MMH.L Regulatory News (MMH)

13 August 2019

MARSHALL MOTOR HOLDINGS PLC

("MMH" or the "Group")

Unaudited interim results for the six months ended 30 June 2019

Strong outperformance of market; outlook in line

Marshall Motor Holdings plc, one of the UK's leading automotive retail groups, announces its unaudited interim results for the six months ended 30 June 2019 ("H1" or the "Period").

Financial Summary

Highlights

Daksh Gupta, Chief Executive Officer, said:

"Despite challenging market conditions, the Group has delivered a strong H1 unit sales performance, ahead of both the new and used car markets and underlying profit before tax in line with the Board's expectations

"Given continued weak consumer confidence as a result of ongoing political uncertainty over Brexit, ongoing cost headwinds for the retail sector and further potential new vehicle supply constraints in the lead up to the implementation of further emissions-related regulations on 1 September 2019, the Board believes it is right to remain cautious regarding the outlook for the remainder of the year. Nevertheless, the Board's current outlook for the full year remains unchanged."

1 "Like-for-like" businesses are defined as those which traded under the Group's ownership throughout both the period under review and the whole of the corresponding comparative period

2 Underlying profit before tax is presented excluding non-underlying items (see Note 6)

3 Adjusted net debt is presented excluding the impact of the recognition of lease liabilities under IFRS16 (see Note 3a)

4 Reported net debt includes the impact of the recognition of lease liabilities under IFRS16. (see Note 3a)

5 Registrations as reported by the Society of Motor Manufacturers and Traders

For further information and enquiries please contact:

Notes to Editors

About Marshall Motor Holdings plc (www.mmhplc.com)

The Group's principal activities are the sale and repair of new and used vehicles. The Group's businesses comprise a total of 106 franchises covering 23 brands, operating from 84 locations across 27 counties in England. In addition, the Group operates five trade parts specialists, three used car centres, five standalone body shops and one pre delivery inspection centre.

In May 2019 the Group was recognised by the Great Place to Work Institute, being ranked the 11th best place to work in the UK (super large company category). This was the ninth year in succession that the Group has achieved Great Place to Work status.

Cautionary statement

This announcement contains unaudited information based on management accounts and forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts and undue reliance should not be placed on any such statements because they speak only as at the date of this document and are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and the Group's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. MMH undertakes no obligation to revise or update any forward-looking statement contained within this announcement, regardless of whether those statements are affected as a result of new information, future events or otherwise, save as required by law and regulations.  

Operating Review

Introduction

Our unaudited interim results for the six months ended 30 June 2019 ("H1" or the "Period") reflect a strong unit sales performance, outperforming the new retail, new fleet and used car markets, together with further growth in aftersales revenues. The Group has delivered an underlying profit before tax of £15.2m (H1 2018: £16.0m). This was a strong performance given the challenging market conditions and ongoing cost headwinds, and was in line with the Board's expectations.

As announced in March 2019, the Group completed two acquisitions during the Period comprising six ŠKODA franchised dealerships, as a result of which the Group became ŠKODA's largest UK retailer and now represents the brand in 11 locations. These acquisitions demonstrated our commitment to our stated strategy to grow with existing brand partners in new geographic territories. The aggregate cash consideration paid for the goodwill and fixed assets of the acquired businesses was £3.5m and the Group also subsequently took the opportunity to separately acquire the freehold property at Northampton ŠKODA for £1.7m. The integration of these businesses is progressing according to plan and performance to date has been in line with our expectations.

The Group operates a well balanced portfolio of volume, premium and alternative premium brands which, at 30 June 2019, accounted for 27.4%, 48.1% and 24.5% respectively of the Group's total franchises (by number). The Group's diverse portfolio means it represents manufacturer brands accounting for over 80% of all new vehicle sales in the UK. The Board continues to believe that this scale and diversified spread of representation helps protect the Group from the effect of the cyclical nature of individual brand performance.

Six months ended 30 June 2019

Six months ended 30 June 2018

*Revenue and gross profit mix calculated excluding internal sales / other

New Vehicles

Total new car revenue in the Period was £569.1m (H1 2018: £584.6m), like-for-like £559.7m (H1 2018: £580.7m) was down 3.6%.

As expected, the UK new car market continued to decline during the Period. The Society of Motor Manufacturers and Traders ('SMMT') has reported that during the Period, new car registrations to retail and fleet customers declined by 3.2% and 3.6% respectively with total registrations of new vehicles in the UK, including the impact of dealer self-registration activity, declining by 3.4%. In the first quarter of 2019, the overall market declined by 2.4% however, the second quarter of 2019 became more challenging with the overall market declining 4.6%.

