Good day, and welcome to the Ferrari N.V. 2018 second quarter results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Nicoletta Russo, Head of IR. Please go ahead.
Thank you, Tony. Welcome to everyone who is joining us. Today's call will be hosted by the Group CEO, Louis Camilleri, and Antonio Picca Piccon, Group CFO. All relevant materials are available in the investor section of the Ferrari corporate website. At the end of the presentation, we will be available to answer your questions. Before we begin, let me remind you that any forward-looking statements we might make during today's call are subject to the risk and uncertainties mentioned in the safe harbor statement included on Page 2 of today's presentation, and the call will be governed by this language. With that, I'd like to turn the call over to Mr. Camilleri.
Thank you very much, Nicoletta. Good afternoon or good morning to everyone joining Antonio and me on our inaugural earnings call in what can only be described as difficult emotional circumstances. We're all deeply saddened by the loss of Sergio Marchionne. He was a man of immense talent, blessed with a razor-sharp brain, an unparalleled level of energy, and a generous heart. Clearly an inspirational and formidable leader for all those who had the privilege to work with and alongside him. On a personal note, Sergio was a dear friend. Beyond our friendship, he sat on the Philip Morris International board, where he served as an exemplary director for the last ten years. I sat on the Ferrari board since its ever so successful spinoff from the FCA group.
This allowed us to be in frequent contact and gave us ample opportunity to discuss and debate our respective business strategies in a fast-moving world. I can very humbly claim that we shared a deep mutual respect for each other, and I will pursue with vigor and discipline the ambitions the board, he, and the entire team here had for this legendary and great company. I've had the privilege of interacting with its management for close to two decades as a lead sponsor and customer, and more recently, board member. I can tell you that all I have seen to date has confirmed to me that we are blessed with a fabulously talented, committed, and determined senior leadership team and organization at every level, all proud to be part of this company and all excited to bring it to ever greater heights with integrity and passion.
We have a product portfolio in place for the next few years that is, quite frankly, stunning from every perspective, one that truly gives me confidence in our future growth and expansion. It is a true privilege to serve as Chief Executive of this jewel of a company. I take this opportunity to thank our new Chairman, John Elkann, and the entire Ferrari board for entrusting me with this responsibility to lead our company to the next level while mindful of the opportunities and risks that we will confront going forward. Rest assured that I will give my all in the best interest of all our stakeholders, our clients, colleagues, business partners, and of course, our shareholders. I look forward to meeting you at our forthcoming Capital Markets Days when we will review the plans and initiatives we have in place to deliver our aspirations.
For now, we are pleased to report a very solid quarter and to confirm our previously disclosed projections for the year, underpinned by a very strong order book that takes us well into next year. It is my pleasure to now hand over the call to Antonio, our Chief Financial Officer, with whom I have already established a great relationship and who will undoubtedly make an invaluable contribution to this great company as we move forward in the coming months and years. Antonio.
Thank you, Louis, for this kind introduction. Good afternoon to everyone and thank you for listening in the call. I'm also among the ones who owe to Sergio Marchionne for all that he taught to us, both as a CEO and as a man during the incredible days of Fiat and FCA. The simple fact of being here today adds to the number of reasons why I'm grateful. His loss makes me feel even stronger, the personal determination and commitment to contribute to the further development of Ferrari at the level this company, all of its stakeholders, our colleagues, and you, Louis, deserve. With that said, let me begin with Page 4. Our shipment reached approximately 2.5K units, which is +5.6% versus prior year.
Results were driven by a 22.6% increase in V12 models, while the V8 ones grew 1%. 12 cylinders models' strong performance was led by the 812 Superfast, partially offset by the F12berlinetta phase out, as well the F12tdf that completed its life cycle in 2017. LaFerrari Aperta is also finishing its limited series run. 8 cylinders models were up versus prior year, mostly thanks to the 488 family, along with the first deliveries of the newly launched Ferrari Portofino, expected to ramp up over the next quarters. This was partially offset by the California T phase out. Group net revenues for Q2 were EUR 906 million, down a few million but up 1.4% at constant currencies. Our adjusted EBITDA improved by 7%, reaching EUR 290 million and 31.9% margin.
