The Horse: Insights on Ferrari’s Q1 2022 Results

Ferrari had an outstanding year in 2021 and has followed that up with a great start to 2022. Every single key financial indicator in Q1 2022 was double digit positive and Ferrari’s guidance for the full year points to another year of expected strong results. The CEO transition to Benedetto Vigna has been flawless and Ferrari has done a superior job navigating through the pandemic vs. all of its major competitors. This really shines through when you compare and contrast the transparency with which Ferrari presents its results and the tone on the analysts call vs. that of another publicly listed niche UK supercar manufacturer. Despite the stock price being down rather significantly recently, and well off its 52 week high, Ferrari is still carrying a market cap over $37 billion. The recent share price drop is much more a reflection of overall turmoil in the stock markets these days than a reflection on Ferrari’s performance. Ferrari enjoys an overflowing order book and seems to be navigating the move to hybrids seamlessly. Ferrari’s continued strong results are a case study in what a highly competent management team, executing a clear strategy, that’s supported by wise forward thinking ownership looks like.

Ferrari’s superior job of navigating through the pandemic has given it a highly advantaged competitive position moving forward. In the two main “volume” segments of Ferrari’s business, the Sports Range and Granturismo Range, two of its main competitors, McLaren & Aston Martin, have fallen back considerably. In the Sports Range, McLaren has been struggling with the transition to next generation hybrids and is only now starting to produce its first entry, the Artura. On the Granturismo side of the business, Aston Martin has effectively ceded the field to Ferrari. Aston Martin’s current GT range is, in the words of Aston Martin’s former CEO, “overage” and with updates to Aston Martin’s models not coming until late 2023, Ferrari should have achieved complete dominance in the GT segment by then. In addition, the launch of the V12 powered Ferrari Purosangue SUV later this year is likely to put another fork into Aston Martin’s struggling DBX SUV.

As per the last Ferrari earnings call, this one was also less insightful than the one’s hosted by John Elkann (Executive Chairman) earlier last year. It looks like this will be the norm going forward as it is very much a reflection of the new CEO, Benedetto Vigna’s style. Vigna comes across as a modest man who holds his cards closer to his chest than his predecessors. Hopefully as he settles into the role and becomes more comfortable with the analysts he will open up a bit more. The CFO, Antonio Picca Piccon was also on the call and did his usual nice job of handling the various questions tossed his way. The areas that I found interesting follow:

Q1 2022 Key Results: The key numbers for Ferrari in Q1 2022 were 3,251 cars sold, (up 17.3% vs Q1 2021), Net Revenues of €1,186 million (+17.3%), and EBITDA of €423 million (+12.5%). Free Cash Flow continued to improve post Covid and came in at a positive of €299 million which is +102.7% vs. Q1 2021. The huge improvement in FCF over the last several quarters really highlights the strength of the business. In 2021, Ferrari returned €135 million to its shareholders via its share repurchase program in Q1 and announced a €250 million dividend payment in May. Vigna stated that the order bank for all models stretches well into 2023 and that most models are already sold out.

Over the last several years, Europe received about 50% of Ferrari’s production. This jumped up to 54% in Q1 2022 as North American deliveries were cut back dramatically from 27% of total production in Q 1 2021 to 20% in Q1 2022 due to congestion in US ports. China and the rest of APAC also benefited from the cuts to North American production, rising to 9% & 17% of the mix respectfully. North America. The cuts in US deliveries have helped to keep the residuals on recent models at an all-time high. In fact, Vigna commented on the strength of the pre-owned Ferrari market. Looking around a few US Ferrari dealerships, in multiple cases 1-2 year old used cars are selling for over the original MSRP.

Product Mix & Profitability: Ferrari’s Q1 2022 net profit is €236 million up 16% vs. Q1 2021. Portfolio mix was a positive €13 million driven by the SF90 Stradale. The limited edition Icona range Monza SP1 & SP2 was actually a drag due to a lower number of units delivered in Q1 2022 as the production run was coming to its conclusion. Historically it’s been the big V12 GTs that have driven Ferrari’s profitability. This has now changed with the introduction of the hybrids. In fact, Ferrari has moved from breaking down its shipments by engine cylinders to “Internal Combustion (ICE)” and “Hybrid”. The SF90 range is highly profitable, and I expect the 296 GTB, which is now in production, to fall into the same category. One area where Ferrari did get a bit of push back on was the guidance on profitability mix for the balance of 2022. Delays in the timing of a few of the new models is the one impact the pandemic has had on Ferrari. Deliveries of the Purosangue SUV & the next generation Icona SP3 Daytona will not be starting until 2023. Net net, the balance of 2022 will be year without an Icona or another Hypercar in production which pulls down the profitability of the product mix a bit. It’s a short term timing issue and the one slightly negative blotch on an otherwise outstanding report card. On a positive note, Vigna did confirm that the Purosangue would be launched with a V12 in the nose.

