Ferrari NV (RACE) 2017 Q2 法說會逐字稿

Good day and welcome to Ferrari N.V. 2017 second quarter and first half 2017 results.

Today's conference is being recorded.

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

Please go ahead, ma'am.

Thank you, Allison, and welcome to everyone who is joining us.

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

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, I'd like to turn the call over to Mr. Marchionne.

Good afternoon.

I'm going to restrict my comments to a couple of the slides in the deck to deal with the Formula 1 stuff at the end of Slide 12, and Slide 11, which talks about the so-called other activities, which I think in time will become significant.

But just a very broad remark on the quarter, I think we're satisfied with what happened in Q2, I think as most of you know, we've been trying to build a machine that will deliver a billion in EBITDA, I think we are halfway there with the second quarter of this year.

We continue to make good progress in terms of maintaining the uniqueness from a technological standpoint.

We're producing the International Engine of the year, if you wish, the award that was given to us by Red Dot, is an indication of the kind of commitment that the house continues to make the technology.

We have had the chance to discuss this hopefully in terms of the Q1 call, about the fact that the introduction of hybridization is an inevitable piece of the technological development of Ferrari.

I think hopefully we should see the first benefit of that technology in the mass production of car within 2019, which is not very far away.

And obviously, that's conditioning also the R&D profile of this house for the next 24 months, which I think is bound to pick up an intensity.

The launch of the 812 has going well.

The reaction from the marketplace has been superb.

We have a waiting list that extends beyond next year.

So, I don't have any bad news.

Last Sunday, I think, was a good day.

I think we restored the Scuderia back on its rightful track to become a contender for the Constructor Series.

There are still 9 races to go.

We have got a car on the track now in Hungary that's being tested for some additional technology developments that we're introducing hopefully by the time when it's planned, and later on this month, I'm -- if I told you there were things that really bothered me, I would be lying, if I told you that I was worried about anything else, the answer is probably yes.

This notwithstanding the fact that we're only making about -- slightly over 8,000 cars.

This is already a relatively complex organization because of technology and the ambition that it has to maintain its leading position in the sector.

So, on that note, I will pass it onto Alessandro, who is going to try and demystify Q2, and then I'll come back at the end.

Thanks.

Thank you, Mr. Marchionne.

Good afternoon, everyone, and thanks for listening in on the call.

Let me start with Page 4 of the deck we provided.

Our shipments reached 2,332 units, up 118 units or 5.3% versus prior year.

Results were driven by a 36% increase in V12 since the GTC4Lusso and LaFerrari Aperta.

V8 were substantially in line with last year, and in terms of portfolio turnover, the F12berlinetta is phasing-out while the 812 Superfast will soon be arriving on the market.

Group net revenues for Q2 2017 were EUR 920 million, up 13.5% or 12.8% at constant currencies.

This was driven by a sound performance of cars and spare parts, as well as engines, and partially offset by the deconsolidation of the European Financial Services Business since November 2016.

Our adjusted EBITDA improved by 24.1% and reaching EUR 270 million and a 29.4% margin.

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

This was partially offset by higher R&D expenses for innovation, components and hybrid technology.

Adjusted EBIT for the group shows a 29.3% increase, reaching the quarterly record of EUR 202 million, and resulting in a margin expansion of 260 basis points to 21.9%.

Adjusted EBIT benefited from a strong adjusted EBITDA, partially offset by higher D&A, mainly attributable to the GTC4Lusso family and LaFerrari Aperta.

Industrial free cash flow for the 3 months ended June 30 2017 was EUR 92 million, driven by strong adjusted EBITDA of EUR 270 million, partially offset by tax payments, 2016 balance and 2017 first advance, and CapEx of EUR 82 million.

Net industrial debt as of June 30, 2017, was reduced to EUR 627 million from EUR 653 million at December 31, 2016.

This was primarily due to industrial free cash flow generation, and partially offset by the cash distribution of EUR 120 million.

Moving to shipments on Page 5. We had a great performance of the 488 and the GTC4Lusso families, as well as of the LaFerrari Aperta.

EMEA expanded by 5%, with France and Italy growing double digit, Germany and United Kingdom were up mid-single digit and this was partially offset by Middle East, down to the reallocation triggered by tough market conditions.

America showed a 3% increase.

Rest of Asia Pacific grew 20.5% with Australia being a strong contributor, and combined deliveries in China, Hong Kong, and Taiwan were down 12.5% due to Ferrari's decision to terminate the distributor in Hong Kong in Q4 2016.

The new dealership will be fully operational by Q3 2017.

And as a result, shipments for the group were up 5.3%.

Moving to Page 6. Second quarter net revenues reached EUR 920 million, up 13.5% versus prior year.

At constant currencies, net revenues would have increased by 12.8%.

Cars and spare parts revenues were up 13.7% or EUR 18 million, due to higher volume and positive mix, led by the 488 and the GTC4Lusso families, as well as LaFerrari Aperta, along with a greater contribution from our personalization programs, pricing increasing and FX.

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

Engines net revenue surged to EUR 101 million, up EUR 30 million or 41.9% versus prior year.

The significant growth was 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 124 million with an increase of EUR 7 million or 5.6% compared to prior 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 8 million to EUR 26 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 up EUR 16 million, due to an increase of approximately 100 units, excluding LaFerrari and LaFerrari Aperta, thanks for the GTC4lusso and the 488 together with positive contribution from our personalization programs.

This was partially offset by the California T in its fourth year of commercialization and the F12berlinetta12, which is phasing-out.

