Ayvens (AYV) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining the Ayvens First Quarter 2024 Results Conference Call. Today's speakers will be Mr. Tim Albertsen, CEO; and Mr. Patrick Sommelet, Deputy CEO and Group CFO of Events. [Operator Instructions] I now hand you over to Mr. Tim Albertsen. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to this Ayvens Q1 2024 Results Conference Call. I'm hosting this call with Patrick Sommelet. And as always, we'll provide more details on our trading statement issued this morning. First, I will present the highlights of Q1, then Patrick will comment on our financial results. And then as always, we'll take your questions after that. Let's go straight to Slide 5. Even started 2024 on a positive note in several aspects, which I will comment on today. In a mixed economic environment where demand slowed, we recorded good Q1 2024 financial results and a clear upturn on the previous quarter despite the weakening of the electro vehicles used car markets. Our Q1 performance is promising. It reflects the solidity of our business model as well as our agility and our capacity to swiftly implement our strategic road map. You remember that our underlying margins had eroded last year. Q1, our margin stabilized at 522 bps of our earning assets, and we registered substantial synergies from the lease plan acquisition in our P&L. We recorded underlying used car sales results per unit at EUR 1,661 stable versus the previous quarter and still at a high level. This translated into our used car sales profit of EUR 95 million this quarter. Our net income group share reached EUR 188 million, and our return on tangible equity stood at 9.6%. Our capital position remains solid, with a core Tier 1 ratio at 12.3% as of March 31, 2024. We are well advanced in our funding program. We issued EUR 2.7 billion of bonds during Q1, which means we have already achieved around 2/3 of our annual program. We also further successfully diversified our investor base and currencies. Let's now move to Page 6 on the progress of the integration. We made tremendous progress in the integration in Q1, we reached a few key milestones which paved the way for value creation. First, we obtained the regulatory approval from the European Central Bank to proceed with the merger and streamlining of our operations. This approval allows us to start the merger of legal entities, and we are now implementing our target operating model locally and centrally. And we have launched the IT integration expected to stretch well into 2025. This enables us to efficiently execute our road map and generate our cost synergies. Our transformation is well underway. Our Ayvens brand continues to be deployed in our local markets, and we already relocated our offices in 5 countries. Another key achievement is the rollout of Avon's car market, which combines ALD and lease plan remarketing capabilities in a single state-of-the-art digital application. This remarketing platform is the most powerful platform targeting traders and car dealers in Europe. Ayvens car market is instrumental in optimizing and broadening our secondary market opportunities. Scale definitely matters in this field. The enhanced catalog underpinned by the most innovative functionalities, is one of the largest in euro. In Q1, we sold 93,000 cars to Ayvens car market, out of a total of 152,000 cars. This compares to a quarterly average of 60,000 last year. Ayvens car market definitely boosted our efficiency. The number of bids per vehicle increased by 31% in Q1 compared to the 2023 monthly average. And this helped us to optimize our resale prices. And thanks to the last geographical footprint, we exported 23,000 vehicles in Q1, thus balance the trends in each of our used car markets. Finally, we registered substantial synergies from the lease plan acquisition in our P&L. With our new scale, we buy more efficiently. Most of the EUR 20 million synergies materializing in Q1 income statement came from procurement, but other synergy streams, such as insurance, also contributed, showcasing the power of our scale. We are on track to achieve the EUR 120 million of pretax P&L synergies over the full year. In March 24, Ayvens and Silence signed a framework agreement for the provision of up to 500,000 vehicles across Europe over a 3-year period. This is an unprecedented agreement in our industry. And thanks to this flexible agreement with one of the world's leading automakers, we ensure our competitive pricing for our clients, we enhance our capacity to leverage on our new scale and buying power to achieve better value for and synergies for all our stakeholders. Let's have a look at our activity on Page 7. Our earning assets increased by a dynamic 12.5% year-on-year on a like-for-like basis to EUR 52.7 billion. The growth pace slightly decelerated compared to last quarter, which was at 14.2%. It reflects our strategy to allocate resources to sustainable and long-term profitability contracts rather than volume. I would like to highlight that this is fully in line with our financial trajectory to 26%. Our total fleet increased by 1.1% year-on-year on a like-for-like basis. In Fleet Management, the number of contracts was down by 3.4% compared to March 23. This decrease results in the decision not to renew some contracts which did not meet our profitability criteria. Conversely, the funded fee continued to grow at 2.4% and on a year-on-year basis. We achieved an EV penetration of 36% in Q1, stable versus the full year '23. And battery EV penetration was 22% and plug-in hybrids, a penetration of 14%. Let me now hand over to Patrick, who will take you through our financial results.

