The Turtle reference is a gift from the Red Bull F1 Driver Max Verstappen who made the following statement in regards to the Aston Martin Vantage F1 safety car in Melbourne: “It was like a turtle. Unbelievable. With that car, to drive 140km/h on the back straight where that was not a damaged car anymore, I don’t understand why we have to drive so slowly. The Aston Martin is really slow. It definitely needs more grip.” So much for the great PR Aston Martin is supposed to be getting from the millions its spending on F1 now.
Both Aston Martin & Ferrari reported their Q1 2022 results on Wednesday. One of the two had another excellent quarter and was rewarded by a drop in its stock price. The other delivered a turd of a quarter and saw its stock price rise due to a clever PR move right before the earnings release. While the stock market can be quite irrational at times, the reactions this time are a real head scratcher if you looki at the underlining numbers. First let’s take a look Aston Martin’s Q 1 before following up next week on Ferrari’s.
Deflecting Attention: Changes at The Top
Lawrence Stroll, Aston Martin’s Executive Chairman, can be quite clever. He’s like the dinner guest who lets out a massive fart (in this case Aston’s Q1 Earnings) but then immediately distracts everyone’s attention by knocking a glass of wine on to the hostess (firing the CEO, Tobias Moers). I have to admit this was a stroke of genius as it diverted most of the press’ and analyst’s attention away from the financial results. The reality is Moers has been “dead man walking” since early January (Stroll Looking To Replace Moers) and only lasted this long as Stroll could not find anyone to take the job. Having to finally turn to a 76 year old Board Member, Amedeo Felisa, to replace Moers as the new Aston Martin CEO reiterates just how unappealing that job has become. Here is what I wrote back in July 2021 (Update on the Aston Saga) when Felisa was first appointed to the Aston Martin Board of Directors:
Amedeo Felisa was the CEO of Ferrari S.p.A. from 2008 until June 2016 which crowned his 26-year career at the supercar company. His tenure as Ferrari CEO is generally considered a success as he was able to consistently deliver growth on both the top and bottom lines. It was Felisa’s tenure as CEO that set Ferrari up for its highly successful IPO in October 2015. During his tenure Ferrari also won its last constructors’ championship in F1. Adding Felisa to the Board puts a proven supercar company CEO in the Aston Martin Boardroom and Stroll now has a highly credible interim replacement for Tobias Moers (Aston Martin CEO) if that relationship continues to fray.
I met Felisa a few times many years ago. He is quite impressive, but this is a completely different situation to the one he took over at Ferrari many years ago. That company was on a roll and had been well run for over a decade. In addition, the level of resources he has at his disposal this time are a fraction and the task at hand is enormous. It will be interesting to see how long Felisa stays in the role.
The Turtle’s Q1
The following covers highlights from the Q1 2022 Results, 2022 Guidance, Analysts Call, and a few other areas of interest including the Manufacturing, Valkyrie, and the “Works” Formula 1 Team. Starting with the Q1 results, which according to Lawrence Stroll:
“We continue to make tremendous progress, now operating as an ultra-luxury brand and seeing exceptional demand across our product range with sports cars sold out for the year and DBX orders up 60%.
Which doesn’t exactly square with what the number say:
Free Cash Flow
In the earnings release, Aston Martin uses Q1 2021 as the comparison period for all the numbers. Unpacking the two numbers that are in positive territory, Revenue of £233 mil. and EBITDA of £24 mil. In Q1 2022, Aston “delivered” 14 Valkyries. Assuming each one of the Valkries was invoiced at a conservative £2.5 mil., that’s £35 mil. in revenue. As no Valkyries were shipped in Q1 2021, the apples to apples revenue comparison would be £198 mil. in Q1 2022 vs. £224 mil. Q1 2021 for a 12% decline which is much more in line with the 14% drop in cars wholesaled. Applying the same logic to EBITDA, it is basically flat year on year.
