Ferrari NV (RACE) 2017 Q1 法說會逐字稿

Good day, and welcome to the Ferrari N.V. 2017 First Quarter Results Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Nicoletta Russo, Head of Investor Relations.

Please go ahead, ma'am.

Thank you, Steffi, and thank you, everyone, for joining us today.

There is one topic that we plan to cover today the group first quarter 2017 financial results.

In light of this, the call is expected to last around 45 minutes.

All relevant materials are available in the Investors section of the Ferrari corporate website.

Today's call will be hosted by the group's Chairman and CEO, Sergio Marchionne and Alessandro Gili, group's Chief Financial Officer.

At the end of the presentation, they 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, I would like to turn the call over to Mr. Marchionne.

Thank you, Nicoletta.

I'm going to take the path of least resistance today.

I'm going to take the easy part of the presentation, Alessandro will deal with the quarter and give you our view about the remainder of 2017.

A couple of broad comments.

First one is obviously, we are satisfied with the results for the first quarter.

I think we're equally impressed by the reaction of our customers, the dealers and the marketplace to the launch of 812 Superfast, which was and continues to be, certainly the largest expression of our involvement in the V12 world.

But I can confirm for you now, the order book has completely filled out for the next 12 months and I think, we're in a good shape too, to have a good launch for the car, and which also supports our view that the guidance that we gave you at the beginning of the year is confirmed.

I think, we're going to wait until Q2 or Q3 to give you an uplift if one is required.

But I think we feel comfortable that what we've outlined in the document today is at least a minimum condition that we will be able to deliver.

Significant progress has been made in Formula 1. You have seen the first 4 races, there is a reference in the document to the fact that we have been on the podium now for all 4 races.

I think that we have made, what some people have referred to as a miraculous recovery from the 2016 season, certainly probably longer than that.

But I think, we've made a decent recovery.

We feel relatively comfortable over the fact that we will be able to -- reestablish Ferrari as a viable and competitor in -- on the Formula 1 circuit and probably one to be feared by most, including our German colleagues out at Stuttgart.

I think we feel comfortable what's happened.

I think, we look forward to the rest of the season to prove the fact that all the work that have gone here in the last 8, 9 months has in fact been of an enduring nature.

The more interesting thing for us and I'll leave this at the end, and maybe if there are any questions, we will take them at the very end.

While we've been busy on the executing our plan and delivering the margins as we promised, I think, one of the biggest objectives that we have had in reshaping Ferrari is to make sure that we provided a product range that would allow us to expand volumes beyond the current expectations.

And I think that we continue to make significant inroads both technically in terms of market research, but the exact reach of this brand and we feel comfortable that hopefully, as we complete the celebration of our 70th year of existence as a car brand, that we will be able to lay out a more comprehensive plan going forward, including some indication of volumes that we think are probably doable within the next 3 or 4 years, given the expansion to consider to be contiguous products to the current offering.

And give you a better understanding what the volume potential for Ferrari is.

All-in-all, a good quarter, good indications for the business for the rest of the year.

I think, we're getting close enough now to be able to call the thousand, the billion in EBITDA as a real target for the year.

And obviously, equally important is the fact Formula 1 is on track.

So on that note, I'll pass it on to Alessandro.

Thank you, Mr. Marchionne.

Hello, everyone, and thank you for listening in on the call.

Let me start with Page 3 of the deck.

Our Q1 2017 shipment reached 2,003 units, showing an increase of 121 units or 6.4% compared to prior year.

The increase was led by solid performance of V12 models, namely the GTC4Lusso, LaFerrari Aperta and the F12tdf as well as 488 family among V8.

Group net revenues grew 21.5% to EUR 821 million.

Adjusted EBITDA increased 36.1% to EUR 242 million, with a 29.5% margin or 30.1% without FX hedges.

Adjusted EBIT reached EUR 177 million, with a margin increase of 360 basis points to 21.6% or 22.3% without FX hedges.

Adjusted net profit for the group surged 60.1% to EUR 124 million.

Finally, at March 31, 2017, our net industrial debt was reduced to EUR 578 million from EUR 653 million at December 31, 2016.

At the beginning of the year, we unveiled the 812 Superfast exclusively to our best customers, which we dedicated private previews and subsequently at the Geneva Motor Show.

Ferrari also signed a multi-year licensing and sponsorship agreement with Ray-Ban and inaugurated the opening of Ferrari Land in PortAventura occurred at the beginning of April.

Finally, Scuderia Ferrari achieved 5 podiums with Sebastian Vettel winning 2 races so far.

The group is confirming its 2017 outlook assuming effects consistent with current market conditions, shipments at around 8,400 units, including supercars.

Net revenues higher than EUR 3.3 billion.

Adjusted EBITDA higher than EUR 950 million and net industrial debt approximately EUR 500 million, including a cash distribution to the holders of common shares and excluding potential share repurchases.

Moving to page 4, we show our operating highlights for the quarter of 2017.

Our shipments reached 2,003 units, up 121 units or 6.4% versus prior year.

The results were driven by a 50.1% increase in V12 cylinder models, thanks to the GTC4Lusso, LaFerrari Aperta and the F12tdf, partially offset by a 3.3% decrease in V8 cylinder models.

The F12berlinetta, at its 6th year of Commercialization is phasing-out and the California T at its 4th year of Commercialization.

Group net revenues for Q1 2017 were up 21.5%, 20.4% at constant currencies to EUR 821 million with sound performance of cars and spare parts as well as engines.

In detail, cars and spare parts growth was driven by higher volumes, strong mix, personalization, pricing increases and FX.

Our adjusted EBITDA improved by 36.1%, reaching EUR 242 million and a 29.5% margin.

The result was primarily driven by higher volume, better mix thanks to V12, positive FX and Engines to Maserati.

This was partially offset by F1 activities.

