Aston Martin & Ferrari’s Q2 2020 Results

Aston Martin & Ferrari’s Q2 2020 Results

In the last two weeks, both Aston Martin and Ferrari have reported their respective Q2 2020 results (McLaren does not report until the end of August so we will come back to them later).  Normally in these types of articles I spend quite a bit of time going through the financial results and highlighting key numbers.  This time I thought I would try something a bit different, instead of focusing on the numbers, which were in line with what I expected (Aston is still a train wreck and Ferrari turned in a very solid quarter given the circumstances), I would instead take a look at what the two executive teams said in their presentations and the question and answer sessions that followed.  I have sat though more quarterly earnings calls than I care to remember, I always find it interesting what CEO’s say and even more so, what they don’t.

Aston Martin

As Aston Martin reported first, we will start with them.  This was Lawrence Stroll’s first earnings call since assuming the position of Executive Chairman.   If you had no background on Aston’s most recent series of challenges, based on Stroll’s opening remarks, you would probably take away that this was a company in good shape with a bright well defined future (Aston Martin 1st Half Earnings Call Transcript). While management teams normally do try to put the best possible face on situations, I did expect a bit of balance to give it an aura of credibility.  In this case it came across as a bit delusional given the depth of the mess Aston Martin is in today. 

In terms of specific comments that were (or were not) made:

  • Current range: I found the comment that dealer destocking would continue through the 1st half of 2021 quite interesting. Considering the destocking started in the 2nd half of 2019, this equates to basically a two-year period to run down excess inventory sitting in dealerships around the world.  Apparently, the destocking is across the range, so it isn’t a specific model that’s the issue, it’s the entire portfolio that has problems.  It was also stated that Aston is still “heavily discounting to move cars” but the cost of this is not captured anywhere in the presentation.  It is also a clear indication that Aston needs to quickly facelift and upgrade the entire current portfolio if it has a hope of generating non-discounted demand post the destocking.  The fact that Aston Martin jammed so much unwanted stock into dealerships in 2018/2019 raises a lot of questions about the former leadership team.  Channel stuffing is certainly viewed as being a highly questionable practice in many industries.
  • Recovery: Stroll commented that it will take a few years to recover to the former 4,000 cars per year production level for the front engine GT sports cars. This would seem to be a clear indication that Stroll does understand the depths of the problems with the current range and doesn’t expect a recovery until they are facelifted/relaunched.
  • DBX SUV: The comments (or lack of) on the DBX were fascinating. This is the horse they have all bet on to pull Aston through the current mess.  However, despite being asked directly several times, none of the three Aston Martin executives would give any information on the size of the order book.  If there was one single number that if I was an investor I would have wanted to hear, it was that one.  When one of the analysis tried to come at it quite craftily from another direction asking about the waitlist timing on DBX orders, Marek Reichman completely dodged the question again by stating “it’s 12 weeks as an order intake before you would get your car, but obviously there’s a stacked up inventory of customers waiting to get theirs prior to that.”  Given that in the Q1 Earnings Report Q&A session, an Aston Martin executive had stated that the DBX order book exceeded 2,000 units and that demand extended into 2021, this sudden complete opacity raises a lot of questions.  Good news normally gets shared, loudly.
  • Valkyrie, Valhalla, and Vanquish mid-engine cars: The Valkyrie’s quest to become the most delayed supercar in history continues unabated. On a slightly amusing note, Aston’s new CEO, Tobias Moers, is coming from Mercedes-AMG where he led the development of the Valkyrie’s main competition for most delayed supercar, the AMG One which is only 2 years late right now.  In Q1, Aston announced Valkyrie deliveries would start in the 2nd half of 2020, In the Q 2 Earnings call this got pushed by Stroll to an undefined time in 2021.  As a reference point on how long the Valkyrie has been under development, David Cameron was the British Prime Minister, back when it was originally announced.  The fact the Stroll did not provide any definitive timing in 2021 would indicate things have gone badly off the rails on the Valkyrie.  Recent rumors I have heard include Stroll getting personally involved and trying to cut costs significantly which is increasing the car’s weight, a major loss of talent on the development team, and Adrian Newey having not been really involved in the car’s development for almost a year now.  If I was a Valkyrie depositor right now, having already effectively provided Aston with a four year interest free £500,000 loan, I would be quite concerned about how different the car is I will finally be getting 3 years late is going to be vs. what was originally promised.  Personally, I probably would have pulled my deposit long ago and signed the check over to Gordon Murray for a T.50.  While the Valhalla and Vanquish were mentioned by Stroll, no timing was indicated on either.  Given the massive delays on the Valkyrie, I would be shocked if we see the Valhalla before 2024, if at all.  The lack of even an indicated date range by Stroll on either are telling signs that both are likely on the chopping block.
  • Electrical Vehicle Platforms: Stroll stated in the Q&A session that Aston had not scrapped its EV plans. Considering that Aston wrote off £39 million in 2019 when it scrapped the Rapid E development program, I’m really not sure what the definition of not scrapped is then.
  • Works Formula 1 Team: Stroll has made quite a big deal about the Racing Point F1 Team becoming the Aston Martin Works F1 Team starting in 2021. The use of the word “Works” would certainly lead me to believe that Aston Martin would be taking on a significant ownership position in Racing Point.  This question came up directly in the Q&A session and Stroll admitted that there is currently no shareholding relationship between the two.  In fact, what Aston Martin will be doing is paying Racing Point a sponsorship fee which is slightly reduced vs. what they are currently paying to sponsor Red Bull.  How writing a check to Racing Point suddenly makes them an Aston Martin Works team is a bit beyond me.  The other interesting point here is that Stroll has clearly not wanted to mix the two ownership structures and put Racing Point at risk if the problems at Aston Martin turn out to be terminal.
  • Ownership: After earning’s calls, I normally check the recent insider transaction history. What I did find quite interesting is Lawrence Stroll sold roughly 26 million AML.L shares on Jun 28th (Aston Martin Lagonda Insider Transaction).

