U.S. Markets close in 2 hrs 37 mins

Edited Transcript of MMH.L earnings conference call or presentation 13-Aug-19 6:05am GMT

Q2 2019 Marshall Motor Holdings PLC Earnings Call

Cambridge Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Marshall Motor Holdings PLC earnings conference call or presentation Tuesday, August 13, 2019 at 6:05:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daksh Gupta

Marshall Motor Holdings Plc - Group CEO & Executive Director

* Richard John Blumberger

Marshall Motor Holdings Plc - CFO & Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

Daksh, another good performance in a challenging market.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

What are the highlights of the half?

--------------------------------------------------------------------------------

Daksh Gupta, Marshall Motor Holdings Plc - Group CEO & Executive Director [2]

--------------------------------------------------------------------------------

Well market conditions across the U.K. were indeed challenging with the new retailer, new fleet and used car markets all declining. However, despite operating with this backdrop, I'm delighted to report that we grew our like-for-like revenues to GBP 1.16 billion, and the group once again outperformed the market across all core KPIs. Our like-for-like new retail unit sales were down just 0.4%, and this compares with the wider market decline in registrations of 3.2%. We also outperformed the fleet market, with our like-for-like unit sales down 1.1% against market registrations that were down 3.6%. Our used unit sales performance was stand-out and built on our strong performance in the second half of the year. We enjoyed our best ever performance here, with like-for-like unit sales up 7.2%, an excellent performance when you consider the market is forecast to decline by 2% this year.

Now the used car market did experience some pressure in the margin in quarter 2. However, we were able to mitigate this with an excellent new car margin performance, which helps us maintain our strong margin at 11.4%. Operating profit came in at GBP 20.2 million, with underlying profit before tax coming in at GBP 15.2 million, and this was a good result considering market conditions, and in line with our expectations. Another highlight of the period was cash. We closed the period with an adjusted net cash position of GBP 5.8 million before the impact of IFRS 16, and that's despite several investments made through the period.

During the half, we completed 2 acquisitions, which added 6 ŠKODA retail centers, which made the group the largest retailer in the U.K. for the brand. The group was also ranked for a fifth year running in the U.K.'s best workplaces, something only a small number of companies have ever achieved and we're recognized for this by the Great Place to Work Institute.

Finally, the Board has approved an interim dividend payment of 2.85p, which is up 32.6% on the prior year. So overall, a great performance considering the challenging market conditions.

--------------------------------------------------------------------------------

Unidentified Analyst, [3]

--------------------------------------------------------------------------------

Now Richard, great to have you with us. Daksh mentioned your cash position and investments made. Talk to us about this and how the balance sheet is looking post IFRS 16?

--------------------------------------------------------------------------------

Richard John Blumberger, Marshall Motor Holdings Plc - CFO & Director [4]

--------------------------------------------------------------------------------

As CFO, I'm really pleased with our cash position. As Daksh just said, adjusted for the impact of IFRS 16, our net cash position was GBP 5.8 million. That's GBP 10.8 million up from the end of last year. That's despite spending GBP 6 million to settle all historic defined benefit pension liability, which we had flagged previously, GBP 3.5 million on 2 acquisitions that we announced earlier in the year, a further GBP 8.8 million invested in capital expenditure, of which GBP 7.8 million was cash outflow in the half. That included the GBP 1.7 million freehold acquisition of the Northampton ŠKODA site.

Finally, as a result of our revised dividend policy announced at the year-end, dividend payments to our shareholders increased by GBP 1.7 million.

Before I talk about the balance sheet, it is worth touching on IFRS 16. The standard came into effect for all companies reporting under International Financial Reporting Standards for any accounting period starting after the 1st of January this year. Therefore, the group has applied IFRS 16 for the first time in these accounts, and we have used a fully retrospective method. What this means is we've restated last year's accounts, assuming that we are accounting under IFRS 16. This will allow for comparability. IFRS 16 removes the current distinction between operating and finance leases and requires that a right-of-use asset and a lease liability are recognized in the consolidated balance sheet. The asset represents the right to use the leased asset and the leased liability represents the commitments payable, both of which have had a discount rate applied. Operating lease rental charges in the consolidated statement of a comprehensive income are replaced by interest charges and depreciation expenses. Timing of the recognition of these lease cost changes, we've increased cost being recognized in the earlier years of the lease due to interest being recognized at a constant rate on the carrying value of the leased liability.

