Ayvens (AYV) Earnings Call Transcript & Summary

Hello, and welcome to the ALD Q1 2020 trading update. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded [Operator Instructions]. I will now hand you over to your host, Tim Albertsen, Chief Executive Officer, to begin today's conference. Thank you.

Good morning, ladies and gentlemen, and welcome to this ALD Q1 2020 Results Call. First of all, I hope you and your families are all safe in these very unpredictable and unprecedented times. I've taken the liberty to anticipate 2 questions you all typically would have on your mind this morning: how did ALD do this quarter and how are we handling the crisis. The quick answer to the first question is that the quarter saw a resilient net income at EUR 128.9 million and Gilles will, of course, come back to this in more details later in the presentation. Now concerning the crisis, it is clear that we and the entire leasing industry are, and will be, affected in the coming months. The IMF has estimated a contraction of GDP that could reach 7.5% in the eurozone this year. The lockdowns and confinements are devastating to the economy despite the support to companies and industries granted by governments. It is difficult to predict the timing and speed of the rebound at present. We already see corporates struggling with their cash management and we anticipate that this could lead to an increase in customer default. Funding pressure on weaker players in our industry is increasing, and car registrations are slowing down in most markets, adding pressure on OEMs and suppliers. In this difficult and uncertain context, ALD has taken a number of immediate measures. First of all, we have very successfully deployed remote working in all the countries under lockdown. Within a week, all our staff was working from home, ensuring business continuity and hence avoided the use of partial and unemployment measures from governments. These achievement is something we are very proud of as it demonstrates the flexibility, the reactivity and the engagement of our staff and we firmly believe that this is a key strength of our organization. We pay specific attention to our cost of risk and have booked some specific provisions because of perceived macroeconomic risk. We have also put in place measures at corporate level in order to reduce our costs, mainly through a decrease of discretionary overheads and acceleration of process digitalization. Our sales teams have also been very busy, proposing contract extensions to our clients that helps us avoid a further buildup of our stocks of used cars. We have been dealing with payment rescheduling request from clients with payment difficulties, the general principle being the delays have been granted on condition of contracts being extended. They have responded to quite a number of international fleet tenders and actually won a very nice portion of those. In countries with less restrictions, normal business partly continues, order taking, vehicle delivery and used car sales, in fact. Vehicle repairs and other service requests are being handled by our customer service teams. Let's go to Slide 4. On Slide 4, you will see the -- one of the important actions we have taken in order to play our part in this crisis, the ALD Solidarity Plan. This plan, which is aimed at supporting stakeholders focuses on 3 pillars: first, lending our assets to those that are on the front line. As an example, ALD Spain has put 500 cars at the disposal of health care professionals and 15 other countries have taken the same kind of initiatives. Secondly, joining the fight. We have been -- we have made a donation of EUR 100,000 to the One O One Fund in order to support intensive care research. We have provided 40,000 masks to the health care professionals, and we have partnered with Gate Gourmet and Caritas to distribute more than 70,000 meals in Spain. And finally, accompanying vulnerable suppliers and customers, we make sure we pay suppliers on time or even ahead of time. We grant payment delays or preferred terms on contract extensions to vulnerable clients, mainly in the SME segments, and we ensure deliveries and customer support to essential activities. In this tense environment, we are happy to see business continue. Let me lead you through our recent strategic initiatives on Slide 5. First, we announced the signing of an agreement with Mitsubishi to launch greenfield operations in Malaysia in March 2020. This joint venture will combine client basis, industry expertise, local knowledge and the financial strength of both groups. It will offer both local and international corporate clients our usual full-service leasing and fleet management products as well as mobility-related products. This JV is a part of a Southeast Asian strategy, and we see a number of opportunities with many of our existing international clients in the region to be considered over the coming years. Our global coverage of our global alliance with Wheels has also been extended recently with the signing of another partnership agreement with Mitsubishi aimed at covering in Japan. The cooperation includes cross referrals, common participation to global fleet tenders, comprehensive fleet services and support. And this agreement is effective since April 1. As we had announced last quarter, our strategic relationship with Tesla continues to expand. Our full-service leasing product is now offered on all Tesla models in 14 countries. And this quarter also takes our collaboration with Polestar one step further with the digital online solution now operating and taking orders in 3 countries. ALD is a company that takes corporate social responsibility very seriously. We are therefore proud to announce that we have been ranked by Vigeo Eiris amongst the top 3 most sustainable companies within the business support sector representing 102 companies. We scored 67 out of 100, achieving Advanced Level and showed excellent scores on fundamental labor rights, social dialogue, career management and corruption. This reward is a recognition of a strong social, societal and environmental commitment and it increases our determination to have a positive impact, and more specifically, contribute to sustainable mobility. Finally, the closing of the sale of our 50% share in ALD Fortune in China that was initiated last year led us to register a EUR 10 million post gain in this quarter as well. Now let's take a closer look at our fleet on Slide 6. As you can see from the graph, we continued to grow our fleet in Q1. Total fleet organic growth reached 4.9% versus the end of same quarter last year. This was achieved despite a significant decrease in deliveries in March due to the lockdowns in many countries where we operate. And this is a very resilient performance that allows us to maintain our leading position in Europe with a total fleet of more than 1.78 million cars at end of March. Let me now hand over to Gilles.

