Two supercar manufacturers released their Q3 2022 results this week. The first manufacturer, Ferrari, beat both the markets Q3 revenue and earnings estimates. Ferrari, for the 2nd quarter in a row, then raised its guidance for the year. The second manufacturer was Aston Martin. Bernstein analyst Daniel Röska summed up AML’s Q3 succinctly: “No amount of sugar-coating will help here: Q3 is not the quarter Aston Martin turns the corner.” It was another remarkable quarter. Despite raising £653 million in new equity this quarter, Aston Martin finished with higher net debt vs. Q3 2021. I described Aston Martin’s 1st half 2022 results as a financial turd. If the first half was a cute little puppy turd, Q3 was what comes out of the backside of an elephant. To quote Mrs. SSO, “this story just doesn’t seem to get any better”.
Instead of doing another deeply depressing deep dive into Aston Martin’s financials, I thought it might be more entertaining to simply provide a few insights on the AML’s Q3 results presentations & different statements AML leadership have made. Much of the commentary that follows comes from my discussions with industry insiders, suppliers, customers, and journalists. What has been interesting in almost all these discussions is that everyone wants to see Aston Martin succeed but the overwhelming consensus is that they are their own worst enemy.
In the Q3 2022 Earnings Press Release, Executive Chairman Lawrence Stroll commented: “We have continued to make excellent progress through the first nine months of the year in our vision to become the world’s most desirable, ultra-luxury British performance brand.”
Stroll has been AML’s Executive Chairman for close to two & a half years now. His definition of “strong progress” appears to be rather unique in the business world:
– AML’s YTD unit sales are down 4% vs. same period YAG.
– AML’s sales in the Americas, which had been AML’s largest region, have dropped 20% YTD 2022
– Sales of the DBX SUV, which was supposed to be AML’s savior, are down 16% YTD.
– Specials, which was mostly the V12 Speedster in 2021 and the Valkyrie in 2022, are down 11%.
– Despite just raising £653 million in new equity, Net debt is up £25 million vs. year ago.
– The one bright spot remains the long neglected Sport/GT cars. Sales are up 9% in the first 9 months of 2022 despite Stroll’s continued disparagement of them as “7 year old sports cars”.
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. Its crystal clear at this point that the big bet on the DBX hasn’t worked and what they are selling to the financial markets is some vague hope that the turnaround is always just a quarter or two away. In Q1, Stroll’s excuse for missing the numbers was:
“in the first quarter we had a boat of another couple 100 DBX’s going to China that would have made the numbers roughly exactly the same as the previous year that we missed by a couple of days”
And in Q2:
“we ended June with more than 350 DBX707s that we had planned to deliver in Q2, still awaiting final parts, consuming tens of millions in cash and temporarily limiting our ability to meet the strong demand we have.”
And the Q3, the “dog eat my homework” excuse was:
“our Q3 growth was hindered by new supply chain challenges, impacting more than 400 vehicles that had been planned to be delivered in the quarter”
Assuming the 350 DBX’s awaiting parts in Q2 were completed and delivered in Q3, the true net Q3 supply chain related delivery miss is only 50 cars, not the 400 Stroll references. On a full year basis, if you assume all of those 400 cars had been delivered in Q3, this would only bring AML’s year on year growth rate up to 5%, still well below the 10% originally promised in the 2022 Earnings Guidance.
This constant rolling forward of “vehicles planned but not delivered” from quarter to quarter is much more likely a direct result of the ever ballooning payables than a true shortage of parts availability. Suppliers that aren’t getting paid tend to not deliver parts needed to complete cars. Over the past few years, I have heard quite a few stories about suppliers putting AML on stop work orders over unpaid bills. None of AML’s competitors are claiming these levels of supply chain disruptions, but then again, their payables as a percentage of sales are far lower.
A key bullet in the Financial Highlights is:
Retails continued to outpace wholesales with strong demand across product lines.
For this statement it to be anywhere near credible, AML needs to go back to reporting retail sales alongside wholesale. It is however a brilliant piece of creativity that is likely true for most of the year as dealers wind down the glut of cars that land on their lots in Q4 of each year. Q4 2021 was 36% higher than the run rate through the 1st 3 quarters of 2021. If Aston Martin is going to get anywhere near the low end of the new revised and lowered) guidance for 2022 deliveries, Q4 will need to be a 58% increase on the year to date run rate and deliver 2,140 cars in Q4. The last time Aston Martin had a 2k+ quarter was Q4 2018 which for all intents and purposes, was a very different company with a different product mix in a very different market environment. Now for a company that swears it only builds cars to meet demands, it’s amazing how year after year so many more people want to buy an Aston Martin in the 4th quarter and yet how few want one in the 1st quarter of the following year.
