Ferrari’s Q2 2023 Results: The Horse Prances

Ferrari exited the COVID years with a huge amount of momentum which has only continued to build over the last several quarters. If Q1 2023 was an excellent quarter (Ferrari’s Q 1 2023 Results), then Q2 2023 was even stronger. Once again, all key financial indicators, bar one, grew double digits vs. Q 2 2022. The only one that was down, shipments (-2%), is completely unconcerning for a company with an order book that stretches well into 2025 now. In the Q1 earnings call, Ferrari management indulged in a bit of sand bagging and downplayed expectations for the back half of the year (which I doubt anyone bought), this time they completely dropped that premise and raised full year guidance across the board. This is actually a quarter ahead of last year when they waited until announcing the Q3 2022 results before raising guidance. Like last year, I fully expect Ferrari to beat these revised goals. Ferrari has made under promise and over deliver into an art form. All in it’s the net outcome of having a clear long term strategy and then executing consistently against it.

Executive Chairman John Elkann has been a consistent guardian of the long term strategy & vision for the past decade and a bit during which time Ferrari has cycled through five CEOs. During this period Ferrari has gone from being a jewel within the Fiat empire, to becoming a fully independent company in 2015 with a market cap on par now with its former corporate (i.e. the Stellantis Group post the Fiat Chrysler – Peugeot merger). I believe one of the keys to this success has been Elkann’s both bringing in and exiting CEOs to meet Ferrari’s needs at that point in time. It started with Sergio Marchionne replacing Amedeo Felisa, who was then followed by Louis Camilleri and Benedetto Vigna. Marchionne, Camilleri, & Vigna all came from non-automotive backgrounds. This has allowed Ferrari to think outside the traditional automotive box and expand into new areas that have generated additional revenue streams.

These additional revenue streams have allowed Ferrari to master the under promise, over deliver dance. This is critical given the current market cap of $56.7 billion, P/E of 49, and the stock sitting near its all-time high. As a point of reference, Ford’s current market cap is $48.3 billion with a P/E of 12. Ford is seen as an auto/truck manufacturer and Ferrari is a super premium luxury goods company. The difference between the two is dramatic, Ferrari is valued at $4 million for each car sold, while Ford has a value of $11k per unit sold.

If Ferrari fails to continue to execute brilliantly and beat expectations, then Ferrari risks becoming a car company in Wallstreet’s eyes which would be ruinous for the stock price. These dynamic plays themselves out both in the way Ferrari acts and the messages it is sending. Reducing shipments slightly while driving revenue up double digits is a great way of hammering the luxury goods message home.

Benedetto Vigna, the current CEO, has been in place for almost 2 years now and it shows. On the earnings call Vigna now comes across as confident and in command. Vigna still holds his cards close to his chest but is a bit more loquacious and comfortable, especially when it comes to discussing future technology, which is clearly where is his passions lie. The CFO, Antonio Picca Piccon, was also on the call and did his usual nice job of concisely handling the questions tossed his way. Vigna & Piccon appear to have a strong, cohesive, relationship.

Highlights from Q2 and the strategies that help deliver the results:

Q2 2023 Key Results: The key numbers for Ferrari in Q2 2023 were 3,392 cars sold, (down 2% vs Q2 2022), Net Revenues of €1,474 million (+14%), and EBITDA of €589 million (+32%). Free Cash Flow was €138 million, up €59 million (+75%) vs. Q1 2022. Mix and pricing contributed €589 million. Ferrari returned €411 million to its shareholders via both dividends and the share repurchase program in the quarter. Probably the most impressive number here is the value (revenue) growth which came off of a slight drop in volumes. A key contributor to the revenue growth was the increase in personalizations which now account for 18% of total car and parts revenue. Ferrari’s ability to continue finding ways of extracting ever increasing sums of money from its customers it truly impressive.

