Ferrari NV

NYSE:RACE

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to Ferrari 2019 Third Quarter Results Conference Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] Must advise you that the call is being recorded today, Monday, the 4th of November 2019. And I shall now hand over to your first speaker, Nicoletta Russo. Please go ahead.

[Nicoletta Russo, executive]

Thank you, Jodi, and welcome to everyone who's joining us. Today's call will be hosted by the group CEO, Louis Camilleri; and Group CFO, Antonio Picca Piccon. All relevant materials are available in the Investors section of the Ferrari corporate website. And 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 risks 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 said, I'd like to turn the call over to Mr. Camilleri.

[Louis Camilleri, executive]

Thank you very much, Nicoletta. Good afternoon, and good morning to everyone. We enjoyed another strong quarter across all financial metrics, which admittedly were flatted in part by a currency tailwind. We remain particularly pleased with the strong level of orders we continue to receive and the overall health of our order book. The quarter was also marked by continued investment in our resources to enhance our capacity to innovate and thus sustain our competitive edge and pricing power for the coming years. As announced in our release earlier today, we have raised our annual guidance across all metrics to reflect the benefit of the strong momentum of our core business.

Beyond the numbers, the third quarter proved to be exciting on many fronts. Of particular note was a 1-month long event held here in Maranello in September, the Universo Ferrari. This event attracted approximately 14,000 carefully selected customers and prospects as well as media, fans and our employees. It was the very first time we showcased all that Ferrari stands for in a holistic manner and I would characterize the event as quite exceptional in every respect. The highlight of the event was the simultaneous launch of the 812 GTS, our first V12 range modeled spider in the last 50 years, and the FS -- F8 Spider, which complements the highly successful F8 Tributo. Both models garnered an enthusiastic response as evidenced by the firm orders collected at the event itself and during this past month.

As you all know, we had announced the launch of 5 models this year. The last to be unveiled will be next week at an event to be held in Rome. We're all excited by the prospects of this particular model.

As previously pledged, I would now like to provide you with a synopsis of our brand diversification strategy, which has now been finalized, and against which execution has begun in a focused, deliberate and disciplined manner. It is the fruit of considerable work, customer surveys and research that has been conducted over the last year. At its very essence, the strategy's formulation encompasses 2 key considerations that will guide everything that we will do going forward. The first is a recognition that while we have a dual identity there exists only one unique brand. The second is that we will only participate in categories that are aligned with our brand values and do not constitute a departure from our legitimate territories and customer appeal, but will enhance the vibrancy and vitality of the brand. Today, our current offerings are too stretched, are in danger of diluting our very precious brand equity. This business relies too heavily on licensing with too many categories and limited control on the products that bear our brand and their distribution. To assure long-term profitable growth that will simultaneously strengthen our brand, we will restrict our participation to just 3 strategic business pillars.

A carefully chosen array of apparel products and accessories that will embody the style, creativity and quality that we stand for as a brand that will collectively fall under the brand extension pillar. An entertainment pillar that will reach out to a wider and younger customer base while leveraging our unique racing roots. And finally, a collection of exclusive luxury products and services, destined to appeal to the owners of our cars and potential future owners, which fall under the label car adjacencies. This disciplined focus requires a dramatic purge in our current offerings. We will reduce our current licensing agreements by some 50%. And in fact, have already terminated or announced the nonrenewal of approximately 20% of these agreements. We will also eliminate some 30% of the product categories in which we participate and 50% of the stock-keeping units present in our directly managed stores that currently carry our trademark. We will also be restructuring our franchising network.

In terms of brand extension pillar, we are extremely pleased to have entered into a long-term manufacturing agreement with the Giorgio Armani Group. 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. The entertainment pillar will provide us with an excellent means to immerse new and younger fans in the racing history, passion and values of Ferrari. Our theme parks at Abu Dhabi and Barcelona, including the museums in Maranello and Modena attract approximately 3 million visitors annually today. And we clearly see the opportunity to further expand these licensing activities. Nevertheless, the predominant immediate focus will revolve around driving simulation centers and the ever-growing popularity of the eSports, which are an obvious and exciting, perfect fit. The car adjacencies pillar will target our most valued customers. With very limited additions and one-off artifacts that embody the inherent craftsmanship and innovative spirit that lie behind the creation, design and manufacture of our cars. We also intend to provide an enhanced experience to the approximate 10,000 customers and prospects who visit our facilities in Maranello each year. To that end, one immediate step that will be taken is the creation of a new restaurant together with the world-famous chef, Massimo Bottura. The opening is planned in late 2020.

The current retail value of the products that bear our name is estimated to be approximately EUR 800 million. Our clear intention is to ensure that we capture a more significant portion of this value than we currently do. Our ultimate objective is that these activities, which will continue to be margin accretive, will ultimately represent some 10% of our overall profitability. It will take time to reach this ambitious but realistic target, which we anticipate to reach within the next 7 to 10 years. To ensure a flawless and consistent execution, we have put in place a devoted and experienced team and will shortly open an office in Milan. I am confident that this strategy, combined with the talented team we have in place, will deliver our financial objectives while enhancing the vigor of our brand equity. One final word before I hand over the call to Antonio. As previously announced, given the strength of our cash flow, we have substantially completed the second tranche of our share repurchase program and we clearly will be announcing a third tranche shortly. Antonio will now present the details of our third quarter performance.