Thanks, Tim, and good morning, ladies and gentlemen. First of all, I hope you're all well and safe in these very troubled times where we have special thoughts for those who have been touched personally by this disease. This is our first financial reporting in the context of COVID-19 crisis, which is clearly setting us all new challenges, forcing us to make unusual assumptions and take corresponding decisions as regards our financial reporting. Just like most other companies, our business started to be impacted in March, earlier in Italy, later in the U.K. and there are even some subsidiaries that have had comparatively little impact such as some of the Scandinavian countries. Overall, the quarter is made of 2 very good months in January and February and a month during which we have started to deploy our tactical plan to cope with new operational challenges that Tim has just covered. So moving on from the fleet dynamics commented by Tim, let me start by taking a look at our used car sales results. In Q1 2020, used car sales results was EUR 3.2 million. At the end of the quarter, we saw an increase in used car stock compared to usual normal quarters due to a number of our markets implementing lockdowns. As a result, we have booked an exceptional EUR 9 million used car stock impairment during the month of March, reflecting both the increase in stock levels and our anticipation of delays in sales and potential price reduction due to the crisis. As a result, the average used car sales per unit reached EUR 43 in Q1 '20. When excluding the exceptional EUR 9 million COVID-19 provision, the average used car sales result per unit is EUR 165, showing that prior to the crisis, the second hand car market was resilient. We believe some cars were affected by lockdowns, leading to a stable number of cars sold compared to last year at 74,000 units. This has led to a moderate rise in used car stock levels. To mitigate this effect, we have been actively promoting contract duration extensions to targeted customers, which also helped us lower the number of vehicles to be sold once the lockdowns are over. Our remarketing platforms also remained key assets in the efficient management of used car sales, especially once the activity will pick up again. Our used car second lease offer, which leverages on our existing partnerships and which has been operational since last year, will, we believe, be particularly suited for the coming period. So let us look at the whole P&L on Slide 8. Leasing contract and services margin increased by almost EUR 10 million compared to Q1 '19, which is a very decent performance given the impact of significant unrealized losses on the valuation of our equity portfolio on leasing contract margin. This equity portfolio is part of normal regulatory assets that our reinsurance subsidiary has to held. Our operating expenses went up by only EUR 4.6 million, reflecting the good activity of this precrisis quarter. And the cost savings measures taken to decrease our expense will reflect starting Q2. You can see that the cost of risk increased by EUR 7.4 million compared to Q1 '19, of which EUR 4.4 million relates to an exceptional IFRS 9 provision, reflecting the expected increase in probability of default linked to the crisis. During Q1 '20, we have not yet seen any significant rise in default and we continued to support our customers to restructure their contracts by extending the duration of their lease which generally leads -- imply a lower monthly rental to help their cash out. As already mentioned by Tim, we also recorded during the quarter a EUR 10 million post-tax profit on the disposal of our stake in ALD China. So as a result, the net income group share reached EUR 128.9 million for the -- for Q1 2020. Let's have a look at the Slide 9 on the funding. We are confident our solid and adaptable funding structure maintains our ability to grow fleet unchanged. As a reminder, our policy is to systematically match our assets and liabilities in terms of duration, currency and interest rates and to strictly manage our liquidity gaps. And we have an access to secure funding sources, thanks to Societe Generale, which are guaranteed. We also benefit from strong ratings, which gives us access to capital markets. We anticipate that our 2020 funding needs will be more limited as we are extending contracts and fleet growth will most probably slow down. We have EUR 1 billion of bonds maturing this year, which will be refinanced in the market, depending on market conditions. So let me now hand back to Tim who will conclude this presentation.

