Ayvens (AYV) Earnings Call Transcript & Summary

Hello, and welcome to the ALD Q2 and First Half 2021 Results Conference Call. My name is Kyle, and I will be your coordinator for today's event. Please note, this conference is being recorded, [Operator Instructions] I will now hand you over to your host, Tim Albertsen, Chief Executive Officer of ALD, to begin today's conference. Thank you.

Good morning, ladies and gentlemen, and welcome to this ALD H1 2021 Results Call. First of all, thank you for your attendance, and I hope you're all in good shape. Before we go to Slide 3 of our presentation, as the pandemic is still creating disturbance, let me give you a few inputs on the environment our industry has been navigating in here in the second quarter of 2021. Despite the pandemic, we feel encouraged to see the economic recovery. We still experienced lockdowns and confinements across most countries in the first half of 2021, but I feel comfortable in stating that ALD has learned to live with and operate in this environment, and so far we have been able to offset the negative effects. The shortage of semiconductors has continued causing delays in delivery of new cars in practically all our markets, a situation that probably will remain a challenge for our new car deliveries, at least until the end of 2021. Now let's get back to Slide 3, which is actually full of positive news. Total number of contracts stood at 1.76 million contracts, stable versus June 2020 and end of March 2021. This does not necessarily sound impressive, but the commercial dynamics are actually strong, and we have the highest order bank ever and a very strong pipeline. Again, our remarketing activities achieved great results as the used car market were particularly dynamic this quarter. Gilles will cover the numbers in more details later, of course, but we sold 169,000 vehicles, which is a record for an H1, and we gained EUR 740 per car sold on average. These good results are driven by several factors: a strong performance and activity on our digital ALD car market platforms and a structural shortage of used cars due to missing trade-ins and less returned rental cars in the markets. We expect the situation to continue into Q3, and we are actually very positive for the year-end in general. We have continued to deliver strong margin growth, resulting in an improvement of our cost income, which decreased to just 49.1%. We are keeping a strong traction on the electrification, with 26% of the deliveries in Europe being electric vehicles, which is a strong achievement and strong steps towards our MOVE 2025 electrification targets. And I can proudly announce that H1 2021 is our ever best results in terms of net income. We have been able to book a net income of EUR 352 million. Let's move to Slide 4 and talk a bit about our progress on the MOVE 2025 strategic plan. As you might recall, MOVE 2025 is built on 4 strategic pillars. You see them in the bottom of this slide. H1 saw several strong achievements in line with the plan, and we confirm that we are fully on track with our anticipated progress on the plan. First of all, skipr acquisition, a strategic investment into a Belgian start-up, marking an acceleration of our strategy in the mobility as a service area. This company's ecosystem allows for the management of mobility needs. It is a great tool for companies and employees to manage their monthly mobility budget. This functionality will be integrated into our existing ALD offering. It will also enable us to combine consultancy services for mobility transformations with digital access to multi-model, flexible and responsible mobility solutions. A very interesting acquisition from our side. On the partnership side, we are keeping developing interesting new partnerships and enhancing our existing ones getting closer to our existing partners. Another excellent achievement this quarter we can announce is the entire new electric vehicle digital partnership with 'smart' in 17 countries in Europe to be launched in 2022. We have signed another white-labelled partnership with Volvo in Ireland and a very interesting commercial offering in Holland on the third-party used car lease via the Stern network in the Netherlands, a first of its kind but surely not the last one, and it can be quite a boost to our growth in the Netherlands. One of the new segments we have been targeting in the strategic plan is the B2B2E segment. I'm therefore happy to announce that we have entered a cooperation with Corporate Benefits, who are headquartered in Berlin, to provide an international B2B2E mobility solution. It's live in 5 countries, and we are targeting more openings with that -- through that channel as well. The opportunity is sizable, targeting a market of 8,000 companies and more than 7 million employees. Last but not least, we have been rated Prime by ISS ESG. ISS ESG is a global recognized provider of sustainable and responsible investment research. ALD holds a top rank performance on the eco-efficiency criteria. Let's move to Slide 5 and talk a bit about the portfolio development. As mentioned earlier, total contracts are stable versus H1 2020 and Q1 2021 at 1.76 million contracts. We have a record high order bank at the quarter end, which is explained by several factors, with large corporate activities sustained with a certain number of important tenders wins recently. This activity is not reflected into the numbers yet, as delivery time for new cars remains long. We have continued to sign new partnerships which are currently ramping up. And finally, some of our OEM partners are suffering from the microchip shortage, which slows the number of new deliveries, but actually the activity is very good. On ALD Flex, we can tell that it's very successful and now fully deployed in 31 countries. Our utilization rates are high and the number of new contracts are growing at good pace. Overall, we are confident that this will allow our funded fleet to grow in 2021. And on top of this, the Banco Sabadell deal will come into our fleet with around 20,000 vehicles during H2. And we anticipate to have a few more M&A opportunities to come through during this year. Hence, we anticipate our funded fleet to grow between 1% to 3% versus 2020. Let's go to Slide 6. The pandemic has clearly accelerated the transformation to EV mobility. We see a sound and strong demand from our clients and we are ready to assist them in this quite complicated transition with both consulting products and services. With this breakthrough on the electrification, we are racing towards our 2025 targets. As you can see, the share of EV passenger cars reached 26% of deliveries in Europe in H1 '21 and 23% globally, more than doubling from a year before. Let me remind you that our 2025 target is actually 30%. Average CO2 emissions of the deliveries stands at below 100 grams for the first time, at 99 gram versus 116 grams in 2019, representing a nice decrease of 15%. The new partnership with smart is adding another reference EV player to the ALD offering. And the combined ALD electric offer now, including charging, is available now in 8 countries. And last but not least, it is worth mentioning that our MOVE 2025 targets are already in line with the EU Commission Fit for 55 climate package. Let me hand over to Gilles now, who will give you -- who will guide you through the financials.

