Aston Martin reported their 1st half results last Wednesday. Aston Martin’s results were broadly in line with expectation and the stock finished up just under 3% on the day the results were released. Aston Martin also indicated that they are on track to deliver their full year targets. This raises a few questions. Is Aston Martin back on track? Are the full year targets really achievable? What do the Q2 and 1st half numbers really tell us?
The earnings call later in the day provided a quite a few additional insights. As per the Q1 call, it was just the CEO, Tobias Moers & the new CFO Kenneth Gregor on the earning’s call. Like at the Goodwood Festival of Speed, The Executive Chairman, Lawrence Stroll, was nowhere to be found. It was interesting listening to Moers on the call, he came across as having all the enthusiasm of an inmate who had just been denied parole.
The results Aston Martin presented all use the 1st half of 2020 as the main point of reference and show enormous improvement. While that presents a nice fuzzy feel-good story, it’s the equivalent of comparing the British Army’s performance at the Battle of Yorktown with Waterloo (where incidentally it was also the timely arrival of the Germans that swung the tide decisively in the allies’ favor). It isn’t really that relevant to understanding the current health and trajectory of the business today. As such, what is relevant when looking at Aston Martin’s results is how they were doing both pre pandemic and over the last several quarters.
Free Cash Flow
This now is a very interesting picture. Just based on car sales and revenue, its looks like Aston Martin is gaining a bit of momentum after a weak Q1. However, if you smooth Q4 2020 with Q1 2021 as Q4 included the DBX pipeline fill of around 600 units, Q2 looks to be about where the quarterly wholesale run rate sits today. What is concerning though is the Operating Profit, Free Cash Flow, and Net Debt are all still heading in the wrong direction. Aston Martin today is still consuming vast amounts of cash, increasing its debt load, with profitability nowhere near in sight. Perhaps my favorite attempt at misdirection in the earnings announcement was the comment on the improved cash position of £506 mil. (up £17 mil. vs end 2020). When you consider Aston issued £77 mil. in new debt in the 1st half this just means you’ve already burned through £60 mil. of what you raised.
Unpacking the numbers in a bit more detail to see if they are on track to deliver the 6,000 units called for in the current 2021 guidance, the car sales need to be split into two very different parts, the DBX SUV and the Sport/GT cars. Aston has stated that they completed the dealer destocking in Q1 2021 and are now only producing cars to meet demand. In fact, Moers stated that Retail sales were ahead of Wholesale sales in the 1st half without providing any numbers to back up the claim. While I do believe Moers statement is technically accurate, it’s a bit misleading as the retail network had one last big push in Q1 on destocking the mountain of leftover Palmer era Vantages and DB11s while it also would have been working down some of the extra 600 DBXs which were wholesaled in Q4 2020. The number that would have been quite telling to have is the Q2 retail and wholesale units. If Aston Martin is truly matching supply to demand, these would be nearly identical. I am quite disappointed that none of the financial analyst who follow Aston demanded it. Eliminating this key piece of information gives Aston the ability to immediately revert back to old bad habits and start stuffing dealerships with cars to manage earnings and hit targets to prop up the share price (the May edition of BusinessF1 has a very well researched article on Aston Martin’s 2018 IPO, Andy Palmer, how the City held its nose, and the grim aftermath).
Looking at the DBX sales in a bit more depth, in Q4 2020 Aston wholesaled 1,171 DBXs against retail sales of 593. This left 578 DBXs sitting in dealerships’ inventory going into 2021. In Q1 2021, Aston wholesaled another 746 DBXs followed by another 849 in Q2. Adding the 578 DBXs left over from Q4 with the 1595 sold in the 1st half of 2021 totals 2,173 DBX’s floating through the Aston Martin retail network in the 1st half of 2021. Just checking the number of DBXs listed for sale at Aston Martin dealers in North America, it is currently 210. Ignoring the fact that dealerships often do not list all the cars they are holding in inventory on their websites, with North America representing 36% of Aston’s global sales, this projects to 580 DBXs for sale globally right now which neatly matches the inventory carry over from 2020 (about two months stock). At first glance therefore it does look like the 1,595 DBXs wholesaled in the 1st half will straight line to hitting the revised Stroll era goal of 3,000 DBXs in 2021 (the original Palmer era goal was 6,000 DBXs per year) and Aston is matching supply with demand. Only issue is there are probably another 300-500 DBXs sitting in dealerships’ inventory right now. (Most high dealers I know only list 1/2 to 2/3rds of their new car inventory on the website as projected scarcity is key to supporting pricing, the vast majority of Aston dealers have either 5 DBXs listed with a few of the larger dealers at 9-10. The consistency in the numbers speaks to adhering to a listing policy set and enforced by Aston). Taking the high and low numbers in that range and subtracting it from the 1595 1st half DBX wholesale number leaves you with range of DBXs truly retailed in the 1st half of 1,095 – 1,295. The only retail number Aston has provided on the DBX was 593 in Q4 2020. That number straight lined into the 1st half of 2021 would be 1,184 which is unsurprisingly right in the middle of the 1,095-1,295 range. This is where I believe DBX sales truly sit, especially as I keep getting increasingly generous offers from different dealers just to come and test drive one.
