Saturday, 31 October 2015

Company Focus – Aston Martin Lagonda – James Bond and Junk Bonds.

The ongoing release of Q3 2015 results for global auto-players adds encouragement for the Europeans especially. Volkswagen Group had managed (ever so aptly) to pull 'a rabbit out of the hat' for itself regards unaffected engine types on diesel emissions ahead of its US sales drive efforts; until the EPA's new , broadened concerns about VW 4x4s, Audi and Porsche. And the investment community re-assesses to what degree VW stock might now represent a level of fair value, much depending upon the rationalisation of worst case extra-ordinary costs.

Likewise, partly depending on the possibility of another 'Draghi Put', investors are also sizing-up the potential tail-winds for the remaining European makers, especially so after what have been strong recent rises by some. Recent peaks possibly sold-off before any such ECB announcement regards further QE, depending upon the actions of America's Fed. 

The Ferrari IPO has thus far gone well, the speedy release of positive Q3 data (especially from NA) demonstrating FCA's seemingly perfected timing. Pitched at a time of much strengthened 'green shoots' of the global economic trough, whilst hardly a 'pop', recent performance has pleased many and appears to offer much in the long-term. But just how quickly the ambition of an extra 2,000 unit sales can be achieved, and just how well Maranello is able to balance the supply and pricing balance, will underpin the level of future traction.

This weblog however – in a very brief manner – looks to Ferrari's British rival, Aston Martin, itself seemingly fiercely independent since its divestment from its previous parent Ford in 2007.

In The Beginning -

The names Bamford and Martin will mean little to all except the automotive cogniscenti, yet their brainchild, born from an initial retailing venture of another make, led to their component coupling (or 'engineering integration' in today's parlance) to create their own marque. By 1947 the firm's later owner and svengali, David Brown (of tractor fame), added the Lagonda name-plate; with the lesser publicly known Tickford added in 1955.

Thus, it was these 3 men who provided the business recognition and impetus Achieved by way of hill-climbing, circuit racing and so gaining an air of playboy caddishness. Enhanced again in a small way by Ian Fleming's creation of James Bond and the swap of a Speed 6 Bentley for an Aston Martin DB2, this effect magnified with the arrival of Bond's on screen adventures and choice of the now legendary DB5. The Bond franchise and AML now mutually supportive cohorts.

But behind the entrancement of the silver screen and film-set, throughout its history AM / AML has in in fact had a myriad of trials and tribulations. Previously very much exposed to the closely aligned UK, European and American economic cycles; with the 1970s a particularly troublesome period seeing three changes of ownership. The 1980s saw improvement as strong petro-dollar earnings were translated into new funding and a more robust business approach was deployed under Victor Gauntlett's efforts and the 'V' car range. As the previously free-flowing oil-money contracted so new rounds of investment were secured from shipping sector entrepreneurs, for a time at least.

Ford's Stabilisation Era -

In recognition of the need to stabilise the business at every level, from parts procurement routes to dealer confidence, it was recognised that a strong parent was required, and so by 1987 Ford had taken a small stake, later taking effective strategic, operational and investment control in 1991; initially under Walter Hayes, later under (ex BMW) Wolfgang Reitzle's PAG division..

It was the might of the Ford empire that updated AML in so many ways, from financing to the provision of new engineering possibilities and production sites to enable sustainable volume increases. A maximisation of cross PAG group synergies allowed for cost reduction of secondary systems and ancillary parts, whilst simultaneously developing the engineering heart of the marque to reinvigorate its own persona. The then new Gaydon based HQ, enhanced design and production facilities and vitally the ability to grow into new rest of world markets.

Present Consortium Owners -

Having very effectively created a successful turnaround and providing a strong business model, Ford sold a majority stake AML in 2007 to a consortium headed by David Richards, advised by John Singers and the additional liquidity of Kuwait's Investment Dar and Adeem Investment.

Although in good shape as an ongoing concern, Ford very fortunately timed the disposal very well, with the 2008 Financial Crisis about to appear on the horizon.

However, unlike previous eras, since the Richards' take-over with Middle-Eastern backing, AML has managed to maintain a greater “red ink stability” through-out the major downturn which would have devastated the company in its former guises. It has incurred losses but proportionately, to a lesser degree than previously, and with a better promised global markets future ahead.

