Ayvens (AYV) Earnings Call Transcript & Summary

Hello and welcome to the ALD First Half 2022 Results. My name is Jess and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Tim Albertsen, CEO, to begin today's call. Thank you.

Good morning, ladies and gentlemen, and welcome to this ALD First Half 2022 Results Call. First of all, thank you for your attendance. And as always, we hope that you're all in a great shape. We guess you're all pretty ready for vacation actually. I will start with some highlights on the first half 2022. And as you will see, we have recorded a strong commercial and exceptional financial performance. Gilles will comment on our financial results in more detail. Finally, I will say a few words on our outlook for 2022 before we take your questions. Let's go directly to Slide 4. In a more complex environment, we recorded very strong commercial dynamics despite continuing supply constraints. Our funded fleet increased by 5.4% compared to the end of June 2021 to 1.45 million vehicles. I will comment further on our commercial expansion in a few minutes. The continued shortage of new cars pushed the prices of used cars further up. And I can say that we are not seeing any sign of normalization for the moment and normalization will likely not happen this year. In this context, used car sales results attained a record level of EUR 3,212 per vehicle sold in H1 2022 compared to EUR 740 million in H1 2021. Under these highly favorable conditions, we generated record high profits in car re-monitoring. Our group net income came in at a record of EUR 606 million in H1 2022, up 72% compared to H1 2021. This number includes a few nonoperating items that Gilles will give you much more details later on. But even stripping out these items, our financial performance is very strong, considering the environment that we have, that we are experiencing, and it demonstrates the relevance and resilience of our business model. Let's go to Page 5. Since the beginning of the year, the macroeconomic environment has changed considerably. ALD has been prompt in adjusting to the new challenges as we presented last quarter. I would like also to highlight that the situation also brings many new opportunities to ALD in a particular -- and ALD is particularly well positioned to take advantage of these. We've taken tactical measures to manage the disruptions of supply chains. In Q1, I already mentioned bulk purchases and anticipation of autos. We're also extending existing contracts, and we are promoting our flexible product offering as an alternative mobility solution like ALD Flex and Used Car Leases, and this allows us to further reinforce our relationship with our clients, and it contributes to the reduction of our residual value risk. As major economies are slowing down, we are developing our multi-cycle lease offering, and we are closely monitoring our riskier client segments. I would like to remind you that our business benefits from the fundamental shift from ownership to usership. Over the past years, car leasing growth has outpaced that of the car market, and I'm confident that this trend will continue and that it will mitigate the effects of a potential recession. We have a wide access to funding, which is a key competitive advantage in the car leasing industry, and we are continuing to protect our margins through our strict hedging of liquidity and interest rate risks. Taking into account the rising inflation, we are adjusting our pricing parameters and new contracts more frequently. Another consequence of inflation is that it underpins our future used car sales results, which is positive to ALD. In a context of higher fuel prices, we have reinforced our customer advisory on more sustainable innovative products, such as ALD Electric or multi model mobility, in line with our Move 2025 strategic plan. The powertrain transition is definitely an opportunity for us as we are a market leader in electrification. So with this tactical plan and considering the opportunities that the situation offers, I'm confident that ALD, thanks to our competitive business edge and the commitment and professionalism of our teams, that we can successfully navigate through this new environment. Let's go to Page 6 and have a look at how we are shaping the world of mobility. Our commitment to shape the future of the industry was further evidenced by the launch of ALD Move in France in May. ALD Move targets the business-to-business to employees, channel the B to B to E, and it's a cutting-edge mobile application, which allows users to plan, book and pay multi-model transports. Its functionalities have been enriched thanks to Skipr, the Belgian Mobility-as-a-Service startup in which we acquired the 17% stake last year. I would like to highlight that ALD Moves potential customer base is much larger than the one of traditional car leasing. This is because ALD Move targets the totality of corporate clients' employees, including those not eligible to a company car. And ALD Move provides users with a high number of flexible and adaptive travel options, leverages on multimodality and contribute to the reduction of carbon footprint within a dedicated budget. I'll say the Move is highly suited to changing mobility needs and preferences, and it has had a promising start since it was last -- since it was launched in May. Meanwhile, ALD Flex in the business-to-business channel continues to be the perfect response to corporate changing needs in a more uncertain environment. Our fleet reached more than 52,000 vehicles at the end of June 2022, an 18% increase compared to December 2021. ALD Flex is continuing its expansion and it will be available in 34 countries by the end of this year. In the business to consumer, Fleetpool had an outstanding performance in H1. Its fleet reached 13,000 vehicles at the end of June 2022. Fleetpool is the #1 subscription company in Germany, which we acquired last year. Operating the like 2 drive and eazycars brands, it targets private consumers to a simple all-inclusive and fully digital subscription product. It has a great growth potential, and we are planning to roll it out across Europe. Let's go to Slide 7, where I can comment on how we're landing the transition -- how we are leading the transition to sustainable mobility. The transition to EV is underpinned by strong megatrends, the more stringent environmental regulation as well as corporates' and individuals' rising interest in reducing their carbon footprint. Over the last 12 months, the share of EVs in our new car registrations in Europe was 27%, and I'm proud that ALD is much ahead of the market, which recorded less than 22% over the same period. Besides, we have been appointed sole EV solution provider for advisory, fleet and charging by a number of large corporate clients during H1. We can mention Thales and Bayer, among others. We want to leverage on our commercial successes, and we'll be deploying the ALD Electric offer in 12 additional countries to reach a total of 34 markets by the end of this year. Finally, in June 2022, we successfully issued a EUR 500 million European green and positive impact bond. This bond will be exclusively dedicated to the financing of battery electric vehicles, and this powertrain is at the forefront of sustainability. By doing this, we confirm our commitment to the highest standards of sustainable development. Let's move to Slide 8 and look at our strong commercial dynamics. H1 was strong in terms of commercial dynamics despite continuing supply constraint. Our funded fleet reached 1.45 million vehicles end of June 2022, a 5.4% growth compared to June '21. Organic growth was at 3.1% since the end of '21. Our funded fleet grew by 1.5%, which means that we are on track to achieve our guidance of 2% to 4% growth this year. Total contracts, including both full-service leasing and fleet management, attained 1.76 million vehicles at the end of June 22. The continued rising order book reflects the strong commercial dynamics. As supply chains remains disrupted, delays in deliveries of new cars are persisting, and clients are placing their orders with great anticipation. Let me now hand over to Gilles, who will comment on our H1 2022 financial results on Page 10.

