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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and thank you for standing by. Welcome to the Aston Martin Lagonda Third Quarter 2022 Results and Webcast. [Operator Instructions] Please note that today's conference is being recorded.
I would now like to hand over to your speaker, Amedeo Felisa, Chief Executive Officer of Aston Martin. Please go ahead.
Good morning to everyone joining us on the call today to discuss Aston Martin Q3 '22 results. I am Amedeo Felisa, CEO, and I'm joined by Doug Lafferty, our CFO. We then plan to provide a brief overview of our year-to-date and Q3 performances, and then we will be happy to take your questions.
A short presentation to accompany our comments can be found on the Results page of our investor relationship website.
Our year-to-date performances has been -- have seen us continue to build the foundation for our long-term growth, aligned with our vision to become the world's most desirable ultra-luxury British performance brand. We have continued to see a very impressive demand across our product range, and the underlying fundamental of Aston Martin are very strong.
For example, retails continue to outpace wholesales. Front-engine sports car are now sold out into second quarter of '23, and we have seen an acceleration in order to our DBX707, the premier ultra-luxury performance SUV on the market, as we increase its availability to dealers.
We have also seen healthy revenues growth, driven by record average selling price and continued excitement around our iconic brand. To further enhance our ultra-luxury position, we have launched a number of breathtaking new products over the course of '22, which all have tremendous consumer desirability.
In addition to the DBX707 and V12 Vantage Coupe we were -- that were announced earlier this year, during Q3, we have unveiled the ultra-luxury DBR22 as well as the stunning V12 Vantage Roadster, both of which are fully sold out at Pebble Beach.
Deliveries of the DBR22, which have limited 22 units at the price of GBP 175 million, are expected to start in '23. We also showcased development upgrade to our hybrid supercar Valhalla, including a spectacular driver-focused interiors and unique sitting position.
At the same time, like many of our other automotive companies are managing the effect of global supply chain and logistic disruption as well as inflationary pressure. In this context, we have experienced our own specific supply chain challenges over the last 2 quarters, which have delayed our ability to fulfill customer demand. Whilst we moved quickly to resolve the shortage that affected our Q2 performance, our Q3 deliveries were hindered by a new and separate supply chain challenges, impacting more than 400 vehicles that have been planned to be delivered in the quarter.
I have been personally involved in the steps we are taking to address this. These actions will not only support the acceleration of delivery in Q4 but also enhance our supplier relationship to support our long-term growth. I'm pleased to say that the overall situation is already improving in Q4, and I am confident that with the actions we are taking, we will exit the year in a stronger position to deliver on our goal for '23 and beyond.
I will now pass the call over to Doug to review our financial performances and outlook. Doug?
Thank you, Amedeo. Good morning, everybody. I'll run through a quick summary of the financial position before we welcome your questions.
As Amedeo described, we continue to enjoy strong demand for our products in Q3, although frustratingly, new supply chain challenges, once again, limited our ability to meet this demand and have impacted our overall performance. Pleasingly, though, we have been able to demonstrate one of the strong fundamentals of the business by delivering substantial revenue growth. This has been driven by excellent pricing dynamics, including pure pricing, option and incentives management and supported by FX tailwinds.
As a result, our core ASP is up 28% year-on-year to new record levels. This is a meaningful trend and is underpinned by the change in approach to being demand-led.
On a year-to-date basis, we have seen more than 300 basis points of gross margin expansion as we continue on our journey towards our medium-term targets of 40% plus. However, to some extent, our margin expansion trajectory has been temporarily checked by some transient dynamics: first, in terms of incremental manufacturing and logistics costs; and second, by a negative mix effect from Specials in Q3 this year.
The supply chain and logistics disruptions that we are currently experiencing are impacting many companies within the automotive industry. Set against that backdrop and similar to the operating challenges I described at the time of our first half results, our Q3 performance was disrupted by both circumstances.
As you will recall from our half year results presentation, I referenced more than 350 ordered cars that were awaiting final parts at the end of June, with the corresponding impact on profitability, working capital and cash in the period. Those vehicles were delivered in Q3. The associated working capital unwound, and the impacts of that specific supply chain shortage were essentially mitigated.
Moving further into Q3. We were continuing to manage volatility and uncertainty in the supply chain, albeit largely unrelated to the disruption I just mentioned. That uncertainty ultimately resulted in disruption to our planned Q3 production, particularly in September, by delaying final assembly and, therefore, forcing the rephasing of deliveries towards the end and beyond the end of the quarter.
This was then compounded by the late outbound logistics to North America due to Hurricane Ian. Overall, the combination of these new factors impacted more than 400 vehicles that we had planned to deliver in Q3. These cars will now be finished, [ where required ], and delivered in Q4.