[Antonio Piccon, executive]

Thank you, Louis. And good morning or afternoon to everyone who is joining us today. Starting on Page 14. Q3 2019 was a solid quarter on all metrics. And as already said, the robust year-to-date performance provides us with the ground to uplift the full year -- full 2019 year guidance that we'll highlight later. Our shipments grew 9.4% or by 212 units, mainly driven by the strong deliveries of the Ferrari Portofino and the 812 Superfast.

Group net revenues increased 9.2% to EUR 915 million. Adjusted EBITDA increased to EUR 311 million, improving by EUR 33 million or 11.5%. Adjusted EBITDA margin was 33.9%, up 70 basis points versus prior year. The margin expansion was supported by improved mix as well as the exchange rates more favorable than expected.

Such a result also reflect the reversal of a provision on emissions obligations and includes a small impact from the adoption of IFRS 16. Adjusted diluted EPS was up 16.9% to EUR 0.90, still benefiting from the Patent Box signed last year, which expires in 2019. Industrial free cash flow for the quarter was EUR 138 million, representing an increase of EUR 43 million versus last year.

Moving to Page 15. Total shipments for the quarter were supported by a 9.5% increase in V8 models and a 8.9% increase in V12 models. This growth mainly reflected the trend of the shipment of the Ferrari Portofino as well as the 812 Superfast. The 488 family recorded slightly lower volumes, with the 488 GTB and the 488 Spider, which concluded their lifecycles partially offset by the 488 Pista and the ramp-up of the 488 Pista Spider. This also generated the shift from the sport to the special series pillar.

Towards the end of September, we also recorded the very first deliveries of a couple of Ferrari Monza SP1 and SP2. In terms of our geographic performance, EMEA grew 13.7%. Americas were in line with prior year. The rest of APAC was up 23.1%, while Mainland China, Hong Kong and TAIWAN was down by a few units as per the decision to concentrate client deliveries in the first part of the year in advance to the early introduction of new emissions regulation. This geographic breakdown reflects judicious allocations driven by the pace of individual model launches and the careful management of our waiting list in each respective region.

Turning to Page 16. You can see here displays the group net revenues of Q3 2019, which increased by 7.1% at constant currency that was at 2018 exchange rates net of hedges. Cars and spare parts revenues were up 12.5% at constant currency. As explained before, the growth reflect the combined impact of the higher volumes just described as well as the personalization programs. Engines revenues declined by EUR 24 million in the quarter, reflecting lower shipments to Maserati. Revenues from sponsorship, commercial and brand were slightly up. Mainly thanks to higher revenues generated by Formula 1 racing activities.

Currency, including translation and transaction impact as well as foreign currency hedges had a positive impact of EUR 17 million mainly reflecting the strength of the U.S. dollar.

Moving to Page 17, which highlights the evolution of the main items of our adjusted EBIT. Adjusted EBIT was up 11.7% at current currency to 20 -- EUR 227 million, with adjusted EBIT margin at 24.8%.

At constant currency, adjusted EBIT grew by 3.8%. Volume was positive by EUR 20 million, thanks to the increase of our shipment. Mix price was positive for EUR 23 million. This improvement was mainly attributable to mix, including a significant impact from the personalization programs, supported by the growth of the special series pillar and the very first deliveries of the Ferrari Monza SP1 and SP2. Industrial costs and R&D grew EUR 40 million, mainly due to spending on innovation for the product range and components as well as for our Formula 1 racing development and higher operational start-up expenses in connection with the introduction of new models.

SG&A increased by EUR 8 million, reflecting new product launches and the company's organizational development. Other, is the [ algebra exam ] of a number of items, including the reversal of an existing provision mentioned in the slide, which is the main driver. The total net positive impact of currency was EUR 15 million for the quarter as the net result of 4 -- of more favorable market rate partially mitigated by the hedges in place.

Turning to Page 18. Industrial free cash flow for the quarter was EUR 138 million driven by the adjusted EBITDA partially offset by capital expenditure of EUR 145 million. I remind you that cash taxes in 2019 benefit from the Patent Box agreement signed last year. As a result, based on our current estimate and the tax payment mechanism in this country, we expect not to pay tax advances in Italy in Q4. Net industrial debt, as of September 30, was EUR 369 million versus EUR 353 million as of last June 30. The increase also reflected the cash impact of the EUR 153 million share repurchase executed in the third quarter of 2019, which more than offset the positive industrial free cash flow. Lease liabilities as per IFRS 16 was stable at EUR 63 million at the end of the quarter. It's worth noting that we would have been cash positive already at the end of Q3 if we added back the impact from the share repurchases executed since November 2018 and from the adoption of IFRS 16.

Let's then move on to Page 19. As announced, the performance to date and the visibility we have going forward associated with the FX headwind allow us to refine our 2019 guidance upwards on all metrics. The revised full year 2019 outlook targets are as follows. Revenues at roughly EUR 3.7 billion. Adjusted EBITDA at approximately EUR 1.27 billion, maintaining and changed the margin of the profile at about 34%. Adjusted EBIT at around EUR 0.92 billion, with an adjusted EBIT margin of approximately 24.5%. Adjusted diluted EPS between EUR 3.70 and EUR 3.75 based on the average number of shares outstanding for this year. Industrial free cash flow, now projected to exceed EUR 0.6 billion, supported by the strong collection of the advances of the Ferrari Monza SP1 and SP2, lower tax payment and the phasing of some investment programs between 2019 and 2020.