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

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

Industrial costs and R&D grew EUR 17 million, due to higher D&A, and R&D expenses to support product range and components innovation, mainly for hybrid technology, partially offset by efficiencies on direct materials.

SG&A costs were slightly higher than prior year mostly due to the recently approved long-term incentive plan, higher costs related to the new directly operated stores, as well as 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 the U.S. dollar, partially offset by the Great Britain pound.

Other was down by EUR 7 million due to lower 2016 championship ranking compared to 2015 and the termination of the rental agreement with a Formula 1 racing team, as well as the deconsolidation of the European Financial Services businesses since November 2016, partially offset by positive contribution from Engines to Maserati.

As a result, Q2 2017 adjusted EBIT was up 29.3% to a quarterly new high of EUR 202 million, adjusted EBIT margin expanded by 260 basis points reaching 21.9% or 21.5% without FX hedges and adjusted EBITDA reached 29.4% margin or 29% without FX hedges.

Moving to Page 8. Industrial free cash flow for the quarter was EUR 92 million, driven by strong adjusted EBITDA of EUR 270 million.

This was partially offset by the 2016 tax balance and 2017 first tax advance payments.

CapEx of EUR 82 million and EUR 9 million of net change in working capital due to the inventory increases driven by the projected volume growth in line with our 2017 outlook.

Other was impacted by accruals and reserves related to deferred compensation, as well as provisions partially offset by lack of contribution from advances of LaFerrari Aperta.

Net industrial debt as of June 30, 2017, reached EUR 627 million.

On Slide 9 and 10, a quick glance to our customer events.

This, as you know, is an opportunity for us to continuously engage with all the Ferraris provide them with unique experiences.

Slide 11 shows our activities such as the opening -- other activities such as the opening of LaFerrari beginning of April.

That is already reaching 160,000 visitors.

On May 25, the Ferrari museum in Maranello opened it's new expanded and renovated exhibition spaces and inaugurated the Ferrari Under the Skin and Infinite Red exhibitions.

I would skip Slide 12 that seems to me some kind of already commented on it.

And on Slide 13, we are providing our confirmed guidance for 2017 for our outlook.

And with that I would like to turn the call back to Mr. Marchionne for any remarks.

Yes, couple of things.

One, as you all know, we've talked on and off on these calls and certainly in terms of conversations with investors that they need to provide clarity in terms of the development of the brand beyond cars.

I think we have made good progress certainly during 2017 and getting our ideas very clear about the association of the stores in the so called Scuderia stores with the Formula 1 activities.

And so you will see a continuing development of that theme in a way which the factory links very effective everything that we do on or around the track activities with what we show and sell in our stores.

There is a parallel activity which is going on and which is a lot more difficult in nature, because it's the extension of the luxury brand of Ferrari into areas that currently it does not cover.

And that's something that's going to require sometime.

We have made, I think, good progress in terms of initial discussions with people in the space already, people that I think can help us mold the Ferrari brand in a different space and effectively this will be treated in a similar way as our cars are currently in the market.

That's a much more difficult discussion because I think we need to find a way in which we can extract a relevant part to the Ferrari DNA in having that translated into something which is as relevant into luxury goods space by somebody who already occupies and so discussions are ongoing.

Hopefully, we'll have a much better view by the time we get together with our Investor Day, which we're going to hold hopefully in the first part of 2018, hopefully in Q1 where I think we'll give you our view about where this plan will take us until the end of 2022.

The last item that I want to cover is Formula 1. I think we have gone -- we have now completed the first full year of Formula 1 activities under the new leadership structure that we put in place in 2016.

I'm delighted by what's going on here.

I think the fact that we have got -- we have now distanced Mercedes on the driver's side and within a reasonable range of Mercedes in terms of the constructor is a good indication of the intensity with which the Ferrari responded to the challenges that was posed to us at the end of 2016.

I expect a lot more from the Scuderia under remainder of the year.

We've got 9 races to run and we have also begun, I think, a very constructive dialog with Liberty now who is now handling the commercial activities of Formula 1 in terms of developing the sport going forward.

I think I remain convinced this new structure would yield benefits to both the racing teams and commercial title holders.

I think discussions will go on between now and certainly the aspiration of the Concorde Agreement which is related to terminate at the end of the 2020 racing season.

So I'm delighted.

I'm encouraged by what I see and I'm encouraged by the fact that we can actually confirm the 2017 outlook as Alessandro mentioned on Page 13.

I know you that guys are always looking for upgrades and forecast.

You should note that we normally don't do them until we get to Q3.

So we're going to hang off for the next 90 days to find out what we do, but for now the outlook for 2017 and confirm the business in good shape, and on that happy note, we will take calls.

(Operator Instructions) We will take our first question from Adam Jonas from Morgan Stanley.

Sergio, I think back in February, maybe just February of last year you were asked about whether you consider doing a crossover SUV and I think your answer was, you got to shoot me first or something about that, something involving shooting.

No, I'll confirm that -- what I said, you will have to shoot me first.

That's fair, and I think based on the comments in the press, there's a lot of room to maneuver around the semantics, just without beating around the bush here, let's not call -- let's not say SUV crossover, but could you consider a car with a Ferrari brand that could, let's say, have a ground clearance that could drive on (inaudible)

Let's deal this issue about what I was willing to be shot for, because I think it's important.

If somebody decided they are going to offer Ferrari badge vehicle that looks like other BMW or even a Bentley SUV, I think I would deserve to be shot.

