Final Results

13 March 2019

MARSHALL MOTOR HOLDINGS PLC

("MMH" or the "Group")

Results for the year ended 31 December 2018

Marshall delivers record results and raises dividend

Marshall Motor Holdings plc, one of the UK's leading automotive retail groups, announces its results for the year ended 31 December 2018.

Financial summary

2018 Highlights

• Like-for-like revenue growth of 1.2%, despite challenging new and used car markets

• Gross margin remained strong at 11.7%

• Record continuing underlying PBT, up 1.2% to £25.7m

• Like-for-like total new vehicle unit sales down 8.2% due to impact of WLTP and diesel challenges

• Strong used car performance: like-for-like unit sales up 2.3% and margin up 32bps

• Further like-for-like aftersales revenue growth, up 2.3%, with overall margin impacted by mix of lower margin parts sales

• Management initiatives in the year mitigated ongoing cost headwinds

• Strong balance sheet with an increase in net assets to £200.4m (£2.57 per share) after £9.3m goodwill impairment; underpinned by £125.3m of freehold / long leasehold property and minimal net debt

• Another year of strong operational cash generation supporting further capital investment of £23.8m

• Revised dividend policy (2.5-3.5x, from 4-5x) given Group's strong financial position and confidence in its long-term prospects; 33.4% increase in full year dividend to 8.54p per share

Daksh Gupta, Chief Executive Officer, said:

"Despite challenging new and used car markets, the Group performed strongly, exceeding last year's record result at continuing underlying PBT level with overall like-for-like revenue growth.

"In light of the Group's strong financial position and confidence in its long-term prospects, we are pleased to announce a change to our dividend policy (to 2.5-3.5x, from 4-5x) and a 33.4% increase in our full year dividend to 8.54p per share.

"The Board notes the latest forecast by The Society of Motor Manufacturers and Traders ("SMMT") for a further decline in the new car market in 2019 and is cognisant of the potential impact that the UK's withdrawal from the European Union may have. The Board therefore remains cautious about the economic outlook for 2019. Our order book for the important March plate-change period is, however, encouraging and our outlook for the full year remains unchanged.

"I would like to take this opportunity, on behalf of the Chairman and the Board, to thank our entire team, our brand partners and suppliers for their continued support."

* results on a 'like-for-like' basis include only the Group's businesses that have been active and trading for a period of 12 consecutive months. Business that are excluded from the definition of 'like-for-like' are those sites that have recently commenced operation, therefore do not have a 12-month trading history, as well as any businesses that were closed and market segments or activities that were ceased during the current or previous year.

** underlying profit before tax is presented excluding non-underlying items as set out in Note 4.

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 have 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 2018 the Group was recognised by the Great Place to Work Institute, being ranked the 21st best place to work in the UK (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.

Marshall Motor Holdings plc

Results for the year ended 31 December 2018

Chairman's Statement

Introduction

I am delighted to present our annual results for the year ended 31 December 2018 (the "Year"), my first since becoming Chairman of the Group on 1 January 2019.

Whilst the market backdrop in 2018 remained challenging, the Group performed strongly. We are pleased to report a record continuing underlying profit before tax performance during the Year.

I am excited to have joined the Group at this time in its development. The global automotive industry is undergoing unprecedented change, driven in large part by exciting new technologies, some of which I have been heavily involved with during my career.

I have visited a number of our dealerships and met with many of our colleagues since I joined the Group and I have been very impressed with how the Group operates.

Strategy

The Group's strategy of close partnership with major global automotive brands has served it well over many years, enabling it to grow significantly and become a leading UK automotive retailer. This strategy has positioned the Group well to continue its success and I very much look forward to being part of the leadership team to help deliver its future potential. We remain committed to our strategy of growing the Group further, both organically and through targeted acquisitions. We continue to believe that those automotive retailers with both scale and a diverse portfolio will be best placed to succeed in a changing market.

Results

The Group has enjoyed another record year, delivering like-for-like revenue growth of 1.2% and continuing underlying profit before tax growth of 1.2% to £25.7m. The Group's balance sheet also remains strong, underpinned by £125.3m of freehold/long leasehold property.

Dividend

The Group's stated dividend policy since 2015 has been to maintain a progressive dividend policy where dividends were covered between 4 to 5 times by underlying earnings. The Board has recently reviewed its dividend policy and, in light of the Group's strong financial position and confidence in its long-term prospects, is pleased to announce a change to this policy.

The Group's revised dividend policy is that, subject to the Group's trading prospects being satisfactory and taking into account potential investments, dividends will 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. The Board believes the revised dividend policy is appropriate and sustainable, balancing the Group's strong financial position and cash generation with its stated strategy of further investment and growth in its business.

The Board is therefore recommending a final dividend for 2018 of 6.39p per share which, if approved by shareholders at our AGM on 21 May 2019, will be paid on 24 May 2019 to shareholders who are on the Company's register at close of business on 26 April 2019. If approved, this will result in a full year dividend of 8.54p per share, an increase of 33.4% on the prior year (2017: 6.40p) and dividend cover of 3.2x (2017: 4.2x).

AGM

Our annual general meeting will be held on 21 May 2019 and I look forward to meeting all shareholders who are able to attend.

Outlook

The Board notes the latest forecast by the Society of Motor Manufacturers and Traders ('SMMT') for a further decline in the UK new car market in 2019 of 2.3%. The Board is also cognisant of the potential impact that Brexit may have on both the UK economy generally and the automotive sector in particular. At the date of this statement, the terms of the UK's departure from the European Union are not certain and the Board therefore remains cautious about the economic outlook for 2019. We are, however, confident in our brand partners' commitment to the UK automotive retail market (the second largest in Europe) and their collective ability to respond effectively to the potential challenges that Brexit may bring.

Our order book for the important March plate-change period is, however, encouraging and our outlook for the full year remains unchanged.

The Group has the benefit of a strong balance sheet and a low level of net debt. This, together with an exceptional management team, leaves it well placed to respond to market changes and challenges and to take advantage of opportunities when they arise.

