Analysis & Insights on Ferrari’s Q3 2021 Results

If putting together last week’s article on Aston Martin’s Q3 results (Aston Martin Q3 2021) was an exercise in digging through a vat of lipstick to find one rather annoyed pig at the bottom, Ferrari’s Q3 results are a case study in what highly competent management team, executing a clear strategy, that’s supported by wise forward thinking ownership looks like.  Needless to say, it was another excellent quarter for the Maranello based supercar manufacturer, and the stock market rewarded Ferrari by pushing the stock price up $30 to $278 in the past two weeks, adding an additional $7.5 billion to its market cap.  While the stock market can be quite irrational at times, this was a well-earned vote of confidence in both the new CEO, Benedetto Vigna, and in a company that has successfully navigated multiple major challenges in the past several years.  I believe it also reflects the transparency that Ferrari demonstrates when it presents the results.  In this case, not only did Ferrari provide the usual year ago comparisons (which due to COVID are irrelevant) but they also provided the comparisons to the same period in 2019.  It would save me a lot of time if certain of their competitors adopted similar practices.  If you had been in a coma since February 2020, just woke up, and were given Ferrari’s Q3 2021 results to review, you would not have an inkling that the world was recently turned upside down by a major pandemic.  The Ferrari machine continues to produce highly desirable cars and immense amounts of cash.  As an example of just how well they are doing, Ferrari has raised its 2021 guidance significantly this quarter given some of the full year goals have already been achieved.

The Ferrari earnings call was different this time but insightful as usual.  The new CEO, Benedetto Vigna led the call with significant support from the CFO, Antonio Picca Piccon.  Both did a nice job and handled the various questions tossed at them by the analysts quite comfortably. Vigna comes across as a modest man who’s quite comfortable having his accomplishments do the talking for him.  When asked what he brings to Ferrari, Vigna answered quite thoughtfully, “three things: international experience, leadership style and ability to manage situations in a changing time”. Based on this, I expect we will see Ferrari continue to focus on developing its markets outside of Europe and the push into electrification will only accelerate and intensify under Vigna’s leadership.  I did miss having John Elkann, Executive Chairman and former acting CEO, on the call as Elkann seemed willing to provide a bit more color and insights into Ferrari’s longer-term strategy than the more reserved Vigna & Piccon.  The areas that I found interesting follow (note: in terms of the financial results, I am using Q3 2019 as the reference quarter as it gives a more balanced picture on the strength/weakness of the numbers):

 

  • Q3 2021 Key Results: The key numbers for Ferrari in Q3 were 2,750 cars sold, (up 11.2% vs 2019), Net Revenues of €1,053 million (+15.1%), and EBITDA of €371 million (+19.6%). Free Cash Flow reversed Q2’s negative trend and came in at a positive of €242 million which is +75.4% vs. Q 3 2019.  The positive development of FCF really highlights the strength of the business. FCF has improved quarter to quarter and Ferrari raised full year FCF guidance a second time this year by another €100 million to €550 million.  In Q3, Ferrari returned €55 million indirectly to its shareholds via the share repurchase program.  Piccon stated that the order bank for all models is now over one year with several already sold out.

 

Over the last several years, Europe received 46-48% of Ferrari’s production.  This jumped up to 55% in 2020 and dropped back a bit to 47% in Q3 2021 as more cars were sent to China. US deliveries accounted for 26% in Q3, down from a high of 32% in 2018 but still up 2 points on a quarter to quarter basis. Ferrari seems to quite deliberately adjust supply to take advantage of currency movements.  As the US dollar has weakened, US supply was reduced, with the dollar now strengthening again, the US is receiving a high allocation of new cars.  The tightening of supply in the US in the last couple of years has also helped support residuals which are at an all-time high for recent models.

  • Product Mix & Profitability: Ferrari’s Q3 2021 profits were €207 million up 22% vs. Q2 2019. Portfolio mix was a positive €4 million driven by the Icona range Monza SP1 & SP2, 812 GTS and the SF90 Stradale.  Historically it’s been the big V12 GTs that have driven Ferrari’s profitability.  Piccon reiterated that with the launch of the SF90 range the mix between V8s and V12 is now becoming less relevant in terms of driving Ferrari’s bottom line.  This will further blur when 296 GTB & the Purosangue SUV deliveries start in 2022.  Elkann’s push towards more electrification is clearly not just driven by environmental concerns but also because the transition is highly profitable for Ferrari.

