Ferrari N.V. (NYSE:RACE) Q1 2023 Earnings Call Transcript

Ferrari N.V. (NYSE:RACE) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good day, and thank you for standing by. Welcome to the Ferrari 2023 Q1 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Nicoletta Russo, Head of Investor Relations. Please go ahead.

Nicoletta Russo : Thank you Sandra, and welcome to everyone who’s joining us. Today we plan to cover the group’s Q1 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 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. Thank you everyone for joining us today. I would like to start by thanking all the women and men at Ferrari for their passion and dedication, which have been essential in navigating the first months of this year. Without the tireless effort of all of them from first to last, the strong result we present today wouldn’t have been possible, I have no doubt. The current technology transition is creating a continuously evolving landscape. From my experience, and having managed some technology transformation in the past, I have learned that being agile and nimble is key to success. These two qualities underpin our strategic plan and the progress we are making are perfectly on track with respect to what we presented at the Capital Market Day almost one year ago.

In particular, I would like to comment on two elements extremely important for our further growth: the building — the e-building and our differentiated product offering. Let’s start with the e-building. It grows taller and taller every day we come to office. This will be the home of our internally developed strategic electric components and it will grant us a higher degree of production flexibility for our hybrid and full electric models. And now the differentiated product offering. Today, it includes ICE and hybrids whose deliveries’ weight doubled in the quarter reaching 35%. Moreover, in line with plans, we will soon add to the family our full electric model tailored to address our current client needs. As we have done throughout this, our history, we will exploit new technologies to the utmost to enhance our sports cars’ driving thrills.

And we will read in our own distinctly uncompromising way. We want to give our clients greater freedom to choose the right type of powertrain, so we welcome the commitment at European Union level to allow the adoption of e-fuels. We believe that ICE still has an important role to play also in a carbon-neutral world. And together with our partners, we are studying and evaluating solution that will contribute decreasing CO2 emissions. As Ferrari, moreover, we have a unique advantage because in 2026, our Formula 1 cars will begin to use 100% sustainable fuel. And this means that we will continue to develop technologies on track and later move them to road. E-fuels can already power our current internal combustion engines. While the production of e-fuels will receive a boost from the recent European Union decision, I see many questions and doubts about their costs and availability.

Although, I can understand this question, I’m a firm believer in the power of technology innovation. I have learned from experience, how initial difficulties in a new technology can be overcome as you learn how to optimize the process. This will be true for both electrification and e-fuels. We will, therefore, continue to execute our product strategy detailed during the Capital Market Day with the highest determination. As we move towards our objective to reach carbon neutrality by end of this decade, we also want to play our part in setting an example and inspiring wider change in energy landscape. While, we continue tirelessly to improve the efficiency of our manufacturing processes and increase the share of solar energy use, we work also beyond the walls of our plant.

As such we recently announced the creation of a photovoltaic plant, serving the newly created renewable energy community of Fiorano and Maranello, which is the first one in Italy ever promoted and supported by a company for the benefit of its local territory. It will bring a positive environmental and social economic impact. Firstly, sharing zero-mile renewable energy reduces CO2 emission and thus we can avoid energy losses during the distribution. Secondly, the energy community will grant a tangible savings in energy bills for its members being citizen, institution, commercial activities and factories. And the renewable energy community initiative is complemented with the introduction of fossil-free hydro-treated vegetable oil on the tracks of our most relevant logistic partners in Europe, substituting the use of diesel and abating up to 80% the CO2 emissions.

Now let’s talk about our strong first quarter results that I’m sure you have already noticed on the projected chart. I’m very pleased to highlight the following three key data; revenues at €1.4 billion, up 20.5% versus the prior year; adjusted EBITDA at nearly €540 million with a 37.6% margin; industrial free cash flow generation at approximately €270 million. Our order book already extends into 2025 on the back of a continuously strong demand. We have just opened the order collection for the newly launched Ferrari Roma Spider. And today we are also pleased to announce, the long-awaited reopening for the Purosangue with deliveries due in 2026. Further testament to the strength of demand for our cash is the continued dynamism of the Ferrari pre-owned market, which translates into sound residual values.

