Good day and welcome to the Ferrari N.V. 2017 First 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 Investor Relations. Please go ahead, ma'am.
Thank you, Sethi, and thank you everyone for joining us today. There is one topic that we plan to cover today, the group's Q1 2017 financial results. In light of this, the call is expected to last around 45 minutes. All relevant materials are available in the investor section of the Ferrari corporate website. Today's call will be hosted by the group's Chairman and CEO, Sergio Marchionne, and Alessandro Gili, group's Chief Financial Officer. At the end of the presentation, they 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 risks and uncertainties mentioned in the safe harbor statement included on page two 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. Marchionne.
Thank you, Nicoletta. I'm gonna take the path of least resistance today. I'm gonna do the easy part of the presentation. Alessandro will deal with the quarter and give you our view about the remainder of 2017. Couple of broad comments. First one is that obviously we're satisfied with the results for the Q1. I think we're equally impressed by the reaction of our customers, the dealers in the marketplace, to the launch of the 812 Superfast, which was and continues to be certainly the largest expression of our involvement in the V12 world.
I can confirm to you now that the order book is completely filled out for the next 12 months, and I think we're in good shape to have a good launch for the car, and which also supports our view that the guidance that we gave you at the beginning of the year is confirmed. I think we're gonna wait until Q2 or Q3 to give you an uplift if one is required. I think we feel comfortable that what we have outlined in the document today is at least the minimum condition that we'll be able to deliver.
Significant progress has been made in Formula 1. You've seen the first four races. There's a reference in the document to the fact that we have been on the podium now for all four races. I think that we have made, what some people have referred to as a miraculous recovery from the 2016 season. Certainly probably longer than that, I think we've made a decent recovery. We feel relatively comfortable about the fact that we will be able to reestablish Ferrari as a viable and competitor in on the Formula 1 circuit, and probably one to be feared by most, including our German colleagues in Stuttgart. I think we feel comfortable with what's happened. I think we look forward to the rest of the reason to prove the fact that all the work that's gone on here in the last eight, nine months has effectively been of an enduring nature.
The more interesting thing for us, and I'll leave this at the end, and maybe if there are any questions, we'll take them at the very end, is this, while we've been, like, busy on executing our plan and delivering the margins as we promised, I think one of the biggest objectives that we've had in reshaping Ferrari is to make sure that we provided a product range that will allow us to expand volumes beyond the current expectations. I think that we continue to make significant inroad, both technically and in terms of market research about the exact reach of this brand.
We feel comfortable that hopefully, as we complete the celebration of our 70th year of existence, as a car brand, that we'll be able to lay out a more comprehensive plan going forward, including some indication of volumes that we think are probably doable within the next three or four years, given the expansion into what I consider to be contiguous products to the current offering, and give you a better understanding of what the volume potential for Ferrari is. All in all, a good quarter, good indications for the business for the rest of the year. I think we're getting close enough now to be able to call the thousand, the billion in EBITDA as a real target for the year. Obviously, equally important is the fact that Formula 1 is on track. On that note, I'll pass it on to Alessandro.
Thank you, Mr. Marchionne. Hello, everyone, and thank you for listening on the call. Let me start with page three of the deck. Our Q1 2017 shipments reached 2,003 units, showing an increase of 121 units or 6.4% compared to prior year. The increase was led by solid performance of V12 models, namely the GTC4Lusso, LaFerrari Aperta, and the F12tdf, as well as the 488 family among V8. Group net revenues grew 21.5% to EUR 821 million. Adjusted EBITDA increased 36.1% to EUR 242 million, with a 29.5% margin or 30.1% without the FX hedges. Adjusted EBIT reached EUR 177 million, with a margin increase of 360 basis points to 21.6%, or 22.3% without the FX hedges. Adjusted net profit for the group surged 60.1% to EUR 124 million. Finally, at March 31st, 2017, our net industrial debt was reduced to EUR 578 million from EUR 653 million at December 31st, 2016.
At the beginning of the year, we unveiled the 812 Superfast exclusively to our best customers, which with dedicated private previews and subsequently at the Geneva Motor Show. Ferrari also signed a multi-year licensing and sponsorship agreement with Ray-Ban and inaugurated the opening of Ferrari Land in PortAventura occurred at the beginning of April. Finally, Scuderia Ferrari achieved five podiums with Sebastian Vettel winning two races so far. The group is confirming its 2017 outlook, assuming effects consistent with current market conditions. Shipments at around 8,400 units, including supercars. Net revenues higher than EUR 3.3 billion. Adjusted EBITDA higher than EUR 950 million. Net industrial debt approximately EUR 500 million, including a cash distribution to the holders of common shares and excluding potential share repurchases.
Moving to page four, we show our operating highlights for the quarter of 2017. Our shipments reached 2,003 units, up 121 units or 6.4% versus prior year. The results were driven by a 50.1% increase in V12 cylinder models, thanks to the GTC4Lusso, LaFerrari Aperta, and the F12tdf, partially offset by a 3.3% decrease in V8 cylinder models. The F12berlinetta, as its sixth year of commercialization, is phasing out, and the California T is at its fourth year of commercialization. Group net revenues for Q1 2017 were up 21.5%, 20.4% at constant currencies to EUR 821 million, with sound performance of cars and spare parts as well as engines. In detail, cars and spare parts growth was driven by higher volumes, strong mix, personalization, pricing increases, and FX.
Our adjusted EBITDA improved by 36.1%, reaching EUR 242 million and a 29.5% margin. The result was primarily driven by higher volume, better mix, thanks to the V12, positive FX, and engines to Maserati. This was partially offset by F1 activities. Adjusted EBIT for the group showed a 46.1% increase, topping EUR 177 million and resulting in a margin expansion of 360 basis points to 21.6%. The adjusted EBIT improvement benefited from a strong adjusted EBITDA coupled with higher D&A, mainly due to the GTC4Lusso family and LaFerrari Aperta.