In the Presentation Deck, the first key bullet point is:
Continued strong demand – GT/Sports sold out into Q2 2023, DBX orders up >40%
And yet AML’s YTD unit sales are down 4%, lead by the 16% decline in year to date DBX sales. I would be very interested to see the math behind DBX orders continuing to be up 40% quarter after quarter and yet sales have now been in decline for the last 6 months. The GT/Sports being sold out is also a bit misleading, YTD, Aston Martin has sold just over half the number of Sports/GT car that were sold in 2019. In terms of the Sport and GT being “sold out” that’s a creative claim as its orders vs. AMLs internal budget. It is not related to actually production capacity. Gaydon, where all the Sport & GT car production is done, is now only running one line and has plenty of extra capacity.
On a regional basis, its sales in the Americas are borderline horrifying. In what had been AML’s largest region, sales dropped 20% through the first 3 quarters of 2022. Not only is this a major sales issue, with a lot of Aston Martin’s debt in US $, earnings and interest payments are now very, and expensively, unbalanced (ideally you want to match your debt obligations to earnings in the same currencies). In the earnings call, Doug Lafferty, the new CFO, tried to blame some of the North America problems in Q3 on logistics related to Hurricane Ian. Only issue with this is what became Hurricane Ian didn’t start forming over the central Caribbean Sea until late Friday, September 23, 2022 and didn’t actually make land fall in Florida until Wednesday, September 28, 2022, exactly two days before the end of the quarter. Throw in the fact that the impact of Ian was limited to just a few southern states, this really doesn’t hold much water, no pun intended. If anything, Hurricane Ian is likely to have more of an impact on Q4 than Q3. It will be interesting to see if Doug recycles this excuse for the next quarter.
Despite all of this, Aston Martin did report a few key numbers that on face value look terrific. Revenue thru 3 quarters in 2022 is £857 million, up 16% and Q3 was especially strong with 33% revenue growth. Gross margin on a YTD basis is also up 330 basis points to 33.4% despite being down 200 basis points in Q3 vs. prior year. While the revenue number looks great, its mostly due to delivering cars that don’t work properly (i.e the Valkyrie) and a lettuce with a blond wig (Liz Truss: Inside the Story of the Lettuce vs. Liz) who spectacularly tanked the value of the British Pound. As most of Aston’s sales are ex UK, Aston got a huge currency conversion benefit when all the ex UK sales were converted back into pounds (UK market is 17% of AML’s sales). However, the downside of Trussonomics was a £245 million foreign exchange revaluation on the US dollar portion of Aston Martin’s mountain of debt.
Moving on to a few key areas:
Per Amedeo Felisa, the new CEO: “In addition to the DBX707 and V12 Vantage Coupe, which were announced earlier this year, we unveiled the ultra-exclusive DBR22 as well as the stunning V12 Vantage Roadster, both of which are fully sold out”
The Final Edition V12 Vantage Roadster was a forgone conclusion as soon as the V12 Vantage Coupe was announced. It will help AML’s margins and bring in extra needed cash in 2023. The DBR22 is just another easy to engineer rebodied DBS V12 Speedster for 6 times the price. Like the V12 Roadster, the DBR22 will help the margins next year but you can only go to this well so often before demand evaporates, just ask McLaren. In the Q3 presentation deck, under the CEO’s priorities it states:
Which still appear to be not much more than a bunch of CAD files. When pushed on the launch timing for the next generation GT/Sports cars in the analyst call, AMLs latest CFO, Doug Lafferty, was spectacularly evasive but did indicate that they now don’t give information on launches that are 1 year or more out. As it is already November 2022, it looks like the next generation GT/Sports cars, that Stroll had originally promised in Q3 2021, probably will not see the light of day until early 2024.
The Valhalla is well positioned to potentially supplant the Valkyrie as AML’s most delayed hypercar. Also like the Valkyrie, the car that was originally promised, and the one that will eventually be delivered, will be very different. Originally announced in 2019, then relaunched in 2021, first deliveries are now promised for 2024. Its only 3 years behind the original production start date. So far, other than a few “design” models AML has been shipping around to dealers and events in the hopes of generating more deposits, from what I have heard, the Valhalla is mostly vaporware still and we are a long way off from seeing running prototypes.
