Vertu Motors plc (LON:VTU), the automotive retailer with a network of 154 sales and aftersales outlets across the UK and a sector leading online presence, has today announced its interim results for the six months ended 31 August 2021.
HIGHLIGHTS
· Record trading results delivered with Adjusted1 profit before tax of £51.8m (H1 FY21: £4.7m, H1 FY20: £16.9m), on revenues of £1.9bn
· Vehicle sales volumes ahead of market trends in all areas and on a like-for-like basis compared to H1 FY20 (6 months ended 31 August 2019)
· Gross margin of 11.6% reflects strong pricing disciplines in all areas
· Acquisitions successfully integrated and performing well
· Very strong cash flow performance – Free Cash Flow of £63.6m in the Period and Net cash2 of £57.3m (H1 FY21: £36.5m)
· Net tangible assets per share of 61.5p (28 February 2021: 50.2p) reflecting strong asset base, Net cash position and cashflow generation
· 2.0m shares repurchased at a cost of £1.1m since 20 August 2021, buyback programme recommences today following publication of this statement
· Dividends re-established with interim dividend of 0.65p per share declared, payable in January
OUTLOOK
· Record trading performance delivered in key month of September with a trading profit of £20.0m
· New and used vehicle supply constraints continue and cost pressures evident, particularly in employment costs
· Colleague reward packages and development programmes being enhanced to ensure fully resourced, stable teams are in place to deliver improvements in customer experience, retention and gross profit generation. Annualised investment of £12m expected
· Continuing cautious view of balance of the year
· The Board now anticipates that the Group’s adjusted profit before tax for FY22 will be at least £65m, previously £50m to £55m
· Increasingly visible acquisition pipeline
1 Adjusted to remove share-based payments charge and amortisation of intangible assets
2 Excludes IFRS 16 liabilities, includes used vehicle stocking loans (no utilisation of used vehicle stocking loans at 31 August 2021)
Commenting on the results, Robert Forrester, Chief Executive, said:
“The record profitability delivered in the period has undoubtedly been aided by very favourable used vehicle market conditions, however, this is a remarkable performance outperforming market trends. I am proud of the entire Vertu team for their adaptability and effort.
The Group has continued to evolve during the period, with further enhancement of its strategy in achieving enhanced online sales capability via the Group’s Click2Drive technology platform and the introduction of a ‘concierge’ service for sales customers under the Click2Drive banner. The number of sales outlets has again grown as a result of the execution of the Group’s multi-franchise strategy. Efficiency and productivity gains continue to be delivered through the enhanced use of technology.
We have again generated significant free cash flow and have a very strong balance sheet making the Group very well placed to benefit from the changes and significant opportunities which are ahead of it. The resumption of paying dividends to shareholders shows the Board’s optimism in our strategy and its execution.”
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/
CHAIRMAN’S STATEMENT
I am delighted with the performance delivered in the first half of our financial year and I would like to personally express my appreciation and thanks to the whole Vertu team for the delivery of such a remarkable and record result for the Group, a profit before tax of £51.1m (H1 FY21: £4.0m; H1 FY20: £16.1m) for the Period.
Changes the Group executed in response to the Pandemic have meant it has emerged in many ways stronger for the experience. The Group has now established a very strong platform from which to deliver on its strategic imperatives and drive its future success:
· The Group has an established track record of execution and a stable and experienced management team. This team, together with the Board, have a clear vision and strategy.
· Vertu has always had one of the strongest balance sheets in the sector and has further augmented this in the Period. The Group has once again generated significant positive Free Cash Flow and is reporting an improved net cash position. This means there is significant cash and debt capacity available for growth.
· The Group’s technological capabilities have given it a strategic advantage with its scalable in-house developed systems both driving efficiency and flexibility in meeting customer needs. The adaptation of systems in response to restrictions has led to increased customer choice and an integrated online/omnichannel sales process. The launch of the ‘Click2Drive’ brand will further augment the Group’s online sales offering, supported by the new customer ‘concierge’ service and backed up by our nationwide dealership network from Fife to Exeter and Kent.