Industrial free cash flow for the three months ended March 31st, 2017 was EUR 76 million, driven by a strong adjusted EBITDA of EUR 242 million, partially offset by CapEx of EUR 72 million, and EUR 53 million of net change in working capital, primarily due to inventory increase driven by projected volume growth in line with our 2017 outlook and lower CapEx payables compared to Q4 2016. Other included approximately EUR 17 million due to 2016 employees' extra bonus payments and lack of contribution from advances of LaFerrari Aperta.
Let me kindly remind you that 2017 tax advance payments will impact future quarters. Net industrial debt as of March 31st, 2017, was reduced to EUR 578 million from EUR 653 million at December 31st, 2016, primarily due to the industrial free cash flow generation. Again, let me remind you that the announced cash distribution of EUR 120 million and the 2017 tax advance payments will impact future quarters.
Moving to shipments on page five in terms of geographical distribution, all regions positively contributed thanks to the 488 family, the F12tdf, the GTC4Lusso, and LaFerrari Aperta. EMEA expanded by 8.8%, with Germany, France, Italy, and U.K. growing at double-digit pace. Americas showed a 4.2% increase. Rest of Asia Pacific group, 4.4%. Combined deliveries in China, Hong Kong, and Taiwan were up 3.2%.
Moving to page 6. Q1 net revenues reached EUR 821 million, up 21.5% versus prior year. At constant currencies, net revenues would have increased by 20.4%. Car and spare parts revenues were up 20.8% or EUR 100 million due to higher volumes and positive mix led by the 488 family, the GTC4Lusso, the F12tdf, and LaFerrari Aperta, along with a strong contribution from our personalization programs and pricing increases as well as FX. This was partially offset by the end of the LaFerrari life cycle in 2016, as well as the non-registered racing car FXX-K and the strictly limited edition F60 America completing the limited series run in 2016.
Engines net revenues surged to EUR 104 million, up EUR 47 million or 81.3% versus prior year. The significant growth was mainly attributable to strong sales to Maserati, more than offsetting the termination of the rental agreement with a Formula 1 racing team. Sponsorship, commercial, and brand net revenues reached EUR 123 million, with an increase of EUR 5 million or 3.8% compared to the previous year. This was mainly due to higher sponsorship revenues, partially offset by lower 2016 commercial revenues for championship ranking compared to 2015. Other revenues decreased by EUR 6 million- EUR 13 million, mostly due to the deconsolidation of the European financial services business since November 2016.
Moving to page seven, you can see the year-over-year changes in the main items of the adjusted EBIT. Volume was up EUR 17 million due to an increase of approximately 125 units, excluding LaFerrari, and LaFerrari Aperta, thanks to the 488 family, the GTC4Lusso, and the F12tdf. With positive contribution from our personalization programs, partially offset by the F12berlinetta phasing out and the California T at its fourth- year commercialization. Mix was positively impacted by LaFerrari Aperta's strong V12 performance, as well as pricing increases. This was partially offset by LaFerrari that completed its life cycle in 2016, as well as the strictly limited edition F60 America and the non-register racing car FXX-K completing their limited series run in 2016.
Industrial costs and R&D costs increased due to higher G&A and R&D expenses to support product range and components innovation mainly for hybrid technology, as well as F1 developments. SG&A costs were higher than prior year, mostly due to the recently approved long-term incentive plan, higher costs related to the new directly operated stores and costs related to the seventieth anniversary, partially offset by the deconsolidation of the European financial services business since November 2016. Foreign exchange, excluding hedges, impacted positively, mostly due to U.S. dollar and Japanese yen, partially offset by Great Britain pound.
Other was up by EUR 3 million with a positive contribution from engines to Maserati, as well as other supporting activities. Partially offset by lower 2016 championship ranking compared to 2015, the termination of the rental agreement with a Formula 1 racing team, and the deconsolidation of the European financial services business since November 2016. As a result of all of the above, Q1 2017 adjusted EBIT was up 46.1% to EUR 177 million. Adjusted EBIT margin expanded by 360 basis points, reaching 21.6%, or 22.3% without the FX hedges. Adjusted EBITDA reached 29.5% margin or 30.1%, without the FX hedges.
Moving to page eight. Net industrial debt as of March 31st, 2017 was reduced to EUR 578 million from EUR 653 million at December 31st, 2016, primarily due to industrial free cash flow generation. Industrial free cash flow for the three months ended March 31st, 2017 was driven by a strong adjusted EBITDA of EUR 242 million, partially offset by CapEx of EUR 72 million and EUR 53 million of net change in working capital due to the inventory increase driven by the projected volume growth in line with our 2017 outlook and lower CapEx payables compared to Q4 2016. Other included approximately EUR 17 million due to the 2016 employees' extra bonus payments and lack of contribution from advances of LaFerrari Aperta. As a reminder, the announced cash distribution in 2017 tax advance payments will impact future quarters.
On February 16, 2017, Ferrari released the first images of the 812 Superfast, the latest 12-cylinder berlinetta model that represents the most powerful and highest performance racing model Ferrari road car of all time. Unveiled on March 7, 2017 at the Geneva Motor Show, the 812 Superfast is aimed at clients demanding an uncompromising sports car that will deliver exhilarating driving both on-road and track, yet it also be comfortable enough to allow its owners to enjoy it as an all-round experience. Scuderia Ferrari has worked diligently to prepare for the 2017 season. The initial results are encouraging. Five podiums in the first four races, with Sebastian Vettel winning two races so far.
On the following slides, we show our brand activities as well as all the events Ferrari has organized to engage with its customers. On the last page, on page 13, we confirm our 2017 outlook. Shipments at approximately 8,400 units, including supercars. Net revenue is greater than EUR 3.3 billion, adjusted EBITDA above EUR 950 million, and net industrial debt at approximately EUR 500 million. With that, I'd like to turn the call back over to Mr. Marchionne for any final remarks, if any.
