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

Ladies and gentlemen, thank you for standing by, and welcome to Aston Martin Lagonda Full Year Results. [Operator Instructions] I would now like to turn the conference over to Lawrence Stroll, Executive Chairman of Aston Martin Lagonda. Please go ahead.

Good morning, everyone, and thank you for joining us for this Q&A on our full year results of 2022. I hope you had a chance to read the release and also watch my address and the presentation of the results from Amedeo and Doug that are on our Investor Relations selection of our corporate website. Last year saw Aston Martin continue to build on the strong foundation that have been established over the last 3 years. While the last 12 months presented industry-wide challenges, we look to the future with renewed confidence in our ability to deliver on our vision and the targets we have set. We ended the year with significantly improved growth, margin enhancement and positive free cash flow in Q4, exiting '22 with the strongest order book in many, many years. Since I became Executive Chairman, we have focused on fixing the core fundamentals of this company and building the necessary foundation to deliver on our vision, which is to become the world's most desirable ultra-luxury British performance brand. Over the last 3 years, we have rebalanced supply to demand consistent with an ultra-luxury business, which has resulted in record ASPs and the strongest order book ever. Starting with the DBX707, we launched the first product developed under my stewardship combining ultra-luxury with high performance. Crucially, all these new models target a 40-plus-percent contribution margin, a very significant increase from the past. We have rejuvenated our iconic brand, further amplified by our partnership with the Aston Martin Aramco Cognizant Formula One Team, which is attracting a rapidly growing new generation of customers and offers new opportunities to enhance our brand image and appeal globally. We have built a world-class leadership team and added significant bench strength across the organization with a focus on innovation, execution and efficiency to support our longer-term growth. And we successfully completed a significant equity capital raise which has allowed us to delever our balance sheet, accelerate our future growth, and our target remains to be sustainably free cash flow positive from 2024. Having completed this heavy lifting over the last 3 years, we are now at the exciting part of the journey and set to reap the rewards of this multiyear transformation. Starting this year, with the delivery of the first of our next generation of sports cars, a whole new lineup, including high-margin specials. And with the cadence of incredible new sports cars launching this year and in '24, this will truly reposition Aston Martin for our future success. Over the last 3 years, I have consistently referenced our target to deliver around GBP 2 billion of revenue, GBP 500 million of adjusted EBITDA by '24, '25. I am extremely proud that given the strong progress we have made to transform Aston Martin into a truly ultra-luxury business, this is now demonstrated by the trajectory of our ASP and gross margins, and we are on track to meet these financial targets, but with significantly less volumes than originally envisioned. Due to the greater gross margin, we're able to get to our EBITDA numbers without necessarily having the higher volume at this point. In addition, I remain highly confident that we will achieve our target to deliver 10,000 wholesales over the coming years and with it significantly enhanced financial performance. And with that, we are now happy to take your questions.

[Operator Instructions] The first question from Arya Ghassemieh from Barclays.

The first one is, please, could you provide a bit more color on the extreme H1, H2 phasing of EBITDA in terms of unit sales, revenue per unit and costs. Just trying to overall understand better why H1 would be so much weaker than H2 this year. The second question is on the new front engines. Please could you provide some more detail on when the transition is happening and the dynamics here in terms of the order book and the order intake as well as the margin? Will the -- will be 40% gross margin vehicles from the first day? And then lastly, on the liquidity, you're guiding for a pretty significant negative free cash flow in the first half. What liquidity level could we expect by the year-end? What's the level you wouldn't want to cross to the downside? And I guess, ultimately, can you rule out needing more capital in the future?

Thanks [ Henning ]. It's Doug. I'll take the take...

You take the first, I'll take the second. How's that?

