In an interview with CNBC in June 2023, Lawrence Stroll stated that “Aston Martin is on fire right now”. Stroll then followed up on the “On Fire” declaration in the July 1st half earnings by proclaiming the Aston Martin’s “Turnaround Was Complete”.
Aston Martin announced their Q3 2023 earnings this week. The earnings call was a fairly subdued affair. The number of financial analysts who now attend thee calls has dropped by nearly half in the last 2 years. Lawrence Stroll, AML’s Executive Chairman lead the call with CFO Doug Lafferty providing the financial overview. CEO Amedeo Felisa made a brief appearance to answer questions, but as usual it really was the Stroll Show and what was not said was as interesting as what was stated. Looking at the Q3 highlights:
AML’s Q3 Highlights
The Q3 highlights according to the Aston Martin press release are:
This all sounds wonderful. What they failed to mention but is buried in the results:
Based on the above, a Lawrence Stroll defined “Turnaround” includes dropping your annual volume target which in “Aston English” is a “marginally updated volume outlook” and “On Fire” refers to the continued cash burn. In more “Aston English” “extraordinary demand” is an order book that now stretches up to 5 months (on the DB12) and a “fulsome refinancing exercise during the first half of 2024” is another way of saying Aston Martin will need another major equity raise soon. All of this isn’t surprising given the declining quarter on quarter wholesales in three of the four regions. The “marginally updated volume outlook” is actually a 11.5% decrease in what had been the YTG expected volumes.
I would summarize this as a company lurching from crisis to crisis. Squaring the management’s statements with the results is an exercise in doctorate level creativity. It’s crystal clear at this point that the big bet on the DBX hasn’t worked, Q3 2023 DBX sales are down 7% vs. Q3 2022. What Aston Martin is selling to the financial markets is some vague hope that it is just about to get better. Coming into 2023, the outlook Aston provided was that the 1st half of the year was going to look very similar to the miserable 1st half of 2022 with the majority of the growth and improvements to the key financials coming in the 2nd half. Overall Aston delivered on the 1st and appears well on its way to missing on the 2nd.
The following covers highlights from the Q3 2023 Results, the Debt, & a few other areas of interest.
Starting with the Q3 results, which according to Lawrence Stroll’s quote in the press release:
“Our 110th anniversary year continues to be a fantastic one for the Company, and we are delighted with the strategic and financial progress we have made during the first nine months of 2023. Our volumes, pricing, gross margins and EBITDA are showing strong improvement, and we are delivering an accelerated industrial turnaround.”
It’s enough to make even Trump blush and doesn’t exactly square with what the number say:
Free Cash Flow
The fantastic year that Stroll references involves racking up -£260 mil. in pre tax losses for an average of -£59.5k per car wholesaled. In terms of financial progress, Stroll must be seeing something I am missing. Q3 2023 revenue is down vs. Q2 2023 and the growth Vs. Q3 2022 can almost all be attributed to the 12 additional Valkyries they shipped this quarter vs YAG. In fact, if you back the Valkyries out of the numbers, it all gets quite ugly pretty quickly. As we are entering the festive season, perhap Stroll should consider sending Christmas cards with a thank you note included to Andy Palmer & Adrian Newey for the Valkyrie. Given the Valkyrie is what’s driving the ASP growth, perhaps a Christmas Turkey should also be included.
Sometimes what isn’t said is as interesting as what is said in the earnings reports. For the first time in as far back as I can remember, Stroll didn’t once mention the “demand-led operating model”. The only comment that was in this area came from Lafferty who stated that “for the full year he is expecting retails across the portfolio to outstrip wholesales”. In 2022, AML increased the stock in dealerships by 442 vehicles and has likely been trying to work this down throughout 2023. I have heard from a few sources that at least in the Americas, AML is now offering dealers funding to help move DBXs off their rather packed forecourts (Lafferty dodged directly answering the question on the earnings call). These same sources indicated that dealer stock levels in the Americas now exceed where they were at the height of the prior regime. None of this is consistent with a “demand-led operating model” which is likely why Stroll has been forced to drop it. In terms of Lafferty expecting retails to outstrip wholesales, as the Rolling Stones once said “You can’t always get what you want, but if you try sometimes, you get what you need” and right now AML needs to wholesale 2,307 cars in Q4 2023 to hit the “marginally updated volume” target of 6,700. The year to date quarterly run rate is 1,466 cars wholesaled so 2,307 cars in Q4 is likely well ahead of “expected” demand so Aston Martin dealers will likely be very well stocked come January.
