Earnings Call Transcript - RACE Q2 2021

Nicoletta Russo, Chairman and acting CEO

Thank you, Gino, and welcome to everyone who is joining us. We plan to cover today the group's second quarter 2021 operating results. In light of this, the duration of the call is expected to be around 60 minutes. Today's call will be hosted by the group's Chairman and acting CEO, Mr. John Elkann; and Group CFO, Mr. Antonio Picca Piccon. All relevant materials are available in the Investors section of the Ferrari corporate website. And 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. Since our team today is connecting from different countries, please forgive us if there are moments of silence during the call while we manage the transition between speakers. With that said, I'd like to turn the call over to Mr. John Elkann.

John Elkann, Chairman and acting CEO

Thank you, Nicoletta, and thank you, everyone, for joining us today. The very strong numbers we're reporting are once again an expression of the extraordinary skills, relentless endeavors, and passionate dedication of all the men and women of Maranello. But most of all, they are testimony to the unique and enduring power of Ferrari to inspire the dreams of our loyal owners all around the world and those of our new customers. June was our record order collection month ever, which is a big achievement for us, driven by a large number of Ferrari soon to be first-time owners, a strong guarantee for our future. In the second quarter, we delivered a strong set of results across all metrics, above pre-pandemic levels with an EBITDA margin of 37%, thanks to the particularly rich mix of this part of the year, boosted by the SF90 Stradale and Ferrari Monza. The mix will normalize in the second half, leading us to confirm our guidance on all metrics. Whilst for the industrial free cash flow, thanks to working capital, we now project to approach €450 million in 2021 versus our original guidance of €350 million. Today's call is the third and final one I will host as Ferrari's CEO, following our announcement in June of the appointment of Benedetto Vigna as our new CEO, commencing on September 1. Benedetto joined Ferrari from ST Microelectronics, where he has been responsible for creating, building, and leading the company's largest and most profitable business. His proven leadership qualities, his impressive track record as an entrepreneur and innovator, and his fluency in the technologies shaping our industry fit strongly with the ambitious plans we have for our future. I'd also like to take the opportunity today to share with you some additional perspectives I have gained over these months in my role as CEO. During this time, I've had the privilege of working more closely than ever with my Ferrari colleagues. Most importantly, these months have allowed me to more intensively experience the uniqueness of Ferrari. I have seen total commitment and passion in every corner of our company, ensuring that Ferrari is and always will be the very epitome of pure luxury, an expression of exclusivity that is imitated but can never be reproduced elsewhere. That is why everything we do will always focus on being distinctively Ferrari, which the opportunity set of electrification, electronics, and other technologies that are coming available will allow us to make even more distinct and unique products. This is why every day, we are finding new ways to excite existing Ferrari owners whose loyalty as repeat customers reflects the unique relationship they have developed with our company, and we with them. And just as importantly, we are building new strong bonds with the next generations of Ferrari owners. I'm pleased to tell you that new-to-Ferrari customers accounted for 60% of the orders for our entry models in the first half of this year. The average owner's age is also coming down, and we have doubled the number of women owners in recent years, with China leading the way with 1 out of 5 buyers being a woman. In Q2, we launched 3 new models: the 812 Competizione and the 812 Competizione Aperta, our special series V12 exclusively limited to our most loyal and committed customers, which already sold out at launch. Then there's the Ferrari 296 GTB, our first V6 hybrid road car with the