Ayvens (AYV) Earnings Call Transcript & Summary

Hello, and welcome to the ALD Trading Update and Q3 results. Please note that this conference is being recorded. [Operator Instructions] I will now hand over to your host, Tim Albertsen, CEO of ALD, to begin today's conference. Thank you.

Good morning, ladies and gentlemen, and welcome to this ALD Q3 2021 results analyst call. First of all, thank you for your attendance, and I hope that you're all in great shape. I can tell you that we are on our end. We'll start by looking at Slide 3 of our presentation, which contains some of the highlights of our performance. But before this, let me give you a few inputs on the environment our industry have been navigating in during this third quarter of 2021. [ Both ] of the markets we're operating in managed to shrug off most of the restrictions from the covered crisis. Yet at the same time, the pandemics impact on the supply chain of semiconductors was being felt more and more significantly by car manufacturers who have struggled to produce and deliver new cars on time, including to our customers. As a result, the excellent commercial dynamics of the quarter principally shows up in our rising order bank being by far an all-time high. Nevertheless, with the help of our 2 recent bolt-on acquisitions, Banco Sabadell renting and Fleetpool, ALD's funded fleet growth is likely to beat the guidance that we issued last quarter. Now let's go back to Slide 3, which is full of extraordinary good financial news. We achieved an outstanding financial performance for the 9 months of 2021, reflected by strong margins, excluding used car sales just a bit about EUR 1 billion, plus 10% versus the same period in 2020. We have again posted strong remarketing results this quarter, profiting from our solid supply position and our leading digital platform in a red hot market for used cars. So the used car sales result stands at EUR 278 million year-to-date 2021 versus EUR 18 million year-to-date 2020. Our cost-income ratio, again excluding used car sales, improved to be at 48.2% in year-to-date 2021. I can proudly announce that the Q3 2021 is our ever best results in terms of net income. We have been able to book a net income of just a bit above EUR 258 million. And ALD's net income year-to-date 2021 stood at EUR 610.1 million, up from EUR 347.5 million in the same period 2020. Let's move to Slide 4 and talk a bit about our acquisitions in these new mobility offerings. These 2 latest acquisitions are a great acceleration of our Move 2025 plan and gives us a real lead in the area of car subscription and urban mobility platforms. The Fleetpool acquisition provides us with a full digital car subscription company based in Germany, running a fleet of around 12,000 vehicles and growing quickly. As mentioned, it's a real acceleration of our development of a digital car subscription service in Europe, and the plan is to expand the commercial reach of the subscription solutions to the main European markets in the coming years. On the Skipr acquisition, this is an urban multi-modality platform to manage, plan, book and pay for corporate mobility services, all in one solution for companies in Belgium and France today, but in the future, in several major cities in Europe. Combining Skipr leading-edge technology with ALD's solid mobility expertise, we have taken a lead in this fast-growing market for flexible, cost-effective and sustainable mobility solutions. And if Skipr and ALD move becomes the success that we expect, we have the option to become 100% owner within the next 3 years. Let's move to Slide 5 and talk a bit about ALD's electric revolution. The pandemic has clearly accelerated the transformation to EV mobility. We see strong demand from our clients, and we are ready to assist them in this quite complicated transition with both consulting, products and services. We remain at the forefront of electrifying our fleets with the share of electric vehicles and passenger car deliveries in '21, reaching 27% in Europe year-to-date. Let me remind you that this is almost a double of the market penetration in Europe. ALD's fully electric offer is now available in 12 countries with further rollout underway in Europe. And ALD Electric includes all the features to make the transition to electric as seamless as possible, including a global partnership with ChargePoint that allows us to -- our clients to charge pretty much everywhere. ALD also has an increasing number of preferred partnerships in place with key players in the e-mobility space. With the recent addition of an exclusive fully digital 100% electric partnership with Smart, this is the latest on top of the partnership signed with Polestar, Tesla, Lincoln within the last 2 years. Let's move to Slide 6 and talk a bit about our fleet. Funded fleet reached 1.382 million units at the end of September '21, up 0.7% versus the end of December 2020. With an all-time high order bank and the integration of Banco Sabadell renting and fleet pool, which will add around 32,000 vehicles to the fleet, the funded fleet growth for the full year 2021 is now expected to be between 3% and 4%. Total contracts stood at 1.679 million vehicles. This reflects the previously announced nonrenewal with one of our fleet management clients based on low profitability, which has reduced the total number of fleet management contracts by around 90,000 units in Q3 2021. Commercial dynamics during Q3 remained strong, but the shortage in supply of semiconductors has continued to have a significant impact on the car manufacturers' ability to deliver new cars in Q3, and hence, the very high order bank. Let me now hand over to Gill, who will guide you through the financials.