With that said, I'd like to turn the call over to Nicoletta.

[Nicoletta Russo, executive]

Thank you, Antonio. We are now ready to start the Q&A session.

[Operator]

[Operator Instructions] Our first question for today is from the line of John Murphy from Bank of America.

[John Murphy, analyst]

We -- as you're going through the discussion and the review of the brand extension, just curious if you can give us sort of a baseline off of where you're operating from? And your discussion of it representing 10% of the business, I apologize, I may have missed this. I think you meant 10% of EBIT or operating income, is that correct? And in the interim, as you get there, 7 to 10 years out, could there be a dip? Or do you think you can manage this relatively smoothly during some of the transition?

[Louis Camilleri, executive]

Thank you for your question, John. Yes, I'm referring to EBIT, so it would be 10% of the EBIT. Clearly, we initially will take one step back to take 2 or 3 steps forward. So clearly, by reducing the amount of licensees and the amount of categories in which we operate, we will take a step-down, but that's to be able to accelerate our profit growth going forward. But I think it's also very important that it is not just about profit. It's also about enhancing our brand equity and the vitality and vibrancy of the brand.

[John Murphy, analyst]

Okay. That's helpful. And then just the second question on mix. It looks like we'll lap the launch of the Portofino early next year. You have a lot of product like the 812, 812 GTS, the F8, Ferrari F8 Spider, the Monza, it just seems like mix, once we lap the Portofino next year, will be very profitable. Yet, if we were to look at your prior 2020 guidance and now what you've just given us for 2019, there are some metrics like EBIT and diluted adjusted EPS, which it seems like you're exceeding this year, 1 year early. Given what seems to be sort of hands down, positive mix as we go into next year, are there any other key factors that would indicate that you might have a downshift in EBIT in earnings year-over-year? Or are we just awaiting some -- maybe some updates to the 2020 guidance that's not being contemplated yet and you're not officially announcing?

[Louis Camilleri, executive]

Well, you're correct in pointing out that, by the end of this year, we will have essentially matched what we had said for 2020 in our Capital Markets Day. I think it's rather premature for us to address 2020 at this time. But clearly, we do anticipate a strong year for the reasons you outlined, mix will be clearly one of the key drivers. Having said that, there are a number of things that we have to give adequate consideration to. And by the time February comes along, we will have a much better sense of those. The first one, obviously, is the macro factors and the economic uncertainties that currently prevail. I'm referring to trade in particular, but also linked to trade are currency movements. The other things are, we just -- what we just mentioned earlier, the slight step down in brands. Maserati engines, we continue to project, there will be an erosion. Formula 1, it will be an important aspect as well. I think you're aware that this weekend, they announced really the beginning of the Concorde agreement for 2021. So effectively, the Formula 1 team will be working on developing both the 2020 car as well as the 2021 car. So there will be some expenses that has sort of doubled up in 2021. And obviously, the pace of the models hitting the market at different times as well as a careful management of our waiting lists inventories and obviously watchful eye on residual values. I would also add that, as you saw in the third quarter, we will continue to invest in our own resources, financial and human, to be able to maintain our competitive edge at a time where there's a lot of transformation going on in our industry.

[John Murphy, analyst]

Okay. So we'll look forward to the update in February. Maybe -- so we're looking forward to that. So maybe just lastly on Universo Ferrari, you mentioned you had 14,000 owners and prospects. I'm just curious if you could give us an idea of the split of how many folks that visited were for prospects and how they were determined? Because I would imagine they might be outside of your traditional existing database and obviously mining new customers goes with the business. Just curious how were they identified. How many there were? And how you verify and follow up with those folks?

[Louis Camilleri, executive]

Yes, we had 14,000 visitors, not orders.

[John Murphy, analyst]

Forgive me, I am sorry, I made a mistake there. Visitors, yes.

[Louis Camilleri, executive]

So of that, we had about 6,000 fans and public visitors. And to your specific question, we had about 3,000 customers, existing customers as well as about 2,000 prospects. And our hit rate in terms of the orders was pretty strong. Particularly with the new models, the GTS and the F8 Spider, but also the SF90 Stradale.

[John Murphy, analyst]

I'm sorry, the hit rate with the prospects was very high, is that what you're saying?

[Louis Camilleri, executive]

Yes. Yes.

[Operator]

Our next question is from the line of Max Warburton from Bernstein.

[Max Warburton, analyst]

I know we're supposed to talk about merchandising. But I'd like to ask questions -- 2 questions, please on other subjects. Just the first is on F1. Louis, you actually referred to that just now, I think, talking about doing development of 2 cars at the same time, but could you just give us your thoughts on what the benefit will be beyond 2021 for the Ferrari F1 finances of this budget cap? It seems to me that the budget cap should lower your costs without lowering your revenues. But in the past, you suggested there won't be a meaningful increase in F1 profitability. Could you just talk to that? And then the second question, I guess, really for Antonio, you were talking about an FX tailwind in the quarter. That reminds me of the risks going forward. Could you talk particularly about the U.K., given the upcoming election, potential political uncertainty. Are you able to do anything special on sterling hedging at the moment and for what time period?