On behalf of the Board, I would once again like to thank Peter Johnson who retired as Chairman on 31 December 2018. His leadership since the Group's IPO in 2015 oversaw its transformation, including through the acquisitions of SG Smith in 2015, Ridgeway in 2016 and the disposal of Marshall Leasing in 2017. I would also like to thank Mark Raban, who stepped down from his position as Chief Financial Officer on 2 January 2019, for his valuable contribution to the Group over the same period. I am very pleased to welcome Richard Blumberger to the Board as our new Chief Financial Officer.

I would also like to thank the leadership team, our brand partners, business suppliers, shareholders and colleagues throughout the Group for their continued support during another successful year.

Finally, I would like to thank all of our customers throughout the UK who choose Marshall as their preferred source of mobility products and services - delighting and satisfying you is the ultimate goal of everything we do.

Professor Richard Parry-Jones CBE

Chairman

12 March 2019 

Operating Review

Overview

For the fourth consecutive year since our IPO, I am pleased to announce another record result at continuing underlying PBT level. Despite the well-publicised decline in our markets, the Group delivered continuing underlying PBT of £25.7m, ahead of last year's record result.

2018 was another successful year for the Group:

• Total revenue of £2.2 billion with like-for-like revenue growth of 1.2% to £2.1 billion;

• Continuing underlying PBT up 1.2% to £25.7m, ahead of last year's record result;

• Strong used car performance: like-for-like volumes up 2.3% combined with a 32bps margin improvement;

• Aftersales like-for-like revenue continued to grow, up 2.3%;

• Like-for-like total new vehicle unit sales down 8.2% due to impact of WLTP and diesel challenges;

• Disciplined cost management despite significant costs headwinds with like-for-like operating expenses as a percentage of turnover marginally down at 10.1%;

• Net debt at 31 December 2018 of £5.1m after continued investment in capital expenditure of £23.8m, including a new freehold at Lincoln Jaguar Land Rover and a long leasehold development at Cambridge Ford;

• Extinguished residual liability for historic defined benefit pension arrangements

• Revised dividend cover policy of 2.5 to 3.5 underlying earnings with recommended final dividend of 6.39p per share, giving a full year dividend of 8.54p per share, an increase of 33.4% versus last year;

• Ninth year of Great Place to Work status with four consecutive years achieving ranked status; and

• Further technological advancements in the Group's bespoke management information system, 'Phoenix 2'.

Strategy

The Group's strategic vision, which is unchanged, is to become the UK's premier automotive Group and this remains central to everything we do. The five strategic pillars, of equal importance, which underpin that vision are: class leading returns; putting our customers first; delivering retailing excellence for the benefit of our customers; being people-centric by focusing on employee engagement; and pursuing strategic growth both organically and through targeted acquisitions in line with the Group's strategy.

Class leading returns

The Group's strategy of building a balanced brand portfolio in attractive geographic locations, has assisted the continuation of our strong track record in the face of a more challenging market. In spite of an overall market decline during the Year, with the new car market declining by 6.8% and the used car market declining by 2.1%, our like-for- like revenue grew by 1.2% and our continuing underlying PBT grew by 1.2% versus last year's record result. In the face of increasing pressures, our costs were tightly controlled and our margins continued to be strong.

In light of the Group's strong financial position and confidence in its long-term prospects, we are pleased that we have been able to amend our dividend policy which has resulted in a 33.4% increase in our full year dividend.

Continuing to grow with our brand partners will enable the Group to access further benefits of scale across a number of areas of the business, including improved commercial terms with suppliers and vehicle stock management. The recent ŠKODA acquisitions also highlight the strength of our relationships with our brand partners. We continue to actively pursue acquisition opportunities which are in line with our strategy and meet our investment criteria.

Customer First

Customer satisfaction is an important element of the Group's strategy, driving repeat business and loyalty to the Marshall brand.

It is therefore pleasing that during the Year, 45.6% of the 40,471 customers surveyed who visited our showrooms indicated that they were either previous customers or were recommended to us, up from 42% in the prior year.

Our in-house developed management information system (Phoenix 2) provides daily customer satisfaction information by dealership which allows management to proactively respond to customer needs and follow up on potential areas of concern.

In addition, on a weekly basis, the Group centrally monitors customer satisfaction for both sales and aftersales across all locations and brand partners. This alignment ensures we focus on our brand partners' key measures whilst also ensuring consistency of internal performance monitoring.

The Group's continued expansion and scale gives customers a wider choice of location and products, increasing both customer satisfaction and sales.

Retailing excellence

A key differentiator is the Group's focus on, and investment in, technology aimed at expanding the Group's customer base and improving operating efficiencies. 2018 saw further investment in these areas.

The Group is focused on engaging and attracting new and existing customers with its online presence both through our website and social media. During the Year, the Group has focused on maximising its marketing return on investment through its online channels which has seen an increase in lead conversion. The Group is widely regarded as being at the forefront of social media in the sector, winning 14 awards in the last two years and two further awards so far in 2019.

During the Year, the Group partnered with one of the UK's leading suppliers of used car pricing and transaction data. This data has been uniquely integrated into Phoenix 2, our bespoke, in house management information system, to create a separate module to support management in vehicle valuations. This enables visibility of pricing comparison to the market, including regional and market desirability variations, all of which leads to greater customer transparency and optimal pricing. In addition, central oversight of stock management and market pricing has been improved. We believe this gives us a competitive advantage in the market place.

People centric

For the ninth consecutive year, the Group has been recognised by the Great Place to Work Institute as a 'great place to work' based on colleagues surveyed during 2018. Our 2018 scores were excellent with 78% of colleagues stating that Marshall was a 'great place to work'. This compares to an average UK score of 55%.

Based on the results of the 2017 survey, the Group was ranked 21st of the Top 30 large employers in the UK which included employers such as Cisco, Admiral Group Plc, SAP and MBNA. 2018 was the fourth year running that the Group was ranked. Given the further improvements of colleague engagement in 2018, we are confident of being ranked for a fifth year running which only 11 companies in the Great Place to Work Institute have achieved.