Thank you. We are now ready to open the Q&A session. Back to you, Sethi.
Certainly. Thank you, ladies and gentlemen. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, to ask a question, please press star one. To withdraw a question from the queue, please press star two. We will take now our first question from John Murphy from Bank of America Merrill Lynch. Please go ahead.
Good afternoon, guys. Just a first question on sort of your comment on sort of updating us on your volume outlook that would be upcoming sort of maybe later this year or next year. I mean, is there a view now that the 10,000-unit sort of small vehicle manufacturer, you know, asymptotic limit is not something that is real and that you could potentially be something significantly above 10,000 units in two to three years' time?
Yeah. Two comments. I don't know what significantly means, and I don't know what two to three years means. I think that we much prefer to come back at the end of the year when we give you a prognostication for 2018. I think broadly speaking, we're of the view that the brand is capable of expressing itself beyond the 10,000 mark. How that takes form is something which is now being analyzed in detail. I've always had the view that we have to protect the core sports car segment of this business, which is made up of b oth the eight and twelve cylinder families, the ones, certainly the 812 Superfast that was launched, and the 488 and its successors.
These cars are unique I, and I think we need to make sure that we do not end up just blowing up at the production in those segments to try and maintain exclusivity. I think that there's a portion of the market which extends beyond that core, and which has been historically the territory of Ferrari, and which I think we have neglected over time. I think, if we play that card right, I think it is the most, sort of the most intelligent and the most efficient way for us to improve performance out of Ferrari without impacting on its core exclusivity claims. That's something that I think needs to be fleshed out over time. We're looking at a real alternative, some of which obviously involve a very clear understanding of the technology limitations associated with the platforms and the coverage that we have .
I think that there's now a view inside the house that electrification is a core skill that needs to be mastered, and that needs to be part of the offering of the combustion engine world. I think the combination of those two will make sure that the 10,000, the 10,000 limit is no longer relevant in terms of emissions and compliance. I think there's a lot to be done here in the next six, seven months. I think when we get to the end of this year or when we report earnings in January 2018, we'll give you certainly a more complete view. The answer, the long answer to your short question is that, yes, it's gonna go beyond 10.
Incredibly helpful. Just a second question. If we think about the near term, the Aperta is helping mix. How much longer will that help mix, and when does the 812 Superfast start shipping and kicking into volume and mix? I think there's a concern out there that as we hit 2018, we're gonna have had the Aperta, the Superfast, and the 70th anniversary cars out there, and there might be a little bit of a weakness on a year-over-year basis, from, for, you know, for mix. Is there other products or additions that you think will launch in 2018 that will potentially offset this extreme fear to the market?
Yeah, I mean, I think the answer is yes. I think we'll transition okay into 2018. It's not really a concern. Most of the 70th anniversary will not be delivered during 2017 anyway. I don't think we'd have to look at delivery schedules. I'm not worried about making the 2018 numbers as of today, so we'll see. I'm sorry, what was the first part of the question?
It's just the timing of the Aperta and how many more are left to ship and how many were realized in the quarter. I mean, if it's something that's gonna be another quarter or two.
How many are left behind to ship, roughly?
Roughly 100.
There's roughly 100 left to be shipped, it will take the rest of 2017 to produce them.
Okay, that's helpful.
The other question you asked was about the 812. You won't see any realistic numbers until Q3 and Q4 into the numbers.
That's gonna help in 2018 as well?
Obviously, that's why I made a comment at the beginning about the fact that the pipeline is full for the 812 Superfast.
Awesome.
There's another car launch that's coming in Frankfurt.
That's great.
We launch two vehicles a year. We've launched one now, which is the Superfast. There's one more coming in Frankfurt.
Okay. Just lastly, on the F1 economics, you know, short term, you know, what does that mean for results here in 2017, and as we go into 2018? You know, is there, you know, greater profit sharing that comes from, you know, doing much better and potentially winning the Constructors' Championship?
Yes, there is. I don't wanna, I don't wanna jinx that call. Let's just say it's built into the forecast for the year. We have not built in any sort of extraordinary income as a result of any positive outcomes from the F1 season. Remember, I said this probably a couple of times on the calls, there's a negative side to winning. We pay bonuses to people because of the fact that they're motivated and enticed and financially motivated to win. I'm not sure that net is a great thing. Obviously, I think it has a huge repercussion on the quality of the brand in the marketplace, and that's something that I think ultimately will pay off. I don't mind going slightly negative in F1. I think we'll pick it up on the commercial side.
Great. Thank you very much.
Thank you. We will now move on to our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead.
Thank you very much. I have two questions, please. Firstly, I'd like to come back to the mix benefit in the quarter, which was very strong. Can you give us an idea of the V12 mix in the quarter? Also, you said the V12 volumes doubled. Give us an idea of whether that V12 mix will be sustained during 2017 or whether it could decline. Second question is.
Well, I give you a general answer to the 12 question. We just launched the 812 Superfast, by definition, it's gonna bias the numbers up historically. We should do all right. I don't know what the exact numbers will be, and mirror Q1, certainly the influence of the 12s will be felt in the rest of 2017.
Great. Should we assume that it can continue at a much higher level in 2018 and 2019? I think the message so far had been that the V12 mix had declined from the past and would stay lower. It has jumped meaningfully in Q1 2017. Is it a level that we, you will be at as well in 2018, 2019? You found a new way to build up a new higher proportion of V12?
Yeah. I mean, yours is a difficult question because one of the things that's sitting with the development of our portfolio going forward beyond 2018 and 2019 is the combination of internal combustion engines and the electrification as a power unit solution to most of our vehicles. One of the benefits associated with that combination is obviously we're going to be able to express power in these vehicles without going to large displacement engines. I'm hesitating to answer your question because as much as I think that there is a big portion of our customer base which has an inherent appreciation for naturally aspirated V12s.