[Louis Camilleri, executive]

Thank you, Max. I think what was announced over the weekend is really the beginning of the process. It's not even the end of the beginning. So there's still quite a lot of work to do together with Formula 1 and the FIA as well as the teams. We've voted in favor of it and we haven't exercised our retail right. So all in all we're sort of satisfied with the direction it's taking. And the principles that have been expanded. But clearly, a lot of details still need to be ironed out. To your specific question, the budget cap relates to only certain elements of the actual car. For [ all the ] best examples that the engine is not part of the budget cap. Our sense is that going forward -- our hope is that there will eventually be a budget cap placed on the engine itself. There have been limitations in terms of dyno usage, which is a very expensive part. So post 2021, the budget cap that exists, even including the exclusions to the budget cap, relative to the revenues, and again, a big chunk of our revenues is sponsorship. So to the extent that Formula 1 becomes more entertaining and brings in more fans then clearly, Formula 1 will generate more revenues, which ultimately benefits all the teams, including Ferrari. So all in all, I see it, Max, as a worst-case neutral and maybe with a bit of upside. Although in 2020, we will have to double up some costs. So it's really 2021 and going forward. And as you know, there's consideration of increasing the amount of races. I don't think that's been finalized yet. But clearly, that carries negatives in terms of the organization. But the positives on the revenues because, obviously if you add 2 or 3 races, the revenues go up. Does that answer your question?

[Max Warburton, analyst]

It does. I mean, just to clarify, if we exclude the engines and we exclude the cost of the drivers, is the $175 million cap still not a meaningful reduction on what you're spending in those other activities?

[Louis Camilleri, executive]

It will require a reduction, yes.

[Antonio Piccon, executive]

As to your question on the FX, Max, it's Antonio here. The main driver for the FX impact on our books is U.S. dollar. I think you all know, our exposure to U.S. dollar is in the region of EUR 1 billion, meaning net revenues, range net of costs. And what we do is we hedge on a 12-month rolling basis. And we do it either by forward rate agreement or by using options. So what this hedging procedure does is to provide visibility on the next few months and to a certain extent, we are not protecting all months at the same level. With respect to the exposure to the British pound. This is in the region -- the exposure is in the region of 5% to 6% of our revenue. So up to EUR 200 million equivalent. And what we do is exactly in line with what I mentioned for the U.S. dollar. In addition, we are protecting by our -- in our dealerships agreement by the fact that in case of a sudden move in the exchange rate we have the chance to change the pricing and on the basis of the impact that we see on the foreign exchange.

[Operator]

Our next question is from the line of Michael Binetti from Crédit Suisse.

[Michael Binetti, analyst]

Congrats on a nice quarter. Louis, can I just ask you, maybe help clarify a little bit on the brand strategy? I know you said 10% of profitability over the longer term. I guess we don't have a lot to anchor our thinking on as we look past this year into 2020. But as I look to the original guidance you gave for EUR 1.3 billion in EBITDA next year. I'm assuming we would swing that a little lower on the reset in the products business for next year. Is there any way you could help us try to quantify how much that impacts profitability next year as we think out? And then I guess just bigger picture, what should we think about that's different in 2020 versus the fourth quarter on mix? I think your fourth quarter guidance implies EBITDA margins close to 39%. I know some of the new cars coming next year will be higher margin even than that, but there are obviously some puts and takes around Formula 1, the brand strategy, and I know R&D spiked a little bit this quarter. Maybe you could help us just think through a little bit of those as we try to roll our models forward, obviously, acknowledging that you're not giving us formal 2020 guidance yet.

[Louis Camilleri, executive]

Yes. Although you're pushing me to give you elements for 2020. It's difficult for me to respond. Clearly, as I mentioned earlier, we expect a relatively strong 2020 and mix will be a key driver for the reasons you've said. I think many of you are assuming that a lot of our new models will start selling in January, which is not the case. They'll come later in the year. Some of those cars are pretty sophisticated animals and it takes a while to ramp up production to full industrial scale. So beyond that, I'm not really prepared to say anything other than, yes, mix will be favorable and that clearly will be a key driver of our performance in 2020.

[Michael Binetti, analyst]

Let me ask you, I guess, on the R&D then specifically, that was up quite a bit in the quarter. Could you maybe speak to what drove the increase in third quarter? And is that a new run rate we should think about?

[Louis Camilleri, executive]

Well, we flagged for some time that we need to enhance our resources and that's exactly what you're seeing. Now it was also up in part because of the new models and cadence of the new models. But clearly, in terms of the resources to address, be it hybridization, electrification, the human machine interface, ADAS, et cetera, those are areas that we certainly need to strengthen going forward. And therefore, we're staffing up for that for the longer term.

[Michael Binetti, analyst]

Okay. And I just wanted to go back to it because we did talk -- I did ask you about 2020 a bit higher level. But the -- is there any way to quantify how much we should think about as a headwind just from the brand reset next year?

