Aston Martin Lagonda Global Holdings PLC
LSE:AML
Earnings Call Analysis
Q3-2023 Analysis
Aston Martin Lagonda Global Holdings PLC
Douglas Lafferty, one of the executives, highlighted an anticipated escalation in average selling prices (ASP) in the upcoming fourth quarter (Q4) and into the following year, which should bolster gross margins. Despite foreign exchange (FX) headwinds and a mix shift due to lower volume sales in China, the core ASP is expected to trend upward, continuing to support the company's profitability.
The company's DBX model has experienced a 23% uptick from the previous year. In the face of some volatility within the Chinese market, the company has navigated this turbulence without significant demand fluctuation in the crucial North American market. The initial order bank for the new DB12 model illustrates a demand consistent with historical patterns, signaling stability and no critical issues in consumer demand dynamics.
In line with sales strategies, retail sales are projected to surpass wholesale numbers for the full year. The newly launched Volante, representing 30% of the portfolio, is on track with its marketplace introduction. However, there is an expectation of inventory build-up, particularly for the DB12 model. Deliveries of the Valkyrie Spider, a high-end specialty model, have commenced, albeit constituting a minority within overall deliveries.
The company has successfully attracted new customers, with 55% of the customer base composed of individuals new to the brand. A significant portion of these new clientele were acquired through the DBX model, leading to subsequent purchases of the DB12. The brand's enhanced performance and alignment with Aston Martin's Formula One team have also contributed to drawing customers from competing sports car brands.
Aston Martin is set to update its product line-up, replacing older models like the DB11 with new introductions such as the DB12, with additional front engine sports cars slated for replacement in 2024. Updates also include interior overhauls in line with the new DB12 and ongoing releases of special edition models. The upcoming mid-engine Valhalla will start deliveries towards the end of next year, with a robust rollout expected in 2025, aiming to provide a comprehensive and attractive product range to maintain brand loyalty and customer retention.
Lawrence Stroll, executive chairman, underlined the company's solid foundation and success with launching the DB12 model. Aston Martin anticipates the debut of two more sports cars in the following months. The company leverages its Formula One team's appeal to capture a new demographic of performance enthusiasts and is poised to meet financial targets in 2024—a year ahead of the original 2025 projections. Despite a minor setback in DB12 production ramp-up, this will not impede the launch of upcoming sports car models as they share the same electronic architecture, setting the stage for an optimistic future outlook.
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Good day, and thank you for standing by. Welcome to the Aston Martin Lagonda Third Quarter 2023 Results Conference Call. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Lawrence Stroll, Executive Chairman, Aston Martin Lagonda. Please go ahead.
Good morning, and thank you for joining us for this call on our Q3 2023 results. I'm joined today by Amedeo and Doug. I hope you have had a chance to read the release and review the presentation of results that are on the IR section of our corporate website. I'd like to say a few words on our continued progress before Doug takes you through some of the financial highlights prior to Q&A.
As I've said before, ensuring the fundamentals of this business has been a clear focus of mine since I became Executive Chairman. We have had to rebuild the foundation, inject new talent across the organization and critically develop new models that match our vision to become the world's most profitable, desirable ultra-luxury high-performance brand. In this, our 110th year anniversary, we are delighted with the strategic progress we continue to make.
Commencing deliveries of our next generation of sports cars is a major milestone, marking the beginning of a completely new lineup of front engine sports cars that will reposition Aston Martin as an ultra-luxury, high-performance brand, enhance our growth and bring higher levels of profitability.
The launch of the DB12, which has been externally reviewed as potentially the best Aston Martin ever, has seen extraordinary demand. It is driving a reappraisal of Aston Martin amongst new audience with 55% of initial DB12 customers new to the brand. And I have no doubt that when we launch our second generation new sports cars in Q1 next year, we will see a similar resounding response.
We look to the future with enormous excitement. And in addition to our ongoing strategic process, we have also made significant financial progress during the first 9 months of 2023. Our volumes, pricing, gross margin and EBITDA are all showing strong improvement, which Doug will highlight shortly. Over the coming quarters, we will showcase our breathtaking lineup of new products, and we remain on track to substantially achieve our '24, '25 financial targets in '24. Now over to Doug.
Thank you, Laurence. Good morning, everyone. As mentioned, year-to-date, we've seen an improvement in our volumes, pricing, gross margins and EBITDA as we continue to execute on our plans. We're pleased to say that our Q3 financial performance is in line with the guidance we gave at our first half 2023 results call back in July.
