Ferrari NV (RACE) 2018 Q3 法說會逐字稿

Good day, and welcome to the Ferrari 2018 Third 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 IR.

Please go ahead.

Thank you, and welcome to everyone, who's joining us.

Today's call will be hosted by the group CEO, Louis Camilleri and Antonio Picca Piccon, group CFO.

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. Camilleri.

Sorry, I understand that you couldn't hear me.

Good morning, and good afternoon, everyone.

It was a pleasure to meet many of you at our Capital Markets Day back in September, and I look forward to our forthcoming encounters in the weeks and months ahead.

As specified in our press release, we had a very solid quarter in line with our expectations, and we remain fully on track to meet our annual guidance for 2018 on all the key measures.

Our net earnings were favorably impacted by the 3-year cumulative tax benefit of the Patent Box agreement that was announced at our Capital Markets Day.

And as you all know, the cash benefit will be realized in the fourth quarter.

We continue to have a strong order book across all regions and models, which augurs well for the future.

Before I hand over the call to Antonio, who will take you through the details of the quarter, I do wish to share with you two important events that were held over the last few days.

On Friday, we had our Annual Dealer Meeting, and I would characterize it has been extremely positive.

Attending the meeting was 600 delegates from 60 countries with whom we shared our plans and expectations for the years ahead.

They are as excited as we are here about our prospects and opportunities going forward.

These include the new product portfolio that is planned and falls under the four pillars we unveiled back in September.

We are clearly privileged to have a focused, determined and enthusiastic network, who are willing to invest in the future.

This weekend was also annual Finali Mondiali, which was clearly an incredibly successful event that was held in Monza.

Many of you met some of our key customers in September, and I believe, we're impressed with the passion and loyalty that the Ferrari generates.

I only wish you'd witness the atmosphere of the Finali.

The enthusiasm and excitement of our clients and key ambassadors were multiple of what one may have felt at the World Premiere of the Monza SP1 and SP2.

To give you a sense of the activities, we had more than 100 488 challenge races, 22 Formula 1 clients and about 40 XX owners and drivers and a host of customers of longstanding.

The event attracted some 30,000 people, celebrating Ferrari and all that the brand represents.

On that note, I will now hand over the call to Antonio.

Thank you, Louis, and good afternoon to everyone.

Let me begin with Page 4 then.

Our shipments increased by 10.6% versus prior year with V8 models growing faster than V12.

Group net revenues for Q3 2018 were EUR 838 million, up 0.3% at current currency and up 2.2% at constant currency, meaning net of translation, transaction and change in hedges.

Our adjusted EBITDA reached EUR 278 million, improving by 4.7% at current currency and by 11.7% at constant currency.

EBITDA margin was 33.2%, up 140 basis points versus prior year.

Adjusted EPS, when excluding the already mentioned Patent Box benefit related to 3 years 2015 to 2017, was up 5.4% to EUR 78 cents.

Industrial free cash flow for the quarter was EUR 100 million, excluding the benefit of the Patent Box 2015 to 2017, which will be realized in Q4.

Net Industrial debt at the end of September, after EUR 30 million of share buyback already accomplished during the first quarter, reached EUR 372 million versus EUR 473 million at December 31, 2017.

Before the share repurchase already executed, we are already in line with full year guidance.

Moving to shipments on Page 5. Total shipments increased by 216 units or plus 10.6% versus prior year, supported by a 11.4% increase in V8 and a 7.9% increase in V12.

The performance was led by a ramp up of the Ferrari Portofino as well as strong deliveries of the 812 Superfast.

The 488 family was in line with prior year with first few deliveries of the special series 488 Pista, while the LaFerrari Aperta is finishing its limited series run.

Growth in shipments happened across all the regions.

EMEA grew 11.3%, Americas showed a 4.6% increase and combined deliveries in China, Hong Kong and Taiwan were up 6.6%, while the rest of APAC was up 27.5%.

Moving to Page 6, on group net revenues.

We see how they increased 2.2% at constant currency from EUR 836 million in Q3 2017 to EUR 854 million in Q3 2018.

