Update – Aston Martin: Turnaround or Turtlearound??

Aston Martin Lagonda announced its latest £210 mil. cash raise (i.e another “Share Placing”) on Monday, July 31^st. This will bring the total amount of cash injected into AML since Executive Chairman Lawrence Stroll came on board to £1.77 bil. The timing is quite interesting given Stroll declared just 5 days before that the business “has been turned around” yet made no mention of an urgent need to further reduce debt and deleverage the balance sheet as the current cash flow is insufficient to do so. Details on the raise are:

c.£210m share placing to accelerate net leverage reduction and support longer term growth

c.£210m placing to facilitate the early redemption of the Group’s existing second lien split coupon notes, due 2026, as well as supporting capital investments related to the Company’s electrification strategy
Building on the Company’s improved financial position, including c.£460 million of liquidity at the end of H1 2023, the proceeds from the proposed placing will further deleverage the balance sheet, while providing further momentum to Aston Martin in delivering its 2024/25 financial targets
Proposed transaction provides the Company with an accelerated pathway to achieving a net leverage ratio towards c.1.0x in 2024/25 and becoming free cash flow positive from 2024, supported by a significant interest cost reduction, as well as achieving a net leverage ratio of below 1.0x in 2027/28
Existing strategic shareholders, who are represented on the Aston Martin board, have committed to subscribe for up to £184m

The Company has received irrevocable undertakings to subscribe for approximately £115 million of the Placing, comprising:

Yew Tree Overseas Limited (“Yew Tree”) to irrevocably subscribe for £44 million on behalf of itself and other members of the Yew Tree Consortium (comprising Saint James Invest SA, J.C.B. Research, RRRR Investments LLC, FrancInvest Holding Corporation, John Idol, Omega Funds I Limited, ErsteAM Ltd and now also BDI Invest L.P.)
Public Investment Fund to irrevocably subscribe for £37 million
Geely International (Hong Kong) Ltd to irrevocably subscribe for £15 million
Mercedes-Benz AG to irrevocably subscribe for £19 million

The remaining approximately £95m of the Placing will be made available to institutional investors via an accelerated bookbuild (the “Bookbuilding Process”).

In addition to irrevocably subscribing for £44 million (being its pro rata share of the Placing), Yew Tree has also agreed to subscribe for up to a further £69 million in the Placing, on behalf of itself and certain other members of the Yew Tree Consortium, to the extent that such Ordinary Shares are not placed as part of the Placing.

A few quick observations, thoughts, and comments:

The timing on this is quite interesting.My estimate earlier this year was they would not need to do another raise until late this year or early next, but the current rate of cash burn has clearly accelerated that timing.
Given that AML announced their 1^st half 2023 results just 5 days before, I find it highly unusual that the “share placing” was not mentioned as part of that announcement although they way it’s being positioned doesn’t fit with Stroll’s “Turnaround Complete” theme. It does feel like AML is trying to keep this as far under the radar as possible.
It’s surprising that AML did not package this share placement with the 1^st half 2023 results and spin it as “Turnaround Complete” and now “raising additional funds to accelerate new model development.”
When last year’s £653 million Capital Raise was announced in July 2022, AML stated that “up to half to repay existing debt, strengthening financial resilience and improving the company’s cash flow generation by reducing its interest costs”. However Gross Debt was only reduced by £75 mil. in the back half of the year. It will be very interesting to see how much of this £210 mil. raise actually goes to reducing debt vs. being consumed in the cash furnace that is AML’s on-going operations.
It was only 2 ½ months ago that Stroll/Yew Tree was finally able to pull some cash out of the AML investment by selling shares to Geely for about £120 mil. (there is an very interesting article in the June issue of Business F1 on the AML-Geely deal: The Party’s Over at Aston Martin Lagonda). To have to turnaround now and plow £44 mil. back in and underwrite a further £69 mil. has to have led to some rather interesting discussions at both Yew Tree & with AML’s management.

