Ayvens (AYV) Earnings Call Transcript & Summary

Welcome, everyone, to the ALD Q4 and FY 2020 Results Call. My name is Patrick, and I will be your coordinator for today's event. [Operator Instructions] I am now handing you over to your host, Tim Albertsen, to begin today's conference. Thank you.

Good morning, ladies and gentlemen, and welcome to this ALD full Year 2020 Results call. And sorry for the small technical problem we had this morning and the delay here. I hope all is good on your side, and let's start this call by looking at Slide 4 of our presentation, which contains some of the highlights of our performance. 2020 was a particularly difficult year, as we all know. So we are proud of what we have achieved under these circumstances. Actually, we ended the year much better than what we anticipated in the first part of 2020. We remain stable on our fleet with total contracts at 1.76 million contracts despite a new car market that was down quite significantly. We proved our agility as we have launched ALD Flex during the lockdowns, which turned out to be a perfect fit for our client needs. It is now live in 25 countries. Our remarketing operations proved once again very efficient, selling 305,000 cars, which is more than ever before. This allowed us to bring our stock levels back to normal. After a strong rebound in the last part of 2020, our used car sales profit stood at EUR 201 per unit, nicely above our guided range. We have paid special attention to our clients and partners, and we have used our agility and our innovation power to answer their needs on a case-by-case basis. This has resulted in reinforced relationships with most of our clients and not least, our strategic partners. Furthermore, we have supported parts of our clients with payment arrangements when it made sense and when there was a need. In difficult times, organizations show us what they're really made of. I think we have confirmed that ALD has what it takes to manage practically any situation. Our leaders and employees have shown incredible efforts and agility, and we have taken the first learnings from the pandemic throughout 2020 and have put our future way of working and changed mindset into a structured program called #ReadyToShapeTomorrow. This program is about flexible working, innovation spirit, work-life balance, which are key motivation and mindset factors. And this will allow us as an organization to make the transformation we have in front of us. Let's go to Slide 5. Here, we show a strong and robust financial performance. I'll not go into too much details, as Gilles will take you through this later. But it's worth mentioning that our operating margins are up 1.5% better than the total contract growth. The cost income ratio is in line with guidance at 50.4% and still by far, the best in the industry. Our cost of risk represents 34 bps as a percentage of average earning assets, which is higher than it was in the past, but this includes a EUR 15.4 million forward-looking provision. This area is clearly under control, and we have no major identified issues regarding collection at this point. All in all, our net income reached a solid EUR 509.8 million, which is a strong achievement, keeping in mind that our usual prudent approach has led us to book EUR 54 million of provisions and excess depreciation over the year. On the basis of these solid results, ALD's Board has proposed to maintain the dividend at EUR 0.63. This represents a payout ratio of 50%. And as mentioned, Gilles will comment on our financial results in greater details a bit later. Slide 6. Apart from our financial performance, which makes us really proud, we are willing to demonstrate that we take extra financial performance very seriously. And this commitment is recognized by the main extra financial rating agencies shown here on this slide. As you are aware, in Move 2025, we have put CSR at the heart of our strategy. The move for good strategic pillar contains all these initiatives, including the #ReadyToShapeTomorrow program that we already mentioned. Talking about this is not enough. We have made a choice of being evaluated by third parties. We are assessed by the biggest names of extra financial assessment. CDP with a B rating better-than-average in Europe and in our sector. EcoVadis, 4 countries with platinum status and gold at group level, top 3%. MSCI, A rating in the top third tier. Vigeo Eiris advanced status top 3% of business support services. Sustainalytics is a new one. A first very positive assessment in the top 8% of global universe and top 3% of transportation. Gaia Rating with a 79 out of 100 score, 28% above average. And we are now including the FTSE4Good Index. We believe this is a really strong achievement and a clear recognition of the quality of