Ferrari badge, targeting a new and younger Ferrari owner since unveiling in late June, orders are flowing fast. The Ferrari 296 GTB is the third hybrid car in our range, following the SF90 Stradale and Spider. But while the latter are our supercars, the new 296 GTB is the most fun-to-drive car for drivers of all levels. What I would like to highlight most is not just the increasing pace of our electrification plans, but our ability to use and invent technologies in a way that is uncompromisingly and distinctively Ferrari. In this last quarter, we also shared with you a taste of our exciting future in a different dimension. In addition to unveiling the latest additions to our richest and most complete model lineup ever, we staged our first runway event to showcase our men's and women's fashion collection and reopened the historic Cavallino restaurant in Maranello, both to great acclaim. These generated 100 million reach with very strong demographics, both in terms of gender, 45% women and 55% men, where 85% of them are in the 18 to 34 age range. These positive reactions we received are early indications, not only of the strength of Ferrari with new audiences, but also of our ability to execute in a way that is true to our history and values for our future, moving into new areas in a considered way and always relentlessly focused on excellence. A further example is our launch on the Fortnite platform, combining virtual and physical with our core product and our capsule collections, further strengthening our reach in terms of audiences and entering new geographies and demographics. At the same time, we are more focused than ever on the importance of our motor racing roots. In Formula 1, our young and exciting driver pairing has brought new energy to the entire Formula 1 team. We are also working intensively on our return to the Hypercar class and particularly to the Le Mans 24-hour races in 2023. Success at the very highest level of motor racing is in our blood, as we have proven with our victory in the 24 hours of Spa-Francorchamps and the Endurance cup of GT World Challenge this weekend. Working even more closely with our racing teams in these months has only sharpened my and our determination to deliver victory on the track and to ensure that we capitalize even more on the opportunities for technology transfer from our motor racing activities to our road car programs. Just as an example, the V6 hybrid is common to our different racing activities, but also to the new car we just launched. We will share much more about the ambitious plans we have for every aspect of our business at our next Capital Markets Day when we also celebrate the 75th anniversary of the founding of our company by Enzo Ferrari. This will set out the path we will take during this decade but it will be much more than this. It will provide the foundations to build the continuing long-term success of Ferrari as the world's most distinctive and innovative luxury brand, swiftly creating continuing growth opportunities from the changes in a fast-transforming world but never compromising our commitment to be the unmatched expression of Italian excellence. Benedetto, our colleagues, and I look forward to welcoming you to our Capital Markets Day in Maranello, now set to take place on June 16 next year, when we will take you deeply into our plans for the coming years. In the meantime, we continue to be laser-focused on our performance in the second half of this current year. It has been a unique privilege for me to lead Ferrari as its CEO since the end of last year. The insights it has given me leave me even more excited about our future, one in which the opportunities for Ferrari to create emotion and value are stronger than ever. I look forward very much to working closely with Benedetto and his team to take Ferrari to new levels in every way. I would also like to conclude by telling you how proud I am that on June 30, we were awarded the 3 stars of the FIA Environmental Accreditation program. On July 12, we were confirmed as an equal salary company, with that confirmation also coming in North America. This is very important and something that we're very proud of in Ferrari because it shows how our commitment to ESG is a true commitment.