To say Stroll, Moers, and their teams have their work cut out for them is the understatement of the century.  The current line up is a major challenge, the new complete lack of transparency on the DBX order book is highly concerning, and the Valkyrie program is still badly behind schedule.  It’s going to take roughly another year of destocking before Aston can fully move to a model of building to demand.

Ferrari

The Ferrari Q2 2020 Earnings Report was a completely different tone and atmosphere from Aston Martin.  Louis Camilleri comes off as both understated and completely in control.  The earning’s call webcast, including the Q&A session, is posted: Ferrari Q2 2020 Earnings Call.  My net takeaway from the call was that this was a company completely on top of both their business and the current situation.   

In terms of specific comments that I found quite interesting:

  • Manufacturing shutdown: The Covid-19 shut down cost Ferrari 2000 units in terms of lost production, in the year to go, Ferrari will only be able to recover 500 units. This is a clear indication that Ferrari has little to no excess manufacturing capacity in the system.
  • Manufacturing backlog: Post the Covid-19 shut down, there will now be a 3-9 month delay on the production of certain new models. In the last several years, Ferrari has been more aggressive on launching new cars.  Both the SF90 Stradale and Roma are new additions to the current portfolio and not replacements of existing models.  Given Ferrari’s manufacturing capacity constraints, I’m not sure why you would further fragment the portfolio while creating additional supply chain costs and complexity.
  • Waitlist: The current waitlist is now over two years. This is almost 2x the target time.  This has Ferrari management concerned as it’s likely that a number of these people drop off and look for alternative options.
  • Profitability: It’s the higher margin models that also tend to have a higher level of personalization which is driving Ferrari’s margins currently. This does sound like a light version of the situation which McLaren put itself into.  In McLaren’s case they became heavily dependent on the margins generated by the Ultimate Series and Long Tail cars and as a result ended up producing far too many models too quickly.  While not to the same extent that McLaren has, Ferrari has started pushing a lot more “Special Series” and “Limited Edition” cars out the door.  Should Ferrari continue to develop a dependency on the “Specials” while further fragmenting its portfolio, they could land in a very difficult situation if demand suddenly shifts.
  • Cash Flow: I was a bit surprised that there was no discussion around the major drop in Free Cash Flow and the potential impact going forward. Current 2020 guidance is €100-150 million down from €700 million in 2019.
  • Racing: The Formula 1 team is a major drag on Ferrari’s finances this year. The combination of lack of competitiveness and the reduced number of races will result in a financial hit of somewhere around $100 million.  