The Group's like-for-like sales of new units to retail customers decreased by 0.4%, a strong market out-performance. The supply challenges reported in the second half of 2018 were alleviated for a number of our brand partners and following a well-reported decline in demand for diesel vehicles, all premium brands have increased the proportion of petrol, hybrid and electric vehicle derivatives being produced to address current consumer demand.

The Group's like-for-like sales of new units to fleet customers decreased by 1.1% which was also a market out-performance. Sales of new vehicles to fleet customers have been impacted by the deferral of vehicle purchases as a result of a combination of continued economic uncertainty and the current lack of clarity in relation to the future tax implications of diesel vehicles which have typically formed a greater share of the market for fleet customers.

Despite these challenges, new car gross margin strengthened during the Period to 7.7%, up 73bp compared with the same period last year (H1 2018: 6.9%). This positive margin performance in new vehicle sales was driven by a combination of the Group's achievement of our brand partners' sales targets without material pre-registration activity and improved product mix in certain brands compared to last year.

Used Vehicles

Total used car revenue in the Period was £509.6m (H1 2018: £474.6m), like-for-like £498.8m (H1 2018: £467.0m) was up 6.8%.

Like-for-like sales of used units during the Period were up 7.2% versus the corresponding period last year, a continuation of the strong performance in the second half of last year.

As has been widely reported, the used car market experienced margin pressure during the Period, particularly during the second quarter of 2019. Seasonal declines in used car values during the Period were sharper than historic norms as a result of a number of factors including strong comparable values in 2018 as a result of WLTP-related supply shortages in the new car market, together with an increased volume of 3-4 year old used cars in the market in the Period. A return to a more historic used car values profile is anticipated for the remainder of this year.

Through the Group's robust operating controls, in particular, our prudent 56-day stocking policy, together with continued enhancement of the Group's management information system Phoenix 2, the Group was able to contain its used car margin reduction to 63bps at 6.6% (H1 2018: 7.2%).

Aftersales

In addition to the servicing, maintenance and repair of vehicles in our franchised retail centres, the Group also operates five standalone bodyshops, five Trade Parts Centres and one standalone central PDI facility.

Total aftersales revenue in the Period was £129.5m (H1 2018: £126.4m) with the Group continuing to deliver consistent like-for-like aftersales revenue growth, up 1.8%.

Aftersales margin during the Period was 44.6% (H1 2018: 46.0%). The reduction in aftersales margin during the Period was due in part to an increased mix of lower margin parts sales, which also experienced margin pressure, together with an increase in operational costs. We are expecting to see some margin recovery in the second half of the year.

At 30 June 2019, the Group had over 70,000 customers in live service plans. Service plans continue to form a key part of the Group's retention strategy, allowing customers to spread the maintenance cost of their vehicle whilst providing us with a greater level of certainty over future aftersales profits.

Total aftersales gross profit was down 0.6% to £57.8m (H1 2018: £58.1m) as a result of the issues referred to above and accounted for 42.8% of the Group's total gross profit (H1 2018: 43.8%).

Operating Costs

Overall Group costs increased by 2.5% to £114.9m (H1 2018: £112.1m), in part driven by the Group's recent acquisitions. Like-for-like operating costs increased by 1.6% to £112.3m (H1 2018: £110.5m). This performance benefitted from £0.6m in relation to a lease disposal, without which like-for-like costs would have been up by 2.0%. This was a strong result which benefited from a number of one-off management actions.

In the face of ongoing well documented cost headwinds for the retail sector, we continue to be disciplined in our approach to cost management, with rigorous policies and procedures in place to control all areas of discretionary spend.

Portfolio Management

As announced on 4 March 2019, the Group acquired the business and assets of Leicester and Nottingham ŠKODA from Sandicliffe Limited on 31 January 2019 and the business and assets of Bedford, Harlow, Letchworth and Northampton ŠKODA from Progress Bedford Limited on 28 February 2019. The Group also took the opportunity to separately acquire the freehold property at Northampton ŠKODA for £1.7m during the Period.

The Group continues to review its portfolio on an ongoing basis to maximise shareholder value. The Group's stated strategy is to grow scale with existing brand partners and extend our geographic footprint into new regions. However, our focus will remain on ensuring a strong strategic and financial case for any acquisition opportunities. We have further headroom to grow with all brand partners in what we believe, with continuing market uncertainty, will still be a consolidating market in which larger dealer groups with diversified franchise portfolios will be better placed.

Capital Investment

During the Period, the Group invested £8.8m of capital expenditure into its retail centres, including £1.7m to acquire the freehold of Northampton ŠKODA. Due to the postponement of certain developments until 2020, we now expect capital expenditure over the full year to be lower than our initial expectations.

During the Period, the Group completed the following developments:

After recent investments, the net book value of Group's freehold and long-leasehold property portfolio increased to £123.9m (H1 2018: £116.6m). 