Antonio Picca Piccon, CFO

Thank you, Mr. Chairman, and good morning or afternoon to everyone who is joining us today. Starting on Page 6, you can see the highlights of the Q2 2021 earnings, a very solid set of results, significantly up, not just in comparison to the second quarter of 2020, but also compared to the same period of 2019 on almost all metrics. As a reminder, the COVID-19 pandemic hit us most during the second quarter of last year when we had production and delivery suspension. Our shipments were 2,685 units in Q2 this year, almost doubled versus the prior year quarter, while they were almost in line with the second quarter of 2019. Group net revenues were €1.035 billion, nearly doubled compared to the prior year and up 5.2% versus 2019, driven mainly by volume and a stronger product mix. EBITDA came in at €386 million, 3x higher versus the second quarter of 2020 and up 23% versus Q2 2019. The EBITDA margin stood at 37.4%, consistent with the strong profitability registered in the first quarter of this year. EBIT was €274 million, 12x higher compared to Q2 2020 and up 14.8% versus 2019. Net profit was €206 million versus €9 million in Q2 2020 and up 12.6% versus Q2 2019, resulting in a diluted EPS of €1.11, up nearly 28 times versus the prior year. Industrial free cash flow for the quarter was robust at €113 million. Please note that Q2 2019 still benefited from the collection of advances on the Ferrari Monza. Turning to Page 7, you can see the details of the shipments of the second quarter 2021, almost doubled versus the second quarter of 2020, which was heavily impacted by the production and delivery suspension due to the spread of the COVID-19 pandemic. Sales of 8-cylinder were up 111% and 12-cylinder were up almost 38%. Please note that such segmentation is becoming less significant in the development of our mix since the introduction of the SF90 Stradale. The deliveries of the quarter were driven by the F8 family and the 812 GTS together with the SF90 Stradale and Ferrari Roma, which reached global distribution. The Ferrari Monza SP1 and SP2 continued to be delivered in line with planning, and the first deliveries of the new Ferrari Portofino M commenced in the quarter. All geographic regions positively contributed in the quarter as a result; EMEA was up 89%, Americas increased 70%, and Mainland China, Hong Kong, and Taiwan posted an exceptionally high 564% increase, boosted by the arrival of new models and accentuated by an easy comparison versus the prior year. As a reminder, we privileged deliveries in this region in the first 9 months of 2019 in advance of the early implementation of new emissions regulations. Finally, the rest of APAC was up 92%. As you all know, in the quarter, we unveiled 3 new models: the 812 Competizione and 812 Competizione Aperta, both limited series that have already sold out. All shipments will commence in Q1 2022 and Q4 2022, respectively, and the 296 GTB, our first V6 hybrid range model whose first deliveries to our clients will start in Q2 2022. Moving to Page 8, you can see the walk of our group net revenues for the second quarter, up 86% at constant currency. The increase in revenues from cars and spare parts was up 101% at constant currency, boosted by the easy comparison on volume and the strong enrichment of the product mix, along with the positive contribution from personalization. Personalizations were up versus the prior year in absolute terms, sustained by volumes, while in line with historical averages in proportion to revenues from cars and spare parts at around 17% due to the phaseout of special series. Engines revenues were up 118%. The improvement is related to higher shipments to Maserati and, to a lesser extent, to the rental of engines to other Formula 1 racing teams. The increasing sponsorship, commercial, and brand contribution was attributable to the more favorable Formula 1 calendar and brand-related activities, partially offset by lower prior year ranking. Currency, including translation and transaction impact as well as foreign currency hedges, had a negative contribution of €30 million, mainly in U.S. dollars. Moving to Page 9, let me review the change in our EBIT bridge, explained by the following variances. Volume was positive for €144 million, with shipments almost doubling in Q2 making the comparison easier. The mix price variance was also positive for €113 million, thanks to the strong contribution of the SF90 Stradale and the Ferrari Monza SP1 and SP2, along with personalization. Industrial costs and R&D costs were in line with the prior year, which included the full cost of employees' paid days of absence during the COVID-19 production suspension. SG&A was negative by €4 million, mainly reflecting communication and marketing activities of recent unveilings and lifestyle events. Other contributions were positive by €24 million, mainly due to the more favorable Formula 1 calendar, higher contribution from brand-related activities, and sales to Maserati, partially offset by lower prior year ranking. The total net impact of currency was negative for €25 million. As a result of what I just mentioned, EBIT reached €274 million versus €23 million from the prior year, with an EBIT margin at 26.5%. Turning to Page 10, industrial free cash flow generation for the quarter was €113 million. The positive generation in the quarter was driven by the strong EBITDA, partially offset by €166 million of investments that are progressing in line with full-year guidance. The capitalization ratio was approximately 42% for the quarter, increased versus the prior year, essentially due to a timing difference in R&D spending in relation to Formula 1 activities. The adverse working capital and other impacts were mainly due to higher inventories and the reversal of the Ferrari Monza SP1 and SP2 advances received in 2019. Higher tax payments mainly refer to the new patent box regime, which provides for the annual benefit to be cashed in 3 yearly installments. Net industrial debt as of the end of June was €552 million versus €420 million as of the end of March. The increase was due to the dividend distribution of €162 million, including distribution to non-controlling interest and the share repurchase for a total of €82 million, which more than offset the positive industrial free cash flow generation in the quarter. On Page 11, we revised upward our 2021 guidance on industrial free cash flow generation, which is now projected to approach €450 million, mainly sustained by improved net working capital, thanks to the collection of advances on the new special series starting in Q3 and the increase in trade payables due to our capital expenditure being weighted over the last month of the year. We also reiterated our confidence to reach the top end of our guidance range for the remaining metrics. As a reminder, our guidance relies on the assumption that trading conditions remain unaffected by further impacts from the COVID-19 pandemic during the course of the year. With regard to the development of our operating margins in the second half of this year, implied by our guidance, let me remind you that the mix will reflect a larger weight of the Ferrari Roma and Portofino M, remaining anyway positive versus the second half of 2020. OpEx will increase as planned, mainly due to marketing activities expenses for product innovation and R&D spending for Formula 1. To conclude, we remain highly confident in our future, firmly supported by the vigor of market demand.