Overall, Ferrari has, and continues to be, very well managed.  The confidence of the management team in their business and its direction comes across clearly.  The few challenges they are facing are more long term and strategic in nature than necessarily Covid-19 generated.  In fact, the few current issues Ferrari does have, a waitlist that is too long and a manufacturing backlog, other companies would kill for.

Summary

Aston Martin and Ferrari might as well be in two completely different universes.  Ferrari is a highly successful company doing a great job navigating in a challenging environment.  The only area of concern I can see is related to mix dependency and portfolio fragmentation.  Neither of these are Covid-19 related and are questions of long-term strategy.  Aston Martin is trying very hard to project confidence and clarity of direction under new management while standing in the middle of a massive turd of a situation.  While the confidence and vision maybe inspiring with the future bright, the present is still one big odious mess.

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August 2020

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If I Ran Aston Martin

If I Ran Aston Martin

In early April I posted an article on the challenges Aston Martin, Ferrari, and McLaren were facing in light of the Coronavirus (Aston Ferrari McLaren Challenges).  I then then put together an update in May once each company’s full Q1 results had been released. (Aston, Ferrari & McLaren Challenges Update).  In both these articles I included a few top line suggestions on what each of the three companies needed to do to get there business back on track.  While it’s easy to toss out a few pretty obvious recommendations from a distance, actually being in charge, dealing with the reality of the situation and assets or liabilities you are inheriting, plus owning the impact of all your decisions, is a completely different situation.  Having sat in the hot seat a few times and lived to tell about it, I asked myself what I would do if I was the new Aston Martin CEO.

As a starting point, with an eye of making this as realistic an exercise as possible, I’ve taken into account the reality that Lawrence Stroll is the controlling shareholder.  This makes him effectively the ultimate decision maker and taking into account his goals is critical to making a success of it.  I have also used Lawrence Stroll’s June 26, 2020 Trading & Funding Update Letter as a starting point on the state of the business.  In summary the situation Stroll lays out is:

  • – restructuring plans in place to bring cost base in line with reduced production levels
  • – financing looks to be in place to get through the next year
  • – production of the DBX SUV has started
  • – the dealership network is now 90% open
  • – deliveries of the Valkyrie have been pushed back (again), this time until 2021,
  • – Capital expenditure and R&D investment year-to-go will be focused on core sports car mid-cycle refreshes, DBX variant and mid-engine development
  • – DB5 Goldfinger Continuation production has started at Aston Martin Works

And then he adds two interesting points:

  • – For the full year total wholesales are currently expected to be broadly evenly balanced between sports cars and DBX
  • – From next year Aston Martin will also have the great benefit of their own highly competitive Works Formula One team

But in terms of how Stroll really sees the future of the business, it is laid out in the first paragraph of the Update Letter:

“I am as enthusiastic and confident in our multi-year plan to build on the inherent strengths of Aston Martin, its unique Brand defined by beautiful design”

The Aston Martin that Stroll envisions going forward is first and foremost a luxury brand.  It needs to become the British “Ferrari”.

What also is very enlightening is two topics that Stroll does not mention:

  • – The two other limited edition cars in the pipeline: the Valhalla & V12 Speedster
  • – What I call the package of Andy’s follies: Aston Martin Miami Apartments, Project Neptune, the Aston Martin submarine, and the AMB 001 motorcycle

In the first article I wrote that “Aston Martin feels like it was built on the side of an active volcano that sits on top of an earthquake fault line”, while my long-term view hasn’t changed much, at least the volcano seems to have entered a dormant phase as Aston’s overall the situation certainly looks more stable than it did several months ago.  Where the owner of the company wants to take the business is now very clear and what pieces you have to work with have been laid out.  Stroll talks repeatedly about Aston Martin as a unique, luxury brand defined by beautiful design which gives a clear starting point.