People Centric

The Group was excited to, once again, achieve 'Great Place to Work' status by The Great Place to Work Institute for the ninth consecutive year. The Group was ranked 11th in the super large category based on the 2018 survey. As a result of being named as one of the UK's Best Workplaces for the fifth consecutive year, the Group was recognised with a Laureate award. The Group remains the number one ranked automotive business in the survey for the third consecutive year.

Technology and Online

The use of technology, online and social media are key drivers to increasing customer engagement levels as well as supporting the day-to-day operation of the business. The Group's website remains the 6th most visited dealer website in the UK and we remain one of the leading innovators in utilising social media channels. This was further recognised in the Period with the Group winning both 'Best Use of Social Media' at the 2019 Automotive Management Awards and the 'Social Media' category at the 2019 Motor Trader awards.

The Group's management information system, Phoenix 2, continues to drive operational effectiveness. Its continued development and disciplined use throughout the business is one of the key drivers to the continued market outperformance by the Group.

Worldwide Harmonised Light Vehicle Test Procedure

The introduction of the Worldwide Harmonised Light Vehicle Test Procedure ("WLTP") for commercial vehicles from 1 September 2019, together with changes to the Real Driving Emissions Test with effect from the same date, each have the potential to impact supply of new vehicles in the second half of 2019. The extent of this impact is not yet known and it will vary by manufacturer and by vehicle model. As with WLTP, industry forecasts suggest there is likely to be some impact on vehicle supply and longer lead times for some models and brands of new vehicles, albeit at this stage, it is anticipated that the impact will be less than that experienced in 2018.

Financial Review

Impact of First Time Adoption of IFRS 16 Leases

The Group has applied IFRS 16 for the first time in the Interim Report and Accounts for the six months ended 30 June 2019; the standard has been adopted using the full retrospective approach. The standard has no effect on the Group's economic activity, nor does it impact cash flows. However, adoption of the standard results in the recognition of new assets and liabilities, changes to the nature and timing of items of expenditure as well as changes to the classification of cash flows relating to lease contracts.

IFRS 16 removes the current distinction between operating leases and finance leases and requires that, for all leases, a right-of use asset and a lease liability are recognised in the Consolidated Balance Sheet. The asset represents the right to use the leased asset and the lease liability represents the commitments payable under the lease.

Operating lease rental charges in the Consolidated Statement of Comprehensive Income are replaced by interest charges and depreciation expenses. The timing of the recognition of these lease costs changes, with increased costs being recognised in the earlier years of the lease due to interest being recognised at a constant rate on the carrying value of the lease liability.

In the Group's full year results announcement released in March 2019, the Group provided an initial estimate of IFRS 16; that it is likely to be marginally earnings dilutive in the early years of adoption, with an initial 1%-2% impact on profit before tax. In addition, if the balance sheet at 31 December 2018 had been restated, we estimated c£86.0m of right-of-use assets and c£92.5m of associated liabilities would have been recognised in the Group's balance sheet, resulting in a c£6.5m decline in net assets.

The following tables summarises the actual impact of adoption of the new standard, the net impact being broadly in line with that estimate given in March 2019:

Full details of the impact of IFRS 16 on the 2019 Interim Report and Accounts, including the restatement of the comparative period, are set out in Note 3 'Changes in Accounting Policies and Disclosures' to the financial statements below.

The impact of IFRS 16 on the Group's profit may vary (either positively or negatively) dependent on the lease commitments either assumed or exited by the Group in each financial period.

Revenue

Reported revenue increased by 1.8% to £1,183.3m (H1 2018: £1,162.9m) with like-for-like revenue increasing by 0.9%. In addition, both used vehicle and aftersales revenues continued to show growth against the comparable period last year. Like-for-like revenue from the sale of new vehicles (to both retail and fleet customers) declined in the Period as a result of the declining UK new car market.

Margin

Gross margin was maintained at 11.4% (H1 2018: 11.4%), with higher new vehicle margins offsetting margin pressure in used vehicles and aftersales. This positive margin performance in new vehicle sales was driven by a combination of the Group's achievement of our brand partners' sales targets without material pre-registration activity and improved product mix in certain brands compared to last year.

On a like-for-like basis, new vehicle margin improved by 73bps to 7.7%. As a result, despite the decline in sales volumes of 0.4%, like-for-like gross profit increased by £2.7m.

On a like-for-like basis, used vehicle gross margin at 6.6% was 62bps below the same period last year. Margin performance was impacted by well documented declines in residual values in the second quarter, partly resulting from an exceptionally strong market in the previous year. The Group mitigated the impact of these declines with strong controls over inventory levels and rigorous application of our prudent 56 day stocking policy.

Like-for-like aftersales gross margin at 44.4% (H1 2018: 46.0%) was impacted in part to an increased mix of lower margin parts sales, which also experienced margin pressure, together with an increase in operational costs.