· The strength and long (over 100 year) history of the Bristol Street Motors brand has been highlighted by the Group’s recent TV advertising campaigns. This brand has in more recent times been joined by the Group’s Scottish brand Macklin Motors and by the premium Vertu Motors brand. Increased awareness of all three of the Group’s brands has been delivered, with further growth targeted in the coming months and years. The Group aims to retain a top three prompted awareness position for Bristol Street Motors in the franchised sector and to substantially grow the prompted awareness of the Macklin and Vertu brands.
· Whilst vehicle sales tend to grab the headlines, the Group’s high margin aftersales business is a major contributor to overall profitability. Aftersales includes vehicle service and repair, accident and cosmetic repairs and parts sales and these functions provide resilience, fuelled by high levels of customer retention. This retention reflects one of the advantages of being franchised retailers and is also as a result of the execution of retention strategies, such as the use of service plans and delivery of high levels of customer service. The Group continues to innovate its aftersales operations, adding new services to augment profitability and grow its customer base.
The Board remains focused on the disciplines of capital allocation. The payment of a dividend, suspended during the uncertainty of the Pandemic, has today been re-established with the announcement of an interim dividend payable in January 2022. The Board considers the payment of dividends an important element of capital allocation and total shareholder returns, so I am delighted that this has been re-established.
The Board has also supported the repurchase of the Company’s shares where they are trading at prices well below levels the Board considers their intrinsic value. The most recent share buyback programme was announced on 20 August 2021 and to date 2.0m shares have been repurchased under this latest scheme, with purchasing to recommence now that the Group is out of close period. The Group has, since 2017, bought back and cancelled over 30 million of its shares, representing approximately 7.5% of the shares in issue.
The repurchase of shares and payment of dividends is only a part of the Group’s capital allocation approach. The Group has a strategic objective to grow its scale of operations and therefore, allocation of capital to acquisitions and organic growth opportunities is vital. The Group has a consistent approach to acquisition valuations, with these based on targeted EV/EBITDA ratios to ensure the delivery of appropriate returns on a sustainable basis. The Group has an excellent track record in driving performance enhancements of acquired businesses.
The Board is optimistic that the Group’s significant strengths will allow a new period of expansion to commence, to deliver a business of greater scale, profitability and cash flow to pay growing dividends whilst remaining disciplined in the allocation of capital.
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 issued in May 2021. Subsequent to this, the Board has reviewed the Group’s strategy post the Pandemic and has revised the key long-term strategic objectives. The core goal remains the same: To deliver growing, sustainable cashflows from operational excellence in the franchise automotive retail sector. The strategic objectives of the Group are set out 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 digitalisation in the sector, delivering a cohesive ‘bricks and clicks’ strategy:
o Optimise our omnichannel retail offering through leveraging the ‘Click2Drive’ technology and utilising this important sub-brand to promote its usage
o Digitalise aftersales processes to improve customer service
o Reduce the cost base of the Group by delivering efficiency through the use of technology
o Utilise data driven decision making to generate enhanced returns
• To develop and motivate the Group’s colleagues to ensure operational excellence is delivered constantly across the business.
• To develop ancillary businesses to add revenue and returns that complement the core business.
An update on progress in executing the Group’s strategy is set out below:
Developing the Scale of the Group
The Group has an excellent platform allowing it to capitalise on sector opportunities:
· Financial capacity
The Group’s balance sheet strength is underpinned by a significant freehold and long leasehold property portfolio. This strong asset base, together with the net cash position at 31 August 2021, (with no used car stocking loans utilised) means that there is significant firepower available to facilitate the Group’s future growth ambitions. The Board estimates that based on a conservative debt multiple and normalised EBITDA assumptions, the acquisition firepower of the Group as at 31 August 2021 is at least £90m. The Group’s capital allocation disciplines include a rigorous assessment of potential acquisitions to ensure appropriate return hurdle rates are met. Current high sector earnings levels may result in some acquisition opportunities being presented to the Group in the short to medium term being too expensive. The Group will continue to apply its very disciplined approach to acquisitive growth ensuring we execute only the right opportunities to drive long term success and shareholder value.
