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Edited Transcript of ALDA.PA earnings conference call or presentation 1-Aug-19 8:00am GMT

Half Year 2019 ALD SA Earnings Call

Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of ALD SA earnings conference call or presentation Thursday, August 1, 2019 at 8:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Gilles Momper


* Michael Masterson

ALD S.A. - CEO & Director


Conference Call Participants


* Albert Ploegh

ING Groep N.V., Research Division - Research Analyst

* Charles Bordes

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Enrico Bolzoni

Crédit Suisse AG, Research Division - Research Analyst

* Gabriel M. Adler

Citigroup Inc, Research Division - Senior Associate

* Geoffroy Michalet

ODDO BHF Corporate & Markets, Research Division - Research Analyst

* Kai Alexander Mueller

BofA Merrill Lynch, Research Division - Associate and Analyst

* Mourad Lahmidi

Exane BNP Paribas, Research Division - Analyst

* Pierre Bosset

HSBC, Research Division - Head of French Equity Research

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research Analyst




Operator [1]


Hello, and welcome to the ALD Webcast for the Half Year 2019 Results Call. My name is Mahan, and I'll be your coordinator for today's event. (Operator Instructions)

I am now handing you over to your host, Mike Masterson, CEO, to begin today's conference. Thank you.


Michael Masterson, ALD S.A. - CEO & Director [2]


Good morning, ladies and gentlemen, and welcome to the ALD H1 2019 results call. The main messages of the pack are the first half presentation on Page 3 of your pack. Total fleet reached 1.7 million vehicles at the end of June, representing an increase of 7.2% over the past 12 months.

During the first half, our powertrain transformation has accelerated with a reduction in the penetration of diesel vehicles in deliveries made. Our private lease segment continues to grow strongly and is on track to reach 150,000 target we have set for the end of the year. Overall, we're confident that ALD will reach the 5% to 7% 2019 organic fleet growth guidance for the year.

The quarter saw a number of strategic and commercial initiatives. ALD was selected by Amazon to launch Motors, the personal car leasing platform in Spain. We made the acquisition of BBVA renting portfolio in Portugal. We completed the SternLease acquisition. And among the many other local deals done, we signed a new distribution agreement with the retailer Eroski, in Spain.

ALD's financial performance were solid in H1. Leasing contracts and service margins together rose 4.4% versus H1 2018 in excess of growth in operating expenses, which was just 2.8%.

Car sales result was strong in Q2, putting the H1 average profit per unit sold at the top of our EUR 100 to EUR 300 guidance range.

Net income for H1 2019 came in at EUR 280.7 million, Gilles will comment further on our financial results.

With this solid performance in H1 2019, ALD confirms its full year financial guidance.

Now let me start by looking in greater detail at this year's fleet growth on Slide 5.

As you can see on the graph on the right-hand side, we continue to grow our fleet in line with our expectations. We are satisfied with this achievement, given the complex environment, marked by pressure on the auto sector and by the continuing powertrain transition.

The dynamics of private lease observed during recent quarters continued. Private lease showed an annualized growth rate of 36% during H1 2019, reaching 133,000 vehicles at the end of June and making us confident of reaching our 150,000 target by year-end.

Slide 6 lists the recent acquisitions and key strategic and commercial initiatives that we've taken in recent months. We're very proud to announce in June that we have been selected by Amazon to launch Motors, personal car leasing platform in Spain. Car leasing on this platform comes at competitive monthly prices, no initial deposit, free doorstep delivery and a 50 kilometer and a 30-day return policy.

Leasing packages are available for either 36 or 48 months and includes service and maintenance, insurance, tire replacement, breakdown assistance, vehicle registration and excess mileage buffer.

After selecting their car and lease duration, customers are taken to the ALD online leasing platform, where they complete a credit assessment and sign contract.

The entire process is done online, using ALD's end-to-end platform. Through this offering, ALD demonstrates its digital capabilities and its permanent focus on delivering best-in-class leasing service to customers.

In Spain, we also entered into an agreement with the retailer Eroski to sell full-service lease through their shops and via an online digital offer. The product is based on special offers to be marketed to private individuals and Eroski's employees and suppliers.

In terms of M&A, Q2 saw the completion of the acquisition with SternLease, the leasing arm of Stern Group, with around 13,000 vehicles rented to SME and private individuals. ALD has further entered into a distribution agreement with Stern Groups' 85 outlets in the Netherlands, which is expected to be a source of strong additional growth for ALD.

ALD also acquired BBVA's vehicle renting portfolio in Portugal. The transaction includes the entry into an agency agreement, whereby BBVA will make available to its corporate and private customers in Portugal a full-service leasing solution managed by ALD. This transaction, which was finalized in July, will further strengthen ALD's presence in Portugal.

Now let me turn to Slide 7, which lists 3 examples of our market-leading proprietary digital solutions.