Th e combination of technology which requires less cylinders and less displacement is eventually going to push the product portfolio to a different, to a different SKU without necessarily impacting on price and positioning. The combination of electrification and combustion is going to be, by definition, more expensive than a naturally aspirated V12 world. I'm not convinced that the margin associated with that combination of power unit is going to be any less than the V12. We need to be careful as we sort of peel the onion back on this thing.
I do not envision a world where even at larger volumes we would actually be decreasing, pick EBITDA, or EBIT margin generation on the business. Whatever it is that we do going forward, regardless of the, of the, of the preponderance or portion of the portfolio which is V12 based, I don't see it impacting negatively on margins. Great. Technology itself will move the portfolio in a different direction.
Thank you. Last quick question, if I may. You had big benefits for a Q2 in a row. Should we assume that FX benefits will be like your hedging, like 12 months instead of 24 months? Or shall we extend the potential FX benefits beyond 2018?
No, actually, we're expecting, as we said in the past, just the H1 of this year to be benefiting from hedges, then the second half we should be going down.
Yeah, I'm not sure that's called a benefit if your underlying results are higher.
Yeah, I mean, last year.
Anyway, the problem with hedging, as you well know, is that it takes us two days to explain this to the markets. If you look at the press release and the analyst deck, we've made reference to ForEx now maybe 20 times to try and explain real versus reported earnings. The reality is that most of these hedges are short legs. I mean, they got 12 months cover, maybe 18. They only cover the immediate future, and they don't cover the long-term positioning of the brand. For a brand like ours to try and deal with this on an ad hoc basis for 12 to 18 months is somewhat awkward.
I understand the fact that we need to cover sold cars, and that's a different story. I wouldn't get hinged, I wouldn't really get attached to this hedging story too much because the long-term problem, if you were to see a weakening of the dollar, I think it's gonna mandate an adjustment on the pricing position of Ferrari into that market. There's nothing we can do about it. We've seen this in the U.K. with the weakening of sterling, where we've had to adjust. I think that will continue. I think we need to reflect reality in this pricing. I think, you know, we will adjust as ForEx markets move. Don't get focused on hedging. It's a 12-month cover at best.
Thank you very much.
Thank you. We will now take our next question from Ryan Brinkman from JP Morgan. Please go ahead.
Great. Thanks for taking my question. Where do you stand relative to the Italian patent box process? Have you been able to assess at all yet your, you know, how your effective tax rate might or might not benefit from the regulation?
For the moment, the tax rate is not reflecting any patent box benefit. We are still waiting for a response from the tax authorities to start the process. The benefit that you see in Q1 compared to Q1 last year was mainly driven by the fact that we are actually using some levers that are provided by the tax regulations, both on the credit and R&D and also on fixed asset hyper amortization and super amortization, which are both provided for this year. Those are related to CapEx expenditures than we have for this year.
That's helpful. Thanks. Then just on the R&D, you know, there was the increase during the quarter. The footnote says that's attributable in part to the hybrid technology investment. Is that investment, you know, kind of incremental to what you guys were thinking at the time of the IPO? Do you still expect a lower R&D to be a driver of higher EBIT, EBITDA going forward? I know you've exceeded all your projections via other sources of profit improvement. Just curious about the trajectory of R&D though over the next couple of years.
Well, to be honest, I think the numbers that we gave you at the time which we pitched the IPO were not all inclusive of the kind of technology stuff that we now have on the table. When we give you the updated view about sort of the longer term projection, I think you're gonna see that there may be a ramp-up in R&D. I think it's totally contingent and offset by increased EBITDA and EBIT generation. This is gonna turn out to be a different business than we thought. Alessandro just reminded me that Hermès just reported earnings and that they shot their margins, both EBIT, and EBITDA margins, beyond their normal sort of range.
I think we've just found an additional level of motivation now to try and move the organization forward. I think that really is the target as to whether we can beat them at that level. I, you know, let's wait for the end of 2017, and when we give you a revised volume and margin performance expectations going forward, I think you might be pleasantly surprised. I would not worry about the R&D side of this as being either exorbitant or really phenomenally excessive to what we've got as a baseline.
Right.
It will be higher, I guarantee you.
The margin's been higher, too.
Yeah.
Just last question. On the very strong increase in your stock price, since your repurchase authorization, you know, was approved, does that change at all how you decide to allocate capital between maybe dividends relative to repurchase?
No, I think that, you know, we have these discussions in other environments in which I've played some type of role. I think, you know, the issue about dividend distribution and share repurchase are things that are not mutually exclusive. I think that one of the things that we've got in front of us is a delineation of a proper policy that incorporates both elements as part of our capital structure. I, you know, we're obviously satisfied with the capital markets performance of our shares.
I think they're reflective and finally they're beginning to reflect the true potential for the business going forward. I think, you know, the non-cyclical nature of what we do, which is really at the heart of the development of Ferrari, we're not in a position today, I think to give you a view as to whether we're gonna come up with a permanent share buyback program that allocates so much capital a year to that process. Having said this, I think we now have authorization, and we now have the resources to try and execute any time we like. So, you know, we are ready to intervene in the event that the market were to show any type of unexplainable dislocation in share price.
Okay. Thank you. Congrats on the quarter.
Thanks.
Thank you. We now take a question from Monica Bosio from Banca IMI. Please go ahead.
Good afternoon, everyone, and thanks for taking my questions. The first question is if you can please highlight the pricing effect in the Q1 and the weight of the personalization in the Q1. The second question is related to the total CapEx. On the back of the hybridization trend, can you give us a guidance on the CapEx, can we expect that it will reach the top this year, and then it will decrease? The very last question is on the potential entry into new customer segment. I'm sorry, but I have no fantasy. Can you give us some examples or some clues about potential customer segment? In term of country, what do you believe is the country less explored by Ferrari? Thank you.