The “God Dammed Debt”
Stroll told the Financial Times in an interview earlier this year that the £653m Equity Raise was to “deal with the god-damned debt”.
And yet, while the latest £653 million Equity Raise is now complete Net Debt (=Gross Debt – Cash) has grown again vs. YTD 2022, essentially vaporizing all the cash AML just raised. It’s a spectacular financial accomplishment and they really should name the next model the “Vanish”.
Gross Debt now sits at £1.61 bil. While AML doesn’t provide a Q3 payables number, at the end of the 1st half it was £843 mil. In a footnote related to free cash flow, it looks like it is up another £59 mil. which would put payables at £902 mil. Customer deposits are roughly £350 mil., while cash on hand at the end of Q3 was £772 mil. All in AML’s total net debt pile is now over £2 billion. I have included customer deposits in the debt pile as they are basically an interest free loan (and in the case of Valkyrie & Valhalla depositors, a long term unsecured interest free loan) from AML’s customers to the company.
In the Equity Raise announcement, it was stated:
The Company intends to use the net proceeds from the Capital Raise for the following purposes:
In October 2022, AML completed a cash tender on $200 mil. (about £180 mil.) on its US denominated debt. While this does provide a savings of roughly £22 mil. in annual interest payments it would bring total cash on hand post tender down by to £592 mil. The “up to half to repay existing debt” so far is only 27%. The reason it isn’t, and likely will not be, more is in the second of the above bullets. AML needs the remaining £592 mil. as a liquidity cushion. Free Cash flow is -£336 mil. YTD 2022 and was -£102 mil. in Q3 2022. At this cash burn rate, AML will be down to £32 mil. of liquidity at the end of 2023. Without a miracle or another cash injection, bankruptcy #8 looms just over the horizon, again. Hard to believe but all of this does make AML’s current market cap of £626 million seem quite optimistic.
Probably Stroll’s most famous quote this year was in February 2022 when he stated:
“Let me be crystal-clear, black-and-white: we do not need money.”
Truth is, there is nothing Aston Martin needs more than money.
The saga of the Valkyrie continues:
In Stroll’s Q2 comments he stated: “production of the Aston Martin Valkyrie has continued to pick up pace, and we are on track to meet our targeted full year deliveries.”
And then under “Outlook” in the Q3 2022 earnings release, it is stated that: “75-90 Aston Martin Valkyrie programme vehicles remain on track for shipment in 2022.”
Finally in the Financial highlights: “Aston Martin Valkyrie deliveries of 44 vehicles YTD in 2022, of which 17 vehicles were delivered in Q3 2022”
The use of the word “shipped” in one of above statements is quite enlightening and indicates AML might be up to the same old games again. Back in Q4 2021, AML stated that 10 Valkyries had been “shipped”. These turned out to have been deposited in a warehouse in Southern England and were not actually delivered until 2022. For the 1st half, AML stated that 38 Valkyries have been “assembled” & 27 have been delivered. This likely includes the 10 Valkyries that were shipped but not delivered in Q4 2021. In Q3, the total delivered number rose to 44. Aston Martin did not provide an updated “assembled” number for Q3 which would indicate all existing finished cars have been delivered. If so, then only 6 Valkyries were built in Q3. The current 2022 “delivered” run rate is 58, well short of 75-90 FY target.
All of the above aside, the most interesting point related to the Valkyrie in the Q3 Results Presentation was in a box in small print under the revised 2022 Guidance:
Focus on refining Aston Martin Valkyrie programme production process
In the article on AML’s 1st Half 2022 Results, I summarized AMLs relationship with key Valkyrie suppliers:
The relationship between AML and Multimatic (who are building the majority of the Valkyrie for Aston Martin and insiders have hinted at are on the hook for many of the issues) has hit a new low and production has effectively stopped over a number of disputes including payments. These payment disputes then extend to Multimatic and its suppliers. Money, or lack thereof, has been a major factor for quite some time as AML went on a cost cutting frenzy with the Valkyrie. The tipping of the cost vs. quality scale in favor of cost on the Valkyrie’s development did lead to a number of suppliers, including Supernatural, which was doing a lot of the carbon fiber work on the tub, to pull out. Just to add another level of intrigue to the whole saga, Multimatic is also doing a lot of the work on the Project One for Mercedes, using many of same suppliers, including Supernatural, and now have disputes on this project as well. If the relationship with Aston completely blows up, what impact it will have on the Multimatic-Mercedes relationship will be interesting to see given Mercedes shareholding in AML. As a final bit of icing, I have also heard from a few sources, that with Felisa now in charge, AML is considering moving all Valkyrie production to Italy, leveraging his deep connections with proven suppliers in that area.
