Marshall Motor Holdings plc (LON: MMH), one of the UK’s leading automotive retail groups, announced today its unaudited interim results for the six months ended 30th June 2019. DirectorsTalk caught up with CEO Daksh Gupta and CFO Richard Blumberger to talk us through the highlights, how the balance sheet looks post IFRS16, how margins have held up and the outlook for the remainder of the year and beyond.
Financial Summary
| H1 2019 | H1 2018 | Var % | |
| (restated for IFRS 16) | |||
| Underlying: | |||
| Like-for-like1 revenue (£m) | 1,160.6 | 1,150.0 | +0.9% |
| Profit before tax2 (‘PBT’) (£m) | 15.2 | 16.0 | (5.3%) |
| Basic earnings per share (p) | 15.0 | 16.1 | (6.8%) |
| Reported: | |||
| Revenue (£m) | 1,183.3 | 1,162.9 | +1.8% |
| Profit before tax (£m) | 14.8 | 16.2 | (9.0%) |
| Basic earnings per share (p) | 14.6 | 16.3 | (10.4%) |
| Dividend per share (p) | 2.85 | 2.15 | +32.6% |
| Adjusted Net Cash / (Debt)3 (£m) | 5.8 | 0.9 | +544.4% |
| Reported Net Cash / (Debt)4 (£m) | (82.2) | (92.7) | +11.3% |
Highlights
• Strong financial performance in a challenging market; H1 result in line with the Board’s expectations
• Market outperformance in all core metrics during the Period:
• Like-for-like new unit sales to retail customers down 0.4% compared to a market5 decline of 3.2%;
• Like-for-like new unit sales to fleet customers down 1.1% compared to a market5 decline of 3.6%;
• Continued strong like-for-like used unit sales growth of 7.2%;
• Like-for-like aftersales revenue up 1.8%
• Gross margin maintained at 11.4% (H1 2018: 11.4%), with higher new vehicle margins offsetting margin pressure in used vehicles and aftersales
• Like-for-like net operating expense growth of 1.6%, 2.0% excluding impact of lease disposal, benefitted from a number of one-off management actions
• Adjusted net cash of £5.8m as at 30 June 2019 (30 June 2018: £0.9m), reflecting disciplined working capital management and working with our brand partners to control capital expenditure. Reported net debt reflects previously highlighted effect of adopting IFRS16
• Continued investment in the Group’s property portfolio; £8.8m capital expenditure during the Period, including the purchase of the Northampton ŠKODA freehold for £1.7m
• Acquisition of six ŠKODA franchised dealerships making the Group ŠKODA’s largest UK retailer
• Continued strong balance sheet with net assets at 30 June 2019 of £200.7m, equivalent to £2.57 per share (30 June 2018: £195.1m, £2.51 per share) including £123.9m of freehold property
• Interim dividend 2.85p per share (2018: 2.15p), up 32.6% aided by recently revised dividend policy
Daksh Gupta, Marshall Motor Holdings Chief Executive Officer, said:
“Despite challenging market conditions, the Group has delivered a strong H1 unit sales performance, ahead of both the new and used car markets and underlying profit before tax in line with the Board’s expectations
“Given continued weak consumer confidence as a result of ongoing political uncertainty over Brexit, ongoing cost headwinds for the retail sector and further potential new vehicle supply constraints in the lead up to the implementation of further emissions-related regulations on 1 September 2019, the Board believes it is right to remain cautious regarding the outlook for the remainder of the year. Nevertheless, the Board’s current outlook for the full year remains unchanged.”
1 “Like-for-like” businesses are defined as those which traded under the Group’s ownership throughout both the period under review and the whole of the corresponding comparative period
2 Underlying profit before tax is presented excluding non-underlying items (see Note 6)
3 Adjusted net debt is presented excluding the impact of the recognition of lease liabilities under IFRS16 (see Note 3a)
4 Reported net debt includes the impact of the recognition of lease liabilities under IFRS16. (see Note 3a)
5 Registrations as reported by the Society of Motor Manufacturers and Traders
Operating Review
Introduction
Our unaudited interim results for the six months ended 30 June 2019 (“H1” or the “Period”) reflect a strong unit sales performance, outperforming the new retail, new fleet and used car markets, together with further growth in aftersales revenues. The Group has delivered an underlying profit before tax of £15.2m (H1 2018: £16.0m). This was a strong performance given the challenging market conditions and ongoing cost headwinds, and was in line with the Board’s expectations.