The loss in 2013 was £-25m, and that of 2014 £-73m. The last FY very nearly triple the former year's. This expected given the effective age of the face-lifted product range (Vanquish S, DB9, V8 and V12 Vantage and Rapide S models) versus presently generally newer or greatly updated offerings from rivals.

However, this is not to say that the firm has managed all aspects its re-financing needs well, as will be seen later regards recently issued debt financing.

The product pipeline, if good, will obviously reverse income trends, whilst ongoing cost-cutting in overhead and workforce headcount will also contribute.

The Product and Brand Story -

As for that pipeline, whilst the Vulcan 'hypercar' seeks to reimpose AM as 'master of the GT universe' (and provides a track parallel to One-77), the true income earners will be direct replacement models and the 2019 introduction of a new segment car: the DBX cross-over coupe; said to be aimed at the female and Chinese, and indeed Chinese female clientel.

And as a key part of that re-strengthening process is the creation of Bond's DB10, the latest offering which appears to offer a mixed bag proposation: merging a very limited edition series á la previous Zagato associated efforts, and partly akin to a hi-concept piece such as the CC100, and new DP 100 'Gran Turismo' video game concept.

Ten have been made for the movie 'spectre', with a single one of these (in 'as new' condition) to be auctioned to raise income. However, given the 'simplicity' of the outer-skin construction by way of expansive mould panels, it appears likely that the other cars will be in time re-bodied with new panels, refurnished internally and sold at a high price to car collectors.

This approach to drive demand and limit supply of an icon vehicle, a useful counter-point to the ongoing expansion of standard range model volumes.

Critically under the current owners, it broadened its operational mindset, so as to try and become truly meaningful to those who enjoy high net worth lifestyles, and indeed those who aspire. Not simply in the creation of personalised and boutique cars, adding to per unit margins through the Q section (named after Bond's boffin colleague), but by seeking to provide a palette of purchase possibilities for its broadening international client set, from artworks to silver-ware. With likewise for the aspirational, seeking to imbue an upper-middle class spirit through associative caché merchandising efforts with the likes of Hackett (polo shirts and other clothing). This desire to better integrate the AM brand into the upper echelons of British culture, assisted by the Royal Warrant bestowed in 1982, and so its heritage and cultural associations.

Thus having seen Ford set the fundamentals of the business right, and a sustained track of innovation development provided by the 'mix and match' “VH” vehicle architecture system (allowing for lengthened and shortened engineering hard-points), it was only natural that Richards et al, whilst adding to the DNA of the marque with racing prowess of the DB9R (and arguably over-stretching with LMP series efforts), would seek to expand AM's reach into luxury consumer markets.

[NB in a manner, the 'Gran Turismo' DP 100 concept, with heavy LMP overtones substitutes a virtual race car on screen at far less cost than developing a real LMP car, and arguably reaching a bigger audience, so as to better connect Aston Martin to global video game culture].

Previous Bad Brand 'Map-Reading' -

One mistake however - as then mentioned by investment-auto-motives – was not the idea of a small city car, but its execution.

Its appearance was the need to off-set AM's high emissions levels by also producing a low-carbon vehicle; very valid. And indeed the idea to re-configure an off the shelf, ready-made donor vehicle was the only feasible option available, the Toyotal iQ the best in its class for build-quality and packaging innovation. But the idea to create a 'Mini-Me' Aston Martin named Cygnet was flawed from the beginning, smacking far to much of the comical 'Austin Powers' than the suave James Bond. The original business model was for it to be sold as a second city car in conjunction with sports car sales. But for those who seek exclusivity, it had neither authenticity nor taste, and so privately mocked by the old guard and potential new buyers alike.

Instead, the vehicle would have better served as either a 'left of field' taster – or “amuse bouche” - for Lagonda (though obviously the polar opposite in segmentation and pricing) or as a trinket-type of purchase, akin to the upmarket novelty items of some of London's best silver-smiths. With that could have come Austin Power's intrinsic light-hearted “oh behave” attitude, and so a new dimension to AM's modernist 'cad' or 'flaneur' personality. It should not have been the loss-maker it obviously was, and could have had an altogether better 'back-story' that that of a supposedly sporty city car whose underpinnings (ie short wheelbase, high roof) were the very opposite; a poor parallel to the brilliance of original 1959 Mini Cooper S.

