*Please see AML’s Q1 Results for an explanation of the Turtle reference
Aston Martin Lagonda (AML) released its first half 2022 results on Friday, July 29th but no longer posts a webcast of the analyst Q&A call on the investors site. During the £653m Equity Raise announcement two weeks ago, AML did give a 1st half trading update that hinted it wasn’t exactly a stellar quarter. However, the results they reported last Friday can only politely be described as a giant financial turd with a few sprinkles scattered on top. The state of AML as an organization was very clearly demonstrated by these two events. Transparency is the hallmark of every great organization. While AML seems to be becoming even less transparent by the day, it does appear that their new auditors, E&Y, are having quite a bit of influence as the amount of financial information disclosed in the Earnings Release is up significantly.
It’s all pretty depressing and raises the question on how AML’s management didn’t see this coming. Running though effectively £370 mil. between the cash burn and the payables inflating isn’t something that just sneaks up on you and happens overnight. I’ve been predicting for a few quarters now when I thought AML would run out of cash. Back in May, I believed they would be able to make it into 2023 before needing another equity infusion. Turns out I was far too optimistic, as without the just announced equity raise, the wallet is empty bell was about to be rung.
Instead of doing another of what’s become a deeply depressing deep dive into Aston Martin’s financials, I thought it might be a bit more entertaining to take a look at the AML spin, and then what the facts are. When it comes to spin, Kellyanne Conway and Dominic Cummings could learn a few things from Stroll and AML’s PR Team. Much of the commentary that follows comes from my discussions with industry insiders, suppliers, customers, and journalists. What has been interesting in almost all these discussions is that everyone wants to see Aston Martin succeed but the overwhelming consensus is that they are their own worst enemy.
Lawrence Stroll, Executive Chairman commented: “We have continued to make strong progress in our vision to become the world’s most desirable, ultra-luxury British performance brand during the first six months of 2022”
Stroll has been AML’s Executive Chairman for a bit over two years now. His definition of “strong progress” appears to be rather unique in the business world:
– AML’s sales have now declined 2 quarters in a row vs. same period YAG.
– AML is on their 3rd CEO & 3rd CFO in 3 years
– AML’s sales in the Americas, which had been AML’s largest region, dropped 32% in the 1st half of 2022 with Q2 on an accelerated decline of 43%
– Sales of the recently launched DBX SUV, were down 32% in the 1st half
– The one bright spot is Sport/GT cars. Sales are up 22% in the 1st half despite Stroll’s continued disparagement of them as “7 year old sports cars”
I would summarize this as a company in turmoil. How you square the management statements with the results is beyond me. The big bet on the DBX hasn’t worked. In Q1, Stroll’s excuse for missing the numbers on the DBX was:
“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”
And in Q2:
“we ended June with more than 350 DBX707s that we had planned to deliver in Q2, still awaiting final parts, consuming tens of millions in cash and temporarily limiting our ability to meet the strong demand we have.”
Giving AML the benefit of the doubt and assuming the 100 Q1 DBX’s were on a slow boat to China were delivered in Q2 and they hadn’t had the “parts issue” in Q2 and all 350 DBX707s had been delivered before the quarter close (highly unlikely), 1st half DBX sales would still have been down 10%.
If the DBX situation is concerning, AML’s sales in the Americas are borderline horrifying. In what had been AML’s largest region, sales dropped 32% in the 1st half of 2022 with Q2 on an accelerated decline of 43%. In the commentary, AML offers the following explanation:
“Year-on-year growth in the Americas was disproportionately impacted by the supply chain and logistics disruptions experienced in the second quarter, particularly for the DBX707.”
This doesn’t even try to explain what happened in Q1 and I’m fairly certain it is about as watertight as the Titanic turned out to be if you start poking at the details on Q2. Going back to the Q1 Earnings call, Stroll stated in the Q&A:
DBX707 ramp up will be in the third and fourth quarters
So, blaming a massive Q2 miss on a SUV that you said in Q1 wasn’t expected to ramp up until later in the year…………….