So, what would I do if I was in charge? With the DBX now out the door with the expectation that it will deliver 50% of unit sales going forward, job one has to be getting the rest of the range back on track.  If beautiful design is a critical Aston value, then all the current sports cars need a serious facelift.  Aston Martin’s current head of design, Marek Reichman, needs to find something else to do.   As a replacement, I would go find Ian Callum and pay him whatever he wants to come in a lead the redesign work.  Not only do all the car exterior need to be redesigned, the interiors also need serious work to bring them up to what I would expect from an Aston Martin.  A return to “beautiful design” and “elegance” is critical for Aston’s success as this is the niche it can carve out for itself in-between Ferrari which own’s passion and engagement & McLaren representing best in class performance.  This expression of “beautiful design” needs to consistently be applied across the Aston Martin experience starting with when you first step foot in a dealership, to all the support materials, to the impression you get both looking at and sitting in the cars.  As part of this model lineup overhaul, the current front engine Vantage needs to be replaced finally by a mid-engine V8 built off a carbon fiber tub.  The Rapide AMR can also go to an early grave as it is fairly pointless sitting in-between the DBX & DBS. The Rapide is the poster child in terms of being an answer to a question no one asked. I would immediately kill the current internal V6 engine program.  Engine development is not something that thin scarce resources should be focused on in the near to mid-term.  For engines, I would sign a long-term supply agreement with Mercedes for AMG V8s & V12s for the full range.  In the supercar market segments Aston needs to be competitive in, a V8 is the minimum expectation. Post relaunch the core portfolio would be the DBX SUV, mid-engine CF tub V8 Vantage, front engine V12 DBS, and a front engine V8 DB11.  This line up should provide good balance while appealing to a much wider range of potential customers.  Depending on how sales development for the new mid-engine V8, dropping the front engine DB11 might make sense in a year or two.  All production would now be made to order only.  The days of overstocked dealership discounting cars heavily to get them off the lot needs to be put and kept firmly in the past.  It destroys residual values and negatively impacts the brand.

If becoming the British “Ferrari” is the goal and Stroll does mention that he sees a great benefit of having their own highly competitive Works Formula One team, I would push hard to make it a true “works team” and have the current Racing Point F1 Team fully merged into Aston Martin vs. the current agreement which is basically a 5 year sponsorship agreement at $20 mil. per year.  Racing Point as a stand-alone brand has little to no value and certainly isn’t worth investing behind.  Fully integrating the team into Aston Martin, which would then allow you to maximize the Aston Martin branding, is critical to unlocking the full benefits of the Formula 1 halo.  I don’t believe you can become the British “Ferrari” without taking this step.  There is a very good reason why Ferrari, McLaren, and Mercedes all fully own their F1 teams.  The F1 halo will be a key element in the success of the new mid-engine V8 Vantage.

 

Two of the major management blunders of Aston in the last few years were a lack of focus and setting objectives that were neither realistic nor achievable.  I would immediately ditch the submarine, Miami apartments, and motorcycle.  They are nothing more than an unnecessary distraction and add zero to the goal of building a unique luxury brand.  There is a good reason why you have never seen a Ferrari motorcycle or a Ferrari submarine.  Probably the poster child for overreaching on objectives is the Valkyrie.  When the Valkyrie (designated the AM-RB 001 at launch) was first launched in 2016, first deliveries were targeted for 2018.  Currently Aston is hoping to finally deliver the first Valkyries in early 2021.  In terms of missing timelines, the Valkyrie has been consistently spectacular, and this just highlights how in over their heads Aston got itself on this project.  In roughly the same time period, McLaren has developed and will have delivered the Senna, Speedtail, and Elva.  Given just how difficult the Valkyrie project has been, ditching both the Valhalla and the V12 Speedster is only prudent.  Resources that these projects would have consumed are much better spent on the base range relaunch.  Developing a mid-engine V8 Vantage is far more strategically important long term for Aston than selling 500 Valhallas.  As Stroll didn’t mention either the Valhalla or V12 Speedster in the Update Letter, I would expect him to be supportive of the move.  Being able to make these sorts of tough, potentially unpopular but strategically sound decisions are what separate a great CEO from an average one.

