The recent Q3 2024 earnings call, was probably the most insightful and interesting of the “Vigna” era.&nbsp; Ferrari CEO Benedetto Vigna sent a few very clear messages about the strength of the business, how they see the business, and that they are keenly aware of the challenges the industry is facing. Vigna, the has been in place for over 2 years now and it shows. The CFO, Antonio Picca Piccon, was also on the call and did his usual nice job of concisely handling the questions tossed his way.&nbsp; Vigna &amp; Piccon appear to have a strong, cohesive, relationship.

Ferrari’s Q3 2024 Results – Automotive Thoroughbred

On November 5th, Ferrari released their Q3 2024 results.&nbsp; Ferrari has delivered stellar performance for the last several years now and Q3 2024 was no different.&nbsp; In fact, when you look at Ferrari’s Q3 2024 results in the context of what’s happening elsewhere in the Automotive Industry, they are truly outstanding.When the Q2 2024 results were released, I wrote:Q2 2024 ResultsIn the nearly 8 years since Ferrari’s IPO, its market cap has increased from $9.8 billion to $77 billion.&nbsp; This spectacular run of wealth generation is likely to continue given Ferrari’s strong balance sheet which will allow it to continue to reward its shareholders handsomely.&nbsp; Ferrari ability to driving pricing to increase revenues and margin is world class.&nbsp; In 2023, Ferrari beat their guidance on every single financial metric for the 3rd year in a row.&nbsp; Ferrari is very much on track to do the same in 2024.&nbsp; While Ferrari may produce cars, it is truly an ultra-luxury company.The recent Q3 2024 earnings call, was probably the most insightful and interesting of the “Vigna” era.&nbsp; Ferrari CEO Benedetto Vigna sent a few very clear messages about the strength of the business, how they see the business, and that they are keenly aware of the challenges the industry is facing. Vigna, the has been in place for over 2 years now and it shows. The CFO, Antonio Picca Piccon, was also on the call and did his usual nice job of concisely handling the questions tossed his way.&nbsp; Vigna &amp; Piccon appear to have a strong, cohesive, relationship.

Q3 2024 Key Results: The key numbers for Ferrari in Q3 2024 were 3,383 cars sold, (-2% units vs Q3 2023), Net Revenues of €1,644 million (+7%), and EBITDA of €638 million (+7%).&nbsp; Free Cash Flow was €338 million, up €62 million (+22%) vs. &nbsp;Q3 2023.&nbsp; Mix and pricing contributed €60 million. &nbsp;Ferrari returned €147 million to its shareholders via the share repurchase program in Q3 2024.&nbsp; Ferrari has also committed to additional share repurchases of over €100 million through Nov 2024.Probably the most impressive number here is the revenue growth, especially in light of the 2% volume drop.&nbsp; Ferrari is the only major automotive company I know that actively constrains supply, carefully manages mix, while consistently driving revenue growth.&nbsp; This really hammers home Ferrari’s credentials as a true luxury brand.&nbsp; On the earnings call, Vigna made 2 statements that really hammered this home:“we give a priority to the quality of revenues”&nbsp;“you know, we are a luxury company”&nbsp;A key contributor to the revenue growth was the increase in personalizations, which this time appear to be driven by increases in the Daytona SP3 deliveries and the Purosangue. &nbsp;The average Ferrari order includes over $100k in personalizations.&nbsp; In addition, sponsorship, commercial, &amp; brand revenues increased 21%, adding another €30 million to Ferrari’s coffers.&nbsp; All in, the Ferrari cash machine continues to function at a very high level. &nbsp;Its brand strength is unmatched, even the museums are drawing record crowds:“The strength of our brand is far more demonstrated by the record attendance at our museums. Two months in Q3 both saw well above 100,000 visitors and year-to-date we already passed the record of attendees of last year.”Product Mix &amp; Profitability: Ferrari’s Q3 2024 net profits were €375 million up 13% vs. Q3 2023.&nbsp; Mix &amp; price was a positive €60 million driven by model mix (Daytona SP3, Purosangue), price increases, and personalization.&nbsp; In Q3 2024, the mix in shipments was driven by the Purosangue, 296 GTS, &amp; Roma Spider.&nbsp;The Roma coupe and 812 Competizione have now been phased out and the 812 Competizione A is nearing the end of its production run.&nbsp; Profitability these days is driven by the “Special Series” cars and the Icona line.&nbsp;Reporting now is done on an ICE (internal combustion engine) and hybrid basis only.&nbsp; In 2023, the split between ICE &amp; hybrid was 56% &amp; 44% respectively, in Q3 2024 this moved to 45% ICE &amp; 55% hybrid, marking the 1st quarter where hybrids have made up the majority of the units sold. &nbsp;I expect this shift to hybrid to continue until hybrids make up 60-65% of the mix.&nbsp; With the launch of Ferrari’s first EV in late 2025, I would not be surprised if we are looking at a powertrain mix of 30/60/10 (ICE/Hybrid/EV) by the end of 2027.&nbsp;In his opening comments on the earnings call, Piccon mentioned:“We look at 2024 guidance with increased confidence on all metrics. To conclude, this quarter's strong financial results, the exceptional reception of the new supercar F80, the high client attendance at our events and our fast order intake on the Dodici Cilindri family, along with the strong order book, all reinforce our confidence in executing our future plans with success.”This is a testament to not only how well run the business currently is across all disciplines, but the strength of the portfolio &amp; brand.&nbsp;