[Louis Camilleri, executive]

I don't think it would be really material.

[Operator]

Your next question for today is from the line of Giulio Pescatore from HSBC.

[Giulio Pescatore, analyst]

So first one, on your point about being careful about management of waiting list and inventories, I mean, I know that you've been really good in the past at pulling supply out of markets that were underperforming, like what you did in the Middle East, I think, in 2016. Are you seeing any pockets of weakness at the moment, anywhere, like -- from markets like U.K. and Europe seems to be really weak for some of your competitors? Are you seeing anything there?

[Louis Camilleri, executive]

Nothing that is sort of pointing to orange or red lights, but things can move quite rapidly. As I said in my opening remarks, the order book is incredibly strong. And continues to strengthen. I just saw this morning, the October orders, and they were very, very encouraging. So we're not seeing anything that's of major concern, I think as Antonio pointed out, the U.S. market was a bit flat in the third quarter, it was probably expected to be flat to down in the fourth quarter and that's essentially due to the pacing of new models. As you know, it usually takes 6 months for a product that is launched in Europe before it hits the U.S. market for, homologation and other reasons.

[Giulio Pescatore, analyst]

Okay. And you're happy with the residual values that you're seeing in the secondhand market [indiscernible]?

[Louis Camilleri, executive]

There are 1 or 2 markets where we have seen a bit of softness. However, relative to others, we still do well. So it remains a bit of a watch out in certain markets. But so far, again, no big orange or red lights.

[Giulio Pescatore, analyst]

Okay. And on the one-off on the provision release. Should we expect more of that in Q4 or was only related to Q3? And maybe can you give us a little bit more detail on what it was?

[Louis Camilleri, executive]

Related to regulation passed on emissions for low volume manufacturers in the U.S. market. So it's completely a one-off. It won't be repeated.

[Operator]

[Operator Instructions] The next is from Ryan Brinkman from JPMorgan.

[Ryan Brinkman, analyst]

I see on Slide 12, you mentioned relative to the brand strategy that it is accretive to Ferrari's margin. I just wanted to check to see whether it's the case that nonautomotive Ferrari branded goods are accretive to margin because of their intrinsically higher margin nature or because of the fact that royalty revenue comes in at a higher margin than when something is in house? I ask to because the chart on Slide 12 seems to imply that maybe you'll have more of this in-house in the future. And I was wondering, the margin implications of -- with more vertical integration? And then just finally, what are the capital -- like the return on capital implications of this strategy. Are financial returns higher at a given level of margin for the nonautomotive business, given less capital requirements, for example?

[Louis Camilleri, executive]

Yes, on all counts. So yes, it will be marginally accretive, including the nonlicensed products, clearly, [ licensee ] is pure royalty. So the margins are very high. And the investments are not necessarily that high. So from a return of investment, it's also accretive.

[Ryan Brinkman, analyst]

Okay, very good. And then how do you expect the level of Icona series that you plan to deliver in the fourth quarter to track in that quarter relative to throughout 2020? I'm just asking because if investors see the margin number that you print in the fourth quarter, is that relatively indicative of the go forward? Or is the fourth quarter going to be somehow very heavy in Icona series deliveries because it's the first real quarter out of the gate? Or will it be a smoother delivery as we progress?

[Louis Camilleri, executive]

Well, clearly, in the fourth quarter, the Monza will be a much higher weighting than in 2020 per quarter relative to the other models. So the fourth quarter margin, EBITDA margin will not necessarily, I know where you're driving at, be the base on which you can project 2020.

[Operator]

Our next question is from Monica Bosio from Banca IMI.

[Monica Bosio, analyst]

The first one is on the personalization. Every quarter, you mentioned that the higher weight of the personalization, which impacted positively both on the top line, but especially on the EBITDA margins. Can you give us just -- give us an update on the level of personalization? And what do you expect going forward? And the second question is on the financial items and financial charges. Can you give us just some highlights on the EUR 16 million of financial charges?

[Antonio Piccon, executive]

Sure, Monica. It's Antonio speaking. On personalization, this quarter has seen an improvement compared to usual. So the total impact of personalization to revenue is higher. It is in the region of 20%, and this is due to the fact that we had this concentration of special series -- deliveries of special series car that command a higher level of personalization. The second one, in terms of financial charges, you should take into consideration that we have the full impact of the repurchase of the bonds in the market during the month of July. And this accounts for EUR 8 million in total in the quarter.

[Operator]

Our next question for today is from Susy Tibaldi from UBS.

[Susy Tibaldi, analyst]

I have a question on volumes. So I think this 9% year-over-year that we saw in Q3 was maybe a little bit stronger than some had expected. Do you have any comment on this? I guess that's one thing that stands out is the fact that if we think about deliveries into China, there were a lot of early deliveries in the first half. But the number this quarter was just down marginally just 2%. So was there any further deliveries? Because to be honest, I guess that we had expected first half to be very strong and then second half being negative for China, but we haven't really seen this yet. So is this something that we're going to see in Q4? And I suppose that also related to Q4 because you're going to have the Monzas, you don't really need big volume contribution because you have strong mix contribution. So is there a possibility that Q4 volumes could be negative.