Thanks, Tim, and good morning, ladies and gentlemen. So let's start with the used car sales activity results for the first semester on Slide 8. The strong used car market dynamic that we have enjoyed in Q1 has continued, reaching exceptional [ and ] expected levels in Q2, a very strong demand observed on our platforms, resulting in a record high volume of vehicles sold over the semester at 169,000 vehicles. This strong sales volume has obviously had also a positive impact on the used car stock, which stands at a low level as disclosed in our balance sheet. And we have released EUR 7 million of used car stock depreciation in H1, reflecting the positive price evolution. The new car delivery delay and the low supply of used cars from rental companies, car rental companies, are continuing to weigh positively on prices with a strong rebound on the margins up to EUR 1,050 in Q2 per vehicle. Our H1 used car sales results stand at a record high level at EUR 125.3 million, with a margin per unit at EUR 740 for the first semester. We anticipate the dynamics to continue in Q3, which enables to provide a guidance for the full year of between EUR 600 and EUR 900 of margin per used car sold. The full year results will depend on the Q4 dynamics, so in an opportunistic scenario the top of the range being based on the continuation of the current trend. The less optimistic scenario, the lower bounds on an improvement of delivery delays of new cars, which could have a negative impact on supply of used cars, and hence on prices and margins. But overall, an outstanding performance, and I guess a very positive guidance on the used car sales. On Slide 9, this slide explains the underlying dynamic of the business as 2020 and 2021's operating performance has been impacted by a few one-off items. I will start to comment the exceptional items which have impacted both years. So in 2020, on the left of the slide, you remember that we booked a significant amount of exceptionals, so EUR 30 million of excess depreciation from our fleet revaluation exercise in H1 '20. On top of the EUR 30 million, EUR 19 million of used car stock depreciation and EUR 13 million of forward-looking provision in the frame of IFRS 9 for the first time. So for a total provisioning of EUR 62 million last year. In 2021, on the right, we are now benefiting from the partial reversal of these exceptional provisions. As anticipated during our Q1 results call, we have performed a new fleet revaluation exercise which has led us to release EUR 13 million of excess depreciation in H1. And as explained just earlier, we've also released EUR 7 million of used car stock depreciation. On the negative side, we have booked an exceptional tax provision. ALD together with the whole leasing industry is disputing the case with the local tax authorities in the country concerned. When you exclude these exceptional elements, you can see the robustness of the business on the used car sales activity, obviously, but also on the margins. The operating expenses have grown by EUR 16 million from a low base in 2020, which was the start of the pandemic. Other factors to be taken into account are, of course, costs related to the strong M&A activities, of which Sabadell and skipr, which have been announced so far, but also staff bonus payment provisions for 2021 as we are widely exceeding our budget. And our cost of risk stands at a particularly low level, reflecting the low rate of company defaults. So when we move to Page 10, when we look at the P&L, so leasing contract and services margins are up EUR 55.6 million. And excluding specific provisioning, leasing contract and services margins taken together grew by EUR 25.7 million, which shows a positive [ jaw ] effect compared to the fleet growth in volume. Leasing contract margins obviously benefit from the increase in rental asset value, driven by the evolution of our fleet mix towards more EV. The services margin are being negatively impacted this quarter by the exceptional tax provisioning we already mentioned, but also still lower excess mileage billing than we're used to and also volume rebates provisioning from suppliers. However, I want also to comment that the loss -- the low loss ratio on accidents is not yet fully reflected in the services margin in H1. The cost-to-income ratio, excluding the used car sales result has improved at 49.1% on the back of these sound margins and also positively impacted by the excess depreciation release in the leasing contract margin. An exceptionally low cost of risk down from previous quarter, and it's worth reminding that all our assumptions on our forward-looking provision remained unchanged. Our effective tax rate stands at 21.2%, and we see the impacts of the Italian Stability Law, which is progressively fading. So this results in the highest H1 net income ever at EUR 352 million. So quickly on Page 11 on the balance sheet, so you can see that the earning assets increased by 3.6%, reflecting the increase here of higher-value vehicles, full EV, PHEV in the new deliveries and some FX impact. These trends on the asset value also explain the increase in other assets and other liabilities. Overall, a very strong total equity assets ratio at 16.7% at the end of June 2021, up from 15.6% in June 2020. Strong earnings generations compensating for dividend payment in Q2 for EUR 254 million. So now let me hand over to Tim, who will present to you the new guidance we have formulated for 2021.

