Vertu Motors plc

Good morning. My name is Robert Forrester, CEO, and I'm joined by Karen Anderson, CFO, and we're here to present our full year results for the year ended February 2024. While it was a more challenging year from a market perspective, the group remains in very good shape, both operationally and strategically. And for the first time, we're now the only listed company of size in our sector on the London Stock Exchange. If you look at our investment case, we believe that our significant scale delivers benefits. We've got a stable management team. We've got the widest and growing portfolio of manufacturers within the business. We've got strong tech expertise with our own software house and very low debt puts us in a very strong financial position. We have a robust business model with very diverse revenue streams. And also I think it's unrecognized just how much the OEMs support the group during crises and support the industry in general. We've got a very strong database that helps us deliver high retention, both in sales and service. We've got over 2 million customers. We have very strong brand recognition. Bristol Street Motors is the England's strongest motor retail brand. We thirdly have a strong focus on cost optimization. We need to because motor retail is a low margin business. Scale certainly helps to spread costs. We have 56 in-house software developers who can therefore spread their work across nearly 200 outlets. The work they do not only helps from a scale standpoint, but removes third-party software costs and fundamentally helps increase productivity of our colleagues to make us more efficient. The board is also committed to maximising returns and there's a strong focus on capital allocation. And you can see this in the active management of our portfolio, both of properties, but also franchises, which franchises we operate in which location. We turn over to slide three. You can see at a glance the period we're discussing, the 12 months to February. We had record revenues. We had record free cash flow. And we have a very, very strong balance sheet, evidence of which is 300 million plus of property assets, no used car stocking loans at the period end, and a tangible net assets per share of over 70 pence. It is fundamentally a people business with a strong focus on colleagues and customer satisfaction. Our great place to work scores at 73% are robust and our used car net promoter score over 87% is sector leading. If we move on to slide five, I'll give an update on the execution against our strategy. Our strategy remains consistent. It is underpinned by our mission statement to deliver an outstanding customer motoring experience through honesty and trust and also our core values. We aim for each of our dealerships to be the best retailer in the town and city that we represent. That is our benchmark. We have four pillars in our strategy. First one, growth. We aim to continue to grow with small bolt-ons in the near term. And there's no question that scale in our industry gives great benefits. Not only allows us to have expert franchise dedicated management, but allows us to have experts across the business where we can spread our cost over more and more outlets. Marketing clearly has big scale benefits over different geographies. Our digitalization strategy has a focus on improving customer journeys to make our digital offering more sticky and give us higher customer retention, but also equally important to enhance the productivity of our colleagues to make us more effective and to be able to control cost. And I think we've got evidence of doing that. It is a people business. The focus on colleagues to deliver customer experiences is clearly paramount, and leadership is very important within that. We invest significantly in training our colleagues to allow us to deliver to our customers. The fourth pillar is around ancillary businesses. These are businesses that complement the franchise dealerships and add value to the group in themselves. We continue to grow these businesses and look for others to add value. to our portfolio. Turning over to sector trends on slide six, there are clearly some really important sector trends currently, and we've identified three here. The first is the electrification transition, If you remember when we had the interims, we said that the government had moved the ban on petrol and diesel new car sales from 2030 to 2035. However, they did not change the target and fine regulations called the Zero Emission Vehicle Mandate, the ZEV mandate. That has actually set very stretching targets for the industry in terms of the mix of vehicles and new car sales that have to be battery electric vehicles. This year, it's 22%. By 2030, it's 80%, even though the ban doesn't come in until 2035. In addition to these stretching targets, there are no financial incentives for private buyers, and this has created quite a considerable supply and demand imbalance. There is the risk, if we don't as an industry hit the 22% mark, that there'll be substantial fines on the OEMs. Now, the legislation is very complex. There's a number of adjustments the manufacturers can apply. But clearly, you'll have seen in the press a number of key manufacturers saying