened the Group culture and increased consistency.

I would like to personally thank every Vertu colleague for their hard work and commitment
during the Period.  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**

**FCA**

The FCA has now published their final findings in connection with the review of 
motor finance.  The recommendations of this review are required to be implemented
by 28 January 2021 and vary the way commission for the sale of finance products 
can be earned.  The prominence of disclosures of the nature of the commissions earned
are also to be enhanced. 

The Group has always considered regulatory compliance to be a core operational competence
and vital to putting the customer first.  The Group uses one in-house, 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.  This gives the Group
the ability to respond to such regulatory changes quickly and effectively.

The Group is well advanced in discussions with its retail finance partners to ensure
that commission models used in future are aligned to the recommendations of the 
FCA review.  The Group expects to fully trial the amended models before the end 
of the calendar year, for roll out across the Group in advance of the stated deadlines.
Our current modelling suggests that the changes will not have a material impact 
on Group earnings from finance commission.  Ultimately, however, this will be, to
some extent, impacted by how competitors in the market react to the changes.  The
changes do therefore pose a future earnings risk, which the Board will monitor.

**UK withdrawal from the EU**

At this stage, the UK’s future trading arrangements with the European Union remain
unclear and may change the terms of trade for new vehicles in particular.  Given
the vast majority of new cars sold in the UK are imported from the EU, these changes
may have a significant future impact on the Group.

In the absence of an agreement on the future arrangements as part of a customs union(
which appears highly likely), a change to the timing of new vehicle consignment 
stock invoicing to retailers is possible.  The Group currently receives invoices,
on which it can reclaim input VAT, from several of its Manufacturer partners when
a vehicle leaves the assembly line following production, regardless of where this
may be located within the EU.  The VAT is currently then reclaimed by the Group,
whilst the invoice is included in trade creditors until the vehicle is sold or a
prolonged period expires utilising Manufacturer funding lines.  Changes to future
VAT regimes on imports may change the timing of VAT cash flows in this regard.  
The most material current VAT advantage arises in the Group’s extensive Ford Division.

In anticipation of the changes to VAT regimes from 1 January 2021, Ford is proposing
to amend their invoicing process for vehicles imported into the UK.  Ford retailers
are to become the ‘importer of record’ which means in future, vehicles will be invoiced
and funded net of VAT.  This will change the timing of VAT cash flows to the Group
in respect of Ford funded new vehicles.  The Group has 22 Ford dealerships and the
change is anticipated to reduce the Group’s current cash flow advantage in respect
of VAT by up to £15m, depending on seasonality.

**Strategic Summary**

Our experienced management team and relative financial strength, compared to many
others in the wider sector, mean that we are well positioned to take advantage of
the opportunities arising and are ambitious to do so.  We will continue to innovate
and execute to meet changes in customers’ needs and to respond to regulatory change.
We will ensure that capital is allocated to those activities, locations and franchises
that are best placed to meet the competitive challenges arising and to provide the
best growth opportunities and maximise return on invested capital.  We will leverage
our proven strengths, execute on our business ideas such as cost saving initiatives,
enhancing operational efficiency, deliver brand growth through marketing and pursue
other new business opportunities.

**OPERATING PERFORMANCE REVIEW**

This unprecedented Period was very much characterised by two distinct phases.  Quarter
1 (March to May) saw the peak registration month of March increasingly impacted 
by a pre-lockdown slowdown until the national lockdown was initiated on 23 March.
The business was then significantly impacted for the remainder of the quarter.  
Quarter 2 (June to August) saw the progressive end of lockdown and a considerable
rebound in activity.  

**March to May Quarter**

The Group incurred an adjusted loss before tax of £14.3m in the March to May quarter(“
Q1”), a shortfall of £27.4m on the prior year period (2019: Profit before tax of
£13.1m).

In Q1, total registrations of new cars in the UK fell by 65.2%, representing a decline
year on year of over half a million vehicles, because of the closure of the retail
network during lockdown.  March activity started off strongly, but was increasingly
impacted by the uncertainty over Covid-19 and the progressively tighter lockdown
rules.  Showrooms closed on 24 March, perhaps the busiest week for new vehicle deliveries
in the year and in the historically most profitable month for motor retail, driven
by the plate change.  The delivery of new and used vehicles was severely curtailed
as were aftersales operations in the final week of the month.  March profitability
was therefore reduced on expected levels.

