The Supercar Trio: Larry, Ben, & Mike

The Supercar Trio: Larry, Ben, & Mike

A couple of weeks ago, I had the privilege of watching a number of the sessions at the Financial Times, Future of the Car, Event in London.  The overall theme of the event was: “What new skills, strategies, and strategic alliances does the car industry need to develop to future-proof businesses and ensure long-term success?” Overall, it was an outstanding and highly informative event and the list of participants was a who’s who of the automotive industry.  Out of the numerous interviews and fireside chats, it was the three sessions with Aston Martin’s Lawrence Stroll, Ferrari’s Benedetto Vigna, and McLaren’s Michael Leiters that really captured my interest.  Leiter’s discussed McLaren’s challenges and where they are headed, Vigna focused mostly on emerging technology and its implications for Ferrari, and Stroll talked about his accomplishments.  All three sessions were moderated expertly by the FT’s Peter Campbell.  The following are my key takeaways from each of the three sessions, in reverse order of the egos involved.

McLaren – Michael Leiters

Leiters came across as quite open, honest, thoughtful, and a little bit nervous.  He was transparent about McLaren’s recent challenges, where he wants to take the business, and how he sees the portfolio and powertrain technology evolving.   Leiters was clearly well prepared, well rehearsed, and remained very much on script during the 30 minute discussion.  It’s clear that he’s got a massive challenge, possible more than he originally bargained for, when he took the job.  He did make a point of saying that he has confidence in the business plan and it has strong shareholder support.  Leiters indicated that he is hoping to have the new capital structure in place in a month.  I hope he is right as it is a bit overdue at this point as the discussions have dragged on for at least 6 months now.  A couple of other interesting points:

 

  • Despite Leiters’ coming from Ferrari, he was very clear he had no intention on trying to copy Ferrari, very clear about the need to stick to McLaren’s DNA.
  • Leiters sees a future for ICE in the McLaren portfolio but believes the majority of the portfolio will likely be hybrid in the next 5 years. EV is further out (if ever). In fact, it was pretty clear that Leiter’s is not sold on EV as a powertrain solution for Supercars given both the weight and lack of emotion.
  • While not outright committing to doing a SUV, Leiters strongly hinted that it is highly likely that at a minimum, McLaren will introduce a 4 seater.
  • While stating that an IPO is not currently on the agenda, he did reveal his cards when he indicated that McLaren needs to become profitable and then we will see what happens.

Ferrari – Benedetto Vigna

Vigna is clearly a captain of industry and quite comfortable in the Ferrari CEO seat now.  While Ferrari might be his first CEO job, Vigna ran a massive highly complex semiconductor operating group prior to joining Ferrari so is used to managing complexity and large organizations.  He started the discussion by establishing that he is used to working in a much faster paced industry than the automotive world which was a rather interesting approach given the audience.  While he did say Ferrari was fast for a auto manufacturer, it was clearly implied that he would be step changing the rate at which Ferrari evolves and embraces change.  He did reference Tesla as a company that has come out of nowhere to completely disrupt the industry.  Vigna is a clear champion of using technology to create disruptions that can be leveraged.  He does believe that innovation is core to the Ferrari DNA and he will use emerging technologies to drive that forward.   A few quite interesting points:

 

  • Sustainability is highly important and Ferrari’s core values include the three P: People, Profit, and Planet.
  • In terms of powertrains, Ferrari is committed to a three prong approach. Ferrari will continue to manufacture ICE, build hybrids, and launch EV. What was very interesting is Ferrari seems now to be very committed to maintaining ICE for as long as possible while being much less excited about EV.  ICE wil be maintained until it socially untenable to do so.
  • Ferrari is first and foremost a luxury goods manufacturer. It must appeal to the emotional side of the customer; it must touch the soul and create an emotional connection.
  • Vigna is clear on the challenges on creating an EV that “touches the soul” while at the same time being quite certain that Ferrari has or will crack the code. His comments on an electric car not being silent was quite telling as to the approach Ferrari is taking. He did illude to the size of the challenge when referencing Enzo Ferrari’s statement that the engine is the soul of a car.  When pushed Vigna stated that in an electric car the soul is now the client as the intent is to stimulate the client’s emotions across the senses and not just via sound but also linear and lateral acceleration and the cockpit environment.  He also admitted that with current battery technology you can’t produce a car that is both a track monster and a long distance tourer.  Current battery technology just isn’t flexible enough.
  • One of the biggest challenges and decisions Vigna is facing is deciding what to produce in-house and what to outsource. Both EV batteries and software are key decision points.  On the software, a car has four main systems, Ferrari will always develop the performance software in house but comfort/climate control, infotainment and autonomous will be outsourced as they are not competitive points of difference.
  • On Ferrari’s future growth, Vigna made what I would call slightly strange statements around the 2022 volume growth being due to Ferrari’s stress testing their supply chain. He then refused to get caught stating any sort of volume cap but did emphasize that he expected most of the growth to come through value, i.e. mix and pricing.  He is looking to add more models at low volumes facilitating this with the Purosangue (and please don’t call it an SUV or he will ignore you) being a good example of the new approach. I would also take this as an indication that Ferrari will expand upon the Icona line given its price point and margins.  
  • Finally on Formula One, don’t expect a quick turn around on Ferrari’s fortunes. He is urging patience for the new team principle, Fred Vassuer.  Doubt he will get it.  Ferrari goes through team principles at the same rate Italy goes through Prime Ministers.