Our end-to-end digital retail lease solution presented on the left can be used for both direct sales or replicated to work inside our partner systems. It is a platform that has been selected by Amazon, and it can distribute both new and used cars. The tool already operates in 11 countries and is being deployed further.

In the middle, we show our retail remarketing solution, which handles all the steps needed for a fully digital customer journey. Once logged on, customers can access a large selection of used cars, including full information on maintenance records. If they require assistance, they can chat with a sales rep before completing a purchase or a lease transaction via e-signature and online payment. This solution helps us to increase the number of vehicles sold to retail, while controlling associated costs.

On the right, you can see the platform that we've developed for car sharing. This tool is available in 5 countries and is continuing to be rolled out further. It is appreciated by our corporate customers wanting to optimize their fleet, while improving employee satisfaction. These digital solutions are key to our future growth ambition.

Next, I'd like to give you some insight into our ongoing powertrain shift and how it affects our business model.

Slide 9 shows you the evolution of our fleet mix. ALD continues to encourage its customers to move towards a more balanced powertrain mix through a combination of advice and pricing initiatives.

In the graph, you can see this strategy is bearing fruit, as there has been a rapid shift away from diesel; and recent deliveries are down from 61% in H1 last year to 47% in H1 2019. This trend is in line with our expectations.

Let me remind you that ALD's diesel fleet is now almost entirely Euro 6 engines, we have less than 29,000 Euro 5 passenger cars left to sell by the end of the year.

In recent quarters, we have seen an increase in petrol, electric and hybrid powertrain.

Slide 10 focuses on the main obstacles to greater adoption of electric and hybrid vehicles, which are the current -- which is the current lack of supply and long delivery delays on these vehicles.

A key factor here is the re -- the enforcement of the European Commission of stricter CO2 emissions constraints, which will start next year before reaching full speed in 2021.

To cope with the new constraints on average CO2 emissions per car, OEMs are expanding their EV and hybrid range. A total of more than 95 electrical hybrid models are expected to be launched this year, which should lead to a significant improvement in supply. And as a result, 2020 is expected to see wider take-up of these technologies.

ALD's green fleet stood at more than 118,000 vehicles under management at the end of June and is expected to increase significantly as supply improves.

To promote electric vehicles, ALD has adapted its service proposal to the specificities of this powertrain. Slide 11 illustrates the details of our offer dedicated to EV's core ALD electric.

We aim to provide our clients with an integrated solution that includes the following 3 components: Firstly, consultancy services to help fleet managers identify drivers who could benefit from an electric vehicle and perform a total cost of ownership analysis; secondly, test drives to give drivers the opportunity to test an electric car; and thirdly, a range of electric charging options and packages for drivers with wide networks, either at home or at the office or on the road. This is where our partners, ChargePoint, E.ON and ENEL play a key role.

In order to break down one of the barriers to the adoption of EV, we have developed ALD Switch offer. This offer enables our clients with an EV to switch to a combustion engine vehicle, where they need to go on long trips.

Our ALD car sharing offer is also very efficient with electric vehicles.

Now let me hand over to Gilles Momper, who will comment on our financial performance.


Gilles Momper, ALD S.A. - CFO [3]


Thanks, Mike, and good morning, ladies and gentlemen. Let's start by taking a look at Slide 13, where we can see on the graph the ongoing improvement of our cost to income ratio from 50.7% in Q2 '18 down to 49.4% in Q2 '19, expressed a 4-quarter rolling average.

This historical low level of cost to income confirms the leadership of ALD in the industry in terms of operating efficiency.

On the back of the sound fleet growth, our margins are increasing by 4.4% but as already mentioned during prior quarterly communication, the rebalance of our fleet towards petrol and green vehicles still weighs on our margin.

We have been repricing the residual value of our diesel vehicles steadily downwards over the last couple of years. This repricing of diesel residual value is aligned with the stresses -- the stress on the diesel cars, which we're embedding in our fleet revaluation over the past few years. This decrease in the residual value translates sometimes into higher discounts on services, which is still weighing on our services margins.

On the cost side, despite our ongoing investments in technology and upgrades of our digital platforms, we are able to contain the overall rise in our operating expenses.

Once again, we are proud to show that our total operating expenses increased just by 2.8% in H1 '19 to EUR 318.8 million (sic - see press release, "EUR 316.8 million").

OpEx is growing well below leasing contract and services margins, generating strong operating leverage.

With this performance, we feel we are on track to reach the 49% target we set for 2019.

Our scale, our tools, our organization makes us confident that we'll be able to maintain our cost base at a level, which contribute to further decrease our cost-to-income ratio and remains the benchmark in the industry.

Let's move to Slide 14, which comments our car sales results.

With used car prices supported by a good demand, car sales results reached EUR 24.4 million this quarter. The volume of cars sold rose slightly at 7,000 (sic - see slide 14, "71,000") in Q2 '19 from 70,000 a year earlier.

