Ferrari N.V. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Ferrari Q3 Results 2024 Conference Call and Webcast. Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Nicoletta Russo, Head of Investor Relations. Please go ahead.

Thank you, Rivia, and welcome to everyone who is joining us. Today, we plan to cover the group's operating results of the third quarter of 2024, and the duration of the call is expected to be around 60 minutes. Today's call will be hosted by the group CEO, Mr. Benedetto Vigna; and Group CFO, Mr. Antonio Picca Piccon. All relevant materials are available in the Investors section of the Ferrari corporate website. At the end of the presentation, we will be available to answer your questions. Before we begin, let me remind you that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included on Page 2 of today's presentation and the call will be governed by this language. With that said, I'd like to turn the call over to Benedetto.

Good afternoon, Nicoletta, and thank you, everyone, for joining us today. Before we begin, I would like to extend my gratitude to the incredible team at Ferrari for their hard work and dedication, to all our client connectors for their ongoing trust in our brand, and to all our partners, suppliers, and dealers for the strong collaborations we have continued to build together. The stability of the Ferrari ecosystem resides on the spirit of cooperation, passion, and sense of belonging. Thank you all. We are continuing to execute our business plan in line with our trajectory, and Q3 was once again a quarter rich in achievements and strong financial results. Let's begin with a brief summary of these financial results, and then Antonio will provide all other details. Revenues were EUR 1.6 billion, up 7% versus the previous year, a double-digit growth in profitability, with EBIT at approximately EUR 470 million and EBIT margin of 28.4%, sustained by the strength of the product mix and the continuing solid trend of personalization, a remarkable net profit of EUR 375 million and industrial free cash flow generation of more than EUR 360 million. Such figures continue to demonstrate strong execution and sustained growth. These results were accompanied by continuous brand momentum. Our order book has evolved as expected, with the new 12Cilindri coupe Spider guiding the order intake and providing us with remarkable rolling visibility well into 2026. The same positive sentiment has been confirmed by many of our dealers who attended the dealer annual meeting a couple of weeks ago here in Maranello in our new e-building. All our 170-plus dealers from all over the world came to this important event and immediately after it, during the dinner, they reported very favorable feedback across the board, from recent product unveilings to customer engagement, from a clear, consistent product and industrial strategy to increased openness and transparency and, of course, unique brand experiences. In this same location, we arranged bespoke reviews of the new supercars, the F80 for our collectors before displaying it to our broader racing community at Finali Mondiali. This model opens a new chapter in the history of our legendary supercars. The F80 will be produced in a limited run of just 799 examples, which have already been fully allocated to our collectors. It joins iconic models like the 288 GTO launched 40 years ago in 1984, F40, F50, Enzo, and LaFerrari showcasing the very pinnacle of technology and performance. The F80 is the most powerful road car ever to emerge from our factories, with a combined maximum power of 1,200 horsepower. It sets a new benchmark for innovation and engineering excellence, from the latest generation V6 hybrid powertrain with the introduction of turbo to the four-wheel drive capability enabled by the electric front axle and from the ultra-light carbon fiber body with extreme aerodynamic solutions. I want to praise the entire team here at Ferrari for this incredible masterpiece, marking the eighth model unveiled out of the 15 we promised during the 2022 Capital Market Day. What is most striking about the F80? Firstly, it symbolizes our technological evolution and the significant transfer of technology from our racing world to the road. Today, both our Formula 1 and our 499P hypercars and Turbo VIC ICE engines utilize hybrid systems. It was a deliberate choice for us to transfer this powerful and advanced architecture into our newly born model. Secondly, we are making a clear technology statement. More specifically, I refer to the following three key components of our F80, all developed and manufactured in our newly inaugurated building: One, the electric motors, the first to be developed, tested, and manufactured entirely by us. Two, a high-voltage battery module conceived for very high power density and adopting a patented carbon fiber housing system to save weight. And three, the front axle designed for high efficiency and incorporating two electric motors and inverters using silicon carbide transistors and integrated advanced decoding systems. What I just mentioned underscores the progress we are making in our electrification journey and our willingness to internalize core components. After the first Hybrid F1 car of 2009, LaFerrari of 2013, and our six hybrid models, the F80 represents a key milestone in our electrification journey. Now, after discussing our amazing F80, let's switch gears to client activities. Q3 has also been marked by many unique experiences, such as our presence at Pebble Beach, where the T1 hosted mini classics and new Ferraris, the Cavalilassic, which attracted over 60 historic Ferraris and their owners to Italy, as well as the legacy tools dedicated to owners of the iconic 288 GTO and our first supercar, and Finali Mondiali, which saw participation from more than 35,000 motorsports enthusiasts, clients, sponsors, suppliers, employees, and their friends and families. Each event has been a resounding success, bringing our community together to celebrate the Ferrari legacy and extraordinary experiences that our brand embodies. These opportunities for our international community offer a unique platform for enthusiasts to immerse themselves in the Ferrari experience. They foster connection and create unforgettable memories that resonate with the true essence of the prancing horse: shared passion and a strong sense of belonging. Finali Mondiali is a good launch pad to our racing and lifestyle world. Let's start with the racing world. September 1 is a date we will always remember because, for the first time in Ferrari's history, we secured two victories in two championships, WC and F1, in a single day, as our victory in Austin came just a few hours after our achievement with the Scuderia Ferrari HP. I was in Monza, and I can tell you that you cannot describe those emotions; you can only experience them, and you will never forget. In Formula 1, the recent victories and improvements in Austin and Mexico City have provided us with the boost we need to continue fighting in the last few races of the championship, always with our four wheels on the ground. We will do all we can to fight until the very last lap. Recent racing and sports car events have also provided occasions to showcase our renewed lifestyle dimension. Among the many activities, I would like to highlight our latest collection shown during Milan Fashion Week, which was very well received. The strength of our brand is further demonstrated by record attendance at our museums, with over 100,000 visitors in Q3, and year-to-date, we have already surpassed last year’s record for attendees. Luckily, I want to mention another very important achievement of this quarter. It is a quantum leap toward our carbon neutrality target for 2030. We have switched off our generation plant here in Maranello. We managed to accomplish this three months earlier than we had previously planned. This means we no longer use gas to generate electricity in Maranello, replacing a significant portion of our methane gas consumption with renewable energy sources. This will ensure us a 60% annual reduction in Scope 1 and Scope 2 CO2 emissions compared to the 2021 base year. To conclude, we are conscious of the macro environment around us, and we continue to monitor it very carefully. We are fully committed to executing our strategy with focus and determination, confident in our clients, our direction, and the opportunities that lie ahead of us while always keeping in mind the importance of being well-grounded. On this note, I hand over to Antonio to review the Q3 '24 financial results.

