Ayvens (AYV) Earnings Call Transcript & Summary

Hello, and welcome to ALD Full Year 2021 Financial results. My name is Suzanne, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand over to your host, Tim Albertsen, ALD's CEO, to begin today's conference. Thank you.

Good morning, ladies and gentlemen, and welcome to this ALD Full Year 2021 Results Call. First of all, thank you for your attendance, and I hope you're all in a great shape. I'll start with some highlights on the year 2021, in particular, focusing on our strategy. Next, Gill will comment on our financial -- record financial results in more detail. And then, I will do a wrap up before we take your questions. Let's start with Slide 4. First, I wish to highlight the strong business development that we have had in 2021. ALD strengthened its footprint and continued to lead innovation in our industry. Our Flex offering encountered a large success with the fleet reaching 44,000 at the end of 2021, an increase of 32% year-on-year, which places us well on track to reach our 60,000 vehicles objective in 2025. Another great success I would like to mention is the partnership that ALD has with car manufacturers and in particular with the EV manufacturers. As you know, we are committed to lead the transition towards sustainable mobility. We have partners that are well known for their innovation capacity, Smart, Lynk & Co Polestar, ChargePoint to name a few. And I'm proud that ALD became Tesla's #1 leasing company in Europe in 2021 after we managed to multiply orders by more than 3. I would also like to mention the continued success of our remarketing platform, Carmarket. This platform is key for our commercial and financial performances. Last year, we recorded 27,000 traders, an increase of 27% compared to 2020, and we expect further growth in 2022. We also made some strategic investments which will enable the industry's future growth. We acquired Fleetpool, the leading German car subscription company. With Fleetpool, we have great ambitions. We will expand the commercial reach of its mobility solutions to over 10 European countries in the coming years. In 2021, we also acquired 17% of Skipr, a Belgium Mobility as a Service startup. The new partnership between Skipr and ALD Move will create a combination of leading-edge technology with a solid mobility expertise and will step up the transition towards more flexible, cost-efficient and sustainable mobility solutions. And as you know, we announced at the beginning of this year that we contemplated the acquisition of LeasePlan, which will be a step change towards the creation of a leading global mobility player. I'll comment more on that later. In parallel to these strategic moves, ALD recorded strong business growth in 2021. So let's go to next page. Our funded fleet reached nearly 1.43 million vehicles at the end of 2021, up 4% over the year and at the top of the guidance that we provided last November. The number includes the fleets of Banco Sabadell and Fleetpool, which we acquired in 2021. The organic growth was 1.9%, accelerating strongly at the end of the year. Commercial dynamics remained very strong, leading to a record order bank, and we have more than 165,000 vehicles at the end of 2021 ordered, but waiting to be produced and delivered to our customers. Total contracts reached 1.726 million vehicles at the end of 2021. The number is moderately down from 2020. And as you may remember, we announced a year ago that the nonrenewal of a commercial relationship with one large partner on account of its low profitability, leading to a loss of 90,000 contracts in Q3. As a result, the year-on-year decrease in fleet management contract is 87,000 contracts. Let's go to Page 6. ALD is committed to leading the industry towards sustainable mobility. In our Move 2025 plan, we had indicated our objective to have EV representing 30% of passenger car deliveries in Western Europe, and I'm delighted to say that we actually reached 27% full year 2021 and 30% in Q4. This means that we reached our Move 2025 target ahead of time. This was helped by the fact that ALD Electric is now offered in 22 countries, which is also in advance compared to the objectives of Move 2025. Coupled with the hard work of our consulting teams advising our customers on electrification, we have obtained a rapid reduction in the CO2 emissions of new cars delivered. We are well on track to reach our minus 40% reduction of emissions between 2019 and 2025. With these great performance, I'm glad to share with you our 2022 objectives. The EV share of passenger cars deliveries in Western Europe is to be above 30% and the ALD Electric offer is to be expanded in additional 8 countries to reach 30 countries at the end of 2022. Let's move to Slide 7. ESG ratings are important to ALD because they provide us with an independent view on the majority of our sustainability strategy, policies and progress. ALD is currently rated by all international reference agencies, Sustainalytics, Vigeo Eiris, MSCI as well as the more specialized agencies, EcoVadis and CDP. We are consistently positioned in the top quartile and sometimes better. We actually have a #1 position [ window ] in the professional services sector. This is due to a good all-round performance on the environmental, social and governance topics, and more specifically, to tangible results in our internal carbon footprint, the energy transition embedded in our business model and high standards in terms of social practices and business ethics. Let's go to next page. As I said, 2021 was an excellent year for ALD. We had record financial results. I'll let Gill explain them in more detail in a few minutes. But to summarize, thanks to the strong demand for used cars and in our outstanding remarketing capacity, we had a used car sales performance of EUR 438 million versus EUR 61 million in the previous year. A cost-income ratio, excluding used car sales, of 48.8%, better than the one in 2020 and 2019. And by the way, this is the best cost-income ratio in the industry. A net income of EUR 873 million, a record high for ALD. It's a 71% increase compared to 2020. Based on this performance, ALD's Board is proposing the payment of EUR 1.08 dividend, subject to the approval of our shareholders. This corresponds to the 50% payout ratio, completely in line with our previous guidance. Now let's talk a bit about the LeasePlan on Page 10. At the beginning of January, we announced our project to acquire LeasePlan. Whilst -- this transaction would be a step change towards the creation of a leading global player in the mobility industry. LeasePlan is one of the leading fleet management and mobility companies in the world with a total fleet of 1.8 million vehicles and a global and extensive offering, making it the perfect fit for ALD to shape the industry's transformation. The acquisition price is EUR 4.9 billion, which would be paid through EUR 2 billion in cash and a 30.75% shareholding in the combined entity. The EUR 2 billion in cash would be funded through a EUR 1.3 billion ALD right issue underwritten by Societe Generale and a EUR 0.7 billion of surplus capital of ALD. Right after closing, Societe Generale will remain the majority shareholder of ALD with a 53%, while the shareholders of LeasePlan would hold 30.75% with a lockup period. The combination will significantly increase the value of our free float. Following the closing, ALD will become the leading multi-brand mobility player worldwide. We will gain in scale and size and have a stronger client coverage and client intimacy, further improving our ability to anticipate further market needs and client expectations. Considering our combined procurement volumes, we see a substantial procurement saving opportunities, with a combined fleet of 3.5 million vehicles. We will be buying 800,000 vehicles a year, representing actually more than 5% of the European new car sales per year. We will therefore be a strategic partner for all the car and tire manufacturers, service and body shop networks and other suppliers in the ecosystems around us. Size has always mattered in our industry, and with the size of the combined entity, we would remain competitive towards our competitors being it OEMs or large tech companies, who would be making a move towards our business model. This transaction would enhance ALD's ability to lead the future of digitization of the mobility industry. Both ALD and LeasePlan have made extensive investments in developing digital capabilities, leading to improved customer experiences and operating efficiencies. The combined digital firepower of (sic) [ at ] our disposal would be more than EUR 400 million of strategic investments. Last but not least, this transaction will create a true leader of sustainable mobility solutions. The combined fleet of EVs would be by far the biggest in the industry and we would become the natural choice for customers and partners in their quest for electrifying their vehicles. Let me now hand over to Gill, who will comment on the value creation from the LeasePlan acquisition and the financial results of 2021.