Adjusted EBIT for the group showed a 7.5% increase, reaching EUR 217 million, quarterly record, with a margin expansion of 200 basis points to 23.9%. Industrial free cash flow for the quarter came in at EUR 93 million. Net industrial debt at the end of June, after EUR 30 million of share buyback and a EUR 136 million dividend distribution, reached EUR 472 million, substantially in line with the level of December 2017. Moving to shipments on Page 5. The 812 Superfast, as well the 488 and GTC4Lusso families performed solidly. Shipments for the group were up 5.6%. EMEA grew 7.2% with Middle East rebounding. Americas showed a 6.6% increase.
Combined deliveries in China, Hong Kong, and Taiwan were up 26.4%. Rest of APAC decreased a few units due to timing of the newly launched Ferrari Portofino, yet to arrive on the market. Moving to Page 6, on group net revenues. We see how they decreased from EUR 920 million in Q2 2017 to EUR 906 million in Q2 2018, therefore down EUR 14 million, but up 1.4% in constant currencies. Car and spare parts revenues totaling EUR 670 million were slightly positive, thanks to higher volumes already commented, as well as mix and price. This was partially offset by negative effects. Engines revenues were EUR 80 million, posting a decrease in sales to Maserati due to lower engine volumes.
Sponsorship, commercial, and brand were EUR 126 million, thanks to an increase in sponsorship and higher championship ranking, partially offset by lower sales generated by brand-related activities and by effects. On Page 7, you can see the year-over-year changes in the main items of the adjusted EBIT. As mentioned, the latter was up 7.5% to EUR 217 million, with adjusted EBIT margin up 200 basis points and adjusted EBITDA reaching 32.9% margin. Volume was up EUR 12 million, thanks to the 812 Superfast, the 488, and the GTC4Lusso families, as well as first deliveries of the Ferrari Portofino. Mix and price were positively impacted by strong performance of V12 models. Pricing increases together with the first deliveries of the strictly limited edition Ferrari J50.
This was partially offset by lower sales of LaFerrari Aperta that is finishing its limited series run. Industrial costs and R&D decreased EUR 2 million, mainly due to lower spending in F1 activities. G&A costs were almost in line with prior year. Foreign exchange, including hedges, had a negative impact, mainly due to the US dollar, the yen, and the British pound depreciation versus euro. Other increased mainly due to higher sponsorship revenues and higher championship ranking, partially offset by lower sales to Maserati and brand-related activities. Moving to Page 8. Industrial free cash flow for the quarter was EUR 93 million, compared to EUR 92 in Q2 2017, driven by strong adjusted EBITDA. This was partially offset by CapEx to support broadening and hybridization of our products in line with expected volume growth over the 2019-2022 period.
In addition, during the second quarter, we paid taxes, which were lowered by the effect of increased cap for deductions related to eligible research and development. Net industrial debt at the end of June, after the already mentioned share buyback and dividend, reached EUR 477.2 million, substantially in line with year-end. The last couple of slides finally show Formula One ranking as well as our client relationship activities. With that, I'd like to turn the call over to Nicoletta.
Thank you, Antonio. We are now ready to start the Q&A session. Please know that in consideration of our Capital Markets Day, today we'll focus on Q2 in 2018 and full year 2018 question only. Thank you. Please, Tony, you can open the Q&A session. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question now from John Murphy of Bank of America. Please go ahead.
Good afternoon, guys, welcome to the call and the company. We're, you know, very sorry to hear about Sergio and his passing. It's also very good to hear about your determination being much higher now that he's gone, you know, that's a driving force. That's a very good thing to hear for investors. Maybe the first question I have, Nicoletta, I apologize, I'm going a little bit out of bounds here. When we think about the targets for 2022, and when they were set and thought of, there are some people that believe that it was, you know, really, you know, something was written on the back of a napkin or an envelope by Sergio.
My understanding is these plans were formed at least a year ago, if not, you know, sort of hatched even further back. Is that a correct characterization, or were they really just sort of Chairman's goals? It seems like they were a lot more than that, and there's a lot more to this plan. Is that correct?
I would say, this is Louis. I would say that clearly those targets were reviewed with the board. They were aspirational. Clearly there were plans behind them. Now, in the Capital Markets Day, we'll cross the T's and dot the I's and tell you how we think we will get there. We will also have to disclose potential risks to that, but also significant opportunities that we see going forward.