Per Chairman Stroll: “The first new models in the extraordinary pipeline of products developed since I became Executive Chairman have also started to be delivered.”
Here Stroll is referring to the Final Edition V12 Vantage and the DBX707. Neither is exactly an “extraordinary” new product. Sticking a V12 in the nose of a Vantage is something AML has done multiple times in the past. Putting a larger turbo on the DBX and stiffing up the suspension a bit doesn’t quite qualify as “extraordinary”. Neither are “new” products, they are just new variants of existing models. Aston is also rumored to be announcing two “new” models at Pebble Beach in a few weeks. I expect they will be a Final Edition V12 Vantage Volante and another easy to engineer rebodied DBS V12 Speedster type limited edition. The rest of the pipeline is ton of vaporware at this point (Valhalla, etc) that may or may not ever see the light of day.
That “God Dammed Debt”
Stroll told the Financial Times in a recent interview that the £653m Equity Raise was to “deal with the god-dammed debt”.
The Debt Pile has grown rather impressively and creatively under Stroll’s leadership.
Gross Debt in Q1 2020, when Stroll assumed command, stood at £1.14 bil. and today it sits at £1.42 bil. Add in payables of £843 mil., up £141 mil. and customer deposits of about £350 mil. up £40 mil. while cash on hand today of £156 mil. is actually £15 mil. lower. Of the £653 mil AML is now raising, they would need to use £475 mil. of it just to get back to where they were at the end of Q 1 2020. All in AML’s financial situation is around half a billion £’s worse today than when Stroll & Co rolled into town.
I have included customer deposits in the debt pile as they are basically an interest free loan (and in the case of Valkyrie & Valhalla depositors, a long term interest free loan) from AML’s customers to the company. While all the Valkyrie deposits are very likely no longer refundable, most of the others still would be. Should the majority of those customers decide to cancel their orders, a very large percentage of the current £156 mil. in cash would disappear leaving AML effectively insolvent.
Ballooning Payables aka “The Hindenburg”
During the Equity Raise announcement Stroll stated: “underlying fundamentals of Aston Martin have never been stronger”.
Of all the numbers though, the movement in payables over the last 12 months is probably the most telling as to the degradation of AML’s financial situation. At the end of June 2021, payables sat at a quite high £609 mil. Just 6 months later, at the end of 2021, they had ballooned to £721 mil. (as a reference, Ferrari’s payables were £670 mil. at year end 2021 on a business more than 3x the size) and today they are at £843 mil. Given the fact that car wholesales are down in the last 6 months, from a purely operational standpoint, AML’s payables should not have continued to balloon and certainly not to this extent. However, if you look at AML’s cash situation, had they held payables at the already elevated year end 2021 levels, the cash on hand would have dropped from £156 mil. to £32 mil., again leaving AML nearly insolvent.
While using your customers to fund your business is hardly a best practice, doing it to your suppliers is fraught with risks and sets the stage for antagonistic relationships which only deteriorate further in tough times. In the earnings release, Stroll states:
we ended June with more than 350 DBX707s that we had planned to deliver in Q2, still awaiting final parts
I suspect this has far more to do with AMLs payables situation than any part shortages (Ferrari just released stellar 1st half earnings and doesn’t seem to have any issues sourcing parts). Over the past few years, I have heard quite a few stories about suppliers putting AML on stop work orders over unpaid bills and looking at the numbers, this situation would appear to only have gotten worse.
Probably Stroll’s most famous quote this year was in February 2022 when he stated:
“Let me be crystal-clear, black-and-white: we do not need money.”
And then Aston Martin proceeded to burn through £248 mil. of cash and blow up their payables by £122 mil. in the first half. Coming into the year, AML had £419 mil. in cash and effectively they have used £370 mil. of it (at some point they are going to need to reduce the ever increasing payables mountain or they will be unable to produce cars as no one will supply parts). If you project the £370 mil. burn rate in the last 6 months out over the next 12 months (£740 mil.), the need for the urgent £653 mil. Equity Raise announced two weeks ago only becomes more stark. Taking the £156 mil. in cash on hand at the end of June, add in the £653 mil. being raised gives you a total of £809 mil. At the current burn rate, subtracting the £740 mil. from the £809 mil. only leaves you with £69 mil. In the equity raises, Aston indicated that half of the raise was going to reducing debt. I don’t see how that is possible, they need almost all of it just to keep the lights on for the next year.
