McLaren’s 1st Half 2021 Results: Road to Recovery

McLaren reported their 1st half 2021 results in mid-September.  Included in these results were not only their performance for the first 6 months but also significant changes to both the balance sheet and corporate structure which were only completed in August.  When reporting results, unlike both Aston and Ferrari which as public companies host presentations and a Q&A session for analyst’s, McLaren, as a private company, simply posts a short overview presentation and a summary of the financial statements on its website (McLaren Investors Center).  Normally I evaluate a company’s performance versus the prior results but given the pandemic that’s not particular useful or relevant.   Instead of just looking at a comparison to the 2020 numbers, I thought it would be more interesting to look at the progress they have made from last year’s near-death experience. 

Last April was perhaps the lowest point for McLaren.  At the time I summarized the situation as:

 

In Q1 2020 McLaren’s results imploded.  McLaren sold fewer cars and lost more money in Q 1 than Aston Martin.  Some of this was by design and some of it not.  What caused this, well the “hamster” died in late 2019.  The “hamster” in this case, which had spun the wheel that powered the McLaren financial model since 2015, was the Ultimate Series and LT series cars.  The model simplistically was that the high profitability from the limited-edition cars would help fund incentives when needed to keep the regular production supercars moving out of dealer’s showrooms.  What killed the “hamster”, overwork and exhaustion.  Instead of keeping the Ultimate Series cars as a once in every 5+ year’s event, McLaren had started churning them out on an almost annual basis as McLaren had become reliant on the profits.  In addition, the last LT car produced, the 600LT was no longer a capped production run and McLaren flooded the market with them.  What happened in 2nd half of 2019 broke the model.  The last Ultimate Series car launched, the Elva didn’t sell out and McLaren was forced to cut the planned production run from 399 units to 249 and then finally to 149.  The writing was on the wall for the Elva by the way the secondary market was allowed to develop for the Senna.  With no restrictions on how long you needed to hold the car for, a significant number of Senna owners flipped the cars shortly after taking delivery.  This gut of Sennas on the market depressed values and for the 1st time in memory, a limited edition hypercar was available on the secondary market at or below list.  While I do believe the way Ford managed the application process for the GT was atrocious, the one thing they did do right was lock owners into holding their cars for at least two years.  At the same time this was happening, in order to move a glut of 600LTs out of showrooms, McLaren was having to provide incentives.  So instead of the 600LT being a high profit contributor, it became a drag on the P&L.

McLaren has a number of major underlining challenges.  McLaren is still sitting on a massive pile of debt, a large amount of which was generated buying unhealthy growth via dealer incentives.  The timing on the rapid ramp up of car production was tied closely to an increase in complaints on McLaren’s build quality and reliability.  Its been a lose lose, as McLaren now has a work to do on rebuilding its reputation alongside a very difficult debt situation to manage.  While the majority to the debt, $250 million and £370 million of 5-yr Senior Secured Notes, doesn’t come due until July 2022, McLaren may need a further capital infusion to get it through 2021.  On top of this there is the not so minor issue of £600 million in un-amortized new product development costs that will need to taken to the P&L at some point.

Overall, the situation was pretty ugly in Woking in early 2020.  Just surviving would take a significant amount of hard work and deft management. 

The New Corporate Structure

Before getting into the first half 2021 results, I believe it’s worth spending a bit of time on the steps McLaren has made to get their financial house in order.  The McLaren Group today looks very different from the McLaren Group circa 2019.  Under Paul Walsh’s leadership, McLaren has taken aggressive steps to get its financial house in order.  Going into this decade, the McLaren Group was a combination of 3 operating companies: Automotive, Racing, and Applied Technologies that all rolled up into a common Profit & Loss Statement.  The problem with this was they are three very different business with different cycles, and very different capital needs.  Applied Technologies, while impressive on paper, never really took off as a business and was a consistent, even if minor, drag on the P&L.  Racing, which basically is the McLaren F1 Team, has been unprofitable as often as it has made money this century.  Finally, McLaren Automotive has always been on the financially fragile as witnessed by the wild swing in EBITDA between 2019 and 2020.  The Automotive Group also sits on the not so minor issue of £876 million in un-amortized new product development costs that will need to be taken to the P&L at some point. 