Yes. Thank you, Tim, and good morning, ladies and gentlemen. So let's have a look at the strong evolution of our margins. I will obviously start by commenting on the few significant nonoperating items booked in H1, which have impacted our leasing contract margin. So the first one relates to the Turkish economy as the cumulative inflation has exceeded 100% on the 3-year period in the first semester 2022. You have seen that Turkey has been included in the list of hyperinflationary countries. And that's why we've applied IAS 29 standard for the first time, which is imposing to revalue all nonmonetary items of which are main assets, our fleet. So we operate a fleet of circa 2,000 units in Turkey, and the revaluation has had a positive P&L impact of EUR 40 million, which corresponds to an anticipation of future car sales profit. The second nonoperating item relates to our normal fleet evaluation procedure. I had already commented in previous calls that our scenario on the prices of used car was a normalization during the year, and this was a prudent assumption used for our fleet revaluation exercise that we have done last year. As just commented by Tim, we clearly see no real improvement on the supply chain, leading to exceptionally high used car prices. So in the most recent fleet evaluation that we have done in H1 2022, we have recognized this market outlook and somehow this is reflect the -- our fleet revaluation reflects these level of prices in the accounting reevaluation of the vehicles and of the vehicles which will be coming off lease within the next 12, 18 months. And this accounting exercise has led to a positive impact in the leasing margin of EUR 40.5 million. And as a second effect and part of this fleet evaluation exercise, you know that we have always tried to be as prudent as possible by ignoring the potential future profits on the sales of used vehicles. But given the high level of inflation on used car prices, we have now a portion of the fleet for which our net book value in H1 2022 is below or well below the expected future use car sales prices. So given the significance of the amount, the accounting norms are imposing us to adjust and sometimes stop depreciating our vehicles further. And this has led to an exceptional booking, which is reducing our depreciation costs which, in effect like for Turkey, is an anticipation of used car sales profit, which would have come in the course of the second semester this year. And this is indeed a significant amount, EUR 63 million, which obviously reflect the current buoyant market. The last nonoperating item related to ALD Ukraine, and we have been able to keep our prudent provisioning booked in Q1. I can comment that for the time being, the situation remains under control despite the war with a slight decrease in the fleet. Our provision rate is prudent as it covers 50% of our rental fleet and customer receivables. And at the end of June, our net assets in Ukraine were only EUR 45 million, which is limited. So when one excludes all these nonoperating items, our leasing and services margin are increasing by a 4.6% year-on-year. So let's go to the next slide on the used car sales results. I will be short, and you can see the contribution from used car sales results reached a new exceptional level in H1 at EUR 433 million compared to EUR 125 million in H1 last year. This record result is driven by ongoing supply shortage with no significant improvement in delivery times. So the average margin on the used car came in at EUR 3,212 per unit. And we have only sold 135,000 cars. And of course, the decrease in volume is mainly due to the rising number of contract extensions and Used Car Leases. So let's look at the rest of the P&L on Slide 12. Our operating expenses reached EUR 404 million in H1. The increase compared to H1 last year is mainly due to a few expected exceptional items. We have exceptional spends in relation with the acquisition of LeasePlan, and lease costs have increased from EUR 10 million in Q1, up to EUR 31 million in Q2. And this increase reflects the implementation of the integration management office, which has been set up in April and which is 100% dedicated to prepare the integration. Also need to note that we also have costs linked to the antitrust filing and to the ECB filing for NSA to become a financial holding company. For the whole year, we are anticipating around EUR 100 million of costs linked to the LeasePlan transaction. The second exceptional item on the OpEx is the fact that we have consolidated for the first time Sabadell Renting and Fault Fleet Management in the U.K. and hence, we have recognized the operating expenses of these entities, and the scope effect represents around EUR 8 million of operating expense. And the last item, I mean likewise for Q1 '22 on the back of our outstanding use car sales results, we had to further increase our viable compensation provision of which some employee profit sharing in some countries. So when you exclude these 3 items, our OpEx have risen by about 5% compared to the same period last year. But again it's worth reminding that the cost base of last year was low due to the COVID restrictions, especially on travels. The cost of risk is 16 bps, stable compared to last year. And so the impairment charges on the receivable coming at EUR 19 million, of which EUR 2 million is related to ALD Ukraine. And our net income group share reached an exceptionally high level at EUR 606 million and this despite the normalization of our effective tax rates. So the earnings per share in H1 amounted to EUR 1.50 compared to EUR 0.87 in H1 last year. So I'll now hand over to Tim, who will comment on our 2022 outlook, and we'll be then ready for questions after that.