Yes. Thanks, Tim, and good morning, ladies and gentlemen. It could be a quick speech on my side as most of the reported figures are really speaking for themselves. So let me start with our margins. Leasing contract and services margins taken together grew by EUR 93 million compared to the first 9 months of 2020, representing a 10% increase. Within this dynamic growth in margins, the leasing contract margin reached EUR 555 million, up 24%, and services margin stood at EUR 464 million, down 3% compared to the same period last year. The strong growth in leasing contract margin over the period is mainly related to two factors: the first one being the powertrain shift, which is causing growth in the earning assets per vehicle, which is positively impacting our leasing contract margin; the second factor is in relation with our fleet revaluation exercise and during the first 9 months of 2021, we have seen a strong positive contribution from the fleet revaluation. Whereas, the same period last year, we registered a significant negative impact, which is representing a swing of EUR 65 million between the 2 periods. The growth in services margins year-to-date is held back mainly due to the [ EUR 13 million ] tax provision we booked in Q2, and to a lesser extent, impact also of the high level of contract extensions campaign, which have weighed negatively on our maintenance costs, but obviously, positively on our used-car sales, we see that later. And also an ongoing lower excess mileage billing compared to pre-pandemic period. The operating expenses reached EUR 492 million, up 5.2% compared to last year, the same period, mainly driven by higher costs incurred in the frame of our external growth strategy with Banco Sabadell and Fleetpool and Skipr acquisitions. And as I already have shared with you previously during our last update, we have increased this year the variable staff compensation as we are outperforming our budget targets. The cost income, excluding used-car sales results improved at 48.2% as margins saw a very fast growth year-to-date. Let's move to the next slide on the used car sales results for the Q3 2021. The strong used car market dynamic that we have enjoyed in H1 '21 has continued, reaching unexpected and new absolute record levels in Q3. The contribution from used car sales results reached EUR 278 million over the 9 -- the first months of the year, of which EUR 152 million in Q3 alone. Average sales margin on used vehicles for the 9 months is coming at EUR 1,126 per unit and as high as EUR 1,974 per unit over the third quarter. So the continued highly favorable supply and demand conditions in used car markets, mainly driven by the semiconductor shortage, explains most of the record results, but also these results are also boosted by the impact of our contract extension program done during the pandemic last year. We managed to sell 247,000 units in the first 9 months, of which 77,000 in Q3, leaving a total used car stock level -- total used car stock at a very low level. We anticipate the dynamic to continue in Q4, which led us to update our guidance for the full year to be above EUR 1,000 of margins per car. So I can even say, well above EUR 1,000 of margins per unit sold. On the next slide, on the net income and to start with the impairment charges on receivables, they reached EUR 25 million, decreasing by EUR 34 million from EUR 59 million recorded in the first 9 months of last year, reflecting an ongoing low cost of risk. And also, I just want to stress here again that for the time being, unchanged methodology on our forward-looking provisions. So despite a higher income tax rate compared to last year, ALD's net income group shares stands now at EUR 610 million for the first 9 months, up from EUR 347 million last year, with a strong contribution, of course, from Q3 itself of EUR 258 million. So Q3 being our second consecutive record in quarterly net income. And let me hand over back to Tim for the guidance. Thank you.

Thanks, Gilles. Yes, in view of the performance so far this year and we believe a better visibility for the remainder of 2021, we're updating our guidance that we gave you back in August. So despite the microchip shortage, but thanks to a very strong order bank and based on our M&A activities, we are confident that our Funded Fleet will now grow between 3% and 4% end of the year. The dynamics of the used car market should continue until year-end and probably further. And we now estimate that we will end well above the 1,000 units of profit per car sold. Our cost income should continue to improve versus 2020 and definitely stay below the 50%. This concludes our presentation. Thank you for listening, and we are now ready for taking questions that you may have. But let me, however, state that I guess, you are all very keen to understand a bit more about the discussions that we are currently having with lease plan, but it is too early to give any kind of details at this point. So perhaps, take that into consideration when you ask your questions. Thank you.

[Operator Instructions] The first question comes from the line of Mourad Lahmidi with Exane BNP Paribas.

I have three questions on my side. So the first one, could you confirm that there was no fleet revaluation exercised during Q3, and is it fair to expect the release of some excess depreciation when you do the exercise in Q4? Second question is about remarketing. Has there been any change in remarketing channels in Q3, which is to say, was there a higher share of B2C versus B2B? My question relates to the level of profit per car, which is very close to what we are -- what we can see in the B2C channels. And finally, can you give us a fleet breakdown by powertrains? So thanks for giving the deliveries, but can you give us some insight in terms of how much diesel, petrol and EV/hybrid?