The Group is committed to diversity in both Marshall and the wider industry. This is demonstrated by the Group recently becoming a member of the Automotive 30 Club, the aim of which is to work towards having women in 30% of key leadership positions by 2030. Currently, 14.3% of the Group's management positions are undertaken by female colleagues and we continue to work towards growing this proportion.

Our Gender Pay Gap Report, which is published on our website, sets out the actions we are taking to address the gender pay gap which exists both in our business and the wider sector. We have made improvements in this area and are committed to do more.

As previously reported, the Group continues to make a significant investment in its sales executive offering with the objective of increasing diversity and retention in these key customer interfacing roles. Since launch, the Group has seen a significant decrease in sales executive turnover although there remains more to do in this area. In addition, the proportion of female sales executives in the Group has grown by 60%. This is encouraging for succession, talent development and gender diversity for the future.

Recognising that people are at the heart of our success, further strategic initiatives have been launched during the Year in the following areas:

• Future leaders programme to identify and develop our future management teams - this programme is for high potential colleagues to ready themselves for their first line management position. Encouragingly, we have already seen a number of the first cohort achieve promotion to their first line management role.

• Management development programme aimed at supporting and upskilling existing managers to help better equip them to get the best out of their teams and improve business performance.

• New in-house recruitment team giving more control over recruitment quality and cost. This initiative also sees the implementation of a new applicant tracking system which will provide greater control over our employment brand and candidate experience, whilst also saving time and cost.

• New learning management system - our new Group wide e-learning platform will help us to deliver more learning and development opportunities to all colleagues.

In keeping with our social agenda and aim to support local communities, we have also implemented a new work experience programme to attract new talent for the future alongside our current apprentice programme which currently has 122 participants.

Strategic growth

The Group's strategy is to grow scale with existing brand partners in new geographical territories, as demonstrated by the acquisitions completed since our IPO. There has been considerable consolidation in the UK motor retail market over the last ten years, in which the Group has played an active role. We expect further industry consolidation over the coming years for which the Group is very well positioned, with a strong balance sheet and excellent manufacturer relationships.

Acquisitions and disposals

The Group continually seeks to maximise return on capital employed and closely monitors and reviews its portfolio to ensure optimal returns. As a result, in November 2017 the Group closed six sub-scale, loss-making businesses. These businesses lost, in aggregate, £1.3m in 2017, with the resultant financial benefits of their closure being realised during the Year. The Group also successfully disposed of its property interests and liabilities in each of these closed sites by the end of the Year. Management took further proactive steps during the Year, closing two used car centres and one franchised site, Vauxhall Leicester, as part of a wider network reorganisation announced by the brand in 2018.

Consistent with our strategic growth pillar, during early 2019 the Group announced two acquisitions which have further extended our relationship with ŠKODA and the Volkswagen Group as a whole, growing our ŠKODA partnership from 5 locations to 11.

Our growth with ŠKODA is in line with the Group's strategy to grow scale with key brand partners and extend our geographic footprint. The Group joined the ŠKODA network in 2013 with the acquisition of Silver Street Automotive which included Barnstaple ŠKODA. We added Croydon ŠKODA as part of the acquisition of S.G. Smith in 2015, followed by the addition of our Newbury, Oxford and Reading ŠKODA businesses as a part of the acquisition of Ridgeway in 2016.

In January 2019, the Group acquired Leicester and Nottingham ŠKODA from Sandicliffe Limited and in February 2019 acquired the Bedford, Harlow, Letchworth and Northampton ŠKODA businesses from Progress Bedford Limited. These dealerships are in excellent locations, fully compliant with the latest ŠKODA brand standards and are contiguous to our existing ŠKODA sites. We believe they have potential for growth and improvement in their operating performance as part of a scaled and focused division.

Each acquisition was completed in consultation with, and the support of, ŠKODA UK, making Marshall the largest ŠKODA retailer in the UK. The ŠKODA brand has enjoyed strong growth in recent years. In 2018 the brand achieved 74,512 registrations which represented a UK market share of 3.2% and has enjoyed a 13.1% growth in the last five years. This has been driven by significant product development, particularly across the SUV segment, and this is expected to increase further with the introduction of two new models in 2019. The brand is part of the Volkswagen Group which has announced it will invest almost €44 billion in electrification and new mobility services. We are very proud to represent the ŠKODA brand and wish to thank the ŠKODA UK management team for their support over the years and look forward to building on our excellent relationship. We would also like to take this opportunity to welcome all colleagues of the acquired businesses to the Group.

Following these additions, the Group now consists of 106 franchises representing 23 brand partners trading in 27 counties nationwide. In addition, the Group operates five trade parts specialists, three used car centres, five standalone body shops and a pre-delivery inspection (PDI) centre. The Group operates a balanced portfolio of volume, premium and alternate premium brands including all of the top five premium brands.

The Group's diverse portfolio means it represents manufacturer brands accounting for 81.4% of all new vehicle sales in the UK. This scale and diversified spread of representation helps mitigate the effect of the cyclical nature of individual brand performance.

Investment in new retail locations and major developments

The Group continues to invest in its retail sites and has invested a total of £19.6m into its property portfolio during the Year. Investment in relocations and major rebuilds included:

• Lincoln Jaguar Land Rover - this development brings together Lincoln Jaguar and Lincoln Land Rover, previously two separate leasehold sites, on one purpose-built freehold site providing a significant increase in capacity for both vehicle and aftermarket sales.

• Cambridge Ford - this relocated our existing leasehold showroom on Newmarket Road to a state-of-the-art Ford Store on long leasehold property and provides a significantly improved customer experience.

• Completion of a redevelopment of Bedford Land Rover, an existing freehold site. This investment brings the site up to Jaguar Land Rover 'arch' concept standard.