Thank you, Gilles. Yes, let's go to Slide 14. As you can see, we posted exceptionally high financial results in H1, partly due to some nonoperating effects, which Gilles just described. Notwithstanding, I would like to highlight that even stripping all these effects, our performance is very strong. As I commented earlier, we are actively responding to the unprecedented challenges that arose, and one should not disregard the opportunities that these changes are also offering and which ALD will take advantage of. Despite the challenges ALD faced strongly in H1, thanks to the solidity of our business model, our agility and the quality of our people. Based on this, I'm confident that we can navigate through the current fast-changing environment. We believe that this disruption in supply chains will continue at least until the rest of the year. Therefore, we maintain our funded free growth guidance between 2% and 4%. We are also expecting the highly favorable supply-demand situation in used car markets to persist in the near term. But as Gilles just explained, with hyperinflation in Turkey and the fleet revaluation, we have anticipated in our H1 margins some used car sales results that would otherwise have been incurred later this year. Therefore, we are maintaining our guidance of used car sales results per vehicle above EUR 2,000. But based on the current market conditions, it will probably be well above EUR 2,000 on average in 2022. Finally, we maintain our dividend payout ratio between 50% and 60%. Let's have a look at Slide 15. So before concluding, I just wanted to say a few words on the LeasePlan acquisition. We are continuing to prepare for the closing of the acquisition of LeasePlan. More than 1,600 contributors from both organizations, ALD and LeasePlan, are sharing the same enthusiasm about this combination of our 2 groups and are working hard to finalize the integration plans. Our discussions with the relevant authorities, the ECB for the regulatory status and the European Commission for antitrust, are on track with our initial plans. This concludes our presentation. Thank you for listening, and we are now to take any questions you may have.