As announced in March 2019, the Group completed two acquisitions during the Period comprising six ŠKODA franchised dealerships, as a result of which the Group became ŠKODA’s largest UK retailer and now represents the brand in 11 locations. These acquisitions demonstrated our commitment to our stated strategy to grow with existing brand partners in new geographic territories. The aggregate cash consideration paid for the goodwill and fixed assets of the acquired businesses was £3.5m and the Group also subsequently took the opportunity to separately acquire the freehold property at Northampton ŠKODA for £1.7m. The integration of these businesses is progressing according to plan and performance to date has been in line with our expectations.
The Group operates a well balanced portfolio of volume, premium and alternative premium brands which, at 30 June 2019, accounted for 27.4%, 48.1% and 24.5% respectively of the Group’s total franchises (by number). The Group’s diverse portfolio means it represents manufacturer brands accounting for over 80% of all new vehicle sales in the UK. The Board continues to believe that this scale and diversified spread of representation helps protect the Group from the effect of the cyclical nature of individual brand performance.
Six months ended 30 June 2019
| Revenue | Gross Profit | |||
| £m | mix* | £m | mix* | |
| New Car | 569.1 | 47.1% | 43.6 | 32.3% |
| Used Car | 509.6 | 42.2% | 33.5 | 24.9% |
| Aftersales | 129.5 | 10.7% | 57.8 | 42.8% |
| Internal Sales / Other | (25.0) | – | 0.2 | – |
| Total | 1,183.3 | 100.0% | 135.0 | 100.0% |
Six months ended 30 June 2018
| Revenue | Gross Profit | |||
| £m | mix* | £m | mix* | |
| New Car | 584.6 | 49.3% | 40.5 | 30.5% |
| Used Car | 474.6 | 40.0% | 34.2 | 25.7% |
| Aftersales | 126.4 | 10.7% | 58.1 | 43.8% |
| Internal Sales / Other | (22.7) | – | 0.1 | – |
| Total | 1,162.9 | 100.0% | 133.0 | 100.0% |
*Revenue and gross profit mix calculated excluding internal sales / other
New Vehicles
| H1 | H1 | Variance | ||
| 2019 | 2018 | Total | LFL | |
| New Retail Units | 16,108 | 15,803 | 1.9% | (0.4%) |
| Fleet Units | 9,199 | 9,396 | (2.1%) | (1.1%) |
| Total New Units | 25,307 | 25,199 | 0.4% | (0.7%) |
Total new car revenue in the Period was £569.1m (H1 2018: £584.6m), like-for-like £559.7m (H1 2018: £580.7m) was down 3.6%.
As expected, the UK new car market continued to decline during the Period. The Society of Motor Manufacturers and Traders (‘SMMT’) has reported that during the Period, new car registrations to retail and fleet customers declined by 3.2% and 3.6% respectively with total registrations of new vehicles in the UK, including the impact of dealer self-registration activity, declining by 3.4%. In the first quarter of 2019, the overall market declined by 2.4% however, the second quarter of 2019 became more challenging with the overall market declining 4.6%.
The Group’s like-for-like sales of new units to retail customers decreased by 0.4%, a strong market out-performance. The supply challenges reported in the second half of 2018 were alleviated for a number of our brand partners and following a well-reported decline in demand for diesel vehicles, all premium brands have increased the proportion of petrol, hybrid and electric vehicle derivatives being produced to address current consumer demand.
The Group’s like-for-like sales of new units to fleet customers decreased by 1.1% which was also a market out-performance. Sales of new vehicles to fleet customers have been impacted by the deferral of vehicle purchases as a result of a combination of continued economic uncertainty and the current lack of clarity in relation to the future tax implications of diesel vehicles which have typically formed a greater share of the market for fleet customers.
Despite these challenges, new car gross margin strengthened during the Period to 7.7%, up 73bp compared with the same period last year (H1 2018: 6.9%). This positive margin performance in new vehicle sales was driven by a combination of the Group’s achievement of our brand partners’ sales targets without material pre-registration activity and improved product mix in certain brands compared to last year.
Used Vehicles
| H1 | H1 | Variance | ||
| 2019 | 2018 | Total | LFL | |
| Total Used Units | 24,330 | 22,659 | 7.4% | 7.2% |
Total used car revenue in the Period was £509.6m (H1 2018: £474.6m), like-for-like £498.8m (H1 2018: £467.0m) was up 6.8%.
Like-for-like sales of used units during the Period were up 7.2% versus the corresponding period last year, a continuation of the strong performance in the second half of last year.