Okay. I appreciate that. Then just a second question on the Superfast. It sounds like demand is obviously far outstripping expectations and wait times for the Superfast are very high. We've heard rumors of three to four years in the U.K. Is that correct? Is there any way that you would ameliorate sort of that risk of losing customers in any way?
Clearly the waiting lists are long. That's a good thing in a way. You know, we're stepping up production. We'll see. Clearly, I think having a very strong order book should give everyone confidence in our growth going forward.
Okay. Just, just lastly, Antonio, as you look at the second half of the year, there is some risk as the Portofino ramps up that mix might turn a little bit negative, there's also another swing factor being FX that might actually turn positive in your favor. How do you think those two forces will balance out in the second half of the year? Are there other big swing factors we should be thinking about as we march through the second half?
Well, I'll pass it on to Antonio, but I would say that, you know, while one can focus on currency, and mix, the important thing is to look at the margin, and we anticipate continued increase in the margin versus prior year.
Thank you, Louis. John, I think the way we look at the guidance for the year is that mix should be substantially neutral compared to 2017. That means that the last quarter may suffer a bit the comparison with the last quarter of 2017. In terms of the effects, we encompass the impact of what we have seen so far up to the end of June. The second half of the year should bring us to a range of negative impacts of the effects for the full year in the range of EUR 80 million-EUR 100 million. That I think has been already communicated in the past, and based on the visibility we have so far, there is no significant reason to change that view.
I'm sorry, just one last follow-up. The if we adjust the revenue and the EBITDA for the swings in Forex or the headwinds in the second quarter, it appears that the EBITDA margin would be closer to 34.5%. I'm just looking at Slide 6 and Slide 7 and literally just backing out the year-over-year headwind from Forex. Is that an incorrect calculation? It seems like the margins may have been a lot better than they are printed.
The sense that we have is that margin would not be significantly different because we have there are a number of items that are contributing to the average margin of this quarter and the previous one, including, of course, the positive mix, and that is partly compensated by the FX impact. I would not expect that at constant currencies, this should bring to a significantly better margin. At least not to a level that may allow you to project much better for the rest of the year.
Okay. Thank you very much, guys.
Thank you, John.
Our next question comes from Michael Binetti of Credit Suisse. Please go ahead.
Hey, guys. Good morning. Let me add my condolences on the loss of Sergio. He will be missed. Louis, we're happy to see you taking the reins. Could I just ask you, since we've already violated Nicoletta's request to stay away from the 2022, you know, I think Louis, it won't be lost on you that quite a bit of the stock move lately has been related to some uncertainty related to the changeover after Sergio's left. You know, we've talked a lot about what is a target of EUR 2 billion in EBITDA. Is that still where you think this brand can go at a high level through 2022?
I know we'll go through a lot of the details at the Analyst Day, but I did think it was important to ask that.
I understand your question, you know, I understand that there's been some pressure on the stock, given that everybody was shocked by, you know, Sergio's sudden and very unexpected disappearance. I don't wanna skirt 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. I think I believe, although there are some risks out there are also opportunities. That number is certainly an aspirational target, and we will do everything we can in terms of our plans to get there.
Okay
honestly, I can't tell you much.
Okay. I guess maybe any initial observations you've had, and I know you haven't been in headquarters for long, but I know you know the brand well. Any initial observations on some of the things that the company's talked about, you know, more in the near term as far as, you know, investment levels related to some of the changes coming on over the next few years on the drivetrain? I know we'd spoken recently about a plan to convert to selling cars in euros globally to take FX risk off. Do you feel confident in what you see early on that those kinds of those kinds of strategies can still go forward in the more near term?
In terms of the product portfolio, I feel very confident. We have a great lineup coming up. In terms of EUR pricing, this is a subject that's been sort of analyzed by virtually every angle for the last 12 months. I have to tell you, we've come to the conclusion that such an action, i.e., pricing in EUR worldwide, would have adverse consequences on our clients, on our dealers, and generally on market dynamics. Ultimately, it would be a negative adverse consequence on us. Having said that, I do recognize that currency affects our results and clearly affects the predictability of our results.
All I can assure you is that we'll do everything we can going forward, to offset or to mitigate, the volatility of this component of our P&L, and I believe this house has considerable levers, to try to achieve that.