Well, let me try and give you the answers backwards. Then I'll leave the first question that you've asked over to Alessandro. I think probably, I think it would be fair to say that Asia Pacific is probably the area that we've least developed in terms of coverage, although I think we've made significant inroads in the last 10 years. There's still additional volume that I think we need to go and explore intelligently. It's a reflection of, I think, of our historical presence in the NAFTA and European regions, which obviously goes back for a large portion of our history. I think Asia Pacific is an area that needs to be developed much more than we've done now.
In terms of the R&D spend, I don't think we're in a position to give you guidance beyond 2017. I'd much prefer to postpone the discussion about our views on this topic when we give you the update on the plan in 2018. In terms of what other products we see as being, sort of complementary to what we're currently selling, I think we, again, I postpone the discussion to 2018. I do remind you of one simple fact. The core of this business today has been built on fundamentally pushing a limited number of vehicles that specialize in delivering, high performance and the highest level of performance possible on a continuous improvement trend, which has been at the heart of Ferrari now for the last 10 years.
This needs to continue, but it also needs to continue in a way which maintains exclusivity to the highest possible extent. There are products which do not necessarily rely on that kind of technical progress and which embody a number of things which have been historically part of Ferrari, which have to do with style and aesthetics and a combination of leading-edge technology, but not on an extreme basis. This is probably the single largest area that we intend to develop. We have seen other people in this marketplace play and be relatively successful in getting share. It's probably an area that we consider to be that belongs very clearly to Ferrari in a very clear way.
The efforts that are going on now on the development side are really to try and refine both the nature of those interventions and the time of their disclosure to the market. This is really at the heart of the business plan that we need to recompile between now and the end of 2017 and present to the markets. The consequence of this, based on what I know today, is that we're gonna have to exceed the 10,000 vehicle a year mark. I think it's going to be done in a very paced way, in a very intentional way. To ensure that we do not diminish the exclusivity of the brand, that we don't impact on its on what has been at the heart of the success of Ferrari for the last certainly 10, 15 years. I'll leave the last question to Alessandro.
Okay. Got it. Right. Thanks.
Personalization.
Yes.
I think was one of your question is in line with Q4, so around 17% contributing to cars and parts revenues. Pricing is not that big of a number. It's 1% more or less on total cars and parts revenues.
Okay, thank you very much. Very clear. Thank you.
Thank you. We will now take a question from George Galliers from Evercore. Please go ahead.
Yeah, good afternoon, everyone. The mix performance was very strong in the quarter. Is it correct to assume that the majority of that was from the GTC4Lusso, and the F12tdf, and LaFerrari Aperta netted off against deliveries last year?
If you're asking in terms of mix overall, I think we provided the percentage in terms of growth. 50% is the co-contribution of the V12 side, the GTC4Lusso, the F12tdf, the F12berlinetta. Don't forget that one. Even if it is offsetting somehow, the number is still providing units to the quarter itself. LaFerrari Aperta, as we said, is also providing a relevant growth. Those are all the contribution in terms of cars that are impacting Q1.
Okay, thanks. Thank you. Second question I had was, you know, I don't know if these prices are correct, but the Geneva also showed the price given for the Superfast. The Italian market looks to be a 6%-7% increase on where the F12berlinetta was. Given the huge improvement in performance and the fact that you obviously have huge demand for this vehicle, do you think that you could have actually, with hindsight, pushed for a much larger price increase?
It's possible. We have this conversation every quarter when we try and present numbers. Do I think that we hit the number, that we hit the pricing, right all the time? The answer is not, and I think sometimes we underprice. I think the biggest mistake that we can make is to overprice. I think that would certainly damage, provide permanent and permanent damage to our marketing activities and to the positioning of Ferrari. I think we're gonna have to learn as we go forward. You made reference to, and I don't comment as to whether you think that the pricing has improved by 6% or 7%. It has moved up from where we are, from where we were.
I think we'll have to wait as we work our way through model years to try and find the right, the right positioning for the 812 Superfast and for all the other models that are coming in after this. It is a trial and we do this by trial and effort. I mean, I don't have a magic wand. I mean, we are in a unique space in terms of pricing these vehicles. We are, these are unique offerings. I think we need to learn how to do this better. The closer we get to the customers, the closer we get to our dealers, the better we're gonna get of an understanding of that pricing mechanism.
To be perfectly honest, that's an area that needs more work than we have done so far. I feel comfortable that we have not retract. We haven't taken any prices back since I've been involved in this business, 2014. I think they've all moved up. Some of them have been triggered by content increases in these vehicles. I think to tell you that the 812 Superfast is iso cost to the F12 would be a lie. It is more expensive. It does have a higher level of technology. I think overall, our margin position on the 812 Superfast has improved compared to the F12. Just bear with us as we try and find our spot. We're not there yet.
Great. Thanks. Congratulations on the Formula 1. Certainly brings a smile to my face to see a red car in the lead every Sunday.
Yeah. No, I think that you are not the only guy smiling. Everybody inside [Maranello] here has got a grin from ear to ear. I think it's about 10 years overdue, but we need to keep our head down. I would not underestimate, and I've never underestimated our competitors, and especially Mercedes. They are formidable competitors, and I think we need to respect them for what they've done. We intend to offer them a good fight, but nothing is taken for granted here.
Thank you.
Thank you very much. We now move on to our next question from Martino De Ambroggi from EQUITA. Please go ahead.
Yeah, thank you. Good afternoon, everybody. Still on pricing. You mentioned in Q1, +1%. If I remember correctly, you in one of your previous calls, you mentioned 2%-3% or even higher price increase was a reasonable trend going forward. I understand this in Q1, the Superfast didn't contribute yet, but is it still the 2%-3% or more growth reasonable trend going forward?