As we look to the remainder of the year, and as mentioned in previous quarters, the profile of 2023 was to be shaped by the timing of product launches in both core and specials. And with that in mind, we continue to expect a significant acceleration in our financial performance in Q4. Coming back to year-to-date '23 in some more detail.
We've seen continued strong demand across existing and new product lines with the DB12 order book now extending into Q2 '24 and DBX orders also running into next year. Wholesale increased by 8% year-on-year to 4,398, primarily driven by a 23% increase in DBX volumes, which more than offset lower sports car sales given the ongoing transition within that portfolio.
During Q3, we commenced deliveries of the DB12. The issues that affected the initial production ramp are now resolved, but did impact overall volume in the quarter as well as having a knock-on effect on our full year volume outlook. Year-to-date revenue increased by 21% year-on-year, benefiting from higher volumes of both core and specials from underlying pricing dynamics in the core portfolio and favorable product mix. This was reflected in our total ASP of GBP 219,000, up 12% year-on-year, and our core ASP up 6% over the same period.
Year-to-date gross margin expanded to 36%, increasing 300 basis points year-on-year and was over 37% for Q3, as we continue to make progress towards our 40% plus gross margin target. Adjusted EBITDA of GBP 131 million increased by 64% year-on-year, primarily driven by the higher gross profit, partially offset by higher operating expenses, including reinvestments into brand and marketing activities as well as some inflationary impacts on our general cost base.
Adjusted EBITDA margin of 13% was up over 300 basis points year-on-year. The adjusted operating loss of GBP 135 million reflects depreciation and amortization increasing year-on-year as we guided. Free cash outflow of GBP 297 million was an improvement of GBP 39 million year-on-year, including increased capital investment year-on-year to GBP 276 million, again, in line with our full year 2023 guidance.
Working capital was an outflow driven by increased inventory to support the launch of next-generation sports car models, which we expect to partially unwind in Q4. Total liquidity at the end of September stood at over GBP 600 million, including GBP 216 million of gross proceeds received from August share offering. Our net debt was around GBP 750 million at the end of Q3, broadly stable from the beginning of the year.
We remain focused on reducing our leverage and retiring debt, and we'll continue to do so in consideration of a wide range of factors. In line with the announcement in July, our objective is to repay the second lien in full. In November, we will be redeeming 50% of the outstanding second lien notes. And beyond that, we intend to undertake a fulsome refinancing exercise during the first half of 2024.
In terms of outlook for this year, our guidance other than volumes remains unchanged. Specifically, within the fourth quarter of 2023, we continue to expect to see a significant increase in adjusted EBITDA, primarily driven by the timing and related contribution of the new product launches or with improved profitability. We have marginally updated our full year volume outlook to circa 6,700 units as the impact of the initial DB12 production delay limits production capacity for the full year. Demand is very strong. This is a timing issue only, and production is now running at the rates required to meet our volume expectations for the year.
So in closing, we are well positioned to deliver a strong Q4 performance as we continue to transition our portfolio with the delivery of the DB12 and our new specials. This should provide us with strong momentum heading into 2024, and we remain focused on delivering against our medium-term plan.
With that, we'll be happy to take your questions.
[Operator Instructions] And now we're going to take our first question, and it comes from the line of Akshat Kacker from JPMorgan.
Three questions from me, please. The first one on the DB12. Could you just give us some confidence that you are overall happy with the demand and lead times on the order bank that you currently have for the DB12, please? And also, should we be expecting a 40% plus contribution margin from the car in line with your general business strategy?
The second question is on the DBX. As you have now updated the infotainment and the HMI interface for GT sports cars, I think a lot of customers might be waiting for an update on the SUV as well. Is that in the works? And when should we expect a refresh on the DBX, please? And the last one is on the specials. You are going to launch a few specials in the coming quarters. Can you just give us your broad expectations for deliveries going into Q4? And if you have something in mind for 2021 as well, please?
As far as D12 is concerned, as you might have read some of the articles critically acclaimed, probably the best Aston Martin ever made, we are very, very pleased with our order book to date. We are slightly disappointed that the demonstrators are literally, as we speak, just deriving in the dealer showrooms. So to get that quantity of orders without any customers seeing or touching a vehicle is nothing short of spectacular.
We are confident that by the end of the year, end of this year, we will be sold out of all of next year's production. As I said, the demonstrators are literally in the dealer showrooms as we speak. As far as your second question on DBX, yes, we are very confident, 100% certain of our contribution margin. DBX, the new infotainment, the new interiors, will continue along the line of DB12 and will be in the marketplace in the near future. And yes, we anticipate on a regular annual basis continuing with our rollout of specials.