Currency, including translation and transaction impact as well as the change in hedging impact were EUR 16 million negative, bringing Q3 2018 group net revenues at current currency to EUR 838 million, still up 0.3%.

Car and spare parts revenues totaling EUR 616 million were positive and up 3.8% at constant currency, thanks to higher volumes already commented as well as pricing and deliveries of the strictly limited edition Ferrari J50, partially offset by mix.

Engines revenues were EUR 70 million that is down 19.9% at constant currency, posting a decrease in sales to Maserati due to lower volumes.

Sponsorship, commercial and brand were EUR 128 million or plus 6.5% at constant currency, thanks to higher championship ranking as well as stronger revenues from sponsorship.

On Page 7, you can see the year-over-year changes in the main items of the adjusted EBIT.

As mentioned, the latter was up 0.4% to EUR 203 million with adjusted EBIT margin of 24.2% and adjusted EBITDA margin reaching 33.2% and up 140 basis points.

At constant currency, adjusted EBIT grew by 9.9% to EUR 222 million, while adjusted EBITDA increased 11.7% to EUR 297 million.

Volume was up EUR 23 million, thanks to the ramp up of the Ferrari Portofino as well as the 812 Superfast.

Mix and price were negatively impacted by strong performance of V8 models and lower sales of LaFerrari Aperta that is finishing its limited series run.

This was partially offset by pricing and deliveries of the strictly limited edition Ferrari J50.

Industrial costs and R&D decreased EUR 5 million, mainly due to lower spending in Formula 1 activities.

SG&A costs were lower than prior year mainly due to lower costs related to the 70th anniversary celebrated in 2017.

Currency, including translation and transaction impact as well as the hedge effect had a negative impact mainly due to U.S. dollar depreciation versus euro.

Moving to Page 8, industrial free cash flow for the quarter was EUR 100 million, driven by strong adjusted EBITDA.

This was partially offset by CapEx to support broadening and hybridization of our product range.

In addition, we reminded, in Q4 2018, industrial free cash flow will benefit from the Patent Box.

Net industrial debt at the end of the September after share buyback was EUR 372 million.

In this respect, as you know, one of our strategy to reward shareholders is through share buyback that we expect to restart once the blackout period ends.

On Page 9, you can see the confirmed 2018 guidance we announced at the Capital Markets Day on September 18, 2018.

We increased CapEx to roughly EUR 650 million to capture commercial opportunities on one end and improved net industrial debt target to lower than EUR 350 million on the other one, as a consequence of the Patent Box agreement.

The last couple of slides show Formula 1 ranking as well as our client relations activities.

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

Thank you, Antonio.

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

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

Just a first question on FX.

I mean, given the significant pressure that you saw in the quarter, I'm just curious if there's anything else you think you need to do on hedging.

I know, you've kind of backed away from the idea of pushing the FX pressure or risk on to your customers through dynamic pricing.

But just curious if there's anything you think you can do there because that seems to be like the only real sort of negative headwind in the quarter?

Thank you, John.

This is Antonio.

I think most of the pressure this quarter comes from the comparison with last year that benefited significantly from the positive hedges in place at the time.

We are just restarting with the implementation of the policies that we have in place in order to smoothen the impact going forward.

I would add, John, yes, it was clearly a tailwind in the quarter, but it's prevailing right looking into next year, it should be a tailwind rather than a headwind.

Okay, that's helpful.

And then a second question, and maybe one of the most important slides, I think, in the deck is Slide 16, where you look at a product cadence.

And I'm just curious if you could give us some commentary around the Icona line and the Monzas, that the two Monzas?

They're sort of wedged or spaced between a special series in the hypercar, but given sort of the rumors around pricing, it sounds like they'll be more like hypercar pricing and potentially profitability.

So I was just curious if you can comment on that?

And then also, if we think about cadence of future Icona models coming out, should we think about those every 2 to 3 years to try to understand that sort of the delivery cadence of the Monzas and when we should maybe expect to see another new like a GTO or a 250 come out and sort of the math and economics around these products?

John, you're right in terms of the Icona, the margins are significant.