 

As of mid 2021, the McLaren Group now looks very different.  The F1 and Automotive business P&Ls have been now decoupled and it is now essentially an automotive manufacturer with a large (85% currently and dropping to 67% in 2023) equity stake in an F1 Team.  In addition, the Applied Technologies division has been sold off (as of Aug 2021).  If the long term plan is to take the McLaren Group public in an IPO, they now have a cleaner simpler structure which will better facilitate that endeavor.

Restoring Balance to the Balance Sheet

Alongside getting the structure of the business right, McLaren has taken aggressive steps to restore its balance sheet to health.  While short-term liquidity hasn’t been a recent issue, putting McLaren back on solid financial ground along with refinancing of McLaren’s £630 million of long-term debt, was job one for the new CFO coming into 2021.  On both of these undertakings, Kate Ferry, the new Group Chief Financial Officer, gets an A+.  As of August, McLaren Group has raised $620 million at 7.5% in new 5-yr Senior Secured Notes, opened a new revolving credit facility of £110 million, completed a £550 million equity raise, sold the McLaren Technology Center for £170 million (and then entered into a 20 year lease to remain on site), and spun off Applied Technologies for an undisclosed sum likely to have been in the range of £40 million to £60 million.  Proceeds from the new note raise and the MTC sale have been used to retire the £630 million of long-term debt that was to come due in 2022. The new notes also better match McLaren’s debt to its revenue in terms of currency as the US now represents 39% of sales.  McLaren reported cash on hand of  £40.2 million as of the end of June which is interesting but no longer relevant as all the major financing activities closed in August which would have increased this number by at least tenfold.

The 1st half 2021 Story

When sorting through the 1st half 2021 results in a bit of detail, reducing & flexing production alongside drastic cost reduction are areas McLaren has continued to excel at.  The key numbers for McLaren for the first six months of 2021 are:

 1st Half 2021Vs. 1st Half 2020Vs. 1st Half 2019
Revenue£360 million+ 110%-42%
Cars Wholesaled1,112+ 90%-52%
Gross Profit£121 million+£110 million-£83 million
EBITDA£95 million+£214 million+£14 million
Cash Flow from Operations-£0.7 million+£219 million+£10.8 million

 

Net net, McLaren has managed to sell fewer cars for more money at a higher profit margin, while effectively stopping the cash bleed.  Negative cash flow is why companies go bankrupt and McLaren is now in a much better place on this key metric.  McLaren did this by pulling £56 million out of overhead costs in 2020 and then held overheads flat in the 1st half of 2021 despite a 90% increase in production. Capex was also reduced 24% to £88 million.  The 2020 production cuts served to flush excess inventory out of the dealer network and McLaren now has a healthy balance of supply and demand. A major benefit of the inventory reduction has been in trade financing (i.e. funds McLaren used to support sales to dealerships) dropped first by £92 million in 2020 and now a further £21 million to £43 million as of June 2021. This leaves McLaren in a much healthier situation going forward, especially with the Artura arriving in late 2021.

A major positive in the 1st half of 2021 is the huge swing in Cash Flow from operations of £219 million.  Working Capital wasn’t quite as positive with an outflow of £14.6 million but this is still a major improvement on the same period in 2020 when £111 million left the building.  Working Capital will continue to be a challenge throughout 2021 as deposit balances drop as the last of the current generation of Ultimate Series and Super Series LT cars are delivered.  My estimate is there are now about 50 Elvas and all 765 of the 765LT Spiders are yet to be built. Operating profit was £78.5 million vs. a negative £96.9 million in the 1st half of 2020.  The final bottom line after tax, amortization, depreciation, and financing cost was a positive £24.3 million.

Is McLaren Now Set Up to Succeed?