And finally, this year’s version of Stroll’s famous quote from Feb. 2022, “Let me be crystal-clear, black-and-white: we do not need money” goes to both CFO Doug Lafferty & CEO Amedeo Felisa.

From: Aston Martin Lagonda Earnings Call Transcript, Mar. 1, 2023

Doug Lafferty: “So, you are asking about liquidity level. Look, I think from our perspective, as I said, from a guidance point of view, I think we have given you the drivers of how we expect the guidance to work out this year. We obviously successfully completed quite a significant capital to raise during the course of last year. This year for us is all about execution. So, we have got to execute the plan. We have got to get to where we need to get to in the second half of the year. And if we do that, then I don’t have any liquidity concerns.”

Amedeo Felisa “I will pickup where Doug left off. But the answer is – we – as long as – Doug rightfully says, execute on the plan, we do not see any liquidity needs whatsoever.”

Based on the two comments above, either AML isn’t executing to plan, or AML’s Senior Management would seem to lack understanding of their on-going financial situation.

More to follow when AML releases their Q3 2023 results.

Below is the article on AML’s 1^st Half 2023 results.

Aston Martin announced their 1^st Half 2023 earnings this week. The earnings call was a fairly subdued affair despite Lawrence Stroll, AML’s Executive Chairman leading the call. Both CEO Amedeo Felisa and CFO Doug Lafferty made brief appearances to answer questions, but it really was the Stroll Show. Stroll did do a fairly reasonable job of staying on what I would term a fairly creative script. As usual, Stroll was laser focused on the positive highlights, declaring that “we are focused on fixing the core fundamentals of this company and rebuilding the necessary foundations to deliver on our vision. What was required was a major industrial and commercial turnaround, which typically takes five to seven years. I’m very pleased to say that we have completed this turnaround in a little over 3”. Stroll did not offer any numbers to support the statement which made me immediately question if the “turn around” really is complete. Looking at the 1st half highlights:

AML’s 1^st Half

The 1^st Half highlights according to the Aston Martin press release are:

Q2 performance ahead of expectations; FY 2023 guidance maintained
H1 revenue growth of 25%, driven by strong DBX volume & ASP growth
H1 Total ASP increased by 14% to £212k; Core ASP increased by 12% to £184k
New DB12 Coupe sold out for 2023 following launch at the end of MayGT/Sports sold out for 2023 ahead of new launches
DBX order book into Q4
On track to substantially achieve 2024/25 financial targets in 2024

This all sounds wonderful. What they failed to mention but is buried in the results:

Vehicle wholesales down 21% vs. 2^nd half 2022
Free Cash Flow in 1^st Half 2023 of -£218 mil.
Net Debt Up £81 mil. to £846 mil. vs. year end 2022
Cash end 1^st Half 2023 down by £183 mil. (vs. year end 2022) to £400 mil. which including £95 mil. proceeds from share sale to Geely (ex Geely cash would be £305 mil. down from £583 mil. at the end of 2022).

Hence why when Lawrence Stroll’s declared in his opening statement on the Earnings Call that the “Turnaround is Complete” it really caught my attention. It immediately reminded me of another situation when a certain former President stood on the deck of a US Aircraft Carrier and declared “Mission Accomplished”. Question is, has Aston Martin’s business been turned around or is this another “Let me be crystal-clear, black-and-white: we do not need money” type Stroll statement? In my past life, we normally did not consider a business “turned around” until we had 2 years of sustained improvement across a majority of key metrics. To understand if AML’s business has really turned the corner, I thought it would be interesting to take a look at several key areas, the financial performance, the product line, and the debt across 1^st half 2019 (pre Stroll), 1^stHalf 2021 (Stroll, Year 1), and 1^st half 2023 (“Turnaround Complete”) benchmark where AML is today vs. 2 years ago. Starting with the Financial performance:

Financial Performance

Here are the key numbers for the 3 measurement periods:

	1^st Half 2019	1^st Half 2021	1^st Half 2023
Cars Wholesale	2,442	2,901	2,954
Revenue	£407 mil.	£499 mil.	£677 mil.
EBITDA	£22 mil	£49 mil.	£81 mil.
Operating Profit	-£35 mil	-£38 mil.	-£93 mil.
Free Cash Flow	-£138 mil.	-£44 mil.	-£218 mil.

