Vertu Motors PLC

LSE:VTU

Earnings Call Analysis

Earnings Call Transcript 2025-Q2

[Robert Forrester, executive]

Good morning, and welcome to the presentation of our interim results for the period to the 31st of August 2024.

If we look at the advantages that the group has, Vertu is now 1 of the 6 super groups operating in the U.K. automotive sector retailers with a turnover in excess of GBP 4 billion. We are the only remaining major listed automotive retailer, and we were founded in 2006.

We certainly have scale as part of that group of super groups, but we've also got financial capacity, operational capacity and the manufacturer support with which to continue growth and to be part of that pack, scale providers with that growth pack -- path and also the benefits of the economies of scale.

As we go through the presentation, we'll also show much evidence of operational excellence, we are outperforming our competitors. The group has significant financial strength supported by our capital allocation policy, and we seek to balance organic growth, inorganic growth, dividends and buybacks. We've got high asset backing, a history of strong cash generation, a dividend growth record and a long-term commitment to share buybacks. In essence, we're in a strong position to react towards a consolidating and transforming market backdrop in the U.K.

The financial results reflect significant market outperformance in what has been a volatile market for new cars as well as a period of considerable cost pressures. We expect H2 profits to be considerably above last year levels. And indeed, the period we're reporting on saw record revenue with growth in most areas.

Aftersales, our high-margin business continues to power ahead with significant gross profit growth. Used cars saw margin and volume growth. The new car market in retail was weak, certainly in terms of vehicle volumes, and U.K. registrations fell 11.2% in the retail sector. The group decline was much more moderate at 5.9%. And clearly, we took market share.

The massive outperformance in retail was also exhibited in battery electric vehicles, where the retail market actually declined in the 6 months to August 7%, but our battery electric vehicle retail sales actually grew on a like-for-like basis by 10.9%, which is clearly important in this current environment. There is no doubt the government set mandate is causing manufacturers problems and distorting the new car market.

Our balance sheet remains strong with continued buildup of shareholders' funds. Our tangible net assets per share at 73.7p, gearing is below target at 23%. The extended share buyback we announced today, we've now got GBP 3.6 million authority to do buybacks as well as growing our dividend shows the strength financially of the group.

If we turn to current trading and outlook, this is clearly important because September, the first month of our H2, is the largest in profit terms. And we're pleased to report that the group performed well, despite the market volatility. Trading performance in September was in line with last year, and full year profits for the full year are expected to be in line with current market expectations.

Aftersales continued its solid growth, used cars remain resilient with margin strengthening, and we think supply constraints will be the bedrock on which the used car business in the next few months will thrive.

It was really in new cars that the group massively outperformed in September. BEV retail sales in the group more than doubled in broadly flat markets. Overall retail sales saw a 5.2% like-for-like increase in volumes in a market that actually declined.

Cost pressures do continue, and they are a concern, and we will look to manage those very carefully as we have done in the past. As part of that, the group today announced that we will move to one retail brand, being Vertu, in order to yield efficiency savings and to maximize our marketing efforts.

So if we look at an overview of where the group is today, clearly delivered record revenues and record outlet numbers. Margins were stable at 11%, underpinned by our strong aftersales business, which, as you can see, generates 43% of our total gross profit. Profits reduced predominantly due to payroll cost pressures and increases in vehicle costs.

The group is actually delivering much higher than average levels of customer experience, both in new cars, aftersales and used cars, and that's certainly good to our relationship with manufacturers. That delivery of customer experience aid retention and goes hand-in-hand with a very strong Great Place to Work score of 84% on the recent survey.

This, we believe, is indicative of our strong culture and the values that are in the business. We've built a very strong regionally based business, which contribute significant taxes and other goods like being in the top 100 U.K. companies for the number of apprentices.

I'll now move on to our strategic update. We are clearly in a period of transformation for global automotive, and there are 2 major link trends, one being electrification driven by governments; and the second, the rise of Chinese manufacturers potentially and indeed coming to Europe.

On electrification, this is clearly the single most important external factor that the group and the industry faces. The U.K. government ZEV mandate targets battery electric vehicle volumes as a mix of the total market. Manufacturers get fined GBP 15,000 of every car over the target. And the targets are stretching. In 2024, 22% mix, rising to 8% mix in 2030. And indeed, government talks of a possible ban of nonelectric vehicles in 2030.

