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Hello, and welcome to today's Aston Martin Lagonda trading update. [Operator Instructions] Just to remind you, this is being recorded.So today, I am pleased to present Andy Palmer, Group CEO; and Mark Wilson, CFO. Gentlemen, please begin.
Good morning, everyone, and thank you for joining us. As you know, we're in an offer period and a closed period ahead of our interim results, which will be published on Wednesday of next week, the 31st of July. And therefore, obviously, in -- somewhat restricted in terms of information that we can currently share. Nevertheless, in May, we commented on the challenging external environment in certain of our markets. Since then, the environment has worsened and macroeconomic uncertainties have increased. We expect this to continue for the remainder of the year and are planning prudently as a result.As a result, we expect wholesale volumes to be in the range 6,300 to 6,500 for 2019, and we'll continue to monitor the external environment. Well, we are obviously disappointed that the short-term wholesales have fallen compared to our original expectations.Retail sales have grown 26% in the first half, reflecting growing customer demand for our products. And I reiterate the production of DBX and the Aston Martin Valkyrie remain firmly on plan.We've been disciplined, as I think is appropriate, for our luxury positioning in maintaining the quality of sales, with core wholesales up in comparison to retails only 9%. And this has supported a continuation of reduction in inventory -- dealer inventory as we prepare the network for the arrival of DBX.In terms of our regional performance, while the Americas and APAC have continued to deliver strong wholesales with growth of 54% and 24%, respectively, the U.K. and EMEA, E-M-E-A, market have decelerated further, posting declines of 17% and 19% for the first half.In addition to this, we've taken a provision of GBP 19 million against the consultancy income recognized in Q2 last year. The commercial position on this contract has deteriorated with significant doubt remaining over the outstanding receivables. You'll see this in other incomes in the results that we report next week.We're taking immediate action to improve efficiency and reduce our fixed cost base as we head into 2020, and we'll update you on these plans in due course.In terms of margin guidance for the year, we expect adjusted EBITDA margin of around 20% and adjusted operating or EBIT margin of around 8%, reflecting the volume revisions and the consulting income provision that we've made.A quick word on our product expansion. As I said earlier, production of the DBX is on track and we're hitting all the key milestones with the new St Athan facility now commissioned and manufacturing the first preproduction cars. First orders will be taken at Monterey Automotive Week in California in August with global launch in December 2019, start of production being Q2 2020 as planned.As we continue to invest appropriately in our product expansion, our capital expenditure will be rephased to become GBP 300 million this year.Now before Mark and I open up for questions, I'd like to reiterate that, firstly, obviously, we're disappointed that short-term wholesales have fallen short of our original expectations, but we're committed to maintaining the quality of sales and protecting our brand position, first and foremost. We are today taking decisive action to manage inventory and Aston Martin Lagonda brands for the long term.And lastly, we remain focused on executing the Second Century Plan and on delivering sustainable long-term growth. Operator, back to you.
[Operator Instructions] We now go to the line of Christoph Laskawi at Deutsche Bank.
Christoph Laskawi with Deutsche. You already said the update is disappointing, and I think that right after the listing is quite clearly. So a couple of questions from my side on why the change is actually quite significant. On -- you always pointed towards a very Q4-heavy financial year. Also with the volumes, the market challenges that you highlighted in May clearly are still present and you cannot argue that away. My question would still be with your order book and potential visibility being a luxury brand, what is -- what has changed over the last couple of months that are now -- basically, the order book doesn't look as good anymore for Q4 and Q3. And did you see people canceling or walking away from their orders? And would that have any impact on pricing as well?
First and foremost, of course, we need to relate the Detroit Electric area, so that's obviously a big hit that we didn't expect. We maintain a minimum of 12 weeks order bank and therefore, assignment to the line, what we've not -- to answer your question directly, we're not seeing people cancel orders. But what we're seeing is softness, particularly in U.K. and Europe, in terms of new orders. And in particular, I guess, I would say on dealers and dealers' confidence. And that's what we're trying to reflect here. So it is basically about not manufacturing cars that we can't sell. It's about -- the wholesale tune back is basically about matching to order book, which I think is the sensible thing to do because we simply don't want -- and as a luxury brand, I don't think we should simply make cars that we don't think we're going to sell.