For the first time, AML included the auditors notes in an Earnings Release. Of interest was the Directors’ “Going Concern” assessment in particular:
the Group also considered the circumstances which would be needed to exhaust the Group’s liquidity over the assessment period, a reverse stress test (before taking into consideration the recently announced proposed Capital Raise). This would indicate that total core vehicle sales (DBX and GT/Sports) would need to reduce by more than 17% from forecast levels without any of the above mitigations to result in having no liquidity. The likelihood of management not taking substantial mitigating actions over such a long period (such as reducing capital spending to preserve liquidity) together with these circumstances occurring is considered remote both in terms of the magnitude of the reduction and occurrence over such a long period.
If you straight line 1st half sales of 2,676 over the full year, you get a 19% reduction vs. 2022 forecast of 6,600. For AML to achieve the 2022 guidance of 6,600 cars wholesaled, they will need to sell 50% more cars per month in the 2nd half of the year vs. what they achieved in the first half.
If the Valkyrie started life as a Nordic Saga, it has now pivoted into being a true Shakespearian tragedy.
In Stroll’s Q2 comments he states: “production of the Aston Martin Valkyrie has continued to pick up pace, and we are on track to meet our targeted full year deliveries.”
And then under “Outlook” in the earnings release, it is stated that: “We continue to expect 75-90 Aston Martin Valkyrie programme vehicles to be shipped in 2022”
The use of the word “shipped” in the above statement is quite enlightening and indicates AML might be up to the same old games again. Back in Q4 2021, AML stated that 10 Valkyries had been “shipped”. These turned out to have been deposited in a warehouse in Southern England and were not actually delivered until 2022. For the 1st half, AML is stating that 38 have been “assembled” & 27 have been delivered. This likely includes the 10 Valkyries that were shipped but not delivered in Q4 2021 which would indicate that only 28 Valkyries were “assembled” in the first half. That implies a current run rate is 56, well short of FY target. Whether that is even sustainable is another question as word on the street is that the relationship between AML and Multimatic (who are building the majority of the Valkyrie for Aston Martin and insiders have hinted at are on the hook for many of the issues) has hit a new low and production has effectively stopped over a number of disputes including payments. These payment disputes then extend to Multimatic and its suppliers. Money, or lack thereof, has been a major factor for quite some time as AML went on a cost cutting frenzy with the Valkyrie. The tipping of the cost vs. quality scale in favor of cost on the Valkyrie’s development did lead to a number of suppliers, including Supernatural, which was doing a lot of the carbon fiber work on the tub, to pull out. Just to add another level of intrigue to the whole saga, Multimatic is also doing a lot of the work on the Project One for Mercedes, using many of same suppliers, including Supernatural, and now have disputes on this project as well. If the relationship with Aston completely blows up, what impact it will have on the Multimatic-Mercedes relationship will be interesting to see given Mercedes shareholding in AML. As a final bit of icing, I have also heard from a few sources, that with Felisa now in charge, AML is considering moving all Valkyrie production to Italy, leveraging his deep connections with proven suppliers in that area.
Back in February, Stroll portificated: “The timing issue arose because we want to deliver these vehicles with no compromises. I think you’re having trouble understanding. This is the most complex vehicle ever made to be driven on the road. Being the owner of a Formula 1 team, I can testify that it’s more complicated than building my Formula 1 car. So we want to deliver them to perfection. We’re taking our time to deliver them perfectly.”