Last on the list of distractions is the DB5 Goldfinger Continuation.  Given that production has started, I would finish the run and then forbid anyone from ever suggesting another project like it.  All these continuation runs do is remind the general public that your glory days are long behind you.  It also demonstrates a lack of creativity and reeks of a desperate cash grab.   I can only imagine what would happen to a young executive in Maranello if he or she suggested producing a few more 250 GTOs.

So where would this all leave Aston Martin going into 2021?  The Aston Martin I would envision:

  • – More stable financial footing
  • – Fully integrated F1 team with both car and racing division owned by Aston Martin Lagonda
  • – An updated road car portfolio that can successfully compete with Ferrari, McLaren, Lamborghini, and Porsche consisting of a mid-engine V8 Vantage sports car, front engine V8 DB11 GT, front engine V12 DBS Super GT, and the DBX SUV
  • – First Valkyries delivered
  • – All the off-strategy distractions eliminated
  • – Valhalla and V12 Speedster projects discontinued

Net net, this will be a much more focused company built around both a competitive F1 race team and a car manufacturer that produces the most elegant, beautiful sports cars & SUV on the market.  With a balanced and competitive car portfolio, Aston should return to growth.  Once back on sound footing, remaining focused on the core business, and not chasing high profile vanity projects that consume enormous resources, will be critical.

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May 2020

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Aston Martin, Ferrari, & McLaren Update Q 1 2020

Aston Martin, Ferrari, & McLaren Business Update Q 1 2020

In early April I posted an article on the challenges Aston Martin, Ferrari, and McLaren were facing in light of the Coronavirus (Aston Ferrari McLaren Challenges).  At that time most of the world was just several weeks into a lock down that would ultimately bring large parts of the global economy to a halt.  Eight weeks later, those lock downs are starting to lift in many countries and a “new normal” is taking root.  This new normal looks nothing like the world circa 2019 and that world is unlikely to return until a vaccine is widely available.  With all three manufacturers now having posted their Q1 results, in this rapidly changing environment, I thought it would be worth taking another look at the health of Aston Martin, Ferrari, and McLaren, the challenges they are facing, and what needs to be done to survive.

 

I am a firm believer that you need to not only understand the situation today but also have a firm grasp on history to be able to even remotely predict the future.  A strong, healthy, well-run company isn’t something that happens overnight, it takes years to build.  On the other hand, baring a crisis, a poorly run, sick company can crawl along on life support for years.  The difference is right now we have a crisis, and the risk to a poorly performing business in this environment is significant. 

 

Below are the financial indicators that I normally start with on any company I am taking a look at.  These are the full year 2019:

 

Manufacturer

(US $)

Market Cap (as of May 29, 2020)

2019 Group Sales

D% vs. 2018

2019 Cars Sold

2019 EBITDA

D% vs. 2018

Aston Martin

$838 mil.

$1,241 mil.

-10%

5,862

$167 mil.

-46%

Ferrari

$42 bil.

$4,118 mil.

+10%

10,131

$1,002 mil.

+11%

McLaren ‘

$2.5 bil.*

$1,960 mil.

+18%

4,662

$230 mil.

+30%

*Based on last round of investment in 2018. 

 

And this is Q 1 2020:

 

Manufacturer

(US $)

Market Cap (as of May 29, 2020)

Q1 2020 Group Sales

D% vs. Q 1 2019

Q 1 2020 Cars Sold

Q 1 2020 EBITDA

D% vs. Q 1 2019

Aston Martin

$838 mil.

$99 mil.

-61%

578

-$58 mil.

-266%

Ferrari

$42 bil.

$1,015 mil.

-0.8%

2,738

$345 mil.

+1.9%

McLaren

$2.5 bil.*

$137 mil.

-62%

307

-$101 mil.

-460%

*Based on last round of investment in 2018. 

