Analysis & Insights on Ferrari’s Q2 2021 Results

Ferrari reported their Q2 2021 results last week.  It was another excellent quarter for the Maranello based supercar manufacturer, and the stock market rewarded Ferrari by pushing the stock price up $10 in the past week.  While the stock market can be quite irrational at times, this was a well-earned vote of confidence 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 do to COVID are irrelevant) but they also provided the comparisons to the same period in 2019.  It would be helpful if certain of their competitors learned from this.

If you had been in a coma for the last 18 months, just woke up, and were given Ferrari’s Q2 2021 results to review, you would likely conclude they had a very good quarter and were continuing the successful run that started many years ago.  The only things that would have raised an eyebrow are the Free Cash Flow and CAPEX numbers.  While many of Ferraris rivals ended up being pushed by COVID into the financial intensive care unit, Ferrari was almost asymptomatic.  As an example of just how well they are doing, Ferrari returned €244 million to shareholders in Q2 via dividends and share repurchases. 

 

The Ferrari earnings call was insightful as usual.  As per the last call the acting CEO, John Elkann, led the discussion and was very actively engaged with Antonio Picca Piccon, the CFO providing support (the incoming CEO Benedetto Vigna doesn’t start until September 1).  Both did a nice job and handled the various questions tossed at them by the analysts quite comfortably. It’s clear they are on top of their business and clearly understand the issues and concerns.  One message that did come out loud and clear is that Elkann is pushing Ferrari into Electric Vehicles more quickly than what was planned under the prior régime.  I also go the feeling Elkann was quite enjoying his brief tenure as the Ferrari CEO.  The areas that I found interesting follow (note: in terms of the financial results, I am using Q2 2019 as the reference quarter as it gives a more balanced picture on the strength/weakness of the numbers):

 

  • Q2 2021 Key Results: The key numbers for Ferrari in Q2 were 2,685 cars sold, (up 0.5% vs 2019), Net Revenues of €1,035 million (+5.2%), and EBITDA of €386 million (+23%). The only negative is Free Cash Flow of €113 million which is a drop of -18.7% vs. Q 2 2019.  While FCF is a negative, it is improving quarter to quarter and Ferrari raised full year FCF guidance by €100 million to €450 million.  In his opening comments, Elkann stated that in June Ferrari set a new record for number of cars ordered.

 

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 50% in Q2 2021 as more cars were sent to China. The prioritization of European and Chinese deliveries vs. the Americas, which were down to 24% in Q2 from a high of 32% in 2018, looks to be a deliberate move to maximize profitability as the dollar has been weakening since late 2019.  The tightening of supply in the US has also helped support residuals.
  • New CEO: In his opening statement, John Elkann noted that this would be his final call following the announcement in June of the appointment of Benedetto Vigna as the new Ferrari CEO, starting on September 1. Vigna is seen as a highly unexpected choice as he has no experience in either the automotive sector or luxury goods.  Vigna is joining Ferrari from ST Microelectronics, a semiconductor firm, where he has been responsible for the sensors group.  Vigna degree is in subnuclear physics from the University of Pisa.  Vigna will have the massive, high risk task of leading Ferrari through the hybrid and EV transition while delivering on Elkann’s promise that announced Ferrari would  launch its first fully electric car by 2025.

 

  • Vigna’s success is hugely important not just for the future of Ferrari but also for the Agnelli Family (John Elkann is the current head of the Agnelli Family. He is 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 Agnelli’s wealth & income today.  If fact, Ferrari makes up a larger portion of the family’s wealth than Fiat’s successor company,   If Vigna fumbles the transition, the impact on the Agnelli Clans wealth will be enormous.
  • Hybrid & Electric Cars: In 9 months, Ferrari has gone from saying that they can’t see Ferrari 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. That’s quite an acceleration of the EV transition in just 9 months.  What was very interesting this time, is in an answer to a question from one of the analyst, Elkann mentioned alternative energy supplies for the first time, specifically calling out e-fuels and hydrogen.  While Ferrari is clearly going all in on electric right now, they clearly would like to have alternatives that keep the essence of internal combustion alive.

 

For Ferrari, a fully electric car is perhaps a bigger challenge than for any of its competitors given how sound is such an integral part of the Ferrari experience. Even though it’s only a quarter of the sales today, the symphonic 12 cylinder engine is still the heart of the Ferrari essence but likely to go the way of the Dodo bird very shortly.  I was talking to a Ferrari dealer earlier this week and he expects the 812 replacements will be a V8 hybrid based on the SF90 powertrain.  If the current V12s are transitioning into hybrid V8s, then I fully expect the current range of twin turbo V8s will evolve into hybrid V6s as the portfolio is rolled forward.  Elkann basically confirmed this with his comment on V6 hybrids being the common engine across Ferrari’s different racing activities including the planned return to Le Mans in the hypercar class in 2023.  The romantic image of crossing continents behind the wheel of howling V12 Ferrari has driven sales for decades.  How they keep the romance, when the most significant sound the car is generating is tire noise, will be a huge challenge.