Good morning or afternoon to everyone joining us today. I start on Page 6 with a quick glance at the highlights of the third quarter. The quarter posted strong financial results aligned with our targets once again affirming this year's main drivers: product mix and personalization. As previously communicated, volumes and mix also reflected our decision to facilitate the company's transition to a new ERP. In this respect, I want to take this opportunity to extend my thanks to all the colleagues who supported the company with this transition. In summary, shipments were a few units less than the prior year, while revenues were up 7%, adjusted EBIT up 10% with a 28.4% margin, adjusted EBITDA increased 7% with a 38.8% margin, and such economic results led to strong industrial free cash flow generation of more than EUR 350 million. Moving to Page 7, we review our shipments for the third quarter. The Purosangue, the Roma Spider, and the 296 GTS drove the deliveries in the quarter. We also commenced the first deliveries of the SF90 XX Spider and increased deliveries of the SF90 XX Stradale. Allocations of the Daytona SP3 grew in the quarter compared to the prior year, in line with our plans, slightly sequentially lower than in the second quarter. Shipments of the 812 Competizione A decreased and were approaching the end of its life cycle, while the 812 Competizione and the Roma are phasing out. As a result, the ivory share reached 55%, in line with product cadence and mainly driven by the tuning GTS. As usual, our product allocations across the different regions were consistent with the product cycle and developments observed in each respective market. On Page 8, you can see the net revenue bridge, which shows a 7% growth versus the prior year at constant currency. The increase in cars and spare parts was driven by the retail product and country mix, as well as higher personalization. In the quarter, personalizations accounted for approximately 20% of total revenues from cars and spare parts, significantly supported by the Purosangue and the Daytona SP3. Sponsorship, commercial, and brand sponsorships increased, mainly thanks to new sponsorships related to our racing activities, largely driven by the new title sponsor with sponsorship from HP. Currency, net of hedges in place, had a negative impact, mainly due to adverse dynamics of the U.S. dollar and Japanese yen versus the euro. Moving to Page 9, the change in adjusted EBIT is explained by the following variances: First, volume slightly negative, reflecting lower deliveries. Second, mix and price positively contributed, thanks to the enriched product mix sustained by the Daytona SP3 and the sale of two 499P Modificata, the increased contribution for personalization, and a positive country mix mainly supported by the Americas. Third, industrial and R&D expenses positively contributed to lower D&A in line with certain model phase-outs. SG&A increased and reflected continuous initiatives in software and digital infrastructure, organizational development, as well as brand investments. Other had a positive impact of EUR 14 million, thanks to the combined effect of new sponsorships and lower costs due to revised Formula 1 in-season ranking assumptions in line with current constructor standings. Lastly, the total net impact of currency was negative for EUR 8 million. The EBITDA margin was 38.8%, while the EBIT margin reached 28.4%, benefiting from flattish E&A. Turning to Page 10, in the third quarter, our industrial free cash flow generation reached EUR 364 million, reflecting the increase in profitability, a positive contribution from net working capital provision, and other factors primarily driven by inventory reduction at quarter end, partially offset by increased capital expenditures in line with the pace of development of our product and new infrastructure in Maranello, largely driven by the new workshops. Higher taxes were due to a different cadence of balanced payments. At the end of September, the industrial debt position was EUR 246 million after share repurchase of EUR 147 million. Moving to Page 11, thanks to increased visibility, we look at 2024 guidance with increased confidence on all metrics. To conclude, this quarter's strong financial results, the exceptional reception of the new supercar F80, the high client attendance at our events, and our fast order intake on the 12-cylinder family, along with a robust order book, all reinforce our confidence in executing our future plans successfully. These achievements underscore the momentum we are building and our continued commitment to delivering value to our clients and stakeholders. I thank you for your attention, and I'll now turn the call over to Nicoletta.