Thank you, Gilles. Yes, I would like to finish this presentation by looking a bit further ahead. Despite the current context, we do not doubt the solidity of our robust business model, which is characterized by multiyear contracts and a moderate credit exposure to a diversified customer base. Our extensive and unparalleled partnership network powered by state-of-art digital tools and our constant attention to cost control have made ALD a clear market leader. As lockdowns are being softened in most countries, the logistical situation will gradually normalize. We are aware that in the coming quarters, the efficiency of our used car management will be key. We are well equipped to face this challenge, thanks to our omnichannel used car lease capacity and our digital platforms for selling and exporting used cars. All in all, we are confident and ready to seize new opportunities when they arise. The shift in behaviors introduced by this crisis is the opportunity for us to launch and promote innovative products such as flexible lease offers and used car leasing. We believe we are well positioned to take advantage of market consolidation and leverage our strong buying power to bring optimal pricing conditions to our clients. Our ability to respond to demand for additional fleet remains intact, thanks to our reliable access to funding. We are ready to rebound and confirm our leadership. Despite all these positives, the high level of uncertainty associated with the COVID-19 crisis and its impact on business conditions during the coming quarters makes it difficult to provide an update on ALD's expected operational and financial performance in 2020. In an optimistic scenario where the European economy were to start to rebound sometimes in the second semester, ALD would be well positioned to resume its profitable growth by end of the year. However, if new lockdowns measures needs to be put in place later this year due to a second wave of COVID-19, then used car sales result and cost of risk would be expected to deteriorate further. It is the company's intention to keep the market informed as the situation evolves and visibility on these trends improves. This concludes our presentation. Thank you for listening, and we are now ready to take any questions you may have.

[Operator Instructions] Our question first question comes in from the line of Albert Ploegh calling from ING.

Yes. I hope you can hear me. Two questions from my end. First, on the credit risk comments you made, which is mostly indeed IFRS 9 driven the increase, can you share maybe little bit details on the amount of -- or number of clients asking for, let's say, the payment extensions to -- in troubled sectors. And what your experience has been on that in April because I guess more clients, at some point, run into financial difficulties. And then accounting-related question to this. Once you have, let's say, major payment extension, how does that work from an accounting perspective? Can you still accrue the income on these extended payments, so to speak? And the second part of the question is on the residual value management. I see what you've done in March with a EUR 9 million provision. Yes, with most countries still being on lockdown in April and now some easing, yes, can you help us a little bit what you've seen in terms of experience in April on the car sales result? I know it's very difficult to look much further ahead, but any color there would be appreciated.

Thank you, Albert. I think I'll start with, actually, your last question on the residual values and the used car sales, maybe giving a bit more broad update on that. And then Gilles will cover the credit risk questions. So clearly -- I mean in the countries where there is a full lockdown and confinement, car sale have basically stalled completely. But having said that, the countries and our diverse geographies means that we still have activities on the car sales part. And in April, actually, on the full, let's say, lockdown and confinement, we have still been selling 1/3 of the cars we normally would be selling on our trade channels through car market. And of course, what we have seen is that the pricing is deteriorating compared to before, let's say, the confinements. So clearly an impact on that. And we still believe that the provision we have done on the stocks is prudent on that part. And last, what we have seen in the last -- we are, of course, following the activity. This is -- I mean, our main challenge is clearly our residual value risk and our used car sales, and therefore, we are following this very closely. And through our remarketing platforms, we can see every day basically the activity. And we can see for 3 weeks now that activity is coming back, traders are logging back in and they actually start bidding on the cars as well. So there's a bit of a light at the end of the tunnel, but we are still far from where we were before the crisis on the residual values. Maybe, Gilles, on the credit risk?

Yes. So as you said, Albert, the main impact we've seen this quarter, we've decided to book an exceptional provision to reflect a potential rise in the probability of default related to the crisis. I mean excluding this EUR 4.4 million forward-looking provision, I would say, you would see that the cost of risk remains in the region, which has been our -- in our historical results in the previous quarters. It's still difficult to quantify the number of customers requesting payment delays. It's still early stage. We are concretely not proactively contacting them. But they come to us. And as explained during the presentation, we tend to generally bundle any holiday payment with a contract extension. Why we do that? It secures us to continue to invoice the customer, to answer your second part of the question. From the accounting standpoint, we don't suspend the billing. We continue to bill the customer, we just extend the payment term. When we do contract extension, just for the sake of clarity, so you extend the contract by 3, 6, 10, 12 months, depending on the customers. So you generally lower the monthly rental payment for the customers, which may come with a credit note, which we don't pay. But we allocate this credit note because the customer has already paid some rentals, and we allocate these credit notes to the future lease payments. So in a nutshell, what we'd expect, so not so much an impact on the P&L. Of course, we'll have an increase in our working capital, in the customer receivables, in the coming months. So that's to answer your question on the accounting side. Am I clear? Do you want more clarity or...

No. That's clear. And can you maybe also -- I don't know how relevant it is to look back at the 2008-'09 global financial crisis period in terms, I think there was something like around 30-plus kind of basis points risk cost. But your model has also, in a way, changed with SMEs and private lease. Yes. So is it relevant to look to those years in terms of what we could expect because I think you're already trending a little bit above -- or in the mid-30s if you annualize Q1. And is there a big difference in trends you see on the corporate side? I assume it's still reasonably okay, but more on the private lease or SMEs. Can you give some insights to what's happening there?