In Q4 2021, Aston Martin did put up its best Sales & Revenue numbers of the year. Aston Martin also did the same in Q4 2019 & Q4 2020. 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 2020, Aston Martin achieved that number by shipping 578 DBXs for dealer pipeline fill. It seems they did the same in Q4 2021 and loaded dealers with DBXs again by wholesaling 815 SUVs. In Q1 2022, total cars wholesaled dropped by 40% vs. Q4 2021 with DBX wholesales down by almost half to 421. Stroll in his comments in the analyst call did try to explain away the drop in DBX sales:
“in the first quarter we had a boat of another couple 100 going to China that would have made the numbers roughly exactly the same as the previous year that we missed by a couple of days”
Which sounds a lot like “the dog eat my homework”. Stroll continually claims that retail sales are running ahead of wholesales but refuses to actually provide any numbers to back it up. For the record, Andy Palmer did the same and we all know how that turned out.
Objectively, this is the worst quarter Aston Martin has turned in overthe last year and a half. Debt levels are up again and just hit an all-time high. The raging inferno that is their cash burn continues and to be that negative 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). Debt is up £234 mil. in the last year while cash has dropped by £172 mil. to £404 mil. At this burn rate, Aston Martin will likely need another equity infusion in 2023.
With Debt still going up and Operating Profit & Free Cash Flow still heading in the wrong direction it doesn’t look like a turnaround is anywhere on the horizon. In Q1 2022, there was a payables inflow of £67 mil. The Q1 receivables number was a very modest £11 mil. As of year end 2021, payables sat at £721 mil. with receivables of £243 mil. With the number of cars produced in Q1 2022 dropping but payables rising significantly again, it could be an indication that Aston Martin is slow to pay its suppliers in order to preserve its dwindling cash. As a reference point, Ferrari’s payables were £670 mil. at year end 2021 on a business more than 3x the size. Summarizing the balance sheet, Total Liabilities are now £2.34 bil., up £236 mil. in the past year with Equity down £210 mil. to £554 mil.
In addition to it looking like Aston Martin could be using its suppliers to help bankroll the company, Aston’s customers are also key source of cash. In Q1 2022 Aston collected an additional £12 mil. in customer deposits. As of year end 2021, Aston was holding £342 mil.in deposits of which £175 mil. was collected in 2021. Aston also returned £30 mil. in deposits in 2021 to customers who may no longer might have been comfortable basically floating Aston Martin an unsecured multiyear interest free loan (Aston did recognize a gain £4.8 mil. in interest off of the deposits in 2021). If you add in the £12 mil. collected in Q1 2022 and unwind the deposits for the 14 Valkyries and 5 other “Specials” delivered in Q1 of roughly £23 mil., Aston is currently sitting on £331 mil. of customer deposits against £404 mil. in total available cash. Add in the payables amount and its clear how precarious the situation appears to be. As Aston is heavily dependent on customer deposits for its funding, I would expect they will have to come up with a few more seven figure “limited edition must haves” in 2022 just to replace the wind down in deposits as the Valkyries and Final Edition V12 Vantages are delivered. Riding the limited edition hamster wheel is highly risk as McLaren found out and when the demand dries up, it all comes to a crashing halt quite suddenly.
Aston Martin’s 2021 results & 2022 guidance are:
Revised 2022 Guidance
Depreciation & Amortization
Capex & R&D
At this point, for 2022, Aston Martin expecting to grow car wholesales by 10%, they recently dropped the EBITDA Margin target slightly, and increased the interest expense by £25 mil. The cars wholesaled number is backend loaded and heavily dependent on the new more powerful DBX707 variant. In the analyst call Stroll stated that long term they expect the new DBX707 to make up 65% of DBX sales and right now the order book is running 50/50 between the base DBX and DBX707. Stoll also stated that the DBX order book is 60% ahead of where it was at this time last year. On the Sport and GT cars, Stroll stated:
“we’re sold out on 7 year old sports cars”
“we have orders today in house for well over 3000 we will produce 3000 or less so there is no inventory to speak up on the market when the new generation comes in 2023 so quite an incredible number for a 7 year old product”
In Q1 2022, Aston Martin sold 728 Sport and GTs which on a straight line basis is down vs 2021’s 3,068 Sport & GT cars. It is however very much in line with Stoll’s less than 3,000 statement. What is shocking though is this is just over half the number Aston Martin sold in 2019 and unless the 2023 Sport and GT facelifts are a huge success, its unlikely to change significantly anytime soon. In terms of the Sport and GT being “sold out” that’s a creative claim as its orders vs. Astons internal budget. It is not related to actually production capacity. Gaydon, where all the Sport & GT car production is done, is now only running one line and has plenty of extra capacity. The Aston brand was built around the beautifully designed front engine GT. The late James Bond drove a DBS or a DB5, not a DBX designed for the school run.
