Ferrari N.V. (NYSE:RACE) Q2 2023 Earnings Call Transcript August 2, 2023
Ferrari N.V. misses on earnings expectations. Reported EPS is $1.45 EPS, expectations were $1.77.
Operator: Good day and thank you for standing by, and welcome to Ferrari 2023 Q2 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I will now like to hand the conference over to your speaker today, Nicoletta Russo, Head of Investor Relations. Please go ahead.
Nicoletta Russo: Thank you Roberto, and welcome to everyone who is joining us. Today we plan to cover the Group’s Q2 2023 operating results and the duration of the call is expected to be around 60 minutes. Today’s call will be hosted by the Group’s CEO, Mr. Benedetto Vigna; and Group’s CFO, Mr. Antonio PiccaPiccon. 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. With that said, I’d like to turn the call over to Benedetto.
Benedetto Vigna: Gracias, Nicoletta. Thank you everyone for joining us today. I would like to start by thanking all the women and men at Ferrari for their passion, dedication, and sense of belonging. Without them, without their agility and nimbleness, the exceptional result of the first quarter would not have been possible, gracias. Definitely Q2 was a quarter dense of many positive milestones on all fronts. Four are the key messages of this call that Antonio and I intend to pass to you. One, record high exceptional results driven by product mix and personalizations, stronger than expected personalization led us to increase the full year guidance on all fronts. Two, our order book remains stunningly high across all geographies in the full product range thanks to our robust order intake.
Three, the geographical pattern of our shipment in the last quarter as in all the other quarters reflects our deliberate allocation plans along with the controlled growth trajectory and they are not at all correlated with respective market trends. In the first semesters, our shipments grew by 4% year-over-year with all regions up, remarkable 14% up of Mainland China, Hong Kong and Taiwan, a 7% up of the Americas. Four, we are on track with our product strategy in Carbon Neutrality Journey. So now let’s start from our exceptional second quarter earnings and I’m very pleased to highlight that the following three key data. Revenues at nearly €1.5 billion, up 14% versus the prior year, even more remarkable in light of shipments substantially flat year-over-year.
Adjusted EBITDA is about €590 million with a 40% margin. Industrial free cash flow generation is approximately €140 million. Interesting to note that it took us only six months to surpass the €1 billion EBDA threshold while it took the entire 2017 to pass that same level, a result that everyone at Ferrari contributed to reach. Beyond these strong financial results in the quarter, there were other important milestone which deserved to take the spotlight. Racing world first Sunday afternoon, June 11, 2023 was an unforgettable day for Ferrari. 58 years after our last participation, we returned to victory in the top class of the WC with the podium at Leman on the centenary of the world’s most famous endurance race. A few days later, we were parade through the streets of the city, here in Maranello and in our factory we celebrated the victory with the 499P team, all Ferrari colleagues, our partners and our enlarged community.
Why is it so important for all of us to celebrate this victory? Because once again, it testifies the effort and the willingness to always push the boundaries of technology and innovation. Racing is our heritage and more than ever it is a stimulus to further innovate. It’s the will to progress that we always need to keep alive. It’s the inheritance of our founder that we need to nurture constantly with confident humility. With the same spirit we started a few months ago, the F1 Championship, but with a competitiveness level below our expectation. In some recent races such as the last one, of last weekend Inspire Franco Champ we saw some sign of improvement. Clearly, we want to keep improving and we are working day and night to make our cars more competitive.
Now, let’s talk about sports cars, and in particular about our newly born special limited series SF90XX Stradale and Spiders. Derived from SF90, they have more than 1000 horsepower, are amazingly beautiful, embed the recently patented Extra Boost Vehicle dynamic feature directly derived from Formula 1 and they use radical new aerodynamic solution including a fixed rear spoiler. The last time we saw it on a Ferrari was in the middle 90s with the F50 supercars. Apart from these unique technical features, I’d also like to underline the strong client traction and in fact both of them, both of them were already sold out to our most loyal clients prior the official unveil. The extremely positive reaction to these two launches is the most recent signal to the strong desirability of our brands.
Further indicators to that are, firstly, the enthusiastic reception to our exceptional product offering led by the Roma Spiders and Purosangue, which commenced deliveries in June as planned. Secondly, the very robust order book in all geographies, further consolidating the visibility that we continue to enjoy well into 2025. Thirdly, the overall persisting dynamism of the Ferrari pre-owned market, which translates into sound residual values. And last but not least, the impressive attendance level to the World Of Ferrari experiences where as we said during the last Capital Markets Day, we want to focus our attention more and more in the future. Indeed, in the quarter, we organized the three highly engaging activities with our community to further strengthen the bonds.
The Tribute to Le Mans in France, Universo Ferrari in South Korea and the Cavalcade in Italy. The tribute to Le Mans took place with 40 crews together with Casa Ferrari, a dedicated and exclusive hospitality which saw over 500 clients, dealers and partners enjoy the race over the long weekend. It was also the stage for the launch of the Hyperclub. What is it? It’s a three-year program limited to 100 membership already sold out that gives privileged access to the 24 hours of Le Mans, ease on track facilities and the 499P race team. This is the first time we launched such a club and this successful perception is a confirmation of the goodness of our strategy to enrich the experience we are offering to our clients. And now Universo Ferrari. Universo Ferrari is an immersive exhibition showcasing the World of Ferrari.
In June, beginning of June, we brought Maranello to Seoul. It was the first time it opened its doors in Korea, hosting more than 3000 people spanning from clients to fans. I attended it and I could experience personally the desirability of our brands in a country where we increased our deliveries three times in the last five years and where the average age of our client is well below 40 years. For the cavalcade instead approximately under 20 Ferraris came from all over the world to Rome. The event ended with a charity auction for initiatives to educate young people, one of the pillars of Ferrari’s ESG activities. All the proceeds from the auction will go to Save the Children to support educational project in a local school. It’s very important for us to thank the local communities that host our events.
We also continue tirelessly to improve the efficiency of all our processes. In Q2, we wanted to play our part in inspiring a wider change with three additional steps aiming to reach carbon neutrality by 2030 as we committed during the last Capital Markets Day. The first one is, since May, we have the first engine built from 100% recycled aluminum in our foundry, a prototype that we are currently testing. The second, we are on track with the construction of the e-building. We are completing the walls and we are ready to start to install the equipment in September to be up and running in June 24th as committed during the Capital Markets Day of June 2022. In two years, the entire building will run on renewable energy. Last but not the least, we hosted over 60 sponsors and partners at our first sustainability workshop, a chance to discuss carbon reduction projects acting as a catalyst for change.
And now reaching gears to the lifestyle, I’d like to underline that we continued to execute against our strategy with a nimble approach and we saw encouraging signs to award our vision. Le Mans was the perfect stage for a Ferrari shop in the fan zone. We have an enthusiastic response from client. And in Le Mans, we also recorded an increase in average ticket our corner boutique in Casa Ferrari as we saw in Rome with our Cavalcade clients. Lastly, our museum performed extremely well with a plus 34% year-over-year traffic presence increase in the first six months. And now, I will leave the stage to Antonio to enter into the earnings details.
Antonio PiccaPiccon: Thank you, Benedetto, and good morning or afternoon to everyone joining us today. Starting on Page 4, we present the highlights of the second quarter results, which show a robust progress of the year. In fact, as we guided last time we spoke, the second quarter of 2023 was very strong, sustained by a continuing remarkable business performance with a rich product mix and highly personalized products. There were also positive timing effects and other occurrences which contained our net operating expenses in the quarter and brought to the exceptionally high percentage margins that we report. Therefore, with shipments basically flat versus the prior year, revenues were up more than 14% and adjusted EBITDA increased roughly 32%.