· Management capacity
The Group has a stable and experienced senior management team, with an established track record of execution and performance delivery. This team has very much an “owner” mentality and sets the “tone from the top” to ensure that the Group’s culture is appropriate and consistent across all its operations. This ensures the 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”). These matters are not considered just words but are vital to the Group’s success.
· Operational Systems Platform
The Group’s in-house developed systems provide uniform processes and control, as well as live management information and data to allow speedy and appropriate decision making. Acquired businesses are quickly migrated onto this scalable technology and process platform to ensure control is quickly established and performance improvement opportunities are highlighted. The scale of the Group has also allowed it to establish efficient, scalable Gateshead-based Customer Experience Centres in aftersales (which handle inbound contacts, service bookings) and increasingly in sales to facilitate lead handling, concierge services, customer follow-up and prospecting.
· Brand Strength
The Group operates three major customer facing brands in the UK: Bristol Street Motors, Macklin Motors and Vertu Motors. Bristol Street Motors remains one of the largest sector brands, with a prompted brand awareness of 45.4%, currently the second highest ranking franchised automotive retail brand in the UK. The brand has 84 outlets in England. In Scotland, the Group operates 12 outlets under the Macklin Motors brand, which has a strong 36.8% and growing brand awareness in this very different market. Vertu Motors is the newest of the Group’s brands but has grown rapidly in terms of outlet numbers. The Group now operates 58 Vertu branded outlets including 9 outlets rebranded from Farnell on 1 July 2021. This premium focused Vertu brand, currently has a prompted awareness of 4.9% and the Group will continue to invest to drive awareness targeting a 7.5% prompted awareness by the end of 2023. Each of the Group’s brands are supported by extensive TV campaigns, sports sponsorships, partnerships and digital marketing initiatives.
· Execution of growth strategy in the Period
The Group has the brand strength and financial, operational, and management capabilities to continue to add additional franchised outlets to the business. We are ambitious to so do. The Group also continues to evaluate and execute multi-franchising actions in its locations to maximise the long-term profitability of each location as previously explained to shareholders.
The Period saw the Group execute on this strategy for growth as set out below:
· In June 2021 a new franchise outlet for Citroen was added alongside the Group’s existing Vauxhall outlet in Northampton. This is the third Citroen outlet added in the last 12 months.
· The Vauxhall franchise was added in July to the Group’s existing Ford dealership premises in Dunfermline, Fife. Further additional franchises are planned at this location in the coming months with Ford sales operations having ceased on 30 September 2021.
· The Honda Bikes franchise was added to the Group’s existing Honda dealership in Stockton bringing the total number of outlets in the Group’s Vertu Motorcycles Division to four. Further expansion is envisaged.
· The Group opened new standalone Renault and Dacia franchise outlets in Leicester and York.
· The Group gained the MG franchise for the first time, adding two outlets. One in its Carlisle dealership, already representing SEAT, Cupra and Vauxhall and the second in Beaconsfield as part of the multi-franchising strategy.
· The Hyundai franchise was added to the Group’s existing Honda dealership in Sunderland.
· The Group now has 28 (24%) of its 118 physical locations representing more than one manufacturer brand under its multi-franchising strategy.
Pruning activities were undertaken in the Period. The Group’s single Mitsubishi sales outlet has ceased operation, as Mitsubishi pulled out of the European market, though aftersales operations remain for the brand in the Group’s Edinburgh, Banbury and Huddersfield operations which remain Authorised Repairers. Leicester Citroen was disposed of in March 2021 with the premises retained to allow refranchising to Renault and Dacia.
On 31 May 2021, the Group also executed on its strategy to add complementary ancillary businesses with the purchase of Powerbulbs Online Limited for £480,000. This business complements the Group’s existing Sittingbourne based AceParts online parts sales operation, which currently sells to consumers via Marketplaces. Powerbulbs represents an established ecommerce website, with good reach and rankings, historically selling to customers both in the UK and substantially overseas. The business has been integrated into AceParts and has strong growth prospects.