I think that if we allow the Ferrari engineers to reinvent the concept of a vehicle which has some utilitarian use in terms of traveling through sort of uncharted territories, no otherwise and I think that you -- the answer is, it will probably happen.

But it will happen in a Ferrari style, and Ferrari has been known historically for being able to redefine and define segments of the auto space.

I think we need to let them to find that space and see whether they came up with something original.

But I don't want to call the UV, it will be whatever Ferrari thinks is appropriate for the requirements.

Adam, it needs to do something to cover that space that's currently occupied by people who normally make UVs.

These are the spaces too big and is too inviting and I think that we have a lot of our customers who will be more than willing to drive the Ferrari branded vehicle that has that kind of utilitarian objectives.

I don't -- I mean, I'm sure is that you'd sell thousands of these FUVs and the stock market would love it and all of that, but I guess, to be blunt, isn't there some sort of -- when you just be selling just a tiny slice of Ferrari soul here.

I mean, because you're certainly not Porsche . I think John Elkann also said that openly, we're not Porsche and I know they don't breathe the same air as Ferrari.

I just -- I guess, has the board already decided on this?

I have the same type of hallucinations on this issue that you have, and therefore, I think we have to leave it Ferrari to find something which does not sell at all, I can't.

But I agree with you, it is not being done to compete with Porsche, I can tell you that now.

I think there was a market need, which currently is being filled by others, but I think that is being done because of the fact that our customer base require coverage and we need to give them a vehicle that is worthy of the Ferrari badge in terms of performance and that does deliver upper expectations.

And the car -- to be perfectly honest, the car doesn't exist today in the market.

I mean we haven't seen it.

So, there's nothing to compare to.

Got it.

And just finally, the board -- this is a decision that has been made, the board has decided to move forward on this SUV?

No.

That's why we haven't announced it.

The press has.

Why are you worried?

You wanted to buy one or you didn't want to buy one?

I am worried.

Sergio, I'm really worried.

I am.

I have to admit.

I think that again, but I've been wrong before on first impressions with vehicles as well.

I think that part of the exotic and hyper-exclusive nature of the brand and the people.

The reason why the second-hand values for so many of your cars perform the way they do is because of the type of clientele you attract to and uncompromising level of engineering, excellence too that -- where there's heritage of the brand and I worry that there's no heritage in vehicles that can go on rocks.

Now, we're belittling the effort and I'm on the page.

Let's just agree that Ferrari sells a car that can't occupy that space, it will not set up in the attribute of being able to climb rocks.

That's not its claimed to fame.

So, I would just ask you to hold back on judging the value of the proposition until you see it, if you ever see one, right.

One thing is for sure, Adam, is that the biggest challenge for all of us involved in running this business is to find a way to leverage the power of this brand without destroying exclusivity.

This is being the single largest objective that anyone of us in this place have.

And so when you mentioned thousands of UVs produced by Ferrari, that's where my skin sort of fringes.

It still, whatever it is, this vehicle is only meant for the select few.

And as long as we...

It would not occupy the same proportion as, say, a Cayenne would, where it would be your highest...

Hell, no, we couldn't.

There would be obscene, you know how much, you and I discussed this.

You know how I'm terrified of just losing the notion of exclusivity.

If we become everybody's brand, we ain't worth much.

So, whatever it is, Adam, it's going to be of the same calibers, everything else we've done.

Thank you, Sergio, I feel a little better, but not a lot better.

Okay, hold your breath then.

Our next question comes from the line of John Murphy from Bank of America Merrill Lynch.

Good morning, guys.

If I can ask, first question on sort of your gentle push upwards on price and volume.

I'm just curious relative to your expectations where you are, and if you're pleasantly surprised to the upside and your ability to push pricing, volume, maybe a little bit more than expected.

The answer is yes and no.

But we've always known that this had to be a very careful -- had to be very careful process.

We just finished a long conversation with Adam about exclusivity.

Pushing volumes by not expanding the product range to try and cover different market needs is not going to be the right answer.

So, I think there is a natural limit to what the current portfolio can yield and I'm not sure that we're -- I think I am actually quite comfortable in telling you that we're very close to our limit.

I don't think we can push volumes per name plate on the current product portfolio beyond sort of a reasonable range around the current volumes.

It just can't happen.

So, the real trick here is not -- is to use the knowledge and the architecture that's embedded in the house to try and cover market segments that are currently not covered by Ferrari.

And to leave sort of what I consider to be the real technology-driven customer base untouched by this expansion.

This cannot -- we cannot impact the exclusivity of the brand in that fashion and this has to be done by expanding reach and this expansion is not obvious.

It's going to take time.

We have done it before, by the way.

If you look at the history of Ferrari, if you look at product development, there were big chunks of its foundation going back to 1947 and probably the 30 years thereafter, they defined Ferrari not just in terms of technology, but I defined it in terms of aesthetic appeal and sort of whatever for a lack of a better term, but certainly a definition of Italian class.

We have gone through a transition where we have now rendered Ferrari very much of a racing thing.

And I think that this essence of racing is something that needs to be accompanied by a return to the more traditional classical styling of Ferrari, which we have somehow dissipated over the last 10 years or 15 years.

This is -- and that's really the big trick for us is to get there and to get customers to come back -- to come into the brand who are not necessarily as -- they are not necessarily enamored by the technology as they are by the combination of style and technology and these are the real issues for us going forward.

So, when we get together for the Investors Day, that's the world we want to talk to you about, because it's a comprehensive world.

It's a world that talks about the extension of the product range, accessing a different customer base and ultimately connecting that customer base with development of Ferrari as a luxury brand in other areas.