The demand model Ferrari has created is extraordinary. I was recently in Monterey for Car Week and had the opportunity to talk to a number of Ferrari owners who are quite active in the world of Ferrari. These were quite insightful discussions and while Italy may well have abolished the nobility in 1946, it is still alive and thriving in the world of Ferrari. Like almost all systems of Nobility, at its core, it’s a pay to play system. However, in terms of the execution, its far more nuanced and can be flexed to meet Ferrari’s goals. Perhaps the place a person’s status/ranking in the world of Ferrari was most visible was at the Casa Ferrari hospitality suite at Pebble Beach. Everyone there had a color-coded card dangling from their necks on a lanyard. At the bottom were those with yellow cards (Ferrari peasants) followed by red, black, and at the top of the heap, white (Ferrari royalty). While owning a 250 GTO, 250 LM, 250 Testa Rossa, 275 GTB/4, and 288 GTO might make you a demi-god in my book but as none of these are recent or current models, it will not help get your name moved up the list for the next Icona model or LaFerrari successor. It’s all about how much you have spent with Ferrari in the recent past, what cars have you bought, what events have you attended, and are you involved in the Challenge Series, or Corsa Clienti. Of the cars that you bought, were they new cars, did you gorge yourself in options at Tailor Made by Ferrari, how long did you hold them for, are they still owned, did you trade them back in at your official dealer. A great recent example of this model in action came from a friend in Switzerland. Ferrari was concerned that there were too many SF90s floating around on the used market which was bad for residuals. Ferrari had local dealerships buy them up. Ferrari then created retail demand for them by implementing a rule that the new limited edition SF90XX allocations would only be given to current owners of SF90s. The net result of all this, in Vigna’s words: “the order book remains stunningly high across all geographies in the full product range thanks to our robust order intake”.

Another way Ferrari mints cash is by shifting allocations on a geographic basis to take advantage of currency movements. In Q2 2023, Ferrari banked a positive €20 million net impact from currency on the back of an increase in EMEA (Europe Middle East Africa) shipments to 48% of the Q2 2023 mix from 40% in Q2 2022.

Product Mix & Profitability: Ferrari’s Q2 2023 profits were €334 million up 33% vs. Q2 2022. As mentioned, mix & price was a positive €94 million driven by model mix and increased personalizations. Historically it’s been the big V12 GTs that have driven Ferrari’s profitability, this has now been taken over by the hybrids (I recently spent several days with a 296 GTB, it is very very good), which now account for 43% of Ferrari’s units sold. In Q2 2023, it was the SF90, 812 Competizione, and Daytona SP3 that have driven the mix increases. When the first EV is delivered in 2025, I would expect that will give margins a further boost. With both the 296 GTS & Purosangue deliveries ramping up in the balance of 2023, product mix should be quite positive going forward and help drive long term profitability. In the analyst call, Vigna seemed to move away from the perceived 15,000 cap on production per annum. When asked about it directly, he stated: “we will always sell one car less than the market demand.”

CAPEX, & Debt: Ferrari has very ambitious plans and is generating the cash needed to bring them to life as demonstrated by the €198 million in Q2 2023 CAPEX spending, up 19% vs. Q2 2022 with further increases planned throughout 2023 with a full year target of €850 million. As per auto industry norms, Ferrari capitalizes around 50-60% of its CAPEX spending, with the balance hitting the P&L in the current year (unlike an other public Supercar manufacturer which capitalizes a much higher percentage which helps inflate EBITDA). I have no concerns with Ferrari’s current debt load. Total debt is down slightly to €2.68 billion, and cash and equivalents have dropped to €1.11 billion (after paying out €411 million to its shareholders in Q2) with total liquidity of an impressive €1.7 billion. Ferrari does have €328 million of debt coming due in the balance of 2023 and has enough cash on hand today to retire all that debt plus a large chunk of the debt maturing through 2025. In fact, they have already announced another €200 million stock buyback in Q3 2023 and placed a tender offer for the €650 million principal 1.500 percent notes due May 27, 2025.