Costs

Underlying operating costs of £114.9m were 2.5% higher than in the same period last year, primarily driven by the impact of acquisitions. Like-for-like costs of £112.3m increased by 1.6% (2018: £110.5m,) an increase which was anticipated due to on-going cost headwinds. The Group continues to face a number of structural and inflationary costs which have been contained by on-going tight control of costs.

Total finance costs of £5.0m were £0.1m higher than the same period last year, driven by increased vehicle stocking charges as a result of higher levels of consignment stock, including our newly acquired sites.

During the Period, the Group incurred £0.4m of non-underlying costs, primarily related to acquisitions, disposals and restructuring.

Tax

The reported effective tax rate for the Period was 22.8% (H1 2018: 21.8%). The underlying effective tax rate for the Period was 22.6% (H1 2018: 21.9%).

Capital expenditure

Capital expenditure during the Period was £8.8m. This was lower than originally expected due to the deferral of two large scale capital expenditure projects, partially offset by the purchase of the Northampton ŠKODA freehold for £1.7m. At 30 June 2019, the Group had £123.9m of freehold / long-leasehold property (30 June 2018: £116.6m), equivalent to £1.58 per share.

Financial position

The Group continues to be cash generative, with cash of £10.8m generated in the Period, and the balance sheet remains strong. At 30 June 2019 the Group had adjusted net cash of £5.8m compared to an adjusted net cash position of £0.9m at 30 June 2018 and net debt of (£5.1m) at 31 December 2018. Reported net debt (post IFRS 16) at 30 June 2019 was £82.2m (H1 2018: £92.7m)

The Group's unutilised £120m revolving credit facility is in place until May 2021 and provides financial flexibility to take advantage of investment and growth opportunities when they arise.

Over the longer term, the Board continues to believe it is in the best interests of all stakeholders that the Group maintains a sound financial position. In this respect, the Board targets net bank indebtedness (excluding the impact of IFRS 16) of not more than 1.25x net debt/EBITDA. This leverage may rise for a period of time towards the Group's banking facility limit of not more than 3.0x (excluding the impact of IFRS 16) should an exceptional investment opportunity arise.

Interim Dividend

The Group's recently revised dividend policy is for full year dividends to be covered by between 2.5 to 3.5 times underlying earnings and paid in an approximate one-third (interim dividend) and two-thirds (final dividend) split, subject to the Group's trading prospects being satisfactory and taking into account potential investment opportunities.

The Board is pleased to announce an interim dividend of 2.85p per share (2018 interim dividend: 2.15p), up 32.6% aided by the revised dividend policy. The dividend will be paid by 20 September 2019 to shareholders who are on the Company's register at close of business on 23 August 2019.

Summary and Outlook

Despite challenging market conditions, the Group has delivered a strong H1 unit sales performance, ahead of the new retail, new fleet and used car markets with underlying profit before tax in line with the Board's expectations.

Whilst still early, our September order bank is building as expected. However, given continued weak consumer confidence as a result of ongoing political uncertainty over Brexit, ongoing cost headwinds for the retail sector and further potential new vehicle supply constraints in the lead up to the implementation of further emissions-related regulations on 1 September 2019, the Board believes it is right to remain cautious regarding the outlook for the remainder of the year. Nevertheless, the Board's current outlook for the full year remains unchanged.

Daksh Gupta

Chief Executive Officer

13 August 2019

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2019

*Prior year cost of sales and net operating expenses have been adjusted by a reclassification from net operating expenses to cost of sales to be consistent with presentation in the current year. The net impact of which is less than £500,000.

The comparative figures have been restated on adoption of IFRS 16 Leases. Full details of the impact of adoption are included in Note 3 'Changes in Accounting Policies and Disclosures'.

All activities of the Group in the current period are continuing.

The above Condensed Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

Condensed Consolidated Balance Sheet

At 30 June 2019

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2019

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2019

Net Debt Reconciliation

For the six months ended 30 June 2019

Notes to the Condensed Consolidated Financial Statements

1. General information

Marshall Motor Holdings Plc (the Company) is incorporated and domiciled in the United Kingdom. The Company is a public limited company, limited by shares, whose shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange. The Company is registered in England under the Companies Act 2006 (registration number 02051461) with the address of the registered office being: Airport House, The Airport, Cambridge, CB5 8RY, United Kingdom.

These interim condensed consolidated financial statements were authorised for issue by the Board of Directors on 12 August 2019.

Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2019 have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. They do not include all the information and disclosures required for full annual financial statements and should be read in conjunction with the Group's consolidated financial statements for the year ended 31 December 2018. A copy of the full Annual Report and Accounts for the year ended 31 December 2018 can be found on the Marshall Motor Holdings Plc website at: www.mmhplc.com.

