Aston Martin Lagonda Global Holdings plc (AML) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aston Martin Half Year 2020 Results. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Lawrence Stroll, Executive Chair. Please go ahead.

Welcome to our Aston Martin Half Year 2020 Results. You have myself, you have Ken Gregor, and you have Marek Reichman [indiscernible] questions you may have.

[Operator Instructions] Your first question comes from the line of George Galliers of Goldman Sachs.

The first question, Mr. Stroll, is just around strategy. It looks like you're aiming to achieve a very healthy balance between supply and demand. You're looking to build a global marketing and franchise effort through Formula One. As a result, this strategy does sound very similar to that of Ferrari. Is it too simplistic to say that you are using Ferrari as a template for the business model for Aston Martin going forward? And are there other areas where you see Aston Martin operating outside of the auto business where potentially Ferrari does not compete today?

[Audio Gap] brand, and I believe that they have done the correct model for a luxury automotive firm. In our [Audio Gap] after Ferrari, we're modeling ourselves on our own business model. [Audio Gap] is critical and it's -- if you look at the history of Aston Martin, in 2018, 2017, there were roughly 4,000 front engine sports cars, true consumer demand on [Audio Gap] spending a lot of emphasis on our SUV program, which [Audio Gap] do intend to have a very strong mid-engine program and market it off Formula One. That is a formula that works to build a true automotive luxury firm. [Audio Gap] have our own goals and our own targets.

Okay. And then a second question, if I may. You mentioned the critically acclaimed for the DBX. Obviously, the Vantage launch was before your involvement in the company, but it, too, did receive critical acclaim with 4 out of -- 4.5 stars out of 5 in most motoring magazines and being described as a spectacular achievement. Do you have a view on why that model didn't achieve its targeted volumes that the DBX will? Was it simply the targets were too high from the beginning? Or do you think there were other issues around the brand and product awareness that held the Vantage back?

Reichman was involved in the Vantage and obviously still involved in the DBX. I'll ask Marek to answer that question for you.

Yes. If we look at how we are preparing the marketplace for DBX, it's very different in terms of how we've gone about and strategize where the product is going to go in terms of our customer, the outreach, the new markets that we're looking at that are either developing or developed markets. And we're planning a marketing campaign and advertising campaign around DBX. We're currently going through the press launch of the car as well and obviously very different -- difficult times around COVID. But so far, we've had a very positive reaction to DBX. We're preparing the marketplace much better than we had done for Vantage. And we're also being more conservative with the projected volumes.

And then, Ken, if I may, just one quick question for you. Price/mix was obviously a positive in the first half and appears very strong in the second quarter. Can you explain what drives this? We can see from your wholesales that GT cars performed better and also the U.K. market on a relative basis. Is it just a function of the outperformance of these 2 segments? Or are there other considerations we should factor in?

Yes. I don't think there's really any other considerations, George. I think you captured the effects we would be thinking about fairly well.

Your next question comes from the line of Charles Coldicott from Redburn.

I have 2, please. The first to Mr. Stroll, you mentioned in your opening remarks that historically, there's been demand for about 4,000 front engine sports cars per year. It would seem that this year, it's going to be closer to half that, and that's partly because of the dealer destock, of course. But when do you think that you can return to demand of about 4,000 units or production of 4,000 units of sports cars per year? And then my second question is actually on working capital. So I think at the start of the year, the guidance was for working capital to be GBP 100 million outflow this year. Now obviously, a lot has changed since then. But given that the outflow is only GBP 86 million in H1, and we would expect some of that to come back in H2 as production begins to ramp up. I just wondered if you could give a latest guidance on working capital for this year.

[Audio Gap] question, and I'll ask Ken to answer the second question. On your first question, the reason these volumes are so significantly less this year, you mentioned destocking, that was only a small [Audio Gap] of course, it was COVID [Audio Gap] closed for a very long period of time. So that's [Audio Gap] disclosed as well. We anticipate returning to that level of volume in the next 2 years. I think that is realistic.

And on the second point on working capital, yes, we saw working capital in the first half at the level that you say with the payables unwinding for 2 reasons. One because we were catching up with supplier payments from year end. And two, because the level of production at the end of June was obviously much smaller than the level of production at the end of December. So those -- you have that payables unwind. We also had in the first half, a smaller inventory buildup than we were expecting largely due to COVID and the fact that we were -- stopped production. So in the second half of the year, the factors, although I'm not going to provide any specific numerical guidance, the factors that we'd expect to see would be -- you'd expect to see the payables wind back up as we ramp up production, both of DBX and sports cars, where we're starting at the end of August. And we would also expect to see inventory build somewhat -- company inventory build somewhat as we fill the pipeline of the factory in DBX and sports cars.

Your next question comes from the line of Angus Tweedie of Citigroup.