At first glance, the 1^st three rows look positive with the bottom two, less so. Revenue in 1^st half 2023 was certainly helped by the 38 Valkyries shipped which would have brought in a bit over £100 mil. Just looking at 1^st half 2019 vs. 1^st half 2023 it looks like AML sold more cars at a much higher price and yet managed to burn more cash and lose more money by doing so. It is even starker when you look at the comparison between where AML was in the 1^st half of 2021 vs. 1^st half 2023 and then compare 1^st half 2021 to 1^st half 2019. With the exception of a slight decrease in Operating Profit in 1^st half 2021 vs. 1^st half 2019, all the other financial indicators were heading in the right “turnaround” direction at that point in time. However, when you breakdown the 2021 vs. 2023 numbers, AML sold 53 more cars in 1^st half 2023 but managed to lose £55 mil. more while burning through an additional -£174 mil. of cash. In summary, while AML has made good progress generating additional revenue by driving average selling price (ASP), they are still a long way from having figured out how to make money doing so. Positive Free Cash Flow is basically table stakes to be considered a heathy business and that still seems a long way off.

Since Lawrence Stroll took over AML in 2020, he has pontificated multiple times that AML only manufacturers vehicles to order. However, AML hasn’t reported retail sales for several years now so there is no way of validating that statement. What we do know from the 2022 AML Annual Report is that at the start of 2022, AML was hoping to reduce the stock held by its dealerships by 450 vehicles. Instead, by the end of 2022, they had increased it by a further 442 vehicles. That’s a swing of 892 vehicles which is 15% of AML’s total global retail sales in 2022. Having visited several Aston Martin dealerships in the US recently, this dealership inventory stock build does appear to be very real as all had plenty of stock on their forecourts. Net net, while that 1^st half 2023 wholesale number does look to be headed in the right direction, it is impossible to tie it back to demand. To have a bit more than a “Rudy Giuliani” level of credibility on their “demand-led operating model”, AML needs to start reporting retail sales again.

The Product Line

Over the past several years, AML’s portfolio has shifted:

Units Wholesaled	1^st Half 2019	1^st Half 2021	1^st Half 2023
Sports/GT	2,406	1,280	1,369
SUV	0	1,595	1,547
Valkyrie	0	0	38
Total Specials	36	20	38

Looking at the numbers, it would appear that under Stroll’s leadership, Aston Martin has transitioned from being solely a Sports/GT car manufacturer to more a supplier of luxury SUVs. As a strategy, it certainly has worked for other Sports & Supercar manufacturers (Porsche, Lamborghini) as the SUV volumes were incremental to the base Sports/GT and Supercar business. In the case of AML, the numbers would suggest that the vast majority of the SUV sales have been cannibalistic of the Sports/GT business. Just to make matters a bit more concerning, SUV sales actually declined in 1^st half 2023 vs. 1^st half 2021. While the Sports/GT sales did increase in 1^st half 2023 vs. 1^st half 2021 that is mainly due to deliveries of the run out limited edition V12 Vantage. However, Sports/GT wholesales are still down 43% vs. 1^st half 2019.

