Aston Martin & Ferrari’s Q2 2020 Results

In the last two weeks, both Aston Martin and Ferrari have reported their respective Q2 2020 results (McLaren does not report until the end of August so we will come back to them later).  Normally in these types of articles I spend quite a bit of time going through the financial results and highlighting key numbers.  This time I thought I would try something a bit different, instead of focusing on the numbers, which were in line with what I expected (Aston is still a train wreck and Ferrari turned in a very solid quarter given the circumstances), I would instead take a look at what the two executive teams said in their presentations and the question and answer sessions that followed.  I have sat though more quarterly earnings calls than I care to remember, I always find it interesting what CEO’s say and even more so, what they don’t.

Aston Martin

As Aston Martin reported first, we will start with them.  This was Lawrence Stroll’s first earnings call since assuming the position of Executive Chairman.   If you had no background on Aston’s most recent series of challenges, based on Stroll’s opening remarks, you would probably take away that this was a company in good shape with a bright well defined future (Aston Martin 1st Half Earnings Call Transcript). While management teams normally do try to put the best possible face on situations, I did expect a bit of balance to give it an aura of credibility.  In this case it came across as a bit delusional given the depth of the mess Aston Martin is in today. 

In terms of specific comments that were (or were not) made:

  • Current range: I found the comment that dealer destocking would continue through the 1st half of 2021 quite interesting. Considering the destocking started in the 2nd half of 2019, this equates to basically a two-year period to run down excess inventory sitting in dealerships around the world.  Apparently, the destocking is across the range, so it isn’t a specific model that’s the issue, it’s the entire portfolio that has problems.  It was also stated that Aston is still “heavily discounting to move cars” but the cost of this is not captured anywhere in the presentation.  It is also a clear indication that Aston needs to quickly facelift and upgrade the entire current portfolio if it has a hope of generating non-discounted demand post the destocking.  The fact that Aston Martin jammed so much unwanted stock into dealerships in 2018/2019 raises a lot of questions about the former leadership team.  Channel stuffing is certainly viewed as being a highly questionable practice in many industries.
  • Recovery: Stroll commented that it will take a few years to recover to the former 4,000 cars per year production level for the front engine GT sports cars. This would seem to be a clear indication that Stroll does understand the depths of the problems with the current range and doesn’t expect a recovery until they are facelifted/relaunched.
  • DBX SUV: The comments (or lack of) on the DBX were fascinating. This is the horse they have all bet on to pull Aston through the current mess.  However, despite being asked directly several times, none of the three Aston Martin executives would give any information on the size of the order book.  If there was one single number that if I was an investor I would have wanted to hear, it was that one.  When one of the analysis tried to come at it quite craftily from another direction asking about the waitlist timing on DBX orders, Marek Reichman completely dodged the question again by stating “it’s 12 weeks as an order intake before you would get your car, but obviously there’s a stacked up inventory of customers waiting to get theirs prior to that.”  Given that in the Q1 Earnings Report Q&A session, an Aston Martin executive had stated that the DBX order book exceeded 2,000 units and that demand extended into 2021, this sudden complete opacity raises a lot of questions.  Good news normally gets shared, loudly.
  • Valkyrie, Valhalla, and Vanquish mid-engine cars: The Valkyrie’s quest to become the most delayed supercar in history continues unabated. On a slightly amusing note, Aston’s new CEO, Tobias Moers, is coming from Mercedes-AMG where he led the development of the Valkyrie’s main competition for most delayed supercar, the AMG One which is only 2 years late right now.  In Q1, Aston announced Valkyrie deliveries would start in the 2nd half of 2020, In the Q 2 Earnings call this got pushed by Stroll to an undefined time in 2021.  As a reference point on how long the Valkyrie has been under development, David Cameron was the British Prime Minister, back when it was originally announced.  The fact the Stroll did not provide any definitive timing in 2021 would indicate things have gone badly off the rails on the Valkyrie.  Recent rumors I have heard include Stroll getting personally involved and trying to cut costs significantly which is increasing the car’s weight, a major loss of talent on the development team, and Adrian Newey having not been really involved in the car’s development for almost a year now.  If I was a Valkyrie depositor right now, having already effectively provided Aston with a four year interest free £500,000 loan, I would be quite concerned about how different the car is I will finally be getting 3 years late is going to be vs. what was originally promised.  Personally, I probably would have pulled my deposit long ago and signed the check over to Gordon Murray for a T.50.  While the Valhalla and Vanquish were mentioned by Stroll, no timing was indicated on either.  Given the massive delays on the Valkyrie, I would be shocked if we see the Valhalla before 2024, if at all.  The lack of even an indicated date range by Stroll on either are telling signs that both are likely on the chopping block.
  • Electrical Vehicle Platforms: Stroll stated in the Q&A session that Aston had not scrapped its EV plans. Considering that Aston wrote off £39 million in 2019 when it scrapped the Rapid E development program, I’m really not sure what the definition of not scrapped is then.
  • Works Formula 1 Team: Stroll has made quite a big deal about the Racing Point F1 Team becoming the Aston Martin Works F1 Team starting in 2021. The use of the word “Works” would certainly lead me to believe that Aston Martin would be taking on a significant ownership position in Racing Point.  This question came up directly in the Q&A session and Stroll admitted that there is currently no shareholding relationship between the two.  In fact, what Aston Martin will be doing is paying Racing Point a sponsorship fee which is slightly reduced vs. what they are currently paying to sponsor Red Bull.  How writing a check to Racing Point suddenly makes them an Aston Martin Works team is a bit beyond me.  The other interesting point here is that Stroll has clearly not wanted to mix the two ownership structures and put Racing Point at risk if the problems at Aston Martin turn out to be terminal.
  • Ownership: After earning’s calls, I normally check the recent insider transaction history. What I did find quite interesting is Lawrence Stroll sold roughly 26 million AML.L shares on Jun 28th (Aston Martin Lagonda Insider Transaction).