 

Clearly things got very ugly for McLaren fast, Ferrari hit a small speed bump, and Aston Martin continued to unravel.  In the two months since the end of Q1 2020, these trajectories, if anything have only accelerated. 

Starting with the strongest of the three, from a financial perspective, Ferrari is clearly performing well and is well positioned to both weather the crisis and emerge in a position of increased strength.  To give an idea of just how solid Ferrari’s current position is, they have enough cash on hand to just about cover all their debt that matures in the next two years.  In the past two months Ferrari’s market cap has actually increased by $4 billion, more than the combined value of Aston and McLaren.  In fact today Ferrari, which produces just over 10k cars a year, is worth more than either General Motors (7.5 mil. cars/year) or Ford (6 mil. cars/year). The stock market values Ferrari as a luxury good manufacturer with a P/E ratio of 37, much more in line with Hermes or LVHM than GM or Ford.  When announcing the Q 1 2020 results, Ferrari did issue guidance for the balance of 2020.  At the high end of the guidance EBITDA is expected to be -5% vs. 2019.  In normal times this would be a poor year, in today’s circumstances, if they can deliver it’s a very strong result.  Ferrari will also benefit significantly from the Formula 1 spending caps coming into place and has reduced its driver cost by an estimated $40 million in 2021 with the switch from Sebastian Vettel to Carlos Sainz.  The biggest risk Ferrari faces right now is to its huge market cap should it miss 2020’s reduced targets. 

Financially, Aston Martin’s situation is just plain ugly, again.  It’s gone bankrupt 7 times in its history and an 8thdoesn’t seem out of the realm of possibility depending on how the next year plays out.  From its IPO in Oct 2018, which valued Aston Martin Lagonda at a little over $5 bil, 18 months later AML’s value sits at 16% of that after the share price recovered a bit in the last week.  It’s a spectacular destruction of shareholder value in a relatively short period of time.  Q 1 2020 for Aston Martin continued the downward spiral Aston perfected in 2019.  All of Aston Martin’s hopes and dreams right now are wrapped around the DBX SUV.  Whether the post Covid-19 economy will be a welcoming one for yet another $200k+ SUV is highly debatable.  Even if it is a success, it may be too little too late.  Lawrence Stroll, brought in to provide badly needed liquidity, is now officially the Executive Chairman and owns Aston’s future.  He recently hired Tobias Moers away from Mercedes-AMG to be Aston’s new CEO and to execute the turnaround.  What is quite shocking is this is really the only major move, other than a bit of belt tightening, Aston has made in the last couple of months. 

 

In the first article I wrote that “Aston Martin feels like it was built on the side of an active volcano that sits on top of an earthquake fault line” and nothing that has happened recently would change my point of view.  Andy Palmer, the former CEO who just recently found out (via a reporter at the Financial Times in a stunning display of poor transition management) that his presence was no longer required looks to be carrying the bag for the current mess.  Whether Dr. Palmer is to blame for the current situation is an interesting discussion.  He was brought in back in 2014 by the controlling private shareholders to polish Aston Martin up for an IPO.  Palmer was brilliant at delivering against that mandate.  He doubled Aston Martin’s revenue between 2015 and the IPO in 2018, more than tripled EBIDTA, almost doubled car sales, while holding debt levels steady.  For his troubles, Dr. Palmer walked away with roughly $40 mil. when Aston went public.  The key words in the last sentence are walked away, because if Andy had taken his cash and ridden off into the sunset, his reputation would certainly be very different than what it is today.  If pre-IPO Aston was a discipled financial enterprise under Palmer, post IPO Aston exhibited all of the financial disciple of an alcoholic locked in a brewery.  Net leverage soared in 2019 to 7.3x adjusted EBITDA, up from 2.3X in 2018 and as of Q 1 2020 sits at an even more frightening 10.4x.  The warning signs that this was going to go off the rails certainly date back to 2018 and the way the IPO was structured.   All money raised from the IPO went to the existing shareholders and did not generate any cash for Aston Martin which could be reinvested in the business.  It’s a clear message that the group that got Aston to this point had little interest in its future.  Throw in a couple of head scratching completely off strategy vanity projects like Project Nepture – the Aston Martin Submarine, and the Aston Martin Apartments in Miami, and its clear management had begun to lose the plot. 

