Ferrari’s Q1 2021 Results

Both Aston Martin & Ferrari reported their Q1 2021 results last week.  Ferrari had an excellent quarter, even by pre Covid standards, and then was rewarded by a 10% drop in its stock price due to announcing that they were pushing back the 2022 financial goals by one year.  Aston Martin also took a 10% hit to its stock price after reporting both a top and bottom line that beat analyst expectations (analysis of Aston Martin’s Q1: AML Q 1 2021) While the stock market can be quite irrational at times, there do seem to be quite sound reasons behind both reactions.  Ferrari enjoys a rich market valuation and cannot afford a single misstep and the push back on the financial goals is certainly a bit of a stumble.

If you had been on another planet for the last 15 months, just woke up, and were given Ferrari’s Q1 2021 results to review, you would likely conclude they had a good quarter.  The only things that would have raised an eyebrow are the Free Cash Flow and CAPEX numbers.  While many of Ferraris rival ended up being pushed by COVID into the financial intensive care unit, Ferrari had a very mild case of the financial flu.  However, a few of the actions they took to migrate their losses in 2020 do have longer term impact on the business. The most significant is the reduction in CAPEX which will result in the delay of a couple of new models in the next couple of years.  While Ferrari indicated that their 2021 results will come in at the high end of the guidance range, they are now pushing the 2022 financial targets back one year to 2023.

 

The Ferrari earnings call was insightful as usual.  While the last call was led by the CFO, Antonio Picca Piccon, this time the acting CEO, John Elkann, took on a much larger, and more active, role (former CEO Louis Camilleri retired suddenly in early December after catching Covid-19).  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 where the issues and concerns are likely to lie.  The areas that I found interesting follow (note: in terms of the financial results, I am using Q1 2019 as the reference quarter as it gives a more balanced picture on the strength/weakness of the numbers):

  • Q1 2021 Key Results: The key numbers for Ferrari in Q1 were 2,771 cars sold, (up 6.2% vs 2019), Net Revenues of €1,011 million (+7.6%), and EBITDA of €376 million (+20.9%). The only major negative is Free Cash Flow of €147 million which is a drop of -47.9% vs. Q 1 2019.  I will come back to this later. 

 

Over the last several years, Europe received 46-48% of Ferrari’s production.  This jumped up to 55% in 2020 and dropped just slight to 53% in Q1 2021. The prioritization of European deliveries vs. North America, which were down to 27% from a high of 32% in 2018, looks to be a deliberate move to maximize profitability as the Euro has been consistently strengthening against the dollar since 2019.

 

  • New CEO: In his opening statement, John Elkann referenced the CEO search and stated that they were making good progress on the search and that the new CEO would have an intimate understanding of all the technologies required to chart a successful future for Ferrari. I would read this as they do not have a final CEO candidate and getting the right candidate will not be easy.  The part of the statement on intimate understanding of technology is also quite interesting as it points to a change of direction in terms of background from the last two Ferrari CEOs.  Both Sergio Marchionne & Louis Camilleri came from outside the automobile industry, were highly respected, & drove enormous amounts of shareholder wealth creation.  This hire 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,    

 

While there are a number of highly appealing aspects to the role, it’s also not one a lot of potential CEOs will want as its going to be a difficult one to win in.  The new CEO is going to have to navigate a hugely disruptive shift from ICE to hybrid and EV, turn around a F1 Team that hasn’t won a world championship in 12 years, launch a SUV while not diluting the brand equity (or calling it an SUV), and do it all while continuing to drive the stock price.  One major stumble with a big earnings miss and Ferrari risks becoming viewed as a struggling car company, and not a luxury goods company.  Using Aston Martin as a reference, the difference between these two views is $47 billion.  That’s the difference between the two companies’ market cap at last Friday close.

  • Electric Vehicles: Over the last three earnings call Ferrari has “evolved” their postion on EV significantly. On Camilleri’s last call in Q3 2020 he was elegantly evasive but did say he could not see Ferrari ever moving to an all EV portfolio and did not see it even reaching 50% in his tenure.  When the question came up on the Q4 2020 call, Elkann stepped in to answer and was very explicit that in the coming decade there will not be a fully electric Ferrari.  Hybrids yes, but fully electric no.  This time Elkann announced that Ferrari would be launching its first fully electric car in 2025.  That’s quite a change in strategy in just 9 months. 

 

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.  The romantic image of crossing Europe at high speed behind the wheel of a Ferrari V12 has driven sales for decades.  Doing it in a golf cart on steroids just doesn’t generate the same emotions.  How you deliver sound & soul from a basically noiseless characterless powerplant without coming across as the world fastest, most expensive, boombox is a huge challenge.