Going back to the 6,600 cars wholesaled target, if you subtract the project 2,900 Sports and GTs, that leaves 3,700 DBXs. In 2021 Aston sold 3,001 DBXs. Getting to the 3,700 number represents 23% growth. Back out the 421 DBXs sold in Q1 (a 44% drop vs. Q1 2021), that is 3,279 DBX in the year to go or 1,093 per quarter on a straight line basis. The most DBXs ever sold in one quarter is 1,171 in Q4 2000 which Aston Martin admitted included 578 units of “pipeline fill”. The next highest number was 849 in Q2 2021. Stroll’s rather bombastic statement during the analyst call on the DBX order book:
“our first quarter numbers we are 60, I don’t know if you heard me in my earlier statement, we are six zero percent ahead in our order book this year versus last year on DBX and those that 60% increase is roughly 50% current traditional DBX and 50% DBX707”
He then added:
“The DBX707 ramp up will be in the third and fourth quarter we are delivering demos as we speak on waters on boats on planes to our dealers those demos will be in place literally in the next weeks or two so extremely confident, we will hit our projections and our numbers”
Net net, the DBX707 deliveries will not begin before the 2nd half. In the 1st quarter DBX wholesales were down 44% but apparently the order book is 60% up. I am not really sure how to square these numbers other to say it looks like a huge reach.
Looking at a few areas of interest in a bit more detail:
Manufacturing: Aston still is carrying manufacturing capacity for 14,000 cars annually with zero plans to get anywhere near that number. Gaydon where all the Sport & GT car production is done, is now only running one line. St Athans where the DBX is produced is running at 40% of capacity and 2022 plans will not get this to even 50%. Moers admitted multiple times that Aston Martin has plenty of available capacity should demand increase but carrying all that addition capacity is becoming an on-going major financial burden that Aston can ill afford. To date there have been no major restructuring plans announced that would cut this down to better match with demand.
Valkyrie: The Valkyrie appears to be one of Stroll’s least favorite subjects at this point and unsurprisingly, he never brought it up during the earnings call. In the earnings release it was referenced twice. In the first instance noting that 14 Valkyries had been delivered in Q1 and in the 2nd that 75-90 remain on track for shipment in 2022. The use of the word “shipment” does raise an eyebrow. In Q4 2021, Aston “shipped” 10 Valkyries that were deposited in a warehouse in Southern England. These were most likely part of the 14 “delivered” in Q1 2022. If so, that would indicate that Aston was only able to ship and deliver and additional 4 Valkyries in Q1. Given that production officially started back in November 2021, that’s about one Valkyrie produced a week so they will need a huge ramp up in production to hit even the 75 “shipped” number given there were only 38 weeks left in 2022 at the end of Q1. Back in November, I estimated that 40 was the more likely number given the current production capability and tooling. It will be interesting to see where this one lands.
The other issue with the Valkyrie, now that there have been a few customer deliveries, is there is still no evidence that the road car runs properly (the Valkyrie AMR track cars are much simpler and don’t appear to have the same level of issues). In several cases that I have heard of, Aston Martin has delivered Valkyries to dealership and then had to send teams from Aston Martin Racing (which is a separate Stroll owned company, more on this below) to try and get them up and running.
For more details on the Valkyrie, here is the article I wrote a couple of months ago ( The Saga of the Valkyrie ) which covers its development from the original idea to first customer delivery.