Sport & GT
With DBX already accounting for over 55% of the cars sold in the 1st half of 2021, its fast becoming the core of the Aston Martin business. This is helping to mask the collapse of the Sport & GT car sales. In 1st half of 2021 Aston sold 1,280 Sport & GT cars and in Q4 2020 the number was 629. This straight lines to about 2,500 to 2,600 Sport & GT cars per year. Comparable numbers from 2018 and 2019 are 5,862 & 6,441. These numbers do include the massive dealer loading at the end of the Palmer era and true demand was more likely in the range of 5,000 per year. Net net, sales of the Sport & GTs are now running at about half the level they were pre pandemic and this is unlikely to change anytime soon. In prior earning call comments, the CEO, Tobias Moers, referred to the Sports Car range as “aged” which may had been an unwise attempt at transparency.
Aston Martin’s current 2021 guidance is:
2021 Run Rate Based on 1st Half 2021 Results
Very Low Teens
Depreciation & Amortization
Capex & R&D
The guidance does not include either a revenue target, which will likely be around £1 billion, or a profit (loss) target which is likely to land in the -£200 mil. range. It’s very hard to make money when EBITDA doesn’t cover your interest expense. In fact, the road to profitability is questionable even if Aston delivers against the 2024/2025 target of £2 billion of revenue. To get to profitability under its current debt load, Aston will need to at least double its current EBITDA margin while holding Depreciation and Amortization and other expenses at current levels. This is a tall ask as Aston Martin is sitting with £1.36 billion (and growing) in intangible assets on the balance sheet which will need to be amortized over the coming years. Moers even admitted that they will likely need to accelerate the write down for the planned model refresh and move to Mercedes supplied technology & powertrains. How they are going to be able to afford to do so is a major unanswered question. In fact, if you take a step back and try to evaluate the true value of Aston Martin today, you have a car company with a market capitalization of £2.3 billion, which sells £1 billion of cars annually at a loss of £200 million, is sitting on £1.36 billion (and growing) in intangible assets on the balance sheet that it needs to write down and has issued debt with a fair market value of £1.36 billion.
Looking at a few other areas of interest in a bit more detail:
Moers has also cut staff and reorganized production at Aston’s other factory, Gaydon with all Sport & GT car production now being done on one line. This makes sense given the collapse of Sport & GT volumes. Moers also did mention that Aston Martin has plenty of available capacity should demand increase. He has also stated that Gaydon is where the Valkyrie and other “Specials” will be produced. This is more than just a bit misleading as the Valkyrie is being developed and built by Multimatic (Multimatic Road Cars) now and it’s likely the Valhalla will be as well. In fact, there is no mention of Multimatic anywhere in the earnings release materials.
Valkyrie: There was little discussion on the Valkyrie this time and the impression I had is it’s a subject Moers would rather avoid which is not surprising given what happened at the Goodwood Festival of Speed. Moers did reiterate the commitment that the first delivery will happen before the end of the year. If Aston Martin finally does deliver a customer Valkyrie before the end of the year, it will have taken Aston longer to develop this car than it took the Manhattan Project to develop the first atomic bomb. Apparently, Aston has had major challenges getting the Valkyrie road car mules to run consistently and according to a few ex Aston Martin employees, Stroll/Moers are apparently putting immense pressure on Multimatic to produce the car as cheaply as possible. These sources also indicated that given the massive problems Multimatic has had trying to get the electronics to work in the road cars, it’s now the Valkyrie Pro AMR track cars that are being prioritized as they will be built without the sophisticated electronics & hybrid system. Last I heard, neither Valkyrie variant had passed crash tests yet. In addition, Aston has only bought 30-40 of the Valkyrie’s Cosworth V12s to date so the actual number of cars that can be produced right now is fairly limited. What is unclear is if the Q4 delivery commitment is for the track car, road car, or both.
Aston Martin has parted company with just about everyone internally who was involved in the Valkyrie’s development starting with Fraser Dunn, the Chief Engineer. Moers apparently has been happy to blame Red Bull for the faults and delays resulting in a relationship with Red Bull that is now fairly toxic. Multimatic also has its own additional challenges as they currently are in court over multimillion pound payment dispute with Supernatural (a specialist carbon fiber component manufacturer) which is Valkyrie related. On a more positive note, I have heard that the Valkyrie is by far the quickest car (road or track) a few of the drivers have ever experienced.
The use of the word “Works” is certainly a creative one as there is currently no shareholding relationship between the two companies. It is just a marketing relationship with Aston Martin paying AMR GP Limited a sponsorship fee of £24 million a year. On an appearance basis it’s highly questionable as Stroll is having a public company, he controls pay a private company that he also owns, and his son drives for.
Moers and his new leadership team are still a long way from being out of the woods. Going back to the three questions I laid out up front:
Is Aston Martin back on track?
Are the full year targets really achievable?
What do the Q2 and 1st half numbers really tell us?
On the first I would say, Aston Martin has found a way to survive but it’s not sustainable over the longer term. Aston is still burning through too much cash too quickly. On the second, they will likely make the top (cars sold) but not the bottom line (EBITDA) and on the third, even taken advantage of the “fog” of only reporting wholesale numbers, Aston is still having major challenge selling cars. While the DBX is helping keep Aston afloat right now, it’s a far cry for being a runaway success. Best case Aston DBX sales will be less than 60% of what Bentley will do with the aged Bentayga or Lamborghini will do with the polarizing Urus. In other areas, the Valkyrie would make for a great Harvard Business School case study on how not to develop a car. For Aston Martin to have risked putting the Valkyrie on the Goodwood Hillclimb course knowing that there was a good chance it would break down points to either desperation or incompetence. Toss in the litigation with Nebula and the Multimatic/Supernatural lawsuit and things are likely to get quite spicy for Moers and Co. in the coming months. At this point, Stroll’s dream of creating the “British Ferrari” feels like it’s just that, a dream.
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