How does this impact? Well, it clearly causes manufacturers concerns if they've got to pay for fines or indeed heavily discount electric vehicles to avoid fines, and we're certainly seeing that. The supply of electric vehicles is running in excess of natural demand that is impacting margins.

We're also seeing some rationing in certain brands where to hit the mix targets of battery electric vehicles, people are putting their foot on the supply of perpetual and hybrid cars, and that's certainly impacting the consumer.

What are we doing about it? Well, clearly, we are seeking to lobby the government and raise public awareness of the issues around this government imposed. We clearly also need to have a massive focus on battery electric vehicles in the business to make sure we outperform in this vital area for manufacturers, and we have done so.

We also need to grow the partnerships with Chinese manufacturers because we consider they have a cost certainly and maybe a technology advantage in the area of electric vehicles. And the U.K. is now the only major Western government with no major tariffs. So we see the likely growth of Chinese manufacturers in the U.K. in the next few years, and we want to be part of that.

If we turn to agency distribution, this has been discussed for a few years, and that indeed the agency model has been implemented by a number of our manufacturers where the invoice goes directly from the manufacturer to the customer. Success in this area for the manufacturers and for retailers is dependent on whether the systems are right and indeed for others, whether the rewards are there for retailers in terms of our commission.

The market dynamics are also interesting, is in a period where you've got excess supply compared to demand, agency actually has some advantages and is far more resilient. We are not affected by discounting of the vehicles to move volume, and we don't get stocking charges building up our stock builds.

So actually, we end up with a less volatile revenue stream in the area of new cars. Some manufacturers have actually backed off the implementation, which was previously announced because it looks like some of the financial advantages the manufacturers identified aren't clear and are not necessarily coming through.

The third item on sector trends is the FCA review of automotive finance. We actually consider that the FCA's intervention in this area and indeed has been welcomed by the industry because it provides a much more consistent approach rather than just relying on the court. We expect the next update to be in May 2025, and no provisions have been made to date.

If we look at our group strategy, certainly a very consistent strategy that's grown the group from a cash shell 18 years ago to, what, being 1 of the 6 U.K. super groups. Our growth strategy looks at capital allocation to make sure we invite -- investing in the right dealerships, it looks at where our assessment of future profitability from manufacturers comes, can they afford the future is a good question, and it gives value to the group with scale and scale of manufacturer relationships.

We're also looking, as part of our ancillary business, to further grow our accident repair centers, which are high margin compared to sales and are a good additional revenue stream for ourselves.

Return to digitalization. We've had a real focus on driving revenues, margins and reducing costs through greater use of technology, and I'll discuss that further. We've got considerable developments in the pipeline to roll out and add value to the business.

Pillar 3 is our focus on colleagues and customers. There is no doubt that this is a people business, and we get our best results when we have stable, committed employees or colleagues. And indeed, our customer satisfaction scores and colleague retention scores have been much improved in the last 12 months and go straight to the heart of delivering better operational excellence. Dealership success is always more guaranteed when it's got a stable, committed workforce.

If we look at growth, growth comes in a number of guises for our group. We can have straightforward acquisitions. We've purchased Exeter Honda to give us the whole Honda franchise from Land's End to the Somerset border. And we've got a strong pipeline of further growth of acquisitions. We have completed the new build of a tow to do the shipping there, which now completes our West of Scotland total market area.

We've undertaken some refranchising. Following the Rowes acquisition, we've repositioned a number of dealerships, adding Renault and Dacia into Plymouth. And also we will open in the next few months a Volvo dealership in Plymouth, where we believe we'll get good returns.

Finally, we have extended our partnerships with Chinese OEMs. We've opened our first BYD dealership who are probably the largest manufacturer of electric vehicles in China. We've got strong MG business, and Stellantis have indicated that by Christmas, we will have 5 Leapmotor Chinese businesses opening in our Stellantis operations as they bring Chinese product from their business in China into the U.K. under the Leapmotor's brand.

If we look further at digitalization, we really try to narrow our focus on a few major tech areas to drive the best progress. Our Vertu Insights' used car pricing system has done great work in enhancing our used car performance. We are now pricing 75% of our used cars daily.

In service, we've seen a growth in revenues and a growth in gross profit. And the technology we've deployed, such as the Pay Later in-house product and the online check-in using kiosks, we feel has given us an edge in terms of customer satisfaction and also given our service advisers more time with which to sell and serve our customers.