Adjusted EBIT for the group showed a 46.1% increase, dropping EUR 177 million, and, resulting in a margin expansion of 360 basis points to 21.6%.

The adjusted EBIT improvement benefited from a strong adjusted EBITDA, coupled with higher D&A, mainly due to the GTC4Lusso family and LaFerrari Aperta.

Industrial free cash flow for the 3 months ended March 31, 2017 was EUR 76 million, driven by a strong adjusted EBITDA of EUR 242 million, partially offset by CapEx of EUR 72 million and EUR 53 million of net change in working capital, primarily due to inventory increase driven by projected volume growth in line with our 2017 outlook and lower CapEx payables compared to Q4 2016.

Other included approximately EUR 17 million due to 2016 employees extra-bonus payments and lack of contribution from advances of LaFerrari Aperta.

Let me kindly remind you that 2017 tax advance payments will impact further quarters.

Net industrial debt as of March 31, was reduced to EUR 578 million from EUR 653 million at December 31, 2016, primarily due to the industrial free cash flow generation.

Again, let me remind you that the announced cash distribution of EUR 120 million and the 2017 tax advance payments will impact future quarters.

Moving to shipments on Page 5. In terms of geographical distribution, all regions positively contributed, thanks to the 488 family, the F12tdf, the GTC4Lusso and LaFerrari Aperta.

EMEA expanded by 8.8%, with Germany, France, Italy and United Kingdom growing at double-digit base.

America showed a 4.2% increase, Rest of Asia Pacific grew 4.4% and combined deliveries in China, Hong Kong and Taiwan were up 3.2%.

Moving to Page 6. First quarter net revenues reached EUR 821 million, up 21.5% versus prior year.

At constant currency net revenues would have increased by 20.4%.

Car and spare parts revenues were up 20.8% or EUR 100 million, due to higher volumes and positive mix led by the 488 family, the GTC4Lusso, the F12tdf and LaFerrari Aperta, along with a strong contribution from our personalization programs and pricing increases as well as FX.

This was partially offset by the end of the LaFerrari lifecycle in 2016 as well as the non-registered racing car FXX K and the strictly limited addition F60 America, completing their limited series run in 2016.

Engines net revenue surged to EUR 104 million, up EUR 47 million or 81.3% versus prior year.

The significant growth was mainly attributable to strong sales to Maserati more than offsetting the termination of the rental agreement with a Formula 1 racing team.

Sponsorship, commercial and brand net revenues reached EUR 123 million, with an increase of EUR 5 million or 3.8% compared to the previous year.

This was mainly due to higher sponsorship revenues, partially offset by lower 2016 commercial revenues for championship ranking compared to 2015.

Other revenues decreased by EUR 6 million to EUR 30 million, mostly due to the deconsolidation of the European Financial Services business since November 2016.

Moving to page 7, you can see the year-over-year changes in the main items of the adjusted EBIT.

Volume was up EUR 17 million, due to an increase of approximately 125 units, excluding LaFerrari and LaFerrari Aperta, thanks to the 488 family, the GTC4Lusso and F12tdf together with positive contribution from our personalization programs, partially offset by the F12berlinetta phasing-out and the California T at its fourth year of commercialization.

Mix was positively impacted by LaFerrari Aperta strong V12 performance as well as pricing increases.

This was partially offset by LaFerrari that completed its lifecycle in 2016, as well as the strictly limited edition F60 America and the non-registered racing car FXX K, completing their limited series run in 2016.

Industrial costs and R&D costs increased due to higher D&A and R&D expenses to support product range and components innovation, mainly for hybrid technology as well as F1 developments.

SG&A costs were higher than prior year, mostly due to the recently approved long-term incentive plan, higher costs related to the new directly operated stores and costs related to the 70th anniversary, partially offset by the deconsolidation of the European Financial Services business since November 2016.

Foreign exchange, excluding hedges, impacted positively, mostly due to U.S. dollar and Japanese yen, partially offset by Great Britain pound.

Other was up by EUR 3 million with a positive contribution from Engines to Maserati as well as other supporting activities, partially offset by lower 2016 championship ranking compared to 2015, the termination of the rental agreement with a Formula One racing team and the deconsolidation of the European Financial Services business since November 2016.

As a result of all the above, Q1 2017 adjusted EBIT was up 46.1% to EUR 177 million, adjusted EBIT margin expanded by 360 basis points, reaching 21.6% or 22.3% without FX hedges and adjusted EBITDA reached 29.5%, margin or 31.1% without FX hedges.

Moving to Page 8. Net Industrial debt as of March 31, 2017, was reduced to EUR 578 million from EUR 653 million at December 31, 2016, primarily due to industrial free cash flow generation.

Industrial free cash flow for the 3 months ended March 31, 2017 was driven by strong adjusted EBITDA of EUR 242 million, partially offset by CapEx of EUR 72 million and EUR 53 million of net changing working capital, due to the inventory increase driven by the projected volume growth in line with our 2017 outlook and lower CapEx payables compared to Q4 2016.

Other included approximately EUR 17 million, due to the 2016 employees' extra-bonus payments and lack of contribution from advances of LaFerrari Aperta.

As a reminder, the announced cash distribution on 2017 tax advance payments will impact future quarters.

On February 16 -- next page, 2017, Ferrari released the first images of the 812 Superfast, the latest twelve cylinder berlinetta model that represents the most powerful and highest performance racing model Ferrari road car of all time.

Unveiled on March 7, 2017 at the Geneva Motor Show, the 812 Superfast is aimed at clients demanding an uncompromising sports cars that will deliver exhilarating driving both on road and track yet it'd also be comfortable enough to allow its owners to enjoy it as an all-around experience.

Scuderia Ferrari has worked diligently to be prepared for the 2017 season and the initial results are encouraging.