And that's why, it's become a fourth pillar and an important one.

In terms of the Monza SP1 and SP2 and in terms of the cadence, it is really towards the end of next year, it's predominantly in the fourth quarter.

We're saying whether we can accelerate that.

But at this stage, it's a fourth quarter '19 impact.

And as to the future Iconas, we haven't really disclosed that.

But you can show yourselves that the series will continue.

I'm not quite prepared to give you a precise timing at this stage.

But to push on that just a little bit more, I mean, thinking about those as sort of 2- to 3-year runs, is that a reasonably fair characterization or pretty off, just trying to understand sort of the rough cadence of those?

No, I think that's fairly reasonable characterization.

Okay.

And then just lastly, given sort of all the global volatility or at least the capital markets are indicating there's global volatility in economies.

What is your flexibility to shift shipments or deliveries maybe away from China and towards the Americas or Europe or vice versa?

And really just trying to understand geographically if you have the flexibility on waitlist to potentially offset weaknesses in specific geographies?

Yes, as I mentioned, our order book is significant, and we do have considerable flexibility.

Again, depending on the geographic specifications, our regulatory constraints as well as left-hand drives versus right-handed drives other than those constraints, we do have considerable flexibility.

And have you seen any changes in waitlist anywhere in your major regions at this point?

No, not at all.

Our order book has actually expanded across all regions.

Okay, great.

And then last just real quick, Antonio, how much cash will come in from the Patent Box in the fourth quarter?

I think, you should look at the guidance there, probably we should not exceed the level of CapEx that we've given as a guidance and the cash flow --that will be coming from adjusted EBITDA, less that would be the positive impact also adding up from the Patent Box that we'll basically reduce to 0 the tax outflow in the quarter.

Okay.

Those should all balance out then.

We will take our next question from Michael Binetti from Crédit Suisse.

You mentioned share buybacks, and we can see you've done a little bit in the quarter here, but I think you're planning on doing quite a bit more by the end of the year.

But you did mention that there's a lockup there.

Could you just help us think about and then with the Patent Box inflows cash coming in, in fourth quarter?

Can you help us think about how to model out share count for the rest of the year?

Or even just directionally, as you think it'll be you've much more opportunity on share repurchase in the fourth quarter than in the prior quarter, given the lockup period?

I think you went from a lockup period in the second quarter quiet period right into the Capital Markets Day and then right into lockup on third quarter sequentially?

Michael, that's correct.

We bought some back in the first quarter, and we haven't since then.

And clearly, since the Capital Markets Day, we've been in a blackout period.

As Antonio said, we will initiate our repurchase program as soon as the blackout period is over.

I'm reluctant to give you the cadence of the share repurchases.

But as you know, on the Milan Stock Exchange rules, you will know essentially what we're buying every week.

So you'll have a very good sense of what we're doing on a weekly basis.

Okay.

Let me ask you about -- I just want to ask about innovation because as we look in this quarter, there's obviously a very meaningful mix headwind as you rolled off Aperta and into a quarter more defined by cars like the Portofino.

I mean, I think that, that should start to diminish the mix headwind -- just start to diminish in the fourth quarter since you started slowing down Aperta last year in fourth quarter, if I'm not wrong.

But I know you guys are very focused on Monza and that can drive a lot of the financial model here, it sounds like, Louis, you're saying that closer to fourth quarter next year.

But I guess, my question is, how complete of a picture do we have from the Analyst Day and what we know today about the innovation coming from Ferrari between now and fourth quarter next year?

I guess, said differently, your plans for 2022 is about 15 cars or about 3 cars per year.

How many of those do we know about today?

It just -- it seems unusual that we wouldn't have some kind of a special car between now and fourth quarter next year, it seems like a pretty long period.

Well, first of all, let's talk about mix.

You're right, mix was unfavorable in this quarter and is likely to be unfavorable in the fourth quarter.

You can look at mix in different ways.

It's often a timing issue, but the positive of it is that mix is -- negative mix is driven in great part by the success of the Portofino.

And the way I look at that is that Portofino is attracting many new customers, and those new customers generally tend to become loyal to the brand and go up the range and eventually by the special series or limited editions.