As has been widely reported, the used car market experienced margin pressure during the Period, particularly during the second quarter of 2019. Seasonal declines in used car values during the Period were sharper than historic norms as a result of a number of factors including strong comparable values in 2018 as a result of WLTP-related supply shortages in the new car market, together with an increased volume of 3-4 year old used cars in the market in the Period. A return to a more historic used car values profile is anticipated for the remainder of this year.
Through the Group’s robust operating controls, in particular, our prudent 56-day stocking policy, together with continued enhancement of the Group’s management information system Phoenix 2, the Group was able to contain its used car margin reduction to 63bps at 6.6% (H1 2018: 7.2%).
Aftersales
| H1 | H1 | Variance | ||
| 2019 | 2018 | Total | LFL | |
| Revenue (£m) | 129.5 | 126.4 | 2.4% | 1.8% |
In addition to the servicing, maintenance and repair of vehicles in our franchised retail centres, the Group also operates five standalone bodyshops, five Trade Parts Centres and one standalone central PDI facility.
Total aftersales revenue in the Period was £129.5m (H1 2018: £126.4m) with the Group continuing to deliver consistent like-for-like aftersales revenue growth, up 1.8%.
Aftersales margin during the Period was 44.6% (H1 2018: 46.0%). The reduction in aftersales margin during the Period was due in part to an increased mix of lower margin parts sales, which also experienced margin pressure, together with an increase in operational costs. We are expecting to see some margin recovery in the second half of the year.
At 30 June 2019, the Group had over 70,000 customers in live service plans. Service plans continue to form a key part of the Group’s retention strategy, allowing customers to spread the maintenance cost of their vehicle whilst providing us with a greater level of certainty over future aftersales profits.
Total aftersales gross profit was down 0.6% to £57.8m (H1 2018: £58.1m) as a result of the issues referred to above and accounted for 42.8% of the Group’s total gross profit (H1 2018: 43.8%).
Operating Costs
Overall Group costs increased by 2.5% to £114.9m (H1 2018: £112.1m), in part driven by the Group’s recent acquisitions. Like-for-like operating costs increased by 1.6% to £112.3m (H1 2018: £110.5m). This performance benefitted from £0.6m in relation to a lease disposal, without which like-for-like costs would have been up by 2.0%. This was a strong result which benefited from a number of one-off management actions.
In the face of ongoing well documented cost headwinds for the retail sector, we continue to be disciplined in our approach to cost management, with rigorous policies and procedures in place to control all areas of discretionary spend.
Portfolio Management
As announced on 4 March 2019, the Group acquired the business and assets of Leicester and Nottingham ŠKODA from Sandicliffe Limited on 31 January 2019 and the business and assets of Bedford, Harlow, Letchworth and Northampton ŠKODA from Progress Bedford Limited on 28 February 2019. The Group also took the opportunity to separately acquire the freehold property at Northampton ŠKODA for £1.7m during the Period.
The Group continues to review its portfolio on an ongoing basis to maximise shareholder value. The Group’s stated strategy is to grow scale with existing brand partners and extend our geographic footprint into new regions. However, our focus will remain on ensuring a strong strategic and financial case for any acquisition opportunities. We have further headroom to grow with all brand partners in what we believe, with continuing market uncertainty, will still be a consolidating market in which larger dealer groups with diversified franchise portfolios will be better placed.
Capital Investment
During the Period, the Group invested £8.8m of capital expenditure into its retail centres, including £1.7m to acquire the freehold of Northampton ŠKODA. Due to the postponement of certain developments until 2020, we now expect capital expenditure over the full year to be lower than our initial expectations.
During the Period, the Group completed the following developments:
• Lincoln Jaguar Land Rover: this development brought together Lincoln Jaguar and Lincoln Land Rover, previously two separate leasehold sites, on one purpose-built freehold site providing a significant increase in capacity for both vehicle and aftermarket sales
• Cambridge Ford Store: this relocated our existing leasehold showroom on Newmarket Road to a state-of-the-art Ford Store on long leasehold property and provides a significantly improved customer experience
• Lincoln Nissan: relocation to the Group’s former Lincoln Land Rover leasehold premises
After recent investments, the net book value of Group’s freehold and long-leasehold property portfolio increased to £123.9m (H1 2018: £116.6m).
People Centric
The Group was excited to, once again, achieve ‘Great Place to Work’ status by The Great Place to Work Institute for the ninth consecutive year. The Group was ranked 11th in the super large category based on the 2018 survey. As a result of being named as one of the UK’s Best Workplaces for the fifth consecutive year, the Group was recognised with a Laureate award. The Group remains the number one ranked automotive business in the survey for the third consecutive year.