That's really sort of the closed group argument and that's going to take time, it doesn't happen overnight.

And you cannot do it in an awkward fashion, you can't rush it.

I think the risk is that you're going to break China in the store and that's not helpful.

And at the risk of annoying you or maybe just a follow-up on this, I mean, there's always this concern that some of your customers are aging out and some of the younger customers might not be as enamored by Ferrari as much as some people believe, although I find that hard to believe.

Is there the possibility of starting with a slightly more entry-level vehicle that would be sort of V6 turbo with a KERS system in it, that would be at a slightly lower price point to maybe broaden the base of customers to then upsell them over time once you've brought them into the family.

It's an interesting proposal.

Actually, John, I do not think that it's a question of price.

It just happens, by the way, that people who have, I mean, unfortunately wealth and age a lot of times go together and so people mistakenly sort of assume that because of our customers are not necessarily 20-year-olds, that we're attracting a different end of sort of the buying population.

I think it's just a question of where wealth sits in.

We have a number of very young people who are coming to the brand.

If you look at the Asian component of our customer base, it is phenomenally young.

I'm not worried about the age profile of our customer base.

And I'm not sure that sort of doing a V6, whether we put KERS, not KERS on a basis of price, would be the basis on which we can sort of load up the sort of the succession plan for the brand.

I think the real issue is to expand the reach and trying to get people in here that -- who have not normally bought an 812 Superfast because of its extreme driving characteristics.

They would actually buy a Ferrari of that size as long as the displayed phenomenal level of style and the typical engine sound and performance of a Ferrari whether it was V12 or V10 or V8 or V6 of turbos, it doesn't really matter.

But people who go back to those basic principles of that we're at the heart of Ferrari when it was launched in 1947.

I think we need to go back and explore that space before we start sort of downgrading the entry level on a price basis for the brand.

It's dangerous.

I mean, we've kicked around this notion of the Dino.

There are split views on this inside the management team.

I don't think anybody is a 100% convinced that bringing back the Dino is the right answer for Ferrari.

We need to be careful.

But look, let's get together in the first part of 2018, and I will say, I mean, we're kicking around -- we will give you a reasoned view, and the great thing about us is that we move at the speed of the light, not just on the track but also in terms of product development.

So I think that we will be able to adjust very quickly with what's happening.

Maybe just 2 quick ones.

What's the max capacity if you went to 2 shifts in Maranello, and then as you work through this issue with a Hong Kong distributor, how long was that hickey on your sales in China and when does that kind of really recover?

It recovers in 2018 on the Hong Kong issue, but it's the best thing -- the best way to look at this is, we can probably double current volumes out of Maranello, that's not without making some additional infrastructure investment, but raw basic capacities in place to take it beyond.

We'll have to tool it up obviously the structures in place to double up.

Our next question comes from Michael Binetti with UBS.

Congrats on a nice quarter.

Sergio, you mentioned on the last call that you do indeed think this brand can deliver the shareholders margins that would approach some of the luxury names that you like to compare the brand to like Hermes which is north of 36%.

It's a long way from where you are at today, but I mean, if you are in your way around the math, you thought very good margins and incremental margins on the cars today.

It doesn't sound like you're convinced that you're in a situation where low hanging fruit already has already been harvested.

Can you just help us think at a high level about some of the things that you think about when you think about driving this brand at those margin levels today?

If I told you that we can get there -- if we keep volumes where they are, although we've drastically changed the product mix, in the sense of coming up with much higher priced vehicles or I think the likelihood of us getting to a 36% margin on our own, is going to be -- I mean we're pushing like damn crazy just don't forget that we have a large building very close to our activities here that appears to have developed an incredibly voracious appetite for cash, yes, it does win on the track from time to time, but it does need to be fed.

That something that Hermes does not have.

But I'd remind you one thing, this thing about EBITDA margin is a very interesting story, and then -- I mean, I don't want to take you back to my bloody pitch on the capital consumption, I mean a couple of years ago.

From a capital consumption standpoint, this is a better business.

This is a better business than Hermes.

A buck invested here has got better returns than a buck invested on Hermes, and I love Hermes, I mean not because I am a big customer of theirs, but I think as a brand.

I've got a couple of people in the room they are smirking now, because I made a comment about my becoming a customer of Hermes which is a pretty unlikely event.

But we have better returns on capital than anybody in the space and that's because of the fact that distribution is financed by others, and so as long as we keep that uniqueness, I think it'll be fine.

I'm on the pitch, I mean if we got to -- if we doubled volumes from where we are today and got to close to that and we could blow the hell out of the EBITDA margins of Hermes.

That's not the issue, right.

We can get there.

We need to build the portfolio to get it there without destroying exclusivity, and that's really the trick.

But I go back to what I said, I think we need to wait until the plan gets launched here in 2018 and then we will give you a pretty through road map about where will be in the next 5 years, and that's really the exciting part of the journey.

I think we've done the easy stuff up to now, the tough stuff is coming on now.

And as you mentioned that you're obviously quickly approaching EUR 1 billion in EBITDA that you pointed out at the IPO as your long-term target, between now and the Analyst Day, there might be a little vacuum of what to think about as you guys get ready to tell us the next cycle between 2022, you mentioned hybrid and informally between quarters mentioned that as a big opportunity would be, give us a little bit more to think about over the next 6 months as far as the portfolio today and the big opportunity next to attack you is a very successful story beyond just hybrid?

I am not sure, I understood the question, Mike.

Well, I would say getting to your EBITDA target of EUR 1 billion 2 years early, that's the bar very high and leaves people thinking how do we top that story -- obviously the press...

