The road to recovery

A big misconception of the financial crisis was that luxury wouldn't be touched. But Hanno Kirner, Aston Martin CFO, has a different take. He saw that while the funds to buy luxury were always there, the good feeling and willingness to spend wasn't. That was the reason why, in 2009, the luxury car market suffered heavily as a result of the financial crisis.

"Many of our customers are entrepreneurs, people who invest their wealth," says Kirner. "And if you have to right-size your company, you're not going to reward yourself by buying a luxury sports car."

It was a painful time, yet Aston Martin fared much better than other luxury car makers. "It was a dreadful year for the industry," he says. "We sold 7,500 cars in 2007 and 3,000 in 2009, but we still managed to turn a small profit of £5 million post-tax."

After years of development and investment, the company is once again tasting success, with five new models added to the Aston Martin stable: the Rapide, the Cygnet city car, the One-77 (at £1.4 million), the Virage and the Virage-S. And in June, it secured long-term stability after successfully concluding a £304 million bond issue, which guarantees funding for the next seven years.

But it didn't happen overnight. In 2007, after an investment consortium made it a requirement to finance debt, Aston Martin chairman David Richards and CEO Ulrich Bez leveraged the company with a £200 million debt structure. Eventually, though, they recognised it would have to be replaced with a more strategic solution.

"So we left it until this year when we thought the market sentiment was good and sensible," Kirner explains. "Then the question was what kind of instrument to go for. We thought it was most sensible to go down the bond road because at some point, we need to open ourselves more to the will at large and communicate financially, and the bond offers the first step to fully-fledged investor relations and financial public relations."

The long-term stability of a high-yield bond was also attractive, so the company's investment function invested in two or three years of the model for a period of five to seven years. It was a rigorous process that involved nailing down the business model and getting ratings for the first time.

"We got BB- from Standard and Poor's and a B2 from Moody's," says Kirner. "This was a good outcome for a company our size based on the judgement of the business model."

Investors onboard

The next step was to take it to investors during a multi-stop roadshow before securing the bond sale. But for investors, Aston Martin was an enigma. Kirner recalls: "The immediate reaction was - which was also mine when I joined the company last year - it's building around 5,000 cars, it's independent in the automotive industry, it goes against any conventional wisdom, but this might be a good, sustainable business model."

Aston Martin's USP, the way it engineers and builds its cars, also proved to be a critical hook. The basic aluminium space frame mixed with steel and carbon-fibre panels, called VH (vertical-horizontal) architecture, is based on a process of creating cars using investment appropriate for volumes in the luxury segment. The standard OEM, in contrast, is used to build millions of cars a year, which requires a different approach.

"For them, a high up-front investment doesn't really matter," says Kirner. "But a low unit cost does. We're not high volume, so we want to reduce investment for all sorts of reasons. First, it helps the business case and, second, one wants to minimise risk as a small company without making huge bets."

The journey into new markets

In the lean years during the financial crisis, in addition to reducing the workforce, Aston Martin dramatically adjusted the cost base, shrinking costs by £45 million in one year. And the company was able to launch its new products while emerging from a period of crisis.

The bond structure doesn't provide any new freedoms that the company didn't have before, but it does make day-to-day expansion much easier.

For example, China is a very strategic market. It's not such an important sports-car market yet, says Kirner, but Aston Martin has set up a national sales company to make sure that the full market potential is being tapped into.

Of the so-called BRIC markets, China has the biggest opportunity for growth. India is promising, too. "We're extending our dealer network quite strongly," Kirner says of the company's presence in China. "Over the next 18 months, we'll probably grow our current dealer network from four to 12 because there are ten major cities with more than ten million inhabitants."

Established markets like Europe and America have also been demonstrating renewed strength in the first half of the year. However, with the general economic environment of uncertainty, Aston Martin is watching market developments with interest and preparing to react. "But as ever, we remain very much aware of the circumstances; we're not going mad in terms of spending," Kirner notes.

Staying fiscally conservative, even in the best of times, has always been a key Aston Martin function, since its business models are dependent on controlling spend and maximising the value of the product for customers. This, in turn, gives the company the potential to sell, price and grow in markets.

"You could say we have an enormously simple strategy," admits Kirner, "and that is to continue doing what we are doing and what we are good at. It's the discipline of how you do it and then, in particular, the discipline of how you take decisions based on it. Because that whole process only works if you are a disciplined decision-maker."

Some of those decisions also involve how to distribute investment toward green technologies, and Aston's lightweight city car, Cygnet, is central to this commitment. "We are also looking at other green technologies like hybridisation in a way that makes sense," he says. "But we want to make sure that in this current competition for technologies, we go for exactly the right one."

Cash is the driver

Given the scope of responsibility and the expectations of the modern CFO, Kirner is acutely aware of delivering for investors. Trust has been won but, as he puts it, you have to walk the walk. "You need to develop processes of how to deal with investors - how and when to meet them, because it's easier to talk about the company if people have experienced the product," he says. "And this is an exciting journey, which is part of the plan to build full investor-relation capabilities, so we are prepared for a potential step on the equity side."

Kirner also knows that all of the organisation's commercial functions understand the value of cash. "For example," he explains, "we only have eight days' material supply in our production environment, which must be a record. And it's one of the benefits of having the shared architecture among the cars because every car uses the same air conditioning system, for instance.

We also don't ship cars on consignment; dealers have to pay for them before we deliver them. So we have only 15 days outstanding in terms of invoices.

"What we look at is the whole value chain from purchase to product delivery, and whether we can speed things up and build cars faster. But I'm happy where we are from a working capital perspective."

When Kirner joined Aston Martin, he saw that the company's existing financial structure was solid, with an arrangement that could have run a couple of more years. There was sufficient cashflow to develop the five new models, and even without the bond, it was fully financed in terms of new model creation over the next couple of years.

"That's something I looked at before I joined, because that's a prerequisite for a successful company," he says. "So really the bond was just to refinance the base debt package we have in place, to keep some basic leverage, to finance the structures."

In no way was it a tactical move to kick-start a development process since all product development is financed from cashflow. "I can't say it enough," he says. "You can't finance a new model from debt."