The first one is probably a little bit along the lines of George's at the start. Could you perhaps discuss, given the sort of focus on what constrained supply of the products and better pricing, how you think about the midterm capacity needs for the business and whether to reach the profitability that we were expecting back at IPO, you really need to hit those volumes that we were thinking back in 2018? And then secondly, could you just discuss on leverage, how you're thinking about that structurally? With GBP 700 million of debt still outstanding, how comfortable are you with that much leverage? And what are your thoughts about that into the refinancing next year?

[Audio Gap] probably best positioned to answer the first question, and Ken the latter.

Yes. I'm Marek. In terms of the positioning of DBX now into the marketplace, obviously, we've done a lot more research into the various markets, whether they are existing or developing markets and also much more work has gone into planning the marketing campaign and advertising campaign of DBX as it comes into the marketplace. We're currently going through the press ride and drive, although constrained a little bit by the COVID issue, obviously, but we're getting very, very favorable results back so far prior to the embargo going out. And we have a planned advertising and marketing campaign, but quite frankly, we hadn't done previously. And then as we get towards the variance around the DBX platform, we will be closer to 10,000 units in 4 to 5 years with capacity in both Gaydon and St Athan plants.

And Charles, on the second point on the debt, I mean, look, obviously, with -- as you rightly say, with the debt maturing in April 22, then that's something we're very aware of. Equally at the same time, of course, I'm 6 weeks in. So that's clearly a focus area for me going forward. But at this point in time, don't have anything to say other than we're very well aware of the need to refinance the debt, and that's then when we've got more to say, we will.

Next question comes from the line of Thomas Besson from Kepler Cheuvreux.

I'd like to come back to the accounting restatements to be sure I fully understand what happened and how that impacts both 2019 and 2020 accounts. So first, can you precisely describe what effectively happened in your U.S. operations and explain what we see as substantial adjustments to your -- the Q1, and I assume Q2 revenues, ASP and adjusted EBIT, please? That would be my first question.

Yes. Fair question. I think in terms of the impact. What we're talking about here is the timing at which the -- some variable marketing expenses in the U.S. ought to have been recognized against revenue. And basically, what we've assessed is those costs should have been deducted from revenue earlier. So having assessed that, we saw that adjustment and the need to make it and we've done so. In terms of the effect for last year, that would serve to have reduced the full year revenue and EBIT by about GBP 15 million. For the first, we have said in the first quarter of this year, the impact versus what we previously seen was a GBP 8 million improvement -- GBP 9 million improvement in EBIT in the first quarter of this year. So it's timing adjustments. It's not cash, and it doesn't impact either historic cash flows or expected future cash flows.

Okay. It's clear. So basically, it's fair to say that it's low as 2019 and it helps a bit the H1 numbers, right?

Yes, correct.

Thank you very much for giving us more details on the quarterly retail and wholesale figure. May I ask if I can get something more, which would be an absolute dealer inventory figure, either for the end of June or for the previous quarters as well so we can have a way to assess how long it takes effectively to take it on the excess dealer inventory that you had in place because if I read the release correctly, you said it would go well into the year. So I assume it's not completely finished yet.

It's Marek here. I'll answer that question for you. Obviously, as you can see, we're around 870 units of destocking thus far, and if you track that throughout the rest of the year with a similar number, around 900 units, we will destock by around 1,250 units into Q1, Q2 of next year, which will bring us down to what we believe is the right level of stock. So we're into next year in terms of destocking, following and tracking as we have been throughout H1 this year.

Great. May I ask a question about the dealers' financial health, please? We've seen obviously a very, very unique situation due to the pandemic. And there has also been for you a complete change ongoing on your business model as you've been describing it. Are you confident that the dealers you have today, first, are sound financially and able to go through this route with you? And second, whether they are the right ones in terms of right partners for a true luxury business?

Yes. Good, good questions. I think in terms of the financial health of the dealers, I mean, obviously, they will have faced significant financial pressures, but we've not seen substantial problems in the dealer network. It's fair to say over the first half of the year. And I think in terms of the representation, I'd perhaps ask Marek to just add a bit of texture on how do you see that.

Yes, absolutely. I think over the past years as well, we've been starting to move our business model to larger dealer groups where they have, obviously, multiple franchises and have, therefore, more of the stability needed. And we're starting to see some recovery through China, in particular, dealers, getting back to full strength in that respect. So we're starting to see some confidence in the dealer groups around the world already. Obviously, some areas are still affected by COVID, but these tend to be the areas where our dealerships are selling single-digit number cars.

Great. Last question, if I may. You've raised the cash in different forms more than initially anticipated because of the environment in H1. Should we expect eventually more of that? Should the end of the year prove more complex than expected due to either Brexit or a second wave? Or do you believe that the balance sheet, in its current form, is going to be sufficient or that the share count is sufficient [ at what point ], saying in different way?

It's Mr. Stroll, I'll answer that question. We have no anticipation to raise any further equity we feel. We are covered in order to meet our business' final requirements.

Your next question comes from the line of Kai Mueller from Bank of America.