Aston Martin – Lawrence Stroll

If Leiters and Vigna were the poster kids for staying on script and disciplined in their response, Stroll was free flowing word salad. The first two discussed their companies’ accomplishments.  Stroll attributed everything to himself in a performance that would even make Trump blush. If someone in the Aston Martin PR department spent time preparing a script for Stroll, it was not time well spent. This was a completely different Stroll vs. the on-script discipled version from the FY 2022 Earnings Call.

 

A few things Stroll would like you to know:

  • He inherited a company that came off a colorful troubled IPO and that was executing a wholesale push model rather than a retail pull model.
  • Stroll has built some of the greatest luxury companies in his life. The Aston Martin he inherited claimed to be operating in a luxury environment but the manner in which the business was conducted couldn’t have been farther from the truth.  In addition, there was an inventory oversupply issue which he had to deal with as well.
  • My new vision is very clear, to build the world’s greatest ultra luxury high performance British brand.
  • The first thing Stroll did when taking over Aston Martin was to solidify the finances of the company. He has raised and invested approximately a billion and a half pounds, which he believes is quite a substantial number by anybody’s standards.
  • He has also brought in what he considers to be the best management in the world that understands how to do small volumes, high performance, and luxury
  • Stroll’s first order of business was to align demand with supply. It was a very costly venture, probably the costliest venture, and cost several 100 million GBP because of the inventory that was in the marketplace.
  • Stroll firmly believes that we should always be manufacturing significantly, or at least a few percent less, than demand. So, the first thing I implemented was we stopped making cars for over 9 months to work through the existing inventory.
  • When Stroll took over most of these cars were selling through discounts. He is adamant that there couldn’t be worse way to build a luxury company.  He then stated that to this day he has not made a car that doesn’t have an order.   
  • Stroll indicated that today there is no (new) inventory to the buy which has driven values of Aston Martin’s second hand cars up significantly. Per Stroll, if you want to buy a new one, you can’t do so without ordering it.
  • Stroll stated that in the next 24 months there will be eight new car launches, and that Aston Martin has never seen so much activity in the history of the company.
  • He has been working for three years to bring new technology performance from our Formula One team and integrated into the road car business.
  • Stroll would like you to know that Aston Martin has created a new sector in cars. Aston Martin has created something far superior to a Grand Tourer which for the first time in the automotive world is going to have this true high level of luxury and a true level of high performance. (it’s what they are calling Super Tourer, not to be confused with ABBA’s Super Trouper).
  • In Stroll’s words, “I’m taking a page out of my previous successful retail history. In order to share Aston Martin experience properly with customers, we will be opening our first flagship store in New York.  It will have the best address on Park Ave at 57th  It opens on the Tuesday before the Canadian Grand Prix. I think it’s the 13th of June.  That’s going to show the world how an Aston Martin customers experience is done and it’s nothing like any other automotive manufacturers has done.  It will really be something that’ll blow your mind. We’ll have one of those in New York, we’re going to have one of those here in London, we’ve actually signed the lease in Berkeley Square.  We’re going to have several in China we have one in Japan we’re going to open several throughout United States.  Beverly Hills and Florida are next on the list. I want to have a dozen of these around the world that give the true customer experience.  They will have designers in those stores seven days a week to help you with your car.  We’ll have designers living in those stores.  You know the extra options you put on the car are very profitable.”
  • Stroll would like everyone to know about the huge benefits that Aston Martin Lagonda, the road car company, is getting by having the Aston Martin Formula One team. In each race Aston Martin has the safety car and the medical car. Stroll claims, Aston Martin has 92% new interest in the brand since joining Formula 1 last year
  • Stroll stated that the Vantage F1, which is a car Aston Martin sells that is similar to the actual F1 safety car, 72% of those sales are due to Formula 1.
  • In terms of the mid engine, cars, Stroll stated that Aston Martin will have a very large mid engine program built around the Valhalla. The Valhalla will ultimately  come in many variants and there will be a number of mid engine specials.
  • Stroll thinks Aston Martin’s shares are significantly undervalued but blames it on the troubled past of the company which predates him.

And my favorite Q&A:

 

In answer to Peter Campbell’s question on inventory, “you said you’ve never made a card that you haven’t already pre sold.  And yet there were some of the books last year, about 900 more cars, in inventory than were planned,  what happened”

 

Stroll replied “with that no we didn’t 100 more if you’re referring to the DBX we had tremendous well two very big supply chain shortages which we mentioned during the course of the year one was one was leather one was bumpers and we had to deliver cars later in the year because we got the components later in the year those were sold orders or to dealers or the customers that we delivered later they were not there. The car should have been delivered earlier but were sold before they were delivered so there’s no, categorically there’s no car made today that aren’t pre sold at all. There’s no cars made today that were not ordered by a customer or by a dealer there’s no cars in our inventory there are cars in dealers inventory. Its just the two or three cars they have in the showroom.  These are the cars that they have for test drives and but unless they’ve ordered the car, or the customer ordered the car, that’s correct we have not made a car. Other than some press cars or things like that”

 

Word salad has never had a finer moment.

 

As a final note, Aston Martin’s shares are down 83% since Lawrence Stroll took over as Executive Chairman and its Gross Debt is up by over £200 million.  Regarding all the Aston Martin boutiques Stroll is planning on opening around the world, only one word comes to mind, Asprey (see: A Royal Mess – Asprey).  In terms of only building to order, in Aston Martin’s 2022 Full Year Financial Report, it was noted that in the timing of deliveries towards the end of Q4, total wholesale volumes were temporarily ahead of retail volumes at the end of 2022.  A check of inventory at a few US Aston Martin dealerships indicated that there are plenty of new Aston Martins for sale on dealer forecourts today.  For more details on Aston Martin’s performance: AML 2022 FY Results & AML Q1 2023 Results.