Car sales results per used vehicles sold stood at EUR 346 for the quarter, up from EUR 258 in Q1. The average for the first half of the year reached EUR 301 at the top of the guidance.

As in the prior quarter, our average used car stock turnover remained stable in Q2.

Keeping in mind that seasonal factors may negatively impact Q4 car sales results, we are confirming the average car sales results per unit for '19 to remain within the EUR 100, EUR 300 guidance.

Let's go to Slide 15, which shows the full P&L for the first half. On the back of a sound fleet growth and despite the discounts and the services, the P&L shows that our leasing and services margins together have increased by EUR 26.9 million in H1 '19 compared to H1 '18, while our operating expenses have only increased by EUR 8.5 million. Our staff costs have only increased by 2.7% year-on-year compared to a fleet growth of 7.2%. And this illustrates, again, the point I made earlier about the significant operating leverage that we have constantly been delivering, thanks to our scale and investments in technology.

A small change in the structure of our operating expenses, due to the first-time adoption of IFRS 16, the right-of-use of our leased premises were depreciated for an amount of circa EUR 10 million in H1 '19, which is in the line, depreciation of the P&L; while the rent expenses of our premises were previously accounted for in the G&A line.

Impairment charges and receivable reached EUR 21.8 million in H1, equivalent to 22 bps when expressed as a percentage of average earning assets.

The effective tax rate remains very low at 4 -- at 17.4%, reflecting the continued strong impact of the benefit of the Italian Stability Law.

The net income reached EUR 280.7 million for H1 '19, up marginally compared to the same period last year, but this includes a particularly strong contribution in Q2 '19 with a record quarterly net income at EUR 146.9 million.

Let's go to Slide 16, a quick word on the balance sheet. Earning assets rose by 4.3% compared to December '18, in line with our own balance sheet fleet growth. You will notice an increase of EUR 492 million in the line other on the asset side of the balance sheet, which is explained by two main elements, the first one being the first-time application of IFRS 16 for around EUR 130 million; and the second one being the SternLease acquisition, which is, for the time being recognized as an investment in Q2 '19, and which will be fully consolidated in Q3 '19.

Overall, the non-consolidation of Stern in our H1 results inflate our balance sheet by circa EUR 200 million, and you can find more details on this topic in our financial statements.

Following the payment of our 2018 dividend of EUR 234 million in Q2, the total equity on total assets ratio stood at 15.2% at the end of June compared to 15.8% at the end of 2018, and this ratio remains within the 17% -- within the 15% to 17% range that we are targeting.

Slide 17, a few words about our funding. In the course of July, we have raised EUR 500 million in senior external debt. We see an improvement of the ALD name in the bond market, which has materialized in our last bond issuance in July. And more generally speaking, in the level of our bond performance in the secondary market, which is also the reflection of our A minus rating by Fitch and BBB+ by S&P. As you can see on this slide, our funding mix remains very optimal and provides us with flexibility and competitive terms to finance our future fleet growth.

And the last slide shows the guidance we've given for the year, which based on the H1 '19 commercial and financial performance are all confirmed.

So we are ready for any questions that you may have on this semester.


Questions and Answers


Operator [1]


(Operator Instructions) So our first question comes from the line of Gabriel Adler from Citi.


Gabriel M. Adler, Citigroup Inc, Research Division - Senior Associate [2]


I have two questions. My first question is on diesel repricing. So we continue to see a gap between the fleet growth and growth in leasing and sales margin. Can you provide an update on your progress in repricing contracts due to customers. And whether you expect this gap to persist into 2020? And is there anything else driving this gap, such as timing of contracts? Or is it exclusively a result of diesel repricing? That's my first question.


Michael Masterson, ALD S.A. - CEO & Director [3]


Sorry, I missed the last part of your question. Whether it's...


Gabriel M. Adler, Citigroup Inc, Research Division - Senior Associate [4]


It was whether there's any other impacts, other than diesel repricing that's driving the gap between fleet growth and leasing services growth.


Michael Masterson, ALD S.A. - CEO & Director [5]


Okay. Yes. Okay. Do you want me to take that first one and then you do the second one?


Gilles Momper, ALD S.A. - CFO [6]


Yes, sure.


Michael Masterson, ALD S.A. - CEO & Director [7]


Yes, okay. Yes, I mean, I think you're right, there is a lag on the margin. If you look across 3-, 5-, 8-year period, you'll see a strong correlation between the growth in the fleet and the growth in the margin. At different points in the cycle, we've been slightly ahead on margin. On the other points, we've been slightly below on margin. And what has two things, I think, really put a strain, but one of them, as you say, is the impact of the diesel factor.

