Aston Martin announced their 1st Half 2023 earnings this week. The earnings call was a fairly subdued affair despite Lawrence Stroll, AML’s Executive Chairman leading the call. Both CEO Amedeo Felisa and CFO Doug Lafferty made brief appearances to answer questions, but it really was the Stroll Show. Stroll did do a fairly reasonable job of staying on what I would term a fairly creative script. As usual, Stroll was laser focused on the positive highlights, declaring that “we are focused on fixing the core fundamentals of this company and rebuilding the necessary foundations to deliver on our vision. What was required was a major industrial and commercial turnaround, which typically takes five to seven years. I’m very pleased to say that we have completed this turnaround in a little over 3”. Stroll did not offer any numbers to support the statement which made me immediately question if the “turn around” really is complete. Looking at the 1st half highlights:
The 1st Half highlights according to the Aston Martin press release are:
This all sounds wonderful. What they failed to mention but is buried in the results:
Hence why when Lawrence Stroll’s declared in his opening statement on the Earnings Call that the “Turnaround is Complete” it really caught my attention. It immediately reminded me of another situation when a certain former President stood on the deck of a US Aircraft Carrier and declared “Mission Accomplished”. Question is, has Aston Martin’s business been turned around or is this another “Let me be crystal-clear, black-and-white: we do not need money” type Stroll statement? In my past life, we normally did not consider a business “turned around” until we had 2 years of sustained improvement across a majority of key metrics. To understand if AML’s business has really turned the corner, I thought it would be interesting to take a look at several key areas, the financial performance, the product line, and the debt across 1st half 2019 (pre Stroll), 1stHalf 2021 (Stroll, Year 1), and 1st half 2023 (“Turnaround Complete”) benchmark where AML is today vs. 2 years ago. Starting with the Financial performance:
Here are the key numbers for the 3 measurement periods:
1st Half 2019
1st Half 2021
1st Half 2023
Free Cash Flow
At first glance, the 1st three rows look positive with the bottom two, less so. Revenue in 1st half 2023 was certainly helped by the 38 Valkyries shipped which would have brought in a bit over £100 mil. Just looking at 1st half 2019 vs. 1st half 2023 it looks like AML sold more cars at a much higher price and yet managed to burn more cash and lose more money by doing so. It is even starker when you look at the comparison between where AML was in the 1st half of 2021 vs. 1st half 2023 and then compare 1st half 2021 to 1st half 2019. With the exception of a slight decrease in Operating Profit in 1st half 2021 vs. 1st half 2019, all the other financial indicators were heading in the right “turnaround” direction at that point in time. However, when you breakdown the 2021 vs. 2023 numbers, AML sold 53 more cars in 1st half 2023 but managed to lose £55 mil. more while burning through an additional -£174 mil. of cash. In summary, while AML has made good progress generating additional revenue by driving average selling price (ASP), they are still a long way from having figured out how to make money doing so. Positive Free Cash Flow is basically table stakes to be considered a heathy business and that still seems a long way off.
Since Lawrence Stroll took over AML in 2020, he has pontificated multiple times that AML only manufacturers vehicles to order. However, AML hasn’t reported retail sales for several years now so there is no way of validating that statement. What we do know from the 2022 AML Annual Report is that at the start of 2022, AML was hoping to reduce the stock held by its dealerships by 450 vehicles. Instead, by the end of 2022, they had increased it by a further 442 vehicles. That’s a swing of 892 vehicles which is 15% of AML’s total global retail sales in 2022. Having visited several Aston Martin dealerships in the US recently, this dealership inventory stock build does appear to be very real as all had plenty of stock on their forecourts. Net net, while that 1st half 2023 wholesale number does look to be headed in the right direction, it is impossible to tie it back to demand. To have a bit more than a “Rudy Giuliani” level of credibility on their “demand-led operating model”, AML needs to start reporting retail sales again.
The Product Line
Over the past several years, AML’s portfolio has shifted:
1st Half 2019
1st Half 2021
1st Half 2023
Looking at the numbers, it would appear that under Stroll’s leadership, Aston Martin has transitioned from being solely a Sports/GT car manufacturer to more a supplier of luxury SUVs. As a strategy, it certainly has worked for other Sports & Supercar manufacturers (Porsche, Lamborghini) as the SUV volumes were incremental to the base Sports/GT and Supercar business. In the case of AML, the numbers would suggest that the vast majority of the SUV sales have been cannibalistic of the Sports/GT business. Just to make matters a bit more concerning, SUV sales actually declined in 1st half 2023 vs. 1st half 2021. While the Sports/GT sales did increase in 1st half 2023 vs. 1st half 2021 that is mainly due to deliveries of the run out limited edition V12 Vantage. However, Sports/GT wholesales are still down 43% vs. 1st half 2019.