Nicoletta Russo, Chairman and acting CEO

Thank you very much, Antonio. Gino, please, we are ready to open the Q&A session. Thank you.

Adam Jonas, Analyst

First, I just have to say, the choice of Mr. Vigna, I think, is a real genius masterstroke given the company's opportunities over the next decade, and I'm telling my clients, you don't want to bet against the guy who hired Sergio. So I think you might have done it again, but there's a lot of work to do. John, what gets you most excited about the EV opportunity at Ferrari and what worries you the most about that transition?

John Elkann, Chairman and acting CEO

Adam, thank you very much, and I definitely look forward to continuing on a great choice of leadership, which ultimately, as you well know, leadership is what makes the difference in any organization. So we're very blessed that we have Benedetto joining Ferrari. What really excites me, Adam, particularly for Ferrari about electrification is that it opens up a whole new world. The good thing that I'm seeing in Ferrari is that it's really being taken very, very much as a new additional field where we can really get the cars to be even better. All that we've learned in hybridization, and everything we're learning also through the racing activity, which I've been very close to, is giving us the opportunity of unchartered waters in terms of what we could see applied. I also think the opportunity set that we have at Ferrari is one where having a much wider set of technologies, of which electrification is one, will enable us to be even more inventive and innovative. To summarize, one, the spirit in which I see the organization reacting to the challenge, seeing it as a huge opportunity. Secondly, just the imagination of what we can do that we would never have imagined. There are good things that we'll be announcing coming up, so that's really exciting. In terms of what I fear the most, I've been trying to look at every angle and seeing in which ways we could, we should mitigate some of the transitions that are happening. I must confess, Adam, I feel very positive about what electrification does for us. Also because I believe that in the next decade, 2030 to 2040, we'll have additional choices because ultimately, electrification solves one issue, which is emissions, but it's not solving carbon footprint as we all know. As we solve carbon footprint, we need to innovate not only on the car side but also on energy sources, ensuring that we get to carbon-free energy sources. We'll end up having many more choices. For example, I believe the development of fuels and e-fuels will allow us to do more on our hybrids than potentially on our combustion engines with those technologies in the energy space coming up. Hydrogen may also take us to places we cannot imagine now. So I feel very positive both on the electrification journey we started for this decade and even more about what we could see coming in the next decade. So that was a long answer, Adam, but I hope I conveyed as much enthusiasm as I feel the organization has.

Adam Jonas, Analyst

That's a very realistic answer. And just a quick follow-up. If you compare the 10-year growth opportunity, thinking about long-term secular growth for Ferrari as an internal combustion car company, let's say we were having this conversation 2 or 3 years ago or during the 2018 CMD, versus now, how do you see moving towards full electrification in that direction? Does it change the growth profile of Ferrari into 2030? Is it similar, higher, or much higher? Just qualitatively, do you think it changes the growth?

John Elkann, Chairman and acting CEO

It ultimately depends on two variables: one, our choice to ensure we maintain uniqueness and exclusivity, and secondly, the pace and cadence at which we can get innovative products to market. If we combine the two, that should drive higher growth linked to the opportunity we'll see. It's a question of how we substitute one technology with another. The biggest challenge, Adam, is being careful not to accelerate the growth opportunity. I think the overall opportunity is bigger than it was. We just need to be disciplined in how we capture it.

Aileen Smith, Analyst

This is Aileen Smith on for John. I wanted to follow up on Slide 4 regarding the Ferrari customer base. Specifically, new to Ferrari owners comprising 60% of orders for entry-level models. How has this metric trended over the past several years? And as you think about the optimal mix of shipments over the long term, how much is comprised of new owners versus existing ones, particularly as Ferrari establishes itself as a newer technology leader consistent with your comments on the EV shift and with Benedetto's appointment as CEO?