Thank you, Gilles. Yes, I guess, in the course of 2021, we have stayed with an outlook due to the visibility. But actually, today, we now feel that we have enough visibility to provide you with the real guidance for the rest of 2021. And as already mentioned, despite the microchip shortage, but thanks to a very strong order bank and based on a good pipeline of M&A deals, we are confident that our funded fleet will grow by 1% to 3% this year. And as Gilles explained, we estimate that the dynamics of the used car market should continue until year-end, meaning that we should land between EUR 600 to EUR 900 per car sold in '21. And as for our cost/ income, it should continue to improve versus last year. This concludes our presentation. Thank you for listening, and we are now ready for any questions you may have.

[Operator Instructions] And the first question comes from the line of Enrico Bolzoni from Credit Suisse.

Congratulations on a very strong set of results. Just a couple of questions, a few questions from my end. So one, [Technical Difficulty] [ clearly we see the lease are ] very strong. You partially mentioned that is mainly due to the change in the mix within the fleet. With regards to electric vehicle, which clearly is -- penetration is increasing. Should we expect a bit of an offset component in the service components of electric vehicle? In theory, if I remember well, you said in the past, might require less [Technical Difficulty] [ servicing ] so the margin might come a bit soft there. I just wanted to clarify that. The second question I had was on the timing of your agreement with corporate benefits. Is this something you expect will start to contribute from this year? Or maybe we really need to wait next year when hopefully the deliveries of new vehicles is going to start? I know that, for example, a corporate scheme, you can join them a specific time [Technical Difficulty] [ wonder if you had ] any specific time horizon in mind. And my last question, I mean, clearly, over the past 6 months, there's been a lot of rumors on potential M&A. So I just wanted to ask you, one, your standard bolt-on acquisition, how does the pipeline look there? Is this something substantial we should expect? And second, in terms of [Technical Difficulty] [ much ] largest consolidation in the industry, if you can give us any update? And related to that, I wanted to ask you how easy it would be for you to possibly pick up [Technical Difficulty] [ a bank taking like ] like some of your [ competitors ].

Thank you, Enrico. I hope we got it. Your line was a bit blurred, but I think we got your question. So I think if we start with the first one on the EV service margin, and Gilles can complement. But I mean, overall, what we anticipate is that the margins will be shifting around a bit. It's true that we talk about investments that is clearly higher than what we are used to with ICE cars. So on the financial part, there is normally a benefit from that. And on the service part, it's true that anticipation is that there will be less service to an EV going forward. But we also know there's other areas, especially like tires and other areas that is actually -- will be increased in terms of cost and margin [Technical Difficulty] [ overall ]. And then there is a lot of new services to be developed around the EV, which we are in the midst of, and the whole charging infrastructure where we're also taking an active part of that, is also creating opportunities for new margins. So I would say what we see in the short run, we do not necessarily see a big shift on things. In, let's say, medium, long term we probably will see that the specific service margin element in terms of maintenance and repairs might be smaller, but we definitely anticipate to offset that with new services that will be provided. I don't know Gilles, if you want to add to that?

Yes, I just want to precise that this semester service margin is mainly based on lower ex mileage billing. And also on the fact that we are basing our provisioning of volume rebates from suppliers on a conservative base because we have no -- not a clear view on the delivery delays of cars which puts all these volume rebates potentially at risk. So we want to be on the safe side, and that's also the explanation of the service margin this semester. I can say that the share of EV on the entire fleet currently has not a significant impact on service margin.