On a positive note, AML is finally taking action to update, in the words of AML Management, the “7 year old sports and GT cars”. These updates were originally promised by Stroll for 2021 but now have finally started to arrive. The first in the series of updates is the DB12 (as it is built off the same basic chassis as the DB11, I consider it an update/facelift vs. being a completely new model) with deliveries to start in the 2^nd half of 2023. AML has promised similar updates for both the DBS and Vantage to follow in the next 18 months. Based on the pictures I have seen (shockingly, I was not invited to the Global Media launch in the French Rivera so I have not seen the DB12 in person), AML has done a nice job updating the DB12s lines while significantly improving the interior. Whether or not these updates and improvements will be enough to turn around the trajectory of the Sports/GT sales will only be clear come 2025 once the initial excitement pipeline has worked its way through the system.

One interesting note is that AML sold almost as many “specials” in 1^st half 2019 as it did in 1^st half 2023. One major difference was the 2023 “specials” were all Valkyries at a price point likely to have been 2x the earlier sales. In addition, the number of “specials” is about to dramatically accelerate in the coming quarters. Per AML’s recent announcements, more “specials” are in the pipeline including the DBR22, Valour, and Valhalla. These are on top of a slew of other “limited edition” models like the DBS Final Edition. Potentially even more so than the Sports/GT updates, the success of all these “specials” is critical to any AML turnaround as they are considerable higher margin than the base Sport/GT business. In addition, AML has become addicted to the hefty deposits these “specials” generate when customers place orders. It is interesting to see that with the exception of Valhalla, which dates back to 2019, all the recent “specials” are front engine. I do suspect that this has to do with the current litigation between AML and Nebula over all the mid engine cars and AML wanting to limit their exposure to damages based on projected mid engine volumes should they lose the case. In addition, an over reliance on “specials”, especially ones that are basically just rebodies of other cars in your line at 2x-4x the price, normally does not end well. Just ask the current Chairman of BAC.

The Debt

	1^st Half 2019	1^st Half 2021	1^st Half 2023
Gross Debt	£859 mil.	£1,299 mil.	£1,246 mil.
Cash	£127 mil.	£506 mil.	£400 mil.
Net Debt	£732 mil.	£792 mil.	£846 mil.
Current Liabilities Including Payables	£861 mil.	£830 mil.	£979 mil.

Since Lawrence Stroll took over as Executive Chairman in 2020, AML has raised £1,561 mil. in new equity. Objectively, just looking at the numbers above, despite this very significant cash infusion (which is more than AML’s current annual revenue), the company is in worse financial shape today than it was back in 2019 as both Net Debt and Current Liabilities are well above where they were back in both 1^st half 2021 & 1^st half 2019. Given that the raging inferno that is their cash burn continues, it’s unlikely that this will change dramatically anytime soon based on the current pace of the business. The picture actually looks even bleaker when you toss in an estimated £315 mil. in customer deposits (equalivant to 79% of AML’s cash). The cash provided by customer deposits is critical to funding AMLs operations which explains the increasing number of “specials” being rolled out. The moment AML starts finding it more difficult to extract long term unsecured interest free loans from its customers, it will potentially trigger another financial crisis. All in, AML’s total debt pile (Gross Debt + Current Liabilities/Payables + Customer Deposits – Cash) is £2.14 billion. There is also £1.4 billion (and growing) of Intangible Assets sitting on the balance sheet which will need to be amortized over the coming years.

Summary

If being on solid financial footing is key to a business turnaround, then the AML story feels very incomplete right now. Solid progress has been made in terms of generating additional revenue and increasing margins. The DB12 does look to be a solid step forward. If the updates for the Vantage and DBS are similar in scope and quality, that does provide for a more promising future. How well these will all do in the marketplace is still very much an unknown.

AML has yet to figure out how to make money selling cars. Loses continue to mount, cash continues to be burned at impressive rates, and debt continues to pile up to the extent that it has basically obliterated the £1,561 mil. raised in the last several years. In Stroll’s opening remarks on the Earnings Call, right before he declared the “Turnaround Complete”, he stated that “a major industrial and commercial turnaround, typically takes five to seven years”. I do believe he was right.