We have taken an extremely strong position on the residual values on diesel, which has a couple of implications. One is that on a major international deal, which is 100% diesel, we're not the most competitive player in the marketplace. And we've kind of accepted in the guidance that we supplied this year being at 5% to 7% and in the actual growth that we've been achieving, that, that will, to some extent, in the short term impact our growth. We are the leading player in Europe. We feel that we need to take a leadership position on this and the -- take what we believe is the right stance in terms of those residual values, which will have a short-term impact on margin.

There are a number of key international accounts. So accounts, we've been working with for 5, 10, 15 years, where we don't want to give up those accounts either. So we are trying to be competitive on margin to make sure that during this transition period, we are keeping those accounts. So it has had some impact on margin.

But obviously, what we have seen is a dramatic impact on the diesel penetration, going from 62% last year, down to 47% this year, which is really a very dramatic transformation.

And we're also seeing a positive impact coming through on the margin. Obviously, it's a portfolio business with a 4-year cycle so that you don't see that from the first step, but we are, in our new production, seeing a significant positive impact on the margin. And therefore, we wouldn't expect this lag to continue into 2020 and beyond.

The other factor which affected us over recent years has been this Italian Stability Law, which I won't go back into. But obviously, that did have an impact on the Italian market, where we have this huge tax benefit, which continues to come through the business. But that did have an impact on the business that we've written over the last 3 or 4 years, which is, obviously, still on fleet, so it's been a drag on our margins.

But those are really the main factors there. We believe it is a temporary impact because of this transition. I think what's important as we go through this transition is that we move the needle in terms of diesel penetration, which, obviously, we believe we're doing.

And also take the opportunity to make sure that the margins are in the right place, so that when we get out of the other side of this next year with more EV product around and a better -- we will have better margins going forward.


Gabriel M. Adler, Citigroup Inc, Research Division - Senior Associate [8]


Okay. That's helpful. And leads on nicely to my second question, which is on EV. Clearly, there's growing demand in the leasing market for electric vehicles, and we're going to see a wide range of new model launches in the next 12 months from the OEMs. Could you provide some color on pricing and profitability of EV contract compared to petrol vehicles? But firstly, do you expect to obtain a similar discount on purchases of electric vehicles from the OEMs? And then secondly, how does your pricing power on electric vehicles compare to petrol vehicles?


Michael Masterson, ALD S.A. - CEO & Director [9]


Yes. Well, I think in electric vehicles -- and there aren't statistics from every leasing company in Europe, but I strongly suspect with such a strong fleet of electric vehicles, we probably have the biggest fleet of electric vehicles in Europe, if not in the world. So we certainly have a strong position on electric vehicles.

The other issue, which will be very important, is that in 2020 and 2021 the manufacturers have a huge incentive to get as many electric vehicles on the road as possible in terms of avoiding the penalties that are related to CO2 emissions.

So I think there is motivation from the manufacturers to increase the production and distribution of this product. They know that the leader of this transformation in the end will be the fleet and corporate market, where the turnover of vehicles is much faster. So there's a much more rapid transition there. So there is a significant incentive.

And the other element, which will support us there obviously is these partnerships that we have with ENEL or with E.ON and with ChargePoint, which leaves us, we believe, well positioned to not just offer a low purchase price, but also have a very smooth offer to the customer on EV.

So we're quite optimistic on the outlook there. So far, the profitability of EVs has been high. The level of car sales profit on EVs has been significantly higher than the average of other vehicles.

But I would say it's a normal -- business is normal. When you look going forward, we can obviously look at the past and see what margins we had, but to a large extent, it's business as normal as we look forward.


Gabriel M. Adler, Citigroup Inc, Research Division - Senior Associate [10]


And one follow-up on electric vehicle, if I may. Is it too early to give an indication on what you're seeing in the residual value market for electric vehicles? Or could you give us some insight into your expectations for residuals given the risk of battery degradation?


Michael Masterson, ALD S.A. - CEO & Director [11]


Yes. I mean, I think the key point at the moment is, obviously, there's a very limited supply of 3- or 4-year-old electric vehicle product in the marketplace. So we are seeing very strong demand to some extent, in some countries, driven by city bans, by 0 tax, by entry into emissions or congestion charge areas. So people, obviously, who can't necessarily afford to buy a new electric vehicle are very much -- so the prices have been much more solid.

I mean, if I give you an example, we had -- initially because of the risk on EVs, we did some buybacks with manufacturers, which is quite rare for us because, in general terms, as you know, we feel that with our 1.7 million vehicles and our knowledge of the market, we're best positioned to actually evaluate residual values.

But some of the perspective of some of the manufacturers of EVs was much more optimistic than our own and offered us some buyback guarantees around some of the EVs that we were putting out.

And in the end, we haven't used those buyback guarantees because they were optional. And we found that actually the resale values in the market have been much stronger than we had anticipated; and in many cases, even stronger than the manufacturer had anticipated. So we're taking those cars and selling them directly without using the buyback guarantee.