However, there is still no evidence that the Valkyrie road car runs properly and based on what I’ve heard from a few different sources, the latest testing sessions in Spain did not go well. It still overheats, the sensors then shut it down, and they can’t get it to run for more than 45 minutes. Apparently only one of the three (and the most basic) driver modes current work. While Valkyries are being delivered to customers, they are also then being picked up again almost as quickly for needed “updates”. It’s a very interesting definition of “perfection” and “perfectly”. The risks of driving a Valkyrie on the street are clear via the multiple sightings of broken down Valkyries on social media. For those customers that are being told that their Valkyrie is ready, it’s quite the dilemma. Do you at least take delivery and control of an asset that has some value, or do you continue to be basically a large creditor to an organization that is deeply in debt. Net net, the issues with the Valkyrie are just a tad more serious than what Stoll indicated coming out of the Goodwood fiasco last year:
“As far as Goodwood, there was some small electrical glitch, some £5 part between the low voltage battery and the high voltage battery that decided not to work for some reason at that moment,”
The fact that the Valkyrie landed in this situation isn’t surprising given the events over the past several years. All of the original parties (Andy Palmer, Red Bull, & Nebula) involved in the Valkyries conception are long gone and in none of the cases did it end well. Stroll fired Palmer shortly after arriving on the scene, and in a less than classy move on AML’s part, it was via the Financial Times that Palmer found out his services were no longer needed. Red Bull hasn’t been involved since the end of 2020. Adrian Newey drove the Valkyrie at Goodwood in July 2021 and described it as having a way to go until it is fully ready for customers with development still to be done. He also stated the car at Goodwood didn’t have active suspension and there’s a lot of mapping work still to be done. Given that the aero and mapping are two of the main issues the Valkyrie is still suffering from, and two areas of deep expertise that Red Bull brought to the project, forcing them out doesn’t seem like it was the best idea in hindsight. It would also indicate that a fix might not be coming anytime in the near future as there is no love lost between the leaderships of the two organizations and Red Bull has just announced their own hypercar.
If there’s blood in the water between AML and Red Bull, the situation is even worse with Nebula. It was Nebula that originally conceived the Valkyrie idea and brought it to AML. In June 2021, with no warning AML blew up the agreement with Nebula (my guess is to get out of having to pay royalties to Nebula on all mid engine AML cars for 10 years) and now the dispute is winding its way through the court system. To date Nebula has prevailed in all the court rulings and the dispute now sits in binding arbitration. Nebula’s claim is in the £150-250 mil. range and from what I have heard from a number of industry insiders, they would appear to have a very strong case. Given the state of AML’s finances, this would be a very tough check to write given their dire financial situation. In fact, AML’s current cash position would barely cover it, leaving them effectively insolvent. This sort of behavior on AML’s part under the current management isn’t just limited to the Valkyrie. AML also summarily cancelled a licensing agreement with a Dutch boat builder, Quintessence Yachts, for Aston Martin Speedboats which resulted in that company taking a major loss when the remaining unsold boats had to be liquidated via auction.
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.
Back in early May, I summarized AML’s position as teetering on the brink of disaster. At this point, they look to have toppled over and are just hoping they can land on a large pillow stuffed with cash which might buy them another year and a bit. In a recent article in Forbes: As Aston Martin Triples Loss, Survival Might Require A Takeover British-based automotive analyst Charles Tennant states:
“Unless sales can be revved up soon, I’m afraid yet more cash – or even a take-over perhaps by the Chinese behemoth Geely – is going to be required sooner than later. With a share price that has tanked 66% so far this year it is clear that the City (investors) has the jitters about future prospects, even though Stroll claims Aston Martin is in a strong position with robust demand”
I believe this is a very polite and accurate summary of AMLs situation. It’s also quite interesting as this is the first time I’ve seen an a major publication take a hard line on AML.
In the last year it would appear that Aston has been living off customer deposits and the backs of its suppliers, but that play has likely run its course. Its biggest market, the Americas has cratered, and sales are well off the pace needed to hit the full year projections. The Valkyrie continues to be a mess, but the damage here is all self-inflicted. Add this altogether and it’s no surprise that £1.03 bil. of shareholder value has evaporated so far in 2022. In this modern financial Shakespearian tragedy, no one has suffered more than the poor heavily diluted AML shareholder.
Note: I do not, and have never, owned any AML shares.
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