 

  • Portfolio: The slow down in the pace on portfolio development due to the reduction in CAPEX in 2020 & 2021 is what drove the stock market to punish Ferrari post the Q1 earnings release. However, when you look at it in historic terms, Ferrari is still pumping out more models more quickly than they ever have done in the past.  Ferrari promised three new road models in 2021 and three have already been launched, the 812 Competizione, the Competizione A (targa version), and the 1st V6 hybrid, the 296 GTB.  Elkann also confirmed the Purosangue (Ferrari’s first SUV) launch in 2022.  However, the next Icona model (rumored to be a tribute to the F40) has been delayed and may not be unveiled until 2022 now.  It is hard to say if this is due to the 2020-21 CAPEX cuts or because there are still a number of Monza SP1 & SP2 build slots that need to find buyers.  The Monza has been a much harder sell for Ferrari than it was originally anticipated but it is highly profitable.  Ferrari is trying to generate renewed interest and hype in the model with a range of Monza focused activities in Monterey this week.   
  • Product Mix & Profitability: Ferrari’s Q2 2021 profits were €206 million up 12% vs. Q2 2019. Portfolio mix was a positive €113 million and while the Icona range Monza SP1 & SP2 are only 2% of the mix that, along with the SF90 Stradale, are driving the gain which helps explain why Ferrari is more than willing to be patient in filling all the Monza build slots.  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 and will become even less so when 296 GTB deliveries start in 2022.  This does help explain why Ferrari is accelerating the push into hybrids, as it’s highly profitable for them to do so.

 

  • Cash Flow & Debt: Q2 2021 Industrial Free Cash Flow came in at €113 million. This is a €271 million improvement on Q2 2020 number but just 18% short of what was generated in Q1 2019.  The acceleration in improvement in the FCF number and raise of the full year guidance by €100 million is massively impressive.  Ferrari has both very ambitious plans and the investment capability to bring them to life.  I don’t see any concerns with Ferrari’s current debt load.  Total debt remains unchanged at €2.3 billion, cash and equivalents is down slightly to €922 million with total liquidity of €1.7 billion.  Ferrari does not have any major debt coming due in 2021 or 2022.  Post the end of Q2, in July, Ferrari placed €150 million in bonds due in 2032 with US institutional investors. 

 

  • Racing & Stores: The Formula 1 team has been a major drag on Ferrari’s finances over the last couple of years but that is now finally starting to turn around with the resumption of a full F1 calendar of races. The team looks more competitive in 2021 but its drivers are not yet consistently finishing on the podium.  Ferrari also staged its first fashion show to showcase new men’s and women’s collections.  This is all part of the push to build Ferrari out as a complete luxury brand.

 

Summary

Ferrari is a highly successful company doing a great job navigating in a challenging environment.  The stock price reflects this, and the company currently carries a $56.1 billion market cap.  Ferrari continues to execute well, and the only change is a minor Covid driven delay on some of the new models.  The new CEO, Benedetto Vigna, will now need to lead Ferrari through perhaps the most significant transformation the business has ever undertaken.  It will be Vigna’s job to lead Ferrari seamlessly through the transition away from the V12, to hybrids and EVs, launch the Purosangue SUV without diluting the Ferrari equity, and get the F1 Team back regularly on the podium.  With a $56.1 billion market cap, this all needs to be done absolutely seamlessly or the Agnelli Family’s wealth is going to take a bit of a hit.

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August 2021

 

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3 Thoughts on Analysis & Insights on Ferrari’s Q2 2021 Results
    John
    17 Aug 2021
     9:22pm

    ST Microelectronics are a good company and I’ve used their parts for many years. I’ve designed their parts in to circuits for clients, and our own products. But that’s the electronics industry, not automotive.

    Yet, there is a cross-over because more and more of cars is electronics. Not just ECUs for drivetrain or even window lift control, but infotainment. When I presented at ISATA it was on how microcontrollers (small single chip computers for control applications) could be affected by noise, now the cars have full blown computers inside them processing data from mobiles and satellites! The level of complexity is huge.

    Benedetto Vigna is probably more used to supplying clients with electronics rather than being the client. I buy my electronics depending upon the function they do. When designing there’s two main parameters – function and cost. The electronics industry is infamous for shaving pennies off the costs of circuits. Save a cent on something you build a million off, or on one of a few hundred parts you buy for that circuit, and you see where profits can be made. When I transition to buyer mode I hunt down the best prices on the most expensive parts and ignore the ones that are only a few cents each. It’s a strategy that works as I’ve had people offering to provide a buying service and none have come close to my price after their markups.

    Ferrari are a luxury brand. If I applied my engineering buyer skills to Ferrari I’d buy something else, something “sensible”. However, my emotional side would buy a Ferrari, or a pre-Reichman Aston Martin, or a McLaren. The question is does Vigna understand the different needs of emotional luxury customers over logical engineering customers?

    But more importantly for a CEO, can Vigna set out a vision for the future of Ferrari to follow?

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