Yeah, it is. As I mentioned in the last call that we had, this was contingent on model rollover, that we will not intervene arbitrarily in a market and just jack up prices. I mean, we need to respect commitments that our dealers have made to our customers. When you got an order book that's 12 months long, a price increase cannot have an immediate effect because of the fact that we need to honor arrangements. Give it time. As these cars roll off, they come in with a different pricing scheme, they end up, you know, binding the dealerships and the customer in a particular contractual context. That needs to happen. If, you know, us moving price here doesn't mean that we have an immediate reaction. It may take as long as 12 months to see it in the marketplace.
Okay. The second question is on the EBITDA margin target. In your last call, you mentioned the 33%-37% range, which is usual for luxury companies, is something reasonable in the medium long term. What's the minimum level of volumes-
You define medium to long term, and the answer is yes. I haven't. I'm looking at that. What is Hermès reported now?
36.5.
36.5. Take that as a target.
Okay.
It is a good number.
Yeah. My question is, what's the minimum level of volumes? I clearly understand there are many different drivers, but what is the minimum level of volumes needed in order to at least approach such a level?
Wait, wait till we recast the plan at the beginning of 2018. I've now just decided that we're gonna do it when we do the call for 2017. Maybe we'll ask you to come and buy a car here at Maranello, and then we'll give you the results for the year and tell you about what 2018 and later looks like. I think it's important. We need to do this diligently. I don't wanna give you nonsense, nonsensical numbers. The number that's been set by Hermès as benchmark now is doable. Let us work on this.
Okay. Yeah, we wait. Thank you.
Thank you. We now move on to our next question from Michael Binetti from UBS. Please go ahead.
Hey, guys. Good afternoon. Congrats on a wonderful quarter. Can I just ask you, as we come up on the EUR 1 billion EBITDA target two years ahead of the IPO plan that you laid out, we're flying a little more blind here in the models, I guess, in a good way. Can you help us just think about 2018, the general theme of how the business will look? I know it sounds like you've got electrification, hybridization on the radar for maybe 2019. I think next year sounds like more of a transitional year, a bridge year.
And obviously, somebody asked earlier about the, you know, what the margins look like. Maybe you could help us think about in terms of the slide you put on slide seven that you give us every quarter. What are some of the broader brush strokes we should think about as you lap a big supercar this year, as far as how you're gonna grow profits next year?
Yeah. Just broad strokes because I think it's inappropriate to have this conversation in May 2017 for 2018. I'm gonna give you some very broad strokes. I think you're gonna see higher volumes than you've seen, than you're seeing now. You're gonna have margins at or slightly above what you see in 2017. You're gonna see bottom line numbers that are in excess of what we've produced and a lower debt number. Directionally, it's gonna be a better year than it is than 2017. I agree, by the way, I'm confirming what you said about 2019 as being the first year in which we're going to be able to show an incarnation of our, of our hybrid strategy. It will be significantly meaningful to try and set the tone for the rest of the product development going forward. You're not gonna be flying blind much longer.
Okay. I know we always have to fly blind a little bit due to the nature of your business and surprising your customers. If you, I guess, you know, to your comments, the margins will be flat or slightly above. Without giving away too much, you know, you've had a good job on cost control and pushing the margins of the units higher, I think. What do you think are the primary drivers of margins considering your point that it's a higher volume year and you are lapping quite a bit of margin from special editions this year?
Well, I think we need to learn how to run this business better from an industrial standpoint. I think we have done some work in terms of creating a higher level of productivity and sort of environment in the house. There are two areas which remain, in our view, still on scope. The first one is pricing, which as you well know has been one of my pet projects now since I've been here for the last couple of years. I think we need to continue to explore the edges on the envelope on that one.
The other one is cost control in F1. I think this is an issue which I think my colleagues in Formula 1 understand. I think we have even now with the owner, new ownership of FOM, with Liberty Media being involved and their desire to expand the reach of the sport, they understand the cost control of these expenditures is an integral part of the effort. Otherwise, we're going to just, you know, we're going to work ourselves out of the business .
How we do this in a way that protects Ferrari's interest as a maker of luxury cars is an interesting and ongoing discussion. We've opened a dialogue now with Chase Carey over at Liberty and the people who are involved in running FOM. Those two elements for at least for 2018 appear to be the most significant elements of profit generation given the fact that in 2018 is around the corner. I mean, we're talking about six, seven months away from now.
The bigger bet to me is what happens in 19 and later, right? As we start delineating the volume expectations going forward and the type of product that we need to start launching in the marketplace. There are some things that we can do relatively quickly. I would expect, and it's my sincere hope that we will be able to show, by 2019, that we will be able to show the first live example of this expansion of the product range into the contiguous space.
This is important because I think it will set the tone for the rest of the activities that we're carrying on. I mean, it'll certainly will set the cadence for product development from 2019 going forward for the next three or four years. This is an interesting development because it's taken us since we have taken this company public now, which I forgot was about 18 months ago, thereabout, October 15th. It's taken us this length of time to really clean up our ideas about how to make this a more interesting business in terms of margin and profit generation. I think we're relatively clear now that we need to prioritize car as being the most accessible area of profit generation. As much as we continue to work on the fact that there are luxury brand extensions that are possible outside of cars for Ferrari.
We understand that the extension into a larger number of vehicles is the quickest and probably the most certain way of us improving performance. That is something that was unclear to us when we took the company public because the fact that we were concerned about the exclusivity restrictions and the fact that the flooding of the market with Ferrari cars in excess of current volumes would damage the brand. I think we're comfortable now having carried out all the work that the extensions are possible without sort of damaging the core of the business itself. That's really the objective here. Let us work on this. I think you'll be pleasantly surprised as we work our way through this.
Thank you very much.
Both as an investor and as a potential acquirer of cars, I think you'll be pleased.
Thank you.
Thank you. Our next question will come now from Stephen Reitman from Societe Generale.