So yes, I think the market is quite buoyant. The relative supply and demand is very positive and the outlook on supply and demand for the coming years, even given it's a very much a niche product still today. So clearly, the outlook for the next 3, 4, 5 years is -- on this is quite positive, particularly with what we're seeing on -- around tax and congestion charge and parking rights in relation to electric vehicles.


Operator [12]


So our next question comes from the line of Albert Ploegh from ING Bank.


Albert Ploegh, ING Groep N.V., Research Division - Research Analyst [13]


Yes. Two questions from my end. The first one is a bit more on the macro and outlook and in general some uncertainty out there. Do you see any adverse impact on demand for leasing and/or any worry you might have on the outlook for impairments on the receivables? I think, personally, not, but any color there would be helpful.

And the second question is on the car sales result, which was quite a good quarter. I hear what you say on the seasonal weaker Q4, that will, of course, come up, still in the second half. But in general, do you -- are you positively surprised by the demand and used car price development in the second quarter and the first half in general? And do you feel that you may have reached, let's say, the bottom or an inflection point when it comes to the absolute level of the car sales result?


Michael Masterson, ALD S.A. - CEO & Director [14]


Yes, just on the question on the macro environment and impairment of receivables. I mean, I feel, to some extent, I think we're at the even -- the cost of risk there is still relatively modest, you have to say, at 22 basis points.

But I do feel the trend there is rather flat downwards over the next 12, 18 months. There were one or 2 specific files that have impacted the end of last year and the first part of this year. And the run rate that we're starting to see over the last month or 2 is slightly lower than that. So I would say the -- if I had to characterize the perspective and the trend there, I would say, I'm hoping and anticipating a flat to downward trend over the next 12 to 18 months on impairment of receivables. That's really related to one or 2 specific files that we've got behind us at this point.

On car sales, I mean, I think, obviously, when we put together the guidance of car sales for the year and it's true, I guess, reflected in the numbers from last year and our position in relation to the guidance last year and this year is quite similar when you look at where we are in our position at the end of Q2 relative to the annual guidance that we gave in 2018 and '19.

And as we've said in the past, we try to fix that guidance reasonably conservatively, with respect to the fact that it is an element that is slightly more volatile than the leasing contract and service margin, which is much more predictable.

So in that regard, we're roughly where we were at Q2 2018 and in line with what we would have expected. As you say, we would expect Q4 traditionally to not be the best quarter of the year. And it's typical to have a EUR 100 or EUR 200 per car drop in the fourth quarter. So globally, for the year, we still anticipate being in the EUR 100 to EUR 300 guidance and obviously, towards the top end of that guidance.


Operator [15]


So the next question comes from the line of Mourad Lahmidi from Exane.


Mourad Lahmidi, Exane BNP Paribas, Research Division - Analyst [16]


So I have two questions. The first one on the repricing of diesel RVs. Last time you spoke, you indicated that your competitors were kind of late in repricing the new diesel contracts. Have you seen some of them catching up in the recent months?


Michael Masterson, ALD S.A. - CEO & Director [17]


Yes. I think it's difficult to characterize a global position of any of our competitors. We are seeing a number of our competitors adjusting diesel residual values. We are seeing also, in some cases, that we're significantly out on a very big diesel international fleet. It's difficult to understand sometimes the position of 1 or 2 of our competitors. But I would say, globally, the competitors are realigning their residual values as well. There seems to be a much stronger push in some countries than other, we've tried to move ours in a coordinated way across the whole group.

We have the impression in -- with some of the competitors that they're moving in some countries and maybe don't seem to have moved very much in some other countries. But I would say, in general terms, the -- since 12 months, the market is progressively moving towards a more conservative position on diesel residual values.


Mourad Lahmidi, Exane BNP Paribas, Research Division - Analyst [18]


Okay. Thanks. And my second question is on the IFRS 16. Have you seen any change of behavior at your clients as a result of them applying IFRS 16?


Gilles Momper, ALD S.A. - CFO [19]


No, I guess, as we have explained already many times for our customers, IFRS 16, it's just as any other IFRS rule. So it's -- they are not -- they are looking for outsourcing an activity, which is noncore to them. So we've not seen any customers complaining on that. Even for the ones -- for the -- for our industrial customers, it improves their EBITDA. So it's even not a bad thing for them having IFRS 16, it's just a bit more complex on the accounting side, but like it is for any leased equipment.


Operator [20]


The next question comes from the line of Sam Bland from JPMorgan.


Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [21]


Two questions from me, please. Related to ones that have already been asked. The first one was on the car sales result, obviously, reasonably strong in Q2. We've seen, certainly in the U.K., quite a bit of pressure on residual values you've fairly well highlighted, that doesn't look to have been the case across Continental Europe.

Could you just talk about specifically what trends you're seeing in Continental Europe on residual values, given the backdrop of reasonably challenged automotive sector, I'd say, generally?