Investment in existing businesses

In addition to large scale redevelopments, the Group continues to invest in upgrading existing businesses to enhance the customer experience, satisfy brand requirements and increase sales and aftersales capacities. In recent years, the Group has invested significantly in its portfolio, with 84% of the Group's facilities having benefited from investment in the latest corporate identity or relocation. We expect this to materially reduce after 2019. Significant corporate identity upgrades were completed at the following locations:

• Audi - Sydenham and Taunton

• Volkswagen Commercial Vehicles - Bridgwater and Reading

• ŠKODA - Newbury and Reading

• SEAT - Cambridge, Leicester and Newbury

• Mercedes-Benz Commercial Vehicles - Croydon

• Honda - Harrogate, Hull, Leicester and Peterborough

• BMW - Salisbury and Scunthorpe

• Volvo - Grantham and Leeds

As has been widely reported, 2018 was challenging for the new vehicle market. The SMMT recorded new vehicle registrations of 2.37m in the Year, a decline of 6.8% versus 2017 (2.54m). A number of factors impacted the market:

• Firstly, general economic uncertainty, including the negative impact of Brexit on consumer confidence. Weakness in Sterling also impacted new vehicle prices and European manufacturers' focus on the UK market

• Secondly, the introduction of the Worldwide Light Vehicle Test Procedure (WLTP) which replaced the outgoing New European Driving Cycle (NEDC) in September 2018, significantly impacted the new vehicle market in 2018. The introduction of the new procedure, during a peak registration month, led to shortages of supply and longer lead times in certain brands and continued to impact the industry for the remainder of 2018 and into 2019.

• Thirdly, the current uncertainty of future government policy in relation to diesel engines has led to a decline of 29.6% in total diesel registrations, taking its share to a 15 year low of 31.7%. This particularly impacted the premium segment which has historically offered a higher proportion of diesel vehicles. Manufacturers have been responding to changing consumer demand for petrol engines by switching production through 2018 and we expect to see this continue through 2019.

Against this market backdrop, during the Year, the Group's like-for-like new retail unit sales declined by 8.4% against an overall UK new retail registration decline of 6.4%. Like-for-like new revenues declined by 4.5%. Given the Group's weighting towards premium brands which were more affected by the decline in diesel, together with a number of our key brands being more exposed to WLTP supply shortages, we were pleased with this result.

Total unit sales to fleet customers declined by 19.4%. This was largely driven by a commercial decision we took during 2017 to withdraw from certain low margin fleet business. Excluding the impact of this and site closures, like-for-like unit sales to fleet customers declined by 7.7% versus an overall market decline of 7.2%.

Sales of new vehicles utilising personal contract purchase ("PCP") have stabilised at 81% during the Year (2017: 83%). At 31 December 2018, the Group had 69,429 active PCPs which create a defined point of renewal/purchase/ replacement and we actively manage the renewal process to ensure, where possible, customers are retained with the Group.

Total new vehicle gross margins were flat versus 2017 at 7.2%, a pleasing performance in a challenging market.

Used vehicles

The SMMT reported further used vehicle market decline of 2.1% in 2018 despite the used car market benefiting from WLTP-related supply shortages in the new vehicle market. In the context of an overall market decline, we are therefore particularly pleased to report continued like-for-like growth in used vehicle unit sales. In addition to increased unit sales, we also delivered a total gross margin improvement of 36bps which we consider to be an excellent performance.

The Group's strategy on used car sales is to utilise existing capacity within the current Group portfolio to maximise throughput on its existing footprint, therefore mitigating the associated investment in additional sites and resource. We believe this approach highlights the resilience of the franchise model even during a time of declining new vehicle sales.

As a result of the closures made in November 2017, total used car unit sales declined by 2.1%. Like-for-like used unit sales grew 2.3% and like-for-like used vehicle revenues increased by 8.1%. This is a particularly strong performance when compared with the overall market decline.

The continued improvement in used volumes and margins has been driven by the addition of our recently enhanced in-house management information system, Phoenix 2 as described earlier. This, along with a continuation of our 56 day stocking policy which encourages accelerated stock turn, leading to higher sales volumes and reduced residual value risk, contributed to the strong volume and margin performance during the Year.

There was further growth in the number of used vehicles purchased using PCP products which have now become a key feature of the 3-6 year old used car market in which the Group primarily operates. 63% of the Group's used vehicles which were purchased on finance were purchased using a PCP (2017: 58%). As in the new car market, PCPs create a defined point of renewal/purchase/replacement and we actively manage the renewal process to ensure, where possible, customers are retained by the Group.

We believe the recent popularity of used car PCPs presents the Group with future opportunities for the sale of older used cars given the event-driven nature of a PCP.

Aftersales

Aftersales remains a key strategic focus of the Group, providing revenue and profit assurance during a challenging economic environment. Our strong performance in recent years continued during the Year, with total revenue growth of 1.3% (2.3% like-for-like). This growth has partially offset margin pressure (down 126bps versus 2017) as a result of reduced pre-delivery inspection revenue caused by fewer new vehicle sales and an increased proportion of lower margin parts sales.

In addition to our retail centre based aftersales facilities, the Group operates five standalone bodyshops, five trade parts centres and one PDI centre. Aftersales contributes 44.0% of total retail gross profit and therefore makes a significant financial contribution to the Group which is important in the context of a more cyclical new car market.

In order to drive customer retention, we offer service plans to customers of both new and used vehicles which allow customers to plan and budget for service costs. These plans are often included in the monthly payment of a vehicle and are therefore very convenient for customers. At 31 December 2018, the Group had over 75,000 live service plans (2017: 77,000).

Market Outlook

In 2018 the SMMT reported new vehicle registrations of 2.37m, down 6.8% versus 2017 and down 13.1% from the peak year of 2016. The current SMMT forecast for 2019 predicts a further new car market decline of 2.3% to 2.31m. Further declines are expected in diesel market share, with growth in registrations of alternative fuel vehicle registrations expected to continue.

The new vehicle market in 2019 may also be affected by the implementation of WLTP for commercial vehicles and changes to the Real Driving Emissions Test in September.