Coming back to the impact that it's having on our overall financial position, inflationary pressures have understandably been a point of discussion over the course of the year. And we've generally been able to mitigate rising costs through pricing actions and, more recently, with the benefit of FX tailwinds.
During the course of Q3, we incurred incremental costs over and above general inflationary pressures and specifically associated with mitigating and resolving the supply chain issues I've just mentioned. This included additional manufacturing costs, co-locating members of our teams with suppliers and incurring premium inbound and outbound logistics costs to minimize disruption to our production schedules.
Together, these, as I refer to them, supply chain recovery costs, totaled approximately GBP 10 million in Q3. These costs essentially offset the benefits of the FX tailwinds we would otherwise see in our numbers.
The good news is that this specific supply chain issue has since improved. As Amedeo referenced, we are confident that we will deliver a strong Q4 in terms of volumes, profitability and cash flows.
With regards to the full year outlook, as a direct result of the new supply chain issues we've experienced in the second half, our outlook for 2022 is modestly updated to reflect a more significant, albeit short-term, impact than previously expected.
On volumes, we now expect total wholesales to be more in line with current consensus expectations and in the range of 6,200 to 6,600. On Valkyrie, there's no change to the 75 to 90 range we previously provided, with a strong ramp-up in deliveries expected in Q4.
Combined with the incremental supply chain recovery costs, which we expect to continue at a similar level into Q4, we are now targeting year-on-year adjusted EBITDA margin expansion of between 100 to 300 basis points. Breaking down the change in EBITDA margin range a little, the revised full year outlook now includes approximately GBP 20 million of short-term incremental supply chain recovery costs that I described. The balance of the change is primarily a function of the volume range.
With regards to cash flow and related to the same supply chain issues that impacted Q3, we now expect cash inflows from a more normalized working capital dynamic to only become visible towards the end of the year and into early 2023. Combined with our Q3 cash flow performance, our target to be free cash flow positive in the second half of the year is certainly now more challenging. However, our target is clearly to be free cash flow positive in Q4, and we will continue to work on optimizing free cash flow with overall H2 performance in mind.
With that, we'd be happy to take your questions.
[Operator Instructions] The questions come from the line of George Galliers from Goldman Sachs.
I had a couple of questions just around the fourth quarter and kind of the implications for 2023. So clearly, you've had significant challenges, but it sounds like, operationally, that is improving due to the measures you've taken. If I take the midpoint of the new wholesale guide, it would imply 2,300 units in 4Q, which I believe would be a record for Aston Martin. So the first question I had was given your order book, how close to this type of run rate do you think you can also be in the first half of 2023?
And then also with respect to your updated EBITDA margin guidance, what EBITDA margin are you expecting in the fourth quarter? And again, what do you think the EBITDA margin will look like in the first half of '23? Should we expect further expansion?
Thanks for your questions. On the first question with regards to the volumes, look, I think historically, Q4 has been a strong quarter for the company. And I think, obviously, we're expecting a strong Q4 in 2022.
There is a head start to the numbers that we need to deliver given the fact that we have a lot of cars awaiting final assembly parts at the end of September. And also, as I referenced, we had a number of cars, which were impacted from a logistics point of view, going into the U.S.A. right at the end of September. Those sales will fall into October. So we had a bit of a head start. Last Q4, the company delivered wholesales of around 1,900 cars in the fourth quarter.
So there's confidence that we can achieve what we need to achieve in the fourth quarter. I think moving into 2023, we'll give some guidance on that at the right and appropriate time. But we're very happy with the level of demand that Amedeo had referenced that I talked to, and we hope that, that sets us well for 2023.
I'm going to give you a similar answer on the EBITDA margin. As I referenced there, we expect Q4 to be strong from a volume, profitability and cash flow point of view. So in and amongst that, we'd expect EBIT margin to be significantly improved from Q3. And again, as we move into next year, we haven't changed our medium-term outlook. And you know that, that means we're targeting GBP 500 million of EBITDA in sort of the 2024, 2025 range at a margin of 25%. And we're on our journey to achieving that.
The next questions come from the line of Charles Coldicott from Redburn.
I've got 2, please. Firstly, on the gross margin, so that was down in Q3, despite the addition of the 707 and the V12 Vantage. Can you confirm, firstly, that those 2 models are at the 40% gross margin target? And in light of the inflationary pressures you mentioned, are you still confident that future launches, including next year's front-engine models, will have a 40% gross margin?
And my second question is on working capital. What do you see as a normalized level for inventory and receivables? And when do you expect to get back to that? Obviously, you've got the model launches next year as well. So should we expect inventories to remain high until late next year?
Thanks, Charles. I think I'll take those questions. So with regards to the gross margin, the target remains 40% plus. I think we've demonstrated through the course of this year that with pricing actions, with the way that we're managing incentives and the move to really being a demand-led business, we've been able to offset general inflationary pressures. That, I don't expect not to continue as we move forward.