The way we top that story is by building the plan between now and 2022.

And to be perfectly honest, I haven't worked through the numbers, but I think if the plan at the end of 2022 does not target the highest EBITDA number of anybody in the sector, then we probably got the wrong plan.

Is there any way you can help us why you think that?

I do because I think -- go back to what I said in my earlier remarks when I started answering calls.

The question is, we need to be able to expand the product offering here without impacting exclusivity, and the only way we are going to understand this by seeing a fully articulated product portfolio that really highlights

how this is going to happen and why we think by introducing additional models on existing technology is not going to hamper the exclusivity of a particular line-up.

This is really the key.

We need to -- there are a lot of -- let me put it this way, there are more people that would buy nonextreme versions of Ferrari than the people who would buy extreme versions of Ferrari.

This I can tell you for a fact.

And we by definition excluded a large portion on the buying population, people who are even close to the brand, people who have the financial means to access the brand because our product offering was so uniquely pushed towards the performance and would actually lost interest, and they also, I think in a lot of ways, became intimidated by the offering.

And that's I think cannot happen.

Ferrari should not be an intimidating brand unless you choose it to be.

And we got to leave that choice to the consumer, not to us.

Next question comes from Thomas Besson with Kepler Cheuvreux.

I have 2 questions please.

First, can you update us on Ferrari's hedging policy please.

We are getting apparently in the phase of a stronger euro.

If I remember correctly, you moved your hedging from 24 months to 12 months.

Can you tell us what you've been doing in the last months and whether we should expect potentially prices to have to go up in some markets like United States to compensate?

Let me give you a broad answer for the question about hedges, because this is a discussion that Gili and I have had, now I'm nauseated and I'm tired, I'm old enough to have had every hedging discussion with every CFO I have ever had.

Whatever hedging strategy one puts on, it's best at 12 to 24 months longer, because it covers you for the foreseeable future, and it doesn't answer the question about what happens if that change a structural, it maybe a blanket that you've bought yourself to try and keep you warm for the next 12 months, but it doesn't address the structural issues.

And the problem is that even the question you just asked, it's just a question about what happens to 2018 earnings.

The reality is that we have covered little of nothing of 2018.

We need to get into a position where we together with the commercial organization of this house start reacting in a very effective way to this changing world that says we are euro-based in terms of production, and that we're going to be exposed to the world at large in terms of what we sell.

So, the answer to your question in a very short brief period of time is, yes.

We need to go back and adjust prices in the market.

There's nothing we can do about this.

It is what it is.

And I think it's only -- it should only reinforce the view about the fact that this brand is exclusive, and then there is really nothing that we need to compare it to another alternatives to buying a sports car, but there is nothing like Ferrari and I think we need to reflect that in the pricing mechanism that we use in the different markets.

We need to protect margins of [mother goose].

It's the only thing that will allows us to continue to invest in the products that we're launching.

It's the only thing, nothing else matters.

The second question, I'd like to come back to the new view on the whatever you want to call that utility vehicle.

Would you likely start -- stick with the 2-doors supersports car view that has been so far the kind of common element of any car that brand has produced or would you go to something that would be not exactly within the direction of what Lamborghini is going to do with their Urus?

Again we are not going do anything that Lamborghini does.

Whatever the answer is, and I have a lot of time for Stefano Domenicali.

He is a good friend and I like him very much.

But I think we're going to go our own way on this.

I think we need to wait until we show you if we do the car for you to judge.

I think that and we never talk about products that we're going to be launching in the future until we launch them.

I think we're going to stop picking up a very bad habit here discussing cars that are not visible.

Let's wait.

Our next question comes from Martino De Ambroggi from Equita.

Yes, Martino De Ambroggi from Equita.

Good morning, good afternoon, everybody.

The first question is on the exclusivity.

I remember we already discussed it several times in the past calls, but mentioning 16,000 units that your in-store capacity in Maranello, should we take at this level as a sort of level in order to avoid to jeopardize the brand exclusivity or must be lower or could be higher.

What's your view on this?

Yes, by the way, sorry 16,000 was the number that I have to do with what was the maximum capacity of the system and I told you that we could double it if we ran double shifts.

I didn't tell you that we would be producing 16,000, don't go out there and think that we're going to launch 16,000 cars now, slow down.

Just everybody lie down and wait until the feeling passes here.

That's not what I said.

Yes, I was just wondering what's the level that you consider reasonably in order to preserve the brand exclusivity.

Mr. Ambroggi, I think you're going to have to wait until we do a presentation on the markets in 2018, let me give you some advice.

I go back to what I said.

In terms of the current lineup, we are now approaching -- unless there is a draconian change in the size of the customer base, I think we're ready within sort of reasonable limits of the size of the production for the current portfolio, maybe with a exception of two cars, which are under the California and the GTC4.

The rest of the car, the 8 cylinders and the 12 cylinders, the 812 or the 488, those cars and their successors are effectively playing in a space, which is almost defining its maximum size.

They cannot go beyond that.

The only way we're going to grow this business is by occupying adjacent space in product offering, which we're currently not connected to.

So, the answer to your question is that we will never ever bargain away the exclusivity of the product range that we got today because we will never over-produce and trying over-covered in those segments, ever, ever.

It's just not worth it.

Two quick questions on the other activities if you can provide us a rough indication of what is the weight today inside the Ferrari and the personalization was 17% in the past few quarters.

If there is an update on this figure and the 36%, 37% EBITDA margin, I suppose that implies the 20% target of personalization.