The enthusiasm of our clients is also expressed by their attendance level at all our events. In March, the Ferrari Cavalcade attracted over 80 Ferrari vehicles and their owners on a 1,000-kilometer adventure through Morocco culminating in the unveiling of the Ferrari Roma Spider. This latest model from Maranello is a timelessly, elegant high-performance car with a contemporary take on the chic pleasure-seeking Italian lifestyle of the 1950s and 1960s. What makes it so striking is the adoption of a soft top, a solution making a welcome return to the Prancing Horse range on a front-engined car, 54 years after the launch of the 365 GTS4 in 1969 that many of us have seen several times in the Miami Vice TV series. I’m also proud to state that Ferrari has won three prestigious awards.

The first one related to Purosangue. It has been named the Red Dot Best of the Best in the product design category. The second, for Ferrari Vision Gran Turismo, voted the Red Dot, Best of the Best in the innovative product category. And the third one is, the Red Dot for the 296 GPS, Maranello’s first spider powered by a plug-in hybrid V6 engine. And what about the motorsport? The racing year, has just begun with mixed results, so far. 2023 will be the Formula 1, longest-ever season. And as we did in the first four races, we will continue to fight race by race with ambition and humility. Attention to details, focus and continuous learning will be key as the season unfolds. In October 2022, we unveiled the 499P, our Le Mans Hypercar. And this March, at the 1000 miles of Sebring, it led the Ferrari’s return after 50 years, to the top class of the FIA World Endurance Championship.

The three-podium, we won in Sebring, Portimão and SPA-Francorchamps, are confirming we are competitive. And with humility, we will continue to learn race by race. We all eagerly await our return to Le Mans in June, a milestone for endurance racing and an experience, we will share with our clients and our fans. But before leaving motorsport, I would like to remember that SPA-Francorchamps, has been a special race for us because the Ferrari team that won with our 488 GTE, was composed by two men and one woman. Lilou, joined us a few months ago and it has been the first time in FIA, World Championship that a woman, won a race. And this together with our equal salary certification, and the girls on track program underlines, our strong commitment on diversity and inclusion side.

2022 was important for the increased expression of our brand into lifestyle, which we are continuing to nurture with the fourth fashion show that took place in February, during the Milan Fashion Week. It generated a strong positive coverage, from press and key opinion leaders. I like also to underline, the incredible reception of the brand-new exhibition Game Changers, that is on display since February 18 at Museo Enzo Ferrari here in Modena, that together with the one in Maranello registered record level of visitor attendance, in the first quarter more than 100,000 people more than 1,000 people per day. Also our thematic parks are experiencing record levels of visitor attendance, sustained by the introduction in January of Mission Ferrari, the world’s most immersive mega coaster and the last addition to the Ferrari World, Abu Dhabi.

Before handing over to Antonio, to review Q1 2023 earnings in all the details, I like to conclude saying that these first months of 2023, have been another significant step on a journey during, which we will continue to execute our strategy with commitment, focus and determination. Antonio, please the stage is yours.

Antonio Picca Piccon: Thank you, Benedetto and good morning or afternoon, to everyone joining us today. Starting on Page 4, we show the highlights of the first quarter results, which represent a very strong start to the year with revenues up more than 20% versus the prior year, and adjusted EBIT, adjusted EBITDA, adjusted diluted EPS growing more than 25%. In particular, revenues came in at €1,429,000,000; adjusted EBITDA at €537 million; and adjusted EBIT at €385 million, with remarkable percentage margins at 36 — 37.6% and 26.9% respectively; adjusted net profit at €297 million, with an adjusted net profit margin of 21%; and finally strong industrial free cash flow generation of €269 million, slightly lower compared to the prior year, which was sustained by the advances collected on the Daytona SP3 and the 812 Competizione A.