they're very concerned about this and saying they will not be paying fines. That therefore produces the potential going forward over the next few years of volatility in new car supply. Because if they don't want to pay fines, but they can't get the demand for battery electric vehicles to the right level to hit the targets, then they might indeed reduce petrol and diesel supply into the UK car market. And this could have a considerable effect on the size of the new car market. Now, that said, the group is very focused on selling electric vehicles. We have a highly successful fleet business supplying thousands of battery electric vehicles. And we've recently been awarded Green Dealer of the Year in terms of the way we focused on getting all our dealerships accredited for electric vehicles. We're also looking at the portfolio to make sure that our manufacturers are going to be successful in the years ahead. And we are extending the number of Chinese brands that we operate with. We've grown again with MG. We plan to have more smart dealerships. And today we announced that we will be taking on the BYD franchise, the largest electric vehicle manufacturer in the world. We're going to have two of those outlets within the coming weeks. So whilst there's uncertainty around the legislation and how it impacts the new car market within the industry, we are well set. We turn to the second trend, which is agency. There's no doubt that agency implemented in the retail side, we're very experienced at it in fleet and in parts, but in the retail side, as each manufacturer goes down a slightly different route, it means that management have to spend time understanding the legal implications, the commercial implications and doing the implementation. However, to date, we've seen that where it has been implemented, there is a struggle within those franchises to actually deliver the volumes that were anticipated. Now, this is particularly acute in the agency model where you have a supply push environment like today, when actually it was probably designed for a pull market rather than a supply push market. I think the challenges around agency from the manufacturer's perspective have led some to reconsider their position. And Ford and Land Rover have recently reversed their intention to go down the agency route. And others who haven't implemented it also intend to do so are delaying it. So it's a very mixed picture in terms of how agency is coming through. And there are various different models. The third element is around the FCA's investigation into discretionary commission arrangements. The group actually seized usually these arrangements in terms of car sales and financing in January 2021. And a few months ago, the FCA decided that they would intervene because the industry of motor finance were receiving hundreds of complaints from claims management companies on behalf of consumers that were going into the financial ombudsman and ultimately some into the court system. And the FCA decided they'd intervene, call a halt to that process and do a thorough review. We're actually thinking that is a favourable development because it's a lot more joined up. So where we are at the moment, there's a report going to be produced by the FCA, actually by Ernst & Young, who are investigating the matters at the moment, and that's expected to report by the end of the year. We've disclosed in our accounts a contingent liability, but no provisions have been made because the situation is very unclear as to if there's a liability and if there is a liability, where that liability sits. We turn over and look at our digitalization strategy. The group has been successful in developing bestowed tech to give us a competitive advantage since we actually formed the group. In the last 12 months, our focus was on digitalization in the after sales channel. And in 2024, our focus is actually in Karen's area of increasing efficiency in the finance function. If we look at after sales in particular, we've doubled the number of online service bookings. 60% of our service customers now check in at home as opposed to in the dealership. And we've got future developments in pilot, such as being able to approve additional work that the technician have identified with a click and indeed remote paying for work so that the checkout process is a lot quicker. We've launched VirtuPay later. which is a product which allows customers to defer payment of large repair bills over a couple of months. We've taken a third-party supplier out, making that cheaper for the group. We haven't ignored the sales side, and we've implemented Virtue Insights, which is an application of AI and algorithms to calculate daily used car values, both from a trade and a retail perspective, and That has quite revolutionized how we price cars. We're now doing up to 5,000 price changes a day. We can no longer have price boards in the cars because we change them so often. So you now have QR codes linked to the website. And the aim is to price up and price down. Historically, we only really have a price down. So we are seeking to maximize gross profit by making sure that car is at the right value for sale. And I'll pass over to Karen to review the financial performance.