Yes. Totally agree. And can you also protect your pricing point with that? Or is that slightly deteriorating because your whole market and Europe is weak as well?
So I think we're taking this action in order to make sure that we are able to manage our pricing as best we can. Certainly, if we didn't take this action, then that pricing I'm sure would come under greater pressure.
Okay. Is there any update on specials as well? Will you stick to the guidance before? Is that...
No. No change...
No. No changes at all to specials.
Okay. Next question will be on the consulting contract. What happened there? And why is the outlook worsening quickly that significantly? Is there any sort of default at the other counterpart or anything between the businesses that wasn't working as planned?
Yes. So we had a schedule of payments. And they've missed a number of those scheduled payments. We've gone back to the company, obviously, and to the guarantor. And we now go through the normal steps that one would go through, starting with a cure period and then necessary actions to enforce the contract. Nevertheless, the fact that they've defaulted on a number of those payment periods leads us to believe that, that contract is at risk. And therefore, we've taken, let's call it, the prudent step of writing it off.
Okay. Last question will be on the midterm targets. Is there any change? Or do you think this is just a short-term wobble and in the midterm, you will get to the levels that you've foreseen anyways?
I mean, basically, the Second Century Plan is basically still a plan that we intend to stand behind. Obviously, there is clearly short-term headwinds. As I said, it would seem particularly for us in Europe and U.K. as those back out as one hopes that they will, then we would see and imagine that we return to the plan as originally intended.
We now go to the line of David Larkam at Numis.
Can you talk about the balance sheet going forward, please? Obviously, sort of where you think the net debt is likely to be at the year-end. I presume the provision comes into that as well. And obviously, covenants look like they could be quite tight.
David, it's Mark. We can't talk about the balance sheet moving forward. Obviously, we will allow you to do your extrapolations. I would point out that the debt that we do have doesn't have any maintenance covenants in it. So those are -- there certainly isn't an issue from that perspective.
But the provision -- that GBP 19 million provision, were you expecting that to be cash in this year or how much of that?
Yes. We were expecting some of that to be cash in, and we've adjusted accordingly.
Okay. And sort of with the lower volumes, does that mean -- so the working capital moves we should think about that particularly?
No. I don't think working capital changes because what we are doing is we are simply adjusting down production rate to be more in line with wholesale rate. So again, the risk of not taking the action we are taking, as Andy has said, is that we produce more cars than we ended up selling. That would give us working capital pressure and taking this action, we avoid that pressure.
In that case, we now go to the line of Daniel Schwarz at Credit Suisse.
Yes. With the weaker demand for the Aston Martin sports cars that you mentioned, does any -- does it raise any concerns regarding the DBX for next year? And then following up on the balance sheet question, you did not provide an update on the Q2 free cash flow today. But I assume the free cash flow guidance for the full year, that's also not in place anymore with the lower earnings guidance.
So Daniel, obviously, today is about the very specific issue we've raised. There is an analyst call in our normal scheduled results next week on Wednesday. We would expect to talk in more detail at that time about the half 1 results.
DBX, it's too early for us to give forecasts for next year. One can only look at the market as it stands today. And obviously, you can see growth in that market. What is clear though is that we are absolutely on track to go to Pebble Beach and we start building the order books as of August.
In that case, we're now over to the line of Giulio Pescatore at HSBC.
The first on the full year targets. I mean, what are you assuming off of Brexit? How much is it assuming the -- how much are you provisioning in this current target? Are you still taking the same provision that you took before?
So Giulio, in terms of Brexit, our guidance remains unchanged in terms of Brexit. This action today is more to do with how we see the market developing and the uncertainty moving forward.
Okay. And second one, in terms of volume. The adjustment is mainly related to the Vantage or also other issues with regard to other models, I guess, for example, DB11.