Yes. As I said, you see the underlying cost of risk of the quote by deducting this EUR 4.4 million. We need, of course, to respect strictly any consumer clients' regulations in some countries. So -- and it's more -- which are around protecting the consumers. You're right. It's still early stage to assess. We expect -- and that the reason for this EUR 4.4 million increase in IFRS 9 provision, which is mainly related to a potential increase in private lease customers to increase the probability of default of these customers. If referring back to the cost of risk we had in 2008 and '09, it was roughly speaking between 40, 45 bps. So that was the order of magnitude that we would be anticipating should the situation deteriorate further.

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

I was just hoping, firstly, if we could follow up on -- you touched a bit on the working capital, how you're thinking about your volume of used cars and stock of used cars moving through the year at the moment? And if you could just provide a bit more color on how you're managing that?

Yes. So I mean, clearly, the stocks for the time being is higher, of course, than what we anticipate at the beginning of the year because the sales are deteriorating, as we already explained. I think what -- our first reactions, which we already put in place, is this extension program. And it's a program that is actually very well appreciated by a lot of our clients. We have a lot of clients who actually come to us who would like to see also a cost saving on their fleet, and therefore, they actually request extensions as well. So it's a win-win situation for us and for them. So overall, we would anticipate to, up till August, to extend approximately 50% of our contracts, which would at least diminish the inflows to our stocks with those like 50%, which would leave us stocks that is more manageable. And then, of course, I mean, first of all, we -- as we said, we still see that we are selling cars, clearly not in the volumes we are used to, but we have, as I said initially, we are seeing that activities are coming back. And in the countries who opened up, let's say, if you go to the Nordics, you have seen that the countries basically stopped their confinement 3 to 4 weeks ago, we start seeing some real activity. So as the de-confinement will start and the countries are coming into a more normalized situation, we would anticipate at least to start selling a decent amount of cars again. The cars that we can't sell, we have another, let's say, initiative, which is, first of all, we -- compared to 2008 and '09 where we were not so well prepared, we have developed much more channels in terms of remarketing. So first of all, we have more digital channels. We have more retail sales than we had those days. And we are also better positioned in terms of exporting cars to markets that potentially have some demand. And last but not least, we are working very focused on offering a flex lease product, which will be a product for typical corporate clients where they can get a car from 1 month to 12 months, which will be cars coming from our used car sales stocks. And again, the feedback from our clients is that it is very well appreciated. They would like also to have more visibility on their own business before they take more commitment to 3- or 4-, 5-years contracts. And therefore, we see again a win-win situation for our clients for us because that could again leverage our used car sales stock. But overall, our anticipation is that we will be running higher stocks at least for the next 3 to 4 months than what we usually will be doing, and that car sales prices will be under pressure. And that if we can be at a car sales result around 0, we would anticipate that to be actually a good result. I don't know if that answers your question.

No, thank you. That's very, very helpful. The other one I was going to ask, and it might be a little bit early to think about this. But are there any areas in the market that you're seeing competitors pull back from that could be interesting opportunities for ALD?

Well, I think we -- if you look at the industry, we know that we are very strong. Also, as Gilles said, our funding position is very strong. There's only one, let's say, company to have the same funding strength as we have. We know that, overall, in the markets in, let's say, the local markets, regional markets, that typically the local players are suffering much more than anybody else and that, of course, gives us more room in the market. And in the longer term, potential new opportunities for consolidation in different markets. So if we look at -- if we look back at '08 and '09 again, in the long run, that was actually positive for ALD because we kept growing and we where then the partner who basically were consolidating this industry. And if that plays out the same way, we do believe that we are in a very good position. As you might know, the -- we are the most cost-efficient leasing company in this industry. And of course, that also helps a lot when you move into a crisis like this to maintain the leadership and actually maintain a grip on the market. So in the medium term, we still see that there will be some interesting opportunities for us now.

Your next question comes in from the line of Pierre Bosset calling from HSBC.

Yes. I have 2 questions, actually. Actually, it's a follow-up question. The first one is on the pricing of used car. Can you give us a little more granularity on the difference between Scandinavian countries where there still is sort of market for second hand cars and a country where the lockdown has reduced considerably the volume of production. So is there a difference between the 2 types of countries? And my second question is on leasing for individual consumer. Do you also try to extend the contract? Or is there more payment defaults? Or is there any difference with corporate client base?

Thank you. Yes, I think on the pricing, it's difficult to give you a very clear picture on. But I mean you could say that the -- I mean, in France, Spain and in Italy who have been in complete confinement and complete lockdown, prices on cars is, of course, very damaged. Whereas in Germany, throughout the whole crisis, even under the confinement, there were still sales, but honestly, we have decided not to sell cars on a certain level of pricing because we do believe that the markets will come back and we can recover those prices in the coming months when demand starts to pick up again. And in between, as we said, we are trying instead to avoid having used cars coming back and use the used cars for a new product. But clearly, in the -- when I said we were selling 1/3 of the cars in April that we normally would do, those cars have been sold not far from basically what we normally would be selling. And the cars where we didn't get a decent offer, we didn't sell actually. But the -- there's a very clear difference from countries who are in full confinement and lockdowns and where there is still a bit of activity. And in the countries where there is a bit of activity, the prices are not severely impacted as such.