Thanks, Robert. Slide 9 sets out some financial KPIs over the last five years. Record revenues were aided by acquisitions, which account for about £450 million, or 64% of the year-on-year growth here. Core group revenues also grew about 7.9% on strong fleet and motability volumes. Adjusted PBT declined slightly on the prior year, as the used vehicle pricing correction in the second half adversely impacted on trading. This had the greatest impact on the group's premium dealerships, including those acquired within the Helston acquisition. I was pleased with the free cash flow generation of the group over the year, which achieved record levels of £57 million, and I'll cover that in more detail shortly. It is this strong cash performance that has given the board confidence to propose a 9.3% increase in the annual dividend to 2.35 pence per share. Turning over to slide 10, this shows a summarized income statement. I've already discussed the increase in revenues with growth achieved in the core group, in addition to the impact of acquired dealerships. Gross margins reduced slightly to 10.9%, reflecting new vehicle margins reverting to previous norms and the impact of the significant used car pricing correction. Strong cost control disciplines were applied and these together with some scale benefits meant costs as a percentage of revenue declined. And I will cover the operating expense movements in more detail shortly. Adjusted operating profit increased by 10.5 million or 21.5% and the group's interest costs grew by 12 million pounds. Manufactured stocking charges account for 4.8% of this interest increased. whilst mortgage and bank borrowings account for much of the rest of the variance. These increased interest costs were driven, of course, by increased interest rates, as well as higher borrowing levels, both following last year's Helston acquisition and from increased pipeline of funded new vehicle inventory. Overall, new vehicle manufacturer funded inventory has increased by approximately £90 million year on year. In some cases, our manufacturer partners have decreased the number of interest-free stocking days on this pipeline, further increasing costs to the group. Non-underlying costs have reduced compared to last year, which included acquisition costs, and this means that profit before tax improved by 6.5%. The group's effective tax rate increased in line with the change to the headline corporation tax rate to 25%, and adjusted EPS consequently reduced. Turning over to slide 11, this shows the profits bridge of the group's adjusted profit before tax compared to last year. Core group gross profit increased by 20.5 million over the year, driven by strong performance from the group's resilient after sales departments and strong new and fleet vehicle performance. Robert will cover gross profit generation within each of the group's core operating departments in more detail shortly. As anticipated, core group operating expenses grew. And I will cover these movements in more detail on the next slide. I've already also covered the increase in finance costs, which include the cost of the additional borrowings taken on with the acquisition of Helston at the end of last year. Contributions from dealerships acquired after the 1st of March were £4.7 million. And this figure is after recovery of group management charges, which actually benefit the core group. The financial contribution from acquired dealerships was below expectations due to the impact of the used car price correction, which was concentrated in premium vehicles in the second half of the year, so adversely impacting the ex-Helston businesses, which had a heavy premium content. Turning over to slide 12, this shows further detail on the core and total group underlying expenses. Overall, expenses as a percentage of revenue declined to 9.7%. Core group operating expenses rose 3.9%. The greatest rise here was seen in vehicle and valet costs, which rose by a total of £7.6 million, or 20%. £6.7 million of this increase relates to the cost of the group's demonstrator fleet. Increased demonstrator requirements mandated by the manufacturers saw an 8 million increase in the fleet year on year. Depreciation rates on this enlarged fleet were increased in response to the market price correction in used vehicles, which increased costs, but this ensured that vehicles stood at the right values at the end of their demonstrator holding periods. Energy costs increased driven by increased rates of per kilowatt hour in the market. The group reduced its energy, electricity, sorry, and gas usage by 2%, despite increasing levels of electric vehicle charging. And this reduction was driven by the group-wide war on waste initiative, detailed usage monitoring to detect potential waste, and the benefit of solar panels installed. Bristol Street Motors retained its position as the most recognized brand in England in terms of prompted brand awareness. And the group achieved this while saving marketing costs during the year. This saving was largely due to a lack of 0% finance events that were run. The single biggest cost of the group is clearly salary costs. And this is more prevalent when you remember that these figures on the slide do not include the productive cost of technicians, which are shown in cost of sales. Salary costs in the core group rose 2.7%. And this came from increased headcount as the group was successful in reducing in vacancy levels over the year, as well as investment in our smart and accident repair businesses. The impact of the national minimum wage increase early in 2023, together with related pay increases, increased core costs by 2.6 million. There's clearly been another significant rise in the national minimum wage in April 2024. And this