Ayvens (AYV) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining the ALD First Quarter 2023 Results Presentation. The speakers today will be Mr. Tim Albertsen, CEO; and Mr. Gilles Momper, as CFO. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Tim Albertsen. Please go ahead, sir.

Thank you. Yes. Good morning, ladies and gentlemen. And welcome to this ALD Q1 2023 Trading Update Call. First of all, thank you for joining us. And secondly, sorry, my voice is not very good this morning. So you have to bear with me. I will start with a few highlights of Q1, where ALD recorded an outstanding performance in many aspects. Gill will comment on our strong financial results in more detail. And then we'll, of course, as always, take your questions right after. Let's go directly to Slide 3. First, let's take a look at the events that shaped our first quarter. ALD had a very good start to the year, strong commercial and financial performances as we'll be describing in a few minutes. During the first quarter, we launched new initiatives to strengthen our leadership in sustainable mobility and further support EV penetration in all our markets. We'll hold our extraordinary general meeting on the 22nd of May to approve the acquisition of LeasePlan, which we expect to close on the same day. ALD will be -- will switch to regulatory status, and we will launch the execution of our plan to integrate LeasePlan immediately after closing. We have completed the disposal of our activities in Russia and at the same time, we are expanding our international footprint through a new joint venture in Thailand, together with Mitsubishi. With this partnership, which will be followed by others in the Southeast Asian region, we are combining our clients, and we'll be able to capture the high-growth potential of these markets. Now let's move to Slide 5 and our strong Q1 performance. In line with our expectations, the new car market is normalizing gradually. Logistics change remained quite disrupted and therefore, delays in car supply persisted. Nevertheless, the production of new cars picked up strongly at the end of Q1. Against this backdrop, our funded fee grew by 3.2% on a like-for-like basis. Excluding the entities held for sale, Russia, Belarus and the remedy entities in Portugal, Ireland and Norway. ALD continued to benefit from the extremely favorable supply-demand situation in the used car markets. Our used car sales resource per unit came in at EUR 2,535. Without the impact of the reduction in depreciation cost registered in '22, it would actually have been at EUR 3,102 which means stable versus last year. Finally, we achieved a tremendous financial performance with a net income of EUR 316 million, an increase of 22% compared to Q1 '22. Let's now go to Slide 6, where I will comment on our new initiatives to strengthen our leadership in electrification. Thanks to the new initiative launched in Q1, ALD reinforced our competitive position in sustainable mobility and further promoted the transition to EVs. Through a new joint venture with our partner, ChargePoint, a leading electric vehicle charging network. We are creating a new EV charging business to accelerate the transition to electrification and generate new margins. We'll provide access to Europe's widest public charging network with 517,000 charging points, offering a cutting-edge app designed to address the evolving needs of our clients. To drivers, we will offer solutions to charge at home, in the office and on the road. So fleet managers will provide a single monitoring dashboard to manage their carbon footprint as well as manage their costs. This offering will be rolled out across Europe by the end of this year. We also signed a USD 400 million facility with the IFC in February, paving the way for further reduction in carbon emissions and transport by accelerating the adoption on penetration of green vehicles. ALD will help to put 15,000 green vehicles on the road in a number of emerging countries with the objective of reducing carbon emissions by more than 22,000 tons a year. Let's now go to Slide 7 on our robust commercial performance. In the context I described earlier, our funded fleet reached 1.423 million vehicles, up by 3.2% versus Q1 '22 on a like-for-like basis. Fleet Management grew by a high 13.8% compared to March 2022, underpinned by a new strong banking partnership. With more than 1.8 million vehicles, our total fleet was up by plus 5% compared to a year ago. Our order bank remained at a high level in Q1. We have recorded an outstanding performance in terms of electrification with our EV penetration reaching 29% in Q1 in Europe. We maintain our leading position being much ahead of the market, with EV penetration only at 20% in Europe. I'm confident that ALD will continue to outperform the market as our clients' demand for electrification remains very strong. And EVs account for 1/3 of our order book today. Let me now hand over to Gilles, who will comment on our financial results in more detail.