Second question?

The second question maybe -- John Saffrett is with us on the phone as well. He was on the private lease. And maybe, John, do you want to take that?

Yes. Thank you, Tim. I hope you can all hear me. Thanks for the question. We offer the same type of support and engagement to all of the customer segments. So with the corporate and the private individuals, the complication on private individuals and with SMEs in some countries is the consumer credit law covering that agreement in the relevant country. So the first action we have is really driven by that consumer credit law and we have to ensure we comply with that, and we ensure that we remain a responsible lender. Some of the legislation or guidance being published, for example, in the U.K., offers a payment holiday for a period but then immediately puts the customer into a credit risk position because they immediately owe back those payments the month after they become deferred. So we have to make sure that we're responsible in advising customers on what we can do for them, how we can support them during this crisis. And obviously, where there are government schemes that provide support for them, we try to ensure that they're aware of how to access that government support because that helps mitigate any ongoing credit risk for that client if they come through. The private lease market remains stable. Obviously, we have a number of requests from clients in that market to apply for payment holidays, but we process them in exactly the same way as we do with the other segments.

The next question comes in from the line of Enrico Bolzoni from Crédit Suisse.

Two questions for me. First, the EUR 9 million provision you booked is actually a very, very small proportion, I think roughly 0.7 -- 7% of the residual value of the stock at the end of '19. I was wondering whether you could give us a bit more color there in terms of do you expect it will increase? You will have to book more? Or does it pertain only to delayed cost that you are going to -- were expected to sell in the very short term? So that's my first question. And the second question relates to M&A. Do you see the current situation more of as an opportunity for you to do some bolt-on deals, given that some smaller players might be struggling more than you? Or rather you're just adopting a more cautious approach and you're a bit on pause there in terms of inorganic expansion?

Thank you, Henry. It's Tim. I think I'll take your second question first, and then Gilles will come back to your provisions on the used car sales. So as I said on the M&A, our anticipation is that there will definitely be some of our competitors who will be suffering. We know that if they are not funded like we are by a substantial bank, funding rates in the external markets are very expensive for the time being. And of course, if you don't have the scale we have, you will have a hard time to compete. So we know that under a crisis like this, like we actually saw last time, there will be opportunities for bolt-on acquisitions coming up, no doubt. And again, in the medium term, that would be very interesting for us. It's also fair to say that if there is an opportunity right now, we don't have enough visibility to price an asset. I mean the used car sales, the risk -- let's say, the credit risk is not easy to estimate at this point. So it's not just around the corner. We need to have more visibility, but we are absolutely sure that there is opportunities coming up in the next 6 to 8 months based on the current situation. So Gilles?

Yes. On your first question, Enrico. So just yet to come back on this EUR 9 million exceptional provision. It's related to the slight increase we have at the end of March on the used car stock. It's made of 2 -- it's 2 parts. I mean there is 2 components of this EUR 9 million. There is volume-related impact because we've seen an increase of -- in used car stock of roughly 15% at the end of March compared to the usual levels we had. Remember, usually, we have always had in prior years, prior quarters, between 1 month -- more than 1 month of stock, I mean. It varies from quarter-to-quarter, generally December being worse than summer, of course. But this time, we've seen a slight increase in this stock and that's why the volume represents a roughly 1/3 of the EUR 9 million. And the remainder of the provision is linked to a potential future price decrease, which we assess is roughly the equivalent of 1 month worth of depreciation. It's what we have assessed for the time being. So reflecting longer sales delays than usual. And it's -- indeed, it's very difficult to predict the dynamic of the used car markets in Europe. It's, first, we are present in 43 countries. So I can tell you that the dynamic of the market are different between the, again, the Nordics, the emerging markets and Italy, for instance, which has been the most impacted. But -- and the used car market dynamics will depend on the local factors, on the supply and demand situation. There is also a situation. As Tim commented, we are developing the flex used car lease products, which can be a good offer for our corporates or even for private individuals looking for short-term lease, for people trying to escape from public transportation. I mean cars today become the safest way of transport, safest than train, safest than plane, safest than public -- general public transportation. So we -- it's a big unknown. I'm not saying -- I don't take it for granted, but it will -- we'll see how the -- after the confinement after the lockdowns, we'll see the dynamic of the market. So that's to answer your question.

My follow-up with a very short one, sorry. Over the past few quarters and years, the mix of your fleet has moved towards higher vehicle -- higher quality type of vehicles like SUVs so on, so forth. Should we expect this trend to continue? Or it in a way is on pause, so you see different trends in the market so that the quality of the fleet is not changing?