Yes, I'll do the third. Okay. So let's run it in that order. So I think we've tried to be fairly clear on our guidance for 2023 and tried to be helpful in terms of the phasing. I think just to put a little bit more color to it, there's a bit of color in the script that I -- on the presentation and the video that we've put up on the website. But we do see quite a heavy weighting against the second half of this year. As I referenced alongside the presentation, we expect 2024 to be much smoother. Now the reasons for that are, as you alluded to with your second question, we've got to phase in the next generation of sports car launches and they commence from Q3 onwards. So there's a little bit about managing volumes in the first half of the year. We expect DBX and particularly DBX707 to be strong in the first half of the year, but we need to start to manage the transition to the new sports car. So that's part of it. And secondly, we are running, obviously, with an increased cost base. We're investing -- continue to invest in the business to set it up for future performance. So that will carry over from last year. A, at a higher run rate, but also increasing to invest behind the business. And I think finally, really with regards to the weighting, it's very second half weighted because we've got so much to look forward to in the second half of the year. We've got very high-margin specials coming in through the 110th year anniversary special through the DBR22 and we also start to see quite significant volume ramp-up with the first of the next-generation sports car launches in the second half of the year. So that hopefully gives you a little bit more color as to the reason why we expect it to be weighted. We're trying to be helpful by giving you a little bit more guidance on the expected phasing for the year. If I just deal with the third question as well, and then Lawrence, you can come back and talk about the sports cars. So you're asking about liquidity level. Look, I think from our perspective, as I said, from a guidance point of view, I think we've given you the drivers of how we expect the guidance to work out this year. We obviously successfully completed quite a significant capital raise during the course of last year. This year for us is all about execution. So we've got to execute the plan. We've got to get to where we need to get to in the second half of the year. And if we do that, then I don't have any liquidity concerns. So that's really how I'm thinking about it. This year is really about execution. And as we've talked about, as Lawrence has just mentioned as well, from '24 onwards, we really start to see this business hopefully delivering a little bit more smoothly and also getting from -- getting into free cash flow positive territory from '24 onwards.

I'll pick up where Doug left off. But the answer is on -- we -- as long as - as Doug rightfully says, execute on the plan, we do not see any liquidity needs whatsoever. Talking about the plan, it all reverts to 2 things: one, the continued success of DBX707, which is critically acclaimed as the greatest high-performance sports SUV in the market and capturing over 20% market share and continues to be the highest rated by all journalists' SUV. And equally as important, the next big step in our journey. I always said the first step was the DBX. And the second big step, which is our DNA is our new generation of front-engine sports cars. So our first front-engine sports car is being built as we speak. Customer deliveries will commence in Q3. Back to Doug's point, that's why we're heavily weighted in Q3 and Q4 because we wanted to slow down the delivery of these sports cars that will be phased out as the new sports cars come into the dealer showrooms. So our first sports car, as I said, is under -- new generation sports car is under production. And over the next 18 months, you will see our whole range of new sports cars, all with a significantly higher, minimum 40% and higher contribution margin. And at our Capital Markets Day, which we will hold this summer at Gaydon we will be showing you guys all the whole future product portfolio, the new generation of sports cars, including our PHEV, our hybrid program and all the way to our full -- BEV full electric. So we're going to show you all this in true color, in real life at our Capital Markets Day this summer.

The next question from George Galliers from GS.

Actually, I just wanted to follow up on the new products. Obviously, a very exciting period for Aston. But you mentioned the new sports cars coming from Q3. Obviously, I think under your definitions, sports car is the Vantage. So presumably a replacement for that. Can you give any insight into the GT cars? Should we also expect a new range of GT cars to replace DB11 and DBS? And if yes, at what point in time should we anticipate those? Also, is Aston still committed to a core mid-engine car at some point in the coming years? The second question I had was more with respect to the gross margin evolution. Obviously, in Q4, you had very strong performance on the DBX, but we only saw a marginal improvement sequentially in the gross margin. Doug, could you just highlight kind of what's holding the gross margin back at this point in time? Because obviously, you do expect it to show significant improvement in the second half of this year and then into '24 and '25. And then the final one was just with respect to the CapEx. You're guiding obviously for a big step up in CapEx this year. I understand you have a lot of new products coming as well as your electrification plans. Is this year's CapEx guide a good proxy for underlying CapEx on a look-forward basis? Or can you give some insight into what that might step down to in 2024, 2025?

I'll take the first question. This is Lawrence. Just for clarification, when we say new generation sports cars, we're referring to all our front-engine range, which includes Vantage that you referred to, a new DB11 and a new DBS. So we refer to all 3 of those models, which is actually 6 models in total, if you count the Volante, the convertible versions. In addition, there's evolutions in Specials. But all 3 of those models in both Coupe and Volante, as I said, first one of those models is currently in production and we will start delivering to customers in Q3. Again, that's why it's so heavily weighted towards Q3 and Q4 because of the launch of these new sports cars. And in the next 18 months, all 6 of -- all 3 of those models that total 6 variations will be coming to market. I hope that answers the question on that. As far as the mid-engine program, we're currently focused on our very exciting hybridized Valhalla. And the balance of the new -- whole new portfolio, we really don't want to talk much more on this call, but we are very -- looking forward to show you on our Capital Markets Day this summer.