 

Summary

Watching the three interviews back to back was fascinating.  Leiters clearly has his hands full, knows it, and isn’t trying to hide it.  Vigna and Ferrari are flying high but are concerned that the emergence of EV could destabilize the cash machine they have created.  As for Stroll, there really isn’t anything to add that he hasn’t said himself.  Stroll couldn’t be more different from the other two if he tried.

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May 2023

 

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Ferrari’s Q 1 2023 Results: The Galloping Horse

Ferrari’s Q 1 2023 Results: The Galloping Horse

Ferrari had a spectacular year in 2022 and that momentum has continued to build in 2023.  Every single key financial indicator, bar one, grew double digits vs. Q 1 2022.  The only hiccup, Free Cash Flow, was down by 9.9% but even there are good reasons for the decline which can be seen as a strong indication for more upcoming growth.  The order book is very healthy, extending now into 2025, and Ferrari indicated that Q2 will be another strong quarter.  Ferrari management then indulged in a bit of sand bagging and tried to downplay expectations for the back half of the year by indicating they expected Q4 to be the weakest quarter in 2023.

 

In Q3 2022, Ferrari raised its guidance on every single key metric and then went ahead and beat even the raised goals last year.  I have no reason to believe they will not do the same this year and the Q1 results certainly point in that direction.  To a certain extent, they have to given the current market cap of $54 billion and the stock sitting at an all-time high (as a reference Ford’s current market cap is $46.5 billion and they do sell a few more cars than Ferrari, another way to look at it is Ferrari is valued at $4.1 million for each car sold, while Ford has a value of $11k per car sold).  Ferrari is valued by Wall Street as a super premium luxury company and not as a car company.  The moment it fails to continue to execute brilliantly and beat expectations, Ferrari risks being seen more as a car company which will be ruinous for the stock price (as another reference, Aston Martin’s market cap is $1.9 billion or $296k per car sold).  These dynamic plays themselves out both in the way Ferrari acts and the messages it is sending.

 

Benedetto Vigna has been the CEO for over a year and a half now and it shows.  In the earnings call Vigna now comes across as more confident and in command.   Vigna still holds his cards very close to his chest but is a bit more loquacious and comfortable providing deeper insights into certain areas while pushing back in others.  The CFO, Antonio Picca Piccon, was also on the call and did his usual nice job of handling the various questions tossed his way.  Vigna & Piccon appear to have a strong relationship and work well together.

The areas that I found interesting follow:

 

  • Q1 2023 Key Results: The key numbers for Ferrari in Q1 2023 were 3,567 cars sold, (up 10% vs Q1 2022), Net Revenues of €1,429 million (+20%), and EBITDA of €537 million (+27%). Free Cash Flow is the one negative at €269 million, down -€30 million (-9.9%) vs. Q1 2022.  The drop in the FCF delivery in Q1 2023 seems to be a result of a parts inventory build and lower incoming deposits vs prior year which benefited from the Daytona SP3 launch.  Ferrari returned €102 million to its shareholders via both dividends and the share repurchase program in the quarter.  Probably the most impressive number here is the value (revenue) growth which is 2x the unit volume growth.   Ferrari’s ability to drive pricing and increase personalization bodes very well for its future and is a critical underpinning of its “luxury” brand positioning with the markets.

 

Over the last several years, Europe received 46-48% of Ferrari’s production.  This rose to 54% in Q1 2022 but dropped back to 43% in Q1 2023 with a 12% decrease in deliveries.  North American deliveries accounted for 27% of the total in Q1 2023, up 46% vs. Q 1 2022.  Ferrari seems to quite deliberately adjust supply to take advantage of currency movements.  As the US dollar has remained quite strong vs. the Euro going into 2023, the US has continued to receive a higher allocation of new cars.  This is likely to change if the dollar weakens in the back half of the year.  Supply in the US, even with a 46% increase in units, is still short of demand.  As a result, residuals on recent models are still quite strong, even if they have receded a bit post the COVID used car bubble.

 

  • Product Mix & Profitability: Ferrari’s Q1 2023 profits were €297 million up 24% vs. Q1 2022. Portfolio mix was a positive €85 million driven by range model mix and increased personalizations.  Historically it’s been the big V12 GTs that have driven Ferrari’s profitability, now that’s been taken over by the hybrids.  The SF90 & 296 ranges are highly profitable and as hybrids grow as a percentage of the overall mix, they will continue to drive margins up.  When the first EV is delivered in 2025, I would expect that will give margins a further boost.  With the Icona SP3 Daytona & Purosangue deliveries both ramping up in the balance of 2023, product mix should be quite positive going forward and help drive long term profitability. 

 