Regional Mix: While multiple other major automobile manufacturers have gotten badly caught out in China, Ferrari has navigated both that and the shift in powertrain technology well.&nbsp; EMEA (Europe Middle East &amp; Africa) received 28 more units, and the Americas were down 26 vs. Q3 2023 year.&nbsp; Mainland China, Hong Kong and Taiwan were down by 114 units with APAC up 36. &nbsp;The Q3 2024 picture is not too dissimilar to Q2 2023 when unit sales were also down 2% with declines in the Americas, APAC, &amp; Mainland China, Hong Kong and Taiwan.&nbsp; In the Q3 2024 earnings call regarding China Vigna stated:“the strategy we highlighted of staying below 10% is the right one”This reenforced that Ferrari intends to keep Greater China at under 10% of their total volume and it currently sits a manageable 8%.&nbsp; While it does look like they might have been caught out slightly in Q3 in China, I suspect we will see a significant bump in cars headed towards the Americas in Q4 which will balance that out on a full year basis.&nbsp; Piccon also mentioned that volumes were impacted by the company’s transition to a new ERP (Enterprise Resource Planning) system.&nbsp; Having gone through a few ERP transition, I can fully sympathize.In terms of Ferrari’s never ending ways of additional generating revenue, post the Q3 close, Ferrari launched its latest hypercar, the F80.&nbsp; All 799 units have been sold out at a price tag in the neighborhood of €3.5 million.&nbsp;And that’s before you start ticking a few option boxes.&nbsp; I wouldn’t be surprised if Ferrari will have collected over €400 million in customer deposits by year end.&nbsp; They also recently sold two 499P Modificata track cars at about $5.5 million apiece.&nbsp;CAPEX, &amp; Debt: Ferrari has very ambitious plans and with Free Cash Flow of €338 million in Q3 they can comfortably afford to bring them to life.&nbsp; In Q3 2024 CAPEX spending was €249 million, up €44 million vs. Q3 2023.&nbsp; In the earnings call, Piccon referenced:&nbsp;“increased capital expenditures in line with the pace of development of our product and the new infrastructure in Maranello and largely driven by the new paint shop”&nbsp;Innovation is key to Ferrari’s ability to drive pricing on new models, and they clearly have the financial strength to fund its development.&nbsp; In May, Ferrari issued €500 million of unsecured bonds with a coupon of 3.625%.&nbsp; The quite modest coupon along with the issue being 2x oversubscribed is another demonstration of Ferrari’s financial strength.&nbsp; Ferrari’s debt load continues to be relatively modest at €3.1 billion, and cash and equivalents increased to €1.5 billion with total liquidity of an impressive €2.1 billion. Ferrari has about €1.3 billion in debt coming due over the next 15 months and already has enough cash on hand to retire all of it.&nbsp;