“Works” Formula 1 Team: On the earning call Stroll sold the benefits of having the Aston Martin Racing F1 Team hard. However nowhere in his comments did he clearly layout that Aston Martin Lagonda (AML) and Aston Martin Racing (AMR) are two separate legal entities. AMR is private-owned company focused on Formula 1 and AML is a publicly listed company that builds road cars. They are completely separate companies with different ownership and no cross holdings. However, listening to Stroll, you would think that Aston Martin (AML) and Aston Martin Racing (AMR) were one company:
What’s really been transformative to this company is our Formula One team I could not speak volumes of what this is done to market this brand in the upper echelon in the highest technical motor sport in the world. We get to meet our customers at 23 events this weekend is Miami we have over 500 American customers visiting us this weekend. I don’t know another sport you get to touch eat, drink, talk, with over 10,000 of our customers over the course of 23 races around the world so this has a tremendous impact on our sales.
The resurgence through Formula One has helped particularly in sports cars for that customer it just shows the strength of the brand. Formula One is a marketing platform and as a brand speaking Aston Martin is in a great place.
We’re also seeing younger customers particularly in sports cars which I think is really influenced by Formula One.
On technology transfer going forward we’re better to have our own full in-house capabilities and remember we’re taking a tremendous amount of technology coming from our Formula One team which the company never had before last year.
This is all highly debatable. Aston Martin has little to no heritage in Formula 1 having competed only in 1959, 1960 (one race), 2021, 2022 and has never won a race. In 2021, Aston Martin Racing finished 7th out of 10 in the F1 Constructors standings and in 2022 they are currently next to last. In its role as a F1 safety car, the Aston Martin Vantage has been ridiculed as slow and called a turtle by the reigning F1 Champion. In addition, Aston Martin Racing is a “customer team” and buys its engines from Mercedes-Benz so I am not sure what this “tremendous amount of technology” Stroll references actually is.
What is clear is the close association between the two entities works well for AMR.
AML is currently paying a £21 million annual sponsorship fee to AMR. In other interviews Stroll’s has explicitly stated that Aston Martin Racing was able to sign “hundreds and hundreds of millions of dollars of sponsorship” off the back of the name change from Racing Point to Aston Martin Racing. If this was the case, Stroll is using AML’s most valuable asset, the Aston Martin brand, to fund his private company (which his son, Lance, also drives for). AMR is also benefiting financially for the work AML has given it on fixing the Valkyrie delivered to customer and other projects. When asked what sort of financial arrangement there is on this type of work, Stroll did seem caught off guard by the question and fumbled the answer a bit:
there is a transfer price I think it’s cost plus 10 I don’t remember. It’s something very marginal since its Lawrence Stroll involved in both it’s not about making profit
Last time I checked cost plus 10% was a nice profit.
Tobias Moers’ watch is mercifully now over. The timing of the CEO transition has excellent in terms of deflection attention away from the Q1 Financial Results. In the end he was as polarizing a figure as Andy Palmer but got paid considerably less for his troubles. The company Moers leaves behind is still teetering on the brink of disaster. Aston Martin has gone bankrupt 7 times in its history and an 8th doesn’t seem out of the realm of possibility So far, they have found a way to survive but it’s not sustainable over the longer term. Aston Martin is still burning through too much cash, too quickly and at the current rate will not make it through 2023 without another large cash injection. I appears that Aston has been living off customer deposits, but that play has likely run its course. While the DBX is helping keep Aston afloat right now, it’s a far cry from being a runaway success, and while the DBX707 represents hope, it doesn’t pay today’s bill. The Sport/GT is a shadow of its former self and will have another down year in 2022. At this point, the Valkyrie is more of a “ball and chain” around Aston’s ankle than a “halo” but the damage here is all self-inflicted. Add this altogether and it’s no surprise the stock price is down 63% in the last year.
Final Note to Aston Martin Investor Relations: While I have no issue with teams recycling PowerPoint slides from past presentations, you do need to make sure when you do this you update all the dates correctly. The title on page 2 of ASTON MARTIN LAGONDA Q1 2022 RESULTS – PRESENTATION is Q1 2021 Highlights.
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