Just a clarification on the specials. What should we be factoring in for Q4 in terms of specials deliveries, please?
Look, I think we're not going to get into the details of the numbers. But you can see that the profile of the delivery of the Valkyrie is running smoothly during the course of this year. We've started deliveries of the Spider, and you can start to see that the margin is picking up in that regard. And then as we previously announced, we'll deliver the DBR22, majority of those through Q4 and also commenced initial deliveries of the Valour. Valour will continue into 2024.
Now we're going to take our next question. And the next question comes from the line of George Galliers from Goldman Sachs.
The first one, I think Doug already confirmed this in his pre-comments. But just with respect to the updated volume guidance, can you confirm that 100% of this is related to the DB12 product delays and not softer volumes on other parts of the portfolio?
Second question I had was just with respect to the free cash flow guide. You didn't reiterate the positive second half free cash flow excluding the technology fees. Was this deliberate? And if yes, it does seem to imply a small downgrade to the free cash flow. If that's the case, can you just confirm that the driver of the slightly lighter free cash flow for this year is the slower ramp of the DB12?
And then finally, obviously, very strong gross margins during the quarter. Can you just give us some insights into what drove that, particularly in light of the step-down in the core ASP. Can it be attributed 100% to the specials? Or did you also see gross margin improvements on your core vehicles sequentially?
It feels like most of those are for me. Yes, so with regards to DB12 and the volume outlook for the year, yes. I mean, look, 100% is a big number, but that's exactly what the update regulates, the delays that we've experienced with the DB12 corresponds exactly to the shortfall or the updated guidance on the volume. I would reiterate again, though, as Lawrence said, demand is strong. We expect it to get stronger. It's a timing issue related to production and not a demand issue.
With regards to free cash flow, yes. So we expect positive free cash flow for Q4. And again, as you sort of rightly pointed out, the impact -- slight impact that we're expecting. Look, I haven't given up hope on doing better on free cash flow. But the impact really is related to that slight volume adjustment and also the working capital dynamics that come along with that. So we had an increase in inventory in Q3. Expect that to partially unwind in Q4. But don't forget, we're also going to be preparing for the launch of the second next-generation sports car. And also the timing of some of the sales being phased into Q4 might impact receivables. So the impact is exactly as you say, linked to the volumes.
And then on the gross margin. Yes, Q3 gross margin, we're very happy with above 37%. We see that continuing to improve. Obviously, we're targeting that 40% plus on every product we sell. And as Lawrence just confirmed, that's exactly what we're seeing and expecting to continue on the DB12. So a rich mix from specials in Q3, supported by the initial DB12 deliveries. And in Q4, we expect to see that sort of strong mix continue in the same as we move into 2024.
Now we're going to the next question. The question is from the line of Henning Cosman from Barclays.
Perhaps I can ask also the DBX, if you could perhaps be a little bit more specific how far the orders currently reach into 2024. And if you could remind us what your ideal order book length look like for the sports cars and also for the DBX. So what I mean is would you typically hope to sell out for the following year pretty soon after the launch of these new sports vehicles and what's the situation for the DBX? That's the first question.
Second question, if you could please discuss these execution issues with your supplier that has led to the unit guidance reduction on the DB12 specifically now. But perhaps more importantly, how we should think about the risk of similar issues as you ramp up many new vehicles over the next 12 months now, not least in Q4, where execution will have to be pretty seamless.
And then the third question is I'm hoping perhaps for a bit of color in the context of consensus. So despite these lower '23 units that you're guiding now, could you discuss how you feel about the full year '23 consensus revenue and EBITDA now in the context of these very strong ASPs that you have? I assume that you're hoping to achieve broadly the current consensus level. But maybe we can talk about if that could be slightly at the expense of having to sell more specials in Q4 and even Q3 that you were originally hoping and pulling some forward from 2024.
Your first question on the DBX. We're very satisfied with our order book. As I said, as we are extremely satisfied with DB12, as you may know, the demonstrators for DB12 are just arriving at our dealers. So extremely confident or actually certain that by the end of the year, we'll have our order book sold for all of next year.
As far as DBX is concerned, as I said, we are very satisfied with our order book. In the near future, we will be coming following up on the DB12 interiors with an updated version of interior in our DBX. So we're looking forward to touching that in the very near future. As far as the -- I think your second question was about the supplier issues, which I'll pass over to Amedeo to answer.