To say Stroll, Moers, and their teams have their work cut out for them is the understatement of the century.  The current line up is a major challenge, the new complete lack of transparency on the DBX order book is highly concerning, and the Valkyrie program is still badly behind schedule.  It’s going to take roughly another year of destocking before Aston can fully move to a model of building to demand.

Ferrari

The Ferrari Q2 2020 Earnings Report was a completely different tone and atmosphere from Aston Martin.  Louis Camilleri comes off as both understated and completely in control.  The earning’s call webcast, including the Q&A session, is posted: Ferrari Q2 2020 Earnings Call.  My net takeaway from the call was that this was a company completely on top of both their business and the current situation.   

In terms of specific comments that I found quite interesting:

  • Manufacturing shutdown: The Covid-19 shut down cost Ferrari 2000 units in terms of lost production, in the year to go, Ferrari will only be able to recover 500 units. This is a clear indication that Ferrari has little to no excess manufacturing capacity in the system.
  • Manufacturing backlog: Post the Covid-19 shut down, there will now be a 3-9 month delay on the production of certain new models. In the last several years, Ferrari has been more aggressive on launching new cars.  Both the SF90 Stradale and Roma are new additions to the current portfolio and not replacements of existing models.  Given Ferrari’s manufacturing capacity constraints, I’m not sure why you would further fragment the portfolio while creating additional supply chain costs and complexity.
  • Waitlist: The current waitlist is now over two years. This is almost 2x the target time.  This has Ferrari management concerned as it’s likely that a number of these people drop off and look for alternative options.
  • Profitability: It’s the higher margin models that also tend to have a higher level of personalization which is driving Ferrari’s margins currently. This does sound like a light version of the situation which McLaren put itself into.  In McLaren’s case they became heavily dependent on the margins generated by the Ultimate Series and Long Tail cars and as a result ended up producing far too many models too quickly.  While not to the same extent that McLaren has, Ferrari has started pushing a lot more “Special Series” and “Limited Edition” cars out the door.  Should Ferrari continue to develop a dependency on the “Specials” while further fragmenting its portfolio, they could land in a very difficult situation if demand suddenly shifts.
  • Cash Flow: I was a bit surprised that there was no discussion around the major drop in Free Cash Flow and the potential impact going forward. Current 2020 guidance is €100-150 million down from €700 million in 2019.
  • Racing: The Formula 1 team is a major drag on Ferrari’s finances this year. The combination of lack of competitiveness and the reduced number of races will result in a financial hit of somewhere around $100 million.  