Thank you, Tim, and good morning, ladies and gentlemen. I will start with an overview of our Q1 24 results on Page 9. So in the mixed economic environment still, Event recorded a clear turn in the previous quarter, driven by the stabilization of our underlying margins and higher used car sales result contribution. And on top of that nonrecurring items were more limited this quarter than the quarter before. LeasePlan was consolidated since 22nd of May 23, so was not contributed in Q1 '23, but not directly comparable. We present on this page a sequential view of our quarterly results. These figures are reported figures with the impact of PPA attributed to each quarter since acquisition closing instead of Q4 '23 only. Our revenues, gross operating income stood at EUR 82 million in Q1 '24, it is up by 9.6% compared to Q1 '23 and 32.2% compared to Q4 '23. The short turnaround compared to Q4 can be seen in both our margins and our Cardon. The margin right is achieved, thanks to the stabilization of our underlying margins and the materialization in our P&L of our first synergy with lease plan. In this quarter, we had a limited impact from nonrecurring items contrary to previous quarters. The contribution of UCS results was EUR 95 million in Q1 '24. It's lower than Q1 '23, which was exceptionally high, but higher than in Q4 '24, I explain why in a couple of minutes. Operating expenses reduced compared to Q4 '23, which is mostly explained by lower cost to achieve, they stand at EUR 49 million. Adjusted for UCS, nonrecurring item and PPA, our cost-to-income ratio slightly improved quarter-on-quarter to 67.7%. Our cost of risk remained benign at 25 basis points. And as a result, our net income group share stood at EUR 288 million, down 40% compared to Q1 '23, which was a very high base, but sharply up versus Q4 '23, which was at EUR 28.2 million. On Page 10, let me give you more detail on the stabilization of underearning margin. Our leasing and service margin stood at EUR 77 million in Q1 '24. It is up 30% compared to Q1 '23, as this plant was not consolidated in Q1 last year. Our margins are also up by 16% compared to Q4 '23, which included Lisa. Underlying margin, meaning margin, excluding nonrecurring items and impact of PPA progressed by 3.7% versus Q4 '23 and express as a percentage of average earning assets, our underlying margin stabilized at 522 basis points versus 515 in Q4 '24. As Tim mentioned, we recorded EUR 20 million synergies, mostly from procurement and insurance. The impact of nonrecurring items and PPA was limited and is shown on the slide, it's certainly lower than previous quarter, standing at EUR 24 million versus EUR 194 million in Q1, '23 and minus 50 in Q4 '23. This is mainly because we had a limited amount of fleet rebate reduction in depreciation cost this quarter in a normalizing used car market. It stands at plus EUR 17 million compared to plus EUR 174 million in Q1 '23 and plus 17% in Q4 '23, mark-to-market of derivatives, which had significantly impacted our margin in Q3 and Q4 was limited in Q1 '24 at EUR 10 million. Interest rate movements were less brutal than those previous quarters. And as we had indicated, our actions to reduce the sensitivity of our hedging portfolio, both fruit. If we now turn to Page 11 on UCS. You see that we reported EUR 95 million U.K. profit in our revenues, the contribution post accounting impacts on 150,000 cars sold. I remind that the used car market in Q1 23 was exceptionally favorable. The situation in Q1 '24 was stable versus Q4 '23. And as you can see from the graph in the middle, the used car market is normalizing from its peak, and the normalization is going on. Excluding the impact of previous reduction in depreciation costs and PPA, UCS profit was EUR 661 per unit in Q1 24 versus EUR 3102 in Q1 '23. Quarter-on-quarter, the results per unit is almost stable, as you can see from the line in yellow. On a reported basis, the results per unit is sharply improving from minus 24 units in Q4 '23 to positive 626 in Q1 '24. The evolution is mainly explained by the impact of previous reduction in depreciation cost, which was minus EUR 191 million in Q4 '23 compared to minus 90 million in Q1 '24. We will now comment on the next page on operating expenses, which are down quarter-on-quarter by minus 5.6%. So the evolution is explained by lower nonrecurring item in Q1 24, EUR 27 million versus EUR 66 million in '23 that's due to the decline in cost to achieve from EUR 45 million to EUR 26 million, while rebranding costs and transaction were almost -- were down by almost EUR 20 million quarter-on-quarter. As I mentioned, cost to income, excluding nonrecurring items, slightly improved from 68.4% to 67.7% in Q1 '24. With no comment on net income and the cost of risk on the next page. So cost of risk is up to EUR 43 million. So it's an increase of EUR 9 million compared to Q4 '23. It is mainly explained by the alignment of this plant to ALD provisioning methodology, expressed as a percentage of average owning assets at cost of risk remained benign at 25 basis points. effective rate -- effective tax rate is standing at 31.3% on the quarter. It's mainly the -- maybe above average level is mainly explained by nondeductible expenses related to hyperinflation accounting in our subsidiaries in Turkey. Net income group share reached EUR 180 million in Q1 '24, a short round versus Q4 '23, thanks to, as we said, stabilization of margin, materialization of our first synergy in our P&L with Fiesta and the more impact of nonrecurring items in our UCS profit. On the next slide, you see the evolution of risk-weighted assets. So the increase from EUR 57.4 billion to EUR 59 billion in the first quarter. So it's a combined impact of EUR 1 billion, which is related to fee growth, minus EUR 0.4 million, which is related to the reduction in order book. There was the annual update in operational risk computation in the life plan perimeter, which is explaining 0.4. And there's 0.6 million, which is a mix, EUR 0.6 billion impact, which is a mix of both market risk impact related to the equity in our non-euro subsidiaries, mainly the impact in the U.K., but also in Denmark with a capital increase in this country. And also the increase of cash balance, having done a significant part of our cash debt issuance, we have a comfortable cash balance for the rest of the year. As a result, CET1 ratio is standing at 12.3% at the end of March 24, it was 12.5% at the end of December. And our strong capital ratio is around 210 basis points above the rotary requirements. This concludes our presentation. Thank you for listening, and we are now ready to take any questions you may have.

