Vertu Motors (LSE:VTU) Q2 2027 Earnings Call

0:00 Good morning and welcome to the Virtue Motors plc interim results for the six months ended August 2026. My name is Robert Forrester, Chief Executive and I'm joined this morning by Karen Anderson, our long-standing CFO. If we move to the investment case first of all in terms of Virtue, I think our investment case is very clear. The results announced today demonstrate this. We are a scaled operation with 5% of the UK automotive market, one of the biggest brands in the UK and with significant capacity for future expansion to add value and future returns to shareholders. We have excellent scaled relationships with our growing number of vehicle manufacturers. We are having growth opportunities presented to us which will allow future investment.

0:52 Our management has capacity for growth especially having appointed two managing directors at the start of the year and our systems and technology is leading edge and scalable. The business is actually underpinned performance wise by our after sales business which shows both resilience and growth. It's aided by nearly 200,000 customers who are either on service plans or have motability service contracts. We have customer experience levels higher than the sector average and that promotes retention. The last two years have seen a real focus on cost optimisation. This included greater efficiency through technology gains, but also increasingly using data to make sure we've got optimisation and marketing spend and that we make good decisions.

1:41 The board is focused on shareholder returns. Our portfolio is reviewed to deliver long-term returns, not short-term wins. We are here for the long term. We have a very disciplined capital allocation approach. We are pivoting towards Chinese brands but with a very long term strategy. That process will continue. Our buyback program has aided earnings per share and tangible net assets per share and long term we have purchased 22% of the company's equity back. So let's have a look at an overview of where we are. Today we announced the third profit upgrade to this current year's profit numbers. The half year results represent a 19% in adjusted profit before tax.

2:29 We've also delivered a strong September when we get to the current trading and outlook section. Our cash generation has been very very good, a 94% conversion and that's helped to deliver a better than expected net debt number below £55 million. Our next tangible assets per share of nearly 81 pence is a record and shows that our balance sheet is strength. In terms of the wider sector, there is plenty to talk about this morning. The zero emission vehicle mandate has drained automotive profit pools but is now undergoing consultation. Chinese brand market share has been spectacular in terms of growth. 25% of retail registrations in September were represented by Chinese brands. and our portfolio mix is clearly starting to reflect that scale is critical and I think we have scale small dealerships and small regional groups are finding it far more difficult to get things working we are in the super group bracket but I think at 5 billion revenues and 5% market share there is a path now to certain groups getting to 10 billion revenues 10% market share Technology and AI is certainly going to aid those scale economies and manufacturers are now looking for efficiency in their retail partners to be super efficient and to deliver for them and I think that stands us in good stead.

4:00 So let's turn to current trading and the important month September. Why is September an important month? It's the second biggest profit month of the year and the biggest in H2. I'm delighted to report we have a strong September. On the back of a very strong quarter in terms of new retail car sales, we hit the manufacturer targets at a high level and that gave us the bonuses dropping in in September. Now the new retail car market, the results have already been published by the SMT, exhibited strong growth in registrations and it's probably worth just spending a moment as to why that is. The manufacturers who saw the fleet retail mix move last year to 65% fleet have been working hard with better offers to stimulate the retail market and that has paid off. Registrations have been bolstered by a high growth of Chinese brands but also by a substantial increase in pre-registration activity where cars get registered by retailers and then sold as used cars.

5:01 We now have nearly 20 Chinese outlets within the group and with plans for more which I'll outline. We are still As we've said for a number of periods, underweight relative to the market in general, that's not necessarily a bad thing. Motability, as predicted when we did our finals, has been very strong due to the timing of renewals and we've performed well in that channel. And in all channels, we've had a real focus on pricing discipline to manage volume and margin to maximise profitability and I think that is exhibited in these results. Indeed, if you ignore the JLR cyber attack effects last September, every channel has seen increasing gross profit, irrespective of that impact last year. Profits have risen year on year, and this is the biggest month in RH2, so when we turn to look at the outlook, it clearly gives the board some confidence.

5:59 The board now anticipates full year results to be ahead of expectations, and this is the third profit upgrade we've delivered this year. We are very focused on self-help initiatives to continue this delivery of results. The launch of Value Cards by Virtue, where we look to progress market share in old used cars, continues and is doing well. We are now launching a new initiative of Sharia law compliant used car finance to grow our market share in some of our core territories with strong Muslim populations. Our new sales executive packages have driven performance and we're now going to extend those into the premium side. That's giving us greater retention of sales teams.

6:46 We're also looking to enhance our technician packages in the next month to gain more resource, to drive our after sales profit and to give us higher efficiency. In essence the business is in good shape as can be seen by the fact that last week we won two national auto trade awards. including retailer of the year for the second year in a row. I will talk more about the ZEV mandate shortly but I think it would be wise to factor in much relief from the consultation in the next few years. I think we'll see some short term relief but the targets for 2030 will still be very high. We are seeing given the pressure on costs and the ZEV mandate more growth opportunities being presented to us each week. Smaller businesses are tending to struggle.