Yes. Thank you, Tim, and good morning. I'll start with our margins on Slide 9. Our total margins reached EUR 541 million, up 63% compared to last year. But of course, this is underpinned by this quarter, again, some exceptional elements. I will start with the depreciation adjustments, which is significant again this quarter. As you recall, we have started to stop amortizing most of our vehicles when their net book value are well below the expected used car prices. You remember that the initial adjustments have been made back in Q2 2022. And since then, we had review our assumptions in Q2 2022 based on a more optimistic view on future used car prices. And this depreciation adjustment calculations recorded in Q1 is still based on our last fleet revaluation exercise that we performed in H2 2022, which is also assuming a softening of the car market within the next 12 months. This depreciation adjustment is leading us to recognize EUR 163 million of positive contribution to the contract leasing margin in Q1. The other nonoperating items amounted to a positive EUR 30 million this quarter on our leasing contract margin and this embeds 2 main items: a further EUR 18.5 million for hyperinflation in Turkey and an EUR 11.6 million positive fleet revaluation movement. Last year, in Q1, these nonoperating items totaled minus EUR 15 million, of which EUR 27 million, as you can -- you may remember, provisions for Ukraine at the time and EUR 12.5 million of positive fleet revaluation. So excluding the impact of reduction in depreciation costs and these nonoperating items, our total margins were stable when compared to Q1 last year. So compared to last year, again, our leasing margin was impacted by the delays in deliveries of new cars while interest rates were strongly increasing. The duration of our contracts have been extended until our clients got their new cars being delivered. The monthly billing to our customer remains based on the initial contract terms. But of course, we need to extend our funding based on new market interest rates, which have been increasing steadily during last year. So conversely, of this negative impact on the leasing contract margin. The longer we keep the vehicle, the better it is for the used car sales margins as we keep charging our customer the contractual monthly depreciation charge. Services margins were up 9% compared to last year, and this is really underpinned by the increase in our total contracts which is 5% compared to last year, including fleet management contracts and Flex products. Let's now move to Slide 10 and have a look at the used car sales results. EUR 191 million in Q1 '23. So the contribution from used car sales results remained at a high level, reflecting the ongoing favorable supply-demand situation and these results include the negative impact from the reduction in depreciation costs that we have recorded in 2022. And the impact amounts to a negative EUR 43 million this quarter. Without the reduction in depreciation costs in 2022, our used car sales results would have reached EUR 3,102 per unit in Q1 2023. And it would have been stable compared to the very high level achieved in Q3 and Q4 last year. So we sold 75,000 cars in Q1 '23 compared to 69,000 last year, same quarter. The increase is mainly due to the improved dynamics in car deliveries, showing a slight improvement in delivery time. So with that, the total ALD gross operating income reached EUR 732 million this quarter, up 12% compared to last year. So let's go now on Slide 11. On our operating expenses came in at EUR 260 million in Q1, and this amount includes integration costs of EUR 38 million, transaction costs in relation to the LeasePlan transaction, but also to the disposal of ALD Russia and remedies entities for a total amount of EUR 12 million. And there is also a scope effect of EUR 7 million as we integrated BanSabadell, Fleetpool and Ford Fleet Management in U.K. in the course of last year. Our operating expense base is also impacted by the costs in relation to the upcoming change in regulatory status as we have completed the program to become a Financial Holding Company and we have put in place new teams to be able to comply with our new ECB requirements. The cost of risk remained at a low level at EUR 8.8 million overall stable compared to last year. When we recorded EUR 7.9 million impairment charges on receivables. We registered this quarter an impairment on the net book value of our entities in Russia and Belarus for EUR 21 million in Q1 in addition to the EUR 51 million recorded in Q4 2022. So the disposal of ALD Russia was completed in April as we have received clearance from the local Russian authorities. So the completion of the sale of ALD Russia in April will still have some impacts in ALD's Q2 consolidated income statement. Two main impacts: the impairment on the net book value of ALD Russia for an additional EUR 6 million and the reclassification of the accumulated translation reserves into the income statement for EUR 72 million. So this reclassification of course, does not impact ALD shareholders' equity. The impairment of ALD Russia is a nontax deductible item. And of course, it has impacted our effective tax rate this quarter. And these nontax deductible item together with a higher tax rate in the U.K. lifted our effective tax rate to 28.4% compared to 26.2% in Q1 2022. So with all these elements, our net income group share reached a strong EUR 316 million, up 22% and a strong performance compared to Q1 2022. So this concludes our presentation. Thank you for listening, and Tim and I are now ready to take any questions you may have.

[Operator Instructions] The first question is from Horst Schneider with Bank of America.