So yes, at times, the short-term impact is negative in terms of pure mix, but I think if you take a longer-term view, it is a positive because most of these customers do go up in the range.

So I did want to mention that.

In terms of the visibility regarding our new products, clearly, we've only talked about really two models, one was the Monza that was the world premiere at the Capital Markets Day and the Purosangue, which we said was in 2022.

For obvious competitive reasons, we're reluctant to tell you exactly what we're going to launch.

But there will be launches, two lunches in the first half of next year, and you have to understand that there's a timing difference between the actual presentation and launch and the actual production and sale.

With that said, is there -- are there examples like in the past where you've been able to announce something and start production more quickly?

Or I guess, another way to ask is mix headwind seems to be the key defining metric in the second half of this year for the company.

Do you think that the mix of the portfolio will be as much of a headwind for you in the first half of '19 before we start talking about Monza as it is in the second half of this year?

I think that's a fair characterization.

But again, I think that's a positive if you take a longer-term view.

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

Relative to the potential for Section 232 tariffs in the United States to be extended from steel and aluminum to include autos and auto parts is, I think, it's been studied by the Commerce Department.

I think the risk for Europe-based manufacturers is less now than before, but just curious if you've looked at this potential impact and whether you think you might be able to apply for an exemption should it come in the past similar to relative to emissions regulations, given your small manufacturer status?

And then maybe just, perhaps, more broadly, perhaps, if you could comment on trade and tariff environment, I would assume while other automakers had complained a lot about tariffs this quarter that maybe you should not really been seen any impact, given what you manufacture and source your components, perhaps even a tailwind, given China's lowering its global tariff in autos, any color there would be helpful?

I would say, it doesn't have a real material impact.

Clearly, we've studied it carefully.

As you suggested, I think, the concerns particularly regarding trade between Europe and the U.S. have declined considerably since the heat of the summer.

As we said at the time, we believe there's a luxury manufacturer that should and it's unlikely, but should there be tariffs in the U.S., we would pass that on to our customers.

And we don't feel that it would have a material impact.

As opposed to most luxury product manufacturers, China, per se, a single-digit for us, and many luxury products and in fact, some car manufacturers, China is obviously huge.

It's not for us today, but our hope is of a time that China will be one of our growth platforms.

Okay, great.

And then just lastly, on the guidance for capital expenditures this year of EUR 650 million, which was increased at the Investor Day.

It now implies a bit of a step up in 4Q.

I'm just curious if you think you're still on track for spending that much and if you could remind the driver of the increased need for investing cash flows, I think, at the Investor Day was called out the cadence of new launches and hybridization technology, et cetera, and maybe speak to where you are and sort of accelerating some of those efforts?

Thank you, Ryan, we are taking track with the guidance on that.

We will take our next question from Monica Bosio, Banca IMI.

It's a follow-up on the price mix.

I understood that at least for the first half of 2019, the price mix would remain broadly negative.

I'm just trying to figure out the trend.

Can you just give us an indication on when the Portofino will reach a peak in term of volumes and sales?

And the same question is for the 488 Pista.

And the second question is you can give us an indication of the personalization rate in the quarter.

We had an improvement or it remains almost flat?

Let me try to answer that question.

In terms of the Portofino, we see it climbing significantly next quarter.

And staying at that level in the sort of first half as it's ramped up.

The 488 family is actually increasing because of the Pista and Pista Spider.

So that is actually increasing towards the second half.

So I don't know if that addresses your question.

In the meantime, the 812 Superfast will be pretty well rather stable across the quarters.

Okay, very clear.

Sorry, for the personalization rate?

Yes, Monica, Antonio speaking.

Personalization, there is nothing material to report.

We're in line with usual heritage.

We will take our next question from Adam Jonas, Morgan Stanley.

First question, any update around negotiations with Liberty Media about the Concorde Agreement that you wanted to highlight?

And specifically, and perhaps separate for any negotiations that are ongoing, can a budget cap of any kind work in your view as you think about these agreements?

No real update, Adam.