Five podiums in the first 4 races, with Sebastian Vettel winning 2 races so far.

On the following slides, we show our brand activities as well as all the events Ferrari has organized to engage with its customers.

And on the last page, on Page 13, we confirm our 2017 outlook, shipments at approximately 8,400 units including supercars, net revenue is greater than EUR 3.3 billion, adjusted EBITDA above EUR 950 million and net industrial debt at approximately EUR 500 million.

With that, I would like to turn the call back over to Mr. Marchionne for any final remarks.

Thank you.

We are now ready to open the Q&A session.

Back to you, Steffi.

(Operator Instructions) We will take now our first question from John Murphy from Bank of America Merrill Lynch.

Good afternoon guys, just -- a first question on sort of your comment on your updating us on your volume outlook, that would be upcoming sort of maybe later this year or next year.

I mean, is there a view now that the 10,000 units sort of small vehicle manufacturer asymptotic limit, is not something that is real and that you could potentially be something significantly above 10,000 units in 2 to 3 years' time?

Two comments.

I don't know what significantly means and I don't know, what 2 to 3 years means.

But I think that -- and I'd -- we'd much prefer to come back at the end of the year, when we give you our prognostication for 2018.

But I think, broadly speaking, we're of the view that the brand is capable of expressing itself beyond the 10,000 mark.

How that takes form, is something, which is now being analyzed in detail.

I've always had the view that we have to protect the core sports car segment of this business, which is made up of so the both the 8 and 12 cylinder family the ones -- certainly the 812 Superfast that was launched and the 488, and its successors.

And so these cars are unique and I think that we need to make sure that we do not end up just blowing up production on those segments to try and maintain exclusivity, but I think, there is a portion of the market, which extends beyond that core and which has been historically the territorial Ferrari, which I think, we have neglected over time.

But I think, if we play that card, right, I think it is the most -- it's sort of the most intelligent and the most efficient way for us to improve performance out of Ferrari.

Without impacting on its core facility claims.

And that's something that I think needs to be fleshed out over time.

We're looking at real alternatives some of which obviously, involve a very clear understanding of technology limitations associated with the platforms and the coverage that we have.

I think there is now a view inside the house that electrification is a core skill that needs to be mastered and it needs to be part of the offering of the combustion engine world.

And I think, the combination of those 2 will make sure the 10,000 -- the 10,000 limit is no longer relevant in terms of emissions and compliance.

So I think, there is a lot to be done here in the next 6, 7 months.

I think when we get to the end of this year, when we report earnings in January 2018, we will give you certainly a more complete view.

But the answer -- the long answer to your short question is, yes, it's going to go beyond 10,000.

Incredibly helpful.

And just a second question.

If we think about the near term, the Aperta is helping mix.

How much longer will that help mix and when does the 812 Superfast start shipping and kicking into volume and mix and I think there's a concern out there that, as we hit 2018, we're going to have had the Aperta, the Superfast and the 70th anniversary cars out there and there might be a little bit of a weakness on a year-over-year basis from mix.

Is there other products or additions that you think will launch in 2018, it will potentially offset this extreme fear that's in the market?

Yes, I mean, the answer is yes.

I think, we'll transition okay to '18.

It's not really a concern, most of the 70th anniversary will not be delivered during 2017 anyway.

I don't think, we have to look at the delivery schedules.

But I'm not worried about making the '18 number as of today.

So we'll see.

But I'm sorry, what was the first part of your question?

No it was just the timing of the Aperta and how many more are left to ship?

And how many were realized in the quarter?

I mean is this something that's going to be another quarter or 2?

How many are left behind to ship?

Roughly.

Roughly 100.

There is roughly 100 left to be shipped and probably it will take the rest of '17 to produce them.

Okay, That's helpful.

And then, just lastly on...

The other question you asked was about the 812.

You won't say any numbers -- any realistic numbers until Q3 and Q4 into the numbers.

So that's going to help in '18 as well?

Obviously.

And that's why I made the comment at the beginning about the fact that the pipeline is full for the 812 Superfast though.

And there is another car launch that's coming in Frankfurt.

So we've launch 2 vehicles a year.

So we've launched one now, which is the Superfast.

There's one more coming in Frankfurt.

Okay.

And then just lastly, on the F1 economics, short term, what does that mean for results here in 2017 and as you go on to 2018, is there greater profit sharing that comes from doing much better and potentially winning the Constructor's Cup?

Yes, there is -- and I don't want to jinx that call.

Let's just say, it's built into the forecast for the year.

We have not built in any sort of extraordinary income as a result of any positive outcomes from the F1 season.

But remember, I said this probably a couple of times in the calls.

There is a negative side to winning.

We pay bonuses to people because of the fact that they are motivated and enticed, and financially, motivated to win.

So I'm not sure that net-net configured it's a great thing.

Obviously, I think it has a huge repercussion on the quality of the brand in the marketplace and that's something, I think, ultimately will pay off.

So I don't mind going slightly negative in F1.

I think we'll pick it up on the commercial side.

We will now move on to our next question from Thomas Besson from Kepler Cheuvreux.

I have 2 questions for you.

Firstly, I would like to come back to the mix benefit in the quarter, which was very strong.

Can you give us an idea of the V12 mix in the quarter?

Also you said V12 volume is doubled and give us an idea whether that V12 mix will be sustained, during 2017 or whether it could decline.

And second question is ...

I'll give you a general answer to the 12 question.

We just launched the 812 Superfast so by definition it's going to bias the numbers up historically.

We should be all right.

I don't know what the exact numbers it will be.

A mirror of Q1, but certainly the influence of the 12s will be felt in the rest of '17.

Great.

Should we assume that it can continue at the much higher level in '18 and '19.

Because I think the message so far had been that the V12 mix had declined from the the past and would stay lower.

It has jumped meaningfully in Q1 '17.