Thank you. Well, maybe let's start -- I'll start with the second question and third and then Gill will take the first question, I guess. So on the remarketing channels, the channel remains actually fairly stable. So we are selling approximately 15% retail today of the used car sales. I think the overall result is not a shipment from wholesale to retail as such. The trade markets are very, very strong as well. So we have not seen a big shift on that, and it's not -- that's not, let's say, a result of that, that you see the results coming in where they are basically. On the third one, so as you saw, we had 20%...

27%.

27% on the EVs. I don't have the exact numbers on diesel actually, but I know we are below 30% in terms of deliveries on diesel cars, which actually then remains the rest for petrol, but it's a big swing. When we -- if you go back to 2017, '18, we were above 80% of diesel deliveries, and now we are below 30%. And as we said, 27% of EVs, the EVs containing full electric plus plug-in hybrids. And actually, I just got the numbers here. So year-to-date, diesel is 29%. Petrol is 26%. So meaning ICE cars 55% and then 27% EVs, as I just mentioned. And other green, which is hybrids, 7%. And all those, which is other powertrain, at 11%. So that's the split between the deliveries this year. So quite a balanced portfolio now as such. Gill, you want to take the first question?

Yes. So regarding the fleet evaluation, yes, I confirm that we are currently doing the exercise of fleet revaluation. We still have in Q3 a further release from the exercise we did in H1. It's difficult for me to state on the further potential release in Q4. You would naturally expect given the excellent results that we would have a further release. We are trying to -- we are having discussions with our auditors because, of course, the reference year 2020 and 2021 are a bit exceptional, and of course, distorted a bit the accounting fleet exercise. So the outcome is not -- I can't give you a clear outcome. You would expect a small further release in Q4, that would be my guess. But I just want to stress that it's more than ever, I guess, a difficult exercise because we have to anticipate also on future trends. And we also want to remain as conservative as possible on the fleet revaluation exercise.

The next question comes from the line of Kiri Vijayarajah with HSBC.

A couple of questions from my side. You mentioned that the stock of used car is at low levels on your books. So presumably, that's going to feed through into a lower number of vehicle sales for the next number of -- a couple of quarters. I'm just wondering, how low can the quarterly vehicle unit sales go? If I look before your IPO that was down in the low 60,000s and already -- I think it's already been last couple of quarters coming down from 90,000-odd to about 77,000. So could that fall a bit more as you deplete your kind of stock of used car vehicles? And then secondly, on your upgraded guidance of 3% to 4% on the Funded Fleet growth for this year, obviously, very helpful. But I wondered if you could just give us some color on the outlook for next year. And could you also give us a feel for how that growth you're thinking about for next year splits between, kind of, underlying organic growth versus what you're penciled in for bolt-on deals that you're thinking about?

All right. Maybe on the stock and the used car sales first. So it's true that with the current stock levels, we are really at a minimum in terms of what you can turn around in terms of cars. What we anticipate and what we have told is that Q3 is the, let's say, the really down point in terms of microprocessors, which means that delivery should start picking up from now and going forward. It will not normalize potentially before probably start of H2 next year, but we will start seeing, let's say, hopefully, that we will be able to deliver new cars better than we have done in Q2 and Q3 this year. That's at least the input we are getting both from the manufacturers and others who are quite close to the subject, which means that the reason why the stock is low is, of course, that we are selling well the used cars. But the fact is, as we don't deliver new cars, we don't get the used cars back. But as the new cars will start to come in, we would anticipate that to normalize over the, let's say, the next 2 to 3 quarters. But you could anticipate that the number of cars we are selling would be lower than what we have seen in the past, again for the next 2 or 3 quarters, not substantially, but low. And you have seen actually the effect this year that has gone down slightly each quarter already this year for the same reasons. So I think that is a good assumption to take that the number of cars we are selling will be slightly less than what we're used to. On the guidance on the Funded Fleet. So what we can tell you is that actually, we have the 0.7% that we have posted so far in terms of organic growth. It's not really representing what we have seen in the last months. We are growing a bit better than we have done in the first 6 months. And again, with a very high order bank, I mean, really, really high order bank, we would anticipate as the new cars are coming in that we will empty the order bank. And hence, we do believe that the organic growth next year will pick up, and we will see a more normalized situation from what you have seen from the past from us on that part. And of course, we are always looking for opportunities in the M&A space. So we will continue to do that clearly as well, but in terms of the commercial dynamics in the markets is very good. We have signed up very nice new clients over the last 6 months. And we have also, as you have seen, signed up new partnerships that eventually will start giving decent volumes also throughout '22. So I think that's the best we can do on the guidance on the funded fleet for next year.

The next question comes from the line of Dominic Edridge from Deutsche Bank.