Yes. No. I think we -- it's difficult to judge right now if this crisis will have an impact on the behavior, I mean, of our clients in general terms. I think John can confirm because I know he was with a large set of our clients yesterday on a conf call. And I mean the feedback is not that they will be looking at changing their car policies. They're still very interested, actually, in the electrification of their fleets that, as Gilles said, they actually -- the car, at least in the shorter term, people do not necessarily want to get into public transportation. And therefore, the car actually becomes potentially even more interesting and more important than it used to be. Whether the mix will change, that people will not take an SUV, but take a smaller car, it's too early to say if there will be an impact on that. We know that typically changing car policies with our clients takes quite a long time. It has typically to go through works council. It's part of a compensation package and so forth. So therefore, I don't believe that we will see a big change right here and there. Again, the feedback, maybe, John, do you want to give a quick feedback on the call you had yesterday?

Yes, I can, Tim. I mean as part of our engagement campaign with clients, we're meeting with our key strategic clients now every week or 2 to discuss their topics. In the call we had, this was very informative. Firstly, we were trying to understand what impact the crisis is having on their thinking about the evolution of their mobility and their fleet management. And as it stands today, it's no change. We still aim to complete that electric transition, but we believe it might delay it purely because of the supply side and the anticipation that supply will be more difficult. They anticipate a review of the mobility options from the nonessential car users to looking at the perk car users. But they still think they'll have to provide some type of mobility offer to those clients. So the structure of that will probably be in an affinity scheme from a recognized provider, like ourselves, rather than just passing cash because that's not the most efficient at the moment. And as Tim said and Gilles mentioned, what they're particularly interested in is they believe that there will be an inflow of employees who've opted out of the company car scheme to come back in because they'll view having an individual car as the safest form of transport for the next 12, 18 months. And we think there'll be a shift away from public transport and shared transport during this period. So in all cases, when they want to put that structure in place, it would be with a provider rather than just offering cash because they still want to maintain the quality. So there's no major shift right now in the thinking. It's business as usual. We're seeing some RFPs being sent to us last week from a number of global clients. But they are beginning now to think about the medium-term impact on mobility of their workforce as a whole rather than just considering this is a negative impact on their current fleet.

The next question comes in from the line of Lucas Ferhani calling from Deutsche Bank.

I have 3 questions. So the first one would be on fleet growth. You usually have some kind of view on what's coming ahead on the order book, so it'd be interesting to know a bit what you're seeing. Obviously, some clients are not ready to take such decisions. And also there's pressure from -- on the OEM side, on the supply side, because they are also on lockdown and unable to kind of maintain the production of car. And the last point on fleet growth will also be that generally in a crisis, you're seeing more outsourcing because some clients are not able to find the funding. So I was just interested on your view on fleet growth near term on all those points.

Right. Yes, I think there's a lot of dynamics in that, which some of them point in a growth direction; others will point in the other way. So again, it's very difficult to give very clear guidance on that at this point. There is, I should say, first of all -- I mean, the fact that we are extending contracts helps, of course, to help our fleet up. So overall, it means that any growth typically will be on top. We also know that there will be clients who will not make this crisis and they will basically early terminate their cars. And again, it's difficult to have a very strong feeling for what the number of that will be at this point. And of course, there is new products like both John and Gilles have mentioned, our flex product, which eventually could become quite substantial, at least from the feedback we have from the customers and the market that, again, not to take a long-term commitment is what a lot of companies would like to do and that would typically be new growth for us at least. And again, the dynamics of people who have in the past maybe opted out from a company car scheme coming back in and potentially going for 6- to 12-month contract, at least to start, again, as things so -- I would say we -- honestly, we can't give you a very specific answer here. I mean there is new customers out there. As John said, we have been -- we have actually been answering tenders over the last 2 months. We have won some quite significant ones, which is some of the new customers and new territories. We have the buildup in Asia, which, of course, will take time. And we have, let's say, a lot of dynamics. There is the Tesla Corporation, there is the Polestar, again, with our new, let's say, partnerships. And the question is, how much they will bring. But I mean -- to expect a fairly stable fleet growth under the circumstances we're in right now is potentially the most prudent to say today.

Okay. That's helpful. And the second one would be on used car leasing. So obviously, we can see the benefits of that right now because it delays the arrival of cars on the used car market and also capping kind of growth and maintaining the top line. Are you already seeing takeup of that? Is it something you're already proactively pushing? Or it's just something and you haven't seen the results yet?