Yes. Thank you, Tim, and Good morning, ladies and gentlemen. Let's take a look at the key numbers of the LeasePlan transaction, which would, of course, accelerate our growth prospects with annual fleet growth expected to reach at least 6% post integration. This could come with improved operating leverage, making this transaction highly synergistic. We expect annual cost synergies of around EUR 380 million by 2025. So this would further improve the combined entity's cost-income ratio to a best-in-class level of 45% in 2025. So the transaction would also enhance our 2023 EPS by a pro forma 20% increase, assuming the full impact of synergies and excluding restructuring costs. And thanks to the capital generation, the dividend policy would remain attractive with a payout ratio between 50% to 60%. For all these reasons, this acquisition is creating substantial value for the shareholders. The new group would have a solid capital structure at closing with the common equity Tier 1 ratio at 13% and a total capital ratio between 15%, up to 16%. And is currently applying for a financial holding company status, which will widen our funding options going forward. You have probably seen also that both Fitch and S&P have put our ratings under positive credit watch. They indicated an upgrade to A- at closing, which would be very good news. SocGen would, of course, continue to support ALD's funding needs -- it has always been the case -- bringing the flexibility which is required to fund the new company. And also, they would continue to benefit from the well-established presence of LeasePlan Bank in Germany and Netherlands, where deposits are collected. So let's look briefly at the time line of the transaction on the next slide. So we are still working on the transaction. We have started the works for obtaining regulatory approvals to close the deal by year-end. In parallel, we will soon set up a dedicated integration management office, IMO, to finalize the plan for a successful integration of LeasePlan closing. We plan to complete our rights issue and close the transaction by the end of 2022. An integration program is aiming at coordinating the execution and the steering of the integration, and it would particularly focus on the top 12 countries where the majority of the synergies are expected by mid-2024. So now let's look at the state of our outstanding 2021 results on Page 14. So starting with our margins. Taken together, our leasing contract and services margins have increased by EUR 126 million, up 10.1% compared to 2020. So of course, on the back of strong used car markets, we'll see them in a minute. Our last fleet revaluation exercise done in H2 2021 has contributed positively on the leasing contract margin. During 2021, the variation in the stock of excess depreciation has positively impacted the P&L for EUR 49.8 million compared to a charge of EUR 39 million in 2020. This means a swing of EUR 89 million between the 2 years, which, of course, is having a positive impact on our cost-income ratio. So when you exclude this exceptional swing, the margins taken together have grown plus 2.9%, broadly in line with the growth of our average earning assets, which is slightly above 3%. I also wanted to comment with you that in agreement with our external editors, we have done some minor restatements in our financial statements, which, of course, do not impact the net results, but change slightly the presentation of the P&L and the balance sheet. And amongst these changes, we have reallocated the volume and loyalty bonus that we pay to our customers from the services margin to the leasing contract margins, which is logical because these rebates are always granted based on volume target achievements. On the operating expenses, they have increased by EUR 41 million compared to 2020. This increase is explained by 2 main factors: the variable compensation and profit sharing agreements have increased, of course, driven by much higher results than budgeted. We have also granted to our staff worldwide an exceptional bonus of EUR 1,000 on average to reward them on the back of our outstanding results. And taken together, the impact on the variable compensation is around EUR 19 million. The second factor is, of course, the costs incurred by the several transactions that we have been announcing during the year and, of course, the main one LeasePlan. And these costs represent around EUR 12 million for the year. So when excluding these 2 elements, the increase in operating expenses is limited to around EUR 10 million, which is a plus 1.6% compared to 2020. And considering all these elements I've just quoted, our cost-income ratio is landing at 48.8%. So let's look now at the used car sales results. The contribution from used car sales results reached an exceptional level in 2021 at EUR 438 million, of which EUR 160 million in Q4 2021 alone, with an absolute record level above EUR 2,600 per vehicle sold. We are, of course, still benefiting from the ongoing highly favorable conditions in used car markets. The delivery delays of new vehicles remain often well above 6 months, driving strong demand of our high-quality used cars. ALD has managed to sell 308,000 units in 2021, of which 61,000 in Q4, leaving a used car stock at the low level. And of course, based on that, we had to release the pandemic stock depreciation that we booked in 2020. So the average sales -- the average used car sales margin for 2021 came in at EUR 1,422 per unit, so well above EUR 1,000. So let's go to the next slide. Impairment charges on receivable dropped by 65% compared to 2020 to a low EUR 25 million, down EUR 46 million compared to last year. This decrease is primarily due to the low default rates that we are currently observing as well on top of a release of EUR 6.5 million in relation with IFRS 9 forward-looking, which has been booked for the first time, as you can remember, in 2020. The release of the forward-looking provision is mainly driven by an improvement in the maturity of our receivables. So the contribution from the cost of risk in Q4 in isolation was actually positive. As a percentage of earning assets, the cost of risk has fallen to an exceptionally low level of 11 bps as a percentage of earning assets. And the last point I want to comment on this slide is the tax rate. The effective tax rate stood at 21.3% in 2021 compared to 17.7% in 2020, which is reflecting a fading benefit of the Italian Stability Law. So the net income, as Tim has already indicated, has reached EUR 873 million group share, which is a significant increase from last year. And with the contribution from Q4 on a stand-alone basis at EUR 263 million, which is an excellent result. So let's have a look at the balance sheet on the next slide. A few things. The end of year earning assets increased by 8%, so the end year position compared to 2020. The funded fleet has started to grow again in H2 2021 and mainly in Q3 and even more in Q4. As commented earlier by Tim, we have seen a significant shift towards electric vehicles in 2021 in the funded fleet, which is obviously driving the increase in investment value and earning assets. So the average earning assets have grown by 3.1% in 2021 compared to the previous year. And the pro forma equity to total assets ratio when you restate the proposed dividend would stand at 16.6% at the end of 2021. So of course, on the back of exceptional used car sales results, the return on average earning assets has risen to 4% and the ROE has jumped to 19.5% and the earnings per share amounted to EUR 2.16 for the year. So on the last slide. I won't repeat what Tim has already commented. Our performance in 2021 was entirely in line with our guidance: funded fleet growth at 4%, a record used car sales result at EUR 1,422, an improved cost-to-income ratio down to 48.8%, and a very strong dividend increase proposed by the Board at EUR 1.08, representing the 50% payout ratio we guided on. So let me hand over to Tim, who will share with you the outlook for 2022.

