It’s been a very busy week at Aston Martin Lagonda (AML). On Monday, June 26, 2023, AML first announced a change to their long-term strategic co-operation with Mercedes-Benz, then announced a new Strategic Supply Co-operation Agreement (SCA) to create industry-leading ultra- luxury high performance electric vehicles with Lucid. Just to top it all off Executive Chairman, Lawrence Stroll, declared “he should be knighted for his efforts at saving thousands of jobs at Aston Martin Lagonda & investing hundreds of millions into Formula 1 through the Aston Martin Racing Team”. Stroll then admitted to having been both angered and motivated by the negative press reaction to previous Aston developments under his watch.
On Tuesday, June 27th this was followed by AML’s 2023 Capital Markets Day where new mid-term financial targets for 2027/2028 were put forward, including:
– Revenue of c. £2.5 billion
– Gross margin in the mid 40s%
– Adjusted EBITDA of c. £800 million
– Adjusted EBITDA margin of c. 30%
– Free cash flow to be sustainably positive – Net leverage ratio of c. 1.0x
In addition, AML stated that they “expect to invest c. £2 billion over the next five years (2023-2027) in long-term growth and the transition to electrification. This will be comprised of c.£1.8 billion of capital expenditures and c. £200 million in technology access fees to the Company’s strategic suppliers and partners over the next five years, including the payments related to its proposed strategic supply agreement with Lucid Group, Inc.”
This is all a lot to unpack.
Mercedes-Benz Strategic Co-operation Agreement (SCA)
A revision to the Mercedes SCA has long been signaled. Under the original agreement, AML was to have issued Mercedes shares as follows:
Only the first point seems to have happened with the rest being first pushed back and now cancelled. Rumors would indicate that the relationship between Mercedes-Benz and both the Aston Martin Lagonda & the Aston Martin Aramco Cognizant Formula One™ Team (AMF1) have been going south for quite some time. Further evidence of this is AMF1 will not be using Mercedes power past the 2025 season. It has always felt like Mercedes got involved with Aston Martin on a kind of “rent before you buy” trial. After all the drama over the last several years, Mercedes has clearly indicated at this point that they have no interest in owning AML and would far prefer to simply become a paid supplier. Had they wanted to own AML, they certainly have the financial ability to have done so at any point. In the announcement, Franz Reiner, Non-Executive Director and Mercedes-Benz AG Board of Director Representative, said: “As a long-term shareholder, Mercedes-Benz supports Aston Martin’s future development as an independent luxury carmaker. Put in layman’s terms, “we are splitting up (consciously uncoupling) but promise to remain friends.”
From AML’s point of view, the major benefit as summarized in the Capital Markets Day 2023 release is:
This basically gets AML off the hook for a major upcoming financial liability that they could ill afford.
New Strategic Supply Agreement with Lucid Group
Since the Saudi’s Public Investment Fund (PIF) invested in AML, some sort of supply agreement for EV tech from Lucid, which just happens to be majority owned and controlled by PIF, seemed inevitable. Under the terms of the agreement:
Back in Q3 2022, PIF invested an estimated £174 million in AML. Between the value of the shares that AML is issuing and the £104 million in cash payments, that AML will be giving to PIF controlled Lucid, PIF will be getting a very large amount of their initial AML investment back. To top it off, even after this PIF will still have a 18% shareholding in AML. Just to make things even a bit more interesting, Stroll’s privately owned AMF1 Team, counts the Saudi state oil company Amamco as its “Strategic Partner” and Saudi Airlines as a “Global Partner”. What these two are paying at AMF1 in sponsorship fees is unknown but rumored to be at least $30-40 million. The level of incest between all these related parties would make the old Habsburg Dynasty proud.
In many ways Lucid is the perfect partner for AML. Lucid missed their Q1 2023 numbers badly and burned through over $800 mil. in cash. Its stock price is also down 75% in the past year. Tying AML closer to PIF/Lucid also makes a lot of strategic sense for Stroll as it creates a second possible buyer to Geely now that Mercedes-Benz is clearly not interested.