Overall, Ferrari has, and continues to be, very well managed.  The confidence of the management team in their business and its direction comes across clearly.  The few challenges they are facing are more long term and strategic in nature than necessarily Covid-19 generated.  In fact, the few current issues Ferrari does have, a waitlist that is too long and a manufacturing backlog, other companies would kill for.

Summary

Aston Martin and Ferrari might as well be in two completely different universes.  Ferrari is a highly successful company doing a great job navigating in a challenging environment.  The only area of concern I can see is related to mix dependency and portfolio fragmentation.  Neither of these are Covid-19 related and are questions of long-term strategy.  Aston Martin is trying very hard to project confidence and clarity of direction under new management while standing in the middle of a massive turd of a situation.  While the confidence and vision maybe inspiring with the future bright, the present is still one big odious mess.

Thoughts and comments? Please see the comments section below.

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August 2020

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3 Thoughts on Aston Martin & Ferrari’s Q2 2020 Results
    desf
    19 Aug 2020
    10:31am

    Lack of news on DBX side is bit concerning, but not exactly surprising. People who wanted to order the car blind already were mentioned in Q1 numbers, and during this whole “coronacrisis” I’m pretty sure the number could have only decreased. But I think it is still only “a bit” concerning, true test for DBX will be in Q3/Q4, where first cars will start hitting streets, dealers will have demo cars to show potential customers, let them test drive it etc. It’s not supercar people will buy only with their heart, I think there might be some people who might be interested but just won’t order it without checking it themselves.

    But all in all, I’m not really sure if it is going to be success Aston is needing. The car isn’t particularly good looking, and (at least for me) doesn’t have this “wow factor”. Plus it is late to the party. If anybody wasn’t satisfied with their Range Rover or Cayenne probably has already switched to Bentayga or Urus. When Bentley debuted it had 12 cylinders and I think one of the best interiors. When Urus debuted it beat other SUVs on performance. And the comes the Aston, with car that doesn’t seem to be breath-taking in any aspect, it is just a good car. And if you want to buy just a good car, why pay around 50% more for Aston when you can buy Range Rover or Cayenne?

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    John
    9 Aug 2020
    2:41pm

    Aston Martin seem to be in a much deeper hole than I thought. Repeatedly let down by Reichman’s design, yet they’ve bet the farm on yet another of his disasters – The DBX. Whilst not absolutely terrible, it’s not what it should be either. You’d buy the Bentley instead.

    Ferrari seems to be much more level. In a far better position to weather the coming Coronavirus storm of fewer buyers for luxury items. It’s not that they’ve lost product that’s the problem but all the buyers who’ll be tightening their belts too.

    The other area to look at is those buyers who effectively “rent” their cars. Never with the intention of owning outright, just keeping ahead of the payments enough to have enjoyed the car. With Ferrari lead times going further out the used value, and therefore the depreciation, will still enable those people to continue this rental model. For the Aston no such luck. Dealer stock is still too high, and it seems there’s not enough deposits being placed upon the DBX and other future models like the Valhalla. Two year wait at Ferrari and Aston probably won’t let you wait more than two seconds before taking your money!

    Stroll still doesn’t fill me with any confidence. And Tobias Moers just doesn’t seem like the right guy to take over Aston when he’s failed to deliver a major project like the Mercedes AMG One. Neither seem willing to do what is necessary to save Aston Martin – Sack Marek Reichman.

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    McLaren's 1st Half 2020 Results | karenable
    30 Aug 2020
    10:09pm

    […] Aston is still a train wreck and Ferrari turned in a very solid quarter given the circumstances (Aston Martin & Ferrari’s Q2 2020 Results). Unlike both Aston and Ferrari, which as public companies host presentations and a Q&A session […]

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