Thank you, Gill. Well, let me comment on our outlook for 2022 on Slide 20. We are well positioned to take advantage of this industry's strong growth fundamentals. We assume that the economies will continue to recover, but we also anticipate that supply chains may not return back to normal before the year-end. Against this backdrop, we expect our funded fleet to grow between 2% and 4% versus December 2021, supported by the strong commercial trends observed recently. With continued high demand for used cars, we expect that the average used car sales per unit remains well above the 1,000 in 2022. As mentioned earlier, ALD have already started to incur cost to comply with all the required conditions to close the transaction and is in the process of setting up an IMO for the rapid, efficient and successful integration of LeasePlan. We'll be, therefore, be booking related transaction and integration cost, which will ramp up during the course of the year 2022. We will provide a quarterly update on the impact of these costs as they are incurred, and an estimate of the full year impact no later than at the time of our half year results publication. These transaction and integration costs will push up our cost-to-income ratio in 2022, but they are not expected to deviate ALD's net income significantly from our historical trend given the exceptionally strong used car sales results expected. Concerning dividends, we maintain our guidance of payout between 50% and 60%. So to wrap up, 2021 was really an outstanding year for ALD. We have continued to deliver on our Move 2025 road map. We have strengthened our commercial positioning. We have continued to lead this industry's innovation and its transition to a sustainable mobility while improving our ESG performances and our operating leverage. ALD registered record financial results in '21. We started 2022 with the announcement of our project to acquire LeasePlan and create a leading global player in mobility. This acquisition would be a step change and it would create a significant value for our clients, partners, shareholders and employees. As a management, we are committed to continue our strong financial trends this year, close the LeasePlan transaction and prepare for its successful integration. This concludes our presentation. Thank you for listening. We are now ready to take any questions you may have.