Sir Lawrence of Gaydon?
On Monday, Stroll declared he should be knighted for his efforts at “saving thousands of jobs at Aston Martin Lagonda” & “investing hundreds of millions into Formula 1 through the Aston Martin Racing Team”. I don’t believe this was a throw away comment by any means. I think Stroll truly believes it and is probably pushing his PR team to land him the highly converted honor. Knighthoods are normally awarded for:
and it really not something you publicly lobby for.
Examining Stroll’s thesis’ for a knighthood: First saving thousands of jobs at Aston Martin Lagonda. In 2019, AMLs headcount was 2,565 and in 2022 it was 2,537. You could make a case that Stroll saved these jobs as his leadership and investment prevented AML from going into bankruptcy and then liquidation. However, AML has already been bankrupt 7 times in its history and an 8th would have been highly unlikely to lead to liquidation and the elimination of “thousand of jobs”. Best case you might be able to make a case that Stroll’s investment saved a couple of hundred jobs. When you only have 2.5k jobs to start, haven’t created any new ones, it’s pretty hard to build a case that you have saved “thousands”. Second: “investing hundreds of millions into Formula 1 through the Aston Martin Racing Team”. Basically, here Stroll is saying he should be recognized for pouring hundreds of millions into his privately owned race team which he purchased so his son Lance would have a seat on the F1 grid. In addition, Formula 1 is owned by Liberty Media, a publicly listed US company. Net net, the F1 investment is first for the Stroll Family’s benefit and a secondly for a US corporation. If making investments in public US companies qualifies one for a knighthood, there are an awful lot of us who would qualify.
In addition, his thesis on buying the Aston Martin Racing Team, with the objective of making his son Lance World Champion, is ironically looking a lot shakier today despite the AMF1 team having its best season to date. AMF1’s signing of Fernando Alonso to fill AMF1’s second seat this season has exposed the gap between Lance’s abilities and those of a F1 Champion. In the 8 F1 races so far this season, Lance has finished 6. In those 6, Lance finished ahead of Fernando once, and that only happened after Fernando agreed not to pass Lance in the final stages of the race. In the five other races, the average gap between the two has been 5 places at the flag. Fernando has finished on the podium 6 times so far and Lance 0. I have heard some rumblings from the paddock that while AMF1 certainly does have a good competitive car this year, that Fernando is probably pulling it forward 2-3 places every race and Lance is worth just the opposite. With Lance being exposed like this, if it continues, it will only be a matter of time before AMF1’s sponsors start putting pressure on the team to put a more competitive driver in the 2nd car to partner Alonso. As Donald Jr. has found out, nepotism can only get you so far. At this point I would put Lance’s chances of winning an F1 Championship about on par with Harry’s becoming King.
Anger at Negative Press
In his comments on Monday, Stroll admitted to having been both angered and motivated by negative press reaction to previous Aston developments under his watch. I was quite shocked that he even mentioned this given some of the recent highly flattering press he has gotten. The Autocar Business editor recently penned a piece on Stroll which read more like a Girls’ Life Review of One Direction & Harry Styles than a balanced objective piece of journalism. In fact, I have seen less gooey profiles of Kim Jung Un coming out of Korean Central News Agency. EVO Magazine also just published a very complementary piece on AML. Other than one very minor modest obscure blog that I doubt he even knows exists, I’m not sure who else might have written anything that could have annoyed him.
Capital Markets Day
In the Capital Markets Day release Executive Chairman Lawrence Stroll declared:
“I am extremely proud of the major industrial turnaround we have completed in the last three years, which has completely rebuilt this iconic company. We are building an ultra-luxury brand, supercharged by our transformational partnership with the F1 team and with our portfolio of highly desirable and performance-driven cars.
“We have updated our EV strategy, working with world-class suppliers to complement our extraordinary in-house engineering and design teams. In addition, we are now driving new levels of operational excellence to support our growth and deliver on our targets which focus on increasing value for each car we sell, aligned with the characteristics of a true ultra-luxury company. With the heavy lifting now behind us, I have never been as confident in our future.”