 

So, if Lawrence Stroll and Tobias Moers are going to save the day and turn Aston Martin into the “British Ferrari” with a P/E ratio north of 30x, they first need to stabilize the business and stop the bleeding.  It’s surprising that a restructuring program has yet to be announced as reducing costs is a critical step in these sorts of situations.  The one line of the P&L that has been increasing well ahead of revenue for a few years is “operating expense”.  This points to an organization becoming increasing bloated and less efficient.  Ditch the submarine and the Miami apartments, they are nothing more than an unnecessary distraction.  Finally get the long-delayed Valkyrie finally out the door and take a hard look at if Aston really has the resources (and the demand) for the Valhalla.  Same goes for the V12 Speedster.  If not, you still have time to pin it all on the Palmer regime and to walk away.  Finally, pray hard that the post Covid-19 world really does have a need for the DBX SUV.

Which finally brings us to McLaren.  In the first article I wrote that McLaren needed to do three things to get the business back on track:

 

  • McLaren’s Formula 1 Team needs to again become a net profit contributor to the group.
  • The next generation Sport and Super series McLaren’s need to be launched flawlessly and deliver segment leading performance.
  • Need to fill the profit gap left by the longer timing now necessary between Ultimate series models given the recent market saturation in this segment.

 

Coming out of 2019, McLaren’s financials looked quite respectable.  It had a growing business, the ten-year-old supercar business made money, and as a privately held company, has been able to attract outside investment whenever necessary.  On the surface, it was the F1 team that presented the biggest financial challenge and the supercar business looked solid.  Then Q1 2020 happened and McLaren’s results imploded.  The F1 team is certainly no longer McLaren’s biggest issue. 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+ years 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.  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. 

 

The roots of McLaren’s problem date back to 2016 when McLaren launched the Track22 plan which called for 15 new models in 6 years.  McLaren then doubled down 2 years later with an updated Track25 plan which called for 18 new models by 2025.  The plan laid out was audacious to say the least.  McLaren then borrowed heavily to fund the development of all these new models, leading to the significant debt problem they are currently facing.  Net leverage is currently at an Aston like 7.8x adjusted EBITDA.  In reality it was too many new models, too fast, that the market could not absorb.  Eight to ten years between new production models with a revite/update/facelift at the mid-point and a minimum of five years between Ultimate Series cars feels like a much more reasonable plan.  In addition, the production ramp up on all these new models did cause a few reliability issues that got very over hyped in a few social media platforms.  (Personally, we have never had any issues McLarens & Reliability). The net impact on McLaren’s reputation though has not been positive.

 

To McLaren’s credit, they did realize they had a major problem well prior to the Coronavirus taking its toll.  Planned production for 2020 was already reduced heading into this year and McLaren just announced a major restructuring.  In addition, capital spending and marketing costs have been cut substantially. The launch of the new Sport Series models has been pushed back to 2021 and the main focus for 2020 is delivering the “hamsters” dying gifts, the Ultimate Series Speedtail & Elva, along with highly profitable 765LTs. 

In summary, all three supercar manufacturers have their challenges.  For Ferrari these are not outside what one would expect for a highly successful company in a challenging environment.  What happens to Aston Martin is anyone’s guess.  It’s in dire straits but like a phoenix, Aston Martin is exceedingly good at rising from the ashes to live yet another day.  If the DBX lives up to expectations, Aston might just make it.  Or at least for long enough for Stroll & Company to cash out handsomely.  McLaren went off the rails quickly, even if the warning signs have been evident for a while.  When things are going well, and by most measurements 2019 was a very good year for McLaren, it’s easy to ignore the warning signs.  McLaren does seem to understand their issues and is taking action to address them.  The good news for McLaren though is their cars are still best in class.

