Aston Martin Lagonda Global : H1 Results 2022 - Transcript

Aston Martin Lagonda

H1 2022 Results

Friday 29th July 2022

Aston Martin Lagonda H1 2022 Results

Friday, 29th July 2022

H1 2022 Overview & Financial Review

Doug Lafferty

CFO, Aston Martin Lagonda

Welcome

Hello, everyone, and welcome to Aston Martin's First Half 2022 Results Presentation. I'm Doug Lafferty, CFO, and I'm joined by Amedeo Felisa, our CEO.

Agenda

In terms of our prepared remarks, I'll start with some key highlights from H1 and our recent announcements before reviewing the numbers in more detail. I would then like to share some perspective on two elements that are important to our mid-term objectives. Firstly, the evolution of our gross margin, and secondly, how we see our capex evolving as we move through the next phases of our product cycle. I'll then turn the call over to Amedeo, who will share some of his early thoughts on the strategic progress we are making.

H1 2022 Highlights

As reflected in today's RNS, the first half of the year has seen us continue to make good progress in the execution of our strategy. We have strong demand across our product lines and although supply chain challenges impacted our first half performance, particularly in Q2, we are confident these are temporary and have therefore reaffirmed our full year outlook.

On the slide you can find some of the key highlights. We delivered 9% revenue growth despite lower wholesale volumes. Particularly pleasing was the ASP development, a record level for Aston Martin. Gross margin increased an impressive 600 basis points year-on-year to 35%, driven by improved pricing and mix dynamics. And adjusted EBITDA increased by 20% to £59 million, delivering a 100 basis point year-on-year margin expansion.

Consistent with our ultra-luxury strategy, we continue to apply a demand-led approach with retails outpacing wholesales in H1. Combined with the strength of our brand, we have continued to see robust orders across the portfolio, with our front-engine sports cars fully sold out in 2023 and DBX order intake more than 40% higher year-over-year.

While supply chain disruptions clearly impacted our financial performance in the first half, particularly relating to working capital, we do expect these headwinds to ease in the second half of the year, which will support our H2 performance and the positive free cash flow we are now targeting. I'll come back to this in more detail as we move through the presentation.

As you know, earlier this month, we announced a major new investment in the company by one of the world's leading global investment funds, PIF, as part of a transformational capital raise. The £653 million raise includes further investment from the Yew Tree Consortium and a cash investment from Mercedes-Benz. Alongside the actions we are already taking, this will significantly strengthen our financial position. In addition, it will accelerate our long-term growth, support delivery of our financial targets, which include becoming sustainably free cash flow positive, and ultimately drive shareholder value.

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Aston Martin Lagonda H1 2022 Results

Friday, 29th July 2022

We continue to enjoy a long-term strategic relationship with Mercedes-Benz evidenced by their proposed investment and our planned deployment of their technologies accessed via the Strategic Cooperation Agreement, or SCA, which was announced in October 2020.

Through the SCA, we're able to access a full range of world-class technologies, including powertrain architecture and future-oriented electric and electronic architectures, removing the costs and risks associated with developing these technologies ourselves, and enabling us to focus our investments in other areas and to expand our portfolio.

As a reminder, the first tranche covers all our vehicles planned for delivery in our mid-term plan, including our next generation sports cars, DBX and DBX variants, as well as plug-in hybrid vehicles, such as Valhalla.

Today, we are pleased to announce a mutually agreed amendment to the SCA, which extends the timeframe for the tranche 2 share issuance related to the second basket of Mercedes technologies, including BEVs, into 2024. Importantly, the amendment does not impact our access to the technologies or change the timeline for our first BEV, which we continue to target for launch in 2025.

H1 2022 Financial Results

Now, turning to our H1 financials in more detail, starting on the next slide. As you can see, despite lower wholesales, we delivered solid revenue growth and strong adjusted EBITDA growth. Revenue growth was driven by strong pricing dynamics across the portfolio, positive mix, including Valkyrie deliveries, and FX tailwinds.

The increase in operating loss essentially reflects higher depreciation and amortisation, whilst free cash flow was materially impacted by short-term working capital headwinds, and a pre- planned acceleration in capex. This all feeds through to the increase in net debt, which for the period end was exaggerated by significant non-cash related FX impact on our US dollar- denominated debt.

H1 2022 Wholesales

The next slide provides some more detail on our wholesale volumes for the period. The pie chart on the top left of the slide gives you a sense of how the supply chain challenges we experienced limited our ability to meet strong demand for the DBX.

DBX represented around 40% of our wholesales, with the DBX707 particularly constrained by short-term supply chain issues in Q2. In addition, DBX was impacted by lower volumes of the V8 model as we transitioned production towards the new DBX707. Pleasingly, overall sports and GTs saw more than 20% year-on-year growth. Looking ahead, we expect wholesale deliveries to increase materially in the second half of the year, predominantly driven by DBX.

On the bottom left is wholesale average selling price. Core was £164,000 in H1, which is both a record and a strong step up from last year, as we put through price increases, executed a reduction in retail and customer financing support and saw improved residual values. FX movements also had a relatively small benefit to ASP in the first half.

Our geographical wholesale split, to the right, highlights the impact of the lower DBX volumes, particularly relevant for the Americas, where we sell a higher mix of SUVs.