Digitalisation Developments
· Omnichannel Retail Sales Developments
The Group recently commissioned an independent research study of its customers by Mediacom, (with a sample size of over 4,000). This has shown that more than four in five people want to visit a dealership to buy a car, since solely using virtual viewings neglected some of the most critical elements of buying a car such as trusting the salesperson, browsing the showroom, and experiencing the car first-hand before deciding which vehicle suited them best. The growth of electric vehicle sales is reinforcing the need for dealership visits as customers are unfamiliar with the product. This is not to say that the internet and technology is not important. Customers are certainly using the internet to research a vehicle prior to visiting a retailer. Bristolstreet.co.uk remains one of the most visited motor retail websites in the UK with the vast majority of the Group’s customers commencing their buying journey on the web. This increasing use of the internet was most apparent amongst the younger people included in the survey, with nearly 40 percent of 18-34 year-olds happy to embrace a combination of online and offline methods when purchasing a car. They believe the convenience of using multiple platforms and the speed at which cars could be browsed all added to their buying experience.
The Group was the first UK retailer in 2017 to offer full online retailing of used cars in the UK and continues to be at the forefront of developments to provide customers with innovative ways to purchase and interact online. To ensure that the Group’s customers today have the requisite flexibility, a new sub-brand ‘Click2Drive’ has been established to capitalise on online and omnichannel sales opportunities. This new brand will be supported by TV advertising campaigns under the Bristol Street Motors brand umbrella. The Group’s online retailing capability is being further enhanced by the launch of a ‘concierge’ service, aiding customers who may need help with their online vehicle purchase. The Group has established a new Customer Experience Contact centre for sales in Gateshead, which will incorporate this new concierge team alongside a central sales prospecting function and other existing central lead handling functions. For those customers who choose to use the concierge service, they will be guided through their online purchase by one of the Group’s colleagues, through a telephone or video call, to ensure that all of the customers questions are answered. The concierge will act as a personal shopper, co-ordinating all interaction with the customer, including liaison with the Group’s 154 sales outlets. The objective is to provide excellent experience and flexibility for all of the Group’s customers, however they choose to interact with us.
It is important to deliver transparency and consistency between the Group’s physical and digital sales processes. The dealership sales process has been reviewed in the Period and is being redesigned to deliver this consistency. One enhancement will be to apply a single valuation of a customer’s part exchange vehicle, whether the customer visits a dealership or chooses to value their part exchange on one of the Group’s websites. This valuation will be controlled centrally, utilising both third party vehicle valuation metrics and the Group’s own data. Once a valuation has been obtained, this price will be guaranteed, dependent only on confirmation of the vehicles condition, for up to seven days. The system valuation metrics are dynamic and can be quickly amended to reflect any change in market conditions and the level of inventory in the Group. This valuation system also powers the Group’s internet based “Sell My Car” offering which is increasingly allowing the Group to purchase cars directly from the public.
The Group is currently in the final stage of developing a Customer Data Platform (CDP) to enhance digital re-marketing prowess, inform our Customer Relationship Management processes and help target digital advertising activity. This is a crucial development in our view.
· Digitalisation of Aftersales
The Group’s aftersales functions, which include vehicle service and mechanical repair, accident repair and parts supply, represent a significant and important proportion of overall profitability. As seen in the digitalisation of sales processes, there is also an increasingly important role for digital within aftersales operations. The Group’s customers have long been able to book their vehicle service appointment fully online, and use ‘chatbot’ technology to help with their booking if required. Over 36,000 service bookings were made online in the Period, a growth of 172% compared to H1 FY20. Bookings made via this route are rising each month and now represent over 12% of all bookings. Details of online bookings are transferred to workshop loading systems through in-house developed robotic process automation, improving efficiency for the Group’s long established aftersales Customer Experience Centre.
The Group also seeks to capture new customers as they are looking for vehicle repairs or service on-line through its digital conquest strategy. This has been a successful strategy, capturing an average of 1,700 additional service bookings per month in the Period. The majority of these customers have never utilised the Group’s aftersales services before.