[Louis Camilleri, executive]

In terms of China, your expectations were correct. I mean the fact is that China volume was down in the third quarter, considerably down, but that's offset by the increase in Hong Kong, where we effectively had a very similar phenomenon to what we had in China in the first half. So there were a lot of deliveries to customers in Hong Kong. With regard to the fourth quarter, we essentially anticipated this stage, that volume will be essentially flat relative to the prior year quarter. Does that answer your questions?

[Susy Tibaldi, analyst]

Yes, it makes sense. If I can ask one more thing, please. I was wondering if you could talk a little bit about the reception from customers with regards to the new models and especially, do you think that people -- have you had any pushback in the sense of people are seeing so many new launches, maybe much more than in the past. And maybe some people are not so happy about it. I don't know. I'm just asking if you have any comment to share? I think it's very clear from an investor perspective why you're doing this? Because you have to refresh your lineup. But I was just wondering if this is clear from a customer perspective.

[Louis Camilleri, executive]

I think the response has been excellent to all of them, actually, and customers are very happy with the array of products that are available. They understand it. As you said, we needed to renew our product portfolio, which hadn't been done for some time and a lot of our models are reaching the end of their lifecycle. I haven't heard much negative. Certain dealers, obviously, are concerned because they need to invest a bit more. But from a pure customer perspective, but also very importantly, from new customers and prospects, we are witnessing a lot of interest from them based on these new products. So all in all, I think it's very positive. I haven't really heard any negatives from customers or prospects, and I think the order book is testament to that. These order books are not just interest. It's a specific order with the down payment to the dealer.

[Operator]

Our next question for today is from the line of Philippe Houchois from Jefferies.

[Philippe Houchois, analyst]

I have a few questions. The first one is, the low growth that we see in the U.S., I would have thought there might be an acceleration of deliveries people trying to beat any concern about import duties. Can you comment on the mix of what you sell in the U.S., maybe less appeal for the products? Just give us some context there.

[Louis Camilleri, executive]

I think there's so much uncertainty on the trade and the tariffs wars. My own sense is that most people in the U.S. and certainly, this week, feel that there won't be a trade war, certainly not affecting cars. So I'm not sure that it's a relevant piece of the U.S. market per se today.

[Philippe Houchois, analyst]

Right? But I would have thought consumers who might have purchased early as opposed to run the risk of the higher import duty. And you haven't seen evidence of that. Is that correct?

[Louis Camilleri, executive]

That's correct.

[Philippe Houchois, analyst]

And I'm just wondering, longer term, when you speak to your customers, compared to maybe 12 months ago, had you sense a bigger or an acceleration of interest in your customers to have Ferrari produce an all-electric car.

[Louis Camilleri, executive]

I would say that, certainly, in terms of hybrid, there's been huge interest, especially since the launch of the SF90. I think there's still a bit of skepticism out there regarding a fully electric Ferrari and what it will be able to do, which is why we're taking our time to ensure that it will be a true Ferrari DNA car. So in all fairness, I think a lot of our customers have difficulty imagining a real Ferrari, which is fully electric. But they had the same skepticism for hybrid. And when they sold the SF90, I think it blew them away. So I'm quite hopeful that we'll be able to do the same with the fully electric car.

[Philippe Houchois, analyst]

All right. Excellent. If I can squeeze the last one is, was there any evidence in your research that -- what you're doing on accessories, et cetera, it makes a lot of sense. I'm just wondering, was there any evidence that what you were doing before, actually had a negative impact on your brand value?

[Louis Camilleri, executive]

There were a few things that -- what I would call imperfect.

[Philippe Houchois, analyst]

Yes. Any particular comment on this, I'm just wondering, because, I mean I can understand that was not optimized, but it was...

[Louis Camilleri, executive]

I don't want to necessarily revisit the past or complain about some of our existing licensees. I hope you appreciate that.

[Operator]

[Operator Instructions] Our next question for today is from Martino De Ambroggi from Equita.

[Martino De Ambroggi, analyst]

Martino De Ambroggi. The first is on the brand extension. So I imagine in 2022 targets, the brand expression is factored with basically 0 contribution? Or was it already included?

[Louis Camilleri, executive]

I think what we said at the Capital Markets Day that by 2022, the brand business would be essentially flat with what it was in 2018. My hope is that by 2022, we should have a bit of upside.

[Martino De Ambroggi, analyst]

Okay. And looking at your Slide 12, you are presenting value for the reference market. That I imagine it's not included in the slide, so you will not provide it. But if I ask you what is the potential sales, order of magnitude, roughly for this kind of activities you mentioned, what is the range?

[Louis Camilleri, executive]

I'm sorry, I'm not going to be able to give you a number at this stage. I think we'll be able to do that going forward, but not today.

[Martino De Ambroggi, analyst]

Okay. And very last, a confirmation on the CapEx for the full year or was EUR 750 million included in your guidance?

[Louis Camilleri, executive]

Yes, this is the number.

[Martino De Ambroggi, analyst]

While volumes are slightly higher than what you indicated at the beginning of the year in the region of 10,000. So is it due to something -- anything in particular? Or is just because of the order flows and the waiting list, I don't know?

[Louis Camilleri, executive]

Our volumes will be in that region. We said that we would be in the 10,000 region and that's where it will be.