[Operator Instructions] The first question comes from the line of Geoffroy Michalet from ODDO BHF.

First one on the cost of risk, which is exceptionally low, almost nonexistent. When do you think it will -- or it could come back to a more, let's say, normative level? That was the first. Second question on the kind of mix that you expect on the new delivery of vehicles, EV, ICE or others, given your guidance of plus 2% to plus 4% on the funded fleet? Another question on the dividend. It seems that you beat the consensus expectation. You stick to your guidance, which is great. But does it mean that you are somehow very optimistic on the future because we expected less given, let's say, the nonnormative level of earnings from the used car sale vehicles?

Let me take your second question first, and then I'll leave it to Gill to comment on the cost of risk and the dividend payout. So I think in terms of the mix of the -- I guess that was your question, the mix of the fleet that we're going to deliver, I guess, in '22. As we said, we anticipate our electric fleet deliveries to be above 30%. And you could consider that a bit conservative thinking the fact that in Q4 we were already there. But we also know that one of the, let's say, challenges in '22 will be to have electric vehicles delivered in time. For the time being, we are seeing delays on electric vehicles between 12 and 14 months and hence we are a bit, let's say, reluctant to be more bullish on that point. Actually in terms of the order bank, we have quite a big number of electric vehicles that will be delivered this year, and hence the 30%. But that's basically our anticipation. I don't know -- was that your question on the mix?

Yes, I just wanted to be sure that it was a bit, let's say, conservative on that point.

It's a bit conservative, you could say, in terms of the demand. But the question is if we actually can get the cars to get delivered. So -- but let me hand over to Gill on the 2 other questions.

Yes. On the cost of risk, Geoffroy, we were also surprised by the low level of cost of risk in Q4, which, as I commented, was -- came in at 0 basically in Q4. It's very difficult to state when it will recover to more normal levels. More normal levels are 25%, up to 30 bps, I mean, across the cycle. And especially, as I was commenting during prior calls, as we are moving towards more SME and private customers, you would anticipate a slight increase in the cost of risk. Having said that, it's well below our expectations for 2021. That's the only thing I can comment. Of course, in these 11 bps and these exceptional results, we also have the benefit of the release of IFRS 9 forward-looking provision of EUR 6.5 million. And whether we'll see a further improvement in the maturity of the receivables next year, I don't know, potentially no. But that's the only comment I can provide you. On the dividend, I mean, here again, as commented many times, we have always had a very consistent and predictable dividend policy, rewarding our shareholders on the net reported results. And we thought it was a fair decision to reward our current shareholders of the excellent good results on the used car sales. As Tim alluded earlier, as you can see, we are at the moment in the cycle where used car sales is at an extremely high level. And we -- with the guidance we give on the used car sales -- and you can notice, we've not given a range. We are guiding off on used car sales which will be above 1,000. Of course, we predict also strong results in 2022. I don't know whether this answers your question. But of course, the Q4 2022 results on the used car sales was exceptional, well above our expectations. But we wanted to be -- to follow our policy on dividend we've had so far. And having said that, we are at the low range, and we have provided guidance on the payout range 1 month ago and wanted to stick to this.