7:33 and pricing we feel is moving in our direction so we will assess these opportunities against our investment hurdle rates. Return to strategy. The group strategy which is outlined here has been presented before and remains very consistent. The sector is moving fast and our strategy is flexible enough to allow us to respond. We certainly have the desire and the capacity to grow In terms of outlet numbers of franchise dealerships, but also in related ancillary businesses which bring the wider group synergies. So you will see growth. We are implementing technology consistently to reduce costs, to be quicker at making the business more efficient and make better decisions.

8:23 This initiatives are much better for customers. We are enhancing our customer speed of response, but also quality of response. It's also fair to say that the advent in the last nine months of AI coding is a game changer for our development team. However, we're still a people business. People buy off people. And I'm pleased to report we've got a strategy that gives us highly trained colleagues who are motivated and have high levels of satisfaction. That in turn derives above sector levels of customer experience. It won't be a surprise When I discuss the evolving competitive landscape in new vehicles that there are two somewhat linked themes. One is the electrification of new vehicle sales and the other is the growth of Chinese new entrants.

9:16 So let's turn to electrification first which is really around the government's zero emission vehicle mandate regulations mandating sales of battery electric vehicles. This is a well-known subject, clearly we've covered it before. Let's just reiterate, this year's targets are 33% for cars, have to be battery electric vehicles, the new car market, 24% for vans. This is then backed up by fines put on the manufacturers for being above target of £12,000 for cars and £15,000 for vans. This is powerful stuff. Now the sector will not hit the battery electric vehicle mix on cars this year. will be around 25-26%, target 33%. In fact, the industry will not hit last year's target this year.

10:06 The target in 2030 is currently set at 80%. This is putting massive pressure on manufacturers and on retailers and everybody within the automotive world because it clearly upsets supply and demand and leads to massive discounting to try and stimulate natural electric vehicle sales. Now the government is currently consulting on these targets which sounds in itself great and is something to be welcomed. The lowest 2030 targets in the consultation are 50% in 2030 for cars and 40% for vans. They are still very stretching so I think we can see continued pressure on the sector if these targets land and they might not land. The actual targets coming out of the consultation may be higher.

10:51 I suspect 2027 we'll see some short term relief from where we might have been but I think this is not a panacea this consultation now in terms of Chinese and you can't pick up a newspaper any day of the week and not see an article on the growth of Chinese brands and discussions about tariffs etc they did hit 25% of the market in September that excludes Volvo which is owned by Geely but we don't class as Chinese why are we seeing this rise in Chinese brands Well, the Chinese car market is depressed and there's currently around 20 million surplus cars produced every year in China. That's the root cause. The UK has the lowest tariffs in the Western world with regard to Chinese battery electric vehicles. But also, the Chinese are very adept at making excellent plug-in hybrids, never mind battery electric vehicles.

11:42 So, any tariffs the UK government imposes may slow down the Chinese onslaught. However, They have a major cost advantage, some would say technology advantage, so it's unlikely to stop them in their tracks. The UK government is currently under pressure to put in place battery electric vehicle tariffs and that may allow the European Union to let UK car production into the made in EU protection measures that have been put in place. That is not for certain. So tariffs would change the playing field with regards to the incumbent manufacturers and the Chinese. As an aside, the Chinese government has also announced in the last couple of days that from April 2027 their export VAT rebates will be reduced from 13% to 9% and that again lowers support levels for Chinese manufacturers exporting and therefore we could see increasing prices of Chinese cars coming into the UK.

12:43 Our view overall is that this could slow down the Chinese, but is unlikely to halt the growth of different Chinese brands taking market share. Of course, it's also true to say that if the UK ends up with tariffs on battery electric vehicles, that will make the overall industry hitting the government's mandate targets even harder. I should point out when we talk about battery electric vehicles, we are not negative on battery electric vehicles. In fact, Virtua has outperformed on the sale of battery electric vehicles for the past three years. And in this period, our battery electric vehicle retail sales grew 126%. So given that sort of backdrop, what are we doing about Chinese brands? And the answer is we are actively engaging with Chinese brands.

13:31 In fact, it's been one of our core occupations for the past 12 months. I actually believe the Chinese brand Sea Virtue is a must-have partner in the UK because of our scale and our ability to deliver volume, property and indeed customer experiences. As this table shows we've made good progress in terms of introducing new brands and introducing increasing number of Chinese outlets. By mid-2027 we will have at least 15% of our outlets being Chinese. Again that excludes Volvo where we are also strong that number may indeed be higher what we're actually seeing is wave one partners of the Chinese who came in two or three years ago actually in some cases being replaced some cases by us where they fail to deliver on property investment, operational excellence or indeed a solid relationship and we stand to benefit as the shakeout comes in the first wave of partners into second wave So the Chinese brand strategy is clearly a key part of what we've been doing strategically over the past six months. However, there are other strategic actions that we've undertook, which largely fall under the controlling the controllables banner.

