Italian exotic-car maker Ferrari (NYSE: RACE) said on Aug. 1 that its net profit rose 18% in the second quarter, to 160 million euros ($187.3 million), on a 6% increase in global shipments driven largely by demand for its new 12-cylinder 812 Superfast model.
Excluding one-time items, Ferrari earned 0.84 euros per share, beating Wall Street’s consensus estimate of 0.81 euros per share. Ferrari’s profit increased despite an exchange-rate-driven decline in revenue to 906 million euros, which fell short of estimates.
During the company’s earnings call, new CEO Louis Camilleri sought to reassure investors in the wake of the death of his predecessor, the charismatic Sergio Marchionne. But Ferrari’s share price fell sharply after Camilleri characterized the aggressive 2022 financial goals set by Marchionne as “aspirational.”
The raw numbers
|Metric||Q2 2018||Change vs. Q2 2017|
|Revenue||906 million euros||(1.6%)|
|Adjusted EBIT (earnings before interest and taxes)||217 million euros||7%|
|Adjusted EBIT margin||23.9%||2.0 ppts|
|Net profit||160 million euros||18%|
|Industrial free cash flow||93 million euros||1.1%|
Ferrari’s net industrial debt, or debt in excess of its cash balance and receivables, stood at 472 million euros as of June 30, 2018; this was up from 413 million euros as of March 31, 2018.
Ferrari’s quarter: The nutshell summary
Ferrari’s model range can seem complicated to the uninitiated, but the rule of thumb for investors is simple: All Ferraris are very profitable products by auto-industry standards, but those with 12-cylinder engines are higher-priced and generally have higher profit margins than 8-cylinder models.
As you’d expect, the 8-cylinder models as a group generally outsell the 12-cylinder Ferraris, but the “mix” varies from quarter to quarter. But note that Ferrari occasionally complicates our rule of thumb by offering limited-run models, which typically fetch very high prices (think millions of U.S. dollars) regardless of engine type. (Ferrari often refers to those limited-run models as “supercars.”)
Right now, Ferrari has two new models drawing considerable interest from customers: The 812 Superfast, a 12-cylinder model (named for a historic 1960s Ferrari model) that began shipping late in 2017, and a new 8-cylinder convertible called the Portofino that just began shipping in the second quarter. The Portofino replaces the 8-cylinder California, which had been Ferrari’s best-selling model until it was discontinued at the end of 2017.
Got all that? Here’s the nutshell summary of the second quarter: Sales of 12-cylinder models rose 22.6% from a year ago, on demand for the Superfast; sales of 8-cylinder models rose 1% as Ferrari ramped up production of the Portofino.
The takeaway: Ferrari’s product mix improved from a year ago, which is why its EBIT margin rose to 23.9% from 21.9% in the second quarter of 2017.
How Ferrari’s business performed
Ferrari has three principal sources of revenue. The sales of its sports cars and spare parts provide the majority, but the company also realizes revenue from the sale of engines to other automakers (notably Maserati) and racing teams, and from sponsorship and other income related to its Formula 1 racing team, called Scuderia Ferrari.
- Revenue from cars and spare parts totaled 670 million euros, up slightly from a year ago, on higher sales volumes including the first deliveries of the new Portofino.
- Product mix improved thanks to strong demand for the 812 Superfast and deliveries of the J50, a high-priced limited-production model based on the 8-cylinder 488 sports car.
- Revenue from engine sales fell 20.2% to 80 million euros, on lower volumes due to a decline in Maserati sales during the quarter.
- Ferrari’s sponsorship, commercial, and brand revenues rose 2.1% to 127 million euros. Ferrari’s racing team is able to charge its sponsors more this year because it placed second in the 2017 championship, up from third place in 2016.
Ferrari noted that while its overall revenue declined from a year ago, it would have increased 1.4% — beating Wall Street’s estimate — if exchange rates had held constant.
What Ferrari’s new CEO said, and why the stock tanked
First, some context. Earlier this year, Ferrari’s late CEO, Sergio Marchionne, announced several “mid-term” financial targets. Among them: A forecast that Ferrari’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) would roughly double to 2 billion euros no later than 2022.
The announcement of that goal gave Ferrari’s stock a boost when it happened, and Marchionne had planned to give a full-day presentation to investors in September to lay out the profit-growth plan in detail.
But in his first conference call with analysts on Wednesday, responding to an analyst’s question as to whether the September presentation will happen, new CEO Louis Camilleri seemed determined to lower investors’ expectations — repeatedly referring to the 2-billion-euro profit target as “aspirational”:
I understand that there’s been some pressure on the stock, given that everybody was shocked by Sergio’s sudden and very unexpected disappearance. I don’t want to scratch your question, but I do want to sort of reiterate that the targets are set. We will cover those in considerable detail in September. They’re aspirational targets.
We are looking at the plans in great detail now, and I’ll be able to tell you with much more confidence in September; but I think, I believe, although there are some risks out there, there are also opportunities. So that number is certainly an aspirational target, and we will do everything we can in terms of our plans to get there. Beyond that, I’m sorry, I can’t tell you much. [emphasis added]
Camilleri’s comments almost instantly sparked a sharp sell-off of Ferrari’s shares.
Looking ahead: Ferrari confirmed its full-year guidance
Ferrari’s 2022 goals may now be in question, but at least the company confirmed the guidance for 2018 that Ferrari provided in January. It still expects:
- Shipments of more than 9,000, including “supercars” (2017 result: 8,398)
- Revenue over 3.4 billion euros (2017: 3.4 billion euros)
- Adjusted EBITDA greater than or equal to 1.1 billion euros (2017: 1.04 billion euros)
- Net industrial debt below 400 million euros at year-end (Year-end 2017: 473 million euros)
- Full-year capital expenditures of about 550 million euros (2017: 387 million euros)
The upshot: Ferrari is still on track for a good year, but we’ll have to wait a few more weeks before we know what to expect over the next few years.
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