Finally, we are cognisant of the potential impact that Brexit may have on both the wider UK economy and the automotive sector. At the date of this report, the terms of the UK's departure from the European Union are not certain. However, we remain confident in our brand partners' commitment to the UK automotive retail market (the second largest in Europe) and their collective ability to respond effectively to the potential challenges that this situation may bring.

Summary

In a challenging economic environment and reduced new and used vehicle market, the Group has delivered a record continuing underlying PBT performance.

I am particularly pleased with our used vehicle performance and continued growth in aftersales revenues. These revenue streams provide resilience to the business during more challenging periods of the cyclical new car market, as demonstrated during the Year.

The Group has the benefit of a strong balance sheet with a low level of net debt which leaves it well placed to respond to market changes and take advantage of opportunities when they arise.

I am pleased that Richard Parry-Jones, as Chairman, and Richard Blumberger, as Chief Financial Officer, have joined the Group and Board. I would also like to thank Peter Johnson and Mark Raban for their significant contributions to the Group since its IPO.

Finally, on behalf of the Board I would like to thank our colleagues, and our brand and business partners for their hard work and support during what is now my 10th full year with the Group. I look forward to continuing to work together in 2019.

Daksh Gupta

Chief Executive Officer

12 March 2019

Financial Review

Overview

I am delighted to present the Group's 2018 annual results, my first since appointment as Chief Financial Officer in January 2019.

The Group is focused on delivering long-term value for our shareholders, our customers and our people. This year's financial results show continued underlying PBT growth, strong margin, growth in earnings per share ("EPS") and solid cash generation. The Group is in a strong financial position with low leverage, a strong balance sheet and long-term committed financing facilities. As a result of this, and our confidence in the Group's long-term prospects, we have been able to amend our dividend policy and increase our dividend.

This was another good year for the Group which again demonstrated the strategic importance and resilience of our business in a toughening market.

Following four years of strong growth since IPO, we anticipated a challenging market in 2018. As such, our focus for the Year was on our cost base and portfolio management. In-line with this strategy, we closed a number of sub-scale, loss-making sites in both 2017 and 2018.

We are, nevertheless, committed to targeting further growth and in early 2019 we have further expanded our portfolio in-line with our strategy to grow with existing brand partners and extend our geographic footprint, and we recently announced two acquisitions, adding 6 ŠKODA dealerships.

Our balance sheet remains robust, with minimal net debt and we continue to invest in our asset base, with a particular focus on freehold and long leasehold property. Total capital expenditure of £23.8m was invested during the Year, including £19.6m relating to investments in freehold and long leasehold properties.

Notwithstanding that the year ahead may be uncertain and we expect the difficult market backdrop to continue, the Group is in a strong position to continue its strategic growth and market penetration.

Reported Financial Performance

Due to 2017 site closures, reported revenue from continuing operations was £2,186.9m compared with £2,232.0m for 2017. The Group's operating profit, on a continuing basis, before non-underlying items, was £32.0m compared to £32.9m in 2017. Continuing underlying PBT in the Year was £25.7m compared to £25.4m in 2017.

Our reported PBT of £18.7m (2017: £12.6m) included one-off non-underlying items of £7.0m (2017: £12.8m) as set out in note 4 of this report.

Analysis of Reported Revenue and Gross Profit

The segmental mix on a reported basis is shown in the table below. Whilst the like-for-like analysis is covered later in the report, the reported basis demonstrates the decline in the new car market in 2018 and our strong performance in the used car market despite the overall market decline.

Twelve months ended 31 December 2018

Twelve months ended 31 December 2017

* mix calculation excludes Internal / Other Sales

Finance Costs

Net finance costs decreased in the Year to £6.4m (2017: £7.5m), reflecting the ongoing strengthening of the balance sheet and focus on vehicle stock management.

Generating Sustainable Shareholder Value

Underlying profit before tax was £25.7m (2017: £25.4m). The total reported effective tax rate was 24.8%, (17.1% on a continuing underlying basis). Profit from continuing operations after tax was £21.3m (2017: £20.8m), giving a basic continuing earnings per share of 27.4p, an increase of 2% on the prior year.

Non-Underlying Items

Non-underlying items are presented separately in the income statement to provide an effective comparison of performance. Non-underlying items in the Year are summarised below:

Profit on disposal of discontinued business 589 36,851

We are pleased to report that all outstanding property issues in relation to dealership closures announced in November 2017 were resolved during 2018, ahead of our initial timing and cost expectations, leading to a net non-underlying profit of £3.3m in the Year.

Following our annual impairment test, a charge of £9.3m has been taken against our BMW/MINI and Nissan goodwill values, which is detailed in the balance sheet review section of this report.

Other restructuring costs of £0.9m are detailed in note 4 to this results statement.

In addition, the Group recognised a further profit on the disposal of our discontinued leasing segment of £0.6m which related to the settlement of certain historic pension liabilities at a reduced cost to that originally provided.

Like-for-Like Financial Performance

Basis of Comparatives

To enable effective comparison of our year-on-year performance, underlying operating profit is shown on a like-for-like basis.

Like-for-Like Segmental Analysis

Twelve months ended 31 December 2018

Twelve months ended 31 December 2017

* mix calculation excludes Internal / Other Sales

Like-for-like Revenue

£2,134.6m (up 1.2%)

(2017: £2,108.9m)

Like-for-like revenue was £2,134.6m (2017: £2,108.9m), a 1.2% growth in a year which saw the new car market declining by 6.8% and the used car market declining by 2.1%.

Like-for-like new retail units, one of our Key Performance Indicators (KPI), declined 8.4% in a year in which the new retail market declined 6.4%. Like-for-like fleet units declined by 7.7% against a market decline of 7.2%. As expected, these were impacted by WLTP and issues surrounding diesel-fuelled engines which had a disproportionate effect on our portfolio. As a result of an increase in the average revenue per unit, like-for-like new revenue only declined by 4.5%.