  • CAPEX, & Debt: Ferrari has very ambitious plans and is generating the cash needed to bring them to life as demonstrated by the €150 million in Q1 2023 CAPEX spending, up 14% vs. Q1 2022 with further increases planned throughout 2023. As per auto industry norms, Ferrari capitalizes around 50% of its CAPEX spending, with the balance hitting the P&L in the current year (unlike a certain other public Supercar manufacturer which capitalizes a much higher percentage which helps inflate EBITDA).  I have no concerns with Ferrari’s current debt load.  Total debt is down slightly to €2.7 billion, and cash and equivalents are up slightly to €1.44 billion with total liquidity of an impressive €2.1 billion.  Ferrari does have €484 million of debt coming due in 2023 and has enough cash on hand today to retire all that debt plus a large chunk of the debt maturing through 2025.  As a demonstration of the strength of Ferrari’s financial position, post the Q1 2023 close, Ferrari has returned an additional €350 million to its shareholders via both a large cash dividend and share repurchases.
  • Portfolio: Ferrari’s current portfolio is by far the most complex in its history with still more to come this year. The strategy that’s delivered the current portfolio was first articulated back in Q3 2018.  It was then that Ferrari changed the way it segmented its portfolio from V8s & V12s to Sport Range, Gran Turismo Range, Special Series, Icona, and Hypercar.  This change in thinking gave Ferrari the license to build out its portfolio in a way it never had been able to in the past.  Redefining the old V8 segment to Sports Range has allowed Ferrari to counter the threat from McLaren’s emergence in the past decade and while building a significant front engine V8 business that has served as the entry point into Ferrari ownership for a new generation of customers.  Redefining the old V12 GT segment to Gran Turismo has given Ferrari the license to build out the  GTC4Lusso & 812 lines while developing the Purosangue and drop both V8s and V12s into several of them (I am fairly certain the Purosangue will be offered with a V8 hybrid in the near furture)  It has really put a fork in Aston Martin’s core front engine GT car business and Ferrari is now at least a generation or two ahead of Mr. Bond’s preferred purveyor of automobiles.  I’m not sure Ferrari even still views them as a competitor.  With the Icona, Ferrari has brilliantly created an avenue to leverage the nostalgia around its back catalog while spinning out an ongoing series of high margin multi-million dollar limited edition specials utilizing existing platforms (the SP3 Daytona is basically a La Ferrari minus the hybrid system).  Ferrari stated that there would be 4 models launched in 2023.  So far only the Roma Spider has been unveiled.  In terms of the other three, I would expect to see a track focused/Speciale version of the SF90 in both coupe and convertible form plus perhaps a Purosangue T with a V8 hybrid. 

 

  • Hybrid & Electric Cars: While Ferrari remains committed to launching its 1st EV in 2025, what was interesting on the analyst call was the renewed focus on ICE with the advent of e-fuels. Post 2025, Ferrari seems very committed to offering three drive train options, ICE, hybrid, and EV.  Per Mark Twain’s great line about “the reports of my death are greatly exaggerated”, the same applies to ICE, I expect it to be with us for at least the next several decades.  It will now be interesting to see if Ferrari restarts development work on a next generation V12.

 

  • Racing: Vigna has very open about the Formula 1 season starting with quite “mixed” results. After steadily improving over the last several years, the F1 team has taken a step backwards so far in 2023.  With Charles Leclerc & Carlos Sainz, Ferrari has both an excellent pair of drivers who seem to work well together.  Where Ferrari’s challenge lies in the team’s management.  Ferrari is now on their 5thteam principal in the last decade, a rate of turnover matched only by the UK with its Prime Ministers.  Vigna did ask for patience and to give the latest individual to sit in the Team Principle seat, Fred Vasseur, time to get things turned around.

 

Where Vigna seems to be more hopefully and excited is with the 499P, Ferraris new Le Mans Hypercar.  The 499P was on the podium in each of its first three races and it should do well at Le Mans.

2023 Targets

The 2023 Targets remain unchanged for now.  Given the strong Q 1 2023 results, none look overly ambitious.  Given how Ferrari blew away its initial 2022 guidance, this feels a bit like another round of under promise and then over deliver.  I would expect to see at least a few of the target revised upwards come Q3.

Risk

In a Bloomberg Interview in Feb 2023, Ferrari CEO, Benedetto Vigna was asked “What is the biggest threat you see for Ferrari?”  His answer, “I can’t see any specific threat for Ferrari.”  Complacency is Ferrari’s biggest risk.  Ferrari’s vast market cap puts it in a position where it has no room for executional error while needing to drive its top line well ahead of any increases in volume.  With Geely now looking like it will be in control of Aston Martin in the not-too-distant future, a rejuvenated and well funded Aston Martin could prove to be a formidable competitor in the front engine Gran Turismo & SuperSUV segments.  Likewise, a resurgent McLaren led by Ferrari’s former Chief Technology Officer could be a serious threat again.  Longer term, given the success of the T.50 & T.33 there is also a serious threat from Gordon Murray Automotive if it continues to expand its portfolio.  Add GMA, with other emerging boutique manufacturers, SCG, Czinger, & Praga, and they could pull a few hundred high ticket sales a year out of Ferrari’s core.  While Ferrari might have plenty of space in-between itself and nearest competitors right now, that gap can close quickly, especially as both Aston Martin & McLaren’s futures look more promising today than they did even a few weeks ago. 

 

Summary

The Ferrari machine keeps going from strength to strength and Ferrari’s hefty $54 billion market cap reflects this.  Vigna must lead Ferrari seamlessly through the transition to a three powertrain platform business with all the additional complexity that brings with it.  Getting the F1 Team back to the very front of the grid doesn’t seem likely to happen anytime soon but the reality is, the F1 team performance only has a minor impact on Ferrari’s finances and none on car sales.  In 2022, Ferrari beat their guidance on every single financial metric for the 2nd year in a row, now they just need to repeat this in 2023, which given the current model portfolio, momentum, and overflowing order book, they very likely will.

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The Twisted Saga of the De Tomaso P72

The Twisted Saga of the De Tomaso P72

Toronto

On Wednesday, March 8, 2023, De Tomaso Chairman Norman Choi introduced the De Tomaso P72 at an invitation only reception in Toronto, Canada.  During the event, De Tomaso announced that the planned production run of the coupe, set at 72 units, is sold out.  But a P72 roadster is in development and is currently undergoing homologation for the North American market, which is expected to be complete by this summer with production getting under way by late 2024.  Which is all quite interesting as production has yet to start on the P72 coupe and is unlikely to in the foreseeable future.  In fact, sources have indicated that all work on the De Tomaso P72 coupe stopped in March 2023.  Work on the coupe was halted by the firm doing the development as De Tomaso hadn’t paid them since December 2022.  With work on the P72 coupe stopped, it is highly unlikely any work is being done on a P72 roadster, which makes the claim about undergoing US homologation hard to fathom.  So how did we get here?