rise doubled the number of group colleagues paid at or near minimum wage, such that now it represents 24.3% of all group colleagues. Turning over to slide 13, this summarises the group's portfolio changes in the year. The substantial £115 million Helston acquisition, completed in December 2022, was fully integrated as anticipated onto group systems by 1st May. As I've already set out, profits in the year were below expected levels as a result of the used vehicle price correction, which was concentrated in premium used vehicles, adversely affecting this premium heavy acquisition. Business performance has improved as used vehicle prices have stabilized, and we expect a robust result in FY25 in line with our expectations at acquisition. The synergies identified at the time of acquisition have been delivered as planned. The group saw other growth during the year with the acquisition of the South West based Rose business in October, as well as the opening of Stockton Nissan, Newcastle Ford, Tamworth Motor Nation and MG in Chesterfield. The group also continued its pruning activity, closing several sales outlets during the year, retaining many customers of those outlets in nearby dealerships of the group. Turning over to slide 14, this shows the group's balance sheet. The balance sheet is very stable and strong, underpinned by the group's freehold and long leasehold portfolio of about £312 million, with this carried at historic depreciated cost. Current assets increased by £94 million, as I've said, of which £90 million relates to manufacturer-funded new vehicle inventory with a corresponding increase in current liabilities. This increase represents both an increase in the pipeline of inventory of about £50 million as supply improved, as well as tactical registrations of vehicles by the group to supply a substantial fleet and commercial vehicle operations. Demonstrator vehicle stock levels also increased, as I've already mentioned. Expanding product ranges led to increased demonstrator requirements mandated by manufacturers. The group was successful in reducing used vehicle inventory, despite the impact of acquired sites. And this reduction was aided by lower average prices of inventory, as well as fewer vehicles being held in stock. Tangible net assets per share are 70.5 pence. Turning over to slide 15, this shows the group's cash flows and net debt position. The group generated record free cash flow of 57 million pounds. Operating cash flow benefited from a 16.7 million cash inflow from working capital. This represented a £12.6 million inflow from the reduction in used vehicle inventory, an £11.5 million inflow arising from an increase in creditors, namely VAT on certain of the group's funded inventory from manufacturers, as well as increased activity in the group's ancillary businesses and used vehicle procurement businesses. These inflows were partially offset by a £7.5 million outflow in respect of fleet trade receivables arising from increased fleet and commercial vehicle sales. Sustaining capital expenditure of £12.4 million was spent in the year, with this partially offset by proceeds from sale of surplus properties of £3.6 million. This results in the net £8.8 million shown on the bridge here. A further £11.6 million has been spent on the year on capital projects, which enhance the operating capacity of the group and on the installation of solar panels, and this spend excluded from their calculation of free cash flow. I was delighted with the cash performance delivered in the year, as this led to a £21.4 million reduction in net debt, which stands at £54 million at the year end. The group has utilised its used vehicle stocking facility periodically during the year, but had no utilisation of this at the balance sheet date. And net debt to EBITDA is well within the stated 1.5 times appetite of the board. Turning to slide 16, my final slide, which covers the group's capital allocation discipline and also some of the application of the free cash flow we've generated. The group remains focused and thoughtful around capital allocation, looking to achieve a balance between investment and growth to deliver on the group's strategic objectives and shareholder returns. In terms of growth and investment in operations, we completed the £6 million acquisition of Rose Garage in the year and have covered off investment in other new dealership openings in an earlier slide. We spent £24 million on cash on capital expenditure in the year, of which the 12.4 million was considered sustaining, and the balance has extended the capacity of the group. For the forthcoming financial year, total capital expenditure of 32 million pounds is expected, and this comprises 16.9 million of sustaining capital expenditure, a further 1.1 million spend on green investments, such as electric vehicle charging points, and 13.8 million in terms of expansion capital expenditure, which includes the completion of representation for Toyota Air, as well as expansion of the group's Chesterfield Toyota and Exeter BMW dealerships. Surplus property disposals are expected to generate a total of £10.6 million of cash proceeds in FY25, with £0.8 million of this already perceived on sale of a surplus property in Taunton back in April 24. These disposals will help to offset land capital spend in FY25. In terms of returns to shareholders, £7.8 million was paid in dividends during the year, and the increased final dividend of 1.5 pence per share has been recommended, bringing the full year dividend to 2.35 pence per share. The group has also bought back 11.3 million shares for £7.5 million during the year, and a further £3 million share buyback programme has been announced today. I'll now hand back to Robert for an update on the market.