The thing that's impacting our margin really at the moment is these incremental costs at the short term, supply chain issues that we've been experiencing. That is having a negative impact on our margin, as you quite rightly pointed out. But we expect that to be transient. Therefore, as we move into the first part of next year, we expect margins to improve.
With regards to the Vantage V12, yes, absolutely, 40% plus margin. With regards to the DBX707, given the fact that, that's a vehicle that's been predominantly impacted by some of these supply chain issues this year, again, temporarily, margin isn't quite at that level. But as things return to normal, DBX707 certainly targets that 40% plus margin going forward.
With regards to your question on working capital, yes, look, we've obviously faced some headwinds this year. I think, as I referenced in my sort of speech at the start of the call, I now expect working capital to unwind over a slightly longer period than we'd anticipated at the end of the first half, I think, targeting that unwind by the end of Q1 next year.
And then specifically with your question on new products coming, I think -- and Amedeo maybe has talked to this slightly better than me. In planning next year, we're really looking at how do we ramp up the delivery of those new vehicles that are coming, how do we manage the supply chain and how do we manage things internally.
So from a working capital perspective, I'm certainly hoping that we don't see some of the same impacts that we've had this year as we move into next year.
Again, looking to the -- as I was saying, to the new models that will reach the market next year, we have -- if you understood what we have done and what we are to increase in terms of strengthen our position versus the supply chain, we have a better relation with them. We have taken the story of the disruption. I think we have increased our capability to manage them and to install in them the understanding of our business.
So I think at the moment, we have -- I have to say that we have a good -- or better relationship with them. And then as we put our people in their organization, I think we have a better control of them.
So combining the 2, I think the next launch of the new product will be probably -- for sure, will be less risky. And then, of course, this will be reflected on the margin of the cost.
Okay. Can I just ask a quick follow-up? What is the timing of the model launches next year?
I think you have to wait. As usual, we don't say in advance, which will be the plan of the release of the new product, especially when we speak of 1 year later.
The questions come from the line of Daniel Roeska from Bernstein.
There's clearly some distance between where you are right now and the free cash flow breakeven in '24. And you've talked about, I think, the aspiration in core terms. But do you have kind of a plan -- a milestone plan? What would you like to achieve kind of in the following quarters? Could you give us kind of the major proof points between now and then that you're also kind of gearing the organization, too?
And then just a smaller question. You mentioned negative mix effect in Q3. Just maybe some color around that, please.
So with regards to our sort of midterm ambition and aspirations, as I said, we haven't changed our outlook and our guidance in that regard. Free cash flow positive in 2024 certainly remains our aspiration and ambition. Specifically with regards to cash flow, and as I mentioned in answering Charles' question, we expect that working capital unwind to happen over the course of the next couple of quarters. That should improve our cash flow position as we move into next year.
And to Amedeo's point, we hope and believe that the work that we're doing with the supply chain will stand us in a better state in that regard. So from a cash flow and a working capital point of view, we have line of sight on improvement.
And similarly, as I answered earlier on gross margin and EBITDA margin, we're expecting improvement along the lines of the guidance that we've given in order to get us to the midterm. The trajectory that we've seen earlier in the course of the year, as I said, has been impacted and checked slightly by some of the sort of transient impacts, particularly with reference to the impact of recovering costs related to these new supply chain issues.
So a temporary interruption in trajectory is what we think is happening. And as we move forward, we should see that strengthen.
On your second question with regards to mix, I think a couple of things. So one, just from a trend point of view this year, obviously, it's been quite lumpy in terms of deliveries of core vehicles to various different parts of the world with boat and shipment timing. I think there was a timing issue at the end of Q2 with China and, obviously, a timing issue at the end of Q3 with the U.S. So it's a little bit lumpy, difficult to see a trend through that.
With regards to Specials, I mentioned there was a mix impact from Specials in Q3, vis-à-vis Q3 last year, and that is really a function of -- it's predominantly Valkyrie deliveries last year with Speedsters. And also within that, there's a customer mix dynamic where we're delivering certain cars at certain times of the year, and that sort of impacts the margin structure as we move through those delivery profiles.
Great. Maybe I'll try to tease out some more detail on that first question. I mean you've adjusted full year guidance. You've got quite an order book. And so let's assume we meet again in Q4 results and kind of the quarter transpired as you're guiding to, to today. But going ahead and what's really -- what needs to happen in the business in Q1 and Q2 for you to be on the right path for cash flow breakeven in '24?
Yes. Look, Daniel, I think it's delivering to our plans. I mean I'm not about to go into any more detail on 2023 and certainly not breaking it down by quarter. So sorry to perhaps disappoint you in terms of the answer, but the trajectory is certainly that.