Thank you very much.
Thank you.
Our next question is from Adam Jonas of Morgan Stanley. Please go ahead.
Louis, Antonio, and team, again, I wanted to echo my condolences. I'm extremely sorry for your loss, and I wanna thank you for your very kind words, Louis, at the beginning, and you, Antonio, as well, for this great man and a great human being we lost.
Thank you.
A couple questions. Do look forward to meeting you in next month, or in September, I should say. Louis, just a couple for you and one for Antonio. you know, Sergio was, you know, again, an incredible enigmatic leader, and had the great qualities as you highlighted. With total respect for that, I'm wondering, you know, everyone does bring their own unique strengths and experiences to a CEO leadership role, and just high level, not violating the September CMD, you know, covenant. What high level things do you envision doing differently or otherwise executing in a different way you could share?
Listen, everyone is different. I can tell you that, Sergio and I shared the same ambitions for the company. I have a different style, but that's natural.
are the same. I think my record as CEO sort of speaks for itself.
to manage complex and highly regulated industries. I think I'm a team builder. You know, Sergio had a lot of other things on his plate. I have a singular focus on Ferrari.
I will be here permanently. I would hope that that would make a difference.
Okay. That's great. Thank you for that answer and compassionate answer. Louis, another one for you. I'm sorry if this comes across as strange, but, you know, some cities, very important, very wealthy cities, where there are many Ferrari owners and repeat owners and multi-Ferrari owners. You know, cities like London or communities like Hong Kong, those kinds of places, right? Are, according to their local governments, let's say, talking about an eventual, a potential elimination of license plates for cars that have tailpipes. Without politicizing that or getting caught up in time horizons and things, just that contemplation is something that's interesting and by our reckonings, been taken seriously at some point.
Do you think a Ferrari that makes no internal combustion engine noise or would have, say, no tailpipe can be a Ferrari?
That's a very valid question.
That's why I asked it.
Yeah. I listen, I'm steeped in the history of Ferrari. I think I understand Ferrari's DNA, and I'm surrounded by a senior management team that certainly understands the importance of this brand equity. Ferrari will always remain a Ferrari, and if I can quote our founder, the next car will be better than the previous one.
the technological skills and the know-how within the company, that can respond to any regulatory issues that will arise. The one you mentioned, I think is a longer-term one.
We can do it while it will remain a Ferrari, a unique, exclusive car.
the pinnacle of the automotive industry.
I'm pretty confident we can get there if necessary. You know, I think, your question is a much longer-term one. I think there would be.
Okay
total chaos.
Understood. Understood, Louis. Antonio, just one final one for you on the kind of remainder of the year horizon. The change in the sponsorship revenue and the championship ranking, you know, on the EBITDA bridge was significant. It strikes me as something that you should have a very good visibility and due in some part because there's a lagging nature to it and a bit more predictable nature. With that in mind, could you provide a bit of either rest of year and sense of what that delta could be in the remaining quarters? Thank you very much, everybody.
Thank you, Adam. I think you are addressing the point of the other contributing to the EBIT change.
Right
positively for the quarter. The way we look at the rest of the year is that the positives that are coming from the first and the second quarter will be absorbed in the third and the fourth. We think of others being rather neutral at year-end on a full year basis. In terms of the ranking, do not forget that for time being, we assume to be ranked number one in the championship. That assumption I gave is based on that presumption.
Just to be clear, you know, that we really wanna win this championship. If we do, because of the way the incentive programs are set up, that's a negative on the year, but clearly a positive into next year.
Got it. Thanks very much.
We will now take our next question from Martino De Ambroggi of Equita. Please go ahead.
Thank you. Good morning, good afternoon, everybody. I echoes the condolence, obviously, and I agree with all what you commented on Sergio. The first question, as Nicoletta Russo suggested, is on the quarterly results, on the EBIT bridge. Looking at the price mix, EUR 8 million positive contribution, I suppose, I assume this is entirely price, if not even more, considering the mix probably was negative in this quarter. Am I right in taking this assumption?
Certainly, price is contributing. In terms of the overall impact of mix is rather, if I take everything else out, is rather neutral, I should say. Price is basically amounting to close to the full amount of the positive price and mix.
Okay. This is the value we should expect for the rest of the year, also for the second half?