During the lockdown, the Group maintained marketing activity and continued to build
a vehicle order bank via online and telephone orders.  Colleagues worked in the 
sales contact centres from home and General Managers remained in place in the dealerships
to facilitate the taking of orders remotely and the delivery of limited numbers 
of vehicles to key workers.  The demand for new vans was very noticeable, as home
courier services took off and the Group’s Vansdirect on-line business in South Wales
saw a significant rise in demand which bolstered fleet and commercial order take.
Like-for-like sales of new retail and Motability cars fell to 39.0% of prior year
levels, fleet and commercial sales to 33.4% and used retail vehicles to 25.9% of
prior year in Q1.  In Q1, total Group gross profit from the sale of vehicles fell
by £31.4m compared to the prior year.  The Group’s twelve Scottish dealerships remained
unable to undertake deliveries from dealerships until after the end of the quarter.

After the 23 March 2020, the vast majority of the Group’s aftersales operations 
remained open for key worker and essential service vehicles, on reduced capacity.
This resulted in the generation of total aftersales gross profits of £16.5m, which
was £20.6m below the same quarter last year.  This activity increased during the
quarter as the lockdown restrictions eased and by 31 May 46% of the Group’s technicians
were back in the business.  Aftersales activity was significantly aided by the excellent
work undertaken by the Group’s centralised reception and service booking operations,
which worked seamlessly from kitchen tables and back bedrooms in colleagues’ homes
in the North East of England.  There is no doubt that the centralised approach to
many of the Group’s back office functions and uniform IT infrastructure and systems
aided the Group’s ability to be flexible and to retain momentum.

The Group took all available actions to mitigate this significant reduction in activity
and profitability by reducing its costs during this period.

Remuneration costs represent the largest component of the Group’s operating expense
and whilst savings were made through the furloughing of colleagues, the Group paid
colleagues in excess of the amounts received from the Job Retention Grant.  No colleague
was paid below the national minimum wage and colleagues were not capped at the maximum
grant received of £2,500 per month.  This protected colleagues’ earnings during 
this critical time (paying 80% of average earnings if above the £2,500 level).  
In addition, the Group’s Senior Management, who remained at work, volunteered to
take a 20% reduction in salary and all members of the plc board elected to take 
a 30% reduction in salary for the period from 1 April to the end of May.  Gross 
pay was £4.5m in excess of the grant receipt in the quarter, for those colleagues
on furlough leave.  The Group initially placed up to 80% of Group colleagues on 
furlough leave, this then declined over time as activity increased.  The resultant
receipt from the Government’s Job Retention Grant significantly supported the Group
in this period, with the grant receipt totalling £17.7m.  Business rates relief 
generated a further year on year cost saving of £1.5m for the Group in the quarter
and will continue until the end of March 2021.

Other costs were reduced significantly, particularly when showrooms were closed,
to conserve cash. Group centralised supplier arrangements facilitated swift actions
to be taken to remove costs. In addition, the Group received substantial support
from certain third-party suppliers who reduced or suspended charges.  The Group’s
Manufacturer partners were also excellent in the period in taking steps to reduce
franchise costs, some of which continue.

**June to August Quarter**

The quarter to 31 August (“Q2”) generated a profit of £19.0m, significantly more
than the prior year period profit of £3.8m, with some record breaking departmental
performances being witnessed within this strong result.

The easing of lockdown restrictions on 1 June allowed the Group’s dealership sales
operations located in England to reopen and our aftersales operations to return 
to capacity.  The Group’s 12 Macklin Motors sales outlets, located in Scotland, 
opened later on 29 June, however, were able to recommence deliveries from dealerships
earlier. The following departmental trends were seen in Q2.

**Used retail vehicles**

Strong post-lockdown demand from customers was witnessed and exceeded expectations.
The reasons for this include, consumers wishing to avoid public or shared transport,
increased savings levels by consumers during lockdown and the absence of alternative
spending options, such as holidays, hospitality and entertainment.  The Group continued
to grow volumes of used vehicles sold as compelling marketing campaigns also boosted
sales enquiries.  Like-for-like volumes and revenues increased 1.9% and 8.1% respectively
and record levels of used vehicle profit were delivered by the Group during the 
quarter.

The used vehicle market in the UK, in contrast to seasonal norms, experienced very
strong pricing conditions throughout Q2.  Tight supply of vehicles following the
lockdown coincided with a period of robust consumer demand.  Part of the supply 
constraint related to wholesale auctions, which were not allowed to restart until
later post lockdown than the retail network.  Logistics constraints were significant
and the move to online only auctions, meant lower trade volumes for much of the 
quarter helping to underpin values.  The Group recognised the pricing and supply
environment ensuring appropriate high margins were obtained in the quarter on the
available stock.