No, and I think if you look, of course, when we talk about electric vehicles today, we talk about 100% BEVs and plug-in hybrids. And actually, the number of plug-in hybrids are still the majority of these cars, even though that the full electric is coming very fast as well. And of course, a plug-in hybrid has at least the same service cost and margins as a normalized car. So it's true that on the portfolio today, that's not the impact as such. But going forward, again, the different elements of the service margin might be changing a bit the structure, but we do not necessarily see that we will miss out on service margin overall going forward. And then your question to Corporate Benefits, so it's an agreement that is actually in place in 1 country and being rolled out to 5 countries now. It takes time to ramp up like anything else. And again, also in terms of delivery times of new cars. So I don't think we will see a lot from that deal this year as such, but -- it will be a strong contribution definitely from the start of 2022. And it's a very, very interesting, let's say, partnership because it gives access to all the employees who typically are not eligible for a company car. And therefore, we increase our presence in the corporate sector here quite substantially with this deal. On your last questions on the acquisitions on the M&A, I mean, on the last part first, we have an established practice not to comment on the rumors, and we haven't changed that as such. So we don't comment on the rumors that has been in the market for a more structural deal. As you've seen, we have taken the stake in skipr, which is clearly different from our bolt-on acquisitions. So it's a real acquisition based on our MOVE 2025 strategy. We have a few others in the pipe of that kind to accelerate our MOVE 2025 and ensure that we are taking real steps ahead to transform our business and remain a real leader in the mobility space when we get to 2025. And at the same time, the bolt-on acquisition are as exclusive as they have always been, and we've been looking everywhere. And again, we are quite active in this space. So you might see the typical bolt-on acquisitions like you saw with Sabadell, and you will see potentially a few more like skipr that will enable us to execute our MOVE 2025 strategy perhaps even a bit faster than anticipated. So I hope that answers your questions, Enrico.

Sorry, yes, it does. If I may -- so the last 1 was just in terms of banking license, I mean, unrelated to M&A and other [ projects ]. But is there something you could potentially pick up if you needed, just to also maybe diversify funding or it would be complicated to do so?

It's quite a complicated process to become a regulated entity today. So I mean, unless there's a very good reason to do it, we don't see a need for a banking license today. We have a very strong position in terms of the funding. SocGen is still providing the majority of the funding. We have 30% of the balance sheet funded through bonds and securitization programs. And unless there is an event that would mean we would need a banking license,, there's no real need for us to get one.

All right. next question comes from the line of Kiri Vijayarajah from HSBC.

Yes. Just a couple of questions. So firstly, on your balance sheet. I just wondered, how do you think about your current leverage? So to your leverage ratio, you show on Slide 11, that's been steadily creeping up now up to 16.7%. So that's up more than 100 bps or so in the last 12 months. So how much scope do you think there is to leverage up your balance sheet take on more debt? And then secondly, changing gears, it was actually talking about 1 of your competitors. I just wondered what your thoughts were on the $400 million equity fundraising that CarNext did back in July. Do you think your equivalent digital used car platform might need that same kind of injection of growth capital to stay in the game? Or would you rather not get into an arms race on the digital marketplace side? There's obviously some property valuations there and you're better off leading that chase for third-party volumes on the digital marketplace to other players. And just your thoughts on what your competitors are doing there, please?

I take the first one and then you -- okay, on the current leverage, very good questions. As we commented earlier, and we have quite a strong pipeline of bolt-on acquisitions, which also explains the reason why our OpEx have increased in H1. We have more cost than really we have announced deals. So -- and that may worsen this ratio when deals are announced and goodwill are booked. So hopefully, we will come in H2 with new announcements. It's always longer than -- as we always commented, it's always longer than anticipated. So that's how you should see it. On the payout ratio, I guess, we'll stick to what we said in our 2025 plan. A dividend payout at least of 50%. And based on these current results, you should expect a good return on the share price.