And then on the -- back on the electric vehicles, just talk about, obviously, reasonably early on in the penetration of them, how you pitch that? And how you decide on what pricing to offer, given that you've probably got less data on residual values of those types of vehicles than with others?


Michael Masterson, ALD S.A. - CEO & Director [22]


Yes. I think the market -- I mean, I think the first thing to take in account in terms of the residual market across Europe is that the values are still relatively low.

When you look at the movement in absolute residual values over the last 5 to 10 years, there's been very little movement in the absolute value of a 3-year-old Focus or a 3-year old Clio. So we're starting from a quite a low point. We know that in the U.S. and to a certain extent, in the U.K., there was an improvement in values after the last crisis in 2010. '11, '12, we saw progressively a significant increase in values of used cars, which has not really been the case across Europe.

So the starting point is relatively low, and therefore, the elasticity of things in terms of that moving downwards, again in relation to poor economic data is relatively low.

The other thing that we found, and I think it's common in the U.K. as well as in Europe, is that sometimes in a period where new cars are not being bought so much, the people still need cars and the alternative option is to buy nearly new 2, 3, 4-year-old vehicle. And we've seen with the reliability of used cars that has been supporting the prices of used cars.

And maybe, to some extent, I mean, if you look at a country like Germany, where you've got a city ban against Euro 2, 3, 4 engines, the Euro 6 engine there. If you're uncertain about diesel, but you want to access cities and not have any concerns, but maybe you're not ready for the step towards electric, it can be a good solution.

To a certain extent, I think this -- the supply and demand environment, the relatively low price base in Europe together with this -- the product that we've got is helping our situation.

The only other comment I would make is that the U.K. is actually performing quite well. We are -- we have some new channels in the U.K., and we're broadening all the time our distribution channels and the U.K. is consequently, actually performing quite well along so.

In terms of electric vehicles, we take a similar approach to what we do on any other vehicle, which is assessing our current values, to look at the life cycle of the product that we've got with a special focus, obviously, on battery life.

But we have algorithms around life cycles in terms of the -- all of the models and the impact of facelifts can have on those models and the cycle of facelifts and also take into account global macro factors like inflation and other such factors.

Obviously, we're looking also at the comparable combustion engine values that -- in absolute values that also exist in the marketplace.

So it's kind of business as normal with, obviously, the special focus on the battery side.


Operator [23]


So the next question comes from the line of Geoffroy Michalet from ODDO BHF.


Geoffroy Michalet, ODDO BHF Corporate & Markets, Research Division - Research Analyst [24]


I have one question on the leasing contract margin. Because I think that you were a bit below the consensus. And I was wondering what happened. So then I had a look on Page 7 of your press release, and I saw that your leasing contract costs, the financing costs, increased by plus 27%. And I was just wondering if you could elaborate a bit on that?


Gilles Momper, ALD S.A. - CFO [25]


I mean, the financing costs have evolved positively in the recent months. Geoffroy, we have not seen any increasing cost of our funding. Even our bond issued in July has been -- we've issued a 4-year bond maturing July 2023 at 37 bps, which is extremely good. The -- then what can -- depending on the funding mix can have a slight impact, whether the maturity of the bond is longer, could be more expensive.

It was the case of the green bond we did in 2018. But overall, our leasing contract margin, as you can see in our H1 results, is increasing in line -- almost in line with the fleet. So we don't have an issue on this particular margin.


Operator [26]


The next question comes from the line of Enrico Bolzoni from Credit Suisse.


Enrico Bolzoni, Crédit Suisse AG, Research Division - Research Analyst [27]


Just on car sales result, now it's 2 quarters that eventually we saw a rebound in the results. I was just keen to understand if this is due to a change in the mix of the cars you're selling. By that, I mean, for example, less Euro 5 as you are eventually selling them all and more recent models? Or to other factors, change in residual values or again, just the way the vehicles have been sold?


Michael Masterson, ALD S.A. - CEO & Director [28]


Yes. I think, as always, with these things, Enrico, there's a lot of different factors. Clearly, we're progressively selling the Euro 5 engines, which will help over time. As I say, we've seen some impact in Germany, where the Euro 6 engine is a kind of safe harbor in terms of access to cities. There is some evidence that, that is supporting the value of Euro 6 engines.

We're progressively seeing the impact of changes that we've made in residual values over the last 3 or 4 years. That -- we're seeing that impact more in the Northern Europe than in Southern Europe because the changes that came in pricing were more -- were earlier in Northern Europe than they were in Southern Europe, but progressively, we're going to see the benefit of these better residual values, particularly on diesel as we go through the next period.

The other factor, which is very important is, first of all, the -- the distribution channels that we are developing, the -- what we call clicks and bricks, the direct sales to drivers and the consumer, which is helping the values that we're getting.