In summary, Stroll is declaring that the turnaround of AML is complete, it’s been driven by the £24 million annual sponsorship fee AML is paying to Stroll’s privately owned racing team, and that they now operate as a true ultra-luxury company. Stroll demonstrated his confidence by reducing his/Yew Tree’s stake in AML from 28.4% to 21.1% last month.
Based on AMLs 2022 results (see: Stuffed Turtle) and Q1 2023 (see: Burning Turtle), there might just be a bit work left to be done. On a very high level, AMLs share price is down about 75% vs. when Stroll arrived on the scene, in AMLs losses in 2022 more than doubled to £495 million, and despite raising £653 mil. last year, AMLs Q1 2023 financial position (Cash £407 mil. & Net Debt £868 mil.) is very similar to where it was in Q1 2022 (Cash £404 mil. & Net Debt £957 mil.). On the topic of true ultra-luxury company, AML did admit in Q4 2022 that they had “temporarily suspended” their demand-led operating model and total wholesale volumes were ahead of retail volumes. These extra unit shipped were supposed to have been sold through in Q1 2023. Based on two recent visits to Aston Martin dealerships, that would not appear to be the case as both were awash in inventory. As reference I also visited the nearby Ferrari dealerships in each of the two cities and like a true ultra-luxury company, neither had a single new car for sale in the dealership.
Given where AML is today, how realistic are the new 2027/28 goals of:
– Revenue of c. £2.5 billion
– Gross margin in the mid 40s%
– Adjusted EBITDA of c. £800 million
– Adjusted EBITDA margin of c. 30%
– Free cash flow to be sustainably positive
– Net leverage ratio of c. 1.0x
As a reference, the original 2024/25 goals were:
and in 2022 AML delivered:
Starting first with the original 2024/2025 goals, I don’t see how AML is going to get to £2bn of revenue by 2024/2025. Revenue in 2022 is £1.38 billion which already includes roughly £220 million from the Valkyrie. AML likely has two more years (2023 & 2024) of similar Valkyrie revenue before that drops off significantly. Assuming they ever get the Valhalla built and out the door, that should deliver roughly £300 million in revenue for about 3 years starting in 2025. All in, this still leaves a gap in 2025 of £500 million in additional revenue that AML will have to coax out of other specials and base business growth. That’s almost 50% growth over what the base business is delivering today and it’s a bit of a stretch to believe a number of facelifts off existing models will do so. I think there is a better chance of the Boris Johnson returning as British Prime Minister than AML hitting £2bn of revenue in 2024/25. On the 2024/25 cars wholesaled number, AML has already admitted that they will not hit it so it’s no surprise that the longer term 2027/28 goals no longer include a unit sales goal. Regarding EBITDA margin, AML has never delivered against an EBITDA Margin growth target, and I see no reason why that will change in the future.
Given how AML is tracking to the midterm 2024/25 goals, the 2027/28 goals do look a bit on the ambitious side. Simplistically the 2027/28 goals have AML almost doubling revenue (CAGR 12.6%) and quadrupling EBITDA margin in 5 years. Based on the information AML has provided so far, it’s very hard to get a feel on if they have even a long shot at making it. The goals imply a heavy dependency on “specials” (see McLaren circa 2020 for how this turns out), plus likely several additional capital raises to reduce leverage and cut financial costs to deliver the Free Cash Flow target. To get anywhere near these goals, AML is going to have to deliver a full pipeline of new models that are well received in the marketplace. Right now, that pipeline consists of a very delayed Valhalla, more facelifts of the existing GT/Sportscar range, and an EV coupe in 2025. There is a lot of heavy lifting yet to do.
If past performance is a good indicator of future, then AML still has a long road ahead. Given AML is not likely to deliver against key 2024/25 goaIs, it doesn’t give me a high level of confidence in the new 2027/28 numbers. The change from Mercedes to Lucid for EV technology has as much to do with one investor (Mercedes-Benz) looking to exit and Stroll doing a “solid” for his friends in Riyadh. As for Stroll’s knighthood, well, we can all dream.
Note: I do not and have never owned any AML shares.
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