The beneficial pricing environment and good demand resulted in core gross profit
generated from used vehicle sales in Q2 increasing by £7.7m compared to the prior
year, due principally to enhanced margin retention.  The prior year, in contrast,
saw used car pricing weakness and margin pressure.  Gross profit per unit on a like-
for-like basis increased to record levels of £1,436 from £1,116 (28.7%).  This growth
in profitability contributed to used gross margin percentages improving from 7.9%
to 9.5% on a like-for-like basis, despite increased average selling prices.

The Group continued to ensure lean stock management and high stock turns. In-house
stock management systems were further developed in the lockdown period, providing
even better real time data to ensure the correct stock levels and valuations were
applied.  This new bespoke system called ‘Vertu Analytics’ uses various industry
data sets such as Autotrader, BCA and Cazana as well as Group data.  It is now in
the process of being rolled out Group-wide and is expected to further improve used
vehicle stock management and pricing.

**New retail cars and Motability sales**

Demand for new cars was weaker in the lockdown than used cars and was slower to 
rebuild momentum.  UK retail registrations fell by 19.2% in the month of June compared
to the prior year.  June registration statistics were undoubtedly impacted by less
pre-registration and other tactical registration activity in the market year on 
year, as there were supply constraints and reduced push by Manufacturers.  This 
is a continuing feature of the market, as halted and disrupted production due to
lockdowns and social distancing feeds through. In addition, logistics constraints
also reduced supply in June, though this aspect has now been resolved.

In the vast majority of franchises, volume targets were reduced or removed by Manufacturers.
The rise in consumer demand seen in used cars was replicated in new cars in July
which saw UK new retail registrations rising 20.4% year on year.  In August, a traditionally
low month for new retail volumes, a 1.7% decline in UK registrations arose as a 
result of a combination of tightening of supply in some franchises and the impact
in the prior year of WLTP related registrations. Underlying consumer demand remained
robust and this was witnessed in the building of strong order banks for the September
market.  Overall, Q2 saw UK new retail registrations fall 2.2%.  In contrast, the
Group overperformed and took market share, growing like-for-like new retail volumes
by 3.4% in the same quarter.

UK Motability sales operations closed completely during lockdown, re-opening for
new applications from 1 July.  In Q2, UK registrations in this channel grew by 9.4%,
reflective of definitive pent up consumer demand as deferred contracts were renewed.
The Group’s Motability volumes in Q2 grew 11.7% on a like-for-like basis representing
outperformance.

Despite the increase in the volume of new retail and Motability vehicles sold by
the Group, like-for-like gross profits from this channel in Q2 fell £3.6m year on
year.  Significantly reduced quarterly manufacturer volume bonus income receipts
in June (representing the period, April to June) was the primary reason for this
decline.  The lockdown impact on vehicle sales volumes in the April to June period
inevitably reduced volume bonus earnings recognised at the end of the calendar quarter
in June.  The resultant lack of bonus income meant that total gross profit per unit
fell 28.6% on a like-for-like basis in Q2.  The Group’s new vehicle margin percentages
declined from 8.3% to 5.4% in the quarter on a like-for-like basis. Underlying new
retail margins, excluding this quarterly volume bonus drop-in effect in June, were
robust.

**Fleet & Commercial vehicle sales**

The UK car fleet market declined 21.1% in Q2.  A lack of demand from the daily rental
market, principally due to reductions in leisure and airport travel, along with 
reduced demand from corporate fleets, due to market uncertainty and potentially 
also increased home working, drove this decline.  Like-for-like the Group delivered
3,601 fleet cars in Q2, representing a decline of 29.2%, which was behind the market.
This reflects the mix of franchises held by the Group, with some Manufacturers moving
away from this low margin channel to preserve profit and to reflect constrained 
supply.

The SMMT reported a 13.2% decline in registrations of commercial vehicles in the
UK in Q2, as large corporate players took longer to restart than the consumer-led
car market following lockdown.  The Group’s like-for-like sales volumes of new commercial
vans was significantly ahead of these market trends, increasing slightly by 0.2%
in Q2. This was aided by very strong performance from the Vansdirect business and
the Group taking share from competitors seeking to reduce their working capital 
demands by reducing their exposure to fleet channels.  

Like-for-like gross profit per unit in the Fleet and Commercial channel fell by 
4.7% to £609 (Q2 FY20: £639).  Like-for-like gross profit generation from fleet 
and commercial sales fell £1.2m in Q2.  As with new vehicles, these trends were 
a reflection of the lack of calendar quarter volume bonus receipts in June, driven
by the reduction in volumes in the lockdown period.