Thank you, Karen. What we're now going to go through on page 18 is the vehicle sales performance of the group and a summary of the general trends. If we look at the new retail car market, the market for new retail cars actually weakened through the period with a market decline of about 1%, which was mirrored by the group on a like-for-like basis. If we take the total market, the BEV mix in 2024 year to date is around 15.7% electric vehicle mix, which is quite a way off the 22% headline target. And that number is actually much lower in the retail channel. Circa less than 10% mix is currently electric vehicle. You can see quite clearly substantial growth in the motability channel, massively up, and actually over 50% now of the new retail car market, so substantial growth. We are the largest partner of Motability in the United Kingdom with over 41,000 cars on the fleet. In terms of why the new car market has been weak, I think we have to look at declining residual values for used cars over the last six months impacting part exchange values. We've had higher interest costs impacting finance rates, and new car prices have been going up over the past two or three years. Mix that in with the high cost of battery electric vehicles, and you can see that the cost to change to consumers is becoming more challenging. It's pleasing to note that we gained market share both in the new retail and the motability channels, and whilst margins have weakened year on year as we've moved from a pull model to a push model, and as more motability has come through the mix, which tends to be lower margin. You can see in the graph at the top on the right-hand side that margins are still quite robust compared to a number of years ago. We take the fleet channel, which I'm going to consider in slightly more detail on the next slide. We've seen strong growth in our fleet car business. That's been driven by substantial volumes of electric vehicles into the salary sacrifice and company car driver market, driven, I think, by government tax incentives. Margins have continued to rise substantially. This has very much gone from a a low margin business to a much better margin business over the last five years. And gross profit per unit is now at a record level. We have kept out of low margin segments, which have grown very rapidly actually in the last 12 months. So while we've lost share, we've actually increased gross profit on a like-for-like basis by £10 million, which is more than the increase in the new retail channel, which actually rose £7 million. We take used cars. We have flagged clearly there was a challenging market in H2. And overall, like-for-like gross profit went down 9.7 million, so quite substantial. Volumes fell 2%, but the whole of that drop was in H1. Volumes actually increased on a like-for-like basis in H2, as with partly we sought to reduce stocks successfully. If you look at margins, it's a tale of two halves. The margin in the first half, £1,533 a unit, and in the second half, £1,296 a unit, and indeed the lowest for several years. That was driven by the price correction post-September, which I'm pleased to report has stabilised by the time we get into March. The price reduction, as Karen said, was far more acute in premium product than it was in volume. And the stabilisation we've got now is that it's more akin to normal seasonal trends. Used car prices drift at a different rate as supply and demand comes in, and that's very seasonal. The internal combustion engine residuals are robust currently. We still see weakness in battery electric vehicle residuals, and that's likely to continue as new car discounting probably accelerate as people try and avoid fines. And it's fair to say that premium residuals are still a little bit weaker than they are in volume. We move over to the next slide. You can see fleet and commercial in more detail. We haven't given a lot of information around this channel for actually quite a while. It reflects around 10% of our gross profit, and we see ourselves that this is a real area of expertise. We deliver 45,000 new vehicles through this channel. We are a major fleet player. Our focus has been on profitability. We have record margins, as I noted previously, and we've kept away from what were the fastest growing channels, of daily rental. And there was vast growth as well in manufacturer registrations and demonstrator registrations, which clearly don't form part of our sales. So whilst we've got reduced market share, we've seen much higher profits. We continue to develop our fleet businesses. Over the last two years, we've grown a very successful and sizable public sector business, which has really accelerated our growth of battery electric vehicles into public sector around salary sacrifice schemes. With the addition of BYD to our portfolio, we'd expect continued potential for growth. Turning to after sales, this is a very good news story as it has been for a number of years. Each of our key segments within after sales has grown gross profit on a like for like basis. Overall, we saw a 13.2 million increase in gross profit and I will cover parts and accident repair in a slide in a moment. But in terms of service, the headlines are quite clear. A 5.8 million increase in core gross profit. That's been aided by the technology we've deployed. It's been aided by having more technicians in our core business and increasing retention and developing greater levels of customer experience. So this is a strong part of our business. If you take retention, We have 163,000 customers who have service plans. They've already paid for their service by the time they come in. And our 41,000 Motability customers, their annual service is paid for by the Motability scheme. If we turn over and look at service in more detail, we've actually increased our technicians and the core business by 10%. That has a significant impact on our capacity. We're not short of work. We were short of technicians. So this aids