Yet Broadened Brand 'Psycho-Geography' -

But at least, even if in an odd and successful way, it set a path of new possibilities for the company, now seen with rumour of al all electric AM model, and later models, so as to off-set the corner-stone of V12 and V8 engines as 'core brand propositions'.

The U-turn that was Cygnet was recognised as inconceivable for the slow and progressive relaunch of the Lagonda marque. Its first iteration of vehicle being the Rapide based Taraf, more upright and formal than the AM 4-door fast-back, and first offered to Middle-Eastern buyers with a reported price-point of £696,000. This then part of a new era growth strategy.

New Era Planning -

Here the DB10 plays its new role, taking on dual characters, both as the iconic V-configured, tyre-melting successor to the original DB5, but intentionally given the low-slope nose of an aerodynamically optimised mid-engine sportscar (akin to a Ferrari or McLaren). The renowned yet subtly reshaped AM grille is applied, though arguably not quite wholly successfully given the near impossibility of achieving an optimum outcome on a low nose car; so 'demoting' the grille's prominence; and said to be akin to an under-slung shark's mouth.

Moreover the DB10, whilst notionally seen to re-utilise the DB5's falling 'belt-line' is in fact (very knowingly) mimicking aspects of the Porsche 911's side profile, this even more apparent in the thin 911-esque rear tail-lights, and its overall foot-print. Deliberate overtones of competitor marques so as to keep AM market relevant in the mind's eye of the potential buyers.

Its remit to move-on public's perception of the brand forward, via its inherent design (or at least styling). Since 2001 AM has relied upon Ian Callum's very successful interpretation of 'classical' GT proportions and forms, first extolled in the original Vanquish, thereafter re-interpreted on each model. As the flagship car, Vanquish set the innate aesthetic of the cars over the last 15 years and for a few more yet.

Whilst a 'new look' is necessary, the question remains, just how successful can any new look be in comparison to such a successful previous era generation.

Undoubtedly that success has demonstrably reconnected and strengthened the pre-2001 diluted marque identity with both old and new clientel, to such an extend that whilst hardly 'make or break', the degree to which Aston's aesthetic DNA is altered is an obviously important issue: 'evolution' versus 'semi-revolution' versus 'revolutionary'. To assist that transition, increasing use of 'signature' and 'corollary' detailing has been brought into play (grille shape relative to lamp shape, BIW feature lines and light lines etc) to provide enough creative freedom to alter overall shape and proportions whilst maintaining elements that underpin marque personality. This then the future.

However, the fact is that the current range based originally upon that classicism has inevitably grown more baroque, and so eventually aesthetically clumsy, as face-lifts demanded lengthened side-strakes, enlarged bonnet louvres etc.

DB10 then creates a clean aesthetic base which can be re-proportioned and altered to suit the model portfolio; and as such is the innate physical representation of what AML argues is a new business era (so as to coincide with the regional and global economic cycles).

Indeed, the DB10 then is both a tactical stop-gap and revenue generator. Its far reaching impact through Bond movie product placement whilst seeking to stop AM customers from migrating to Ferrari, McLaren or Porsche before the replacement cars reach dealers. And as seen, the vehicle able to attract the attention of worldwide HNW car collectors.

It appears the case that the DB10's rear thin lamp unit has been derived from the name of the 1923 light-car record attempt. A retrospective cultural nuance, which sits well when providing the inspiration story to for customers; so that they too feel 'in the know' and have dinner-table stories to tell their friends.

Also it seems obvious that the car's 'shark nose' mimics the available low front of hybrid and all-electric sportscars (Tesla's first iteration to Porsche 918), thus visually reflects this idiom.

A Business Platform of Technical JVs -

As is well known, a few years ago Aston Martin provided Daimler AG with 5% of its ownership, so as to introduce both high development cost technology systems which the UK firm could not rationally fund, and install a new compliance aligned generation of 'ready made' AMG sourced V8 engines.

Although it has partially developed EV systems (via its own “Q Section”) the heavy 'financing draw' is almost akin to that of the electric motors, so commendably is to rely upon advances made at Daimler-AMG.

That relationship was created by former boss, now Non-Exec Chairman, Dr Ulrich Bez and both firm's mutual desire to explore and procure the most capable pure electric and eco-orientated drive trains. Given the reliance on large capacity ICE power-plants in standard cars, such knowledge was the obvious strategic next step for both. Daimler has created its own 751hp SLS based model EV.