14:49 I've mentioned technology quite a lot already, but I think it's worth just focusing in a bit more detail. Digitalization, including AI adoption, is critical if the business is to be efficient and to deliver scale economies. Smaller players cannot adopt this strategy. I'd just like to go through three successful examples of where we've been implementing technology in the past six months. OPPORTUNE has been developed with our telephony partner to provide a sales customer experience that is much better and to enhance sales conversion. By using large language models of 40,000 inbound phone calls linked to sales data and linked to our training material, We can now predict, after a phone call has been received in the sales contact centre, the predictability of making a sale.

15:39 And the sales people in the dealership get, these are the three things you need to talk about. I wouldn't mention this very often. This needs to be in the video. That is moving our sales conversion up. And we've been piloting it in a number of dealerships, as you can see here, and it's so far given a 12.7% increase in conversion. This is not a small thing, so we are now clearly rolling it out. VMAX is a personalised dashboard where each salesperson can see their earnings real time, how much they've earned month to date, where they've earned it, where they've missed out, what the next transaction is worth and it uses gamification around successful KPIs to stimulate the outcomes we would like by effectively having a dashboard which is in place in our volume dealerships and it has good effect.

16:30 We're now going to launch it with new sales packages into our premium dealership. The final third area is an area of business we don't often talk about which is our parts departments. So we've used a dashboard again for each parts department with lead tables and gamification so for each KPI you can earn points which then puts you into a lead table and that has led in the last three months since we've implemented it into a significant improvement in controls and efficiency on the nuts and bolts literally of running a parts department. It's also highlighted a few low-level frauds and some poor practice and it's certainly doing its job. This is good use of technology to make our business better. When we spoke at the finals a few six months ago, we discussed the launch of Value Cars by Virtue. This was an initiative to Thank you for watching.

17:50 And we're delighted with the progress. 1400 plus more cars sold. Stronger margins in this stage than we previously had. And when you look at the margins, our normal younger used cars have a 6.9% gross margin. These cars had a 13.5% gross margin. So it does augment the margin as we expected. They also sell quicker. Now there is more to come as we focus on this and as people get used to it. The next initiative is to launch Sharia compliant used car finance, where we can effectively sell cars with a counterparty on finance, fully compliant with UK and Sharia law.

18:43 I use the no interest. on the loan. So this will enable us to take customers from the growing minority and to deliver a main dealer experience which we think we can take market share. For all the talk of technology the world is still populated by people who buy off people and I'm delighted to say that we've made good progress again in this area and we've got good plans to make more. There is definitely a benefit in a stable sales team. The graph on the left hand side shows that this industry has a high level of sales executive turnover, always have, particularly new starters within the first six months. But we've seen a step change in our sales team stability, with turnover declining from 53% to 39% in the last 18 months, which is a major change.

19:35 Why? Well we've been adopting new sales executive packages, we've been very good at selling cars which is always good if you're a sales executive and I think we've tightened up on recruitment so I think there's a number of reasons but this could have quite a material impact going forward in terms of customer experience, sales retention, our overall effectiveness. Turning to technicians, this is clearly going to be, it's come in and out in terms of being an issue but there is a long-term issue around Retirement of Technicians versus the number of apprentices coming through in the industry as a whole. We're putting a lot of apprentices into the business. But we want to get on the front foot and make sure we've got the right level of resource to grow our after sales business. So in November we are going to launch revised packages particularly around new bonuses to drive efficiency and we expect a benefit from that and to be able to recruit more people and retain more people to grow after sales.

20:29 Overall, I believe we've got a committee team of colleagues. We drive and really look at colleague satisfaction in a lot of detail. We have very high levels of colleague satisfaction and then that translates into customer satisfaction. And this is critical not only to drive retention of customers if they don't come back if they've had a poor experience and you can see in sales compared to the manufacturer franchises we're 38% better than the national average. In service we're 6% our national average and our used car net promoter score is absolutely excellent. This clearly helps us win awards like the auto trader awards but customer satisfaction scores are also vital in terms of making sure we deliver for manufacturers and able to buy new dealerships but also to drive search engine optimization and AI search and we've got excellent Google and Trustpilot scores which help us drive that web engagement.

21:27 So I'm now going to pass to Karen who's going to look at cost reduction and control.