Out of the Ashes

This chapter of the De Tomaso story starts back in April 2015 when an Italian bankruptcy court approved the sale of De Tomaso to Consolidated Ideal Team Ventures (ITV), a holding company incorporated in the Virgin Islands but based in Hong Kong for €1.05 mil.  Per the sale report, a lawyer for the buyer announced that Ideal Team Venture plans to produce cars in China bearing the De Tomaso name.  Norman Choi, is listed as both the ITV and De Tomaso Chairman.  Little is known about his background but apparently Choi went to school in the United States in the 80s which is where his interest in De Tomaso started. Per his comments at the March 2023 Toronto event;

 

“I went to school in the U.S. back in the late 80s, and De Tomaso at the time was still a big hit,” Choi told Wheels.ca. “My neighbour had a Pantera, so every weekend he would take out the car and I was like wow, holy smoke, that’s a nice-looking car. So, that’s how I got started.”

 

Ideal Team Ventures was actually the under bidder at the original auction to L3 Holdings but ended up with De Tomaso after L3 Holdings was unable to fulfill its financial obligations.  ITV then added to its brand portfolio when it acquired the bankrupt German Supercar manufacturer Gumpert in early 2016 and renamed it Apollo Automobil GmbH.  In 2018, ITV changed its name to De Tomaso Automobili.  De Tomaso is basically a marketing, design, and sales company with little to no experience in developing and producing cars.  In an interview in early 2022, Ryan Berris, the CEO & CMO of De Tomaso, stated: “The team behind De Tomaso doesn’t come from an automotive background and I think that’s important in that it makes for a much more open mindset.”

 

The Intensa Emozione

While it would be four years before ITV revealed its plans for De Tomaso, work on a new Apollo hypercar started almost immediately after ITV acquired the rights to the brand.  In October 2017, ITV unveiled the Apollo Intensa Emozione (IE) and production of the limited 10 unit run started in early 2019.  Development and production of the Apollo IE was outsourced to HWA AG (a customized vehicles & racing car constructor which was spun out of Mercedes AMG) with Capricorn Group providing the carbon fibre monocoque chassis.

 

The Apollo IE carried a €2.3 mil. sticker price and was not street legal.  Talking to a few sources, it appears that the IE is more garage art than useable track car as all are basically prototypes with limited development.  Not surprising given the very limited production run and quite low overall value of the program.  The Use Casefor the IE appears to be “to be seen”.  However, the IE development did provide running platform for the 1stmules for ITV’s next endeavor, the De Tomaso P72.   

 

ITV sold Apollo Automobil GmbH in March 2020 after three IEs had been delivered to customers.  In conjunction with the sale, De Tomaso entered into a three year license agreement starting in May 2020 to use the new vehicular platform designed and developed by Apollo Automobil for a minimum aggregate license fee of $10 mil.

Goodwood Coming Out Party

The new De Tomaso P72 was shown at the UK’s Goodwood Festival of Speed in the summer of 2019 with an initial price tag of €750K with customer cars slated for delivery starting in late 2020 or early 2021. The P72’s coming out party was very impressive and from what I was able to gather at the time all 72 planned cars had deposits placed against them in short order.  In fact, I understand that De Tomaso had far more individuals expressing serious interest than they had build slots.  The initial deposit was around €100K and was to be fully refundable until the final vehicle specifications were released.  At the time, it was communicated that the P72 deposits were being held in escrow and not directly by De Tomaso.  It was also consistent with Choi’s statement:

 

De Tomaso does not need to make money. “It would be nice, but it’s not a critical element.  So, I have room to be able to build a car in the way I that I think is worthy of the name. The idea with this vehicle is not to create a business plan about profit margins, but to create a car that people can value for its design, engineering and craftsmanship.”

 

The P72 prototype shown at Goodwood was built off the Apollo IE platform with a new body designed by Jowyn Wong.  Wong also did the design work for the Apollo IE.  Post Goodwood, the P72 was next seen at Pebble Beach in August 2019.  This was followed by an announcement in October 2019 that the P72 would be powered by a 700 bhp Ford supplied V8, developed and built by Roush. 

 

Restoring the Romance

The main public activity around the P72 in 2020 & 2021 was the showing of the three prototypes built by HWA AG at numerous events in the US & Europe.   Two of these prototypes were basically rebodied Apollo IEs and the third has an early version of Roush V8 fitted.  De Tomaso has repainted the prototypes several times over the last several years, giving the illusion that there are multiple prototypes in existence.  Why De Tomaso would go to the expense of showing the P72 at all these different locations if all were spoken for does raise a few questions. 

 

Other than displaying the prototypes, 2020-21 was mostly radio silence with a few rather interesting announcements, several of which haven’t aged very well.  Starting off this list, in October 2020, De Tomaso announced that they were moving all of their operations to the US “to restore the romance, beauty, passion and elegance in the luxury American automotive industry”.   2021 news from De Tomaso was limited to just a couple of videos about their past, a few line drawings, and black and white pictures of a gearbox housing.