Portfolio: Ferrari’s current portfolio is by far the most complex in its history with three new models (12Clindri Coupe &amp; 12 Clindri Spider, F80) launched in 2024.&nbsp; Ferrari’s current portfolio consists of the Range Models (Roma Spider, Purosangue, 296 GTB, 296 GTS, 12Cilindri), Special Series (SF90 XX Stradale, SF90 XX Spider, 812 Competizione A), Icona (Daytona SP3), Supercar (F80), &amp; Track (296 Challenge,499P Modificata).&nbsp; This portfolio strategy and structure has been a key driver in Ferrari’s financial success over the past decade. It’s given them a rich set of tools to move people first into the Ferrari family, then trade them up, maximizing customer value at each step in the journey. Key to this has been the order book, which, as Vigna stated on the earnings call, stretches well into 2026.&nbsp; &nbsp;This overflowing order book has been key to supporting residuals, and strong residuals are critical to being able to continue to drive pricing.&nbsp; However, on the 296 GTB &amp; GTS there has been some softening of residuals recently, Vigna was asked about this directly on the earnings call and his answer was quite insightful:“We keep monitoring what is happening on the residual value, and we notice that, let me say when there is a degree of personalization that is a little bit too high, well the clear the following buyer in some cases not willing to buy for personalization that pleased a lot the first buyers.”Looking at preowned Ferrari 296 GTBs on the Ferrari US website, Vigna’s comment is spot on.&nbsp; There are quite a few 296 GTBs listed for sale now right around the current base price.&nbsp; However, there isn’t a single one for sale below the base price of the year in which it was produced.&nbsp; Net net, used buyers are becoming increasingly unwilling to pay for options they didn’t spec.&nbsp; As “personalizations” have been a major driver of Ferrari’s growth in profitability over the past several years, this could present a risk if first time buyers start reducing the number of option boxes they tic on the order form as they release those options are a “cost” and not an “investment”.&nbsp; I believe the risk is minimal as an orgy of “personalizations” on an order is a key driver of an owner’s Ferrari customer ranking.&nbsp; Most owners will not want to put that at risk after years of investment in the system.Electric Cars: Ferrari’s approach on EVs continues to evolve.&nbsp; A couple of years ago, the focus and discussion was all around Electric Vehicles, it has pivoted much more now to “electrification”.&nbsp; There were a number of quite insightful comments on the earnings call that clearly outlined the pivot.&nbsp; To start, Piccon stated:“For us is not electric transition. For us it's electric addition”“Our strategy to push to keep alive the three platform, the ICE, the hybrid and to add the electric”“We will leave the ultimate choice to our client”Ferrari has clearly seen what is happening in the EV market in general and clearly limiting its risk and exposure.&nbsp; They have no intentions of trying to drive conversion.&nbsp; EVs volume will be incremental to the current base ICE &amp; hybrid business.&nbsp;In addition, they are now wrapping innovation, new technology and electrification all tightly together.&nbsp; On the F80, Vigna stated:“Three key components of our F80, all developed and manufactured in our newly inaugurated e-building. One, the electric motors, the first to be developed, tested and manufactured entirely by us. Two, the high voltage battery module, conceived for very high power density and adopting a patented carbon fiber housing system to save weight. And three, the front axle, designed for high efficiency and incorporating two electric motors and inverter using silicon carbide transistors and integrated advanced cooling system. What I just mentioned above underlines the progress that we are making in our electrification journey”In fact, I wouldn’t be surprised if they are rethinking what that first Ferrari EV will be.&nbsp; When asked on the earning call whether the first Ferrari EV would be positioned above the F80, adjacent to it, or below, Vigna became quite cagey and basically declared it a “state secret”.&nbsp;Racing: Racing again was just mentioned in passing.&nbsp; The F1 Team is making progress and is in the best shape it has been in for several years now.&nbsp; Regular podiums are now an expectation vs. a pleasant surprise.&nbsp;

2024 TargetsFerrari has become one of the world’s premier companies when it comes to “sandbagging”. The 2024 Targets were increased at the end of the 1st half and on the Q3 earnings call, Piccon stated:&nbsp;“We look at 2024 guidance with increased confidence on all metrics.”&nbsp;This is about as close to a guarantee that I have ever heard.&nbsp; As they say, it’s not bragging if you can back it up.&nbsp;SummaryIn the 8 years since Ferrari’s IPO, its market cap has increased from $9.8 billion to $82 billion.&nbsp; Ferrari’s market cap today is over $20 billion more than BMW, Ford, Mercedes-Benz, Porsche, Stellantis, or VW.&nbsp; In 2023, Ferrari beat their guidance on every single financial metric for the 3rd year in a row.&nbsp; Ferrari looks to be set to do the same in 2024.&nbsp; Ferrari’s ability to driving pricing to increase revenues and margin is world class.&nbsp; While Ferrari may produce cars, it is truly an ultra-luxury company.&nbsp;Note: I do not, and have never owned, Ferrari shares.