Is it a level that you will be up as well in '18, '19?

You found a way to build up, it's a new higher proportion for V12?

Yes, I mean, you asked a difficult question.

Because one of the things that's sitting with the development of our portfolio going forward beyond '18 and '19 is the combination of internal combustion engines and electrification as a power unit solution to most of our vehicles.

One of the benefits associated with that combination is obviously we're going to able to express power in these vehicles without going to large displacement engines and I think the -- I'm hesitating to answer your question because as much as I think that there is a big portion of our customer base, which has an inherent appreciation for naturally aspirated 12s.

The combination of technology, which requires less cylinders -- less displacement is eventually going to push the product portfolio to a different skew without necessary impacting on price and positioning, because the combination of electrification and combustion is going to be by definition, more expensive than a naturally aspirated 12 world.

And so I'm not convinced that the margin associated with that combination of power unit is going to be any less than the V12s.

So we need to be careful as we sort of peel the onion back on this thing.

I don't -- I don't envision a world where even at larger volumes we would actually be decreasing the EBITDA or EBIT margin generation in the business.

Whatever it is that we do going forward.

Regardless of the preponderance or portion of the portfolio, which is V12-based, I don't see it impacting negatively on margins.

The technology -- the technology itself will move the portfolio in a different direction.

Last quick question, if I may.

You had big benefits for second quarter in a row.

Should we assume that FX benefits will be like your hedging, like 12 months into the 24 months?

Or should we extend the potential FX benefits beyond 2018?

Actually, we are expecting -- as we said in the past, just the first half of the year to be benefiting from hedges and then the second half, we should be going down.

Yes, I'm not sure that it's called a benefit if your results are higher.

But anyway, the problem with hedging, as you well know is it takes us 2 days to explain this to the market.

If you look at the press release and the analyst deck, we've made reference to ForEx now maybe 20 times, to try and explain real versus reported earnings and the reality is that most of hedges are short-legs.

I mean, they got 12 months' cover, maybe 18.

They only cover the immediate future and they don't cover the long-term positioning of the brand.

For a brand like ours to try and deal with this on an ad-hoc basis for 12 to 18 months, is somewhat awkward.

I understand the fact that we need to cover sold cars and that's a different story.

But I wouldn't get -- I wouldn't really get attached to this hedging story too much because the long-term problem.

If you were to see a weakening of the dollar, I think it's got -- it's going to mandate an adjustment on the pricing position of Ferrari into that market.

There is nothing we can do about it.

We've seen this in U.K. where the weakening of sterling where we've had to adjust and I think that will continue, I think we need to reflect reality in these pricing.

And I think, we will adjust as ForEx markets move.

So don't get focused on hedging.

It's a 12-month cover at best.

We will now take our next question from Ryan Brinkman from JPMorgan.

Great.

Where do you stand relative to the Italian patent box process?

Have you been able to assess at all yet, how your effective tax rate might or might not benefit from the regulation?

So for the moment, the tax rate is not reflecting any patent box benefit.

We're still waiting for a response from the tax authorities to start the process.

The benefit you see in Q1 compared to Q1 last year, was mainly, driven by the fact that we are actually using some levers that are provided by the tax regulations, both from the credit in R&D and also on fixed asset hyper amortization and super amortization, which are both provided for this year.

So those are related to CapEx expenditures that we have for this year.

That's helpful.

And then just on the R&D -- there was the increase during the quarter, the footnote says that's attributable in part to the hybrid technology investment.

Is that investment kind of incremental to what you guys were thinking at the time of the IPO?

And do you still expect a lower R&D to be a driver of higher EBIT -- EBITDA going forward, I know you've exceeded all your projections -- the other sources of product improvement.

Just curious about the trajectory of R&D over the next couple of years?

Well, to be honest, I think, the numbers that we gave you at a time, which we pitched the IPO were not all inclusive of the kind of technology stuff that we now have on the table.

So when we give you the updated view of -- sort of the longer-term projection, I think, you're going to see there may be a ramp-up in R&D, but I think it's totally contingent and offset by increased EBITDA and EBIT generation.

I -- this is going to turn out to be a different business than we thought.

And Alessandro just reminded me that Hermes just reported earnings and that they shot their margins both EBIT and EBITDA margins beyond their normal sort of range.

So I think we just found an additional level of motivation now try to move the organization forward.

I think that really is the target as to whether we can beat them at their level.

So I -- let's just wait for the end of 2017, and when we give you the -- a revised volume and margin performance expectations going forward.

I think you might be pleasantly surprised.

I would not worry about the R&D side of this as being either exorbitant or really phenomenally excessive to what we've got as a baseline.

It will be higher.

I guarantee it.

And the margin's been higher too.

Just last question, on the very strong increase in your stock price since your repurchase authorization was approved.

Does that change at all how you decide to allocate capital between maybe dividend relative to repurchase?

No, I think that -- no I think that -- I have these discussions in other environments in which I play some type of role.

And I think, the issue of a dividend distribution and share repurchase, are things, that are not mutually exclusive.

And I think the one of the things that we got in front of us is, the delineation of a proper policy that incorporates both elements as part of our capital structure.

So I -- we're obviously satisfied with the capital market performance of our shares.

I think, they are reflective and finally, they are beginning to reflect the true potential for the business going forward.

And I think the noncyclical nature of what we do, which is really at the heart of the development of Ferrari.

We're not in a position today, I think, to give you a view as to whether we're going to come up with a permanent share buyback program that allocates so much capital a year to that process.

Having said this, I think we now have authorization and we now have the resources to try and execute any time we like.

And so, we are ready to intervene in the event that the market were to show any type of unexplainable dislocation in share price.

We now take a question from Monica Bosio from Banca IMI.

The first question is, if you can please highlight the pricing effect in the first quarter and the weight of the personalization in the first quarter?