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

Yes. I've got a couple of questions on the cost side. So firstly, I wonder if you could talk about the kind of cost pressures you're seeing across kind of OpEx, procurement, car parts, labor costs, et cetera. Also kind of how that's working out by geography, particularly in your core markets? And also, to what extent you started having conversations with the customers about passing some of those inflationary cost pressures on as contracts come up for renewal? And then secondly, more on the LeasePlan cost base. Now that the deal has been announced, I wonder if you've been able to tell LeasePlan to hold back on big discretionary expenditure on things like marketing, IT investments ahead of the merger closing. Or is it more a case that you don't really have that power as yet? So we should think about the cost base at LeasePlan as fairly steady state as we go through the course of 2022. So just some insights on how to sort of think about the LeasePlan cost base this year.

So let me take the #2 and 3 questions first, and then I'll leave it to Gill to comment on the cost side and the different geographies and, let's say, the cost pressure, as you say. I think in terms of the inflation that's in the -- we basically have a fixed price for cars that is on the road across the contract. So there's no change over there. And we are basically hedging on these kind of underlying costs as well. Now clearly, there will be inflation, and in the inflation you could say that we price into our contracts the anticipated inflation we would have on service and maintenance and tires. So that inflation should cover the contract, and for the customers there's really no change over the contract. I think everybody is expecting the fact that things will become more expensive and, of course, we have discussions with customers. But again, it's kind of a natural trend that that's moving on. And -- I mean, it's nothing particular. I mean, for our customers, you will not see a hike in the existing fleet. It's true that for the future contracts, there could be a change in the pricing, mainly on the service and maintenance parts as such. On the LeasePlan cost base. Obviously, LeasePlan is completely separate at this point and there's no way that we can dictate any kind of management decision on the LeasePlan side until closing. And of course, we don't do that. So probably, as you said, the best way to look at the LeasePlan cost base is to look at it as is in the past to some extent. And then we will, of course, be more specific after closing on that particular part. I think what is important to state is that we have guided of a cost-income ratio of 45% by 2025. And there's nothing at this point who have indicated that we could not get there, at least to our information we have today. So maybe on the cost side, Gill?

Yes. On the cost side, as alluded by Tim, so on the margin side and the investment side, we see already, of course, an inflation in the assets and the earning assets, which is -- also have a positive impact on our margin. We need to be and we are monitoring the increase in costs of our margins, and this is monitored and embedded in our quotation. On the OpEx side, as I commented earlier, we are in a way lucky because our OpEx on the -- the inflation on our OpEx is not linked to the inflation of our assets. So basically, we'll see going forward certainly a higher increase in earning assets and hence contract leasing margin and to a lesser extent on the OpEx. Of course, like any company, we see in certain categories of staff, a buoyant labor market. But again, we are immune on the fact that our OpEx base is not -- has no correlation with the inflation we see on the assets. Does it answer your question?

Yes, yes. It's very interesting.

The next question comes from the line of Mourad Lahmidi from Exane BNP Paribas.

Hello? Hello?

We can hear you now.

Hello? Can you hear me?

Yes.

Yes. Two for me. The first one on the state of the used car market across your market in Europe. Can you give us more insight about the direction of used car prices? What has been the year-over-year change on average in Europe in 2021? And what are you seeing since the beginning of the year? Second question is on the cost of funding. Are you expecting any uplift in the cost of funding in 2022 and the years to come as a result of higher interest rates? And have you embedded that in your quotations for the leasing -- especially leasing contract margin?

Well, yes, I guess the used car market has been mentioned a few times already now, is particularly volatile, I guess, and more than we had expected. What we have seen from the first months of '22 is that we are not far from where we closed 2021. And I think what is to be expected is that as new car sales hopefully will come back to a more normal -- it's not necessarily happening actually in 2022, at least not probably before late this year. But at that time, of course, you would anticipate that the number of used cars coming to the market is quite substantial. Today, you have a dynamics where some people who actually would like to buy a new car don't want to wait for 12 or 14 or 16 months, so they buy a used car. It also means that there's no used cars coming in as a trade-in. So there's a kind of a double effect. And of course, at the point where new cars will be coming to the market at a steady stream, you'll see the impact disappearing, and hence, we would anticipate quite a lot of used cars coming to the market. But it's not anticipated definitely before -- probably Q2, late Q2 -- sorry, Q3 or Q4 this year. And hence, the anticipation is that the used car market remains strong in '22. And again, we have said that clearly we anticipate results above the 1,000. And again, it depends a bit how quick the car manufacturers is coming back to normal. But -- so I think that's on the used car market. Gill, you want to cover the cost of fund?