Portfolio: Ferrari’s current portfolio is by far the most complex in its history with still more to come this year. The strategy that has delivered the current portfolio was first articulated back in Q3 2018. It was then that Ferrari changed the way it segmented its portfolio from V8s & V12s to Sport Range, Gran Turismo Range, Special Series, Icona, and Hypercar. This change in thinking gave Ferrari the license to build out its portfolio in a way it never had been able to in the past. Redefining the old V8 segment to Sports Range has allowed Ferrari to counter the threat from McLaren’s emergence in the past decade, add a twin turbo V6 hybrid, and build significant front engine V8 business that has served as the entry point into Ferrari ownership for a new generation of customers. Redefining the old V12 GT segment to Gran Turismo gave Ferrari the license to build out the GTC4Lusso & 812 lines while developing the Purosangue and drop both V8s and V12s into several of them (I expect the Purosangue will be offered with a V8 hybrid in the near future) The combination of the Roma Coupe and Spider coupled with adding a convertible to the 812 line, really put a fork in Aston Martin’s core front engine GT car business, Adding insult to injury, the Purosangue is not good news for the DBX. If you were even able to place an order for a Purosangue today, it would be at least until 2025 before it showed up on your doorstep. On the other hand, Aston Martin dealership forecourts do seem to be littered with DBX’s these days. With the Icona, Ferrari has brilliantly created an avenue to leverage the nostalgia around its back catalog while spinning out an ongoing series of high margin multi-million dollar limited edition specials utilizing existing platforms (the SP3 Daytona is basically a La Ferrari minus the hybrid system). Ferrari stated that there would be 4 models launched in 2023. So far, the Roma Spider, SF90XX Coupe & SF90XX Spider have been unveiled. In terms of the yet to be unveiled, perhaps it will be a Purosangue T with a V8 hybrid.

Hybrid & Electric Cars: While Ferrari remains committed to launching its 1^st EV in Q4 2025, the first shipments will likely not be until at the end of 2026. What was interesting on the analyst call was the renewed focus on ICE and development of e-fuels. Post 2025, Ferrari seems very committed to offering three drive train options, ICE, hybrid, and EV with hybrid likely being the majority of the volume. With an 812 successor due in the not too distant future, it will be interesting to see if it comes with a naturally aspirated V12 in the nose, a hybrid V12, or something completely different.

Racing: Vigna was very loquacious and almost downright excited when it came to talking about the 499P and Ferrari’s win at Le Mans. In terms of F1, I get the feeling its now the less that is said the better. He did say that the team’s performance has been below expectations but in the last race there were signs of improvement before quickly changing the topic to sports cars.

2023 Targets

The 2023 Targets have now been upgraded, as expected. Given the strong 1^st half 2023 results, even the upgraded guidance doesn’t look overly ambitious. Given how Ferrari blew away its upgraded 2022 guidance, this feels a bit like another round of under promise and then over deliver. It will be interesting to see if Ferrari further revises targets upwards come Q3.

Summary

Ferrari continues to execute its long term strategy brilliantly and its hefty $56.7 billion market cap reflects this. Ferrari’s strong balance sheet allows it to continue to reward its shareholders handsomely and retire debt ahead of schedule. Vigna must lead Ferrari seamlessly through the evolution to a three powertrain platform business while managing an increasing broad and complex portfolio of models. Getting the F1 Team back to the very front of the grid doesn’t seem likely to happen anytime soon but the reality is, the F1 team performance has no impact on car sales. The 499Ps success at Le Mans provides a very welcome bit of good news in motorsport. In 2022, Ferrari beat their guidance on every single financial metric for the 2^nd year in a row. It looks like they will do the same in 2023, which given the current model portfolio, momentum, and overflowing, ever growing order book, they certainly have a good shot at doing.