**Aftersales**

In Q2, pent up demand from customers whose vehicles reached service intervals in
the lockdown aided growth in the Group’s vehicle servicing departments, driving 
an 9.7% increase in the Group’s like-for-like service revenues.  The like-for-like
gross margin percentage on vehicle servicing rose to 79.8% (Q2 FY20: 77.8%).  Higher
average invoice values on retail work were achieved through the Group’s effective
vehicle health check processes.  The introduction of individual timed appointments
for customers, to ensure social distancing in dealerships, allowed more time for
the Group’s Service Advisors to better explain identified work to customers, aiding
improved sales conversion.  In addition, the Group saw a higher retail mix of work
in workshops with private consumer demand more evident than business users from 
the fleet sector and this enhanced margins.  Fleet servicing demand was back to 
normal levels by August.  Similarly, warranty work has been muted post lockdown 
compared to normal and this also aided margins and productive efficiency.

In contrast to the strong performance in service, parts and accident repair like-
for-like revenues fell 8.9% in Q2.  Fewer motoring journeys led to less accidents,
reducing accident repair work and trade parts sales to accident repair centres. 
In addition, the previously announced changes to parts distribution within the Vauxhall
network also had a reducing effect on the Group’s parts sales and profitability.

Overall, like-for-like gross profits in aftersales rose £1.8m in Q2 driven by the
strong service performance. 

**Acquisitions**

Acquisitions from the prior year contributed an additional £0.4m of profit in Q2.
The Yorkshire Volkswagen acquisitions contributed most of this profit, with the 
remaining acquisitions at breakeven performance for the quarter.  These results 
exceed the original acquisition business plans.  All acquired businesses are fully
integrated onto Group systems and we are pleased with the progress made to date.

**Current trading – September**

The Group’s trading performance in September was significantly ahead of prior year
and original budget levels.  The month’s profit represented a record month in terms
of the Group’s profitability. 

Group revenue rose substantially in the month aided by acquisitions, like-for-like
volume increases and higher average selling prices.

Service activity continued to benefit from pent up demand with like-for-like revenue
up 10.8%, aided by an extra working day year on year.  Used vehicles saw very strong
like-for-like volume growth of 8.9% together with continued high gross margin levels,
reflecting constrained supply. 

In new vehicles, despite evident supply constraints for certain manufacturers, the
Group delivered a like-for-like volume increase in the new retail channel of 6.3%,
ahead of UK market registrations which fell by 1.1%.  Market registrations dipped
due to lower levels of pre-registration and tactical activity with actual sales 
to consumers in the month reflecting robust consumer demand and order take through
the summer.  Motability sales also grew on a like-for-like basis by 8% as post-lockdown
volumes benefited from pent up demand.

The fleet car market continued to be impacted by trends seen in the first half. 
Tactical registrations, supply constraints, weaker daily rental demand and uncertainty
in the corporate company car market all weighed on the market in the month.  Like-
for-like fleet car volumes fell 27.5% with a reduced profit impact since this is
a low margin channel.

In contrast, new commercial vehicle sales were up 53.5% in volume terms on a like-
for-like basis.  This reflected the Group taking significant share in a strong market
driven principally by the rise of courier services and delivery of online purchases.
Competitor actions to preserve working capital led to their exiting of the channel
in some cases and the Group taking share.  In addition, Vansdirect, the Group’s 
online commercial vehicle channel, continued its significant growth.

The Group continued to benefit from the rates holiday on showrooms and started to
see the cost savings from the cost reduction programme coming through aiding profitability.

**Outlook**

The Board is confident in the prospects for the Group.  With its strong balance 
sheet, well invested systems and omni-channel technology and experienced leadership
team, the Board believes that the Group is strategically very well placed to capitalise
on the challenges and consequent opportunities in the UK motor retail sector.  The
Board is actively considering several opportunities for the expansion of the Group
and expects such consolidation opportunities will be significant over the coming
months and years.  At the same time, dealership numbers in the UK are likely to 
face downward pressure.  This should improve the profit potential of those that 
remain, with more scaled operations gaining from cost and marketing synergies.

As we write this report, the Government is again increasing the restrictions related
to Covid-19 in the UK. September witnessed a rise in the occurrence of Covid-19 
cases and increased incidence of self-isolation amongst colleagues around the Group.
This has had no material impact on financial performance to date, but clearly represents
an uncertainty. The pandemic is likely to dominate the environment certainly for
the next six months at least. While the essential tenor of this report about the
future is optimistic, the prospects for the next six months remain uncertain and
the impact on the business is unclear. In addition, there is uncertainty over the
UK’s departure from the EU and rising unemployment due to the pandemic.  The prospects
for the remainder of the financial year remain as uncertain as the virus itself 
and therefore the outlook for FY21 trading performance is subject to risks and should
be viewed in this context.

Despite this uncertain environment, following the strong trading performance seen
since 1 June the Board is increasingly confident of a strong financial outcome for
the financial year as a whole.

Robert Forrester, CEO

Share on: