McLaren finally got around to reporting their Q4 and full year 2020 results this week on April 28th. Most other publicly traded automotive companies had reported back in February but as a private company McLaren operates under different reporting requirements. 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 would evaluate a company’s performance versus the prior results but given the pandemic that’s not particular useful or relevant. Instead of only looking at the 2020 numbers, I thought it would be more interesting to also pull apart the story behind the scene while looking at how McLaren did vs. their revised 2020 goals & Q4 performance. Finally, I’ve tried to give a bit of perspective on whether or not McLaren is now set up to succeed going forward.
Delivery Against Mid Year Goals & Q4 Results
In Q3, McLaren estimated that 2020 Group revenue would be in the range of £750-800 million, which was reliant on delivering a £400 million Q4. This would represent a 48% decline in revenue vs. 2019 and a 64% decline in wholesale car sales. McLaren’s official Q 3 EBITDA guidance was -£30 to -£40 million for full year 2020. Here’s where the 2020 numbers finally landed:
Final 2020 Estimate
Perfomance Vs. Estimate
D% vs 2019
Q 4 2020
Car Sales Retail
Car Sales Wholesale
-£30 to -£40 mil.
NA= Not available
The good news is McLaren broadly delivered against the Q3 expectations. They did this through a very rich product mix. Over 60% of the cars sold in Q4 were high margin Speedtails, Sabres, Elvas, and 765LTs. McLaren delivered an estimated 78 Ultimate Series cars in Q4 2020 with 120-130 still to come in 2021.
The 2020 Story
When sorting through the 2020 results in a bit more detail, reducing & flexing production alongside drastic cost reduction were areas McLaren exceled at. In 2020, McLaren pulled £56 million out of overhead costs and the benefits of this will carry forward. Capex was also reduced 26% (by £81 million) to £238 million. Going into 2020 McLaren had planned to reduce production in the 1st half to flush excess inventory out of the dealer network. Dealer inventory was cut by over 50% in 2020. If I look back at the last 3 years of wholesale (car sales from McLaren to its dealers) and retail sales (car sales from the dealers to customers), McLaren wholesaled 852 more cars than they retailed in 2018, 330 more cars in 2019 (for a total retail inventory build of 1,182), and then wholesaled 1,172 less in 2020 leaving a negligible 3 year inventory build of only 10 cars. Another benefit of the inventory reduction was trade financing (i.e. funds McLaren used to support sales to dealerships) dropped by £92 million in 2020 to £64 million. This leaves McLaren is a much healthier situation going forward, especially with new models arriving in the next several years. The silver lining in the Covid-19 pandemic has been the ability to get the reduction in overhead costs and the reduction in dealer inventory done more quickly.
On the uglier side, Cash Flow from operations was negative £220 million, a swing of £451 million vs. 2019. Add to this a working capital outflow of £223 million vs. 2019 due to both the car sales reduction and the drop in deposit balances as the Ultimate Series cars were delivered. With another 120-130 Ultimate Series cars set to be delivered in 2021, working capital is again going to be a challenge. Operating profit was negative £291 million vs. a positive £25 million in 2019. McLaren finished the year with total Liquidity of £105 million, Cash on hand of £67 million and long term Net Debt of £630 million.
While their short-term liquidity issue isn’t currently an issue refinancing McLaren’s £630 million of long-term debt is now job one for the new CFO. While the majority of the debt, $250 million of US $ denominated and £370 million of British £ denominated, 5-yr Senior Secured Notes doesn’t come due until July 2022, McLaren may need a further capital infusion to get it through 2021. The sale of the McLaren’s Headquarters for £170 million is expected to close in Q2 which will certainly help. The HQ sale is £30 million less than the original asking price which on the surface seems disappointing but as it’s a sale and lease back deal, if the leasing costs going forward are based on the reduced sale’s price, then it’s only a short term cash concern. On top of the debt mountain, there is the not so minor issue of £802 million in un-amortized new product development costs that will need to be taken to the P&L at some point. All of the above doesn’t happen by accident and McLaren has clearly had some management challenges in the past several years. This has been recognized by the Board as in the past 12 months there have been three major changes in the C-Suite: Paul Walsh was brought in as Executive Chairman, Kate Ferry as the new Group Chief Financial Officer, & Gareth Dunsmore as Chief Marketing Officer for McLaren Automotive. The fact that there have not been any further management changes in the McLaren Automotive Group would seem to indicate that rapid ramp up in car production, expansion of dealer inventory, and increase in dealer incentives in 2018 & 2019 was done with the full support of the Board of Directors.