the growth of this high margin revenue scheme. You can see we've gone from 829 in February 21 to 914. at the end of February 24. We continue to invest heavily in apprentices and our retention tools such as service plans are paying off. 65% of our work is now on cars three years or older and they have a higher average invoice value. We are employing more sophisticated email marketing techniques using behavioral psychology to actually increase the average invoice value in things like the summer check and the winter check and that's been deployed very successfully. Tyres, we think, remains a great opportunity. The number of potholes in the UK is significant, and that should drive increased tyre sales. Interestingly, some of our independent competitors are reporting weakness in the tyre market. We're certainly not seeing that. We've had a 14% like-for-like increase in retail sales on tyres. Slide 22 looks at our parts and accident repair centres. business really is predominantly our biggest customers, clearly ourselves, of supplying parts through our workshops, but we also have a very substantial trade business where we're supplying independent motor repairers and body shops. We grew gross profit 3.8 million, and this is an area of real expertise. Our trade business was up like for like 10.5% in terms of revenues. Accident repairs covers not only the group's body shops, but also our smart repair business. overall delivered a 3.6 million like-for-like increase in gross profit. We take the accident repair centres first. Over the last 18 months, we have substantially moved where we get our work from, from insurance companies, which tended to be low margin, to a different set of customers, i.e. through manufacturer-approved programmes and indeed our own 2 million customers on the database. That has led to a step change in margins and profitability. Our smart repair business continues to perform very strongly. We've got over 100 vans doing work for the group to make sure our used cars are prepared properly. And actually, we're probably still constrained by labour in this area. We've set up a new retail business, as we flagged at the interims, called Bristol Street Motors Repairmaster, which will go out to fleets and also our own customers to understate smart repair, whereas our historic smart repair business is very internally focused. Slide 23 covers the work done on brand and marketing. We've invested heavily in marketing over a long period. The Bristol Street Motors brand, when we acquired it in 2007, was, I believe, quite tired. We've now grown that, so it is now England's leading retailer brand. And this year, indeed, it's its anniversary. It's 100 years old, which we have celebrated. Its prompted brand awareness is the highest in England at 57%, and we think it is now very much a brand on the up. You can see some of the work done here. We have a three-year deal to sponsor the EFL trophy, now called the Bristol Street Motors Trophy, for the lower leagues of English football. And you can see there the Bristol Street takeover of Wembley. Our social media focus is very strong. We have more followers than any of our competitors with over half a million followers on social media. So finally, let's look at our current trading and outlook. Pleased to report that we've had a strong start to the new financial year, slightly ahead of the board's expectations, and we would envisage full year expectations to remain unchanged. Clearly, the first two months has given us confidence. In terms of what's actually happened in that performance, the new retail volumes have outperformed the market quite substantially. The market is down around 10%. we were down significantly less than that. Margins are continuing to normalize, particularly in battery electric vehicles, which are under some competitive pressure as supply rises. We've got a very good performance in used cars, absolutely delighted. 5.8% volume growth like for like, and margins up as well, which goes to the stabilization of the wholesale market in used cars after sales continues to grow. So if we look at the outlook, I think the key item in terms of next few months, maybe 12, 18 months, is what happens in the new car market. We have flagged in the announcement the potential uncertainty on petrol and diesel new car supply. If the manufacturers don't hit the ZEV mandate targets, let's for ease call it 22%, and if they don't want to pay fines, which are £15,000 per vehicle that they sell in addition to the target. Are you failing to hit the 22% target? That is really concentrating the minds. And the numbers are massive. If you miss... by thousands, you just times that by £15,000 and you get to a very, very big number. So what is potentially going to happen is that manufacturers will make the decision of curtailing supply into the UK, which will clearly curtail the new car market. And that will be interesting to see how that pans out by manufacturer and how that impact on the business unwinds. Clearly, in a constrained environment for new cars, we know what happens. Used vehicle values strengthen. So it's a double-edged impact on us. But there's no question that the BEV market is under stress, where supply is outstripping demand. The manufacturers are asking the government for incentives to try and bridge that supply-demand gap, but it doesn't seem to be much movement so far. So we would envisage more discounting to come in the battery electric vehicle market. Overall, we are very focused on delivering our strategy and making sure we're in control of costs and customer experience. So in summary, we will continue our strategy of improving the business by investing in colleagues, making sure we've got the right resource levels, utilising our technology to make us more productive. As Karen has outlined, we are in an excellent financial position and with plenty of growth opportunities to improve performance within the portfolio and to expand the group further. Thank you.