In the July Earnings Call, Lafferty’s Christmas wish was: “I really like to see us starting to flatten the profile and certainly start to see an end of you know Q4 being you know the sort of end of the hockey stick.” Given the need to ship 2,307 cars in Q4, Lafferty is back out on the ice stick in hand. My guess is at this rate, Lafferty will likely spend as much time holding a hockey stick as Gordie Howe.
Puff the Magic Dragon
Sounding a bit like General Cornwallis before the Battle of Yorktown, back in March Lafferty & Felisa stated:
Lafferty: “So, you are asking about liquidity level. Look, I think from our perspective, as I said, from a guidance point of view, I think we have given you the drivers of how we expect the guidance to work out this year. We obviously successfully completed quite a significant capital to raise during the course of last year. This year for us is all about execution. So, we have got to execute the plan. We have got to get to where we need to get to in the second half of the year. And if we do that, then I don’t have any liquidity concerns.”
Felisa: “I will pickup where Doug left off. But the answer is – we – as long as – Doug rightfully says, execute on the plan, we do not see any liquidity needs whatsoever.”
Net debt coming into 2023 stood at £765 mil. and today it’s at £750 mil. which would make it appear to be at least stable if it weren’t for the fact that AML raised £311 mil. in share sales this year. Basically, all that cash raised has burned through (which confirms Stroll’s comment in June on CNBC that Aston Martin is on fire). Going back to Lafferty’s and Felisa’s comments, it would appear AML might not have executed on the plan as Lafferty has now stated that a:
“fulsome refinancing exercise during the first half of 2024”
The use of the word fulsome is quite interesting as the Cambridge Dictionary defines it as:
“expressing a lot of admiration or praise for someone, often too much, in a way that does not sound sincere”
Which should make for a very interesting refinancing exercise come 2024.
Looking at a few areas of interest in a bit more detail:
Per Stroll’s comments in the earnings release:
“The launch of the DB12, which has seen extraordinary demand, is driving a reappraisal of Aston Martin amongst new audiences, with 55% of initial DB12 customers new to the brand”
Which is an awful lot of weight to put on the shoulders of what’s basically a facelifted DB11 with a new infotainment system/user interface. So how has this all worked out? Well so far the DB12 is being 100% blamed for the “marginally updated volume outlook” and AML is pointing the finger at “supplier readiness” and “software integration”:.
Per the Press Release:
“The DB12 production ramp up was temporarily affected as supplier readiness and integration of the new EE platform that supports the fully redeveloped infotainment system was delayed.”
And via Stroll’s comments on the earnings call:
The DB12, the startup around the production was mainly related to challenges that we have on the software integration or the electronic platform with the new infotainment that is brand-new and that was spoken by Aston Martin. So, we had some issues on software, but I think everything now is fixed.
Which is pretty surprising as back in May, Lafferty stated:
So far, things are coming together, and we would expect to be being able to meet our ramp-up curve for the first of the next-generation sports cars with a high degree of quality and a high degree of certainty on the product that we are delivering to the customers.
And in terms of the “extraordinary demand” Stroll references, on the July earnings call, Lafferty stated: and I’m quite confident that by the third quarter will be sold out on DB12 for next year. Given the order book just now stretches all the way into Q2 2024, that comment has not aged well. AML also has to be a bit concerned on the length of the orderbook given they have spent heavily in support of the launch including flying in a large number of journalist and influencers to the south of France for test drives and had a Taj Mahal size Hospitality Suite at Pebble Beach. In addition, Stroll has a very interesting definition of “new”. In the earnings release Stroll states that “55% of initial DB12 customers new to the brand” and then on the earning call philosophizes: “a good portion of those 55% have bought a DBX and are now, because of the acquisition of the DBX, buying the DB12.” So……which is it?