The interim condensed consolidated financial statements for the six months ended 30 June 2019, and for the comparative six months ended 30 June 2018, are unaudited but have been reviewed by the Auditor. A copy of their Review Report is set out at the end of these financial statements. The financial information for the year ended 31 December 2018 does not constitute the Group's statutory financial statements for that period as defined in section 434 of the Companies Act 2006, but is instead an extract from those financial statements. The Group's financial statements for the year ended 31 December 2018 were authorised for issue by the Board of Directors on 12 March 2019 and have been delivered to the Registrar of Companies. The Auditor's Report on those financial statements contained an unqualified opinion, did not draw attention to any matters by way of emphasis and did not contain any statement under section 498 of the Companies Act 2006.

During the period the Group has adopted the amendments to IFRS 3 Business Combinations, IAS 12 Income Taxes and IAS 23 Borrowing Costs as well as the interpretation of IFRIC 23 Uncertainty over Income Tax Treatment which has had no impact on the financial statements. The Group has also adopted the new lease accounting standard; IFRS 16 Leases. Full details of the impact of adoption are set out in Note 3 'Changes in Accounting Policies and Disclosures'.

The interim condensed consolidated financial statements are prepared in Sterling which is the presentational currency of the Group. All values are rounded to the nearest thousand pounds (£'000) except where otherwise indicated.

Principal risks and uncertainties

The principal risks and uncertainties for the six months ended 30 June 2019 are consistent with those set out in the Marshall Motor Holdings Plc 2018 Annual Report and Accounts dated 12 March 2019. These principal risks and uncertainties are expected to be consistent for the year ending 31 December 2019.

Progress of the European Union exit negotiations continues to be reviewed with appropriate actions taken in response to changes in economic conditions. The Company is not a direct importer of vehicles and parts from the EU; it makes purchases from manufacturers' UK national sales companies (NSCs) which have primary responsibility for managing imports to the UK. As a result, the Company continues to maintain close relationships with manufacturers and to review manufacturers' Brexit preparations.

Going concern

The interim condensed consolidated financial statements are prepared on the going concern basis. After making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and for at least one year from the date that these interim condensed consolidated financial statements are signed. For these reasons they continue to adopt the going concern basis in preparing the interim condensed consolidated financial statements.

Notes to the Condensed Consolidated Financial Statements

2. Accounting policies

Except where disclosed otherwise in Note 3 'Changes in Accounting Policies and Disclosures', the accounting policies as well as the critical accounting judgements, estimates and assumptions applied are consistent with those set out in the Marshall Motor Holdings Plc 2018 Annual Report and Accounts dated 12 March 2019. These accounting policies and critical accounting judgements, estimates and assumptions are expected to apply for the year ending 31 December 2019.

3. Changes in accounting policies and disclosures

New standards, amendments and interpretations adopted by the Group

The following amendments to existing standards became effective on 1 January 2019 and have been adopted in the consolidated financial statements for the first time during the six months ended 30 June 2019. These have been assessed as having no financial or disclosure impact on the numbers presented.

·; IFRIC Interpretation 23 Uncertainty over Income Tax Treatment

·; IFRS 3 Business Combinations

·; IAS 12 Income Taxes

·; IAS 23 Borrowing Costs

The following new standard became effective on 1 January 2019 for the current reporting period. The Group had to change its accounting policies and make adjustments as a result of adopting the following new standard:

·; IFRS 16 Leases

The impact of the adoption of this standard and the new accounting policy are disclosed below.

Three other standards, amendments and interpretations apply for the first time with effect from 1 January 2019; however, they do not have an impact on the interim condensed consolidated financial statements of the Group.

Impact on current period of the adoption of new standards, amendments and interpretations

a) IFRS 16 Leases - impact of adoption

The Group has applied IFRS 16 issued in January 2016 with a date of initial application of 1 January 2019. IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC-15 Operating Lease Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

The Group has applied IFRS 16 using the full retrospective approach, therefore, the Group applied IFRS 16 at the date of initial application as if the standard had already been effective at the commencement date of the Group's existing lease contracts. As a result, the comparative information in these interim condensed consolidated financial statements has been restated. The nature and effects of the key changes to the Group's accounting policies resulting from the adoption of IFRS 16 are summarised below.

Definition of a lease

Previously the Group determined at contract inception whether an arrangement is or contains a lease under IFRIC 4. Under IFRS 16, the Group assesses whether a contract is or contains a lease based on the definition of a lease as explained in the accounting policy.

On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Group has applied the definition of a lease under IFRS 16 to contracts that have been entered into, or changed, on or after 1 January 2019.

Group as lessee

As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all the risks and rewards incidental to ownership of the underlying asset to the Group. Under IFRS 16, the Group recognises in the Consolidated Balance Sheet right-of-use assets and lease liabilities for most leases.