Yes. On the cost of funding, we have already seen some recent increase in the interest rates since a couple of weeks and months. And I just want to remind here that we are fully matched. So any increase is passed directly into the quotation. And every year in our financial statements in the -- I guess, it's in the risk section, in the treasury risk, we have a full paragraph on the interest rate risk, where you can see the sensitivity of the P&L from an increase in -- of 100 bps of interest. And in fact, we have a very low risk appetite on interest rate risk. And the sensitivity of the P&L is around -- I mean it's not published yet, but it will. But it's -- you can refer to the prior year impact. It's around EUR 10 million, which is peanuts compared to the total amount of margin. So I'm not saying it's good news. It participates to the inflation of costs for our customers. But it's fully embedded in the quotation. Am I clear, Mourad?

Hello? Yes. I have a follow-up one. On the deal with LeasePlan, one technical point. So there is the -- part of the financing will come from capital increase underwritten by Societe Generale. Does it mean that Societe Generale will subscribe to the full capital increase? Or is it open to other shareholders?

On that, they will participate down to -- in order for them to achieve 43%...

53%.

53%. So I said 43%, sorry. 53% at closing. So yes, that's the target. I can't -- we can't say the percentage of subscription. But that's the deal.

Okay. So basically, they are underwriting the cap increase? Or...

Yes.

But it's opened for subscription to other shareholders of ALD, right?

Yes.

Clearly, we want to increase the free flow of this transaction as well, which is important. So that's part of it.

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

Just a few. Firstly, on the EVs. Can you just say in terms of what you're seeing so far in terms of the service revenues from those assets, are there any major changes to what you're seeing from the legacy vehicles at all? Or anything you're thinking about over the life cycle there? A second thing on the electric vehicles. Can you say -- I mean, when you -- obviously, there must be quite a lot of customer demand at the moment for EVs maybe versus petrol fleet. Does that give you an opportunity to maybe price slightly differently just given the demand dynamics there? And third question was just on the car sales. I know you've kindly given us a number for the profits per car. Can you just say, are you expecting the absolute number of cars in your fleet that you're going to sell this year to be a lot less or a lot more than historically just given obviously some of the production limits that we all know are out there? And then the last question is more of a general one on rising interest rates, obviously, other general cost inflation. Obviously, that's a negative side from your point of view of costs going up. Is there also an opportunity from your point of view to maybe increase margins as some of these costs are going up because obviously it's a lot easier to pass through costs when things are going up than it is maybe -- to increase margins when costs are going up than it is when costs are going down?

So let me try and answer your first 2 questions, and Gill will answer your 3 and 4 here. So I think on the EVs, EVs are much more simple cars than ICE cars, to be very honest. And head and shoulder -- the service and maintenance revenues are supposed to be reduced. It's not something we have seen significantly at this point. I guess the car manufacturers is still, let's say, also trying to find their own feet around this. But clearly, in the longer term, we anticipate that the service margins and the service cost for these cars will be less. Now -- and hence, we are looking into the full value chain of EVs to create new opportunities for margins, which I think we have some really good prospect for. And -- but on the specific service and maintenance, yes, we would anticipate that the service margins would be trending downwards to some extent. And on the demand, I think it's true that there's a bigger demand potentially in 2022 than what can be delivered. Again, we are in a very competitive market and also I think there's not an opportunity necessarily for us to create a specific margin on that as such. I think what it means is that the car sales results that potentially could come from some of the EVs coming off lease could be quite good and better than anticipated. But in terms of us, let's say, improving our margins towards our customers and EVs because of a supply and demand situation is not really there. It's -- we are in a very competitive market and we fight for contract every day, I guess. So maybe, Gill, you want to take the...

Yes, on the volume, maybe volume of cars. As -- the volume of cars that we are selling every year depends on the number of terminations we have. And as we have been growing in the -- I mean, in the year 2018, '19, so we'd expect a higher number of cars to come back. So it's, of course, difficult to give a precise number, but that's the logic behind. The more you grow, the more cars you have to sell 3, 4 years later. On the rising interest and as a complement -- to complement what Tim was explaining on the EV. The good thing, as I keep repeating myself, is the investment value of EV, which is higher, which is offsetting also the lower margin on services kind of. And the rising interest, yes, it's an opportunity to potentially increase spread. But here again, I would repeat what Tim is saying. We are in a competitive market and we are in the moment where vehicle price are increasing, investment value is increasing, interest rates are increasing. So participating to the whole -- to the increasing price. So it's not always obvious to pass on additional spread. But if there is any opportunity, of course we do.

The next question comes from the line of Sanjay Bhagwani from Citi.