Thank you, Antonio. We are now ready to open the Q&A session. Thank you.

And the questions come from the line of Thomas Besson from Kepler Cheuvreux. Hello, Thomas, your line is open, you may ask your question.

Sorry for that. It's Thomas. I have two questions, please. I'd like to start with the F80. Can you give us an idea of the timeline for the first deliveries of this product and over which period or how many quarters you intend to deliver it, given its substantial price point and likely contribution? That's my first question. The second question, I'd like to come back on the mix gains in Q3. Could you discuss why it declined sequentially that much? Is it mainly due to sequentially lower internal shipments? Or is there something else that explains relatively low mix gains?

I'll take the first one. Antonio will be more specific about the second question. So F80, we start deliveries Q4 '25, and we will continue for 2 to 3 years. That’s about the F80, and the total number of cars we will ship is 799. Regarding the second question about the mix, Antonio will comment.

The sequential decline is due to the fact that the comparison with last year was based on a particularly high mix impact from the Daytona SP3 and personalization last year in Q3.

We are now going to proceed with our next question. The questions come from the line of John Murphy from Bank of America.

Just a question as you look at sort of the upcoming product launches. I mean you got the F80, which is very impressive, the forthcoming successor to the ICONA, the Daytona, and the Persona successor that will come in the next couple of years along with the EV hypercar. There's a lot at the high end here. It seems like it's very strong and will be well received. How do you think about positioning all of this with your customers? Particularly, the F80 as we look at it sort of somewhere between the ICONAs and the EV hypercar that's coming.