our CSR strategy and our strong conviction to make a difference where we can going forward. Slide 7. The uncertain environment in 2020 did not slow down our capacity to keep innovating and pushing strategic business development initiatives. And we are continuing to see our business evolve and develop positively. Let me lead you through some of the recent strategic initiatives on this slide. During the Capital Market Day, we discussed our international digital framework, which is today a strong competitive factor for our capacity to lead the digital partnership space. It is a fully scalable and customized digital framework, clearly ahead of competition appraised by our partners, including top digital companies like Amazon and Tesla. As mentioned, it is a key differentiator when entering into new partnerships. The platform has been deployed recently with Tesla, where we are now fully digital journeys in 14 operating countries. Polestar is now live in 4 countries, the latest being in Belgium. And Ford have asked us to support them in the launch of their Mach-E in 4 countries for the time being. And last but not least, on our own direct offering, we are now fully digital in 5 countries. We are happy to announce that we have also entered into a new partnership with Lynk & Co, which is an EV car company which offers a completely new way of using a car. The offer will be targeted essentially corporates as a first step and will be rolled out in Q2. Furthermore, on the partnership side, the creation of Ford Fleet management that was announced in July is now live. It's about providing integrated solutions to private and corporate customers, where Ford brings the product expertise and connected car capability and ALD brings our global scale and know-how in full-service leasing and fleet management. This is expected to boost our volumes, particularly in the LCV segment going forward. And last but not least, our Southeast Asian strategy has been initiated with the creation of a joint venture with Mitsubishi Bank to open in Malaysia. We got the first client wins in December and the development has a lot of potential. In 2021, we anticipate more countries to come. On top of all of this, 1 of the key highlights of 2020 was the launch of our Move 2025 strategic plan, which provided us with a lot of energy and ambition. The plan secures ALD maintaining our position as the leader in our market, mainly through strengthening our competitive edges across the business. It is built on the 4 strategic pillars towards becoming a fully integrated, sustainable mobility provider. And Move 2025 is about move for customers, move for growth, move for good and move for performance. The plan has been very well received by all stakeholders as a strategic plan that offers a strong vision of the future of this group, while being realistic and concrete at the same time. Let's move to Slide 9, which shows a stable development in our contract portfolio despite an adverse microeconomic environment. Our large corporate segment was resilient with different impacts over the year. A significant slowdown in deliveries and order take in Q2 due to the multiple lockdowns and mobility restrictions across Europe, then globally followed by a good recovery in Q3 and acceleration in Q4 in order intake. And as we have already mentioned, we did a strong effort on contract extensions. And in the context of the pandemic, we have also seen a trend away from public transportation, which has driven more interest in our flex and multi model mobility packages. On the partnership side, our digital capacity and overall agility were key with an increased use of our online channels. Private lease continued to grow despite the conditions of sales in many markets, also, again, thanks to our digital platforms. Let me now go into more details on Slide 10, with the evolution of green powertrains. As anticipated, 2020 was an important year for EV based on mainly EU initiatives coming into force. We are proud to show that we are clearly leading the market in terms of energy transition. We saw a sharp increase of green deliveries, which doubled over the year from 12% in '19 to 24% in 2020 in Europe. We have seen that the pandemic has accelerated the sustainability agenda for all corporates with strong demand, not just for electric cars, but also hybrids and cleaner vehicles. It is clear that total cost of ownership parity still remains very important where we are seeing more and more clients being much more receptive to the CSR agenda and having clear objectives to reduce their CO2 emissions from their fleets. We have comfortably passed the target we set ourselves of more than 20% green deliveries in Europe by 2020. Let me now hand over to Gilles, who will guide you through the financials.