As we said, on mix and price, we expect to be rather neutral as of year-end on a full year basis.
Okay, including prices.
Okay.
Um, the second and the third-
On quarter by quarter, when you look at that, particularly in 2018, you'll see the Ferrari Aperta contributing negatively, and instead, depending on the quarter, we might have, I mean, the V12 model that are contributing positive on the mix initially, and then, this trend to be slightly reduced with entering of the Portofino.
Okay. The other two questions are more long-term related issues. For Louis. What's your personal view on the role to retain the exclusivity of the brand going forward? First question. The second, what's your personal view on the Formula One ongoing negotiation? I know there is still a long time before the expiry of the existing contract, but Sergio had a clear view showed in the past. I don't know if you have a different view. Thank you.
Could you repeat your first question? I am not sure I understood.
Yeah.
Sorry.
Yeah. What are the basic rules to retain the exclusivity? It means, obviously, a smaller single-digit growth going forward. I don't know if there is a threshold you consider something that cannot be exceeded. What could happen after exceeding the 10,000 cars, losing the small vehicle producer status, and you will be obliged to pay some penalties in some regions. Just overview on the exclusivity.
I think as has been said before, we're very focused on revenues, less so on volumes. We will surpass the 10,000 thresholds at some point. I don't think that will adversely affect our brand equity and the exclusivity of the brand. That's something we're all very focused on. I view my job in part as being the guardian of that brand equity, and I can assure you that Ferrari will remain Ferrari. As to crossing the 10,000 thresholds, I think, again, that's been debated at length and discussed in the past. Given the hybridization of the powertrains, we do not believe that that's an issue. Hybrids are going to come and going to stay longer term. That's what I would say.
In terms of Formula One, yes, there have been a number of discussions, in terms of the next Concorde Agreement. I believe there's been some progress on the technical side. There's less progress on the budget caps and economics and the governance aspects. I think Sergio and I saw eye to eye on Formula One going forward.
Okay, thank you.
We will now take our next question from Thomas Besson of Kepler. Please go ahead.
Yeah, thank you very much. It's Thomas Besson, Kepler Cheuvreux. I have a few questions as well. I'll start with the impact you may see on the Chinese business from the tax change and what your view is on the potential impact of overall tariffs on your business outside Europe.
Well, as you know, the tariffs were reduced, and I think the commercial team should be complimented as to how they handled that, because others have suffered, and we did actually very well within those conditions and prepared ourselves well for that decline in the tariff. Obviously, the price has come down as it has across the board. We see a pretty bright future in China, and we expect our business there to continue to grow.
Thank you. Second question. You talked about a very large order book and how good that is. Can you tell us what you view as the optimal level of order book? Don't you think that three, four years is too much, that maybe 12, 18 months is the maximum you should have?
Well, I think I mentioned, three and four years is long, but I don't think that that's across the board. It's for maybe one or two specific models in one or two specific geographies. The way I look at it is that some of our models have about a two-year waiting period between 18 months and two years. That's the general thing, and some of them are slightly less than 12 months. I wouldn't look at the extreme of just three or four years. Those are rather exceptional, I think.
Great. Thank you. I have a last one, please, for you, Louis. You, you said, I think three or four times, in your initial comments that, the 2022 targets were aspirational. Can you say whether that is the general acceptation of Sergio Marchionne having aspirational targets for FCA Ferrari, meaning that, they are ambitions more than necessarily pure targets that, are there to motivate, employees as much as investors? Or whether you meant that this aspiration is probably something which is, too ambitious to be achieved?
No, I didn't say that. I think I said that both Sergio and I had the same ambitions. I would rather defer to the Capital Markets Day to give you the plans and initiatives we have in place, and that are being developed to ensure that we meet and deliver those targets.
Perfect. I just wanted to clarify that point because your share price has, I think, reacted very negatively to this comment. Thank you very much.
Thank you.
Our next question comes from Monica Bosio of Banca IMI. Please go ahead.
Good afternoon, everyone. Before starting with the questions, let me express my deep sadness for the loss of Sergio. I join the company sentiment in this moment.
Thank you.