The first question that I have is maybe a stupid one, I apologize. I enjoyed basically explanations on the year-on-year changes. Maybe you can explain the changes in the lease contract margin and services margin quarter-on-quarter. So I see that the services margin quarterly has -- the result has come down a little bit. I think in the lease contract margin, the reason why it's down sequentially is because there have been these changes in the reduction in depreciation costs. But correct me if I'm wrong, that would be my first question and the after I'll go on with the second one.

Yes. Thank you. I guess on the -- as I said during the presentation, the leasing contract margins compared to last year is impacted -- I don't know whether you recall, Horst, we also did a rebalancing of our discounts back in 2021 between -- they were impacting mostly our services margin and now there has been a rebalancing of these discounts in the leasing contract margin. And on top of that, as I explained during the comment, what are the impact us is the fact that we had long delivery times of our cars, which -- when the contracts are extended, of course, we need to continue to fund the car. And the funding, the cars which are -- which have terminated in Q1 2023 has been originated back in 2019 or 2020. and interest rates, which were not the same. But of course, as I also said in my comments, this is all good. This is all fine from a used car sales standpoint. And this is what is driven the trend on the leasing contract margin. On the services margin, maybe if you compare Q4 and Q1. In Q4, we had a the consolidation of Bansabadell and Fleetpool, which is -- which makes the comparison with the last quarter a bit , yes, clear.

Then coming back to the point that you mentioned regarding interest costs. Can you remind us maybe what is now the interest cost increase in percentage rate terms today versus a year ago. So in other words, what have you got to pass on to the customer now versus a year ago?

I mean we are -- you can calculate the implicit interest rates, when you look at our interest cost and the debt based on our December 2022. I mean, we've been impacted like any other banks or any other financial services on interest rates. The issue for us is more the delivery time. Usually, we have 2, 3 months. I mean pre-COVID, we had 2, 3 months of delivery time. Now we have been living since more than 1 year with 12 months and more [indiscernible] time, which is one, difficult to put in place the right funding. But again, overall P&L, this is all contributing nicely to the used car sales results. But again, we have been impacted like any other. So we need to pass on these interest rates increase in our pricing. It's what we do. But it's on the contracts which are terminating which is the most impactful, so to speak, because of course, 3, 4 years ago, we could not have anticipated that the cars would still be on the road 12 months more.

Okay. Got it. The other question that I have is basically coming back to an anecdote that I had recently with a carmaker. So I don't want to mention the name of the carmaker here. But basically, we discussed the pricing of this carmaker versus Tesla. Never saying, well, your prices are higher than Tesla Model 3, Model Y, you need to lower the prices. And then the carmaker said to me, no, Horst. That is not the case because we look at our lease rates, the leasing rate that we have is more attractive than compared to Tesla Model 3 and Model Y. And he said the reason for that is that they take more generous residual value assumptions. So I think the problem is then transferred towards the back end of the lease contract. But nevertheless, in that context, I want to ask you, when I hear you're speaking about higher EV penetration rates and associated residual value risks. How do you handle that? And then the second question is, what part of the funded fleet now is electric vehicles already?

Good. Thanks, Horst. Good question. I mean -- and I think it's a classic that you actually postponed the pain by putting high residuals in the market. So it's normally not a good practice in the long run. But -- so I would say, if you talk to the manufacturer again, you probably should try to tell that it's not the right way to do it. Anyhow, residual values on electric vehicles for us is not a big issue, but a big theme that we spend a lot of time on. First of all, I think we have said a few times, we have a particular task force working in our pricing department to try, first of all, to understand the technological development, making sure we are pinpointing the best technology constantly to our customers. Because, I mean, some years ago, it was autonomy. Now it's more about how fast can you charge your batteries. And of course, let's say, going from the driving experience to something. So that's one part of it. And then, of course, we look very much on the supply and demand situation where I would say we know that used EVs will be in terms of numbers, very small in the coming 3, 4, 5 years still. So clearly, a positive impact when we look at residual values for EVs on that particular part. And then, of course, we try to understand what will be the future price development of these cars be. And I mean, for the time being, the EVs we are selling, which is very small numbers are performing very well. It's mainly because of the, let's say, supply and demand situation, I guess, and also the fact that the inflation on EVs have been quite significant. But overall, I would say we anticipate an EV market, but obviously, there will be a fast technological development. But at the same time, there will be very few used EVs which means that we believe that the residuals are pretty much at the level of where our ICE cars are today. That's actually the level we have gotten to today pretty much in terms of a percentage of residual value with EVs. And then I think what we have done, we also talked about that in the previous quarters. We are developing very fast our second life lease capacity because we know that some of these electric vehicles will potentially not be necessarily super fit for sale. Because the technology is maybe not the newest, but we know that the usage of that car is still very valid because you can take it to the city. It's -- you're still obviously environmental friendly when you drive it and driver experience is good. So we believe that some of these cars and probably quite a lot of these cars have an option to go for a second round or third round of leasing. And also, we know that the sustainability of the electric vehicles is much better than ICE cars. So it's a bit difficult to see an ICE car going 3,000, 4,000, 5,000 kilometers. That's not a problem at least today with an EV from the experience we got. So we see those tasks much more minded for keeping them actually in our fleet 6, 7, 8 years, perhaps. And that's, of course, mitigating a lot the residual value risk we have in these cars.