So as to balance the organisational equation at AML, Dr Andrew Palmer was given the post of CEO, having delivered the Nissan Leaf EV programme and acquainted with the hybrid technology pipeline for Nissan's 'near-luxury' arm Infiniti. Daimler and Infiniti agreed upon an eco-technology development and manufacturing JV interest some years ago.

The Second Century Plan -

The headline news about Andrew Palmer's ambition is - unsurprisingly like that of Ferrari – to have Aston Martin perceived akin to the apparent peer set of luxury goods makers. In his word's, more aligned to ”Tod's, Ferragamo, Gucci, Prada and Hermés”.

An obvious desire given their generally highly rated capital markets valuations; so seemingly increasing brand perceptions, broadening the products and merchandise buyer set and critically providing easier and less costly routes to future funding, so as to create improved business model stability over the long term, and avoidance of the 'boom and bust' experiences of the past, and critically to allow continued independence.

However, there should be a word of caution in trying too hard to mimic others.

Especially if pressured by the agent provocateurs both internally (the consortium looking for eventual exit) and those within the capital markets who desire a future of blue-book running, window-dressing, investor road-shows, fee-earnings and proprietary trading.

Devil in the Detail -

The innate nature of a legendary car company, whilst believed to be akin to a luxury goods company, is far more subtle and complex. Especially since, unlike a leather goods, watch-making or couture firm, a large part of production involves not age old simple handicrafts of plush yet basic materials, with creation maintained wholly in-house, but the development, procurement and warranty provision of highly advanced supplier owned vehicle systems and components.

The luxury goods companies mentioned are different, and maintain effectively full-control of a simple process, from basic materials buying to labour intensive production to boutique retailing. Their success and profit margins then come from the innate ability to – in relative terms – charge a heavily veblanistic influenced high price point for products which contain a lot of low and mid-value labour content.

AML has learned to apply this for its very limited edition 'atelier' cars such as One-77 and its Q division very heavily adapted / bespoke adaptions of its other cars, but unlike the French or Italian luxury goods firms, such a contributory function may not be able to be deployed across its core business. Thus whilst it seeks to have the 'halo effect' of 'atelier' shine down upon the higher volume lesser cars, inevitably the central business models of 'artwork' vs 'boutique' vs 'mid-volume niche' demand different business emphasis. This is not to say that overall it cannot work, simply that there is a grown complexity which AML must well understand, effectively a '3-in-1' model.

[NB the 3-in-1 phrase deliberately used given its engineering lubrication overtones. That approach, through proficient business acumen translated directly into engineering strategy effectively lubricating the structure and wheels of the firm. Indeed this recognised as a 4-in-1 approach when the Heritage classic AML renovation business at Newport Pagnell is included, which provides an obviously large perceptual contribution to the marque].

We have seen the success of 'production commoditisation' of personal technology, such as Apple Inc's iPhones made by Foxconn in China, wholly sensible given the product type, buyer type and massive level of brand loyalty. However, whilst parallel learning is useful – and be thought an ideal alternative model by some in the semi-luxury car business (eg Tesla and Elon Musk and his backers) if AML were to seek to directly apply any such simplistic parallel it would be naïve at best and fool-hardy at worst.

Nevertheless, whilst caution needs to be applied (especially regards operational over-stretch) AML has become far more intelligent in the manner it now seeks to combat the previously devastating onslaught of economic down-turns, and to better ride the opportunities from the up-turn wave.

As to the innards of the business model, as with the past vision of Reitzle's PAG division, to create 'centres of technical competence' amongst its constituent subsidiary firms, it appears that AML seeks to likewise cherry-pick and install overtly high cost technical advances which lay beyond its own scope and capabilities.

After the unsuccessful attempt at the luxury city car that was Cygnet, and the rebirth of Lagonda via the more limousine-esque Taraf, questions abound regards the right business strategy. Part of this was the recognition that it was deemed better to maintain the V12 appeal, off-set with the 'no emissions' solution that is the pure EV. The latest showcase of that ideal has been the RapidE, its remit evident in the subtle name-change of the 4-door coupe Rapide. The FT reports that the buy-out group China Equity has provided £50m for its development.

Financially 'Taken for a Ride' ? -

Product, whilst vital, however makes up only one ingredient of a successful business.

Whilst likewise strategy, procurement, distribution and (increasingly) consumer financing provide important contributions, it is perhaps the cost of capital to a firm which dictates an ability to run as a profitable entity and provide a return to shareholders.