Reality Bites

In a rather abrupt change of direction, in early 2022 De Tomaso entered into a partnership in Germany with the Capricorn Group to co-develop the P72.  In conjunction with the Capricorn announcement, De Tomaso stated that customer deliveries were targeted to start in the first half of 2023.  The Capricorn Group is a highly regarded specialist OEM supplier to the automotive industry with six production facilities across multiple countries.  Capricorn’s main business is motor sport and they have worked with teams in Formula 1, WEC, World Rally Championship, World Touring Car Championship, Rally Dakar, NASCAR, GP2, GP3 S, MotoGP, Moto2, Moto3 to name a few.  Their list of customers reads like a who’s who of the auto industry including Ferrari, Lamborghini, McLaren, Bugatti, Porsche etc so they have a huge amount of experience.  In the press release announcing the partnership, De Tomaso stated that a new carbon fiber chassis and suspension would be developed vs. the one they had originally planned to use.  How this impacts the $10 mil. three year license agreement to use the Apollo IE vehicular platform I have no idea.  As De Tomaso is basically just a sales & design operation, bringing a partner in that knew what it was doing to handle the development and production was an absolute necessity.  To produce the P72, De Tomaso also announced they were building a new factory, visitor center and interactive museum at the Nürburgring in Germany with a targeted competition date of October 2022.  Why De Tomaso felt the need to make this announcement about a factory is beyond me as Capricorn was going to build the P72s for De Tomaso and already had multiple facilities.  To top it off, De Tomaso only has a very small group of about 4 employees, none of which come from an automotive background.  They would need to recruit, train, and fund a whole new work force if they were actually going to produce the P72 “in house”.

 

As of November 2022, it looked like the P72 was finally on track to start production in early 2023.  In a fairly short period of time, Capricorn was done developing the chassis, suspension, and other components, and Roush was ready with the heavily modified Ford Coyote V8.  In addition, EU homologation had been mostly completed.  As a “taster” to the production startup, De Tomaso posted a video in November 2022 showing parts being bolted onto a P72 as it sits on a stand in what appears to be a small factory room.  At about the same time De Tomaso also announced a new track only car, the P900 of which 18 units would be built at a price tag of $3 mil. with first deliveries slated for late 2024.  How many of the original depositors of the P72 from 2019 remain I don’t know, but I have heard De Tomaso had collected about €500k from each at this point.

 

With 6 chassis already in early build up at Capricorn’s facility at the Nürburgring, in March 2023, it all came to a screeching halt.  Turns out De Tomaso had neglected to fully pay Capricorn.  With a multimillion Euro bill outstanding, Capricorn halted all further development on both the P72 & P900 and has taken legal action to recover its debt.  As it is Capricorn that took what was a design model and turned it into a production ready car, they own the IP so De Tomaso can’t easily turn to another supplier.  In addition, as part of the debt recovery process, Capricorn has control of two of the three P72 prototypes in existence (the third is with HWA) plus De Tomaso and Norman Choi’s assets in Germany.

And Yet……

On De Tomaso’s website today, the base price is now listed as €1.6 mil. and they are accepting “registrations of interest”.  With a more than a 2x increase it seems they might have had a bit of a math problem with the original estimate on the build costs.  Turns out the bill of materials for a P72 is €600k so the original sales price of €750k wasn’t even remotely realistic unless De Tomaso was going to subsidize the build cost on each P72 to the tune of over €1mil.  De Tomaso also announced that they are sponsoring one of the Grids at the Le Mans classic on June 29th-July 2nd.  With 2 of the 3 prototypes definitely unavailable to them, it will be interesting to see how, and with what, they show up.  Then just to top it all off, De Tomaso issued an update to their “Custodians” (De Tomaso’s internal name for depositors) in early May 2023 stating that:

 

In the beginning of 2023, we have successfully awarded the final production of the P72 to our longstanding partner, HWA.  To increase the P72 production output and assist with the transition into assembly, the official De Tomaso Automobili factory will now be repositioned from our interim facilities at Capricorn, the Nurburgring, to the heart of HWA within Affalterbach, Germany.

 

No date is given on when De Tomaso expects production to start at HWA.

 

 

In Summary

What a mess.  Despite Capricorn pulling the plug, Choi and De Tomaso seem to be merrily going along as if all is on track.  Right now, it doesn’t look like the long suffering depositors are going to see their cars anytime soon, if ever.  In the last several years, De Tomaso has announced they were moving all their operations to the US (2020) “to restore the romance, beauty, passion and elegance in the luxury American automotive industry”, then it was off to the Nürburgring (2022) where they were going to build a new factory, visitor center and interactive museum and now (2023) it’s to the heart of HWA within Affalterbach, Germany.  What’s the three strike rule again?

 

If De Tomaso did collect roughly €36 mil. in deposits, that money is likely long gone, given they can’t afford to pay Capricorn.  The one thing Choi did state that is almost accurate: 

 

“De Tomaso does not need to make money”

 

Because there is basically no chance that I can see that it will. 

 

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May 2023

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Aston Martin’s Q1 2023 Results…..A Burning Turtle

Aston Martin’s Q1 2023 Results…..A Burning Turtle

Both Aston Martin Lagonda (AML) & Ferrari reported their Q1 2022 results this week.   One of the two had another excellent quarter and the other delivered a bit of a turd.  Despite the results, AMLs stock price is only down slightly which I believe is more of a function of how lightly traded it is these days vs. anything else.  First let’s take a look Aston Martin’s Q 1 before following up next week on Ferrari’s. 