The Formula 1 Team has continued its transformation from loss leader to eventual profit contributor. Looking at 2019 vs 2020 EBITDA, the F1 team delivered a positive swing of £16 million. The McLaren F1 Team finished 2020 in 3rd place in the constructor’s championship and with the most point scored since 2012. In mid-December, an initial 15% stake (which will grow to 33% by 2023) in the McLaren F1 Team was sold to a US based consortium in return for a commitment to invest £185 million into McLaren Racing over the next 3 years. As a result of this investment, F1 Team has been decoupled from the McLaren Group’s financial results. From an accounting perspective, the F1 Team will now be treated as a joint venture based on the equity method.
Is McLaren Now Set Up to Succeed?
Despite doing a lot of things right and getting a bit lucky in terms of product mix, McLaren still has a number of major underlining challenges. McLaren is sitting on a massive pile of debt, of which a significant amount was generated buying unhealthy growth via dealer incentives, & roughly £802 million in un-amortized new product development costs. Bringing in a new Chief Financial Officer in 2021 is both a recognition of the challenges and indication of the need for a very different approach going forward. 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. Once Elva & Speedtail production wraps up in 2021, the next Ultimate Series McLaren is not slated to appear until 2025 so McLaren is going to need to pull some new levers in the next few year to fill the missing Ultimate Series revenue and profit gap.
With the new hybrid supercar, the Artura, coming in Q2 2021, the base business should be secure, at least for the next couple of years if they get the launch right. The build quality on the Artura needs to be outstanding from car #1. McLaren carried over orders 120-130 Ultimate Series cars into 2021 along with around 400 765LT orders. Add in another 400 orders for the yet unannounced, 765LT Spider, and you have 30% of your 2021 estimated 3,000 units already sold. Given the high-end product mix, this will deliver 50% of the projected 2021 revenue. A new Chief Marketing Officer is now in place who will hopefully be able to stabilize a function that has had both some great successes and made several rather spectacular missteps. The portfolio has already been simplified with the entry level Sport Series being dropped:
How this will look over the next several years will be interesting to see develop as we have the Artura launch in 2021, the 720S & GT will be with us for at least another year or 2, and the next Ultimate Series will not arrive until 2025. However, I do expect McLaren Special Operations (MSO) will continue to produce a number of very limited bespoke projects (example the Sabre) each year. Given the 720S will be with us for a bit, I would not be surprised to see a final road legal track focused 720S derivate (a “780 R”) announced in early 2022. The recently launched track only 720S GT3X gives a fairly good indication of what a “780R” would look like. Buried in the text of the Financial Statements, McLaren stated that the full fleet would be hybrid by 2026 and an electric car would be introduced by 2030.
I would expect as part of the “plug the Ultimate Series Profit Gap Program” there will be performance upgrade packages for the P1, Senna, and Elva before 2025. Two other initiatives I would not be surprised to see are a sort of “Classic” service and “Classic” update program for the production series road cars now that early 12Cs are a decade old. This program could then be extended to all models once they hit the 10-year mark in terms of age. It is a great way of keeping older models within the official dealership network.
In 2020 McLaren did a highly commendable job of navigating in a challenging environment. They have made a ton of hard calls, survived the market shut down, stemmed the bleeding, hired three new key executives, all to set up the company for a more successful future. However, the financial situation, while currently stable, remains precarious and is heavily dependent on the long-term debt restructuring. McLaren has done an excellent job getting dealer inventory back to a healthy level and now needs to have the discipline to hold it there. Next comes the work to restore the brand’s reputation with great new best in class models with outstanding build quality.
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