Turning to page 5, you can see the details of the Q1 2023 shipments, which were up 9.7% compared to the prior year. The increase was mainly driven by the Ferrari Portofino M the 296 GTB and the 812 Competizione. In the quarter, we commenced the deliveries of the 296 GTS and the 812 Competizione A while the F8 Tributo reached the end of its life cycle. The Daytona SP3 was in a ramp-up in the quarter with lower deliveries compared to the Monza SP1 and SP2 last year. As already highlighted by Benedetto, you see that in Q1 we doubled the hybrid versus last year reaching 35% of total deliveries as we roll out the allocation of our four hybrid models. As customary the geographical allocation was deliberate and reflected the pace of introduction of new models.

As such Americas and Mainland China, Hong Kong, and Taiwan posted double-digit growth versus the prior year. On page 6, you can see the walk of our group net revenues growing 18% at constant currency. The growth in cars and spare parts was driven by higher volumes a richer product and country mix a strong contribution from personalization as well as the price increase on selected models and markets that we communicated last year. Personalization’s 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 and the contribution from lifestyle activities mainly led by museums’ visitors and retail. Engines revenues declined in line with the reduction of supplies to Maserati as the supply agreement gets closer to its maturity.

Currency had a positive impact, mainly following the US dollar dynamic. Moving to page 7. The change in adjusted EBIT bridge is explained by the following variances. First, volume positive for €28 million reflecting the shipment increase versus the prior year. Mix and price strongly positive for €85 million driven by higher personalizations whose contribution exceeded our projections. The richer product mix compared to the prior year led by the 812 Competizione and the SF90 families as well as the decreased weight of the F8 family. Positive country mix in absolute terms sustained by Americas and Mainland China, Hong Kong and Taiwan, as well as the already mentioned price increases. Industrial and energy expenses grew €47 million, mainly due to higher depreciation and amortization and raw material cost inflation which is visible.

The latter together with the larger share of shipments to China is containing our percentage gross margin which anyway remains slightly above 50%. SG&A were negative by €22 million reflecting marketing and lifestyle activities obviously centered around the Roma Spider unveiling in Marrakesh and the fashion show in Milan as well as our organizational development. Other was almost in line mainly reflecting the better prior year Formula 1 ranking and the higher contribution from lifestyle activities. The overall total net impact of currency was positive for €28 million. Turning to page 8. Our industrial free cash flow generation for the quarter was strong at €269 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 running volumes and the richer product mix.

Our inventories will remain high throughout the year also to preserve our agility in a context where the fluidity of the supply chain is not yet fully restored. Capital expenditure for €150 million in line with our product and infrastructure development and consistent with the full year guidance to end up higher compared to last year up to €850 million. In the quarter, the capitalization ratio of our development expenses was 43% increased versus the prior year as we entered the development phase on a number of future models and per effect of the budget caps imposed on the spending in Formula 1. Net industrial debt at the end of March was €53 million decreased compared to December 2022 reflecting the solid industrial free cash flow generation net of the share repurchase program.

It is also worth mentioning that during the quarter we completed the refinancing through new bank loans of the bond maturing for €390 million and this allowed us to successfully diversify sources and tenors, while keeping a stable and safe level of total liquidity. To conclude on page 9, we confirm the 2023 guidance which targets solid growth and consistent progress in profitability. Looking at the development of the year as we see it today we directionally expect a strong Q2 followed by a softer tail in H2 and particularly Q4 in line with our planned product cadence. In essence to conclude we keep on executing flawlessly according to our strategy thanks to the passion and enthusiasm of everyone here in Ferrari and with all of our partners.

With that said, I turn the call over to Nicoletta.

Nicoletta Russo: Thank you, Antonio. Sandra, we are now ready to open for Q&A.

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Q&A Session

Operator: Thank you. We will now take the first question. It comes from the line of Susy Tibaldi from UBS. Please go ahead. Your line is open.

Susy Tibaldi: Good afternoon. Thanks for taking my questions and congratulations for another strong quarter. The first question on — just to go back to something you just mentioned. If I heard correctly you said that you expect now H2 to be a bit weaker and especially Q4. I think previously you were flagging that this year was going to be a little bit more H2 weighted. So can you just explain like what has changed? Because if we look at the mix progression Q1 definitely was weaker than what we should be expecting for the rest of the year because you’re going to have a ramp-up in Daytona in the competition in the specials and some of the higher-value cars. So can you explain the moving parts there? And then my second question on the Purosangue.