Just as a reminder, this accounting standard has no effect on the group's economic activity, nor does it affect cash flows, although it will affect reported net debt. However, due to the current immaturity of our operating lease portfolio, it will have a small negative profit before tax impact in the early years. As a result of these changes, we will see reported net debt increase by around GBP 88 million at the half year. This does not impact our covenants, as they will be measured on a frozen GAAP basis, and we will show an adjusted net debt position in our accounts, excluding the impact of this.

In terms of the balance sheet. Again, I'm really pleased here. We closed the period with net assets of GBP 200.7 million, which is up GBP 6.6 million from the year-end. And that equates to GBP 2.57 per share. The balance sheet is also underpinned by our property portfolio, following further investments in the half, the group's freehold and long leasehold assets totaled GBP 123.9 million, which equates

GBP 1.59 per share.

As I mentioned, we are highly cash generative. And in the period, we had cash inflows generated from operations of GBP 40.1 million, GBP 10 million of which came from our keen working capital focus. We also have our GBP 120 million revolving credit facility, which is secured until May 2021.

So as you can see, the group's balance sheet remains exceptionally strong, and that leaves us well placed to take advantage of any potential opportunities that may arise.

--------------------------------------------------------------------------------

Unidentified Analyst, [5]

--------------------------------------------------------------------------------

Richard, despite market conditions, your margins have held up well. You must be pleased.

--------------------------------------------------------------------------------

Richard John Blumberger, Marshall Motor Holdings Plc - CFO & Director [6]

--------------------------------------------------------------------------------

I was pleased with our margin performance. We maintained our gross profit at 11.4%. Like-for-like gross profit in the new segment was up 6.6% to GBP 43 million due to a strong margin performance, which was up 73 basis points to 7.7% which was a standout performance. At our results presentation in March, we highlighted a number of our premium brands were adversely affected by not having the right mix of petrol cars. During the period, as anticipated, we saw a number of our brands adjusting the balance between diesel and petrol, which allowed for better matching of availability to demand. In addition, we work closely with our brand partners to negotiate the right targets and we retail to those targets. This minimizes the need to preregister and has enabled us to maximize bonus earnings.

Like-for-like gross profit in the used segment was down 2.5% to GBP 32.8 million, driven by some residual value pressures in the market. Whilst our used car margins were down 62 basis points to 6.6%, we were able to contain the margin pressures through our continued focus on our prudent 56-day stocking policy. After sales like-for-like gross profit was down 1.6% to GBP 56.5 million, and we did experience some margin pressures, largely as a result of an increasing mix of part sales, which was up 4.5%, which has a lower margin attributable to it as well as some ongoing cost pressures.

Within the after-sales number, pleasingly, services revenues increased by GBP 1.1 million, which equates to 2% like-for-like growth, and margins remained broadly flat. What I think this demonstrates is the resilience of our business model through the cycle and the movements that you typically see between each of our segments.

--------------------------------------------------------------------------------

Unidentified Analyst, [7]

--------------------------------------------------------------------------------

So Daksh, what's the outlook for the rest of the year and beyond?

--------------------------------------------------------------------------------

Daksh Gupta, Marshall Motor Holdings Plc - Group CEO & Executive Director [8]

--------------------------------------------------------------------------------

Well, at the end of July, the new car market was down 3.5%. However, the latest SMMT forecast for 2019 is a decline of 2.2%, which indicates that the final 5 months of the year are expected to be broadly flat. That's worth remembering that last September was affected by supply constraints caused by WLTP and was down 20.5%. As previously advised, September will see the introduction of WLTP to commercial vehicles. And this coincides with the introduction of real driving emissions test to passenger cars, which builds on WLTP introduced last year.

Now at this stage, we are aware that certain brands will be affected in terms of supply, but it's too early to form any conclusions as to the extent.

In terms of the used car market, it's forecast to decline by 2% this year, and September will be a key underpin for the full year result. And while still early, our order bank for September is building as anticipated. Beyond that, with the wider political and economic uncertainty, the Board believes it's right to remain cautious. However, the outlook for the full year remains unchanged. For longer term, the market will continue to consolidate. With our people-focused culture, strong balance sheet and OEM relationships, I believe we're very well placed to grow further. However, we will only do so where it makes strategic and financial sense for our shareholders.