Look, the supercar, as we said, is coming as the pinnacle of technology and performance. As I mentioned earlier, this represents an important step in our electrification journey because it shows how Ferrari can manage some key components for electric vehicles. I think that in the F80, there are a couple of important messages. Firstly, Ferrari is able to perform excellently both in hybrid world as well as in the ICE world. Secondly, our product roadmap ensures continuity between what we’ve done in the past and what we are planning for the future. This continuity is a unique strength of our company, integrating traditional values with innovation. The F80 is a learning opportunity in manufacturing that will benefit not only our future electric cars but all of our other vehicles. So this is the importance of the F80 in our roadmap.

Ben, maybe just a follow-up. If you consider the EV hypercar or supercar, will it be positioned above the F80, adjacent to it, or below it?

I understand your curiosity. However, as a luxury company, we want to keep some secrets for the future. Let’s wait a little bit after Q3, as we’ve already presented the F80. So, for now, let’s keep the intrigue alive.

We love products. Just one follow-up. There's a hyper focus right now this quarter about volume declining. There are concerns in the luxury market. Now, looking at all this great product coming, is it possible that you run this company with little to no volume growth and drive mix in quality to be more Ferrari-like that drives profits and margins higher in the future instead of needing volume growth? There seems to be a real concern in the short run regarding volume decline.

This is a good question. I would like to remind you and everyone that this company merges two important dimensions: luxury and technology. We always prioritize the quality of revenues over quantity. This should also be considered while evaluating the evolution of our business plan. We do not want to push excessively on the top-line growth; rather, we wish to maintain our focus on the quality of the P&L.

We are now going to proceed with our next question. The questions come from the line of George Galliers from Goldman Sachs.

The first question I wanted to ask was just with respect to the guidance. Obviously, you stated that you're increasingly confident in it, but at the low end, and I'm sure you'll do better than the low end. The implied EBIT for Q4 would be about EUR 400 million, which is lower sequentially than Q3. Could you just walk us through a few of the puts and takes as we think about the evolution of Q4 relative to Q3? The second question I had was with respect to some of the residual value developments we're seeing in certain used markets. I think it's notable that low mileage relatively young 296s are actually trading at lower values than older high mileage cars. Why do you think that is? Is that leading you to reconsider your pricing strategy or powertrain strategy going forward?

I will take the second question regarding residual values, while Antonio will elaborate on the first. I want to clarify a few aspects about residual value dynamics. Firstly, the dynamics are not consistent across all countries. You're correct that in the U.K., the market is a bit softer, but this is not true for other regions. We keep monitoring residual values diligently. When there’s a higher degree of personalization that doesn’t appeal to the next buyer, that often results in lower willingness to pay. So, you should keep in mind two things: first, the market pattern varies worldwide, and second, it largely depends on the degree of personalization that initial buyers have chosen.

George, on the guidance, please note that the guidance uses 'greater than,' which is an open upward declaration. In Q4, we are planning higher deliveries of the Daytona SP3 compared to the prior year; but sequentially they will be lower than the previous quarters. Additionally, we have incremental OPEX, particularly related to rising activities in lifestyle, encompassing expectations of persistent inflation, and incremental D&A related to digital initiatives and compliance. These are the main drivers for Q4. However, please don't lose sight of the upward-facing guidance.

We are now going to proceed with our next question. The questions come from the line of Adam Jonas from Morgan Stanley.

I want to follow up on the implied Q4 guide for industrial free cash flow, where you stated 'up to EUR 950 million,' which would imply a year-on-year decline of about 36% in industrial free cash flow if I use EUR 950. In addition to the factors you already mentioned driving EBIT for the fourth quarter, could you comment on your outlook for changes in working capital or CAPEX that might be affecting that type of year-on-year decline in free cash flow? I have a follow-up question as well.

Thank you, Adam, for this question. This year has been particularly strong in terms of capital expenditure. I’ve previously mentioned that spending is more linear compared to what we were used to. This linearity is primarily due to our investment in infrastructural development, including the rebuilding in the earlier part of the year followed by new installations in the second quarter. Therefore, this will impact our cash flow for the full year. The second element is I do not anticipate working capital to significantly contribute to generating cash flow, especially given the anticipated higher taxes stemming from our expected results.