Thanks, Tim, and good morning, ladies and gentlemen. So let me start with the used car sales results for the year on Slide 12. As you are aware, lockdowns have resulted in a historically low level of activity in Q2, followed by a progressive rebound in sales since December and reaching pre-crisis levels in June and an exceptionally strong remarketing activity during H2, even peaking in Q4. From memory, we have never seen such trends during the year where normally the used car sales activity slowing down in Q4 and notably in November and December. And thanks to our online remarketing platforms, we have been able to sell a record number of vehicles during the second semester, close to 180,000 vehicles in 6 months, with historical record volumes in November and December. And on the whole year, as Tim was mentioning, we have sold 305,000 vehicles with stock levels returning back to normal, as you can notice on the balance sheet. Demand for used car remained strong. The pandemic keeping people away from public transportation, and you know that at ALD, we are providing very attractive vehicles for people looking for recent and high-quality used vehicles. It's also true that the lower new car registrations in Western Europe in 2020 has favored a shortage of used vehicles. So overall, we are reporting an excellent used car sales results in 2020 at EUR 61.1 million, which is the equivalent of a margin per vehicle of EUR 201 above the revised guidance we provided last August. If I switch to the Slide 13 on our operating performance. On this slide, you have an analytical view of our financial performance in 2020, separating out on one side the exceptional items on the left and the right-hand of the slide, and the actual operating performance items in the middle. As you can see on the right-hand side, we are now left with only 2 exceptional items in 2020. Excess depreciation and IFRS forward-looking provisions. As our used car stock level has normalized throughout H2, we don't have the impairment on stock. Regarding excess depreciation, we already booked EUR 30 million in the first half of the year, and our fleet revaluation process in the second part of the year has conducted us to provide for an additional EUR 9 million, reaching EUR 39 million for the whole year. And despite the strong momentum on used car market during the second half, our fleet revaluation still includes stress to take into account a potential deterioration of the market if lockdowns would impact our sales activity once again. The level of stress has been significantly decreased compared to H1, and we'll review the situation during the course of the next 6 months in the frame of our next fleet revaluation exercise. As I've already explained here in the past, you know that our fleet revaluation process embeds a lot of prudent approach. The other exceptional items is the IFRS 9 forward-looking provision, which amounts to EUR 15.4 million, to which I will come back in a minute. So these 2 items together represent a charge of EUR 54 million before tax. And I believe constitute a prudent approach to the various estimates based on the knowledge we have of today's economic outlook. So when you restate for the exceptional items for both 2019 and 2020, you can see in the middle that our operating margin grew by EUR 19.4 million. And this increase illustrates how resilient our business model is even during crisis time. Our used car sale results, which I've already talked about, only decreased by EUR 13.8 million compared to last year. And on top of that, we have saved EUR 1.3 million in overheads during 2020 compared to the same period last year, and our cost of risk, excluding the forward-looking elements, has only increased by EUR 10.8 million. So all in all, our operating profit before tax for 2020 reached EUR 669 million. So overall, you can see that if we put the fleet revaluation, the provisioning parts aside, our operating performance remains very strong. So on Slide 14 now. Coming back to our margins. So our leasing contract margin, which is EUR 626 million for the year, down EUR 37.9 million compared to last year. And again, this variation needs to be understood in the light of the EUR 59.4 million negative swing or negative variation in excess depreciation between the 2 years. The services margin amounts to EUR 630.3 million, and is only down by EUR 2 million compared to last year. And this evolution is explained by two opposite effects. So on one side, as our vehicles have driven lower mileage, we have incurred less accidents, less maintenance costs, which is, of course, weighing positively on the services margin. On the opposite side, the services margin has been negatively impacted by lower estimated volume rebates and lower excess mileage revenue compared to normal years, so to speak. So all in all, our margins, excluding the effect of excess depreciation, are up 1.5% for a stable fleet. So on the cost side, we managed to keep our OpEx slightly under 2019, while we continue to invest in IT, as shown by the increase in the amortization line by EUR 4 million compared to last year, and staff and G&A expenses have decreased by EUR 4.5 -- EUR 5.4 million compared to last year. And we have paid, of course, during the whole year, a specific attention to all discretional overheads. As a result, the cost income ratio lands at 50.4%, which sits well inside the guidance. And this ratio being, of course, significantly impacted by the exceptional access depreciation we booked for 2020. On the next slide, on the cost of risk. Without a surprise on Slide 15, 2020 has seen a rise in the cost of risk, which reached EUR 71.1 million for the year, up from EUR 45 million from -- in 2019. This increase in the cost of risk in bps for the first time the forward-looking provisions in the frame of IFRS 9. So in the light of this -- of the negative economic outlook and our assessments of potential cash flow difficulties that some vulnerable sectors may experience, we have booked a EUR 15.4 million forward-looking provision. This amount has been assessed based on a detailed analysis of our customer portfolio to identify customers or sectors likely to be more significantly impacted by the crisis. And in addition to that, a global stress has been applied to the probability of default for the entire customer base. So the remainder of the increase in the cost of risk is mainly explained by our strict provisioning policy on doubtful for receivables. So when you exclude the forward-looking elements, the cost of risk represents 27 bps as you can see on the graph of the average earning assets. As we have mentioned in previous communications, the negotiation of payment terms has been granted to certain customers on the condition of being bundled with contract extensions. And we can say that these payment plans, adjustments have proven to be successful so far. And -- which is illustrated by the stable customer receivable balance at year-end, even lower than last year. We have also stopped origination on risky sectors and we have also tightened our granting criteria and collection capabilities to ensure a good monitoring of the cost of risk going forward. So if I move to Slide 16 on the P&L, so you have our full P&L, the leasing contract and services margins together have decreased by EUR 40 million compared to last year and the negative swing coming from the excess depreciation, while the operating part of margins improved by EUR 19 million. So I already mentioned that our operating expense were down by EUR 1.3 million, reflecting the measures we've taken to strictly monitor our OpEx. And the cost of risk lands at 34 bps as a percentage of average returning asset. So if we take also into account the recorded EUR 10 million post-tax profit on the disposal of ALD China, which is embedded in our net income for the year, which lands at EUR 509 million for 2020. And the last point on this slide is the tax income driven by a successful contract duration extension campaign in Italy. The famous Italian stability law that I've commented many, many times here, has continued to weigh positively on the group effective tax rate, which lands at a low 17.7% for the year. And the next slide shows the evolution of the balance sheet. So our earning assets have decreased by 1.7% compared to 2019, reflecting the slight decrease of our funded fleet, the positive effects of our contract extensions campaign, which has led to an overall slight increase in the contract durations of the fleet. So if you take the combination of excellent net income for the year, our working capital, which has been well-managed and the slight decrease of our asset base will lead to an increase in our capitalization ratio at 16.7%, up from 15.7% in 2019. So I guess on that, let me hand back to Tim, who will conclude the presentation on the outlook.