Okay. Let me say that in the last year, we have vastly improved our regulation with the supplier and for sure now, the supply chain regulation is by far better than it was last year.
About the DB12, the startup around the production was mainly related to challenges that we have on the software integration or the electronic platform with the new infotainment that is brand-new and that was spoken by Aston Martin. So we had some issues on software, but I think everything now is fixed. And then we have also the opportunity, having the software with a possibility to make the improvement over the area. Everything will be an improvement in the future, which will be loaded by the year.
And by the way, it's the same software where we have a bit of startup problems with. That is going to be the same software used in all of our new front engine sports car. So you get through the first hurdle, it's the same for the second car, the same for the third cars.
And then on the third question, Henning, yes. So look, we've always guided to the last part of the year, Q4 being a very rich mix. So as I just said, we're expecting the continuation of the Valkyrie program deliveries in Q4, the initial deliveries of the Valour and deliveries of the DBR22, that's always been the plan. And there's no significant deviation from that plan at all in light of the marginal update to the DB12 volumes.
I think as it relates to consensus, we haven't updated our financial guidance. As I say so, we're pretty comfortable with where consensus has got to based on our guidance for EBITDA margin and so on. And I would say, as we run into 2024, our plans are still very much as they were. And we've talked this year about our intention to substantially deliver on our prior midterm guidance, which is the GBP 2 billion of revenue and the GBP 500 million of EBITDA. And that plan remains what we're aiming to deliver for next year. So no, this slight interruption that we've experienced on the DB12 doesn't materially impact anything as it relates to the sort of profile of delivery in Q4 or what we're expecting to do in 2024.
Okay. And if I could just follow up very briefly on Amedeo's point around the innovations that have led to the supply issues. So there are no innovations in the specials that you're looking to launch in the fourth quarter where there's a potential risk of similar execution issues there?
If you want to compare the special with DB12, DB12 by far is the best product we are having on the product line. So everything of the innovation coming from the sports car line.
And the next question comes from the line of Christoph Laskawi from Deutsche Bank.
I'd like to start with a question on demand in Asia and North America. Wholesale deliveries obviously in Q3 had been down year-over-year. Could you comment on what kind of momentum you're seeing at the dealers and if you expect that to improve in the coming quarters? And then linked from that to pricing. Well, obviously, geo mix slightly negative in Q3. But you also stated that you have pricing, at least giving a bit of price in the ramp-downs of the models. Could you comment on what we should expect for that in Q4 and early '24 when new models are launched as well?
As far as the wholesale deliveries are concerned, simple reason, they're slightly down as we're transitioning from the old product to the new product. So we're not going to keep putting more old front engine product into the market. So that's a transition and timing event. And I'll ask Doug to answer on the second question.
Yes. Look, on pricing, I think if you're talking about Q3 versus Q3 last year, a little bit of geo mix in the lower volume into China that impacted, but also there was a bit of FX at play in there. I think absent the FX, it would have been up on the core ASP quarter-on-quarter as well.
The way I would encourage you to think about ASP as we move forward is that it will evolve positively. So we're expecting further ASP momentum in Q4 and as we run into next year, and not to sound like a broken record, but that will really support the gross margin deliveries. We've seen really nice gross margin momentum as we've come through this year, and I expect that to continue running into Q4 and into 2024 and to a larger extent, driven by the ASP dynamics that we expect to evolve.
A follow-up, if I may, on the regional comments as well. So the weakness in China or relative weakness in China and the U.S. is not linked to the DBX, which is also down year-over-year, but it's really also linked to the delays that you have in the DB12 and not being able to put out the volumes that you hoped? Just to clarify.
The DBX is up year-over-year. So year-to-date, we're 23% up on the DBX. There's -- we're working closely with the teams in China. We wouldn't be the only company to say there's a little bit of volatility there. But as Lawrence said, China hasn't received any DB12. We're on the wind down of the sports cars. So it's just managing our way through that transitionary process.
And then I think you'd also mentioned North America. North America specifically, we haven't seen any significant change in demand dynamics from consumers. When we look at the initial order bank of the DB12s, the ratio of orders that's coming from the U.S. is exactly where we'd expect it to be and in line with our normal dynamics. So no significant change. Obviously, we're mindful of everything that's going on. We'll continue to monitor. We work very closely with the regions to monitor performance, and we'll continue to do so. But as things stand today, certainly from that regard, no material issues.