There remains significant opportunity for further digitalisation of the customer aftersales journeys and the Group is working on a number of developments in this regard to ensure that customers are delighted and retained.
· Digitalisation to improve efficiency and reduce cost
The Group has always been very focused on the detailed management of its cost base and has been successful in the digitalisation of processes to drive efficiency and therefore reduce costs per transaction. The increased digitalisation of the Group’s vehicle administration processes, for example, contributed significantly to the £10m annualised cost savings delivered in FY21. There remains significant opportunity to drive further efficiency from the digitalisation of processes and use of robotics and to increase the use of data to aid decision making. In addition, projects are underway to reduce reliance on a number of third-party technology platforms by replacing with in-house developed technology. This will achieve further cost savings in due course.
· Digitalisation of used car procurement
Used vehicle inventory is currently in high demand due to reduced supply in the UK. Enhanced digitalisation has also been deployed to assist in the area of vehicle procurement such as the launch of ‘Sell My Car’ functionality on the Group’s websites. This allows customers to value their vehicle online and if they are happy with the value, arrange an appointment to drop their car off at their local dealership and receive payment. It is aimed that vehicle procurement in the future will be further aided by the use of robotics in purchasing cars at auction and machine learning to maximise on the Group’s return on investment in vehicle inventory around stocking and pricing decisions.
Recruiting, Retaining and Developing Colleagues
It is a priority of the Group to develop and motivate the Group’s colleagues to ensure the delivery of operational excellence. One of the most significant current challenges in the business at present is workforce recruitment and retention. The number of UK job vacancies reached over 1 million in August 2021 for the first time since records began, with the inevitable impact that pay levels are rising. This should, of course, bolster consumer confidence and demand for the Group’s services going forwards. The Group is not immune to these effects and currently has approximately 500 vacancies, with Group colleague turnover now disappointingly back to pre-pandemic levels.
A key objective for the Group in the remainder of FY22 is to significantly reduce the number of outstanding vacancies and colleague turnover. A number of initiatives have been undertaken to ensure that the Group remains an employer of choice in the sector and to achieve the target of over 90% of colleagues ranking the Group as a great place to work. For example, the Group recently enhanced its benefits by a significant improvement in maternity pay provisions, increasing these from the statutory minimum to 90% of pay for up to six months. In addition, the Group is currently undertaking pay reviews for all colleagues which will be actioned by 1 January 2022. The aim of this is to aid in the recruitment and retention of colleagues.
The Group has also launched dealership colleague forums, a formalised way in which colleagues of all levels can provide their feedback on work matters. Forums will also have the opportunity to access the non-executive director for colleague engagement, Pauline Best.
The Group has long been committed to extensive investment in the development of all colleagues to provide opportunity to those who are talented and driven to succeed. Current programmes include a degree apprentice scheme, technician apprentice schemes and development programmes to facilitate progression to management roles. The Group will launch, in the coming months, two further initiatives:
· A new modern apprentice programme for service advisors with over 120 additional apprentices to be recruited by 1 March 2022: and
· A deepening of the partnership with the Dale Carnegie Institute to increase the scope of on-line and off-line personal and leadership development training across the Group. All colleagues will have access to on-line personal development programmes based on the principles of Dale Carnegie’s book, “How to Win Friends and Influence People”.
The Board anticipates that the above investment to aid the sustainability of the Group’s operations will have an annualised impact of approximately £12m going forward. Increased resource levels and colleague stability should ensure higher and more consistent revenue generation to offset these costs, at least partially.
Strategic Summary
Our experienced management team, strong brands, digital prowess and financial strength, ensure Vertu Motors is well positioned to take advantage of the opportunities arising and as a team, we are ambitious to do so. We will continue to innovate and execute to ensure that the Group excels in meeting customer needs and overcomes the current vehicle supply and cost headwinds faced by the sector. 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 long-term return on invested capital. We will leverage our proven strengths and execute on our business ideas such as cost saving initiatives, continued development of our colleagues, accelerating brand growth and pursuing new business opportunities. In essence, we have a plan and the energy to execute it.
Robert Forrester, CEO