The Group has elected to apply the recognition exemptions for lease contracts that do not contain a purchase option and have a lease term of 12 months or less and/or are for underlying assets with a low value.

For leases not covered by these recognition exemptions, the Group recognised right-of-use assets and lease liabilities on adoption of IFRS 16. The Group also tested these right-of-use assets for impairment and recognised an impairment loss against some right-of-use assets on transition and when restating the comparative 2018 period.

Notes to the Condensed Consolidated Financial Statements

3. Changes in accounting policies and disclosures (continued)

Impact on current period of the adoption of new standards, amendments and interpretations (continued)

a) IFRS 16 Leases - impact of adoption (continued)

Group as lessor

Under IFRS 16, lessor accounting continues to require lessors to classify leases as either operating leases or finance leases using similar principles as were used under IAS 17. As a result, with the exception of sub-lease arrangements, the Group is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor.

Under IFRS 16, the Group is required to assess the classification of a sub-lease with reference to the right-of-use asset, not the underlying asset. On transition, the Group reassessed the classification of sub-lease contracts previously classified as an operating lease under IAS 17. The Group concluded that two sub-leases are finance leases under IFRS 16, and accounted for these subleases as new finance leases entered into at the date of initial application.

Impacts on financial statements

As described above, June 2018 and December 2018 comparatives have been restated following the adoption of IFRS 16. The following tables on pages 21 to 23 summarise the restatements arising on adoption of IFRS 16 in the Group's interim condensed consolidated financial statements.

Transition adjustment

The following table summarises the impact, net of tax, of transition to IFRS 16 on reserves and retained earnings as at 1 January 2018. Full details of the first time adoption of IFRS 9 are set out in the Marshall Motor Holdings plc 2018 Annual Report and Accounts.

Taxation

A deferred tax liability arises on the right-of-use asset and a deferred tax asset arises on the corresponding lease liabilities. These meet the conditions for offsetting and are presented net on the Condensed Consolidated Balance Sheet. The net effect is a deferred tax asset which has been recognised as it is probable that future taxable profits will be available against which the deferred tax asset can be offset.

Consolidated balance sheet

Right-of-use assets and corresponding lease liabilities have been recognised and presented separately in the Consolidated Balance Sheet. Long leasehold assets previously included under property, plant and equipment have been derecognised as well as any rent prepayments and accruals relating to leases previously classified as operating leases. In addition, the portion of vacant property provisions relating to operating lease rents has been derecognised and replaced with impairments of right-of-use assets in respect of leases of vacant premises. The net effect of all these adjustments has been recognised in retained earnings.

Notes to the Condensed Consolidated Financial Statements

3. Changes in accounting policies and disclosures (continued)

Impact on current period of the adoption of new standards, amendments and interpretations (continued)

a) IFRS 16 Leases - impact of adoption (continued)

Impacts on financial statements (continued)

Consolidated balance sheet (continued)

Notes to the Condensed Consolidated Financial Statements

3. Changes in accounting policies and disclosures (continued)

Impact on current period of the adoption of new standards, amendments and interpretations (continued)

a) IFRS 16 Leases - impact of adoption (continued)

Impacts on financial statements (continued)

Consolidated statement of comprehensive income

The depreciation expense has increased due to the charge on the newly recognised right-of-use assets, net of the reduced charge following the derecognition of long leasehold property assets. Rental charges have reduced following the reclassification of most leases as on balance sheet. Net finance costs have increased due to the interest charge on the newly recognised lease liabilities.

There is no material impact on other comprehensive income or on basic and diluted earnings per share.

Consolidated cash flow statement

The adoption of IFRS 16 changes neither the timing nor amount of the Group's cash flows. The only changes are presentational. The classification of lease payments changes from being shown exclusively as an operating cash flow. Lease payments become a combination of operating cash flows (reflecting the interest portion of lease payments) and financing cash flows (reflecting the principal portion of the lease liability). The following table shows the reclassification between categories of cash flows for the six months ended 30 June 2018.

Notes to the Condensed Consolidated Financial Statements

3. Changes in accounting policies and disclosures (continued)

Impact on current period of the adoption of new standards, amendments and interpretations (continued)

b) IFRS 16 Leases - accounting policies applied from 1 January 2018

Group as lessee

The Group recognises a right-of-use asset and a lease liability at the lease commencement date.