Cash Flow, CAPEX, & Debt: Q1 2022 Industrial Free Cash Flow came in at €299 million. This is a €152 million improvement on Q1 2021 and even exceeds Q1 2019 prior record high. Ferrari has ambitious plans and is generating the cash needed to bring them to life. The €132 million in Q1 2022 CAPEX spending was a bit light but total Research & Development cost were up slightly to €234 million. As per auto industry norms, Ferrari capitalizes at least 50% of its CAPEX spending, with the balancing hitting the P&L in the current year (unlike certain other Supercar manufacturers which capitalizes a much higher percentage which helps inflate EBITDA). I don’t see any concerns with Ferrari’s current debt load. Total debt is unchanged at €2.6 billion, cash and equivalents are up at €1.5 billion with total liquidity of €2.2 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 through 2024.

Portfolio: Ferrari’s current portfolio is by far the most complex in its history. The strategy that’s delivered the current portfolio was first articulated back in Q3 2018 with the next refresh coming in June of this year. Back in 2018, Ferrari changed the way it segmented its portfolio from V8s & V12s to Sport Range, Gran Turismo Range, Special Series, Icona, and Hypercar. As mentioned earlier, shipments are now just broken down into ICE and Hybrid with the number of cylinders irrelevant. In terms of the portfolio evolution, while it is clear that the 296 GTB & 296 GTS sit within the Sport Range, how Ferrari intends to classify the Purosangue SUV is still up in the air. This change in portfolio approach gave Ferrari the license to evolve its portfolio in ways the old rigid engine focused parameters never allowed it to do in the past. Redefining the old V8 segment to Sports Range has allowed Ferrari to respond effectively to McLaren’s emergence in the past decade while redefining the old V12 GT segment to Gran Turismo has really put a fork in Aston Martin’s core front engine Sport & GT car business, which is now half the size it was just 3 years ago.

Hybrid & Electric Cars: Back in Q3 2021 analysts call, Ferrari indicated that they will be launching the first fully electric Ferrari in 2025. Based on past statements, this is clearly one of Executive Chairman, John Elkann’s priority projects. What was interesting in this analysts call was that nothing was said about the move to EV. In fact, Piccon indicated that Ferrari was extending the life cycle of certain ICE models.

Racing & Stores: After being a major drag on Ferrari’s finances over the last couple of years, the Formula 1 Team is back to being a positive contributor to both Ferraris image and bottom line. The Ferrari F1 Team’s 3^rd place finish in 2021 gets paid out in 2022 and its current front of the grid position points to a promising future. The F1 Teams driver line up is now settled for the next several years with a good balance between a young potential F1 champion and a highly competent more experienced #2 driver. With Covid store closures now a thing of the past, total “brand”, which includes both racing, licensing, and stores, was up 17.2% million in Q1 2022.

Other than Net Revenue, the 2022 targets do not appear to be the least bit ambitious, even taking into account the headwinds on product mix due to the phasing of the Icona models between the Q1 2022 end of deliveries on the SP1 & SP2 with the SP3 not starting until Q1 2023. Originally my guess was that Ferrari was setting up the new CEO with an easy to make year to build credibility with investors. In light of recent turmoil in the financial markets, hikes in interest rates, and global economic slowdown, these goals are looking more prudent. The next Capital Market presentation is on June 16^th in Maranello where Ferrari will unveil its next major multiyear business plan. The great Q1 2022 numbers give Vigna plenty of credibility going into that event. 2022 is also Ferrari’s 75^th anniversary so I would not be surprised if there is a new limited edition model announced this year to commemorate that event.

Summary

The Ferrari machine keeps going from strength to strength. It’s executed a major CEO transition flawlessly and Ferrari’s still hefty $37 billion market cap reflects this. Ferrari is about to announce its next 5 year plan in June and it will be Vigna’s job deliver both the growth and portfolio laid out in that plan. While Ferrari is well underway in the transition to hybrids, EVs will likely be the main focus as we get into the 2^nd half of this decade. As engine sound has been such a core essence of the Ferrari driving experience for the last 75 years, how this gets resolved in the EV transition will be a major challenge. The F1 Team looks to be back on track which is a major accomplishment after a decade of mixed results. In 2021, Ferrari beat their guidance on every single financial metric and 2022 is off to a great start. However, the tailwinds on portfolio that helped deliver those results are about to become headwinds for the balance of the year. With an overflowing order book, an F1 Team back on track, and rich current portfolio of models, they should be able to beat their guidance again this year.