Adjusted EBITDA and EBIT margins reached 40% and 29.7% respectively, leading to an adjusted net profit margin of 22.7%. On this basis, we have decided to upgrade our guidance for the year on all metrics as we’ll discuss in few minutes. On Page 5, you can see the details of the Q2 2023 shipments. As mentioned by Benedetto, in the quarter, we continued to serve a very high order book with deliveries which rebalanced the first semester and in line with our volume, geographic and product mix strategy for the year. Thus, we draw EMEA up double digit versus the prior year while deliveries in America, Mainland China, Hong Kong and Taiwan and rest of APAC ended up being lower compared to Q2 2022. Shipments in the quarter were mainly driven by the 296 GTB, the Roma and the Portofino M, while the 296 GTS and 812 Competizione were in ramp up phase.
The allocations of the Daytona SP3 continued as planned and we commenced the first deliveries of the Purosangue. As we continue to execute on our electrification journey, the hybrid wave on total deliveries has further improved reaching 43% more than double compared to last year. On Page 6, you can see the walk of our Group net revenues growing 12.8% at constant currency. The growth in cars and spare parts was driven by a richer product mix sustained by the Daytona SP3 and the 812 Competizione family, as well as continuing very strong contribution from personalizations and pricing. Personalizations, mainly sustained by carbon look and leverage offering, were widely spread among the portfolio and stood at 18% in proportion to revenues from cars and spare parts.
Sponsorship, commercial and brand reflected the better prior year Formula 1 ranking, new sponsorships and the contribution from lifestyle activities mainly led by entertainment and retail. Engines revenues declined in line with the reduction of supplies to Maserati as the agreement gets closer to its maturity. Currency has a positive impact, mainly following the U.S. dollar dynamics. Moving to Page 7, the change in adjusted EBIT is explained by the following variances. Volume flat and reflecting the quarterly allocations plan, mix and price strongly positive for €94 million driven by the richer product mix sustained by the Daytona SP3 and the 812 Competizione and the SF90 families, the increased contribution from personalizations and pricing.
Industrial and R&D expenses grew €36 million mainly due to higher depreciation and amortization and once again I want to flag it, continued cost inflation partially offset by quarterly specific lower Formula 1 expenses, neither of technology related government incentives. SG&A were negative for €15 million, mainly reflecting the company’s digital infrastructure and organizational development as well as marketing activities. Other was positive for €54 million, mainly reflecting the combined effects of higher commercial revenues from better prior year Formula 1 ranking and the lower cost due to the revised Formula 1 in season ranking assumptions, new sponsorships, higher contribution from lifestyle activities and a positive adjustment to car environmental provisions due to more favorable market conditions.
The total net impact of currency was positive for €20 million. Based on the just listed items, we reached an exceptional EBITDA margin of 40%. Excluding the mentioned timing and other positive effect, the EBITDA margin in the quarter would have been anyhow the highest of the year and slightly above our full year guidance. Turning to Page 8, our industrial free cash flow generation for the quarter was solid at €138 million, reflecting the increased profitability partially offset by a negative change in working capital provisions and other mainly linked to the increased inventory value both in relation to the yearly production planning and to the richer product mix. As flagged in the previous quarter our inventories will remain high throughout the year to preserve our agility to manage the still complex dynamics of our supply chain.
Capital expenditure for €198 million in line with our product and infrastructure development, and consistent with the full year target of approximately €850 million. Net industrial debt at the end of June was €331 million higher compared to March 2023, reflecting our capital allocation strategy. We payed €328 million in dividends in line with our increased dividend policy and €83 million of share repurchases in the quarter, €359 million in the 2022 Capital Markets Day. To conclude on Page 9, we upgraded 2023 guidance as thereby described. Business is essentially driven by the trend of personalizations that we are confident will continue stronger than originally anticipated and higher racing revenues from sponsorships and commercial, albeit to a lesser extent.