On a positive note, AML is finally taking action to update, in the words of AML Management, the “7 year old sports and GT cars”. These updates were originally promised by Stroll for 2021 but now have finally started to arrive. The first in the series of updates is the DB12 (as it is built off the same basic chassis as the DB11, I consider it an update/facelift vs. being a completely new model) with deliveries to start in the 2nd half of 2023. AML has promised similar updates for both the DBS and Vantage to follow in the next 18 months. Based on the pictures I have seen (shockingly, I was not invited to the Global Media launch in the French Rivera so I have not seen the DB12 in person), AML has done a nice job updating the DB12s lines while significantly improving the interior. Whether or not these updates and improvements will be enough to turn around the trajectory of the Sports/GT sales will only be clear come 2025 once the initial excitement pipeline has worked its way through the system.
One interesting note is that AML sold almost as many “specials” in 1st half 2019 as it did in 1st half 2023. One major difference was the 2023 “specials” were all Valkyries at a price point likely to have been 2x the earlier sales. In addition, the number of “specials” is about to dramatically accelerate in the coming quarters. Per AML’s recent announcements, more “specials” are in the pipeline including the DBR22, Valour, and Valhalla. These are on top of a slew of other “limited edition” models like the DBS Final Edition. Potentially even more so than the Sports/GT updates, the success of all these “specials” is critical to any AML turnaround as they are considerable higher margin than the base Sport/GT business. In addition, AML has become addicted to the hefty deposits these “specials” generate when customers place orders. It is interesting to see that with the exception of Valhalla, which dates back to 2019, all the recent “specials” are front engine. I do suspect that this has to do with the current litigation between AML and Nebula over all the mid engine cars and AML wanting to limit their exposure to damages based on projected mid engine volumes should they lose the case. In addition, an over reliance on “specials”, especially ones that are basically just rebodies of other cars in your line at 2x-4x the price, normally does not end well. Just ask the current Chairman of BAC.
1st Half 2019
1st Half 2021
1st Half 2023
Current Liabilities Including Payables
Since Lawrence Stroll took over as Executive Chairman in 2020, AML has raised £1,561 mil. in new equity. Objectively, just looking at the numbers above, despite this very significant cash infusion (which is more than AML’s current annual revenue), the company is in worse financial shape today than it was back in 2019 as both Net Debt and Current Liabilities are well above where they were back in both 1st half 2021 & 1st half 2019. Given that the raging inferno that is their cash burn continues, it’s unlikely that this will change dramatically anytime soon based on the current pace of the business. The picture actually looks even bleaker when you toss in an estimated £315 mil. in customer deposits (equalivant to 79% of AML’s cash). The cash provided by customer deposits is critical to funding AMLs operations which explains the increasing number of “specials” being rolled out. The moment AML starts finding it more difficult to extract long term unsecured interest free loans from its customers, it will potentially trigger another financial crisis. All in, AML’s total debt pile (Gross Debt + Current Liabilities/Payables + Customer Deposits – Cash) is £2.14 billion. There is also £1.4 billion (and growing) of Intangible Assets sitting on the balance sheet which will need to be amortized over the coming years.
If being on solid financial footing is key to a business turnaround, then the AML story feels very incomplete right now. Solid progress has been made in terms of generating additional revenue and increasing margins. The DB12 does look to be a solid step forward. If the updates for the Vantage and DBS are similar in scope and quality, that does provide for a more promising future. How well these will all do in the marketplace is still very much an unknown.
AML has yet to figure out how to make money selling cars. Loses continue to mount, cash continues to be burned at impressive rates, and debt continues to pile up to the extent that it has basically obliterated the £1,561 mil. raised in the last several years. In Stroll’s opening remarks on the Earnings Call, right before he declared the “Turnaround Complete”, he stated that “a major industrial and commercial turnaround, typically takes five to seven years”. I do believe he was right.
Note: I do not and have never owned any AML shares.
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