21:32 Thank you Robert. The group came into the financial year having completed the second consecutive year of targeted cost reduction programmes. These programmes, which included some dealership closures, have kept cost growth in the total group to 2.1% in the period and have driven a reduction in operating expense of the percentage of revenues. Salary costs, as Robert said, this is a people business, so it's no surprise really that salary costs remain the largest single cost of the group. And these costs rose by 3.9% or 5.4 million pounds. With this explained by higher sales commissions and performance related bonuses, the colleagues based on the improved financial and sales performance we have delivered. The headcount savings delivered as part of the cost reduction programs offset the increased costs The improvement in sales performance also impacted on marketing costs, which include fleet introductory commissions.

22:32 The increase in fleet sales volumes increased costs in this area. In addition, the group also delivered two group-wide new vehicle sales events in the period, with such events not occurring in the prior year. Cost control clearly remains a priority for the group. and we are taking further proactive action to mitigate cost headwinds. For example, the deployment of technology to increase efficiency, installation of building management systems to reduce energy costs and increasing the use of data and sales attribution to improve marketing cost return on investment. If we turn next to another key element of our strategy which is returns to shareholders, The group continues to seek a balance between investment and growth, targeting returns in excess of weighted average cost of capital to deliver on the group's strategic objectives and shareholder returns. And we have a pipeline of potential acquisitions currently under consideration.

23:35 A key element of the group's approach to capital allocation remains pruning. You've seen the impact of this actually already on the cost side. and the group maintains its discipline in reviewing dealership operations regularly to ensure each generates an adequate return on investment and the contribution to group profitability. In terms of investment in organic growth, the group anticipates net capital expenditure of £21.6 million in the FY27 full year, with this spend including the investment in additional Chinese manufacturer outlets that Robert has outlined. The group has had a programme of share buybacks in place since FY18. The group spent £1.8 million in the period on share buybacks and since the start of these programmes has bought back almost 22% of our issued share capital.

24:23 We announced a further £12 million share buyback programme back in March for the FY27 financial year and we have £10.2 million left to deploy under this programme. The board are committed to continue share buybacks at prices up to 105% of tangible net assets per share, around 85 pence a share. Finally, we propose an 11% increase in the FY27 interim dividend to 1 pence per share and this will be paid in January. Turning now to the financial performance in the period, Drive 17 highlights some financial highlights for the year. Strong organic growth drove revenues to a new record and like-for-like growth in gross profit was delivered in all channels, as well as strong cost control being exhibited.

25:15 Adjusted profit before tax therefore increased 19% to £23.8 million, with a non-underlying profit on sales surplus property driving PBT to £24.2 million. That's a 24% increase. I was delighted with the strong conversion of operating profit to cash, driving the low level of net debt at the end of August, which frankly exceeded my expectations. This was thanks to better than anticipated fleet sales cash flows around the period end. If I turn over now to slide 18, it's a summary of our group income statements for the period. Group revenues grew by £86.5 million, with actually a growth of £106 million delivered from the group's core dealerships.

26:00 New and acquired businesses added £29.5 million of revenues, while site closures reduced revenues by £49 million over the period. Gross margin was stable at 11.2%. and costs as the percentage of revenue declined to 9.9% increasing scale at operating margins to 1.3%. The group's interest costs reduced by £800,000 compared to last year and this was driven by reduced charges on manufacturer new vehicle funding and this was due to a reduction in the level of funded inventory held by the group. Adjusted profit before tax therefore rose by 19% to £24.2 million. Non-underlying income actually represents a profit on the sale of surplus property, partially offset a little by some site closure costs.

26:53 If I turn over again now to slide 19, we're presenting our bridge of the group's adjusted profit before tax compared to last year, the last prior year period. Core group gross profit increased by £10.9 million over the prior period, with increases in all four segments of new, sleek, used and after sales. The group's resilient and high-margin after-sales operations generated an additional £3.9 million of gross profit in the period. New vehicle sales generated an additional £3.4 million of gross profit, which has been very welcome following two years of declining profit in this channel. Used gross profit generation in the core group also rose, again aided by the success of the Value Cars initiative.

27:40 As anticipated, core group operating expenses grew year on year, with much of this increase driven by the improvements in financial performance, which have driven increased sales commission and performance-related bonus earnings for colleagues, as I've just outlined. Turning then to slide 20. The group's balance sheet is very stable and strong, underpinned by a freehold and long-usehold property portfolio of £327 million, prudently carried at an historic depreciated cost. A recent desktop valuation by Knight Frank indicates supports of property value that current net book value, with just over half of the group's property portfolio unencumbered by mortgages.

28:25 Vehicle inventory reduced with this reduction arising in new vehicles. These are largely funded by manufacturer facilities and therefore the reduction had little cash impact but did obviously result in reduced stocking interest costs being paid. Tangible net assets per share increased again to 80.8 pence and this is a new record for the group.