George, it's Doug. So if I take those 2 questions in order then. So with regards to the gross margin evolution, I think you're referring to Q4 versus Q3 last year. Yes, we started to see some benefit in the gross margin from a core point of view with strong deliveries of the DBX707. Obviously, that delivery profile had been disrupted as we moved through last year with the interruptions we had in Q2 and Q3. However, as you quite rightly pointed out, perhaps the gross margin for Q4 not looking as strong as we would have liked it and perhaps you would have expected it to be, but for 3 main reasons. One, a bit of geographical mix going on. So China towards the end of last year played a part in that. As we alluded to at our Q3 results, we were incurring supply chain recovery costs as we came to the end of the year recovering from the issues that we dealt within Q2 and Q3. So they had an impact on margin. And also finally, just regards to Specials mix. So we had 2 things going on there. One, lapping -- sorry, no, Q4 versus Q3 was really the number of Valkyrie deliveries in the quarter and the customer mix there in. So we've talked about in our release the impact of the ongoing situation with Nebula and in particular, in Q4, quite a lot of cars went to those affected customers and that impacted the margin. That said, going forward, we do expect strong trajectory in margin as we move through this year. And as we've been saying in the first part of the call, the second half of the year, in particular, with high-margin Specials, and the start of the next-generation sports cars. With a targeted margin of 40% plus to complement the margin that we already target on the DBX707 at 40% plus, we do start -- we do really see strong trajectory in margins as we move through this year. With regards to CapEx, George, yes. So this year is a step-up. We've described that as what we expect to be the peak in CapEx over the course of the next few years. We illustrated the reasons why this year steps up a bit of phasing from last year. There is obviously very, very high inflation but -- not only us, but a lot of other businesses -- all businesses incurred last year, and that will carry through. We're investing in the 110th year anniversary special that will give us quick returns and really help us in terms of delivery in the second half of the year and into 2024. And then also, it's the sort of crossover period between heavy investment in ICE and investment in electrification. So they are the reasons why this year peaks, we expect it to readjust from 2024 onwards. And I think, again, I'm not going to give any color or guidance on that number today. But as we move into the Capital Markets Day and can describe to you what the plans are for the future, we can disclose a little bit more detail on that at that time hopefully.

Great. And very much looking forward to the CMD in the summer.

The next question is from Christoph Laskawi from Deutsche Bank.

Take the next question, operator.

The next question from Horst Schneider from Bank of America.

A very simple one maybe for the beginning. That is when you say you want to achieve up to 20% EBITDA margin. Is there also a kind of lower threshold? So what's the minimum you want to achieve? Maybe you can provide some color on that. Then the second question that I have that refers a little bit to the demand situation because you say you have got a record order book at the moment. So maybe you can shed some color on the current inventory situation that you have. And maybe an add-on to the demand question is, what I observe is that there are major price differences between regions so that the prices that you -- that are charged in the U.S. seem to be very much higher as compared to Europe. So should we interpret that as a sign that the U.S. dealers basically charge prices above list prices. Maybe you can comment on that as well. And if you give me a last one, that is on the technology partnership because I ask myself all the time in the context of this technology agreement with Mercedes. You mentioned, for example, in your perspective, still a reference price that is maybe valid then in the upcoming stake raise that might be done by 2024. Is this reference price still valid? Or has that been diluted as well?

Let me start with your last question. As far as Mercedes -- as far as Mercedes Benz is concerned, we have a terrifically strong partnership. We've never been closer. Most recently demonstrated by them investing GBP 60 million into our last rights issue this past summer, which demonstrates, again, the strength of our partnership. So partnership could not be stronger technically or from a shareholding point of view as well. What was the first question?

The first question that was related to the up to 20% EBITDA margin, if there is a lower threshold?

Yes. Okay. Let me take that one. So I think, look, we're expecting significant improvement in our profitability this year. We're not going to put a floor on the EBITDA margin, but I think the language is fairly clear. We expect significant improvement. And we expect that if we execute our plans as we're talking about, we'll get up towards that level of 20%.