First of all, congratulations, gentlemen, for again such strong results. And I've got a couple of questions. My first one is on used car sales margin guidance. So as you already mentioned, like, so far things haven't really changed much from what was in -- as to last year and if you look at the H2 used car sales margin run rate of somewhere around EUR 2,000 per vehicle. So what exactly do you think is changing going forward in H2? Or like do you see any signs of things changing much more? Or any visible headwinds? Or this is just you are being cautious just in line of an unknown supply chain issues? That is my first question. I'll follow up with the next later.

Let me try to cover this one. Yes. So as I said, we get a bit of mixed signals, I guess. There is an anticipation that new car sales will increase this year. Having said that, when we talk to our manufacturers and people close to the manufacturers, there's no anticipation that they will fill up the supply chain this year and eventually we might be still 5 to 10 million cars below on a global level than what we were in 2018, '19. So it's very difficult to predict the used car sales at this point. There's no doubt that we feel comfortable with being 1,000 and above. But I would say probably if things is not improving in terms of new car deliveries -- I mean, you could consider this as quite a conservative guidance. So the question is really when they really start selling new cars. And then we will probably see when the new car starts coming, and hopefully in a steady flow, you will probably see that the curve that you have seen coming up will be pretty much replicated coming down. And as we always said, the kind of results we have now is absolutely exceptional. And we are typically in a normal market. We are thinking between EUR 100 million, EUR 300 million of profit. But clearly, for '22, we'll be well above that. And all the -- even if things, let's say, normalizes, in H2, we are pretty comfortable with 1,000 and above.

So is there also an element of any structural measures you have taken as part of your Move '25 plan in this improved used car sales margin? Or this is all just the cyclical and driven by the supply chain? I remember you had announced for a few measures like moving to high mix profitable channels, et cetera, last year.

Yes. No, I think -- I mean, clearly, the -- I mean the main part of these results is, let's say, the market -- let's say -- well, yes, the market demand and supply in the market here. But clearly, we have also -- and we are continuously improving our used car sales performance through Carmarket, which we said, but also through actually the fact that we have more channels. We are selling more retail. We are selling -- we have the Flex, which means we can take out cars that we essentially do not want to sell because of a particular bad market situation. So I mean, we are clearly improving. And as we said in our Move 2025, we are working on that on a continuously basis. So part of the results. But still, I would say, the minority of the result is based on our capacity to remarket our cars better.

That is very helpful. My next question is on this accelerated EV penetration. So given that penetration is now much higher than what you are expecting in terms of your registrations as well, does this change anything in terms of your residual value assumption? Or when do you actually revisit this?

Gill, do you want to...

Yes. No, it's a good question. We are -- we have indeed an increasing share of EV. We are tracking the performance of EV and the EV we sell today are part of the good performance. We believe that anyway the used car market will in the coming years, and not only in 2022, but to a lesser extent -- the supply and demand situation will continue to be favorable because of this low production level. Don't forget that the number of cars produced in 2020 and in 2021 is well, well below the level of 2019 before the pandemic. So this should sustain the overall supply and demand. So it doesn't change our policy as such. And we have a positive view on EVs going forward as they will be the preferred -- in 3, 4 years' time, there will be even more demand on EV. Also have the potential benefit of tax subsidies from states, which will fade, which is also a potential benefit for EV. So all these factors are taken into account. But we -- yes, this is globally our view on the EV used car market going forward -- the used car market, of which the EV.

And do you see any difference between the plug-in hybrids and battery electric vehicles either in terms of the pricing you are able to monetize or underlying demand from the consumers? Or you are basically kind of just following the market trend that is basically as long as the market accepts the plug-in hybrid, you continue to deliver? Or is there like a strategy towards more inclination towards the EVs?

So I think, Sanjay, that -- we always said that the plug-in hybrid is a good bridge technology and it remains that. And we can see when we do the analysis at our customer's site -- we do a very, let's say, a detailed analysis of what kind of technology is best for the different purposes. And the plug-in hybrids clearly have a purpose in some of these fleets. And it will remain like that for quite some while. So the plug-in hybrids looks pretty much in terms of residual values like our ICE cars. And of course, they have a longer life than the ICE cars, because at some point ICE cars will be completely banned from the city centers and other places, perhaps. Whereas, of course, in the longer term, the EV is anticipated to be the technology that survives. But at this point, we are looking at the plug-in hybrids pretty much as ICE cars with a longer life, you could say, to some extent than the ICE cars. But -- and at this point, we definitely believe there is a market for these cars for the next couple of years at least, and we remain, let's say, positive on these as well.

The next question comes from the line of Horst Schneider from Bank of America.

The first one that I have refers to your outlook on the growth of the funded fleet, the 2% to 4%. I just want to get a feeling what are the underlying assumptions for this 2% to 4% growth. So in terms of new car sales growth in Europe. But then also what you assume what are the growth drivers doing -- for example, regarding Tesla. I mean they open up now the plant in Berlin. Potentially, the European sales will increase a lot. Is that -- also the leasing business will grow a lot. So can you elaborate a little bit more on the assumptions behind this 2% to 4% growth?