It does help, Antonio. As a follow-up to SG&A, increased two times faster than revenue this quarter. You've noted some reasons for this including the digital journey, ERP integration, etc. Can you provide any outlook on forward SG&A? Is this just a temporary bulge in SG&A reversing a multi-year decline in SG&A as a percentage of sales? How long might this continue, if you can describe it in either dollar or percentage terms?

Yes, there is a structural element. Current accounting principles dictate that expenditures for digital infrastructure, particularly software, are expensed directly in the P&L. As we grow in this area, particularly with updates to our digital infrastructure, this will add to our SG&A spending as we have seen.

We are now going to proceed with our next question. The questions come from the line of Monica Bosio from Intesa Sao Paulo.

The first one is on the F80. Are you going to collect advances on the supercar, and if yes, when do you expect to account for them? My second question is on the personalization rate, which was at 20% in the third quarter. I'm curious about the average price increase embedded in your personalization compared to the previous year. And the third question is on the shipments. Obviously, you can allocate the shipments as you see fit, and it’s a deliberate strategy. In China, shipments decreased a lot. I know that it's below 10%. I'm just wondering if you can give us a flavor on consumer lending or the willingness to buy in China as of now. Any color you could provide would be helpful.

I will take the third one, and Antonio will cover the first two. First of all, I appreciate when you highlight the significance of our deliberate objectives; that’s very important. Coming specifically to China, I met all five of our dealership owners there. They agree that growth in the Ferrari market must comply with a gradual approach, aiming to stay below 10%, ensuring customers become familiar with our brand. They do not observe any particular negative trends as the order book remains around five quarters. We face varied dynamics in different regions—while some areas see growth, regions like Greater China reveal mixed results. In China, there's strong traction for some of our models, and we want to offer cars suited to their tax structure; for instance, the 12-cylinders are significantly pricier in China.

Monica, yes, we will collect advances on the F80 and this will start in 2025. As for personalization, the 20% in Q3 represented an average increase in price consistent with inflationary trends.

We are now going to proceed with our next question. The questions come from the line of Michael Binetti from Evercore.

I guess with Daytona moving into the later part of its life cycle over the next few quarters, if I assume some estimates around how many units are left to sell and generally distribute them as the units are decelerating quarter-over-quarter, as we look past the end of this year into the first half of next year, you'll have Daytona's lower impact on the all-important average selling price per car before the F80 starts to shift in the fourth quarter. How might you strategically approach managing any compression on net revenues per car given these dynamics? Additionally, how do you see the margins on an expanding portfolio of electrified cars influencing some of the historical targets you've set, like the 40% EBITDA margin you outlined at the 2026 Capital Markets Day?

I'll take the second question while Antonio will handle the first one. What we have been doing aligns with our plans; call it electrification, hybridization, and combustion engine in line with our overall strategy.

You're right: the Daytona is likely to decelerate until the third quarter of next year, more or less than we can expect now. However, the development of the mix will also depend on the range of cars and specials we have. In Q3, you have seen several initial units of the excess models starting to be delivered. This will grow, diversifying our offering more than just the Daytona.

We are now going to proceed with our next question. The questions come from the line of Tom Narayan from RBC.

The first question is just confirming that the ERP volume impacts are largely behind us from Q3 and won't happen in Q4. Did you disclose how many Daytona's were delivered in Q3? My second question follows up on residual values. There are concerns about the Purosangue, given that it's likely a very different type of vehicle. It may serve different purposes, potentially affecting its residual value. I'd love to hear your thoughts on how you plan to maintain the residual value of the Purosangue.

Tom, I’ll take the first and third questions, and Antonio will cover the second. The ERP transition has been concluded. Therefore, there will be no impact in Q4. As you may remember, during the previous call, Antonio mentioned that we anticipated some shipment adjustments to ensure a smoother transition. That work was completed within the three months of Q3. Regarding the residual value of the Purosangue, you are correct in observing that some clients are utilizing the Purosangue for a wider range of purposes, which we believe will positively influence its long-term appeal. While we do not yet have comprehensive data, demand for the Purosangue remains very strong, with continual requests from clients worldwide who want to experience our vehicle.

Yes, in Q3 we delivered around 70 units of the Daytona, which is two units less than the previous quarter. However, as I've stated, it's not the specific number but the overall mix that matters; Q3 was particularly heavy on entry-level range cars.