It’s good to have wealthy friends and McLaren’s have certainly stepped forward to provide desperately needed funding in the last year and a half.  At some point in the not too distant future though, these investors will want to see a positive return.   The question now is can McLaren deliver?  McLaren still has a number of major underlining challenges that it will need to work through in the coming years.  While the debt load is now much more manageable, there is still that pesky £876 million in un-amortized new product development costs that will need to be charged to the P&L at some point.  The rapid ramp up of car production in 2018 & 2019 was tied closely to an increase in complaints on McLaren’s build quality and reliability.  To repair the damage this caused to McLaren’s reputation, build quality on the Artura needs to be outstanding from car #1. The next Ultimate Series McLaren is not slated to appear until 2025 so once the Elva’s production wraps up later this year, McLaren is going to need to pull some new levers to fill the missing Ultimate Series revenue and profit gap.  The 765LT Spider will certainly help fill the gap for the 2nd half of 2021 and 2022.

 

As part of the gap fill, I expect McLaren Special Operations (MSO) will continue to produce a number of very limited bespoke projects each year.  I would expect to see one of these break cover next year with a second to follow in 2023.  Given the huge success of the 765LT, I would not be surprised to see a final very limited series 7XX MSO derivate announced in mid 2022 as the last non-hybrid McLaren.  While I doubt it is being considered, after spending a thoroughly enjoyable day with an Elva (windscreen version), an Elva 2.0 at a Senna price point that had useable luggage space could be intriguing. McLaren has stated that the full fleet would be hybrid by 2026 and an electric car would be introduced by 2030.

 

Summary

The magic combination is to be both good and lucky.  In term of the good, in 2021 McLaren is reaping the rewards of a ton of hard calls they made in 2020.  This has been followed up in 2021 by overhauling the corporate structure and getting their financial house in order.  On the lucky, the pandemic hit just as McLaren was cycling into the most premium end of its portfolio with plans already in place to reduce volumes.  In the 765LT series, McLaren has a major hit while the Speedtail in 2020 and Elva in 2021 have bought in outsize profitability and kept the lights on.   Up next is the start of Artura production which needs to be done flawlessly.

Thoughts and comments? Please see the comments section below.

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October 2021

 

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6 Thoughts on McLaren’s 1st Half 2021 Results: Road to Recovery
    John
    25 Oct 2021
     9:30pm

    You get the feeling that McLaren were willing to do whatever was necessary to survive. And whilst the Elva wasn’t the hit they wanted, I think it suffered more from the saturation of the million pound supercar market than being a bad product. If anything, the windscreen version answered the questions some people had of it.

    The other two marques of interest are of course Ferrari and Aston. Ferrari will somehow survive because people will buy Ferrari cars as long as they’re not complete dogs. Aston just had a massive advertising campaign globally in the latest Bond film. If only they were mass producing DB5s? I’m sure I seen shots where they drove the Valhalla, but the original concept was only shown in the background now. An updated design of the Valhalla is certainly better looking, but with it being a Reichman design we have to limit our expectations. Share price for Aston seems to be starting to circling the drain again. Not sure which direction it’s going to go.

    Gordon Murray’s T.50 has also been shown at Goodwood (it was the 78th Members Meeting and I think that was Goodwood they were on). I’ve been watching the Dario videos on YouTube and from what you can see it’s a much better sorted car than the Valhalla. Firstly, it’s not jumping up and down on its suspension. Secondly, it’s not throwing debris out the rear! For the current state of development it really does look superb.

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    Simon B.
    19 Oct 2021
     12:44pm

    What I am really curious about is, how do the orders for the Artura look like? I am not sure if it’s telling or not that we’ve heard absolutely nothing on that front so far.

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    Andrew Bayley
    20 Oct 2021
     8:18am

    Against the tide in positivity, they have just cancelled the Artura European media launch at three days’ notice on the basis of software problems with the car. It looks like it is going to be a real struggle to get it to market.

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    GC CPA
    2 Nov 2021
     4:59pm

    I understand vanity investing has other goals in addition to profitability. However, there appears to be tremendous amount of pressure to perform on a thin sales volume. The new notes are expensive. It’s good to see an upgrade from the previous Moody’s rating, although these notes are still speculative grade. The sudden resignation of the CEO will hopefully not destabilize the positive financial movement of the company.

    As a Mclaren owner and strong believer in their products – I wish the very best for this excellent manufacturer. However now being exposed to the financial details through reading your blog – well… it’s a bit like watching the sausage being made from farm to table. 🙂

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