While “refining Aston Martin Valkyrie programme production process” could mean a variety of things, that comment was put there for a very deliberate reason and I expect more to follow on it when AML releases the full year 2022 results. My guess is it directly related to the last sentence in the paragraph above on Felisa considering moving production to Italy where he has deep connections. It will also provide a convenient excuse for AML if it misses the 75-90 FY “shipment” target.
Just to top it off, there is still no evidence that the Valkyrie road car runs properly. While AML hopes that the latest round of software updates will fix a number of the issues, this is still to be determined. The other major Valkyrie related issue is the legal proceedings between AML and Nebula. Nebula originally conceived the Valkyrie idea and brought it to AML. June 2021, AML blew up a 10 year royalty agreement with Nebula on the Valkyrie and all other future Aston Martin mid-engine cars. The case has been winding its way through the court system ever since. To date Nebula has prevailed in all the court rulings and the dispute now sits in binding arbitration. Nebula’s claim is in the £150-250 mil. range and from what I have heard from a number of industry insiders, they appear to have a very strong case.
For more details on the Valkyrie, here is the article I wrote a couple of months ago ( The Saga of the Valkyrie ) which covers its development from the original idea to first customer delivery.
“Works” Formula 1 Team
On the Q1 2022 earnings call and in multiple other times in the past, Stroll has sold the benefits of having a “Works” Aston Martin Racing F1 Team hard. However, Aston Martin Lagonda (AML) and Aston Martin Racing (AMRGP) are two separate legal entities. AMRGP is privately owned (Stroll is the majority owner) racing team and AML is a publicly listed company that builds road cars. AML pays AMRGP a £21 million annual sponsorship fee. The two are separate companies with different ownership and no cross holdings.
This time, the Aston Martin F1 Team was not even mentioned on the earnings call and was only vaguely referenced in both the Earnings Presentation:
“Retail customer demand continuing to run ahead of wholesales1, enhanced brand strength with expanded appeal, supported by F1 relationship”
and in the Earnings Press Release:
“Aston Martin Aramco Cognizant Formula One Team connecting brand with engaged audience”
The change in tone and defocusing on the F1 Team “relationship” is quite sudden and jarring. I would not be surprised if might have something to do with the following disclosure on page 210 of the latest Equity Raise Prospectus:
15.1.5 F1TM Sponsorship Agreement
On 27 February 2020, AML Limited and AMR GP Limited (formerly Racing Point UK Limited) (AMRGP) entered into a sponsorship agreement, as amended on 13 March 2020 and amended and restated on 24 May 2022 (the F1TM Sponsorship Agreement), pursuant to which AML Limited granted AMRGP the worldwide, royalty-free right to use the “Aston Martin” name, logo and branding (the AML Branding) in respect of Formula 1TM participation for an initial 10-year term starting on 1 January 2021, with the possibility for AML Limited to extend the term for additional five year periods up to the end of 2050, at the Board’s discretion, and with the possibility to extend for a further five years by mutual agreement between AML Limited and AMRGP (the Branding Arrangements).
In interviews Stroll’s has explicitly stated that Aston Martin Racing GP was able to sign “hundreds and hundreds of millions of dollars of sponsorship” off the back of the name change from Racing Point to Aston Martin Racing GP. The fact that the rights to the Aston Martin brand name were given over to the race team for free, and the race team (which Stroll’s son drives for) has used that brand to raise hundreds of millions in new sponsorship, is not something cash strapped AML likely wants a lot of public discussion around.
The latest Equity Raise looks like, best case, it will buy AML another year and a bit before they run out of cash again. It hasn’t even begun to solve the debt issues. Sales through the 1st three quarters are well off the pace needed to hit even the new lowered full year projections. To get even close to the wholesale number, there is going to need to be another massive loading in Q4. The Valkyrie continues to be a mess, but the damage here is all self-inflicted. Add this altogether and it’s no surprise that AML’s shares have dropped 80% so far in 2022. Despite all this Stroll declared in the Q3 Earnings Press Release that:
“the medium and long-term outlook is robust. I remain extremely confident in our strategy and ability to deliver the targets we have set”
I hope he is right, but I wouldn’t put money on it.
Note: I do not and have never owned any AML shares.
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