Yes, good afternoon. Thank you for taking my questions. I have two questions. The first, going back to the slide on the debt bridge, on the industrial debt bridge, and the comment about inventories had increased for future deliveries. Was there a significant difference between the level of vehicles produced and the shipments, the 2,003 that you reported in the quarter?
My second question is also regarding looking at the sales mix. Obviously the Q1 it was very much, the growth was driven by EMEA, and obviously America was down in terms of share. How do you see that actually developing over the next years? You mentioned that Asia Pacific is the great area to go to, but when do you think you will be actually seeing some progress in terms of lessening the importance, the reliance on the European market? Thank you.
For your first question, certainly we produce more than what we shipped. I think the delta in terms of additional inventory was around 300 units, which is supporting our next quarters, as we said. For your second question, I think the year is to 2019.
Yeah, look, the work in terms of expanding reach in APAC is as you well know, these are things that take time. I'll give you an example. If you look at our China performances, I think our China performance is capable of delivering a lot more than we're delivering now. I think the product range that we have for China may not be the most appropriate for that jurisdiction. I think the extension into the wider range of offerings, I think, will be quite helpful.
As we try and develop the product offering, I think you will see better penetration of these of these regions than we've had so far. When you look at the number of cars sold in China, you look at our presence in China, I mean, it's a complete mismatch. I mean, I mean, Maserati has gotten a much, much better traction in China than Ferrari. That should not be. We need to fix it.
Just briefly on that question about the inventory, you said 300 units. Thank you very much for the clarity on that. These are vehicles that are still held by Ferrari, so they haven't actually been, so as you said, they're not shipped and not billed. You have had some benefit obviously, in terms of fixed cost coverage.
I would, by the way, if that's your concern, I would not, I would mark it up to a rounding error. We're not, this machine here doesn't run on fixed cost absorption. Trust me.
Thank you. Thank you.
Thank you. We now move on to our next question from Lello Della Ragione from Intermonte. Please go ahead.
Hi, Lello from Intermonte. Thank you for taking my question. Actually two left. One is related to the, on the free cash flow side, where in the comments that you made, even in the slide, you mentioned several times tax advance payment for 2017. I was wondering if that is just a new, the usual way about tax advance payments or there is something else. I mean, last year was a one-time tax advance payment, but this year should be more or less all business as usual. If it's, is it correct?
Even on that slide related to CapEx, you said there is, if I look at it in percentage of sales, which is the easiest way to compare the how much money you spend there, actually this are below last year level. I was wondering if I if this implied that overall CapEx, including PPA and capitalized R&D for the year will be somehow at the level of last year.
Last question related to instead on the production side, more a long-term question. You said in the past that you have capability for 40,000 units in the long term, meaning adding just one shift. I was wondering just on that side, so without additional CapEx, how long time will it take to implement one additional shift in terms of in months' time? Thank you.
Yeah, by the way, I'm not gonna comment on whether you accurately depicted what I said about capacity in the system. What I do know, I have told you, and I will confirm it now, is that the existing infrastructure is capable of producing cars up to the level that you mentioned, for a variety of reasons, both in terms of engine capacity and assembly. To get an additional shift on site, in terms of assembly itself, will probably take us six to nine months.
Thank you, Robert.
Going to your first two questions, I think tax advance payments will impact obviously twice this year. We have the first one either in June or July, depending on what we choose when we choose to pay, then the second one November or December. Obviously, we are following the rule under Italian regulations. 40% impact on the first, is the first one, and 60% is the second one. On CapEx, I think we mentioned it during the call. We said EUR 350 million, EUR 360 million or higher, depending on timing of R&D and capital expenditures over the year.
That's confirmed.
We've been pretty low in Q1.
Okay, okay. Just for clarification, it's business as usual for the tax advance payment as the other company in Italy. There's nothing strange. It's just that you mentioned that you will have a cash out.
Yeah.
Okay. Okay. Thank you.
Correct.
Thank you, gentlemen. Now we move on to our next question from Philippe Houchois from Jefferies.
Yes, good afternoon. Thank you, and congratulations for the numbers. The questions I have, first one is more short term, but what you said earlier about the downside of success in Formula 1 is that you pay higher bonuses, et cetera. We know kind of from the rules of F1 that whether you come first or fourth doesn't change a lot in terms of the payments you receive from the sport. Is there a benefit in terms of your sponsorships? Are there agreements that basically increase the payments from them if you perform better or not, that might help reduce the losses in F1, is my first question.
Not yet, but they will.
Right. Okay. They will. Is it something we can look forward to for next year?
2019. I think it takes a while to round them off.
Right. Okay. The other question, it's interesting, the number of references you made to Hermès margins. I mean, they're higher than yours.
I'm intrigued by that business, Philippe.
Well, absolutely. No, so am I. At the same time, what I find interesting in your business is that your margins may be lower, but in the way I look at capital, your returns on this capital are significantly higher because you don't have a lot of net working capital.
Yeah.
I'm not saying it's the wrong metrics, but it's a different way of looking at the business.
It may be, Philippe, but if we take EBITDA as an indication of cash flow generation, then I think it's a good number, right?
Yeah. I mean, it's a crude metric, but yeah, it is kind of an indication of cash flow. I agree.
Yeah.
What I'm getting to is it fair to assume that you've looked around, and you kind of said that, you've lifted the cap to 10,000. You've looked around opportunities, you've come back to the conclusion, which I would kind of agree with, is that no other business will give you the right combination of high margins and low invested capital and maintain, you know, phenomenal returns that you currently have.
That's why, logically, meaningful exposure growth and diversification has to be somehow in cars. You've kind of answered that already by lifting the 10,000 cap. I'm just wondering, does it make sense to consider more brands? I mean, it's like the Ferrari, a car you enjoy, you don't drive, and it's not a brand, it's a car you drive or a different way of looking at the business, but you still address the same customers, and you still can aspire to the same returns.