[Operator Instructions] The first question comes from the line of James de Chastelain from Bank of America.

So the first one, I was just wondering if you could give us maybe a bit more outlook on what you expect in the second half on the expected car sales result per unit. I mean, obviously you mentioned there's still supply constraints, which are likely to push up the car sales result per unit, well above the EUR 2,000 mark. But I was wondering if you can maybe give us a bit more color on a broad range of what you expect in the second half and the full year results. And then my second question, in terms of high interest rate costs given the increasing interest rates around the world, what effect do you think this will have on the lease and contract margin? Are you able to pass these costs on in H2? And what are you hearing from your customers? Can we expect an impact on volumes? And will you be able to push these increased interest rates into your contract quotations?

Thank you, James, for the questions. Let me take the first one and then Gilles will answer your second question. So I think on the car sales, obviously the very strong results are based still on the supply situation -- well, supply and demand situation that is favorable. And as it has been said in the call here, we don't anticipate that to actually change dramatically over the year. So one of the reasons why you can say we are not guiding higher than the EUR 2,000 is as we explained the fact that obviously, some of these, let's say, extraordinary profit is now in our margins. And secondly, I guess we have seen that the results is plateauing at this point. We also start seeing that the demand side is less favorable. It has been the number of traders on our platforms is coming down still way above what it was in '21. But we see a kind of a cooling off on the demand side as well. So the thing is that when the new car sales will pick up, obviously we'll start seeing a strong supply of used cars to the market. And hence, the situation could normalize quicker than we anticipate at that point. But it's true to say and fair to say at this point, for 2022 we don't really see a big difference to where we are. So as I said, we do anticipate that above EUR 2,000 is high above EUR 2,000, let's say, for the rest of the year, for the full year 2022.

Yes. On the high interest rates, I mean broadly speaking, we are -- as you know, we are -- our policy is to consider interest rates as a technical cost. So we've taken into account in the case of the subsidiaries. It's fair to say that when you have a month like June where we have increase every week, there is sometimes a time lag between the quotation and the real interest cost, but I mean nothing material. But it's not an obvious one because we, as Tim alluded earlier in the presentation, we need to update our pricing parameters on a more frequent basis. I mean you also take into account the competition and what they do. I mean, broadly speaking, I mean everybody is impacted on the same way. Interest rates rise are impacting everybody. So it will be embedded in the leasing going forward and it is for us at least anyway. Regarding the impact of the volumes, I mean you've seen we have a record order bank. We still have a strong commercial dynamics. People are more concerned about the supply chain and the shortage of cars and the delivery times. So we don't see any adverse impact for the time being. But if you combine the high interest rates potential and inflation on cars, I mean this -- we've always said that this could drive some -- of course, some adverse impact on the volume that we don't see so far.

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

I've got a couple of questions. First of all, congratulations, gentlemen, for yet another strong set of results. I've got a couple of questions. Maybe I'll kick off with -- my first one is on Slide 6, you mentioned that you are more frequently adjusting the pricing of the new contract, which is largely a function of inflation. And then there is an interesting point you made that this is underpinning the future used car sales results. Could you maybe provide some more color on the -- on how the whole equation works and what sort of impact will this have in the medium term for the used car sales results. That's my first question. I'll follow up to the neck after this.