The second question is related to the total CapEx.

On the back of the hybridization trend, can you give us a guidance on the CapEx?

And can we expect that if it will reach the top this year and then it will decrease?

And the very last question is, on the potential entry into new customer segment.

I'm sorry, about that, I have no fantasy.

Can you give us some examples of -- some clues about potential customer segment and in term of country, what do you believe is the country less explored by Ferrari?

Let me try and give you the answers backwards and then I'll leave the first question that you've asked over to Alessandro.

I think probably -- I think it would be fair to say Asia Pacific is probably the area that we've least developed in terms of coverage although, I think, we made significant inroads in the last 10 years.

There's still additional volume that I think we need to go and explore intelligently, it's a reflection of, I think, of our historical presence, in the NAFTA, European regions, which obviously goes back for a large portion of our history.

But I think Asia Pacific is an area that needs to be developed much more that we have done now.

In terms of the R&D spend, I don't think, we're in a position to give you guidance beyond 2017.

I'd much prefer to postpone the discussion of our views on this topic, when we give you the update on the plan in 2018.

And in terms of what other products do we see, as being, sort of complementary to what we're currently selling, I think, we, again, I postpone the discussion of the 2018, I do remind you, on one simple fact, the core of this business today has been built on fundamentally pushing a number of -- a limited number of vehicles that specialize in delivering high performance at the highest level of performance possible on a continuous improvement trend, which has been at the heart of Ferrari now for the last 10 years.

This needs to continue, but it also needs to continue in a way which maintains exclusivity to the highest possible extent.

There are products, which do not necessarily rely on that kind of technical progress in which -- involve a number of things, which have been historically part of Ferrari, which have to with style, and esthetics and a combination of leading-edge technology but not on an extreme basis.

This is probably the single largest area that we intend to develop, we have seen other people in this marketplace, play and be relatively successful in getting share.

It's probably an area that we consider to be -- that it belongs very clearly to Ferrari, in a very clear way.

So the efforts that are going on now, on the development side are really to try and refine, both the nature of those interventions at a time of their disclosure to the market.

This is (inaudible) -- and it's at the heart of the business plan that we need to recompile between now and the end of '17 and present to the markets.

But the consequence of this based on what I know today is that we're going to have to exceed the 10,000 vehicle a year mark, but I think, it's going to -- it's going to do that in a very paced way and a very intentional way to ensure that we do not diminish the exclusivity of the brand, that we don't impact on it's -- on what has been at the heart of the success of Ferrari for the last certainly 10, 15 years.

And I will leave the last question to Alessandro.

Okay.

got it.

Personalization I think was one of your questions.

Is in line with Q4 so around 17% contributing to cars and parts revenues.

And pricing is not that big of a number.

Is 1% more or less in total cars and parts revenues.

And we will now take a question from George Galliers from Evercore.

The mix performance was very strong in the quarter.

Is it correct to assume that the majority of that was from the GTC4Lusso and the F12tdf and LaFerrari Aperta methods of gains deliveries last year?

If you're asking in terms of mix overall, I think we provided the percentage in terms of growth, of 50% is the contribution of V12 GTC4Lusso, the tdf, the F12berlinetta don't forget that one even if it is offsetting somehow, the number is still providing the unit to the quarter itself and LaFerrari Aperta as we said, is also providing a relevant growth.

So those are all the contribution in terms of cars that are impacting Q1.

Okay.

And then, second question, I had was, I don't know if these prices are correct, but the Geneva Auto showed the price given for the Superfast for the Italian market looks to be a 6% to 7% increase on where the F12berlinetta was.

Given the improvement in performance and the fact that you obviously, have huge demand for this vehicle, do you think that you could have actually, with hindsight, pushed for a much larger price increase?

It's possible and -- but we have this conversation every quarter, when we try and present numbers.

Do I think, that we hit the number do we hit the pricing, right all the time?

The answer is, not and I think, sometimes, we underprice.

I think, the biggest mistake that we can make is to overprice.

Because I think that would certainly damage -- provide permanent damage to our marketing activities in terms of the positioning of Ferrari.

I think, we're going to have to learn as we go forward, you made reference to -- and I don't comment as to what you think the pricing is improved by 6% to 7% yes, it has moved up from where we were.

And I think we'll have to wait, as we work our way through model year is to try and find the right positioning for the 812 Superfast, and for all the other models that are coming in after this.

It is a trial and we do this by trial and effort.

I mean, I don't have -- I don't have a magic wand.

I mean we are in a unique space, in terms of pricing these vehicles, we are -- these are unique offerings and I think, we need to learn how to use this better.

The closer we get to the customers, the closer we get our dealers, the better we are going to get of an understanding of their pricing mechanism.

And I -- to be perfectly honest, that's an area that needs more work than we have done, so far.

But I feel comfortable that we have not retract -- we haven't taken any prices back since I've been involved in this business 2014.

I think they've all moved up.

Some of them have been -- have been triggered by content increases in these vehicles, I need to tell you that 812 Superfast is -- actual cost of the F12 would be a lie, it is more expensive.

It does have higher level of technology.

But I think, overall, our margin position on the 812 Superfast has improved compared to the F12.

So just bear with us as we try and find our spot.

We're not there yet.

Great.

Thanks.

And congratulations on the Formula 1, certainly brings smile to my face to see a red car in the lead every Sunday.

I think that you are not the only guy smiling.

Everybody inside Maranello here, has got a grin from ear-to-ear.

I think, it's -- about 10 years overdue, we need to keep our head down.

I would not underestimate and I have never underestimated our competitors and especially Mercedes.

They are formidable competitors and I think we need to respect them for what they've done and we intend to offer them a good fight, but nothing is taken for granted here.

We now move on to our next question from Martino de Ambroggi from Equita.