Thank you, Gilles. Yes, I would like to finish this presentation by looking a bit further ahead. Our ambitions for 2025, that you see on Slide 19, are strong statement of our belief in our products, services and organization to keep developing our industry and to deliver strong results. Let me reiterate the outlook that we have in our Move 2025 plan, which I'm confirming to you today. We are still well on track to deliver the objectives in 2025. We still expect to have 2.3 million contracts and clearly leading our industry, increasing our presence up to 50 countries from 43 today, keeping the best geographical coverage. Anticipate strong growth in the private lease sector and in new segments, such as mobility contracts with a 15% CAGR in the next 5 years. We are taking a strong commitment on the environmental side in 2025, with 30% of the vehicles registered being EVs, and we will have reduced our CO2 emissions from our customers' fleet with 40%. We want to stay ahead as the most cost-efficient player in our industry with a cost/income ratio that will be improved down to 46% to 48%. And we intend to distribute 50% to 60% of our net income to shareholders, except, of course, in the case of larger acquisitions. This transformation is already underway, and it will profoundly change ALD and the way we do business. And this is what we show you on Slide 20. What do we need to take away from our Move 2025 plan? While by 2025, ALD will be addressing all markets, multinationals and large accounts, SMEs, customers and employees at global level. With digital solution, we have a lot of structural growth in front of us. The range of our product offering will enable us to cover all types of client needs, even the ones that has not really appeared yet. We will hold our assets for a longer time through multicycle leases, thereby mitigating the RV risk that we have in the business. And that will enable us to deliver a profitable strong growth to remain a very resilient business and to offer an attractive dividend policy. On Slide 21, I'll now turn to the outlook for 2021. But first, I have to say a bit about the economic scenario that we used to build it. Considering the current global level of uncertainty, we have decided to opt for an outlook rather than a guidance and provide you with trends rather than figures. We expect this uncertainty to start to lift during the course of the coming months, which would allow us to refine this outlook to a more qualified guidance to be published with our Q1 results. Building our scenarios, we have assumed the impact of the COVID-19 pandemic gradually fades and economic condition improves, thanks to strong macroeconomic policies by the governments. On this basis, we anticipate a positive funded free growth versus 2020. In 2021, ALD's core business grouped together as funded fleet is expected to renew with positive growth after a difficult 2020. The number of fleet management contracts will decrease in 2021. Following a strategic review of that portfolio, we have decided not to renew a commercial relationship with a larger partner, which is around 80,000 contracts, as it was not profitable. The impact on the operating income will be practically 0. The launch and continued rollout of our ALD Move is expected to partly offset the loss of these volumes in 2021 but with higher contractual margins. Used car sales results per unit is expected to be positive. Q4 was a very strong quarter. 2021 is expected to be good, given favorable underpinnings. Giving one example is the bottlenecks in the car industry that is still delaying the arrival of new vehicles, but uncertainty remains high at this point. Our cost income excluded used car sales results should improve. This concludes our presentation. Thank you for listening, and we are now to take any questions you may have.