And we also have progressively a different way of looking at asset management, where we can put vehicles out on a second lease, and we can also -- we have a number of flexible leasing products and to customers where if a vehicle, let's say, has an early termination, which, for whatever reason, has a significant loss on it, it gives us an alternative to the immediate resale of that vehicle: to put that vehicle on to a second lease, to put it into a flexi lease product or one of the many distribution channels that we have around the re-leasing of used cars.

And so I think all of these things are helping progressively. They've helped across many quarters actually. But I think more and more, these things are having a positive impact.


Operator [29]


The next question comes from the line of Pierre Bosset from HSBC.


Pierre Bosset, HSBC, Research Division - Head of French Equity Research [30]


I just would like to come back to cost of financing. Maybe first of all, a naive question, is the fact that your clients have to take the IFRS 16 rule, does it make the cost of financing more apparent for some of them? And have -- does it makes a discussion more complex when they see the cost of financing and the spreads that you are charging? That's the first question.

And the second question, can we have a bit of granularity on the evolution of the spread or basically, your average cost of financing? And what sort of costs you are charging to your clients in terms of financing?


Gilles Momper, ALD S.A. - CFO [31]


The -- in terms of IFRS 16, no, I guess, again, it's the same question -- same answer as for Mourad, I guess, we've not seen -- I mean, the spread, we charge the customer depend on the customer base. I mean, and then it's based on the cost of fund plus the spread. And the spread depends on the quality of the customers we've got. And I guess IFRS 16 has no impact. And again, IFRS 16, keep in mind that it's only for big customers who are probably disclosing their accounts under IFRS, which does not include all the SME and private individuals.

So you've seen in the recent years, the leasing contract margin as -- is always between 3.4%, 3.5%, 3.7%. We have not seen a major, a major evolution in the leasing contract margin in the recent years.

You should take, if you have a look over, I don't know, 5, 6, 7 years, it's quite similar, and like it is for our overall margin, we are still a bit below the 700 bps of margin expressed as a percentage of earning assets.

So we've not seen tremendous changes in the cost of funds. In the recent month, I would say, even in the recent weeks, it has been quite -- in fact, it has been better. I mean, in the recent few weeks, few months.


Michael Masterson, ALD S.A. - CEO & Director [32]


Pierre, just to comment further on your point on transparency. We're supplying a lot of reporting to the customers to support the way they book the asset within there. And in terms of transparency, most of those customers are looking to discount the flows at their own cost of funding. So the actual cost of funding in the lease rate is not the key element there, actually, IFRS 16 allows the customer to discount those future cash flows at their own funding cost.

So most customers have a funding cost that they use to translate all of those flows, which is their own internal cost of funding.


Gilles Momper, ALD S.A. - CFO [33]


And even sometimes, leasing, the leasing of cars is just not taken into account because it's not material for the customers. In some cases, they can argue that with the auditors. If you take a big pharmaceutical groups or big -- big groups, it's -- the equipment is not material enough to be accounted for.


Operator [34]


So the next question comes from the line of Kai Mueller from Bank of America.


Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [35]


The first one is, we've obviously talked a lot about 2019. When we look into 2020 with, obviously, European demand, generally, softening the PMI has not been that strong, have you seen any corporate customers becoming a bit tighter on corporate fleets? That's the first one as we move into 2020.

The second one is your used car sales results, we obviously discussed 2019, you're at the upper end in H1, but staying somewhat more cautious, given you still have the Q4 to see, is it still right to say in your view that we probably are through the trough in 2019, and we should be getting a better results going forward?

And then the last one is actually on diesels. You have, obviously, significantly reduced the diesel exposure of your portfolio. With the latest model, we're seeing some of them have actually better NOx emissions than petrol cars, the CO2 footprint is also better, is that something corporate customers are still looking at? Or are they just worried about diesel and so are you in terms of the residuals, where we're moving to and, therefore, switching more directly into electric cars.


Michael Masterson, ALD S.A. - CEO & Director [36]


Yes. Yes. I mean, we have -- we are a business which -- I'm going to your first question, which was on demand and the position of corporates in terms of pulling back. I mean, in general terms, we are a business, which can be quite anticyclical in times of treasury constraints and funding and balance sheet concerns, a lot of customers look to leasing as a way of managing their -- some of their assets. So that's the general framework.

I would say we are -- I can think of 3 or 4 significant customers that we have, which are in some kind of restructure. And you can read these kind of things in the newspapers. Inevitably, these restructures do have some impact on the fleet.

I mean, most of these corporates, anyway, need the vehicles to -- for the sales people and also for -- to deliver the product but at a marginal level, they -- these restructures of senior management teams, for example, can have some impact on the volumes.

But I -- we are very diversified as a company, we're dealing with many corporates across a large number of countries, and we don't have any significant percentage with any individual corporate customer.

