Analysis of McLaren’s 1st Half 2023 Results

McLaren released their 1^st half 2023 results this past week. At a very high level, the story it tells is one of hope but with some concern remaining. There has been a considerable amount of progress made on getting the business turned around but it’s still not health. McLaren’s owners continue to be supportive as the recapitalization process is on-going. Most of the sins of the past appear to be behind McLaren now and it’s clear that they have learned from their prior missteps. It’s a business in transition that is having to balance “surviving today” in order to hopefully “thrive tomorrow”.

As McLaren is a private company, it does not host an earnings call so I didn’t have the opportunity to gather any additional insights from Executive Chairman Paul Walsh or McLaren Automotive CEO Michael Leiters comments. The last time we heard publicly from Leiters was back in May at the Financial Times, Financial Future of the Car Event in London (Supercar Trio). A few key points Leiter made then:

he has confidence in the business plan and it has strong shareholder support.
he was hoping to have the new capital structure in place in a month (i.e end of June).
Despite Leiters’ coming from Ferrari, he was very clear he had no intention on trying to copy Ferrari, very clear about the need to stick to McLaren’s DNA.
Leiters sees a future for ICE in the McLaren portfolio but believes the majority of the portfolio will likely be hybrid in the next 5 years.
EV is further out (if ever). In fact, it was pretty clear that Leiter’s is not sold on EV as a powertrain solution for Supercars given both the weight and lack of emotion.
While not outright committing to doing a SUV, Leiters strongly hinted that it is highly likely that at a minimum, McLaren will introduce a 4 seater.
While stating that an IPO is not currently on the agenda, before that can even be considered McLaren needs to become profitable.

Which all seems consistent with the latest results release.

Key Performance Highlights

Cars wholesaled increased by 52% to 1,292 vs. 1^st half 2022, while revenue was up 8%. The delta between the units sold and revenue was due to a major mix shift from 765LT, 720S, and Elva in the 1^st half of 2022 to mostly Artura & GT in the 1^st half of 2023. As McLaren dealers today hold little to no new car inventory, wholesales and retails are on par. Mix will be richer in the 2^nd half of 2023 as Solus & 750S deliveries start. EBITDA swung -£50 mil. from a -£25 mil. in 1^st half 2022 to -£75 mil. in 1^st half 2023. Cash was up £67 mil. to £77 mil. An additional £220 mil. of new equity was injected in the 1^st half of 2023 with a further £85 mil. in July 2023 for a total of £305 mil. year to date. Net debt was down £83 mil. to £437 mil. The order book sat at 1,581 as of the end of June and now stretches into 2024. CAPEX was up 38% to £95 mil. in the 1^st half.

The story the numbers paint is of a supercar company in the midst of a major transition. Operating cash flow is still quite negative at -£130 mil. yet gross and net debt are down, CAPEX spending is up and the McLaren’s owners continue to pump money into the company as needed. In addition, Leiters’ has been quietly building his management team, both bringing in, and bringing back talent. Right now, it looks like McLaren will probably ship 2,500-2,800 units this year as it rebuilds its base supercar business post the COVID implosion.

Capital Structure, CAPEX, & Debt: Back in May Leiters stated that he hoped the new capital structure would be in place by the end of the 1^st half. I’m not surprised that it’s taken a bit longer than expected. The sums of money involved are enormous and most of it will most likely need to come from McLaren’s largest shareholder, Mumtalakat, the Bahraini Sovereign Wealth Fund. As part of the recapitalization process, Mumtalakat, has already taken steps to simplify the shareholder structure. In June they spent $510 mil. to buy out Saudi Arabia’s Public Investment Fund (PIF) and Ares Management. McLaren’s shareholders do seem to be fully committed to the business as they have already injected £305 mil. into the company this year. This cash injection has allowed McLaren to begin investing more aggressively in future models as CAPEX is up 38% in the 1st half of the year. While McLaren’s CAPEX spending trails Ferrari significantly on an absolute basis, on a unit basis it is over 150%. In terms of debt, on both a gross and net basis debt is down. Interest costs on the debt are about £42 mil. annually which should be quite manageable once volumes pick up. In addition, McLaren’s shareholders clearly have the financial ability to retire the debt at any point in time. Last year, Mumtalakat’s CEO indicated that he expected to IPO McLaren in 2-3 years, per Leiter’s comments in May, that clearly not on the current agenda and I would expect it to be at least 5 years out.

Portfolio: McLaren’s current portfolio is the simplest it’s been since the 650S launch and the longer term vision appears to be still very much a work in progress.. It currently consists of the Solus track only hypercar, 750S supercar, Artura supercar, and the GT. All 25 units of the Solus are long sold out and it will bring in needed cash at a high margin as deliveries stretch over the next 18 months. McLaren’s first production series hybrid, the Artura, has had a difficult birth to say the least but it appears that all the problems are now finally behind it. I give both Leiters and McLaren a huge amount of credit for not shipping cars that had potential issues. It is also a very visible demonstration of McLaren’s commitment to quality today. It’s doubtful the prior regime would have made the decision to hold shipments. The drama around the Artura’s birth is too bad as it is a terrific car (4 Days with the Artura). Now that all the Artura’s development issues are resolved, I would expect we will see a Spider version in the next 12 months. The 750S has been well received and is sold out well into 2024. As the 750S is all proven tech, the production start up should go smoothly. The 750S will also provide a solid bridge until the 7XX series replacement is ready in a few years. The 7XX series replacement along with the P1 successor will be the first of the truly “Leiters” era McLarens and the future of the company will hinge on their success. Going forward, McLaren not only needs to build great cars, but they need to get the marketing and positioning right. Both the Speedtail and Elva were misses. The car Gordon Murray is building, the T.50, is much closer to what the Speedtail should have been than what rolled of the production floor in Woking. On the Elva, they got the car right, it is spectacular to drive, but all the marketing was focused around it not having a windscreen and its actual capabilities got lost (Driving the Elva). While McLaren is still selling the GT, its fairly long in the tooth now and I would expect it will be phased out in 2024 as 750S and Artura volumes pick up. A four seater or SUV, if it happens at all, is still a long way out. EV was not mentioned in any of the 1^sthalf 2023 materials and I doubt we will see a McLaren EV this decade.

Racing: While the F1 team had a rather horrendous start to the season, the latest round of car upgrades have worked spectacularly well. In the first 8 races of the season, both McLaren drivers could normally be found in the bottom 10. Since then, Lando Norris has been on the podium twice, and both drivers are now regularly in the top 10 finishers. McLaren now sits 5^th in the Constructors Championship and has a chance of catching Ferrari for 4^th before year end if they can continue to improve. A fourth place finish in the F1 Constructor’s Championship should result in McLaren Racing being a net positive contributor to the McLaren Group’s bottom line in 2024.

Summary

McLaren today is a completely different company than McLaren circa 2019. Gone are the days of over production, dealer loading, and heavy discounting to move stock. While it is still today, and has been for the last several years, surviving due to the generosity of its owners, it has started to take concrete steps to return the business to health. The 52% increase in cars shipped in the 1^st half is a solid indication that underlying demand for McLarens remains healthy. The commitment to quality, as demonstrated by the way the Artura launch has been handled, will pay significant dividends in the long run. Overall McLaren’s management team is making much better long term decisions today than they have in the past. While not a fully new model, the 750S is step in the right direction and buys needed development time for the next generation. Getting the Recapitalization done will be job one for the year to go.