Super impressive that you are already taking orders for 2026. I was wondering if you can share a bit more qualitative comments from your customers and also whether you are seeing demand from customers also for a hybrid version? Thank you.

Benedetto Vigna: Susy, I’ll take here on the second question Purosangue and the first one Antonio will come back to you. So the Purosangue, we decided to reopen the orders starting in 2026 because we see that, let’s say, there was — as we told you last time there was a collection of expression of interest from many customers. At the beginning when we launched the cars, we were not expecting such strong, let’s say, reaction from the clients. So we had to put a little bit of stop to organize ourselves so that we could reopen properly. So there is no change in our strategy to keep this Purosangue at always lower 20% of our annual volume. This is very, very important to underline. What we see is that the clients have — are positively surprised because it’s really unique car that gives you the feeling that people start to try it to give the feeling of a sport car with the roominess that usually a sport car is not able to provide because it’s smaller.

So this is the decision we took and we wanted to share with you and the rest of the world today because I think it’s very important and if you want also make us a little bit proud to make something that is highly appreciated by our client. For the first one H1 H2 relative weight, I leave it to Antonio if he can explain to you.

Antonio Picca Piccon: Thank you, Benedetto and Susy for the question. I think we probably — I was a bit unprecise back in the call of February because I said that margins would have improved during the course of the year, which is correct actually. Nothing changed compared to that. It’s simply that I forgot to mention at the time that Q2 would have been the strongest quarter as it is — as we see it today. And then of course there are refinements of allocation by country and by product depending throughout the various months. So there is nothing more than a better visibility or more precise planning of our product delivery during the course of the year.

Susy Tibaldi: Okay. Understood. Very clear. But when it comes to the mix is it fair to assume that Q1 was let’s say the weakest the softest quarter of the year in terms of mix if we just think about the phasing of the models that are coming? So, we’ve got the Daytona. You’ve got the specials and you have lower weight of F8. So in theory the mix from here should improve.

Antonio Picca Piccon: Yes, you’re right. That’s definitely what we see today.

Susy Tibaldi: Okay. Thanks.

Operator: Thank you. We will now take the next question. It comes from the line of Giulio Pescatore from BNP Paribas Exane. Please go ahead, your line is open.

Giulio Pescatore: Hi thanks for taking my question and good afternoon everybody. So, the first one just I need to follow-up on the guidance because it’s just not clear in my head. So, you had a first quarter margin especially on the EBIT level way above the guidance almost 100 bps above the guidance. And now saying the Q2 will be better I understand that there will be maybe a slowdown in Q3 in Q4 even though it’s not really clear in my head why that would be the case given the Daytona and Purosangue. So, I’m just trying to connect all the dots here. What am I missing? Why would why 26% EBIT margin is still the right target for this year? Then sorry — the second question on the cash buybacks. You’re very close to being a net cash position.

I think in the past you clearly said that you don’t want to be in a net cash position. Why not stepping off the buyback? Should we expect Q2 to be more focused on the buyback program going forward given that cash flow should also accelerate in the second part of the year? And then the last question. I remember in the past having too long waiting list could wait on your customer demand because some customers are not willing to wait three years to two years plus to receive delivery of the cars. So, is there an issue? At what point does it become an issue? And if it does will you be forced to accelerate the phasing of deliveries compared to your initial plan?

Benedetto Vigna: Giulio, Benedetto taking the question and then I leave the first to Antonio. The waiting list clearly if we do if we say we reopen the order in 2026 is because there is a strong interest. And I can tell you that there is no trend in order cancellations that we see from the customers, okay? They are — I can share you with these things yesterday was having a dinner. There was a guy that was 58 years old and he is planning for making himself a gift to when he turns 60. So, it’s perfectly in line with our plan to reopen the order. So, we don’t see client let me say canceling the orders because of the time. They are considering it already. So, this is the question about waiting list. And for the other two questions, I hand over to Antonio.