Probably, I'm not worth through the numbers, but Alessandro will give you the percentage.

So, the other impact of the different activity is not that material, i think we have never disclosed the number in terms of EBIT contribution, but it is not the most important one.

In terms of personalization component, we are still at 17%.

Our next question comes from George Galliers from Evercore.

Hi and thank you for taking my question.

First question was really on other activities and maybe we'll have to wait until next year to get more detail, but is there anything you see from brands which looks interesting, for example, Aston Martin is perhaps the more prominent in men's clothes, Bugatti has the EB line, this Porsche design, I'm not sure of the exact ownership, but do you see anything that other brands associated with the auto industry is doing that could be interesting for Ferrari.

No.

sorry I need to be this arrogant again on this blund, which is the reason why we have been walking very softly on the stuff.

This is the area where I think you could easily make a mistake and certainly would be underpredictive.

I mean whenever we are seeing things stretch out into areas, which are outside their DNA, we are seeing people come up with mediocre results both in terms of the economics and other lines.

And I think that we need to -- Ferrari needs to find its own way of dealing with this issue.

And hopefully when we deal with the plan in the first part of 2018, then I think we'll be able to show you some real life examples of things that we can do.

And they will build on a variety of offerings that will ultimately complete the product ranges.

It needs to be of the same exclusive nature as our cars.

And with that in mind, are you happy with the development of the Ferrari store and I understand I think a lot of this product is aimed at the tifosi and your followers, but it does seem to, I guess, be a quite mixed assortment of products, you sell there and it also seems to be on sale a large percentage of the time.

Yes, I mean obviously not, because that store in our view now and that's the transition we're working our way through now is a reflection of our racing activities.

It is a reflection of the Scuderia as a racing team of its -- and its wares whatever the goods are sold in that environment ultimately end up being out to be a reflection of that world and not of the luxury goods that we sell through the Ferrari brand.

These are two separate worlds.

And we have been -- to be perfectly honest, it's been the single largest struggle that I had here to try and drive discipline between these two worlds.

I think we made good progress.

I think we need to continue to refine this, because the two concepts are not mixable.

They're just not at all mixable.

They've nothing to do one with the other.

And so I think we need to come back in and we need to restrict to reach the Scuderia stores.

We need to make sure they're much more closely aligned with our racing world and then build the luxury brand outside of this in connection with our cars and that's it.

That's a different trip altogether.

And then finally, not to be just a dead horse, because that's been discussed a lot on the call, but just looking at your history, isn't that 250 a great example of how essentially with the same engine you were able in the past to extend the product offering from race cars to sports cars to GT cars.

Look, we've got our history is littered and I hate using the term littered, but littered with examples where that worked and worked well.

And I think we need to learn from that past, but more importantly, I think we need to rebuild the skills inside this house to design those cars, to build them, to speak to that audience, and that customer base which is fundamentally different than the one that we currently have.

I think there are some cars that we're working on now.

at least on paper, that I think when launched will make people's heads turn.

I was due today for different reasons, but these are examples of what I consider to be, probably the best examples of Italian style that we can come up with.

And we know the technically we can make them unique to the point when nobody else can match us.

I think we need to go back to those days.

And it's a lot of fun.

It's a lot of fun if you are in the business like ours to try and do those things, because they're really fully leveraged on every dollar that we put into this technology pull, everything.

And so, at the end of the day, the core skills of this house, which have to do with the 8 and the 12 cylinders need to mature, they need to move into a hybrid world, they need to link up to F1, so that people can start feeling the association with racing and have an experience, which is unforgettable in terms of driving dynamics and then some people who just want to look good listen to Ferrari engine, and have the ultimate luxury in their environment.

That is Ferrari space.

We need to re-occupy, we did go to some others who have done a lousy job of occupying it.

But I think we want that back.

Next question comes from Stephen Reitman.

Yes, good afternoon, thank you for taking my call.

I have 2 questions, the first on the mix in the second quarter.

You highlighted that you've had positive impacts from Aparta offset to an extent by obviously not having LaFerrari in there anymore which finished in 2016.

Could you give some kind of idea of where we are through the Aparta in terms of deliveries of the 200 odd units that you're planning for that series.

My second question is again well about the growth of the brand and the volumes, and going beyond 10,000 units of the small-vehicle manufacture cap.

I think there is no doubt that there wouldn't be an issue among your customers if it was about, let's say, the ability to pay any fines or any kind of penalties or malices that were imposed on the vehicles and there are some already on your cars today.

And obviously, you will mitigate that to some extent with hybridization, but what do you think actually over the whole idea that your customers will -- you could expand and your customers just pay maybe extra, because I know that obviously the image of Ferrari is technical cutting edge and the like.

Is there a disconnect then maybe with also being seen as being more polluting just in kind of the environment that we're moving into, that's my question?

Let me try and deal with the second part of the question and then I will move back onto the other.

The first one, the reason why we have engaged as actively as we have engaged in the hybridization is because that is the world to come.

And by the way that world to come is the world that's here.

It is having an incredibly difficult time, taking shape and real form and I'm talking about the non-luxury slide of this.

If you look at the number of electric or hybrid cars that were sold in U.S. in the month of July, it would be appalled, that's not a very large number, and I think there's a lot of incredible amount of -- go back to what I said about Elon Musk and Tesla, I think Elon and I are good friends.

I think he has done a phenomenal job of building Tesla.

He occupies more space with the 3 series of this car now than most of the 98% of the carmakers.

We take up the risk with diesel issues.