What is the share of EVs in your funded fleet? You said -- I think you said it's very small, but could you put a number behind that or a rough number?

Yes. So just when we say EVs, we bundle fully lease and plug-in hybrid. And today, 13% of our funded fleet is EVs. So EVs, full EVs and plug-in hybrids. And I was actually in Q1, for the first time, the number of deliveries of full EVs is higher than plug-in hybrids. So it's another thing, I think, that's also important to understand in terms of residual values and the pricing development. There's a lot of subsidies in the market from different governments. So we know that the manufacturers will be trying to get the price point downwards. But as they do that, of course, the subsidies will start either disappearing or -- so again, the street price of an electric vehicle is somehow deemed to stay high. Even if the manufacturers can get the cost down from 30,000 to 25,000 due to the subsidies, you will not see that effect in the market at the end of the day. So that's also a part of our anticipation on that. But for the first time, we are delivering more full EVs than plug-in hybrids actually in Q1 here.

But when we look at the mix of the funded fleet on xEVs then basically more than 50% should be PHEV, just because corporate customers preferred also in the past, more PHEVs probably. Is that correct assumption?

Yes, I think it's actually a bit more because for a long time, it was like 1/3 full EVs and 2/3 plug-in hybrids. And you're right. Plug-in hybrids have been a kind of a technology that has bridged from an ICE car and the plug-in hybrids were also subsidized in many markets for quite a while. Now the governments have decided that a plug-in hybrid is not a green car at the end of the day, and they have removed those. So that's also one of the reasons why people now go full EV rather than a plug-in hybrid.

The next question is from Julien Onillon with Stifel.

My first question will come on the used car price and more specifically on your profit result by units sold that improved well, not significantly too much, but has, however, improved in Q1 compared to Q4. Excluding, of course, the depreciation adjustment. What is the reason for this improvement? Is it a price increase in the market? Was it a mix effect specific to yourselves? Is there any volumes effect. It is my first question and what you can -- and what's the outlook you are seeing for the Q2 or eventually Q3? Second question will be on the -- on your disposal of your remedies. You have disclosed the value of the assets in your books in annual results, in your annual report. Have you expecting have you a price now in mind and potential capital gain?

Okay. Thanks, Julien. Let me start by the first one then Gill will take you through the disposal countries. So I think, first of all, there is a seasonality when it comes to used cars. It's true that if you look at the last 2 years, it has been quite a specific environment. So we are not necessarily seeing the normal seasonality. But Typically, Q4 is typically the worst, let's say, quarter for selling used cars. A lot of the dealers do not want to have a big, let's say, part of their cars on the balance sheet at year-end. And obviously, people are not necessarily buying cars throughout the winter period. So Q1, Q4 is typically the worst quarter. So that's, I think, what we have seen. We are now back to a normal seasonality on the used car markets. So Q4 down and Q1 up. Our best quarters are typically Q2 and then normally a good quarter as well in Q3. So that's the normal seasonality, and that's what you have seen actually in the results here. So for the rest of '23, in terms of anticipation of the used car markets, I mean, the high inflation we have seen still have an impact. And in terms of the supply of used cars remains very low, actually, compared to pre-COVID. And hence, we anticipate that the used car market will remain strong for '23. Whether it's above EUR 3,000. I mean, that's still a question mark. But obviously, we remain a very good result. I think just, I mean, for information, EUR 3,000 of profit on a used car is absolutely exceptional. So these are numbers that clearly we do not anticipate going forward in the longer term. But we expect strong -- a very strong market for '23. And then, of course, a normalization over the coming years.