[Operator Instructions] Our first question comes from the line of Angus Tweed from Citi.

I've got a couple. I guess the first one to start off with, could you perhaps discuss how you're thinking about residual value trends from here? And whether or not we should be considering further excess depreciation in 2021. Secondly, please, could you discuss the large contracts you lost and the customer contract you lost there? Can you perhaps discuss any reasons for losing that contract? And how we should think about that going forward? And then thirdly, perhaps slight more structurally, looking at your 2025 plans, you are predominantly selling vehicles, used vehicles through the B2B channel today. Can you discuss about your plans moving in a more B2C direction and what that can mean for margins?

Thank you, Angus. I'll actually start with your last question, then I'll leave the first 2 to Gilles to answer. So in terms of our sales or car sales capacity, we already do sell, I mean, cars today to individuals. We have retail sales in quite a few countries already. We are selling approximately 20% of our cars retail, either to the end user or to the user of the car to a retail client. Now this is being, I would say, improved, and we have anticipation because of the digital capacity we are building that we can improve that percentage going forward. And on top of that, I think it's also important to say that what we are starting to do on our clicks & bricks platforms, which is retail sales, we are also offering these cars typically as a used car lease. And when we see customers going digitally onto our used car sale sites, they actually opt typically for a used car lease instead of buying the car. In some of the countries, it's up to 70% of the customers who are taking a lease on a used car instead of buying the car. But I would say, you will see that we will expand into the retail area going forward. We have a lot of digital assets to do that, and we have been building our clicks & bricks platform that has being spreading out over Europe these years. I hope that covers your third question, and then I hand over to Gilles for the first 2.

Yes. So on your first question regarding the RV trend, just to remember you the sequence we have had this year, we booked the first EUR 30 million of charge in the first half of the year. You remember that in Q3, we said that we wouldn't change the trend. So we continued to book excess depreciation, and we have released some of the stress, which were embedded in our fleet revaluation exercise. So I guess what we can say is that on the basis of our Q4 and full year results on the car sales, which comes, I guess, is a very positive surprise, we can say that, and as we indicated on the slide, we have a strong momentum on the used car sales market. The volumes are there. The demand is there. So as I said in my presentation, I guess it's maybe too early to give you an indication. But as we've done it in H2, we'll review the state of the used car market and the volume and the margins. And on the light of that, we may release the remainder excess depreciation that we have booked on behalf of COVID or not. It's -- I guess it's too early really to state anything at this stage. What we can say again is that the fundamental of the market is there. But again, the lockdowns, the current lockdowns and the sanitary measures doesn't help. So that's true to say. On the large contract that we have lost. So it was a fleet management contract, large from a statistical standpoint, but I will leave -- I would say, barely profitable to us. In general terms, fleet management is a way for us to try to convert customers or partners to do full-service leasing, which is the core of our business. And in this case, we've done a review of our customer base. And there was no willingness from this partner to convert that in a more long-term partnership. And so that's why we've decided to -- with -- we have agreed to stop this contract, which again, is a non-event from an operating margin standpoint as it was -- as I said, it was barely profitable. So certainly, the less profitable fleet management customer that we had. But you're right in terms of statistics, it's a large number.

Okay. Thank you for those comments, very helpful. Just 1 quick follow-up would be on the Amazon relationship. I'm not sure if you can provide any details on how that's progressed. And any developments we should look forward to in 2021?

Yes. Angus, actually, John Saffrett is on the line as well. So maybe, John, do you want to give a comment on that?

Yes. Angus, this is John. So as you know, a couple of years ago, we launched Amazon Motors in Spain with Amazon, and we were experimenting with Amazon around a number of different offers that could be made available via the platform with a view to, if successful in Spain, taking it into other markets. We continue to try to find the right offer on the Amazon platform that works. So we're continuing to talk with them about what the offer could look like and what kind of user journey we can do there. And we're hoping to bring a couple of new offers to the market in the coming year to see if we can drive some demand on that platform as well. So more to come from that partnership, we hope going forward.

Our next question comes from the line of Pierre Bosset from HSBC.

There is currently a number of IPOs of web platforms selling second-hand cars, such as AUTO1. Some of the valuations are very attractive. What is your view on that? Do you have any could you consider to spin-off your web platform as lease plan considered 2 years ago with CarNext? Is there any way for you to create some value with this sort of business?

Thank you, Pierre. It's stunning valuations we see on these platforms, to be very frank and can be a bit difficult to understand. But I think it's a very different business to ours. I mean you're looking at players who are trying to consolidate and digitize a used car market that is, I mean, huge in Europe. So they are definitely looking at a huge opportunity. And if you look at our remarketing platforms, it's a derivative of our core business. For us, it's a mitigating risk factor to have strong remarketing capacity. And of course, we try to optimize the profitability of that through different channels. And I think, honestly, we have some really strong tools and strong platforms today, car market for traders and car market now for retail is a very strong digital assets, but the business model is completely different. So I think -- I mean, if you look at the lease plan and CarNext, I think that tent has been difficult because you try to make 2 things happen. You have to -- you try to carve out a thing that is actually a very, very important and integrated part a company like ALD or lease plan or well others in this business and make what A1 is doing or Carvana is doing in the U.S. and we don't think that's the right way. So you're right, if you, I mean if you should do something here, you have to do it on a separate basis and try to find a different way. I don't think that ALD would be successful doing this. I don't think that anybody else will do it. So you have to really have a completely different approach to it because it's a completely different market you're looking at. But it's true that when you look at the numbers and the valuations, of course, we think that part of the valuation you give to some of these platforms, you should actually put to ALD as well, but that's a different story.