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Aston Martin Lagonda H1 2022 Results

Friday, 29th July 2022

Wholesales in China recovered strongly in Q2 following the transportation delays mentioned on our Q1 call, which affected first quarter volumes. This was partially offset by the effect of the COVID-19 lockdowns in Q2.

H1 2022 Adjusted EBITDA

On slide eight, you can see the details of our adjusted EBITDA, which increased to £59 million versus the same period last year with a 10.8% margin. Comparing to the first half of last year, the biggest driver was strong pricing dynamics, as I have already mentioned. Mix was also a further positive, including a higher number of specials and the initial deliveries of the V12 Vantage, which more than offset lower overall wholesale volumes.

Net operating expenses increased by £38 million, driven by brand and marketing initiatives, some inflationary impacts, as well as higher overall G&A to support our future growth. In addition, we continue to enjoy FX tailwinds to profitability, mainly due to GBP weakness versus the US dollar.

On the right-hand side of the chart looking below EBITDA, D&A increased as guided due to Aston Martin Valkyrie programme deliveries and accelerated D&A ahead of our new front- engine vehicles next year. Net adjusted financing expense increased significantly, driven by the £156 million year-on-yearnon-cash FX revaluation of our US dollar-denominated debt.

Finally, non-cash adjusting items consist of a £24 million adjusting financing credit relating to the outstanding warrants on the second lien, partially offset by a £13 million charge related to the pension scheme closure accrual as disclosed in our full year 2021 results.

H1 2022 Free Cashflow

Moving on to cash flow. The starting point was, of course, the increased loss before tax driven by the elements I have just run through. Adding back D&A and other non-cash items resulted in a positive post-tax cash profit of £34 million. Working capital though, was a £67 million outflow, primarily driven by temporary supply chain shortages that firstly pushed deliveries towards the end of the half, and secondly, resulted in elevated receivables and inventories.

This included more than 350 near-finished and ordered DBX707s still awaiting final parts at the end of June. The positive is that this significant working capital build is expected to unwind through the balance of the year, as we collect the cash from the late June deliveries, supply chain issues are resolved, and we start to clear the work in progress inventory and return to a more normalised working capital situation.

Moving to the right-hand of the slide, capex of £138 million was focused on the next- generation front-engine vehicles, as well as development of the mid-engine PHEV programme.

Finally, net interest paid was £63 million.

H1 2022 Cash & Debt

With regards to cash and net debt, at a high level, our H1 closing cash balance was impacted by a combination of more than £125 million of short-term factors. This relates to the £46 million repayment of the revolving credit facility, and more than £80 million from the elevated receivables and a number of vehicles awaiting final assembly parts, as described in the previous slide.

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Aston Martin Lagonda H1 2022 Results

Friday, 29th July 2022

We have now started to deliver these vehicles in July and expect further improvements in the supply chain as we move through the second half, supporting the delivery of our full year targets.

As a result of the working capital dynamics in H1 and our expected second half performance, we now expect free cash flow to be positive in H2, resulting in a significantly higher cash balance at the end of the year, prior to the net impact of the proposed capital raise.

Outlined on the right is our debt table showing the breakdown of our net debt. In addition to the cash flow dynamics I've described, year-on-year net debt was inflated by the impact of a £156 million non-cash FX revaluation of our US dollar bonds, given the weakening of the pound versus the US dollar.

2022 and Medium-Term Outlook Re-Affirmed

Looking ahead into the second half, our guidance for the year remains unchanged. For the second half of 2022, we expect strong year-on-year wholesale volumes and EBITDA growth, supported by easing supply chain dynamics, robust demand, as well as the production ramp up of the DBX707 and the V12 Vantage. Both of these bring improved profitability compared with our prior models, aligned to our 40%-plus contribution margin target.

In addition, price adjustments have been made across the portfolio with three price increases since the end of last year, most recently in June, reflecting the strong pricing power of the Aston Martin brand and our ability to offset cost inflationary pressures.

Aston Martin Valkyrie production continues to pick up pace. We continue to expect 75 to 90 Aston Martin Valkyrie programme vehicles to be shipped in 2022 with 38 vehicles already assembled in the first half of the year.

And as mentioned, we expect free cash flow to be positive in the second half of 2022 as the higher profitability and cash inflows from more normalised working capital dynamics are expected to offset the remaining cash interest payments and planned capital expenditures. This is expected to support a year end cash balance in excess of £200 million, before the net proceeds from the proposed capital raise of £653 million.

Before I turn the call over to Amedeo, and as mentioned when I started my comments, I wanted to cover a couple of key topics related to our medium-term targets and our journey to becoming sustainably free cash flow positive: gross margin and capex.

Strong progress on journey to 40%+ contribution margin

Starting with gross margin, which is a significant building block of our future deliverables and a key benchmark for any luxury business. The slide demonstrates the strong progress we have made since 2020, during which we have almost doubled our gross margin reaching 35% in the first half of 2022.

The pathway to getting to 40% and beyond is clear, as we bring new and improved products to market all with this goal in mind. Since 2020, the business has completely reset its strategy, destocking excess inventory, and repositioning the company towards ultra-luxury norms.

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