I think there's been progress on the technical specifications, but in terms of the economics, there really hasn't been any progress.

And obviously, the economics are also linked to the budget cap.

I think that the budget cap eventually makes sense, but the devil's in the details, and I think it would eventually be in everybody's interest, But we're not there yet.

And just a follow-up or ups for you, Antonio.

Is it too soon to talk a bit more holistically about 2019 at a high level without quantifying, of course, and we've touched on some of these in this call now in terms of like mix in the first half, perhaps, volume.

But without quantifying, again, what are the key puts and takes in terms of pricing mix, R&D and depreciation creep, FX or other items, we could begin to think about exploratorial -- from an exploration of the forward year?

Thanks for the question, Adam.

I think it's worth postponing the answer to the end of this year when we will be clearer as to 2019 as we see it.

We will take our next question from George Galliers, Evercore.

First just one housekeeping on the limited-edition models.

On the LaFerrari Aperta, you mentioned in the press release that it was finishing its limited series.

Can you confirm whether the last Aperta, which shipped in Q3 and give any insight into the number in the quarter?

I think, we'll have just few units still to be sold, but for sure, it is very, very limited number, less than 5 during the next quarter.

Okay.

Great.

And then on the J50, is it correct that 10 is the number that you publicly disclose you will produce and will all 10 delivered in the quarter or will that be staggered shipment?

I think they will be the spread over the year, and they are 10 in total with the bulk of that in Q3.

Okay, great.

And then just the final question was, just since the Ferrari IPO, the only part of the business, which has, arguably, fallen short is Formula 1. What steps do you need to take to climb the final step of the podium next year?

And is winning the championship a pressing priority or actually is competing towards the front of the grid sufficient for the company?

Well, clearly, winning for us is a priority, it's part of our heritage.

We were very close and the Constructors' Championship is still open.

Mathematically, anyway, there are still two races left.

Winning for Ferrari is very important.

What do we need to win, we need a great car and two great drivers.

This year was somewhat unfortunate.

We came very, very close.

And hopefully, next year, we can get there too.

There's not much I can add other than it's very important, and we're doing everything we can to win.

But I would say that in 2018, just based on the numbers, it was probably our best season since 2008, probably it was our best season since 2008.

So we're making progress.

We're not quite where we wanted to be, and we'll see how we go next year.

We will take our next question from James Albertine from Consumer Edge.

I wanted to ask on the engine segment of the business.

There's been some pressure obviously the last few quarters.

We're starting to get into a point where compares our -- somewhat easier in the fourth quarter.

So how do we think about sort of that business?

Is it nearing a stabilization point?

Or should we expect more weakness there perhaps given some decelerating the data coming out of China and the like?

Well, as you know, FCA announced its results on Maserati last week, and they reduced production because of their stock levels and the issues they'd faced primarily in China.

I think those are being addressed with vigor, and we'll see what their orders will be for the next quarter.

We will take our next question from Giulio Pescatore, HSBC.

First one on the Monza.

When do we expect to see the first deposits coming in because it doesn't seem like in the quarter you were already taking deposits for that car?

And would that be material for this year?

Can you give us an idea of, I mean, how much of the percentage of the base price is taken as deposits?

Giulio, I think, in terms of advances coming through customers, nothing has been yet received in Q3.

We expect this to come in since the beginning of 2019.

Okay.

And the second one on margin, I mean, if we adjust the quarter for the FX impact, it looks like your adjusted EBITDA margin was very close to 35%.

I mean, is that an underlying level at which you think you can remain, especially looking at next year?

Or it's -- or there are factors in this quarter that inflated the margin?

And also, the quarter had a negative mix so it looks like a very strong results for this quarter?

It sort of is linked to the prior question.

Clearly, despite all the previous questions on mix, EBITDA on a constant currency basis, the EBITDA margin was up.

But it was flattered by the fact that engines were down significantly.

What we said in the Capital Markets Day is that over the next 4 years, we'd like to get to a margin of in excess of 38%, so that's our target.

I think to put into your model 35% is being the base today is too high and as I've said, it's in this quarter, it's rather flattered.