Right-of-use asset

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

Lease liability

The lease liability is initially measured at the present value of the lease payments to be made over the lease term that have not been paid at the lease commencement date. When calculating the present value, the lease liability is discounted using the interest rate implicit in the lease, or, if that rate cannot be readily determined, the Group's incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise:

- fixed payments, including in-substance fixed payments, less any lease incentives receivable;

- variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the lease commencement date;

- amounts expected to be payable under a residual value guarantee;

- the exercise price under a purchase option that the Group is reasonably certain to exercise; 

- lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option; and

- penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Short-term leases and leases of low-value assets

The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases and leases of low-value assets. Short-term leases are those that do not contain a purchase option and have a lease term of 12 months or less. Low value assets are those with a value below £5,000. The Group recognises on a straight-line basis over the lease term the lease payments associated with these leases in net operating expenses in the Consolidated Statement of Comprehensive Income.

Notes to the Condensed Consolidated Financial Statements

3. Changes in accounting policies and disclosures (continued)

b) IFRS 16 Leases - accounting policies applied from 1 January 2018 (continued)

Group as lessor

The Group only acts as a lessor in the context of sub-lease arrangements. When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease as being either a finance lease or an operating lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. To classify each sub-lease, an overall assessment is made as to whether the lease transfers to the lessee substantially all of the risks and rewards of ownership incidental to ownership of the right-of-use asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset. If a head lease is a short-term lease to which the Group applies the exemption described above, then it classifies the sub-lease as an operating lease.

If an arrangement contains lease and non-lease components, the Group applies IFRS 15 Revenue from Contracts with Customers to allocate the consideration in the contract.

The Group recognises lease payments received under operating leases as income on a straight-line basis over the lease term as part of other income presented within net operating expenses in the Consolidated Statement of Comprehensive Income.

4. Segmental information

IFRS 8 Operating Segments requires operating segments to be consistent with the internal management reporting provided to the Chief Operating Decision Maker who is responsible for allocating resources and assessing the performance of the operating segments. The Group considers the Chief Executive Officer to be the Chief Operating Decision Maker.

The Group has identified its key product and service lines as being its operating segments because both performance and strategic decisions are analysed at this level. The IFRS 8 aggregation criteria have been met as a result of the Group's key product and service lines sharing common characteristics such as; similar types of customer for the products and services, similar nature of the product and service offerings, similar methods used to distribute the products and provide the services and similar regulatory and economic environment. As a result of these criteria being satisfied, the Group's operating segments constitute one reportable segment (retail) and all segmental information has been disclosed as such. The retail segment includes sales of new and used vehicles, together with the associated ancillary aftersales services of; servicing, body shop repairs and parts sales.

The Group has concluded that rental income arising from investment properties does not meet the quantitative thresholds required to constitute a reportable segment as defined in IFRS 8. Due to the non-material nature of these amounts, they are combined with the retail segment rather than being disclosed separately. As a result, all of the Group's activities are disclosed within the one reportable segment - the retail segment.

Geographical information

Revenue earned from sales is disclosed by origin and is not materially different from revenue by destination. All of the Group's revenue is generated in the United Kingdom.

Notes to the Condensed Consolidated Financial Statements

4. Segmental information (continued)

Information about reportable segment

All segment revenue, profit before taxation, assets and liabilities are attributable to the principal activity of the Group being the provision of car and commercial vehicle sales, vehicle service and other related services.

The following tables show the disaggregation of revenue by major product/service lines for continuing operations:

*mix calculation excludes internal / other sales

^Prior year cost of sales and net operating expenses have been adjusted by a reclassification from net operating expenses to cost of sales to be consistent with presentation in the current year. The net impact of which is less than £500,000.

5. Profit before taxation

Profit before taxation is arrived at after charging / (crediting):

Notes to the Condensed Consolidated Financial Statements

6. Non-underlying items

Acquisition costs

See Note 12 'Goodwill and Other Intangible Assets' for further details of the transactions giving rise to the acquisition costs.

Other non-underlying items

All other expenses disclosed in non-underlying items are a continuation of items disclosed in previous periods. More information about the non-underlying items in the year ended 31 December 2018 is available in the 2018 Annual Report and Accounts available at www.mmhplc.com. 

7. Net finance costs

8. Taxation

The tax charge for the six months ended 30 June 2019 is recognised based on best estimates of the average annual effective tax rate expected for the full financial year, adjusted for the tax impact of any discrete items arising in the period. The estimated average annual restated effective tax rate used for the six months to 30 June 2019 is 22.6% (restated six months ended 30 June 2018: 21.9%).

The reported effective tax rate for the six months ended 30 June 2019 is 22.8% (restated six months ended 30 June 2018: 21.8%). The underlying effective tax rate for the six months ended 30 June 2019 is 22.6% (restated six months ended 30 June 2018: 21.9%).

Notes to the Condensed Consolidated Financial Statements

9. Earnings per share

Basic and diluted earnings per share are calculated by dividing the earnings attributed to equity shareholders by the weighted average number of ordinary shares during the year and the diluted weighted average number of ordinary shares in issue in the year after taking account of the dilutive impact of shares under option of 2,775,357 (June 2018: 2,757,186, December 2018: 2,423,249).