We are now going to proceed with our next question. The questions come from the line of Henning Cosman from Barclays.

Perhaps the first one is for Antonio. I'm perplexed about the deliberately softer language regarding Q3. I think it was a strong quarter in terms of margin and mix. I’m trying to understand if it turned out better or not as expected. Can you clarify?

Indeed, it was a strong quarter overall from a revenue and margin perspective, which came from strategic decisions around shipments while transitioning to the new ERP. I initially indicated that there would be fewer units in Q3 because, during the ERP transition, production and delivery were stalled for several weeks, prompting us to shift some units from Q3 to previous quarters. The numbers observed in Q3 do not reflect overall demand or performance but rather our deliberate choice within the constraints we faced.

Okay. A question for Benedetto or both of you: Benedetto mentioned executing in line with trajectory. Following the F80 release and comparing it to expectations, the economics seem stronger. Considering that '26 will be a year where you benefit from this vehicle, can you provide more clarity on your planned trajectory?

That’s a good question. During the Capital Market Day in June 2022, we did not anticipate such high levels of personalization and the carbon finishes that clients are valuing highly. The distinction between our original expectations and what has transpired lies in client engagement with these personalization options. For providing a longer-term perspective, we'll hold the Capital Market Day in H2 next year to give you a comprehensive update.

We are now going to proceed with our next question. The questions come from the line of Stephen Reitman from Bernstein.

A question about the F80 and the special cars. We heard that demand for the F80 is approximately three times more than what you will deliver. We also know the factory does not aim to increase capacity but provides more flexibility. Given the F80's production timescale, will the building offer more flexibility for complex cars like this in the future? Also, has the battery warranty rollout begun? I’d like an update on that.

Thank you, Stephen. Benedetto, I will address the two points. The F80 is an important milestone for our electrification journey, as we will manufacture key components internally for the first time. The e-building is not meant to increase production capacity, but rather to enhance technological flexibility, ensuring our clients have choices in the motorization of their vehicles. This is crucial for us as we maintain three platforms—ICE, hybrid, and electric. The e-building enables us to manage this flexibility. Regarding the battery warranty, we have just started providing it, and while it’s a bit too early to measure take-up rates, feedback from clients has been positive, with the warranty providing them peace of mind.

We are now going to proceed with our next question. The questions come from the line of Anthony Dick from ODDO BHF.

Just some follow-ups on the shipments and the mix. I know shipment is not the main criteria, but with all the impacts in Q3, is it fair to assume that shipments should go up in Q4? Or is Q2 the new normal? Additionally, could you provide clarity on Daytona SB3 deliveries in Q4? Should we expect higher than 60-unit run rates, or are they normalizing?

I would say that the level of volumes is considered acceptable. We’ve held thorough discussions with dealers.

For Q4, we expect unit deliveries to be higher than last year but lower than previous quarters. As for Daytona deliveries, they will be lower but still exceed last year’s deliveries.

We are now going to proceed with our next question. The questions come from the line of Michael Tyndall from HSBC.

Just two questions, if I may. The first one is related to the F1 provision release. Can you provide context around its scale? What does it imply for the underlying business? The second question is about the ERP system; was there a cost-benefit analysis conducted? Could you talk a bit more about the benefits, particularly regarding working capital?

I take the second question while Antonio will address the first. We never really had an efficient ERP in the company. Transitioning sales to production was often burdensome due to two incompatible systems. We expect efficiencies in SG&A as we streamline operations since we’ve integrated two different generations of ERP that spoke different languages. The second question is.

As for Formula 1, the provision release impacted around EUR 10 million which, while not substantial, reflects the adjustments necessary for operational considerations.

We will now conclude the Q&A session. I will now hand back to Benedetto Vigna for closing remarks.

Thank you for your time today and for all your questions. This strong Q3 result and the continuous progress in our journey provide us with confidence for the development of the years ahead. If you were here, I would invite you to celebrate Antonio's birthday with cake. On the cake, I assure you it's written 'greater than.' I wish you a good afternoon, and thank you again for your attention.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines.