Ferrari N.V. (NYSE:RACE) Q3 2023 Earnings Call Transcript

Ferrari N.V. (NYSE:RACE) Q3 2023 Earnings Call Transcript November 2, 2023

Ferrari N.V. beats earnings expectations. Reported EPS is $1.82, expectations were $1.59.

Operator: Good day and thank you for standing by. Welcome to the Ferrari Third Quarter 2023 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicoletta Russo, Head of Investor Relations. Please go ahead.

Nicoletta Russo: Thank you, Nadia, and welcome to everyone who is joining us. Today we plan to cover the group’s Q3 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 CEO, Mr. Benedetto Vigna; and group’s 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. With that said, I’d like to turn the call over to Benedetto.

Benedetto Vigna: Gracias, Nicoletta, and thank you everyone for joining us today. Before we begin, I would like to thank all the women and men of Ferrari for their outstanding work, all our clients for their continuous trust in our brands, and all our partners, suppliers, dealer and sponsors with whom we have continued to strengthen our relations. In the current macroeconomic context, we are continuing to execute our business plan in line with the trajectory outlined in the last year during our Capital Market Day. And Q3 was once again a quarter full of achievements. Three are the key messages we want you to focus on. One, record Q3 financial result sustaining our greater confidence towards year end guidance. Two, product and infrastructure development are well on-track in particular on the electrification side with the full electric Ferrari in prototype phase and the e-building proceeding as planned.

Three, continued strong brand momentum forward towards by 2 new model launches, the 296 Challenge and 499P Modificata, an outstanding event attendance in Italy and in the United States. So let’s start with financial results and the business performance of our company. Q3 was a record quarter. We have all key metrics showing a double-digit growth versus the previous year. For the first time, the revenues were above €1.5 billion, 24% up versus the prior year. We have a shipment 9% up. All geographic regions grew in the first 9 months. EBITDA about €600 million and EBIT over €420 million were both up about 40%, driven by product mix and personalization. And last but not least, the industrial free cash flow generation was more than €300 million.

These results are further proof of the strength of our business and the increase and the visibility towards the end of the years led us to revise upward the full-year outlook. The vitality of our business is also confirmed by the current order book, which remains at the highest levels across all geographies and models, covering the entire 2025. And before you ask, I can already tell you that in the next few months we do not expect the order book to continue to grow since all models are substantially sold out, but one: the Roma Spider. Last week at the dealer annual meeting, I spend one full day with dealers from all over the world and I received a very positive comments on the market sentiment. And by this, I mean throughout, from products to client interest and to brand experiences.

And again, anticipating one of your question, I would like to underline that during the dealer annual meeting of last week, I specifically spent time with our dealers in Mainland China, which confirmed that the traction of the brand continues to be very strong. We are also making progress on the future product pipeline. All projects are on track as planned. And in particular, I’m excited about the full electric Ferrari, now a prototype in testing mode. I had the pleasure to see and try it. And unfortunately, I cannot tell you more. You have to be patient. And as you know, this is part of the desirability of our brand. I’m also very proud of how the e-building is progressing towards the inauguration expected in June next year, exactly 2 years later after our Capital Market Day.

After finishing the walls, we started already to install the equipment to produce the selected strategic component and by Q1 2024, we will finalize the assembly line of the electric engine and e-axles. Talking about our product offering, last week we unveiled 2 new standing models, both inspired by our racing DNA. In fact, the recent Finali Mondiali at our Mugello race track provided the ideal stage for the unveiling of the latest 2 addition to our portfolio. The first one is the 296 Challenge. It is an ICE car that makes full use of experience and expertise gained by the company in the field of International GT racing. The result is a car in several respects very close to the 296 GT3 which debuted in January 2023. And the second is the 499P Modificata.

It is a strictly limited-series track cars. And the most high-performance closed-wheel car ever offered for gentlemen driver use and already fully allocated. We are the only brand offering its client the possibility to drive the newest racing car only 6 months after the debut on the racetrack in Sebring inaugurating the new Sport Prototipi Clienti program, which joins the F1 Clienti program. Once again, the Finali Mondiali, the unique reunion of the Ferrari community to celebrate the final events of our client experience on-track. So the participation of almost 30,000 motorsport enthusiasts among clients, tifosi and employees. In talking about our community, I’m also proud to mention that the Ferrari Gala, which took place in New York in mid-October, this event was an opportunity to highlight our brand’s influence on sports cars, on racing, lifestyle, and beyond, celebrating also the unique bond and share the values between Ferrari in the U.S., which goes back to the earliest days of our histories in the ’50s and those strong today.

This event was an opportunity to share a series of the unique experiences with such a passionate community. During this 3-day exhibition, we got the opportunity to get 130,000 visitors at the New York City’s Hudson Yards complex, the one that you are seeing now in your chart. And an exclusive charity auction during the Ferrari Gala dinner, which raised more than $7 million. And the funds will be devoted to projects supporting education in the community because we believe that giving back is a moral obligation. This quarter, we also had the many client experiences on-road among which the Ferrari Cavalcade Classiche is the first Ferrari legacy tours dedicated to the beautiful F40, which is saw the participation of 40 owners of F40 from all over the world.

Moving to the racing world. In the World Endurance Championship, after the victory of the 24 Hours of Le Mans, the Ferrari 499P confirmed to be competitive with the podium in Italy, a fourth and fifth place in Japan, and we are looking forward to our return to action for the grand finale of the season with the 8 hours of Bahrain this coming weekend. The Formula 1, the recent volumes and improvements provide us the boost to prepare ourselves for the next season. Clearly, we need to keep improving and recover our technical gap. And thus, on one side, we are strengthening the team and the Fred. In another side, we are enlarging our racing manufacturing infrastructure, which will grant us highest development speed and quality. I saw this facility this morning.

We are also pleased with the renewal of the multi-year partnership with Puma will become our Formula 1 premium partners starting from next year. We also strengthened the licensing agreement with Puma for Ferrari-branded products and they became the suppliers of our racing teams and all other racing activities. Continuing lifestyle, on top of this partnership that I just mentioned with Puma, Ferrari showcase its latest the Spring/Summer 2024 looks during the Milan Fashion Week, a powerful collection perceived from many editors as their absolute favorite so far. We also continue to strengthen our presence with successful activation in Pebble Beach and in New York brand event by creating our own pop-up for our clients to increase collection, awareness and visibility.

And we registered a record level of visitors in our museum reaching over 650,000 visitors since the beginning of January, confirming the strength of the brand and the passion of our community. For your reference, in the whole 2022 we had about 620,000 visitors. So, we still have a couple of months to go till year end. And before leaving the stage to Antonio, one comment on our important sustainability journey. While many activities continue to run at factory level to address Scope 1 and Scope 2 emission, and we are looking carefully at energy efficiency and recycled material use, we are engaging our suppliers, our dealers to address Scope 3 emission. Indeed last week during our dealer annual meeting, for the first time we also awarded the most active dealers in reducing their CO2 emission with the Green Award.

And we will keep this Green Award also for the years to come to keep wide attention on this topic that is so important for our company. And then now, I leave the stage to Antonio to enter into the earnings details.

Antonio Piccon: Thank you, Benedetto. And good morning or afternoon to everyone joining us today. Starting on Page 4, we present the highlights of the third quarter results, a quarter which confirms the positive dynamic saw in the first part of the year and represents a further improvement compared to the expectations we had. Our strong business performance was sustained by a rich product and country mix and high personalizations, leading to a remarkable double-digit growth in revenues, profitability, and industrial free-cash flow generation. With shipments single-digit higher than last year, revenues were up roughly 24%. Adjusted EBITDA increased 37% with a 38.6% margin. Adjusted EBIT was up 42% with a 27.4% margin, supporting a strong industrial free cash flow generation of €300 million.

On Page 5, you can see the details of the Q3 shipments. In the quarter, we continued to serve the highest order book that Benedetto commented and we are all very proud of. Backed by the above shipments in the quarter, reflected our volume and product allocation strategy for the year and by geography. Thus, EMEA and Americas were up versus the prior year. Deliveries in Mainland China, Hong Kong and Taiwan decreased by a few turns and rest of APAC was substantially flat year-over-year. All regions are up in the first 9 months with Americas, benefiting from a larger share of allocations year-over-year and visibly supporting our margins. The increase in shipments was driven by the 296 and SF90 families together with 812 Competizione A and the Purosangue, which were in their ramp-up phase.

In the quarter, the F8 Spider was approaching the end of its lifecycle. And the allocations of the Daytona SP3 continued in line with planning. Lastly, in the quarter, the hybrid wave on total deliveries further improved reaching 51% and surpassing that of ICE for the first time as a result of the SF90 and the 296 families contribution. On Page 6, you can see the net revenues reached posting a strong 26% growth at constant currency. The increase in cars and spare parts was driven by higher volumes, a richer product and country mix, as well as stronger personalizations and pricing. Personalizations further increased in absolute value in the quarter and reached approximately 19% in proportion to revenues from cars and spare parts mainly driven by paint, leverage and the use of carbon.

Sponsorship, commercial and brand reflected higher sponsorships including Formula 1 and World Endurance Championship racing activities and higher commercial revenues as a result of the better prior year Formula 1 ranking. Engines revenue declined in line with the reduction of supplies to Maserati. And please note that from Q1, 2024 we’ll stop reporting such item in the bridge analysis as a result of the supply agreement coming to its natural end. Currency had a negative net impact this time mainly reflected the Chinese yuan and the Japanese yen, and secondarily the U.S. dollar dynamic. Moving to Page 7, the change in adjusted EBIT is explained by the following variances. Volume, positive and reflecting the increase in shipments. Mix and price strongly positive for €170 million thanks to the very favorable mix, both product mix sustained by the Daytona SP3, 812 Competizione A and the SF90 families, and country mix driven by Americas.

And obviously to the increased contribution from personalizations and pricing. Industrial and R&D expenses grew €63 million, mainly due to higher depreciation and amortization, and raw materials and component cost inflation. SG&A were slightly negative for €10 million, mainly reflecting the company’s additional development and digital infrastructure. Other was positive for €17 million, mainly reflecting higher commercial revenues from the better prior year Formula 1 ranking and new sponsorships. The total net impact of currency was negative for €23 million. With the positive net support of these variances, we reached remarkable EBITDA and EBITDA margins that we mentioned. Turning to Page 8, our industrial free cash flow generation for the quarter was strong at €301 million, reflecting the increased profitability partially offset by capital expenditure for €205 million, in line with our product and infrastructure development, and consistent with the full year target of approximately €850 million, an increase in net working capital, which reflect a seasonal decrease of trade payables during the past summer as a result of our decision to carry higher inventories and accelerate our capital expenditure in the previous months.

To be noted that the net contribution from advances collected on our future deliveries, including the start of French models in certain countries, was positive, but very limited in the quarter. Net industrial debt at the end of September, decreased to €233 million, reflecting the solid industrial free cash flow generation in the quarter, partially offset by €194 million of share repurchases. To conclude on Page 9. We upgrade the guidance for the full year on the back of another very positive quarter. Q3 earnings were supported by an extremely favorable product and country mix enriched with personalizations. In addition, it benefited from timing on cost mainly related to racing in a more favorable U.S. dollar dynamics compared to our previous expectations.

We expect this positive contributions to be visible also in Q4 despite the planned lower volumes allocation, higher D&A linked to product life cycles, continuing inflationary pressure, as well as a significant seasonal increase in rising expenses on one side for the development cost for the 2024 Formula 1 car, and on the other, the logistics expenses for the last overseas races or for the season. All of the above augurs well for 2024, and we are confident and ready in front of its challenges. As we anticipated during our Capital Market Day, next year we expect a normalized revenues growth after the very strong start of the business plan, which will be explained front loaded. That said, we are obviously conscious of the strength of our margins, which is there and in line with our plans.

Many thanks for your attention and let me now turn the call over to Nicoletta.

Nicoletta Russo: Thank you, Antonio. Nadia, we are now ready to start the Q&A session. Thank you.

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Q&A Session

Operator: [Operator Instructions] Now we’re going to take our first question. And the first question comes from the line of Adam Jonas from Morgan Stanley.

Adam Jonas: There was a bit cutting out there. It’s Adam Jonas. Can you hear me?

Benedetto Vigna: Very well, Adam.

Adam Jonas: So to comment, first question on your order book you said that you don’t expect the order book to grow because you’re basically sold-out. So does this mean that you’re only going to take new orders at a pace that replaces your deliveries? Or you — or you’re just not taking any new orders? I’m just curious if this is unprecedented or if you’re aware. I know you’re relatively new to Ferrari, but whether you’re aware of the situation happening before?