Underlying earnings per share are based on basic earnings per share adjusted for the impact of non-underlying items.

Notes to the Condensed Consolidated Financial Statements

10. Dividends

An interim dividend of 2.85p per share will be paid by 20 September 2019 to shareholders who are on the Company's register at close of business on 23 August 2019.

An interim dividend of £1,674,000 in respect of the year ended 31 December 2018 was paid in September 2018. This represented a payment of 2.15p per ordinary share in issue at that time. A final dividend of £4,995,000 for the year ended 31 December 2018 was paid in May 2019. This represented a payment of 6.39p per share in issue, giving a full year dividend of 8.54p.

11. Share-based payments

In April 2019 the second tranche of the IPO Performance Awards vested and became exercisable. On 2 April 2019, all option holders exercised these options. As such, 306,795 ordinary shares of 64p were issued. During the period, the decision was made for a portion of the share options being exercised to be settled in cash rather than being equity-settled. The total value of cash-settled transactions is £708,000.

In April 2018, the third tranche of the IPO Restricted Share Awards as well as the first tranche of the IPO Performance Awards vested and became exercisable. On 11 April 2018, all option holders exercised these options as well as the second tranche of the IPO Restricted Awards which had previously vested and become exercisable in the prior period. As such, 472,791 ordinary shares of 64p were issued. During the period, the decision was made for a portion of the share options being exercised to be settled in cash rather than being equity-settled. The total value of cash-settled transactions is £968,000.

12. Goodwill and other intangible assets

The carrying value of goodwill and other intangible assets principally consists of goodwill and franchise agreements of £114.6m (June 2018: £120.8m, December 2018: £111.5m).

Acquisitions - current period

On 31 January 2019 the Group acquired the trade and assets of two ŠKODA dealerships located in Leicester and Nottingham. These acquisitions are part of the Group's stated strategy to grow with existing brand partners in new geographic territories by adding further sites in excellent locations that are contiguous to the Group's existing ŠKODA sites.

On 28 February 2019 the Group acquired the trade and assets of four ŠKODA dealerships in Northampton, Bedford, Letchworth and Harlow. These acquisitions are part of the Group's stated strategy to grow with existing brand partners in new geographic territories by adding further sites in excellent locations that are contiguous to the Group's existing ŠKODA sites.

The estimated identifiable assets and liabilities at the date of the acquisitions are stated at their provisional fair value as set out below. The goodwill arising on acquisition is attributed to the expected synergies and benefits associated with the increased brand representation which has resulted in the Group becoming the UK's largest ŠKODA retailer.

Notes to the Condensed Consolidated Financial Statements

12. Goodwill and other intangible assets (continued)

Acquisitions - current period (continued)

On 31 January 2019:

The results of the acquired ŠKODA dealerships were consolidated into the Group's results from 31 January 2019. For the period from acquisition to 30 June 2019, the revenues and the loss before tax generated by these dealerships were immaterial in the context of the Group's revenues and profit before tax.

If the acquisition had taken effect at the beginning of the reporting period in which the acquisition occurred (1 January 2019), on a pro forma basis, the change in revenue and profit before tax of the combined Group for the six months ended 30 June 2019 would have been immaterial in the context of the Group.

On 28 February 2019:

The results of the acquired ŠKODA dealerships were consolidated into the Group's results from 28 February 2019. For the period from acquisition to 30 June 2019, the revenues and the loss before tax generated by these dealerships were immaterial in the context of the Group's revenues and profit before tax.

If the acquisition had taken effect at the beginning of the reporting period in which the acquisition occurred (1 January 2019), on a pro forma basis, the change in revenue and profit before tax of the combined Group for the six months ended 30 June 2019 would have been immaterial in the context of the Group.

Notes to the Condensed Consolidated Financial Statements

12. Goodwill and other intangible assets (continued)

Acquisitions - current period (continued)

Transaction costs arising on acquisitions in 2019 totalled £159,000. These costs have been recognised in net operating expenses in the Consolidated Statement of Comprehensive Income and are part of operating cash flows in the Consolidated Cash Flow Statement.

Acquisitions - prior period purchase of non-controlling interests

On 22 February 2018, the Group acquired the remaining 1% of the share capital of the following subsidiary undertakings; Marshall of Peterborough limited, Marshall of Ipswich Limited and Marshall of Stevenage Limited, taking the Group's shareholdings in these entities up to 100%. Total consideration for these shares amounted to £50,000; the value of consideration in excess of the carrying value of the non-controlling interests acquired has been recognised in retained earnings.

13. Property, plant and equipment

At 30 June 2019, the Group had capital commitments totalling £4.5m relating to ongoing construction projects.

Notes to the Condensed Consolidated Financial Statements

13. Property, plant and equipment (continued)