[Operator]

Our next question today is from George Galliers from Goldman Sachs.

[George Galliers-Pratt, analyst]

The first one is on the brand extension and the target of 10% of profitability. Clearly, there aren't many luxury items outside of the steel sports watches and certain handbags that have the same kind of wait list as your cars. Do you have any concerns about this increasing the cyclicality of your business?

[Louis Camilleri, executive]

No, I don't. We've been very careful to ensure that we're in the appropriate categories. So I'm not overly concerned by the cyclicality of that business.

[George Galliers-Pratt, analyst]

And then as a second question, with the introduction of the 812 GTS and the SF90 clearly, your sports car range has expanded from sort of traditionally being around 3 vehicles to 5. And I think with the new products that you're going to unveil in November will also see an incremental unit in the GT class. So really, you're going from sort of 6 series models to closer to 9, which is about a 30% increase. Does this lead to any incremental extra manufacturing cost or complexity that it's a challenge to handle? Or is there enough commonality between these vehicles, but ultimately, it doesn't have a huge impact from R&D and manufacturing complexity perspective?

[Louis Camilleri, executive]

Well, I think we're sort of working hard in defining the actual segments. And I personally don't think that you can put the SF90 and the 812 Superfast or 812 GTS in the same segment. But I think that will become more apparent as the years unfold because we're looking at it very much from a consumer perspective as opposed to just from a technical perspective. With regard to your questions, yes, these are complex cars and it will add complexity, but I think as we've proven with the Monza, which is a very, very complex car, we were ahead of schedule, which is why, despite the fact that we had to actually construct a new production line just for that model, we were able to deliver a couple of cars ahead of schedule. So that gives me confidence in the organization and its excellence in meeting deadlines. So yes, it's more complex. Two, can we handle it? Yes.

[George Galliers-Pratt, analyst]

Great. And if I could just slip in a final one. Obviously, without saying too much ahead of the products unveiled. Will the new vehicle that you unveil, later this month, reduce the entry point for people eager to get their hands on a new set of Ferrari keys.

[Louis Camilleri, executive]

You'll have to wait and see. It's not that long a wait. It's next Wednesday.

[Operator]

Our next question for today is from the line of Thomas Besson from Kepler.

[Thomas Besson, analyst]

I have a first question on the brand extension. You have mentioned EUR 800 million for 2019 and talk about the share of profitability in about 7- to 10-year plan. where do you think you're going to be in terms of that equivalent retail, where you offer branded goods in 7 to 10 years? Should we think it's going to be a bit higher or do you believe it's going to stay around that level?

[Louis Camilleri, executive]

I won't give you a precise number, but it is our intention to increase the size of the cake and our share of the cake.

[Thomas Besson, analyst]

Yes, that's what I had in mind as well. Great. I have 2 very quick questions in terms of just the quarter and the year. Could you give us the amount of the provision release in the quarter, the one on U.S. small car manufacturer. And if I may, could you give us all, what you expect now for FX for the full year, knowing that I think we've been positively surprised both in Q2 and Q3?

[Louis Camilleri, executive]

Yes, the release of provision, it is in the region of EUR 10 million. And the expectation for the rest of the year is that it remains more or less flat at the customer level.

[Operator]

Our next question for today is from the line of Adam Jonas from Morgan Stanley.

[Adam Jonas, analyst]

So I hope no Ferrari branded baby shoes, socks and underwear, down the pipe. Louis, I had a question for you. I mean it's a good idea. So Louis, on complexity. I just want to kind of follow that thread from the earlier question. Maybe starting with the Monza engine, super exquisite kind of a Swiss watch on steroids kind of thing entirely designed and manufactured in-house. As you do eventually move towards an all EV, BEV, electric, Monza of the future, these vehicles have been described as the super, noncomplex. Now maybe Ferrari will have a different take on it. But compared to a V12 engine, very, very super, noncomplex. How does that change your make or buy decisions at Ferrari as you eventually do move towards EVs? Will you want to continue to make things in-house, even if they aren't complex and exquisite? Or would you search for best-of-breed, of course, to your specifications supplied from the outside?

[Louis Camilleri, executive]

It's good. It's clearly something we're studying. Adam, I think we're leaning towards make rather than buy, but that will require investments in infrastructure and resources. And we're leaning towards make because, ultimately, we feel that, that's where we can get a competitive advantage and really differentiate our products from those that are offered by others. So that is where we are leaning.

[Adam Jonas, analyst]

And just one quick follow-up. On the Purosangue. Have you decided on a powertrain architecture for that vehicle yet? Is it hybrid or a pure BEV? I'm assuming it's not a pure ICE. But I'm curious if you finalize that?

[Louis Camilleri, executive]

We have finalized it. As it leads for the first one, and I'm not in a position to share with you. That one you're going to have to wait.

[Operator]

Our next question is from Andrea Balloni from Mediobanca.

[Andrea Balloni, analyst]

Only one left, it's about DNA. How should we model the impact of DNA for the remaining part of the year? I'm asking about that because I would have expected a larger impact in Q3, following the launch of introduction of a new model. So all in all, what should we expect in Q4 something inline within Q3 or even an acceleration?

[Louis Camilleri, executive]

You may expect a slight acceleration there.

