After a Strong 2017, Ferrari Aims to Double Profit

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Italian supercar maker Ferrari N.V. (NYSE: RACE) said on Feb. 1 that its adjusted earnings before interest, tax, depreciation, and amortization (adjusted EBITDA) rose 18% in 2017, to 1.04 billion euros, on a modest increase in sales and stronger sales of its most profitable vehicles.

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That result was in line with analysts' expectations. But it's worth noting that Ferrari reached the 1-billion-euro adjusted EBITDA mark two years earlier than it had forecast at the time of its initial public offering in 2015. That success led it to announce ambitious profit and cash flow goals for the next five years.

For the fourth quarter, Ferrari's adjusted EBITDA was 258 million euros, up 7% from the year-ago period.

The key numbers

All financial figures are in euros. As of Feb. 1, 1 euro = about $1.25.

Metric Q4 2017 Change vs. Q4 2016 Full Year 2017 Change vs. 2016
Vehicle shipments 2,017 4% 8,398 5%
Revenue 840 million 1% 3.417 billion 10%
Adjusted EBITDA 258 million 3% 1.036 billion 18%
Adjusted EBIT (earnings before interest and tax) 194 million 7% 775 million 23%
Adjusted EBIT margin 23.1% 1.2 ppts 22.7% 2.3 ppts
Net income 136 million 24% 537 million 34%
Industrial free cash flow 13 million Improved by 84 million 328 million 17%

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Ferrari's "net industrial debt," or debt in excess of its cash balance and receivables, totaled 473 million euros as of the end of 2017, down from 653 million euros at the end of 2016.

Ferrari's 2017 in a nutshell

Ferrari has several different models, but for financial purposes, they're best thought of in two groups: Those with 8-cylinder engines, and those with 12 cylinders. 12-cylinder Ferraris are higher-priced and more profitable than 8-cylinder models.

The story in 2017 is simple: Sales of 12-cylinder Ferraris jumped 25%, thanks largely to strong demand for the new 812 Superfast coupe and the limited-production LaFerrari Aperta, while sales of 8-cylinder models were roughly flat year over year. Ferrari was also able to increase its prices in 2017 as it released updated versions of other models.

The improvement in mix goes a long way toward explaining how a 4.8% increase in vehicles sold translated to larger gains in revenue, adjusted EBIT, and margin. Ferrari also saw some margin improvement from its expanded "personalization" program, which allows customers to order their vehicles with unique, upgraded trims and options -- for a (not insignificant) price, of course.

How Ferrari performed by region

Americas: Shipments rose 4.6% from 2016. In the U.S., Ferrari's single largest market, shipments rose 2.8% on strong sales of (mostly) 8-cylinder models. The new 812 Superfast wasn't released in this region until the fourth quarter.

Europe, Middle East, and Africa: Shipments rose 3.5% on strong demand from Italy, France, and the U.K. That more than offset a decline in demand from the Middle East, where economic conditions were tough in key markets in 2017.

China, Hong Kong, and Taiwan: Shipments were flat year over year for the region as as a whole, as strong demand from China (shipments up 11%) was offset by a drop in sales in Hong Kong as Ferrari transitioned from an independent distributor to a factory dealership.

Rest of Asia Pacific: Shipments rose 12.3% in the region as a whole, as strong demand in Australia was tempered somewhat by a more modest increase in Japan.

What Ferrari's CEO said about 2017

CEO Sergio Marchionne was characteristically blunt as he summed up Ferrari's year:

Broadly speaking, it's been a good year. I think we made all the numbers that we had targeted. I think you saw from the headline [on Ferrari's earnings press release] that we actually overachieved our own ambitions.

If you go back to the time of the IPO, we were targeting about 1 billion euros in EBITDA a couple of years from now. We got there much earlier. We like the shape of the EBIT and EBITDA margins that we've been able to get for '17. It's an indication of the fact that we keep on improving the quality of the offering. I think it's reflected in the margin generation of the house. Cash is decent.

Looking ahead: Ferrari's 2018 guidance and longer-term goals

Here's Ferrari's guidance for 2018:

Metric 2018 Guidance 2017 Actual
Shipments More than 9,000 8,398
Revenue More than 3.4 billion euros 3.4 billion euros
Adjusted EBITDA Equal to or more than 1.1 billion euros 1.04 billion euros
Net industrial debt Less than 400 million euros 473 million euros
Capital expenditures About 550 million euros 387 million euros

In addition to its 2018 guidance, Ferrari also spelled out three "mid-term" goals: It's targeting adjusted EBITDA of 2 billion euros no later than 2022, industrial free cash flow of 1.2 billion euros no later than 2022, and to reduce net industrial debt to zero by 2021.

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