He takes up the space with a very limited number of cars.

So, I think there is a heightened and perhaps unjustified level of interest in electrification and hybrid cars today given the relevance in today's marketplace.

But they are an indication of the fact that these are the things to come.

Ferrari needs to embrace that technology.

It needs to make it, it has already, because we run it in Formula 1 that we have made it available in LaFerrari and Aperta, but we need to make this as a structural element of our product offering.

It cannot be denied, the time has come and so hopefully by 2019 you'll see the first embodiment of that car, because strangely enough in the case of Ferrari and it enables that brand to express itself even more powerfully than it would do otherwise because of combination of combustion and electrical motor will produce pretty high levels of power that would be very, very helpful to anybody who is trying to experience the Ferrari way of driving.

So, I don't feel bad about this.

And so what we've built in our models now is shown that as we keep on rolling out this hybrid world throughout the portfolio, then we will continue to lower our CO2 emissions in a very substantial way, and so when we run the numbers on this 10,0000 barrier, which everybody talks about as if we all know what we're talking about, the reality is that we really don't know what we're talking about.

The 10,000 rule has got -- undoubtedly defines small-volume manufacturers.

If you look at the U.S., for example, on greenhouse gas emissions, 10,000 rule is irrelevant because of 5,000 cars per year, and in order for the rule to be -- in order for you not to be a small-volume manufacturer, you must've been in excess of 5,000 for 3 years running.

And then there are implications and which in the scheme of our economics are really not that consequential.

I would never ever impose -- if the current taxation system stay in place in terms of greenhouse gas, I would never impose all the levy attacks on a customer of ours that reflects, sort of this greenhouse gas taxation.

It would be part of the offering and I think it would go on.

It would be part of the price that's being asked by house to the customer in general.

It is not that you are humongous prices and it doesn't -- it would not distort the economics of this house even if -- I hate to say this, but even if I have to absorb them in our world, we will not be distorting our P&L.

So, we need to be very careful.

I know there is this view that once you cross 10,000, then you go all hell breaks loose.

It depends on the jurisdiction and there are some consequences which are worse than others.

They need to be looked at in terms of the rollout of hybrids throughout the portfolio and the jurisdiction.

The combination of these 2 things do not make them unmanageable, they are manageable and we will show you when we get together in the first half of 2018, we will actually show you what if if we change portfolio, then we will show you what happens in terms of the impact of the economics.

It's not that large, it's obviously negative on the accounts, but it's not that large.

We need to be careful, don't think that 10,000 cars a year is the end of world, it isn't.

So, on your question on the Aperta, at the end of Q2, we were slightly higher than 50% of the total volumes, and we will be close to 90% by the end of the year.

So, there is a tail in 2018 as we already mentioned last time.

Next question comes from Lello Della Ragione with Intermonte.

Just wondering with the short term before going back to the 10K threshold, you are quite clear that you will not upgrade the guidance to third quarter, but still at this point in time, what's the reason to not do it, because if I run through the number that you're guiding at, especially at the EBITDA level, we see a slowdown in terms of a margin which might imply some additional investment in terms of R&D, or some other effect coming on the top line which might be flattish year-over-year, and I was wondering if you need to charge concerned by the reason or are you already expecting some headwind in the second half of the year?

And the second question is it refers to the 10K threshold that Mr. Marchionne was just talking about.

I mean do you think it's feasible to including a 5-year business plan, so looking forward to accept fine.

So, you're already planning to go above this level, whatever you're going to do with the fine paid by yourself or charge to the customer worldwide.

I mean do you think that on the other side, the regulator will just standby and accept your strategy like that, or do you think there is a risk that this might not be a feasible strategy?

Thank you.

Mr. Lello Ragione, just to be absolutely clear, exceeding the 10,000 limit has one very simple consequence.

I lose my small manufacturer status and I become like the other guys.

And none of the other guys are going to die.

So, it's not as if we're going from purgatory into stratospheric hell, we're just going to everybody else's world and that's got applications we understand them and we will adapt the economic cost of the compliance is not large and I keep on repeating this, do not build yourself a level of our anxiety that is unrequired, that's the first issue, and the answer to your question, I am not sure how to give you the sense of better than I've given it to you already.

We are not going to upgrade guidance, if at all, until Q3.

That does not prevent you from running your own model saying these people are being incredibly conservative, and the real number is Y. And I would encourage to do that.

I'm sure that you have enough talent, skills knowledge and imagination to imagine a number other than the incredibly measly, poor, pedantic, boring, conservative forecast that we put in front of you, by all means let it go.

Just a follow-up on the not saying the SME definition.

The thing is that concerns me the most is that last year they just doubled the dollar amount of fine that they used to compute the fine, and the point is you are an Italian company at the end of the day, and I don't know if they can actually double again or multiply by taking the current amount, and that will change the economics, and at that point, what will you do?

You are talking about an Italian company being victimized, because it's Italian.

No, no, no, the point is they don't need to defend your strategy, I mean, it's your point, they can do whatever they want.

So as they did last year, doubling the dollar amount of fine, they can do it again and again and again in the next 5 years.

I mean, I think...

I think they could and I think they would impact whole auto industry if they did.

And I think the consequences for the other auto industry will be so drastic that makes what you suggest of unlikely.

Our next question comes from Philippe Houchois from Jefferies.

Two questions for me.

The first one is, I think you mentioned that the order book on the Superfast extends beyond '18.

Is this kind of success of this car ahead of expectations in the sense that some people expect this might be the last V12 naturally aspirated car or am I reading too much into this is 1 question ?