John Elkann, Chairman and acting CEO

That's a great question. Depending on our decision around growth rates, we want to keep uniqueness and exclusivity while having loyal and repeat customers who will also migrate to our more exclusive and higher-margin products. We are increasing the funnel. There are 2 big areas of younger customers that we are reaching. One is China, where growth in the first half is encouraging but there's still a lot we can do. Secondly, women—there's imagery that Ferrari is mainly a car for men, but this is changing as proven in China, where 1 out of 5 cars we sell are to women.

Aileen Smith, Analyst

Is it fair to assume that the percentage of new-to-Ferrari owners has increased over the past several years and could improve going forward?

John Elkann, Chairman and acting CEO

Correct. We are working to ensure we have the right funnel. Ultimately, we want loyal customers, which is Ferrari's strength. We need to manage the growth of those loyal customers by having new Ferrari owners. The data we've been working on and confirming in the last six months is very encouraging. The right mix will depend on the growth trajectory we want, which must be managed carefully to ensure long-term sustainable pricing power instead of just volume capability.

Aileen Smith, Analyst

And then, regarding supply chain challenges, especially the semiconductor shortage affecting traditional automakers, did you experience any impact from the shortages in Q2 or do you expect an impact in Q3, or have you avoided this pressure by perhaps shifting production and deliveries across different models?

John Elkann, Chairman and acting CEO

We have managed it very precisely by working to an order book. That has helped us plan ahead, and the volumes we generate allow us to mitigate the chip shortage. However, it will depend on how long this situation continues. We're now assuming a market stabilization in 2022. Of course, if that does not happen, we will have to manage accordingly.

George Galliers, Analyst

Given the industry transition away from ICE by the 2030s, whether through noise emissions or CO2 pollution, do you see a risk that social acceptance of ICE becomes increasingly challenging as we've seen with smoking and the use of precious skins in the last two decades?

John Elkann, Chairman and acting CEO

There is a strong determination to achieve climate goals, and Europe wants to lead the way in this regard, which is an objective we subscribe to as a company. We believe that the work we started on ESG is crucial, and how we operate and the products we create must be mindful of environmental impact. We are moving from emission regulations to more comprehensive energy regulations, leading to new forms of energy. We believe this presents exciting opportunities for products we can bring to market.

Monica Bosio, Analyst

The second quarter CapEx was a bit below expectations. Should we assume approximately €800 million of CapEx by year-end? Additionally, can you provide insights into next year's guidance, given that the Capital Markets Day will be in mid-June?

Antonio Picca Piccon, CFO

With respect to the guidance for this year, CapEx remains unchanged, up to €800 million. The expenditure growth throughout the year is exponential, which explains why there is more weight on the last few months. As for next year, you'll need to wait for the full year call where we'll provide more clarity.

Henning Cosman, Analyst

Are you prepared to talk about the order book? In the past, you've shared comments about the length of the waitlist. Have you now reached a point where the order book is normalizing?

John Elkann, Chairman and acting CEO

June was our record month in terms of order book. We've never had such a strong order book in our history.

Antonio Picca Piccon, CFO

There is no inflection point; we have been growing.

Stephen Reitman, Analyst

With your sourcing from YASA, acquired by Mercedes, does Ferrari consider developing more of this kind of componentry in-house or acquiring other manufacturers and pioneers in this field?

John Elkann, Chairman and acting CEO

We have had good conversations with YASA and Daimler. The level of customization they're working with us is such that these technologies will not be applicable elsewhere. Collaborating with us is a stimulating opportunity to push boundaries. We're excited about our chance to partner with others, as there is no company like Ferrari that can push boundaries as we do. We're enthusiastic about these opportunities.

Nicoletta Russo, Chairman and acting CEO

Thank you very much. This concludes today's conference call. The Investor Relations team will be available to answer any follow-up questions you may have. We thank you all for attending today's conference call. Bye-bye.

John Elkann, Chairman and acting CEO

Thank you all. Thank you for your support.

Nicoletta Russo, Chairman and acting CEO

Thank you very much.