The demand -- as far as demand has never been stronger, as we've mentioned. Our order book is sold out for sports cars and for DBX707 and DBX550 till the third quarter of this year. So demand has never been stronger. A lot of that has to do with the great new DBX. A lot of it has to do with the strong following we're enjoying with our Formula One team. We brought a whole new younger customer to Aston Martin that we never had previously demonstrated by our success in the Vantage F1 edition, which 72% of those customers are new to Aston Martin. So through great product, through a great Formula One platform to help market this brand, we're enjoying greater demand than we've ever seen in the history of the company. And it will only get stronger with the launch of all of our new next-generation sports cars, as I mentioned, starting in the third quarter of this year.

Yes. No, that's great. But just a follow up then on Mercedes, you cannot comment on this reference price issue, right, regarding the technology agreement? Or you don't want to comment on that?

Well, what's stated in the prospectus is factually correct. But as Lawrence said, we don't anticipate that being something, which is part of the conversation with Mercedes, we've got a very, very strong relationship with them. And as and when that comes to be the conversation, we don't expect that to be an issue at that time.

Yes. Just as demonstrated in July by the rights issue when we required the amendment for the technology agreement. So again, the relationship has never been better, never been stronger, and we work together to work out whatever we can. It's a long-term relationship.

We're now taking the question from Christoph Laskawi from Deutsche Bank.

The first one would be on the rollout of the new models. You already said you are starting production right now or you are already in production? Is there any execution risk that you would see in the ramp-up sort of like a quality [ led ] ramp up like for the DBX that could cause a bit of risk to the volume assumptions for H2? Or is everything running very smoothly? And the models are in the way they are built so similar to the old ones that there shouldn't be any issues to come? And then sorry to come back to that, on the margin question that Horst had as well. You made clear that you don't want to provide a floor for that. Is there anything in specific we should watch outside of what you said, the execution of the plan that would bring you towards the 20%? Do you need the 7,000 units or could it be slightly less? A comment like that would be much appreciated. And then just on the ASP in Q4 where core was down versus Q3. Is it right to assume that this was just due and product mix that was driving the core ASP down and nothing fundamentally has changed versus the gains that you had in previous quarters?

About the starting of the production of the first front-engine car, sports car, we started the [ pro series ] a few months ago. And now we are completing the position. We go for job 1 at the first of April. Then we need to start up with the preparation of the customer car. As mentioned, we will deliver the cars in early Q3. This is the first one. The second one we'll start on the second part of the year. The -- to complete or to prepare the launch of the cars. So we have done in Gaydon 3 weeks ago. Today, so work with the more important supplier of the cars. And in order to understand the readiness also of the external partners. Because we are not only -- we are part of the play, but then we need to have all the partners supply with us. And then it was a very interesting moment to understand if they are -- in which position they are versus the starting of the production. And frankly speaking, the meeting was very positive. And we had the possibility to discuss with them. We did 18 workshop on the specific component of the different segment system of the cars. And then I think we have a pretty clear idea where they are [ personally ] the completion.

Okay. Coming back to the EBITDA margin. Yes. So I've already sort of tried to answer this question. We expect significant margin enhancement this year. I think consensus is currently 18.5%, we're expecting to get up towards 20%. We're confident on the trajectory in our gross margins, which will support that. We haven't referenced on this call already, but as you all know, we've had a very strong order book on, for example, DBS 770 Ultimate. Also on the Specials that we've talked about, we've still got V12 Vantage to run through this year, a lot of those products, all of those products indeed are sold out. So that gives us confidence in our ability to have the gross margin trajectory to support the EBITDA margin direction that we expect to deliver in 2023, again, assuming that we execute our plans. And as Amedeo just said, make sure that we bring the new sports cars to the market on time and in full and avoiding some of the issues that we had last year with the DBX707 ramp-up. On your question on ASP, you answered it yourself. So yes, predominantly, in fact, the vast majority of the impact in Q4 was geographical mix. So nothing fundamental, and we expect to see ASP trajectory moving in the right direction through the rest of this year.

And the next question is from Daniel Roeska from Bernstein.