 

  • Cash Flow & Debt: Q3 2021 Industrial Free Cash Flow came in at €242 million. This is a €165 million improvement on Q3 2020 number and up a very impressive €104 million on Q3 2019.  The acceleration in improvement in the FCF number coupled with the raise of the full year FCF guidance by an additional €100 million for the second quarter in a row is massively impressive.  Ferrari has both very ambitious plans and the capability to bring them to life.  I don’t see any concerns with Ferrari’s current debt load.  Total debt is up €250 million to €2.6 billion, cash and equivalents are up €350 million to €1.3 billion with total liquidity of €2 billion.  Ferrari does not have any major debt coming due until 2023 and has enough cash on hand today to retire all of the debt that is maturing up through 2024.  In July, Ferrari successfully placed €150 million in bonds due in 2032 with US institutional investors. 
  • The New CEO: The new CEO, Benedetto Vigna, started on September 1. He’s joining Ferrari from ST Microelectronics, a semiconductor firm, where he has been responsible for the sensors group.  Vigna’s success is hugely important not just for the future of Ferrari but also for the Agnelli Family (Ferrari’s Executive Chairman, John Elkann is the current head of the Agnelli Family. He is also the Chairman & CEO of Exor, the holding company for the Agnelli family’s main investments.  The original source of the Agnelli Family’s wealth was Fiat Automobile.)  Ferrari is one of Exor’s largest holdings and a key source of the Agnelli family’s wealth & income today.  In listening to the last several earning’s calls that were led by Elkann when he was the acting CEO, he came across as knowledgeable, involved, and very clear on the direction he believed Ferrari needed take to be successful as the automotive industry transitions from ICE to EV.  This “seizing of the strategic reins” would seem to mark a new era for Ferrari with Elkann providing the vision and Vigna tasked to bring it to reality.  This is quite a departure from the situation with the last several “larger than life” Ferrari CEOs who dominated on center stage.

 

  • Hybrid & Electric Cars: In a year, Ferrari has gone from saying that they can’t see ever moving to an all EV portfolio, to then stating that in the coming decade there will not be a fully electric Ferrari, to now declaring they will be launching the first fully electric Ferrari in 2025. Elkann is clearly driving the strategy and Vigna now needs to deliver it.  In the past Elkann has also called out e-fuels and hydrogen as well so it does seem like there are multiple options on the table.  Having low/no emission alternatives that keep the essence of internal combustion alive would certainly make the transition smoother for a company for which the symphonic 12 cylinder engine is such a core part of its heritage.

 

  • Portfolio: Ferrari’s current portfolio is by far the most complex in its history with still more to come in the next year. Ferrari promised three new road models in 2021 and as of today, four have been launched, the 812 Competizione, the Competizione A (targa version), the 1st V6 hybrid, the 296 GTB, and the next model in the Icona range, the Daytona SP3.  The SP3 was originally rumored to be delayed until 2022.  It is hard to say if the original delay was due to the 2020-21 CAPEX cuts or because up until recently there were still a number of Monza SP1 & SP2 build slots that need to find buyers.  There has been a major push in Q3 on the Monza SP1 & SP2 including a number of activities in Monterey which would seem to have been successful.  The Purosangue (Ferrari’s first SUV) appears to be on track for a launch in 2022.  

 

  • Racing & Stores: The Formula 1 team has been a major drag on Ferrari’s finances over the last couple of years. While finishing 6th in 2020 is a drag on 2021 given the timing of the payouts from Formula 1, the F1 Teams current #3 ranking does point to a more financially rewarding 2022.  The team has been more competitive in 2021 but is still a long way from challenging consistently for wins.  It looks like the majority of Ferrari stores are open again as “brand” was up by €6 million in Q3 2021.
  •  

Summary

The Ferrari machine keeps going from strength to strength.  It may just be the most effective and efficient organization to emerge from Italy since the Roman Legions headed towards Gaul.  The stock price reflects this.  Ferrari continues to execute well, and what looked to be a few Covid driven delays on a few new models a couple of quarters ago, have been worked through and they are back on track.  The new CEO, Benedetto Vigna, will now need to lead Ferrari through perhaps the most significant transformation the business has ever undertaken since the placement of engines went from the nose to the middle of the car.  It will be Vigna’s job to lead Ferrari seamlessly through the transition to hybrids and EVs, launch the Purosangue SUV, and get the F1 Team back to the pointy end of the grid.  The $68.2 billion market cap for a company with projected revenues of €4.3 billion in 2021, is as much a reward for past performance as it is a vote on what perceived to be a very bright future.

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November 2021

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