 

The Aston Martin earnings call was a very subdued affair this time with only CFO Doug Lafferty making an appearance.  Doug’s delivery makes John Major look flamboyant.  I have to admit really missing former CEO Tobias Moers’ vivacious personality.  CEO Amedeo Felisa appears to have gone back into a witness protection program after his brief appearance at the FY 2022 results presentation. Lawrence Stroll, AML’s Executive Chairman, was nowhere to be found despite having done such a good job staying very much on script his last time out.  It appeared that only a small number of analysts joined the call this time as only 4 questions were asked.

The Turtle’s Q1

The Q1 highlights according to the Aston Martin press release are:

 

  • Q1 performance in-line with expectations; FY 2023 guidance maintained
  • Strong demand across the portfolio; c.95% of current range GT/Sports sold out for 2023 ahead of upcoming launches; DBX order book to the end of Q3
  • Q1 revenue growth of 27% driven by strong DBX volumes and ASP growth
  • First of the next generation of sports cars to be launched later this month; production started in early Q2 and customer deliveries due to commence in Q3

 

This all sounds wonderful.  What they fail to mention is:

 

  • Vehicle wholesales down 47% vs. Q4 2022 and -5% vs. Q1 2021
  • Free Cash Flow in Q1 2023 of -£118 mil. vs. -£25 mil. in Q1 2022
  • Net Debt Up £102 mil. to £868 mil. vs Q4 2022
  • Cash in Q1 2023 down by £176 mil. to £407 mil.

 

The following covers highlights from the Q1 2023 Results, the Debt, 2023 Guidance, & the Specials. 

Q1 Results

Starting with the Q1 results, which according to Lawrence Stroll’s quote in the press release:

 

“2023 is set to be one of the most exciting years in Aston Martin’s history. In addition to celebrating our 110th anniversary and our exciting line-up of Specials, it will also see the start of our next generation of sports cars which will truly reposition Aston Martin as an ultra-luxury performance brand and enhance our growth.

 

“Since the start of the year, we have continued to see strong demand across our product range, with our current range of sports cars essentially sold out for the year. The DBX707, the first car developed under my leadership, continues to receive broad media acclaim and, with a growing number incredibly satisfied customers, is strengthening the DBX orderbook in our all major markets, as well as our overall financial performance.”

 

This doesn’t exactly square with what the number say:

 

 

 

Q1 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Cars Wholesale

1,353

1,168

1,508

1,384

2,352

1,269

Revenue

£224 mil.

£233 mil.

£309 mil.

£316 mil.

£524 mil.

£296 mil.

EBITDA

£21 mil

£24 mil.

£34 mil.

£21 mil.

£110 mil.

£30 mil.

Operating Profit

-£15 mil

-£34 mil.

-£42 mil.

-£59 mil.

£10 mil.

-£51 mil.

Free Cash Flow

£24 mil.

-£25 mil.

-£234 mil.

-£336 mil.

-£84 mil.

-£118 mil.

Net Debt

£723 mil.

£957 mil.

£1,266 mil.

£833 mil.

£765 mil.

£868 mil.

 

The strong demand that Stroll references is versus an incredibly week Q1 2022.  In terms of cars wholesaled, Q1 2023 is actually the weakest quarter in the last 4 and even lower than Q 1 2021.  Aston Martin is a company that has been in deep trouble and is being touted as being back on track by both the Chairman and CEO.  When I look at troubled companies in the middle of a turnaround, I want to see consistent quarter to quarter improvements.  That’s not at all the story the chart above tells.  The one positive I would take away is given how badly AML loaded its dealers in Q4 2022, it’s encouraging to see that they sold any cars this quarter.  AML did indicate that they returned to a “demand-led operating model” in Q1 this year but as they do not report retail sales numbers, it’s a bit like the 3 year old who says he deserves dessert now as he has finished all his vegetables but then refuses to let you see his plate.

 

Unpacking the one number that does look quite positive, Revenue of £296 mil., it is heavily driven by the Valkyrie.  In Q1 2023, AML “delivered” 18 Valkyries.  These would have been a mix of the Valkyrie road cars (estimate is 13) and the few remaining higher priced Valkyrie AMR Pro track cars (estimate is 5).  The 18 Q1 Valkyries is half the number AML delivered in Q4 2022.  A large number of the Q4 Valkyries were very likely to have been the AMR Pros which are both significantly more profitable and far easier to build as it doesn’t have the active aero or KERs system.  In addition, the AMR Pro uses a different simpler carbon fiber tub.  Assuming each one of the Q1 2023 Valkries was invoiced at a conservative £2.5 mil., and the AMR Pros at £3.5 mil., that’s £50 mil. in revenue.   Take the AMP Pros out as all 25 have now very likely been delivered, and it drops to £32.5 mil.  This will likely be the quarterly run rate (+/- £5 mil.) in terms of Valkyrie revenue contribution for the remainder of the year.  Hmmm…..

 

In Q4 2022, Aston Martin did put up its best Sales & Revenue numbers of the year.  Aston Martin also did the same in Q4 2020 & Q4 2021.  Year end loading seems to be very much a part of Aston Martin’s commercial DNA and the bill for this inevitability comes due in the following quarter.  In Q4 2021, Aston Martin achieved that number by shipping 815 DBXs.  In Q1 2022, total cars wholesaled dropped by 40% vs. Q4 2021 with DBX wholesales down by almost half to 421.  History just repeated itself again, only on an even larger scale.  In Q4 2022, AML wholesaled 1,393 DBXs.  In Q1 2023, DBXs wholesaled dropped 52% to 669 with total cars wholesaled down by 47%.  As a reference Ferrari’s Q1 2023 cars wholesaled are up 6% vs. Q4 2022.