It was just more of a question about sort of current market dynamics in terms of lease rates and obviously, what's going on with residual values. I mean, a, could you just maybe describe how you see the current market in terms of underlying lease rates? How that maybe compares with previous years as well in terms of the book that -- the business book that you currently are building? And then on residual values, do you see the market yourself changing the views on long-term residual values? Or is your view just, look, this is a short-term distortion in the market, it's a nice windfall, but it won't be something you factor in when you're thinking about lease prices going forward? And is that something you feel is also the same for the market generally?

Right. John Saffrett is with us here. He can take the first question. So John, do you want to take the first one?

Yes. Sure. Thank you for the question, Dominic. I think what we're seeing in the dynamics of the commercial market, this has always been a competitive market with a large number of players chasing after the corporate business and the partnership business. There's been no significant shift in the lease rates that being -- that are being offered to clients today. The corporate market remains super competitive because it's a sticky client base and once you secure a large corporate fleet, you tend to hold on to it for a long period of time. So all of the commercial dynamics in that market have rebounded in line with what we saw before COVID. And then in the partnership and the SME market, obviously, the lease rates have probably crept up a little bit because of the lack of supply of new cars, which means that discount levels are being impacted slightly, and there are less discounts being available. But again, in terms of our model, we pass that movement onto the clients anyway where there's lower discounts available. And through most of our partnership channels, anyway, the price point for the client is dictated by the partner. So we've not seen a significant move in those lease rates, and we don't anticipate there being a movement in those lease rates for the foreseeable future affecting our margins in any particular way. So I'll hand back to Tim for the answer on the second question.

Yes. So on the question on residual values, let's say, medium, long term, I mean the current market conditions is exceptional. I mean it's a combination of a few things. First of all, there is less used cars in the market than we're used to. I mean most of the rental companies are not de-fleeting, have not been up-fleeting either and that they normally post quite a big chunk of used cars into the markets. The fact that people are not delivering or the manufacturers are not delivering new cars to the extent they used to do, and there's probably going to miss around 10 million cars on a global scale this year in terms of new car deliveries. It means that the trade-ins that normally comes in when you sell a new car is not in the market either. And as people cannot get their hands on a new car, they tend to try to get a used car. So that also actually improves a bit the demand side. It's probably more supply side problem than a demand side, but it's actually a bit of both at this point. It's an exceptional situation. It will not last. I mean that's absolutely for sure. So I think the -- to change the policy based on this particular situation on your policy for residual value setting is not the wise thing to do, and definitely, that's not our intention. On top of that, we are in the middle of transformation to -- of the electrification. There's a lot of legislation being put on ICE cars that will start pushing residuals downwards on diesel and petrol gas going forward. So I would say, again, as you know, we are fairly prudent when we look at residual values. We will remain that. We will not take into consideration the current situation because it's exceptional as such. And what we are doing instead is that we are looking very deep into the residual value setting of electric vehicles, which is, you could say a new exercise for us where you don't have the same experience. You don't have the same amount of data, and we are working with different new models to actually assess the prices and have other means in place for certain residuals on these cars. So I hope that answers your questions, Dominic.

Maybe just one quick follow-up. I mean do you feel that your approach is very much the one being taken by the leasing industry as a whole? Or let me put it this way, in the past there has been a time when residual values have risen, have you seen the competitive dynamic change, particularly at all?

I think, historically, you have seen that people tend to look short term on things, and there might be a hype that actually could spill into the market and people are getting a bit more sporty in taking risk in the future and all, but typically have always ended pretty bad. And I think we have 30 years of experience in this business. We have been seeing all the ups and downs, and so we probably will see especially typically. You see smaller, let's say, local players who are while maybe not considering this business in the long term, and they take the opportunity to go out a bit stronger. On the global scale, I mean, all the big players, I think, knows this is the biggest risk in this business. We are prudent across the board, I guess. And when you look in the market, there's none of the major players who are looking very different from each other in this particular part.

[Operator Instructions] The following question comes from the line of Geoffroy Michalet with ODDO.

I was just wondering if you could give us a sense on how dilutive was the contract ended on the Fleet Management business, the 90,000 fleet that you externalized from your current fleet?

Geoff, thanks for the question. As we said, this contract has been also terminated on the back that it counts for very little in our net income. It was a fleet management contract, which really has no material impact on the net income. I can't state more than that, but it has -- yes. I can just reiterate what we have disclosed at the time because there's no spread on the funding. There was minimal services around and I would say, then even on the stat standpoint, it's even better without these ones now as they were not really contributing a lot to the net income.

We currently have no more questions on the line. [Operator Instructions] There are no more questions on the line.

Okay. Well, but I hope that's clear then. So that's great. So thank you all for your attention and your questions. And as always, our IR team stands ready to answer any further questions you might have. So don't hesitate to get in touch with them. Thanks a lot. Thanks for your time, and have a nice day.

Thank you for joining today's call. You may now disconnect.