Technology and Online
The use of technology, online and social media are key drivers to increasing customer engagement levels as well as supporting the day-to-day operation of the business. The Group’s website remains the 6th most visited dealer website in the UK and we remain one of the leading innovators in utilising social media channels. This was further recognised in the Period with the Group winning both ‘Best Use of Social Media’ at the 2019 Automotive Management Awards and the ‘Social Media’ category at the 2019 Motor Trader awards.
The Group’s management information system, Phoenix 2, continues to drive operational effectiveness. Its continued development and disciplined use throughout the business is one of the key drivers to the continued market outperformance by the Group.
Worldwide Harmonised Light Vehicle Test Procedure
The introduction of the Worldwide Harmonised Light Vehicle Test Procedure (“WLTP”) for commercial vehicles from 1 September 2019, together with changes to the Real Driving Emissions Test with effect from the same date, each have the potential to impact supply of new vehicles in the second half of 2019. The extent of this impact is not yet known and it will vary by manufacturer and by vehicle model. As with WLTP, industry forecasts suggest there is likely to be some impact on vehicle supply and longer lead times for some models and brands of new vehicles, albeit at this stage, it is anticipated that the impact will be less than that experienced in 2018.
Financial Review
Impact of First Time Adoption of IFRS 16 Leases
The Group has applied IFRS 16 for the first time in the Interim Report and Accounts for the six months ended 30 June 2019; the standard has been adopted using the full retrospective approach. The standard has no effect on the Group’s economic activity, nor does it impact cash flows. However, adoption of the standard results in the recognition of new assets and liabilities, changes to the nature and timing of items of expenditure as well as changes to the classification of cash flows relating to lease contracts.
IFRS 16 removes the current distinction between operating leases and finance leases and requires that, for all leases, a right-of use asset and a lease liability are recognised in the Consolidated Balance Sheet. The asset represents the right to use the leased asset and the lease liability represents the commitments payable under the lease.
Operating lease rental charges in the Consolidated Statement of Comprehensive Income are replaced by interest charges and depreciation expenses. The timing of the recognition of these lease costs changes, with increased costs being recognised in the earlier years of the lease due to interest being recognised at a constant rate on the carrying value of the lease liability.
In the Group’s full year results announcement released in March 2019, the Group provided an initial estimate of IFRS 16; that it is likely to be marginally earnings dilutive in the early years of adoption, with an initial 1%-2% impact on profit before tax. In addition, if the balance sheet at 31 December 2018 had been restated, we estimated c£86.0m of right-of-use assets and c£92.5m of associated liabilities would have been recognised in the Group’s balance sheet, resulting in a c£6.5m decline in net assets.
The following tables summarises the actual impact of adoption of the new standard, the net impact being broadly in line with that estimate given in March 2019:
| £m | 30-Jun-18 | ||
| As originally presented | IFRS 16 Transition | Restated | |
| Underlying P&L extract | |||
| Revenue | 1,162.90 | – | 1,162.90 |
| Cost of sales | -1,029.90 | – | -1,029.90 |
| Gross profit | 133 | – | 133 |
| Net operating expenses | -113.3 | 1.2 | -112.1 |
| Operating profit | 19.7 | 1.2 | 20.9 |
| Net finance costs | -3.3 | -1.6 | -4.9 |
| Profit before taxation | 16.4 | -0.4 | 16 |
| Balance sheet extract | |||
| Right-of-use assets | – | 85.3 | 85.3 |
| Freehold / long leasehold | 114.9 | -4.3 | 110.6 |
| Other | 630.3 | 0.5 | 630.8 |
| Total assets | 745.2 | 81.5 | 826.7 |
| Lease liabilities | – | 93.6 | 93.6 |
| Other | 544 | -6 | 538 |
| Total liabilities | 544 | 87.6 | 631.6 |
| Net assets | 201.2 | -6.1 | 195.1 |
| Net cash / (debt) | 0.9 | -93.6 | -92.7 |
Full details of the impact of IFRS 16 on the 2019 Interim Report and Accounts, including the restatement of the comparative period, are set out in Note 3 ‘Changes in Accounting Policies and Disclosures’ to the financial statements below.
The impact of IFRS 16 on the Group’s profit may vary (either positively or negatively) dependent on the lease commitments either assumed or exited by the Group in each financial period.
Revenue
Reported revenue increased by 1.8% to £1,183.3m (H1 2018: £1,162.9m) with like-for-like revenue increasing by 0.9%. In addition, both used vehicle and aftersales revenues continued to show growth against the comparable period last year. Like-for-like revenue from the sale of new vehicles (to both retail and fleet customers) declined in the Period as a result of the declining UK new car market.