We will take our next question from Andrea Balloni, Mediobanca.

First of all, about ForEx, again.

I was wondering if you can break down the EUR 19 million EBITDA between cost of hedging and negative real ForEx impact we understood, but largest part is about data compared to cost of hedging Q3 last year, but if you can provide us more detail about that?

My second question is a follow-up about Monza advance payment.

Is it fair to assume a level of advance payment to a tune of 30% to 40%.

If I'm not wrong, which is given or taken a level of LaFerrari in the past?

And my very last question is about free cash flow generation in Q4.

I lost your previous explanation, if you can repeat of a bridge of free cash flow in Q4, that would be great?

Thanks, Andrea.

In terms of the change in hedges impact out of the total currency impact, you're seeing the vast majority of that is practically explained by hedges; translation and transaction, representing a minimal addition to that.

And then most of it comes from the negative comparison with last year.

With respect to the cash flow, for Q4, I think it will be relatively simple because, as I said, we expect to have the cash flow represented by the EBITDA necessary to get to the guidance level.

And the same applies for CapEx.

And we do not expect to have taxes paid as a result of the use of the Patent Box benefit for 2015-2017.

Then all the rest working capital and other should not be material.

And about the advance payment for Monza?

As I said, the advance payment for Monza will come starting from the beginning of 2019.

Okay.

And is it fair to assume around 30% to 40% of pricing?

We are currently refining the policy there.

We will take our next question from Stephen Reitman, Societe Generale.

You mentioned that the Portofino is bringing in new customers to Ferrari.

Would you say the conquest rate of new customers is higher on the Portofino than you were seeing on the California, particularly when, obviously -- when it was a new vehicle launched in 2008?

I think that's a fair characterization from what I've been told.

We don't have a 100% accurate numbers yet because it's early days.

But clearly anecdotally, the direction is the way you said it, better than California.

And is the option take up greater than you're seeing on the run out of the California T?

In terms of the order book.

What you were saying, the optional take up, yes.

The optional take up on the Portofinos, are they taking higher specifications on the cars?

I would say, yes.

We will take our next question from Philippe Houchois, Jefferies.

A couple of questions from my end.

The first one is about 2 years ago, Ferrari sold its exposure to financial services in Europe, if I remember and kept the U.S. one.

It wasn't clear at the time why that was the case.

And I'm just wondering from a balance sheet perspective, would it be beneficial to Ferrari's ability to buy back shares or pay dividend if that the only exposure to financial services was dispose of?

Would that create anymore flexibility from a more strategic standpoint?

Thanks, Philippe for the question.

Actually, we have not looked at that as a priority.

I think the financial service arm that we maintain in the U.S. is actually functional to the development of our service there due to the market habits.

At the same time, I think it's self-funded, meaning that the portfolio we have may be easily securitized and that is what we're doing currently at the same time, while managing the P&L and the risk there with the usual care a financial service company has to apply: so separately and independently from the commercial arms.

So difficult to give you a simple answer: it's simply something we have there for the time being, is not negatively affecting in any way our performance.

Right.

And it's not critical decision.

Okay.

And if I can follow up with you -- Antonio on a couple of more housekeeping that would you be able to announce the 2018 Patent Box effect, when you report full year numbers, I'm assuming February or March next year?

Yes, that's correct, Philippe.

And last point on me, I know you give us this numbers later in the 10-Q, but would you able to tell us right now how much R&D was capitalized in Q3 and how much of it was amortized to try to work of kind of a U.S. GAAP type of earnings for Ferrari in Q3?

I tell you what the percentage of the CapEx is related to R&D and this is about half the amount.

Intangible and R&D amount to close to EUR 90 million.

So a bit more than compared to EUR 65 million in PP&E.

All right, okay.

And amortization should be not much different from Q2 because it's kind of a linear progression?

Yes, more or less.

It appears there are no further questions at this time.

I would like to turn the conference back to Ms. Nicoletta Russo for any additional remarks.

Thank you very much for following us today.

As always, the IR team will be down to and available to answer all your follow-up questions.

Thank you.

Bye-bye.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.