I mean, it's across -- broadly speaking, it's across the range. And market by market, it's slightly different. Vantage is stronger in the United States. DB11 is stronger, for example, in Europe. So net-net-net, it's basically -- the cut is pretty much across the -- pretty much evenly across the range.
We now go to the line of Kai Mueller at Bank of America Merrill Lynch.
Just to start off with -- just to get a better clarity on this consulting contract because it was a one-off last year. Can you a little bit outline what this exactly was actually in terms of the consulting services you were providing to Detroit Electric?
I don't think that we've confirmed the name of the company. But obviously, you can make your assumptions. But basically, we were working with a start-up company. Start-up company needed some advice and help in terms of -- particularly the development of not the electrical system, but the vehicle chassis system. It was predominantly around technology sharing. And for us, it was basically using legacy assets that we had around us. So from all of those points of view, it seemed to be a good contract for us because we were using stuff that we had around us. Obviously, it was -- it's a contract that was properly signed, properly guaranteed. But as I said, basically, what was -- as we moved into the contractual execution, the payment schedules have not been met.
Okay. And then on that, you mentioned there were guarantors. So are there claims you can be making for that to be paid from those guarantors? So how do we have to think about that?
Sorry, Kai, we missed that. You broke up there. Could you repeat?
You mentioned something that the contract had guarantors. Are you seeking compensation from them right now? And how long would you think that takes? Because given you have now completely written off that contract as far as I understand.
Financially, we've written off the contracts. Obviously, we go into now what is a cure period. And then beyond the cure period, then you obviously look at whatever legal action you choose to take. But we think it's simply prudent. Basically, if you want linking these 2 issues that have hit us, we think it's better to link them together now and give you a more accurate outlook.
Okay. And then on the overall market development between your retail sales and your wholesale sales, obviously, now it's for the second quarter, big diversion between the 2 numbers. We obviously understand in Q4, you sort of delivered a lot of cars to hit the wholesale numbers for 2018. Where do you think that inventory level has gone to? Because I understand, obviously, your comments around you want to keep it free so you can have a good sign up on the DBX launch schedule. But what's really the delta? Is it the market that the sellout doesn't work because clearly, the retail seems to be working fine. It's the dealers not wanting to take more inventory as far as I understand.
Yes. To -- you've characterized it actually perfectly. Retail is -- as you can see is a relatively good buy by any measurement. Therefore, it's the sell into the dealer which is where we're not seeing the uptick that we quite expected, so it's that drop, if you want, from 7,100 down to 6,500. There's a number of things going on there. Certainly, from our point of view, we want the dealer inventory to be tighter because we want to ensure that as we move to DBX, dealers have funding lines that would allow them to take those cars. So that's very important for us to ensure, generally speaking, a success of that DBX launch. So one needs to prepare the ground very clearly for that. Apart from that, it's also true I think that we're obviously selling into dealer groups and many of those dealer groups are multi-franchised. And I think you only have to look at the wider picture of the industry around us and the way that the industry is generally struggling. But basically, those dealer groups are being prudent everywhere. And therefore, it's harder for us, therefore, to put the normal amount of -- or the coverage into those dealers. So it's a harder conversation -- probably, I would say, those 2 reasons. One is, perhaps, their lack of confidence given the greater picture and the shared franchise, and the second is making sure we absolutely succeed with DBX.
Okay. Very helpful. And then if I think about those dealers, you mentioned obviously the dealer financing and the availability. Is the -- as far as I understand, during the IPO process, I think it's Standard Chartered offering the dealer financing facilities. Are they all still intact at the same sizes? And are they still planning to be growing in line with obviously your unit output that's been your medium-term targets?
Yes. Kai, very short answer is no -- there's no change in any of those circumstances from where we've been previously.
It's just dealers are taking less of those facilities up.
As Andy has said, I think he has characterized it well. Dealers are taking a more risk-averse view on the wholesales they are willing to hold in stock. And that is why we are taking our prudent view today in order not to overstretch the system and in order not to -- in order to ensure that we don't have stock on our balance sheet which is unsold at the end of the year.
