Ferrari’s Q3 2020 Results

In the last two weeks, both Aston Martin and Ferrari have reported their respective Q3 2020 results (McLaren does not report until the end of November so we will come back to them later).  The article on Aston Martin’s Q3 Results & Mercedes Deal was posted last week and in summary:

 

To say Stroll, Moers, and their teams have their work cut out for them is the understatement of the century.  The new Mercedes Benz technical partnership gives Aston Martin access to the technology it needs to be able to relaunch the current line up and deliver the next generation of cars.  It also allows Mercedes to “rent” Aston before they decide to “buy”.  The lack of transparency on the DBX order book is highly concerning, but the plans for the relaunch/facelift of the current line starting in the back half of next year is reason for hope.  Financially Aston is a long way from being out of the woods, but they have bought themselves a few extra years at a fairly steep price.  There is likely more pain for the organization as a restructuring is in store to address the excess manufacturing capacity.  I do give Stroll and his new management team high marks for getting the deal with Mercedes done and the financing in place while standing in the middle of a massive turd of a situation.  While the confidence and vision are refreshing, it’s going to take flawless execution to get them out of what is still one big odious mess.

Unlike Aston Martin, which is still basically a train wreck with the hope that the light at the end of the tunnel isn’t another train coming at them, Ferrari turned in another very solid quarter given the circumstances. In fact, if it was a normal year, you would look at Ferrari’s Q3 results and probably walk away with the impression that they are only mildly disappointing.  Shipments were down 7% vs. Q3 2019, with Sales at negative 3% and net profit up €2 million which is highly impressive. How they did this is quite interesting and shows the depth and experience of their management team.  It also presents some risk going forward as I not sure that some of the levers they pulled to deliver these results are repeatable.

On the Ferrari Q3 2020 Earnings Call, CEO Louis Camilleri comes off as both understated and completely in control.  The earning’s call webcast is posted: Ferrari Q3 Earnings Call.  There were some specific comments that I found interesting:

 

  • Electric Vehicles: Longer term Ferrari sees the move towards hybrid/EV as being margin accretive but has no plans to move to 100% EV and Camilleri doesn’t even see them reaching 50% in his tenure.
  • Portfolio: This year Ferrari has introduced two new models, the Roma and SF90 Stradale which are additions to their portfolio and not replacements of older models. While the Roma appears to be targeted at younger and new users, the hybrid SF90 has been dropped into a no man’s land between supercars and hypercars.  Both add a considerable amount of production complexity and are unlikely to be margin accretive to the total portfolio.  As a reference on the added complexity in the Ferrari supply chain, they will produce a total of 14 different models in 2020, up from 6 in 2010.
  • Product Mix & Profitability: Ferrari’s Q3 profits were €171 million up €2 million vs. Q3 2019. Reading through the report and comments, it would appear that it’s the Icona range Monza SP1 & SP2 that’s driving the gain.  Icona was 2% of Ferrari’s Q3 production mix but over delivers on profitability per unit (in 2019 Icona was less than 1% of total production).  42% of the Monza SP1s & SP2s delivered YTD came in Q3 and that increase in units would certainly have swung Ferraris profitability from a potential year on year decline to a gain.  Ferrari also flexed production to favor all the more profitable V12s with the mix rising from 24% in 2019 to 27% in Q3 2020 (total car revenues increased by €19 million Q3 2020 vs Q3 2019).  If the reliance on the Icona range to goose profitability sounds familiar it’s because it’s a similar situation to the one McLaren put itself into.  In McLaren’s case they became heavily dependent on the margins generated by the Ultimate Series and as a result ended up producing far too many models too quickly.  In Ferraris case, unlike the LaFerrari where demand far outstripped supply, the Monza SP1 & SP2 were a much harder sell and Ferrari got plenty of push back from some of their longest term, most loyal, customers.  In the call, it was mentioned that Ferrari would be launching one more model this year.  This new model will most likely be in the Icona range and rumors point to it being a 21st century homage to the “F40”.  What the demand is for a rebodied F8 or SF90 at $1.5-2 million right now is highly questionable.
  • Manufacturing Shutdown: The Covid-19 shut down cost Ferrari 2000 units in terms of lost production. Currently Ferrari is on track to recover 500 of these 2000 units.  This is a clear indication that Ferrari has little to no excess manufacturing capacity in the system, but they do have the ability to switch the capacity across models as V8 production was down 12.8% and the more profitable V12s up by 15.4%
  • Order Backlog & Waitlist: The current waitlist for new cars is around two years which sounds like a great problem to have. In this case it does come with considerable risk.  Ferrari has spent considerable efforts attracting new and younger consumers especially in the Asian markets.  The Roma is doing very well against this target with orders running 50% above where the Portofino was in the equivalent time post launch.  The risk and concern here is that it’s likely that a number of these people get tired of waiting, drop off, and look for alternative options.
  • Cash Flow: I was a bit surprised that there was no discussion around the major drop in free cash flow and the potential impact going forward. Current 2020 guidance is €150 million down from €700 million in 2019.  This will likely have a significant major negative impact on investments in the short term.
  • Racing & Stores: The Formula 1 team is a major drag on Ferrari’s finances this year as are the Ferrari Stores where in store traffic has dropped significantly. The combination of store traffic declines and the lack of general competitiveness in F1, in particular Vettel’s SF1000 looks like its running on only half the cylinders in most races, will result in a financial hit of somewhere around €130 million in my estimation.