So nothing there that would outweigh the fact that the full service leasing is still growing significantly in all markets, the penetration for service leasing in the corporate sector has still got a long way to go. We still see penetration rates that are way below the 50%, 60% that you see in maybe U.K. or Netherlands. Within all the other countries, we still see penetration rates much lower and we anticipate that to grow strongly.

Partnership business will still be double-digit this year. And obviously, the private lease business will be 30%, 40%. So relative to those factors, the 3 or 4 corporates that are restructuring is relatively immaterial and kind of a normal business cycle in a business that's -- can often be anticyclical.

Yes. I mean, I think what we're -- just moving on to the car sales, and let me know on any of these if you want more clarification. But on the car sales, I think what we're seeing is the market's fundamentally pretty stable. It has been for 2, 3 quarters. And we see that stability in the market fundamentally based on the fact that the value of used cars is still relatively low in absolute terms compared with 2, 3, 5 years ago.

So we see a market which is fundamentally reasonably stable.

So where we see an opportunity to improve is to continue to develop. Secondly, is to continue to improve the way we sell our used cars, and on that basis, we think we are at the low point or have been at the low point of the cycle and the outlook for the future. With progressively better residual values coming back, obviously, we've taken a fairly conservative position on diesel. And progressively that should improve values going forward.

In terms of the diesel, it varies an awful lot. I mean, there are some corporates out there who want to have fully electric car fleets, there's not many actually, but it does happen.

A lot of -- I think there's a high level of awareness with the senior fleet managers about the impact of CO2 and NOx. Obviously, they all have their own CSR policy and to a certain extent, they're driven by their CSR policy. But you're right, the latest Diesel 6 engine is performing much better on NOx than the many of the petrol cars. So there are -- there is an awareness of that and different fleets managers adapt their policy based upon their own perspective on that. Some of them are fully electric and some a mixture of petrol and diesel.

The key driver there, obviously, is total cost of ownership. And as you say, with the high performance of diesel, if you have a car, which is driving 120,000 kilometers or 50,000 kilometers plus a year, then obviously the total cost of ownership still points towards a diesel engine in many cases, particularly in the case of LCVs.

So it's a balanced picture there. I don't know whether that answers your question, Kai?


Operator [37]


So the next question comes from the line of Charles Bordes from Kepler Cheuvreux.


Charles Bordes, Kepler Cheuvreux, Research Division - Equity Research Analyst [38]


Regarding the electric vehicles in your fleet, how fast do you expect the proportion of those vehicles to rise in shipments and in the total fleet? I'm trying to understand the moving parts regarding the fleet acquisition price, do you have an idea of how big would be the lift on the purchase price per vehicle, considering potential evolution of the subsidies policy? Or as you said previously, the fact that OEMs have an incentive for putting as many as takers on the road in the coming years?


Michael Masterson, ALD S.A. - CEO & Director [39]


Yes. I mean, we are growing the electric, the EV product very rapidly. I will just say, what we're seeing today is a significant delay in the delivery of these vehicles, which is impacting the flow of those vehicles into the fleet. It's also having an impact on our order bank, where we're having longer delays.

I think one trend we've seen is customers are less inclined to tolerate a delivery time of 6 or 9 months, which in the past has been quite common. Many drivers, they need the vehicle, and they would rather compromise and get something which is available in a shorter time scale. So there's no doubt that the lack of supply is impacting the number of deliveries there.

Having said that, we are growing very rapidly. We're looking -- as we transform away from diesel, we're looking to target around about 50% of that transformation towards EV or hybrid.

And that means where we have 5% to 10%, let's say, 10% movement away from diesel, we're looking to increase by 5% the EV or hybrid. And what's impacted that was working well last year and in the first half of this year, we've seen these delays on the delivery of EVs and hybrid impacting those volumes.

One other factor that's impacting that and is impacting the delivery of new product is the fact that the measurement of the EVs and hybrids will start from 2020 onwards. So in a sense, many manufacturers would prefer to deliver a car on the 1st of January 2020 rather than in 2019, because in a way, the 2019 sale is a lost sale in terms of the calculation of their average CO2 across all of their deliveries.

So the huge volume of -- the huge wave of EV will really impact the beginning of last year. All of the pricing in relation to that new EV product isn't available yet. I would say the trend is clearly downwards on EV with the reliability and the cost of batteries and the scale benefits in the production of these vehicles.

But I think it's too early to give a -- for me, anyway, to give a general indicator on what the global pricing policy of manufacturers in relation to the EV product will be, but hopefully, that will help you to give a picture of how those trends are going. But on the actual pricing of those new EV products we're waiting to see to some extent.


Operator [40]


There are no further questions, so I'll turn the call back to your host.


Michael Masterson, ALD S.A. - CEO & Director [41]


Okay. Well, thank you very much, everybody. We do have some roadshows planned for the half year. So we look forward to being out there. And thank you very much for listening to the call. Thank you and goodbye.


Operator [42]


Thank you for joining today's call. You may now replace your handsets.