Margin
Gross margin was maintained at 11.4% (H1 2018: 11.4%), with higher new vehicle margins offsetting margin pressure in used vehicles and aftersales. This positive margin performance in new vehicle sales was driven by a combination of the Group’s achievement of our brand partners’ sales targets without material pre-registration activity and improved product mix in certain brands compared to last year.
On a like-for-like basis, new vehicle margin improved by 73bps to 7.7%. As a result, despite the decline in sales volumes of 0.4%, like-for-like gross profit increased by £2.7m.
On a like-for-like basis, used vehicle gross margin at 6.6% was 62bps below the same period last year. Margin performance was impacted by well documented declines in residual values in the second quarter, partly resulting from an exceptionally strong market in the previous year. The Group mitigated the impact of these declines with strong controls over inventory levels and rigorous application of our prudent 56 day stocking policy.
Like-for-like aftersales gross margin at 44.4% (H1 2018: 46.0%) was impacted in part to an increased mix of lower margin parts sales, which also experienced margin pressure, together with an increase in operational costs.
Costs
Underlying operating costs of £114.9m were 2.5% higher than in the same period last year, primarily driven by the impact of acquisitions. Like-for-like costs of £112.3m increased by 1.6% (2018: £110.5m,) an increase which was anticipated due to on-going cost headwinds. The Group continues to face a number of structural and inflationary costs which have been contained by on-going tight control of costs.
Total finance costs of £5.0m were £0.1m higher than the same period last year, driven by increased vehicle stocking charges as a result of higher levels of consignment stock, including our newly acquired sites.
During the Period, the Group incurred £0.4m of non-underlying costs, primarily related to acquisitions, disposals and restructuring.
Tax
The reported effective tax rate for the Period was 22.8% (H1 2018: 21.8%). The underlying effective tax rate for the Period was 22.6% (H1 2018: 21.9%).
Capital expenditure
Capital expenditure during the Period was £8.8m. This was lower than originally expected due to the deferral of two large scale capital expenditure projects, partially offset by the purchase of the Northampton ŠKODA freehold for £1.7m. At 30 June 2019, the Group had £123.9m of freehold / long-leasehold property (30 June 2018: £116.6m), equivalent to £1.58 per share.
Financial position
The Group continues to be cash generative, with cash of £10.8m generated in the Period, and the balance sheet remains strong. At 30 June 2019 the Group had adjusted net cash of £5.8m compared to an adjusted net cash position of £0.9m at 30 June 2018 and net debt of (£5.1m) at 31 December 2018. Reported net debt (post IFRS 16) at 30 June 2019 was £82.2m (H1 2018: £92.7m)
The Group’s unutilised £120m revolving credit facility is in place until May 2021 and provides financial flexibility to take advantage of investment and growth opportunities when they arise.
Over the longer term, the Board continues to believe it is in the best interests of all stakeholders that the Group maintains a sound financial position. In this respect, the Board targets net bank indebtedness (excluding the impact of IFRS 16) of not more than 1.25x net debt/EBITDA. This leverage may rise for a period of time towards the Group’s banking facility limit of not more than 3.0x (excluding the impact of IFRS 16) should an exceptional investment opportunity arise.
Interim Dividend
The Group’s recently revised dividend policy is for full year dividends to be covered by between 2.5 to 3.5 times underlying earnings and paid in an approximate one-third (interim dividend) and two-thirds (final dividend) split, subject to the Group’s trading prospects being satisfactory and taking into account potential investment opportunities.
The Board is pleased to announce an interim dividend of 2.85p per share (2018 interim dividend: 2.15p), up 32.6% aided by the revised dividend policy. The dividend will be paid by 20 September 2019 to shareholders who are on the Company’s register at close of business on 23 August 2019.
Summary and Outlook
Despite challenging market conditions, the Group has delivered a strong H1 unit sales performance, ahead of the new retail, new fleet and used car markets with underlying profit before tax in line with the Board’s expectations.
Whilst still early, our September order bank is building as expected. However, given continued weak consumer confidence as a result of ongoing political uncertainty over Brexit, ongoing cost headwinds for the retail sector and further potential new vehicle supply constraints in the lead up to the implementation of further emissions-related regulations on 1 September 2019, the Board believes it is right to remain cautious regarding the outlook for the remainder of the year. Nevertheless, the Board’s current outlook for the full year remains unchanged.
Daksh Gupta
Chief Executive Officer
13 August 2019