We have a major focus in the next few months in deploying technology to increase finance efficiency with the aim of increasing productivity and delivering savings.

Finally, in the strategy section, we're announcing today that we're moving our retail dealerships to one brand over the next 6 months, and that will be the Vertu brand. There are a number of reasons why we've chosen to do this.

The traditional split of the sector between volume dealerships and premium dealerships is no longer highly relevant. We are selling GBP 50,000 for battery electric vehicles, GBP 70,000 Hyundais. We feel and, indeed, our manufacturers have expressed this to us in consultation that the Vertu brand expresses a more modern feel, and they're all very happy to move to that brand.

It will certainly aid the power of our marketing in terms of message and efficiency of spend since, clearly, we're not spreading over 3 brands as we do today. This simplifies our operations in marketing, making 1 website, 1 search engine optimization strategy, 1 pay-per-click strategy and will make us significantly efficient with cost savings.

If we are going to compete as we do with the other super groups, we need to do with one brand to make the punch very, very strong. We do foresee major cost savings from this, and that will outweigh even the short-term cost to change and will be value accretive.

I'd now like to introduce Karen Anderson, our CFO, who will review the financial performance.

[Karen Anderson, executive]

Slide 13 shows a summarized income statement. Group revenues grew to record levels and grew by GBP 70 million, with a growth of 2.1% achieved in the core group, in addition to the impact of acquired dealerships, which added GBP 45 million of revenues in the period.

Gross margin remained consistent at 11% overall, with weaker new vehicle margins, offset by improvements elsewhere. Costs grew as a percentage of revenue, with growth in payroll and vehicle costs, partially offset by savings delivered in marketing and energy costs. I'll cover these movements in operating expenses in much more detail shortly.

As anticipated, adjusted operating profit in the first half reduced from prior year levels. The group's interest costs grew by GBP 1 million compared to last year. Manufacturer stocking charges grew by GBP 1.2 million, so accounted for all of this increase.

These increased interest costs were driven by increased interest rates compared to the first half of last year and from increased pipeline of funded new vehicle inventory as supply has improved, particularly of electric vehicles. Overall, new vehicle manufacturer funded inventories increased by approximately GBP 95 million year-on-year.

Nonunderlying costs represent the share-based payments charge and amortization. In terms of the group's share-based payment charge, financial year '25 will be the first financial year with the charge in both this current year reported period, and the comparative period includes 4 years' worth of partnership share awards.

These noncash charges will be reclassified into underlying costs in the full year report and accounts for 28th of February 2025. Given the immaterial nature of amortization within nonunderlying costs, we'll also treat these with underlying costs in the full year results.

Turning over to Slide 14. This shows a bridge of the group's adjusted profit before tax compared to last year. Core group gross profit increased by GBP 4.5 million over the prior year period, driven by strong performance from the group's resilient aftersales departments.

Gross profits from new retail and Motability sales reduced because of the market dynamics Robert has already outlined. He will also cover gross profit generation with each of the group's core operating departments in more detail shortly.

As anticipated, core group operating expenses grew year-on-year, and I'll cover these movements more in detail on the next slide. I've already covered the cost -- the year-on-year increase in finance costs due to increased new vehicle consignment stocking charges, and contributions from dealerships acquired represent a small loss of GBP 0.3 million. And this was expected given the start-up nature of some of these new dealerships.

Turning over to Slide 15. This shows further detail on the core and group total underlying expenses. Overall, expenses as a percentage of revenue in the period increased to 9.6%. Core group operating expenses rose 5% over the period. The biggest single cost of the group is salary costs, remembering that these figures on the slide do not include the productive cost of technicians as this is included in cost of sales.

Salary costs in the core group rose 6.4% over the period. GBP 3.1 million of this rise was due to increased headcount. The group was successful in reducing vacancy levels and invested in additional sales executives, service front-of-house colleagues and in the growth of our accidents and Smart repair businesses. We also invested in technician apprentices.

This investment helped to drive the market volume outperformance in new retail and the strong aftersales growth we delivered. Clearly, where we have newer colleagues, their operational impact will increase as they mature into their roles.

The impact of the national minimum wage increases in early 2024, together with related pay uplift, drove a further rise of GBP 3.1 million. Over 1/4 of the group's colleagues -- or sorry, almost 1/4 of the group's colleagues are now being paid within 5% of the minimum wage rate.