In this regard, AML itself appears to have been perhaps overly narrow when seeking its revolving finance needs, specifically the 'coupon' rate agreements both in 2011 and in 2015.

The FT also reports that in 2011 AML issued £304m worth of 'Senior Secure' Notes at a rate of 9.25%, whilst in March 2015 it issued £165m worth of 'PIK' (Payment In Kind) Notes at 10.25%. This excluding the £200m new funding from its majority owners Investment DAR (Kuwait) and InvestIndustrial (Italy).

As stated earlier, investment-auto-motives suspects that whilst AML product pipeline is in a relative 'trough', the company itself, with new products to be launched into slowly re-expanding global markets - is very probably in better overall shape, and has higher potential, than a cursory review might suggest.

However, although various managers associated with poor decisions of the past have gone - ”leaving the Cygnet (inc £12.6m impairment) and smoke” - and the product strategy agenda is restricted to core vehicles, given the future need to re-expand into the future, as the much touted 'luxury goods company' means that the issue of strategic decision-making: people, processes and crucial creativity should perhaps be considered more deeply than before.

The Aston Martin brand itself obviously has a very high degree of 'goodwill', that may be baked into its accounts with far less trickery than is the case with many other firms, so whilst rightly any finance provider will drill-down to tangible asset values and general EV/EBITDA and similar formulae; the company has perhaps far more valuation leeway than it appears has been recognised  by hard-negotiating lenders.

Whilst not knowing which individuals, firms or institutions bought the notes, it appears that AML's stand-in CFO Vikram Bhatia (after Hanno Kerner's departure) has either faced limited finance sourcing options, or (on the surface) has simply been unable to gain a balanced and advantageous deal, by paying such high rates in 2015 (after Kerner's own poor deal in 2011).

This during a period of expansionary fiscal policies and “near zero” rate monetary policies by the Fed, BoE and ECB (now considering going beyond -0.2% overnight rates), and in a period when other firms of far lesser status are paying in the region of 6-7.5% to attract buyers to their own 'Junk Bonds'.

More likely, for possibly internally agreed strategic reasons Bhatia has sourced financing from an Indian entity. So required to cover the high base rates of the BoI, and the typically greater additional margin for such lending. If so the March 2015 note would have been bought at a GBP to INR rate of 1 : 92, versus the current rate of 1 : 99; much obviously depending upon how the note was structured, whether in Sterling or Rupee.

If the case, this could very well have been undertaken to access India's often tightly controlled links to its internal market, one of the few slightly more robust EM regions, and be connected to ongoing or future distribution and dealer-base expansion, or indeed possibly latter-day ties with TATA Motors (ie JLR) or Mahindra or others). This done to off-set the many lost sales in the far larger Chinese market.

Even so, appears that the lenders have dissected AML's position and (typically) over-played the risk dimension of the firm. Otherwise even with any strategic imperative, it seems odd that AML would be satisfied to pay 'over the odds' for sums involved.

Basic Key Figures -

In summary, the recent FT report states:

Unit Sales
2013 – 4,200
2014 – 3,500 (approx)
[50% 2007 figure]

Revenues / EBIT / PbT
2013 - £515m / £1.5m / £-25m
2014 - £468m / £-18m / £-72m

To End -

Unlike the very necessary showmanship seen by Ferrari with its NYSE IPO, presently Aston Martin Lagonda is very much in the shadows. Now undertaking a vital commercial re-configuration to cut costs whilst simultaneously using the 007 film 'Spectre' to re-emphasise innately British credentials spanning brilliance to brutishness.

However, whilst James Bond can call upon the deep pockets of The UK Treasury to fund his fictional exploits, AML must either make full use of 'their man in India' (if the suspicion is indeed true) or find far cheaper sources of new era funding.

Ideally both: this seemingly seen with the £50m investment by China (terms unknown).

Remolding the company so as to be seen akin to an idealised luxury goods company is one thing, and beset with expectations and problems...but without what must be a 'new era' history of much reduced cost of capital, future investors – IPO sought or otherwise – will be reticent at what they see as innate immediate value destruction.

Bond's DB5 was able to deflect bullets with its rear screen shield, and overpriced  'Junk Bonds' may have played their role at a critical time, but future long term investors should perhaps seek greater input into the origins of future borrowing, and so avoid any possibility of “having the wool pulled over their eyes”.