Thanks a lot for the question. Yes, so I think in this environment with inflation, you know that we lock in the prices for our customers when we actually sign the contract. So you have a budget basic, yes, fixed budget for the service, maintenance, tires, of course the interest rate. And as we also mentioned on interest rates, we actually hedge everything there, so there's no risk there. On the other parameters in terms of inflation, in terms of tires and maintenance, of course that has to be reflected in the quote as well. And hence, we now adjust our quotations much more frequently than we had to do in the past. We have had pretty much 15 years without any kind of inflation, very low inflation. And of course, we have to make sure that we reflect that. So you could say that on the existing contracts, we do have a risk on the service and maintenance and entire margins there. Obviously, we use all our procurement power to ensure that obviously it has the minimal impact, but there is a risk there on that. And hence, what we're saying in a high inflation, let's say, regime, it has a positive impact on the used car sales that typically offsets any kind of negatives on the margins on the service side because obviously with a high inflation, we know from countries where we are, where there have been a high inflation that it's quite positive for the used car sales overall. So for us, we see the equation being quite neutral at the end of the day, if you take the contract margins and the used car sales overall. I hope that gives you -- I could answer to that.

So yes. No, that is clear. So in a nutshell, inflationary environment is positive for you. Is that a correct read on this? Because you can increase the prices on the new contract and also you benefit on the used car pricing.

Yes, exactly. I mean, we even have in our contract in some countries that if inflation goes above a certain level, we can actually recalculate the contracts. Now based on where the used car sales is today, we don't do that because we also want to protect our commercial relationship with our customers. What we actually do have in the contracts in quite a few countries an opportunity to actually change the contract if inflation goes above a certain level. But clearly for the future, we build in the expected inflation. And hence, we do believe we are well positioned there for all the future business.

My next one is on ALD Move, congratulations for the launch. Could you maybe provide some color on the subscription prices that is what basically the subscription does it cost, like for a month to a user? And more importantly, what sort of penetration you are expecting for this in the medium term? If any color on the uptake, how the response has been so far, et cetera.

Yes. So we have John Saffrett with us as well. So, John, do you want to answer that?

Yes, thank you, Tim. Thank you, Sanjay, for the question. I mean, firstly, we should understand ALD Moved very early in its life. And it's one of the areas where when we shared our Move 2025 plan back in November '20, we said we wanted to start building some muscle and foundation to address some of those emerging mobility trends such as mobility as a service and subscription. The pricing can vary depending on the offer that the user takes. The pricing also varies depending on the structure of the product. So sometimes it's linked to a corporate mobility budget which is allocated to employees, which provides access to a limited range of services and a limited range of sustainability mobility options. And sometimes there's a more wide-ranging budget encompassing the car leasing budget as well. So it does vary from company to company. It's too early to really talk about penetration numbers. As Tim said, it's a product that, in theory, could be made available to 100% of the employees of corporates and corporates more grappling with this sustainability challenge and employ mobility as a key contributor to achieving those objectives. So that's why we've developed it and built it. It's too early really to understand what we think a normal penetration would look like in a large corporate going forward. We've had lots of good interest from some large corporates in France and in fact, in other countries who are interested in taking on the platform. And we'll keep you updated as the number of contracts improved over a period of time. But so far, so good, but very early. And we wouldn't want to provide you with any more specific detail on it at this stage.

So if I understood this correctly, this is still going to be margin accretive, right? So this is not like an add-on service that you provide to your existing customers, but this does come at a cost and hedge to the margins. Is that right?

Yes, this is an incremental product. There's a lot of talk sometimes about how cars will be replaced by mobility budgets. And I think most of the regional studies on that indicate that that will be a timely minority of the company car fleet will transition into mobility budget management. What will happen is corporates will become more focused on the rest of the employees and the way the rest of those employees complete their work, travel and their mobility, travel around cities, around urban centers, and they'll be focused on making that sustainable as possible. So we see this as an incremental product, which we can offer to the noncompany car employees primarily.