[Andrea Balloni, analyst]

Okay. And my second question is very quick one, it's about ForEx. I lost your answer before about Q4. What should we expect in terms of impact on EBITDA.

[Louis Camilleri, executive]

We said we expect the exchange rate to remain in line with what they've been in Q3 present level.

[Operator]

[Operator Instructions] Our next is from Stephen Reitman from Societe Generale.

[Stephen Reitman, analyst]

I have 2 questions. For a few months since you launched the SF90 Stradale, which obviously explored a pricing point significantly higher than you've had with the previous -- with the 812 Superfast. I was wondering what you've been observing in terms of the clients coming in for this? Because, obviously, you've been very careful in the past when you replace a model with price increase being relatively modest over its predecessor. But obviously, in this case, you brought out a new series car at a significantly higher price. So I'm just interested in what the reaction has been and how is that aim from the traditional level Superfast customers and the like? My second question is about the brand extension. You talked about, obviously, reducing a lot of the products that are not really helping the brand. So are we talking about, really, sort of, like, a cull in the way you saw at [indiscernible] when [indiscernible] business and then reduced the number of product lines from 20,000 to about 7,000 or 8,000? Looking at the estimate, maybe, I'm not clear about that.

[Operator]

We will now take our next question is from the line of Massimo Vecchio from Mediobanca.

[Nicoletta Russo, executive]

Sorry, Massimo, just to interrupt you. We still need to answer the previous question, apology on our side, we had a problem with the line.

[Louis Camilleri, executive]

Sorry, we had an issue. With regard to the SF90, what I was saying, Stephen, was that the reception has been very strong among existing customers as well as some new prospects and they come both from V12 and V8. The order book is extremely strong at least 18 months and that's only within the last 6 weeks. So we feel very good about, as you described it, a new model in the series range at a higher price. So that is very encouraging for the future.

With regard to the brand extension, I think I've mentioned in my remarks that we are culling some 50% of our license agreement and some 30% of the categories in which we participate. And in our own stores, which is a reflection of what will happen elsewhere, we are reducing the amount of SKUs by about 50%. So yes, there is a significant purge of culling, as you call it.

[Nicoletta Russo, executive]

Massimo, please go ahead with your next question.

[Massimiliano Vecchio;Mediobanca - Banca di credito finanziario S.p.A., Research Division, analyst]

A lot of my questions have already been answered. I only have follow-up on the SF90 Stradale. If you can share with us the -- if you had any pushback from clients on the price or which may could even be a positive reaction. It would be interesting.

[Louis Camilleri, executive]

No pushback that I'm aware of on price. A lot of push to be on the list.

[Operator]

Our last question for today is from the line of Adam Hull from MainFirst.

[Adam Hull, analyst]

I just wanted to go back a little bit to FX. Just remind us what the positive for the full year will be this year, obviously, it was EUR 13 million in Q3? And as you sit here now at spot rates where they are, should we be expecting a positive year-on-year on FX into next year? And then the second question, if I look at your Q3 and I strip out the EUR 10 million provision and I strip out FX, your margins are actually sort of down year-on-year. And that's with a headwind on the depreciation amortizing into next year, are you comfortable with consensus approaching EUR 160 million on the EBIT side or...

[Antonio Piccon, executive]

Maybe in terms of the full year impact of the exchange rate, what we are projecting it is basically on the basis of a market exchange rate in line with what you have seen in Q3. Okay. So we'll be -- all in all, the positive tailwind from the FX for the full year will be just marginally higher compared to what it has been for the first 9 months.

[Adam Hull, analyst]

And just remind us what that number is for the 9 months?

[Antonio Piccon, executive]

I think it's EUR 40 million, net of hedges. Okay.

[Adam Hull, analyst]

And for next year in terms of 2020, how do you stand -- I mean, we don't know...

[Antonio Piccon, executive]

We are not -- we are not going to comment yet on 2020.

[Adam Hull, analyst]

Well, maybe then I could ask, as you stand with regard to depreciation amortized, I guess, you've got a pretty good feel for the accounting numbers that will come through, what would be the headwind on depreciation amortizing into 2020, roughly versus 2019 [indiscernible] according to you guys...

[Antonio Piccon, executive]

Once again, as you may imagine, we have been growing in terms of capital expenditures. And this is going to flow through the P&L as the models are introduced. So you may expect and predict on the net basis.

[Adam Hull, analyst]

And then a final question, just on the U.S., I mean, it's quite a big change in Q3 shipments flattish versus sort of roughly 5% growth over the whole 9 months, I mean, what really happened in Q3? And which sort of models? I mean, is it GT? Or if you can help us a little bit as to where the change either in shipments, but also maybe in orders as well? Is there a new change there? Is there a residual question mark?

[Louis Camilleri, executive]

It's really a reflection of the pacing of the new models, nothing else than that. And as I said earlier, you're also going to see that same phenomenon in the fourth quarter.

[Operator]

There are no further questions at this time. I'll hand the call back to Nicoletta for closing comments.

[Nicoletta Russo, executive]

Thank you, everyone, for joining us today. As always, the IR team will be soon available for any follow-up you may have. Thank you very much. Bye-bye.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participation. You may now disconnect. .