And sorry, just the last one. How is this changed in the last, call it, 6 weeks to 2 months? Because I remember, obviously, you did the site visit in St Athan. Were you seeing some signs there? Or has it really developed in the last 4 weeks? I'm just asking about the scale, obviously.
I think this has developed relatively quickly into the back end of the quarter. Obviously, you expect the quarter ends are very often higher, particularly in June with the selling season. So we've been very, very watchful. We've been looking at the market dynamics. We've been looking forward as well. It's not just a look back and taking soundings, and that's why now we feel this is, on a combination of all those factors, the right time to do what we're doing and the right time to take this more prudent approach.
[Operator Instructions] We'll go to the line of Sanjay Jha at Panmure Gordon.
I have 2 questions, if I may. First of all, you just said that you saw things falling off in the last -- towards the end of the quarter 2. Is that sort of mainly in U.S. or in Europe, U.K.? Because I'm struggling here a little bit because you had opportunity to tell us when you hit the June, things were not going to get to the full year numbers. I just -- I'm trying to understand what's happened in the last 4 weeks. Is there something made you revise your guidance for this year? And my second question is are you going to cut back on the specials introduced in the next few years?
Just answer the last question first. There's no change to the specials either this year or in the following years. Obviously, the key special for next year is the Valkyrie and that's on track. Bear in mind that what we're doing here is, obviously, look forward as well as looking back. So obviously, you're looking at trends and particularly velocity trends of the last 4 weeks. And obviously, we've set a level of expectation as we were landing June and that's where we saw softness. And to your question, particularly we saw softness in Europe and U.K. So it's that alert that causes us to take a more critical view in the look forward. And obviously, what we're trying to do is we're trying to take into account changing customer sets, customer -- changing dealer sentiment in reality in terms of what that looks like, listening to them and their commentary, and obviously, looking at the wider economic volatility.
Okay. So you can't think of any reason why certainly Europe and U.K. would suddenly come off in the last 4 weeks?
Well, I mean -- I think, Sanjay, we've been very consistent since Q3 of last year into the prelims, Q1 of this year, very consistent in saying we see the U.K. and Europe softness. And the question has been around how long that will endure, and it has continued to endure through those periods, and it is enduring still. And as we look forward, we see reasons to be cautious rather than reasons to be optimistic. And so I think we laid very clearly our views on U.K. and Europe. So this isn't necessarily a short-term thing, it's a cumulation effect. And naturally, at this point in the year, we are taking a look forward anyway to half 2. So I think that's been a consistent theme from us for quite a while now on the U.K. and Europe.
And Sanjay, I think you'll understand that it's always going to be more prudent for us to underproduce cars than overproduce and not sell. So we rely very much on this pull -- this retail pull-through. And what we don't want to do is we don't want to have incremental cars swimming around in inventory.
We have the final question and that's over to the line of Thomas Swift at CreditSights.
Apologies if I'm just repeating some questions. I came on the call slightly late. The first being, can I just get some clarity as to what you guys mean for planning prudently for 2020? I know that might be discussed in, say, next week, but any color will be great. And then finally, just on the technicalities, the CapEx guidance is at GBP 300 million. Previously, we got CapEx and R&D guidance. Am I right to assume that this is an apples-for-apples? So I think last time, we got GBP 320 million to GBP 340 million and now we're getting GBP 300 million, so -- yes, so just a comparison, that will be great.
Yes. They're the same number, just for absolute clarity. Sorry, I should have been more precise, but it's CapEx and R&D. And those -- the 2 comparators are absolutely correct. So you see where we've taken some of the actions to see greater efficiency in that area.
And on 2020, you're right. We have a results call next week and we don't intend to say any more today about 2020.
Okay. Well, that was the final question in today's call. So can I please pass it back to you for any closing comments at this stage.
So just to say thank you for your attention. Obviously, we look forward to speaking with you again next week as we go into the normal interims. Thank you for your attention.
This now concludes today's call. So thank you all very much for attending, and you can now disconnect your lines.