I think what would please us moving into next year, and Amedeo and I talk about this quite regularly, is smoothening the profile. So Q4 has historically been a strong quarter for the business. And as the dynamics work out this year, that needs to be the same. What we'd like to see as we move into next year for all sorts of different reasons, including some of those that I've already illustrated on the call with regards to working capital, we'd like to see a smoother profile as we move through the course of next year.
So I expect you'll still see a little bit similarity in the profile of the business that we might have seen over the last couple of years. But our objective is to try and smooth that and make sure that we can meet the strong demand on a more sort of routine basis and not have to manage the interruptions that we've seen over the last 6 months in the business.
We are now going to proceed with the next question. It's from the line of Christoph Laskawi from Deutsche Bank.
The first one will be on pricing. Obviously, ASPs in Q3 have been quite strong and better than expected. Considering that you are continuously facing headwinds, inflationary pressure now on the supply chain side, should we expect further price increases into Q4 and early next year, ahead of then the repricing of the new model lineup or essentially all price measures done as of now, and we probably see a bit of an uptick also into Q4 but not necessarily transitioning into '23, again before the new launches?
And then the second question will be on the DBX and the 707. I think you're stating that order intake is up 40%. It's around the same number you gave with H1. Could you provide detail on the length of the order book? Is it also into Q3 -- into Q2 next year as for the sports cars? Or is it significantly different? And considering that there's a recession next year, and you could argue that the DBX is somewhat less prestige than other models that you're running, would you see a negative demand impact more towards the second half of next year, in case we are moving into a recession in Europe or the U.S.?
Okay. Thank you for the questions. Let me try and chop through. Then Amedeo, if you'd like to add anything, then please. On -- with regard to pricing side, look, I think we're very happy with the pricing dynamics that we've got in the business. I think we've established pricing power. As you referenced, we've taken various different pricing actions over the course of the last 12 months. I think some of those have recently filtered through, let's say. And obviously, some of the pricing actions that we take are to protect customers who previously ordered cars. So as we move into Q4, we'll keep pricing under review. I don't anticipate any new price increases during the course of the rest of this year.
As we move into 2023, we're currently in planning mode, and we'll see what actions we may or may not need to take on pricing, taking into account any ongoing inflationary pressures, new product launches and so on. So that's sort of work in progress.
On the third point -- on the third question, I'll come back to DBX with regards to recessionary pressures, look, I think the only thing that we can point to at the moment in that regard is the order book, and the order book remains strong. And we're not seeing any significant disruption at all in terms of order intake from ongoing speculation or the ongoing impact of the macroeconomic position. So nothing to sort of talk about in that regard at the moment.
With regards to DBX specifically, I think what I would say is the DBX707 launch has been obviously been impacted by the sort of short-term supply chain issues that we've seen this year. In some regards, we're just getting some of the first cars into dealers. We're getting -- the dealers are all getting their demos. They're getting their showroom car. The first customers are getting their cars. We expect and have seen recently an acceleration in DBX orders. The order book runs into the first half of next year. We expect to see that strengthen as cars continue to be delivered into dealers, and the dealers have the opportunity to showcase those with customers.
If you see what happens in the U.S. where we have completed in October the demo cars to all the dealers, we are increasing our request of new cars. And then the requests are always over our proposal. So since then, the car is going well.
We are now going to proceed with the last question. It's from the line of José Asumendi from JPMorgan.
It's José, JPMorgan. Just a couple of questions. Amedeo, can you comment, please, on any gaps you see, either manufacturing processes or as to how Aston Martin launches the vehicles that you think, from your perspective, need to be addressed?
And the second question, I'd love to take your perspective when you compare versus your previous employer, the dependence that Aston Martin has in the U.K. market is obviously something that your previous competitor does not have, the large reliance on one of the markets, one of the regions only. How do you see that structurally for Aston Martin? And can you reduce the -- these tenders that you have in the U.K. market to potentially also improve the ASP of the company going forward?
Okay. Going to your first question, I think the processes in Aston related to what is connected to the supply chain are strong enough to face what is happening there. Of course, we are continuing to increase. And then during my speech, I explained that we have increasing our relationship with the customer, of course, trying to ask them to become not a supplier but the supporter of our work. So they become partners of us, and this is, I think, is what is obtained in the latest quarter. I think we have obtained a good result on that.
So the processes inside the company are strengthening continuously. So the situation that we have faced was not expected, but I think that we have done what was needed in order to face the situation, and then we are going out of this kind of disruption.
Again, on the second question, mainly -- anyway, take in mind that our major market is U.S. If we compare U.S. with the other European market, U.S. is always the larger one. And -- but anyway, the success we are having in U.K. is important. And then you feel that especially with the customer we are having for the special version. All the special version we have presented were sold out in a short time. So that means the brand is very strong, and we have a lot of loyal customers that continue to follow us.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.