Still on pricing.

You mentioned in Q1, plus 1%.

If I remember correctly, you -- in one of your previous calls, you mentioned 2%, 3% or even higher price increase was a reasonable trend going forward.

I understand this -- in Q1, the Superfast didn't contribute yet, but is it still the 2%, 3% or more percent growth a reasonable trend going forward?

Yes, it is.

And as I mentioned in the last call we had, that was contingent on model rollover.

That we would not intervene arbitrarily or the market would just jack up prices.

And we need to respect commitments that our dealers have made to our customers.

And when you've got an order book that's 12 months' long, a price increase cannot have an immediate effect because of the fact that we need to honor arrangements.

So give it time.

As these cars roll off, they come in with a different pricing scheme and they end up binding the leaderships and the customer in a particular contractual complex.

Those, that needs to happen.

So as moving price here doesn't mean that we have an immediate reaction.

It may take as long as 12 months to see it in the marketplace.

Okay.

And the second question is on the EBITDA margin target.

In your last call, you mentioned the 33%, 37% range, which is usual for luxury company as something reasonable in the medium and long term.

But what's the minimum level of volumes...

You define medium to the long term and the answer is, yes.

I think, I haven't -- I'm looking at -- what is the Hermes, reported now?

36.5.

36.5.

So take that as a target.

Medium to long term, it's a good number.

Okay.

Yes.

My question is what's the minimum level of volume.

I clearly understand there are many different drivers.

But what is the minimum level of volume needed in order to at least approach such a level?

Wait until we recast a plan at the beginning of '18.

I've now just decided that we're going to do it when we do the call for 2017.

Maybe we'll ask you to come and buy a car here at Maranello and then we'll give you the results for the year and tell you what 2018 and later look like.

I think it's important.

We need to do this diligently, I don't want to give you nonsensical numbers.

But the number that's been set by Hermes benchmark now is doable.

So let us work on this.

We now move on to our next question from Michael Binetti from UBS.

Can I just ask you, as we come up on the EUR 1 billion EBITDA target, 2 years ahead of the IPO plan that you laid out, we're flying a little more blind here in the models, I guess, in a good way.

But can you just help us think about 2018, the general theme of how the business will look, maybe -- I know it sounds like you've got electrification and hybridization on the

radar for maybe 2019.

So I think next year sounds like more of a transitional year, a bridge year.

And obviously somebody asked earlier about the -- what the margins look like.

Maybe you could help us think about in terms of the slide you put on -- Slide 7, that you give us every quarter.

What are some of the broader brush strokes we should think about as you lap a big super car this year as far as how you are going to grow profits next year?

Just broad strokes because I think it's inappropriate to this conversation in May of 2017 for '18.

So I'm going to use some very broad strokes.

I think you're going to see higher volumes than you see now.

You're going to have margin at or slightly above what you see in 2017, and you're going to see bottom line numbers that are in excess of what we produce in a lower debt number.

Directionally, it's going to be a better year than 2017.

I agree and by the way, I am confirming what you said about 2019 as being the first year, in which we're going to be able to show an incarnation of our hybrid strategy and it will be significantly meaningful to try and set the tone for the rest of the product development going forward.

So you're not going to be flying blind much longer.

Okay.

I know we always have to fly the line a little bit due to the nature of your business, and surprising your customers.

But if you, I guess, to your comments on margins will be flat or slightly above, without giving away too much, you've had a good job on cost control and pushing the margins units higher, I think, but what do you think are the primary drivers of margins considering your point that it's a higher volume year and you're lapping quite a bit of margin from special editions this year?

Well, I think we do need to learn how to run this business better.

From an industrial standpoint, I think we've done some work in terms of creating a higher level of productivity and sort of environment in the house, we -- there are 2 areas, which remain in our view, still on scope, the first one is pricing, which, as you well know, has been one of my pet projects now since I have been here for the last couple of years.

I don't -- I think we need to continue to explore the edges on the envelope on that one.

And the other one is cost control on F1.

I think, this is an issue, which I think, my colleagues in Formula 1 understand.

I think we have even now with the new ownership of F1 and liberty media being involved and their desire to expand the reach of the sport, they understand the cost control of these expenditures is an integral part of the effort.

Otherwise, we're going to just work ourselves out of the business.

How we do this in a way that protects Ferrari's interest, as a maker of luxury cars is an interesting and ongoing discussion.

We've opened a dialog now with Chase Carrey over at Liberty and the people who are involved in running F1.

But that -- those 2 elements for at least for '18 appear to be the most significant elements of profit generation, given this -- given the fact that '18 is around the corner and we're talking about 6, 7 months away from now.

The bigger bet to me is what happen in '19 and later, right?

And as we start delineating the volume expectations going forward and the type of product that we need to start launching in the marketplace, there are some things that we can do relatively quickly I would expect.

And it's my sincere hope that we will be able to show our -- by 2019 that we will be able to show the first live example of this expansion of the product range into the contiguous space.

This is important -- because I think it will set the tone for the rest of the activities that we're carrying on.

I mean, it will -- certainly we'll set the cadence for product development from '19 going forward for the next 3 or 4 years.

So if this is an interesting -- it's an interesting development because it's taken us since we've taken this company public now, which I forgot, was it about 18 months ago, thereabouts?

October '15?

It's taken us this length of time to really clean up our ideas about how to make this a more interesting business in terms of margin and profit generation, I think, we're relatively clear now that we need to prioritize car as being the most accessible area of profit generation as much as we continue to work on the fact that there are luxury brand extensions, that are possible outside of car for Ferrari, we understand the extension into a larger number of vehicles is the quickest, and probably the most certain way of us improving performance.

That is something that was unclear to us when we took the company public, because the fact that we were concerned about the exclusivity restrictions and the fact that the flooding of the market with Ferrari cars in excess of current volumes would damage the brand.