You know, I, you know, I wish you had the easier questions, Philippe, but let me try and give you an answer. That is probably the most difficult issue that we've had to deal with because it is undoubtedly true, as you well know, that there are, the know-how that sits within Ferrari, both in terms of the sort of the technical side of car making, and its ability to present products in a way which is consistent with luxury and exclusive brands, allows Ferrari to look at other people in this space and saying, "I think if we intervene in that space, we can, we can run those brands, we can produce cars from them, we can engineer them properly, and effectively, we can replicate an equivalent of what LVMH has done with sports cars."
I am not there yet because the thing that I fear most is the fact that we would somehow, it doesn't mean that that may not be the right answer. It may be. I'm not on that page yet because I'm severely concerned about the dilution on the brand equity associated with such a move. I would have to feel absolutely comfortable that, one, we wouldn't be pissing off our customers.
Secondly, that we would not be creating any in-house alternatives that would cheapen the DNA of Ferrari, and that we will not be creating sort of any type of diluting effect on our financial performance. Those things are sort of sacred because those customers that we built this business with over the last 70 years and the people that are currently, 8,400 people that are buying our cars this year, they're a precious resource to this house, and we can't do anything to damage that relationship.
The extension into other spaces in car are appealing, but I think we will need to satisfy all those things that I mentioned earlier. In terms of our thought process, Philippe, yes, we went looking everywhere else. The only thing we, if I can just correct the way in which you correctly analyzed, at least in part, our thought process, is that we have reprioritized our interests because we know that we are better at running the luxury car side, and that we're better at executing it in a shorter timeframe than the extension into other luxury areas, which are non-car related.
That doesn't mean that we don't care about them. We do, and we're working in parallel to getting that done. I think the most immediate improvement in our results is gonna be from expanding car. That, by definition, is gonna be the case. It's our core skill, and it's something that we need to do seriously. Now that I feel comfortable that by doing it, we will not be diluting brand, I think we should move on this at the speed of light.
Mm-hmm. Makes sense to me. If I can squeeze one simpler question, but, I think you finalized your contract with Ferrari. For how long can we have the pleasure of your management of Ferrari?
2021.
You're gonna leave 2021, okay.
I got a complete 2021.
Right. Okay, great. Thank you very much.
Thanks.
Thank you. Now we move on to our next question from Adam Jonas from Morgan Stanley. Please go ahead.
Sergio, so what you're basically saying is you're gonna keep making Ferraris, right?
Yeah. That's right.
Okay. I have no further questions. No, okay. No, two more questions real quick. About 9% of your total revenues last quarter, and last year's quarter were in China. I think amongst luxury goods peers, you stand out as a real outlier in how low that exposure is to China. I think that might be something a lot of people on this call would actually say is a strength because you're not too dependent on some potentially unpredictable economic policy or, you know, social, anything out-outcome in the PRC. Is it an objective strategically to keep China sales, with all due respect to the Chinese customers, and they're as important as any other customer, but to keep that manageable, let's say, at 10% or less?
I think it is. I think it is as long as the product offering is what it is. I mean, I think on an expanded product range, I think I would feel very uncomfortable limiting it to 10. Because I think that the extension of the product range would play well in China. I think we need to be careful that we don't start using dogmatic answers to, you know, I don't wanna be overly exposed to China, therefore, we're gonna restrict volumes.
Reality is that because of the nature of what we produce today, we're not necessarily the most instinctively appealing brand in China. That's something that needs to be fixed, right? Because we also don't have the history of Ferrari in China. We don't have the racing pedigree that has been at the heart of the attachment to Ferrari over a number of years. This takes time to build. While we're doing that, I think we need to expand the product offering and deal with real-life demand that's available today in China.
All right.
The 9% that we reported, which I think has been historical, if we go back even longer than that, the number has not been significantly different than that number. It's been positive given the current pro-product portfolio. I think it's something that needs to be fixed as we grow up.
Okay. Sergio, just 'cause we're getting late in the call, just one final one, maybe it's philosophical, but here it goes. It seems as autonomous technology kind of rapidly is applied to personal vehicles that over time, maybe perhaps over a long period of time, Sergio, there may be fewer opportunities for people to enjoy pure human driving pleasure for those few seconds on their commute or galloping through the Chianti Hills, or the Valleys of Umbria, or streets of Windsor, Ontario or whatever. As cars get, like, gradually desexualized, so to speak.
Could one argue that those moments of extreme driving pleasure get more rare and potentially more valuable? It might mean that you have to go to special venues like private tracks or closed roads to enjoy that pleasure, but it seems Ferrari could have a dominant position in this experience, even if it might require you to think differently about, you know, real estate or infrastructure to facilitate that. Am I crazy?
No, no, you're not crazy. I think, you know, this will take a long discussion, and we may end up having to have this conversation in front of a glass of wine in Chianti. The answer is absolutely yes. I think that Ferrari is ideally suited. By the way, there are documents in this presentation. If you look at the experience that we offer our customers, all the cavalcades, all the experiences that we have, these things go beyond the ability to go fast. It has to do with the ability to ride a car like Ferrari and do things which go beyond racing.
I think that's something that's endemic to the brand. It's structural to what we do. It's the way in which we can connect and the way in which we keep the relationship with our customer base. I don't care whether we start flying, you know, we have flying Uber cars all over the place. That reality will continue to live, and I think we can cater to that customer base. The answer is yes.
[Thank you.]
Thank you very much. That will conclude today's question and answer session. With that, I will hand back the call to Ms. Nicoletta Russo, Head of Investor Relations, for any additional or closing remarks. Thank you.
Thank you very much, Sethi, thank you very much, everyone, for joining us today. Please note that the IR team will soon available for any follow-up you may have. Thank you very much. Bye-bye.
Thank you very much, ladies and gentlemen. This will conclude today's conference call. Thank you for your participation. You may now disconnect.