Congrats on Q4. Number one, if I may, kind of what are you doing to maintain the production schedule in '23? What I'm looking for is kind of any color of measures you've put into place recently to monitor kind of the up and the downstream supply chain, kind of how can you react to unforeseen events? How well kind of do you see supply chain bottlenecks coming your way? Or how well can you deal with kind of supply chain bottlenecks downstream to your dealers? And then Lawrence, if you think about the Capital Markets Day in '23, you already provided some color alluded to the main topics. On electrification, what's the level of detail you're aiming to showcase at that Capital Markets Day? How much do you think can you unveil and share with us by that time? And then for Doug, I'll come back to the cash flow this year. Let's see the -- if there were some unforeseen events that would create some disruptions in your cash flow, what are the levers you're thinking about? If there were a cash gap to open up, what's the floor of cash you would deem acceptable for the business? Do you think the markets are open as you're looking at them right now? Just thinking about the contingency planning, if you will, on the cash front this year.

I'll let Amedeo start and then I'll go and then Doug, you'll go.

Okay. I think the 707 last year was a good experience to understand where we have to strengthen the organization, internal and external, means the supplier. I think what we have done is to a little bit change the organization of the production line. As mentioned, we have started this month on going on the main line. Until now, we have produced several tens of cars on the pilot line in order to prepare the production and the network to the supplier. Now we are moving on the final phase, which is that we'll end up until the end of March. So I think the experience we got give us the understanding where we have to strengthen the organization, and this was done in the production side, as mentioned. From the other side, we have decided to strengthen the cooperation with the supplier, which is -- if you want 70% of the value, so the car is coming from outside. So we have decided to really have the supplier as partners, not only a supplier. And this was the very well new way to work that we have decided to do end of last year starting this year in order to have all the larger companies, that means us and the supplier, working together. This was the reason of the meeting. We decided to have 2 weeks -- 2 or 3 weeks ago with the 40 main supplier for the new car. And I think the result is coming. Then of course, we have to still improve. But I think the starting of the production phase of the new car, I think it started better than it was the 707.

As far as your second question in regarding Capital Markets Day and what we're going to share and how much we're going to share. We're going to share a great deal. We're going to share our future product plans. We're going to share the capital requirement to deliver it, which does not dramatically change from the numbers you guys already are imagining. We're going to share our complete electrification strategy, and we're going to share our mid-term guidance. So it's going to be a very exciting day that you'll visually see, the products that I'm referring to. So it's not only going to be us discussing them, you will visually be seeing models of them. Some will already be made. Some will be prototype. But you'll see a real clear vision of the journey that I've been building for the last 3 years, which is now really coming to light. It came to light first with the first new vehicle under my management, the DBX707. And now you're going to see all the rest of the cars this summer, that's going to take us through our full combustion story. It's going to take us through our PHEV, our hybrid story, and it's going to take us right through the full journey of the plans for electrification. So a tremendous amount to share and really excited to share it with you because again, it's all the last 3 years of heavy lifting and the work we've done, and now we're seeing delighted to the end of the tunnel of how we get to the famous 10,000 cars in the next few years.

Daniel, just on your last question. So look, I think I'll start by saying, again, look, we've got confidence that we've got the resources that we need to meet the plan for 2023 and beyond. So our target of becoming free cash flow positive from 2024 remains and our plan is all about execution as we've talked about before. So I don't foresee any issues from a liquidity point of view in 2023. If there were extreme pressures that came onto the business, the first place we'd look at internally in terms of the profile of our spend, our investment in variable costs that we can control. But really no plans on the radar in terms of anything external. So we're confident that we've got the cash that we need in the business to execute on the plan. If we execute the plan, that takes us with very strong momentum into 2024 to deliver on the midterm targets that Lawrence has just talked about, and we'll talk about refreshing as we move into the summer.

Thank you for your question. There are no further questions at the moment. I will hand back for closing remarks.

The only closing remarks, as I've stated, is the last 3 years has been a journey to take us to this exciting point, which is our core DNA, the launch of all our new next-generation sports cars. We're currently on -- the first one is under production, delivering third quarter this year. In the next 18 months, all of them will be coming to market. So this is the moment we've all been waiting for, continuing on the success of our critically acclaimed DBX707 and moving on to our Valhalla, our super mid-engine hybrid. So couldn't be a more exciting future. This is all what we've been working for. We believe we have our issues behind us on supply chains. We learned a great deal from last year. And as Amedeo mentioned, our suppliers are now becoming partners rather than suppliers. So learning from last year, bringing the experience of that into this year to hopefully have a very smooth ramp-up in delivery of all our exciting new front-engine sports cars. So please continue to follow us on this exciting journey. It's just all about to get started. Thank you.

That conclude the conference for today. Thank you for participating. You may all disconnect.