We consider all of this net of the inflationary pressure that I mentioned also for the quarter and which leads us to confirm our percentage margins for the full year. The very robust results we presented today, together with the continuous strong momentum we are enjoying truly give us further confidence in the execution of our business plan. With that said, I’ll turn the call over to Nicolette. Thank you.
Nicoletta Russo: Thank you, Antonio. Roberto, we are now ready to start the Q&A session.
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Q&A Session
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Operator: [Operator Instructions] We are now taking the first question. Please stand by. The first question is from Susy Tibaldi from UBS. Please go ahead. Your line is open.
Susy Tibaldi: Hi, good afternoon. Thanks for taking my questions. My first one would be on the impact of inflation that you have in, you have mentioned a few times. Would you be able to give us a quantitative indication on of how much this is weighing on your OpEx or profitability? And also are you planning to make any price adjustments to offset this? Secondly, in the first few months of the year, have you observed any, I mean so far any change in the way your consumers and prospective consumers behave, it sounds like there hasn’t been really any change in the demand patterns that you’re seeing. So I just wanted to confirm that and whether you expect for the rest of the year any change at all? And then lastly on your e-building which will open in mid. 24 given that the expectation of the first EV unveil is in 2025, how should we think about the ramp up of this new building? Thank you.
Benedetto Vigna: Thank you, Susy. So let’s start from the third one. The building it’s a— will be, let me say up and running with all equipment in mid next year in June, exactly 2 years after we added the Capital Market Day here. And [indiscernible] building we will develop strategic component for the electric cars. But also will guarantee us the flexibility to assemble cars that are not only electric, in fact we will start also to assemble other car that are not electric. When it comes to another important [indiscernible] to E-building, let’s consider that this will be a building that will use more state-of-the-art equipment, let’s say with all the renewable energy and we’ll have the flexibility that we need in a company such as such as Ferrari that is, always pushing for uniqueness and desirability.
Another important point for the part of your question is that we are on track because we will unveil our electric Ferrari in Q4 end of 2025 and some component as we said to you last year will be assembled over there. So the team I think did a great job because we are completely on track and the last year for some component like the cement, the concrete or whatever, it was not easy. So here, if you pass by our company you can see the mushroom are getting taller and taller any day. The second point was about the customer, the client behavior. Well, I can tell you that we do not have any change. We don’t see any change on the consumer behavior. If I go to see the– or the [indiscernible] that as I told you very high and it goes well into 2025, Well, I see that the split among the different region of the order book is very good, they are all growing.
So we don’t see any change. The only thing I can add is that there are some regions like what I mentioned before in Korea, for example, that are growing at a good a pace. But all the client in all the region are, let me say, do not show any change in their I would say in their pattern to order our cars. For the inflation and the price.
Antonio Picca Piccon: Yes, actually thanks for the question. I think what we are assuming here is to be in line with the general economy. So between 4% and 5% is an overall impact over the year. And with respect to price increase, obviously we are mindful and willing to protect our margins and that’s what we keep on doing obviously at the same time we have a strong order book. So we need to manage it very carefully and basically, preserve it while maintaining a clear and fair relationship with our clients.
Susy Tibaldi: Thanks. And just a quick follow up on the e-building, as you’re planning also to assemble some of non-electric car, shall we still think about this 15,000 units during the current plan as a CAP or does the new building give you more flexibility?
Benedetto Vigna: I understand there is a lot of curiosity on these numbers. What I can tell you is that we will always sell one car less than the market demand. And today what the building will do for us is two things. Number one, to guarantee us more flexibility so we can accommodate more, let me say, freedom in the personalization we offer to our clients, so this is the flexibility. The second is about having a process that is more sustainable, a manufacturing process that is more sustainable because we are using state-of-the-art equipment that are let’s say help us to go in the direction of the carbon neutrality by 2030. So flexibility is key for us and the use of let me say, state-of-the-art equipment.