28:50 Slide 21 summarises the group's debt facilities and net debt at the 31st of August. This week the group has agreed the renewal of its bank facilities. A new facility comprising a £70 million revolving credit facility for general commercial purposes together with a £50 million accordion has been put in place. These new facilities replace the old £93 million acquisition facility. The same counterparty banks namely Barclays, Lloyds and NatWest have remained in place and the facilities are for an initial term of three years with the option for the group to extend for a further two years. The new facility reduces the margin payable by 0.25% and increases flexibility allowing the group to repay and draw funds as cash and working capital fluctuations allow. We anticipate that annualised finance cost savings of up to half a million pounds are anticipated as a result of this new facility in terms of the reduction in margin, reduction in limit and our ability to flexibly pay back.

29:59 It's worth remembering though that approximately 60% of the group's net debt remains long term property tax mortgages with no covenants. Slide 22 highlights the group's cash flows. The group generated a free cash inflow of £17.5 million in the period, with an excellent 94% conversion of operating profits to cash flow from operating activities. The working capital movement represented an £11 million outflow in the period, driven by lower vehicle deposit levels and an increase in trade receivables driven by the growth in fleet sales in the period. Sustaining capital expenditure of £5.7 million was spent in the period with this partially offset by proceeds from sale of surplus properties and other assets of £1.6 million.

30:46 A further £1.2 million has been spent in the period on capital projects which enhance the operating capacity of the group and freehold and business acquisition. Net debt at the end of the period was £54.2 million excluding these liabilities. representing a £7.1 million pound decrease on FY26. I'll now turn back to Robert to cover some of the trading and operational elements of the series.

31:16 Okay, so go through each of the key segments in a little bit more detail. If we turn to new vehicle sales performance and that includes vans and fleet, the market overall for new vehicles but particularly actually the retail market has been surprisingly strong in the past 10 months really. And we've seen a rise in retail registrations versus fleet. After fleet dropped to 65% of the market, a real high watermark historically six months ago. Historically, the market between retail and fleet has been about 50-50. So why is the retail market being so strong? And I think there are a number of answers there. If you go 10 years ago, the average age of a car in the UK was 7 years. It's now risen to 9 years, 10 months. Big, big increase.

32:04 So you could argue there's a lot of people who are looking to replace their cars if an offer is affordable. The manufacturers have been making new car offers far more affordable than in the past two or three years. And in addition, the Chinese manufacturers have come in with very competitive monthly payments and have probably taken some used car customers out of the market and put them into the new retail market. On top of this, we've seen a far more normalised market in terms of levels of pre-registration. Pre-registration is where a retailer buys a car from the manufacturer, a new car and then sells it at delivery mileage as a used car. So it bolsters registrations but you don't see the same in new retail sales. So I think that's why the market is up. We've actually underperformed notionally against the market data but of course we don't have pre-registration registrations in our sales data and we've hit manufacturer targets at a high level.

32:59 So albeit on a headline basis We've lost share. We're actually quite comfortable. So we've got a rising market. Motability was particularly strong and is actually accelerating as those contracts come through. If you actually look at sales prices of vehicles, and we've got new retail and motability, and then we've got fleet and vans here, you can see sales prices actually coming down for a variety of reasons. Car sales prices have come down because we've got now cheaper battery electric vehicles both in terms of smaller vehicles and the discounted vehicles to hit the mandate. That's clearly having an effect. In the van market we've seen a shift to smaller vans away from larger vans for sure and we've seen more car fleet as opposed to van fleet. Vans are clearly more expensive than cars so therefore the actual average sales price has come down by over £2,000.

33:56 The key thing for us is clearly a combination of volume and margin and I'm pleased to say that our margin percentages in car retail has gone up. That's pricing discipline. We are very aware that we need to generate profitability and balance volume and margin. We don't want too much volume with no margin, clearly, or the other way around. So we've been very clinical actually in trying to balance that and we've also been helped by agency where Honda and Mini went into the agency model where we don't have revenue actually we just get a handling fee so that has augmented our gross margin percentages in terms of fleet and commercial vehicle margins actually they reduced but that is entirely due to the fact we've done a lot more fleet car we've taken a lot of market share in fleet car as opposed to vans and I think overall a margin of 984 pounds Gross Profit Per Unit is actually very respectable.

34:54 So reasonably complicated picture, we have generated more gross profit. Return to used vehicle sales, much bigger market than the new vehicle market, quite clearly. We've now had two periods of like-for-like growth in our used vehicle volume. That's despite this thought that Chinese manufacturers on new cars have taken some used car business and put it into new cars. And I think why have we managed to grow like-for-likes in that environment? The Value Car Initiative has clearly given us access to a new market and we've done well with that extra 1,400 cars actually in growing volumes. It's also enhanced margins as you saw. Now the margin expansion I was actually envisaging will be greater. I was expecting to see greater margins in used cars as a result of value and that's because that effect has been offset by weakness in values of large premium SUVs. and I think that's for two reasons.