Our used car business performed very well with like-for-like unit sales up 2.3% year on year against a used car market decline of 2.1%. Used unit sales is a KPI and continued to be a key area of focus. Strong focus on margin and mix meant the 2.3% unit increase translated into an 8.1% revenue increase.

Aftersales revenue had another strong year with like-for-like revenues up 2.3%, the fourth consecutive year of growth.

Like-for-like Gross Profit

£250.5m (down 0.3%)

(2017: £251.1m)

Like-for-like gross profit at £250.5m (2017: £251.1m) was consistent year on year, with margins remaining strong at 11.7% compared to 11.9% in 2017.

New vehicle margins were slightly down in the year at 7.2% (2017: 7.5%) which we consider a good result in a challenging market.

Our used vehicle margin at 7.3% was up by 32bps driven by our technology-led approach in our used car sales process and further reflects our strategic focus on the used car market. The combination of revenue and volume growth led to a total gross profit improvement of £7.5m on used vehicles.

Like-for-like aftersales margin was 45.7% compared to 47.1% last year. This was as a result of reduced pre-delivery inspection revenue caused by fewer new vehicle sales and an increased proportion of lower margin parts sales.

Like-for-like Operating Expenses

£216.4m (down 0.1%)

(2017: £216.6m)

Despite cost pressures continuing to impact the overall sector, like-for-like expenses were marginally down £216.4m (2017: £216.6m). This was a strong performance given the significant cost headwinds experienced. The Group placed particular focus on discretionary costs both in our central cost base as well as at dealership level, including marketing effectiveness, demonstrator vehicle costs and stocking costs.

Like-for-like Operating Profit

£34.1m (down 1.4%)

(2017: £34.6m)

Given the factors referred to above, like-for-like operating profit at £34.1m (2017: £34.6m), whilst slightly down on 2017, is a good example of the resilience shown in a difficult market, allowing our operating margins to be consistent at 1.6% year on year.

Shareholder Returns

Full year dividend per share

8.54p (up 33.4%)

(2017: 6.40p)

The Group has a strong track record of delivering growth in our financial results and growing returns to our shareholders as a result is an important part of our strategy. As mentioned earlier, we have amended our dividend policy and as such, the final dividend recommended by the Board is 6.39p per share, giving a full year dividend of 8.54p and a cover of 3.2x underlying earnings per share (2017:4.2x). This year's dividend to shareholders and change in dividend policy, demonstrates the Group's strong financial position and our confidence in its long-term prospects and represents growth of 33.4%.

During the Year, total dividends of £5.0m were paid to shareholders.

ROCE

Return on capital employed (ROCE) for the Year was 12.8% (2017: 13.3%). ROCE is calculated as underlying profit before tax divided by total equity.

The Group has ongoing capital expenditure requirements and will continue to pursue organic and acquisitive growth opportunities. This may also include further freehold investments in preference to leasehold liabilities which can have a short-term impact on ROCE, as it did in 2018 with our capital programme.

Balance Sheet

There is no material difference between the reported and the like-for-like balance sheet so unless otherwise stated, the remainder of the financial review is on an as reported basis.

Intangibles

Each year we test the carrying value of goodwill and other intangible assets for impairment. For the year ended 31 December 2018, we have applied a more cautious assessment on the market outlook for our BMW and Nissan CGUs and as a result, recognised an impairment of £9.3m of goodwill. Further details are set out in Note 10 to the financial statements.

There were no additions to goodwill and intangibles in the Year with the only movement being the amortisation of previous acquisitions.

Freehold / Long Leasehold

The Group's property portfolio is a key strength of the business. Our capital programme continues, with a further £23.8m of capital expenditure invested in the Year including the new builds of Lincoln Jaguar Land Rover and Cambridge Ford Store, the major redevelopment of Bedford Land Rover and further investment across a number of our brands. This brings our cumulative expenditure to £76.4m over the last three years, of which £63.1m has been invested in freehold and long leasehold properties. The net book value of the Group's property, plant and equipment at 31 December 2018 was £155.8m, of which £125.3m (80.4%) related to freehold and long leasehold property.

Strong Working Capital Management

Working capital management is a key focus for the Group with a strong result in inventory and debtor management in the Year.

Inventory, net of provisions, at £384.0m reduced year on year by 4.3% with a strong focus on stock profiling. As at 31 December 2018, the value of vehicles held under vehicle financing arrangements was £370.8m (2017: £380.6m).

A reduction of 13.5% in our trade and other receivables was reflective of the strong focus placed on working capital management at all levels of the business.

Overall the Group had reported net assets at 31 December 2018 of £200.4m (2017: £191.8m), which equates to £2.57 per share (2017: £2.47).

Good Cash Conversion

Operating cash flow conversion (defined as cash flow generated by operations divided by continuing operations operating profit before interest, tax, depreciation and amortisation) is key to allowing us to maintain our investment programme. During the Year, cash inflows from operations were £36.5m (2017: £69.6m), representing a cash conversion of 88.2% (2017: 150.0%). Our cash conversion has been consistently strong, reflecting our focus on working capital management over recent years.

Net Debt and Facilities

As at 31 December 2018, net debt was £5.1m (2017: £2.2m). Our current facilities include a £120m revolving credit facility which is in place until June 2021. Our interest rate is LIBOR plus 1.2% to 2.0%, dependant on the leverage level. We remain comfortably within each of our banking covenants.

Tax

The Group manages all taxes, both direct and indirect to ensure that it pays the appropriate amount of tax. Our tax strategy is reviewed regularly and approved by the Board.

The Group's tax charge for the Year (before non-underlying items) was £4.4m (2017: £5.3m) giving an effective tax rate of 17.1% (2017: 18.1%). The effective tax rate was positively impacted by a review of historic capital allowance claims. Excluding the impact of these, the underlying effective tax rate would have been 21.6%. After adjusting for non-underlying items, the total tax charge was £4.8m (2017: £3.8m) giving an effective tax rate of 24.8% (2017: 7.1%).

Full details of the Group's tax governance framework can be found in the Group's tax strategy which is available on the Group's website.