Specials & the Valhalla
In the 2022 Financial Results, Aston Martin admitted that after 3 years, only 50% of Valhalla build slots had been sold. In the Q3 earnings release, AML admitted customer deposit dropped by £1 mil. in YTD 2023. This doesn’t seem like much until you pull apart the details. With each Valkyrie delivery, roughly £1.25 million in deposits is taken off the books. Sixty seven Valkyries were delivered in the first 3 quarters which equates to about £84 million in deposit unwinds. On the plus side AML would have been collecting deposits for the DBR22, Valour, and Valhalla. The fact that those three haven’t generated at least positive deposit cash inflow doesn’t bode well for the future as more of the Valkyrie deposits come off the books. Aston has been heavily dependent on its customers cash to keep the lights on and unless they can continue coming up with a constant stream of £1+ million specials that its customers are willing to buy, (something that might not have been made easier by Felisa’s comment on the earnings call: “If you want to compare the specials with DB12, DB12 by far is the best product we have”.) this will just put further intense pressure on the balance sheet in the near future.
On the earnings call, Stroll stated: “Valhalla will start to deliver the end of next year” and in the earnings release update on that “the first running prototype taking to the road later this year”. Going from an initial running prototype to production in a year is quite ambitious. Then again all of Aston’s recently production startups including the Valkyrie, DBX707, and DB12 have gone about as well as leaving Red Bull has gone for Daniel Riccardo.
In the earnings release it states: “DBX volumes increased by 23% year-on-
year, driven by the DBX707, the world’s most powerful luxury SUV. The DBX707 is now clearly established as a benchmark in the ultra-luxury SUV segment with strong volume growth in the majority of our key markets.” This looks great except Q3 wholesales of the DBX were down 7% vs. Q3 2022. The decline would seem to tie into the theory that AML loaded dealers with DBXs in the first half, began to have issues forcing more stock onto forecourts, and has now had to offer incentives to move them. I would expect to see the base DBX discontinued shortly with only the DBX 707 remaining in the portfolio. Stroll did indicate that the DBX 707 will be updated with the DB12 interior/infotainment with no timing indicated. Full year 2023 wholesales of DBXs will now likely be in the 3,000-3,400 range. This is still far off the 3,700 DBX’s AML was originally targeting to sell in 2022. What’s even stranger about the call out on the DBX in the Q3 earnings release was the Sport/GT cars had a much better Q3 and were up 16% vs. Q3 2022.
In the March Earning Call, Stroll finally admitted that the Aston Martin Aramco Cognizant Formula One Team (AMF1) was a “partnership” with AML and is not a AML’s “Works” F1 Team. In the Q3 earnings call, he now referred to it as a “Marketing Platform”. Like the French at Agincourt, while the AMF1 Team had a very strong start to the F1 season it has been going backwards since the Italian Grand Prix in September. At the most recent race in Mexico the Aston Martin F1 team hit rock bottom with two DNFs (Did Not Finish). Other recent Aston Martin F1 highlights include an angry Lance Stroll pushing his trainer out of the way after being eliminated in the first qualifying session at the Qatar Grand Prix and rumors emerging that Fernando Alonso might jump to Red Bull. While I doubt Red Bull would partner two uber alpha males together, the fact that the rumor is floating around it is very likely Alonso is sending a message to the Aston Martin F1 Team that he isn’t happy and something needs to change. Just to underscore how bad things are, Alonso did refer to the car as being undrivable during a recent race. To be honest, I am not that surprised things have turned for the worst. A friend who is well connected in F1 circles mentioned he did not expect Aston’s strong early season performance to continue. He indicated that AMF1 had spent the majority of its money upfront and therefore would not be able to fund the continued development of the car as the season progressed. It’s clear other teams (McLaren being a great example) cars have improved significantly and AMF1s has not.
As expected, it looks like AML is well on its way to running out of cash again. Despite Lafferty’s comments about “remaining focused on reducing our leverage and retiring debt.” they just haven’t. At this point, I have to assume that the “focused” means he is just staring at it hard. The Q3 wholesales were soft and the DB12 start up looks like it’s been a bit of a mess. The DB12 orderbook looks light, certainly lighter than expected. The £311 million cash raised so far in 2023 hasn’t been used to solve the debt issue and appears to basically be gone. To get even close to the “marginally updated volume outlook”, its likely there will need to be another rather large “temporary suspension of the demand-led operating model. The big bet this year was on the next generation GT, the DB12 and now that’s being used as the excuse for lowering the guidance.
Note: I do not and have never owned any AML shares.
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