We are reading too much into it.

It is not the last naturally aspirated 12.

Doesn't mean that it will be the only -- there is not a company by somebody else, but it's not the last.

And secondly, I think it's gone probably better than I expected.

So just in terms of the order book firming up along to the end of '18 and into '19.

I wouldn't expect you to say so last one anyway, but, and that's maybe chattering in the market that might explain the good performance of that vehicle.

But at least you kind of confirmed, it seems like you're ahead of your expectations, that's interesting.

And the other question is, I wanted to go back to the comments you made to me on the Q&A of FCA a few days ago.

You talked about Ferrari and customer intimacy and what I'm getting there is it's almost like and though there's lot of angst about what kind of car you're going to come up with, it can SUV or whatever.

And to me from my understanding of customer intimacy is that you know your customer base probably better than any other business I can think of and when you put a car in the market, we have an idea, it's not like you come up with an idea and you put in the market and hopefully it sticks.

It's kind of symbiosis of development ideas that you have with your customers, because you know them extremely well in which case it doesn't matter if I like the car or Adam Jonas likes the car.

You will have validated that concept with your customers and therefore the risk there is very low.

Am I think in the right direction there?

No, you are Philippe -- the only area where I think where I'm cautious -- I agree with you that the level of intimacy that we have with the customer base is unparalleled and I think it's unique in the space.

I think we've done a great job and continue to do a great job.

I was in low on the start, it's been going on in the house for quite a while, but very strong ties and then incredible level of sense of belonging by our customer base to the Scuderia.

The real issue to me is there as we expand the product offering beyond what we have currently covered, we're going to end up into same green space, space that is not yet at least not recently, it has not been the object or the basis of sort of empirical exchanges of views with the customer base.

So we're learning how to bring them in now, because we do need to make them part of the solution.

So that's going to take some time, and that's why I'm hesitant.

I think once, if we can -- if we ever, and these are all hypothetical, if we ever come up that smells and looks like a UV and it's not a UV, the very first people that would have a chance to examine it and evaluate it are the people who are sitting in a customer base, because they're the ones that will have a better understanding as to whether you feel offended as Ferrari customers about what we're doing.

So I expect it to continue, but it's much more difficult as the product portfolio enlarges.

My next question comes from Max Warburton from Bernstein.

We've got a lot of fun on this call talking about road cars.

I am wondering if I could just ask few questions on Formula 1 and as for the small part of the business, but it seems to be taking quite a lot of management costs which makes me wonder how you're thinking about it at the present time.

I think we will understand it's a marketing tool, but is there anyway you can see to make it profitable?

I mean, the reason I asked this is, I think you said in the beginning of the call that you've been having constructive discussions with Liberty Media recently.

Is something going to emerge that actually could change the economics for F1 for Ferrari?

Yes.

I think -- you are going to put in them very cross terms.

I think Liberty wants to make as much money as they can having made the investment that they have made in Formula 1. I think we want to make as much money as we can running Formula 1. So if can expand the revenue base, I think there is a willingness on the part of Liberty to share it.

After they take the due piece out of this play.

I think the last thing that they want is a poor team.

So how it turns out, we'll see because to be honest Max, we've been losing money.

We've been losing money running F1.

I'm looking at Alessandro, but that's going to be a good decade, 9-10 years has been negative on the bottom line.

So...

Okay.

And it was profitable once.

When was it profitable out of interest?

When Jean Todt was here

And just the timing of this.

For the business to be, for the sports of Formula 1 for Ferrari to be profitable, does that have to involve a new Concorde Agreement or is there anything in the near term with the championship with Sauber et cetera that could reduce losses before 2021?

We will make a profitably before Concorde expires.

This is for sure.

The question is how much more profitable it is going to be for a proper Concorde or structured.

As you all know Ferrari because of its -- it's the only racing team that has been present in every year of Formula 1. So it has value in terms of -- by the way it's asserted that value against the organizers of Formula 1. It does take a larger piece of the pie than every other team does in terms of distribution.

I've always had the fear, Max, that if we had not started winning than we will somehow lose that right going forward, because we would have no right to establish this right to take first dibs at distribution.

I think as we keep on improving our performance on the track, I think, I feel better that we can sort of advance that case with Liberty.

I think it's way too early in the process in '17.

Who knows what will happen and the discussions will start probably at the end of this year, beginning of next.

We will have a couple of years to hammer out an agreement that makes sense to everybody who was involved.

But I do hope this to become -- I'm not sure it's going to move -- I don't think it's going to move -- if the number is EUR 1 billion EBITDA, I don't think we're going to move it by a large amount, but it certainly will not be a drain on our financial reserves going forward.

And last question on this, just to understand the myth, the engine deal extension with Sauber , is that a profitable agreement or is it a strategic agreement?

It's a -- I give you my view, Max, but I don't what Mercedes would tell or Renault would tell you when they sell engines.

It is difficult -- we would have to build the engine anyway for our racing purposes.

So if we can sell at a price that recovers the variable cost and the fixed cost on manufacturing of the engine plus some reasonable amount that we see as a contribution to R&D expenditure, we will be happy.

So the answer is, it's P&L accretive.

Would I get into this business on a standalone basis, the answer is bloody no.

Ladies and gentlemen, that concludes today's question-and-answer session.

Ms. Russo, at this time, I'll turn the conference back to you for any additional or closing remarks.

Thank you very much everyone for joining us today.

The IR team would be soon available for any follow-up question you may have.

Thank you.

This concludes today's call.

Thank you for your participation.

You may now disconnect.