 

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May 2020

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Ferrari 365 GT/4 BB & 512BB

Memories of the Ferrari 365BB & 512BB

Ferrari 365 GT/4 BB & 512BB

Several years ago, I owned a pair of Ferrari Berlinetta Boxers. These were the 2ndand 4thof the sixteen Ferraris we have owned to date. If the F355 GTS was the car that introduced me to the world of Ferrari, it was the Berlinetta Boxers that cemented a long relationship with the cars from Maranello.  It’s hard to beat a carbureted V12 sitting behind your head for sensory stimulation.  While not the easiest cars to master, they reward tremendously when you take the time to learn how to drive one properly.  They are a true Grand Tourer and can devour huge highway mileage effortlessly.  The race track however is not a friend and driving one on in that environment is only for the brave.  The following are two of my more memorable stories from my Boxer days.

365BB

I picked up my 365 GT4 BB from the workshop where it had been for the better part of the last two months having a few age-related issues attended to. At 30 years old, all the rubber bits and a lot of the wiring were in need of attention.  The workshop did a great job and came in at the agreed budget.  

What happened next was not at all fun. Upon leaving for the roughly 40-mile drive back, I hit a major traffic jam. Later I found out that a truck had crashed and caught fire, shutting down the major highway back towards London. It was now Friday late afternoon, rush hour starting, dusk descending rapidly, and I am sitting in a 30-year-old Ferrari barely moving. Over the next two hours of crawling along detours in bumper to bumper traffic I came the following conclusions:

– the 365BB is not designed for inching forward. Try this for over an hour and your left leg will just about fall off. The large single plate clutch is a beast to manage at low speed

– the side mirrors on a 512BB are just about useless, but useless is still much better than no side mirrors at all

– having to do a 3 point turn, in the dark, with not exactly outstanding rear three quarters visibility, is both an outstanding upper body workout, and involves a lot of praying that you are not about to back over something short or hidden

– 30 year old headlights, even if in perfect working order, are pretty pathetic

– the normal 12-14 miles to a gallon drops to 12-14 gallons to the mile when you are not moving  

despite all this the car behaved impeccably. Oil temp & pressure, and water temp all stayed right at normal throughout the whole ordeal.  The driver’s blood pressure was another story. 

The 365BB is clearly a car for sunny days and open roads. However, the 365BB can handle trying of situations if it has to.

512BB

It started on a beautiful fall day, bright blue sky, crisp air, and as it was early, not a lot of people on the road. Perfect driving conditions. It had been about a month since I had driven the 512BB. It was an angry beast when I first starting pumping fuel through the Webers and demanded that it wake up. After a bit of a fight the engine finally came to life and settled into a low annoyed rumble. There we sat for about five minutes until the water temp gauge started the long slow journey to 90 degrees C. As soon as we started moving, oil pressure read a perfect 6.  

It is interesting how soon you forget things. The 512BB’s steering is very heavy at low speeds and turning around in the driveway today was a full cardio vascular work out. It might have been easier to try to pick up the front end and walk it around. That completed we were off first to the highway for some high-speed cruising to warm up and then into the mountains for a proper work out. After about 10 minutes on the highway the engine temperature gauge actually started to move. Sometimes this takes half an hour and if you cruise at under 3000 RPMS it may never move. With basically no traffic on the highway though, we were in triple digit territory once everything had fully warmed up. At speed, the 512BB forgave me for ignoring it for the past couple of weeks and became a completely different car. The steering transforms itself to become perfectly weighted and highly responsive. It is a much better car at 100 than at 50 mph. At low speed it was rough, barking, with a lot of different noises filling the back of your head. Over 4000 rpm, it is all in harmony. I rarely use the stereo, in fact, not sure it even works. We cruised for about 20 minutes before exiting onto the more mountainous portion of the drive.  

After navigating quickly through 2 little towns we were in the foothills on a great windy road. Lots of fast long sweepers that the 512BB is well set up for. The car was really running well at this point and everything flowed smoothly. Getting the corners right I find highly rewarding as you can feel the rear snap into line through the back of the seat. On these roads the 512BB seems to shrink and become more agile than it should be. We did this for about another 30 minutes before heading back. It was a great run and I love the feeling when everything is in sync between man and machine. 

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