This is the conference operator. We will now begin the session telephone to remove yourself ever when asking questions at this time. The first question is from Geoffroy Michalet with BHF. The next question is from Sanjay Bhagwani with Citi.

I have got 3 questions. My first one is on the underlying margins, excluding UCS results. So thinking of this line item going forward for the rest of the year, how should we think of this, excluding any synergies given that if I recollect correctly, you have been renegotiating some of the contracts to reprice it for higher interest rates and higher inflation. So is it fair to assume that this is now what we have in quarter 1 is the low point and it sees a progressive improvement going into the rest of the year? That is my perception. And I'll just follow up with the next one, if that is okay.

Well, thank you Sanjay. Well, to a question on margins. And so I think what is important to state is that there has been a lot of work done to reset the margin on the business side. So basically, running through our customer portfolio and partner portfolio and ensuring that we basically, let's say, serve the right clients and at the right price. So part of that is definitely sustainable. And anticipate it to continue, of course, going forward, and we are not finished. We continue actually that work. We think there is more to do and more to be done. But of course, there's a few items and maybe Patrick, you can give a few items that could still introduce a bit of volatility on the margin side.

Yes. So as you said, there has been a very intense work over the past 3 quarters to look at margin in details and to see whether the impact of the new economic environment was appropriately taken into account in our margin. So it's fair to say that this is having the first fruit. We intend to indeed stabilize the margin and probably have action thereafter to expand them. So there can still be an impact of nonrecurring items related to the mark-to-market of the swaps. Even if we have decreased the volatility and as you can see, the volatility is included in our appendices, it has decreased depending on the level of interest rates. You can have a bit of volatility. And on the underlying, I would say the stabilization is more taking place currently on the leasing margin. The service margin is still impacted by high inflation. As you know, inflation is slowing down now main street inflation, but auto component inflation remains relatively high. We believe that this will progressively run down for the year, but this remains to be confirmed in the next month as the economic environment becomes more stable probably.

That is very, very helpful. And second one on the follow-up to that is that now that you are on the top line side, you are prioritizing the customers which are more profitable, as you can see already in the services or the fleet mania number of contracts. So are you thinking of any actions to move towards the cost side of the equation as well in terms of optimizing the cost structure further, keeping in mind that new customer mix in mind? That's my second question.

Yes. I think, Sandy, I mean, we have also -- we have taken quite a strong, ambitious target for '24. As you know, on the cost line. We anticipate to bring the cost down compared to excluding the cost to achieve. And of course, we are taking actions there. And as you can see from the first quarter, we see also the first fruit of that. It's not fully implemented yet. But clearly, the redressing of the business also includes, of course, the cost to serve and the cost to serve the different segments. Now we do anticipate that we will eventually start seeing growth again probably from next year to a more large extent. But where we think the growth should be, which is, let's say, targeting right segments, customers, partners and so forth. But obviously, I think we have taken a strong, ambitious target for '24, which is being implemented as we speak on the cost side as well.

That is very helpful. So if the target for the full year if you have the lower operating cost underlying basis versus the previous year...

But for the full year... For the full year, we have given a cost income target, which we confirm, which is 65% to 67%, excluding CTA.

That's very helpful. And just a final one on the tax rate. So Q1 '19 mentioned there are some nondeductible debt expenses, which spike the effective tax rate in Q1. How should we think of this tax rate for the rest of the year, please?

Well, as you know, this quarter, it has been impacted by a very specific hyperinflation accounting in Turkey. So it's really difficult to be very specific on that as a prediction. We intend that it should remain approximately around the same level, again, depending on the evolution of main street inflation and car index inflation in Turkey. Which are volatile items by nature.

So basically activate more towards for the full year, more towards still between 30%, 70%, 29% or it could be higher?