And the next question comes from the line of Anthony Dick from ODDO BHF.
First one on the timing of the order book opening and the production ramp-up on the DB12 Volante and the other sports cars, if you can. And also, how do you expect -- what are your expectations for DB12 Volante orders by the end of the year and mix into 2024?
Then second question on the retail versus wholesale. What should we expect as the year considering you're probably building up a bit of inventory on the DB12? And then the last one, I was wondering if you could just disclose the number of Valkyrie Spiders that we delivered in Q3.
Your first question, the Volante is 30% of the portfolio. We just recently launched the car a couple of months ago. And the demonstrators for the Volante have not yet arrived at the dealerships where the as the Coupes are literally, as I mentioned earlier on the call, just arriving as we literally speak. Your second question?
It was retail versus wholesale. So yes, for the full year, we expect retails to be above wholesales and unchanged. And yes, there might be a bit of inventory build still in DB12, but still expecting retails across the portfolio to outstrip wholesales.
And then the final question, I think, was related to the Valkyrie Spider. So I'm going to give the specific number exactly, but it was the minority of the deliveries was certainly from the Spider. But it's great to have that program now started in delivery. And you can hopefully start to see, along with other mix in Valkyrie deliveries, the margin improvement that, that starts to bring and supports our evolution of the journey to 40% plus across the board.
And the next question comes from the line of [ Hipeng Hu ] from Bernstein Research.
I've got 2 questions here, 2 slightly longer term, I guess, strategic questions. The first question would be on your order book. So what's the proportion of new customers in the existing order book? I understand that you provided some color on DB12 order books on that number. But how do you expect that to change with new product launches?
And my second question, it's slightly related, would be what does the product journey for new and existing customers look like for Aston Martin? So how does the company intend to keep existing customers with the brand? I believe one of your key competitors has a really strong product ladder for customers to climb. How does Aston envisage sort of that product ladder for its customers?
As far as DB12 is concerned, to answer your question, it's 55% currently new customers to the brand that are -- a lot of which have come through experiencing driving and owning a DBX. So a good portion of those 55% have bought a DBX and are now, because of the acquisition of by the DBX, buying the DB12.
We're also seeing customers come from other brands, other sports car brand, particularly with our higher performance than we historically have delivered. It's a very different product sitting on the tails of our Formula One team and the performance -- the balance of performance coming out of the cars and the exciting platform of Formula One.
So long-winded answer. 55% of the customers were new for the 2 reasons I just mentioned.
My second question?
Could you repeat the second question? I'm sorry.
Yes. So the second question was what your product portfolio and sort of keeping customers within the brand, right? So is there a clear product ladder? So you mentioned from DBX to DB12. Should we expect that sort of product ladder to be established, well established within the next 3 years and for customers to be able to stay within the Aston Martin brand?
Of course, yes, it's the DNA of our business. As we said, we are going to be replacing. We've already replaced DB11 with DB12. Our other 2 front engine sports cars get replaced both in 2024, 1 at the beginning of the year, 1 closer to the middle latter part of the year. So you'll have all new front engine sports cars in 2024, both Coupe and Volante.
And then, of course, we have our DBX, which as we said, will come with an update and eventually new interior to the DB12. And then, of course, we will continue rolling out on an annual basis our specials. We also have our mid engine Valhalla, which we will start to deliver the end of next year and then very strong into '25. So you'll have ultimately a full portfolio of front engine sports cars, SUVs, mid-engine sports cars and specials. Quite an extensive portfolio.
There are no further questions at this time. I would now like to hand the conference over to Lawrence Stroll for any closing remarks.
Just as I mentioned on the last call, it's been a very exciting journey the last 3.5 years. All the fundamentals of the business are now strong, deep rooted. We have a fantastic launch of our DB12. We look forward in the next coming months to our second launch of our new generation sports car and a few months after that, our third new generation sports car. All this on the heels of a very exciting Formula One marketing platform that is extensively opening us to a group of new customers that have never shopped the brand before. You could call them petrol heads, if you like, and it goes very much in line with our new products and the new higher performance handling, et cetera.
So look forward to a very exciting year. We will be ahead of what I predicted 3 years ago. As we said, we will hit our financial numbers in '24 for what we projected in '25. And other than a slight delay in ramp-up in DB12, which is now very much behind us, and this will not affect our other new sports car launches because it is the exact same electronic architecture going in the other new sports cars.
So on that, stay tuned and look forward to speaking to you on the next call.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.