No. I think we started our second life lease program already 2 years ago. And last year, I think we ended up with a fleet of 12,000 used car leases. In the meantime, we have been building our digital tools to actually make these cars available in several channels. And we have been working very hard actually to where we do have retail sales, which is in civil markets today in Western Europe. We do actually have a used car leasing offer on a car that is also for sale. So we are well prepared for that. We do believe, again, in this crisis, people are looking typically towards more used cars than new cars. And in the medium term, we think that used cars will be interesting again in the economic environment, we would anticipate. And therefore, as we have done pretty much all the preparatory work to have used car leasing as a standard part of our offering, both to corporates but also to consumers, we think we're well positioned there. And we will push that even further this year, but clearly also in '21.

Okay. And the last one was on the cost-income ratio. In Q1, the operating expenses grew 3%. And if you look at the last 2 years, there was similar to that sort of low to mid-single digits. And you are growing the top line, obviously, at higher rates, probably than what you're seeing this year. Are you taking any measure on the cost base? Do you think you'll still have to grow operating expenses roughly 3-something percent? Or are you able to kind of find ways to cut a bit on the cost base?

Yes. Thanks, Lucas. So yes, indeed, we've not really commented the cost-income ratio in Q1. I mean indeed, it's better than last year, 50.2% against 50.3% last year. Keep in mind that this is a Q1 trading update, and Q1 has been made of 2 normal months, I would say, and a very good month overall. And March, which has been more mitigated, as I explained, depending on the geographies. So we've not seen yet in these results an impact on our expenses, but we are, of course, taking hard measures to reduce our cost base. You can see also on the margin side that Q1 has been very good and an increase of EUR 10 million against last year, 3.1%, taking into account some exceptionals on the -- included in the financing margins. So -- which means that when you compare overall the margin, the behavior of the margin has been very, very resilient. So yes, we are taking measures on the expense side to offset some of the impacts we may see on the gross operating income overall and to protect the PBT basically. But you will see that materializing from Q2 onwards. We have, of course, some costs associated to this crisis, like any other companies, that we are currently assessing. But surely, you will see some reduction in the cost base.

Sorry, I actually have just one last. On the cost base again, obviously, Q1, like you said, is not necessarily representative of what's coming ahead. But how much can you kind -- like you said, you already have kind of the best-in-class. So is that kind of short-term measure just to adjust? Or are you able to like previously kind of improve really the business? Or will it be just short term kind of to see where the revenue line is?

For the time being, I mean, as we explained, we are taking measures to protect our fleet, contract extension to maintain our fleet portfolio intact. And I mean then it will all depend on the countries. If we see countries where we have, I don't know, a lower fleet growth or de-fleeting, we may adjust the head count. We have not -- it will be done based on what we see on the portfolio development. But it's very early stage to say. For the time being, the measures we've taken are based on discretional overheads mainly and also pushing a lot digitization processes. It's a unique opportunity to push more digital transactions with customers, with suppliers. And it's a unique -- this crisis a unique opportunity to accelerate the digitization of processes. But to come back to your question. So it will depend on the fleet development and then we'll adjust potentially the head count.

The next question comes in from the line of Charles Bordes calling from Kepler Cheuvreux.

Two, if I may. The first one, just to clarify on the rise of the cost of risk related to private lease. Does it mean you're offsetting a divergence already between corporates and private defaults? Is there also a difference in the evolution of demand between the two, i.e., a demand potentially more impacted in private corporates? And second, regarding to the new flexible contracts, part of the resilience of ALD's business, but that is based on long-term contracts. Aren't you afraid of more volatility by going more flexible and shorter-term contracts if customers massively switch to this type of offering?

So I take the first one. So on the cost of risk, it's, as I explained, it's more forward-looking approach that we have had here. And we need to, I guess, as I said in my speech, we need to get used to unusual assumptions, to exceptional assumptions and a lot of, yes, judgmental approach in how we assess our provisions. And it's what we have been doing. We haven't seen, in Q1, any specific rise in customer risk. We need, as I explained earlier, and especially in countries where private lease is regulated, it may be -- we have to accept early terminations with less favorable conditions for us than with corporates. And we will see surely -- we expect to see an increase in the default of private lease. But so far, I cannot -- I mean, it's the -- it's just stating the obvious. But it's very speculative and we've decided to be prudent on the probability of default. And this forward-looking provision will be, of course, updated in the course of Q2 as we are surveying each market and each market having a different behavior depending on the customer segments, depending on the geography. So it's -- keep in mind, it's 43 countries with different type of typology of clients by subsidiary, some having more private lease than others. I'm less concerned with private lease in Germany than I am in Italy, for instance. So we'll see how it develops, but we wanted to have this approach for Q1 and to take this -- and to book this exceptional provision, which we'll update in the -- in the course of Q2.

And John, maybe you want to take the one on flexible lease?