I think, we are comfortable now having carried out all the work extensions are possible without sort of damaging the core, the core of the business itself and that's really the objective here.

So let us work on this -- I think, you'll be pleasantly surprised as we work our way through this.

Both as an investor and a potential acquirer of cars, I think you'd be pleased.

Our next question will come now from Stephen Reitman from Societe Generale.

I have 2 questions.

The first going back to the -- on the slide on the -- the slide on the debt -- industrial debt bridge.

And the comment about inventory had been increased, had increased for -- for future deliveries.

Was there a significant difference between the level of vehicles produced and the shipments in 2003 that you reported in the quarter?

And my second question is also regarding looking at the sales mix, obviously in the first quarter, it was very much the growth was driven by EMEA and obviously, America was down in terms of share.

How do you see then actually developing over the next few years?

You mentioned that Asia Pacific is the great area to go to, but when do you think it will be actually seeing some progress in terms of lessening the importance the reliance on the European market?

So for your first question, certainly we produced more than we shipped, I think the delta in terms of the additional inventory was around 300 units, which is supporting our next quarters, as we said.

For your second question, I think the year is 2019.

The work in terms of expanding reach in APAC, as you all know, these are things that take time.

I'll give you an example.

If you look at our China performance is, I think, our China performance is capable of delivering a lot more than we're delivering now.

I think, the product range that we have for China may not be the most appropriate for their jurisdiction.

I think we -- the extension into the wider range of offerings I think it would be quite helpful.

And so as we try and develop the product -- the product offering, I think, you'll see better penetration of these regions that we've had so far.

When you look at a number of cars sold in China, you look at our presence in China, I mean, the numbers are -- it's a complete mismatch.

I mean, Maserati has got a, much, much better traction in China than Ferrari.

That should not be.

So we need to fix it.

And just briefly on that question about the inventory.

You said 300 units.

Thank you very much for the clarity on that.

These are vehicles that are still held by Ferrari, so they haven't actually been -- so I said not shipped, not billed.

But you have had some benefit obviously in terms of fixed cost coverage...

By the way if that's your concern, I would mark it off to a rounding error.

This machine yet doesn't run a fixed-cost absorption.

Trust me.

And we now move on to our next question from Lello Della Ragione from Intermonte.

Actually 2 left, one is related to on the free cash flow side.

In the comments that you made even in the slide, you mentioned several time tax advance payment for 2017.

I was wondering if that is just a usual way of tax advance payments or is there something else -- I mean, last year, it was 1 time tax advance payments but this year should be more of a business as usual and is it correct?

And even on that slide related to CapEx, you said that there is a -- if I look at it in percentage of sales, which is the easiest way to compare how much money you spend there, actually it is below last year level.

And I was wondering, if this implies that overall, CapEx including PP&E, and capitalized R&D for the year would be somehow at the level of last year?

And last question related on the production side, more a long-term question.

You said, in the past that you have capability for 14,000 units in the long term, meaning adding one shift, just one shift and I was wondering, just on that side, without additional CapEx, how long time will it take to implement one additional shift in terms of months' time?

By the way, I'm not going to comment on whether you accurately depicted what I said about capacity in the system.

What I do know I've told you and I will confirm it now is that the existing infrastructure is capable of producing cars up to the level that you mentioned.

For a variety of reasons, both in terms of engine capacity and assembly, to give an additional shift on site in terms of assembly itself will probably take us 6 to 9 months.

So good going to your first 2 questions.

I think, tax advance payment will impact obviously twice this year.

So we have -- the first one either in June or July depending on what we choose -- when we choose to pay and then the second one, November or December.

And obviously, we are following that the rule on the return and regulation of 40%, impacting the first one.

60% is the second one.

And on CapEx, I think, we mentioned it during the call, we said EUR 350 million, EUR 360 million or higher depending on the timing of R&D and capital expenditures over the year.

Will be still low Q1.

Okay.

Just for clarification, so it's business as usual for the tax advance payment as the companies in Italy?

There's nothing strange, it's just -- did you mention that will have a catch up?

Okay.

We move on to our next question from Philippe Houchois from Jefferies.

The question I had, the first one is more short term, but would you say about the downside of success in Formula One is that you pay higher bonuses, et cetera.

We know kind of from the rules of F1 that whether you come first or fourth, doesn't change a lot in terms of the payments you receive from the sport.

But is there a benefit in terms of your sponsorships?

Are there agreements that basically increase the payment from them if you perform better or not?

That might help reduce the losses in F1 is my first question.

Not yet, but it will.

Right.

Okay.

It will.

Is it something we can look forward to for next year?

(inaudible) '19.

I think it takes a while to run them off.

Okay.

The -- other question that's interesting, the number of references you made to Hermes margins, I mean, they're higher than yours.

I'm intrigued by their business, Philippe.

Absolutely, so am I. At the same time, what I find interesting in your business is that your margin have been lower, but the way I look at capital, your returns have been significantly higher because you don't have a lot of net working capital.

And so it's kind of in a way -- I'm not saying it's the wrong metrics, but it's a different way of looking at the business.

It may be Philippe.

But if we take EBITDA as an indication of cash flow generation, then I think it's a good number, right.

Yes, I mean it's a crude metric, but it is kind of an indication of cash flow, I agree.

What I'm getting to is, is it fair to assume that you've looked around, can you kind of say that you've lifted cap to 10,000, you've looked around opportunities and you have come back to the conclusion which I would kind of agree with is that no other business will give you the right combination of high margins and low invested capital and maintain a phenomenal returns that you currently have and that's why, logically, meaningfully, exposure to growth and diversification has to be somehow in cars and you've kind of answered that already by lifting a 10,000 cap.

And I'm just wondering does it make sense to consider more brands?