The Debt…….Again

Objectively, this quarter is much weaker than what AMLs initial guidance suggested.  Debt levels are up again and if you add in the roughly £80 mil. rise in payables over the last year, it is almost exactly where it was in Q1 2022.  This would imply that all £653 mil. raised last year to, in Stroll’s words, “to deal with the god-damned debt” is gone and the debt is very much still here.  The raging inferno that is their cash burn continues and to be that negative (£181 mil.) on cash flow in a quarter when no interest was due on the debt is highly concerning (interest is paid in the 2nd & 4th quarters). In the March Earnings Call, Stroll stated “as long as we execute on the plan, we do not see any liquidity needs whatsoever”.  This seems like wishful thinking given both cash and debt levels in Q1 2023 (Cash £407 mil. & Net Debt £868 mil.) are very similar to where they were in Q1 2022 (Cash £404 mil. & Net Debt £957 mil.).  Back in Feb 2022, Stroll was quoted as saying:

 

“Let me be crystal-clear, black-and-white: we do not need money.”

 

This was followed several month later by the announcement of the £653 mil. Equity Raise.  It is very hard to see how Aston Martin will avoid needing another equity infusion in 2023 at the rate they are going.

2023 Targets

Aston Martin’s 2022 results & 2023 guidance are:

 

 

2022 Results

2023 Guidance

Cars Wholesaled

6,412

7,000

EBITDA Margin

13.8%

20%

Depreciation & Amortization

£308 mil.

£350-370 mil.

Interest Expense

£166 mil.

£120 mil.

Capex & R&D

£287 mil.

£370 mil.

 

In terms of the 2023 Guidance AML just issued, the Wholesales number which represents 9.2% growth appears to be a massive stretch if AML truly reverts to the “demand-led operating model” Stroll so often references as they will first need to work through all those extra vehicles which were shipped ahead of demand in Q4 2022.  In 2022, even with the Q4 loading, vehicle sales were only up 3.7% vs. 2021.  In fact, when you read through the bullet points to the right of the guidance numbers, the indications are 1st half 2023 will be in line with same miserable period in 2022 but don’t worry, AML is going to have a stupendous 2nd half as they are rolling out a few facelifts and upgrades on the “7 year old Sports and GT cars” along with another new limited edition Special.  Based on the assumption that the 1st half 2023 is in line with same period year ago, this implies that cars wholesaled will increase 50% in the 2nd half.  As of the beginning of May, none of these new Sports & GT cars which are supposed to drive that 50% increase have been seen although the 1st in the series, the DB 11 replacement, is slated to be unveiled on May 24th.  I do find this quite strange as most other manufacturers unveil new models months before production starts.  According to the comments Doug Lafferty made on the analyst call, production has already started on the DB11 replacement (which was followed by his not exactly convincing claim that the production start up is going a bit more smoothly than the massive mess that was the DBX 707 production start up last year).  While I do expect the 2nd half will be stronger than the 1st half, the Guidance Goals seems to be a massive stretch at best.  Also, AML has never delivered against an EBITDA Margin growth target, and I see no reason why that will change in 2023.

 

Looking at a few areas of interest in a bit more detail:

 

Valhalla & Vanquish:  All mention of the planned mid engine production series Vanquish disappeared in last quarters earnings materials.  This time around it was the Valhalla’s turn to do the disappearing act.  Which is quite surprising given just a couple of months ago, AML touted in its 2022 highlights, the Valhalla’s “Development upgrades which were showcased to customer acclaim at Pebble Beach”.  I suspected the Vanquish’s vanishing act had a lot to do with the current litigation between AML and Nebula over all the mid engine cars (see: Saga of the Valkyrie) and AML wanting to limit their exposure to damages based on projected mid engine volumes should they lose the case.  Looks like the Valhalla might have been caught up in this as well.  Also, Aston may well be rethinking the wisdom of doing the Valhalla again especially as they admitted in the 2022 Financial Results, that after 3 years, only 50% of Valhalla build slots have been sold.  AML did report that customer deposit dropped by £20 mil. in Q1 2023.  This is roughly in line with the number of Valkyries delivered but also indicates that they haven’t been able to bring in much in new deposits for the Valhalla. 

 

Formula 1 Team Partnership

In the March Earning Call, Stroll finally admitted that the Aston Martin Aramco Cognizant Formula One Team was a “partnership” with AML and is not AML’s “Works” F1 Team.  Aston Martin Aramco Cognizant Formula One Team has had a very strong start to the F1 season this year behind several brilliant performances by Fernando Alonso.  During the Q1 Earnings Call, AML CFO Doug Lafferty was asked how they planned to monetize the F1 success.  The answer was “it’s all about amplifying the brand” followed by a comment around Aston Martin providing the safety car (where the “Turtle” name came from thanks to Max Verstappen) and the DBX 707 medical car.  Clearly the F1 Team’s success has caught AML by surprise, and they need a bit more time to develop an even semi coherent plan on how to leverage it with customers.

 

Summary

Right now, it looks like AML is well on its way to running out of cash again.  The £653 million Equity Raise in 2022 didn’t solve the debt issue and it appears to basically be gone.  To get even close to the 2023 Guidance wholesale number, its likely there will need to be another rather large “temporary suspension of the demand-led operating model.  The big bet this year is all on the next generation Sports & GT car that have yet to be publicly unveiled.  The lack of any mention of the Valhalla this time just raises additional questions given that it appears the mid engine mainstream supercar (Vanquish) has been cancelled.  Per Stroll’s comment:

 

“2023 is set to be one of the most exciting years in Aston Martin’s history”

 

2023 likely will be, just maybe not in the way he envisions.

 

Note: I do not and have never owned any AML shares.

 

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May 2023

 

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