35:49 One, the escalation in fuel prices always seems to knock large petrol, diesel SUVs. They tend to go down in value in that period and the manufacturers have been really adopting an aggressive stance on new vehicles which has an effect on residuals. So I think, I was expecting slightly more in used car margins than we actually delivered but for good reasons. If we turn to after sales, this is clearly a major high margin and growing profit generator for the group and has been for many years. Gross profit overall was up 3.9 million across the channels in the six months, so we're very pleased with that. Service represented the biggest increase, even though I think we were a bit resource constrained on technicians, which we're about to fix. The vehicle health check process, the virtue pay later process, has added real value to our service operations, growing revenues and margin.

36:41 Interestingly, since we started Virtue Pay Later, which I think is two years ago, we've actually lent out £60 million on the Pay Later product on a three to five month basis. But we are running with excellent recovery profiles and it's really helping boost profitability. Our parts businesses saw strong revenue growth, actually mainly in the trade wholesale share where we have a real expertise and resource in trade parts and those businesses did really well.

37:10 In accident and smart repair, fairly complicated here actually.

37:13 Accident repair saw reduction in number of accidents as technology continues to reduce major accidents. But we saw a nice increase in our smart repair business of actually repairing alloy wheels where we in our sales department sold a tyre and wheel repair insurance policy and that's reasonably good margin. So you can see the margin enhancement in accident and smart repair 1.4% up. We don't often talk about petrol forecourts. We have one petrol forecourt, an excellent petrol forecourt in Widnes if you're ever passing. And interestingly there you can see a 33% increase in revenue. That is fairly high at fuel prices coming through. You can see it in our numbers. So final slide from me. I think the group is very well positioned.

38:03 I think we've got real scale and that gives our group a competitive advantage over much of the sector. We are in the top four. Many outside of the top four are struggling. We have a balance sheet with management and technology and strong manufacturer relationships to grow and grow with significant additional shareholder value going forward. We are in a great position. We have a winning team and I think today's results are witness to that. Thank you. Thank you to Robert and Karen for the presentation. We'll now be moving to Q&A. Just as a reminder, if you would like to ask a question, please type them into the Q&A box situated on the right hand side of your screen.

38:52 Our first question is, how profitable are Chinese brands compared to the established franchises? Are they the biggest opportunity you've had in years or are they a risk?

39:04 It's a good interesting question. Thank you for the question. It's a relatively complex answer because actually if you look at how a dealership operates, it operates with new cars, fleet, used cars and after sales. And clearly if you have a new start-up Chinese brand, it has no after sales at all. and to the group 9% of our revenues are after sales but 44% of our gross profit so one answer is if you just bought a building put a Chinese brand in it you would absolutely blow your brains in to be honest however our strategy has been to seek to put Chinese brands either multi-franchise alongside a traditional brand but always seeking to keep and authorised repairer contract for an after sales traditional brand in the back end to give us after sales contribution.

40:02 If you hone the question down to what are margins like on new retail vehicles, Chinese brands profitability is very similar on average to a normal franchise, a traditional franchise. So I think long term profitability from one of these businesses would be very much akin to a traditional historic franchise. In relation to whether it's a massive opportunity or a massive risk, as with most things in life, it represents an opportunity and a risk. We've got to decide which brands we invest in. Some of those may work out, some of those may not. and every time a Chinese operator takes a percentage of market share in the UK, clearly the remaining portfolio, which is the vast majority at the moment, potentially suffers. And I think the strategy we've got of multi-franchising, of continuing the traditional manufacturers after sales in the same building is a pretty good hedge. And actually we see Good long term returns coming out of Chinese franchises once they actually develop after sales. So I hope that sort of answers the question.

41:22 Thank you Robert. Next we have how are you turning EV growth into better profits?

41:30 I don't see why a change in powertrain of electric vehicles would yield higher profits. I think the profitability on the sales side of an electric vehicle or a plug-in hybrid or a petrol or diesel don't sense any great difference there I think in after sales that's actually quite nuanced I think there is good evidence that a simpler electric only model probably means there's less parts to go wrong, less wear and tear on parts etc so you could see after sales revenues decline, however instead of that We'd be fairly optimistic in an electric vehicle environment, especially with the complex technology in modern cars, that we'd see retention actually going up.