The greatest percentage cost increase was seen in vehicle and valet costs, which rose GBP 4.4 million or 18.1% over the prior year period. The majority of this increase relates to the cost of the group's demonstrator and courtesy vehicle fleet. Increased demonstrator requirements mandated by manufacturers, including higher-value electric vehicles, drove up the cost of the -- the value of the fleet. Depreciation rates were increased over the first half of last year levels to ensure that vehicles stood at the right values at the end of demonstrator periods.

Energy costs were reduced through continued focus on energy use through the group's War on Waste program. This delivered a 2.3% reduction in electricity use by the group like-for-like. Costs were also aided by the impact of the group's solar panel installations, which generated over 10% of the group's energy requirement in the first half of the financial year, in line with our pre-investment targets.

The group delivered a saving in marketing costs through a focus on marketing return on investment, which reduced cost per sale in several areas. The reduced costs also reflected a rightsizing of marketing costs in response to a decline in the new retail market.

Turning over to Slide 16. This shows the group's balance sheet. The group's balance sheet is very stable and strong, underpinned by a freehold with long lease hold portfolio of GBP 324 million carried at historic depreciated cost. The increase in current assets relates to the movement of inventory shown on the slide.

New vehicle pipeline inventory, much of which is funded by our manufacturer partners, increased as supply continued to improve, particularly in electric vehicles. Used vehicle inventory reduced by GBP 21.4 million compared to last August levels. Stability of used prices in the market meant that the group did not reduce inventory levels by as much at the end of August 2024 as it did at the end of February. And this was to ensure good stockholding levels for the robust September market. We remain comfortable with our used inventory levels post September.

Current liabilities increased because of the growth in funded new vehicle pipelines, and overall tangible net assets per share sits at 73.7p.

Turning over to Slide 17. This highlights the group's cash flows in the period. The group saw a free cash outflow of GBP 14.3 million in the period, and this outflow was due to a GBP 38.8 million cash outflow from working capital compared to 28th of February 2024.

The main elements of this outflow were a GBP 21.5 million outflow arising from an increase in used vehicle inventory, driven by that improved pricing stability, which meant we didn't reduce stock by as much as we did in advance of the March plate change.

A further GBP 14.9 million outflow arose from a reduction in creditors, namely vehicle deposits from retail customers and payments in advance from our fleet customers as lead times on new vehicles have reduced.

There are several other smaller movements in working capital, including the investment in the group's Pay Later product, which helped to drive improved aftersales performance.

Sustaining capital expenditure of GBP 4.8 million was spent in the period, with this partially offset by proceeds from the sale of one of our surplus properties for GBP 800,000. A further GBP 7.2 million has been spent in the period on capital projects, which enhanced the operating capacity of the group. And this includes the GBP 3 million investment in the new build Toyota dealership in Ayr, together with investment in the expansion of our exit of BMW and MINI businesses.

Net debt at the end of the period was GBP 83.9 million, excluding lease liabilities.

Turning to my final slide, Slide 18. This looks at the group's capital allocation discipline. The group remains focused and thoughtful around capital allocation, looking to achieve a balance between the investment in growth to deliver on the group's strategic objectives and shareholder returns, targeting returns in excess of weighted average cost of capital. With a strong asset base and a low level of gearing, we believe we can successfully achieve this balance.

In terms of growth and investment in operations, we now have 193 sales outlets, representing a net increase of 5 outlets in the period. And the portfolio represents 33 different manufacturer partners.

We spent GBP 12 million of cash on capital expenditure in the period, split between sustaining and expansion of capacity of the group. We disposed of one surplus property held for resale for GBP 800,000 in the period, whilst the total of GBP 9.6 million is anticipated to be received in the full financial year in respect of our -- in respect to surplus property disposals.

In terms of returns to shareholders, we started paying dividends in January 2011. And since then, we've paid a total of GBP 56 million in dividends and have increased the interim dividend by 5.9% to 0.9p per share.

The group has also had a program of share buybacks in place started in FY '18. The group spent GBP 2.4 million in the period on share buybacks and since the start of this program has bought back nearly 16% of issued shares for a total of GBP 33.3 million. A further GBP 3 million share buyback program has been announced today, which, together with the remaining GBP 0.6 million from the existing program, brings the total we have to spend to GBP 3.6 million.