Yes. Regarding your second question, I mean, just to go back to what we disclosed back in December 2022. The assets held for sale was more than EUR 1 billion, but it includes not only our 3 remedy country. You remember on the remedies, there is 6 countries, 3, 4 ALD, 3 for LeasePlan, but also ALD Russia. So ALD Russia has been sold, the sale has been completed in Q2. But then the closing of the 6 remedy countries, I mean, we don't have a precise date in terms of closing, but we can expect that to happen Q2, Q3. And then we'll disclose more on the potential gains on those.

So you expect still -- you can expect a capital gain, however?

Yes.

The next question is from Kiri Vijayarajah with HSBC.

A couple of questions from my side. Firstly, it's a question is on AT1. Could you just remind us how much you had in mind in terms of the AT1 in your future capital stack? I know the total capital ratio is 16%. I think you really gave us a split between kind of AT1 and Tier 2 in that 400 basis points. And I ask because of all the turmoil in the AT1 market. Are you needing to maybe rethink the composition of that capital stack in any way, maybe at least in the short term, have to run with a bit more CET1 than you originally planned for. So just your thoughts on the AT1 side of things and kind of timing there? And then secondly, just coming back on to the costs related to the change in regulatory status. Could you just give us maybe elaborate a bit on how much those are and just confirm that they sound like they're recurring. I guess the reason I'm kind of asking is, you don't really flag these additional costs when you announced the LeasePlan deal last year or maybe I missed it. And two, I appreciate it's a bit late in the day now, but does it really make sense for you to have pushed for a banking license given that it seems to have been a bit of a headache, keeps adding these extra costs. Sounds like it's delayed the closing at the LeasePlan deal. And in some ways, it also links to my first question because if you didn't have the banking license, you wouldn't need to issue the AT1. So just your kind of thought that if you had the choice, I know you don't, but if you have a choice, would you prefer to stay with the old ALD nonbank model versus what you're working towards now?

Let me start maybe on the last one, and Gill will give you some more details on the cost levels for the regulatory stream and also give you input on the AT1 situation. So I mean you're right. I mean it's not really -- we don't really have a choice whether we want to become a regulated entity or not. And you're right, it's a complicated process. I think we have done a really, really good job. We started actually a project called Lilly back in mid-2021 when we anticipated to be able to announce the deal because we knew we needed much more time to actually get ready for that. So I think we are today in a good place on that particular part. But it's a big exercise to become regulated directly by the ECB. And -- but we are there. I think what -- I mean, when you look at this business after integration, Obviously, there's -- I mean there's some pluses definitely to becoming regulated entity. First of all, on our funding you will see that the ratings that we are having today will be improved quite substantially. Which obviously will give us access to new funding pools and more competitive funding. So it's true that there is a cost to getting there. There's also a kind of modus operandi that changes the business as such. But obviously, there is also pluses. And I then think in terms of the cost, and again, Gill will give you a bit more details, but LeasePlan is already a regulated entity. So it's regulated directly by ECB. And it means there is actually a cost insight LeasePlan who runs that regulation. And of course, you could say today, we have doubled the cost because we have to take the cost to become one. But over time, and it's part of the synergies, obviously, we would anticipate that we can scale down and, of course, not get to double of the cost of -- or the, let's say, the cost of the 2, but obviously, having a cluster. But I think it's important to state there is also some clear pluses. And again, when you look at the business and the size of the business going forward, it's for us, it seems completely normal that we will be regulated as a bank, and it will give us access, as I said, to funding in a very different manner than we have today. Gill, you want to add?

Yes. And regarding the costs, I mean there were -- I'm surely has been commenting them since last year. These costs have been somehow embedded in the LeasePlan related costs -- LeasePlan acquisition-related costs. We are in a specific situation just before the closing as we are still true separate company, and we had to implement on our side. We had to prove to the ECB that we are at the level of being a regulated entity. But of course, you can see these costs as then to be part of the synergies with LeasePlan. Of course, I mean, there has been a lot of work to be done, functional tests, technical tests to be able to report as a financial holding company. And this is what you see in our Q1 comps. But these costs, again, you would expect, as we've always said, LeasePlan is a regulated entity, and we would expect some synergies from. On the basis of the combination of these 2 cost base. Regarding your more precise question on the AT1 and Tier 2, I mean this has been disclosed in the URD and especially when we disclosed our pro forma accounts, and the amount remains at EUR 750 million for the AT1 to be issued and to be downstream by Societe Generale to us.