42:19 So, so far, so good. And let's be honest, electric vehicle adoption and impact on the vehicle park is going to be very, very slow. Nowhere near what the government thinks it is. There are 42 million vehicles in the park. I think it's a long time before we see our last diesel or petrol car coming through the workshops. and we should also remember that a plug-in hybrid actually has two power frames going on so lots of things can go wrong and lots of things to have wear and tear on so I don't think the premise of the question is actually correct that EV represents this massive opportunity I don't actually see that but neither do I see it necessarily as a massive threat. Thank you and on that topic are more customers choosing EVs because they genuinely want them or because of manufacturer discounts?

43:11 Another good question. And again, the world is complicated. A slight variation on the question would be, is higher diesel and petrol prices leading to an increase in battery electric vehicle and plug-in hybrid sales? I think logic would say yes. I think that is true. But it's very much actually the fastest growing powertrain is actually plug-in hybrid, not battery electric vehicles. So it's not just all about special electric vehicles. What I think the question might be getting at, effectively, is the government's policy of the zero emission vehicle mandate, which sets unrealistic targets in terms of mix of special electric vehicle sales as a potential new car or new van market, is leading to seismic manufacturer discounts to avoid fines.

44:04 So for example this year the industry is on around 25-26% bachelor electric vehicle mix, the target for this year is 33%, bear in mind the target for 2030 is 8% and the manufacturers by their own organisations calculations are discounting about £5 billion a year to stimulate bachelor electric vehicle demand. so whereas there is certainly a group who like electric vehicles there are others who are being stimulated into buying a battery electric vehicle because the manufacturers are deeply discounting so there is definitely some truth in that and clearly you could have a long debate with yourself around what's the impact if the UK imposes tariffs on Chinese battery electric vehicles for example and how does that affect the uptake of battery electric vehicles and indeed adherence to the zero emission vehicle mandate Thank you, Robert. Our next question is, could you please comment on new car warranty revenue? Is this significant? And for that, how do new brands compare with established brands?

45:14 Okay, I'm trying to understand what the question is. The question is, how much money do you make from new vehicle warranty? Well, we don't sell new vehicle warranties. The car comes with a new vehicle warranty as opposed to in used cars where we actually make money selling warranties The revenue stream comes in actually in the after sales business where the car goes wrong within three or indeed some warranties now are eight years and then that work comes into our workshop we undertake the work on behalf of the manufacturer under the warranty and then the customer goes home happy having not paid anything and that has always been a material part of after sales that is one of the benefits of being franchise retailers is we get that warranty work and that is continuing and that will continue in terms of electric vehicles they come with warranty on the batteries can be eight years probably eight years in most cases actually Chinese manufacturers have warranties so nothing really changes on that the only thing I would say is that It can be quite lumpy. You can get periods in a manufacturer where you get a big amount of recall, then it dissipates. You can get significant warranty issues on particular engines, and then it dissipates.

46:33 And I don't think any manufacturer is immune from those periodic increases in warranty. But warranty is important as a revenue stream, and it's a high-margin stream. Thank you. Our next question is you've bought back over 20% of the company's shares since 2018. Has that made much of a difference to shareholder value as you've hoped?

46:55 I think it has, yes. We like to strike a balance in terms of capital allocation between our objectives to grow and our strategy to grow and returns to shareholders and I think it's an important element of returns to shareholders along with dividends. It helps enhance Earnings per share, because the number of shares that we're actually dividing from your earnings has decreased, it's helped tangible net assets per share. We've bought them back at an average of 56 pence actually, which is well below tangible net assets per share. And the main thing there is obviously we couldn't buy additional assets at so much discount to tangible net assets per share. And at times where price aspirations in the market for people selling dealerships have been very high, Thank you Karen.

48:10 Our next question is what would an acquisition need to offer for you to pursue in today's market?

48:17 An acquisition would need to offer the right brand in the right geography that can be run and improved within our operational bandwidth that can be purchased within our financial conservative bandwidth and when we do our modeling of what cash we anticipate yielding from that investment over a three-year period it hits certain investments further rates that would have been the answer every year for the past 20 years nothing changes I think something that has changed in the past 12 months two years and Karen sort of alluded to it on the flip side is when we came out of Covid the sector made incredible levels of profit and I think that meant potential vendors got slightly carried away with where they expected valuations to be I think we've had a number of years where the depressing influence of the reserve mandate on profits has been very clear where the scale benefits to the larger players is clear where there are smaller players in varying levels of unhappiness and where if you've got certain higher levels of indebtedness life is very uncomfortable so I think we sense that value is coming in our direction that there are more opportunities that could be executed if we manage to knock them over where there's significant value to be gained for increasing

49:52 the scale of the business and generating enhanced returns So if you asked me 12 months ago compared to today, I would probably be more optimistic of undertaking acquisitions in the next 12 months and allocating capital to that than I was this time last year. Thank you Robert. Our next question is what drove the improvement in cash generation and can you repeat it in the second half?

