Why Ferrari Raised Guidance: Strong Earnings and Cash Flow

Shares of Italian supercar maker Ferrari (NYSE: RACE) hit an all-time high earlier this week after the company increased its full-year guidance following strong third-quarter earnings.

The quarter's operating profit rose 12% from a year ago, to 227 million euros ($251 million), on sales increases in Europe and Asia. Following the strong results, the company boosted its expectations for full-year revenue, cash flow, and profit.

The raw numbers

Metric Q3 2019 Change (Decline) vs. Q3 2018
Revenue 915 million euros 9%
Vehicle shipments 2,474 9.4%
Earnings before interest and tax (EBIT) 227 million euros 12%
EBIT margin 24.8% 0.6 pp higher
Net profit 169 million euros (41%)
Industrial free cash flow 138 million euros 45.3%

Data source: Ferrari. Pp = percentage points. As of Nov. 4, 1 euro = $1.11. Industrial free cash flow is from Ferrari's core automaking business and excludes results from its financial-services unit.

What happened at Ferrari in the third quarter

Notwithstanding the 41% decline in net profit from the third quarter of 2018, when an intellectual-property tax incentive in Italy gave the bottom line a boost, it was a terrific quarter for the Prancing Horse. Shipments of both 8-cylinder and 12-cylinder models were up significantly from a year ago, and gains in revenue, operating income, and margin all followed.

  • Sales growth hasn't yet recovered the pace we saw in the first quarter, when sales rose 23% year over year -- but it was up a full percentage point from last quarter. 
  • Sales of 8-cylinder models rose 9.5%, while sales of higher-profit 12-cylinder models rose 8.9%. Demand remains strong for both the 8-cylinder Portofino convertible and the 12-cylinder 812 Superfast. Ferrari will add an open-top version of the 812, dubbed the 812 GTS, in the first half of 2020. 
  • Deliveries in EMEA (Europe, Middle East, and Africa) rose 13.7%, deliveries in North and South America were roughly flat from a year ago, and deliveries in Asia Pacific (outside of China) grew 23%.
  • Deliveries in China, Hong Kong, and Taiwan were down a bit, a result of Ferrari's decision to concentrate deliveries in the first half of 2019, ahead of new emissions regulations. 
  • Aside from a limited-run Pista model, Ferrari has now phased out the 8-cylinder 488 sports car. Shipments of its successor, the F8 Tributo, will begin in the fourth quarter, with a convertible version due next year.
  • Deliveries of the exclusive limited-run Monza SP1 and SP2 models began in September.
  • It spent 303 million euros on share repurchases in the first nine months of 2019, and paid dividends totaling 195 million euros. 
  • As of Sept. 30, Ferrari had 1.24 billion euros in debt attributable to its automaking business, versus 871 million euros in cash and equivalents, for total "net industrial debt" of 369 million euros. Ferrari had 370 million euros in net industrial debt as of the end of 2018.
  • The company had no special items in the third quarter of 2019 or the year-ago period. 

A red Ferrari Portofino, a sharply-styled convertible sports car.

The Portofino convertible is Ferrari's least expensive model, starting around $215,000 -- but a lengthy options list can boost the price to over $300,000. Image source: Ferrari. 

Ferrari increased full-year guidance

Ferrari told investors in August that it expected its full-year results to come in at the high ends of the guidance ranges it gave in January. It has now taken that one step further, boosting its guidance for revenue, earnings, and cash flow for the full year. 

Metric Q3 2019 Change (Decline) vs. Q3 2018 Metric New guidance Prior guidance 2018 result
Revenue 915 million euros 9% Revenue More than 3.7 billion euros More than 3.5 billion euros 3.4 billion euros
Vehicle shipments 2,474 9.4% Adjusted EBITDA About 1.27 billion euros Between 1.2 billion euros and 1.25 billion euros 1.1 billion euros
Earnings before interest and tax (EBIT) 227 million euros 12% Adjusted EBITDA margin About 34% Unchanged 32.6%
EBIT margin 24.8% 0.6 pp higher Adjusted EBIT About 920 million euros Between 850 million euros and 900 million euros 825 million euros
Net profit 169 million euros (41%) Adjusted EBIT margin About 24.5% Unchanged 24.1%
Industrial free cash flow 138 million euros 45.3% Adjusted earnings per share 3.70 euros to 3.75 euros 3.50 euros to 3.70 euros 3.40 euros
Industrial free cash flow More than 600 million euros More than 550 million euros 400 million euros

Data source: Ferrari. EBITDA = earnings before interest, tax, depreciation, and amortization. 

What Ferrari's CEO had to say

During the earnings call, CEO Louis Camilleri said that after a review of its brand-licensing arrangements, Ferrari has found that its current offerings are too extensive, putting its brand equity in danger. In response, it will discontinue about half of its licensing agreements, while pushing its remaining efforts upscale, in part via a new long-term agreement with luxury clothing maker Giorgio Armani. 

Camilleri said: "This agreement with such a recognized and prestigious Italian luxury company underscores our ambitions to elevate the standards and quality of all our offerings. Made in Italy will be a key focus, and we will exert full control over the design, quality, and pricing of these products as well as their distribution, which will include a complete overhaul of our own stores and a revamp of our e-commerce platforms."

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