IFRS16

The Group is finalising its impact assessment of the accounting standard IFRS16 which is mandatory for accounting periods starting 1 January 2019. The standard has no economic impact on the Group or on our cash flows. It does, however, have an impact on the way the assets, liabilities and the income statement of the Group are presented, as well as the classification of cash flows relating to lease contracts.

Due to the profile of our current operating lease portfolio, it is anticipated that the impact of IFRS16 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 estimate 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.

Pensions

During the Year, the Group ceased to be a participating employer in the Marshall Group Executive Plan ('Plan') following a strategic decision taken in 2017 to crystallise and pay the Group's residual liability to this historic defined benefit pension scheme. The aggregate amount paid by the Group to exit the Plan was in-line with the provision of £6.0m taken in last year's accounts and was paid to the Trustees in February 2019. As a result, the Group no longer has any further obligations in relation to any defined benefit pension schemes.

Richard Blumberger

Chief Financial Officer

12 March 2019

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2018

CONSOLIDATED BALANCE SHEET

At 31 December 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2018

NET DEBT RECONCILIATION

For the year ended 31 December 2018

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

1. General information

Marshall Motor Holdings Plc (the "Company") is incorporated and resident 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 and Wales 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.

The financial statements of Marshall Motor Holdings plc were authorised for issue by the Board of Directors on 12 March 2019.

The condensed consolidated financial information for the year ended 31 December 2018 has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with the requirements of the Companies Act 2006 applicable to entities reporting under IFRS. The accounting policies applied are consistent with those set out in the Marshall Motor Holdings Plc Annual Report and Accounts 2017 published on 19 March 2018.

The financial information contained within this preliminary announcement for the years ended 31 December 2018 and 31 December 2017 does not comprise statutory financial statements within the meaning of section 434 of the Companies Act 2006. Statutory financial statements for the year to 31 December 2017 have been prepared in accordance with UK GAAP and have been filed with the Registrar of Companies. Financial statements for the year ended 31 December 2018 will be filed following the Company's Annual General Meeting. The Auditors' Reports on the statutory financial statements for the years ended 31 December 2018 and 31 December 2017 are unqualified, do not draw attention to any matters by way of emphasis, and do not contain any statement under section 498 of the Companies Act 2006.

A copy of the full Group financial statements for the period ended 31 December 2018 that comply with IFRSs will be made available at www.mmhplc.com.

'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.

Going concern

The 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 consolidated financial statements are signed. For these reasons they continue to adopt the going concern basis in preparing the Group's financial statements.

In preparing the preliminary announcement, the Directors have also made reasonable and prudent judgements and estimates and prepared the preliminary announcement on the going concern basis. The preliminary announcement and management report contained herein give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

2. Segmental information

a) Operating segments - 2018 onwards

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.

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

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

2. Segment information (continued)

b) Operating segments - prior periods

Prior to the disposal of Marshall Leasing Limited, the Group's business was split into two main revenue-generating operating segments and a third support segment. No significant judgments were made in determining the reporting segments.

Retail

The retail segment included sales of new and used vehicles, together with the associated ancillary aftersales services of; servicing, body shop repairs and parts sales.

Leasing

The leasing segment included the leasing of vehicles to end consumers and fleet customers.

Unallocated

The unallocated segment included the Group's head office and central management functions including; the Board, group finance functions, the human resources department, the IT department and all governance and compliance related functions in support of the wider business. Also included was rental income arising from investment properties.

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

Geographical information

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

Information about portable segments

Information related to each reportable segment is set out below.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

3. Profit before taxation

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

4. Non-underlying items

Post-retirement benefits charge

See Note 12 'Pensions' for further details of the transaction giving rise to the post-retirement benefits charge in the prior year.

Profit on disposal of assets classified as held for sale

In May 2018, the Group sold the freehold property classified as held for sale as at 31 December 2017 for a profit £268,000.

Net release / (recognition) of restructuring costs and provisions

Restructuring costs during the current year include costs incurred as a result of the closure of one of the Group's franchised dealerships. The closure arose in the context of the UK wide franchise network review carried out by Vauxhall. Restructuring costs include vacant property related costs of £154,000, redundancy costs of £280,000 and £252,000 of intangible asset impairment losses and write offs. Also included in the current year is a £4,160,000 release of vacant property and dilapidation provisions following the better than expected exit from lease commitments on premises no longer used by the Group. £3,234,000 of the release relates to the exiting of a lease through the acquisition and immediate disposal of an investment property.

Restructuring and reorganisation costs in the prior period represent the costs incurred as a result of the closure of five franchised dealerships and one used car centre.

Loss on disposal of investment property

In December 2018 the Group disposed of the investment property acquired in the year for proceeds of £4,654,000, resulting in a loss on disposal of £1,146,000. The acquisition and immediate disposal of the investment property provided the Group with a faster than expected exit from the lease commitment.

Loss on impairment of goodwill and other intangible assets

See Note 10 'Goodwill and other intangible assets' for further details of the transaction giving rise to the loss on impairment of goodwill and other intangible assets.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

4. Non-underlying items (continued)

Profit on disposal of subsidiary

See Note 5 'Discontinued Operations' for further details of the transaction giving rise to the profit on disposal of subsidiary.

5. Discontinued operations

In November 2017 the Group disposed of Marshall Leasing Limited and its subsidiary (Gates Contract Hire Limited). A retention of £1,500,000 was withheld in respect of anticipated settlement of legacy defined benefit pension obligations triggered by the change in ownership of Marshall Leasing Limited. In April 2018, the surplus retention withheld was calculated and returned to the Group, generating an additional £589,000 profit on disposal of Marshall Leasing Limited and its subsidiary.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

5. Discontinued operations (continued)

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

7. Taxation

The tax charge on discontinued operations amounting to £nil (2017: £716,000) all relates to tax payable on profit from operations.