You're welcome. Coming back to the questions, I would like to know I will limit to housekeeping question as we will meet in September. The first one is on the level of personalization. If you can just indicate us the current level of personalization on cars. The second question is on the ForEx effect. Sorry to come back to this issue once again, but I've seen that the impact on the first half has been in the range of EUR 70 million, of which EUR 32 million, if I remember well, in the second quarter. I remember that the previous guidance was a total impact on the EBITDA between EUR 80 million and EUR 100 million. I was just wondering if you can confirm this target because I lost the previous answer. The third question is on Maserati.
I know it's maybe it's not the right moment to speak about this, but Maserati is going down. I'm just wondering if we should expect the same slowdown for the next quarters. If you have a comment on Maserati as for the future, also on the back of the second quarter results of FCA. Thank you very much.
Monica, in terms of the effects, I think I already answered before, meaning we confirmed the guidance EUR 80 million-EUR 100 million.
Okay.
for the full year.
Okay.
Okay. With respect to Maserati, I think the volumes that we have seen so far, reflect the, I think the volume reduction that they've reported. In terms of the rest of the year, we are talking about a change with respect to 2017. We're waiting to see what the final numbers they will require us to produce. In terms of the impact on EBIT, in any event, given the take or pay nature of the agreement in place, we should not expect a material-
Yeah, sure.
a material impact there.
Okay. Sorry, another follow-up. Any news from the patent box?
Just maybe say discussions are progressing, and we expect to be in a position to give better indication during the next quarters.
Thank you very much. Thank you. I'm sorry, and the personalization?
if the question is what do you, I mean.
The weight.
what do you mean by the level of personalization? Mm-hmm.
Yes. It's the weight, if it's a.
Year, year-over-year in Q2, they are rather neutral.
Okay.
There is no, not a significant impact.
Okay.
Okay?
Thank you.
Our next question comes from Stephen Reitman of Societe Generale. Please go ahead.
Yes, good afternoon. Stephen Reitman, Societe Generale. I have two questions. You partially answered about LaFerrari Aperta, which has been on its, finishing its limited series run for quite some time. I just wanted to get an idea of sort of volume impact in the second quarter and the first half. I mean, is this over now, or will there still be some cars sold in the second half of this year? Also, if you comment maybe on the impact of the J50, how many of the limited run, I think 10 cars, were actually delivered in the second quarter? My second question is about the sort of the role of special, the special hypercars, the limited edition vehicles.
Do you feel there is scope to increase the number of those vehicles that form parts of your model range, against your series cars? Because obviously, these have a very big impact on your overall margins. Thank you.
First of all, in terms of the, those model, we normally do not communicate in terms of units. We expect the LaFerrari Aperta basically to come to conclusion of its life cycle by the end of the year. In terms of the J50, we expect to have some few units to be sold for the rest of the year, and a few units were sold even in Q1 and Q2. The impact of the phase out of the LaFerrari Aperta is partly compensating the positive that we have during the quarter on the mix. It is why I answered before saying that mix is rather neutral.
In terms of what we expect going forward is that this is gonna impact the phase out of LaFerrari Aperta is gonna impact negatively, Q3 and Q4. The ramp up of the Portofino, in that respect is not compensating fully. That reinforce our expectation to have mix on a full year basis neutral.
I would say, Stephen.
Thank you.
-that we're very focused on the importance of hypercars. you know, It's been a sort of 10-year cycle and, whether we can shorten that cycle is something clearly that we have to look at carefully.
Thank you.
Our next question comes from Giulio Pescatore of HSBC. Please go ahead.
Hello. Thank you for taking my question. The first one will be on the Pista. Can you give us an update on when the Pista will start shipping this year or perhaps next year? What sort of volumes are expecting for 2018 and 2019? Could the shipment of the Pista offset to a certain extent the negative mix into perhaps the last quarter when this model ramps up? That's the first question. Thanks.
The Pista is expected to be first introduced in Q3 and growing in Q4, ramping up. That is one of the positive contributor to the mix for the second half of the year. I don't think we have communicated ever any volume targets for the Pista.
Okay. Second question would be on the engine segment. Could you perhaps elaborate a little bit more on how the take-or-pay contract works? Where in the bridge would you see the payments coming from Maserati to compensate for the lower sales? Is that in the other line? Is that contributing to the strong other performance that we have seen in the first two quarters?
Yeah. Sorry. The take-or-pay acts as a compensation for reduced fixed cost absorption. The impact of that is gonna be in the other.