 

Overall, Ferrari has, and continues to be, very well managed. 

Summary

Ferrari is a highly successful company doing a great job navigating in a challenging environment.  The only areas of concern I can see are related to mix dependency for profitability, a waitlist that is too long, and continued portfolio fragmentation.  None of these are Covid-19 related and are questions of long-term strategy.  The drop in free cash flow is concerning and needs to rebound in 2021.  The F1 team is unlikely to bounce back until 2022 when the rules change again but the stores should recover as soon as the Covid-19 pandemic retreats.

Post Script on My Recent Experiences

One additional area I do see risk for Ferrari is in the attitude and approach of a number of the dealerships.  My last two experiences with Ferrari salesmen have been abysmal.  In one case, I was basically told I should feel privileged to have the opportunity to buy a Ferrari.  In the other I actually contacted them on a car that I had formerly owned and potentially had an interest in reacquiring.  I talked to a salesman once and then emailed the him with the history on the car that they were missing.  Despite making an additional follow up call and leaving a message with the receptionist, two weeks later, I am still awaiting a reply.  The chances I would buy a car from them now are basically zero.  If a dealership doesn’t respond when you are interested in buying, I can’t imagine how helpful they would be if there was later an issue.  Alienating customers is never good for the long-term health of a business. 

Thoughts and comments? Please see the comments section below.

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November 2020

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4 Thoughts on Ferrari’s Q3 2020 Results
    John Glen
    9 Nov 2020
    6:08am

    I have been using the Toilets in Ferrari dealerships in the UK for years with no fear of anyone approaching me as I walk through the dealership, the receptionists are alway happy to point you in the right direction. I just presumed Ferrari have a spectacularly successful sales prevention training course to manage the waiting list.

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    keli
    16 Nov 2020
    8:33am

    Hey man,
    Thank you for always giving us this insights into car ownership. Not saying this to flatter you but I do think this is now the only online automotive magazine I read. While I am not a car owner yet, its seems as if we’ve moved on from the golden age of motoring. The new cars are coming out too fast and too furious and current models don’t seem to be given the opportunity to age at all. And I’m not talking super cars, just talking cars in general.
    Either way, I’ll end my rant here. Thank you again.
    Keli.

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    John
    10 Nov 2020
    12:01pm

    Ferrari have relied upon their specials to keep themselves healthy, which is very fortunate they had those in the pipeline. There’s enough appeal to the brand to keep them on top, for the moment, over others. It’s why Ferrari also get an extra payment to be in F1…

    But you have to admit, their product range have never been better.

    As for dealer service, this goes across all marques. Ferrari don’t have exclusivity on being terrible. Doesn’t matter if it’s a Lada or Lambo, it’s your hard earned that going in to buying these and every dealer should try to make you feel special, especially when you pick the car up.

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