Benedetto Vigna: No, no look, thanks for the question, Adam. So last year — in the last years, we had a stronger increase of order book. We expect these order book not to grow at the same speed for a couple of reasons. Number one, we are allocating final tail of Purosangue. So it’s almost gone, let’s say. And we cannot take orders on the — on Roma Spiders. Clearly, we have at the special version, but the special version, let’s say, are all allocated as well as the 499P Modificata. They are all allocated, but so we remain confident about the traction of our cars. I was with — at Finale Mondiali with many clients. There were 600 clients last weekend and they were literally in love with our track cars. But clearly the speed of growth order book will not be the same as in the past.

We have many things. Let’s say we have less model to offer to the clients because they eagerly took everything we offer them. So it’s a good challenge for us to keep challenge — to keep, let me say, delighting them with unique car.

Adam Jonas: And maybe as a follow-up. Can you remind us how that works for pricing, the mechanism from the time an order is placed, let’s say, at the far end of your order book late 2025? Tell us how what is the expectation that one of Ferrari customer would have for the price paid prior to configuring versus your ability to work with them, including potentially higher prices? Not just because you can because obviously you want to treat the company — you want the customer to promise of value. But just remind us in during times when there is very-very tight order book and it goes very-very long out, how — confirm that you don’t lock in pricing and kind of historically, how that could move, if you follow the logic of my question?

Benedetto Vigna: No, I think I follow. What I want to tell you is that it’s true the order book is pretty long. I have to say that during last years, we gave a clear priority to all our dealers to engage the client. Also with on one side experiences, on the other side is with the pre-owned cars. So I have to say that and that’s what also what I said to the dealer last week in Florence. I thanked them because they did what we were committing, what we were asking them to do. And in terms of pricing flexibility, like you said, it’s always you have to find the right balance in increasing the price of what is already contracted versus also not upsetting the client. I think we have the bond. And let me say the link and understanding of the client is such that we can continue to manage in the same way we did so far. So I do not expect, honestly, big troubles over there, Adam.

Operator: And the next question comes from the line of Thomas Besson from Kepler Cheuvreux.

Thomas Besson: I have a couple of questions, please. I’d like to start first with the level of your revised 2023 target. When you compare it with 2026 targets you showed us at the Investor Day 18 months ago, so clearly you’ve done better than you are assuming for ’22. You’re going to do a lot better than you were assuming for ’23. So the question is simply, is there a plan at one stage in February or maybe in June next year when we visit your EV plant to eventually raise the ’26 targets? Or are you going to leave us with these ’26 targets for longer? That’s the first question. The second, you have fully sold everything you’re going to make until the end of 2025. Can you talk about the impact this has on your residuals on existing vehicles on the road?

And share with us the share of used vehicle sales in your cars and spare parts revenues and explain us whether this is going to increase? You plan to control a higher proportion of your used car business in the future or not?

Benedetto Vigna: So I take the first one. Thomas, thanks for the question. So we confirm the plan we shared with you one year ago. You have to wait still, let me say, a few quarters more than your visit maybe next June before we update our plan. So this is — we will not review this before ’25, okay, the year ’25. So we keep — we want to do what we committed in front of our shareholder to do in 2022. The second, I will start and then Antonio will add as he believes are appropriate. It’s true that we are sold out. As I said, this is helping a lot on the pre-owned market. And I have to say that we see the pre-owned market pretty healthy. In some sense, yes, it can help to sell spare parts. But I would say that the thing that we see is not happening as originally we planned at the beginning of the year. I mean, it’s going better than we plan. It is the personalization. The spare part, correct me Antonio, but it’s pretty in line with what we saw. No?

Antonio Piccon: Absolutely. And maybe I can complement on this. In terms of pre-owned vehicles that we sell, it’s really limited to the cars that we use for our events, for introducing the car, per se, but in terms of commercial strategy, so in terms of volume is really limited to a small number of pieces every year. In terms of interest for controlling the market, this is not for us. It’s obviously for our dealer. And we encourage our dealers, to become more and more present in the pre-owned business. That’s certainly an area of further potential development for them.

Thomas Besson: Can I maybe have just a quick follow-up? Would it make sense for you, given that you’ve already sold almost everything you’re going to make, to already start selling the BEV products you plan to show us in ’25 before showing it to customers or do you want to show it first to customers?

Benedetto Vigna: No, we will show the BEV in Q4, ’25 as planned. So everyone will see, let me say, in that quarter, apart from the people that are working here, obviously, that have to see to make it happen. So it’s Q4 ’25, Thomas.