Okay. Perhaps one last one. You mentioned that you don't expect to go ahead with moving the prices to euro. In the past you will said clearly that there was no reason why that should not happen given the strength of the brand. Maybe can you elaborate a little bit more on why you're taking this step back? Why are you taking this decision to keep things as they are at the moment?
After considerable study, we came to the conclusion that it would adversely affect market dynamics. I can confirm to you that Sergio in the very recent past had strong reservations about it, too.
Is it a measure to protect dealers, or it's more a customer concern?
It's market dynamics. That includes everybody.
Yeah. Thank you.
We will now take our next question from Fei Teng of Berenberg. Please go ahead.
Hi. Thanks. Firstly, just wanna echo everyone's comments on Mr. Marchionne. My thoughts of course go to his family, friends, and all of you guys, after the sad news. My first question would be to Louis. I'm happy to see you joining. Just coming back to the topic of pricing. I mean, given that you've previously been in an industry that's also been driven to a large degree by pricing, I just wanted to get your thoughts on whether you think there are parallels that can be brought from tobacco into the luxury car industry in terms of things like managing prices and demand. I guess if there's anything that you would tweak in what Ferrari does on pricing at the moment outside of offsetting currency.
Well, clearly, where I come from, we had quite a lot of pricing power. It sort of pales in comparison to the pricing power that this house has. I would say that my experience has been, in terms of pricing, is a close razor focus on price structures, from the ex-factory price all the way down to the retail price. Tax structures per se, duty structures, are things that can be changed to our advantage, and that's something that I think I can bring to the table, in terms of pricing going forward. I think that we will always have this delicate balance between price and mix and volume, to achieve our margin and income objectives.
My next question would be on the Formula One business. I guess, first of all, would you be looking to stay as involved as Mr. Marchionne was in the governance of the sport? I guess more broadly, would there be ideas that you would like to bring to the discussion that maybe haven't been in focus so far?
Well, in all humility, yes, I will be involved. I'm not sure that I can bring new ideas. I think that the focus has been on, very much on slicing up the cake as it exists today, and I don't think enough focus has been given to increasing the size of the cake. That's one aspect that I think I can bring value to.
In terms of the relationship with Philip Morris, are you happy with the existing relationship as it is in terms of sponsorship? Could there be scope for any changes that could benefit either side?
Well, we have a contract in place till 2020. You know, we've been, Ferrari has had an agreement with Philip Morris, for, I believe, it's now 45 years. It's a long-term relationship that I believe has been mutually beneficial and will continue to be.
Is there any update on finding a replacement for Santander as the second sponsor?
I think that we've taken that over. When I say we, Philip Morris. The impact of Santander has been more than offset by the Philip Morris sponsorship.
Okay, thank you.
We'll now take our next question from George Galliers of Evercore. Please go ahead.
Thank you. As others have said, our thoughts are with you. Just following up on the Formula One question, I think you made it clear that there needs to be more focus on increasing the size of the pie rather than how it's split. In light of Force India being placed into administration last week, does it matter from Ferrari's perspective how many teams are competing in Formula One? Would you be comfortable if it was just yourself, the two other works team, and Red Bull Racing each weekend?
I think that we want a number of teams out there. That's what makes Formula One what it is. It's unfortunate Force India fell into administration, as you say. We'll see going forward. Clearly, there are other examples of teams that are doing extremely well, who don't necessarily have the kind of budgets that others may have. I think in principle, budget caps are probably a good thing. The devil is in the details as to how those caps are determined and calculated.
Okay, thank you. The next question was just as we think about the ramp of the Portofino, just kind of looking at the California and then the orders you're seeing for Portofino, are you seeing a step up in personalization with the new vehicle versus what you saw historically with the California? How does personalization on Portofino compare, for example, with the 488 or other vehicles in your model line up?
I think for the time being, we are projecting to have that in line. No major differences in terms of the amount of personalization or the size and the value of the personalization for such car compared to the California as of now.
Great. Thank you.
Thank you.
That concludes today's question and answer session. At this time, I will turn the conference back over to Nicoletta Russo for any additional or closing remarks.
Thank you, Toni. Thank you, everyone, for joining us today. The investor relation team will be soon available for any follow-up question you may have. Thank you.