 

  • Portfolio: The change in the pace on portfolio development is what drove the stock market to punish Ferrari post the earnings release. The change is due to the reduction in CAPEX in 2020 & 2021 which will result in the delay of a couple of new models in the next couple of years.  The reduction in CAPEX spending was absolutely the right thing to do during last year’s crisis and the continued uncertainty going into 2021.  The spending cuts haven’t resulted in any new models being cancelled, it’s just a delay in the production ramp up timing which has pushed the profits these new models are expected to deliver forward by a year.  Ferrari had promised three new road models in 2021 and at least one has already been launched, the 812 Competizione (I am not sure if Ferrari is counting the Competizione A (targa version) as a 2nd new 2021 model).  Elkann also confirmed the Purosangue (Ferrari’s first SUV) launch in 2022 in his opening remarks.  In the Q&A session that followed, it emerged that the launch of the next Icona model (rumored to be a tribute to the F40) will be delayed.  When Ferrari did the original financial projections for 2022, they were probably counting on the Pursangue production starting early in the year and quickly ramping up.  Do to the CAPEX cuts, this has now likely been delayed by 6-9 months which is pushing the majority of the revenue recognition from 2022 to 2023.  In the case of the next Icona model, its mostly likely moved from an early to late 2021 launch with production starting 12 months later.

 

In 2020 Ferrari spent €60 million in 2020 buying up land next to the existing factory in Maranello.  This is most likely for future production expansion plans needed to support the upcoming EV & SUV launches.  With COVID, construction would likely have been delayed which helps explain the shift in timing. 

  • Product Mix & Profitability: Ferrari’s Q1 2021 profits were €206 million up 13.9% vs. Q1 2019. Portfolio mix was a positive €48 million while volume (units) added €5 million.  While the Icona range Monza SP1 & SP2 is only 2% of the mix that, along with the SF90 Stradale, are driving the gain.  Historically it’s been the big V12 GTs that have driven Ferrari’s profitability.  However, Piccon stated 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 does help explain why Ferrari has been pushing the SF90 so hard, its highly profitable for them to do so.

 

  • Cash Flow, Rewarding Shareholders, & Debt: Q1 2021 Industrial Free Cash Flow came in at €147 million. This is double the Q1 2020 number but just over half of what was generated in Q1 2019.  While the FCF number continues to improve, it is still well short of where it was pre pandemic and will likely continue to have a negative impact on investments in the short term.  Ferrari has now resumed its share repurchase program with €150 million tranche to be completed by September and approved a dividend payout of €160 million.  I don’t see any concerns with Ferrari’s current debt load.  Total debt is €2.3 billion, cash and equivalents is €980 million with total liquidity of €1.8 billion.  Ferrari does not have any major debt coming due in 2021 or 2022. 

 

  • Racing & Stores: The Formula 1 team was a major drag on Ferrari’s finances in 2020 and it is unlikely that this situation will change in the near term. While the Ferrari F1 team has been more competitive in 2021 than it was in 2020, it is still not a top 3 team. The pandemic has also had a major negative impact on the Ferrari stores which continued to be closed into Q1 2021.  A fashion show is planned for mid-June to relaunch Ferrari in the luxury space.

 

Summary

Ferrari is a highly successful company doing a great job navigating in a challenging environment.  Right now, the stock price has been punished a bit for making what were exactly the right financial decisions back in 2020.  Ferrari continues to execute well, and the only major change is on the timing of some of the new models.  The most important decision the Ferrari Board of Directors will make this year will be on the appointment of a new CEO.  While Ferrari clearly has a highly skilled executive team that has been able to carry the business during the transition, it will be the new CEOs job to lead Ferrari seamlessly through the transition to hybrids and EVs, launch the Purosangue SUV without diluting the Ferrari equity, and turn around the F1 Team.  How smoothly that person does this will determine Ferrari’s long-term future. 

 

Thoughts and comments? Please see the comments section below.

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May 2021

 

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2 Thoughts on Ferrari’s Q1 2021 Results
    John
    18 May 2021
    10:33pm

    Like all EVs, Ferrari are desperate for a revolution in battery technology. Recent news on Lithium-Metal rather than Ion looks promising with faster charging, enough cycles beyond the life of any product, and I believe higher capacities too. Once the packaging of the batteries becomes something that can be optimised rather than accommodated it will make a huge difference to all cars. Then the likes of Ferrari will have a better choice on how to deploy that power.

    Will it tease your senses? Sadly, the roar of the engine will be replaced by a purr. I do feel sorry for the next generation, but I hope the drive will still excite.

    As for their current portfolio, I don’t think Ferrari have ever had a better line up of cars than now. Not sure about their SUV offering as I think it’s going to be more of a cross-over between estate (station wagon) and SUV. Think GTC4 Lusso that’s been to the photocopier and enlarged 50% in the vertical direction.

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    Nik
    16 May 2021
    9:35pm

    Highly insightful as always! I’m a dinosaur that still reads car magazines and not one has addressed, at any great length, the CEO change at Ferrari.

    Wouldn’t it be great to bring back Luca M as a consultant to steer the prancing horse away from this desire for ever increasing production and stop chasing HP and performance numbers.

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