I mean, it's like the Ferrari your car you enjoy you don't drive, and it's another brand the car you drive.

Or a different way of looking at the business where you still address the same customers and you still aspire to the same returns.

I wish you had easier questions, Philippe.

But let me try and give you an answer.

That is probably the most difficult issue that we've had to deal with.

Because it is undoubtedly true as you well know, that there are -- the know how that sits within Ferrari, both in terms of sort of the technical side of car making and, it's ability to present products in a way which is consistent with luxury and exclusive brands, allows Ferrari to look at other people in this space, and saying I think if we intervene in that space, we can run those brands, we can produce cars from them, we can engineer them properly.

And effectively, we can replicate an equivalent of what LVMH was done with sports cars.

I'm not there yet, because the thing that I fear most is the fact that we would somehow, it doesn't mean that -- that may not be the right answer and maybe but I'm not on that page yet, because I am severely concerned about the dilution on the brand equity associated with such a move.

I would have to feel absolutely comfortable that one we wouldn't be pissing off our customers, secondly, we would not be creating any in-house alternatives that would cheapen the DNA of Ferrari.

And that we would not be creating sort of any type of diluting effect on our financial performance.

Those things are sort of sacred because those customers that we built this business with over the last 70 years and the people that are currently 8,400 are buying our cars this year, there are -- they are our precious resource to this house and we can't do anything to damage that relationship.

So the extension into other spaces in car are appealing but I think we would need to satisfy all those things that I mentioned earlier.

In terms of our thought process Philippe, yes, we went looking everywhere else and the only thing we -- if I can just correct the way in which you've correctly analyzed at least in part, our thought process, is that we have re-prioritized our interest because we know we are better at running the luxury car side and that we're better at executing in a shorter timeframe the extension into other luxury areas, which are non-carbolated.

Doesn't mean that we don't care about them, we do and we're working in parallel in getting that done.

But I think the most immediate improvement in our results is going to be from expanding car.

That by definition got to be the case.

It's our core skill and it's something we need to do seriously and now that I feel comfortable by doing it that we will not be diluting brand, then I think we should move on this at the speed of light.

Makes sense to me.

If I can squeeze one simple question.

I think you finalized your contract with Ferrari.

So for how long can we have the pleasure of your management of Ferrari?

I got to complete '21.

And now we move on to our next question from Adam Jonas from Morgan Stanley.

So Sergio, what you're basically saying is you're going to keep making Ferrari's right?

Yes, that's right.

Okay, I have no further questions.

No, okay, 2 more questions real quick.

About 9% of you total revenues last quarter and last year's quarter were in China.

And I think amongst luxury goods peers, you stand out as a real outlier as how low that exposure is to China.

And I think that might be something a lot of people on this call would actually say is a strength because you're not too dependent on some potentially unpredictable economic policy or social, anything outcome in the PRC.

Is it an objective strategically to keep China sales, with all due respect to the Chinese customers and they're as important as any other customer, but to keep that manageable at 10% or less?

I think it is as long as the product offering is what it is.

I think on an extended product range, I think I would feel very uncomfortable limiting it to 10%.

Because I think the extension of the product range would play well in China.

And I think we need to be careful that we don't sort of using -- we don't start using dogmatic answers to -- I don't want to be overly exposed to China, therefore, we're going to restrict volumes.

Reality is that because of the nature of what we produce today we're not necessarily the most instinctively appealing brand in China.

That's something that needs to be fixed, right?

Because we also don't have the history of Ferrari in China, we don't have the racing pedigree that has been at the heart of the attachment to Ferrari over the number of years.

This takes time to build.

That's why, while we're doing that I think we need to expand the product offering and deal with real-life demand that available today in China.

So, the 9% that we reported, which I think has been historically if we go back even longer the number's not been significantly different than that number.

It's been a positive given the current product portfolio and I think it's something that needs to be fixed as we grow up.

Okay.

Sergio, and just because we're getting late in the call.

Just one final one and maybe it's philosophical.

But here goes, it seems as autonomous technology kind of rapidly is applied to personal vehicles that over time, maybe perhaps over a long period of time Sergio.

There may be fewer opportunities for people to enjoy pure human driving pleasure for those few seconds on their commute or galloping through the Chianti hills or the Valleys of Umbria, or streets of Windsor, Ontario or whatever.

So as cars get like gradually desexualized, so to speak, could one argue that, those moments of extreme driving pleasure get more rare and potentially, more valuable.

It might mean that you have to go to special venues, like private tracks or closed roads, to enjoy that pleasure, but it seems Ferrari could have a dominant position in this experience, even if might require you to think differently about real estate or infrastructure to facilitate?

Am I crazy?

No, you're not crazy.

I think, this will take a long discussion, we may end up having to have this conversation in front of a glass of wine in Chianti.

But the answer is absolutely, yes.

And I think that Ferrari's ideally suited, and by the way, there are documents in this presentation, if you look at the experience that we offer our customers, all the cavalcades, all the experience that we have, these things go beyond the ability to go fast.

It has to do with the ability to ride the car like Ferrari and do things which go beyond racing.

And I mean, that's be something that's endemic to the brand, it's structural to what we do, it's the way in which we can connect and the way in which we keep the relationship with our customer base and I don't care whether we start flying -- we have flying Uber cars all over the place, that reality will continue to live.

And I think we can cater to our customer base.

So the answer is yes.

Thank you very much.

That will conclude today's question-and-answer session and with that, I will hand back the call to Ms. Nicoletta Russo, Head of Investor Relations for any additional or closing remarks.

Thank you.

Thank you very much.

Thank you and thank you very much everyone for joining us today.

Please note that the IR team will be soon available for any follow-up you may have.

Thank you very much.

Bye-bye.

Thank you very much ladies and gentlemen.

This will conclude today's conference call.

Thank you for your participation.

You may now disconnect.