Good, yes, on the used -- let's say, digital used car sales platforms, I guess we have talked upon it several times before, and it's an interesting development. I mean, the way we look at our car market is a natural extension of taking a lot of residual value risk. And for us, it's about mitigating that risk basically to be able to sell our car if it comes back. And what we have seen with CarNext is really embarking on a completely different business model, because they basically will be selling third-party vehicles, I guess, and become a completely independent, let's say, company to lease plan, if we have understood correctly. And if you take [ A1 ], Cazoo and the others, it's simply -- you're basically creating a used car sales company, which is different to what we see with car market. And I mean, we could potentially do the same in terms of the digital assets and in terms of the, let's say the infrastructure that you need to do it. All is there to do it, but it's really embarking on a new business model. And that's not where we are today with car market. We actually see these platforms as quite interesting supplement to the market because all these platforms are now competing for used cars. And it means that the used car prices are being even better, I would say, based on the fact that there is more competition. And we have actually, A1 and others, buying cars on car market. and we see them as an interesting part of ensuring the best prices on car market for us for our used cars. So -- but I mean, it's really around a completely different business model, which we have not decided, at least for now, to do the same as lease plan. But -- and it's very interesting to see the development. And clearly, there is a market for these digital platforms. But for us, it's an add-on to the competition in the market, which is healthy for our used car sales prices.

. The next question comes from the line of Sanjay Bhagwani from Bank of America.

Thank you very much for taking the questions as well. My first 1 is on the provisions. So I mean, if we just talk about the excess depreciation provisions and the credit risk provision. Last year, you provided for something around $55 million. And so far, of that, you have just released around EUR 15 million. So how should we think about the release of the rest of the $40 million given that -- I mean the uncertainty around the residual value risk and the credit risk is also fading. So how should we think of that?

Yes, thanks, Sanjay, for the questions. Good questions. So as indeed, we'll perform a new fleet revaluation exercise in the second half of the year which may, depending on [ because ], of course, these exercises are based on historical performance also. So I can't clearly give you a precise answer to your question, but my gut feeling would be that we would still have some more reversal of this excess depreciation to be taken into H2. Is it to the extent of the full provisioning of last year? I don't know. But it's true to say that with used car sales results of EUR 1,000 margin in Q2 as I commented in my speech, it's way above our expectations. So it should have a positive impact also in H2. Regarding the credit risk, for the time being, as I commented earlier also, we haven't changed the forward-looking assumptions. So it stays as it is, in fact, has a slight benefit on the fact that the aging of our receivables have improved, so it's a technical benefit, so to speak. For the time being, we are keen to keep these forward-looking provision. We'll see if credit risk is worsening in the next quarter. So timing, it remains very low Q2 being even lower than Q1, trying to provision as conservatively as we can, but we don't see any credit risk really materializing these days. So you -- I mean, based on -- I can't see credit risk being negative -- having a negative trend in the immediate next quarters. So that's the answer I can give you. So of course, this has a positive impact on the cost/ income, which we need to take into account, especially on the excess depreciation. So short answer to your question, yes, we should see some more reversal in H2.

That is very helpful. And when we talk about the used car margins, what I'm trying to understand is how much of this is purely cyclical versus -- in fact, you discussed some structural measures as well in your CMD where you're planning to shift the mix from lower profitable channels to high profitable channels. So how much of this [ scalable ] used car margin is driven by those structural measures? Or how is it [ progressing ]?

Yes, I think that's -- it's quite a difficult question to answer, Sanjay. I think what -- I mean, if you look at the market, it's very clear it's an exceptional situation basically where the shortage of used cars is evident, and it's driven by the fact that the new car sales or the new cars being sold is very long to be delivered, which means that -- typically when you sell a new car, there is a trade-in coming in there, which is not coming now because of the new cars are delayed. We saw that I think the first half of this year, there's a miss of 4 million cars are not being sold for the time being, which, of course, is quite substantial. And that has an immediate impact. These trade-ins are typically cars that competes with our cars. And at the same time, the rental business is not at the level it has been in the past before the pandemic. And they also actually would be offloading quite a number of cars throughout the year, which is not happening at the same speed either. So it's quite exceptional what's going on. I think then -- There's no doubt that our capacity to actually steer our cars into the right channel. We have retail sales. We have wholesale. We have -- we are using all the channels also in terms of cross-border sales and we are starting to use some interesting AI on our platforms to ensure that we are measuring, let's say, the markets much more focused than we were in the past. And that potentially also have clearly an impact on the prices we achieve for our cars. But I cannot tell you whether that's accounting for 10% of the additional margins we're getting today or not, that's not really -- it's very difficult. It's too volatile, to be frank, on that part. But I mean we are doing and having a lot of activities on the remarketing side to constantly improve the channels and ensure that we put the right car to the right channel, and that we find the right cars for -- the right customers for the cars and that we are constantly pushing also for retail sales to the largest possible extent. So the good results is clearly a very strong market for the time being, but it is also the fact that we are, I think, handling this particular area very professional.