The analysis of the Group's effective tax rate between underlying and non-underlying activities is as follows:

Non-recurring items

The Group's total effective tax rate for 2018 of 24.75% was influenced by the impairment of goodwill as well as by the non-taxable gain on disposal of Marshall Leasing Limited in the prior year and profit on disposal of freehold properties shielded from chargeable gains. The 2018 underlying effective tax rate of 17.12% is lower than the Group's expected underlying effective tax rate due to the impact of substantial credits in respect of return to provision true-ups resulting from the filing in 2018 of retrospective capital allowances claims on the Group's historic capital expenditure. Excluding the impact of these, the underlying effective tax rate would have been 21.6%.

The prior year total effective tax rate of 7.14% was influenced by the significant non-taxable gain on disposal of a subsidiary, due to the chargeable gain falling within the substantial shareholding exemption. Excluding this item, the total effective tax rate for the year would have been 18.13%.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

8. Earnings per share

Basic and diluted earnings per share are calculated by dividing the earnings attributable 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 2,441,203 at 31 December 2018 (2017: 2,866,231).

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

9. Dividends

A final dividend of £3,309,000 (2016: 2,864,00) for the year ended 31 December 2017 was paid in May 2018. This represented a payment of 4.25p per ordinary share in issue at that time.

An interim dividend in respect of the year ended 31 December 2018 of £1,674,000 (£1,663,000), representing a payment of 2.15p per ordinary share in issue at that time, was paid in September 2018.

A final dividend of 6.39p per share in respect of the year ended 31 December 2018 is to be proposed at the annual general meeting on 21 May 2019. The ex-dividend date will be 26 April 2019 and the associated record date will be 27 April 2019. This dividend will be paid subject to shareholder approval on 24 May 2019 and these financial statements do not reflect this final dividend payable.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

10. Goodwill and other intangible assets

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

10. Goodwill and other Intangible assets (continued)

Impairment testing

For the purpose of impairment testing, goodwill and franchise agreements are allocated to a cash generating unit ("CGU"), or to the smallest group of CGUs where it is not possible to apportion the goodwill or intangible assets at the individual CGU level. Each CGU or group of CGUs to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for management purposes. Goodwill and intangible assets arising on business combinations are allocated to CGUs by determining which CGU is expected to benefit from the synergies of the business combination.

The Group's CGUs are groups of dealerships connected by manufacturer brand. The allocation of goodwill and indefinite lived intangible assets to the CGU groups is as follows:

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable and a potential impairment may be required. Impairment reviews have been performed for all groups of CGUs for the years ended 31 December 2018 and 2017.

Valuation basis

The recoverable amount of the Group's CGUs is determined by reference to their value-in-use to perpetuity calculated using a discounted cash flow approach, with a pre-tax discount rate applied to the projected, risk-adjusted pre-tax cash flows and terminal value. Where higher, the fair value of groups of CGUs, less costs of disposal, is taken as the recoverable amount. The fair value amount is calculated by adding the net assets of each CGU to the estimated goodwill per CGU (budgeted EBITDA multiplied by a goodwill premium factor). The goodwill premium factor is estimated based on brand premiums paid by our market peers in recent acquisitions

Period of specific projected cash flows

The value-in-use of each CGU is calculated using cash flow projections for a five-year period; from 1 January 2019 to 31 December 2023. These projections are based on the most recent budget which has been approved by the Board; the budget for the year ending 31 December 2019. The key assumptions in the most recent annual budget on which the cash flow projections are based relate to expectations of sales volumes and margins and expectations around changes in the operating cost base. The assumptions made are based on past experience, adjusted for expected changes, and external sources of information. The cash flows include ongoing capital expenditure required to maintain the Group's dealership network, but exclude any growth capital expenditure projects to which the Group was not committed at the reporting date.

Growth rates, ranging from -2% to 5% (2017: 5%) have been used to extrapolate cash flows for a further four years beyond budget, through to 31 December 2023. Growth rates for the BMW/MINI CGU have been used to extrapolate budgeted cash flows from 2021 onwards. These growth rates reflect the products and markets in which the relevant CGU, or groups of CGUs, operate. Growth rates are internal forecasts based on both internal and external market information.

Discount rate

The cash flow projections have been discounted using a rate derived from the Group's pre-tax weighted average cost of capital adjusted for industry and market risk. The discount rate used is 10.5% (2017: 10.4%).

Terminal growth rate

The cash flows after the forecast period are extrapolated into the future over the useful economic life of the group of CGUs using a steady or declining growth rate that is consistent with that of the product and industry. These cash flows form the basis of what is referred to as the terminal value. The growth rate to perpetuity beyond the initial budgeted cash flows applied in the value-in-use calculations to arrive at a terminal value is 2% (2017: 2%).Terminal growth rates are based on management's estimate of future long-term average growth rates.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

10. Goodwill and other intangible assets (continued)

Impairment testing (continued)

Conclusion

At 31 December 2018 the Group recorded impairment charges totalling £9,302,000; of which £8,388,000 is in respect of BMW/MINI and £914,000 is in respect of Nissan. The impairments recorded are a consequence of the continuing deterioration in market conditions in these brands, resulting in revised assumptions around future profitability and growth rates. The impairment charge is recorded within net operating expenses in non-underlying items in the Consolidated Statement of Comprehensive Income.

Sensitivity to changes in key assumptions

Impairment testing is dependent on estimates and judgements, particularly as they relate to the forecasting of future cash flows, the discount rates selected and expected long-term growth rates.

The Group has performed a sensitivity analysis on the impairment tests using two scenarios; firstly, where the discount rate increases by 200 basis points, secondly, where cash flows in 2019 are based on a 1% decline in current year performance. Under both scenarios, all groups of CGUs not currently subject to impairment continue to have adequate headroom to support the carrying value of associated goodwill and other intangible assets. Both scenarios would increase impairment of the BMW/MINI CGU by 53% and 8% respectively. However, only the second scenario affects the recoverable value of the Other CGUs, increasing the impairment by 46%.

NOTES TO THE FINANCIAL INFORMATION

For the year ended 31 December 2018

11. Property, plant and equipment