Yes. Yes. Yes. Sure, Tim. Thank you. Just to add to Gilles' comment on the demand side on private lease, obviously, our main private lease channels are partnership channels and a lot of those channels are dealer-based, and we know that in a lot of countries, the dealer activity is frozen, but there is still a slower business coming in. What is interesting to note is that some of the digital-only channels that we have with private lease, and we've been sharing our digital investment and our digital journey evolution with you over the last couple of years, we are still seeing activity coming down those digital-only channels. And you'll have seen recently a number of the OEMs looking to now accelerate their digital launches as well. So we believe that one of the outcomes of this will be the acceleration of the digital-only transaction in automotive. On the second point regarding flex. Again, coming back to Tim and Gilles' point, in this immediate period, the next 6 to 9 months, the focus on flex is about managing our used car stock. And ensuring that our used car stock can put out on lease rather than looking to sell all those down some of the existing remarketing channels. And then going forward, after that, we really see flex as a complementary product to our core business. It's not going to be right for every client. In the markets where we already have a flex product, the customer base is less than 50% coming from our existing corporate base and is actually a new customer base, which is attracted to the product. And coming back to the pricing on flex as well, there's clearly a premium that someone will pay for flexibility. And what you try to do is you try to price that appropriately, so that in the event that you do get some of those cars returned earlier than anticipated, that premium covers it. It should be noted that the customer behavior we see so far in the countries where we have a flex footprint is actually the average contract length runs up to 2 years and beyond because once they take the car and they like the assurance of having flexibility, they then keep the car and almost run it as a normal full-service leasing contract. But it will be a complementary product to our core business, and we won't be looking to just switch all of our business overnight because as you rightly said, one of the key cornerstones of our business model is this security of the long-term leasing business that we have.

Yes. Maybe just to finish on that question, Charles. I mean in terms of -- we believe actually that this crisis might speed up some of the global trends that you're seeing in terms of the mobility space and where mobility is going. And clearly, the ownership to user-ship, we think, will be actually pushed even further during this crisis and let's say the behavior of people. And flexibility is anticipated to become a key feature of many, many products, so car-a-service. So you could say that this is pointing into what you would anticipate in 5 or 10 years from now. The good part of this is it could be playing a major role on mitigating some of the risk we have in this business in the short run as well. Okay.

We do have one final question coming through. The final question comes in from the line Pierre Bosset calling from HSBC.

Yes. Sorry, just 2 follow-up questions -- detailed question. The first one is on what should be the cost of shipping a used car, let's say, from Italy to Scandinavia? And how does it compare with the average gain that you are making on the sale of a used car? And my second question is just on the Tesla contract. Is it -- sorry, is it a normal type of contract? Or do you benefit from buyback guarantee from Tesla?

Right. Pierre, I will take the first one, and then John, I think, will answer the question on Tesla. So basically, in terms of our export capacity, I mean, we know the prices in each market. And typically, a car doesn't go from, let's say, Italy to the Nordics. It's true that the cost of transportation -- and we do anticipate that the logistic cost will be quite high in the coming months because of the lockdowns and the demand will potentially be higher than the supply and so forth. So every time we have a car on an export platform, you anticipate what is the cost of transportation and what is the additional margin you can make in a different market. So typically, you would see cars moving in regions. And typically, actually, cars from Italy and Spain would go to Germany first. And from Germany, they would be sold into Eastern Europe. So it's a bit of a different pattern than just saying, well, I have a customer in Sweden and I'm going to buy the car in Italy. That's not really what's happening typically. But the -- you will see that on specific models, you can see differences in prices of between EUR 500 and EUR 1,000. So you have quite, let's say, a margin to play with also in terms of logistics. But typically, that also has to happen very quickly because the demands are changing week by week. So you have to be able to actually sell the car and get it to your destination typically within 8 to 10 days, which is also a part of that equation. But today, I think we have said that before, around 20% of all our sales, I would say, precrisis went cross-border basically. And we could anticipate that this will keep increasing over the next couple of years. John, you want to take the one on Tesla?

Yes. So we -- so as we said, the Tesla offer is live in 14 countries and we'll gradually become a full digital offer through those countries over the next several months. It's part of the Model 3 strategy for Tesla because with those increasing volumes, they see a very promising market in corporate and private leasing. And Tesla's strategy in the past has been to offer a buyback across all the models. With Model 3, they need to -- we believe also, they need to let the vehicle find its market price. So it's not built on a buyback guarantee. There may be times during the partnership where those buybacks may be put in place for commercial reasons. What the partnership gives to Tesla is obviously the ability to provide a leasing offer at competitive pricing. And also, they can continue to work with us on managing the second life on that vehicle because one of the reasons behind the buyback was they wanted to try to keep the vehicles within the Tesla frame and the Tesla network so they could manage the second and third lease of those vehicles. And they'll be able to do that through the partnership with us, using our digital platforms and their digital tools also.

Okay. I think time is, unfortunately, up. Clearly, we can answer more questions through the normal channels through the -- through our public relations -- IR, sorry. And thanks a lot for attending the call, and have a nice day, and we'll be back with our second quarter results in August. Thank you.

Thank you very much.

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