50:18 A number of things drove that improvement. Thank you very much. but if one of those opportunities comes along we will use our working capital to do it. You'll have seen that there was low capex in the first half compared to a full year expectation which is somewhat higher so we had end loaded some capital expenditure and we spent less on share buybacks in the first half than we historically have as well which also helped in terms of cash generation.

51:17 Thank you Karen. Isn't there a risk the introduction of retailing older cars is likely to result in reduced customer satisfaction and harm Virtue's reputation, particularly given the increasing customer legal rights? Plus, with these older cars, the reconditioning costs will be higher to bring them to a quality expected by Virtue's customers, and bearing in mind they will need to be priced competitively to sell, results in lower margins.

51:45 Well, the facts are the facts. we have sold 1400 more cars between 7 years and 14 years old the margin on those cars is 13.9% as opposed to younger used cars which is 7% and we put a lot of time in, 12 months of planning because the points raised are valid points but we've got strategies to make sure they're not valid so we put a lot of time into preparation costs I actually came to the conclusion that a customer does not expect a car that's nine years old to look exactly as a car that's 12 months old and our customer proposition is to make that very clear however said that I haven't come across any cars I haven't been proud to sell in the last six months which is a joy we made it the responsibility of the general manager to say whether they were happy with the cosmetic standard of the car in terms of mechanical preparation we haven't We haven't done something that's going to expose the company to reputational risk.

52:51 We have used non-OEM parts to reduce preparation costs. I think that's been good. And critically, we will not allow those cars to be moved across the country to different dealerships. A general manager takes responsibility for the car and sells that car, ideally locally. And it's been very popular. The critical point is, because quite rightly an older car has more chance of going wrong than a younger car, How do we deal with it when it goes wrong? And the answer is, speedily. And if necessary, we just take the car back. That might be the right answer. So we look at that quite a lot. We are selling cars we didn't sell this time last year. And we measure used car satisfaction with a third party called Drift Service, massive sample sizes. our net promoter score in the last three months of which we've been selling lots of value cars is 85% it is an astonishingly good net promoter score so I think it's a valid question I think it's a good challenge we have a long time thinking about it but it was the right decision actually for our customers because there were customers who wanted the main retailer experience who wanted to trust Virtue and we didn't offer a proposition and now we do and I think as long as we hold to our values and sort problems out which might mean buying the car back quickly we offer a 14 day money back guarantee

54:21 by the way on all our used cars including value cars then I think we'll be alright and indeed we are. Thank you. Our next question is how do you manage all the disruption in this industry particularly with the market shares certain brands collapsing?

54:39 We work harder. We have to analyse the situation, understand reality, think about how things are going to change and make logical decisions which don't destabilise the business but change the portfolio over time to reflect the changing success and otherwise of the manufacturer brands. Always been the case, however I think there's a higher level of transformation currently than there has been and therefore we've had to work a lot harder. I've been helped in that by having the appointment of two motion directors in January which has actually freed me up and others to spend time in terms of Chinese and adopting these strategies and putting a lot of change in the business. Now we expect to have over 30 Chinese outlets by mid-2017.

55:27 I think we'll have more than that. That speed of change may be at its peak because if you go down the route of Chinese quotas, Chinese tariffs Thank you. The next question is, who do you see as your biggest competitors these days? Arnold Clark, Sittner, Looker's Parent Group or the online car retailers?

56:16 Well, I don't think there are any online car retailers really, since the demise of Kazooie too much. We think our next best competitor is the dealership near our dealership with the best salesman in, irrespective of who owns it. Our salesmen are up against another salesman and if they smile more, Listen More, Identify Needs More, and are better at understanding the customer's buying requirements, they will get the sale. So it's not that we compete with Arnold Clark or Sittner or whoever it is. We are some very good independent operators out there. We are up against the salesman a mile away who is better than ourselves. Thank you Robert.

57:02 We are now moving on to our final question. If you have any further questions please email the team who respond to any questions that weren't covered today. The question is, what's the biggest opportunity for Virtue over the next few years?

57:17 I think the biggest opportunity for Virtue over the next few years is to use our balance sheet conservatively but to scale up to generate greater economies of scale, greater market share, greater power of marketing, greater number of used cars on the web. and to generate shareholder value through investment in enhancing growth. Thank you Robert. That's unfortunately all the questions that we have time for today so I'll hand back over to the management team for any closing remarks.

57:51 Well I'd just like to thank you all for giving your time up. Time is precious and I'd like to thank you for either investing in Virtue or considering investing in Virtue. and I'd like to wish you all a great afternoon and a great weekend. Thank you. Thank you. Thank you to the management team for joining us today. That concludes the VirtuMotors interim results presentation. Please take a moment to complete a short survey following this event. A recording of this presentation will be made available on Engage Investor. I hope you enjoyed today's webinar.