I'll now hand back to Robert for a more detailed update on the group's trading in the period.

[Robert Forrester, executive]

If we look at vehicle sales, it's good to see that on a like-for-like basis, the group sold more vehicles than in the previous year, but there were significant mix changes. The retail market was weak.

In the U.K., it was down 11.2%. And clearly, that's a big headwind. We outperformed significantly in the BEV car market and, overall, gaining market share in retail. Motability saw a considerable growth, again, though we expect this is likely to cool from here.

If we look at the fleet car and van market, daily rental volumes rose quite considerably as more supply came in compared to demand, and that tends to happen in an oversupply situation. It is certainly a low-margin segment for us, and we don't participate in it on a significant basis. Hence, we lost market share certainly in vans and indeed cars.

Last year in vans, we enjoyed very good van supply ahead of our competition. But as the market supply has come back, we've lost some share as the general supply situation improved.

Returns to used cars, 3.9% like-for-like volume growth, improved margins, and we are clearly seeing some movement of demand from expensive new cars into used cars despite higher financing costs. But clearly, that's aided by the fact that the contraction in prices in quarter 4 last year has made used cars more affordable.

If we look at new retailer, Motability, there's some interesting trends here. We've seen a continued rise in average prices, with the average sales price of a new retail and Motability car now up GBP 4,000 in the last 2 years. Clearly, that's impacted by the BEV mix, which tends to be more expensive.

Margin in retail weakened, as clearly discounting was seen as supply outstrip demand, and Motability tends to be lower margin. So as that mix increased, percentage margins declined. We saw significant outperformance, though, in the retail channel, particularly in BEV.

The market we must remember is still considerably back on pre-pandemic levels. Less than a GBP 2 million market is forecast by the SMMT this year. And indeed, with the pressure that the ZEV mandate puts on the sector, we could actually see declines in the new car market.

If we turn to used vehicles, you can see here what I'm saying about average sales prices. The average sales price actually declined by nearly GBP 900 year-on-year because of that price correction. That's clearly helped growth. We're now looking at pricing being stable, certainly, for 36-month plus cars.

We are in a supply-constrained position coming out of COVID, the impact of Ukraine, the impact of semiconductors, there are less cars coming back into the used car market. Now that's not the case actually near the new product because supply has potentially outstrip demand in new cars. You've seen an increase in near the new product. But also, we've seen heavy discounting in new cars, which has an impact on nearly new margins.

We fully expect H2 to have a much more robust used car performance compared to last year, with price stabilization being the key thing.

So if we look at aftersales, we're very pleased with aftersales performance. It generates 43% of our overall gross profit, is high margin and highly resilient with very different cycles. All areas grew gross profit on a like-for-like basis, but the biggest growth came in service where more technician resource, the new Pay Later upsell product, greater sales conversion due to our colleagues having more time to sell delivered good results.

In fact, the tire market in the U.K. is said to be declining, but we delivered a 19.4% increase in tire sales on a like-for-like basis. The resilient nature of aftersales is clearly seen. We have 160,000 people on service plans who are going to come back for a service in the next 12 months.

We continue to see growth in accident repair and Smart repair, and continue to invest in capacity in both those channels.

So my final slide. We believe scale is critical. We are now one of the newly emerged 6 super groups. It's a very dynamic space. Due to electrification and government mandates, plus government-imposed cost rises, we are nimble in how we approach things. Our move towards Chinese partnerships, our massive overperformance in battery electric vehicle sales point to this. But clearly, we're going to have to be very nimble on cost management as well.

We are delivering operational excellence and the stable experienced management team, plus the use of our sector-leading technology helps us in that. The higher recruitment, less vacancies and more recruitment and more stable workforce is also helping to drive operational excellence.

If we turn to financial strength, we have low gearing, a high asset base, 73.7% (sic) [ 73.7p ] tangible net assets per share, and we continue to receive cash from the disposal of surplus assets.

We do take capital allocation very seriously. When we're looking at growth opportunities and potential returns, when we're looking at dividend policy, GBP 56 million of dividends since FY '11, a buyback of GBP 33 million since FY '18, which has bought back 16% of the group's equity and with more authorized.

So we believe we're in a strong position. We have scale with future growth potential. We have operational excellence and great financial strength. Thank you.