We have John here with us as well. So I'll let John answer that one.

I think, firstly, we've got a big order bank. We've advised on previous calls that the order bank has been building up this year. And there are some hope that the supply issues will ease a little on new car sales in '22. We think the first half of '22 is still going to be challenging, but the indications are that the second half of '22 will begin to see an easing. But we stay alert to that situation. So one of the assumptions is that the order bank will begin to empty out a bit and that will drive some of the growth on the fleet. The second, as you rightly said, is the emergence of some of the new partnerships. Remember, if you go back 4, 5 years, we established some very strong global partnerships, which are now in their first renewal cycle, and we're having a good effort and performing very well in terms of improving the renewal rate on the existing business. But you reach a point where you have to add new partnerships on top in order to drive further growth out of that segment. And hence, the Tesla partnership has been particularly strong in 2021. The Model 3 has been one of the best-selling cars in Europe. And we've benefited from that because the leasing product is very attractive in that segment. And we can anticipate that in '22, that performance will increase as well as new partnerships such as Smart, which we announced at the end of last quarter coming online towards the end of '22 as well. We also shouldn't underestimate the impact of the Fleetpool acquisition, which gives us a footprint in the subscription space, which is growing very rapidly. And Fleetpool already operate with a number of our partners in Germany and we'll look to expand the international footprint of Fleetpool towards the end of '22 with some other partners as well. Corporate market remains strong. So there's an assumption that the corporate market will come back online in '22 following a slight softening of that market during the COVID period. So all in all, we think all of the segments that we're in have got some strong growth opportunities coming through, and we remain very optimistic about '22 and confident in the guidance we've issued.

But with that regard, would you say that the 2% to 4% is rather a conservative assumption or really realistic?

I think it's a realistic assumption. I mean, remember, when we spoke about the LeasePlan acquisition, we obviously said there's a lot of effort that will have to go into preparing for the LeasePlan deal, which we'll begin to execute in '23 as well. And there is that uncertainty around new car production and whether it will fully come back online. And even if it doesn't, when you'll start to see the impact of those new cars coming into the market. So I think if there's some good news on the new car production, then we would hope to be towards the higher end of that guidance. But we remain waiting on the OEMs and their ability to source chips and the parts for those cars as well.

Of course, in that context, it would be interesting to know what is your assumption on production growth or on new car sales growth in Europe. You don't have a number for us, right?

No, we don't have a number that we make available. I mean we're talking with all the OEMs all the time and being updated by them on their current production challenges. We're close to one of the biggest buyers of their vehicles. But we're really guided by them in terms of that. And you'll have seen last year that the situation is quite fluid in terms of the new car sales production estimate. So we'll stay close to that. And if there's a step change in that, we'll inform you, obviously.

Yes. All right. Then the last one that I have is on, again, this residual value gains. I know you made a recent statement -- so when you said that the start to the year was positive, as good as it was in December maybe, so we should expect a strong Q1, Q2, and then basically it should flatten out towards Q4. But if I remember right, you never write up your residual values. So therefore, we need to see really a brutal used car price decline before it gets to 0 potentially in Q4. Is that the right way of calculation? Or...

Yes, Horst, I think that's true. I mean it's -- I mean we don't anticipate to get to 0 in Q4. That's for sure. And that's not even what we have in a normal market. So clearly not. And the fact is that we have seen a very steep curve upwards because of this, let's say, lack of new cars, because it means, as I said before, that you have actually some people who normally would buy a new car who is buying a used car. So you actually have more customers in the used car markets than you normally would see. And of course, if there's no new car sales, you don't get the trade engine. So you will see the same steepness, we think, when it comes down, when actually the new car sales normalizes. The question is: when it happens. And that's a bit the question. So I mean, let's be honest, we are very comfortable with the 1,000 and above at this point for the year.

1,000 and above means it could get as close to 2,000, right? I mean, who knows if normalization just happens in Q4. It's just a matter of supply-demand, right? So...

Yes, you could say. But I mean, again, we did not reach 2021, so we'll not read 2000 and...

But in Q4, right?

Yes. But you don't have 4 quarters like that, I guess. So anyhow -- but yes. But it will be a good year for used car sales no doubt.

Yes. I just wanted to challenge you. No. Thank you. That's great. And congrats again for the numbers. Great numbers.

Thanks, Horst.

There are no further questions, so I'll hand back to your host to conclude today's conference.

Yes. So thank you all for your attention. I hope you have -- we have answered your questions in a fruitful way. 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 for your time. And we hope you all keep all well till next call. Thanks a lot.

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